JOINT REVIEW OF THE STRATEGIC

PLANS AND BUDGET OF THE

INTERNAL REVENUE SERVICE, 2001

HEARING

BEFORE THE

COMMITTEE ON WAYS AND MEANS

COMMITTEE ON APPROPRIATIONS

COMMITTEE ON GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

AND THE

COMMITTEE ON FINANCE

COMMITTEE ON APPROPRIATIONS

COMMITTEE ON GOVERNMENTAL

AFFAIRS

UNITED STATES SENATE

ONE HUNDRED SEVENTH CONGRESS

FIRST SESSION

MAY 8, 2001

JCS–2–02

Printed for the use of the Joint Committee on Taxation

JOINT REVIEW OF THE STRATEGIC PLANS AND BUDGET OF THE INTERNAL REVENUE SERVICE, 2001

U.S. GOVERNMENT PRINTING OFFICE

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77–620 2002

JOINT REVIEW OF THE STRATEGIC

PLANS AND BUDGET OF THE

INTERNAL REVENUE SERVICE, 2001

HEARING

BEFORE THE

COMMITTEE ON WAYS AND MEANS

COMMITTEE ON APPROPRIATIONS

COMMITTEE ON GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

AND THE

COMMITTEE ON FINANCE

COMMITTEE ON APPROPRIATIONS

COMMITTEE ON GOVERNMENTAL

AFFAIRS

UNITED STATES SENATE

ONE HUNDRED SEVENTH CONGRESS

FIRST SESSION

MAY 8, 2001

JCS–2–02

Printed for the use of the Joint Committee on Taxation

(II)

COMMITTEE ON WAYS AND MEANS

WILLIAM M. THOMAS, California,

Chairman

CHARLES B. RANGEL, New York

COMMITTEE ON APPROPRIATIONS

C. W. BILL YOUNG, Florida, Chairman DAVID R. OBEY, Wisconsin

COMMITTEE ON GOVERNMENT REFORM

DAN BURTON, Indiana, Chairman HENRY A. WAXMAN, California

COMMITTEE ON FINANCE

CHARLES E. GRASSLEY, Iowa, Chairman MAX BAUCUS, Montana

COMMITTEE ON APPROPRIATIONS

TED STEVENS, Alaska, Chairman ROBERT C. BYRD, West Virginia

COMMITTEE ON GOVERNMENTAL AFFAIRS

FRED THOMPSON, Tennessee, Chairman JOSEPH I. LIEBERMAN, Connecticut

(III)

C O N T E N T S

Page

Press release of April 25, 2001, announcing joint review .................................... VI

Opening statements ................................................................................................. 1

WITNESSES

Internal Revenue Service, Hon. Charles O. Rossotti, Commissioner .................. 7

IRS Oversight Board, Hon. Larry R. Levitan, Chairman .................................... 61

Department of the Treasury, Hon. David C. Williams, Treasury Inspector

General for Tax Administration .......................................................................... 89

General Accounting Office, Mr. James R. White, Director—Tax Policy and

Administration Issues .......................................................................................... 103

SUBMISSIONS FOR THE RECORD

Senator Charles E. Grassley, Iowa, statement and questions ............................. 132

Senator Fred Thompson, Tennessee, statement and questions ........................... 136

Hon. Charles O. Rossotti, Internal Revenue Service Commissioner, response

to questions ........................................................................................................... 139

Hon. Larry R. Levitan, IRS Oversight Board, Chairman, response to questions ....................................................................................................................... 148

Hon. David C. Williams, Department of the Treasury, Treasury Inspector

General for Tax Administration, response to questions ................................... 151

Mr. James R. White, General Accounting Office, Director—Tax Policy and

Administration Issues, response to questions .................................................... 154

(V)

JOINT REVIEW OF THE INTERNAL REVENUE SERVICE,

2001

TUESDAY, MAY 8, 2001

The joint review met, pursuant to notice, at 9:00 a.m., in room

1100 Longworth House Office Building, Honorable William M.

Thomas, presiding.

[The press release announcing the hearing follows:]

VI

(1)

JOINT REVIEW OF THE STRATEGIC PLANS

AND BUDGET OF THE INTERNAL REVENUE

SERVICE, AS REQUIRED BY THE INTERNAL

REVENUE SERVICE RESTRUCTURING AND

REFORM ACT OF 1998

TUESDAY, MAY 8, 2001

U.S. HOUSE OF REPRESENTATIVES,

UNITED STATES SENATE,

JOINT COMMITTEE ON TAXATION,

Washington, DC.

The joint review met, pursuant to notice, at 9:02 a.m., in room

1100, Longworth House Office Building, Hon. Bill Thomas (chairman of the Joint Committee) presiding.

Representatives present: Thomas, Houghton and Coyne.

Senators present: Grassley.

Chairman THOMAS. The joint review hearing will come to order.

We are here this morning pursuant to legislation on ongoing follow-up and focus on the Internal Revenue Service. The joint review, by statute, is to include two members of the majority and one

member of the minority of the relevant committees, namely, the

Committee on Ways and Means, Appropriations, and Government

Reform in the House of Representatives, and the Senate Committee

on Finance, Appropriations and Governmental Affairs.

The chair has an opening statement and would place it in the

record and would request any other members who have opening

statements to have them placed in the record.

[The opening statements follow:]

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Chairman THOMAS. With that, does the gentleman from Iowa,

the Chairman of the Senate Finance Committee, have any opening

comment?

OPENING STATEMENT OF HON. CHARLES E. GRASSLEY,

SENATOR FROM IOWA

Senator GRASSLEY. I want to comment on two topics, worker productivity at the IRS, and financial management at the agency.

On worker productivity, the General Accounting Office, in its testimony today, states that the IRS cannot provide a valid explanation of why the productivity has declined at the IRS. I want to

suggest two factors for this decrease in productivity that comes

from the Treasury Inspector General.

The Inspector General, in written reports, states that there has

been significant misuse by the IRS employees of Internet and email. The IG states that over half of the Internet activity was for

nonbusiness purposes, including even looking at filth.

During just one seven-day period, IRS employees spent over half

their time on the Internet for nonbusiness purposes. The amount

of time spent on the Internet by IRS for nonbusiness purposes was

8,250 hours in just one week, equal to 429,000 hours a year that

would be wasted. That translates into about 238 people at the IRS

who do nothing all year except ‘‘surf’’ the Internet, shopping, looking at filth, and joining ‘‘chat rooms’’. Now, are taxpayers sitting on hold while the IRS employees are

surfing the Internet instead of answering the phone? Of course, we

hope not. And this waste doesn’t include the time spent by IRS employees on thousands of non-business e-mails every day. The IG, in

this case, says that e-mails significantly impact productivity. It’s

tough for me to hear a Federal agency talk about needing more

money when it’s wasting money they’ve already got.

I would like to make one note regarding a letter that I received

from Commissioner Rossotti. There has been much in the news

about the drop in employees at the IRS, but in response to my

questions, the Commissioner’s letter admits that at the same time

the number of IRS employees has gone down, the amount of money

spent on contract employees has skyrocketed. The IRS has gone

from $444 million in contract spending to nearly $1.3 billion in the

year 2000. So, to talk about the number of IRS employees without

mentioning a huge increase in money spent on contract employees

is not providing a full picture to Congress.

I would now like to turn to the financial management at the IRS.

I have a longer statement and questions on this matter that I will

submit for the record. But I want to say quickly that I’m concerned

that there is a double standard in auditing at the IRS, a very strict

standard for taxpayers and a lax standard at the agency.

When the IRS audits a tax return, everything had better be in

order. But the same standards I think should also apply to the

agency. So we have the Chief Financial Officers Act of 1990 requiring that every agency must prepare a financial statement every

year. These statements are then subjected to independent audit by

the General Accounting Office or the Inspector General.

While the General Accounting Office gave an unqualified opinion

to the IRS this year, it still had a lot of ‘‘ifs, ands or buts’’, the

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main one being that an IRS-paid accounting firm, KPMG, performed a work-around. KPMG had to manually reconstruct the

records and fill in the gaps. Billions of dollars in unrecorded transactions had to be backed into the general ledger. The General Accounting Office characterized this as a ‘‘monumental, labor intensive, ad hoc effort.’’

