[House Hearing, 105 Congress]
[From the U.S. Government Publishing Office]
RECOMMENDATIONS OF THE NATIONAL COMMISSION ON RESTRUCTURING THE IRS ON
EXECUTIVE BRANCH GOVERNANCE AND CONGRESSIONAL OVERSIGHT OF THE IRS
=======================================================================
HEARING
before the
COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTH CONGRESS
FIRST SESSION
__________
SEPTEMBER 16 AND 17, 1997
__________
Serial 105-81
__________
Printed for the use of the Committee on Ways and Means
U.S. GOVERNMENT PRINTING OFFICE
58-922 CC WASHINGTON : 1999
------------------------------------------------------------------------------
For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402
COMMITTEE ON WAYS AND MEANS
BILL ARCHER, Texas, Chairman
PHILIP M. CRANE, Illinois CHARLES B. RANGEL, New York
BILL THOMAS, California FORTNEY PETE STARK, California
E. CLAY SHAW, Jr., Florida ROBERT T. MATSUI, California
NANCY L. JOHNSON, Connecticut BARBARA B. KENNELLY, Connecticut
JIM BUNNING, Kentucky WILLIAM J. COYNE, Pennsylvania
AMO HOUGHTON, New York SANDER M. LEVIN, Michigan
WALLY HERGER, California BENJAMIN L. CARDIN, Maryland
JIM McCRERY, Louisiana JIM McDERMOTT, Washington
DAVE CAMP, Michigan GERALD D. KLECZKA, Wisconsin
JIM RAMSTAD, Minnesota JOHN LEWIS, Georgia
JIM NUSSLE, Iowa RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas MICHAEL R. McNULTY, New York
JENNIFER DUNN, Washington WILLIAM J. JEFFERSON, Louisiana
MAC COLLINS, Georgia JOHN S. TANNER, Tennessee
ROB PORTMAN, Ohio XAVIER BECERRA, California
PHILIP S. ENGLISH, Pennsylvania KAREN L. THURMAN, Florida
JOHN ENSIGN, Nevada
JON CHRISTENSEN, Nebraska
WES WATKINS, Oklahoma
J.D. HAYWORTH, Arizona
JERRY WELLER, Illinois
KENNY HULSHOF, Missouri
A.L. Singleton, Chief of Staff
Janice Mays, Minority Chief Counsel
Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public
hearing records of the Committee on Ways and Means are also published
in electronic form. The printed hearing record remains the official
version. Because electronic submissions are used to prepare both
printed and electronic versions of the hearing record, the process of
converting between various electronic formats may introduce
unintentional errors or omissions. Such occurrences are inherent in the
current publication process and should diminish as the process is
further refined.
C O N T E N T S
__________
Page
Advisory of September 9, 1997, announcing the hearing............ 2
WITNESSES
U.S. Department of the Treasury, Hon. Robert E. Rubin, Secretary. 71
______
Alexander, Hon. Donald C., Akin, Gump, Strauss, Hauer & Feld,
L.L.P.......................................................... 265
American Bar Association, Phillip L. Mann........................ 214
American Institute of Certified Public Accountants, Michael E.
Mares.......................................................... 230
Automatic Data Processing, Josh S. Weston........................ 110
Brand, Phil, KPMG Peat Marwick, LLP.............................. 288
Cardin, Hon. Benjamin L., a Representative in Congress from the
State of Maryland.............................................. 32
Cherecwich, Paul, Jr., Tax Executives Institute, Inc., and
Thiokol Corp................................................... 203
Cohen, Hon. Sheldon S., Morgan, Lewis & Bockius, LLP............. 271
Coyne, Hon. William J., a Representative in Congress from the
State of Pennsylvania.......................................... 61
Goldberg, Hon. Fred T., Jr., National Commission on Restructuring
the Internal Revenue Service................................... 94
Grassley, Hon. Charles, a U.S. Senator from the State of Iowa,
and National Commission on Restructuring the Internal Revenue
Service........................................................ 37
Hoyer, Hon. Steny H., a Representative in Congress from the State
of Maryland.................................................... 65
Joint Committee on Taxation, U.S. Congress, Kenneth J. Kies...... 177
Kerrey, Hon. J. Robert, a U.S. Senator from the State of
Nebraska, and National Commission on Restructuring the Internal
Revenue Service................................................ 27
Kettl, Donald F., Brookings Institution, and Robert M. La
Follette Institute of Public Affairs, University of Wisconsin-
Madison........................................................ 144
Kies, Kenneth J., Joint Committee on Taxation, U.S. Congress..... 177
Kinghorn, C. Morgan, Jr., Coopers and Lybrand.................... 282
Loengard, Richard O., Jr., New York State Bar Association........ 231
Mann, Phillip L., American Bar Association....................... 214
Mares, Michael E., American Institute of Certified Public
Accountants.................................................... 230
National Commission on Restructuring the Internal Revenue
Service:
Hon. Fred T. Goldberg, Jr.................................... 94
Hon. Charles Grassley........................................ 37
Hon. J. Robert Kerrey........................................ 27
Hon. Rob Portman............................................. 11
Josh S. Weston............................................... 110
James W. Wetzler............................................. 113
New York State Bar Association, Richard O. Loengard, Jr.......... 231
Portman, Hon. Rob, a Representative in Congress from the State of
Ohio, and National Commission on Restructuring the Internal
Revenue Service................................................ 11
Steuerle, C. Eugene, Urban Institute............................. 135
Stobaugh, Robert B., Graduate School of Business Administration,
Harvard University............................................. 154
Tax Executives Institute, Inc., Paul Cherecwich, Jr.............. 203
Thiokol Corp., Paul Cherecwich, Jr............................... 203
Weston, Josh S., National Commission on Restructuring the
Internal Revenue Service, and Automatic Data Processing........ 110
Wetzler, James W., National Commission on Restructuring the
Internal Revenue Service, and Deloitte & Touche, LLP........... 113
SUBMISSIONS FOR THE RECORD
Human Services Forum on Government Relations, Carmen Delgado
Votaw, statement............................................... 302
National Association for the Self-Employed, Bennie L. Thayer,
letter......................................................... 304
National Association of Enrolled Agents, Gaithersburg, MD, Joseph
F. Lane, statement............................................. 305
National Association of Manufacturers, statement................. 308
National Council of Nonprofit Associations, Ann Mitchell Sackey,
statement...................................................... 310
Senior Executives Association, Carol A. Bonosaro, and G. Jerry
Shaw, letter................................................... 313
RECOMMENDATIONS OF THE NATIONAL COMMISSION ON RESTRUCTURING THE IRS ON
EXECUTIVE BRANCH GOVERNANCE AND CONGRESSIONAL OVERSIGHT OF THE IRS
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TUESDAY, SEPTEMBER 16, 1997
House of Representatives,
Committee on Ways and Means,
Washington, DC.
The Committee met, pursuant to call, at 1:17 p.m., in room
1102, Longworth House Office Building, Hon. Bill Archer
(Chairman of the Committee) presiding.
[The advisory announcing the hearing follows:]
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Chairman Archer. The Chair would like for staff, guests and
Members to take their seats so we can begin.
Today is the first day of a 2-day hearing which will look
into how we restructure and improve the Internal Revenue
Service. We are pleased to have with us today Secretary Rubin,
Secretary of the Treasury; several members of the Restructuring
Commission and many other distinguished experts. The Chair
appreciates the attendance of all of our witnesses.
Before we begin, I would particularly thank Congressman Rob
Portman and Congressman Coyne, who served on the bipartisan
National Commission on Restructuring the Internal Revenue
Service. Their service on this Commission has brought us to
where we are today--the brink of House passage of the first
comprehensive reform of the IRS since 1952.
It is important to note that the Commission on which they
serve consisted of 9 Democrats and 8 Republicans yet its final
recommendations were endorsed by a vote of 12 to 5.
It is my intention to address this issue in that same
bipartisan spirit. The job of the IRS is complicated enough
without either party injecting politics into an IRS that must
be above and beyond political approach.
Similarly, as tempting as it may be, these forums should
not be used as an excuse to bash the IRS, nor should they be
used to shield the administration from its duty to manage the
IRS properly and without political interference. Instead, until
the great day comes when we have pulled the income tax out by
its roots and no longer need an IRS, this Committee has a
special obligation as stewards of the Tax Code to do what is
necessary so the IRS can implement and enforce the laws that we
pass.
That is why I am pleased that the Commission's
recommendations cut across party lines, and that is why any
legislation that we consider should be able to attract support
from Members of both parties.
In the House, Congressman Portman and Congressman Cardin
have introduced such a bill as have Senators Kerrey and
Grassley in the Senate. Tomorrow these hearings will also focus
on Congress' role in overseeing the IRS.
Both ends of Pennsylvania Avenue have to face their
responsibilities for fixing the IRS and I intend to explore
what Congress can do better.
I consider this matter a top priority before we finish our
session this year, and I intend to pass a bill in the House of
Representatives this year that will build a new IRS. While the
nation's financial sector--particularly the service sector--has
undergone sweeping change and experienced dramatic
modernization in the last decade, the IRS has not been reformed
in 40 years.
There is no reason the IRS cannot be run more efficiently,
more effectively, and treat taxpayers more considerately than
the current IRS.
[The opening statement follows:]
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Chairman Archer. I now yield to the distinguished Ranking
Member for any opening remarks, Mr. Rangel.
Mr. Rangel. Thank you my distinguished Chairman.
Let me join with you in making a plea to our Members that
whatever we do, we should try to join in making this a
bipartisan issue. The reason I would want to do that is because
so many people still have some degree of confidence in our
system, and that is why it is the most successful in the world,
because it is a volunteer system.
If we make a partisan battle out of this, it might cause a
lot of people just to walk away from the IRS, and instead of
just pulling it up by its roots, might find reasons and excuses
to not abide by the law and the regulations involved.
I want to compliment Mr. Portman and Mr. Cardin, because I
think that they are two Members of the Committee that are
working hard to avoid what could be a very explosive political
situation since the IRS is under a political attack. We all are
working together for the good of the nation to improve the IRS'
delivery of service.
The issue here, of course, involves how much confidence
should Americans place in a board of businesspeople responsible
for the conduct of the IRS, tax policy, and the hiring and
firing of IRS officials--business folks that would be
unaccountable to the Congress. But last week, in working with
Treasury, and Congressmen Bill Coyne, Bob Matsui, Steny Hoyer
and Henry Waxman, we introduced a bill, H.R. 2428, that goes a
long way in improving the conditions that we all find
unacceptable as it relates to the Internal Revenue Service.
Bill Coyne and Bob Matsui representing House Democrats and
the National Commission on Restructuring will have a lot to do
with input here.
Unlike the initial drafting of the Commission's bill, Mr.
Chairman, I do want you to know that you can depend on my
complete support in making this effort bipartisan. I do hope
that the Chairman's mark on this will have the consultation of
Democrats who feel as strongly as you for IRS reform but may
not share your views about pulling it up at its roots at this
point in time.
[The opening statement follows:]
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Mr. Rangel. So, I want to thank you for calling the hearing
and the cooperation that you have given to Members who are
working together. I promise my support toward that end.
Chairman Archer. I thank the gentleman for his comments and
I think that both of our statements should start the Committee
off to a good bipartisan beginning.
Members without objection will be able to insert their
written remarks in the record at this point.
[The opening statement of Mr. Ramstad follows:]
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Chairman Archer. Now we have our first panel. The Chair
will first recognize a Member of the Committee, the Cochairman
of the Restructuring Commission for any comments that he would
like to make to the Committee, Mr. Portman.
STATEMENT OF HON. ROB PORTMAN, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF OHIO; AND NATIONAL COMMISSION ON
RESTRUCTURING THE INTERNAL REVENUE SERVICE
Mr. Portman. I thank you, Mr. Chairman, and my colleagues
on the Committee for giving me the opportunity to testify
today; and special thanks to you, Mr. Chairman. You have
reiterated again today your making IRS restructuring a top
priority of this Committee, and particularly making H.R. 2292,
the IRS Restructuring Reform Act, your top personal priority.
In fact, I would say based on Mr. Rangel's comments,
notwithstanding some differences in approach that I am sure
will emerge this afternoon, I think it is safe to say that I
join every Member of this Committee in commending you for
undertaking this challenge to transform the Internal Revenue
Service and vastly improve its services to the American
taxpayer.
My focus here will be on the bill Ben Cardin and I
introduced and many of you have cosponsored. It implements the
recommendations of the National Commission on Restructuring the
IRS and includes the first comprehensive reforms of the IRS
since 1952.
I will briefly discuss the Commission's process and outline
our major proposals in the area of governance and oversight,
the subject of this hearing.
The 17-member IRS Restructuring Commission which I
cochaired with Senator Bob Kerrey was established by Congress
and included Senator Grassley and our colleague, Bill Coyne, as
well as a diverse group of professionals with real expertise in
IRS problem areas. Eight Commissioners were appointed by the
Republican congressional leadership, nine were chosen by the
Democratic congressional leadership and the Clinton
administration. The Commissioner of the IRS was a member ex
officio.
During its yearlong existence, the Commission conducted 12
days of public hearings, three townhall meetings around the
country, and hundreds and hundreds of hours with experts inside
and outside the IRS. After this extensive yearlong process, 12
of the 17 Commissioners, on a bipartisan basis, supported the
final recommendations.
Just last month, the one ex officio member of the
Commission--then-Commissioner Peggy Richardson, now private
citizen--said she too, had she had the opportunity, would have
supported the recommendations.
By taking an objective, nonpartisan, but tough-minded
approach, I believe the Commission came up with a realistic
balance and credible plan for achieving the goal of truly
transforming the IRS into a responsive, taxpayer friendly
service organization.
The problems at the IRS are well documented. The attempt to
computer modernization, including the $3 or $4 billion that was
misspent, has been nothing short of a disaster. Only half its
callers are getting through on the IRS help lines. The
organization is dominated with an enforcement mentality, even
though close to 90 percent of taxpayers comply voluntarily.
Most efforts to reform the IRS has focused on these and
many other specific problems--usually after the fact and in
response to a crisis. The Commission took a different approach.
We focused on the fundamental structural flaws, which if fixed,
we believe can solve the problems and sustain quality in
management and service over time.
Three fundamental flaws were identified. One, a lack of
expertise; two, a lack of continuity; and three, a lack of
accountability.
First, expertise. While the service revolution has swept
the private sector and other governmental agencies even, the
IRS has lagged behind. Why? Because the IRS and Treasury have
lacked people with expertise to guide a modernization effort,
to competently address the huge organizational challenges
involved with over 100,000 employees handling over 200 million
tax returns a year.
As you review competing oversight proposals, ask yourself
if you believe that the necessary expertise is there to really
ensure the tough questions get asked and the IRS turns itself
around.
Second, continuity. In our view, the IRS' core problems
will take 3 to 6 years to solve. They must retrain the work
force, build a new computer system and put in place new
measurement systems to ensure employees have more respectful
interactions with taxpayers. This will require sustained
leadership.
Historically, the leaders at IRS and Treasury have had very
short tenures of 2 to 3 years, not long enough to get the job
done.
Third, accountability. We have got to hold people's feet to
the fire. Our proposals ensure that someone is there to support
the Commissioner and the agency when they are doing a good job,
and to hold them accountable when they are not. The bottom line
is we have found an IRS that has been largely independent of
consistent, expert oversight.
The Commission's recommendation and our legislation address
each of these three fundamental flaws--and I want to remind the
Committee that even though the Oversight Board had drawn the
most attention because of Treasury's opposition, it is only
part of a much broader, comprehensive package, that taken
together will lead to a more accountable and responsive IRS.
Among other things, we consolidate congressional committee
oversight to ensure that IRS receives much clearer guidance
from the Congress. But let us go to the core of the Treasury's
concern--the IRS Oversight Board.
Its members are appointed and removable at will by the
President, confirmed by the Senate for a 5-year, staggered
term. They are special government employees while serving, and
thus subject to disclosure and conflict of interest rules, and
they will be barred from any involvement whatsoever in
individual tax cases, specific law enforcement activities,
procurement or tax policy.
The Board's functions are very clear--to approve the long-
range mission and annual, strategic and operational plans of
the IRS; to support and oversee IRS top management; and to
review and approve the IRS budget, and submit it to the
Secretary of the Treasury, who retains final authority.
The nine-member Board includes the Secretary, a
representative of IRS employees and seven individuals, who
collectively would bring needed expertise and information
technology, compliance, customer service, taxpayer needs and
management of a large service organization. Without such a
body, the structural flaws will not be addressed and the
problems will continue to fester.
I know current Secretary, Robert Rubin disagrees with the
need to establish a new oversight structure with real
authority, claiming that the decade's old vacuum can be filled
by Treasury. But neither the record or common sense support
this.
Let me be clear. This is not about the Clinton
administration, and certainly not about this Secretary of the
Treasury with whom I have great personal respect, and who has
probably in the past year focused more attention on the IRS and
our recommendations than any Secretary in history.
This is about a fundamental flaw in the system. Yes on
paper, Treasury cedes some authority over the IRS, which is 64
percent of Treasury's work force, and 70 percent of its budget.
But I truly believe--and much more importantly--former Treasury
Secretaries, Nicholas Brady and James Baker believe that this
structure should not be viewed as a threat to Treasury's turf,
but--and I quote from their letter yesterday--``As an effective
mechanism to assist the Secretary in IRS oversight.''
Again, I thank my colleagues for their attention and look
forward to working together with you to transform the IRS for
the taxpayer. They deserve it.
Thank you, Mr. Chairman.
[The prepared statement and attachments follow:]
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Chairman Archer. Thank you, Mr. Portman.
We are very pleased to have with us, also, today the
Cochairman of the Structuring Commission, Senator Robert Kerrey
of Nebraska.
Senator, we are delighted to have you and we would be
pleased to hear you testimony; and you may proceed.
STATEMENT OF HON. J. ROBERT KERREY, A U.S. SENATOR FROM THE
STATE OF NEBRASKA; AND NATIONAL COMMISSION ON RESTRUCTURING THE
INTERNAL REVENUE SERVICE
Senator Kerrey. Mr. Chairman, I would ask, consistent with
Senate practices--we talk longer--so I have a very long
statement and would ask that it be made a part of the record.
Chairman Archer. Without objection, your entire written
statement will be entered into the record, and you may
synopsize. [Laughter.]
Mr. Rangel. Reserving the right to object, Mr. Chairman,
but I will not object. I would just like to join you in
welcoming my dear friend and we look forward to your
contribution to this very sensitive problem.
Thank you.
Senator Kerrey. Thank you very much, Mr. Chairman.
Congressman Rangel, quite correctly, this is a very
sensitive subject. We began this effort as a consequence of
sitting on the Appropriations Committee--actually, Steny Hoyer
and I did--creating this Commission in the first place as a
result of GAO evaluation, after the GAO evaluation saying that
the status quo just was not working.
The Tax Systems Modernization money was being wasted,
customer dissatisfaction was high, added to--the approval
rating of the IRS is lower than the CIA. Measured by what
taxpayers are saying, change is essential and necessary.
We started off in a very bipartisan and bicameral fashion.
Congressman Portman and I have worked together. We have become
friends. We have acquired a capacity to trust and work with one
another, and I hope that--as Congressman Rangel said--this will
continue to be a bipartisan effort. I mean, there is no reason
for it not to be.
This is basically Congress taking action, Congress
evaluating, Congress putting pressure on the administration;
and indeed the administration response has been quite
encouraging. There have been many changes during the process of
our deliberations that have been constructive. We just have to
believe they need to go further than they are currently willing
to go.
To be clear, we heard from citizens, we heard from citizens
as taxpayers, we heard from citizens as professionals, we heard
from the employees of the Internal Revenue Service itself; and
this proposal has the full endorsement of the Treasury
employees union. We heard from private companies that are in
the business of providing services as well, taxpayer services
that in some ways are competitive with the IRS, we even heard
from other nations who have gone through the same sort of
problems that we have and have attempted to make, of course,
corrections.
We found across the board, very poor customer satisfaction,
a waste of money and technology, a gap--breathtaking gap--
between what the IRS can do and what the private sector can do.
The Speaker in providing us our guidance did something that I
thought to be quite demonstrative of the problem, which was to
hold up an ATM card and suggest that this is what the private
sector has been doing for the last half a dozen years, trying
to serve customers, trying to give customers better service,
and we are still in the process of thinking about using that
kind of technology; and as a result, the customers are not
happy with what they are able to do.
Tremendous complexity problems--we have heard up to $200
billion of cost attributable to complexity of the Code. We
heard convincing evidence that most Americans--well over 80
percent of Americans voluntarily comply so the problem is not
one of insufficient resources for law enforcement. We heard an
equal apportioning of blame between the executive branch and
the legislative branch--both in terms of complexity in
providing resources and inconsistent oversight. I mean, we
heard fairly balanced reports from taxpayers and from providers
who are out there trying to figure out how to make this thing
work.
We have concluded that there is a need for an independent
board that will be more accountable to the people. We have
compromised with Treasury, leaving law enforcement and tax
policy inside of Treasury. That compromise was not sufficient
to get their support, but we are unwilling to go further.
We believe that you need an independent and accountable
board, and believe that the criticism of it, being corporate
individuals, is falsely placed.
Most people in the current administration in positions of
responsibility who came from corporations or came from
businesses should not be disqualified because you do--and
indeed the Board that we recommend has not only the Treasury
Secretary on it, but the Treasury employee union head, which I
believe is important because there will be tough personnel
changes that have to be made, and I hope that that
recommendation is allowed.
But the President can appoint anybody he wants that is
confirmed by the Senate, and the President has the authority to
remove for cause. We believe that extending the life of the
Commissioner was important as well. We believe we need to shift
more power to the taxpayer, and we believe we needed to make
some recommendations with regard to complexity which we both
did in our report and with the legislation itself.
This is a change, Mr. Chairman and Members of this
Committee, that I think is long overdue. It is quite sensitive.
It is quite difficult. Our goal should be to increase the
customer satisfaction. Increase the number of taxpayers who
say, ``I still hate paying taxes, but it has gotten a whole
heck of a lot easier.''
Currently, I do not believe that the current structure of
the IRS leads me to conclude that that customer satisfaction is
going to go up to a point where I believe it is necessary in
order to restore citizen confidence in their government.
So, again, I have gone beyond the red light as I promised I
would not do. I appreciate the opportunity to testify; but I
wanted to reinforce what occurred in this process. It has been
very bipartisan, right from the get-go. Congressman Portman and
I; Senator Grassley and I; Congressman Cardin and I have
attempted to look at this problem in an objective way and I
hope that is the way it will continue to proceed.
[The prepared statement follows:]
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Chairman Archer. Senator, you actually ended quite
precisely at the moment that the red light came on. That is a
great compliment to you.
Another member of the Commission is also a respected Member
of the Committee, the gentleman from Maryland, Mr. Cardin. We
will be pleased to have your testimony.
STATEMENT OF HON. BENJAMIN L. CARDIN, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF MARYLAND
Mr. Cardin. Thank you, Mr. Chairman. Although my statement
is not as long as Senator Kerrey's, I would ask that it be made
a part of the record.
Chairman Archer. Without objection, it is ordered.
Mr. Cardin. Mr. Chairman, I wanted to concur in your
comments and observations concerning the public service that
Congressman Portman, Senator Kerrey, Senator Grassley and
Congressman Coyne displayed in their service on the National
Commission. All four served with distinction and we all should
be very proud of their record.
I would also like to compliment Congressman Hoyer for his
longstanding interest in the Internal Revenue Service and his
steadfast support of the appropriation process for a more
accountable Internal Revenue Service.
Secretary Rubin has been perhaps the most active Secretary
of the Treasury in the interest of the IRS. For too many years
the IRS has been an orphan agency. Secretary Rubin has elevated
the interest of the agency and I applaud him for those efforts.
He has made significant change.
Secretary Rubin also understands the need for legislation
and has filed legislation before the Congress. We may differ as
to the form of that legislation, but it is important that
Congress pass legislation reforming the IRS.
We all share the common goal of a more efficient, better
managed, more taxpayer friendly IRS. Mr. Chairman, I agree with
you that that must be done in a bipartisan way. I am pleased to
join Congressman Portman as a cosponsor of the legislation. I
think we will demonstrate that we will work and need to work in
a bipartisan manner.
There are many important points or sections in the
legislation before you. There are sections that deal with
simplification, there are sections that deal with Taxpayer Bill
of Rights, with electronic filing, with congressional
oversight; but I would like to spend a few minutes dealing with
the Board, since that has had by far the most discussion and is
the most controversial section in the bill.
It is clear that the legal authority of the agency rests
with the public official. The Board will provide oversight,
expertise, guidance and advice to the Commissioner. The
legislation is clear that it does not give to the Board
authority that should rest with public officials. The bill
specifically denies the Board any authority with respect to
development and formulation of Federal tax policy and specific
law enforcement activities of the IRS, including compliance
activities. That remains with our public officials.
The Board has no authority with respect to the day-to-day
operational plans of the IRS, which remains properly within the
authority of the Commissioner. The Board has no authority with
respect to the appointment of the Chief Counsel of the IRS.
The Board has a vitally important role to play in helping
the Commissioner, in helping the agency develop its long-range
plans, and developing a game plan in order to be able to
accomplish those objectives.
Under H.R. 2292, the Secretary of the Treasury would serve
on the Board. The Board is appointed and removable by the
President of the United States. The Board will act as an
advocate for the IRS. There are many important roles it will
play. Perhaps one of the most important is to have an advocate
here in Congress for the needs of the IRS, to help us identify
in a more objective way the tools that the IRS needs in order
to be able to achieve its objectives; and yes, the IRS needs
evaluation and accountability, and that is also built into the
Board.
I think the Board can be strengthened if the appointment of
the Commissioner remains with the President. The need for this
legislation is clear. How the IRS interacts with our
constituents or our taxpayers is well documented--that it needs
to be improved. Its communication with our taxpayers needs to
be clear, courteous, and the information it supplies must be
correct.
In too many cases, that is not the case today. The IRS must
also be able to resolve problems of our taxpayers quickly. That
in too many cases, again, is not the case today; and it must be
more efficient in its collection of government revenues.
The legislation that you have before you today will move us
to achieving those goals and I hope that we will be able to
move a bill in a bipartisan manner quickly through the
Committee.
Thank you, Mr. Chairman.
[The prepared statement follows:]
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Chairman Archer. Thank you, Mr. Cardin.
We also have a respected Member of the Senate, a member of
the Restructuring Commission with us today, Senator Grassley,
Senator from Ohio. We are pleased to have you and--Iowa.
Senator Grassley. We will take it.
Chairman Archer. What did you say? You will take it?
[Laughter.]
Senator from Iowa.
Mr. Rangel. Reserving the right to object, I will not
object.
Chairman Archer. The Chair has not asked for unanimous
consent. [Laughter.]
Mr. Rangel. I just ask the Chairman to yield.
Chairman Archer. I will be happy to yield.
Mr. Rangel. I just want you to know that if you have any
special concerns about corn or anything like that, I want you
to feel free----
[Laughter.]
Senator Grassley. We would--Charlie, I know that people do
not know the background of your statement, but I will be seeing
you in the next 2 weeks on the subject of ethanol. [Laughter.]
Chairman Archer. Well, the Chair was hopeful that in as
much as we already have a sensitive and delicate issue before
us that there not be any other potentially controversial issues
that are injected----
[Laughter.]
Chairman Archer [continuing]. Into these discussions today.
But we are pleased to have you with us, Senator Grassley,
and we will be pleased to have your testimony.
If you have got a long written statement, without
objection, it can be inserted into the record and you can
verbally synopsize.
Senator Grassley. OK.
STATEMENT OF HON. CHARLES GRASSLEY, U.S. SENATOR FROM THE STATE
OF IOWA; AND NATIONAL COMMISSION ON RESTRUCTURING THE INTERNAL
REVENUE SERVICE
Senator Grassley. Mr. Chairman, Members of the Committee, I
thank you very much for the invitation to be here today and
particularly to be here with my House and Senate cosponsors of
this very important legislation.
When it comes to the subject of our work over the last year
that is before this Committee for today on IRS governance and
management, people divide their remarks into two areas.
The first area is the matter of the new Management Board.
The second area is a kind of group into all other issues. We
need to be careful to not miss some very important points among
these other issues because we are focusing on the ever-
important Board.
The matter of the Board is actually a simple issue. Is it
going to be a real board with independence, responsibility and
having teeth and power? Or is it going to be just another
reshuffling of the deck chairs down at the U.S. Treasury?
I succinctly summarized the arguments 2 months ago before
the Subcommittee on IRS Oversight by saying--and I would like
to quote myself. ``Treasury officials who 2 years ago could not
find the IRS if they were standing at the corner of Eleventh
and Constitution are suddenly in fits about losing some control
over a part of their budget and bureaucracy.''
The American people deserve better from the executive
branch than just a reshuffling of the chairs on the deck of the
Titanic. We are presenting real options for real change in our
report in our legislation.
This brings me to an important issue that has been lost
among all the other issues. That is that the silence of the
President of the United States and his constitutional
responsibility over administration--and particularly on this
subject of the IRS--the Constitution says that the Congress
makes the laws and the President enforces the laws.
The IRS, of course, is a law enforcement, executive branch
agency. So where is the Chief Executive regarding his own
agency; and does he intend to enter into the reform debate? So
far, we have not heard from the President.
This should not, of course, be taken as partisan criticism,
because most of the problems with the IRS predate and are still
present during the Clinton presidency. He can be so outspoken
on some other pieces of legislation; and so why has not he
personally said something about the IRS?
On another subject, the personal flexibility section of the
bill, I want to say that this is very important, because when
this restructuring goes through and we have new
administration--new people and a new chain of command within
the IRS--we must give the new IRS Commissioner the statutory
ability to hire his or her own team of senior managers.
The IRS has a pyramidal structure. Every few years, we
replace the Commissioner at the top, but the next higher block
of persons seem to persist and persist and persist. When
private-sector executives poorly manage a private-sector
company, they are taken over by a new chief executive officer.
That chief executive officer usually culls out the remaining
failed management team. We can not do that at the IRS because
of the executive service laws.
If a new, business-type IRS Commissioner is to succeed,
that person will need to retool, therefore, he or she will need
to bring in his or her own people. So do not overlook that very
important provision of our legislation.
On the matter of the next Commissioner, first it is
encouraging to hear that the Commissioner nominee, Mr. Rosati,
is not a lawyer. He is supposed to know something about leading
a large and diverse organization. That is encouraging. Second,
if he had to commit to defending the status quo at the IRS in
exchange for his nomination, then he may have a tough row to
hoe in the Senate. However, his nomination could go smoother if
the President would get on record about his personal plans to
lead at the IRS.
End of my remarks.
Thank you.
[The prepared statement follows:]
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Chairman Archer. Senator Grassley, thank you. The Chair
compliments each of you for some very cogent input to the
Committee.
Mr. Portman, there seems to be a lot of common ground
between the bill that you and Congressman Cardin had
cosponsored and the Treasury's recommendations. Could you
highlight for the Committee any significant differences?
Mr. Portman. I think that one of the major differences is
that the legislation we introduced is not quite as
comprehensive. Senator Kerrey earlier said that the Treasury
Department's bill does not go as far, and that is true. But
also, some of the taxpayer rights provisions, and personnel
flexibilities we might have to talk about. I do not know if
there is any opposition to those; but there are just things
that need to be added to the mix in order to compare the two.
The major difference, though, in terms of the subjects that
each address would be this notion of the Oversight Board. The
Treasury proposal is to have a Board composed of really
midlevel bureaucrats and political appointees that would
oversee the IRS, and that does not meet any of the criteria
that I think the Treasury Department and we agree on, which is,
you have got to have vastly increased expertise, you have got
to have this continuity we talked about and the accountability.
In terms of expertise, those individuals--the political
appointees--do not bring the kind of information technology,
customer service expertise we are looking for. They just do not
have it.
In terms of continuity, the average length of service of
the people identified on that Board, Mr. Chairman is less than
2 years. So we know you are not going to have the continuity.
