U.S. GOVERNMENT PRINTING OFFICE

61–839 CC WASHINGTON : 2000

OVERSIGHT OF THE INTERNAL REVENUE SERVICE’S FISCAL YEAR 1998 FINANCIAL STATEMENTS

HEARING

BEFORE THE

SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,

INFORMATION, AND TECHNOLOGY

OF THE

COMMITTEE ON

GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED SIXTH CONGRESS

FIRST SESSION

MARCH 1, 1999

Serial No. 106–72

Printed for the use of the Committee on Government Reform

(

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

(II)

COMMITTEE ON GOVERNMENT REFORM

DAN BURTON, Indiana, Chairman

BENJAMIN A. GILMAN, New York

CONSTANCE A. MORELLA, Maryland

CHRISTOPHER SHAYS, Connecticut

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

STEPHEN HORN, California

JOHN L. MICA, Florida

THOMAS M. DAVIS, Virginia

DAVID M. MCINTOSH, Indiana

MARK E. SOUDER, Indiana

JOE SCARBOROUGH, Florida

STEVEN C. LATOURETTE, Ohio

MARSHALL ‘‘MARK’’ SANFORD, South

Carolina

BOB BARR, Georgia

DAN MILLER, Florida

ASA HUTCHINSON, Arkansas

LEE TERRY, Nebraska

JUDY BIGGERT, Illinois

GREG WALDEN, Oregon

DOUG OSE, California

PAUL RYAN, Wisconsin

JOHN T. DOOLITTLE, California

HELEN CHENOWETH, Idaho

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

GARY A. CONDIT, California

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

———

BERNARD SANDERS, Vermont

(Independent)

KEVIN BINGER, Staff Director

DANIEL R. MOLL, Deputy Staff Director

DAVID A. KASS, Deputy Counsel and Parliamentarian

CARLA J. MARTIN, Chief Clerk

PHIL SCHILIRO, Minority Staff Director

SUBCOMMITTEE ON GOVERNMENT MANAGEMENT, INFORMATION, AND TECHNOLOGY

STEPHEN HORN, California, Chairman

JUDY BIGGERT, Illinois

THOMAS M. DAVIS, Virginia

GREG WALDEN, Oregon

DOUG OSE, California

PAUL RYAN, Wisconsin

JIM TURNER, Texas

PAUL E. KANJORSKI, Pennsylvania

MAJOR R. OWENS, New York

PATSY T. MINK, Hawaii

CAROLYN B. MALONEY, New York

EX OFFICIO

DAN BURTON, Indiana HENRY A. WAXMAN, California

J. RUSSELL GEORGE, Staff Director and Chief Counsel

BONNIE HEALD, Director of Communications/Professional Staff Member

MASON ALINER, Clerk

FAITH WEISS, Minority Professional Staff Member

(III)

C O N T E N T S

Page

Hearing held on March 1, 1999 .............................................................................. 1

Statement of:

App, Steven O., Deputy Chief Financial Officer, Department of the Treasury .................................................................................................................. 47

Cunninghame, Donna H., CPA, Chief Financial Officer, Internal Revenue

Service ............................................................................................................ 42

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

Financial Management Issues, Accounting and Information Management Division, U.S. General Accounting Office, accompanied by Steven

J. Sebastian, Assistant Director, Governmentwide Accounting and Financial Management; and Joan B. Hawkins, Assistant Director, Governmentwide Accounting and Financial Management .............................. 10

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

App, Steven O., Deputy Chief Financial Officer, Department of the Treasury, prepared statement of ........................................................................... 49

Cunninghame, Donna H., CPA, Chief Financial Officer, Internal Revenue

Service, prepared statement of .................................................................... 44

Dalrymple, John, Chief Operations Officer, Internal Revenue Service:

Information concerning earned income tax credit .................................. 56

Information concerning trust funds ......................................................... 66

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

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

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

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

of ..................................................................................................................... 14

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

prepared statement of ................................................................................... 6

(1)

OVERSIGHT OF THE INTERNAL REVENUE

SERVICE’S FISCAL YEAR 1998 FINANCIAL

STATEMENTS

MONDAY, MARCH 1, 1999

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,

INFORMATION, AND TECHNOLOGY,

COMMITTEE ON GOVERNMENT REFORM,

Washington, DC.

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

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

Present: Representatives Horn and Turner.

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

Bonnie Heald, director of information/professional staff member;

Matthew Ebert, policy advisor; Larry Malenich, GAO detailee;

Mason Alinger, clerk; Paul Wicker, Kacey Baker, and Richard

Lukas, interns; Faith Weiss, minority professional staff member;

and Earley Green, minority staff assistant.

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

order.

Today’s hearing is the first in a series of hearings the subcommittee will conduct to examine the audits of financial statements of selected Federal agencies.

In the late 1980’s, Congress recognized that one of the root

causes of waste in the Federal Government was that financial management leadership policies, systems, and practices were in a state

of disarray. Financial systems and practices were obsolete and ineffective. They failed to provide complete, consistent, reliable, and

timely information to congressional decisionmakers as well as executive branch agency management.

In response, Congress passed a series of laws on a bipartisan

basis designed to improve financial management practices and to

ensure that tax dollars are spent for the purposes that Congress intends. The Chief Financial Officers Act, enacted in 1990, represented the most comprehensive financial reform legislation of the

last four decades. It established a leadership structure for Federal

financial management, including the appointment of Chief Financial Officers in the 24 largest Federal departments and independent agencies.

In 1994, the Chief Financial Officers Act was amended to require

agencywide audited financial statements covering the agencies’ acVerDate 11-MAY-2000 13:29 Mar 07, 2001 Jkt 066095 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 E:\HEARINGS\61839 pfrm04 PsN: 61839
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counts and associated activities. March 1st is the due date for these

statements, and it is appropriate that the first hearing we are conducting is on the Internal Revenue Service’s financial statements.

That will bring joy to many taxpayers as they struggle through

April 15th.

The Internal Revenue Service is the government’s revenue collection arm. It has undergone financial auditing since 1992 under a

pilot program created by the Chief Financial Officers Act. Each

year these audits have shown significant weaknesses in the agency’s financial management. Despite these weaknesses, the General

Accounting Office [GAO], the fiscal and program auditor for the

legislative branch, gave the Internal Revenue Service a clean opinion in its 1997 financial statements. However, the auditors rendered this opinion only after the Internal Revenue Service spent

several months and hundreds of thousands of taxpayer dollars to

prepare the statements. This special effort was necessary because

the Internal Revenue Service’s accounting systems cannot provide

basic accounting information in an efficient manner.

On April 15th of last year, this subcommittee held an oversight

hearing on the results of the Internal Revenue Service’s 1997 audit.

At that hearing, we learned that IRS estimated it could only recover about 13 percent of the $214 billion which taxpayers owed

the Federal Government as of September 13, 1997; 13 percent out

of the amount that is owed. That is not very good. In fact, that is

what started me several years ago with Mrs. Maloney, then the

ranking Democrat, on the debt collection law of 1996. And of course

it does not apply to tax debt, it applies to all nontax debt. And I

do want to go into that with you in terms of the question period.

We will learn today whether the agency has improved its ability to

collect the amounts owed to the Federal Government.

Last year’s hearing also illustrated the need for better controls

in handling cash payments at the Internal Revenue Service centers. The 1997 audit provided the steps and direction the Internal

Revenue Service officials needed to follow in order to gain stronger

financial control of this very important agency.

We are here today to determine what progress has been made in

meeting this sizable challenge. We will hear testimony from representatives of the General Accounting Office, the Internal Revenue Service, and the Department of the Treasury.

We have an excellent group of witnesses, and I thank each of

them for coming on such short notice. I look forward to your testimony.

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

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Mr. HORN. And I think you know the routine of this committee

is we swear in all witnesses, so if you will rise, raise your right

hands.

[Witnesses sworn.]

Mr. HORN. The clerk will note that all five witnesses affirmed.

Mr. Turner.

Mr. TURNER. Thank you, Mr. Chairman.

I want to admit at the outset of this hearing, Mr. Chairman, that

I started working on my tax return last night, so I am not in a very

good mood. I am one of those taxpayers who still tries to do my

own return, and it becomes increasingly challenging every year

that passes.

But it is good to be here this morning, and I appreciate the witnesses being here. I know it was very short notice for you. This

hearing was only called last Friday, and so I know you were working diligently to prepare to be here today, and for that we are very

grateful.

The scope of your operations are, of course, very impressive. On

an annual basis, your agency processes tax returns from over 200

million taxpayers, reviews more than 2 billion documents, collects

nearly $1.8 trillion in revenue, and issues $151 billion in refunds,

which we all hope we are able to have a part of, Mr. Chairman.

But your annual operation is over $8 billion, using Federal appropriations in that amount.

The task that you undertake, you do so with technology that I

understand dates back to the 1970’s. It is very difficult, I am sure,

for the IRS to comply with modern financial management standards with technology that is that old. We know the IRS is in need

of technological modernization, and to meet that demand, Commissioner Rossotti is working toward modernizing the IRS, making it

more consumer-friendly. This makes good business sense, and it

should increase the level and quality of services provided to each

IRS customer.

However, without significant modernization of its financial systems, the IRS will continue to lack resources to ensure financial

discipline. The audit being released today underscores the reasons

why the IRS needs to implement a technological modernization program as quickly as possible.

As evidenced by the audit, we hear about serious financial management deficiencies at the IRS. Although the year-end information

provided by the IRS regarding its annual $1.8 trillion in collections

and its $151 billion in refunds is considered reliable, the General

Accounting Office has identified several significant material weaknesses in the IRS financial systems which prevent the IRS from

complying with several financial management laws and standards,

and, therefore, it is in need of correction.

The underlying financial problems with the IRS are chronic and

long-standing and have spanned both Democrat and Republican administrations. The General Accounting Office documented many of

the same financial problems in its first audit of the IRS financial

statements for fiscal year 1992, and some of these problems go

back, I understand, 17 years.

However, this is no excuse. It is time for the IRS to implement

modern financial systems that are capable of doing what the IRS

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expects the average American to do. Simply put, the IRS should be

able to balance its checkbook, list its debts, and locate and identify

its property and equipment. It is time for the agency to address

some of the custodial concerns raised by the General Accounting

Office, such as maintaining the security of the information submitted by taxpayers to the IRS and improving its ability to determine when it is owed money and when it has been paid.

Many of the major financial problems that the General Accounting Office identifies would be resolved with more modern financial

management systems. There are steps that the IRS can take now

to improve its control over the cash, checks, and taxpayer information that it receives.

At this time, we are experiencing a new era of Federal agency

management. Agencies recognize that they must not only provide

top quality Government services, but also achieve them in a costeffective manner. Agencies must develop financial management

systems capable of tracking their ongoing financial condition, assessing the financial vulnerabilities, and determining the most

cost-effective approach.

We can anticipate criticism today of the IRS; however, in the

spirit of improving the agency, I believe that the IRS will consider

and respond to the legitimate concerns that are raised by the GAO

audit. We have been told that the IRS plans to address its weaknesses through actions being implemented over the next few years.

Given the importance of financial management requirements, we

must not let the implementation of IRS corrective action fall

through the cracks. The GAO report is something that the IRS

should pay careful attention to.

In closing, again, I thank the witnesses for being here today, for

the efforts that you have made to prepare for this hearing, and it

is my hope that the hearing will be productive for the Internal Revenue Service.

Thank you, Mr. Chairman.

Mr. HORN. We thank you for that very fine statement.

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

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Mr. HORN. We now start with the representative of the General

Accounting Office. Mr. Gregory D. Kutz is the Associate Director,

Governmentwide Accounting and Financial Management Issues of

the Accounting and Information Management Division of the GAO.

Mr. Kutz.

STATEMENT OF GREGORY D. KUTZ, ASSOCIATE DIRECTOR,

GOVERNMENTWIDE ACCOUNTING AND FINANCIAL MANAGEMENT ISSUES, ACCOUNTING AND INFORMATION MANAGEMENT DIVISION, U.S. GENERAL ACCOUNTING OFFICE, ACCOMPANIED BY STEVEN J. SEBASTIAN, ASSISTANT DIRECTOR, GOVERNMENTWIDE ACCOUNTING AND FINANCIAL

MANAGEMENT; AND JOAN B. HAWKINS, ASSISTANT DIRECTOR, GOVERNMENTWIDE ACCOUNTING AND FINANCIAL

MANAGEMENT

Mr. KUTZ. Mr. Chairman and Congressman Turner, good morning. It is a pleasure to be here this morning to discuss the results

of our audit of IRS’s fiscal year 1998 financial statements, which

is being released today in accordance with the March 1st statutory

requirement. These financial statements are significant because

they report the nearly $1.8 trillion in tax revenues, $151 billion in

refunds, and $26 billion in net taxes receivable, which I will refer

to throughout this statement as IRS’s custodial activities. These

statements also show IRS’s fiscal year 1998 appropriations of near- ly $8 billion and the related activities, which I will refer to in this

statement as IRS’s administrative activities.