Unfortunately, this work-around is not sustainable and is not in

keeping with the goals of the Chief Financial Officers Act. The goal

is to produce accurate financial information as a basis for sound decisions. The IRS needs to clean up the books, fix the problems as

soon as possible, and I would ask that my statement and questions

be placed in the record.

I would like to say in closing that these comments may be strong,

but they aren’t really any stronger than I would make to the Department of Defense on an annual basis, when the General Accounting Office reports that their books are not in order. What I

am concerned about in the case of the IRS is that you cannot be

the only one ‘‘pulling the wagon’’.

I would appreciate any thoughts you may have on my comments

about low productivity, the IRS waste of taxpayers’ money, or financial management.

Chairman THOMAS. I thank the chairman for the statement.

I will turn now to our first witness, the Honorable Charles O.

Rossotti, Commissioner of Internal Revenue. I would tell the Commissioner that his written statement will be made a part of the

record and he can address us in the time he has in any way he sees

fit.

OPENING STATEMENT OF HON. CHARLES O. ROSSOTTI,

COMMISSIONER, INTERNAL REVENUE SERVICE

Commissioner ROSSOTTI. Thank you very much, Mr. Chairman.

Let me thank all the members of the Joint Review Committee, as

well as the President and Secretary O’Neill, for their continued

support of the IRS modernization program.

Even before RRA’98 became law, it was clear to the members of

the Presidential commission that preceded the law that a long-term

commitment was required to fix the IRS. The changes that were

triggered by the Act, together with the need to modernize the IRS’

archaic computer systems, probably are of unprecedented magnitude for any government agency.

Since the RRA’s enactment, the IRS has a new mission and

goals. We have changed the entire way that success is valued at

the agency, both individually and collectively. We have implemented and are administering 71 new taxpayer rights provisions

that represent a new way of doing business for all of our 100,000

employees.

We have also inaugurated a new, more taxpayer-focused organization, eliminating a 50-year-old structure of District service centers, regions and national office staffs. Tens of thousands of IRS

managers and employees have new jobs and many old jobs were

abolished. We are now in the process of redesigning nearly every

business process and system, the way examinations are planned

and conducted and the way phone calls are answered.

8

We are making these changes while achieving our first clean financial opinion from the GAO, stopping the drop in enforcement

revenues in fiscal year 2000, and managing an extremely difficult

Y2K program in three consecutive successful filing seasons. In

2001, the filing season just ended, new records were set for electronic filing and web site use, and although the phone service is

still not adequate, more taxpayers are getting through on the

phones and they are getting more accurate responses.

We know that we are still not providing the level and quality of

service that taxpayers desire, nor are we collecting all the taxes

due as efficiently as we could. Nor are we keeping our books and

records in the most completely effective way consistent with the

CFO Act. However, we are setting the stage for year-by-year improvements in performance and for implementation of fundamental

improvement enabled by our business systems modernization program.

Our new strategic plan spells out what we must do to solve these

problems, to improve taxpayer service and meet our compliance

goals, while continuing to shrink the size of the agency in relation

to the economy.

We think that this strategic plan, together with the implementation of major parts of the reorganization and our other RRA provisions, means that there is one very important difference between

the IRS situation today and even that of a year ago; that is, that

the level of uncertainty about the future is reduced. We still have

much to do, but we think we know more clearly how to do it and

have put the foundation for doing it in place.

The fiscal year 2002 budget request of $9.28 billion will enable

us to continue to maintain current operations and provide crucial

investments for our longer-term business systems modernization

program. It will address the highest priority gaps in our ability to

meet our mission and goals, and focus on areas that will need more

resources, even while modernization continues.

I think it is very important to note the time that it takes to see

practical effects from changes in IRS resources and from our initiatives. For example, through the STABLE initiative, the IRS requested some additional staff resources to cope with the RRA workload and responsibilities. That request was formulated in calendar

’99 for the 2001 budget request, which was submitted to Congress

last year. The resources were appropriated and made available by

the Congress this year, 2001, and they will really produce significant results in 2002, and the statistics will be reported in 2003. So

there are significant time lags to see the effects of modernization,

and that makes it all the more important to sustain the effort over

a period of time.

In terms of responsibility for this sustained effort, we believe it

is shared by the IRS, the Treasury, the Oversight Board, and Congress. We think the greatest responsibility does fall on us, the IRS

management, to make the necessary improvements and to identify

essential resources and other support. Treasury and the Oversight

Board are providing essential guidance and oversight and, of

course, the Congress has the critical role in providing resources

through the appropriations process, oversight and guidance

9

through the oversight committees, and legislative changes through

the tax-writing committees.

Mr. Chairman, I am frequently asked, and I was last year at this

hearing, if there are changes to RRA that we would recommend.

Now, based on almost three years of experience, I believe there are

some modifications that would help us implement the Act’s intent

more effectively.

With this hearing, I would like to begin a dialogue with Congress

about certain changes. These would include a modification to section 1203 that would continue to provide the IRS the authority to

terminate employees for the listed offenses, but would reduce the

impact of unsubstantiated allegations.

Another would be technical changes to the collection provisions

that would provide the IRS more flexibility to settle debts with taxpayers, and to simplify procedures for court appeals and collection

due process cases. Still other provisions would be a measure to reduce the impact of the frivolous use of collection due process, offers

and compromise and taxpayer advocate protections. I believe these

changes would be fully consistent with RRA’s intent and will allow

us to implement it more successfully.

In conclusion, Mr. Chairman, I think we have laid out a plan and

we have demonstrated the ability to make some short-term improvements in service, but more importantly, I think we have the

path ahead of us laid out that will guide our efforts and allow us

to raise the performance of this agency to the level that the public

has a right to expect.

Thank you, Mr. Chairman.

[The statement of Mr. Rossotti follows:]

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Chairman THOMAS. Thank you very much, Commissioner.

There are a lot of questions that can be asked, and my hope

would be that, given the limited time that we have, both for the

questioning and the response, that, where appropriate, we could

get written answers so that we can more fully appreciate the positions that are taken.

Commissioner ROSSOTTI. Yes, sir.

Chairman THOMAS. I applaud you for going right back in and examining legislation. One of the things I hope we do not do in this

particular relationship is stick to whatever posited goals or results

we thought we could get prior to actually getting in and looking at

the situation, and then having a series of hearings in which basically not enough money has been funded and that the rationale for

not meeting whatever percentage you throw on out, the 80 percent

of electronic returns, for particular reasons, and never going back

and examining the goals that were originally established to determine whether or not they were realistic.

I think this effort is one in which I wouldn’t mind at all reviewing the previously stated goals, examining them to determine

whether or not they were really realistic in the light of what we

know now, and adjusting them so that we can have some measurable but achievable objectives. I have been through too many of

these review hearings in which there is a failure to communicate

in terms of ‘‘it’s not our fault’’ and ‘‘these are the reasons why.’’ The

reasons why are almost always not enough money.

We can posit at the beginning there is never going to be enough

money. What I want is a clear understanding of priorities within

the amount of money that we have. What goals are achievable?

What goals are not achievable, and where we need to adjust those

goals so that neither one of us is frustrated at the next review and

we repeat that cycle over and over and over.

So in the brief time that I’m able to stay on top of shepherding

this legislation, I would be very much concerned in creating a goal

structure which is achievable upon agreement and, where we fail,

we analyze why we failed and readjust our goals.

In that light, Commissioner, what goals that were established

initially do you believe are either not realistic and that you would

like to reexamine adjustment of those, and what would be that readjustment? I know my time is brief, so that if you want to follow

up with written statements, I would be more than willing to accept

that.

Commissioner ROSSOTTI. Mr. Chairman, first of all, I really welcome the way that you phrased that. I think we do have three

years of experience now with this Act. We have learned a lot. I

think there are, as I mentioned in my statement, some modifications to some provisions.

