U.S. GOVERNMENT PRINTING OFFICE

58–922 CC WASHINGTON : 1999

RECOMMENDATIONS OF THE NATIONAL COMMISSION ON RESTRUCTURING THE IRS ON EXECUTIVE BRANCH GOVERNANCE AND CONGRESSIONAL OVERSIGHT OF THE IRS

HEARING

BEFORE THE

COMMITTEE ON WAYS AND MEANS

HOUSE OF REPRESENTATIVES

ONE HUNDRED FIFTH CONGRESS

FIRST SESSION

SEPTEMBER 16 AND 17, 1997

Serial 105–81

Printed for the use of the Committee on Ways and Means

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COMMITTEE ON WAYS AND MEANS

BILL ARCHER, Texas, Chairman

PHILIP M. CRANE, Illinois

BILL THOMAS, California

E. CLAY SHAW, JR., Florida

NANCY L. JOHNSON, Connecticut

JIM BUNNING, Kentucky

AMO HOUGHTON, New York

WALLY HERGER, California

JIM MCCRERY, Louisiana

DAVE CAMP, Michigan

JIM RAMSTAD, Minnesota

JIM NUSSLE, Iowa

SAM JOHNSON, Texas

JENNIFER DUNN, Washington

MAC COLLINS, Georgia

ROB PORTMAN, Ohio

PHILIP S. ENGLISH, Pennsylvania

JOHN ENSIGN, Nevada

JON CHRISTENSEN, Nebraska

WES WATKINS, Oklahoma

J.D. HAYWORTH, Arizona

JERRY WELLER, Illinois

KENNY HULSHOF, Missouri

CHARLES B. RANGEL, New York

FORTNEY PETE STARK, California

ROBERT T. MATSUI, California

BARBARA B. KENNELLY, Connecticut

WILLIAM J. COYNE, Pennsylvania

SANDER M. LEVIN, Michigan

BENJAMIN L. CARDIN, Maryland

JIM MCDERMOTT, Washington

GERALD D. KLECZKA, Wisconsin

JOHN LEWIS, Georgia

RICHARD E. NEAL, Massachusetts

MICHAEL R. MCNULTY, New York

WILLIAM J. JEFFERSON, Louisiana

JOHN S. TANNER, Tennessee

XAVIER BECERRA, California

KAREN L. THURMAN, Florida

A.L. SINGLETON, Chief of Staff

JANICE MAYS, Minority Chief Counsel

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.

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C O N T E N T S

Page

Advisory of September 9, 1997, announcing the hearing ..................................... 2

WITNESSES

U.S. Department of the Treasury, Hon. Robert E. Rubin, Secretary .................. 71

Alexander, Hon. Donald C., Akin, Gump, Strauss, Hauer & Feld, L.L.P ........... 265

American Bar Association, Phillip L. Mann .......................................................... 214

American Institute of Certified Public Accountants, Michael E. Mares ............. 230

Automatic Data Processing, Josh S. Weston ......................................................... 110

Brand, Phil, KPMG Peat Marwick, LLP ............................................................... 288

Cardin, Hon. Benjamin L., a Representative in Congress from the State

of Maryland .......................................................................................................... 32

Cherecwich, Paul, Jr., Tax Executives Institute, Inc., and Thiokol Corp. .......... 203

Cohen, Hon. Sheldon S., Morgan, Lewis & Bockius, LLP .................................... 271

Coyne, Hon. William J., a Representative in Congress from the State of

Pennsylvania ........................................................................................................ 61

Goldberg, Hon. Fred T., Jr., National Commission on Restructuring the Internal Revenue Service ............................................................................................. 94

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

Commission on Restructuring the Internal Revenue Service .......................... 37

Hoyer, Hon. Steny H., a Representative in Congress from the State of Maryland ........................................................................................................................ 65

Joint Committee on Taxation, U.S. Congress, Kenneth J. Kies .......................... 177

Kerrey, Hon. J. Robert, a U.S. Senator from the State of Nebraska, and

National Commission on Restructuring the Internal Revenue Service ........... 27

Kettl, Donald F., Brookings Institution, and Robert M. La Follette Institute

of Public Affairs, University of Wisconsin-Madison .......................................... 144

Kies, Kenneth J., Joint Committee on Taxation, U.S. Congress ......................... 177

Kinghorn, C. Morgan, Jr., Coopers and Lybrand .................................................. 282

Loengard, Richard O., Jr., New York State Bar Association ............................... 231

Mann, Phillip L., American Bar Association ......................................................... 214

Mares, Michael E., American Institute of Certified Public Accountants ............ 230

National Commission on Restructuring the Internal Revenue Service:

Hon. Fred T. Goldberg, Jr ................................................................................ 94

Hon. Charles Grassley ..................................................................................... 37

Hon. J. Robert Kerrey ...................................................................................... 27

Hon. Rob Portman ............................................................................................ 11

Josh S. Weston .................................................................................................. 110

James W. Wetzler ............................................................................................. 113

New York State Bar Association, Richard O. Loengard, Jr ................................. 231

Portman, Hon. Rob, a Representative in Congress from the State of Ohio,

and National Commission on Restructuring the Internal Revenue Service ... 11

Steuerle, C. Eugene, Urban Institute .................................................................... 135

Stobaugh, Robert B., Graduate School of Business Administration, Harvard

University ............................................................................................................. 154

Tax Executives Institute, Inc., Paul Cherecwich, Jr ............................................ 203

Thiokol Corp., Paul Cherecwich, Jr ....................................................................... 203

Weston, Josh S., National Commission on Restructuring the Internal Revenue

Service, and Automatic Data Processing ........................................................... 110

Wetzler, James W., National Commission on Restructuring the Internal Revenue Service, and Deloitte & Touche, LLP .......................................................... 113

SUBMISSIONS FOR THE RECORD

Human Services Forum on Government Relations, Carmen Delgado Votaw,

statement .............................................................................................................. 302

Page

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National Association for the Self-Employed, Bennie L. Thayer, letter ............... 304

National Association of Enrolled Agents, Gaithersburg, MD, Joseph F. Lane,

statement .............................................................................................................. 305

National Association of Manufacturers, statement .............................................. 308

National Council of Nonprofit Associations, Ann Mitchell Sackey, statement ... 310

Senior Executives Association, Carol A. Bonosaro, and G. Jerry Shaw, letter .. 313

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RECOMMENDATIONS OF THE NATIONAL COMMISSION ON RESTRUCTURING THE IRS ON

EXECUTIVE BRANCH GOVERNANCE AND

CONGRESSIONAL OVERSIGHT OF THE IRS

TUESDAY, SEPTEMBER 16, 1997

HOUSE OF REPRESENTATIVES,

COMMITTEE ON WAYS AND MEANS,

Washington, DC.

The Committee met, pursuant to call, at 1:17 p.m., in room 1102,

Longworth House Office Building, Hon. Bill Archer (Chairman of

the Committee) presiding.

[The advisory announcing the hearing follows:]

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Chairman ARCHER. The Chair would like for staff, guests and

Members to take their seats so we can begin.

Today is the first day of a 2-day hearing which will look into how

we restructure and improve the Internal Revenue Service. We are

pleased to have with us today Secretary Rubin, Secretary of the

Treasury; several members of the Restructuring Commission and

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many other distinguished experts. The Chair appreciates the attendance of all of our witnesses.

Before we begin, I would particularly thank Congressman Rob

Portman and Congressman Coyne, who served on the bipartisan

National Commission on Restructuring the Internal Revenue Service. Their service on this Commission has brought us to where we

are today—the brink of House passage of the first comprehensive

reform of the IRS since 1952.

It is important to note that the Commission on which they serve

consisted of 9 Democrats and 8 Republicans yet its final recommendations were endorsed by a vote of 12 to 5.

It is my intention to address this issue in that same bipartisan

spirit. The job of the IRS is complicated enough without either

party injecting politics into an IRS that must be above and beyond

political approach.

Similarly, as tempting as it may be, these forums should not be

used as an excuse to bash the IRS, nor should they be used to

shield the administration from its duty to manage the IRS properly

and without political interference. Instead, until the great day

comes when we have pulled the income tax out by its roots and no

longer need an IRS, this Committee has a special obligation as

stewards of the Tax Code to do what is necessary so the IRS can

implement and enforce the laws that we pass.

That is why I am pleased that the Commission’s recommendations cut across party lines, and that is why any legislation that

we consider should be able to attract support from Members of both

parties.

In the House, Congressman Portman and Congressman Cardin

have introduced such a bill as have Senators Kerrey and Grassley

in the Senate. Tomorrow these hearings will also focus on Congress’ role in overseeing the IRS.

Both ends of Pennsylvania Avenue have to face their responsibilities for fixing the IRS and I intend to explore what Congress can

do better.

I consider this matter a top priority before we finish our session

this year, and I intend to pass a bill in the House of Representatives this year that will build a new IRS. While the nation’s financial sector—particularly the service sector—has undergone sweeping change and experienced dramatic modernization in the last decade, the IRS has not been reformed in 40 years.

There is no reason the IRS cannot be run more efficiently, more

effectively, and treat taxpayers more considerately than the current

IRS.

[The opening statement follows:]

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Chairman ARCHER. I now yield to the distinguished Ranking

Member for any opening remarks, Mr. Rangel.

Mr. RANGEL. Thank you my distinguished Chairman.

Let me join with you in making a plea to our Members that

whatever we do, we should try to join in making this a bipartisan

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issue. The reason I would want to do that is because so many people still have some degree of confidence in our system, and that is

why it is the most successful in the world, because it is a volunteer

system.

If we make a partisan battle out of this, it might cause a lot of

people just to walk away from the IRS, and instead of just pulling

it up by its roots, might find reasons and excuses to not abide by

the law and the regulations involved.

I want to compliment Mr. Portman and Mr. Cardin, because I

think that they are two Members of the Committee that are working hard to avoid what could be a very explosive political situation

since the IRS is under a political attack. We all are working together for the good of the nation to improve the IRS’ delivery of

service.

The issue here, of course, involves how much confidence should

Americans place in a board of businesspeople responsible for the

conduct of the IRS, tax policy, and the hiring and firing of IRS officials—business folks that would be unaccountable to the Congress.

But last week, in working with Treasury, and Congressmen Bill

Coyne, Bob Matsui, Steny Hoyer and Henry Waxman, we introduced a bill, H.R. 2428, that goes a long way in improving the conditions that we all find unacceptable as it relates to the Internal

Revenue Service.

Bill Coyne and Bob Matsui representing House Democrats and

the National Commission on Restructuring will have a lot to do

with input here.

Unlike the initial drafting of the Commission’s bill, Mr. Chairman, I do want you to know that you can depend on my complete

support in making this effort bipartisan. I do hope that the Chairman’s mark on this will have the consultation of Democrats who

feel as strongly as you for IRS reform but may not share your

views about pulling it up at its roots at this point in time.

[The opening statement follows:]

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Mr. RANGEL. So, I want to thank you for calling the hearing and

the cooperation that you have given to Members who are working

together. I promise my support toward that end.

Chairman ARCHER. I thank the gentleman for his comments and

I think that both of our statements should start the Committee off

to a good bipartisan beginning.

Members without objection will be able to insert their written remarks in the record at this point.

[The opening statement of Mr. Ramstad follows:]

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Chairman ARCHER. Now we have our first panel. The Chair will

first recognize a Member of the Committee, the Cochairman of the

Restructuring Commission for any comments that he would like to

make to the Committee, Mr. Portman.

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STATEMENT OF HON. ROB PORTMAN, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF OHIO; AND NATIONAL COMMISSION ON RESTRUCTURING THE INTERNAL REVENUE

SERVICE

Mr. PORTMAN. I thank you, Mr. Chairman, and my colleagues on

the Committee for giving me the opportunity to testify today; and

special thanks to you, Mr. Chairman. You have reiterated again

today your making IRS restructuring a top priority of this Committee, and particularly making H.R. 2292, the IRS Restructuring Reform Act, your top personal priority. In fact, I would say based on

Mr. Rangel’s comments, notwithstanding some differences in approach that I am sure will emerge this afternoon, I think it is safe

to say that I join every Member of this Committee in commending

you for undertaking this challenge to transform the Internal Revenue Service and vastly improve its services to the American taxpayer.

My focus here will be on the bill Ben Cardin and I introduced

and many of you have cosponsored. It implements the recommendations of the National Commission on Restructuring the

IRS and includes the first comprehensive reforms of the IRS since

1952.

I will briefly discuss the Commission’s process and outline our

major proposals in the area of governance and oversight, the subject of this hearing.

The 17-member IRS Restructuring Commission which I cochaired

with Senator Bob Kerrey was established by Congress and included

Senator Grassley and our colleague, Bill Coyne, as well as a diverse group of professionals with real expertise in IRS problem

areas. Eight Commissioners were appointed by the Republican congressional leadership, nine were chosen by the Democratic congressional leadership and the Clinton administration. The Commissioner of the IRS was a member ex officio.

During its yearlong existence, the Commission conducted 12 days

of public hearings, three townhall meetings around the country,

and hundreds and hundreds of hours with experts inside and outside the IRS. After this extensive yearlong process, 12 of the 17

Commissioners, on a bipartisan basis, supported the final recommendations.

Just last month, the one ex officio member of the Commission—

then-Commissioner Peggy Richardson, now private citizen—said

she too, had she had the opportunity, would have supported the

recommendations.

By taking an objective, nonpartisan, but tough-minded approach,

I believe the Commission came up with a realistic balance and

credible plan for achieving the goal of truly transforming the IRS

into a responsive, taxpayer friendly service organization.

The problems at the IRS are well documented. The attempt to

computer modernization, including the $3 or $4 billion that was

misspent, has been nothing short of a disaster. Only half its callers

are getting through on the IRS help lines. The organization is

dominated with an enforcement mentality, even though close to 90

percent of taxpayers comply voluntarily.

Most efforts to reform the IRS has focused on these and many

other specific problems—usually after the fact and in response to

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a crisis. The Commission took a different approach. We focused on

the fundamental structural flaws, which if fixed, we believe can

solve the problems and sustain quality in management and service

over time.

Three fundamental flaws were identified. One, a lack of expertise; two, a lack of continuity; and three, a lack of accountability.

First, expertise. While the service revolution has swept the private sector and other governmental agencies even, the IRS has

lagged behind. Why? Because the IRS and Treasury have lacked

people with expertise to guide a modernization effort, to competently address the huge organizational challenges involved with

over 100,000 employees handling over 200 million tax returns a

year.

As you review competing oversight proposals, ask yourself if you

believe that the necessary expertise is there to really ensure the

tough questions get asked and the IRS turns itself around.

Second, continuity. In our view, the IRS’ core problems will take

3 to 6 years to solve. They must retrain the work force, build a new

computer system and put in place new measurement systems to ensure employees have more respectful interactions with taxpayers.

This will require sustained leadership.

Historically, the leaders at IRS and Treasury have had very

short tenures of 2 to 3 years, not long enough to get the job done.

Third, accountability. We have got to hold people’s feet to the

fire. Our proposals ensure that someone is there to support the

Commissioner and the agency when they are doing a good job, and

to hold them accountable when they are not. The bottom line is we

have found an IRS that has been largely independent of consistent,

expert oversight.

The Commission’s recommendation and our legislation address

each of these three fundamental flaws—and I want to remind the

Committee that even though the Oversight Board had drawn the

most attention because of Treasury’s opposition, it is only part of

a much broader, comprehensive package, that taken together will

lead to a more accountable and responsive IRS.

Among other things, we consolidate congressional committee

oversight to ensure that IRS receives much clearer guidance from

the Congress. But let us go to the core of the Treasury’s concern—

the IRS Oversight Board.

Its members are appointed and removable at will by the President, confirmed by the Senate for a 5-year, staggered term. They

are special government employees while serving, and thus subject

to disclosure and conflict of interest rules, and they will be barred

from any involvement whatsoever in individual tax cases, specific

law enforcement activities, procurement or tax policy.

The Board’s functions are very clear—to approve the long-range

mission and annual, strategic and operational plans of the IRS; to

support and oversee IRS top management; and to review and approve the IRS budget, and submit it to the Secretary of the Treasury, who retains final authority.

The nine-member Board includes the Secretary, a representative

of IRS employees and seven individuals, who collectively would

bring needed expertise and information technology, compliance,

customer service, taxpayer needs and management of a large servVerDate 11-SEP-98 14:18 Nov 29, 1999 Jkt 058922 PO 00000 Frm 00016 Fmt 6633 Sfmt 6602 D:58922 W&M3 PsN: W&M3
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ice organization. Without such a body, the structural flaws will not

be addressed and the problems will continue to fester.

I know current Secretary, Robert Rubin disagrees with the need

to establish a new oversight structure with real authority, claiming

that the decade’s old vacuum can be filled by Treasury. But neither

the record or common sense support this.

Let me be clear. This is not about the Clinton administration,

and certainly not about this Secretary of the Treasury with whom

I have great personal respect, and who has probably in the past

year focused more attention on the IRS and our recommendations

than any Secretary in history.

This is about a fundamental flaw in the system. Yes on paper,

Treasury cedes some authority over the IRS, which is 64 percent

of Treasury’s work force, and 70 percent of its budget. But I truly

believe—and much more importantly—former Treasury Secretaries, Nicholas Brady and James Baker believe that this structure

should not be viewed as a threat to Treasury’s turf, but—and I

quote from their letter yesterday—‘‘As an effective mechanism to

assist the Secretary in IRS oversight.’’

Again, I thank my colleagues for their attention and look forward

to working together with you to transform the IRS for the taxpayer. They deserve it.

Thank you, Mr. Chairman.

[The prepared statement and attachments follow:]

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Chairman ARCHER. Thank you, Mr. Portman.

We are very pleased to have with us, also, today the Cochairman

of the Structuring Commission, Senator Robert Kerrey of Nebraska.

Senator, we are delighted to have you and we would be pleased

to hear you testimony; and you may proceed.

STATEMENT OF HON. J. ROBERT KERREY, A U.S. SENATOR

FROM THE STATE OF NEBRASKA; AND NATIONAL COMMISSION ON RESTRUCTURING THE INTERNAL REVENUE

SERVICE

Senator KERREY. Mr. Chairman, I would ask, consistent with

Senate practices—we talk longer—so I have a very long statement

and would ask that it be made a part of the record.

Chairman ARCHER. Without objection, your entire written statement will be entered into the record, and you may synopsize.

[Laughter.]

Mr. RANGEL. Reserving the right to object, Mr. Chairman, but I

will not object. I would just like to join you in welcoming my dear

friend and we look forward to your contribution to this very sensitive problem.

Thank you.

Senator KERREY. Thank you very much, Mr. Chairman.

Congressman Rangel, quite correctly, this is a very sensitive subject. We began this effort as a consequence of sitting on the Appropriations Committee—actually, Steny Hoyer and I did—creating

this Commission in the first place as a result of GAO evaluation,

after the GAO evaluation saying that the status quo just was not

working.

The Tax Systems Modernization money was being wasted, customer dissatisfaction was high, added to—the approval rating of

the IRS is lower than the CIA. Measured by what taxpayers are

saying, change is essential and necessary.

We started off in a very bipartisan and bicameral fashion. Congressman Portman and I have worked together. We have become

friends. We have acquired a capacity to trust and work with one

another, and I hope that—as Congressman Rangel said—this will

continue to be a bipartisan effort. I mean, there is no reason for

it not to be.

This is basically Congress taking action, Congress evaluating,

Congress putting pressure on the administration; and indeed the

administration response has been quite encouraging. There have

been many changes during the process of our deliberations that

have been constructive. We just have to believe they need to go further than they are currently willing to go.

To be clear, we heard from citizens, we heard from citizens as

taxpayers, we heard from citizens as professionals, we heard from

the employees of the Internal Revenue Service itself; and this proposal has the full endorsement of the Treasury employees union.

We heard from private companies that are in the business of providing services as well, taxpayer services that in some ways are

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competitive with the IRS, we even heard from other nations who

have gone through the same sort of problems that we have and

have attempted to make, of course, corrections.

We found across the board, very poor customer satisfaction, a

waste of money and technology, a gap—breathtaking gap—between

what the IRS can do and what the private sector can do. The

Speaker in providing us our guidance did something that I thought

to be quite demonstrative of the problem, which was to hold up an

ATM card and suggest that this is what the private sector has been

doing for the last half a dozen years, trying to serve customers, trying to give customers better service, and we are still in the process

of thinking about using that kind of technology; and as a result,

the customers are not happy with what they are able to do. Tremendous complexity problems—we have heard up to $200 billion of cost attributable to complexity of the Code. We heard convincing evidence that most Americans—well over 80 percent of

Americans voluntarily comply so the problem is not one of insufficient resources for law enforcement. We heard an equal apportioning of blame between the executive branch and the legislative

branch—both in terms of complexity in providing resources and inconsistent oversight. I mean, we heard fairly balanced reports from

taxpayers and from providers who are out there trying to figure out

how to make this thing work.

We have concluded that there is a need for an independent board

that will be more accountable to the people. We have compromised

with Treasury, leaving law enforcement and tax policy inside of

Treasury. That compromise was not sufficient to get their support,

but we are unwilling to go further.

We believe that you need an independent and accountable board,

and believe that the criticism of it, being corporate individuals, is

falsely placed.

Most people in the current administration in positions of responsibility who came from corporations or came from businesses

should not be disqualified because you do—and indeed the Board

that we recommend has not only the Treasury Secretary on it, but

the Treasury employee union head, which I believe is important because there will be tough personnel changes that have to be made,

and I hope that that recommendation is allowed.

But the President can appoint anybody he wants that is confirmed by the Senate, and the President has the authority to remove for cause. We believe that extending the life of the Commissioner was important as well. We believe we need to shift more

power to the taxpayer, and we believe we needed to make some recommendations with regard to complexity which we both did in our

report and with the legislation itself.

This is a change, Mr. Chairman and Members of this Committee,

that I think is long overdue. It is quite sensitive. It is quite difficult. Our goal should be to increase the customer satisfaction. Increase the number of taxpayers who say, ‘‘I still hate paying taxes,

but it has gotten a whole heck of a lot easier.’’

Currently, I do not believe that the current structure of the IRS

leads me to conclude that that customer satisfaction is going to go

up to a point where I believe it is necessary in order to restore citizen confidence in their government.

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So, again, I have gone beyond the red light as I promised I would

not do. I appreciate the opportunity to testify; but I wanted to reinforce what occurred in this process. It has been very bipartisan,

right from the get-go. Congressman Portman and I; Senator Grassley and I; Congressman Cardin and I have attempted to look at

this problem in an objective way and I hope that is the way it will

continue to proceed.

[The prepared statement follows:]

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Chairman ARCHER. Senator, you actually ended quite precisely at

the moment that the red light came on. That is a great compliment

to you.

Another member of the Commission is also a respected Member

of the Committee, the gentleman from Maryland, Mr. Cardin. We

will be pleased to have your testimony.

STATEMENT OF HON. BENJAMIN L. CARDIN, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF MARYLAND

Mr. CARDIN. Thank you, Mr. Chairman. Although my statement

is not as long as Senator Kerrey’s, I would ask that it be made a

part of the record.

Chairman ARCHER. Without objection, it is ordered.

Mr. CARDIN. Mr. Chairman, I wanted to concur in your comments and observations concerning the public service that Congressman Portman, Senator Kerrey, Senator Grassley and Congressman Coyne displayed in their service on the National Commission. All four served with distinction and we all should be very

proud of their record.

I would also like to compliment Congressman Hoyer for his longstanding interest in the Internal Revenue Service and his steadfast

support of the appropriation process for a more accountable Internal Revenue Service.

Secretary Rubin has been perhaps the most active Secretary of

the Treasury in the interest of the IRS. For too many years the IRS

has been an orphan agency. Secretary Rubin has elevated the interest of the agency and I applaud him for those efforts. He has

made significant change.

Secretary Rubin also understands the need for legislation and

has filed legislation before the Congress. We may differ as to the

form of that legislation, but it is important that Congress pass legislation reforming the IRS.

We all share the common goal of a more efficient, better managed, more taxpayer friendly IRS. Mr. Chairman, I agree with you

that that must be done in a bipartisan way. I am pleased to join

Congressman Portman as a cosponsor of the legislation. I think we

will demonstrate that we will work and need to work in a bipartisan manner.

There are many important points or sections in the legislation

before you. There are sections that deal with simplification, there

are sections that deal with Taxpayer Bill of Rights, with electronic

filing, with congressional oversight; but I would like to spend a few

minutes dealing with the Board, since that has had by far the most

discussion and is the most controversial section in the bill.

It is clear that the legal authority of the agency rests with the

public official. The Board will provide oversight, expertise, guidance and advice to the Commissioner. The legislation is clear that

it does not give to the Board authority that should rest with public

officials. The bill specifically denies the Board any authority with

respect to development and formulation of Federal tax policy and

specific law enforcement activities of the IRS, including compliance

activities. That remains with our public officials.

The Board has no authority with respect to the day-to-day operational plans of the IRS, which remains properly within the auVerDate 11-SEP-98 14:18 Nov 29, 1999 Jkt 058922 PO 00000 Frm 00036 Fmt 6602 Sfmt 6602 D:58922 W&M3 PsN: W&M3
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thority of the Commissioner. The Board has no authority with respect to the appointment of the Chief Counsel of the IRS.

The Board has a vitally important role to play in helping the

Commissioner, in helping the agency develop its long-range plans,

and developing a game plan in order to be able to accomplish those

objectives.

Under H.R. 2292, the Secretary of the Treasury would serve on

the Board. The Board is appointed and removable by the President

of the United States. The Board will act as an advocate for the IRS.

There are many important roles it will play. Perhaps one of the

most important is to have an advocate here in Congress for the

needs of the IRS, to help us identify in a more objective way the

tools that the IRS needs in order to be able to achieve its objectives; and yes, the IRS needs evaluation and accountability, and

that is also built into the Board.

I think the Board can be strengthened if the appointment of the

Commissioner remains with the President. The need for this legislation is clear. How the IRS interacts with our constituents or our

taxpayers is well documented—that it needs to be improved. Its

communication with our taxpayers needs to be clear, courteous,

and the information it supplies must be correct.

In too many cases, that is not the case today. The IRS must also

be able to resolve problems of our taxpayers quickly. That in too

many cases, again, is not the case today; and it must be more efficient in its collection of government revenues.

The legislation that you have before you today will move us to

achieving those goals and I hope that we will be able to move a

bill in a bipartisan manner quickly through the Committee.

Thank you, Mr. Chairman.

[The prepared statement follows:]

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Chairman ARCHER. Thank you, Mr. Cardin.

We also have a respected Member of the Senate, a member of the

Restructuring Commission with us today, Senator Grassley, Senator from Ohio. We are pleased to have you and—Iowa.

Senator GRASSLEY. We will take it.

Chairman ARCHER. What did you say? You will take it? [Laughter.]

Senator from Iowa.

Mr. RANGEL. Reserving the right to object, I will not object.

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Chairman ARCHER. The Chair has not asked for unanimous consent. [Laughter.]

Mr. RANGEL. I just ask the Chairman to yield.

Chairman ARCHER. I will be happy to yield.

Mr. RANGEL. I just want you to know that if you have any special

concerns about corn or anything like that, I want you to feel

free——

[Laughter.]

Senator GRASSLEY. We would—Charlie, I know that people do

not know the background of your statement, but I will be seeing

you in the next 2 weeks on the subject of ethanol. [Laughter.]

Chairman ARCHER. Well, the Chair was hopeful that in as much

as we already have a sensitive and delicate issue before us that

there not be any other potentially controversial issues that are injected——

[Laughter.]

Chairman ARCHER [continuing]. Into these discussions today.

But we are pleased to have you with us, Senator Grassley, and

we will be pleased to have your testimony.

If you have got a long written statement, without objection, it

can be inserted into the record and you can verbally synopsize.

Senator GRASSLEY. OK.

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

FROM THE STATE OF IOWA; AND NATIONAL COMMISSION ON

RESTRUCTURING THE INTERNAL REVENUE SERVICE

Senator GRASSLEY. Mr. Chairman, Members of the Committee, I

thank you very much for the invitation to be here today and particularly to be here with my House and Senate cosponsors of this

very important legislation.

When it comes to the subject of our work over the last year that

is before this Committee for today on IRS governance and management, people divide their remarks into two areas.

The first area is the matter of the new Management Board. The

second area is a kind of group into all other issues. We need to be

careful to not miss some very important points among these other

issues because we are focusing on the ever-important Board.

The matter of the Board is actually a simple issue. Is it going

to be a real board with independence, responsibility and having

teeth and power? Or is it going to be just another reshuffling of the

deck chairs down at the U.S. Treasury?

I succinctly summarized the arguments 2 months ago before the

Subcommittee on IRS Oversight by saying—and I would like to

quote myself. ‘‘Treasury officials who 2 years ago could not find the

IRS if they were standing at the corner of Eleventh and Constitution are suddenly in fits about losing some control over a part of

their budget and bureaucracy.’’

The American people deserve better from the executive branch

than just a reshuffling of the chairs on the deck of the Titanic. We

are presenting real options for real change in our report in our legislation.

This brings me to an important issue that has been lost among

all the other issues. That is that the silence of the President of the

United States and his constitutional responsibility over administraVerDate 11-SEP-98 14:18 Nov 29, 1999 Jkt 058922 PO 00000 Frm 00041 Fmt 6602 Sfmt 6602 D:58922 W&M3 PsN: W&M3
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tion—and particularly on this subject of the IRS—the Constitution

says that the Congress makes the laws and the President enforces

the laws.

The IRS, of course, is a law enforcement, executive branch agency. So where is the Chief Executive regarding his own agency; and

does he intend to enter into the reform debate? So far, we have not

heard from the President.

This should not, of course, be taken as partisan criticism, because most of the problems with the IRS predate and are still

present during the Clinton presidency. He can be so outspoken on

some other pieces of legislation; and so why has not he personally

said something about the IRS?

On another subject, the personal flexibility section of the bill, I

want to say that this is very important, because when this restructuring goes through and we have new administration—new people

and a new chain of command within the IRS—we must give the

new IRS Commissioner the statutory ability to hire his or her own

team of senior managers.

The IRS has a pyramidal structure. Every few years, we replace

the Commissioner at the top, but the next higher block of persons

seem to persist and persist and persist. When private-sector executives poorly manage a private-sector company, they are taken over

by a new chief executive officer. That chief executive officer usually

culls out the remaining failed management team. We can not do

that at the IRS because of the executive service laws.

If a new, business-type IRS Commissioner is to succeed, that person will need to retool, therefore, he or she will need to bring in

his or her own people. So do not overlook that very important provision of our legislation.

On the matter of the next Commissioner, first it is encouraging

to hear that the Commissioner nominee, Mr. Rosati, is not a lawyer. He is supposed to know something about leading a large and

diverse organization. That is encouraging. Second, if he had to commit to defending the status quo at the IRS in exchange for his nomination, then he may have a tough row to hoe in the Senate. However, his nomination could go smoother if the President would get

on record about his personal plans to lead at the IRS.

End of my remarks.

Thank you.

[The prepared statement follows:]

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40

41

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Chairman ARCHER. Senator Grassley, thank you. The Chair compliments each of you for some very cogent input to the Committee.

Mr. Portman, there seems to be a lot of common ground between

the bill that you and Congressman Cardin had cosponsored and the

Treasury’s recommendations. Could you highlight for the Committee any significant differences?

Mr. PORTMAN. I think that one of the major differences is that

the legislation we introduced is not quite as comprehensive. Senator Kerrey earlier said that the Treasury Department’s bill does

not go as far, and that is true. But also, some of the taxpayer

rights provisions, and personnel flexibilities we might have to talk

about. I do not know if there is any opposition to those; but there

are just things that need to be added to the mix in order to compare the two.

The major difference, though, in terms of the subjects that each

address would be this notion of the Oversight Board. The Treasury

proposal is to have a Board composed of really midlevel bureaucrats and political appointees that would oversee the IRS, and that

does not meet any of the criteria that I think the Treasury Department and we agree on, which is, you have got to have vastly increased expertise, you have got to have this continuity we talked

about and the accountability.

In terms of expertise, those individuals—the political appointees—do not bring the kind of information technology, customer service expertise we are looking for. They just do not have

it.

In terms of continuity, the average length of service of the people

identified on that Board, Mr. Chairman is less than 2 years. So we

know you are not going to have the continuity.

Finally, in terms of accountability, I am not sure it is the kind

of accountability we want. In 1952, the last time we addressed this

issue, we specifically did so to take politics out of the IRS, and to

put political appointees—including members of the executive office

43

of the President—into the IRS to help run the IRS, would be a

grave error. I think it not only does not solve the problems, but it

injects a whole other problem into the IRS we want to stay away

from.

So, that is the major difference I see between the two approaches. Otherwise there are a lot of similarities; and I think,

again, we share the same goal.

Other Members may want to comment on that.

Chairman ARCHER. Does any other Member want to comment?

Senator KERREY. Mr. Chairman and Members of the Committee,

to elaborate. First of all, we began—I began with the belief that the

IRS should be completely independent.

In an effort to gain the administration’s support, moved in their

direction, leaving significant responsibilities in Treasury—tax policy, tax enforcement—inside of Treasury; and moving the operational side, with the Secretary of Treasury, on this particular

Board.

So, we have moved in their direction, but not enough to get their

support. Their recommendation is significantly different. As Congressman Portman said, they are proposing to create two advisory

boards. The first one has got over a dozen political appointees to

the administration. The second, 14 advisors with no real responsibility.

Now, in an effort to accommodate in a good-faith fashion, I did

consider these proposals; but as I said, I do not believe it gets us

to a point—either in terms of independence or in terms of expertise

that is needed in order to give me a level of confidence that I can

go home and say, ‘‘If this bill is passed, if these changes are made,

10 years from now, your satisfaction with the IRS is going to be

higher, the gap between the private sector and what the IRS can

do is going to close.’’ I just do not think that is going to happen

with their recommendation.

As you compare the two proposals, to have a Board over the IRS

and new management, you have got to remember that the key reason for doing so is to have people with the proper expertise involved in solving their problems.

If you look at Treasury’s proposal, they have got the same group

of lawyers and economists trying to oversee this big agency in need

of operational and technological restructuring. I just think the

question you have got to ask is, ‘‘Are these the right people to do

the job?’’

Congressman Portman has talked about turnover. There is significant turnover at the IRS. It has been a problem at the top. If

you look at—again, if you look at both the political problems that

could be involved, the politicizing of the IRS as well as the turnover problem, I just do not believe—and again, a good-faith effort

to evaluate the Treasury proposal, that they get to a point where

you can actually go home and say, ‘‘You have got a Board there

with both the power and the expertise to bring the kind of decisionmaking necessary to improve the customer satisfaction’’—those customers out there that are trying to comply with the IRS policies.

Chairman ARCHER. Is it fair to say that the Treasury’s proposal

would maintain management within the Treasury with an outside

advisory board that really would have no power other than to recVerDate 11-SEP-98 14:18 Nov 29, 1999 Jkt 058922 PO 00000 Frm 00047 Fmt 6602 Sfmt 6602 D:58922 W&M3 PsN: W&M3
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ommend? Whereas, your proposal, your Commission’s restructuring

proposal would give more quasi-independent management to an

independent board?

Senator KERREY. Yes. That is an accurate way of saying, Congress still has all the oversight that we currently have. The executive branch still has the power to remove.

It is not as if it is the Postal Service, for example, which is one

of the models that we looked at. The Postal Service is very difficult

for the Congress to get at, very difficult for the President to get at.

We keep significant accountability and responsibility vested both

with the Congress and with the President in our proposed structure.

But there is, I think, a significant difference between our proposal and what the Treasury is proposing to do, in terms both of

accountability and of competency to be able to make the kinds of

decisions that are necessary, as I said, to close the gap between

where we are today and where we would like to be in terms of

measured consumer satisfaction.

Mr. Chairman, I want to underscore as well, Treasury has done

a lot of good things. They brought in a Chief Information Officer

about half a year after we started our effort, they made some

changes by creating a management board. As Senator Grassley

said, they have now for the first time in several years looked at

nominating or recommending for the IRS Commissioner somebody

with real management expertise. These are all good things.

So I think we need, in trying to get a piece of legislation enacted

with the President’s signature, to acknowledge what they have

done. I just think that the recommendation that they made does

not get us as far as is necessary if we are going to, again, be able

to say to citizens that, ‘‘Ten years from now you are going to like

the IRS an awful lot better than you do today.’’

Chairman ARCHER. There are many, many questions to be asked,

and I am only going to ask one last short one and then turn to my

colleague, the gentleman from New York for any questions.

The Treasury has said a number of times that your plan would

simply turn the IRS over to part-time chief executive officers. Is

that true?

Senator KERREY. No, it is absolutely not true. It is no more true

that it—the Board itself is composed of—we tried to structure the

Board so that it is composed of people who have the expertise to

make decisions.

As I said, we for the reason of acknowledging that there are

going to be very difficult personnel decisions to be made—and we

did not do it for political reasons, putting the head of Treasury employees union on there. It was done. As I say, most of the Republicans and Democrats on this Committee feel this is one that could

become politicized.

We did it because this is one of the recommendations that the

Australian ministers that went through a very similar kind of restructuring suggested. Because a lot of difficult personnel decisions

are going to have to be made. Better to have the Treasury employee union inside making those kind of decisions than outside objecting to them.

45

As I said, the Secretary of the Treasury is on there. We tried to

structure this thing so we would have the expertise on there. If the

objection is full versus part time, I am perfectly willing to acknowledge that maybe they all ought to be full time.

We did not believe that was necessary, but we should not disqualify, it seems to me, from serving your country people from corporate life or private-sector life who are only needed for part-time

service by implying that somehow they are not going to be able to

operate without a conflict of interest.

We have lots of good and able people who come into public service, who serve on all kinds of commissions and serve part time; and

I do not think it serves the interest of advancing the cause of this

nation to suggest that somehow they are going to be conflicted in

the decisions they are going to be making.

Chairman ARCHER. Thank you.

Mr. Rangel.

Mr. RANGEL. Senator, I think the last question that the Chairman asked is where the debate is going to be. Every one is in accord that in order for the IRS to have any credibility, it has to improve its accountability and to insure that taxpayers have confidence in the system.

The question is whether or not executive types from the private

sector, with all good intentions, can come in once a month—and

even though you say that they will not be able to set policy, they

will be able to hire and fire the Commissioner.

It just seems to me that what this Congress is all about is that

we have the diversity of representing all kinds of people. Your

Board seems to represent the executive type. I am not saying it is

a conflict of interest, but you think based on your experiences. If

we are talking about millions of taxpayers having a handful of people who have no accountability to the Congress, except being able

to confirm them, I just do not know what assurances I will have.

Conflict of interest does not mean that someone intends to break

the law. It means they can not help themselves in thinking the way

they do. In this bill, you allow the President to select the Chief

Counsel to the Commissioner that is appointed by the Board. It

seems like that is a conflict of interest between the President and

your governing board.

The whole idea that private-sector people could be involved in

law enforcement by having a Commissioner that has to be involved

in all of these things frightens a lot of us. How we handle this, I

would think, is for those people who are trying to work toward getting a bipartisan bill, if they would concentrate on the agreement

that has already been made by Treasury, even to the point of trying to strengthen it.

I think when we get to this one point, as to whom are these people accountable, and what confidence will the American taxpayer

have in having this person in charge rather than the Secretary of

the Treasury. I know that the Commission studied this and they

probably came out with a whole lot of business decision.

But what we have to do, as I said earlier, is to make certain

whatever we do, that the American people have confidence in what

we have done, and there are very, very strong feelings—and I do

not think it is partisan, it is just different feelings as to who directs

46

the tax collection for the people of the United States of America

and who sets the rules, as to what the policy is, as to who gets indicted, who does not get indicted, what group of people should we

concentrate on, where the emphasis should be, and what is more

effective.

You tell me who is calling the shots and what a guy like Charlie

Rangel has to do in talking about it. But if you take this just because they are good and decent people and we should trust them

because they are experts in management, you are implying that in

all of the U.S. Government, we just do not have the people who

have these type of skills to make our IRS more effective.

Mr. Portman and Mr. Cardin still do not have any accord here

on that issue. So I could agree with all of you and we could walk

away. But until that issue is resolved—and that is the button that

causes the problems that may appear to be political; but, I am certain the U.S. Chamber of Commerce would approve of what you are

doing, but I am not sure that the taxpayer-rights people would approve of what you are doing as it relates to this private-sector

board.

Senator KERREY. Congressman, I am sure you have made proposals in the past, and then you have heard it described by somebody

else and you say, ‘‘My gosh, are they describing the same thing

that I wrote and put out?

Mr. RANGEL. Where was I wrong?

Senator KERREY. Let me go down. Nowhere in this bill is the

word chief executive officer mentioned.

Mr. RANGEL. Oh, I know that.

Senator KERREY. Congressman, I mean, let me finish.

Mr. RANGEL. You described who the people would be and the

head honcho will not be coming——

Senator KERREY. No, sir. No, sir, it is not. The critics of the bill

have used the word chief executive officer. They have implied

that——

Mr. RANGEL. Why not describe the pool of people who will be eligible to be appointed?

Senator KERREY. We put the head of the Treasury employees

union on. You could certainly assert there that that is not an

American corporate leader. Yes?

Mr. RANGEL. Well, I would——

Senator KERREY. That is one out of nine. We certainly assert that

the Treasury Secretary is not.

Mr. RANGEL. Senator, if you have already written him in, I would

like to believe that he would support it. I mean, he is not selected.

You have written him in. If you write me in, I will be with the bill,

too. [Laughter.]

Senator KERREY. Congressman, what I am trying to do, with

great respect to your legislative ability and great respect for you

personally is just to suggest that we have to debate the facts of the

bill.

Nowhere in this bill does it say, ‘‘chief executive officer.’’ If you

want to talk—I am willing——

Mr. RANGEL. Strike out the union person and just describe for

me, Senator, what would be the attributes——

47

Senator KERREY. Look at the bill language. The bill says that we

want some one with management of large service organizations,

somebody with experience. I mean, that could be a nonprofit, somebody with experience in customer service, somebody with experience of compliance, somebody with experience in information technology, somebody with experience in organizational development,

somebody with experience in dealing with needs and concerns of

taxpayers.

In other words, we are dealing—what we were trying to do was

write in general requirements so as not to tie the hands of the

President in making appointments, but still coming up with a

board that has expertise.

I am just saying that what critics have done is falsely describe

this proposal as being one that suggests they all have to be chief

executive officers. Nowhere in the bill does it say, ‘‘chief executive

officer.’’

So, I am willing to argue, I am willing to debate, I am willing

to negotiate with anybody that wants to make specific changes in

recommendations for changes in this bill. But when they start off

by saying, ‘‘I want to have chief executive officers take over the

IRS,’’ or some have gone on to say that ‘‘chief executive officers will

be setting tax policy,’’ the language specifically says that this Board

cannot do tax policy, it cannot do law enforcement, it cannot have

access to tax return information—those things are specifically prohibited in the bill.

So, I am willing to negotiate in good faith with anybody who has

got an objection to the specific language; but, if they misrepresent

what is in the bill, it is difficult to reach——

Mr. RANGEL. Let me withdraw the term, ‘‘chief executive officer’’

Senator, and just describe it as a private-sector person. Then,

maybe at another time we can discuss the debate. But the title

chief executive officer does not bother me nearly as much as it does

you. It is someone that I do not believe that we have accountability

from, meeting once a month, to do the things that are stated in the

bill.

Mr. PORTMAN. Charlie, you are going to have to go a little bit

broader than that because it just says, ‘‘From private life.’’ If you

look at the criteria, it would not preclude somebody, let us say,

from a state taxing authority, somebody who happened to be working for a university, somebody who was with a taxpayer rights

group, somebody from a think tank, somebody who was retired and

maybe at one time was in the business community.

I actually have a list of two seven-person slates. I have not

talked to the people about it, they are just people who have the criteria we are talking about. Not one is a chief executive officer. I

am going to present that to Mr. Rubin later today for his consideration.

But it is not even as narrow as you have now described it. It has

to be from the private sector. You do need these skills sets, though.

If you do not bring these skill sets into the IRS, we are not going

to solve the problem.

Mr. CRANE [presiding]. I would simply remind our colleagues

here that the light applies to us as well as to our witnesses.

[Laughter.]

48

I am trying to keep your interrogations within the timeframe of

5 minutes.

Now in a written statement submitted for the record, the National Association of Enrolled Agents and the National Association

for the Self-Employed strongly endorsed the Oversight Board concept, but suggested that the Board should include representatives

from both the small business sector and tax practitioner communities.

I would like to throw it open to the panel to get your insights

on those proposals.

Mr. CARDIN. The Board is not configured so that every interest

is going to be represented on the Board. It is configured to bring

to the IRS the expertise it needs in developing its long-range strategy and to evaluate its performance. It is also a small board. We

would like to keep it that way so it can do its work efficiently.

