FROM THE OFFICE OF PUBLIC AFFAIRS

Thank you for that kind introduction.

One of my purposes in being here today is tothank the Tax Section for your assistance to the IRS and theTreasury Department. If we have made any progress in the last fewyears in our efforts to improve the Service, it has only occurredwith the support and the cooperation of the practitionercommunity.

The 5,000 plus pages of our tax laws requireextensive interpretation if our system of voluntary taxself-assessment is to work fairly and effectively. The federalagency that affects 200 million Americans every year will onlywork well if it can partner closely with groups like yours thataid the public with the interpretation of our tax laws.

As you know, the even-handed administration ofthe law, and the adherence of the IRS to the rule of law make ourtax system work. However, anything that undermines America’sconfidence in the even-handed, professional enforcement of thetax laws puts in jeopardy the revenue collection system thatfunds 95% of the operations of the Federal Government.

I am here today to urge you to work with us on aprogram of reform at the IRS that will fix real problems and makeimprovements at the IRS without jeopardizing the basic values offairness and integrity that lie at the heart of the tax code.

My conclusions about the IRS are the product of avariety of experiences. Of course, my three years as GeneralCounsel and my five years of service at the Department would giveanyone familiarity with our tax system, however, the last yearhas been unique.

My experience as a member of the IRSRestructuring Commission was in many respects surprising. Iexpected to immerse myself in technology issues. Instead, I foundmyself in the middle of a debate about the best way to manage afederal agency. I want to review with you my conclusionsregarding the Commission’s work and particularly the legaland tax policy issues raised by the Commission’srecommendations.

On June 25, 1997, the National Commission onRestructuring the IRS issued its final report andrecommendations. Five of the commissioners, including myself,dissented from that report and filed our own views. Recently,legislation has been introduced by the Commission’sco-chairs.

I want to emphasize that all the Commissionersagreed on a number of significant points. Principal among thesepoints was that change in the IRS’s performance and serviceto taxpayers is needed. We agreed that the IRS needs to improvecustomer service, its use of technology, and encourage moreelectronic filing. We agreed that to achieve those goals,Congress must provide the IRS with adequate and stable fundingand with greater management flexibility. And of course, we allagreed that we need to simplify the tax code.

We also agreed that the Executive Branch mustprovide the IRS with more institutionalized oversight, includingproviding greater continuity in IRS leadership. We agreed thatthe IRS would benefit from more private sector input,particularly in the technology area.

The Administration has acted on these sharedgoals.

· On Thursday, the President announced that he would nominate Charles Rossotti to be the next Commissioner of the IRS. As Secretary Rubin stated then, Mr. Rossotti is uniquely qualified to lead the IRS into the 21st century. Mr. Rossotti is Chairman and founder of American Management Systems, Inc., an independent computer systems and consulting firm with 7000 employees. From 1965-70, Mr. Rossotti served in a number of senior positions at the Defense Department.

· The President has institutionalized IRS oversight through the establishment by Executive Order of the IRS Management Board.

The IRS Management Board is an interagency working group comprised of career and non-career governmental officials from Treasury, IRS, OPM, and OMB that will directly support the Treasury Secretary’s oversight of the IRS. In this respect, it operates much like the National Security Council in advising the President on important national security issues.

· Recently, the Vice President ordered a study led by the National Performance Review to identify ways to enhance customer service at the IRS.

· Treasury has proposed 59 tax simplification initiatives, 43 of which are contained in the tax legislation Congress approved this week.

· Treasury and the IRS have revamped the IRS computer modernization program by cutting and collapsing the number of technology contracts from 26 to 9, recruiting new leadership and publishing a well received "blueprint" for the technological future of the Service.

 

Our next step will be the introduction oflegislation mandating and enabling additional constructive,positive -- yet not radical -- change. Our legislation willaddress the need for increased accountability, continuity,workforce and procurement flexibilities, stable budgeting, andprivate sector input at the IRS. The Treasury Department isworking to finalize this legislation for introduction inSeptember.

Therefore, from the perspective of this member ofthe IRS Commission, the Administration has taken to heart thecore concerns of the Restructuring Commission. We areimplementing an action plan with regard to each critical area:oversight, simplification, technology, budget, customer service,and workforce flexibilities. Nevertheless, we still have somefundamental differences which were the basis of my dissent.

The differences have several root causes in myview. The Commission majority, even with the best of motivations,ignored or misinterpreted several key points in reachingadditional, controversial conclusions.

The errors came together in its proposal for aboard of governors with sweeping powers to run the IRS, whichwould be controlled by private sector, part-time businessexecutives. The board would be "within the TreasuryDepartment" but "independent," a legal andpractical contradiction that illustrates the confusion at thecore of this idea.

The board supposedly would have no role in taxpolicy, but, at the same time, its sweeping powers would exceedthe current powers of the Secretary of the Treasury.