With me today is Steve Sebastian, who was responsible for our

work on the IRS’ custodial activities, and Joan Hawkins, who was

responsible for our work on the IRS’ administrative activities.

I would like to summarize my statement, but I would ask, Mr.

Chairman, that my entire statement be made part of the record.

Mr. HORN. I would say every witness, their documents and appendices, everything, are put in the record when they start talking.

But take your time on this.

Mr. KUTZ. OK. I would also like to thank IRS senior management for the courtesy that they provided to me and the GAO staff

throughout the country during this year’s audit. They were very

courteous in all respects.

The bottom line of my testimony is that IRS continues to experience serious financial management and internal control problems.

Many of these problems date back to our first audit in fiscal year

1992, as Congressman Turner noted.

This morning I will focus on three areas: First, our opinions on

IRS’s fiscal year 1998 financial statements; second, issues impacting those opinions; and third, issues impacting taxpayers and resulting in lost revenue to the Federal Government.

The audit we performed of IRS’s financial statements is similar

in nature to audits done of all major publicly traded corporations

in the United States. In addition, our audit included extensive testing of IRS’s internal controls. My first point relates to our opinions

on IRS’s six main financial statements. And for reasons I will discuss in a moment, our opinions on these six financial statements

vary.

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Our opinion on IRS’s statement of custodial activities for this

year is unqualified. This means that IRS’s reported revenue of nearly $1.8 trillion and refunds of $151 billion are reliable. Our

opinion on IRS’s balance sheet is qualified. Although IRS’s net tax

receivable number of $26 billion is reliable, we were unable to determine the reliability of fund balance with Treasury and accounts

payable. In addition, another key balance sheet account, property

and equipment, is likely materially understated.

Our opinions on the other four main statements, the statements

of net cost, changes in net position, budgetary resources, and financing, are disclaimers. This means that because of the problems

we found with IRS’s balance sheet, along with errors and weaknesses relating to nonpayroll expenses and budgetary accounts, we

were unable to determine the accuracy of these financial statements.

In addition, because of the severity of these problems, GAO was

unable to determine whether IRS complied with the Antideficiency

Act, which restricts agencies from spending more than they are appropriated.

Let me now move on to my second issue, which is that the problems negatively impacting our opinions for fiscal year 1998 relate

to the IRS’ administrative activities. Some of the reasons for the

opinion qualifications and the four disclaimers include, first, IRS

did not reconcile the accounts related to its reported $1.8 billion

fund balance with Treasury accounts. Think of this as not balancing your checkbook to the monthly bank statement and at the

same time having a recordkeeping system that was prone to error.

Second, IRS was unable to properly safeguard or reliably report

property and equipment. For example, when verifying the items in

IRS’s inventory, we noted a missing Chevy Blazer, laptop com- puter, and $300,000 printer. We also found items including a television, a fax machine, and a VCR that were not included in IRS’s

records. At one IRS field office, 19 of 130 computer assets costing

over $50,000 each could not be located by IRS staff. IRS has itself

reported property and equipment as a major internal control problem for 17 consecutive years.

Third, IRS could not provide adequate support for accounts payable, nonpayroll expenses, and budgetary data. Mr. Chairman, I

have done dozens of audits in my career of corporations, State and

local governments, and not-for-profit organizations, and IRS is the

first entity that I have audited that could not provide a listing of

accounts payable at year end.

In addition to systems problems related to this issue, IRS has an

suspense account with amounts that date back to 1989 appropriations. IRS has not investigated nor resolved amounts in this account.

My third and most important issue is that many of the problems

we are reporting today have the potential to touch the everyday

lives of taxpayers and result in lost revenue to the Federal Government. As I mentioned earlier, IRS was able to reliably report its

custodial activities; however, this achievement required extensive,

costly, and time-consuming ad hoc procedures to overcome chronic

internal control and systems weaknesses. IRS cannot produce reliable custodial information on a routine basis.

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Despite the reliable custodial information, we found three significant weaknesses that impact taxpayers and result in lost revenue

for the Federal Government. First, we found systems problems relating to amounts due from taxpayers that have resulted in taxpayer burden and lost revenue. For example, we found that IRS

was pursuing and collecting amounts from individuals whose taxes

had already been paid. We also found instances where delays in recording transactions resulted in IRS missing opportunities to offset

refunds paid to taxpayers against amounts that those taxpayers

owed to the Federal Government.

Next, we noted deficiencies in preventive controls over tax refunds that have permitted the disbursement of millions of dollars

in fraudulent refunds. IRS has procedures in place to identify erroneous or fraudulent tax returns claiming refunds; however, these

controls occur months after the refunds have been disbursed. Once

a refund has been disbursed, IRS is compelled to expend its resources to recover it, with dubious prospect of success.

In addition, vulnerabilities and controls over cash, checks, and

taxpayer data do not adequately protect the Government and taxpayers from loss or inappropriate disclosure of sensitive data. For

fiscal years 1997 and 1998, IRS reported over 150 actual or alleged

employee thefts of receipts at IRS field offices and lockbox banks.

These cases only represent IRS employees that were caught. The

magnitude of thefts not identified by IRS is unknown.

The vulnerabilities we noted include, but are not limited to, IRS

not receiving results of background checks on new employees until

well after they were placed in positions to handle tax receipts and

taxpayer data. Fifteen percent of thefts of taxpayer receipts committed at IRS service centers in recent years were by individuals

who had previous arrest records that were not identified prior to

their employment.

In addition, we observed the use of single, unarmed couriers in

ordinary civilian vehicles, including in one instance a bicycle, to

transport hundreds of millions in taxpayer receipts to the bank. At

the service center that Mr. Sebastian and I visited, the courier left

over $200 million of endorsed taxpayer checks with sensitive data

in a Ford Explorer that was unlocked with the windows down

while he returned to the service center. Theft of taxpayer checks

and other data can result in access to bank accounts and identity

fraud, which can create significant taxpayer burden.

One other matter that you mentioned in your opening statement,

Mr. Chairman, of great importance to the Federal Government is

the collectibility of IRS’s unpaid assessments.

The poster board to my right and the last page of my written

statement show the components of IRS’s $222 billion of unpaid assessments at September 30, 1998. Please note that, based on a statistical projection done jointly by GAO and the IRS, that $26 billion, or only 11 percent, of IRS unpaid assessments will ultimately

be collected.

In summary, IRS cannot do many of the basic accounting and

recordkeeping tasks that it expects American taxpayers to do. And,

several of the problems I discussed have resulted in unnecessary

taxpayer burden and losses to the Federal Government. We agree

with the IRS that this situation is not acceptable.

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The problems I have described this morning are chronic in nature and, despite past attempts and corrective action plans by IRS,

have not yet been successfully resolved.

Some of these problems can be resolved quickly with improvements in basic internal controls. However, for other problems, tax

system modernization will need to be part of a longer-term solution. We have provided IRS with a series of recommendations to resolve these weaknesses. The agency agrees with the facts discussed

in our report and has reacted in a very constructive manner. In its

written response to our report, IRS committed to executing the

changes necessary to improve its operations. We are committed to

working with the IRS in fiscal year 1999 and future years to develop lasting solutions to these pervasive problems.

Mr. Chairman, this concludes my testimony. My colleagues and

I will be happy to respond to any questions.

Mr. HORN. Well, we thank you for that very succinct statement

of your testimony.

[The prepared statement of Mr. Kutz follows:]

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Mr. HORN. I take it at this point neither of your colleagues have

anything else to add to the presentation?

Mr. KUTZ. We can hold that to Q and A.

Mr. HORN. We will wait for the questioning until everybody has

a chance to get their statement in.

Mr. HORN. So let us go then to the next witness, which is Ms.

Donna Cunninghame, Chief Financial Officer of the Internal Revenue Service.

STATEMENT OF DONNA H. CUNNINGHAME, CPA, CHIEF

FINANCIAL OFFICER, INTERNAL REVENUE SERVICE

Ms. CUNNINGHAME. Mr. Chairman and Mr. Turner, I thank you

for this opportunity to testify on the GAO report. I must sadly state

that the findings contained in this report have merit, and I am

deeply disappointed that we failed to meet our obligations.

While many of these problems, as you have heard repeatedly, are

not new and require long-term solutions, the GAO has also outlined several new issues that we need to address. The GAO correctly raised significant concerns and identified substantial weaknesses and deficiencies that prevented the IRS from reliably reporting on several of its required principal financial statements in the

timeframe allowed.

This is unacceptable to the IRS, to the Congress, and to the taxpayers that we serve. We must first acknowledge and understand

how and why we failed. Second, we need to create and implement,

in the process of doing so, short- and long-term plans that will address the challenges raised. And third, we need to followup with

these plans with an ongoing commitment from the highest level of

IRS management.

I want to stress, too, Mr. Chairman, that this will not be a plan

developed behind closed doors, but will be an open and shared enterprise on behalf of America’s taxpayers. We are developing it

with the assistance from OMB, the Treasury Department and their

Inspector General, with outside contractors, and with the assistance of the GAO. I plan to present it to you in the final draft and

submit it to you and to the subcommittee to seek your comments

to ensure that you agree with our approach. We will welcome any

suggestions you have and we will report to you regularly on our

progress.

Mr. Chairman, I became the Chief Financial Officer at the Internal Revenue Service on August 16, 1998. During the 6 months that

I’ve held this position, our vulnerabilities became particularly apparent in the loss of several qualified individuals who previously

managed the preparation of our administrative financial statements. Unfortunately, we did not replace them in time. Results of

this personnel shortfall have become painfully obvious and the consequences unacceptable.

We have also learned the painful lesson that solutions left unattended quickly become problems again. We must follow through on

problems. We need to repeatedly review our performance and build

upon our successes while learning about our failures.

In the short term, we are addressing many of the problems

raised by the GAO. In the past month, I have hired five new professional employees to fill key slots on the administrative side, and

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we are contracting with two large public accounting firms to assist

us in providing the human resources and the expertise that we

must have to meet the needs identified in the GAO report.

Although we were pleased to obtain an unqualified opinion on our $1.8 trillion custodial financial statements, we do agree with

the GAO that it was the result of extensive ‘‘work around’’ procedures. We recognize the system’s deficiencies, and we have ongoing

initiatives aimed at correcting these problems in both the short and

the long term.

Mr. Chairman, there will be noticeable improvements in our financial statements, but I need to emphasize that these are nevertheless short-term fixes with the inherent deficiencies that go along

with them. Our systems solutions will take several years to put

into effect.

In the long term, the inadequacies of our financial reporting systems must be addressed through our broader efforts under Commissioner Rossotti to modernize both the system and the structure

of the IRS as mandated by the IRS Restructuring and Reform Act

of 1998. But like our troubled financial statements, most solutions,

as I said previously, will require years to plan and to implement.

One key to better financial management at the IRS is improved

technology. The IRS must replace nearly its entire inventory of

commuter applications and convert its data on every taxpayer to

new systems. This must be accomplished in conjunction with redesigned business practices as part of our overall modernization program, at the same time while we continue to provide service to taxpayers and to respond to ongoing tax law and other changes. This

is vast, complex, and a risky undertaking that will require many

years to accomplish.

Mr. Chairman, in conclusion, I would again like to thank this

committee for providing us with this opportunity to review and acknowledge the issues set forth in the GAO’s report and to discuss

with you the IRS’s plans to address these serious shortcomings.

The IRS must work every day to earn the trust of the American

public. To do that I pledge to you today that we will continue to

improve our financial reporting system and modernize so that the

IRS can provide America’s taxpayers top-quality service for the decades to come.

Thank you.

Mr. HORN. Thank you very much.

[The prepared statement of Ms. Cunninghame follows:]

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Mr. HORN. Our last witness is Mr. Steven App, the Deputy Chief

Financial Officer of the Department of the Treasury.

STATEMENT OF STEVEN O. APP, DEPUTY CHIEF FINANCIAL

OFFICER, DEPARTMENT OF THE TREASURY

Mr. APP. Thank you, Mr. Chairman, Mr. Turner. Good morning.

Thank you for inviting me here again today to discuss financial

management in the Department of Treasury and in the Internal

Revenue Service. It was 21⁄2 years ago in September 1996 that I

last appeared before the committee on the eve of the first required

agencywide financial statements being prepared by Treasury and

by other agencies. Today I would like to limit my oral remarks to

just three points submitted in my written testimony.

