U.S. GOVERNMENT PRINTING OFFICE

64–388 CC WASHINGTON : 2000

UNPAID PAYROLL TAXES: BILLIONS IN DELINQUENT TAXES AND PENALTY ASSESSMENTS

ARE OWED

HEARING

BEFORE THE

SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,

INFORMATION, AND TECHNOLOGY

OF THE

COMMITTEE ON

GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED SIXTH CONGRESS

FIRST SESSION

AUGUST 2, 1999

Serial No. 106–116

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

(II)

COMMITTEE ON GOVERNMENT REFORM

DAN BURTON, Indiana, Chairman

BENJAMIN A. GILMAN, New York

CONSTANCE A. MORELLA, Maryland

CHRISTOPHER SHAYS, Connecticut

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

STEPHEN HORN, California

JOHN L. MICA, Florida

THOMAS M. DAVIS, Virginia

DAVID M. MCINTOSH, Indiana

MARK E. SOUDER, Indiana

JOE SCARBOROUGH, Florida

STEVEN C. LATOURETTE, Ohio

MARSHALL ‘‘MARK’’ SANFORD, South

Carolina

BOB BARR, Georgia

DAN MILLER, Florida

ASA HUTCHINSON, Arkansas

LEE TERRY, Nebraska

JUDY BIGGERT, Illinois

GREG WALDEN, Oregon

DOUG OSE, California

PAUL RYAN, Wisconsin

HELEN CHENOWETH, Idaho

DAVID VITTER, Louisiana

HENRY A. WAXMAN, California

TOM LANTOS, California

ROBERT E. WISE, JR., West Virginia

MAJOR R. OWENS, New York

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

PATSY T. MINK, Hawaii

CAROLYN B. MALONEY, New York

ELEANOR HOLMES NORTON, Washington,

DC

CHAKA FATTAH, Pennsylvania

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

ROD R. BLAGOJEVICH, Illinois

DANNY K. DAVIS, Illinois

JOHN F. TIERNEY, Massachusetts

JIM TURNER, Texas

THOMAS H. ALLEN, Maine

HAROLD E. FORD, JR., Tennessee

JANICE D. SCHAKOWSKY, Illinois

———

BERNARD SANDERS, Vermont

(Independent)

KEVIN BINGER, Staff Director

DANIEL R. MOLL, Deputy Staff Director

DAVID A. KASS, Deputy Counsel and Parliamentarian

CARLA J. MARTIN, Chief Clerk

PHIL SCHILIRO, Minority Staff Director

SUBCOMMITTEE ON GOVERNMENT MANAGEMENT, INFORMATION, AND TECHNOLOGY

STEPHEN HORN, California, Chairman

JUDY BIGGERT, Illinois

THOMAS M. DAVIS, Virginia

GREG WALDEN, Oregon

DOUG OSE, California

PAUL RYAN, Wisconsin

JIM TURNER, Texas

PAUL E. KANJORSKI, Pennsylvania

MAJOR R. OWENS, New York

PATSY T. MINK, Hawaii

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

GRANT NEWMAN, Clerk

TREY HENDERSON, Minority Counsel

(III)

C O N T E N T S

Page

Hearing held on August 2, 1999 ............................................................................. 1

Statement of:

Kutz, Gregory D., Associate Director, Governmentwide Accounting and

Financial Management, Accounting and Information Management Division, U.S. General Accounting Office, accompanied by Cornelia Ashby,

Associate Director, Tax Policy and Administration Issues, General Government Division; and Steve J. Sebastian, Assistant Director, Governmentwide Accounting and Financial Management .................................... 9

Rossotti, Charles, Commissioner, Internal Revenue Service, accompanied

by Paul Cosgrave, Chief Information Officer, Internal Revenue Service;

David Mader, Chief, Management and Finance, Internal Revenue Service; and Charles Peterson, Assistant Commissioner .................................. 57

Letters, statements, et cetera, submitted for the record by:

Horn, Hon. Stephen, a Representative in Congress from the State of

California, prepared statement of ................................................................ 3

Kutz, Gregory D., Associate Director, Governmentwide Accounting and

Financial Management, Accounting and Information Management Division, U.S. General Accounting Office, prepared statement of ................... 14

Rossotti, Charles, Commissioner, Internal Revenue Service, prepared

statement of ................................................................................................... 61

Turner, Hon. Jim, a Representative in Congress from the State of Texas,

prepared statement of ................................................................................... 7

(1)

UNPAID PAYROLL TAXES: BILLIONS IN DELINQUENT TAXES AND PENALTY ASSESSMENTS ARE OWED

MONDAY, AUGUST 2, 1999

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

2154 Rayburn House Office Building, Hon. Stephen Horn (chairman of the subcommittee) presiding.

Present: Representatives Horn, Biggert, and Turner.

Staff present: Russell George, staff director/chief counsel; Bonnie

Heald, director of communications; Grant Newman, clerk; Chip

Ahlswede, staff assistant; Seann Gallagher, intern; Trey Henderson, minority counsel; and Jean Gosa, minority staff assistant.

Mr. HORN. A quorum being present, the Subcommittee on Government Management, Information, and Technology will come to

order. Few things are as annoying as seeing a portion of one’s

hard-earned wages deducted from a paycheck for Federal taxes.

Most workers correctly assume the missing money is on its way to

the U.S. Treasury. But today’s hearing has been called because in

too many cases, too many of hard-earned wages are not being forwarded to the Internal Revenue Service.

As will be discussed by the General Accounting Office, the

Congress’s financial and program auditors, in releasing a report

today, it indicates an appalling number of employers, estimated at

1.9 million of them, have deducted money from their employees’

paychecks for programs such as Social Security and Medicare, then

failed to forward the collected money to the Federal Government.

The General Accounting Office estimates that $49 billion is at

stake.

Now, we are arguing over a piddling amount, saying that we

have a surplus. Obviously, we would have a real surplus if we had

the $49 billion there. The loser in this case is the U.S. Treasury,

and of course that means every taxpayer.

We will explore if the workers who thought they were contributing toward Social Security and Medicare won’t be penalized for the

loss. Often by the time that the loss is finally discovered by the Internal Revenue Service, neither the business nor the delinquent

employer can be located. In many instances, the culprits are businesses that were struggling to survive. To a lesser degree, some

2

employers knowingly defraud the system. Either way, the Internal

Revenue Service has failed to uphold its responsibility to the taxpayer.

This is not an isolated problem at the agency. Reviews of Internal Revenue Service audits for the past 2 years have turned up significant weaknesses in the agency’s financial procedures. Following

each annual audit review conducted by the General Accounting Office, this subcommittee has held a series of hearings to examine the

problems found within not only the Treasury, but in the 24 agencies of the executive branch that have most of the budget.

On March 1, 1999, the subcommittee examined financial management at the Internal Revenue Service. The subcommittee found

that serious problems existed with the agency’s financial management systems which cannot provide basic accounting information,

let alone management information in an efficient manner. In addition, the agency poorly controlled its records and the manner in

which it handled its cash payments.

Today we are focusing on those employers who have failed to pay

mandatory payroll contributions to the Federal Government. We

are also concerned about those employers who have paid these

taxes but whose record of payment may be buried in someone’s file

cabinet. We want to know the scope of this payroll tax debt, its

causes, and what is being done by the Internal Revenue Service to

prevent this massive violation of the law from recurring. We also

want to know whether these delinquent employers are receiving

other Federal benefits such as loans and other payments.

We have excellent witnesses today who can answer these questions for us: Commissioner of the Internal Revenue Service,

Charles Rossotti, and Mr. Gregory Kutz, the Associate Director of

Governmentwide Accounting and Financial Management Issues for

the General Accounting Office.

We will start with the General Accounting Office. Mr. Kutz will

be accompanied by Ms. Cornelia Ashby and Steve Sebastian. Following that panel, Commissioner Rossotti will be here and we will

introduce those with him at that time.

[The prepared statement of Hon. Stephen Horn follows:]

3

4

5

Mr. HORN. So would the gentleman from the General Accounting

Office come forward and be sworn in, please? I think you know the

routine. We swear in all witnesses. It’s an investigating committee

and your full statement is put in the record the minute we call on

you, and then we would like you to summarize the statement.

[Witnesses affirmed.]

Mr. HORN. The clerk will note all three witnesses affirmed. I

think that we have got everybody there.

Mr. Turner has an opening statement.

Mr. TURNER. Thank you, Mr. Chairman. The issue of unpaid

Federal payroll taxes is a very important one and has repercussions throughout the government. As a result of our failure to properly collect payroll taxes, the general revenue fund is forced to subsidize Social Security and hospital insurance trust funds. Therefore, less funds are available to finance other Federal programs

when Federal payroll taxes go unpaid.

While the majority of businesses pay taxes withheld from employees’ salaries as well as the employers’ matching amounts, a significant number of businesses apparently do not. According to IRS

records as of September 30, 1998, nearly 2 million businesses owed,

as the chairman said, about $49 billion in payroll taxes, or about

22 percent of the IRS’ $222 billion total outstanding balance of unpaid tax assessments. Additionally, $15 billion in trust fund recovery penalties has been assessed against and continued to be owed

by approximately 185,000 individuals who are found to be willful

and responsible for the nonpayment of payroll taxes.

Nonetheless, it is even more disturbing to learn that individuals

and businesses responsible for the nonpayment of payroll taxes

continue to receive significant Federal benefits and other Federal

payments such as Federal contracts or loans. The GAO estimates

that about 16,700 business and individuals with unpaid payroll

taxes and penalties received an estimated $7 billion in Federal payments over a 3-month period.

Unpaid payroll taxes and penalties have a low recovery potential.

We are gathered here today to learn about several factors that affect the ability of the IRS to enforce compliance and pursue collections in this area. These include system deficiencies and internal

control issues which affect the integrity of IRS data, ineffective

early warnings and taxpayer education programs, procedural limitations, Federal and State laws, and staffing resources.

Another issue affecting the IRS’s ability to collect is their lack of

capability to offset Federal benefits and other Federal payments

against unpaid assessments. Federal law does not prevent businesses or individuals from receiving Federal payments or loans

when they are delinquent in paying Federal taxes. The Debt Collection Improvement Act of 1996, which Chairman Horn and this subcommittee steered through the Congress, called upon the centralization and aggressive pursuit of delinquent Federal receivables. However, they were unable to include Federal tax receivables and other unpaid tax assessments from its provisions.

I am pleased to note that the Department of Treasury, using the

Taxpayer Relief Act of 1997 as its legal authority, is developing a

mechanism which will grant the IRS the authority to place a conVerDate 11-MAY-2000 12:16 Aug 01, 2000 Jkt 000000 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 C:\DOCS\64388.TXT HGOVREF1 PsN: HGOVREF1
6

tinuous levy on delinquent taxpayer Federal benefits to assist in

recovering overdue taxes.

Mr. Chairman, I hope that we can get at the heart of the problem here today with this hearing, and I look forward to hearing

from each of our witnesses. Thank you, Mr. Chairman.

Mr. HORN. I thank the gentleman from Texas for that very

thoughtful statement.

[The prepared statement of Hon. Jim Turner follows:]

7

8

9

Mr. HORN. The vice chairman, Mrs. Biggert of Illinois, has an

opening statement.

Mrs. BIGGERT. Thank you, Mr. Chairman. Thank you for holding

this timely hearing. I think all of us here today want the same

thing; that is, to ensure that America’s entitlement programs such

as Medicare and Social Security remain solid and dependable for

this generation as well as the next.

However, like many, I am concerned about the health of these

important programs has been undermined by a number of factors.

Today’s hearing focuses on another but lesser known factor that

threatens to undermine the solvency of these programs: unpaid

payroll taxes. And the General Accounting Office will present what

could only be a disturbing report this morning that details the extent to which payroll taxes have been withheld by employers, but

are not being remitted to the Federal Government.

Keep in mind, payroll taxes such as Federal insurance contributions, are used to fund and maintain the Social Security and Medicare Trust Funds. If what I understand the GAO will report this

morning is correct, that unpaid payroll taxes represent a substantial amount of the billions owed to the Federal Government in unpaid assessments, I further fear for the long-term health of these

programs.

Today’s hearing presents this committee with an opportunity to

conduct its most important function—oversight. As such, I will be

interested to hear from the witnesses. I am also interested in hearing about what the Department of Treasury, which has jurisdiction

over the Medicare and Social Security Trust Funds, is doing in this

situation.

Again, Mr. Chairman, I thank you for holding this important

hearing today. I look forward to working with you and the agencies

here today and the taxpayers to collect what is owed and to

strengthen retirement security.

Mr. HORN. I thank the gentlewoman. I see no other opening

statements, so we will go to the General Accounting Office. Our

principal witness is Mr. Gregory Kutz, the Associate Director, Governmentwide Accounting and Financial Management for the Accounting and Information Management Division of the General Accounting Office. He is accompanied by Cornelia Ashby, the Associate Director, Tax Policy and Administration Issues; and Mr. Steve

Sebastian, the Assistant Director, Governmentwide Accounting and

Financial Management. Please go ahead, Mr. Kutz.