Rep. Portman and I may disagree on how extensivethe Board’s powers will be. However, for all of us who havebosses, it is easy to understand these facts: the board picks theCommissioner; the Commissioner reports to the board; the boardevaluates, compensates and if it chooses, fires the Commissioner.You tell me who will run the IRS. You tell me who will be theboss of the IRS.

In my view, in recommending the establishment ofthis board the Commission ignored the following critical points:

First, the IRS is a governmental law enforcementagency. If you give a board any real power over the IRS, such aspower over the agency’s budget priorities -- let alone thesweeping powers the Commission advocates -- it will be knee-deepin law enforcement. As the Department of Justice wrote to DeputySecretary Larry Summers on June 23:

"... [The Justice Department is] concerned that the creation of an independent, part-time, and largely private sector IRS Board of Directors, with its ‘overall responsibility for IRS governance,’ may well present a significant and unjustifiable risk to important law enforcement missions, such as combating domestic and international organized crime, narcotics trafficking, and money laundering. Simply put, we fear that a private sector Board will put too much emphasis on generating revenue, and not place enough emphasis on law enforcement."

 

This is no surprise to the American public. Theyknow the IRS is a law enforcement agency. They know that AlCapone was put behind bars because of the work of IRS lawenforcement. But they may not know what you know, such as --

-- the IRS is part of drug task forces in virtually every judicial district;

-- the IRS was at the front lines of the recent anti-money laundering efforts in New York City that has limited the flow of the dirty money from drug sales to Columbia;

-- the IRS, working with authorities in New York, Pennsylvania and Georgia, cracked a number of fuel tax evasion schemes, including some involving Russian organized crime; and

-- the IRS is deeply involved with the FBI in efforts to curb health care fraud.

 

In addition to the IRS’s criminal lawenforcement responsibilities, its civil law enforcementresponsibilities are complex and unsuited to a private sectorboard. For example, many of the IRS’s examination andcollection determinations involve discretionary judgments thathave significant legal consequences, such as the imposition ofpenalties and the use of levies.

Over 50% of the IRS budget of $7.2 billion goesto enforcement. More than 50% of its 102,000 employees areengaged in civil and criminal law enforcement.

You will not find this picture of the IRS in theCommission report. They ignored it. As a consequence, no thoughtwas given to how a private sector board with private sectorsensibilities would deal with one of the largest law enforcementorganizations in this country. This is a grave error.

Second, tax policy and tax administration areinextricably intertwined. Every person in this room knows this.It is at the heart of the history of the ABA Tax Section. Yourinput in such matters as proposed regulations, in addition toparticipation in forums such as the Commissioner’s AdvisoryGroup, has helped bring about better tax policy through closecooperation with the IRS and the Treasury.

Effective administration of the Code requires amarriage between tax policy and tax administration. TheCommission proposal is a divorce -- a divorce on uncertaingrounds that will engender confusion and litigation as the courtssort out who does what -- a formula for disaster. It does justwhat the ABA Tax Section advised the Commission not to do: itsplits the tax function in two. This is a grave error.

Third, the Commission made a mistake that membersof this organization would never make. You understand the legaland economic checks placed on private sector boards of directorsthat make them work: the pressures of shareholders,directors’ liability and simple profit goals. In the publicsector, the GAO, among others, has found that boards are lesseffective than single executives in leading large agencies. Ifirmly believe that the concerns of the GAO would be multipliedby the type of board contemplated by the Commission. It would berisky and potentially harmful to our revenue collection system toempower part-time, private sector CEOs to attempt to balancecomplex public policy goals like privacy, law enforcement andrevenue collection.

Let me give you some examples of the real lifeproblems this private sector board would face. Think about, ifyou would, how they would grapple with these problems based upontheir ongoing employment in the private sector.

· Should tax auditors be reassigned to answering the telephones during the filing season?

· Which effort should be given a higher priority: enforcing the foreign tax credit rules or combating earned income tax credit fraud?

· What resources should be devoted to the large case examination program?

 

These are real questions in the real world thatare at the heart of the management of the IRS. No private sectorboard should be allowed to make these and similar decisions. Thisis not to call into question the integrity of a particularindividual; the fact is that in decision making, where you sitcounts for a lot: anyone with full-time loyalties to acorporation and full-time responsibilities to shareholders willreflect those loyalties and responsibilities in decision making.These loyalties and responsibilities inevitably will conflictwith their duties on the board.

Which brings me to the fourth problem. And it isperhaps one of the most readily apparent and fundamentalweaknesses in the Commission’s proposal, namely, thepotential conflicts of interest and appearance problems createdby this private sector board with vast power over every American.

