<DOC>
[106th Congress House Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:70279.wais]
OVERSIGHT OF THE INTERNAL REVENUE SERVICE: THE COMMISSIONER REPORTS
=======================================================================
HEARING
before the
SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,
INFORMATION, AND TECHNOLOGY
of the
COMMITTEE ON
GOVERNMENT REFORM
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
SECOND SESSION
__________
APRIL 10, 2000
__________
Serial No. 106-189
__________
Printed for the use of the Committee on Government Reform
Available via the World Wide Web: http://www.gpo.gov/congress/house
http://www.house.gov/reform
----------
U.S. GOVERNMENT PRINTING OFFICE
70-279 WASHINGTON : 2001
_______________________________________________________________________
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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 PATSY T. MINK, Hawaii
THOMAS M. DAVIS, Virginia CAROLYN B. MALONEY, New York
DAVID M. McINTOSH, Indiana ELEANOR HOLMES NORTON, Washington,
MARK E. SOUDER, Indiana DC
JOE SCARBOROUGH, Florida CHAKA FATTAH, Pennsylvania
STEVEN C. LaTOURETTE, Ohio ELIJAH E. CUMMINGS, Maryland
MARSHALL ``MARK'' SANFORD, South DENNIS J. KUCINICH, Ohio
Carolina ROD R. BLAGOJEVICH, Illinois
BOB BARR, Georgia DANNY K. DAVIS, Illinois
DAN MILLER, Florida JOHN F. TIERNEY, Massachusetts
ASA HUTCHINSON, Arkansas JIM TURNER, Texas
LEE TERRY, Nebraska THOMAS H. ALLEN, Maine
JUDY BIGGERT, Illinois HAROLD E. FORD, Jr., Tennessee
GREG WALDEN, Oregon JANICE D. SCHAKOWSKY, Illinois
DOUG OSE, California ------
PAUL RYAN, Wisconsin BERNARD SANDERS, Vermont
HELEN CHENOWETH-HAGE, Idaho (Independent)
DAVID VITTER, Louisiana
Kevin Binger, Staff Director
Daniel R. Moll, Deputy Staff Director
David A. Kass, Deputy Counsel and Parliamentarian
Lisa Smith Arafune, 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
Bryan Sisk, Clerk
Trey Henderson, Minority Counsel
C O N T E N T S
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Page
Hearing held on April 10, 2000................................... 1
Statement of:
Rossotti, Charles O., Commissioner, Internal Revenue Service,
Department of the Treasury................................. 6
Wrightson, Margaret T., Associate Director, Tax Policy and
Administration Issues, U.S. General Accounting Office;
Colleen M. Kelley, national president, National Treasury
Employees Union; W. Val Oveson, National Taxpayer Advocate,
Internal Revenue Service; and David L. Keating, senior
counselor, National Taxpayers Union........................ 54
Letters, statements, etc., submitted for the record by:
Horn, Hon. Stephen, a Representative in Congress from the
State of California, prepared statement of................. 3
Keating, David L., senior counselor, National Taxpayers
Union, prepared statement of............................... 101
Kelley, Colleen M., national president, National Treasury
Employees Union, prepared statement of..................... 77
Oveson, W. Val, National Taxpayer Advocate, Internal Revenue
Service, prepared statement of............................. 90
Rossotti, Charles O., Commissioner, Internal Revenue Service,
Department of the Treasury:
Information concerning deficiencies...................... 45
Prepared statement of.................................... 9
Wrightson, Margaret T., Associate Director, Tax Policy and
Administration Issues, U.S. General Accounting Office,
prepared statement of...................................... 59
OVERSIGHT OF THE INTERNAL REVENUE SERVICE: THE COMMISSIONER REPORTS
----------
MONDAY, APRIL 10, 2000
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, Walden, and Turner.
Staff present: J. Russell George, staff director and chief
counsel; Louise DiBenedetto, GAO detailee; Bonnie Heald,
director of communications and professional staff member; Bryan
Sisk, clerk; Ryan McKee, staff assistant; Michael Soon, intern;
Trey Henderson, minority counsel; and Jean Gosa, minority
assistant clerk.
Mr. Horn. A quorum being present, the Subcommittee on
Government Management, Information, and Technology will come to
order.
The only contact that most taxpayers have with the Internal
Revenue Service is when they file their annual income tax
return. Now, 1 week before the deadline, many taxpayers are
frantically focused on gathering the year's worth of documents
and receipts needed to verify the accuracy of their own tax
return.
Taxpayers should expect prompt, quality service from their
Government, especially from the agency that collects their
money, but over the years critics have bitterly complained
about the agency's rude service or lack of any service at all,
and I believe times have changed quite a bit now.
The IRS has come under fire for everything from its failure
to assist taxpayers in preparing and filing their tax forms to
ensuring that all taxpayers pay their tax obligations. The IRS
had, indeed, become the Federal agency that everyone loved to
hate.
The public told the tax agency that it expects better
services, and on July 22, 1998, Congress passed and the
President signed the Internal Revenue Service Restructuring and
Reform Act. Their message to the Internal Revenue Service was
clear: there must be a fundamental change in the way it
conducts business. The Internal Revenue Service must not only
collect taxes; it must provide quality service to the people
who pay those taxes.
The law demanded that the Internal Revenue Service shift
from its self-defined role as an enforcement agency toward a
role that more resembles a financial service organization.
Internal Revenue Service Commissioner Charles Rossotti has
taken that message seriously. He is responsible for planning
and implementing the most fundamental changes in the IRS in
nearly half a century.
A few weeks ago, the commissioner testified before another
House subcommittee stating that the IRS is ``wholly committed
to implementing each and every taxpayer's rights provision and
making them work as intended, while still fulfilling the
mandate to collect taxes that are due.''
Some people are now concerned that the agency has become so
user friendly that it isn't collecting enough of the tax money
that is owed. In a recent hearing before this subcommittee, we
learned that taxpayers owe the people and the Treasury $231
billion in overdue taxes and penalties. We recognize that this
is an enormous undertaking filled with both short-term and
long-term challenges.
We welcome each of our witnesses today and look forward to
discussing the agency's progress and challenges and how they
are affecting the American people and the Internal Revenue
Service workers.
I might say, Commissioner, I'm very pleased with the
willingness of the IRS workers to come to our District office
to set up phones, to have hundreds of constituents go there and
electronically file for the first time, in most cases, to those
constituents. We hope down the line that we will all be
sensitive to filing in time, and that would help get the
refund, if they had one, and it would also be simpler than most
people now have to go to.
[The prepared statement of Hon. Stephen Horn follows:]
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Mr. Horn. So I now yield an opening statement to the
ranking member, Mr. Turner, the gentleman from Texas.
Mr. Turner.
Mr. Turner. Thank you, Mr. Chairman.
After having worked on my tax return yesterday, I hope I am
in a good mood here to visit with the commissioner.
We do appreciate the commissioner being here this morning.
As we all know, your agency is responsible for the very
difficult task of administering and enforcing the internal
revenue laws and related statutes.
Your mission is to collect the proper amount of tax at the
least cost to the public and in a manner that warrants the
highest degree of confidence in the Service's integrity,
efficiency, and fairness.
We know the IRS has been subject to many studies and
congressional inquiries and much criticism. Congress and others
have identified a long list of problems, including inadequate
technology, poor services to taxpayers, violation of taxpayers'
rights, failure to follow established procedures, and lack of
adequate employee training and resources.
This concern led the Congress to pass the IRS Restructuring
and Reform Act of 1998. This law included many provisions to
enhance taxpayer rights and to fundamentally reform the IRS.
To achieve these goals, the IRS plans to make fundamental
changes on virtually every front. The IRS has referred to this
process as ``modernization,'' because it involves building on
the essential components that have made the IRS successful in
the past, while bringing them up to date in a way designed to
achieve the new mission.
We are here today to assess the progress the IRS has made
in implementing its modernization changes. This subcommittee
wants to ensure that all Federal managers are given the
necessary tools and incentives to perform effectively and to be
held accountable for their job.
We welcome the commissioner this morning and I commend you,
Commissioner Rossotti, on your leadership. I commend the
employees of the IRS in your efforts to become a better agency.
When I came to Congress 3 years ago, the IRS had an image that
was less than desirable. Since that time, with the new
legislation and the efforts you have made, I am confident there
has been significant progress toward the goal of providing the
type of high-quality service that the taxpayers of this country
expect and deserve.
I appreciate the leadership you have brought to the
position, and I look forward to hearing your testimony this
morning.
Thank you.
Mr. Horn. As you know, Commissioner, and the others that
follow you, we swear in all witnesses before this committee, so
if you would raise your right hand we will swear you in.
[Witness sworn.]
Mr. Horn. Thank you. Also, as I think you know since you
are a regular here, your full statement goes in the record
right now, so we would appreciate it if you could summarize it
and then we will have more chance for dialog.
Thank you.
STATEMENT OF CHARLES O. ROSSOTTI, COMMISSIONER, INTERNAL
REVENUE SERVICE, DEPARTMENT OF THE TREASURY
Mr. Rossotti. Mr. Chairman and Mr. Turner, we think the IRS
is following the clear direction of the Congress in the IRS
Restructuring and Reform Act. As both of you noted in your
opening statements, this involves some of the most significant
changes in organization, technology, and, most importantly, the
way we serve taxpayers.
We are already witnessing some positive results. These
include the implementation of the 71 taxpayer rights that were
in the act, improved hours and improved phone service, and more
electronic filing in this current season.
Just to note some statistics, we expect to receive 127
million individual returns this season, and electronic filing
is up 16 percent over last year, so we will get about 34 to 35
million returns electronically.
Our level of telephone service overall is about 63 percent
this year, which is still way too low, but is up a lot from the
50 percent or so from last year.
And for the whole year, we expect to collect $1.67 trillion
in net receipts for the Treasury.
Of course, all of this has been done after the completion
of the enormous program to fix the Y2K program, which I am
pleased to say was accomplished almost flawlessly.
Just going back for a moment to Y2K, I think that this
success was achieved due to comprehensive planning and
preparations over a significant period of time. Mr. Chairman,
we are most grateful for your guidance and assistance which you
provided over that entire period. We think your leadership was
a critical component of our success.
Mr. Horn. Thank you very much.
Mr. Rossotti. Despite some of these signs of progress, Mr.
Chairman, we have to say honestly that today the IRS does not
meet all the legitimate service expectations of the vast
majority of compliant taxpayers, and at the same time our
compliance activities, such as exam and collections, continues
to drop.
Further, as GAO has pointed out, many of the systems we use
to manage and account for the $1.67 trillion in tax revenue are
inherently deficient.
These are severe problems, and if they are not addressed
they will certainly, over time, undermine the fairness and
perhaps even the viability of the Federal tax system. But these
problems are not newly identified, nor do I believe that they
are impossible to solve. In fact, I believe we now have
employees at the top level plans that will allow us to address
them.
We have implemented the taxpayer rights provisions of RRA.
We have completed a new system of balance performance measures,
and our reorganization, which is aimed at increasing customer
focus and management accountability, is progressing rapidly and
we have a new top management team in place.
Building on this foundation, we are now beginning the
longer-term program of re-engineering all of our business
practices and technology so that we will be able to deliver on
the RRA's mandates for improved service and taxpayer treatment,
while also increasing fairness and compliance effectiveness.
As these new management and technology practices become
established, we can also improve efficiency. However, to
succeed in this enormous program, we do need adequate budget
resources in fiscal year 2001 to address critical operational
needs in the short run and to invest in new technology for the
long run.
The rapidly expanding economy continues to increase the
IRS's workload. For example, since 1993, the number of
individual tax returns of over $100,000, which are generally
the more-complex returns, have increased by 63 percent, but,
because of budget constraints, the IRS staff has dropped by
17,000 personnel, which, as shown on the chart at your left,
shows the workload going up, the staff going down.
On top of these general trends, as shown on the second
chart which is going to be put up there, certain specific
provisions of RRA, alone, have required about 4,500 additional
personnel to administer. Those are just listed by code section
there, an estimate of personnel.
