<DOC>
[106th Congress House Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:61839.wais]
OVERSIGHT OF THE INTERNAL REVENUE SERVICE'S FISCAL YEAR 1998 FINANCIAL
STATEMENTS
=======================================================================
HEARING
before the
SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,
INFORMATION, AND TECHNOLOGY
of the
COMMITTEE ON
GOVERNMENT REFORM
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
FIRST SESSION
__________
MARCH 1, 1999
__________
Serial No. 106-72
__________
Printed for the use of the Committee on Government Reform
Available via the World Wide Web: http://www.house.gov/reform
______
U.S. GOVERNMENT PRINTING OFFICE
61-839 WASHINGTON : 2000
COMMITTEE ON GOVERNMENT REFORM
DAN BURTON, Indiana, Chairman
BENJAMIN A. GILMAN, New York HENRY A. WAXMAN, California
CONSTANCE A. MORELLA, Maryland TOM LANTOS, California
CHRISTOPHER SHAYS, Connecticut ROBERT E. WISE, Jr., West Virginia
ILEANA ROS-LEHTINEN, Florida MAJOR R. OWENS, New York
JOHN M. McHUGH, New York EDOLPHUS TOWNS, New York
STEPHEN HORN, California PAUL E. KANJORSKI, Pennsylvania
JOHN L. MICA, Florida GARY A. CONDIT, California
THOMAS M. DAVIS, Virginia PATSY T. MINK, Hawaii
DAVID M. McINTOSH, Indiana CAROLYN B. MALONEY, New York
MARK E. SOUDER, Indiana ELEANOR HOLMES NORTON, Washington,
JOE SCARBOROUGH, Florida DC
STEVEN C. LaTOURETTE, Ohio CHAKA FATTAH, Pennsylvania
MARSHALL ``MARK'' SANFORD, South ELIJAH E. CUMMINGS, Maryland
Carolina DENNIS J. KUCINICH, Ohio
BOB BARR, Georgia ROD R. BLAGOJEVICH, Illinois
DAN MILLER, Florida DANNY K. DAVIS, Illinois
ASA HUTCHINSON, Arkansas JOHN F. TIERNEY, Massachusetts
LEE TERRY, Nebraska JIM TURNER, Texas
JUDY BIGGERT, Illinois THOMAS H. ALLEN, Maine
GREG WALDEN, Oregon HAROLD E. FORD, Jr., Tennessee
DOUG OSE, California ------
PAUL RYAN, Wisconsin BERNARD SANDERS, Vermont
JOHN T. DOOLITTLE, California (Independent)
HELEN CHENOWETH, Idaho
Kevin Binger, Staff Director
Daniel R. Moll, Deputy Staff Director
David A. Kass, Deputy Counsel and Parliamentarian
Carla J. Martin, Chief Clerk
Phil Schiliro, Minority Staff Director
------
Subcommittee on Government Management, Information, and Technology
STEPHEN HORN, California, Chairman
JUDY BIGGERT, Illinois JIM TURNER, Texas
THOMAS M. DAVIS, Virginia PAUL E. KANJORSKI, Pennsylvania
GREG WALDEN, Oregon MAJOR R. OWENS, New York
DOUG OSE, California PATSY T. MINK, Hawaii
PAUL RYAN, Wisconsin CAROLYN B. MALONEY, New York
Ex Officio
DAN BURTON, Indiana HENRY A. WAXMAN, California
J. Russell George, Staff Director and Chief Counsel
Bonnie Heald, Director of Communications/Professional Staff Member
Mason Aliner, Clerk
Faith Weiss, Minority Professional Staff Member
C O N T E N T S
----------
Page
Hearing held on March 1, 1999.................................... 1
Statement of:
App, Steven O., Deputy Chief Financial Officer, Department of
the Treasury............................................... 47
Cunninghame, Donna H., CPA, Chief Financial Officer, Internal
Revenue Service............................................ 42
Kutz, Gregory D., Associate Director, Governmentwide
Accounting and Financial Management Issues, Accounting and
Information Management Division, U.S. General Accounting
Office, accompanied by Steven J. Sebastian, Assistant
Director, Governmentwide Accounting and Financial
Management; and Joan B. Hawkins, Assistant Director,
Governmentwide Accounting and Financial Management......... 10
Letters, statements, et cetera, submitted for the record by:
App, Steven O., Deputy Chief Financial Officer, Department of
the Treasury, prepared statement of........................ 49
Cunninghame, Donna H., CPA, Chief Financial Officer, Internal
Revenue Service, prepared statement of..................... 44
Dalrymple, John, Chief Operations Officer, Internal Revenue
Service:
Information concerning earned income tax credit.......... 56
Information concerning trust funds....................... 66
Horn, Hon. Stephen, a Representative in Congress from the
State of California, prepared statement of................. 3
Kutz, Gregory D., Associate Director, Governmentwide
Accounting and Financial Management Issues, Accounting and
Information Management Division, U.S. General Accounting
Office, prepared statement of.............................. 14
Turner, Hon. Jim, a Representative in Congress from the State
of Texas, prepared statement of............................ 6
OVERSIGHT OF THE INTERNAL REVENUE SERVICE'S FISCAL YEAR 1998 FINANCIAL
STATEMENTS
----------
MONDAY, MARCH 1, 1999
House of Representatives,
Subcommittee on Government Management, Information,
and Technology,
Committee on Government Reform,
Washington, DC.
The subcommittee met, pursuant to notice, at 10 a.m., in
room 2154, Rayburn House Office Building, Hon. Stephen Horn
(chairman of the subcommittee) presiding.
Present: Representatives Horn and Turner.
Staff present: J. Russell George, staff director and chief
counsel; Bonnie Heald, director of information/professional
staff member; Matthew Ebert, policy advisor; Larry Malenich,
GAO detailee; Mason Alinger, clerk; Paul Wicker, Kacey Baker,
and Richard Lukas, interns; Faith Weiss, minority professional
staff member; and Earley Green, minority staff assistant.
Mr. Horn. A quorum being present, the Subcommittee on
Government Management, Information, and Technology will be in
order.
Today's hearing is the first in a series of hearings the
subcommittee will conduct to examine the audits of financial
statements of selected Federal agencies.
In the late 1980's, Congress recognized that one of the
root causes of waste in the Federal Government was that
financial management leadership policies, systems, and
practices were in a state of disarray. Financial systems and
practices were obsolete and ineffective. They failed to provide
complete, consistent, reliable, and timely information to
congressional decisionmakers as well as executive branch agency
management.
In response, Congress passed a series of laws on a
bipartisan basis designed to improve financial management
practices and to ensure that tax dollars are spent for the
purposes that Congress intends. The Chief Financial Officers
Act, enacted in 1990, represented the most comprehensive
financial reform legislation of the last four decades. It
established a leadership structure for Federal financial
management, including the appointment of Chief Financial
Officers in the 24 largest Federal departments and independent
agencies.
In 1994, the Chief Financial Officers Act was amended to
require agencywide audited financial statements covering the
agencies' accounts and associated activities. March 1st is the
due date for these statements, and it is appropriate that the
first hearing we are conducting is on the Internal Revenue
Service's financial statements. That will bring joy to many
taxpayers as they struggle through April 15th.
The Internal Revenue Service is the government's revenue
collection arm. It has undergone financial auditing since 1992
under a pilot program created by the Chief Financial Officers
Act. Each year these audits have shown significant weaknesses
in the agency's financial management. Despite these weaknesses,
the General Accounting Office [GAO], the fiscal and program
auditor for the legislative branch, gave the Internal Revenue
Service a clean opinion in its 1997 financial statements.
However, the auditors rendered this opinion only after the
Internal Revenue Service spent several months and hundreds of
thousands of taxpayer dollars to prepare the statements. This
special effort was necessary because the Internal Revenue
Service's accounting systems cannot provide basic accounting
information in an efficient manner.
On April 15th of last year, this subcommittee held an
oversight hearing on the results of the Internal Revenue
Service's 1997 audit. At that hearing, we learned that IRS
estimated it could only recover about 13 percent of the $214
billion which taxpayers owed the Federal Government as of
September 13, 1997; 13 percent out of the amount that is owed.
That is not very good. In fact, that is what started me several
years ago with Mrs. Maloney, then the ranking Democrat, on the
debt collection law of 1996. And of course it does not apply to
tax debt, it applies to all nontax debt. And I do want to go
into that with you in terms of the question period. We will
learn today whether the agency has improved its ability to
collect the amounts owed to the Federal Government.
Last year's hearing also illustrated the need for better
controls in handling cash payments at the Internal Revenue
Service centers. The 1997 audit provided the steps and
direction the Internal Revenue Service officials needed to
follow in order to gain stronger financial control of this very
important agency.
We are here today to determine what progress has been made
in meeting this sizable challenge. We will hear testimony from
representatives of the General Accounting Office, the Internal
Revenue Service, and the Department of the Treasury.
We have an excellent group of witnesses, and I thank each
of them for coming on such short notice. I look forward to your
testimony.
[The prepared statement of Hon. Stephen Horn follows:]
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Mr. Horn. And I think you know the routine of this
committee is we swear in all witnesses, so if you will rise,
raise your right hands.
[Witnesses sworn.]
Mr. Horn. The clerk will note that all five witnesses
affirmed.
Mr. Turner.
Mr. Turner. Thank you, Mr. Chairman.
I want to admit at the outset of this hearing, Mr.
Chairman, that I started working on my tax return last night,
so I am not in a very good mood. I am one of those taxpayers
who still tries to do my own return, and it becomes
increasingly challenging every year that passes.
But it is good to be here this morning, and I appreciate
the witnesses being here. I know it was very short notice for
you. This hearing was only called last Friday, and so I know
you were working diligently to prepare to be here today, and
for that we are very grateful.
The scope of your operations are, of course, very
impressive. On an annual basis, your agency processes tax
returns from over 200 million taxpayers, reviews more than 2
billion documents, collects nearly $1.8 trillion in revenue,
and issues $151 billion in refunds, which we all hope we are
able to have a part of, Mr. Chairman. But your annual operation
is over $8 billion, using Federal appropriations in that
amount.
The task that you undertake, you do so with technology that
I understand dates back to the 1970's. It is very difficult, I
am sure, for the IRS to comply with modern financial management
standards with technology that is that old. We know the IRS is
in need of technological modernization, and to meet that
demand, Commissioner Rossotti is working toward modernizing the
IRS, making it more consumer-friendly. This makes good business
sense, and it should increase the level and quality of services
provided to each IRS customer.
However, without significant modernization of its financial
systems, the IRS will continue to lack resources to ensure
financial discipline. The audit being released today
underscores the reasons why the IRS needs to implement a
technological modernization program as quickly as possible.
As evidenced by the audit, we hear about serious financial
management deficiencies at the IRS. Although the year-end
information provided by the IRS regarding its annual $1.8
trillion in collections and its $151 billion in refunds is
considered reliable, the General Accounting Office has
identified several significant material weaknesses in the IRS
financial systems which prevent the IRS from complying with
several financial management laws and standards, and,
therefore, it is in need of correction.
The underlying financial problems with the IRS are chronic
and long-standing and have spanned both Democrat and Republican
administrations. The General Accounting Office documented many
of the same financial problems in its first audit of the IRS
financial statements for fiscal year 1992, and some of these
problems go back, I understand, 17 years.
However, this is no excuse. It is time for the IRS to
implement modern financial systems that are capable of doing
what the IRS expects the average American to do. Simply put,
the IRS should be able to balance its checkbook, list its
debts, and locate and identify its property and equipment. It
is time for the agency to address some of the custodial
concerns raised by the General Accounting Office, such as
maintaining the security of the information submitted by
taxpayers to the IRS and improving its ability to determine
when it is owed money and when it has been paid.
Many of the major financial problems that the General
Accounting Office identifies would be resolved with more modern
financial management systems. There are steps that the IRS can
take now to improve its control over the cash, checks, and
taxpayer information that it receives.
At this time, we are experiencing a new era of Federal
agency management. Agencies recognize that they must not only
provide top quality Government services, but also achieve them
in a cost-effective manner. Agencies must develop financial
management systems capable of tracking their ongoing financial
condition, assessing the financial vulnerabilities, and
determining the most cost-effective approach.
We can anticipate criticism today of the IRS; however, in
the spirit of improving the agency, I believe that the IRS will
consider and respond to the legitimate concerns that are raised
by the GAO audit. We have been told that the IRS plans to
address its weaknesses through actions being implemented over
the next few years. Given the importance of financial
management requirements, we must not let the implementation of
IRS corrective action fall through the cracks. The GAO report
is something that the IRS should pay careful attention to.
In closing, again, I thank the witnesses for being here
today, for the efforts that you have made to prepare for this
hearing, and it is my hope that the hearing will be productive
for the Internal Revenue Service.
