FROM THE OFFICE OF PUBLIC AFFAIRS

Thank you. It is a pleasure to be among tax professionals to discuss thetremendouschanges under way at our nation's tax collection service and the best ways to continue thattransformation.

These past couple of years have been a period of tremendous ferment -- inside the IRS, andabout theIRS. Continuing improvements in the service provided by banks, brokers, credit card companiesand otherusers of information technology have brought ever more sharply into focus the IRS' problemswithcustomer service. Treasury, the IRS, the National Treasury Employees Union, many interestedmembers ofCongress -- we have all recognized that the IRS needed to do much better at providing the kindof cost-effective, high-quality service that American taxpayers have come to expect from theprivate sector andthat our nation deserves.

The problems at the IRS have developed over many decades -- they will not be solvedovernight, oreven over a couple of filing seasons. But with the work of the National Commission onRestructuring theIRS, led by Senator Bob Kerrey and Congressman Rob Portman, with input from valuablehearings onCapitol Hill and the work of many others inside and outside the Administration, a clear consensushasemerged among a wide group of stakeholders on the need for change. With the executive actionswe havetaken and will take, and the legislative progress that has been made, those changes are now firmlyon theway to being achieved. The IRS has started to change and the public is starting to feel thebenefits of thatchange.

Today I would like to review what we have done; what the results have been so far; andoutlinewhere we go from here, emphasizing the importance of passing the IRS reform legislationpresentlybefore Congress.

I. Changes at the IRS

When I spoke here a year ago I had the opportunity to lay out Treasury's five point plan forchanging the IRS. Our goals were: to strengthen leadership; to increase managerial flexibility; toenhance oversight; to improve IRS budgeting; and to work for a simpler, fairer tax code. Wehavemade real progress in all of these areas. But more progress depends on passing the IRS reformlegislation that has already passed the House last fall and that we hope soon to see enacted.

New leadership

Last year I emphasized the need for a different type of commissioner, whose experienceemphasized management, emphasized customer service, emphasized the critical importance oftechnology. We believed that major change at the IRS had to come from the top. At that time wedidnot know who that commissioner would be. Fortunately after an extensive search we weresuccessfulin finding and appointing Charles Rossotti.

Charles will be speaking later today, and I know all of you will be as impressed by his boldnewapproach to the IRS as we at Treasury -- and so many in the IRS and in Congress -- have been. He is aformer Chief Executive Officer of a large, highly successful private sector company, someonewith a longrecord of building effective organizations -- effective organizations that succeed because theymeet theircustomers' needs.

An important aspect of leadership is continuity. The IRS reform bill passed in the House lastfalland presently being debated in the Senate calls for the five year term for the new Commissionerthat weproposed last year. This will enable longer term planning and greater independence and provideformuch greater continuity from Administration to Administration. It is the modern way to run aneffectiveorganization. And it is the right way.

Greater flexibility

One thing is clear: if new leadership is to mean anything, it will be vital to provide for themanagerialflexibility at the IRS to translate it into practice. Getting the right people in the right jobs is one ofthe mostimportant elements of effective management. Everyone who has looked seriously at the IRS,includingthe Restructuring Commission and the Congress, agrees that this kind of flexibility is badlyneeded,particularly to help recruit people in the critical areas of information technology and customerservice.

The IRS legislation passed in the House last year includes several provisions that will help toaddress this urgent need. But we believe these can and should be broadened to include other newflexibilities. Specifically, there is a need for:

• streamlined authority to appoint a limited number of critical technical, professional andmanagement experts on a fixed term basis;
• additional critical pay authority to appoint individuals at competitive rates to critical positions,andthus boost the IRS' ability to attract high-skilled individuals to hard-to-fill vital posts inmanagementand technology;
• authority for the Treasury Secretary, subject to Office of Personnel Management approval, tovarythe provision of IRS recruitment, retention and relocation incentives, once again to be morecompetitivewith the private sector in recruiting and retaining high-quality candidates for hard-to-fill andexecutivepositions;
• a broadening of the proposal included in the House bill that provides for greater variation inthepayment of performance-based bonuses, extending the new flexibility to cover all senior IRSexecutives with program management responsibility over significant agency functions.

We are working hard with Congress to include these additional flexibilities in IRS reformlegislation. As the Commissioner has said, "the new IRS will not hold together without the rightpeoplein the right places". If we are serious about building a new IRS we need to give it the capacity tofind,train and retain the right people.

Improved oversight

To improve oversight, since we last met Treasury has taken the existing ModernizationManagement Board (MMB) -- which I chair and which includes key executives in Treasury, OMBandthe IRS -- and we have broadened its mandate so that it is no longer only concerned with systemsmodernization.

The new IRS Management Board has a broader portfolio and deals with all major strategicissuesconcerning tax administration. Already, it has helped to steer new strategies in important areassuch aselectronic filing. In addition, as of last fall the Board and the IRS have an important new sourceofsupport and expertise in Nancy Killefer, a former Director at McKinsey & Co, who is now ourAssistant Secretary for Management.

