SPEAKERS CONTENTS INSERTS
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49–307 CC
1998
REPORT OF THE NATIONAL COMMISSION ON RESTRUCTURING THE INTERNAL REVENUE SERVICE
HEARING
before the
SUBCOMMITTEE ON OVERSIGHT
of the
COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTH CONGRESS
FIRST SESSION
JULY 24, 1997
Serial 105–30
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Printed for the use of the Committee on Ways and Means
COMMITTEE ON WAYS AND MEANS
BILL ARCHER, Texas, Chairman
PHILIP M. CRANE, Illinois
BILL THOMAS, California
E. CLAY SHAW, Jr., Florida
NANCY L. JOHNSON, Connecticut
JIM BUNNING, Kentucky
AMO HOUGHTON, New York
WALLY HERGER, California
JIM McCRERY, Louisiana
DAVE CAMP, Michigan
JIM RAMSTAD, Minnesota
JIM NUSSLE, Iowa
SAM JOHNSON, Texas
JENNIFER DUNN, Washington
MAC COLLINS, Georgia
ROB PORTMAN, Ohio
PHILIP S. ENGLISH, Pennsylvania
JOHN ENSIGN, Nevada
JON CHRISTENSEN, Nebraska
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WES WATKINS, Oklahoma
J.D. HAYWORTH, Arizona
JERRY WELLER, Illinois
KENNY HULSHOF, Missouri
CHARLES B. RANGEL, New York
FORTNEY PETE STARK, California
ROBERT T. MATSUI, California
BARBARA B. KENNELLY, Connecticut
WILLIAM J. COYNE, Pennsylvania
SANDER M. LEVIN, Michigan
BENJAMIN L. CARDIN, Maryland
JIM McDERMOTT, Washington
GERALD D. KLECZKA, Wisconsin
JOHN LEWIS, Georgia
RICHARD E. NEAL, Massachusetts
MICHAEL R. McNULTY, New York
WILLIAM J. JEFFERSON, Louisiana
JOHN S. TANNER, Tennessee
XAVIER BECERRA, California
KAREN L. THURMAN, Florida
A.L. Singleton, Chief of Staff
Janice Mays, Minority Chief Counsel
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Subcommittee on Oversight
NANCY L. JOHNSON, Connecticut, Chairman
ROB PORTMAN, Ohio
JIM RAMSTAD, Minnesota
JENNIFER DUNN, Washington
PHILIP S. ENGLISH, Pennsylvania
WES WATKINS, Oklahoma
JERRY WELLER, Illinois
KENNY HULSHOF, Missouri
WILLIAM J. COYNE, Pennsylvania
GERALD D. KLECZKA, Wisconsin
MICHAEL R. McNULTY, New York
JOHN S. TANNER, Tennessee
KAREN L. THURMAN, Florida
Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public hearing records of the Committee on Ways and Means are also published in electronic form. The printed hearing record remains the official version. Because electronic submissions are used to prepare both printed and electronic versions of the hearing record, the process of converting between various electronic formats may introduce unintentional errors or omissions. Such occurrences are inherent in the current publication process and should diminish as the process is further refined. The electronic version of the hearing record does not include materials which were not submitted in an electronic format. These materials are kept on file in the official Committee records.
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C O N T E N T S
Advisory of July 15, 1997, announcing the hearing
WITNESSES
U.S. Department of the Treasury, Hon. Lawrence H. Summers, Deputy Secretary
U.S. Department of Commerce, Hon. Larry Irving, Assistant Secretary of Commerce for Communications and Information; Administrator, National Telecommunications and Information Administration; and National Commission on Restructuring the Internal Revenue Service
Automatic Data Processing, Inc., Josh Weston
Electronic Data Systems, Corp., George C. Newstrom
Goldberg, Hon. Fred T., Jr., National Commission on Restructuring the Internal Revenue Service
Grassley, Hon. Charles, a U.S. Senator from the State of Iowa
Keating, David L., National Commission on Restructuring the Internal Revenue Service, and National Taxpayers Union
Kerrey, Hon. Bob, a U.S. Senator from the State of Nebraska
National Commission on Restructuring the Internal Revenue Service:
Hon. Larry Irving
Hon. Fred T. Goldberg, Jr.
David L. Keating
George C. Newstrom
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Robert M. Tobias
Josh Weston
National Taxpayers Union, David L. Keating
National Treasury Employees Union, Robert M. Tobias
Newstrom, George C., National Commission on Restructuring the Internal Revenue Service, and Electronic Data Systems, Corp
Tobias, Robert M., National Commission on Restructuring the Internal Revenue Service, and National Treasury Employees Union
Weston, Josh, National Commission on Restructuring the Internal Revenue Service, and Automatic Data Processing, Inc
SUBMISSIONS FOR THE RECORD
National Society of Accountants, Alexandria, VA, Leroy A. Strubberg, letter
National Tax Consultants, Inc., Merrick, NY, William Stevenson, letter
REPORT OF THE NATIONAL COMMISSION ON RESTRUCTURING THE INTERNAL REVENUE SERVICE
THURSDAY, JULY 24, 1997
House of Representatives,
Committee on Ways and Means,
Subcommittee on Oversight,
Washington, DC.
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The Subcommittee met, pursuant to notice, at 9:55 a.m., in room 1100, Longworth House Office Building, Hon. Nancy L. Johnson (Chairman of the Subcommittee) presiding.
[The advisory announcing the hearing follows:]
ADVISORY
FROM THE COMMITTEE ON WAYS AND MEANS
SUBCOMMITTEE ON OVERSIGHT
CONTACT: (202) 225–7601
FOR IMMEDIATE RELEASE
July 15, 1997
No. OV–6
Johnson Announces Hearing on the
Report of the National Commission on
Restructuring the Internal Revenue Service
Congresswoman Nancy L. Johnson (R–CT), Chairman, Subcommittee on Oversight of the Committee on Ways and Means, today announced that the Subcommittee will hold the first of a series of hearing to examine the June 25, 1997 report of the National Commission on Restructuring the Internal Revenue Service (IRS) entitled, ''A New Vision for the IRS.'' The hearing will take place on Thursday, July 24, 1997, in the main Committee hearing room, 1100 Longworth House Office Building, beginning at 10:00 a.m.
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Oral testimony at this hearing will be from invited witnesses only. Witnesses will include members of the Commission and officials from the U.S. Department of the Treasury. However, any individual or organization not scheduled for an oral appearance may submit a written statement for consideration by the Committee and for inclusion in the printed record of the hearing.
BACKGROUND:
The National Commission on Restructuring the Internal Revenue Service was established by Public Law 104–52. Its purpose was to review the present practices of the IRS and to make recommendations for modernizing and improving its efficiency and taxpayer services. The 17-member panel was comprised of Members of Congress, Administration officials, representatives from various private sector firms, taxpayer organizations, and the National Treasury Employees Union, a former IRS Commissioner, and a State tax administrator. The Commission was co-chaired by Senator Robert Kerry (D–NE) and Representative Rob Portman (R–OH). Senator Charles Grassley (R–IA) and Representative William Coyne (D–PA), the Ranking Democrat on the Subcommittee on Oversight, also served on the Commission.
Over the past year, the Commission held 12 days of public hearings, 3 field hearings, and numerous private sessions with public and private sector experts, academics and citizen's groups to examine IRS operations and services. It also reviewed thousands of reports on IRS operations, management, governance, and oversight. The Commission's report, which was endorsed by 12 of its 17 members, contains recommendations relating to Congressional oversight and Executive Branch governance; IRS management and budget; IRS workforce and culture; IRS customer service and compliance; technology modernization; electronic filing; tax law simplification; taxpayer rights; and financial accountability.
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Its most notable recommendation is that responsibility for Executive Branch governance of the IRS should be placed with a new Board of Directors appointed by the President for staggered five-year terms, and comprised of one representative each from the Treasury Department and from the National Treasury Employees Union, and five private sector individuals with expertise in managing a large service organization. The Board's role would be to guide long-term strategic planning at the IRS, appoint and remove senior IRS leadership (including the Commissioner), approve the development of IRS's budget and allocation of the agency's resources, and hold IRS management accountable for success. The Commission also recommends that the IRS Commissioner should be appointed for a five-year term and should be given greater flexibility in hiring, firing, and salary decisions.
The Administration has formulated its own plan, entitled the ''Five-Point Plan for IRS governance,'' which includes the establishment of an IRS Management Board (comprised of 20 high-level Federal officials) to improve management and operation of the IRS, and an IRS Advisory Board (comprised of 14 private-sector professionals) to provide advice to the Treasury Secretary, and a National Performance Review to address customer service problems at the IRS.
In announcing the hearing, Chairman Johnson stated: ''On a daily basis, the IRS touches the lives of millions of hard-working Americans who provide the very lifeblood of the Federal Government through the taxes they pay. In return, the nation's taxpayers deserve high-quality service and fair treatment. Regrettably, the near-universal view is that the quality of IRS's interaction with the taxpayers has deteriorated over the past two decades. The IRS Restructuring Commission has performed a valuable service to nation by identifying the complex problems facing the IRS and offering constructive recommendations for changing it into an agency which provides world class service and citizen satisfaction.''
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FOCUS OF THE HEARING:
The purpose of hearing will be to provide Subcommittee Members with a general overview of the Commission's findings and recommendations, as well as the Administration's position on the Commission's recommendations and its five-point plan for improving the IRS. Additional Subcommittee hearings will be scheduled later in the year to examine specific proposals in the Commission Report within the jurisdiction of the Committee on Ways and Means.
DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:
Any person or organization wishing to submit a written statement for the printed record of the hearing should submit at least six (6) single-space legal-size copies of their statement, along with an IBM compatible 3.5-inch diskette in ASCII DOS Text format only, with their name, address, and hearing date noted on a label, by the close of business, Thursday, August 7, 1997, to A.L. Singleton, Chief of Staff, Committee on Ways and Means, U.S. House of Representatives, 1102 Longworth House Office Building, Washington, D.C. 20515. If those filing written statements wish to have their statements distributed to the press and interested public at the hearing, they may deliver 200 additional copies for this purpose to the Subcommittee on Oversight office, room 1136 Longworth House Office Building, at least one hour before the hearing begins.
FORMATTING REQUIREMENTS:
Each statement presented for printing to the Committee by a witness, any written statement or exhibit submitted for the printed record or any written comments in response to a request for written comments must conform to the guidelines listed below. Any statement or exhibit not in compliance with these guidelines will not be printed, but will be maintained in the Committee files for review and use by the Committee.