Thank you, Mr. Chairman.
Mr. Horn. We thank you for that very fine statement.
[The prepared statement of Hon. Jim Turner follows:]
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Mr. Horn. We now start with the representative of the
General Accounting Office. Mr. Gregory D. Kutz is the Associate
Director, Governmentwide Accounting and Financial Management
Issues of the Accounting and Information Management Division of
the GAO.
Mr. Kutz.
STATEMENT OF GREGORY D. KUTZ, ASSOCIATE DIRECTOR,
GOVERNMENTWIDE ACCOUNTING AND FINANCIAL MANAGEMENT ISSUES,
ACCOUNTING AND INFORMATION MANAGEMENT DIVISION, U.S. GENERAL
ACCOUNTING OFFICE, ACCOMPANIED BY STEVEN J. SEBASTIAN,
ASSISTANT DIRECTOR, GOVERNMENTWIDE ACCOUNTING AND FINANCIAL
MANAGEMENT; AND JOAN B. HAWKINS, ASSISTANT DIRECTOR,
GOVERNMENTWIDE ACCOUNTING AND FINANCIAL MANAGEMENT
Mr. Kutz. Mr. Chairman and Congressman Turner, good
morning. It is a pleasure to be here this morning to discuss
the results of our audit of IRS's fiscal year 1998 financial
statements, which is being released today in accordance with
the March 1st statutory requirement. These financial statements
are significant because they report the nearly $1.8 trillion in
tax revenues, $151 billion in refunds, and $26 billion in net
taxes receivable, which I will refer to throughout this
statement as IRS's custodial activities. These statements also
show IRS's fiscal year 1998 appropriations of nearly $8 billion
and the related activities, which I will refer to in this
statement as IRS's administrative activities.
With me today is Steve Sebastian, who was responsible for
our work on the IRS' custodial activities, and Joan Hawkins,
who was responsible for our work on the IRS' administrative
activities.
I would like to summarize my statement, but I would ask,
Mr. Chairman, that my entire statement be made part of the
record.
Mr. Horn. I would say every witness, their documents and
appendices, everything, are put in the record when they start
talking. But take your time on this.
Mr. Kutz. OK. I would also like to thank IRS senior
management for the courtesy that they provided to me and the
GAO staff throughout the country during this year's audit. They
were very courteous in all respects.
The bottom line of my testimony is that IRS continues to
experience serious financial management and internal control
problems. Many of these problems date back to our first audit
in fiscal year 1992, as Congressman Turner noted.
This morning I will focus on three areas: First, our
opinions on IRS's fiscal year 1998 financial statements;
second, issues impacting those opinions; and third, issues
impacting taxpayers and resulting in lost revenue to the
Federal Government.
The audit we performed of IRS's financial statements is
similar in nature to audits done of all major publicly traded
corporations in the United States. In addition, our audit
included extensive testing of IRS's internal controls. My first
point relates to our opinions on IRS's six main financial
statements. And for reasons I will discuss in a moment, our
opinions on these six financial statements vary.
Our opinion on IRS's statement of custodial activities for
this year is unqualified. This means that IRS's reported
revenue of nearly $1.8 trillion and refunds of $151 billion are
reliable. Our opinion on IRS's balance sheet is qualified.
Although IRS's net tax receivable number of $26 billion is
reliable, we were unable to determine the reliability of fund
balance with Treasury and accounts payable. In addition,
another key balance sheet account, property and equipment, is
likely materially understated.
Our opinions on the other four main statements, the
statements of net cost, changes in net position, budgetary
resources, and financing, are disclaimers. This means that
because of the problems we found with IRS's balance sheet,
along with errors and weaknesses relating to nonpayroll
expenses and budgetary accounts, we were unable to determine
the accuracy of these financial statements.
In addition, because of the severity of these problems, GAO
was unable to determine whether IRS complied with the
Antideficiency Act, which restricts agencies from spending more
than they are appropriated.
Let me now move on to my second issue, which is that the
problems negatively impacting our opinions for fiscal year 1998
relate to the IRS' administrative activities. Some of the
reasons for the opinion qualifications and the four disclaimers
include, first, IRS did not reconcile the accounts related to
its reported $1.8 billion fund balance with Treasury accounts.
Think of this as not balancing your checkbook to the monthly
bank statement and at the same time having a recordkeeping
system that was prone to error.
Second, IRS was unable to properly safeguard or reliably
report property and equipment. For example, when verifying the
items in IRS's inventory, we noted a missing Chevy Blazer,
laptop computer, and $300,000 printer. We also found items
including a television, a fax machine, and a VCR that were not
included in IRS's records. At one IRS field office, 19 of 130
computer assets costing over $50,000 each could not be located
by IRS staff. IRS has itself reported property and equipment as
a major internal control problem for 17 consecutive years.
Third, IRS could not provide adequate support for accounts
payable, nonpayroll expenses, and budgetary data. Mr. Chairman,
I have done dozens of audits in my career of corporations,
State and local governments, and not-for-profit organizations,
and IRS is the first entity that I have audited that could not
provide a listing of accounts payable at year end.
In addition to systems problems related to this issue, IRS
has an suspense account with amounts that date back to 1989
appropriations. IRS has not investigated nor resolved amounts
in this account.
My third and most important issue is that many of the
problems we are reporting today have the potential to touch the
everyday lives of taxpayers and result in lost revenue to the
Federal Government. As I mentioned earlier, IRS was able to
reliably report its custodial activities; however, this
achievement required extensive, costly, and time-consuming ad
hoc procedures to overcome chronic internal control and systems
weaknesses. IRS cannot produce reliable custodial information
on a routine basis.
Despite the reliable custodial information, we found three
significant weaknesses that impact taxpayers and result in lost
revenue for the Federal Government. First, we found systems
problems relating to amounts due from taxpayers that have
resulted in taxpayer burden and lost revenue. For example, we
found that IRS was pursuing and collecting amounts from
individuals whose taxes had already been paid. We also found
instances where delays in recording transactions resulted in
IRS missing opportunities to offset refunds paid to taxpayers
against amounts that those taxpayers owed to the Federal
Government.
Next, we noted deficiencies in preventive controls over tax
refunds that have permitted the disbursement of millions of
dollars in fraudulent refunds. IRS has procedures in place to
identify erroneous or fraudulent tax returns claiming refunds;
however, these controls occur months after the refunds have
been disbursed. Once a refund has been disbursed, IRS is
compelled to expend its resources to recover it, with dubious
prospect of success.
In addition, vulnerabilities and controls over cash,
checks, and taxpayer data do not adequately protect the
Government and taxpayers from loss or inappropriate disclosure
of sensitive data. For fiscal years 1997 and 1998, IRS reported
over 150 actual or alleged employee thefts of receipts at IRS
field offices and lockbox banks. These cases only represent IRS
employees that were caught. The magnitude of thefts not
identified by IRS is unknown.
The vulnerabilities we noted include, but are not limited
to, IRS not receiving results of background checks on new
employees until well after they were placed in positions to
handle tax receipts and taxpayer data. Fifteen percent of
thefts of taxpayer receipts committed at IRS service centers in
recent years were by individuals who had previous arrest
records that were not identified prior to their employment.
In addition, we observed the use of single, unarmed
couriers in ordinary civilian vehicles, including in one
instance a bicycle, to transport hundreds of millions in
taxpayer receipts to the bank. At the service center that Mr.
Sebastian and I visited, the courier left over $200 million of
endorsed taxpayer checks with sensitive data in a Ford Explorer
that was unlocked with the windows down while he returned to
the service center. Theft of taxpayer checks and other data can
result in access to bank accounts and identity fraud, which can
create significant taxpayer burden.
One other matter that you mentioned in your opening
statement, Mr. Chairman, of great importance to the Federal
Government is the collectibility of IRS's unpaid assessments.
The poster board to my right and the last page of my
written statement show the components of IRS's $222 billion of
unpaid assessments at September 30, 1998. Please note that,
based on a statistical projection done jointly by GAO and the
IRS, that $26 billion, or only 11 percent, of IRS unpaid
assessments will ultimately be collected.
In summary, IRS cannot do many of the basic accounting and
recordkeeping tasks that it expects American taxpayers to do.
And, several of the problems I discussed have resulted in
unnecessary taxpayer burden and losses to the Federal
Government. We agree with the IRS that this situation is not
acceptable.
The problems I have described this morning are chronic in
nature and, despite past attempts and corrective action plans
by IRS, have not yet been successfully resolved.
Some of these problems can be resolved quickly with
improvements in basic internal controls. However, for other
problems, tax system modernization will need to be part of a
longer-term solution. We have provided IRS with a series of
recommendations to resolve these weaknesses. The agency agrees
with the facts discussed in our report and has reacted in a
very constructive manner. In its written response to our
report, IRS committed to executing the changes necessary to
improve its operations. We are committed to working with the
IRS in fiscal year 1999 and future years to develop lasting
solutions to these pervasive problems.
Mr. Chairman, this concludes my testimony. My colleagues
and I will be happy to respond to any questions.
Mr. Horn. Well, we thank you for that very succinct
statement of your testimony.
[The prepared statement of Mr. Kutz follows:]
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Mr. Horn. I take it at this point neither of your
colleagues have anything else to add to the presentation?
Mr. Kutz. We can hold that to Q and A.
Mr. Horn. We will wait for the questioning until everybody
has a chance to get their statement in.
Mr. Horn. So let us go then to the next witness, which is
Ms. Donna Cunninghame, Chief Financial Officer of the Internal
Revenue Service.
STATEMENT OF DONNA H. CUNNINGHAME, CPA, CHIEF FINANCIAL
OFFICER, INTERNAL REVENUE SERVICE
Ms. Cunninghame. Mr. Chairman and Mr. Turner, I thank you
for this opportunity to testify on the GAO report. I must sadly
state that the findings contained in this report have merit,
and I am deeply disappointed that we failed to meet our
obligations.
While many of these problems, as you have heard repeatedly,
are not new and require long-term solutions, the GAO has also
outlined several new issues that we need to address. The GAO
correctly raised significant concerns and identified
substantial weaknesses and deficiencies that prevented the IRS
from reliably reporting on several of its required principal
financial statements in the timeframe allowed.
This is unacceptable to the IRS, to the Congress, and to
the taxpayers that we serve. We must first acknowledge and
understand how and why we failed. Second, we need to create and
implement, in the process of doing so, short- and long-term
plans that will address the challenges raised. And third, we
need to followup with these plans with an ongoing commitment
from the highest level of IRS management.
I want to stress, too, Mr. Chairman, that this will not be
a plan developed behind closed doors, but will be an open and
shared enterprise on behalf of America's taxpayers. We are
developing it with the assistance from OMB, the Treasury
Department and their Inspector General, with outside
contractors, and with the assistance of the GAO. I plan to
present it to you in the final draft and submit it to you and
to the subcommittee to seek your comments to ensure that you
agree with our approach. We will welcome any suggestions you
have and we will report to you regularly on our progress.
Mr. Chairman, I became the Chief Financial Officer at the
Internal Revenue Service on August 16, 1998. During the 6
months that I've held this position, our vulnerabilities became
particularly apparent in the loss of several qualified
individuals who previously managed the preparation of our
administrative financial statements. Unfortunately, we did not
replace them in time. Results of this personnel shortfall have
become painfully obvious and the consequences unacceptable.
We have also learned the painful lesson that solutions left
unattended quickly become problems again. We must follow
through on problems. We need to repeatedly review our
performance and build upon our successes while learning about
our failures.
In the short term, we are addressing many of the problems
raised by the GAO. In the past month, I have hired five new
professional employees to fill key slots on the administrative
side, and we are contracting with two large public accounting
firms to assist us in providing the human resources and the
expertise that we must have to meet the needs identified in the
GAO report.
Although we were pleased to obtain an unqualified opinion
on our $1.8 trillion custodial financial statements, we do
agree with the GAO that it was the result of extensive ``work
around'' procedures. We recognize the system's deficiencies,
and we have ongoing initiatives aimed at correcting these
problems in both the short and the long term.
Mr. Chairman, there will be noticeable improvements in our
financial statements, but I need to emphasize that these are
nevertheless short-term fixes with the inherent deficiencies
that go along with them. Our systems solutions will take
several years to put into effect.
In the long term, the inadequacies of our financial
reporting systems must be addressed through our broader efforts
under Commissioner Rossotti to modernize both the system and
the structure of the IRS as mandated by the IRS Restructuring
and Reform Act of 1998. But like our troubled financial
statements, most solutions, as I said previously, will require
years to plan and to implement.
