U.S. GOVERNMENT PRINTING OFFICE

49–307 CC WASHINGTON : 1998

REPORT OF THE NATIONAL COMMISSION ON

RESTRUCTURING THE INTERNAL REVENUE

SERVICE

HEARING

BEFORE THE

SUBCOMMITTEE ON OVERSIGHT

OF THE

COMMITTEE ON WAYS AND MEANS

HOUSE OF REPRESENTATIVES

ONE HUNDRED FIFTH CONGRESS

FIRST SESSION

JULY 24, 1997

Serial 105–30

Printed for the use of the Committee on Ways and Means

(
2

COMMITTEE ON WAYS AND MEANS

BILL ARCHER, Texas, Chairman

PHILIP M. CRANE, Illinois

BILL THOMAS, California

E. CLAY SHAW, JR., Florida

NANCY L. JOHNSON, Connecticut

JIM BUNNING, Kentucky

AMO HOUGHTON, New York

WALLY HERGER, California

JIM MCCRERY, Louisiana

DAVE CAMP, Michigan

JIM RAMSTAD, Minnesota

JIM NUSSLE, Iowa

SAM JOHNSON, Texas

JENNIFER DUNN, Washington

MAC COLLINS, Georgia

ROB PORTMAN, Ohio

PHILIP S. ENGLISH, Pennsylvania

JOHN ENSIGN, Nevada

JON CHRISTENSEN, Nebraska

WES WATKINS, Oklahoma

J.D. HAYWORTH, Arizona

JERRY WELLER, Illinois

KENNY HULSHOF, Missouri

CHARLES B. RANGEL, New York

FORTNEY PETE STARK, California

ROBERT T. MATSUI, California

BARBARA B. KENNELLY, Connecticut

WILLIAM J. COYNE, Pennsylvania

SANDER M. LEVIN, Michigan

BENJAMIN L. CARDIN, Maryland

JIM MCDERMOTT, Washington

GERALD D. KLECZKA, Wisconsin

JOHN LEWIS, Georgia

RICHARD E. NEAL, Massachusetts

MICHAEL R. MCNULTY, New York

WILLIAM J. JEFFERSON, Louisiana

JOHN S. TANNER, Tennessee

XAVIER BECERRA, California

KAREN L. THURMAN, Florida

A.L. SINGLETON, Chief of Staff

JANICE MAYS, Minority Chief Counsel

SUBCOMMITTEE ON OVERSIGHT

NANCY L. JOHNSON, Connecticut, Chairman

ROB PORTMAN, Ohio

JIM RAMSTAD, Minnesota

JENNIFER DUNN, Washington

PHILIP S. ENGLISH, Pennsylvania

WES WATKINS, Oklahoma

JERRY WELLER, Illinois

KENNY HULSHOF, Missouri

WILLIAM J. COYNE, Pennsylvania

GERALD D. KLECZKA, Wisconsin

MICHAEL R. MCNULTY, New York

JOHN S. TANNER, Tennessee

KAREN L. THURMAN, Florida

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public hearing records

of the Committee on Ways and Means are also published in electronic form. The printed

hearing record remains the official version. Because electronic submissions are used to

prepare both printed and electronic versions of the hearing record, the process of converting

between various electronic formats may introduce unintentional errors or omissions. Such occurrences are inherent in the current publication process and should diminish as the process

is further refined.
3

C O N T E N T S

Page

Advisory of July 15, 1997, announcing the hearing .............................................. 2

WITNESSES

U.S. Department of the Treasury, Hon. Lawrence H. Summers, Deputy

Secretary ............................................................................................................... 19

U.S. Department of Commerce, Hon. Larry Irving, Assistant Secretary of

Commerce for Communications and Information; Administrator, National

Telecommunications and Information Administration; and National

Commission on Restructuring the Internal Revenue Service .......................... 66

Automatic Data Processing, Inc., Josh Weston ..................................................... 47

Electronic Data Systems, Corp., George C. Newstrom ......................................... 70

Goldberg, Hon. Fred T., Jr., National Commission on Restructuring the

Internal Revenue Service .................................................................................... 55

Grassley, Hon. Charles, a U.S. Senator from the State of Iowa .......................... 9

Keating, David L., National Commission on Restructuring the Internal

Revenue Service, and National Taxpayers Union ............................................. 73

Kerrey, Hon. Bob, a U.S. Senator from the State of Nebraska ........................... 4

National Commission on Restructuring the Internal Revenue Service:

Hon. Larry Irving ............................................................................................. 66

Hon. Fred T. Goldberg, Jr. ............................................................................... 55

David L. Keating .............................................................................................. 73

George C. Newstrom ........................................................................................ 70

Robert M. Tobias .............................................................................................. 60

Josh Weston ...................................................................................................... 47

National Taxpayers Union, David L. Keating ....................................................... 73

National Treasury Employees Union, Robert M. Tobias ...................................... 60

Newstrom, George C., National Commission on Restructuring the Internal

Revenue Service, and Electronic Data Systems, Corp ...................................... 70

Tobias, Robert M., National Commission on Restructuring the Internal

Revenue Service, and National Treasury Employees Union ............................ 60

Weston, Josh, National Commission on Restructuring the Internal Revenue

Service, and Automatic Data Processing, Inc .................................................... 47

SUBMISSIONS FOR THE RECORD

National Society of Accountants, Alexandria, VA, Leroy A. Strubberg, letter ... 93

National Tax Consultants, Inc., Merrick, NY, William Stevenson, letter .......... 95
(1)

REPORT OF THE NATIONAL COMMISSION ON

RESTRUCTURING THE INTERNAL REVENUE

SERVICE

THURSDAY, JULY 24, 1997

HOUSE OF REPRESENTATIVES,

COMMITTEE ON WAYS AND MEANS, SUBCOMMITTEE ON OVERSIGHT, Washington, DC.

The Subcommittee met, pursuant to notice, at 9:55 a.m., in room

1100, Longworth House Office Building, Hon. Nancy L. Johnson

(Chairman of the Subcommittee) presiding.

[The advisory announcing the hearing follows:]
2

ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS

SUBCOMMITTEE ON OVERSIGHT

FOR IMMEDIATE RELEASE CONTACT: (202) 225–7601

July 15, 1997

No. OV–6

Johnson Announces Hearing on the

Report of the National Commission on

Restructuring the Internal Revenue Service

Congresswoman Nancy L. Johnson (R–CT), Chairman, Subcommittee on Oversight of the Committee on Ways and Means, today announced that the Subcommittee will hold the first of a series of hearing to examine the June 25, 1997 report

of the National Commission on Restructuring the Internal Revenue Service (IRS)

entitled, ‘‘A New Vision for the IRS.’’ The hearing will take place on Thursday, July

24, 1997, in the main Committee hearing room, 1100 Longworth House Office Building, beginning at 10:00 a.m.

Oral testimony at this hearing will be from invited witnesses only. Witnesses will

include members of the Commission and officials from the U.S. Department of the

Treasury. However, any individual or organization not scheduled for an oral appearance may submit a written statement for consideration by the Committee and for

inclusion in the printed record of the hearing.

BACKGROUND:

The National Commission on Restructuring the Internal Revenue Service was established by Public Law 104–52. Its purpose was to review the present practices of

the IRS and to make recommendations for modernizing and improving its efficiency

and taxpayer services. The 17-member panel was comprised of Members of Congress, Administration officials, representatives from various private sector firms,

taxpayer organizations, and the National Treasury Employees Union, a former IRS

Commissioner, and a State tax administrator. The Commission was co-chaired by

Senator Robert Kerry (D–NE) and Representative Rob Portman (R–OH). Senator

Charles Grassley (R–IA) and Representative William Coyne (D–PA), the Ranking

Democrat on the Subcommittee on Oversight, also served on the Commission.

Over the past year, the Commission held 12 days of public hearings, 3 field hearings, and numerous private sessions with public and private sector experts, academics and citizen’s groups to examine IRS operations and services. It also reviewed

thousands of reports on IRS operations, management, governance, and oversight.

The Commission’s report, which was endorsed by 12 of its 17 members, contains recommendations relating to Congressional oversight and Executive Branch governance; IRS management and budget; IRS workforce and culture; IRS customer service and compliance; technology modernization; electronic filing; tax law simplification; taxpayer rights; and financial accountability.

Its most notable recommendation is that responsibility for Executive Branch governance of the IRS should be placed with a new Board of Directors appointed by

the President for staggered five-year terms, and comprised of one representative

each from the Treasury Department and from the National Treasury Employees

Union, and five private sector individuals with expertise in managing a large service

organization. The Board’s role would be to guide long-term strategic planning at the
3

IRS, appoint and remove senior IRS leadership (including the Commissioner), approve the development of IRS’s budget and allocation of the agency’s resources, and

hold IRS management accountable for success. The Commission also recommends

that the IRS Commissioner should be appointed for a five-year term and should be

given greater flexibility in hiring, firing, and salary decisions.

The Administration has formulated its own plan, entitled the ‘‘Five-Point Plan for

IRS governance,’’ which includes the establishment of an IRS Management Board

(comprised of 20 high-level Federal officials) to improve management and operation

of the IRS, and an IRS Advisory Board (comprised of 14 private-sector professionals)

to provide advice to the Treasury Secretary, and a National Performance Review to

address customer service problems at the IRS.

In announcing the hearing, Chairman Johnson stated: ‘‘On a daily basis, the IRS

touches the lives of millions of hard-working Americans who provide the very lifeblood of the Federal Government through the taxes they pay. In return, the nation’s

taxpayers deserve high-quality service and fair treatment. Regrettably, the nearuniversal view is that the quality of IRS’s interaction with the taxpayers has deteriorated over the past two decades. The IRS Restructuring Commission has performed a valuable service to nation by identifying the complex problems facing the

IRS and offering constructive recommendations for changing it into an agency which

provides world class service and citizen satisfaction.’’

FOCUS OF THE HEARING:

The purpose of hearing will be to provide Subcommittee Members with a general

overview of the Commission’s findings and recommendations, as well as the Administration’s position on the Commission’s recommendations and its five-point plan for

improving the IRS. Additional Subcommittee hearings will be scheduled later in the

year to examine specific proposals in the Commission Report within the jurisdiction

of the Committee on Ways and Means.

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

Any person or organization wishing to submit a written statement for the printed

record of the hearing should submit at least six (6) single-space legal-size copies of

their statement, along with an IBM compatible 3.5-inch diskette in ASCII DOS Text

format only, with their name, address, and hearing date noted on a label, by the

close of business, Thursday, August 7, 1997, to A.L. Singleton, Chief of Staff, Committee on Ways and Means, U.S. House of Representatives, 1102 Longworth House

Office Building, Washington, D.C. 20515. If those filing written statements wish to

have their statements distributed to the press and interested public at the hearing,

they may deliver 200 additional copies for this purpose to the Subcommittee on

Oversight office, room 1136 Longworth House Office Building, at least one hour before the hearing begins.

FORMATTING REQUIREMENTS:

Each statement presented for printing to the Committee by a witness, any written

statement or exhibit submitted for the printed record or any written comments in

response to a request for written comments must conform to the guidelines listed

below. Any statement or exhibit not in compliance with these guidelines will not be

printed, but will be maintained in the Committee files for review and use by the

Committee.

1. All statements and any accompanying exhibits for printing must be typed in single space

on legal-size paper and may not exceed a total of 10 pages including attachments. At the same

time written statements are submitted to the Committee, witnesses are now requested to submit

their statements on an IBM compatible 3.5-inch diskette in ASCII DOS Text format.

2. Copies of whole documents submitted as exhibit material will not be accepted for printing.

Instead, exhibit material should be referenced and quoted or paraphrased. All exhibit material

not meeting these specifications will be maintained in the Committee files for review and use

by the Committee.

3. A witness appearing at a public hearing, or submitting a statement for the record of a public hearing, or submitting written comments in response to a published request for comments
4

by the Committee, must include on his statement or submission a list of all clients, persons,

or organizations on whose behalf the witness appears.

4. A supplemental sheet must accompany each statement listing the name, full address, a

telephone number where the witness or the designated representative may be reached and a

topical outline or summary of the comments and recommendations in the full statement. This

supplemental sheet will not be included in the printed record.

The above restrictions and limitations apply only to material being submitted for printing.

Statements and exhibits or supplementary material submitted solely for distribution to the

Members, the press and the public during the course of a public hearing may be submitted in

other forms.

Note: All Committee advisories and news releases are available on the World

Wide Web at ‘‘HTTP://WWW.HOUSE.GOV/WAYSlMEANS/’’.

The Committee seeks to make its facilities accessible to persons with disabilities.

If you are in need of special accommodations, please call 202–225–1721 or 202–226–

3411 TTD/TTY in advance of the event (four business days notice is requested).

Questions with regard to special accommodation needs in general (including availability of Committee materials in alternative formats) may be directed to the Committee as noted above.

tant hearing on the report of the National Commission on RestrucChairman JOHNSON. Good morning, and welcome to this imporf

turing the Internal Revenue Service. Today’s hearing is the first of

several hearings by the Subcommittee, and we are honored to have

with us this morning Hon. Senator Kerrey and Senator Grassley to

speak on this report.

I’m going to delay my opening statement—until after the Senators have had a chance to testify, because they do have votes coming up in the Senate.

With that, Senator Kerrey, who was the Senate Chair of this

Commission, it’s a pleasure to have you with us today. I know that

my colleague, Mr. Coyne, would like to welcome you as well.

STATEMENT OF HON. BOB KERREY, A U.S. SENATOR FROM

THE STATE OF NEBRASKA

Senator KERREY. Thank you very much, Madam Chair and Representative Coyne. I appreciate very much the chance to present

our testimony and to give you our views on what we believe needs

to occur with the law in order to bring the Internal Revenue Service to the standards of the American people.

We started the National Commission on Restructuring the Internal Revenue Service well over a year ago, and next week we will

introduce legislation drafted to conform with the report of this

Commission. The goal of the legislation is to make the IRS work

for the American people.

Let me begin by explaining why I think this legislation is so important. First, there are twice as many people who pay taxes as

vote. Citizens’ faith that their government can be fair and efficient

is dependent on a well-functioning IRS.

Second, the days of the old-fashioned tax collector are over. The

core of the Commission’s report and the legislation is based on a

vision for a new IRS. We believe, Madam Chair, in today’s world,

the job of the IRS is to operate as an efficient financial management organization.
5

It is simply a myth that the bulk of the Federal revenue is generated through heavy enforcement. While the IRS must maintain

a strong enforcement presence, its core and the core of the Federal

revenue stream lie in a revamped, modern organization that can

assist taxpayers promptly and efficiently, track account information, and send out clear notices. There is a breathtaking gap between the service levels of the IRS and those of the private sector.

Madam Chair, I would ask consent to include my entire remarks

in the record. I’m going to try to summarize them in order that

Senator Grassley can get his testimony in before we have to go

over and vote.

Chairman JOHNSON. Certainly, Senator Kerrey.

Senator KERREY. Madam Chair, our Commission met, as I said,

for well over a year, taking testimony from the private sector, taking testimony from IRS employees, both current and former, taking

testimony, most importantly, in the field from citizens who deal

with the IRS constantly.

With very rare exception did we hear a witness come forward

and bash the Internal Revenue Service. On a very rare occasion did

we hear somebody come forward in a disrespectful fashion. This

testimony was offered with great respect for the burdens placed

upon Internal Revenue Service employees, but with an intense interest in trying, as I said earlier, to close the gap between what

they find themselves being able to get, in terms of service in the

private sector, and what the Internal Revenue Service is able to do.

Madam Chair, we focused on six main areas in our deliberations

and in our legislation. The first is executive branch governance and

management; second, work force and civil service flexibilities; third,

incentives for electronic filing; fourth is taxpayer rights; fifth, coordination of congressional oversight; and sixth, complexity of the

Tax Code itself.

Senator Grassley and my fellow Commission members will each

address different areas. My intent today is to focus on the governance, management, and congressional oversight.

Madam Chair, there is one operative paragraph in here, in my

testimony, that describes the status quo. We heard it repeatedly

from all sources, from current and former employees, stakeholders,

both the taxpayer as well as the practitioners. We heard consistently, over and over and over, the following problem identified:

A key problem identified by the Commission was a lack of a coherent accountable structure to implement a long-term vision and

goals. We found that we in Congress often send conflicting signals

to the agency. We found that Treasury has basically left the IRS

to its own devices, leaving a vacuum in the executive branch oversight of the agency. We found executives unable to maintain focus

and gain traction with Congress on IRS strategy.

In short, at the top levels of the IRS and Treasury, there are

murky lines of accountability, a lack of necessary expertise to operate in the new information age, and no people of authority with significant tenure to get the job done.

We recommend in our legislation, in terms of governance, to create first a Board of Governors, appointed by the President, with

staggered 5-year terms. Second, the Commissioner will be appointed for a 5-year term, so he or she will be around long enough
6

to accomplish real change. Third, the Commissioner will be given

greater flexibility to hire or fire his or her own team of executives.

Fourth, congressional oversight will be coordinated among the authorizing Subcommittees.

Madam Chair, there’s a competing proposal, which you will hear

later today from the Treasury Secretary and the Deputy Secretary,

who disagree with our plan. They have developed an alternative

proposal that creates two advisory boards which attempt to

strengthen Treasury’s governance of the IRS. The first has 20 political appointees, the second has 14, advisors with no real responsibilities.

The Commission considered this proposal seriously but in the

end rejected it. We rejected it because Treasury’s plan further blurs

accountability instead of answering the urgent need for clear lines

of accountability. It does nothing to alleviate the continuity problem with political appointees, who traditionally serve for a short

period of time. Third, it endangers politicizing the IRS. What the

IRS needs is accountability without politicization.

The Treasury’s proposal to create an oversight board of officials

from Office of Management and Budget, OMB, Office of Personnel

Management, OPM, and the Vice President’s office could undermine the credibility of the IRS as an apolitical organization.

We continue to work, by the way, with Secretary Rubin and with

Deputy Secretary Summers, trying to reach a compromise. But I

must, with respect to the diligence of these two individuals, point

out some things that have been said, with all due respect, that are

simply inaccurate.

They have said that private people should not control law enforcement, and that our Nation’s revenue stream will be at risk

under our proposal. Madam Chair, those accusations are simply

not true. First, we propose that the Board of Governors be presidentially appointed, Senate confirmed, and removable at the will of

the President. While members serve on the board, they will be government employees serving in a government function, much like

the Postal Board of Governors, who have vast control over the Postal Service. Additionally, the board will not have any role in tax policy. The IRS Commission’s proposal would draw clear lines of accountability between tax policy and tax administration.

In addition, Madam Chair, the Secretary of the Treasury will be

a member of the new board, subjecting it to scrutiny, were there

to be any appearance of impropriety.

Again, we continue to try to work with Treasury, hoping to reach

some accommodation, but we believe our legislation, if enacted, will

over time narrow the gap between what people get from the private

sector and what they get from our Internal Revenue Service.

I thank you very much, Madam Chair, and Members of the Subcommittee. I see that my Cochair is here now, and I will now yield

to the senior Senator from Iowa.

[The prepared statement follows:]
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Statement of Hon. Bob Kerrey, U.S. Senator from the State of Nebraska

Madame Chairwoman and members of the Committee, it is a distinct honor to

share with you the findings and recommendations of the National Commission on

Restructuring the Internal Revenue Service. Next week we will introduce legislation

drafted to conform with the report. The goal is to make the IRS work for the American taxpayer.

Let me begin by explaining why I think this legislation is so important. First,

there are twice as many people who pay taxes as vote. Citizens’ faith that their government can be fair and efficient is dependent on a well functioning IRS. Second,

the days of the old-fashioned tax collector are over-the core of the Commission’s report and legislation is based on a vision for a new IRS. We believe, in today’s world,

the job of the IRS is to operate as an efficient financial management organization.

It is a myth that the bulk of the federal revenue is generated through heavy enforcement. While the IRS must maintain a strong enforcement presence, its core and

the core of the federal revenue stream lie in a revamped, modern organization that

can assist taxpayers promptly and efficiently, track account information, and send

out clear notices. There is a breathtaking gap between the service levels of the IRS

and those of the private sector.

The IRS has a 20 percent error rate for processing paper returns and expends an

incredible amount of resources and focus to correct these errors. It captures only 40

percent of the data from returns and is still drowning in a sea of paper It is typically 18 months before a return can be matched against 1099s. A private sector

business that took on average 18 months to send someone a bill, certainly wouldn’t

stay in business very long.

The Commission’s report and accompanying legislation offer both a realistic goal

for those who will take charge of the agency and a credible plan for reaching that

goal.

We spent the last year studying the problems and solutions for the IRS. Clearly,

our access to the IRS’s operations and employees was unprecedented. We spent 12

days in public hearings, interviewed 300 IRS employees in field offices, and interviewed over 500 current and former officials from the IRS, the Treasury Department, congressional committees that oversee the IRS, and other IRS experts. We

also commissioned consulting reports and internal reviews of IRS management, governance, workforce, compliance, and customer service. Finally, we heard directly

from citizens through town meetings and surveys. The job of the Commission was

to provide a reasoned, thoughtful look at how to make the IRS serve the American

people.

Our legislation focuses on six main areas:

• Executive branch governance and management • Workforce and civil service flexibilities • Incentives for electronic filing, which holds great potential for cost savings • Taxpayer protection and rights provisions • Coordinating congressional oversight of the IRS • Implementing procedures that require analysis of the complexity of new tax legislation

Senator Grassley and my fellow Commission members will each address important areas. I will focus on Governance, Management, and Congressional Oversight.

COMMISSION RECOMMENDATIONS

A key problem identified by the Commission was a lack of a coherent, accountable

structure to implement a long term vision and goals. We found that we in Congress

often send conflicting signals to the agency. We found that Treasury has basically

left the IRS to its own devices, leaving a vacuum in the Executive Branch oversight

of the agency. We found executives unable to maintain focus and gain traction with

Congress on IRS strategy.

In short, at the top levels of the IRS and at Treasury there are murky lines of

accountability, a lack of necessary expertise to operate in the new information age,

and no people of authority with significant tenure to get the job done. The officials

at the Treasury Department have expertise in tax law, but do not have the expertise

in areas of customer service, technology, and management to oversee the IRS.

Worse, they are not around long enough to ensure focus on multi-year projects like

the Tax System Modernization (TSM) or changing the culture of the agency to be

more responsive to taxpayers.

Additionally, Treasury does not coordinate its own oversight: The Commissioner

of the IRS must deal with various assistant secretaries on budget, operations, computers, and others. At the end of the day, the IRS Commissioner really reports to

the Deputy Secretary who also manages eleven other agencies-not to mention the
8

economy. The recently retired Commissioner of the IRS, Margaret Richardson, told

us that she reported to three different Deputy Secretarys during her four-year tenure as IRS Commissioner. Aware of these glaring problems, the Restructuring Commission began developing ideas for a new governance structure. Our criteria for success were: (1) clear accountability, (2) expertise in running a modern customeroriented organization, and (3) continuity.

To provide for accountability, expertise and continuity the legislation we will introduce will include:

First, a board of governors, appointed by the President for staggered five year

terms. The board will: approve the mission, objectives, and annual strategic plans

of the IRS; oversee the IRS management; have significant tenure to force change

throughout the organization; and have unique public and private sector expertise in

managing large service organizations.

Second, the Commissioner will be appointed for a five-year term, so he or she will

be around long enough to achieve real change.

Third, the Commissioner will be given greater flexibility to hire or fire his own

team of executives, who will bring new expertise into the IRS. While the Board will

keep an eye on long-range strategic issues, the Commissioner will run the organization and be given greater authority to do so.

Fourth, congressional oversight will be coordinated among the authorizing committees, the appropriating committees, and the government oversight committees.

Our legislation codifies coordinated oversight, stating that committee leaders, majority and minority, meet regularly to ensure that the IRS receives clear guidance from

Congress, and that Congress is given the proper information to oversee the IRS.

COMPETING PROPOSAL

As you may know, the Secretary of the Treasury Bob Rubin and Deputy Secretary

Larry Summers disagree with our plan for a board of governors to oversee the IRS.

They have developed an alternate proposal, that would create two advisory boards

which attempt to strengthen Treasury’s governance of the IRS. The first would consist of 20 political appointees from the Administration and the second would be composed of 14 advisors with no real responsibility. While we seriously considered their

proposal, in the end the Commission rejected their approach.

Our opinions are, first, that Treasury’s plan further blurs accountability when

there is an urgent need for clearer lines of accountability. Second, it does nothing

to alleviate the continuity problem-political appointees, who traditionally serve for

a short time, will continue to oversee IRS operations. Third, it endangers politicizing

the IRS. What the IRS needs is accountability without politicization. The Treasury’s

proposal to create an oversight board of officials from OMB, OPM, and the Vice

Presidents Office could undermine the credibility of the IRS as an apolitical institution. The White House has always, in our judgment wisely, tried to keep an arms

length distance from the IRS. Finally, it does not guarantee that the people with

proper expertise in computers, technology, and service will oversee IRS operations.

Secretary Rubin and Deputy Secretary Summers have been diligent, but with all

due respect, inaccurate in their attacks of our proposal. They have said that private

people should not control law enforcement, and that our nation’s revenue stream

will be at risk under our proposal. Those accusations are simply not true. First, we

propose that the Board of Governors be Presidentially appointed, Senate confirmed,

and removable at the will of the President. While members serve on the Board, they

will be government employees serving in a government function, much like the Postal Board of Governors who have vast control over the postal service, including the

postal inspectors-their enforcement arm. Additionally, this board will not have any

role in tax policy, which will stay with the Secretary of the Treasury.

The Restructuring Commission’s proposal will draw clear lines of accountability

between tax policy and tax administration. Also, the Secretary of the Treasury will

be a member of this new board, subjecting it to scrutiny were there to be any appearance of impropriety. Lastly, the Secretary of the Treasury would continue to

have final say over the IRS budget before it is sent to Congress. Under our proposal,

the board would send Congress a copy of their budget at the same time they send

it to the Secretary, allowing Congress to make the decision of how much money to

appropriate.

Congressman Portman and I sent Mr. Rubin a letter two weeks ago addressing

his concerns, which is available for the record. We did move significantly to accommodate concerns raised by Treasury. In fact, many of us thought that the IRS

should be an independent agency. The only reason we did not go that far was to

display to the Treasury Department our willingness to work with them to fix the

IRS—an objective we still hold.
9

CONCLUSION

Madame Chairwoman and Members of the Committee, Congress, the Administration and the American people know that the status quo is no longer tolerable and

that the IRS needs fixing. $3.4 billion was wasted on a failed modernization project.

Its operations are antiquated and outdated, and taxpayers (close to 90% of whom

voluntarily pay their taxes) are generally, and unfairly, treated as if they are guilty

of something when they contact the IRS.

The IRS’s problems are rooted in the lack of strategic vision and focus, measures

that do not encourage employees to treat taxpayers well, operational units that do

not communicate with each other, and a systemic lack of expertise and continuity

in management and governance. The Commission worked in a bipartisan, bicameral

manner to come up with a reasoned, comprehensive approach to fixing these problems. We hope you will work with us over the coming months to strengthen our legislation and implement it into law so that the American people have the IRS they

expect and deserve.

Our work to restructure the IRS will go a long way toward restoring taxpayers’

faith not only in our tax system, but in our government, as well.

Chairman J

Senator Grassley.

OHNSON. Thank you, Senator Kerrey.

f

STATEMENT OF HON. CHARLES GRASSLEY, A U.S. SENATOR

FROM THE STATE OF IOWA

Senator GRASSLEY. Thank you, Madam Chairwoman. Thank you

first of all for your leadership. You have demonstrated through this

Subcommittee on a taxpayers’ bill of rights in the past, because

that is also a part of the work—the extension of that is part of the

recommendations of our Commission.

Also let me up front say that the product of this Commission

would not be as perfect of a document as it is without the hard

work and leadership of Congressman Portman and Senator Kerrey,

not only because of their ability but because they gave this job over

the last 12 months the necessary attention that it needed to get to

the bottom of this. So let’s all say thank you to their leadership.

Congress is on the verge of a major shift in power from the Federal Government to the people. The recommendations of the Commission are a blueprint for that transfer of power.

Understandably, there is much anxiety within the Federal bureaucracy at this moment. It is in anticipation of this loss of power.

The anxiety is at the highest levels of the executive branch.

The American taxpayers have waited a long time for this. They

have suffered through decades of encounters with an agency that

has been unaccountable, unresponsive, misleading, arrogant, and

abusive. The IRS has been granted enormous powers that at times

seemed to disrespect, even undermine, civil liberties. The responsibility to our citizens that goes along with such governmental

power was not exercised.

Furthermore, IRS management seemed to have taken a vacation.

Billions of dollars have been wasted. Performance failures were not

met with discipline. Questionable activity was covered up by secrecy, by abusing the authority of section 6103. Congressional oversight of the IRS has been rendered all but impotent because of absurd 6103 restrictions. These 6103 restrictions make the Pentagon’s highly secret and highly restrictive Joint Chiefs of Staff

‘‘vault’’ seem like a Freedom of Information office, I might say.
10

I appear before this Subcommittee asking you, Madam Chairwoman, and the constitutional responsibilities of the Ways and

Means Committee, to seize the moment. IRS reform is overdue and

vital.

Congress has never had a chance at reform as we have today,

thanks to the effective leadership that I have already alluded to.

To restore accountability to the taxpayer, the Commission has

made several recommendations. The one attracting the greatest attention has been the Commission’s proposal for an independent

board to oversee the Service. The Commission’s belief is that an

independent board will provide an infusion of talent from the private sector to set appropriate performance measures and reward or

discipline managers who either meet or fail to meet these performance measures.

In private meetings, the administration appears to be divided on

the proposal of a board. But it is unfortunate that some who oppose

this proposal are doing so only because it signifies a monumental

power struggle that they stand to lose. Treasury officials, who 2

years ago couldn’t find the IRS if they were standing at the corner

of 11th and Constitution, are suddenly in fits about losing some

control over part of their budget and bureaucracy.

They must be reminded that the IRS is one of the few governmental agencies that has a significant impact on almost every

American. The American taxpayer deserves a modern IRS that provides taxpayers customer service on a level equal to that provided

by private financial institutions throughout the country.

We have seen a lot of promises of reform coming from the Treasury of late, but wholly in response to the work of this Commission.

Treasury assures us that the IRS reform is their top priority and

their best people are on top of it. But if Congress turns its back

now on reforming the IRS and listens to the ‘‘siren song’’ of Treasury, I predict that 1 year from now Congress will face the justified

wrath of angry American taxpayers.

Treasury officials who are locked in this power struggle, trying

to preserve their bureaucratic empire, would do well to remember

the quote of the first Secretary of the Treasury, Alexander Hamilton, who said, ‘‘Here, sir, the people govern.’’ That is the essence

of what this Commission would do: Return power from the Federal

Government to the people of this country.

I am also pleased that the Commission did not call for easy solutions, simply that more money is what is needed to perfect the IRS.

One Treasury official privately admitted recently that the IRS

never would be serious about embracing reform as long as Congress kept throwing more money at the agency.

The Commission made several findings and recommendations

about protecting taxpayers and strengthening taxpayer rights. I

know that you, because of your leadership, will be working on that.