I would say, though—and I will follow up——

Chairman THOMAS. If I might, just on those items that you mentioned, most of those are fine-tuning and adjustments from a management point of view.

Commissioner ROSSOTTI. Right.

Chairman THOMAS. Most people who will be concerned about

achievement of goals are looking at those broader interactions between the government and the individual and the follow up. For

55

example, the initial statement of the Chairman of the Finance

Committee, the larger picture goals, whereby we’re measured, if

not by each other, at least by the press.

Commissioner ROSSOTTI. Yes, and let me go directly to that. I

will follow up with a more lengthy written statement, because I

think it’s an extremely important question you have asked.

But to summarize it this way, my personal belief—and I really

took this job because I believed in the goals that were set in this

Act—I believe that those goals, in the broad sense, are achievable.

I guess I would describe them as being able to satisfy the reasonable expectations of the average taxpayer and how they deal with

the agency, while still collecting the tax. I mean, those are the two

basic goals, and the Act sets forth a lot of specific ways that that’s

supposed to be done. Most of them, by the way, are not quantitatively set forth in the Act, with the exception of the electronic

filing goal. So I think we can achieve those goals.

I will say there’s been skepticism by many parties about whether

there was some conflict inherent in tax collection that you couldn’t

treat people correctly and protect taxpayers’ rights and still be effective in tax collection. Notwithstanding the difficulties, my belief

is that it can be done. It is, however, a process that is going to take

some time.

I think the main issue that I would comment on is the question

of time. I believe that if we sustain this effort over a period of another three, four, five years, I believe we will be able to raise the

agency’s performance very, very significantly.

Now, some of the items in the bill that were specifically designed

for the protection of taxpayer rights and setting forth certain procedures, we have found costly and difficult to implement. We have

some suggestions about how to modify those. By the way, those

don’t involve any money. They just involve ways of improving.

Let me finish with just a comment about the money, and I will

give a more detailed written statement. I believe that if we were

to attempt to meet all the goals broadly defined in the Act by continuing to do business—I’ll call it ‘‘the same old way’’—it would be

extraordinarily expensive. There would be a requirement to add

very significant numbers of staff to answer phones and collect

debts, the way it’s been done, and to do many other things that are

required.

We have not proposed that kind of a plan. What we have proposed are some limited increases in the operational resources and

some significant investments in modernization. Modernization encompasses especially the computer technology, but also the ways of

doing business.

So my proposal is that we achieve those goals over a period of

time by investing and improving the way we do business, primarily, rather than simply throwing money at the problem, to

make everything bigger and address all the problems. That does

mean we have to tolerate some deficiencies for a period of years as

we gradually proceed towards our goals.

Chairman THOMAS. I thank the Commissioner.

My concern will be that we evaluate periodically the goals, and

that where they were overly ambitious, we refocus them so that the

hearing would be on supposedly achievable goals, those we’ve met

56

and those we haven’t, and why we haven’t, and how we have adjust

those goals to reach achievable goals. To me, that’s the only way

we can move forward in this extremely difficult and complex area.

We can beat each other up any day of the week over any one of

these points that we’re trying to deal with. The intent of Congress

in providing this structure with the Oversight Board was to, in

fact, move forward on achievable goals. I look forward to the written follow up on those statements.

The gentleman from Iowa, the Chairman of the Finance Committee.

Senator GRASSLEY. First of all, I want to acknowledge that I appreciate very much your opening statement, where you talked

about possible changes that will increase IRS productivity.

Do you agree that we can achieve both the protection of taxpayers rights and improve IRS productivity?

Commissioner ROSSOTTI. Yes, Mr. Chairman, I do. I think that’s

the sort of crystallizing question of the Reform Act. I have to say

that I wouldn’t be sitting in this chair if I didn’t believe that.

That’s why I really took this job.

I don’t think that it’s an easy thing to do, because there is a propensity to view those goals as being either/or. Either you provide

good service and protect rights, or you collect money. It’s my belief

that you do both. One of the main reasons is that most taxpayers

are honest taxpayers.

I do think, as I have said in here, there are some taxpayers who

are taking advantage of some—I’ll call them loopholes—in the way

some of these provisions are written, and I believe if we could work

together with Congress to make some adjustments in those, we can

eliminate that problem. But I consider those more fine-tunings of

how the process works than anything that would be a deviation

from the basic direction that the Congress set in the Restructuring

Act.

Senator GRASSLEY. Ways and Means and the Senate Finance

Committee recently received a major report from the Joint Tax

Committee on simplification of the Tax Code, with 150 suggestions,

and I think the people doing the study would characterize this as

obviously not necessarily an easy simplification, but simplification

that is very obvious and not going in the direction that a lot of people would suggest simplification of throwing the Tax Code out and

starting over.

But based upon that study, and whether you know all 150 recommendations or not, my question would be very general to you.

How much will simplification of the Tax Code make the IRS’ job

easier and within the general approach of the study that was given

to us?

Commissioner ROSSOTTI. Yes, Mr. Chairman, I have had a

chance to read—I have to say I’ve read the executive summary. I

haven’t read all the three volumes yet. But I thought it was a very

excellent layout. Some of these points have been made by others,

including our own complexity report, and yes, they would definitely

make our job easier.

I think what might be even more important is that they would

make the taxpayers’ job easier, because we do need to remember

that for every dollar that the IRS spends on its administrative

57

budget, taxpayers spend somewhere between 10 and 20 times that

amount of money—and, by the way, we’re getting a good study of

that number and we’ll give it to you when we have it. But it is

much greater. The taxpayers, in terms of their own time and the

money they outlay to practitioners, is very great.

I think that if the recommendations that were in the Joint Committee report were adopted, many of them, they would definitely

reduce that burden on the taxpayers and would also make the

IRS’s job easier.

I can give you a practical example. We strive mightily to answer

questions that taxpayers pose to us over the telephone. During the

filing season, we get about 100 million questions, or calls. Many of

them, about 30 percent of them, are questions about the tax law.

Some of those can be quite complex to answer, even though they

seem simple. Like if you ask the question, ‘‘Can I take my niece

or nephew as a dependent’’, it seems like a fairly straightforward

question. When you penetrate down, you find that there are a lot

of sub-questions that you have to ask. In the Joint Committee report, they laid that out pretty carefully. And then you go on and

on into the alternative minimum tax and all these other things.

If those provisions were changed along the lines of what the

Joint Committee said, I believe that it would reduce the burden on

taxpayers and simplify the IRS’s job.

I do need to point out a qualification. A lot of what the IRS does

is not so much keyed to the specific provisions of the Code, as just

the process of collecting and processing and following up on two

trillion dollars. When you have that many transactions, there’s a

lot of work to do. Even if the Code was simpler, there is a lot of

work that has to do with the processing and the accounting and the

follow up for people who don’t pay in full and all those sorts of

things. So that part of it would not be changed. But the actual filling out of the returns and the accuracy of the returns would probably increase significantly.

Senator GRASSLEY. My time is just about up.

My last point would be—and your response may be short now,

but I would encourage you to write longer answers in your reaction

to my comments in my opening statement, particularly the misuse

of the Internet and just to put things in perspective, so that you

don’t think we’re just looking at the IRS.

Within the last short period of time, I have heard about employees at the U.S. Department of Agriculture watching soap operas all

afternoon. So we have a major problem throughout government

here. We aren’t just looking at the IRS. But we do have the IRS

Inspector General speaking to these, and I would think that would

be an authoritative voice within the Treasury on this issue.

Commissioner ROSSOTTI. There is no question that the Internet,

as he said in his report, is a tremendously powerful tool that we

want to give to our employees, because they do use it to look up

information that they need to process taxpayer cases. But, of

course, it is difficult.

Even in business, I remember in my previous firm we had an

issue and people had access to the Internet, and some people would

use it for nonbusiness uses. It is hard to filter those things.

58

Since that report was done, we have put some additional policies

in place, but I will concede that it is a challenging issue, the use

of the Internet, and making sure that it’s used for business purposes. Of course, ultimately, it’s a management issue. We need to

have our managers making sure they understand what our employees are doing and following up on that.