Finally, in terms of accountability, I am not sure it is
the kind of accountability we want. In 1952, the last time we
addressed this issue, we specifically did so to take politics
out of the IRS, and to put political appointees--including
members of the executive office of the President--into the IRS
to help run the IRS, would be a grave error. I think it not
only does not solve the problems, but it injects a whole other
problem into the IRS we want to stay away from.
So, that is the major difference I see between the two
approaches. Otherwise there are a lot of similarities; and I
think, again, we share the same goal.
Other Members may want to comment on that.
Chairman Archer. Does any other Member want to comment?
Senator Kerrey. Mr. Chairman and Members of the Committee,
to elaborate. First of all, we began--I began with the belief
that the IRS should be completely independent.
In an effort to gain the administration's support, moved in
their direction, leaving significant responsibilities in
Treasury--tax policy, tax enforcement--inside of Treasury; and
moving the operational side, with the Secretary of Treasury, on
this particular Board.
So, we have moved in their direction, but not enough to get
their support. Their recommendation is significantly different.
As Congressman Portman said, they are proposing to create two
advisory boards. The first one has got over a dozen political
appointees to the administration. The second, 14 advisors with
no real responsibility.
Now, in an effort to accommodate in a good-faith fashion, I
did consider these proposals; but as I said, I do not believe
it gets us to a point--either in terms of independence or in
terms of expertise that is needed in order to give me a level
of confidence that I can go home and say, ``If this bill is
passed, if these changes are made, 10 years from now, your
satisfaction with the IRS is going to be higher, the gap
between the private sector and what the IRS can do is going to
close.'' I just do not think that is going to happen with their
recommendation.
As you compare the two proposals, to have a Board over the
IRS and new management, you have got to remember that the key
reason for doing so is to have people with the proper expertise
involved in solving their problems.
If you look at Treasury's proposal, they have got the same
group of lawyers and economists trying to oversee this big
agency in need of operational and technological restructuring.
I just think the question you have got to ask is, ``Are these
the right people to do the job?''
Congressman Portman has talked about turnover. There is
significant turnover at the IRS. It has been a problem at the
top. If you look at--again, if you look at both the political
problems that could be involved, the politicizing of the IRS as
well as the turnover problem, I just do not believe--and again,
a good-faith effort to evaluate the Treasury proposal, that
they get to a point where you can actually go home and say,
``You have got a Board there with both the power and the
expertise to bring the kind of decisionmaking necessary to
improve the customer satisfaction''--those customers out there
that are trying to comply with the IRS policies.
Chairman Archer. Is it fair to say that the Treasury's
proposal would maintain management within the Treasury with an
outside advisory board that really would have no power other
than to recommend? Whereas, your proposal, your Commission's
restructuring proposal would give more quasi-independent
management to an independent board?
Senator Kerrey. Yes. That is an accurate way of saying,
Congress still has all the oversight that we currently have.
The executive branch still has the power to remove.
It is not as if it is the Postal Service, for example,
which is one of the models that we looked at. The Postal
Service is very difficult for the Congress to get at, very
difficult for the President to get at. We keep significant
accountability and responsibility vested both with the Congress
and with the President in our proposed structure.
But there is, I think, a significant difference between our
proposal and what the Treasury is proposing to do, in terms
both of accountability and of competency to be able to make the
kinds of decisions that are necessary, as I said, to close the
gap between where we are today and where we would like to be in
terms of measured consumer satisfaction.
Mr. Chairman, I want to underscore as well, Treasury has
done a lot of good things. They brought in a Chief Information
Officer about half a year after we started our effort, they
made some changes by creating a management board. As Senator
Grassley said, they have now for the first time in several
years looked at nominating or recommending for the IRS
Commissioner somebody with real management expertise. These are
all good things.
So I think we need, in trying to get a piece of legislation
enacted with the President's signature, to acknowledge what
they have done. I just think that the recommendation that they
made does not get us as far as is necessary if we are going to,
again, be able to say to citizens that, ``Ten years from now
you are going to like the IRS an awful lot better than you do
today.''
Chairman Archer. There are many, many questions to be
asked, and I am only going to ask one last short one and then
turn to my colleague, the gentleman from New York for any
questions.
The Treasury has said a number of times that your plan
would simply turn the IRS over to part-time chief executive
officers. Is that true?
Senator Kerrey. No, it is absolutely not true. It is no
more true that it--the Board itself is composed of--we tried to
structure the Board so that it is composed of people who have
the expertise to make decisions.
As I said, we for the reason of acknowledging that there
are going to be very difficult personnel decisions to be made--
and we did not do it for political reasons, putting the head of
Treasury employees union on there. It was done. As I say, most
of the Republicans and Democrats on this Committee feel this is
one that could become politicized.
We did it because this is one of the recommendations that
the Australian ministers that went through a very similar kind
of restructuring suggested. Because a lot of difficult
personnel decisions are going to have to be made. Better to
have the Treasury employee union inside making those kind of
decisions than outside objecting to them.
As I said, the Secretary of the Treasury is on there. We
tried to structure this thing so we would have the expertise on
there. If the objection is full versus part time, I am
perfectly willing to acknowledge that maybe they all ought to
be full time.
We did not believe that was necessary, but we should not
disqualify, it seems to me, from serving your country people
from corporate life or private-sector life who are only needed
for part-time service by implying that somehow they are not
going to be able to operate without a conflict of interest.
We have lots of good and able people who come into public
service, who serve on all kinds of commissions and serve part
time; and I do not think it serves the interest of advancing
the cause of this nation to suggest that somehow they are going
to be conflicted in the decisions they are going to be making.
Chairman Archer. Thank you.
Mr. Rangel.
Mr. Rangel. Senator, I think the last question that the
Chairman asked is where the debate is going to be. Every one is
in accord that in order for the IRS to have any credibility, it
has to improve its accountability and to insure that taxpayers
have confidence in the system.
The question is whether or not executive types from the
private sector, with all good intentions, can come in once a
month--and even though you say that they will not be able to
set policy, they will be able to hire and fire the
Commissioner.
It just seems to me that what this Congress is all about is
that we have the diversity of representing all kinds of people.
Your Board seems to represent the executive type. I am not
saying it is a conflict of interest, but you think based on
your experiences. If we are talking about millions of taxpayers
having a handful of people who have no accountability to the
Congress, except being able to confirm them, I just do not know
what assurances I will have.
Conflict of interest does not mean that someone intends to
break the law. It means they can not help themselves in
thinking the way they do. In this bill, you allow the President
to select the Chief Counsel to the Commissioner that is
appointed by the Board. It seems like that is a conflict of
interest between the President and your governing board.
The whole idea that private-sector people could be involved
in law enforcement by having a Commissioner that has to be
involved in all of these things frightens a lot of us. How we
handle this, I would think, is for those people who are trying
to work toward getting a bipartisan bill, if they would
concentrate on the agreement that has already been made by
Treasury, even to the point of trying to strengthen it.
I think when we get to this one point, as to whom are these
people accountable, and what confidence will the American
taxpayer have in having this person in charge rather than the
Secretary of the Treasury. I know that the Commission studied
this and they probably came out with a whole lot of business
decision.
But what we have to do, as I said earlier, is to make
certain whatever we do, that the American people have
confidence in what we have done, and there are very, very
strong feelings--and I do not think it is partisan, it is just
different feelings as to who directs the tax collection for the
people of the United States of America and who sets the rules,
as to what the policy is, as to who gets indicted, who does not
get indicted, what group of people should we concentrate on,
where the emphasis should be, and what is more effective.
You tell me who is calling the shots and what a guy like
Charlie Rangel has to do in talking about it. But if you take
this just because they are good and decent people and we should
trust them because they are experts in management, you are
implying that in all of the U.S. Government, we just do not
have the people who have these type of skills to make our IRS
more effective.
Mr. Portman and Mr. Cardin still do not have any accord
here on that issue. So I could agree with all of you and we
could walk away. But until that issue is resolved--and that is
the button that causes the problems that may appear to be
political; but, I am certain the U.S. Chamber of Commerce would
approve of what you are doing, but I am not sure that the
taxpayer-rights people would approve of what you are doing as
it relates to this private-sector board.
Senator Kerrey. Congressman, I am sure you have made
proposals in the past, and then you have heard it described by
somebody else and you say, ``My gosh, are they describing the
same thing that I wrote and put out?
Mr. Rangel. Where was I wrong?
Senator Kerrey. Let me go down. Nowhere in this bill is the
word chief executive officer mentioned.
Mr. Rangel. Oh, I know that.
Senator Kerrey. Congressman, I mean, let me finish.
Mr. Rangel. You described who the people would be and the
head honcho will not be coming----
Senator Kerrey. No, sir. No, sir, it is not. The critics of
the bill have used the word chief executive officer. They have
implied that----
Mr. Rangel. Why not describe the pool of people who will be
eligible to be appointed?
Senator Kerrey. We put the head of the Treasury employees
union on. You could certainly assert there that that is not an
American corporate leader. Yes?
Mr. Rangel. Well, I would----
Senator Kerrey. That is one out of nine. We certainly
assert that the Treasury Secretary is not.
Mr. Rangel. Senator, if you have already written him in, I
would like to believe that he would support it. I mean, he is
not selected. You have written him in. If you write me in, I
will be with the bill, too. [Laughter.]
Senator Kerrey. Congressman, what I am trying to do, with
great respect to your legislative ability and great respect for
you personally is just to suggest that we have to debate the
facts of the bill.
Nowhere in this bill does it say, ``chief executive
officer.'' If you want to talk--I am willing----
Mr. Rangel. Strike out the union person and just describe
for me, Senator, what would be the attributes----
Senator Kerrey. Look at the bill language. The bill says
that we want some one with management of large service
organizations, somebody with experience. I mean, that could be
a nonprofit, somebody with experience in customer service,
somebody with experience of compliance, somebody with
experience in information technology, somebody with experience
in organizational development, somebody with experience in
dealing with needs and concerns of taxpayers.
In other words, we are dealing--what we were trying to do
was write in general requirements so as not to tie the hands of
the President in making appointments, but still coming up with
a board that has expertise.
I am just saying that what critics have done is falsely
describe this proposal as being one that suggests they all have
to be chief executive officers. Nowhere in the bill does it
say, ``chief executive officer.''
So, I am willing to argue, I am willing to debate, I am
willing to negotiate with anybody that wants to make specific
changes in recommendations for changes in this bill. But when
they start off by saying, ``I want to have chief executive
officers take over the IRS,'' or some have gone on to say that
``chief executive officers will be setting tax policy,'' the
language specifically says that this Board cannot do tax
policy, it cannot do law enforcement, it cannot have access to
tax return information--those things are specifically
prohibited in the bill.
So, I am willing to negotiate in good faith with anybody
who has got an objection to the specific language; but, if they
misrepresent what is in the bill, it is difficult to reach----
Mr. Rangel. Let me withdraw the term, ``chief executive
officer'' Senator, and just describe it as a private-sector
person. Then, maybe at another time we can discuss the debate.
But the title chief executive officer does not bother me nearly
as much as it does you. It is someone that I do not believe
that we have accountability from, meeting once a month, to do
the things that are stated in the bill.
Mr. Portman. Charlie, you are going to have to go a little
bit broader than that because it just says, ``From private
life.'' If you look at the criteria, it would not preclude
somebody, let us say, from a state taxing authority, somebody
who happened to be working for a university, somebody who was
with a taxpayer rights group, somebody from a think tank,
somebody who was retired and maybe at one time was in the
business community.
I actually have a list of two seven-person slates. I have
not talked to the people about it, they are just people who
have the criteria we are talking about. Not one is a chief
executive officer. I am going to present that to Mr. Rubin
later today for his consideration.
But it is not even as narrow as you have now described it.
It has to be from the private sector. You do need these skills
sets, though. If you do not bring these skill sets into the
IRS, we are not going to solve the problem.
Mr. Crane [presiding]. I would simply remind our colleagues
here that the light applies to us as well as to our witnesses.
[Laughter.]
I am trying to keep your interrogations within the
timeframe of 5 minutes.
Now in a written statement submitted for the record, the
National Association of Enrolled Agents and the National
Association for the Self-Employed strongly endorsed the
Oversight Board concept, but suggested that the Board should
include representatives from both the small business sector and
tax practitioner communities.
I would like to throw it open to the panel to get your
insights on those proposals.
Mr. Cardin. The Board is not configured so that every
interest is going to be represented on the Board. It is
configured to bring to the IRS the expertise it needs in
developing its long-range strategy and to evaluate its
performance. It is also a small board. We would like to keep it
that way so it can do its work efficiently.
So I appreciate the concerns that different groups would
like to see, make sure that there is adequate representation on
board, but we would encourage keeping the Board at its current
size, and that the talents that are needed on this Board are
more functional talents than representing one of the interests
that might be dealing with the IRS.
Mr. Crane. Any others want to comment on that?
One of the ones in that proposal that struck me as
significant was the tax practitioner communities. You do not
think that is a constituency that could serve a very good
purpose?
Mr. Cardin. Well, I think the IRS needs to be responsive to
all of the entities that it interacts with, the most important
being the taxpayer himself or herself. But to start to say that
we are going to give a seat on this Board to one interest that
happens to deal with the IRS, I think would be a mistake
Mr. Portman.
Phil, could I follow up on that?
I agree with what Ben Cardin has said. I think it would be
a real mistake for us to reserve certain seats on the Board for
certain interests, whether they are tax practitioners, small
business or other.
We avoided that temptation here by setting out these skill
sets, and then giving the President the ability--and
incidentally, this President would choose all seven of these
members. Because then the staggered terms would begin. But give
the President the ability to find the people who meet these
criteria.
With regard to your specific question on tax practitioners,
we have got to remember what the challenge here is. It really
is not so much something that a tax lawyer or even an enrolled
agent would have expertise in, although that is helpful; and
you do want to hear from those people. We do set up means by
which those people can communicate their concerns through
advisory committees.
But it really is, making the train run on time; the phones
work, the computers work, providing people with the status of
their account. Again, this information technology and service
revolution that has swept the private sector that the IRS has
been left behind on. That is where we really need the
expertise, and that is why we spelled out these particular
skill sets.
It does say as one of these skill sets, ``The needs and
concerns of the taxpayer,'' and there you might want to have a
representative either from the practitioner community or the
taxpayer rights community.
Mr. Crane. Well, the light has not gone on, but I know
Charlie ate into my time significantly; so I now will yield to
Mr. Thomas. [Laughter.]
Mr. Thomas. I thank the Chairman for yielding.
First of all I want to thank all of you. Senator, I do
not--Senator Kerrey, specifically, but Senator Grassley, you
have been involved as well. I do not know how you folks get
yourselves into this. You have been on other commissions. This
one, I have a hunch, is going to be more successful than some
of the others.
In fact, if you look at the administration's proposed
legislation, you have already won, in terms of their
willingness now to make a fairly fundamental change.
I want to underscore what everyone else will say, or if
they do not say it explicitly, they certainly mean it. This is
certainly not an attack on this administration. The fundamental
problems of the IRS are there regardless of who the President
is and what the President's party affiliation is. It has gone
on for a long time. The problem is truly bipartisan and what we
are looking for is a bipartisan solution.
I guess the crux for me, since in so many ways, the
administration's proposal now duplicates the proposals of the
Commission, is my understanding that there was a clear two-way
line of communication and what you folks developed as good
policy they picked up in their bill--and there is nothing wrong
with that.
But my question is, is there enough change in the
administration proposal, and will those changes, once
instituted, last? That is where I think the Commission proposal
that you are advocating has a better chance.
Just as an aside--the Secretary is not here yet, but when
he arrives and delivers his testimony, on page 3 of his
testimony he indicates that they have a nominee for a
Commissioner. In his testimony he chooses to describe the
nominee this way, and I quote: ``Our nominee for Commissioner--
a chief executive officer, or CEO of a large private-sector
organization, with extensive experience in systems
modernization and other technology issues--is a symbol of our
commitment to continuing the process of change.''
So I guess they are looking for a Commissioner that fits
the criticisms of the Board that has been indicated, but quite
honestly, all of us agree we are looking for professional
people, not necessarily a chief executive officer.
One of the quotes of the Secretary that concerns me quite a
bit appeared in the New York Times in which the Secretary said,
``I do not think that in this debate about governance in the
IRS there are''--``I do think that in this debate about
governance in the IRS there are others who have other
agendas,'' Mr. Rubin said, without naming anyone. ``I think
clearly there is a desire on the part of some to undermine our
progressive taxation system and replace it with a different
system of taxation, and that one approach to trying to do that
is to attack the Internal Revenue Service,'' he said.
I think attacking the Internal Revenue Service is too easy.
That is not hard to do. The question is, what do you offer to
fix it? It seems to me that if someone wanted to undermine the
current system, you would be pushing for the status quo, not a
fundamental reform such as this.
So I want to, once again, visit what I think will be the
key debating point. That is, if we are going to try to fix the
IRS through the Commission's proposal or through the
administration's proposal, which one fixes it more
fundamentally and more permanently?
The key to me is looking at the package as a whole, not
just the debate about the Board and its independence in
appointing the Commissioner--not just the kind of Commissioner
for a fixed, 5-year term; but also the ability to utilize the
new structure for employees--both in payment and reward that
you have initiated.
So when we look at the criticism, the first thing I would
ask my colleagues to do is to read the legislation and not
listen to the representations of the legislation, from a
permanent and a fundamental point of view.
Could you check off the one, two or three points--once
again, because I think repetition on this has to be critical.
What is it about the Commission's proposal that more
fundamentally and more permanently fixes the IRS?
Senator Kerrey. Well, first of all, I need to beg the
Committee's indulgence and apologies. I have to go to another
presentation. So, after I answer briefly, I have got to take my
leave. Again, I appreciate the chance to testify and look
forward to working with all Members as we try to enact a piece
of legislation.
I do think, Congressman, when you get right to it--I mean--
the question is, which one more closely permanently fixes the
problem? I have got to say I would even go further than we have
gone with independence.
When I started off--and actually ended--believing that the
IRS should be significantly independent. Congress still needs
oversight. I do not want it as independent as the Postal
Service. I still want it to have significant accountability.
Indeed, one of the problems we have right now with the IRS is
that it is not terribly accountable to us.
I mean, all of us know, if you have a citizen problem--a
citizen has a problem with the IRS, it is difficult to
intervene, and it is difficult to approach and try to get
satisfaction without being accused yourself of doing something
that is going to personally benefit a friend or a constituent.
The independence actually provides the taxpayer with
significantly more accountability and freedom. Secretary Rubin
is talking about people with another agenda--it is true, by the
way, that having an independent Commissioner is going to result
in times in the Commissioner saying, ``You know, Mr. President,
that is a terrific proposal you made on taxes, but here is what
it is going to cost the taxpayers to comply.''
If it costs $200 billion or $100 billion for taxpayers to
comply--we are all talking about the need for simplification--
very often our proposal is the very proposal that makes it more
complicated. This Commissioner will have the same kind of
independence that we now have with the Social Security
Administration. That administrator now should come to Congress
and say, ``Here is the problem. Here is what is going to happen
if we do not take action,'' regardless of whether or not it is
going to embarrass the President or embarrass Members of
Congress.
It is that kind of independence that provides much more
accountability. We tried to provide a balance, in short. I
think the administration's proposal does not come close to the
kind of independence necessary to achieve the necessary
accountability with the customer--with the taxpayer.
That really is the goal. That is the thing that all of us
need to keep in mind here. How do we get that taxpayer to say,
``This is better. It has gotten easier to comply.'' Eighty-five
percent of the people out there voluntarily comply. They do not
need cops. They do not need enforcement. They just need to know
the information. It is the largest bill that most taxpayers
have, the largest bill they pay. It is vital that they know
what that number is so they can do financial planning.
If half of their calls do not get answered and 25 percent
of those that are answered are wrong, they cannot rely on the
agency in its current form.
So what we have tried to do is create independence with our
Board, that achieves accountability without surrendering
Congress' ability to approve budgets, without surrendering the
President's ability to be able to appoint and to make sure it
gets people on that Board with expertise.
But imagine--this is one of the last things I am going to
say--if any of us were Secretary of the Treasury. Just imagine
if you were Treasury Secretary Thomas, or Treasury Secretary
Kerrey, all of the things you have got to do, including in the
current arrangement, managing an organization with 100,000
people, and the Secret Service, and the Bureau of Alcohol,
Tobacco and Firearms, and Customs and half a dozen other
independent agencies.
Mr. Thomas. Senator, the administration proposes to help
the Secretary of the Treasury by moving people from the Vice
President's office and the Office of Management and the Budget
to assist in this independent evaluation.
Senator Kerrey. That, on its face I would say, Congressman,
is a mistake. It would politicize the IRS. It may sound good,
but I would just very respectfully suggest that--independent of
whether or not a more loose board with less responsibility is
going to work, putting anybody on there from the Vice
President's Office or OMB would politicize the IRS and take us
in precisely the wrong direction.
Mr. Thomas. Thank you.
Senator Kerrey. I thank the Committee's indulgence and this
opportunity to testify.
Mr. Crane. Well, we thank you for your appearance here
today, Senator Kerrey, and understand.
Our next interrogator is Mr. Coyne.
Mr. Coyne. Thank you, Mr. Chairman.
I would just like to ask all the panelists, in as much as
H.R. 2292 contains the requirement that the Oversight Board
hire the Commissioner, I presume that you do not agree with the
proposition by Congressman Cardin that the bill would be
improved by not having the Oversight Board hire the
Commissioner.
Mr. Portman. This is a point where I think there can be an
honest discussion of various alternatives. My own view is that
it is better to have the Board hire and fire the Commissioner
simply because that then creates the kind of accountability
that we are looking for with the Board.
If the President were to be in the position of appointing
the Commissioner, perhaps the Board could have a role in that,
as we do in many other agencies where an entity like this Board
might recommend a slate of candidates, maybe two or three
candidates.
Maybe on the other end--which is the removal power--to also
be in a position to recommend to the President removal, when
that is appropriate.
What you have in this Board--as you know, Mr. Coyne, is the
Board's function of evaluating the performance of the
Commissioner. Again, accountability of holding the
Commissioner's feet to the fire.
If you take away too much of that, including taking away
the entire ability to affect that person's hiring or firing,
then I think you really have lost something. You have lost a
good deal of authority with the Board. I think there may be
some room for discussion there.
I personally believe that the stronger approach that will
really bring the kind of change we are looking for at the IRS
would be to maintain that authority at the Board level.
Senator Grassley. I agree with Congressman Portman only I
would back it up with testimony we had before our Committee
over a period of 1 year from employees and former employees,
people who have had good experiences, and people who have had
bad experiences in dealing with the IRS. The common theme of
criticism that we heard is that a major problem at IRS is
inbreeding and being an insular-type organization.
It seems to me that to overcome that, it is very important
that we have the Board appoint the manager, and more
importantly than even just doing that, is his ability to bring
in a whole team of managers to make sure that whatever changes
at the highest level that need to be made are actually carried
out and not do what we have been doing, by always having
somebody who had to be a tax attorney as a qualification--
written or unwritten--to be Commissioner of IRS.
A person who was there because they were noted more for
their understanding of tax law than they were for
administration--particularly with their subordinates being
people in middle management who have been around for a long
time, just build upon the insularity that is the basic problem
we are trying to deal with here.
Then in addition to management of that, there is another
very important principle that we put into this. That is to make
sure that freedom of information requests are responded to
immediately; and also, to make sure that the abuse of the
privacy laws that had been used to protect this insularity are
modified, particularly in the case of the freedom of
information, so that the things that police government,
generally, police the IRS to be a responsible agency, including
people in the media that are involved in freedom of
information.
The mere fact that the historian resigns because documents
are being destroyed and there is no effort to archive still
seems to us to be evidence of--not necessarily covering up,
because there might not be a specific thing that is going to be
covered up, but when you make access to this information either
impossible or very difficult, it protects the inbreeding and
insular attitude that we have; and it is that attitude that we
need to modify.
Mr. Cardin. Bill, the key here is the balance on the Board
so that the Board has enough impact and influence on the
decisionmaking at the IRS that you can attract the right people
to serve on the Board, to invest their time in helping the IRS
develop its game plan, and holding its management accountable
to achieve those results.
I think it is enhanced by the Commissioner being a
Presidential appointment. I think you actually enhance the
ability of the Board to do its work.
As Rob pointed out, there is some honest difference of view
here. I do not think you attract better people to the Board
because they can nominate the Commissioner. To the contrary, I
think the people who serve on this Board will be willing to
serve on this Board because they are interested in helping work
with the IRS in developing a mission and accomplishing that
mission in a more effective way.
So I think you actually improve the Board by keeping the
Commissioner as a Presidential appointment; and I think it is
somewhat awkward to have some of these people appointed by the
President, but yet the Commissioner will be the chief person
responsible for carrying out the policies and will not be
appointed by the President. I think it strengthens the bill to
have the Commissioner appointed by the President.
Mr. Coyne. Thank you.
Mr. Crane. Mr. Shaw.
Mr. Shaw. Thank you, Mr. Chairman. I am going to try to set
a trend here and be brief. [Laughter.]
The document before us provides that ``The overall
governance of the IRS will be provided by a Board which will
oversee the Internal Revenue Service in the administration,
management, conduction, direction, supervision execution, and
application of the Internal Revenue laws, but would have no
responsibility or authority with respect to the development and
formulation of Federal tax policy relating to existing or
proposed Internal Revenue laws or specific law enforcement
activities of the Internal Revenue Service, including
compliance activities such as criminal investigations,
examinations and collection activities.''
How do you propose to separate them with regard to criminal
prosecution and development of regulations? I throw that out to
whoever might care to take that on.
Mr. Portman.
Mr. Portman. First, I want to thank you, Mr. Shaw, for
reading the legislation. [Laughter.]
That is very helpful. Honestly, it has been misrepresented,
as we said earlier, on a number of points. This is one that is
very important and needs to be clarified.
Fred Goldberg, former Commissioner of the IRS, former
Assistant Secretary for Tax Policy and former Chief Counsel was
on this Commission. We also conferred with former
Commissioners. We also conferred with people on the Treasury
side at the Secretarial level, also Deputy Secretary and
Assistant Secretary level on this very issue: Can the two be
separated?
The answer is, yes. In fact, they are separated now.
With regard to the regulatory side and the enforcement side
that you just mentioned at the end, and tax policy, those
continue to be Treasury functions. Those are not functions
right now that are handled by the IRS, nor should they be.
One of the concerns about total independence is that there
is a certain amount of synergy between tax policy, in
particular, and tax administration; and you probably want to
retain that. That is one reason the Commission in the end did
not recommend the model of the Post Office, as Bob Kerrey said,
of total independence.
There are some reasons to keep these two areas involved
with one another in a close way as they are now, but you can
accomplish what that legislation states, for the most part,
because it is already done that way.
The IRS does not get involved. The General Counsel at the
Treasury Department is responsible, as you know, for drafting
those regulations. The Assistant Secretary for Tax Policy,
Treasury, is responsible for tax policy. We believe it should
stay that way.
The one benefit, I think, you get from this in terms of
your very question is, you do have a more independent view from
the IRS from the point of view of tax administration on tax
policy. That has been one of my frustrations on this Committee
and I know one of yours and others, is that we do not often
hear directly from the IRS, as an example, on how a tax credit
for education might work, or how the EITC might work.
In this case, I think because of not only separating it the
way we did, but also because we provided on the congressional
side for the IRS to be at the table, giving us their input, we
will get better information, unvarnished, from the IRS about
how you actually would administer some of these great sounding
tax policy ideas.
Mr. Cardin. On the compliance issues and on the specific
law enforcement, there are very strict laws today about who has
authority in those areas. This bill specifies that the Board
has no authority in these areas.
So, without a specific grant of authority, the Board could
not have access to individual returns, and will not be able to
be involved in any of the specific law enforcement issues
involving an individual taxpayer.
Mr. Shaw. I appreciate your clearing that point up and
yield back the balance of my time.
Mr. Crane. Mrs. Johnson.
Mrs. Johnson of Connecticut. Thank you, one of the useful
and thoughtful parts of this report--and gentlemen, I commend
you all, those who have served on the Commission, and Mr.
Cardin, who has given a lot of time and thought to reviewing
the work of the members of the Commission, and working with Mr.
Portman.
One of the thoughtful parts of this report is its analysis
of congressional oversight of the IRS. There have been times
when the congressional process has really worked against IRS
action and leadership, and has been of concern to me.
However, there are some significant differences between the
Treasury's proposal on this score and the Commission's
proposal; and I would ask that you comment on those
differences.
Mr. Portman. Well, thank you. I responded earlier to Mr.
Rangel's question, I think--perhaps it was Chairman Archer's--
regarding the differences between the Treasury proposal and our
proposal by not mentioning congressional oversight; and I
should have.
The Treasury proposal, to my knowledge, does not address
the issue of congressional oversight. So the difference is,
they have no proposal there. Our proposal is actually pretty
interesting. I think the fact that you support it and other
Members of leadership support it, is extremely significant and
perhaps unusual. Because it requires consolidation of
Committees in a way that one might think would threaten
jurisdictional prerogatives.
What we say quite simply is that the IRS is not getting a
clear message from Congress. There are seven different
Committees of Congress that have some responsibility for IRS
oversight, I include in there the Appropriations Committees, of
course.
Because, particularly in recent years, they have had a good
deal to do with not just IRS spending, but IRS oversight by
legislating in Appropriations bills. What we say is that all of
the leadership of all seven of these Committees would confer
twice a year in hearings with the IRS present. One on the
strategic plan of the IRS; and one on the budget of the IRS;
and then they would issue a report, together as a consolidated
Committee under the auspices of the Joint Tax Committee.
The Joint Tax Committee is bicameral, bipartisan and seems
to have the expertise that is needed to be able to staff this
kind of a--almost superconsolidation of Committees.
That is what is in our proposal. I feel very strongly that
if we do not streamline and consolidate the oversight at this
end of Pennsylvania Avenue, we will have not responsibly
addressed the existing problems. We cannot just look downtown
at Treasury. We have to also look here in our own back yard.
Mr. Cardin. Mrs. Johnson, I remember as a new Member of
this Committee looking at the IRS functions, budgets and making
certain recommendations to the Budget Committee and absolutely
having it totally ignored, that there was really no
coordination at all among the different Committees that had
jurisdiction of the IRS.
As Mr. Thomas pointed out, the problems of the IRS
developed over a long period of time. Part of the
responsibility has been the inability of Congress to adequately
oversight the operation of the IRS.
So I think it is right and I am pleased to see our
legislation confronts the issue of a more effective way that
Congress can use its energy to coordinate oversight of the IRS.
I can understand the administration not wishing to put that in
its bill, the congressional oversight; but I do hope that we
will include that provision in the final bill that is brought
forward.
Mrs. Johnson of Connecticut. I do want to point out that if
we fail to include the IRS at the time we are writing tax
policy, we will never straighten out our problems. If we fail
to require of ourselves the amount of change that we are asking
of the executive branch, we also will fail to make government
more responsive to the taxpayer, more efficient and effective.
We talk a lot about it, but this portion of your report is
extremely important. I am proud to say that the Chairmen of the
three Committees, this year, have been meeting to talk about
some demonstration projects and pilot projects that we asked
the IRS to do in order to avoid the three Committees
interpreting the work differently, so on and so forth.
But, it is extremely important that we begin to work as a
body on oversight of the IRS at the same level of discipline
and coordination--on the part of the Congress--as we are asking
the executive branch, in terms of both the bureaucracy and the
private sector. This is a new era we are moving into and we
have to drag ourselves forward as well as them forward.
Thank you.
Mr. Crane. Mr. Levin.
Mr. Levin. Thank you, Mr. Chairman.
Clearly there has to be some changes. I think everybody
agrees with that. The Commission has helped to spotlight some
of the needed changes. There are urgent needs for improvement
in management.
Let me, though, try to zero in on what are the differences,
because I think where we are agreeing, we will legislate. It is
where we disagree that may be more difficult. It relates to the
powers of the Board. I think Chairman Archer described it
somewhat well, it is the question of whether there would be an
advisory capacity, or also a quasi-management authority in any
board or commission.
Senator Grassley, you said in your testimony, ``Will it be
a real Board with real independence authority and teeth?''
Senator Kerrey talked about a Board that could make difficult
personnel decisions. I think that is really the most
fundamental disagreement.
