U.S. GOVERNMENT PRINTING OFFICE

70–279 DTP WASHINGTON : 2001

OVERSIGHT OF THE INTERNAL REVENUE SERVICE:

THE COMMISSIONER REPORTS

HEARING

BEFORE THE

SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,

INFORMATION, AND TECHNOLOGY

OF THE

COMMITTEE ON

GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED SIXTH CONGRESS

SECOND SESSION

APRIL 10, 2000

Serial No. 106–189

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

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: (202) 512–1800 Fax: (202) 512–2250

Mail: Stop SSOP, Washington, DC 20402–0001

(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-HAGE, 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

LISA SMITH ARAFUNE, 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

BRYAN SISK, Clerk

TREY HENDERSON, Minority Counsel

(III)

C O N T E N T S

Page

Hearing held on April 10, 2000 .............................................................................. 1

Statement of:

Rossotti, Charles O., Commissioner, Internal Revenue Service, Department of the Treasury .................................................................................... 6

Wrightson, Margaret T., Associate Director, Tax Policy and Administration Issues, U.S. General Accounting Office; Colleen M. Kelley, national

president, National Treasury Employees Union; W. Val Oveson, National Taxpayer Advocate, Internal Revenue Service; and David L.

Keating, senior counselor, National Taxpayers Union .............................. 54

Letters, statements, etc., submitted for the record by:

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

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

Keating, David L., senior counselor, National Taxpayers Union, prepared

statement of ................................................................................................... 101

Kelley, Colleen M., national president, National Treasury Employees

Union, prepared statement of ...................................................................... 77

Oveson, W. Val, National Taxpayer Advocate, Internal Revenue Service,

prepared statement of ................................................................................... 90

Rossotti, Charles O., Commissioner, Internal Revenue Service, Department of the Treasury:

Information concerning deficiencies ......................................................... 45

Prepared statement of ............................................................................... 9

Wrightson, Margaret T., Associate Director, Tax Policy and Administration Issues, U.S. General Accounting Office, prepared statement of ........ 59

(1)

OVERSIGHT OF THE INTERNAL REVENUE

SERVICE: THE COMMISSIONER REPORTS

MONDAY, APRIL 10, 2000

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON GOVERNMENT MANAGEMENT, INFORMATION, AND TECHNOLOGY, COMMITTEE ON GOVERNMENT REFORM, Washington, DC.

The subcommittee met, pursuant to notice, at 10 a.m., in room

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

Present: Representatives Horn, Walden, and Turner.

Staff present: J. Russell George, staff director and chief counsel;

Louise DiBenedetto, GAO detailee; Bonnie Heald, director of communications and professional staff member; Bryan Sisk, clerk;

Ryan McKee, staff assistant; Michael Soon, intern; Trey Henderson, minority counsel; and Jean Gosa, minority assistant clerk.

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

order.

The only contact that most taxpayers have with the Internal

Revenue Service is when they file their annual income tax return.

Now, 1 week before the deadline, many taxpayers are frantically focused on gathering the year’s worth of documents and receipts

needed to verify the accuracy of their own tax return.

Taxpayers should expect prompt, quality service from their Government, especially from the agency that collects their money, but

over the years critics have bitterly complained about the agency’s

rude service or lack of any service at all, and I believe times have

changed quite a bit now.

The IRS has come under fire for everything from its failure to

assist taxpayers in preparing and filing their tax forms to ensuring

that all taxpayers pay their tax obligations. The IRS had, indeed,

become the Federal agency that everyone loved to hate.

The public told the tax agency that it expects better services, and

on July 22, 1998, Congress passed and the President signed the Internal Revenue Service Restructuring and Reform Act. Their message to the Internal Revenue Service was clear: there must be a

fundamental change in the way it conducts business. The Internal

Revenue Service must not only collect taxes; it must provide quality service to the people who pay those taxes.

The law demanded that the Internal Revenue Service shift from

its self-defined role as an enforcement agency toward a role that

more resembles a financial service organization.

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Internal Revenue Service Commissioner Charles Rossotti has

taken that message seriously. He is responsible for planning and

implementing the most fundamental changes in the IRS in nearly

half a century.

A few weeks ago, the commissioner testified before another

House subcommittee stating that the IRS is ‘‘wholly committed to

implementing each and every taxpayer’s rights provision and making them work as intended, while still fulfilling the mandate to collect taxes that are due.’’ Some people are now concerned that the agency has become so

user friendly that it isn’t collecting enough of the tax money that

is owed. In a recent hearing before this subcommittee, we learned

that taxpayers owe the people and the Treasury $231 billion in

overdue taxes and penalties. We recognize that this is an enormous

undertaking filled with both short-term and long-term challenges.

We welcome each of our witnesses today and look forward to discussing the agency’s progress and challenges and how they are affecting the American people and the Internal Revenue Service

workers.

I might say, Commissioner, I’m very pleased with the willingness

of the IRS workers to come to our District office to set up phones,

to have hundreds of constituents go there and electronically file for

the first time, in most cases, to those constituents. We hope down

the line that we will all be sensitive to filing in time, and that

would help get the refund, if they had one, and it would also be

simpler than most people now have to go to.

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

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Mr. HORN. So I now yield an opening statement to the ranking

member, Mr. Turner, the gentleman from Texas.

Mr. Turner.

Mr. TURNER. Thank you, Mr. Chairman.

After having worked on my tax return yesterday, I hope I am in

a good mood here to visit with the commissioner.

We do appreciate the commissioner being here this morning. As

we all know, your agency is responsible for the very difficult task

of administering and enforcing the internal revenue laws and related statutes.

Your mission is to collect the proper amount of tax at the least

cost to the public and in a manner that warrants the highest degree of confidence in the Service’s integrity, efficiency, and fairness.

We know the IRS has been subject to many studies and congressional inquiries and much criticism. Congress and others have

identified a long list of problems, including inadequate technology,

poor services to taxpayers, violation of taxpayers’ rights, failure to

follow established procedures, and lack of adequate employee training and resources.

This concern led the Congress to pass the IRS Restructuring and

Reform Act of 1998. This law included many provisions to enhance

taxpayer rights and to fundamentally reform the IRS.

To achieve these goals, the IRS plans to make fundamental

changes on virtually every front. The IRS has referred to this process as ‘‘modernization,’’ because it involves building on the essential components that have made the IRS successful in the past,

while bringing them up to date in a way designed to achieve the

new mission.

We are here today to assess the progress the IRS has made in

implementing its modernization changes. This subcommittee wants

to ensure that all Federal managers are given the necessary tools

and incentives to perform effectively and to be held accountable for

their job.

We welcome the commissioner this morning and I commend you,

Commissioner Rossotti, on your leadership. I commend the employees of the IRS in your efforts to become a better agency. When I

came to Congress 3 years ago, the IRS had an image that was less

than desirable. Since that time, with the new legislation and the

efforts you have made, I am confident there has been significant

progress toward the goal of providing the type of high-quality service that the taxpayers of this country expect and deserve.

I appreciate the leadership you have brought to the position, and

I look forward to hearing your testimony this morning.

Thank you.

Mr. HORN. As you know, Commissioner, and the others that follow you, we swear in all witnesses before this committee, so if you

would raise your right hand we will swear you in.

[Witness sworn.]

Mr. HORN. Thank you. Also, as I think you know since you are

a regular here, your full statement goes in the record right now,

so we would appreciate it if you could summarize it and then we

will have more chance for dialog.

Thank you.

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STATEMENT OF CHARLES O. ROSSOTTI, COMMISSIONER, INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY

Mr. ROSSOTTI. Mr. Chairman and Mr. Turner, we think the IRS

is following the clear direction of the Congress in the IRS Restructuring and Reform Act. As both of you noted in your opening statements, this involves some of the most significant changes in organization, technology, and, most importantly, the way we serve taxpayers.

We are already witnessing some positive results. These include

the implementation of the 71 taxpayer rights that were in the act,

improved hours and improved phone service, and more electronic

filing in this current season.

Just to note some statistics, we expect to receive 127 million individual returns this season, and electronic filing is up 16 percent

over last year, so we will get about 34 to 35 million returns electronically.

Our level of telephone service overall is about 63 percent this

year, which is still way too low, but is up a lot from the 50 percent

or so from last year. And for the whole year, we expect to collect $1.67 trillion in net

receipts for the Treasury.

Of course, all of this has been done after the completion of the

enormous program to fix the Y2K program, which I am pleased to

say was accomplished almost flawlessly.

Just going back for a moment to Y2K, I think that this success

was achieved due to comprehensive planning and preparations over

a significant period of time. Mr. Chairman, we are most grateful

for your guidance and assistance which you provided over that entire period. We think your leadership was a critical component of

our success.

Mr. HORN. Thank you very much.

Mr. ROSSOTTI. Despite some of these signs of progress, Mr.

Chairman, we have to say honestly that today the IRS does not

meet all the legitimate service expectations of the vast majority of

compliant taxpayers, and at the same time our compliance activities, such as exam and collections, continues to drop.

Further, as GAO has pointed out, many of the systems we use

to manage and account for the $1.67 trillion in tax revenue are inherently deficient.

These are severe problems, and if they are not addressed they

will certainly, over time, undermine the fairness and perhaps even

the viability of the Federal tax system. But these problems are not

newly identified, nor do I believe that they are impossible to solve.

In fact, I believe we now have employees at the top level plans that

will allow us to address them.

We have implemented the taxpayer rights provisions of RRA. We

have completed a new system of balance performance measures,

and our reorganization, which is aimed at increasing customer

focus and management accountability, is progressing rapidly and

we have a new top management team in place.

Building on this foundation, we are now beginning the longerterm program of re-engineering all of our business practices and

technology so that we will be able to deliver on the RRA’s manVerDate 11-MAY-2000 07:57 Mar 09, 2001 Jkt 000000 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 C:\DOCS\70279.TXT HGOVREF1 PsN: HGOVREF1
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dates for improved service and taxpayer treatment, while also increasing fairness and compliance effectiveness.

As these new management and technology practices become established, we can also improve efficiency. However, to succeed in

this enormous program, we do need adequate budget resources in

fiscal year 2001 to address critical operational needs in the short

run and to invest in new technology for the long run.

The rapidly expanding economy continues to increase the IRS’s

workload. For example, since 1993, the number of individual tax

returns of over $100,000, which are generally the more-complex returns, have increased by 63 percent, but, because of budget constraints, the IRS staff has dropped by 17,000 personnel, which, as

shown on the chart at your left, shows the workload going up, the

staff going down.

On top of these general trends, as shown on the second chart

which is going to be put up there, certain specific provisions of

RRA, alone, have required about 4,500 additional personnel to administer. Those are just listed by code section there, an estimate

of personnel.

Now, since our compliance personnel, those that do exams and

collections, represent the largest component of the IRS budget, they

are also the ones that administer these RRA provisions. Our net

front line compliance staffing has declined quite rapidly, which is

shown here in this red line on the third chart. So I think we can

see that, as a result of these resource declines and the pervasive

change in the way the business has done, there has been not only

resource declines but some uncertainty, confusion, and a great deal

of relearning among our employees and managers, and this, combined, is the reason that, overall, the number of exam and collection cases we have been able to complete has declined about half

since 1997.

To address these operational problems, we have requested an increase in staffing in the 2001 budget which would provide for about

2,800 FTEs and would allow us to rectify some of the shortages

that have developed over the last 2 years, and that would be one

component of the budget.

This staffing increase increment will allow us to meet some critical short-term needs while we transition to the more-efficient structure and re-engineered technology, which is the second key needed

in our fiscal year 2001 budget and, as you have pointed out many

times, Mr. Chairman, is really the long-term solution that we need

to get to.

Clearly, we depend on our computer systems to administer the

tax system and to properly collect and account for our $1.8 trillion

of tax revenues.

We have submitted our plan for re-engineering our systems in

some detail, and they are included in my written testimony and in

the funding request that we have made to the Appropriations Committees.

Let me stress that, although there is no way to avoid risk in a

program of this size and complexity, we believe we can manage

these risks and achieve our goals, just as we did with the $1.4 billion Y2K program, and we now have in place some of the elements

needed to do this properly, which were not in place in the past.

