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[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]

 RESULTS OF THE INTERNAL REVENUE SERVICE'S FISCAL YEAR 1999 FINANCIAL 
                            STATEMENT AUDIT

=======================================================================

                                HEARING

                               before the

                 SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,
                      INFORMATION, AND TECHNOLOGY

                                 of the

                              COMMITTEE ON
                           GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

                               __________

                           FEBRUARY 29, 2000

                               __________

                           Serial No. 106-154

                               __________

       Printed for the use of the Committee on Government Reform

  Available via the World Wide Web: http://www.gpo.gov/congress/house
                      http://www.house.gov/reform

                               __________

                    U.S. GOVERNMENT PRINTING OFFICE
66-876                     WASHINGTON : 2001

                     COMMITTEE ON GOVERNMENT REFORM

                     DAN BURTON, Indiana, Chairman
BENJAMIN A. GILMAN, New York         HENRY A. WAXMAN, California
CONSTANCE A. MORELLA, Maryland       TOM LANTOS, California
CHRISTOPHER SHAYS, Connecticut       ROBERT E. WISE, Jr., West Virginia
ILEANA ROS-LEHTINEN, Florida         MAJOR R. OWENS, New York
JOHN M. McHUGH, New York             EDOLPHUS TOWNS, New York
STEPHEN HORN, California             PAUL E. KANJORSKI, Pennsylvania
JOHN L. MICA, Florida                PATSY T. MINK, Hawaii
THOMAS M. DAVIS, Virginia            CAROLYN B. MALONEY, New York
DAVID M. McINTOSH, Indiana           ELEANOR HOLMES NORTON, Washington, 
MARK E. SOUDER, Indiana                  DC
JOE SCARBOROUGH, Florida             CHAKA FATTAH, Pennsylvania
STEVEN C. LaTOURETTE, Ohio           ELIJAH E. CUMMINGS, Maryland
MARSHALL ``MARK'' SANFORD, South     DENNIS J. KUCINICH, Ohio
    Carolina                         ROD R. BLAGOJEVICH, Illinois
BOB BARR, Georgia                    DANNY K. DAVIS, Illinois
DAN MILLER, Florida                  JOHN F. TIERNEY, Massachusetts
ASA HUTCHINSON, Arkansas             JIM TURNER, Texas
LEE TERRY, Nebraska                  THOMAS H. ALLEN, Maine
JUDY BIGGERT, Illinois               HAROLD E. FORD, Jr., Tennessee
GREG WALDEN, Oregon                  JANICE D. SCHAKOWSKY, Illinois
DOUG OSE, California                             ------
PAUL RYAN, Wisconsin                 BERNARD SANDERS, Vermont 
HELEN CHENOWETH-HAGE, Idaho              (Independent)
DAVID VITTER, Louisiana

                      Kevin Binger, Staff Director
                 Daniel R. Moll, Deputy Staff Director
           David A. Kass, Deputy Counsel and Parliamentarian
                    Lisa Smith Arafune, Chief Clerk
                 Phil Schiliro, Minority Staff Director
                                 ------                                

   Subcommittee on Government Management, Information, and Technology

                   STEPHEN HORN, California, Chairman
JUDY BIGGERT, Illinois               JIM TURNER, Texas
THOMAS M. DAVIS, Virginia            PAUL E. KANJORSKI, Pennsylvania
GREG WALDEN, Oregon                  MAJOR R. OWENS, New York
DOUG OSE, California                 PATSY T. MINK, Hawaii
PAUL RYAN, Wisconsin                 CAROLYN B. MALONEY, New York

                               Ex Officio

DAN BURTON, Indiana                  HENRY A. WAXMAN, California
          J. Russell George, Staff Director and Chief Counsel
   Bonnie Heald, Director of Communications/Professional Staff Member
                           Bryan Sisk, Clerk
                    Trey Henderson, Minority Counsel

                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on February 29, 2000................................     1
Statement of:
    App, Steven, Deputy Chief Financial Officer, U.S. Department 
      of the Treasury............................................    45
    Kutz, Gregory D., Associate Director, Government-wide 
      Accounting and Financial Management, Accounting and 
      Information Management Division, U.S. General Accounting 
      Office, accompanied by Steven J. Sebastian, Assistant 
      Director...................................................    10
    Rogers, Lawrence W., Acting Chief Financial Officer, 
      accompanied by John M. Dalrymple, Chief Operations Officer 
      and Commissioner of the Wage and Investment Operating 
      Division, Internal Revenue Service.........................    35
Letters, statements, et cetera, submitted for the record by:
    App, Steven, Deputy Chief Financial Officer, U.S. Department 
      of the Treasury, prepared statement of.....................    47
    Biggert, Hon. Judy, a Representative in Congress from the 
      State of Illinois, prepared statement of...................     7
    Horn, Hon. Stephen, a Representative in Congress from the 
      State of California, prepared statement of.................     3
    Kutz, Gregory D., Associate Director, Government-wide 
      Accounting and Financial Management, Accounting and 
      Information Management Division, U.S. General Accounting 
      Office, prepared statement of..............................    14
    Rogers, Lawrence W., Acting Chief Financial Officer, prepared 
      statement of...............................................    38
    Turner, Hon. Jim, a Representative in Congress from the State 
      of Texas, prepared statement of............................     5

 
 RESULTS OF THE INTERNAL REVENUE SERVICE'S FISCAL YEAR 1999 FINANCIAL 
                            STATEMENT AUDIT

                              ----------                              

                       TUESDAY, FEBRUARY 29, 2000

                  House of Representatives,
Subcommittee on Government Management, Information, 
                                    and Technology,
                            Committee on Government Reform,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10 a.m., in 
room 2247, Rayburn House Office Building, Hon. Stephen Horn 
(chairman of the subcommittee) presiding.
    Present: Representatives Horn, Biggert, and Turner.
    Staff present: J. Russell George, staff director and chief 
counsel; Louise DiBenedetto, GAO detailee; Bonnie Heald, 
director of communications; Bryan Sisk, clerk; Trey Henderson, 
minority counsel; and Ellen Rayner, minority chief clerk.
    Mr. Horn. The Subcommittee on Government Management, 
Information, and Technology will come to order.
    Unfortunately, it is an accepted fact that the Federal 
Government's financial systems are obsolete and ineffective. 
Most Federal agencies cannot produce complete, consistent and 
reliable financial information on a timely basis. These 
problems have been identified by the General Accounting Office 
and Inspectors General during the audits of the Federal 
agencies' annual financial statements.
    Attempting to correct these problems, Congress passed 
several major legislative reforms, including the Chief 
Financial Officer's Act of 1990, the Government Management 
Reform Act of 1994, and the Federal Financial Management 
Improvement Act of 1996. These were all bipartisan laws and 
they were enacted to ensure that Federal agencies produce 
timely and accurate information, which they need to manage 
their operations and measure the full cost and financial 
performance of their programs.
    Unfortunately, our previous subcommittee hearings have 
demonstrated that this important goal is a long way from being 
met. For the past 2 years, this subcommittee has held oversight 
hearings on the actions or lack of actions being taken by 
Federal departments and agencies to resolve their long-standing 
financial management problems. Again, this year, the Government 
Management Subcommittee will conduct a series of hearings 
examining financial audits of selected departments and 
agencies. Today's hearing begins this series.
    The auditing process can determine whether entities, 
private or public, are managing their money efficiently and 
whether they can produce timely, accurate and useful management 
information, particularly financial management information. At 
today's hearings, we will learn the results of the General 
Accounting Office's audit of the Internal Revenue Service for 
fiscal year 1999. The results of this audit and related 
financial management practices at the Internal Revenue Service 
are not only important, but they are important to Congress and 
its functioning, they are important to the President, and they 
are important to all of the taxpayers who depend on the agency 
to accurately collect the taxes the Treasury is due. Further, 
many Americans rely on the accurate refund of overpayments and 
expect the agency to pursue those who fail to pay the taxes 
that they owe.
    Last year alone, the IRS collected a total of $1.8 trillion 
in Federal tax revenue and paid out $151 billion in tax 
refunds. Prior reports by the General Accounting Office have 
been alarming. Serious problems in the Internal Revenue 
Service's operations and financial management have placed an 
unacceptable burden on taxpayers and an equally unacceptable 
loss of revenue for the government. Even more alarming, most of 
these issues have plagued the IRS since 1992. Throughout the 
years, the IRS has acknowledged these issues and has pledged to 
take the necessary corrective actions. During this session, we 
will learn what progress has been made by the IRS in meeting 
this challenge. We will hear testimony from representatives of 
the General Accounting Office, the Internal Revenue Service, 
and the Department of the Treasury. I welcome each of the 
witnesses and look forward to their testimony.
    [The prepared statements of Hon. Stephen Horn, Hon. Jim 
Turner, and Hon. Judy Biggert follow:]
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    Mr. Horn. We will now swear in the witnesses and they are--
let me just go--note who is here.
    Mr. Gregory Kutz, the Associate Director of Government-wide 
Accounting and Financial Management, Accounting and Information 
Management Division, U.S. General Accounting Office, part of 
the legislative branch. He is accompanied by Steven J. 
Sebastian, the Assistant Director.
    Next will be Mr. Lawrence W. Rogers, Acting Chief Financial 
Officer of the Internal Revenue Service, accompanied by John M. 
Dalrymple, Chief Operations Officer; and Mr. Steven App, the 
Deputy Chief Financial Officer of the Department of the 
Treasury.
    So, gentlemen, if you will rise and raise your right hands.
    [Witnesses sworn.]
    Mr. Horn. The clerk will note that all five witnesses 
affirmed the oath.
    We will start with Mr. Kutz, who is Associate Director, 
Governmentwide Accounting and Financial Management. So please 
begin.

 STATEMENT OF GREGORY D. KUTZ, ASSOCIATE DIRECTOR, GOVERNMENT-
   WIDE ACCOUNTING AND FINANCIAL MANAGEMENT, ACCOUNTING AND 
   INFORMATION MANAGEMENT DIVISION, U.S. GENERAL ACCOUNTING 
 OFFICE, ACCOMPANIED BY STEVEN J. SEBASTIAN, ASSISTANT DIRECTOR