Now, since our compliance personnel, those that do exams
and collections, represent the largest component of the IRS
budget, they are also the ones that administer these RRA
provisions. Our net front line compliance staffing has declined
quite rapidly, which is shown here in this red line on the
third chart. So I think we can see that, as a result of these
resource declines and the pervasive change in the way the
business has done, there has been not only resource declines
but some uncertainty, confusion, and a great deal of relearning
among our employees and managers, and this, combined, is the
reason that, overall, the number of exam and collection cases
we have been able to complete has declined about half since
1997.
To address these operational problems, we have requested an
increase in staffing in the 2001 budget which would provide for
about 2,800 FTEs and would allow us to rectify some of the
shortages that have developed over the last 2 years, and that
would be one component of the budget.
This staffing increase increment will allow us to meet some
critical short-term needs while we transition to the more-
efficient structure and re-engineered technology, which is the
second key needed in our fiscal year 2001 budget and, as you
have pointed out many times, Mr. Chairman, is really the long-
term solution that we need to get to.
Clearly, we depend on our computer systems to administer
the tax system and to properly collect and account for our $1.8
trillion of tax revenues.
We have submitted our plan for re-engineering our systems
in some detail, and they are included in my written testimony
and in the funding request that we have made to the
Appropriations Committees.
Let me stress that, although there is no way to avoid risk
in a program of this size and complexity, we believe we can
manage these risks and achieve our goals, just as we did with
the $1.4 billion Y2K program, and we now have in place some of
the elements needed to do this properly, which were not in
place in the past. These include a single, centrally managed
information systems organization, a very active top-level
governance process, adherence to architectural, technological,
and methodological standards, use of the prime contract to
manage development and integration activities, and, most
importantly, an unwavering commitment to an open process that
includes outside oversight agencies such as GAO and OMB.
Now, although we have put in place most of the necessary
elements, I do want to stress, Mr. Chairman, that it will take
time and practical experience executing projects for our
management process to mature.
I would like to call the subcommittee's attention to a
fourth chart, which is about to be put up on the screens, which
shows what I would consider the normal pattern by which we
would expect our management process to mature over time if we
are successful.
Based on my experience in the industry, if we were to
achieve the kind of growth rate depicted on this chart, it
would actually be a quite rapid rate of growth in maturity of
our management process, and within 1 to 2 years I think it
would put IRS in a top category of institutions managing large
technology programs.
Since this maturity process necessarily depends on
practical experience, one of our most important
responsibilities as top managers is to adjust the level of
activity we are managing to that which is appropriate to the
level of management capacity we have at any point in time. We
have already seen this process in action as we have
unhesitatingly revised some initial proposals to slow down some
projects and rearrange others to ensure that management and
architectural issues were adequately addressed.
On the other hand, I also have to stress that there is no
way to achieve maturity in the management process without
practical experience actually executing projects.
So, Mr. Chairman, I believe we are making real progress in
the goals and mandates of the Restructuring Act. I believe, if
Congress will continue to provide us the support for IRS
modernization, which includes acting favorably on our budget
request, we will be able to produce the most visible, tangible
changes in service, compliance, and productivity that America's
taxpayers expect and deserve.
Thank you.
Mr. Horn. Thank you.
[The prepared statement of Mr. Rossotti follows:]
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Mr. Horn. We have a few questions for you, and we will be
alternating between Mr. Turner and myself 5 minutes at a time.
Let me first start. There are a lot of different groups,
including OMB, the IG--Inspector General--that give you
recommendations. Tell me how you go about prioritizing which is
which, and particularly the Inspector General's.
Mr. Rossotti. Well, you are right, Mr. Chairman. We get
hundreds of recommendations every year from many different
audits that are done by the IG, as well as GAO, and, of course,
many other things that come in from congressional sources and
from our stakeholders, such as the practitioner groups and
taxpayer groups. There are hundreds of them.
What we have put in place over the last 2 years is a
management process which we call ``taxpayer treatment and
service improvement,'' by which we have a small program staff
that reviews all of these and lists all of these
recommendations, tries to apply criteria to them, and then
comes before a top management group, which I chair, to
basically determine which ones we can manage in which
timeframes.
We are going through a new phase of this process in the
next year as we establish our new organization. We are folding
this process into an even more systematic strategic planning
and budgeting process where we will include this kind of
prioritization as part of our planning and budgeting and we, as
a matter of fact, have already started that for fiscal year
2002, as well as 2001, which is, of course, the budget that is
before Congress.
So we made, I think, an important step in prioritizing and
managing these recommendations, and now we are going even
further with strategic planning.
I think the, of course, crux of this is that we have more
demands on our capacity than we can implement. In other words,
we have more things that we would like to do and that others
would like us to do than we have capacity to manage, so we
simply have to make choices along the way.
Mr. Horn. How much, if any, do you get from that Advisory
Committee that was put together to sort of guide the
commissioner under the Restructuring and Reform Act of IRS?
Now, who is on and who isn't? Have all the appointees been
nominated?
Mr. Rossotti. Yes. I think you're referring to the
Oversight Board, as it is termed in the act.
Mr. Horn. That's right.
Mr. Rossotti. And they were nominated, they were acted upon
by the Senate Finance Committee favorably in--I believe it was
February, and it is now on the Senate floor waiting for action
to go through the Senate floor. That would be the last step
before they would become active.
There are seven private sector members, as well as the
commissioner and the Secretary of the Treasury. So there have
been no meetings yet because they have not been finally
confirmed, but we have had some informal discussions when they
were preparing for their confirmation hearings actually at some
length.
I think that these--in fact, I know that these members are
all very qualified people who are quite fired up, as a matter
of fact, about the idea of participating in this, and so I am
looking forward to having them--and, of course, one of their
statutory responsibilities is precisely the point that you were
noting in your question, is participating in the strategic
planning process to help us make the right choices for how we
deploy our resources and what initiatives we undertake.
Mr. Horn. The law took effect when?
Mr. Rossotti. Well, the law took effect July 1998. It
requested the President----
Mr. Horn. So we have lost almost 2 years from that
particular committee?
Mr. Rossotti. Well, yes.
Mr. Horn. That wasn't your fault. That was the President's
fault. He didn't like the system. So is that going to work? I
mean, they've now got them, you say, before the Senate.
Hopefully they will be confirmed one way or the other.
Mr. Rossotti. Yes. Well, I was somewhat involved,
tangentially involved. It is quite a process to find seven
private sector qualified people and get them through all the
clearances. That certainly took longer than expected.
But I think that, without question, at this point there is
strong support now for, I think, all quarters for making this
Oversight Board work. You know, I've met quite a few times with
the Secretary of the Treasury about this, and he is committed
to it. He has met with them and, you know, we have a plan to
get them oriented. So I think as soon as they are confirmed by
the Senate we will be ready to really gear up.
I really anticipate that they will be a very constructive
force in helping us have the continuity to make this whole
process work.
Mr. Horn. My last question on this round is the computing
situation. You went through Y2K. That caused you to look at
various systems--should you merge some, should you get rid of
some.
We've asked the General Accounting Office to look across
the whole executive branch to look at the hardware and the
software.
I wonder--you're an expert in this area--what are your
plans?
Mr. Rossotti. Well, I think you are quite right. One of the
residual benefits of Y2K is that we did standardize and
consolidate quite a few different systems, I mean, and water
also, I think importantly, and probably one of the most
important things is that we centralized all of the information
systems resources under one management. I mean, previously we
had about 15 different information--roughly 15 different
information systems organizations. We now have one, and they
control almost essentially all the resources. We have
consolidated our mainframes. By the end of this year we will
have them all into 3 centers instead of 12. And we've
eliminated, you know, thousands of one-off type vendor products
that were on desktops, for example.
So that was an important benefit of Y2K. We still have more
work to do in that regard, but I think that is one of the
foundational elements that gives us a foundation to start going
up this ``S'' curve that we need to get to to manage in a more-
effective way.
Mr. Horn. Thank you.
The gentleman from Texas, Mr. Turner, 5 minutes.
Mr. Turner. Thank you, Mr. Chairman.
Commissioner, the growth in electronic filing seems to be
impressive, but I gather that most of the electronic filing
that takes place under current law has to go through some third
party in order to accomplish it, rather than electronically
filing directly with the IRS.
Why is that the case? And is there anything we could or
should do about that?
Mr. Rossotti. Well, as a matter of fact, that is one of the
issues that we are addressing in the whole strategic plan for
electronic filing.
I think one thing that is important to understand is that
preparing a return electronically is a prerequisite for filing
electronically. Those two processes are very closely linked. I
mean, you can't file something electronically until you've
prepared it. In order to prepare it, you have to have tax
preparation software, and I think, if you've ever used any of
this software, you know that there are quite a few software
products out there on the market that are very sophisticated
and really quite effective consumer software products.
So the route that the IRS has taken is to essentially try
to--and this was actually a provision in the Restructuring Act
encouraged us to do this--was to partner with the private
sector to encourage competition in the private sector to bring
down the cost and make it easier to file electronically by
taking advantage of the capabilities that are offered in the
private sector.
We don't see it as the right strategy to try to separate
these two parts of the equation, if you will--the preparation
and the filing. Instead, what we are working on--and there is a
provision, actually, in the President's budget for this that
was just submitted earlier this year which requests or requires
the IRS, by 2002, to be able to, working with private industry,
find a way to allow every taxpayer to file--both prepare and
file their taxes on the Web at no cost to the taxpayer. I think
that's really what taxpayers want.
As a matter of fact, even in this season that's possible on
a limited basis, because there are a number of providers that
provide software on the Web that allow you to prepare your tax
return and send it to the IRS. Many of them charge a fee of
$9.95. Some of them charge no fee, however, and this is because
of competition driving down the prices.
What we have been requested in the President's budget to do
and will continue to do is to work with the industry to provide
ways--and this may require us to provide some incentive to the
industry--to basically drive that price down to zero so that
every taxpayer would be able to sign on to the Web, use that in
a secure way to prepare their tax return, which is, I think,
the thing that people get the most benefit out of, just being
able to use the question and answer format to prepare their tax
return, and then just push a button and file it up through us.
Mr. Turner. Is there any statutory inhibition to doing that
now? Isn't there a problem with the signature and the way it
works now? Doesn't the taxpayer get something back in hard copy
by mail and they sign it and send it back?
Mr. Rossotti. Right. There's a second issue. Even if you do
file, you now have to send in a separate--in most cases, you
have to send in a separate signature document. We have some
pilot projects this year where we've sent out specific
identification numbers that avoid the need to send in the paper
document, and one of our highest priorities is to figure out
how we can extend those pilots basically to everyone, or almost
everyone, so that they would not have to send in that paper
jurad, as it is called.
We do not, at this moment, think we need special additional
legislative authority. We think that it is more a matter of
administrative action to ensure ourselves that we have adequate
authentication of the return that the taxpayer has filed.
Mr. Turner. How, then, do you get a signature on that
return so that the signature line, which is the taxpayers
attestation that they are providing the correct information
under penalty of law, how do you get that electronically?
Mr. Rossotti. What we're doing now in our pilot projects is
using PINs, as we call them--personal identification numbers.
Many taxpayers received--I don't remember the exact number. I
could get it for you. But we sent out letters to quite a few
millions of taxpayers prior to this season giving them personal
identification numbers which they could then enter in in lieu
of a signature, in lieu of a hand signature as the
authentication that it was a valid tax return.
Mr. Turner. Thank you.
Mr. Horn. I think we had the staff furnish you an appeal
from a particular constituent in Colorado, and his point is
very interesting. This is Kenny Knapp of Steamboat Springs, CO.
He received a reply to his appeal from the district director,
Deborah Decker, and he felt that the proper authority to write
him on that was the Secretary of Treasury. I wonder if you have
had a chance to look at that? And do you feel that the district
director, Deborah Decker, has that authority from the Treasury
or not?
Mr. Rossotti. First of all, as you know, I can't
specifically comment on a particular taxpayer matter, but I
think that it has been well established that the Secretary
designates and delegates certain authority to take certain
actions to the commissioner, and the commissioner, in turn, can
re-delegate them to other authorized individuals. That's the
way the tax system has worked for many, many years, and it
really has to, because you have to be able to delegate
authority for people to act or you couldn't really function at
the scale that we function.
