FROM THE OFFICE OF PUBLIC AFFAIRS

HOUSE WAYS AND MEANS SUBCOMMITTEE ON OVERSIGHT

I am pleased to be here today to talk with you about Treasury’s plan to achieve lasting improvements in the performance of the IRS and to discuss the report of the National Commission on Restructuring the IRS on this same subject. Before I begin, I would like to thank the Chairman, the Ranking Member and the other members of this Committee for their leadership on the matter of IRS reform. In addition, I hope you will join me in recognizing and thanking the more than 100,000 loyal and dedicated IRS employees who carry on the unpopular but vitally important task of collecting 95% of our government's revenue.

Madame Chairman, over the last year, we have been involved in an important and historic debate about how to improve the operations of the IRS. The National Commission on Restructuring the IRS, under the joint chairmanship of Senator Kerrey and Congressman Portman, has done much to illuminate that debate and drive it forward. Everyone involved in the Commission has worked hard to understand the complex problems facing the IRS, and the Report contains many constructive suggestions for change.

In fact the Administration and the Commission have traveled very similar paths in their search for a better IRS. We agree on the need for change at the IRS: on the need for more effective oversight, increased continuity, and greater access to outside expertise. This finds us making many of the same recommendations in important areas. However, as Secretary Rubin has said, we part company with the Commission on the crucial question of how the IRS should be governed. Today I will be focusing my remarks particularly on this issue.

First, however, I would like to briefly describe some of the progress we’ve made on improving the IRS and how we intend to push things forward in our forthcoming legislation. Our aim, Madame Chairman, as always, is to build a modern, efficient and accountable IRS to serve

the American taxpayer into the 21st century. As you will see, we believe that objective is getting closer every day. I will then go on to explain why, for all the many areas of agreement between us, the Administration believes that the Commission’s proposals for IRS governance are fundamentally flawed; indeed, they would be more likely to aggravate its problems than solve them.

MANAGEMENT REFORM

Madame Chairman, for some time now we have been engaged in a many-sided effort to improve the IRS. Longstanding problems in modernizing the computer systems of the IRS initially focused attention on the shortfalls of the information technology of the Service. At the same time, improvements in customer service in the private sector have led the American people to want interaction with the IRS to be as efficient and straightforward as with credit card companies and other private-sector financial institutions. This has occurred at a time when the IRS is also coping with an increased workload. In 1997, the IRS processed over 200 million returns.

Over the last few years, the Treasury Department has focused intense efforts on improving the IRS. We are committed to change and real change is underway. Our goal is to create a more efficient, modernized and taxpayer-friendly Internal Revenue Service. This Committee and others in the Congress have held extensive hearings on the matter. These efforts and the work of the Commission have helped forged a consensus among a wide group of stakeholders, from business executives to Members of Congress to leaders of the IRS and the National Treasury Employees Union, on the need for change.

I believe that in the next year, we have the opportunity and the obligation to bring about the most far-reaching changes in decades in how the IRS is managed and how it does business.

Indicators of progress

Last year, in testimony before this body, Secretary Rubin and I recognized that the IRS's modernization program was, as we put it at the time, "off track". We called for a "sharp turn" and made clear our determination to bring about change in the way the IRS uses information technology and provides customer service. And there has been change. The results, while still in their early stages, are already producing benefits and give the IRS a solid foundation on which to build. Some examples of the steps we have taken include the following:

• Our new Chief Information Officer, Art Gross, has cut and collapsed the number of tax systems modernization projects from 26 to nine.

 

• In May 1997, after many months of intense preparation, Mr. Gross released the IRS’s Blueprint for Technology Modernization, which was well-received in the professional information technology (IT) communities both inside and outside the government. This Blueprint represents the first comprehensive attempt to form a strategic partnership on IT with the private sector.

 

• The IRS has also increased outsourcing. The percentage of work performed by contractors 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 136.

 

• The IRS is now working with a top marketing firm on an electronic filing marketing strategy to bolster taxpayer participation in the entire line of IRS electronic filing products, including Telefile, On-line filing, 1040-PC filing, and traditional electronic filing. The bureau is also putting forth a Request for Information (RFI) that will produce opportunities for partnering with the private sector to increase electronic filing.