    Mr. Kutz. Mr. Chairman, good morning. It is a pleasure to 
be here to testify on the results of our audit of IRS's fiscal 
year 1999 financial statements. The financial activities in 
these statements are enormous when compared to other entities, 
including $1.9 trillion in tax revenue, $185 billion in 
refunds, and $21 billion in net taxes receivable. With me this 
morning is Steve Sebastian who works with me on the financial 
audit of IRS. I also thank IRS senior management and staff 
across the country for their cooperation and professionalism 
throughout this year's audit.
    The bottom line of my testimony this morning is that IRS 
does not have reliable financial and performance information 
that is needed to effectively manage its operations. In 
addition, control deficiencies relating to unpaid taxes and 
refunds have likely cost the Federal Government billions of 
dollars.
    My testimony this morning is in three parts. First, the 
results of our 1999 audit; second, problems IRS has in 
accounting for and managing its $8 billion appropriation; and 
third, weaknesses in controls and management of unpaid taxes 
and refunds.
    Before providing the results of our fiscal year 1999 audit, 
I want to recognize the IRS for its notable progress this year 
in seven areas: financial reporting, accounts payable, suspense 
accounts, documentation of unpaid taxes, fund balance with 
Treasury reconciliations, computer security, and controls over 
hard-copy taxpayer data. We commend the IRS for their progress 
in these seven areas. We also commend the IRS for issuing their 
financial statements by the March 1st statutory deadline for 
the third consecutive year.
    The audit results for fiscal year 1999 include opinions on 
IRS's six financial statements and an opinion on internal 
controls and a report on compliance with laws and regulations. 
Our opinion on IRS's statement of custodial activities is 
unqualified. This means that the $1.9 trillion in tax revenue 
and $185 billion in refunds are reliable. Our opinion on IRS's 
balance sheet is qualified; except for issues relating to net 
position, IRS's balance sheet is reliable.
    Our opinions on the other four financial statements, the 
statements of net cost, changes in net position, budgetary 
resources, and financing, are disclaimers. Because of problems 
relating to IRS's systems and controls, we were unable to 
determine whether the information in these financial statements 
is reliable.
    Our opinion on IRS's internal controls is that they are not 
effective. In addition, we found noncompliance relating to the 
structuring of taxpayer installment agreements and the 
releasing of Federal tax liens. We also concluded that IRS's 
systems do not comply with the Federal Financial Management 
Improvement Act. Because of a number of problems, we were 
unable to determine whether IRS complied with the 
Antideficiency Act.
    I want to stress that although an unqualified audit opinion 
is a recognized accomplishment that IRS should strive for, it 
is not the ultimate goal. Rather, the ultimate goal is for IRS 
to routinely produce reliable financial and performance 
information to use in managing its operations.
    Let me move on to a discussion of my second point, which 
relates to problems IRS has in managing an accounting for 
activity related to its $8 billion budget. My discussion will 
focus on undelivered orders and property and equipment.
    The qualification of IRS's balance sheet related to 
problems we found primarily with the undelivered orders 
component of net position. Undelivered orders represent the 
cost of goods and services that have been ordered, but have not 
been received. In testing a sample of year-end undelivered 
orders, we found a 42 percent error rate.
    For example, a large number of items recorded as 
undelivered had, in fact, been delivered before year-end. In 
addition, many of the items in our sample were no longer valid 
orders. Undelivered orders is a key budgetary account. IRS 
needs reliable budgetary information to effectively manage its 
operations.
    In our 1998 audit, we reported that IRS's property and 
equipment was likely materially understated. Because IRS could 
not rely on its own records, it hired consultants and 
appraisers to develop a projected year-end balance. This effort 
increases IRS's property and equipment balance by over $1 
billion or 600 percent. Although IRS was able to develop a 
reliable estimate at September 30, 1999, the chronic problems 
in the underlying property and equipment inventory remain. For 
example, when verifying the items in IRS's inventory, we found 
at one location that 200 personal computers in IRS's records 
had actually been disposed of. We also found video-conferencing 
equipment and three new mail sorting machines costing over 
$800,000 each that were not in IRS's records.
    Finally, we found numerous errors in IRS's records relating 
to costs. For example, a Compaq laptop computer was incorrectly 
recorded at a cost of $310,000, and a copy of Microsoft office 
software costing $213 was erroneously recorded at $212,300. IRS 
itself has reported property and equipment as a material 
weakness since 1983.
    My third and most important point is that IRS continues to 
have difficulty managing unpaid taxes and refunds. The 
difficulty has resulted in burden to taxpayers and has likely 
cost the Federal Government billions of dollars. The problems 
we found are a result of human error, systems limitations, and 
according to the IRS, resource constraints.
    For fiscal year 1999, we found that taxpayer records 
contained errors that IRS had not caught and resolved in a 
timely manner. For example, we found delays in posting trust 
fund recovery penalty payments to all appropriate taxpayer 
accounts. Some payments made by taxpayers as far back as the 
late 1980's were still not properly recorded.
    We also found delays in correcting erroneous assessments 
due to data input errors. In one case, IRS took 18 months to 
correct an erroneous assessment of over $160,000 against a 
taxpayer that was actually owed a refund. The case file 
indicated that IRS knew of the error 10 months before it was 
finally corrected.
    Last August, Mr. Sebastian and I testified before this 
subcommittee that outdated systems and ineffective processes 
make it difficult for IRS to effectively collect delinquent 
taxes. At that hearing, the Commissioner noted that IRS's 
systems are fundamentally deficient in this area.
    In addition to these problems, we found, during our 1999 
audit, numerous unpaid taxes with collection potential that are 
not being pursued by the IRS. During fiscal year 1999, in order 
to reduce a backlog of unassigned cases, IRS removed $2.4 
billion of cases from its field collection inventory. As a 
result, these cases were closed without filing a tax lien or 
taking normal collection action. Some of these cases that we 
reviewed appeared to have some collection potential.
    In addition, we found other unassigned cases that had 
collection potential. For example, in one case, we noted a 
doctor that owed taxes of over $100,000 from as far back as the 
late 1980's. Although this individual had 1998 adjusted gross 
income of nearly $200,000, the case was not being actively 
pursued.
    As we have reported in prior years, IRS has ineffective 
controls that allow invalid refunds to be disbursed. According 
to IRS, it relies primarily on detective controls in this area. 
In fiscal year 1999, we found significant gaps in the 
effectiveness of these detective controls. For example, months 
after the filing season, IRS matched its tax return information 
to third-party income information such as W-2s and 1099s. This 
matching procedure is intended to identify under-reported 
income.
    For tax year 1996, IRS screened about 155 million 
individual income tax returns and found that 12 million had 
potential taxes due of $15 billion. However, IRS investigated 
only 25 percent of these returns relating to about $5 billion. 
Thus, IRS did not pursue nearly 9 million taxpayers with $10 
billion of potential unpaid taxes.
    Historically, the earned income tax credit has been 
vulnerable to high rates of invalid claims. In fiscal year 
1999, $26 billion of the $30 billion of EITC claims were 
refunded. During fiscal year 1999, IRS examined 573,000 
suspicious returns claiming $1.25 billion in EITC and found 
that 86 percent of the claims were invalid. If these 
examinations are done before the refund is disbursed, that is 
an effective preventive control. However, according to IRS, 30 
percent of these examinations were completed after the refund 
was disbursed.
    In summary, IRS cannot do some of the basic accounting and 
recordkeeping tasks that it expects of American taxpayers. IRS 
must resolve the financial and operational issues discussed in 
our report to provide quality customer service and fulfill its 
responsibility as the Nation's tax collector. Gaps in the 
effectiveness of controls over unpaid taxes and refunds have 
likely cost the Federal Government billions of dollars. We 
believe that the vast majority of American taxpayers comply 
with the Tax Code. However, failure to pursue and collect taxes 
due could substantially reduce future compliance and erode 
compliant taxpayers' confidence in the current system.
    During fiscal year 1999, IRS senior management demonstrated 
a high level of involvement and commitment to addressing many 
of the issues discussed in our report. We encourage IRS to 
sustain the progress made in 1999 and use it as a building 
block for further improvement in the future. In addition, the 
success of IRS's long-term modernization efforts is critical to 
resolving the challenges we are talking about today. We are 
committed to working with IRS in fiscal year 2000 and future 
years to develop lasting solutions to these issues.
    Mr. Chairman, this concludes my testimony. Mr. Sebastian 
and I will be happy to respond to any questions.
    [The prepared statement of Mr. Kutz follows:]
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    Mr. Horn. Well, thank you very much. As you know, we 
practice letting all of the witnesses speak and then we take 
questions. So, we hope everybody is going to be here this 
morning.
    That was an excellent document and we have quite a few 
questions that are going to come from it.
    We now have Mr. Lawrence W. Rogers, the Acting Chief 
Financial Officer for the Internal Revenue Service. He is 
accompanied by Mr. John Dalrymple, the Chief Operations 
Officer, and Mr. App, the Deputy Chief Financial Officer of the 
Treasury. So go ahead, Mr. Rogers.

    STATEMENT OF LAWRENCE W. ROGERS, ACTING CHIEF FINANCIAL 
  OFFICER, ACCOMPANIED BY JOHN M. DALRYMPLE, CHIEF OPERATIONS 
 OFFICER AND COMMISSIONER OF THE WAGE AND INVESTMENT OPERATING 
               DIVISION, INTERNAL REVENUE SERVICE

    Mr. Rogers. Thank you, Mr. Chairman. We have submitted my 
testimony for the record, and I have a short summary of that.
    Mr. Horn. Just take your time. You are a principal witness. 
So automatically, all of your statements go into the record 
once we introduce you. But feel free.
    Mr. Rogers. Yes, sir. I will give you a short summary of 
that and then we will turn to questions. My testimony is for 
Mr. Dalrymple and myself representing the IRS.
    Mr. Chairman and distinguished members of the subcommittee, 
I am pleased to testify today on GAO's report on our financial 
1999 audits. I would introduce Mr. Dalrymple whom you have 
already mentioned. Mr. Dalrymple is the Chief Operations 
Officer for IRS.
    This year, due to the combined efforts of the IRS and GAO 
teams, GAO was once again able to render an unqualified, or 
clean opinion on the IRS statements of custodial activity, as 
has been noted by Mr. Kutz, and represents $1.9 trillion that 
IRS collected in tax revenues in this past year.
    That being said, we are very disappointed that we were 
unable to achieve an unqualified opinion on our administrative 
actions. I can assure you that this was an effort, an all-out 
effort, by the agency to improve; and I am going to talk later 
about the improvements that we were able to achieve.
    The IRS believes the GAO report is generally accurate. In 
its report, GAO staff expressed concern about the IRS use of 
labor-intensive, compensating work-arounds. In fact, really, 
during the audits that we have, it requires a cooperative 
effort by the GAO teams and ourselves to carry out these 
audits; and we will have to continue with these types of work-
arounds for the near term, that is, until we are able to 
replace the archaic Legacy data systems that IRS now uses to 
track its tax collections. With these improvements, though, 
that we have made during the past year, we believe we can 
sustain the progress that we have achieved and do this while we 
are seeking more fundamental system improvements.
    I would like to spend a couple of minutes talking about our 
improvements over the past year. We were able to overcome the 
loss 2 years ago of a mass migration of supervisors out of our 
system, out of our accounting system, and we have replaced all 
of those people. They are trained and in place. This is one of 
the issues that was brought up in last year's report by GAO, 
and these folks are there and are working very well.
    On the custodial side, we have improved the data extract 
process by which the audit is done. In 1999, IRS staff was able 
to assume responsibility for analysis of the financial 
classifications for accounts receivable. We were also able to 
perform collectibility analyses of receivables, and this was 
work that the GAO teams previously had to perform before we 
were able to come up to speed and take over some of that 
workload.
    On the administrative side, the fund balance was reconciled 
with Treasury at the end of fiscal year 1999, and I think the 
GAO notes that in its report, although expresses some concern. 
But we think that we have gotten there, and in fact, we are 
continuing to reconcile the cash balance each month, and we 
have done that for October and November of fiscal year 2000. A 
new permanent team is now charged on a recurring basis with 
that duty. I will tell you that I personally check on that 
every month, just to make sure.
    IRS also cleaned up the suspense account to a reasonable 
level and the appropriate entries were made to record the 
clean-out of that account.
    We are providing for this coming year to make a subsidiary 
ledger for our accounts available which will enable us in the 
future to give GAO cleaner extracts for audit purposes. In 
addition, we put into effect procedures that the IRS will 
follow to ensure sustainability of our property evaluation 
figure from the end of our fiscal year 1999. This process will 
remain in place until a more permanent solution is found.
    Also of interest to the GAO and the subcommittee, we 
continued to improve on an aggressive security management 
program which focuses on identifying, managing and mitigating 
security weaknesses. We also have established the financial and 
management control of the executive steering committee, and 
that committee is chaired by the deputy commissioner to 
strategically manage and improve on initiatives and ensure that 
appropriate controls are an integral part of the IRS programs.
    We view these steps and numerous others that are described 
in detail in our written statement as necessary investments. 
These investments have to be made so that IRS can meet the 
statutory policy requirements for good financial data that 
fairly presents the status of IRS finances to all interested 
parties. We did this to the best of our ability in 1999, and we 
will continue to do so from here on.
    Mr. Chairman, in the long term, the inadequacies in and 
solutions to our financial reporting systems must be addressed 
through the broader efforts under Commissioner Rossotti to 
modernize both the systems, technology and organization of the 
IRS as mandated by the landmark IRS Restructuring and Reform 
Act of 1998. I want to thank you, and if Commissioner Rossotti 
were here, he would certainly do this as well, for the 
leadership that you have provided from this subcommittee, 
especially in the area of computer systems and the Y2K process. 
In the interim, we intend to develop the best financial data 
possible while continuing to concentrate on the more complete 
reform of the data systems.
    I can assure you that we will sustain each of this year's 
improvements. We will work toward a financial management system 
that fulfills the requirements of the various acts; and also in 
the longer run perhaps--and I think this is what Mr. Kutz is 
saying--will provide IRS managers with the data they need to 
operate the agency effectively and efficiently.
    Thank you very much. We would be glad to answer any 
questions that you may have.
    [The prepared statement of Mr. Rogers follows:]
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    Mr. Horn. Mr. App, the Deputy Chief Financial Officer for 
the Department of the Treasury.