So I appreciate the concerns that different groups would like to

see, make sure that there is adequate representation on board, but

we would encourage keeping the Board at its current size, and that

the talents that are needed on this Board are more functional talents than representing one of the interests that might be dealing

with the IRS.

Mr. CRANE. Any others want to comment on that?

One of the ones in that proposal that struck me as significant

was the tax practitioner communities. You do not think that is a

constituency that could serve a very good purpose?

Mr. CARDIN. Well, I think the IRS needs to be responsive to all

of the entities that it interacts with, the most important being the

taxpayer himself or herself. But to start to say that we are going

to give a seat on this Board to one interest that happens to deal

with the IRS, I think would be a mistake

Mr. PORTMAN. Phil, could I follow up on that?

I agree with what Ben Cardin has said. I think it would be a real

mistake for us to reserve certain seats on the Board for certain interests, whether they are tax practitioners, small business or other.

We avoided that temptation here by setting out these skill sets,

and then giving the President the ability—and incidentally, this

President would choose all seven of these members. Because then

the staggered terms would begin. But give the President the ability

to find the people who meet these criteria.

With regard to your specific question on tax practitioners, we

have got to remember what the challenge here is. It really is not

so much something that a tax lawyer or even an enrolled agent

would have expertise in, although that is helpful; and you do want

to hear from those people. We do set up means by which those people can communicate their concerns through advisory committees.

But it really is, making the train run on time; the phones work,

the computers work, providing people with the status of their account. Again, this information technology and service revolution

that has swept the private sector that the IRS has been left behind

on. That is where we really need the expertise, and that is why we

spelled out these particular skill sets.

It does say as one of these skill sets, ‘‘The needs and concerns

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tive either from the practitioner community or the taxpayer rights

community.

Mr. CRANE. Well, the light has not gone on, but I know Charlie

ate into my time significantly; so I now will yield to Mr. Thomas.

[Laughter.]

Mr. THOMAS. I thank the Chairman for yielding.

First of all I want to thank all of you. Senator, I do not—Senator

Kerrey, specifically, but Senator Grassley, you have been involved

as well. I do not know how you folks get yourselves into this. You

have been on other commissions. This one, I have a hunch, is going

to be more successful than some of the others.

In fact, if you look at the administration’s proposed legislation,

you have already won, in terms of their willingness now to make

a fairly fundamental change.

I want to underscore what everyone else will say, or if they do

not say it explicitly, they certainly mean it. This is certainly not

an attack on this administration. The fundamental problems of the

IRS are there regardless of who the President is and what the

President’s party affiliation is. It has gone on for a long time. The

problem is truly bipartisan and what we are looking for is a bipartisan solution.

I guess the crux for me, since in so many ways, the administration’s proposal now duplicates the proposals of the Commission, is

my understanding that there was a clear two-way line of communication and what you folks developed as good policy they picked

up in their bill—and there is nothing wrong with that.

But my question is, is there enough change in the administration

proposal, and will those changes, once instituted, last? That is

where I think the Commission proposal that you are advocating

has a better chance.

Just as an aside—the Secretary is not here yet, but when he arrives and delivers his testimony, on page 3 of his testimony he indicates that they have a nominee for a Commissioner. In his testimony he chooses to describe the nominee this way, and I quote:

‘‘Our nominee for Commissioner—a chief executive officer, or CEO

of a large private-sector organization, with extensive experience in

systems modernization and other technology issues—is a symbol of

our commitment to continuing the process of change.’’

So I guess they are looking for a Commissioner that fits the criticisms of the Board that has been indicated, but quite honestly, all

of us agree we are looking for professional people, not necessarily

a chief executive officer.

One of the quotes of the Secretary that concerns me quite a bit

appeared in the New York Times in which the Secretary said, ‘‘I

do not think that in this debate about governance in the IRS there

are’’—‘‘I do think that in this debate about governance in the IRS

there are others who have other agendas,’’ Mr. Rubin said, without

naming anyone. ‘‘I think clearly there is a desire on the part of

some to undermine our progressive taxation system and replace it

with a different system of taxation, and that one approach to trying

to do that is to attack the Internal Revenue Service,’’ he said.

I think attacking the Internal Revenue Service is too easy. That

is not hard to do. The question is, what do you offer to fix it? It

seems to me that if someone wanted to undermine the current sysVerDate 11-SEP-98 14:18 Nov 29, 1999 Jkt 058922 PO 00000 Frm 00053 Fmt 6602 Sfmt 6602 D:58922 W&M3 PsN: W&M3
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tem, you would be pushing for the status quo, not a fundamental

reform such as this.

So I want to, once again, visit what I think will be the key debating point. That is, if we are going to try to fix the IRS through the

Commission’s proposal or through the administration’s proposal,

which one fixes it more fundamentally and more permanently?

The key to me is looking at the package as a whole, not just the

debate about the Board and its independence in appointing the

Commissioner—not just the kind of Commissioner for a fixed, 5-

year term; but also the ability to utilize the new structure for employees—both in payment and reward that you have initiated.

So when we look at the criticism, the first thing I would ask my

colleagues to do is to read the legislation and not listen to the representations of the legislation, from a permanent and a fundamental point of view.

Could you check off the one, two or three points—once again, because I think repetition on this has to be critical. What is it about

the Commission’s proposal that more fundamentally and more permanently fixes the IRS?

Senator KERREY. Well, first of all, I need to beg the Committee’s

indulgence and apologies. I have to go to another presentation. So,

after I answer briefly, I have got to take my leave. Again, I appreciate the chance to testify and look forward to working with all

Members as we try to enact a piece of legislation.

I do think, Congressman, when you get right to it—I mean—the

question is, which one more closely permanently fixes the problem?

I have got to say I would even go further than we have gone with

independence.

When I started off—and actually ended—believing that the IRS

should be significantly independent. Congress still needs oversight.

I do not want it as independent as the Postal Service. I still want

it to have significant accountability. Indeed, one of the problems we

have right now with the IRS is that it is not terribly accountable

to us.

I mean, all of us know, if you have a citizen problem—a citizen

has a problem with the IRS, it is difficult to intervene, and it is

difficult to approach and try to get satisfaction without being accused yourself of doing something that is going to personally benefit a friend or a constituent.

The independence actually provides the taxpayer with significantly more accountability and freedom. Secretary Rubin is talking

about people with another agenda—it is true, by the way, that having an independent Commissioner is going to result in times in the

Commissioner saying, ‘‘You know, Mr. President, that is a terrific

proposal you made on taxes, but here is what it is going to cost the

taxpayers to comply.’’

If it costs $200 billion or $100 billion for taxpayers to comply—

we are all talking about the need for simplification—very often our

proposal is the very proposal that makes it more complicated. This

Commissioner will have the same kind of independence that we

now have with the Social Security Administration. That administrator now should come to Congress and say, ‘‘Here is the problem.

Here is what is going to happen if we do not take action,’’ regardVerDate 11-SEP-98 14:18 Nov 29, 1999 Jkt 058922 PO 00000 Frm 00054 Fmt 6602 Sfmt 6602 D:58922 W&M3 PsN: W&M3
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less of whether or not it is going to embarrass the President or embarrass Members of Congress.

It is that kind of independence that provides much more accountability. We tried to provide a balance, in short. I think the administration’s proposal does not come close to the kind of independence

necessary to achieve the necessary accountability with the customer—with the taxpayer.

That really is the goal. That is the thing that all of us need to

keep in mind here. How do we get that taxpayer to say, ‘‘This is

better. It has gotten easier to comply.’’ Eighty-five percent of the

people out there voluntarily comply. They do not need cops. They

do not need enforcement. They just need to know the information.

It is the largest bill that most taxpayers have, the largest bill they

pay. It is vital that they know what that number is so they can do

financial planning.

If half of their calls do not get answered and 25 percent of those

that are answered are wrong, they cannot rely on the agency in its

current form.

So what we have tried to do is create independence with our

Board, that achieves accountability without surrendering Congress’

ability to approve budgets, without surrendering the President’s

ability to be able to appoint and to make sure it gets people on that

Board with expertise.

But imagine—this is one of the last things I am going to say—

if any of us were Secretary of the Treasury. Just imagine if you

were Treasury Secretary Thomas, or Treasury Secretary Kerrey, all

of the things you have got to do, including in the current arrangement, managing an organization with 100,000 people, and the Secret Service, and the Bureau of Alcohol, Tobacco and Firearms, and

Customs and half a dozen other independent agencies.

Mr. THOMAS. Senator, the administration proposes to help the

Secretary of the Treasury by moving people from the Vice President’s office and the Office of Management and the Budget to assist

in this independent evaluation.

Senator KERREY. That, on its face I would say, Congressman, is

a mistake. It would politicize the IRS. It may sound good, but I

would just very respectfully suggest that—independent of whether

or not a more loose board with less responsibility is going to work,

putting anybody on there from the Vice President’s Office or OMB

would politicize the IRS and take us in precisely the wrong direction.

Mr. THOMAS. Thank you.

Senator KERREY. I thank the Committee’s indulgence and this

opportunity to testify.

Mr. CRANE. Well, we thank you for your appearance here today,

Senator Kerrey, and understand.

Our next interrogator is Mr. Coyne.

Mr. COYNE. Thank you, Mr. Chairman.

I would just like to ask all the panelists, in as much as H.R. 2292

contains the requirement that the Oversight Board hire the Commissioner, I presume that you do not agree with the proposition by

Congressman Cardin that the bill would be improved by not having

the Oversight Board hire the Commissioner.

52

Mr. PORTMAN. This is a point where I think there can be an honest discussion of various alternatives. My own view is that it is better to have the Board hire and fire the Commissioner simply because that then creates the kind of accountability that we are looking for with the Board.

If the President were to be in the position of appointing the Commissioner, perhaps the Board could have a role in that, as we do

in many other agencies where an entity like this Board might recommend a slate of candidates, maybe two or three candidates.

Maybe on the other end—which is the removal power—to also be

in a position to recommend to the President removal, when that is

appropriate.

What you have in this Board—as you know, Mr. Coyne, is the

Board’s function of evaluating the performance of the Commissioner. Again, accountability of holding the Commissioner’s feet to

the fire.

If you take away too much of that, including taking away the entire ability to affect that person’s hiring or firing, then I think you

really have lost something. You have lost a good deal of authority

with the Board. I think there may be some room for discussion

there.

I personally believe that the stronger approach that will really

bring the kind of change we are looking for at the IRS would be

to maintain that authority at the Board level.

Senator GRASSLEY. I agree with Congressman Portman only I

would back it up with testimony we had before our Committee over

a period of 1 year from employees and former employees, people

who have had good experiences, and people who have had bad experiences in dealing with the IRS. The common theme of criticism

that we heard is that a major problem at IRS is inbreeding and

being an insular-type organization.

It seems to me that to overcome that, it is very important that

we have the Board appoint the manager, and more importantly

than even just doing that, is his ability to bring in a whole team

of managers to make sure that whatever changes at the highest

level that need to be made are actually carried out and not do what

we have been doing, by always having somebody who had to be a

tax attorney as a qualification—written or unwritten—to be Commissioner of IRS.

A person who was there because they were noted more for their

understanding of tax law than they were for administration—particularly with their subordinates being people in middle management who have been around for a long time, just build upon the

insularity that is the basic problem we are trying to deal with here.

Then in addition to management of that, there is another very

important principle that we put into this. That is to make sure that

freedom of information requests are responded to immediately; and

also, to make sure that the abuse of the privacy laws that had been

used to protect this insularity are modified, particularly in the case

of the freedom of information, so that the things that police government, generally, police the IRS to be a responsible agency, including people in the media that are involved in freedom of information.

53

The mere fact that the historian resigns because documents are

being destroyed and there is no effort to archive still seems to us

to be evidence of—not necessarily covering up, because there might

not be a specific thing that is going to be covered up, but when you

make access to this information either impossible or very difficult,

it protects the inbreeding and insular attitude that we have; and

it is that attitude that we need to modify.

Mr. CARDIN. Bill, the key here is the balance on the Board so

that the Board has enough impact and influence on the decisionmaking at the IRS that you can attract the right people to serve

on the Board, to invest their time in helping the IRS develop its

game plan, and holding its management accountable to achieve

those results.

I think it is enhanced by the Commissioner being a Presidential

appointment. I think you actually enhance the ability of the Board

to do its work.

As Rob pointed out, there is some honest difference of view here.

I do not think you attract better people to the Board because they

can nominate the Commissioner. To the contrary, I think the people who serve on this Board will be willing to serve on this Board

because they are interested in helping work with the IRS in developing a mission and accomplishing that mission in a more effective

way.

So I think you actually improve the Board by keeping the Commissioner as a Presidential appointment; and I think it is somewhat awkward to have some of these people appointed by the

President, but yet the Commissioner will be the chief person responsible for carrying out the policies and will not be appointed by

the President. I think it strengthens the bill to have the Commissioner appointed by the President.

Mr. COYNE. Thank you.

Mr. CRANE. Mr. Shaw.

Mr. SHAW. Thank you, Mr. Chairman. I am going to try to set

a trend here and be brief. [Laughter.]

The document before us provides that ‘‘The overall governance of

the IRS will be provided by a Board which will oversee the Internal

Revenue Service in the administration, management, conduction,

direction, supervision execution, and application of the Internal

Revenue laws, but would have no responsibility or authority with

respect to the development and formulation of Federal tax policy

relating to existing or proposed Internal Revenue laws or specific

law enforcement activities of the Internal Revenue Service, including compliance activities such as criminal investigations, examinations and collection activities.’’

How do you propose to separate them with regard to criminal

prosecution and development of regulations? I throw that out to

whoever might care to take that on.

Mr. Portman.

Mr. PORTMAN. First, I want to thank you, Mr. Shaw, for reading

the legislation. [Laughter.]

That is very helpful. Honestly, it has been misrepresented, as we

said earlier, on a number of points. This is one that is very important and needs to be clarified.

54

Fred Goldberg, former Commissioner of the IRS, former Assistant Secretary for Tax Policy and former Chief Counsel was on this

Commission. We also conferred with former Commissioners. We

also conferred with people on the Treasury side at the Secretarial

level, also Deputy Secretary and Assistant Secretary level on this

very issue: Can the two be separated?

The answer is, yes. In fact, they are separated now.

With regard to the regulatory side and the enforcement side that

you just mentioned at the end, and tax policy, those continue to be

Treasury functions. Those are not functions right now that are

handled by the IRS, nor should they be.

One of the concerns about total independence is that there is a

certain amount of synergy between tax policy, in particular, and

tax administration; and you probably want to retain that. That is

one reason the Commission in the end did not recommend the

model of the Post Office, as Bob Kerrey said, of total independence.

There are some reasons to keep these two areas involved with

one another in a close way as they are now, but you can accomplish

what that legislation states, for the most part, because it is already

done that way.

The IRS does not get involved. The General Counsel at the

Treasury Department is responsible, as you know, for drafting

those regulations. The Assistant Secretary for Tax Policy, Treasury, is responsible for tax policy. We believe it should stay that

way.

The one benefit, I think, you get from this in terms of your very

question is, you do have a more independent view from the IRS

from the point of view of tax administration on tax policy. That has

been one of my frustrations on this Committee and I know one of

yours and others, is that we do not often hear directly from the

IRS, as an example, on how a tax credit for education might work,

or how the EITC might work.

In this case, I think because of not only separating it the way

we did, but also because we provided on the congressional side for

the IRS to be at the table, giving us their input, we will get better

information, unvarnished, from the IRS about how you actually

would administer some of these great sounding tax policy ideas.

Mr. CARDIN. On the compliance issues and on the specific law enforcement, there are very strict laws today about who has authority

in those areas. This bill specifies that the Board has no authority

in these areas.

So, without a specific grant of authority, the Board could not

have access to individual returns, and will not be able to be involved in any of the specific law enforcement issues involving an

individual taxpayer.

Mr. SHAW. I appreciate your clearing that point up and yield

back the balance of my time.

Mr. CRANE. Mrs. Johnson.

Mrs. JOHNSON of Connecticut. Thank you, one of the useful and

thoughtful parts of this report—and gentlemen, I commend you all,

those who have served on the Commission, and Mr. Cardin, who

has given a lot of time and thought to reviewing the work of the

members of the Commission, and working with Mr. Portman.

55

One of the thoughtful parts of this report is its analysis of congressional oversight of the IRS. There have been times when the

congressional process has really worked against IRS action and

leadership, and has been of concern to me.

However, there are some significant differences between the

Treasury’s proposal on this score and the Commission’s proposal;

and I would ask that you comment on those differences.

Mr. PORTMAN. Well, thank you. I responded earlier to Mr. Rangel’s question, I think—perhaps it was Chairman Archer’s—regarding the differences between the Treasury proposal and our proposal

by not mentioning congressional oversight; and I should have.

The Treasury proposal, to my knowledge, does not address the

issue of congressional oversight. So the difference is, they have no

proposal there. Our proposal is actually pretty interesting. I think

the fact that you support it and other Members of leadership support it, is extremely significant and perhaps unusual. Because it requires consolidation of Committees in a way that one might think

would threaten jurisdictional prerogatives.

What we say quite simply is that the IRS is not getting a clear

message from Congress. There are seven different Committees of

Congress that have some responsibility for IRS oversight, I include

in there the Appropriations Committees, of course.

Because, particularly in recent years, they have had a good deal

to do with not just IRS spending, but IRS oversight by legislating

in Appropriations bills. What we say is that all of the leadership

of all seven of these Committees would confer twice a year in hearings with the IRS present. One on the strategic plan of the IRS;

and one on the budget of the IRS; and then they would issue a report, together as a consolidated Committee under the auspices of

the Joint Tax Committee.

The Joint Tax Committee is bicameral, bipartisan and seems to

have the expertise that is needed to be able to staff this kind of

a—almost superconsolidation of Committees.

That is what is in our proposal. I feel very strongly that if we

do not streamline and consolidate the oversight at this end of

Pennsylvania Avenue, we will have not responsibly addressed the

existing problems. We cannot just look downtown at Treasury. We

have to also look here in our own back yard.

Mr. CARDIN. Mrs. Johnson, I remember as a new Member of this

Committee looking at the IRS functions, budgets and making certain recommendations to the Budget Committee and absolutely

having it totally ignored, that there was really no coordination at

all among the different Committees that had jurisdiction of the

IRS.

As Mr. Thomas pointed out, the problems of the IRS developed

over a long period of time. Part of the responsibility has been the

inability of Congress to adequately oversight the operation of the

IRS.

So I think it is right and I am pleased to see our legislation confronts the issue of a more effective way that Congress can use its

energy to coordinate oversight of the IRS. I can understand the administration not wishing to put that in its bill, the congressional

oversight; but I do hope that we will include that provision in the

final bill that is brought forward.

56

Mrs. JOHNSON of Connecticut. I do want to point out that if we

fail to include the IRS at the time we are writing tax policy, we

will never straighten out our problems. If we fail to require of ourselves the amount of change that we are asking of the executive

branch, we also will fail to make government more responsive to

the taxpayer, more efficient and effective.

We talk a lot about it, but this portion of your report is extremely important. I am proud to say that the Chairmen of the

three Committees, this year, have been meeting to talk about some

demonstration projects and pilot projects that we asked the IRS to

do in order to avoid the three Committees interpreting the work

differently, so on and so forth.

But, it is extremely important that we begin to work as a body

on oversight of the IRS at the same level of discipline and coordination—on the part of the Congress—as we are asking the executive

branch, in terms of both the bureaucracy and the private sector.

This is a new era we are moving into and we have to drag ourselves forward as well as them forward.

Thank you.

Mr. CRANE. Mr. Levin.

Mr. LEVIN. Thank you, Mr. Chairman.

Clearly there has to be some changes. I think everybody agrees

with that. The Commission has helped to spotlight some of the

needed changes. There are urgent needs for improvement in management.

Let me, though, try to zero in on what are the differences, because I think where we are agreeing, we will legislate. It is where

we disagree that may be more difficult. It relates to the powers of

the Board. I think Chairman Archer described it somewhat well, it

is the question of whether there would be an advisory capacity, or

also a quasi-management authority in any board or commission.

Senator Grassley, you said in your testimony, ‘‘Will it be a real

Board with real independence authority and teeth?’’ Senator

Kerrey talked about a Board that could make difficult personnel

decisions. I think that is really the most fundamental disagreement.

So, if you would, tell me the kinds of decisions that you think

this Board will be able to make? There is a disagreement as to

whether the Board would appoint the Treasury—the IRS Commissioner, which is a pretty important issue. But in addition to that—

Senator Grassley, let me start with you.

What kinds of—when you say ‘‘real independence, authority and

teeth.’’ I tend to agree that it has to be a Board with more expertise than perhaps envisioned in one of the bills, but that can be

readily fixed. So tell me what you mean by ‘‘independence, authority and teeth?’’ Give me examples of what the Board would do.

Senator GRASSLEY. Well, this may not be specific enough for you,

but it seems to me that it is tone and direction and mission. What

we are trying to do here with the Board is something that I guess

in over 1 year—that not just in 1 day of testimony, but in testimony over a long period of time, it tended to be a theme that somehow the Internal Revenue Service was just kind of a mission onto

itself, without proper oversight from the President and the Secretary of Treasury.

57

We understand that the Secretary of Treasury has so many important duties—and you could list eight or nine that are very, very

important—and whether or not the IRS being within that organization has the mission and the goals laid out adequately by an overseer to make sure that problems within are seen and overcome

very shortly.

Now that is a very general answer to your question, but——

Mr. LEVIN. How about a few specifics in terms—Senator Kerrey,

who had to leave, talked about ‘‘difficult personnel decisions.’’

Senator GRASSLEY. OK. Well, one that I mentioned already is the

fact that under the existing administrative set up, even though a

new President, elected with an overwhelming mandate—maybe

nothing to do with the IRS, but still having an overwhelming mandate to come in and govern, appoints a new Commissioner of Internal Revenue; and that new Commissioner tends to always be a tax

attorney, with probably very good expertise in tax law, goes in to

manage an organization, but inherits because of tradition and because of law a middle management that may be inbred with the

organization to keep the real changes that the Commissioner of Internal Revenue wants to get carried out. From that standpoint, it

seems to me that we do not get the changes that need to be done

as fast as we should.

Mr. LEVIN. Mr. Portman and Mr. Cardin.

That could be fixed, Senator Grassley, by—you do not need to set

up a Board to give the Commissioner more authority, vis-a-vis personnel, I do not think. I am not an expert on that system.

Senator GRASSLEY. And I cannot disagree with what you say, but

we set it up as an independent—a more independent agency with

a Board that is going to have special authority to look at that.

Since it is outside the normal stream of Cabinet Presidential relations.

Mr. CARDIN. Mr. Levin, let me just try, if I might—just quickly,

if I might.

That is, it is not so critical—the decisions that are made by the

Board. It is the Board working with the Commissioner and developing a management strategy that will correct the problems that we

all have identified with the IRS. So, if you look at the bill, you will

find that the legal authority rests primarily with the public officials, not with the Board. The Board has access to the Commissioner in the development of the strategic plan and the development of a budget necessary to carry out that strategic plan. You

have a working relationship between experts in the area—the

Board—and the Commissioner working to develop a strategy that

will correct the problems at the IRS.

Establishing evaluation techniques, so that we all can see—including those of us who serve in Congress—as to whether the IRS

is carrying out its mission will be a tremendous assistance to Congress, as well as the American people.

But the legal authority rests with the public officials. All of us

can draw from our own personal experience of serving on boards.

We know good boards, we know boards that have not functioned so

well. A good board works in tandem with the institution; and that

is how we see this happening. We think that we have given enough

access to the decisionmaking by the Board so you can attract the

58

kind of talent that is necessary in order for the Board to carry out

its mission. If you are looking for legal authority to make decisions,

most of that rests with public officials.

Mr. LEVIN. I think you have described an effective advisory

board.

Mr. CARDIN. We could spend a lot of time on what the Board

should be called. We think it is an Oversight Board.

Mr. LEVIN. An Oversight Board.

Mr. CARDIN. Yes.

Mr. PORTMAN. Mr. Levin, I appreciate your question. Let me try

to give you some—even more specific corrections on that, that

comes right out of the legislation. It is actually pretty well spelled

out on pages 12 through 15 in the legislation, probably as well as

in many of the summaries I have seen.

I think it is very important to look at this Board, not so much

as a management board—which happens to be the name of the

Treasury Board—but as an oversight board. There is a difference

between the two. It is not an advisory board. It is not a management board. It is an oversight board, meaning that it has certain

powers that are approval-type powers, and certain boards that are

consulting-type powers.

We have spent a lot of time on this and the way we ended up

working out that balance between approval, which as you said earlier is real authority, it gives it real teeth; and on the other hand

consulting with the Commissioner was as follows: The Board actually approves the strategy.

I mentioned in my statement, not just the long-range mission of

the IRS, but the annual strategy for implementing, really, that

mission. So there is a strategic plan that has to be prepared now

by the Commissioner, has to be presented to the Board, and that

Commissioner needs to work with the Board to come up with a

plan that is approved by the Board. That, in my view, is where a

lot of the authority vests.

Second is performance measures. One of the things that we tried

to do, as I said earlier, is to push change all the way through the

system. Part of that is change in the performance measures. Not

making it as an example, but subject to the kind of incentive where

if you end up raising more money from the taxpayer, you end up

getting a better performance review. Rather, the performance

measures should be tied to taxpayer service.

The notion there being that ultimately we are trying to improve

the service to the taxpayers. That will in the end lead to better

compliance. But we need to reestablish the performance measures.

The Board will have that authority, too, to approve something the

Commissioner presents to them.

The appointment of the Commissioner, you mentioned, which is

very significant, I think. Although, I think there are other ways to

do that to give the Board some power—there is, as I mentioned

earlier, a slate of candidates—maybe some removal powers.

Finally, the budget. The budget is very interesting. Because

Treasury has argued before this Committee and the Subcommittee

and has said publicly many times that the Board is going to establish the budget for the IRS, and that that would somehow lead to

unavoidable conflicts of interest. That is not the way it works.

59

It works much like Social Security, where you and I, Social Security Subcommittee Members and the Full Committee Members get

an informational copy of what the Social Security Board thinks is

the right budget, but the budget itself—actually, once it is approved by the Board—and again, the Commissioner has every incentive to work with the Board. The Secretary of the Treasury is

on the Board. Then that budget goes to the Secretary. The Secretary has the same veto power that the Secretary currently has.

Then it goes as part of the President’s unified budget, through

OMB, through the White House, and up to the Hill.

So the President’s request comes really from Treasury and OMB.

But at the same time, you and I will get an informational copy of

a budget that was actually approved by the Board working with

the Commissioner.

So those really are the fundamental authorities of this Board.

Where the Board does not have approval power, but has review

power, includes the management plans—kind of the day-to-day

management plans—the technology plans. We talked about that a

little today and in the last year. Many have explained the IRS has

made a lot of progress with the blueprint for a new technology

plan. But we need to have that continuity we talked about earlier

because there has been a new technology—Tax Systems Modernization Plan—every couple of years; and it has not been followed

through on.

The reorganization plan, which would include some of the

downsizing you talked about, potentially; personnel systems and

training plans. Those would be reviewed by this Board in a formal

way; but the Board would not have to approve it. The Secretary

would be required to submit that to the Board.

So it is a balance. Your question is a very good one. In the end,

this is a board that is neither advisory nor management, but it is

in my view—I think the best way to describe it is oversight.

Mr. CRANE. Colleagues, I would like to interrupt for a moment

here because I have learned that our colleague, Mr. Hoyer, has to

be out of here by 3, and Secretary Rubin has to be out of here by

4. So I would ask our remaining questioners if you would be kind

enough, if it is not a major, overriding question that you have to

ask of any one of our current panelists, to hold and we will save

them either for Steny and our good friend, Mr. Coyne, or we will

save them for Secretary Rubin.

Next, though, in line of succession is Mr. McCrery.

Mr. MCCRERY. Thank you, Mr. Chairman. I just have one quick

question that can get a quick answer.

Congressman Portman, did the Commission study the approaches taken in the Treasury Department’s proposal? If so, what

was the discussion around those proposals?

Mr. PORTMAN. It is a good question. Yes, the Commission did

take into account the Treasury’s proposal. The General Counsel of

the Department of Treasury was a member of the Commission. We

got a lot of input from Treasury along the way. The report actually

reflects a lot of Treasury’s input and IRS’ input, even though in the

end, Treasury opposed the final recommendations. As I said, earlier, it was a 12 to 5 vote on a bipartisan basis with Treasury not

supporting it.

60

What we have determined is that Treasury’s idea—which actually came relative to relating to the Commission’s, but was part of

our deliberations of having a, again, midlevel bureaucrat, political

appointee, management board, in that case, made up of 20 individuals—which has actually been implemented by Executive order—

simply did not meet any of the criteria which we all seemed to

agree on, which is a needed—more expertise at the IRS to solve

their very tough problems with information technology, customer

service and so on.

There was no continuity. The average length of the people who

actually were named on that Board is less than 2 years. That is

not continuity to get the job done; and third, accountability. They

did not provide that kind of accountability. You really can never

get accountability, in our view, unless you have the first two: expertise and continuity. Otherwise, there really is not good accountability.

Finally, as I mentioned earlier, there is a real concern that the

kind of accountability you have might not be what you wanted. Because to have political appointees actually managing the IRS—because it is called a management board and I do not know exactly

how the duties are enumerated. It may not be that different from

ours. But they had political appointees and that position seemed to

us to really risk politicizing the IRS in a way that I think none of

us want to go back to.

Mr. MCCRERY. Thank you.

Mr. CRANE. Our next questioner would be Mr. Neal. Do you have

any questions, Mr. Neal?

Mr. NEAL. Mr. Chairman, maybe one quick question of the panel

and I can get that done in a rapid manner.

By definition, it is my understanding that the Board would not

have any influence over tax policy?

Mr. CARDIN. That is correct. Tax policy would continue to reside

at the Department of Treasury.

Mr. NEAL. And how do you maintain that very clever distinction.

Mr. CARDIN. There is a specific provision in the bill that specifically states that.

Mr. NEAL. You would not ever see an opportunity for a conflict?

Mr. CARDIN. No, as Congressman Portman pointed out, traditionally tax policy has been handled by the Secretary, Department of

Treasury. It has not been in the IRS itself. IRS administers the

laws. It has not been involved directly in tax policy.

Mr. NEAL. But would not they make——

Mr. CARDIN. It would specifically prohibit this Board from being

involved.

Mr. NEAL. Would not they make recommendations then over tax

collection policy, or who to focus on, something like that?

Mr. CARDIN. No. We do not see that happening. We do not see

that as part of the mission of this Board. We think—what we are

talking about is giving direction to the agency, not dealing with either a specific policy; or a specific enforcement issue.

Mr. CRANE. Next is Mr. Ramstad.

Mr. RAMSTAD. Mr. Chairman, I have no Earth shattering questions and will gladly defer.

Mr. CRANE. Very good. Thank you kindly.

61

Mr. English.

Mr. ENGLISH. No questions, Mr. Chairman.

Mr. CRANE. Very good.

Mr. Becerra.

[No verbal response.]

Mr. CRANE. Mr. Tanner, do you have any questions?

Mr. TANNER. No.

Mr. CRANE. Well, that concludes this panel and we thank you

both for your participation and that of our departed colleagues.

With that, we will ask our colleagues, Mr. Coyne and Mr.——

Chairman ARCHER [presiding]. Mr. Crane, I am going to ask,

with the permission of Mr. Coyne and Mr. Hoyer whether they

might be willing to defer to the Secretary, who has got time problems.

Unless we can have some kind of an agreement that we would

be very succinct in questioning Mr. Hoyer and Mr. Coyne, if we

could have that agreement and that is acceptable to the Members,

then we will recognize Mr. Coyne and Mr. Hoyer. Particularly, I

am concerned about my friend Steny Hoyer having to sit around

in the Ways and Means Committee. Some of it might rub off on

you. [Laughter.]

We are pleased to have both of you and the Chair would first recognize a Member of the Committee and also a member of the Restructuring Commission, Mr. Coyne for his testimony. Without objection, your written statement can be put in the record in its entirety.

STATEMENT OF HON. WILLIAM J. COYNE, A REPRESENTATIVE

IN CONGRESS FROM PENNSYLVANIA

Mr. COYNE. Well, thank you, Mr. Chairman. I thank you and the

Members of the Committee for the opportunity to testify here today

on H.R. 2428.

I believe the Restructuring Commission has made an important

contribution to the debate on the role of the IRS by carefully studying the problems facing the IRS and producing some very thoughtful recommendations in the report. I want to especially commend

the Cochairs of the Commission, Senator Kerrey and Congressman

Portman, for their skillful leadership and for all of their hard work.

As you know, all of the Commission members agreed that there

is a clear need for dramatic reforms at the IRS. In fact, we agreed

on a number of reforms that should be adopted in order to improve

IRS operations and make this agency more customer friendly.

There are some issues, however, that still need to be debated before Congress enacts an IRS reform bill. H.R. 2292 and H.R. 2428

reflect two different perspectives with regard to those issues. Both

H.R. 2428 and H.R. 2292 would make IRS personnel policies on

issues like hiring and pay more flexible; and they both attempt to

provide a fix for the troubled IRS computer modernization program. Both bills would also promote increased electronic tax return

filing.

Finally, and perhaps most important, both bills attempt to increase oversight of the IRS and to provide the agency with the expertise and leadership it needs to carry out its mission fairly, efficiently and courteously.

62

There is, however, one major difference between H.R. 2292 and

H.R. 2428. H.R. 2292 would turn control of the IRS over to a board

of directors composed primarily of private citizens, which would select and appoint the Commissioner. Under H.R. 2428 the Commissioner would be appointed by the President and confirmed by the

U.S. Senate.

Under H.R. 2292, the Board would review and approve the IRS

budget and it would review and approve the strategic plan of the

IRS. Consequently, in my opinion, H.R. 2292 would make the IRS

less accountable to the American public than it currently is.

The Federal Government has and will continue to have a number

of substantial obligations: national defense, law enforcement, scientific research, investment in infrastructure and maintaining safety net programs like Medicare and Medicaid.

As long as it continues to have such obligations, it will need to

collect the revenues necessary to meet them; and it will need an

agency that collects taxes fairly and efficiently.

The question before us today in considering these two proposals

is whether that agency, the IRS, will be accountable to the American people. Both of these bills will make the IRS more efficient

and more taxpayer friendly, but I believe that H.R. 2428 would

make the agency more responsive to the American people than

H.R. 2292. H.R. 2292 creates a layer of unelected appointees between the IRS and the taxpayer public.

While those appointees might provide the IRS with much needed

technical knowledge and managerial experience, they could also

serve to insulate and alienate the IRS from the taxpayers and our

elected representatives. I see no compelling need to sacrifice accountability to the American people in order to provide the IRS

with the benefits of outside technical expertise and private-sector

management experience.

Gerald Seib of the Wall Street Journal, addressing the idea of an

outside board to oversee management at the IRS, states that, ‘‘The

idea would erode accountability, which is key to integrity in government.’’ He concludes by saying that, ‘‘Attacking the IRS’ ineptitude should not require undermining government integrity.’’

Would the taxpayers feel better knowing that executives from

around the country, rather than the officials they elected, are in

charge of the IRS? I think not. Would there be concerns about conflicts of interest with a board of directors who serve the public part

time while keeping their lucrative private-sector jobs? I suspect

that there would be, and legitimately so. Would part-time board

members be able to dedicate the time and energy necessary to exercise effective oversight of the IRS? I do not think they would.

Mr. Chairman, there is a better way to address this problem.

H.R. 2428 would codify actions already taken by Treasury and the

IRS to set up an IRS Management Board composed of high ranking

Federal officials and an IRS Advisory Board composed of experts

from the private sector.

This approach would allow the IRS to benefit from private-sector

knowledge and experience without sacrificing accountability. In

most of the other provisions, H.R. 2428 is very similar to H.R.

2292. Consequently, I urge my Ways and Means colleagues to support H.R. 2428.

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I know that it is fashionable in some quarters to bash the IRS.

In fact, the Wall Street Journal reports that a Member of the other

body actually sent out a letter soliciting funds in which he stated

that, ‘‘With your immediate help today we can virtually abolish the

IRS as you know it.’’

Of course, I know that is not the intent of anyone here today on

this Committee, or anyone who will testify here today. I only raise

this issue to say that we on this Committee know what we are up

against on this issue. I hope that Congress and the administration

will work together with the taxpayers’ interest foremost in our

minds to reform the IRS in a manner that promotes efficiency, equity and accountability.

I thank you once again for the opportunity to testify before the

Committee.

[The prepared statement follows:]

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Chairman ARCHER. Thank you, Congressman Coyne.

Our next witness is an individual well known to the Members of

the House, our friend Steny Hoyer.

Mr. Hoyer, we will be pleased to receive your testimony.

STATEMENT OF HON. STENY H. HOYER, A REPRESENTATIVE

IN CONGRESS FROM THE STATE OF MARYLAND

Mr. HOYER. Thank you very much, Mr. Chairman, Mr. Rangel

and Members of the Committee. I want to also commend Mr.

Portman, a Member of this Committee, and Senator Kerrey, for

their work on the Commission.

The Commission has made a number of very good proposals.

They are included in H.R. 2292 and they ought to be adopted. I,

however, have joined with Mr. Rangel, Mr. Coyne, Mr. Waxman

and Mr. Matsui in introducing H.R. 2428, which includes many of

the Commission’s proposals.

The IRS has been rightly criticized in recent years for its failure

to manage its operations well, our Treasury-Postal Appropriations

Committee has been among that number. Particular focus has been

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directed to the attempt to modernize its information systems. Until

very recently, that effort had been severely criticized by the GAO.

Furthermore, Mr. Chairman, for the first time in the 15 years I

have been reviewing IRS budgets, a Secretary of the Treasury and

his Deputy are giving personal attention to IRS management

issues. It is making a difference.

However, as the Commission points out, Congress’ failure to have

consistent policies regarding funding, its frequent changes of the

Tax Code, and its attempt to micromanage, in some instances, the

IRS have all undermined the ability of IRS to manage efficiently

in the long or short term.

In fiscal 1995, we started a major compliance initiative to collect

overdue revenues. Despite the fact that it collected far more than

anticipated, Congress abruptly canceled the effort in fiscal 1996.

Congress is also the perpetrator of budget problems at the agency. In June 1996, Chairman Archer and Chairman Johnson signed

a 10-page letter detailing problems with IRS funding in the Fiscal

1997 Treasury Postal General Government Bill.

I want to congratulate both of you for your leadership and important intervention at that time.

The attacks on the agency’s budget, while partially restored in

Congress, hurt morale and distracted management from the task

at hand. The Commission wisely recommended that, ‘‘Congress provide the IRS certainty in its operational budget in the near future,’’

and further called for ‘‘greater stability in funding levels.’’ Our bill

addresses those concerns by calling for stable budgets and, when

appropriate, multiyear budgets.

As I noted, there are similarities in the two proposals for improvement. Both bills before the Committee strengthen employee

performance management systems. Both bills provide flexibility for

recruiting and managing employees. Both sets of proposals promote

electronic filing, which shows great promise for lowering cost and

speeding refunds to taxpayers. Both bills set a fixed, 5-year term

for Commissioner to enhance the stability of IRS leadership.

The central, critical and compelling difference between the two

bills is the issue of governance. This difference, Mr. Chairman, may

be a profoundly philosophical one on how best to protect and promote the public interest. I believe very strongly that the IRS, more

perhaps than any other government office, must be governed and

managed by those unconflicted by private interest and responsibilities.

Donald Kettl, director of the Brookings Center for Public Management, referred to the Commission’s proposal for governance as

fundamentally flawed. He stated that it was ‘‘An unwise, unaccountable, and probably unconstitutional transfer of public authority.’’

Mike McNamee of Business Week called the proposal, ‘‘One truly

bad idea.’’ Gerald Seib of the Wall Street Journal, who has already

been quoted, said that in this instance, the Commission’s good intentions had produced a bad idea.

I am very strongly opposed to H.R. 2292’s unprecedented proposal to turn day-to-day management of the IRS over to an independent group. While there is no doubt a role for private-sector advice and expertise, what the IRS needs is more accountability, not

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less. H.R. 2292 would place management in the hands of people

who, however well meaning, are loyal and accountable to the firms

and businesses that employ them—as they should be.

While everyone has a joke, Mr. Chairman, about a tax collector,

the vast majority of Americans believe that the IRS will protect the

confidentiality of their private information and enforce laws evenly

and fairly. Directors tied to private interests could easily undermine public confidence in the agency and dramatically decrease

what Senator Kerrey and others have referred to as a very high,

voluntary compliance.

I know that Secretary Rubin will review in far greater detail the

serious problems that he sees with H.R. 2292. I hope, Mr. Chairman, that Members of this Committee will recognize that H.R.

2428 meets the spirit of the Restructuring Commission without the

fatal flaws of delegating a central and sensitive responsibility to a

private-sector board.

I want to close by noting that far too often critics of the Tax Code

go after the employees of the Internal Revenue Service. Federal

employees are easy targets for those who dislike the laws we pass

here in Congress. Nowhere is it more apparent than the IRS, and

it should stop.

The reality is quite different. The Commission’s final report said

that interviews with IRS employees gave ‘‘an overall impression of

competent, hardworking people who want to deliver a high quality

product to the American taxpayer.’’

Therefore, instead of denigrating these civil servants, we should

provide adequate training and reward those employees who are

giving a 110 percent effort. I want to congratulate Mr. Portman for

the Commission’s attention to that issue.

There are a lot of dedicated men and women in the agency who

are working hard to ensure that our voluntary tax compliance remains the highest in the world. By adopting H.R. 2428, Congress

can ensure that we enter the 21st century with an IRS that is

customer-friendly, technologically advanced, and governed ‘‘by the

people, for the people.’’

Mr. Chairman, I want to again reiterate how much I have enjoyed working with you and your staff, and Mrs. Johnson and her

staff from the Treasury Postal Committee Appropriation’s standpoint, to have an IRS that is more taxpayer friendly, is more efficient and spends collection dollars as efficiently as possible.

I thank you, Mr. Chairman, for your time.

[The prepared statement follows:]

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Chairman ARCHER. The Chair thanks both of you for your input.

It was very constructive and very helpful to the Committee.

If Members have questions for these two witnesses, the Chair

would appreciate their deferral until after the testimony of the Secretary of the Treasury.

Congressman Hoyer, certainly you are excused, but if there are

questions that might be directed at Congressman Coyne, the Chair

would appreciate Members deferring until after the Secretary of

the Treasury has testified.

Mr. RANGEL. Mr. Chairman.

Chairman ARCHER. Mr. Rangel.

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Mr. RANGEL. I want to thank them and especially let Mr. Hoyer

know that we have got to try desperately hard to reach a bipartisan solution to this problem. We think it is important for the Congress and for IRS administration.

I feel very comfortable in having you included in all those discussions.

Mr. HOYER. Mr. Chairman, if I might, we have all talked about

bipartisanship, and I talked about you, Mrs. Johnson and I and

others on the Treasury Postal Committee working together in a bipartisan fashion.

I believe there is a basis on which we can reach bipartisan agreement, not only in the Congress, but between the Congress and the

administration, which I think will be important; and I thank you

for the time.

Chairman ARCHER. Thank you.

Now, Mr. Secretary, we welcome you back to the Ways and

Means Committee. You are no stranger to our Committee. I apologize that you have been kept waiting in the wings here for the period of time that has occurred in questioning the previous witnesses. But we are happy to have you with us now and you know

the subject of the hearing and we will be pleased to receive your

testimony.

STATEMENT OF HON. ROBERT E. RUBIN, SECRETARY, U.S.

DEPARTMENT OF THE TREASURY

Secretary RUBIN. Mr. Chairman, thank you. I put my extra time

to good use working on fast track.

Chairman ARCHER. That is a very worthwhile activity, Mr. Secretary.

Secretary RUBIN. Mr. Chairman, Mr. Rangel, let me thank you

very much for providing this opportunity to talk about what the administration is doing to improve the Internal Revenue Service, and

about the proposals that have been put forward by Senator Kerrey

and Congressman Portman.

Under the leadership—under their leadership, the National Commission on the Restructuring of the IRS has given serious thought

to the issues confronting the Internal Revenue Service. Its report,

which I read in its entirety, has made an important contribution

in dealing with these issues.

Mr. Chairman, we know there are real problems at the IRS,

problems which have developed over many years, and we have devoted a great deal of time and resource to fixing those problems.

We have made real progress, but we know the full job will take

time. We are committed to change and to building a fair, efficient

and accountable IRS the American deserve.

We agree with the Commission on goals—fair treatment for all

taxpayers, strong customer service and effective use of technology,

all while collecting the taxes due. We agree that achieving these

goals requires better oversight, greater continuity of leadership and

improved access to expert advice from the private sector.

Mr. Chairman, there is a right way and a wrong way to achieve

change. I believe the Commission’s proposal to give governing control over the IRS to a private-sector board is greatly flawed and

would create grave and unacceptable problems.