Could I comment on your other one, on the financial statements,

Mr. Chairman, because that was your other opening point?

We have been working very hard on these financial statements.

I think you know that, for the first time ever, the IRS did get a

clean opinion. It did require a tremendous effort. Most of that effort

was actually put in by IRS employees who were working very hard,

as was the GAO, by the way, they were working very hard with

us, and we did have some support from our contractors.

Many of the things that were done in fiscal 2000 to get that

clean opinion were not limited to getting the statements done for

that year. They have also been aimed at making the process better

for next year. What we are basically doing is having a plan yearby-year to make that process more efficient, so that we will continue to get a clean opinion. But we will also do it in a more orderly way and in a more systematic way.

Part of the solution does involve upgrade of the computer systems. We are using very, very old computer systems to process

data, about two trillion dollars worth of tax money. That is not the

only problem, but it is certainly at the root of many of the problems

having to do with our accounting and financial management.

Senator GRASSLEY. Thank you.

Chairman THOMAS. I thank the Chairman.

I would just tell the Commissioner that his last statement is one

I’m concerned about, because we’re slipping back into the argument

that the reason we aren’t able to do something is because of a wellknown fact when we began the process of reform. We need to factor

in when and how we update computers to address the problems

that we see, rather than to simply state that our computers aren’t

up-to-date.

It has been a decade-long attempt, and will be an additional decade-long attempt. I would rather create measurable milestones to

determine whether or not we’re moving in the direction that we

need to move.

Commissioner ROSSOTTI. Yes, sir.

Chairman THOMAS. I thank the chair.

Does the gentleman from New York, the Chairman of the Oversight Committee of Ways and Means, wish to inquire?

Mr. HOUGHTON. Yes, Mr. Chairman, I would.

First of all, thank you, and also, Commissioner Rossotti, thank

you very much for being here, and thanks for the job you’re doing

for the IRS and for the country.

You quoted in your testimony something about Alfred North

Whitehead, who was sort of a hero of mine, about producing change

amid order and order amid change.

It seems to me that you’ve got two issues here. One, you have

the short-term issue of trying to fulfill the objectives that you set

out and the IRS is required to produce in terms of its everyday acVerDate 11-MAY-2000 00:03 Mar 02, 2002 Jkt 077620 PO 00000 Frm 00066 Fmt 6633 Sfmt 6602 E:\HR\OC\A620.XXX pfrm01 PsN: A620
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tivities. The other thing is long term, the business systems modernization program.

Where should we be most concerned? With both, or with one of

those?

Commissioner ROSSOTTI. Well, I think we have to pay attention

to both of them, Mr. Chairman. I think the most difficult challenge

that we have—and it really goes exactly to what Chairman Thomas

said—is that we have to operate every year. We have to do a filing

season; we have to make progress. And yet, we know we’re not

going to reach fully the goals that we are striving for until we’ve

made some more fundamental changes, and especially in the computer systems. So I couldn’t agree more with the Chairman’s approach.

I think we need to make step-by-step progress in both service

and compliance at the same time we’re performing these more fundamental issues. That is really the most difficult thing about this

whole job. I mean, I often joke that if we could just shut down the

IRS for two or three years and rebuild the systems and start over,

it would be an easier job. Of course, that’s not practical or possible.

So we have to do both at the same time.

That’s really what our whole plan attempts to do. We try to balance long-term progress and short-term progress at the same time.

Mr. HOUGHTON. Yeah, but where’s the biggest problem?

Commissioner ROSSOTTI. What is the biggest problem? The biggest problem is really trying to do them both at the same time. I

think that is really the most challenging problem, balancing—— Mr. HOUGHTON. But this happens in any business. It happens in

any institution. You don’t shut down a business that has problems.

Commissioner ROSSOTTI. Right.

Mr. HOUGHTON. You try to fix them and then look forward to the

future. But it would seem to me that one of the reasons that you

came into this job was to do this very basic systems modernization

program.

Commissioner ROSSOTTI. Right.

Mr. HOUGHTON. Is this something we should be concerned about?

Is it on track?

Commissioner ROSSOTTI. Well, first let me say that I think, no

matter what else we do, if we don’t succeed in the business systems

modernization program, we will never reach the goals that the

Congress has set, because the thing that is unique compared to

other businesses, Mr. Chairman—yes, all businesses have these

problems—but I don’t know there’s any large business that I was

ever aware of—and I was in it 28 years—that got this far behind

in its systems. Because if they were that far behind, they would

have been acquired by a competitor or someone else. So it’s really

a unique situation. This, I believe, is honestly an accurate situation, that we still have—— Mr. HOUGHTON. Maybe we should sell it to the Bundestag or

something like that.

Commissioner ROSSOTTI. That’s what makes it unique. Every

business has to upgrade its systems, but not in the extreme that

we have. So it is absolutely essential, and it is a risky situation.

Are we on track? I believe that we are making progress. I think,

if you get your testimony later from GAO, you will note that they

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see some weaknesses still, some improvements that we have to

make in our management capacity—and we are fully in accord with

that.

What we are doing is trying to build our management capacity,

our ability to manage this really complex program. At the same

time we make progress in the program, we can’t just make

progress in management without actually applying that to real

work. Every once in a while we make adjustments, you know, in

the speed with which we go forward, or the speed with which we,

in some cases, slow down a bit, to make sure our management is

caught up.

But I believe that in the less than two years we’ve been in this,

we have done some very significant things. Over the next few

months we will be delivering our first actual operational projects,

that will improve business results this year. We have put a program management office in place that has put in some discipline

procedures. They’re not fully at the level we would like, but they

have matured a great deal. We have laid out a long-term plan in

architecture, and there’s more work to be done. But it is dramatically more substantial than it was even six months ago. And we

have, over the next 18 months, a significant amount of additional

practical results that we hope to deliver. I think that’s quite a bit.

So are we on track? I believe we are on a positive path. I think

we can succeed. Have we addressed every issue? No, we have more

work we need to do in terms of management and organization.

Mr. HOUGHTON. In other words, you have not lost confidence in

the opportunity for doing these things you wanted to do in the first

place?

Commissioner ROSSOTTI. I have definitely not lost confidence.

While I often say this is a very risky program, I sometimes have

to correct a misimpression I give, that I’m saying I think it’s going

to fail, that it’s not going to work. I don’t believe it’s going to fail.

I believe it’s going to succeed. I believe it is succeeding, but not

without twists and turns in the road and, you know, occasional

delays. Our management responsibility is to adjust to those as

quickly as possible and not let them get too far off track before we

correct any problems we find.

Mr. HOUGHTON. Thank you, Mr. Chairman.

Chairman THOMAS. I thank the gentleman.

Does the gentleman from Pennsylvania, Mr. Coyne, wish to inquire?

Mr. COYNE. Thank you, Mr. Chairman.

Commissioner, what is the administration’s position relative to

the Oversight Board’s recommendation of a $10.3 billion funding

for fiscal year 2002?

Commissioner ROSSOTTI. Well, I think the administration’s position is reflected in the President’s budget request, which lays out

the specific budget—I believe it’s $9.276 billion, if I have the number correct—that is requested. So, obviously, there are some difference between that number and what the Oversight Board has

suggested.

Mr. COYNE. Is that going to result in some diminution of service

as a result of not getting the request that the Board wanted?

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Commissioner ROSSOTTI. Well, as in any agency that has pressing needs, if we had more resources, we could do more in terms of

delivering service and perhaps moving some of the modernization

forward more quickly. But I believe that, with the budget that the

administration has proposed, we will be able to continue to make

progress on our operations as well as on our modernization program. I think those are the twin things that we really need to do

in this agency.

Mr. COYNE. Well, in future years, when the Oversight Board

comes and makes a recommendation for a budget, are they going

to be taken seriously in the recommendations they make?

Commissioner ROSSOTTI. Well, I hope so. One thing to note is

that the Oversight Board was getting in business at the same time

the new administration was getting in business. It was a very short

period of time for the administration to put the budget together.