 

The IRS has taken many steps to improve customer service. For example:

• A joint Treasury, IRS, National Performance Review (NPR) task force is concluding a 90-day study of customer service. The study has drawn on the experience of front-line employees and has focused on the issues that touch customers most deeply. Among other tasks it will identify ways to improve notices sent to taxpayers, the quality of walk-in center assistance, and training.

 

Our efforts are paying off. For example:

• The GAO found that 50.9% of calls by taxpayers to IRS taxpayer assistance were answered in 1997. Although this percentage remains far too low, it has more than doubled from only 20.1% in 1996.

 

• In fiscal year 1996, the IRS redesigned, combined and eliminated notices to taxpayers, cutting the number of different notices by 12 which resulted in 18 million fewer taxpayer notices being issued and mailed. In 1997, it eliminated another 20 types of notices, resulting in 3 million fewer notices being mailed.

 

• As of July 4, the number of returns filed electronically by paid preparers rose from 12.1 million in 1996 to 14.4 million in 1997. Meanwhile, filing over the telephone through the IRS' Telefile program has risen from 2.8 million in 1996 to 4.7 million this year. As a result, the percentage of individual tax returns filed electronically has risen from 13.1% in 1996 to 16.5 % in 1997, or about one in six taxpayer returns.

 

These improvements, while far from sufficient, are meaningful. Looking ahead, we are committed to raising the standards of IRS performance even higher.

• As part of the Government Performance Review Act process, we have established tougher targets for a variety of performance measures including improvements in telephone service, to which I alluded above, reductions in the cost of collecting revenue and increases in the percentage of revenue collected electronically. For example, in fiscal year 1997, we have set a target of collecting 24.7% of revenues electronically. In 1998, we will increase that target to 48.4%.

 

In short, we have made a good start toward building the modern, efficient and accountable IRS the American people deserve. But everyone involved in the process - at Treasury, the IRS, Congress and the union - recognizes that problems that have been building for decades do not get solved overnight, or even over a couple of filing seasons. Further structural changes will be needed to propel the reform process forward and build an IRS for the 21st century. Let me turn now to the Administration’s plans to make these changes come about.

OUR APPROACH TO REFORM

In March of this year, the Administration unveiled a five-point plan outlining our approach to achieving long-term improvements in IRS performance. Our approach includes measures to strengthen oversight, improve leadership, increase flexibility, improve budgeting procedures and simplify the tax code that the IRS administers. As you know, we have begun to make progress in all these areas. Today, I want to focus on our forthcoming legislative proposals to bring our vision of a modern and responsive IRS even closer. These will guarantee lasting improvements in oversight and accountability at the IRS while giving it greater access to outside expertise and more internal flexibility.

Improving Governance

Oversight and Accountability

First, to improve oversight and accountability, we will build on the success of the Modernization Management Board by making it permanent and extending its mandate. The IRS Management Board (as it will be called) will be made up of senior career and non-career officials from Treasury, IRS, OMB, and the Office of Personnel Management. In addition, one board member will be the Taxpayer Advocate, whose presence will give taxpayers a stronger voice in IRS governance.

The board will function much like a corporate board of directors, meeting once a month to assist the Secretary on high-level IRS management issues such as operations, modernization and taxpayer assistance and services. As now, the Board will be chaired by the Deputy Secretary of the Treasury.

It will also prepare semiannual reports to the President and the Congress. An Executive Committee will review strategic decisions, including significant reorganizations, performance measures, budgetary issues, major capital investments and compensation matters.

With greater oversight will come greater responsibility. Our legislation will require the Secretary and Deputy Secretary to come to Congress twice a year to report on the operations of the IRS. This will ensure that future occupants of these positions are required to demonstrate the same full-time commitment to the IRS that Secretary Rubin and I have shown over the past year.

Access to private-sector expertise

Second, the administration’s proposals recognize the undoubted need for the IRS to have greater access to private-sector expertise. To achieve this we intend to establish an Internal Revenue Service Advisory Board that reports directly to the Secretary of the Treasury. This Board will include up to 14 individuals, each appointed by the Secretary and serving a staggered 3-year term. Members will be selected so as to represent the broadest range of outside interest and expertise, including taxpayer groups, small and large-scale businesses, nonprofit or educational organizations and tax professionals as well as state tax administrators, technology leaders, and experts in customer service.

