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93–489—PDF 2004

S. HRG. 108–437

NOMINATION OF SAMUEL W. BODMAN

HEARING

BEFORE THE

COMMITTEE ON FINANCE

UNITED STATES SENATE

ONE HUNDRED EIGHTH CONGRESS

SECOND SESSION

ON THE

NOMINATION OF

SAMUEL W. BODMAN, TO BE DEPUTY SECRETARY, U.S. DEPARTMENT

OF THE TREASURY

FEBRUARY 10, 2004

(

Printed for the use of the Committee on Finance

COMMITTEE ON FINANCE

CHARLES E. GRASSLEY, Iowa, Chairman

ORRIN G. HATCH, Utah

DON NICKLES, Oklahoma

TRENT LOTT, Mississippi

OLYMPIA J. SNOWE, Maine

JON KYL, Arizona

CRAIG THOMAS, Wyoming

RICK SANTORUM, Pennsylvania

BILL FRIST, Tennessee

GORDON SMITH, Oregon

JIM BUNNING, Kentucky

MAX BAUCUS, Montana

JOHN D. ROCKEFELLER IV, West Virginia

TOM DASCHLE, South Dakota

JOHN BREAUX, Louisiana

KENT CONRAD, North Dakota

BOB GRAHAM, Florida

JAMES M. JEFFORDS (I), Vermont

JEFF BINGAMAN, New Mexico

JOHN F. KERRY, Massachusetts

BLANCHE L. LINCOLN, Arkansas

KOLAN DAVIS, Staff Director and Chief Counsel

RUSSELL SULLIVAN, Democratic Staff Director

(II)

C O N T E N T S

OPENING STATEMENTS

Page

Grassley, Hon. Charles E., a U.S. Senator from Iowa, chairman, Committee

on Finance ............................................................................................................ 1

Baucus, Hon. Max, a U.S. Senator from Montana ................................................ 1

ADMINISTRATION NOMINEE

Bodman, Samuel W., nominee to be Deputy Secretary of the Treasury, U.S.

Department of the Treasury ................................................................................ 3

ALPHABETICAL LISTING AND APPENDIX MATERIAL

Baucus, Hon. Max:

Opening statement ........................................................................................... 1

Bodman, Samuel W.:

Testimony .......................................................................................................... 3

Prepared statement .......................................................................................... 19

Responses to questions from Senators Grassley, Baucus, and Bingaman ... 20

Biographical ...................................................................................................... 26

Grassley, Hon. Charles E.:

Opening statement ........................................................................................... 1

COMMUNICATIONS

Gallup Organization Executive Summary ............................................................. 39

(III)

(1)

NOMINATION OF SAMUEL W. BODMAN, TO BE

DEPUTY SECRETARY, U.S. DEPARTMENT OF

THE TREASURY

TUESDAY, FEBRUARY 10, 2004

U.S. SENATE,

COMMITTEE ON FINANCE,

Washington, DC.

The hearing was convened, pursuant to notice, at 10:07 a.m., in

room SD–215, Dirksen Senate Office Building, Hon. Charles E.

Grassley (chairman of the committee) presiding.

Also present: Senator Baucus.

OPENING STATEMENT OF HON. CHARLES E. GRASSLEY, A U.S.

SENATOR FROM IOWA, CHAIRMAN, COMMITTEE ON FINANCE

The CHAIRMAN. Senator Baucus and I are happy to call this

hearing to order.

We are here for the purpose of welcoming, questioning, and hearing from Mr. Bodman, nominated by the President to serve as Deputy Secretary of the Department of Treasury.

Throughout his long and distinguished career, Mr. Bodman has

held a number of high-ranking posts in the private sector, and

mostly recently at the Department of Commerce. He has a proven

track record of successfully managing large and diverse organizations, such as he will be called upon to do in this very important

post in the Department of Treasury.

An engineer by training, Mr. Bodman began his career as a professor of chemical engineering at the Massachusetts Institute of

Technology. He later served as president and chief operating officer

of Fidelity Investments.

Following his tenure at Fidelity, he served as chairman and chief

executive officer of Cabot Corporation. In this post, Mr. Bodman

successfully managed a large and diverse company, with operations

throughout the world in about 25 countries.

For the past two and a half years, Mr. Bodman has served as

Deputy Secretary of the U.S. Department of Commerce. Based on

this experience, I am confident that Mr. Bodman has much to offer

and will serve the Department well. We look forward to working

with him in this capacity.

Senator Baucus?

OPENING STATEMENT OF HON. MAX BAUCUS, A U.S. SENATOR

FROM MONTANA

Senator BAUCUS. Thank you, Mr. Chairman.

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Just a couple of words here. First, this committee needs to confirm a very capable and well-qualified deputy, and I think we are

going to be doing that very quickly.

Mr. Bodman has been nominated to serve as deputy in a position

vacant for nearly a year. The Department desperately needs your

leadership, Mr. Bodman. That is why I am very pleased that the

President has nominated you and that you are here before us and

will be confirmed, hopefully, very quickly.

Your experience is very important and helpful in leading Fidelity

and Cabot in the past, and most recently the deputy of Commerce,

where you are quite highly acclaimed from the reports I am getting. You have a reputation as someone who has fixed companies

that have fallen into trouble in the past, and that is always helpful.

According to a 2002 Gallup survey of Treasury employees, 78

percent of Department staff are disengaged from their jobs. That

means that only 22 percent of the employees at Treasury are actively engaged in what they are doing. Who knows how accurate

that is, but there is probably more than a kernel of truth in it. It

is clearly something that has to be addressed.

The sentiment that the Department is adrift is also echoed in an

August, 2003 New Republic article entitled, ‘‘Buried Treasury.’’ The

article details the use of career Treasury economists and lawyers

for political ends. I think this is unprecedented.

Treasury has such a sterling reputation, and has had in the past.

It is extremely important that be maintained that employees not

be used for political purposes. I have no doubt that using Treasury

career employees in this way hurts morale.

I look forward to hearing from you on what you expect to do to

help set the Treasury Department and its employees on the right

course. The American taxpayers deserve a Treasury Department

with employees who are working up to their potential. In these

tough economic times, the country can afford no less.

You also, Mr. Bodman, have significant challenges in the policy

area. The President’s budget shows a budget deficit of $521 billion.

The IRS notes that they neglect to collect $310 billion every year,

including close to $18 billion lost to corporate tax dodges.

Others have suggested that these numbers are too low. It is essential that the Treasury Department and the IRS begin to take

enforcement of our tax laws seriously. I am interested in hearing

from you today about the administration’s plan to beef up enforcement of our tax laws.

In addition to enforcement of our tax laws, the Treasury also has

the responsibility to stem the flow of terrorist financing. The Chairman and I sent a letter to the Office of Foreign Assets Control in

December, inquiring about how well they are performing their duties and about their progress on some of the changes that the Inspector General at Treasury has recommended. I understand that

the Department is providing a full response to most of the questions, and I appreciate that.

Today, I would like to hear your opinion on the effectiveness of

that office, that is, the Foreign Assets Control, the Financial

Crimes Enforcement Network, and Treasury’s coordination with

other agencies.

3

I would also like to hear what improvements you think can be

made to make sure that terrorists do not have the money to carry

out their plans.

Finally, there is one more issue, and that is Cuba. The Chairman

and I recently asked the Office of Foreign Assets Control to identify

for us how they allocate their limited resources.

As I noted, they have very serious responsibilities, that office. It

plays a key role in our war against terrorism. They are an agency

that follows the money. They were to impede financing for terrorist

activities, drug trafficking, and also weapons of mass destruction.

So I was appalled, frankly, when the Office of Foreign Assets

Control reported to the committee that it spends one-sixth of its resources on keeping American citizens from traveling to Cuba.

In a time when we are at war with Iraq, and the troubles in Afghanistan, when our soldiers are being shot at every day, when our

citizens face very real dangers from Al Queda and we also face

massive budget deficits, this incredible waste of resources, I believe, is unconscionable.

I look forward to working with you. That is our job here. We do

take it very seriously. I appreciate your dedication, Mr. Bodman,

your experience, and your willingness to take this on.

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you, Senator Baucus.

We will now go to your statement, anything you want to open

with. If you have a real long statement, you can put in the record

and summarize any way you can. The time now is yours, Mr.

Bodman.