STATEMENT OF GREGORY D. KUTZ, ASSOCIATE DIRECTOR,

GOVERNMENTWIDE ACCOUNTING AND FINANCIAL MANAGEMENT, ACCOUNTING AND INFORMATION MANAGEMENT DIVISION, U.S. GENERAL ACCOUNTING OFFICE, ACCOMPANIED

BY CORNELIA ASHBY, ASSOCIATE DIRECTOR, TAX POLICY

AND ADMINISTRATION ISSUES, GENERAL GOVERNMENT DIVISION; AND STEVE J. SEBASTIAN, ASSISTANT DIRECTOR,

GOVERNMENTWIDE ACCOUNTING AND FINANCIAL MANAGEMENT

Mr. KUTZ. Mr. Chairman and members of the subcommittee,

good morning. It is a pleasure to be here this morning to discuss

our report on unpaid payroll taxes. This report, which is being

10

issued today, was prepared at the request of this subcommittee.

With me this morning is Cornelia Ashby, an Associate Director in

our tax policy area, and Steve Sebastian, an Assistant Director who

works with me on IRS financial management issues.

The bottom line of my testimony this morning is that delinquent

payroll taxes are substantial, are largely uncollectible, and represent a significant enforcement challenge for the IRS.

My testimony this morning will answer four overall questions:

What are payroll taxes and trust fund recovery penalties? How significant are delinquent payroll taxes? To what extent are individuals and businesses responsible for these taxes receiving other Federal payments? And what factors affect IRS’ ability to enforce compliance or pursue collection in this area?

First, what are payroll taxes and trust fund recovery penalties?

Payroll taxes are comprised of individual income tax withholdings

and employer and employee withholdings for Federal Insurance

Contribution Act [FICA], which includes Social Security and Medicare taxes. Employers are required to deposit payroll taxes every

2 weeks, or monthly, depending on the size of their payroll.

While the vast majority of businesses remit their payroll taxes as

required, a significant number do not. Think of the Federal Government as a corporation and the businesses that pay payroll taxes

as its customers. Inevitably, some of the corporation’s customers

fail due to factors such as poor management.

As a result, for the Federal Government, unpaid payroll taxes

are like a corporation’s uncollectible receivables. They represent a

cost of doing business. One or more individuals found to be willful

and responsible for unpaid payroll taxes can be assessed a trust

fund recovery penalty. The most extreme case of willful and responsible we found was the diversion of unpaid payroll taxes to install an individual’s swimming pool. This penalty covers only the

portion of payroll taxes that are withheld from employees. The

term ‘‘trust fund recovery penalty’’ is used because the employeewithheld amounts are deemed to be held ‘‘in trust’’ by the business

on behalf of the Federal Government.

The bar chart on the poster board provides an example. In this

example, the corporation’s unpaid payroll taxes are $75,000. The

three responsible individuals were each assessed a $50,000 trust

fund recovery penalty. As you can see, this penalty represents only

amounts withheld from employees for Federal income and FICA

taxes. While each $50,000 trust fund recovery penalty appears as

a separate assessment on IRS’s records, the $75,000 of payroll

taxes owed by the business are to be collected only once.

I now move on to our findings, starting with the second question:

How significant are delinquent payroll taxes? Cumulative unpaid

payroll taxes at September 30, 1998, were about $49 billion and

were owed by 1.8 million businesses. The components of this balance are old, with about 70 percent of the amounts predating 1994.

The amounts comprising this balance are generally uncollectible.

Our analysis of 191 unpaid payroll tax cases found that many of

the businesses were defunct or otherwise unable to pay. Given the

condition of these businesses, it is not surprising to see, as shown

on the pie chart, that we estimate only 9 cents on the dollar will

be collected for these cases.

11

IRS records indicate that most of the businesses with delinquent

payroll taxes are corporations. We found that they were typically

small and closely held, in labor-intensive industries, with few assets available as collection sources for the IRS. We found that the

most common types of businesses that owe payroll taxes construction companies and restaurants.

The cumulative balance of unpaid trust fund recovery penalties

was about $15 billion at September 30, 1998. IRS records indicate

that these penalties were assessed against 185,000 individuals.

Who are these individuals that are assessed trust fund recovery

penalties? Typically, they are officers of the corporation, such as

the president or the Chief Financial Officer. Similar to payroll

taxes, we found that trust fund recovery penalties are generally not

collectible. As shown on the poster board, IRS records indicate that

at September 30, 1998, nearly 25,000 individuals have been assessed trust fund recovery penalties for more than one business. In

fact, as the chart shows, nearly 6,000 of what I will refer to as

‘‘multiple offenders’’ are responsible for unpaid payroll taxes at 3

or more businesses. Amazingly, the 7 most flagrant multiple offenders were responsible for unpaid payroll taxes at 20 or more

separate businesses.

IRS revenue officers we interviewed believe that most multiple

offenders are not flagrantly disregarding their responsibility. However, some revenue officers told us of multiple offenders who intentionally abused the system. For example, in one case we found a

president and owner responsible for unpaid payroll taxes at 5 separate construction-related businesses. Each company accumulated

unpaid payroll taxes, and then went out of business.

Whether the individual exercises poor business judgment or is

abusing the system, the failure to pay these taxes has the same effect on the Federal Government—increased collection cost and lost

tax revenue.

Let me now move on to the third question: Is it possible that

businesses and individuals responsible for delinquent payroll taxes

are also receiving Federal benefits, contracts, and loans? Unfortunately, the answer is yes. As shown on the table, we found that

over 18,000 of these individuals were receiving an estimated $212

million in annual civilian benefits. These include Social Security,

civilian retirement, civilian salary, and railroad retirement payments. In addition, we found that 16,700 of these individuals and

businesses received about $7 billion in civilian vendor payments

over a 3-month period.

Also, we estimate that at September 30, 1998, about 12,700 taxpayers had received SBA loan disbursements of about $3.5 billion.

Many of these individuals and businesses received these loan disbursements after defaulting on their payroll taxes. IRS revenue officers confirmed that individuals and businesses across the country

responsible for delinquent payroll taxes were receiving Federal benefits, payments, and loans.

The troubling situation I have described leads to my final question: What factors affect IRS’ ability to enforce compliance or pursue collection in this area? In answering this question I will touch

on three key factors.

12

First, system deficiencies and internal control weaknesses make

it difficult for IRS to manage its unpaid tax assessments. These

system and control weaknesses have led to significant errors in

taxpayer accounts. In our review of trust fund recovery penalty

cases for fiscal years 1997 and 1998, we found error rates of over

50 percent in taxpayer accounts. In one case we found that IRS had

pursued and collected nearly $1 million for trust fund recovery penalty assessments from two officers and had placed Federal tax liens

on their personal property. However, these officers’ liabilities had

already been satisfied from bankruptcy proceedings relating to the

business.

Second, based on discussions with IRS revenue officers nationwide, we learned that taxpayer education and early warning programs are ineffective. For example, IRS’ FTD Alert Program is intended to prevent potential delinquencies through early identification of missed payroll tax deposits. However, IRS field representatives noted that alerts typically are received too late to prevent employers from accumulating substantial tax delinquencies. In addition, these untimely alerts sometimes caused revenue officers to

contact taxpayers who had already paid their taxes. Many revenue

officers believe the key to improving IRS’ effectiveness is to contact

the business immediately after the first missed payment.

Third, Federal and State laws inhibit IRS’ ability to enforce collection of payroll taxes. States govern the incorporation of businesses. If businesses fail to pay State taxes, State licensing authorities can deny them business licenses or license renewals. However, States do not consider Federal payroll tax delinquencies, in

part because the Internal Revenue Code prohibits disclosure of

Federal tax information without taxpayer consent. Because the IRS

is unable to share this information with the States to use in granting business licenses, stopping multiple offenders is clearly inhibited.

In summary, unpaid payroll taxes cost the Federal Government

billions of dollars annually. At the same time, businesses and individuals responsible for these unpaid taxes are benefiting from billions of dollars of Federal payments. The end result is that compliant American taxpayers must pay more.

For the Federal Government, unpaid payroll taxes are a cost of

doing business. Based on the information I have provided to you

this morning, I think you will agree that collecting payroll tax revenue while protecting taxpayer rights is a formidable challenge for

the IRS.

Some of the issues relating to enforcement and collection, such

as incorporation at the State level, are beyond IRS’ control. However, to improve the Federal Government’s ability to prevent default and collect these taxes, IRS must improve its systems, policies, and internal controls.

IRS has concurred with the facts in our report and shares our

concern. They are working on short-term measures to improve the

13

accuracy of taxpayer accounts. However, we recognize that the systems problems resulting in errors in taxpayer accounts must be resolved as part of tax systems modernization.

Mr. Chairman, this ends my statement. My colleagues and I will

be happy to answer any questions.

[The prepared statement of Mr. Kutz follows:]

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

29

30

31

32

33

34

35

36

37

38

39

40

41

42

43

44

Mr. HORN. We thank you very much for that helpful statement.

We are going to have a round of questions, each of us 5 minutes.

I will start this one and then Mr. Turner will be next and then

Mrs. Biggert.

Let me just clarify a few things here. You have noted the businesses, and the ones that are very marginal: restaurants, small

construction firms, so forth. Did you have a chance to look at the

degree to which nonprofits, 501(c)(3) tax-exempt ones, did they default on some of these matches? Did you have an example like

that?

Mr. KUTZ. No, we didn’t see any in our sample, but we did speak

to IRS revenue officers who were responsible for that area and

found that generally it’s the same. It’s very, very small not-for-profits that in some cases do not pay their payroll taxes. But it is not

any large not-for-profits.

Mr. HORN. Do we have any idea how large that universe is and

what the default rate is? You are saying it is about the same?

Mr. KUTZ. I don’t know if it’s the same.

Mr. HORN. If the taxes are not being deposited in the particular

general account, as I understand it, it comes in with a coupon that

is an excise tax, but it really doesn’t tell which tax it is, it’s just

sort of lumped in; is that right?

Mr. KUTZ. Right. When the money comes in, it is generally not

identified. Although with IRS’ new electronic tax payment system,

some of the taxpayers are now identifying how much is collected

for the various types of taxes. One of the problems with that is that

IRS currently does not have the systems capability to summarize

that data by tax type. But they are not requiring taxpayers to send

the information in with the money that tells where the taxes

should go.

Mr. HORN. Someone listening to this hearing is going to say, My

heavens, do I have Social Security credits, do I have Medicare credits? What could you tell them? Do they still get their credits even

if their employer is running off with the money?

Mr. KUTZ. Yes, they do. Essentially there is a subsidy to the Social Security and Medicare Trust Funds to the extent that payroll

taxes are not collected. So the taxpayers do get made whole at the

end of the day.

Mr. HORN. You are sure of that? We will ask the Commissioner

the same question.

Mr. KUTZ. It’s basically coming out of the general revenue fund

of the Federal Government.

Mr. HORN. It’s very clear from your data that the Small Business

Administration needs to get on board with us and perhaps have on

one of the loan sheets before they grant any loans ‘‘Have you paid

all of your taxes?’’

Mr. KUTZ. Mr. Chairman, I would say that it’s not just the SBA.

They are the only loan program that we looked at. This would potentially apply to any of the loan programs in the Federal Government.

Mr. HORN. So Farmer’s Home Administration and all of the rest

of them?

Mr. KUTZ. It could be. They were beyond the scope of what we

did for this review.

45

Ms. ASHBY. Mr. Chairman, if I may add with regard to SBA, they

do in fact as prospective buyers, whether or not they have delinquent taxes. But apparently because we did find several instances

of SBA loans to such people, that that’s not a deterrent from them

getting the loans.

Mr. HORN. We have noticed that before. That’s why we put the

debt collection bill on the books. Some guy had taken $3 million in

one part of the State from the same agency that he had taken several million from the other part of the State. There are a few rascals out there, let’s face it.

I am going to yield the rest of my time to Mrs. Biggert and then

she can have her own time. I have 2 minutes and then we will call

Mr. Turner.

Mrs. BIGGERT. Thank you, Mr. Chairman. Could you go over the

early warning signs or the early warning program a little bit? How

long does the nonpayment go on? Is there a shutdown? What happens?

Mr. KUTZ. I will give you an overall answer and then let Mr. Sebastian elaborate. Typically it takes months and sometimes it could

take over a year before the FTD alert would get into the field officer’s hand to go and knock on the taxpayer’s door, asking where

are the taxes, et cetera. It takes a long time for the actual alert

to get out into the field. Taxpayers file their tax returns about a

month and a half after each quarter, but the alert sometime goes

out later than that. Many times, by the time the FTD alert gets

into the field, the business’ doors are shut and boarded and it’s all

over.

Mrs. BIGGERT. Then what is the recourse, just to have the debt

collection?

Mr. KUTZ. The recourse is to determine if some of the officers

were willful and responsible in that case, or there still could be

possibilities where there is money that could be taken out of bankruptcy proceedings. The next step would be to determine whether

or not anyone was willful and responsible for these withheld taxes

and to pursue the officers or whoever that might be.

Mrs. BIGGERT. Did you have any knowledge of anyone, then, say

a construction company; it seems like—do they change names and

then startup another company?