 STATEMENT OF STEVEN APP, DEPUTY CHIEF FINANCIAL OFFICER, U.S. 
                   DEPARTMENT OF THE TREASURY

    Mr. App. Mr. Chairman and members of the subcommittee, good 
morning and thank you for inviting me here today to discuss 
financial management in the Department of Treasury and the 
Internal Revenue Service.
    Throughout fiscal year 1999, the reporting cycle senior 
management, including the Assistant Secretary for Management 
and CFO, as well as the IRS Deputy Commissioner, have provided 
critical oversight to improve the audit results at IRS. Mr. 
Chairman, that is a commitment we made to you last year. Across 
Treasury, we are pleased with the progress that we have made on 
financial reporting and the sole qualification this year on our 
report will be the IRS administrative statements.
    Working with our audit partners and the IRS, we hope to 
strive for unqualified opinions in 2000 at both the IRS and the 
Treasury. It should be noted, however, that the path to 
improved short-term audit results at IRS will remain labor-
intensive for the next few years until the core financial and 
management systems can be reconfigured or replaced.
    The Department's management fully recognizes the leadership 
role that main Treasury must play in sound financial reporting, 
and we will continue to support the IRS efforts to sustain the 
progress made during fiscal year 1999, to strengthen the CFO 
structure and management team at the IRS, and to build the 
financial systems needed to improve reporting and, more 
importantly, the management of IRS resources.
    To that end, the Department is actively engaged with the 
IRS on longer-term system solutions. Also, we made needed 
changes in CFO leadership at IRS. You have heard from my 
colleague, Larry Rogers. Larry Rogers has demonstrated 
throughout Treasury his leadership ability, has tackled the 
jobs of starting the Inspector General Office at IRS, as well 
as filling in the permanent leadership at the Inspector 
General. The Department and IRS and GAO have all recognized Mr. 
Rogers' capabilities, and I think they are demonstrated by the 
results this year. Going forward, our collective goal is to win 
the war for top financial talent at IRS, both by selecting a 
strong, permanent CFO and strengthening the CFO office.
    While freely acknowledging the financial reporting problems 
at IRS and the negative impact on the Department, I would like 
to conclude my remarks by pointing out three areas of steady 
progress across Treasury. First, in terms of timeliness, we 
expect to meet the March 1st statutory deadline for the 
Department for the first time in Treasury's history. The 
Secretary is signing the reports today, as well as the 
Inspector General, and we hope to deliver them to OMB today.
    Second, for fiscal years 1997 through 1999, as you have 
already heard, Treasury has received unqualified opinions on 
its primary governmentwide functions: collecting revenue and 
also managing the public debt. GAO is again rendering 
unqualified opinions, as you have heard, on the revenue of $1.9 
trillion at IRS, as well as public debts, $5.7 trillion in 
debt. Also, the rest of the Department's bureau and custodial 
activities, with the exception of IRS, all have clean audit 
opinions, no department-level audit qualifications.
    Finally, a last point is that the nonpayroll, IRS 
administrative accounts that have been the focus of the GAO 
reporting problems this year largely have a negligible impact 
on the status or opinion of the governmentwide financial 
statements, due to their low level of materiality.
    Mr. Chairman, that concludes my testimony. I would be 
pleased to respond to any questions you may have. Thank you.
    [The prepared statement of Mr. App follows:]
    [GRAPHIC] [TIFF OMITTED] T6876.036
    