So, if you would, tell me the kinds of decisions that you
think this Board will be able to make? There is a disagreement
as to whether the Board would appoint the Treasury--the IRS
Commissioner, which is a pretty important issue. But in
addition to that--Senator Grassley, let me start with you.
What kinds of--when you say ``real independence, authority
and teeth.'' I tend to agree that it has to be a Board with
more expertise than perhaps envisioned in one of the bills, but
that can be readily fixed. So tell me what you mean by
``independence, authority and teeth?'' Give me examples of what
the Board would do.
Senator Grassley. Well, this may not be specific enough for
you, but it seems to me that it is tone and direction and
mission. What we are trying to do here with the Board is
something that I guess in over 1 year--that not just in 1 day
of testimony, but in testimony over a long period of time, it
tended to be a theme that somehow the Internal Revenue Service
was just kind of a mission onto itself, without proper
oversight from the President and the Secretary of Treasury.
We understand that the Secretary of Treasury has so many
important duties--and you could list eight or nine that are
very, very important--and whether or not the IRS being within
that organization has the mission and the goals laid out
adequately by an overseer to make sure that problems within are
seen and overcome very shortly.
Now that is a very general answer to your question, but----
Mr. Levin. How about a few specifics in terms--Senator
Kerrey, who had to leave, talked about ``difficult personnel
decisions.''
Senator Grassley. OK. Well, one that I mentioned already is
the fact that under the existing administrative set up, even
though a new President, elected with an overwhelming mandate--
maybe nothing to do with the IRS, but still having an
overwhelming mandate to come in and govern, appoints a new
Commissioner of Internal Revenue; and that new Commissioner
tends to always be a tax attorney, with probably very good
expertise in tax law, goes in to manage an organization, but
inherits because of tradition and because of law a middle
management that may be inbred with the organization to keep the
real changes that the Commissioner of Internal Revenue wants to
get carried out. From that standpoint, it seems to me that we
do not get the changes that need to be done as fast as we
should.
Mr. Levin. Mr. Portman and Mr. Cardin.
That could be fixed, Senator Grassley, by--you do not need
to set up a Board to give the Commissioner more authority, vis-
a-vis personnel, I do not think. I am not an expert on that
system.
Senator Grassley. And I cannot disagree with what you say,
but we set it up as an independent--a more independent agency
with a Board that is going to have special authority to look at
that. Since it is outside the normal stream of Cabinet
Presidential relations.
Mr. Cardin. Mr. Levin, let me just try, if I might--just
quickly, if I might.
That is, it is not so critical--the decisions that are made
by the Board. It is the Board working with the Commissioner and
developing a management strategy that will correct the problems
that we all have identified with the IRS. So, if you look at
the bill, you will find that the legal authority rests
primarily with the public officials, not with the Board. The
Board has access to the Commissioner in the development of the
strategic plan and the development of a budget necessary to
carry out that strategic plan. You have a working relationship
between experts in the area--the Board--and the Commissioner
working to develop a strategy that will correct the problems at
the IRS.
Establishing evaluation techniques, so that we all can
see--including those of us who serve in Congress--as to whether
the IRS is carrying out its mission will be a tremendous
assistance to Congress, as well as the American people.
But the legal authority rests with the public officials.
All of us can draw from our own personal experience of serving
on boards. We know good boards, we know boards that have not
functioned so well. A good board works in tandem with the
institution; and that is how we see this happening. We think
that we have given enough access to the decisionmaking by the
Board so you can attract the kind of talent that is necessary
in order for the Board to carry out its mission. If you are
looking for legal authority to make decisions, most of that
rests with public officials.
Mr. Levin. I think you have described an effective advisory
board.
Mr. Cardin. We could spend a lot of time on what the Board
should be called. We think it is an Oversight Board.
Mr. Levin. An Oversight Board.
Mr. Cardin. Yes.
Mr. Portman. Mr. Levin, I appreciate your question. Let me
try to give you some--even more specific corrections on that,
that comes right out of the legislation. It is actually pretty
well spelled out on pages 12 through 15 in the legislation,
probably as well as in many of the summaries I have seen.
I think it is very important to look at this Board, not so
much as a management board--which happens to be the name of the
Treasury Board--but as an oversight board. There is a
difference between the two. It is not an advisory board. It is
not a management board. It is an oversight board, meaning that
it has certain powers that are approval-type powers, and
certain boards that are consulting-type powers.
We have spent a lot of time on this and the way we ended up
working out that balance between approval, which as you said
earlier is real authority, it gives it real teeth; and on the
other hand consulting with the Commissioner was as follows: The
Board actually approves the strategy.
I mentioned in my statement, not just the long-range
mission of the IRS, but the annual strategy for implementing,
really, that mission. So there is a strategic plan that has to
be prepared now by the Commissioner, has to be presented to the
Board, and that Commissioner needs to work with the Board to
come up with a plan that is approved by the Board. That, in my
view, is where a lot of the authority vests.
Second is performance measures. One of the things that we
tried to do, as I said earlier, is to push change all the way
through the system. Part of that is change in the performance
measures. Not making it as an example, but subject to the kind
of incentive where if you end up raising more money from the
taxpayer, you end up getting a better performance review.
Rather, the performance measures should be tied to taxpayer
service.
The notion there being that ultimately we are trying to
improve the service to the taxpayers. That will in the end lead
to better compliance. But we need to reestablish the
performance measures. The Board will have that authority, too,
to approve something the Commissioner presents to them.
The appointment of the Commissioner, you mentioned, which
is very significant, I think. Although, I think there are other
ways to do that to give the Board some power--there is, as I
mentioned earlier, a slate of candidates--maybe some removal
powers.
Finally, the budget. The budget is very interesting.
Because Treasury has argued before this Committee and the
Subcommittee and has said publicly many times that the Board is
going to establish the budget for the IRS, and that that would
somehow lead to unavoidable conflicts of interest. That is not
the way it works.
It works much like Social Security, where you and I, Social
Security Subcommittee Members and the Full Committee Members
get an informational copy of what the Social Security Board
thinks is the right budget, but the budget itself--actually,
once it is approved by the Board--and again, the Commissioner
has every incentive to work with the Board. The Secretary of
the Treasury is on the Board. Then that budget goes to the
Secretary. The Secretary has the same veto power that the
Secretary currently has. Then it goes as part of the
President's unified budget, through OMB, through the White
House, and up to the Hill.
So the President's request comes really from Treasury and
OMB. But at the same time, you and I will get an informational
copy of a budget that was actually approved by the Board
working with the Commissioner.
So those really are the fundamental authorities of this
Board. Where the Board does not have approval power, but has
review power, includes the management plans--kind of the day-
to-day management plans--the technology plans. We talked about
that a little today and in the last year. Many have explained
the IRS has made a lot of progress with the blueprint for a new
technology plan. But we need to have that continuity we talked
about earlier because there has been a new technology--Tax
Systems Modernization Plan--every couple of years; and it has
not been followed through on.
The reorganization plan, which would include some of the
downsizing you talked about, potentially; personnel systems and
training plans. Those would be reviewed by this Board in a
formal way; but the Board would not have to approve it. The
Secretary would be required to submit that to the Board.
So it is a balance. Your question is a very good one. In
the end, this is a board that is neither advisory nor
management, but it is in my view--I think the best way to
describe it is oversight.
Mr. Crane. Colleagues, I would like to interrupt for a
moment here because I have learned that our colleague, Mr.
Hoyer, has to be out of here by 3, and Secretary Rubin has to
be out of here by 4. So I would ask our remaining questioners
if you would be kind enough, if it is not a major, overriding
question that you have to ask of any one of our current
panelists, to hold and we will save them either for Steny and
our good friend, Mr. Coyne, or we will save them for Secretary
Rubin.
Next, though, in line of succession is Mr. McCrery.
Mr. McCrery. Thank you, Mr. Chairman. I just have one quick
question that can get a quick answer.
Congressman Portman, did the Commission study the
approaches taken in the Treasury Department's proposal? If so,
what was the discussion around those proposals?
Mr. Portman. It is a good question. Yes, the Commission did
take into account the Treasury's proposal. The General Counsel
of the Department of Treasury was a member of the Commission.
We got a lot of input from Treasury along the way. The report
actually reflects a lot of Treasury's input and IRS' input,
even though in the end, Treasury opposed the final
recommendations. As I said, earlier, it was a 12 to 5 vote on a
bipartisan basis with Treasury not supporting it.
What we have determined is that Treasury's idea--which
actually came relative to relating to the Commission's, but was
part of our deliberations of having a, again, midlevel
bureaucrat, political appointee, management board, in that
case, made up of 20 individuals--which has actually been
implemented by Executive order--simply did not meet any of the
criteria which we all seemed to agree on, which is a needed--
more expertise at the IRS to solve their very tough problems
with information technology, customer service and so on.
There was no continuity. The average length of the people
who actually were named on that Board is less than 2 years.
That is not continuity to get the job done; and third,
accountability. They did not provide that kind of
accountability. You really can never get accountability, in our
view, unless you have the first two: expertise and continuity.
Otherwise, there really is not good accountability.
Finally, as I mentioned earlier, there is a real concern
that the kind of accountability you have might not be what you
wanted. Because to have political appointees actually managing
the IRS--because it is called a management board and I do not
know exactly how the duties are enumerated. It may not be that
different from ours. But they had political appointees and that
position seemed to us to really risk politicizing the IRS in a
way that I think none of us want to go back to.
Mr. McCrery. Thank you.
Mr. Crane. Our next questioner would be Mr. Neal. Do you
have any questions, Mr. Neal?
Mr. Neal. Mr. Chairman, maybe one quick question of the
panel and I can get that done in a rapid manner.
By definition, it is my understanding that the Board would
not have any influence over tax policy?
Mr. Cardin. That is correct. Tax policy would continue to
reside at the Department of Treasury.
Mr. Neal. And how do you maintain that very clever
distinction.
Mr. Cardin. There is a specific provision in the bill that
specifically states that.
Mr. Neal. You would not ever see an opportunity for a
conflict?
Mr. Cardin. No, as Congressman Portman pointed out,
traditionally tax policy has been handled by the Secretary,
Department of Treasury. It has not been in the IRS itself. IRS
administers the laws. It has not been involved directly in tax
policy.
Mr. Neal. But would not they make----
Mr. Cardin. It would specifically prohibit this Board from
being involved.
Mr. Neal. Would not they make recommendations then over tax
collection policy, or who to focus on, something like that?
Mr. Cardin. No. We do not see that happening. We do not see
that as part of the mission of this Board. We think--what we
are talking about is giving direction to the agency, not
dealing with either a specific policy; or a specific
enforcement issue.
Mr. Crane. Next is Mr. Ramstad.
Mr. Ramstad. Mr. Chairman, I have no Earth shattering
questions and will gladly defer.
Mr. Crane. Very good. Thank you kindly.
Mr. English.
Mr. English. No questions, Mr. Chairman.
Mr. Crane. Very good.
Mr. Becerra.
[No verbal response.]
Mr. Crane. Mr. Tanner, do you have any questions?
Mr. Tanner. No.
Mr. Crane. Well, that concludes this panel and we thank you
both for your participation and that of our departed
colleagues. With that, we will ask our colleagues, Mr. Coyne
and Mr.----
Chairman Archer [presiding]. Mr. Crane, I am going to ask,
with the permission of Mr. Coyne and Mr. Hoyer whether they
might be willing to defer to the Secretary, who has got time
problems.
Unless we can have some kind of an agreement that we would
be very succinct in questioning Mr. Hoyer and Mr. Coyne, if we
could have that agreement and that is acceptable to the
Members, then we will recognize Mr. Coyne and Mr. Hoyer.
Particularly, I am concerned about my friend Steny Hoyer having
to sit around in the Ways and Means Committee. Some of it might
rub off on you. [Laughter.]
We are pleased to have both of you and the Chair would
first recognize a Member of the Committee and also a member of
the Restructuring Commission, Mr. Coyne for his testimony.
Without objection, your written statement can be put in the
record in its entirety.
STATEMENT OF HON. WILLIAM J. COYNE, A REPRESENTATIVE IN
CONGRESS FROM PENNSYLVANIA
Mr. Coyne. Well, thank you, Mr. Chairman. I thank you and
the Members of the Committee for the opportunity to testify
here today on H.R. 2428.
I believe the Restructuring Commission has made an
important contribution to the debate on the role of the IRS by
carefully studying the problems facing the IRS and producing
some very thoughtful recommendations in the report. I want to
especially commend the Cochairs of the Commission, Senator
Kerrey and Congressman Portman, for their skillful leadership
and for all of their hard work.
As you know, all of the Commission members agreed that
there is a clear need for dramatic reforms at the IRS. In fact,
we agreed on a number of reforms that should be adopted in
order to improve IRS operations and make this agency more
customer friendly.
There are some issues, however, that still need to be
debated before Congress enacts an IRS reform bill. H.R. 2292
and H.R. 2428 reflect two different perspectives with regard to
those issues. Both H.R. 2428 and H.R. 2292 would make IRS
personnel policies on issues like hiring and pay more flexible;
and they both attempt to provide a fix for the troubled IRS
computer modernization program. Both bills would also promote
increased electronic tax return filing.
Finally, and perhaps most important, both bills attempt to
increase oversight of the IRS and to provide the agency with
the expertise and leadership it needs to carry out its mission
fairly, efficiently and courteously.
There is, however, one major difference between H.R. 2292
and H.R. 2428. H.R. 2292 would turn control of the IRS over to
a board of directors composed primarily of private citizens,
which would select and appoint the Commissioner. Under H.R.
2428 the Commissioner would be appointed by the President and
confirmed by the U.S. Senate.
Under H.R. 2292, the Board would review and approve the IRS
budget and it would review and approve the strategic plan of
the IRS. Consequently, in my opinion, H.R. 2292 would make the
IRS less accountable to the American public than it currently
is.
The Federal Government has and will continue to have a
number of substantial obligations: national defense, law
enforcement, scientific research, investment in infrastructure
and maintaining safety net programs like Medicare and Medicaid.
As long as it continues to have such obligations, it will
need to collect the revenues necessary to meet them; and it
will need an agency that collects taxes fairly and efficiently.
The question before us today in considering these two
proposals is whether that agency, the IRS, will be accountable
to the American people. Both of these bills will make the IRS
more efficient and more taxpayer friendly, but I believe that
H.R. 2428 would make the agency more responsive to the American
people than H.R. 2292. H.R. 2292 creates a layer of unelected
appointees between the IRS and the taxpayer public.
While those appointees might provide the IRS with much
needed technical knowledge and managerial experience, they
could also serve to insulate and alienate the IRS from the
taxpayers and our elected representatives. I see no compelling
need to sacrifice accountability to the American people in
order to provide the IRS with the benefits of outside technical
expertise and private-sector management experience.
Gerald Seib of the Wall Street Journal, addressing the idea
of an outside board to oversee management at the IRS, states
that, ``The idea would erode accountability, which is key to
integrity in government.'' He concludes by saying that,
``Attacking the IRS' ineptitude should not require undermining
government integrity.''
Would the taxpayers feel better knowing that executives
from around the country, rather than the officials they
elected, are in charge of the IRS? I think not. Would there be
concerns about conflicts of interest with a board of directors
who serve the public part time while keeping their lucrative
private-sector jobs? I suspect that there would be, and
legitimately so. Would part-time board members be able to
dedicate the time and energy necessary to exercise effective
oversight of the IRS? I do not think they would.
Mr. Chairman, there is a better way to address this
problem. H.R. 2428 would codify actions already taken by
Treasury and the IRS to set up an IRS Management Board composed
of high ranking Federal officials and an IRS Advisory Board
composed of experts from the private sector.
This approach would allow the IRS to benefit from private-
sector knowledge and experience without sacrificing
accountability. In most of the other provisions, H.R. 2428 is
very similar to H.R. 2292. Consequently, I urge my Ways and
Means colleagues to support H.R. 2428.
I know that it is fashionable in some quarters to bash the
IRS. In fact, the Wall Street Journal reports that a Member of
the other body actually sent out a letter soliciting funds in
which he stated that, ``With your immediate help today we can
virtually abolish the IRS as you know it.''
Of course, I know that is not the intent of anyone here
today on this Committee, or anyone who will testify here today.
I only raise this issue to say that we on this Committee know
what we are up against on this issue. I hope that Congress and
the administration will work together with the taxpayers'
interest foremost in our minds to reform the IRS in a manner
that promotes efficiency, equity and accountability.
I thank you once again for the opportunity to testify
before the Committee.
[The prepared statement follows:]
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Chairman Archer. Thank you, Congressman Coyne.
Our next witness is an individual well known to the Members
of the House, our friend Steny Hoyer.
Mr. Hoyer, we will be pleased to receive your testimony.
STATEMENT OF HON. STENY H. HOYER, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF MARYLAND
Mr. Hoyer. Thank you very much, Mr. Chairman, Mr. Rangel
and Members of the Committee. I want to also commend Mr.
Portman, a Member of this Committee, and Senator Kerrey, for
their work on the Commission.
The Commission has made a number of very good proposals.
They are included in H.R. 2292 and they ought to be adopted. I,
however, have joined with Mr. Rangel, Mr. Coyne, Mr. Waxman and
Mr. Matsui in introducing H.R. 2428, which includes many of the
Commission's proposals.
The IRS has been rightly criticized in recent years for its
failure to manage its operations well, our Treasury-Postal
Appropriations Committee has been among that number. Particular
focus has been directed to the attempt to modernize its
information systems. Until very recently, that effort had been
severely criticized by the GAO.
Furthermore, Mr. Chairman, for the first time in the 15
years I have been reviewing IRS budgets, a Secretary of the
Treasury and his Deputy are giving personal attention to IRS
management issues. It is making a difference.
However, as the Commission points out, Congress' failure to
have consistent policies regarding funding, its frequent
changes of the Tax Code, and its attempt to micromanage, in
some instances, the IRS have all undermined the ability of IRS
to manage efficiently in the long or short term.
In fiscal 1995, we started a major compliance initiative to
collect overdue revenues. Despite the fact that it collected
far more than anticipated, Congress abruptly canceled the
effort in fiscal 1996.
Congress is also the perpetrator of budget problems at the
agency. In June 1996, Chairman Archer and Chairman Johnson
signed a 10-page letter detailing problems with IRS funding in
the Fiscal 1997 Treasury Postal General Government Bill.
I want to congratulate both of you for your leadership and
important intervention at that time.
The attacks on the agency's budget, while partially
restored in Congress, hurt morale and distracted management
from the task at hand. The Commission wisely recommended that,
``Congress provide the IRS certainty in its operational budget
in the near future,'' and further called for ``greater
stability in funding levels.'' Our bill addresses those
concerns by calling for stable budgets and, when appropriate,
multiyear budgets.
As I noted, there are similarities in the two proposals for
improvement. Both bills before the Committee strengthen
employee performance management systems. Both bills provide
flexibility for recruiting and managing employees. Both sets of
proposals promote electronic filing, which shows great promise
for lowering cost and speeding refunds to taxpayers. Both bills
set a fixed, 5-year term for Commissioner to enhance the
stability of IRS leadership.
The central, critical and compelling difference between the
two bills is the issue of governance. This difference, Mr.
Chairman, may be a profoundly philosophical one on how best to
protect and promote the public interest. I believe very
strongly that the IRS, more perhaps than any other government
office, must be governed and managed by those unconflicted by
private interest and responsibilities.
Donald Kettl, director of the Brookings Center for Public
Management, referred to the Commission's proposal for
governance as fundamentally flawed. He stated that it was ``An
unwise, unaccountable, and probably unconstitutional transfer
of public authority.''
Mike McNamee of Business Week called the proposal, ``One
truly bad idea.'' Gerald Seib of the Wall Street Journal, who
has already been quoted, said that in this instance, the
Commission's good intentions had produced a bad idea.
I am very strongly opposed to H.R. 2292's unprecedented
proposal to turn day-to-day management of the IRS over to an
independent group. While there is no doubt a role for private-
sector advice and expertise, what the IRS needs is more
accountability, not less. H.R. 2292 would place management in
the hands of people who, however well meaning, are loyal and
accountable to the firms and businesses that employ them--as
they should be.
While everyone has a joke, Mr. Chairman, about a tax
collector, the vast majority of Americans believe that the IRS
will protect the confidentiality of their private information
and enforce laws evenly and fairly. Directors tied to private
interests could easily undermine public confidence in the
agency and dramatically decrease what Senator Kerrey and others
have referred to as a very high, voluntary compliance.
I know that Secretary Rubin will review in far greater
detail the serious problems that he sees with H.R. 2292. I
hope, Mr. Chairman, that Members of this Committee will
recognize that H.R. 2428 meets the spirit of the Restructuring
Commission without the fatal flaws of delegating a central and
sensitive responsibility to a private-sector board.
I want to close by noting that far too often critics of the
Tax Code go after the employees of the Internal Revenue
Service. Federal employees are easy targets for those who
dislike the laws we pass here in Congress. Nowhere is it more
apparent than the IRS, and it should stop.
The reality is quite different. The Commission's final
report said that interviews with IRS employees gave ``an
overall impression of competent, hardworking people who want to
deliver a high quality product to the American taxpayer.''
Therefore, instead of denigrating these civil servants, we
should provide adequate training and reward those employees who
are giving a 110 percent effort. I want to congratulate Mr.
Portman for the Commission's attention to that issue.
There are a lot of dedicated men and women in the agency
who are working hard to ensure that our voluntary tax
compliance remains the highest in the world. By adopting H.R.
2428, Congress can ensure that we enter the 21st century with
an IRS that is customer-friendly, technologically advanced, and
governed ``by the people, for the people.''
Mr. Chairman, I want to again reiterate how much I have
enjoyed working with you and your staff, and Mrs. Johnson and
her staff from the Treasury Postal Committee Appropriation's
standpoint, to have an IRS that is more taxpayer friendly, is
more efficient and spends collection dollars as efficiently as
possible.
I thank you, Mr. Chairman, for your time.
[The prepared statement follows:]
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Chairman Archer. The Chair thanks both of you for your
input. It was very constructive and very helpful to the
Committee.
If Members have questions for these two witnesses, the
Chair would appreciate their deferral until after the testimony
of the Secretary of the Treasury.
Congressman Hoyer, certainly you are excused, but if there
are questions that might be directed at Congressman Coyne, the
Chair would appreciate Members deferring until after the
Secretary of the Treasury has testified.
Mr. Rangel. Mr. Chairman.
Chairman Archer. Mr. Rangel.
Mr. Rangel. I want to thank them and especially let Mr.
Hoyer know that we have got to try desperately hard to reach a
bipartisan solution to this problem. We think it is important
for the Congress and for IRS administration.
I feel very comfortable in having you included in all those
discussions.
Mr. Hoyer. Mr. Chairman, if I might, we have all talked
about bipartisanship, and I talked about you, Mrs. Johnson and
I and others on the Treasury Postal Committee working together
in a bipartisan fashion.
I believe there is a basis on which we can reach bipartisan
agreement, not only in the Congress, but between the Congress
and the administration, which I think will be important; and I
thank you for the time.
Chairman Archer. Thank you.
Now, Mr. Secretary, we welcome you back to the Ways and
Means Committee. You are no stranger to our Committee. I
apologize that you have been kept waiting in the wings here for
the period of time that has occurred in questioning the
previous witnesses. But we are happy to have you with us now
and you know the subject of the hearing and we will be pleased
to receive your testimony.
STATEMENT OF HON. ROBERT E. RUBIN, SECRETARY, U.S. DEPARTMENT
OF THE TREASURY
Secretary Rubin. Mr. Chairman, thank you. I put my extra
time to good use working on fast track.
Chairman Archer. That is a very worthwhile activity, Mr.
Secretary.
Secretary Rubin. Mr. Chairman, Mr. Rangel, let me thank you
very much for providing this opportunity to talk about what the
administration is doing to improve the Internal Revenue
Service, and about the proposals that have been put forward by
Senator Kerrey and Congressman Portman.
Under the leadership--under their leadership, the National
Commission on the Restructuring of the IRS has given serious
thought to the issues confronting the Internal Revenue Service.
Its report, which I read in its entirety, has made an important
contribution in dealing with these issues.
Mr. Chairman, we know there are real problems at the IRS,
problems which have developed over many years, and we have
devoted a great deal of time and resource to fixing those
problems. We have made real progress, but we know the full job
will take time. We are committed to change and to building a
fair, efficient and accountable IRS the American deserve.
We agree with the Commission on goals--fair treatment for
all taxpayers, strong customer service and effective use of
technology, all while collecting the taxes due. We agree that
achieving these goals requires better oversight, greater
continuity of leadership and improved access to expert advice
from the private sector.
Mr. Chairman, there is a right way and a wrong way to
achieve change. I believe the Commission's proposal to give
governing control over the IRS to a private-sector board is
greatly flawed and would create grave and unacceptable
problems.
The administration's reforms already instituted have had
real effect and our proposed legislation, which provides for
appropriate use of private-sector input, would get the IRS
where it needs to be without unacceptable risks.
More than a year ago, we established a Treasury Oversight
Board which proved to be the most significant structural change
in IRS governance in 45 years. In large measure, as a
consequence of this improved oversight, we have made
significant changes in improved use of technology and better
customer service.
Let me list just a few examples. Today Americans have a
Taxpayer Bill of Rights and a taxpayer advocate to give them a
voice in the IRS. Around 14 million people filed their taxes
electronically this year, an increase of 19 percent. Filing by
telephone was up more than 65 percent to more than 4 million
returns.
Twenty-six systems contracts were canceled or collapsed
into nine; and a comprehensive technology proposal for a
public/private partnership, prepared under the direction of a
new Chief Information Officer, has received a favorable
response from both Congress and the private sector.
Much has been done. Much remains to be done. But we must
proceed in a sensible way. The IRS Improvement Act introduced
in the House last week with the support of the administration,
would institutionalize our commitment to change, and continue
our very real progress without creating unacceptable risks.
The bill would make permanent the IRS Management Board.
This Board, which under the legislation would be comprised of
senior officials from Treasury, OMB and the IRS, and a
representative of the employees union, provides ongoing
oversight for the operation of the IRS, of the modernization of
its systems, customer service, IRS strategy and other relevant
matters. Its members are available, as needed, to deal with IRS
issues.
The legislation would also require the Secretary and Deputy
Secretary to report on the IRS, in person, to Congress each
year. I believe perhaps that should be changed to at least
twice a year. This is key. In my view, this kind of public
exposure will, in the words of Benjamin Franklin, ``concentrate
the mind'' of any future Secretary and Deputy Secretary and
cause them to take their responsibilities for the IRS
seriously, and to make those responsibilities a top, personal
priority.
Second, the legislation recognizes the critical value of
private-sector input by creating an IRS Advisory Board made up
of individuals to represent a wide range of relevant expertise.
This Board would report to the Secretary of the Treasury, and
make an annual report to the Congress and the American people.
Third, to provide for increased continuity at the IRS. Our
legislation calls for the appointment of an IRS Commissioner to
a fixed, 5-year term. Our nominee for Commissioner, a chief
executive officer of a large, private-sector organization, with
extensive experience in systems modernization and other
technology issues is a symbol of our continuing commitment to
the process of change.
Mr. Chairman, I would now like to turn to the proposal to
put a board of private-sector individuals in charge of the IRS
with great power with respect to the budget, evaluation and
compensation of senior personnel and strategy, both explicitly
and because the board would both appoint and have the power to
fire the Commissioner.
Mr. Chairman, as you know, I spent 26 years in the private
sector, much at a very senior level, before entering public
service at the beginning of this administration. I would be the
last person to question the value of private-sector input.
However, having now spent nearly 5 years at relatively
senior levels of government, I would also caution that there
are very substantial differences between the public and private
sectors in objectives, obligations, the complexities of public
process and other respects. My understanding of these
differences have informed both the structuring of the IRS
Improvement Act and my great concerns about private-sector
board governance for the IRS.
My views on this proposal are in line with a wide range of
serious commentators such as the New York State Bar
Associations; the Brookings Institution report said that the
proposal was deeply flawed. Business Week has called it, ``A
truly bad idea.''
In prepared testimony for presentation later in the
hearing, the Tax Section of the American Bar Association says
that management should not be moved to a private-sector board.
We see five major problems with this proposal. First, our
Constitution envisions substantial government functions be
conducted by departments and agencies that are accountable to
the President on an ongoing and regular basis. Putting the IRS
in the hands of a board that is appointed by the President and
can be dismissed by him would reduce accountability to a bare
minimum. On a day-to-day basis, that board would report to no
one, and for all practical purposes, would not be accountable
to anybody, except in extreme cases requiring outright
dismissal.
Second, a private-sector board would give private citizens
control over a major law enforcement agency. More than half of
the IRS' $7.2 billion budget goes to civil and criminal
enforcement, both to collect taxes and to work alongside with
other government agencies in their efforts to combat drugs,
money laundering, health care fraud and the like.
While the proposed board would not have access to specific
law enforcement cases, the decisions it would take about the
IRS' budget priorities, personnel and overall strategic
direction, would have as substantial impact on law enforcement.
Private governance of substantial law enforcement would be
totally unprecedented in our history.
In a recent letter to Deputy Secretary Summers, the
Department of Justice expressed its grave concerns that the
proposed board system would, ``Present a significant and
unjustifiable risk to important law enforcement missions.''
Third, putting private citizens in charge of the IRS would
pose serious real and apparent conflicts of interest, which are
inherent in the proposal and not curable through recusal.
As private-sector individuals, members of the proposed
board would have a wide range of interests, which could be
deeply affected by the judgments the IRS makes. The board would
be prohibited from involvement with case specific matters. But
the temptation and the potential for abuse would have been
created.
Even leaving aside matters dealing with board members'
specific interests, more general IRS decisions will be
affecting their interest all the time. To state just one
example. Under the proposed board, executives whose companies
are automatically subject to yearly audits could end up
affecting the audit budget for the IRS and its audit and
enforcement strategies.
Looking at conflict from the other direction, I do not
believe that there is any question that the people who work in
a large organization are affected by the outlook of the people
at the top--such as those who have the powers of this board--
and by the desire to satisfy those people.
Lawyers call this a ``chilling effect,'' one which would
almost certainly have an impact on IRS audit policy,
enforcement policy and the like. Under the proposed board
system, the public will also very likely feel that the IRS was
responding to the views of a private-sector board. That creates
a serious risk of undermining public confidence in the fair and
professional application and enforcement of the nation's tax
laws. That in turn could work to undermine our voluntary system
of compliance--a very grave issue indeed.
If I were still in the private sector, Mr. Chairman, I
could not in good conscience serve on such a board.
Fourth, this proposal would separate tax policy from tax
administration--two functions which are inexplicitly
intertwined. If our tax policies are determined by an elected
President working with Congress and then the IRS does not put
enough emphasis on enforcing those policies, those
democratically decided tax policies can wither on the vine.
Finally and very importantly, I believe that this board is
unlikely to work in providing the intense oversight that is
necessary. The IRS requires ongoing, energetic oversight of
full-time government employees who are available, as needed--
the kind of oversight that has been provided by the
Modernization Management Board in the past year and which will
be made permanent by our legislation, not the sporadic
attention of people whose dominant involvement is in the
private sector and who meet once a month.
To conclude, Mr. Chairman, we must continue reforming the
IRS and we are committed to change, but we must proceed in the
right way. We must also, in my view, respect and support the
committed men and women of the IRS, who year in and year out
perform the difficult and often unpopular job of collecting the
taxes that fund our Federal Government.
In recent years, we have seen threats and incidents of
violence against these public servants and bomb threats against
IRS facilities.
There is no doubt, Mr. Chairman, that in any large
organization with significant powers there will be a number of
instances each year where individuals behave improperly. Let me
be clear, the Treasury and IRS do not condone such actions. We
find any instance of abusive behavior deeply troubling and the
Treasury Department and the IRS are working to curb them in
every way possible.
We can and we must deal with these instances, but always in
the context of continued support for the people and mission of
the organization as a whole.
Mr. Chairman, we have made real progress. We are committed
to change. We have put forth a sound plan to accomplish change,
but there is much to be done. I very much look forward to
working with the Members of this Committee, members of the
Commission, with the National Treasury Employees' Union, the
men and women of the IRS and with other interested parties as
we work to continue to process of change.