First, in terms of departmental oversight, we are disappointed in

the fiscal year 1998 audit results due to the IRS problems even

though we are expected to receive an overall qualified opinion on

Treasury statements for the second year in a row. Frankly, based

on the success of 1997, with a clean opinion of the IRS, one qualification and a March 30 delivery date, we were optimistic that 1998

would be our break-through year in terms of a quality clean opinion for the Treasury Department.

In late January 1999, when it became apparent that the General

Accounting Office identified problems in the IRS that would result

in a less than desirable audit, we immediately contacted the Office

of Management and Budget, GAO, IRS to discuss what could and

should be done for the 1998 audit: Extend the audit for 1998 in

hopes of getting better results, or stop the audit and focus on the

future.

The Department and IRS, supported by GAO and OMB, chose to

focus on the future, developing an action plan for fiscal year 1999

for the financial statement and audit process. The Department is

fully cognizant that IRS is the key issue for 1999 financial statements. And on behalf of the Assistant Secretary for Management

and CFO, I can assure you that we are using the full weight of our

office to help ensure better results for 1999.

In short, we are committing that the fiscal year 1999 reporting

initiative will be better focused by IRS and the Department, that

our partnership with GAO will continue to improve, and that we

will do everything within our power to allow GAO to begin as early

as possible with the interim audit work.

The second area I would like to mention is regarding the risk factors that we have identified for the IRS audit. One of those risk

factors in the administrative statements involves three new statements that all agencies are facing: The statement of net cost, the

statement of financing, and the statement of budgetary resources;

as well as certain balance sheet items, like property, plant and

equipment that deal with capitalization thresholds. In fairness to

the IRS, these problematic issues are not restricted to them alone,

but are governmentwide issues as well. While many of Treasury’s

bureaus successfully negotiated these issues, I think you will find

in future hearings with other agencies that these also pose a problem for them.

Finally, in terms of progress, while we freely acknowledge the financial statement and preparation problems at the IRS and its sigVerDate 11-MAY-2000 13:29 Mar 07, 2001 Jkt 066095 PO 00000 Frm 00051 Fmt 6633 Sfmt 6602 E:\HEARINGS\61839 pfrm04 PsN: 61839
48

nificant impact on the Department, we have made considerable

progress over the past three required audit cycles both in terms of

quality of results and in terms of timeliness of completion, in 1996

moving from a disclaimer on our Treasurywide statements, to 1997

with a qualified opinion, and again for 1998, with increasing convergence on the March 1st delivery date, from April 30th to March

30th to mid-March this year.

In addition, as was previously mentioned, the Treasury again received unqualified opinions in 1998 on its primary governmentwide

functions, collecting revenue, managing the public debt. GAO is

rendering unqualified opinions on the IRS revenue collection of

$1.8 trillion and Bureau of Public Debt’s Federal debt of $5.5 trillion.

With the exception of the IRS administrative statements, all

other Treasury-audited bureaus and entities this year are also receiving clean audit opinions, including our other revenue bureaus,

Customs and ATF, which will have clean audit opinions for 3 years

in a row, as well as with the other parts of Treasury.

I would like to conclude by emphasizing again that our renewed

focus on the IRS administrative accounts and action plan for 1999,

coupled with the demonstrated 3-year track record of converging on

a clean opinion by March 1st, makes the CFO and myself remain

optimistic and committed to making 1999 our break-through year

for both fronts.

I would be pleased to answer any questions. That ends my prepared remarks. Thank you.

Mr. HORN. Thank you very much.

[The prepared statement of Mr. App follows:]

49

50

51

Mr. HORN. Let me start with 5 minutes. Mr. Turner and I are

going to alternate every 5 minutes, probably to rest our throats

with what is diseased in this city. Let me start in with the obvious

one, because it just sort of glaringly shows up in this property management, and that is the printer.

I take it it was worth $300,000; is that correct, Mr. Kutz?

Mr. KUTZ. According to IRS’s records, yes.

Mr. HORN. How big was a printer like this? I am just curious

how you get that out of an office and down through the elevator

and all the rest of it. How big was this thing? Do we know?

Mr. KUTZ. Let me defer to Ms. Hawkins on more specifics if she

has them.

Mr. HORN. You are the printer chaser. Has anybody ever found

it, by the way?

Ms. HAWKINS. In the case of the printer, it was disposed of. We

did receive a document saying it was disposed of in 1994. So we

haven’t seen it, and we don’t know what it looks like. The IRS did

not post the disposal on it’s property records. So even though they

could give us a document saying it had been disposed of in 1994,

it was still being counted as one of the assets on their records.

Mr. HORN. Well, when you say ‘‘disposed,’’ I am just not clear on

what that means. Does that mean somebody walked out with it,

and they wrote it off like they have written off the receivables and

write-offs of $119 billion?

Ms. HAWKINS. In this case it probably means they turned it over

to another agency, such as the General Services Administration, for

disposal according to proper procedures. What they failed to do was

to record that disposal.

Mr. HORN. OK, so nobody took it, then; is that correct?

Ms. HAWKINS. No, I don’t think anyone took that printer.

Mr. HORN. So they were turning it in for a new one?

Ms. HAWKINS. They were turning it in because they no longer

needed it. I assume they probably also got a new one.

Mr. HORN. They went through this last year with the Pentagon

in terms of ‘‘where are their ships’’ and ‘‘where are their missiles’’

and so forth. Do the IRS offices have security from, say, the General Services Protective Service, or do you have your own?

Ms. CUNNINGHAME. Yes, we do have security.

Mr. HORN. Do you have your own people, or do you use GSA’s?

Ms. CUNNINGHAME. We do have our own people who are certified.

Mr. HORN. Are they armed?

Ms. CUNNINGHAME. Yes, they are.

Mr. HORN. Are they there at night when different shifts are coming on and off?

Ms. CUNNINGHAM. Yes, sir, they are.

Mr. HORN. And would they mark down something if somebody is

walking through a door with a personal computer, or a printer as

the case may be?

Ms. CUNNINGHAME. I believe the answer to that is an unqualified

yes.

Mr. HORN. So what does GAO say? Did you look at their security

system on how things can go out the back door? Every firm in

America has that problem, so there are ways to solve it.

52

Mr. KUTZ. Whether it relates to security or recordkeeping, at this

point we are unclear. We did look at their records. We did inventories from the IRS’ records to the floor and from the floor to the

IRS’ records, and we found errors both ways. We aren’t sure exactly what is.

They do take inventories periodically of these assets and adjust

their records for the inventories, but whether the problem relates

to physical security as you’re describing it, we’re not sure at this

point.

Mr. HORN. Do they have a standard time in which they take inventory, or is it an unstandard time in the sense that you surprise

everybody and say, where is the typewriters? Where is the personal

computers? Where are anything of much value? How does IRS deal

with that? And who does it; does some outside firm come in, or

does IRS do it?

Mr. KUTZ. We believe that they take cycle inventories. So I think

they try to hit everything once a year, is my understanding, across

the country.

Mr. HORN. At the same time?

Mr. KUTZ. No, cyclically. Different places get an inventory at a

different point in time.

Mr. HORN. Did you ever find the Chevy Blazer?

Ms. CUNNINGHAME. Yes, sir.

Mr. HORN. Who had that one?

Ms. CUNNINGHAME. The Chevy Blazer highlights two problems

we have with our fixed asset inventory records. One is that we

have two systems that we use that are not integrated, do not talk

to each other. We also have employees who sometimes are less diligent than they should be about following the procedures that have

been established.

With regard to the Chevy Blazer, it was a leased vehicle. It had

been returned to the company that owned it, I think, a month or

so before the inventory was to take place. Where we failed is two

places. We did not remove it from the inventory listing as we

should have; and second, we were not able to account for it in a

timely manner when GAO first raised the issue. We should be able

to do both of those, and we failed.

Mr. HORN. That was 17 years ago. How long has this problem

been out there and not addressed?

Ms. CUNNINGHAME. It has been there for a period of time. And

we do take a lot of manual activities that we try to bridge the gap

between the two systems. I have not been here long enough. I don’t

know if somebody can answer that for me. I guess it has just been

an ongoing problem, sir.

Mr. HORN. Well, I realize IRS has downsized about 6,000 employees since 1993. I think there is 102,000 employees now?

Ms. CUNNINGHAME. That’s accurate.

Mr. HORN. What is needed in terms of having an effective and

efficient accounting service and an inventory service?

Ms. CUNNINGHAME. Our basic problems stem to our systems. We

do not have the types of systems we need that talk to each other,

that are up-to-date, state-of-the-art, integrated systems that will

readily post to our general ledger system.

53

As you are aware, I know, we are doing a number of things on

trying to fix that. I do have Paul Cosgrave, who is our Chief Financial Officer, and if you will allow me, I would like him to tell you

a little bit about what we are doing with our systems, including the

financial systems.

Mr. HORN. Fine. I will tell you, let’s do it on my round. I want

to have Mr. Turner right now, and then we will get back to that.

Mr. TURNER. Thank you, Mr. Chairman.

I want to address the issue of refunds a little bit with you. I

guess I need to ask the General Accounting Office first to address

the problem of refunds. You have identified several problems in

that area. And I guess first if you could just give us an estimate

of the amount inappropriately paid out in refunds in the last year,

and if you will also maybe identify what types of refunds we are

talking about in those improper refunds.

I noticed last year there was testimony from Ms. Cunninghame’s

predecessor about several steps that the IRS was taking to try to

correct the problems of improper refunds, and I would like to ask

the General Accounting Office if you have noted any improvements

as a result of the efforts that were testified to a year ago by Ms.

Cunninghame’s predecessor?

Mr. KUTZ. Congressman Turner, we have seen some improvements, and I will defer to Mr. Sebastian to give you some details

on the improvements and specifically the first question you had

asked about the known number.

I will mention that the actual amount of fraudulent or inappropriate refunds disbursed is unknown. There is no way to determine

for sure what that number is. But there is a known number that

is reported by the IRS, and I will defer to Mr. Sebastian for that.

Mr. SEBASTIAN. The IRS has actually identified $17 million in

fraudulent refunds that were disbursed in the first 9 months of calendar year 1998. In addition, the IRS had actually stopped the disbursement of inappropriate refunds amounting to $65 million over

that same time period.

As Mr. Kutz points out, the exact number or exact amount of inappropriate refunds disbursed is unknown, and it is, in fact, one

of the issues that we have raised with the IRS dating back to our

fiscal year 1997 audit, when we recommended that the IRS consider conducting a comprehensive cost benefit study to determine

whether it was cost-beneficial to add additional preventive controls

to the up-front processing of tax returns prior to the issuance or

disbursement of refunds.

To date, we have seen some estimates of the up-front additional

cost associated with adding additional preventive controls, such as

verifying information from the tax returns to certain third-party information such as wage and tax statements. However, what we

have yet to see is an actual estimate of the dollar value of inappropriate refunds that are disbursed on a yearly basis as well as the

additional cost associated with identifying and then pursuing collections on those refunds. So, again, there is no dollar value out

here that we could point to that would give you the magnitude of

this problem.

Now, the IRS has made some improvements. As I pointed out a

few moments ago, the IRS was able to identify and stop the disVerDate 11-MAY-2000 13:29 Mar 07, 2001 Jkt 066095 PO 00000 Frm 00057 Fmt 6633 Sfmt 6602 E:\HEARINGS\61839 pfrm04 PsN: 61839
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bursement of $65 million in potential fraudulent claims. In addition, with respect to their earned income tax credit program, the

IRS examined roughly 290,000 tax returns claiming EITC claims.

The dollar value associated with those EITC claims amounted to

about $662 million. The IRS determined that roughly 68 percent of

that dollar value, or $448 million, were found to be not valid, and

those amounts were not disbursed.

So there are some additional procedures that are in place that

are flagging and identifying some of these potentially fraudulent or

erroneous returns.

Mr. TURNER. So do I understand, you said the IRS examined

290,000 earned income tax credit claims, and out of those they

found $448 million of them to be improper?

Mr. SEBASTIAN. The dollar value associated with the claim, $442

million out of a total of $668 million in the EITC claims were associated with those 290,000 tax returns.

Mr. KUTZ. Congressman Turner, let me mention that those were

actual EITC claims that were flagged for having some characteristics that were unusual. So that is not a representative percentage

of earned income tax credit claims that are invalid. It is the percentage of those that look suspicious that were invalid. That is an

important distinction here.

Mr. TURNER. Just to give me a little perspective here, how many

earned income tax credit claims do we have each year?

Mr. SEBASTIAN. Well, in total, in fiscal year 1998, the IRS proc- essed earned income tax credit claims amounting to $29 billion, of

which $23 billion actually resulted in refunds. The other $6 billion

resulted in a reduction of the tax liability.

Mr. TURNER. So the percentage that we are examining of that

290,000 is really a very small portion of earned income tax credit.

Mr. SEBASTIAN. That’s correct.

