FROM THE OFFICE OF PUBLIC AFFAIRS

Council for Electronic Revenue Communcation Advancement
Washington, D.C.

I appreciate the opportunity to appear before you today. Cerca plays an important role in discussions about the IRS by focusing on electronic filing, which is an extremely important aspect of the future of the IRS. And although your particular interest may be in electronic tax administration, I know that you have a strong interest in working toward a well functioning IRS for years to come.

Just as Cerca is looking toward the future with respect to the IRS, so is the Treasury Department. We are keenly aware that the IRS has significant problems, and is in need of repair. But I also believe that there is a right way and a wrong way to reform the IRS. The wrong way is to proceed with reform injudiciously, which could undermine the credibility of the tax system, and risk funding critical functions of government. Today, I would like to speak with you about what I consider to be a central issue of IRS reform; that is the question of who should run the IRS.

It goes without saying that no one likes to pay taxes. Yet, all too frequently we forget the vital role the IRS plays in the functioning of government. Roughly 95 percent of all federal funds comes from the collection of the IRS. The revenue that the IRS collects funds everything from fighter jets to Medicare checks to grants for college education. The basis for any reform of the IRS must be that we do not interfere with the collection of that revenue, and thus, put at risk these vital functions of government.

Since coming to the Treasury Department, I have devoted an enormous amount of time working towards solutions of the problems of the IRS. We have one objective with respect to the IRS, and that is to make sure the IRS is effective at fulfilling its mission for the American people. The problems of the IRS have developed over decades and we will not be able to solve them overnight, but we are committed to fixing these problems and changing the IRS responsibly. We believe we are well on the way toward important changes and improvements. We must not be put off course now.

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In some areas, we have made real progress. The IRS just completed a very successful filing season and we have already issued over 65 million refunds. Electronic filing was up 19 percent to over 14 million electronic returns and telefiling was up 65 percent to over four million returns. There were more than 140 million hits on the IRS WEB site. While these numbers are certainly impressive, with your help, I believe we can do better. Increased -- and better use -- of technology increases efficiency, lowers costs, and is more convenient for taxpayers.

We have made real changes in other areas. As you all know, computer systems have been the source of much-publicized difficulty at the IRS. A little over a year ago, the IRS and Treasury pledged to make a sharp turn in this area. We hired a new Chief Information Officer with a strong record on tax systems, who has won high regard by those who monitor the activities of the IRS. Under his guidance, the IRS has reduced 26 separate projects to nine. The IRS has now released for public comment its long-term Modernization Blueprint to guide the overhaul of the IRS technology systems. The plan, devised after months of extensive consultations with private and public sector experts, replaces today’s patchwork with a coherent system and breaks dramatically with the past by establishing a strategic partnership with the private sector. So far this blueprint has been favorably received.

These steps were taken under the direction of a new Modernization Management Board, which includes representatives from Treasury, the Office of Management of the Budget, and the National Performance Review and which is chaired by Deputy Secretary Larry Summers.

Last month we also announced our plan for enhanced oversight of the IRS. Our plan combines permanent, intense and ongoing oversight of the IRS by Treasury with a new Advisory Board of private citizens empowered to advise us and report annually to the taxpayers and the Congress. Our approach achieves the critical objectives of continuity, through a five year term for the Commissioner, outside input through the Advisory Board, and accountability, through frequent reporting to Congress, without putting at risk the progress we have made to date, or the critical functions of government.

Our plan not only provides for substantial oversight, but it also continues the synergies that exist between IRS and Treasury. After months of studying the IRS, we have reached the conclusion that the best way to reform the IRS, serve the American taxpayers and protect revenue flows is by establishing strong public accountability informed by private sector expertise.

As many of you know, last week, the National Commission on Restructuring the Internal Revenue Service, under the leadership of Senator Kerrey and Congressman Portman, announced their proposal for changing the IRS. Their proposal is an important contribution to the debate on the future of the IRS and they offered a number of constructive suggestions, many of which I agree with.