I will now be delighted to respond to any questions.
[The prepared statement follows:]
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Chairman Archer. Mr. Secretary, thank you. Unfortunately
the bells have rung for record votes on the floor of the House.
It is the intention of the Chair to conduct inquiry as long as
we can in this first 15-minute vote segment. Then we will
recess, with your permission, make our 5-minute votes and then
return as rapidly as we can.
Mr. Secretary, as has been said earlier, whatever we do
needs to be bipartisan; and whatever we do should not be
considered to be a reflection on anyone that is in your
position, but rather an effort to find a better policy than we
have had in the past as far as how we govern the IRS.
You have come a good way, I think, in your recommendation.
However, I have some concern in that our system has been called
voluntary. I question whether it is really voluntary because
there is always a big stick back there that causes people to
want to volunteer.
But certainly trust in the system is exceedingly important.
Perception is exceedingly important. The perception today that
disturbs me and disturbs many other people with whom I converse
is that there is a great potential for the IRS to be used for
political reasons.
I worry about how your recommendation will get around that
perception. Because all your management board--as I read your
recommendation--are basically political appointees; and you
still leave the complete accountability and running of the IRS,
for the reasons that you outlined, which are not without merit.
The Secretary and the Deputy Secretary are arms of the
President of the United States.
How do we overcome what is currently in the minds of many
Americans that the use of this extremely powerful arm of our
government can be used for political purposes?
Secretary Rubin. Mr. Chairman, you and I have discussed
this issue before and I think it is an important issue that you
raise. Let me give you my views on it.
As you know, it is the established practice of the
Treasury, not to get involved in case specific matters. If
there is ever a question about--at least in the time I have
been there, there is no doubt we never have. If there is ever a
question about whether that has occurred, then it would seem to
me that people who have that question should go either to the
IG of the Treasury or possibly to other appropriate persons.
I also think that whenever there is a concern of any sort
with respect to the issues that you have just raised, there are
now a number of modalities available for people to get
satisfaction. You have the IG at the Treasury, you have the
Inspector at the IRS. We now have a taxpayer advocate. That was
a very good thing. We believe in a robust taxpayer advocate
function.
So I think basically, Mr. Chairman, that is the best way to
do this. I think that vigorous congressional oversight can also
contribute very substantially. I agree with you that confidence
in the fairness of the IRS is absolutely critical. But I think
by taking the IRS and putting it under the governorship of a
private-sector board, rather than ameliorating this issue will
create an enormous new and I think vastly greater range of
issues, which is the question of the public attitude toward
governance of the IRS by private-sector individuals, with all
of their manifold interests.
Even if these people behave in a totally appropriate
fashion, I think it would create an enormous sense of
uncertainty about what kind of effect these private-sector
citizens are having upon the administration of the tax law. One
of the things that most troubles me about the private-sector
board is exactly this factor. That it does, I think, create a
very real possibility for undermining confidence in the
fairness and impartiality of our tax system and all the adverse
effects that you say they would have.
Chairman Archer. Well, I understand your concern on that
side, although Senator Kerrey has just testified in a very
strong way that he disagrees with you in what you just said,
but that still does not overcome what I think is a major
problem, perceptionwise, that exists in the minds of the
American people today, perhaps more so now in the last week
than in quite some period of time.
Even though you and every other former Secretary of the
Treasury that would testify before this Committee, if they
would be here would tell us, they have never ever gotten
involved in a political way with the IRS. But the perception is
still out there with the American people.
I think we have a responsibility to do what we can about
that perception and whether or not there is an ombudsman for
the taxpayers and whatever else is not alleviating that
perception in the minds of the American people. That is simply
all that I wanted to say within the constraints of time.
Secretary Rubin. Could I add just one thing, Mr. Chairman?
Just one quick comment?
Chairman Archer. Yes.
Secretary Rubin. If one had the conclusion that really had
become a serious problem, it is not--my impression is that that
problem is not really to the level of seriousness that you
quite suggested, but nevertheless, I absolutely agree with you.
It is an issue.
I think a very sensible way to go about trying to deal with
that, without creating what I think would be enormous
additional problems to a private-sector board, would be through
some additional congressional oversight that is directed at
that issue. Then Congress could play a very constructive role.
Chairman Archer. I do not think we should belittle it,
because as recently as 1\1/2\ hours ago, a Member of Congress
said that he was convinced that he had been audited 3 years in
a row as a result of political input on the part of a previous
Secretary of the Treasury.
So, it is a situation that is out there, Mr. Secretary, and
I am concerned about it.
Secretary Rubin. I did not mean to belittle it. I am sorry.
What I meant to say was that if it has risen to the level where
it seems like it needs additional attention, my suggestion
would be that that is a totally appropriate, and I think, very
constructive role for Congress to play, which does not create
the other kinds of problems that the private-sector board does.
That was what I meant to say.
Chairman Archer. Mr. Rangel, just a couple of minutes.
Mr. Rangel. We have to vote, but Mr. Secretary, before you
arrived, I think all the Members were concerned that we find
out what the bottom line is and whether or not we can support
it. Because since we agree it is the credibility of the IRS and
the perception of the IRS that is at stake, we may be doing
more damage than good with our discussion, if it reaches the
point that our dispute is based along political lines.
So, I know that you are working with the Members trying to
improve the situation there, and I hope that they will continue
to do so in the tone that you have set. It would help us to
assure the American people that we conclude that something
better has to be done. It is just a question of how to do it
without injuring the tax administration system further.
Thank you.
Chairman Archer. Mr. Secretary, I hate to ask you, but if
you can, could you stick around a little longer until we vote,
then we will come back and in the meantime we are happy to make
an office available to you or whatever. It should hopefully be
15 minutes----
Secretary Rubin. I would be delighted, Mr. Chairman. You
know there is a----
Chairman Archer [continuing]. If not before.
Secretary Rubin. That is fine. You know I have a slight
problem at 4 o'clock. Are you familiar with that?
Chairman Archer. Yes. We will understand that you have to
leave at 4 o'clock. Is that correct?
Secretary Rubin. I am delighted to stay.
[Recess.]
Mr. McCrery [presiding]. If everyone would take a seat, we
will get started as soon as the Secretary gets back in the
room.
Mr. Secretary, Chairman Archer has been called away to a
leadership meeting and apologizes for his being absent. We do
have some Members who are close by and are being summoned now.
As soon as we get----
Secretary Rubin. Rob, I think you have a singular
enthusiasm. [Laughter.]
Mr. McCrery. Why don't we go ahead.
The meeting will come to order. Mr. Secretary, as you
heard, there is another vote. However, since one of the primary
authors of the legislation is here, why don't we proceed for as
long as we can, then perhaps some of the other Members will
return and they can allow us to go vote.
Mr. Portman, would you like to inquire of the witness?
Mr. Portman. Thank you, Mr. Chairman. First, I would like
to inquire of you if I may enter into the record certain
publications that deal with the IRS reform issue. We previously
heard from Mr. Coyne and also Mr. Rubin that the Wall Street
Journal and Business Week had supported Treasury's approach;
and just to set the record straight, individual columnists
contributing to those publications have--the Wall Street
Journal has actually editorialized in favor of the approach by
the Commission and by H.R. 2292 and I thought it would be
helpful to include in the record, again, these articles and
editorials which have appeared in magazines and newspapers.
Mr. McCrery. Without objection.
Mr. Portman. Thank you, Mr. Chairman.
Mr. Secretary, thank you for once again coming before the
Committee to talk about this issue that is near and dear to our
hearts. You mentioned earlier my singular interest in this. I
know other Members would want to be here--including Ben Cardin,
with whom I just spoke, but are at other testimonies in his
case and other meetings--and are now on the floor voting again.
Your arguments, of course, I have heard before--both
publicly and privately. As you know, the Commission in private
session with you heard you out. In my view, we addressed some
of the concerns, specifically, in the legislation. You and I
may disagree on that. Perhaps we will have an opportunity to
walk through some of those specific issues, such as tax policy
that you mentioned.
With regard to other points that you made, the Commission
simply agreed to disagree. This is why in the end--although we
heard, I think it is fair to say, every one of these concerns
raised both by you and your able representative on the
Commission, General Counsel Ed Knight, we determined in the end
by a 12-to-5 bipartisan vote to take a slightly different
approach.
I think it is very true what we have heard from Mr. Rangel
and others today that for the most part we are in agreement. I
know your proposal does not address congressional oversight,
nor should it probably coming from the Treasury Department. But
obviously we need to do more in terms of consolidating the
oversight here in Congress on taxpayer rights.
I know that you all chose not to address that as well,
although I do not know that there is a great deal of
disagreement and maybe we can work those concerns out. I do not
know whether it is fair to say it is 80 percent or 90 percent
of the proposals we pretty much agree on, but it is certainly a
substantial part and the majority of the legislation and the
Commission report on which it is based.
The issue, again, that we come back to time and time again
is this issue of the oversight bodies that might, again, meet
those criteria we talked about earlier. I guess my first
question to you would be, do you agree with us? I think you do
that indeed when you look at the problems at the IRS, it really
comes down to some structural flaws in the way the IRS has been
both managed by Treasury and the U.S. Congress and the lack of
oversight. In particular, there is a lack of expertise, as we
talked about and you mentioned in your statement.
Continuity, the follow through, and finally this issue of
accountability, that there has not been a group to keep
Treasury's and the IRS' feet to the fire on the strategic plans
and other proposals, which have been either recommended by the
IRS or promoted by Treasury or the Congress.
Do you agree with those criteria, that we need to meet the
expertise, continuity and accountability criteria to be able to
properly judge your proposal?
Secretary Rubin. I think it is a useful framework with
which to approach the problem, Mr. Portman. Having spent pretty
much my whole adult life running large organizations; and as I
looked at the IRS when I first got there, it seemed to me the
key was to establish an institutionalized, some kind of very
intense oversight as you would--I was actually involved in one
in the private sector--as you would for a troubled company.
It was really out of that concept that the Modernization
Management Board came. It was really out of that concept that
the notion came of having the Secretary and Deputy Secretary be
so accountable to Congress, and publicly--within the full realm
of public exposure, that they would in effect be forced to take
the responsibilities that were needed to be taken.
Mr. Portman. That is interesting. I would agree with you on
the need to institutionalize the oversight function. So I guess
we are one step closer there. Then the question is, what are we
institutionalizing?
One of the interesting conversations I have had in the last
few months with stakeholder groups, with some of the experts
inside and outside the IRS, has been the degree to which the
Commission has influenced, and indeed Treasury, over the last
year. Folks have volunteered to me that they thought the
Commission made some impact, in a positive way.
What I have said in response is, ``What we are trying to do
really is to institutionalize that kind of oversight.'' You are
probably going to be off doing other things. I will be off
doing other things. Senator Kerrey will be off running for
President or whatever he is going to do and the Commission is
now disbanded.
There is a need, I think, to indeed institutionalize the
kind of expertise, customer service, information technology,
management of large service organizations. In many respect I
think this longer term oversight board fills precisely that
role.
I guess what I would ask you is whether you think your
plan, and this is the management board, meets the criteria that
we set out earlier, expertise, continuity, accountability, and
whether indeed it does institutionalize the kind of pressure
that is needed to move the IRS?
Secretary Rubin. Yes, let me respond in two pieces, if I
may, Mr. Portman.
I think that once you get a Secretary and a Deputy
Secretary--particularly a Secretary--to make something one of
his or her highest priorities, I think you then have created
enormous energy that can be applied to dealing with whatever
the issue may be.
So I think if you put into place the legislation that we
proposed, I do believe you will have institutionalized long-
term, ongoing, intense focus. Then the question is, what is the
mechanism through which this focus should operate? The view we
had was that something analogous to the Modernization
Management Board, which is our IRS Management Board, would be
the appropriate vehicle for doing that. So I think the answer
to your question is, yes.
The other part of my answer would be that I think that a
private-sector board, for reasons I discussed in my testimony,
is not likely to work. I actually think the probability of it
working is very slight, because I have lived it. I lived this
thing. I know what it is like.
Between my Deputy and myself, people come to us all the
time with IRS kinds of issues. We are full-time people. We are
there and we can deal with them.
I think a group that has predominant interests elsewhere,
it seems to me, is seemingly unlikely to give the IRS what it
needs in its current state, which is a state in which there are
very many challenges to be met.
Mr. Portman. If we went to bimonthly meetings, would you
support the proposal?
Secretary Rubin. If you were constantly in session and had
full-time people----
Mr. Portman. Let me follow up on that?
In your testimony in the unlikely to work chapter, you do
indeed talk about the need--and I quote your testimony--``For
ongoing, energetic oversight of full-time government employees,
who are available, as needed.''
Secretary Rubin. Right.
Mr. Portman. And you say that is what the IRS needs. I
guess I would have two questions about that.
One, going back to the criteria, do those full-time
government employees provide the expertise needed? Do they
provide the accountability, given that the average tenure is
less than 2 years, of the very people who are selected on your
board, and is there the accountability that we are looking for
if we do not have either the expertise--something we do not--
the information technology, customer service and so on, or the
continuity.
Secretary Rubin. I think you have gotten--if you are taking
those two criteria--I think in terms of expertise that really
depends on what you do. I think that as we have structured it,
we have gotten exactly what we need. We have the CIO--well, let
us just focus on systems for a moment, although you could look
at other areas.
We have the CIO from the IRS, and we have the CIO from
Treasury. So you have two people who are steeped in this sort
of thing. The Advisory Board can consist of who you desire to
have on it, but it would certainly be our expectation that it
would be some number of people who have systems expertise.
It so happens--although this is not necessarily true going
forward--we chose as our nominee for a Commissioner a person
who in his private-sector capacity has run, in effect, a firm
deeply involved in systems. So, yes, I think you can provide
the expertise that you need. You can also pull in extra people
from the outside for consulting, one thing and another.
As far as accountability, I think one of the strengths of
the system is it provides accountability within an existing
constitutional structure of government so that people are
accountable. There is no question where the buck stops. The
buck stops with me; and I find that quite an awesome
responsibility.
Mr. Portman. I guess I would ask whether there is
accountability running the other way? In other words, is that
group going to be able to hold the IRS' feet to the fire if it
does not have, in my view, the kind of continuity that you
would need.
As we said earlier--I think my testimony said it is
probably a 3 to 6 year process of retraining the work force,
computerizing the IRS, bringing the IRS up to speed, if you do
not have that continuity. In my view, the expertise you are
looking for really is outside expertise. It is taking advantage
of the service revolution that is occurring in the private
sector, and trying through these special government employees,
subject to all of the restrictions that special government
employees are, which includes disclosure--financial disclosure,
conflict of interest, confirmation by the Senate and so on can
bring to bear.
I guess what I would ask is that over the next couple of
months as we work through this, that we can see whether--if you
indeed agree with the criteria--whether indeed there is an
oversight body that meets those criteria that perhaps provides
that continuity we are talking about, provides that expertise,
and in the end, provides that accountability. Because I think,
again, if we do not do that, we will have failed in our mission
to make long-term change. I do, again, as I said in my
testimony, commend you for the amount of time and effort you
have put into this over the last year. If you can make a
commitment that you will be with us for another 5 years--3 to 6
years, I think we said--I might feel differently about it. But
that is not going to be the case, and this is a structural law
that I think needs to be addressed and not simply something
that might apply to this current administration and your
renewed interest and Mr. Summers' interest in the oversight of
the IRS.
Secretary Rubin. I appreciate the comment, Mr. Portman. My
answer to you would be this--you know, I have seen the private
sector too.
I think if you could institutionalize the structure that we
have, particularly given that you have--well, I do not
necessarily depend on this--but given that you do have career
IRS personnel. I think the history of the last couple years
suggests that this can and will work.
My problem with the--as you know, because we discussed this
many times--my problem with the outside board is, I do not
think it is a question of continuity, I just do not think it is
very likely to work altogether. So I do not think you are going
to get continuity in something that does not work.
No, I think if you institutionalize this the way I said,
even though people will turn over just as they did at the firm
I used to be at, once you have a structure institutionalized
and you have a top management who take that responsibility with
the enormous seriousness that I think it has to be taken, I
think you will have the continuity and you will have the
intensity and effectiveness that you need, I do.
Mr. Portman. Again, I would suggest that the average tenure
for a Treasury Secretary is also somewhere between 2 and 3
years, even continuity at that higher level might be lacking.
I thank you, Mr. Secretary. Apparently we have to now make
a sprint for the floor.
Secretary Rubin. You are going back?
Mr. Portman. Thank you, Mr. Chairman. I yield back my time.
Mr. Collins [presiding]. We thank the gentleman for his
inquiry. Mr. Secretary, I know you have to leave very shortly,
sir. Two things.
One, we have some questions that Congresswoman Dunn would
like to submit to you in writing for some reply.
[The questions follow:]
[GRAPHIC] [TIFF OMITTED] T8922.544
[At the time of printing, no answers had been received.]
Mr. Collins. Also, Congressman Neal would like to ask a
brief question.
Secretary Rubin. Sure.
Mr. Neal. Thank you, Mr. Chairman.
Mr. Secretary, there has been some confusion about the
legal authority that is proposed in the Portman-Cardin bill.
Some supporters have suggested that under 2292 that there are
no legal authorities. Is that your assessment?
Secretary Rubin. Are you asking me whether I think that
there is legal authority in this governing board?
Mr. Neal. Yes.
Secretary Rubin. Oh, I think, Mr. Neal, there is enormous
governing authority. Let me get to--well, I think I remember it
well enough to deal with the statute.
The statute says that the Board has the power to review and
approve--review and approve a budget and then submit it to the
Treasury, that has to pass it on unchanged to the President and
to the Congress. That power over the budget is a very
substantial power.
The Board also has the power to review and approve
strategic plans, a very substantial power. The Board also has
the power to--and sole power--to approve and dismiss the
Commissioner. So, as long as the Board can dismiss the
Commissioner, it seems to me it basically has full power over
everything the Commissioner does.
Because if it is dissatisfied with any aspect of what the
Commissioner does, it can dismiss the Commissioner. There is
also specific statutory language which in effect takes a wide
range of powers that have previously existed in the Secretary
of the Treasury, and puts them in the Commissioner. So the
Commissioner then has those powers and the Commissioner reports
to the Board, which can dismiss him or her.
So I would say that the Board is--I do not have any
question that the Board is vested with enormous power over the
IRS. It is a governing group.
Mr. Neal. I appreciate your insight, Mr. Secretary, thank
you.
Thank you, Mr. Chairman.
Mr. Collins. We thank you, gentlemen.
Mr. Secretary, before you leave, you know one of the most
intimidating or fearsome things to me is to go to the mailbox
and find a letter that has a return address on it that says,
``Internal Revenue Service.'' I mope and drag all the way back
to the house and ask my wife to open it and read the bad news
to me, because I just cannot stand to read it myself.
Therefore, I think the Commission's proposal for
restructure is a very formal proposal. I understand that you
have some difference of opinion. But even in your comments, you
made the statement that even with restructuring, in 10 years,
you as a taxpayer would still not like the IRS because, ``I
will still be fearful of receiving that letter in the mail from
the Internal Revenue Service.''
So, therefore, it appears to me that the only way we can
overcome that fearfulness as a taxpayer, and for other
taxpayers, is to restructure and reform the--not only IRS, but
the whole Tax Code to something that is flatter, simpler and
more fair, whether it is a consumption tax, or it is just a
flat income tax. Because of the statement you made, in 10 years
I will still hate the IRS. I will still fear them.
Is that not true, sir.
Secretary Rubin. Well, I do not think actually that
statement about 10 years was in my testimony. It may have been
in somebody else's, but, tax collection agencies have never
been popular. I suspect they never will be popular.
You are raising another issue, which is the question of
should we reform our tax structure--have structural tax reform
and go to a flat tax of some sort. I think that is what you
said.
Mr. Collins. My point is that it is just fearsome to me to
pick up a letter out of the mailbox that has a return address
for the Internal Revenue because I know that any news from the
Internal Revenue is not good news. The only good news from the
Internal Revenue is no news.
Secretary Rubin. Let me say this, Mr. Collins----
Mr. Collins. The only way that I see I can overcome that
intimidation is that somewhere in the future there would be a
complete elimination of the IRS, or either a downsizing to the
point we would not have that intimidation, no matter how we
restructure the top end of it.
Secretary Rubin. Let me break it into two parts, if I may.
I do think, as I said in my testimony, that there is a need for
a great deal of change at the IRS. I think we have accomplished
a good bit, but there is a lot to do. We are committed to
change and we need to make it taxpayer friendly and all the
rest.
Having said that, the tax collection process by itself will
always I think be unpopular. I suspect--I really have not
thought it out in terms of a flat tax. But no matter what kind
of a tax you have, there are always going to be people who have
problems with those who collect the taxes and that is going to
create issues.
If you are asking me the other question, do I think that we
should have tax reform, in effect thereby eliminating the IRS,
then that is a whole other megaquestion. I do happen to have
views on that subject, but I think it is a different and very
complicated question that I suspect will probably get debated
in the context of this debate about--may get debated in the
context of this debate about reforming the IRS.
Mr. Collins. Yes, we are just starting that.
Thank you. Mrs. Johnson, you have a quick question?
Mrs. Johnson of Connecticut. Thank you. I have already
voted on this--what is before the House--so I am just waiting
for the next vote.
But, Mr. Secretary, I did hear your testimony. I am sorry I
have not heard the questioning of my colleagues, so, I
apologize if I am repetitive.
I do hope that we will, in the end, be able to bring
forward a bipartisan bill as well, but I am very concerned
about the governance structure that you have proposed. The
Management Board made up of executive branch people seems to me
not to respond at the level that we need to respond to the
expertise issue.
We really have to bring people into helping us modernize
government. Civil service people in Treasury and in OMB and
other parts of the administration--many of them have been there
a long time. If you are going to take the top people, then you
have all political appointees.
Now, there are agencies that work together. You have been
getting their input. But you know, I have been around for a
long time. I have watched the Defense Department try to reform
procurement. I went through the whole FAA effort in trying to
allow the FAA to modernize its technology governing landings
and take-offs at our airports, and failing to do so, because we
really could not within the bureaucracy, meet the demand for
expertise in an ongoing, advisory way.
It seems to me that we really need to bring a board to the
service of the IRS, with a breadth of experience that is
envisioned in this board; and that substituting people from the
OMB and the Vice President's office--which incidentally I think
is extremely dangerous--plain, flat-out dangerous----
Secretary Rubin. That is not in our goal, Mrs. Johnson.
Mrs. Johnson of Connecticut. Well, it was in your original
proposal.
Secretary Rubin. Yes, but we agreed with your view and we
took it out of the bill.
Mrs. Johnson of Connecticut. OK, but even so, OMB also is
naturally in the service of the President, so is the
Secretary's office. We need to have outside expertise with an
independent view and broad experience in how the private sector
manages technology such as new pay structures, personnel issues
and management issues. We have never had that. That has impeded
our ability to modernize service in department after department
in the years that I have been a Member of Congress--though we
have tried.
Secretary Rubin. Well, let me partly agree, if I may Mrs.
Johnson, and partly--well, I do not so much want to disagree as
to try to draw a distinction.
I have enormous respect for the private sector. I came out
of it. I spent 26 years in it. I might add, incidentally, a lot
of the problems I have seen at IRS with respect to systems,
were the same kinds of problems that the firm I was part of
had. It took us probably--well, toward 10 years to get the
systems operation right, and we----
Mrs. Johnson of Connecticut. In the private sector?
Secretary Rubin. Yes.
Mrs. Johnson of Connecticut. It is just that there is an
urgency in the private sector that makes them noncomparable. If
you do not modernize in the private sector, you are out of
business in the end. In the public sector, you are still in
business for ever and ever, regardless of what you do.
Secretary Rubin. No, I am not--I am just saying that these
problems are not totally public sector problems.
I think there is a very great value to having private-
sector expertise. I do not disagree with that. Our notion was
that in part you would have it through the advisory board. In
part you could have it through--and you very well might choose
to have it--through special groups of people that you called in
to advise you on particular problems.
For example, on the blueprint that we put out. That is
being put out as part of the public/private partnership. A lot
of the work will be outsourced.
Mrs. Johnson of Connecticut. OK, can I just have a dialog
with you because I think----
Secretary Rubin. Sure.
Mrs. Johnson [continuing]. Because I think----
Secretary Rubin. Could I just add one more word, though?
But I think the distinguishing character--but I think the
distinction, though, that I would like to make is that if you
are calling upon outside expertise--which I agree with--and the
governing power over the IRS is placed in these outsiders is
what I disagree with.
Mrs. Johnson of Connecticut. But our failure has not been
in not seeking advice. We have had an advisory board. Our
failure has been in implementation. Our failure has been in
continuity. Our failure has been the inability to oversee
change.
The mechanisms you point to, even the plan you have, that
is short term. We do not do such a bad job in the short term.
In fact, your involvement and your interest in the IRS during
the time that you have been the Secretary of the Treasury, has
made a difference. It is just that nobody has before and
probably nobody will after and we cannot count on that
mechanism.
So, what impresses me about the proposal before us is that
it provides expertise and continuity. Your advisory board is to
me a statutory rendition of what is already there.
The advisory boards, we all know, get listened to or not,
depending on whatever the weather is. So, I am not impressed
with advisory boards. I want more concrete input than that. I
want a closer coupling of action and advice than your advisory
board gives. Your coupling of action and advice is really with
the OMB, Treasury, executive branch team. Those are
administrators, who in their own bureaucracies, need to
modernize and have not.
So I do not see how we couple them for action. We have to
couple advice and the agency for action. Coupling OMB, Treasury
and the executive branch--with all due respect--does not give
one a lot of belief that action will result.
Secretary Rubin. Well, let me respond, if I may, Mrs.
Johnson.
On the question of, will future Secretaries and Deputy
Secretaries take this with the seriousness that I do believe
Larry Summers and I have? We--as you know, we have addressed
that and what I think--in a mode that I think will work.
Having now been there almost 5 years, one of the things I
have noticed is that, if there is a lot of public exposure for
something that I am doing, it gets a lot of attention. That is
the reason we put in the provision about reporting to Congress.
I think we should report more frequently. I think we should
report often enough so that a Secretary would have to take it
as a number one priority--well, wait a minute--as a prime
priority.
I do not think I agree with the other, Mrs. Johnson. I
think that if you have people in the form that we have in our
IRS Management Board, and you put the appropriate people inside
the government and you support them with advice and
consultation outside the government, I think you can make that
work. And I think you can get what you need to get done.
My fear is the one that I expressed before. I just do not
see a board that meets once a month and gives basically a
sporadic kind of attention from people whose minds are
predominantly elsewhere, being effective. But that is--you
know, that is----
Mrs. Johnson of Connecticut. Thank you for your thoughts,
and I look forward to talking with you about this in the
future.
Secretary Rubin. Sure.
Mrs. Johnson of Connecticut. I did not realize you had a
deadline. I had lost track of that when I was out of the room.
Sorry for having taken so much of your time.
Mr. Collins. I understand Mr. Coyne has a brief question
and that you have been instructed to give a brief answer, so we
will move to Mr. Coyne.
Secretary Rubin. I will match the brevity of your question,
Mr. Coyne. I doubt the President is here.
Mr. Coyne. Thank you. Thank you, Mr. Chair.
Mr. Secretary, we are going to hear testimony later on
today from witnesses--at least from one witness--who will say,
It is also somewhat troubling and surprising that the
administration's tax proposal--the IRS proposal--does not
preclude either the management board or the advisory board from
involving themselves in tax policy, law enforcement,
procurement decisions and day-to-day management of the IRS.
It also appears that members of the management board, some
or all of whom may be political appointees, would have access
to tax return information. While this may not have been
intended, it is a frightful thought.
Could you address yourself to that?
Secretary Rubin. On the last piece there, Mr. Coyne, under
section 6103--I do know counsel is here, I am not sure, he
might have seen this--they would not have access--well, he was
here. Oh, he is still here. OK.
That is simply not correct. They would not have access to
taxpayer information. If there is any ambiguity with respect to
that in the legislation, we will change it. Under 6103, they
would absolutely not.
What was the first part of the question?
Mr. Coyne. Well, involving themselves in the daily
operation of the IRS.
Secretary Rubin. Well, they would not be involved with case
specific matters, as a matter of practice. They would not get
taxpayer information. They would be involved in such matters as
systems, customer service----
Mr. Coyne. Law enforcement?
Secretary Rubin. Yes, with law enforcement. Not with
cases--not with individual cases. Zero, with respect to
particular cases. But, the budget is related to law
enforcement, or the strategy is related to law enforcement, and
matters of that sort.
They would be involved in exactly the kinds of things you
want them to be involved with, to provide the energized
oversight that will help the IRS reform and become the IRS we
want it to be.
Mr. Coyne. Thank you.
Secretary Rubin. But nothing case specific.
Mr. Coyne. Thank you.
Secretary Rubin. Thank you, Mr. Coyne.
Thank you, Mr. Collins.
Mr. Collins. Thank you, Mr. Secretary. We know we have kept
you a few minutes overtime.
Secretary Rubin. No, no.
Mr. Collins. We appreciate it.
Secretary Rubin. I am pleased to be with you all. Thank
you.
Mr. Collins. OK, our next panel--are you all ready? Does
someone have their nameplates?
Mr. Goldberg, we have you listed first on the panel. Let me
see, you are a Commissioner, National Commission on
Restructuring the Internal Revenue Service.
Will you go ahead and give us your testimony?
STATEMENT OF HON. FRED T. GOLDBERG, JR., COMMISSIONER, NATIONAL
COMMISSION ON RESTRUCTURING THE INTERNAL REVENUE SERVICE
Mr. Goldberg. Thank you, Mr. Collins. I request my written
statement be included in the record, and I will try to keep
this very brief.
Mr. Collins. All of the statements in their entirety will
be entered into the record.
Mr. Goldberg. Thank you.
Having listened to today's hearings, I would like to just
take this opportunity to just jump right in and talk about this
question of private-sector involvement in the board structure
that the Commission recommended. That clearly--that has been
identified as the issue that concerns most folks, and I would
like to talk about it.
The starting point is that the Commission members shared
those concerns. Anytime you talk about putting folks, who are
private-sector individuals, into a position of some kind of
responsibility in the government, you need to be very careful
about that. I think the Commission bent over backward to be
sensitive to those concerns.
I believe that when you look at the facts, when you look at
the legislation as introduced, the Commission was wholly
responsive to those concerns. In particular, I believe any
suggestion that the Commission recommended turning IRS
management over to the private sector is simply wrong.
I would like to take a few minutes--this is not flowery
stuff, but I think it is important to look at the facts. The
President remains ultimately responsible. The President
appoints the board members, and the President can remove the
board members at any time for any reason.
Second, the proposal leaves in place Code section 7801(a).
Section 7801(a) of the Internal Revenue Code provides that the
administration and enforcement of the tax laws is to be
performed by or under the supervision of the Secretary of the
Treasury.
Third, by statute, the board would have no involvement in
or authority over tax policy matters, tax law enforcement,
procurement decisions, day-to-day administration of the tax
laws. By statute, the board would have no access to tax return
information.
Fourth, the expressed function of the board is to provide
oversight, not management. As introduced, the legislation makes
this clear. It is an oversight board, and it is a board that
resides within the Department of the Treasury.
Fifth, by their very nature, the board's products--what
this board does, ends up in the public domain. At the end of
the day, everything this board does, what it produces is
subject to the scrutiny of the Congress and is subject to the
scrutiny of the American people.
Sixth, as introduced, the board has nine members. That
means that each member's conduct is subject to the review and
assessment of his or her eight colleagues.
Finally, while the Commission members are absolutely
confident that this administration--in particular this
administration and this Secretary--will be able to recruit
representatives of the business community who are of the
highest integrity and competence. That is not required. We
assume that some members of the Board would come from other
walks of life, academia, the nonprofit sector, state and local
government, retirees from both the public and private sector.
If some administration were so uncomfortable with the
involvement of the business community, they could create a
board of directors consisting of no one from the business
community.