The Internal Revenue Service Advisory Board will meet quarterly to help the Secretary find ways to improve the management and operations of the IRS and will provide recommendations about IRS policies, programs and plans. The public will receive a yearly account of the board’s contribution in the form of an Annual Report to Taxpayers.

Greater continuity

Finally, like the Commission, we want to provide for increased continuity at the IRS within a framework of clear accountability to the Executive by appointing the IRS Commissioner on the basis of a fixed, five-year term. We have identified a potential candidate for Commissioner of the IRS with a background in management of information technology. The Commissioner, as now, will be appointed by the President with the advice and consent of the Senate and will be removable at will.

To sum up, I am confident that the four steps I have outlined - creating a permanent management board, requiring the Secretary and Deputy Secretary to report to Congress semi-annually, creating an advisory board comprised of outside experts, and appointing the Commissioner to a fixed five-year term - will strike the proper balance between helping the IRS operate more effectively and making it more accountable and responsive to private-sector expertise.

Flexibility

We are all agreed that the IRS needs to have greater flexibility in both selecting and managing personnel and in procurement.

We are exploring options in the area of recruiting and retaining needed technical and professional staff with critical skills. For instance, we intend to seek flexibility to set the pay for a limited number of critical positions at higher than usual salary rates. We will ask for legislation to liberalize the pay limits for outside experts and consultants. In addition, to give the Commissioner greater flexibility to address short-term staffing needs at the most senior levels, the bill will provide greater authority to appoint limited-term and emergency Senior Executive Service staff.

We will also be seeking authority to enable the IRS to work with the Union and the Office of Personnel Management (OPM) to develop and implement personnel management demonstration projects. This authority - a streamlined version of provisions that have been in the law for many years - will support IRS efforts to try out new ways of doing business.

In addition, our legislation will contain a range of mechanisms to make it easier for the IRS to make strategic long-term purchases, streamline the procurement cycle for major acquisitions and encourage the development of long-term strategic partnerships with reliable, competitive contractors. These mechanisms include a two-phase competitive acquisition process that promotes efficient and effective communication to identify the best fit between government needs and marketplace capabilities and allows limited recompetitions for continuing requirements. The legislation would further enhance the bureau’s ability to buy information technology in more manageable, modular increments.

Stable budgeting

Finally, let me add briefly that the Administration has not lost sight of the need to obtain more stable and predictable funding for the IRS. The report of the National Commission on Restructuring the IRS was clear on this point. It recommends that "the IRS should receive stable funding for the next three years so that its leaders can undertake the proper planning to rebuild its foundation." This recommendation pertains to the budgets for tax law enforcement and processing, assistance and management.

Similarly, the Commission believes that stability and certainty are needed for IRS’ technology and capital investment budgets. The President’s FY 1998 budget proposes multi-year investments for technology in order to ensure this stability. We are glad that both the House and Senate appropriations subcommittees have acknowledged this need and that they have proposed funding for FY 1998.

THE RIGHT REFORM MIX

I come now to my more detailed comments on the IRS Commission’s Report. At bottom, the Commission’s and the Administration's diagnoses of the IRS's problems are strikingly similar. Like the Commission, we believe that more effective governance, flexible management practices, and stable budgeting hold the key to an IRS that can meet the needs and expectations of American taxpayers into the next century. We further agree with the Commission that efforts to improve governance ought to focus on injecting greater accountability, continuity and outside expertise.

As I have shown, the common ground between us and the Commission does not stop at diagnosis. We have also found ourselves coming up with many of the same prescriptions in drawing up our legislation. In our view, however, the Commission’s proposal would fail to achieve the objectives we share. What is more, it would endanger the service’s ability to serve the public with the efficiency and integrity we demand of such a core part of our government.

The Commission has proposed that the IRS be governed by an outside board of private citizens who serve on a part-time basis. This, on the grounds that it "will bring accountability, continuity and expertise to executive branch governance and oversight of the IRS". While perhaps superficially attractive, we believe the proposal will deliver none of these benefits. Far from increasing oversight and continuity, the change would subject the IRS to a grand and uncertain experiment, fraught with legal and administrative uncertainties. The service, in such a setting, could find it difficult to function at all, let alone do so more effectively. Meanwhile part-time outsiders with neither the time nor the insulation from special interests of full-time public officials would be running a core government agency, with possibly grave implications for public confidence in the IRS and the Service’s confidence in itself.