One key to better financial management at the IRS is
improved technology. The IRS must replace nearly its entire
inventory of commuter applications and convert its data on
every taxpayer to new systems. This must be accomplished in
conjunction with redesigned business practices as part of our
overall modernization program, at the same time while we
continue to provide service to taxpayers and to respond to
ongoing tax law and other changes. This is vast, complex, and a
risky undertaking that will require many years to accomplish.
Mr. Chairman, in conclusion, I would again like to thank
this committee for providing us with this opportunity to review
and acknowledge the issues set forth in the GAO's report and to
discuss with you the IRS's plans to address these serious
shortcomings. The IRS must work every day to earn the trust of
the American public. To do that I pledge to you today that we
will continue to improve our financial reporting system and
modernize so that the IRS can provide America's taxpayers top-
quality service for the decades to come.
Thank you.
Mr. Horn. Thank you very much.
[The prepared statement of Ms. Cunninghame follows:]
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Mr. Horn. Our last witness is Mr. Steven App, the Deputy
Chief Financial Officer of the Department of the Treasury.
STATEMENT OF STEVEN O. APP, DEPUTY CHIEF FINANCIAL OFFICER,
DEPARTMENT OF THE TREASURY
Mr. App. Thank you, Mr. Chairman, Mr. Turner. Good morning.
Thank you for inviting me here again today to discuss financial
management in the Department of Treasury and in the Internal
Revenue Service. It was 2\1/2\ years ago in September 1996 that
I last appeared before the committee on the eve of the first
required agencywide financial statements being prepared by
Treasury and by other agencies. Today I would like to limit my
oral remarks to just three points submitted in my written
testimony.
First, in terms of departmental oversight, we are
disappointed in the fiscal year 1998 audit results due to the
IRS problems even though we are expected to receive an overall
qualified opinion on Treasury statements for the second year in
a row. Frankly, based on the success of 1997, with a clean
opinion of the IRS, one qualification and a March 30 delivery
date, we were optimistic that 1998 would be our break-through
year in terms of a quality clean opinion for the Treasury
Department.
In late January 1999, when it became apparent that the
General Accounting Office identified problems in the IRS that
would result in a less than desirable audit, we immediately
contacted the Office of Management and Budget, GAO, IRS to
discuss what could and should be done for the 1998 audit:
Extend the audit for 1998 in hopes of getting better results,
or stop the audit and focus on the future.
The Department and IRS, supported by GAO and OMB, chose to
focus on the future, developing an action plan for fiscal year
1999 for the financial statement and audit process. The
Department is fully cognizant that IRS is the key issue for
1999 financial statements. And on behalf of the Assistant
Secretary for Management and CFO, I can assure you that we are
using the full weight of our office to help ensure better
results for 1999.
In short, we are committing that the fiscal year 1999
reporting initiative will be better focused by IRS and the
Department, that our partnership with GAO will continue to
improve, and that we will do everything within our power to
allow GAO to begin as early as possible with the interim audit
work.
The second area I would like to mention is regarding the
risk factors that we have identified for the IRS audit. One of
those risk factors in the administrative statements involves
three new statements that all agencies are facing: The
statement of net cost, the statement of financing, and the
statement of budgetary resources; as well as certain balance
sheet items, like property, plant and equipment that deal with
capitalization thresholds. In fairness to the IRS, these
problematic issues are not restricted to them alone, but are
governmentwide issues as well. While many of Treasury's bureaus
successfully negotiated these issues, I think you will find in
future hearings with other agencies that these also pose a
problem for them.
Finally, in terms of progress, while we freely acknowledge
the financial statement and preparation problems at the IRS and
its significant impact on the Department, we have made
considerable progress over the past three required audit cycles
both in terms of quality of results and in terms of timeliness
of completion, in 1996 moving from a disclaimer on our
Treasurywide statements, to 1997 with a qualified opinion, and
again for 1998, with increasing convergence on the March 1st
delivery date, from April 30th to March 30th to mid-March this
year.
In addition, as was previously mentioned, the Treasury
again received unqualified opinions in 1998 on its primary
governmentwide functions, collecting revenue, managing the
public debt. GAO is rendering unqualified opinions on the IRS
revenue collection of $1.8 trillion and Bureau of Public Debt's
Federal debt of $5.5 trillion.
With the exception of the IRS administrative statements,
all other Treasury-audited bureaus and entities this year are
also receiving clean audit opinions, including our other
revenue bureaus, Customs and ATF, which will have clean audit
opinions for 3 years in a row, as well as with the other parts
of Treasury.
I would like to conclude by emphasizing again that our
renewed focus on the IRS administrative accounts and action
plan for 1999, coupled with the demonstrated 3-year track
record of converging on a clean opinion by March 1st, makes the
CFO and myself remain optimistic and committed to making 1999
our break-through year for both fronts.
I would be pleased to answer any questions. That ends my
prepared remarks. Thank you.
Mr. Horn. Thank you very much.
[The prepared statement of Mr. App follows:]
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Mr. Horn. Let me start with 5 minutes. Mr. Turner and I are
going to alternate every 5 minutes, probably to rest our
throats with what is diseased in this city. Let me start in
with the obvious one, because it just sort of glaringly shows
up in this property management, and that is the printer.
I take it it was worth $300,000; is that correct, Mr. Kutz?
Mr. Kutz. According to IRS's records, yes.
Mr. Horn. How big was a printer like this? I am just
curious how you get that out of an office and down through the
elevator and all the rest of it. How big was this thing? Do we
know?
Mr. Kutz. Let me defer to Ms. Hawkins on more specifics if
she has them.
Mr. Horn. You are the printer chaser. Has anybody ever
found it, by the way?
Ms. Hawkins. In the case of the printer, it was disposed
of. We did receive a document saying it was disposed of in
1994. So we haven't seen it, and we don't know what it looks
like. The IRS did not post the disposal on it's property
records. So even though they could give us a document saying it
had been disposed of in 1994, it was still being counted as one
of the assets on their records.
Mr. Horn. Well, when you say ``disposed,'' I am just not
clear on what that means. Does that mean somebody walked out
with it, and they wrote it off like they have written off the
receivables and write-offs of $119 billion?
Ms. Hawkins. In this case it probably means they turned it
over to another agency, such as the General Services
Administration, for disposal according to proper procedures.
What they failed to do was to record that disposal.
Mr. Horn. OK, so nobody took it, then; is that correct?
Ms. Hawkins. No, I don't think anyone took that printer.
Mr. Horn. So they were turning it in for a new one?
Ms. Hawkins. They were turning it in because they no longer
needed it. I assume they probably also got a new one.
Mr. Horn. They went through this last year with the
Pentagon in terms of ``where are their ships'' and ``where are
their missiles'' and so forth. Do the IRS offices have security
from, say, the General Services Protective Service, or do you
have your own?
Ms. Cunninghame. Yes, we do have security.
Mr. Horn. Do you have your own people, or do you use GSA's?
Ms. Cunninghame. We do have our own people who are
certified.
Mr. Horn. Are they armed?
Ms. Cunninghame. Yes, they are.
Mr. Horn. Are they there at night when different shifts are
coming on and off?
Ms. Cunningham. Yes, sir, they are.
Mr. Horn. And would they mark down something if somebody is
walking through a door with a personal computer, or a printer
as the case may be?
Ms. Cunninghame. I believe the answer to that is an
unqualified yes.
Mr. Horn. So what does GAO say? Did you look at their
security system on how things can go out the back door? Every
firm in America has that problem, so there are ways to solve
it.
Mr. Kutz. Whether it relates to security or recordkeeping,
at this point we are unclear. We did look at their records. We
did inventories from the IRS' records to the floor and from the
floor to the IRS' records, and we found errors both ways. We
aren't sure exactly what is.
They do take inventories periodically of these assets and
adjust their records for the inventories, but whether the
problem relates to physical security as you're describing it,
we're not sure at this point.
Mr. Horn. Do they have a standard time in which they take
inventory, or is it an unstandard time in the sense that you
surprise everybody and say, where is the typewriters? Where is
the personal computers? Where are anything of much value? How
does IRS deal with that? And who does it; does some outside
firm come in, or does IRS do it?
Mr. Kutz. We believe that they take cycle inventories. So I
think they try to hit everything once a year, is my
understanding, across the country.
Mr. Horn. At the same time?
Mr. Kutz. No, cyclically. Different places get an inventory
at a different point in time.
Mr. Horn. Did you ever find the Chevy Blazer?
Ms. Cunninghame. Yes, sir.
Mr. Horn. Who had that one?
Ms. Cunninghame. The Chevy Blazer highlights two problems
we have with our fixed asset inventory records. One is that we
have two systems that we use that are not integrated, do not
talk to each other. We also have employees who sometimes are
less diligent than they should be about following the
procedures that have been established.
With regard to the Chevy Blazer, it was a leased vehicle.
It had been returned to the company that owned it, I think, a
month or so before the inventory was to take place. Where we
failed is two places. We did not remove it from the inventory
listing as we should have; and second, we were not able to
account for it in a timely manner when GAO first raised the
issue. We should be able to do both of those, and we failed.
Mr. Horn. That was 17 years ago. How long has this problem
been out there and not addressed?
Ms. Cunninghame. It has been there for a period of time.
And we do take a lot of manual activities that we try to bridge
the gap between the two systems. I have not been here long
enough. I don't know if somebody can answer that for me. I
guess it has just been an ongoing problem, sir.
Mr. Horn. Well, I realize IRS has downsized about 6,000
employees since 1993. I think there is 102,000 employees now?
Ms. Cunninghame. That's accurate.
Mr. Horn. What is needed in terms of having an effective
and efficient accounting service and an inventory service?
Ms. Cunninghame. Our basic problems stem to our systems. We
do not have the types of systems we need that talk to each
other, that are up-to-date, state-of-the-art, integrated
systems that will readily post to our general ledger system.
As you are aware, I know, we are doing a number of things
on trying to fix that. I do have Paul Cosgrave, who is our
Chief Financial Officer, and if you will allow me, I would like
him to tell you a little bit about what we are doing with our
systems, including the financial systems.
Mr. Horn. Fine. I will tell you, let's do it on my round. I
want to have Mr. Turner right now, and then we will get back to
that.
Mr. Turner. Thank you, Mr. Chairman.
I want to address the issue of refunds a little bit with
you. I guess I need to ask the General Accounting Office first
to address the problem of refunds. You have identified several
problems in that area. And I guess first if you could just give
us an estimate of the amount inappropriately paid out in
refunds in the last year, and if you will also maybe identify
what types of refunds we are talking about in those improper
refunds.
I noticed last year there was testimony from Ms.
Cunninghame's predecessor about several steps that the IRS was
taking to try to correct the problems of improper refunds, and
I would like to ask the General Accounting Office if you have
noted any improvements as a result of the efforts that were
testified to a year ago by Ms. Cunninghame's predecessor?
Mr. Kutz. Congressman Turner, we have seen some
improvements, and I will defer to Mr. Sebastian to give you
some details on the improvements and specifically the first
question you had asked about the known number.
I will mention that the actual amount of fraudulent or
inappropriate refunds disbursed is unknown. There is no way to
determine for sure what that number is. But there is a known
number that is reported by the IRS, and I will defer to Mr.
Sebastian for that.
Mr. Sebastian. The IRS has actually identified $17 million
in fraudulent refunds that were disbursed in the first 9 months
of calendar year 1998. In addition, the IRS had actually
stopped the disbursement of inappropriate refunds amounting to
$65 million over that same time period.
As Mr. Kutz points out, the exact number or exact amount of
inappropriate refunds disbursed is unknown, and it is, in fact,
one of the issues that we have raised with the IRS dating back
to our fiscal year 1997 audit, when we recommended that the IRS
consider conducting a comprehensive cost benefit study to
determine whether it was cost-beneficial to add additional
preventive controls to the up-front processing of tax returns
prior to the issuance or disbursement of refunds.
To date, we have seen some estimates of the up-front
additional cost associated with adding additional preventive
controls, such as verifying information from the tax returns to
certain third-party information such as wage and tax
statements. However, what we have yet to see is an actual
estimate of the dollar value of inappropriate refunds that are
disbursed on a yearly basis as well as the additional cost
associated with identifying and then pursuing collections on
those refunds. So, again, there is no dollar value out here
that we could point to that would give you the magnitude of
this problem.
Now, the IRS has made some improvements. As I pointed out a
few moments ago, the IRS was able to identify and stop the
disbursement of $65 million in potential fraudulent claims. In
addition, with respect to their earned income tax credit
program, the IRS examined roughly 290,000 tax returns claiming
EITC claims. The dollar value associated with those EITC claims
amounted to about $662 million. The IRS determined that roughly
68 percent of that dollar value, or $448 million, were found to
be not valid, and those amounts were not disbursed.
So there are some additional procedures that are in place
that are flagging and identifying some of these potentially
fraudulent or erroneous returns.