    [GRAPHIC] [TIFF OMITTED] T6876.037
    
    Mr. Horn. Gentlemen, we are going to now conduct the 
questioning. It will be 5 minutes per member, and we will 
alternate between both sides of the aisle. Let me just start 
with a couple of questions.
    On pages 30 and 31 of the GAO report, at the bottom of page 
30, it notes taxes collected on behalf of the Federal 
Government are deposited in a General Revenue Fund at the 
Department of the Treasury from which they are subsequently 
distributed to the appropriate trust funds. Now, this is a 
question I have asked numerous times in the last 6 years, and I 
still am concerned about it.
    Here we are: Amounts representing Social Security and 
hospital insurance payroll taxes are distributed to their 
respective trust funds, based on employee wage information 
certified by the Commissioner of the Social Security 
Administration.
    What I would like, Mr. Rogers, is for you to tell me in 
simple English for the average taxpayer that might read this 
transcript some day, are we really getting all that we should 
be getting from payroll taxes? Because over here in footnote 
29, GAO recently reported in detail, unpaid payroll taxes: 
billions in delinquent taxes and penalty assessments are owed, 
August 2, 1999.
    Now, that is what has been worrying me for 6 years, that we 
don't quite put the money that comes in as an excise tax from 
the employer that is deducted, half of the Social Security wage 
and the person's additional half. We just seem to have 
economists that say, yes, I guess that is right, and Social 
Security administrators say, apparently, that is right.
    I don't believe it. Isn't there a simple way, in an age of 
digital analysis and sweeps in a grocery store, we could have 
sweeps in an excise tax as it comes in and gets it right and 
puts it in the right trust fund? We now have the lockbox, at 
least out of the House, and we are going to make enough noise 
on that lockbox on Social Security that no President, 
regardless of party, and no Congress, regardless of party, will 
be dipping their hands in it. But I am worrying about the stuff 
that never got in there to start with.
    So what can you do to reassure us?
    Mr. Rogers. I think I can assure you, Mr. Chairman, that 
money that is collected for the trust funds does go through the 
general fund, but into the trust fund itself. I think in 
looking at a stream of information over time and the way the 
taxes are collected, there will be some occasions when 
employers who have collected the money and were holding it in 
trust never paid it. That is, they went out of business or 
something happened that the money is not collected.
    So when you look at a long-term stream, some of this money 
won't get collected; it just will never get there.
    However, the certification process calls for the Social 
Security Trust Fund basically to be made whole. I think it has 
been referred to as a subsidy by GAO, but in fact it is the way 
Congress and the government have chosen over time to make sure 
that all people whose Social Security benefits have been 
withheld, it is guaranteed that way.
    So I think there will always be a small loss.
    The issue, I think, for IRS is to do the best job it can to 
collect the money from those people who do not pay; and that is 
the primary administrative issue that I think we face.
    Mr. Horn. Now, that M.D. that you cited with a case, was 
that part of his problem that he hadn't paid payroll taxes?
    Mr. Rogers. I have not seen that case. I would have to ask 
Mr. Kutz.
    Mr. Kutz. That was individual income taxes, a 1040.
    Mr. Horn. It had nothing to do with office employees or 
anything?
    Mr. Kutz. No.
    Mr. Horn. I think we have found, when you look at all of 
these cases across the country, you often have nonprofits that 
usually hang by the nails anyhow, and the first thing they 
don't report to the IRS is their wage deductions from their 
employees, and they use that to keep running the information.
    Mr. Kutz. Right. As we reported to you last summer, unpaid 
payroll taxes are the No. 1 enforcement issue at the IRS. 
Indeed, as Mr. Rogers pointed out, the amounts that go into the 
Social Security Trust Fund--despite the fact that these payroll 
taxes aren't collected, the trust fund is indeed made whole, 
which creates a built-in subsidy, and that is in accordance 
with the law; but the subsidy we reported in this report is 
about $43 billion over time.
    But we do continue to see a number of unpaid payroll tax 
cases in our samplings as part of the fiscal 1999 audit. We 
found again that there were officers that were responsible for 
starting up and shutting down business after business and not 
paying over their payroll taxes. We have a number of examples 
of those that we can share with you if you would like.
    Mr. Horn. I will get into that on my next question, but I 
will yield now to the gentleman from Texas, the ranking 
Democrat and the ranking member, Mr. Turner, for questioning.
    Mr. Turner. Thank you, Mr. Chairman. Please excuse me for 
being late today. In fact, I would like to submit my opening 
statement for the record.
    Mr. Horn. Sure. It will be put right after mine and put as 
if read.
    Mr. Turner. I want to followup on the question you were 
pursuing, Mr. Chairman.
    This problem of unpaid payroll taxes, it seems to me that 
there ought to be some examination of ways to improve upon 
that, to include ideas such as, perhaps, what would be the 
effect if you required a $200 deposit by everyone who applies 
for an employer identification number, to be refunded after 
successfully paying your taxes for 1 year, or something like 
that? You know, how much would that generate in terms of 
savings?
    I mean, are we talking about people, Mr. Rogers, who don't 
even apply for an employer identification number, or are we 
talking about people who do apply for one, but end up being 
delinquent in their payroll taxes? I guess if they never apply 
for one, you don't know about them, do you?
    Mr. Rogers. I think that is right. I think that you are on 
the right track.
    Mr. Turner. So what would be the financial impact of 
requiring a $200 deposit at the time you apply for an employer 
identification number? Would that be helpful?
    Mr. Rogers. I think $200 seems like a small amount and 
probably most employers who are entering into the market could 
do that. It brings with it all of the administrative issues of 
any situation like this where the government would have to 
record it, you know, take care of it, put it into an escrow 
account, pay it back at some point when they went out of 
business. So there is always a hidden cost that becomes very 
real when you start trying to administer something like that.
    I think you and Mr. Rossotti were engaged in a discussion 
about this earlier, and I think his view was that you have to 
kind of balance off the impact and the burden on employers or 
people who are trying to startup who may be, you know, eking 
out a beginning and whether this would have an impact on them. 
I don't know that $200, frankly, would be high enough to be 
good, earnest money; it might need to be higher.
    Mr. Turner. I think Mr. Rossotti and I talked one time 
about the effect of requiring a bond by those, and perhaps a 
bond could cover a much larger amount of unpaid liability. Not 
knowing anything about the potential market for that kind of 
proposal, I don't know what the bond could cost an employer, 
but obviously we need something to make some inroads on the 
large amount of unpaid payroll taxes.
    Mr. Rogers. To some extent, though, one of the problems is 
the number of outfits that go out of business. The bankruptcy 
laws in this country are such that there is a limit on what you 
can get back from a bankrupt company. So there is going to be a 
residue along the way of a loss on payroll taxes; and 
especially for Social Security, I think the issue is, how do 
the country and the government ensure against that?
    As was said earlier, I don't view this as a subsidy, but 
sort of a self-insurance program that the government has put in 
place to make sure that this very important account, Social 
Security, is kept whole.
    Mr. Kutz. Congressman Turner, let me just mention one thing 
on this.
    As you may recall from our hearing last summer, the 
individuals and businesses that we are talking about here, that 
don't pay payroll taxes, many times are receiving other Federal 
benefits, such as SBA loans, Navy contracts, et cetera. So that 
is another issue. It is even worse than just not paying the 
taxes, that these same individuals and businesses are 
benefiting from other programs within the Federal Government, 
which is another issue that needs to be looked at.
    Mr. Turner. I just have the feeling that there are probably 
some solutions here that both of you could help us fashion, as 
long as they weren't unduly burdensome on the business 
community. It seems to be an area we should pursue. After all, 
we are talking about taxes, half of which are actually the 
funds that belong to the employees who work for those 
businesses; so it doesn't seem to me to be totally unreasonable 
for us to have some--at least a little bit stronger enforcement 
ability to collect those moneys that actually belong, at least 
half of it, to those employees.
    I want to pursue a little different line of questioning and 
perhaps, Mr. Rogers, you could help me on this. I understand 
that Secretary Summers has embarked upon an examination of 
corporate tax shelters; and I don't know if the GAO audit in 
any way touched upon that subject, but is it true--at least it 
seems to be what I have read recently in press reports--that 
corporate income tax revenues to the IRS are down?
    Mr. Rogers. Yes. I am not sure of the figures, but I think 
they have dropped from 26 percent of their corporate income to, 
I believe the figure is 22 percent over the past few years; but 
we would have to get the exact figures for you. That is in the 
face of the percentage payment by individuals going up. They 
are going in different directions.
    Mr. Turner. So the fact that the percentage of total 
collections by corporate entities is down from 26 to 22 doesn't 
mean that the actual total dollar collections by corporate 
taxpayers is down?
    Mr. Rogers. I don't think so, but I think the rise in the 
economy and the total tax collections is lifting everything, 
even though the proportions have changed.
    Mr. Turner. It was disturbing when I read that article in 
the sense that we all have the impression that the economy is 
booming, and you would certainly think corporate income tax 
payments would be on the rise, as are individual tax payments, 
as a result of the good economy. So it was somewhat troublesome 
to me to see that.
    It seems to me to address maybe a broader problem that I 
would expect you to have an opinion on, and that is this issue 
of whether or not many of the problems that we are hearing 
about today can be traced back to the complexity of the 
Internal Revenue Code, which every year that passes in our 
efforts here in Congress to provide additional provisions to, 
in many cases, induce good conduct by our taxpayers, we have 
new provisions that taxpayers have to deal with and the IRS has 
to deal with.
    I would be interested in your view as to whether or not 
much of the difficulty you face in administering your agency 
could be traced back to the very complexity of the Code itself, 
and thus, the issue could be raised of whether or not we should 
be talking more about simplicity or simplifying the Code.
    Mr. Rogers. I am not sure I am ready to give an opinion on 
simplifying yet, but I think we can state the facts here.
    The comparison, the analogy has been made that the Internal 
Revenue Code, in words, is larger than the Bible. I think that 
the number of changes in the last couple of years with the 
reform act amounts to 800 law changes in the Code. In an agency 
that is trying to collect taxes and implement that number, that 
magnitude of changes, it obviously makes it difficult.
    I recall that you said that you still do your own taxes, as 
I do myself, and even from a personal standpoint, this is 
something that is pretty daunting. I feel like I am pretty well 
informed on it.
    So I think the complexity affects everybody. It affects the 
administrative apparatus of an agency like this. We have to 
deal with a very large economy, with a lot of people, a lot of 
activity going on; and the changes and the complexity make it 
very difficult. There is no doubt about it. I think at this 
point, though, I am really not prepared to speak to whether we 
need some broad simplification or something of that sort. I 
think this is an issue that is much broader and greater than I 
am prepared to deal with today.
    Mr. Horn. I have given you your opening statement time. Go 
ahead.
    Mr. Turner. Thank you.
    Let me just ask as a followup. The problem that Secretary 
Summers is wanting to address in terms of the increasing 
utilization of tax shelters by the corporate community, isn't 
that a direct reflection of the fact that the Code has become 
so complex that the corporate community and their tax advisors 
and attorneys are doing things that really you in the Internal 
Revenue Service don't have the ability to even look at to 
determine whether or not they are complying with the law or 
not?
    Mr. Rogers. Well, I think the identification of this 
problem is a result of looking at these tax shelters, and the 
examination of large companies like this. I mean, I am going to 
ask Mr. Dalrymple to help me here in a minute; but I think that 
the companies would say that the tax system exists, it is 
there, and that they are entitled really to look at it and use 
it to their proper benefit.
    I think the issue that is in debate right now is whether or 
not some of the companies may have pushed that limit a bit 
beyond good practice; and that is what Mr. Summers has been 
taking on as an issue and has been discussing here on the Hill.
    Mr. Horn. Mr. Dalrymple, do you want to add to that?
    Mr. Dalrymple. The only thing I would add is that what Mr. 
Summers has been talking about, of course, is abusive tax 
shelters; because tax shelters, in and of themselves, there is 
nothing wrong with them. Everyone shelters their income legally 
and should, because that is what the law is all about. But the 
real issue is whether there is a real economic base or economic 
reality to the transactions.
    As Mr. Rogers correctly stated, we have uncovered these 
through examination. They are very, very complex issues when we 
uncover them. They take a tremendous amount of effort to 
uncover them. The idea behind the regulations, of course, is to 
ensure that these shelters are identified as the returns are 
being filed by the taxpayers, so that they are easily 
identified and they are returned and, therefore, are sort of 
basically an open book policy.
    Mr. Horn. Well, I thank the gentleman for those additional 
facts. I just thought that maybe we ought to have only a ``last 
year'' for every Presidential term, and then they finally get 
around to doing the right thing. So the first 3 years, they 
milk the cow for elections and then the last year they do the 
public interest. So I am all for having maybe 4 last years for 
everybody from now on.
    The vice chairman, the gentlewoman from Illinois, Mrs. 
Biggert, 5 minutes.
    Mrs. Biggert. Thank you, Mr. Chairman. If I might also ask 
unanimous consent to put my opening statement into the record.
    Mr. Horn. It will go right after Mr. Turner's, and we will 