There were conversations, but I think it was a limited period of

time.

I know Mr. Levitan is going to testify later, and I’m sure he’ll

be able to comment on his views on that. But I think we all have

a goal of making this process work cooperatively between the IRS,

the Oversight Board, and the administration.

Mr. COYNE. But one could make the case that, without the funding that they recommend after a close examination, that some of

the services will not be provided?

Commissioner ROSSOTTI. Certainly, I mean, if we had more funding, we could accelerate the improvement of service.

Mr. COYNE. Thank you.

Chairman THOMAS. Thank you very much, Commissioner.

With that, we will ask our next panel to come forward, the Honorable Larry Levitan, the Chairman of the Internal Revenue Service Oversight Board; the Honorable David C. Williams, Inspector

General, Tax Administration, U.S. Department of the Treasury;

and James R. White, Director, Tax Issues, U.S. General Accounting

Office.

Thank you, gentlemen. Any written statement you may have will

be part of the record, and you may address us in any way you see

fit in the time that you have.

I will start with Chairman Levitan and then move across the

panel.

OPENING STATEMENT OF LARRY R. LEVITAN, CHAIRMAN, IRS

OVERSIGHT BOARD

Mr. LEVITAN. Chairman Thomas, members of the committee, I

appreciate the opportunity to appear before you today. I am proud

to represent the IRS Oversight Board and to discuss our role of improving the operations of the IRS.

I would like to take this opportunity to also recognize two other

Board members that are here, Steve Nichols and Chuck Kolbe.

Mr. Chairman, one obvious but powerful way to summarize the

challenges the IRS faces is to tell you what the IRS is failing to

do. The IRS is not meeting any of the three strategic goals and objectives defined in its own strategic plan:

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The IRS does not provide top-quality service to each taxpayer in

every interaction. For example, phone calls frequently go unanswered and notices to taxpayers are often difficult to understand.

The IRS does not provide top-quality service to all taxpayers

through fair and uniform application of the law. For example, the

level of audits and other enforcement activities have fallen to an

unreasonably low level.

The IRS does not provide productivity through a quality work environment. Because of outdated technology, the work environment

is completely inconsistent with efficient and modern practices.

These problems are well understood by Congress, by Treasury,

and by the IRS. They were the subject of congressional hearings

and led directly to the IRS Restructuring Commission and the passage of the IRS Restructuring and Reform Act of 1988. The passage

of RRA ’98 was landmark legislation that pointed the IRS in a new,

long-overdue direction. The IRS oversight Board believes that with

this legislation in place, with new management on the job, with a

modernization program back on track, the IRS is on the right

course now, but much work still remains in order to turn around

years of neglect.

Mr. Chairman, as you know, one of our statutory responsibilities

is to review and approve the IRS budget each year. The statute requires the Board to submit its own budget proposal, which rides in

tandem with the President’s budget submission to Congress.

Much of our efforts since we went into business last September

focused on reviewing and approving the IRS strategic plan and putting together a budget that supports the goals and objectives outlined by Congress. Mr. Chairman, our conclusion is that the President’s fiscal year 2002 budget does not adequately support the IRS

strategic plan and fails to provide enough funding for technology

modernization and other vital operations.

The administration claims that their budget provides a 6.6 percent increase over 2001. While this statement is technically accurate, the Board believes it is misleading, since the IRS had an additional $256 million of available funds in 2001 in ITIA carryover

from previous years. Therefore, the real, spendable, increase in the

President’s budget is 3.4 percent, not 6.6 percent.

The IRS Oversight Board reviewed the budget recommended by

the President very carefully. We applied our judgment and we

looked at it carefully and independently. To illustrate our budget

recommendations, let me quickly outline a number of the major differences between our budget and the President’s budget.

The Board recommends full funding of the STABLE program

that will end a decade-long reduction of IRS personnel and provide

approximately 3,800 new employees to improve service and enforcement capabilities. The administration also claims to fully fund

STABLE. This statement is also technically accurate, but misleading. While the STABLE line item in the budget is fully funded,

the President’s budget eliminates funding for $137 million of real

costs that the IRS will have to fund by eliminating approximately

1,300 positions.

The Board recommends an expenditure of $54 million to start to

replace out-of-date laptop and desktop computers that will not support the new software—that is available today and improving

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daily—that will improve security and make IRS employees more effective. The President’s budget provides no funding for this program. It makes no sense to the Oversight Board to spend hundreds

of millions of dollars on new software and then not provide the necessary computer equipment to run the software.

The Board recommends providing the ITIA with an additional year of expenditures, $550 million for 2003, to ensure that projects

that cross fiscal years will not have to experience inefficient delays

and slowdowns. This multi-year funding of the investment account

was part of the original strategy for the fund, and this will be the

first year since the fund was set up that it will drop to a zero balance. The President’s budget does not recognize the importance of

multi-year funding for ITIA, which the Board believes is a critically

important concept.

The Oversight Board believes that the IRS is at a critical juncture. The IRS has begun an aggressive program of modernization

that has the first real chance in many years to create a new and

greatly improved system of tax administration and an agency that

can finally provide the kind of service and responsiveness that the

American taxpayers deserve.

Mr. Chairman, thank you for the opportunity to be here today.

The newly restructured and modernized IRS is very much a work

in progress. The IRS Oversight Board is proud of its important role

in this process.

I appreciate this opportunity to report on our activities and our

views on these critical matters, and would be pleased to answer

any questions that you may have.

[The statement of Mr. Levitan follows:]

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Chairman THOMAS. Thank you very much.

Mr. Williams.

OPENING STATEMENT OF DAVID C. WILLIAMS, INSPECTOR

GENERAL, TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION, U.S. DEPARTMENT OF THE TREASURY

Mr. WILLIAMS. Mr. Chairman and members of the House and

Senate committees, I appreciate this opportunity to appear before

you to discuss the progress that the IRS has made in implementing

the IRS Restructuring and Reform Act of 1998.

In my testimony before you last year, I committed TIGTA to

timely and accurate reporting on the IRS reforms and making recommendations to improve the direction and pace of the progress.

Today, I will report to you on the results of our work involving taxpayer protection and rights, systems modernization, and organizational restructuring.

Since July, 1998, when the RRA ’98 was enacted, the IRS has involved itself deeply in implementing the law’s 11 major components, with considerable emphasis on the 71 provisions for taxpayer protection and rights.

Our audit work for the provisions that TIGTA is required to review has shown that the IRS has made substantial progress in protecting taxpayer rights, but it still needs to complete its efforts to

comply with the following areas: providing proper and timely notices for all Federal tax liens, timely consideration of innocent

spouse relief claims, and fully eliminating the use of illegal tax protester designations.

With respect to systems modernization, the IRS has completed

major foundational aspects, including overall architecture and program management processes, to guide the modernization. However,

most of the projects have taken longer and cost more than originally planned. These delays are of concern because the seriously

needed improvements in IRS operations are heavily dependent on

the success of the projects.

Some of the expected benefits the taxpayers will receive are:

quicker access to more accurate tax help, readily available, correct,

and current account information, more electronic filing capabilities,

refunds in days instead of weeks, and expanded self-service options

over the telephone and Internet.

The other major component of the IRS modernization involves organizational restructuring. The IRS has made significant progress

over the past three years in its restructuring efforts. For example,

on October 1, 2000, the IRS substantially completed the stand up

of its four customer-focused business units.

Although the organizational standup was an important first step,

the next phase of IRS reengineering needs to address management

and operational issues that relate to designing management information systems to support the new organizational structure, improving taxpayer access to walk-in and toll-free telephone services,

increasing accuracy of responses provided to taxpayers, hiring,

training and retaining a qualified workforce, and eliminating computer security weaknesses.