Mr. Horn. Well, is there a delegation from the Secretary of
the Treasury? And what is the source of that? Is it a
regulation of the Secretary?
Mr. Rossotti. There are delegation orders in effect, as
they're called, that delegate, generally speaking. I can give
you more technical answers in a written response, but basically
the way it works is that the law frequently authorizes the
Secretary to do certain things, and then the Secretary has
standing delegation orders that delegate to certain officials--
usually the commissioner--to take action. And then, within the
agency, we have official delegation orders that delegate
certain other officials to take certain other kinds of action.
Mr. Turner. That was really in relation to a deficiency
notice. So you feel that you have sufficient authority from the
Secretary of the Treasury?
Mr. Rossotti. Yes.
Mr. Turner. Because often Congress, over the years, and not
just in IRS, has taken the authority away from the President,
taken it away from Cabinet officers, and vested it in the
person that really is responsible for the operation. So you
don't feel a loss of authority there?
Mr. Rossotti. I don't. And I'd be glad to give you a more-
specific answer in writing, but generally----
Mr. Horn. Without objection, we'll put it in the record in
this place.
[The information referred to follows:]
[GRAPHIC] [TIFF OMITTED] T0279.034
Mr. Horn. Now, on the modernization efforts, and when they
might be made, I'd like to give you a little time. You've
mentioned it, but just give us an idea of where some of this
modernization is going besides the electronic aspect. What else
is there?
Mr. Rossotti. Well, there is an entire program of what we
call our major business systems modernization, which is really
aimed at replacing all of the basic systems that are deficient
in the IRS that support basic tax administration processing, as
well as, I might add, financial management systems, which I
know in your committee you've had a great deal of concern
about, because that is really at the root of a lot of our
problems.
These go to basic systems that keep all the taxpayer
records, for example. That's the most fundamental system. We
still keep all of our taxpayer accounts on tape files in a
system that was designed in the 1960's. It is hard to believe
that. Sometimes when I say this people think I'm exaggerating,
but it really is true. Really, every single taxpayer's records,
business and individual, is on tape files that are only updated
once a week. This is the heart of our entire system.
Then there are about 130 other systems that do everything
from collecting money to accounting for money to helping to
support auditing of taxpayers, and then, of course, the actual
customer assistance. If somebody wants to call up and wants to
find out where their refund is or there's a mistake on their
account, to fix that is quite a laborious process.
All of these are what we call our ``basic tax
administration systems.'' Frankly, Mr. Chairman, I think I have
testified before, this agency is very, very deep in the hole in
this matter. This is not a matter of--you know, most businesses
today are going forward with their basic--you know, like, for
your bank the demand deposit system is there. OK. They know how
many debits and credits there are in somebody's bank account.
What they're working on is putting it on the Web and making it
easier for people to do banking over the Web.
We're going back to foundations and rebuilding, you know,
if you will, the equivalent of our basic checking account
system, which I can't stress too much is really an essential
thing for this country.
Every day we see examples of really horrible problems that
we have in just administering the tax laws because of the
limits of these systems. Unfortunately, we're so far behind
that this is not an easy process to fix.
We have in place now, over the last year and over the last
several years, put together the outlines of a plan of how to do
this, and we are now beginning to launch this process. In fact,
we've just, within the last several months, submitted the first
large request to our Appropriations Committees to get money
released from the fund that has been established to provide
this.
At the same time what we're doing is we're building, as is
shown on this curb, the management process that we need in
place.
This is a very complex, large-scale program, and, as GAO
and many others have observed, the IRS in the past has not had
in place the management process to do this.
We are putting that process in place. To actually make it
work takes some time and some experience, and so it is not an
instantaneous process and it can't be done just by reading
textbooks and by going to training classes. I mean, we can't
build a world-class football team by just, you know, reading--
watching videotapes of football games.
So we have to proceed in a measured pace, and I think one
of the most important responsibilities that I feel I have--and
my top management team is working on this--and you've met Mr.
Cosgrave and some others--is to try to really manage this
process so the level of activity we undertake, in terms of
making actual projects go forward, initiating projects, is
managed in relation to the capacity we have to manage them.
That's sort of an ever-changing process.
However, just to put the bottom line as to what I expect to
happen, if we get the release approval we expect from the
committees to release funds, we will be launching the first
real significant development projects which will deliver some
initial capabilities next year in 2001. These will be mainly in
the area of customer service and customer communications.
Then, basically every year for the next, you know, as far
as we can plan at this point, at least 5 years, every year, at
least once and possibly twice a year, we will be delivering
additional new capacity into the system, and this will include
not only the electronic services, the e-filing, and customer
communications, but I think one of the most important of all
these is the taxpayer accounts data base, because, again, we
need to get rid of that 35-year-old tape file before we can do
anything else.
I think we finally have a plan as to how to do that in a
sort of way that has acceptable risk.
One other area I'll mention that I know has been important
to you, Mr. Chairman, as well as Mr. Turner, is the whole area
of debt collection. We talked about this. We now have, I think,
the outline at least of a plan to replace the technology that
we need and to basically completely re-engineer this process. I
don't have time to go through it this morning, but I think when
we get to that we will have something that will basically have
the effect of allowing us to act much more quickly on overdue
accounts, which right now is not one of our forefronts. We're
very slow--to act much more quickly on potential or actual
overdue accounts, and also use our resources more efficiently
to do collection the right way. If all it takes is a phone
call, we'll only make a phone call. If it really takes a
collection officer to go out there, we can do that.
This, in turn, might provide us some broader opportunities,
such as the ones I know you are interested in, to use other
resources, perhaps outside resources to supplement our own,
because basically we will have in process with this collection
system what we really need to manage our collection process,
but this is not going to happen in a year, this is going to
take a couple years.
Mr. Horn. You mentioned in this answer that you have two
committees. Now, that's Senate Finance and House Ways and
Means? Or are you also including the Appropriations
Subcommittee?
Mr. Rossotti. Well, on this matter it is the Appropriations
Committees actually that we have to work with to get the money
released.
Mr. Horn. So this would be Mr. Kolbe's subcommittee?
Mr. Rossotti. Yes, sir.
Mr. Horn. And on the Senate side the same?
Mr. Rossotti. Senator Campbell.
Mr. Horn. Senator Campbell?
Mr. Rossotti. Yes.
Mr. Horn. I now yield to the gentleman from Texas, Mr.
Turner.
Mr. Turner. Commissioner, you mentioned your efforts to try
to improve debt collection. As you know and your staff is
aware, I introduced a bill, H.R. 4181, last week, joined by
Chairman Horn, as well as Chairman Burton and Ranking Member
Waxman, and, as I recall, most of the members of our
subcommittee, to try to help on your debt collection problem.
As you know, the law has provided for some time under the
Debt Collection Act that if a person owes a non-tax debt to the
Government they can go out and get Federal contracts and get
Federal loans and other Government benefits, and so we wanted
to close that loophole by providing that tax debt is now
subject to those same rules, so that if you owe tax debt you
can't get an SBA loan until you make arrangements to pay your
tax debt, or you can't enter into a contract to sell the
Government some equipment or services if you owe taxes, unless
you make arrangement to pay those taxes.
I know your staff has been kind to take a look at the bill,
and I wanted to ask you just three questions. One is: do you
feel the concept is good with regard to it? And then I wanted
you to comment on whether you thought you could
administratively handle this task and whether you felt good
about the efforts we've made to address the privacy concerns
with the provision that we have in there that says the taxpayer
is the one that will sign the consent form to release the
information as to whether or not they owe any taxes, and that
form would be promulgated by your office, but it would go to
you and then you would respond back to the agency.
Mr. Rossotti. Let me just talk about the administrative one
first, because that's the one that most directly affects us. I
think that we could administer that, provided, in the short
term, if the volume of transactions was relatively limited. The
only limitation there is because of our computer systems. A lot
of this kind of stuff has to be handled semi-manually right
now, so as long as it wasn't too large a volume of
transactions, which I don't think it would be if it was Federal
contracts, we could manage that. In the longer term, we'd be
able to manage a larger volume, you know, we modernize our
computer systems, but in the short term that would be the only
issue administratively is just how large the volume of
transactions would be.
As far as the privacy issue, I think that certainly
requiring a disclosure of consent by the taxpayer would be an
appropriate step, would be the right and necessary step to
conform to the requirements of disclosure. We need that under
our 6103, which is the section of the tax code which deals with
taxpayer privacy.
I think that, on the broader issue of privacy, there is, I
guess, a longstanding and probably never-ending debate over the
broader question of whether it is the right policy decision to
use tax information for other legitimate Government purposes.
That's more of a broader policy issue. The Treasury probably
takes the lead on that, rather than the IRS.
The Joint Committee has issued a report just recently on
this very subject which dealt with disclosures of tax records,
even with consent of taxpayers, to other Federal agencies for
various other purposes, and what they simply said was that they
felt that it should be done only if there is a ``compelling
case'' made by the part of the other agency. Whether it is a
compelling case or not is a question.
But I think that, from the point of view of helping us to
collect tax debt, to the extent that we had additional, you
know, incentives, if you will, built into the taxpayers to
actually pay those taxes, that can only help us.
Mr. Turner. Thank you. I want to thank your staff for
helping us on the bill.
We are going to have a hearing on May 9th, as I recall, Mr.
Chairman, that you've set, and I welcome any of your staff's
input between now and then----
Mr. Rossotti. Sure.
Mr. Turner [continuing]. Or at the hearing to be sure that
we do this right.
Mr. Rossotti. Sure.
Mr. Turner. The objective clearly is to enhance collection
of taxes, but to do it in a way that is appropriate.
Mr. Rossotti. Yes.
Mr. Turner. So any help that your staff can give us is
welcome on this.
Mr. Rossotti. We'll be happy to.
Mr. Turner. Thank you very much.
Mr. Rossotti. We'll be pleased to do that.
Mr. Horn. I thank the gentleman.
It is on May 9th, a Tuesday, 10 a.m., right here. And so we
look forward for future action.
Let me ask you about the General Accounting Office
testimony before this subcommittee. They said the IRS chief
financial officer is not appropriately placed in the
organization to address its serious financial and operational
problems. What action is being taken by you and your management
team to address this particular problem, because we had a real
concern over the lack of internal methods for looking at the
financial statements.
Mr. Rossotti. Mr. Chairman, it is always a pleasure to be
here and to be able to give a clear, simple, straightforward
answer that we fixed that problem. In this case, I can honestly
do that because we have successfully recruited and appointed
Mr. Rogers as the chief financial officer, and he now reports,
as of about 2 weeks ago, directly to the Office of the
Commissioner. That includes myself and the deputy commissioner.
The reason it is stated that way is there are certain
matters that I am recused from with respect to financial
systems, but the deputy commissioner, Mr. Winzel, who is here
with me today, will take my place in those cases.
But the important point is Mr. Rogers is now, No. 1,
appointed on a permanent basis. He was previously acting.
Second, he is reporting up directly through the Office of the
Commissioner. We've also made certain other realignments to
give him some more authority and staff.
And so I believe that I can honestly say at this point that
we fixed whatever concerns there might have been in that
regard. They have been definitively addressed.
Mr. Horn. So you are very happy with it?
Mr. Rossotti. On that particular point we have. I have to
say that we still have a tremendous amount of work to do to
address many of the issues in financial systems--not just
financial systems, but our whole accounting process. Some of
them Mr. Rogers and his team, with the support of Mr. Winzel, I
believe will be able to address this year in a very, you know,
active way. They relate to such things as reconciling balances
with the Treasury and hopefully working on our property
management.
Others, of course, as GAO, itself, have noted, are really
longer-term issues related to technology modernization. They
have to do with fixing the basic accounting systems. Those will
not be fixed this year, obviously, but we will be working on
the plans that will allow us to replace those systems longer
term.