STATEMENT OF SAMUEL W. BODMAN, TO BE DEPUTY

SECRETARY, U.S. DEPARTMENT OF THE TREASURY

Mr. BODMAN. Thank you, Mr. Chairman, Senator Baucus. I have

a short statement for the record, and I will make it even shorter

in order to summarize it for you.

The CHAIRMAN. Something we normally do here that I forgot. If

you have friends or family that are with you that you would like

to introduce to the committee, now would be an appropriate time

to do that.

Mr. BODMAN. Thank you. I would like to introduce my wife,

Diane, in the blue dress on my immediate left who is here. She is

the light of my life and I am very proud to have her here.

Senator BAUCUS. Diane, why do you not stand so we can give you

a round of applause.

[Applause.]

Mr. BODMAN. Thank you, sir.

I am very honored to be the nominee for this post. I am very

grateful to Secretary Snow for the confidence he has shown and for

supporting my transition from the Commerce Department to Treasury. I have had the privilege of serving this administration since

2001, so about two and a half years or so.

I have had the good fortune to work closely with a number of

members of this committee, and I look forward to a very productive

relationship with the committee, sir, on an ongoing basis.

Just to summarize, briefly, my own background, I was born in

Chicago, raised in Illinois in a small town, although I spent most

4

of my adult life in Massachusetts. I went there as a graduate student and ended up staying 40 years. I never left. I was, first, a

teacher, then managed the two companies that the Senator has already described.

So, I have had some experience in the financial services industry,

as well as managing an industrial company, a manufacturing company with operations in basically all parts of the world.

So, that was a revealing experience for me, and frankly something that has proved to be very useful in my work in the Commerce Department. Having someone who has been on the ground

and understands some of these issues creates a rapport that I

think is important.

Three years ago, I resigned my job at Cabot and Diane an I

moved here to Washington so that I might serve in this administration. In a collective fashion, my experiences have instilled in me a

very strong belief in the American free enterprise system.

The free market, the private sector does the inventing, does the

increases in productivity, the job creation that really moves our Nation forward. The time I have spent in Washington has reinforced

my belief that government has a very crucial role to play in maintaining our economic health.

As the President likes to say, government does not create wealth,

the private sector does that. But government must create an environment so the private sector can do its job. The job is, oftentimes,

hopefully, a successful one where jobs are created and business is

improved.

But it also is one that has the flexibility necessary for companies

to fail and to start over again, and that is one of the beauties that

our system has, as well as one of the challenges for those of us in

government.

I have had the privilege of working with many people in the

Commerce Department and I am very grateful to them. A number

of them are here today as well. Under Don Evans’ leadership, we

have worked very hard to open markets all over the world, to promote free and fair trade, and to protect intellectual property.

We have saved lives, we have saved homes and businesses with

more accurate and timely severe weather forecasts from our friends

at NOAA. We have promoted economic development and job growth

throughout this country. I am very proud of the work we have done

at Commerce and the fact that we do have a strengthened management and esprit de corps there that is quite strong.

There is a lot more to be done, obviously. If I am to believe—and

I do not know the details of the Gallup poll that the Senate cited—

if there are issues of the sort that you described, I will pledge to

you that I will do my very best to understand what they are and

to attempt to deal with them.

The Treasury is at the forefront of many critical policy challenges: stopping the flow of funds to terrorists around the world,

reforming and modernizing the IRS, ensuring that our current economic momentum translates into lasting prosperity for our citizens.

I will do my best, I pledge to you, if I am confirmed in this job,

to see to it that we honorably serve those ends.

I am very proud to be here. I am very proud to be a member of

President Bush’s administration and represent Secretary Snow at

5

this hearing and to have come from the environment of the leadership of Don Evans over at Commerce.

I very much look forward to working with this committee and I

would be very pleased to take any questions that you may want to

direct at me. Thank you, sir.

[The prepared statement of Mr. Bodman appears in the appendix.]

The CHAIRMAN. First of all, three questions that we ask every

nominee that comes before the committee.

One, is there anything you are aware of in your background that

might present a conflict of interest with the duties of the office to

which you have been nominated?

Mr. BODMAN. No, sir, there is not.

The CHAIRMAN. Two, do you know of any reason, personal or otherwise, that would in any way prevent you from fully and honorably discharging the responsibilities of the office to which you have

been nominated?

Mr. BODMAN. No, sir.

The CHAIRMAN. Lastly, do you agree without reservation to respond to any reasonable summons to appear and testify before any

duly-constituted committee of Congress, if you are confirmed?

Mr. BODMAN. I certainly do agree, sir.

The CHAIRMAN. I do not think I have any surprises for you in

questions, but let me go through a few questions, then I will turn

to Senator Baucus.

The Finance Committee is very concerned about the administration’s effectiveness in fighting the war against terrorism financing.

The Department of Treasury, of course, is critical in this area.

I believe, because of its critical role, the Department of Treasury

must remain the lead in senior interagency meetings on terrorism

financing. I would ask for your general view about combatting terrorism financing, and specifically about Treasury remaining the

chair of senior interagency meetings on this subject.

Mr. BODMAN. Mr. Chairman, it is clear, based on my visits with

personnel in the Treasury Department, that the Department has

played a very strong role in stopping the flow of funds to terrorists

around the world.

The OFAC offices, the FINSEN office or bureau, have been, in

my view, effective. There have been increases in budgets that have

been made available. Both of these are parts of the Treasury organization and I think they have, from what I can tell as an outsider,

done a good job and have played a very important role.

I cannot really speak to the issue of the role of a Treasury official

in terms of its preeminence vis-a-vis the other departments of the

government. What I can pledge to you, sir, is that I believe I have

earned my spurs in dealing with my counterparts in other parts of

the government.

I do believe that there will be a certain element of respect that

comes from the experience that I have had in working in this administration, and I do believe that we will be listened to and we

will play an active role, which we need to play. We have the wherewithal to do it.

The CHAIRMAN. Could I ask you, since you are not able to give

a definitive answer on the main point of my question about the

6

chairing, for you and people in your Agency to give some consideration of that, maybe, and answer in writing? Maybe you can be

more definitive if you have a chance to think about it for 24 hours

or so.

Mr. BODMAN. I would be happy to provide an answer in writing,

sir.

The CHAIRMAN. On another point, it is my understanding that

you will be active in tax administration at Treasury and IRS. Of

course, I welcome that and would ask you about that shortly. I

want to focus, now, though, on the importance of nominees for the

tax court.

The proper administration of the Tax Code depends critically on

tax court. Specifically, that we have capable, knowledgeable judges

sitting on that tax court. The long tradition of the tax court has

been that, barring something very improper, that tax judges are reappointed.

My understanding is that the reappointment of Judge Colvin was

unanimously recommended by the administration’s advisors at the

Department of Treasury, and also by the White House Consul’s Office. Yet, weeks have stretched into months and nothing has been

done.

In addition, my colleagues—and specifically Senator Baucus and

Senator Hatch—all wrote last fall supporting Judge Colvin, and we

have basically not heard much. The administration, particularly

Treasury, needs to show its commitment to good tax administration

with words and deeds.

The appointment and reappointment of capable judges to the tax

court as a priority for this committee and it should be a priority

for the administration and for your Department or the Department

you will be serving.

I know that you have been told I would raise this matter, so let

me ask what guidance you can give the committee as we try to get

the administration to concentrate on this appointment.

Mr. BODMAN. Mr. Chairman, I would observe that this is a presidential nomination and it comes from the White House with advice

from Treasury, among other departments. At least, I believe that

to be the case. Therefore, I would not presume to speak for the

President on this matter, and I really cannot say anything further

than that.

The CHAIRMAN. All right.

I raise the issue. I do not know what my posture might be, but

you could expect people on this committee who are very concerned

about this nomination to raise this issue with the White House, I

suppose, since you say you cannot comment, and maybe have something to do with your nomination. I cannot say for sure. I mean,

I think people need to take that into consideration.

On another point, it is my understanding that you will be active,

as I said, in tax administration. In the past, I have worried that

senior management at the Department of Treasury could not find

the IRS, even though it has got that great big building down there

on the corner of 11th and Constitution.

While we have good, energetic leadership at IRS, I think it is certainly a help to have additional hands at the oars, particularly senior management, where you are going to be.

7

I would ask, what are the priorities you see for yourself in the

area of tax administration?

