In recent decades, the Treasury Department has played four specific roles: (1) formulating,recommending, and implementing economic, financial, tax, and fiscal policies; (2) serving as thesole financial agent for the federal government; (3) enforcing federal financial, tax, counterfeiting,customs, tobacco, alcoholic beverage, and gun laws; and (4) producing postage stamps, currency,and coinage. The creation of the Department of Homeland Security (DHS) in late 2002 and its assumptionof the authorities and duties transferred to it by executive order in March 2003 drastically reshapedTreasury's functional profile. (2) While Treasury still exerts a strong influence over economicpolicymaking within the executive branch and still serves as the government's financial manager,revenue collector, and producer of currency and coinage, its role in law enforcement is much morecircumscribed. At its most basic level of organization, the department is comprised of departmental officesand operating bureaus. In general, the departmental offices are responsible for the formulation andimplementation of policy initiatives and the management of departmental operations; the operatingbureaus, in contrast, carry out specific tasks assigned to the department, largely through statutorymandates. The bureaus typically account for more than 95% of the department's personnel andfunding. With one notable exception, the bureaus may be divided into those focused on financialmatters and those engaged in law enforcement. In recent decades, the following Treasury bureaushave all contributed to the management of federal finances or the daily operation of the U.S.financial system: Comptroller of the Currency, U.S. Mint, Bureau of Engraving and Printing,Financial Management Service, Bureau of Public Debt, Community Development FinancialInstitutions Fund (CDFI), and Office of Thrift Supervision. At the same time, law enforcement hasbeen central to the main responsibilities assigned to the following current or former Treasurybureaus: Bureau of Alcohol, Tobacco, and Firearms (BATF), U.S. Secret Service, Federal LawEnforcement Training Center, U.S. Customs Service, Financial Crimes Enforcement Network(FinCEN), and Treasury Forfeiture Fund. The exception to this simplified dichotomy is the InternalRevenue Service (IRS), which is involved in both the collection of tax revenue and the enforcementof federal tax laws and regulations. As noted above, the creation of DHS greatly diminished Treasury's role in law enforcement. Under the law establishing DHS ( P.L. 107-296 ), the Secret Service, Customs Service, and FederalLaw Enforcement Training Center were transferred from Treasury to DHS, while the TreasuryForfeiture Fund and many of the law enforcement duties of BATF were transferred to the JusticeDepartment (DOJ). In addition, in January 2003, the Treasury Department established a new bureauto administer laws governing the use of alcohol and tobacco and implement regulations formerlyhandled by BATF: the Alcohol and Tobacco Tax and Trade Bureau. Its main tasks do not involvelaw enforcement: collecting alcohol and tobacco excise taxes, classifying those products for taxpurposes, and regulating the operations of industrial users of distilled spirits. The operations of most Treasury bureaus are funded through annual appropriations passedby Congress. This is true of the IRS, Financial Management Service, Bureau of the Public Debt,departmental offices, FinCEN, Alcohol and Tobacco Tax and Trade Bureau, Office of InspectorGeneral, Treasury Inspector General for Tax Administration (TIGTA), CDFI, and Treasury'sinternational programs. But a handful of bureaus finance their operations largely through thecollection of fees for the services and products they provide. This funding arrangement applies tothe Treasury Franchise Fund, U.S. Mint, Bureau of Engraving and Printing, Office of theComptroller of the Currency, and the Office of Thrift Supervision. In FY2005, Treasury received $11.218 billion in appropriated funds, an amount that was1.1% more than it received in FY2004 (see Table 1 ). About 91% of these funds were used tofinance the operations of the IRS, whose budget was set at $10.236 billion. The remaining $982million was distributed in the following manner among Treasury's other bureaus and its departmentaloffices: departmental offices (including TFI), $156 million; OFAC, $22 million; department-widesystems and capital investments, $32 million; Office of Inspector General, $16 million; TIGTA,$128 million; Air Transportation Stabilization program, $2 million; CDFI, $55 million; Treasurybuilding and annex repair and restoration, $12 million; FinCEN, $72 million; Financial ManagementService, $229 million; Alcohol and Tobacco Tax and Trade Bureau, $82 million; and Bureau of thePublic Debt, $174 million. These amounts reflected an 0.83% across-the-board cut (or rescission)in non-defense discretionary spending that was included in the law funding the Treasury Departmentand most other federal agencies in FY2005: the Consolidated Appropriations Act, 2005 ( P.L.108-447 ). For FY2006, the Bush Administration asked Congress to provide $11.649 billion inappropriated funds for Treasury operations -- or 3.8% more than the amount enacted for FY2005 (see Table 1 ). Once again, the vast share of this requested amount was to go to the IRS, whose budgetwould have totaled $10.679 billion. The other departmental offices and bureaus would havereceived the following amounts: departmental offices, $195 million; departmental systems andcapital investments, $24 million; Office of Inspector General, $17 million; TIGTA, $133 million;Air Transportation Stabilization program, $3 million; CDFI, $8 million; Treasury building and annexrepair and restoration, $10 million; FinCEN, $74 million; Financial Management Service, $236million; Alcohol and Tobacco Tax and Trade Bureau, $62 million; and Bureau of the Public Debt,$177 million. All accounts -- except those for departmental systems and capital investments andTreasury building and annex repair and restoration -- would have been funded at higher levels thanin FY2005. The Administration also requested that funding for OFAC be treated not as a separateaccount but as part of the account for departmental offices. Under the Administration's budgetproposal, total full-time employment at Treasury was projected to rise to 113,242 from 113,002 inFY2005. (3) Congressional action on the Administration's budget request for FY2006 commenced in theHouse with a series of hearings held by the House Appropriations Subcommittee on Transportation,Treasury, Housing and Urban Development, the Judiciary, and District of Columbia in March, April,May, and June of this year. On June 15, the Subcommittee approved by voice vote a measure( H.R. 3058 ) to provide funding for Treasury and a handful of other federal agencies inFY2006. The Appropriations Committee also voted by voice vote to report favorably ( H.Rept.109-153 ) to the House an amended version of H.R. 3058 on June 21. Following theconsideration of 48 amendments spread over two days of floor debate, the House approved themeasure on June 30 by a vote of 405 to 18 and sent it on to the Senate. As passed by the House, H.R. 3058 would have given Treasury $11.529 billionin funding for FY2006, or $311 million more than the amount