Mr. KUTZ. Yes, they do. They would change the name from—let’s

use me as an example—Greg’s Construction Co. to Greg’s Green

Construction Co. Something minor, probably. But the business is in

the same location in many instances. They change the name on the

lease or whatever the case may be, but it would be similar business

names.

Mrs. BIGGERT. You said that probably the one thing that States

can’t do—or can’t get the Federal tax records from these people

when they incorporate a business or anything. Is there any way

with that incorporation that it could be acknowledged that they

had—where they had companies either in that State or in other

States, and what the financial outcome of that company was?

Mr. KUTZ. If IRS could share delinquency information with the

States, that information could definitely be used in granting or renewing business licenses, but section 6103 of the Internal Revenue

46

Code does not allow for sharing of information unless the taxpayer

consents. So right now that’s not being done.

Mrs. BIGGERT. Is there anything else, laws that we have, that

cause us not to be able to find out or collect the debts?

Ms. ASHBY. In some instances, State property—not property

taxes, but State property disposition laws or ownership laws inhibit

IRS from perhaps collecting some amounts that they could otherwise. If, for example, a State has ownership by the entirety, and

a husband and wife—but only one is delinquent on taxes—then the

IRS can’t pursue that property because it’s owned jointly on that

basis.

Mr. HORN. We will have to continue that in the next round. The

gentleman from Texas, Mr. Turner, 5 minutes for questioning.

Mr. TURNER. Thank you, Mr. Chairman. Ms. Ashby, you were

talking a minute ago about the fact that SBA, before they disperse

the proceeds of the loan, they do ask whether the borrower is current in their payroll taxes. Is there some kind of certification, or

just merely asking across the table as you routinely go down a

checklist of things at loan closing?

Ms. ASHBY. It’s one piece of information that is requested on the

loan application. The prospective borrower is asked if they have delinquent taxes and, if so, on a separate part of the form they are

to provide information about who is owed, how much, the nature

of the debt and that sort of thing.

Mr. TURNER. So the question says, do you owe them or not? And

if they say they don’t owe them, then they go right on?

Ms. ASHBY. That’s correct.

Mr. TURNER. Couldn’t the SBA require some kind of evidence to

be produced by the borrower that the taxes are current? Couldn’t

you secure that kind of information? Couldn’t the taxpayer either

get it from the IRS or bring it in based on their payroll deposits

and that kind of thing?

Ms. ASHBY. That’s certainly possible. As Mr. Kutz said, in terms

of disclosing taxpayer information, any instance in which a taxpayer authorizes IRS to disclose the information, IRS can do so. In

your question and answer to your question, yes, a taxpayer could

somehow provide certification that taxes are current.

Mr. TURNER. You are saying that if there is a remedy here, it

may be one that could be implemented simply by SBA regulations,

and I would welcome your assistance in coming up with a suggestion to the SBA that maybe Mr. Horn and I might consider sending

to the SBA, requesting them to modify the regulations, because it

does seem totally inexcusable for somebody to get a loan or disbursements under a loan when they owe payroll taxes. That ought

to be paid first.

Mr. HORN. The gentleman is absolutely correct, and that will be

done. We will jointly send them a little note.

Mr. TURNER. If you could help us come up with what the right

suggestion is, we would appreciate it.

Ms. ASHBY. Please note, as Mr. Kutz said, it’s not just SBA.

There are other government agencies, Department of Education

with student loans, for example. There are other departments that

issue loans, make grants to delinquent taxpayers.

47

Mr. TURNER. We would welcome any suggestion along that line,

because it seems to me that the agencies themselves would have

the power to remedy that through their regulatory authority.

Mr. SEBASTIAN. Mr. Turner, there is actually some guidance that

was put out by the Office of Management and Budget in Circular

A–129 that specifically covers this particular circumstance in looking through a loan application, making a determination as to

whether the applicant is delinquent on any—including Federal tax

debt—and if so, the OMB circular would indicate that you should

deny the applicant the loan.

Mr. KUTZ. It’s kind of a good government type of circular, but it’s

a circular. I don’t think that it has any legal binding.

Mr. TURNER. It requires you to ask, but not ask for any underlying supporting evidence that you have in fact paid your payroll

taxes.

Mr. SEBASTIAN. And would indicate actually denying the applicant if in fact it is disclosed that they have tax delinquencies.

Mr. TURNER. In an SBA loan situation, is it not fairly common

that a disbursement might occur over a period of time under a

loan, or is most of the loan made all at once, Ms. Ashby?

Ms. ASHBY. I would assume so, but I am not that familiar with

SBA loans. That would seem reasonable.

Mr. TURNER. If you could help us with a suggestion to tighten

up on that, it seems like that certainly could be remedied. I notice

in California they have the requirement that a new business post

a bond before they can be in business. Do you think some bond requirement would be appropriate to ensure the payment of payroll

taxes?

Mr. KUTZ. That is effective in the State of California and that is

one of the things that some of the IRS revenue officers we spoke

to nationwide mentioned, particularly in that area of the country,

as a potential remedy to this. It is not a remedy, but it certainly

could protect the Federal Government more than they are now.

Mr. TURNER. What would be the pros and cons of a bond requirement for payment of payroll taxes?

Mr. KUTZ. Well, the pros would be in the Federal Government’s

favor, and the cons would be that it would probably cost the business a little bit more to startup. Businesses would have to pay a

fee to post the bond. So there would be a little bit more cost. There

also might be a little more time involved in starting up the business.

Mr. TURNER. I guess it would create an enforcement problem if

we did not have the cooperation of the States to do it? I assume

that if we had cooperation from the States, a corporate charter

maybe was not issued until a bond was posted; but in the case of

sole proprietorships, it might be hard to ensure that we get the

bond at the outset, at the inception of the business.

Ms. ASHBY. I would like to add just a cautionary note. When

dealing with how to handle government contractors and so forth,

there are extenuating circumstances sometimes, such as sole source

for some critical service or good. So all of that needs to be taken

into consideration in individual cases. It’s hard to generalize and

come up with one way of dealing with Federal contractors.

48

Mr. TURNER. What’s the main objection to providing in the law

that civilian benefits and payments under contracts with the Federal Government will not be made if there are delinquent payroll

taxes? What’s the downside? What is the objection?

Ms. ASHBY. I was going to say the main problem now is the system deficiencies and internal control weaknesses in IRS’ own

records. Before one would do something like this, one would want

to make sure that the tax is actually owed. Because of system deficiencies and timing differences between the time a debt actually occurs and when it becomes—when the revenue office becomes aware

to do something about it, the tax may have been paid.

Mr. KUTZ. You don’t want to have somebody having their Social

Security paycheck garnished when in fact they don’t owe taxes.

And that possibility exists, given the systems problems that we

have at IRS today.

Ms. ASHBY. All sorts of considerations that the IRS and the Federal Management Service are currently trying to resolve in order

to have a system in place by July 2000 to actually levy such payments.

Mr. TURNER. Thank you, Mr. Chairman.

Mr. HORN. Well, thank you. Let me just ask a question or two

to followup on it. I think Mr. Turner has an excellent suggestion

there. There is no law that says Federal agencies can’t share information. In fact, they can. Now, is the IRS compatible enough in its

computerization of this that it would interface with, say, agriculture loan agencies, HUD loan agencies, SBA and all of the others? Is that possible?

Ms. ASHBY. IRS can in fact share tax information for certain purposes under section 6103 of the Internal Revenue Code. It can

share such information with State and local governments as well,

but only for certain specified purposes.

Mr. HORN. That’s only limited to the States, not the Federal

agencies; is that right?

Ms. ASHBY. No. The fact is that IRS does share taxpayer information with several Federal agencies, Federal departments, and

several States and local jurisdictions as well. But for specific purposes such as for the Department of Education to determine whether or not to make a student loan, for local agencies to determine

whether or not someone qualifies for welfare benefits, for example,

there are specified reasons where such information can be shared.

And as of now, none of those reasons cover the instances that we

are talking about today.

Mr. HORN. So there is no problem, then, on interoperability or

compatibility——

Ms. ASHBY. I am sure there are some. I don’t know the exact nature or the extent of them and what it would take to overcome

them. I am familiar somewhat with the Department of Education,

because I worked in that area in GAO. There were systems problems that the Department of Education had to overcome to be able

to accept the information from IRS and to be able to use it in its

systems. I would imagine that’s true for other agencies as well.

Mr. HORN. When your team, Mr. Kutz, saw one person go in and

out of business five times, it’s clearly playing games with the tax

collector. Did anybody check to see what the U.S. attorney in that

49

area was doing, and had the IRS put that file into the office there?

That’s a clear pattern and practice, as far as I am concerned.

Mr. KUTZ. I don’t recall, but the pattern is very clear. What you

will see is several quarters, let’s say in 1994, where the taxpayer

doesn’t pay or the business doesn’t pay. Then the business appear

to shut the doors, and then a year and a half or half year later,

whatever the case may be, three or four more delinquencies for a

separate related company. And that ends, and then you will see another company. So the pattern was clear. I don’t recall specifically

whether or not that case was being pursued.

Mr. HORN. OK. Mrs. Biggert, 5 minutes for the vice chairman.

Mrs. BIGGERT. Thank you, Mr. Chairman. You mentioned that

the Federal Government is really subsidizing Social Security and

Medicare Trust Funds when these taxes have not been paid from

the general revenue fund. Do you have any idea how much of

this—is this on an annual basis or cumulative basis?

Mr. KUTZ. It is likely several billion dollars annually. We have

done an estimate of the cumulative subsidy, including self-employed or SECA taxes, and at September 30, 1998, we estimated

that the subsidies were about $38 billion. That included accumulated interest over time. This estimate is understated to the extent

that taxpayers have rolled off of IRS’ system.

After 10 years, there is a collection statute where the taxpayers

fall off of IRS’ system. So anything that is not on the systems anymore would not be included in that $38 billion estimate. On an annual basis, the subsidy is several billion dollars. Cumulatively it’s

been tens of billions.

Mrs. BIGGERT. Is the IRS in a position to be able to tell us how

much has been collected for their trust funds, or a report from you?

Mr. KUTZ. They concurred with the $38 billion estimate cumulatively. They may have a better idea how much the annual amount

is.

Mrs. BIGGERT. Then I think you mentioned in your written statement that States like Connecticut publish the names of delinquent

taxpayers to increase the compliance and generate collections.

Could this be done for Federal payroll tax?

Mr. KUTZ. Not right now with the Internal Revenue Code restrictions. And I would again caution, as Ms. Ashby did a moment ago,

on the data quality at IRS. You don’t want to be publishing taxpayer names unless you are certain that the taxpayers actually

owe, or the amount is correct.

Mrs. BIGGERT. Just because of the timing with people paying and

by the time it’s published they have already paid?

Mr. KUTZ. Right.

Mrs. BIGGERT. Then you report that the IRS and the Department

of Treasury are not offsetting any Federal payments against unpaid payroll taxes. Does the current law authorize the Federal Government to intercept or withhold Federal benefit payments to satisfy the delinquent payroll taxes?

Mr. KUTZ. Yes, it does. Under the Taxpayer Relief Act of 1997,

there is a continuous levy provision that allows the IRS to levy up

to 15 percent of Federal benefit payments to offset tax debt. That

provision is planned to be done maybe mid—next summer.

Ms. ASHBY. July 2000 is the current plan. It has not started yet.

50

Mr. KUTZ. It has not started yet. It will be rolled into the overall—under the Debt Collection Improvement Act, the overall offset

program for the Federal Government.

Mrs. BIGGERT. Then the Internal Revenue Code authorizes the

IRS to enter into installment agreements with taxpayers only if the

agreements are for the full amount of the liability. You reported

that as part of its fiscal year 1998 financial audit, that the IRS’

uses of installment agreements does not comply with the IRS code?

Mr. KUTZ. That’s correct. I will give you an overall example, and

then Mr. Sebastian has some examples from the trust fund recovery penalty work that we did. We found that for over half of the

cases we looked at, the IRS was in violation of that law. One of the

violations that we found as part of our 1998 audit was a $25 a

month installment payment on a $16 million tax debt. Mr. Sebastian has a couple more that he can share with you that we found

in this work.

Mr. SEBASTIAN. Yes. In two cases where we had unpaid payroll

taxes, one of the situations was a sole proprietorship and there was

no trust fund recovery penalty assessed. The outstanding tax

amount was about $220,000 for the unpaid tax. The payments that

were required under the installment agreement were essentially

$25 a month, which would have yielded less than $2,000 prior to

the expiration date of that particular unpaid tax assessment.

We had another situation in which—this was a corporation—two

officers were assessed trust fund recovery penalty assessments.

One officer entered into an installment agreement. The total dollar

amount of the trust fund recovery penalty assessment was about

$3.3 million. And here again when you calculate out the monthly

payments up to the point in time when that particular tax account

falls off the IRS’ records, the IRS would have collected $11,000.

Mrs. BIGGERT. When they entered into that agreement, does that

mean that that agreement satisfies their payment?

Mr. KUTZ. That’s what the law requires. But what we are telling

you is that is not what is happening as of the 1998 financial audit.

What IRS is supposed to do when accepting less than 100 cents on

the dollar, so to speak, is to go through what is called an offer and

compromise program where they are able to accept less than 100

cents on the dollar.