give you some additional time on questioning.
    Mrs. Biggert. Thank you. My first question is for Mr. Kutz.
    What we have been debating in Congress over the past few 
months has been the issue of privacy. I wanted just to ask 
about that. Certainly, there is sensitive information about an 
individual in the IRS. I am wondering whether, since the 
management practices, is there any compromising of that 
information?
    I am disturbed by reports stating that the IRS is lax in 
protecting sensitive taxpayer information. Do you agree with 
that concern? Is that a concern?
    Mr. Kutz. Yes, it is a concern in two areas. No. 1, the 
area of computer security which--as Mr. Rogers said earlier, 
IRS has a very proactive program in that area where they go out 
and do self-assessments and identify various computer security 
issues. They still have a lot of challenges in that area to 
resolve.
    The issue we are most concerned about at this point is the 
delay in the responses of the fingerprint checks where 
employees are going into the service centers and handling 
taxpayer data, checks, cash, and various other information 
before IRS receives the fingerprint results back. What has been 
found in the past and what we have reported is that some of 
these various individuals have stolen information and committed 
fraud with it. So we are very concerned.
    We believe that the IRS policy should be that these 
individuals should not be allowed into the service centers or 
anywhere else to handle this information until satisfactory 
results of fingerprint checks are received.
    Mrs. Biggert. Thank you. Do you think that there is any 
need for congressional action on this issue?
    Mr. Kutz. That is pretty much a management issue in our 
view, and I think it is something that IRS should be able to 
address and get around the various administrative issues they 
have in actually implementing it. I think last year we had this 
same discussion before this subcommittee, and IRS was going to 
have that problem solved by last summer, and they don't have it 
solved at this point as far as we have seen. It is something 
that needs to be done.
    Not only do they have electronic fingerprint issues, and 
then they have basically the ink blot at some locations that 
they are still using for fingerprint checks. I think that both 
of those issues need to be streamlined before employees are 
allowed to go into service centers and handle this information.
    Mrs. Biggert. Mr. Rogers, I assume that you spoke about 
this during your testimony, but I am sorry I missed it, if you 
could just comment briefly on that.
    Mr. Rogers. I am going to ask Mr. Dalrymple to answer this 
question. This is strictly an operational and management issue.
    Mr. Dalrymple. I believe it was 3 years ago actually, and 
this is part of a much broader context in terms of security, 
physical security, at our service centers in which the GAO was 
very helpful in terms of pointing out some specific issues that 
we needed to address. As you talk about privacy and access to 
confidential information, very confidential information, 
sensitive confidential information, I believe 3 years ago most 
of our controversy at the time was around browsing that we had 
by employees; and we have solved that problem.
    In addition to that, the GAO pointed out other deficiencies 
that we have also addressed, and I think they would be Johnny-
on-the-spot to say that we have addressed a number of the 
physical security issues. We have taken the ability for people 
to take handbags and hats and things into processing areas; we 
have put lockers outside of those areas so that people have to 
put their personal belongings in there so that they can't 
easily take checks or other confidential information out of 
those areas.
    In addition to that, we had a process in place prior to 
that audit where our background investigations took so long 
that by the time our--most of these are temporary employees 
that come in during our filing season. By the time our 
background investigations came back, the employees were 
actually off roll, they were no longer working for us.
    Now we have an arrangement with the FBI where we get data 
back where there are no hits within 3 days, and on average, we 
are getting information back within 8 days. Our current policy 
is not to have those folks, until their background 
investigations are completed, be in our remittance processing 
organization or our receipt and control organization.
    Now, what I will say is that during our very peak days, 2 
or 3 days where we have tremendous amounts of mail coming in, 
and we are recruiting and hiring right up through April 15th, 
17th, 18th, when tremendous amounts of mail come in, we do have 
to make some decisions on whether or not we are going to make--
get the mail open and get deposits in the bank on a timely 
basis, or not. And a lot of that depends on how many people are 
available, how many hands.
    So what I am saying here is that I can't completely commit 
that we wouldn't have to use some people who we don't have the 
checks back from; but the bottom line is, we get the checks 
back in time to find out whether or not we have people with a 
record and that we can take action before they have left our 
rolls.
    Mrs. Biggert. Do you think that 3 days for fingerprints or 
8 days for completion of a background check is soon enough? I 
mean, we certainly have been able to do that faster with 
criminals now, with the instant background or the instant 
check.
    Mr. Dalrymple. Well, these are the instant checks that we 
are getting through the FBI now. So I am not sure that we can 
cut that timeframe any closer, although frankly, we are trying 
to do--especially on the cases where we have hits for the 8 
days. I think, getting them back within 3 days doesn't pose too 
much problem because the training and orientation that goes on 
when you hire a new employer takes 1 day, and getting the 
information back within 3 allows us to productively employ them 
before we put them into sensitive areas.
    Mrs. Biggert. Just changing gears a little bit, Mr. Rogers, 
some of my constituents who work for the IRS have contacted me 
in recent months about the agency and the working environment, 
and I think this is all part of what has been happening. They 
say that really the morale of the IRS is declining due to the 
recent well, congressional reforms, is the way they put it. I 
don't know if it is the reforms, but trying to change the 
practices or whatever.
    Have these concerns been raised to you? Do you see a 
situation where people are down, so to speak?
    Mr. Rogers. Well, I don't know about down. I think 
Commissioner Rossotti has spoken to this issue on several 
occasions and perhaps before this subcommittee. The agency is 
undergoing massive change, and the reorganization, the 
restructuring, is a big one. It is an incredible change in 
government circles about the way this agency does business. And 
moving from the traditional regional/territorial kinds of 
organizations to functional groups like this is almost 
unprecedented. It is a change, I think, which the Commissioner 
endorses and which the Congress has asked the agency to 
undertake. When you have that kind of change, I think it is 
inevitable that people are going to be very concerned.
    There is also the overlay of the 10 issues that were in the 
Reform Act, and the concern that people have had that they 
might be fired. I mean, those 10 issues, it moves personnel 
actions away from the traditional civil service system of 
appeals and safeguards to one of dismissal without review, 
except by one person. That is a major change as well.
    I think the implementation of those provisions, however, 
has been done correctly and clearly employs ``must knowingly 
violate'' these things; and if you look at the issues there, if 
an employee had knowingly violated them, they would have been 
terminated previously.
    But until everyone gets comfortable with this new 
environment, I think there will be concern. It is a big change 
that is going on, and this overlay I think clearly will create 
concern on the part of any rational employee. But I don't 
think--you know, you look at the record here this year, again, 
all of the forms went out, the taxes got collected.
    You know, there are issues on the margin that we need to 
deal with in the under-reporting and the taxes that haven't 
been collected. But in fact, the agency did achieve its basic 
purpose; it got the money in, got it reported on, and as the 
GAO said, that part of the agency's financial statement 
received an unqualified opinion, which I think is a tribute to 
people who are working in the place under these conditions.
    Mrs. Biggert. Mr. Kutz, have you seen any changes in the 
environment since the reforms or your investigations?
    Mr. Kutz. I would say overall that many of the people are 
very inspired by the Commissioner, I would say the new 
Commissioner--I guess he is not that new anymore. But the one 
area, we talked to enforcement and collections people across 
the country as to the payroll tax work we did for you last 
summer--and we testified before you last summer--and I think we 
found and heard a change in the culture and atmosphere within 
some of the people in the collections and enforcement area 
where ``enforcement'' was kind of--almost a bad word to some 
extent.
    We did find an example of a case this year that I will have 
Mr. Sebastian--just to give you an idea of the kind of 
environment that you may be dealing with at this point.
    Mr. Sebastian. This was actually an unpaid payroll tax case 
where the business had accumulated a number of quarters of 
delinquent taxes. The IRS had actually assessed several 
officers a trust fund recovery penalty for the employee-
withheld but unremitted amount. One particular officer had a 
total unpaid tax assessment of $4 million. The IRS had actually 
exhausted all other attempts at collection and had seized a 
condominium owned by this taxpayer.
    Exactly 1 day prior to auction, the property was pulled 
from the potential sale and later released and returned back to 
the then deceased taxpayer's spouse. The indications in the 
revenue officer case files were that the IRS did not want to 
have an ``open seizure'' on an internal control report.
    In our report, we characterized this as ``no reasonable 
explanation'' because the truth of the matter is, aside from 
the explanation I have just given you, there is nothing in the 
case file that would indicate why the IRS didn't go forward and 
sell this property.
    Mrs. Biggert. So that was just written up as a loss then?
    Mr. Sebastian. At the end of the day, yes.
    Mr. Kutz. That was revenue that the Federal Government 
would have otherwise collected had the seizure gone through.
    Mrs. Biggert. Thank you, Mr. Chairman.
    Mr. Horn. I will now yield myself 5 minutes and maybe a 
couple more to equal both of you.
    Getting back to that Social Security situation, on page 31 
you talk about how the Federal Government's general fund 
revenue subsidized the Social Security and Hospital Insurance 
Trust Funds. A lot of us thought Social Security was 
subsidizing everybody else with Presidents, both Democratic and 
Republican. Where is that money coming from in the general 
revenue into the Social Security Trust Fund?
    Mr. Kutz. I will let Mr. Sebastian handle that one. This is 
his area.
    Mr. Sebastian. Well, essentially, I think we have probably 
gone through this in prior sessions. All revenues that are 
collected are initially going into the General Revenue Fund of 
the U.S. Government, where they are then distributed into the 
various trust funds such as Social Security and Hospital 
Insurance. The distribution, the initial distributions to the 
Social Security and Hospital Insurance Trust Funds are based on 
estimates of wage information that is conducted by the Social 
Security Administration's Office of the Chief Actuary. Roughly 
9 to 12 months after that initial distribution, when actual 
wage information is obtained by both the Social Security 
Administration and the Internal Revenue Service, the Social 
Security Administration Commissioner will certify based on that 
wage information the amounts that should have been transferred 
into the Social Security and Hospital Insurance Trust Funds. 
The Treasury's financial management service will affect any 
adjustments needed.
    So the bottom line is, the revenue is coming in throughout 
the course of the year. It is initially being distributed based 
on estimates, but at the end of the day, it is being adjusted 
for the wage information. There is really no relationship 
between that and the amounts that are actually collected for 
Social Security and Hospital Insurance. In fact, the IRS 
currently doesn't have a mechanism for measuring the actual 
amounts that are collected for Social Security and Hospital 
Insurance taxes.
    Mr. Kutz. So to the extent you have unpaid payroll taxes, 
that is where you have a subsidy to the Social Security and 
possible Medical Insurance Trust Funds.
    Mr. Horn. How many billions of dollars in subsidies from 
taxpayers are generally put into the Social Security Trust 
Fund?
    Mr. Sebastian. Are you talking about on an annual basis? 
Because the number that we actually present here is cumulative, 
with some caveats; there are some expired accounts that are not 
considered. But roughly it would probably be a couple of 
billion dollars a year.
    Mr. Horn. Just a couple of billion?
    Mr. Sebastian. A couple of billion a year.
    Mr. Horn. You are saying it is chicken feed then?
    Mr. Sebastian. Over time it adds up.
    Mr. Kutz. On an annual basis, yes. Several billion, 
probably.
    Mr. Horn. Since I sit on the Transportation Committee, let 
me ask you about the Airport Improvement Fund and about the 
Interstate Highway Fund. Do they have that subsidy also from 
the taxpayers?
    Mr. Sebastian. A different situation there in that, by law, 
the Highway, Airport and Airway Trust Funds receive 
distribution based on actual revenue collected. The IRS has the 
same problem there in that, as receipts are being paid over the 
course of any given quarter, the IRS cannot attribute a receipt 
with a specific type of tax. So, initially, excise tax receipts 
are distributed into the various trust funds based on an 
estimation process done by Treasury's Office of Tax Analysis.
    Roughly 6 months after any given quarter as the IRS 
receives and processes tax returns, it matches tax return 
information against the actual collections for those taxes, and 
using the tax return, the IRS certifies the amounts that should 
have been distributed to the trust funds based on type of tax. 
It is really not until they process the tax return that they 
can equate the dollar collected to the specific tax type. Even 
then, it is still somewhat an estimation process.
    Mr. Kutz. But it is an estimate of what is collected, not 
what should have been collected.
    Actually, I have the information. The Highway Trust Fund 
received $39.3 billion during fiscal year 1999, and we did 
audit work on that for the Transportation Inspector General. 
The Airport and Airway Trust Fund received $10.4 billion during 
fiscal year 1999. Again, this is for all of the various types 
of taxes. With the Highway, there are 16 different taxes that 
go into that trust fund, and with the Airport and Airway there 
are six different taxes that go in.
    Mr. Horn. Well, does GAO have any recommendations that 
would make this more accurate than having estimators? I still 