This issue really does not require extensiveanalysis. The Commission proposal explicitly states thatindividuals with experience from the areas of informationtechnology, customer service and management of large serviceorganizations will be appointed to the board. Imagine the pictureof the CEOs of IBM (information technology), American Express(customer service), GE (organization development) and H. and R.Block (service organization) meeting to discuss the appropriateaudit policy for the IRS; this is troubling on its face. But theproblems go deeper than that: the top of an organization sets thetone for the whole organization. The Commission’s proposalsends a strong signal that the government and the private sectorare the same, that law enforcement is not a priority, and thatpublic confidence in even-handed administration of our tax lawsis secondary to turning the IRS into an American Express on thePotomac.

That’s just part of the ethical/conflictsproblem. Another part of it is that these board members will besubject to lower ethical standards than all the other seniorofficials at the IRS and Treasury. The board members will betreated as special government employees. As such, they will beallowed to keep their full-time private sector jobs and incomes.

Let me be specific about this. Sections 203 and205 of Title 18 of the U.S. Criminal Code provide for criminalpenalties if a government employee acts as an "agent foranyone" before the agency in which he or she serves. Thisapplies to me and to all other full-time federal employees.However, these provisions include an exemption for specialgovernment employees. Such employees can appear on behalf ofprivate parties in matters before the agencies in which they areserving with certain limitations. The Portman legislationspecifically references this exception to provide a safe harborfor the board members.

Therefore, the Chairman of XYZ can serve on theIRS board on Monday in which general procurement policies andstrategies are discussed and then turn around on Tuesday andrepresent XYZ in a procurement contract pending before the IRS.He can get a bonus from his company for his procurement work atthe IRS. How long would the American people stand for that?

Finally, accountability to the President byExecutive Branch officials is at the center of our Constitutionalform of government. Legal authority on this point ranges from theFederalist Papers to the last decision handed down by the SupremeCourt this past term-- the Printz decision. In PrintzJustice Scalia wrote:

"The Constitution does not leave to speculation who is to

administer the laws enacted by the Congress; thePresident,

it says ‘shall take care that the Laws befaithfully executed,’

personally and through officers he appoints ....The insistence

of the Framers upon unity in the FederalExecutive --- to

ensure both vigor and accountability -- is wellknown."

The Commission’s proposal ignores thesedeeply rooted Constitutional precepts. By removing from thePresident the right to appoint the IRS Commissioner, an importantofficer of the Executive Branch, and handing that authority to apart-time board that would not be the "head of aDepartment," the proposal violates Appointments Clauseprinciples.

Some have asked me recently what the problem isthat the board solves. In reality the board is a solution lookingfor a problem. The Commission was originally created to addressthe problems the IRS had with its computer modernization program.However, as the Commission’s year of hearings progressed,its members came to realize that the Treasury and the IRS hadturned the corner on a troubled computer modernization program,and that there was no workable big idea left to implement.

I know Senator Kerrey and Congressman Portmanwere well motivated. But the problems at the IRS will not befixed by this board.

In fact, attacking the IRS can unleash otheragendas, like the push for a flatter tax. If you cannot changethe structure of the tax code or the structure of government,some people turn to changing the structure of the IRS as abackdoor means of achieving those goals.

But care must be taken. We should not tamper witha revenue collection system that Treasury has successfullyoverseen through, among other things, a Civil War, two WorldWars, and now the longest period of peacetime prosperity inmodern history. We would be wise to read the words of that greatand first Treasury Secretary, Alexander Hamilton, in FederalistPaper Number 70.

In Number 70 Hamilton wrote about his oppositionto boards and councils in the Executive. He thought they woulddestroy accountability. Excuses would be made that "I wasoverruled by my council" or that "the council was sodivided in its opinions that it was impossible to obtain a betterresolution...."

In short, he said boards in the Executive"conceal faults and destroy responsibility."

The Tax Section has always exercised itsresponsibility to speak to the important tax issues of the day.Your collective wisdom and input is needed in this debate.

I have tried to lay out today in what I hope wasa rational explanation supported by relevant legal authority inthe U.S. Criminal Code, corporate law principles, Supreme Courtrulings and the teaching of the Founders for my view that aprivate sector board running the IRS is a fundamentally flawedidea.

Now it is time for the ABA and the Tax Section tobe heard on this matter. Your experience with, and commitment togood tax administration as advocates for your clients -- thetaxpayers of America -- make you uniquely qualified to contributeforcefully to this debate. Let’s go forward to improve theIRS, to make it the kind of organization that we all can be proudof. But let’s do it in a way that maintains the basic valuesof fairness and integrity that lie at the heart of the tax code,our government, and the Constitution.

In the words of Steven Salch, Chair of the ABATax Section, who testified before the Commission in April,"[The IRS] does have its problems - some serious, some notso serious - and it can and should be made better. But overall,it has been successful at its mission. It needs to be built upand strengthened, not torn down or weakened." TheAdministration’s plan for improved IRS governance will dothis within the existing structures of government and withoutunnecessary risk to the continued operation of the tax system.