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The administration’s reforms already instituted have had real effect and our proposed legislation, which provides for appropriate

use of private-sector input, would get the IRS where it needs to be

without unacceptable risks.

More than a year ago, we established a Treasury Oversight

Board which proved to be the most significant structural change in

IRS governance in 45 years. In large measure, as a consequence of

this improved oversight, we have made significant changes in improved use of technology and better customer service.

Let me list just a few examples. Today Americans have a Taxpayer Bill of Rights and a taxpayer advocate to give them a voice

in the IRS. Around 14 million people filed their taxes electronically

this year, an increase of 19 percent. Filing by telephone was up

more than 65 percent to more than 4 million returns.

Twenty-six systems contracts were canceled or collapsed into

nine; and a comprehensive technology proposal for a public/private

partnership, prepared under the direction of a new Chief Information Officer, has received a favorable response from both Congress

and the private sector.

Much has been done. Much remains to be done. But we must

proceed in a sensible way. The IRS Improvement Act introduced in

the House last week with the support of the administration, would

institutionalize our commitment to change, and continue our very

real progress without creating unacceptable risks.

The bill would make permanent the IRS Management Board.

This Board, which under the legislation would be comprised of senior officials from Treasury, OMB and the IRS, and a representative

of the employees union, provides ongoing oversight for the operation of the IRS, of the modernization of its systems, customer

service, IRS strategy and other relevant matters. Its members are

available, as needed, to deal with IRS issues.

The legislation would also require the Secretary and Deputy Secretary to report on the IRS, in person, to Congress each year. I believe perhaps that should be changed to at least twice a year. This

is key. In my view, this kind of public exposure will, in the words

of Benjamin Franklin, ‘‘concentrate the mind’’ of any future Secretary and Deputy Secretary and cause them to take their responsibilities for the IRS seriously, and to make those responsibilities

a top, personal priority.

Second, the legislation recognizes the critical value of private-sector input by creating an IRS Advisory Board made up of individuals to represent a wide range of relevant expertise. This Board

would report to the Secretary of the Treasury, and make an annual

report to the Congress and the American people.

Third, to provide for increased continuity at the IRS. Our legislation calls for the appointment of an IRS Commissioner to a fixed,

5-year term. Our nominee for Commissioner, a chief executive officer of a large, private-sector organization, with extensive experience in systems modernization and other technology issues is a

symbol of our continuing commitment to the process of change.

Mr. Chairman, I would now like to turn to the proposal to put

a board of private-sector individuals in charge of the IRS with

great power with respect to the budget, evaluation and compensation of senior personnel and strategy, both explicitly and because

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the board would both appoint and have the power to fire the Commissioner.

Mr. Chairman, as you know, I spent 26 years in the private sector, much at a very senior level, before entering public service at

the beginning of this administration. I would be the last person to

question the value of private-sector input.

However, having now spent nearly 5 years at relatively senior

levels of government, I would also caution that there are very substantial differences between the public and private sectors in objectives, obligations, the complexities of public process and other respects. My understanding of these differences have informed both

the structuring of the IRS Improvement Act and my great concerns

about private-sector board governance for the IRS.

My views on this proposal are in line with a wide range of serious commentators such as the New York State Bar Associations;

the Brookings Institution report said that the proposal was deeply

flawed. Business Week has called it, ‘‘A truly bad idea.’’

In prepared testimony for presentation later in the hearing, the

Tax Section of the American Bar Association says that management should not be moved to a private-sector board.

We see five major problems with this proposal. First, our Constitution envisions substantial government functions be conducted

by departments and agencies that are accountable to the President

on an ongoing and regular basis. Putting the IRS in the hands of

a board that is appointed by the President and can be dismissed

by him would reduce accountability to a bare minimum. On a dayto-day basis, that board would report to no one, and for all practical purposes, would not be accountable to anybody, except in extreme cases requiring outright dismissal.

Second, a private-sector board would give private citizens control

over a major law enforcement agency. More than half of the IRS’

$7.2 billion budget goes to civil and criminal enforcement, both to

collect taxes and to work alongside with other government agencies

in their efforts to combat drugs, money laundering, health care

fraud and the like.

While the proposed board would not have access to specific law

enforcement cases, the decisions it would take about the IRS’ budget priorities, personnel and overall strategic direction, would have

as substantial impact on law enforcement. Private governance of

substantial law enforcement would be totally unprecedented in our

history.

In a recent letter to Deputy Secretary Summers, the Department

of Justice expressed its grave concerns that the proposed board system would, ‘‘Present a significant and unjustifiable risk to important law enforcement missions.’’

Third, putting private citizens in charge of the IRS would pose

serious real and apparent conflicts of interest, which are inherent

in the proposal and not curable through recusal.

As private-sector individuals, members of the proposed board

would have a wide range of interests, which could be deeply affected by the judgments the IRS makes. The board would be prohibited from involvement with case specific matters. But the temptation and the potential for abuse would have been created.

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Even leaving aside matters dealing with board members’ specific

interests, more general IRS decisions will be affecting their interest

all the time. To state just one example. Under the proposed board,

executives whose companies are automatically subject to yearly audits could end up affecting the audit budget for the IRS and its

audit and enforcement strategies.

Looking at conflict from the other direction, I do not believe that

there is any question that the people who work in a large organization are affected by the outlook of the people at the top—such as

those who have the powers of this board—and by the desire to satisfy those people.

Lawyers call this a ‘‘chilling effect,’’ one which would almost certainly have an impact on IRS audit policy, enforcement policy and

the like. Under the proposed board system, the public will also very

likely feel that the IRS was responding to the views of a privatesector board. That creates a serious risk of undermining public confidence in the fair and professional application and enforcement of

the nation’s tax laws. That in turn could work to undermine our

voluntary system of compliance—a very grave issue indeed.

If I were still in the private sector, Mr. Chairman, I could not

in good conscience serve on such a board.

Fourth, this proposal would separate tax policy from tax administration—two functions which are inexplicitly intertwined. If our

tax policies are determined by an elected President working with

Congress and then the IRS does not put enough emphasis on enforcing those policies, those democratically decided tax policies can

wither on the vine.

Finally and very importantly, I believe that this board is unlikely

to work in providing the intense oversight that is necessary. The

IRS requires ongoing, energetic oversight of full-time government

employees who are available, as needed—the kind of oversight that

has been provided by the Modernization Management Board in the

past year and which will be made permanent by our legislation, not

the sporadic attention of people whose dominant involvement is in

the private sector and who meet once a month.

To conclude, Mr. Chairman, we must continue reforming the IRS

and we are committed to change, but we must proceed in the right

way. We must also, in my view, respect and support the committed

men and women of the IRS, who year in and year out perform the

difficult and often unpopular job of collecting the taxes that fund

our Federal Government.

In recent years, we have seen threats and incidents of violence

against these public servants and bomb threats against IRS facilities.

There is no doubt, Mr. Chairman, that in any large organization

with significant powers there will be a number of instances each

year where individuals behave improperly. Let me be clear, the

Treasury and IRS do not condone such actions. We find any instance of abusive behavior deeply troubling and the Treasury Department and the IRS are working to curb them in every way possible.

We can and we must deal with these instances, but always in the

context of continued support for the people and mission of the organization as a whole.

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Mr. Chairman, we have made real progress. We are committed

to change. We have put forth a sound plan to accomplish change,

but there is much to be done. I very much look forward to working

with the Members of this Committee, members of the Commission,

with the National Treasury Employees’ Union, the men and women

of the IRS and with other interested parties as we work to continue

to process of change.

I will now be delighted to respond to any questions.

[The prepared statement follows:]

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Chairman ARCHER. Mr. Secretary, thank you. Unfortunately the

bells have rung for record votes on the floor of the House. It is the

intention of the Chair to conduct inquiry as long as we can in this

first 15-minute vote segment. Then we will recess, with your permission, make our 5-minute votes and then return as rapidly as we

can.

Mr. Secretary, as has been said earlier, whatever we do needs to

be bipartisan; and whatever we do should not be considered to be

a reflection on anyone that is in your position, but rather an effort

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to find a better policy than we have had in the past as far as how

we govern the IRS.

You have come a good way, I think, in your recommendation.

However, I have some concern in that our system has been called

voluntary. I question whether it is really voluntary because there

is always a big stick back there that causes people to want to volunteer.

But certainly trust in the system is exceedingly important. Perception is exceedingly important. The perception today that disturbs me and disturbs many other people with whom I converse is

that there is a great potential for the IRS to be used for political

reasons.

I worry about how your recommendation will get around that

perception. Because all your management board—as I read your

recommendation—are basically political appointees; and you still

leave the complete accountability and running of the IRS, for the

reasons that you outlined, which are not without merit. The Secretary and the Deputy Secretary are arms of the President of the

United States.

How do we overcome what is currently in the minds of many

Americans that the use of this extremely powerful arm of our government can be used for political purposes?

Secretary RUBIN. Mr. Chairman, you and I have discussed this

issue before and I think it is an important issue that you raise. Let

me give you my views on it.

As you know, it is the established practice of the Treasury, not

to get involved in case specific matters. If there is ever a question

about—at least in the time I have been there, there is no doubt we

never have. If there is ever a question about whether that has occurred, then it would seem to me that people who have that question should go either to the IG of the Treasury or possibly to other

appropriate persons.

I also think that whenever there is a concern of any sort with

respect to the issues that you have just raised, there are now a

number of modalities available for people to get satisfaction. You

have the IG at the Treasury, you have the Inspector at the IRS.

We now have a taxpayer advocate. That was a very good thing. We

believe in a robust taxpayer advocate function.

So I think basically, Mr. Chairman, that is the best way to do

this. I think that vigorous congressional oversight can also contribute very substantially. I agree with you that confidence in the fairness of the IRS is absolutely critical. But I think by taking the IRS

and putting it under the governorship of a private-sector board,

rather than ameliorating this issue will create an enormous new

and I think vastly greater range of issues, which is the question

of the public attitude toward governance of the IRS by private-sector individuals, with all of their manifold interests.

Even if these people behave in a totally appropriate fashion, I

think it would create an enormous sense of uncertainty about what

kind of effect these private-sector citizens are having upon the administration of the tax law. One of the things that most troubles

me about the private-sector board is exactly this factor. That it

does, I think, create a very real possibility for undermining conVerDate 11-SEP-98 14:18 Nov 29, 1999 Jkt 058922 PO 00000 Frm 00085 Fmt 6602 Sfmt 6602 D:58922 W&M3 PsN: W&M3
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fidence in the fairness and impartiality of our tax system and all

the adverse effects that you say they would have.

Chairman ARCHER. Well, I understand your concern on that side,

although Senator Kerrey has just testified in a very strong way

that he disagrees with you in what you just said, but that still does

not overcome what I think is a major problem, perceptionwise, that

exists in the minds of the American people today, perhaps more so

now in the last week than in quite some period of time.

Even though you and every other former Secretary of the Treasury that would testify before this Committee, if they would be here

would tell us, they have never ever gotten involved in a political

way with the IRS. But the perception is still out there with the

American people.

I think we have a responsibility to do what we can about that

perception and whether or not there is an ombudsman for the taxpayers and whatever else is not alleviating that perception in the

minds of the American people. That is simply all that I wanted to

say within the constraints of time.

Secretary RUBIN. Could I add just one thing, Mr. Chairman? Just

one quick comment?

Chairman ARCHER. Yes.

Secretary RUBIN. If one had the conclusion that really had become a serious problem, it is not—my impression is that that problem is not really to the level of seriousness that you quite suggested, but nevertheless, I absolutely agree with you. It is an issue.

I think a very sensible way to go about trying to deal with that,

without creating what I think would be enormous additional problems to a private-sector board, would be through some additional

congressional oversight that is directed at that issue. Then Congress could play a very constructive role.

Chairman ARCHER. I do not think we should belittle it, because

as recently as 11⁄2 hours ago, a Member of Congress said that he

was convinced that he had been audited 3 years in a row as a result of political input on the part of a previous Secretary of the

Treasury.

So, it is a situation that is out there, Mr. Secretary, and I am

concerned about it.

Secretary RUBIN. I did not mean to belittle it. I am sorry. What

I meant to say was that if it has risen to the level where it seems

like it needs additional attention, my suggestion would be that that

is a totally appropriate, and I think, very constructive role for Congress to play, which does not create the other kinds of problems

that the private-sector board does. That was what I meant to say.

Chairman ARCHER. Mr. Rangel, just a couple of minutes.

Mr. RANGEL. We have to vote, but Mr. Secretary, before you arrived, I think all the Members were concerned that we find out

what the bottom line is and whether or not we can support it. Because since we agree it is the credibility of the IRS and the perception of the IRS that is at stake, we may be doing more damage

than good with our discussion, if it reaches the point that our dispute is based along political lines.

So, I know that you are working with the Members trying to improve the situation there, and I hope that they will continue to do

so in the tone that you have set. It would help us to assure the

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American people that we conclude that something better has to be

done. It is just a question of how to do it without injuring the tax

administration system further.

Thank you.

Chairman ARCHER. Mr. Secretary, I hate to ask you, but if you

can, could you stick around a little longer until we vote, then we

will come back and in the meantime we are happy to make an office available to you or whatever. It should hopefully be 15 minutes——

Secretary RUBIN. I would be delighted, Mr. Chairman. You know

there is a——

Chairman ARCHER [continuing]. If not before.

Secretary RUBIN. That is fine. You know I have a slight problem

at 4 o’clock. Are you familiar with that?

Chairman ARCHER. Yes. We will understand that you have to

leave at 4 o’clock. Is that correct?

Secretary RUBIN. I am delighted to stay.

[Recess.]

Mr. MCCRERY [presiding]. If everyone would take a seat, we will

get started as soon as the Secretary gets back in the room.

Mr. Secretary, Chairman Archer has been called away to a leadership meeting and apologizes for his being absent. We do have

some Members who are close by and are being summoned now. As

soon as we get——

Secretary RUBIN. Rob, I think you have a singular enthusiasm.

[Laughter.]

Mr. MCCRERY. Why don’t we go ahead.

The meeting will come to order. Mr. Secretary, as you heard,

there is another vote. However, since one of the primary authors

of the legislation is here, why don’t we proceed for as long as we

can, then perhaps some of the other Members will return and they

can allow us to go vote.

Mr. Portman, would you like to inquire of the witness?

Mr. PORTMAN. Thank you, Mr. Chairman. First, I would like to

inquire of you if I may enter into the record certain publications

that deal with the IRS reform issue. We previously heard from Mr.

Coyne and also Mr. Rubin that the Wall Street Journal and Business Week had supported Treasury’s approach; and just to set the

record straight, individual columnists contributing to those publications have—the Wall Street Journal has actually editorialized in

favor of the approach by the Commission and by H.R. 2292 and I

thought it would be helpful to include in the record, again, these

articles and editorials which have appeared in magazines and

newspapers.

Mr. MCCRERY. Without objection.

Mr. PORTMAN. Thank you, Mr. Chairman.

Mr. Secretary, thank you for once again coming before the Committee to talk about this issue that is near and dear to our hearts.

You mentioned earlier my singular interest in this. I know other

Members would want to be here—including Ben Cardin, with

whom I just spoke, but are at other testimonies in his case and

other meetings—and are now on the floor voting again.

Your arguments, of course, I have heard before—both publicly

and privately. As you know, the Commission in private session

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with you heard you out. In my view, we addressed some of the concerns, specifically, in the legislation. You and I may disagree on

that. Perhaps we will have an opportunity to walk through some

of those specific issues, such as tax policy that you mentioned.

With regard to other points that you made, the Commission simply agreed to disagree. This is why in the end—although we heard,

I think it is fair to say, every one of these concerns raised both by

you and your able representative on the Commission, General

Counsel Ed Knight, we determined in the end by a 12-to-5 bipartisan vote to take a slightly different approach.

I think it is very true what we have heard from Mr. Rangel and

others today that for the most part we are in agreement. I know

your proposal does not address congressional oversight, nor should

it probably coming from the Treasury Department. But obviously

we need to do more in terms of consolidating the oversight here in

Congress on taxpayer rights.

I know that you all chose not to address that as well, although

I do not know that there is a great deal of disagreement and maybe

we can work those concerns out. I do not know whether it is fair

to say it is 80 percent or 90 percent of the proposals we pretty

much agree on, but it is certainly a substantial part and the majority of the legislation and the Commission report on which it is

based.

The issue, again, that we come back to time and time again is

this issue of the oversight bodies that might, again, meet those criteria we talked about earlier. I guess my first question to you

would be, do you agree with us? I think you do that indeed when

you look at the problems at the IRS, it really comes down to some

structural flaws in the way the IRS has been both managed by

Treasury and the U.S. Congress and the lack of oversight. In particular, there is a lack of expertise, as we talked about and you

mentioned in your statement.

Continuity, the follow through, and finally this issue of accountability, that there has not been a group to keep Treasury’s and the

IRS’ feet to the fire on the strategic plans and other proposals,

which have been either recommended by the IRS or promoted by

Treasury or the Congress.

Do you agree with those criteria, that we need to meet the expertise, continuity and accountability criteria to be able to properly

judge your proposal?

Secretary RUBIN. I think it is a useful framework with which to

approach the problem, Mr. Portman. Having spent pretty much my

whole adult life running large organizations; and as I looked at the

IRS when I first got there, it seemed to me the key was to establish

an institutionalized, some kind of very intense oversight as you

would—I was actually involved in one in the private sector—as you

would for a troubled company.

It was really out of that concept that the Modernization Management Board came. It was really out of that concept that the notion

came of having the Secretary and Deputy Secretary be so accountable to Congress, and publicly—within the full realm of public exposure, that they would in effect be forced to take the responsibilities that were needed to be taken.

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Mr. PORTMAN. That is interesting. I would agree with you on the

need to institutionalize the oversight function. So I guess we are

one step closer there. Then the question is, what are we institutionalizing?

One of the interesting conversations I have had in the last few

months with stakeholder groups, with some of the experts inside

and outside the IRS, has been the degree to which the Commission

has influenced, and indeed Treasury, over the last year. Folks have

volunteered to me that they thought the Commission made some

impact, in a positive way.

What I have said in response is, ‘‘What we are trying to do really

is to institutionalize that kind of oversight.’’ You are probably going

to be off doing other things. I will be off doing other things. Senator

Kerrey will be off running for President or whatever he is going to

do and the Commission is now disbanded.

There is a need, I think, to indeed institutionalize the kind of expertise, customer service, information technology, management of

large service organizations. In many respect I think this longer

term oversight board fills precisely that role.

I guess what I would ask you is whether you think your plan,

and this is the management board, meets the criteria that we set

out earlier, expertise, continuity, accountability, and whether indeed it does institutionalize the kind of pressure that is needed to

move the IRS?

Secretary RUBIN. Yes, let me respond in two pieces, if I may, Mr.

Portman.

I think that once you get a Secretary and a Deputy Secretary—

particularly a Secretary—to make something one of his or her highest priorities, I think you then have created enormous energy that

can be applied to dealing with whatever the issue may be.

So I think if you put into place the legislation that we proposed,

I do believe you will have institutionalized long-term, ongoing, intense focus. Then the question is, what is the mechanism through

which this focus should operate? The view we had was that something analogous to the Modernization Management Board, which is

our IRS Management Board, would be the appropriate vehicle for

doing that. So I think the answer to your question is, yes.

The other part of my answer would be that I think that a private-sector board, for reasons I discussed in my testimony, is not

likely to work. I actually think the probability of it working is very

slight, because I have lived it. I lived this thing. I know what it

is like.

Between my Deputy and myself, people come to us all the time

with IRS kinds of issues. We are full-time people. We are there and

we can deal with them.

I think a group that has predominant interests elsewhere, it

seems to me, is seemingly unlikely to give the IRS what it needs

in its current state, which is a state in which there are very many

challenges to be met.

Mr. PORTMAN. If we went to bimonthly meetings, would you support the proposal?

Secretary RUBIN. If you were constantly in session and had fulltime people——

Mr. PORTMAN. Let me follow up on that?

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In your testimony in the unlikely to work chapter, you do indeed

talk about the need—and I quote your testimony—‘‘For ongoing,

energetic oversight of full-time government employees, who are

available, as needed.’’

Secretary RUBIN. Right.

Mr. PORTMAN. And you say that is what the IRS needs. I guess

I would have two questions about that.

One, going back to the criteria, do those full-time government

employees provide the expertise needed? Do they provide the accountability, given that the average tenure is less than 2 years, of

the very people who are selected on your board, and is there the

accountability that we are looking for if we do not have either the

expertise—something we do not—the information technology, customer service and so on, or the continuity.

Secretary RUBIN. I think you have gotten—if you are taking

those two criteria—I think in terms of expertise that really depends on what you do. I think that as we have structured it, we

have gotten exactly what we need. We have the CIO—well, let us

just focus on systems for a moment, although you could look at

other areas.

We have the CIO from the IRS, and we have the CIO from

Treasury. So you have two people who are steeped in this sort of

thing. The Advisory Board can consist of who you desire to have

on it, but it would certainly be our expectation that it would be

some number of people who have systems expertise.

It so happens—although this is not necessarily true going forward—we chose as our nominee for a Commissioner a person who

in his private-sector capacity has run, in effect, a firm deeply involved in systems. So, yes, I think you can provide the expertise

that you need. You can also pull in extra people from the outside

for consulting, one thing and another.

As far as accountability, I think one of the strengths of the system is it provides accountability within an existing constitutional

structure of government so that people are accountable. There is no

question where the buck stops. The buck stops with me; and I find

that quite an awesome responsibility.

Mr. PORTMAN. I guess I would ask whether there is accountability running the other way? In other words, is that group going to

be able to hold the IRS’ feet to the fire if it does not have, in my

view, the kind of continuity that you would need.

As we said earlier—I think my testimony said it is probably a

3 to 6 year process of retraining the work force, computerizing the

IRS, bringing the IRS up to speed, if you do not have that continuity. In my view, the expertise you are looking for really is outside

expertise. It is taking advantage of the service revolution that is

occurring in the private sector, and trying through these special

government employees, subject to all of the restrictions that special

government employees are, which includes disclosure—financial

disclosure, conflict of interest, confirmation by the Senate and so

on can bring to bear.

I guess what I would ask is that over the next couple of months

as we work through this, that we can see whether—if you indeed

agree with the criteria—whether indeed there is an oversight body

that meets those criteria that perhaps provides that continuity we

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are talking about, provides that expertise, and in the end, provides

that accountability. Because I think, again, if we do not do that,

we will have failed in our mission to make long-term change. I do,

again, as I said in my testimony, commend you for the amount of

time and effort you have put into this over the last year. If you can

make a commitment that you will be with us for another 5 years—

3 to 6 years, I think we said—I might feel differently about it. But

that is not going to be the case, and this is a structural law that

I think needs to be addressed and not simply something that might

apply to this current administration and your renewed interest and

Mr. Summers’ interest in the oversight of the IRS.

Secretary RUBIN. I appreciate the comment, Mr. Portman. My

answer to you would be this—you know, I have seen the private

sector too.

I think if you could institutionalize the structure that we have,

particularly given that you have—well, I do not necessarily depend

on this—but given that you do have career IRS personnel. I think

the history of the last couple years suggests that this can and will

work.

My problem with the—as you know, because we discussed this

many times—my problem with the outside board is, I do not think

it is a question of continuity, I just do not think it is very likely

to work altogether. So I do not think you are going to get continuity in something that does not work.

No, I think if you institutionalize this the way I said, even

though people will turn over just as they did at the firm I used to

be at, once you have a structure institutionalized and you have a

top management who take that responsibility with the enormous

seriousness that I think it has to be taken, I think you will have

the continuity and you will have the intensity and effectiveness

that you need, I do.

Mr. PORTMAN. Again, I would suggest that the average tenure for

a Treasury Secretary is also somewhere between 2 and 3 years,

even continuity at that higher level might be lacking.

I thank you, Mr. Secretary. Apparently we have to now make a

sprint for the floor.

Secretary RUBIN. You are going back?

Mr. PORTMAN. Thank you, Mr. Chairman. I yield back my time.

Mr. COLLINS [presiding]. We thank the gentleman for his inquiry.

Mr. Secretary, I know you have to leave very shortly, sir. Two

things.

One, we have some questions that Congresswoman Dunn would

like to submit to you in writing for some reply.

[The questions follow:]

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[At the time of printing, no answers had been received.]

Mr. COLLINS. Also, Congressman Neal would like to ask a brief

question.

Secretary RUBIN. Sure.

Mr. NEAL. Thank you, Mr. Chairman.

Mr. Secretary, there has been some confusion about the legal authority that is proposed in the Portman-Cardin bill. Some supporters have suggested that under 2292 that there are no legal authorities. Is that your assessment?

Secretary RUBIN. Are you asking me whether I think that there

is legal authority in this governing board?

Mr. NEAL. Yes.

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Secretary RUBIN. Oh, I think, Mr. Neal, there is enormous governing authority. Let me get to—well, I think I remember it well

enough to deal with the statute.

The statute says that the Board has the power to review and approve—review and approve a budget and then submit it to the

Treasury, that has to pass it on unchanged to the President and

to the Congress. That power over the budget is a very substantial

power.

The Board also has the power to review and approve strategic

plans, a very substantial power. The Board also has the power to—

and sole power—to approve and dismiss the Commissioner. So, as

long as the Board can dismiss the Commissioner, it seems to me

it basically has full power over everything the Commissioner does.

Because if it is dissatisfied with any aspect of what the Commissioner does, it can dismiss the Commissioner. There is also specific

statutory language which in effect takes a wide range of powers

that have previously existed in the Secretary of the Treasury, and

puts them in the Commissioner. So the Commissioner then has

those powers and the Commissioner reports to the Board, which

can dismiss him or her.

So I would say that the Board is—I do not have any question

that the Board is vested with enormous power over the IRS. It is

a governing group.

Mr. NEAL. I appreciate your insight, Mr. Secretary, thank you.

Thank you, Mr. Chairman.

Mr. COLLINS. We thank you, gentlemen.

Mr. Secretary, before you leave, you know one of the most intimidating or fearsome things to me is to go to the mailbox and find

a letter that has a return address on it that says, ‘‘Internal Revenue Service.’’ I mope and drag all the way back to the house and

ask my wife to open it and read the bad news to me, because I just

cannot stand to read it myself.

Therefore, I think the Commission’s proposal for restructure is a

very formal proposal. I understand that you have some difference

of opinion. But even in your comments, you made the statement

that even with restructuring, in 10 years, you as a taxpayer would

still not like the IRS because, ‘‘I will still be fearful of receiving

that letter in the mail from the Internal Revenue Service.’’

So, therefore, it appears to me that the only way we can overcome that fearfulness as a taxpayer, and for other taxpayers, is to

restructure and reform the—not only IRS, but the whole Tax Code

to something that is flatter, simpler and more fair, whether it is

a consumption tax, or it is just a flat income tax. Because of the

statement you made, in 10 years I will still hate the IRS. I will still

fear them.

Is that not true, sir.

Secretary RUBIN. Well, I do not think actually that statement

about 10 years was in my testimony. It may have been in somebody

else’s, but, tax collection agencies have never been popular. I suspect they never will be popular.

You are raising another issue, which is the question of should we

reform our tax structure—have structural tax reform and go to a

flat tax of some sort. I think that is what you said.

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Mr. COLLINS. My point is that it is just fearsome to me to pick

up a letter out of the mailbox that has a return address for the Internal Revenue because I know that any news from the Internal

Revenue is not good news. The only good news from the Internal

Revenue is no news.

Secretary RUBIN. Let me say this, Mr. Collins——

Mr. COLLINS. The only way that I see I can overcome that intimidation is that somewhere in the future there would be a complete

elimination of the IRS, or either a downsizing to the point we

would not have that intimidation, no matter how we restructure

the top end of it.

Secretary RUBIN. Let me break it into two parts, if I may. I do

think, as I said in my testimony, that there is a need for a great

deal of change at the IRS. I think we have accomplished a good bit,

but there is a lot to do. We are committed to change and we need

to make it taxpayer friendly and all the rest.

Having said that, the tax collection process by itself will always

I think be unpopular. I suspect—I really have not thought it out

in terms of a flat tax. But no matter what kind of a tax you have,

there are always going to be people who have problems with those

who collect the taxes and that is going to create issues.

If you are asking me the other question, do I think that we

should have tax reform, in effect thereby eliminating the IRS, then

that is a whole other megaquestion. I do happen to have views on

that subject, but I think it is a different and very complicated question that I suspect will probably get debated in the context of this

debate about—may get debated in the context of this debate about

reforming the IRS.

Mr. COLLINS. Yes, we are just starting that.

Thank you. Mrs. Johnson, you have a quick question?

Mrs. JOHNSON of Connecticut. Thank you. I have already voted

on this—what is before the House—so I am just waiting for the

next vote.

But, Mr. Secretary, I did hear your testimony. I am sorry I have

not heard the questioning of my colleagues, so, I apologize if I am

repetitive.

I do hope that we will, in the end, be able to bring forward a bipartisan bill as well, but I am very concerned about the governance

structure that you have proposed. The Management Board made

up of executive branch people seems to me not to respond at the

level that we need to respond to the expertise issue.

We really have to bring people into helping us modernize government. Civil service people in Treasury and in OMB and other parts

of the administration—many of them have been there a long time.

If you are going to take the top people, then you have all political

appointees.

Now, there are agencies that work together. You have been getting their input. But you know, I have been around for a long time.

I have watched the Defense Department try to reform procurement.

I went through the whole FAA effort in trying to allow the FAA

to modernize its technology governing landings and take-offs at our

airports, and failing to do so, because we really could not within

the bureaucracy, meet the demand for expertise in an ongoing, advisory way.

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It seems to me that we really need to bring a board to the service

of the IRS, with a breadth of experience that is envisioned in this

board; and that substituting people from the OMB and the Vice

President’s office—which incidentally I think is extremely dangerous—plain, flat-out dangerous——

Secretary RUBIN. That is not in our goal, Mrs. Johnson.

Mrs. JOHNSON of Connecticut. Well, it was in your original proposal.

Secretary RUBIN. Yes, but we agreed with your view and we took

it out of the bill.

Mrs. JOHNSON of Connecticut. OK, but even so, OMB also is naturally in the service of the President, so is the Secretary’s office.

We need to have outside expertise with an independent view and

broad experience in how the private sector manages technology

such as new pay structures, personnel issues and management

issues. We have never had that. That has impeded our ability to

modernize service in department after department in the years

that I have been a Member of Congress—though we have tried.

Secretary RUBIN. Well, let me partly agree, if I may Mrs. Johnson, and partly—well, I do not so much want to disagree as to try

to draw a distinction.

I have enormous respect for the private sector. I came out of it.

I spent 26 years in it. I might add, incidentally, a lot of the problems I have seen at IRS with respect to systems, were the same

kinds of problems that the firm I was part of had. It took us probably—well, toward 10 years to get the systems operation right, and

we——

Mrs. JOHNSON of Connecticut. In the private sector?

Secretary RUBIN. Yes.

Mrs. JOHNSON of Connecticut. It is just that there is an urgency

in the private sector that makes them noncomparable. If you do not

modernize in the private sector, you are out of business in the end.

In the public sector, you are still in business for ever and ever, regardless of what you do.

Secretary RUBIN. No, I am not—I am just saying that these problems are not totally public sector problems.

I think there is a very great value to having private-sector expertise. I do not disagree with that. Our notion was that in part you

would have it through the advisory board. In part you could have

it through—and you very well might choose to have it—through

special groups of people that you called in to advise you on particular problems.

For example, on the blueprint that we put out. That is being put

out as part of the public/private partnership. A lot of the work will

be outsourced.

Mrs. JOHNSON of Connecticut. OK, can I just have a dialog with

you because I think——

Secretary RUBIN. Sure.

Mrs. JOHNSON [continuing]. Because I think——

Secretary RUBIN. Could I just add one more word, though?

But I think the distinguishing character—but I think the distinction, though, that I would like to make is that if you are calling

upon outside expertise—which I agree with—and the governing

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power over the IRS is placed in these outsiders is what I disagree

with.

Mrs. JOHNSON of Connecticut. But our failure has not been in not

seeking advice. We have had an advisory board. Our failure has

been in implementation. Our failure has been in continuity. Our

failure has been the inability to oversee change.

The mechanisms you point to, even the plan you have, that is

short term. We do not do such a bad job in the short term. In fact,

your involvement and your interest in the IRS during the time that

you have been the Secretary of the Treasury, has made a difference. It is just that nobody has before and probably nobody will

after and we cannot count on that mechanism.

So, what impresses me about the proposal before us is that it

provides expertise and continuity. Your advisory board is to me a

statutory rendition of what is already there.

The advisory boards, we all know, get listened to or not, depending on whatever the weather is. So, I am not impressed with advisory boards. I want more concrete input than that. I want a closer

coupling of action and advice than your advisory board gives. Your

coupling of action and advice is really with the OMB, Treasury, executive branch team. Those are administrators, who in their own

bureaucracies, need to modernize and have not.

So I do not see how we couple them for action. We have to couple

advice and the agency for action. Coupling OMB, Treasury and the

executive branch—with all due respect—does not give one a lot of

belief that action will result.

Secretary RUBIN. Well, let me respond, if I may, Mrs. Johnson.

On the question of, will future Secretaries and Deputy Secretaries take this with the seriousness that I do believe Larry Summers

and I have? We—as you know, we have addressed that and what

I think—in a mode that I think will work.

Having now been there almost 5 years, one of the things I have

noticed is that, if there is a lot of public exposure for something

that I am doing, it gets a lot of attention. That is the reason we

put in the provision about reporting to Congress. I think we should

report more frequently. I think we should report often enough so

that a Secretary would have to take it as a number one priority—

well, wait a minute—as a prime priority.

I do not think I agree with the other, Mrs. Johnson. I think that

if you have people in the form that we have in our IRS Management Board, and you put the appropriate people inside the government and you support them with advice and consultation outside

the government, I think you can make that work. And I think you

can get what you need to get done.

My fear is the one that I expressed before. I just do not see a

board that meets once a month and gives basically a sporadic kind

of attention from people whose minds are predominantly elsewhere,

being effective. But that is—you know, that is——

Mrs. JOHNSON of Connecticut. Thank you for your thoughts, and

I look forward to talking with you about this in the future.

Secretary RUBIN. Sure.

Mrs. JOHNSON of Connecticut. I did not realize you had a deadline. I had lost track of that when I was out of the room.

Sorry for having taken so much of your time.

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Mr. COLLINS. I understand Mr. Coyne has a brief question and

that you have been instructed to give a brief answer, so we will

move to Mr. Coyne.

Secretary RUBIN. I will match the brevity of your question, Mr.

Coyne. I doubt the President is here.

Mr. COYNE. Thank you. Thank you, Mr. Chair.

Mr. Secretary, we are going to hear testimony later on today

from witnesses—at least from one witness—who will say, It is also

somewhat troubling and surprising that the administration’s tax

proposal—the IRS proposal—does not preclude either the management board or the advisory board from involving themselves in tax

policy, law enforcement, procurement decisions and day-to-day

management of the IRS.

It also appears that members of the management board, some or

all of whom may be political appointees, would have access to tax

return information. While this may not have been intended, it is

a frightful thought.

Could you address yourself to that?

Secretary RUBIN. On the last piece there, Mr. Coyne, under section 6103—I do know counsel is here, I am not sure, he might have

seen this—they would not have access—well, he was here. Oh, he

is still here. OK.

That is simply not correct. They would not have access to taxpayer information. If there is any ambiguity with respect to that

in the legislation, we will change it. Under 6103, they would absolutely not.

What was the first part of the question?

Mr. COYNE. Well, involving themselves in the daily operation of

the IRS.

Secretary RUBIN. Well, they would not be involved with case specific matters, as a matter of practice. They would not get taxpayer

information. They would be involved in such matters as systems,

customer service——

Mr. COYNE. Law enforcement?

Secretary RUBIN. Yes, with law enforcement. Not with cases—not

with individual cases. Zero, with respect to particular cases. But,

the budget is related to law enforcement, or the strategy is related

to law enforcement, and matters of that sort.

They would be involved in exactly the kinds of things you want

them to be involved with, to provide the energized oversight that

will help the IRS reform and become the IRS we want it to be.

Mr. COYNE. Thank you.

Secretary RUBIN. But nothing case specific.

Mr. COYNE. Thank you.

Secretary RUBIN. Thank you, Mr. Coyne.

Thank you, Mr. Collins.

Mr. COLLINS. Thank you, Mr. Secretary. We know we have kept

you a few minutes overtime.

Secretary RUBIN. No, no.

Mr. COLLINS. We appreciate it.

Secretary RUBIN. I am pleased to be with you all. Thank you.

Mr. COLLINS. OK, our next panel—are you all ready? Does someone have their nameplates?

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Mr. Goldberg, we have you listed first on the panel. Let me see,

you are a Commissioner, National Commission on Restructuring

the Internal Revenue Service.

Will you go ahead and give us your testimony?

STATEMENT OF HON. FRED T. GOLDBERG, JR., COMMISSIONER, NATIONAL COMMISSION ON RESTRUCTURING THE

INTERNAL REVENUE SERVICE

Mr. GOLDBERG. Thank you, Mr. Collins. I request my written

statement be included in the record, and I will try to keep this very

brief.

Mr. COLLINS. All of the statements in their entirety will be entered into the record.

Mr. GOLDBERG. Thank you.

Having listened to today’s hearings, I would like to just take this

opportunity to just jump right in and talk about this question of

private-sector involvement in the board structure that the Commission recommended. That clearly—that has been identified as the

issue that concerns most folks, and I would like to talk about it.

The starting point is that the Commission members shared those

concerns. Anytime you talk about putting folks, who are privatesector individuals, into a position of some kind of responsibility in

the government, you need to be very careful about that. I think the

Commission bent over backward to be sensitive to those concerns.

I believe that when you look at the facts, when you look at the

legislation as introduced, the Commission was wholly responsive to

those concerns. In particular, I believe any suggestion that the

Commission recommended turning IRS management over to the

private sector is simply wrong.

I would like to take a few minutes—this is not flowery stuff, but

I think it is important to look at the facts. The President remains

ultimately responsible. The President appoints the board members,

and the President can remove the board members at any time for

any reason.

Second, the proposal leaves in place Code section 7801(a). Section

7801(a) of the Internal Revenue Code provides that the administration and enforcement of the tax laws is to be performed by or under

the supervision of the Secretary of the Treasury.

Third, by statute, the board would have no involvement in or authority over tax policy matters, tax law enforcement, procurement

decisions, day-to-day administration of the tax laws. By statute, the

board would have no access to tax return information.

Fourth, the expressed function of the board is to provide oversight, not management. As introduced, the legislation makes this

clear. It is an oversight board, and it is a board that resides within

the Department of the Treasury.

Fifth, by their very nature, the board’s products—what this

board does, ends up in the public domain. At the end of the day,

everything this board does, what it produces is subject to the scrutiny of the Congress and is subject to the scrutiny of the American

people.

Sixth, as introduced, the board has nine members. That means

that each member’s conduct is subject to the review and assessment of his or her eight colleagues.

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Finally, while the Commission members are absolutely confident

that this administration—in particular this administration and this

Secretary—will be able to recruit representatives of the business

community who are of the highest integrity and competence. That

is not required. We assume that some members of the Board would

come from other walks of life, academia, the nonprofit sector, state

and local government, retirees from both the public and private

sector.

If some administration were so uncomfortable with the involvement of the business community, they could create a board of directors consisting of no one from the business community.

Finally, let me talk about the budget. There is apparently some

confusion on this score. The Board will indeed form its position on

funding for the IRS and will communicate that position, publicly.

That is exceedingly important. This Congress has already vested

similar authority in the Social Security Administration.

But that is not the budget of the IRS. The Congress decides the

funding for the IRS, through the normal appropriations process. So

while the Board performs a critically important function in expressing its independent views on funding, those decisions regarding

funding stay exactly where they are.

So, again, I think it is confusing and misleading this entire discussion to talk about turning the IRS over to the private sector. It

is not the recommendation. It is not going to happen. It should not

happen. It is a red herring argument in its entirety.

Real quickly, on the point of continuity. Changing computer systems, introducing quality concepts into one organization, revising

training, changing culture of an organization—these are very, very

hard things to do. They take more than 2 or 3 years.

The Secretary said it took 10 years to do systems work in the private sector. There is nothing about the administration’s proposal

that offers the slightest hope for the continuity that is required.

Thank you very much, Mr. Chairman.

[The prepared statement follows:]

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Mr. COLLINS. Thank you, Mr. Goldberg.

Mr. Weston, you are next, please.

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STATEMENT OF JOSH S. WESTON, COMMISSIONER, NATIONAL

COMMISSION ON RESTRUCTURING THE INTERNAL

REVENUE SERVICE; AND CHAIRMAN, AUTOMATIC DATA

PROCESSING

Mr. WESTON. Thank you, Mr. Chairman. I am also chairman of

Automatic Data Processing. I have been a senior ADP executive for

over 25 years. President Clinton appointed me to the IRS Commission. I was the only large company chief executive officer on the

Commission.

ADP itself is a $4 billion-plus computer service. We have 60 computer centers, 33,000 employees and the longest growth record in

America, 36 years in a row of double-digit growth.

We pay 22 million Americans on payday. We are electronically

interfaced with 2,000 U.S. taxing authorities, from IRS to local

school districts. Our IRS relationship is paperless. We transmit

$200 billion a year to IRS. That is one-seventh of the Federal Government’s revenues.

We also give IRS 35 million, paperless, W–2 forms and millions

of electronic tax returns. ADP handles over 50 million phone calls

per year, and while 40 to 60 percent of the IRS phone calls reach

their destinations, well over 90 percent of the calls to us reach us

at the proper point.

We support 100,000 computer terminals for Wall Street, where

response time is measured in milliseconds. Our computers process

20 percent of Wall Street trades, where timing and accuracy are

absolutely critical, as with payrolls.

So I think I know a lot about service, efficiency, computerization

and management. In addition, I serve on the boards of four large

service companies. In each case, I think I am a well-informed, focused and influential part-timer.

Although those boards generally pay me around $30,000 annually, they get my dedicated attention. My fellow board members

have more board longevity than do relevant Treasury executives

and the present advisory boards concerned with IRS.

Our private-sector boards neither micromanage nor do they implement policy. They do not manage. Boards do not run companies.

They are not in charge. chief executive officers are in charge. Effective boards do maintain clear focus, clear oversight and continuity.

They demand measurable plans, competent organizations and good

outcomes from the chief executive officer.

The President recently named a very qualified, private-sector executive to be IRS Commissioner. Because of my connections in private-sector activities, I was the private-sector part-timer who identified this next IRS chief executive officer to Larry Summers.

I give you a lot of this background because it illustrates the kind

of public-minded talent that is available for the IRS Board that our

Commission recommends. There are many qualified, private-sector

individuals like me. They are not all chief executive officers, and

my description illustrates why I disagree with the Treasury’s view

that an external IRS Board of part-time executives would not be

appropriate, qualified or dedicated for the IRS operations and service.

As a further indicator of the relevance of private-sector executives to IRS, I can tell you that in just 4 months on the IRS ComVerDate 11-SEP-98 14:18 Nov 29, 1999 Jkt 058922 PO 00000 Frm 00114 Fmt 6602 Sfmt 6602 D:58922 W&M3 PsN: W&M3
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mission, I made indepth visits to five tax centers. I doubt that any

of the salaried Treasury advisors have learned from as many IRS

field personnel and tax processes as I did as an unpaid part-timer.

There are others like me who could bring relevant experience and

competence and consistent guidance to the IRS.

By contrast, as to relevant experience, consistency and accountability, the past 20 years clearly indicate that existing IRS and

Treasury oversight have suffered from a glaring lack of relevant experience, focus and consistency regarding large scale, service and

operation activities.

IRS oversight by Treasury is flawed because the relevant officials, as you have well heard, generally have low longevity and limited experience to guide IRS. The Treasury proposal does not

amend or improve this situation.

I would like next to talk about accountability. Accountability is

very important. It is absolutely the missing ingredient in the

Treasury proposal. Accountability only applies to persons, not to

departments, not to positions. An incumbent feels accountability

only if he or she both launched and finished a plan or a business

cycle.

Successor appointees cannot effectively be held accountable for a

prior incumbent’s deeds or plans. Short longevity in Treasury absolutely negates effective accountability.

Our proposed board and IRS Chief Executive Officer would both

have the longevity to permit effective accountability.

The bulk of IRS employees are not in heavy-duty enforcement.

Most of them are in service, phone call activities and computer operations, because well over 75 percent of revenues come in almost

automatically from withholding taxes and employer payroll taxes.

Therefore, it is particularly important to get help with accountability that can improve service, clerical activities and computer operations.

I thank you for your time and would be happy to answer any

questions.

[The prepared statement follows:]

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Mr. COLLINS. Thank you, Mr. Weston.

Mr. Wetzler.