However, there is one area of their proposal with which I disagree with strongly. The Commission has proposed that the Internal Revenue Service be governed by an outside board of private citizens who serve on a part-time basis. Let me share with you a few of the reasons why I believe this proposal is fundamentally flawed and would threaten some of our most important government functions.

First, running the IRS is not a part-time job. We cannot afford to experiment by placing such an important function like the IRS under the jurisdiction of sporadic part-time management. Meeting only every month or so, there is a real possibility that the management would not be able to provide energetic, robust, ongoing oversight of an enormous agency with 103,000 employees. Under the Treasury plan, the Deputy Secretary chairs the oversight board and, of course, the Secretary is involved in a meaningful way as well. Having the IRS under the supervision of full time Treasury senior officials who are there when they are needed is absolutely critical.

Second, we cannot impose private sector solutions on the public sector. I believe that the Commission’s position is based on an overly simplistic interpretation of private sector practices. Outside boards of directors can work well in the private sector. No one, least of all I, would challenge the value of private sector input. But if there is one thing that I have learned after 26 years in the private sector and four and one-half years in government, it is that there are important differences between the two. For example, the private sector is accustomed to considering efficiency and profitability. Obviously there are important but broader concerns in government such as privacy, law enforcement, and fairness. We agree there is a need for private sector input, but that input should be used properly, and without compromising other objectives. I believe our proposal for the Advisory Board strikes the right balance.

Third, there will be real and apparent conflicts of interest. Having the private sector set the budget, make personnel decisions, or implement policy will inevitably open a Pandora’s Box of conflicts of interest, both real and apparent, which could paralyze the Board’s activities. This, in turn, would undermine the credibility of the tax system, which is very dangerous for our society.

There are also a range of constitutional issues, which in itself creates an element of uncertainty. There are, in short, real risks with this proposal, both in the short term while we debate this proposal, and then if the proposal is adopted, there is a long term risk it simply will not work. We cannot afford that kind of risk with the agency responsible for funding so many of the functions of government that are critical to our society. We need to continue our efforts to get the IRS on track, but do it the right way. We believe that our plan does that, without unnecessary risks.

There are many issues that I have to deal with as Secretary of Treasury, and that Larry Summers has to deal with as Deputy -- from the budget and other economic issues to a wide range of law enforcement issues. The easiest thing to do would involve relinquishing the responsibility of governing the IRS, but, in our view, that would be an abdication of our responsibility. Making the IRS the kind of institution we envision requires the Secretary and the Deputy Secretary to be in a position of leadership and, more importantly, accountability.

Our plan provides for that kind of accountability by institutionalizing a structure that will hold the Secretary accountable by requiring reports to Congress every six months. With a five year term for the Commissioner, our plan provides for continuity and non-partisanship. In short, our plan provides for effective, proactive, ongoing oversight. The elements of our plan that have already been implemented are working -- we should not be delayed or impeded as we continue this progress.

As a final point, I do think that some people proposing new risky governance ideas really do so because they think these are in the best interest of the IRS and American taxpayers. But I think there are other people who may very well be motivated by other agendas. Some would really like to see the IRS, and more broadly our government diminished, and our tax system replaced. I believe we should simplify the tax system, but not by replacing our progressive system of taxation. We must not allow that kind of back-door policy making.

We are at a crossroads with respect to the IRS. It is important for the American people to consider the question of how best to manage the IRS, which, after all, affects every one of us. Our plan provides a good framework for the future for the IRS. The Commission’s proposal imperils the IRS.

There are no perfect or easy answers to getting the IRS back on track. But what we must not do is enact an experiment whose risks far outweigh any benefits. I believe our plan offers the best opportunity for putting the IRS on the road to improved customer service, more efficient operations and increased ability to further compliance with the nation’s tax laws.