Mr. TURNER. But they do represent a group that was identified

as having potential problems, so it is not fair to say 68 percent of

all EITC claims are probably fraudulent.

Mr. SEBASTIAN. That’s correct.

Mr. TURNER. It seems to me, as I recall, doesn’t the law require

these refunds or all refunds to be made within 45 days?

Mr. SEBASTIAN. Yes, it does. And that is a problem, a perplexing

situation the IRS finds itself in. They are required to process tax

returns involving refunds and issue the refunds within 45 days.

Any refunds issued beyond that date would include interest payments to the taxpayer.

Mr. TURNER. And you say there really has been no determination

as to whether or not it is cost-effective to add additional staff at

IRS to be sure we are not refunding billions of dollars in inappropriate refunds?

Mr. SEBASTIAN. There is no comprehensive study that we have

seen at this time. We have seen initial estimates of the additional

up-front cost in terms of staff days in validating certain information on the tax returns with other third-party information prior to

disbursing the refunds. What we haven’t seen is the back-end savings associated with preventing disbursements of inappropriate refunds and any additional costs associated with trying to recover

those inappropriate disbursements.

55

Mr. TURNER. I want to suggest something here that obviously

may not be consistent with what you just shared with me, but it

seems to me that if we have fraud going on in the Internal Revenue Service, if there are people who are claiming refunds to which

they are not entitled, that we have an obligation to uphold the law

and to be sure that that is not happening even if it is not cost-effective. And it disturbs me somewhat to think that those of us who

have fought very hard to be sure that we have a tax system that

has the trust and confidence of the American people would be told

that we are not going to collect those taxes and we are not going

to prevent improper refunds unless it is cost-effective.

I think the American people who are paying their taxes are entitled to know that everyone is paying what they properly owe and

no one is getting anything back that they are not due. And I really

think that the Service needs to take a new look if that is the philosophy of the Internal Revenue Service as you have shared it here

today.

Mr. HORN. Let me pursue the earned income tax credit. I would

like to know does the IRS and the Treasury have a view on that,

and what do they think can be done in a reasonable way to get at

the fraud that clearly exists in the program? Everybody that writes

about it says, gee, there is great fraud here.

The fact that we took millions off the tax rolls in the 1986 act

just seems to me—how do we differentiate between those we simply took off the tax rolls? And in a sense this is a welfare system,

and that is what it was designed to be. I think this was a Nixon

administration creation, wasn’t it?

Ms. CUNNINGHAME. If I might, Mr. Horn, I would like to defer

to our Chief Operations Officer, John Dalrymple, who can share his

experience on the EITC with you.

Mr. HORN. OK. We are going to have to swear him in.

[Witness sworn.]

Mr. HORN. The clerk will note the witness has affirmed it.

Mr. DALRYMPLE. With regard to EITC, actually we’ve tried to

take sort of a two-pronged approach here. One is to eliminate as

much of the overclaim rate as possible. On the other hand, make

sure that all the people who are eligible for EITC actually claim

it, because we really have a problem on both ends of that.

But just to give you some numbers, in 1998, we actually did

800,000 examinations on prerefund returns. Now, what that means

is that before the refund went out, we actually examined those tax

returns. We also did 600,000 math errors, which Congress gave us

the authority to treat these as math errors. Again, those are

prerefund.

Together we believe we stopped somewhere around $977 million

going out in overclaims that would have gone to folks that

shouldn’t have gotten them in 1998. So this is actually a payoff for

the investment that the Congress made in this program 2 years

ago, and 1998 was the first year that we actually spent, I believe,

$138 million to try to deal with this issue.

On the other hand, we also sent out several million notifications

to those people who we had fairly good knowledge should have

been claiming or could have been claiming this credit and didn’t.

And in addition to that, we had several programs this last year

56

that we tried to take an alternative approach to these folks as opposed to the examination routine or any other sort of enforcement

activity. We actually identified some people who we thought may

have been involved in using someone else’s Social Security number.

In other words, they were used more than once, a duplicate identification number. And we sent out about 300,000 of those notices,

and we got very good compliance of people actually going back and

amending their returns, and then, in the subsequent year, this

year, not claiming that dependent that they shouldn’t have. Many

of these instances were spouses who were separated, et cetera, and

really didn’t know who was claiming the child. And in addition we

have done a substantial amount of outreach around this program

this year.

This law is not a simple piece of legislation, the EITC credit, in

terms of determining whether or not you qualify or not. So we have

done quite a bit around this in terms of outreach to make sure people understand when and when they do not qualify for this credit.

Mr. HORN. What is the range of payments that one can get under

the earned income tax credit? What is the scale?

Mr. DALRYMPLE. I think the maximum you could probably get is somewhere around $3,000. The lowest range, I believe, is down to

several hundred dollars. I could get that, though, for you for the

record.

Mr. HORN. Could you? Without objection, it will be in the record

at this point.

[The information referred to follows:]

For tax year 1998, the maximum earned income tax credit for one child was $2,271; two or more children $3,756; and no qualifying children $341.

Mr. HORN. Obviously, we want to know how the formula works,

how many people access the formula at one end as opposed to the

other end.

Mr. KUTZ. Mr. Chairman, that’s consistent with what we saw in

our financial audit, in the sample items from the 1998 audit.

Mr. HORN. Does GAO have anything else to comment on this

particular program?

Mr. KUTZ. No. But the size of the EITC refunds you are talking

about, or actual claims, is consistent with what Mr. Dalrymple

said.

Mr. HORN. Any other comments you want to make on that?

Mr. DALRYMPLE. The only other thing I would say is to sort of

buttress what the GAO said about our whole strategy around refund fraud is to put a system up front. And several years ago we

contracted with a fairly substantial vendor to try to put on our upfront systems an electronic fraud detection system, and we have

been enhancing that each year. We have contracted with Malcolm

Sparal to come in and review that system, and he has given us

some advice on how we might make it better, et cetera.

So we agree with the GAO, the real crux here is to have a system

on the front end that would over time be smart enough, intelligent

enough, to actually see trends, et cetera.

The other point I would make is that our refund detection teams,

we have over 500 employees now employed in that system, and

they are literally looking for schemes. And just this year, for example, we found a scheme where promoters were telling taxpayers to

57

go out and claim all of their Social Security payments that they

have ever made back against a refund this year. And so far we

have stopped over $50 million in refunds on that scheme alone just

in this filing season. So the fact is we are catching schemes.

Mr. HORN. Now, who is investigating that? Is the FBI?

Mr. DALRYMPLE. Our Criminal Investigation Division is investigating that.

Mr. HORN. And what is happening as a result of that investigation?

Mr. DALRYMPLE. It is just unfolding as we speak, Mr. Horn.

Mr. HORN. How extensive do you think that is?

Mr. DALRYMPLE. We are trying to find that out right now. We

found the scheme in the centers. We stopped the refunds. And now

we are trying to go back up the trail.

Mr. HORN. Was it in one area?

Mr. DALRYMPLE. No. It is wider than that, sir.

Mr. HORN. What do you think caused it? I mean, is there somebody that is scamming nationwide?

Mr. DALRYMPLE. I would say that that would be my initial reaction. But again, I don’t have enough data to tell you that for sure.

Mr. HORN. Well, keep us informed on that one.

Mr. Turner.

Mr. TURNER. I am not sure I understood the scheme that you are

now investigating. Explain what is happening.

Mr. DALRYMPLE. Let me look to make sure I give it to you exactly

correctly. It’s a scheme in which individual taxpayers file a fraudulent return claiming significant refunds. They are being told that

for a paperwork fee of about $100, they can receive a refund of all

of their Social Security taxes withheld during their lifetime. So

they are being directed to obtain a printout from the Social Security Administration of their lifetime Social Security earnings for

themselves and their spouses. Then fraudulent returns are then

filed, which computes a refund based on the current tax rate during the times of the lifetime earnings. Basically, it is preying on

people’s lack of knowledge of the Social Security system and the

tax laws.

Mr. TURNER. So you are saying that someone is out there telling

folks to claim a refund of all the Social Security contributions they

have made during their lifetime?

Mr. DALRYMPLE. That’s right.

Mr. TURNER. And they are actually filing that kind of return, and

they are getting a refund?

Mr. DALRYMPLE. They are not getting a refund. We have been

stopping the refunds, but they are filing the returns. And you’re

right, someone is promoting it, Mr. Turner.

Mr. TURNER. It is hard to imagine that anyone would think that

that is possible, but perhaps somebody is doing a pretty good sales

job. And they are being compensated for advising folks to do this?

Mr. DALRYMPLE. That’s the information I have with me today.

Mr. TURNER. Another area that is a problem, as I understand it,

in refunds is that taxpayers are getting refunds when they may

owe the Federal Government money in either taxes or some other

venue. Is that a finding of the General Accounting Office, and what

is the extent of that particular problem?

58

Mr. KUTZ. We found that this year in our sample results where

there were several instances of inappropriate refunds found in the

unpaid assessment sample. I will defer to Mr. Sebastian to give you

the details of that. But, yes, we did find that.

Mr. SEBASTIAN. I cannot give you the specific number of cases.

We did look at a total of 700 unpaid assessment sample items. But

the instances that we did identify were simply those where actual

assessments, i.e., additional tax liabilities, had not posted to IRS’s

systems prior to the disbursement of a refund. Had those assessments posted on a timely basis and been on the books, the IRS

would have been able to offset or retain the refund to pay down the

additional tax liability that should have been on the books.

Mr. TURNER. You correct me if I am wrong, but it appears to me

that because the law requires a refund to be made by the IRS within 45 days, that all that is going on is the IRS is sending out the

refund within 45 days, and there is not much else happening before

the refund goes out. Am I misinformed here, or is that actually

what is taking place?

Mr. SEBASTIAN. Well, again, in the cases that we looked at, these

were assessments that should have been posted and on the books

at the time the return with the refund claim had been filed. So had

they been on the books at that point in time, the IRS would have

been able to offset.

Mr. KUTZ. There is no way that the IRS would have known that

these assessments were there, because we found that some of the

assessment posting delays are several years.

Again, the IRS is in a difficult position with the 45 days and the

timing of processing these returns. Especially during the peak season you are getting—I will let them tell you how many, but millions of pieces of mail a day in the April filing season. So the IRS

is under a lot of pressure to get the refunds out. I’m sure you probably have gotten some calls from your constituents on where their

refund checks are. I know other Members probably have at least.

The IRS is in a difficult position. It doesn’t excuse what is happening, but it is a tough position.

Mr. TURNER. It just seems to me that we have a problem that

is brought about by the 45-day time limit that either has got to be

remedied by extending the time for a refund, which taxpayers

would not like, or staffing at a level that will allow us to recover

these fraudulent refunds.

Mr. KUTZ. One of the long-term solutions that IRS is looking at

is the electronic matching up front, and this, I believe, is part of

their tax system modernization program. I don’t know if they have

any comment on that.

Ms. CUNNINGHAME. He is correct on that. And if I may, I would

like to ask Paul Cosgrave, our CIO, to explain to you what we are

doing in that area.

Mr. HORN. He has not been sworn in. Next time, if you have got

25 assistants with you, let us swear them all in.

[Witness sworn.]

Mr. HORN. The clerk will note the witness has affirmed it.

Mr. COSGRAVE. Thank you, Chairman Horn and Mr. Turner, for

allowing me to speak on this issue.

59

First of all, I think as has been stated, the age of the IRS’s systems is correct, quite old. I believe you referred to them dating

back to the 1970’s. In fact, some of them date back to the 1960’s,

and that is at the root cause of some of these problems. However,

let me try to correct a few things.

First of all, as it relates to refund checking, we do have a process

in place that goes against a debtor file that is not just IRS debtor

file, but debtor file to the government as a whole, and most refunds

are run around up against that file before, in fact, they are issued.

So, as you stated, it is not just that these refunds are being issued

without any checking, there is, in fact, a check against that.

Mr. HORN. What is the authority of Treasury and/or IRS in

terms of checking other government debts that that person might

have incurred and have they repaid them? Is there a law that permits you to do that?

Mr. COSGRAVE. Yes, there is. I can’t give you specifics of it, but

I will say it exactly follows the process that you just described.

And, in fact, this year with this filing season, we actually transferred that function over to FMS, who now performs that across all

the government. We performed it ourself across all the government,

but the improved process is where FMS is doing it all.

Mr. HORN. I’m all for you, because when our Debt Collection Act

of 1996 became law, it applied only to nontax areas. So if you’re

collecting it, God bless you. I was outraged by the millions that

were going under the table, and nobody ever had to pay around

here.

Mr. COSGRAVE. In 1998, we offset 2.7 returns through this vehicle. So—— Mr. HORN. And that boiled down to what? I’m looking at that

chart, and if we can just go over it again. You’ve got the taxes re- ceivable collectible, $26 billion is the estimate; taxes receivable

uncollectible is $55 billion; compliance assessments at $22; but the

one that has always annoyed me, and that’s what led to the 1996

act, writeoffs of $119 billion.