Finally, let me talk about the budget. There is apparently
some confusion on this score. The Board will indeed form its
position on funding for the IRS and will communicate that
position, publicly. That is exceedingly important. This
Congress has already vested similar authority in the Social
Security Administration.
But that is not the budget of the IRS. The Congress decides
the funding for the IRS, through the normal appropriations
process. So while the Board performs a critically important
function in expressing its independent views on funding, those
decisions regarding funding stay exactly where they are.
So, again, I think it is confusing and misleading this
entire discussion to talk about turning the IRS over to the
private sector. It is not the recommendation. It is not going
to happen. It should not happen. It is a red herring argument
in its entirety.
Real quickly, on the point of continuity. Changing computer
systems, introducing quality concepts into one organization,
revising training, changing culture of an organization--these
are very, very hard things to do. They take more than 2 or 3
years.
The Secretary said it took 10 years to do systems work in
the private sector. There is nothing about the administration's
proposal that offers the slightest hope for the continuity that
is required.
Thank you very much, Mr. Chairman.
[The prepared statement follows:]
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Mr. Collins. Thank you, Mr. Goldberg.
Mr. Weston, you are next, please.
STATEMENT OF JOSH S. WESTON, COMMISSIONER, NATIONAL COMMISSION
ON RESTRUCTURING THE INTERNAL REVENUE SERVICE; AND CHAIRMAN,
AUTOMATIC DATA PROCESSING
Mr. Weston. Thank you, Mr. Chairman. I am also chairman of
Automatic Data Processing. I have been a senior ADP executive
for over 25 years. President Clinton appointed me to the IRS
Commission. I was the only large company chief executive
officer on the Commission.
ADP itself is a $4 billion-plus computer service. We have
60 computer centers, 33,000 employees and the longest growth
record in America, 36 years in a row of double-digit growth.
We pay 22 million Americans on payday. We are
electronically interfaced with 2,000 U.S. taxing authorities,
from IRS to local school districts. Our IRS relationship is
paperless. We transmit $200 billion a year to IRS. That is one-
seventh of the Federal Government's revenues.
We also give IRS 35 million, paperless, W-2 forms and
millions of electronic tax returns. ADP handles over 50 million
phone calls per year, and while 40 to 60 percent of the IRS
phone calls reach their destinations, well over 90 percent of
the calls to us reach us at the proper point.
We support 100,000 computer terminals for Wall Street,
where response time is measured in milliseconds. Our computers
process 20 percent of Wall Street trades, where timing and
accuracy are absolutely critical, as with payrolls.
So I think I know a lot about service, efficiency,
computerization and management. In addition, I serve on the
boards of four large service companies. In each case, I think I
am a well-informed, focused and influential part-timer.
Although those boards generally pay me around $30,000
annually, they get my dedicated attention. My fellow board
members have more board longevity than do relevant Treasury
executives and the present advisory boards concerned with IRS.
Our private-sector boards neither micromanage nor do they
implement policy. They do not manage. Boards do not run
companies. They are not in charge. chief executive officers are
in charge. Effective boards do maintain clear focus, clear
oversight and continuity. They demand measurable plans,
competent organizations and good outcomes from the chief
executive officer.
The President recently named a very qualified, private-
sector executive to be IRS Commissioner. Because of my
connections in private-sector activities, I was the private-
sector part-timer who identified this next IRS chief executive
officer to Larry Summers.
I give you a lot of this background because it illustrates
the kind of public-minded talent that is available for the IRS
Board that our Commission recommends. There are many qualified,
private-sector individuals like me. They are not all chief
executive officers, and my description illustrates why I
disagree with the Treasury's view that an external IRS Board of
part-time executives would not be appropriate, qualified or
dedicated for the IRS operations and service.
As a further indicator of the relevance of private-sector
executives to IRS, I can tell you that in just 4 months on the
IRS Commission, I made indepth visits to five tax centers. I
doubt that any of the salaried Treasury advisors have learned
from as many IRS field personnel and tax processes as I did as
an unpaid part-timer. There are others like me who could bring
relevant experience and competence and consistent guidance to
the IRS.
By contrast, as to relevant experience, consistency and
accountability, the past 20 years clearly indicate that
existing IRS and Treasury oversight have suffered from a
glaring lack of relevant experience, focus and consistency
regarding large scale, service and operation activities.
IRS oversight by Treasury is flawed because the relevant
officials, as you have well heard, generally have low longevity
and limited experience to guide IRS. The Treasury proposal does
not amend or improve this situation.
I would like next to talk about accountability.
Accountability is very important. It is absolutely the missing
ingredient in the Treasury proposal. Accountability only
applies to persons, not to departments, not to positions. An
incumbent feels accountability only if he or she both launched
and finished a plan or a business cycle.
Successor appointees cannot effectively be held accountable
for a prior incumbent's deeds or plans. Short longevity in
Treasury absolutely negates effective accountability.
Our proposed board and IRS Chief Executive Officer would
both have the longevity to permit effective accountability.
The bulk of IRS employees are not in heavy-duty
enforcement. Most of them are in service, phone call activities
and computer operations, because well over 75 percent of
revenues come in almost automatically from withholding taxes
and employer payroll taxes.
Therefore, it is particularly important to get help with
accountability that can improve service, clerical activities
and computer operations.
I thank you for your time and would be happy to answer any
questions.
[The prepared statement follows:]
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Mr. Collins. Thank you, Mr. Weston.
Mr. Wetzler.
STATEMENT OF JAMES W. WETZLER, COMMISSIONER, NATIONAL
COMMISSION ON RESTRUCTURING THE INTERNAL REVENUE SERVICE; AND
DELOITTE & TOUCHE LLP
Mr. Wetzler. Mr. Collins, thank you. I am James Wetzler. I
am speaking here as a member of the Restructuring Commission
who dissented from the final report. My experience with tax
policy and administration is primarily 11\1/2\ years spent here
on the staff of the Joint Tax Committee, and then 6\1/2\ years
as New York State Tax Commissioner in the latter part of the
eighties and early nineties.
Let me first emphasize that there was a substantial
consensus within the Restructuring Commission on quite a number
of points. I tried to outline that in the first couple of pages
of my statement. We agreed on quite a number of things, and if
you put together an IRS reform bill that consisted of all the
items on which there was a substantial consensus, you would
have a very, very successful reform of tax administration in
this country.
I am not going to belabor that here, because I think it is
more useful to go into some of the differences.
You should start your deliberations on this issue with a
balanced assessment of the strengths and weaknesses of the
Internal Revenue Service. We have heard a lot about the
weaknesses in the last year. We have heard a lot about the
weaknesses so far today in this hearing.
But the IRS also has very substantial strengths, and they
are not always given proper attention in the public discussion.
The IRS, remember, is basically an organization that is
accomplishing its mission. Taxpayers do get their refunds every
year. The tax forms are printed and distributed to taxpayers;
their accounts are maintained.
The country has a tolerably high level of voluntary
compliance with our tax laws. The IRS runs a very low-cost
operation. Measured in terms of its budget as a percent of
revenue collected, the IRS is much cheaper than tax
administrations in states here in the United States, or in
other countries.
Confidentiality of taxpayer information is maintained. The
IRS issues a massive amount of guidance every year about our
very, very complex tax law. And the IRS is almost entirely--and
has been for many, many years--almost entirely free from
political interference, if not entirely free. These are very
substantial assets. Things could be a lot worse.
Other countries like Italy and Russia envy our relatively
successful tax administration. You are dealing in an area where
the downside of making our tax administration worse is very,
very serious. Because a serious deterioration of our tax
administration below what it is today threatens the fiscal
stability of the country.
So I urge you to approach your task with a balanced
assessment of the Service's strengths and weaknesses. Things
could be a lot worse.
I dissented from the Commission's report for two reasons.
One is, I am opposed to the idea of turning management of the
Internal Revenue Service over to a private-sector board; and
second, there were certain areas that I thought should have
received more attention in the Commission's report than they
actually did--and I will allude to those in a minute or two.
Let me start with the governance suggestion. My objection
to the Board is not an ideological objection. The reason I
object to it is, having thought about the idea for the better
part of a year, I still cannot identify sensible solutions to
what I think of as serious problems with the way this would
actually work on a day-to-day basis in practice. Indeed, I
continue to think about it, and I continue to identify problems
at a somewhat faster rate than I am identifying solutions.
The proposal envisions a matrix management structure for
the Service. The Board would hire and fire the Commissioner,
approve the Service's budget and strategic plan, and review
operational plans, as well as the pay and hiring of senior
officials.
However, the Board would be specifically precluded from
involving itself in law enforcement matters, procurement
decisions and tax policy--and I assume by this we mean tax
policy as both the IRS input into your decisions on how to
write the tax laws, as well as the content of guidance issued
by the Internal Revenue Service, rulings, regulations and so
forth.
I do not really understand how this would work. Would the
Secretary continue to supervise the Commissioner with respect
to all the matters from which the Board is precluded? How would
the Secretary exercise his authority over the Commissioner and
the senior staff over any aspect of their performance, when he
or she has no involvement except as a board member in payroll
and personnel decisions?
What would prevent the Board from intervening into matters
from which it is supposed to be precluded? How would the Board,
in its hiring and firing decisions, take proper account of how
the Commissioner is performing, or the Commissioner's
capabilities, in the precluded areas? Who would supervise the
Commissioner with respect to areas that are not specifically
reserved for the Board, but from which the Board is not
specifically precluded? Is it the Secretary or is it the Board?
When Congress gets two different IRS budget requests, one
directly from the Board through the Treasury, the second from
OMB, how is Congress going to respond? Are they just going to
take each line item and pick the lower of the two amounts and
that will be the IRS' budget? It is hard for me to see how this
is going to work successfully on a day-to-day basis in
practice.
The conflict of interest issue, I think, is important. To
my mind, this is largely an issue of perception. Personally, I
am confident you could select board members who have the proper
qualifications, who are willing and able to put aside their
parochial interests and make decisions that are in the best
interest of tax administration. I think if you select the board
members properly, they will be able to handle themselves
ethically.
But I think in approaching the conflict of interest issue,
you have to consider realities in modern-day Washington. This
is a town where you create a national scandal if you buy
somebody lunch. I really think that as a practical matter, the
people who have the qualifications that you are going to want
on a board like this are going to have perceived conflicts of
interest, and this issue will totally dominant the appointments
process, the confirmation process, and the public perception
and the press coverage of the Board's behavior, once it is
appointed.
Finally, boards have a very mixed record of directing
organizations. Some are very successful and contribute to their
organization's success. Others are inattentive and do little or
nothing. Some boards micromanage and make their organizations
worse.
The key to a board-directed structure is that there is no
one person who is responsible. The board's responsibility is
defused among the board members. No one of them actually is
responsible for the success of the organization, and that
causes some boards to perform well, and some boards to perform
poorly.
Given the risks of poor performance, and the risk to the
country of an organization that would cause the IRS to
deteriorate, as some organizations do, I am not sure I would
want to take the risk inherent in a board structure.
An alternative governance structure can create virtually
all the advantages of the Commission's recommendations without
the disadvantages.
You can get outside input through an advisory board, an
advisory board that makes public reports to Congress. As a
practical matter, that is going to give that board a lot of
power. The Secretary of the Treasury is going to be very
reluctant to ignore public reports given by his advisory board
about how things like systems modernization or other features
of our tax administration are proceeding.
However, because the board would only be advisory--would
not have decisionmaking power--Congress and the President could
feel free to ignore those suggestions, and the conflict of
interest issue would be greatly reduced.
I think the way you would get the Secretary to pay
attention to tax administration, as Secretary Rubin suggested,
is to haul him up here a couple of times a year to tell
Congress what he is doing to improve tax administration, and
that as a practical matter, will focus the Secretary and the
Deputy Secretary's attention on making sure they have something
constructive to say during these hearings.
I do not see a need to legislate the creation of an
internal IRS Management Board consisting of government
officials within the executive branch. As a practical matter,
many executive branch agencies exercise some control over
various aspects of the IRS: the Office of Personnel Management,
the Office of Management and Budget, the General Services
Administration, various bureaus within the Treasury Department.
It seems reasonable to suggest that they should meet
periodically to make sure they all are operating under the same
strategy. I do not see why that has to be legislated. People
can have meetings any time they want to without Congress
writing legislation.
My testimony goes into some areas I believe were not given
proper emphasis in the Commission's report, and those include
the IRS budget, budget scorekeeping and the tax compliance gap.
I will leave those for my written statement and will be happy
to respond to any of your questions.
[The prepared statement and attachment follow:]
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Mr. Collins. Thank you, gentlemen.
Mr. Goldberg and Mr. Weston, I have an interest in your
comments about the particular proposal by the Commission--and
yours, too, Mr. Wetzler. You had very interesting comments
also.
You stated very firmly that this does not put the IRS under
the private sector. Mr. Goldberg, go back through those steps,
maybe the first four, once again, as briefly as you can.
Mr. Goldberg. The President has full authority to appoint
and remove the board members. By statute, Code section 7801(a)
will continue to vest responsibility for tax administration and
enforcement in the Secretary of the Treasury.
Third, by statute, the Board will be precluded from any
involvement in tax policy, tax administration or procurement
and would have no access to tax return information.
Fourth, the statute specifically identifies its
responsibilities as oversight and the duties it is asked to
perform are those of oversight, not management.
This inability to distinguish between management and
oversight is what plagues the Federal Government, Mr. Collins.
The Treasury proposal was more micromanagement. The whole point
of the Board's structure is not to have these people messing
around in the day-to-day concerns. The point is to have
somebody who will say, ``What is it going to look like in 3
years, in 5 years, in 10 years?''
How can we deliver on that promise 3, 5, 10 years from now?
What do we need to do to deliver on the future; and that does
not exist today; and that is what this Board is all about.
Mr. Collins. Mr. Weston, you said you had been to several
different regions visiting with employees and also supervisors.
Did you find that the directors at those different regions were
inconsistent in how they interpret and enforce? Did you find a
lot of the decisionmaking on what went on within a region that
varies from region to region mainly made by the director
himself or herself?
Mr. Weston. No, I would not say I found that kind of
inconsistency. I found loyal, conscientious people who had
received directives or were subject to budgets that did not
strike me to be in balance with the best of service and
operations, and as a result, I think unfortunately we are
compelled to generate a burden on taxpayers and unfavorable
environments that in a private sector you would say are
unacceptable, whether it is telephone calls being answered only
40 percent of the time, or backlogs in certain kinds of
correspondence going back for months; or not withstanding the
presence of a so-called taxpayer advocate.
I have seen cases where the same issue has reverberated 15
times without resolution in a local district because they did
not have the authority to say, ``This is what is right. Do
it.''
So, my answer to you is, there are darn good people, but
the overall management practices, the budget as it was
constructed, senses of urgency did not strike me as being up to
the standard that I know many people in the service industries
could help out on.
Mr. Collins. Do you want to comment, Mr. Wetzler?
Mr. Wetzler. Mr. Collins, could I comment on Mr. Goldberg's
statement about what this proposal means. Because, I think it
all boils down to who has the power to hire and fire the
Commissioner.
You are dealing here with a matrix structure where the
intention, as I understand it, is that the Commissioner reports
to the Board with respect to certain matters and to the
Treasury with respect to other matters.
But, the fact is right now the President appoints the
Commissioner and can fire the Commissioner. The President is in
frequent contact with the Secretary of the Treasury, so the
Secretary is in a position to supervise the Commissioner
because the Commissioner knows that the Secretary is likely to
be very influential with the President in terms of the
President's decision on whether to hire or fire. So the
Commissioner responds to the Secretary.
Under a board structure where the board has the power to
hire and fire, I cannot see any result other than the
Commissioner being very, very responsive to the board and very
unresponsive to the Secretary. Because the fact is, while the
board is appointed by the President, the only way the President
can, under this proposal, get rid of the Commissioner is to
fire the board, wait until the Senate confirms a new board, and
then the new board can fire the Commissioner.
As a practical matter, that is going to lead to a much more
attenuated political accountability than exists when the
Commissioner is reporting directly to the Secretary with
authority delegated by the President.
So I think as a practical matter, this proposal does
involve putting a group of part-time, private-sector
individuals in control of the Internal Revenue Service.
Now, I am not saying you cannot find very dedicated people
to perform this function, not that they would not do a good
job. I am just saying, that is what the proposal involves, and
I think it is a concern to many people.
Mr. Goldberg. Mr. Collins, could I clarify a couple of
points.
Mr. Collins. Very briefly, because I know the other Members
want to ask some questions.
Mr. Goldberg. First, both Mr. Wetzler and the Secretary
referred to the Commission's recommendation that the Board have
authority over pay and compensation and hiring of other IRS
executives. That piece was deleted from the legislation that
was introduced because Mr. Cardin expressed the kinds of
concerns that have been voiced. I think it is important to
clarify that this is an evolving process.
Second, if Mr. Wetzler thinks that the Commissioner would
be so responsive to the Board because the Board hires and fires
the Commissioner, one would assume the Board would be very
responsive to the President, because the President hires and
fires the Board.
Mr. Collins. Mr. Weston.
Mr. Weston. Mr. Chairman, may I comment on one part of Mr.
Wetzler's comments.
The way he put it one could think that hiring and firing is
the crux of oversight governance and guidance. It is not. On
every board I am involved in, intelligent, conscientious
people, occasionally with diverse points of views, one of whom
might be the chief executive officer, work back and forth on
issues--and there is not a pervasive sense of, ``Well, if I as
a chief executive officer can be fired by that board member, I
will kowtow to every suggestion the board member makes.''
It does not represent the reality I live in in the four
boards I am on.
Mr. Collins. Thank you.
Mrs. Johnson.
Mrs. Johnson of Connecticut. Thank you.
Mr. Wetzler, I was interested in your last comment. You
said, ``It all boils down to who has the power to appoint the
Commissioner.'' If this report was changed so that the
President did retain the authority to appoint the Commissioner
as under current law, would you support it?
Mr. Wetzler. As I understand the legislation, if the Board
no longer had the power to hire and fire the Commissioner, the
Board would have two remaining powers. One would be the power
to approve the IRS budget and send it to Congress. Under the
legislation that has been proposed, the Board would have one
budget and OMB would send up another budget, and Congress would
then write its own budget--which is what it is going to do
anyway.
Mrs. Johnson of Connecticut. My understanding is that the
Board would approve the budget and then the Secretary would
have to approve the budget before it went up to OMB.
Mr. Wetzler. I may be mistaken, but as I understand the
legislation, the Board would approve an IRS budget request that
would be transmitted directly to Congress, and OMB would
approve its own recommendation for the IRS budget. So really
there would be two proposed IRS budgets, if I understand the
statute.
Mrs. Johnson of Connecticut. OK.
Mr. Wetzler. In any event, Congress is going to write the
budget one way or the other. So Congress ends up with ultimate
authority over the IRS budget at the end of the day under any
of these structures--which is what the Constitution provides.
So the remaining power of the Board would be approving the
strategic plan of the IRS. That would be the one remaining
piece of authority left in a private-sector board.
Mrs. Johnson of Connecticut. Does that disturb you?
My question was, if the President appointed the
Commissioner, would you then support the report?
Mr. Wetzler. Oh, with the one remaining power?
Mrs. Johnson of Connecticut. With the Board approving the
budget, but also approving the strategic plan.
Mr. Wetzler. I do not know. I would have to think about it.
Mrs. Johnson of Connecticut. I wish you would think about
it. Because first of all, it is very important to me that the
Board does make whatever statement it wants to make about the
budget. Frankly, nobody controls what OMB is going to send
forward, the Commissioner or the Secretary will send OMB what
he wants, OMB will do whatever they want and they send that to
the Congress. We all know that.
Furthermore, what OMB says to the Congress about the budget
may or may not be taken seriously. It is a terribly haphazard,
chaotic practice. It would be far better for the IRS, if under
a formal process that Board is able to say, ``This is what we
think the agency needs,'' to both the executive branch and the
Congress. It is one way of creating, greater budget continuity
and consistency and support. So I do not object to that.
But you know, that is not a big power there. To approve the
strategic plan, I think is good to have some outside eyes. But
also, this issue of continuity, I think, is extremely
important. Appointees in the executive branch at the top level
are short-term folks. Bureaucracies are long-term folks.
The Congress is made up of short-term folks. If you are
going to make change in any big organization, 5 years is rather
a limited amount of time to make any change. You may have heard
in preceding hearings our concern about the fact that they set
the objective in 1993 to get 80 percent of filers electronic,
but no plan was ever laid out. We never knew what their plan
was. Nobody could ever hold them accountable.
We only really got the technology modernization problem
visible because there was a change in the majority; and so the
Oversight Chairman changed--and this is not to put down my
predecessor, it is just that lots of things come on you. But
you had GAO out there saying it was not working. You had lots
of voices out there saying it was not working.
We really have to take some risk here in doing something
more aggressive about government's ability to do what it knows
needs to be done. Treasury cannot get the budget from OMB it
wants. Why would it be able to assure we could manage a
modernization process in the future, frankly, much better than
we did in the past?
So, I think when you look at the history of advisory
boards, it is not impressive. And then you look at the history
of interagency cooperation, it can be terrific in the short
term--advisory boards can also be terrific in the short term--
but government's problem is constancy, the staying with things.
This is worth a shot, I think, and that is why I would like
to have you think about it and get back to me. It is worth a
shot to put in place people who come to the table with a
different level of experience than anyone we have ever had come
to the table; and over 5 years can just talk with the
Commissioner.
The Commissioner has no one to talk to and I think it is
interesting that Peggy Richardson, with whom I have worked very
closely now for 3 years, and for whom I have great respect, has
come out in favor of this plan. What does that tell you? She
could only get the ear when there was press attention out
there. That is when she got the ear.
Secretary Baker, Secretary--who is the other one? I have
forgotten, anyway--Brady. So I think--I would like to know. I
can see the concern about appointment.
So, if you would think about that and get back to me, I
would be very appreciative.
Mr. Wetzler. On the continuity question, I have to confess
that that one stumps me. Setting a 5-year term for the
Commissioner does not guarantee the Commissioner is going to
stay for 5 years. The way you are going to get Commissioners to
stay for 5 years is to make the job more attractive. That, I
think, is going to be a difficult task.
Mr. Collins. Mr. Portman.
Mr. Portman. Thank you, Mr. Chairman, and I thank all three
of my colleagues. It is like a family reunion here of
Commissioners. We all enjoyed working together and for the most
part we agreed.
I would love to hear a little more interaction between the
three of you. Fred Goldberg, you were not only a Commissioner,
but Chief Counsel and the Assistant Secretary for Tax Policy.
It is a rather unique perspective you bring to this.
Josh Weston is chairman and chief executive officer of a
major and successful service company and on the board now, I
understand, of four service companies. You bring a perspective
from the board side that I think is probably unparalleled in
terms of service businesses.
Perhaps the two of you can answer more directly some of Mr.
Wetzler's concerns. Because he laid them out in his testimony
with regard to how this would actually work. Let me just try to
rephrase, if I might Mr. Wetzler, some of your concerns and
have both Mr. Goldberg and Mr. Weston comment on them.
You say that the Board would be precluded from involvement
in law enforcement, which--we have made that point over and
over again, sometimes to deaf ears. I notice now the Treasury
is making that with regard to their Management Board. So maybe
we will get more receptivity.
Procurement decisions and tax policy. You have trouble
imagining how that would possibly work. Mr. Goldberg, you have
been there on both sides, how could that possibly work; and Mr.
Weston, from a board perspective, how could that possibly work?
Mr. Goldberg. Mr. Portman, the most difficult issues the
Commissioner faces are things having to do with systems
modernization, with recruiting and retention policies as they
relate to employees. How you change this law enforcement
mentality, which is important in certain respects, to a
customer service orientation and other facets.
Those are hard things to do. Those do not involve law
enforcement, they do not involve day-to-day case selection.
They do not even get close to the universe of what is happening
every day in the IRS. They are a different level of concern.
That is where the IRS is falling down. That is where the system
has breached faith with the people. That is not management.
Well, how does that happen? It means you talk to a board. I
do not think you have to talk to the board once a month. I
think once a quarter is fine, because these are long-term
problems; and the discussions you can have with the types of
folks we are talking about do not even get in the same universe
as law enforcement and tax policy. They are management
questions and strategic-direction questions. That is how it
works.
It is nothing more than the ability to have a dialog with
people who have been there and lived with it and probably know
a hell of a lot more than you do. There is no more magic to it
than that. That is how it works.
Mr. Portman. Mr. Weston.
Mr. Weston. I would like to mention something for the first
time that has not come up in this proceeding that is very
common in private-sector boards which I think addresses some of
what we are talking about.
Every board I am on has created committees of the board
that deal with certain areas of expertise. Each of those
committees typically has about four board members, so you do
not have to convene a committee of the whole where you cannot
find a convenient time, and so forth.
Those committees are chosen for competence. Those
committees quite apart from quarterly or monthly board meetings
go deep on their subject, based on their expertise; and because
they also have continuity, you have the same people there as
counselors to the chief executive officer that are not forever
flaunting power and threat of being fired.
I have heard the word ``power'' far too much here and I
have heard practically nothing about the real world that goes
on between the board and chief executive officers, which is
counsel, advice, occasionally difference of opinion, and on
rare occasions, the exertion of what one might call ``raw
power'' let alone the threat of termination.
I can only tell you that from my experiences, chief
executive officers value the help from diverse, other
experienced people, who also have the continuity to be around
at the beginning and the end of a project.
This whole business of accountability that I have heard
many, many times is a play on words from many of the well-
intentioned presenters. Accountability does not mean a darn
thing, unless it is a person who is there at the beginning and
the end, otherwise, you are not accountable. You get that in
most private boards because the folks there are there far
longer than appears to be the case in the public sector?
Mr. Portman. Are you convinced?
Mr. Wetzler. I think that many boards function very well
and are very helpful to their organizations. There are other
boards that do not function very well. We are dealing with a
public sector organization, not a private-sector organization,
where there is in the private sector one bottom line of
profitability that everybody understands and everybody agrees
with.
In the public sector--I will just cite an example. Let us
take the New York City school system, which is run by a board
where the appointees come from six different places. It used to
be run by a board that was controlled by the mayor. That was
changed in the late sixties, and the school system has been
heading downhill pretty much ever since, and nobody feels
responsibility for the success of the school system. Everybody
can always point to somebody else who has the ultimate
authority.
So some boards do not function well.
Mr. Portman [presiding]. If I could just make one point
there. I think you heard the testimony earlier regarding
whether there should be spaces reserved on the Board for
certain interests. I think that is the situation in New York
City, as I understand it.
I think you and other members of the Commission thinking
through this--particularly on the governance task force--made a
conscious decision not to have that kind of Balkanization of
the Board. But rather, to set out these skills sets you need
represented on the Board, and then have the Board work together
to avoid those same kinds of problems.
I would just make one final comment; and that is that it
seems to me that we are actually very close among this panel
and this expertise is unbelievable and exactly the kind of
expertise that one would hope to find on an oversight board--
not that any of the three of you would be interested in serving
or even asked, after this yearlong process.
But, honestly, this is exactly what I think the Congress
needs and the American people need. As I said to Secretary
Rubin, it is really the institutionalization of the kind of
expertise that the three of you bring to this and I hope you
will stick with it and we can work out a proposal that would
actually move the ball forward and achieve the goal we all
share.
Mr. Coyne.
Mr. Coyne. Thank you, Mr. Chairman. I too want to welcome
the three Commissioners and thank you all for the benefit of
your testimony and your service on the Commission.
Mr. Goldberg, earlier you pointed out your hope that the
Oversight Board would be created because you say, ultimately,
the President is going to be responsible for the makeup of that
Board, anyhow.
Many of us who voted against the Commission's report and
are supporting other legislation are supporting other
legislation exactly for that reason. We see their effort to
create another Board for the President to deal with as
superfluous. The President ultimately now, along with the
Treasury Secretary, is responsible for the operation of the
IRS. To create another Board is just another layer between the
American people and their government.
I just wish you could respond to that.
Mr. Goldberg. Mr. Coyne, I understand that concern. I will
point out that the administration proposal creates two, not
one. I think that is important. One is better than two; and I
think small is better than bigger.
But, Josh put it now better than I have ever heard it; and
it was--I think I did some good things as Commissioner. I know
I did a lot of bad things as Commissioner; and the absence--the
complete absence of what Josh was describing was to me, as I
looked back on my experience, the biggest hole in what I did.
I thought Congress did good things in oversight in certain
areas; Treasury did good things, but there was not what Josh
was describing; and I believe that that Board, however
configured, gives the Commissioner more ability to do his or
her job; and I think maybe in cooler time, a little bit more
distance, I believe probably that Board structure is the single
best thing you can do to enable the Secretary to do his or her
job better than it is being done now.
I think that those trade sessions that are going on right
now are extremely important. That is where he belongs. I think
that it gives the Secretary some institutional continuity that
he can draw on or that she can draw on when they are appointed
to the job.
When they get in their job, who do they talk to about the
IRS? Right now there is no one. There is no one. What the Board
says is that this Secretary can go to the Board and learn about
the history, learn where the thing is headed, learn what ugly
stuff is under the locks out there.
I think if we get a little bit less emotional about this, I
think it does make it easier for everyone involved to do their
job and leaves it ultimately where it ought to be, with the
President and the Secretary. Absolutely, that is where it ought
to end.
Mr. Coyne. I wanted to ask this question of the three of
you on the panel.
Earlier we heard testimony from Congressman Cardin that he
thought that the legislation as proposed by the Commission
could be enhanced, that the legislation would be even better if
the Board did not have the responsibility of appointing the IRS
Commissioner.
I was wondering what your views are on that.
Mr. Weston. I will give you a comment as an individual. We
are no longer a Commission.
There has got to be a lot of give and take within the
Congress, which is an area I have very little experience in. If
someone were to say that as part of the give and take, we can
retain all the positives--or most of the positives of the
Commission's proposal, but it would be necessary to change to
where the Board would float up two or three recommended names
to the President and the President could pick one or the Board
could float up one and the President decided yes or no on that
name for the IRS Commissioner.
If that was the necessary compromise to get the other
things here, I as a citizen would say it is a worthwhile
compromise rather than saluting either the status quo or these
two large Boards that Treasury is recommending--one with 20
people, one with 14 people and none of them would have the
longevity, competence and accountability.
Mr. Wetzler. Mr. Coyne, I think the sides are relatively
close together here. Everybody agrees that the governance of
the IRS needs advice from outside experts who have strengths
outside the traditional tax field.
The question is, do you want to give those people
decisionmaking authority, or do you want to give them the
ability to give advice; and to give both private advice and
public advice, so there is more of a chance the advice is taken
seriously.
I do not agree with the statements that have been made that
advisory boards are always irrelevant. I think you have some
very, very important advisory boards in the government right
now that do have a major impact on the public discussion and on
policy decisions because of the individuals who are on those
boards and because of the tradition that their recommendations
have been respected over the years.
So I do not have the same negative view of advisory boards
if the right people are appointed to the board and if the board
is giving its advice publicly as well as privately.
Mr. Coyne. Mr. Goldberg.
Mr. Goldberg. I have a ``back to school'' night tonight,
Mr. Coyne. Can I be excused, please? [Laughter.]
My personal view is that there is an awful lot to be said
for having the Commissioner appointed by the President. I think
you need to look at it in terms of what retained role the Board
had; and I think you need to look at it in terms of what other
changes were made in the legislation.
But of all the concerns that have been voiced, I believe
that is an honorable and appropriate concern to be expressed. I
think a lot of this other stuff I do not really get, but I
understand that issue; and if that were the only issue, and
that led to a bipartisan piece of legislation, I would
recommend that you do it in a minute.
Mr. Coyne. Thank you.
Mr. Portman. Thank you, Mr. Coyne.
I would just mention one thing before going on to Mr.
Houghton. You mentioned, Mr. Goldberg, that the Secretary has
many other things to address; and that it is good that he is in
meetings on international trade and so on.
As he arrived this afternoon, Chairman Archer jokingly
said, ``Sorry to have detained you. I hope you got some work
done.'' He said, it was ``Fine, Mr. Chairman. I worked on `fast
track.' '' I think you and I would agree. That is appropriate.
The Secretary should be working on fast track, if that is what
he chose to do with the time he had waiting for me and other
verbose Members of Congress to finish our comments.