The issue with that is there are more stringent procedures to review the taxpayers records. I suspect that’s one of the reasons why

maybe some of the officers are circumventing that process to do an

easier process which—you can do an installment agreement right

now by telephone, is my understanding.

Mrs. BIGGERT. So what you are saying is that they entered into

that agreement and that has satisfied the IRS as far as the payment of those taxes?

Mr. KUTZ. It satisfied the revenue officer that entered into the

agreement, but it did not pay the full amount of the tax liability,

yes.

Mrs. BIGGERT. Is that tax liability still on the books or have they

wiped out the tax owed?

Mr. KUTZ. As Mr. Sebastian said, it would go off the IRS’ records

after the 10-year statute of collections, yes. So it will go away eventually.

51

Ms. ASHBY. Let me add that with respect to OMB circular A–129,

if there is an installment agreement and an agency contracts or

issues a loan or grant to that taxpayer, that is in accordance with

the OMB circular, if there is an active installment agreement and

the taxpayer is making the installments.

Mrs. BIGGERT. About how many of these agreements did you find

that were not tending to the law?

Mr. SEBASTIAN. This finding came out of our work on the fiscal

year 1998 financial statements of the Internal Revenue Service.

There were 93 cases out of a total sample size of 690 unpaid tax

assessment cases. In 48 of the 93 cases where there were installment agreements, we found the situation where the total amount

to be collected under the installment agreement would not satisfy

the outstanding tax debt.

Mrs. BIGGERT. Were most of these companies that had gone out

of business? Were the officers paying this or the companies?

Mr. SEBASTIAN. These 93 cases are really across the spectrum.

There are some businesses, there are also a number of individuals.

Mr. KUTZ. Many of those were for delinquent 1040 or individual

income taxes.

Mrs. BIGGERT. Thank you, Mr. Chairman.

Mr. HORN. Thank you. I think we will all have calls from our

constituents when we get back to the office as to where you get this

million dollar loan and only pay $25 back? Did I hear that correctly?

Mr. KUTZ. That is correct.

Mr. HORN. What kind of tax was this, or was this a benefit out

of a Federal agency that wasn’t the IRS?

Mr. KUTZ. The ones that Mr. Sebastian mentioned were for trust

fund recovery penalties where there was $150 being paid a month

on a $3 million balance. Most of these were——

Mr. HORN. It sounds like terrific terms. Were they serious, or

was their brother Uncle Louie or something? OK. The gentleman

from Texas, Mr. Turner, 5 minutes.

Mr. TURNER. Let me be sure that I understand. In these instances, Mr. Sebastian, these 48, the IRS had agreed to accept less

than the amount owed, but they had not gone through the offer

compromise program that would allow that?

Mr. SEBASTIAN. That’s correct.

Mr. TURNER. And you mentioned that if this amount is not paid

within 10 years, that it goes off the IRS’ collectibles. Is that because there is a 10-year statute of limitations?

Mr. SEBASTIAN. That’s correct.

Mr. TURNER. Would it not be appropriate that if a taxpayer is

willing to enter into a—whether it is an offer in compromise or

whether they just simply enter into an installment plan, that as a

part of that agreement the statute of limitation is tolled? Knowing

in the private sector any time that you acknowledge a debt, you

pay on a debt, you extend the statute of limitations that would otherwise run the collectibility of that debt against the debtor.

Mr. SEBASTIAN. Yes, Mr. Turner. In fact, that can occur as well.

The taxpayer can waive that statutory expiration period. In these

cases they did not.

Mr. KUTZ. We have seen that before as part of our test work.

52

Mr. TURNER. It would seem to me that there should be some requirement that if you are going to get the benefit of installment

payout or the benefit of offer and compromise program to reduce

your tax liability, that automatically the statute of limitations is

tolled against the debt that you are tying to pay. Would there be

anything wrong with that being a part of the law?

Mr. SEBASTIAN. Not to my knowledge.

Mr. TURNER. Is it statute that says that the taxpayer has the option to enter into an installment payout, but at the taxpayer’s option they can see if I can’t pay it in 10 years the debt is gone? Is

that the taxpayer’s option under law or is that regulatory with the

IRS?

Mr. SEBASTIAN. Under the specific provisions of the Internal Revenue Service covering installment agreements, that is, in essence,

the situation unless the taxpayer consents to tolling, as you indicated, the statutory collection period.

Mr. TURNER. So the only leverage that the IRS has is to try to

negotiate some kind of installment payout and also negotiate by

trying to persuade the taxpayer to waive the 10-year statute of limitations.

Mr. SEBASTIAN. That section of the Internal Revenue Service, as

currently written, that’s correct.

Mr. TURNER. I think we could strengthen the tax collector’s hand

if we just set in law that if you are going to take advantage of a

payout agreement and installment payout of your tax liability, if

you are going to take advantage of a compromise settlement, then

you have got to be willing to waive the statute of limitation. Is that

being too harsh? Am I thinking incorrectly here? Is there any

downside to my suggestion?

Mr. SEBASTIAN. None that I can think of.

Mr. TURNER. Mr. Kutz, am I off base here?

Mr. KUTZ. No, that is certainly a possibility for improving the

IRS’ hand in this.

Mr. TURNER. What is the defense that the taxpayer would levy

to argue against this suggestion? Is it unduly harsh or unreasonable?

Mr. KUTZ. They would have to pay more at the end of the day.

Let me just say one thing on installment agreements. When we did

report to you before that IRS was going to collect, I believe, $26 billion out of the $222 billion of unpaid taxes, much of what we did

see that was collectible was from installment agreements.

On the other side of the coin, the IRS has collected billions of dollars through these installment agreements. There are many installment agreements where the taxpayer is full paying the module.

But again, as Mr. Sebastian said, we did find about half of the installment agreements were being done inappropriately.

Mr. TURNER. Ms. Ashby, what would you say to my suggestion?

Ms. ASHBY. I know of no reason why your suggestion would not

be appropriate. I was going to say that the issue here is the particular vehicle that IRS is choosing to use to collect from the taxpayer. To the offer and compromise program, it would be perfectly

acceptable for the IRS to accept less than 100 percent of the debt,

not so through the installment agreement program. Apparently

that is, in essence, what is occurring. The IRS can deny a request

53

for the installment agreement, they can deny a request for offer

and compromise. It can, as far as I know, stipulate certain requirements such as a waiver of the statutory statute of limitations.

Mr. TURNER. Well, it seems to me that the law should work for

the IRS and the Federal Government just like it does, I know at

least in my State, and that is the statute of limitations doesn’t

start running until you have failed to make a payment. Any time

you owe a debt and you continue to make a few payments along,

the statute of limitation period runs from the date that the last

payment was made.

There is some valid reason for having a statute of limitation, but

it just seems to me that in the case of a collection of Federal taxes,

the statute of limitation runs from the date—is this correct, Mr. Sebastian—the date of the inception of the obligation, or the date of

the original levy, that we lose an important tool that every other

private sector debt collector understands and takes advantage of;

that is, the statute does not run until someone has refused finally

to make a payment?

Mr. SEBASTIAN. Yes. One other statistic that I might point out

is we apprised the IRS of the noncompliance situation during the

course of the 1998 audit. The IRS responded by issuing some guidelines to its collection division and revenue officers, staff, that tightened up the standards through which the installment agreements

would be entered into; i.e., calling for 100 percent payoff of the tax

liability.

If you take a look at some of the recent statistics that were published by the IRS, they are showing a significant drop in the number of installment agreements through the first half of 1999 in

comparison with the prior 2 years. So this may be a factor, the fact

that they are going back now and tightening their policies with regard to when they would grant or enter into an installment agreement.

Mr. TURNER. If a taxpayer enters into an installment agreement

or a compromise—which I think are valid tools, they are used in

the private sector, they are important ways to try to collect the

debt—but if they do that, and then they fail to keep their agreement, does IRS then——

Mr. SEBASTIAN. They have the ability to go back and pursue the

entire tax debt; that is correct.

Mr. TURNER. I think if we can change the statute of limitation

problem, we would be making a significant improvement in our

ability to collect our taxes.

Thank you, Mr. Chairman.

Mr. HORN. You are quite welcome. Let me ask you, when you

went over these various collection horrors, did you look at what

IRS had done to recoup them and did they use it with their own

revenue officers, or did they have private collectors? Did you ever

try to see any efficiencies and effectiveness in, say, private collectors versus revenue officers or revenue officers versus private collectors?

Ms. ASHBY. Well, to the extent that IRS issues private collectors—and to date, that has been only in a pilot program—the collectors did not actually take the final actions to collect the tax.

54

They simply located the taxpayer and contacted the taxpayer initially.

In the pilot, one pilot that has occurred, the results were not very

successful, not very encouraging. It ended up costing IRS more to

use the private debt collectors. Because of certain provisions in IRS’

contract with the private collectors, it cost the IRS more than the

collector——

Mr. HORN. Explain to me how.

Ms. ASHBY. Well, for example, one of the provisions allowed a

fixed fee to the collector for locating and contacting a taxpayer. It

wasn’t contingent upon collecting anything or it wasn’t a percentage of amount collected. So because of the fixed nature of the fee,

in spite of the result, that in and of itself cost IRS quite a bit. In

the case of the pilot, IRS had to take some of its collection

employees——

Mr. HORN. But you said that they are only going to get the person at a certain address? I would have thought that IRS would

have given them the address.

Ms. ASHBY. In lots of those instances IRS does not have a good

address. They may have an address but are not able to contact the

taxpayer at that address.

Mr. HORN. Well, then, doesn’t it make some sense that if a private collector finds them and refers them to IRS, that’s money they

wouldn’t have had?

Ms. ASHBY. If they in fact collect, if they are able to collect based

on that information. You might want to ask IRS about this later,

but it was IRS’ determination that it could not legally use private

collection agencies beyond the point of locating and contacting the

taxpayer. So any face-to-face meetings, any particular levying or

anything else IRS had to do itself, they had to take its collection

of employees to pursue those taxpayers.

In the particular case of the pilot, there were a substantial number of delinquent taxpayers that were what IRS considers deferred,

they owed a small amount of tax. And with deferred delinquencies,

IRS’ practice is to collect that money through offsetting refunds. In

these cases, a large percentage of those were part of the pilot

so——

Mr. HORN. Which pilot are you talking about, the one 2 years ago

under the previous Commissioner?

Ms. ASHBY. That’s right.

Mr. HORN. Yeah, well that was as phoney as they make them.

They gave them 5-year-old debt and expected them to come in some

with something.

Ms. ASHBY. That’s the only action to date. There has not been a

subsequent pilot.

Mr. HORN. We ought to be taking a look at that, but we can discuss it with the new commissioner.

Let me just ask two closing questions on my part. In your statement, you mentioned the extreme case of where the payroll tax

money was diverted to an individual that used the money to build

a swimming pool. Could you give us a little more detail on that

case and how many of those did you find?

Mr. KUTZ. Yes, we can give you more detail on that, and I guess

the case—it’s much worse than I described. Mr. Sebastian has the

55

details on that, and he will walk you through that briefly. It’s quite

interesting.

Mr. HORN. OK. Mr. Sebastian, it’s all yours.

Mr. SEBASTIAN. OK. This business actually was heavily involved

in Federal contracts, had contracts with the Department of the

Navy as well as other Federal entities.

Mr. HORN. That’s the swimming pool?

Mr. SEBASTIAN. Exactly. In fact, the business’ revenues, about 65

to 85 percent of their revenues over a 2-year period came from Federal contracts. The business withheld but did not pay forward to

the Federal Government payroll taxes in excess of $2 million. The

IRS determined through interviews with the former comptroller as

well as other third-party information that some of those funds were

actually being diverted to an affiliated company of one of the officers to purchase equipment, trucks, et cetera.

The IRS also determined that other funds—other of the company’s funds were being used to pay the estimated tax liabilities of

one of the officers to pay for the purchase or the installation and

maintenance of a swimming pool, to pay off the company president’s wife’s car loan, to purchase a tractor for home use, and to

pay for the maintenance of——

Mr. HORN. This is the suburbs or the farms?

Mr. SEBASTIAN. Excuse me?

Mr. HORN. That was in the suburbs or the farms?

Mr. SEBASTIAN. I can’t recall the exact location, and I can’t recall

exactly what the size of the tractor was. So there were more diverted payments beyond those for the maintenance of the swimming pool. And, again, the diversion occurred at the same time that

these payroll taxes were being withheld and should have been remitted to the Federal Government.

Mr. HORN. Yes. What about some of the reasons that individuals

continue to have unpaid payroll taxes at multiple businesses? Is it

simply poor business management or intentional disregard for the

individual’s responsibility to forward the payroll taxes? What’s your

judgment on that? Are they just over the edge and they feel, gee,

if I invest that money and my company will make it?

Mr. KUTZ. In most cases, I believe it’s poor business judgment.

Cash flow problems come up, and they’re faced with a choice of

paying the utility bill, the rent, or IRS. And I believe IRS falls to

the bottom of the list. And I don’t think that they really fully understand what they’re doing. I mean, I would kind of look at this—

similar to a 401(k) plan, where you’re withholding money from employees to send to the Federal Government, and you’re not paying

it.