If I was listening to this or reading about it in the paper, I would

say, ‘‘gee,’’ all you’ve got to do is wait them out, and pretty soon,

they will just forget about me. That’s sort of amazing, because I

wouldn’t think anybody would forget about the IRS, but your bulldog appearance does not necessarily say that they were recognized,

because these people just sit there. And I would love to know the

makeup from both GAO and the IRS as to these writeoffs of $11

billion.

I realize people go into bankruptcy and all that, but if it’s a pattern and practice, I think we ought to amend the bankruptcy law

or something and get some of that money back for the taxpayers

when the rest of us are paying the bills.

Mr. KUTZ. To the extent that refunds have been offset, the

amounts would no longer be included in the unpaid assessment inventory. And I don’t know what the actual dollars are. I believe

over a billion dollars is associated with the 2.7 million items Mr.

Cosgrave mentioned.

But with respect to the writeoffs, those are primarily failed

S&Ls, RTC entities and defunct corporations that date back in

some instances to the 1970’s. There is no hope of collection. Also

60

individuals that are in prison for life sentences with no assets, or

persons that have passed away that have no estate are included in

that amount. The reason it gets to be so large is that IRS is required to keep these amounts on its books for 10 years or more, if

you go through a bankruptcy court, et cetera.

So each of those years that goes by you have the accrual of a lot

of interest. For example, the S&Ls and those types of entities, I

don’t know—do you have the numbers?

Mr. SEBASTIAN. No, I don’t.

Mr. KUTZ. The actual amount of those initial assessments was

less than $10 billion, but it’s going to grow to over $40 billion by

the end of the statute period—fiscal year 2003.

Mr. HORN. In other words, they’re applying the interest and putting that into the writeoff?

Mr. KUTZ. That’s correct. There’s interest.

Mr. HORN. At the end of 10 years, it just goes away?

Mr. KUTZ. Right, it comes off the books completely. So most of

the items in the writeoff category are very old.

Mr. HORN. Well, but the—you know, they can’t forever blame the

S&Ls. When was the peak of the S&L robbery against the American taxpayers?

Mr. SEBASTIAN. Well, you’re looking at large S&L and then bank

failures from the period of about 1984, 1985 through 1991.

Mr. HORN. Well, OK. Is this a sort of another year 2000 problem,

they’re all going to explode at once or come back to life at once?

Mr. SEBASTIAN. To the extent they’re not in the midst of bankruptcy proceedings, what should end up happening after that 10-

year period is the balance of the taxes receivable and all associated

penalties and interest will come off the books. It could be a significant writeoff of the writeoffs.

Mr. HORN. Does my colleague want to pursue anything on this?

Mr. TURNER. Well, I certainly share your concern, Mr. Chairman.

It disturbs me, when we try to analyze the actions that the IRS has

taken to improve their financial management practices, that we

may not be seeing the emphasis placed where I really believe the

emphasis should be placed, and that is on building a credible tax

system that has the confidence of the American people.

And as I mentioned in my remarks earlier, there are certain

things that seem to me that must be done to be sure that we have

a tax system we can all have confidence in and believe that we’re

all paying our fair share. And in those areas, if the IRS would simply try to identify the credibility areas and move aggressively in

those areas, I think we at least might have a tax code that will survive for a few more years.

As we all know, the tax code is under increasing stress. There

are those who would like to simply abolish the aggressive income

tax, which has served us for many, many years. And I think those

who would like to accomplish that can certainly cite some good examples that we’ve heard here today of what is wrong with the Federal income tax system as we know it. And I think we’ve got an

obligation to make some changes.

I also think the Internal Revenue Service has an obligation to

this Congress. When we find areas where there is abuse and fraud,

you know, 45 days is not working, maybe we need to talk about reVerDate 11-MAY-2000 13:29 Mar 07, 2001 Jkt 066095 PO 00000 Frm 00064 Fmt 6633 Sfmt 6602 E:\HEARINGS\61839 pfrm04 PsN: 61839
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funding half of the taxpayers money 45 days and the other half in

90, something to allow this tax system to work fairly and credibly.

If we keep going down this road, I’m really concerned that we’re

not going to have a system that is going to survive.

One other problem that was mentioned in the testimony that I

have a hard time understanding, and that is why we can’t reconcile

our trust fund collections that are received by the IRS with what

the Treasury has, and that seems to me to be a simple accounting

problem. I understand you accomplish that at the end of the year

by some ad hoc methodology, but it’s beyond me as to why we can’t

keep up with what is supposed to be in the trust funds between

the IRS and the Treasury Department.

Could you expand on that just a little bit from the perspective

of the General Accounting Office?

Mr. COSGRAVE. Could I first address your first point, if I may?

Mr. TURNER. Sure.

Mr. COSGRAVE. I think, as you’re well aware, the IRS is in the

midst of a transformation of significance. We have a new Commissioner, Commissioner Brodham; Ms. Cunninghame as new Chief

Executive Officer; myself as new Chief Information Officer all within the past year. We’re recommitted to restructuring the organization in a great way. We’re changing the organization, as you know,

to align ourselves with the taxpayers. That’s a major effort that’s

going on.

We’re developing new measures of performance for the Service.

We have a new mission statement, which clearly recognizes the

need to provide service to its taxpayer, at the same time providing

fairness to all the points you raised earlier. We’re revamping business processes, and we’re modernizing the technology. All of these

things are occurring simultaneously, and the costs of the age and

the serious inadequacies in many of the base systems are requiring

an awful lot of work and aren’t going to happen overnight.

But I just want to assure you that the Commissioner and all of

his direct reports are absolutely committed to what you’ve laid out

in terms of generally supporting the system that we have in place.

And I think some of the loopholes that have been brought up here

are simply that; they’re weaknesses in the system that can be corrected, but they’re not overall massive failure of the system.

I think you need to understand it in that context, that we’ve

taken some specific examples, such as a refund check going out

that may have slipped through the process, but in general, we’re

processing and controlling the vast majority of the payments properly as indicated by the clean opinion and the historical statements.

Mr. HORN. Let me pursue an example. Our employer takes out

the amount of money out of every paycheck for the Social Security

Trust Fund and the Hospital Insurance Trust Funds. Now, when

that comes in, let’s say he’s got five employees, and half is met by

the employer under Social Security and Medicare, and that money

comes into an IRS center. What happens? Do they actually assign

it to ‘‘a trust fund’’? Tell me where the reconciliation comes in.

Does somebody keep it on a paper bag at lunch and say, ‘‘gee,’’ we

owe that trust fund something at the end of the year. When does

reconciliation and love occur?

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Mr. COSGRAVE. I will let Mr. Dalrymple give you the answer to

that. The service centers are under his direction.

Mr. HORN. OK. Well, you’ve been sworn in.

Mr. DALRYMPLE. I’ve been sworn in, thank you.

If I understood your question correctly, it is when do we actually

certify the moneys over. Two years ago, I believe it was 2 years

ago, it may have been 3 years ago, we got a recommendation from

the GAO when we actually start reconciling this to when it was

paid, as opposed to when it was reported, because, as you know,

there are times when this money is not paid over, and so then it

goes into a collection activity, and we end up collecting it.

Mr. HORN. Well, let’s make that very clear. When it is paid, by

whom?

Mr. DALRYMPLE. By the employer.

Mr. HORN. OK. When the employer’s half comes in and the employee’s half—they’re really coming in at different timetables,

aren’t they?

Mr. DALRYMPLE. Actually, they come in at the same time, but

they’re—you know, they’re withheld, as you know. This is

witholding taxes, so they—but we are now certifying twice. We’re

certifying what we expect is in the—on the books at the end of each

quarter, and then we certify later when we verify that the payments have actually come in, so what was actually paid.

Mr. HORN. Now, this is whose books at this point? Is it on the

provider’s books or your books?

Mr. DALRYMPLE. I’m sorry, I’m misunderstanding the question.

Mr. HORN. Well, when the money is deducted in the paycheck,

the employee has it at that point, he’s supposed to turn it in to the

IRS.

Mr. DALRYMPLE. He turns it in quarterly.

Mr. HORN. Quarterly. And you get also the employee’s half quarterly. Now, do those come in in one check or two; the employee

sends one?

Mr. DALRYMPLE. They come in in one check. They come in one

time, one deposit by the employer, because the employer——

Mr. HORN. So the full 15 percent or whatever it is—— Mr. DALRYMPLE. Exactly.

Mr. HORN [continuing]. Is paid on Mr. Jones.

Mr. DALRYMPLE. Yes.

Mr. HORN. And at that point what do you do with it? Do you

have something called a trust fund? The fact is you don’t, do you?

Mr. DALRYMPLE. We don’t have a——

Mr. HORN. There is no trust fund?

Mr. DALRYMPLE. Right, that’s correct.

Mr. HORN. Right. Does that come as a surprise to anybody on

Capitol Hill? What we want to do, frankly, in this Congress is

make sure that every single dime comes in to a trust fund, and

that the President can’t borrow it, no matter who the President is,

and it’s going to sit there, and it’s going to be a trust fund. So tell

us how it works right now.

Mr. DALRYMPLE. Well, it comes in, we make an estimate based

on the filings, the total amounts, and then later we go back and

verify that through collections, and then that is what is certified,

as I understand it.

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Mr. KUTZ. Mr. Chairman, what he’s speaking about is actually

excise taxes. I believe you’re speaking about payroll taxes; is that

correct?

Mr. HORN. Right, that is correct.

Mr. KUTZ. That is a different process. The IRS is now doing their

certifications of excise taxes based on collections. However, for the

Social Security taxes, that is not what’s being done. It’s basically

being done on IRS wage information. Let me defer to Mr. Sebastian

to give you a detailed discussion of that process just to clarify the

difference.

Mr. HORN. I would like to know how the system works, because

I think it’s an illusion in many cases.

Mr. SEBASTIAN. Yeah. As Mr. Kutz pointed out, what is actually

happening with regard to the distribution of moneys into the Social

Security, Hospital Insurance Trust Funds, those distributions are

actually based on a certification of wage information that is done

by the Commissioner of the Social Security Administration.

There may be no relationship between what’s certified and

what’s actually collected on a quarterly basis. And, in fact, IRS’s

systems currently don’t capture information as payments are being

received that would allow you to actually affect the distribution to

the specific trust funds.

It’s important to point out that the process of distributing into

the Social Security and Hospital Insurance Trust Funds using

wage information versus actual collections is actually in accordance

with the law.

Mr. HORN. Now, is that what you would call an audit in the

sense of the word? Can you trace them and get a fix between the

wage determination that is made and the actual payment that’s

made? Is there a gap there at all?

Mr. KUTZ. Yes, there is a gap, and we reported on that as part

of the audit.

Mr. HORN. That’s my point. In which direction is the gap going,

more money than they should collect or less money than they

should collect?

Mr. KUTZ. The way it’s working is the general fund is essentially

subsidizing the Social Security Trust Fund, because the IRS, as

you can see on the poster board, look at the writeoffs—many of

those writeoffs are probably related to payroll taxes, as I recall.

Mr. SEBASTIAN. In fact, about $47 billion of the amounts in there

relate to payroll taxes.

Mr. KUTZ. To the extent those are not collected, the Trust Fund

gets the money anyway. And we reported an estimated subsidy of

about $38 billion this year. That is a low end of the estimate of

what the cumulative subsidy would be to the Social Security Trust

Fund from the general fund.

Mr. HORN. Well, it seems to be that you’re talking about employers and employees paying in taxes at a certain time schedule, and

it’s going into one big pool of money. And hopefully you’re depositing it fast so the Treasury can earn an interest on it and save

the taxpayers a little bit of money.

So what I’m trying to get at is what is certifiable, what is

auditable, and what does the GAO think as to the time period for

that audit? Is it simply an annual audit? And it seems to me

64

there’s an estimate made here, and on what basis is the estimate

made? It seems to me that a lot of good people might have another

way to do it. And I’m just curious how firm that estimate is.

And is that simply a decision of the Secretary of the Treasury as

to what happens with the money when it comes in; where’s the

bread, where’s the money?

Mr. KUTZ. There are two separate audit issues. The Social Security Trust Fund is an audit that we are not involved in; however,

we have done some work for the Department of Labor and Transportation Inspectors General related to the amounts that get distributed to the Highway and Airport and Airway Trust Fund. And

so we have done some audit procedures in the excise tax area.

The Social Security audit is done by their Inspector General. I

think they contract with PriceWaterhouseCoopers to do that audit.

And so the actual audit of the Social Security information is done

as part of that audit.

But we do assist the Labor and Transportation Inspectors General in auditing the certifications that Mr. Dalrymple talked about

with respect to the Highway and the Airport and Airways Trust

Funds.