Through October 27th, the IRS has had a successful 2001 filing

season, but a great deal of work is still needed to achieve its priVerDate 11-MAY-2000 00:03 Mar 02, 2002 Jkt 077620 PO 00000 Frm 00097 Fmt 6633 Sfmt 6602 E:\HR\OC\A620.XXX pfrm01 PsN: A620
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mary goal of providing quality customer service as the key to improving tax compliance. As of this date, approximately 39.6 million

of the 118 million individual income tax returns have been filed

electronically, which is a 13 percent increase over last year. Similarly, the number of refunds deposited directly into bank accounts

increased by almost 15 percent. In addition, the IRS Web site recorded over 1.5 billion accesses, which is a 57 percent increase over

last year.

In contrast to these successes, the IRS has experienced a drop in

its examination and collection activity. From fiscal year 1996 to

2000, revenues attributed to compliance activities have declined by

$4.2 billion, to $33.8 billion, and unpaid assessments have increased by 22 percent.

Finally, the IRS customer service statistics continue to show the

need to improve dramatically. It may take some time before we

have conclusive evidence of the totality of IRS efforts to better protect taxpayer rights, modernize its systems and organization, and

achieve a higher level of customer service. In this regard, my office

will continue to review the progress made and problems encountered in implementing RRA ’98.

This concludes my statement and I would be pleased to respond

to any questions that you have at the appropriate time.

[The statement of Mr. Williams follows:]

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Chairman THOMAS. Thank you very much, Mr. Williams.

Mr. White.

OPENING STATEMENT OF JAMES R. WHITE, DIRECTOR, TAX

ISSUES, GENERAL ACCOUNTING OFFICE; ACCOMPANIED BY

RANDOLPH C. HITE, DIRECTOR, INFORMATION TECHNOLOGY SYSTEMS ISSUES

Mr. WHITE. Mr. Chairman and members of the committees, I am

pleased to be here today as we approach the third anniversary of

the IRS Restructuring and Reform Act of 1998. I will summarize

some of our major points regarding IRS’ current performance in its

ongoing modernization effort. I will also note some issues related

to IRS’ fiscal year 2002 budget request.

First, current performance. We are calling IRS’ current performance mixed. On the plus side, during this year’s tax filing season,

the IRS processed millions of tax returns and issued refunds without significant problems. Importantly, taxpayers calling IRS with

questions had an easier time this year than last getting through.

And for the first time, IRS earned an unqualified opinion on their

financial audit.

On the down side, I want to highlight two issues. The trends in

audit rates and enforcement programs continue to be troubling. As

the board shows, which is also figure 2 on page 6 of my statement,

audit rates in the upper left-hand corner, seizures in the upper

right, and the use of liens and levies, the two lower graphs, are all

down dramatically in recent years.

Also troubling is that IRS has not been able to work many cases

of known delinquencies. IRS has been closing these cases after

sending the taxpayers written notices, but without making followup contacts either by phone or field visit. IRS refers to this as

shelving cases. The next board, figure 3, which is on page 7 of my

statement, shows that, as of March 31, 2001, IRS has shelved

about 2.5 million delinquency cases with outstanding debts totaling

about $12 billion.

Related to these declines are declines in compliance staffing and

productivity. For example, between 1996 and 2000, the number of

IRS employees working collection cases fell by about a third, from

5,500 to 3,600. During the same time period, the amount of staff

time per case increased by about a third. That is, productivity decline. We are concerned that these declines could increase the

temptation for taxpayers to underreport their tax obligations.

Now I want to discuss IRS’ ongoing modernization efforts where

IRS made important progress this year. It implemented its new organizational structure, focused on types of taxpayers, and it also

made progress in managing its business systems modernization

program, its multi-year program to replace its antiquated computer-based information system.

Specifically, IRS made progress this year implementing a variety

of management controls and capabilities. However, IRS’ progress in

this area, as in others, has been slower than expected. For example, we are concerned because business systems modernization

projects are moving past critical milestones without certain essential management controls in place and functioning.

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We have discussed these control weaknesses with the Commissioner and his modernization executives. They recognize the need

to address these weaknesses. They have taken steps to implement

many of these controls by the end of June this year, and decided

recently to slow ongoing projects and new projects, giving priority

to putting into place missing management capacity.

Because of the slowdown, it is unclear whether IRS needs the

$53 million requested by the IRS Oversight Board for the investment account beyond the $397 million in the administration’s request for fiscal year 2002.

Performance management is another key part of IRS’ modernization. A performance management system that establishes goals and

clear measures that is a structure of guiding and evaluating the

transformation of IRS, and that creates incentives for front-line

employees to work in new ways to support the goals, is essential

to meeting congressional expectations for a new IRS.

Regarding performance management, IRS deserves credit for its

strategic plan and its new management planning and budgeting

process. However, IRS is still missing key measures of voluntary

compliance without which the consequences of the decline in enforcement actions discussed earlier cannot be well understood.

Furthermore, managers throughout IRS do not routinely collect

and analyze data to learn what caused past performance and,

based on this understanding, make informed decisions to improve

future performance. One example is financial data. While IRS received a clean audit opinion from GAO this year, the data underlying the opinion was compiled months after the fact. The data was

not available to IRS managers on a real time basis and, thus, could

not be used as an input into managerial decision making.

Another example is the productivity decline I mentioned earlier.

IRS managers were unable to give us a data base explanation for

what caused the declines, in turn leaving managers with less information about how to improve productivity.

Mr. Chairman, that completes my statement. I would be happy

to answer any questions.

[The statement of Mr. White follows:]

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Chairman THOMAS. Thank you very much.

One of the difficulties that I think we’re going to be in is trying

to get a handle on the Oversight Board in terms of just exactly how

we deal with reports, recommendations, especially the Inspector

General from Treasury, since my assumption is the relationship to

the Board is a dotted line and not a direct one—GAO gets to parachute in anywhere and examine at any time requests are made.

With that as a kind of backdrop, Chairman Levitan, my understanding is that the Board, because of the difficulty in going

through appointments, was not up and running until September.

How many meetings of the Board have we had so far?

Mr. LEVITAN. The Board came into play late in September. Our

first meeting was September 29th. We meet as a full Board every

two months for two days, and in addition to that, we have committees that meet periodically. In addition to that, we have individual

Board members who do additional work. As Board chairman, I

probably spend over half my time on these efforts.

Chairman THOMAS. And what about staffing?

Mr. LEVITAN. We have operated up until last week really without

any full-time staffing. We have brought on board a staff director,

Mr. Chuck Lacijan, who is seated behind me, who will help us in

our efforts.

Chairman THOMAS. The reason I ask that question is to try to

put into context the statements that you have made as chairman,

in terms of your analysis in the time frame that you’ve been on

board with the resources that you have available, the statement

that the administration’s funding proposal is inadequate, and that

you not only have been able to assess that it’s inadequate, but that

you have been able to recommend specific amounts in specific

areas.

I guess my question would be, how are you able to achieve that

in the time frame that you’ve been up and running with the staff

that you have?

Mr. LEVITAN. Well, the bottom line is through a lot of hard work.

We realized in September, at our first meeting, that we needed to

jump on the budget very, very quickly and spend a lot of time and

effort working on it. So we have been working on it since September and, you know, the administration didn’t come on board

until January.

Quite honestly, from the discussions we’ve had, from the results,

we feel that at the time the budget was prepared, both ours and

the administration’s, that we knew a lot more about the specific

needs and situations at the IRS than the White House, the OMB,

or the Treasury Department did.

Chairman THOMAS. Or the General Accounting Office?

Mr. LEVITAN. I am not aware of GAO’s work on the budget, so

I——

Chairman THOMAS. Not so much the budget, but the results of

what the budget is intended to do, and that is to fund, in an orderly fashion, the various departments and agencies.

So I guess my question would go to you, Mr. Williams and Mr.

White. Based upon the IRS’ decision, in terms of dealing with the

modernization question and the timing, versus the budget money

available and the budget money proposed by the Board, clearly eiVerDate 11-MAY-2000 00:03 Mar 02, 2002 Jkt 077620 PO 00000 Frm 00132 Fmt 6633 Sfmt 6602 E:\HR\OC\A620.XXX pfrm01 PsN: A620
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ther there’s going to be more money than they can spend reasonably or they are not following a timetable which indicates they

need to spend more money in a more rapid fashion. So where do

you, either Mr. Williams or Mr. White, come out in analyzing the

IRS’ decisions on its change of pace in modernization, versus the

additional recommendation of additional resources to be supplied to

that area?