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1. All statements and any accompanying exhibits for printing must be typed in single space on legal-size paper and may not exceed a total of 10 pages including attachments. At the same time written statements are submitted to the Committee, witnesses are now requested to submit their statements on an IBM compatible 3.5-inch diskette in ASCII DOS Text format.
2. Copies of whole documents submitted as exhibit material will not be accepted for printing. Instead, exhibit material should be referenced and quoted or paraphrased. All exhibit material not meeting these specifications will be maintained in the Committee files for review and use by the Committee.
3. A witness appearing at a public hearing, or submitting a statement for the record of a public hearing, or submitting written comments in response to a published request for comments by the Committee, must include on his statement or submission a list of all clients, persons, or organizations on whose behalf the witness appears.
4. A supplemental sheet must accompany each statement listing the name, full address, a telephone number where the witness or the designated representative may be reached and a topical outline or summary of the comments and recommendations in the full statement. This supplemental sheet will not be included in the printed record.
The above restrictions and limitations apply only to material being submitted for printing. Statements and exhibits or supplementary material submitted solely for distribution to the Members, the press and the public during the course of a public hearing may be submitted in other forms.
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Note: All Committee advisories and news releases are available on the World Wide Web at ''HTTP://WWW.HOUSE.GOV/WAYS_MEANS/''.
The Committee seeks to make its facilities accessible to persons with disabilities. If you are in need of special accommodations, please call 202–225–1721 or 202–226–3411 TTD/TTY in advance of the event (four business days notice is requested). Questions with regard to special accommodation needs in general (including availability of Committee materials in alternative formats) may be directed to the Committee as noted above.
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Chairman JOHNSON. Good morning, and welcome to this important hearing on the report of the National Commission on Restructuring the Internal Revenue Service. Today's hearing is the first of several hearings by the Subcommittee, and we are honored to have with us this morning Hon. Senator Kerrey and Senator Grassley to speak on this report.
I'm going to delay my opening statement—until after the Senators have had a chance to testify, because they do have votes coming up in the Senate.
With that, Senator Kerrey, who was the Senate Chair of this Commission, it's a pleasure to have you with us today. I know that my colleague, Mr. Coyne, would like to welcome you as well.
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STATEMENT OF HON. BOB KERREY, A U.S. SENATOR FROM THE STATE OF NEBRASKA
Senator KERREY. Thank you very much, Madam Chair and Representative Coyne. I appreciate very much the chance to present our testimony and to give you our views on what we believe needs to occur with the law in order to bring the Internal Revenue Service to the standards of the American people.
We started the National Commission on Restructuring the Internal Revenue Service well over a year ago, and next week we will introduce legislation drafted to conform with the report of this Commission. The goal of the legislation is to make the IRS work for the American people.
Let me begin by explaining why I think this legislation is so important. First, there are twice as many people who pay taxes as vote. Citizens' faith that their government can be fair and efficient is dependent on a well-functioning IRS.
Second, the days of the old-fashioned tax collector are over. The core of the Commission's report and the legislation is based on a vision for a new IRS. We believe, Madam Chair, in today's world, the job of the IRS is to operate as an efficient financial management organization.
It is simply a myth that the bulk of the Federal revenue is generated through heavy enforcement. While the IRS must maintain a strong enforcement presence, its core and the core of the Federal revenue stream lie in a revamped, modern organization that can assist taxpayers promptly and efficiently, track account information, and send out clear notices. There is a breathtaking gap between the service levels of the IRS and those of the private sector.
Madam Chair, I would ask consent to include my entire remarks in the record. I'm going to try to summarize them in order that Senator Grassley can get his testimony in before we have to go over and vote.
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Chairman JOHNSON. Certainly, Senator Kerrey.
Senator KERREY. Madam Chair, our Commission met, as I said, for well over a year, taking testimony from the private sector, taking testimony from IRS employees, both current and former, taking testimony, most importantly, in the field from citizens who deal with the IRS constantly.
With very rare exception did we hear a witness come forward and bash the Internal Revenue Service. On a very rare occasion did we hear somebody come forward in a disrespectful fashion. This testimony was offered with great respect for the burdens placed upon Internal Revenue Service employees, but with an intense interest in trying, as I said earlier, to close the gap between what they find themselves being able to get, in terms of service in the private sector, and what the Internal Revenue Service is able to do.
Madam Chair, we focused on six main areas in our deliberations and in our legislation. The first is executive branch governance and management; second, work force and civil service flexibilities; third, incentives for electronic filing; fourth is taxpayer rights; fifth, coordination of congressional oversight; and sixth, complexity of the Tax Code itself.
Senator Grassley and my fellow Commission members will each address different areas. My intent today is to focus on the governance, management, and congressional oversight.
Madam Chair, there is one operative paragraph in here, in my testimony, that describes the status quo. We heard it repeatedly from all sources, from current and former employees, stakeholders, both the taxpayer as well as the practitioners. We heard consistently, over and over and over, the following problem identified:
A key problem identified by the Commission was a lack of a coherent accountable structure to implement a long-term vision and goals. We found that we in Congress often send conflicting signals to the agency. We found that Treasury has basically left the IRS to its own devices, leaving a vacuum in the executive branch oversight of the agency. We found executives unable to maintain focus and gain traction with Congress on IRS strategy.
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In short, at the top levels of the IRS and Treasury, there are murky lines of accountability, a lack of necessary expertise to operate in the new information age, and no people of authority with significant tenure to get the job done.
We recommend in our legislation, in terms of governance, to create first a Board of Governors, appointed by the President, with staggered 5-year terms. Second, the Commissioner will be appointed for a 5-year term, so he or she will be around long enough to accomplish real change. Third, the Commissioner will be given greater flexibility to hire or fire his or her own team of executives. Fourth, congressional oversight will be coordinated among the authorizing Subcommittees.
Madam Chair, there's a competing proposal, which you will hear later today from the Treasury Secretary and the Deputy Secretary, who disagree with our plan. They have developed an alternative proposal that creates two advisory boards which attempt to strengthen Treasury's governance of the IRS. The first has 20 political appointees, the second has 14, advisors with no real responsibilities.
The Commission considered this proposal seriously but in the end rejected it. We rejected it because Treasury's plan further blurs accountability instead of answering the urgent need for clear lines of accountability. It does nothing to alleviate the continuity problem with political appointees, who traditionally serve for a short period of time. Third, it endangers politicizing the IRS. What the IRS needs is accountability without politicization.
The Treasury's proposal to create an oversight board of officials from Office of Management and Budget, OMB, Office of Personnel Management, OPM, and the Vice President's office could undermine the credibility of the IRS as an apolitical organization.
We continue to work, by the way, with Secretary Rubin and with Deputy Secretary Summers, trying to reach a compromise. But I must, with respect to the diligence of these two individuals, point out some things that have been said, with all due respect, that are simply inaccurate.
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They have said that private people should not control law enforcement, and that our Nation's revenue stream will be at risk under our proposal. Madam Chair, those accusations are simply not true. First, we propose that the Board of Governors be presidentially appointed, Senate confirmed, and removable at the will of the President. While members serve on the board, they will be government employees serving in a government function, much like the Postal Board of Governors, who have vast control over the Postal Service. Additionally, the board will not have any role in tax policy. The IRS Commission's proposal would draw clear lines of accountability between tax policy and tax administration.
In addition, Madam Chair, the Secretary of the Treasury will be a member of the new board, subjecting it to scrutiny, were there to be any appearance of impropriety.
Again, we continue to try to work with Treasury, hoping to reach some accommodation, but we believe our legislation, if enacted, will over time narrow the gap between what people get from the private sector and what they get from our Internal Revenue Service.
I thank you very much, Madam Chair, and Members of the Subcommittee. I see that my Cochair is here now, and I will now yield to the senior Senator from Iowa.
[The prepared statement follows:]
Statement of Hon. Bob Kerrey, U.S. Senator from the State of Nebraska
Madame Chairwoman and members of the Committee, it is a distinct honor to share with you the findings and recommendations of the National Commission on Restructuring the Internal Revenue Service. Next week we will introduce legislation drafted to conform with the report. The goal is to make the IRS work for the American taxpayer.
Let me begin by explaining why I think this legislation is so important. First, there are twice as many people who pay taxes as vote. Citizens' faith that their government can be fair and efficient is dependent on a well functioning IRS. Second, the days of the old-fashioned tax collector are over-the core of the Commission's report and legislation is based on a vision for a new IRS. We believe, in today's world, the job of the IRS is to operate as an efficient financial management organization. It is a myth that the bulk of the federal revenue is generated through heavy enforcement. While the IRS must maintain a strong enforcement presence, its core and the core of the federal revenue stream lie in a revamped, modern organization that can assist taxpayers promptly and efficiently, track account information, and send out clear notices. There is a breathtaking gap between the service levels of the IRS and those of the private sector.
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The IRS has a 20 percent error rate for processing paper returns and expends an incredible amount of resources and focus to correct these errors. It captures only 40 percent of the data from returns and is still drowning in a sea of paper It is typically 18 months before a return can be matched against 1099s. A private sector business that took on average 18 months to send someone a bill, certainly wouldn't stay in business very long.
The Commission's report and accompanying legislation offer both a realistic goal for those who will take charge of the agency and a credible plan for reaching that goal.
We spent the last year studying the problems and solutions for the IRS. Clearly, our access to the IRS's operations and employees was unprecedented. We spent 12 days in public hearings, interviewed 300 IRS employees in field offices, and interviewed over 500 current and former officials from the IRS, the Treasury Department, congressional committees that oversee the IRS, and other IRS experts. We also commissioned consulting reports and internal reviews of IRS management, governance, workforce, compliance, and customer service. Finally, we heard directly from citizens through town meetings and surveys. The job of the Commission was to provide a reasoned, thoughtful look at how to make the IRS serve the American people.
Our legislation focuses on six main areas:
• Executive branch governance and management
• Workforce and civil service flexibilities
• Incentives for electronic filing, which holds great potential for cost savings
• Taxpayer protection and rights provisions
• Coordinating congressional oversight of the IRS
• Implementing procedures that require analysis of the complexity of new tax legislation
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Senator Grassley and my fellow Commission members will each address important areas. I will focus on Governance, Management, and Congressional Oversight.
Commission Recommendations
A key problem identified by the Commission was a lack of a coherent, accountable structure to implement a long term vision and goals. We found that we in Congress often send conflicting signals to the agency. We found that Treasury has basically left the IRS to its own devices, leaving a vacuum in the Executive Branch oversight of the agency. We found executives unable to maintain focus and gain traction with Congress on IRS strategy.