He, as the Secretary of the Treasury is responsible for the
domestic and international economy, and that is a big job.
Mr. Houghton.
Mr. Houghton. Thank you. I will try not to take too long.
Thanks, Mr. Chairman. Gentlemen, good to see you and listen to
your testimony.
You know the thing that confuses me is that I think this
board issue is way out of context here. I cannot understand the
position of the Secretary. First of all he says, ``You know a
board has got to meet more than once a month.'' Well, boards
meet once a month. That is what they do.
They do not meet more because you cannot get good people.
If they did meet more, they would be doing the job that
management should be doing. Also, the concept of having
diversity--you know, a long time ago, board used to be all
internal. Then, not only did stockholders complain, but also
management realized it was far better having outside opinions.
But you know this is really not a board as such. The two
functions of a board is to choose a chief executive and to
approve the money. This board does neither. It is really an
advisory board.
But you know, it seems to me that all the issues have been
focused on that and the question really is, how do we make the
IRS more efficient, in effect. You do that by two things, in my
mind.
One, you give them the tools to do the job. I am not sure
we have addressed that. I mean, I was down here on the Grace
Commission in 1982, and we did not give them the tools. We did
not give Social Security the tools. We did not give the
Department of Commerce the tools. We did not give other people
the tools. We thought we did, but we did not.
The other thing really is to make sure that Congress stays
out of the mix. I mean, Congress in this case is the board and
the stockholders combined. I do not know whether combining
under the Joint Tax is going to make that much difference. I
hope it does, but if I was still in business and I was asked to
come to work for the IRS, and Congress has done to the IRS what
I have seen it do--because I used to be on the Oversight
Committee of the Ways and Means Committee--I would not join the
IRS. I would not do it.
So the question really--forgetting about the board--is, are
we doing those things in the boiler room of the IRS to make it
more effective. I would like to ask all of you gentlemen, but I
would like to start with Mr. Goldberg, if I could.
If you were still the Commissioner, would this make you a
more effective Commissioner adopting this report?
Mr. Goldberg. I think the combination of recommendations,
Mr. Houghton, would make any individual a far better
Commissioner.
You are absolutely right. It is a package. You need to do
all of these pieces. At the end of the day it is giving the
agency the tools to do the job. I believe that the package of
recommendations here are the prerequisite to getting it done.
Mr. Houghton. Mr. Weston.
Mr. Weston. I would say that the proposal creates a
structure and a process which might and hopefully would produce
the tools; but the tools are not all designed by any stretch in
our proposal. Let me take just one little example.
One of the things I learned from Peggy Richardson when she
was IRS Commissioner and I was asking her, ``How come you
sometimes only answer 40 percent of the phone calls? Is not
that horrendous?'' She told me, ``Well, all we got was a budget
that allowed us to answer 50 percent, and therefore, that is
what we had.''
If we had a structure and a process that this board--
whatever you want to call it, advisory, governance or something
else--gave the IRS Commissioner the insight and the support
that as a tax service, damn it, you have got to have a budget
and an expectation to answer 80 percent, 90 percent of the
phone calls.
That same message was transmitted by this independent,
knowledgeable board to the Secretary of Treasury and even
Congress, my guess is that that structure and that process
would have avoided a situation where allegedly there was a
budget that only permitted answering 50 percent of the phone
calls.
So I see us at the beginning creating a structure and a
process. Hopefully the structure and the process and the people
would then recognize and create the tools. Certainly folks who
come from large service organizations, if they were on this
board, they would understand that on day one.
Mr. Houghton. The problem I see, of course, is that you can
choose a good Commissioner, you can choose good people, you can
have a different attitude and you can be able to hire and
fire--get rid of the dead wood--but if you cannot invest the
money in the equipment, it does not make any difference. I do
not see that process attended to here.
Mr. Weston. Is that a question addressed to me?
Mr. Houghton. Yes.
Mr. Weston. My observation and learning curve on this
Commission included the following: First, for whatever set of
reasons, there does not appear to be a correlation between
proposed investments and the return that we get--equipment or
otherwise--or the opportunity cost of failing to invest, which
produces a different kind of hidden expense. There are no
footprints of any kind of process or outcome that addresses
that.
Second, in our voluntary, self-assessment tax system, we
initially get about 85 percent voluntary, first round
compliance--which compared to Italy and France is terrific.
On the other hand, a mere shifting of 1 percent in that
compliance equates to $15 billion a year of Federal revenue. I
have seen no process structure or support in the current
environment to look at that and say what investments are
necessary and/or would support creating a higher compliance
when a mere 1 percent improvement would create $15 billion.
Everything about it is missing. Not that a new board would
be magic, but the kinds of colleagues I see on my boards would
be raising those questions on day one; and if it was necessary
to give support or political cover to the IRS Commissioner who
said, ``I really need more money in computers or answering the
phone,'' at least such an independent board would help OMB,
Secretary of Treasury, Congress, whomever, feel more
comfortable in authorizing an investment that made good return
sense.
Mr. Houghton. Mr. Chairman, would it be all right if I
asked Mr. Wetzler what his comments might be. I know my time is
up.
Mr. Wetzler.
Mr. Wetzler. The Commission outlined the vision of what tax
administration ought to look like. You could agree or disagree
with that vision. It did not then go ahead and ask the
question, ``How much does that vision cost?''
We thought about answering the question, but the political
dynamic within the Commission was such that the judgment was
made that since Congress was unlikely to enact anything that
dramatically increased the IRS' budget, under the present
circumstances, it would not really be a good investment of our
time to try to ask how much the vision would cost; because if a
recommendation was for a big increase in the budget, no one
would pay any attention to it, anyway.
So, I think you made a very, very good point that outlining
a vision is not the end of the story. You have got to ask, how
much is it going to cost to achieve that vision; and see how
well that aligns with the present level of resources that they
have.
Mr. Goldberg. Mr. Houghton, I think it is important to turn
it on its head, turn your question a little bit on its head.
Absolutely the kind of changes that the Commission is
recommending--many of which the administration agrees with--I
would not trust the IRS with the money. I think you have to do
both.
I think you need to do this step before you spend more
money. I think that once you do this step, I think it is
imperative to give the agency the tools you are talking about.
Mr. Houghton. Thank you.
Mr. Portman. Thank you, Mr. Houghton and I thank the
witnesses again for their time and effort, not just this
afternoon, but through the last year in preparation for today;
and we look forward to continued dialog.
We now have one final panel. Gentlemen, I thank you for
your patience; and apologize for the congressional schedule on
behalf of all of us.
We have Gene Steuerle, senior fellow, Urban Institute; Don
Kettl, director, Center for Public Management, Brookings
Institution and director of the Robert La Follette Institute of
Public Affairs, University of Wisconsin-Madison; and we have
Robert Stobaugh, Charles Edward Wilson Professor of Business
Administration, Graduate School of Business Administration,
Harvard University.
Gentlemen, I would ask that you try to keep your opening
remarks to 5 minutes, certainly submitting your full statement
for the record; and that we begin with Mr. Steuerle.
We probably are going to be called for a vote at some point
during your presentation. Again, apologizing in advance for
that, but we will see what we can get through.
Mr. Steuerle.
STATEMENT OF C. EUGENE STEUERLE, SENIOR FELLOW, URBAN INSTITUTE
Mr. Steuerle. Thank you, Mr. Chairman, and Members of the
Committee, and thank you for staying around at this late hour
to listen to us.
Using the recommendations of the National Commission on
Restructuring the IRS as a starting point, I believe this
Committee has a real opportunity to improve tax administration.
Although I will also talk to the issue of a board of directors,
I have to express my regret that so much focus has been paid to
it, because I think many of the other recommendations of the
Commission, as well as some other ideas that are out there, are
really worthy of considerable attention as ways to improve tax
administration.
A very brief summary of my recommendations is as follows:
The IRS administration can certainly be improved, as suggested
in different draft bills if congressional oversight is
streamlined. The simple fact is that IRS Commissioners are
called to testify so quickly and so often, in addition to the
time that they spend reporting to the Treasury and the Office
of Management and Budget, among others, that they are put in a
defensive position almost from day one, even before they have
learned the job.
My second recommendation is that IRS be given greater
authority to hire the necessary expertise and to move away from
a salary structure that emphasizes management to the exclusion
of other skills. Again, I think a recommendation like this is
contained in the Restructuring Commission's report.
I think the personnel problems are especially severe in the
areas such as computer science and statistics--that is the
quantitative areas. Good computer scientists and statisticians
are worth their weight in gold, but both personnel policies and
IRS culture tend to require that higher salaries correlate
mainly with the number of persons managed, not with knowledge
and ability.
Third, the Restructuring Commission acknowledged that many
of IRS administrative problems were due to the inordinate
requirements placed on it by tax legislation.
The demand for changes in tax laws is not going to
dissipate, but there are ways to give simplification a greater
hearing and on a timely basis. The Commission suggested that
the Joint Committee on Taxation report annually with
recommendations to simplify tax law administration.
I suggest that a role also be give to IRS and Treasury as
well. They have much of the expertise and knowledge that is
necessary, and the Joint Committee staff is quite small.
Perhaps a biannual reporting requirement should be placed on
the executive branch, with a followup report by the Joint
Committee, which could also assess strengths and weaknesses of
those reports.
Fourth, I think we need to figure out ways to give
simplification more attention during the legislative process.
One recommendation I have made for years is that mockup tax
forms be made available during certain stages of the
legislative process.
Now I recognize that there has to be a rule or reason here,
as time constraints are severe, but more can be done than
currently. I give in my testimony some anecdotal pieces of
evidence with respect to the Catastrophic Health Bill of 1987,
where the introduction of mockup tax forms did indeed change
that legislation, albeit, inadequately.
Finally, let me turn to the board issue that is so
preoccupying our attention. In its report, ``A Vision on the
New IRS,'' the National Commission on Restructuring the IRS
suggested that the executive branch governance of the IRS
should be place with a new board of governors.
The Treasury Department suggests we set up a sort of super
management board, with representatives from various other
agencies, to try to monitor the IRS. After following the debate
for some time now, I am convinced that both sides are partly
right and both sides are partly wrong.
The new management board pushed by Treasury would probably
create more problems than it would solve. But a new board of
directors fits neither within the structure set up by the
Constitution for the executive branch, nor can it provide clear
lines of authority associated with private-sector boards.
Perhaps there is a better organizational structure--a
compromise to these structures--that we could offer. The
primary goal, it seems to me--the one emphasized most by the
Restructuring Commission--is to raise the level of
accountability, as well as oversight of the IRS.
This goal might be achieved better through some
intermediate structure that still included private persons,
with a greater stature and power than advisors or Commission
members, but with less control than directors. Such individuals
might serve more or less as trustees for the public, and share
oversight and responsibility with Treasury and other parts of
the executive branch to report on the success and failures, the
capability and limitations of the IRS.
They would have no power, however, to make actual decisions
for the executive branch. The purpose of the board would not be
to turn accountability over to yet another group, but instead
to hold more accountable those in the executive branch
responsible for the IRS, for its successes and failures.
I give some evidence in my testimony as to the success of
the Board of Trustees for the Social Security Trust Funds and
their ability, both directly and indirectly to influence that
process.
In conclusion, constructed well, I believe that a package
of reforms can be assembled by this Committee to improve tax
administration. Among the items I support most are: One, a
streamlining of congressional oversight; two, greater authority
within the IRS to hire necessary expertise, particularly in the
quantitative areas; three, regular reports by IRS, Treasury and
the Joint Committee on Taxation on taxpayer complexity and IRS
enforcement difficulties.
I should add, by the way, that you have never really gotten
those reports--at least in my long history in this town.
Fourth, the release of mockup tax forms during the
legislative process; and finally, the selection of a small--not
a large and unwieldy--number of private-sector individuals who,
in the manner of the public trustees of Social Security,
participate in a type of board whose sole responsibility is to
monitor and report on IRS progress.
Thank you.
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Mr. Portman. Thank you, Mr. Steuerle.
Mr. Kettl.
STATEMENT OF DONALD F. KETTL, DIRECTOR, CENTER FOR PUBLIC
MANAGEMENT, BROOKINGS INSTITUTION; AND ROBERT M. LA FOLLETTE
INSTITUTE OF PUBLIC AFFAIRS, UNIVERSITY OF WISCONSIN-MADISON
Mr. Kettl. Mr. Chairman, thank you very much. It is a great
pleasure to appear before you this afternoon and to note the
tremendous service that this Commission has done to the nation
in outlining the critical problems that the IRS simply must
begin now to attack.
It is in many ways precisely right on the problems that
need to be solved. So you need to try to improve the level of
expertise that the IRS has, and probably even more importantly,
you need to try to restore public trust in the Internal Revenue
Service and in the process of collecting the nation's tax
revenue.
My concern with the report focuses principally on the
proposal for the governance board. There is an assumption that
the problem is in some way structural. My view, on the other
hand, is that it is not primarily a problem that needs to be
solved with a change in structure, it is a problem in
management. Put differently, what can we do at the top to
ensure that the quality of services that we want at the bottom
happens? That in my mind is not primarily a structural problem.
It is one that requires fundamental changes in management that
I hope to outline shortly.
There are, though, a couple of concerns that I want to
outline with this governance board that has been proposed,
having to do with the conflict of interest issue that we have
heard constantly today. I simply want to underline many of the
concerns that have been raised.
The concern in a nutshell is this: If there is a discussion
about the level of budget that ought to be supplied for, say,
the audit function of the Internal Revenue Service, there is no
way to consider the level of auditing in the budget without
somehow raising questions about who will be audited and at what
level.
The degree to which there may, for example, be private-
sector people representing simultaneously some companies and,
say, the IRS, in the process of sorting through these
decisions, there will inevitably be questions about the way in
which those priorities are set. This is, I think, a serious
concern that is just simply unresolvable.
The second concern I have is what I view as a continuing
false distinction we have been making between management,
policy, and oversight. I have been in the public management
business for 20 years--there are those who have been doing it a
whole lot longer than I have for the last century--the one
point that comes through unarguably is the fact that the
distinctions among oversight and management policies are simply
false.
For example, consider the IRS' oversight policy--it is
budget policy. Its overall policy toward audits will be
determined by how much money is supplied and how that money is
spent. We can talk about broad policy goals, but it is only in
the implementation of those goals--by the money actually
spent--that determines what the policy actually turns out to
be.
So, seeking to try to have an arbitrary line separating
policy and administration in many ways flies in the face of the
realities of the implementation of tax policy.
The second thing--and this is a piece of evidence that was
supplied to me by experts in tax policy in New Zealand--is how
important the integration of the management and policy
functions are, especially in providing feedback into the
system. For all of the reasons my colleague just suggested, we
need to have early warnings about changes. We need to have
quick feedback on proposals to the tax forms.
What we need in the process of doing that is some way to
make sure that policy and administration are more integrated,
and not more separated.
I guess my conclusion is that in many ways we know
precisely what it is that we need to do to fix the IRS. The
problem is in figuring out how to get it done. My concern is
that I see nothing in the fundamental structural change that
will ensure that actually happens.
We have been talking about accountability, which is really
the nub of the problem. The nub of the problem really has to do
with trying to find a way to make sure that what it is we want
to have happen at the top occurs at the bottom of the tax
system.
My concern, ultimately, with the proposed board--for that
matter, the administration's boards--is that there is no
guarantee that the current system will get the changes that we
need. There is no guarantee that having new boards will produce
the changes that we want either.
What it is that we know from the nation that has
experimented more with this than any other nation in the
world--New Zealand--is that they have focused more on
governmentalizing the policy side, and producing incentives for
improved management at the managerial side, as well. Building
that linkage is critical.
How to go about doing this? I think that it is clear there
has to be top-level leadership and support from both the
Congress and the Treasury, from the Secretary on down--from
this Committee on down--to ensure that what we want to have
happen in tax policy happens.
The second is that it is terribly important to get outside
advice for all the reasons that we have heard from other
witnesses earlier today. But more importantly, I think we need
to find some way--as we have heard--to ensure accountability
and continuity in the process.
One way of doing it is to restructure. There is another way
through people. But I think the more important lesson--and this
comes through quite clearly in the experiences in Australia and
New Zealand--is to focus on performance-based measures.
That is, set out measures very clearly, goals that are
unarguably clear for everyone about what it is that ought to
happen and how. How many call ought to be answered? How long
should it take? What kind of feedback should there be?
The fact that I have here before me some of the performance
measures that the Australian and New Zealand tax services have
established for doing that.
So my conclusion, I think, is that there are ways of doing
this--but these ways are fundamentally procedural, though not
structural. They have to do with leadership and management.
They are not primarily organizational. Restructuring will not
solve them.
In my view, the only way to guarantee that we pay attention
to what we must pay attention to is to ensure we have solutions
tailored to the problems, and the problems in the end require
focus on performance and performance based management.
[The prepared statement and attachments follow:]
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Mr. Portman. Thank you, Mr. Kettl.
Mr. Stobaugh.
STATEMENT OF ROBERT B. STOBAUGH, CHARLES EDWARD WILSON
PROFESSOR OF BUSINESS ADMINISTRATION, EMERITUS, GRADUATE SCHOOL
OF BUSINESS ADMINISTRATION, HARVARD UNIVERSITY
Mr. Stobaugh. Thank you, Mr. Chairman. Thank you for the
invitation to appear here today. I understand my written
statement will be put into the record.
Mr. Portman. Without objection.
Mr. Stobaugh. Because my area of expertise, which happens
to be corporate governance, I will focus on the IRS Oversight
Board proposed by the Commission.
First, I strongly support the Commission's plan for
governance of the IRS. Second, I think that the membership
makeup on the Oversight Board is appropriate. That is, seven
members from private life, plus the two from the government.
That will provide a well-rounded board.
Next, the proposed responsibilities, I believe, are
appropriate. The Board focuses on strategic issues--and there
are differences between oversight and management. They focus on
the strategic issues appropriate for oversight. This Board
would have less power than corporate boards, but I still thing
that is OK under the circumstances.
The Secretary of Treasury would still have major control
over the IRS. The Secretary would still be responsible for tax
policy; and the Board would not be involved in tax policy. The
Secretary would be the most powerful board member. It is like
having an 800-pound gorilla there on the Board.
The Secretary would recommend the selection and dismissal
of other board members to the President--the President can do
that; and then like an earlier witness, the way I read the
bill, the President--the bill says the President can dismiss a
director. I do not think it says he has to dismiss all the
directors at one time.
Also, the Treasury Secretary can veto the budget, in
effect, by not incorporating it in the budget pushed forward by
OMB. I found the proposal acceptable, but I would not move to
weaken the Board's proposed powers from these shown in the
bill.
I reviewed the competing proposal of the Treasury
Department and I think it has three major defects. I think it
muddles the accountability by having additional boards.
Secretary Rubin criticizes the part-time board proposed by the
Commission, but in effect, the key Board in the Treasury
proposal would be a part-time board--in terms being able to be
devoted to the IRS, because they would have other duties in
their government jobs.
My guess is that if a Mexican currency crisis comes up,
there is going to be a lot of attention paid to that at the
expense of the IRS by people on that Board.
The second major problem is the historical lack of interest
on the part of the Treasury Department officials in the IRS. I
do not consider that a criticism of the Treasury Department
officials, but they naturally spend time on what they are
experts at; and they are experts at tax policy, international
affairs, capital markets. They are world class experts on those
subjects and they are not experts on governance.
Now, even if we make the assumption that their interest has
all of a sudden changed--and I think part of it changed, once
this Commission was announced--but if their interest would
change in the future and they would want to devote more time to
the IRS, I think there is still a major defect left--and it
probably is the most important one.
That is that the members of this IRS Management Board as
proposed by the Treasury will not have the qualifications to do
an outstanding job of overseeing the IRS. They are primarily
trained in their work experience as economists and lawyers.
They are very smart people, with outstanding careers, but
they have no experience in providing oversight of a large
organization, with a goal of becoming world class in service
and efficiency. Now, there is a big contrast between that
experience and what is available in the private sector.
In the private sector, we have talked about chief executive
officers being available; but there are a lot of people who are
not chief executive officers who would be available. You have
former chief executive officers with experience. You have
people who have had a lot of board experience and have worked
for companies, but have never been a chief executive officer.
We honored one at the National Association of Corporate
Directors because she was an outstanding director.
You have people in the university world. A colleague of
mine has written books and serves as director and teaches
directors how to be better directors. So I am confident there
are many, many people in the private sector who are qualified
to do this oversight function.
I think that my--according to the red light, my time is up.
If I may make one other quick statement. That is, I think a lot
of dissenters confuse tax policy and oversight; and I think
there is a difference. They confuse the oversight function with
the day-to-day management, which is for full-time managers; and
I think that is a clear distinction.
Thanks again for the privilege of being here; and I will be
happy to answer any questions.
[The prepared statement follows:]
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Mr. Portman. Mr. Stobaugh, thank you for the time and
effort you put into this--all three of the panelists.
We have a decision to make here. We have a vote in about 4
minutes I am told. I think we need to go. We can come back in a
half hour to continue the questioning, and I am perfectly
willing to do that, and I think other Members would be as well.
Would you prefer to adjourn this hearing now and not wait
around a half hour? You could work on fast track. [Laughter.]
Or, would you like to wait for a half hour and we will be
back for questions?
Unidentified Speaker. It is up to you, Mr. Chairman.
Mr. Portman. Can you stay?
[No verbal response.]
Mr. Portman. All right. We will see you in a half hour.
Thank you very much. Mr. Coyne, do you have a quick
question before we leave? We have about 3\1/2\ minutes.
[No verbal response.]
Mr. Portman. OK, we have to go. We will recess now, but we
will be back in session about 30 minutes.
[Recess.]
Mr. Portman. Gentlemen, thank you for your patience again,
I really appreciate the testimony.
I would like to, if he is ready, to move straight to Mr.
Coyne and then I will have some further questions.
Mr. Coyne.
Mr. Coyne. I would like to address a question to Mr. Kettl.
First of all, I want to thank you for being a witness. We
appreciate all three of your testimonies here today. It is very
helpful to us.
Mr. Kettl, some people have argued that the President's
authority to remove board members gives the President indirect
but sufficient authority over the IRS Commissioner. It may be
indirect, but it is good enough to have the authority over the
IRS Commissioner.
Would you agree or disagree with that?
Mr. Kettl. I guess my reaction would be that it would give
the President indirect, but insufficient authority over that.
In fact, he would have some leverage, but there is, I think,
insufficient control to ensure any kind of real policy
responsiveness.
The board members would have fixed terms and they would
know that absent any kind of truly egregious problem, they
would likely serve. It would create serious problems for the
President to try to muddle or to be appearing to muddle with
issues of that sort.
So my concern is that it would be unlikely to give the
President any great operational control, or any real influence
over the behavior of the board in that kind of way. So, across
some line on a far extreme on some extraordinary piece of
policy, I cannot imagine the President invoking it, but I
cannot imagine it proving a very effective source of
Presidential influence, especially in the day-to-day or month-
to-month or year-to-year basis.
Mr. Coyne. Does anyone else care to----
Mr. Stobaugh. Yes, I would like to say that I doubt that
the President is going to do much on the day to day, even if
there is not a board there.
I mean, the President is not going to oversee the IRS
Commissioner. He has a lot of other things to do. At least he
will have a board there overseeing the Commissioner. I mean,
the thought of the President doing day to day, month to month
or even year to year, reviewing the plans and strategy of the
IRS and so on like an oversight board, I do not think----
Mr. Coyne. Well, what about his removal powers?
Mr. Stobaugh. Yes, sure. He can remove the Commissioner,
but I guess under what conditions is he likely to remove the
Commissioner?
Mr. Coyne. Thank you.
Mr. Portman. Thank you, Mr. Coyne. I have a number of
questions, starting with Mr. Steuerle.
First of all, we really appreciate the time and effort you
put into looking at the report and the legislation. As you
walked through your testimony, it was clear that you have
invested a lot of your time and your experience at Treasury is
very helpful as you analyzed it.
As you know, Congressman Coyne, myself and others tried
hard to put together a simplification incentive; and what we
came up with was this analysis for simplification. You talk
about the potential addition of a biannual report from Treasury
to Congress. That was in the report, I think, as a suggestion,
not a recommendation as I recall.
The National Taxpayers Union, David Keating, was on the
Commission and was quite supportive of that idea as well. I
like that idea; and I do not know how my other supporters of
this legislation would feel about it, but having an additional
report from the Treasury Department and administration to
Congress on perhaps a biannual basis, I think, would force them
to deal with the simplification issue--which is after all a
two-way street. If we just do it up here and do not have
Treasury's input and expertise, it is unlikely to happen.
So my first question to you would be, given what you saw in
the Commission report and what is in the legislation, do you
think that would be a natural or logical addition to what we
are talking about with simplification? What other ideas do you
have on simplification?
Mr. Steuerle. Mr. Portman, I studied this issue long and
hard when I was at Treasury. I was coordinator of the 1986 tax
reform package out of Treasury. The attempt then was to try to
create a system that would tax income more equally. There were
some efficiency issues, raised also simplification. But we
really did not get much simplification out of that act.
My quick reading of the history of the Tax Code is we have
never really had a major focus on simplification, per se. Now I
am not saying that if you went to a flat tax for everybody or a
value-added tax for everybody, that there are not major
complete overhauls of the system that might simplify; but I am
talking about the type of simplification effort that I think we
need to have a more regular basis, which is kind of bottom-up
simplification. You know, can we combine any retirement
accounts in this way? Can we simplify penalties? There are just
hundreds and thousands of these provisions.
That is one reason I recommended that you had to have IRS
and Treasury involved. Because just trying to go through that
enormous range of provisions is very difficult. I do not want
to suggest that there doesn't have to be some goodwill involved
here.
If the Secretary or the President or Congress or the Joint
Committee decides they are not going to put a lot of effort
into it, I do not know how you can control that type of thing
by legislation. But I do think legislation can demand that
there be a report; and you can make several demands--not just
on Treasury and IRS, but maybe on the Joint Committee--to
monitor whether Treasury and IRS are really doing it.
I would like IRS to report item-by-item, on which areas of
enforcement they have the greatest difficulty. They actually do
this calculation indirectly, if you look at some of their
statistics. They are reluctant to release them, because they
are a little bit uncertain as to how well they do the
statistics, but they do report on compliance rates across all
sorts of items.
One reason they are reluctant to do this type of study
because, if they do it they are going to offend people. If they
report on noncompliance on the EITC ITC, they are going to
offend the President when he advocates an EITC increase. On the
other side, if they report on noncompliance in areas, say, like
capital gains, then they are going to offend people who want
capital gains relief.
So, they get caught in a box. They must be required to
report on complexity on a regular basis, or they will not do it
because there is a danger of offending somebody in the process.
I think the process itself would be enhanced if these EITC
reports were automatic--if they were required to report on
enforcement problems. The Treasury in turn could come up with a
list of simplification options.
Think of the impact, for instance, of the deficit reduction
options that CBO puts out every year. Now I do not even agree
with a lot of those options, but CBO does not put them forward
as necessarily saying that these are the best options, or that
there are no options. But it gives Congress a list, almost an
enactable list--something that is not far from draftable if
Congress wanted to use it.
Well, what happens if Treasury would do this and the Joint
Committee year after year? You would start having laundry lists
of areas where, if you wanted to take action, you could do it.
You do not have that ability now. Today if you want to do
simplification it is because somebody is objecting to something
somewhere, you know, or there is a press report or something.
It is very indirect, and so there is no formal process to
really make a simplification effort on a much grander scale. I
just really think that better information needs to be part of
the system and this mandate to report seems to be one way to
try to force it.
Mr. Portman. At this stage, I think it would be very
helpful if you would go on and sit down with me and the staff
and try to work through what we already have on simplification
and see whether some of these might be added.
I think it is one of the most important aspects of the
Commission report, making that nexus between tax complexity and
tax administration. I am proud the Commission went that far. It
was further than probably our mandate envisioned; and yet I
think Mr. Coyne, myself and others would be very interested in
any concrete things we could put in this legislation to
encourage a simplification, in a thoughtful way, which would
include in my view, getting Treasury and IRS involved in giving
us proposals so that we could then begin to vent these and have
hearings on them.
The other one you mentioned, which is marking up tax forms.
As you know, in the legislative proposal, as well as in the
Commission report, we urged that the IRS be at the table in
developing tax legislation. That is not always practical when
you are in a conference committee at 3 o'clock in the morning,
literally, the eleventh hour before taking a bill to the floor.
But most of our proposals we do develop through the
Subcommittee and Committee process, and I think to have the IRS
there in a formal way and require that, will help.
I think marking up tax forms should be a part of that in
the sense of the IRS telling us what forms will be required for
this tax law change. That is certainly the intent of this
legislation; and maybe we can specifically add that very
helpful suggestion.
Your suggestion on the public trustees I think is generally
positive. I think it helps move the debate forward. It is the
only, frankly, helpful suggestion I have heard in the last
couple months to try to maybe bridge some of the gaps.
My concern with it, of course, is accountability. If they
do not have absolute decisionmaking authority, and they look at
the citizens advisory group--or the Commissioner Advisory
Group, the CAG, and other advisory groups and if they do not
have the ability to--as in the case of our board--approve the
budget, which then goes to the Congress, but not through the
process, as we talked about, approve the strategic plan, hire
and fire the Commissioner, who is going to listen to them.
I think, to be taken seriously by the Service, what kind of
accountability will there be to that group; and is it just
another exercise in futility. I think, the final question I
would have is, who is going to serve on such a Committee.
If they do not have some authority, one of my great
concerns--and Ben Cardin raised it earlier today--are you
really going to be able to attract the kind of high-caliber
people we are talking about?
Mr. Steuerle. Mr. Portman, I struggled with this a great
deal. I did not come to the issue of the board of directors on
one side or the other. I have struggled with it for months. I
suppose where I am coming out is a compromise.
But to have these people as more than advisors--I think
there is a difference between an advisory role and a monitoring
role. Usually, if you are in an advisory role you are on the
inside. You know, you are sort of like the Joint Committee on
Taxation, which provides great people as advisors to you, but
they are not going to go out and say, ``Boy, did Mr. Portman
publicly make a mistake when he enacted this legislation.'' A
monitor, on the other hand, does say, ``OK, IRS is not doing
this. The budget is inadequate for that,'' so I want to raise
this board--whatever we call it--to this kind of monitoring
position.
Yes, they can advise as well, but I think their principal
function should be monitoring. The best example that I have--
and I admit that it is not a perfect metaphor--is with the
Board of Trustees of Social Security. That is partly because I
have watched the way they operate. I know the people who have
done this job over time, people like Stan Ross, Marilyn Moon
and others.
They actually participate in the process of reporting--in
this case, reporting on the status of the trust funds. With
them as representatives of the public and knowing they have to
put out these reports, they take very seriously this monitoring
role. They actually do it with the government. That is, the
government really still has all the data.
So, the people inside the government are gathering the
information, but the outsiders are saying, ``Look, that
information is inadequate, you have got to do this.'' A lot of
times, the success of the trustees is never really seen, except
indirectly. Because they have held the administration's feet to
the fire to force them to report on things accurately.
That is sort of the role that I see for them. My biggest
fear with actually giving them authority in the actual
appointment of the Commissioner or with the budget is that I
fear that we would add one more layer on what, in my
experience, is already a confused process. I tend to believe
the decisionmaking has to be an executive decisionmaking
process. Essentially, you know at every stage who is above
whom, and I am not sure whether that would help if you actually
give aboard partial authority over appointing the Commissioner
or setting the budget.
But as I say, I do not want this board just to be advisory.
I do want them to play this accountability role, which seemed
to me to be the main focus of your concerns as a Commission.
Mr. Portman. I want to hear from Mr. Kettl and Mr.
Stobaugh, if they are interested in this particular issue, but
I would just make the suggestion that, if you look at the
Social Security model, the reporting particularly. That is a
very specific and very interesting report every year, not just
for Members of Congress--I guess it is on a quarterly basis,
actually--of the Medicare Trust Fund and the degree to which we
might be going into a deficit. It has political ramifications
and so on.
This Board we have set up also has this reporting
requirement in the sense of reporting to Congress, really, on
the budget, on the strategic plan, working with the government,
as you say.