Mr. Turner. So do I understand, you said the IRS examined
290,000 earned income tax credit claims, and out of those they
found $448 million of them to be improper?
Mr. Sebastian. The dollar value associated with the claim,
$442 million out of a total of $668 million in the EITC claims
were associated with those 290,000 tax returns.
Mr. Kutz. Congressman Turner, let me mention that those
were actual EITC claims that were flagged for having some
characteristics that were unusual. So that is not a
representative percentage of earned income tax credit claims
that are invalid. It is the percentage of those that look
suspicious that were invalid. That is an important distinction
here.
Mr. Turner. Just to give me a little perspective here, how
many earned income tax credit claims do we have each year?
Mr. Sebastian. Well, in total, in fiscal year 1998, the IRS
processed earned income tax credit claims amounting to $29
billion, of which $23 billion actually resulted in refunds. The
other $6 billion resulted in a reduction of the tax liability.
Mr. Turner. So the percentage that we are examining of that
290,000 is really a very small portion of earned income tax
credit.
Mr. Sebastian. That's correct.
Mr. Turner. But they do represent a group that was
identified as having potential problems, so it is not fair to
say 68 percent of all EITC claims are probably fraudulent.
Mr. Sebastian. That's correct.
Mr. Turner. It seems to me, as I recall, doesn't the law
require these refunds or all refunds to be made within 45 days?
Mr. Sebastian. Yes, it does. And that is a problem, a
perplexing situation the IRS finds itself in. They are required
to process tax returns involving refunds and issue the refunds
within 45 days. Any refunds issued beyond that date would
include interest payments to the taxpayer.
Mr. Turner. And you say there really has been no
determination as to whether or not it is cost-effective to add
additional staff at IRS to be sure we are not refunding
billions of dollars in inappropriate refunds?
Mr. Sebastian. There is no comprehensive study that we have
seen at this time. We have seen initial estimates of the
additional up-front cost in terms of staff days in validating
certain information on the tax returns with other third-party
information prior to disbursing the refunds. What we haven't
seen is the back-end savings associated with preventing
disbursements of inappropriate refunds and any additional costs
associated with trying to recover those inappropriate
disbursements.
Mr. Turner. I want to suggest something here that obviously
may not be consistent with what you just shared with me, but it
seems to me that if we have fraud going on in the Internal
Revenue Service, if there are people who are claiming refunds
to which they are not entitled, that we have an obligation to
uphold the law and to be sure that that is not happening even
if it is not cost-effective. And it disturbs me somewhat to
think that those of us who have fought very hard to be sure
that we have a tax system that has the trust and confidence of
the American people would be told that we are not going to
collect those taxes and we are not going to prevent improper
refunds unless it is cost-effective.
I think the American people who are paying their taxes are
entitled to know that everyone is paying what they properly owe
and no one is getting anything back that they are not due. And
I really think that the Service needs to take a new look if
that is the philosophy of the Internal Revenue Service as you
have shared it here today.
Mr. Horn. Let me pursue the earned income tax credit. I
would like to know does the IRS and the Treasury have a view on
that, and what do they think can be done in a reasonable way to
get at the fraud that clearly exists in the program? Everybody
that writes about it says, gee, there is great fraud here.
The fact that we took millions off the tax rolls in the
1986 act just seems to me--how do we differentiate between
those we simply took off the tax rolls? And in a sense this is
a welfare system, and that is what it was designed to be. I
think this was a Nixon administration creation, wasn't it?
Ms. Cunninghame. If I might, Mr. Horn, I would like to
defer to our Chief Operations Officer, John Dalrymple, who can
share his experience on the EITC with you.
Mr. Horn. OK. We are going to have to swear him in.
[Witness sworn.]
Mr. Horn. The clerk will note the witness has affirmed it.
Mr. Dalrymple. With regard to EITC, actually we've tried to
take sort of a two-pronged approach here. One is to eliminate
as much of the overclaim rate as possible. On the other hand,
make sure that all the people who are eligible for EITC
actually claim it, because we really have a problem on both
ends of that.
But just to give you some numbers, in 1998, we actually did
800,000 examinations on prerefund returns. Now, what that means
is that before the refund went out, we actually examined those
tax returns. We also did 600,000 math errors, which Congress
gave us the authority to treat these as math errors. Again,
those are prerefund.
Together we believe we stopped somewhere around $977
million going out in overclaims that would have gone to folks
that shouldn't have gotten them in 1998. So this is actually a
payoff for the investment that the Congress made in this
program 2 years ago, and 1998 was the first year that we
actually spent, I believe, $138 million to try to deal with
this issue.
On the other hand, we also sent out several million
notifications to those people who we had fairly good knowledge
should have been claiming or could have been claiming this
credit and didn't. And in addition to that, we had several
programs this last year that we tried to take an alternative
approach to these folks as opposed to the examination routine
or any other sort of enforcement activity. We actually
identified some people who we thought may have been involved in
using someone else's Social Security number. In other words,
they were used more than once, a duplicate identification
number. And we sent out about 300,000 of those notices, and we
got very good compliance of people actually going back and
amending their returns, and then, in the subsequent year, this
year, not claiming that dependent that they shouldn't have.
Many of these instances were spouses who were separated, et
cetera, and really didn't know who was claiming the child. And
in addition we have done a substantial amount of outreach
around this program this year.
This law is not a simple piece of legislation, the EITC
credit, in terms of determining whether or not you qualify or
not. So we have done quite a bit around this in terms of
outreach to make sure people understand when and when they do
not qualify for this credit.
Mr. Horn. What is the range of payments that one can get
under the earned income tax credit? What is the scale?
Mr. Dalrymple. I think the maximum you could probably get
is somewhere around $3,000. The lowest range, I believe, is
down to several hundred dollars. I could get that, though, for
you for the record.
Mr. Horn. Could you? Without objection, it will be in the
record at this point.
[The information referred to follows:]
For tax year 1998, the maximum earned income tax credit for
one child was $2,271; two or more children $3,756; and no
qualifying children $341.
Mr. Horn. Obviously, we want to know how the formula works,
how many people access the formula at one end as opposed to the
other end.
Mr. Kutz. Mr. Chairman, that's consistent with what we saw
in our financial audit, in the sample items from the 1998
audit.
Mr. Horn. Does GAO have anything else to comment on this
particular program?
Mr. Kutz. No. But the size of the EITC refunds you are
talking about, or actual claims, is consistent with what Mr.
Dalrymple said.
Mr. Horn. Any other comments you want to make on that?
Mr. Dalrymple. The only other thing I would say is to sort
of buttress what the GAO said about our whole strategy around
refund fraud is to put a system up front. And several years ago
we contracted with a fairly substantial vendor to try to put on
our up-front systems an electronic fraud detection system, and
we have been enhancing that each year. We have contracted with
Malcolm Sparal to come in and review that system, and he has
given us some advice on how we might make it better, et cetera.
So we agree with the GAO, the real crux here is to have a
system on the front end that would over time be smart enough,
intelligent enough, to actually see trends, et cetera.
The other point I would make is that our refund detection
teams, we have over 500 employees now employed in that system,
and they are literally looking for schemes. And just this year,
for example, we found a scheme where promoters were telling
taxpayers to go out and claim all of their Social Security
payments that they have ever made back against a refund this
year. And so far we have stopped over $50 million in refunds on
that scheme alone just in this filing season. So the fact is we
are catching schemes.
Mr. Horn. Now, who is investigating that? Is the FBI?
Mr. Dalrymple. Our Criminal Investigation Division is
investigating that.
Mr. Horn. And what is happening as a result of that
investigation?
Mr. Dalrymple. It is just unfolding as we speak, Mr. Horn.
Mr. Horn. How extensive do you think that is?
Mr. Dalrymple. We are trying to find that out right now. We
found the scheme in the centers. We stopped the refunds. And
now we are trying to go back up the trail.
Mr. Horn. Was it in one area?
Mr. Dalrymple. No. It is wider than that, sir.
Mr. Horn. What do you think caused it? I mean, is there
somebody that is scamming nationwide?
Mr. Dalrymple. I would say that that would be my initial
reaction. But again, I don't have enough data to tell you that
for sure.
Mr. Horn. Well, keep us informed on that one.
Mr. Turner.
Mr. Turner. I am not sure I understood the scheme that you
are now investigating. Explain what is happening.
Mr. Dalrymple. Let me look to make sure I give it to you
exactly correctly. It's a scheme in which individual taxpayers
file a fraudulent return claiming significant refunds. They are
being told that for a paperwork fee of about $100, they can
receive a refund of all of their Social Security taxes withheld
during their lifetime. So they are being directed to obtain a
printout from the Social Security Administration of their
lifetime Social Security earnings for themselves and their
spouses. Then fraudulent returns are then filed, which computes
a refund based on the current tax rate during the times of the
lifetime earnings. Basically, it is preying on people's lack of
knowledge of the Social Security system and the tax laws.
Mr. Turner. So you are saying that someone is out there
telling folks to claim a refund of all the Social Security
contributions they have made during their lifetime?
Mr. Dalrymple. That's right.
Mr. Turner. And they are actually filing that kind of
return, and they are getting a refund?
Mr. Dalrymple. They are not getting a refund. We have been
stopping the refunds, but they are filing the returns. And
you're right, someone is promoting it, Mr. Turner.
Mr. Turner. It is hard to imagine that anyone would think
that that is possible, but perhaps somebody is doing a pretty
good sales job. And they are being compensated for advising
folks to do this?
Mr. Dalrymple. That's the information I have with me today.
Mr. Turner. Another area that is a problem, as I understand
it, in refunds is that taxpayers are getting refunds when they
may owe the Federal Government money in either taxes or some
other venue. Is that a finding of the General Accounting
Office, and what is the extent of that particular problem?
Mr. Kutz. We found that this year in our sample results
where there were several instances of inappropriate refunds
found in the unpaid assessment sample. I will defer to Mr.
Sebastian to give you the details of that. But, yes, we did
find that.
Mr. Sebastian. I cannot give you the specific number of
cases. We did look at a total of 700 unpaid assessment sample
items. But the instances that we did identify were simply those
where actual assessments, i.e., additional tax liabilities, had
not posted to IRS's systems prior to the disbursement of a
refund. Had those assessments posted on a timely basis and been
on the books, the IRS would have been able to offset or retain
the refund to pay down the additional tax liability that should
have been on the books.
Mr. Turner. You correct me if I am wrong, but it appears to
me that because the law requires a refund to be made by the IRS
within 45 days, that all that is going on is the IRS is sending
out the refund within 45 days, and there is not much else
happening before the refund goes out. Am I misinformed here, or
is that actually what is taking place?
Mr. Sebastian. Well, again, in the cases that we looked at,
these were assessments that should have been posted and on the
books at the time the return with the refund claim had been
filed. So had they been on the books at that point in time, the
IRS would have been able to offset.
Mr. Kutz. There is no way that the IRS would have known
that these assessments were there, because we found that some
of the assessment posting delays are several years.
Again, the IRS is in a difficult position with the 45 days
and the timing of processing these returns. Especially during
the peak season you are getting--I will let them tell you how
many, but millions of pieces of mail a day in the April filing
season. So the IRS is under a lot of pressure to get the
refunds out. I'm sure you probably have gotten some calls from
your constituents on where their refund checks are. I know
other Members probably have at least. The IRS is in a difficult
position. It doesn't excuse what is happening, but it is a
tough position.
Mr. Turner. It just seems to me that we have a problem that
is brought about by the 45-day time limit that either has got
to be remedied by extending the time for a refund, which
taxpayers would not like, or staffing at a level that will
allow us to recover these fraudulent refunds.
Mr. Kutz. One of the long-term solutions that IRS is
looking at is the electronic matching up front, and this, I
believe, is part of their tax system modernization program. I
don't know if they have any comment on that.
Ms. Cunninghame. He is correct on that. And if I may, I
would like to ask Paul Cosgrave, our CIO, to explain to you
what we are doing in that area.
Mr. Horn. He has not been sworn in. Next time, if you have
got 25 assistants with you, let us swear them all in.
[Witness sworn.]
Mr. Horn. The clerk will note the witness has affirmed it.
Mr. Cosgrave. Thank you, Chairman Horn and Mr. Turner, for
allowing me to speak on this issue.
First of all, I think as has been stated, the age of the
IRS's systems is correct, quite old. I believe you referred to
them dating back to the 1970's. In fact, some of them date back
to the 1960's, and that is at the root cause of some of these
problems. However, let me try to correct a few things.
First of all, as it relates to refund checking, we do have
a process in place that goes against a debtor file that is not
just IRS debtor file, but debtor file to the government as a
whole, and most refunds are run around up against that file
before, in fact, they are issued. So, as you stated, it is not
just that these refunds are being issued without any checking,
there is, in fact, a check against that.