In short, at the top levels of the IRS and at Treasury there are murky lines of accountability, a lack of necessary expertise to operate in the new information age, and no people of authority with significant tenure to get the job done. The officials at the Treasury Department have expertise in tax law, but do not have the expertise in areas of customer service, technology, and management to oversee the IRS. Worse, they are not around long enough to ensure focus on multi-year projects like the Tax System Modernization (TSM) or changing the culture of the agency to be more responsive to taxpayers.
Additionally, Treasury does not coordinate its own oversight: The Commissioner of the IRS must deal with various assistant secretaries on budget, operations, computers, and others. At the end of the day, the IRS Commissioner really reports to the Deputy Secretary who also manages eleven other agencies-not to mention the economy. The recently retired Commissioner of the IRS, Margaret Richardson, told us that she reported to three different Deputy Secretarys during her four-year tenure as IRS Commissioner. Aware of these glaring problems, the Restructuring Commission began developing ideas for a new governance structure. Our criteria for success were: (1) clear accountability, (2) expertise in running a modern customer-oriented organization, and (3) continuity.
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To provide for accountability, expertise and continuity the legislation we will introduce will include:
First, a board of governors, appointed by the President for staggered five year terms. The board will: approve the mission, objectives, and annual strategic plans of the IRS; oversee the IRS management; have significant tenure to force change throughout the organization; and have unique public and private sector expertise in managing large service organizations.
Second, the Commissioner will be appointed for a five-year term, so he or she will be around long enough to achieve real change.
Third, the Commissioner will be given greater flexibility to hire or fire his own team of executives, who will bring new expertise into the IRS. While the Board will keep an eye on long-range strategic issues, the Commissioner will run the organization and be given greater authority to do so.
Fourth, congressional oversight will be coordinated among the authorizing committees, the appropriating committees, and the government oversight committees. Our legislation codifies coordinated oversight, stating that committee leaders, majority and minority, meet regularly to ensure that the IRS receives clear guidance from Congress, and that Congress is given the proper information to oversee the IRS.
Competing Proposal
As you may know, the Secretary of the Treasury Bob Rubin and Deputy Secretary Larry Summers disagree with our plan for a board of governors to oversee the IRS. They have developed an alternate proposal, that would create two advisory boards which attempt to strengthen Treasury's governance of the IRS. The first would consist of 20 political appointees from the Administration and the second would be composed of 14 advisors with no real responsibility. While we seriously considered their proposal, in the end the Commission rejected their approach.
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Our opinions are, first, that Treasury's plan further blurs accountability when there is an urgent need for clearer lines of accountability. Second, it does nothing to alleviate the continuity problem-political appointees, who traditionally serve for a short time, will continue to oversee IRS operations. Third, it endangers politicizing the IRS. What the IRS needs is accountability without politicization. The Treasury's proposal to create an oversight board of officials from OMB, OPM, and the Vice Presidents Office could undermine the credibility of the IRS as an apolitical institution. The White House has always, in our judgment wisely, tried to keep an arms length distance from the IRS. Finally, it does not guarantee that the people with proper expertise in computers, technology, and service will oversee IRS operations.
Secretary Rubin and Deputy Secretary Summers have been diligent, but with all due respect, inaccurate in their attacks of our proposal. They have said that private people should not control law enforcement, and that our nation's revenue stream will be at risk under our proposal. Those accusations are simply not true. First, we propose that the Board of Governors be Presidentially appointed, Senate confirmed, and removable at the will of the President. While members serve on the Board, they will be government employees serving in a government function, much like the Postal Board of Governors who have vast control over the postal service, including the postal inspectors-their enforcement arm. Additionally, this board will not have any role in tax policy, which will stay with the Secretary of the Treasury.
The Restructuring Commission's proposal will draw clear lines of accountability between tax policy and tax administration. Also, the Secretary of the Treasury will be a member of this new board, subjecting it to scrutiny were there to be any appearance of impropriety. Lastly, the Secretary of the Treasury would continue to have final say over the IRS budget before it is sent to Congress. Under our proposal, the board would send Congress a copy of their budget at the same time they send it to the Secretary, allowing Congress to make the decision of how much money to appropriate.
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Congressman Portman and I sent Mr. Rubin a letter two weeks ago addressing his concerns, which is available for the record. We did move significantly to accommodate concerns raised by Treasury. In fact, many of us thought that the IRS should be an independent agency. The only reason we did not go that far was to display to the Treasury Department our willingness to work with them to fix the IRS—an objective we still hold.
Conclusion
Madame Chairwoman and Members of the Committee, Congress, the Administration and the American people know that the status quo is no longer tolerable and that the IRS needs fixing. $3.4 billion was wasted on a failed modernization project. Its operations are antiquated and outdated, and taxpayers (close to 90% of whom voluntarily pay their taxes) are generally, and unfairly, treated as if they are guilty of something when they contact the IRS.
The IRS's problems are rooted in the lack of strategic vision and focus, measures that do not encourage employees to treat taxpayers well, operational units that do not communicate with each other, and a systemic lack of expertise and continuity in management and governance. The Commission worked in a bipartisan, bicameral manner to come up with a reasoned, comprehensive approach to fixing these problems. We hope you will work with us over the coming months to strengthen our legislation and implement it into law so that the American people have the IRS they expect and deserve.
Our work to restructure the IRS will go a long way toward restoring taxpayers' faith not only in our tax system, but in our government, as well.
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Chairman JOHNSON. Thank you, Senator Kerrey.
Senator Grassley.
STATEMENT OF HON. CHARLES GRASSLEY, A U.S. SENATOR FROM THE STATE OF IOWA
Senator GRASSLEY. Thank you, Madam Chairwoman. Thank you first of all for your leadership. You have demonstrated through this Subcommittee on a taxpayers' bill of rights in the past, because that is also a part of the work—the extension of that is part of the recommendations of our Commission.
Also let me up front say that the product of this Commission would not be as perfect of a document as it is without the hard work and leadership of Congressman Portman and Senator Kerrey, not only because of their ability but because they gave this job over the last 12 months the necessary attention that it needed to get to the bottom of this. So let's all say thank you to their leadership.
Congress is on the verge of a major shift in power from the Federal Government to the people. The recommendations of the Commission are a blueprint for that transfer of power.
Understandably, there is much anxiety within the Federal bureaucracy at this moment. It is in anticipation of this loss of power. The anxiety is at the highest levels of the executive branch.
The American taxpayers have waited a long time for this. They have suffered through decades of encounters with an agency that has been unaccountable, unresponsive, misleading, arrogant, and abusive. The IRS has been granted enormous powers that at times seemed to disrespect, even undermine, civil liberties. The responsibility to our citizens that goes along with such governmental power was not exercised.
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Furthermore, IRS management seemed to have taken a vacation. Billions of dollars have been wasted. Performance failures were not met with discipline. Questionable activity was covered up by secrecy, by abusing the authority of section 6103. Congressional oversight of the IRS has been rendered all but impotent because of absurd 6103 restrictions. These 6103 restrictions make the Pentagon's highly secret and highly restrictive Joint Chiefs of Staff ''vault'' seem like a Freedom of Information office, I might say.
I appear before this Subcommittee asking you, Madam Chairwoman, and the constitutional responsibilities of the Ways and Means Committee, to seize the moment. IRS reform is overdue and vital.
Congress has never had a chance at reform as we have today, thanks to the effective leadership that I have already alluded to.
To restore accountability to the taxpayer, the Commission has made several recommendations. The one attracting the greatest attention has been the Commission's proposal for an independent board to oversee the Service. The Commission's belief is that an independent board will provide an infusion of talent from the private sector to set appropriate performance measures and reward or discipline managers who either meet or fail to meet these performance measures.
In private meetings, the administration appears to be divided on the proposal of a board. But it is unfortunate that some who oppose this proposal are doing so only because it signifies a monumental power struggle that they stand to lose. Treasury officials, who 2 years ago couldn't find the IRS if they were standing at the corner of 11th and Constitution, are suddenly in fits about losing some control over part of their budget and bureaucracy.
They must be reminded that the IRS is one of the few governmental agencies that has a significant impact on almost every American. The American taxpayer deserves a modern IRS that provides taxpayers customer service on a level equal to that provided by private financial institutions throughout the country.
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We have seen a lot of promises of reform coming from the Treasury of late, but wholly in response to the work of this Commission. Treasury assures us that the IRS reform is their top priority and their best people are on top of it. But if Congress turns its back now on reforming the IRS and listens to the ''siren song'' of Treasury, I predict that 1 year from now Congress will face the justified wrath of angry American taxpayers.
Treasury officials who are locked in this power struggle, trying to preserve their bureaucratic empire, would do well to remember the quote of the first Secretary of the Treasury, Alexander Hamilton, who said, ''Here, sir, the people govern.'' That is the essence of what this Commission would do: Return power from the Federal Government to the people of this country.
I am also pleased that the Commission did not call for easy solutions, simply that more money is what is needed to perfect the IRS. One Treasury official privately admitted recently that the IRS never would be serious about embracing reform as long as Congress kept throwing more money at the agency.
The Commission made several findings and recommendations about protecting taxpayers and strengthening taxpayer rights. I know that you, because of your leadership, will be working on that. I would note that in the past the Congress has focused its energies on giving rights to taxpayers who are in dispute with the IRS. The Commission builds on these taxpayer bills of rights.
I'm going to have to stop because we have only 6 minutes remaining in this vote, and I would ask permission to put the remainder of my statement in the record. But it parallels what Senator Kerrey has already said, that it's a matter of emphasis for all these parts and the work of the Commission.
Thank you very much.
[The prepared statement follows:]
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Statement of Hon. Charles Grassley, U.S. Senator from the State of Iowa
Madam Chairwoman, members of the Subcommittee, thank you for the invitation to share my views with you. As a member of the National Commission on Restructuring the IRS, as the former Chairman of the IRS Oversight Subcommittee on the Finance Committee, as a current senior member of that subcommittee, as the chief Senate Republican sponsor of the Taxpayers Bill of Rights and Taxpayers Bill of Rights II, and as a taxpayer myself, I have been involved for many years in an effort to finally reach this point.
Congress is on the verge of a major shift in power from the federal government to the people. The recommendations of the Commission are a blueprint for the transfer of power.
Understandably, there is much anxiety within the federal government at this moment. It is in anticipation of this loss of power. The anxiety is at the highest levels of the executive branch.
The American taxpayers have waited a long time for this. They have suffered through decades of encounters with an agency that has been unaccountable; unresponsive; misleading; arrogant; abusive. The IRS has been granted enormous powers that at times seemed to disrespect, even undermine civil liberties. The responsibility to our citizens that goes along with such powers was not exercised.