Mr. Horn. The senior counselor of the National Taxpayers
Union, Mr. David Keating, noted in his testimony, which is
about to come, that Treasury Secretary Summers said many times
that the Board of Oversight is unnecessary and unwise, and
``the long delay in submitting the nominations raises the
question of whether the Administration is seeking to revamp the
IRS on its own without the oversight and input of the legally
required IRS Oversight Board. It also suggests to taxpayers the
IRS reform is a low priority issue for the Administration.''
Then he says, ``We were also disappointed that none of the
nominees appear to have, as required by law, professional
experience and expertise in the needs and concerns of
taxpayers.''
Do you want to make some comments on that? I realize they
aren't your nominees.
Mr. Rossotti. Yes. Well, first of all, as far as the issue,
though, of whether the Treasury Department supports this whole
concept, I mean, it is a fair statement that in the early
stages, when the bill was being debated, that there was a great
debate about this and exactly what the powers of the Board
should be, but I think that threshold was passed long ago,
frankly, and I worked very closely with the Secretary.
I can tell you the Secretary was probably, especially
toward the end of last year, as frustrated as anybody else at
various things that caused us not to get these nominations up
there.
I can tell you just one thing is that going through the
clearance process to get a private sector person who has never
been in the Government before into this, because they go
through the same thing that you would go if you were a full-
time employee, is really quite an interesting process. And it's
not only lengthy, but in some cases it caused people to drop
out.
So it was very difficult. I do not believe, from my
observation, that the delay was caused by the Treasury
Department not wanting this to happen.
It's true in the early stages they were against it, but
once they changed they did get behind it, and I think that they
absolutely--the Secretary does want this to work.
Now we've had the nominees and they are in the Senate, so
it's just a matter of the Senate acting, and we'll get them
there.
As far as the nominees, themselves, I can only say that we
have a wide range of nominees that cover such things as, you
know, for example, Mr. Colby--that's not Congressman Kolbe, but
the nominee Mr. Colby--who actually is one of Senator
Grassley's constituents, and he's a cattle rancher from Iowa,
small business person. The other side, we have people like Mr.
Farr, who ran American Express and had a lot of experience at
the big business side, and we have, you know, Mr. Levitan, who
is very much of an expert in large-scale technology programs.
So it is a wide-ranging board. I don't know whether one can
prove that it touches every base of all the things that were
listed in the legislation, but I think it is a wide-ranging
board, and they are certainly interested in the task that has
been assigned to them, from what I've seen from talking to
them.
Mr. Horn. Well, my last question--I certainly agree with
you, by the way, on it's a wonder we get anybody to serve in
the executive branch of the Federal Government in terms of the
forms, the ethics, the financial filings, and all the rest. So
these do take time, and I understand that.
My last question is that you've testified you've
implemented the various taxpayer rights legal provisions;
however, you stated you are several years away from making them
work more efficiently and at higher quality, so I'd like you to
elaborate on what you mean by that and what are you doing to
address that situation.
Mr. Rossotti. Well, what I mean by it is that the taxpayer
rights provisions were very pervasive in their impact in a way
that almost every employee or a large percentage of our
employees works. And many of them were quite complex.
An example of what I mean, the innocent spouse provision.
This was a very important provision, very high profile, and I
think a very necessary change in the law.
What happened at the time that the law was passed is that,
whereas there was one provision in the law that in very limited
circumstances allowed for relief of liability on a joint tax
return, there are now four provisions, including the one that
was there before, and they are really quite finely tuned, as is
appropriate, to try to determine, you know--because here you
are talking about taking basically a married couple that filed
a joint tax return and now has split up, and you're trying to
figure out who knew what about their tax return at the time
they filed it. I mean, that's not a simple thing to do.
Then it adds to it an additional consideration, which the
IRS has not really been required to do in the past, to my
knowledge, which is deal with equity. In the past it was
strictly, you know, who owed the money. On this particular
provision, as well as some others, there is now what is called
``equitable relief.'' Well, you know, figuring out what is
appropriate to give equitable relief to one spouse in a
marriage on a tax liability is something that takes some time
to learn.
So we went forward and got out forms and we let people file
claims, because they were--as was required, and we began to
adjudicate those claims, but learning how to do it correctly
and learning how to do it in a reasonable amount of time has
been quite a challenge.
I think we have made some big progress. Again, it's a curve
like that. It's a learning curve. You just don't do it
overnight.
I think at this point, just taking that provision, we now
have gotten out lots of guidance. We've learned how to
adjudicate some cases. We've taken advantage of that experience
to revamp the training materials. We've done a whole bunch of
things which I won't go into here. So now we are at a point
where I think we are starting to do them in a timely manner,
and, second, do them correctly, with higher assurance that they
are being done correctly. That's an example.
And there are 71 different provisions. I could give you a
story like that on each one.
Mr. Horn. Does the gentleman from Texas have any further
questions?
Mr. Rossotti, the commissioner, will stay through the next
panel and is prepared to answer questions that are raised by
panel two.
Mr. Turner. I wanted to give you an opportunity to make
this point again about your need for funding for your
modernization effort. I know you intend to go to the
appropriate committees and seek some movement of funds within
your agency, but the overall modernization effort seems to me
to be one that may very well and could detract from
enforcement, and I don't think any of us would want that to
occur.
I want to be sure that you have been able to make your case
clearly for why you need additional funding for modernization.
Mr. Rossotti. Mr. Turner, I think that, you know, what we
have to do in the budget is to both do the modernization but
also keep enforcing the tax laws at the same time. I mean,
that's the two things that we have to do.
I think if you look at some of the previous charts that
were up there--I don't know whether, Floyd, you can keep the
previous one up--what has happened over the last--and this
really is even before the Restructuring Act, but the budget was
very constrained, and a majority of the money is for the case
work, for going out and auditing and collecting money.
What has happened is you can see in the green line that the
number--since 1995, the number of front-line people--this is in
compliance. These are people that actually audit taxpayers,
collect money--the green line is what was happening just to the
staffing because of the budget. The red line shows that the gap
between those two, with the additional requirements of the
Restructuring and Reform Act, just required more time.
So if you look the that red line, you can see that we're
down in 2000 well below where we were 4 years ago. And then
there are even some intangible factors on top of that.
The net effect is we have half the number of audits that we
were doing 4 years ago. Nobody knows exactly what the right
number is, but I don't think that kind of a line is where we--
you know, we're really risking the tax system if we keep that
line.
So what we've proposed in the 2001 budget is two things,
basically. One is stabilize that. OK? That's what we call it,
stable. Give us enough staff to basically keep that from
continuing to go down, keep it steady so we will no longer go
down in terms of our compliance enforcement activities, and
then, the other piece of the money is for the modernization for
the technology, which is really how we are going to fix this.
I mean, we know that we can collect money more efficiently.
I mean, I feel very confident of that. It does require some
people, but we can leverage those people with more procedures
and better technology, but it is going to take a few years to
get to that point.
Mr. Turner. In my last comment, I want to--for those of us
that are struggling to get our tax return in, April 15th is on
Saturday this year. Does that mean we have to have it in the
Post Office? Can we get it postmarked by April 15th on a
Saturday?
Mr. Rossotti. Well, I think that it has actually come to
the 17th as the day that it has to be done.
Mr. Turner. OK. So you can actually deposit your tax return
in the Post Office on Monday and still be in compliance with
the law?
Mr. Rossotti. Yes, sir.
Mr. Turner. And I also wanted to mention, for those who may
be interested in a phone number, 1-800-829-1040 is where you
can get information, among--there are several other options
available, as well, for taxpayers, but that is the 24-hour, 7-
day-a-week, toll-free phone number, is it not?
Mr. Rossotti. Yes.
Mr. Turner. The 1-800-829-1040?
Mr. Rossotti. Yes, sir.
Mr. Turner. Well, for those who are struggling, as I am, to
meet the deadline, I urge them to take advantage of that
number.
And I noticed that your website is becoming much more
popular in the past. I believe you had twice as many hits this
year as you did last year, and that IRS.GOV is another place
where taxpayers can get help.
Mr. Rossotti. Yes, sir. Absolutely. As a matter of fact, I
can tell you that this calendar year, through the end of March,
we had 658 million hits on that Website, so it is really quite
a popular one and one of our best products.
Mr. Turner. Thank you.
Thank you, Mr. Chairman.
Mr. Horn. We thank you. That's good information for the
average citizen.
Well, Commissioner, I'm done asking questions of you and
I'll go to the next panel. And I must say you are a brave
commissioner to stay here and when your critics are there. Most
of the other people just run.
Mr. Rossotti. We're happy to stay. We consider them very
constructive critics.
Mr. Horn. Well, I know you are, and that's why you've got
good relations on Capitol Hill.
So we will now have panel two: Margaret Wrightson of the
General Accounting Office; Colleen Kelley of the Treasury
Employees Union; Mr. Oveson, National Taxpayer Advocate; and
David Keating, National Taxpayers Union.
If you will stand and raise your right hands, and if there
is anybody going to assist you on the answers have them stand,
also.
We have four at the witness table, three in back, for a
total of seven.
[Witnesses sworn.]
Mr. Horn. The three helpers and the four witnesses are
certified and noted to the clerk.
We will now start with Margaret Wrightson, the Associate
Director, Tax Policy and Administration Issues of the U.S.
General Accounting Office, the programmatic arm of the
legislative branch.
STATEMENTS OF MARGARET T. WRIGHTSON, ASSOCIATE DIRECTOR, TAX
POLICY AND ADMINISTRATION ISSUES, U.S. GENERAL ACCOUNTING
OFFICE; COLLEEN M. KELLEY, NATIONAL PRESIDENT, NATIONAL
TREASURY EMPLOYEES UNION; W. VAL OVESON, NATIONAL TAXPAYER
ADVOCATE, INTERNAL REVENUE SERVICE; AND DAVID L. KEATING,
SENIOR COUNSELOR, NATIONAL TAXPAYERS UNION
Ms. Wrightson. Thank you, Mr. Chairman.
Mr. Chairman and members of the subcommittee, Mr. Turner,
thank you very much for inviting me here this morning to
discuss IRS' progress on key elements of its modernization
efforts.
Let me begin with my three bottom-line conclusions. In each
case, it is important to say at the outset that there is
substantial agreement between GAO and IRS on the issues and
actions IRS must take.
First, before taxpayers will see any appreciable benefits
from modernization, IRS needs to make breakthrough changes in
its business practices and become more customer friendly.
Second, if IRS is to better balance the value it
historically has placed on compliance with the value it now
wishes to place on customer service, it needs to revamp its
performance management system.
Finally, modernization will not succeed unless IRS follows
through on important tasks for information systems
modernization--most notably, complete its enterprise system
architecture and systems development life cycle.
With regard to business practice changes, IRS has already
completed a number of developmental steps that will help it
redefine the way it does business, including establishing an
organizational structure built around customer-focused
operating divisions. Reorganization is going reasonably well,
but the agency must also re-engineer business practices.
Breakthrough changes are needed because IRS' current processes
are not well-suited to taxpayers' needs.
IRS has a number of re-engineering efforts underway, and
the commissioner has mentioned a few. I'd like to highlight
three this morning.
The first one is something that we're going to call
``creating one-stop shopping at IRS walk-in centers.''
Taxpayers, as you know, have long been frustrated in trying to
reach the right person at IRS. In large part, their frustration
came from IRS' old structure that was kind of a transactional
assembly line for addressing taxpayer inquiries, clarifying and
correcting tax returns, and collecting unpaid taxes.
Because of this stovepipe structure, IRS really couldn't
take care of taxpayers on an end-to-end basis. To help solve
the problem, IRS has established a new position that can handle
a much larger range of taxpayer problems. It is called the tax
resolution representative [TRR]. TRRs will still perform
traditional duties like answering taxpayer questions and
helping prepare returns, but they also will be able to do
compliance work, like installment agreements, lien and levy
releases, account adjustments, and simple audits. IRS intends
to have about 2,000 TRRs on staff by fall, 2001.
Now, implementing the TRR concept is, of course, going to
require substantial investments in people and systems. Probably
the greatest human capital challenge for IRS will be the cross-
training that is going to be needed, but TRRs are also going to
need enhanced IT so they can have access to complete and up-to-
date account information or they won't be able to be successful
at this new role.