enacted for FY2005 but $120 millionless than the amount requested by the Bush Administration. The IRS was to receive $10.556 billion,or $320 million more than its budget in FY2005 but $123 million less than the amount requested bythe Administration. The House denied a request by the Administration to combine funding fortaxpayer service, tax law enforcement, and information systems into a new single account for taxadministration and operations. In addition, H.R. 3058 would have increased funding inFY2006 relative to FY2005 for the following accounts and in the following amounts: Alcohol andTobacco Tax and Trade Bureau, +$9 million; the Financial Management Service, +$7 million;TIGTA, +$5 million; Bureau of the Public Debt, +$3 million; FinCEN, +$2 million; anddepartmental offices (which includes OFAC and TFI) and Office of Inspector General, +$1 million. Three accounts would have been funded at lower levels in FY2006 than in FY2005: department-wide systems and capital investments, -$11 million; Treasury building and annex repairand restoration, -$2 million; and CDFI, -$0.1 million. One current account would have received nofunding under the measure: the Air Transportation Stabilization program. In the Senate, the Appropriations Committee favorably reported ( S.Rept. 109-109 ) anamended version of H.R. 3058 as passed by the House by a vote of 28 to 0 on July 21. Following three days of debate and the consideration of over 130 amendments, the Senate approvedby a vote of 93 to 1 on October 20 a version of H.R. 3058 that differed in some importantways from the House-passed version. Under the version of H.R. 3058 approved by Senate, the Treasury Departmentwould have received $11.698 billion in funding in FY2006 -- or $480 million more than the amountenacted for FY2005, $49 million more than the amount requested by the Bush Administration, and$169 million more than the amount approved by the House. The IRS would have received $10.679billion -- or $443 million more than the amount enacted for FY2005, the same amount requested bythe Administration, and $123 million more than the amount approved by the House. Like the House,the Committee rejected an Administration proposal to combine funding for taxpayer service, tax lawenforcement, and information systems into a new single account for tax administration andoperations. But unlike the House, the Senate elected to give the IRS the same amount for tax lawenforcement that was requested by the Administration: $4.726 billion. In addition, the followingaccounts would have received an increase in funding relative to their budgets for FY2005: departmental offices (including OFAC and TFI), +$42 million; Alcohol and Tobacco Tax and TradeBureau, +$9 million; the Financial Management Service, +$7 million; TIGTA, +$5 million; theBureau of Public Debt, +$3 million; FinCEN, +$2 million; and Office of Inspector General and AirTransportation Stabilization program, +$1 million. Funding for three Treasury accounts would havebeen cut relative to the amounts enacted for FY2005: department-wide systems and capitalinvestments, -$8 million; Treasury building and annex repair and restoration, -$2 million; and CDFI,$-0.1 million. Furthermore, the Senate-passed version of H.R. 3058 would also haverestored funding for two programs that were effectively eliminated in FY2005: expanded access tofinancial services ($4.0 million) and violent crime reduction ($1.2 million). The significant differences between the versions of H.R. 3058 passed by theHouse and Senate meant that a conference committee had to be formed in order to resolve thosedifferences. In late October, such a committee was formed, and it came to an agreement on the billthat was detailed in a conference report ( H.Rept. 109-307 ) released on November 18. Later the sameday, the House approved the report by a vote of 392 to 31, and the Senate did likewise through aprocedure known as unanimous consent. President signed the measure ( P.L. 109-115 ) on November30. Under the conference agreement on H.R. 3058 , Treasury is receiving $11.689billion in appropriated funds in FY2006 -- or $471 million more than it received in FY2005. Of thisamount, $10.672 billion goes to the IRS -- or $436 million more than it received in FY2005. Theconference report specifies that the IRS may reorganize or reduce its workforce only with the consentof the House and Senate Appropriations Committees. Moreover, Treasury's departmental officesare receiving $197 million, $40 million of which is to be used to combat financial crimes (includingthe financing of terrorist operations). The remaining accounts are funded at the following levels:department-wide systems and capital investments, $24 million; Office of Inspector General, $17million; TIGTA, $133 million; Air Transportation Stabilization program, $3 million; Treasurybuilding and annex repair and restoration, $10 million; FinCEN, $74 million; Financial ManagementService, $236 million; Alcohol and Tobacco Tax and Trade Bureau, $91 million; Bureau of PublicDebt, $177 million; and CDFI, $55 million (to be available until September 30, 2007). Table 1. Department of Treasury Appropriations, FY2004 toFY2006 (millions of dollars) Source: Figures are from a budget authority table provided by the House Committee onAppropriations with one exception. The figures for the Senate Committee on Appropriations comefrom S.Rept. 109-109 . Columns may not sum to the total shown at the bottom because of roundingor the exclusion of certain relatively small line-items. a. FY2004 figures reflect an across-the-board rescission of 0.59%. b. FY2005 figures reflect an across-the-board rescission of 0.83%. According to budget documents, the Administration's FY2006 budget request for theTreasury Department was intended to support a variety of strategic objectives. Heading the list wereimproving taxpayer compliance with tax laws; modernizing IRS's computer and managementsystems; enhancing Treasury's capability to analyze and disrupt terrorist financing and financialcrimes; maintaining and safeguarding the integrity of federal finances and the U.S. financial system;and increasing opportunities for economic development through policy initiatives such as enactingpermanent tax cuts and fundamental tax reform. This section examines some of the key policy issuesraised by the Administration's budget request for Treasury operations except the IRS. Many of theseissues are tied to the Department's strategic objectives. The policy issues raised by the budgetrequest for the IRS are examined in a subsequent section. Combating Terrorist Financing. Not surprisingly,recent congressional testimony by senior Treasury officials indicates that one of their highestpriorities is uncovering, monitoring, and disrupting or stopping the flow of funds to terroristgroups. (4) In the wake of the terrorist attacks of September 11, 2001, Treasury has taken severalnoteworthy steps to extend and restructure its involvement in the federal government's evolvingcampaign to uproot the financing of terrorist groups hostile toward the United States and otherfinancial crimes. In March 2003, the Treasury Secretary announced the establishment of the Executive Officeof Terrorist Financing and Financial Crimes (EOTF). From the outset, the Office's mission was tocoordinate and direct Treasury's efforts to