Furthermore, IRS management seemed to have taken a vacation. Billions of dollars have been wasted. Performance failures were not met with discipline. Questionable activity was covered up by secrecy—by abusing the authority of Section 6103. Congressional oversight of the IRS has been rendered all but impotent because of absurd 6103 restrictions. These restrictions make the Pentagon's highly secret and highly restrictive JCS ''Vault'' seem like a Freedom of Information office.
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I appear before this subcommittee Madam Chairwoman, to urge you to seize the moment. IRS reform is overdue and vital.
Congress has never had a chance at reform as we have today, thanks to the effective leadership of the co-chairmen of the Commission, Senator Bob Kerrey of Nebraska, and Congressman Rob Portman of Ohio. I would also like to recognize the important work and contribution you have made to this effort, Madam Chairwoman, especially ensuring passage of the Taxpayers Bill of Rights II. And I would like to pay tribute to my friend and former colleague, Senator David Pryor, with whom I teamed in the Senate in these efforts for many years.
I would like to highlight just a few important issues recommended by the Commission.
To restore accountability to the taxpayer, the Commission has made several recommendations. The one attracting the greatest attention has been the Commission's proposal for an independent board to oversee the IRS. The Commission's belief is that an independent board will provide an infusion of talent from the private sector to set appropriate performance measurements and reward or discipline managers who either meet or fail to meet these performance measures.
In private meetings, the administration appears to be divided on the proposal of a board. But it appears unfortunate that some who oppose this proposal are doing so only because it signifies a monumental power struggle that they stand to lose. Treasury officials who two years ago couldn't find the IRS if they were standing at 11th and Constitution are suddenly in fits about losing some control over part of their budget and bureaucracy.
They must be reminded that the IRS is one of the few government agencies that has a significant impact on almost every American. The American taxpayer deserves a modern IRS that provides taxpayers customer service on a level equal to that provided by private financial institutions throughout this country.
We have seen a lot of promises of reform coming from the Treasury of late, wholly in response to the work of this Commission. Treasury assures us that IRS reform is their top priority and their best people are on it. But if Congress turns its back now on reforming the IRS and listens to the siren song of Treasury, I predict that a year from now Congress will face the justified wrath of angry American taxpayers.
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Treasury officials who are locked in this power struggle, trying to preserve their bureaucratic empire, would do well to remember the quote of the first Secretary of the Treasury, Alexander Hamilton, ''Here, Sir, the people govern.'' That is the essence of what this Commission would do—return power from the federal government to the people of this country.
I am also pleased that the Commission did not call for the easy solution—that more money is what is needed at the IRS. One Treasury official privately admitted recently that the IRS never would be serious about embracing reform as long as Congress kept throwing more money at them. Until two years ago, the IRS had seen continual increases in its budget for 40 years. This Commission uncovered that hundreds of millions of taxpayer dollars were being wasted. Clearly, the problem at the IRS is management, NOT money.
The Commission made several findings and recommendations about protecting taxpayers and strengthening taxpayer rights. Let me say that many of the recommendations build on the work of this subcommittee and that the Commission greatly benefited from the assistance you provided, Madam Chairwoman, as well as from discussions with your staff director. I would note that in the past, the Congress has focused its energies on giving rights to taxpayers who are in a dispute with the IRS. The Commission builds on this. We recommend a strengthening of taxpayers' rights in a number of areas. But I think of equal importance is the emphasis the Commission has placed on protecting taxpayers; that is, preventing problems before they even happen by emphasizing quality of work and customer service.
We all know the story of the small business owner who gets the notice from the IRS that he or she owes $2,000. The business owner goes to his accountant who says that he doesn't owe the IRS $2,000, but its going to cost $5,000 to fight it. So the business owner forks over the $2,000.
Why does this happen? Because the IRS puts such little emphasis on quality control and taxpayer rights. The IRS still measures its managers on dollars assessed, whether or not it is the proper tax owed. Is it any surprise, then, that when a taxpayer does appeal, the IRS loses 72 cents on the dollar. It is wrong that many taxpayers have to spend millions of dollars fighting the IRS because there is no quality control. I know your subcommittee has had the General Accounting Office examine the lack of quality control, Madam Chairwoman, and I look forward to working with you to address this matter.
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I am pleased that the Commission also emphasized the need for customer service. We recommend that taxpayers who are subject to examination or collection efforts, or who simply try to contact the IRS to resolve a problem, are provided a chance to comment on the service given. While revolutionary to the IRS, this is old hat for many state tax collection agencies as well as, of course, the private sector. By measuring managers on customer service, we hope to begin to change the culture of the IRS and its employees.
Emphasizing quality service and customer service are ways to protect taxpayers in the first place. It is also a way to measure performance in an appropriate manner that will hold managers and employees at the IRS accountable for their action.
I would suggest that the emphasis on quality service and customer service is in keeping with what many saw as the mandate given to the Congress in 1994—moving power from government to the people. The reforms suggested by the Commission certainly emphasize that it is the taxpayer who comes first, and it is serving the taxpayer as a customer that must be the top priority for the IRS.
Madam Chairwoman, let me just touch briefly on a third point—the need for greater openness at the IRS. The Commission found that the IRS was a very closed and insular organization. The Commission put forward a first step to make the IRS more open to Congress and the press. If we are going to be at all successful in changing the culture of the IRS, a key ingredient is greater openness. I think Senator Kerrey was absolutely right when he noted at one of our hearings that the media is one of the key ways in which Congress finds out what is going on at government agencies.
To encourage openness and also ensure accountability, there are three areas:
• The IRS must be timely in responding to Freedom of Information Act (FOIA) requests.
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• The IRS should not abuse its authority under section 6103 to cover up embarrassing information about management mistakes. For example, this Commission highlighted that the IRS had abused its 6103 authority to hide from the press the fact that IRS had provided Congress false information.
• The IRS must maintain and preserve documents. The Commission itself discovered first-hand several times that the former IRS historian Shelly Davis is right—that the IRS doesn't preserve records. Many requests by the Commission for documents and data were met with the response that the data no longer existed or the documents could not be found.
Addressing these three areas of openness may not be headline grabbing, but my experience has shown me that they will go far in bringing accountability at the IRS and changing its culture.
My final point is to speak for the co-chairman of our Commission, Congressman Portman. I know if he were at the table with us, he would also emphasize the Commission's findings on the need to simplify the tax code. It is to Congressman Portman's credit that the Commission focused on this matter. We heard from countless witnesses, as well as hundreds of IRS employees and thousands of taxpayers that the complexity of the code is crippling to IRS management.
While I've spent a lot of my time here criticizing IRS, let me make clear that the complex code is not the fault of the IRS, it is a burden placed on IRS management by Congress and the White House. It is clear that if we wish to see improvements at the IRS in customer service and relations with taxpayers, steps must be taken to simplify the code.
Thank you for allowing me the opportunity to speak present my views. The Commission's proposals are not just paper for the shelves. As you know, Senator Kerrey and I both serve on the Finance Committee. We will be introducing next week in the Senate and Congressman Portman in the House a comprehensive legislative proposal to restructure the IRS in accordance with the findings and recommendations of the Commission. I have talked to Chairman Roth and Majority Leader Lott, they are very supportive of trying to pass comprehensive reform of the IRS this year. I look forward to working with you, Madam Chairwoman, and all of the Members of this subcommittee to make that possible.
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Chairman JOHNSON. Gentlemen, you're now down to 5 minutes left in your vote, so we are not going to ask you any questions. But I do want to tell you, thank you very much for your testimony. The report that you have brought before us, along with my colleague here, Mr. Portman, and all the Commissioners, is a very serious document. You have made very important recommendations.
I agree with you that this is a moment of opportunity, and your vision of a modern, responsive, customer-oriented IRS, one that serves the people that for the most part voluntarily pay their taxes, is one we share. This is a time when we must make good on the promise that change offers.
So I look forward to working with you in greater detail as we move through this, and certainly with the administration, and thank you very much for your excellent testimony today.
Mr. Portman, would you like to say a word?
Mr. PORTMAN. Just that I had an opening statement where I extensively praised both of you, and since you're leaving, I'm not going to have an opportunity to have you hear it.
Godspeed on your vote, and thank you for all your work.
[The opening statement follows:]
Opening Statement of Hon. Bob Portman, a Representative in Congress from the State of Ohio
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I thank our Chair, Mrs. Johnson, for holding this hearing today on the report of the National Commission on Restructuring the IRS. And, I would like to say a special word of thanks to Donna Steele and Beth Vance for their assistance throughout the Restructuring Commission's work.
During the last year, I have been pleased to serve as Co-Chairman of the Commission along with Senator Bob Kerrey, who is with us today. And I would like to extend my appreciation to each of the seventeen members of the Commission for the bipartisan and, indeed, nonpartisan manner in which the Commission conducted its business. Many of the Commission members are with us today, like Senator Grassley, Fred Goldberg, Josh Weston, Bob Tobias, David Keating, George Newstrom and Larry Irving. And, I would like to thank the Treasury Department—including Deputy Secretary Summers who is here with us today—for their service on the Commission and their ongoing input in our work.
The Commission's report is the first comprehensive Congressional blueprint for reforming the IRS in my lifetime—we have not seen fundamental changes to the IRS since 1952. Our conclusions highlight the need for a serious, bipartisan dialogue to simplify our nation's tax system to make the IRS work better for the taxpayer. Our report is truly a roadmap for transforming the IRS into a responsive service organization for the 21st Century—one that makes customer service and customer satisfaction a priority. And, taken as a whole, I believe our proposals will allow the Congress to do something truly remarkable—make the IRS a model for the rest of government.
I am pleased to note that a number of leading organizations that deal with IRS concerns on a daily basis have endorsed our recommendations—including the National Treasury Employees Union (which represents IRS employees), National Taxpayers Union, Americans for Tax Reform, the American Bankers Association, the American Payroll Association, the American Society of Payroll Managers, the American Institute of Certified Public Accountants, the National Association of Computerized Tax Processors, the National Association of Enrolled Agents, the National Association of Tax Practitioners, and the National Society of Accountants.
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We will be introducing legislation to implement the Commission's recommendations next week. I look forward to hearing from today's witnesses and to our ongoing efforts to make the IRS work the for the American taxpayer.
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Senator KERREY. Thanks.
Chairman JOHNSON. As we await the arrival of Deputy Secretary Lawrence Summers, who is our next witness, let me say that it is a pleasure to welcome the Commissioners here this morning, as well as the administration, to discuss what I consider to be an extremely important report.
Too often work is done in this body and disregarded. This report will not be disregarded. It is my intention, it is my belief that it is the Chairman's intention, that we move forward on this document, that we work through the policy changes that it proposes, and in this Congress help the IRS move into the next millennium.