STATEMENT OF JAMES W. WETZLER, COMMISSIONER, NATIONAL COMMISSION ON RESTRUCTURING THE INTERNAL

REVENUE SERVICE; AND DELOITTE & TOUCHE LLP

Mr. WETZLER. Mr. Collins, thank you. I am James Wetzler. I am

speaking here as a member of the Restructuring Commission who

dissented from the final report. My experience with tax policy and

administration is primarily 111⁄2 years spent here on the staff of

the Joint Tax Committee, and then 61⁄2 years as New York State

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Tax Commissioner in the latter part of the eighties and early nineties.

Let me first emphasize that there was a substantial consensus

within the Restructuring Commission on quite a number of points.

I tried to outline that in the first couple of pages of my statement.

We agreed on quite a number of things, and if you put together an

IRS reform bill that consisted of all the items on which there was

a substantial consensus, you would have a very, very successful reform of tax administration in this country.

I am not going to belabor that here, because I think it is more

useful to go into some of the differences.

You should start your deliberations on this issue with a balanced

assessment of the strengths and weaknesses of the Internal Revenue Service. We have heard a lot about the weaknesses in the last

year. We have heard a lot about the weaknesses so far today in

this hearing.

But the IRS also has very substantial strengths, and they are not

always given proper attention in the public discussion. The IRS, remember, is basically an organization that is accomplishing its mission. Taxpayers do get their refunds every year. The tax forms are

printed and distributed to taxpayers; their accounts are maintained.

The country has a tolerably high level of voluntary compliance

with our tax laws. The IRS runs a very low-cost operation. Measured in terms of its budget as a percent of revenue collected, the

IRS is much cheaper than tax administrations in states here in the

United States, or in other countries.

Confidentiality of taxpayer information is maintained. The IRS

issues a massive amount of guidance every year about our very,

very complex tax law. And the IRS is almost entirely—and has

been for many, many years—almost entirely free from political interference, if not entirely free. These are very substantial assets.

Things could be a lot worse.

Other countries like Italy and Russia envy our relatively successful tax administration. You are dealing in an area where the downside of making our tax administration worse is very, very serious.

Because a serious deterioration of our tax administration below

what it is today threatens the fiscal stability of the country.

So I urge you to approach your task with a balanced assessment

of the Service’s strengths and weaknesses. Things could be a lot

worse.

I dissented from the Commission’s report for two reasons. One is,

I am opposed to the idea of turning management of the Internal

Revenue Service over to a private-sector board; and second, there

were certain areas that I thought should have received more attention in the Commission’s report than they actually did—and I will

allude to those in a minute or two.

Let me start with the governance suggestion. My objection to the

Board is not an ideological objection. The reason I object to it is,

having thought about the idea for the better part of a year, I still

cannot identify sensible solutions to what I think of as serious

problems with the way this would actually work on a day-to-day

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tinue to identify problems at a somewhat faster rate than I am

identifying solutions.

The proposal envisions a matrix management structure for the

Service. The Board would hire and fire the Commissioner, approve

the Service’s budget and strategic plan, and review operational

plans, as well as the pay and hiring of senior officials.

However, the Board would be specifically precluded from involving itself in law enforcement matters, procurement decisions and

tax policy—and I assume by this we mean tax policy as both the

IRS input into your decisions on how to write the tax laws, as well

as the content of guidance issued by the Internal Revenue Service,

rulings, regulations and so forth.

I do not really understand how this would work. Would the Secretary continue to supervise the Commissioner with respect to all

the matters from which the Board is precluded? How would the

Secretary exercise his authority over the Commissioner and the

senior staff over any aspect of their performance, when he or she

has no involvement except as a board member in payroll and personnel decisions?

What would prevent the Board from intervening into matters

from which it is supposed to be precluded? How would the Board,

in its hiring and firing decisions, take proper account of how the

Commissioner is performing, or the Commissioner’s capabilities, in

the precluded areas? Who would supervise the Commissioner with

respect to areas that are not specifically reserved for the Board, but

from which the Board is not specifically precluded? Is it the Secretary or is it the Board?

When Congress gets two different IRS budget requests, one directly from the Board through the Treasury, the second from OMB,

how is Congress going to respond? Are they just going to take each

line item and pick the lower of the two amounts and that will be

the IRS’ budget? It is hard for me to see how this is going to work

successfully on a day-to-day basis in practice.

The conflict of interest issue, I think, is important. To my mind,

this is largely an issue of perception. Personally, I am confident

you could select board members who have the proper qualifications,

who are willing and able to put aside their parochial interests and

make decisions that are in the best interest of tax administration.

I think if you select the board members properly, they will be able

to handle themselves ethically.

But I think in approaching the conflict of interest issue, you have

to consider realities in modern-day Washington. This is a town

where you create a national scandal if you buy somebody lunch. I

really think that as a practical matter, the people who have the

qualifications that you are going to want on a board like this are

going to have perceived conflicts of interest, and this issue will totally dominant the appointments process, the confirmation process,

and the public perception and the press coverage of the Board’s behavior, once it is appointed.

Finally, boards have a very mixed record of directing organizations. Some are very successful and contribute to their organization’s success. Others are inattentive and do little or nothing. Some

boards micromanage and make their organizations worse.

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The key to a board-directed structure is that there is no one person who is responsible. The board’s responsibility is defused among

the board members. No one of them actually is responsible for the

success of the organization, and that causes some boards to perform well, and some boards to perform poorly.

Given the risks of poor performance, and the risk to the country

of an organization that would cause the IRS to deteriorate, as some

organizations do, I am not sure I would want to take the risk inherent in a board structure.

An alternative governance structure can create virtually all the

advantages of the Commission’s recommendations without the disadvantages.

You can get outside input through an advisory board, an advisory

board that makes public reports to Congress. As a practical matter,

that is going to give that board a lot of power. The Secretary of the

Treasury is going to be very reluctant to ignore public reports given

by his advisory board about how things like systems modernization

or other features of our tax administration are proceeding.

However, because the board would only be advisory—would not

have decisionmaking power—Congress and the President could feel

free to ignore those suggestions, and the conflict of interest issue

would be greatly reduced.

I think the way you would get the Secretary to pay attention to

tax administration, as Secretary Rubin suggested, is to haul him

up here a couple of times a year to tell Congress what he is doing

to improve tax administration, and that as a practical matter, will

focus the Secretary and the Deputy Secretary’s attention on making sure they have something constructive to say during these

hearings.

I do not see a need to legislate the creation of an internal IRS

Management Board consisting of government officials within the

executive branch. As a practical matter, many executive branch

agencies exercise some control over various aspects of the IRS: the

Office of Personnel Management, the Office of Management and

Budget, the General Services Administration, various bureaus

within the Treasury Department. It seems reasonable to suggest

that they should meet periodically to make sure they all are operating under the same strategy. I do not see why that has to be legislated. People can have meetings any time they want to without

Congress writing legislation.

My testimony goes into some areas I believe were not given proper emphasis in the Commission’s report, and those include the IRS

budget, budget scorekeeping and the tax compliance gap. I will

leave those for my written statement and will be happy to respond

to any of your questions.

[The prepared statement and attachment follow:]

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Mr. COLLINS. Thank you, gentlemen.

Mr. Goldberg and Mr. Weston, I have an interest in your comments about the particular proposal by the Commission—and

yours, too, Mr. Wetzler. You had very interesting comments also.

You stated very firmly that this does not put the IRS under the

private sector. Mr. Goldberg, go back through those steps, maybe

the first four, once again, as briefly as you can.

Mr. GOLDBERG. The President has full authority to appoint and

remove the board members. By statute, Code section 7801(a) will

continue to vest responsibility for tax administration and enforcement in the Secretary of the Treasury.

Third, by statute, the Board will be precluded from any involvement in tax policy, tax administration or procurement and would

have no access to tax return information.

Fourth, the statute specifically identifies its responsibilities as

oversight and the duties it is asked to perform are those of oversight, not management.

This inability to distinguish between management and oversight

is what plagues the Federal Government, Mr. Collins. The Treasury proposal was more micromanagement. The whole point of the

Board’s structure is not to have these people messing around in the

day-to-day concerns. The point is to have somebody who will say,

‘‘What is it going to look like in 3 years, in 5 years, in 10 years?’’

How can we deliver on that promise 3, 5, 10 years from now?

What do we need to do to deliver on the future; and that does not

exist today; and that is what this Board is all about.

Mr. COLLINS. Mr. Weston, you said you had been to several different regions visiting with employees and also supervisors. Did

you find that the directors at those different regions were inconsistent in how they interpret and enforce? Did you find a lot of the deVerDate 11-SEP-98 14:18 Nov 29, 1999 Jkt 058922 PO 00000 Frm 00128 Fmt 6602 Sfmt 6602 D:58922 W&M3 PsN: W&M3
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cisionmaking on what went on within a region that varies from

region to region mainly made by the director himself or herself?

Mr. WESTON. No, I would not say I found that kind of inconsistency. I found loyal, conscientious people who had received directives or were subject to budgets that did not strike me to be in balance with the best of service and operations, and as a result, I

think unfortunately we are compelled to generate a burden on taxpayers and unfavorable environments that in a private sector you

would say are unacceptable, whether it is telephone calls being answered only 40 percent of the time, or backlogs in certain kinds of

correspondence going back for months; or not withstanding the

presence of a so-called taxpayer advocate.

I have seen cases where the same issue has reverberated 15

times without resolution in a local district because they did not

have the authority to say, ‘‘This is what is right. Do it.’’

So, my answer to you is, there are darn good people, but the

overall management practices, the budget as it was constructed,

senses of urgency did not strike me as being up to the standard

that I know many people in the service industries could help out

on.

Mr. COLLINS. Do you want to comment, Mr. Wetzler?

Mr. WETZLER. Mr. Collins, could I comment on Mr. Goldberg’s

statement about what this proposal means. Because, I think it all

boils down to who has the power to hire and fire the Commissioner.

You are dealing here with a matrix structure where the intention, as I understand it, is that the Commissioner reports to the

Board with respect to certain matters and to the Treasury with respect to other matters.

But, the fact is right now the President appoints the Commissioner and can fire the Commissioner. The President is in frequent

contact with the Secretary of the Treasury, so the Secretary is in

a position to supervise the Commissioner because the Commissioner knows that the Secretary is likely to be very influential with

the President in terms of the President’s decision on whether to

hire or fire. So the Commissioner responds to the Secretary.

Under a board structure where the board has the power to hire

and fire, I cannot see any result other than the Commissioner

being very, very responsive to the board and very unresponsive to

the Secretary. Because the fact is, while the board is appointed by

the President, the only way the President can, under this proposal,

get rid of the Commissioner is to fire the board, wait until the Senate confirms a new board, and then the new board can fire the

Commissioner.

As a practical matter, that is going to lead to a much more attenuated political accountability than exists when the Commissioner is reporting directly to the Secretary with authority delegated by the President.

So I think as a practical matter, this proposal does involve putting a group of part-time, private-sector individuals in control of

the Internal Revenue Service.

Now, I am not saying you cannot find very dedicated people to

perform this function, not that they would not do a good job. I am

just saying, that is what the proposal involves, and I think it is a

concern to many people.

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Mr. GOLDBERG. Mr. Collins, could I clarify a couple of points.

Mr. COLLINS. Very briefly, because I know the other Members

want to ask some questions.

Mr. GOLDBERG. First, both Mr. Wetzler and the Secretary referred to the Commission’s recommendation that the Board have

authority over pay and compensation and hiring of other IRS executives. That piece was deleted from the legislation that was introduced because Mr. Cardin expressed the kinds of concerns that

have been voiced. I think it is important to clarify that this is an

evolving process.

Second, if Mr. Wetzler thinks that the Commissioner would be so

responsive to the Board because the Board hires and fires the Commissioner, one would assume the Board would be very responsive

to the President, because the President hires and fires the Board.

Mr. COLLINS. Mr. Weston.

Mr. WESTON. Mr. Chairman, may I comment on one part of Mr.

Wetzler’s comments.

The way he put it one could think that hiring and firing is the

crux of oversight governance and guidance. It is not. On every

board I am involved in, intelligent, conscientious people, occasionally with diverse points of views, one of whom might be the chief

executive officer, work back and forth on issues—and there is not

a pervasive sense of, ‘‘Well, if I as a chief executive officer can be

fired by that board member, I will kowtow to every suggestion the

board member makes.’’

It does not represent the reality I live in in the four boards I am

on.

Mr. COLLINS. Thank you.

Mrs. Johnson.

Mrs. JOHNSON of Connecticut. Thank you.

Mr. Wetzler, I was interested in your last comment. You said, ‘‘It

all boils down to who has the power to appoint the Commissioner.’’

If this report was changed so that the President did retain the authority to appoint the Commissioner as under current law, would

you support it?

Mr. WETZLER. As I understand the legislation, if the Board no

longer had the power to hire and fire the Commissioner, the Board

would have two remaining powers. One would be the power to approve the IRS budget and send it to Congress. Under the legislation that has been proposed, the Board would have one budget and

OMB would send up another budget, and Congress would then

write its own budget—which is what it is going to do anyway.

Mrs. JOHNSON of Connecticut. My understanding is that the

Board would approve the budget and then the Secretary would

have to approve the budget before it went up to OMB.

Mr. WETZLER. I may be mistaken, but as I understand the legislation, the Board would approve an IRS budget request that would

be transmitted directly to Congress, and OMB would approve its

own recommendation for the IRS budget. So really there would be

two proposed IRS budgets, if I understand the statute.

Mrs. JOHNSON of Connecticut. OK.

Mr. WETZLER. In any event, Congress is going to write the budget one way or the other. So Congress ends up with ultimate authorVerDate 11-SEP-98 14:18 Nov 29, 1999 Jkt 058922 PO 00000 Frm 00130 Fmt 6602 Sfmt 6602 D:58922 W&M3 PsN: W&M3
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ity over the IRS budget at the end of the day under any of these

structures—which is what the Constitution provides.

So the remaining power of the Board would be approving the

strategic plan of the IRS. That would be the one remaining piece

of authority left in a private-sector board.

Mrs. JOHNSON of Connecticut. Does that disturb you?

My question was, if the President appointed the Commissioner,

would you then support the report?

Mr. WETZLER. Oh, with the one remaining power?

Mrs. JOHNSON of Connecticut. With the Board approving the

budget, but also approving the strategic plan.

Mr. WETZLER. I do not know. I would have to think about it.

Mrs. JOHNSON of Connecticut. I wish you would think about it.

Because first of all, it is very important to me that the Board does

make whatever statement it wants to make about the budget.

Frankly, nobody controls what OMB is going to send forward, the

Commissioner or the Secretary will send OMB what he wants,

OMB will do whatever they want and they send that to the Congress. We all know that.

Furthermore, what OMB says to the Congress about the budget

may or may not be taken seriously. It is a terribly haphazard, chaotic practice. It would be far better for the IRS, if under a formal

process that Board is able to say, ‘‘This is what we think the agency needs,’’ to both the executive branch and the Congress. It is one

way of creating, greater budget continuity and consistency and support. So I do not object to that.

But you know, that is not a big power there. To approve the strategic plan, I think is good to have some outside eyes. But also, this

issue of continuity, I think, is extremely important. Appointees in

the executive branch at the top level are short-term folks. Bureaucracies are long-term folks.

The Congress is made up of short-term folks. If you are going to

make change in any big organization, 5 years is rather a limited

amount of time to make any change. You may have heard in preceding hearings our concern about the fact that they set the objective in 1993 to get 80 percent of filers electronic, but no plan was

ever laid out. We never knew what their plan was. Nobody could

ever hold them accountable.

We only really got the technology modernization problem visible

because there was a change in the majority; and so the Oversight

Chairman changed—and this is not to put down my predecessor,

it is just that lots of things come on you. But you had GAO out

there saying it was not working. You had lots of voices out there

saying it was not working.

We really have to take some risk here in doing something more

aggressive about government’s ability to do what it knows needs to

be done. Treasury cannot get the budget from OMB it wants. Why

would it be able to assure we could manage a modernization process in the future, frankly, much better than we did in the past?

So, I think when you look at the history of advisory boards, it

is not impressive. And then you look at the history of interagency

cooperation, it can be terrific in the short term—advisory boards

can also be terrific in the short term—but government’s problem is

constancy, the staying with things.

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This is worth a shot, I think, and that is why I would like to

have you think about it and get back to me. It is worth a shot to

put in place people who come to the table with a different level of

experience than anyone we have ever had come to the table; and

over 5 years can just talk with the Commissioner.

The Commissioner has no one to talk to and I think it is interesting that Peggy Richardson, with whom I have worked very closely

now for 3 years, and for whom I have great respect, has come out

in favor of this plan. What does that tell you? She could only get

the ear when there was press attention out there. That is when she

got the ear.

Secretary Baker, Secretary—who is the other one? I have forgotten, anyway—Brady. So I think—I would like to know. I can see

the concern about appointment.

So, if you would think about that and get back to me, I would

be very appreciative.

Mr. WETZLER. On the continuity question, I have to confess that

that one stumps me. Setting a 5-year term for the Commissioner

does not guarantee the Commissioner is going to stay for 5 years.

The way you are going to get Commissioners to stay for 5 years is

to make the job more attractive. That, I think, is going to be a difficult task.

Mr. COLLINS. Mr. Portman.

Mr. PORTMAN. Thank you, Mr. Chairman, and I thank all three

of my colleagues. It is like a family reunion here of Commissioners.

We all enjoyed working together and for the most part we agreed.

I would love to hear a little more interaction between the three

of you. Fred Goldberg, you were not only a Commissioner, but

Chief Counsel and the Assistant Secretary for Tax Policy. It is a

rather unique perspective you bring to this.

Josh Weston is chairman and chief executive officer of a major

and successful service company and on the board now, I understand, of four service companies. You bring a perspective from the

board side that I think is probably unparalleled in terms of service

businesses.

Perhaps the two of you can answer more directly some of Mr.

Wetzler’s concerns. Because he laid them out in his testimony with

regard to how this would actually work. Let me just try to rephrase, if I might Mr. Wetzler, some of your concerns and have

both Mr. Goldberg and Mr. Weston comment on them.

You say that the Board would be precluded from involvement in

law enforcement, which—we have made that point over and over

again, sometimes to deaf ears. I notice now the Treasury is making

that with regard to their Management Board. So maybe we will get

more receptivity.

Procurement decisions and tax policy. You have trouble imagining how that would possibly work. Mr. Goldberg, you have been

there on both sides, how could that possibly work; and Mr. Weston,

from a board perspective, how could that possibly work?

Mr. GOLDBERG. Mr. Portman, the most difficult issues the Commissioner faces are things having to do with systems modernization, with recruiting and retention policies as they relate to employees. How you change this law enforcement mentality, which is

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important in certain respects, to a customer service orientation and

other facets.

Those are hard things to do. Those do not involve law enforcement, they do not involve day-to-day case selection. They do not

even get close to the universe of what is happening every day in

the IRS. They are a different level of concern. That is where the

IRS is falling down. That is where the system has breached faith

with the people. That is not management.

Well, how does that happen? It means you talk to a board. I do

not think you have to talk to the board once a month. I think once

a quarter is fine, because these are long-term problems; and the

discussions you can have with the types of folks we are talking

about do not even get in the same universe as law enforcement and

tax policy. They are management questions and strategic-direction

questions. That is how it works.

It is nothing more than the ability to have a dialog with people

who have been there and lived with it and probably know a hell

of a lot more than you do. There is no more magic to it than that.

That is how it works.

Mr. PORTMAN. Mr. Weston.

Mr. WESTON. I would like to mention something for the first time

that has not come up in this proceeding that is very common in

private-sector boards which I think addresses some of what we are

talking about.

Every board I am on has created committees of the board that

deal with certain areas of expertise. Each of those committees typically has about four board members, so you do not have to convene

a committee of the whole where you cannot find a convenient time,

and so forth.

Those committees are chosen for competence. Those committees

quite apart from quarterly or monthly board meetings go deep on

their subject, based on their expertise; and because they also have

continuity, you have the same people there as counselors to the

chief executive officer that are not forever flaunting power and

threat of being fired.

I have heard the word ‘‘power’’ far too much here and I have

heard practically nothing about the real world that goes on between the board and chief executive officers, which is counsel, advice, occasionally difference of opinion, and on rare occasions, the

exertion of what one might call ‘‘raw power’’ let alone the threat

of termination.

I can only tell you that from my experiences, chief executive officers value the help from diverse, other experienced people, who

also have the continuity to be around at the beginning and the end

of a project.

This whole business of accountability that I have heard many,

many times is a play on words from many of the well-intentioned

presenters. Accountability does not mean a darn thing, unless it is

a person who is there at the beginning and the end, otherwise, you

are not accountable. You get that in most private boards because

the folks there are there far longer than appears to be the case in

the public sector?

Mr. PORTMAN. Are you convinced?

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Mr. WETZLER. I think that many boards function very well and

are very helpful to their organizations. There are other boards that

do not function very well. We are dealing with a public sector organization, not a private-sector organization, where there is in the

private sector one bottom line of profitability that everybody understands and everybody agrees with.

In the public sector—I will just cite an example. Let us take the

New York City school system, which is run by a board where the

appointees come from six different places. It used to be run by a

board that was controlled by the mayor. That was changed in the

late sixties, and the school system has been heading downhill pretty much ever since, and nobody feels responsibility for the success

of the school system. Everybody can always point to somebody else

who has the ultimate authority.

So some boards do not function well.

Mr. PORTMAN [presiding]. If I could just make one point there.

I think you heard the testimony earlier regarding whether there

should be spaces reserved on the Board for certain interests. I

think that is the situation in New York City, as I understand it.

I think you and other members of the Commission thinking

through this—particularly on the governance task force—made a

conscious decision not to have that kind of Balkanization of the

Board. But rather, to set out these skills sets you need represented

on the Board, and then have the Board work together to avoid

those same kinds of problems.

I would just make one final comment; and that is that it seems

to me that we are actually very close among this panel and this

expertise is unbelievable and exactly the kind of expertise that one

would hope to find on an oversight board—not that any of the three

of you would be interested in serving or even asked, after this yearlong process.

But, honestly, this is exactly what I think the Congress needs

and the American people need. As I said to Secretary Rubin, it is

really the institutionalization of the kind of expertise that the three

of you bring to this and I hope you will stick with it and we can

work out a proposal that would actually move the ball forward and

achieve the goal we all share.

Mr. Coyne.

Mr. COYNE. Thank you, Mr. Chairman. I too want to welcome the

three Commissioners and thank you all for the benefit of your testimony and your service on the Commission.

Mr. Goldberg, earlier you pointed out your hope that the Oversight Board would be created because you say, ultimately, the

President is going to be responsible for the makeup of that Board,

anyhow.

Many of us who voted against the Commission’s report and are

supporting other legislation are supporting other legislation exactly

for that reason. We see their effort to create another Board for the

President to deal with as superfluous. The President ultimately

now, along with the Treasury Secretary, is responsible for the operation of the IRS. To create another Board is just another layer between the American people and their government.

I just wish you could respond to that.

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Mr. GOLDBERG. Mr. Coyne, I understand that concern. I will

point out that the administration proposal creates two, not one. I

think that is important. One is better than two; and I think small

is better than bigger.

But, Josh put it now better than I have ever heard it; and it

was—I think I did some good things as Commissioner. I know I did

a lot of bad things as Commissioner; and the absence—the complete absence of what Josh was describing was to me, as I looked

back on my experience, the biggest hole in what I did.

I thought Congress did good things in oversight in certain areas;

Treasury did good things, but there was not what Josh was describing; and I believe that that Board, however configured, gives

the Commissioner more ability to do his or her job; and I think

maybe in cooler time, a little bit more distance, I believe probably

that Board structure is the single best thing you can do to enable

the Secretary to do his or her job better than it is being done now.

I think that those trade sessions that are going on right now are

extremely important. That is where he belongs. I think that it

gives the Secretary some institutional continuity that he can draw

on or that she can draw on when they are appointed to the job.

When they get in their job, who do they talk to about the IRS?

Right now there is no one. There is no one. What the Board says

is that this Secretary can go to the Board and learn about the history, learn where the thing is headed, learn what ugly stuff is

under the locks out there.

I think if we get a little bit less emotional about this, I think it

does make it easier for everyone involved to do their job and leaves

it ultimately where it ought to be, with the President and the Secretary. Absolutely, that is where it ought to end.

Mr. COYNE. I wanted to ask this question of the three of you on

the panel.

Earlier we heard testimony from Congressman Cardin that he

thought that the legislation as proposed by the Commission could

be enhanced, that the legislation would be even better if the Board

did not have the responsibility of appointing the IRS Commissioner.

I was wondering what your views are on that.

Mr. WESTON. I will give you a comment as an individual. We are

no longer a Commission.

There has got to be a lot of give and take within the Congress,

which is an area I have very little experience in. If someone were

to say that as part of the give and take, we can retain all the

positives—or most of the positives of the Commission’s proposal,

but it would be necessary to change to where the Board would float

up two or three recommended names to the President and the

President could pick one or the Board could float up one and the

President decided yes or no on that name for the IRS Commissioner.

If that was the necessary compromise to get the other things

here, I as a citizen would say it is a worthwhile compromise rather

than saluting either the status quo or these two large Boards that

Treasury is recommending—one with 20 people, one with 14 people

and none of them would have the longevity, competence and accountability.

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Mr. WETZLER. Mr. Coyne, I think the sides are relatively close

together here. Everybody agrees that the governance of the IRS

needs advice from outside experts who have strengths outside the

traditional tax field.

The question is, do you want to give those people decisionmaking

authority, or do you want to give them the ability to give advice;

and to give both private advice and public advice, so there is more

of a chance the advice is taken seriously.

I do not agree with the statements that have been made that advisory boards are always irrelevant. I think you have some very,

very important advisory boards in the government right now that

do have a major impact on the public discussion and on policy decisions because of the individuals who are on those boards and because of the tradition that their recommendations have been respected over the years.

So I do not have the same negative view of advisory boards if the

right people are appointed to the board and if the board is giving

its advice publicly as well as privately.

Mr. COYNE. Mr. Goldberg.

Mr. GOLDBERG. I have a ‘‘back to school’’ night tonight, Mr.

Coyne. Can I be excused, please? [Laughter.]

My personal view is that there is an awful lot to be said for having the Commissioner appointed by the President. I think you need

to look at it in terms of what retained role the Board had; and I

think you need to look at it in terms of what other changes were

made in the legislation.

But of all the concerns that have been voiced, I believe that is

an honorable and appropriate concern to be expressed. I think a lot

of this other stuff I do not really get, but I understand that issue;

and if that were the only issue, and that led to a bipartisan piece

of legislation, I would recommend that you do it in a minute.

Mr. COYNE. Thank you.

Mr. PORTMAN. Thank you, Mr. Coyne.

I would just mention one thing before going on to Mr. Houghton.

You mentioned, Mr. Goldberg, that the Secretary has many other

things to address; and that it is good that he is in meetings on

international trade and so on.

As he arrived this afternoon, Chairman Archer jokingly said,

‘‘Sorry to have detained you. I hope you got some work done.’’ He

said, it was ‘‘Fine, Mr. Chairman. I worked on ‘fast track.’ ’’ I think

you and I would agree. That is appropriate. The Secretary should

be working on fast track, if that is what he chose to do with the

time he had waiting for me and other verbose Members of Congress

to finish our comments.

He, as the Secretary of the Treasury is responsible for the domestic and international economy, and that is a big job.

Mr. Houghton.

Mr. HOUGHTON. Thank you. I will try not to take too long.

Thanks, Mr. Chairman. Gentlemen, good to see you and listen to

your testimony.

You know the thing that confuses me is that I think this board

issue is way out of context here. I cannot understand the position

of the Secretary. First of all he says, ‘‘You know a board has got

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to meet more than once a month.’’ Well, boards meet once a month.

That is what they do.

They do not meet more because you cannot get good people. If

they did meet more, they would be doing the job that management

should be doing. Also, the concept of having diversity—you know,

a long time ago, board used to be all internal. Then, not only did

stockholders complain, but also management realized it was far

better having outside opinions.

But you know this is really not a board as such. The two functions of a board is to choose a chief executive and to approve the

money. This board does neither. It is really an advisory board.

But you know, it seems to me that all the issues have been focused on that and the question really is, how do we make the IRS

more efficient, in effect. You do that by two things, in my mind.

One, you give them the tools to do the job. I am not sure we have

addressed that. I mean, I was down here on the Grace Commission

in 1982, and we did not give them the tools. We did not give Social

Security the tools. We did not give the Department of Commerce

the tools. We did not give other people the tools. We thought we

did, but we did not.

The other thing really is to make sure that Congress stays out

of the mix. I mean, Congress in this case is the board and the

stockholders combined. I do not know whether combining under the

Joint Tax is going to make that much difference. I hope it does, but

if I was still in business and I was asked to come to work for the

IRS, and Congress has done to the IRS what I have seen it do—

because I used to be on the Oversight Committee of the Ways and

Means Committee—I would not join the IRS. I would not do it.

So the question really—forgetting about the board—is, are we

doing those things in the boiler room of the IRS to make it more

effective. I would like to ask all of you gentlemen, but I would like

to start with Mr. Goldberg, if I could.

If you were still the Commissioner, would this make you a more

effective Commissioner adopting this report?

Mr. GOLDBERG. I think the combination of recommendations, Mr.

Houghton, would make any individual a far better Commissioner.

You are absolutely right. It is a package. You need to do all of

these pieces. At the end of the day it is giving the agency the tools

to do the job. I believe that the package of recommendations here

are the prerequisite to getting it done.

Mr. HOUGHTON. Mr. Weston.

Mr. WESTON. I would say that the proposal creates a structure

and a process which might and hopefully would produce the tools;

but the tools are not all designed by any stretch in our proposal.

Let me take just one little example.

One of the things I learned from Peggy Richardson when she was

IRS Commissioner and I was asking her, ‘‘How come you sometimes only answer 40 percent of the phone calls? Is not that horrendous?’’ She told me, ‘‘Well, all we got was a budget that allowed

us to answer 50 percent, and therefore, that is what we had.’’

If we had a structure and a process that this board—whatever

you want to call it, advisory, governance or something else—gave

the IRS Commissioner the insight and the support that as a tax

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service, damn it, you have got to have a budget and an expectation

to answer 80 percent, 90 percent of the phone calls.

That same message was transmitted by this independent, knowledgeable board to the Secretary of Treasury and even Congress, my

guess is that that structure and that process would have avoided

a situation where allegedly there was a budget that only permitted

answering 50 percent of the phone calls.

So I see us at the beginning creating a structure and a process.

Hopefully the structure and the process and the people would then

recognize and create the tools. Certainly folks who come from large

service organizations, if they were on this board, they would understand that on day one.

Mr. HOUGHTON. The problem I see, of course, is that you can

choose a good Commissioner, you can choose good people, you can

have a different attitude and you can be able to hire and fire—get

rid of the dead wood—but if you cannot invest the money in the

equipment, it does not make any difference. I do not see that process attended to here.

Mr. WESTON. Is that a question addressed to me?

Mr. HOUGHTON. Yes.

Mr. WESTON. My observation and learning curve on this Commission included the following: First, for whatever set of reasons, there

does not appear to be a correlation between proposed investments

and the return that we get—equipment or otherwise—or the opportunity cost of failing to invest, which produces a different kind of

hidden expense. There are no footprints of any kind of process or

outcome that addresses that.

Second, in our voluntary, self-assessment tax system, we initially

get about 85 percent voluntary, first round compliance—which compared to Italy and France is terrific.

On the other hand, a mere shifting of 1 percent in that compli- ance equates to $15 billion a year of Federal revenue. I have seen

no process structure or support in the current environment to look

at that and say what investments are necessary and/or would support creating a higher compliance when a mere 1 percent improvement would create $15 billion.

Everything about it is missing. Not that a new board would be

magic, but the kinds of colleagues I see on my boards would be

raising those questions on day one; and if it was necessary to give

support or political cover to the IRS Commissioner who said, ‘‘I

really need more money in computers or answering the phone,’’ at

least such an independent board would help OMB, Secretary of

Treasury, Congress, whomever, feel more comfortable in authorizing an investment that made good return sense.

Mr. HOUGHTON. Mr. Chairman, would it be all right if I asked

Mr. Wetzler what his comments might be. I know my time is up.

Mr. Wetzler.

Mr. WETZLER. The Commission outlined the vision of what tax

administration ought to look like. You could agree or disagree with

that vision. It did not then go ahead and ask the question, ‘‘How

much does that vision cost?’’

We thought about answering the question, but the political dynamic within the Commission was such that the judgment was

made that since Congress was unlikely to enact anything that draVerDate 11-SEP-98 14:18 Nov 29, 1999 Jkt 058922 PO 00000 Frm 00138 Fmt 6602 Sfmt 6602 D:58922 W&M3 PsN: W&M3
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matically increased the IRS’ budget, under the present circumstances, it would not really be a good investment of our time

to try to ask how much the vision would cost; because if a recommendation was for a big increase in the budget, no one would

pay any attention to it, anyway.

So, I think you made a very, very good point that outlining a vision is not the end of the story. You have got to ask, how much

is it going to cost to achieve that vision; and see how well that

aligns with the present level of resources that they have.

Mr. GOLDBERG. Mr. Houghton, I think it is important to turn it

on its head, turn your question a little bit on its head.

Absolutely the kind of changes that the Commission is recommending—many of which the administration agrees with—I

would not trust the IRS with the money. I think you have to do

both.

I think you need to do this step before you spend more money.

I think that once you do this step, I think it is imperative to give

the agency the tools you are talking about.

Mr. HOUGHTON. Thank you.

Mr. PORTMAN. Thank you, Mr. Houghton and I thank the witnesses again for their time and effort, not just this afternoon, but

through the last year in preparation for today; and we look forward

to continued dialog.

We now have one final panel. Gentlemen, I thank you for your

patience; and apologize for the congressional schedule on behalf of

all of us.

We have Gene Steuerle, senior fellow, Urban Institute; Don

Kettl, director, Center for Public Management, Brookings Institution and director of the Robert La Follette Institute of Public Affairs, University of Wisconsin-Madison; and we have Robert

Stobaugh, Charles Edward Wilson Professor of Business Administration, Graduate School of Business Administration, Harvard University.

Gentlemen, I would ask that you try to keep your opening remarks to 5 minutes, certainly submitting your full statement for

the record; and that we begin with Mr. Steuerle.

We probably are going to be called for a vote at some point during your presentation. Again, apologizing in advance for that, but

we will see what we can get through.

Mr. Steuerle.

STATEMENT OF C. EUGENE STEUERLE, SENIOR FELLOW,

URBAN INSTITUTE

Mr. STEUERLE. Thank you, Mr. Chairman, and Members of the

Committee, and thank you for staying around at this late hour to

listen to us.

Using the recommendations of the National Commission on Restructuring the IRS as a starting point, I believe this Committee

has a real opportunity to improve tax administration. Although I

will also talk to the issue of a board of directors, I have to express

my regret that so much focus has been paid to it, because I think

many of the other recommendations of the Commission, as well as

some other ideas that are out there, are really worthy of considerable attention as ways to improve tax administration.

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A very brief summary of my recommendations is as follows: The

IRS administration can certainly be improved, as suggested in different draft bills if congressional oversight is streamlined. The simple fact is that IRS Commissioners are called to testify so quickly

and so often, in addition to the time that they spend reporting to

the Treasury and the Office of Management and Budget, among

others, that they are put in a defensive position almost from day

one, even before they have learned the job.

My second recommendation is that IRS be given greater authority to hire the necessary expertise and to move away from a salary

structure that emphasizes management to the exclusion of other

skills. Again, I think a recommendation like this is contained in the

Restructuring Commission’s report.

I think the personnel problems are especially severe in the areas

such as computer science and statistics—that is the quantitative

areas. Good computer scientists and statisticians are worth their

weight in gold, but both personnel policies and IRS culture tend to

require that higher salaries correlate mainly with the number of

persons managed, not with knowledge and ability.

Third, the Restructuring Commission acknowledged that many of

IRS administrative problems were due to the inordinate requirements placed on it by tax legislation.

The demand for changes in tax laws is not going to dissipate, but

there are ways to give simplification a greater hearing and on a

timely basis. The Commission suggested that the Joint Committee

on Taxation report annually with recommendations to simplify tax

law administration.

I suggest that a role also be give to IRS and Treasury as well.

They have much of the expertise and knowledge that is necessary,

and the Joint Committee staff is quite small. Perhaps a biannual

reporting requirement should be placed on the executive branch,

with a followup report by the Joint Committee, which could also assess strengths and weaknesses of those reports.

Fourth, I think we need to figure out ways to give simplification

more attention during the legislative process. One recommendation

I have made for years is that mockup tax forms be made available

during certain stages of the legislative process.

Now I recognize that there has to be a rule or reason here, as

time constraints are severe, but more can be done than currently.

I give in my testimony some anecdotal pieces of evidence with respect to the Catastrophic Health Bill of 1987, where the introduction of mockup tax forms did indeed change that legislation, albeit,

inadequately.

Finally, let me turn to the board issue that is so preoccupying

our attention. In its report, ‘‘A Vision on the New IRS,’’ the National Commission on Restructuring the IRS suggested that the executive branch governance of the IRS should be place with a new

board of governors.

The Treasury Department suggests we set up a sort of super

management board, with representatives from various other agencies, to try to monitor the IRS. After following the debate for some

time now, I am convinced that both sides are partly right and both

sides are partly wrong.

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The new management board pushed by Treasury would probably

create more problems than it would solve. But a new board of directors fits neither within the structure set up by the Constitution

for the executive branch, nor can it provide clear lines of authority

associated with private-sector boards.

Perhaps there is a better organizational structure—a compromise

to these structures—that we could offer. The primary goal, it seems

to me—the one emphasized most by the Restructuring Commission—is to raise the level of accountability, as well as oversight of

the IRS.

This goal might be achieved better through some intermediate

structure that still included private persons, with a greater stature

and power than advisors or Commission members, but with less

control than directors. Such individuals might serve more or less

as trustees for the public, and share oversight and responsibility

with Treasury and other parts of the executive branch to report on

the success and failures, the capability and limitations of the IRS.

They would have no power, however, to make actual decisions for

the executive branch. The purpose of the board would not be to

turn accountability over to yet another group, but instead to hold

more accountable those in the executive branch responsible for the

IRS, for its successes and failures.

I give some evidence in my testimony as to the success of the

Board of Trustees for the Social Security Trust Funds and their

ability, both directly and indirectly to influence that process.

In conclusion, constructed well, I believe that a package of reforms can be assembled by this Committee to improve tax administration. Among the items I support most are: One, a streamlining

of congressional oversight; two, greater authority within the IRS to

hire necessary expertise, particularly in the quantitative areas;

three, regular reports by IRS, Treasury and the Joint Committee

on Taxation on taxpayer complexity and IRS enforcement difficulties.

I should add, by the way, that you have never really gotten those

reports—at least in my long history in this town.

Fourth, the release of mockup tax forms during the legislative

process; and finally, the selection of a small—not a large and unwieldy—number of private-sector individuals who, in the manner of

the public trustees of Social Security, participate in a type of board

whose sole responsibility is to monitor and report on IRS progress.

Thank you.

[The prepared statement follows:]

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Mr. PORTMAN. Thank you, Mr. Steuerle.

Mr. Kettl.

STATEMENT OF DONALD F. KETTL, DIRECTOR, CENTER FOR

PUBLIC MANAGEMENT, BROOKINGS INSTITUTION; AND ROBERT M. LA FOLLETTE INSTITUTE OF PUBLIC AFFAIRS, UNIVERSITY OF WISCONSIN-MADISON

Mr. KETTL. Mr. Chairman, thank you very much. It is a great

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mendous service that this Commission has done to the nation in

outlining the critical problems that the IRS simply must begin now

to attack.

It is in many ways precisely right on the problems that need to

be solved. So you need to try to improve the level of expertise that

the IRS has, and probably even more importantly, you need to try

to restore public trust in the Internal Revenue Service and in the

process of collecting the nation’s tax revenue.

My concern with the report focuses principally on the proposal

for the governance board. There is an assumption that the problem

is in some way structural. My view, on the other hand, is that it

is not primarily a problem that needs to be solved with a change

in structure, it is a problem in management. Put differently, what

can we do at the top to ensure that the quality of services that we

want at the bottom happens? That in my mind is not primarily a

structural problem. It is one that requires fundamental changes in

management that I hope to outline shortly.

There are, though, a couple of concerns that I want to outline

with this governance board that has been proposed, having to do

with the conflict of interest issue that we have heard constantly

today. I simply want to underline many of the concerns that have

been raised.

The concern in a nutshell is this: If there is a discussion about

the level of budget that ought to be supplied for, say, the audit

function of the Internal Revenue Service, there is no way to consider the level of auditing in the budget without somehow raising

questions about who will be audited and at what level.

The degree to which there may, for example, be private-sector

people representing simultaneously some companies and, say, the

IRS, in the process of sorting through these decisions, there will inevitably be questions about the way in which those priorities are

set. This is, I think, a serious concern that is just simply

unresolvable.

The second concern I have is what I view as a continuing false

distinction we have been making between management, policy, and

oversight. I have been in the public management business for 20

years—there are those who have been doing it a whole lot longer

than I have for the last century—the one point that comes through

unarguably is the fact that the distinctions among oversight and

management policies are simply false.

For example, consider the IRS’ oversight policy—it is budget policy. Its overall policy toward audits will be determined by how

much money is supplied and how that money is spent. We can talk

about broad policy goals, but it is only in the implementation of

those goals—by the money actually spent—that determines what

the policy actually turns out to be.

So, seeking to try to have an arbitrary line separating policy and

administration in many ways flies in the face of the realities of the

implementation of tax policy.

The second thing—and this is a piece of evidence that was supplied to me by experts in tax policy in New Zealand—is how important the integration of the management and policy functions are,

especially in providing feedback into the system. For all of the reasons my colleague just suggested, we need to have early warnings

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about changes. We need to have quick feedback on proposals to the

tax forms.

What we need in the process of doing that is some way to make

sure that policy and administration are more integrated, and not

more separated.

I guess my conclusion is that in many ways we know precisely

what it is that we need to do to fix the IRS. The problem is in figuring out how to get it done. My concern is that I see nothing in

the fundamental structural change that will ensure that actually

happens.

We have been talking about accountability, which is really the

nub of the problem. The nub of the problem really has to do with

trying to find a way to make sure that what it is we want to have

happen at the top occurs at the bottom of the tax system.

My concern, ultimately, with the proposed board—for that matter, the administration’s boards—is that there is no guarantee that

the current system will get the changes that we need. There is no

guarantee that having new boards will produce the changes that

we want either.

What it is that we know from the nation that has experimented

more with this than any other nation in the world—New Zealand—

is that they have focused more on governmentalizing the policy

side, and producing incentives for improved management at the

managerial side, as well. Building that linkage is critical.

How to go about doing this? I think that it is clear there has to

be top-level leadership and support from both the Congress and the

Treasury, from the Secretary on down—from this Committee on

down—to ensure that what we want to have happen in tax policy

happens.

The second is that it is terribly important to get outside advice

for all the reasons that we have heard from other witnesses earlier

today. But more importantly, I think we need to find some way—

as we have heard—to ensure accountability and continuity in the

process.

One way of doing it is to restructure. There is another way

through people. But I think the more important lesson—and this

comes through quite clearly in the experiences in Australia and

New Zealand—is to focus on performance-based measures.

That is, set out measures very clearly, goals that are unarguably

clear for everyone about what it is that ought to happen and how.

How many call ought to be answered? How long should it take?

What kind of feedback should there be?

The fact that I have here before me some of the performance

measures that the Australian and New Zealand tax services have

established for doing that.

So my conclusion, I think, is that there are ways of doing this—

but these ways are fundamentally procedural, though not structural. They have to do with leadership and management. They are

not primarily organizational. Restructuring will not solve them.

In my view, the only way to guarantee that we pay attention to

what we must pay attention to is to ensure we have solutions tailored to the problems, and the problems in the end require focus

on performance and performance based management.

[The prepared statement and attachments follow:]

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Mr. PORTMAN. Thank you, Mr. Kettl.

Mr. Stobaugh.

STATEMENT OF ROBERT B. STOBAUGH, CHARLES EDWARD

WILSON PROFESSOR OF BUSINESS ADMINISTRATION, EMERITUS, GRADUATE SCHOOL OF BUSINESS ADMINISTRATION,

HARVARD UNIVERSITY

Mr. STOBAUGH. Thank you, Mr. Chairman. Thank you for the invitation to appear here today. I understand my written statement

will be put into the record.

Mr. PORTMAN. Without objection.

Mr. STOBAUGH. Because my area of expertise, which happens to

be corporate governance, I will focus on the IRS Oversight Board

proposed by the Commission.

First, I strongly support the Commission’s plan for governance of

the IRS. Second, I think that the membership makeup on the Oversight Board is appropriate. That is, seven members from private

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life, plus the two from the government. That will provide a wellrounded board.

Next, the proposed responsibilities, I believe, are appropriate.