It is really not that far from our model when you think
about the actual workings of the Board and how it would
interact with the Congress and with the public--the American
people.
Fred Goldberg kept making the point that, after all, this
is all public. That is very important. With the IRS there may
not be as much interest in the budget or the strategic plan as
there is in the report of the trustee with the Medicare Trust
Fund. But I do think it is not--in terms of this actual impact
on the process--that different from the role you laid out.
Mr. Kettl.
Mr. Kettl. Yes, let me draw one distinction and then make a
slightly different point on the idea of the Social Security
Trust Fund and this Committee as a possible metaphor.
As for Social Security: the Commission that reviews that on
a regular basis examines the overall financial health of the
system, which is one kind of thing. Here we are talking about
trying to find some way to crawl inside the administration of
the IRS and make a report on that, which is a very different
kind of animal.
The Social Security Committee does not really look inside
Social Security to see what percentage of checks are going out
on time, which kinds of computer problems they are having in
dealing with that. It is just on the financial health of the
system.
So, the point of similarity that is important is just how
seriously they take it; and how brave in some cases they have
been to declare that ``The emperor has no clothes.'' But on the
other hand, they do not really get into the question about what
you have to do at the top of the Social Security Administration
to ensure solution to the problems of information technology,
or if the delivery of the checks happened. That is the real
level at which, it seems to me, the IRS needs to try to devote
its efforts.
I do think that the possibility for some kind of reporting
and oversight role is a very important possibility here. There
is another mechanism, of course, that exists not only through
strategic planning, but also through the Government Performance
and Results Act. It seems to me that is the lever that is
available to this Committee, for starters; but also, if there
is an oversight board of some kind created to that board,
because that is the handle by which to grab the IRS'
activities.
There is an interest in trying to ensure there is a long
range of attention to these issues. The way to do it is to send
out clear signals through the oversight hearings and through
the strategic plans and the reports on GPRA to ensure that is
taken care of. There is an interest in making sure the people
at the bottom get the lesson. That is the way to send the
lesson across.
Mr. Portman. I misspoke earlier when I said Medicare. The
Medicare Trustees also issue a report, but the Social Security
Trustees was your analogy, and I would make that same analogy
to the Medicare system as to the Social Security system.
I will say also that at Social Security the phones are
getting answered. The customer service satisfaction level that
Bob Kerrey talked about earlier is higher; and it probably
needs different kinds of attention as you indicate and would
need a different kind of board at the IRS to get the same kind
of results.
Mr. Stobaugh, do you want to comment on this?
Mr. Stobaugh. I was going to comment on this reporting to
the public, the President and Congress. I think that is very,
very important. I think this IRS Oversight Board could make the
decision to report an account of the things that actually
affect citizens.
At the service level, I would anticipate they will do some
reports on service levels of the IRS, as opposed to just, ``The
IRS budget was $7.4 billion this year and $7.5 billion next
year,'' and numbers of that sort.
I think the citizens would be very interested in how
service is improving.
Mr. Portman. That is an excellent point. I think what you
will see in the budget, of course, is more than just the
aggregate number, but a reallocation of resources based on
whatever the board's informed insight is on that. I would
suspect that customer service will become more important over
time and that will be something the public will see.
Mr. Kettl, you have given an interesting statement today. I
read your initial article in the Brookings publication and then
looking at your testimony. I heard your testimony today and I
see some disparity between what I heard today and the Brookings
article.
I think you are much more flexible about these various
approaches than it would appear, based on your article. I think
your view of the Treasury proposal is fascinating and certainly
has not been touted by the Treasury Department, which has taken
great pains to tout your views on our Oversight Board.
[Laughter.]
I do not want this to be putting you on the spot. We are
having a good give and take, and I want to learn more from you
about your distinction between management, oversight and so on.
But, I take it from your earlier comments that you would
be, if anything, less enthusiastic about the Treasury
Management Board proposal than you would about the Oversight
Board proposal in the Commission report?
Mr. Kettl. I am not sure about that--and I certainly do not
want to be speaking out of different sides of my mouth. This is
an incredibly complex issue and the difficulties are in trying
to find some way to get one's arms around it simultaneously.
Let me make two points on the question of the boards. I
find the idea of the basic board as proposed by the Commission
very troubling because of its role, regardless of what it is
called. Whether it is called oversight, whether it is called
management, the fact is it is making governmental decisions;
and I find that extremely troublesome.
I have great difficulties in that, especially having to do
with the appointment of the IRS Commissioner and its approval
and review of the IRS budget. That is a question of, who is it
that would make final decisions about each of those. I find
that very troubling.
I think the Treasury's proposal for these boards is
interesting. I think that, for example, it is a very useful
idea to make sure that all of those who have a role within the
Treasury affecting the IRS' operation sit together on a regular
basis to make sure that their operations are coordinated. I
think it is extremely important that information and ideas and
insight come in from the outside.
I have a concern about the Treasury's Boards in that there
is a risk in making these things too big, too huge, too
ungainly. My concerns ultimately about both of these Boards is
that I am not sure they really solve the problem. That I think
is what we have--I worry that we are in the process now, as we
have been engaging in these discussions of tinkering, possibly,
in the margins with things that in the end will not
fundamentally attack the basic problem, which has to do with
improving the competence of the Internal Revenue Service,
first; and second securing public trust in the Internal Revenue
Service's operations.
There is a risk that the more tinkering that goes on with
these, the further we will get away from attacking those basic
problems. That is where we basically have to go in the end.
Mr. Portman. I do not think we are going to change your
mind on that, but I guess all I would suggest is it is
precisely what we have done over the years is to tinker. This
is a major structural change, which is not tinkering at all.
Mr. Kettl. No, I do not mean to suggest--I do not mean in
any way to suggest----
Mr. Portman. No, whether this was tinkering or not, I do
not mean to be defensive about that. All I am suggesting is
that if you want to get real change through the system, which
you emphasized in your oral statement today--which I could not
agree with more. That is ultimately where we have to be.
The only way to do it, as you say, is from the top down.
The only way to do that is to undertake these very significant
structural reforms. If Treasury could have done it, they would
have done it. It has been about four decades now since we got
into these problems. It is not about the Clinton
administration, as many of us have taken great pains to say
today, it is about a structural flaw, which is that the
Treasury Department does focus on fast track--as they should.
The Treasury Department does not have the expertise to
bring to bear these major problems at the IRS, and the Treasury
does not have the continuity. As you know, that Management
Board has less than a 2-year tenure; and you also know it is
going to take several years to straighten this out.
Finally, if you do not have those two things, what kind of
accountability do you have. Because the IRS people in the field
just kind of wait it out until the next great proposal from
Treasury, even if those proposals are forthcoming because of
the increased tension.
So, I think, you know, you are a nationally renowned, I am
sure, expert on public management and I am just a Member of
Congress; but I think structural reform does make sense here.
Because if you do not have the structural reform, you really
have not solved the problem.
Now, it may not work in the end. Even the structural reform
may not work, but certainly without them it is not going to
work. I think the record is very clear on that. We all have to
do our best here in Congress to increase and consolidate
oversight, as you said. We suffer from some of those same
problems, though. We do not have the continuity.
My constituents may throw me out in--what is it, about 1
year, 14 months? In any case, you know, I may be off the
Oversight Subcommittee. Bill Coyne probably has more longevity
than I do, politically, but it is honestly very unlikely you
are going to see that kind of stability here on the Hill. Plus
there are political issues here on the Hill that make it
difficult for us to focus and to give the IRS the kind of
support it needs.
So, I would ask you to go back through the recommendations.
Take a look again at the legislation. Also, in your statement,
there were a number of things that changed in the legislation.
I just want to bring those to your attention. You have a seven-
member board. It is now nine, as you know.
Looking at the Commission report you say it confuses the--I
am now on page 1 of your floor statement--``To turn the agency
over to a board dominated by private officials.'' We are not
talking about running the IRS day to day. It really is an
oversight function. You know now, I think as of today, what the
functions of that board is.
They are limited. In my view there is a difference between
oversight and management or even governance. You say, ``Putting
the Treasury Department in charge of developing tax policy, but
removing it from administering it.'' Well, we do not remove
Treasury from doing that. They have never been that. That has
been the IRS.
So, I just think there are some things--``No precedent for
vesting substantial governmental power in the hands of private
citizens,'' this is unusual, I admit. I do not know if it is
unprecedented. We have the Post Office. We have citizens review
boards in various communities around the country for police
forces. We have the Independent Council, also special
government employees. So there are some precedence for this. I
agree this is not the usual approach to problems at an
organization like the IRS.
And finally, some of page 4. Some of your power decisions
of the budget management strategy, information technology. That
is a review power, not an approval power on information
technology--which is the way we think it should be. You say
that the Board would have a small permanent staff. That is not
the way it is in the legislation. It may have been in the
report. We went back and forth on that and for many reasons
decided not to give the Commission--I am sorry, the Oversight
Board--an actual staff.
Finally, you say it is a private and independent entity
vested with governmental power. It is not. It is a governmental
entity. These are special government employees. We can talk
about the constitutional issues if you like. We have
constitutional scholars on our side who very clearly say that
this is--if the President wants all these people, it is a
governmental entity and it can then appoint an inferior
officer.
So I think the constitutional issue is, at best, murky. I
happen to believe that once we took away the proposal in the
Commission report. We said the President could not remove board
members. Once the President has that removal power--appointment
and removal--I think the constitutional issue with regards to
the appointments clause was handled. We can talk about. But
these are special government employees and it is a governmental
body. The question is whether the Commissioner should be an
inferior officer of government.
I have talked too long without giving you a chance to
respond. Let me, just quickly, to Mr. Stobaugh, and then Mr.
Kettl, if you have additional comments, I will be delighted to
hear them.
Mr. Stobaugh, when Amo Houghton--who could not be here--
left he said, ``I agree with that guy from Harvard.'' So, I
want you to know that even though he could not come back, he
was impressed with what you said.
I guess the question I would have for you, given your
experience and background in the private and public sector in
the governance area is, you know, we have heard a lot today
from the Secretary of the Treasury and others regarding sort of
the inherent flaw in having private-sector people involved in
this kind of organization really for two reasons.
One, they would be part time; and second, they would have
unavoidable conflicts of interest if they were not full-time
government employees. Can you respond to those? Is that
appropriate for you to respond to?
Mr. Stobaugh. First, on the issue of part time. American
industry is directed by directors who work part time. Many
board of directors only meet six times a year, seven times a
year, four times a year. This board here is meeting once a
month.
I think in my own studies, corporate governance--American
corporate governance--is really the leader in the world. So I
think this so-called part-time board can provide oversight
very, very effectively.
On this issue of management versus oversight, I would
recommend to the Committee to read carefully again the
statements of Mr. Goldberg and Mr. Weston. I thought they hit
the nail right on the head in terms of the real world, as to
how boards operate and how the Commissioner needs people to
talk with and get advice from. So I think the board will
function very well.
In terms of--any questions before I move on?
Mr. Portman. I do have one before you get into the last
point. Do you think we can attract high caliber people to this
board?
Mr. Stobaugh. Pardon?
Mr. Portman. Given your experience, do you think we can
attract high caliber people to get the job done?
Mr. Stobaugh. I am sure you can. There are many, many
people with the qualifications to do the kind of oversight that
needs to be done who would certainly be willing to help the
country by serving on this particular board.
The payment here is not as high as a corporate board may
be, given the same amount of time involved; but I think the
payment is adequate and I think a lot of people would probably
serve. I do not think the payment tied to the thing would be a
major issue. I can name many people off hand.
One of my coprofessors at Harvard, Jim Cash, who is an
expert on information technology and a director of several
boards, including General Electric, he would be a great board
member. Ben Bailar, former Postmaster General, who was the dean
of the Rice Business School, has been a director of a number of
companies. He would be a great director, and I name other
people in my statement. So I do not think there would be any
problem on that.
On the conflict of interest, I think there certainly is
testimony there--particularly Mr. Goldberg's--about the level
of questions that would come to the board. I cannot see at all
how the issue of how much money is going to be spent auditing
General Electric is going to make it to this board--this
oversight board. The oversight board is going to have certain
measures given to them, certain classifications of the thing,
how much it may cost and where they may want to put their
resources. But they will be looking at cost benefit and
effectiveness analysis.
Also, overlooking a lot of this discussion on this board,
the Secretary of Treasury or his designee will be right there
on the board, and there will be another government official
right there on the board. I just cannot imagine the kind of
conflict of interest that people have been talking about.
Mr. Portman. I think that is a very important point we
should have made earlier, which is there is an additional
safeguard of having the Secretary of Treasury in all the board
meetings.
Mr. Stobaugh. The other thing is, people have been talking
about chief executive officers and thinking of this person
having loyalty to one big company. You can get directors who
are not chief executive officers--people with director
experience who have been members of four or five boards. This
would be another one. But they are not going to put--I cannot
imagine the quality people you would get here would ever dream
of putting the interest of any of these boards over their duty
as a director here--and they are used to dealing with these
kind of issues.
Mr. Portman. Thank you. I just want to tell you that we
have gotten a lot of input from Professor Lorsch--Jay Lorsch on
these proposals. We want to, through you, thank him for his
help.
We are now going to adjourn, but before we do, if there are
any other comments, Mr. Kettl you would like to get on the
record or Mr. Steuerle--and I want to thank you all again for
your patience. This is the kind of private-sector input we need
and you are doing it out of the goodness of your hearts, I
know, without compensation today just as we would hope we would
get private sector on the IRS Board.
Everything you say here is made part of the record. So even
though it is kind of a lonely dais, know that this information
is going to be available--not just to the other Committee
Members and staff, but also to the public.
Mr. Kettl.
Mr. Kettl. Just a couple brief points, if I might, Mr.
Portman.
The first is just by way of clarification. The policy brief
that I wrote for Brookings was actually written quite a while
ago, based on the Commission's report; and the legislation was
drafted subsequently. So that explains some of the
distinctions, because some of the changes was made since the
time it was drafted.
Mr. Portman. I was referring to your testimony today--the
written testimony.
Mr. Kettl. That was in fact based on the policy brief.
Mr. Portman. That is fine. Thank you.
Mr. Kettl. That explains that. The one thing I want to
conclude by saying is that I do not think anybody could
possibly have listened to the discussion today and the
interchange between the Members of the Committee and witnesses
without coming away with just a deep appreciation for how
seriously everyone involved is taking this; and how hard
everybody is wresting with what is essentially a very difficult
set of problems.
My concern with the proposal that has been made by the
Commission on governance, leaving aside everything else which
as I said before is absolutely first rate, is not so much the
fact that we cannot find good people, that they will not try
hard to do a good job; and that they will not in fact do a job
well, but that there very well may be--for those of us sitting
way out beyond the beltway near the Mississippi--the kind of
perception that, if for example, an issue comes up about how
much money should we spend on auditing corporate taxes as
opposed to individual taxes--auditing versus taxpayer
assistance?
There will be, I fear, a deep concern on the part of many
taxpayers out there that those who are involved are somehow
steering the process in a way that will further undercut the
trust in the system. I do not in any way believe that those
good people who would be responsible for making those decisions
and those recommendations and those reviews would in any way
attempt to steer the process to advantage themselves.
But there is a very serious problem of perception out there
in the country, and I worry greatly about anything that might
aggregate the perception. That is something, I think, the
recommendations would have to address very clearly.
Ultimately, my real concern is--what I am struck by after
having listened now to 5\1/2\ hours of testimony is--how
unanimous the sense is of what the problems are. I sense a gap
between some of the recommendations and those things that are
likely, in my opinion, to actually produce the results that we
want. It is my concern ultimately about the governance
proposals in particular that I am not sure they are likely to
produce the results that we need.
As I suggested, I think, based on my study of what has
happened in New Zealand and Australia and other places that
have established, or have attempted to establish, world class
tax collection systems, that it is the performance-based system
that is much more likely to provide the kind of guidance that
is needed to change the system.
Mr. Portman. I thank you, Mr. Kettl. I know you understand
how the budget works, but in terms of the perception as to
where audit resources might be allocated, it would be the
opportunity for the Secretary to not only be on the Board and
be part of the discussion as to that budget; but then
ultimately, the Secretary would have veto authority and if the
Secretary were to determine that the Board's decision on the
budget were inappropriate, the Secretary through the process
would then be able--as part of the President's request--to lay
that out.
So it is, one, in a sense advisory opinion that would be
coming up here; and I do not think the perception of the
taxpayer would be affected by that much. What Congress does, of
course, is another matter--which is a whole 'nother process and
ultimately decides the IRS budget.
But I do appreciate your testimony and your analysis of
this. I think you are right. I think there is an amazing
consensus now on the problem, at least. The question is how we
actually make a difference on the performance-based management
issue.
As you know, there is a whole section of this legislation
that we are not going over in Ways and Means, because it is not
in our jurisdiction. That has to do with title V, and has to do
with some of the reinventing government ideas that Vice
President Gore and others have talked about--performance-based
organization. I am very excited about that. That is a very
important part of this legislation.
It is not the Tax Code. It is actually a civil service
issue. If we can do it, it will make the IRS, in my view, a
model agency, believe it or not. If my colleagues were here to
hear that, they would think that I had spent too much time
looking at the IRS Code.
But I think what you are talking about actually is in the
legislation. I will get you that material so you can see it in
terms of pushing that through the system and rewarding people
based on performance.
Mr. Stobaugh.
Mr. Stobaugh. I just want to make one last point and that
is, on this issue of what directors do and what they do in the
private sector, there have been major changes in the last 10
years. There is something called ``Director Professionalism.''
I happened to sit on a blue-ribbon commission of the National
Association of Corporate Directors that issued a report on
director professionalism, outlining: ``Here are the kind of
people you need for directors and here is what they ought to
do.''
I wanted to volunteer to make this available to the
Committee here.
Mr. Portman. I appreciate it. We will take a look at it and
I appreciate your wanting to share it with us.
Mr. Steuerle.
Mr. Steuerle. Just a last statement. I would like to add my
compliments to you, Senator Kerrey and the other members of the
Commission.
I have to confess that when I saw how the Commission was
originally put together, I was somewhat skeptical it was going
to be able to come to any type of agreement at all. The fact
that it put forward so many good proposals, I think, is a real
testimony to your own abilities, as well as the staff and
Senator Kerrey's.
Again, to repeat one comment that I made earlier, I regret
that so much attention gets focused on the Board as a measure
of success or lack of success. Because I think it takes
attention away from other details, but very important details,
of the Commission's report to which I think we all need to
devote some attention.
Mr. Portman. I thank you, Mr. Steuerle and the Committee
will now stand in recess until 10 a.m., tomorrow.
[Whereupon, at 6:45 p.m., the Committee recessed to
reconvene the next day at 10 a.m.]
RECOMMENDATIONS OF THE NATIONAL COMMISSION ON RESTRUCTURING THE IRS ON
EXECUTIVE BRANCH GOVERNANCE AND CONGRESSIONAL OVERSIGHT OF THE IRS
----------
WEDNESDAY, SEPTEMBER 17, 1997
House of Representatives,
Committee on Ways and Means,
Washington, DC.
The Committee met, pursuant to call, at 10 a.m., in room
1100, Rayburn House Office Building, Hon. Bill Archer (Chairman
of the Committee) presiding.
Chairman Archer. The Committee will come to order. We are
going to get started, in spite of the vote on the floor of the
House, and we will move along for 10 or 12 minutes and then go
vote and then come back.
Today marks the second day of a 2-day hearing to examine
the recommendations of the National Commission on Restructuring
the IRS. Mark Twain once said that everyone complains about the
weather, but no one does anything about it. Sometimes it seems
to me that this statement could apply to the way that we have
let the IRS languish since 1952, but that is about to change.
As I indicated yesterday, I consider reforming the IRS into
an efficient, consumer-oriented, taxpayer-considerate agency
this Committee's highest priority for the remainder of this
session, and my sincere goal is to work with my colleagues on
the Ways and Means Committee on a bipartisan basis to meet that
challenge.
For many taxpayers the IRS is a source of fear and for far
too many it is a source of frustration. It has likely more
direct contact between anyone representing the Federal
Government and the average citizen in this country than any
other operation at the Federal level. We may not be able to
prevent people from getting a knot in their stomachs when they
open an envelope from the IRS, even if it is a refund check
until they see the check, but we are certainly going to try to
address the needless frustration.
Today, we are going to talk in part about Congress' role in
overseeing the IRS and the need to sweep our own doorstep,
because Congress bears a big part of the problems in the IRS.
Not only do we have the responsibility of oversight, but the
Congress passes laws that are often virtually impossible to
administer.
As I said yesterday, both ends of Pennsylvania Avenue must
face their responsibilities for fixing the IRS and I intend to
explore what Congress can do better. In the hearing today, we
will hear from Ken Kies regarding the role of the Joint
Committee on Taxation under H.R. 2292. Additionally, we will
receive testimony from experts in the tax arena: the American
Bar Association Section of Taxation, the Tax Executive
Institute, the AICPA and the New York State Bar Tax Section. We
will also receive the views of former IRS Commissioners and
other former senior IRS executives.
[The opening statement follows:]
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Chairman Archer. And I now yield to Bill Coyne, a member of
the Commission on Restructuring for any comments that he might
like to make in an opening statement.
Mr. Coyne. Thank you, Mr. Chairman. I just want to welcome
Ken Kies and the rest of the witnesses and say that the Ranking
Member, Mr. Rangel, was held up and will not be here for a
while, and I look forward to the testimony.
Chairman Archer. We do have with us today the Chief of
Staff of the Joint Committee on Taxation, Ken Kies, and we are
pleased to have your input on this very important topic. You
may proceed.
STATEMENT OF KENNETH J. KIES, CHIEF OF STAFF, JOINT COMMITTEE
ON TAXATION, U.S. CONGRESS
Mr. Kies. Thank you, Mr. Chairman. I want to thank the
Committee for inviting me to testify today. It is my pleasure
to present the testimony of the staff of the Joint Committee
concerning the proposals to restructure the IRS and improve
congressional oversight of IRS operations.
There are two principal proposals under consideration at
this time. H.R. 2292, introduced by Congressmen Portman and
Cardin, embodies the recommendations of the IRS Restructuring
Commission. H.R. 2428, introduced by Congressmen Rangel, Coyne,
Matsui, Hoyer, and Waxman, would codify an administration
proposal. As H.R. 2428 contains no specific proposals impacting
the operations of the Joint Committee, my testimony will be
limited to the provisions of H.R. 2292 that affect the Joint
Committee.
You may recall that the Joint Committee was originally
created in 1926 to have a significant and ongoing role in the
oversight of the entire Federal tax system. In fact, the
history of the creation of the Joint Committee provides some
interesting background on why Congress was concerned with this
oversight.
The Joint Committee was originally created because of
concerns in the Congress that the IRS was not properly
administering the Internal Revenue laws and that the IRS was
being improperly influenced by political appointees in the
Treasury Department. In 1924, Senator James Couzens introduced
a resolution in the Senate for the creation of a select
Committee to investigate the Bureau of Internal Revenue.
At the time there were reports of inefficiency, waste and
fraud in the Bureau. One of the issues investigated by the
select Committee was the valuation of oil properties. The
Committee found that there appeared to be a total absence of
competent supervision in the determination of oil property
values.
In 1925, after making public charges that millions of tax
dollars were being lost through the favorable treatment of
large corporations by the Bureau, Senator Couzens was notified
by the Bureau that he owed more than $10 million in back taxes.
Then Treasury Secretary Andrew Mellon was believed to be
personally responsible for the retaliation against Senator
Couzens. At the time, Secretary Mellon was the principal owner
of Gulf Oil, which had benefited from rulings specifically
criticized by Senator Couzens.
The investigations by the Senate Select Committee led, in
the Revenue Act of 1926, to the creation of Joint Committee.
The Revenue Act of 1926 defined the duties of the Joint
Committee, which have remained essentially unchanged since that
time.
Under present law, the Joint Committee has broad
responsibilities and powers relating to the operation and
effects of the Federal tax system, including oversight of IRS
operations. The powers of the Joint Committee include, among
other things, the power to inspect tax returns, to hold
hearings and to subpoena witnesses.
I have the following comments with respect to the
provisions of H.R. 2292 relating to the work of the Joint
Committee. H.R. 2292 would require all requests for
investigations of the IRS by the GAO, other than requests from
Committees and Subcommittees, to be approved by the Joint
Committee. We generally agree that in order to ensure
appropriate allocations of resources both of the IRS and the
GAO, it is important to coordinate requests for investigations.
The proposal aids in this regard by indicating congressional
intent that there should be further scrutiny of investigations
relating to the IRS.
The provisions of H.R. 2292 require the Joint Committee
staff to provide support with respect to two annual joint
hearings of certain Members of the congressional Committees
with jurisdiction over the IRS. This does not expand the powers
of the Joint Committee so much as it would formalize the role
the staff would have with respect to these joint hearings. I
would note that the bill's approach adopts recommendations made
by the staff of the Joint Committee and I appreciate the
willingness of Congressmen Portman and Cardin to adopt this
approach.
H.R. 2292 clarifies the duties of the Joint Committee with
respect to reports to be provided to the Congress. In addition
to the duties of the Joint Committee under present law, the
bill requires that the Joint Committee report annually to the
taxwriting committees on the overall state of the Federal tax
system; and annually to the six congressional Committees with
jurisdiction over the IRS with respect to matters relating to
IRS operations.
I believe that this reporting approach is appropriate and
that it will assure that all of the Committees responsible for
oversight of the IRS will receive consistent information on a
regular basis. This approach should improve the decisionmaking
capabilities of the Congress with respect to IRS oversight.
H.R. 2292 provides that it is the sense of the Congress
that the IRS should provide the Congress with an independent
view of tax administration and that, during the legislative
process, the taxwriting committees should hear from frontline
technical experts at the IRS with respect to the
administrability of pending tax legislation. I believe that it
is vital to the legislative process for the Congress to have
the ability to consult with IRS officials with respect to
pending legislative proposals and, therefore, I wholeheartedly
support the goals of this provision.
The bill would require that the Joint Committee provide a
tax complexity analysis for each tax provision in a bill,
resolution, amendment, or conference report considered by the
Congress.
The Commission's recommendations are based on the
Commission's finding that the complexity of the laws is a major
source of taxpayer frustration. I share these concerns, and we
generally support the bill's approach. However, we have several
recommendations, outlined in my written testimony as to how the
complexity analysis could be modified to make it more workable.
I thank the Committee for the opportunity to offer the
testimony of the staff of the Joint Committee with respect to
certain provisions in H.R. 2292, and look forward to working
with the Committee in the consideration of this legislation.
Thank you, Mr. Chairman.
[The prepared statement follows:]
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Chairman Archer. Thank you, Mr. Kies. And once again our
schedule gets interrupted by votes on the floor. I am going to
have to shortly run over and vote, then Rob Portman will chair
the Committee until I get back.
First, my compliments to you and to your staff for a very
comprehensive analysis and anybody who sees this can see that
it is comprehensive of this entire issue, which is going to be
very, very helpful to the Committee.
There have been a number of problems that have cropped up,
and I am not sure how much attention was given yesterday to the
need of the Congress in its oversight function to have direct
access to officials at the IRS. In the past, every time that we
have wanted to have direct testimony or access, the Treasury
has stepped in and said, oh, no, you cannot do that. The IRS
can only be heard through a Treasury official. Which is, in
effect, an insulator which has prevented us from having direct
access. I do understand that the Joint Committee has in its
authorized authority legislatively the right to demand and get
direct access to the IRS, but that is very rarely used.
Do you have any suggestions as to what we should do as we
restructure the IRS so that the Congress will have more direct
input from the IRS in its oversight responsibilities?
Mr. Kies. Well, Mr. Chairman, I think there are a couple of
things that could be done. One, during the legislative drafting
process, it was the historic practice, at least up until the
1996 act, that representatives from the Internal Revenue
Service would actually participate in all of the legislative
drafting sessions to provide input into things like trying to
make provisions easier to administer, to alert the Congress as
to the difficulty that might arise with respect to development
of IRS forms to implement new provisions.
We think a return to that practice is something that would
be very helpful. That is what the sense of the Congress
resolution that is contained in H.R. 2292 is partly intended to
get at. We have already actually initiated discussions with the
Treasury Department to try and make that happen immediately or
at least in the near future. IRS participation and more direct
participation in the legislative drafting process, I think,
would be a major help.
The direct involvement of the Internal Revenue Service with
the Congress on oversight with respect to administration, I
think, is also an important step. The bill provides for a
series of reporting responsibilities and hearings that should
be considered to get that direct input from officials at the
Internal Revenue Service. We think that would be a very
positive step in improving the oversight role that the Congress
should be playing with respect to the administration and
operation of the IRS.
Mr. Portman [presiding]. Thank you, Mr. Kies. I would like
to echo the comments of the Chairman with regard to your
analysis of the legislation and of the Commission's
recommendations. It is thorough. It is probably the most
helpful analysis that we have seen because it actually sticks
to the language of the legislation and your sense, given your
experience and expertise, as to how it would work day to day.
I think it is extremely helpful to get your additional
comments on the notion of having the IRS be more involved, not
just in the development of legislation at this Committee, but
through the process. As you and I have talked about often,
legislation ends up getting written in conference committees,
and any assistance that you can provide this Committee, I
think, would be very helpful to come up with practical ways to
be sure that Members of Congress understand the implications of
what are often great sounding tax ideas, but might make life
more difficult for the IRS and the taxpayer such as putting
together forms and understanding what the burdens might be.
So, I think your suggestions there are very helpful and I
hope that you will continue to work with the Committee on
helping to solve that problem. I think, as you say, the
restructuring legislation, H.R. 2292 has a good resolution, but
maybe doesn't go far enough in that regard.
Other areas that you have looked at include the complexity
of the Tax Code. I know this is a controversial one and I am
sorry that I couldn't have been here for your entire statement.
This is a tough one. I think there are a number of us on this
Committee who feel strongly about it. I know Senator Kerrey and
I did. We need to come up with some way to encourage Congress
to simplify rather than to make the Code more complex.
In this legislation, H.R. 2292, the Joint Committee would
be charged with a significant responsibility to highlight the
complexity of legislation, to come up with an analysis of
legislation. It would be helpful for me today and for the
Committee and I think for the record, if you could tell us
whether you agree on the need to raise awareness on tax
complexity. And second, what you think is the most workable way
to achieve that goal if you agree with that goal.
Mr. Kies. Mr. Portman, as I think my written and oral
statement both say, we agree that one of the sources of
discontent with the existing tax system is complexity. It is
also a source of many of the problems the Internal Revenue
Service has had in its administration function. We have said a
couple of things in the testimony regarding the bill's
complexity analysis.
The first is that requiring some level of greater attention
to the complexity side of the legislative drafting process will
not be a complete panacea. The Tax Code has inherent
complexities, and the process by which legislation is drafted,
which sometimes is very time-pressured, will frequently lead to
complexity because of the pressures between revenue and other
considerations.
However, we have said that we think a more consistent
process by which we bring to the attention of the taxwriting
committees complexity concerns is something that may very well
help heighten the level of attention as, for example, the line-
item veto has heightened the attention of Members to the
possibility that provisions may be narrow in their focus. And
so that over the long term, we may see some benefits to this
type of approach.
We think perhaps the approach that is in H.R. 2292 may be
too rigid and perhaps too complex itself, and that we want to
work with the Committee to find an approach that is workable,
but which will address the objectives that you and Senator
Kerrey and others have to heighten the attention to the
complexity issue. And, indeed, one of the things we have said
as part of that is perhaps we ought to also identify those
instances in which the Congress simplifies.
For example, the bill that was passed this summer
eliminates the need for over 1 million taxpayers to file
dependent tax returns, and for over 250,000 people to make
estimated tax payments. It eliminates the problems of almost
all small businesses dealing with the corporate AMT.
Mr. Portman. Capital gains for homeowners.
Mr. Kies. Capital gains for homeowners. Although we hope
the States will follow suit so individuals don't have to keep
records for State tax purposes. I think there is some reason to
be optimistic the States will follow suit.
Congress sometimes doesn't get credit when they do some
simplifying things and maybe we ought to bring attention to
those as well as highlight new areas of complexities so that we
minimize the extent to which that happens in the future.