Everyone recognizes the benefits of outside input as a source of expertise, continuity andaccountability. Yet we in the Department have considered it important also to ensure executiveresponsibility for functions such as law enforcement, and to ensure effective coordination of taxpolicy andadministration.

After discussions with Congress, the Administration was able to support the proposalsincluded inthe IRS reform legislation that passed the House last fall. We believe the new oversight boardthatwould be created by this bill -- made up of public and private citizens -- would provide animportantnew avenue for outside expertise and insights.

Improved budgeting procedures

We have tried to put in place an effective budget approach for systems modernization. Oureffortsto improve the underlying information systems on which the IRS depends have continued to makeprogress. The much-criticized TSM program is making the sharp turn we promised, to a newapproach based on careful planning, step-by-step construction and reliance on the private sector.Thenext step in this process is the release of a Request for Proposals for a new prime systemscontractor. This will happen in the near future. These new systems will not be built in a day, but they areessentialif we want to have the kind of tax administration agency the American people rightly expect of us.

As we go forward we will have to ensure that the IRS obtains adequate funding for systemsmodernization and improved customer service -- and has the resources for tackling the enormouschallenges presented by Year 2000 conversion. Last year, working with Congress, we receivedmulti-year funding for IRS modernization. We are hoping to receive more funding in thisinvestment accountin FY 1999. We believe that stable funding is critical to provide the IRS the resources it needs tomodernize its information systems.

A Simpler, Fairer Tax Code

As you know, there has been a lot of debate recently in the news and on the Hill on the issueofsunsetting the tax code. I will talk more about tax policy in a moment. I think we all recognizethe difficulties that complexity has created for the taxpayers, the practitioner community, and -- notleast --the IRS itself.

Last year, President Clinton proposed and signed into law 40 tax simplification measures aspart ofthe balanced budget agreement. As a result of that agreement:

• filing will be simpler for the 99 percent of homeowners who will not have to pay capitalgainstax when they sell their home;
• filing will be simpler for the 9 out of 10 corporations who will not have to worry about thealternative minimum tax.
• and filing will be simpler for parents with dependents who have both earned and unearnedincome. This change will allow children to earn a greater amount of income without being subject to taxandthereby encourages them to work and save for their education or other needs.

  What has become plain in the last year is that beyond the problems of efficiency at the IRSand thecomplexity of the code there were more critical problems of basic fairness to taxpayers than anyof ushad recognized. The Treasury and the IRS shared the outrage of every American at the abuseshighlighted in the Senate Finance Committee hearings last fall. We have a base for movingforward inthe two sets of expanded Taxpayer Bill of Rights provisions that the President has signed and arehelpingensure taxpayers can count on fair treatment from the IRS, and in the work of the TaxpayerAdvocate, whohas already helped more than 300,000 Americans solve their tax complaints. But as the hearingsmadeclear, this is insufficient. We need to do more.

  Going forward, we are taking more steps to promote greater fairness and accountability at theIRS,including:

  • ensuring that measurement of performance at the IRS depends on service in all itsmanifestations,not just collection rates, and does not undermine fair treatment of taxpayers, by abolishing practicessuch as ranking districts by enforcement activities, assigning dollar goals to individual employeesandincluding penalty amounts in statistics of revenue collected.

  • expanding the power of the Taxpayer Advocate to issue immediate relief to taxpayers in abroad rangeof circumstances, through tax assistance orders;
  • and creating new, independent local Citizen Advocacy Panels. These panels would work withlocalTaxpayer Advocates to identify ways to improve taxpayer service, independently review theperformance oflocal IRS offices in solving problems, and refer complaints to the national Taxpayer Advocatewhenproblems cannot be resolved locally.

    We have proposed a range of further Taxpayer Bill of Rights provisions and presently areworkingwith Congress to get them enacted. These measures include new steps to require IRS collectionagents toinform tax payers of the "innocent spouse" provisions in cases where they are relevant, and aprovision thatwould permit "tolling" of the statute of limitations in certain equitable cases. Many of theseprovisions areincluded in the house-passed IRS reform legislation that, as I have said, we want to see enacted assoon aspossible.

    II. A Better IRS -- Today and in the Future

    All of these changes are paying off in concrete ways for the American taxpayer. A goodmany ofyou have probably heard about Vice-President Gore and Secretary Rubin's announcements lastweektoward "reinventing" the IRS. A joint task force of Treasury and IRS staff, in conjunction withpersonnel from the National Partnership for Reinvention, has made over 200 specific proposals toimprove customer service at the IRS. As the Vice-President said, this group has helped the IRSrediscover its last name -- "service".

    Many of the proposals reflect the concerns that the practitioner community has expressed totheIRS over the years. And already a good many have been implemented:

    • as of the first quarter of 1998, more than 3 million small businesses will be able to filetheirquarterly returns over the telephone, for free;
    • a brand-new advisory committee is being formed to improve paperless filing to make it easierandmore convenient;
    • and, as of three weeks ago, more than 150 IRS public offices have been opening their doorsonSaturdays to give extra help to taxpayers during the filing season.

