```

[House Hearing, 105 Congress]
[From the U.S. Government Publishing Office]

 
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

                               

                     U.S. GOVERNMENT PRINTING OFFICE
 49-307 CC                  WASHINGTON : 1998
------------------------------------------------------------------------------
                  For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402

                      COMMITTEE ON WAYS AND MEANS

                      BILL ARCHER, Texas, Chairman

PHILIP M. CRANE, Illinois            CHARLES B. RANGEL, New York
BILL THOMAS, California              FORTNEY PETE STARK, California
E. CLAY SHAW, Jr., Florida           ROBERT T. MATSUI, California
NANCY L. JOHNSON, Connecticut        BARBARA B. KENNELLY, Connecticut
JIM BUNNING, Kentucky                WILLIAM J. COYNE, Pennsylvania
AMO HOUGHTON, New York               SANDER M. LEVIN, Michigan
WALLY HERGER, California             BENJAMIN L. CARDIN, Maryland
JIM McCRERY, Louisiana               JIM McDERMOTT, Washington
DAVE CAMP, Michigan                  GERALD D. KLECZKA, Wisconsin
JIM RAMSTAD, Minnesota               JOHN LEWIS, Georgia
JIM NUSSLE, Iowa                     RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas                   MICHAEL R. McNULTY, New York
JENNIFER DUNN, Washington            WILLIAM J. JEFFERSON, Louisiana
MAC COLLINS, Georgia                 JOHN S. TANNER, Tennessee
ROB PORTMAN, Ohio                    XAVIER BECERRA, California
PHILIP S. ENGLISH, Pennsylvania      KAREN L. THURMAN, Florida
JOHN ENSIGN, Nevada
JON CHRISTENSEN, Nebraska
WES WATKINS, Oklahoma
J.D. HAYWORTH, Arizona
JERRY WELLER, Illinois
KENNY HULSHOF, Missouri

                     A.L. Singleton, Chief of Staff

                  Janice Mays, Minority Chief Counsel

                                 ______

                       Subcommittee on Oversight

                NANCY L. JOHNSON, Connecticut, Chairman

ROB PORTMAN, Ohio                    WILLIAM J. COYNE, Pennsylvania
JIM RAMSTAD, Minnesota               GERALD D. KLECZKA, Wisconsin
JENNIFER DUNN, Washington            MICHAEL R. McNULTY, New York
PHILIP S. ENGLISH, Pennsylvania      JOHN S. TANNER, Tennessee
WES WATKINS, Oklahoma                KAREN L. THURMAN, Florida
JERRY WELLER, Illinois
KENNY HULSHOF, Missouri

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.

                            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

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:]

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 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 near-universal 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 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/WAYS__MEANS/''.
      

    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.
      

                                

    Chairman Johnson. Good morning, and welcome to this 
important hearing on the report of the National Commission on 
Restructuring 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.
    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 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:]

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 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 
customer-oriented 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.

                               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 Johnson. Thank you, Senator Kerrey.
    Senator Grassley.

  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.
    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 
Senator 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.
    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.
    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.
      

                                

    Chairman Johnson. Gentlemen, you're now down to 5 minutes 
left in your vote, so we are not going to ask you any 
questions. But 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 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.
      

                                

    Senator Kerrey. Thanks.
    Chairman Johnson. As we await the arrival of Deputy 
Secretary 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 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, high-quality 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 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 Chairwoman 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.
    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 mid-week.
    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.

 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 
2\1/2\ 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 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 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.
    First, however, I would like to briefly describe some of 
the progress we've made on improving the IRS and how we intend 
to push things forward in our forthcoming legislation. Our aim, 
Madame Chairman, as always, is to build a modern, efficient and 
accountable IRS to serve the American taxpayer into the 21st 
century. As you will see, we believe that objective is getting 
closer every day. I will then go on to explain why, for all the 
many areas of agreement between us, the Administration believes 
that the Commission's proposals for IRS governance are 
fundamentally flawed; indeed, they would be more likely to 
aggravate its problems than solve them.

                           Management Reform

    Madame Chairman, for some time now we have been engaged in 
a many-sided effort to improve the IRS. Longstanding problems 
in modernizing the computer systems of the IRS initially 
focused attention on the shortfalls of the information 
technology of the Service. At the same time, improvements in 
customer service in the private sector have led the American 
people to want interaction with the IRS to be as efficient and 
straightforward as with credit card companies and other 
private-sector financial institutions. This has occurred at a 
time when the IRS is also coping with an increased workload. In 
1997, the IRS processed over 200 million returns.