Mr. HORN. Well, let’s take that, since I sit on the Transportation

Committee. You’ve got a Highway Trust Fund, an Airport Improvement Fund, and the fact is you don’t get the exact amount that is

going—run up on that gasoline pump, let’s say, when somebody

takes their car in to fill the tank. And the company presumably is

supposed to be keeping track of the Federal tax and sending them

a check, I assume, what, quarterly?

Mr. DALRYMPLE. It’s quarterly, yes.

Mr. HORN. What is the case of your friendly local oil company.

Maybe you should tell us how it works. You’re awful quiet on this.

I think it’s because the emperor has no clothes or something. What

can you tell us about how the money is deposited into those funds?

Presidents sit on them and the taxpayers pay them, Congress authorizes the fund for a purpose; namely, to maintain the interstate

highway system or maintain and expand the airport system in

America. And yet we don’t know how much is coming in accurately,

do we; or don’t we? Don’t all jump at it.

Mr. KUTZ. You want us to answer that?

Mr. HORN. I want both of you to answer it.

Mr. KUTZ. With respect to the excise taxes, we have done work

for 2 years now, what is called agreed upon procedures work. And

we did find problems with the IRS certification process in fiscal

year 1997. In fiscal year 1998, as a result of recommendations by

GAO, the IRS did make improvements in its certification process,

and we found during this year’s audit work that there were more

accurate distributions to the Highway and Airport and Airway

Trust Fund. However, there are still some control problems that

exist and IRS is working on our recommendations.

Mr. HORN. Well, let me ask you, what is the current state of our

tax on, let’s say, airports, the Airport Improvement Fund or the

Highway Trust Fund? What’s the tax that’s levied in that area?

Mr. DALRYMPLE. I wouldn’t have any idea exactly what it is in

that particular area or any individual area, but just to reiterate

what Mr. Kutz has said——

65

Mr. HORN. What I’m after is what’s the methodology of saying—

do you add up all the gallons of gasoline that have been sold, or

how does one check where the money is?

Mr. KUTZ. Mr. Chairman, I think it would be helpful if Mr. Sebastian walked you through the actual process here, because it’s

fairly complicated. But he’s done it many times, so let me give him

a chance to do that. He’s a pro at this.

Mr. SEBASTIAN. I’m not a pro at it, and it is a complicated process. Let me start first by saying that as deposits—excise tax-related deposits are made, they are going directly into the general

revenue fund of the U.S. Government. They are then being initially

distributed to the various excise tax-related trust funds, such as

highway, airport and airways. Those distributions are based on estimates done by the Office of Tax Analysis within the Department

of the Treasury, and they essentially use much of the information

that they use to derive the President’s budget in making those initial distributions.

What occurs roughly 6 months after a particular quarter ends is

as the IRS receives the tax returns, excise tax returns, much of the

information that you had mentioned, gallons of fuels, airport ticket

tax, et cetera, is identifiable by the taxpayer on the tax returns.

The IRS then matches—and this is a relatively new process this

fiscal year, but the IRS matches the information on the returns to

the amounts it has in its records with respect to what was collected

by that taxpayer for that particular quarter. And bear in mind, up

to that particular point, the IRS can’t break the amounts that have

been received down into the specific taxes, they have to wait for the

tax return to come in.

As a result of matching the information on the return to what

was collected, the IRS then certifies the amounts that should have

been deposited into the respective trust funds for that particular

quarter. That information then goes over to the Department of

Treasury’s Financial Management Service, which compares the

amounts the IRS is certifying for a given quarter against what was

actually distributed based on OTA’s initial estimation process,

and——

Mr. HORN. Why don’t you define OTA’s?

Mr. SEBASTIAN. The Office of Tax Analysis.

Mr. HORN. Right.

Mr. SEBASTIAN. It’s a detailed estimation model. It looks into patterns of revenue streams.

Mr. HORN. Do their estimates come into a phase of reality with

the audit, and to what degree is there a difference?

Mr. SEBASTIAN. I would say that we’ve looked at the OTA estimation process from a standpoint of what controls they have in

place to factor in tax law changes, et cetera. We haven’t done a detailed analysis getting into the adequacy of the underlying assumptions, but our sense is that the OTA’s estimation process presents

reasonable estimates of the amounts that would be distributed.

That doesn’t mean—again, because they’re estimates, they are subject to change, and that’s a part of what the IRS subsequent certification process attempts to measure is the degree of change between

the estimate and the actual.

66

Mr. KUTZ. But the root cause of this problem is when the money

comes in the door, the taxpayer is not required to and does not

break out the details of the different pieces for the fuel tax, et

cetera. So IRS does not know at that point in time where the

money should go. Because of that root cause problem, this elaborate process that Mr. Sebastian just described takes place at this

point.

Mr. HORN. It seems to me it ought to be very simple; how many

gallons of gasoline did you sell at what price or whatever, and

here’s your share of the tax. Now, I take it that the individual gas

station owner or franchise does not do that. The company, I take

it, does the actual amount of the Federal tax; is that correct? Anybody know?

Mr. KUTZ. You mean the big oil companies?

Mr. HORN. Yes.

Mr. KUTZ. Most of the returns coming in are from the major oil

companies and the chemical companies, yes, et cetera.

Mr. HORN. OK. And is there a way that the IRS has audited

them to see if they’re producing the right numbers off all of their

stations? There’s thousands of stations some of them have, and

they get a weekly report, or almost daily, on inventory. So you can

tell. I remember working my way through college, you posted the

report at 7 a.m. before you went off the 11 to 7 shift, and it was

how many gallons had come in on the shift, how many had you

pumped out. So those data all are everywhere, I’m sure.

Mr. DALRYMPLE. As part of our large case examination program,

when we audit one of these large companies, we have an excise

team that’s part of that examination, and they do just that. They

literally go out and do some checks and some local calls to determine whether or not there’s any reason to go further in terms of

checking, and then assess additional excise tax if appropriate or

not, depending on how the examination goes.

Mr. HORN. What’s the most difficult trust fund to deal with in

terms of the estimate?

Mr. DALRYMPLE. I’m probably not qualified to answer that question, Mr. Horn, but I suspect that someone from Office of Tax Analysis would probably be the one.

Mr. HORN. We will save a little spot in the record, without objection, to see what the experts are going to do.

[The information referred to follows:]

The Highway Trust Fund has the most tax items appropriated to it. Each of these

items has a different tax rate and a single tax may be apportioned to several accounts. For example, tax paid for gasoline is appropriated to the Highway Account

of the Highway Trust Fund, the Mass Transit Account of the Highway Trust Fund,

and the Leaking Underground Storage Tank Trust Fund. In addition, a portion of

the gasoline receipts is subsequently transferred to the Aquatic Resources Trust

Fund to reflect that some gasoline is used in motor boats. The large number of tax

items and multiple accounts make the Highway Trust Fund the most difficult to administer.

Mr. KUTZ. Mr. Chairman, I would say it would be the Highway

Trust Fund. If you look at the form that comes in from the taxpayer, the form 720, the Highway Trust Fund is made up of numerous different taxes, whether it be diesel fuel, alcohol fuel, whatever the case may be, versus the Airport and Airway Trust Fund

is only four actual taxes.

67

So I think the answer to your question would be the highway

would be the most complicated because it consists of the most different types of taxes.

Mr. HORN. Do you want to pursue anything on this?

Mr. TURNER. Not on this. I have other questions.

Mr. HORN. Mr. Turner has some questions to ask.

Mr. TURNER. When we passed the IRS reform legislation last

year, there was a lot of comment from the Internal Revenue Service to the effect that making the agency more taxpayer-friendly was

going to make it harder to collect taxes rightfully due. And I would

like to hear from each of you, Ms. Cunninghame, or any of the others that you brought with you, about your assessment of that claim

at this point in time, because it’s my hope that what the Congress

did was make the IRS a more responsive agency to the taxpayer.

But at the same time I hope it did not keep your agency from

collecting taxes rightfully due. Could you comment on that and

whether or not you believe that we are going to have some problems with collection, or can we overcome those problems and rightfully collect what is due?

Ms. CUNNINGHAME. I’m not sure we have the total answer, but

I do think John can address those issues as well.

Mr. DALRYMPLE. Actually, I think that the Service’s position was

and is and will be, on a forward-going basis, is that we actually believe that by putting our activities on the front end of the system,

making ourselves much more taxpayer-friendly in the sense that

we are out in front trying to inform people about what their responsibilities are actually impacts compliance on the back end in

a positive way, and that if we can get people to change their behaviors, because we understand them better, because we’re organized

around the way the taxpayers actually do their business, whether

it’s small business, or wage and investment, or exempt organizations, or large and midsized businesses, I think what we anticipate

now and in the future is that we will be much better able to serve

them and that we will reserve our enforcement resources for the

most egregious cases, and that we’re actually helping more people

to comply by having more resources on the front end than on the

back end.

In fact, I think many of the people that end up on the chart over

there if we could have gotten to much, much earlier in the process

would not be on the chart.

Mr. TURNER. Do I take it then that you’re trying to reassure me

that what the Congress did to make the agency more customerfriendly is not going to have an adverse impact upon collections?

Mr. DALRYMPLE. I think if there’s any adverse impact on collections, specifically on collections, it’ll—whatever it will be, it will be

short-lived, and that over time certainly the right thing to do is to

help people comply with the tax laws as opposed to waiting for

them not to comply up front and then try to use resources on the

back end to try to get them back into compliance. That’s just not

a very smart way to do business.

Mr. TURNER. Ms. Cunninghame, I was reading your statement

again that you delivered to us earlier, and you attempted to reassure us that you were going to work diligently to address the concerns of the General Accounting Office; that you were going to

68

bring in some independent help. A comment was made by one of

your colleagues that, you know, that the Commissioners knew.

I guess I get the sense that even though the IRS is going through

some reorganization, I don’t sense that there’s been a real significant effort to deal with these financial management systems problems that we’re talking about here today. And I guess first maybe

I should ask you if the IRS has contracted out for the work to modernize its systems, and whether or not we’re getting the kind of

independent advice and the emphasis that is needed to overcome

these problems, rather than simply coming in here every year after

an audit and having, you know, someone in your position as the

Chief Financial Officer saying, yes, I’m going to respond to this.

These problems seem to be running pretty deep. As we said,

some of the systems have been in place since the 1970’s and before,

and I just don’t get the sense that there has been an emphasis internally at the IRS to really deal with this seriously enough. Would

you comment on that, and then perhaps I would ask the GAO to

also respond?

Ms. CUNNINGHAME. Certainly, Mr. Turner. I think that we have

put a great deal of attention on enhancing our systems, and certainly with the release of the prime contract that we made a few

weeks ago. I think that there is a big emphasis on a number of top

priorities at the IRS, one of which is the financial systems.

I would like Mr. Cosgrave to have an opportunity to be more specific about what those are and to assure you that the financial systems are in queue to be dealt with with the other systems that are

top priorities for the service.

Mr. COSGRAVE. Very briefly. The overall plan that we’ve been

executing against for the last 2 years since we presented the technology blueprint for modernization was aimed primarily at the tax

processing systems. With the audit, the GAO audit from the last

year, where there was some deficiencies pointed out in the way we

processed data for the custodial accounts, we took some action

that’s been going on now for a year to, in fact, improve those custodial systems in the way we provide data to support that analysis

up there. With this report, we will now start additional efforts in

terms of the administrative systems that frankly were not being

addressed as forcefully as custodial systems.

Now I need to put all of that in the context, that, first of all, we

have hired outside expertise in the form of computer science corporations and the partnership that we have put together, which includes IBM, UNISYS, among other players, KPMG, et cetera, to

help us deal with all of this issue. And, in fact, they are the systems integrator that is driving the program going forward.

So we definitely reached out to the private sector for this assistance. However, we haven’t made progress in these areas in terms

of the inventory examples, for example, brought up earlier. We

have had a problem that was recognized in terms of particularly

getting assets that have been disposed of through proper channels

off of our books. We have been slow in terms of doing that. And

this presented some problem to us, particularly in terms of confirming everything that we had for Y2K compliance.

So over the last 4 months, since the effective date of the audit,

we have invested over $5 million in actually improving the basic

69

inventory system to address that one fundamental problem, so I

suspect we will see some short-term improvements here the next

time we have the inventory analyzed. However, I can’t emphasize

more once again that these are very long-term problems in their

nature. They have been long-standing problems, and we will continue to work on them.

The other point that was raised earlier in the testimony was related to security, and I would just like to point out there that GAO

had reported that IRS had long-standing problems in the security

area. But 2 years ago we implemented our own system, standards

and evaluation office. This office is led by two SES executives, who

were former GAO employees, and over 60 employees. And we’ve actually reported, and GAO reported in their audit, in fact I can

quote here, that they acknowledged that 75 percent of the improvements—75 percent of the weaknesses that were identified in the

April 1997 report have, in fact, been mitigated.

