FROM THE OFFICE OF PUBLIC AFFAIRS

Good morning. Thankyou for that kind introduction. It is an honor to be here amongtax professionals to discuss the vital question of improving theway in which the IRS collects our nation's taxes.

Nobody likes to paytaxes, but, as Oliver Wendell Holmes once said, they are theprice we pay for civilized society. They have been at the centerof our nation's greatest debates from Revolutionary times totoday. They fund our armed forces, our children’s education,and our parents’ health care, and they finance advances inscience and technology that benefit us all.

Collecting taxes hasalways posed a difficult challenge. Because of the nature of thework they do, tax collectors will never win popularity contests.Recently, announcements we have made about continuing problems incomputer systems have focused attention on the Internal RevenueService. Continuing improvements in the service provided bybanks, brokers, credit card companies, and other users ofinformation technology bring ever more sharply into focus theIRS’s problems with customer service. At Treasury and theIRS we recognize that the IRS could do much better at providingthe kind of cost-effective, high quality service that theAmerican people deserve.

We have, I believe,reached an important turning point. Over the last year, theTreasury Department has focused intense efforts on improving theIRS. The National Commission on Restructuring the IRS, led bySenator Bob Kerrey and Congressman Rob Portman, has already madea significant contribution to the ongoing discussion. A consensushas emerged among a wide group of stakeholders, from businessexecutives to Members of Congress to leaders of the NationalTreasury Employees Union. The message is clear: it is time forchange.

I believe that inthe next year or so we have the opportunity and the obligation tobring about the

RR-1556

most far-reachingchanges in the way the IRS is managed and in the way it does itsbusiness in decades. The IRS needs to be more responsive totaxpayers, to use technology more effectively, and to be moreefficient. However you feel about structural tax reform, Isuspect that most of you share my conviction that for theforeseeable future, the United States will have an income taxthat taxes people based on their ability to pay. Given this, itis not possible to eliminate the IRS, and it is vital that wehave an IRS that functions effectively. We must all workconstructively toward this end. What we must not do is attack theIRS in order to promote other agendas.

It will be the taskof management at the IRS to manage information technology betterand to harness it toward the goal of better customer service.What I would like to provide today is the TreasuryDepartment’s view of how to establish a framework withinwhich the IRS can best get its mission accomplished. I use thephrase "get its mission accomplished" deliberately tounderscore the fact that the IRS of the future will have tocontract out, outsource, partner with the private sector, andrely on outside vendors to a much greater extent than the IRS ofthe present.

Last year intestimony before Congress, Secretary Rubin and I recognized thatthe modernization program was, as we put it at the time, offtrack. We called for a sharp turn and made clear ourdetermination to bring about change in the way the IRS usesinformation technology and provides customer service. And therehas been change.

• We have appointed a new Chief Information Officer at the IRS, Art Gross. Following his review of technology projects, we canceled or collapsed 26 programs into nine.

• The IRS has increased outsourcing. The percentage of contractors, as opposed to IRS staff, working on tax systems modernization has increased from 40 to 64 percent over the past two years. The number of IRS staff working on tax systems modernization has decreased from 524 to 156. And we expect to pursue a prime contractor for systems modernization and integration and to develop an outsourcing strategy for submissions processing.

• The IRS has made progress in eliminating paper. This year, we estimate that 19.2 million Americans will file electronically by telephone or computer, up from 11.8 million taxpayers in 1995.

• While there is a long way to go, the IRS has made progress in being able to respond to all incoming calls.

• The IRS has improved customer service by beginning to change the internal culture of the IRS. Last summer, President Clinton signed bi-partisan legislation enacting the Second Taxpayer Bill of Rights, which vastly increased our number of taxpayer advocates. After interviewing our head Taxpayer Advocate on NBC's Today Show, Katie Couric proclaimed that Americans have a friend at the IRS.

Steps such as theseare obviously only the beginning. Everyone involved in thisprocess at Treasury, the IRS, Congress, and the union hasrecognized that the problems at the IRS have developed overdecades and will not be solved overnight or even over a couple offiling seasons. Only if we confront problems directly -- fromprotecting taxpayers’ privacy to using technology to makingsure the phones are answered -- will we build an IRS for the 21stcentury.

The Five PointPlan

As we chart our newcourse, we will focus on five critical areas -- oversight,flexibility, budgeting, tax simplification, and leadership.

Let me address eachof these in turn.

I.Institutionalize Oversight

First, we at theTreasury Department have strengthened and made proactive ouroversight of the IRS, and we take responsibility for reformingthe institution. We will devote the necessary resources, bothmanagerial and financial, to do the job.

Oversight of the IRSby the Treasury department is the best way to ensure theIRS’s accountability to the American people and tocoordinate tax collection with tax policy. Through the Treasury,the IRS is able to bring concerns about the difficulty ofadministering tax changes to senior Administration officials; Iraise these concerns frequently in tax policy discussions withpolicymakers in the White House and throughout theAdministration. In addition, the IRS is able to draw uponTreasury resources for critical projects, as demonstrated by ourcurrent cooperation on the Year 2000 conversion.

Going forward, wewill take two concrete steps to institutionalize oversight of theIRS. Over the last year, we have set up a ModernizationManagement Board comprised of senior officials from Treasury, theIRS, and other parts of the Administration. The ModernizationManagement Board is directed at overseeing the informationtechnology programs and functions in many ways like a corporateboard, approving major strategic decisions and investments. Basedon its success, we will ask the President to issue an ExecutiveDirective that will make this board permanent and extend itsmandate to cover the broad range of strategic issues facing theIRS.