The second example I want to mention is one that has been
mentioned previously, which is electronic filing. During the
filing season, we all see commercials of tired and frazzled
taxpayers. This year, my personal favorite saga is a taxpayer
who is on day 20 of trying to paper file his family's return.
The commercial is pretty funny. I mean, the taxpayer has got
hands full of pencils, his hair is uncombed, his shirt tail is
hanging out. But the fact is that paper filing a tax return is
really no laughing matter.
Electronic filing, or e-filing, is not going to make the
tax code any simpler, but it can reduce the wear on taxpayers
from filing itself.
E-filing also reduces the calculation and transcription
errors that later trigger IRS notices, and that's all to the
good, as well.
But e-filing will benefit IRS. I don't know how many of you
have been to an IRS service center, but I think it is fair to
say that IRS is drowning in paper.
The returns are literally piled to the ceiling in the halls
at IRS service centers. These returns must be opened and sorted
and reviewed, transcribed, shipped, and stored. And then later,
if IRS employees need additional information, they have to get
them shipped from where they are stored so they can have access
to that paper return again.
Although electronic filing promises to be win/win, however,
IRS is having difficulty making it sufficiently appealing. A
major criticism is that e-filing is not yet paperless. IRS has
been testing eliminating W-2s and signature documents and
allowing people to pay balances using credit cards. The
commissioner mentioned that in his testimony.
However, before electronic filing can fully replace paper,
IRS must enhance its technology to allow the full range of
returns to be filed and also develop new marketing strategies
for additional market segments.
The last example that I want to point to of business
process re-engineering is something called risk-based
examination. Here, I'm going to start with a personal story,
because I think, while taxpayer benefits from one-stop shopping
and e-filing are pretty obvious to all of us, I'm not sure it
is so obvious why IRS building a better mousetrap for auditing
is going to benefit taxpayers. So let me use an example.
When I was about 10 years old, I remember standing on the
porch with my dad, and the postman walked up--that was in the
days when they, in fact, did walk up--he talked to my dad and
handed him the mail. And, after thanking the postman, my dad
started sifting through that mail until he stopped and he
stared at a very official-looking document. You're right.
Actually, in retrospect, that was a notice from the IRS.
I'm never going to forget, as a 10-year-old, looking at my
dad and seeing this big guy and the panic on his face when he
looked at that envelope. And I'm also not going to forget that
he waited until my mom came home before he opened it up. I
think he needed her moral support.
What's striking about my own little example is that it is
not unusual. No taxpayer wants to get a letter from the IRS in
his or her mailbox--unless, of course, it is a refund from the
Treasury Department. But they certainly don't want to be
audited when they are compliant, nor, when audited, do
taxpayers prefer anything other than for their audits to be
efficient and targeted only to the questionable return items.
Our past work has identified weaknesses in how IRS
determines which taxpayers to audit. When IRS picks the wrong
person or approaches an audit like a fishing expedition,
everybody loses. Taxpayers are burdened unnecessarily, and IRS
wastes valuable resources.
To improve the situation, IRS hopes to deploy something
called ``risk-based examination,'' a model that will target
audits more accurately and help determine which compliance
strategies are actually going to be the most efficient and
effective.
If IRS' approach is successful, taxpayers and IRS will both
benefit, but, as was true with my first two examples, training,
new technology, and more data about taxpayers are going to be
critical if that business process is going to be re-engineered
effectively.
OK. The second part of my testimony looks at IRS' efforts
to revamp its performance management system. Before Congress
enacted the Restructuring Act, there was an uneasy feeling on
the Hill and elsewhere that IRS employees were so intent on
assessing and collecting taxes that they did not give due
regard to taxpayer needs and rights.
The Restructuring Act mandated changes to IRS' performance
management system, including a new mission statement to place
greater emphasis on taxpayer needs. IRS now has that new
mission statement and is in the process of revamping its
performance management system. However, for the system to work,
IRS employees will need to understand that customer service and
compliance are intended to be complimentary and not competing
values and activities. Our work suggests that this relationship
may not be well understood at IRS at this point.
The commissioner does not view compliance and customer
service as competing. Indeed, he has said that improvements in
customer service will increase compliance among taxpayers who
do not understand the applicable tax law requirements or find
IRS' processes too daunting to deal with.
Understanding that customer service and compliance
activities are meant to work together will take time at IRS and
an ample amount of communication and clear training, which I
think is going to be mentioned by some of our subsequent
witnesses.
At the same time, however, it will be very important to
ensure that IRS employees also understand that they can and
should use the full range of IRS' enforcement tools to collect
taxes owed by those who willfully fail to comply with the tax
laws.
Our second concern about performance management involves
IRS' new system of balanced performance measures. Although IRS
is on the right track with these measures and may well be
regarded as a leader in the Federal Government in this area, it
still does not yet have a key measure of performance.
Mr. Chairman, that measure is a measure of voluntary
compliance. For over 30 years, until the early 1990's, IRS had
measures of voluntary compliance that were developed by
periodically auditing random samples of taxpayers' returns.
In 1995, IRS formally canceled plans to continue the random
audits because of concerns that it was overly costly and overly
intrusive on compliant taxpayers.
The commissioner has said that, in the absence of such
measures, informed decisions on strategies to improve voluntary
compliance will be impossible.
At this point, you might be wondering: why not just use
data from audits that IRS does conduct to measure voluntary
compliance? The answer is that that data would not capture the
extent of voluntary compliance among all taxpayers. Using only
audit results is actually akin to using information about
speeding tickets to measure how many drivers are driving
safely. As anyone who has ever ventured onto the Washington
Beltway knows, just because a driver doesn't get ticketed
doesn't mean he or she is driving 55.
Similarly, the results of IRS' audits tell you something
about the population of taxpayers who are audited, but they
tell you nothing about the population of taxpayers who are not.
IRS is beginning to tackle the problem of how to measure
voluntary compliance, but the solution likely will involve
auditing some--and I say some--randomly selected returns, and
IRS may have difficulty going forward without the support of
key outside stakeholders.
GAO believes that, in moving forward on this, IRS should
work diligently to minimize intrusion and burden on compliant
taxpayers; however, we also believe in the principle of random
selection when necessary to ensure the accuracy and integrity
of IRS' results.
The last part of my statement is on a topic that I know,
Chairman Horn, you are very familiar with, which focuses on IRS
systems modernization challenges, which is a perennial problem
at IRS.
Although IRS' past track record in this area is dismal,
Congress has supported IRS' most recent efforts to modernize
its systems through the 1998 and 1999 Appropriations Acts and
the establishment of the new technology account.
In light of concerns about giving IRS free reign, however,
Congress set certain conditions on spending, including
requiring spending plans to ensure that IRS had the management
and technical discipline to successfully design major software-
intensive systems. It is this issue that the commissioner is
referring to with his ``S'' curve, I believe.
Thus far, IRS has obligated about $68 million from its
technology account and submitted plans in March asking for
approval to spend an additional $176 million; however, based on
our review of IRS' most recent plan and reported progress, we
have concluded that IRS is still not ready to build major
software-intensive systems.
As I noted earlier in my statement, IRS has not yet
completed its enterprise systems architecture and systems
development life cycle. Until we are convinced that IRS is
ready, we will continue to designate its systems modernization
efforts as high risk.
Thank you, Mr. Chairman. I can answer questions now or wait
until you complete the rest of the panel.
[The prepared statement of Ms. Wrightson follows:]
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Mr. Horn. We're going to have everybody else finish. Each
are going to summarize for 5 minutes each. That's 15 minutes.
And then we'll still have a chance for questions and the
commissioner some answers to the questions.
So we will now go to Ms. Colleen M. Kelley, national
president of the National Treasury Employees Union.
Ms. Kelley. Thank you, Chairman Horn, Ranking Member
Turner, and members of the subcommittee.
I am the president of the National Treasury Employees Union
[NTEU] which represents more than 155,000 Federal employees
across the country, including the employees who work at the
Internal Revenue Service.
The IRS interacts with more citizens than any other
Government agency or private sector business. Twice as many
people pay taxes as vote, yet many Americans take for granted
the outstanding work done by IRS employees.
Following enactment of the IRS Restructuring and Reform Act
of 1998, Commissioner Rossotti set in motion a process to
restore the public's confidence in the IRS. The commissioner
recognized that any meaningful reform had to include the active
participation of his chief assets, his employees, and employees
have been involved in the reorganization work being done as we
speak and going back to the enactment of RRA 1998.
I believe that modernization will succeed, with the support
of Congress and the dedicated work of IRS employees, and I
believe Commissioner Rossotti would agree with me that,
although the modernization of the IRS will require several more
years of effort and commitment, the results so far have been
positive.
Communication between IRS management and the employees who
make the IRS work has been crucial and will continue to be
essential in improving customer service and increasing
productivity at the IRS.
I was pleased that Congress, too, recognized the importance
of ensuring that the employees' voice in reforming the IRS be
heard by insisting on an employee representative on the IRS
Oversight Board, which was established through RRA 1998.
Congress recognized that an employee representative was
necessary, not in spite of, but because of the important role
of IRS employees in reform. NTEU takes great pride in the fact
that we have had a cooperative relationship with the IRS dating
back more than a decade. Our partnership efforts and employee
efforts are constantly being tested, reworked, and revised in
the face of budget restrictions and funding limitations and
changes in the tax law.
One particular area where NTEU and the IRS have worked
together and where we feel we have made great strides has been
in improving customer service. This has included not just
providing longer office hours, but hours that meet customers'
needs.
Without the commitment of the IRS rank and file employees,
these well-documented customer service improvements could not
have been accomplished in the short timeframe in which they
occurred.
We are at a critical point in our restructuring efforts at
the IRS. First, technology improvements and investments must
continue to give the IRS and employees the tools that they need
to do the work that America's taxpayers need and want done.
Next, since 1993, staffing levels at the IRS have been
reduced by 17,000 FTEs; yet, during this period IRS' toll-free
phone services and Web-based services for taxpayers have
improved and taxpayers have more options for filing their tax
returns.
Our employees have made great strides in customer service
at the IRS, while continuing to perform the necessary functions
of ensuring that the taxes that are due to the Treasury are
paid.
Additionally, Congress has made hundreds of changes to the
tax code in the past 3 years. In fact, the Taxpayer Relief Act
of 1997, alone, made 801 tax law changes.
Next, continued record economic growth in this country has
led to an increased number of tax returns and more complexities
in taxpayer and business filings. The bottom line is the IRS
work force is being asked to do considerably more work with
fewer resources. And, while I applaud advances in the use of
technology at the IRS and I commend this subcommittee's
commitment to these improvements, technology, alone, cannot
possibly manage the increasing workload at the IRS.
For this reason, I wish to express NTEU's strong support
for increased funding for staff training and the new IRS
initiative, STABLE. This initiative will support the hiring of
approximately 2,800 new employees at the IRS. The number of IRS
revenue agents has declined by roughly 17 percent since 1995,
and it will continue to decrease another 4 percent in this
fiscal year. We need to reverse the severe cuts in IRS staffing
levels and approve this STABLE request.
One last thing I would like to mention is that IRS
employees continue to work in fear in section 1203 of the
Revenue Restructuring Act. As you know, section 1203 lists 10
infractions, known as the ``10 deadly sins,'' for which IRS
employees face mandatory dismissal. The broad scope and vague
nature of these 10 deadly sins have created anxiety and
confusion in the workplace.
Just last week, the House Ways and Means Committee approved
legislation which would waive penalties for taxpayers who do
not pay their taxes on time; yet, if IRS employees are as
little as 1 day late in paying their taxes, they are subject to
mandatory dismissal.
NTEU vigorously opposed section 1203 and continues to
believe that this section of the Restructuring Act should be
repealed. I am hopeful that this subcommittee will work with
NTEU and Commissioner Rossotti to address this issue.
In summary, since 1992 the IRS work force has declined by
more than 16 percent. In the meantime, demands on IRS employees
have increased significantly. Unless Congress gives the IRS the
staffing and the resources for technology necessary to do the
job, our entire tax system will be threatened and we will not
be able to meet the challenges of the 21st century.