Our goal today is to provide the Subcommittee with a general overview of the Commission's findings and recommendations, as well as the administration's concerns. We will hear from members of the Commission and the administration, and at future hearings, after the August break, we will go into greater detail on the Commission's specific recommendations and receive input from taxpayers and other stakeholders.
The National Commission on Restructuring the IRS was established in 1996 in response to mounting public concern about performance problems and the lack of accountability at the IRS. It's 17 Commissioners were comprised of Members of Congress, administration officials, members of the private sector, taxpayer organizations, the National Treasury Employees Union, a former IRS Commissioner, and estate tax administrator.
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The Commission was Cochaired by Senator Robert Kerrey and my colleague, Representative Rob Portman. I must say, the Cochairmen did an outstanding job of leading a very fine Commission. On that Commission in second position, working closely, was Senator Grassley and my Ranking Member, Bill Coyne. I thank them for the many, many hours that they put in. This was an unusually hard working Commission, with the members very involved, and that always lays a solid foundation for sound action.
The Commission's report was endorsed by 12 of the 17 members, and contains recommendations for reforms in congressional oversight and the executive branch's governance of the IRS, stability of the IRS' budget, and financial accountability on IRS' part for the way it allocates and spends its resources. The report also speaks to the need to modernize IRS' technology base and make real progress toward electronic filing to simplify the tax system and to protect taxpayers rights.
Obviously, not everyone agrees with all of the Commission's recommendations. The administration has concerns about some of them, particularly the independent board of directors, and in response has developed its own plan for institutionalizing executive branch oversight and management of the IRS. My colleagues in the Congress and I will, I'm sure, develop our views about the Commission's recommendations relating to both executive branch oversight and congressional oversight.
Yet, as we begin this second phase of the process of reforming the IRS, the legislative phase, we must remember that we all share the common goal of transforming the IRS into a modern, high-quality service organization where taxpayers can call and resolve problems and get accurate information. We share the vision of the Commissioners, and it is our responsibility to make good on that vision, working with the Commissioners and the IRS.
On a daily basis, the IRS touches the lives of millions of hard working Americans who provide the life blood of the Federal Government through the taxes they pay. In return, the Nation's taxpayers deserve both respect and efficiency. Regrettably, the near universal perception is that both of these qualities have been in short supply in recent weeks.
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For the first time since 1952, Congress and the administration are both embarking on a serious effort to reform the IRS. While there are divergent views about some of the individual steps that should be taken, there are many elements of the Commission's recommendations that are strongly supported by everyone here today. As the Subcommittee begins the process of examining the Commission's recommendations and developing our own recommendations to the Full Committee for legislative actions, I hope we can remain focused on the end goal.
I would also like to commend the Commission for its discussion and exploration of the relationship between the increasing complexity of the Tax Code as a result of congressional action and the problems of the IRS, because some of the problems can only be solved by Congress taking responsibility for writing clearer, simpler tax law, and that, too, is a challenge we must be capable of meeting.
I would now like to recognize my Ranking Member, Bill Coyne, one of the Chairs of the Commission and a gentleman who put in many, many hours. I thank you, Bill.
Mr. COYNE. Thank you, Madam Chairwoman.
I want to say that today the Oversight Subcommittee will have an opportunity to discuss proposals to reform the operation and governance of the Internal Revenue Service. Specifically, we will debate the proposals recommended by the National Commission on Restructuring the IRS in its June 1997 report and the proposals recommended by the administration in its 5-point plan to reform the IRS.
As a Member of this Subcommittee and as a Commissioner on the Restructuring Commission, I believe it is timely for the Ways and Means Oversight Subcommittee to conduct a series of hearings on proposals for changing the governance and operation of the IRS. Debate over the successes, failures, and future of the IRS is an oversight responsibility and a fundamental part of our ongoing review of how our tax laws are to be administered.
There is much agreement about how the IRS could be improved. The IRS should improve its customer service, its training of employees, and the development of new technology and technology to grapple with the problems within the agency. Oversight of the IRS needs to be enhanced and institutionalized with significant input from the private sector. Mechanisms should be established to provide direction of long-term strategy at the IRS and IRS management should be held accountable for its decisions.
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The IRS Commissioner should run the IRS for a meaningful period of time, and be able to hire expert senior level managers. The Congress could do a better job of coordinating its oversight and funding of the IRS operations. There is fundamental disagreement, however, on how the IRS should be governed in the future and who should be in charge at that important agency.
I object to turning the IRS over to individuals who are not directly accountable to the American people. I believe that the President or the Treasury Secretary should have the power to appoint and dismiss the IRS Commissioner. I suggest that the Congress carefully review the current administration's plan for establishing an IRS management board and an IRS advisory board, and for giving the IRS Commissioner authority to hire a top notch management team to govern the agency.
To ensure long-term IRS reform, I believe that we should amend the Tax Code to make the administration's proposal on governance structure permanent in the Code.
Some of the other recommendations in the Commission's report seem to me to be extraneous to the Commission's statutory mandate and require much more analysis, particularly the sections relating to Taxpayer Bill of Rights, simplification, and creation of a new congressional entity. Also, some of the recommendations in the Commission's report, in my opinion, would have a negative effect on the IRS' interactions with the public and raise tax policy issues of great significance.
I do not agree, for example, with the Commission's conclusion that the child support tax refund offset program is a diversion of IRS resources or creates a risk of undermining the IRS' core responsibilities and capabilities.
Also, I object when the earned income tax credit, EITC, is indirectly characterized in the Commission's report as a credit added to the Internal Revenue Code to target a specific population already served by other Federal agencies. The EITC is a program for the working poor in this country. It is not, as recently characterized by some Members of Congress, a form of welfare.
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In conclusion, I want to thank Congressman Portman for his commitment to reforming the IRS, and I also want to thank my colleagues from the National Commission on Restructuring the IRS who are with us here today, and others from the Commission, for appearing as witnesses at this hearing. Without a doubt, our mutual goal is to make the IRS the first-class tax collection agency the public expects and deserves. I intend to work closely with Chairwoman Johnson and others on these issues, and look forward to the Oversight Subcommittee's future hearings on IRS reform, to be held later this year and beyond.
Thank you very much, Madam Chairwoman.
Chairman JOHNSON. Thank you, Bill.
Now I would like to give my colleague, Rob Portman, the opportunity for an opening statement. He was my designee on the Commission, Cochaired the Commission, put in many, many hours, did a very thorough job, and Rob, you have been a coleader in bringing to this Subcommittee a really outstanding, thoughtful, and important report.
Mr. PORTMAN. Thank you, Nancy, and thank you for holding this hearing.
This is a busy time in Congress, as all of us know, and there are plenty of excuses, frankly, for postponing these proceedings today because of all the other activity going on. It's a tribute to you that you were willing to move forward with it, and I think, as Bill Coyne just said, it is a very important and timely hearing on the issues of IRS reform that came up in the Commission's work.
I just want to thank Donna Steele and Beth Vance of the Subcommittee staff for their help in putting this hearing together, but more importantly, for their work over the past year with regard to the Commission's work. They were very involved and active and without them we would not have been able to put together the product that we have before us today.
Mrs. Johnson mentioned that I'm Cochair of the IRS Commission. She didn't really mention the fact that I'm in this position because she designated me. In fact, at the time I wondered how much of an honor that was. A year later, I can say, without any regrets, that I'm very pleased that she chose me to represent her on that Commission, and then becoming Cochair was an honor and it was an honor to work with Senator Kerrey, with whom we worked very closely. You heard from him earlier with regard to his strong views on the final report.
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All 17 members of the Commission put an enormous amount of time and effort into this. I see a number of them here. Josh Weston, Fred Goldberg I see here. I know Bob Tobias, David Keating, George Newstrom, and Larry Irving are coming. Jeff Trinca is here, who was Executive Director of the Commission. All of them deserve a great deal of credit for this final product as well.
It was an unusual experience. In a nonpartisan way, not even a bipartisan way, I would say we really rolled up our sleeves and tried to do what was right for the IRS and for the American taxpayer. I think again, as we look at the results today, through the testimony you will hear, that many of you will agree that this was a thorough, comprehensive effort that will result in real change and will really help not only the Service but the taxpayer.
I also want to commend Treasury for its work on this. Ed Knight, who is General Counsel at Treasury, was on the Commission, and that needs to be noted. Treasury's input was very much a part of this. Ed has just arrived, as well as Larry Summers, who is now here with us. I want to thank them for their service and input and work.
Finally Bill Coyne, who was a gentleman throughout this whole process. I will say, to show you how unusual this work product is in the Washington context, almost every one of the concerns that Congressman Coyne mentioned he had input in, and actually changed and moved his way, even though in the end he was not able to sign the report. I think it's fair to say that his input was significant, as was Treasury's, and that in the end Bill Coyne and I agree on about 80 to 90 percent of the final work product, because this really was in many respects a consensus product, with the exception of a few tough issues that we'll get into later today.
This is the first comprehensive blueprint for reform of the IRS in my lifetime. Not since 1952 have we suggested these kinds of fundamental changes. I think it is truly a road map for transforming the IRS into a 21st century taxpayer service and customer service entity. Nancy Johnson forcefully made the comments that we need to do this, it needs to be dramatic reform, if we are indeed to respond to the concerns of taxpayers expressed to us as Members of Congress, and as expressed through various other surveys and evidence that the Commission was able to discover.
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I am pleased that a number of organizations, Madam Chair, worked with us on a daily basis in putting together this report, and have now endorsed the recommendations. This includes the National Treasury Employees Union, which as most of you know represents the bulk of the IRS employees. It also includes the National Taxpayers Union, again to show you how unusual this product is. The Americans for Tax Reform, the American Bankers Association, the American Payroll Association, the American Society of Payroll Managers, the American Institute of Certified Public Accountants, the National Association of Computerized Tax Processors, the National Association of Enrolled Agents, the National Association of Tax Practitioners, and the National Society of Accountants all endorse this report.
These stakeholders endorse this product because again they had significant input in it. We listened to them as we listened to the American taxpayer, and I think it is a tribute to them that they were willing, as the Commissioners were, to roll up their sleeves and dig into this issue and come up with a good product, and then in the end to stand behind it.
I would also like to announce that next week we will be introducing legislation to implement the Commission's recommendations. Senator Kerrey, Senator Grassley, and myself and other Members of the House and Senate will be doing so some time probably mid-week.
Madam Chair, I look forward to hearing from today's witnesses, and again I want to thank you for giving us this opportunity today.
Chairman JOHNSON. Thank you, Rob.
It is my pleasure now to welcome Hon. Lawrence Summers, Deputy Secretary of the U.S. Treasury.