We will alsoestablish a blue ribbon Advisory Committee, reporting directly tothe Secretary of the Treasury, to bring private sector expertiseto bear on the management of the IRS. This committee, composed ofsenior business executives, experts in information technology,small business advocates, tax professionals, and others, willmeet regularly to make recommendations on major strategicdecisions facing the IRS.

II. IncreaseFlexibility

Second, we willenhance and strengthen the IRS’s ability to manage itsoperations. The IRS faces a multitude of restrictions --restrictions that would be unacceptable in the private sector --that hamper its ability to provide efficient service. Forexample:

• The Commissioner should not have to wait four months to hire the management team he or she needs.

• The IRS should be able to attract and retain the highest quality information technology specialists and other professionals.

• The IRS should not face rules that make restructuring the workforce needlessly difficult for employees and the employer.

To strengthen theCommissioner's ability to effect change, we at Treasury will workwith Congress, the Commission, and the union to improveflexibility: to bring on people with specific skills morequickly... to pay them more competitively... and to give them thetraining they need. Many of these changes will requirelegislation, and we expect to propose this legislation toCongress later this year.

In return, iflegislation is passed, employees of the IRS, as in anywell-managed business, will be held accountable for results.

Let me add that intaking these steps, we are committed to maintaining theindependence and freedom of the IRS from political influence.

And a crucial partof any strategy for improving flexibility has to be outsourcing.Just as private industry has found that outsourcing enables anorganization to focus on what it does best and to rely on othersfor what they do better, so government can benefit fromoutsourcing as well. Inevitably, resources hired from privatecompanies will be more flexible than those that become part ofthe IRS’s overhead. Where it is cost effective, but onlywhere it is cost effective, we will pursue outsourcing strategiesvigorously.

III. ReformBudgeting Procedures

Third, we will workwith Congress to help the IRS get the stable and predictablefunding it needs to operate more effectively.

Multi-year budgetingfor capital projects is already in use in other federal agencies.For example, the Department of Defense uses multi-year fundingfor many procurement projects, and the Department of Housing andUrban Development uses this funding method for housingconstruction.

Today, the IRSoperates in a low-trust, short-tether budgeting environment. Thismakes rational planning for capital projects such as informationtechnology very difficult. As we re-establish trust anddemonstrate that the IRS is investing resources wisely andprudently, we are examining longer term approaches to budgeting.This year we have proposed funding for the next two years forsystems modernization, funding which can be used when needed. Asevidence that we recognize our responsibility to Congress and theAmerican people, we have committed not to spend these funds untiland unless we demonstrate the clear benefits of our fundingproposals.

Over time, theAdministration and Congress will have to give carefulconsideration to the appropriate size of the IRS budget. Thebudget has declined by more than nine percent in real terms overthe last two years. On the one hand, efficiency improvements aresurely possible through information technology, which shouldenable us to reduce the budget. On the other hand, more customerservice requires more people serving customers, and experiencedemonstrates that investments in improving compliance havepay-offs in extra revenues that far exceed their costs.

IV. SimplifyTaxes

Fourth, we will workto simplify the tax code.

There is no doubtthat we can do a better job of administering the tax laws than wehave. But our job, and yours, would be far easier if we, workingwith Congress, were able to streamline our 9,451-page tax code.

Our Administrationhas already taken several steps toward simplification. Thisaudience knows first hand how our "check-the-box"regulations have simplified tax planning and compliance,particularly for small business. The President's current proposalto exclude up to $500,000 of capital gains from the sale of ahome will dramatically simplify record keeping for more than 60million families. The President’s budget also states ourintention to introduce new tax simplification legislation in thisyear’s budget cycle.

There are some who,based on the complexity of the tax code and on problems at theIRS, argue for extreme measures such as a flat tax. I believethat such proposals would not only unfairly increase the taxburden on the middle class and hamper economic growth, they wouldnot simplify the administration of the tax code.

V. Leadership

Ultimately, everybusiness executive knows that leadership is crucial toperformance. Leadership is particularly important when there is aneed to change the culture of the organization.

Over the last fouryears, Commissioner Richardson has guided the IRS throughdifficult times and has made progress in many areas. Now, as wemove forward, we are committed to appointing a new Commissionerwho has experience with the challenges of organizational change,customer service improvement, and information technologymanagement that the IRS faces. While technical excellence in taxmatters must be maintained, the greatest challenges facing theIRS in the coming years are managerial.

We will charge thenew Commissioner with developing a detailed strategic plan forchange. And we will work to give the new Commissioner theflexibilities and tools he or she needs to effect change and torecruit a first-rate management team.

Conclusion

These steps --institutionalizing oversight, increasing flexibility, obtainingpredictable funding, simplifying taxes, and introducing newleadership -- provide a framework for the kind of taxadministration system that American taxpayers deserve. Of course,there are other critical issues that we must address. But Ibelieve that progress on these five fronts will give the IRS asolid foundation on which we can build.

In the comingmonths, the nation will engage in a discussion of how to reformand renew the IRS. It is essential that we proceedconstructively. The problems may lie in many places, but the103,617 dedicated people of the IRS perform a difficult andunpopular job for our country. It does not serve our country wellto attack their professionalism or integrity.

As we evaluate andimprove the way we administer our taxes, you, as taxprofessionals, have an important role to play. We at Treasury andthe IRS want and need your suggestions and help. I look forwardto working closely with Congress, the Commission, and members ofthe public such as yourselves to set the Internal Revenue Serviceon a new course for change as we enter the 21st Century.