Mr. Horn. What is the authority of Treasury and/or IRS in
terms of checking other government debts that that person might
have incurred and have they repaid them? Is there a law that
permits you to do that?
Mr. Cosgrave. Yes, there is. I can't give you specifics of
it, but I will say it exactly follows the process that you just
described. And, in fact, this year with this filing season, we
actually transferred that function over to FMS, who now
performs that across all the government. We performed it
ourself across all the government, but the improved process is
where FMS is doing it all.
Mr. Horn. I'm all for you, because when our Debt Collection
Act of 1996 became law, it applied only to nontax areas. So if
you're collecting it, God bless you. I was outraged by the
millions that were going under the table, and nobody ever had
to pay around here.
Mr. Cosgrave. In 1998, we offset 2.7 returns through this
vehicle. So----
Mr. Horn. And that boiled down to what? I'm looking at that
chart, and if we can just go over it again. You've got the
taxes receivable collectible, $26 billion is the estimate;
taxes receivable uncollectible is $55 billion; compliance
assessments at $22; but the one that has always annoyed me, and
that's what led to the 1996 act, writeoffs of $119 billion.
If I was listening to this or reading about it in the
paper, I would say, ``gee,'' all you've got to do is wait them
out, and pretty soon, they will just forget about me. That's
sort of amazing, because I wouldn't think anybody would forget
about the IRS, but your bulldog appearance does not necessarily
say that they were recognized, because these people just sit
there. And I would love to know the makeup from both GAO and
the IRS as to these writeoffs of $11 billion.
I realize people go into bankruptcy and all that, but if
it's a pattern and practice, I think we ought to amend the
bankruptcy law or something and get some of that money back for
the taxpayers when the rest of us are paying the bills.
Mr. Kutz. To the extent that refunds have been offset, the
amounts would no longer be included in the unpaid assessment
inventory. And I don't know what the actual dollars are. I
believe over a billion dollars is associated with the 2.7
million items Mr. Cosgrave mentioned.
But with respect to the writeoffs, those are primarily
failed S&Ls, RTC entities and defunct corporations that date
back in some instances to the 1970's. There is no hope of
collection. Also individuals that are in prison for life
sentences with no assets, or persons that have passed away that
have no estate are included in that amount. The reason it gets
to be so large is that IRS is required to keep these amounts on
its books for 10 years or more, if you go through a bankruptcy
court, et cetera.
So each of those years that goes by you have the accrual of
a lot of interest. For example, the S&Ls and those types of
entities, I don't know--do you have the numbers?
Mr. Sebastian. No, I don't.
Mr. Kutz. The actual amount of those initial assessments
was less than $10 billion, but it's going to grow to over $40
billion by the end of the statute period--fiscal year 2003.
Mr. Horn. In other words, they're applying the interest and
putting that into the writeoff?
Mr. Kutz. That's correct. There's interest.
Mr. Horn. At the end of 10 years, it just goes away?
Mr. Kutz. Right, it comes off the books completely. So most
of the items in the writeoff category are very old.
Mr. Horn. Well, but the--you know, they can't forever blame
the S&Ls. When was the peak of the S&L robbery against the
American taxpayers?
Mr. Sebastian. Well, you're looking at large S&L and then
bank failures from the period of about 1984, 1985 through 1991.
Mr. Horn. Well, OK. Is this a sort of another year 2000
problem, they're all going to explode at once or come back to
life at once?
Mr. Sebastian. To the extent they're not in the midst of
bankruptcy proceedings, what should end up happening after that
10-year period is the balance of the taxes receivable and all
associated penalties and interest will come off the books. It
could be a significant writeoff of the writeoffs.
Mr. Horn. Does my colleague want to pursue anything on
this?
Mr. Turner. Well, I certainly share your concern, Mr.
Chairman. It disturbs me, when we try to analyze the actions
that the IRS has taken to improve their financial management
practices, that we may not be seeing the emphasis placed where
I really believe the emphasis should be placed, and that is on
building a credible tax system that has the confidence of the
American people.
And as I mentioned in my remarks earlier, there are certain
things that seem to me that must be done to be sure that we
have a tax system we can all have confidence in and believe
that we're all paying our fair share. And in those areas, if
the IRS would simply try to identify the credibility areas and
move aggressively in those areas, I think we at least might
have a tax code that will survive for a few more years.
As we all know, the tax code is under increasing stress.
There are those who would like to simply abolish the aggressive
income tax, which has served us for many, many years. And I
think those who would like to accomplish that can certainly
cite some good examples that we've heard here today of what is
wrong with the Federal income tax system as we know it. And I
think we've got an obligation to make some changes.
I also think the Internal Revenue Service has an obligation
to this Congress. When we find areas where there is abuse and
fraud, you know, 45 days is not working, maybe we need to talk
about refunding half of the taxpayers money 45 days and the
other half in 90, something to allow this tax system to work
fairly and credibly. If we keep going down this road, I'm
really concerned that we're not going to have a system that is
going to survive.
One other problem that was mentioned in the testimony that
I have a hard time understanding, and that is why we can't
reconcile our trust fund collections that are received by the
IRS with what the Treasury has, and that seems to me to be a
simple accounting problem. I understand you accomplish that at
the end of the year by some ad hoc methodology, but it's beyond
me as to why we can't keep up with what is supposed to be in
the trust funds between the IRS and the Treasury Department.
Could you expand on that just a little bit from the
perspective of the General Accounting Office?
Mr. Cosgrave. Could I first address your first point, if I
may?
Mr. Turner. Sure.
Mr. Cosgrave. I think, as you're well aware, the IRS is in
the midst of a transformation of significance. We have a new
Commissioner, Commissioner Brodham; Ms. Cunninghame as new
Chief Executive Officer; myself as new Chief Information
Officer all within the past year. We're recommitted to
restructuring the organization in a great way. We're changing
the organization, as you know, to align ourselves with the
taxpayers. That's a major effort that's going on.
We're developing new measures of performance for the
Service. We have a new mission statement, which clearly
recognizes the need to provide service to its taxpayer, at the
same time providing fairness to all the points you raised
earlier. We're revamping business processes, and we're
modernizing the technology. All of these things are occurring
simultaneously, and the costs of the age and the serious
inadequacies in many of the base systems are requiring an awful
lot of work and aren't going to happen overnight.
But I just want to assure you that the Commissioner and all
of his direct reports are absolutely committed to what you've
laid out in terms of generally supporting the system that we
have in place. And I think some of the loopholes that have been
brought up here are simply that; they're weaknesses in the
system that can be corrected, but they're not overall massive
failure of the system.
I think you need to understand it in that context, that
we've taken some specific examples, such as a refund check
going out that may have slipped through the process, but in
general, we're processing and controlling the vast majority of
the payments properly as indicated by the clean opinion and the
historical statements.
Mr. Horn. Let me pursue an example. Our employer takes out
the amount of money out of every paycheck for the Social
Security Trust Fund and the Hospital Insurance Trust Funds.
Now, when that comes in, let's say he's got five employees, and
half is met by the employer under Social Security and Medicare,
and that money comes into an IRS center. What happens? Do they
actually assign it to ``a trust fund''? Tell me where the
reconciliation comes in. Does somebody keep it on a paper bag
at lunch and say, ``gee,'' we owe that trust fund something at
the end of the year. When does reconciliation and love occur?
Mr. Cosgrave. I will let Mr. Dalrymple give you the answer
to that. The service centers are under his direction.
Mr. Horn. OK. Well, you've been sworn in.
Mr. Dalrymple. I've been sworn in, thank you.
If I understood your question correctly, it is when do we
actually certify the moneys over. Two years ago, I believe it
was 2 years ago, it may have been 3 years ago, we got a
recommendation from the GAO when we actually start reconciling
this to when it was paid, as opposed to when it was reported,
because, as you know, there are times when this money is not
paid over, and so then it goes into a collection activity, and
we end up collecting it.
Mr. Horn. Well, let's make that very clear. When it is
paid, by whom?
Mr. Dalrymple. By the employer.
Mr. Horn. OK. When the employer's half comes in and the
employee's half--they're really coming in at different
timetables, aren't they?
Mr. Dalrymple. Actually, they come in at the same time, but
they're--you know, they're withheld, as you know. This is
witholding taxes, so they--but we are now certifying twice.
We're certifying what we expect is in the--on the books at the
end of each quarter, and then we certify later when we verify
that the payments have actually come in, so what was actually
paid.
Mr. Horn. Now, this is whose books at this point? Is it on
the provider's books or your books?
Mr. Dalrymple. I'm sorry, I'm misunderstanding the
question.
Mr. Horn. Well, when the money is deducted in the paycheck,
the employee has it at that point, he's supposed to turn it in
to the IRS.
Mr. Dalrymple. He turns it in quarterly.
Mr. Horn. Quarterly. And you get also the employee's half
quarterly. Now, do those come in in one check or two; the
employee sends one?
Mr. Dalrymple. They come in in one check. They come in one
time, one deposit by the employer, because the employer----
Mr. Horn. So the full 15 percent or whatever it is----
Mr. Dalrymple. Exactly.
Mr. Horn [continuing]. Is paid on Mr. Jones.
Mr. Dalrymple. Yes.
Mr. Horn. And at that point what do you do with it? Do you
have something called a trust fund? The fact is you don't, do
you?
Mr. Dalrymple. We don't have a----
Mr. Horn. There is no trust fund?
Mr. Dalrymple. Right, that's correct.
Mr. Horn. Right. Does that come as a surprise to anybody on
Capitol Hill? What we want to do, frankly, in this Congress is
make sure that every single dime comes in to a trust fund, and
that the President can't borrow it, no matter who the President
is, and it's going to sit there, and it's going to be a trust
fund. So tell us how it works right now.
Mr. Dalrymple. Well, it comes in, we make an estimate based
on the filings, the total amounts, and then later we go back
and verify that through collections, and then that is what is
certified, as I understand it.
Mr. Kutz. Mr. Chairman, what he's speaking about is
actually excise taxes. I believe you're speaking about payroll
taxes; is that correct?
Mr. Horn. Right, that is correct.
Mr. Kutz. That is a different process. The IRS is now doing
their certifications of excise taxes based on collections.
However, for the Social Security taxes, that is not what's
being done. It's basically being done on IRS wage information.
Let me defer to Mr. Sebastian to give you a detailed discussion
of that process just to clarify the difference.
Mr. Horn. I would like to know how the system works,
because I think it's an illusion in many cases.
Mr. Sebastian. Yeah. As Mr. Kutz pointed out, what is
actually happening with regard to the distribution of moneys
into the Social Security, Hospital Insurance Trust Funds, those
distributions are actually based on a certification of wage
information that is done by the Commissioner of the Social
Security Administration.
There may be no relationship between what's certified and
what's actually collected on a quarterly basis. And, in fact,
IRS's systems currently don't capture information as payments
are being received that would allow you to actually affect the
distribution to the specific trust funds.
It's important to point out that the process of
distributing into the Social Security and Hospital Insurance
Trust Funds using wage information versus actual collections is
actually in accordance with the law.
Mr. Horn. Now, is that what you would call an audit in the
sense of the word? Can you trace them and get a fix between the
wage determination that is made and the actual payment that's
made? Is there a gap there at all?
Mr. Kutz. Yes, there is a gap, and we reported on that as
part of the audit.
Mr. Horn. That's my point. In which direction is the gap
going, more money than they should collect or less money than
they should collect?
Mr. Kutz. The way it's working is the general fund is
essentially subsidizing the Social Security Trust Fund, because
the IRS, as you can see on the poster board, look at the
writeoffs--many of those writeoffs are probably related to
payroll taxes, as I recall.
Mr. Sebastian. In fact, about $47 billion of the amounts in
there relate to payroll taxes.
Mr. Kutz. To the extent those are not collected, the Trust
Fund gets the money anyway. And we reported an estimated
subsidy of about $38 billion this year. That is a low end of
the estimate of what the cumulative subsidy would be to the
Social Security Trust Fund from the general fund.
Mr. Horn. Well, it seems to be that you're talking about
employers and employees paying in taxes at a certain time
schedule, and it's going into one big pool of money. And
hopefully you're depositing it fast so the Treasury can earn an
interest on it and save the taxpayers a little bit of money.
So what I'm trying to get at is what is certifiable, what
is auditable, and what does the GAO think as to the time period
for that audit? Is it simply an annual audit? And it seems to
me there's an estimate made here, and on what basis is the
estimate made? It seems to me that a lot of good people might
have another way to do it. And I'm just curious how firm that
estimate is.
And is that simply a decision of the Secretary of the
Treasury as to what happens with the money when it comes in;
where's the bread, where's the money?