STATEMENT OF HON. LAWRENCE H. SUMMERS, DEPUTY SECRETARY, U.S. DEPARTMENT OF THE TREASURY
Mr. SUMMERS. Thank you very much, Madam Chairman. Let me apologize to the Subcommittee for the delay in traffic that I experienced on my way up here. I have a longer statement which I submit for the record.
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I am pleased to be here today to talk with you about the report of the Commission on Restructuring the IRS and Treasury's plans to implement solutions to the difficulties facing the IRS.
Before saying anything else, I would like to thank the Chairman, the Ranking Member, and other Members of the Subcommittee for their leadership on this critical issue.
Over the last year we have been involved in an important and historic debate about how best to improve the operations of the IRS. The National Commission on Restructuring the IRS, under the leadership of Senator Kerrey and Congressman Portman, has done a great deal to illuminate this debate and to advance thinking as to possible solutions.
We in the administration and the Commission have in many ways traveled similar paths in the search for better IRS. We agree on the need for change for the 21st century. We agree on what needs fixing: More effective oversight, increased continuity, more private sector input, a more flexible and responsive institution that can provide far better customer service. The question is how best to achieve that change.
Last year, in testimony before this body, Secretary Rubin and I recognized the severity of the problems that the IRS faces. We highlighted the importance of improved customer service and noted the serious management problems that have arisen with respect to the modernization program. It was, as we put it at that time, ''off track.'' We called for a sharp turn and made clear our determination to bring about change.
I think there has been change. Under the direction of our new Chief Information Officer, the IRS has released a blueprint for technology modernization, the first attempt to form a strategic partnership on information technology with the private sector.
Outsourcing has increased dramatically, with more than 60 percent of IRS information technology work now carried out by private contractors. The IRS has increased electronic filing and filing by telephone by more than 50 percent, and it has doubled the number of taxpayer calls answered.
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There is a lot of debate about just what the right statistics are, but on one set of statistics, the fraction of calls for taxpayers assistance, was increased by a factor of 2 1/2 during 1996. We're still not doing what we should be doing, but real progress is being made.
I think we've made a good start toward building the modern, efficient and accountable IRS that the American people deserve, but we must do more. The administration believes that we should make change on a broad range of fronts. Today I want to focus on legislation that will soon be introduced to improve governance and to improve management flexibility.
As I emphasized, we share with the Commission the view that current governance arrangements are flawed, in not providing adequately for continuity, for accountability, and for increased outside input. That's why we have proposed to appoint the IRS Commissioner for a fixed 5-year term. That's why we've proposed to make permanent the current Modernization Management Board, comprised of senior government officials, to review high level management issues and to require the Secretary and the Deputy Secretary to report to Congress on the IRS in person twice each year.
That's why we have proposed to bring outside expertise to bear on the problems of the IRS by establishing an Internal Revenue Service Advisory Board reporting directly to the Secretary of the Treasury, a board made up of private sector individuals selected to represent a wide range of relevant experience, including information technology and customer service.
In order to ensure that that advisory board functions in a strong and effective way, and in order to ensure that the Treasury maintains its oversight responsibilities, we will ask the requirement be embodied in legislation that that advisory board make a report to the American people on the performance of the IRS and on the performance of Treasury oversight of the IRS each year.
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But, however successful we are in improving our oversight, ultimately it is what the IRS does that will be what American taxpayers see. That's why we have focused very intensively on leadership and have identified a candidate now going through the vetting process to be Commissioner of the IRS, with an outstanding private sector management background and extensive experience in the information technology area.
But another crucial piece of this effort has to be to give the IRS much needed flexibility. Our legislation will contain a range of measures to enhance the IRS' capacity to do what we and the Commission both recognize is necessary—to recruit and retain people with critical skills and to streamline procurement procedures.
We also believe that stability and certainty are needed for the IRS' technology and capital investment budgets. The President's fiscal year 1998 budget proposes multiyear investments for technology in order to ensure this stability. We look forward to working with the Congress to implement the Commission's budgeting recommendations.
Finally, Madam Chairman, I would like to comment briefly on the Commission's proposal that an outside board of private citizens take on the governance function at the IRS. We believe this proposal raises grave concerns and subjects 95 percent of our Nation's Federal revenues collected by the IRS to unacceptable risks.
First, we doubt the efficacy of such a proposal. The challenges the IRS faces in its size and complexity demand more than the part time and sporadic attention that such a board could provide. Urgent and complicated decisions, which can now be taken by Treasury officials, might be delayed a month or more. The board of directors model has some successes in the private sector, but experience suggests that it has been notoriously problematic in government.
Second, we believe granting decisionmaking powers to high stature individuals from the business world would expose the Service to dangerous and unacceptable risks of conflicts of interest. Under the Commission's proposal, on at least one interpretation, for example, corporate executives whose companies might automatically be subject to yearly audits would have no recourse at all to their own corporate situation but could have a crucial role in determining the audit budget for the IRS and its strategic approach to enforcement.
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Third, we are concerned that a new layer of management would create bureaucratic confusion by dividing core IRS functions into disparate elements. Today, for example, the IRS is able to give Secretary Rubin and me its analysis of the impact of proposed tax changes on tax administrations. Under the Commission's proposal, while there still would be the possibility of communication, we believe that the synergy would be lost.
Fourth, and particularly troubling to us, the Commission's proposal would grant private citizens control over one of the largest law enforcement agencies in our Nation. This is only one of many areas which could expose the new board to constitutional and legal challenges and risk paralyzing the IRS.
Fifth, the proposal would undermine accountability. Right now, accountability for the performance of the IRS rests with the President and rests with the Secretary of the Treasury, one of the most senior members of his cabinet. The Treasury Secretary is accountable to the President, and the President is accountable to the people. Resting accountability with a group of part-time participants, who inevitably would have primary loyalty elsewhere and who would not be subject to the kind of discipline that shareholders provide in the private sector, seems to us to be very, very problematic.
In sum, Madam Chairman, I think there is no disagreement about ends. We all want an IRS that is ready for the 21st century, that can provide the kind of customer service that the American people expect. We all believe that it needs to become a more flexible, more aggressively and effectively managed institution, that harnesses information technology far more effectively than in the past, to achieve those objectives. What we need to do, working together, is find the most effective means of achieving that end.
Thank you very much, Madam Chairman.
[The prepared statement follows:]
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Statement of Hon. Lawrence H. Summers, Deputy Secretary, U.S. Department of the Treasury
I am pleased to be here today to talk with you about Treasury's plan to achieve lasting improvements in the performance of the IRS and to discuss the report of the National Commission on Restructuring the IRS on this same subject. Before I begin, I would like to thank the Chairman, the Ranking Member and the other members of this Committee for their leadership on the matter of IRS reform. In addition, I hope you will join me in recognizing and thanking the more than 100,000 loyal and dedicated IRS employees who carry on the unpopular but vitally important task of collecting 95% of our government's revenue.
Madame Chairman, over the last year, we have been involved in an important and historic debate about how to improve the operations of the IRS. The National Commission on Restructuring the IRS, under the joint chairmanship of Senator Kerrey and Congressman Portman, has done much to illuminate that debate and drive it forward. Everyone involved in the Commission has worked hard to understand the complex problems facing the IRS, and the Report contains many constructive suggestions for change.
In fact the Administration and the Commission have traveled very similar paths in their search for a better IRS. We agree on the need for change at the IRS: on the need for more effective oversight, increased continuity, and greater access to outside expertise. This finds us making many of the same recommendations in important areas. However, as Secretary Rubin has said, we part company with the Commission on the crucial question of how the IRS should be governed. Today I will be focusing my remarks particularly on this issue.
First, however, I would like to briefly describe some of the progress we've made on improving the IRS and how we intend to push things forward in our forthcoming legislation. Our aim, Madame Chairman, as always, is to build a modern, efficient and accountable IRS to serve the American taxpayer into the 21st century. As you will see, we believe that objective is getting closer every day. I will then go on to explain why, for all the many areas of agreement between us, the Administration believes that the Commission's proposals for IRS governance are fundamentally flawed; indeed, they would be more likely to aggravate its problems than solve them.
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Management Reform
Madame Chairman, for some time now we have been engaged in a many-sided effort to improve the IRS. Longstanding problems in modernizing the computer systems of the IRS initially focused attention on the shortfalls of the information technology of the Service. At the same time, improvements in customer service in the private sector have led the American people to want interaction with the IRS to be as efficient and straightforward as with credit card companies and other private-sector financial institutions. This has occurred at a time when the IRS is also coping with an increased workload. In 1997, the IRS processed over 200 million returns.
Over the last few years, the Treasury Department has focused intense efforts on improving the IRS. We are committed to change and real change is underway. Our goal is to create a more efficient, modernized and taxpayer-friendly Internal Revenue Service. This Committee and others in the Congress have held extensive hearings on the matter. These efforts and the work of the Commission have helped forged a consensus among a wide group of stakeholders, from business executives to Members of Congress to leaders of the IRS and the National Treasury Employees Union, on the need for change.
I believe that in the next year, we have the opportunity and the obligation to bring about the most far-reaching changes in decades in how the IRS is managed and how it does business.
Indicators of Progress
Last year, in testimony before this body, Secretary Rubin and I recognized that the IRS's modernization program was, as we put it at the time, ''off track''. We called for a ''sharp turn'' and made clear our determination to bring about change in the way the IRS uses information technology and provides customer service. And there has been change. The results, while still in their early stages, are already producing benefits and give the IRS a solid foundation on which to build.
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Some examples of the steps we have taken include the following:
• Our new Chief Information Officer, Art Gross, has cut and collapsed the number of tax systems modernization projects from 26 to nine.
• In May 1997, after many months of intense preparation, Mr. Gross released the IRS's Blueprint for Technology Modernization, which was well-received in the professional information technology (IT) communities both inside and outside the government. This Blueprint represents the first comprehensive attempt to form a strategic partnership on IT with the private sector.
• The IRS has also increased outsourcing. The percentage of work performed by contractors has increased from 40 to 64 percent over the past two years. The number of IRS staff working on tax systems modernization has decreased from 524 to 136.
• The IRS is now working with a top marketing firm on an electronic filing marketing strategy to bolster taxpayer participation in the entire line of IRS electronic filing products, including Telefile, On-line filing, 1040-PC filing, and traditional electronic filing. The bureau is also putting forth a Request for Information (RFI) that will produce opportunities for partnering with the private sector to increase electronic filing.
The IRS has taken many steps to improve customer service. For example:
• A joint Treasury, IRS, National Performance Review (NPR) task force is concluding a 90-day study of customer service. The study has drawn on the experience of front-line employees and has focused on the issues that touch customers most deeply. Among other tasks it will identify ways to improve notices sent to taxpayers, the quality of walk-in center assistance, and training.