Mr. BODMAN. There are two areas that Secretary Snow has

asked me to give first priority to in my time at Treasury, should

I be confirmed. The first of those, you have already touched on,

namely the question of terrorist financing, and understanding in

greater depth than I do now the role of the Department in that

arena.

The second of those is IRS, and to better understand what

progress they are making in improving the operation of the IRS.

I have had the good fortune of working with Commissioner Everson

during his tenure at OMB prior to his taking on the assignment,

so I do have knowledge of him. I hold him in high regard. I have

visited with him on two occasions in preparation for this hearing.

I am encouraged, frankly, and have so reported to the Secretary

by what I heard in my meetings with Everson. I have not really

had time, nor has it been appropriate, to get into depth that.

But, first of all, their efforts in encouraging compliance, which

take a number of forms dealing with reengineering audits, working

on corporate, high-income, or offshore tax shelters, that sort of

thing, where they have committed and increasing resources in the

2005 budget proposal that has recently been put forth.

Second, the area of increasing service or maintaining a very high

level of service. I think it is fair to say, under Mr. Rossotti, who

preceded Mr. Everson in this role, made a concerted effort to improve the service levels that our citizens should become accustomed

to.

Most notably, there, I guess I would mention two things. One,

are e-filings, which they have done a good job on. It strikes me we

have a very substantial number of tax returns that are now filed

electronically. Then, second, working with the taxpayer advocate

that represents the average taxpayer, if you will, in dealing with

issues before the IRS.

So the idea, as I see it, is to continue to maintain a high level

of service on the one hand, while improving compliance on the

other hand. Then, lastly, there is a significant effort under way in

modernizing the technology involved in managing the IRS. It is fair

to say, when compared with the private sector, the IRS is well behind where it should be.

Significant sums have been spent, I think between $300 and

$400 million a year, for some period of time. I think it is fair to

say that progress in modernizing the information systems has not

progressed in a fashion that I would deem acceptable, nor has Mr.

Everson. They have evaluated that.

In this area, Mr. Chairman, there is plenty of blame to go

around. I think that the IRS has concluded that they, themselves,

have not been as effective as they might be, that the contractor has

not been as effective as they might be, and in particular that

maybe they bit off too much and that they have tried to do too

much all at one time. So, they have reduced it.

This has been reflected in the 2005 budget that has been proposed to reduce the expenditures and to focus more on what you

might think of as the kernel of the problem.

8

So, I have been impressed with the effort that they put into it.

I would expect to devote myself in some depth into understanding

what kind of progress they are making and to hold them accountable for that.

The CHAIRMAN. I have just two more questions.

Mr. BODMAN. Yes, sir.

The CHAIRMAN. So as a follow-on then of your work about tax administration, I wanted to note, particularly, private foundations. I

say this because I know that your family has a private foundation

that I have been informed is run in a very proper manner, as is

the case for most private foundations.

However, the newspapers have recently been filled with stories

of serious and significant abuses of some private foundations. It is

clear that there are far too many private foundations that are more

intent on lining their own pockets than helping those in need.

We have all read about private foundation trustees being paid

hundreds of thousands of dollars a year for doing little or no work,

as well as staff getting outrageous salaries and benefits.

It is the poor who suffer when money meant for charities is spent on Persian rugs or $200,000 weddings. I would ask for your response to these abuses and ask for your commitment that the

Treasury will work with us to end this problem.

Mr. BODMAN. I will certainly commit to you, sir, that I will do

everything possible, first, to understand this problem, and then to

deal with it. I would observe that this is one of the areas of the

compliance effort that has been under way and has been articulated by the Commissioner, namely, the focus on tax-exempt, or entities of the sort that you described. So, it has been something that

has been identified.

I am sure, like anything else, it is a matter of trying to set priorities as to where the best return for effort is on the part of members of the IRS. But I will certainly educate myself, which I had

not been prior to being informed about this concern. I was quite

surprised.

Apparently, a lot of this came from Boston and was reported duly

in the newspaper there. I am no longer a reader of the Boston

newspapers, so I was unaware of it until yesterday. I will certainly

get myself educated and I will do my best to pursue the matter.

The CHAIRMAN. All right.

Then my last question deals with the delegation of custom authority from the Department of Treasury to the Department of

Homeland Security. This was included in the Homeland Security

Act of 2002.

During that time, I noted that Senator Baucus and I worked very

hard with the administration and with the Committee on Governmental Affairs to make clear that we did not intend for a wholesale, or even large scale, delegation of revenue-related functions

from the Customs Service to the Department of Homeland Security.

I understand that the Department of Homeland Security and the

Department of Treasury have, on the whole, followed this intent in

implementing delegation of authority.

Although a sunset review of the delegation of authority is not

due to occur until February, 2008, I request that the Department

9

of Treasury continue to consult with this committee on a regular

basis regarding the operation of this delegation and practice.

Mr. Bodman, would you see to it that the Treasury keeps this

committee informed of any modifications to the measures already

in place to implement this delegation of authority?

Mr. BODMAN. I would be happy to do so, sir.

The CHAIRMAN. Thank you very much.

Senator Baucus?

Senator BAUCUS. Thank you, Mr. Chairman.

I am interested in your top two priorities, Mr. Bodman. According to the directions from the Secretary, they are terrorist financing and working to help IRS do its job.

That leads into a question I had and I raised during my statement. Namely, that the resources in OFAC, the Office of Foreign

Assets Control, as I mentioned, between one-seventh and one-sixth

is devoted to the travel ban on Cuba. Does that make sense to you?

Mr. BODMAN. Senator, I am of the belief that it is very hard for

any part of the government to decide which laws should be enforced and which ones should not be enforced. The way I see my

job here, if I am confirmed, would be to enforce all the laws for

which I am responsible. This is one of them.

I have no problem with that, frankly, with respect to Cuba. I do

believe that the efforts prior to yesterday, as well as yesterday’s

designations as described by the Secretary, are consistent with that

statement. They are consistent with the fact that Mr. Castro has

been a very oppressive dictator, has not helped the people of Cuba.

Senator BAUCUS. Is that more of a national security threat to the

United States than following the money in terrorist financing?

Mr. BODMAN. I believe, sir, we can do both.

Senator BAUCUS. That there is poverty in Cuba? I mean, what

is the relevance?

Mr. BODMAN. Well, I believe that we can do both. I cannot speak

to the poverty in Cuba and how that might contrast with terrorist

financing. I do believe that we are being effective, again, from what

I can tell. I have not been there and I have not lived with this.

I appreciate your statement on this. I had understood before I

came in here of your beliefs. I now understand them more clearly

than I did before. I would be happy to look into it and try to understand it personally to a greater extent than I do now.

But I would observe that, based on the incomplete information

which I have, I think they have done a very effective job, and continue to do an effective job in chasing the terrorist financial links

around the world.

I would observe that OFAC has increased is personnel numbers

over the last few years, from something—I think, if memory

serves—like 70 or 80 up to 130 or 140. So, we have had a significant expansion in the personnel that are available to do this work.

Most of those have been devoted to the terrorist financing effort,

but I think we can do both.

Senator BAUCUS. How can you assure us that we are adequately

pursuing terrorist financing, drug money trafficking, WMD financing, all from the jurisdiction of that office? How can you assure us?

Mr. BODMAN. Well, I cannot assure you, sir, personally, because

I have not done the work at this point in time. I have not been

10

there. I will be very happy to dig into that personally and to come

back to this committee, if requested, and to report to you on that

matter.

Senator BAUCUS. Well, I would like that. In fact, I do not know

whether it is a committee matter or not, but if you could personally, in a letter, meeting, somehow, just tell me at the appropriate

time, once you know what the facts are, what is going on. That

would make a big difference to me, and I think to a lot of American

people, too.

Mr. BODMAN. If I am confirmed, sir, I will be happy to dig into

that and do it. I have not had the opportunity to meet the people.

Senator BAUCUS. I appreciate that. It is just my impression that

this is a misallocation of resources.

Mr. BODMAN. Yes, sir. I understand what you are saying.

Senator BAUCUS. And resources are scarce these days. We cannot

afford misallocations.

Mr. BODMAN. I agree with that 100 percent, sir.

Senator BAUCUS. Good.

The CHAIRMAN. I would back the Ranking Member up on that

point, not necessarily because I agree philosophically with where

he is coming from on Cuba, necessarily, but because this committee

has to be very concerned about the uses of resources.

