FROM THE OFFICE OF PUBLIC AFFAIRS

INTRODUCTION

Mr. Chairman, Congresswoman Maloney, distinguished members of this Subcommittee. I am pleasedto be here today to talk with you about Treasury’s plan toimplement lasting solutions to difficulties the IRS hasencountered. Later this morning, it is my understanding thatUnder Secretary Hawke and Assistant Secretary Murphy will testifyon the Department of the Treasury's actions to implement the DebtCollection Improvement Act of 1996. They will address progress inimplementing that important piece of legislation and improvingour system of debt collection.

Today, I would like to discussanother matter: the Department's oversight of the InternalRevenue Service. Before I begin I would like to thank theChairman, the Ranking Minority Member and the other members ofthis Committee for their leadership on the matter of IRS reform.In addition, I hope you will join me in recognizing and thankingthe more than 100,000 loyal and dedicated IRS employees whoearlier this week completed a successful filing season.

Management Reform

Mr. Chairman, recent announcementsof problems in modernizing the computer systems of the IRS havefocused attention on the shortfalls of the service and provokedan important debate about how best to improve the InternalRevenue Service.

Over the last year, the TreasuryDepartment has focused intense efforts on improving the IRS. ThisCommittee and others within the Congress have held extensivehearings on the matter. The National Commission on Restructuringthe IRS, led by Senator Bob Kerrey and Congressman Rob Portman,has also made a significant contribution to the ongoingdiscussion. A consensus has emerged among a wide group ofstakeholders, from business executives to Members of Congress toleaders of the National Treasury Employees Union. The message isclear: it is time for change

I believe that, in the next yearor so, we have the opportunity and the obligation to bring aboutthe most far-reaching changes in the way the IRS is managed andin the way it does its business in decades. 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 todayis the Treasury Department’s view of how to establish aframework within which the IRS can best get its missionaccomplished. I use the phrase "get its missionaccomplished" deliberately to underscore the fact that theIRS of the future will have to contract out, outsource, partnerwith the private sector, and rely on outside vendors to a muchgreater extent than the IRS of the present.

Secretary Rubin and I recognizedlast year in testimony before the Appropriations Committees thatthe IRS's modernization program was, as we put it at the time,off track. We called for a "sharp turn" and made clearour determination to bring about change in the way the IRS usesinformation technology and provides customer service. And therehas been change. Specifically:

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.

We 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.

è On 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 these are obviouslyonly the beginning. Everyone involved in this process atTreasury, the IRS, Congress, and the union has recognized thatthe problems at the IRS have developed over decades and will notbe solved overnight or even over a couple of filing seasons. Onlyif we confront problems directly -- from protectingtaxpayers’ privacy to using technology to making sure thephones are answered -- will we build an IRS for the 21st century.

As we chart our new course, ourfocus will center on five critical areas to effect broad change:(1) oversight; (2) flexibility; (3) budgeting; (4) taxsimplification; and (5) leadership. Let me address each of thesein turn.

First, Treasury has strengthenedand made proactive our oversight of the IRS. We will consolidatethe success to date of the Modernization Management Board (MMB)by making it permanent and extending its mandate to cover thebroad range of strategic issues facing the IRS. We will alsoestablish a Blue Ribbon Advisory Committee to bring privatesector expertise to bear on the management of the IRS.

Oversight of the IRS by theTreasury department is the best way to ensure the IRS’saccountability to the American people and to coordinate taxcollection with tax policy. Through the Treasury, the IRS is ableto bring concerns about the difficulty of administering taxchanges to senior Administration officials; I raise theseconcerns frequently in tax policy discussions with policymakersin the White House and throughout the Administration. Inaddition, the IRS is able to draw upon Treasury resources forcritical projects, as demonstrated by our current cooperation onthe Year 2000 conversion.

Going forward, first, we have setup a Modernization Management Board comprised of senior officialsfrom Treasury, the IRS, and other parts of the Administration.The Modernization Management Board is directed at overseeing theinformation technology programs and functions in many ways like acorporate board, approving major strategic decisions andinvestments.

We will also establish a blueribbon Advisory Committee, reporting directly to the Secretary ofthe Treasury, to bring private sector expertise to bear on themanagement of the IRS. This committee, composed of seniorbusiness executives, experts in information technology, smallbusiness advocates, tax professionals, and others, will meetregularly to make recommendations on major strategic decisionsfacing the IRS.

Second, we will enhance andstrengthen the IRS’s ability to manage its operations,working with Congress and the union to improve managementflexibility in personnel and procurement. In return, employees ofthe IRS, as in any well-managed business, will be heldaccountable for results. In addition, 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 the Commissioner'sability to effect change, we at Treasury will work with Congress,the Commission, and the union to improve flexibility: to bring onpeople with specific skills more quickly... to pay them morecompetitively... and to give them the training they need. Many ofthese changes will require legislation, and we expect to proposethis legislation to Congress later this year.