I would note that in the past the Congress has focused its energies

on giving rights to taxpayers who are in dispute with the IRS. The

Commission builds on these taxpayer bills of rights.

I’m going to have to stop because we have only 6 minutes remaining in this vote, and I would ask permission to put the remainder of my statement in the record. But it parallels what Sen-
11

ator Kerrey has already said, that it’s a matter of emphasis for all

these parts and the work of the Commission.

Thank you very much.

[The prepared statement follows:]

Statement of Hon. Charles Grassley, U.S. Senator from the State of Iowa

Madam Chairwoman, members of the Subcommittee, thank you for the invitation

to share my views with you. As a member of the National Commission on Restructuring the IRS, as the former Chairman of the IRS Oversight Subcommittee on the

Finance Committee, as a current senior member of that subcommittee, as the chief

Senate Republican sponsor of the Taxpayers Bill of Rights and Taxpayers Bill of

Rights II, and as a taxpayer myself, I have been involved for many years in an effort

to finally reach this point.

Congress is on the verge of a major shift in power from the federal government

to the people. The recommendations of the Commission are a blueprint for the

transfer of power.

Understandably, there is much anxiety within the federal government at this moment. It is in anticipation of this loss of power. The anxiety is at the highest levels

of the executive branch.

The American taxpayers have waited a long time for this. They have suffered

through decades of encounters with an agency that has been unaccountable; unresponsive; misleading; arrogant; abusive. The IRS has been granted enormous powers

that at times seemed to disrespect, even undermine civil liberties. The responsibility

to our citizens that goes along with such powers was not exercised.

Furthermore, IRS management seemed to have taken a vacation. Billions of dollars have been wasted. Performance failures were not met with discipline. Questionable activity was covered up by secrecy—by abusing the authority of Section 6103.

Congressional oversight of the IRS has been rendered all but impotent because of

absurd 6103 restrictions. These restrictions make the Pentagon’s highly secret and

highly restrictive JCS ‘‘Vault’’ seem like a Freedom of Information office.

I appear before this subcommittee Madam Chairwoman, to urge you to seize the

moment. IRS reform is overdue and vital.

Congress has never had a chance at reform as we have today, thanks to the effective leadership of the co-chairmen of the Commission, Senator Bob Kerrey of Nebraska, and Congressman Rob Portman of Ohio. I would also like to recognize the

important work and contribution you have made to this effort, Madam Chairwoman,

especially ensuring passage of the Taxpayers Bill of Rights II. And I would like to

pay tribute to my friend and former colleague, Senator David Pryor, with whom I

teamed in the Senate in these efforts for many years.

I would like to highlight just a few important issues recommended by the Commission.

To restore accountability to the taxpayer, the Commission has made several recommendations. The one attracting the greatest attention has been the Commission’s

proposal for an independent board to oversee the IRS. The Commission’s belief is

that an independent board will provide an infusion of talent from the private sector

to set appropriate performance measurements and reward or discipline managers

who either meet or fail to meet these performance measures.

In private meetings, the administration appears to be divided on the proposal of

a board. But it appears unfortunate that some who oppose this proposal are doing

so only because it signifies a monumental power struggle that they stand to lose.

Treasury officials who two years ago couldn’t find the IRS if they were standing at

11th and Constitution are suddenly in fits about losing some control over part of

their budget and bureaucracy.

They must be reminded that the IRS is one of the few government agencies that

has a significant impact on almost every American. The American taxpayer deserves

a modern IRS that provides taxpayers customer service on a level equal to that provided by private financial institutions throughout this country.

We have seen a lot of promises of reform coming from the Treasury of late, wholly

in response to the work of this Commission. Treasury assures us that IRS reform

is their top priority and their best people are on it. But if Congress turns its back

now on reforming the IRS and listens to the siren song of Treasury, I predict that

a year from now Congress will face the justified wrath of angry American taxpayers.

Treasury officials who are locked in this power struggle, trying to preserve their

bureaucratic empire, would do well to remember the quote of the first Secretary of

the Treasury, Alexander Hamilton, ‘‘Here, Sir, the people govern.’’ That is the essence of what this Commission would do—return power from the federal government to the people of this country.
12

I am also pleased that the Commission did not call for the easy solution—that

more money is what is needed at the IRS. One Treasury official privately admitted

recently that the IRS never would be serious about embracing reform as long as

Congress kept throwing more money at them. Until two years ago, the IRS had seen

continual increases in its budget for 40 years. This Commission uncovered that hundreds of millions of taxpayer dollars were being wasted. Clearly, the problem at the

IRS is management, NOT money.

The Commission made several findings and recommendations about protecting

taxpayers and strengthening taxpayer rights. Let me say that many of the recommendations build on the work of this subcommittee and that the Commission

greatly benefited from the assistance you provided, Madam Chairwoman, as well as

from discussions with your staff director. I would note that in the past, the Congress

has focused its energies on giving rights to taxpayers who are in a dispute with the

IRS. The Commission builds on this. We recommend a strengthening of taxpayers’

rights in a number of areas. But I think of equal importance is the emphasis the

Commission has placed on protecting taxpayers; that is, preventing problems before

they even happen by emphasizing quality of work and customer service.

We all know the story of the small business owner who gets the notice from the

IRS that he or she owes $2,000. The business owner goes to his accountant who says

that he doesn’t owe the IRS $2,000, but its going to cost $5,000 to fight it. So the

business owner forks over the $2,000.

Why does this happen? Because the IRS puts such little emphasis on quality control and taxpayer rights. The IRS still measures its managers on dollars assessed,

whether or not it is the proper tax owed. Is it any surprise, then, that when a taxpayer does appeal, the IRS loses 72 cents on the dollar. It is wrong that many taxpayers have to spend millions of dollars fighting the IRS because there is no quality

control. I know your subcommittee has had the General Accounting Office examine

the lack of quality control, Madam Chairwoman, and I look forward to working with

you to address this matter.

I am pleased that the Commission also emphasized the need for customer service.

We recommend that taxpayers who are subject to examination or collection efforts,

or who simply try to contact the IRS to resolve a problem, are provided a chance

to comment on the service given. While revolutionary to the IRS, this is old hat for

many state tax collection agencies as well as, of course, the private sector. By measuring managers on customer service, we hope to begin to change the culture of the

IRS and its employees.

Emphasizing quality service and customer service are ways to protect taxpayers

in the first place. It is also a way to measure performance in an appropriate manner

that will hold managers and employees at the IRS accountable for their action.

I would suggest that the emphasis on quality service and customer service is in

keeping with what many saw as the mandate given to the Congress in 1994—moving power from government to the people. The reforms suggested by the Commission

certainly emphasize that it is the taxpayer who comes first, and it is serving the

taxpayer as a customer that must be the top priority for the IRS.

Madam Chairwoman, let me just touch briefly on a third point—the need for

greater openness at the IRS. The Commission found that the IRS was a very closed

and insular organization. The Commission put forward a first step to make the IRS

more open to Congress and the press. If we are going to be at all successful in

changing the culture of the IRS, a key ingredient is greater openness. I think Senator Kerrey was absolutely right when he noted at one of our hearings that the

media is one of the key ways in which Congress finds out what is going on at government agencies.

To encourage openness and also ensure accountability, there are three areas:

• The IRS must be timely in responding to Freedom of Information Act (FOIA)

requests.

• The IRS should not abuse its authority under section 6103 to cover up embarrassing information about management mistakes. For example, this Commission

highlighted that the IRS had abused its 6103 authority to hide from the press the

fact that IRS had provided Congress false information.

• The IRS must maintain and preserve documents. The Commission itself discovered first-hand several times that the former IRS historian Shelly Davis is right—

that the IRS doesn’t preserve records. Many requests by the Commission for documents and data were met with the response that the data no longer existed or the

documents could not be found.

Addressing these three areas of openness may not be headline grabbing, but my

experience has shown me that they will go far in bringing accountability at the IRS

and changing its culture.
13

My final point is to speak for the co-chairman of our Commission, Congressman

Portman. I know if he were at the table with us, he would also emphasize the Commission’s findings on the need to simplify the tax code. It is to Congressman

Portman’s credit that the Commission focused on this matter. We heard from countless witnesses, as well as hundreds of IRS employees and thousands of taxpayers

that the complexity of the code is crippling to IRS management.

While I’ve spent a lot of my time here criticizing IRS, let me make clear that the

complex code is not the fault of the IRS, it is a burden placed on IRS management

by Congress and the White House. It is clear that if we wish to see improvements

at the IRS in customer service and relations with taxpayers, steps must be taken

to simplify the code.

Thank you for allowing me the opportunity to speak present my views. The Commission’s proposals are not just paper for the shelves. As you know, Senator Kerrey

and I both serve on the Finance Committee. We will be introducing next week in

the Senate and Congressman Portman in the House a comprehensive legislative

proposal to restructure the IRS in accordance with the findings and recommendations of the Commission. I have talked to Chairman Roth and Majority Leader Lott,

they are very supportive of trying to pass comprehensive reform of the IRS this

year. I look forward to working with you, Madam Chairwoman, and all of the Members of this subcommittee to make that possible.

left in your vote, so we are not going to ask you any questions. But

Chairman JOHNSON. Gentlemen, you’re now down to 5 minutes

f

I do want to tell you, thank you very much for your testimony. The

report that you have brought before us, along with my colleague

here, Mr. Portman, and all the Commissioners, is a very serious

document. You have made very important recommendations.

I agree with you that this is a moment of opportunity, and your

vision of a modern, responsive, customer-oriented IRS, one that

serves the people that for the most part voluntarily pay their taxes,

is one we share. This is a time when we must make good on the

promise that change offers.

So I look forward to working with you in greater detail as we

move through this, and certainly with the administration, and

thank you very much for your excellent testimony today.

Mr. Portman, would you like to say a word?

Mr. PORTMAN. Just that I had an opening statement where I extensively praised both of you, and since you’re leaving, I’m not

going to have an opportunity to have you hear it.

Godspeed on your vote, and thank you for all your work.

[The opening statement follows:]

Opening Statement of Hon. Bob Portman, a Representative in Congress

from the State of Ohio

I thank our Chair, Mrs. Johnson, for holding this hearing today on the report of

the National Commission on Restructuring the IRS. And, I would like to say a special word of thanks to Donna Steele and Beth Vance for their assistance throughout

the Restructuring Commission’s work.

During the last year, I have been pleased to serve as Co-Chairman of the Commission along with Senator Bob Kerrey, who is with us today. And I would like to

extend my appreciation to each of the seventeen members of the Commission for the

bipartisan and, indeed, nonpartisan manner in which the Commission conducted its

business. Many of the Commission members are with us today, like Senator Grassley, Fred Goldberg, Josh Weston, Bob Tobias, David Keating, George Newstrom and

Larry Irving. And, I would like to thank the Treasury Department—including Deputy Secretary Summers who is here with us today—for their service on the Commission and their ongoing input in our work.

The Commission’s report is the first comprehensive Congressional blueprint for

reforming the IRS in my lifetime—we have not seen fundamental changes to the

IRS since 1952. Our conclusions highlight the need for a serious, bipartisan dialogue
14

to simplify our nation’s tax system to make the IRS work better for the taxpayer.

Our report is truly a roadmap for transforming the IRS into a responsive service

organization for the 21st Century—one that makes customer service and customer

satisfaction a priority. And, taken as a whole, I believe our proposals will allow the

Congress to do something truly remarkable—make the IRS a model for the rest of

government.

I am pleased to note that a number of leading organizations that deal with IRS

concerns on a daily basis have endorsed our recommendations—including the National Treasury Employees Union (which represents IRS employees), National Taxpayers Union, Americans for Tax Reform, the American Bankers Association, the

American Payroll Association, the American Society of Payroll Managers, the American Institute of Certified Public Accountants, the National Association of Computerized Tax Processors, the National Association of Enrolled Agents, the National Association of Tax Practitioners, and the National Society of Accountants.

We will be introducing legislation to implement the Commission’s recommendations next week. I look forward to hearing from today’s witnesses and to our ongoing

efforts to make the IRS work the for the American taxpayer.

Chairman J

Senator KERREY

OHNSON

. Thanks.

. As we await the arrival of Deputy Secretary

f

Lawrence Summers, who is our next witness, let me say that it is

a pleasure to welcome the Commissioners here this morning, as

well as the administration, to discuss what I consider to be an extremely important report.

Too often work is done in this body and disregarded. This report

will not be disregarded. It is my intention, it is my belief that it

is the Chairman’s intention, that we move forward on this document, that we work through the policy changes that it proposes,

and in this Congress help the IRS move into the next millennium.

Our goal today is to provide the Subcommittee with a general

overview of the Commission’s findings and recommendations, as

well as the administration’s concerns. We will hear from members

of the Commission and the administration, and at future hearings,

after the August break, we will go into greater detail on the Commission’s specific recommendations and receive input from taxpayers and other stakeholders.

The National Commission on Restructuring the IRS was established in 1996 in response to mounting public concern about performance problems and the lack of accountability at the IRS. It’s

17 Commissioners were comprised of Members of Congress, administration officials, members of the private sector, taxpayer organizations, the National Treasury Employees Union, a former IRS

Commissioner, and estate tax administrator.

The Commission was Cochaired by Senator Robert Kerrey and

my colleague, Representative Rob Portman. I must say, the Cochairmen did an outstanding job of leading a very fine Commission.

On that Commission in second position, working closely, was Senator Grassley and my Ranking Member, Bill Coyne. I thank them

for the many, many hours that they put in. This was an unusually

hard working Commission, with the members very involved, and

that always lays a solid foundation for sound action.

The Commission’s report was endorsed by 12 of the 17 members,

and contains recommendations for reforms in congressional oversight and the executive branch’s governance of the IRS, stability of

the IRS’ budget, and financial accountability on IRS’ part for the
15

way it allocates and spends its resources. The report also speaks

to the need to modernize IRS’ technology base and make real

progress toward electronic filing to simplify the tax system and to

protect taxpayers rights.

Obviously, not everyone agrees with all of the Commission’s recommendations. The administration has concerns about some of

them, particularly the independent board of directors, and in response has developed its own plan for institutionalizing executive

branch oversight and management of the IRS. My colleagues in the

Congress and I will, I’m sure, develop our views about the Commission’s recommendations relating to both executive branch oversight

and congressional oversight.

Yet, as we begin this second phase of the process of reforming

the IRS, the legislative phase, we must remember that we all share

the common goal of transforming the IRS into a modern, highquality service organization where taxpayers can call and resolve

problems and get accurate information. We share the vision of the

Commissioners, and it is our responsibility to make good on that

vision, working with the Commissioners and the IRS.

On a daily basis, the IRS touches the lives of millions of hard

working Americans who provide the life blood of the Federal Government through the taxes they pay. In return, the Nation’s taxpayers deserve both respect and efficiency. Regrettably, the near

universal perception is that both of these qualities have been in

short supply in recent weeks.

For the first time since 1952, Congress and the administration

are both embarking on a serious effort to reform the IRS. While

there are divergent views about some of the individual steps that

should be taken, there are many elements of the Commission’s recommendations that are strongly supported by everyone here today.

As the Subcommittee begins the process of examining the Commission’s recommendations and developing our own recommendations

to the Full Committee for legislative actions, I hope we can remain

focused on the end goal.

I would also like to commend the Commission for its discussion

and exploration of the relationship between the increasing complexity of the Tax Code as a result of congressional action and the problems of the IRS, because some of the problems can only be solved

by Congress taking responsibility for writing clearer, simpler tax

law, and that, too, is a challenge we must be capable of meeting.

I would now like to recognize my Ranking Member, Bill Coyne,

one of the Chairs of the Commission and a gentleman who put in

many, many hours. I thank you, Bill.

Mr. COYNE. Thank you, Madam Chairwoman.

I want to say that today the Oversight Subcommittee will have

an opportunity to discuss proposals to reform the operation and

governance of the Internal Revenue Service. Specifically, we will

debate the proposals recommended by the National Commission on

Restructuring the IRS in its June 1997 report and the proposals

recommended by the administration in its 5-point plan to reform

the IRS.

As a Member of this Subcommittee and as a Commissioner on

the Restructuring Commission, I believe it is timely for the Ways

and Means Oversight Subcommittee to conduct a series of hearings
16

on proposals for changing the governance and operation of the IRS.

Debate over the successes, failures, and future of the IRS is an

oversight responsibility and a fundamental part of our ongoing review of how our tax laws are to be administered.

There is much agreement about how the IRS could be improved.

The IRS should improve its customer service, its training of employees, and the development of new technology and technology to

grapple with the problems within the agency. Oversight of the IRS

needs to be enhanced and institutionalized with significant input

from the private sector. Mechanisms should be established to provide direction of long-term strategy at the IRS and IRS management should be held accountable for its decisions.

The IRS Commissioner should run the IRS for a meaningful period of time, and be able to hire expert senior level managers. The

Congress could do a better job of coordinating its oversight and

funding of the IRS operations. There is fundamental disagreement,

however, on how the IRS should be governed in the future and who

should be in charge at that important agency.

I object to turning the IRS over to individuals who are not directly accountable to the American people. I believe that the President or the Treasury Secretary should have the power to appoint

and dismiss the IRS Commissioner. I suggest that the Congress

carefully review the current administration’s plan for establishing

an IRS management board and an IRS advisory board, and for giving the IRS Commissioner authority to hire a top notch management team to govern the agency.

To ensure long-term IRS reform, I believe that we should amend

the Tax Code to make the administration’s proposal on governance

structure permanent in the Code.

Some of the other recommendations in the Commission’s report

seem to me to be extraneous to the Commission’s statutory mandate and require much more analysis, particularly the sections relating to Taxpayer Bill of Rights, simplification, and creation of a

new congressional entity. Also, some of the recommendations in the

Commission’s report, in my opinion, would have a negative effect

on the IRS’ interactions with the public and raise tax policy issues

of great significance.

I do not agree, for example, with the Commission’s conclusion

that the child support tax refund offset program is a diversion of

IRS resources or creates a risk of undermining the IRS’ core responsibilities and capabilities.

Also, I object when the earned income tax credit, EITC, is indirectly characterized in the Commission’s report as a credit added

to the Internal Revenue Code to target a specific population already served by other Federal agencies. The EITC is a program for

the working poor in this country. It is not, as recently characterized by some Members of Congress, a form of welfare.

In conclusion, I want to thank Congressman Portman for his

commitment to reforming the IRS, and I also want to thank my colleagues from the National Commission on Restructuring the IRS

who are with us here today, and others from the Commission, for

appearing as witnesses at this hearing. Without a doubt, our mutual goal is to make the IRS the first-class tax collection agency the

public expects and deserves. I intend to work closely with Chair-
17

woman Johnson and others on these issues, and look forward to the

Oversight Subcommittee’s future hearings on IRS reform, to be

held later this year and beyond.

Thank you very much, Madam Chairwoman.

Chairman JOHNSON. Thank you, Bill.

Now I would like to give my colleague, Rob Portman, the opportunity for an opening statement. He was my designee on the Commission, Cochaired the Commission, put in many, many hours, did

a very thorough job, and Rob, you have been a coleader in bringing

to this Subcommittee a really outstanding, thoughtful, and important report.

Mr. PORTMAN. Thank you, Nancy, and thank you for holding this

hearing.

This is a busy time in Congress, as all of us know, and there are

plenty of excuses, frankly, for postponing these proceedings today

because of all the other activity going on. It’s a tribute to you that

you were willing to move forward with it, and I think, as Bill

Coyne just said, it is a very important and timely hearing on the

issues of IRS reform that came up in the Commission’s work.

I just want to thank Donna Steele and Beth Vance of the Subcommittee staff for their help in putting this hearing together, but

more importantly, for their work over the past year with regard to

the Commission’s work. They were very involved and active and

without them we would not have been able to put together the

product that we have before us today.

Mrs. Johnson mentioned that I’m Cochair of the IRS Commission. She didn’t really mention the fact that I’m in this position because she designated me. In fact, at the time I wondered how much

of an honor that was. A year later, I can say, without any regrets,

that I’m very pleased that she chose me to represent her on that

Commission, and then becoming Cochair was an honor and it was

an honor to work with Senator Kerrey, with whom we worked very

closely. You heard from him earlier with regard to his strong views

on the final report.

All 17 members of the Commission put an enormous amount of

time and effort into this. I see a number of them here. Josh Weston, Fred Goldberg I see here. I know Bob Tobias, David Keating,

George Newstrom, and Larry Irving are coming. Jeff Trinca is here,

who was Executive Director of the Commission. All of them deserve

a great deal of credit for this final product as well.

It was an unusual experience. In a nonpartisan way, not even a

bipartisan way, I would say we really rolled up our sleeves and

tried to do what was right for the IRS and for the American taxpayer. I think again, as we look at the results today, through the

testimony you will hear, that many of you will agree that this was

a thorough, comprehensive effort that will result in real change

and will really help not only the Service but the taxpayer.

I also want to commend Treasury for its work on this. Ed Knight,

who is General Counsel at Treasury, was on the Commission, and

that needs to be noted. Treasury’s input was very much a part of

this. Ed has just arrived, as well as Larry Summers, who is now

here with us. I want to thank them for their service and input and

work.
18

Finally Bill Coyne, who was a gentleman throughout this whole

process. I will say, to show you how unusual this work product is

in the Washington context, almost every one of the concerns that

Congressman Coyne mentioned he had input in, and actually

changed and moved his way, even though in the end he was not

able to sign the report. I think it’s fair to say that his input was

significant, as was Treasury’s, and that in the end Bill Coyne and

I agree on about 80 to 90 percent of the final work product, because

this really was in many respects a consensus product, with the exception of a few tough issues that we’ll get into later today.

This is the first comprehensive blueprint for reform of the IRS

in my lifetime. Not since 1952 have we suggested these kinds of

fundamental changes. I think it is truly a road map for transforming the IRS into a 21st century taxpayer service and customer service entity. Nancy Johnson forcefully made the comments that we

need to do this, it needs to be dramatic reform, if we are indeed

to respond to the concerns of taxpayers expressed to us as Members of Congress, and as expressed through various other surveys

and evidence that the Commission was able to discover.

I am pleased that a number of organizations, Madam Chair,

worked with us on a daily basis in putting together this report, and

have now endorsed the recommendations. This includes the National Treasury Employees Union, which as most of you know represents the bulk of the IRS employees. It also includes the National

Taxpayers Union, again to show you how unusual this product is.

The Americans for Tax Reform, the American Bankers Association,

the American Payroll Association, the American Society of Payroll

Managers, the American Institute of Certified Public Accountants,

the National Association of Computerized Tax Processors, the National Association of Enrolled Agents, the National Association of

Tax Practitioners, and the National Society of Accountants all endorse this report.

These stakeholders endorse this product because again they had

significant input in it. We listened to them as we listened to the

American taxpayer, and I think it is a tribute to them that they

were willing, as the Commissioners were, to roll up their sleeves

and dig into this issue and come up with a good product, and then

in the end to stand behind it.

I would also like to announce that next week we will be introducing legislation to implement the Commission’s recommendations.

Senator Kerrey, Senator Grassley, and myself and other Members

of the House and Senate will be doing so some time probably midweek.

Madam Chair, I look forward to hearing from today’s witnesses,

and again I want to thank you for giving us this opportunity today.

Chairman JOHNSON. Thank you, Rob.

It is my pleasure now to welcome Hon. Lawrence Summers, Deputy Secretary of the U.S. Treasury.
19

STATEMENT OF HON. LAWRENCE H. SUMMERS, DEPUTY

SECRETARY, U.S. DEPARTMENT OF THE TREASURY

Mr. SUMMERS. Thank you very much, Madam Chairman. Let me

apologize to the Subcommittee for the delay in traffic that I experienced on my way up here. I have a longer statement which I submit for the record.

I am pleased to be here today to talk with you about the report

of the Commission on Restructuring the IRS and Treasury’s plans

to implement solutions to the difficulties facing the IRS.

Before saying anything else, I would like to thank the Chairman,

the Ranking Member, and other Members of the Subcommittee for

their leadership on this critical issue.

Over the last year we have been involved in an important and

historic debate about how best to improve the operations of the

IRS. The National Commission on Restructuring the IRS, under

the leadership of Senator Kerrey and Congressman Portman, has

done a great deal to illuminate this debate and to advance thinking

as to possible solutions.

We in the administration and the Commission have in many

ways traveled similar paths in the search for better IRS. We agree

on the need for change for the 21st century. We agree on what

needs fixing: More effective oversight, increased continuity, more

private sector input, a more flexible and responsive institution that

can provide far better customer service. The question is how best

to achieve that change.

Last year, in testimony before this body, Secretary Rubin and I

recognized the severity of the problems that the IRS faces. We

highlighted the importance of improved customer service and noted

the serious management problems that have arisen with respect to

the modernization program. It was, as we put it at that time, ‘‘off

track.’’ We called for a sharp turn and made clear our determination to bring about change.

I think there has been change. Under the direction of our new

Chief Information Officer, the IRS has released a blueprint for

technology modernization, the first attempt to form a strategic

partnership on information technology with the private sector.

Outsourcing has increased dramatically, with more than 60 percent of IRS information technology work now carried out by private

contractors. The IRS has increased electronic filing and filing by

telephone by more than 50 percent, and it has doubled the number

of taxpayer calls answered.

There is a lot of debate about just what the right statistics are,

but on one set of statistics, the fraction of calls for taxpayers assistance, was increased by a factor of 21⁄2 during 1996. We’re still not

doing what we should be doing, but real progress is being made.

I think we’ve made a good start toward building the modern, efficient and accountable IRS that the American people deserve, but

we must do more. The administration believes that we should

make change on a broad range of fronts. Today I want to focus on

legislation that will soon be introduced to improve governance and

to improve management flexibility.

As I emphasized, we share with the Commission the view that

current governance arrangements are flawed, in not providing adequately for continuity, for accountability, and for increased outside
20

input. That’s why we have proposed to appoint the IRS Commissioner for a fixed 5-year term. That’s why we’ve proposed to make

permanent the current Modernization Management Board, comprised of senior government officials, to review high level management issues and to require the Secretary and the Deputy Secretary

to report to Congress on the IRS in person twice each year.

That’s why we have proposed to bring outside expertise to bear

on the problems of the IRS by establishing an Internal Revenue

Service Advisory Board reporting directly to the Secretary of the

Treasury, a board made up of private sector individuals selected to

represent a wide range of relevant experience, including information technology and customer service.

In order to ensure that that advisory board functions in a strong

and effective way, and in order to ensure that the Treasury maintains its oversight responsibilities, we will ask the requirement be

embodied in legislation that that advisory board make a report to

the American people on the performance of the IRS and on the performance of Treasury oversight of the IRS each year.

But, however successful we are in improving our oversight, ultimately it is what the IRS does that will be what American taxpayers see. That’s why we have focused very intensively on leadership and have identified a candidate now going through the vetting

process to be Commissioner of the IRS, with an outstanding private

sector management background and extensive experience in the information technology area.

But another crucial piece of this effort has to be to give the IRS

much needed flexibility. Our legislation will contain a range of

measures to enhance the IRS’ capacity to do what we and the Commission both recognize is necessary—to recruit and retain people

with critical skills and to streamline procurement procedures.

We also believe that stability and certainty are needed for the

IRS’ technology and capital investment budgets. The President’s

fiscal year 1998 budget proposes multiyear investments for technology in order to ensure this stability. We look forward to working

with the Congress to implement the Commission’s budgeting recommendations.

Finally, Madam Chairman, I would like to comment briefly on

the Commission’s proposal that an outside board of private citizens

take on the governance function at the IRS. We believe this proposal raises grave concerns and subjects 95 percent of our Nation’s

Federal revenues collected by the IRS to unacceptable risks.

First, we doubt the efficacy of such a proposal. The challenges

the IRS faces in its size and complexity demand more than the part

time and sporadic attention that such a board could provide. Urgent and complicated decisions, which can now be taken by Treasury officials, might be delayed a month or more. The board of directors model has some successes in the private sector, but experience

suggests that it has been notoriously problematic in government.

Second, we believe granting decisionmaking powers to high stature individuals from the business world would expose the Service

to dangerous and unacceptable risks of conflicts of interest. Under

the Commission’s proposal, on at least one interpretation, for example, corporate executives whose companies might automatically be

subject to yearly audits would have no recourse at all to their own
21

corporate situation but could have a crucial role in determining the

audit budget for the IRS and its strategic approach to enforcement.

Third, we are concerned that a new layer of management would

create bureaucratic confusion by dividing core IRS functions into

disparate elements. Today, for example, the IRS is able to give Secretary Rubin and me its analysis of the impact of proposed tax

changes on tax administrations. Under the Commission’s proposal,

while there still would be the possibility of communication, we believe that the synergy would be lost.

Fourth, and particularly troubling to us, the Commission’s proposal would grant private citizens control over one of the largest

law enforcement agencies in our Nation. This is only one of many

areas which could expose the new board to constitutional and legal

challenges and risk paralyzing the IRS.

Fifth, the proposal would undermine accountability. Right now,

accountability for the performance of the IRS rests with the President and rests with the Secretary of the Treasury, one of the most

senior members of his cabinet. The Treasury Secretary is accountable to the President, and the President is accountable to the people. Resting accountability with a group of part-time participants,

who inevitably would have primary loyalty elsewhere and who

would not be subject to the kind of discipline that shareholders provide in the private sector, seems to us to be very, very problematic.

In sum, Madam Chairman, I think there is no disagreement

about ends. We all want an IRS that is ready for the 21st century,

that can provide the kind of customer service that the American

people expect. We all believe that it needs to become a more flexible, more aggressively and effectively managed institution, that

harnesses information technology far more effectively than in the

past, to achieve those objectives. What we need to do, working together, is find the most effective means of achieving that end.

Thank you very much, Madam Chairman.

[The prepared statement follows:]

Statement of Hon. Lawrence H. Summers, Deputy Secretary, U.S.

Department of the Treasury

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.
22

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 privatesector 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.
23

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 es-
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tablish 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 twophase 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.
25

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 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-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 ca-
26

pacity 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 ‘‘highstature’’ 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.
27

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’s 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.

Chairman J

We have a vote called and we only have a few minutes now left

OHNSON. Thank you, Secretary Summers.

f

to vote, so we’re going to go vote and recess for about 7 or 8 minutes.

[Recess.]

Chairman JOHNSON. Mr. Secretary, thank you for your testimony. It is a pleasure to look at how much of this work, that consumed a year of dedicated effort on the part of many thoughtful
28

and knowledgeable people, you all agree on. On the issue of governance, however, you do have significant disagreements.

I would like to invite you to discuss in a little bit greater depth

why you think that your current board, that includes appointees

from the Vice President’s office, OMB, OPM, and Treasury, can exercise oversight that brings to the table the level of knowledge and

consistency that we all agree we need. Because, in my estimation,

the appointee from the Vice President’s office raises questions of

political influence, and I don’t see the expertise specific to the IRS

challenge as coming or being there in either OMB or OPM.

I would like to hear you talk about this management board as

an alternative, because right off the top it doesn’t make it, in my

mind.

Mr. SUMMERS. I think you raise a very important set of questions. Let me just clarify one point.