Senator BAUCUS. Thank you, Mr. Chairman. Also, before I go further, I would like to concur with you about Judge Colvin. That is,

he served for 15 years. I think he deserves another 15. We just

have to get going here. There is no reason why his reappointment

should be delayed.

Mr. BODMAN. I understand your view, sir.

Senator BAUCUS. Thank you.

I would like to turn a little bit to tax shelters.

Mr. BODMAN. Yes, sir.

Senator BAUCUS. In November of last year, Secretary Snow gave

a keynote address to the Tax Foundation. He discussed the President’s six point plan to strengthen the economy, which included:

make health care more affordable; prevent frivolous lawsuits; build

a more affordable and reliable energy system; streamline regulations; open new markets; and make tax relief permanent.

Mr. BODMAN. Yes, sir.

Senator BAUCUS. It is interesting to me, because the plan did not

include any mention to curb abusive tax shelters, despite the fact

that a rash of corporate scandals has weakened our Nation’s economy, well known, certainly, at that time.

Unlike Secretaries Rubin and Summers, and to some extent

O’Neal, Secretary Snow seldom mentions the need to combat deliberate tax cheating, in essence, all cake and no vegetables.

It is also interesting to me that your two top priorities somewhat

conflict with or are different from those priorities that the Secretary gave as the President’s top. They are not necessarily apples

and oranges here, but top priorities to strengthen the economy. You

mentioned that your top two priorities include terrorism financing,

and also IRS strengthening.

Mr. BODMAN. Yes, sir.

Senator BAUCUS. I would guess a lot of that would include any

abusive tax shelters.

11

Mr. BODMAN. Yes, sir.

Senator BAUCUS. Can you comment on that, please? How aggressive are you going to be, when the White House and Treasury, so

far, have done very little in this area?

Let me just point out, very conservative estimates—this is a recent study commissioned by the IRS—are that the current cost to

honest taxpayers of abusive corporate tax shelters range from $14

to $18 billion a year, with a total amount uncollected, income tax

uncollected, over $300 billion annually. That is based on 1988 data.

It has got to be a lot more than that, now.

Just think what we could do with a little more than $300 billion.

Some would like to lower taxes. Some would like to spend it. Just

think what could be done. And, more importantly, the message that

would tell, if we could stop this, to honest taxpayers. As you know,

we rely upon a voluntary system.

Mr. BODMAN. Yes, sir.

Senator BAUCUS. My guess is, the more it is known, and it is

known more widely, that a lot more is uncollected, there are fewer

audits and so forth, that a lot of people are not voluntarily complying as much as they maybe were earlier.

Mr. BODMAN. Well, first, let me, if I may sir, tell you that I do

not find it unusual that Secretary Snow would encourage me to

spend time in areas that are different than the ones to which he

gives attention.

That has been the case in my work in the Commerce Department, where I tend to define my job in many ways as working in

those areas of management responsibility for the Department that

are not being given the most attention by the Secretary, purely for

the reasons that we are better off making sure that we have effective cover on both sides. Therefore, I do not find it surprising that

the areas that I have been asked to spend time on are different

than those that the Secretary has focused on.

Second, I would observe that there is an effort, as I alluded to

before, of increased compliance efforts within the IRS. I do know

that. I do know what the areas are on which they are focusing the

effort.

I cannot, sir, attest to the quality of that effort because I simply

have not been there and have not met the people who are doing

the work on a day-to-day basis. I think the plans that they have

and the programs that they have make a lot of sense and will get

at many of the issues, sir, that you have identified.

I will certainly commit to you that, if I am confirmed, I will dig

into that and will be happy to come back when I know more than

I know at this point in time to report to you, sir.

Senator BAUCUS. Right. Some time ago, this Congress, regrettably, repealed something called TCMP, which was designed to address abusive shelters, but has since then—and I do not recall

whether this is legislation or the IRS Commissioner—there is now

a place called the NRP, the National Research Program, which replaces TCMP. Commissioner Everson has talked to me about that

personally, and I think it is a good program. It is working pretty

well. However, it needs resources. It needs focus. It needs a priority.

12

It is just my feeling that, thus far, this administration, and to

some degree past administrations, for reasons that I do not fathom,

have not spent sufficient time on abusive shelter, inversions, and

collections. The number in all of those areas of abuses is rising all

the time. Just think what you could do if you could take care of

that and stop that. You would be a hero.

Mr. BODMAN. As the deputy in Commerce that has just seen the

budget cut by 1 percent that was submitted in the 2005 budget, I

understand the needs for funds within the government to undertake effective programs. I take your points and your comments very

seriously.

Senator BAUCUS. I mentioned more specifically, a study recently

commissioned by the IRS estimates that current cost to taxpayers

of abusive corporate shelters ranges from $14 billion to $18 billion

a year. That is a study the IRS commissioned. Do you have any

idea how you might attack that? That is a separate problem. It is

a subset of the bigger problem.

Your thoughts?

Mr. BODMAN. No. The only areas of which I am aware, this is in

the corporate area, sir, that you alluded to.

Senator BAUCUS. Correct.

Mr. BODMAN. The area that I am aware of is one that I think

Chairman Grassley has been in the forefront of, the so-called silos.

Senator BAUCUS. We are working on that. We are working in

silos. It is a big one.

Mr. BODMAN. That is an important matter that this committee,

I think, has shown a lot of leadership on, from what I can tell, and

should be congratulated for having identified them.

I can tell you that when someone comes into the Treasury at a

high-level position, the briefing materials include that as a very

high-level item. So, that is, for example, an area that we hope can

be dealt with legislatively. But I managed two companies, sir. Both,

in my judgment, even with the benefit of hindsight, were scrupulous in the way they undertook the responsibilities of the taxes

we paid and the approach to it.

Senator BAUCUS. But not all companies are as scrupulous.

Mr. BODMAN. I understand, sir.

Senator BAUCUS. So, that is the problem we are dealing with

here.

Mr. BODMAN. I understand a hundred percent. I am just telling

you, at least I come from this background.

Senator BAUCUS. Well, that is helpful.

Mr. BODMAN. Therefore, to the extent that others are not following that standard, there rises a certain emotional interest in

seeing to it that they do. So, I will certainly——

Senator BAUCUS. If you do that, I am just asking the question.

Mr. BODMAN. Yes, sir.

Senator BAUCUS. Part of the administration’s plan is, in dealing

with shelters, to reallocate resources within the IRS. That is, shifting resources clearly means, if it is more to address abusive shelters, this money is being taken away from somewhere else, like audits, for example.

Mr. BODMAN. Right. Again, I cannot speak to that. I can tell you

that I believe there has been request for additional resources on

13

the compliance side. At least, that was my understanding as I was

getting briefed on this. So, to the extent that it is a reallocation,

I cannot speak to that, sir.

Senator BAUCUS. I appreciate that.

I mentioned the morale problem.

Mr. BODMAN. Yes, sir.

Senator BAUCUS. It sounds pretty serious.

Mr. BODMAN. Well, the numbers you gave were not very encouraging.

Senator BAUCUS. I must say, though, they are somewhat similar

to the responses of employees in other companies nationwide.

Mr. BODMAN. Yes, sir.

Senator BAUCUS. I think it is even in the private and public sector, but a little worse at Treasury.

Mr. BODMAN. Yes, sir. My only responsibility, if I am confirmed,

sir, would be to deal with the issues at Treasury. Treasury is a

great department. It is one of the crown jewels, should be one of

the crown jewels, of this administration.

I think that it is fair to say, where one has not had an operating

officer living and working within the building, that it would not be

a surprise that perhaps morale is not what it should be. That

would not be a surprise. I cannot speak to what morale is, sir, because I am not living in the building and I do not know.

To the extent that the problems that you mentioned are real—

and I am not suggesting they are not, but to the extent that I find

them to do so—I have had a record of being able to improve morale

in other organizations that I have worked with. It does take time.

It is not something that can be done by a simple act.

It involves a consistent commitment to the welfare of the people

such that the people who work for an organization know that the

person or persons responsible for it care about them. That has been

a hallmark of what I have done in my life, and I would continue

to do that in this stop.

Senator BAUCUS. I appreciate that.

To be totally fair, and I am trying to be as objective as I possibly

can, there is a perception in this town that more agencies, government agencies, are receiving more direction from the White House

to be more political.

That is, in addition to or instead of doing substantive work, policy work, that a good number of agencies and officials are getting

pressured to be more political, that is, to try to help the party in

power as opposed to doing solid public policy work.