Let me add that in taking thesesteps, we are committed to maintaining the independence andfreedom of the IRS from political influence.

And a crucial part of any strategyfor improving flexibility has to be outsourcing. Just as privateindustry has found that outsourcing enables an organization tofocus on what it does best and to rely on others for what they dobetter, so government can benefit from outsourcing as well.Inevitably, resources hired from private companies will be moreflexible than those that become part of the IRS’s overhead.Where it is cost effective, but only where it is cost effective,we will pursue outsourcing strategies vigorously.

Third, we will work with Congressto help the IRS get the stable and predictable funding it needsto operate more effectively. To this end, the FY 1998 budgetproposes multi-year investments for technology.

Today, the IRS operates in alow-trust, short-tether budgeting environment. This makesrational 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, the Administration andCongress will have to give careful consideration to theappropriate size of the IRS budget. The budget has declined bymore than nine percent in real terms over the last two years. Onthe one hand, efficiency improvements are surely possible throughinformation technology, which should enable us to reduce thebudget. On the other hand, more customer service requires morepeople serving customers, and experience demonstrates thatinvestments in improving compliance have pay-offs in extrarevenues that far exceed their costs.

Fourth, we will work to simplify atax code that covers 9,451 pages. Just yesterday, theAdministration proposed a series of simplification proposals aspart of our plan to improve IRS operations. These proposalsrepresent a continuation of efforts to provide the IRS with asimpler tax code to administer. The proposals, which will savetaxpayers millions of tax preparation hours, contain more than 60legislative proposals that will simplify the tax code forindividuals, families and businesses, reduce the complexities andpaperwork burdens of the existing Internal Revenue Code andprovide substantial new tax rights to the American taxpayer.

There are some who, based on thecomplexity of the tax code and on the problems at the IRS, arguefor extreme measures such as a flat tax. I believe that suchproposals would not only unfairly increase the tax burden on themiddle class and hamper economic growth, they would not simplifythe administration of the tax code.

Fifth, leadership is crucial toperformance. Commissioner Richardson has guided the IRS throughdifficult times and has made progress in many areas. As we moveforward, we are committed to appointing a new Commissioner whohas experience with the challenges of organizational change,customer service improvement, and information technologymanagement that the IRS faces.

These five 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.

We have already moved quickly onthe next steps to formulating detailed proposals around thismanagement plan. I have directed the establishment of a series ofshort-term task forces to work with the new Commissioner, as wellas OMB and Congress, to develop the full details of theseproposals. Their final recommendations will be available soon.

In the coming months, the nationwill engage in a discussion of how to reform and renew the IRS.As we evaluate and improve the way we administer our taxes, we,at Treasury and the IRS, want and need your suggestions and help.

Let me briefly touch on onespecific topic -- the issue of unauthorized access by IRSemployees of tax returns and taxpayer information. From theDepartment’s perspective, total respect for the privacy ofinformation provided by taxpayers is integral to high qualityservice and voluntary compliance -- the foundation of our systemof taxation.

A key problem is that unauthorizedaccess or inspection is not itself a criminal offense. In ourview, it should be. That is why we, at Treasury, as well asCommissioner Richardson, supported the anti-browsing legislationthat was introduced by Senator Glenn in the Senate andCongressmen Archer in the House and was passed by both housesthis week.

This new legislation willstrengthen our hand in putting an end to unauthorized access. Inaddition, the IRS needs to strengthen its computer systems todetect and prevent unauthorized access before it occurs.Secretary Rubin and I have ordered the IRS to report within onemonth on what it proposes to do both managerially and technicallyto better address this problem. As soon as that report iscomplete, we will convene a special meeting of the ModernizationManagement Board to agree on appropriate action.

With respect to browsing, Mr.Chairman, Our policy is simple: Willful unauthorized access willnot be tolerated. Our goal is also simple: We want quick,appropriate and severe penalties for those who violate theserules.

Conclusion

This morning I have discussed thebroad five point plan that we believe represents the best way toreform the management of the IRS.

But we must recognize that whilethe IRS needs to be more responsive to taxpayers, to usetechnology more effectively, and to be more efficient, it islikely that for the foreseeable future, the United States willhave an income tax that taxes people based on their ability topay. Given this, it is not possible to eliminate the IRS, and itis vital that we have an IRS that functions effectively. We mustall work constructively toward this end. What we must not do isattack the IRS in order to promote other agendas.

While we have further to go, thefiling season which has just been completed has been our mostsuccessful to date. Let me share with you three statistics whichI believe demonstrate that IRS performance is on the upswing. Todate:

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

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

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

Reflecting the success of thispast filing season, Americans are recognizing that the IRS hasimproved. A poll by the Associated Press released last weekreported that 7 out of 10 taxpayers give the IRS a positiverating on its ability to handle returns and inquiries.

In conclusion, we are makingprogress. But we have a long way to go. I will now be happy toanswer any questions the Committee may have.