    Over the last few years, the Treasury Department has 
focused intense efforts on improving the IRS. We are committed 
to change and real change is underway. Our goal is to create a 
more efficient, modernized and taxpayer-friendly Internal 
Revenue Service. This Committee and others in the Congress have 
held extensive hearings on the matter. These efforts and the 
work of the Commission have helped forged a consensus among a 
wide group of stakeholders, from business executives to Members 
of Congress to leaders of the IRS and the National Treasury 
Employees Union, on the need for change.
    I believe that in the next year, we have the opportunity 
and the obligation to bring about the most far-reaching changes 
in decades in how the IRS is managed and how it does business.

Indicators of Progress

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

Some examples of the steps we have taken include the following:
     Our new Chief Information Officer, Art Gross, has 
cut and collapsed the number of tax systems modernization 
projects from 26 to nine.
     In May 1997, after many months of intense 
preparation, Mr. Gross released the IRS's Blueprint for 
Technology Modernization, which was well-received in the 
professional information technology (IT) communities both 
inside and outside the government. This Blueprint represents 
the first comprehensive attempt to form a strategic partnership 
on IT with the private sector.
     The IRS has also increased outsourcing. The 
percentage of work performed by contractors has increased from 
40 to 64 percent over the past two years. The number of IRS 
staff working on tax systems modernization has decreased from 
524 to 136.
     The IRS is now working with a top marketing firm 
on an electronic filing marketing strategy to bolster taxpayer 
participation in the entire line of IRS electronic filing 
products, including Telefile, On-line filing, 1040-PC filing, 
and traditional electronic filing. The bureau is also putting 
forth a Request for Information (RFI) that will produce 
opportunities for partnering with the private sector to 
increase electronic filing.

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

Our efforts are paying off. For example:
     The GAO found that 50.9% of calls by taxpayers to 
IRS taxpayer assistance were answered in 1997. Although this 
percentage remains far too low, it has more than doubled from 
only 20.1% in 1996.
     In fiscal year 1996, the IRS redesigned, combined 
and eliminated notices to taxpayers, cutting the number of 
different notices by 12 which resulted in 18 million fewer 
taxpayer notices being issued and mailed. In 1997, it 
eliminated another 20 types of notices, resulting in 3 million 
fewer notices being mailed.
     As of July 4, the number of returns filed 
electronically by paid preparers rose from 12.1 million in 1996 
to 14.4 million in 1997. Meanwhile, filing over the telephone 
through the IRS' Telefile program has risen from 2.8 million in 
1996 to 4.7 million this year. As a result, the percentage of 
individual tax returns filed electronically has risen from 
13.1% in 1996 to 16.5 % in 1997, or about one in six taxpayer 
returns.
    These improvements, while far from sufficient, are 
meaningful. Looking ahead, we are committed to raising the 
standards of IRS performance even higher.
     As part of the Government Performance Review Act 
process, we have established tougher targets for a variety of 
performance measures including improvements in telephone 
service, to which I alluded above, reductions in the cost of 
collecting revenue and increases in the percentage of revenue 
collected electronically. For example, in fiscal year 1997, we 
have set a target of collecting 24.7% of revenues 
electronically. In 1998, we will increase that target to 48.4%.
    In short, we have made a good start toward building the 
modern, efficient and accountable IRS the American people 
deserve. But everyone involved in the process--at Treasury, the 
IRS, Congress and the union--recognizes that problems that have 
been building for decades do not get solved overnight, or even 
over a couple of filing seasons. Further structural changes 
will be needed to propel the reform process forward and build 
an IRS for the 21st century. Let me turn now to the 
Administration's plans to make these changes come about.

                         Our Approach to Reform

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

                          Improving Governance

Oversight and Accountability

    First, to improve oversight and accountability, we will 
build on the success of the Modernization Management Board by 
making it permanent and extending its mandate. The IRS 
Management Board (as it will be called) will be made up of 
senior career and non-career officials from Treasury, IRS, OMB, 
and the Office of Personnel Management. In addition, one board 
member will be the Taxpayer Advocate, whose presence will give 
taxpayers a stronger voice in IRS governance.
    The board will function much like a corporate board of 
directors, meeting once a month to assist the Secretary on 
high-level IRS management issues such as operations, 
modernization and taxpayer assistance and services. As now, the 
Board will be chaired by the Deputy Secretary of the Treasury.
    It will also prepare semiannual reports to the President 
and the Congress. An Executive Committee will review strategic 
decisions, including significant reorganizations, performance 
measures, budgetary issues, major capital investments and 
compensation matters.