don't see in this age when a gasoline station is deducting the 
pay and it is going into a huge corporation, the thousands of 
stations that might be under, say, Chevron or Mobil or Texaco, 
and they are going to send on whatever basis--quarterly or 
monthly, I have forgotten how that is handled by IRS--but it 
just seems to me with that you have so many cents off the 
gallon, that is to go into the Federal Treasury and into the 
trust fund, and the same with when I fly on my little trip 
every other week to California, I have a little excise tax when 
I land at certain airports. So that, it seems to me, can 
automatically be put into right fund and you don't need an 
estimator.
    Mr. Kutz. You would have to require the taxpayer when the 
money comes in to tell the IRS basically what each piece of the 
deposit is for. The money comes in in a bulk amount for excise 
taxes and the payroll taxes, and you would have to have them 
report up front.
    What you could probably do is, at the back end, relieve 
some of the other requirements that they have, such as the 
quarterly filings. You maybe could have them file annually 
their payroll taxes and excise taxes; if you required them to 
tell you every 2 weeks--because they make deposits every 2 
weeks, the big companies, if they were to tell you every 2 
weeks how many dollars of each deposit goes where.
    I don't know if Mr. Rogers has anything to add to that, 
because the IRS actually has done a study last year where they 
looked at this issue.
    Mr. Horn. What did they find, Mr. Rogers, when they looked 
at the issue? Here you have a bunch of people we are paying 
salaries to called estimators, Ph.D.s in economics from the Ivy 
League, I assume. We don't need that. Why do we? Why don't we 
just get it accurately from the person that is deducting the 
money and shipping it to you?
    Mr. Rogers. It would shift the burden to taxpayers to 
provide more information at this point, the way the tax 
structure is set up. But the process here is one of doing an 
estimation, and there are not many people that do it. I am 
going to guess maybe 4 or 5 or 6 people in our office; this is 
not a big operation. The estimates basically allocate the money 
at the outset, and then you correct it when the tax returns 
come in each quarter.
    When you have an income stream, having an estimate and an 
adjustment like this is not, in and of itself, dangerous. I 
mean, it is something that, as you go along, might be the most 
efficient way to do it, as opposed to putting more burden on 
taxpayers. They come in, and the emphasis here is on collecting 
the money. People who run weekly payrolls provide money every 
week, people who do biweekly, every 2 weeks; and that money is 
coming in, it is in the government's hands and it is available 
for the government to draw interest on, so that you have it in 
hand. I mean, that is what withholding is about and that is 
what these quarterly payments are about.
    So the emphasis has been, over time, get the money, get it 
in circulation and have the government get the interest on it, 
and then adjust as the returns come in quarterly; and I don't 
know--the study shows it would be a burden and my guess is that 
employers might resist it.
    Mr. Horn. Might resist? You mean we would have tax 
resistance?
    Mr. Rogers. No. Having a change in the tax.
    Mr. Horn. Believe me, we would have it if Bierdly Rummel 
hadn't dreamed up withholding. This country wouldn't be past 2 
percent when you get to the end of the year, there would be a 
tax revolt from one end to the other.
    Mr. Rogers. Well, again, that is the emphasis that Congress 
put on it is to get the money to pay as you go, and that part 
of it I think is working very well.
    Mr. Horn. Well, I only wish the taxpayer, when IRS is 
wrong, would get their amount back with interest. Now, have we 
adjusted that?
    Mr. Rogers. Yes. There is a 45-day requirement that we make 
refunds and after the 45 days, then we begin to pay interest on 
it. I think there has been discussion about that before, and 
the mandate to get the refunds out in time so that people who 
are owed them don't suffer by having them kept here.
    Mr. Horn. Last year, as I remember, we had some felons that 
had been hired by IRS, and this gets back to the security 
issue. Here you have, as I understand it, you have where the 
money flows into these service centers, we have surrounding 
fences, security guards, metal detectors, yet GAO reported that 
someone somehow was able not only to get into the service 
center, he was handed a $28 million deposit without even asking 
for identification, just because he was wearing a courier 
uniform, even though the security guards and the staff that 
handed him the deposit didn't know him. How could something 
like that happen?
    Mr. Dalrymple. Well, it shouldn't have happened like that. 
They should have asked for his identification when he came in. 
That is the procedure.
    But what happened was exactly the way he described it. He 
came in in the courier uniform of the courier that picks up 
deposits, he was an employee of the courier, he came in in the 
courier vehicle; he parked where he was told to park, where the 
couriers are always asked to park; he went in, he got the 
receipts as the couriers are supposed to do; and he left. What 
they did not do is they did not confirm his employment with 
that courier, and they should have done that.
    Mr. Kutz. This gets into the issue of how difficult it is 
to enforce policies at the IRS. You have so many offices around 
the country that IRS can have certain policies in place, but it 
is very difficult to enforce them across the board. I know Mr. 
Dalrymple knows how difficult that is for the IRS.
    Mr. Horn. Mr. Turner.
    Mr. Turner. Mr. Rogers, back on the subject of 
simplification of the Tax Code, does the IRS have a computer 
model in place that would give the Congress access to the type 
of information one would need if you seriously wanted to go 
about the task of trying to simplify the Tax Code? For example, 
if Congress wanted to take a look at how many taxpayers are 
utilizing a deduction for educational expenses that the 
Congress has in the law and we want to see how many people are 
using it, what is the revenue loss as a result of people using 
it, do you have the ability to turn around that kind of 
information quickly?
    Mr. Rogers. I don't think there is a model of the type that 
I think I hear you conceiving of, where you have everything set 
up and you could just change a variable and it would give you a 
new answer. There is not a model of that sort, I am confident 
in saying.
    However, one of the things that IRS does traditionally is 
analyze proposals that are made and provide information of what 
the impact would be one way or the other. I think that were 
there some specific suggestions of that sort, that the agency 
could respond with studies or analyses of what they would 
consider the impact to be.
    Mr. Turner. So you routinely do analyses of proposals, but 
in terms of just looking back and seeing how a certain 
deduction is being utilized, who is utilizing, what income 
categories of taxpayers are utilizing that deduction, those 
kinds of things you really do not have the ability to provide 
that kind of information?
    Mr. Dalrymple. We actually do quite a bit of that through 
our Statistics of Income Division in conjunction with the 
Office of Tax Analysis at the Treasury Department and in 
conjunction with the Joint Committee on Taxation here on the 
Hill. By no means is it every item, but there is a great deal 
of work done every year on particular items, specifically 
around credits, what they have done, how they have been used, 
what the impact has been.
    So as Mr. Rogers said, it is more specific than general, 
but there is quite a bit of that work that is done.
    Mr. Turner. If we were to undertake seriously a project to 
simplify the Tax Code--and of course you know in the House 
there was a bill that passed that would sunset the Tax Code, 
thus forcing a complete review of the Code--would there be 
suggestions that you would make to the Congress in terms of 
getting the data in better shape for that kind of an analysis 
than we have today? Would there be things that would need to be 
done prior to a serious review of the Tax Code?
    Mr. Rogers. I think it really depends on the nature of the 
proposals. Sort of ``simplifying'' is kind of an attractive 
word, but as we were talking about earlier, this is a huge 
undertaking. I think it would really depend on the nature of 
the proposals to be able to react to something like that. This 
is a hard area.
    Mr. Turner. I guess my concern is that as we hear these 
reports from the GAO about the difficulties that the IRS has in 
administering the Code, the difficulties in collection, we hear 
reports from Secretary Summers about perhaps the stretching of 
the utilization of tax shelters, you know, it seems to me that 
we are going to come to the point where the general public 
begins to sense that there are a lot of folks that are not 
paying their fair share. And as we all know, the ability to 
collect taxes is based, in large part, on the basic honesty of 
the American people right now; their willingness to try to 
comply is critical.
    I am concerned that, over time, we are seeing an erosion of 
the public's confidence in that. Unfortunately, I think from 
time to time the Congress contributes to that with their own 
rhetoric, but it does seem to me, after reading this GAO 
report, that there are many things that certainly would cause a 
taxpayer to lose confidence in the collection agency and would 
contribute to one's general sense that perhaps some other folks 
aren't paying their fair share and, therefore, I don't think I 
ought to have to pay all of mine. At some point, it seems to me 
that we are going to have to try to deal with that, do 
something about that.
    Now, you have watched this a lot longer than I have, Mr. 
Rogers, and maybe you would disagree with me and not be 
concerned about that; and I would be interested in your 
observations.
    Mr. Rogers. No, sir, Mr. Congressman. I am concerned about 
it, but I think that we--if you look at the GAO report, it sort 
of breaks down into some financial issues and some management 
issues. In my estimation, most of the management issues in here 
are things that this agency can control over the longer run, or 
even the shorter run. I mean, the whole issue of couriers and 
talking about that--that went wrong and it shouldn't have--and 
I hope--you know, we can say that the guards have been dealt 
with, trained and retrained. So when you sort of split this and 
look, we didn't pay some bills, this sort of thing; but when 
you look at tax collection, you are right.
    I mean, it is amazing. I was looking at some data today 
before we came up here, and 180 days past the point at which 
taxes are due the outstanding tax liability that is unpaid is 
less than 1 percent on personal income taxes. I mean, people do 
comply, and what we are looking at is the difference in trying 
to pinpoint those issues that deal with collection.
    The subsidy issue that has been raised by the GAO, the $43 
billion that is subsidizing Social Security, well, that is a 
10-year accumulation; so on average, it is $4.3 billion a year, 
and 65 percent of that, the penalties and interest. The taxes 
are quite small that people didn't pay.
    So we get focused, you know, on this, and we miss the 
bigger piece, which is this system is working pretty well and 
people do come up here and people--tax shelters, I mean the 
Secretary is concerned about that, so there is a situation 
where people are not doing everything they should. We ought to 
do something about it; I think you are right.
    In fairness to everybody in this country, everybody ought 
to be paying their taxes. But the system is working pretty well 
now, and I think when we look at these isolated instances, we 
lose sight of that, frankly.
    Mr. Kutz. Congressman, let me mention one thing with 
respect to that, because I think the issue is even bigger than 
what Mr. Rogers said, because what we are talking about with--
the $231 billion in unpaid taxes, for example, is what IRS 
knows about. There is still the issue of the remainder of the 
tax gap out there, which includes the underground cash economy, 
illegal activities, et cetera; and that is something that IRS, 
GAO and nobody really knows how substantial that is. But that 
is also a consideration in what you are talking about.
    Mr. Turner. It certainly is.
    Thank you, Mr. Chairman.
    Mr. Horn. The gentlewoman from Illinois, Mrs. Biggert.
    Mrs. Biggert. Thank you, Mr. Chairman.
    Along this line, but just going back to focus on the $23 
billion of taxes owed, Mr. Kutz, could you talk a little bit 
more about the collectibility of these dollars and about the 
issue of that amount of money?
    Mr. Kutz. Yes, I can. In the inventory of unpaid 
assessments at September 30, 1999, there is $231 billion of 
total unpaid taxes. Of that, there are pieces called write-
offs, there are pieces called compliance assessments, and then 
there are the gross and net taxes receivable.
    What you see up on the poster board to my right are the 
taxes receivable for fiscal years 1999 and 1998, and those are 
accounts that either the taxpayers acknowledge that they owe, 
or the IRS has a favorable ruling that a taxpayer owes the 
amount; and you will see there the actual collectibility rates 
of, and I guess 32 percent and 27 percent.
    So that is the amount of collectible out of the actual 
receivables amount.
    The write-off amounts that we are talking about are 
primarily failed businesses, individuals who have passed away 
with no estate, et cetera. So those are the ones that don't 
have a whole lot of collectibility. But what really is on the 
table as unpaid taxes that IRS has a chance to collect, what 
you see on the poster board is what really is most likely to 
have some potential down the road.
    Mrs. Biggert. Thank you. Mr. Rogers, in your testimony you 
stated that the IRS is not able to pursue all of the cases, and 
that the IRS thought it was a necessary and sound business 
decision to modify its criteria as to which assessments would 
be designated as uncollectible. Could you explain how you came 
up with that decision?
    Mr. Rogers. Yes, ma'am, and I am going to ask Mr. Dalrymple 
to help me in a moment. One of the things I would like to do is 
put this a little bit in perspective.
    The $77 billion is basically a 10-year accumulation. I 
think it is not unfair to average this, and you are really 
talking about $7.7 billion per year in a system that collects 
this year $1.9 trillion. So if you look at this as kind of a 
corporate enterprise, any corporation of this size and not 
knowing who its customers are and whether they are creditworthy 
or not is going to have some loss in collecting its bills.
    So when you begin to analyze that and decide where you are 
going to put your effort with an agency that, by and large, 
still is working full out, you do have to make some decisions 
like this. And we have done that, and John will walk you 
through how we do that.
    Mr. Dalrymple. We have prioritized work for as long as I 
have been with the Service, and I have been with the Service 
for 25 years in terms of our collection work and what has been 
described in the GAO report is the prioritization of our work. 
It is clear that with the resources we have to work collection 
accounts, there is a certain amount of work that we would do in 
particular ways, such as through our notice activities, through 