Mr. Kutz. There are two separate audit issues. The Social
Security Trust Fund is an audit that we are not involved in;
however, we have done some work for the Department of Labor and
Transportation Inspectors General related to the amounts that
get distributed to the Highway and Airport and Airway Trust
Fund. And so we have done some audit procedures in the excise
tax area.
The Social Security audit is done by their Inspector
General. I think they contract with PriceWaterhouseCoopers to
do that audit. And so the actual audit of the Social Security
information is done as part of that audit.
But we do assist the Labor and Transportation Inspectors
General in auditing the certifications that Mr. Dalrymple
talked about with respect to the Highway and the Airport and
Airways Trust Funds.
Mr. Horn. Well, let's take that, since I sit on the
Transportation Committee. You've got a Highway Trust Fund, an
Airport Improvement Fund, and the fact is you don't get the
exact amount that is going--run up on that gasoline pump, let's
say, when somebody takes their car in to fill the tank. And the
company presumably is supposed to be keeping track of the
Federal tax and sending them a check, I assume, what,
quarterly?
Mr. Dalrymple. It's quarterly, yes.
Mr. Horn. What is the case of your friendly local oil
company. Maybe you should tell us how it works. You're awful
quiet on this. I think it's because the emperor has no clothes
or something. What can you tell us about how the money is
deposited into those funds? Presidents sit on them and the
taxpayers pay them, Congress authorizes the fund for a purpose;
namely, to maintain the interstate highway system or maintain
and expand the airport system in America. And yet we don't know
how much is coming in accurately, do we; or don't we? Don't all
jump at it.
Mr. Kutz. You want us to answer that?
Mr. Horn. I want both of you to answer it.
Mr. Kutz. With respect to the excise taxes, we have done
work for 2 years now, what is called agreed upon procedures
work. And we did find problems with the IRS certification
process in fiscal year 1997. In fiscal year 1998, as a result
of recommendations by GAO, the IRS did make improvements in its
certification process, and we found during this year's audit
work that there were more accurate distributions to the Highway
and Airport and Airway Trust Fund. However, there are still
some control problems that exist and IRS is working on our
recommendations.
Mr. Horn. Well, let me ask you, what is the current state
of our tax on, let's say, airports, the Airport Improvement
Fund or the Highway Trust Fund? What's the tax that's levied in
that area?
Mr. Dalrymple. I wouldn't have any idea exactly what it is
in that particular area or any individual area, but just to
reiterate what Mr. Kutz has said----
Mr. Horn. What I'm after is what's the methodology of
saying--do you add up all the gallons of gasoline that have
been sold, or how does one check where the money is?
Mr. Kutz. Mr. Chairman, I think it would be helpful if Mr.
Sebastian walked you through the actual process here, because
it's fairly complicated. But he's done it many times, so let me
give him a chance to do that. He's a pro at this.
Mr. Sebastian. I'm not a pro at it, and it is a complicated
process. Let me start first by saying that as deposits--excise
tax-related deposits are made, they are going directly into the
general revenue fund of the U.S. Government. They are then
being initially distributed to the various excise tax-related
trust funds, such as highway, airport and airways. Those
distributions are based on estimates done by the Office of Tax
Analysis within the Department of the Treasury, and they
essentially use much of the information that they use to derive
the President's budget in making those initial distributions.
What occurs roughly 6 months after a particular quarter
ends is as the IRS receives the tax returns, excise tax
returns, much of the information that you had mentioned,
gallons of fuels, airport ticket tax, et cetera, is
identifiable by the taxpayer on the tax returns. The IRS then
matches--and this is a relatively new process this fiscal year,
but the IRS matches the information on the returns to the
amounts it has in its records with respect to what was
collected by that taxpayer for that particular quarter. And
bear in mind, up to that particular point, the IRS can't break
the amounts that have been received down into the specific
taxes, they have to wait for the tax return to come in.
As a result of matching the information on the return to
what was collected, the IRS then certifies the amounts that
should have been deposited into the respective trust funds for
that particular quarter. That information then goes over to the
Department of Treasury's Financial Management Service, which
compares the amounts the IRS is certifying for a given quarter
against what was actually distributed based on OTA's initial
estimation process, and----
Mr. Horn. Why don't you define OTA's?
Mr. Sebastian. The Office of Tax Analysis.
Mr. Horn. Right.
Mr. Sebastian. It's a detailed estimation model. It looks
into patterns of revenue streams.
Mr. Horn. Do their estimates come into a phase of reality
with the audit, and to what degree is there a difference?
Mr. Sebastian. I would say that we've looked at the OTA
estimation process from a standpoint of what controls they have
in place to factor in tax law changes, et cetera. We haven't
done a detailed analysis getting into the adequacy of the
underlying assumptions, but our sense is that the OTA's
estimation process presents reasonable estimates of the amounts
that would be distributed. That doesn't mean--again, because
they're estimates, they are subject to change, and that's a
part of what the IRS subsequent certification process attempts
to measure is the degree of change between the estimate and the
actual.
Mr. Kutz. But the root cause of this problem is when the
money comes in the door, the taxpayer is not required to and
does not break out the details of the different pieces for the
fuel tax, et cetera. So IRS does not know at that point in time
where the money should go. Because of that root cause problem,
this elaborate process that Mr. Sebastian just described takes
place at this point.
Mr. Horn. It seems to me it ought to be very simple; how
many gallons of gasoline did you sell at what price or
whatever, and here's your share of the tax. Now, I take it that
the individual gas station owner or franchise does not do that.
The company, I take it, does the actual amount of the Federal
tax; is that correct? Anybody know?
Mr. Kutz. You mean the big oil companies?
Mr. Horn. Yes.
Mr. Kutz. Most of the returns coming in are from the major
oil companies and the chemical companies, yes, et cetera.
Mr. Horn. OK. And is there a way that the IRS has audited
them to see if they're producing the right numbers off all of
their stations? There's thousands of stations some of them
have, and they get a weekly report, or almost daily, on
inventory. So you can tell. I remember working my way through
college, you posted the report at 7 a.m. before you went off
the 11 to 7 shift, and it was how many gallons had come in on
the shift, how many had you pumped out. So those data all are
everywhere, I'm sure.
Mr. Dalrymple. As part of our large case examination
program, when we audit one of these large companies, we have an
excise team that's part of that examination, and they do just
that. They literally go out and do some checks and some local
calls to determine whether or not there's any reason to go
further in terms of checking, and then assess additional excise
tax if appropriate or not, depending on how the examination
goes.
Mr. Horn. What's the most difficult trust fund to deal with
in terms of the estimate?
Mr. Dalrymple. I'm probably not qualified to answer that
question, Mr. Horn, but I suspect that someone from Office of
Tax Analysis would probably be the one.
Mr. Horn. We will save a little spot in the record, without
objection, to see what the experts are going to do.
[The information referred to follows:]
The Highway Trust Fund has the most tax items appropriated
to it. Each of these items has a different tax rate and a
single tax may be apportioned to several accounts. For example,
tax paid for gasoline is appropriated to the Highway Account of
the Highway Trust Fund, the Mass Transit Account of the Highway
Trust Fund, and the Leaking Underground Storage Tank Trust
Fund. In addition, a portion of the gasoline receipts is
subsequently transferred to the Aquatic Resources Trust Fund to
reflect that some gasoline is used in motor boats. The large
number of tax items and multiple accounts make the Highway
Trust Fund the most difficult to administer.
Mr. Kutz. Mr. Chairman, I would say it would be the Highway
Trust Fund. If you look at the form that comes in from the
taxpayer, the form 720, the Highway Trust Fund is made up of
numerous different taxes, whether it be diesel fuel, alcohol
fuel, whatever the case may be, versus the Airport and Airway
Trust Fund is only four actual taxes.
So I think the answer to your question would be the highway
would be the most complicated because it consists of the most
different types of taxes.
Mr. Horn. Do you want to pursue anything on this?
Mr. Turner. Not on this. I have other questions.
Mr. Horn. Mr. Turner has some questions to ask.
Mr. Turner. When we passed the IRS reform legislation last
year, there was a lot of comment from the Internal Revenue
Service to the effect that making the agency more taxpayer-
friendly was going to make it harder to collect taxes
rightfully due. And I would like to hear from each of you, Ms.
Cunninghame, or any of the others that you brought with you,
about your assessment of that claim at this point in time,
because it's my hope that what the Congress did was make the
IRS a more responsive agency to the taxpayer.
But at the same time I hope it did not keep your agency
from collecting taxes rightfully due. Could you comment on that
and whether or not you believe that we are going to have some
problems with collection, or can we overcome those problems and
rightfully collect what is due?
Ms. Cunninghame. I'm not sure we have the total answer, but
I do think John can address those issues as well.
Mr. Dalrymple. Actually, I think that the Service's
position was and is and will be, on a forward-going basis, is
that we actually believe that by putting our activities on the
front end of the system, making ourselves much more taxpayer-
friendly in the sense that we are out in front trying to inform
people about what their responsibilities are actually impacts
compliance on the back end in a positive way, and that if we
can get people to change their behaviors, because we understand
them better, because we're organized around the way the
taxpayers actually do their business, whether it's small
business, or wage and investment, or exempt organizations, or
large and midsized businesses, I think what we anticipate now
and in the future is that we will be much better able to serve
them and that we will reserve our enforcement resources for the
most egregious cases, and that we're actually helping more
people to comply by having more resources on the front end than
on the back end.
In fact, I think many of the people that end up on the
chart over there if we could have gotten to much, much earlier
in the process would not be on the chart.
Mr. Turner. Do I take it then that you're trying to
reassure me that what the Congress did to make the agency more
customer-friendly is not going to have an adverse impact upon
collections?
Mr. Dalrymple. I think if there's any adverse impact on
collections, specifically on collections, it'll--whatever it
will be, it will be short-lived, and that over time certainly
the right thing to do is to help people comply with the tax
laws as opposed to waiting for them not to comply up front and
then try to use resources on the back end to try to get them
back into compliance. That's just not a very smart way to do
business.
Mr. Turner. Ms. Cunninghame, I was reading your statement
again that you delivered to us earlier, and you attempted to
reassure us that you were going to work diligently to address
the concerns of the General Accounting Office; that you were
going to bring in some independent help. A comment was made by
one of your colleagues that, you know, that the Commissioners
knew.
I guess I get the sense that even though the IRS is going
through some reorganization, I don't sense that there's been a
real significant effort to deal with these financial management
systems problems that we're talking about here today. And I
guess first maybe I should ask you if the IRS has contracted
out for the work to modernize its systems, and whether or not
we're getting the kind of independent advice and the emphasis
that is needed to overcome these problems, rather than simply
coming in here every year after an audit and having, you know,
someone in your position as the Chief Financial Officer saying,
yes, I'm going to respond to this.
These problems seem to be running pretty deep. As we said,
some of the systems have been in place since the 1970's and
before, and I just don't get the sense that there has been an
emphasis internally at the IRS to really deal with this
seriously enough. Would you comment on that, and then perhaps I
would ask the GAO to also respond?
Ms. Cunninghame. Certainly, Mr. Turner. I think that we
have put a great deal of attention on enhancing our systems,
and certainly with the release of the prime contract that we
made a few weeks ago. I think that there is a big emphasis on a
number of top priorities at the IRS, one of which is the
financial systems.
I would like Mr. Cosgrave to have an opportunity to be more
specific about what those are and to assure you that the
financial systems are in queue to be dealt with with the other
systems that are top priorities for the service.
Mr. Cosgrave. Very briefly. The overall plan that we've
been executing against for the last 2 years since we presented
the technology blueprint for modernization was aimed primarily
at the tax processing systems. With the audit, the GAO audit
from the last year, where there was some deficiencies pointed
out in the way we processed data for the custodial accounts, we
took some action that's been going on now for a year to, in
fact, improve those custodial systems in the way we provide
data to support that analysis up there. With this report, we
will now start additional efforts in terms of the
administrative systems that frankly were not being addressed as
forcefully as custodial systems.
Now I need to put all of that in the context, that, first
of all, we have hired outside expertise in the form of computer
science corporations and the partnership that we have put
together, which includes IBM, UNISYS, among other players,
KPMG, et cetera, to help us deal with all of this issue. And,
in fact, they are the systems integrator that is driving the
program going forward.
So we definitely reached out to the private sector for this
assistance. However, we haven't made progress in these areas in
terms of the inventory examples, for example, brought up
earlier. We have had a problem that was recognized in terms of
particularly getting assets that have been disposed of through
proper channels off of our books. We have been slow in terms of
doing that. And this presented some problem to us, particularly
in terms of confirming everything that we had for Y2K
compliance.
So over the last 4 months, since the effective date of the
audit, we have invested over $5 million in actually improving
the basic inventory system to address that one fundamental
problem, so I suspect we will see some short-term improvements
here the next time we have the inventory analyzed. However, I
can't emphasize more once again that these are very long-term
problems in their nature. They have been long-standing
problems, and we will continue to work on them.