    With greater oversight will come greater responsibility. 
Our legislation will require the Secretary and Deputy Secretary 
to come to Congress twice a year to report on the operations of 
the IRS. This will ensure that future occupants of these 
positions are required to demonstrate the same full-time 
commitment to the IRS that Secretary Rubin and I have shown 
over the past year.

Access to private-sector expertise

    Second, the administration's proposals recognize the 
undoubted need for the IRS to have greater access to private-
sector expertise. To achieve this we intend to establish an 
Internal Revenue Service Advisory Board that reports directly 
to the Secretary of the Treasury. This Board will include up to 
14 individuals, each appointed by the Secretary and serving a 
staggered 3-year term. Members will be selected so as to 
represent the broadest range of outside interest and expertise, 
including taxpayer groups, small and large-scale businesses, 
nonprofit or educational organizations and tax professionals as 
well as state tax administrators, technology leaders, and 
experts in customer service.
    The Internal Revenue Service Advisory Board will meet 
quarterly to help the Secretary find ways to improve the 
management and operations of the IRS and will provide 
recommendations about IRS policies, programs and plans. The 
public will receive a yearly account of the board's 
contribution in the form of an Annual Report to Taxpayers.

Greater continuity

    Finally, like the Commission, we want to provide for 
increased continuity at the IRS within a framework of clear 
accountability to the Executive by appointing the IRS 
Commissioner on the basis of a fixed, five-year term. We have 
identified a potential candidate for Commissioner of the IRS 
with a background in management of information technology. The 
Commissioner, as now, will be appointed by the President with 
the advice and consent of the Senate and will be removable at 
will.
    To sum up, I am confident that the four steps I have 
outlined--creating a permanent management board, requiring the 
Secretary and Deputy Secretary to report to Congress semi-
annually, creating an advisory board comprised of outside 
experts, and appointing the Commissioner to a fixed five-year 
term--will strike the proper balance between helping the IRS 
operate more effectively and making it more accountable and 
responsive to private-sector expertise.

Flexibility

    We are all agreed that the IRS needs to have greater 
flexibility in both selecting and managing personnel and in 
procurement.
    We are exploring options in the area of recruiting and 
retaining needed technical and professional staff with critical 
skills. For instance, we intend to seek flexibility to set the 
pay for a limited number of critical positions at higher than 
usual salary rates. We will ask for legislation to liberalize 
the pay limits for outside experts and consultants. In 
addition, to give the Commissioner greater flexibility to 
address short-term staffing needs at the most senior levels, 
the bill will provide greater authority to appoint limited-term 
and emergency Senior Executive Service staff.
    We will also be seeking authority to enable the IRS to work 
with the Union and the Office of Personnel Management (OPM) to 
develop and implement personnel management demonstration 
projects. This authority--a streamlined version of provisions 
that have been in the law for many years--will support IRS 
efforts to try out new ways of doing business.
    In addition, our legislation will contain a range of 
mechanisms to make it easier for the IRS to make strategic 
long-term purchases, streamline the procurement cycle for major 
acquisitions and encourage the development of long-term 
strategic partnerships with reliable, competitive contractors. 
These mechanisms include a two-phase competitive acquisition 
process that promotes efficient and effective communication to 
identify the best fit between government needs and marketplace 
capabilities and allows limited recompetitions for continuing 
requirements. The legislation would further enhance the 
bureau's ability to buy information technology in more 
manageable, modular increments.

Stable budgeting

    Finally, let me add briefly that the Administration has not 
lost sight of the need to obtain more stable and predictable 
funding for the IRS. The report of the National Commission on 
Restructuring the IRS was clear on this point. It recommends 
that ``the IRS should receive stable funding for the next three 
years so that its leaders can undertake the proper planning to 
rebuild its foundation.'' This recommendation pertains to the 
budgets for tax law enforcement and processing, assistance and 
management.
    Similarly, the Commission believes that stability and 
certainty are needed for IRS' technology and capital investment 
budgets. The President's FY 1998 budget proposes multi-year 
investments for technology in order to ensure this stability. 
We are glad that both the House and Senate appropriations 
subcommittees have acknowledged this need and that they have 
proposed funding for FY 1998.

                          The Right Reform Mix

    I come now to my more detailed comments on the IRS 
Commission's Report. At bottom, the Commission's and the 
Administration's diagnoses of the IRS's problems are strikingly 
similar. Like the Commission, we believe that more effective 
governance, flexible management practices, and stable budgeting 
hold the key to an IRS that can meet the needs and expectations 
of American taxpayers into the next century. We further agree 
with the Commission that efforts to improve governance ought to 
focus on injecting greater accountability, continuity and 
outside expertise.