It’s really the National Performance Review staff that is represented on the board, not the Vice President’s personal staff

and——

Chairman JOHNSON. But to that point, if I may, that’s a creature

of this Vice President. Will the next Vice President have such a

board? In the future, will Vice Presidents’ offices be dependent——

Mr. SUMMERS. No. I think probably not, so I think what’s important is that I would expect any administration would have a locus

of people who were concerned with maximizing efficiency in government, and I would expect that group of people to be represented

on that board.

In this administration, the National Performance Review has

been under the Vice President’s responsibilities, but that’s why our

proposal allows for the possibility of modification of the composition

of the board precisely to reflect the fact that where the focus on efficiency in government is will change, or may change a bit, from

administration to administration.

Chairman JOHNSON. Mr. Summers, just to stay on this one point,

and then move on to the others, first of all, we would have to be

very careful about how we wrote that statute, so that we got the

right person.

Mr. SUMMERS. I agree with that.

Chairman JOHNSON. But whoever we got—because remember,

Vice President Dan Quayle had the first sort of modernization efficiency—I’ve forgotten what he called his, the National Competitiveness Council—that had the same goal and looked at similar kinds

of issues. Those councils always make a contribution. They made

a contribution under Vice President Quayle, and Vice President

Gore is certainly making a contribution through this council.

But they are, after all, political entities. They are seen by the

rest of the world as part of an administration and, therefore, part

of a political platform and set of goals.

Do you think it’s really wise to bring that kind of entity into, in

a sense, a permanent relationship with the IRS, given some of the

problems that we’ve had historically between elected officials and

the IRS in those areas?

Mr. SUMMERS. I think it’s appropriate for the President and the

senior people that the President appoints to be members of his administration, to take on the responsibility for oversight of the IRS.
29

I think that they should take that responsibility on in a way that

is directed at overseeing policy and management, and obviously

with no connection to specific cases.

I think it is helpful to the Treasury Department, where that responsibility is centered, to be able to draw on expertise from other

parts of the administration. In our administration, we have people

with extensive knowledge and experience in the procurement area,

in the information technology area, in the labor relations and personnel area, who are located at OMB, who are located at the OPM,

and who have in this administration function as part of the National Performance Review staff.

I certainly agree with you that it would be inappropriate to include in IRS governance persons whose primary concerns were political or communications oriented. But just as Congress, by statute, many years ago set up the National Security Council as a

grouping of senior officials reporting to the President, charged that

grouping with certain responsibilities, just as I think this administration has innovated effectively with the National Economic Council, which is a group of executive branch officials, given an important responsibility.

I believe the same thing can work, and has worked, at the IRS.

So that’s the reason for going and getting the expertise outside of

Treasury.

We have found that, in terms of holding the IRS accountable,

having a monthly board meeting and requiring decisions to be presented to a group of senior government officials, is an effective device for achieving IRS accountability. I think that, working through

the board, we have been successful in levering a great deal of

change, particularly in the management of the information technology program, over the past year. So I believe that this is the

right and is an effective approach.

But I would want to stress that we share the Commission’s concerns about the issues of continuity, of accountability, and of outside input. As far as continuity is concerned, that’s why we have

come to believe that the IRS Commissioner should be given a 5-

year term, so that you won’t get into situations where a Commissioner is appointed right toward the end of a presidential term and

is a lame duck, so that there will be a further degree of insulation

from the political process. So that’s why we have supported the 5-

year term.

We believe that outside input is very, very important. That’s why

we’ve proposed an advisory board with teeth, an advisory board

that just doesn’t report to the IRS but reports directly to the Secretary of the Treasury, who is really the person who is going to be

on the hook and accountable to the people for the performance of

the IRS, and that is asked and, indeed, required to prepare an annual report to taxpayers, so that if that outside input is not being

taken, it will be clear to all and the Congress will know who, the

Secretary of the Treasury, to hold responsible.

We have emphasized the importance of accountability. I believe

that having the Secretary of the Treasury and the Deputy Secretary of the Treasury accountable is an integral portion of their

job for the performance of the IRS, accountable to the President,

accountable to the Congress, for the performance of the IRS, offers
30

a better prospect for improvement than the appointment of a committee of outsiders whose primary loyalty will lie to their other

pursuits and no one of whom will feel that responsibility and will

feel that it is their responsibility to have this work.

I think that collective responsibility among people whose primary

loyalty is elsewhere is a mechanism that’s less likely to achieve the

objective of accountability. So we are for major change in governance, but we believe that the approach we’ve laid out offers the

best prospect for continuity, outside input, and accountability.

Chairman JOHNSON. Thank you, Mr. Summers. I know other

Members have a lot of questions, so I will not ask more. But I do

think that this is a very important issue.

I’m glad to hear that working with people from OMB and OPM

and through the process of presenting decisions to them on a regular basis, that you feel you have improved the quality of management of the IRS. Nonetheless, I think one has to be conscious that

appointments to a board, like this outside advisory board, on average, those appointees have served about a year and a half on average, if you look across those kinds of boards. That’s not encouraging in terms of longevity and expertise and so on.

And then, when you have this as an added responsibility for

someone from OMB, who has many other responsibilities, in the

long term, in the short term of making change—and we have an

agency in trouble here, that’s one kind of action. What I will be

concerned with in thinking this through is, is the kind of action

that you can do under triage something that you can do on a regular, ongoing basis, that doesn’t bring the expertise to the table that

we need.

Mr. Coyne.

Mr. COYNE. Thank you, Madam Chairwoman. Welcome, Mr. Secretary, and thank you for your testimony.

You didn’t have the opportunity to be here earlier when Senator

Grassley testified, and I want to read you part of his testimony and

have you respond to it. It says, ‘‘In private meetings, the administration appears to be divided on the proposal of a board. But it appears unfortunate that some who oppose this proposal are doing so

only because it signifies a monumental power struggle that they

stand to lose. Treasury officials, who 2 years ago couldn’t find the

IRS if they were standing at 11th and Constitution, are suddenly

in fits about losing some control over part of their budget and bureaucracy.’’

I wonder if you could respond to that.

Mr. SUMMERS. Let me just say, Congressman, Secretary Rubin

has said many times that the easiest thing for him, the easiest

thing for us, would be to turn the IRS over to a board and to concentrate on our tasks of financial policy, concentrate on the tax bill,

concentrate on what’s happening in Thailand and Malaysia, concentrate on the future of the banking system. The easy thing would

be to turn away from this and not to be prepared to accept responsibility for what happens in terms of change in a very large organization. That would be much the easier thing.

Secretary Rubin and I have made a judgment that it is profoundly important to this country that this be fixed, that this get

better, and that the best way for it to get better is for us to take
31

on a major involvement in overseeing management at the IRS and

to put in place a set of procedures that will institutionalize that involvement, so that our successors will feel the same kind of obligation.

I think the objection that for some time Treasury officials, in

both parties, in both administrations, have not watched over the

IRS with adequate vigor is probably right. Certainly, since the moment I became Deputy Secretary, and the moment Secretary Rubin

became Secretary, it was a small number of months from the moment I was appointed until the moment I was up here testifying

that this was way off track and that major change had to be put

in place, and that the board was underway. Similarly, Secretary

Rubin, since he became Secretary, has made this a major responsibility.

But I do think we have a real concern that at some point in the

future it might drift back to the way it was, with inadequate oversight. I think we’ve proposed a set of mechanism that very, very

substantially contain that risk, a group of outside advisors of

prominent people who will make a report every year to the Congress, which will represent a standard to which the Secretary of

the Treasury and the Deputy Secretary of the Treasury will be

measured against, a requirement that the Secretary and the Deputy Secretary testify on the progress of their oversight to the Congress every 6 months.

We are building a career staff in the Treasury that has, I think,

the potential to be a legacy that we will leave to our successors,

in terms of capacity to maintain effective oversight at the IRS.

If I might make just one final observation, Congressman, I think

one has to make a comparison, and I think it’s probably fair to say

that, particularly past moments of crisis, the record of committees

appointed by the President, each of whom is going to be serving on

a part-time basis, in terms of their effectiveness and responsiveness in addressing various problems, is something that is not totally encouraging. Certainly the GAO looking at experience with

boards in the private sector—in the public sector—did not find that

they were an effective governance mechanism.

Mr. COYNE. Thank you.

Chairman JOHNSON. Mr. Portman—I’m sorry.

Mr. COYNE. I had one other question.

I wonder if you could respond to the constitutional problems, that

have been raised, by having private citizens rather than the President and the Treasury Secretary appoint, hire and fire the IRS

Commissioner.

Mr. SUMMERS. I will furnish you with a learned written answer.

Let me just say now—learned as prepared by the staff, because I’m

not capable of giving a learned one. But the essence of it is that

the appointments clause basically provides for the President, or his

direct members of the cabinet, to make appointments to the government, not for appointments to Federal Government positions to

be made by outside committees of people who are not members of

the President’s cabinet or heads of departments. So I think that

would be a real constitutional question to be posed.

I think that there are other constitutional questions. There’s a

letter from the Attorney General’s office expressing quite serious
32

concerns about the Commission’s proposal. I think part of what we

have to recognize is that even if there is constitutional uncertainty

and questions, you’re looking at doubts about the process by which

we’re raising 95 percent of the revenue. So even taking risks in

that area with respect to constitutionality seems to me a problematic course.

Mr. COYNE. Thank you, Mr. Secretary.

Thank you, Madam Chairwoman.

Chairman JOHNSON. Thank you.

Mr. Portman.

Mr. PORTMAN. Thank you, Madam Chair.

I heard Chuck Grassley’s comments earlier about 11th and Constitution. I would like to attest that Larry Summers was not in this

job 2 years ago today—I don’t think, is that correct?

Mr. SUMMERS. Not quite. That’s right.

Mr. PORTMAN. And you’re the third Deputy Secretary in this administration; is that right?

Mr. SUMMERS. It is.

Mr. PORTMAN. But I have been at 11th and Constitution with

Larry Summers. He knows where it is now, so although he wasn’t

around 2 years ago, per Mr. Grassley’s comment, I happen to know

from personal experience that he knows where it is and knows how

to find his way there.

Secretary Summers, thank you again for all the interaction we’ve

had over the last year. We’ve had a healthy give and take, I think,

but disagreed on one of the fundamental recommendations. But do

you think it’s fair to say—and I think this is already stated, at

least indirectly, in your testimony—that the majority of the recommendations you and the Treasury Department support?

Mr. SUMMERS. Certainly there are many, many recommendations—I haven’t done a count, but certainly there are many,

many——

Mr. PORTMAN. I think there are 52 recommendations. I would

guess the vast majority of them, the Treasury Department would

support. Let’s put aside governance recommendation at this point.

Mr. SUMMERS. I think, outside of the governance area, I think

we’re certainly going in the same direction. I think there are a

number of very interesting proposals, such as what’s said about

staggered filing and the like, that in our view are interesting proposals that would require further study before we would be prepared—before certainly we would be comfortable in endorsing those

proposals.

The Commission has a fairly wide range of tax policy proposals

within its simplification section, many of which would be things we

could support, but I think some of which are——

Mr. PORTMAN. Half of which were taken from you, and they

aren’t part of the recommendation, as you know.

Mr. SUMMERS. No, as I say, many, many which we could——

Mr. PORTMAN. It would be a shock to me if I were to hear you

say that you do not support a majority of the recommendations, but

maybe you don’t now. But that would be a shock, given how closely

we worked with you.
33

You mentioned the simplification proposals, which are not a recommendation but simply suggestions that Congress look at them,

and half were taken from Treasury specifically.

Would you agree also that the status quo is simply not acceptable—again, I’m just sort of paraphrasing your own testimony—

and that major structural change is needed?

Mr. SUMMERS. I think there’s no question that we need to make

major changes.

Mr. PORTMAN. Let me say, as you know, at every public occasion,

I have made the point this is not about the Clinton administration.

This goes back to the Bush administration, where I served; it goes

back to the Reagan administration and before. My view, and the

view clearly of a majority of the Commissioners, is that there’s an

inherent flaw in the system and it needs to be changed. But this

is not about Larry Summers or Bob Rubin or the Clinton administration.

Would you say that the Commission report has resulted in Treasury making some of the changes that you have outlined today?

Mr. SUMMERS. Oh, I don’t know. I think we’ve certainly valued

the dialog that’s taken place with the Commission, but certainly

the kinds of pressures that led to the setting of the Commission,

and the kind of concerns that led to the setting of the Commission,

were concerns that we very much felt in the Treasury—and we’ve

been moving along on a whole set of changes, outsourcing to a

much greater extent, the information technology management, converting the management partnership that existed previously to a

management board.

But certainly I think the interaction we’ve had with the Commission, and the sense of the seriousness of this problem, which I

think the Commission has done very much in bringing to public attention, has certainly been——

Mr. PORTMAN. That sounds like a ‘‘No.’’ OK. Which is also a

shock to me, given the interaction we’ve had and the previous testimony and so on. But I just wanted to kind of see where you all

were fitting in.

I’m going to have a chance later to talk to you more about the

management board. You talked about continuity, expertise, and accountability, and I would like to go over that with you.

Madam Chair, can I have some time now, or would you prefer

me to come back on a second round?

Chairman JOHNSON. Yes, go right ahead, Mr. Portman.

Mr. PORTMAN. The first question I guess I would have is along

the lines of what Nancy Johnson talked about, which is the political aspect of the board. If you’re going to put this in legislation,

which you announced today you are going to do, then you’re going

to have the Office of the Vice President in there, OPM and OMB

and so on, Executive Office of the President.

Clearly, we don’t want to politicize the IRS. I assume you agree

with that. We don’t want political appointees involved in the dayto-day management of the IRS from the White House; is that correct, and are you going to change that proposal? I was a little unclear about your earlier response.

Mr. SUMMERS. Anyone who is appointed by the President, whether it’s the current Commissioner of the IRS, whether it’s myself——
34

Mr. PORTMAN. So having the White House——

Mr. SUMMERS [continuing]. Whether it’s members of the proposed

board, is——

Mr. PORTMAN. Having members of the White House, the Executive Office of the President involved, doesn’t bother you? I took it

from your earlier comments that you had some concerns.

Mr. SUMMERS. I do not anticipate—I do not anticipate that members of the White House, political members of the White House

staff——

Mr. PORTMAN. Is the Vice President’s Office not part of the White

House?

Mr. SUMMERS [continuing]. Would have a role in IRS governance.

Mr. PORTMAN. So you will probably change the legislation——

Mr. SUMMERS. Just to make clear that it’s the National Performance Review staff, rather than——

Mr. PORTMAN. Of the 20 members of your board, I question them

with regard to qualifications. Let’s start with number one, expertise. What expertise do they bring? Arguably, your advisory commission brings some expertise. They’re from the outside world. But

then you have two boards. You said they’re going to have teeth. I

guess they’re going to have teeth because they don’t report to the

Commission, as the current Commissioner Advisory Group, CAG,

does. Rather, they report to the Secretary, and that gives them

teeth.

Is that the difference?

Mr. SUMMERS. That, and the fact that they make an annual report to the public on the performance of the IRS, which will form

a basis for holding——

Mr. PORTMAN. Will they have any authority with regard to the

IRS—if their recommendations to the Secretary are not accepted,

do they have any recourse? It’s an advisory group, right?

Mr. SUMMERS. Their recourse is to make their recommendations

and their evaluation of IRS’ performance and the Secretary’s performance public. That is their recourse.

Mr. PORTMAN. With regard to your board, again, there are 20

board members, including—we talked about the Office of Vice

President, OPM, OMB. Do you think they bring that kind of expertise to bear that is needed? Do you think they bring information

technology expertise, the private sector customer service orientation that we’ve talked about throughout the course of the last year,

and as I think you said earlier, Treasury agrees needs to be part

of the IRS?

Mr. SUMMERS. I think they provide an effective mechanism for

oversight. I think people like John Koskinen who served on our

board, who’s had extensive experience in turning around private

sector companies, people like Ray Kelly, who have enormous experience in the law enforcement area, do bring to bear very valuable

perspective.

Mr. PORTMAN. Some of the private sector expertise that we all

acknowledge is needed?

Mr. SUMMERS. They do bring to bear expertise. But I would not

want to tell you that the principal source of outside input to the

IRS is envisioned to be this management board. That’s why——
35

Mr. PORTMAN. So you wouldn’t get the expertise—OK, that’s fine.

So let’s forget expertise then. We need expertise, but we don’t get

it through your board.

Continuity, is another point that I think we agree on. We need

more continuity. We mentioned earlier that you’re the third Deputy

Secretary, and you have focused on the IRS, in my view, more than

any Deputy Secretary in history, particularly in the last 6 months,

from what I can tell historically. Maybe some of the IRS historians

in the room here can correct us on that.

But continuity we agree is a very big part of the problem. It’s a

management issue. As I look at it—and I just looked at this again

this morning—only 2 of the 15 of the specifically designated proposed members of this advisory group have been on the job for the

last 5 years. Only 2 of the 15.

What kind of continuity is that? Seven of the positions have had

three or more occupants in the same period, including yours, your

position. I don’t see how the Treasury plan improves continuity. I

think it worsens continuity. You’re going to have an incredible

amount of turnover. Just looking at your very plan, the numbers

are very clear.

So expertise we’ve kind of discounted. In continuity, you have to

look at the facts. And I guess the last issue is accountability.

Now, do you have a response on the continuity issue? I want to

give you a chance to respond.

Mr. SUMMERS. Thank you. It seems to me there are three responses on the continuity issue.

First, the most important continuity is in the day-to-day chief executive leadership of the IRS.

Mr. PORTMAN. I couldn’t agree with you more. That’s why the

Commission recommended a 5-year term for the Commissioner.

Mr. SUMMERS. That’s why I think the 5-year term recommendation——

Mr. PORTMAN. And you all picked that up. That’s great. Although

you don’t agree with most of the recommendations, apparently, and

we didn’t affect your proceedings or your thinking on it, a few

months ago you decided that that was a good idea, after we recommended it—which is great. That does help in terms of continuity.

But does your board provide continuity?

Mr. SUMMERS. Congressman, if I could just——

Mr. PORTMAN. Does the board provide continuity?

Mr. SUMMERS. If I could just return to the earlier—I want to be

very clear. I think the Commission has made an enormous contribution. There are a very large number of recommendations that

the Commission has made that we share. I just haven’t done a numerical count to know whether it’s a majority or a large number——

Mr. PORTMAN. Maybe we can do it afterward.

Mr. SUMMERS. There are important recommendations that we

share, and I think it’s been an enormous contribution to this process. Certainly its thinking has helped to guide where we all are

now. So if I was understood as saying something different, I should

not have. I think the Commission has made an enormous contribution.
36

Mr. PORTMAN. But your board does not provide any continuity.

It doesn’t solve the problem of continuity. In fact, it exacerbates it.

Mr. SUMMERS. No, I think the 5-year term for the Commissioner

is very effective with respect to continuity. I think the outside advisers who are making an annual report, who will serve in terms

that are staggered, is a very important response to continuity.

I think the most important thing that any of us can do is to build

a career staff that will provide the real long-term continuity and

who are there every day, who are involved in the oversight function. That’s something we’re very much focused on.

Mr. PORTMAN. Again, as you know, we have a lot of specific recommendations in the report, many of which I think you would

agree with, about how to get that senior team additional expertise——

Mr. SUMMERS. Absolutely.

Mr. PORTMAN [continuing]. Some outside expertise, and more

continuity and more expertise is important. I hope to get back to

you later, but I want to pass along to my other colleagues.

Thank you, Madam Chair.

Chairman JOHNSON. Thank you.

Since Mr. Portman and Mr. Coyne invested so much time on the

Commission, I thought it appropriate that they have a chance to

expand a little bit on their questions. I appreciate Mr. Portman

passing on now to other Members of the Subcommittee.

Since there are quite a few Members of the Subcommittee

present, and we have another panel, I would appreciate it if the

rest would stay within the 5 minutes.

Mr. Kleczka.

Mr. KLECZKA. Thank you, Madam Chair.

Madam Chair and Members, first of all I want to acknowledge

the work of the National Commission. Here’s a group of citizens

who spent a lot of time and effort to come up with some recommendations, resolving a problem at an agency that I must say

at the outset will never be popular. The IRS could send everyone

of us a Christmas card and we still would not think nicely of them.

What troubles me about the report, the mainstay of the report,

is that because we don’t like the way they operate, we are going

to turn the management over to a citizen board, knowing full well

this is a government function. If, in fact, other agencies in the future fall into disfavor with the public, I ask the authors of this proposal whether or not they’re going to come forward and suggest a

citizens board for that agency.

I can see Health and Human Services, HHS, not the most popular, but they serve the needs of needy people, so there is some sympathy for them. But they could fall in disfavor and all of a sudden

we come up with the citizens board to run them. Department of Defense, DOD, a couple of stories on $600 toilet seats, and there’s a

proposal before Congress to have a citizens board run them.

After we have all the agencies run by citizen boards, my question

is, what is the sense of electing a President to formulate an administration, one who is responsible to all the voters, to all the residents in all 50 States, I think at that point you make that job kind

of meaningless.
37

I’ll tell you, if you want to talk about disfavor, we can look at

ourselves in Congress. Why not, my colleagues, have a citizen

board to run the day-to-day operations of the Congress? Clearly,

the schedule is not family friendly. Let’s get some housewives on

the citizen board running the schedule of Congress. Let’s get a

bunch of chief executive officers in and have them run the Ways

and Means Committee, because clearly there are too many bumps

and rough edges when the tax bill is being put together.

You can see how absurd this keeps going on and on and on, until

all of a sudden we have no government.

I’m not here to defend the IRS. In fact, if I might, I will relate

to you a recent problem I had with the agency, Mr. Secretary. It

involves my campaign account, wherein interest is taxable, like any

other interest for any other tax filer. So I filed the necessary form

and paid my debt, and lo and behold, a month later, I get a notice

saying ‘‘you underpaid by some $900.’’ Well, I pull out the form,

looked at the percentage, looked at the interest income, and said

no, these folks are wrong.

Well, when they sent me the letter, they didn’t say, ‘‘Jerry, look

this over. You might have a problem.’’ They convicted me and hung

me on the first paragraph. Then they added another two pages indicating to me what the severe penalties were, based on various

amounts and lengths of deficiency. I thought it’s all over. This account is going bankrupt and I’m going to have to resign my seat.

It’s all over for the guy.

So then we write them a letter, and the upshot was that they

were in error, and I received a $15 check for an overpayment. So

no one is here to defend the IRS.

But I think the important thing with this hearing, with the proposal, is that maybe now we’ll have some decent public discussion

on how to change it. Will it be a citizen committee? Don’t know.

I’m very leery about it, and I think that’s one of the major issues

to be decided by this Subcommittee and by the Full Committee

eventually. Nevertheless, at least we’re going to start giving this

the talk and the dialog that it needs.

There are other options that I think we can explore. If, in fact,

we don’t like the attachment of the IRS to the Treasury, let’s make

it a separate entity of the government, controlled by a Secretary

who will be a Cabinet member. If we’re fearful that that Secretary

might be a political crony, let’s put some specifics on who can get

that job—10 years in the private sector, or whatever other criteria

you want to make. So there are other options we can explore.

The bottom line is the importance, Madam Chair, of a public discussion of the issue, and hopefully we’ll put our minds together and

come forth with the best proposals that would satisfy the public’s

need to have an agency who will always do an unsavory thing; i.e.,

take our money, but I think they can do it in a friendly manner.

It’s always easier to pay a bill to a smiling face than someone who’s

frowning. So if we can put the big smile on IRS and some accountable administration, I think that’s the job we should be up to.

As far as the proposal goes, I will be asking the actual Commissioners who will be appearing next specific questions on how this

operation is going to work, what these folks are going to be paid.
38

But nevertheless, we’ve heard a lot of talk over the last couple

of minutes about conflict of interest, people not being partial, or

impartial, and my question to you, Mr. Secretary, is—and Mr.

Portman criticized some of the proposals that you are bringing

forth and putting online now. But what guarantee do we have that

this 7-member Commission is going to be impartial? What guarantee do we have that they won’t bring with them any conflict of interest, and what guarantee do we have that they will serve out

their full term and not resign prior to filling out the term because

of a job change or some other family situation? Could you respond

to that, Mr. Secretary?

Mr. SUMMERS. I don’t think we have those guarantees with respect to the Commission’s proposal. That’s part of why we find the

Commission’s proposal so troubling. We think there will be major

appearance issues raised by people whose primary loyalty is large,

private sector organizations, being put in charge of enforcing the

tax law. We think that such people will serve as long as they will

serve and there’s no guarantee of continuity and input.

We think, if you’re talking about continuity of input, the continuity of input that comes from the fact that Secretary Rubin and myself and our Assistant Secretary of Management, the people who

work with our Assistant Secretary of Management, go into the

Treasury Department every day and are available to work on IRS

issues, respond to IRS questions, every day, is a kind of continuity

of input that is very important.

It would be lost by moving to a proposal where this would be a

side activity for the people who are put in charge of the Nation’s

tax system. We think that putting the Nation’s tax system in

charge of a committee, for whom it is a side activity, with real appearance questions, is not the right thing to do.

Mr. KLECZKA. Thank you.

Thank you, Madam Chair.

Chairman JOHNSON. Thank you.

Mr. Kleczka, this is a core issue, whether or not you’re going to

get greater continuity, and minimize conflict of interest problems

through presidential appointees, approved by the Senate, which is

a very serious business, we all know, or whether you would get

greater continuity and fewer conflicts of interest through appointees to an advisory board that do not go through that process.

This is a core issue that Members of the Subcommittee will give

a good deal of time to.

Congresswoman Dunn.

Ms. DUNN. Thank you very much, Madam Chairman.

Mr. Secretary, I am getting a confusing message from you. I’ve

been told that you worked closely with the Commission in their development of recommendations, and yet now, as we start talking

about a core recommendation, the board of directors, I’m hearing

you say it’s not necessary and that accountability should rest with

the Secretary of the Treasury and the President.

I have a real problem with that. I mean, that’s who it has always

rested with, and that’s who allowed IRS to spend $4 billion of public funds on a computer system that doesn’t work. That’s what people at home whom I represent understand. So I don’t see the valid-
39

ity, and you’re saying we can continue under this same system of

accountability which has demonstrably failed.

You said that the board of directors would be exposed, in your

testimony, to dangerous and unacceptable risks of conflict of interest. As Mr. Portman and our Chairman have said, under the Commission’s recommendations, these would be private sector members

who are special government employees, nominated by the President, approved by the Senate, subject to the same ethics and conflict of interest protections that cover all political appointees. They

would have no interest or involvement in tax policy decisions. It

would not be available to receive income tax information.

I would just like to know what risks are you referring to?

Mr. SUMMERS. Congresswoman, obviously the rules would have

to get drafted if such a board came to pass. As we understand the

rules governing special government employees, who serve on a temporary basis, the nature of the ethics restrictions are far less serious and far less binding than the ethics restrictions that apply to

me, for example, as a full-time government employee.

I would just ask the question, what the inherent conflict is between someone’s service as a chief executive officer of a Fortune

500 company and their responsibility for the enforcement of the

Nation’s tax law. When questions of strategy, with respect to auditing of corporations comes up, how would a member of the business

roundtable avoid, even with the best and most totally honorable of

intentions, being in a situation that would create an appearance of

conflict, as that question was faced. When questions relating to the

quality of taxpayer service provided to corporations were to arise,

the similar kinds of conflicts of interest would arise. When questions with respect to enforcement of laws on cash transfers came

up, how would the head of a large bank be in a position to provide

the appropriate appearance of neutrality.

Of course, one could say, I suppose, that nobody who was in any

of those kinds of situations would be eligible to serve on the board.

But then it seems to me the kind of person that’s being envisioned

as a board member would be ruled out.

Ms. DUNN. We’re all adults; we’re all professionals. Those of us

who come to Congress to represent our constituents have particular

interests. Many of us are small business people. There could be potential conflicts of interest. A Senate-confirmed appointee could be

expected in some manner to set aside a potential conflict of interest, or would recuse himself or herself if that issue came to the

table.

It sounds like what you’re saying is that there’s a potential for

private sector folks to actually influence the IRS in some way, to

affect their own company audits, for example. I hope that’s not

what you’re saying, Secretary Summers, because I think that’s a

really weak position to go at this very considerably considered and

thoughtfully presented board of directors proposal, that we have

recommended and are very interested in pursuing on a very objective level, because we think that finally there will be some accountability at the IRS and, on behalf of my constituents—and I would

guess on every other Members of Congress constituents on this

panel—we’ve got to recognize the reality that right now there is no

accountability.
40

That’s why you’ve changed Commissioners of the IRS, and that’s

why we want to take a good look at this, and we want to have oversight that’s going to pay attention to the IRS and is going to shape

that agency up.

Now, I hope in the future there will be an opportunity to completely redo the IRS. You know, there’s talk of tax systems that

would replace the income tax system. Many of us favor that sort

of thing. But we want to do it thoughtfully and carefully. We don’t

want to leave in place a system that penalizes the people that we’re

here to represent.

Thank you, Madam Chairman.

Chairman JOHNSON. Thank you, Congresswoman.

Congressman English. We do have a vote, but we’re going to go

ahead, I hope, with two members, 5 minutes each.

Mr. ENGLISH. Thank you.

Mr. Summers, I have a couple of questions of my own, but frankly, I wanted to follow along the line of questioning that Representative Dunn had pursued, because I find some of your comments to

be, where they are not ambiguous, astonishing.

Under the Commission’s recommendations, the private sector

members of the board would be special government employees,

nominated by the President, confirmed by the Senate, and subject

to all the same ethics and conflict of interest provisions applicable

to all other political employees. They would have no involvement

in tax policy decisions, and would not be eligible to receive tax return information.

So can you clarify what these risks are that you’re talking about?

Mr. SUMMERS. As a full-time government employee, confirmed by

the Senate, I’m not allowed to earn income by working for any

other employer, other than the Federal Government. As I understand the Commission’s proposal, that restriction would not be a

restriction that would apply to members of the board.

That is a very fundamental kind of difference. My primary loyalty is to the Federal Government. The only person paying any salary to me is the Federal Government. If I am the head of a private

company serving on the board, I am receiving the bulk of my income, the bulk of my professional career activity, the bulk of my

professional loyalty is directed to the institution for which I work.

Inevitably, the job I do as a board member, 11⁄2 days every month

or——

Mr. ENGLISH. Reclaiming my time, my ability as a private sector

board member would be very limited to effect any specific policies

that would affect my company.

I notice also you stated that corporate executives whose companies may be automatically subject to yearly audits could end up determining the audit budget for the IRS in its strategic enforcement

activities.

Now, are you seriously suggesting that these private sector board

members would actually cut IRS enforcement resources to affect

their own companies’ audits?

Mr. SUMMERS. I’m seriously suggesting that I think people would

be led to ask whether a group of corporate executives, deciding how

much resources were going to be devoted to corporate auditing, and

how much resources were going to be devoted to other things,
41

might, would develop a view—not with bad motives at all—would

develop a view that was related to what their primary loyalty was.

Yes, I think that’s a question many people would ask.

Mr. ENGLISH. Mr. Secretary, I’m glad you’re conceding the point

on motives.

Let me move on. You say that the independent board would pose

an unacceptable risk to our Nation’s revenue stream. That has

been the position of the Treasury. How would it do that exactly?