our automated collectionsites, and then eventually through our 
field activities.
    We have a system in place that is somewhat risk-based, so 
that it is certainly not where we want to go with the risk-
based collection activity. But the bottom line is, we do some 
risk analysis on this inventory and we determine whether or not 
it is worth our pursuing with the resources we have available 
to go after that particular account. In these instances, we 
felt that it was not; that there were other higher-priority 
types of work.
    In business trust fund cases, a perfect example, we wanted 
to give those a very high priority. So we have determined these 
cases to not be collectible at this time. They are currently 
not collectible, which does not mean they are not collectible. 
It means we put them in a suspense account. We systemically 
monitor them. Any offsets to refunds would be taken against 
these accounts. Liens are filed on some of the accounts, 
depending on the value of them. Again, taxpayers who want to 
extinguish the lien have to come back and satisfy the 
liability. There are a number of systemic things that happen on 
these accounts.
    So when we say ``currently not collectible,'' that is 
exactly whether we mean, as opposed to--as Mr. Kutz referred to 
earlier, these are not considered write-offs at this point.
    Mrs. Biggert. Mr. Kutz, it seems to me that some of this 
might be a case of lost opportunity, and particularly after 
hearing from Mr. Sebastian of a case that was written off the 
day before the end of the year so that it won't show up. What 
do you think about that?
    Mr. Kutz. Well, these are lost opportunities in many ways. 
The $2.4 billion that Mr. Dalrymple was talking about that was 
taken from the collection inventory had some potential 
collectibility. The $10 billion of potential unreported taxes 
due, that IRS was unable to pursue, had potential to be 
collected to some extent.
    They also do a matching program for, I guess it is called a 
``combined annual wage reporting program,'' and they get 
$600,000 or so discrepancies in that program and that program 
has not been funded and they haven't done anything with those 
600,000 matches, so there is potential there.
    There are also the cases like the doctor case that I gave 
you in my opening statement that are sitting in the inventory 
as unassigned case, that are not being worked; and that was 
clearly an individual that has the means to pay the taxes due.
    So I think that there is a substantial number of 
opportunities. As Mr. Rogers said, if you look at the bigger 
picture and say 1.9 trillion, it is not significant compared to 
that, but are billions or tens of billions of dollars 
significant? Yes, I think so.
    Mrs. Biggert. Since it becomes a trillion, I guess the 
saying goes----
    Mr. Dalrymple. Congresswoman, if I could address this 
particular case, since it has come up a couple of times here, 
it is--when I saw this case, I decided to personally look into 
this, because I was somewhat concerned about the report; and as 
it turns out, this case was a case with a clouded title, and 
that is why the case did not go to auction. Our counsel 
actually advised against selling this asset at auction and 
advised the manager of that. So there was very good reason that 
this case didn't go to auction.
    Mrs. Biggert. It had a clouded title over and above some of 
the tax problems?
    Mr. Dalrymple. Exactly, exactly.
    Mrs. Biggert. Do you know what that was?
    Mr. Dalrymple. I really can't get into the specifics of 
that here, but suffice it to say that there was a clouded title 
on this case.
    Mrs. Biggert. Thank you.
    Thank you, Mr. Chairman.
    Mr. Horn. Was there political intrusion at all on that 
case?
    Mr. Dalrymple. No, there was not.
    Mr. Horn. So nothing in the files?
    Mr. Dalrymple. Not that I have seen.
    Mr. Horn. OK. The predecessor to Mr. Rossotti as 
Commissioner and I had a discussion in probably early 1995, and 
I looked at the $100 billion sitting around that was not being 
collected, and she then said, oh, I have another $60 billion 
which could be collected. I must say when I look at that 
receivable for 1999 and we have $21 billion collectible and we 
have $56 billion uncollectible, I ask myself, is any of that, 
the $60 billion she talked about in 1995 and the $100 billion 
they were just letting go. It just seems to me, as I told her, 
it was a national scandal as far as I am concerned.
    Then we had the Debt Collection Act in 1996. It doesn't 
really apply to the IRS, right?
    Mr. Dalrymple. Actually, it does this year. The taxes are 
part of that effort starting this year.
    Mr. Horn. You make me feel better. As I remember, Secretary 
Rubin did care and did use it, whether it was authorized by him 
or not.
    Mr. Dalrymple. We actually believe that, through your 
efforts, that that is going to be a significant event for us.
    Mr. Horn. Well, that is good. I am glad. That will make me 
feel good. We are going to have an extra panel and you will 
probably be back there again on the debt collection situation. 
We know that there are bankruptcies in there and all the rest 
of it, but there has to be some way that when people in the 
audience and everywhere else across the country are paying 
their taxes and these people go in and out of bankruptcy and it 
is a pattern and practice, I think something ought to be done 
about it. I think we ought to get that money somewhere down the 
line.
    Does the Treasury have any bright ideas on this?
    Mr. Rogers. I think the one thing I would do, Mr. Chairman, 
is add some analysis about what the receivables look like if 
you could go to the $21 billion. Mr. Chairman, 43 percent of 
that is the result of insolvent corporations. Another 30 
percent are financial hardship situations where the IRS has 
pursued collection from an individual and has come to the 
conclusion that there is nothing left there, the assets have 
been seized, they have no income, so there is just no reason to 
keep going. Another 3 percent represent people who are 
deceased, and another 21 percent are actually bankruptcies, and 
a small 3 percent are people that we are unable to locate.
    In other words, while it is sitting there and it looks like 
you could do it, there are really pieces of this that make it 
difficult to do; and I think it goes to the whole issue of 
collecting this kind of debt.
    I was looking this morning before we came up here in trying 
myself, because I am relatively new to this part of the 
Treasury Department, and I was looking and thinking about $1.9 
trillion. If you have a 1 percent loss in a year of $1.9 
trillion, that is $19 billion. So these are big amounts, and I 
think the most important thing from my perspective, in going 
back to Congressman Turner, is the whole sense of fairness. 
That is, while these are relatively small figures, I think it 
is important that the agency be in a position to collect 
everything that is due, that we fairly do that, and that we 
make that case to the public.
    Mr. Horn. Are we using private collectors to help collect 
some of this?
    Mr. Rogers. No, sir, we are not. I think--as you know, that 
was tried, and I was not here and I can't speak to it too 
thoroughly, but I think--the Commissioner and I were talking 
about this again yesterday. The view here is that we have to 
fix this system to get to these debts sooner, and that if we go 
through the process of giving the four notices and then the due 
process that was put in under the reform act, the restructuring 
act of giving it a 30-day due-process notice and a due-process 
decision, we really are way down the stream of time before 
these debts are really something to be collected. And if the 
agency, and even a private collector, could get to them in a 
year or two, that is too late. I think that is what he is 
saying too.
    Mr. Horn. Well, if you are thinking of the private 
collector pilot program, that was the phoniest thing I have 
ever seen in government. They wanted it to fail. They gave them 
5-year-old debt, instead of getting them in on the act in 30 
days, 60 days, whatever. And the IRS, at least in 1995, was not 
in any way organized to collect anything.
    Mr. Rogers. I think that is the problem that the people in 
IRS face themselves. They are trying to collect that ancient 
debt, that old debt like that; and again, the Commissioner is 
trying to reform the system so that we have a computer system 
that will let us get close to that 6-month period at which the 
private sector is paying. If you let it age more than that, you 
are going to lose it. But again, we are looking at the 
compliance issue.
    On the margin, the numbers here relative to all of the 
taxes that people pay voluntarily that comes in, that is huge, 
and yet the compliance is very high and within 180 days, the 
outstanding debt is less than 1 percent.
    Mr. Horn. When you look at that chart, that compliance 
isn't very high?
    Mr. Rogers. Yes, sir, but again that is, on average, $7.7 
billion a year, which is about--it is less than one-half of 1 
percent of the collections last year.
    Mr. Horn. It is a lot of money.
    Mr. Rogers. It is a lot of money. I don't want to take away 
from that. But to get enough people and enough money in an 
agency to collect everything down to perfection would make this 
an extraordinary expensive agency to run.
    Mr. Horn. Well, I would sure like to see you organized on 
getting the notices out, getting some telephone contact, and 
then if that hasn't worked in a month or two, give them to 
private people, and they will do it if IRS hasn't been able to 
do it. Maybe the Commissioner has some new special task force 
that is doing this somewhere, but I wish you would take an area 
where you have had a lot of bankruptcy, whatever, and try to 
track those people. We have to put a law on the books, or 
something, so that they don't keep milking us when everybody 
else is paying and these jerks are going out of business.
    Well, I wish the Treasury would come in with something on a 
proactive area, not just sort of live with it and say, gee, 
that is 1 percent. I don't care if it is 1 percent, if it is 
$21 billion, I have a concern about it.
    Mr. Rogers. Yes, sir, and you are right. The compliance 
issue here and the fairness issue here is paramount. It is very 
important.
    Mr. Horn. Well, you know, one of the reasons people pay 
taxes is, they think the IRS really follows this stuff, and now 
you look at that, you wonder who is working over there. I know 
you dropped from 108 to 102. What are you now in total 
employees, 102,000?
    Mr. Rogers. The 2001 budget request would be about 102,000.
    Mr. Horn. Are we going to get some new agents?
    Mr. Rogers. Yes, sir. The budget request calls for 
increased staff in almost every function, except the 
information technology, and there are funds being requested to 
improve the computer systems.
    Mr. Horn. It was mentioned that a lot of supervisors left 
last year. Was that just a matter of quality of supervisors, or 
what led to their going?
    Mr. Rogers. I am the one who mentioned that. No, the GAO 
pointed out that there was a management problem in not having 
adequate managers trained to run the accounting shop, if I 
could put it that way. This is a group of about, well, less 
than 200 people out of all of the IRS, and 5 of the top 
supervisors at one time all left and took jobs at the 
Department of Agriculture. It was to their advantage; they saw 
this as something they needed to do for their own personal 
good. On the other hand, it left IRS in a bit of a lurch, so 
that we had to catch up.
    We had to get people there, get them trained and make sure 
that that part of the agency was working right, and I can 
report to you that it is at this point. But it was a gap. I 
mean, I think some of the issues that GAO ran into last year, 
and specifically I would say, the failure to reconcile the cash 
balance with FMS, with the Treasury Department, is directly 
attributable to that. And so we have overcome it, but that is a 
singular, isolated incident.
    Mr. Horn. Mr. Kutz, it says, as I recall, that the IRS does 
run some automated matching programs, and I understand they are 
run months after the issuance of tax refunds and they don't 
investigate all of the taxpayers identified in having 
underreported tax liabilities. Don't you report--out of the $15 
billion identified as potentially being underreported, the IRS 
only investigated $5.2 billion; is that correct?
    Mr. Kutz. That is correct. And the other $10 billion that 
you are speaking of would not be included in the unpaid taxes. 
That would never have been assessed or followed up on. It would 
have basically been removed from the files or nothing was done 
with it.
    Mr. Horn. Well, does this basically mean the individuals 
and businesses that are reflected in that 9.8 billion, that 
they got away without paying their fair share of the taxes?
    Mr. Kutz. To the extent that those 9 million individuals, I 
believe, or 10 million--I think it was 9 million actually--
really owed those taxes and actually underreported income; yes, 
that is correct.
    Mr. Horn. Well, is that a 1 percent deal, or is that 
something we ought to worry about?
    Mr. Rogers. I think it is something we would worry about, 
but I think John will tell you that we are trying to pick those 
cases through a winnowing process that are most likely to be 
the ones that we need to do.
    Mr. Dalrymple. I think the numbers were 155 million 
individual tax returns originally filed, and as we looked at 
those accounts, we saw about 12 million that had some potential 
for running through our underreported matching program. We then 
looked again to determine what we considered to be the very 
best cases there, so that we wouldn't be burdening people with 
letters that we weren't certain would result in--that wouldn't 
result in an error on their return.
    So we were pretty confident of the 3.1; we went over those, 
and we ran an underreported program there. Again, we do not 
resource the Service to go after every last account.
    Mr. Horn. Well, do you still have them under statutory law 
where you could investigate them on the $9.8 billion that was 
uninvestigated?
    Mr. Dalrymple. Each year we run the same matching program. 
There is a 3-year statute of limitations on how long you can go 
after those, once we screen a particular year and go after the 
particular people in that year. So, for example, the 3 million 
underreporters that we investigated, the other 9 million that 
we set aside in that year, we do not pursue after that, unless 
they come up for examination--and some of them would--come up 
for examination in a regular examination. Then those issues 
would be raised in that examination, although that would be a 
very small percentage of that 12 million, in total.
    Mr. Horn. I am just thinking of the $9.8 billion.
    Mr. Kutz. Mr. Chairman, one thing I would point out here is 
that it would be useful for IRS to provide to the Congress the 
kind of information that you could make good decisions based 
on, and that would be for every dollar you put looking at these 
9.8 million individuals that may have underreported their 
income, what would you get back in cash from a governmentwide 
perspective for that? That is the kind of information that you 
should expect from the IRS, but I don't think you get it at 
this point, and that is something IRS should work on in the 
future.
    Mr. Horn. Well, this was which fiscal year, Mr. Kutz?
    Mr. Kutz. It was the last fiscal year which they did the 