Thank you, again, for the opportunity to appear today.
Mr. Horn. Thank you very much.
[The prepared statement of Ms. Kelley follows:]
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Mr. Horn. Our next presenter is W. Val Oveson, National
Taxpayer Advocate, Internal Revenue Service.
Mr. Oveson. Thank you, Mr. Chairman and distinguished
members of the subcommittee. I appreciate the opportunity to be
here with you today and to talk a little bit about the role of
the Taxpayer Advocate--the ``Taxpayer Advocate Service'' is the
name we have adopted internally--in helping taxpayers to
resolve their problems with the IRS.
I have now been the National Taxpayer Advocate for 18
months, and during that 18 months we've implemented the
provisions or RRA 1998 within the Taxpayer Advocate Service, or
in the process of implementing them. Many of them, as
Commissioner Rossotti mentioned, will take some time to
actually play themselves out.
The restructuring provided opportunities for the Taxpayer
Advocates across this country to be better positioned, better
trained, and more focused to address the problems that the
taxpayers are facing.
I am pleased to report to you that the new Taxpayer
Advocate Service officially transitioned as a modernized
organization on March 12, 2000.
Every State now has at least one local Taxpayer Advocate
who works to resolve problems that individual taxpayers have
with the IRS. Many States have multiples, depending on the
population and other factors. They also address taxpayer
problems within the IRS, policy and procedural failures, and
recommend solutions to improve those problems.
Between October 1, 1999 and March 31, 2000, the Taxpayer
Advocates across this country closed 114,000 cases. During
fiscal year 1999, Taxpayer Advocates worked on more than
292,000 taxpayer cases to help resolve their problems with the
IRS, and almost 93,000 of those cases met the expanded hardship
criteria defined in RRA 1998.
RRA 1998 expanded the authority to issue taxpayer
assistance orders when taxpayers are suffering or about to
suffer a significant hardship.
We work with front-line IRS employees in an effort to
resolve taxpayer problems, and knowing that we have the
authority to issue the taxpayer assistance order is usually
enough to convince the functional IRS employees to work with
the taxpayer to resolve the issue.
So far this fiscal year we have issued three taxpayer
assistance orders. During fiscal year 1999, we issued five.
We also identify and monitor the progress of procedural and
systemic changes designed to benefit taxpayers. For example, we
worked with IRS operations to delay the implementation of some
of the procedural changes related to secondary Social Security
number matching. By negotiating a change to the implementation
date, we prevented refund delays and communications
frustrations for thousands of taxpayers.
In addition, we worked with a variety of stakeholders to
identify legislative changes. In the fiscal year 1999 report, I
included several recommendations related to penalty and
interest administration, and a proposal that would allow the
IRS to correct its own errors--amazing as that sounds, that's
something that needs to be corrected.
I am pleased that several of these provisions are included
in the proposed Taxpayer Bill of Rights 2000.
My annual report to Congress includes a ranked list of the
top 20 most serious problems facing taxpayers. Today I'd like
to focus on four of those.
The complexity of the tax code remains the most serious
problem facing taxpayers. I believe that the single most
complicating factor of tax administration is the frequency and
number of changes to the tax law. I encourage you to reduce the
complexity of the existing laws, or at least to slow down the
frequency of change.
No. 2, the IRS must be able to communicate with taxpayers
regarding account activity and computer-generated compliance
notices. This means the toll-free telephone service must be
improved, and I say that recognizing that some tremendous
improvements have been made over the last year, but they're
still not enough.
The IRS must ensure that taxpayers can get in to an
individual who can help them with their problems and who can
answer the phone.
It is equally important that Congress fund this critical
activity.
RRA 1998 provisions expanded the innocent spouse relief
available to taxpayers, and they are filing in large numbers.
The sheer volume of cases stretches the ability of the system
to deal with these cases.
The IRS must reduce the processing time, increase the
training, and ensure that all levels of the agency have
internalized the new requirements of this law in order to get
it right in the future.
Offer and compromise is another area of RRA 1998 that I'd
like to talk about for a moment. This provided the authority to
resolve collections issues that the IRS now has the authority
to compromise based on the effective tax administration
criteria. The training needs are tremendous. The volumes are
much greater than anticipated. And the IRS must speed up the
process so that taxpayers can get timely decisions to these
critical issues.
The changes being made as a result of the modernization are
placing the service in a better position to understand the
problems, the frustrations, and the needs of taxpayers. The new
operating divisions will be a catalyst to improving service to
the IRS and to make progress in eliminating problems that are
on my top 20 list.
In conclusion, thank you very much for inviting me here
today. The Taxpayer Advocates mission statement is to help
taxpayers resolve problems that taxpayers are having with the
IRS, and with your continued support and the support of the
Treasury Department and all of the IRS employees, we can
continue to make progress toward that goal.
Thank you very much.
Mr. Horn. Thank you very much.
[The prepared statement of Mr. Oveson follows:]
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Mr. Horn. We now have Mr. David L. Keating, the senior
counselor, National Taxpayers Union.
Mr. Keating.
Mr. Keating. Mr. Chairman, Mr. Turner, members of the
subcommittee, I thank you for the invitation this morning to
testify on the IRS, and I appreciate your continued interest in
how the IRS is operating.
A historic step was taken 2 years ago when the Congress
passed and the President signed into law the Internal Revenue
Service Restructuring and Reform Act. As a member of the
Commission on Restructuring the IRS, I was both proud and
pleased to see that Congress not only agreed to the far-
reaching reforms that we recommended, but went a few more steps
beyond.
While a promising start has been made by the IRS, I think
it is still far too early to conclude whether reform efforts
will succeed or fail. If reform is successful, it will take
many years before the average taxpayer will notice substantial
improvements in the day-to-day operations of the IRS,
especially in the audit and collection area.
The risk of failure is still high, due to the tax laws'
growing complexity, the agency's culture that still resists
change, criticism, and independent advocacy for taxpayers,
and--I think this is equally important--the possibility that
elected officials will pressure the IRS to increase enforcement
at the expense of fairness.
There are both hopeful signs and discouraging signs. I'm
hopeful the agency will improve because Congress continues to
show genuine interest in how it operates. This is something
that we had not seen in years before the Commission was
established to review the IRS. Congress also passed much-needed
taxpayers' rights provisions.
We're also very much impressed with the work of the
commissioner and the caliber of several of the people he has
hired to help him improve the IRS. We believe he brings the
right background and attitude to the job, and we have had the
pleasure to meet with him.
He has proven, I think, beyond a doubt, that a commissioner
does not have to be a tax lawyer or accountant. In fact, a good
case can be made that we may be better off with commissioners
who are not tax lawyers or accountants.
I do want to say a few things about the IRS Oversight
Board. My testimony was quoted earlier, but I really do think
it was important for the administration to meet the legal
deadline. It was over a year late, and we're still waiting,
unfortunately, for the nominees to be confirmed, due to an
unrelated controversy in the Senate.
I call on the administration today to encourage the unnamed
democratic Senator, who has placed a hold on at least one of
these nominees and prevented the Senate from considering all of
them, to release that hold and let's get these nominees
confirmed and get them to work. They should have been on the
job quite some time ago, and I think it is unconscionable that
we are holding up confirmation of these nominees for some issue
unrelated to the issue of tax administration and the IRS.
The IRS touches essentially every American citizen,
directly or indirectly, and the unrelated controversy that is
being talked about in the Senate, my understanding is, concerns
some ambassador to some country that probably isn't even that
large, certainly not compared to the population of taxpayers.
The administration should work with its party colleagues in the
Senate and get that hold released to get these nominees
confirmed.
Also, I do want to say a few words about IRS culture. It is
very important that the agency's culture be changed, and they
are working very diligently to do that. This, too, requires
ongoing commitment by the Congress. For far too long in the
past, the IRS emphasized tax collection as opposed to faithful
interpretation of the law and respect for taxpayers' rights.
Much of that attitude, I think, developed over the years from
the 1970's and 1980's. In that time pressure was placed on the
agency to increase revenues so that Congress would not have to
increase tax rates to close the deficit.
As a result, the IRS developed internal statistic that
tracked enforcement actions, while neglecting agency compliance
with laws, regulations, and its own Internal Revenue Manual.
Recent news accounts indicate some Members of Congress and
candidates have raised concerns about the IRS' level of
enforcement actions in the previous fiscal year. While we can
understand these concerns, we think they are misplaced at this
time. The IRS is in the middle of a massive restructuring and
retraining program. In our view, the recent collection
statistics are almost meaningless.
Those who expressed a concern about the enforcement
statistics seem unconcerned by recent reports from the
Inspector General for Tax Administration that show the IRS
failed to follow the law, regulations, or internal guidelines
in roughly one of three enforcement actions reviewed by the
Inspector General. We think this error rate is also completely
unacceptable.
We do note that the IRS is moving ahead with balanced
measurement statistics. I am very optimistic that these will
help ensure fair collection and fair treatment of taxpayers in
the future.
My statement also explains that the IRS may soon
administratively define the power of the National Taxpayer
Advocate to issue a taxpayer assistance order. We think the law
is rather clear, and we are rather puzzled at the need to
perhaps administratively define, and we fear limit, that power,
which we think power is quite clear.
The advocate can order the IRS to take any action the IRS
could take on its own. I have spoken with the commissioner on
this, and I know they are working on it diligently, but the
same IRS that doesn't think that it can post taxpayers who are
due refunds on the Internet because they are allowed to send
press releases out to every newspaper in the country but they
can't take the same press release and put it on the Internet,
shows an IRS that tries to adhere to the law to its letter.
Yet, I think the law regarding the Taxpayer Advocate is equally
clear and the advocate's power should be duly recognized in any
administrative action.
One final point I would like to make here--two final
points, if I might--while we applaud the IRS' efforts to
publish photos of missing children on pages of tax form
instruction booklets, we wonder why the IRS is not doing more
to reunite millions of parents with their missing part of their
tax refunds.
The Inspector General noted that the IRS is not bringing to
the attention of perhaps--I think it is 1.7 million taxpayers
who appear to have forgotten to claim the child tax credit last
year, and presumably they will make the same error this year.
We found the agency's response to the Inspector General's
report unsatisfactory and unacceptable, and we think if there
are 1.7 million taxpayers who may have forgotten a tax credit,
the IRS should tell them that they may have forgotten it.
The final point I'd like to make is the issue of
simplification. As Val Oveson has stated, and many of us have
stated, the tax law is so complicated nobody understands it.
Yet we expect the IRS to enforce and administer this law.
One of the recommendations not taken up by the Congress
from the National Commission was some sort of procedure to
establish a quadrennial simplification process or provide
additional simplification incentives beyond a simple report by
the Joint Tax Committee on pending legislation.
I would like to bring to the committee's attention and the
public's attention the interest in simplification was recently
demonstrated by an unprecedented joint initiative of the
American Bar Association, the American Institute of Certified
Public Accountants, and the Tax Executives Institute that
recommended 10 ways to simplify the law. Many of these
recommendations were quite good, and we commend them to the
Congress.
We see no reason, for example, why there has to be multiple
definitions of a child under the tax law to claim various tax
breaks such as tax credit, and earned income credit and
personal exemption. It's ridiculous. It makes things
complicated for the taxpayer as well as the IRS.
Again, thank you very much, Mr. Chairman, Mr. Turner,
members of the committee, for holding this hearing and for your
continued interest in the IRS.
Mr. Horn. Thank you.
[The prepared statement of Mr. Keating follows:]
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Mr. Horn. I would thank all of you, because each of you has
raised some very interesting points, and we hope to now pursue
them. We'll start with Mr. Walden, the Representative from
Oregon, to begin the questioning.
Mr. Walden. Thank you very much, Mr. Chairman.
Mr. Rossotti, I thank you for being here today and for the
work you are doing to improve the situation at the IRS.
I'm curious as to what you believe are the major obstacles
in developing a measure of voluntary compliance.