uncover and dismantle terrorist financing networks,combat a variety of financial crimes, implement certain key provisions of the Bank Secrecy Act of1970 (BSA) and the USA Patriot Act, and represent the United States in international organizationsdedicated to fighting terrorist financing and financial crimes. In carrying out this task, EOTF wasauthorized to draw on the resources of FinCEN and the Office of Foreign Assets Control (OFAC). It appears, however, that these plans never came to fruition. About one year later, the Treasury Secretary announced the formation of another office tooversee and coordinate the department's contributions to the government's campaign against terroristfinancing and other financial crimes: the Office of Terrorism and Financial Intelligence (TFI). TFIseeks to integrate the operations and resources of the Office of Terrorist Financing and FinancialCrime (TF/FC), OFAC, FinCEN, the Office of Intelligence and Analysis (OIA), and the TreasuryExecutive Office for Asset Forfeiture. In essence, TFI has two basic responsibilities: (1) gatheringand evaluating financial intelligence and (2) enforcing various financial laws and regulations. OIAprovides the intelligence, mainly through the analysis of complex financial transactions. Enforcement is handled by TF/FC, OFAC, and FinCEN and includes such activities as identifyingand freezing the bank accounts of terrorists, leaders of drug smuggling operations and their supportnetworks; implementing U.S. sanctions policy; administering and enforcing the BSA; and fosteringclose working relationships between domestic law enforcement agencies and financial institutionsaround the aim of exposing or tracking illicit activities. Upon request, TFI also is authorized to assistIRS special agents in their investigations of allegations of terrorist financing, money laundering, andother financial crimes. The Administration's proposed budget for Treasury in FY2006 seeks to bolster the agency'srole in the campaign against terrorist financing. It asked Congress to increase funding for programswithin the Treasury Department dedicated to combating financial crimes (including terroristfinancing) from an estimated $25 million in FY2005 to $40 million in FY2006, a rise of 60%. Morethan half of this money ($22 million) was to be funneled into OFAC and the remainder to TFI. Congress evidently agreed with this approach: the enacted version of H.R. 3058 included $40 million for these programs. The Administration's request to increase substantially spending on Treasury programsto combat terrorist financing and other financial crimes raised significant questions about howthese additional funds would be spent, what they would mean for Treasury's role in the federalgovernment's campaign to combat terrorist financing networks, and whether the likely benefitsfrom the increased spending would outweigh the cost of expanding the programs. Morespecifically, would the proposed budget for countering financial crimes enhance Treasury'scapability to analyze and disrupt terrorist financing? How would the proposed budget fit intothe federal government's diversified and evolving campaign against terrorist financing? Would the activities to be undertaken by TFI in FY2006 duplicate any of the contributions ofother Treasury bureaus (particularly FinCEN) and other federal agencies (particularly theDepartment of Justice or the Federal Bureau of Investigation)? If so, to what extent? Whatare the expected benefits of expanding Treasury's programs to counter terrorist financing andhow do they compare to the additional cost of such an expansion? The Administration provided few details in its budget documents that addressed anyof these questions. (5) Some Members of Congress had similar questions about Treasury's plans to increaseits involvement in the campaign against terrorist financing. In its report to the House on H.R. 3058 , the Committee on Appropriations expressed concern about thepurpose of TFI and its role in the government's campaign against terrorist financing. (6) Future congressionaloversight of the TFI and related Treasury programs may wish to focus on these policyquestions. Administration of the Community Development FinancialInstitutions Fund. The Administration's FY2006 budget request for theTreasury Department included a reduction in funding for the Community DevelopmentFinancial Institutions Fund (CDFI) from $55.1 million in FY2005 to $7.9 million in FY2006. To say the least, the proposal provoked a controversy over its merits. Since its inception, the CDFI, which was created by the Riegle CommunityDevelopment and Regulatory Improvement Act of 1994, has sought to increase theavailability of credit, investment capital, and financial services in relatively poor urban andrural communities. The fund pursues these objectives by augmenting the private resourcesfor investment in economic development, affordable housing, and basic banking services inthese communities. It works with two sets of partners in boosting such investment: privatefinancial institutions certified by the CDFI as community development financial institutionsand private equity groups certified by the CDFI as community development entities (CDEs). Under the Administration's proposal, three core elements of the CDFI -- NativeInitiatives, Bank Enterprise Award Program, and Community Development FinancialInstitutions Program -- would have been consolidated within the Commerce Department withat least 17 other federal community and economic development programs. (7) In taking such a step,the Administration has said it was trying to "achieve greater results and focus on communitiesmost in need of assistance." No additional funding for loans and grants was proposed for theCDFI programs that were to be transferred to the Commerce Department. It was not clearfrom the Administration's budget documents whether funding for these programs would becut relative to spending on them in recent fiscal years. What was clear was that the $7.9million requested for CDFI in FY2006 would have enabled the fund to continue administeringthe so-called "new markets" tax credit created by the Community Renewal Tax Relief Act of2000 and manage its existing portfolio of loans and grants. The credit is intended to injectgreater private investment into poorer neighborhoods with relatively high rates of poverty andunemployment through the medium of CDEs. The Administration's proposal was sharply criticized on the grounds that it wouldundermine the prospects for needed economic development in poorer communities byeffectively eliminating the CDFI programs to be transferred to the Commerce Department. Some feared the proposal would lead to a substantial loss of seed capital for small banksclassified as community development financial institutions. (8) Among these criticswere some Members of Congress. Their views apparently proved decisive in thecongressional debate over the merits of the proposal: the enacted version of H.R. 3058 not only retained the current administrative structure for the CDFI but also provided itwith $55.0 million in funding in FY2006 and FY2007, $6 million of which is for direct loansand $4 million of which is for technical assistance for native American, Hawaiian, andAlaskan communities. A policy issue raised by the Administration's proposal -- one