Mr. WHITE. Mr. Chairman, I would like to break that question

up into two pieces. One has to do with business systems modernization, and I have with me Mr. Hite from GAO, who is our Director of Information Technology, and he will address that part of

the issue.

Chairman THOMAS. I believe my question allowed you to utilize

the resources available to us.

Mr. HITE. Mr. Chairman, subsequent to the decision by the ad- ministration to fund the business systems modernization at $397

million, we have had discussions with the Commissioner and his

executive staff about the need to ensure that plans for moving forward with the modernization are in line with their capacity to

manage that. So, based on those discussions, the Commissioner has

chosen to pull back on certain ongoing projects in terms of the pace

and the plans for those, and also the timing for the initiation of

new projects.

In light of those changes, it was our opinion that the necessity of the additional $53 million then becomes an item of question, and

whether or not the money that would be needed, in fact, would

have a material effect on the progress of the modernization over

the next year.

I understand your position, that we don’t want to throw more

money at something unless we have the capacity to reasonably invest it in the software engineering community. This is referred to

as the concept of the ‘‘mythical man month’’, where just throwing

more resources at something doesn’t necessarily mean that it’s

going to get done faster and better. You have to invest in something within the context of your capacity to manage that investment and, hence, our question about the necessity of that $53 million.

Chairman THOMAS. That gets to my initial question to the Commissioner. Any initial goals are stated with a degree of ambition

and, to a degree, devoid of reality. As we move forward, my hope

is that reality is what governs us. Because if, in fact, the IRS, as

they have indicated on their business system projects, is beginning

to experience performance shortfalls, not meeting deadlines, making adjustments, it clearly would have a budgetary impact in implementing.

My concern would be how we make sure that we coordinate so

that we can get the best advice possible between the GAO, the

Treasury Department, and the Oversight Board, with the Oversight Board urging ‘‘more gas, step on the pedal’’, and IRS and

GAO overseeing, give me some indication that perhaps the original

goals were a bit overambitious and that we need to re-adjust what

our goals are, which would clearly affect the funding stream.

I don’t want this oversight to be the usual ‘‘we didn’t get enough

money, therefore, we failed in what we were doing.’’ I want to know

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if the original goals were achievable goals, which apparently there

seems to be a reexamination of whether or not they’re achievable.

GAO would best function, for my purposes, in evaluating those

goals and determining whether or not the reassessment or the readjustment of the reestablishment of those goals is an appropriate

adjustment, and that an achievable time line has now been created

so that we can measure against that time line.

My concern is that, at the very beginning of this process, I want

to know how the Board views itself and its role in trying to accomplish those very laudable goals that were stated for the purpose of

the legislation, and how you hope to achieve some integration between the monitoring of the ongoing historical structures and the

role of the Board, both in terms of encouragement, oversight analysis, and hopefully resource for the Congress. That’s my concern in

how we continue this coordination.

So, with that, Mr. Levitan, on what basis do you feel comfortable

evaluating the amount of money that you felt was a shortfall in the

budget for the IRS, and whether or not the IRS, if they got the

amount of money that you’re proposing, could actually spend it in

a meaningful way, given the adjustment of the various phase-ins

of the modernization?

Mr. LEVITAN. Chairman Thomas, that’s an excellent question,

and I really believe, particularly on that $53 million, our positions

are not that far off from GAO. But let me explain.

Another thing I would say is that I followed very closely the work

that GAO has done in reviewing and auditing the work of modernization, and I think they are doing an outstanding job. By and

large, I do agree with their conclusions.

In looking at funding for modernization in technology, the Board

is really recommending three items. One is the money for laptop

and desktop computers. It has nothing to do with the slowdown.

It’s needed today and should be spent today.

Secondly is multi-year funding for the ITIA account. That is

again something to provide for additional management capability of

the overall program. It will not increase expenditures actually in

2002, but will allow the IRS, with close oversight of GAO, Congress

and others, to manage the program more efficiently.

On the $53 million difference between ourselves and the President’s budget, we have looked at the detailed plan that the IRS has

put together for modernization. We have also looked at the impact

of the slowdown that was just implemented. We believe that the

IRS can effectively utilize that money in 2002 and will allow us to

go faster and get more done but still do it in an efficient manner.

Now, as far as the key question that you asked, are the goals realistic and can they be obtained, on modernization, the goals have

to be obtained. The only question is, how long will it take and how

much will it cost. Unfortunately, the answers to those are that it’s

going to take too long and it’s going to cost too much. But, the primary way that the Board has looked at it is that we would like to

see the job done as quickly as possible, consistent with the IRS’

ability to both absorb change and to manage the program effectively. We believe that they could do that, that they could use that

$53 million and, therefore, be further down the road.

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Is it absolutely necessary expenditures for 2002? No. But the impact will be that they’ll be further down the road and they will get

the job done faster by being able to put more resources to work.

Mr. WILLIAMS. Mr. Chairman, our primary concern is that the

ITIA fund would run out of money completely, or that the releases

would be delayed for the wrong reasons, in the appropriation process. So we would support the idea of multi-year funding.

We have another concern, though. Modernization stumbled significantly as it came out of the starting blocks. To date, we have

spent $400 million and nothing has happened to improve service to

taxpayers. We’re worried that the modernization hasn’t caught its

balance yet, and until it does, flooding more money could result in

exactly the kind of problems that you suggested. We would like to

see the first projects completed and we would like to think that IRS

learned from some rather substantial mistakes that were made

early on by the prime contractor and by the IRS itself before accelerated funding is considered.

Chairman THOMAS. Chairman Levitan, if you think you have difficulty meeting two days every other month, we do this once a year.

So we are not going to get the kind of progress if we assume that

these hearings are sufficient for an oversight function.

Frankly, I’m less concerned on where the three of you agree. We

can put those in our pocket and walk away. My concern is where

you don’t agree. We are going to be conducting ongoing written dialogue in which, if you do disagree, we want you to present your argument as to why you disagree, so that we can create periodic monitoring sessions, notwithstanding not having the oversight.

I agree with you, Mr. Chairman, that it may cost too much and

it may take too long, but it has got to be done. We don’t have any

friendly takeovers or hostile takeovers on the horizon. It’s ours, and

we have to deal with it, notwithstanding the frustrations associated

with it. All I want from the resources available is the best possible

achievable goal setting, prioritization, monitoring, and then follow

up, so that we can actually show progress—not matter how slow—

moving in the direction that we need to go.

I look forward to the Board getting a few more months under its

belt, to continue this ongoing dialogue with the other monitoring

agencies. Thank you very much for your testimony.

The gentleman from New York.

Mr. HOUGHTON. Thanks very much.

Mr. Williams, you talked about $400 million just a minute ago.

Where did it go?

Mr. WILLIAMS. There has actually been a nice amount of progress

in certain areas, and a troubling level of progress in others. The

IRS has developed the platform and infrastructure for all of the improvements, the architecture plan is completed, and IRS has developed a project management discipline.

The projects themselves, the things that will actually change the

level of service, in all too many instances, have been cut back, are

late and are over budget.

Mr. HOUGHTON. Is that because there wasn’t enough money or

it wasn’t applied, or the management was a little lax, what?

Mr. WILLIAMS. I have concerns with the delivery of the prime

contractor, the consortium. They have been consistently late. I

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would also say, that the project management discipline that’s been

selected, the Enterprise Life Cycle, hasn’t been followed very well.

Many times the project is 90 percent done and the prime tends to

move forward without completing the rest. You can’t do that in

projects of this magnitude and where issues of justice and taxpayer

rights are involved. It has to be complete in a way that perhaps

you would not find in private sector deliverables.

Also there was inappropriate sequencing. The IRS started the

project work before the blueprint was done, and had to go back and

retrofit some of the initiatives.