The Board focuses on strategic issues—and there are differences

between oversight and management. They focus on the strategic

issues appropriate for oversight. This Board would have less power

than corporate boards, but I still thing that is OK under the circumstances.

The Secretary of Treasury would still have major control over the

IRS. The Secretary would still be responsible for tax policy; and the

Board would not be involved in tax policy. The Secretary would be

the most powerful board member. It is like having an 800-pound

gorilla there on the Board.

The Secretary would recommend the selection and dismissal of

other board members to the President—the President can do that;

and then like an earlier witness, the way I read the bill, the President—the bill says the President can dismiss a director. I do not

think it says he has to dismiss all the directors at one time.

Also, the Treasury Secretary can veto the budget, in effect, by

not incorporating it in the budget pushed forward by OMB. I found

the proposal acceptable, but I would not move to weaken the

Board’s proposed powers from these shown in the bill.

I reviewed the competing proposal of the Treasury Department

and I think it has three major defects. I think it muddles the accountability by having additional boards. Secretary Rubin criticizes

the part-time board proposed by the Commission, but in effect, the

key Board in the Treasury proposal would be a part-time board—

in terms being able to be devoted to the IRS, because they would

have other duties in their government jobs.

My guess is that if a Mexican currency crisis comes up, there is

going to be a lot of attention paid to that at the expense of the IRS

by people on that Board.

The second major problem is the historical lack of interest on the

part of the Treasury Department officials in the IRS. I do not consider that a criticism of the Treasury Department officials, but they

naturally spend time on what they are experts at; and they are experts at tax policy, international affairs, capital markets. They are

world class experts on those subjects and they are not experts on

governance.

Now, even if we make the assumption that their interest has all

of a sudden changed—and I think part of it changed, once this

Commission was announced—but if their interest would change in

the future and they would want to devote more time to the IRS,

I think there is still a major defect left—and it probably is the most

important one.

That is that the members of this IRS Management Board as proposed by the Treasury will not have the qualifications to do an outstanding job of overseeing the IRS. They are primarily trained in

their work experience as economists and lawyers.

They are very smart people, with outstanding careers, but they

have no experience in providing oversight of a large organization,

with a goal of becoming world class in service and efficiency. Now,

there is a big contrast between that experience and what is available in the private sector.

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In the private sector, we have talked about chief executive officers being available; but there are a lot of people who are not chief

executive officers who would be available. You have former chief

executive officers with experience. You have people who have had

a lot of board experience and have worked for companies, but have

never been a chief executive officer. We honored one at the National Association of Corporate Directors because she was an outstanding director.

You have people in the university world. A colleague of mine has

written books and serves as director and teaches directors how to

be better directors. So I am confident there are many, many people

in the private sector who are qualified to do this oversight function.

I think that my—according to the red light, my time is up. If I

may make one other quick statement. That is, I think a lot of dissenters confuse tax policy and oversight; and I think there is a difference. They confuse the oversight function with the day-to-day

management, which is for full-time managers; and I think that is

a clear distinction.

Thanks again for the privilege of being here; and I will be happy

to answer any questions.

[The prepared statement follows:]

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Mr. PORTMAN. Mr. Stobaugh, thank you for the time and effort

you put into this—all three of the panelists.

We have a decision to make here. We have a vote in about 4 minutes I am told. I think we need to go. We can come back in a half

hour to continue the questioning, and I am perfectly willing to do

that, and I think other Members would be as well.

Would you prefer to adjourn this hearing now and not wait

around a half hour? You could work on fast track. [Laughter.]

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Or, would you like to wait for a half hour and we will be back

for questions?

UNIDENTIFIED SPEAKER. It is up to you, Mr. Chairman.

Mr. PORTMAN. Can you stay?

[No verbal response.]

Mr. PORTMAN. All right. We will see you in a half hour.

Thank you very much. Mr. Coyne, do you have a quick question

before we leave? We have about 31⁄2 minutes.

[No verbal response.]

Mr. PORTMAN. OK, we have to go. We will recess now, but we

will be back in session about 30 minutes.

[Recess.]

Mr. PORTMAN. Gentlemen, thank you for your patience again, I

really appreciate the testimony.

I would like to, if he is ready, to move straight to Mr. Coyne and

then I will have some further questions.

Mr. Coyne.

Mr. COYNE. I would like to address a question to Mr. Kettl. First

of all, I want to thank you for being a witness. We appreciate all

three of your testimonies here today. It is very helpful to us.

Mr. Kettl, some people have argued that the President’s authority to remove board members gives the President indirect but sufficient authority over the IRS Commissioner. It may be indirect, but

it is good enough to have the authority over the IRS Commissioner.

Would you agree or disagree with that?

Mr. KETTL. I guess my reaction would be that it would give the

President indirect, but insufficient authority over that. In fact, he

would have some leverage, but there is, I think, insufficient control

to ensure any kind of real policy responsiveness.

The board members would have fixed terms and they would

know that absent any kind of truly egregious problem, they would

likely serve. It would create serious problems for the President to

try to muddle or to be appearing to muddle with issues of that sort.

So my concern is that it would be unlikely to give the President

any great operational control, or any real influence over the behavior of the board in that kind of way. So, across some line on a far

extreme on some extraordinary piece of policy, I cannot imagine the

President invoking it, but I cannot imagine it proving a very effective source of Presidential influence, especially in the day-to-day or

month-to-month or year-to-year basis.

Mr. COYNE. Does anyone else care to——

Mr. STOBAUGH. Yes, I would like to say that I doubt that the

President is going to do much on the day to day, even if there is

not a board there.

I mean, the President is not going to oversee the IRS Commissioner. He has a lot of other things to do. At least he will have a

board there overseeing the Commissioner. I mean, the thought of

the President doing day to day, month to month or even year to

year, reviewing the plans and strategy of the IRS and so on like

an oversight board, I do not think——

Mr. COYNE. Well, what about his removal powers?

Mr. STOBAUGH. Yes, sure. He can remove the Commissioner, but

I guess under what conditions is he likely to remove the Commissioner?

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Mr. COYNE. Thank you.

Mr. PORTMAN. Thank you, Mr. Coyne. I have a number of questions, starting with Mr. Steuerle.

First of all, we really appreciate the time and effort you put into

looking at the report and the legislation. As you walked through

your testimony, it was clear that you have invested a lot of your

time and your experience at Treasury is very helpful as you analyzed it.

As you know, Congressman Coyne, myself and others tried hard

to put together a simplification incentive; and what we came up

with was this analysis for simplification. You talk about the potential addition of a biannual report from Treasury to Congress. That

was in the report, I think, as a suggestion, not a recommendation

as I recall.

The National Taxpayers Union, David Keating, was on the Commission and was quite supportive of that idea as well. I like that

idea; and I do not know how my other supporters of this legislation

would feel about it, but having an additional report from the Treasury Department and administration to Congress on perhaps a biannual basis, I think, would force them to deal with the simplification

issue—which is after all a two-way street. If we just do it up here

and do not have Treasury’s input and expertise, it is unlikely to

happen.

So my first question to you would be, given what you saw in the

Commission report and what is in the legislation, do you think that

would be a natural or logical addition to what we are talking about

with simplification? What other ideas do you have on simplification?

Mr. STEUERLE. Mr. Portman, I studied this issue long and hard

when I was at Treasury. I was coordinator of the 1986 tax reform

package out of Treasury. The attempt then was to try to create a

system that would tax income more equally. There were some efficiency issues, raised also simplification. But we really did not get

much simplification out of that act.

My quick reading of the history of the Tax Code is we have never

really had a major focus on simplification, per se. Now I am not

saying that if you went to a flat tax for everybody or a value-added

tax for everybody, that there are not major complete overhauls of

the system that might simplify; but I am talking about the type of

simplification effort that I think we need to have a more regular

basis, which is kind of bottom-up simplification. You know, can we

combine any retirement accounts in this way? Can we simplify penalties? There are just hundreds and thousands of these provisions.

That is one reason I recommended that you had to have IRS and

Treasury involved. Because just trying to go through that enormous range of provisions is very difficult. I do not want to suggest

that there doesn’t have to be some goodwill involved here.

If the Secretary or the President or Congress or the Joint Committee decides they are not going to put a lot of effort into it, I do

not know how you can control that type of thing by legislation. But

I do think legislation can demand that there be a report; and you

can make several demands—not just on Treasury and IRS, but

maybe on the Joint Committee—to monitor whether Treasury and

IRS are really doing it.

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I would like IRS to report item-by-item, on which areas of enforcement they have the greatest difficulty. They actually do this

calculation indirectly, if you look at some of their statistics. They

are reluctant to release them, because they are a little bit uncertain as to how well they do the statistics, but they do report on

compliance rates across all sorts of items.

One reason they are reluctant to do this type of study because,

if they do it they are going to offend people. If they report on noncompliance on the EITC ITC, they are going to offend the President

when he advocates an EITC increase. On the other side, if they report on noncompliance in areas, say, like capital gains, then they

are going to offend people who want capital gains relief.

So, they get caught in a box. They must be required to report on

complexity on a regular basis, or they will not do it because there

is a danger of offending somebody in the process. I think the process itself would be enhanced if these EITC reports were automatic—if they were required to report on enforcement problems.

The Treasury in turn could come up with a list of simplification options.

Think of the impact, for instance, of the deficit reduction options

that CBO puts out every year. Now I do not even agree with a lot

of those options, but CBO does not put them forward as necessarily

saying that these are the best options, or that there are no options.

But it gives Congress a list, almost an enactable list—something

that is not far from draftable if Congress wanted to use it.

Well, what happens if Treasury would do this and the Joint Committee year after year? You would start having laundry lists of

areas where, if you wanted to take action, you could do it. You do

not have that ability now. Today if you want to do simplification

it is because somebody is objecting to something somewhere, you

know, or there is a press report or something. It is very indirect,

and so there is no formal process to really make a simplification

effort on a much grander scale. I just really think that better information needs to be part of the system and this mandate to report

seems to be one way to try to force it.

Mr. PORTMAN. At this stage, I think it would be very helpful if

you would go on and sit down with me and the staff and try to

work through what we already have on simplification and see

whether some of these might be added.

I think it is one of the most important aspects of the Commission

report, making that nexus between tax complexity and tax administration. I am proud the Commission went that far. It was further

than probably our mandate envisioned; and yet I think Mr. Coyne,

myself and others would be very interested in any concrete things

we could put in this legislation to encourage a simplification, in a

thoughtful way, which would include in my view, getting Treasury

and IRS involved in giving us proposals so that we could then

begin to vent these and have hearings on them.

The other one you mentioned, which is marking up tax forms. As

you know, in the legislative proposal, as well as in the Commission

report, we urged that the IRS be at the table in developing tax legislation. That is not always practical when you are in a conference

committee at 3 o’clock in the morning, literally, the eleventh hour

before taking a bill to the floor. But most of our proposals we do

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develop through the Subcommittee and Committee process, and I

think to have the IRS there in a formal way and require that, will

help.

I think marking up tax forms should be a part of that in the

sense of the IRS telling us what forms will be required for this tax

law change. That is certainly the intent of this legislation; and

maybe we can specifically add that very helpful suggestion.

Your suggestion on the public trustees I think is generally positive. I think it helps move the debate forward. It is the only, frankly, helpful suggestion I have heard in the last couple months to try

to maybe bridge some of the gaps.

My concern with it, of course, is accountability. If they do not

have absolute decisionmaking authority, and they look at the citizens advisory group—or the Commissioner Advisory Group, the

CAG, and other advisory groups and if they do not have the ability

to—as in the case of our board—approve the budget, which then

goes to the Congress, but not through the process, as we talked

about, approve the strategic plan, hire and fire the Commissioner,

who is going to listen to them.

I think, to be taken seriously by the Service, what kind of accountability will there be to that group; and is it just another exercise in futility. I think, the final question I would have is, who is

going to serve on such a Committee.

If they do not have some authority, one of my great concerns—

and Ben Cardin raised it earlier today—are you really going to be

able to attract the kind of high-caliber people we are talking about?

Mr. STEUERLE. Mr. Portman, I struggled with this a great deal.

I did not come to the issue of the board of directors on one side or

the other. I have struggled with it for months. I suppose where I

am coming out is a compromise.

But to have these people as more than advisors—I think there

is a difference between an advisory role and a monitoring role.

Usually, if you are in an advisory role you are on the inside. You

know, you are sort of like the Joint Committee on Taxation, which

provides great people as advisors to you, but they are not going to

go out and say, ‘‘Boy, did Mr. Portman publicly make a mistake

when he enacted this legislation.’’ A monitor, on the other hand,

does say, ‘‘OK, IRS is not doing this. The budget is inadequate for

that,’’ so I want to raise this board—whatever we call it—to this

kind of monitoring position.

Yes, they can advise as well, but I think their principal function

should be monitoring. The best example that I have—and I admit

that it is not a perfect metaphor—is with the Board of Trustees of

Social Security. That is partly because I have watched the way

they operate. I know the people who have done this job over time,

people like Stan Ross, Marilyn Moon and others.

They actually participate in the process of reporting—in this

case, reporting on the status of the trust funds. With them as representatives of the public and knowing they have to put out these

reports, they take very seriously this monitoring role. They actually

do it with the government. That is, the government really still has

all the data.

So, the people inside the government are gathering the information, but the outsiders are saying, ‘‘Look, that information is inadVerDate 11-SEP-98 14:18 Nov 29, 1999 Jkt 058922 PO 00000 Frm 00168 Fmt 6602 Sfmt 6602 D:58922 W&M3 PsN: W&M3
165

equate, you have got to do this.’’ A lot of times, the success of the

trustees is never really seen, except indirectly. Because they have

held the administration’s feet to the fire to force them to report on

things accurately.

That is sort of the role that I see for them. My biggest fear with

actually giving them authority in the actual appointment of the

Commissioner or with the budget is that I fear that we would add

one more layer on what, in my experience, is already a confused

process. I tend to believe the decisionmaking has to be an executive

decisionmaking process. Essentially, you know at every stage who

is above whom, and I am not sure whether that would help if you

actually give aboard partial authority over appointing the Commissioner or setting the budget.

But as I say, I do not want this board just to be advisory. I do

want them to play this accountability role, which seemed to me to

be the main focus of your concerns as a Commission.

Mr. PORTMAN. I want to hear from Mr. Kettl and Mr. Stobaugh,

if they are interested in this particular issue, but I would just

make the suggestion that, if you look at the Social Security model,

the reporting particularly. That is a very specific and very interesting report every year, not just for Members of Congress—I guess

it is on a quarterly basis, actually—of the Medicare Trust Fund

and the degree to which we might be going into a deficit. It has

political ramifications and so on.

This Board we have set up also has this reporting requirement

in the sense of reporting to Congress, really, on the budget, on the

strategic plan, working with the government, as you say.

It is really not that far from our model when you think about the

actual workings of the Board and how it would interact with the

Congress and with the public—the American people.

Fred Goldberg kept making the point that, after all, this is all

public. That is very important. With the IRS there may not be as

much interest in the budget or the strategic plan as there is in the

report of the trustee with the Medicare Trust Fund. But I do think

it is not—in terms of this actual impact on the process—that different from the role you laid out.

Mr. Kettl.

Mr. KETTL. Yes, let me draw one distinction and then make a

slightly different point on the idea of the Social Security Trust

Fund and this Committee as a possible metaphor.

As for Social Security: the Commission that reviews that on a

regular basis examines the overall financial health of the system,

which is one kind of thing. Here we are talking about trying to find

some way to crawl inside the administration of the IRS and make

a report on that, which is a very different kind of animal.

The Social Security Committee does not really look inside Social

Security to see what percentage of checks are going out on time,

which kinds of computer problems they are having in dealing with

that. It is just on the financial health of the system.

So, the point of similarity that is important is just how seriously

they take it; and how brave in some cases they have been to declare that ‘‘The emperor has no clothes.’’ But on the other hand,

they do not really get into the question about what you have to do

at the top of the Social Security Administration to ensure solution

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to the problems of information technology, or if the delivery of the

checks happened. That is the real level at which, it seems to me,

the IRS needs to try to devote its efforts.

I do think that the possibility for some kind of reporting and

oversight role is a very important possibility here. There is another

mechanism, of course, that exists not only through strategic planning, but also through the Government Performance and Results

Act. It seems to me that is the lever that is available to this Committee, for starters; but also, if there is an oversight board of some

kind created to that board, because that is the handle by which to

grab the IRS’ activities.

There is an interest in trying to ensure there is a long range of

attention to these issues. The way to do it is to send out clear signals through the oversight hearings and through the strategic

plans and the reports on GPRA to ensure that is taken care of.

There is an interest in making sure the people at the bottom get

the lesson. That is the way to send the lesson across.

Mr. PORTMAN. I misspoke earlier when I said Medicare. The

Medicare Trustees also issue a report, but the Social Security

Trustees was your analogy, and I would make that same analogy

to the Medicare system as to the Social Security system.

I will say also that at Social Security the phones are getting answered. The customer service satisfaction level that Bob Kerrey

talked about earlier is higher; and it probably needs different kinds

of attention as you indicate and would need a different kind of

board at the IRS to get the same kind of results.

Mr. Stobaugh, do you want to comment on this?

Mr. STOBAUGH. I was going to comment on this reporting to the

public, the President and Congress. I think that is very, very important. I think this IRS Oversight Board could make the decision

to report an account of the things that actually affect citizens.

At the service level, I would anticipate they will do some reports

on service levels of the IRS, as opposed to just, ‘‘The IRS budget

was $7.4 billion this year and $7.5 billion next year,’’ and numbers

of that sort.

I think the citizens would be very interested in how service is improving.

Mr. PORTMAN. That is an excellent point. I think what you will

see in the budget, of course, is more than just the aggregate number, but a reallocation of resources based on whatever the board’s

informed insight is on that. I would suspect that customer service

will become more important over time and that will be something

the public will see.

Mr. Kettl, you have given an interesting statement today. I read

your initial article in the Brookings publication and then looking

at your testimony. I heard your testimony today and I see some

disparity between what I heard today and the Brookings article.

I think you are much more flexible about these various approaches than it would appear, based on your article. I think your

view of the Treasury proposal is fascinating and certainly has not

been touted by the Treasury Department, which has taken great

pains to tout your views on our Oversight Board. [Laughter.]

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I do not want this to be putting you on the spot. We are having

a good give and take, and I want to learn more from you about

your distinction between management, oversight and so on.

But, I take it from your earlier comments that you would be, if

anything, less enthusiastic about the Treasury Management Board

proposal than you would about the Oversight Board proposal in the

Commission report?

Mr. KETTL. I am not sure about that—and I certainly do not

want to be speaking out of different sides of my mouth. This is an

incredibly complex issue and the difficulties are in trying to find

some way to get one’s arms around it simultaneously.

Let me make two points on the question of the boards. I find the

idea of the basic board as proposed by the Commission very troubling because of its role, regardless of what it is called. Whether

it is called oversight, whether it is called management, the fact is

it is making governmental decisions; and I find that extremely

troublesome.

I have great difficulties in that, especially having to do with the

appointment of the IRS Commissioner and its approval and review

of the IRS budget. That is a question of, who is it that would make

final decisions about each of those. I find that very troubling.

I think the Treasury’s proposal for these boards is interesting. I

think that, for example, it is a very useful idea to make sure that

all of those who have a role within the Treasury affecting the IRS’

operation sit together on a regular basis to make sure that their

operations are coordinated. I think it is extremely important that

information and ideas and insight come in from the outside.

I have a concern about the Treasury’s Boards in that there is a

risk in making these things too big, too huge, too ungainly. My concerns ultimately about both of these Boards is that I am not sure

they really solve the problem. That I think is what we have—I

worry that we are in the process now, as we have been engaging

in these discussions of tinkering, possibly, in the margins with

things that in the end will not fundamentally attack the basic problem, which has to do with improving the competence of the Internal

Revenue Service, first; and second securing public trust in the Internal Revenue Service’s operations.

There is a risk that the more tinkering that goes on with these,

the further we will get away from attacking those basic problems.

That is where we basically have to go in the end.

Mr. PORTMAN. I do not think we are going to change your mind

on that, but I guess all I would suggest is it is precisely what we

have done over the years is to tinker. This is a major structural

change, which is not tinkering at all.

Mr. KETTL. No, I do not mean to suggest—I do not mean in any

way to suggest——

Mr. PORTMAN. No, whether this was tinkering or not, I do not

mean to be defensive about that. All I am suggesting is that if you

want to get real change through the system, which you emphasized

in your oral statement today—which I could not agree with more.

That is ultimately where we have to be.

The only way to do it, as you say, is from the top down. The only

way to do that is to undertake these very significant structural reforms. If Treasury could have done it, they would have done it. It

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has been about four decades now since we got into these problems.

It is not about the Clinton administration, as many of us have

taken great pains to say today, it is about a structural flaw, which

is that the Treasury Department does focus on fast track—as they

should.

The Treasury Department does not have the expertise to bring

to bear these major problems at the IRS, and the Treasury does not

have the continuity. As you know, that Management Board has less

than a 2-year tenure; and you also know it is going to take several

years to straighten this out.

Finally, if you do not have those two things, what kind of accountability do you have. Because the IRS people in the field just

kind of wait it out until the next great proposal from Treasury,

even if those proposals are forthcoming because of the increased

tension.

So, I think, you know, you are a nationally renowned, I am sure,

expert on public management and I am just a Member of Congress;

but I think structural reform does make sense here. Because if you

do not have the structural reform, you really have not solved the

problem.

Now, it may not work in the end. Even the structural reform

may not work, but certainly without them it is not going to work.

I think the record is very clear on that. We all have to do our best

here in Congress to increase and consolidate oversight, as you said.

We suffer from some of those same problems, though. We do not

have the continuity.

My constituents may throw me out in—what is it, about 1 year,

14 months? In any case, you know, I may be off the Oversight Subcommittee. Bill Coyne probably has more longevity than I do, politically, but it is honestly very unlikely you are going to see that

kind of stability here on the Hill. Plus there are political issues

here on the Hill that make it difficult for us to focus and to give

the IRS the kind of support it needs.

So, I would ask you to go back through the recommendations.

Take a look again at the legislation. Also, in your statement, there

were a number of things that changed in the legislation. I just

want to bring those to your attention. You have a seven-member

board. It is now nine, as you know.

Looking at the Commission report you say it confuses the—I am

now on page 1 of your floor statement—‘‘To turn the agency over

to a board dominated by private officials.’’ We are not talking about

running the IRS day to day. It really is an oversight function. You

know now, I think as of today, what the functions of that board is.

They are limited. In my view there is a difference between oversight and management or even governance. You say, ‘‘Putting the

Treasury Department in charge of developing tax policy, but removing it from administering it.’’ Well, we do not remove Treasury

from doing that. They have never been that. That has been the

IRS.

So, I just think there are some things—‘‘No precedent for vesting

substantial governmental power in the hands of private citizens,’’

this is unusual, I admit. I do not know if it is unprecedented. We

have the Post Office. We have citizens review boards in various

communities around the country for police forces. We have the

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Independent Council, also special government employees. So there

are some precedence for this. I agree this is not the usual approach

to problems at an organization like the IRS.

And finally, some of page 4. Some of your power decisions of the

budget management strategy, information technology. That is a review power, not an approval power on information technology—

which is the way we think it should be. You say that the Board

would have a small permanent staff. That is not the way it is in

the legislation. It may have been in the report. We went back and

forth on that and for many reasons decided not to give the Commission—I am sorry, the Oversight Board—an actual staff.

Finally, you say it is a private and independent entity vested

with governmental power. It is not. It is a governmental entity.

These are special government employees. We can talk about the

constitutional issues if you like. We have constitutional scholars on

our side who very clearly say that this is—if the President wants

all these people, it is a governmental entity and it can then appoint

an inferior officer.

So I think the constitutional issue is, at best, murky. I happen

to believe that once we took away the proposal in the Commission

report. We said the President could not remove board members.

Once the President has that removal power—appointment and removal—I think the constitutional issue with regards to the appointments clause was handled. We can talk about. But these are special government employees and it is a governmental body. The

question is whether the Commissioner should be an inferior officer

of government.

I have talked too long without giving you a chance to respond.

Let me, just quickly, to Mr. Stobaugh, and then Mr. Kettl, if you

have additional comments, I will be delighted to hear them.

Mr. Stobaugh, when Amo Houghton—who could not be here—left

he said, ‘‘I agree with that guy from Harvard.’’ So, I want you to

know that even though he could not come back, he was impressed

with what you said.

I guess the question I would have for you, given your experience

and background in the private and public sector in the governance

area is, you know, we have heard a lot today from the Secretary

of the Treasury and others regarding sort of the inherent flaw in

having private-sector people involved in this kind of organization

really for two reasons.

One, they would be part time; and second, they would have unavoidable conflicts of interest if they were not full-time government

employees. Can you respond to those? Is that appropriate for you

to respond to?

Mr. STOBAUGH. First, on the issue of part time. American industry is directed by directors who work part time. Many board of directors only meet six times a year, seven times a year, four times

a year. This board here is meeting once a month.

I think in my own studies, corporate governance—American corporate governance—is really the leader in the world. So I think

this so-called part-time board can provide oversight very, very effectively.

On this issue of management versus oversight, I would recommend to the Committee to read carefully again the statements

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of Mr. Goldberg and Mr. Weston. I thought they hit the nail right

on the head in terms of the real world, as to how boards operate

and how the Commissioner needs people to talk with and get advice from. So I think the board will function very well.

In terms of—any questions before I move on?

Mr. PORTMAN. I do have one before you get into the last point.

Do you think we can attract high caliber people to this board?

Mr. STOBAUGH. Pardon?

Mr. PORTMAN. Given your experience, do you think we can attract high caliber people to get the job done?

Mr. STOBAUGH. I am sure you can. There are many, many people

with the qualifications to do the kind of oversight that needs to be

done who would certainly be willing to help the country by serving

on this particular board.

The payment here is not as high as a corporate board may be,

given the same amount of time involved; but I think the payment

is adequate and I think a lot of people would probably serve. I do

not think the payment tied to the thing would be a major issue.

I can name many people off hand.

One of my coprofessors at Harvard, Jim Cash, who is an expert

on information technology and a director of several boards, including General Electric, he would be a great board member. Ben

Bailar, former Postmaster General, who was the dean of the Rice

Business School, has been a director of a number of companies. He

would be a great director, and I name other people in my statement. So I do not think there would be any problem on that.

On the conflict of interest, I think there certainly is testimony

there—particularly Mr. Goldberg’s—about the level of questions

that would come to the board. I cannot see at all how the issue of

how much money is going to be spent auditing General Electric is

going to make it to this board—this oversight board. The oversight

board is going to have certain measures given to them, certain classifications of the thing, how much it may cost and where they may

want to put their resources. But they will be looking at cost benefit

and effectiveness analysis.

Also, overlooking a lot of this discussion on this board, the Secretary of Treasury or his designee will be right there on the board,

and there will be another government official right there on the

board. I just cannot imagine the kind of conflict of interest that

people have been talking about.

Mr. PORTMAN. I think that is a very important point we should

have made earlier, which is there is an additional safeguard of having the Secretary of Treasury in all the board meetings.

Mr. STOBAUGH. The other thing is, people have been talking

about chief executive officers and thinking of this person having

loyalty to one big company. You can get directors who are not chief

executive officers—people with director experience who have been

members of four or five boards. This would be another one. But

they are not going to put—I cannot imagine the quality people you

would get here would ever dream of putting the interest of any of

these boards over their duty as a director here—and they are used

to dealing with these kind of issues.

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Mr. PORTMAN. Thank you. I just want to tell you that we have

gotten a lot of input from Professor Lorsch—Jay Lorsch on these

proposals. We want to, through you, thank him for his help.

We are now going to adjourn, but before we do, if there are any

other comments, Mr. Kettl you would like to get on the record or

Mr. Steuerle—and I want to thank you all again for your patience.

This is the kind of private-sector input we need and you are doing

it out of the goodness of your hearts, I know, without compensation

today just as we would hope we would get private sector on the IRS

Board.

Everything you say here is made part of the record. So even

though it is kind of a lonely dais, know that this information is

going to be available—not just to the other Committee Members

and staff, but also to the public.

Mr. Kettl.

Mr. KETTL. Just a couple brief points, if I might, Mr. Portman.

The first is just by way of clarification. The policy brief that I

wrote for Brookings was actually written quite a while ago, based

on the Commission’s report; and the legislation was drafted subsequently. So that explains some of the distinctions, because some of

the changes was made since the time it was drafted.

Mr. PORTMAN. I was referring to your testimony today—the written testimony.

Mr. KETTL. That was in fact based on the policy brief.

Mr. PORTMAN. That is fine. Thank you.

Mr. KETTL. That explains that. The one thing I want to conclude

by saying is that I do not think anybody could possibly have listened to the discussion today and the interchange between the

Members of the Committee and witnesses without coming away

with just a deep appreciation for how seriously everyone involved

is taking this; and how hard everybody is wresting with what is essentially a very difficult set of problems.

My concern with the proposal that has been made by the Commission on governance, leaving aside everything else which as I

said before is absolutely first rate, is not so much the fact that we

cannot find good people, that they will not try hard to do a good

job; and that they will not in fact do a job well, but that there very

well may be—for those of us sitting way out beyond the beltway

near the Mississippi—the kind of perception that, if for example,

an issue comes up about how much money should we spend on auditing corporate taxes as opposed to individual taxes—auditing versus taxpayer assistance?

There will be, I fear, a deep concern on the part of many taxpayers out there that those who are involved are somehow steering

the process in a way that will further undercut the trust in the system. I do not in any way believe that those good people who would

be responsible for making those decisions and those recommendations and those reviews would in any way attempt to steer the

process to advantage themselves.

But there is a very serious problem of perception out there in the

country, and I worry greatly about anything that might aggregate

the perception. That is something, I think, the recommendations

would have to address very clearly.

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Ultimately, my real concern is—what I am struck by after having

listened now to 51⁄2 hours of testimony is—how unanimous the

sense is of what the problems are. I sense a gap between some of

the recommendations and those things that are likely, in my opinion, to actually produce the results that we want. It is my concern

ultimately about the governance proposals in particular that I am

not sure they are likely to produce the results that we need.

As I suggested, I think, based on my study of what has happened

in New Zealand and Australia and other places that have established, or have attempted to establish, world class tax collection

systems, that it is the performance-based system that is much

more likely to provide the kind of guidance that is needed to

change the system.

Mr. PORTMAN. I thank you, Mr. Kettl. I know you understand

how the budget works, but in terms of the perception as to where

audit resources might be allocated, it would be the opportunity for

the Secretary to not only be on the Board and be part of the discussion as to that budget; but then ultimately, the Secretary would

have veto authority and if the Secretary were to determine that the

Board’s decision on the budget were inappropriate, the Secretary

through the process would then be able—as part of the President’s

request—to lay that out.

So it is, one, in a sense advisory opinion that would be coming

up here; and I do not think the perception of the taxpayer would

be affected by that much. What Congress does, of course, is another

matter—which is a whole ’nother process and ultimately decides

the IRS budget.

But I do appreciate your testimony and your analysis of this. I

think you are right. I think there is an amazing consensus now on

the problem, at least. The question is how we actually make a difference on the performance-based management issue.

As you know, there is a whole section of this legislation that we

are not going over in Ways and Means, because it is not in our jurisdiction. That has to do with title V, and has to do with some of

the reinventing government ideas that Vice President Gore and

others have talked about—performance-based organization. I am

very excited about that. That is a very important part of this legislation.

It is not the Tax Code. It is actually a civil service issue. If we

can do it, it will make the IRS, in my view, a model agency, believe

it or not. If my colleagues were here to hear that, they would think

that I had spent too much time looking at the IRS Code.

But I think what you are talking about actually is in the legislation. I will get you that material so you can see it in terms of pushing that through the system and rewarding people based on performance.

Mr. Stobaugh.

Mr. STOBAUGH. I just want to make one last point and that is,

on this issue of what directors do and what they do in the private

sector, there have been major changes in the last 10 years. There

is something called ‘‘Director Professionalism.’’ I happened to sit on

a blue-ribbon commission of the National Association of Corporate

Directors that issued a report on director professionalism, outlinVerDate 11-SEP-98 14:18 Nov 29, 1999 Jkt 058922 PO 00000 Frm 00176 Fmt 6602 Sfmt 6602 D:58922 W&M3 PsN: W&M3
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ing: ‘‘Here are the kind of people you need for directors and here

is what they ought to do.’’

I wanted to volunteer to make this available to the Committee

here.

Mr. PORTMAN. I appreciate it. We will take a look at it and I appreciate your wanting to share it with us.

Mr. Steuerle.

Mr. STEUERLE. Just a last statement. I would like to add my

compliments to you, Senator Kerrey and the other members of the

Commission.

I have to confess that when I saw how the Commission was originally put together, I was somewhat skeptical it was going to be

able to come to any type of agreement at all. The fact that it put

forward so many good proposals, I think, is a real testimony to

your own abilities, as well as the staff and Senator Kerrey’s.

Again, to repeat one comment that I made earlier, I regret that

so much attention gets focused on the Board as a measure of success or lack of success. Because I think it takes attention away

from other details, but very important details, of the Commission’s

report to which I think we all need to devote some attention.

Mr. PORTMAN. I thank you, Mr. Steuerle and the Committee will

now stand in recess until 10 a.m., tomorrow.

[Whereupon, at 6:45 p.m., the Committee recessed to reconvene

the next day at 10 a.m.]

(175)

RECOMMENDATIONS OF THE NATIONAL COMMISSION ON RESTRUCTURING THE IRS ON

EXECUTIVE BRANCH GOVERNANCE AND

CONGRESSIONAL OVERSIGHT OF THE IRS

WEDNESDAY, SEPTEMBER 17, 1997

HOUSE OF REPRESENTATIVES,

COMMITTEE ON WAYS AND MEANS,

Washington, DC.

The Committee met, pursuant to call, at 10 a.m., in room 1100,

Rayburn House Office Building, Hon. Bill Archer (Chairman of the

Committee) presiding.

Chairman ARCHER. The Committee will come to order. We are

going to get started, in spite of the vote on the floor of the House,

and we will move along for 10 or 12 minutes and then go vote and

then come back.

Today marks the second day of a 2-day hearing to examine the

recommendations of the National Commission on Restructuring the

IRS. Mark Twain once said that everyone complains about the

weather, but no one does anything about it. Sometimes it seems to

me that this statement could apply to the way that we have let the

IRS languish since 1952, but that is about to change.

As I indicated yesterday, I consider reforming the IRS into an efficient, consumer-oriented, taxpayer-considerate agency this Committee’s highest priority for the remainder of this session, and my

sincere goal is to work with my colleagues on the Ways and Means

Committee on a bipartisan basis to meet that challenge.

For many taxpayers the IRS is a source of fear and for far too

many it is a source of frustration. It has likely more direct contact

between anyone representing the Federal Government and the average citizen in this country than any other operation at the Federal level. We may not be able to prevent people from getting a

knot in their stomachs when they open an envelope from the IRS,

even if it is a refund check until they see the check, but we are

certainly going to try to address the needless frustration.

Today, we are going to talk in part about Congress’ role in overseeing the IRS and the need to sweep our own doorstep, because

Congress bears a big part of the problems in the IRS. Not only do

we have the responsibility of oversight, but the Congress passes

laws that are often virtually impossible to administer.

As I said yesterday, both ends of Pennsylvania Avenue must face

their responsibilities for fixing the IRS and I intend to explore

what Congress can do better. In the hearing today, we will hear

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ation under H.R. 2292. Additionally, we will receive testimony from

experts in the tax arena: the American Bar Association Section of

Taxation, the Tax Executive Institute, the AICPA and the New

York State Bar Tax Section. We will also receive the views of

former IRS Commissioners and other former senior IRS executives.

[The opening statement follows:]

Chairman ARCHER. And I now yield to Bill Coyne, a member of

the Commission on Restructuring for any comments that he might

like to make in an opening statement.

Mr. COYNE. Thank you, Mr. Chairman. I just want to welcome

Ken Kies and the rest of the witnesses and say that the Ranking

Member, Mr. Rangel, was held up and will not be here for a while,

and I look forward to the testimony.

Chairman ARCHER. We do have with us today the Chief of Staff

of the Joint Committee on Taxation, Ken Kies, and we are pleased

to have your input on this very important topic. You may proceed.

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STATEMENT OF KENNETH J. KIES, CHIEF OF STAFF, JOINT

COMMITTEE ON TAXATION, U.S. CONGRESS

Mr. KIES. Thank you, Mr. Chairman. I want to thank the Committee for inviting me to testify today. It is my pleasure to present

the testimony of the staff of the Joint Committee concerning the

proposals to restructure the IRS and improve congressional oversight of IRS operations.

There are two principal proposals under consideration at this

time. H.R. 2292, introduced by Congressmen Portman and Cardin,

embodies the recommendations of the IRS Restructuring Commission. H.R. 2428, introduced by Congressmen Rangel, Coyne, Matsui, Hoyer, and Waxman, would codify an administration proposal.

As H.R. 2428 contains no specific proposals impacting the operations of the Joint Committee, my testimony will be limited to the

provisions of H.R. 2292 that affect the Joint Committee.

You may recall that the Joint Committee was originally created

in 1926 to have a significant and ongoing role in the oversight of

the entire Federal tax system. In fact, the history of the creation

of the Joint Committee provides some interesting background on

why Congress was concerned with this oversight.

The Joint Committee was originally created because of concerns

in the Congress that the IRS was not properly administering the

Internal Revenue laws and that the IRS was being improperly influenced by political appointees in the Treasury Department. In

1924, Senator James Couzens introduced a resolution in the Senate

for the creation of a select Committee to investigate the Bureau of

Internal Revenue.

At the time there were reports of inefficiency, waste and fraud

in the Bureau. One of the issues investigated by the select Committee was the valuation of oil properties. The Committee found that

there appeared to be a total absence of competent supervision in

the determination of oil property values.

In 1925, after making public charges that millions of tax dollars

were being lost through the favorable treatment of large corporations by the Bureau, Senator Couzens was notified by the Bureau

that he owed more than $10 million in back taxes. Then Treasury

Secretary Andrew Mellon was believed to be personally responsible

for the retaliation against Senator Couzens. At the time, Secretary

Mellon was the principal owner of Gulf Oil, which had benefited

from rulings specifically criticized by Senator Couzens.

The investigations by the Senate Select Committee led, in the

Revenue Act of 1926, to the creation of Joint Committee. The Revenue Act of 1926 defined the duties of the Joint Committee, which

have remained essentially unchanged since that time.

Under present law, the Joint Committee has broad responsibilities and powers relating to the operation and effects of the Federal

tax system, including oversight of IRS operations. The powers of

the Joint Committee include, among other things, the power to inspect tax returns, to hold hearings and to subpoena witnesses.

I have the following comments with respect to the provisions of

H.R. 2292 relating to the work of the Joint Committee. H.R. 2292

would require all requests for investigations of the IRS by the

GAO, other than requests from Committees and Subcommittees, to

be approved by the Joint Committee. We generally agree that in

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order to ensure appropriate allocations of resources both of the IRS

and the GAO, it is important to coordinate requests for investigations. The proposal aids in this regard by indicating congressional

intent that there should be further scrutiny of investigations relating to the IRS.

The provisions of H.R. 2292 require the Joint Committee staff to

provide support with respect to two annual joint hearings of certain

Members of the congressional Committees with jurisdiction over

the IRS. This does not expand the powers of the Joint Committee

so much as it would formalize the role the staff would have with

respect to these joint hearings. I would note that the bill’s approach

adopts recommendations made by the staff of the Joint Committee

and I appreciate the willingness of Congressmen Portman and

Cardin to adopt this approach.

H.R. 2292 clarifies the duties of the Joint Committee with respect to reports to be provided to the Congress. In addition to the

duties of the Joint Committee under present law, the bill requires

that the Joint Committee report annually to the taxwriting committees on the overall state of the Federal tax system; and annually to the six congressional Committees with jurisdiction over the

IRS with respect to matters relating to IRS operations.

I believe that this reporting approach is appropriate and that it

will assure that all of the Committees responsible for oversight of

the IRS will receive consistent information on a regular basis. This

approach should improve the decisionmaking capabilities of the

Congress with respect to IRS oversight.

H.R. 2292 provides that it is the sense of the Congress that the

IRS should provide the Congress with an independent view of tax

administration and that, during the legislative process, the

taxwriting committees should hear from frontline technical experts

at the IRS with respect to the administrability of pending tax legislation. I believe that it is vital to the legislative process for the

Congress to have the ability to consult with IRS officials with respect to pending legislative proposals and, therefore, I wholeheartedly support the goals of this provision.

The bill would require that the Joint Committee provide a tax

complexity analysis for each tax provision in a bill, resolution,

amendment, or conference report considered by the Congress.

The Commission’s recommendations are based on the Commission’s finding that the complexity of the laws is a major source of

taxpayer frustration. I share these concerns, and we generally support the bill’s approach. However, we have several recommendations, outlined in my written testimony as to how the complexity

analysis could be modified to make it more workable.

I thank the Committee for the opportunity to offer the testimony

of the staff of the Joint Committee with respect to certain provisions in H.R. 2292, and look forward to working with the Committee in the consideration of this legislation.

Thank you, Mr. Chairman.

[The prepared statement follows:]

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Chairman ARCHER. Thank you, Mr. Kies. And once again our

schedule gets interrupted by votes on the floor. I am going to have

to shortly run over and vote, then Rob Portman will chair the Committee until I get back.

First, my compliments to you and to your staff for a very comprehensive analysis and anybody who sees this can see that it is

comprehensive of this entire issue, which is going to be very, very

helpful to the Committee.

There have been a number of problems that have cropped up,

and I am not sure how much attention was given yesterday to the

need of the Congress in its oversight function to have direct access

to officials at the IRS. In the past, every time that we have wanted

to have direct testimony or access, the Treasury has stepped in and

said, oh, no, you cannot do that. The IRS can only be heard

through a Treasury official. Which is, in effect, an insulator which

has prevented us from having direct access. I do understand that

the Joint Committee has in its authorized authority legislatively

the right to demand and get direct access to the IRS, but that is

very rarely used.

Do you have any suggestions as to what we should do as we restructure the IRS so that the Congress will have more direct input

from the IRS in its oversight responsibilities?

Mr. KIES. Well, Mr. Chairman, I think there are a couple of

things that could be done. One, during the legislative drafting process, it was the historic practice, at least up until the 1996 act, that

representatives from the Internal Revenue Service would actually

participate in all of the legislative drafting sessions to provide

input into things like trying to make provisions easier to administer, to alert the Congress as to the difficulty that might arise

with respect to development of IRS forms to implement new provisions.

We think a return to that practice is something that would be

very helpful. That is what the sense of the Congress resolution that

is contained in H.R. 2292 is partly intended to get at. We have already actually initiated discussions with the Treasury Department

to try and make that happen immediately or at least in the near

future. IRS participation and more direct participation in the legislative drafting process, I think, would be a major help.

The direct involvement of the Internal Revenue Service with the

Congress on oversight with respect to administration, I think, is

also an important step. The bill provides for a series of reporting

responsibilities and hearings that should be considered to get that

direct input from officials at the Internal Revenue Service. We

think that would be a very positive step in improving the oversight

role that the Congress should be playing with respect to the administration and operation of the IRS.

Mr. PORTMAN [presiding]. Thank you, Mr. Kies. I would like to

echo the comments of the Chairman with regard to your analysis

of the legislation and of the Commission’s recommendations. It is

thorough. It is probably the most helpful analysis that we have

seen because it actually sticks to the language of the legislation

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and your sense, given your experience and expertise, as to how it

would work day to day.

I think it is extremely helpful to get your additional comments

on the notion of having the IRS be more involved, not just in the

development of legislation at this Committee, but through the process. As you and I have talked about often, legislation ends up getting written in conference committees, and any assistance that you

can provide this Committee, I think, would be very helpful to come

up with practical ways to be sure that Members of Congress understand the implications of what are often great sounding tax ideas,

but might make life more difficult for the IRS and the taxpayer

such as putting together forms and understanding what the burdens might be.

So, I think your suggestions there are very helpful and I hope

that you will continue to work with the Committee on helping to

solve that problem. I think, as you say, the restructuring legislation, H.R. 2292 has a good resolution, but maybe doesn’t go far

enough in that regard.

Other areas that you have looked at include the complexity of the

Tax Code. I know this is a controversial one and I am sorry that

I couldn’t have been here for your entire statement. This is a tough

one. I think there are a number of us on this Committee who feel

strongly about it. I know Senator Kerrey and I did. We need to

come up with some way to encourage Congress to simplify rather

than to make the Code more complex.

In this legislation, H.R. 2292, the Joint Committee would be

charged with a significant responsibility to highlight the complexity

of legislation, to come up with an analysis of legislation. It would

be helpful for me today and for the Committee and I think for the

record, if you could tell us whether you agree on the need to raise

awareness on tax complexity. And second, what you think is the

most workable way to achieve that goal if you agree with that goal.

