FROM THE OFFICE OF PUBLIC AFFAIRS

Introduction
I am pleased to be here today to talk with you aboutTreasury’s plan to implement lasting solutions todifficulties the IRS has encountered and, more specifically, theissue of unauthorized access by IRS employees to tax returns andtaxpayer records. I understand that this is the first of a seriesof hearings your Committee will be holding over the next twomonths on Treasury operations as you begin your review of theDepartment's budget requirements for the next fiscal year. ThisCommittee has been very supportive of the key role Treasury playsin Government as tax administrator, revenue collector, lawenforcer, financial manager and regulator. Secretary Rubin and Ilook forward to working with you and members of your Committeethroughout the coming year.

This is the day thatAmericans fulfill their annual obligation to pay their taxes. Assuch, it is an appropriate moment to recall both the purpose oftaxation as well as what Americans ought to demand of theirsystem of tax collection. Taxes funds our armed forces, ourchildren’s education, and our parents’ health care, andthey finance advances in science and technology that benefit usall. They play a critical role in sustaining our society.

However, recentannouncements about problems in modernizing the computer systemsof the IRS have focused attention on its shortfalls and provokedan important debate about how best to improve it. I would like tobegin this morning by addressing the specific topic of today'ssession, the issue of unauthorized access by IRS employees of taxreturns and taxpayer information. I want to thank the Congressand others for their continued focus on this matter, which ishelping to ensure that it gets the attention it deserves. Inturn, I will also discuss specific elements of theAdministration’s five-point plan for reform of the IRS.

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UnauthorizedAccess of Tax Returns
From the Department’s perspective, total respect for theprivacy of information provided by taxpayers is integral to highquality service and voluntary compliance -- the foundation of oursystem of taxation. That is why, in 1995, in response toincidents of violation of that privacy, the IRS announced whatwas intended to represent an aggressive policy to combatunauthorized access to taxpayer records. Two years later,however, it is clear that this policy was not effectivelydesigned or implemented and penalties are neither sufficientlyconsistent nor severe to put an end to unauthorized access.

A key problem isthat unauthorized access or inspection is not itself a criminaloffense. In our view, it should be. We, at Treasury, as well asCommissioner Richardson, believe that the anti-browsinglegislation introduced by Senator Glenn, and a companion billintroduced by Congressman Archer in the House, developed with ouractive participation from the beginning of the process, a bill weworked together to draft, should be enacted as soon as possible.

As the Congress hasrecognized, appropriate penalties for IRS employees engaged inunauthorized access must be swift and sure if the IRS is toconvince its employees and the public that unauthorized access totaxpayer information will not be tolerated. Unauthorized accessrepresents a fundamental violation of the public's trust in theconfidentiality of tax returns and return information.

Significant progresswas made on this issue last year when the Economic Espionage Actof 1996 amended the Federal wire fraud statute, to makeunauthorized access by computer to information from anydepartment or agency of the United States a separate misdemeanoroffense. In view of these provisions, "browsing" aFederal computer is already punishable as a crime.

However, the billsbefore the House and Senate today would amend the InternalRevenue Code to specifically prohibit the unauthorized access orinspection of tax returns and return information, whether or notthe information is relayed to someone else, criminalizingactivities not punishable under current law. For instance, theywould prohibit the unauthorized inspection of non-computerizedtax information, such as "hard-copies" of paper returnsor return information. They would also prohibit unauthorizedinspection of State or local government computers (not covered bythe Economic Espionage Act amendments last year) when Federal taxinformation has been conveyed to them. Finally, even in casesthat are already prohibited under current law, the newmisdemeanor will provide prosecutors with an additional tool toobtain a plea bargain or to use in cases where they feel thatother provisions of the law should not be invoked.

While the newlegislation would strengthen our hand in putting an end tounauthorized access, it is important to remember that penaltiesare only a deterrence. In addition, the IRS needs to strengthenits computer systems to detect and prevent unauthorized accessbefore it occurs. Secretary Rubin and I have ordered the IRS toreport within one month on what it proposes to do bothmanagerially and technically to better address this problem. Letus be clear, however, that this problem is not one confronted bythe IRS alone. Every organization that depends on complexcomputer systems faces a similar challenge. Therefore, theSecretary and I have also asked the IRS to identify in its reportwhat best practices might be copied from other enterprises, bothpublic and private, which acquire and process sensitiveinformation, such as medical and financial records. As soon asthat report is complete, we will convene a special meeting of theModernization Management Board to agree on appropriate action.

In short, Mr.Chairman, Our policy is simple: Willfulunauthorized access will not be tolerated. Our goal is alsosimple: We want quick, appropriate and severe penaltiesfor those who violate these rules.

While it is vitallyimportant that Congress pass the legislation I have mentioned,let me share with you some of the administrative steps we havealready taken.

Under Treasury'soversight, the IRS has:

·Expanded use of the Electronic Audit Research Log ("EARL") to identify instances of unauthorized access;

·Created an "800" number offering tips about unauthorized inspections;

·Hired new managers in computer security; and

· Putin place disciplinary procedures that include provisions up to and including dismissal, for employees who are found to have violated the privacy policy.

In addition, IRSemployees have been provided with:

·Warnings to employees on unauthorized access to taxpayer records when documents are accessed by computer;

·Training on the privacy policy of § 6103;

·Regular refreshers on § 6103; and

·Privacy guidelines which explicitly condemn unauthorized browsing of taxpayer records;

We expect that theseactions as well as others enumerated in the GAO report issuedlast week will exert a strong deterrent effect on employees whomight otherwise be tempted to perform unauthorized inspection oftaxpayer records.