Mr. Rossotti. Well, the difficulty is finding a way to do
that measurement without being overly intrusive or burdensome
on otherwise compliant taxpayers. I think Ms. Wrightson gave
one of the better expositions that I've ever heard of what is
involved in doing this and why it is necessary.
So what we are working on is a plan or a proposal for how
to get the necessary information that we need to measure
voluntary compliance and figure out how to target our audit
resources where they really are needed and not where they are
not needed. That's the reason we do it.
We're working on a plan to figure out how to do that with
the least burden on the taxpayers. It will never be reduced to
zero, because it is in some ways like jury duty. I mean, you
have to have some people that go to a jury to basically make
the justice system fair, and it is certainly burdensome on the
people that do it while they do it, so there's going to be some
burden to do this measurement process.
But what we are working on is trying to figure out a way
that we would basically do two things to reduce the burden. One
is to reduce the number of taxpayers that need to be surveyed,
and, second, reduce the amount of time it will take for them to
be part of this process.
We have not yet completed that. We have been working on it.
As a matter of fact, this is one of the first things that
amazed me, frankly, when I got to the IRS, because I always
heard that there were these numbers like 87 percent of the
people comply and all that, so where did that number come from?
Well, it turns out it came from some very old studies that are
no longer valid and I realized that we had to do something
about this.
So we have been working on it, and I think we are
reasonably close to having what I consider an acceptable
proposal, but we're not quite there yet.
Mr. Walden. I think I read in somebody's testimony, perhaps
yours, that there is $231 billion in uncollected taxes out
there. Is that----
Mr. Rossotti. Well, on the books there is something like
$220 or $220 billion of, you know, a whole variety of numbers
that represent assessments, and we're required to keep them for
10 years, as well as the interest and penalties. That is,
frankly, not a valid number as to what could be--a lot of that
is bankrupt corporations from years ago that are still kept on
the books, just because they are there for 10 years.
According to the GAO audit of our 1999 financial
statements, on the balance sheet there was, if my number is
right, I think it was $21 billion.
Ms. Wrightson. I'm not the financial person, but I think
that's right.
Mr. Rossotti. It was either $21 or $20 billion. Somewhere
in that range is the number that was viewed as actually
collectible amounts that we should be able to collect, which
actually went down slightly from the preceding year.
There's another array of money in that $20 billion that
could possibly be collected that represents what are called
compliance assessments. These are assessments where we have
proposed, an adjustment to your tax bill, but you, as a
taxpayer, have not accepted it, so it is still in, a disputed
category, and some of that may turn out to be money.
So there is a significant amount of money that is out
there, but it's not $221 billion.
Mr. Walden. You weren't referring to my taxes, personally,
were you?
Mr. Rossotti. No, sir.
Mr. Walden. Good.
Mr. Rossotti. I meant ``you'' generically. Pardon me for
using that. I just meant generically, you, as a taxpayer.
Ms. Wrightson. It is 21.
Mr. Walden. Twenty-one?
Ms. Wrightson. Right.
Mr. Walden. Billion?
Ms. Wrightson. Right.
Mr. Walden. OK. What about putting out some of that to
private collection process? I know Department of Education and
elsewhere has worked pretty effectively trying to recapture
overdue student loans using the private sector in a
responsibility way.
Mr. Rossotti. Yes. This is a matter that I know the
chairman has a great interest in, and something that I,
personally, in my previous life, have actually worked on and
done successfully.
I think that possibility exists, but I believe, very
honestly, where we are right now is that our whole tax
collection process--and I brought a chart for one of these
hearings that showed what it is because of our computer
systems, our internal rules, and the recently passed
restructuring account. It is so complicated and our data
systems are so poor that it is really hard to figure out how
you could ever extract a portion of that and turn it over to
anybody very effectively in today's world.
I think, as we re-engineer it, those possibilities may well
exist. As I said in my earlier testimony, that's one of the
major initiatives of our re-engineering is re-engineering the
collection process.
Mr. Walden. Mr. Chairman, I'll yield back.
Mr. Horn. OK. The gentleman from Texas, Mr. Turner.
Mr. Turner. Ms. Wrightson, you were talking about voluntary
compliance. Is it correct that there is no random audit system
at the IRS any longer?
Ms. Wrightson. Well, there is no--hopefully there is no
random audit system at the IRS because one shouldn't audit at
random. What we're really talking about here is the random
selection of returns to audit, so that--and, in fact, today
there is no random selection process.
IRS had a process in place. I think the last one was
probably 10 to 12 years ago, maybe even 13. It abandoned that
process because it was viewed as too onerous to compliant
taxpayers and politically sensitive, so there is not one now.
We believe, like the commissioner, that, as they go
forward, and they're going to have to do some measure,
probably, of randomly selected returns; however, no one knows
right now how much that will be required.
For example, IRS could use more information that it already
has about taxpayers. It could audit much smaller numbers. It
could do it on a continuous basis. But it doesn't have it now
and it probably will need some measure of that in the future in
order to get accurate, reliable indicators of voluntary
compliance.
Mr. Turner. And did I read somewhere that the IRS is
working on that, but it's about 2 or 3 years off before they
may be able to do it?
Ms. Wrightson. As the commissioner has said, they are
working on something called the ``national compliance survey.''
Do I have that right, NCS? They have been holding it fairly
close, I think for obvious reasons. It is going to be
politically sensitive. We have not had access to look at what
they're doing. I think we enjoy a fairly good, close
communication with the commissioner. I know our Comptroller
General and he meet every 6 months or so to talk and this issue
came up. So I expect we'll be looking at that in the future and
provide to them again our feedback as to whether the strategy
that they're using is the one with the least burden, but also
providing reliable results.
Mr. Turner. Thank you.
Ms. Kelley, you were critical of section 1203, and I
understand your concerns. I am curious as to how many employees
have been dismissed under the new section 1203, to give me some
feel for the actual impact upon IRS employees.
Ms. Kelley. To date the numbers are actually probably just
in the double digits. It is less than 100. Commissioner
Rossotti probably knows the exact numbers, as there are reports
issued every quarter on these.
Part of the problem and the fear that it has created among
employees is that even if, in the end, there is not the
ultimate termination, the process that employees go through
during that period of time puts them in a position where they
are just afraid to do much of anything.
There are already processes in place in the IRS that
require, under the rules of conduct, that employees file tax
returns, of course, and pay their taxes, and there has always
been a process in place to deal with employees who don't do
that as required under law, and it is a process that has
worked. So those parts of 1203 just haven't, in our opinion,
been necessary and have led to unnecessary fears and
investigations. It also has led to, in some cases, managers
being afraid of making a wrong decision because of this
overview of 1203. And that is just one example of 1203. There
are, of course, 10, and the one that I cited was about paying
taxes late.
Mr. Turner. Commissioner, what's your impression of section
1203 and how it has worked.
Mr. Rossotti. Well, first let me just give the number.
There have been 17 employees actually finished through the
termination process. There were a few others that resigned
without actually being terminated. I have to say that most of
those employees, as Ms. Kelley said, probably would have been,
if not terminated, at least severely disciplined even without
1203, because they really were serious cases.
I have to say that this provision has turned out to be one
of the most difficult provisions to administer properly of any
of the provisions of the Restructuring and Reform Act, simply
because of the practical difficulty of learning how to apply
it, and the psychological problems of, on the one hand, trying
to follow through on the intent of Congress that serious
misconduct be disciplined and people be terminated, which we
have done, and, on the other hand, trying to reassure employees
what I believe is true and have said right from the beginning--
that this was not intended, was never intended, and as long as
we are here administering it, it will never be administered in
such a way as to provide a penalty or a termination penalty,
especially, for an employee who simply, for example, makes a
mistake in the normal course of their job. That is not the
intent.
The difficulty is that, although I think we have made some
progress in getting that point across, there is still this fear
out there that, even if an employee is not ultimately
terminated, I'm going to go through a long and very unpleasant
process potentially of being investigated and have this threat
hanging over me. That is a fact that does exist out there.
So what we are trying to do, since this law is on the books
and it is there, is to administer it in a very fair and very
transparent way so that people know what we're actually doing.
I mean, one of the--probably the most important thing that
we've done, one of the most important things that we've done,
as Ms. Kelley said, is to actually publish on a regular basis
all the actions that are taken--by the way, not just under
1203, but all the disciplinary actions, a very mysterious area
in the past. Nobody actually knew, you know, what kind of
actions were taken, and there were all kind of rumors that
spread.
So we've taken to--actually, I must say, with great
cooperation from NTEU--it was really their idea to do this--to
publish on a regular basis, without identifying specifically
named employees, of course, but, nevertheless, to identify, not
only on a statistical basis, a complete list of all the
disciplinary actions that are taken and at what levels they are
taken so that people will actually know how this process is
really being administered.
I believe that in practice we can administer it so that we
will not terminate employees that shouldn't be, but, whether we
can convince people to be more comfortable with the fact that
this process exists. This is where we are going to have the
most difficulty.
Mr. Turner. Thank you.
Mr. Horn. Any other questions? The gentleman from Oregon?
The gentleman from Texas?
Mr. Turner. I just want to followup with Mr. Rossotti. What
is your assessment of the morale of the IRS employees
currently? They've gone through quite a bit of stress because
of restructuring legislation, and now we hear this specific
problem on 1203. Give us an assessment from your point of view.
Ms. Kelley says it is not too good. I just want to hear from
your point of view.
Mr. Rossotti. I would concur with that. We do a regular
survey of all IRS employees, and then we do other samples, and
more than that. I, personally, travel almost all the time
talking to people.
It is varied by different segments of the 100,000-person
work force. I would say that the field compliance employees,
especially the collection employees and the exam employees, are
the ones that had the most pervasive changes as a result of the
Restructuring Act and were the ones that took some of the
criticisms most personally, I think that there is where we have
our most significant morale problems.
They're learning how to implement these new provisions.
They're learning what it means to--again, I have to say Ms.
Wrightson was very articulate in saying that our goal is to
provide good service and provide taxpayer rights to all
taxpayers, but also to enforce the law for the people that are
not willing to comply. Doing both of those things--it's harder
to learn how to do two things at the same time than one thing
at the same time. Those are all things that are learning
process.
So I think if you look at the field compliance employees,
where they've had the biggest change, certainly I would not
describe the morale there as good. I think we've gotten by some
of the really serious fears about 1203 to some degree. We've
started to put the balanced measurement system in place. We've
certainly done a lot of training. I could go on and on and talk
about all the things that we've done, but I think that we are
still at a fair low point.
Now, I will say that--violating my own rule that it is OK
to make predictions, as long as they're not about the future,
I'll go off on a limb and predict that this fiscal year, in
terms of the field compliance, will be sort of that we will hit
the bottom in terms of both morale and some of the statistics,
and that in 2001, especially if we get the budget request
approved, we will see a material turn-around, because we will
have a new organization structure in place, we'll have the
balanced measurement system in place for a longer period of
time, we will have gotten a lot of the training issues
resolved, at least to a certain level, and I do believe that we
will see, in several tangible measures of both morale and
operational effectiveness, some improvements during 2001 in the
area where we have the greatest weakness today.
Mr. Horn. Let me ask you about the level of supervisorial
training. Do you have enough funds there and enough people to--
--
Mr. Rossotti. Yes.
Mr. Horn. I know when I was at your swearing-in you said,
``This is going to take me a few years,'' and there's no
question----
Mr. Rossotti. Well, it's a very, very important----
Mr. Horn [continuing]. We all knew that, but training is
key, our human resources.
Mr. Rossotti. It is important, and you mentioned
specifically the supervisory training. I think that the answer
to your question is the Congress did provide that particular
funding, so I can't use that as an excuse, if you will. I mean,
the funding for the training has improved significantly.
What we have is, though, a job where, you know, training is
one thing and learning is something else. OK? I mean, we have a
learning process, and this ``S'' curve that I put up could be
used for a lot of things that we're learning at the IRS.
In the case of the first-line supervisors, especially in
exam and collection, the big learning process is how do we
manage, in a world where it is not just one thing that we're
measuring, but it is two things we're measuring--we want to
provide taxpayer service and taxpayer rights. We also want to
collect the money. That is a learning process that many
businesses have gone through. You know, every business has to
do the same thing.