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These include a single, centrally managed information systems organization, a very active top-level governance process, adherence to

architectural, technological, and methodological standards, use of

the prime contract to manage development and integration activities, and, most importantly, an unwavering commitment to an open

process that includes outside oversight agencies such as GAO and

OMB.

Now, although we have put in place most of the necessary elements, I do want to stress, Mr. Chairman, that it will take time

and practical experience executing projects for our management

process to mature.

I would like to call the subcommittee’s attention to a fourth

chart, which is about to be put up on the screens, which shows

what I would consider the normal pattern by which we would expect our management process to mature over time if we are successful.

Based on my experience in the industry, if we were to achieve

the kind of growth rate depicted on this chart, it would actually be

a quite rapid rate of growth in maturity of our management process, and within 1 to 2 years I think it would put IRS in a top category of institutions managing large technology programs.

Since this maturity process necessarily depends on practical experience, one of our most important responsibilities as top managers is to adjust the level of activity we are managing to that

which is appropriate to the level of management capacity we have

at any point in time. We have already seen this process in action

as we have unhesitatingly revised some initial proposals to slow

down some projects and rearrange others to ensure that management and architectural issues were adequately addressed.

On the other hand, I also have to stress that there is no way to

achieve maturity in the management process without practical experience actually executing projects.

So, Mr. Chairman, I believe we are making real progress in the

goals and mandates of the Restructuring Act. I believe, if Congress

will continue to provide us the support for IRS modernization,

which includes acting favorably on our budget request, we will be

able to produce the most visible, tangible changes in service, compliance, and productivity that America’s taxpayers expect and deserve.

Thank you.

Mr. HORN. Thank you.

[The prepared statement of Mr. Rossotti follows:]

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Mr. HORN. We have a few questions for you, and we will be alternating between Mr. Turner and myself 5 minutes at a time.

Let me first start. There are a lot of different groups, including

OMB, the IG—Inspector General—that give you recommendations.

Tell me how you go about prioritizing which is which, and particularly the Inspector General’s.

Mr. ROSSOTTI. Well, you are right, Mr. Chairman. We get hundreds of recommendations every year from many different audits

that are done by the IG, as well as GAO, and, of course, many

other things that come in from congressional sources and from our

stakeholders, such as the practitioner groups and taxpayer groups.

There are hundreds of them.

What we have put in place over the last 2 years is a management process which we call ‘‘taxpayer treatment and service improvement,’’ by which we have a small program staff that reviews

all of these and lists all of these recommendations, tries to apply

criteria to them, and then comes before a top management group,

which I chair, to basically determine which ones we can manage in

which timeframes.

We are going through a new phase of this process in the next

year as we establish our new organization. We are folding this

process into an even more systematic strategic planning and budgeting process where we will include this kind of prioritization as

part of our planning and budgeting and we, as a matter of fact,

have already started that for fiscal year 2002, as well as 2001,

which is, of course, the budget that is before Congress.

So we made, I think, an important step in prioritizing and managing these recommendations, and now we are going even further

with strategic planning.

I think the, of course, crux of this is that we have more demands

on our capacity than we can implement. In other words, we have

more things that we would like to do and that others would like

us to do than we have capacity to manage, so we simply have to

make choices along the way.

Mr. HORN. How much, if any, do you get from that Advisory

Committee that was put together to sort of guide the commissioner

under the Restructuring and Reform Act of IRS? Now, who is on

and who isn’t? Have all the appointees been nominated?

Mr. ROSSOTTI. Yes. I think you’re referring to the Oversight

Board, as it is termed in the act.

Mr. HORN. That’s right.

Mr. ROSSOTTI. And they were nominated, they were acted upon

by the Senate Finance Committee favorably in—I believe it was

February, and it is now on the Senate floor waiting for action to

go through the Senate floor. That would be the last step before

they would become active.

There are seven private sector members, as well as the commissioner and the Secretary of the Treasury. So there have been no

meetings yet because they have not been finally confirmed, but we

have had some informal discussions when they were preparing for

their confirmation hearings actually at some length.

I think that these—in fact, I know that these members are all

very qualified people who are quite fired up, as a matter of fact,

about the idea of participating in this, and so I am looking forward

41

to having them—and, of course, one of their statutory responsibilities is precisely the point that you were noting in your question,

is participating in the strategic planning process to help us make

the right choices for how we deploy our resources and what initiatives we undertake.

Mr. HORN. The law took effect when?

Mr. ROSSOTTI. Well, the law took effect July 1998. It requested

the President—— Mr. HORN. So we have lost almost 2 years from that particular

committee?

Mr. ROSSOTTI. Well, yes.

Mr. HORN. That wasn’t your fault. That was the President’s

fault. He didn’t like the system. So is that going to work? I mean,

they’ve now got them, you say, before the Senate. Hopefully they

will be confirmed one way or the other.

Mr. ROSSOTTI. Yes. Well, I was somewhat involved, tangentially

involved. It is quite a process to find seven private sector qualified

people and get them through all the clearances. That certainly took

longer than expected.

But I think that, without question, at this point there is strong

support now for, I think, all quarters for making this Oversight

Board work. You know, I’ve met quite a few times with the Secretary of the Treasury about this, and he is committed to it. He has

met with them and, you know, we have a plan to get them oriented. So I think as soon as they are confirmed by the Senate we

will be ready to really gear up.

I really anticipate that they will be a very constructive force in

helping us have the continuity to make this whole process work.

Mr. HORN. My last question on this round is the computing situation. You went through Y2K. That caused you to look at various

systems—should you merge some, should you get rid of some.

We’ve asked the General Accounting Office to look across the

whole executive branch to look at the hardware and the software.

I wonder—you’re an expert in this area—what are your plans?

Mr. ROSSOTTI. Well, I think you are quite right. One of the residual benefits of Y2K is that we did standardize and consolidate

quite a few different systems, I mean, and water also, I think importantly, and probably one of the most important things is that

we centralized all of the information systems resources under one

management. I mean, previously we had about 15 different information—roughly 15 different information systems organizations.

We now have one, and they control almost essentially all the resources. We have consolidated our mainframes. By the end of this

year we will have them all into 3 centers instead of 12. And we’ve

eliminated, you know, thousands of one-off type vendor products

that were on desktops, for example.

So that was an important benefit of Y2K. We still have more

work to do in that regard, but I think that is one of the

foundational elements that gives us a foundation to start going up

this ‘‘S’’ curve that we need to get to to manage in a more-effective

way.

Mr. HORN. Thank you.

The gentleman from Texas, Mr. Turner, 5 minutes.

Mr. TURNER. Thank you, Mr. Chairman.

42

Commissioner, the growth in electronic filing seems to be impressive, but I gather that most of the electronic filing that takes place

under current law has to go through some third party in order to

accomplish it, rather than electronically filing directly with the

IRS.

Why is that the case? And is there anything we could or should

do about that?

Mr. ROSSOTTI. Well, as a matter of fact, that is one of the issues

that we are addressing in the whole strategic plan for electronic filing.

I think one thing that is important to understand is that preparing a return electronically is a prerequisite for filing electronically.

Those two processes are very closely linked. I mean, you can’t file

something electronically until you’ve prepared it. In order to prepare it, you have to have tax preparation software, and I think, if

you’ve ever used any of this software, you know that there are

quite a few software products out there on the market that are

very sophisticated and really quite effective consumer software

products.

So the route that the IRS has taken is to essentially try to—and

this was actually a provision in the Restructuring Act encouraged

us to do this—was to partner with the private sector to encourage

competition in the private sector to bring down the cost and make

it easier to file electronically by taking advantage of the capabilities that are offered in the private sector.

We don’t see it as the right strategy to try to separate these two

parts of the equation, if you will—the preparation and the filing.

Instead, what we are working on—and there is a provision, actually, in the President’s budget for this that was just submitted earlier this year which requests or requires the IRS, by 2002, to be

able to, working with private industry, find a way to allow every

taxpayer to file—both prepare and file their taxes on the Web at

no cost to the taxpayer. I think that’s really what taxpayers want.

As a matter of fact, even in this season that’s possible on a limited basis, because there are a number of providers that provide

software on the Web that allow you to prepare your tax return and

send it to the IRS. Many of them charge a fee of $9.95. Some of

them charge no fee, however, and this is because of competition

driving down the prices.

What we have been requested in the President’s budget to do and

will continue to do is to work with the industry to provide ways—

and this may require us to provide some incentive to the industry—to basically drive that price down to zero so that every taxpayer would be able to sign on to the Web, use that in a secure

way to prepare their tax return, which is, I think, the thing that

people get the most benefit out of, just being able to use the question and answer format to prepare their tax return, and then just

push a button and file it up through us.

Mr. TURNER. Is there any statutory inhibition to doing that now?

Isn’t there a problem with the signature and the way it works now?

Doesn’t the taxpayer get something back in hard copy by mail and

they sign it and send it back?

Mr. ROSSOTTI. Right. There’s a second issue. Even if you do file,

you now have to send in a separate—in most cases, you have to

43

send in a separate signature document. We have some pilot

projects this year where we’ve sent out specific identification numbers that avoid the need to send in the paper document, and one

of our highest priorities is to figure out how we can extend those

pilots basically to everyone, or almost everyone, so that they would

not have to send in that paper jurad, as it is called.

We do not, at this moment, think we need special additional legislative authority. We think that it is more a matter of administrative action to ensure ourselves that we have adequate authentication of the return that the taxpayer has filed.

Mr. TURNER. How, then, do you get a signature on that return

so that the signature line, which is the taxpayers attestation that

they are providing the correct information under penalty of law,

how do you get that electronically?

Mr. ROSSOTTI. What we’re doing now in our pilot projects is

using PINs, as we call them—personal identification numbers.

Many taxpayers received—I don’t remember the exact number. I

could get it for you. But we sent out letters to quite a few millions

of taxpayers prior to this season giving them personal identification

numbers which they could then enter in in lieu of a signature, in

lieu of a hand signature as the authentication that it was a valid

tax return.

Mr. TURNER. Thank you.

Mr. HORN. I think we had the staff furnish you an appeal from

a particular constituent in Colorado, and his point is very interesting. This is Kenny Knapp of Steamboat Springs, CO. He received

a reply to his appeal from the district director, Deborah Decker,

and he felt that the proper authority to write him on that was the

Secretary of Treasury. I wonder if you have had a chance to look

at that? And do you feel that the district director, Deborah Decker,

has that authority from the Treasury or not?

Mr. ROSSOTTI. First of all, as you know, I can’t specifically comment on a particular taxpayer matter, but I think that it has been

well established that the Secretary designates and delegates certain authority to take certain actions to the commissioner, and the

commissioner, in turn, can re-delegate them to other authorized individuals. That’s the way the tax system has worked for many,

many years, and it really has to, because you have to be able to

delegate authority for people to act or you couldn’t really function

at the scale that we function.

Mr. HORN. Well, is there a delegation from the Secretary of the

Treasury? And what is the source of that? Is it a regulation of the

Secretary?

Mr. ROSSOTTI. There are delegation orders in effect, as they’re

called, that delegate, generally speaking. I can give you more technical answers in a written response, but basically the way it works

is that the law frequently authorizes the Secretary to do certain

things, and then the Secretary has standing delegation orders that

delegate to certain officials—usually the commissioner—to take action. And then, within the agency, we have official delegation orders that delegate certain other officials to take certain other kinds

of action.

44

Mr. TURNER. That was really in relation to a deficiency notice.

So you feel that you have sufficient authority from the Secretary

of the Treasury?

Mr. ROSSOTTI. Yes.

Mr. TURNER. Because often Congress, over the years, and not

just in IRS, has taken the authority away from the President,

taken it away from Cabinet officers, and vested it in the person

that really is responsible for the operation. So you don’t feel a loss

of authority there?

Mr. ROSSOTTI. I don’t. And I’d be glad to give you a more-specific

answer in writing, but generally—— Mr. HORN. Without objection, we’ll put it in the record in this

place.