that may have contributedto its defeat -- was its impact on the communities that have benefitted from the CDFIprograms the Administration wanted to consolidate within the Commerce Department. Morespecifically, the proposal led some to ask whether the proposed reorganization of the CDFIwould trigger sharp declines in lending to small firms and investment in commercial realestate development and low-income housing and gradual retrenchments in the availability offinancial services in these communities. Future congressional oversight of the CDFI maywish to assess the effects of its programs in the communities directly affected by them. Funding for the Alcohol and Tobacco Tax and TradeBureau. The Administration's FY2006 budget request also sought to chargeuser fees for some of the services provided by the Alcohol and Tobacco Tax and TradeBureau. Two new fees were proposed: (1) an administrative fee for "drawbacks" frommanufacturers of non-beverage products and (2) a filing fee for Certificate of Label Approvalsfor distilled spirits, wine, and beer, American Viticultural Areas, proposed formulas, and newpermit applications. To make the adoption of the fees feasible, the Administration said itwould seek the enactment of legislation giving the bureau the authority to collect the proposedfees. The Administration said the fees were warranted because they would compel the firmsbenefitting from the bureau's regulatory activities to bear at least some of the cost of theseactivities. Among the benefits cited by the Administration were the assurance that alcoholand tobacco products sold domestically were unadulterated and fair competition among firmssubject to the regulations. The Administration estimated that the proposed fees would raise$28.6 million in revenue in FY2006. Some opposed the proposed fees on the grounds that they would prove undulyburdensome for smaller firms, especially family-owned wineries. The opponents includedsome lawmakers. Evidently more than a few Members of Congress found this line ofreasoning persuasive: the enacted version of H.R. 3058 rejected the proposeduser fees. In the minds of some, the Administration's proposal raised the broader policy questionof under what circumstances is it appropriate for a federal agency to rely on user fees ratherthan appropriated funds to cover the cost of providing specific services. In order to finance its operations and many of its programs, the federal governmentlevies individual and corporate income taxes, social insurance taxes, excise taxes, estate andgift taxes, customs duties, and miscellaneous taxes and fees. The federal agency responsiblefor administering and collecting these taxes and fees (except customs duties) is the InternalRevenue Service (IRS). In discharging this responsibility, the IRS receives and processesmillions of tax returns and related documents and payments; disburses refunds; enforcescompliance through audits and other methods; collects delinquent taxes; and provides avariety of services to taxpayers to help them understand their rights and responsibilities andresolve problems. In FY2004, the IRS collected $2.035 trillion before refunds, the largestcomponent of which was individual income tax revenue of $990 billion. In FY2005, the IRS received $10.236 billion in appropriated funds (see Table 2 ). Thisamount was 0.5% more than the amount enacted for FY2004. Of the amount enacted forFY2005, $4.057 billion was designated for processing, assistance, and management; $4.364billion for tax law enforcement; $1.578 billion for information systems management; $203million for the business systems modernization program (BSM); and $35 million toadminister the health insurance tax credit established by the Trade Act of 2002. Of the fundsappropriated for processing, assistance, and management, Congress specified that $4 millionbe used to operate the Tax Counseling for the Elderly program, and that $7.5 million be usedas grants for low-income taxpayer clinics. None of the funds appropriated for the BSMprogram could be spent without the consent of the House and Senate AppropriationsCommittees. In addition, the IRS Commissioner was required to submit quarterly reports inFY2005 to both committees assessing the agency's "progress, status, and results inimplementing its proposed compliance initiatives" during the fiscal year. (9) The Bush Administration requested that IRS operations be funded at $10.679 billionin FY2006 -- or 4.3% more than the funding the agency received in FY2005 (see Table 2 ). To bring its proposed budget into closer alignment with IRS's major programs and most recentstrategic plan, the Administration proposed that the agency's budget be restructured beginningin FY2006. Under the proposal, the number of appropriations accounts in the IRS budgetwould be reduced from six to three: tax administration and operations (TAO), BSM, andadministration of the health insurance tax credit. TAO would be equivalent to the existingaccounts for tax law enforcement; processing, assistance, and management; and informationsystems. For FY2006, the Administration sought $10.460 billion in appropriated funds forTAO -- or about 5% more than was spent for this purpose in FY2005; $199 million for BSM-- or 2% less than the amount enacted for FY2005; and $20 million for administration of thehealth insurance tax credit -- or 43% less than the amount enacted for FY2005. Comparedto the FY2005 budget, the Administration sought $500 million more for enforcement but $38million less for taxpayer service and $4 million less for BSM. The Administration estimatedthat its budget proposal would have boosted total full-time employment at the IRS from97,440 in FY2005 to 97,679 in FY2006. In the first few months of 2005, the IRS disclosed how it planned to achieve therequested $38 million reduction in spending on taxpayer service. Most of the savings, theagency revealed, would come from the closure of 68 out of 400 Taxpayer Assistance Centers(TACs) and a reduction in the weekly hours of operation for toll-free telephone assistance fortaxpayers by the end of 2005. These disclosures sparked howls of protest from some, whofeared that the planned cutbacks in service would make it much harder for many individualand business taxpayers to comply with the tax laws. In a bid to ensure that the IRS got the requested funding for tax law enforcement of$6.893 billion, the Administration proposed that Congress fund IRS operations through abudgetary mechanism known as a contingency appropriation in FY2006. Under this method,caps are imposed on discretionary spending for all federal agencies in accordance with Section302(a) of the Congressional Budget Act of 1974 and Section 251 of the Balanced Budget andEmergency Deficit Control Act of 1985. The Administration asked Congress to increase thecap on funding for the IRS in FY2006 by $446 million. According to existing budgetaryrules, Congress could do so only if it specified that all additional funds be used forenforcement and approved a base level of funding for enforcement in FY2006 of $6.446billion. Otherwise, the added $446 million could not be appropriated or made available to theIRS. (10) A key player in the annual budget cycle for the IRS is the IRS Oversight Board. Underthe Internal Revenue Service Restructuring and Reform Act of 1998 (RRA98, P.L. 