Unacceptable Risks

Instead of enhancing oversight, the insertion of the board into IRS governance arrangements would actually alter the present clear line of accountability between the IRS leadership and the American people as embodied in their elected President.

The Commission has pointed out, correctly, that the Treasury has not always met the IRS's need for consistent strategic oversight and guidance. But to respond to these past failings by inserting a new private-sector management board, would, in our view, be a large step in the wrong direction.

The division of authority between the Secretary and the Board would not only create internal confusion, but would significantly increase the likelihood of litigation; disgruntled taxpayers might well challenge the authority of the entity that had made a decision with which they disagreed. In addition, the Commissioner's authority would be vulnerable to Constitutional challenge on the grounds that his appointment by the Board violates the Appointments Clause.

The Appointments Clause of the Constitution states that principal federal officers must be appointed by the President with the advice and consent of the Senate, but that Congress may provide that inferior officers may be appointed either by the President alone or by "Heads of Department" or "Courts of Law".

It might by considered ironic that a Commission that has done so much to highlight the importance of the IRS to American life should apparently see the IRS Commissioner as an inferior office. At any event, it is not clear that the proposed board would constitute a "head of department." Thus, the Commission's proposal does not comply with the mandates laid down in the Appointments Clause.

These and the other structural concerns would leave the IRS' actions open to serious legal challenges that could impede the flow of 95% percent of our nation's revenue. It would be the height of irresponsibility, at a time when we are trying to balance the Federal budget for the first time in a generation and facing difficult decisions about our spending priorities, to create a legally suspect regime that could threaten funding for everything from national defense to the education of our children.

Although the Commission’s proposal purports to leave Treasury in charge of developing tax policy and performing the IRS' law enforcement function, it contravenes that notion by giving the board broad authority over the budget and personnel of the IRS. In essence, private-sector CEOs would control the purse strings and hiring practices at one of the most powerful government agencies.

At best, the proposal would split tax policy and law enforcement between Treasury and the Board; at worst, it establishes the Board as a de facto policy voice. Rather than fragmenting accountability, the legislation I have outlined here today will strengthen it.

Our day to day involvement with the IRS' management direction serves a critical purpose that would be undermined by the Commission's proposals. This is the capacity to treat tax policy and tax administration as they should be treated: as two sides of the same, public, coin. It is no accident that close and institutionalized coordination between the IRS and Treasury’s Office of Tax Policy has been maintained without interruption for well over 50 years.

Even if the many concerns I have mentioned were to be overcome, I do not believe that a private-sector board would meet frequently enough to address the critical and complicated decisions facing the Service over the next decade. Urgent matters requiring the board’s immediate attention and input might have to wait a month or more until the next board meeting, by which time these busy executives would somehow have to have fully prepared themselves to deal with the issue - if, that is, it were not by then too late to act.

The challenges the IRS faces and the size and complexity of the institution demand more than the part-time and sporadic attention that the Commission's proposed board would provide. Clearly, the problems of the IRS show that Treasury in the past failed to exercise appropriate oversight. But things are different now. And the measures we are proposing will make sure they stay different, not merely in this Administration, but in the many to come. Today, Secretary Rubin and I, as well as other Treasury officials, are always available to discuss pressing issues with the IRS - and frequently do so.

The IRS's relationship with Treasury provides an effective mechanism for presenting to senior Administration officials the IRS's analysis of the impact of proposed tax changes on tax administration. Secretary Rubin and I raise such concerns frequently in tax policy discussions in the White House and elsewhere throughout the Administration. Furthermore, Treasury oversight allows the IRS to draw upon Treasury resources for critical projects, as demonstrated by our current cooperation on the Year 2000 conversion. Under the Commission's proposed governance structure, this much-needed synergy between the IRS and the Treasury would be lost.

Outsider control, outsider interests

The Commission's desire to import private citizens to oversee the IRS's operations raises another major worry. Once again, the stated objective is the same as the Administration's - namely to open the IRS to wider sources of outside expertise. But, in our view, attempting to achieve this by granting decision-making powers to "high-stature" individuals from the business world would expose the service to dangerous and unacceptable risks of conflicts of interest. The IRS needs to be managed by officials whose full-time, sworn responsibility is to uphold and enforce the law. Anything else risks creating the appearance, if not the reality, of serious conflicts of interest in the management and oversight of the IRS's activities.