[The information referred to follows:]

45

46

Mr. HORN. Now, on the modernization efforts, and when they

might be made, I’d like to give you a little time. You’ve mentioned

it, but just give us an idea of where some of this modernization is

going besides the electronic aspect. What else is there?

Mr. ROSSOTTI. Well, there is an entire program of what we call

our major business systems modernization, which is really aimed

at replacing all of the basic systems that are deficient in the IRS

that support basic tax administration processing, as well as, I

might add, financial management systems, which I know in your

committee you’ve had a great deal of concern about, because that

is really at the root of a lot of our problems.

These go to basic systems that keep all the taxpayer records, for

example. That’s the most fundamental system. We still keep all of

our taxpayer accounts on tape files in a system that was designed

in the 1960’s. It is hard to believe that. Sometimes when I say this

people think I’m exaggerating, but it really is true. Really, every

single taxpayer’s records, business and individual, is on tape files

that are only updated once a week. This is the heart of our entire

system.

Then there are about 130 other systems that do everything from

collecting money to accounting for money to helping to support auditing of taxpayers, and then, of course, the actual customer assistance. If somebody wants to call up and wants to find out where

their refund is or there’s a mistake on their account, to fix that is

quite a laborious process.

All of these are what we call our ‘‘basic tax administration systems.’’ Frankly, Mr. Chairman, I think I have testified before, this

agency is very, very deep in the hole in this matter. This is not a

matter of—you know, most businesses today are going forward

with their basic—you know, like, for your bank the demand deposit

system is there. OK. They know how many debits and credits there

are in somebody’s bank account. What they’re working on is putting it on the Web and making it easier for people to do banking

over the Web.

We’re going back to foundations and rebuilding, you know, if you

will, the equivalent of our basic checking account system, which I

can’t stress too much is really an essential thing for this country.

Every day we see examples of really horrible problems that we

have in just administering the tax laws because of the limits of

these systems. Unfortunately, we’re so far behind that this is not

an easy process to fix.

We have in place now, over the last year and over the last several years, put together the outlines of a plan of how to do this,

and we are now beginning to launch this process. In fact, we’ve

just, within the last several months, submitted the first large request to our Appropriations Committees to get money released

from the fund that has been established to provide this.

At the same time what we’re doing is we’re building, as is shown

on this curb, the management process that we need in place.

This is a very complex, large-scale program, and, as GAO and

many others have observed, the IRS in the past has not had in

place the management process to do this.

We are putting that process in place. To actually make it work

takes some time and some experience, and so it is not an instantaVerDate 11-MAY-2000 07:57 Mar 09, 2001 Jkt 000000 PO 00000 Frm 00050 Fmt 6633 Sfmt 6633 C:\DOCS\70279.TXT HGOVREF1 PsN: HGOVREF1
47

neous process and it can’t be done just by reading textbooks and

by going to training classes. I mean, we can’t build a world-class

football team by just, you know, reading—watching videotapes of

football games.

So we have to proceed in a measured pace, and I think one of

the most important responsibilities that I feel I have—and my top

management team is working on this—and you’ve met Mr.

Cosgrave and some others—is to try to really manage this process

so the level of activity we undertake, in terms of making actual

projects go forward, initiating projects, is managed in relation to

the capacity we have to manage them. That’s sort of an ever-changing process.

However, just to put the bottom line as to what I expect to happen, if we get the release approval we expect from the committees

to release funds, we will be launching the first real significant development projects which will deliver some initial capabilities next

year in 2001. These will be mainly in the area of customer service

and customer communications.

Then, basically every year for the next, you know, as far as we

can plan at this point, at least 5 years, every year, at least once

and possibly twice a year, we will be delivering additional new capacity into the system, and this will include not only the electronic

services, the e-filing, and customer communications, but I think

one of the most important of all these is the taxpayer accounts data

base, because, again, we need to get rid of that 35-year-old tape file

before we can do anything else.

I think we finally have a plan as to how to do that in a sort of

way that has acceptable risk.

One other area I’ll mention that I know has been important to

you, Mr. Chairman, as well as Mr. Turner, is the whole area of

debt collection. We talked about this. We now have, I think, the

outline at least of a plan to replace the technology that we need

and to basically completely re-engineer this process. I don’t have

time to go through it this morning, but I think when we get to that

we will have something that will basically have the effect of allowing us to act much more quickly on overdue accounts, which right

now is not one of our forefronts. We’re very slow—to act much more

quickly on potential or actual overdue accounts, and also use our

resources more efficiently to do collection the right way. If all it

takes is a phone call, we’ll only make a phone call. If it really takes

a collection officer to go out there, we can do that.

This, in turn, might provide us some broader opportunities, such

as the ones I know you are interested in, to use other resources,

perhaps outside resources to supplement our own, because basically we will have in process with this collection system what we

really need to manage our collection process, but this is not going

to happen in a year, this is going to take a couple years.

Mr. HORN. You mentioned in this answer that you have two committees. Now, that’s Senate Finance and House Ways and Means?

Or are you also including the Appropriations Subcommittee?

Mr. ROSSOTTI. Well, on this matter it is the Appropriations Committees actually that we have to work with to get the money released.

Mr. HORN. So this would be Mr. Kolbe’s subcommittee?

48

Mr. ROSSOTTI. Yes, sir.

Mr. HORN. And on the Senate side the same?

Mr. ROSSOTTI. Senator Campbell.

Mr. HORN. Senator Campbell?

Mr. ROSSOTTI. Yes.

Mr. HORN. I now yield to the gentleman from Texas, Mr. Turner.

Mr. TURNER. Commissioner, you mentioned your efforts to try to

improve debt collection. As you know and your staff is aware, I introduced a bill, H.R. 4181, last week, joined by Chairman Horn, as

well as Chairman Burton and Ranking Member Waxman, and, as

I recall, most of the members of our subcommittee, to try to help

on your debt collection problem.

As you know, the law has provided for some time under the Debt

Collection Act that if a person owes a non-tax debt to the Government they can go out and get Federal contracts and get Federal

loans and other Government benefits, and so we wanted to close

that loophole by providing that tax debt is now subject to those

same rules, so that if you owe tax debt you can’t get an SBA loan

until you make arrangements to pay your tax debt, or you can’t

enter into a contract to sell the Government some equipment or

services if you owe taxes, unless you make arrangement to pay

those taxes.

I know your staff has been kind to take a look at the bill, and

I wanted to ask you just three questions. One is: do you feel the

concept is good with regard to it? And then I wanted you to comment on whether you thought you could administratively handle

this task and whether you felt good about the efforts we’ve made

to address the privacy concerns with the provision that we have in

there that says the taxpayer is the one that will sign the consent

form to release the information as to whether or not they owe any

taxes, and that form would be promulgated by your office, but it

would go to you and then you would respond back to the agency.

Mr. ROSSOTTI. Let me just talk about the administrative one

first, because that’s the one that most directly affects us. I think

that we could administer that, provided, in the short term, if the

volume of transactions was relatively limited. The only limitation

there is because of our computer systems. A lot of this kind of stuff

has to be handled semi-manually right now, so as long as it wasn’t

too large a volume of transactions, which I don’t think it would be

if it was Federal contracts, we could manage that. In the longer

term, we’d be able to manage a larger volume, you know, we modernize our computer systems, but in the short term that would be

the only issue administratively is just how large the volume of

transactions would be.

As far as the privacy issue, I think that certainly requiring a disclosure of consent by the taxpayer would be an appropriate step,

would be the right and necessary step to conform to the requirements of disclosure. We need that under our 6103, which is the section of the tax code which deals with taxpayer privacy.

I think that, on the broader issue of privacy, there is, I guess,

a longstanding and probably never-ending debate over the broader

question of whether it is the right policy decision to use tax information for other legitimate Government purposes. That’s more of

49

a broader policy issue. The Treasury probably takes the lead on

that, rather than the IRS.

The Joint Committee has issued a report just recently on this

very subject which dealt with disclosures of tax records, even with

consent of taxpayers, to other Federal agencies for various other

purposes, and what they simply said was that they felt that it

should be done only if there is a ‘‘compelling case’’ made by the

part of the other agency. Whether it is a compelling case or not is

a question.

But I think that, from the point of view of helping us to collect

tax debt, to the extent that we had additional, you know, incentives, if you will, built into the taxpayers to actually pay those

taxes, that can only help us.

Mr. TURNER. Thank you. I want to thank your staff for helping

us on the bill.

We are going to have a hearing on May 9th, as I recall, Mr.

Chairman, that you’ve set, and I welcome any of your staff’s input

between now and then—— Mr. ROSSOTTI. Sure.

Mr. TURNER [continuing]. Or at the hearing to be sure that we

do this right.

Mr. ROSSOTTI. Sure.

Mr. TURNER. The objective clearly is to enhance collection of

taxes, but to do it in a way that is appropriate.

Mr. ROSSOTTI. Yes.

Mr. TURNER. So any help that your staff can give us is welcome

on this.

Mr. ROSSOTTI. We’ll be happy to.

Mr. TURNER. Thank you very much.

Mr. ROSSOTTI. We’ll be pleased to do that.

Mr. HORN. I thank the gentleman.

It is on May 9th, a Tuesday, 10 a.m., right here. And so we look

forward for future action.

Let me ask you about the General Accounting Office testimony

before this subcommittee. They said the IRS chief financial officer

is not appropriately placed in the organization to address its serious financial and operational problems. What action is being taken

by you and your management team to address this particular problem, because we had a real concern over the lack of internal methods for looking at the financial statements.

Mr. ROSSOTTI. Mr. Chairman, it is always a pleasure to be here

and to be able to give a clear, simple, straightforward answer that

we fixed that problem. In this case, I can honestly do that because

we have successfully recruited and appointed Mr. Rogers as the

chief financial officer, and he now reports, as of about 2 weeks ago,

directly to the Office of the Commissioner. That includes myself

and the deputy commissioner.

The reason it is stated that way is there are certain matters that

I am recused from with respect to financial systems, but the deputy

commissioner, Mr. Winzel, who is here with me today, will take my

place in those cases.

But the important point is Mr. Rogers is now, No. 1, appointed

on a permanent basis. He was previously acting. Second, he is reporting up directly through the Office of the Commissioner. We’ve

50

also made certain other realignments to give him some more authority and staff.

And so I believe that I can honestly say at this point that we

fixed whatever concerns there might have been in that regard.

They have been definitively addressed.

Mr. HORN. So you are very happy with it?

Mr. ROSSOTTI. On that particular point we have. I have to say

that we still have a tremendous amount of work to do to address

many of the issues in financial systems—not just financial systems,

but our whole accounting process. Some of them Mr. Rogers and

his team, with the support of Mr. Winzel, I believe will be able to

address this year in a very, you know, active way. They relate to

such things as reconciling balances with the Treasury and hopefully working on our property management.

Others, of course, as GAO, itself, have noted, are really longerterm issues related to technology modernization. They have to do

with fixing the basic accounting systems. Those will not be fixed

this year, obviously, but we will be working on the plans that will

allow us to replace those systems longer term.

Mr. HORN. The senior counselor of the National Taxpayers

Union, Mr. David Keating, noted in his testimony, which is about

to come, that Treasury Secretary Summers said many times that

the Board of Oversight is unnecessary and unwise, and ‘‘the long

delay in submitting the nominations raises the question of whether

the Administration is seeking to revamp the IRS on its own without the oversight and input of the legally required IRS Oversight

Board. It also suggests to taxpayers the IRS reform is a low priority issue for the Administration.’’

Then he says, ‘‘We were also disappointed that none of the nominees appear to have, as required by law, professional experience

and expertise in the needs and concerns of taxpayers.’’

Do you want to make some comments on that? I realize they

aren’t your nominees.

Mr. ROSSOTTI. Yes. Well, first of all, as far as the issue, though,

of whether the Treasury Department supports this whole concept,

I mean, it is a fair statement that in the early stages, when the

bill was being debated, that there was a great debate about this

and exactly what the powers of the Board should be, but I think

that threshold was passed long ago, frankly, and I worked very

closely with the Secretary.

I can tell you the Secretary was probably, especially toward the

end of last year, as frustrated as anybody else at various things

that caused us not to get these nominations up there.