Mr. SUMMERS. I think, by undermining the day-to-day supervision and executive responsibility that the Treasury Department

now exercises, and is exercising with increasing effectiveness and

real results, by undermining all of that, I think it would put at risk

the capacity of the IRS to function effectively, and that, in turn,

would put at risk the Nation’s revenue stream.

Mr. ENGLISH. Well, then, I’ll move to a final question, because

obviously we have a fundamental disagreement on this.

There is a recommendation in this report also having to do with

tax simplification. Do you agree with the comments, with the recommendations of the Commission on tax simplification? Specifically, should there be a complexity analysis of every tax proposal,

and would the Treasury be willing to submit its own proposals to

a complexity analysis before they are submitted to Congress?

Mr. SUMMERS. I think there’s no question that an analysis of

their implications for complexity should play a role, should play a

role in every tax bill. Certainly we think simplification is an important objective. That’s why the Treasury put forth a package of tax

simplification measures, which Congressman Portman and many

others have endorsed. We have been pleased that many of those

provisions, which I think do represent significant simplification,

are contained in the bills that passed the House and the Senate,

and we hope and trust that many of them will survive and make

it through the conference process.

Mr. ENGLISH. Do you then support the Commission recommendation on tax simplification?

Mr. SUMMERS. We support the broad approach of focusing on

simplification, yes.

Mr. ENGLISH. I’ll take that as a qualified yes. Thank you for testifying today.

Chairman JOHNSON. I’m going to recognize Mr. Tanner. Some

Members have gone over to vote. I do not intend to suspend the

panel, if I can avoid it, out of respect for the time schedules of the

following panel.

Mr. Tanner.

Mr. TANNER. Thank you very much, Madam Chairman.

I appreciate your time, Mr. Secretary. Let me ask one question

conceptually. I have read parts of the Commission report, and in

the report language it seems to try to carve out tax policy and law

enforcement functions as not being a part of the Commission.

Now, conceptually, I think there ought to be more discussion

about how much of the tax policy of the country should be turned

over to an independent agency not directly accountable to the people. I don’t think that has been fully communicated in the country,

to the citizens. I think we ought to spend a little time on that, as

I said, conceptually.
42

But could you give us an example or two of how, one, if we accepted the Commission as presented, how does one carve out the

tax policy and law enforcement function and have that work as intended or as conceptualized?

Mr. SUMMERS. Honestly, I think one of the reasons why we’re as

troubled as we are about the Commission’s proposal, and believe

that while completely well intentioned, it would represent a grave

mistake, is that we don’t think it’s possible to separate tax policy

from tax administration, or to separate tax policy from law enforcement.

Every several—Very frequently, Secretary Rubin and I are in the

White House, and we have an opportunity to discuss some tax policy question, and somebody’s got some scheme to do something or

other, using the tax system, and we say that can’t work. It just

can’t work because it’s too great a burden on the IRS and it’s not

feasible.

Frankly, an independent IRS wouldn’t have representatives at

that meeting to make that argument, and if they did have representatives, they wouldn’t get the kind of weight that the Secretary of the Treasury gets. So I think by lodging this responsibility for actually administering the taxes and collecting the revenues

with the Secretary of the Treasury, you internalize much more into

the government’s decisionmaking that administration and administrative ability consideration.

I don’t think, since so much crime—You know, Al Capone went

to jail for tax evasion—that so much crime is detected and enforced

via tracing the money and tracing the financial trail through the

tax system, and many of those things start as very routine audits

but then something comes up in the tax audit, discovers and leads

to a more serious problem. I don’t see how you can really divorce

law enforcement from tax administration.

I think you can write rules, and I think this is the point that the

Commission emphasizes, and I think they’re right. I think you can

write rules that cavern off responsibility and involvement in specific cases from specific people. Just as I can’t get involved in a specific case, I think you can write a rule that says that the private

board member can’t get involved in specific cases.

But I think the problem is that so many of the strategic policy

decisions that the IRS makes are decisions that influence private

interests. That’s where it seems to me you get into the serious

problem.

Mr. TANNER. So am I correct in, I guess, interpreting your answer to say that, although the Commission report has merit with

respect to some of the changes, some of the modernization and so

forth, that conceptually the idea of turning over tax policy and law

enforcement to unelected, independent members of this commission

or agency is troubling in terms of it being overbroad with respect

to these specific items of tax policy and law enforcement function?

Is that a fair characterization?

Mr. SUMMERS. That is very fair, Congressman Tanner. I would

just say that we believe that the Commission’s governance proposal

would represent a grave mistake that would seriously threaten law

enforcement, tax policy, and effective customer service.
43

Mr. TANNER. Maybe we can continue to work on that together

and see if we can reach agreement.

Thank you. I must run and vote.

Mr. SUMMERS. Thank you.

Mr. PORTMAN [presiding]. I didn’t hear the beginning of Congressman Tanner’s question, and I will have a chance to visit with

him later when he comes back. But I took it from his question to

you that his supposition is that the board is involved in tax policy

and enforcement, which as you know it is not. It specifically stated

so in the Commission’s report, and there are safeguards in place

for that. So I hope we’ll have a chance to go over the report in more

detail in the legislation. But there is a specific bar to that.

In fact, when you look at what Mr. Kleczka said, why not make

it an independent agency—and I would love your comments on that

generally—but the main reason that our Commission, I think it’s

fair to say, did not move to the independent agency model is because we do believe there are some synergies with Treasury, and

one of the synergies, of course, is tax policy. Treasury would continue to have tax policy under this proposal.

For you to say, in response to questions about the political appointees, including those of the Executive Office of the President

being involved on your board, that while those folks, to quote you,

would focus on policy and management—this is what I wrote down

from your statement—and they would have no impact on specific

cases, and then for you to turn around and say, ‘‘but this other

board would have strategic decisionmaking that would have an impact on tax policy’’ seems to me to be entirely inconsistent.

Mr. SUMMERS. No. Could I explain for a moment?

Mr. PORTMAN. I would be happy to have you explain. This is your

worst nightmare. It’s you and me. Everybody else is gone. [Laughter.]

If another Member doesn’t come back, we’ll have to move to the

next panel because I see a lot of the Commissioners and other experts are here to testify. But we are going to wait and see if a couple other Members come back in the next few minutes, in that

case, because I know they wanted to talk to you, too.

Go ahead.

Mr. SUMMERS. Congressman, I always enjoy discussing these

issues with you.

What I tried to say, in answering Representative Tanner’s question, is that I think it is possible to, whether it’s a government

board or whether it’s a private board, I think it is possible to cavern off involvement with cases facing specific taxpayers. I think we

know how to do that and I think that can be done. I think involvement in specific cases isn’t a problem on either side.

Mr. PORTMAN. But earlier you did raise that as a concern, specifically with regard to——

Mr. SUMMERS. I think what is a problem, I think——

Mr. PORTMAN. What’s the conflict of interest problem if it’s

not——

Mr. SUMMERS [continuing]. As one gets to policy questions—for

example, a policy question of the allocation of IRS audit resources

between corporations and individuals——
44

Mr. PORTMAN. Let’s talk about that. Let’s talk about that for just

a moment.

Mr. SUMMERS. I think it’s questionable to have a member of the

business roundtable have a central role in making that decision.

Mr. PORTMAN. OK. Let me ask you a specific question about that.

As you know, in the Commission’s report the allocation of resources

for enforcement, precisely what you just said would be the problem,

is determined by the budget. Who determines the budget of the Internal Revenue Service under this report?

Mr. SUMMERS. Well, I’ll leave you to be the authority——

Mr. PORTMAN. No, it’s very clear. The Department of the Treasury. The Secretary of the Treasury approves the budget. It becomes

part of the unified budget. It goes through the same process the

budget does now, with OMB, and it comes to the Hill as part of

the President’s budget.

Why would that be any different—Secretary Summers, I’ll wait

until you finish hearing it from Ed there—but with regard to the

current situation? I don’t get it. I see that as one of many red herrings you’re raising.

When you go through and look specifically at the way we came

at this, which was a balanced approach—frankly, as you know,

about half the Commissioners would have loved independence. But

we tried to move toward you, including the very important issue of

allocation of resources for the IRS.

Mr. SUMMERS. Well, I think that when you get into all of the decisions that your board will shape, how information technology will

be used——

Mr. PORTMAN. So it’s not the budget issue. That was——

Mr. SUMMERS [continuing]. Where the focus will be——

Mr. PORTMAN. Hold it. Let’s get back to the budget one. What’s

your answer?

Mr. SUMMERS. The answer to the budget—even in the case of the

budget ones, the Commission will exercise considerable leverage

over the personnel at the IRS, who will be the people who provide

the information——

Mr. PORTMAN. So it’s leverage over the personnel now, not the

budget. It’s not allocation of resources.

Mr. SUMMERS [continuing]. To provide the information——

Mr. PORTMAN. Let’s just target on what your concerns are and

then we can try to address them. But on the budget side you’re satisfied?

Mr. SUMMERS. I didn’t say that. I didn’t——

Mr. PORTMAN. What are your concerns?

Mr. SUMMERS. I think I’ll have a better chance of clarifying my

concerns if you let me speak for just a——

Mr. PORTMAN. Sure. I just want to stick on one, and then we’ll

go to the next one and try to address that one, and kind of move

our way down.

Mr. SUMMERS. The concern about the budget goes to several levels. First, it is important that the decisionmaking about the microstructure of the IRS budget, which in turn drives the IRS employment locations, in turn drives the information technology, strategy,

in turn drives the way in which taxpayers—there’s interaction with

taxpayers—it is possible to envision that all of those decisions are
45

made at the Treasury level and that all decisions that impact on

the budget are made at the Treasury level.

But once all decisions that are made that impact on the budget

are made at the Treasury level, I would be left to wonder just what

the decisions were that the board is going to make. That’s one

point.

Mr. PORTMAN. Wait a minute. Currently are you saying——

Mr. SUMMERS. Second and separately——

Mr. PORTMAN. I’m confused. Let’s just clarify what you’re saying.

You said micromanagement decisions about the budget are made

at the Treasury level now? Doesn’t the Commissioner put together

the budget?

Mr. SUMMERS. The Commissioner puts together the budget——

Mr. PORTMAN. Which is what the Commission report provides for

as well.

Mr. SUMMERS. Which is reviewed—the Commission puts together

the budget, which is reviewed in very considerable detail in the

Treasury Department, and is responded to in very considerable detail in the Treasury Department, as a central tool of oversight helping to set the organizational priorities for——

Mr. PORTMAN. Why wouldn’t Treasury have that ability under

this proposal?

Mr. SUMMERS [continuing]. For the IRS.

Well, if the Treasury has that ability, then if that——

Mr. PORTMAN. Treasury does have that ability under this report.

I would hope that the Secretary of the Treasury is not making

micromanagement decisions about the budget. If he currently is, I

don’t know how he has time to do all the other things he’s doing

with regard to the domestic and international economy. That certainly is not our intent, that either the Secretary or the board

would do that. The Commissioner does that, and her designees or

his designees.

I think on the allocation issue of resources we have determined

that that is not a legitimate issue.

What’s the——

Mr. SUMMERS. As I understand the Commission’s proposal, the

Commission would propose a budget which it would send directly

to the Hill.

Mr. PORTMAN. Yes. There would also be an informational budget,

just as Social Security does now. The Social Security Administration puts together a budget and sends it to the Hill for informational purposes, which I think will be very helpful to know what

these overseers think about where the allocation should be.

Mr. SUMMERS. But, of course, that budget——

Mr. PORTMAN. But it will then become part of the President’s

budget. Treasury signs off on it. Treasury has to approve it.

Mr. SUMMERS. Which the board——

Mr. PORTMAN. And it then becomes part of the unified budget.

That is the President’s budget to the Hill for the IRS. That’s the

budget that you work from, just as we do with Social Security.

There’s a model here.

Mr. SUMMERS. Of course, the budget that is—of course, Social Security is not run by anyone whose primary loyalty is to the outside.
46

Of course, in Social Security, there are not the same prospects

for——

Mr. PORTMAN. The board sends its approved budget to us. It’s the

same model. It’s an advisory board, the Social Security board. Social Security has a board. They don’t have accountability or teeth

because they’re advisory, along the lines of the Commissioner’s advisory group, and along the lines of your proposed outside board.

Mr. SUMMERS. Social Security has trustees.

Mr. PORTMAN. No, not the trustees. The board. They send forward a budget proposal for information purposes. I’m just saying

there’s a model for that, but the budget proposal from the President is the one that goes through the regular unified budget process.

Mr. SUMMERS. There’s a budget process. The Commission——

Mr. PORTMAN. That’s the one that you’re going to continue to

have approval authority over at Treasury.

Mr. SUMMERS. I understand that. I also understand, that I believe it is the intent of the Commission’s proposal that the outside

board exercise influence over the allocation of resources within the

IRS. If it is in a position to exercise influence over the allocation

of resources in the IRS, the question will naturally arise whether

they will want to allocate resources in a way that favors their primary loyalties. That seems to me to be inherent in the structure

that you pose, unless one took the position that the Commission

wouldn’t—that the board would not influence the allocation of resources within the IRS, in which case it would seem to me to be

difficult to achieve significant improvement without influencing the

allocation of resources.

So I think it is—and I’m sorry that I was not as sharp as I might

have been in addressing the precise details of your proposal—but

I think it is inherent in the proposal that the Commission exercise

authority, or exercise influence, over the allocation of resources

within the IRS. Once you have that, it seems to me you have the

conflicts.

Mr. PORTMAN. Let’s just make it clear again that the way the

budget works is that it’s going to the Secretary of the Treasury for

approval and become a part of the unified budget, so that for future

reference—and we talk about this in our letter to Secretary Rubin,

Senator Kerrey and I, and that issue can be addressed on a factual

basis.

I’m being told we have to go on to the next panel. Congressman

Coyne has agreed not to ask any further questions, I guess. Thank

you very much, Dr. Summers, for being with us.

Mr. SUMMERS. Thank you very much.

Mr. PORTMAN. We would now like to call forward the next panel.

Fred T. Goldberg, Commissioner from the National Commission

on Restructuring the IRS, and currently a partner with Skadden,

Arps, Slate, Meagher & Flom, in Washington, DC.

Robert Tobias, also a Commissioner on the Restructuring Commission, and president of the National Treasury Employees Union.

Assistant Secretary Larry Irving, who also is a Commissioner,

and is currently Assistant Secretary for Communications and Information at the U.S. Department of Commerce.
47

George Newstrom, another Commissioner, who is the corporate

vice president and group executive of Electronic Data Systems,

EDS, in Herndon, VA.

Josh Weston, another Commissioner, chief executive officer,

Automatic Data Processing, Inc., ADP, Roseland, NJ, former CEO

of ADP.

Finally, David Keating, the executive vice president of the National Taxpayers Union, and also a member of the Commission.

Gentlemen, welcome. Thank you for your patience. We understand that Mr. Weston has a flight, so with your indulgence, we

will ask Josh to go first.

Other Members of Congress will be trickling in after these votes,

but I would ask you to proceed, Mr. Weston. I think we’re on the

5-minute rule, is that right. OK. We’ll be on a 5-minute rule, and

then we will have time for some dialog back and forth.

Mr. Weston.

STATEMENT OF JOSH WESTON, COMMISSIONER, NATIONAL

COMMISSION ON RESTRUCTURING THE INTERNAL

REVENUE SERVICE; AND CHAIRMAN, AUTOMATIC DATA

PROCESSING, INC.

Mr. WESTON. Mr. Chairman, thank you. If it would serve the

convenience of the Subcommittee, I don’t mind waiting 5 minutes,

if your colleagues are coming back.

Mr. PORTMAN. Well, I would recommend, Mr. Weston, that you

begin, because you never know about these Members of Congress.

They may or may not come back. But your testimony, of course,

will be made a part of the record, and they will have an opportunity to review it.

Mr. WESTON. Thank you, Mr. Chairman, and Members of the

Subcommittee. My name is Josh Weston. I am chairman of Automatic Data Processing, or ADP for short, where I have been a senior executive for over 25 years. President Clinton appointed me as

one of the Commissioners on the National Commission to Restructure IRS.

ADP is a $4-plus billion computer services company, with over 50

computer centers, over 30,000 employees, and by far the longest

consecutive annual growth record of any American company—36

consecutive growth years in a row.

We currently pay well over 20 million Americans every payday,

on behalf of some 300,000 employers. And we electronically interface with over 2,000 U.S. taxing authorities, from the IRS to the

smallest school district in Ohio.

Our side of the relationship with IRS is paperless, as we transmit $200 billion per year to the IRS. We also give them 35 million

paperless W–2 forms each year, and millions of electronic tax returns from those employers.

ADP handles over 100 million client phone calls per year, almost

as many as the IRS. And while 40 to 60 percent of the IRS phone

calls get to their intended destinations, well over 90 percent of our

calls do so.

We also support 100,000 stock quotation terminals for Wall

Street, where critical response time is measured in milliseconds.
48

Our computers process 20 percent of all Wall Street trades, where

timing and accuracy are very critical, as is the case with payrolls.

So I think our company and I both know a lot about service, efficiency, computerization, and employee motivation.

In addition, I serve on the boards of four other very large service

companies. In each such case, I think I am very well informed, focused, and an influential part timer. Although those boards generally pay me $30,000 to $40,000 annually for my efforts, they do

get my dedicated attention. My fellow board members in the private sector, on average, serve noticeably longer than appears to be

the case in IRS and Treasury executive positions and advisory

boards.

Those companies on whose boards I serve also get free supplemental help from my ADP colleagues whenever I think it can be

helpful. Those boards neither micromanage nor implement policy.

In fact, they do not manage. But they do maintain clear focus, oversight, priorities, continuity, and a demand for measurable results

and outcomes.

The President recently identified a very qualified and capable

private sector executive to be the next IRS Commissioner. Because

of my Commission activities and knowledge, and my private sector

activities, it was I, as a private sector part timer, who was able to

identify and recommend this next likely chief executive officer of

the IRS to both Bob Rubin and Larry Summers.

I give you all this background because it illustrates the kind of

public-minded talent and help that is available for the type of IRS

governance board that our National Commission has recommended

to Congress. And there are many other senior private sector execs

like me. My self-description also illustrates why I disagree with the

Treasury Department’s view that a mostly external IRS board of

experienced senior service execs would not be an appropriate,

qualified, or dedicated governance entity for the operational and

service portion of the IRS.

As a further indicator of the relevance and abilities of senior, private sector executives to guide IRS on operational matters, I will

tell you that in just 4 months I voluntarily made five, indepth visits to five different tax centers. Frankly, I doubt that any or many

of the current internal Treasury Department advisors to IRS have

seen and learned from as many IRS field personnel and tax processes as have I as a part-time, unpaid outsider. And there are

other non-Treasury Department executives like me who could bring

very relevant and consistent guidance to the IRS if our Commission’s recommendations on a governance board are adopted by Congress. Incidentally, I am not applying for the job.

By contrast, on the subjects of relevant experience and consistency, the past 20 years clearly indicate that the various existing

IRS and Treasury Department governance and oversight processes

have suffered from a glaring and continual lack of relevant executive experience, focus, consistency, and knowledge on a scale that’s

necessary for the IRS.

The present, past and prospective consistency and continuity in

IRS oversight by the Treasury Department were and are flawed because the relevant officials, often political appointees, generally

have low longevity and limited relevant experience that is nec-
49

essary to guide the IRS and its chief executive officer in dealing

with better service, better efficiency, and state-of-the-art electronics

that aligns technology with the business mission.

The recent Treasury proposal of a 14-person advisory board hardly approaches the prospective value and punch of our recommended

board. The Treasury’s large advisory board would include only four

senior executives from the private sector and would only meet

quarterly. It would not have intensity. It would not have clout. It

would not have accountability. It would be more like a townhall

meeting.

The Treasury’s proposed 20-percent internal management and

review board consists mostly of interagency, mid-level department

heads who would generally lack the degree and scale of senior-level

experience to truly create and guide a $1.5-trillion, 100,000-

employee, computerized service environment that handles 1 billion

transactions and 150 million phone calls a year. Nor could such a

heterogeneous additional board, as recommended by Treasury, likely have a shared, sustained strategic vision with clear authority

and accountability.

Some people have characterized our Commission’s proposal as

setting up a freestanding, privatized, nonaccountable tax enforcement agency. Those allegations are not accurate. Each board member would be selected by the President, who could also terminate

him or her. The Senate would have a say on each appointee. The

Secretary of the Treasury would be on that board. The board’s

budget requests would flow through both the Treasury Secretary

and the Congress. This board would have no say on tax policy and

tax enforcement, which would continue to flow through Treasury.

The bulk of the IRS employees are not in heavy-duty enforcement. Most IRS employees are in service and operations because

well over 75 percent of revenues come in almost automatically from

employee withholding taxes and employer payroll taxes, where tax

enforcement and tax policy are not primary issues.

Before concluding, I would like to emphasize to this Subcommittee some significant, non-governance observations. As you probably

well know, our tax collection system is based on voluntary selfassessment. It produces $1.5 trillion per year. The voluntary compliance is around 85-percent accurate, which is very high by most

international comparisons.

Voluntary self-assessment is very sensitive to taxpayer attitudes

and taxpayer treatment. A mere 1-percent compliance shift in either direction affects Federal proceeds by $15 billion a year.

Current IRS service standards, behavior, and audit methodology

are much below the best private sector standards and probably cost

the government huge shortfalls in revenue potential and goodwill.

Better, more qualified top-level board governance, not daily management by the board, could make a big difference.

I thank you for your attention.

[The prepared statement follows:]
50

Statement of Josh Weston, Commissioner, National Commission on

Restructuring the Internal Revenue Service; and Chairman, Automatic

Data Processing, Inc.

Madam Chair and members of the Committee. My name is Josh Weston and I

am chairman of Automatic Data Processing, Inc., or ADP, where I have been a senior executive for over 25 years. President Clinton appointed me as one of the commissioners on the National Commission to Restructure IRS.

ADP is a $4+ billion computer services company, with over 50 computer centers,

over 30,000 employees, and by far the longest consecutive annual growth record of

any U.S. company . . . 36 years in a row.

We pay well over 20 million Americans every payday, on behalf of 300,000 employers. We electronically interface with over 2000 U.S. taxing authorities, from IRS

to the smallest school district in Ohio.

Our side of the relationship with IRS is paperless, as we transmit $200 billion

per year to IRS. We also give them 35 million paperless W–2 forms each year and

millions of electronic tax returns from employers.

ADP handles over 100 million client phone calls per year, almost as many as IRS.

While 40–60% of IRS phone calls get to their intended destinations, well over 90%

of our calls do so.

We support 100,000 stock quote terminals for Wall Street, where critical response

time is measured in milliseconds. Our computers also process 20% of all Wall Street

trades, where timing and accuracy are critical, as is the case with payrolls.

So, I think our company and I both know a lot about service, efficiency, computerization, and employee motivation.

In addition, I serve on the boards of four other very large service companies. In

each such case, I think I am a very well informed, focused, and influential parttimer. Although those boards generally pay me $30 to $40 thousand annually for

my efforts, they get my dedicated attention. Those companies also get free supplemental help from my ADP colleagues when I think it can be helpful. My boards neither micromanage nor implement policy, but they do maintain clear focus, priorities,

continuity, and a demand for measurable results and outcomes.

The President recently nominated a very qualified and capable private sector executive to be the next IRS Commissioner. Because of my Commission activities and

knowledge, it was I, a private sector part-timer, who was able to identify and recommend this next CEO of the IRS to Bob Rubin and Larry Summers.

I give you all this background because it illustrates the kind of public-minded talent and help that is available for the type of IRS governance board that our National Commission has recommended to Congress. My self description also illustrates why I disagree with the Treasury Department’s view that a mostly-external

IRS board of experienced senior service executives would not be an appropriate,

qualified, and dedicated governance entity for the operational and service portion

of the IRS.

As a further indicator of the relevance and abilities of senior, private sector executives to guide IRS on operational matters, I will tell you that in just four months,

I voluntarily made five, in-depth visits to five different tax centers. Frankly, I doubt

that any or many of the current internal Treasury Department advisors to IRS have

seen and learned from as many IRS field personnel and tax processes as have I as

a part-time outsider. And there are other non-Treasury Department executives like

me who could bring very relevant and consistent guidance to the IRS if our Commission’s recommendations on a governance board are adopted by Congress. Incidentally, I am not applying for the job.

By contrast, on the subjects of relevant experience and consistency, the past twenty years clearly indicate that the various existing IRS and Treasury Department

governance and oversight processes have suffered from a glaring and continual lack

of relevant executive experience, focus, consistency, and knowledge in large scale

service and operations environments. The past, current, and prospective consistency

and continuity in IRS oversight by the Treasury Department were and are flawed

because the relevant officials, often political appointees, generally have low longevity and limited relevant experience in roles that are intended to guide the IRS and

its CEO, towards better service, better efficiency, and state-of-the-art electronics

that aligns technology with business mission.

The recent Treasury proposal of a 14-person advisory board hardly approaches the

prospective value and punch of our recommended board. The Treasury’s large advisory board would include only four senior executives from the private sector, and

would only meet quarterly. It would not have intensity, clout, and accountability.

It would be more like a town hall meeting.
51

The Treasury’s proposed internal management and review board consists mostly

of inter-agency, mid-level department heads who would lack the degree and scale

of senior level experience to truly create and guide a $1.5 trillion, 100,000 employee,

computerized service environment that efficiently handles a billion transactions and

150 million phone calls per year. Nor would such a heterogeneous additional board

likely have a shared, sustained strategic vision with clear authority and accountability for achieving objectives.

Some people have characterized our Commission’s proposal as setting up a freestanding, privatized, non-accountable tax enforcement agency. Those allegations are

utter nonsense. Each board member would be selected by the President, who could

also terminate him or her. The Senate would have a say on each appointee. The

Secretary of the Treasury would be on the board. The board’s budget requests would

flow through both the Treasury Secretary and the Congress. The board would have

no say on tax policy and tax enforcement, which would continue to flow through

Treasury.

The bulk of IRS’ employees are not in heavy-duty enforcement functions. They are

in service and operations, because well over 75% of revenues come in almost automatically from employee withholding taxes and employer payroll taxes, where tax

enforcement and tax policy are not primary issues.

Before concluding, I would like to emphasize to this Committee some significant,

non-governance observations that are important to your deliberations.

1. As you know, our tax collection system is based on voluntary, self-assessment.

It produces $1.5 trillion per year. That voluntary compliance is around 85% accurate, which is very high by most international comparisons.

2. Voluntary self-assessment is very sensitive to taxpayer attitudes and treatment. A mere 1% compliance shift in either direction affects federal proceeds by $15

billion.

3. Current IRS service standards, behavior, and audit methodology are much

below the best private sector standards, and probably cost the government huge

shortfalls in revenue potential and goodwill. Better, more qualified top-level board

governance (not daily management by the board) could make a big difference.

4. Congress also needs better coordinate its oversight and interference with the

IRS. In a typical year, at least seven different committees interrogate and guide the

IRS. They typically hold 20–30 hearings per year. In each of these past ten

years,you have authorized over 40 different GAO investigations and reports on the

IRS, most of which have been far more burdensome than useful. In a typical IRS

year, there are over 12,000 Congressional calls and letters to IRS requesting some

kind of action. The Congressional process can be much improved.

5. I strongly recommend, as does our Commission report, that the House and Senate have one joint, senior body to better coordinate the direction, focus, and consistency of Congressional and GAO guidance.

6. Because there are no complexity tests or cost/benefit analyses applied to each

incremental piece of tax policy, legislation, or IRS regulation, IRS and taxpayers are

both very heavily burdened with unnecessary and unproductive complexities and inefficiencies. All proposed tax policy and regulatory changes should require a concurrent complexity analysis.

In addition, the IRS Commissioner should be directed to annually submit to some

joint House/Senate committee a list of best candidates for further simplification that

would have little effect on either tax policy or tax revenues.

7. Finally, I have a few comments on technology:

a. It is imperative that you fully fund and monitor IRS progress on fixing the Year

2000 challenge well before December 1999, or chaos will ensue.

b. It is equally imperative that IRS be allowed and encouraged to build and retain

an experienced, capable senior technology leadership team that is not solely home

grown talent.

c. Electronic filing and other simplifications are critical to enhanced accuracy, efficiency, and auditing. This project needs funding, clear targets, and legislative revisions to make electronic more attractive and simpler.

I thank you for your attention and would be pleased to further help you.

Chairman J

In view of your schedule, we are going to proceed with questions

OHNSON. Thank you, Mr. Weston.

f

at this moment, and I am going to recognize Mr. Portman.
52

Mr. PORTMAN. Mr. Weston, thank you for your testimony today.

Mostly, though, thanks for your work on the Commission. You were

tough, hardnosed, nonpartisan, sometimes monopolizing the hearings for us, but honestly, it was a pleasure to work with you, and

I think all of the Commissioners share in that commendation because you brought that private-sector expertise, knowledge, and

commitment to the task. So thank you for all you did.

I have one question for you, and it has to do with your experience

on both the ADP board and other boards you have been on because

I think that goes to a lot of the concerns that the Treasury has

raised.

You serve on a couple of major boards now, you said, and you

have been on the ADP boards. Do you all micromanage these companies? Do you get involved in decisions that would be the equivalent of an individual taxpayer’s decision? Tell us a little about what

you do.

Mr. WESTON. I think the polite answer is ‘‘heck no,’’ and I could

substitute two other letters if I did not have to be polite.

Most board members I serve with clearly recognize that a board

does not manage, cannot manage, should not manage, and will not

manage. It just does not happen that way except in some crazy,

freak situation that I do not know about.

Most board members have senior-level executive experience

someplace else, and they clearly understand the difference between

oversight and guidance on the one hand and management on the

other, and I cannot recall in any of the five boards I am on, all of

which are large service organizations, a single instance of a board

zeroing in on micromanagement versus insisting and getting from

the chief executive officer clear plans, clear accountability, and

intermittent updates on status versus those plans. If the chief executive officer is not performing according to those plans, then the

board holds the chief executive officer accountable and in some regrettable situations gets a different chief executive officer, but a

board cannot and does not micromanage, does not manage at all,

and every time I heard the word ‘‘manage’’ earlier this morning, it

seemed to me to be a gross misconnect between reality of boards

and theoretical hypotheses.

Mr. PORTMAN. As one follow on, would you say that the IRS can

use some of that oversight and guidance that a board does supply?

Mr. WESTON. Well, let me give you just a few examples. Every

board I am on, once a year, receives a very clear, long-term plan

from the chief executive officer and this plan is massaged,

critiqued, and if necessary, the plan is amended.

Once there is a long-term plan and direction, every board I am

on receives an annual operating plan which is more than just a

budget. It has all other key objectives, key organization needs, and

once approved by the board, it is the chief executive officer’s job,

not the board’s job, to achieve that performance, and every board

I am on gets a quarterly update at least on how the company is

doing versus those particular plans. If an issue is not going well,

the board asks the chief executive officer to come back with a clear

course of action to remedy the shortfall as compared to a board trying to manage around the chief executive officer.

I do not know if I answered your question.
53

Mr. PORTMAN. You did. Thank you.

Chairman JOHNSON. Mr. Coyne.

Mr. COYNE. Thank you, Madam Chairwoman, and thank you,

Josh, for your testimony. I appreciate your being here today.