So we clearly are making progress; however I can’t emphasize

more the long-term nature of some of these. Particularly because

of Y2K you will not see a lot of immediate results in terms of the

systems changing, because clearly Y2K is our top priority at this

time.

Mr. TURNER. I would also ask, Mr. Kutz, if you would respond

to that. Again, what I’m looking for is your assessment of the degree of the commitment and the effort by the IRS to remedy these

financial systems problems that you have identified.

Mr. KUTZ. Yes, I would concur with Mr. Cosgrave in that the

focus of IRS over the last year or 2 has been fixing the custodial

systems, and I would also concur that is a very long-term prospect

that is going to take numerous years. So we will be talking about

these problems for the foreseeable future. I don’t think there was

as much emphasis placed on the administrative control issues with

respect to the property and equipment, being able to produce

things like an accounts payable listing at year end, or listing the

budgetary accounts, for example, your undelivered orders at year

end. And I do believe IRS now recognizes the administrative-related problems and is going to build a plan to try to fix those systems-related problems.

Mr. TURNER. Thank you.

Mr. HORN. Let me go back to debt collection for a minute. Could

you tell me as Chief Financial Officer, Ms. Cunninghame, the degree to which you tell the taxpayer that money is owed, and how

you do it, and in what time period? How does that system work,

and have you had a chance to look at it?

Ms. CUNNINGHAME. I have had a chance to look at it, and we do

have a system that works, but, again, the expert on that is Mr.

Dalrymple, if you would let me defer to him.

Mr. HORN. Well, I would hope you would also know about this.

Ms. CUNNINGHAME. I do, sir, but, you know, I’m relatively new,

and I don’t know it to the extent of Mr. Dalrymple, who has been

with the Service for 23 years.

Mr. HORN. OK. How’s the process work?

Mr. DALRYMPLE. Well, the process works once there’s a valid

debt, whether you file your return and just didn’t—weren’t able to

pay it, or whether there was an examination of your return and

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there was an amount due or some other means, once that happens,

then a notice is generated, and it’s a statutory notice of deficiency,

and that’s by law. And you receive a first in a series of notices saying, would you please pay the tax that is here.

Mr. HORN. When does the first notice go out? Is it a 30-days?

Once you notice a default, how does that work?

Mr. DALRYMPLE. Well, notice and default refers to the examination process. But just, in general, let’s just take a normal taxpayer

who files their tax return on April 15th. Generally those notices go

out in June and July for our returns that were due to be filed on

April 15th, and we ask that the taxpayer pay that account then

within—I believe within 30 days on the first notice. At the end of

that period of time, we send a second notice and then a third notice.

Mr. HORN. A second notice goes out roughly 60 days after April

15th?

Mr. DALRYMPLE. Roughly—actually, it’s probably later than that,

because the first notice goes out about 60 days after April 15th.

Mr. HORN. OK.

Mr. DALRYMPLE. So about 45 days after that first notice goes out,

a second notice would occur.

Mr. HORN. Now, that’s a written notice?

Mr. DALRYMPLE. That’s a written notice.

Mr. HORN. None of this has been telephone so far?

Mr. DALRYMPLE. Nothing telephone at this point in time. And a

third notice is generated to the taxpayer asking them to pay. At

the end of this point in time—now, there are certain types of accounts that go directly to our telephone contact units primarily. It

would be trust fund accounts that—where withholding has been

made, and the employer didn’t turn that withholding over, but just

the general run-of-the-mill April 15th filer. Now you’re under a

fourth notice. Finally, you will get a final notice before that says

it is a levy action. That’s actually what the notice says. Once that

has been out, then we send it to our telephone system for a collection. And then telephone calls—actually, then some sort of telephone call system is set up for outcalls and/or to receive calls from

the taxpayers, depending on what action we may have taken, such

as sending a levy out to an employer or a bank account.

Mr. HORN. Do you ever use the telephone first?

Mr. DALRYMPLE. No, we haven’t. And——

Mr. HORN. In other words, you don’t, say, if this looks like a big

taxpayer?

Mr. DALRYMPLE. That’s right, actually we do not. We treat everyone the same. That’s one of the things I believe that is wrong with

the system. I talked about earlier how we need to get up front. I’m

not just talking about up front with our taxpayers’ education, corrective, but we need to move everything up front in the process

what we’re going through now, and Mr. Rossotti has done some of

this through his prior life in this other company, is to go through

a risk assessment for taxpayers to determine who is not at risk at

all, who will pay just through an installment agreement process, et

cetera; others who are at real risk and need telephone calls immediately or should be—may even need a field contact immediately,

as opposed to going through the notice routine.

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So our long-range view here is to do a total risk assessment of

all of the accounts that we do and move that collection process on

a much, much more timely basis. Right now we basically treat all

taxpayers the same way, go through a methodology. Now, we do

short-cut some of the systems on some basis of risk now, as I mentioned, trust fund taxpayers, et cetera, but generally speaking, we

do not have a very good risk assessment process right now for the

general population.

Mr. HORN. What about the private collector? At what point do

you involve private collectors to collect your debt?

Mr. DALRYMPLE. We don’t at all.

Mr. HORN. You don’t?

Mr. DALRYMPLE. No.

Mr. HORN. Did you ever look at that?

Mr. DALRYMPLE. Yes, sir, we did.

Mr. HORN. As I remember, you put out a 5-year-old debt for them

to bid on, which I thought was one of the sillier things I had seen

in the bureaucracy. That’s bound to not be collectible. The question

is when you get in there early—and I went through this with the

previous Commissioner, and that’s what lead to the Debt Collection

Act of 1996. I said it’s a national scandal, as far as I’m concerned,

when you’ve got $100 billion written off, and you have no process

to really do it.

None of your people were doing what they should have done, and

you’ve put your finger on the risk assessment certainly, and the fact is that because little Willie Jones that only owes you $30, and

somebody else owes you $30,000 or has a loan from the Farmers

Home Administration, which was the example of several million,

and they would go and had given him several other million, even

though he even defaulted on the other several million, and so forth

and so on, and that sufficiently got my Irish dander up as to why

are we letting them steal from the taxpayers of the United States.

And I just don’t understand it, and I still don’t. I think the world

of Mr. Rossotti, and I hope he will, you know, face up to this. I

think he’s got the common sense. Because when I said, why not

turn it over to the private collectors, to his predecessor, the answer

was, oh, well, we have privacy laws. Baloney. You give them the

amount, you give them the address, and say, go to it. If they’ve got

a beef with IRS, fine, you use your people. But we’re losing billions

of dollars.

I don’t know what GAO’s thinking about it, but I must say when

I see that that thing keeps going up, up and up, and there’s no—

not too many S&Ls going under now as an excuse to not collect it,

and that’s all I regard it as is an excuse, and it seems to me you

had that experiment, I don’t know who put that one together, on

the 5-year debt to have private collectors bid on it, but it just

means you’re passing it up. You’re passing it up. And I don’t understand why you can’t use private collectors.

Mr. KUTZ. Mr. Chairman, one thing I would say, those private

collectors would be basically stuck with the same system that IRS

has for collecting from taxpayers. So that would certainly hinder

their efforts to go after some of these amounts. In other words, if

the system doesn’t properly identify who to go after when the tax

was incurred, et cetera, that would create some problems for priVerDate 11-MAY-2000 13:29 Mar 07, 2001 Jkt 066095 PO 00000 Frm 00075 Fmt 6633 Sfmt 6602 E:\HEARINGS\61839 pfrm04 PsN: 61839
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vate sector collectors. So a better system would also help no matter

who goes after the collections.

Mr. HORN. What would the General Accounting Office suggest as

a rational system?

Mr. KUTZ. I think that as part of their long-term tax system

modernization plan, they’re trying to put together an appropriate

subledger similar to what you would have in the private sector that

appropriately identifies the amounts due from taxpayers along with

other detailed subsidy information on those individuals or corporations. And they do plan to do that as part of their tax system modernization. The problem is that is a very long-term effort.

Mr. HORN. Well, yeah, but, my heavens, we have been at this

now for 4 years or—yeah, 4 years of trying to get them to face up

to how you run an organization. Now, I think Mr. Rossotti has

those credentials, so I’ve got great faith in him, but it seems to me

you get people working for you, and when you can’t collect it now

and a private collector could collect it, I don’t understand why

somebody over in IRS doesn’t say, hey, let’s reorganize this operation. Are they afraid of the union or what? If not, get the union

to go out and knock on the doors. But it has to be something that

is delaying people from common sense in administration.

Now, does anybody got a plan at that table in terms of the Treasury which—by the way, who is the Chief Financial Officer of the

Treasury?

Mr. APP. Nancy Killefer, sir.

Mr. HORN. Is she full-time Chief Financial Officer, or is she also

Assistant Secretary?

Mr. APP. She’s Assistant Secretary for Management and Chief

Financial Officer, and she has spent considerable time with the

whole IRS modernization plan.

Mr. HORN. Well, I don’t see how you can when you’re holding an

18-hour-a-day job also, which is the Assistant Secretary for Management. But that’s another story of why I think Treasury has

been out of sync for a long time.

Well, I’m not happy with the answers on debt collection, and it

just seems to me you shouldn’t let people off like that. And if I

were listening to this out there, and I was sort of worried about

do I know where my next payroll is—and that’s where a lot of the

problems come, somebody tries to not contribute on what the match

is for Medicare and Social Security and all the rest. And then the

problem here is, you really don’t know what’s in those trust funds

or what should be in. You’re making estimates.

And now have we ever done an actual audit of this on a random—you do a random sample. Does IRS?

Mr. KUTZ. Mr. Chairman, could you rephrase the question, a random sample of what specifically?

Mr. HORN. On the trust funds, I think we’re pretty clear that you

don’t have a record that you can follow on the taxpayer that had

certain things deducted from their payroll and that the employer

sent in a check to IRS; nobody has an account down there. It’s sort

of almost like when you finally draw on it, that somebody says, gee,

we better get some more money in there, a lot of people are drawing this quarter.

73

There is no relationship into what they deduct in relation to

what you get. And you can’t seem to audit it, either at the GAO

level or the IRS level.

Mr. KUTZ. That’s right. The IRS and the Federal Government do

not know how much is collected for Social Security, individual, and

hospital insurance taxes.

Mr. HORN. Right.

Mr. KUTZ. They must combine those for their financial statements.

Mr. HORN. Is that basically your recommendation? Your recommendation is, what, to make sure that the money is there?

Mr. KUTZ. We have recommended to them in the past to try to

get the information from taxpayers up front so that that information can be—so the estimate process over at the Department of

Treasury that Mr. Sebastian described would no longer be necessary. And they do have a study that they have performed that

we have not seen the results of that as soon as we begin our 1999

audit of IRS’s financial statements, we will review.

Mr. HORN. Mr. Turner, do you have any more questions on this?

Mr. TURNER. There is one item I want to briefly address, it

seems to be something that would be manageable in the short

term, and that’s the problem that was raised in the audit regarding

the hiring of individuals. I assume this occurs a lot during peak

seasons of employment at the IRS, hiring people with criminal

records and ways in which that could be prevented. It seems to me

there ought to be a short-term solution to that particular problem.

Am I correct, is there one, Mr. Kutz, and did you recommend one

to the IRS?

Mr. KUTZ. I think there is a reasonably short-term fix to this

with new machines that can provide on-line fingerprint checks, and

we saw one of these in Philadelphia. Actually, it’s a machine that

they can do an on-line fingerprint check with the Philadelphia City

Police and get a turnaround in maybe 24 to 48 hours. They don’t

have that capability yet with the FBI, but I believe that is part of

the IRS short- to longer-term solution to this problem.

Mr. TURNER. I notice that—— Ms. CUNNINGHAME. Excuse me, Mr. Turner, if I might, we have

worked with the FBI, and we are currently—we’ve just implemented the FBI electronic system to check those fingerprints in a

more thorough and quick turnaround basis.

Mr. TURNER. And so that—you think that will remedy this particular problem in the short term?

Ms. CUNNINGHAME. We’re in the process of implementing that

system currently, and we will have results known in a little while.

But, yes, we think this is going to be a very big help in checking

very quickly whether these people have criminal records, and not

relying on a 2- or 3-week wait as we have done in the past.

Mr. TURNER. Thank you.

Mr. KUTZ. I think the problem in the past was not a 2- or 3-week

wait. I think the time delays were much more significant. I think

this solution would provide, again, a 1- or 2-day turnaround, which

would mean that you’re not going to have people going into the

service centers and handling cash and checks and taxpayer data

until you know that they don’t have a derogatory background.

74

Mr. TURNER. Thank you.

Thank you, Mr. Chairman.