In our view, creating a new management board to run the IRS, comprised mainly of individuals who spend the bulk of their days in private business, would run precisely this risk. The Report states that board members would be subject to the same ethics laws as the individuals now associated with the governance of the IRS, but the Commission failed to recognize that those laws impose significantly diminished restrictions on outside financial interests and conflicting activities of part-time employees.

In any event, it is clear that individual board members - who will continue to draw private-sector salaries - will face an uphill struggle ensuring that their private interests and their newly acquired, part-time public duties do not conflict with one another. Under the Commission's proposal, for example, corporate executives whose companies may be automatically subject to yearly audits could end up determining the audit budget for the IRS and its strategic enforcement activities.

At best, the need for board members to recuse themselves from a wide range of matters facing the IRS to avoid conflicts will reduce their ability to provide effective input, even on a part-time basis. At worst, the new structure could fatally weaken the public's confidence that the IRS administers and enforces the nation's tax system fairly and even-handedly.

In both the report and subsequent correspondence, defenders of the Commission's proposals have denied that such conflicts will arise, on the grounds that the new board would not be involved in specific law enforcement matters. Yet the board’s sweeping control over budget and personnel would put it knee deep in law enforcement issues. In fact, decades of experience suggest that, just as tax policy questions cannot be separated from tax administration, tax enforcement and administration are so intertwined as to be, at times, indistinguishable.

The Report claims that the job of the IRS is solely to be an "efficient financial management organization". This claim is both improper and incorrect. The IRS is, rather, an essential governmental agency charged, under the supervision and authority of the Secretary, to enforce the internal revenue laws enacted by Congress and the President.

As Acting Deputy Attorney General Waxman has noted, this legal mandate means that the IRS can be duty-bound to pursue enforcement activities that, while fully justified in terms of the broader public good of protecting society from crime, may not be justifiable on narrow financial grounds. One does not have to go back to Al Capone to find examples of such activities; during the past three fiscal years, the IRS was second only to the Drug Enforcement Administration in its participation in Organized Crime Drug Enforcement Task Force investigations.

We share the concerns of the Attorney General's office that a private board along the lines proposed by the Commission might tend to focus solely on generating revenue. This, at the cost of undermining the IRS's longstanding contribution to important law enforcement missions such as combating domestic and international organized crime and money laundering. The long-term social benefits of an active and long-term commitment of IRS personnel and resources to such missions are hard to translate into dollars and cents. The worry must be that they would not be given due weight by private, part-time "special government employees" whose remit is to serve the public purse and not, more broadly, the public good.

Finally, let me add that in the public sector, management by a board is notoriously difficult. In the private sector, financial markets, shareholder voting rights and a well established body of law around corporate governance as well as the imperative of profit, provide checks on the actions of a board of directors. In the public sphere, no such checks exist. For these reasons alone, the GAO counseled against vesting oversight of an agency like the IRS in a separate board.

To sum up, I believe the management board proposed by the Commission will do little to enhance effective oversight or boost continuity within the IRS. Put simply, the collection of the revenues that underpin this nation's government is too important to subject to this degree of risk - particularly in return for such uncertain benefits.

Conclusion

In conclusion, this morning I have discussed some of the specific steps we are taking to modernize the IRS. We have already made considerable progress. But we have far more to do. The legislation that I have described is necessary to continue the job of building the IRS of the future. Its key elements -- reforming governance and improving management flexibility -- will give us the tools we need to improve our tax administration system, not just this year but for years to come.

The subject of governance, in particular, is one where I believe we must exercise extreme care. This morning I have described our approach to this critical issue. I have also highlighted areas where we agree and where we disagree with the proposals of the Commission on Restructuring the IRS. In coming weeks and months, I look forward to working with members of the Commission, with members of this committee, with the union and with other interested groups in building on the many areas of agreement that exist among us, many of which will be reflected in the Administration's legislation.

We have made tremendous progress over the past year in identifying the need for change in the IRS and we are starting to make that change a reality. The task for the years ahead will be to keep this process of renewal moving forward. Between us we can build an IRS that meets the high standards the American people set for it - and the demands of a new century. I hope we can all share a commitment to doing this without at the same time jeopardizing the ethos of dedicated public service that has, rightly, made the US system of tax collection and enforcement the envy of the world.

Thank you, Madame Chairman and members of the Committee. I would welcome any questions.