    As I have shown, the common ground between us and the 
Commission does not stop at diagnosis. We have also found 
ourselves coming up with many of the same prescriptions in 
drawing up our legislation. In our view, however, the 
Commission's proposal would fail to achieve the objectives we 
share. What is more, it would endanger the service's ability to 
serve the public with the efficiency and integrity we demand of 
such a core part of our government.
    The Commission has proposed that the IRS be governed by an 
outside board of private citizens who serve on a part-time 
basis. This, on the grounds that it ``will bring 
accountability, continuity and expertise to executive branch 
governance and oversight of the IRS''. While perhaps 
superficially attractive, we believe the proposal will deliver 
none of these benefits. Far from increasing oversight and 
continuity, the change would subject the IRS to a grand and 
uncertain experiment, fraught with legal and administrative 
uncertainties. The service, in such a setting, could find it 
difficult to function at all, let alone do so more effectively. 
Meanwhile part-time outsiders with neither the time nor the 
insulation from special interests of full-time public officials 
would be running a core government agency, with possibly grave 
implications for public confidence in the IRS and the Service's 
confidence in itself.

Unacceptable Risks

    Instead of enhancing oversight, the insertion of the board 
into IRS governance arrangements would actually alter the 
present clear line of accountability between the IRS leadership 
and the American people as embodied in their elected President.
    The Commission has pointed out, correctly, that the 
Treasury has not always met the IRS's need for consistent 
strategic oversight and guidance. But to respond to these past 
failings by inserting a new private-sector management board, 
would, in our view, be a large step in the wrong direction.
    The division of authority between the Secretary and the 
Board would not only create internal confusion, but would 
significantly increase the likelihood of litigation; 
disgruntled taxpayers might well challenge the authority of the 
entity that had made a decision with which they disagreed. In 
addition, the Commissioner's authority would be vulnerable to 
Constitutional challenge on the grounds that his appointment by 
the Board violates the Appointments Clause.
    The Appointments Clause of the Constitution states that 
principal federal officers must be appointed by the President 
with the advice and consent of the Senate, but that Congress 
may provide that inferior officers may be appointed either by 
the President alone or by ``Heads of Department'' or ``Courts 
of Law.''
    It might by considered ironic that a Commission that has 
done so much to highlight the importance of the IRS to American 
life should apparently see the IRS Commissioner as an inferior 
office. At any event, it is 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 capacity to treat tax 
policy and tax administration as they should be treated: as two 
sides of the same, public, coin. It is no accident that close 
and institutionalized coordination between the IRS and 
Treasury's Office of Tax Policy has been maintained without 
interruption for well over 50 years.
    Even if the many concerns I have mentioned were to be 
overcome, I do not believe that a private-sector board would 
meet frequently enough to address the critical and complicated 
decisions facing the Service over the next decade. Urgent 
matters requiring the board's immediate attention and input 
might have to wait a month or more until the next board 
meeting, by which time these busy executives would somehow have 
to have fully prepared themselves to deal with the issue--if, 
that is, it were not by then too late to act.
    The challenges the IRS faces and the size and complexity of 
the institution demand more than the part-time and sporadic 
attention that the Commission's proposed board would provide. 
Clearly, the problems of the IRS show that Treasury in the past 
failed to exercise appropriate oversight. But things are 
different now. And the measures we are proposing will make sure 
they stay different, not merely in this Administration, but in 
the many to come. Today, Secretary Rubin and I, as well as 
other Treasury officials, are always available to discuss 
pressing issues with the IRS--and frequently do so.
    The IRS's relationship with Treasury provides an effective 
mechanism for presenting to senior Administration officials the 
IRS's analysis of the impact of proposed tax changes on tax 
administration. Secretary Rubin and I raise such concerns 
frequently in tax policy discussions in the White House and 
elsewhere throughout the Administration. Furthermore, Treasury 
oversight allows the IRS to draw upon Treasury resources for 
critical projects, as demonstrated by our current cooperation 
on the Year 2000 conversion. Under the Commission's proposed 
governance structure, this much-needed synergy between the IRS 
and the Treasury would be lost.