Have you heard that? Are you aware of that?

Mr. BODMAN. No, sir, I have not. More importantly, I have not

found that to be the case, at least in my dealings at Commerce.

Senator BAUCUS. Well, you are not confirmed, yet.

Mr. BODMAN. No, no, sir. I meant in Commerce. We do have matters where we are working with the White House, and I have

found, at least my interactions on a wide variety of subjects, Commerce deals over an even wider range of activities than the Treasury does. I have not found that situation in terms of my work

there, sir.

Senator BAUCUS. Have you read the new book out by Ron

Susskind on Secretary O’Neal?

14

Mr. BODMAN. No, sir, I have not. I have read reviews of it, but

I have not read the book.

Senator BAUCUS. I have read it. I encourage you to read it. It is

instructive at many, many different levels, kind of how government

runs, a little bit. I am not suggesting it to be critical of the administration.

I am suggesting it more to get a better feel and understand of

how government works and, as Secretary O’Neal points out, a very

strong need for analysis, for getting the facts, analyzing the facts,

and reaching one’s opinion on the facts as process. Very poor and

distinct from politics. Your job is to get the right information, the

right facts for the right public policy.

Mr. BODMAN. I take your point, sir. I would only respond by telling you that, sir, I am an engineer.

Senator BAUCUS. Well, that is helpful.

Mr. BODMAN. I do try to deal with facts. Sometimes the facts are

elusive.

Senator BAUCUS. That book will give you great insights that are

going to be very important for you to be successful.

Mr. BODMAN. I appreciate your insights, sir.

Senator BAUCUS. I strongly suggest you read the book.

Mr. BODMAN. Yes, sir.

Senator BAUCUS. Mr. Bodman, just a couple of points about, we

have a great Senator here called Senator Robert Z. Byrd.

Mr. BODMAN. Yes, sir.

Senator BAUCUS. He is the author of a couple of Byrd amendments.

Mr. BODMAN. Yes, sir.

Senator BAUCUS. In fact, there is a third amendment. As a member of this committee years ago, Harry Byrd.

Mr. BODMAN. Yes, sir.

Senator BAUCUS. So, there are three Byrd amendments. I am referring to one, and that is the Byrd amendment essentially which

we enacted in this Congress which says that dumping of subsidy

revenues essentially are redistributed to the injured domestic industries.

Mr. BODMAN. Yes, sir.

Senator BAUCUS. This is under attack at WTO, et cetera. I would

just like your position on the Byrd amendment. What do you think?

Mr. BODMAN. Well, my position is, sir, that it is the law, and I

obey the law. So, to me, that is a Congressional matter. Whatever

I am presented, I will deal with. I do not know what to say, other

than that.

Senator BAUCUS. All right.

Back to collection or IRS enforcement.

Mr. BODMAN. Yes, sir.

Senator BAUCUS. Former IRS Commissioner Rossotti reported

that 60 percent of identified tax debts are not pursued. That is, we

know where those people are. We know their names. We know

where they live. We have their telephone numbers. But we are not

collecting the taxes and the penalties that they owe. The amount,

I think, is in the nature of $15 billion. Why? Do you know about

that?

15

Mr. BODMAN. No, sir. I have not heard that that was what Mr.

Rossotti’s position was.

Senator BAUCUS. No. It is a fact. A large amount of uncollected

dollars is out there uncollected.

Mr. BODMAN. Yes. No, I understand. That, it seems to me, is consistent with some of the other observations that you have made

during this hearing, sir. I said before, and I say it again, I take

your comments very seriously. If I am confirmed, I will do my best

to dig into it. But I do not have any comments on that, other than

it is not right. I agree with you.

Senator BAUCUS. And 56 percent of identified taxpayers with in- come over $100,000 under report taxes. That is not pursued, either.

I have a hunch a lot of this is resources, inadequate resources.

To be honest, Mr. Bodman, many times you hear administrations—it is all administrations, in my view, in the last 10, 15

years—mouth the words, you bet, we have got to enforce the laws

and beef up IRS.

Mr. BODMAN. Yes, sir.

Senator BAUCUS. But that is about as far as it gets.

Mr. BODMAN. Well, I would like to think that one of the reasons

the President nominated me for this job is that we have been able

to show results in the Commerce Department, and I hope we can

start down that path in the Treasury Department. I will do my

best to do that.

Senator BAUCUS. I just want to say, it is a huge problem and it

is getting to be more and more of a problem every year. I have been

in this town a few years. I can feel it. I can sense it. It is happening. At some point, something is going to break.

Now, I am not saying this is going to be the trigger which causes

a large lack of confidence in the stock market or foreign investors

in America because of the huge debt, or whatnot. Who knows what

the trigger is going to be unless something is done about all this.

But there is going to be a trigger somewhere, and I doubt this

will be the one. But it is getting worse. That is, the inability, the

failure of our government to collect and enforce the laws against

those people who are abusing it in terms of ripping off honest taxpayers.

Mr. BODMAN. Yes. I am confident that, perhaps through your and

the Chairman’s comments to Mr. Everson when he came through

this committee, I know that this is foremost in his mind. I am

aware of that. I am aware that he is taking steps that he believes

will lead to an improvement in the situation that you described. I

know that.

Senator BAUCUS. I do, too. He is working very hard. He is a very

earnest, hardworking guy.

Mr. BODMAN. Yes, he is. What I will commit to you, sir, if you

confirm me in this job, I will go to work with him to try to deal

with it. First, to try to understand the problem, which I do not profess to understand today, and then to try to go to work to make

some inroads in the problem. To say that we are going to solve it

in the next month or 6 months, or whatever, is probably premature. But I think we ought to make some progress.

Senator BAUCUS. I appreciate that. My sense is, you will try very

hard. My sense is, you will run up against a stone wall, OMB,

16

somebody else in the administration. No, no, no. Let that go. That

is not as important. It all begins at the top. You are a good person.

You are going to work real hard. But you are working for people

and they make some bigger decisions.

I just urge you to be almost as mean as a junkyard dog when

you are dealing with those people, and maybe even resign if you

think that they are disabusing you, if they are not being respectful

of what has got to be done, in your judgment.

That is not a tradition in this country, but somebody has got to

make a statement somehow, somewhere. This problem is just growing by leaps and bounds. People are not paying their taxes. There

are fewer and fewer audits and more and more people ripping us

off.

It has been at least 2 years since Enron, Tyco, and all of these

other problems developed. We have not passed any anti-shelter legislation yet, and that is partly our fault. But it is also partly can

be left at the door at the administration, because they are not

pushing us that hard to get the stuff done.

Inversions legislation. It is an outrage to me that American companies, in order to avoid taxes, set up their operations offshore. I

thought they were Americans. They are not Americans if they do

that. If they do that, they should not enjoy the privileges of being

Americans.

I will get off my soapbox here. But you have got a huge problem,

and therefore you have a huge opportunity. I urge you to take advantage of the opportunity and just go for it.

Mr. BODMAN. Well, I appreciate everything that you have said,

Senator. I will do my best, if you confirm me, to seek this out. I

do not know that I would use the term ‘‘junkyard dog,’’ and I do

not know that I would threaten to resign.

Senator BAUCUS. That term is probably not advisable. But you

get the point.

Mr. BODMAN. I do get the point. Yes, sir. I have had a record of

having achieved some success in working with my friends at the

Office of Management and Budget and getting the kind of support

for worthy endeavors, and particularly those areas that I deem to

be the top priority of the Department. This seems to be, if I may

say, your top priority, at least as I hear you, and I take your comments seriously.

Senator BAUCUS. We have all got tons of top priorities.

Mr. BODMAN. I understand. I understand. But, at least as I understand it today, that seems to be today’s top priority.

Senator BAUCUS. That is the top priority du jour. That is right.

It is very important.

Mr. BODMAN. And I will do my best to chase that down and to

tell you I would be happy to come back here, if you would be willing to spend the time, and tell you how we are doing. I would be

happy to do it.

Senator BAUCUS. I would love to.

Why do you want this job?

Mr. BODMAN. I came here to serve my country. I have been the

beneficiary of a good deal of success in my life. I had, as I like to

describe to my friends here, a perfectly good job running a company. I was 61 or 62 years old, and I was very well-compensated,

17

in my judgment, as I should have been because we did a great job

with the company.