Mr. KIES. Mr. Portman, as I think my written and oral statement

both say, we agree that one of the sources of discontent with the

existing tax system is complexity. It is also a source of many of the

problems the Internal Revenue Service has had in its administration function. We have said a couple of things in the testimony regarding the bill’s complexity analysis.

The first is that requiring some level of greater attention to the

complexity side of the legislative drafting process will not be a complete panacea. The Tax Code has inherent complexities, and the

process by which legislation is drafted, which sometimes is very

time-pressured, will frequently lead to complexity because of the

pressures between revenue and other considerations.

However, we have said that we think a more consistent process

by which we bring to the attention of the taxwriting committees

complexity concerns is something that may very well help heighten

the level of attention as, for example, the line-item veto has heightened the attention of Members to the possibility that provisions

may be narrow in their focus. And so that over the long term, we

may see some benefits to this type of approach.

We think perhaps the approach that is in H.R. 2292 may be too

rigid and perhaps too complex itself, and that we want to work

with the Committee to find an approach that is workable, but

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which will address the objectives that you and Senator Kerrey and

others have to heighten the attention to the complexity issue. And,

indeed, one of the things we have said as part of that is perhaps

we ought to also identify those instances in which the Congress

simplifies.

For example, the bill that was passed this summer eliminates

the need for over 1 million taxpayers to file dependent tax returns,

and for over 250,000 people to make estimated tax payments. It

eliminates the problems of almost all small businesses dealing with

the corporate AMT.

Mr. PORTMAN. Capital gains for homeowners.

Mr. KIES. Capital gains for homeowners. Although we hope the

States will follow suit so individuals don’t have to keep records for

State tax purposes. I think there is some reason to be optimistic

the States will follow suit.

Congress sometimes doesn’t get credit when they do some simplifying things and maybe we ought to bring attention to those as

well as highlight new areas of complexities so that we minimize the

extent to which that happens in the future.

Mr. PORTMAN. Whatever you can do with regard to title 4, subtitle C, which is the tax law complexity part of H.R. 2292 to make

it less complex, I would appreciate that. This is something that we

struggled with, particularly David Keating with the National Taxpayers Union, who was a Commissioner and who was very active

in this area, as were a number of other members of the Commission.

I think the intent of this is clearly shared by you and the Joint

Committee. If there is a way to do it that is more practical, I know

that we would embrace it so long as there was an incentive that

had real meaning to encourage Congress to simplify rather than

the current status which works the other way. We have a point of

order process here, as you know, which if this simplification analysis is not done, the questions are not answered as to what the implications are going to be on the IRS and the taxpayer, then any

individual Member would have the right to stand on the floor of

the House and stop tax legislation. How do you feel about that enforcement mechanism in the House?

Mr. KIES. I think if we get a set of provisions that are workable

for trying to bring to the attention of the Congress the complexity

concerns, that we would not see any problem with a procedural enforcement mechanism to comply with that requirement because we

would fully expect that we would comply with it, as we have in the

case of the unfunded mandate legislation that was passed in 1995,

that now applies to tax legislation. And likewise in the case of the

line-item veto responsibility that we now have as well.

So, I think if we get a workable set of rules, there should be no

objection to a procedural enforcement mechanism to make sure

that they are complied with.

Mr. PORTMAN. Again, I thank you. That is the critical thing that

you help us with, that enforcement mechanism. I know that there

will be other Committees of Congress and Members who may have

concerns about this kind of enforcement mechanism. It is real and

has teeth and has worked for unfunded mandates for that reason.

It causes headaches for the leadership because of the power it gives

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individual Members, but without that enforcement it would be unlikely to be an effective mechanism. So we need to work on the

mechanism and make certain that it is workable, simple and I appreciate your help on that and we need your help and assistance.

I have a lot of other questions and Mr. Collins is here and I want

to give him a chance before the vote. Yesterday, we had a lot of

testimony from a lot of experts, including Members of Congress,

but also academia and members of the Commission on all sides of

the issue.

One thing we never heard, with the exception of Secretary

Rubin, was who really supported Treasury’s proposal. This includes

Mr. Kettl from the Brookings Institution who Secretary Rubin had

talked about and implied that he was supportive—and his testimony speaks for itself. He was not supportive of the Treasury proposal. That was really the story of yesterday’s hearing. We either

have status quo or the Treasury proposal, which seems to have little support or some more fundamental restructuring to change the

culture at the IRS and help taxpayers, which is what this is all

about.

I know that today this is more focused on the congressional side

and that is where you have unique expertise, and I appreciate all

your help there. But regarding how Treasury’s oversight role might

work, have you come up with improvements with regard to the

structural reforms that are in H.R. 2292 for real oversight of the

IRS?

Mr. KIES. Well, Mr. Portman, as you know, in the process of not

only preparing the materials that were prepared for this hearing,

but also in preparing for dealing with this legislation, we have gone

through a series of meetings in the past couple of weeks. We have

met with Commissioners from the IRS Restructuring Commission,

and with former IRS Commissioners, going all the way back to

Lyndon Johnson’s Commissioner.

We have met with representatives of the tax section bar, and

other tax practitioners. One of the themes that comes through

clearly in our assessment of the status quo is that there has been

inadequate oversight of the IRS on both the congressional side and

on the executive branch side.

We think the congressional side improvements that are in your

bill are a good step in the direction of getting Congress to be more

attentive to its oversight function.

On the executive branch side, what we have heard from management experts, from chief executive officers, from other people who

are experts in management, is that you will not have an effective

oversight function if that entity that has oversight responsibility

doesn’t have some sort of significant power and responsibility. And

I think that is the balance that is going to have to be struck as

the Committee goes forward in trying to create an effective executive branch oversight function. We are prepared to try and work

with you all on that.

I don’t think that at this point we would say that we have a

magic answer because I think it is a balancing act. But clearly I

think for this entity to be effective, this oversight function is going

to have to be real, and that, I think, is one of the sources of criticism of the Treasury proposal, is that it would simply be putting

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in place another advisory body without significant power. And some

would say without any power. That is where I think the Committee

is going to have to strike a balance. We have identified some constitutional concerns that are going to have to be given attention,

but we would hope that there is going to be an ability to structure

a significant oversight function within the executive branch that

will accomplish the purposes that I think you all have in mind, and

still balance the reasonable concerns that Treasury has raised.

Mr. PORTMAN. Thank you, Mr. Kies.

Mr. Collins.

Mr. COLLINS. Thank you, Mr. Chairman. Mr. Kies, as we were

working on the tax bill earlier this year, we had a lot of constituents andtrade association representatives come in, and talk about

auditing. It seems as though there is a lot of discretion among regional directors of the IRS and their interpretation of auditing procedures. Sometimes varying region to region. Have you experienced

any of this? Do you have any information in this area?

Mr. KIES. Well, Mr. Collins, I think we, too, have heard from taxpayer representatives who from time to time express the same kind

of concern that you have identified that perhaps in one region of

the country, one standard is being applied which may be different

from the standard being applied in another region of the country.

Obviously, that creates problems because taxpayer confidence is

eroded if they feel there are different standards being applied to

taxpayers in comparable situations. And we think that is one of the

areas in which congressional oversight is appropriate.

At the same time, we would hope that the Treasury Department,

who under Congressman Portman’s legislation would retain all tax

policy functions, would be concerned about as well. And it is something that perhaps through the congressional oversight process

could be formalized as an area of concern so that it is brought to

the attention not only of Treasury, but IRS. I think it is clearly a

cause for concern if it is, indeed, happening because it is obviously

not fair to treat similarly situated taxpayers differently.

Mr. COLLINS. Well, it is a major concern. And it looks like there

is a lack of proper management when those things happen. But another thing, too, in this same area, it appears that there may be

compensation tied to the regional director’s collections. And if you

have a regional director who is in an area with a concentration of

a certain type of industry that must comply with a set of very specific or unique tax laws or regulations, there is enormous movement toward increased audits. In addition, rules established by

that director for his area often lead to additional audits and additional assessments, fines, penalties, and so forth.

This is a major concern. It really bothered me when I heard that

sometimes compensation is tied to increased audits and collections.

Are we in any sort of way with this legislation or in oversight looking at the fact that compensation is tied to collective resources?

Mr. KIES. Mr. Collins, let me say two things. First, one other

point on your first question. That is, one of the reasons the IRS national office issues guidance at the national level through revenue

rulings and coordinated issue papers, things like that, is to try to

avoid the problem that you have identified. So I want to say that

the IRS, itself, does try to get national guidance coordinated.

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I think the instances in which these kind of problems arise tend

to be on issues that have not made their way to the national level

and so they are developing simultaneously in different regions and

getting different interpretations.

On the issue of compensation, clearly that is an issue that would

be appropriate for Congress to look at in the oversight function to

see whether or not the method of compensation being utilized by

the service is consistent with the fair administration of the tax system. Likewise, I think the Oversight Board would want to look at

those types of things as well.

On the other hand, the job of the IRS is to ensure that taxpayers

do pay what is appropriately owed. And so there is a balance there

in terms of the responsibility they have. You don’t want to have

your compensation system structured so that it encourages behavior that is inconsistent with sound administration, but you also

want to make sure that it is consistent with it.

I think this is an issue that the service has grappled with over

the years, and many Commissioners have recognized that they

have got to compensate their regional Commissioners on a wide

range of issues, some of which may be related to collections, but

others need to be related to taxpayer service, for example, whether

or not they are conducting the education of their agents in a proper

manner so that they can actually answer correctly questions that

taxpayers have. I think there is a whole wide range of issues that

should be taken into account in determining compensation other

than just the efficiency of collection.

Mr. COLLINS. It bothers me not only in the area of compensation,

but also in the area of promotions for agents.

Thank you.

Mr. KIES. Yes, sir.

Chairman ARCHER [presiding]. Mr. Coyne.

Mr. COYNE. Thank you, Mr. Chairman.

Welcome, Mr. Kies. I was wondering if you could give us your

views, maybe a comparison, about the governance provision in the

two pieces of legislation.

Mr. KIES. Well, Mr. Coyne, I was trying to answer some of that

with respect to one of the questions Mr. Portman asked, that the

legislation that you and Mr. Matsui and Mr. Rangel and others

have introduced, which the administration has put forward, also

creates an oversight function. So I think both the administration

and the Restructuring Commission on which you served have recognized that there is a need for more consistent oversight at both

the executive and the legislative branch levels.

I think that the difficult question that this Committee and the

Finance Committee and the two Houses are going to have to address is how do you strike the right balance between, on the one

hand, giving adequate responsibility and power to an oversight

function so that you have some confidence level that it will be an

effective oversight function, versus the concerns that have been

raised by Secretary Rubin, and others, that you don’t want to add

too much of a privatized notion to the operation of the IRS. I think

that is the balance that you need to strike there.

I do think that some of the concerns that have been raised about

potential conflicts of interest on the part of the Oversight Board

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perhaps are overstated; that the responsibility of the President

under the Commission structure will be to find people that have

quality management expertise, but which do not have the potential

for conflicts of interest. And I think we should be looking to other

than current CEOs, for example, to serve on that Board.

There are many people other than CEOs of Fortune 500 corporations that have management expertise. But I think that is the balance that the Committees, both here and in the Senate, are going

to have to strike. How do you create an entity that has enough responsibility and power that it can serve an effective oversight function without unduly putting too much responsibility for the running of the IRS outside of the normal executive branch structure?

Mr. COYNE. Do you have any suggestions relative to the management and operation of the IRS and how to improve it?

Mr. KIES. Well, I must say, I agree with what I think is the underlying assumption of both the Treasury Department proposal and

the Commission proposal. That is, that many of the problems that

have arisen at the IRS—and not just the computer problem, I think

the computer problem is merely symptomatic of a larger problem—

are a result of a lack of consistent, long-term accountability. And

that is the problem on the congressional side, too.

The Members that have served on the six Committees that have

congressional oversight tend to turn over so that the people who

are in the positions of overseeing the IRS 2 years ago may not necessarily be the people who are there today, so there is not a longer

term picture of what really has happened over time.

Continuity is something that will improve the management at

the IRS. I also think, and I say this as a tax lawyer, that putting

a person with management skills rather than tax expertise into the

position of Commissioner is probably a smart and wise move. Doing

that, however, does make the position of Chief Counsel of the IRS

much more important in terms of the tax policy function. And I

think that is something this Treasury Department probably already does recognize. But I think getting a person with significant

management skills into the position of Commissioner is a very wise

move to run a 100,000-plus person organization.

Mr. COYNE. Well, I take it from your response about the governance issue that you do not have any problem with the proposed

Oversight Board hiring the Commissioner?

Mr. KIES. Actually, Mr. Coyne, we have raised, in the pamphlet

that we prepared, the fact that there are some constitutional issues

that need to be thought through in connection with that power. The

litigation that has occurred in this area involving the Postal Board

would seem to imply that it can work constitutionally, but it is by

no means a completely settled question. And, therefore, I think

that the Committee is going to have to ponder that as they examine that feature of the Oversight Board to determine whether they

are comfortable with that aspect of it. So we have identified that

as an issue that you do have to think through in terms of how you

proceed on that particular point.

Mr. COYNE. Thank you very much.

Chairman ARCHER. Mr. McCrery.

Mr. MCCRERY. Mr. Kies, just one question and that concerns the

provision in the proposal for all the various legislative committees

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of jurisdiction to meet together a couple of times a year with the

IRS to hear about how their strategic planning is going and so

forth. Have you had any chance to look at that and develop any

thoughts on the advisability of that?

Mr. KIES. Yes, Mr. McCrery, we actually think that is a very

sound recommendation. Again, we believe that many of the oversight problems with respect to the IRS can be traced not only to

the executive branch problems, but to the fact that Congress’ oversight has not been completely structured and coordinated. This recommendation is clearly intended to result in more coordinated, consistent oversight on the congressional side.

We think it makes a good deal of sense to do that. And it will

provide for a structured periodic review on the part of the Congress, which will force the Commissioner and the Treasury Department to realize that they are going to have to come back and report

how well they are meeting the goals that they set out 6 months

ago, 1 year ago or 2 years ago. And that is a very effective mechanism to ensure that there is a more effective oversight and accountability function. So we think that is a very sound proposal.

Mr. MCCRERY. Thank you. Thank you, Mr. Chairman.

Chairman ARCHER. Mr. McDermott.

Mr. MCDERMOTT. Mr. Kies, I just have one question to follow up

on what Mr. Coyne asked. Let’s suppose that we pass a bill that

gives the Board the ability to appoint the Commissioner and a lawsuit is brought and it is decided in the lower court—perhaps takes

a year—and then moves up to the Court of Appeals and takes another year or more before it gets on the docket and goes to the Supreme Court and takes another year. So we are talking 3 years.

What do you anticipate would be the effect on the tax-gathering

ability of the U.S. Government if the question of the appointment

of the Commissioner and all the policies which he or she were to

put in place were called into question. What would be the effect on

the ability to require payments or penalties or assess fines or whatever?

Mr. KIES. Mr. McDermott, two points on that. First, we think if

the Committee and the Congress were to proceed with this appointment mechanism, it might be advisable to try and structure some

sort of expedited Supreme Court review to try and short-circuit or

shorten the period of time that it might be necessary to get a Supreme Court decision, which was done with respect to line-item

veto legislation.

Mr. MCDERMOTT. How long did that take?

Mr. KIES. Unfortunately, it didn’t quite work the way it was intended because the Supreme Court concluded that there wasn’t a

case or controversy the first time around because there had been

no exercise of the power. It only took about 9 months to get it

through the Supreme Court.

In this case, the power would be immediate, so I don’t think we

would have that concern.

Mr. MCDERMOTT. But they could make the ruling that no one

has been injured. The courts could turn it down as they have in

term limit cases and other cases no one has been injured. So term

limit cases are now only coming to fruition. They are ripening in

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the courts because now people are being excluded from running for

legislatures or the Congress or whatever.

So if they chose not to do it for ripening questions, how long? A

year?

Mr. KIES. Well, it could be—could even be longer. And let me just

say that to try and structure an expedited review is only one possible way to address what I think is a legitimate concern here. It

may not be possible to make it work with complete efficiency.

I think the other aspect of my answer is perhaps more important

though, and that is that we have actually looked at this issue of

whether the actions of the Commissioner would be deemed invalid.

Our preliminary conclusion is that they probably would not. But I

think that is something that we need to take a very close look at

because I think that is going to determine the extent to which you

and the Finance Committee may be willing to make a decision that

is in the gray area as compared to one that clearly does not raise

a constitutional problem.

Mr. MCDERMOTT. Have you asked for an advisory opinion from

the Justice Department or from anybody as to whether or not the

decisions made by an improperly appointed or unconstitutionally

appointed Commissioner could then be reversed or thrown out?

Mr. KIES. Mr. McDermott, we have not asked for an advisory

opinion. Let me get back to you with a more specific answer. I believe there is case law that essentially says that the exercise of the

responsibilities of the official, even though they might be inconsistent with the appointment clause, are nevertheless recognized until

the Supreme Court holds that the appointment clause was not complied with. But let me give you a more specific answer on that. I

know this is an issue that we have started to explore ourselves because we had the same kind of concern, that obviously is the basis

for your question. So let me get back to you on that.

Mr. MCDERMOTT. I raise this issue because my experience in the

State legislature was we had a school board member who once said,

‘‘We are elected as school board members and we appoint the superintendent and once we appoint the superintendent, our job is to

rubber stamp whatever he or she decides.’’ So that appointment

process is key to the whole issue of whether or not the decisions

made, whether the strategic decisions made or anything else that

is made, are within the constitutional structure. And I think you

would throw, or at least it is a real potential that you would throw

the whole system into chaos for 3 or 4 years while the constitutional issue was being litigated in the courts. That is my major concern on this particular issue.

I would be grateful if you would give me the case law that makes

you believe that you could have the decisions made by such an appointed Commissioner standard, even though they might later be

constitutionally considered out of office.

Mr. KIES. I will be happy to do that. And I will just point out

that this is different than the school board situation. Although it

doesn’t necessarily answer the constitutional issue, there is the fact

that the Oversight Board under Mr. Portman’s legislation clearly

is intended to have an ongoing responsibility in terms of oversight

of the decisions that are made by the Commissioner.

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My staff just brought to my attention that the case that I was

referring to is Ryder vs. United States, which held that the socalled de facto officer doctrine conferred validity upon acts performed by a person acting under the color of official title, even

though it is later discovered that the legality of that person’s appointment is deficient.

Mr. MCDERMOTT. Could you give me the cite of the case?

Mr. KIES. Absolutely. It is in our pamphlet, but I will give it to

you specifically. It is 115 S. Ct. 2031 (1995).

Chairman ARCHER. Mrs. Johnson.

Mrs. JOHNSON of Connecticut. Thank you. Mr. Kies, I was reading the more detailed remarks in your written testimony in regard

to the complexity analysis and the role that the Commission report

seeks to develop for the Joint Tax Committee in helping the Congress write tax law that is more easily administered. And without

question, simplicity is the issue out there for the public. Simple law

that people can understand is fair because they know what is expected of them.

On the other hand, I am well aware of the case you make about

why the proposed analysis will not meet our needs and where in

the process that complexity occurs.

Do you have some recommendations as to how we could deal

with this problem differently than in the report? And what are

your thoughts on that?

Mr. KIES. Well, we have started to develop some recommendations and we are working on those. I have met with Mr. Portman

several times to explore some different ideas. We want to make

sure that the provision that is in the statute itself is workable. I

earlier said we don’t want a provision that is too complex to analyze complexity. So we are striving toward something that is administrable, but which will bring to the attention of the taxwriting

committees on a timely basis the fact that a particular provision

could be the source of significant additional complexity.

Mrs. JOHNSON of Connecticut. This is going to take longer than

we have here today, but I would like you to look at a complexity

analysis accompanying every tax bill introduced. When we introduce bills, often people will not sign on until they know what the

cost is going to be and that has helped to discipline the process.

And I think if people saw that often a good idea means that on the

tax forms there will be five new items and how that interfaces with

a lot of other tax law, that good ideas could be rethought as to how

we accomplish that goal.

But I think that one of the points you make is that you have to

notice this at the very beginning of the process. And that is one

point we certainly ought to be able to address. I look forward to

working with you on this particular issue of how we in Congress,

deal with the issue of tax complexity, because both we and the executive branch talk simplification, but write complex laws.

Chairman ARCHER. Will the gentlewoman yield just to piggyback

on that, and it will save me having to ask about it later?

Mrs. JOHNSON of Connecticut. Certainly.

Chairman ARCHER. Mr. Kies, what do you think about the suggestion that Gene Sterling made that we be given markup forms

as we go through the markup process in the Committee so that we

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can see graphically what is going to happen to the tax return as

a result of the provisions that we are considering at that time?

Mr. KIES. Well, I think actually it has been done before. It has

not been done frequently. And I think there might be some merit

to it on provisions that are of wide application. I am not sure that

I would recommend it on every provision that comes before the

Committee. For one thing, I think it might cause the entire legislative process to grind to a halt because the development of forms

does take time.

But on provisions of broad application, it might very well be useful to the Members to get a sense of what taxpayers are going to

have to do to comply with the provision. And conversely what the

IRS is going to have to do to administer it.

Chairman ARCHER. As the gentlewoman said, this is an issue

that we need to expand upon and take a lot of time with it at another point in time. But let me simply point out right now that it

is not just the lines on the return. In fact, the return frequently—

and I will reiterate that I am the first Chairman of the Ways and

Means Committee in memory who does his own tax return, and frequently the returns will leave out a line for simplification and you

have a gigantic struggle to go through all of the explanations and

the instructions to figure out where you are supposed to put something because there is no line on the return for it.

So in the name of simplification because it may be a relatively

isolated item that is not used by the masses of taxpayers, they simplify the return and take a line off and there is no place for you

to put what you are trying to put in, which the law requires that

you put on the return.

The other thing neglected to be looked at, I would say to the gentlewoman from Connecticut, is not just lines on the form. It is now

the developing work sheets that you have to go through that are

not on the form, in order to be able to get the number to put on

the line on the form. And these are where the real complications

come, more than the number of lines that are on the form. So we

deceive ourselves if we are only talking about how many lines are

on the form. I thank the gentlewoman for yielding.

Mrs. JOHNSON of Connecticut. I agree absolutely with the Chairman. One of the real problems for us has been that often a major

change in tax law will not have corresponding regulations for

years. And so taxpayers are out there guessing at how to comply.

And years later they learn they may or may not have guessed

right. So I think this is a very, very significant issue.

At the very least, any major proposal introduced by a Member

ought to have this backup and any proposal introduced by the administration ought to have certain backup administratively. We

need to illustrate new proposals in a way that we get a real understanding of the administrative complexity and of the complexity for

the taxpayer.

Thank you.

Chairman ARCHER. Ms. Kennelly.

Mrs. KENNELLY. Thank you, Mr. Chairman. I almost think I am

listening to a plot as I sit here, and the plot is somebody will have

to pull the Tax Code out by the roots if this continues because of

complexity. And as we know, it is almost virtually impossible in a

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markup to get an answer from IRS, but it is just as hard to get

an answer from Joint Tax. And then if we ever put the tax complexity analysis on top of that, I don’t know quite what Joint Tax

would do.

But I was going to ask a question and we have a vote now, about

the compliance burden estimates. Now, here is another level of

complication and work that we are saying we are going to put on

top of all these other things. Am I in the real world, or is it right

for me to be highly skeptical that the Joint Tax staff could contract

the compliance baseline? Can you carry out all of these things?

Mr. KIES. Mrs. Kennelly, we did say in our written testimony

that we have some significant concerns about the ability, just technical ability to be able to develop a compliance burden index or

measure because there are substantial disagreements among experts, whether they be economists, lawyers or accountants, about

exactly how you go about measuring this type of thing, so we have

expressed some serious reservations about that piece.

As you probably know, the Internal Revenue Service as a result

of legislation that Congress passed some time ago is required to

put on forms how many minutes it is anticipated that people will

take to interpret the law, fill out the form, things of that nature.

They are in a wholesale revisiting of those because there has been

substantial questions raised about those measurement times being

correct and exactly how you go about doing that.

So, on this piece in particular we share the concern that you

have raised about how realistic it is to be able to quantify that. It

doesn’t mean that complexity isn’t something that we ought to be

more attentive to, but we have some serious question about whether it can be quantified.

Mrs. KENNELLY. I see that we are going in the direction of supposedly reform of the IRS becoming even more complex. The bill

that we passed from the summer added to the complexity of the

Code, and particularly in the area of the alternative minimum tax.

So I almost think we should take a deep breath and stop a minute

and see what we are doing here, because I don’t know how individuals, let alone the IRS, is going to be able to deal with what we

are looking at right now. It seems like every time we say we are

going to reform, we just further complicate.

Thank you, Mr. Chairman.

Chairman ARCHER. Ms. Dunn.

Ms. DUNN. Mr. Chairman, no questions.

Chairman ARCHER. Mrs. Thurman.

Mrs. THURMAN. Mr. Chairman. Thank you. In listening to this

conversation up here, I think, if we were to do the analysis of the

reports of the tax issues, part of the responsibility would fall within

these Committees that look at that and putting some kind of time

limit on when we, or like a 24-hour time or 48-hour time where

amendments would have to be done so that the proper analysis

could be done, either through yourselves or through IRS telling us

feasibility or how it would be implemented.

If we are talking about this, is that something that you would

make that recommendation?

Mr. KIES. Mrs. Thurman, one of the reasons that we have, for

example, suggested on the complexity analysis that perhaps it

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should be limited to major provisions is there are practical considerations here. One has to recognize how the legislative process does

work, particularly when you are under time pressure and things of

that nature.

So I think we have to be a little careful about not developing

complex procedural rules that may be very difficult to comply with

in many circumstances because that will mean that we have not

really accomplished much.

So, we would try and encourage the Committee to the extent it

acts in this area to pass something that is flexible and that can be

made to work, but which will go in the direction of accomplishing

the goal of raising and heightening the intention of the tax writers

to complexity issues. And we think you can strike a nice balance

there. Clearly, we can do more.

I will say, slightly in defense of the staff, that we do, from time

to time, under current practice, bring to the attention of the Committees that legislation under consideration may be complex. Many

times the Committees accept that advice and act accordingly. Other

times their decision is that, notwithstanding complexity, the proposal is consistent with our objective and we are going to proceed

anyway. So we should not assume that whatever we are going to

do here will be a complete panacea, because it will not. But by no

means does that mean we cannot improve the situation.

Mrs. THURMAN. I know in the State legislature, there is a requirement that every bill go through an analysis. It gives us a public, a private, a government context of what potentially the

changes, what the bill does today or what the law is today, what

the changes would be. But we are given time so our staffs can prepare that. And even through the mandatory process there is a period of time in which you have a 24-hour time.

I recognize even going through the tax bill there were a lot of

amendments going on and people wanting to know what the cost

of it was and how it was going to be implemented. Our staffs were

calling you and trying to put pressure on you all. I think there is

some liability for us, at least in the consideration of looking at an

analysis of this, that we should be giving you the consideration

that it does take time and not to jump on people when they come

before us because they cannot give us the answer. And I just would

hope that that would be considered as we are talking about these

kinds of analysis.

Thank you, Mr. Chairman.

Chairman ARCHER. The Committee will be in recess for the vote

and return. Are there any other Members that wish to inquire of

Mr. Kies other than the Chair? We will go vote and return. Mr.

Kies, if you do not mind, I have a couple of questions I would like

to ask you on return.

[Recess.]

Chairman ARCHER. Thank you for waiting, Mr. Kies. I will try

and be brief.

As the Chief of Staff of the Joint Committee on Taxation, it is

practical to note that you make recommendations or supposedly

oversee various functions of Federal Government. There are many,

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tion from that when we begin to evaluate how we want to create

a Board relative to the IRS.

Mr. KIES. Well, Chairman Archer, one of the things that we have

done in our process of getting ready not only for this hearing, but

also in just analyzing the legislation, has been to look at where

there are other advisory boards within the Federal Government.

And indeed one of the concerns that has been raised about some

of those structures is that they are merely advisory and don’t have

significant authority or responsibilities, and that has been identified as one of the concerns about what is done here.

If you want it to be effective, you need to give it some more responsibility to be able to make it more than an advisory nature.

And we haven’t completed our analysis in that regard, but it is one

of the things that we have looked at in trying to assess how you

strike a balance on this entity that you want to create with respect

to the Internal Revenue Service.

Chairman ARCHER. I don’t think the information—I would rather

it be a result of a conference of study on your part. But the anecdotal experience that I have had in talking to people who have

served on various advisory boards over the last many years is that

they really don’t count for very much; that these people put in the

time and in the end what they say, what they recommend, really

doesn’t count for very much, and an awful lot of people have even

decided not to serve on these advisory boards because they think

it is, ‘‘a waste of their time.’’

But those are anecdotal, and I would like to have something that

is more comprehensively looked into, and I am glad you are doing

that.

I think of one particular thing recently and that is the White

House Conference on Small Business, and that was not an advisory

board, but a lot of people were drawn in to make recommendations

as to what the Federal Government should do for small business.

They issued their report, and their number one priority was to reform the independent contractor rules. And you remember very

well that we put that in our bill right here in this Committee to

change the Tax Code to reform the independent contractor rules,

which was the number one recommendation of that advisory board,

and the President refused to accept it and threatened a veto of the

tax bill if it was not removed. So clearly, in that instance, the highest possible recommendation of that advisory group was of no force

and effect.

But in any event, I am glad you are looking into that.

In his testimony yesterday, Gene Steuerle suggested that the bill

be amended to require the Treasury to submit a report to Congress

every 2 years with review and comment by the Joint Committee

staff for recommendations for a possible simplification or proposal

for a number of matters related to tax administration.

Do you have any comments on that suggestion?

Mr. KIES. Well, Mr. Chairman, I guess my recommendation was,

you shouldn’t do that every 2 years. You ought to probably do it

every couple of months. And indeed, as you know, in this most recent legislation, there were a number of simplification proposals included. The Treasury had made some recommendations which

202

picked up many of the provisions that were in the vetoed legislation from 1995.

But, clearly, we should be always looking for effective ways to try

and accomplish simplification. And as you well know, one of the

most significant constraints is revenue, but this most recently

passed bill is a good example of where you can do some pretty significant simplifications on a cost-effective basis.

For example, the elimination of the requirement to file returns for dependent taxpayers cost only $37 million a year and eliminated the need to file 1 million returns a year, which is some fairly

meaningful simplification for the cost involved. But I think that the

Joint Committee, the Ways and Means staff, the Finance Committee staff and Treasury should always be coming back to the Members with recommendations whenever they find something that can

be effective.

Chairman ARCHER. Well, I want to reiterate that I think we have

got to be very cautious about creating expectations for simplification, again, simply by affecting one line on the form. It is simply

on the form when you go to file as a head of a household on one

line on the form, but the IRS has to ask you 42 questions before

they can tell you whether you qualify as head of a household to use

that one line on the form.

Now, the lines on the form are like the tip of the iceberg. What

is unseen is everything that is below water level. And we cannot

forget that and, again, of course, that leads me to my favorite subject.

I don’t think we will ever solve this. I think we should tear the

income tax out by its roots because it is inherently flawed, but everybody knows that.

Mr. Hulshof.

Mr. HULSHOF. Thank you, Mr. Chairman. Along with that, Mr.

Kies, the Commission recommended stable funding for the IRS for

3 years. And I apologize if this question has been asked previously,

but they also are suggesting improved IRS service regarding telephone access, more funding for the exempt organization function,

and so forth; and likewise, recommended that Joint Tax would

have to pick up some additional responsibilities.

What are your thoughts on that?

Mr. KIES. Well, in terms of the stable funding, I think, Mr.

Hulshof, that it would be very wise for the Congress to give the Internal Revenue Service a more long-range, stable funding plan so

that they can do planning that goes beyond just the next fiscal

year.

For example, just this simple area of education, which is so important, that IRS agents are getting comprehensive, up-to-date

education. The Congress, in 1 year, appropriated 87-some million

for that function and the next year, cut it almost in half. That obviously creates great disruption in terms of being able to have a consistent, comprehensive and thoughtful education process, which

ties directly into taxpayer service, because it directly affects the

ability to accurately answer questions that taxpayers have. So I

think that makes good sense.

In terms of the Joint Committee’s added responsibilities, we hope

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sources to carry out those functions. We don’t think they will be

dramatic, but there will be some additional responsibilities.

We have said in our testimony that we think the Joint Committee can help coordinate the oversight role of the six Committees of

the Congress that do have a function in this area and that the coordination of that oversight will make congressional oversight more

effective. So we do believe that that is a very constructive recommendation that would improve the Congress’ oversight responsibility, which is just as important as the executive branch’s oversight responsibility.

Mr. HULSHOF. I appreciate that.

I yield back, Mr. Chairman.

Chairman ARCHER. Mr. Cardin, do you wish to inquire?

Mr. CARDIN. No, thank you, Mr. Chairman.

Chairman ARCHER. OK.

Mr. Kies, thank you very much.

Mr. KIES. Thank you, Mr. Chairman.

Chairman ARCHER. Our next panel is Phillip Mann, chairman of

the Section of Taxation of the ABA; Paul Cherecwich, international

president, Tax Executives Institute; Michael Mares, chair, Tax Executive Committee; and Richard Loengard, chair, Tax Section, New

York State Bar Association.

Gentlemen, if you would take your seats there at the witness

table. The Chair apologizes to you for keeping you waiting in the

wings, but we are very eager to get you in here on this very important issue.

Mr. Cherecwich, would you lead off, please, sir.

Just to reiterate, according to the rules of the Committee, your

entire written statement, without objection, will be inserted in the

record; and we would ask you to be as brief as possible in your oral

testimony and to attempt to limit that to 5 minutes. I know it is

a short time, but we would appreciate it if you would help us with

that.

Mr. Cherecwich.

STATEMENT OF PAUL CHERECWICH, JR., INTERNATIONAL

PRESIDENT, TAX EXECUTIVES INSTITUTE, INC., AND VICE

PRESIDENT, TAXES AND TAX COUNSEL, THIOKOL CORP.,

OGDEN, UTAH

Mr. CHERECWICH. Thank you, Mr. Chairman.

Chairman ARCHER. Also, will you personally identify yourself for

the record before you begin to testify.

Mr. CHERECWICH. Thank you, Mr. Chairman. Although I am employed as vice president, Taxes and Tax Counsel for Thiokol Corp.

in Ogden, Utah, I am here today as the president of Tax Executives

Institute, the largest group of in-house tax professionals in North

America.

The Institute’s members work for the top 2,700 companies in the

United States and Canada and interact with the Internal Revenue

Service on a daily basis. We have day-to-day dealings with senior

corporate management and corporate boards of directors, and accordingly, we know first hand the strengths and weaknesses of the

corporate governance model. TEI is pleased to participate in this

hearing on proposals to restructure the IRS.

204

TEI commends the National Commission on Restructuring the

IRS for its efforts in identifying the issues of concern, seeking out

the views of interested parties and crafting proposed solutions.

Even though TEI disagrees with certain provisions of H.R. 2427,

we are convinced that the proposed legislation holds great promise

for bringing continuity, accountability and expertise to the management and oversight of the IRS.

Mr. Chairman, I believe it is appropriate to begin by acknowledging and asking the Committee to acknowledge that consensus has

already been attained on a wide variety of issues, such as a fixed

5-year term for the Commissioner and, indeed, that significant

progress has been achieved, for example, in improving the modernization of the IRS’ computer systems.

TEI recognizes that there are sharply divergent views on how

best to provide effective oversight of the IRS. We respectfully suggest that it is time to tone down the rhetoric on both sides of the

debate and to focus on the substance of the various proposals.

Hence, we urge the critics of the current system not to demonize

the IRS or its employees, because unfounded and exaggerated attacks on the IRS not only undermine the public’s trust in an agency that, like it or not, is indispensable, but also erode the people’s

faith in the entire government. The key is not or should not be

scoring debate points or whose proposal wins, but rather on improving the management of the IRS and giving the American people the tax system they deserve.

That said, Mr. Chairman, I want to turn to particular proposals

for improving the management and oversight of the Internal Revenue Service.

TEI is especially pleased that nearly all parties recognize that

there is no single solution to what ails the IRS. What is needed is

a balanced, integrated approach. One change, say the appointment

of an oversight body, will not transform the agency unless it is effectively coupled with others, including coordinated and streamlined legislative oversight and simplifying the tax laws. Indeed, unless the horrendous complexity of the Tax Code is addressed in a

meaningful way, the best management structure in the world will

not enable the IRS to do its job efficiently and effectively.

Mr. Chairman, as has already been noted, the most significant

disagreement between the administration and the Restructuring

Commission lies in the area of executive branch oversight. With

due respect, TEI believes there is an acceptable, workable middle

ground between restructuring the Commission’s private-sectordominated board and the administration’s government-only board.

Specifically, TEI recommends the establishment of a reasonably

balanced Oversight Board whose members are appointed by the

President and charged with the responsibility for overseeing the

administration of the Internal Revenue laws. In our view, having

representatives of both government and the private sector on the

Board would afford the IRS the benefit of private-sector expertise

in a large number of areas, which would be lacking on a

government-only board, while recognizing the unique mission of the

IRS as a tax collection agency.

Similarly, a board of limited size, say no more than 10 or 12

members, would likely operate more efficiently than a larger group.

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Unlike the Restructuring Commission, TEI believes that the

Commissioner of Internal Revenue should serve as a full member

on the Oversight Board, as should the Secretary or Deputy Secretary of the Treasury. Beyond these two individuals, we believe

members should be selected solely on the basis of their expertise

in areas such as, general management, finance, technology and personnel. In other words, no particular group should be guaranteed

a position on the Board.

TEI believes that the Oversight Board should be involved in reviewing the IRS’ strategic plans, the Commissioner’s plans for reorganizing the IRS and the agency’s plans pertaining to modernization, training and education and other operational functions. The

Board should also ensure that the IRS’ budget supports the agency’s annual and long-range plans and should also ensure appropriate financial audits of the IRS.

TEI agrees with the Restructuring Commission that the Board

should have no tax policy responsibilities, though we note that the

dividing line between policy and administration is not always easy

to discern and maintain. For example, budgetary decisions regarding research or compliance programs could well affect how the tax

law is interpreted or applied, thereby affecting policy. Hence, we

acknowledge that the presence of private-sector representatives on

the Oversight Board raises conflict-of-interest issues of real concern.

While these issues cannot be minimized or ignored, they should

not be overstated. Institutional protections can and should be implemented, just as they have been in the private sector where the

same individuals serve, for example, on multiple boards of directors. Moreover, it should be remembered that with or without a

board, it is the Secretary of the Treasury who will remain ultimately responsible and accountable for the management of the IRS.

This brings us to another area where our views diverge from

those of the Restructuring Commission. TEI strongly believes that

the Commissioner should continue to be appointed by the President

with the advice and consent of the Senate and not by the Oversight

Board. Providing for Presidential appointment of the Commissioner

would not only address certain legal and constitutional issues that

have been raised, but would also recognize that the Commissioner

will be responsible for all functions of the IRS, including those beyond the Board’s areas of responsibility, such as specific enforcement and customer service functions.

TEI also believes that the President should retain the authority

to dismiss the Commissioner, but suggests that the Board should

play an advisory role in both the selection and retention of the

Commissioner.

Hence, TEI believes that the IRS can learn much from the private sector. Even though the corporate governance model is not

perfect, an oversight board will help to ensure that the IRS is held

accountable for its operations. In the final analysis, however, it is

not the oversight board to which the agency can or should answer;

it is to the administration, to Congress, and to the American people.

Mr. Chairman, before concluding, I want to address one additional issue: the need to streamline congressional oversight of the

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IRS. TEI agrees that responsible oversight by the legislative

branch is absolutely essential. We suggest, however, that steps can

be taken to streamline congressional oversight activities and to

make it at once less reactive, more constructive, and more integrated. Changes are needed not only to conserve the agency’s resources but to ensure that mixed signals are not being sent about

what the IRS’ priorities should be.

Mr. Chairman, Tax Executives Institute appreciates this opportunity to provide its comments on proposals to restructure the IRS.

I should be pleased to respond to any questions you may have.

Thank you.

[The prepared statement follows:]

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Mr. PORTMAN [presiding]. Thank you, Mr. Cherecwich.

I would urge all members of the panel to try to keep their oral

statements to 5 minutes so we have more time for questions.

Mr. Mann.

STATEMENT OF PHILLIP L. MANN, CHAIR, SECTION OF

TAXATION, AMERICAN BAR ASSOCIATION

Mr. MANN. Thank you. My name is Phillip Mann, and I am appearing before you today on behalf of the American Bar Association, Section of Taxation. The section has been privileged to work

with the Commission members and staff as they have developed

the Commission’s report. We particularly appreciate the courtesy

that Congressman Portman extended to us during this process.

As a preliminary matter, we endorse the conclusions of the Commission that the complexity of the tax law leads directly to difficulties in tax administration and frustration with the IRS. Simplification of the tax law is an urgent necessity.

But let me move now to the topic of executive branch governance

and congressional oversight, which is the purpose of today’s hearing. First, governance. The recommendations that we present today

are guided by seven current needs for our tax system. These are

the needs for clear accountability within the IRS and within the executive and legislative branches, effective oversight of the IRS by

the executive and legislative branches, continuity of IRS management, integrity assurance for the IRS, Presidential responsibility

for Federal revenues, private-sector assistance for IRS management, and oversight and better integration, not separation, of tax

administration and tax policy. These ideas are further developed in

the written testimony, but I want to move now to our proposed recommendations.

Taking into account these needs, the section believes that the following management and oversight structure would be appropriate:

We believe the President should remain the ultimate authority

over the Internal Revenue Service, appointing the Commissioner

and Chief Counsel and controlling its budget. Therefore, we recommend that the Service remain an agency within the Treasury

Department, subject to its authority and accountability. Consistent

with our view that private-sector expertise should be made available to the Service’s senior management and should be involved in

the oversight process, we recommend that Congress create an Internal Revenue Service Board of Review.

This Board would be made up exclusively of private-sector members serving staggered terms. Either the President or the President

and the Congress would appoint the board members, who would be

subject to existing laws relating to disclosure, recusal and conflicts

of interest. The precise tasks of the Board would be specified by

Congress in the implementing legislation.

The most important power of the Board would derive from its

duty to make periodic independent reports directly to the President

and to the Congress concerning its assigned tasks. It would also

provide a consultative resource for the IRS on major management

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issues and, in addition, the Board would be available to consult directly with and testify before the Congress on the progress and

problems of the agency.

We do not support the Commission’s recommendation that approval of certain management decisions be shifted from the Treasury to the Board and neither do we support membership on any

IRS Board by other executive branch personnel. We believe this

would raise concerns about potential political influence, as well as

confuse loyalties.

As a result, we do not support the IRS Management Board created in President Clinton’s recent Executive order and proposed in

H.R. 2428.

Finally, we believe that Congress should establish the new position of Under Secretary of Taxation. While we concur in the Commission’s assessment that oversight of the Service has been limited

and uncoordinated, we are skeptical that its proposed Oversight

Board is the answer. Instead, we believe a new Under Secretary of

Taxation, charged specifically with that responsibility, together

with the task of coordinating the entire tax system, both tax administration and tax policy, would work.

Creation of a new position of Under Secretary of Taxation would

avoid the prospects of management by Committee, assure greater

coordination of fiscal management of the Service tax administration and tax policy, and together with the Board of Review reporting directly to Congress, the Under Secretary would provide a clear

focus of responsibility, authority and accountability.

Let me switch briefly to congressional oversight. We strongly

agree with the Commission’s conclusions that within both the executive branch and the Congress the proliferation of entities responsible for some aspect of the tax system makes the development of

a coherent legislative, administrative and budgetary policy virtually impossible, and we endorse the Commission’s proposal to establish a joint oversight panel.

In conclusion, we have attempted to set out for the Committee

a plan for the future governance and oversight of the Service that

we believe will be most successful. We do so with only one objective

and that is to improve the Nation’s tax system for the benefit of

all Americans. We will do our best to assist the Ways and Means

Committee as it works to craft a plan for the future of the Internal

Revenue Service.

Thank you, Mr. Chairman, for the opportunity to appear today.

[The prepared statement and attachments follow:]

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Mr. PORTMAN. Thank you, Mr. Mann.

Mr. Mares.

STATEMENT OF MICHAEL E. MARES, CHAIR, TAX EXECUTIVE

COMMITTEE, AMERICAN INSTITUTE OF CERTIFIED PUBLIC

ACCOUNTANTS

Mr. MARES. Good morning, Mr. Chairman, Members of the Committee. My name is Michael Mares, and I am the chair of the Tax

Executive Committee of the American Institute of Certified Public

Accountants. Our 331,000 members provide tax preparation and

tax advice for millions of American businesses, individuals and notfor-profit organizations. It is from this base of experience that the

AICPA offers its comments.

First, we strongly believe that the structure on oversight that

has served the Service in the past will not serve it in the future.

Thus, we support the creation of an independent IRS Oversight

Board as referenced in the legislation. But we oppose the reservation of any seat on such a board for any special interest group.