Outsider control, outsider interests

    The Commission's desire to import private citizens to 
oversee the IRS's operations raises another major worry. Once 
again, the stated objective is the same as the 
Administration's--namely to open the IRS to wider sources of 
outside expertise. But, in our view, attempting to achieve this 
by granting decision-making powers to ``high-stature'' 
individuals from the business world would expose the service to 
dangerous and unacceptable risks of conflicts of interest. The 
IRS needs to be managed by officials whose full-time, sworn 
responsibility is to uphold and enforce the law. Anything else 
risks creating the appearance, if not the reality, of serious 
conflicts of interest in the management and oversight of the 
IRS's activities.
    In our view, creating a new management board to run the 
IRS, comprised mainly of individuals who spend the bulk of 
their days in private business, would run precisely this risk. 
The Report states that board members would be subject to the 
same ethics laws as the individuals now associated with the 
governance of the IRS, but the Commission failed to recognize 
that those laws impose significantly diminished restrictions on 
outside financial interests and conflicting activities of part-
time employees.
    In any event, it is clear that individual board members--
who will continue to draw private-sector salaries--will face an 
uphill struggle ensuring that their private interests and their 
newly acquired, part-time public duties do not conflict with 
one another. Under the Commission's proposal, for example, 
corporate executives whose companies may be automatically 
subject to yearly audits could end up determining the audit 
budget for the IRS and its strategic enforcement activities.
    At best, the need for board members to recuse themselves 
from a wide range of matters facing the IRS to avoid conflicts 
will reduce their ability to provide effective input, even on a 
part-time basis. At worst, the new structure could fatally 
weaken the public's confidence that the IRS administers and 
enforces the nation's tax system fairly and even-handedly.
    In both the report and subsequent correspondence, defenders 
of the Commission's proposals have denied that such conflicts 
will arise, on the grounds that the new board would not be 
involved in specific law enforcement matters. Yet the board's 
sweeping control over budget and personnel would put it knee 
deep in law enforcement issues. In fact, decades of experience 
suggest that, just as tax policy questions cannot be separated 
from tax administration, tax enforcement and administration are 
so intertwined as to be, at times, indistinguishable.
    The Report claims that the job of the IRS is solely to be 
an ``efficient financial management organization''. This claim 
is both improper and incorrect. The IRS is, rather, an 
essential governmental agency charged, under the supervision 
and authority of the Secretary, to enforce the internal revenue 
laws enacted by Congress and the President.
    As Acting Deputy Attorney General Waxman has noted, this 
legal mandate means that the IRS can be duty-bound to pursue 
enforcement activities that, while fully justified in terms of 
the broader public good of protecting society from crime, may 
not be justifiable on narrow financial grounds. One does not 
have to go back to Al Capone to find examples of'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 Johnson. Thank you, Secretary Summers.
    We have a vote called and we only have a few minutes now 
left 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 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. 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 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 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 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.
    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 day-to-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----
    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----
    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.
    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.
    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.
    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 validity, 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.
    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, 
1\1/2\ 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, 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.
    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.
    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----
    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 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. 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.
    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. 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 necessary 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 self-assessment. 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:]

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 part-timer. 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.
    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 free-standing, 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 Johnson. Thank you, Mr. Weston.
    In view of your schedule, we are going to proceed with 
questions at this moment, and I am going to recognize Mr. 
Portman.
    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.
    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 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 well-known 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 half-a-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.
    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 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, high-quality 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 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 day-to-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.

                              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 hard-working 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.
     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.
---------------------------------------------------------------------------
    \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 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 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 Johnson. Thank you, Mr. Goldberg.
    Mr. Tobias, thank you for your service on this Commission, 
and 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 
high-quality 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 
rightly 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.
    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.
    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 presumably 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 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.
    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 Johnson. Thank you, Mr. Tobias.
    Mr. Larry Irving, Assistant Secretary for Communications 
and 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 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:]

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 Congress. 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-to-day 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.
    Thank you Madam Chairwoman and other Members of the 
Committee. I welcome any questions.
      

                                

    Chairman Johnson. Thank you, Mr. Irving, and I look forward 
to the opportunity to hear your testimony.
    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.
    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 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 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 Johnson. Thank you very much, Mr. Newstrom.
    Mr. Keating, thank you for serving on the Commission. You 
certainly 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 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 
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 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 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 
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.
    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 Johnson. Thank you, Mr. Keating.
    Mr. Keating, you made a very interesting comment that you 
felt 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.
    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 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 advisory 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 policy, 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 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.
    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 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 2\1/2\ 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 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, 
tax-practitioning 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 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.
    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?
    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.
    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 proposal 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:]
      

                                

      
                                       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 five-year 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 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 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
                                                          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 insights 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 
practitioner 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
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