I had an opportunity to serve my country and to give something

back. I came here with that as an objective. I believe that the fact

that I have been nominated for this job is a reflection of the fact

that perhaps some people view the fact that I have been successful

in Commerce. So, I am happy to continue to serve my country.

That is why I came.

Senator BAUCUS. How do you want to be remembered when you

leave? We are all going to leave.

Mr. BODMAN. Absolutely. These are all rent-a-jobs. We are here

for a period of time, then we are out of here. I, frankly, do not

think about how I want to be remembered. It is not important to

me. What is important to me is knowing in my heart that I came

here and I made a difference.

I do not think that the people of the Commerce Department, 5

years from now, will look back and say, well, Sam Bodman did this,

or did that. I may be wrong about that, but I do not think so. My

goal is to serve my country. That is why I came. That is strictly

it.

Senator BAUCUS. That is a good way to be remembered.

Mr. BODMAN. Well, if that is how I am remembered, then that

would be fine.

Senator BAUCUS. Well, I wish you the greatest luck. These are

huge challenges.

Mr. BODMAN. Thank you, sir.

Senator BAUCUS. I know I speak for the Chairman when I say

we are here to work with you.

Mr. BODMAN. Thank you very much.

Senator BAUCUS. That is the only way solid things get done.

Mr. BODMAN. I appreciate your support. Thank you.

Senator BAUCUS. Mr. Chairman, I might also ask to put in the

record this Gallup Organization Executive Summary.

The CHAIRMAN. All right.

Senator BAUCUS. Thank you.

The CHAIRMAN. Without objection, so ordered.

[The information appears in the appendix at page 39.]

The CHAIRMAN. I have no further questions, unless some come up

that we submit to you in writing. Remember, a lot of members of

this committee could not become because of conflicts.

Mr. BODMAN. Yes, sir.

The CHAIRMAN. So, you may get some questions in writing from

them. I ask that you respond as quickly as you can.

Then, because I think it is fair to the Senate that all questions

be answered, unless there is some political reason, using that as

an excuse to hold up your nomination for no good reason, so please

cooperate with the committee on that.

Senator Baucus?

Senator BAUCUS. Yes. Thank you, Mr. Chairman.

I think you will find, Mr. Bodman, that we are very open, the

Chairman and I, to conversations, ideas, and whatnot. Just give us

a call on anything that you think warrants it, and so forth. We

mean it. We believe in this process, too.

Mr. BODMAN. Yes, sir.

18

Senator BAUCUS. We just want to let you know that we are available.

Mr. BODMAN. Thank you. I appreciate that very much. That

means a lot to me to know that. I want you to know, sir, that I

mean it, too.

Senator BAUCUS. I can tell. Thank you.

The CHAIRMAN. Together, we try to make the Senate work as far

as the consideration of the work of this committee, and make this

committee work. To the extent to which we can also help your Department do its job, since we have oversight over that Department

and particularly since we almost demand that you cooperate with

us to get information we need, we should be ready to do that in

return. So, feel free to call upon us.

Mr. BODMAN. Thank you so very much.

The CHAIRMAN. Thank you very much.

Mr. BODMAN. Thank you very much.

The CHAIRMAN. Hearing adjourned.

[Whereupon, at 11:11 a.m., the hearing was concluded.]

(19)

A P P E N D I X

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

PREPARED STATEMENT OF SAMUEL W. BODMAN

Mr. Chairman, Senator Baucus, Members of the Committee, thank you for the opportunity to appear before you today. I am honored to be President Bush’s nominee

to serve as Deputy Secretary of the Treasury Department, and I am most grateful

to Secretary Snow for his confidence and support. As Deputy Secretary of the Commerce Department, I have had the privilege to serve President Bush and the American people since 2001. In that position, I’ve had the good fortune to work closely

with several of you, and I look forward to what I know will be a productive relationship with this Committee.

I am most pleased that my wife, Diane, is here with me. I am the proud father

of five children and eight grandchildren, and I’m blessed to have their continued

support.

I was born in Chicago and raised in a small Illinois community, but I spent most

of my adult life in Massachusetts. I went to Boston as an MIT graduate student

and ended up staying for 40 years. I started out my career as a professor of chemical engineering at MIT. In 1970, I joined a then-fledgling investment firm called

Fidelity Investments. During my seventeen years there, the last ten as president,

I helped orchestrate the transformation of a small company into one of the nation’s

largest financial service enterprises.

Following my time at Fidelity, I spent fifteen years serving as Chairman and CEO

of Cabot Corporation, a specialty chemical manufacturer and one of Boston’s oldest

industrial companies. Operating 45 manufacturing plants in 25 countries, my colleagues and I faced many of the challenges that confront American companies in

today’s global marketplace—from international trade, to technology integration, to

safety and security.

Three years ago, I resigned my job at Cabot; and Diane and I moved to Washington so that I might serve as Deputy Secretary of Commerce. Collectively, my experiences have instilled in me a strong belief in the power of the American free enterprise system, the engine of innovation,productivity, and job creation that drives

our nation forward. And my time in Washington has reinforced my belief that government does have a crucial role to play in maintaining our economic health. As

President Bush has said many times, government does not create wealth; the private sector does that. But government must create an environment that encourages

the entrepreneur, that allows companies to plan, that provides the flexibility necessary to create and grow, and sometimes, to fail and start over.

It has been my privilege to work with the fine men and women of the Commerce

Department to advance this vision for government. Under Secretary Evans’s leadership, we have worked hard to open markets around the world, to promote free and

fair trade, and to protect intellectual property. We have saved lives, homes, and

businesses with more accurate and timely severe weather forecasts. We have promoted economic development and job growth throughout this nation. And, we have

strengthened the management of our programs and Department.

There is more work to be done, and that’s why I am so pleased that President

Bush has extended the opportunity for me to continue my public service at the

Treasury Department. The Treasury is at the forefront of many critical policy challenges: stopping the flow of funds to terrorists around the world; reforming and

modernizing the IRS; and ensuring that our current economic momentum translates

into lasting prosperity for our citizens.

20

I’m proud to be afforded the great opportunity to serve the American people with

President Bush, Secretary Evans, Secretary Snow, and now this Committee. With

that, I would be pleased to take any questions that you may have.

RESPONSE TO A QUESTION FROM SENATOR GRASSLEY

Question. How is the inter-agency process for dealing with terrorist financing

being organized? Will Treasury continue to lead this inter-agency effort?

Answer. It is my understanding that the structure and functions of the interagency policy coordinating committee on terrorist financing are under review by the

National Security Council and the interagency members of that group. Since its inception, this committee has been dedicated to targeting identified terrorist supporters and financiers and determining the best course of action to take against

those identified targets and risks. Treasury initially led that effort because of its equities in all of the key areas and elements of the overarching campaign against terrorist financing. Moving forward, the restructured committee process will likely

place the NSC, which is responsible for coordinating all U.S. Government

counterterrorism activities, in the central coordinating role, but Treasury will continue to serve as a major player in this interagency policy and decision-making process.

RESPONSES TO QUESTIONS FROM SENATOR BAUCUS

Question 1. Former IRS Commissioner Rossotti reported that 60 percent of identified tax debts are not pursued. Seventy-five percent of taxpayers who did not file

a tax return are not pursued. Fifty-six percent of identified taxpayers with income

of $100,000 or more and underreport tax are not pursued. When you are confirmed,

how would you adequately demonstrate to the American taxpayer that the tax laws

are being enforced? Please give specific answers, citing particular steps you will

take.

Original Answer. In order to understand and address the problem of noncompliance, we must first ensure that we have the right information about the problem

and then make sure that we are devoting the right resources to the problem.

I am told that the IRS is undertaking its first, comprehensive study of taxpayer

compliance in well over a decade. This National Research Program (NRP) will give

us critical information on the areas of noncompliance today and will cover individual

taxpayers of all income levels. Later phases of the NRP will address businesses. The

IRS’s current compliance data are out of date. The information that the NRP will

provide us will be critical in understanding where the IRS must focus its efforts to

improve compliance.

In the meantime, I have been informed that the IRS already is moving forward

to streamline operations so that resources can be directed at compliance, including

collection. I commend Commissioner Everson for taking steps necessary to make the

IRS more efficient so that it can better serve the American taxpaying public. In addition, the Commissioner has focused on improving the implementation of the Business Systems Modernization (BSM) program. While we all are aware of the significant challenges experienced by that program, it appears that progress is being

made. The Commissioner is committed to making sure that this progress continues

and accelerates in the future. If confirmed, I will work with the Commissioner to

ensure that these important efforts are successful.