We believe the IRS must change the way it is governed. Today,

and for the foreseeable future, the IRS faces multifaceted challenges such as technology, improving customer service and enforcing compliance with the tax laws. These challenges are not easily

separated into the traditional tax policy or tax administration

camps, but cross several boundaries. There is a need for additional

different and creative ways to address these challenges, something

we believe the Board will provide.

We see several advantages to the creation and implementation of

the Board. First, we believe the Board will improve tax policy deliberations and perhaps the legislative process. A more independent

IRS will provide input on the administratability of legislative proposals, perhaps even suggesting improvements based upon the

practical experience and implementation of tax laws. Tax policy decisions would remain with Treasury. Treasury or the Congress

could elect to pass legislation, irrespective of difficulty with

administratability, but at least the Congress and Treasury would

recognize if administratability is going to be difficult.

We also believe the Board will create continuity of oversight and

accountability. The 5-year staggered terms that are proposed will,

as in the private sector, enable the Board to provide continuity of

oversight.

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Second, we see a real advantage in that the staggered terms will

allow the appointment of members to specifically address the problems that the IRS faces at that particular point in time.

Finally, we believe that the governance limitations proposed in

the legislation reduce the potential for conflicts of interest. Obviously, a board must not have any conflicts of interest. Obviously,

it is important that the Board be viewed with integrity as an integral part of the tax system.

The Board’s focus would not be on the day-to-day management,

but on the overall governance of the Internal Revenue Service.

Also, the statutory controls, specifically the appointment of board

members and designation of board members as special government

employees, are sufficient to address the issue. We are also confident that if it is determined that that, in and of itself, they are

not sufficient, additional safeguards can be implemented that

would avoid the problems.

Finally, we believe that, even if it is deemed that such conflicts

of interest for active participants in businesses, tax practitioners,

and so forth, could not be avoided, there is a large pool of qualified

individuals in this country who could be appointed, such as retired

executives, practitioners who are out of practice, educators, and so

forth, who have the qualifications and could provide distinguished

service without raising the specter of a conflict of interest.

We believe very strongly that all board members should be selected for their expertise based on the criteria set forth in the legislation, not because they represent any specific group. We believe

that anything less than this will create the impression that the

Board is comprised of special interest groups and not a board of integrity, as we have discussed previously.

It is our firm belief that public confidence must be restored in

the Internal Revenue Service. An independent board focusing on

the IRS problems, on strategic issues that must be addressed and

faced, bringing to the table diverse private-sector experience, is the

catalyst for this effort. We believe that the Board is a good way to

move the IRS back to both credibility and to effectiveness.

Another issue I would like to address briefly is the issue of congressional oversight. While we support the concept, as specified in

the legislation, of two joint hearings a year for representatives of

the current oversight committees, this should not be allowed to result in more meetings than are now being held, but should serve

as the focal point for reducing the meetings that Congress has dealing with IRS oversight.

Finally, I would like to thank this Committee for the opportunity

to present our views today. The AICPA, as always, stands ready to

offer our assistance and whatever additional comments we can to

the Committee.

Mr. PORTMAN. Thank you, Mr. Mares.

Mr. Loengard.

STATEMENT OF RICHARD O. LOENGARD, JR., CHAIR, TAX

SECTION, NEW YORK STATE BAR ASSOCIATION, NEW YORK, NY

Mr. LOENGARD. My name is Richard Loengard, Jr., and I am appearing as chair of the Tax Section of the New York State Bar Association.

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First, I would like to thank the Committee for giving us the opportunity to express our views on the recommendations of the National Commission on Restructuring the IRS with respect to executive branch governance and congressional oversight of the Service.

The Tax Section wrote letters to, among others, Chairman Archer,

Congressman Rangel, and Congressman Portman on August 13,

1997, commending the Commission for its analysis of the issues

and commenting on certain of its proposals.

A copy of the letter to Chairman Archer has been attached to our

written statement. We ask that it be included in the record.

As we noted in that letter, we are attorneys who practice in the

tax area, but we are neither management consultants nor computer

experts, and our comments are limited to those areas of the Commission’s report and the IRS Restructuring and Reform Act of 1997

as to which our professional activities have given us some insight.

I think that the principal comments contained in our letter may

be summarized as follows:

We recognize the difficulty of the task facing the Internal Revenue Service. It is a tax collection agency, and those who deal with

it do not come to it voluntarily or necessarily with a desire to cooperate with it. Although we think most IRS personnel try to be

helpful to taxpayers, the Internal Revenue Service will never be

universally popular.

Having said that, we recognize that the Internal Revenue Service

has not always done as good a job as it might in facilitating taxpayer compliance with our laws. IRS personnel are occasionally peremptory or even abusive to taxpayers. Lack of funding results in

inadequate staffing, which diminishes the Service’s ability to assist

taxpayers, as well as its ability to carry out its audit function.

Especially we recognize that the Service’s use of computer technology has not been successful, and that this has made both voluntary compliance and IRS enforcement more difficult. However, in

reviewing the work of the Service, we agree with the Chairman

that the complexity of the tax law lies at the heart of the problem,

not only impeding the Service’s ability to function, but also impeding voluntary compliance with the law by taxpayers. We heartily

commend the Commission’s emphasis on the need for simplification, as well as its concern for the frequency of substantive changes

to the law. These factors make it vastly more difficult for the Service to cope with its interpretive function and to train its personnel.

We note, however, with dismay that the recently adopted amendments to the Code, while including some simplification provisions,

have added other provisions introducing significant additional complexity affecting many taxpayers.

So long as the Code continues to be as complex as it is and is

changed so frequently, it will be difficult for taxpayers to understand the rules needed to calculate their tax and it will be difficult

for the Service to give guidance on the application of those rules.

Under such circumstances, conflicts are bound to arise, and taxpayer frustration with the Internal Revenue Service is certain to

increase. To place the blame for this situation primarily on the

Service is clearly unfair.

Hence, we commend section 6 of the Commission’s report dealing

with the need to simplify the Internal Revenue Code. We also note

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with favor that section 422 of the Restructuring and Reform Act

provides for a ‘‘Tax Complexity Analysis,’’ although we do not have

enough relevant experience to enable us to evaluate the likelihood

that it will successfully reduce the complexity of the Code. However, we do have some reservations with provisions of that act

which create an independent role for the Internal Revenue Service

in making the ‘‘Tax Complexity Analysis.’’

While we think that the Treasury Department should consult

with the Internal Revenue Service on such matters and should incorporate the views of the Service in the Treasury’s tax complexity

analysis presented to Congress, we think it is better that the executive branch speak with one voice on issues of complexity as these

necessarily involve questions of policy and enforcement, areas in

which the Treasury Department retains ultimate responsibility.

We have also considered the proposal of the Commission, as incorporated in the proposed act, to establish a board of directors,

with a small staff, to oversee the management of the Internal Revenue Service. The Board will appoint the Commissioner, but it will

not have oversight over several aspects of the Service’s activities,

including issues of tax policy and enforcement activities, such as

examinations, criminal investigations and collection.

On the other hand, the Board will have a role in creating a budget for the Service, which it will send to the Treasury Department

and which will accompany the President’s budget for the Internal

Revenue Service when that is submitted to Congress. It will not appoint the Chief Counsel, who will be appointed by the President.

The board of directors will have nine members, seven of whom will

be from the private sector and will serve on a part-time basis.

We note that many have expressed reservations about the board

of directors on the grounds of conflicts of interest and similar

issues. We do not disagree with those comments. For example, we

are concerned that no matter how careful the members of the

Board are to insulate themselves from issues in which they or their

companies have an interest, the perceived possibility of such conflicts will further weaken, rather than enhance, the public’s regard

for the Internal Revenue Service and its faith in the Service’s impartiality.

However, our principal concern with the proposal is that we do

not think that the dividing line between the administration on the

one hand and policy and enforcement on the other is easily identifiable, nor do we think such a division will be a practical one. Furthermore, we do not see how issues of policy and enforcement can

be separated from the budget process. Hence, we believe that there

will inevitably be jurisdictional and budgetary conflicts between the

Treasury Department and the Board, which will share responsibility for a single administrative agency.

The position of the Chief Counsel, whose work is primarily in tax

policy and enforcement, areas for which the Treasury has responsibility, but who will report to the Commissioner, who in turn reports to the Board, seems unclear at best. We are concerned that

this division of authority between those responsible for the tax policy and enforcement functions of the Service and those responsible

for its administrative functions, including its budget, will lead to

confusion within the Service as to who is in charge and what poliVerDate 11-SEP-98 14:18 Nov 29, 1999 Jkt 058922 PO 00000 Frm 00237 Fmt 6601 Sfmt 6602 D:58922 W&M3 PsN: W&M3
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cies are to be implemented. If this occurs, the act, rather than enhancing the ability of the Service to function, will reduce it.

Again, we thank you very much for the opportunity to appear

here today, and we will be happy to answer any questions you may

have.

[The prepared statement follows:]

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Mr. PORTMAN. Thank you, Mr. Loengard.

Mr. Rangel would like an opportunity to welcome you and to initiate the questioning. He has another commitment, so I would like

to yield now to Mr. Rangel.

Mr. RANGEL. Mr. Loengard, let me thank you for coming and also

say thanks to the New York State Bar Association for giving the

Congress guidance, but more importantly, giving me guidance.

We are dealing with a subject matter that the whole country

agrees has to be dealt with. In addition to that, we are dealing

with the perception of the IRS. If everyone starts saying, just pull

the IRS up by the roots, and that the tax collection system is not

working, we on the Committee must continue making every attempt to correct this situation, but at the same time not make it

partisan. We are splitting America as to what we should or should

not do.

Mr. Portman, in his Commission, worked with Mr. Coyne and

Ben Cardin. Mr. Coyne—he is the Democratic leader. We try not

to get partisan here. All of us are working together to make certain

we end up on the same page. The only way the American people

are going to believe that we are serious is that we have a bipartisan solution. That is where the New York Bar, I hope, will continue to work with me until we reach a conclusion. That is, who

is going to establish tax policy and who is going to be in charge of

the tax collection system of this country?

Now, we have got preconceived ideas about this issue. People

come to this with their own experiences as to what they are going

to do and what they are going to concentrate on. Some of us believe

that a person as high as the IRS Commissioner is the person or

the body that should control tax administration policy. If you can

help us to reach the correct conclusion, and include the safeguards

that people could believe in, remembering that the government is

accountable for what we are trying to do here, it would be very

helpful.

I see a situation where there is bipartisan support for the objective. As always, there’s a possibility of a clash in terms of how we

reach the end result. I hope that you would help me to make certain that this is a bipartisan effort, and that what we send to the

President will work. So I am going to thank you for your leadership, as well as other Members of the Committee. But most important, we are so close to the forest—you know, we work with the

IRS every day, and we hear taxpayers’ complaints. You are out

there maybe better able to see the solution.

Thank you, Mr. Chairman.

Mr. PORTMAN. Thank you, Mr. Rangel.

Mr. Cardin.

Mr. CARDIN. Thank you, Mr. Chairman. I want to join Mr. Rangel not only in welcoming you but welcoming your advice on these

issues. And we are struggling to pass legislation that will be bipartisan in the way that it restructures the Internal Revenue Service.

Mr. Loengard, I want to, if I might, just ask you to clarify some

positions in your statement. You point out in your August 13 letter

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that the bill that was filed was different from the Commission’s report but did not materially affect the views that you expressed.

And then you go on expressing your concern about the jurisdictional and budgetary conflicts between the Treasury Department

and the Board, talking about tax policy.

The bill that was filed is different from your letter in that the

Chief Counsel is appointed by the President, not by the Commission. The Board does not have an independent staff; it uses the

staff of the IRS. And there were two points that you had mentioned

in your August 13, 1997, letter. It seems to me that they are significant changes; at least it was highlighted in your letter to us.

But yet your footnote indicates that there were no significant

changes. That concerns me a little bit.

But I guess I would ask that you tell me where in the legislation

you draw a concern about the jurisdictional and budgetary conflicts.

The legislation is pretty specific in saying that the Board has no

power over tax policy and the budget submitted—like the Social Security Administration, for informational purposes to Congress, the

budget goes through the Secretary of the Treasury and the OMB

and the President to Congress.

Mr. LOENGARD. Well, if I can address a few of those questions in

order.

First, we—I thought with respect to the legislation and to some

extent I am speaking here without having discussed it with other

people in the New York State Bar, Tax Section, we thought with

respect to the legislation that while it did change the status of the

Chief Counsel as to who appointed him, as I mentioned in my testimony today, he still reports to the Commissioner. He still has a

sort of bifurcated role in which part of him is reporting, it seems

to us, to the Treasury, part of him is reporting to the Commissioner

and the Commissioner, in turn, seems to be responsible to the

Board.

Mr. CARDIN. And where do you draw that from in the legislation,

where he would be responsible to the Board and potentially involved tax policy in—I don’t see that in the legislation. And if there

is a need to clarify it, I would appreciate if you could, because the

legislation is pretty clear that the appointment is by the President.

The Chief Counsel is involved with the policy—the policy, the

Board has no role to deal with it. The Chief Counsel actually works

with the Secretary, more so than the Commissioner. The Secretary

clearly doesn’t report to a board. I am not sure I understand where

you draw the conclusion that the Chief Counsel has to report at all

to the Board.

Mr. LOENGARD. Well, I thought—perhaps I am in error. I thought

that the Chief Counsel would, under the legislation, continue to report to the Commissioner. He would be evaluated by the Commissioner, that the Commissioner would recommend whether he

should be retained or was otherwise doing a suitable job. And in

that sense, I thought that there was a problem there for the Chief

Counsel, as to whether his loyalties were to lie with the Treasury

or to lie with the Board, and to some extent that might confuse the

lines of authority. I don’t know whether that is an answer, and I

think maybe it could be dealt with by clarification.

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I thought with respect to the Board’s staff, which you mentioned,

that it wasn’t clear to me, when I read the legislation, for how long

people were to be transferred to the Board by the Commissioner,

whether that was to be a temporary assignment or a permanent assignment. I also think that to some extent for a board to function

effectively, whether it is a board such as the Treasury is suggesting

or a board such as included in H.R. 2292, there is a need for some

staff if the Board is not to be wholly dependent on what it gets

from the people that it is supposed to be administering. And that

is a problem which I think is inherent in any board structure,

whether it is the Board structure recommended by the Treasury or

the Board structure recommended in the legislation.

Mr. CARDIN. I thank you for that.

Let me just read from page 19 of H.R. 2292, the duties of the

Chief Counsel. ‘‘The Chief Counsel shall be the chief law enforcement officer of the Internal Revenue Service and shall perform

such duties as may be prescribed by the Secretary of the Treasury.’’

I think—so it is—I don’t know how we could make it much clearer

than that.

We are always open for more clarification, but we have said, no,

the responsibility for tax policy is not in the Board. The Chief

Counsel is appointed by the President; duties prescribed by the

Secretary of the Treasury.

For the life of me, I just don’t see the concern that you raise

here; and we are always open to try to clarify these points, and we

welcome any additional information that you could bring forward

on this issue.

Mr. LOENGARD. Well, if we were mistaken, I apologize.

Mr. CARDIN. Thank you.

Mr. LOENGARD. I think in response to one of your other questions, we do see that the distinction between tax policy and tax enforcement on the one hand and the management of the IRS on the

other is not a clear line; and we also do think that the budget process is inherently intertwined with the issues of tax policy and tax

administration, which are being left in the hands of the Treasury

Department.

Now, we recognize that the budget is merely an advisory budget,

and yet, nonetheless, it would seem to me that people in the Internal Revenue Service will play a role in creating the budget that is

going to be presented by the Board to the Secretary.

Mr. CARDIN. But it is going to be passed by the Congress. The

Congress is going to make that decision. The budget that is submitted by the President is the President’s budget. The information

submitted by the Board is additional information for the Congress

in order to be able to act on what it thinks is appropriate budget

support for the agency.

Again, the Social Security model has shown that it is useful to

have more information in Congress as to what is necessary, what

an independent group believes is necessary in order to carry out a

mission.

I don’t see the conflict, but I am always willing to, if you have

specific recommendations for change in the legislation, that may be

useful. But I can tell you, we agonized over this to be extremely

careful to maintain the legal authority within the President and

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the Secretary of the Treasury as it relates to the budget, with ultimate responsibility resting with the Members of Congress.

Mr. PORTMAN. Thank you.

Mrs. Johnson.

Mrs. JOHNSON of Connecticut. Mr. Cherecwich, I was pleased to

hear Mr. Mann comment that he didn’t think executive branch participants on the Board was a good idea. I think in these hearings,

we really haven’t focused enough on the difficulties created by executive branch people from other agencies participating in an advisory board, both the political implications of that number of political appointees being involved in the governance of the IRS and also

the dearth of evidence that they in their own departments have

been able to meet the kinds of challenges the IRS is faced with.

But I think both you and Mr. Mann carry a burden that you

have not yet met today.

You know, the proposal to change is in response to the failure

of the current system. The current system includes an advisory

board. It includes independent studies by the GAO. The GAO has

come to us for years. This is my third year as Chairman of the

Oversight Committee, and my predecessor heard reports, too.

The GAO does excellent work. They bring reports. It is very hard

for the Congress to use those reports to force change, because we

are not close enough to the problem. And an advisory board that

has the kind of expertise envisioned by this advisory board, every

month sitting down with the Commissioner and saying, what

progress are you making, what progress are you making, it seems

to be very important.

Now, you are in the business. I don’t know how familiar you are

with the Taxpayer Bill of Rights, but we asked in the Taxpayer Bill

of Rights to have the taxpayer advocates report to us what problems they were seeing, so we could get a better understanding of

what problems ought to be resolved.

The bureaucracy is so ladened that we couldn’t get that.

Now, it is going to take us another year, but we are going to get

that. But it does seem to me that an outside board would have understood what we were asking for.

Now, that is only one example. We also asked for IRS to develop

a system of overseeing—you know, of tracking personnel performance, so that those agents that are abusive to taxpayers out there

would be held accountable. At least we would know who was receiving complaints. To this date, they haven’t.

It does seem to me there are some routine management practices

that an outside board would bring to this, that the advisory board

hasn’t been able to because the appointments don’t last. People are

in for 1 year, they are in for 2 years, they are in and out. They

meet quarterly. It simply doesn’t work.

The board members proposed by the Commission aren’t just casual appointees. These folks are appointed by the President, confirmed by the Senate, which is a very big deal, and have a real responsibility for 5 years. That is entirely different from any kind of

private-sector involvement or input or conversation that we have

ever tried to bring to this agency. If anything stands out from past

experience, it is that we need oversight—we need to make plans

and we need to implement plans.

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We make plans; we don’t implement plans. That takes constancy.

It takes continuity. It takes experience, broad experience, outside

of government bureaucracies.

So I think the burden is on you to demonstrate that your advisory committee is going to perform differently than those in the

past, and that outside reports are going to have any more effect

than the excellent outside reports we have already had.

After all, if this doesn’t work, we will fix it. If there are problems,

we will fix it. But really, you are not dealing, I don’t believe, seriously enough with the failure of the very mechanisms you are recommending.

So I wish you would address yourself to those, why you think

they will work when they have not in the past.

Mr. CHERECWICH. Thank you for your comments, Mrs. Johnson.

I think that we are not that far apart in our perception of what

needs to be done. We do believe that an oversight board, rather

than an advisory board, is very, very appropriate. In our written

testimony, we take care to distinguish these terms because we, too,

are concerned that we do more than just the same old solution and

the same old Band-Aid. I think that oversight board, that has some

very specific responsibilities as suggested by the Commission, is

very, very appropriate.

About the only major difference we are having with this is that

we think that the Board’s composition should be more balanced.

As Mr. Rangel said a few moments ago, perception of the public

is very important, and we do have to recognize that the Internal

Revenue Service is responsible for tax collections in this country.

By having a more balanced board, I think we would be able to take

advantage of private-sector expertise while still maintaining the

role of the executive branch and performing the basic functions of

the Internal Revenue Service.

So I do believe that we are very, very close in what your concerns

are.

Mrs. JOHNSON of Connecticut. And would your board have essentially the same powers, except for the appointment of the Commissioner, as the Board in the Commission’s report? You didn’t go into

that in great detail in your testimony.

Mr. CHERECWICH. In our written testimony, we do lay out the

role that we thought the Management Board should have, and we

do think that they should be responsible for oversight and review

of the strategic plans, giving guidance to the Commissioner on

budgetary matters and other things like training of employees.

Mrs. JOHNSON of Connecticut. How about——

Mr. CHERECWICH. I think that the Board should have some responsibility for accountability, yes. The manner in which they

would exercise that responsibility ultimately would be in making

some strong recommendations to the President to remove the Commissioner if the Commissioner is not doing his or her job.

Mrs. JOHNSON of Connecticut. I would ask you to have your people do some research and see if there is any instance in which an

advisory board has ever made recommendations to either the Congress or the President that have been implemented. I say that in

seriousness. I have seen excellent people serve. I helped to estabVerDate 11-SEP-98 14:18 Nov 29, 1999 Jkt 058922 PO 00000 Frm 00245 Fmt 6601 Sfmt 6602 D:58922 W&M3 PsN: W&M3
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lish the Expert Council in the Department of Commerce to try to

get private-sector input and saw their terrible frustration.

Help us make sure. We have to have an effect here. So if you can

help us account, and you can look yourself at powers and what has

actually—where we can see a model of action, I think that is what

we are looking for.

Mr. MANN. Mrs. Johnson, let me say that I share your concern

that an advisory board of the kind that we have had in the past

is not adequate. I have served on those advisory committees and

I know exactly what you are talking about.

I think that the Tax Section’s ideas are a little different from

TEI’s ideas. We have the same concern that you have expressed in

terms of wanting private-sector expertise added to the management

expertise of the Service. But also with respect to the oversight. We

think that private-sector oversight is very, very significant. What

we have proposed is a kind of two-headed approach to that. The

first would be a review board appointed by the Congress with specific statutory duties with reviewing and reporting directly to the

President and the Congress, probably semiannually. We think that

that is very likely to be the prescription that we need for true accountability and oversight.

We have added to that what we also believe is important, which

is daily oversight by recommending that we have an Under Secretary of Taxation whose personal responsibility is to assure that

the oversight function is continuous and effective within the Internal Revenue Service, and he will be the person, or she will be the

person, where the buck stops. There will be no way to avoid the

accountability there.

Mrs. JOHNSON of Connecticut. Unfortunately, my time has expired, but I think you need to ask yourself what are our hiring

practices? How effective has anyone been in overseeing? Even this

Secretary, who really has been very interested, hasn’t had the time

to be proactive. I worry about having one person. What breadth of

experience will he bring to the oversight activity? How much will

he be listened to? You will still have that Deputy Secretary and the

Commissioner. Will there be conflicts there? Now, you have hired

two people to do basically the same job.

I think we have to look at hiring practices, who we would be able

to make available in that niche and whether or not they could

bring to the table, without actually being the Commissioner, that

breadth of pressure and outside view.

So I appreciate your thoughtfulness, and we look forward to

working with you on a solution that I hope will be impressive to

all. Thank you.

Chairman PORTMAN. Mr. Coyne.

Mr. COYNE. Thank you, Mr. Chairman. I thank the panel for

their helpfulness.

I wanted to ask Mr. Cherecwich questions relative to your concerns about the Management Board. You referred to the Management Board outlined in the administration’s proposal as a government board staffed by government employees and indicated you

didn’t think it could be as effective as the Oversight Board in H.R.

2292. But I was wondering if you were aware that there is also an

advisory board proposed in 2428 that would fill some of the obligaVerDate 11-SEP-98 14:18 Nov 29, 1999 Jkt 058922 PO 00000 Frm 00246 Fmt 6601 Sfmt 6602 D:58922 W&M3 PsN: W&M3
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tions that are proposed for the Oversight Board in 2292. So it is

not just a management board—the Advisory Board in 2428 would

fulfill some of those oversight roles.

Mr. CHERECWICH. I am aware of that, Mr. Coyne. Part of the concern that TEI has is that the Advisory Board might be no more effective than other advisory boards, as Mrs. Johnson has just challenged me on. And for that reason, we strongly believe that we

need to have an oversight board that is reasonably balanced between the government and the private sector. I think we are going

to get the best of both worlds with a small oversight board that has

representatives from both government and the outside world.

Mr. COYNE. Do you have trouble with the proposed Advisory

Board in 2292 approving the budget? It seems to me that what you

have attempted to provide for us today is that the Oversight Board

in 2292 would review and have some oversight, but would not be

able to approve the budget of the IRS.

Mr. CHERECWICH. We believe that ultimately the budget has to

be the responsibility of the President and the Secretary of the

Treasury—and, of course, Congress. We see the role of the oversight Committee in working with the Commissioner in the development of the budget and helping the Commissioner to ensure that

the budget is there to achieve the strategic plans that have been

established.

Mr. COYNE. Thank you.

Mr. Mares, you indicated that you were somewhat concerned

about any oversight board that would have special interest groups

represented.

Could you define what you mean by a special interest group? I

mean, it seems to me that anyone who comes into a board like that

is going to have some special interests of their own.

Mr. MARES. There are two points I would like to make. First of

all, we believe that Treasury should have a seat on the Board or

any board as it may ultimately be constituted. So Treasury, we specifically exclude from our definition of special interest groups.

I think what our concern is that a board member should be chosen based upon that particular board member’s meeting the legislatively mandated criteria, not because that member represents a

specific group or a specific group has the right to select someone

who then, in turn, is appointed to the Board, subject to the approval of the Senate, and so forth. So our concern is not that individuals will come to the Board with their own experience, which

will give them certainly some bias; our concern is with any specific

group having an assigned seat on the Board.

Mr. COYNE. Thank you. Thank you, Mr. Chairman.

Mr. PORTMAN. Thank you, Mr. Coyne. Mr. Hulshof.

Mr. HULSHOF. Thanks, Mr. Chairman.

Mr. Mann, in your written statement and testimony you mention

the Internal Revenue Service must be free from improper political

influence and the potential for corruption, and I couldn’t agree with

you more. It has been testified or mentioned by a couple of you, I

think Mr. Cherecwich just mentioned public perception. I think

there is a growing perception among the American people that politics too often plays a role in IRS’ decisions. Recently, the press

headlines that an individual who has litigation ongoing with the

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President of the United States is now being subject to audit, being

one of those examples.

Let me ask you, do you think that the Treasury’s idea of a management board, which consists largely in my mind of political appointees, many of whom may have scant knowledge of tax administration law, do you believe that that creates a greater risk of politicizing the IRS?

Mr. MANN. Well, Mr. Hulshof, I think that the testimony says

that we think that one of the risks of having the Board with other

executive branch personnel on it is that it raises at least the perception that there may be political influence, as well as confused

loyalty. So both of those points I think we would make in opposing

other executive branch personnel on any kind of a review board.

Mr. HULSHOF. Let me ask, Mr. Cherecwich, putting aside the

issue of the governance, the executive branch governance, does TEI

believe that the rest of the recommendations in especially H.R.

2292, does that help us put the IRS on the right course?

Mr. CHERECWICH. There are a very large number of recommendations that we think are very, very appropriate that we detailed in

our written testimony. We think that the continuity of management with a 5-year term is very important. We think the concepts

of stabilized funding, consideration of a 3-year budget so the IRS

can get on with the job is extremely important. Streamlining of

congressional oversight in order to avoid many of the demands that

have taken place on the people trying to get the job done is really

significant to us. We think, for example, that the GAO ought to

have to come to Congress for permission to do yet another audit of

the Internal Revenue Service.

And speaking specifically of oversight, we do know that the legislation includes the requirement for independent reports back to

Congress, not only from the Oversight Board but from advisory

groups and various offices within the IRS. We really think that

Congress needs to think twice about legislating the requirement for

additional reports from the IRS and take care of it through an

oversight board.

We think that some of the items in there for strengthening taxpayer rights are really very, very appropriate. For instance, we

urge you to carefully weigh proposals to eliminate the net worth

limitations on awarding costs and fees to taxpayers when the IRS

has been proven in court to have absolutely no basis. There should

be no reason why, just because a corporation has been raked over

the coals inappropriately, that they should be treated any differently from an individual who has been raked over the coals inappropriately.

We also think that the comments regarding interest that are in

the legislation are a step in the right direction, although we have

some specific concerns about equalizing interest between overpayments and underpayments based upon some sort of revenue neutrality has us a bit confused. We would like to address that issue

and help you work with that.

Mr. HULSHOF. I appreciate that. My time is expiring.

Mr. Mares, the American Institute of CPAs states that one fundamental aspect of public accounting is providing independent objective advice to clients. And I think your organization—certainly

245

members have significant experience in resolving potential conflict

of interest situations.

Are you comfortable with the idea of private-sector experts helping to provide oversight to an agency like the IRS? There has been

a lot of talk about conflict of interest or potential conflict of interest

and I would like to have your thoughts.

Mr. MARES. First of all, I think that the point is not only conflict

of interest but also the perception of conflict of interest. And yes,

we are comfortable with the proposal that this outside or oversight

board can accomplish its goals without violating the conflict of interest rules.

And again I go back to my comments, which include the fact that

the designation of these individuals as special government employees, thereby putting them under the auspices of title 18, certainly

goes a long way toward that. If it is believed that that is not

enough alone to deal with the perception of a conflict of interest,

we feel very confident that additional safeguards can be presented

so that there isn’t an issue over that.

Mr. HULSHOF. Thank you, Mr. Chairman. I yield back.

Mr. PORTMAN. You were actually past your time but your questions were so good that we were happy to have them. Mrs. Thurman?

Mrs. THURMAN. I don’t have any questions.

Mr. PORTMAN. Mr. Neal.

Mr. NEAL. Thank you, Mr. Chairman.

I think during the 2 days of testimony that we have received

here that the term that has been most frequently used and applied

has been the term ‘‘accountability’’ and how best to ensure the integrity of the agency, and at the same time maintain a sense of accountability to the taxpayers as a whole.

What you find around here these days under the guise of accountability is that we ought to have term limits so that there

won’t be accountability, and then when we think the public is not

looking we ought to be able to change that rule so that the Chairman can stay on afterward.

Then we think we should have the line-item veto so that we are

less accountable, and then we transfer that power down to the

White House. Then, we think we ought to have a balanced budget

amendment so that we are less accountable for the day-to-day expenditures, even though we have demonstrated we can balance the

budget. Now, the IRS becomes the latest example of what we ought

to focus on.

I thought yesterday Chairman Archer did a very good job in a

very even-tempered manner in which he said that there are an

awful lot of problems that confront the IRS today, we hear about

them frequently in our congressional offices and this raises accountability. Accountability is what has contributed to this discussion and has, I think, helped to shape and change the national debate.

As I listen to some of the witnesses this morning speak to these

various issues, I thought again that the term ‘‘accountability’’ was

applied regularly. Now, the argument is made that if we simply

take tax compliance away from the Federal Government of the

United States and turn it over to a private-sector board, who will

246

also be allowed to appoint the Commissioner, that that is going to

give the taxpayer more accountability. When the truth is that

many of us complain here about rules that are typically made by

agencies of the Federal Government who we argue are less accountable, despite the fact that it has been Congress that has relinquished their authority time and again for making those very decisions.

The best accountability remains your ability to get ahold of your

Congressman or your Congresswoman to protest the action of a

Federal agency which in the end brings about this sort of hearing.

Now, Mr. Mann, in your testimony, I heard you speak to the

issue of accountability and how best to do that. Would you argue

today that turning the appointment authority for the IRS Commissioner over to a private board is accountability?

Mr. MANN. Well, it is certainly one kind of accountability. We

recommend quite a different kind of accountability. We believe that

because the President really is responsible for the revenues, and

the Treasury is responsible for the revenues, that we think the

Commissioner ought to be appointed by the President, and responsible to the Treasury Department. That is our view of what is the

best accountability.

Mr. NEAL. The idea that the President who has to stand for reelection and Members of Congress who have to go back home and

face the public, that somehow that accountability doesn’t make any

difference anymore. That if we simply do not like the IRS, we give

it to a private board and let them do it, that somehow all will be

well.

Mr. MANN. I think that is right. And I think the confusion comes

that people want the Internal Revenue Service to have an integrity

about the way they go about doing their business, and they are

confusing the word ‘‘integrity’’ sometimes with ‘‘independence’’ from

the President and the Treasury Department. We would urge that

there is that tension between accountability and integrity, but it

can be done, and we would urge that this relationship remain in

the Treasury Department.

Mr. NEAL. Thank you. In democracy, there is supposed to be

some tension. That is, in the end, what sheds light on an issue. A

little bit of sunshine and accountability and standing in front of the

public at election time is still the best description of a viable democracy.

The other members of the panel, I hope that you would feel free

to comment within the limited time that I have left.

Mr. CHERECWICH. Thank you, sir. I believe that the President

should appoint the Commissioner, that we should maintain an accountability much in the same manner that you do, and that the

Commissioner should be on the Oversight Board.

I sincerely believe that the private sector can be of some assistance, and hope that the proponents of both pieces of legislation

could resolve their differences, because we are not very far apart

in achieving something truly good for the IRS and for the country.

Thank you.

Mr. MARES. We have recommended to the Commission, after the

release of the reported legislation, that the Commissioner be appointed by the Board, but subject to confirmation by the Senate in

247

line with the way effectively the Chief Counsel, under the legislative proposal, would be.

But I think it is important to point out that there is still executive branch accountability throughout this. The President would

have the right to appoint and dismiss the board members. The Secretary of Treasury or the Deputy Secretary would serve on the

Board as created. As to the budget process and tax policy—ultimate

approval of budget process for the agency would remain with

Treasury and tax policy would remain with Treasury. So there is

plenty of accountability. I think what the Board does is create an

accountability source for the management of the Internal Revenue

Service, and management of the IRS is one of the problems that

we see needs to be addressed.

Mr. LOENGARD. I think that we agree with everybody on the

panel that the Commissioner and the Chief Counsel should be essentially people who are appointed by and eventually report to the

executive branch, the Secretary of the Treasury and through the

Secretary of the Treasury to the President. And that the Secretary

and the President are ultimately responsible for tax policy and the

enforcement of the tax laws and that that probably, because we feel

it is a web, includes the administration of the Internal Revenue

Service ultimately. We do not think those functions can be divided.

We also, I think, have no opposition to the setting up of an advisory board, a board which would include non-Internal Revenue

Service or Treasury people, outsiders, private people, who would

play a role in oversight of the Internal Revenue Service and its various functions.

Mr. NEAL. Thank you. I don’t know if you noticed or not that I

was attempting to needle my colleagues in this institution and

point out to them that the best accountability is still standing in

front of the voters every 2 years. Thank you.

Mr. PORTMAN. Thank you, Mr. Neal. I think that was not an advertisement for term limits. And I appreciate the panel.

I would point out, Mr. Neal, two things. One, you talk about the

regulatory agency needing to be accountable. Treasury retains, as

you know, the ability on the regulatory side that they have now.

So you have that accountability. And, second, what you propose,

and what all our constituents are not happy with, is the status quo

with regard to the other side of the accountability.

What we are talking about with accountability is keeping the

IRS’ feet to the fire and making the computer systems work and

the phones work and so on. And this is the great challenge that

we have before us. And all four of you have given us a lot of input

today and you have helped shape the proposal in H.R. 2292.

As you know, we have heard testimony from three other organizations extensively, before the Commission, and we heard it at the

Committee level and the Subcommittee level. We thank you for

your help on that.

You agree on a lot, not only among yourselves but with regard

to what is in H.R. 2292 regarding congressional oversight on simplification. I think it is fair to say that every one of your organizations has made that a top priority over the years, and you continually tell us it is your number one or number two priority.

248

This was not necessarily, as Mr. Coyne will confirm, in the mandate of the Commission. And yet we did it. We took it on. And I

would hope that you not only acknowledge that but now support

us in this effort, because it is not going to be easy to get what we

were able to get through the Commission and to this level with regard to making the Tax Code less complex. And I think that is one

of the great things about the proposal and we need your help on

that. I hope you will help.

I would also make one other comment, and that is that we very

much appreciate hearing from the bar and the tax lawyers represented by other groups, very much appreciate hearing from the

folks in the corporate world who handle the tax function, the executive vice presidents for tax, Mr. Cherecwich, such as yourself, as

well as from the accountants.

The major challenge at the IRS, though, is, in my view, really an

operational challenge, an organizational challenge. And as I mentioned earlier with respect to what my friend, Mr. Neal, was concerned about, which I am too, the accountability. This is really

about, again, a computer system that works, phones that work, taxpayer service.

Have all of you been to service centers?

Mr. MANN. I have.

Mr. MARES. I have.

Mr. CHERECWICH. I have.

Mr. PORTMAN. Have you been to a service center, Mr. Loengard?

Mr. LOENGARD. No, I have not.

Mr. PORTMAN. I happen to have one in my area, so I have been

there a lot.

Again, I greatly appreciate your comments on the Oversight

Board, and the computers and the information technology challenge, and the other challenges we have. But we have to keep in

mind that, as Mr. Loengard said in his testimony very clearly, you

are not computer experts, you are not management experts, you

are tax lawyers. And just to keep that in mind, I think the Committee needs to keep that in mind as we hear this testimony.

Having said that, again, I think we are all very much in agreement on 90 percent of the report. Actually, we are very close on the

proposal.

I would ask one general question of all four of the panelists, if

I could. As you know, yesterday, the Secretary testified about

Treasury’s proposal, which has been introduced here in the Congress now, and it includes a management board, as Mr. Hulshof

said, made up largely of political appointees. That is factual. It

would probably also have some career civil servants on it. We have

heard Mr. Mann’s concerns with that and that he would not support such an approach.

Is there anyone on the panel who does support that approach?

I hear a deafening silence.

Mr. CHERECWICH. Mr. Portman, TEI has recommended that we

have a balanced board.

Mr. PORTMAN. OK. My question was, do you support the Treasury proposal, yes or no?

Mr. CHERECWICH. No, sir.

Mr. PORTMAN. Thank you.

249

Just quickly with some of the specific issues, Mr. Mann, I think

your Under Secretary for Tax idea sounds intriguing. I have talked

to you privately about it and you raised it publicly now. You have

made the point to me that back in the seventies we had such an

Under Secretary and I think again in the eighties for a short period

of time.

Why didn’t it succeed before? And what were the problems with

having an Under Secretary? Why did it not continue? Why do you

think it would succeed today?

Mr. MANN. I am going to have to speculate with you a little bit,

Mr. Portman, because I actually don’t know. But I think it is my

information that it had more to do with the number of Under Secretary slots that the Treasury Department was permitted under

whatever deal that they made with OMB and the Budget Committees, and that there was no Under Secretary slot left over to be

this.

I do not think that you should regard that as particularly a comment on this proposal, because of the difference in the times. I believe that faced with the difficulties that the Internal Revenue

Service has today and the need in a global economy to keep our tax

administration and tax policy coordinated better, I believe it makes

all the sense in the world to have an Under Secretary of Taxation

with the oversight responsibility and the responsibility to coordinate tax policy and administration.

Mr. PORTMAN. Let me ask you a followup question. I heard your

testimony this morning and read it and I understand how you come

down on the management side. But my question to you is the

Under Secretary for Tax, this idea of really coordinating Treasury’s

role in this, is that inconsistent in any way with the Oversight

Board notion that is in H.R. 2292?

Mr. MANN. The problem that we have identified, Mr. Portman,

is that on page 12 in the general responsibilities, and the exception

itself says that the Board has no responsibility for the formulation

of tax policy or specific law enforcement activities and some other

specifically delegated things having mostly to do with procurement

policy, I believe.

We do not actually think that you can separate tax administration, tax policy, and these procurement activities very easily. There

can be specific instances when you can do it easily, but there are

so many more when you cannot. So we are worried that when you

try to make an artificial or nonfunctional kind of a division of authority like that, that it may not work. So I would say just in that

sense there may be inconsistencies there.

Mr. PORTMAN. But one could follow that by saying that your notion of an Under Secretary for Tax at the Treasury Department

who combines some tax administration with tax policy functions

would, in fact, complement what is in H.R. 2292 for the very reason

that you state.

Mr. MANN. You can——

Mr. PORTMAN. In a sense it would be an improvement from

today.

Mr. MANN. I think we would agree that that is an improvement

from where we are today, yes, sir.

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Mr. PORTMAN. Yesterday, as you know, we had testimony from

various experts and much of what they said is consistent with what

we are hearing today. These are people from academia, Commissioners who were involved in this yearlong process and so on.

One of the aspects of your testimony today, Mr. Mann, that I

thought was interesting, was that you said with regard to the private sector that they do have a role to play. Your testimony says

the oversight process will benefit from private-sector input. The

Commission makes a compelling case that bringing the appropriate

expertise from the private sector to bear on major management

issues could greatly assist the service.

Later in response to a question from Mrs. Johnson you said you

think private-sector oversight is very important and it has to be

true accountability, not advisory.

Given all that, your views on the private sector and their input,

do you think it is accurate to say that the American Bar Association specifically rejects the transfer of important IRS management

decisions to an outside board?

Mr. MANN. Well, in the first place I speak for the Tax Section

and not the whole ABA. But I think that the Secretary’s testimony

yesterday, in which I believe that testimony is present, doesn’t accurately state what the ABA’s or the section’s position is. What we

said was we don’t support the Oversight Board that you have in

H.R. 2292. Neither do we support the notion that the Treasury Department has in 2248 or whatever it is. We do not support the

Treasury’s Board.

Mr. PORTMAN. But do you reject that the private sector has a role

to play in the management of the IRS?

Mr. MANN. We do not. No, I think that the only quibble we have,

Mr. Portman, is whether the powers of the Board are as we suggest, which are to review and to report to the Congress and the

President or whether the Board has the power to, for example, appoint a Commissioner, approve the budget or something of that nature.

Mr. PORTMAN. How about approving the strategic plan of the

IRS?

Mr. MANN. As I remember what the legislation says now, that

is one of the functions where there is approval, the strategic plan

of the IRS. And I don’t think we have a position that directly addresses that.

In my personal opinion that wouldn’t be a bad idea. I don’t know

that we need to—I guess our institutional view, Mr. Portman, is

that we don’t need to do that once they review it and report directly to the Congress.

Mr. PORTMAN. I would just make the suggestion that the Secretary’s comments yesterday, which were quoted from by myself

earlier, are not accurate, and also make a further comment that

the American Bar Association is indeed a different body than the

Tax Section and we need to keep the Tax Section focus on this because you really are the experts among the bar.

Mr. MANN. Indeed, sir.

Mr. PORTMAN. Thank you for that clarification.

Mr. Cherecwich, again as I go through your written and oral

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most all of it. And your strong statements on simplification, congressional oversight and so on, some of which could have been

taken from my testimony yesterday—maybe I plagiarized from you,

I am not sure. But we are there. The strong support that you have

for an oversight body is consistent with H.R. 2292.

The two things that I see are, one, balance. That you would like

to see more government political appointees on this Board than we

currently have. Now it is at two—arguably two to three depending

on how you view the National Treasury Employee Union representative. So balance is number one. And the second is the appointment of the Commissioner.

With regard to the budget, you said, in essence, in response to

a direct question, that you were not sure you supported H.R. 2292

and then you proceeded to say what you supported, something

which sounded to me precisely like H.R. 2292.

Just to clarify that for a moment, I don’t think we are going to

get any agreement on the appointment of the Commissioner or the

balance issue necessarily today, but on the budget let’s be very

clear.

The Commissioner, as you know, would be responsible for putting together the budget just as he or she is now. That budget

would then go to the Board, which would include the Secretary of

the Treasury. That Board would then be in a position to review

that budget, work with the Commissioner to approve a budget for

the IRS that is then sent to the Secretary, and goes through the

same vetting process the current budget does, which would include

competition with Customs Service and ATF and other functions of

Treasury, and then into the unified budget process with OMB and

competing with all the rest of government. And then it would come

up here as part of the President’s request.

When the President’s request came, Members of Congress, TEI,

the American public, also would have the benefit of seeing what

the Board, with the Secretary on the Board, thought was the appropriate budget for the Internal Revenue Service.

Do you disagree with that?

Mr. CHERECWICH. We still have a few little qualms about requiring the submission of the Board-approved budget directly to Congress, because in the final analysis, accountability for the IRS and

the budget does rest with the Treasury Department. We are also

concerned that the proposed legislation might blur the lines of accountability or might heighten the possibility of conflict between

the Board and the administration. We do, however, certainly believe that the IRS can benefit from having the Oversight Board

heavily involved in the development and review of its budget.

Mr. PORTMAN. Thank you. We will leave it at that.

Mr. Mares, thank you, again, for giving us input on this again.

You were helpful in putting together the proposal that we have before us.

One of the fundamental aspects of public accounting, of course,

is providing independent objective advice to clients, and, as such,

your members have a lot of experience in identifying and resolving

potential conflict of interest situations. Let me ask you again, are

you comfortable with the idea of the private-sector experts helping

in an oversight role in the IRS?