I don’t believe everybody fully understands that they’re in kind

of a trustee capacity here as an officer of a corporation.

Mr. HORN. Mrs. Biggert, any more questions?

Mrs. BIGGERT. Thank you, Mr. Chairman.

I think overall our job and your job is to talk about the collectibility and what happens to the taxpayer. I mean, we’ve all ended

up having to pay for this. And it seems like we’ve got the education

program and we’ve got the Alert program and we’ve been talking

about maybe legislatively with the statute of limitations to tell

that. I think that’s an issue we have to look at. Because I think

56

the installment program has brought in some money, and whether

that will cut that off or not, I don’t know. But I think the things

that we can look at—what else can be—we can do, either as the

Congress or we can—you can do or the IRS can do to make sure

that we’re not just being able to collect 9 percent of that debt that’s

owed? Or even that there is so much debt that has been defaulted

on in the first place?

Mr. KUTZ. Well, I would say, first of all, hearings such as this

one where you’re able to talk with the IRS about some of the systems problems they have and the control problems they have certainly helps, and it helps them focus on some of the things that

they need to do.

One other possibility is with respect to the offset program, while

IRS is fixing its systems, setting up some sort of an independent

audit process before the information sent over to FMS is used for

offset purposes to determine that the actual data is correct. Because absent that, again, we do have some concerns about some of

the offset going on here.

And, with respect to the sharing of information with the States,

there’s possibilities there with respect to changing the law. Again,

I think this oversight hearing is a good start.

Mrs. BIGGERT. Thank you.

Mr. HORN. If the gentleman from Texas has any more questions,

please feel free to ask them.

Mr. TURNER. Just one. The IRS, as you’ve explained, is going to

implement the continuous levy against civilian benefits, and I believe Ms. Ashby said that that would be an authority to levy 15

percent.

Ms. ASHBY. Up to 15 percent each payment.

Mr. TURNER. Up to 15 percent. And I can see the wisdom in having some limitation on the amount that could be assessed, collected, delinquent tax against someone who is receiving some government benefit. How does that work with respect to vendors? That

seems to be the largest category of delinquent tax amounts, $7 billion. These are people that do business with the Federal Government. How is that program going to affect them?

Ms. ASHBY. It will work the same way with respect to other Federal beneficiaries. It’s up to 15 percent of each payment can be levied, and I believe that’s the intention.

Mr. TURNER. So if somebody has a contract to provide paper to

the Federal Government, there would be the authority to withhold

15 percent of the payment to that vendor in payment of the supply

of paper——

Ms. ASHBY. That’s correct.

Mr. TURNER [continuing]. To pay against their taxes?

Ms. ASHBY. Correct.

Mr. KUTZ. Certain programs are exempt from this, also.

Mr. TURNER. For example?

Ms. ASHBY. Needs-based payments, such as——

Mr. SEBASTIAN. Unemployment, unemployment.

Ms. ASHBY. Right, unemployment insurance payments.

Mr. TURNER. It just seems to be that the rule ought to be a little

tougher on a vendor who is supplying some product or service to

57

the Federal Government than perhaps any other category that

we’ve talked about.

Mr. KUTZ. Potentially, you could consider not letting venders get

Federal contracts, too. That’s another issue, should companies with

delinquent taxes have a Federal contract in the first place.

Mr. TURNER. Is the IRS, in implementing this 15 percent, are

they bound by that by law?

Ms. ASHBY. The 15 percent is statutory.

Mr. TURNER. Statutory, all right.

Thank you, Mr. Chairman.

Mr. HORN. You’re quite welcome. I agree with you. Maybe if we

put out the word, we will amend the procurement laws. And you’ve

got to pay your taxes. Suddenly billions might flow in.

So we thank you for your testimony. Don’t leave. We hope you

can stay through the rest of the hearing. And Commissioner

Rossotti and his team will be up. There might be some questions

we want to ask you. So get a seat in the front row, if you would.

And now we are honored to have the Commissioner. Accompanying the Commissioner is Mr. Paul Cosgrave, the Chief Information

Officer for the Internal Revenue Service; Mr. David Mader, Chief,

Management and Finance, Internal Revenue; and Mr. Charles Peterson, the Assistant Commissioner.

If you’re all going to testify and anybody behind you that’s going

to testify or have a loud whisper——

Mr. ROSSOTTI. I think we will be OK.

Mr. HORN [continuing]. Stand up and raise their hands. I only

want one baptism at a time.

[Witnesses sworn.]

Mr. HORN. The clerk will note all four witnesses affirmed.

We’re delighted to have you, Commissioner. Please render your

statement however you would like to do it.

STATEMENT OF CHARLES ROSSOTTI, COMMISSIONER, INTERNAL REVENUE SERVICE, ACCOMPANIED BY PAUL

COSGRAVE, CHIEF INFORMATION OFFICER, INTERNAL REVENUE SERVICE; DAVID MADER, CHIEF, MANAGEMENT AND

FINANCE, INTERNAL REVENUE SERVICE; AND CHARLES PETERSON, ASSISTANT COMMISSIONER

Mr. ROSSOTTI. Thank you. Thank you, Mr. Chairman, Mr. Turner. I’m glad to be here. I think that the GAO has provided a very

thoughtful examination of IRS deficiencies with respect to the collection of payroll taxes and the Trust Fund Recovery Program.

We agree with the finding that most of these payroll taxes on the

IRS books at the present time are not fully collectable, but, more

importantly, I think GAO has identified, as they have in the past,

some long-standing management systems’ deficiencies that have

prevented us from collecting or solving many of these problems.

And I think these same shortcomings tend to be the root cause of

many of the problems described in this report as well as other reports.

And, Mr. Chairman, as we had discussed on a number of occasions, our decades-old technology is really a key factor, a stumbling

block, if you will, in our ability to provide adequate service and effiVerDate 11-MAY-2000 12:16 Aug 01, 2000 Jkt 000000 PO 00000 Frm 00061 Fmt 6633 Sfmt 6633 C:\DOCS\64388.TXT HGOVREF1 PsN: HGOVREF1
58

cient tax administration, including, in particular, early collection

and intervention on payroll tax issues.

We need to recall that the basic data systems that the IRS uses

to keep records on all tax papers, tax accounts, including payroll

taxes, are built on about a 30-year-old set of systems, which is a

fundamentally deficient foundation for tax administration. And

GAO has repeatedly reported and continues to report, as they did

this morning, the IRS cannot provide reliable taxpayer account and

financial information for many purposes, including the ones that

are discussed here today.

In the opinion on the audited custodial financial statements,

GAO cited as a material weakness the lack of a system to be able

to routinely generate reliable and timely financial information for

internal and external users; and, in particular, GAO noted the lack

of subsidiary ledgers that track unpaid assessments on an ongoing

basis.

So, Mr. Chairman, we simply cannot do our job properly in many

dimensions without this data. And particularly updating our business practices to both serve taxpayers better and also to be more

efficient in collecting taxes really depends on our ability to update

these computer applications and to convert all of the existing taxpayer data.

This, as we’ve noted, is a very vast and complex and, frankly,

risky undertaking that’s going to take a number of years to accomplish. However, we think an important initial step was taken last

month when we received from the Appropriations Committees and

with the advice of GAO the authorization for release—the first release of funds from the Information Technology Investment Account.

Now, this is a first installment toward the development of a new

set of computer systems and a significant step forward in our overall modernization plan. Now that’s technology.

I’ve also testified before your committee and other committees

that the whole approach that the IRS takes to collection is not at

the level of best business practices employed widely today in the

private sector and especially the financial sector. And this process,

which I’ve now had put in chart form, Mr. Chairman, and it’s

shown over there to your left where it says collections, current

State process and issues, is—as you can see, I don’t expect you to

see all the detailed boxes there, but we can provide for your illumination copies of this to look at in detail—but it basically shows

the process that exists today.

And this process is deeply embedded in a whole variety of laws,

regulations, operational procedures, as well as in particular technology; and the difficult thing here is that these factors together

are very tightly coupled. I wish it weren’t that way, but it is the

case. And that being the case, there is no way really to make major

improvements without addressing all of these factors together, and

what that tells you is that there’s no quick or easy solution.

But I think we do know what the solution is. In fact, I think it’s

really quite clear, and that’s what we call our modernization program, which includes a totally revamped approach to collections.

And the whole idea here is that, to the extent possible, we will prevent taxpayer problems from occurring in the first place through

59

education, outreach and intervention with specific taxpayer groups,

such as small business owners and new business startups; and

where problems occur or may occur, we will begin to be able to address these compliance problems such as repeated lack of payment

of payroll taxes in the most effective way; and when we do identify

a potential problem, the risk of nonpayment, we can use a variety

of techniques to settle that debt.

So that’s the direction. But in order to achieve that, we must

have new technology which provides an updated and accurate history of all taxpayers, individuals or businesses who are responsible

for debt.

I think, as your committee has looked at this issue, you’re well

aware that any effective collection process, no matter who executes

it, no matter what the sector is, depends on knowing accurately

and on a current basis who owes the money, how much is owed,

and what is the payment history. Those are fundamental; and, unfortunately, we are deficient in all of those.

So in addition to that, of course, there are other important pieces

of technology which could be useful, such as updated decision models, telephone, predictive dialing equipment and various kinds of

collection support systems, and we don’t have any of those either

at the present time.

Moreover, I think your hearing has highlighted an important

point, which is that for the particular type of taxes and the taxpayer population that has been addressed in today’s hearing, collection is not a one-time event, it’s not a set of debts that you hand

over and you collect it. It’s an ongoing process. And this requires

a carefully constructed and ongoing monitoring process which allows you to intervene at the right time and to take the appropriate

action based on what you know. And, again, this is what we don’t

have.

So I just want to note, Mr. Chairman, that in another report, a

GAO report that was released not too long ago on the first anniversary of the Restructuring and Reform Act, GAO stated, and I

quote, we agree with the Commissioner that various components of

IRS modernization must be implemented in an integrated fashion.

Simply restructuring the organization, for example, without concurrent revisions to the work processes and related information systems will do little to improve the quality of service being provided

to taxpayers.

I think we’re in agreement with GAO on the nature of the problem, and it is particularly relevant to the challenges that are outlined today.

So, in conclusion, I would commend GAO for its thoughtful and

considerate examination. We fully comprehend the significance of

approximately $49 billion in payroll taxes owed the Federal Government, and we will use the GAO report to make what near-term

efforts we can to correct the deficiencies, especially within the trust

fund recovery system. We believe, however, that in the long run

the best and in fact the only solution to these fundamental problems is through the massive change program that we already have

under way. It will take years and it will take some significant and

assured resources to complete the underlying—to solve the underlying problems in both technology and organization that cause these

60

unpaid tax assessments to occur. However, with the continued support of the Congress and the understanding of the time and resources involved, I believe we can succeed.

Thank you, Mr. Chairman.

Mr. HORN. Well, thank you.

[The prepared statement of Mr. Rossotti follows:]

61

62

63

64

65

66

67

68

69

70

Mr. HORN. Let me ask you a few questions that specifically relate

to your statement.

I’m delighted you feel good about the computers that have been

authorized and the money appropriated in Mr. Kolbe’s budget, I assume. Was that all you wanted or were you in on that budget

cycle? Maybe you got little after they had started firming up downtown.

Mr. ROSSOTTI. Well, you’ve got two different things here. There

has been $500 million that was previously appropriated for the Information Technology Investment Account, which was held aside

specifically for technology until we could get adequate plans together. And the point I made in my testimony is that we recently

got the first $35 million allotment out of that fund. I think that

really was an important step. It’s really, literally, just the first

step, but it indicated that, you know, we’ve made progress in defining our plans and getting a management process in place.

The ongoing budget issue is still being debated, as you know, in

the Appropriations Committees and, you know, there’s certainly—

from my point of view, it’s very, very important that we get at least

what’s in the President’s request in order to be able to continue

progress. So these are two separate issues.

Mr. HORN. Do you know offhand what the President’s request

was for you on this?

Mr. ROSSOTTI. Well, the President’s request in the total appropriation for all of the IRS was $8.1 billion for fiscal 2000. It did

not specifically include any additional money for the Information

Technology Investment Account, because there was already this

$500 million that had been advance funded and, given our timing,

it was not required to have an additional increment funded in specifically 2000. It will be very important to get that increment beginning to resume funding in the following fiscal year.

Mr. HORN. Well, you should be involved, I guess, around now for

the President’s budget that he proposes to Congress in January

2000. So——

Mr. ROSSOTTI. Well, yes, that’s the fiscal 2001. We’re already

working hard on that.

Mr. HORN. Right. What do you think you will need that you

didn’t get this year?

Mr. ROSSOTTI. Well, I’m not prepared to talk about specific numbers for 2001. But I think the important point was that the Information Technology Investment Account, that particular segment

was advance funded in prior fiscal years. There was no funding in

fiscal 2000, which was appropriate, because we were not—timing

wise we weren’t in a situation where we needed it. But we will

need it again in 2001. So that will have to be resumed.

Mr. HORN. Right. Well, I’m assuming you will put in a full request on that?

Mr. ROSSOTTI. Yes.

Mr. HORN. You know and we know OMB plays all sorts of games.