Also, there was a lapse in the area of management information

systems development that was overlooked in the beginning, and it’s

vital to administering the program. Management information is

still being organized for old bureaucracy, not for the new business

units. That has to all be redeveloped.

Mr. HOUGHTON. Let me ask Mr. Levitan, do you feel the management has been a little lax in this area?

Mr. LEVITAN. The modernization, which started probably around

two years ago, got off to a slow start. The IRS did not have the

management capabilities. The prime contractor did get off to a slow

start. I’m not sure that they had all of the right kinds of people

with the right kind of experience on board.

Over the past year, I believe significant progress has been made

in addressing those issues. Management processes have improved

significantly——

Mr. HOUGHTON. You mean they’ve gotten better people?

Mr. LEVITAN. The IRS has gotten additional people and they’ve

gotten stronger people with more experience. They have put into

place better and improved management processes.

Are they enough? Are they a hundred percent? No, they’re not.

That effort does need to continue. GAO has pointed out specifically

things that need to be done to improve it. We agree with those

things.

Mr. HOUGHTON. If another $400 million was thrown at this issue,

with the people you have now, do you think it would be better

spent?

Mr. LEVITAN. First let me say I do not believe that $400 million

has been wasted. I think that much has been accomplished and

they are much further down the road. I think that the processes

that are in place, and the people that are in place, with the continued improvement that must be made, I think will move them along

and get the job done.

Mr. HOUGHTON. Finally, I would like to ask Mr. White a question.

Mr. White, in your testimony you talked about the number of

IRS employees going down by about a third, in terms of following

up on these collection cases, and that is substantiated by your

chart on page 7, tax delinquencies.

I guess one of the things I have always talked to the Commissioner about—and, Mr. Levitan, you’ve heard me say this—is that

one of the unique things of our system is the element of trust we

have in it. If people feel that now they can take advantage of the

system because there aren’t the people to run it, it really does more

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than just destroy the numbers. It destroys the underlying support

that we have.

How do you feel about that?

Mr. WHITE. Mr. Chairman, I think you raise an excellent point.

Many people, inside and outside IRS, are concerned with those declines for exactly that reason. Our tax system does depend on people believing that their neighbors are paying their fair share and

that their business competitors are paying their fair share, and

without that trust that others are paying their fair share, there is

a concern that people may be less compliant in filing their taxes.

One of the problems at IRS is that they currently do not have

a measure of voluntary compliance, the extent to which people are

voluntarily complying with the tax laws. They last measured it in

1988, and because of changes in the economy and the tax law, that

is now outdated information.

IRS does have an effort underway to try to develop a new measure of voluntary compliance, but right now, they are managing

blindfolded in this area. They don’t know the consequences of the

kind of declines that I talked about in my statement.

The STABLE initiative is designed to increase staffing in this

area, as well as in the area of customer service, so that is part of

their plan to address this issue.

Chairman THOMAS. I thank the gentleman.

Does the gentleman from Pennsylvania wish to inquire?

Mr. COYNE. Thank you, Mr. Chairman.

Mr. White, given GAO’s concerns as expressed by you in some of

the operations of the IRS, is it your recommendation that the

Board’s budget be adopted, or do you want to take a position on

that?

Mr. WHITE. Again, we can answer that in two pieces. I will let

Mr. Hite briefly respond on the business systems modernization

piece, and then I would like to come back and talk about the operating portion of the budget.

Mr. HITE. With respect to the ITIA funding request, and whether

it would be $397 or $450 million, we have not put forth an official

GAO recommendation on the dollar amount.

Our position has been, the way the Appropriations Act of ’99 was

set up, the moneys that are appropriated for business systems

modernization are not available to IRS for use until they put forth

these incremental expenditure plans to the Appropriations Committees for approval of release of the money for a specific increment of work to be done, with specific objectives to be accomplished

during that increment.

That’s an additional control surrounding the use of appropriated

funds that, in our view, mitigates the necessity to have a precise

amount of money appropriated in the ITIA account, based on a specific, well-defined need for that year. It’s the incremental release

and the controls in place for assuring there’s a justification for that

incremental release that mitigates that need.

So, again, we have not taken a position and made a recommendation with regard to 397 versus 450 million.

Mr. WHITE. And with respect to the operating portion of the

budget, where there are some differences between the Oversight

Board and IRS, some of those differences, for example, are due to

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inflationary, nonpay costs that would be borne. IRS believes that

they can cover those costs out of their budget, and until we see IRS

lay out some facts about the negative consequences of failing to get

that additional budget money, it is difficult for us to support the

increase.

Mr. COYNE. Should we take from your testimony that it’s not a

desirable thing to be shelving these tax delinquencies?

Mr. WHITE. We are very concerned about what that does to the

temptation to not fully comply with the tax laws, that the taxpayers see that and get concerned about whether their neighbors

and competitors are paying their fair share.

Mr. COYNE. Is there any evidence in your finding that, if the

budget were increased, if there were more resources available to

the IRS, that there would be less shelving of the tax delinquencies?

Mr. WHITE. We do believe that the budget increase that IRS is

asking for this year, compared to last year, does target areas where

improvement is needed at IRS. The STABLE initiative is targeted

on the compliance enforcement area. It is aimed to increase the

number of full time equivalent staff there. It is also targeted on another area of need, telephone customer service.

Mr. COYNE. Mr. Levitan, what will happen to the IRS taxpayer

service, the walk-in and telephone assistance, and taxpayer compliance generally, if there is not adequate funding as recommended in

your proposal?

Mr. LEVITAN. We have reviewed the IRS’ plans if they do not receive the funding for inflationary costs and other mandatory costs,

which account for about $137 million. The net impact is that they

will have 1,300 fewer people.

Now, 1,300 fewer people is not going to have a huge change on

the service or the enforcement levels, but what STABLE was

meant to do was to say let’s provide a one-time increase, 3,800 people, to start to address these areas so that we can stop the level

of performance degradation, stabilize it, and start to provide some

level of improvement while we wait for modernization.

More people are not the right answer to fix the IRS’ problems.

More people is like sticking your finger in the dike to stop the leaking while we rebuild the dike. That was our recommendation, to

finish STABLE as it was originally designed, bring the level of people to that point, and then hold it relatively on a stable, even basis

as we move forward. So it will have some impact on service and

on enforcement. Exactly how much, I can’t tell you.

Mr. COYNE. Thank you.

Chairman THOMAS. I thank the gentleman very much.

If there are no additional questions, obviously, the purpose of the

legislation was to make sure that the Internal Revenue Service

functioned to its best capacity and in delivering the performance of

its currently much needed services.

But my concern is that, in creating the Oversight Board, we have

the traditional watchers and we have a new watcher. Our role is

to watch the watchers. It is going to be much easier if, in fact,

there is clear communication and, from a written point of view, I

will request and hopefully you will provide assessments of each

other’s examination of the IRS.

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It really doesn’t serve, in my opinion, the purposes of the legislation to come and hear three separate voices and then ‘‘we thank

you very much for the testimony’’. And we arrive next year and

hear three separate voices.

If, in fact, there is agreement in terms of your analysis, we need

to know where that agreement is. Where there is disagreement, we

need you to discuss those areas of disagreement and attempt to

come to an area of agreement. We will provide the umbrella for

that dialogue to occur.

All of us, I think, have the same intention. Our goal is to make

sure that, however much it costs, and for however long it takes, we

have measurable, achievable goals and we move toward accomplishing what all of us want.

Perhaps the goal I will finally state is one that’s unachievable;

that is, a smoothly functioning, responsive, Internal Revenue Service, as long as we have a voluntary tax system in which the collection of that money is essential to provide the revenue to run the

government.

You have an extremely difficult job, Mr. Levitan. Mr. Williams

has a few other responsibilities under his umbrella, and the GAO,

in terms of its money available in the job that it has, also has a

difficult one.

Thank you very much for your performance and testimony today.

I look forward to the continued written dialogue that I will share

with members of this Joint Committee, so that we can talk about

the goals that were set and achieved at the next hearing.

With that, the oversight hearing is adjourned.

[Whereupon, at 10:25 a.m., the hearing was concluded.]

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