105-206 ),the Board is authorized to review the agency's annual budget request, submit its own budgetrecommendation to the Treasury Department, and determine whether the budget submittedby the President to Congress is adequate to support the annual and long-term strategic plansof the IRS. (11) The Board recommended a budget of $11.629 billion for the IRS in FY2006, anamount that was about 14% greater than the agency's budget in FY2005 and 9% greater thanthe budget requested by the Bush Administration for FY2006. (12) Whileacknowledging that the IRS had made significant progress in improving customer service andcombating tax evasion in the past few years, the Board argued that more money should beappropriated than the Administration requested for enforcement (an additional $35 million),taxpayer service (an additional $111 million), BSM (another $140 million), and expectedincreases in IRS operating costs (another $87 million). Congressional action on the Administration's FY2006 budget request for the IRScommenced in the House with a series of hearings held by the House AppropriationsSubcommittee on Transportation, Treasury, Housing and Urban Development, the Judiciary,and District of Columbia in March, April, May, and June of 2005. On June 15, theSubcommittee approved by voice vote a measure ( H.R. 3058 ) to provide fundingfor the Treasury Department (including the IRS) and certain other executive agencies inFY2006. The Appropriations Committee also voted by voice vote to report favorably( H.Rept. 109-153 ) to the House an amended version of H.R. 3058 on June 21. Following the consideration of a total of 48 amendments spread over two days of floor debate,the House approved the measure on June 30 by a vote of 405 to 18 and sent it on to theSenate. As passed by the House, H.R. 3058 would have appropriated $10.556billion for IRS operations in FY2006 (see Table 2 ), an amount that was $319 million morethan the agency's budget in FY2005 but $123 million less than the amount requested by theBush Administration. The House did not endorse the Administration's proposed restructuringof the IRS budget. As a result, it was difficult to make meaningful comparisons between theAdministration's budget request and the funding for IRS operations included in theHouse-passed version of H.R. 3058. Nonetheless, it was possible to compare thefunding approved by the House with the amounts enacted for FY2005. Of the $10.556 billionin funding for the IRS approved by the House, $4.182 billion (or $125 million above the levelfor FY2005) would have gone to processing, assistance, and management; $4.580 billion (or$216 million above the level for FY2005) to tax law enforcement; $1.575 billion (or $3million below the level for FY2005) to information systems; $199 million (or $4 millionbelow the level for FY2005) to the BSM program; and $20 million (or $15 million below thelevel for FY2005) to administering the health insurance tax credit. The measure also specifiedthat of the funds recommended for processing, assistance, and management, $4 million wasto be set aside for the Tax Counseling for the Elderly program, $8 million for grants tolow-income taxpayer clinics, and $1.5 million for the IRS Oversight Board. In addition, themeasure included a provision prohibiting the IRS from closing or consolidating any TACsuntil TIGTA had completed a "thorough study" that assessed the "impact of (planned) closureson taxpayer compliance." (13) In the Senate, the Appropriations Committee favorably reported ( S.Rept. 109-109 ) anamended version of H.R. 3058 by a vote of 28 to 0 on July 21. The Senateapproved the bill with a few changes by a vote of 93 to 1 on October 20. The version of H.R. 3058 passed by the Senate granted the IRS the samelevel of funding in FY2006 requested by the Administration: $10.679 billion, or $443 millionmore than the amount enacted for FY2005 and $123 million more than the amount approvedby the House (see Table 2 ). Like the House, the Senate rejected the Administration'sproposed restructuring of the IRS budget on the grounds that it was "overly simplistic" andhampered the ability of the Appropriation Committee to hold the IRS accountable for how itused appropriated funds. Under the Senate-passed version of H.R. 3058, the IRSwould have received $4.137 billion for processing, assistance, and management (or $80million more than the amount enacted for FY2005 but $45 million less than the amountapproved by the House); $4.726 billion for tax law enforcement (or $362 million more thanthe amount enacted for FY2005 and $145 million more than the amount approved by theHouse); $1.598 billion for information systems (or $20 million more than the amount enactedfor FY2005 and $23 million more than the amount approved by the House); $199 million forthe BSM program (or $4 million less than the amount enacted for FY2005 but the sameamount requested by the Administration and approved by the House); and $20 million foradministering the health insurance tax credit (or $15 million less than the amount enacted forFY2005 but the same amount requested by the Administration and approved by the House). Like the House-passed version of H.R. 3058, the Senate-passed version alsoincluded a provision that would have barred the IRS from using any of the funds appropriatedby the bill to implement any planned reduction in taxpayer services TIGTA had completeda study "detailing the impact of the IRS's plans to reduce services on taxpayer compliance andtaxpayer assistance." (14) The Senate also agreed with the House in specifying that$4.1 million be set aside for the Tax Counseling for the Elderly program and $8 million forgrants to low-income taxpayer clinics. But unlike the House-passed bill, the version passedby the Senate would have removed the cap imposed by the FY1995 Treasury, Postal Serviceand General Government Appropriations Act on the amount of user fees collected by the IRSin a fiscal year that it is allowed to retain and would have prevented the IRS from competingwith the private sector in developing tax return preparation software by requiring the agencyto continue the Free File program begun in 2002. Table 2. IRS Appropriations, FY2004 toFY2006 (millions of dollars) Source: Figures are from a budget authority table provided by the House Committee onAppropriations. Columns may not sum to the total shown at the bottom because of roundingor the exclusion of relatively small line-items. a. FY2004 figures reflect a rescission of 0.59%. b. FY2005 figures reflect a rescission of 0.83%. c. Under the Bush Administration's FY2006 budget request, three IRS appropriationsaccounts (i.e., processing, assistance and management; tax law enforcement, andinformation systems) would have been consolidated into a single account known astax administration and operations (TAO). The Administration asked Congress toappropriate $10.460 billion for TAO in FY2006, or about 5% more than was spent forthat purpose in FY2005. d. Includes a rescission of $9 million. The differences between the House-passed and Senate-passed version of H.R. 3058 must be resolved by a conference committee before a version of thebill can be sent to the President for his signature. Such a committee was formed in lateOctober. On November 18, it released a conference report ( H.Rept. 109-307 ) spelling out theterms of