I just wanted to followup on your testimony relative to the

boards that you serve on. You stated that the members of these

boards do not intervene in the day-to-day operations of the boards.

Do you see any circumstances under which someone who would

serve on the proposed IRS board would be asked to act on behalf

of a constituent or taxpayer relative to IRS problems

Mr. WESTON. My comment on that, Congressman, is that on any

board I am on, if occasioned by accident some individual board

member appears to be going off on a toot, whether it is self-serving

or just hysterical, the other board members have sufficient respect

and recognition that they will cut off that board member and say,

‘‘Kindly take that thing offline. We want to talk to you.’’

One of the things that an external board does is monitor the performance of its individual associated board members, and if you

have people of experience and clout who have served on boards like

that, they are a self-correction device for any other board member

who might by accident be going off on an inappropriate tangent.

If for some reason the board members did not recognize it quickly, it is certainly the chief executive officer’s prerogative to call to

the attention of the board or the chairman of the board that this

particular item is better handled in some different way. It can be

done, Congressman.

Mr. COYNE. So the potential intervention exists?

Mr. WESTON. Well, if it arose, I would think all of the following

would be remedially operative. Within the context of the 7-member

board, including the Secretary of the Treasury, there would be at

least somebody who would say that particular proposal is off limits.

If for some reason the board did not self-correct, the President,

under our proposal, would literally have the power to fire that particular board member.

So I think the checks and balances are such that if there by accident arose an inappropriate initial direction, it would not survive

the scrutiny of the fellow board members, the Secretary of the

Treasury, the chairman of the board, and the President who would

have the right to fire such inappropriate board member.

Mr. COYNE. Thank you.

Chairman JOHNSON. Mr. Weston, I have had a chance to review

your testimony, and I appreciate your speaking to so many of the

issues that have been discussed here today, but on the issue of continuity, which I think is one of the most important, do you think

we can get people to serve 5 years on something that takes this

much attention?

Mr. WESTON. I have served on one board of a very large company

that pays me somewhere between $30,000 to $40,000 a year. I have

served on that board for 12 years. I think my inputs to the board

far exceeds my income, if you want to measure it monetarily.

I think, although I have never done the arithmetic, on every

board I am on, the average longevity of the incumbent board members is greater than 5 years. Some may have 2 years. Some may

have 9, and I think the idea of serving something outside of your
54

own private company is not strange music to senior chairmen and

senior chief executive officers in the private sector. They do not do

it for money because $30,000 to $40,000 a year, although to some

people it is significant, is not the driving force in getting board

members on large entities.

Chairman JOHNSON. Honestly, knowing this sort of environment

in which public issues are discussed at this time in our country, do

you think that we could get the caliber of people we need willing

to go through the Senate confirmation process?

Mr. WESTON. Well, I do not know about the Senate confirmation

process, but I——

Chairman JOHNSON. Well, they could, at the worst, be subject to

rather ugly conflict-of-interest questions.

Mr. WESTON. Well, my comment would be more general in this

proposed board. I think in many important areas of the public sector, very good private-sector people are discouraged from participating because of the hearing process, but that is not an observation

particularized to our recommendation. I think it makes all aspects

of public service somewhat handicapped.

Chairman JOHNSON. I agree with you on that. I also think the

issue of continuity in the kind of board the Treasury is proposing

is a very, very big issue, but I wanted to at least get your opinion.

Mr. WESTON. If I could add a comment, Madam Chairwoman, to

what you just said. Aside from the private boards that I have already discussed that I serve on, I am involved in several very wellknown pro bono nationwide boards. The board members on those

boards, such as the Committee for Economic Development, CED,—

the board members are generally chief executive officers and chairmen of wherever they come from. They get paid zero at CED and

other organizations that I serve in the pro bono sector. They do it

for the betterment of our society. They do it to return to society,

thank you for our good luck, and I do not think that the fact that

the pay is not high or other things really determines how many

senior executives would react.

I can think, although this is the wrong place, of at least a halfa-dozen people who are equal or better than I am in qualifications

for this kind of a board who I believe, if invited, would serve.

Chairman JOHNSON. Thank you.

This is not a question, but I do want to put on the record a part

of your testimony that you skipped over in deference to the time.

You mentioned that there are seven different committees that interrogate and ‘‘guide’’ the IRS, and one of the things that this report does do is to recommend that we improve the quality of oversight in the legislative branch of the IRS and eliminate some of the

duplication and tensions and contradictory guidance that we give

the IRS. I think that is a very important part of this report that

this body is all too likely to ignore, and I intend to go into that at

greater length in future hearings, and I hope that we will succeed

in a way that will please you in that regard.

Mr. Cardin has joined us, and I am pleased to have him. He had

a very important meeting this morning down at the White House

and was unable to be here earlier.

Would you like to question at this time? Mr. Weston has a plane

to get.
55

Mr. CARDIN. Thank you, Madam Chairman. I appreciate the

courtesy of being included. I have no questions for Mr. Weston. I

look forward to the other witnesses’ testimonies.

Chairman JOHNSON. I thank you, Mr. Weston, for your being

with us this morning. We will move on now to the rest of the panel.

Mr. WESTON. Thank you, Madam Chairwoman.

Chairman JOHNSON. Mr. Goldberg, it is a pleasure to have you,

friend. You have brought a lot of experience to this Commission,

and we look forward to hearing your comments.

STATEMENT OF HON. FRED T. GOLDBERG, JR., COMMISSIONER, NATIONAL COMMISSION ON RESTRUCTURING THE

INTERNAL REVENUE SERVICE; PARTNER, SKADDEN, ARPS,

SLATE, MEAGHER & FLOM; AND FORMER COMMISSIONER OF

THE INTERNAL REVENUE SERVICE

Mr. GOLDBERG. Thank you, Madam Chair.

I served as IRS Chief Counsel from 1984 to 1986 under President

Reagan. I served as IRS Commissioner from 1989 to 1991 and as

Assistant Secretary for Tax Policy during 1992 under President

Bush. I was appointed to the Restructuring Commission by Senate

Minority Leader, Tom Daschle. I am appearing today as a member

of the Commission and not on behalf of any client interest.

In light of the time constraints and my own view that the Commission’s report pretty much speaks for itself, I would just like to

comment briefly on a couple of matters that I would urge the Subcommittee to keep in mind as it goes through these deliberations.

Before turning to those points, however, I would like to thank Congressman Portman and Senator Kerrey for their work in Chairing

the Commission. I think they did an extraordinary job. I think that

Congressman Coyne, Senator Grassley, and those of you who serve

on these elected positions and have many pulls on your time, I

found it, as a citizen, a very encouraging experience because I

think there is a shared bipartisan commitment to making this

thing work better, and I would like to express my gratitude to each

of you.

I think the first point that I would like to make is that in considering the recommendations, as you go forward, it is critically important to keep in mind the criteria for the decisions you are about

to make, regardless of the problems we were looking at, regardless

of whether we were talking about computers or tax gap or telephone service. Every issue we examined, we came back to the same

conclusions, and I believe, based on Secretary Summers testimony

this morning, they have reached the same conclusion.

Wherever we look, whatever issue we are looking at, what is

missing is an explicit agreement on what the administration and

Congress want from the IRS, and what is missing is the expertise,

accountability, and continuity to deliver on those expectations. So

that, whatever recommendations you move forward with, I urge

you to test them against those standards.

When you apply those standards, I believe that the case for the

Commission’s recommendations regarding management, governance, and oversight is overwhelming. A commissioner for a 5-year

term, giving that commissioner the authority and the tools to build

his or her own team, and to hold his or her colleagues accountable
56

for performance, a Board of Governors fully accountable to the

President of the United States with the expertise and continuity to

focus on strategic and long-term objectives, and the ability to hold

the commissioner accountable for performance, coordinated congressional oversight among the seven Committees responsible for

all aspects of the IRS, stable financing over a 3-year period, these

recommendations comprise an integrated package.

Each of these elements is essential to provide for a clear statement of vision, for the expertise, the accountability, and the continuity necessary to give the American people what they have every

right to demand and expect from the IRS.

With respect to how you think about the IRS, the Commission’s

report contains two recommendations that have not received a

great deal of attention, but I believe are of critical importance.

First, the IRS should not, should never contact a taxpayer unless

the IRS is prepared to provide that taxpayer with a prompt, highquality resolution of the matter in question.

Second, the government should not, should never force a citizen

to deal with an Internal Revenue Service employee who is not

trained to do the job and who does not have the tools to do the job

properly.

These may sound obvious. This is business necessity and, I believe, a moral imperative in our system of government, but it is not

happening. It has not happened for many years. If you were to accept this view of how the IRS is to work, it would transform the

agency.

Most of the controversy has focused on the Commission report’s

recommendation, creation of a Board of Governors. Several points.

First, I urge you to bear in mind that it is part of a comprehensive

package. Having served as Commissioner and having served in the

Treasury, I can certainly understand the Treasury’s discomfort

with this particular recommendation, but I am absolutely certain

that that discomfort is well worth enduring for the sake of the

other reforms being recommended. In my view, it is not even a

close question.

With respect to the concerns that have been raised by Treasury,

it is critically important to be clear on what the Commission is and

is not recommending.

First, the President of the United States remains ultimately and

unambiguously accountable for tax administration. The President

appoints the board members, and the President has the unfettered

power to remove those board members. Those board members are

confirmed by the Senate of the United States.

Second, by statute, the board would have no involvement in,

much less authority over, tax policy matters, tax law enforcement,

procurement decisions, or day-to-day administration of the tax

laws. These responsibilities are and these responsibilities should

remain vested in the Secretary of the Treasury, the Commissioner

of Internal Revenue and others to whom authorities have been appropriately delegated. Nothing would change in this regard.

Third, and this is a point that Josh made far more eloquently

and based on far more experience than I have personally, but the

function of the board is to provide overall governance and to help
57

hold the commissioner accountable for delivering strategic and

long-term objectives.

In my judgment, one of the primary areas of expertise that this

board would bring to bear is the ability to distinguish between

strategic objectives, long-term objectives, overall accountability,

and the day-to-day management of affairs of the enterprise. In my

judgment and in my experience, the ability to distinguish between

those two types of activity is sorely lacking in the Federal Government.

Though well aware there is no perfect answer to these issues,

what is important is to keep in mind that we are trying to achieve

a balance. We have to make choices between competing good and

laudable objectives, and I think that the Treasury’s recommendations, management board are instructive in this process.

Yes, the recommendation avoids an issue that is of concern to the

Treasury Department, but ask yourself about the criteria against

which the recommendation should be attested. Does that 20-person

board do anything to provide the kind of expertise that is required,

including the expertise to distinguish between oversight and dayto-day management? I do not think so.

Does that board bring to bear an ability to impose accountability?

I do not think so.

Does that 20-person board provide for the continuity that is essential to make the IRS work? Whether you are talking computers

or training or customer service or access or improved enforcement

and compliance, making a 100,000-person organization get the job

done, buy into the kind of change that has to happen is a process

that requires years of energy and focus and attention. Will you get

that kind of energy focus and attention out of that 20-person

board? In my judgment, the answer is no.

What you are likely to get is more micromanagement, more diffusion of attention, and while I believe utterly unintended, absolutely

unintended by the administration, if you step back and you say we

are talking 20 political appointees and giving them monthly contact

and monthly responsibility over the activities of the IRS, with no

apparent restrictions on access to tax return information, no apparent restriction on access to specific case matters, none of the safeguards that were built into our recommendations, I believe that

you are courting disaster.

Thank you very much.

[The prepared statement follows:]

Statement of Hon. Fred T. Goldberg, Jr., Commissioner, National Commission on Restructuring the Internal Revenue Service; Partner, Skadden,

Arps, Slate, Meagher & Flom; and Former Commissioner of the Internal

Revenue Service

Madam Chair and Members of the Committee: My name is Fred Goldberg. I

served as IRS Chief Counsel from 1984–1986, as IRS Commissioner from 1989–

1991, and as Assistant Secretary of the Treasury for Tax Policy during 1992. I was

appointed to the IRS Restructuring Commission by Senate Minority Leader Tom

Daschle. I am appearing today as a Member of the Commission and not on behalf

of any client interest.

For the most part, I believe the Commission’s Report speaks for itself, and I will

limit my comments to several observations that I urge you to keep in mind as you

review our recommendations.
58

THE CONTEXT

The IRS is the one institution of government that directly affects everyone. It is

essential that it meet the demands and expectations of the American public. It does

a very difficult and important job; that job is made close-to-impossible by a complicated and unworkable Internal Revenue Code. Most IRS employees are hardworking and well-meaning, and the IRS still collects most of the revenue that is due

and owing at a lower cost than its counterparts around the world.

At the same time, however, there is widespread frustration that something is terribly wrong—from phones that aren’t answered and audits that go on forever to correspondence that is often incomprehensible; from employees who lack the training

and tools to do the job to employees that view all citizen-taxpayers as crooks and

cheats; from a large and growing tax gap to legendary computer troubles. Above all,

there is one, incontrovertible fact: the IRS fails to meet the minimum acceptable

standards that citizens have come to expect and demand from service companies in

the private sector. This failure does not mean that the IRS is doing ‘‘worse’’—it

means that the IRS has not kept pace with changes that are transforming the private sector.

THE CAUSES AND CRITERIA FOR CHANGE

By and large, the problems result from two causes. First is the complexity of the

tax law. This issue was beyond the scope of the Commission’s charge, but it is important to emphasize our finding that simplification of the tax law is essential.

Second is the need for fundamental change in the management, governance and

oversight of the IRS. Regardless of the ‘‘problem’’ under review, the same themes

kept recurring. What’s missing is agreement on what the Administration and Congress want from the IRS—and the expertise, accountability, and continuity to deliver on those expectations.

This is the most important point to bear in mind. All of our recommendations

were focused on these criteria: what do we want from the IRS, and how can we provide for the expertise, accountability and continuity to get the job done? I urge you

to test our recommendations—and consider alternatives—against these standards.

THE COMMISSION’S RECOMMENDATIONS

When viewed in this light, I believe that the case for the Commission’s recommendations in the areas of management, governance and oversight is overwhelming:

• Appoint the Commissioner for a five-year term

• Give the Commissioner authority and tools to build his or her own senior management team, and hold those individuals accountable for performance

• A Board of Governors—fully accountable to the President of the United States—

with the expertise and continuity to focus on strategic, long-term objectives, and

hold the Commissioner accountable for performance

• Coordinated Congressional oversight among those responsible for all aspects of

the IRS, with a specific focus on strategic and long-term issues

• Stable financing over a three year period and explicit Congressional authority

to provide additional IRS funding outside the budget caps, subject to the express

understanding that the IRS will use that three year period to get its house in order,

develop appropriate performance measures and obtain ‘‘clean’’ financial audits.

These recommendations comprise an integrated package. Each of these elements

is essential to provide the requisite expertise, accountability and continuity; no single recommendation standing alone would be sufficient.

With respect to the question of vision—what’s expected of the IRS—the Commission believes that this is ultimately a matter for the Administration and Congress

to decide, on behalf of the American people. A primary purpose of the reforms we

are recommending is to create a structure that will force agreement on this all-important issue.

Nonetheless, most Commission members share the vision laid out by Senator

Kerrey in his statement earlier today. There are many ways to describe this consensus—for example, customer service comparable to the best that is available from the

private sector. What needs emphasizing is that this choice has consequences. For

example, we recommend that the IRS adopt two fundamental principles in its dealings with the American public:

• The IRS should not contact a taxpayer unless the IRS is prepared to devote the

resources necessary to provide the taxpayer with a prompt, high quality resolution

of the matter in question.
59

1 It is worth noting that other, highly regarded tax administration systems go much further

than the Commission’s recommendations. For example, the California tax system is administered by independent agencies governed by elected officials. Revenue Canada, which is undergoing its own restructuring, is independent of the Ministry of Finance.

• The IRS should not force the taxpayer to deal with an IRS employee unless that

employee is adequately trained and has the tools to do the job properly. These

standards are a business necessity and a moral imperative in our system of government. They may sound obvious, but make no mistake about it: at present, and for

all too many years, the IRS has failed to live up to these standards. I can tell you

from personal experience, if the IRS did adhere to these standards, it would transform tax administration.

The reasons for this failure go to the essence of our recommendations: First, there

has been no explicit acceptance—by either Congress or the Executive Branch—that

these standards embody first principles of tax administration. Second, management,

governance and oversight of the IRS does not provide the expertise, accountability

and continuity that would be necessary to meet these standards.

To prove the point, ask yourselves the following questions: What if adhering to

these standards meant lower audit coverage and a short-term reduction in revenue?

What if adhering to these standards meant increased funding for the IRS? What

measures are in place to assess whether the IRS is meeting these standards? How

do the Administration’s budget request and Congressional appropriations align

themselves with these standards? How many Congressional oversight hearings have

focused on these standards? Who’s accountable for meeting these standards?

THE BOARD OF GOVERNORS

Most of the controversy surrounding the Commission’s Report has focused on the

recommendation for a Board of Governors. As a preliminary matter, it is important

to reemphasize that this is only one in a series of integrated recommendations to

provide expertise, accountability and continuity. Having served as IRS Commissioner and as Treasury Assistant Secretary, I can understand why this particular

proposal makes the Treasury Department uneasy. But I am absolutely certain that

any discomfort would be well worth enduring for the sake of the other reforms being

recommended by the Commission. In my view, it’s not even a close question.

With respect to the concerns that have been voiced by Treasury, it is important

to be quite clear on what the Commission is—and is not—recommending.1 First, the

President remains ultimately and unambiguously accountable for tax administration. The President would appoint Board members, and could remove those members at will. Second, by statute, the Board would have no involvement in (much less,

authority over) tax policy matters, tax law enforcement, procurement decisions, and

day-to-day administration of the tax laws. These responsibilities are—and would remain—vested in the Secretary of the Treasury, the IRS Commissioner or others to

whom appropriate authority has been delegated. Thus, nothing would change in this

regard. Third, the function of the Board is to provide overall governance, and hold

the Commissioner accountable for delivering strategic and long-term objectives. One

of the primary areas of expertise that Board Members from the private sector would

bring to their job is the ability to distinguish between legitimate governance and

oversight activities and the type of micromanagement that plagues much of government.

The Commission was well aware that there is no perfect answer to this (or any

other) issue we considered. It requires a balance among competing concerns and objectives. What’s important to keep in mind is what we are trying to accomplish: provide IRS with the expertise, accountability and continuity—while avoiding the pitfalls that accompany any change.

The IRS management board that was created by the Administration last month

illustrates this point. The Executive Order creates a 20 person group led by political

appointees from throughout Treasury, other Federal agencies, and the Office of the

Vice President. This board will assume some significant (but ill-defined) responsibility for management and oversight of the IRS. This approach may avoid some issues,

but it raises others. In particular, this approach may fail to satisfy the three criteria

that should be used to evaluate any reform proposal. First, there is no reason to

believe that this group will bring to bear the kinds of expertise that the IRS requires. Second, it may diffuse, not focus accountability. Finally, constant turnover

in the positions identified by the Executive Order may engender more confusion

than continuity. On the downside, there is nothing in the Executive Order that precludes the management board from involving itself in tax policy, law enforcement,

procurement decisions, and day-to-day management of the IRS. To the contrary, the
60

net result may be less focus on priorities and more micromanagement. It also appears that these individuals (most of whom are political appointees, including two

from the Office of the Vice President) would have access to tax return information.

While this may not have been intended, it is a frightening thought, at least for those

who recall why Section 6103 was enacted in the first place.

CONCLUSION

I have spent most of my professional life dealing with taxes and tax administration; I consider myself extremely fortunate to have served in a number of senior government positions in the world of taxes. Based on my experience, I am certain of

the following:

Fundamental change in IRS management, governance and oversight is essential.

That change must result in a shared vision of what we want from the IRS, and

the expertise, accountability and continuity to deliver that vision.

You and your colleagues, and the Administration, have a unique opportunity—one

that doesn’t come along very often. A well-functioning IRS is not a partisan issue,

or a turf issue, or a question of hidden agendas. The IRS occupies a unique role

in our system of government. It is essential that it meet the legitimate demands

and expectations of the American people.

Chairman J

Mr. Tobias, thank you for your service on this Commission, and

OHNSON. Thank you, Mr. Goldberg.

f

it is a pleasure to have you as the president of the National Treasury Employees Union.

STATEMENT OF ROBERT M. TOBIAS, COMMISSIONER, NATIONAL COMMISSION ON RESTRUCTURING THE INTERNAL

REVENUE SERVICE; AND NATIONAL PRESIDENT, NATIONAL

TREASURY EMPLOYEES UNION

Mr. TOBIAS. Thank you very much. I am very pleased to be here

as the president of NTEU and a member of the Commission to Restructure the IRS. I am extremely proud to have served as a member of that Commission.

We all know, everyone in this room knows, that the IRS is an

important government agency because it raises 95 percent of the

revenue funding for the Federal Government, and we know it is

important because it touches the lives of every citizen who must

decide every year, do I owe the government money.

The IRS is in the mind of every citizen every year. The IRS, however, has, in my view, lost a lot of its credibility with the public,

the press, and Congress, and the Commission report provides a

blueprint for restoring that credibility and that trust.

The report accurately portrays IRS employees as competent, hard

working, and motivated individuals who want to deliver a highquality product to the American taxpayers. It underscores the need

for stable and steady funding levels, improved and expanded training programs, continuity of leadership and direction, and it recognizes the importance of the agency’s employees having an active

voice in operations beyond that available now.

It suggests personnel flexibilities, a redesigned salary, incentive

program to reward employees for meeting objectives and providing

quality service. It provides the basis for a truce, a much needed

cease fire in the hostility against the IRS and its employees.

Now, 85 percent of the IRS employees interviewed by the Commission requested that Congress stop bashing the IRS. They right-
61

ly stated that broadsiding the institution for difficulties and controversies surrounding Federal tax policies makes their job much,

much more difficult, and the Commission wholeheartedly agreed

with that assessment.

The guiding principle of the Commission’s report was that IRS

customer service and taxpayer satisfaction must be the primary

strategy to fulfill the IRS mission, and I totally concur with that.

The available research cited in my full statement confirms what

we believe intuitively. The quality of service delivery lies in the environment created by the organization of the service deliverer; that

the atmosphere that surrounds service delivery is the key to service quality. Critical policies include the organization demonstrating

concern for the customer by soliciting and using customer feedback,

and providing staffing and training programs that emphasize service quality.

Equally important is a demonstrated concern for the employees—

Considerate supervision, training, career development, being proud

of the organization and what it stands for, and facilitating, not inhibiting, work effectiveness.

Their report that I cite in my full testimony continues, ‘‘When

these two sets of conditions exist, employees are surrounded by

cues and clues that service quality is not only appropriate, but expected. The very conditions of the work and workplace breed an atmosphere in which the delivery of superior service quality is the

norm, and the situation promotes the message that service quality

is valued. This belief on the part of employees is based on the conditions management creates in the workplace. The belief is not

based on what management says it believes in.’’

The study continues, ‘‘When employees report that such a climate for service quality exists, customers report they receive superior service quality. In short, employees know when they deliver effective customer service, and if asked, they will tell the employer.

Further, the greater the discrepancy between the customer service

employees actually provide and the amount of services customers

demand, the greater the employee emotional stress in the workplace. Employees know what customers want, and when they are

not allowed to provide the service, employees’ stress levels skyrocket.’’

An internal IRS research document shows that decreased employee satisfaction results in decreased employee productivity and

higher employee satisfaction leads to higher employee productivity.

The direct correlation between employee job satisfaction and satisfied customers cannot be ignored.

In addition to the correction in strategic direction, the Commission and NTEU both believe that taxpayers should deal only with

IRS employees who are adequately trained. Training is key to customer satisfaction. Training must include not only substantive information, but also the cues and the clues that service quality is

expected.

The IRS has been in a period of great uncertainty regarding

funding, making it impossible to allot resources in a coherent manner, never mind establish a stable and directed training program

that would provide employees with the skills and tools to best perform their jobs.
62

Changing strategic direction requires stability and funding, the

ability to plan expenditures over a period of time, coupled with stable leadership, leadership that has a vision and the time to implement a vision. Neither of these factors are present in the IRS

today, but both need to be present in the IRS of the future.

The key to long-term planning at the IRS, to improve customer

service, to improve taxpayer and employee satisfaction, to gain continuity and stability in management at the very highest levels of

the agency depends on commitments being made on at least two

important fronts: First, consensus among public leaders and elected

officials on the direction the agency should pursue; and second,

adequate, stable funding levels to allow the agency to move forward

and continue to make progress. I think the Commission report addresses these areas quite clearly and quite persuasively.

I would be happy to answer any questions. Thank you very

much.

[The prepared statement follows:]

Statement of Robert M. Tobias, Commissioner, National Commission on

Restructuring the Internal Revenue Service; and National President,

National Treasury Employees Union

Madam Chairwoman, Members of the Subcommittee, thank you very much for

this opportunity to appear before you today to discuss the Report of the National

Commission on Restructuring the Internal Revenue Service (IRS). As the National

President of the National Treasury Employees Union (NTEU), the exclusive representative of IRS employees, I was proud to serve on this panel for more than a

year studying IRS operations. I look forward to participating in the ensuing discussions that I hope will lead to a better understood, better valued and more appropriately funded IRS.

The Internal Revenue Service interacts with more citizens than any other government agency or private sector business. Twice as many people pay taxes as vote.

No one fact better underscores the importance of restoring both credibility and stability to the IRS.

The Commission Report provides an avenue for restoring the IRS’ credibility—

with Congress, with the press, with the public and perhaps most importantly, with

the majority of Americans who comply with our Nation’s tax laws. The Report accurately portrays IRS employees as competent, hardworking and motivated individuals who want to deliver a high quality product to the American taxpayer. It underscores the need for stable and steady funding levels, improved and expanded training programs, continuity of leadership and direction, and it recognizes the importance of the agency’s employees having an active voice in operations beyond that

available now. It suggests personnel flexibilities and redesigned salary and incentive

programs to reward employees for meeting objectives and providing quality service.

It provides the basis for a truce, a much needed cease-fire in the hostility against

the IRS—and its employees.

Eighty-five percent of the IRS employees interviewed by the Commission requested that Congress stop bashing the IRS. They rightly stated that broadsiding

the institution for difficulties and controversies surrounding federal tax policy

makes their jobs more difficult. The Commission wholeheartedly agreed with that

assessment.

IRS bashing by public figures and some Members of Congress is unfortunately

well documented. Quotes such as we should kill the IRS, ‘‘drive a stake through its

heart, bury it and hope it never rises again,’’ or ‘‘we should blow it up,’’ or the IRS

building should be sold ‘‘so the roaches can’t come back in’’ are irresponsible at best

and dangerous at worst.

These comments quite literally endanger the lives of the men and women of the

IRS whose job it is to enforce the laws Congress creates and collect the accurate

amount of taxes owed. Attacks on IRS Revenue Officers attempting to perform their

duties are well documented. Carole Jones and Stephen Golder, IRS Revenue Officers

from Wilmington, Delaware were forced to flee from an attempt to seize property

when the taxpayer’s daughter threatened that she was going to blow their (expletive) heads off. She retreated to the house and returned pointing a gun at the officers, forcing the two to abandon their efforts.
63

Sherman Stanley, a Twin Falls, Idaho Revenue Officer, was threatened by a demolition expert during the seizure of heavy construction equipment for taxes owed.

This particular taxpayer filed liens against the IRS employee’s personal property

and threatened to blow up his home. Mr. Stanley and his family were forced from

their home until police were able to determine the seriousness of the threat. The

taxpayer and his wife were later convicted and sentenced to prison. They will be

released soon.

Wanlyn Burnet, a Revenue Officer from Missoula, Montana was the victim of a

drive by shooting last summer. He was also intentionally run off the road last September. Mr. Burnet believes tax protestors were behind both these incidents. In May

of l995, the IRS Office in Denver issued an internal memorandum warning that l0

Montana individuals associated with the United Apostolic Brethren, a group with

armed militia links that believes it has sovereign immunity from federal income tax

law, had sworn an oath to kill any IRS agent who attempted to arrest them.

Incidents such as these occur with increasing frequency in all areas of our country.

The guiding principle of the Commission’s Report was that IRS customer service

and taxpayer satisfaction must become paramount. I concur. The IRS collects the

taxes that run our government and increased compliance with tax laws will only

occur when Americans find the IRS to be fair and efficient.

But, the employees charged with carrying out the IRS’ mission must stop receiving conflicting messages from Congress, from the press, and from the public that

seem to indicate that the services they perform have no merit and serve only to harass the taxpaying public.

A recent study of service quality by University of Maryland professor Dr. Benjamin Schneider and Dr. Beth Chung, reported in Trends In Organizational Behavior, presents an interesting perspective on the conditions that promote quality service. Their research has shown that the quality of service delivery lies in the situation created by the organization for the service deliverer; that the atmosphere that

surrounds service delivery is the key to service quality. Critical policies include the

organization demonstrating concern for the customer by soliciting and using customer feedback, and providing staffing and training programs that emphasize service quality. Equally important, is a demonstrated concern for the employees—considerate supervision, training and career development, being proud of the organization

and what it stands for and facilitating, not inhibiting, work effectiveness.

Their report continues, ‘‘When these two sets of conditions exist, employees are

surrounded by cues and clues that service quality is not only appropriate but expected. The very conditions of the work and workplace breed an atmosphere in

which the delivery of superior service quality is the norm; the situation promotes

the message that service quality is valued . . . this belief on the part of employees

is based on the conditions management creates in the workplace; the belief is not

based on what management says it believes in.’’ The study continues, ‘‘when employees report that such a climate for service quality exists, customers report they receive superior service quality.’’

In short, employees know when they deliver effective customer service and, if

asked, they will tell the employer. Further, the greater the distance between the

customer service employees actually provide, and the amount of service customers

demand, the greater the employee emotional stress in the workplace. Employees

know what customers want, and when they are not allowed to provide the service,

employee stress levels skyrocket.

The direct correlation between employee job satisfaction and satisfied customers

cannot be ignored. In addition to the correction in strategic direction, the Commission and NTEU both believe that taxpayers should deal only with IRS employees

who are adequately trained—training is key to customer satisfaction. Training must

include not only substantive information, but also the ‘‘cues and clues’’ that service

quality is ‘‘expected.’’ Yet, the IRS has been in a period of great uncertainty regarding its funding, making it impossible to allot resources in a coherent manner,

nevermind establish a stable and directed training program that would provide employees with the skills and tools to best perform their jobs.

Moreover, for more than a year now, IRS employees across the country have lived

under a cloud of potential reductions in force (RIFs). There is little question in my

mind that employees focus less on providing the best customer service and satisfaction when they are consumed by threats of losing their jobs.

The field reorganization RIF proposed by the IRS will result in decreased service

to the public by consolidating offices and eliminating skilled personnel, only to rehire fewer individuals to perform the same tasks in other locations. It is especially

ironic that under the IRS proposal, skilled problem resolution office personnel are

scheduled to be RIF’d and replaced in the new locations with employees with pre-
64

sumably no problem resolution experience. IRS personnel responsible for taxpayer

education and electronic filing coordinators responsible for providing information

and encouragement to taxpayers and tax preparers to file electronically are scheduled to be RIF’d. Field information technology employees who maintain telephone

and computer systems are scheduled to be RIF’d.