As you are aware, the Administration has made a number of legislative proposals

that will improve the IRS’s ability to address outstanding tax liabilities. The proposal to use private collection agencies, or PCAs, to assist the IRS in limited but

important ways will allow the IRS to reach many more taxpayers who are aware

of their obligations but are not paying them even though they are capable of doing

so. At the same time, the PCA proposal will allow the IRS to focus on more complex

cases and issues. The Administration also has proposed several modifications to existing taxpayer protections to allow the IRS to deal more effectively with those taxpayers who are abusing these protections to delay or prevent collection. These proposals will maintain fully existing protections for those taxpayers seeking to resolve

their liabilities. Finally, the Administration has proposed extending the due date for

electronically filed returns by 15 days. This will further encourage the use of electronic filing, which is easier, more accurate, and more efficient for both taxpayers

and the IRS.

Supplemental Answer. As Deputy Secretary of the Treasury, I will work with

Commissioner Everson to address the problem of non-compliance. Based on information provided to me by the IRS, I believe that the IRS can and is taking a number

of positive steps to assure American taxpayers that we are administering the tax

laws fairly and effectively.

21

First, the IRS’ efforts must be focused in order to be effective. In September 2002,

the IRS, following months of planning, announced that it was realigning its audit

resources to focus on key areas of non-compliance with the tax laws. The IRS’ Small

Business/SelfEmployed Division is handling this effort, with assistance from other

parts of the IRS, including the IRS’ Large and MidSized Business Division. The key

areas of noncompliance targeted by this initiative include:

• Domestic and offshore abusive schemes and promoters.

• High-risk, high-income taxpayers.

• High-income non-filers.

• Unreported income.

The IRS is focusing its examination resources on these problems. Taxpayers falling within one of these high-priority areas of non-compliance must be identified

quickly for expedited processing. I intend to work with the Treasury Department’s

Office of Tax Policy and the IRS to ensure that our efforts in these areas are being

effective. As I noted in my original response, the National Research Program (NRP)

will give us much better information on the areas of noncompliance today. The

Treasury Department and the IRS will work together to evaluate the results of the

NRP and determine how the information we obtain should be used in setting future

IRS priorities.

Second, our current and future efforts to increase compliance will not be fully effective unless the IRS’ information technology systems continue to improve. As I

noted in my original response, improving the implementation of the Business Systems Modernization (BSM) program is a priority for Commissioner Everson, and I

will work to ensure the success of the program.

Third, the IRS must make more efficient use of its personnel. In that regard, the

IRS has changed a number of key processes, including:

• Case Selection—The IRS must both address the most serious areas of noncompliance while still addressing a wide range of cases and issues. Improvements to the case selection process will better enable the IRS to address its

compliance priorities.

The IRS has refined its inventory delivery system which enables it to select higher priority cases for assignment to the collection field function and the Automated

Collection System. Compliance risk, potential collectibility, and potential return on

investment are related factors used in the filters for the IRS’ inventory delivery system. This results in high priority cases being assigned for collection earlier in the

delinquency cycle, which means the IRS gets to the case before the taxpayer has

gone deeper and deeper into debt. The IRS continues to examine how case selection

can be improved further.

• Employment Taxes—The failure of employers to make their federal tax deposits

and pay over the withheld trust fund taxes is a serious compliance issue. The

IRS is developing and implementing a strategy to improve collection of employment taxes. For instance, the IRS is assigning these cases for collection action

early in the delinquency process, when there is a higher probability for collection and less chance for the account to grow with additional employment tax

delinquencies.

• Causes for Underpayment and Non-Filing—The IRS is working to identify the

components of its potentially collectible inventory, the main causes of noncompliance, and the contributing market segments. The information obtained is

being used to address taxpayers through outreach and education, and to determine potential systems and policy changes. One significant component involves

estimated tax compliance.

• Taxpayer Education—The IRS is aggressively reaching out to taxpayers before

they, either intentionally or inadvertently, fail to file or fail to pay the full

amount of tax due. Stopping noncompliance before it occurs is far preferable to

having to find it afterwards. The IRS website, for example, has been a tremendous success and has been an important resource for taxpayers. It also is an

important way for the IRS to communicate to taxpayers. Low-income taxpayer

clinics (LITCs), volunteer income tax assistance (VITA) sites, and tax counseling

for the elderly (TCE) sites also play an important role in taxpayer outreach and

education. The IRS is examining how taxpayer outreach can be improved and

made more effective.

It is important to note that the IRS also is reaching out to those taxpayers who

may be missing out on important tax benefits to which they are entitled. For example, many non-filers would have received a refund had they filed a return. For the

last three years, the IRS has issued news releases to alert the 1.6 to 1.7 million

taxpayers each year who will lose their right to claim refunds if they do not make

a claim within the 3-year limit.

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I commend Commissioner Everson and the IRS for taking the steps necessary for

a more efficient and effective IRS. I intend to work with the Commissioner to continue these important efforts.

Fourth, the IRS believes that it can make more effective use of existing enforcement tools when the circumstances warrant. These tools include:

• Jeopardy assessments.

• Liens and levies.

• Legal action.

These are important collection tools that must be used appropriately and effectively. At the same time, the IRS must respect taxpayer rights during all phases

of the collection process.

Question 2. As of the end of fiscal year 2003, how many collection accounts were

in deferred status and what was the total, mean, and median dollar value of these

accounts?

Original Answer. Treasury staff and I are working with the IRS to obtain the information requested. I note, however, that information as of the end of fiscal year

2003 may require some time to compile.

Supplemental Answer. ‘‘Deferred status’’ refers to a case that has been removed

from active inventory so that another case with higher priority or higher probability

of collection can be assigned and worked by IRS employees. Deferred status cases

are monitored systemically for changes in account status that might indicate that

collectibility has increased. In addition, deferred status cases may have liens filed

on them and usually are included in the Federal Payment Levy Program—a systemic levy/offset program administered by the Treasury Department’s Financial

Management Service (FMS) that levies any federal payments that may be made to

the taxpayer.

Information on the accounts in deferred status as of the end of Fiscal Year 2003

is set out in the following table:

As of the end of Fiscal Year 2003, 2,246,700 modules (i.e., a specific amount of

tax owed by a specific taxpayer for a specific tax period) were in deferred status.

The total dollar value of these accounts was $16,469,623,857.98, with a mean dollar

value of $14,000.64. The IRS’ information systems currently cannot generate a median dollar value.

Many of the accounts in deferred status represent taxpayers who have filed a tax

return showing an amount of tax due, but who have failed to pay the tax. Other

accounts represent taxpayers who have been assessed additional tax by the IRS and

have made three or more voluntary payments to satisfy that additional tax, but who

have stopped making payments. These taxpayers are aware of their outstanding liabilities. The IRS, however, is unable to continuously pursue each taxpayer with an

outstanding tax liability. Many taxpayers with outstanding tax liabilities, however,

would make payment if contacted by telephone and, if necessary, offered the ability

to make payment of the full amount in installments. The Administration’s FY 2005

Budget proposes to permit the IRS to use private collection agencies (PCAs) to address accounts in deferred status.

Question 3. What types of taxpayers have accounts in deferred status? Please give

a specific break out based on income.

Original Answer. Treasury staff and I are working with the IRS to obtain the information requested. I note, however, that information as of the end of fiscal year

2003 may require some time to compile.

Supplemental Answer. At the end of Fiscal Year 2003, there were 313,502 business taxpayers and 862,846 individual taxpayers in deferred status, for a total of

1,176,348. The IRS’ information systems currently cannot readily associate income

amounts with these taxpayers.

Question 4. What is the largest delinquent amount in deferred status?

Original Answer. Treasury staff and I are working with the IRS to obtain the information requested. I note, however, that information as of the end of fiscal year

2003 may require some time to compile.

Supplemental Answer. The largest delinquent amount in deferred status is over

$50 million. As the Deputy Secretary, I ordinarily do not have access to confidential

return information and therefore am not providing additional information on this

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amount. If further detail is desired, the IRS will respond to a request from the Committee. See I.R.C. § 6103(f).

Question 5. How have the amounts referred to in the previous 3 questions

changed in recent years? Are deferrals increasing or decreasing?

Original Answer. Treasury staff and I are working with the IRS to obtain the information requested. I note, however, that information as of the end of fiscal year

2003 may require some time to compile.