the agreement it reached. Later the same day, the House approved the conferenceagreement on H.R. 3058 by a vote of 392 to 31, and the Senate did likewise througha procedure known as unanimous consent. President Bush signed the measure on November30. Under the enacted version of H.R. 3058 , the IRS is receiving $10.672billion in FY2006, or $435 million more than it received in FY2005. Of this amount, $4.137billion is being used for processing, assistance, and management; $4.726 billion for tax lawenforcement; $1.599 billion for information systems; $199 million for BSM; and $20 millionfor administering the health insurance tax credit. The act specifies that the IRS may notreorganize or reduce its workforce without the consent of the House and SenateAppropriations Committees, and that the IRS may not eliminate or reduce any of the servicesit provides to taxpayers until TIGTA completes a study of the likely impact of any suchcutbacks on taxpayer compliance. It also directs the IRS to abide by the terms of the newfour-year agreement it signed with the Free File Alliance, which bars the IRS from competingin the market for tax return preparation software. Moreover, under the act, the IRS OversightBoard, and the National Taxpayer Advocate are required to develop a five-year plan fortaxpayer services that balances strategic goals for enforcement and service and submit thereport to the Committees no later than April 14, 2006. The Administration's budget request for the IRS in FY2006 raised several policyissues. Each issue was tied in some way to the three principal aims of the agency's currentfive-year strategic plan, which was issued in July 2004: (1) continued improvement oftaxpayer service; (2) strengthened enforcement of the tax laws; and (3) continuedmodernization of IRS's information systems. Taken together, the issues underscored thedifficult tradeoffs facing Congress as it allocated limited resources among programs intendedto advance the three aims at a time when the estimated tax gap and the federal budget deficitwere large and growing. Stronger Emphasis on Enforcement. Thebudget request made it clear that the Administration placed a high priority on improvingtaxpayer compliance and collecting overdue taxes. (15) It called for a rise in spending on enforcement of 8%relative to the amount enacted for FY2005 but decreases in spending of 1.1%for taxpayerservice, 2.1% for the BSM program, and 41.5% for administering the health insurance taxcredit. FY2006 marked the sixth fiscal year in a row that the IRS asked Congress to fund anincrease in enforcement staff. There were no increases in staffing before FY2005 because therises in funding for enforcement enacted in FY2001 through FY2004 was used largely tocover unbudgeted increases in operating expenses or to address other priorities. (16) In testimony beforethe House Ways and Means Subcommittee on Oversight, IRS Commissioner Mark Eversonstated that if his agency's requested budget for enforcement were enacted, the IRS would beable to increase the audit rate for mid-size corporations from 7.6% in FY2004 to 16% inFY2008, close 50% more delinquent accounts in FY2008 than in FY2004, and raise the auditrate for individual taxpayers with taxable incomes between $250,000 and $1 million from1.5% in FY2004 to 2.8% in FY2008. (17) The Administration sought more resources for tax law enforcement for severalreasons. First, a failure to pay taxes owed was becoming a significant problem. Accordingto the latest estimate by the IRS, the gross tax gap -- which is the difference between federaltaxes owed on legal sources of income and federal taxes on that income paid on time -- in the2001 tax year amounted to somewhere between $312 billion and $353 billion. (18) By contrast, thegross tax gap was estimated to have been about one-third that level in 1992: $110.1 billionto $127.0 billion. (19) Tax evasion is a serious policy issue because if leftunchecked, it can undermine the fairness and integrity of the tax system, waste considerableeconomic resources, and hamper the performance of the economy. Second, from the mid-1990s through the first few years of the third millennium, IRS'sresources for enforcing compliance with tax laws and regulations declined while the volumeof tax returns grew. From FY1996 to FY2003, the size of the IRS workforce engaged inenforcement activities steadily fell from 26,061 in FY1996 to 19,322 in FY2003, a drop of26%. (The downward trend ended in FY2004 when the total number of revenue agents,revenue offices, and special agents rose to 20,863.) Meanwhile, between 1995 and 2003, thenumber of individual income tax returns filed rose from 116.5 million to 130.8 million, a gainof 12%, and the typical return became more complex owing to new tax provisions and aproliferation of sophisticated new financial instruments. A predictable result of these trendswas a sharp drop in the share of individual and corporate tax returns subject to examinationover the same period: the overall audit rate for individual taxpayers was 0.65% in FY2003,down from 1.67% in FY1996; for all corporations with assets of $10 million or more, theaudit rate stood at 12.08% in FY2003, down from 25.33% in from FY1996. Third, spending on enforcement has the potential to generate a large return oninvestment. Through its enforcement activities, the IRS collects taxes that otherwise mightgo unpaid. In addition, the threat of investigation and prosecution inherent in enforcementactivities deters some individuals from engaging in tax evasion, leading to higher levels ofcurrent-year tax payments than otherwise would be the case. In FY2004, IRS's enforcementactivities yielded $43.1 billion in additional revenue, an increase of $5.5 billion (or 15%) fromFY2003. (20) Without providing supporting evidence, the Administration argued in its budget request forthe IRS in FY2006 that spending $265 million more on enforcement in FY2006 than inFY2005 would yield nearly $1.2 billion in additional revenue by FY2008. Research on theefficacy of tax law enforcement activities suggests there is no incontestable causal connectionbetween spending on enforcement and the amount of revenue collected. (21) A recent report byTIGTA questioned the methodology used by the IRS to project a return of $4.40 in FY2008for every dollar spent on enforcement in FY2006 above the level of FY2005. (22) The proposed increase in spending on enforcement raised at least three policyquestions that might be of interest to lawmakers: How much additional revenue would becollected as a result of the increase, and over what period would it be collected? Could of itsoverall budget devoted to enforcement without compromising taxpayer service or itscommitment to protect and uphold taxpayer rights? Should Congress set enforcement goalsfor the IRS and make its budget for enforcement contingent on tangible progress towardachieving those goals? Use of Private Debt Collection Agencies. As part of its strategy for improving taxpayer compliance and shrinking the gross tax gap, theBush Administration sought in its budget requests for FY2004 and FY2005 the legal authorityto hire private debt collection agencies (PCAs) to help the IRS collect certain delinquentindividual tax debt. (23) The IRS gained the authority with the passage of theAmerican Jobs Creation Act of 2004. Under