All total, fewer employees will be available to answer taxpayer inquiries. IRS imposed liens on taxpayer properties will not be released as timely. Interest costs to

taxpayers will increase because their cases will not be processed as timely. Inexperienced personnel will generate incorrect bills and there will be fewer experienced

personnel to correct the errors. In addition, this proposed RIF occurs in a context

of an 8 percent reduction in the IRS workforce just since Fiscal Year l995. Moreover,

the IRS has no data and no plan to refute the logical inference that l3l2 new, inexperienced employees cannot provide the same level of customer service as the 237l

current experienced employees that the IRS proposes to RIF. There is little question

in my mind that if the IRS proceeds with this RIF, compliant taxpayers and those

seeking to be compliant will not receive the service they need and deserve. This

threat of further service quality erosion is significant and should not be ignored by

this panel.

If Congress intends to treat the recommendations of the Report of the National

Commission on Restructuring the IRS as a serious document worthy of careful scrutiny, Congress must immediately halt the proposed IRS RIF. Congress stopped it

once already, demanding that the IRS show just how customer service could be

maintained with fewer employees and fewer locations. The IRS has not addressed

those concerns. Does the IRS need to reorganize? I think we all agree that the answer is yes. Does the IRS need to conduct a RIF in order to reorganize? No. In fact,

the Commission’s findings are quite clear on this point: ‘‘Unless the agency is in a

fiscal crisis so deep that it simply cannot afford to do so, the IRS should minimize

reductions in force. Employees did not create the bureaucracies in which they work,

and they should not pay the price of reinventing those bureaucracies. . . ’’

The Report demands that restoring confidence, improving customer service and

taxpayer satisfaction are paramount. The proposed RIF will have the opposite effect.

The Report states that two of the greatest needs at IRS are stability and continuity.

The proposed RIF will cause the opposite to occur. The Report understands that tax

systems modernization and increased electronic filing will not only reap financial rewards, but increase compliance as well. Yet, the IRS RIF proposal calls for eliminating some of the very employees who provide electronic filing guidance and technological support.

As further evidence of the havoc the proposed RIF will cause, taxpayers interviewed by the Commission expressed mounting frustration with the lengths to

which they must go to obtain IRS materials and information. Many complained that

the number of IRS offices and available hours are decreasing, that the IRS has

closed or reduced functions in many local offices resulting in either no access or a

long drive to the nearest IRS office. Taxpayers report that they sometimes wait four

to six weeks for IRS forms or publications to come by mail. If there is one message

I wish to share today, it is this. If the IRS RIF is allowed to go forward, these frustrations expressed by taxpayers will increase. Confidence will not be restored. Taxpayer satisfaction will not improve.

Despite its obvious shortcomings, however, the IRS has come a long way in improving its operations. The IRS and the employees who make it run perform remarkably well despite its faults. Some of its achievements, in fact, have been outstanding.

As of March 7 of this year, the number of electronic filings by phone and computer

had increased by 24 percent over last year. As of March 2l, the IRS had received

more than l2.l million standard electronic returns. The IRS estimates that l9.2 million Americans will file electronically in l998, almost double the number who filed

electronically in l995.

Most importantly, while revenues continue to increase, IRS costs continue to fall.

In FY l992, the cost of collecting $l00 in revenue was 60 cents. By FY l996 that

cost had dropped to 54 cents and for FY l997, the cost of collecting $l00 in revenue

stood at 50 cents. The IRS has also made significant improvements in telephone accessibility and accuracy. During the l996 filing season, the IRS answered only 2l

percent of incoming calls. Yet, between October of l996 and April of l997, the IRS

responded to 5l percent of incoming calls. As the Commission Report points out, this

is still unacceptable compared to private sector service performance.

However, as the Commission Report also details, Congress, the General Accounting Office, the press and even the Department of the Treasury tend to focus only

on the IRS’ failures; rarely acknowledging its successes. The IRS has been the subject of l40 GAO Reports over the last four years. Forty-three audits of the agency
65

are currently underway. While GAO is quick to point out problems, rarely do they

promote solutions.

What the IRS needs more than anything is stability in its funding and consistency

in its leadership and direction. When any agency receives mixed messages, its ability to perform at its best is hampered. The IRS, for example, is told one day that

its most important priority is customer service and that its customers must be treated with the utmost in politeness. At the same time, others are stressing that the

IRS is not collecting revenue aggressively enough. Increasingly, the IRS has been

subject to contracting out of tax collection efforts to the private sector because of

the belief by some in Congress that they are not being aggressive enough in collecting revenue owed to the Treasury.

The Commission Report underscores my own view that contracting out IRS functions to the private sector is not the panacea some think. The Report states: ‘‘The

most important question is not whether to outsource a public activity, but how to

get the most effective and efficient performance for the taxpayers’ dollar.’’ The Commission also recognized that ‘‘Deciding which powers of the IRS are so sensitive that

private industry cannot hold them...’’ is equally important.

There are some functions that federal agencies should look to the private sector

to perform. And, this applies to the IRS as well. I would include in this group, particular types of specialized expertise, such as computer technology. However, I believe strongly that tax collection does not belong on this list. The federal government

should perform its own tax collection.

Contracting out tax collection serves only to diminish the public’s confidence in

the IRS. Private sector employees—working on commission—aren’t going to care

whether their actions antagonize taxpayers or erode IRS credibility. Private sector

managers are likewise unlikely to invest resources in ferreting out misdeeds against

taxpayers with anywhere near the same vigilance as the IRS. In fact, IRS employees

working the 1–800 service lines have reported taxpayer complaints concerning how

they were treated by contractor employees as part of a private sector debt collection

pilot program. Some of the reported taxpayer comments that have been shared with

me include, ‘‘I was treated like scum,’’ ‘‘I was threatened and abused,’’ and perhaps

most telling, ‘‘I want the IRS back, at least they treat us well.’’

There are valid reasons why federal income taxes have been collected exclusively

by federal employees in the past and why federal income tax information remains

so closely guarded. Privacy. There is no single issue that will more quickly erode

the public’s confidence in the IRS than a breach of individual privacy. And IRS employees are constantly reminded of that fact not only by the union, but by management and through Congress’ passage of legislation from the Taxpayer Bill of Rights

to imposition of severe penalties for willful browsing.

There is another highlight of the Commission Report on which I want to specifically comment. There was virtually unanimous agreement among those who testified before the Commission that the tax code is overly complex and must be simplified. The Commission discovered as well that there is a clear connection between

the complexity of the IRS Code and the difficulty of tax law administration and taxpayer frustration. The frequency with which the Legislative and Executive branches

change tax law only compounds the problem. Each tax law change requires the IRS

to reprogram computers, retrain employees and update forms, publications and

guidance. Yet, funding restrictions rarely provide the funding necessary to accomplish these goals. The temptation is then to blame IRS employees for the complexity

of the law, when in fact they are only the messengers of that law.

Recognizing this, the Commission recommends a mechanism to ensure that elected officials understand how proposed tax legislation will impact the IRS and taxpayers. The Commission recommends the development of a framework to provide

Congress with a better understanding of the impact of tax proposals on taxpayers,

the IRS and IRS resources before they are implemented. This approach is long overdue. Constant incremental changes to the tax law have a significant negative effect

on taxpayers’ understanding of the law and the IRS’ ability to enforce that law.

The complexity of the tax law is an area many have used to further individual

tax policy goals. While I continue to believe that tax policy should always be decided

on the merits of a particular proposal, I want to stress the importance of providing

the IRS with the resources necessary to insure that the training and implementation procedures necessary to enforce tax code changes are provided to them.

In conclusion, NTEU takes great pride in its cooperative relationship with the IRS

which dates back to l987. Today, our partnership efforts are being tested by unprecedented budget cuts, furloughs, proposed reductions in force and increased contracting out of IRS work to the private sector. Nonetheless, NTEU remains committed

to this partnership and committed to working with this Congress to bring about

positive changes at the IRS.
66

The key to long-term planning at the IRS, to improved customer service, to taxpayer and employee satisfaction, to continuity and stability in management at the

very highest levels of the agency depends on commitments being made on at least

two important fronts: First, consensus among public leaders and elected officials on

the direction the agency should pursue and second, adequate, stable funding levels

to allow the agency to move forward and continue to make progress.

I would be happy to answer any questions. Thank You.

Chairman J

Mr. Larry Irving, Assistant Secretary for Communications and

OHNSON. Thank you, Mr. Tobias.

f

Information from the U.S. Department of Commerce.

Let me say to the Subcommittee Members, we are going to hear

Mr. Irving. After that, we will break and come back for the other

two. I am anxious for the Members of the Subcommittee to have

a chance to actually hear the testimony, and while that may cut

into the amount of time Members have to stay and ask questions,

I think it is important to hear from you in your words.

Mr. Irving.

STATEMENT OF HON. LARRY IRVING, COMMISSIONER,

NATIONAL COMMISSION ON RESTRUCTURING THE

INTERNAL REVENUE SERVICE; ASSISTANT SECRETARY OF

COMMERCE FOR COMMUNICATIONS AND INFORMATION;

AND ADMINISTRATOR, NATIONAL TELECOMMUNICATIONS

AND INFORMATION ADMINISTRATION, U.S. DEPARTMENT

OF COMMERCE

Mr. IRVING. Thank you, Madam Chair.

It is a pleasure to be here today to testify concerning the recommendations of the National Commission on Restructuring the

IRS. It was an honor and a privilege to serve as a member of the

Commission, and I want to commend all of my colleagues, in particular, Congressman Coyne, Senator Grassley, and our Chairman,

Senator Kerrey, and Congressman Portman. They did outstanding

work, and I believe that we have made an outstanding report.

Madam Chair, I do agree with the vast majority of the recommendations in the report, and I feel particularly strongly about

the recommendations regarding electronic filing and modernization,

and consequently, it was with deep regret that I was not able to

join with a majority of the Commission in endorsing the final Commission report because of my strong opposition to the recommendations on governance.

The IRS is incredibly important to every person in this Nation.

It collects 95 percent of the revenue, and I think the recommendations taken as a whole by this Commission will strengthen the IRS

by increasing the agency’s focus on customer service, but ensuring

taxpayer compliance, by increasing the agency’s effectiveness and

efficiency, and the report’s emphasis on tax implication, taxpayer

rights, and financial management will be an important contribution to this Nation.

The recommendations on modernization are essential to the ability of the IRS to move effectively into the next century, the century

date change issues, the integration of technology with strategic objectives, an increasing intellectual capital resource available to the
67

IRS, strengthen the IRS so that it can respond quickly and accurately to taxpayer needs.

The Commission’s report appropriately emphasizes the importance of electronic filing. Electronic filing will facilitate IRS compliance efforts. It will allow the IRS to receive information in tax returns and match data within the same calendar year. Electronic filing will improve the speed of processing returns. It will reduce errors on the part of the taxpayer. It will be cheaper to process than

paper filing.

In sum, electronic filing holds a great potential to increased cost

savings and compliance with only a small investment by the IRS,

but as was noted repeatedly today and repeatedly during the Commission’s deliberations, the fundamental issue at the heart of the

Commission’s report is governance, and I simply cannot and do not

support the majority’s recommendations on this issue.

I do not believe that the governance of the IRS should reside in

an outside board of directors composed principally of part-time, private-sector executive officers who would keep their private-sector

jobs and salaries, and I also do not agree that the board should not

have the level of direct accountability that the Treasury Secretary

presently has to an elected President.

The report hands the board’s responsibilities and characteristics

that I believe blur the lines of accountability to the IRS. The board

would appoint and compensate senior executives at the IRS, including the Commissioner and the Chief Counsel. The board would be

‘‘independent,’’ and the board would review and approve the commissioner’s recommendations regarding the budget.

Any entity that has the ability to hire and fire, to make hiring

and firing decisions, to look at a budget, I believe, has a significant

effect, and we will have some problems with regard to issues such

as law enforcement and policy direction.

I do not believe that law enforcement and the tax policy of this

Nation should rest with an outside board. I do believe it should

rest with people directly accountable to the President.

The board, according to the report, would be responsible for the

oversight of the IRS and not be involved in law enforcement of tax

policy or day-to-day management, but I run a Federal agency every

day, and I do not know how a board can do its job the way it is

outlined in this report and not get involved in those crucial issues.

I see that my time has expired, and I want to conclude by restating my strong support for the vast majority of the recommendations put forward in the Commission’s report. I cannot, however,

Madam Chair, endorse the recommendation where the agency that

collects 95 percent of the revenue that funds our government will

be subject to the control of a part-time board composed principally

of members from the private sector.

I thank you for your time this afternoon.

[The prepared statement follows:]
68

Statement of Hon. Larry Irving, Commissioner, National Commission on

Restructuring the Internal Revenue Service; Assistant Secretary of Commerce for Communications and Information; and Administrator, National

Telecommunications and Information Administration, U.S. Department of

Commerce

It is a pleasure to be here today to talk with you about my views on the recommendations of the National Commission on Restructuring the IRS. My name is

Larry Irving and I am the Assistant Secretary of Commerce for Communications

and Information and the Administrator of the National Telecommunications and Information Administration (NTIA) at the Department of Commerce.

It was an honor and a privilege to serve as a member of the Commission. Senator

Kerrey and Congressman Portman deserve to be commended for their hard work

over the past year. Their hard work and dedication to the process served as examples to all of us on the Commission. I also would like to thank my fellow Commissioners from whom I learned much in the process. Under the distinguished leadership of Chairmen Kerrey and Portman, the members of the Commission have

worked hard to understand the complex problems facing the IRS.

I agree with the vast majority of the recommendations in the report, and feel particularly strongly about many of the recommendations regarding electronic filing

and modernization. Consequently, it was with deep regret that I was not able to join

with the Commission’s majority in endorsing the Final Commission Report because

of my strong opposition to the recommendations on governance.

We all realize how important the IRS is to this nation. The agency collects 95 percent of the revenue of our government. Most of the Commission’s recommendations,

taken as a whole, will strengthen the IRS by increasing the agency’s focus on customer service, ensuring taxpayer compliance and increasing effectiveness and efficiency. The report’s emphasis on tax simplification, taxpayer rights and financial

management also are important sections.

The recommendations on modernization are essential to the ability of the IRS to

move effectively into the next century. The century date change, the il capital, all

go to the essence of strengthening the IRS so that it can respond quickly and accurately to taxpayer needs.

And the Commission’s report appropriately emphasizes the importance of electronic filing. Increased utilization of electronic filing will facilitate IRS compliance

efforts, allowing the IRS to receive information and tax returns and match data

within the same calendar year. Better data capture capability also will facilitate

customer service. At present, only 40 percent of the data on individual income tax

returns is entered into IRS computers.

Electronic filing also will improve the speed of processing returns by the IRS and

the burden on taxpayers. Furthermore, numerous studies indicate that electronic filing greatly reduces errors on the part of the taxpayer, and is cheaper to process

than paper filing. On the taxpayer side, most tax practitioners charge for electronic

filing today because they incur additional expenses, including the cost of communications and third party transmitters. Surveys suggest that the cost of electronic

filing is a disincentive to taxpayers to file electronically. Yet, as the volume of electronically filed returns increases, demand in the marketplace will drive down prices

for electronic filing. In sum, electronic filing holds great potential to increase cost

savings and compliance with only a small investment by the IRS.

Madam Chairwoman, the report deserves commendation for many of the Commission’s recommendations. Nevertheless, as was noted repeatedly during the Commission’s deliberations, the fundamental issue at the heart of the Commission’s report

is governance, and I simply cannot and do not support the majority’s recommendations on this issue. I do not believe that the governance of the IRS should reside

in an outside Board of Directors composed principally of part-time private sector

chief executive officers who would keep their private sector jobs and salaries. This

Board would be an extremely powerful body, affecting every American citizen, yet

without the level of direct accountability that the Treasury Secretary has to an

elected President.

The IRS is an essential government agency. I am concerned about blurring the

lines as to who is in charge at the agency—the outside Board, the IRS Commissioner or the Secretary of the Treasury. The report hands the Board responsibilities

and characteristics that blur the lines of accountability at the IRS. For example, (1)

the Board would appoint and compensate all senior executives at the IRS, including

two currently appointed by the President—the IRS Commissioner and the Chief

Counsel; (2) the Board would be ‘‘independent;’’ and (3) the Board would ‘‘[r]eview

and approve the Commissioner’s recommendations regarding the IRS budget . . . ’’

and have the authority to send its own budget request for the IRS directly to Con-
69

gress. It should be clear to the American people that when something goes wrong

at the IRS, it is the IRS Commissioner and the Treasury Secretary that are responsible, and not five private-sector CEOs.

Although I share the Treasury Department’s concerns regarding the constitutionality of this proposed Board, my objection to placing the governance of the IRS

with an outside Board is based primarily on my own experiences over the last four

years running a federal government agency that is subject to different people with

oversight responsibility. My agency, NTIA, must answer to many layers of authority.

According to the Commission’s report, the Board only will be responsible for the

oversight of the IRS and not be involved in law enforcement, tax policy or day-today management issues within the IRS. It is difficult to draw bright lines between

oversight and tax policy, law enforcement and management and that the Board’s

powers will ultimately extend to all of these areas. I cannot support a governance

proposal that relies on this sort of line-drawing as a justification for its existence

because I know from experience how difficult this line will be to police and maintain.

Furthermore, a governance proposal that relies upon such lines for legitimacy ultimately will raise serious accountability and jurisdictional issues for the both IRS

and the Department of Treasury, inviting challenges to the revenue collection function of our government. Although the Commission’s report says that the Board

members will not be involved in law enforcement issues, the major corporate executives who would make up the Board could, through their budgetary and personnel

decisions, redirect IRS resources away from audits and enforcement actions on corporations’ tax returns and towards the returns of individuals. Even done openly,

such action would be unlikely to violate any provision of law applicable to the

Board, yet I would argue that this constitutes Board involvement in enforcement

issues at the IRS.

In addition to the potential for actual conflict of interest issue, there also is a

strong likelihood of the appearance of a conflict related to the fact that our tax collection system depends on voluntary compliance. Voluntary compliance depends on

a sense of fairness, and on a sense that everyone is paying their fair share. There

is a risk of undermining that sense of fairness if the American people feel that the

law enforcement, auditing, and compliance functions of the IRS are being directed

by a group of private sector chief executives. For example, under the Commission’s

proposal, private sector board members would be able to represent their employers

before the IRS, on audits of their employers’ returns, in seeking contracts for their

employers and otherwise, so long as the Board had not considered that specific issue

or matter. Moreover, Board members would be free to accept bonuses or partnership

distributions earned by representing private interests before IRS.

I have experienced the complexities of shne between oversight and management.

Based on these experiences, I believe that responsibility for IRS management must

continue to reside with an IRS that remains fully accountable to the President and

Congress. Change at the IRS must be done in a manner that minimizes risk to the

vital flow of revenues that fund our government and at the same time allows

progress on reforms at the IRS to continue.

I find it troubling that the members of the Commission’s proposed Board would

serve on a part-time basis and yet be responsible for improving the IRS’ current

oversight; and that this responsibility would be in addition to their primary responsibilities to their private sector jobs. The Treasury Secretary and Deputy Secretary

are in their governmental office every day, and they have no non-governmental responsibilities. The only job of the Secretary and Deputy Secretary is to promote and

defend the public interest. Madam Chairman, it is my experience that heading a

federal agency is more than a full time job, and NTIA is not even one-tenth the size

of the IRS. I meet daily with members of my senior staff to discuss a variety of policy and managerial issues. Many of these matters require considerable thought, attention and internal deliberation. Meetings sometimes must be called with little or

no notice on an emergency basis. Members of the Board would be expected to provide similar leadership to the IRS, although they will be physically situated across

the county with other non-governmental responsibilities. The American people rightly demand an IRS that is responsive to the public and is led by officials who are

held accountable for achieving success.

In conclusion, I want to restate strongly my support for the vast majority of the

recommendations put forward in the Commission’s report. I cannot however, endorse the recommendation where the agency that collects 95 percent of the revenue

that funds our government is subject to the control of a part-time Board composed

of members primarily from the private sector.
70

Thank you Madam Chairwoman and other Members of the Committee. I welcome

any questions.

to the opportunity to hear your testimony.

Chairman JOHNSON. Thank you, Mr. Irving, and I look forward

f

We have 4 minutes left. That is not time enough to fully hear

the remarks of Mr. Newstrom. So the Subcommittee will recess for

about 6 or 7 minutes. Let’s go over fast and then come back so we

can hear the last two people. Thank you.

[Recess.]

Chairman JOHNSON. The Subcommittee will reconvene.

We will proceed with the testimony of Mr. Newstrom, corporate

vice president and group executive of the Electronic Data Systems,

Herndon, Virginia, and it is a pleasure to have you. Thank you for

your service on this Commission.

STATEMENT OF GEORGE C. NEWSTROM, COMMISSIONER,

NATIONAL COMMISSION ON RESTRUCTURING THE

INTERNAL REVENUE SERVICE; AND VICE PRESIDENT,

ELECTRONIC DATA SYSTEMS, CORP., HERNDON, VIRGINIA

Mr. NEWSTROM. Thank you, Madam Chairman and Members of

the Subcommittee.

I appreciate this opportunity to testify before you concerning the

recommendations of the National Commission on the Restructuring——

Chairman JOHNSON. Excuse me, Mr. Newstrom. Could you pull

the microphone a little closer?

Mr. NEWSTROM. Is that better?

Chairman JOHNSON. Yes. You have to get really quite up on it.

Mr. NEWSTROM. How is that?

Chairman JOHNSON. Thank you. That is much better.

Mr. NEWSTROM. EDS is one of the Nation’s largest information

technology service companies and a leader in applying information

technology to meet the needs of businesses and governments worldwide. EDS has operations in over 40 countries, employs more than

90,000 employees, many of them who work in partnership with clients in the government sector.

I, too, am very proud to have worked on the Commission, and I

would also like to thank Congressman Portman and Senator

Kerrey for the leadership that they showed.

Our members represented a broad section of the public/private

sector, and in the end, just like Mr. Irving said, we were in agreement on the preponderance of the things that will enable the IRS

to provide better, more cost-effective services to the taxpayer.

I personally supported in excess of 90 percent of what was included in the final document; even the governance section, which

includes one recommendation that causes me concern, included important recommendations which I supported.

For example, the governance section recommends that the IRS

Commissioner be appointed for a 5-year term and that the Commissioner be given greater flexibility in hiring, terminating, and

compensation decisions.
71

I represent a corporation of 90,000 employees, as I told you. I

know how difficult it is for leadership of large organizations to

chart a clear direction and earn the commitment of the entire organization. A strong, unified and stable leadership team is critical to

the success of an organization. The Commissioner needs the flexibility to attract and retain the best and the brightest for the IRS

management team. This means adequate compensation and bonus

packages and the ability to promote and remove based on performance.

Unfortunately, I am unable to support the Commission’s recommendations of the creation of an independent board, and underscore the word ‘‘independent.’’ After more than two decades of

building partnerships between the public and the private sector, I

am committed to maintaining a clear distinction between policymaking functions of government and the use of private sector contractors to make government operations more effective, and remember, I am a private-sector contractor.

I know the Commissioners who support these recommendations

intended that the board have no policymaking role. However, it is

difficult for me as well to understand how a body that hires the executive officer of an organization sets their compensation, approves

their budget proposals and interacts on a regular basis with Members of Congress, can refrain from influencing policy. I do not believe that an independent board should have control over these responsibilities for implementing the tax law of this Nation.

Moreover, I am convinced that the Treasury Department and the

IRS have already taken steps and continue to take steps toward

implementing an improved governance process. I have been impressed by the efforts to focus the IRS on its core competencies and

by the commitment to leverage the private sector to obtain resources such as systems integration and the capabilities that are

not part of their core competencies. I would like to give these efforts that are at work right now some time to work.

I would like to talk for a moment about my role as a technology

task force member. Much of the work was focused on the issues

that are critical to the ability of the IRS to function successfully in

the 21st century. Technology is an enabler and only an enabler, but

it will make it possible for the IRS leadership to provide better

service to the taxpayers and increase compliance.

The technology gap between the IRS and the private sector financial institutions is widening daily. Taxpayers expect the same

level of efficient and accurate and courteous treatment from their

government as they do from the private sector.

It is essential that the IRS have the technical capability and the

funding to deal with the century date change. However, it must

also press forward with the modernization blueprint and develop

public/private sector partnerships that will enable it to improve

customer service and compliance functions. It must expedite the

use of electronic filing.

My experience on the Commission has convinced me that this is

a unique opportunity to make dramatic improvement in the IRS

technology and taxpayer services. The presence of a committed

leadership team at Treasury and the IRS, coupled with the release

of a high-quality modernization blueprint have added tremendous
72

momentum to the force of change. The contractor community is

now prepared to make substantial investments in the procurement

and a major financial commitment to ensuring that this modernization effort is a success.

An extended delay or uncertainty about Congress’ commitment to

fund this effort would undermine this effort, and the people in the

government who are willing to take risks for the change. It would

make it more difficult for private contractors to commit large

amounts of money and key people to this resources-intensive effort.

As this Subcommittee moves forward in its discussions of the

governance issues, I hope they will also be mindful of the importance of the modernization effort and the need to ensure the funding is available to implement the blueprint when the modernization

contract is awarded.

I realize that your time is limited, and I will be happy to answer

questions and would be delighted to return, if possible. Thank you.

[The prepared statement follows:]

Statement of George C. Newstrom, Commissioner, National Commission on

Restructuring the Internal Revenue Service; and Vice President,

Electronic Data Systems, Corp., Herndon, Virginia

Good morning, Madam Chairwoman and members of the Subcommittee. My name

is George Newstrom. I am vice president of Electronic Data Systems Corporation

(EDS).

I appreciate this opportunity to testify before you concerning the recommendations of the National Commission on Restructuring the Internal Revenue Service.

I will speak this morning as one who had the opportunity to serve as a member

of the Commission. I will also speak as a member of the business community.

EDS is one of the nation’s largest information technology services companies, and

a leader in applying information technology to meet the needs of businesses and

governments worldwide. EDS has operations in more than 40 countries and employs

more than 90,000 people many of whom work in partnership with our clients in the

government sector.

I am very proud of the work produced by the Commission, and I would like to

thank Senator Kerrey and Congressman Portman for their leadership. Our members

represented a broad cross section of the public and private sectors, and, in the end,

we were in agreement on many things that will enable the IRS to provide better

and more cost-effective service to taxpayers.

I personally support more than 95 percent of what was included in the final document. Even the governance section, which includes one recommendation that causes

me concern, includes important recommendations that I strongly endorse.

POSITIVE RECOMMENDATIONS

For example, the governance section recommends that the IRS Commissioner be

appointed for a five-year term and that the Commissioner be given greater flexibility in hiring, termination, and compensation decisions.

I represent a company with more than 90,000 employees. I know how difficult it

is for the leadership of a large organization to chart a clear direction and earn the

commitment of the entire organization. A strong, unified, and stable leadership

team is critical to the success of the organization as a whole.

The Commissioner needs the flexibility to attract and retain the best and the

brightest for the IRS management team. This means adequate compensation and

bonus packages and the ability to promote and remove based on performance.

CONCERNS REGARDING THE RECOMMENDATION TO CREATE AN INDEPENDENT BOARD

Unfortunately, I am unable to support the Commission’s recommendation for the

creation of an independent board. After more than two decades of building partnerships between public and private sector organizations, I am committed to maintaining a clear distinction between the policy making functions of government and the

use of private sector contractors to make government operations more effective.

I know the Commissioners who support this recommendation intend that the

board have no role in policy making. However, it is difficult for me to understand
73

how a body that hires the executive officers of an organization, sets their compensation, approves their budget proposals, and interacts on a regular basis with members of Congress can refrain from influencing policy. I do not believe that an independent board should have control over those responsible for the implementation of

the tax law of this nation.

Moreover, I am convinced that the Treasury Department and the IRS have already taken and continue to take important steps toward implementing an improved governance process. I am impressed by efforts to focus the IRS on its core

competencies, and by the commitment to leverage the private sector to obtain resources such as systems integration capabilities that are not part of tencies. I would

like to give efforts that are now in progress the time to work.

TECHNOLOGY TASK FORCE/BUSINESS PERSPECTIVE

In conclusion, I would like to talk for a moment about my work as a member of

the Technology Task Force. Much of this work was focused on issues that are critical to the ability of the IRS to function successfully in the 21st century.

Technology is an enabler that will make it possible for IRS leadership to provide

better service to taxpayers and increase compliance. The technology gap between

the IRS and private sector financial institutions is widening daily. Taxpayers expect

the same level of efficient, accurate, and courteous treatment from their government

as they do from the private sector.

It is essential that the IRS have the technical capability and funding to deal with

century date change. It must press forward with its modernization blueprint and develop the public sector/private sector partnership that will enable it to improve customer service and compliance functions. It must expedite the use of electronic filing.

My experience on the Commission has convinced me that there is a unique opportunity to make dramatic improvement in IRS technology and taxpayer service.

The presence of a committed leadership team at Treasury and IRS coupled with

the release of a high quality modernization blueprint have added tremendous momentum to the forces of change. The contractor community is now prepared to make

substantial investments in the procurement and a major financial commitment to

ensuring that the modernization effort is a success.

An extended delay or uncertainty about Congress’ commitment to fund the procurement could undermine efforts of people in government who are willing to take

risks for change and make it difficult for private sector contractors to commit large

amounts of money and key people to such a resource intensive effort.

As this Committee moves forward in its discussion of governance issues, I hope

that it will also be mindful of the impodernization effort and the need to ensure that

funding is available to implement the blueprint when the modernization contract is

awarded.

I realize that today’s time is limited. I will be happy to answer any questions and

would be delighted to return if necessary to discuss the technology initiatives with

the Committee in detail.

Chairman J

Mr. Keating, thank you for serving on the Commission. You cerOHNSON. Thank you very much, Mr. Newstrom.

f

tainly also put in a great deal of time, and I appreciate your being

here today as executive vice president for the National Taxpayers

Union.

STATEMENT OF DAVID L. KEATING, COMMISSIONER,

NATIONAL COMMISSION ON RESTRUCTURING THE

INTERNAL REVENUE SERVICE; AND EXECUTIVE VICE

PRESIDENT, NATIONAL TAXPAYERS UNION, ALEXANDRIA,

VIRGINIA

Mr. KEATING. Thank you for holding these hearings this morning

and this afternoon and for inviting me to testify. I appreciate it.

The IRS contacts millions of Americans each year. For many of

us, it is the only agency that we deal with so regularly, and that
74

is why I think it is so important that Congress move to improve

the IRS because it needs improvement.

A poll conducted for our group last month found that 90 percent

of those surveyed said that improving the IRS should be a very

high or somewhat high priority for the current Congress, and now

that we have the Commission’s report for the Congress, we have

given a road map for discussion and debate about exactly how to

do that.

This report was endorsed by 12 of the 17 Commissioners, and

even those who voted against it endorsed much of the report.

The issue of controversy is on management and governance, and

I want to associate myself with the earlier remarks of Josh Weston

and Fred Goldberg. I agree with what they said, 100 percent, concerning management and governance.