I can tell you just one thing is that going through the clearance

process to get a private sector person who has never been in the

Government before into this, because they go through the same

thing that you would go if you were a full-time employee, is really

quite an interesting process. And it’s not only lengthy, but in some

cases it caused people to drop out.

So it was very difficult. I do not believe, from my observation,

that the delay was caused by the Treasury Department not wanting this to happen.

51

It’s true in the early stages they were against it, but once they

changed they did get behind it, and I think that they absolutely— the Secretary does want this to work.

Now we’ve had the nominees and they are in the Senate, so it’s

just a matter of the Senate acting, and we’ll get them there.

As far as the nominees, themselves, I can only say that we have

a wide range of nominees that cover such things as, you know, for

example, Mr. Colby—that’s not Congressman Kolbe, but the nominee Mr. Colby—who actually is one of Senator Grassley’s constituents, and he’s a cattle rancher from Iowa, small business person.

The other side, we have people like Mr. Farr, who ran American

Express and had a lot of experience at the big business side, and

we have, you know, Mr. Levitan, who is very much of an expert in

large-scale technology programs.

So it is a wide-ranging board. I don’t know whether one can

prove that it touches every base of all the things that were listed

in the legislation, but I think it is a wide-ranging board, and they

are certainly interested in the task that has been assigned to them,

from what I’ve seen from talking to them.

Mr. HORN. Well, my last question—I certainly agree with you, by

the way, on it’s a wonder we get anybody to serve in the executive

branch of the Federal Government in terms of the forms, the ethics, the financial filings, and all the rest. So these do take time,

and I understand that.

My last question is that you’ve testified you’ve implemented the

various taxpayer rights legal provisions; however, you stated you

are several years away from making them work more efficiently

and at higher quality, so I’d like you to elaborate on what you

mean by that and what are you doing to address that situation.

Mr. ROSSOTTI. Well, what I mean by it is that the taxpayer

rights provisions were very pervasive in their impact in a way that

almost every employee or a large percentage of our employees

works. And many of them were quite complex.

An example of what I mean, the innocent spouse provision. This

was a very important provision, very high profile, and I think a

very necessary change in the law.

What happened at the time that the law was passed is that,

whereas there was one provision in the law that in very limited circumstances allowed for relief of liability on a joint tax return, there

are now four provisions, including the one that was there before,

and they are really quite finely tuned, as is appropriate, to try to

determine, you know—because here you are talking about taking

basically a married couple that filed a joint tax return and now has

split up, and you’re trying to figure out who knew what about their

tax return at the time they filed it. I mean, that’s not a simple

thing to do.

Then it adds to it an additional consideration, which the IRS has

not really been required to do in the past, to my knowledge, which

is deal with equity. In the past it was strictly, you know, who owed

the money. On this particular provision, as well as some others,

there is now what is called ‘‘equitable relief.’’ Well, you know, figuring out what is appropriate to give equitable relief to one spouse

in a marriage on a tax liability is something that takes some time

to learn.

52

So we went forward and got out forms and we let people file

claims, because they were—as was required, and we began to adjudicate those claims, but learning how to do it correctly and learning

how to do it in a reasonable amount of time has been quite a challenge.

I think we have made some big progress. Again, it’s a curve like

that. It’s a learning curve. You just don’t do it overnight.

I think at this point, just taking that provision, we now have gotten out lots of guidance. We’ve learned how to adjudicate some

cases. We’ve taken advantage of that experience to revamp the

training materials. We’ve done a whole bunch of things which I

won’t go into here. So now we are at a point where I think we are

starting to do them in a timely manner, and, second, do them correctly, with higher assurance that they are being done correctly.

That’s an example.

And there are 71 different provisions. I could give you a story

like that on each one.

Mr. HORN. Does the gentleman from Texas have any further

questions?

Mr. Rossotti, the commissioner, will stay through the next panel

and is prepared to answer questions that are raised by panel two.

Mr. TURNER. I wanted to give you an opportunity to make this

point again about your need for funding for your modernization effort. I know you intend to go to the appropriate committees and

seek some movement of funds within your agency, but the overall

modernization effort seems to me to be one that may very well and

could detract from enforcement, and I don’t think any of us would

want that to occur.

I want to be sure that you have been able to make your case

clearly for why you need additional funding for modernization.

Mr. ROSSOTTI. Mr. Turner, I think that, you know, what we have

to do in the budget is to both do the modernization but also keep

enforcing the tax laws at the same time. I mean, that’s the two

things that we have to do.

I think if you look at some of the previous charts that were up

there—I don’t know whether, Floyd, you can keep the previous one

up—what has happened over the last—and this really is even before the Restructuring Act, but the budget was very constrained,

and a majority of the money is for the case work, for going out and

auditing and collecting money.

What has happened is you can see in the green line that the

number—since 1995, the number of front-line people—this is in

compliance. These are people that actually audit taxpayers, collect

money—the green line is what was happening just to the staffing

because of the budget. The red line shows that the gap between

those two, with the additional requirements of the Restructuring

and Reform Act, just required more time.

So if you look the that red line, you can see that we’re down in

2000 well below where we were 4 years ago. And then there are

even some intangible factors on top of that.

The net effect is we have half the number of audits that we were

doing 4 years ago. Nobody knows exactly what the right number

is, but I don’t think that kind of a line is where we—you know,

we’re really risking the tax system if we keep that line.

53

So what we’ve proposed in the 2001 budget is two things, basically. One is stabilize that. OK? That’s what we call it, stable. Give

us enough staff to basically keep that from continuing to go down,

keep it steady so we will no longer go down in terms of our compliance enforcement activities, and then, the other piece of the money

is for the modernization for the technology, which is really how we

are going to fix this.

I mean, we know that we can collect money more efficiently. I

mean, I feel very confident of that. It does require some people, but

we can leverage those people with more procedures and better technology, but it is going to take a few years to get to that point.

Mr. TURNER. In my last comment, I want to—for those of us that

are struggling to get our tax return in, April 15th is on Saturday

this year. Does that mean we have to have it in the Post Office?

Can we get it postmarked by April 15th on a Saturday?

Mr. ROSSOTTI. Well, I think that it has actually come to the 17th

as the day that it has to be done.

Mr. TURNER. OK. So you can actually deposit your tax return in

the Post Office on Monday and still be in compliance with the law?

Mr. ROSSOTTI. Yes, sir.

Mr. TURNER. And I also wanted to mention, for those who may

be interested in a phone number, 1–800–829–1040 is where you

can get information, among—there are several other options available, as well, for taxpayers, but that is the 24-hour, 7-day-a-week,

toll-free phone number, is it not?

Mr. ROSSOTTI. Yes.

Mr. TURNER. The 1–800–829–1040?

Mr. ROSSOTTI. Yes, sir.

Mr. TURNER. Well, for those who are struggling, as I am, to meet

the deadline, I urge them to take advantage of that number.

And I noticed that your website is becoming much more popular

in the past. I believe you had twice as many hits this year as you

did last year, and that IRS.GOV is another place where taxpayers

can get help.

Mr. ROSSOTTI. Yes, sir. Absolutely. As a matter of fact, I can tell

you that this calendar year, through the end of March, we had 658

million hits on that Website, so it is really quite a popular one and

one of our best products.

Mr. TURNER. Thank you.

Thank you, Mr. Chairman.

Mr. HORN. We thank you. That’s good information for the average citizen.

Well, Commissioner, I’m done asking questions of you and I’ll go

to the next panel. And I must say you are a brave commissioner

to stay here and when your critics are there. Most of the other people just run.

Mr. ROSSOTTI. We’re happy to stay. We consider them very constructive critics.

Mr. HORN. Well, I know you are, and that’s why you’ve got good

relations on Capitol Hill.

So we will now have panel two: Margaret Wrightson of the General Accounting Office; Colleen Kelley of the Treasury Employees

Union; Mr. Oveson, National Taxpayer Advocate; and David

Keating, National Taxpayers Union.

54

If you will stand and raise your right hands, and if there is anybody going to assist you on the answers have them stand, also.

We have four at the witness table, three in back, for a total of

seven.

[Witnesses sworn.]

Mr. HORN. The three helpers and the four witnesses are certified

and noted to the clerk.

We will now start with Margaret Wrightson, the Associate Director, Tax Policy and Administration Issues of the U.S. General Accounting Office, the programmatic arm of the legislative branch.

STATEMENTS OF MARGARET T. WRIGHTSON, ASSOCIATE DIRECTOR, TAX POLICY AND ADMINISTRATION ISSUES, U.S.

GENERAL ACCOUNTING OFFICE; COLLEEN M. KELLEY, NATIONAL PRESIDENT, NATIONAL TREASURY EMPLOYEES

UNION; W. VAL OVESON, NATIONAL TAXPAYER ADVOCATE,

INTERNAL REVENUE SERVICE; AND DAVID L. KEATING, SENIOR COUNSELOR, NATIONAL TAXPAYERS UNION

Ms. WRIGHTSON. Thank you, Mr. Chairman.

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

thank you very much for inviting me here this morning to discuss

IRS’ progress on key elements of its modernization efforts.

Let me begin with my three bottom-line conclusions. In each

case, it is important to say at the outset that there is substantial

agreement between GAO and IRS on the issues and actions IRS

must take.

First, before taxpayers will see any appreciable benefits from

modernization, IRS needs to make breakthrough changes in its

business practices and become more customer friendly.

Second, if IRS is to better balance the value it historically has

placed on compliance with the value it now wishes to place on customer service, it needs to revamp its performance management system.

Finally, modernization will not succeed unless IRS follows

through on important tasks for information systems modernization—most notably, complete its enterprise system architecture and

systems development life cycle.

With regard to business practice changes, IRS has already completed a number of developmental steps that will help it redefine

the way it does business, including establishing an organizational

structure built around customer-focused operating divisions. Reorganization is going reasonably well, but the agency must also reengineer business practices. Breakthrough changes are needed because IRS’ current processes are not well-suited to taxpayers’

needs.

IRS has a number of re-engineering efforts underway, and the

commissioner has mentioned a few. I’d like to highlight three this

morning.

The first one is something that we’re going to call ‘‘creating onestop shopping at IRS walk-in centers.’’ Taxpayers, as you know,

have long been frustrated in trying to reach the right person at

IRS. In large part, their frustration came from IRS’ old structure

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payer inquiries, clarifying and correcting tax returns, and collecting

unpaid taxes.

Because of this stovepipe structure, IRS really couldn’t take care

of taxpayers on an end-to-end basis. To help solve the problem, IRS

has established a new position that can handle a much larger

range of taxpayer problems. It is called the tax resolution representative [TRR]. TRRs will still perform traditional duties like

answering taxpayer questions and helping prepare returns, but

they also will be able to do compliance work, like installment

agreements, lien and levy releases, account adjustments, and simple audits. IRS intends to have about 2,000 TRRs on staff by fall,

2001.

Now, implementing the TRR concept is, of course, going to require substantial investments in people and systems. Probably the

greatest human capital challenge for IRS will be the cross-training

that is going to be needed, but TRRs are also going to need enhanced IT so they can have access to complete and up-to-date account information or they won’t be able to be successful at this new

role.

The second example I want to mention is one that has been mentioned previously, which is electronic filing. During the filing season, we all see commercials of tired and frazzled taxpayers. This

year, my personal favorite saga is a taxpayer who is on day 20 of

trying to paper file his family’s return. The commercial is pretty

funny. I mean, the taxpayer has got hands full of pencils, his hair

is uncombed, his shirt tail is hanging out. But the fact is that

paper filing a tax return is really no laughing matter.

Electronic filing, or e-filing, is not going to make the tax code any

simpler, but it can reduce the wear on taxpayers from filing itself.

E-filing also reduces the calculation and transcription errors that

later trigger IRS notices, and that’s all to the good, as well.

But e-filing will benefit IRS. I don’t know how many of you have

been to an IRS service center, but I think it is fair to say that IRS

is drowning in paper.

The returns are literally piled to the ceiling in the halls at IRS

service centers. These returns must be opened and sorted and reviewed, transcribed, shipped, and stored. And then later, if IRS employees need additional information, they have to get them shipped

from where they are stored so they can have access to that paper

return again.