the act, the IRS is authorized to enter intocontracts with PCAs to pursue such debt. Overdue taxes collected through the firms'collection activities are to be put into a revolving fund from which the PCAs will be paid fortheir services up to 25% of the amount collected. The IRS is soliciting bids for the first phaseof the private debt collection initiative. It intends to award three contracts in February 2006and launch a limited collection program involving the three contractors the following June. All firms approved by the General Services Administration to undertake debt collection forfederal agencies under Federal Supply Schedule 520-4 are eligible to submit bids. If noproblems arise in the first phase of the initiative, the number of contractors could be expandedto 12 in January 2008. The proposal to allow the IRS to use PCAs has been controversial since it was firstunveiled. Critics contend that the use of PCAs would violate the well-established and widelyaccepted principle that the collection of taxes is an inherently governmental function, threatentaxpayer privacy, undermine the security of IRS jobs, and serve as an invitation to taxpayerabuse by giving private debt collectors a financial incentive to use aggressive tactics with thetaxpayers they contact. Supporters of the proposal retort that these concerns are largelyunfounded, and that the proposed use of PCAs plan offers several advantages over hiringadditional IRS staff to pursue the targeted individual tax debt. First, no appropriated fundswould be used to pay for the services rendered by the PCAs. Second, the private collectionagencies would augment and not replace the IRS's own collection staff. Finally, the use ofPCAs would enable the IRS to focus its enforcement resources on more legally challengingcases of tax evasion with potentially higher payoffs. Some Members of Congress remain opposed to IRS's private debt collection initiativeeven though it is just beginning to take shape. In the House debate over H.R. 3058 , Representatives Chris Van Hollen and Rob Simmons introduced an amendment( H.Amdt. 418 ) that would have prohibited the IRS from using any appropriatedfunds to enter into, implement, or manage contracts with PCAs in FY2006. The amendmentwas withdrawn after a congressional supporter of the initiative threatened to raise a point oforder against it. A similar amendment did not surface during the Senate's debate over itsversion of H.R. 3058. The IRS initiative raised the important question of whether PCAs can collect this debtmore efficiently and effectively than IRS enforcement staff without violating taxpayer rights. Congress may wish to focus on this question as it oversees the implementation of theinitiative. Proposed Cuts in Taxpayer Service. Although the Administration said one of the major aims of its FY2006 budget request for theIRS was to improve taxpayer service, it called for a net reduction in spending on this serviceof $38.5 million in FY2006, or 1.1% below the amount enacted for FY2005. In reality, theAdministration sought a gross cut of $134 million in the budget for taxpayer service, but itintended to use more than $95 million of that savings to cover expected increases in the costof labor, materials, postage, and rent. (24) The proposed net reduction came on top of a drop inspending for this purpose of $104 million in FY2005 relative to FY2004. Senior IRS officialscontended that the proposed cut in spending on taxpayer service was justified for two reasons. First, usage of IRS taxpayer assistance centers (TACs), the IRS TeleFile service, and the IRStoll-free telephone help line had declined in recent years as more and more taxpayers accessthe IRS website to obtain needed tax forms and filing instructions and file tax returnselectronically. (25) Second, the cost of assisting taxpayers and processing returns was much lower online than inperson or over the telephone. Some were concerned that further cutbacks in the budget for taxpayer service wouldreverse some of the advances in taxpayer service that had occurred since the passage ofRRA98. (26) Theseadvances included improved responses by IRS staff to taxpayer questions over toll-freetelephone lines and expanded access to a number of self-serve options over the telephone andthrough the IRS website aimed at simplifying the filing of tax returns and payment of taxes. Over the first eight months of 2005, senior IRS officials announced or took severalsteps intended to cut $134 million from spending on taxpayer service in FY2006. One suchstep was a plan announced in May 2005 to close 68 out of 400 taxpayer assistance centers(TACs) nationwide by the end of 2005. IRS Commissioner Everson estimated that theclosures could result in a cost savings of $50 million to $55 million in FY2006. (27) TACs providetaxpayers with a wide variety of walk-in services, including interpreting tax laws andregulations, preparing individual tax returns, resolving concerns about taxpayer accounts, andaccepting payments. Two other planned steps were the elimination of electronic tax lawassistance for domestic taxpayers and practitioners and a 20% reduction in the weekly hoursof operation for toll-free telephone assistance; the estimated cost savings from these stepstotaled $18 million in FY2006. (28) In August 2005, the IRS ended its TeleFile service, whichmade it possible for taxpayers to file tax returns using a telephone; the measure is expectedto save up to $5 million in FY2006. The proposed reduction in spending on taxpayer service in general and the proposedclosure of a number of TACs in particular drew sharp criticism from a variety of players inthe annual appropriations cycle for the IRS, including the IRS Oversight Board, the NationalTaxpayer Advocate, the National Treasury Employees Union, and certain Members ofCongress. A major concern of critics was how the loss of 68 TACs and a reduction intoll-free telephone assistance would affect compliance by those in greatest need of assistance,especially the elderly, low-income households, and immigrants. This concern so galvanizedcongressional critics that they inserted a provision (section 205) in the enacted version of H.R. 3058 that bars the IRS from using any of the funds appropriated for FY2006to reduce taxpayer services until TIGTA completes a study on how the proposed reductionswould affect taxpayer compliance. In addition, the FY2006 defense appropriations bill( H.R. 2863 ) passed by Congress in December 2005 contained a provision thatprohibits the IRS from reducing the hours of its toll-free telephone assistance "below thelevels in existence during the month October 2005." (29) Responding to congressional concerns, the IRS announced in late July that it wassuspending the decision to close 68 TACs by the end of 2005 until Congress had approveda budget for the agency in FY2006. (30) In early November, a senior IRS official disclosed thatthe agency would not close any TACs before March 1, 2006. (31) In addition, the IRSis reported to have abandoned its plan to reduce the daily hours of its toll-free telephoneassistance starting on January 23, 2006. (32) The Administration's proposed reduction in spending on taxpayer service in FY2006raised the issue of how the reduction would affect taxpayer compliance over time. Somelawmakers were concerned that the