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Our efforts are paying off. For example:
• The GAO found that 50.9% of calls by taxpayers to IRS taxpayer assistance were answered in 1997. Although this percentage remains far too low, it has more than doubled from only 20.1% in 1996.
• In fiscal year 1996, the IRS redesigned, combined and eliminated notices to taxpayers, cutting the number of different notices by 12 which resulted in 18 million fewer taxpayer notices being issued and mailed. In 1997, it eliminated another 20 types of notices, resulting in 3 million fewer notices being mailed.
• As of July 4, the number of returns filed electronically by paid preparers rose from 12.1 million in 1996 to 14.4 million in 1997. Meanwhile, filing over the telephone through the IRS' Telefile program has risen from 2.8 million in 1996 to 4.7 million this year. As a result, the percentage of individual tax returns filed electronically has risen from 13.1% in 1996 to 16.5 % in 1997, or about one in six taxpayer returns.
These improvements, while far from sufficient, are meaningful. Looking ahead, we are committed to raising the standards of IRS performance even higher.
• As part of the Government Performance Review Act process, we have established tougher targets for a variety of performance measures including improvements in telephone service, to which I alluded above, reductions in the cost of collecting revenue and increases in the percentage of revenue collected electronically. For example, in fiscal year 1997, we have set a target of collecting 24.7% of revenues electronically. In 1998, we will increase that target to 48.4%.
In short, we have made a good start toward building the modern, efficient and accountable IRS the American people deserve. But everyone involved in the process—at Treasury, the IRS, Congress and the union—recognizes that problems that have been building for decades do not get solved overnight, or even over a couple of filing seasons. Further structural changes will be needed to propel the reform process forward and build an IRS for the 21st century. Let me turn now to the Administration's plans to make these changes come about.
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Our Approach to Reform
In March of this year, the Administration unveiled a five-point plan outlining our approach to achieving long-term improvements in IRS performance. Our approach includes measures to strengthen oversight, improve leadership, increase flexibility, improve budgeting procedures and simplify the tax code that the IRS administers. As you know, we have begun to make progress in all these areas. Today, I want to focus on our forthcoming legislative proposals to bring our vision of a modern and responsive IRS even closer. These will guarantee lasting improvements in oversight and accountability at the IRS while giving it greater access to outside expertise and more internal flexibility.
Improving Governance
Oversight and Accountability
First, to improve oversight and accountability, we will build on the success of the Modernization Management Board by making it permanent and extending its mandate. The IRS Management Board (as it will be called) will be made up of senior career and non-career officials from Treasury, IRS, OMB, and the Office of Personnel Management. In addition, one board member will be the Taxpayer Advocate, whose presence will give taxpayers a stronger voice in IRS governance.
The board will function much like a corporate board of directors, meeting once a month to assist the Secretary on high-level IRS management issues such as operations, modernization and taxpayer assistance and services. As now, the Board will be chaired by the Deputy Secretary of the Treasury.
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It will also prepare semiannual reports to the President and the Congress. An Executive Committee will review strategic decisions, including significant reorganizations, performance measures, budgetary issues, major capital investments and compensation matters.
With greater oversight will come greater responsibility. Our legislation will require the Secretary and Deputy Secretary to come to Congress twice a year to report on the operations of the IRS. This will ensure that future occupants of these positions are required to demonstrate the same full-time commitment to the IRS that Secretary Rubin and I have shown over the past year.
Access to private-sector expertise
Second, the administration's proposals recognize the undoubted need for the IRS to have greater access to private-sector expertise. To achieve this we intend to establish an Internal Revenue Service Advisory Board that reports directly to the Secretary of the Treasury. This Board will include up to 14 individuals, each appointed by the Secretary and serving a staggered 3-year term. Members will be selected so as to represent the broadest range of outside interest and expertise, including taxpayer groups, small and large-scale businesses, nonprofit or educational organizations and tax professionals as well as state tax administrators, technology leaders, and experts in customer service.
The Internal Revenue Service Advisory Board will meet quarterly to help the Secretary find ways to improve the management and operations of the IRS and will provide recommendations about IRS policies, programs and plans. The public will receive a yearly account of the board's contribution in the form of an Annual Report to Taxpayers.
Greater continuity
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Finally, like the Commission, we want to provide for increased continuity at the IRS within a framework of clear accountability to the Executive by appointing the IRS Commissioner on the basis of a fixed, five-year term. We have identified a potential candidate for Commissioner of the IRS with a background in management of information technology. The Commissioner, as now, will be appointed by the President with the advice and consent of the Senate and will be removable at will.
To sum up, I am confident that the four steps I have outlined—creating a permanent management board, requiring the Secretary and Deputy Secretary to report to Congress semi-annually, creating an advisory board comprised of outside experts, and appointing the Commissioner to a fixed five-year term—will strike the proper balance between helping the IRS operate more effectively and making it more accountable and responsive to private-sector expertise.
Flexibility
We are all agreed that the IRS needs to have greater flexibility in both selecting and managing personnel and in procurement.
We are exploring options in the area of recruiting and retaining needed technical and professional staff with critical skills. For instance, we intend to seek flexibility to set the pay for a limited number of critical positions at higher than usual salary rates. We will ask for legislation to liberalize the pay limits for outside experts and consultants. In addition, to give the Commissioner greater flexibility to address short-term staffing needs at the most senior levels, the bill will provide greater authority to appoint limited-term and emergency Senior Executive Service staff.
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We will also be seeking authority to enable the IRS to work with the Union and the Office of Personnel Management (OPM) to develop and implement personnel management demonstration projects. This authority—a streamlined version of provisions that have been in the law for many years—will support IRS efforts to try out new ways of doing business.
In addition, our legislation will contain a range of mechanisms to make it easier for the IRS to make strategic long-term purchases, streamline the procurement cycle for major acquisitions and encourage the development of long-term strategic partnerships with reliable, competitive contractors. These mechanisms include a two-phase competitive acquisition process that promotes efficient and effective communication to identify the best fit between government needs and marketplace capabilities and allows limited recompetitions for continuing requirements. The legislation would further enhance the bureau's ability to buy information technology in more manageable, modular increments.
Stable budgeting
Finally, let me add briefly that the Administration has not lost sight of the need to obtain more stable and predictable funding for the IRS. The report of the National Commission on Restructuring the IRS was clear on this point. It recommends that ''the IRS should receive stable funding for the next three years so that its leaders can undertake the proper planning to rebuild its foundation.'' This recommendation pertains to the budgets for tax law enforcement and processing, assistance and management.
Similarly, the Commission believes that stability and certainty are needed for IRS' technology and capital investment budgets. The President's FY 1998 budget proposes multi-year investments for technology in order to ensure this stability. We are glad that both the House and Senate appropriations subcommittees have acknowledged this need and that they have proposed funding for FY 1998.
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The Right Reform Mix
I come now to my more detailed comments on the IRS Commission's Report. At bottom, the Commission's and the Administration's diagnoses of the IRS's problems are strikingly similar. Like the Commission, we believe that more effective governance, flexible management practices, and stable budgeting hold the key to an IRS that can meet the needs and expectations of American taxpayers into the next century. We further agree with the Commission that efforts to improve governance ought to focus on injecting greater accountability, continuity and outside expertise.
As I have shown, the common ground between us and the Commission does not stop at diagnosis. We have also found ourselves coming up with many of the same prescriptions in drawing up our legislation. In our view, however, the Commission's proposal would fail to achieve the objectives we share. What is more, it would endanger the service's ability to serve the public with the efficiency and integrity we demand of such a core part of our government.
The Commission has proposed that the IRS be governed by an outside board of private citizens who serve on a part-time basis. This, on the grounds that it ''will bring accountability, continuity and expertise to executive branch governance and oversight of the IRS''. While perhaps superficially attractive, we believe the proposal will deliver none of these benefits. Far from increasing oversight and continuity, the change would subject the IRS to a grand and uncertain experiment, fraught with legal and administrative uncertainties. The service, in such a setting, could find it difficult to function at all, let alone do so more effectively. Meanwhile part-time outsiders with neither the time nor the insulation from special interests of full-time public officials would be running a core government agency, with possibly grave implications for public confidence in the IRS and the Service's confidence in itself.
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Unacceptable Risks
Instead of enhancing oversight, the insertion of the board into IRS governance arrangements would actually alter the present clear line of accountability between the IRS leadership and the American people as embodied in their elected President.
The Commission has pointed out, correctly, that the Treasury has not always met the IRS's need for consistent strategic oversight and guidance. But to respond to these past failings by inserting a new private-sector management board, would, in our view, be a large step in the wrong direction.
The division of authority between the Secretary and the Board would not only create internal confusion, but would significantly increase the likelihood of litigation; disgruntled taxpayers might well challenge the authority of the entity that had made a decision with which they disagreed. In addition, the Commissioner's authority would be vulnerable to Constitutional challenge on the grounds that his appointment by the Board violates the Appointments Clause.
The Appointments Clause of the Constitution states that principal federal officers must be appointed by the President with the advice and consent of the Senate, but that Congress may provide that inferior officers may be appointed either by the President alone or by ''Heads of Department'' or ''Courts of Law.''
It might by considered ironic that a Commission that has done so much to highlight the importance of the IRS to American life should apparently see the IRS Commissioner as an inferior office. At any event, it is clear that the proposed board would constitute a ''head of department.'' Thus, the Commission's proposal does not comply with the mandates laid down in the Appointments Clause.
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These and the other structural concerns would leave the IRS' actions open to serious legal challenges that could impede the flow of 95% percent of our nation's revenue. It would be the height of irresponsibility, at a time when we are trying to balance the Federal budget for the first time in a generation and facing difficult decisions about our spending priorities, to create a legally suspect regime that could threaten funding for everything from national defense to the education of our children.
Although the Commission's proposal purports to leave Treasury in charge of developing tax policy and performing the IRS' law enforcement function, it contravenes that notion by giving the board broad authority over the budget-sector CEOs would control the purse strings and hiring practices at one of the most powerful government agencies.
At best, the proposal would split tax policy and law enforcement between Treasury and the Board; at worst, it establishes the Board as a de facto policy voice. Rather than fragmenting accountability, the legislation I have outlined here today will strengthen it.
Our day to day involvement with the IRS' management direction serves a critical purpose that would be undermined by the Commission's proposals. This is the capacity to treat tax policy and tax administration as they should be treated: as two sides of the same, public, coin. It is no accident that close and institutionalized coordination between the IRS and Treasury's Office of Tax Policy has been maintained without interruption for well over 50 years.