I do want to add some additional observations. First, there is no

proposal that can guarantee sound management, but unlike the

Treasury Department’s proposal or what we have today, the Commission’s recommendations will allow for management’s success

rather than guarantee bureaucratic failure.

The fact is, if the Treasury Department could improve or would

improve, over the long term, the IRS on its own, it would have

done so already. I have watched the IRS closely for close to 20

years. Short of tax returns being dropped in the dumpster, which

we saw in the mideighties, we rarely saw much attention to the

IRS from the Treasury Department. The current Secretary is an

exception, but I doubt that he and the attitudes that he has

brought to the IRS will be the rule in the future.

Look at the management structure of the IRS. Commissioners

typically come and go quickly. The Deputy Treasury Secretary, to

whom the Commissioner reports, has many other responsibilities,

and in fact, some of them have not even realized that they were

in charge of overseeing the IRS until they arrived on the job. What

does that say? I think it says that the Treasury Department has

not typically put a high priority on good management at the IRS.

That is why I believe the Commission’s proposal for an IRS board

of directors is so important, because it will bring continuity that we

rarely see, competence, and focus to the job. Add to this, better coordinated congressional oversight and approval of key decisions

and I think you will see a better IRS, which is what we all want.

I also want to reemphasize one of our most important recommendations that Fred Goldberg touched on earlier. The IRS

should only initiate a contact with a taxpayer if it is prepared to

devote the resources necessary for a proper and timely resolution

of the matter. Think about this for a minute. When the IRS is contacting a taxpayer, the Government is saying you have done something wrong. If the taxpayer has not done something wrong and

wants to straighten it out, they should be able to straighten that

out quickly because they are responding to government’s request.

I also want to point out that we recommended that the IRS use

survey techniques, and I am not talking about public opinion polls

here, but surveys of taxpayers who have actually interacted with

the agency. Incredibly, the IRS does not do this today in any way.

Now, such customer service performance measures are common

in the private sector, and indeed, many State revenue agencies
75

have formal systems for receiving taxpayer feedback on individual

State agency employee audits and the like, and we think that is

something that the IRS should do as well.

In conclusion, on the topic of management and governance, I

think the Commission’s recommendations will make it much more

likely that top management of the IRS will be held accountable for

improving taxpayer service, which should be job one. In fact, that

is part of the name of the Internal Revenue Service.

We refer repeatedly in our report to customer service. Now, while

everyone supports the goal of improving service to citizens, I am

sure that most taxpayers certainly do not feel like customers. After

all, real customers have a choice about the products and services

they buy, but taxes are, of course, are involuntary payments and

no one has a choice about which IRS to select or which agency employee to deal with. That brings me to my point of why taxpayer

rights issues are so important.

The IRS has enormous power, and it is very important that that

power be exercised carefully. One of our key recommendations is

the taxpayer advocate needs more independence and clout. The advocate should be free to function without concern for career aspirations within the IRS. In fact, one of our recommendations is that

the advocate be appointed from outside the IRS or, if selected as

an IRS employee, not someone selected for this job as part of a career track to future promotions. I think a more independent advocate would give better input to the Congress and to the IRS board

about what needs to be fixed.

When I asked the current taxpayer advocate questions during

our Commission’s hearings, he did not seem to feel that he had any

responsibility to give Congress any clear input or independent

input. I found that to be amazing.

I will not go into detail, but we have many solid recommendations for additional taxpayer rights in the Commission report, and

I hope those will become part of any product that is reported out

of Congress on the issue of IRS reform.

I do want to make a concluding point, and that is simplification.

It is something that everyone talks about, but rarely seems to get

done. It is very, very important because we have a law that nobody

understands, and we also have given the IRS powers that we have

given to no other government agency. That is a recipe for a civil

liberty catastrophe—vague laws enforced with draconian enforcement powers. It is a frightening thought. Fortunately, abuses are

rare, but when they occur, they can be hair raising.

There are some recommendations in the report, including a quadrennial simplification process because there does not seem to be

much glory in simplification—all the grunt work that needs to go

comb through the Tax Code and find out what can be tossed aside

and what can be simplified. I think a simplification Commission

every 4 years or so might harness some of the private-sector activity that we saw on the Commission and then give these people

some ownership to help push it through the congressional process.

So I think it is something that might help there.

Anyway, in conclusion, I urge the Subcommittee to move forward

with the Commission’s report, craft it into legislation and pass it

as soon as possible. I very much appreciate the efforts made in the
76

past by the Members of this Subcommittee to improve the performance of the IRS and look forward to working with you on implementing this Commission’s report into law.

Thank you very much.

[The prepared statement follows:]

Statement of David L. Keating, Commissioner, National Commission on

Restructuring the Internal Revenue Service; and Executive Vice

President, National Taxpayers Union, Alexandria, Virginia

Madam Chair and Members of the Committee, thank you for inviting me to testify

on the Report of the National Commission on Restructuring the Internal Revenue

Service. I am the Executive Vice President of the 300,000-member National Taxpayers Union and was appointed to the Commission by Senator Bob Dole.

The Internal Revenue Service contacts millions of Americans each year. For many

of us, it is the only agency we deal with so regularly. The Commission’s report

marks the starting point for fundamental reform of the IRS, and it’s important that

Congress move quickly to improve the IRS. The American people agree. A poll conducted for National Taxpayers Union last month found that 90 percent of those surveyed said ‘‘improving the IRS’’ should be a ‘‘very high’’ or ‘‘somewhat high’’ priority

for Congress.

The Commission’s report is a comprehensive and nonpartisan document supported

by 12 of the 17 Commissioners. I strongly agree with the overwhelming majority of

the findings and recommendations and actively participated in the consensus building process. Although I have some concerns about certain areas, I would be pleased

to see the entire package become law and urge the Committee to pass legislation

soon to implement the recommendations contained in the Commission’s report.

MANAGEMENT AND GOVERNANCE

The critical issues of management and governance illustrate why the IRS today

is so resistant to reform. The witnesses heard by the Commission and the evidence

collected by its staff convinced me that management of the IRS is broken and needs

to be fixed. While no proposal can guarantee superb management, it will establish

a framework that, unlike either the Treasury Department’s proposal or the current

system, will allow for management success rather than bureaucratic failure.

Consider for a moment the current management structure of the IRS. Commissioners with little management experience often come and go quickly. The Treasury

Deputy to whom the Commissioner reports has many other responsibilities for tax

policy, and an even shorter tenure. He or she is normally selected with little consideration of ability or inclination to oversee the IRS.

At the same time, the Treasury Department has many other issues to worry

about, issues that many consider more prestigious if not more important. Whether

the Secretary is managing the public debt, giving advice to the President on economic policy, addressing international monetary problems, reviewing banking

issues, or monitoring government-sponsored enterprises, the Treasury Secretary is

a very busy person. Over the last two decades, I have rarely seen the Treasury Department take much interest in the IRS unless there were huge problems.

While Secretary Robert Rubin has recently been a welcome exception to a long

parade of Treasury Secretaries who neglect the IRS, I have little confidence that his

successors will demonstrate the same interest. That’s why the Commission’s proposal for an IRS board of directors is so important. It can bring continuity, competence and focus to the job. Adding coordinated congressional oversight and approval of key decisions should also lead to better direction for the agency.

While I believe our recommendations greatly improve the odds of good management and taxpayer service, to fundamentally change the IRS as an organization,

many other actions are required. The President and Congress must select an outstanding board of directors for the IRS. The board must select capable leadership

for the IRS. Employees who give excellent taxpayer service must be rewarded and

employees who can’t give good service must be terminated. Congress must take

more interest in and more action on tax administration, and should go beyond our

recommendations for coordinated oversight and approval of tax administration at

the IRS.

Even if the Commission’s plan is enacted and implemented quickly and effectively, the American people should not expect immediate change. The IRS is a huge

bureaucracy. It will take time to reform it. The IRS’s computers won’t improve overnight either. Much of the work on improving technology over the next few years will

be to minimize ‘‘year 2000’’ conversion problems. That leaves little management
77

time or procurement money to upgrade the hardware or software to provide better

taxpayer service.

TAXPAYER SERVICE

I want to emphasize one of our most important recommendations: ‘‘The IRS

should only initiate contact with a taxpayer if it is prepared to devote the resources

necessary for a proper and timely resolution of the matter.’’ Here are some examples

of practical changes that would be made if this principle is followed. New returns

should not be placed in the pipeline for auditors and appeals officers, when there

are unfinished cases older than 90 days. Service Center employees should make answering phone calls and letters their first priority, and should not send out new inquiry notices to taxpayers until the last batch has been worked. Collection officers

should accept or reject ‘‘offers in compromise’’ within 30 days, so that neither the

government nor the taxpayer is compromised by delays in resolving the debt.

The IRS should take steps to prevent taxpayer service problems before they occur.

Management must not only train IRS employees to treat taxpayers fairly, but must

also ensure that fair treatment actually occurs. The Commission suggested giving

the IRS new flexibility to use performance measures relevant to fair tax administration in order to hold employees accountable for ensuring that taxpayers receive

quality service. These performance measures should incorporate the requirements of

Revenue Procedure 64–22, which outlines standards of conduct for IRS employees

involving fair and professional treatment of taxpayers.

The Commission also recommended the use of survey techniques to gauge taxpayers’ opinions about how knowledgeable, courteous, and respectful IRS employees

are to taxpayers. Incredibly, the IRS does not directly measure taxpayer service or

satisfaction in any way. Taxpayers who interact with IRS employees are not asked

for their opinions of how IRS employees perform.

Such customer service performance measures are common in the private sector

and many state revenue agencies have formal systems for receiving taxpayer feedback on individual state tax agency employees.

One of the most important goals of restructuring that the IRS can undertake is

to transform its culture. Foremost, they (like the federal bureaucracy as a whole)

must always act like the employees of ‘‘the People’’ that they are. Millions of Americans form much of their personal opinions about government based on their experience with the IRS.

IRS employees are armed with extraordinary powers—in terms not only of what

they can do to taxpayers but also what they can demand of them. The taxpayer of

course cannot select among IRS employees or find a new tax agency and IRS employees know this. Consequently, while most employees are helpful, too many are

often rude, dismissive and abusive to taxpayers.

Moreover, since IRS employees have few cost considerations, they often fail to

take into account how inconvenient or costly their demands on a taxpayer may be.

The management and governance recommendations will increase the likelihood

that top management of the IRS will be held accountable for improving taxpayer

service. Also, with these performance measures and enhanced personnel flexibility,

the IRS will be able to provide incentives to employees who provide taxpayers with

quality service, and to discipline employees who do not. Only by focusing the IRS

on taxpayer service will we see a true change in the culture of the IRS and the way

that taxpayers are treated.

TAXPAYERS’ RIGHTS

The Commission’s report repeatedly refers to ‘‘customer’’ service. While everyone

supports the goal of improving service to citizens, I’m sure many, if not most, taxpayers certainly don’t feel like they are customers. Real customers have a choice

about the products and services they buy. Yet taxes are, after all, involuntary payments, and there’s no choice about which IRS to use. That’s one reason why taxpayers’ rights issues are so important.

There are many substantial and solid recommendations in the taxpayers’ rights

portion of the report. It is essential that Congress provide more rights and remedies

for taxpayers by adopting these recommendations, as it modernizes and restructures

IRS.

I want to emphasize several of the key recommendations of the Commission regarding taxpayers’ rights.

The Taxpayer Advocate needs more independence and clout. I strongly believe

that the Taxpayer Advocate should not be a career IRS employee. The Taxpayer Advocate must be free to function without concern for his career aspirations within the
78

IRS. He should not have to worry about how other IRS managers view his input

into their areas of responsibility.

A more independent Advocate would come to the job without the restrictive mission-oriented mentality that besets many career agency executives. He would be

more receptive to the needs of taxpayers and to changing business-as-usual, and

would be far more likely to recommend to the Congress and the IRS Board solutions

to taxpayers’ problems.

The Commission recommended that candidates for Taxpayer Advocate ‘‘should

have substantial experience representing taxpayers before the IRS or with taxpayers rights issues. If the Advocate is selected from the ranks of career IRS employees, the selection should also be a person with substantial experience assisting

taxpayers or with taxpayer rights issues, and the job description should stipulate’’

that it will not be part of a career track for the employee.

The Commission’s recommendation that the IRS Board should ‘‘have final authority over the hiring decision’’ of the Taxpayer Advocate will also help ensure the independence and clout needed to increase the effectiveness of this position.

The standard of hardship is unnecessarily high for a Taxpayer Assistance Order

(TAO). The Commission recommended giving more authority and flexibility for the

Taxpayer Advocate to issue a TAO if the IRS is not following guidelines or if there

is ‘‘imminent threat of adverse action; delay of more than 30 days in resolving a

taxpayer account problem; or prospect of paying significant professional fees for representation.’’

Taxpayers can still suffer severe financial losses even when they clearly win a tax

dispute. Although the Taxpayers’ Bill of Rights packages enacted into law in 1988

and 1996 offer important new safeguards for taxpayers, the job of protecting innocent taxpayers from ruin is far from complete.

In the 1986 Tax Reform Act, Congress substantially liberalized the definition of

negligent actions by individual taxpayers. Beginning in the 1980s, tax preparers

were also subjected to increasing penalties for not exercising due diligence. Yet incredibly, Congress refuses to require the IRS to exercise reasonable caution in using

its vast array of enforcement powers.

I was very pleased to see the Commission recommend that taxpayers who have

been financially harmed or devastated by IRS carelessness should have the right to

sue and recover damages when the IRS is negligent.

Attorney fee awards are still inadequate. Taxpayers can suffer enormous financial

damages even when they win. Again, the 1996 legislation made several needed improvements in the law, especially the new requirement that the IRS prove it was

‘‘substantially justified’’ in pursuing a case. The Commission recommended changes

to ‘‘allow recovery of costs incurred prior to the time of the final administrative notice from the IRS. Because most administrative costs are incurred between the time

of the preliminary notice of deficiency (i.e., the 30 day letter) and the time of the

final notice of deficiency (i.e., the 90 day letter), the present construction of section

7430 is self-defeating.’’

I have often heard reports that the IRS will sometimes crush taxpayers of modest

means because agency employees know such taxpayers often cannot afford representation to ensure their rights. The Commission recommended that ‘‘Congress also

should clarify that nonprofit clinics that represent low income taxpayers, and other

pro bono representatives, are eligible to receive awards under section 7430, based

upon the number of hours worked and costs expended.’’

As the Commission noted in the report, ‘‘there historically has been a concern that

expanding taxpayer rights to redress would be disruptive to collection efforts. Setting aside the issue of whether it is appropriate that taxpayers should be provided

rights only to the extent that it does not disrupt collection efforts, the Commission

found no evidence that the rights to redress and collection of representation fees

provided to the taxpayer under the Omnibus Taxpayer Bill of Rights and Taxpayer

Bill of Rights 2 have caused disruption to IRS collection efforts. In addition, the

costs of expanding taxpayers’ redress have been vastly overestimated. For example,

the cost of reimbursing representation fees was originally estimated to be over $100

million per year. The actual cost has been approximately $5 million per year.’’

SIMPLIFICATION

The tax code is so convoluted that no one inside or outside the IRS understands

it. Money magazine’s annual test of tax preparers this year brought another sad result. All forty-five tested tax professionals got a different answer, and no one calculated the correct tax on a hypothetical tax return. Two out of three were off by

more than $1,300.
79

Currently there is no requirement that members of Congress receive information

on whether a proposed tax law change increases or decreases complexity. Since complexity is not directly considered in the legislative process, it’s often ignored. At the

same time, congressional committees must meet substantial reporting requirements

for revenue estimates and the political process generates much data on the progressivity of proposed tax law changes. The tax legislative process is driven by these

two numbers, which further biases the legislative process towards producing more

complex legislation.

The Commission also suggested that Congress consider a quadrennial simplification process, and I hope that Congress and the President will quickly implement

such a process either through legislation or by executive order. The Commission

found that many members of the private sector tax community were willing to volunteer substantial time to make suggestions for simplification. The fact is, comprehensive simplification rarely happens. I’m not sure why. Probably because it’s too

much work, with too little reward politically.

A quadrennial simplification commission would harness this volunteer activity

and give a broad group of people much more incentive to work for the adoption of

simplification rules. This quadrennial commission would also give the Joint Committee on Taxation and the Treasury Department more incentive to suggest simplification of the law.

CONCLUSION

In conclusion, I urge the Committee to move forward with the Commission’s recommendations immediately, so that taxpayers can soon benefit from improvements

in the quality of service they deserve from the IRS. The job of improving taxpayer

service, protecting taxpayer rights and simplifying the laws and regulations will

never end. The Commission’s report can mark the beginning of a historic improvement in the operations of the IRS. We sincerely appreciate the efforts being made

by members of this Subcommittee to improve the performance of the IRS and, ultimately, public confidence in our tax system.

Source and amount of Federal government grants and contracts received by David

Keating or National Taxpayers Union for the current and preceding two fiscal years:

None.

Chairman J

Mr. Keating, you made a very interesting comment that you felt

OHNSON. Thank you, Mr. Keating.

f

the outside board could bring to the management discussion table,

issues that needed to be raised and more forcefully, and you used

the example of the taxpayer advocate.

I think you have hit on a very important point, and I think the

rest of you, particularly those of you who think that we can do this

from inside, need to be able to give me an example of where any

current board has made this level of substantial input to any government agency over time. I can think of no example of any advisory board having the kind of substantial continuous effect on management quality or performance that we are asking of this board.

I just say to you, 2 years ago in the Taxpayers Bill of Rights II,

to try to get this kind of input, we wrote very specific provisions,

and we asked the taxpayer advocate to provide us with a list of the

10 most commonly asked problems. The 10 most commonly seen

problems by the advocates, trying to circumvent the sort of normal

process that happens in any bureaucracy, whether it is State or

Federal, whereby any Commissioner looks at what are the 45 million things that concern us and what are the 10 things I ought to

focus on in Congress. In that process, little things do not get the

necessary attention. Anybody in government knows that.
80

We wanted to go around that process. We wanted this Oversight

Subcommittee to just hear from the advocates so we could make

that decision, are these little things or big things.

I think had we been doing that, we would at least have structured the earned income tax credit, EITC, 4 years ago, differently.

We would have done different things about reform, and I can tell

you, we are not getting the input on tax policy that Congress

needs. So we put that in there, and the result was an absolutely

pathetic hearing. This is after specific direction.

So the bureaucracy simply, A, did not hear us. B, it did not care

that much. So this is not to criticize them because now they are

going to come around and do it, now that they have heard that

what they did is not what we asked. We are going to do this, but

now we have lost a year. We spent a year passing the legislation.

We spent a year talking about what it is we actually asked you to

do and now would you please do it all over again. This is not to

demean them, and I am sorry about the tone of voice because it is

so frustrating, but really, it is not that the bureaucracy does not

want to do this. It is that they have other things to do, and the

idea that somehow OMB people or the Office of Personnel Management people or other people from outside would give this constant

direction when we specifically gave very specific direction to the

agency which the Treasury knew about and they had this board

meeting, I have to ask you, if they could not hear that simple direction, how can I possibly believe that an internal board would provide the kind of constant input, just suggestions, this is how we do

it? If you are going to do customer service, this is what you have

got to do. If you are going to do technology modernization, you cannot talk about it this year and not next year. The Congress is going

to need more determined, in a sense, input from IRS overseers, and

it cannot go up through the Secretary of the Treasury and have the

Secretary of the Treasury, who has a lot of other responsibilities,

weigh how much he is going to go to bat for IRS versus other

things under his jurisdiction.

So I think that the burden of proof on this issue of governance

is truly at this time, in my mind, on those who say it can be done

from inside because you are taking on a responsibility for the internal bureaucracy that I have never seen the bureaucracy carry out.

So I open it to your comments, but this was a point of difference

amongst the Commissioners. The majority went with the kind of

outside board that we have not tried, and those that oppose that

really carry a heavy burden to give this Subcommittee examples of

where we have seen, because we have appointed a lot of good people, just tons of good people to outside advisory boards in that

sense. So where is it? I am open to any comments.

Mr. KEATING. I would like to take an initial crack at that because

one of the things I struggled with on the Commission was this

whole idea of whether there should be an outside board.

Now, the IRS is a unique agency of the Government. Most other

agencies, we have got political appointees up and down the agency.

One way of getting the IRS to be more responsive to the political

process would be to add more political appointees. In fact, that had

been tried before I was born, and my understanding is it did not

work too well. So there has been an understandable reluctance to
81

add more political appointees to the IRS, but that is certainly one

direction you could go in.

One of the things that I have seen over the years that I have

watched the IRS is that it is so incredibly resistant to change.

There is so little outside input. The agency is so insular, always

looking inward. In fact, we found very few people who came in from

the outside, and the two recent ones who have come in from the

outside seemed to have had a very beneficial effect. Morgan

Kinghorne, who I understand was the first Chief Financial Officer,

and now Art Gross, the Chief Information Officer.

I think this shows the kind of positive developments you can get

if you bring in an outside perspective, people from outside the

agency.

Now, you have got essentially just the Commissioner and Chief

Counsel who comes in from the outside on any regular basis. I

think having this private-sector board, people carefully selected,

you would wind up with a number of people like Josh Weston to

bring in the customer service skills that we see practiced so well

in many private sector companies. It would force the agency to stay

focused on taxpayer service and bring in new ideas. So I see it as

something that could invigorate the agency to improve its service.

I have concluded, given the other constraints, we do not want to

put more political appointees in the IRS. We need to do something

like this because the Treasury Department, frankly, has been in

charge of the IRS for decades and nothing seems to ever change.

Chairman JOHNSON. Anyone else?

Mr. Irving.

Mr. IRVING. I hesitate to wade into these waters.

Chairman JOHNSON. But you need to because you were going to

in your testimony.

Mr. IRVING. You have put the burden of proof on——

Chairman JOHNSON. Right. So I want to hear this from you.

Mr. IRVING. My concern is a little bit different. I think I understand what you are saying with regard to the need for outside opinions, but if you have a politically tone-deaf IRS, I think it would

be just a tone-deaf to a governance board, and a governance board,

as I understand it, is not supposed to get involved in policy. It is

supposed to get involved in day-to-day management.

Some of the issues that this Subcommittee and other congressional Committees are going to be concerned about are by necessity

going to be enforcement or policy concerns, and I do not think you

want an outside group of people, that governance board getting involved.

I think advice is important, and I think a high-level advisory

board is important. I think the Treasury Department recognizes

that.

Where I get off the bus really is not on the issue of outside information. It is having a group of outside, mostly chief executive officers, predominantly private sector governing the IRS. That is

where I have a difference of opinion.

Chairman JOHNSON. Mr. Irving, I made the point before that I

need an example of where we see this working.

We have in the IRS now an advisory board. So we have outside

input. We have businesses and executives who serve on that advi-
82

sory board, and it does not have any impact, at least it has not had

any significant impact on any of these issues.

The reason I think this taxpayer advocate example is so relevant

is because it took place during the time that Treasury was focused

on the problems of the IRS. Of course, they were focused on technology modernization. That is a big problem, but their interest did

not go down to this because they actually have a vested interest

in the opposite effect and are not getting the information because

it always travels through them so that they can set the larger

agencies’ priorities.

So the outside advisory board currently—and there currently is

an advisory board called CAG or something, Commissioners Advisory Group—is not doing the job, and I really would have to have

a good reason to believe that a different advisory group could do

the job, and then I want to hear from the others because it is not

my understanding that this board would do day-to-day tasks, but

it is true it would not do policy. So we need to clean up what does

it do, actually, but I’d like your comment, and then maybe Mr.

Goldberg and anyone else who wants to comment.

Mr. IRVING. I do not know how the governance board is going,

whether or not it would have missed the issue about the taxpayer

advocate if it was not doing day-to-day management, if it was not

getting into the micromanagement. It is as likely a scenario that

the governance board could miss it as a politically tone-deaf institution missed it, if in fact they missed it.

I do not know what happened with the taxpayer advocate, but

I am not certain that a board is supposed to do macropolicy that

is looking at hiring, firing, and is not supposed to do policy, would

have not missed it any more than anyone else would have not

missed it.

I understand you are putting the burden of proof on me, but with

this kind of a substantial change for one of the most important

agencies in the Government, I guess my sense is that the burden

of proof of this type of change should not rest just with those who

are advocating the status quo because I am not advocating the status quo. I am saying that when you are talking about changing the

form of governance, adding another significant layer of bureaucracy, adding another level of political appointees, five political appointees at a minimum, maybe seven, that is a significant change

in the governance of the IRS and one that I think we should do

with great hesitancy, and the particular proposal, I have significant

problems with.

Mr. NEWSTROM. Madam Chairman, may I address this from a

slightly different perspective? Remember that everyone has testified, and I believe everyone before us testified, that the preponderance of the recommendations we have violent agreement on.

Chairman JOHNSON. Yes, I appreciate that. That is very helpful.

Mr. NEWSTROM. Violent agreement on. This one here is unique,

and I find myself in a very unique position, coming from the private sector, recommending that you do not have an independent

board mostly filled with private-sector people because of the policy

implications.

The comments that the board would hire, be able to set compensation, approve budgets, and so forth, and not get into the pol-
83

icy, I just have a hard time comprehending that. So I liken it to

my job and my role in my company. I report to the president. I

have annual targets, requirements to produce numbers. I contemplate an independent board sitting on top of me, appointed by

somebody who sets my compensation, hires my executives, theoretically does not get involved in policy, but controls a large part of

what I do, and yet, I have to report to the president and produce

the results. I just have a hard time with that.

The last part of what I said was that I am comfortable that there

has been progress made by Treasury, by the IRS. The nominee for

IRS Commissioner Charles Rossotti comes from Northern Virginia.

He is a member of the technology community that I work and live

in. I think it is a tremendous message that there are outsiders, as

Mr. Keating said, being brought in and on the issue of probably the

most important thing that the IRS needs to address, which is technology for the future. You have a person that has that capability

to manage technology issues.

So, hopefully, with a combination of the other recommendations,

the direction of the IRS and Treasury, and new leadership, I am

comfortable that we are taking new steps, as Mr. Irving has also

said.

Chairman JOHNSON. This is the most difficult issue that the Subcommittee will decide, and it is a matter of judgment. That is why

I wanted to provoke you to differ with one another.

Mr. Goldberg.

Mr. GOLDBERG. Madam Chair, having been in these positions, I

would like to talk sort of how it feels when you are the Commissioner for a second.

Chairman JOHNSON. That would be very helpful.

Mr. GOLDBERG. One of the most difficult parts of the job is if you

believe in the direction that I think our Commission accepts the

IRS should go, in a sense, it is very easy to say, but, boy, is it hard

to do. I think that at least in my personal experience, and this is

going to come across wrong, I would envision the board as almost

a sanctuary. That is the wrong word, but there is no place that you

can go push against and no place that pushes against you about

the things that matter most.

Congress does its oversight hearings, and the nature of the process in Congress is it is lots of problems, it is lots of anecdotes, lots

of bad stories, lots of this issue, that issue, and that is part of the

congressional process, and that is helpful. That is good, but it has

its limitations.

You have OMB involved and you have GAO involved and you

have the Treasury involved and you have GSA involved. Where is

the focus on what matters most, and who is going to drag me by

the scruff of the neck as Commissioner periodically and say this is

what matters most, how are you doing? Good, if you are doing well.

Shame on you if you are doing bad, and we are going to hold you

accountable. That is missing from the process. That is what we are

trying to fill, and that is what this board is about.

Take the example that David Keating gave. If you believe it

should be an absolute maximum of tax administration, that you

just never contact the taxpayer unless you are prepared to fix the

problem timely, on time, and do it well, does the Congress buy that
84

view? Does the administration buy that view? How are you going

to measure whether you are even doing it? How do you know that

you are getting that result? Who is going to be sure year in and

year out that you have got the measures in place and is riding you

to do that? If it means you do not do 15 other things, at least you

are doing that. That is not happening, and in my judgment, it is

never going to happen unless you deal with these kinds of issues

of continuity.

Chairman JOHNSON. I think you make a very important point because we do have GAO out there watching and saying things. We

do now have voices, but there is no consistent pressure, and there

is no backup for the agency when it is going in the right direction

and trying to achieve goals, but I want you also to talk about—because I do not understand—I want you to talk about this issue of

day-to-day management and policy.

If the board is not going to do day-to-day management and you

are not going to do tax policy, what are you going to do? Why aren’t

you going to end up doing those other things, I guess, is the more

important question.

Mr. GOLDBERG. There are a number of reasons. Historically, the

day-to-day management, particularly on the law enforcement side

and the decisions about the day-to-day activities are delegated way

down within the agency. By statute, those decisions are decentralized. You have Regional Commissioners. You have District Directors.

The judgment that was made in the early fifties, and it is a judgment that I believe was correct at the time, is that those kinds of

enforcement decisions happen through an apolitical career civil

service in the field, and I think it has to stay that way because the

threat, even the notion that law enforcement is going to be politicized, is something that we have decided we want to stay far away

from, and that is the right decision.

What the board should be focusing on are issues of strategic importance. The simple decision, I want to be sure whenever I contact

the taxpayer, I am going to be able to answer the question and

solve the problem, sounds easy. The board should be asking questions like is that your first priority. How do you measure whether

you are delivering on that promise? What kind of progress are you

making toward that overall objective? Those are the kinds of bigger

questions that I believe are not addressed in the system today, and

I believe the board could address those kinds of questions.

I think they can do it meeting four times a year because those

are high-level questions about putting measures in place and assessing aggregate performance against aggregate measures.

Are taxpayers satisfied with the service they are getting? If you

believe David’s argument that you ought to be surveying taxpayers

about how well they are being treated, that is an aggregate issue.

The board says that is real important, and that is a large—a big

question with aggregate measures that never involve the board in,

well, was Fred or Sally or Jane unhappy. It is aggregate measures,

and I think that is the function that the board can perform, and

it is a function that at least in my opinion is not being performed

today.
85

The Government, the Treasury Department historically at least,

the White House historically at least, have said we never want to

hear from the IRS Commissioner, we never want to have anything

to do with what that agency is up to on a day-to-day basis in a specific-case context. I do not think you want to change that for a

minute.

The board spends its time in a completely different universe,

with completely different kinds of issues it is trying to work

through. Maybe the answer is, hey, it is not so important that

every time we contact the taxpayer we are there to answer the

question because that is not really what the IRS is about. The IRS

is about getting tax dollars.

So if we kind of do not respond all the time, so it goes. The object

is to maximize tax receipts. If that is the judgment that Congress

makes, if that is what Congress wants from the IRS, if that is what

the administration wants from the IRS, fine. Make that judgment.

Then you are not worried about serving taxpayers. What you are

worried about is maximizing compliance revenues. Fine. If that is

the direction the board sets, if that is the direction the President

sets and the Congress sets, go make it happen. I think that is a

terrible direction, but the point is those decisions are not made,

and there is no long-term accountability to get you where you want

to go. That is what is missing. It is not how you audit, who you

audit, when you audit. That is 15 layers below anything the board

of directors should ever consider.

Chairman JOHNSON. Thank you. That was very helpful.

I am going to yield to my colleague, Mr. Coyne.

Mr. COYNE. Thank you, Madam Chairwoman. I would like to

welcome all the Commissioners and thank you for your service on

the Commission and your testimony here today.