planned cuts in taxpayer service would lead to moreindividuals failing to fulfill their legal obligations under the tax code even if more moneywere spent on enforcement. Although senior IRS officials argued that compliance could onlyimprove by shifting funds from taxpayer service to enforcement, they provided no hardevidence to support this claim during congressional action on the Administration's budgetrequest for the IRS. One question lawmakers may wish to address as they oversee IRSoperations and its use of appropriated funds concerns what the proper balance between taxlaw enforcement and taxpayer service might be. Status and Future of the Business Systems ModernizationProgram. The Administration's budget request for the IRS in FY2006 alsowas intended to support the strategic goal of "modernizing the IRS through its people,processes, and technology." Critical to this effort, in the view of many, is the BSM program,which seeks to upgrade IRS's antiquated collection of computer systems through targetedinvestments in new information systems designed to handle with greater efficiency suchcrucial functions as financial management, the processing of tax returns, and the release ofrefunds. Congress first created an appropriations account for BSM in FY1998, and theprogram began the following year. Initially, it was envisioned as a 15-year venture whosetotal cost would not exceed $8 billion. Through FY2006, a total of $2.1 billion has beenappropriated for BSM. No appropriated funds may be spent until the House and SenateAppropriations Committees have approved an annual BSM expenditure plan submitted by theIRS. The annual appropriation for BSM has been declining since it peaked at $405.6 millionin FY2002: the amount enacted for FY2006, $199 million, is 2% below the amount enactedfor FY2005 ($203 million), which was 47.5% below the level of funding authorized forFY2004. The decline in funding for the program in recent fiscal years reflects considerabledoubt in Congress that IRS management is capable of taking the steps needed to improve theprogram's performance and rein in its cost. From the start, the BSM program has beenplagued by cost overruns and schedule delays for key projects. This doubt and relatedconcerns influenced congressional consideration of the Administration's FY2006 budgetrequest for the program. (33) Nonetheless, the BSM program is beginning to yield technological advances that couldyield significant benefits for taxpayers and the IRS. The advances should eventually enabletaxpayers to file and retrieve increasing volumes of information electronically and the IRS toreduce its backlog of collections cases and gain immediate access to financial informationneeded to enforce compliance with tax laws and regulations. Since 2004, the IRS hasdeployed the following information systems developed through the BSM: (1) the ModernizedE-File, which is intended to allow large and small firms and tax-exempt organizations to filetheir tax returns electronically; (2) E-Services, which allows most taxpayers and taxpractitioners to conduct business with the IRS electronically; (3) the Customer Account DataEngine, which will gradually replace the agency's outmoded computerized database oftaxpayer information and is currently used to process 1040EZ returns for single taxpayers withrefunds; and (4) the Integrated Financial System, which replaces key aspects of IRS's corefinancial systems and functions as its new internal accounting system. (34) Proposals to lower funding for the BSM program raise some interesting policy issues. Some analysts are concerned that continued reductions in the budget for BSM are bound tolessen IRS's chances of achieving its primary goals for the program and cause avoidabledelays in implementing certain planned technology improvements. (35) In addition, furtherreductions may adversely affect taxpayer service and IRS enforcement activities in the longrun. Raymond Wagner, the Chair of the IRS Oversight Board, stated in congressionaltestimony that the BSM program is the "key to improving customer service and enforcement,"and that the program should be expanded "not only to reduce costs and speed up deliverytime, but to avoid a catastrophic collapse of the IRS's archaic legacy computer systems. (36) 

Summary: The Treasury Department performs a host of critical functions as a federal agency. Foremostamong them are protecting the nation's financial system from a variety of financial crimes,administering the tax code and collecting tax revenue, managing and accounting for the public debt,administering the government's finances, and regulating and supervising financial institutions. This report examines the President's budget request for Treasury and the Internal RevenueService (IRS) in FY2006, some of the key policy issues it raised, and congressional action on therequest. It will not be updated again. For FY2006, the Bush Administration asked Congress to provide $11.648 billion inappropriated funds for Treasury, or 3.8% more than the amount enacted for FY2005. As usual, thevast share of the proposed budget was to go to the IRS, which would have received $10.679 billion. The remaining departmental offices and bureaus would have received the following amounts:departmental offices, $195 million; departmental systems and capital investments, $24 million;Office of Inspector General, $17 million; Inspector General for Tax Administration, $133 million;Air Transportation Stabilization program, $3 million; Community Development FinancialInstitutions Fund, $8 million; Treasury building and annex repair and restoration, $8 million;Financial Crimes Enforcement Network, $74 million; Financial Management service, $236 million;Alcohol and Tobacco Tax and Trade Bureau, $91 million; and the Bureau of the Public Debt, $177million. The Administration budget request for IRS operations ($10.679 billion) in FY2006 was 4.3%more than the amount enacted for FY2005. To better align the request with the IRS's currentfive-year strategic plan, the Administration sought to revise the agency's budget beginning inFY2006. Under its proposal, the number of accounts would be reduced from six to three: taxadministration and operations (TAO), business systems modernization (BSM), and administrationof the health insurance tax credit. For FY2006, the Administration asked that $10.460 billion bespent on TAO, or 4.6% more than was spent for this purpose in FY2005; $199 million on BSM, or2.3% less than the amount enacted for FY2005; and $20 million on administration of the health caretax credit, or 41.5% less than the amount enacted for the current fiscal year. Compared to theamounts enacted for FY2005, the Administration sought $500 million more for enforcement but $39million less for taxpayer service and $4 million less for BSM. The House and Senate approved somewhat differing versions of an FY2006 appropriationsbill ( H.R. 3058 ) that included Treasury and the IRS. As a result, the differences hadto be resolved in a conference committee. Under the conference agreement passed by the House andSenate on November 18, 2005, and signed by President Bush on November 30, Treasury is receiving$11.689 billion in funding (or about $40 million more than the amount requested by theAdministration); nearly 91% of that amount, or $10.671 billion, is set aside for the IRS.