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Mr. MARES. Yes, we are, Mr. Portman.

Mr. PORTMAN. Mr. Loengard, Mr. Cardin went over some of the

points that I was going to make just to clarify where we are now

in the legislation. I think we have made some progress since your

last thorough analysis, and I just wanted to make that further

point. Chief Counsel, I think, the dialog between you and Mr.

Cardin will be helpful to the staff in putting together their final

mark on that.

I think we are where you want us to be. I understand your difference with regard to the appointment of the Commissioner, but

I think you will find it more acceptable to you.

The idea of a staff with the Board, as you know, is something

that we looked at in the Commission. I think it was part of the

Commission recommendation. We chose to not pursue that in the

legislation for a number of reasons, including the fact that we do

not view this as a kind of exercise which would be contrary to the

Commission; rather, it would be working with the Commissioner of

the IRS and we think that kind of overlap of staff through delegating staff is consistent with that idea.

The New York State Bar has consistently said the most significant problem facing the IRS is the complexity of the tax law and

basically your statement spends 80, 90 percent of your time talking

about that. And although I can suggest to you being a Member of

Congress now and looking at it from the inside as opposed to where

I was before, trying to practice law and take clients through some

of this, it is unlikely that in the short term we are going to see the

kind of complexity that you advocate, although I do believe that if

legislation is passed would urge Congress to move toward that. I

don’t think this latest tax change would have been as complicated

if this discipline had been in place.

But do you think that the IRS also needs substantial reform,

even given the fact that we are going to have a rather complicated

Tax Code at least for the short term?

Mr. LOENGARD. We believe that there are several facets to the

problem. One is, of course, funding. Dealing with taxpayer questions, answering phones and all the rest of it, you need staff. You

need staff to issue the regulations that Congresswoman Johnson

referred to as sometimes being very long delayed after legislation

gets enacted. So that is one facet of the problem.

There is no question in our view that the computer technology

that the Service has is inadequate to its task and that that needs

improvement from whatever source it can get help. We understand—as we said earlier, we are not computer experts, that there

has been progress made there. So certainly the Service could be improved in the way it functions. And we certainly believe that. And

we think that—I have not had a chance to fully study the proposal

made by the American Bar Association, but it is probably, speaking

personally now, not for the New York State Tax Bar, not very different from what we might consider and propose.

[The prepared statement and attachment follow:]

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Mr. PORTMAN. Gentlemen, I thank you very much.

Are there any other questions of the Committee Members?

Thank you gentlemen very much. We will continue our dialog.

I would like to call the next panel. We are now pleased to have

before the Committee Donald C. Alexander, former Commissioner

of the IRS, a partner in Akin, Gump, Strauss, Hauer & Feld; Sheldon S. Cohen, former Commissioner of the Internal Revenue Service and a partner in Morgan, Lewis & Bockius; Morgan Kinghorn,

Jr., former Controller and former Chief Financial Officer of the IRS

and now director of Government Consulting Practice of Coopers

and Lybrand; and Phil Brand, director of Internal Revenue Service

Policies and Dispute Resolution at KPMG Peat Marwick and

former Chief of Compliance at the Internal Revenue Service.

Gentlemen, thank you for being here and again for all the input

you have already given us through the Commission and these proceedings.

Mr. Alexander, I would like you to begin your testimony. And I

urge you to keep your oral statement to 5 minutes. You can submit

anything longer to the record.

STATEMENT OF HON. DONALD C. ALEXANDER, FORMER COMMISSIONER, INTERNAL REVENUE SERVICE, AND PARTNER,

AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P.

Mr. ALEXANDER. Thank you, Mr. Chairman. I will not repeat any

of my statement.

I was delighted to hear this morning the dialog between Mrs.

Johnson, the Chairman, and Mr. Kies about actually doing something useful about not imposing burdens on individual taxpayers

like some that have been imposed in the 1997 act, and having

mockups of individual tax returns. I am not talking about a corporate return or a narrow issue; I am talking about broad matters

that affect millions of individual taxpayers and vastly increase the

burdens on those taxpayers and on the Internal Revenue Service.

If the committees, the taxwriting committees, would actually look

at mockup returns before they make final decisions, it would be extremely helpful to make sure that the system would not be gamed

by IRS apparently trying to make the returns too complicated.

Joint staff should have the right, maybe the duty, to review those

mockups, and both Majority and Minority staff of the taxwriting

committee should have that duty.

I hope that comes about because I continue to believe that many

of the problems that the Restructuring Commission addressed in

its constructive report and its constructive bill are laid at the incredible complexity of current tax law.

I support much of H.R. 2292, and I want to note that much of

it is paralleled in H.R. 2428. I think the Commissioner ought to

have a 5-year term. The President who appointed me decided to

fire me less than 3 months after I was in office, and I don’t want

others to have to endure that sort of precarious existence. Presumably, the President can rid of a Commissioner, but he or she would

have to show cause rather than pure personal dislike.

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And I support many of the other constructive proposals that have

been made to implement the Restructuring Commission’s concerns,

its findings, its views. But I do have some questions, as I mentioned before, about the Board as presently constituted and with its

present duties. I do not think that a board composed largely of private individuals should have the right to discharge the Commissioner. I hope that that will be reconsidered.

Thank you.

[The prepared statement and attachment follow:]

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Mr. PORTMAN. Thank you, Mr. Alexander.

Mr. Cohen.

STATEMENT OF HON. SHELDON S. COHEN, FORMER COMMISSIONER, INTERNAL REVENUE SERVICE, AND PARTNER,

MORGAN, LEWIS & BOCKIUS, LLP

Mr. COHEN. Mr. Portman, these are my views, not my firm’s nor

my clients’. I will start by saying that.

I do not think anybody disagrees with. The goals of the Commission as outlined, there are a number of bullet points on my submission that reflect the ones of the Commission. I think everybody

wants a better Internal Revenue Service. They want better management, more control, they want more strategic planning, all of

those things.

What I have heard this morning, and what I have read before,

and what my testimony says is I don’t think they have the right

way to get there. That is, this outside board is going to create more

problems than it is going to solve. There are enough conflict of interest issues that arise every day in the Revenue Service with one

Commissioner and one Chief Counsel than with a board of nine

people who have a variety of interests, political and otherwise, and

social and otherwise, business and otherwise.

I have pointed out in my testimony a number of ways I think

they will get into deep trouble and that trouble will then reflect on

the Revenue Service. Nobody will say it was the Board or the board

member; they will say it is the management of the Revenue Service, and I think that is a deep problem, and I don’t think it is susceptible to cure by the techniques suggested by the Commission.

Having said that, I need to come up with an answer. The Revenue Service is a good organization. I think there is a lot of dirt

being dumped that isn’t meant to be dumped. The system that collects $1.6 billion or $1.7 billion, is a model for most of the rest of

the world. So something down there is going right. Now, a lot of

things are going wrong. And in a big organization on any given

day, a lot of things are going to go wrong. They had a lot of bad

starts on their electronic data processing system. That is clear.

Now, major changes have been made in the management of the

Revenue Service by hiring and bringing in new people. The new

Commissioner has skills in this area. That problem seems to be on

the road to being cured.

Now, whether the other problems are deep enough to require this

great change—I mean, here we are dealing with a system. I used

to sit down there in sheer terror that anything I did would deteriorate the system by as much as 1 percent, because 1 percent of the

revenue is so big, my budget would pale beside it. And here we are

trying to make this major surgery on an organization I just don’t

think is warranted, and that is what I have said.

The 5-year term for the Commissioner I think is fine, although

I don’t believe it is going to happen. That is—I am one of those

three since the reorganization who served for a full 4 years. No

agency I know of that has fixed terms has anybody who really

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served that, except for the Controller General. The Controller General is about the only one. But for 20 years now we have had a 10-

year term for the head of the FBI and no one has served as much

as 4. So we will see. Maybe Mr. Freeh will break the record.

I am going to skip most of the rest of this.

The complications problem is very serious and the communications with the Revenue Service is very serious. When I was Commissioner, Mr. Mills used to invite me to his office probably as

much as once every 4, 5, or 6 weeks and we would talk about administrative problems and pending legislation. So it can be done.

It can be done informally; you don’t need change in law—there was

no law, there was no great mechanism, he just invited me to come

up and talk.

We need more respect for the Internal Revenue Service. We need

more respect for government employees generally. The deterioration of service has something to do with that. But it has something

to do with the complications that you folks pile on. Nobody on the

private side of the aisle—our side of the desk is ever going to complain about a complex provision that benefits them. It is only a

complex provision that causes them problems.

The Revenue Service’s curse has been its ability, in most instances, to be able to handle those complex provisions. So you pile

on more. You say, oh, they are pretty good at doing this. They will

find a way to handle it. They will develop a form or procedure that

will get through these complications and we do not have to worry

about it. But, you see, you do have to worry about it because you

have piled on so many that it is beginning to break the system.

And I applaud any of those efforts that, by oversight or otherwise,

would do to simplify the system.

Now, I testified before an oversight committee in 1987 on the use

of foundations in political campaigns. Recently, somebody called me

when this problem arose and said, do you have anything, and I

said, yeah, I testified before an oversight committee in 1987, and

I xeroxed it and sent it to this reporter, and she said to me, you

wrote that 10 years ago? It reads like it was written for yesterday.

Well, the point was that the Congress knew about the problem

and was concerned about it. The hearing report expressed concern,

but Congress never did anything. So those kinds of issues where

you could clean up an area are not sexy enough. There is really no

constituency out there lobbying you to clean those areas up. You

have to be self-starters in that respect.

One of the problems, of course, here is that the Revenue Service

doesn’t send you a report on legislation. You get the report from

the Treasury. The report that the Service sends to the Treasury

might be enlightening on occasion because they sometimes say different things, because they are not concerned so much with the

overall policy as with the administration. And if you are really concerned about administration, you ought to get involved. You have

to. I mean, you have to get your hands dirty, unfortunately.

You know, customer service is great, but remember, you are dealing with an organization that is not helping me finance my credit

card purchases; they are taking money away from me, or at least

I view it that way. So I am not going to be kindly toward them no

matter how good the service is. If they give me an answer I don’t

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like, the answer could be courteous or kind or fast, I am still not

going to like it if it wasn’t the answer I wanted to hear.

There are some alternatives, by the way, to oversight and I have

suggested a couple, and I am sure there are others in which you

can get an outside group which has some accountability and which

has answerability to you or to whomever you think is appropriate,

but would not overly burden the structure and management of the

Revenue Service, which I think is a problem.

And I think I will stop right there and maybe we will have more

time for questions.

Thank you, sir.

[The prepared statement follows:]

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Mr. PORTMAN. Mr. Kinghorn.

STATEMENT OF C. MORGAN KINGHORN, JR., FORMER CONTROLLER AND FORMER CHIEF FINANCIAL OFFICER, INTERNAL REVENUE SERVICE, AND DIRECTOR, GOVERNMENT

CONSULTING PRACTICE, COOPERS AND LYBRAND CONSULTING, McLEAN, VIRGINIA

Mr. KINGHORN. My name is C. Morgan Kinghorn, and from April

1990 until August 1995, I was honored to serve as the first Controller of the IRS and then its Chief Financial Officer. I am currently employed with Coopers and Lybrand Consulting, but my attendance here reflects my own views as a former IRS employee and

not necessarily those of Coopers and Lybrand.

I think I have some unique opportunities to share with you. I

was the first outsider to be appointed a chief, reporting directly to

the Deputy Commissioner and Commissioner. Sheldon tells me

there was another outsider that he appointed several years ago.

But, in effect, in recent years I was certainly the first outsider to

be brought in on at senior executive level. And I was an outsider

who was anchored in one of the functions, financial management,

but took a key interest in using those functional powers to help the

core mission of IRS and help bring about fundamental reform.

I would like to touch today on the key areas and I agree with

the Chairman, are the key issues, and those are the governance

questions facing the IRS. You cannot talk about governance really

without talking about culture. This is not some fuzzy management

concept. The cultures of organizations—and I have learned this certainly in the last 2 years in my consulting work—really affect the

management and the decisionmaking powers and authorities within an organization.

IRS, as I think you have learned, is a closed-loop system, or has

been, and by that I mean there has been no consistent insertion of

external perspectives through the recruitment of individuals at the

executive level except, of course, for the Commissioner, who can

truly bring new ideas or different ideas to the Service.

While the Service has certainly attracted excellent individuals at

all levels, the numbers who have been able to make it through the

system have not been sufficient, in my mind, to make much of a

difference for the long term.

I also observed the closed-loop nature of the Service has helped

to make the Service a very risk-averse organization, generally distrustful of new ideas that were not generated from within its own

ranks. That is probably because the Service for decades and decades was best at what it did and probably did not see the need to

have outside expertise.

But I believe the intense internalization of discussions within the

organization and, in effect, among others who talked the same way

and have been brought up in the organization for 25 to 30 years,

can greatly limit the perspective and, over time, limit choices that

are available to senior executives making decisions in a very difficult environment.

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On accountability, which was discussed today, it is hard to find

accountability in most large public sector organizations, and this is

no less true in the IRS. Obviously, the Commissioner is the single

focus, at least in a political sense, but what about the accountability of the 110,000 people at IRS at the executive managerial level?

It is one of the most difficult tasks in the public and private sector

to define.

At IRS there is, I think, a primary reason for some confusion on

accountability, and, again, I believe that is the functional stovepipe

organization structures that really minimize accountability, because no one really manages an entire large-scale process. Problems in returns processing can be blamed on the system’s failures;

low collection rate downstream can be blamed on examinations

done earlier; the failure of a new systems initiative can be blamed

on the fact that the program office was constantly changing its requirements. So it is difficult to pin down accountability.

An executive at the IRS once told me, the good news is, the IRS

is politically naive; that is why we have a Commissioner; but the

bad news is that the IRS is politically naive.

IRS is in many ways very ill-prepared for the kinds of challenges

to its mission that are currently under way. It traditionally does

not deal well with outside oversight. It has for so long operated in

isolation; yet it is a fragile machine that belies its tough image. In

order to better deal with the governance issues that result from a

bureaucracy that is inherently inward looking and an operating environment that is strategically and constantly changing, there are

several key questions surrounding governance that you have focused on and I think are generally consistent with your approach

in the legislation.

First, and I think most important, we do need to develop the

mechanisms that you discuss in the legislation to bring new and

diverse talent from the outside into the IRS executive and managerial ranks at the earliest possible timeframe. I think that is probably one of the most essential moves that can be done.

We need to look at mechanisms to inject on a more regular basis

practical and useful oversight and outside views of the core activities of the Service to inject at a strategic level outside views of operations, customer service, and technology. I think the Board concept that you are recommending is part and parcel of that approach.

The closed-loop system is beginning to change, and I think we

have to give IRS credit. My experience is 2 years old, and in very

recent weeks, for instance, clearly the process for technology investments has been opened up to outside views and there is tremendous interest in looking at alternative ways of partnering with the

private sector to look at approaches.

IRS is now looking for outside assistance and advice in restructuring its entire training programs and executive development efforts, and very recently the IRS is moving out beyond its own expertise generally anchored in paper processing to get outside views

on approaches on expanding electronic filing. I think these are evidence of the fact that the organization is listening and beginning

to respond to some of the criticisms and some of the objectives that

you are trying to reach.

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IRS needs organizational structures that reflect broad business

practices rather than bureaucratic fiefdoms. Some work was done

on that in the IRS over the last 5 years, and I think, hopefully, will

be reexamined when the new team comes in.

Finally, structure increasing amounts of flexibility and discretion

in day-to-day business process and improvements for the field; in

effect, empowering people in the field to make changes that will not

affect the issue of unfairness and tax treatment but will get to

being able to manage some of the management processes in ways

that make most sense for those particular working environments.

What is most critical at this juncture is to move on and with

some due haste, provide the government’s framework for the IRS,

and give the IRS room to respond and change to the new mandates, and I am sure it will.

Thank you, Mr. Chairman.

[The prepared statement follows:]

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Mr. PORTMAN. Thank you, Mr. Kinghorn.

Mr. Brand.

STATEMENT OF PHIL BRAND, DIRECTOR, INTERNAL REVENUE

SERVICE POLICIES AND DISPUTE RESOLUTION, KPMG PEAT

MARWICK, LLP, WASHINGTON, DC

Mr. BRAND. Mr. Chairman, I am Phil Brand. I am director of IRS

policies and dispute resolution for KPMG Peat Marwick. The views

I express today, however, are my own and do not represent the

views of KPMG.

I was employed with the Internal Revenue Service for 261⁄2

years. I retired in 1995. I most recently held the position of chief

compliance officer for the IRS in the Washington national office.

My perspective was influenced by the fact that I enjoyed my career

at IRS. I was treated extraordinarily well by Treasury officials, by

the Commissioners and Deputy Commissioners, and the other people I worked with. I have fond memories of the men and women

I was privileged to lead and enormous respect for the difficult job

that tax administrators must undertake.

I followed the work of the National Commission on Restructuring

the IRS closely from its establishment to the final report. I worked

with the AICPA and the National Association of Enrolled Agents

in helping them understand and respond to the Commission’s review support report.

I am hopeful that the upcoming debate and any resulting legislation, structural change, and guidance will be the product of congressional and administration consensus on the future of the IRS.

Improving the efficiency, the effectiveness, and making the IRS

more user friendly are important goals. Once clarity is reached on

how best to achieve these goals, I urge that the IRS be given the

breathing space to implement the reforms in a constructive environment of oversight.

The past 2 years have produced unprecedented criticism of the

IRS. I know that IRS career employees understand the need for the

agency to renew and refresh itself. The men and women of the IRS

need the opportunity to do so over a period of time, with the constructive help of stakeholders, but in a less intense environment.

There must be more stability in the IRS budget process. The tax

system and the revenue flow it produces are a vital part of the Nation’s infrastructure. This infrastructure requires ongoing investment and replenishment. Just as our highway and air transportation systems require continuous maintenance and upgrading, so

does the tax system.

In summary, I am pleased to be a part of this debate. I appreciate the difficult task that Congress has in deciding on how to

renew the tax administration infrastructure. I encourage you to

rethink the process in this context. I will, of course, be available

to answer questions at this particular point in time.

[The prepared statement follows:]

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Mr. PORTMAN. Thank you, Mr. Brand. And thank you, gentlemen, for all of your good input. I am going to yield to my colleagues

here. Some of them may have other commitments.

Mr. Coyne.

Mr. COYNE. I have no questions. Mr. Chairman.

Mr. PORTMAN. Mr. Hulshof.

Mr. HULSHOF. Mr. Alexander, I looked for some softballs, and I

couldn’t find any. I know you feel strongly that the primary job of

the IRS is to, in your words, collect the proper amount of revenue

due under the Internal Revenue Code. And I take it you question

the Commission’s goal of turning the IRS into, ‘‘a world class service organization.’’ Is that a fair summary of your belief?

Mr. ALEXANDER. It is fair. One of the goals set forth in the bill

is to convert the IRS into a world class service organization. And

I am not sure that that is the primary duty, anyway, of the IRS.

The duty of the IRS is to try to make the system work, and that

duty is a very difficult one. And since most of our revenues come

in voluntarily over the transom to the IRS, the IRS has a duty to

those taxpayers to try to educate them and try to support them.

However, if IRS is directed, as a notion called Compliance 2000

that was recently espoused by a couple of former Commissioners,

that its primary goal is to educate taxpayers and turn a happy face

toward taxpayers, I am skeptical that the many that comply voluntarily may not believe that they are being played for suckers, because IRS would not be then in a position to call on taxpayers that

do not meet their obligations, like Leona Helmsley, to step up and

pay their taxes.

Now, perhaps that is an archaic, outmoded view, but it remains

mine.

Mr. HULSHOF. And I guess we toss around the acronym ‘‘IRS’’ so

often, I think we forget, though, that IRS stands for Internal Revenue Service, and certainly by collecting taxes as part of the Service.

But I think the Commission’s recommendations regarding being

more accessible or taxpayer friendly is one of the goals.

Let me follow up. I know you have some concerns, Mr. Alexander, about the union representative on the Board. I think that

under H.R. 2292, you have some concerns about the Board’s authority to appoint a Commissioner. But putting those aside just for

a second, do you believe that a board with members from the private life, with expertise, say, in management or technology issues,

could they not bring or help bring greater continuity and expertise

to the Internal Revenue Service?

Mr. ALEXANDER. Of course, they could. Of course, they could

bring very valuable skills, knowledge, experience, and judgment to

the IRS. So a board itself is probably necessary at this particular

time when IRS is under such severe attack; some of it justified,

some of it not, of course.

The problems that I have, as I mentioned, are to some extent

with the composition of the Board but largely with the powers and

authority of the Board.

Mr. HULSHOF. OK.

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Mr. Cohen, you mentioned—and you are nodding your head because you also mention, I think, at page 6 in your written testimony, the appointment of Mr. Gross, Arthur Gross, to manage the

computer system. He has testified in front of our Committee—

again, someone from the private sector to try to get a handle on

Tax Systems Modernization efforts.

So would you also then agree generally that outside individuals

could provide some additional continuity and expertise?

Mr. COHEN. Yes, sir. I said in my testimony when we had an advisory group back in the sixties, it was not subject—there was no

act that required those Committees to meet in public, and, therefore, we had candid discussion. We could talk about sensitive subjects and not worry about it being on the front page of the New

York Times or one of the tax publications the very next day.

Once the Advisory Committee Act came in, the Commissioner’s

advisory meeting became ‘‘show and tell.’’ Everybody looked to the

back of the room, although they may not have physically looked,

but mentally they were looking to the back of the room, and they

would not say anything that they didn’t want to be on the front

page of the tax publications the very next day.

Yes, it is wonderful to have smart people who are involved in the

system or who have a stake in the system to comment on it, whether it is by an advisory group or whether it is by some kind of oversight group. I mean, you can play with that kind of design.

But I have the same fears that others have expressed that the

Board, as composed, is likely to have serious conflict-of-interest

problems, I don’t think it is going to help that much, because it is

going to involve the Service in that much more controversy. Just

those kind of innocent things that I mentioned and other people

have mentioned in their testimonies are going to come up, and then

we are all going to be diverted to worrying about those kinds of

things instead of what really is going on.

The Service is a big organization, 100,000 people out there. If

each one of them made one mistake a month, you could spend forever looking for the mistakes. The point is to try to find a system

that minimizes the mistakes and has a technique for correcting

them when they are made, because you cannot focus on the hole

in the donut, you ought to focus on the donut.

Mr. HULSHOF. Thank you, Mr. Portman.

Mr. PORTMAN. Mrs. Thurman.

Mrs. THURMAN. Thank you, Mr. Chairman.

First of all, I want to thank our witnesses on this panel. I think

having people who have been there and have seen, they come with

a little more candor, because they are not being threatened anyway, I guess, in the debate with what happens with the Board and

what doesn’t happen with the Board.

I particularly am interested because, Mr. Alexander, I actually

do kind of agree with you that I think that we do use certain agencies and departments, depending on what Committees we serve on,

to beat up on them to protect our own kingdoms or fiefdoms or

whatever. So I do believe that we are part of the problem. So now

we are here to be part of the solution.

In the time that any of you spent there, let me use the idea of

the issue of the computers and the modernization, if you had the

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right to go in—I have looked at the way we do RFPs and how we

are able to get equipment. It takes us 3 years to get through getting the equipment. By the time we get the equipment, it is outdated and we are already behind the curve instead of in front of

the curve.

Are there some suggestions, just using that instance that you

saw working there, from your perspective, that as Congress tries

to move ahead, that we can be doing that would satisfy and help

IRS become more modern?

You could take it from Mr. Kinghorn, who talks about thinking

out of the box; to Mr. Alexander, who believes that we might potentially be some of the problem. And, Mr. Brand and Mr. Cohen, I

would love to hear some of your comments and suggestions that

you could give us that would work.

Mr. ALEXANDER. That would work. Perhaps you want us to go in

order?

Mrs. THURMAN. I don’t care. Flip a coin. It doesn’t matter.

Mr. ALEXANDER. I don’t have any coins. We might then go in

order.

First, I think there are some pretty good recommendations to try

to meet some of these problems in both bills, particularly the budget recommendations in H.R. 2292. You have to plan long-term even

though, in my tenure at least, I had to be ready to step out of the

office any day. But I stayed almost 4 years.

You also have to try to sell the administration and Congress on

the need for long-range planning and particularly for a long-range

approach toward a data processing system.

I was lucky on selling the administration. I was unlucky that

Congress decided they did not want the IRS have to an efficient

and up-to-date data processing system because of the concern about

‘‘Big Brother watching over you.’’ So we missed out during my tenure—I think Sheldon did better in his earlier tenure—because of

the Big Brother syndrome and perhaps some concerns by unsuccessful bidders.

The IRS is badly in need of the new Commissioner coming on

soon with his data processing background and with his acceptability to what is needed now in room 3000, someone with a managerial and data processing background. IRS is lucky to have hired

Art Gross, who I am sure will be helpful in turning around IRS’

recent problems, frequently overstated, with its data processing upgrade.

Mr. COHEN. I was lucky. The beginning of the design of the computer system was started with Dana Latham—to give you an illustration of time lines, when Dana Latham was Commissioner of Internal Revenue, and that was 1959–1960. I became Chief Counsel

in 1963, and I became Commissioner in the beginning of 1965. We

were beginning to install the system. We finished in about 1967 or

1968. We had state-of-the-art equipment. We were first in line.

Every computer designer wanted to do it, because we were big and

we were an example.

The Congress did not know much about computers, so they did

not bother us. Luckily, about the time the Congress began to ask

me questions, it was working. The first few months, we were having an awful time. When I left, I had instructed the staff to prepare

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a system that would be installed sometime in the midseventies.

That is the system that Don was talking about.

The staff began design work in about 1967 or 1968, right along

there, and, as he indicated to you, it was not installed in the seventies. Again, in the eighties, a new system was thought about, designed, and the President, President Reagan in that instance,

would not ask for it. So the Service was basically stuck with an archaic system which was state of the art when it was put in, and

worked well, and fell into disrepair.

And Roscoe Eggers put in some peripheral changes to the system, but basically the design was the old design. And if you are

going to think about this long term, as I say in my testimony, it

is like building an aircraft carrier; it is not any different. You have

got to think about it in terms of 2 or 3 years in design, 3 or 4 years

in installation. That is what it takes. This is a great big system you

cannot turn around on a dime, and if you tried, you would have a

collapse. These fellows can tell you better than I can.

Mr. KINGHORN. There are really sort of three perspectives on sort

of the technology. One is technical, and one of the issues that IRS

and many other Federal public agencies have is that we do not

have a very good record in this area; the requirements keep moving. No one can lock anybody in the room and come out with an

agreement between the information technology folks and the program staff: ‘‘This is what we are going to do, and we are not going

to change, at least until you build the first one.’’

Second, things got too big in terms of growth and what we want

this thing to do, and there were times at IRS where we basically

all at the end of the day said ‘‘let TSM do it.’’ No one knew quite

what that meant. So there was tremendous growth in the size of

these thing and which also increased the timeframes and all the

problems associated with that.

And then the problem of trying to be first on the block with some

technology that you are going to be the beta test on; those are the

technical issues. And I think what you are doing in terms of bringing in outside experience through a board mechanism and other

mechanisms will help bring some reality to the discussion.

The second is looking outside, and when I was there, then—this

was quite a while ago—I tried to get the head of the taxpayer service and the call site programs to come with my staff to American

Express in North Carolina. We had a contact with American Express. They were providing some help to us. I couldn’t get anyone

in IRS to go except a district person from Baltimore. They just

didn’t get it.

And I think, again, what you are doing bringing in outside expertise is to have an environment where people will be questioned.

There may be a conflict of interest, as you hear, but we have to get

people in a room with IRS who understand customer service at the

call site and have done it successfully. IRS does some of it successfully, but there are elements it does not.

Finally, you cannot put this all on the back of Art Gross or the

CIO. Everyone is thinking Art is going to do it. That is the same

thing as, ‘‘TSM’s going to do it.’’ I think the program offices—I

think this is happening, and I give Art credit for it—have got to

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get them back in the room, as they are doing, and get the requirements solidified.

I think your approach of opening up the IRS and getting a variety of mechanisms where there will be additional substantive questions at a strategic level, much like Mrs. Johnson was suggesting,

I think is the approach to go.

Mr. BRAND. Mrs. Thurman, just to point out two quick examples.

I think the multiyear budgeting—in 1995, as Chief Compliance Officer, I was authorized to hire, and did hire, 5,000 additional compliance officers. In 1996, my successor was told to get rid of 5,000

compliance officers. That is hard to do in terms of managing, and

it doesn’t make sense in the way you manage an agency strategically.

I think the second part is the need for the IRS at the drafting

table in the legislative process. I think of the earned income tax

credit. I make no value judgment on the goodness or badness of it,

but I think about the complexity of the earned income tax credit

and the fact that the IRS was not at the drafting table during the

initial drafting of that legislation, and it has turned out to be a tremendous burden both administratively and in terms of the cost to

the government over the years. Two examples.

Mrs. THURMAN. Thank you.

Mr. PORTMAN. Mr. Neal.

Mr. NEAL. No questions.

Mr. PORTMAN. Gentlemen, again, I thank you for the input.

Mr. Alexander, I have to start off by full disclosure. You are not

only a close friend, but you are a former resident of the district I

now represent. Notwithstanding that, we don’t agree on everything,

but yet we have learned a lot from you through this process.

I want to start off by just asking you a question that relates to

your optimal solution to the IRS. You have written, I think publicly

now through an op-ed that I saw, and I think privately we have

talked about this, that you think independence from Treasury altogether might be the better route. Is that your thought as to where

the IRS should optimally be placed?

Mr. ALEXANDER. At times, I have pretty strongly promoted the

idea of the IRS as an independent agency. If it were an independent agency today, a board of some sort would be an absolute necessity. I don’t think IRS would be permitted to function independently without it.

There is much, I think, to be said for IRS as an independent

agency, with private-sector input, with very strong and continuous

oversight by the proper Committees, the taxwriting committees,

more than Gov. Op. Committees in the Congress.

Mr. PORTMAN. We always appreciate hearing that on this Committee. So thank you.

Mr. ALEXANDER. I am strongly opposed and, frankly, quite surprised at the American Bar Tax Section proposal for an Under Secretary of Tax in Treasury. That idea was abandoned back in the

Eisenhower years. It was not reinstituted in 1980. The gentleman

given that particular title was kicked sideways upstairs on his way

out, I think, as ABA people of long tenure would well know. And

I don’t think that would work at all.

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If IRS stays a part of the Treasury Department, the Commissioner ought to report to the Secretary of the Treasury, sometimes

through the Deputy. But that ought to be the reporting mechanism,

not to some subordinate official in Treasury. It is bad enough now.

Mr. PORTMAN. Thank you.

The issue raised earlier by Mr. Hulshof with regard to customer

service is interesting. In your testimony, you say that you believe

the quality of IRS’ interaction with taxpayers has deteriorated

since you were Commissioner. And I understand your response to

Mr. Hulshof that this is, after all, a collection agency and an enforcement agency. But given that comment, which I have no reason

to believe is not correct, don’t you think improving customer service

should be a priority in this day and age?

Mr. ALEXANDER. Of course it should be ‘‘a’’ priority. The question

is whether it should be ‘‘the’’ priority. Back in my day when we

strengthened customer service, or taxpayer service, as we then

called it and I still think might be a better name, we had strong

resistance from the private sector. They thought that we were competing unfairly with them. And some of the tax preparation organizations lobbied strongly to try to get rid of any taxpayer service element in IRS on the grounds that we were intruding on their domain and, even more important, on their wallets.

That, thank God, has diminished, if not disappeared, and now

the question is what IRS’ role is. Certainly, IRS has a role in taxpayer service, and a strong one. Certainly, IRS could not demand

that millions of individuals file accurate tax returns and tell them,

by the way, we are not going to help you in that difficult job.

But does IRS also have a duty, and perhaps some slightly more

significant duty, to make sure that the proper amount, not too

much, but hopefully not too little, will be collected.

There is no one else out there, there is no one in the private sector, that fills that particular role. And that role remains a very demanding, difficult problem of IRS, because many taxpayers do not

like to be separated from that which they rightfully owe their government.

Mr. PORTMAN. Let me try to give you a little bit of comfort on

a couple of comments you made in your written statement. You

talk about the concern that there might be some mandates in the

electronic filing recommendations. Just to be clear on that, because

there was some confusion about that with Treasury’s testimony—

I think it was 2 weeks ago now—there are no mandates. We went

through that and made a deliberate choice to not put mandates in.

And you make a good point there, I think. That was covered in the

Subcommittee under Chairwoman Johnson.

Your comment on the legislative language on demonstrating ability in management, I think you make a good point there, and I

think it is something we might want to work on. And, as you know,

that certainly was not the intent of the Commission, to require that

as a way of precluding people from being Commissioner, but it was

a notion that management is important, which I think you said

earlier that you also would agree with.

Finally, your issue as to the Oversight Board. I do appreciate

your suggestion that private-sector input is helpful and good and

so on. Your main concern seems to be on the advisory versus overVerDate 11-SEP-98 14:18 Nov 29, 1999 Jkt 058922 PO 00000 Frm 00300 Fmt 6601 Sfmt 6602 D:58922 W&M3 PsN: W&M3
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sight role: How much oversight, how much advisory. Your concern

on that seems to be related to the conflict of interest possibility.

Your question is: Would a skeptical public believe that a budget

decision to beef up taxpayer service and weaken compliance activities directed at large corporations was done entirely for proper reasons?

I would just again make the point that if you look at how this

budget would work, not just read the legislation—I know you have,

carefully—but how it actually works in practice, these kinds of

budget decisions I don’t think would raise conflict of interest, because this Board is not ultimately deciding the budget.

As all of us have come to realize over the last few weeks looking

carefully at this budget issue, ultimately it is Congress that makes

that decision. But certainly it is not that Board. The Board does

send an advisory budget up with the President’s request, but the

President’s request goes through Treasury, OMB, and that whole

process. But I think if that is really your concern, maybe I can give

you some comfort there.

There are so many questions, Mr. Cohen, I would like to ask you.

Just quickly, because you talked about having served one of the

last full terms. In response to Mrs. Thurman’s question, you were

talking about the need to turn around the information technology

challenge over time, making the analogy to turning an aircraft carrier, I think. And yesterday we heard testimony that this would be

a 3- to 6-year project and that there is the need for continuity.

You said that you were one of the last Commissioners to serve

a full term. When was that?

Mr. COHEN. From 1965 to 1969. I was the first appointment of

President Johnson in his full term, and I left on January 20, 1969.

Mr. PORTMAN. The percentage of taxpayers at that time who

were audited was higher than today; is that correct?

Mr. COHEN. Yes, the numbers were counted differently, but it

was approximately 41⁄2, though they counted some computerization

office audits a little differently than they do now. But it was much

higher than it is now.

The problem is like a traffic policeman. I think Don has used the

same illustration. If you drive out on interstate route 270 or any

of the other major highways around here, and there are no traffic

police, they are just nonexistent that day, you will see everybody

going 5 to 10 miles an hour above the speed limit. If you see a traffic cop or there is a traffic car parked on the side with a radar gun,

everybody behaves. They may go 4 or 5 miles above the speed limit,

but they do not go wild. The same analogy is here.

Mr. PORTMAN. Do you think that the compliance resource initiatives that we now have, the document matching and so on, makes

it unnecessary to have the level of auditing that we had back in

the sixties?

Mr. COHEN. I think that document matching is terrific. It started

with me. We were the first to do document matching. The first year

we put in the computers, interest and dividend reporting went up

26 percent, 26 percent in 1 year. We could have put a bale of straw

out there and said it was a computer, and it would have had the

same effect. It just proves that there was a lot of cheating.

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Why do we have a lesser reporting of interest and dividends than

we do of salary today? It is not astronomically different, but it is

significantly different, because there is withholding on salary. In

other words, compulsion has an effect in this; Don and I agreed on

that. And the question is how much, and I don’t think 0.6 or 0.8

of 1 percent in auditing is enough.

I think the fact that I know my friend or my neighbor or somebody I am acquainted with has been looked at this year makes me

behave a little more carefully. There is an old Yiddish expression

which, translated to English, my father used to use it, and it is a

wonderful expression. It says: He thinks he is an honest man who

is not given an opportunity to steal.

Windows—you put locks on your windows and you put locks on

your doors to keep honest people from becoming thieves. A good

thief can get in anyway. That is the object here, is to keep the vast

majority of citizenry who are relatively honest, better—a little better than they would be if there were not that system.

Mr. PORTMAN. I appreciate and understand your concern on the

compliance enforcement side. I don’t think it is inconsistent with

where we came out on the Commission. There is some discussion

as to whether we should have focused more on that in terms of our

objectives for the Commission for the IRS.

Mr. COHEN. Some of us had the impression that you thought the

money would come over the transom forever, and, believe me, it

will not.

Mr. PORTMAN. Eighty to 90 percent of the taxpayers are voluntarily complying with our system. We have got to pay attention to

that and make sure that does not fall apart. But also, we need to

target enforcement better, including on the audit side.

There has been discussion here among all four of you about political issues, political interference with the IRS. The Treasury proposal is for a management board made up of 20 individuals perhaps, mostly political appointees. Do any of you support the Treasury proposal?

Mr. COHEN. Well, you can ask that question: Do I support the

Treasury? No. But I don’t support yours either. So to be fair, if you

were asking for Sheldon Cohen’s support, which is not terribly important, there would have to be modifications in either proposal.

Mr. PORTMAN. You made that statement in your testimony, but

my question is on the Treasury alternative.

Mr. Alexander, do you have comments on the Treasury alternative?

Mr. ALEXANDER. I have deep concerns about the Treasury’s

Board and the Executive order, and I understand the Executive

order is still outstanding; I don’t think it has been revoked. And,

sure, I have some deep concerns about that, because I think it runs

the risk of politicizing the IRS. There are some people on there that

shouldn’t be on there.

Nobody from the Vice President’s office should be on such a

board, whatever they call the National Performance Review, and so

forth, because the Vice President is always running for President.

The Under Secretary for Enforcement has no business whatever

being on a board in charge of IRS, because that person is always

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trying to get his hands on Intelligence Division, or Criminal Investigation Division, as it is called today.

I could give further examples, but a brief answer to your question is no, I don’t support it. I think they have improved it some

in H.R. 2428, but I think it still has problems.

Mr. PORTMAN. Do you support that legislation?

Mr. ALEXANDER. H.R. 2428?

Mr. PORTMAN. Yes, sir.

Mr. ALEXANDER. No, I don’t, for the reason that I expressed. I

would be concerned about that board. I think the Commissioner, so

long as IRS remains a part of Treasury, should report to the Secretary of the Treasury, perhaps through the Deputy, but I think

the Commissioner should have direct access to and reporting responsibilities to the Secretary of the Treasury and no other person.

Mr. PORTMAN. Mr. Kinghorn, do you support the Treasury proposal?

Mr. KINGHORN. I don’t. I have worked probably for 30 political

people in my career and came to the IRS. One of the reasons that

I came was that I wanted to go to an organization that was nonpolitical. And I worked for three Commissioners, and you could not

tell day to day, hour to hour, what political party they were part

of. That issue is important to me.

More substantively on the board, I saw the board basically as an

attempt to bring in again some special experience. And I think on

the Board you might want to have some career expertise, say, from

the Social Security Administration that deals with the call centers

and perhaps someone from the Financial Management Service that

deals with electronic transfer of data. But that would be the level

of board.

And I really saw predominantly as an external private-sector

board of people that would come in and assist the IRS with sort

of a sequence of tenure on issues that were important over the next

2 years. Obviously, right now the use of technology and information

management is a key issue.

So I didn’t quite understand the purpose of having a board composed of political appointees in the administration, particularly

coming close to the IRS.

Mr. PORTMAN. I will get back to your other points in a moment.

Mr. Brand, do you support the Treasury proposal?

Mr. BRAND. No, sir, I do not. And pragmatically, aside from the

other reasons that have been outlined here, I think the size of the

Board itself renders it almost impossible to be effective. You cannot

put 22 people or so in a room and basically have that to be a very

meaningful discussion or oversight, in my judgment.

Mr. PORTMAN. Mr. Kinghorn, a lot of the discussion in this room

over the last 24 hours has been about the Oversight Board. I think

it is important and a critical part of the overall plan to push

change through the system, but we have ignored a lot of other important recommendations, one of which is allowing the Commissioner to hire and fire his or her own top people and bring in outside expertise. Have you had a chance to look at H.R. 2292’s proposals in that regard?

Mr. KINGHORN. I have had more opportunity to look at the Commission’s report. On hiring and firing people, I always believed—

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and I think Phil probably felt the same way—if the Commissioner

came in and told me, ‘‘We really don’t want you to be part of the

team,’’ I wouldn’t want to work in that environment and I would

find something else to do.

But I do think the IRS in general—this is such an important

point—I think your budget recommendations are critical. You have

an organization that can return 5, 7, 10, 12 to 1 on revenue, and

I think at this point the numbers are pretty reasonably trustworthy. Those recommendations are fine. I think bringing in new

people—and I think the concept of the Board makes a great deal

of sense in terms of looking at these issues.

I think there is already a lot of flexibility in the Federal personnel system. But, again, we are at a crossroads with the IRS that

some of the recommendations, at least that I saw in the Commission’s report, probably make some sense to give the Commissioner

additional authority.

But I think the IRS is a very responsive place. I think probably

to a person, certainly in the executive level, if in an appropriate

and professional way the Commissioner says, ‘‘I really need someone else on my team’’—you might have to find them something else

in IRS to do, and I think that is legitimate—those people would be

willing to move on. There may be exceptions, but within the IRS

I think there is a way to make that happen now. But I think additional authority could be useful.

Mr. PORTMAN. I think the objective in the legislation is precisely

what you talked about in your written statement, and that is

bringing in people laterally that have experience, and if you would

take a look at H.R. 2292 and see if you have any improvements

that you might suggest—you are probably the recent guinea pig at

least on bringing in someone with experience from the outside, and

you have seen the culture from the inside and the outside. It would

be helpful to get your comments on that.

Mr. Brand, you spent most of your career at the IRS and succeeded there in the sense that you went up the ladder to be chief

compliance officer, I believe, and therefore your testimony here

today is very significant. You said you haven’t been there for how

long?

Mr. BRAND. Two years now.

Mr. PORTMAN. And some things have changed in the last 2 years,

but that certainly is a perspective that we need to hear from.

The Oversight Board has received, again, probably too much of

the discussion over the last 2 days and not enough in terms of

changing the system. As you know, we have the National Treasury

Employees Union supporting this proposal for some of the same

reasons that you support it, which is, they really think that the

management has been insufficient and that if you are going to create an IRS that works better for taxpayers, it will also work better

for the employees.

Do you have any thoughts on some of the changes that we have

recommended, some of which are not even in the jurisdiction of this

Committee but have to do with increased personnel flexibility in

the system?

Mr. BRAND. One of the reasons that I have been supportive in

my work with the AICPA and the National Association of Enrolled

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Agents is the thought process that I think the Service will benefit

immensely by additional outside perspective in its management

councils and in its thought processes.

Again, the example of Art Gross, the new CIO, being brought in

from the outside has the opportunity. I think the appointment of

a Commissioner with a different background has the opportunity of

creating a different set of perspectives and debate and discussion

which is extremely important.

It is sort of unfortunate in one respect. I understand why, but

the focal point of all this debate has been on the Board, and yet

when you go through this report, 90 percent of this report I suspect

you could get agreement on. And it is frustrating to me to see the

Congress and the administration juxtaposed over probably what

could come to a sensible conclusion and bring this outside influence, which I think is just paramount for the Service.

You need the right blend of the professional tax administrators

that are going to run the place and be there, but with renewal and

refreshment. I would like to see the debate move beyond the Board,

when possible, into these other areas, because they are extremely

critical and thoughtful suggestions, and I am just hopeful it works

that way.

Mr. PORTMAN. I agree with you, and, as you know, through our

process, the Board has changed quite a bit in response to Treasury’s concerns. Now the President has the ability to remove at will,

which was not initially going to be in the Commission report. That

was changed at the last minute.

We also made some changes with regard to the responsibilities

of the Board, even in the legislation, in essence giving it a more

narrow set of responsibilities with regard to approval as compared

to advisory-type capacity with the Commissioner.

The one final thing I want to ask you is one of the specific things

that I think is important. H.R. 2292 has a provision that would

seek to provide an independent source of funding—which has been

an issue Congress has dealt with in the past—for the employee

plans and exempt organizations function. Do you think that is necessary?

Mr. BRAND. Absolutely. I strongly endorse it. I have been instrumental in trying to help people focus on it.

I think people are unaware—some people are unaware of the size

and scope and the complexity of exempt organizations and the

whole issue of employee plans. I think it is a real requirement.

Mr. PORTMAN. Thank you.

Thank you again, gentlemen, for all of your input. We look forward to the continued dialog. And the Committee is now adjourned.

[Whereupon, at 1:45 p.m., the hearing was adjourned.]

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