    This follows closely on the success of Problem Solving Days, a monthly open house fortaxpayersinitiated last November. On that day people had a chance to meet with senior IRS officials towork onsolving long-standing problems. Taxpayers have been enormously satisfied with the service theyhavereceived on these days -- which has already involved the handling of more than 22,000 problems. In anationwide customer service survey for the Problem Solving day in January respondents gave theIRSan average score for quality of service of 6.6 on a 7-point scale -- more than 80 percent ofcustomersgave the top rating possible.

    All of our efforts to improve IRS service and give taxpayers the same customer service fromtheIRS they have come to expect from the private sector are delivering concrete results.

    • electronic filing is up significantly from prior years. The latest statistics, through earlyMarch,show that electronic filing is up by 21 per cent compared to the same point last year. Last week,theIRS already exceeded the total number of electronic returns received in all of last year. TeleFilingis upby 25 per cent. The number of hits to the IRS web page is up by nearly 200 per cent.
    • the IRS is doing a better job in answering the phones. A year ago, nearly one third of callersgot abusy signal when they tried the IRS' toll-free lines. Now that share is down to 10 percent -- andheading downwards. To be sure, we also have to continue to work to make sure that once peoplegetthrough, they get helped faster so that there are fewer abandoned calls.

    III. The Road Ahead

    So we have worked to change the IRS -- and that effort is starting to pay off in better servicefortaxpayers. The question is where do we go from here? There is a wrong way to build on theprogress we have achieved and there is a right way. Putting everything at risk with the abolition of our taxcodeand the 95 percent of federal revenues that depend on that code is the wrong way.

    The wrong way to reform

    As I said earlier, we have taken important steps toward simplifying the tax code but we allknowwe have a long way to go. Ultimately, informed consent to taxation and voluntary compliancewith ourtax system both demand that the people understand how the system works. If the tax systembecomestoo complex it will lose its moral authority. But rhetoric is no substitute for good government.Andabolition is no substitute for sound reform.

    It should be obvious to everyone -- I'm sure it is obvious to everyone in this room -- thattaxesmust be collected and someone has to take on the job. And yet, in the ferment surrounding theIRS wehave heard calls to "abolish" the IRS -- and most recently we have heard calls, and seenlegislationsubmitted, to "sunset" the Tax Code without any replacement.

    Let me outline, briefly, why we believe this would carry such enormous risks:

    • it would put the economic expansion at risk, with no fiscal path to rely on because therewouldbe no clear revenue path to rely on. The sheer uncertainty involved risks a spike in interest ratesthatwould impose a heavy cost on nearly every sector of our economy.
    • it would put at risk the value of millions of families' homes -- all because house buyers wouldnotknow whether they could count on the mortgage interest deduction in the future. That could meanhugeswings in house values because buyers would have to be compensated for the possibility that thededuction would not be there;
    • the entire corporate sector of our economy would suffer from the inability to make anylong-termcommitments -- businesses would be less willing to invest because they would not be able tocount onrecovering the cost of that investment and they would be paralyzed by uncertainty about whatwouldhappen to approximately $3 trillion in unclaimed depreciation allowances;
    • and, of course, it would threaten plans based on desirable tax preferences -- charitabledeductions,for example, employer-provided health insurances...the list continues.

    In short, this proposal is truly unwise, and would pose very real risks to our economy and thefiscalgood health we have worked so hard to achieve.

    The right reform path

    The right way to proceed -- the way we must proceed -- is to pass the IRS legislation I havedescribed,legislation that will further strengthen IRS leadership, will further improve managerial flexibility,that willfurther enhance oversight, that will support more effective budgeting, and that will advance thecause of afairer tax system. And the right way is to continue to make the tax code work better for peopleandseriously to consider alternatives to our present tax law on the basis of the ability to be fair.

    There will and must be a vigorous debate about tax policy in this country. We will and mustall be concerned with identifying the tax structure that can best keep the budget balanced, promotegrowth, and befair -- and as simple as possible -- to all Americans. But we must as we go forward agree thatwe want tohave the best tax administration system we possibly can in the United States -- a system that is aseffectiveas possible, not in collecting the most tax it can, but in collecting the right amount of tax fromeachtaxpayer.

    The stakes are high. As Oliver Wendell Holmes said, taxes are the price we pay forcivilization. Theidea that we need a fairly administered and enforced tax code should not be in dispute. Difficultas theseissues are, it is vital that we maintain a constructive course. I know all of those concerned withthefuture of the American tax administration system will join me in condemning the 800 documentedincidents of physical abuse or threats against IRS personnel that have occurred since these debatesbegan.

    For all the difficult discussions we have had about the best way to reform the IRS, we have allbeenagreed on the goal: a modern, efficient accountable IRS to serve the American taxpayer well intothe nextcentury. I don't think there would be any dispute that the IRS has moved substantially nearer tothat goal inthe past year. With the dedicated leadership of Charles Rossotti, with all those now working tohelp himimprove the IRS, and with the invaluable support and insights of groups such as this I amconfident that wecan move it even further in the months ahead. Thank you.
    

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