The other point that was raised earlier in the testimony
was related to security, and I would just like to point out
there that GAO had reported that IRS had long-standing problems
in the security area. But 2 years ago we implemented our own
system, standards and evaluation office. This office is led by
two SES executives, who were former GAO employees, and over 60
employees. And we've actually reported, and GAO reported in
their audit, in fact I can quote here, that they acknowledged
that 75 percent of the improvements--75 percent of the
weaknesses that were identified in the April 1997 report have,
in fact, been mitigated.
So we clearly are making progress; however I can't
emphasize more the long-term nature of some of these.
Particularly because of Y2K you will not see a lot of immediate
results in terms of the systems changing, because clearly Y2K
is our top priority at this time.
Mr. Turner. I would also ask, Mr. Kutz, if you would
respond to that. Again, what I'm looking for is your assessment
of the degree of the commitment and the effort by the IRS to
remedy these financial systems problems that you have
identified.
Mr. Kutz. Yes, I would concur with Mr. Cosgrave in that the
focus of IRS over the last year or 2 has been fixing the
custodial systems, and I would also concur that is a very long-
term prospect that is going to take numerous years. So we will
be talking about these problems for the foreseeable future. I
don't think there was as much emphasis placed on the
administrative control issues with respect to the property and
equipment, being able to produce things like an accounts
payable listing at year end, or listing the budgetary accounts,
for example, your undelivered orders at year end. And I do
believe IRS now recognizes the administrative-related problems
and is going to build a plan to try to fix those systems-
related problems.
Mr. Turner. Thank you.
Mr. Horn. Let me go back to debt collection for a minute.
Could you tell me as Chief Financial Officer, Ms. Cunninghame,
the degree to which you tell the taxpayer that money is owed,
and how you do it, and in what time period? How does that
system work, and have you had a chance to look at it?
Ms. Cunninghame. I have had a chance to look at it, and we
do have a system that works, but, again, the expert on that is
Mr. Dalrymple, if you would let me defer to him.
Mr. Horn. Well, I would hope you would also know about
this.
Ms. Cunninghame. I do, sir, but, you know, I'm relatively
new, and I don't know it to the extent of Mr. Dalrymple, who
has been with the Service for 23 years.
Mr. Horn. OK. How's the process work?
Mr. Dalrymple. Well, the process works once there's a valid
debt, whether you file your return and just didn't--weren't
able to pay it, or whether there was an examination of your
return and there was an amount due or some other means, once
that happens, then a notice is generated, and it's a statutory
notice of deficiency, and that's by law. And you receive a
first in a series of notices saying, would you please pay the
tax that is here.
Mr. Horn. When does the first notice go out? Is it a 30-
days? Once you notice a default, how does that work?
Mr. Dalrymple. Well, notice and default refers to the
examination process. But just, in general, let's just take a
normal taxpayer who files their tax return on April 15th.
Generally those notices go out in June and July for our returns
that were due to be filed on April 15th, and we ask that the
taxpayer pay that account then within--I believe within 30 days
on the first notice. At the end of that period of time, we send
a second notice and then a third notice.
Mr. Horn. A second notice goes out roughly 60 days after
April 15th?
Mr. Dalrymple. Roughly--actually, it's probably later than
that, because the first notice goes out about 60 days after
April 15th.
Mr. Horn. OK.
Mr. Dalrymple. So about 45 days after that first notice
goes out, a second notice would occur.
Mr. Horn. Now, that's a written notice?
Mr. Dalrymple. That's a written notice.
Mr. Horn. None of this has been telephone so far?
Mr. Dalrymple. Nothing telephone at this point in time. And
a third notice is generated to the taxpayer asking them to pay.
At the end of this point in time--now, there are certain types
of accounts that go directly to our telephone contact units
primarily. It would be trust fund accounts that--where
withholding has been made, and the employer didn't turn that
withholding over, but just the general run-of-the-mill April
15th filer. Now you're under a fourth notice. Finally, you will
get a final notice before that says it is a levy action. That's
actually what the notice says. Once that has been out, then we
send it to our telephone system for a collection. And then
telephone calls--actually, then some sort of telephone call
system is set up for outcalls and/or to receive calls from the
taxpayers, depending on what action we may have taken, such as
sending a levy out to an employer or a bank account.
Mr. Horn. Do you ever use the telephone first?
Mr. Dalrymple. No, we haven't. And----
Mr. Horn. In other words, you don't, say, if this looks
like a big taxpayer?
Mr. Dalrymple. That's right, actually we do not. We treat
everyone the same. That's one of the things I believe that is
wrong with the system. I talked about earlier how we need to
get up front. I'm not just talking about up front with our
taxpayers' education, corrective, but we need to move
everything up front in the process what we're going through
now, and Mr. Rossotti has done some of this through his prior
life in this other company, is to go through a risk assessment
for taxpayers to determine who is not at risk at all, who will
pay just through an installment agreement process, et cetera;
others who are at real risk and need telephone calls
immediately or should be--may even need a field contact
immediately, as opposed to going through the notice routine.
So our long-range view here is to do a total risk
assessment of all of the accounts that we do and move that
collection process on a much, much more timely basis. Right now
we basically treat all taxpayers the same way, go through a
methodology. Now, we do short-cut some of the systems on some
basis of risk now, as I mentioned, trust fund taxpayers, et
cetera, but generally speaking, we do not have a very good risk
assessment process right now for the general population.
Mr. Horn. What about the private collector? At what point
do you involve private collectors to collect your debt?
Mr. Dalrymple. We don't at all.
Mr. Horn. You don't?
Mr. Dalrymple. No.
Mr. Horn. Did you ever look at that?
Mr. Dalrymple. Yes, sir, we did.
Mr. Horn. As I remember, you put out a 5-year-old debt for
them to bid on, which I thought was one of the sillier things I
had seen in the bureaucracy. That's bound to not be
collectible. The question is when you get in there early--and I
went through this with the previous Commissioner, and that's
what lead to the Debt Collection Act of 1996. I said it's a
national scandal, as far as I'm concerned, when you've got $100
billion written off, and you have no process to really do it.
None of your people were doing what they should have done,
and you've put your finger on the risk assessment certainly,
and the fact is that because little Willie Jones that only owes
you $30, and somebody else owes you $30,000 or has a loan from
the Farmers Home Administration, which was the example of
several million, and they would go and had given him several
other million, even though he even defaulted on the other
several million, and so forth and so on, and that sufficiently
got my Irish dander up as to why are we letting them steal from
the taxpayers of the United States.
And I just don't understand it, and I still don't. I think
the world of Mr. Rossotti, and I hope he will, you know, face
up to this. I think he's got the common sense. Because when I
said, why not turn it over to the private collectors, to his
predecessor, the answer was, oh, well, we have privacy laws.
Baloney. You give them the amount, you give them the address,
and say, go to it. If they've got a beef with IRS, fine, you
use your people. But we're losing billions of dollars.
I don't know what GAO's thinking about it, but I must say
when I see that that thing keeps going up, up and up, and
there's no--not too many S&Ls going under now as an excuse to
not collect it, and that's all I regard it as is an excuse, and
it seems to me you had that experiment, I don't know who put
that one together, on the 5-year debt to have private
collectors bid on it, but it just means you're passing it up.
You're passing it up. And I don't understand why you can't use
private collectors.
Mr. Kutz. Mr. Chairman, one thing I would say, those
private collectors would be basically stuck with the same
system that IRS has for collecting from taxpayers. So that
would certainly hinder their efforts to go after some of these
amounts. In other words, if the system doesn't properly
identify who to go after when the tax was incurred, et cetera,
that would create some problems for private sector collectors.
So a better system would also help no matter who goes after the
collections.
Mr. Horn. What would the General Accounting Office suggest
as a rational system?
Mr. Kutz. I think that as part of their long-term tax
system modernization plan, they're trying to put together an
appropriate subledger similar to what you would have in the
private sector that appropriately identifies the amounts due
from taxpayers along with other detailed subsidy information on
those individuals or corporations. And they do plan to do that
as part of their tax system modernization. The problem is that
is a very long-term effort.
Mr. Horn. Well, yeah, but, my heavens, we have been at this
now for 4 years or--yeah, 4 years of trying to get them to face
up to how you run an organization. Now, I think Mr. Rossotti
has those credentials, so I've got great faith in him, but it
seems to me you get people working for you, and when you can't
collect it now and a private collector could collect it, I
don't understand why somebody over in IRS doesn't say, hey,
let's reorganize this operation. Are they afraid of the union
or what? If not, get the union to go out and knock on the
doors. But it has to be something that is delaying people from
common sense in administration.
Now, does anybody got a plan at that table in terms of the
Treasury which--by the way, who is the Chief Financial Officer
of the Treasury?
Mr. App. Nancy Killefer, sir.
Mr. Horn. Is she full-time Chief Financial Officer, or is
she also Assistant Secretary?
Mr. App. She's Assistant Secretary for Management and Chief
Financial Officer, and she has spent considerable time with the
whole IRS modernization plan.
Mr. Horn. Well, I don't see how you can when you're holding
an 18-hour-a-day job also, which is the Assistant Secretary for
Management. But that's another story of why I think Treasury
has been out of sync for a long time.
Well, I'm not happy with the answers on debt collection,
and it just seems to me you shouldn't let people off like that.
And if I were listening to this out there, and I was sort of
worried about do I know where my next payroll is--and that's
where a lot of the problems come, somebody tries to not
contribute on what the match is for Medicare and Social
Security and all the rest. And then the problem here is, you
really don't know what's in those trust funds or what should be
in. You're making estimates.
And now have we ever done an actual audit of this on a
random--you do a random sample. Does IRS?
Mr. Kutz. Mr. Chairman, could you rephrase the question, a
random sample of what specifically?
Mr. Horn. On the trust funds, I think we're pretty clear
that you don't have a record that you can follow on the
taxpayer that had certain things deducted from their payroll
and that the employer sent in a check to IRS; nobody has an
account down there. It's sort of almost like when you finally
draw on it, that somebody says, gee, we better get some more
money in there, a lot of people are drawing this quarter.
There is no relationship into what they deduct in relation
to what you get. And you can't seem to audit it, either at the
GAO level or the IRS level.
Mr. Kutz. That's right. The IRS and the Federal Government
do not know how much is collected for Social Security,
individual, and hospital insurance taxes.
Mr. Horn. Right.
Mr. Kutz. They must combine those for their financial
statements.
Mr. Horn. Is that basically your recommendation? Your
recommendation is, what, to make sure that the money is there?
Mr. Kutz. We have recommended to them in the past to try to
get the information from taxpayers up front so that that
information can be--so the estimate process over at the
Department of Treasury that Mr. Sebastian described would no
longer be necessary. And they do have a study that they have
performed that we have not seen the results of that as soon as
we begin our 1999 audit of IRS's financial statements, we will
review.
Mr. Horn. Mr. Turner, do you have any more questions on
this?
Mr. Turner. There is one item I want to briefly address, it
seems to be something that would be manageable in the short
term, and that's the problem that was raised in the audit
regarding the hiring of individuals. I assume this occurs a lot
during peak seasons of employment at the IRS, hiring people
with criminal records and ways in which that could be
prevented. It seems to me there ought to be a short-term
solution to that particular problem.
Am I correct, is there one, Mr. Kutz, and did you recommend
one to the IRS?
Mr. Kutz. I think there is a reasonably short-term fix to
this with new machines that can provide on-line fingerprint
checks, and we saw one of these in Philadelphia. Actually, it's
a machine that they can do an on-line fingerprint check with
the Philadelphia City Police and get a turnaround in maybe 24
to 48 hours. They don't have that capability yet with the FBI,
but I believe that is part of the IRS short- to longer-term
solution to this problem.
Mr. Turner. I notice that----
Ms. Cunninghame. Excuse me, Mr. Turner, if I might, we have
worked with the FBI, and we are currently--we've just
implemented the FBI electronic system to check those
fingerprints in a more thorough and quick turnaround basis.
Mr. Turner. And so that--you think that will remedy this
particular problem in the short term?
Ms. Cunninghame. We're in the process of implementing that
system currently, and we will have results known in a little
while. But, yes, we think this is going to be a very big help
in checking very quickly whether these people have criminal
records, and not relying on a 2- or 3-week wait as we have done
in the past.
Mr. Turner. Thank you.
Mr. Kutz. I think the problem in the past was not a 2- or
3-week wait. I think the time delays were much more
significant. I think this solution would provide, again, a 1-
or 2-day turnaround, which would mean that you're not going to
have people going into the service centers and handling cash
and checks and taxpayer data until you know that they don't
have a derogatory background.
Mr. Turner. Thank you.