Management Reform

To improve ourability to handle this and the other issues facing the IRS,significant changes are needed. I would now like to turn to ourplan to improve the management and operation of the IRS.

Over the last year,the Treasury Department has focused intense efforts on improvingthe IRS. 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 most far-reaching changes in the way the IRS ismanaged and in the way it does its business in decades. It willbe the task of management at the IRS to manage informationtechnology better and to harness it toward the goal of bettercustomer service. What I would like to provide today is theTreasury Department’s view of how to establish a frameworkwithin which the IRS can best get its mission accomplished. I usethe phrase "get its mission accomplished" deliberatelyto underscore 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.

Secretary Rubin andI recognized last year in testimony before the AppropriationCommittees that the IRS's modernization program was, as we put itat the time, off track. We called for a "sharp turn"and made clear our determination to bring about change in the waythe IRS uses information technology and provides customerservice. And there has been change. Specifically:

èWe 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.

èThe 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.

èThe 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.

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

èThe 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.

èWe will be submitting a draft Request for Proposal for a Tax Systems Modernization prime contractor to Congress and to industry on May 15, ten weeks ahead of the required due date.

èOn May 15 of this year, we will submit to Congress an architectural blueprint which will clearly describe what modernization would and would not include and how the pieces fit coherently together.

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.

As we chart our newcourse, our focus will center on five critical areas to effectbroad change: (1) oversight; (2) flexibility; (3)budgeting; (4) tax simplification; and (5)leadership. Let me address each of these in turn.

First,Treasury has strengthened and made proactive our oversightof the IRS. We will consolidate the success to date of theModernization Management Board (MMB) by making it permanent andextending its mandate to cover the broad range of strategicissues facing the IRS. We will also establish a Blue RibbonAdvisory Committee to bring private sector expertise to bear onthe management of the IRS.

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,first, we have set up a Modernization Management Board comprisedof senior officials from Treasury, the IRS, and other parts ofthe Administration. The Modernization Management Board isdirected at overseeing the information technology programs andfunctions in many ways like a corporate board, approving majorstrategic decisions and investments.

Second, 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.

Second,we will enhance and strengthen the IRS’s ability to manageits operations, working with Congress and the union to improvemanagement flexibility in personnel and procurement. Inreturn, employees of the IRS, as in any well-managed business,will be held accountable for results. Second, we will enhance andstrengthen the IRS’s ability to manage its operations. TheIRS faces a multitude of restrictions -- restrictions that wouldbe unacceptable in the private sector -- that hamper its abilityto provide efficient service. For example:

• 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.

Third,we will work with Congress to help the IRS get the stable andpredictable funding it needs to operate more effectively.To this end, the FY 1998 budget proposes multi-year investmentsfor technology.

Fourth,we will work to simplify a tax code that covers 9,451pages. Just yesterday, the Administration proposed a series ofsimplification proposals as part of our plan for improve IRSoperations. These proposals represent a continuation of effortsto provide IRS with a simpler tax code to administer.

There are some who,based on the complexity of the tax code and on the problems atthe IRS, 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.

Fifth,leadership is crucial to performance. CommissionerRichardson has guided the IRS through difficult times and hasmade progress in many areas. As we move forward, we are committedto appointing a new Commissioner who has experience with thechallenges of organizational change, customer serviceimprovement, and information technology management that the IRSfaces.

Conclusion

This morning I havediscussed some of the specific steps we are taking and must taketo put an end to unauthorized access to taxpayer information. Inturn, I have discussed the broad five point plan that we believerepresents the best way to reform the management of the IRS.

Let us be clearabout one thing. In any discussion of the performance of the IRS,we must recognize the unswerving professionalism and dedicationof the 100,000 loyal IRS employees who are just completing thisyear’s filing season. They are not the problem.

Let us alsorecognize that while the IRS needs to be more responsive totaxpayers, to use technology more effectively, and to be moreefficient, it is likely that for the foreseeable future, theUnited States will have an income tax that taxes people based ontheir ability to pay. Given this, it is not possible to eliminatethe IRS, and it is vital that we have an IRS that functionseffectively. We must all work constructively toward this end.What we must not do is attack the IRS in order to promote otheragendas.

While we havefurther to go, the filing season which is about to end has beenour most successful to date. Let me share with you threestatistics which I believe demonstrate that IRS performance is onthe upswing. To date:

èElectronically-filed returns are up 25% over last year, while 35% more taxpayers have been served by IRS employees over the telephone;

èThe IRS web site has received over 95 million hits this fiscal year, a 162% increase; and

èThe accuracy rate for tax law questions continues its upward trend from 90% to 93%.

Reflecting thesuccess of this past filing season, Americans are recognizingthat the IRS has improved. A poll by the Associated Pressreleased last week reported that 7 out of 10 taxpayers give theIRS a positive rating on its ability to handle returns andinquiries. I have attached to this statement summary statisticson the current filing season.

In conclusion, weare making progress. But we have a long way to go. As we goforward, we, at Treasury and the IRS, want and need yoursuggestions and help, and I look forward to working closely withthis Committee to set the right course and stay on it. I will nowbe happy to answer any questions the Committee may have.