Supplemental Answer. As set out in the tables below, accounts in deferred status

(by module) have decreased slightly, but the dollar amounts for these accounts have

increased, from Fiscal Year 2002 to Fiscal Year 2003.

Question 6. What alternatives have been considered for reducing this collections

workload gap and the dollar value of outstanding delinquent tax debt? Please give

specific examples if other alternatives have been considered or implemented.

Original Answer. Some of the steps that the Treasury Department and the IRS

already have taken are outlined in my response to Question 1. 1 will provide a fuller

description of the alternatives that have been considered in a subsequent response.

Supplemental Answer. See Supplemental Response to Question 1.

Question 7. According to the General Accounting Office, IRS deferred collection action on about one out of three new collection cases in fiscal year 2002. This raises

questions about how IRS manages the number of new enforcement actions (such as

examinations and document matching cases) which ultimately determine the collections workload. Since IRS determines the level of new enforcement actions initiated

each year, what analysis has IRS done to determine the best balance between allocating resources to starting new exams as opposed to allocating more resources to

collecting outstanding delinquent tax debt?

Original Answer. Treasury staff and I are working with the IRS to provide the

information requested.

Supplemental Answer. The IRS has reviewed data from the Taxpayer Compliance

Measurement Program (TCMP) to evaluate the best balance in allocating resources

between new examinations and the collection of outstanding tax liabilities. The last

TCMP study of individual tax returns was for tax year 1988, more than 15 years

ago. Data for corporations and other entities are even older and less reliable. Accordingly, the following analysis is preliminary only. The ongoing National Research

Program (NRP) will provide much more current information on taxpayer compliance

that will allow the IRS to better analyze the reasons for noncompliance and better

prioritize the allocation of its resources to address noncompliance.

Based on the IRS’ evaluation of TCMP data, the IRS believes that most failures

to pay the correct amount of tax due are the result of underreporting (i.e., not reporting the correct amount owed, and therefore underpaying) rather than the result

of underpayment (i.e., not paying the amount reported) and non-filing. Underreporting can be addressed by examinations, and a decision by the IRS to conduct

more examinations is based primarily on a need to promote voluntary compliance

with tax laws and, to a lesser degree, on the ultimate effect on collections. Given

the number of examinations that the IRS can conduct, however, examinations have

a small effect on the collections workload.

Only 450,000 (or about 8%) of the 5.5 million of new collection accounts arising

in Fiscal Year 2003 were generated from examinations.

The IRS’ examination and collection work plans take into account audit coverage,

compliance risk, and specific strategic priorities. While underreporting accounts for

the greater percentage of uncollected taxes, the IRS is working to improve the collection of delinquent debt and the securing of overdue tax returns.

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Question 8. Has IRS studied whether a different balance between the initiation

of new enforcement actions and its capacity to collect delinquencies would lead to

higher levels of tax revenue or improved compliance? If so, please provide the Committee with these studies.

Original Answer. Treasury staff and I are working with the IRS to provide the

information requested.

Supplemental Answer. The IRS is conducting two studies relating to steps that

might be taken to improve taxpayer compliance. The first study will focus on the

impact of collection actions on employment tax/trust fund compliance. The second

study will focus on federal tax liens and case selection for cases designated as currently not collectible. Both are scheduled to be completed in early 2005. The IRS

also is considering whether other studies, tools or models may help the IRS in evaluating this issue.

Question 9. Tax laws provide a 10-year statute of limitations on the time authorized to collect tax debts. Considering that IRS’s deferral policy is almost 5 years old

and some of the first debts deferred are likely to have been a year or two old in

1999, what plans does IRS have to assure that all deferred tax debt receives adequate collection action before the statute of limitations expires?

Original Answer. Treasury staff and I are working with the IRS to provide the

information requested.

Supplemental Answer. The IRS makes business decisions, considering its available

resources, to pursue or defer action on accounts. Compliance risk, potential collectibility, and potential return on investment are related criteria used to prioritize collection activity.

To ensure that all deferred accounts receive adequate collection action, the IRS

has implemented several systemic actions in collection systems. These include:

• Automatic refund offset for as long as the statute of limitations remains open.

• Inclusion of the debt in the Federal Payment Levy Program, which ensures that

any federal payments due to the taxpayer are subject to levy.

• Systemic reactivation of an account upon the occurrence of new activity, such

as a new liability, a source of income or tax filing delinquency.

• Annual notices to remind taxpayers of these tax obligations and to encourage

payment.

As discussed earlier, the Treasury Department believes that many accounts in deferred status could be addressed effectively and efficiently by private collection agencies (PCAs). The Administration’s FY 2005 Budget proposes the limited and targeted use of PCAs by the IRS to address these accounts.

RESPONSES TO QUESTIONS FROM SENATOR BINGAMAN

Introduction

I share your concern about recent reports of TIGTA investigations of undocumented workers and recognize the affect that these reports may have on tax compliance. The Treasury Department, which includes the IRS and TIGTA, is the agency

charged with the administration of this country’s tax laws. The Administration has

a very strong interest in having all taxpayers comply with their U.S. tax obligations,

regardless of whether an individual is in the U.S. legally. If confirmed, I would look

forward to working with the Committee to ensure that our responsibilities as tax

administrators, and TIGTA’s responsibilities as an inspector general, are focused on

improving compliance and addressing threats to the integrity of our tax system.

Before I address your specific questions, I want to emphasize that I have been

assured that neither the IRS nor TIGTA has a program or project to identify and

investigate undocumented workers for possible immigration law violations. Some of

the recent press reports suggest that this may be the case, and, as I understand

it, that simply is not true.

Question 1. Please provide my office with the following information:

1. What is Treasury’s position regarding the legality of taxpayer identification

numbers being shared with immigration enforcement officials? Are such disclosures

prohibited under IRC Section 6103? Please provide me with the statutory and regulatory basis for yourresponse.

Answer. Our tax system fundamentally is based on voluntary compliance, and voluntary compliance requires that taxpayers be confident that the IRS treats their

taxpayer information as confidential and uses that information only for tax administration purposes. The laws governing the disclosure of taxpayer information, particularly section 6103 of the Internal Revenue Code, are designed to ensure that any

disclosure of taxpayer information for non-tax administration purposes is carefully

limited and serves a compelling purpose. The following is a brief description of these

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rules that has been provided to me, and I would be happy to provide further details

if you desire.

Section 6103(a) provides that taxpayer returns and return information shall be

confidential except as expressly authorized. Officers and employees of the Treasury

Department, including IRS and TIGTA employees, may access returns and return

information if required by their official duties. I.R.C. § 6103(h)(1). Protected return

information includes taxpayer identification numbers, or TINs. See I.R.C.

§§ 6103(b)(2) and (b)(6). TINs include both Social Security numbers (SSNs) issued

to eligible individuals as well as individual taxpayer identification numbers (ITINs)

issued by the IRS to taxpayers not eligible for SSNs. Treas. Reg. § 301.6109–1.

Disclosure of information protected by section 6103(a) is carefully controlled by

statute. IRS agents and TIGTA agents, for instance, are authorized to disclose return information as needed in the course of their official tax administration investigations. I.R.C. § 6103(k)(6). For example, an IRS agent may disclose return information, such as the purchase price of an asset reported on a return, to verify whether it is correct. See Treas. Reg. § 301.6103(k)(6)–1T.

Disclosures by IRS and TIGTA agents to other law enforcement agencies, such as

the Department of Justice, are subject to additional, strict requirements. Section

6103(h) governs disclosures for tax administration purposes, and section 6103(i) governs disclosures for non-tax administration purposes. Any disclosures pursuant to

these sections must comply with the specific requirements mandated by Congress.

Disclosures that do not comply with the requirements of section 6103 may result

in civil and criminal penalties. I.R.C. §§ 7213, 7213A, and 7431.

Question 2. Please provide my office with the following information:

What steps, if any, is Treasury currently taking to address these concerns?

Answer. I have been informed that TIGTA currently is reviewing the circumstances of the reported investigations to determine whether all legal requirements, including restrictions on the disclosure of tax return information, and all

TIGTA policies and procedures were followed. I have been assured that TIGTA is

taking the concerns that you and others have expressed very seriously, and that the

Treasury Department is committed to working with TIGTA to ensure that TIGTA’s

policies and activities focus on addressing threats to the integrity of our tax system.

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