Thank you, Mr. Chairman.
Mr. Horn. Thank you.
Mr. Kutz, elaborate on the Antideficiency Act which you
mentioned and the IRS's accounting procedures in relation to
it, because criminal penalties are provided in the act, but I
don't think in the history of the country they've ever been
invoked, or am I wrong on that?
Mr. Kutz. I don't know.
Mr. Horn. You don't know. Do you ever remember a case?
Mr. Kutz. Of actually reporting?
Mr. Horn [continuing]. That someone reported on the
Antideficiency Act.
Mr. Kutz. I do believe several years ago that we did report
at the IRS there was an Antideficiency Act issue.
Mr. Horn. I'm not thinking of the IRS, I'm thinking of the
whole executive branch.
Mr. Kutz. I can't speak to that otherwise.
Mr. Horn. Anybody got history of that in the Treasury?
Usually they move money around, so there isn't a deficiency
such as there is.
Mr. Kutz. Right.
Mr. Horn. How does that relate then in the implications to
the IRS accounting procedure?
Mr. Kutz. Well, Ms. Hawkins has been left out of this, so I
want to give her a chance to answer this one here. I will pass
it to her and give her an opportunity to see----
Mr. Horn. Give her a chance to commit to this committee, I
see. Glad to have you experts.
Ms. Hawkins. I think, as Mr. Kutz mentioned, we disclaimed
on the budgetary statement, and part of the reason for that is
we could not get the data we needed to verify a lot of those
accounts like the undelivered orders. On the suspense account,
that had a net balance of disbursements of $100 million as of
September 30, 1998. That gave us concerns, because basically
those are amounts other agencies in the government through a
treasury system can basically take the money out of your fund
balance. With Treasury, if you owe money----
Mr. Horn. When you say expense account, what does that
define? Is that per diem and travel?
Ms. Hawkins. No. For example, for telecommunications, if
GSA, the General Services Administration, is providing those
services for you, when they determine the amount that you owe
for a particular month, they will withdraw this amount through
the OPAC system.
Mr. Horn. And spell that one out, please, for we
uninitiated nonbureaucrats.
Ms. Hawkins. It's basically a computerized system, they
automatically deduct money from your fund balance with your
Treasury account, the funds from your appropriation that you
have with the Treasury. They transfer money to themselves to
cover your expenses such as telecommunications or rent.
Mr. Kutz. It's kind of like an electronic bill-paying
system.
Ms. Hawkins. Yes. We found in our sample where we tested
expense amounts, we found several cases where items went into
the suspense account, because the amount being charged by the
agencies, such as the General Services Administration, was for
more than what was obligated. And in budgetary terms you
obligate money to say we're reserving money from our
appropriation to pay for what we expect to owe. An agency can't
pay a bill until it obligates the funds.
We found cases where items would go into suspense, and the
suspense account is not charged against any individual
appropriation that is given to IRS. The IRS uses a suspense
account, and then when the obligation amount for a specific
appropriation was increased, the money would come out of
suspense.
When we look at the budgetary statements as of September
30, 1998, for the two major appropriations for IRS, the
processing assistance and management had an unobligated balance
available of $4 million, and the tax law enforcement had an
amount of $8 million available. There was $100 million in the
suspense account. We don't know whether or not all of those
amounts have been obligated, so we don't know whether or not
there was a violation of the Antideficiency Act.
Mr. Horn. In other words, Congress gives them an
appropriation. The President recommends an appropriation. We
discuss it. We send back an omnibus appropriations bill or
whatever it's called that year, and there is a target for IRS.
And you're saying there's a separate account that is there that
isn't really where--all the money for administration of the tax
system is not in a particular account, is what I'm listening
to, and if I'm wrong, and listening to you, let's get it a
little clearer.
Ms. Hawkins. No, I think what you're saying is correct.
Mr. Horn. So they can pay the bills out of the--well, I
guess the old term was using the float in terms of the interest
that they accrue on other accounts. Has any of that been used
by IRS to function as an agency when it wasn't appropriated by
Congress or what? What are you finding?
Ms. Hawkins. Because of the problems auditing this year, we
didn't go into a lot of detail on this area. We did find cases
like in one appropriation for fund balance from Treasury, a
specific appropriation where there was a note saying we don't
have enough of this appropriation, we need to transfer money
from another appropriation to cover the needs that we have in
this appropriation.
Mr. Horn. And Congress has or has not given them the
authority known as reprogramming money from one to the other?
Ms. Hawkins. Well, in this particular case, the dollar
amount was low enough that I don't think they had to come to
Congress for the reprogramming authority. And, again, in some
of these cases, it's related to the way the administrative
activities are handled. These two appropriations were about $6
billion and----
Mr. Horn. Six?
Ms. Hawkins. Billion.
Mr. Horn. Million with an M, or billion with a B?
Ms. Hawkins. Billion.
Mr. Horn. We think only with B's around here, not M's.
Ms. Hawkins. And yet when you look for just these two
appropriations, the amount as of September 30th remaining to
cover things that hadn't been identified was $12 million, which
seems quite small. We do know there are some areas where the
IRS will be collecting money that will increase available
funding from these appropriations again, but we just don't know
whether or not their budgetary accounts are accurate or not.
Mr. Horn. You're saying it's hard for you to get an answer
to them? Was that because agency employees did not want to give
you an answer or what?
Ms. Hawkins. No, I would say agency employees were very
helpful to the extent that they could be. Some of the problems
dealt with when we asked for a breakout of the suspense account
at the end of January, they didn't have a listing of what made
the suspense account, so we couldn't go into details in terms
of trying to find out what was in suspense whether or not they
were violating the Antideficiency Act.
We could not obtain a list of undelivered orders, which
affects the budgetary accounts as of September 30, 1998 or
1997. So we could not say whether or not what they had was
correct. Some of the problems dealt with the systems and the
way they are set up, and some of them dealt with the timeliness
of being able to provide this computer information.
Mr. Horn. Who sets the budget accounts for Treasury? Is it
the Assistant Secretary for Management or the Chief Financial
Officer? In this case, one person is holding both jobs. Is that
what they have to wait for once a new fiscal year comes in, or
are these well-established accounts?
Mr. App. They are well established, with some adjustment
every year.
Mr. Horn. Is that what the problem is? In other words, they
are using this suspense account?
Ms. Hawkins. Yes.
Mr. Horn. To what extent are they using the suspense
account? This is before allocation to a budget category; is
that right?
Ms. Hawkins. Right. As of September 30, 1997, there was a
balance over $100 million, and also there was a balance over
$100 million, net, as of the end of September 30, 1988. How
many transactions are going in and going out during the year, I
don't know.
Mr. Horn. Well, it is OK unless it is criminal. Do you
detect any criminality in it?
Ms. Hawkins. I don't think that there was any criminality
in terms of purposely overspending appropriations. I think
because of some of the problems with the accounting systems and
how they are used, that there is a potential that accidentally
something could happen.
Mr. Kutz. Right. But with the disclaimer opinion, we are
saying that because of the difficulties and the problems we
had, we don't know.
Mr. Horn. Last year they had a very fine opinion, right, on
the 1997?
Mr. App. Unqualified opinion on both admin and revenue.
Mr. Horn. And you amazed all of us because back in 1993-
1994 when that law was put on the books, we said there are two
agencies that will never meet it: One is the IRS and the other
is the DOD. And so we were only half right. You amazed us, so
congratulations.
I wonder why this year seems to be so different from last
year when GAO goes in to audit things.
Ms. Cunninghame. First of all, I would like to say that we
have full confidence that we are appropriately obligating and
expending our appropriated funds.
Part of the difficulty we have had this year with the
administrative audit is we did not set our own timetables to
coincide appropriately with GAO's timetable. Our accounts are
extremely laborious to audit. The number of transactions,
because of the volume of business that we do, makes it very,
very time-consuming to take each individual major account and
provide a sufficient audit trail so that it can be fully
audited by the GAO auditors.
What we did do is we tried to do that. We have the new
statements that called for new accounts to be audited that had
not been audited previously. We feel that had we had--had we
not run out of time and made the conscious decision to direct
our attention to 1999, that we could have proven those numbers
to a much greater extent. We just frankly ran out of time, and
I think that is the reason that they have the disclaimer. We do
feel that we are appropriately handling our appropriated funds.
Mr. Horn. Does this mean that you have to have a new
allocation of where you place people in the Department and
within the IRS or what? What is your solution as Chief
Financial Officer to get some of these problems done? Is it
more training?
Ms. Cunninghame. Are you talking about to get a clean
audit?
Mr. Horn. Yes.
Ms. Cunninghame. Yes. Again, this is where we are talking
about we have a multidimensional project team working currently
to determine exactly what we need to do. We know that we cannot
quickly bridge the long-term solutions required for our
financial systems but we can do more manual preparation in a
more timely fashion. We are getting started much earlier this
year so when GAO comes in, we can provide them with auditable
types of account analyses. We have talked to our contractor who
provides us that accounting help and they are making some
changes and accumulating data a little bit differently for us.
It is auditable; it is just very time-consuming to get it
audited.
Mr. App. I think that was one of the conscious decisions
that we made, because starting on the 1999 action plan, what
that means is proving the 1998 balances. So that will be the
first thing: to make sure that the opening balances for 1999
were correct. So we will be working on that as well.
Mr. Horn. Any other comments either side might have about
the testimony you have listened to? What are we missing? Well,
there will be a number of questions sent to both the General
Accounting Office, IRS, and the Treasury that we haven't been
able to get to, but we would appreciate any response you could
give us on that. We have held a few things open for different
exhibits, as you have noted.
Let me, just before I make a few closing remarks, let me
first thank the people who set up this hearing, and we
appreciate you coming up here on such short notice and we know
that is not easy, and we are sorry to disrupt your weekend.
J. Russell George, our staff director and chief counsel, is
behind me. Bonnie Heald, director of information, is also
there. Matthew Ebert, policy advisory. Larry Malenich of the
GAO, we appreciate that loan. Mason Alinger is the clerk, and
then we have three able interns, Paul Wicker, Kacey Baker, and
Richard Lucas; and for the professional staff for the minority,
Faith Weiss and Earley Green, staff assistant. Knowing the
complexity of this, we had three court reporters this morning:
Ryan Jackson, Cindy Sebo, and Doreen Dotzler. We thank them.
Let me just make a few comments. Today's testimony displays
that there has been some financial waste by the Department and
IRS, and that taxpayers too often believe that all agencies in
the Federal Government have that. I don't happen to agree with
that, but I think we need processes and systems to make sure.
And some of them are just very simple, such as the segregation
of duties when you get into accounting.
I have learned a lot from auditors over the years, and you
force people to take their vacations and somebody else sit at
their desk, and you would be amazed to see what happens
sometimes when they say, What is this authorization all about?
And apparently $17 million--was it--in fraudulent refunds and
misplaced vehicles, printers, and that needs to get more
attention than just thinking it is an accounting procedure,
because that wouldn't really be acceptable in most small
businesses or medium businesses. And you are a very large
business, with IRS having 102,000 employees alone. I believe
that is the figure. I think the stockholders, the taxpayers,
have every reason to demand an immediate change. And that
includes debt collection, when we see that figure, the
writeoffs at $110 billion, and that is 54 percent of the unpaid
debts that are owed. Just think, we talk about a surplus, we
talk about helping Social Security, it would be great to try to
collect even 10 percent of that or 15 percent. We ought to set
our goals higher.
So I think there is a lot of work to be done and I am
hopeful. It sounds like you are getting this up to speed, and I
hope next year we have a clean opinion and the processes on
handling property and equipment in particular will be improved.
And the security force that you have at your field offices and
processing centers, there ought to be ways to make sure that
they can check that printers and personal computers are not
just walking out the door, or if they are, there is an
authorization where you have a name at checkout, and you check
it in; very simple little procedure.
Does my colleague have any more questions that he would
like to ask, and if not, we will wrap it up.
Mr. Turner. No questions, Mr. Chairman. I simply want to
say, as the chairman did, that obviously there is work to be
done. But on the other hand, I want to say here today as I have
listened to some of the witnesses, that oftentimes we fail to
acknowledge the contributions that the career employees of
agencies like the IRS make to the people of this country. And
for those of you who are career employees of the Treasury and
the IRS, we owe you a debt of gratitude because you work in a
very complex area with very difficult problems. And many times
I think if we can provide the political leadership needed, you
have the background and the dedication and knowledge to get the
job done. So to all of those career IRS employees, some of whom
were in my office a couple of weeks ago from my district in
Texas, I thank you for the work that you do.
Mr. Horn. That is well said.
With that, ladies and gentlemen, we thank you for coming,
and this hearing is adjourned.
[Whereupon, at 12:10 p.m., the subcommittee was adjourned.]