If they know we’re going to add the money back, they cut the budget. Good example, they slashed away at the space program, they

slashed away at the Veterans, they all know we’re going to add the

money back, and they can look like a group of economizers. So,

hopefully they will take yours seriously.

71

How do you know in IRS when a person has begun a business?

What do you use as your sources? There are thousands of businesses everyday.

Mr. ROSSOTTI. The main thing that we get is they apply for a

number. They apply for an employee identification number.

Mr. HORN. How do they know—see, the average citizen or one

that’s a new immigrant has an idea, might work out of the house,

et cetera.

Mr. ROSSOTTI. Well, of course, you know, if they want to establish an entity, they have to apply for an employment identification

number. If they just want to work out of their house as an individual and be a self-employed business——

Mr. HORN. With a business in this day and age, you have computers, as you know.

Mr. ROSSOTTI. Yeah. You don’t have to do anything if you’re an

individual and you’re just working yourself as a self-employed individual. But if you want to have employees and pay payroll taxes,

you have to have an EIN, but, of course, herein lies the issue, there

are people—I can give you examples of people from my own previous business, when I was in the software business, where a programmer would leave the company because they had, you know, a

lot of talent in programming software, said I can go out and be an

independent consultant and make more money and be more successful. So they would do that, and the first thing you know they

would get together with some other people and have some employees. The furthest thing from their minds was payroll taxes. I mean,

most of those folks, frankly, had never seen a, you know, tax form

other than maybe their own personal income tax return. They can

be easily somebody that can get behind a quarter or two before we

would find out about it, and they would get in serious trouble.

One of the key strategies that I think we need to follow for this

segment of the population is to work in cooperation with, for example, State agencies and other places to educate these folks. We

have education programs now, but, you know, more specific intervention at a very early stage through whatever source, either when

they apply for a number or when we find out some other means

that they’re starting a business, just let them know—look, this is

what you need to do to make sure you’re complying properly with

the law. We have some programs like that now, but it’s a very, very

small percentage of our operation.

We have some initial steps that we’re taking over the next fiscal

year, again, modest, to try to what we call mentor new employees.

It’s really very simple—new employers—it’s really very simple. It

is just telling them, here are the forms you need to file, and here’s

what you need to do to make sure you’re staying compliant. But

that is probably the cheapest thing we could ever do to get problems solved before they occur, and that will be a major part of our

emphasis of our new program beginning with small steps next fiscal year.

Mr. HORN. Because a lot of that can be done with the local municipality. People do know, gee, I guess I better go down and get

a permit for this and that. It seems to me there is one place to educate more people.

Mr. ROSSOTTI. Absolutely, I couldn’t agree with you more.

72

Mr. HORN. Let me ask you, you heard my comments on the private collector versus your own revenue officers. Are you going to

get into an experiment on what can be done in the private sector?

Mr. ROSSOTTI. Well, you know, I think that—here the issue becomes, what’s the first step and what’s the priority step? I think

there’s obviously potential to do those experiments over time. But

I think if you look at that chart over there and you mention, well,

you know, the last experiment they give old debt, that wasn’t realistic. But the difficulty was, if you look over there on the right,

that’s the place that our collectors—I know you can’t see too much

of it, but we will give it to you—but the far right third of that chart

is basically the time when our actual collectors or field collectors

get the money, get the debt that’s turned over to them.

By the time it’s there, it’s typically a couple of years old. So when

they did the experiment, you know, actually I don’t honestly think

there was an attempt to rig it. It was just all they did was they

took what the collectors get, and they gave the same thing to the

private collectors. The private collectors said, what’s this? This is

junk. We can’t collect this. I said, yeah, that is exactly what many

of our collectors are actually collecting on.

So to really do a proper experiment and do things realistically,

you really have to get a much earlier intervention into this cycle.

If you look at the middle chart there, this is a chart that one—

where analysts that are working on our new computer systems put

together, and what it shows is from some private sector sources the

probability in the private sector of collecting debt, those are the

green bars as time goes by. And it goes down to about, you know,

if you can see that, 121⁄2 percent, 24 months——

Mr. HORN. I can see that.

Mr. ROSSOTTI [continuing]. Well, if you look down at the bottom,

that’s about the time that we actually turn the debt over to our

revenue officers. So, I mean, the game is almost over by the time

they get it.

Mr. HORN. Presumably you’re going to change that?

Mr. ROSSOTTI. We’re going to change it. But if you look at those

boxes on the left what you can see is there’s an awful lot of boxes,

and they go through a series of steps. That is not something that

I or anyone else can decree has changed very, very quickly when

you recognize that some of those boxes are, for example, written

into law. I mean, for example, the due process, the Revenue Restructuring and Reform Act just added a whole lot of new boxes

with some of the procedures—some of them are derived just by procedures, and all of them are embedded deeply into the computer

systems that we have.

So this is why, you know, I’ve said and GAO I think agreed,

there is no—it would be good if you could pick out one piece of this

and just say let’s fix that. People have tried that before, and it’s

failed every time. Honestly, I think it would fail again. You really

have to reengineer this process, which includes all phases of it, to

make it really effective.

Mr. HORN. The key is to do it earlier, the first 6 months?

Mr. ROSSOTTI. Absolutely.

Mr. HORN. Because otherwise——

Mr. ROSSOTTI. You can see the green bars show you——

73

Mr. HORN. Yeah, they think it’s a grant. It’s like students. If they

got a loan and nobody says, hey, I want my interest, they’re going

to say, gee, I guess somebody just turned it into a grant; I didn’t

hear from them.

Mr. ROSSOTTI. Well, the other thing is that, as your hearing

pointed out in—and the GAO report pointed out in this particular

sector, the payroll taxes, people are paying all the time. So I mean

it isn’t a matter of just a one-time debt, it’s an ongoing monitoring

process. And with the right kind of computer systems, the private

sector does this all the time in the credit business, that’s an ongoing process as well.

It’s really quite feasible to monitor with statistical miles to try

to figure out where the risk is. If somebody is late one or two times,

they may not be a risk. They may be away on a vacation, and they

just didn’t pay the bill. In the other case, if you had the right information, you could find out very quickly there’s a risk. We don’t

have anything like that kind of information available at the IRS.

Mr. HORN. Well, is there a way to really get at that?

Mr. ROSSOTTI. Well, I think there is, and that’s what we have—

I think that the whole—what we call our modernization program

basically comprises three elements. It comprises reorganizing so we

have, you know, instead of 43 different people collecting, we have

a central process to oversee this. That’s management.

The second one is technology, which is what we’re working on

through the ITIA account.

And the third, that enables you to reengineer this to basically do

what’s on those green bars there.

I mean, the thing about this, it’s really not hard to know what

to do. We know what to do. Getting it done in the magnitude of

what we’re dealing with and in the—with the constraints we have

is not so easy.

Mr. HORN. The gentleman from Texas, Mr. Turner.

Mr. TURNER. Mr. Rossotti, you heard my discussion earlier about

the possibility of a bond requirement for the payment of payroll

taxes. And I assume if you had one we would have to maybe apply

it only to employers that have a certain number of employees or

greater, certain size payroll or greater, so every mom and pop

wouldn’t be having to file or post a bond. But do you think there’s

any wisdom in considering a bond requirement?

Mr. ROSSOTTI. Well, there certainly would be wisdom from the

point of view of reducing the risk of nonpayment of payroll taxes.

I don’t think there’s any question.

The difficulty you get in, as the GAO representative noted, is

that it does place an additional burden on the taxpayer. And, really, if you look at our whole mission at the IRS, it’s bouncing multiple objectives. Because on the one hand we want to make sure we

achieve compliance and we don’t have people failing to pay what’s

due. At the same time, we want to make that process as easy as

possible.

And I go to another hearing once a year or so with Senator Bond,

Small Business Committee, and their perspective is how can we

make it easier for small businesses to startup, which is a very appropriate thing do to. We try to accomplish both. I think a bond

program would have the—have to be very carefully considered in

74

terms of what its potential burden on new businesses that we’re

starting up might be. That would be the principal downside.

Mr. TURNER. Payroll taxes appears, if I have my data correct, to

be a fairly sizable portion of your uncollected taxes, about one

quarter of your total taxes?

Mr. ROSSOTTI. Yes. To put this in perspective, though, I don’t

want to minimize the importance of this number, the $49 billion

and the $38 billion that it represents, but payroll taxes and withholding taxes are the largest share of the cash that comes into the

Federal Government. I mean, it’s a very large amount.

I mean, our total in fiscal 1998—our total receipts from payroll

taxes, and this is both employee and employer shares, was about

$550 billion, and if you add in withholding payments for withheld

income taxes, you’re getting around $1 trillion. So I mean this is

the largest single source of money coming into the Federal Government. It’s an enormous sum, and it’s actually attributed to the taxpayers of America. But most of this actually comes in quite smoothly, and it’s more the exception that causes the difficulty.

On the other hand, the exceptions, because of the size of the system, are still very large. So I don’t want to minimize them. But in

terms of total scale of operations, there is around $1 trillion a year

coming in from both withholding income taxes and payroll taxes.

The reason that it shows up as a significant workload for revenue officers is because of the ongoing nature of this. I mean, the

basic kind of—you know, you really have two kinds of tax issues—

tax collection issues. One is from assessments, which are made, for

example, when we audit someone and find that they underreported

their taxes, and now they owe X amount more, and then we have

to go and collect that money from an individual.

That’s more of a sporadic event. I mean, most people don’t underreport every year. The payroll taxes and withholding is something—for an in-business taxpayer is an ongoing, weekly kind of an

operation. So, clearly, the techniques of collecting and the intensity

of the need to collect is different.

Mr. TURNER. When will you be able to implement the continuous

levy that you were authorized to do in the Taxpayer Relief Act of

1997?

Mr. ROSSOTTI. Again, this is a program that involves primarily

the financial management service and the IRS together, although

our role is mainly to provide information to them. The current target I believe is to have it done, to be implemented in July or let’s

say the summer, or about a year from now in the year 2000.

On that chart over there on the right, it shows you actually the

simplified version of the process that goes through. And, again, I

know you can’t read these, but you can get the impression. We will

be glad to give you the detailed chart. But it shows you the various

steps that have to be done.

I mean, it’s definitely a good program, the 15 percent levy, because it will be able to assess, you know, benefits of people, Federal

benefits from people. But it is not a simple thing to do because, as

you can see in these charts, there are a number of steps. For example, because of the Restructuring and Reform Act, there’s what’s

called a due process in the collections process.

75

So before anybody can be levied, there’s an entire process that

goes all the way through multiple steps internally within the IRS

and potentially to the tax court before you can actually assess a

levy. And before you can give somebody a due process in collection

notice, you have to know that there’s a valid levy source. So part

of the process going back and forth there are, first, we have to find

out that there’s a tax debt. Then we have to find out if the financial management service actually has, for example, some sources of

levy, such as a Social Security payment or a vendor payment. Then

if there is, we have to send—go through the whole due process in

collection law, which is a multi stepped process in and of itself.

Once that’s done, it has to go back to the financial management

service.

So I think, you know, when the GAO representative said they believe this is a good program, but there’s cautionary notes, I think

this is some of the things that they were saying. This is not to undermine or any way—I don’t want to give the impression that I’m

saying this is not a good program. I believe that it makes a lot of

sense to do this. It’s just to try to provide a little bit of information

about what’s involved.

As best I know it today, and it does depend in part heavily on

what the financial management service does, it should go into effect for everything—well, for most of the things that are authorized, except for wages of Federal employees. There are some complications there. But it should go into effect, for example, for vendor payments and Social Security payments next July or so.

Mr. TURNER. Finally, I would like to get your opinion on the

issue of the statute of limitations that I raised with the GAO. Do

you think the law should be as it is, giving the taxpayer the option

to waive the statute of limitations?

Mr. ROSSOTTI. Well, let me just say that the situation has

evolved little bit since the GAO—the GAO did the work they did

in conjunction with their audit of the 1998 financial standpoints.

But during approximately the latter part of fiscal 1998, we actually

at the IRS, as part of some of our reviews that we were conducting,

you know, basically discovered or realized that this program was

not being implemented properly—and really the way it arose was

that revenue officers or others that were collecting, what they were

really doing was that they were going into installment agreements

in a lot of cases for the authorized period of 10 years. And then

what was happening is, let’s say a few months before the statute

expired, we had a computer system that was bumping these things

out and they were going back to the taxpayer and requiring them

at that time in most cases to actually extend the statute of limitations, the alternative being potentially other action—other enforcement action such as a seizure of assets or a levy of assets.

So they were basically, in most cases, requiring the taxpayer to

extend these agreements. And we found cases where people were

on agreements for as long as, frankly, 30 or 40 years, which is

somewhat dubious from a lot of point of views.

Furthermore, what we also found is that practice, although it

was well-intentioned, actually violated a prior statute on the Taxpayer Bill of Rights, which forbid us from basically requiring a taxpayer under threat of enforcement action to extend a statute.

76

So at that point, which was approximately a year ago this summer, we completely revised a lot of these procedures and basically

don’t allow installment agreements any longer which don’t pay off

the full loan during the statute or I think it’s a 5-year extension,

one-time 5-year extension. See we can request the taxpayer to

make an extension if we do it up front at the time—as you indicated, at the time that we make the installment agreement.