It is starting to get there. We did one thing recently that
was never done before. We brought all of the first-line
managers for our field collection organization, which is about
550--these are the first line, the first level of management,
the group supervisors that supervise the collection employees.
We brought them all together in one place, about 550 of them,
for a 3-day training session, and all of our top executives
were there for almost the entire time, and they were some of
the employees that--some of the managers that I'd say, first of
all, are the most critical, in terms of turning this whole
thing where we want it to go, and, second of all, you know,
probably had some of the more significant morale problems.
You know, General Eisenhower said one time that when he
hears his generals say that there is a morale problem, he
thinks that they're the ones that may have the morale problem.
Well, I think that, in the case of our managers, they were
talking about the employees' morale problem, they're the ones
that had morale problems for very legitimate, understandable
reasons.
I think in that meeting we made a significant turn-around,
because we began to get down to very concrete details about
what we really expect in the collection area for people to do
and what we don't expect them to do, and, most importantly,
just created an atmosphere of support for what we did. And we
acknowledged very openly that there is a long list of things
that we, as the top management, have to explain better or
resolve in how we're going to go about reconciling these
competing objectives, which was a good thing for them to hear.
So that's a step, I mean, but there are many steps.
My bottom-line conclusion is I think that we will--that
this year we will sort of hit bottom, if you will, and I really
do believe that, with some luck, and especially if we can get a
little bit of resource to meet some of these stop-gap staffing
problems, that next year, meaning fiscal year 2001, we will
see, you know, some noticeable indicators of improvement in the
field area.
In the customer service area and the phones, and so forth,
we've already had some noticeable improvement, but I'm talking
about in the area where we have the most problems still.
Mr. Horn. Well, as you said, dear to my heart is the Debt
Collection Act of 1996, and we put that on the books through
using the omnibus appropriations bill, which nobody could veto
it that way, and Mrs. Maloney, the ranking democrat then, was
very helpful with that.
Could you give me an idea of what do we do, in terms of
someone that has a debt to IRS, in terms of the number of
letters they go from IRS, the telephones they go, and to, if
any degree, you have a revenue officer knock on their door.
Mr. Rossotti. Well, I think that this is the chart that I
think that I showed you that you took back to your office last
time. Unfortunately, we still have that long process.
Mr. Horn. We've got a broader audience today.
Mr. Rossotti. Well, it really is--I mean, here's a simple
way to understand it. If you look at the main resources we have
in debt collection, which are our phones and revenue officers,
about 90 percent of their time is spent on accounts that are
more than 6 months old, and if you look at the revenue officer
inventories, many of those would be a couple of years old.
That's not because they are doing the wrong thing as
employees, it's just the process--some of it is defined in
regulations, some of it is defined in just procedures. All of
it is embedded in our computer systems. A lot of it is related
to the fragmentation of our collection organizations.
You know, it's just not a very easy thing to fix, but we
are moving one step at a time. Now, one step will be in place
by the end of this year, a very important step, which is we
will have consolidated the organization, so we will have
collection processes, you know, managed in a more integrated
way.
We are making some smaller steps that we can do within our
existing technology later this summer on our phone collection
operations to accelerate some things.
And then the really big opportunity is through this re-
engineering process, which will basically replace the
technology underpinnings but also the business practices. Then,
at that point, we can be more effective in using various kinds
of resources to do debt collection.
Mr. Horn. Your predecessor, when I discussed the matter
with her, they had, as I looked at your financials--this is
back in 1994 and 1995--that it was roughly $100 billion to $110
billion that had been sort of written off with the
bankruptcies, as you said, with small business and this kind of
thing, and they had another pile that was roughly $60 billion
they thought they could collect.
I raised the obvious question: besides your own revenue
people, what about putting that out for debt collectors that
know their business? And then I was told, ``Oh, no, there are
privacy problems.'' Look, you just give them the address, you
give them the amount. No privacy problem as to the details of
their tax form. And if they have a gripe about what IRS is
doing to them, then you put them in to the revenue officers
that are authorized to deal with that particular situation.
Now, have you thought about going to your authorizing
committees--Ways and Means in the House, Finance in the
Senate--and get that authority for the private collectors, or
do you feel you already have it?
Mr. Rossotti. I think that actually the way it works is
that we could--it's a little more complicated because you can't
give out any information, even names and addresses, under
current law, but I think, on the other hand, if we were to
treat some people as contractors we could get them to agree to
certain--under even existing law, we probably could overcome--I
say ``probably,'' because anything that deals with these legal
issues really requires research. We could probably overcome the
privacy issues, and basically I think we could solve that
particular part of the problem.
The more serious problem right now is just the process that
we have that is just--it's really not in a shape right now,
very honestly, to pull a piece of this out and give it to
somebody. If we did that, we would end up just having them
fail, probably, and give a bad name to the whole thing.
I'm not saying that it can't be done in the future, but I
think there's some work we have to do to get the data in shape
and get the process simplified to at least a level where we
could realistically turn over to it.
One opportunity that might exist longer-term is that, as we
get to a newly re-engineered process, one of our challenges
will be what we do with the old inventory, because we will have
to take our existing resources of revenue officers and others
and apply them to more-current work, so then we would have this
base of old work, and that might be an opportunity in the
future. But we are probably, realistically, a couple years away
from that.
Mr. Horn. Well, I would also hope that the Treasury and IRS
would look at the people that have claimed bankruptcy, and when
they pop up again and there is a pattern and practice of where
they are milking the taxpayers, very frankly--and, since those
of us that pay our taxes aren't too happy when we see them
getting away with murder. I would hope that the Treasury and
the IRS would figure out a way to follow them through their
business career and try to get some of the money back that are
owed to the taxpayers of the country.
Mr. Rossotti. Incidentally, the biggest obstacle in that
area is our data systems, because, you know, part of our
problem is that the basic records don't allow us to point and
make these relationships between one taxpayer and another. It's
all one taxpayer number.
It's like the way that the old phone systems used to be.
You know, the telephone companies used to bill everything off
the phone number because they thought everybody had one phone
number, and that was one of the problems that they ran into
that I used to work on in my old days, you know, when people
started to get five phone numbers. How do you point them and
make them one customer? The issue that we have is how do you
track, as you say, a small business person or principal through
multiple entities that they may have, either at one time over
time. Right now our data systems don't really provide very good
support for that.
Mr. Horn. One of the things that I have found when I'm
looking at the IRS claims that go through our District office--
and you have some very good people at Laguna Niguel that we can
talk to there, and I'm really interested in the degree to which
the Taxpayer Advocate with--are you now handling those that
come from District offices? There's 435 District offices on the
House side--there may be 40 with the territories--and you've
got 100 on the Senate side. So when we've got these cases of
people that say, ``I've got a problem with the IRS,'' or others
are obviously Social Security, Medicare, Immigration, the whole
works, when I look at the ones on IRS, the ones I've found over
the years that bother me is one part of the IRS has put a lien
on the person and they can't pay what the other part of the IRS
is. Have we solved that problem? And the right hand didn't seem
to know what the left hand was doing, by the way.
Mr. Oveson. There are still challenges in those
communications that you've mentioned, but Connie Adams is the
Taxpayer Advocate in Laguna Niguel, and she reports now
directly to me, rather than the district director. We are
handling the congressional cases that you've mentioned, and
hopefully doing an excellent job of that.
Mr. Horn. Well, we have great praise for the people that
are helping us solve this, and that's why I wanted to know, are
we still going to the district directors, or do we strictly go
to the Taxpayer Advocate?
Mr. Oveson. Again, the congressional correspondence and the
individual casework is being handled now by the Taxpayer
Advocate.
With the modernization program, that is being solidified
and standardized throughout the country, and hopefully it will
continue to work well.
Mr. Horn. Now, when you say you have taxpayer assistance
orders, five in fiscal year 1999 and three in fiscal year 2000
so far, is that then across the whole IRS system as to a
generic issue, or is this one case?
Mr. Oveson. No. That's across the whole IRS. And I
mentioned in my annual report right up front that I felt those
numbers were too small, but you need to understand that this
year there were nearly 90,000 applications for taxpayer
assistance orders, and the need to actually implement the
taxpayer assistance order in the end was only used five times
last year, three times so far this year.
Most of those situations are resolved by the Taxpayer
Advocate visiting with and talking with the individual that has
the case in either exam or collections and working out an
arrangement that is acceptable. But my No. 1 goal for this year
is to get the taxpayer assistance order process into a
situation that is more meaningful and more representative and
that we have more experience with the taxpayer assistance
orders as per the intent of Congress, I believe.
Mr. Horn. Mr. Keating made a very interesting point in his
testimony that the IRS is over-collecting millions of dollars
every year because they are not informing taxpayers of their
right to the child tax credit, and I wonder, Mr. Keating, how
significant do you believe this problem is, and what do you
believe should be done about it?
Mr. Keating. Well, I think it is especially interesting,
given the comparison to the way the IRS has acted in the past
regarding the earned income credit. There have been examples in
the past where the IRS sent checks out to people who didn't
even quality for the earned income credit. Then there was no
chance of ever getting the money back from these people, almost
by definition. They had probably gone out and spent it, and
these are people of modest means, by and large.
I think what should be done is what the Inspector General
recommended, which is to at least send a notice to the taxpayer
flagging a potential error on the return that may have resulted
in an overpayment by the taxpayer.
The IRS management response was that they were worried that
taxpayers receiving such a notice would lower their withholding
in response to the notice, then find out when they completed
the subsequent tax returns they were not eligible for the
credit.
I think there is a very, very small chance of that
happening. First of all, three-quarters, roughly, of all
taxpayers receive refunds. A very smaller number go and adjust
their withholding in the middle of the year in response to an
IRS letter such as this.
We are not calling on the IRS to automatically send a
refund check. We think the notice should flag it and send a
questionnaire to the taxpayer to go through the steps needed to
ensure the taxpayer may actually be due the additional refund.
So we think it can be done, and we hope that it will be done.
I don't know how many other areas of the law are like this.
I suspect this is one that might be a problem because it is a
new item in the tax code it started. I believe, in the last tax
filing season, and there are some taxpayers that haven't
figured it out yet.
Mr. Horn. Well, we thank you for those suggestions, and we
have a few questions the staff on both sides would like to send
you, and we'll put them at this place in the record, if you
don't mind.
Let me just ask, as one more point, as many Americans work
toward meeting the filing deadline, is there anything you wish
to say to them, Commissioner?
Mr. Rossotti. I just want to say that I hope that every
taxpayer will have an increased level of confidence in the IRS
interest in basically helping taxpayers get the right--pay the
right tax, no more, no less.
I do agree with Mr. Keating that it is our obligation to
inform taxpayers of where they have credits due. As a matter of
fact, we had a public service commercial that was, I think,
pretty effective on the child tax credit.
So if they call us, I really hope that we are making some
progress in getting taxpayers to have increased confidence that
we are not there as the enemy, we are not there as an
adversary, we are there as a resource to basically help people
get it right.
Of course, we are also there--if there is that small group
of taxpayers that wants to burden everybody else by not paying,
we are also there to make the system fair, and we are looking
out for those that are not willing to pay. But the majority
are, and I hope they will recognize that that's what our
interest is, is in helping to make the system fair and having
them pay what they owe, no more, no less.
Mr. Horn. Well, I thank you and I thank all of your
colleagues here that have made excellent suggestions, and I
want to thank the staff that prepared this hearing: J. Russell
George, the staff director and chief counsel of the
Subcommittee on Government Management back there against the
wall; and to my left and your right, Louise DeBenedetto, who is
the professional staff person on this issue and a detailee from
the General Accounting Office; Bonnie Heald, director of
communications, professional staff member, on the wall in the
back there; Bryan Sisk, clerk; and Ryan McKee, staff assistant;
and Michael Soon, a valued intern; and, on the minority side,
counsel to Mr. Turner as the ranking Member is Trey Henderson;
and Jean Gosa, the minority clerk; and we thank Mel Jones for
being the court reporter today.
With that, we are adjourned.
[Whereupon, at 12 noon, the subcommittee was adjourned.]
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