Even if the many concerns I have mentioned were to be overcome, I do not believe that a private-sector board would meet frequently enough to address the critical and complicated decisions facing the Service over the next decade. Urgent matters requiring the board's immediate attention and input might have to wait a month or more until the next board meeting, by which time these busy executives would somehow have to have fully prepared themselves to deal with the issue—if, that is, it were not by then too late to act.
The challenges the IRS faces and the size and complexity of the institution demand more than the part-time and sporadic attention that the Commission's proposed board would provide. Clearly, the problems of the IRS show that Treasury in the past failed to exercise appropriate oversight. But things are different now. And the measures we are proposing will make sure they stay different, not merely in this Administration, but in the many to come. Today, Secretary Rubin and I, as well as other Treasury officials, are always available to discuss pressing issues with the IRS—and frequently do so.
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The IRS's relationship with Treasury provides an effective mechanism for presenting to senior Administration officials the IRS's analysis of the impact of proposed tax changes on tax administration. Secretary Rubin and I raise such concerns frequently in tax policy discussions in the White House and elsewhere throughout the Administration. Furthermore, Treasury oversight allows the IRS to draw upon Treasury resources for critical projects, as demonstrated by our current cooperation on the Year 2000 conversion. Under the Commission's proposed governance structure, this much-needed synergy between the IRS and the Treasury would be lost.
Outsider control, outsider interests
The Commission's desire to import private citizens to oversee the IRS's operations raises another major worry. Once again, the stated objective is the same as the Administration's—namely to open the IRS to wider sources of outside expertise. But, in our view, attempting to achieve this by granting decision-making powers to ''high-stature'' individuals from the business world would expose the service to dangerous and unacceptable risks of conflicts of interest. The IRS needs to be managed by officials whose full-time, sworn responsibility is to uphold and enforce the law. Anything else risks creating the appearance, if not the reality, of serious conflicts of interest in the management and oversight of the IRS's activities.
In our view, creating a new management board to run the IRS, comprised mainly of individuals who spend the bulk of their days in private business, would run precisely this risk. The Report states that board members would be subject to the same ethics laws as the individuals now associated with the governance of the IRS, but the Commission failed to recognize that those laws impose significantly diminished restrictions on outside financial interests and conflicting activities of part-time employees.
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In any event, it is clear that individual board members—who will continue to draw private-sector salaries—will face an uphill struggle ensuring that their private interests and their newly acquired, part-time public duties do not conflict with one another. Under the Commission's proposal, for example, corporate executives whose companies may be automatically subject to yearly audits could end up determining the audit budget for the IRS and its strategic enforcement activities.
At best, the need for board members to recuse themselves from a wide range of matters facing the IRS to avoid conflicts will reduce their ability to provide effective input, even on a part-time basis. At worst, the new structure could fatally weaken the public's confidence that the IRS administers and enforces the nation's tax system fairly and even-handedly.
In both the report and subsequent correspondence, defenders of the Commission's proposals have denied that such conflicts will arise, on the grounds that the new board would not be involved in specific law enforcement matters. Yet the board's sweeping control over budget and personnel would put it knee deep in law enforcement issues. In fact, decades of experience suggest that, just as tax policy questions cannot be separated from tax administration, tax enforcement and administration are so intertwined as to be, at times, indistinguishable.
The Report claims that the job of the IRS is solely to be an ''efficient financial management organization''. This claim is both improper and incorrect. The IRS is, rather, an essential governmental agency charged, under the supervision and authority of the Secretary, to enforce the internal revenue laws enacted by Congress and the President.
As Acting Deputy Attorney General Waxman has noted, this legal mandate means that the IRS can be duty-bound to pursue enforcement activities that, while fully justified in terms of the broader public good of protecting society from crime, may not be justifiable on narrow financial grounds. One does not have to go back to Al Capone to find examples of's the IRS was second only to the Drug Enforcement Administration in its participation in Organized Crime Drug Enforcement Task Force investigations.
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We share the concerns of the Attorney General's office that a private board along the lines proposed by the Commission might tend to focus solely on generating revenue. This, at the cost of undermining the IRS's longstanding contribution to important law enforcement missions such as combating domestic and international organized crime and money laundering. The long-term social benefits of an active and long-term commitment of IRS personnel and resources to such missions are hard to translate into dollars and cents. The worry must be that they would not be given due weight by private, part-time ''special government employees'' whose remit is to serve the public purse and not, more broadly, the public good.
Finally, let me add that in the public sector, management by a board is notoriously difficult. In the private sector, financial markets, shareholder voting rights and a well established body of law around corporate governance as well as the imperative of profit, provide checks on the actions of a board of directors. In the public sphere, no such checks exist. For these reasons alone, the GAO counseled against vesting oversight of an agency like the IRS in a separate board.
To sum up, I believe the management board proposed by the Commission will do little to enhance effective oversight or boost continuity within the IRS. Put simply, the collection of the revenues that underpin this nation's government is too important to subject to this degree of risk—particularly in return for such uncertain benefits.
Conclusion
In conclusion, this morning I have discussed some of the specific steps we are taking to modernize the IRS. We have already made considerable progress. But we have far more to do. The legislation that I have described is necessary to continue the job of building the IRS of the future. Its key elements—reforming governance and improving management flexibility—will give us the tools we need to improve our tax administration system, not just this year but for years to come.
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The subject of governance, in particular, is one where I believe we must exercise extreme care. This morning I have described our approach to this critical issue. I have also highlighted areas where we agree and where we disagree with the proposals of the Commission on Restructuring the IRS. In coming weeks and months, I look forward to working with members of the Commission, with members of this committee, with the union and with other interested groups in building on the many areas of agreement that exist among us, many of which will be reflected in the Administration's legislation.
We have made tremendous progress over the past year in identifying the need for change in the IRS and we are starting to make that change a reality. The task for the years ahead will be to keep this process of renewal moving forward. Between us we can build an IRS that meets the high standards the American people set for it—and the demands of a new century. I hope we can all share a commitment to doing this without at the same time jeopardizing the ethos of dedicated public service that has, rightly, made the US system of tax collection and enforcement the envy of the world.
Thank you, Madame Chairman and members of the Committee. I would welcome any questions.
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Chairman JOHNSON. Thank you, Secretary Summers.
We have a vote called and we only have a few minutes now left to vote, so we're going to go vote and recess for about 7 or 8 minutes.
[Recess.]
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Chairman JOHNSON. Mr. Secretary, thank you for your testimony. It is a pleasure to look at how much of this work, that consumed a year of dedicated effort on the part of many thoughtful and knowledgeable people, you all agree on. On the issue of governance, however, you do have significant disagreements.
I would like to invite you to discuss in a little bit greater depth why you think that your current board, that includes appointees from the Vice President's office, OMB, OPM, and Treasury, can exercise oversight that brings to the table the level of knowledge and consistency that we all agree we need. Because, in my estimation, the appointee from the Vice President's office raises questions of political influence, and I don't see the expertise specific to the IRS challenge as coming or being there in either OMB or OPM.
I would like to hear you talk about this management board as an alternative, because right off the top it doesn't make it, in my mind.
Mr. SUMMERS. I think you raise a very important set of questions. Let me just clarify one point.
It's really the National Performance Review staff that is represented on the board, not the Vice President's personal staff and——
Chairman JOHNSON. But to that point, if I may, that's a creature of this Vice President. Will the next Vice President have such a board? In the future, will Vice Presidents' offices be dependent——
Mr. SUMMERS. No. I think probably not, so I think what's important is that I would expect any administration would have a locus of people who were concerned with maximizing efficiency in government, and I would expect that group of people to be represented on that board.
In this administration, the National Performance Review has been under the Vice President's responsibilities, but that's why our proposal allows for the possibility of modification of the composition of the board precisely to reflect the fact that where the focus on efficiency in government is will change, or may change a bit, from administration to administration.
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Chairman JOHNSON. Mr. Summers, just to stay on this one point, and then move on to the others, first of all, we would have to be very careful about how we wrote that statute, so that we got the right person.
Mr. SUMMERS. I agree with that.
Chairman JOHNSON. But whoever we got—because remember, Vice President Dan Quayle had the first sort of modernization efficiency—I've forgotten what he called his, the National Competitiveness Council—that had the same goal and looked at similar kinds of issues. Those councils always make a contribution. They made a contribution under Vice President Quayle, and Vice President Gore is certainly making a contribution through this council.
But they are, after all, political entities. They are seen by the rest of the world as part of an administration and, therefore, part of a political platform and set of goals.
Do you think it's really wise to bring that kind of entity into, in a sense, a permanent relationship with the IRS, given some of the problems that we've had historically between elected officials and the IRS in those areas?
Mr. SUMMERS. I think it's appropriate for the President and the senior people that the President appoints to be members of his administration, to take on the responsibility for oversight of the IRS. I think that they should take that responsibility on in a way that is directed at overseeing policy and management, and obviously with no connection to specific cases.
I think it is helpful to the Treasury Department, where that responsibility is centered, to be able to draw on expertise from other parts of the administration. In our administration, we have people with extensive knowledge and experience in the procurement area, in the information technology area, in the labor relations and personnel area, who are located at OMB, who are located at the OPM, and who have in this administration function as part of the National Performance Review staff.
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I certainly agree with you that it would be inappropriate to include in IRS governance persons whose primary concerns were political or communications oriented. But just as Congress, by statute, many years ago set up the National Security Council as a grouping of senior officials reporting to the President, charged that grouping with certain responsibilities, just as I think this administration has innovated effectively with the National Economic Council, which is a group of executive branch officials, given an important responsibility.
I believe the same thing can work, and has worked, at the IRS. So that's the reason for going and getting the expertise outside of Treasury.
We have found that, in terms of holding the IRS accountable, having a monthly board meeting and requiring decisions to be presented to a group of senior government officials, is an effective device for achieving IRS accountability. I think that, working through the board, we have been successful in levering a great deal of change, particularly in the management of the information technology program, over the past year. So I believe that this is the right and is an effective approach.
But I would want to stress that we share the Commission's concerns about the issues of continuity, of accountability, and of outside input. As far as continuity is concerned, that's why we have come to believe that the IRS Commissioner should be given a 5-year term, so that you won't get into situations where a Commissioner is appointed right toward the end of a presidential term and is a lame duck, so that there will be a further degree of insulation from the political process. So that's why we have supported the 5-year term.
We believe that outside input is very, very important. That's why we've proposed an advisory board with teeth, an advisory board that just doesn't report to the IRS but reports directly to the Secretary of the Treasury, who is really the person who is going to be on the hook and accountable to the people for the performance of the IRS, and that is asked and, indeed, required to prepare an annual report to taxpayers, so that if that outs