Although electronic filing promises to be win/win, however, IRS

is having difficulty making it sufficiently appealing. A major criticism is that e-filing is not yet paperless. IRS has been testing

eliminating W–2s and signature documents and allowing people to

pay balances using credit cards. The commissioner mentioned that

in his testimony.

However, before electronic filing can fully replace paper, IRS

must enhance its technology to allow the full range of returns to

be filed and also develop new marketing strategies for additional

market segments.

The last example that I want to point to of business process reengineering is something called risk-based examination. Here, I’m

going to start with a personal story, because I think, while taxpayer benefits from one-stop shopping and e-filing are pretty obviVerDate 11-MAY-2000 07:57 Mar 09, 2001 Jkt 000000 PO 00000 Frm 00059 Fmt 6633 Sfmt 6633 C:\DOCS\70279.TXT HGOVREF1 PsN: HGOVREF1
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ous to all of us, I’m not sure it is so obvious why IRS building a

better mousetrap for auditing is going to benefit taxpayers. So let

me use an example.

When I was about 10 years old, I remember standing on the

porch with my dad, and the postman walked up—that was in the

days when they, in fact, did walk up—he talked to my dad and

handed him the mail. And, after thanking the postman, my dad

started sifting through that mail until he stopped and he stared at

a very official-looking document. You’re right. Actually, in retrospect, that was a notice from the IRS.

I’m never going to forget, as a 10-year-old, looking at my dad and

seeing this big guy and the panic on his face when he looked at

that envelope. And I’m also not going to forget that he waited until

my mom came home before he opened it up. I think he needed her

moral support.

What’s striking about my own little example is that it is not unusual. No taxpayer wants to get a letter from the IRS in his or her

mailbox—unless, of course, it is a refund from the Treasury Department. But they certainly don’t want to be audited when they

are compliant, nor, when audited, do taxpayers prefer anything

other than for their audits to be efficient and targeted only to the

questionable return items.

Our past work has identified weaknesses in how IRS determines

which taxpayers to audit. When IRS picks the wrong person or approaches an audit like a fishing expedition, everybody loses. Taxpayers are burdened unnecessarily, and IRS wastes valuable resources.

To improve the situation, IRS hopes to deploy something called

‘‘risk-based examination,’’ a model that will target audits more accurately and help determine which compliance strategies are actually going to be the most efficient and effective.

If IRS’ approach is successful, taxpayers and IRS will both benefit, but, as was true with my first two examples, training, new

technology, and more data about taxpayers are going to be critical

if that business process is going to be re-engineered effectively.

OK. The second part of my testimony looks at IRS’ efforts to revamp its performance management system. Before Congress enacted the Restructuring Act, there was an uneasy feeling on the

Hill and elsewhere that IRS employees were so intent on assessing

and collecting taxes that they did not give due regard to taxpayer

needs and rights.

The Restructuring Act mandated changes to IRS’ performance

management system, including a new mission statement to place

greater emphasis on taxpayer needs. IRS now has that new mission statement and is in the process of revamping its performance

management system. However, for the system to work, IRS employees will need to understand that customer service and compliance

are intended to be complimentary and not competing values and

activities. Our work suggests that this relationship may not be well

understood at IRS at this point.

The commissioner does not view compliance and customer service

as competing. Indeed, he has said that improvements in customer

service will increase compliance among taxpayers who do not unVerDate 11-MAY-2000 07:57 Mar 09, 2001 Jkt 000000 PO 00000 Frm 00060 Fmt 6633 Sfmt 6633 C:\DOCS\70279.TXT HGOVREF1 PsN: HGOVREF1
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derstand the applicable tax law requirements or find IRS’ processes

too daunting to deal with.

Understanding that customer service and compliance activities

are meant to work together will take time at IRS and an ample

amount of communication and clear training, which I think is going

to be mentioned by some of our subsequent witnesses.

At the same time, however, it will be very important to ensure

that IRS employees also understand that they can and should use

the full range of IRS’ enforcement tools to collect taxes owed by

those who willfully fail to comply with the tax laws.

Our second concern about performance management involves

IRS’ new system of balanced performance measures. Although IRS

is on the right track with these measures and may well be regarded as a leader in the Federal Government in this area, it still

does not yet have a key measure of performance.

Mr. Chairman, that measure is a measure of voluntary compliance. For over 30 years, until the early 1990’s, IRS had measures

of voluntary compliance that were developed by periodically auditing random samples of taxpayers’ returns.

In 1995, IRS formally canceled plans to continue the random audits because of concerns that it was overly costly and overly intrusive on compliant taxpayers.

The commissioner has said that, in the absence of such measures, informed decisions on strategies to improve voluntary compliance will be impossible.

At this point, you might be wondering: why not just use data

from audits that IRS does conduct to measure voluntary compliance? The answer is that that data would not capture the extent

of voluntary compliance among all taxpayers. Using only audit results is actually akin to using information about speeding tickets

to measure how many drivers are driving safely. As anyone who

has ever ventured onto the Washington Beltway knows, just because a driver doesn’t get ticketed doesn’t mean he or she is driving 55.

Similarly, the results of IRS’ audits tell you something about the

population of taxpayers who are audited, but they tell you nothing

about the population of taxpayers who are not.

IRS is beginning to tackle the problem of how to measure voluntary compliance, but the solution likely will involve auditing

some—and I say some—randomly selected returns, and IRS may

have difficulty going forward without the support of key outside

stakeholders.

GAO believes that, in moving forward on this, IRS should work

diligently to minimize intrusion and burden on compliant taxpayers; however, we also believe in the principle of random selection when necessary to ensure the accuracy and integrity of IRS’

results.

The last part of my statement is on a topic that I know, Chairman Horn, you are very familiar with, which focuses on IRS systems modernization challenges, which is a perennial problem at

IRS.

Although IRS’ past track record in this area is dismal, Congress

has supported IRS’ most recent efforts to modernize its systems

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through the 1998 and 1999 Appropriations Acts and the establishment of the new technology account.

In light of concerns about giving IRS free reign, however, Congress set certain conditions on spending, including requiring spending plans to ensure that IRS had the management and technical

discipline to successfully design major software-intensive systems.

It is this issue that the commissioner is referring to with his ‘‘S’’ curve, I believe.

Thus far, IRS has obligated about $68 million from its technology

account and submitted plans in March asking for approval to spend

an additional $176 million; however, based on our review of IRS’ most recent plan and reported progress, we have concluded that

IRS is still not ready to build major software-intensive systems.

As I noted earlier in my statement, IRS has not yet completed

its enterprise systems architecture and systems development life

cycle. Until we are convinced that IRS is ready, we will continue

to designate its systems modernization efforts as high risk.

Thank you, Mr. Chairman. I can answer questions now or wait

until you complete the rest of the panel.

[The prepared statement of Ms. Wrightson follows:]

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Mr. HORN. We’re going to have everybody else finish. Each are

going to summarize for 5 minutes each. That’s 15 minutes. And

then we’ll still have a chance for questions and the commissioner

some answers to the questions.

So we will now go to Ms. Colleen M. Kelley, national president

of the National Treasury Employees Union.

Ms. KELLEY. Thank you, Chairman Horn, Ranking Member

Turner, and members of the subcommittee.

I am the president of the National Treasury Employees Union

[NTEU] which represents more than 155,000 Federal employees

across the country, including the employees who work at the Internal Revenue Service.

The IRS interacts with more citizens than any other Government

agency or private sector business. Twice as many people pay taxes

as vote, yet many Americans take for granted the outstanding work

done by IRS employees.

Following enactment of the IRS Restructuring and Reform Act of

1998, Commissioner Rossotti set in motion a process to restore the

public’s confidence in the IRS. The commissioner recognized that

any meaningful reform had to include the active participation of

his chief assets, his employees, and employees have been involved

in the reorganization work being done as we speak and going back

to the enactment of RRA 1998.

I believe that modernization will succeed, with the support of

Congress and the dedicated work of IRS employees, and I believe

Commissioner Rossotti would agree with me that, although the

modernization of the IRS will require several more years of effort

and commitment, the results so far have been positive.

Communication between IRS management and the employees

who make the IRS work has been crucial and will continue to be

essential in improving customer service and increasing productivity

at the IRS.

I was pleased that Congress, too, recognized the importance of

ensuring that the employees’ voice in reforming the IRS be heard

by insisting on an employee representative on the IRS Oversight

Board, which was established through RRA 1998.

Congress recognized that an employee representative was necessary, not in spite of, but because of the important role of IRS employees in reform. NTEU takes great pride in the fact that we have

had a cooperative relationship with the IRS dating back more than

a decade. Our partnership efforts and employee efforts are constantly being tested, reworked, and revised in the face of budget restrictions and funding limitations and changes in the tax law.

One particular area where NTEU and the IRS have worked together and where we feel we have made great strides has been in

improving customer service. This has included not just providing

longer office hours, but hours that meet customers’ needs.

Without the commitment of the IRS rank and file employees,

these well-documented customer service improvements could not

have been accomplished in the short timeframe in which they occurred.

We are at a critical point in our restructuring efforts at the IRS.

First, technology improvements and investments must continue to

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give the IRS and employees the tools that they need to do the work

that America’s taxpayers need and want done.

Next, since 1993, staffing levels at the IRS have been reduced by

17,000 FTEs; yet, during this period IRS’ toll-free phone services

and Web-based services for taxpayers have improved and taxpayers

have more options for filing their tax returns.

Our employees have made great strides in customer service at

the IRS, while continuing to perform the necessary functions of ensuring that the taxes that are due to the Treasury are paid.

Additionally, Congress has made hundreds of changes to the tax

code in the past 3 years. In fact, the Taxpayer Relief Act of 1997,

alone, made 801 tax law changes.

Next, continued record economic growth in this country has led

to an increased number of tax returns and more complexities in

taxpayer and business filings. The bottom line is the IRS work

force is being asked to do considerably more work with fewer resources. And, while I applaud advances in the use of technology at

the IRS and I commend this subcommittee’s commitment to these

improvements, technology, alone, cannot possibly manage the increasing workload at the IRS.

For this reason, I wish to express NTEU’s strong support for increased funding for staff training and the new IRS initiative, STABLE. This initiative will support the hiring of approximately 2,800

new employees at the IRS. The number of IRS revenue agents has

declined by roughly 17 percent since 1995, and it will continue to

decrease another 4 percent in this fiscal year. We need to reverse

the severe cuts in IRS staffing levels and approve this STABLE request.

One last thing I would like to mention is that IRS employees continue to work in fear in section 1203 of the Revenue Restructuring

Act. As you know, section 1203 lists 10 infractions, known as the

‘‘10 deadly sins,’’ for which IRS employees face mandatory dismissal. The broad scope and vague nature of these 10 deadly sins have

created anxiety and confusion in the workplace.

Just last week, the House Ways and Means Committee approved

legislation which would waive penalties for taxpayers who do not

pay their taxes on time; yet, if IRS employees are as little as 1 day

late in paying their taxes, they are subject to mandatory dismissal.

NTEU vigorously opposed section 1203 and continues to believe

that this section of the Restructuring Act should be repealed. I am

hopeful that this subcommittee will work with NTEU and Commissioner Rossotti to address this issue.

In summary, since 1992 the IRS work force has declined by more

than 16 percent. In the meantime, demands on IRS employees have

increased significantly. Unless Congress gives the IRS the staffing

and the resources for technology necessary to do the job, our entire

tax system will be threatened and we will not be able to meet the

challenges of the 21st century.

Thank you, again, for the opportunity to appear today.

Mr. HORN. Thank you very much.

[The prepared statement of Ms. Kelley follows:]

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Mr. HORN. Our next presenter is W. Val Oveson, National Taxpayer Advocate, Internal Revenue Service.

Mr. OVESON. Thank you, Mr. Chairman and distinguished members of the subcommittee. I appreciate the opportunity to be here

with you today and to talk a little bit about the role of the Taxpayer Advocate—the ‘‘Taxpayer Advocate Service’’ is the name we

have adopted internally—in helping taxpayers to resolve their

problems with the IRS.