So under our current process what it boils down to is, if you can

pay off the entire loan with one extension of the statute, we can

then enter into an installment agreement on that basis. The alternative is to have an expanded offer in the compromise program,

which is the second leg of the stool, the second change that we’ve

made. And as of January of this year, we did issue new guidance

on the offer in the compromise program, which allowed us to have

a much wider range of different kinds of offers, including deferred

payment offers, which is essentially a combination of an installment agreement and an offer in compromise.

So we were—basically, if you can look at it this way, we are in

the process of basically revamping and reconsidering all of these

tools, so that we have a—I mean, we have to conform to the bill

of rights, Taxpayer Bill of Rights’ issues. We have to conform to the

statute of limitations’ issues, and we have to try to figure out what

is the best tool to collect the most money from the taxpayer. And

this is part of this major revamping process that we’re in.

I think in terms of the statute of limitations, we actually have

the authority now essentially to work with the taxpayer to request

an extension of the statute in order to achieve a full payout

through an installment agreement. And if they don’t accept that at

the beginning, we do have a number of tools to, you know, to essentially provide some enforcement authority that I think gives an incentive for the taxpayer to work with us to extend that statute.

Mr. TURNER. So you don’t think it would be helpful at all if the

statute of limitations ran from the date of the last payment a taxpayer made, rather than from the date of the initial tax obligation?

Mr. ROSSOTTI. Well, that’s a technical question. I think what we

would like to do is to get back to you on that. I think that particular question—I don’t think we can adequately think it through here

on-line.

Mr. TURNER. That’s fine. And I would urge you to look at State

laws regarding collection of private debts. I know in my own State,

statute of limitation runs from the date of the last payment on a

debt. Oftentimes, debtors refuse to make a payment because they

know the limitation period is running, and if they make a payment

they’re going to extend the statute.

Mr. ROSSOTTI. There are those intricate byplays that you get into

with these statutes. But I think we will be glad to take a look at

this particular issue that you’ve raised and get back to you with

some thoughts on that.

Mr. TURNER. Thank you.

Thank you, Mr. Chairman.

Mr. HORN. Mrs. Biggert, vice chairman.

Mrs. BIGGERT. Thank you, Mr. Chairman.

Mr. HORN. Eight minutes.

Mrs. BIGGERT. Thank you.

77

Mr. Rossotti, the GAO report noted that about 70 percent of the

amount owed in delinquent taxes predates 1994. How long on the

average does it take for the IRS to go knocking on somebody’s door

after they first default to require a payroll tax deposit? I can see

the chart. It’s 24 months. Where it’s——

Mr. ROSSOTTI. Well, it depends—what happens is, as you can basically see in this chart here, but we will get it for you, is the first

process is the notice process, normally is a notice process, where

they get some notices depending on whether it’s business taxes or

individual taxes.

Mrs. BIGGERT. How long does it take for that notice to go out,

on the average?

Mr. ROSSOTTI. The first notice will go out maybe—if I can get

any colleague here to help me on the precise timing.

Mr. PETERSON. Sure. Basically, on a trust fund, which is a little

bit accelerated over an individual 1040 liability, normally, it’s

about 3 months from the time the return is filed until the time

someone knocks on the door. And in the intervening time you received a couple of notices and hopefully had a call from the automated telephone system, but it would bypass a lot of the normal

processing. And normally it would be about 3 to 4 months from the

time the return was filed until the time that someone would be out

talking about the business.

Mr. ROSSOTTI. I should note that a return is filed, you know,

after the end of the quarter. So you’ve got a whole quarter of deposits, and then you’ve got the leg time to until the return is filed. And

then you’ve got potentially up to 4 months, you know, before someone—and that’s probably the most accelerated process we have,

and that’s a whole lot faster than most of the processes.

Mrs. BIGGERT. That really would then be 7 months?

Mr. ROSSOTTI. From the time of the deposit, you know, depending on, you know, a deposit goes weekly or biweekly.

Mrs. BIGGERT. Do you have any statistics then about how many

companies have already gone out of business before they receive

the first notice, if it’s 7 months?

Mr. PETERSON. No, we really don’t have. We can probably look

to see if we can do an extract on that. But I’m not sure if we would

have that data available anywhere.

Mr. HORN. Get the microphone a little closer to you, Mr. Peterson.

Mr. PETERSON. Sure.

Mr. HORN. Thank you.

Mrs. BIGGERT. I’m just trying to figure out how many businesses

are notified and they’ve already gone out of business, because it

seems like the process takes such a long time.

Mr. ROSSOTTI. Well, we don’t have the exact numbers, but, without having any numbers, we already know it takes too long. I

mean, our whole process is to reengineer this. We do have this

Alert system, as GAO has noted, that tries to get some intervention

earlier, but it has its limitations.

Mrs. BIGGERT. With your revamping of the computers and your

program, will there be something done with the first area? GAO

also noted that it didn’t seem like the First Alert was working. Do

you have something to change that?

78

Mr. ROSSOTTI. Yes. I think that—again, this is where you get

into this intricate complication of regulations, organization, technology, and so forth. I mean, part of the problem is that, you know,

that what triggers the Alerts now is a very crude kind of a process.

I mean, it requires I think four quarters of delinquent taxes, you

know, which is pretty stringent criteria. So, you know, and then we

have a limited number of revenue officers that can do this, so

sometimes the Alerts don’t always get followed up on.

The goal where we need to go on this is to have much better history and much better records and then use these—what the private

sector uses in the credit card business are risk prediction models.

They take all the things in the computer into account, including

past payment histories, the delinquencies, you know, the patterns

of payments and all of these things. I mean, you probably made a

credit card charge at some time—most people have—where they intervene right on the spot where you were making the charge and

called you back to verify that it was really you that was making

the charge, because their models have detected that particular payment even.

So I mean that’s how sophisticated it can be in the private sector.

There’s nothing about our process that says we couldn’t take advantage of that kind of technology, if we had the technology. And

the effect of it would be that we would know in a much more precise way where the real risks are and where we need to intervene

and when and we can take the appropriate action.

The appropriate action might be do nothing. Because this is the

taxpayer that, you know, based on history is really going to pay,

and it’s just probably a clerical error or something, don’t waste

your resources on it to look. This is a real risk, high risk; and you

need to send a revenue officer out there right away and sit down

with that taxpayer and figure out what to do or it could be an intermediate ground, just sending them a notice or just sending a

phone call.

So that’s—I mean, it’s really not hard to figure out what we

should be doing; and it’s very, very well modeled in the private sector. But, again, I don’t want to sound like a broken record, it really

depends on having the right technology, the right information and

also the right management structure so when you get the information you can send it to the right people and have them act on it.

Now, right today it’s—the Alert system is a very crude—very,

very crude attempt to approximate that kind of approach. And, you

know, as GAO indicated, being crude, it doesn’t work that well.

Mrs. BIGGERT. And they also mentioned that there were certain

types of businesses like the construction business or the restaurant

business that are more prone to fall into that, the category of defaulting. So this would be an area then that would be targeted for

the type of business that you might send to the IRS?

Mr. ROSSOTTI. Hopefully more precisely than that. That could be

a factor that would be taken into account. Basically what you want

to know is, where is your risk, and you want to know that very

quickly so you can do something about it.

Mrs. BIGGERT. Then are there any initiatives that the IRS has

taken to target high-risk industries, or are you intent to be more

precise than that?

79

Mr. ROSSOTTI. I think, honestly, at this point, you know, that we

really don’t have fine-grained enough information to do that without potentially—you know, you have to be very careful in the IRS

when you start, quote, targeting anybody, because they—people on

the whole don’t like to be targeted, unless you can prove there’s a

very, very good reason to it and just identifying a whole industry

is not so wise.

But I think what we need to do is to—I mean is to—I keep

sounding like a broken record—but to have more accurate and updated information. We can apply real models that would then be

rigorous that would allow us to intervene quickly. In the meantime,

I think we’re stuck with some basically modest refinements.

The one key thing, and you might want to mention the mentoring program, we have one initiative that we approved right now

that I think gets partly to Mr. Horn’s point about the new employers. And I would ask Mr. Peterson to describe this, because this is

one thing that we can do now.

Mr. PETERSON. We actually started a test that’s going on this

week, and it’s a program which he is talking about that’s called

Mentor and Monitor. And what we’re doing is with every—in a certain area—we are actually testing this out in the north Texas district, but with every business that applies for a identification number in that area we’re making contact with every one of those and

explaining to them what their requirements are, explaining to

them what they need to do to make sure they’re filing all their Federal taxes, including payroll taxes.

We then go ahead and monitor their track record and make sure

how they’re doing; and if there’s kind of a missed payment or anything else, we give them a call right on the spot. And if they have,

quote, significant problems, we will send a revenue officer out. And

we’re doing that against a test group to try and get an analysis of

what that kind of attention does in terms of the general business

versus the ones that get the extra attention and see if that isn’t

a very valid way of starting to do a little bit of what we’re talking

about in terms of more outreach and more monitoring to make sure

that people are aware of their tax responsibilities, as well as complying with them.

Mrs. BIGGERT. Is there anything with the States when a company files for articles of incorporation that there would be information—is there information given with that incorporation or would

the States perhaps include that in their——

Mr. PETERSON. Not in the Mentor and Monitor program. I mean,

there are things that we have done, but the difficulty with that is

those kinds of agreements are done State by State under the FedState agreements. A lot of States that have no tax have no, really,

interest in entering into a Fed-State agreement with us at this

time because there’s no quid pro quo of exchanging information. So

it really is a State-by-State basis right now. We’ve got a program—

obviously a formal program that attempts to do that, but it really—

our success with those kinds of agreements really do run by the individual State and their wish to get involved with that.

We are trying to do something in the collection area this fall in

terms of—for the first time, we’re doing a nationwide Fed-State

symposium on some of the things we can do to try and share those

80

kinds of ideas and do things together, but that’s a first-time effort

as well.

Mrs. BIGGERT. Thank you.

Thank you, Mr. Chairman.

Mr. HORN. On that last point, it seems to me if you picked a city,

you could pick mine if you want, Long Beach or the State, California, you can get those incorporations and those business licenses.

They’re glad to render it for a fee, and that might be one way to

check when businesses are coming in and going out. So it just

seems to me there’s a way to collect $49 billion if we put our minds

to it.

And I guess that I would ask you, Commissioner, what, in particular, are you going to do in response to the GAO report? I know

you feel they’re right.

Mr. ROSSOTTI. Right. I mean, as I indicated in my testimony,

there are some specific individual initiatives that we can take, particularly with respect to the trust fund recovery penalty. We have

some initiative to try to clean up what are called the transcripts

in the initiation of these trust funds recovery penalties. Although

I don’t want to overstate the effect of that, because this is one of

the most extreme examples, as GAO has noted, of the deficiencies

of a computer system where we have two tape files, you know, one

on individual taxpayers and one on business taxpayers, and the

process of managing this trust fund recovery is very, very labor intensive and very error prone, but we do have to do some things to

try to improve the cleanup of that, and that’s probably one of the

most important things.

We do have a few specific initiatives on the payroll. Probably one

of the more important is this pilot project on the early intervention

with monitoring and mentoring. But, in all honesty, the degree of

impact that we can have on improving this by these kinds of steps

is relatively limited. I really have to say that, very honestly, is relatively limited. The sources of this problem are very fundamental,

and they go to the things that we are talking about.

And I think that it would be wrong to tell this committee that

there’s anything that we can do that’s going to have a big impact

on this area, short of what we really need to do, which is a very,

very fundamental modernization and revamping of our whole collections and process and especially the technology.

We also have the issue that I think was raised by GAO of the

more recent decline in statistics. I mean, underlying all of this, we

also have a need for improvement on taxpayer rights that we’re

trying to implement that was called for by the Restructuring and

Reform Act, and we haven’t talked about that here. And I don’t

want to imply that I don’t support that, because I think it’s the

right thing to do, to have these taxpayer rights.

But the immediate impact of this, short of having also improved

our technology, is simply to elongate the process. I mean, it goes

in the exact opposite direction in some ways, not that it can’t be

compensated for in the long run. But in the near term what it does

it adds more boxes to this chart and more labor-intensive processes

that have to be done manually which, in turn, reduces the number

of collection activities that are—the number of cases that our ofVerDate 11-MAY-2000 12:16 Aug 01, 2000 Jkt 000000 PO 00000 Frm 00084 Fmt 6633 Sfmt 6633 C:\DOCS\64388.TXT HGOVREF1 PsN: HGOVREF1
81

fices can work. So this is another aspect of what we’re dealing

with.

The net effect of this is that I think that there are some immediate steps that we can take, particularly in the trust fund area

that can have some effect, ameliorative, the mentoring and monitoring program. These are steps and clearly we will do those and

monitor them, but it would be misleading everyone to believe that

this problem can be solved in any short-term way by anything we

do, short of really revamping this whole process.

Mr. HORN. Let me throw out a suggestion for you to think about.