underreporting. There is always a delay. It was fiscal 1996, so 
that was the tax year 1996 which they would do the match in 
late--late 1997, and probably followup----
    Mr. Horn. So the statute of limitations has expired, or 
what?
    Mr. Dalrymple. It would have expired this year, yes.
    Mr. Horn. It expired this year? Do we still have time?
    Mr. Dalrymple. April 15th of this year they would expire.
    Mr. Horn. Well, not if you did something. You would still 
do it within the 3-year time period. I just wonder, when you 
have $9.8 billion that went uninvestigated, I just wonder why 
we aren't doing something about it. I mean, is somebody afraid 
that the Portman bill, who said smile, but we didn't say smile 
on everything. If there are tax cheats, let's go after them.
    Mr. Dalrymple. Absolutely, Mr. Chairman.
    Mr. Horn. We also reported the Portman bill. So, we are for 
smiling IRS agents too, but I would smile a lot more if I saw 
that $9.8 billion pursued.
    Mr. Dalrymple. Again, as Mr. Kutz pointed out, we have no 
idea whether that $9.1 billion is legitimate underreporting. 
All we had were indications that there may be some question on 
those particular returns. We culled out of the 12 million 
returns, we culled out 3 million for investigation.
    Mr. Horn. Mr. Turner.
    Mr. Turner. Mr. Chairman, I know all of us have been asking 
questions based on the GAO report and our other concerns about 
the agency. Perhaps it is appropriate for us to--and I think we 
all agree on this. There is probably no agency that requires 
more of its employees than the IRS; it is a very demanding 
position at any level, and I personally want to commend the 
agency and its employees. I know--the recent legislative 
changes, I think, have made improvements. In each of our 
offices we deal on almost a daily basis with the IRS on behalf 
of our constituents who have had problems and are seeking our 
help. I have noticed a very positive change within the agency 
as a result of the recent legislation and in the leadership of 
Mr. Rossotti, and I really do believe that we owe all of you a 
debt of gratitude for the commitment and the service that each 
of you gives from the very top to the very lowest level, 
because it is a very demanding job requiring very special 
people. So we thank you for your service.
    Mr. Rogers. I thank you, Mr. Congressman. And on behalf of 
Mr. Rossotti and all of the IRS employees, we really appreciate 
that. As I said earlier, we are doing everything we can to get 
better. It is not a lack of desire.
    Mr. Horn. Well, the reason I am high on Commissioner 
Rossotti is that he brings some management skills to that job 
where there had never been any management skills. I don't have 
a problem with most of the IRS people. I think the problem has 
been lack of management over there, lack of organization, and I 
think that is now happening, and that should make everybody 
happy, the people there and the people here.
    Any other questions, Mrs. Biggert?
    Mrs. Biggert. I guess you all thought that was the end, but 
I do have one further question.
    Mr. Kutz, I recall that last year you had a concern that 
the property and equipment reported by the IRS could have been 
materially understated, and given the massive increase in 
property and equipment reported, that is less than the $200 
million in 1998 to $1.3 billion in 1999. Could you elaborate on 
what you found in your audit?
    Mr. Kutz. Well, what that was is a projection by the IRS 
using--they had some consultants and appraisers that were 
involved and part of it was statistical information and part of 
it was from other information that the IRS put together. But 
that number--I believe it is the $1.3 billion, or somewhat less 
than that--is an estimate of what the balance is on September 
30, 1999. As I said in my opening statement, the actual 
underlying problems with the inventory and the accuracy of it 
is an issue IRS faces for fiscal year 2000. So that number is 
just a number at a point in time that was developed for the 
purposes of the financial statements.
    Mrs. Biggert. So, Mr. Rogers, I guess you would agree that 
the property had been materially underestimated or--unless you 
purchased $1 billion, or your estimate was really pretty far 
off?
    Mr. Rogers. No, I think you characterize it correctly. The 
records did not show a value at that level, and in government 
property management, there has been a tendency over time to be 
more concerned about what the article is than what the article 
costs. And so if you go to inventory systems, you will see the 
item there, but there is nothing in the cell that says this is 
the value of it. As a consequence, the value of the property is 
materially understated, as you have observed and as GAO has 
identified.
    We do believe that the estimate that we derived this year 
is a fairly accurate and reliable estimate and we worked 
through this process with the General Accounting Office 
overseeing it, in effect, or testing it as we went along.
    I think the important thing for us now is to make sure that 
we don't lose that figure; that is to say, we need to maintain 
this property level in terms of the accounting systems as we go 
through this year. That is, we need to take every acquisition, 
value it, every disposal, value it, so that when we come to the 
end of fiscal 2000 we have a property figure that will reliably 
tell our stakeholders what our property plant and equipment 
value is. And we intend to do that. We have worked out a 
process to do that during the rest of the year, and in the 
longer run, we will introduce a newer kind of automated 
accounting office to do that.
    Mrs. Biggert. So this property was not subject to theft or 
anything, it was just an underestimate?
    Mr. Rogers. It is all there. I mean, if you could see the 
appraisal process that went on, it went to every building. 
There are 600 buildings in IRS. The buildings were selected by 
random, they went into floor plans, they drew grids, they 
picked the grids by random collection, they went to that place, 
they checked if the property was there, they went to the books 
to see and then went back and adjusted it. So it was a fairly--
I don't want to say exhaustive, but statistically it was a good 
process that gives us a good idea of the value of the place.
    Yes, it was undervalued; I mean, the property was there, 
but the systems used to account for were simply not used fully 
to attribute the right value to them.
    Mrs. Biggert. But it still was not a check of every piece 
of property?
    Mr. Rogers. No. It was a statistical evaluation. On the 
other hand, the major portion of the property that is valued is 
the information systems, the computers. And the Information 
Service Group in IRS has been doing a wall-to-wall, total 
inventory, front-to-back, and book-to-floor and floor-to-book; 
and that is the preponderance of the value of the plant and 
equipment, and that inventory we think will be quite accurate.
    Mrs. Biggert. So this is, actually the IRS has received so 
much money for the tax systems modernization, so that will be 
tracked piece by piece?
    Mr. Rogers. Yes, but only a small portion of the 
modernization money is directly----
    Mrs. Biggert. I meant for the equipment part of it.
    Mr. Rogers. Yes, that is directly related to the equipment. 
There is a fund actually set aside and identified separately 
for the information technology investment.
    Mrs. Biggert. Do you know how much the IRS has spent 
already on the property and equipment related to the tax 
systems modernization, then?
    Mr. Rogers. No, ma'am, I didn't come prepared to do that, 
but I could certainly get a figure for you.
    Mrs. Biggert. All right. If you would do that.
    And so you have then tracked all of that property and 
equipment? That is not done by an estimate?
    Mr. Rogers. On the information and technology equipment? 
That is correct.
    Mrs. Biggert. Thank you.
    Mr. Horn. We thank you.
    Let me just ask a few closing questions here. I am 
particularly interested in the CFO office for the Treasury. Mr. 
App, you spoke about installing a permanent CFO, as well as 
strengthening the CFO office. Could you sort of elaborate on 
that, what you have in mind, what Treasury has in mind?
    Mr. App. Sure.
    Basically, as I mentioned, Mr. Rogers has admirably filled 
in as Acting CFO, but he, as well as the Commissioner and other 
officials at IRS, have been looking for candidates to go 
forward and to strengthen the organization. They have also been 
looking at alternatives to add responsibilities to that 
organization, as appropriate, to improve financial management 
and that is an ongoing process as we speak.
    Mr. Horn. Now, Mr. App, you are the Deputy Financial 
Officer for the Department of the Treasury?
    Mr. App. That is correct.
    Mr. Horn. Who is the CFO for Treasury?
    Mr. App. The Assistant Secretary for Management and CFO is 
now Lisa Ross, who has been Acting since December 30th. We have 
enjoyed real strong leadership in that position compared to 
other agencies. The last two people in that position have 
averaged over 2\1/2\ to 3 years in that position, and we have a 
good division of labor. Right now, for instance, Ms. Ross is 
working with the Secretary to brief one of your colleagues this 
afternoon on Customs funding issues.
    Mr. Horn. One of the things that concerns me, and I said 
that to Mr. Munoz when he held that job, is that to me and to 
the Congress on a bipartisan basis, we all agree that the CFO 
position is a full-time job, and you can't be Assistant 
Secretary for Management and also CFO. I don't know if the new 
Secretary is taking that into mind, but it just seems to me 
that one of the problems in Treasury has been that the CFO was 
part of the Assistant Secretary for Management and not a full-
time CFO, and that is what Congress wanted.
    If we had wanted to put it with the Assistant Secretary for 
Management, we would have written it into the law. That has 
been around since the Hoover Commission of the 1950's--late 
1940's, early 1950's. But we just are not getting, I feel, the 
leadership there when you don't have somebody full-time that 
reports to the Secretary or the Deputy Secretary, as the case 
may be.
    Mr. App. I would say that the person that has held that job 
since I have been there, both Mr. Munoz and Ms. Killefer, and 
now Lisa Ross, do take their responsibilities very seriously. 
We have a strong deputy network as well, and I think the 
progress that we have made on financial management over the 
last 4 years that I have been in Treasury shows that commitment 
and it really does come from that leadership. The division of 
labor is such that we do cover all of the bases, I believe.
    Mr. Horn. Well, but a CFO in other agencies is full-time. I 
mean, let's face it, the Assistant Secretary for Management has 
a lot to do without having the CFO burden put on top of that.
    As I recall in your resume, Mr. Rogers, it says you are 
Senior Adviser to the Assistant Secretary for Management and 
acting CFO. In the case of the Internal Revenue Service, won't 
you agree that given the current financial management problems 
facing IRS, that the CFO position ought to be a full-time job?
    Mr. Rogers. Well, yes, sir, and I will assure you that in 
the time I have been here, it has been full-time. While I hold 
the other position, I am on loan full-time for IRS, and that is 
the only thing I am working on.
    Mr. Horn. Well, I just feel at the Treasury level, IRS 
level, we want persons absolutely totally focused. Those are 
18-hour jobs a day, we know that, and it is 6 days a week. 
Anybody in that kind of level. It is just not doing the CFO 
job, no matter how they might seem to paint it, but the other 
agencies that have come from zero into fairly good shape 
nowadays, they are full-time CFO.
    And I would hope Secretary Summers understands that, but 
maybe he doesn't. Maybe we need to write him a letter to remind 
him or something.
    Does GAO have any remarks on this?
    Mr. Kutz. I would say GAO has been very pleased with the 
work Mr. Rogers has done in the short period of time he has 
been there. He has demonstrated a tremendous amount of ability 
as a manager and someone who can get things done. So we are 
very encouraged by what he has done.
    I will say that right now the organization of the CFO 
within the IRS is a problem. The CFO is three levels below the 
Commissioner and is more of a controller position, if you think 
of the corporate model, than it is a CFO. So one of the issues 
on that we have had--and the Comptroller General spoke directly 
to the Commissioner of the IRS on this was that that position 
needs to be elevated and given more clout and more 
responsibility to try to make sure that some of these issues 
get resolved.
    Mr. Horn. Well, I noticed that when I looked at your 
organization chart here, the mess under previous years where 
everybody sort of was all over the place; but I didn't see the 
CFO reporting to the Commissioner.
    Mr. Kutz. No. Way, way below that level.
    Mr. Horn. It should. Well, I couldn't tell from the source 
where the level was. That was the problem. I have forgotten now 
the page it is on, but here we are. It is the new organization 
structure--struggle is right. That is a Freudian slip.
    Page 41--page 42 and page 41, presumably it says, exhibit 
2, current organization structure, is Commissioner; Deputy 
Commissioner, Operations; Deputy Commissioner, Modernization; 
and so forth. Well, the Commissioner has turned that completely 
around, right, and this is the new organization structure on 
exhibit 3 where you have Deputy Commissioner--Commissioner, 
Deputy Commissioner, and then a national office staff, which 
has finance there somewhere, who--although we can't quite tell 
where. And the Chief Counsel reports directly to the 
Commissioner and the Deputy Commissioner, but there is no word 
that the principal finance or management officer or, the CFO 
and the CIO--Congress, after listening to your fine GAO reports 
for years said. Hey, we have to do something about this. So we 
have to get a line where the people can have access to the 
person the President is holding responsible for the agency, 
which is the Commissioner.
    Mr. Kutz. And a key to involving these problems is to have 
a strong manager like Mr. Rogers in the appropriate position 
within the organization, to have the clout to make the kind of 
changes that need to be made to get these problems resolved.
    Mr. Horn. Well, I agree with you. So have we written Mr. 
Rossotti that?
    Mr. Kutz. We have not written him. The Comptroller General 
told him face-to-face.
    Mr. Horn. OK. Well, that is good. I will do it either way. 
Great. Both.
    Anyhow, we thank you all for coming up here. It has been 
very helpful. We will send a few questions just for the record 
so it is rounded out, but I don't want to take your time today.
    Good luck, Mr. Rogers and Mr. App, you are all doing a fine 
job; and the GAO always does a fine job. So thank you very 
much, gentlemen.
    To the clerk, we will note that I want to thank the 
following people Russell George, staff director and chief 
counsel; Louise DiBenedetto, the detailee counsel here for this 
hearing from GAO; Bonnie Heald, director of communications; 
Bryan Sisk, clerk for the subcommittee. Minority staff, Trey 
Henderson, counsel; Jean Gosa, minority staff assistant; and 
the court reporter is Julie Bryan.
    With that, we are closed.
    [Whereupon, at 1:55 p.m., the subcommittee was adjourned.]

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