Mr. HORN. Thank you.

Mr. Kutz, elaborate on the Antideficiency Act which you mentioned and the IRS’s accounting procedures in relation to it, because criminal penalties are provided in the act, but I don’t think

in the history of the country they’ve ever been invoked, or am I

wrong on that?

Mr. KUTZ. I don’t know.

Mr. HORN. You don’t know. Do you ever remember a case?

Mr. KUTZ. Of actually reporting?

Mr. HORN [continuing]. That someone reported on the

Antideficiency Act.

Mr. KUTZ. I do believe several years ago that we did report at

the IRS there was an Antideficiency Act issue.

Mr. HORN. I’m not thinking of the IRS, I’m thinking of the whole

executive branch.

Mr. KUTZ. I can’t speak to that otherwise.

Mr. HORN. Anybody got history of that in the Treasury? Usually

they move money around, so there isn’t a deficiency such as there

is.

Mr. KUTZ. Right.

Mr. HORN. How does that relate then in the implications to the

IRS accounting procedure?

Mr. KUTZ. Well, Ms. Hawkins has been left out of this, so I want

to give her a chance to answer this one here. I will pass it to her

and give her an opportunity to see—— Mr. HORN. Give her a chance to commit to this committee, I see.

Glad to have you experts.

Ms. HAWKINS. I think, as Mr. Kutz mentioned, we disclaimed on

the budgetary statement, and part of the reason for that is we

could not get the data we needed to verify a lot of those accounts

like the undelivered orders. On the suspense account, that had a

net balance of disbursements of $100 million as of September 30,

1998. That gave us concerns, because basically those are amounts

other agencies in the government through a treasury system can

basically take the money out of your fund balance. With Treasury,

if you owe money——

Mr. HORN. When you say expense account, what does that define? Is that per diem and travel?

Ms. HAWKINS. No. For example, for telecommunications, if GSA,

the General Services Administration, is providing those services for

you, when they determine the amount that you owe for a particular

month, they will withdraw this amount through the OPAC system.

Mr. HORN. And spell that one out, please, for we uninitiated nonbureaucrats.

Ms. HAWKINS. It’s basically a computerized system, they automatically deduct money from your fund balance with your Treasury

account, the funds from your appropriation that you have with the

Treasury. They transfer money to themselves to cover your expenses such as telecommunications or rent.

Mr. KUTZ. It’s kind of like an electronic bill-paying system.

Ms. HAWKINS. Yes. We found in our sample where we tested expense amounts, we found several cases where items went into the

75

suspense account, because the amount being charged by the agencies, such as the General Services Administration, was for more

than what was obligated. And in budgetary terms you obligate

money to say we’re reserving money from our appropriation to pay

for what we expect to owe. An agency can’t pay a bill until it obligates the funds.

We found cases where items would go into suspense, and the suspense account is not charged against any individual appropriation

that is given to IRS. The IRS uses a suspense account, and then

when the obligation amount for a specific appropriation was increased, the money would come out of suspense.

When we look at the budgetary statements as of September 30,

1998, for the two major appropriations for IRS, the processing assistance and management had an unobligated balance available of

$4 million, and the tax law enforcement had an amount of $8 million available. There was $100 million in the suspense account. We

don’t know whether or not all of those amounts have been obligated, so we don’t know whether or not there was a violation of the

Antideficiency Act.

Mr. HORN. In other words, Congress gives them an appropriation. The President recommends an appropriation. We discuss it.

We send back an omnibus appropriations bill or whatever it’s

called that year, and there is a target for IRS. And you’re saying

there’s a separate account that is there that isn’t really where—all

the money for administration of the tax system is not in a particular account, is what I’m listening to, and if I’m wrong, and listening to you, let’s get it a little clearer.

Ms. HAWKINS. No, I think what you’re saying is correct.

Mr. HORN. So they can pay the bills out of the—well, I guess the

old term was using the float in terms of the interest that they accrue on other accounts. Has any of that been used by IRS to function as an agency when it wasn’t appropriated by Congress or

what? What are you finding?

Ms. HAWKINS. Because of the problems auditing this year, we

didn’t go into a lot of detail on this area. We did find cases like

in one appropriation for fund balance from Treasury, a specific appropriation where there was a note saying we don’t have enough

of this appropriation, we need to transfer money from another appropriation to cover the needs that we have in this appropriation.

Mr. HORN. And Congress has or has not given them the authority known as reprogramming money from one to the other?

Ms. HAWKINS. Well, in this particular case, the dollar amount

was low enough that I don’t think they had to come to Congress

for the reprogramming authority. And, again, in some of these

cases, it’s related to the way the administrative activities are handled. These two appropriations were about $6 billion and——

Mr. HORN. Six?

Ms. HAWKINS. Billion.

Mr. HORN. Million with an M, or billion with a B?

Ms. HAWKINS. Billion.

Mr. HORN. We think only with B’s around here, not M’s.

Ms. HAWKINS. And yet when you look for just these two appropriations, the amount as of September 30th remaining to cover

things that hadn’t been identified was $12 million, which seems

76

quite small. We do know there are some areas where the IRS will

be collecting money that will increase available funding from these

appropriations again, but we just don’t know whether or not their

budgetary accounts are accurate or not.

Mr. HORN. You’re saying it’s hard for you to get an answer to

them? Was that because agency employees did not want to give you

an answer or what?

Ms. HAWKINS. No, I would say agency employees were very helpful to the extent that they could be. Some of the problems dealt

with when we asked for a breakout of the suspense account at the

end of January, they didn’t have a listing of what made the suspense account, so we couldn’t go into details in terms of trying to

find out what was in suspense whether or not they were violating

the Antideficiency Act.

We could not obtain a list of undelivered orders, which affects

the budgetary accounts as of September 30, 1998 or 1997. So we

could not say whether or not what they had was correct. Some of

the problems dealt with the systems and the way they are set up,

and some of them dealt with the timeliness of being able to provide

this computer information.

Mr. HORN. Who sets the budget accounts for Treasury? Is it the

Assistant Secretary for Management or the Chief Financial Officer?

In this case, one person is holding both jobs. Is that what they

have to wait for once a new fiscal year comes in, or are these wellestablished accounts?

Mr. APP. They are well established, with some adjustment every

year.

Mr. HORN. Is that what the problem is? In other words, they are

using this suspense account?

Ms. HAWKINS. Yes.

Mr. HORN. To what extent are they using the suspense account?

This is before allocation to a budget category; is that right?

Ms. HAWKINS. Right. As of September 30, 1997, there was a bal- ance over $100 million, and also there was a balance over $100 million, net, as of the end of September 30, 1988. How many transactions are going in and going out during the year, I don’t know.

Mr. HORN. Well, it is OK unless it is criminal. Do you detect any

criminality in it?

Ms. HAWKINS. I don’t think that there was any criminality in

terms of purposely overspending appropriations. I think because of

some of the problems with the accounting systems and how they

are used, that there is a potential that accidentally something

could happen.

Mr. KUTZ. Right. But with the disclaimer opinion, we are saying

that because of the difficulties and the problems we had, we don’t

know.

Mr. HORN. Last year they had a very fine opinion, right, on the

1997?

Mr. APP. Unqualified opinion on both admin and revenue.

Mr. HORN. And you amazed all of us because back in 1993–1994

when that law was put on the books, we said there are two agencies that will never meet it: One is the IRS and the other is the

DOD. And so we were only half right. You amazed us, so congratulations.

77

I wonder why this year seems to be so different from last year

when GAO goes in to audit things.

Ms. CUNNINGHAME. First of all, I would like to say that we have

full confidence that we are appropriately obligating and expending

our appropriated funds.

Part of the difficulty we have had this year with the administrative audit is we did not set our own timetables to coincide appropriately with GAO’s timetable. Our accounts are extremely laborious to audit. The number of transactions, because of the volume

of business that we do, makes it very, very time-consuming to take

each individual major account and provide a sufficient audit trail

so that it can be fully audited by the GAO auditors.

What we did do is we tried to do that. We have the new statements that called for new accounts to be audited that had not been

audited previously. We feel that had we had—had we not run out

of time and made the conscious decision to direct our attention to

1999, that we could have proven those numbers to a much greater

extent. We just frankly ran out of time, and I think that is the reason that they have the disclaimer. We do feel that we are appropriately handling our appropriated funds.

Mr. HORN. Does this mean that you have to have a new allocation of where you place people in the Department and within the

IRS or what? What is your solution as Chief Financial Officer to

get some of these problems done? Is it more training?

Ms. CUNNINGHAME. Are you talking about to get a clean audit?

Mr. HORN. Yes.

Ms. CUNNINGHAME. Yes. Again, this is where we are talking

about we have a multidimensional project team working currently

to determine exactly what we need to do. We know that we cannot

quickly bridge the long-term solutions required for our financial

systems but we can do more manual preparation in a more timely

fashion. We are getting started much earlier this year so when

GAO comes in, we can provide them with auditable types of account analyses. We have talked to our contractor who provides us

that accounting help and they are making some changes and accumulating data a little bit differently for us. It is auditable; it is just

very time-consuming to get it audited.

Mr. APP. I think that was one of the conscious decisions that we

made, because starting on the 1999 action plan, what that means

is proving the 1998 balances. So that will be the first thing: to

make sure that the opening balances for 1999 were correct. So we

will be working on that as well.

Mr. HORN. Any other comments either side might have about the

testimony you have listened to? What are we missing? Well, there

will be a number of questions sent to both the General Accounting

Office, IRS, and the Treasury that we haven’t been able to get to,

but we would appreciate any response you could give us on that.

We have held a few things open for different exhibits, as you have

noted.

Let me, just before I make a few closing remarks, let me first

thank the people who set up this hearing, and we appreciate you

coming up here on such short notice and we know that is not easy,

and we are sorry to disrupt your weekend.

78

J. Russell George, our staff director and chief counsel, is behind

me. Bonnie Heald, director of information, is also there. Matthew

Ebert, policy advisory. Larry Malenich of the GAO, we appreciate

that loan. Mason Alinger is the clerk, and then we have three able

interns, Paul Wicker, Kacey Baker, and Richard Lucas; and for the

professional staff for the minority, Faith Weiss and Earley Green,

staff assistant. Knowing the complexity of this, we had three court

reporters this morning: Ryan Jackson, Cindy Sebo, and Doreen

Dotzler. We thank them.

Let me just make a few comments. Today’s testimony displays

that there has been some financial waste by the Department and

IRS, and that taxpayers too often believe that all agencies in the

Federal Government have that. I don’t happen to agree with that,

but I think we need processes and systems to make sure. And some

of them are just very simple, such as the segregation of duties

when you get into accounting.

I have learned a lot from auditors over the years, and you force

people to take their vacations and somebody else sit at their desk,

and you would be amazed to see what happens sometimes when

they say, What is this authorization all about? And apparently $17

million—was it—in fraudulent refunds and misplaced vehicles,

printers, and that needs to get more attention than just thinking

it is an accounting procedure, because that wouldn’t really be acceptable in most small businesses or medium businesses. And you

are a very large business, with IRS having 102,000 employees

alone. I believe that is the figure. I think the stockholders, the taxpayers, have every reason to demand an immediate change. And

that includes debt collection, when we see that figure, the writeoffs

at $110 billion, and that is 54 percent of the unpaid debts that are

owed. Just think, we talk about a surplus, we talk about helping

Social Security, it would be great to try to collect even 10 percent

of that or 15 percent. We ought to set our goals higher.

So I think there is a lot of work to be done and I am hopeful.

It sounds like you are getting this up to speed, and I hope next

year we have a clean opinion and the processes on handling property and equipment in particular will be improved. And the security force that you have at your field offices and processing centers,

there ought to be ways to make sure that they can check that

printers and personal computers are not just walking out the door,

or if they are, there is an authorization where you have a name at

checkout, and you check it in; very simple little procedure.

Does my colleague have any more questions that he would like

to ask, and if not, we will wrap it up.

Mr. TURNER. No questions, Mr. Chairman. I simply want to say,

as the chairman did, that obviously there is work to be done. But

on the other hand, I want to say here today as I have listened to

some of the witnesses, that oftentimes we fail to acknowledge the

contributions that the career employees of agencies like the IRS

make to the people of this country. And for those of you who are

career employees of the Treasury and the IRS, we owe you a debt

of gratitude because you work in a very complex area with very difficult problems. And many times I think if we can provide the political leadership needed, you have the background and the dedication

and knowledge to get the job done. So to all of those career IRS

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employees, some of whom were in my office a couple of weeks ago

from my district in Texas, I thank you for the work that you do.

Mr. HORN. That is well said.

With that, ladies and gentlemen, we thank you for coming, and

this hearing is adjourned.

[Whereupon, at 12:10 p.m., the subcommittee was adjourned.]

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