I have now been the National Taxpayer Advocate for 18 months,

and during that 18 months we’ve implemented the provisions or

RRA 1998 within the Taxpayer Advocate Service, or in the process

of implementing them. Many of them, as Commissioner Rossotti

mentioned, will take some time to actually play themselves out.

The restructuring provided opportunities for the Taxpayer Advocates across this country to be better positioned, better trained, and

more focused to address the problems that the taxpayers are facing.

I am pleased to report to you that the new Taxpayer Advocate

Service officially transitioned as a modernized organization on

March 12, 2000.

Every State now has at least one local Taxpayer Advocate who

works to resolve problems that individual taxpayers have with the

IRS. Many States have multiples, depending on the population and

other factors. They also address taxpayer problems within the IRS,

policy and procedural failures, and recommend solutions to improve

those problems.

Between October 1, 1999 and March 31, 2000, the Taxpayer Advocates across this country closed 114,000 cases. During fiscal year

1999, Taxpayer Advocates worked on more than 292,000 taxpayer

cases to help resolve their problems with the IRS, and almost

93,000 of those cases met the expanded hardship criteria defined

in RRA 1998.

RRA 1998 expanded the authority to issue taxpayer assistance

orders when taxpayers are suffering or about to suffer a significant

hardship.

We work with front-line IRS employees in an effort to resolve

taxpayer problems, and knowing that we have the authority to

issue the taxpayer assistance order is usually enough to convince

the functional IRS employees to work with the taxpayer to resolve

the issue.

So far this fiscal year we have issued three taxpayer assistance

orders. During fiscal year 1999, we issued five.

We also identify and monitor the progress of procedural and systemic changes designed to benefit taxpayers. For example, we

worked with IRS operations to delay the implementation of some

of the procedural changes related to secondary Social Security

number matching. By negotiating a change to the implementation

date, we prevented refund delays and communications frustrations

for thousands of taxpayers.

In addition, we worked with a variety of stakeholders to identify

legislative changes. In the fiscal year 1999 report, I included several recommendations related to penalty and interest administration, and a proposal that would allow the IRS to correct its own erVerDate 11-MAY-2000 07:57 Mar 09, 2001 Jkt 000000 PO 00000 Frm 00092 Fmt 6633 Sfmt 6633 C:\DOCS\70279.TXT HGOVREF1 PsN: HGOVREF1
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rors—amazing as that sounds, that’s something that needs to be

corrected.

I am pleased that several of these provisions are included in the

proposed Taxpayer Bill of Rights 2000.

My annual report to Congress includes a ranked list of the top

20 most serious problems facing taxpayers. Today I’d like to focus

on four of those.

The complexity of the tax code remains the most serious problem

facing taxpayers. I believe that the single most complicating factor

of tax administration is the frequency and number of changes to

the tax law. I encourage you to reduce the complexity of the existing laws, or at least to slow down the frequency of change.

No. 2, the IRS must be able to communicate with taxpayers regarding account activity and computer-generated compliance notices. This means the toll-free telephone service must be improved,

and I say that recognizing that some tremendous improvements

have been made over the last year, but they’re still not enough.

The IRS must ensure that taxpayers can get in to an individual

who can help them with their problems and who can answer the

phone.

It is equally important that Congress fund this critical activity.

RRA 1998 provisions expanded the innocent spouse relief available to taxpayers, and they are filing in large numbers. The sheer

volume of cases stretches the ability of the system to deal with

these cases.

The IRS must reduce the processing time, increase the training,

and ensure that all levels of the agency have internalized the new

requirements of this law in order to get it right in the future.

Offer and compromise is another area of RRA 1998 that I’d like

to talk about for a moment. This provided the authority to resolve

collections issues that the IRS now has the authority to compromise based on the effective tax administration criteria. The

training needs are tremendous. The volumes are much greater

than anticipated. And the IRS must speed up the process so that

taxpayers can get timely decisions to these critical issues.

The changes being made as a result of the modernization are

placing the service in a better position to understand the problems,

the frustrations, and the needs of taxpayers. The new operating divisions will be a catalyst to improving service to the IRS and to

make progress in eliminating problems that are on my top 20 list.

In conclusion, thank you very much for inviting me here today.

The Taxpayer Advocates mission statement is to help taxpayers resolve problems that taxpayers are having with the IRS, and with

your continued support and the support of the Treasury Department and all of the IRS employees, we can continue to make

progress toward that goal.

Thank you very much.

Mr. HORN. Thank you very much.

[The prepared statement of Mr. Oveson follows:]

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Mr. HORN. We now have Mr. David L. Keating, the senior counselor, National Taxpayers Union.

Mr. Keating.

Mr. KEATING. Mr. Chairman, Mr. Turner, members of the subcommittee, I thank you for the invitation this morning to testify on

the IRS, and I appreciate your continued interest in how the IRS

is operating.

A historic step was taken 2 years ago when the Congress passed

and the President signed into law the Internal Revenue Service Restructuring and Reform Act. As a member of the Commission on

Restructuring the IRS, I was both proud and pleased to see that

Congress not only agreed to the far-reaching reforms that we recommended, but went a few more steps beyond.

While a promising start has been made by the IRS, I think it is

still far too early to conclude whether reform efforts will succeed

or fail. If reform is successful, it will take many years before the

average taxpayer will notice substantial improvements in the dayto-day operations of the IRS, especially in the audit and collection

area.

The risk of failure is still high, due to the tax laws’ growing complexity, the agency’s culture that still resists change, criticism, and

independent advocacy for taxpayers, and—I think this is equally

important—the possibility that elected officials will pressure the

IRS to increase enforcement at the expense of fairness.

There are both hopeful signs and discouraging signs. I’m hopeful

the agency will improve because Congress continues to show genuine interest in how it operates. This is something that we had not

seen in years before the Commission was established to review the

IRS. Congress also passed much-needed taxpayers’ rights provisions.

We’re also very much impressed with the work of the commissioner and the caliber of several of the people he has hired to help

him improve the IRS. We believe he brings the right background

and attitude to the job, and we have had the pleasure to meet with

him.

He has proven, I think, beyond a doubt, that a commissioner

does not have to be a tax lawyer or accountant. In fact, a good case

can be made that we may be better off with commissioners who are

not tax lawyers or accountants.

I do want to say a few things about the IRS Oversight Board. My

testimony was quoted earlier, but I really do think it was important for the administration to meet the legal deadline. It was over

a year late, and we’re still waiting, unfortunately, for the nominees

to be confirmed, due to an unrelated controversy in the Senate.

I call on the administration today to encourage the unnamed

democratic Senator, who has placed a hold on at least one of these

nominees and prevented the Senate from considering all of them,

to release that hold and let’s get these nominees confirmed and get

them to work. They should have been on the job quite some time

ago, and I think it is unconscionable that we are holding up confirmation of these nominees for some issue unrelated to the issue

of tax administration and the IRS.

The IRS touches essentially every American citizen, directly or

indirectly, and the unrelated controversy that is being talked about

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in the Senate, my understanding is, concerns some ambassador to

some country that probably isn’t even that large, certainly not compared to the population of taxpayers. The administration should

work with its party colleagues in the Senate and get that hold released to get these nominees confirmed.

Also, I do want to say a few words about IRS culture. It is very

important that the agency’s culture be changed, and they are working very diligently to do that. This, too, requires ongoing commitment by the Congress. For far too long in the past, the IRS emphasized tax collection as opposed to faithful interpretation of the law

and respect for taxpayers’ rights. Much of that attitude, I think, developed over the years from the 1970’s and 1980’s. In that time

pressure was placed on the agency to increase revenues so that

Congress would not have to increase tax rates to close the deficit.

As a result, the IRS developed internal statistic that tracked enforcement actions, while neglecting agency compliance with laws,

regulations, and its own Internal Revenue Manual.

Recent news accounts indicate some Members of Congress and

candidates have raised concerns about the IRS’ level of enforcement actions in the previous fiscal year. While we can understand

these concerns, we think they are misplaced at this time. The IRS

is in the middle of a massive restructuring and retraining program.

In our view, the recent collection statistics are almost meaningless.

Those who expressed a concern about the enforcement statistics

seem unconcerned by recent reports from the Inspector General for

Tax Administration that show the IRS failed to follow the law, regulations, or internal guidelines in roughly one of three enforcement

actions reviewed by the Inspector General. We think this error rate

is also completely unacceptable.

We do note that the IRS is moving ahead with balanced measurement statistics. I am very optimistic that these will help ensure

fair collection and fair treatment of taxpayers in the future.

My statement also explains that the IRS may soon administratively define the power of the National Taxpayer Advocate to issue

a taxpayer assistance order. We think the law is rather clear, and

we are rather puzzled at the need to perhaps administratively define, and we fear limit, that power, which we think power is quite

clear.

The advocate can order the IRS to take any action the IRS could

take on its own. I have spoken with the commissioner on this, and

I know they are working on it diligently, but the same IRS that

doesn’t think that it can post taxpayers who are due refunds on the

Internet because they are allowed to send press releases out to

every newspaper in the country but they can’t take the same press

release and put it on the Internet, shows an IRS that tries to adhere to the law to its letter. Yet, I think the law regarding the Taxpayer Advocate is equally clear and the advocate’s power should be

duly recognized in any administrative action.

One final point I would like to make here—two final points, if

I might—while we applaud the IRS’ efforts to publish photos of

missing children on pages of tax form instruction booklets, we wonder why the IRS is not doing more to reunite millions of parents

with their missing part of their tax refunds.

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The Inspector General noted that the IRS is not bringing to the

attention of perhaps—I think it is 1.7 million taxpayers who appear to have forgotten to claim the child tax credit last year, and

presumably they will make the same error this year.

We found the agency’s response to the Inspector General’s report

unsatisfactory and unacceptable, and we think if there are 1.7 million taxpayers who may have forgotten a tax credit, the IRS should

tell them that they may have forgotten it.

The final point I’d like to make is the issue of simplification. As

Val Oveson has stated, and many of us have stated, the tax law

is so complicated nobody understands it. Yet we expect the IRS to

enforce and administer this law.

One of the recommendations not taken up by the Congress from

the National Commission was some sort of procedure to establish

a quadrennial simplification process or provide additional simplification incentives beyond a simple report by the Joint Tax Committee on pending legislation.

I would like to bring to the committee’s attention and the public’s

attention the interest in simplification was recently demonstrated

by an unprecedented joint initiative of the American Bar Association, the American Institute of Certified Public Accountants, and

the Tax Executives Institute that recommended 10 ways to simplify

the law. Many of these recommendations were quite good, and we

commend them to the Congress.

We see no reason, for example, why there has to be multiple definitions of a child under the tax law to claim various tax breaks

such as tax credit, and earned income credit and personal exemption. It’s ridiculous. It makes things complicated for the taxpayer

as well as the IRS.

Again, thank you very much, Mr. Chairman, Mr. Turner, members of the committee, for holding this hearing and for your continued interest in the IRS.

Mr. HORN. Thank you.

[The prepared statement of Mr. Keating follows:]

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Mr. HORN. I would thank all of you, because each of you has

raised some very interesting points, and we hope to now pursue

them. We’ll start with Mr. Walden, the Representative from Oregon, to begin the questioning.

Mr. WALDEN. Thank you very much, Mr. Chairman.

Mr. Rossotti, I thank you for being here today and for the work

you are doing to improve the situation at the IRS.

I’m curious as to what you believe are the major obstacles in developing a measure of voluntary compliance.

Mr. ROSSOTTI. Well, the difficulty is finding a way to do that

measurement without being overly intrusive or burdensome on otherwise compliant taxpayers. I think Ms. Wrightson gave one of the

better expositions that I’ve ever heard of what is involved in doing

this and why it is necessary.

So what we are working on is a plan or a proposal for how to

get the necessary information that we need to measure voluntary

compliance and figure out how to target our audit resources where

they really are needed and not where they are not needed. That’s

the reason we do it.