You’ve got about 102,000 employees, as I remember, unless there’s

been some changes. Suppose you gave them a little crib sheet and

a phone number and they phoned up some of these people. Each

one of them to be in touch with real people. Some of them aren’t

in touch with real people. A lot of them are. But you would make

it an agency effort. It’s like libraries, that sort of have a Good Samaritan Day bring the books back kind of thing.

What about using those 102,000 people to make one call a week?

Mr. ROSSOTTI. The trouble is, all of those 102,000 people are

doing something. And most of them, you know, there’s—in order to

even contact the taxpayer, the IRS, there’s many requirements,

OK, that are legally imposed. You know, without the proper training I would be a little reluctant to have people calling taxpayers,

also without having necessarily the correct information. So I think

that might be a hard one to implement in our current——

Mr. HORN. Think about it.

Mr. ROSSOTTI. OK.

Mr. HORN. It’s like having a campus blood drive or something.

You get their juices going and see if they can win.

Mr. ROSSOTTI. OK.

Mr. HORN. And, you know, give flowers to the ones that win.

Mr. ROSSOTTI. OK.

Mr. HORN. You heard the discussion on computer capability and

intraoperatability between agencies. What do you think about trying to get the benefits straight from other agencies?

Mr. ROSSOTTI. Well, I wasn’t quite clear as to whether—I did

hear the question, but I wasn’t quite clear as to whether the idea

was that, for example, when another agency was making a loan to

an individual that they first check——

Mr. HORN. To see if the taxes were paid.

Mr. ROSSOTTI. And they would check with the IRS rather than

the taxpayer, is that the idea?

Mr. HORN. They could ask the taxpayer, but there ought to be

a way that they check the IRS.

Mr. ROSSOTTI. Yes, there is a way to do that; and private mortgage companies can do that, too. And it requires the approval of

the taxpayer, but if they’re requesting a loan, you know, that could

be a requirement. And they can request a transcript from the IRS

of their taxes. So that is an ongoing process.

Let me just say that this is another example, interestingly

though, that the current process for doing that—and it’s exactly for

that purpose—I mean, it serves that purpose. If you’re applying for

a loan, you sign a waiver. You send it in a request to the IRS. We

do a transcript of your—it’s called a transcript. It basically says,

82

here’s the situation, whether you’ve paid your taxes and send it to

the lender. So that serves that purpose.

The real problem right now is a very manual-intensive process.

It takes about 6 to 8 weeks to do that. We have a proposal that

we’re working on to do a more automated version through an email kind of a process that would speed that up dramatically. The

principal issue there is various security and privacy issues. Because here we run into some security and privacy concerns that if

there’s, you know, risk of unauthorized people getting access to taxpayer records, that could be a problem.

So there is a process right now to do it, and it could be implemented. It’s just a little labor intensive and a little time consuming, but with some additional investment, we could automate that

process.

Mr. HORN. One of the concerns we’ve had before is when various

excise taxes come in to the Internal Revenue Service. There’s a coupon on them, but there’s apparently not a coupon that says this is

Medicare deduction. This is Social Security deduction, and all the

other deductions one has.

Mr. ROSSOTTI. Yeah.

Mr. HORN. And instead of that we just dump it all in one big

pile, and you’ve got an office of—what—analysis that—and Social

Security has it that they say, well, this percentage is ours, you owe

us for our account. And the fact is there isn’t a real trust account

there.

Now we’ve tried to lock that off so Presidents can’t put their fingers on it and spread it around on all sorts of Santa Claus programs. Instead, we want to preserve Social Security. So we’ve

heard of a 10 percent radioactive fence right around that so-called

trust fund.

Now, do we have a trust fund or don’t we? And why can’t we get

them to put the coupon on and actually add those up with all that

new high-powered computer machinery that you have?

Mr. ROSSOTTI. Yeah. There’s two parts to this. One is what we

would have to do internally—first off, let me just say that you are

correct in that the tax deposits that are made on a weekly basis

or depending on the taxpayer’s frequency are just that, they’re a

deposit. They’re not a tax return. And, traditionally, they have only

designated very limited information so they don’t precisely say

what tax trust fund each tax should go for, excise taxes or Social

Security taxes. This then requires a reconciliation process, which is

what you’ve described.

I think that, you know, it certainly would be feasible to require

precise designations at the time of deposit rather than at the time

of return, if that would be possible. But there are two issues that

have been, I think, repeatedly stood in the way of this. The more—

one issue is just internal. We don’t have the computer systems,

again, to process this data right now.

Mr. HORN. On that very point——

Mr. ROSSOTTI. Yeah.

Mr. HORN [continuing]. You are familiar with the universal price

system in your friendly grocery store, and they can just do a sweep

like all of those coupons, and you would have an accurate statement of what should go where.

83

Mr. ROSSOTTI. Well, we have the—we actually do scan the coupon. In fact, most of it does come in electronically through banks.

Mr. HORN. But it doesn’t have it subdivided into Medicare and

Social Security?

Mr. ROSSOTTI. And that’s—I said the easier problem to solve is

the systems problem. That could be solved. The more difficult question is really a policy question and I think, you know, possibly

would require consultation broadly through our Congress, because

it would require putting an additional mandate on taxpayers. It

would require taxpayers who currently can file a relatively simple—just, here’s the total dollars, and then just file a return once

a quarter.

Mr. HORN. You’re putting it on taxpayers, in quotes, you’re putting it on the employer to deduct it. One of the greatest schemes

ever known to mankind, Beardsley Rummell in the Second World

War, take it out before you give them the money.

Mr. ROSSOTTI. It’s true.

Mr. HORN. The citizens—are having a terrible time. A lot of people up here don’t agree with that.

Mr. ROSSOTTI. Well, I’m simply saying what it would require—

and I’m not debating the merits of it. What it would require is telling employers, businesses—and many of them, or at least a fraction

of them, a significant fraction of them are small businesses—that

whereas today they can file a relatively simpler thing which says

here’s how many dollars we’re depositing, it would require them to

enumerate—obviously, it would require them to enumerate how

much was for each purpose.

It may seem like a simple thing to do. I found that, with businesses, when you ask them to put more information on forms, they

don’t always respond with great enthusiasm to that proposal. And

they can do it now voluntarily through the electronic system, but

I think to make it complete, to provide accurate information, it

would have to be mandated. And that would be the policy issue. Do

we want to mandate, you know, a couple million businesses to put

that more detailed information at the time they make these deposits.

And I don’t really think it’s a decision that the IRS should make,

actually. I think that’s a policy issue that ought to be determined

through some process.

Mr. HORN. Somewhere in the law it must say you’re supposed to

give us—in the case of IRS, you’re supposed to give half of that salary to a certain level and match it.

Mr. ROSSOTTI. Yes.

Mr. HORN [continuing]. With the employer’s share. It’s the employer’s share. The employee’s share, now, they give you very complicated payment statements. Practically everybody has that. I

don’t know why everybody can’t—if everybody is doing it, why can’t

the IRS do it and get them to put the accurate amount? Because

what I’m hearing is that, let’s say somebody makes $30,000 a year,

and you’ve got maybe $5,000 goes for the employer, $5,000 for the

individual, and what it sounds like is they can just write you a

check, and it might only be $4,000, when they should have

matched it to $5,000 or vice versa.

84

Mr. ROSSOTTI. It’s a question of when they do it, because they do

require quarterly, for example, on employment taxes to file a tax

return that lays out what those details are. The difficulty is that

prior to the time that they filed their tax return, they actually have

to deposit the cash, usually weekly or biweekly, depending on what

size of employer they are; sometimes more frequently with each

payroll.

It’s the reconciliation of those things that makes the issue. We

do have the tax return and they do file the tax return quarterly

in the case of employment taxes and also the excise taxes. But the

real issue is what to do with the deposits. The deposits is when

they actually send us the cash and the deposit is just that. As it

is conceived today, it’s not a tax return. It’s just a deposit. It’s just

a cash advance, if you will, that says this is a cash advance we are

sending you generally for this purpose. It’s not, as a tax return is,

detailed as to what precisely is there.

So what would have to be done to be totally precise along the

lines of I think what you are suggesting, is we would have to convert the deposit instrument into something that lays this out in detail. In our electronic deposits, we already have the capability of

doing that. But the question that comes up is do we mandate the

taxpayers to provide us that detail at the time of deposits, which

is more frequently than at the time of returns. That’s a question

that I don’t know that it’s up to the IRS to make a decision on it.

It is really more of policy question. Certainly, if that was a decision

of Congress that that was what was required, that that was——

Mr. HORN. We look at our check and we see what is taken out

of it. If they are not depositing it, it seems to me that’s where we

think they are depositing it because they have deducted it off of our

gross payroll. Where is it? Is it an endowment for swimming pools

or what? We have great curiosity.

The average person that goes and gets their check once a month

by electronic deposit with a long list of things that have been deducted, health care and all the rest, noble causes all; but if they

are going to do that, why not put the money in there on the other

side? They have deducted it from us.

Mr. Turner, the gentleman from Texas.

Mr. TURNER. Just one followup question, Mr. Rossotti. Did I understand you to say that if an SBA loan officer wants to find out

whether or not the individual that he is loaning this SBA money

to owes payroll taxes to the IRS, that he could make a call to find

that out; but if he did, it would take 6 weeks for him to get an answer?

Mr. ROSSOTTI. Right. That’s the way it works. To get a transcript

of taxpayer information today is a very manual and intensive process. You can’t just make a call. You have to send in a form, get

a taxpayer authorization that goes through a manual process. I

know this sounds startling. I have been in this office a year and

a half. I have found many startling things. One of the places that

we do this is in Tennessee.

Not to tell a war story, but my first trip down to an IRS service

center, I was down in the service center of Tennessee, and I was

asking about this process because I used to do business with mortgage companies that check these kinds of things and I asked about

85

this. Sure enough, it takes 6 to 8 weeks. They said, There is a car

factory down the road. They can build you a car quicker than we

can give you a transcript for a taxpayer on their return.

It isn’t that we have bad people that are doing a lousy job. The

process is extremely labor intensive, it is not computerized really

at all. There is any number of different steps that you have to go

through. By the time that you mail it and so forth, it takes about

6 weeks. We have a pilot project that does it electronically, I am

sure an e-mail system that basically does it almost instantaneously. This is something that has been piloted and would speed

it up to almost nothing.

The issues there have to do with both some technology issues,

but mostly privacy issues, in ensuring that there is adequate security; because the other thing that we bump up into anytime that

we release taxpayer data, anybody, we have very strong requirements on us to ensure that (a), that it’s only given to somebody

that is authorized to receive it; that it is not misused for other purposes; that it isn’t intercepted during transmission; that there is a

whole variety of security requirements that have to be met.

So when you start to transmit it out electronically through the

e-mail type of environment, you run into those kinds of issues.

The real solution to this, though, I believe, is to automate this

through an e-mail process so that any taxpayer that wants to get

a loan or wants to get their information to verify something that

they need should be able to send an authorized transaction and

have it sent back right away. That’s clearly the right way to go.

Mr. TURNER. I hope that your modernization program will get

you there so that we can do that. And in the meantime, I hope that

we can persuade the Small Business Administration to request of

the IRS 6 weeks in advance to find out before they close the loan

and disburse funds——

Mr. ROSSOTTI. There may be some way that we could work with

the Small Business Administration. There might be some ways,

frankly, if the Small Business Administration set up a process for

us, that we could work a special way to get to them quicker than

6 weeks.

Mr. TURNER. The GAO study that we heard testimony on this

morning, if we could solve that one problem, we could save $31.6

million in unpaid payroll taxes if somebody would just ask before

they disbursed the funds.

Mr. ROSSOTTI. We would be more than happy to work with the

Small Business Administration on that issue. We have a good relationship with them today. The administrator is someone that I

have gotten to know. If that was something that—we would be

happy to work with them on that. We have all of these little sort

of special solutions that we come up with to work these particular

problems in the interim. It’s not the right way to go long-term, but

we can do some of these things if we work on it.

Mr. HORN. Let me ask before we wrap this up, does the General

Accounting Office have any other comments they would like to

make based on this discussion? They don’t? Your lucky day.

Commissioner, we assure you we want to do everything that we

can to help you. We are from the government, too. We are here to

help you. I have great confidence in your leadership.

86

Mr. ROSSOTTI. Thank you.

Mr. HORN. And I hope that when we meet again, you will have

that $49 billion in the nearest Federal depository run by the Treasury. That would help us on a lot of things that we have to do here,

like dealing with Medicare. That $49 billion would sure help us

right now. We hope that you will find it soon.

Let me thank the staff here that helped on this: Russell George,

the staff director and chief counsel; Randy Kaplan, to my left and

your right, the counsel and professional staff member; Bonnie

Heald, director of communications back there; Grant Newman, our

clerk; Chip Ahlswede, our staff assistant; and Seann Gallagher, the

intern for us. And then on the minority side, we have Michelle Ash

and Trey Henderson and Early Green and Jean Gosa, minority professional staff members. And we have our two court reporters,

Randy Sandefer and Cindy Sebo.

I thank you gentlemen for coming and I wish you well; and as

you know, if we don’t see you before, we will see you on April 15th

as usual.

We are adjourned.

[Whereupon, at 12:09 p.m., the subcommittee was adjourned.]

Æ