We were very fortunate to have Fred Goldberg serve on the Commission. Fred has served at the different levels in government, including IRS Commissioner.

Fred, I had a question for you. You indicated that under proposed Commission recommendations the Commissioner would now

be directly responsible to the President. But the Commission’s recommendations are different from the way it works today the board

that would hire the Commissioner, so that IRS board is between

the President and the Commissioner.

Mr. GOLDBERG. Mr. Coyne, that was perfectly a hard issue for

me to deal with in the context of the Commission’s report, having

been appointed by the President of the United States. That is a big

deal, but the answer is, right now the Commissioner does not report directly to the President. The Commissioner of the Internal

Revenue reports to the Secretary of the Treasury.

Mr. COYNE. Who is appointed by the President.

Mr. GOLDBERG. The Secretary is appointed, right.

What would happen is that the Commissioner in the day-to-day

law enforcement activities, the Commissioner’s role in policy formulation, all of the roles that the Commissioner traditionally performs

today that is making day-to-day decisions, advising regarding how

the laws or regulations should be written, advising regarding legislation, the Commissioner would continue to report to the Secretary
86

of the Treasury, who would continue to report to the President, in

all of those areas. So that would not change.

With respect to the Board of Directors’ activity, Board of Governors’ activity, where the Commissioner is trying to get beyond

the day-to-day fray and sort of step back and talk about where this

ought to be going, what the picture is and what it ought to be like

in gross, the Commissioner is reporting to the board. That board

is appointed by the President. That board can be removed by the

President. As a practical matter, I believe that board will in the

real world turn out to be largely a creature of the Secretary of the

Treasury, which I find very reassuring, and what it creates is a

structure there that does not change the line, Commissioner, Secretary, President, on the stuff that affects taxpayers day to day on

the rules and regulations.

The only thing I see it doing is giving the Secretary the institution, the Department of the Treasury, a mechanism to enforce continuity, a mechanism to say as we go through administrations, as

we go through Secretaries and Deputy Secretaries and heads of

OMB, there is some incremental measure of stability so that when

you ask the question about the 5 years that it takes you to implement one-stop service on telephones or when you talk about the 7

years it takes to redo technology or when you talk about the 4

years it takes to reform training so that all of the employees are

getting the training they need, there is an institution there that

can tell you here is what has happened, here is where we are

going, here is how we are doing.

It always runs to the President, and the Commissioner is always

going through political appointees to get there.

Mr. COYNE. Well, I was only making the point that it is going

to be different if this board is approved. The board will hire the

Commissioner, which is different from what it is today.

Mr. GOLDBERG. Right. That is correct.

Mr. COYNE. I suppose that the Commission could fire the IRS

Commissioner.

Mr. GOLDBERG. The way the recommendation is laid out, that is

correct. If the judgment were that it was important to have the

Commissioner appointed by the President of the United States, I

think you are still keeping the structure, the same concept in place

at that point.

Mr. COYNE. I was wondering, can you think of any decisions that

you had made as Commissioner of IRS that would have been different had there been a board of directors in place at that time?

Mr. GOLDBERG. There are lots of decisions I made that I am unhappy with, Mr. Coyne. There are a lot of decisions I did not make

that I wish I had, but my judgment is that this relentless focus on

making it work better for the taxpayer is so important, and it is

so easy to lose sight of that. I believe that if there had been a

structure in place that said this is what matters most and every

quarter you have got to come up and tell us how you are doing, I

believe we would have been a lot further down that road. I am confident we would have been a lot further down that road, but those

are 21⁄2 years.

Look at all of the people who have walked through that office

over the last 10 years. Look at all of the folks who have walked
87

through the Deputy Secretary’s job over the last 10 years, every

one of them, I believe well intentioned and capable, but it had not

worked. That is what we are missing, and I think this is what the

Commission was trying to get at.

Mr. COYNE. Thanks very much.

Mr. PORTMAN [presiding]. Thanks, Mr. Coyne.

Mr. English.

Mr. ENGLISH. Thank you, Mr. Chairman.

First of all, I want to congratulate this Commission because you

have really issued an extraordinary report. It is visionary. It has

taken your charter and explored it fully, and what I particularly

wanted to congratulate you on is the fact that you have tried to get

at the core of some of the problems of the IRS, not just the symptoms.

One of the fundamental problems, and I think all of you will

have to agree with this, is the complexity of the Tax Code. You

have been willing to include that observation as part of your fundamental recommendations.

I want to say that by referencing and using as an example the

problem of the alternative minimum tax, AMT, you have given real

impetus to the cause of tax reform on the Hill.

The first bill that I introduced in coming to Congress was a bill

to repeal the AMT. It is a tax that every practitioner knows about.

It is incredibly complex and burdensome, dead drag on the productivity of our economy, and includes staggering compliance cost. By

making the recommendation that we consider phasing out the AMT

and finding some sort of replacement way of doing the policy, I

think you have given our cause a great shot in the arm.

Your recommendation also provided for a quadrennial process of

reviewing simplification and having recommendations prepared.

This quadrennial process, I know, Mr. Keating, in your testimony, you suggested should take the form of a Commission. Do you

want to amplify on that?

Mr. KEATING. During our work on the Commission, it seemed

that whenever we were going to do something, have an important

hearing or make an important announcement, the Treasury Department, the day before, announced some new IRS initiative. I

think one of the reasons why the Treasury Department announced

initiatives for simplification this year was the mere existence of our

Commission.

Mr. ENGLISH. Mr. Keating, isn’t it gratifying to see immediate results for your recommendation?

Mr. KEATING. Well, it is, but I think one of the problems with

simplification is it is a classic public interest-type good. You do not

have people walking the halls of Congress twisting arms, asking for

a simplification of this provision or the entire Tax Code, other than

in a general way.

Our Commission, even though it was not charged with simplifying the Tax Code, caused many in the private sector, taxpractitioning community to put together a lot of ideas and send

them to us. We did not endorse them because that was not our job,

per se, but I think if you could create such a Commission, it would

be a prestigious post. People would angle to get onto it. They would

put a lot of voluntary work into this. They would have ownership
88

of the ideas, and they would walk the halls of Congress. They

would go to the Treasury Department and promote these ideas, and

I think you might see some very healthy input into the process,

both in the Treasury Department and in the Congress itself. I

know the staff is often stretched thin working on the day-to-day

issues, whether it is Medicare reform or other things that are dealt

with by this Committee and the Joint Tax Committee. Simplification could, I think, be encouraged by such a Commission.

Mr. ENGLISH. Could I ask each of you, also included as a recommendation, that for every tax proposal there be done a complexity analysis at the time it is submitted. Very briefly, do each of you

support that recommendation?

Mr. ENGLISH. Mr. Keating.

Mr. KEATING. Yes.

Mr. ENGLISH. Mr. Newstrom.

Mr. NEWSTROM. Yes.

Mr. ENGLISH. Mr. Irving.

Mr. IRVING. Yes.

Mr. ENGLISH. Mr. Tobias.

Mr. TOBIAS. Yes.

Mr. ENGLISH. Mr. Goldberg.

Mr. GOLDBERG. Yes, sir.

Mr. ENGLISH. Thank you. I think it is one of the better features

of your proposals.

A final question. Commissioner Goldberg, welcome. It is good to

see you back. I noticed one of the more, I thought for me, stimulating comments by Secretary Summers was the claim that an independent board would ‘‘post an unacceptable risk to our Nation’s

revenue stream.’’ I think you have already touched on this in your

testimony, but it seems to me what he is arguing is that by somehow restraining the IRS, we would be experiencing an unacceptable

level of revenue loss, which is one of the things that we concern

ourselves with here.

Can you comment on that? Do you think this is from a professional standpoint an unacceptable risk to the Nation’s revenue

stream?

Mr. GOLDBERG. No, sir, I do not. I think the contrary is the case.

In my judgment, the biggest threat the tax system has right now

is we are losing the base. We are losing the 90 percent of the people who are trying to do it right. It is too hard. It is too complicated. It is too intrusive, but unless we find a way to keep the

base, unless we kind of find a way to make it work right for the

everyday Americans out there, we are in serious trouble.

I believe that these kinds of recommendations that we are making are intended to make the system work right for everyday Americans, and if we do not, we will lose it. So I see the opposite. I see

the far bigger risk is in inaction.

Mr. ENGLISH. Mr. Chairman, I have a lot of other questions, but

I know my colleagues have, I think, many of the same questions.

I appreciate the opportunity to ask this very distinguished panel

for their comments.

Again, this report, I think, is one of the best things I have seen

since I joined the Ways and Means Committee, and it gives us a

clear direction for further legislative action.
89

Thank you, Mr. Chairman.

Mr. PORTMAN. Thank you, Mr. English, for your patience, as well

as your interest.

I am going to go to another patient colleague and defer and hope

to have some time to ask questions afterward.

Mr. Cardin.

Mr. CARDIN. Thank you, Mr. Chairman.

I also want to add my thanks to our panelists not only for their

testimony and presence here today, but for their service on the

Commission. You came up with these recommendations.

We have been spending most of the time today talking about the

governance issue, but there are many other important recommendations. Mr. Keating, I particularly appreciate your mentioning the simplification issue. I know that our Chairman, Mr.

Portman, worked hard on the simplification matters and to sensitize Congress on bills that move through this body that are well

intended, but are very complicated in enforcement. Hopefully, the

policymakers, the Members of Congress, who are ultimately responsible for enactment of tax policy will be more sensitive on simplification issues as we consider policy. I really want to congratulate Mr. Portman for his leadership in that area.

It seems to me that you all have made a very strong case that

IRS needs to develop a game plan, then given the tools to carry out

that strategy, and ultimately held accountable, and that an independent board can certainly help in that direction. Even those that

have concern about the authority of this board, it seems to me, are

speaking out for the need for a game plan and the tools necessary

to carry out those game plans.

I stress that because the Ways and Means Committee that has

oversight jurisdiction of the Internal Revenue Service, historically,

has sent letters to the appropriators, to the Budget Committee, to

provide the tools necessary for IRS to carry out its functions, and

those letters are ignored. There has not been an effective way for

us to put a spotlight on what the Internal Revenue Service will

need in order to carry out its mission, and it seems to me that an

independent board can play a very valuable role in developing not

just a game plan in accountability, but to come forward with a responsible attention to what Congress needs to do in appropriating

the resources, so that IRS can carry out its function.

Mr. Goldberg, you have had, I think, the most experience on the

direct line on these areas. I listened with interest to your testimony, and there are two points that I would just want to take

issue with or at least get your response to. One is that if the Commissioner is going to be held accountable, it seems to me the Commissioner has to be able to appoint his or her top management, and

that the responsibility must rest with the Commissioner in that regard. Then, as far as the appointment of the Commissioner by the

board that is appointed by the President, it seems to me that obviously the board has to have a role, but ultimately, the appointment

of the Commissioner should be by the President. I think that is

consistent with what you are trying to bring out here, and I would

just like to get your comment. On accountability, doesn’t that make

more sense?
90

Mr. GOLDBERG. Mr. Cardin, I think that is well within the framework of what the Commission was looking at. I think the Commission was trying to create a way to think about the problem, and

my personal judgment is the kinds of things you are talking about

that fit well within that framework, and if the collective judgment

of the Congress were the Commissioner ought to be appointed by

the President or if the Commissioner were to appoint somebody as

his or her senior officials directly, I would certainly understand

those judgments.

I think the role of having some institution outside the Commissioner deal with some of the senior-level executive appointments,

I believe, is important, not because it is—it is a balance. You want

them accountable to the Commissioner, but on the other hand,

there are institutional issues that I think are important. So we

struck the balance a little bit differently, but I think those are well

within the parameter that reasonable people could reach different

judgments.

Mr. CARDIN. Thank you.

Thank you, Mr. Chairman.

Mr. PORTMAN. Thank you, Mr. Cardin.

I have so many questions for my friends that I do not know

where to start. So I will, instead just be brief, and I want to thank

each of you.

This is kind of like family to me. We are having a reunion here

today. Each of you put in a tremendous amount of time and effort,

and I think did so in good faith, and each contributed mightily to

our work; David, on the simplification measures and pushed us

hard on that, otherwise we would not have ended up where we are.

George provided a lot of expertise in the information technology

task force, and with that unique background you have, as vice

president for government systems for a company that does a lot of

its work around the world and not just the United States, and Hon.

Assistant Secretary Larry Irving provided us expertise not only on

the information technology, which is what you do day to day, but

also being from Capitol Hill, you have brought us a lot of good insight and input, even on the very controversial issue which was referenced earlier of congressional oversight. Bob Tobias, I do have a

couple of questions for you.

As I go around talking about this issue and people begin to understand what the focus of this report is, there are mixed views.

One is, are you talking about the IRS being more effective? I say

yes, actually, it would be more effective. That actually frightens

some people because they have had an experience with the IRS

that perhaps was not an entirely beneficial one. I explained that

this is about restoring trust and credibility in the agency that affects more Americans than any others, and it is about having it

work right. If you are going to have a tax collection agency, which

we need under our current Code and our current system, it has got

to work better for the American taxpayer.

I guess what would be interesting for me to hear, and maybe for

the other Members here, is why in the end representing the employees at the IRS, people who are on the line doing the actual

work, you thought this Commission report ended up in the right

place and you were able in the end to support its recommendations.
91

Mr. TOBIAS. Well, as I said in my statement, I believe that the

Internal Revenue Service has lost a great deal of credibility with

the public, with Congress, with the press, and I do not see with the

existing approach that that credibility can be restored in a timely

manner.

I think that the problems of funding, the problems of giving employees an effective voice, the problems of governance structure in

the Internal Revenue Service itself, which has not received a lot of

focus or attention by the Commission, sort of a glancing blow by

the Commission, but the hierarchial management structure, and

the symptom of that is a resistance to change, I do not see that

changing. I see more ossification.

So I supported this report because I see it as the best chance to

make the IRS efficient, and I guess I would quibble with your characterization because if the IRS is efficient, it is not calling the

wrong people. It is calling the right people. It is not assessing tax

that is incorrect. It is assessing the correct tax. If the IRS is efficient, the telephone calls get answered by people who are interested in satisfying the needs, the questions, the concerns of the

person who is on the other end of the line.

So I think that a more efficient IRS would be an IRS that would

be more supported by the public because I believe that the vast

majority of the public wants to comply, and if, in fact, that trust

is reestablished, then there will be the support in the public to go

after those folks who are noncompliant because, after all, 75 percent of those who filed their taxes are wage earners, have their

taxes withheld, and they are 95 percent compliant.

So those are the folks who are paying their taxes. Those are the

folks who are supporting this government, and when they can get

their questions answered and their problems resolved, then there

will be the kind of support that I think is necessary to be more effective in ensuring that those who are currently noncompliant become compliant.

Mr. PORTMAN. Thank you.

That characterization was not my characterization, but was the

response that I was receiving, and I could not agree with you more.

To have someone who answers the phone who is responsive, is well

trained, who can answer the question, and who can provide information people need, responsive to the taxpayer needs, I think is an

improved IRS, as well as a more efficient IRS. I think that is why,

in the end, we were able to not only have the National Taxpayers

Union support this report enthusiastically, but also the Treasury

Employees Union, and I thank you for your work and your willingness, frankly, to take some risks in this process, as all of this had

to be.

Fred, you have already made a number of comments, and I will

not ask you to give us any more of your wisdom, although it was

much appreciated on the Commission and here today. No one has

held all three of those positions in history of Chief Counsel, Assistant Secretary, and Commissioner, and so you bring a unique perspective. You did keep us focused on the criteria, and those criteria

include accountability, continuity, and expertise. Every single time

someone came up with a new proposal, whether it was independent

or the board or some other reiteration such as the Treasury pro-
92

posal we heard earlier today, we measured them against those criteria. Frankly, those criteria, I think, were agreed to by not all, but

certainly the best majority of the Commission, and that is what got

us to where we were.

It was not a preconceived notion. It was something that was arrived at only through careful analysis and figuring out whether, in

fact, those important measures were met.

I have so many questions. I would like to bring more out. We are

going to have more hearings. Chairwoman Johnson has committed

to doing that. The hearings will be focused more on some of the

specific elements of the legislation to be introduced next week, and

I really look forward to working with all of you on that process of

implementing now these recommendations and doing it in a way

that I think perhaps can address some of the concerns raised.

I do think we are a lot closer to the Treasury Department than

might have been indicated earlier today, and I just wanted to make

that statement for the record. But there is a fundamental difference of opinion, and I think it relates in part to turf. I think it

relates in part to the fact that the IRS is such a big part of Treasury and in part to some of the legitimate concerns raised, but I

think we can address those.

I look forward, again, to working with you, Mr. Coyne and Mrs.

Johnson, and the rest of the Members of our Full Committee, such

as Ben Cardin, and the Subcommittee to address them and move

forward with legislation.

So thank you all very much for being here today.

Mr. Coyne, do you have any additional questions?

Mr. COYNE. No, thank you.

Mr. PORTMAN. This hearing is now adjourned.

[Whereupon, at 2 p.m., the hearing was adjourned.]

[Submissions for the record follow:]

f
93

NATIONAL SOCIETY

OF ACCOUNTANTS

July 24, 1997

The Honorable Nancy L. Johnson

Subcommittee on Oversight

Committee on Ways and Means

U.S. House of Representatives

1136 Longworth House Office Building

Washington, D.C. 20515

Dear Chairman Johnson:

The National Society of Accountants (NSA) commends the Subcommittee on Oversight, Committee on Ways and Means, for holding this first in a series of hearings

on the recently released report of the National Commission on Restructuring the

IRS. The report is entitled, A Vision for aNew IRS.

NSA strongly supports the objectives of the recommendations found in the National Commission’s report. The Commission was charged with a most difficult task.

It has done an outstanding job in producing a report which details the current practices of the IRS, and making recommendations for modernizing, improving agency

efficiency, and enhancing taxpayer services.

THE IRS MANAGEMENT STRUCTURE

The Subcommittee on Oversight is well aware of all the national press surrounding the report’s recommendation regarding an independent Board of Directors for

the IRS. We believe an independent Board of Directors is one of the Commission’s

most important contributions to the issue of making the IRS a more customer service oriented agency. An independent Board of Directors has the potential of affording the IRS the opportunity to take an objective look at the agency’s procedures and

programs and overcoming problems concerning them.

While the independent Board of Directors will help contribute to the agency’s ability to achieve a higher level of customer service for American taxpayers, the report

makes other very important recommendations for streamlining the operations of the

IRS. NSA commends the Commission’s recommendation for providing the agency

with stable funding for the next threeyears. This recommendation, if implemented,

should provide the agency with greater certainty in carrying out its mission of improving customer services and raising revenues to fund governmental programs.

Another excellent recommendation in the report is the establishment of a fiveyear appointment for the Commissioner of Internal Revenue position, similar to the

Chairman of the Federal Reserve and certain other federal agencies. The new Commissioner position would also have greater flexibility in the hiring, firing, and salary

decisions involved with IRS senior management.

By providing the IRS with stable funding and a new management culture, NSA

believes that fundamental and positive changes will take place within the agency.

In many ways, legislative enactment of these management oriented recommendations will begin the process of restoring the respect of IRS employees for themselves

and by the public. The last several years of budgetary cutbacks for the IRS has contributed to a high level of demoralization and dissatisfaction within the agency’s

work force; in turn, it has had a clear and negative impact on the level of

customerservices provided by IRS employees.

CUSTOMER SERVICE

One of the major objectives of the National Commission’s report is to upgrade the

level of customer service provided by IRS employees to that which private financial

services companies offer the public. The practitioner community is an important

stakeholder relative to customer service. A great number of taxpayers deal with the

IRS through their tax practitioners. There are many opportunities for practitioners

to experience IRS customer service at various levels, from telephone contact through

exams, collections and appeals. Based on their repeated and varied contact with

IRS, practitioners have a unique perspective on IRS customer service issues.

The report emphasizes the concept of customer service over compliance. However,

traditionally the public has viewed the IRS main mission to be that of tax compliance, i.e. audits and collection. NSA agrees with the Commission that the service

component of the IRS should be the primary engine which drives the agency’s mission. We believe that a customer service orientedmission will bring out the best in
94

IRS employees. This is what the American public wants, and it is what we believe

IRS employees want as well.

There should be improvement in all aspects of IRS’s customer service. For example, from the public s perspective, the front lines in IRS customer service is what

they experience when they speak with an IRS employee on the telephone. The quality of the IRS telephone systems, as well as the way in which IRS employees answer

the telephone, has shown substantial improvement in recent years. Nevertheless,

the IRS telephone system and customer relations process continues to cry out for

further and dramatic improvement.

The proper training of IRS employees and providing them with technology are important keys to quality customer service. The Commission’s report strives to portray

IRS employees as competent, hard-working employees who want nothing more than

to deliver the highest quality in service to the public. In order to turn around the

supertanker we call the IRS, there needs to be achange in the management structure of the IRS along the principles described above. This includes better training

of IRS employees. They also need to be provided with more of the basic technology

tools of the 1990’s, tools which NSA s members often take for granted. This includes

providing employees with more fax machines, copiers, and computers.

ELECTRONIC FILING

The Commission report calls for the IRS to develop and implement a strategic and

marketing plan to make electronic filing the preferred method of filing tax returns

within ten years. The report states that this can be achieved over a ten-year period

by using existing infrastructure, such as tax practitioners, financial institutions, and

the Internet. According to the Commission, this can be accomplished by a partnership with practitioners and financial institutions through a process of burden reductions and incentives.

NSA recognizes that electronic filing contributes to certain significant efficiencies

in terms of the tax administration process. First, the IRS estimates that the cost

of processing a paper return is $2.65 per return, while it costs $1.15 to process an

electronically filed return (an amount which also includes the processing of paper

signature documents). Also, the IRS estimates that mistakes occur in only about 1

percent of all electronically filed returns as compared to some type of mistake occurring in about 22 percent of all paper filed returns.

In order to make electronic filing more attractive to taxpayers and practitioners,

the report makes a number of recommendations to remove barriers to electronic filing. One such recommendation calls for the elimination of filing requirements for

signature documents and associated W–2s, by having taxpayers retain signed 1040s

and W–2s on file. The elimination of Form 8453, the current signature form for electronic returns, would expedite the filing process for practitioners. NSA fully supports this recommendation.

There are two further recommendations NSA fully supports. One is a recommendation that there should be a checkoff box on the electronic return authorizing the preparer to discuss aspects of the return with the IRS. Another one which

is likely to generate attention is a suggestion that all preparers be subject to the

regulations governing practice before the IRS (Circular 230). According to the report, Uniform requirements will increase professionalism, encourage continuing education, improve ethics, and better enable the IRS to prevent unscrupulous tax preparers from operating. As indicated, NSA supports these recommendations and believes thatthey not be limited to electronic filing.

Other recommendations include a realignment of due dates for tax returns, expansion of the telefile pool, and making paperless payment methods available to taxpayers. The report also recommends that the IRS pay tax practitioners (as an incentive) for submitting electronic returns until 2004, after which the incentives will terminate and all practitioners will be required to file electronically.

NSA clearly recognizes that implementation of these other recommendations will

have a pronounced and dramatic impact on the tax practice which independent accountants have traditionally known. Accordingly, it is our intention to report back

to the Subcommittee on Oversight with some further perspective on whether such

recommendations are likely to improve the use of electronic filing—as well as the

extent to which they are likely to improve the tax administration process overall.

IRS NOTICES

American taxpayers traditionally have had a difficult time deciphering and understanding IRS notices they receive. The Commission’s report aptly describes this

problem by stating, IRS notices and correspondence to taxpayers often fail to explain the problem in a clear and simple manner and fail to inform the taxpayer how
95

to resolve it. According to the report, 85 percent of the certified public accountants

in a survey mentioned that IRS notices do not contain a precise explanation of the

problem. NSA supports the report s recommendation calling for the IRS to continue

its notice re-engineering effort. This effort should continue its focus on designing notices with concise explanations of the amounts owed, how adjustments have been

calculated, and how taxpayers should comply.

TAX SIMPLIFICATION

The complexity of the tax laws represent a high level of frustration for taxpayers

and the practitioner community. NSA recognizes that we live in a complex society

and that complexity is inevitable. We agree with the Commission’s plea for consistent interpretation of the law, rules and regulations by the IRS. It is the inconsistent

treatment of them that causes the greatest consternation in the practitioner community. Where possible, the laws need to be simplified and mechanisms put in place

whereby taxpayers can expect to be treated consistently and fairly no matter where

they are located.

TAXPAYER ADVOCATE

NSA acknowledges the Commission’s point that over the last several years Congress has made great strides in passing legislation that is designed to protect the

rights of the taxpayers. We agree with the Commission that the Taxpayer Advocate

must be empowered to speak for taxpayers and to take actions on their behalf. In

this regard, the Taxpayer Advocate position needs to be strengthened and made an

independent voice within the IRS. The Commission is on the right track. If the IRS’s

primary mission is one of customer service, the transition of the Taxpayer Advocate

will be a natural one.

CONCLUSION

The National Society of Accountants looks forward to working closely with the

Subcommittee on Oversight in its quest to improve the working structure and procedures of the IRS. NSA thanks the Subcommittee for the opportunity to participate

in this important project.

Sincerely,

LEROY A. STRUBBERG

f

President

NATIONAL TAX

CONSULTANTS, INC.

July 22, 1997

The Honorable Nancy L. Johnson

Subcommittee on Oversight

Committee on Ways and Means

U.S. House of Representatives

Washington, D.C. 20515

Dear Chairman Johnson:

The purpose of this submission is to provide more details to my letter of support

for the bipartisan efforts of the National Commission on Restructuring the Internal

Revenue Service. If adopted, Congress will change the Internal Revenue Service as

we know it. This change will be a positive contribution to the quality of life of not

only the American taxpayers but to the loyal employees of the Internal Revenue

Service as well.

The main controversy of the Commission’s report is centered around the establishment of an independent Board of Directors. While I am not insensitive to Treasury’s

objections to such a board, I believe that an independent Board of Directors is one

of the Commission’s most important contributions. The proposed Board of Directors

would not be part of the bureaucratic culture indigenous to large organizations like

the Internal Revenue Service. An independent Board of Directors will be able to

take an objective look at problems, processes, procedures and programs. The Internal Revenue Service and the Department of the Treasury can benefit from the in-
96

sights provided to it by a knowledgeable, blue ribbon group of people. These professionals, individually and collectively, will be in a position to help the Internal Revenue Service change into a ‘‘service oriented, customer service focussed organization.

Over the past ten years I have attempted to work with the Internal Revenue

Service through a variety of liaison activities including a two-year term on the Commissioner’s Advisory Group. In that extensive time frame it became evident to me

that is very difficult, if not impossible, for outside groups to have a broad based impact on changing the Internal Revenue Service. An independent Board of Directors

will provide an institutionalized conduit for positive and constructive recommendations. The Internal Revenue Service’s current structure of obtaining input and ideas

from the tax practitioner community is simply a public relations effort.

It is important for Congress to realize that Board of Directors concept is devised

to primarily focus on the administration of the tax policy. Tax policy is and should

remain a function of the Treasury Department. It is the administration of Treasury’s policies that the new Board will address.

The Commission is also emphasizing the concept of service over compliance. In

the last several years, the deficit of this country has been reduced because the

amount of money sent to the Treasury has increased significantly. Does any one in

this nation believe that the increase in tax receipts is due to the compliance efforts

of the Internal Revenue Service? On the contrary, most of the funds that found its

way into the United States Treasury arrived there without any collection effort. In

other words, the citizens of this country voluntarily send taxes to the Internal Revenue Service. Unlike the tax collector in biblical times, the Service does not have to

go door to door to collect its due from the large majority of its citizens. Yet, the

Service still considers its main mission to be one of tax compliance. While human

nature requires us to give the Internal Revenue Service some compliance tools, the

service component should be the primary engine that drives its mission.

By adopting a service mission, Congress will, in fact, ‘‘change the IRS as we know

it.’’ We believe that the American public expects a service mission from the Internal

Revenue Service. A service oriented mission will bring out the best in people. We

have seen how the compliance mission is bringing out undesirable negative qualities

in some of the agency’s employees. It has been my personal experience that most

IRS employees want to do a good job. However, in many instances, the culture and

the system is preventing them from performing the type of service that they are capable of providing to the taxpayers. Changing the mission will change the Service’s

focus in a very positive sense.

Tax System Modernization is an integral part of developing a viable service mission. Without avant garde technical prowess, the Service will never be able to provide the kind of service that Congress and the American public will come to expect.

Furthermore, tax systems modernization is not just computers and programs. It also

includes modern fax and copy machines, telephone systems and so forth. Tax system

modernization is never completed. If the Service were to immediately implement

any of its ideas, the chances for instantaneous obsolescence would be very high on

the very day of implementa- tion. Congress must recognize that funds must be built

in to the budget to accommodate changing technology.

The practitioner community and the taxpayers have not accepted the electronic

filing program because it is easier to file a paper return. The current electronic filing program has more disincentives than it has incentives. Over the past six years,

I have made Herculean efforts to help the Service understand why the program has

not been successful. The electronic filing of tax returns should be mandatory for

most practitioners. However, many improvements in the system have to be made

before this happens.

In addition to the mechanical improvements, the Service should consider ‘‘booster

shot’’ incentives. The problem is critical, and extreme measures should be considered to expedite its solution. An incentive that could have significant potential for

increasing the acceptance of electronic filing is to develop a program resulting in the

conclusion that an electronically filed return will not be audited and that the taxpayer would be notified of the conclusion. This, of course, would require caveats,

conditions and exceptions. While the recommendation may be a radical departure

from current tax administration procedures and have inherent risks, the benefits

may outweigh those risks. Electronic Filing of tax returns is the platform for Tax

Systems Modernization. We must get the program to work or the concept of modernization will be greatly compromised.

The complexity of the tax laws represent a high level of frustration for taxpayers

and the practitioner community. Nevertheless, we live in a complex society; complexity is inevitable. I agree with the Commission’s plea for consistent interpretation

of the law, rules and regulations by the Internal Revenue Service. It is the inconsistent treatment of the rules that cause the greatest consternation among the prac-
97

titioner community. Where possible, the laws need to be simplified and mechanisms

put into place whereby taxpayers can expect to be treated consistently and fairly

no matter where they are located.

The Commission was on track when it pointed out that over the last several years

Congress has made great strides in passing legislation that was designed to protect

the rights of the taxpayers. I also agree with the Commission that Taxpayer Advocates must be empowered to speak for and to take actions on behalf of taxpayers.

The Taxpayer Advocate needs to be strength- ened so that advocates are free to help

taxpayers resolve problems the solutions of which may go against the culture of the

system. Their hands must be untied so that they are not so dependent on their current supervisors for support. I believe the Commission is on the right track and that

if the Service’s primary mission is changed from service to compliance, the transition of the advocate program will be a natural one.

Financial accountability of an agency like the Internal Revenue Service should be

an inalienable right of our democratic society. The Internal Revenue Service should

provide this nation with a model of financial accountability. In order to regain the

trust and respect of the American people, the IRS must demonstrate that it is financially accountable.

In conclusion, I support the recommendations of the National Commission on Restructuring the Internal Revenue Service. The recommendations need to be adopted

in full as the sum of its parts are greater than the whole.

Sincerely,

WILLIAM STEVENSON

President

Æ