We’re working on a plan to figure out how to do that with the

least burden on the taxpayers. It will never be reduced to zero, because it is in some ways like jury duty. I mean, you have to have

some people that go to a jury to basically make the justice system

fair, and it is certainly burdensome on the people that do it while

they do it, so there’s going to be some burden to do this measurement process.

But what we are working on is trying to figure out a way that

we would basically do two things to reduce the burden. One is to

reduce the number of taxpayers that need to be surveyed, and, second, reduce the amount of time it will take for them to be part of

this process.

We have not yet completed that. We have been working on it. As

a matter of fact, this is one of the first things that amazed me,

frankly, when I got to the IRS, because I always heard that there

were these numbers like 87 percent of the people comply and all

that, so where did that number come from? Well, it turns out it

came from some very old studies that are no longer valid and I realized that we had to do something about this.

So we have been working on it, and I think we are reasonably

close to having what I consider an acceptable proposal, but we’re

not quite there yet.

Mr. WALDEN. I think I read in somebody’s testimony, perhaps

yours, that there is $231 billion in uncollected taxes out there. Is

that——

Mr. ROSSOTTI. Well, on the books there is something like $220

or $220 billion of, you know, a whole variety of numbers that represent assessments, and we’re required to keep them for 10 years,

as well as the interest and penalties. That is, frankly, not a valid

number as to what could be—a lot of that is bankrupt corporations

from years ago that are still kept on the books, just because they

are there for 10 years.

According to the GAO audit of our 1999 financial statements, on

the balance sheet there was, if my number is right, I think it was

$21 billion.

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Ms. WRIGHTSON. I’m not the financial person, but I think that’s

right.

Mr. ROSSOTTI. It was either $21 or $20 billion. Somewhere in

that range is the number that was viewed as actually collectible

amounts that we should be able to collect, which actually went

down slightly from the preceding year.

There’s another array of money in that $20 billion that could possibly be collected that represents what are called compliance assessments. These are assessments where we have proposed, an adjustment to your tax bill, but you, as a taxpayer, have not accepted

it, so it is still in, a disputed category, and some of that may turn

out to be money.

So there is a significant amount of money that is out there, but

it’s not $221 billion.

Mr. WALDEN. You weren’t referring to my taxes, personally, were

you?

Mr. ROSSOTTI. No, sir.

Mr. WALDEN. Good.

Mr. ROSSOTTI. I meant ‘‘you’’ generically. Pardon me for using

that. I just meant generically, you, as a taxpayer.

Ms. WRIGHTSON. It is 21.

Mr. WALDEN. Twenty-one?

Ms. WRIGHTSON. Right.

Mr. WALDEN. Billion?

Ms. WRIGHTSON. Right.

Mr. WALDEN. OK. What about putting out some of that to private

collection process? I know Department of Education and elsewhere

has worked pretty effectively trying to recapture overdue student

loans using the private sector in a responsibility way.

Mr. ROSSOTTI. Yes. This is a matter that I know the chairman

has a great interest in, and something that I, personally, in my

previous life, have actually worked on and done successfully.

I think that possibility exists, but I believe, very honestly, where

we are right now is that our whole tax collection process—and I

brought a chart for one of these hearings that showed what it is

because of our computer systems, our internal rules, and the recently passed restructuring account. It is so complicated and our

data systems are so poor that it is really hard to figure out how

you could ever extract a portion of that and turn it over to anybody

very effectively in today’s world.

I think, as we re-engineer it, those possibilities may well exist.

As I said in my earlier testimony, that’s one of the major initiatives

of our re-engineering is re-engineering the collection process.

Mr. WALDEN. Mr. Chairman, I’ll yield back.

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

Mr. TURNER. Ms. Wrightson, you were talking about voluntary

compliance. Is it correct that there is no random audit system at

the IRS any longer?

Ms. WRIGHTSON. Well, there is no—hopefully there is no random

audit system at the IRS because one shouldn’t audit at random.

What we’re really talking about here is the random selection of returns to audit, so that—and, in fact, today there is no random selection process.

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IRS had a process in place. I think the last one was probably 10

to 12 years ago, maybe even 13. It abandoned that process because

it was viewed as too onerous to compliant taxpayers and politically

sensitive, so there is not one now.

We believe, like the commissioner, that, as they go forward, and

they’re going to have to do some measure, probably, of randomly

selected returns; however, no one knows right now how much that

will be required.

For example, IRS could use more information that it already has

about taxpayers. It could audit much smaller numbers. It could do

it on a continuous basis. But it doesn’t have it now and it probably

will need some measure of that in the future in order to get accurate, reliable indicators of voluntary compliance.

Mr. TURNER. And did I read somewhere that the IRS is working

on that, but it’s about 2 or 3 years off before they may be able to

do it?

Ms. WRIGHTSON. As the commissioner has said, they are working

on something called the ‘‘national compliance survey.’’ Do I have

that right, NCS? They have been holding it fairly close, I think for

obvious reasons. It is going to be politically sensitive. We have not

had access to look at what they’re doing. I think we enjoy a fairly

good, close communication with the commissioner. I know our

Comptroller General and he meet every 6 months or so to talk and

this issue came up. So I expect we’ll be looking at that in the future and provide to them again our feedback as to whether the

strategy that they’re using is the one with the least burden, but

also providing reliable results.

Mr. TURNER. Thank you.

Ms. Kelley, you were critical of section 1203, and I understand

your concerns. I am curious as to how many employees have been

dismissed under the new section 1203, to give me some feel for the

actual impact upon IRS employees.

Ms. KELLEY. To date the numbers are actually probably just in

the double digits. It is less than 100. Commissioner Rossotti probably knows the exact numbers, as there are reports issued every

quarter on these.

Part of the problem and the fear that it has created among employees is that even if, in the end, there is not the ultimate termination, the process that employees go through during that period

of time puts them in a position where they are just afraid to do

much of anything.

There are already processes in place in the IRS that require,

under the rules of conduct, that employees file tax returns, of

course, and pay their taxes, and there has always been a process

in place to deal with employees who don’t do that as required

under law, and it is a process that has worked. So those parts of

1203 just haven’t, in our opinion, been necessary and have led to

unnecessary fears and investigations. It also has led to, in some

cases, managers being afraid of making a wrong decision because

of this overview of 1203. And that is just one example of 1203.

There are, of course, 10, and the one that I cited was about paying

taxes late.

Mr. TURNER. Commissioner, what’s your impression of section

1203 and how it has worked.

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Mr. ROSSOTTI. Well, first let me just give the number. There

have been 17 employees actually finished through the termination

process. There were a few others that resigned without actually

being terminated. I have to say that most of those employees, as

Ms. Kelley said, probably would have been, if not terminated, at

least severely disciplined even without 1203, because they really

were serious cases.

I have to say that this provision has turned out to be one of the

most difficult provisions to administer properly of any of the provisions of the Restructuring and Reform Act, simply because of the

practical difficulty of learning how to apply it, and the psychological problems of, on the one hand, trying to follow through on

the intent of Congress that serious misconduct be disciplined and

people be terminated, which we have done, and, on the other hand,

trying to reassure employees what I believe is true and have said

right from the beginning—that this was not intended, was never

intended, and as long as we are here administering it, it will never

be administered in such a way as to provide a penalty or a termination penalty, especially, for an employee who simply, for example, makes a mistake in the normal course of their job. That is not

the intent.

The difficulty is that, although I think we have made some

progress in getting that point across, there is still this fear out

there that, even if an employee is not ultimately terminated, I’m

going to go through a long and very unpleasant process potentially

of being investigated and have this threat hanging over me. That

is a fact that does exist out there.

So what we are trying to do, since this law is on the books and

it is there, is to administer it in a very fair and very transparent

way so that people know what we’re actually doing.

I mean, one of the—probably the most important thing that

we’ve done, one of the most important things that we’ve done, as

Ms. Kelley said, is to actually publish on a regular basis all the actions that are taken—by the way, not just under 1203, but all the

disciplinary actions, a very mysterious area in the past. Nobody actually knew, you know, what kind of actions were taken, and there

were all kind of rumors that spread.

So we’ve taken to—actually, I must say, with great cooperation

from NTEU—it was really their idea to do this—to publish on a

regular basis, without identifying specifically named employees, of

course, but, nevertheless, to identify, not only on a statistical basis,

a complete list of all the disciplinary actions that are taken and at

what levels they are taken so that people will actually know how

this process is really being administered.

I believe that in practice we can administer it so that we will not

terminate employees that shouldn’t be, but, whether we can convince people to be more comfortable with the fact that this process

exists. This is where we are going to have the most difficulty.

Mr. TURNER. Thank you.

Mr. HORN. Any other questions? The gentleman from Oregon?

The gentleman from Texas?

Mr. TURNER. I just want to followup with Mr. Rossotti. What is

your assessment of the morale of the IRS employees currently?

They’ve gone through quite a bit of stress because of restructuring

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legislation, and now we hear this specific problem on 1203. Give us

an assessment from your point of view. Ms. Kelley says it is not

too good. I just want to hear from your point of view.

Mr. ROSSOTTI. I would concur with that. We do a regular survey

of all IRS employees, and then we do other samples, and more than

that. I, personally, travel almost all the time talking to people.

It is varied by different segments of the 100,000-person work

force. I would say that the field compliance employees, especially

the collection employees and the exam employees, are the ones that

had the most pervasive changes as a result of the Restructuring

Act and were the ones that took some of the criticisms most personally, I think that there is where we have our most significant

morale problems.

They’re learning how to implement these new provisions. They’re

learning what it means to—again, I have to say Ms. Wrightson was

very articulate in saying that our goal is to provide good service

and provide taxpayer rights to all taxpayers, but also to enforce the

law for the people that are not willing to comply. Doing both of

those things—it’s harder to learn how to do two things at the same

time than one thing at the same time. Those are all things that are

learning process.

So I think if you look at the field compliance employees, where

they’ve had the biggest change, certainly I would not describe the

morale there as good. I think we’ve gotten by some of the really serious fears about 1203 to some degree. We’ve started to put the balanced measurement system in place. We’ve certainly done a lot of

training. I could go on and on and talk about all the things that

we’ve done, but I think that we are still at a fair low point.

Now, I will say that—violating my own rule that it is OK to

make predictions, as long as they’re not about the future, I’ll go off

on a limb and predict that this fiscal year, in terms of the field

compliance, will be sort of that we will hit the bottom in terms of

both morale and some of the statistics, and that in 2001, especially

if we get the budget request approved, we will see a material turnaround, because we will have a new organization structure in

place, we’ll have the balanced measurement system in place for a

longer period of time, we will have gotten a lot of the training

issues resolved, at least to a certain level, and I do believe that we

will see, in several tangible measures of both morale and operational effectiveness, some improvements during 2001 in the area

where we have the greatest weakness today.

Mr. HORN. Let me ask you about the level of supervisorial training. Do you have enough funds there and enough people to——

Mr. ROSSOTTI. Yes.

Mr. HORN. I know when I was at your swearing-in you said,

‘‘This is going to take me a few years,’’ and there’s no question——

Mr. ROSSOTTI. Well, it’s a very, very important——

Mr. HORN [continuing]. We all knew that, but training is key,

our human resources.

Mr. ROSSOTTI. It is important, and you mentioned specifically the

supervisory training. I think that the answer to your question is

the Congress did provide that particular funding, so I can’t use

that as an excuse, if you will. I mean, the funding for the training

has improved significantly.

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What we have is, though, a job where, you know, training is one

thing and learning is something else. OK? I mean, we have a learning process, and this ‘‘S’’ curve that I put up could be used for a

lot of things that we’re learning at the IRS.

In the case of the first-line supervisors, especially in exam and

collection, the big learning process is how do we manage, in a world

where it is not just one thing that we’re measuring, but it is two

things we’re measuring—we want to provide taxpayer service and

taxpayer rights. We also want to collect the money. That is a learning process that many businesses have gone through. You know,

every business has to do the same thing.

It is starting to get there. We did one thing recently that was

never done before. We brought all of the first-line managers for our

field collection organization, which is about 550—these are the first

line, the first level of management, the group supervisors that supervise the collection employees. We brought them all together in

one place, about 550 of them, for a 3-day training session, and all

of our top executives were there for almost the entire time, and

they were some of the employees that—some of the managers that

I’d say, first of all, are the most critical, in terms of turning this

whole thing where we want it to go, and, second of all, you know,

probably had some of the more significant morale problems.

You know, General Eisenhower said one time that when he hears

his generals say that there is a morale problem, he thinks that

they’re the ones that may have the morale problem. Well, I think

that, in the case of our managers, they were talking about the employees’ morale problem, they’re the ones that had morale problems

for very legitimate, understandable reasons.

I think in that meeting we made a significant turn-around, because we began to get down to very concrete details about what we

really expect in the collection area for people to do and what we

don’t expect them to do, and, most importantly, just created an atmosphere of support for what we did. And we acknowledged very

openly that there is a long list of things that we, as the top management, have to explain better or resolve in how we’re going to

go about reconciling these competing objectives, which was a good

thing for them to hear.

So that’s a step, I mean, but there are many steps.

My bottom-line conclusion is I think that we will—that this year

we will sort of hit bottom, if you will, and I really do believe that,

with some luck, and especially if we can get a little bit of resource

to meet some of these stop-gap staffing problems, that next year,

meaning fiscal year 2001, we will see, you know, some noticeable

indicators of improvement in the field area.

In the customer service area and the phones, and so forth, we’ve

already had some noticeable improvement, but I’m talking about in

the area where we have the most problems still.

Mr. HORN. Well, as you said, dear to my heart is the Debt Collection Act of 1996, and we put that on the books through using the

omnibus appropriations bill, which nobody could veto it that way,

and Mrs. Maloney, the ranking democrat then, was very helpful

with that.

Could you give me an idea of what do we do, in terms of someone

that has a debt to IRS, in terms of the number of letters they go

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from IRS, the telephones they go, and to, if any degree, you have

a revenue officer knock on their door.

Mr. ROSSOTTI. Well, I think that this is the chart that I think

that I showed you that you took back to your office last time. Unfortunately, we still have that long process.

Mr. HORN. We’ve got a broader audience today.

Mr. ROSSOTTI. Well, it really is—I mean, here’s a simple way to

understand it. If you look at the main resources we have in debt

collection, which are our phones and revenue officers, about 90 percent of their time is spent on accounts that are more than 6

months old, and if you look at the revenue officer inventories, many

of those would be a couple of years old.

That’s not because they are doing the wrong thing as employees,

it’s just the process—some of it is defined in regulations, some of

it is defined in just procedures. All of it is embedded in our computer systems. A lot of it is related to the fragmentation of our collection organizations.

You know, it’s just not a very easy thing to fix, but we are moving one step at a time. Now, one step will be in place by the end

of this year, a very important step, which is we will have consolidated the organization, so we will have collection processes, you

know, managed in a more integrated way.

We are making some smaller steps that we can do within our existing technology later this summer on our phone collection operations to accelerate some things.

And then the really big opportunity is through this re-engineering process, which will basically replace the technology

underpinnings but also the business practices. Then, at that point,

we can be more effective in using various kinds of resources to do

debt collection.

Mr. HORN. Your predecessor, when I discussed the matter with

her, they had, as I looked at your financials—this is back in 1994

and 1995—that it was roughly $100 billion to $110 billion that had

been sort of written off with the bankruptcies, as you said, with

small business and this kind of thing, and they had another pile

that was roughly $60 billion they thought they could collect.

I raised the obvious question: besides your own revenue people,

what about putting that out for debt collectors that know their

business? And then I was told, ‘‘Oh, no, there are privacy problems.’’ Look, you just give them the address, you give them the

amount. No privacy problem as to the details of their tax form. And

if they have a gripe about what IRS is doing to them, then you put

them in to the revenue officers that are authorized to deal with

that particular situation.

Now, have you thought about going to your authorizing committees—Ways and Means in the House, Finance in the Senate—and

get that authority for the private collectors, or do you feel you already have it?

Mr. ROSSOTTI. I think that actually the way it works is that we

could—it’s a little more complicated because you can’t give out any

information, even names and addresses, under current law, but I

think, on the other hand, if we were to treat some people as contractors we could get them to agree to certain—under even existing

law, we probably could overcome—I say ‘‘probably,’’ because anyVerDate 11-MAY-2000 07:57 Mar 09, 2001 Jkt 000000 PO 00000 Frm 00120 Fmt 6633 Sfmt 6633 C:\DOCS\70279.TXT HGOVREF1 PsN: HGOVREF1
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thing that deals with these legal issues really requires research.

We could probably overcome the privacy issues, and basically I

think we could solve that particular part of the problem.

The more serious problem right now is just the process that we

have that is just—it’s really not in a shape right now, very honestly, to pull a piece of this out and give it to somebody. If we did

that, we would end up just having them fail, probably, and give a

bad name to the whole thing.

I’m not saying that it can’t be done in the future, but I think

there’s some work we have to do to get the data in shape and get

the process simplified to at least a level where we could realistically turn over to it.

One opportunity that might exist longer-term is that, as we get

to a newly re-engineered process, one of our challenges will be

what we do with the old inventory, because we will have to take

our existing resources of revenue officers and others and apply

them to more-current work, so then we would have this base of old

work, and that might be an opportunity in the future. But we are

probably, realistically, a couple years away from that.

Mr. HORN. Well, I would also hope that the Treasury and IRS

would look at the people that have claimed bankruptcy, and when

they pop up again and there is a pattern and practice of where

they are milking the taxpayers, very frankly—and, since those of

us that pay our taxes aren’t too happy when we see them getting

away with murder. I would hope that the Treasury and the IRS

would figure out a way to follow them through their business career and try to get some of the money back that are owed to the

taxpayers of the country.

Mr. ROSSOTTI. Incidentally, the biggest obstacle in that area is

our data systems, because, you know, part of our problem is that

the basic records don’t allow us to point and make these relationships between one taxpayer and another. It’s all one taxpayer number.

It’s like the way that the old phone systems used to be. You

know, the telephone companies used to bill everything off the

phone number because they thought everybody had one phone

number, and that was one of the problems that they ran into that

I used to work on in my old days, you know, when people started

to get five phone numbers. How do you point them and make them

one customer? The issue that we have is how do you track, as you

say, a small business person or principal through multiple entities

that they may have, either at one time over time. Right now our

data systems don’t really provide very good support for that.

Mr. HORN. One of the things that I have found when I’m looking

at the IRS claims that go through our District office—and you have

some very good people at Laguna Niguel that we can talk to there,

and I’m really interested in the degree to which the Taxpayer Advocate with—are you now handling those that come from District

offices? There’s 435 District offices on the House side—there may

be 40 with the territories—and you’ve got 100 on the Senate side.

So when we’ve got these cases of people that say, ‘‘I’ve got a problem with the IRS,’’ or others are obviously Social Security, Medicare, Immigration, the whole works, when I look at the ones on

IRS, the ones I’ve found over the years that bother me is one part

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of the IRS has put a lien on the person and they can’t pay what

the other part of the IRS is. Have we solved that problem? And the

right hand didn’t seem to know what the left hand was doing, by

the way.

Mr. OVESON. There are still challenges in those communications

that you’ve mentioned, but Connie Adams is the Taxpayer Advocate in Laguna Niguel, and she reports now directly to me, rather

than the district director. We are handling the congressional cases

that you’ve mentioned, and hopefully doing an excellent job of that.

Mr. HORN. Well, we have great praise for the people that are

helping us solve this, and that’s why I wanted to know, are we still

going to the district directors, or do we strictly go to the Taxpayer

Advocate?

Mr. OVESON. Again, the congressional correspondence and the individual casework is being handled now by the Taxpayer Advocate.

With the modernization program, that is being solidified and

standardized throughout the country, and hopefully it will continue

to work well.

Mr. HORN. Now, when you say you have taxpayer assistance orders, five in fiscal year 1999 and three in fiscal year 2000 so far,

is that then across the whole IRS system as to a generic issue, or

is this one case?

Mr. OVESON. No. That’s across the whole IRS. And I mentioned

in my annual report right up front that I felt those numbers were

too small, but you need to understand that this year there were

nearly 90,000 applications for taxpayer assistance orders, and the

need to actually implement the taxpayer assistance order in the

end was only used five times last year, three times so far this year.

Most of those situations are resolved by the Taxpayer Advocate

visiting with and talking with the individual that has the case in

either exam or collections and working out an arrangement that is

acceptable. But my No. 1 goal for this year is to get the taxpayer

assistance order process into a situation that is more meaningful

and more representative and that we have more experience with

the taxpayer assistance orders as per the intent of Congress, I believe.

Mr. HORN. Mr. Keating made a very interesting point in his testimony that the IRS is over-collecting millions of dollars every year

because they are not informing taxpayers of their right to the child

tax credit, and I wonder, Mr. Keating, how significant do you believe this problem is, and what do you believe should be done about

it?

Mr. KEATING. Well, I think it is especially interesting, given the

comparison to the way the IRS has acted in the past regarding the

earned income credit. There have been examples in the past where

the IRS sent checks out to people who didn’t even quality for the

earned income credit. Then there was no chance of ever getting the

money back from these people, almost by definition. They had probably gone out and spent it, and these are people of modest means,

by and large.

I think what should be done is what the Inspector General recommended, which is to at least send a notice to the taxpayer flagging a potential error on the return that may have resulted in an

overpayment by the taxpayer.

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The IRS management response was that they were worried that

taxpayers receiving such a notice would lower their withholding in

response to the notice, then find out when they completed the subsequent tax returns they were not eligible for the credit.

I think there is a very, very small chance of that happening.

First of all, three-quarters, roughly, of all taxpayers receive refunds. A very smaller number go and adjust their withholding in

the middle of the year in response to an IRS letter such as this.

We are not calling on the IRS to automatically send a refund

check. We think the notice should flag it and send a questionnaire

to the taxpayer to go through the steps needed to ensure the taxpayer may actually be due the additional refund. So we think it

can be done, and we hope that it will be done.

I don’t know how many other areas of the law are like this. I suspect this is one that might be a problem because it is a new item

in the tax code it started. I believe, in the last tax filing season,

and there are some taxpayers that haven’t figured it out yet.

Mr. HORN. Well, we thank you for those suggestions, and we

have a few questions the staff on both sides would like to send you,

and we’ll put them at this place in the record, if you don’t mind.

Let me just ask, as one more point, as many Americans work toward meeting the filing deadline, is there anything you wish to say

to them, Commissioner?

Mr. ROSSOTTI. I just want to say that I hope that every taxpayer

will have an increased level of confidence in the IRS interest in basically helping taxpayers get the right—pay the right tax, no more,

no less.

I do agree with Mr. Keating that it is our obligation to inform

taxpayers of where they have credits due. As a matter of fact, we

had a public service commercial that was, I think, pretty effective

on the child tax credit.

So if they call us, I really hope that we are making some

progress in getting taxpayers to have increased confidence that we

are not there as the enemy, we are not there as an adversary, we

are there as a resource to basically help people get it right.

Of course, we are also there—if there is that small group of taxpayers that wants to burden everybody else by not paying, we are

also there to make the system fair, and we are looking out for those

that are not willing to pay. But the majority are, and I hope they

will recognize that that’s what our interest is, is in helping to make

the system fair and having them pay what they owe, no more, no

less.

Mr. HORN. Well, I thank you and I thank all of your colleagues

here that have made excellent suggestions, and I want to thank the

staff that prepared this hearing: J. Russell George, the staff director and chief counsel of the Subcommittee on Government Management back there against the wall; and to my left and your right,

Louise DeBenedetto, who is the professional staff person on this

issue and a detailee from the General Accounting Office; Bonnie

Heald, director of communications, professional staff member, on

the wall in the back there; Bryan Sisk, clerk; and Ryan McKee,

staff assistant; and Michael Soon, a valued intern; and, on the minority side, counsel to Mr. Turner as the ranking Member is Trey

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Henderson; and Jean Gosa, the minority clerk; and we thank Mel

Jones for being the court reporter today.

With that, we are adjourned.

[Whereupon, at 12 noon, the subcommittee was adjourned.]

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