Mr. Portman. Whatever you can do with regard to title 4,
subtitle C, which is the tax law complexity part of H.R. 2292
to make it less complex, I would appreciate that. This is
something that we struggled with, particularly David Keating
with the National Taxpayers Union, who was a Commissioner and
who was very active in this area, as were a number of other
members of the Commission.
I think the intent of this is clearly shared by you and the
Joint Committee. If there is a way to do it that is more
practical, I know that we would embrace it so long as there was
an incentive that had real meaning to encourage Congress to
simplify rather than the current status which works the other
way. We have a point of order process here, as you know, which
if this simplification analysis is not done, the questions are
not answered as to what the implications are going to be on the
IRS and the taxpayer, then any individual Member would have the
right to stand on the floor of the House and stop tax
legislation. How do you feel about that enforcement mechanism
in the House?
Mr. Kies. I think if we get a set of provisions that are
workable for trying to bring to the attention of the Congress
the complexity concerns, that we would not see any problem with
a procedural enforcement mechanism to comply with that
requirement because we would fully expect that we would comply
with it, as we have in the case of the unfunded mandate
legislation that was passed in 1995, that now applies to tax
legislation. And likewise in the case of the line-item veto
responsibility that we now have as well.
So, I think if we get a workable set of rules, there should
be no objection to a procedural enforcement mechanism to make
sure that they are complied with.
Mr. Portman. Again, I thank you. That is the critical thing
that you help us with, that enforcement mechanism. I know that
there will be other Committees of Congress and Members who may
have concerns about this kind of enforcement mechanism. It is
real and has teeth and has worked for unfunded mandates for
that reason. It causes headaches for the leadership because of
the power it gives individual Members, but without that
enforcement it would be unlikely to be an effective mechanism.
So we need to work on the mechanism and make certain that it is
workable, simple and I appreciate your help on that and we need
your help and assistance.
I have a lot of other questions and Mr. Collins is here and
I want to give him a chance before the vote. Yesterday, we had
a lot of testimony from a lot of experts, including Members of
Congress, but also academia and members of the Commission on
all sides of the issue.
One thing we never heard, with the exception of Secretary
Rubin, was who really supported Treasury's proposal. This
includes Mr. Kettl from the Brookings Institution who Secretary
Rubin had talked about and implied that he was supportive--and
his testimony speaks for itself. He was not supportive of the
Treasury proposal. That was really the story of yesterday's
hearing. We either have status quo or the Treasury proposal,
which seems to have little support or some more fundamental
restructuring to change the culture at the IRS and help
taxpayers, which is what this is all about.
I know that today this is more focused on the congressional
side and that is where you have unique expertise, and I
appreciate all your help there. But regarding how Treasury's
oversight role might work, have you come up with improvements
with regard to the structural reforms that are in H.R. 2292 for
real oversight of the IRS?
Mr. Kies. Well, Mr. Portman, as you know, in the process of
not only preparing the materials that were prepared for this
hearing, but also in preparing for dealing with this
legislation, we have gone through a series of meetings in the
past couple of weeks. We have met with Commissioners from the
IRS Restructuring Commission, and with former IRS
Commissioners, going all the way back to Lyndon Johnson's
Commissioner.
We have met with representatives of the tax section bar,
and other tax practitioners. One of the themes that comes
through clearly in our assessment of the status quo is that
there has been inadequate oversight of the IRS on both the
congressional side and on the executive branch side.
We think the congressional side improvements that are in
your bill are a good step in the direction of getting Congress
to be more attentive to its oversight function.
On the executive branch side, what we have heard from
management experts, from chief executive officers, from other
people who are experts in management, is that you will not have
an effective oversight function if that entity that has
oversight responsibility doesn't have some sort of significant
power and responsibility. And I think that is the balance that
is going to have to be struck as the Committee goes forward in
trying to create an effective executive branch oversight
function. We are prepared to try and work with you all on that.
I don't think that at this point we would say that we have
a magic answer because I think it is a balancing act. But
clearly I think for this entity to be effective, this oversight
function is going to have to be real, and that, I think, is one
of the sources of criticism of the Treasury proposal, is that
it would simply be putting in place another advisory body
without significant power. And some would say without any
power. That is where I think the Committee is going to have to
strike a balance. We have identified some constitutional
concerns that are going to have to be given attention, but we
would hope that there is going to be an ability to structure a
significant oversight function within the executive branch that
will accomplish the purposes that I think you all have in mind,
and still balance the reasonable concerns that Treasury has
raised.
Mr. Portman. Thank you, Mr. Kies.
Mr. Collins.
Mr. Collins. Thank you, Mr. Chairman. Mr. Kies, as we were
working on the tax bill earlier this year, we had a lot of
constituents andtrade association representatives come in, and
talk about auditing. It seems as though there is a lot of
discretion among regional directors of the IRS and their
interpretation of auditing procedures. Sometimes varying region
to region. Have you experienced any of this? Do you have any
information in this area?
Mr. Kies. Well, Mr. Collins, I think we, too, have heard
from taxpayer representatives who from time to time express the
same kind of concern that you have identified that perhaps in
one region of the country, one standard is being applied which
may be different from the standard being applied in another
region of the country.
Obviously, that creates problems because taxpayer
confidence is eroded if they feel there are different standards
being applied to taxpayers in comparable situations. And we
think that is one of the areas in which congressional oversight
is appropriate.
At the same time, we would hope that the Treasury
Department, who under Congressman Portman's legislation would
retain all tax policy functions, would be concerned about as
well. And it is something that perhaps through the
congressional oversight process could be formalized as an area
of concern so that it is brought to the attention not only of
Treasury, but IRS. I think it is clearly a cause for concern if
it is, indeed, happening because it is obviously not fair to
treat similarly situated taxpayers differently.
Mr. Collins. Well, it is a major concern. And it looks like
there is a lack of proper management when those things happen.
But another thing, too, in this same area, it appears that
there may be compensation tied to the regional director's
collections. And if you have a regional director who is in an
area with a concentration of a certain type of industry that
must comply with a set of very specific or unique tax laws or
regulations, there is enormous movement toward increased
audits. In addition, rules established by that director for his
area often lead to additional audits and additional
assessments, fines, penalties, and so forth.
This is a major concern. It really bothered me when I heard
that sometimes compensation is tied to increased audits and
collections. Are we in any sort of way with this legislation or
in oversight looking at the fact that compensation is tied to
collective resources?
Mr. Kies. Mr. Collins, let me say two things. First, one
other point on your first question. That is, one of the reasons
the IRS national office issues guidance at the national level
through revenue rulings and coordinated issue papers, things
like that, is to try to avoid the problem that you have
identified. So I want to say that the IRS, itself, does try to
get national guidance coordinated.
I think the instances in which these kind of problems arise
tend to be on issues that have not made their way to the
national level and so they are developing simultaneously in
different regions and getting different interpretations.
On the issue of compensation, clearly that is an issue that
would be appropriate for Congress to look at in the oversight
function to see whether or not the method of compensation being
utilized by the service is consistent with the fair
administration of the tax system. Likewise, I think the
Oversight Board would want to look at those types of things as
well.
On the other hand, the job of the IRS is to ensure that
taxpayers do pay what is appropriately owed. And so there is a
balance there in terms of the responsibility they have. You
don't want to have your compensation system structured so that
it encourages behavior that is inconsistent with sound
administration, but you also want to make sure that it is
consistent with it.
I think this is an issue that the service has grappled with
over the years, and many Commissioners have recognized that
they have got to compensate their regional Commissioners on a
wide range of issues, some of which may be related to
collections, but others need to be related to taxpayer service,
for example, whether or not they are conducting the education
of their agents in a proper manner so that they can actually
answer correctly questions that taxpayers have. I think there
is a whole wide range of issues that should be taken into
account in determining compensation other than just the
efficiency of collection.
Mr. Collins. It bothers me not only in the area of
compensation, but also in the area of promotions for agents.
Thank you.
Mr. Kies. Yes, sir.
Chairman Archer [presiding]. Mr. Coyne.
Mr. Coyne. Thank you, Mr. Chairman.
Welcome, Mr. Kies. I was wondering if you could give us
your views, maybe a comparison, about the governance provision
in the two pieces of legislation.
Mr. Kies. Well, Mr. Coyne, I was trying to answer some of
that with respect to one of the questions Mr. Portman asked,
that the legislation that you and Mr. Matsui and Mr. Rangel and
others have introduced, which the administration has put
forward, also creates an oversight function. So I think both
the administration and the Restructuring Commission on which
you served have recognized that there is a need for more
consistent oversight at both the executive and the legislative
branch levels.
I think that the difficult question that this Committee and
the Finance Committee and the two Houses are going to have to
address is how do you strike the right balance between, on the
one hand, giving adequate responsibility and power to an
oversight function so that you have some confidence level that
it will be an effective oversight function, versus the concerns
that have been raised by Secretary Rubin, and others, that you
don't want to add too much of a privatized notion to the
operation of the IRS. I think that is the balance that you need
to strike there.
I do think that some of the concerns that have been raised
about potential conflicts of interest on the part of the
Oversight Board perhaps are overstated; that the responsibility
of the President under the Commission structure will be to find
people that have quality management expertise, but which do not
have the potential for conflicts of interest. And I think we
should be looking to other than current CEOs, for example, to
serve on that Board.
There are many people other than CEOs of Fortune 500
corporations that have management expertise. But I think that
is the balance that the Committees, both here and in the
Senate, are going to have to strike. How do you create an
entity that has enough responsibility and power that it can
serve an effective oversight function without unduly putting
too much responsibility for the running of the IRS outside of
the normal executive branch structure?
Mr. Coyne. Do you have any suggestions relative to the
management and operation of the IRS and how to improve it?
Mr. Kies. Well, I must say, I agree with what I think is
the underlying assumption of both the Treasury Department
proposal and the Commission proposal. That is, that many of the
problems that have arisen at the IRS--and not just the computer
problem, I think the computer problem is merely symptomatic of
a larger problem--are a result of a lack of consistent, long-
term accountability. And that is the problem on the
congressional side, too.
The Members that have served on the six Committees that
have congressional oversight tend to turn over so that the
people who are in the positions of overseeing the IRS 2 years
ago may not necessarily be the people who are there today, so
there is not a longer term picture of what really has happened
over time.
Continuity is something that will improve the management at
the IRS. I also think, and I say this as a tax lawyer, that
putting a person with management skills rather than tax
expertise into the position of Commissioner is probably a smart
and wise move. Doing that, however, does make the position of
Chief Counsel of the IRS much more important in terms of the
tax policy function. And I think that is something this
Treasury Department probably already does recognize. But I
think getting a person with significant management skills into
the position of Commissioner is a very wise move to run a
100,000-plus person organization.
Mr. Coyne. Well, I take it from your response about the
governance issue that you do not have any problem with the
proposed Oversight Board hiring the Commissioner?
Mr. Kies. Actually, Mr. Coyne, we have raised, in the
pamphlet that we prepared, the fact that there are some
constitutional issues that need to be thought through in
connection with that power. The litigation that has occurred in
this area involving the Postal Board would seem to imply that
it can work constitutionally, but it is by no means a
completely settled question. And, therefore, I think that the
Committee is going to have to ponder that as they examine that
feature of the Oversight Board to determine whether they are
comfortable with that aspect of it. So we have identified that
as an issue that you do have to think through in terms of how
you proceed on that particular point.
Mr. Coyne. Thank you very much.
Chairman Archer. Mr. McCrery.
Mr. McCrery. Mr. Kies, just one question and that concerns
the provision in the proposal for all the various legislative
committees of jurisdiction to meet together a couple of times a
year with the IRS to hear about how their strategic planning is
going and so forth. Have you had any chance to look at that and
develop any thoughts on the advisability of that?
Mr. Kies. Yes, Mr. McCrery, we actually think that is a
very sound recommendation. Again, we believe that many of the
oversight problems with respect to the IRS can be traced not
only to the executive branch problems, but to the fact that
Congress' oversight has not been completely structured and
coordinated. This recommendation is clearly intended to result
in more coordinated, consistent oversight on the congressional
side.
We think it makes a good deal of sense to do that. And it
will provide for a structured periodic review on the part of
the Congress, which will force the Commissioner and the
Treasury Department to realize that they are going to have to
come back and report how well they are meeting the goals that
they set out 6 months ago, 1 year ago or 2 years ago. And that
is a very effective mechanism to ensure that there is a more
effective oversight and accountability function. So we think
that is a very sound proposal.
Mr. McCrery. Thank you. Thank you, Mr. Chairman.
Chairman Archer. Mr. McDermott.
Mr. McDermott. Mr. Kies, I just have one question to follow
up on what Mr. Coyne asked. Let's suppose that we pass a bill
that gives the Board the ability to appoint the Commissioner
and a lawsuit is brought and it is decided in the lower court--
perhaps takes a year--and then moves up to the Court of Appeals
and takes another year or more before it gets on the docket and
goes to the Supreme Court and takes another year. So we are
talking 3 years.
What do you anticipate would be the effect on the tax-
gathering ability of the U.S. Government if the question of the
appointment of the Commissioner and all the policies which he
or she were to put in place were called into question. What
would be the effect on the ability to require payments or
penalties or assess fines or whatever?
Mr. Kies. Mr. McDermott, two points on that. First, we
think if the Committee and the Congress were to proceed with
this appointment mechanism, it might be advisable to try and
structure some sort of expedited Supreme Court review to try
and short-circuit or shorten the period of time that it might
be necessary to get a Supreme Court decision, which was done
with respect to line-item veto legislation.
Mr. McDermott. How long did that take?
Mr. Kies. Unfortunately, it didn't quite work the way it
was intended because the Supreme Court concluded that there
wasn't a case or controversy the first time around because
there had been no exercise of the power. It only took about 9
months to get it through the Supreme Court.
In this case, the power would be immediate, so I don't
think we would have that concern.
Mr. McDermott. But they could make the ruling that no one
has been injured. The courts could turn it down as they have in
term limit cases and other cases no one has been injured. So
term limit cases are now only coming to fruition. They are
ripening in the courts because now people are being excluded
from running for legislatures or the Congress or whatever.
So if they chose not to do it for ripening questions, how
long? A year?
Mr. Kies. Well, it could be--could even be longer. And let
me just say that to try and structure an expedited review is
only one possible way to address what I think is a legitimate
concern here. It may not be possible to make it work with
complete efficiency.
I think the other aspect of my answer is perhaps more
important though, and that is that we have actually looked at
this issue of whether the actions of the Commissioner would be
deemed invalid. Our preliminary conclusion is that they
probably would not. But I think that is something that we need
to take a very close look at because I think that is going to
determine the extent to which you and the Finance Committee may
be willing to make a decision that is in the gray area as
compared to one that clearly does not raise a constitutional
problem.
Mr. McDermott. Have you asked for an advisory opinion from
the Justice Department or from anybody as to whether or not the
decisions made by an improperly appointed or unconstitutionally
appointed Commissioner could then be reversed or thrown out?
Mr. Kies. Mr. McDermott, we have not asked for an advisory
opinion. Let me get back to you with a more specific answer. I
believe there is case law that essentially says that the
exercise of the responsibilities of the official, even though
they might be inconsistent with the appointment clause, are
nevertheless recognized until the Supreme Court holds that the
appointment clause was not complied with. But let me give you a
more specific answer on that. I know this is an issue that we
have started to explore ourselves because we had the same kind
of concern, that obviously is the basis for your question. So
let me get back to you on that.
Mr. McDermott. I raise this issue because my experience in
the State legislature was we had a school board member who once
said, ``We are elected as school board members and we appoint
the superintendent and once we appoint the superintendent, our
job is to rubber stamp whatever he or she decides.'' So that
appointment process is key to the whole issue of whether or not
the decisions made, whether the strategic decisions made or
anything else that is made, are within the constitutional
structure. And I think you would throw, or at least it is a
real potential that you would throw the whole system into chaos
for 3 or 4 years while the constitutional issue was being
litigated in the courts. That is my major concern on this
particular issue.
I would be grateful if you would give me the case law that
makes you believe that you could have the decisions made by
such an appointed Commissioner standard, even though they might
later be constitutionally considered out of office.
Mr. Kies. I will be happy to do that. And I will just point
out that this is different than the school board situation.
Although it doesn't necessarily answer the constitutional
issue, there is the fact that the Oversight Board under Mr.
Portman's legislation clearly is intended to have an ongoing
responsibility in terms of oversight of the decisions that are
made by the Commissioner.
My staff just brought to my attention that the case that I
was referring to is Ryder vs. United States, which held that
the so-called de facto officer doctrine conferred validity upon
acts performed by a person acting under the color of official
title, even though it is later discovered that the legality of
that person's appointment is deficient.
Mr. McDermott. Could you give me the cite of the case?
Mr. Kies. Absolutely. It is in our pamphlet, but I will
give it to you specifically. It is 115 S. Ct. 2031 (1995).
Chairman Archer. Mrs. Johnson.
Mrs. Johnson of Connecticut. Thank you. Mr. Kies, I was
reading the more detailed remarks in your written testimony in
regard to the complexity analysis and the role that the
Commission report seeks to develop for the Joint Tax Committee
in helping the Congress write tax law that is more easily
administered. And without question, simplicity is the issue out
there for the public. Simple law that people can understand is
fair because they know what is expected of them.
On the other hand, I am well aware of the case you make
about why the proposed analysis will not meet our needs and
where in the process that complexity occurs.
Do you have some recommendations as to how we could deal
with this problem differently than in the report? And what are
your thoughts on that?
Mr. Kies. Well, we have started to develop some
recommendations and we are working on those. I have met with
Mr. Portman several times to explore some different ideas. We
want to make sure that the provision that is in the statute
itself is workable. I earlier said we don't want a provision
that is too complex to analyze complexity. So we are striving
toward something that is administrable, but which will bring to
the attention of the taxwriting committees on a timely basis
the fact that a particular provision could be the source of
significant additional complexity.
Mrs. Johnson of Connecticut. This is going to take longer
than we have here today, but I would like you to look at a
complexity analysis accompanying every tax bill introduced.
When we introduce bills, often people will not sign on until
they know what the cost is going to be and that has helped to
discipline the process. And I think if people saw that often a
good idea means that on the tax forms there will be five new
items and how that interfaces with a lot of other tax law, that
good ideas could be rethought as to how we accomplish that
goal.
But I think that one of the points you make is that you
have to notice this at the very beginning of the process. And
that is one point we certainly ought to be able to address. I
look forward to working with you on this particular issue of
how we in Congress, deal with the issue of tax complexity,
because both we and the executive branch talk simplification,
but write complex laws.
Chairman Archer. Will the gentlewoman yield just to
piggyback on that, and it will save me having to ask about it
later?
Mrs. Johnson of Connecticut. Certainly.
Chairman Archer. Mr. Kies, what do you think about the
suggestion that Gene Sterling made that we be given markup
forms as we go through the markup process in the Committee so
that we can see graphically what is going to happen to the tax
return as a result of the provisions that we are considering at
that time?
Mr. Kies. Well, I think actually it has been done before.
It has not been done frequently. And I think there might be
some merit to it on provisions that are of wide application. I
am not sure that I would recommend it on every provision that
comes before the Committee. For one thing, I think it might
cause the entire legislative process to grind to a halt because
the development of forms does take time.
But on provisions of broad application, it might very well
be useful to the Members to get a sense of what taxpayers are
going to have to do to comply with the provision. And
conversely what the IRS is going to have to do to administer
it.
Chairman Archer. As the gentlewoman said, this is an issue
that we need to expand upon and take a lot of time with it at
another point in time. But let me simply point out right now
that it is not just the lines on the return. In fact, the
return frequently--and I will reiterate that I am the first
Chairman of the Ways and Means Committee in memory who does his
own tax return, and frequently the returns will leave out a
line for simplification and you have a gigantic struggle to go
through all of the explanations and the instructions to figure
out where you are supposed to put something because there is no
line on the return for it.
So in the name of simplification because it may be a
relatively isolated item that is not used by the masses of
taxpayers, they simplify the return and take a line off and
there is no place for you to put what you are trying to put in,
which the law requires that you put on the return.
The other thing neglected to be looked at, I would say to
the gentlewoman from Connecticut, is not just lines on the
form. It is now the developing work sheets that you have to go
through that are not on the form, in order to be able to get
the number to put on the line on the form. And these are where
the real complications come, more than the number of lines that
are on the form. So we deceive ourselves if we are only talking
about how many lines are on the form. I thank the gentlewoman
for yielding.
Mrs. Johnson of Connecticut. I agree absolutely with the
Chairman. One of the real problems for us has been that often a
major change in tax law will not have corresponding regulations
for years. And so taxpayers are out there guessing at how to
comply. And years later they learn they may or may not have
guessed right. So I think this is a very, very significant
issue.
At the very least, any major proposal introduced by a
Member ought to have this backup and any proposal introduced by
the administration ought to have certain backup
administratively. We need to illustrate new proposals in a way
that we get a real understanding of the administrative
complexity and of the complexity for the taxpayer.
Thank you.
Chairman Archer. Ms. Kennelly.
Mrs. Kennelly. Thank you, Mr. Chairman. I almost think I am
listening to a plot as I sit here, and the plot is somebody
will have to pull the Tax Code out by the roots if this
continues because of complexity. And as we know, it is almost
virtually impossible in a markup to get an answer from IRS, but
it is just as hard to get an answer from Joint Tax. And then if
we ever put the tax complexity analysis on top of that, I don't
know quite what Joint Tax would do.
But I was going to ask a question and we have a vote now,
about the compliance burden estimates. Now, here is another
level of complication and work that we are saying we are going
to put on top of all these other things. Am I in the real
world, or is it right for me to be highly skeptical that the
Joint Tax staff could contract the compliance baseline? Can you
carry out all of these things?
Mr. Kies. Mrs. Kennelly, we did say in our written
testimony that we have some significant concerns about the
ability, just technical ability to be able to develop a
compliance burden index or measure because there are
substantial disagreements among experts, whether they be
economists, lawyers or accountants, about exactly how you go
about measuring this type of thing, so we have expressed some
serious reservations about that piece.
As you probably know, the Internal Revenue Service as a
result of legislation that Congress passed some time ago is
required to put on forms how many minutes it is anticipated
that people will take to interpret the law, fill out the form,
things of that nature. They are in a wholesale revisiting of
those because there has been substantial questions raised about
those measurement times being correct and exactly how you go
about doing that.
So, on this piece in particular we share the concern that
you have raised about how realistic it is to be able to
quantify that. It doesn't mean that complexity isn't something
that we ought to be more attentive to, but we have some serious
question about whether it can be quantified.
Mrs. Kennelly. I see that we are going in the direction of
supposedly reform of the IRS becoming even more complex. The
bill that we passed from the summer added to the complexity of
the Code, and particularly in the area of the alternative
minimum tax. So I almost think we should take a deep breath and
stop a minute and see what we are doing here, because I don't
know how individuals, let alone the IRS, is going to be able to
deal with what we are looking at right now. It seems like every
time we say we are going to reform, we just further complicate.
Thank you, Mr. Chairman.
Chairman Archer. Ms. Dunn.
Ms. Dunn. Mr. Chairman, no questions.
Chairman Archer. Mrs. Thurman.
Mrs. Thurman. Mr. Chairman. Thank you. In listening to this
conversation up here, I think, if we were to do the analysis of
the reports of the tax issues, part of the responsibility would
fall within these Committees that look at that and putting some
kind of time limit on when we, or like a 24-hour time or 48-
hour time where amendments would have to be done so that the
proper analysis could be done, either through yourselves or
through IRS telling us feasibility or how it would be
implemented.
If we are talking about this, is that something that you
would make that recommendation?
Mr. Kies. Mrs. Thurman, one of the reasons that we have,
for example, suggested on the complexity analysis that perhaps
it should be limited to major provisions is there are practical
considerations here. One has to recognize how the legislative
process does work, particularly when you are under time
pressure and things of that nature.
So I think we have to be a little careful about not
developing complex procedural rules that may be very difficult
to comply with in many circumstances because that will mean
that we have not really accomplished much.
So, we would try and encourage the Committee to the extent
it acts in this area to pass something that is flexible and
that can be made to work, but which will go in the direction of
accomplishing the goal of raising and heightening the intention
of the tax writers to complexity issues. And we think you can
strike a nice balance there. Clearly, we can do more.
I will say, slightly in defense of the staff, that we do,
from time to time, under current practice, bring to the
attention of the Committees that legislation under
consideration may be complex. Many times the Committees accept
that advice and act accordingly. Other times their decision is
that, notwithstanding complexity, the proposal is consistent
with our objective and we are going to proceed anyway. So we
should not assume that whatever we are going to do here will be
a complete panacea, because it will not. But by no means does
that mean we cannot improve the situation.
Mrs. Thurman. I know in the State legislature, there is a
requirement that every bill go through an analysis. It gives us
a public, a private, a government context of what potentially
the changes, what the bill does today or what the law is today,
what the changes would be. But we are given time so our staffs
can prepare that. And even through the mandatory process there
is a period of time in which you have a 24-hour time.
I recognize even going through the tax bill there were a
lot of amendments going on and people wanting to know what the
cost of it was and how it was going to be implemented. Our
staffs were calling you and trying to put pressure on you all.
I think there is some liability for us, at least in the
consideration of looking at an analysis of this, that we should
be giving you the consideration that it does take time and not
to jump on people when they come before us because they cannot
give us the answer. And I just would hope that that would be
considered as we are talking about these kinds of analysis.
Thank you, Mr. Chairman.
Chairman Archer. The Committee will be in recess for the
vote and return. Are there any other Members that wish to
inquire of Mr. Kies other than the Chair? We will go vote and
return. Mr. Kies, if you do not mind, I have a couple of
questions I would like to ask you on return.
[Recess.]
Chairman Archer. Thank you for waiting, Mr. Kies. I will
try and be brief.
As the Chief of Staff of the Joint Committee on Taxation,
it is practical to note that you make recommendations or
supposedly oversee various functions of Federal Government.
There are many, I know, on the books; and we should take some,
I think, information from that when we begin to evaluate how we
want to create a Board relative to the IRS.
Mr. Kies. Well, Chairman Archer, one of the things that we
have done in our process of getting ready not only for this
hearing, but also in just analyzing the legislation, has been
to look at where there are other advisory boards within the
Federal Government. And indeed one of the concerns that has
been raised about some of those structures is that they are
merely advisory and don't have significant authority or
responsibilities, and that has been identified as one of the
concerns about what is done here.
If you want it to be effective, you need to give it some
more responsibility to be able to make it more than an advisory
nature. And we haven't completed our analysis in that regard,
but it is one of the things that we have looked at in trying to
assess how you strike a balance on this entity that you want to
create with respect to the Internal Revenue Service.
Chairman Archer. I don't think the information--I would
rather it be a result of a conference of study on your part.
But the anecdotal experience that I have had in talking to
people who have served on various advisory boards over the last
many years is that they really don't count for very much; that
these people put in the time and in the end what they say, what
they recommend, really doesn't count for very much, and an
awful lot of people have even decided not to serve on these
advisory boards because they think it is, ``a waste of their
time.''
But those are anecdotal, and I would like to have something
that is more comprehensively looked into, and I am glad you are
doing that.
I think of one particular thing recently and that is the
White House Conference on Small Business, and that was not an
advisory board, but a lot of people were drawn in to make
recommendations as to what the Federal Government should do for
small business. They issued their report, and their number one
priority was to reform the independent contractor rules. And
you remember very well that we put that in our bill right here
in this Committee to change the Tax Code to reform the
independent contractor rules, which was the number one
recommendation of that advisory board, and the President
refused to accept it and threatened a veto of the tax bill if
it was not removed. So clearly, in that instance, the highest
possible recommendation of that advisory group was of no force
and effect.
But in any event, I am glad you are looking into that.
In his testimony yesterday, Gene Steuerle suggested that
the bill be amended to require the Treasury to submit a report
to Congress every 2 years with review and comment by the Joint
Committee staff for recommendations for a possible
simplification or proposal for a number of matters related to
tax administration.
Do you have any comments on that suggestion?
Mr. Kies. Well, Mr. Chairman, I guess my recommendation
was, you shouldn't do that every 2 years. You ought to probably
do it every couple of months. And indeed, as you know, in this
most recent legislation, there were a number of simplification
proposals included. The Treasury had made some recommendations
which picked up many of the provisions that were in the vetoed
legislation from 1995.
But, clearly, we should be always looking for effective
ways to try and accomplish simplification. And as you well
know, one of the most significant constraints is revenue, but
this most recently passed bill is a good example of where you
can do some pretty significant simplifications on a cost-
effective basis.
For example, the elimination of the requirement to file
returns for dependent taxpayers cost only $37 million a year
and eliminated the need to file 1 million returns a year, which
is some fairly meaningful simplification for the cost involved.
But I think that the Joint Committee, the Ways and Means staff,
the Finance Committee staff and Treasury should always be
coming back to the Members with recommendations whenever they
find something that can be effective.
Chairman Archer. Well, I want to reiterate that I think we
have got to be very cautious about creating expectations for
simplification, again, simply by affecting one line on the
form. It is simply on the form when you go to file as a head of
a household on one line on the form, but the IRS has to ask you
42 questions before they can tell you whether you qualify as
head of a household to use that one line on the form.
Now, the lines on the form are like the tip of the iceberg.
What is unseen is everything that is below water level. And we
cannot forget that and, again, of course, that leads me to my
favorite subject.
I don't think we will ever solve this. I think we should
tear the income tax out by its roots because it is inherently
flawed, but everybody knows that.
Mr. Hulshof.
Mr. Hulshof. Thank you, Mr. Chairman. Along with that, Mr.
Kies, the Commission recommended stable funding for the IRS for
3 years. And I apologize if this question has been asked
previously, but they also are suggesting improved IRS service
regarding telephone access, more funding for the exempt
organization function, and so forth; and likewise, recommended
that Joint Tax would have to pick up some additional
responsibilities.
What are your thoughts on that?
Mr. Kies. Well, in terms of the stable funding, I think,
Mr. Hulshof, that it would be very wise for the Congress to
give the Internal Revenue Service a more long-range, stable
funding plan so that they can do planning that goes beyond just
the next fiscal year.
For example, just this simple area of education, which is
so important, that IRS agents are getting comprehensive, up-to-
date education. The Congress, in 1 year, appropriated 87-some
million for that function and the next year, cut it almost in
half. That obviously creates great disruption in terms of being
able to have a consistent, comprehensive and thoughtful
education process, which ties directly into taxpayer service,
because it directly affects the ability to accurately answer
questions that taxpayers have. So I think that makes good
sense.
In terms of the Joint Committee's added responsibilities,
we hope that the Congress has the wisdom to provide us some
additional resources to carry out those functions. We don't
think they will be dramatic, but there will be some additional
responsibilities.
We have said in our testimony that we think the Joint
Committee can help coordinate the oversight role of the six
Committees of the Congress that do have a function in this area
and that the coordination of that oversight will make
congressional oversight more effective. So we do believe that
that is a very constructive recommendation that would improve
the Congress' oversight responsibility, which is just as
important as the executive branch's oversight responsibility.
Mr. Hulshof. I appreciate that.
I yield back, Mr. Chairman.
Chairman Archer. Mr. Cardin, do you wish to inquire?
Mr. Cardin. No, thank you, Mr. Chairman.
Chairman Archer. OK.
Mr. Kies, thank you very much.
Mr. Kies. Thank you, Mr. Chairman.
Chairman Archer. Our next panel is Phillip Mann, chairman
of the Section of Taxation of the ABA; Paul Cherecwich,
international president, Tax Executives Institute; Michael
Mares, chair, Tax Executive Committee; and Richard Loengard,
chair, Tax Section, New York State Bar Association.
Gentlemen, if you would take your seats there at the
witness table. The Chair apologizes to you for keeping you
waiting in the wings, but we are very eager to get you in here
on this very important issue.
Mr. Cherecwich, would you lead off, please, sir.
Just to reiterate, according to the rules of the Committee,
your entire written statement, without objection, will be
inserted in the record; and we would ask you to be as brief as
possible in your oral testimony and to attempt to limit that to
5 minutes. I know it is a short time, but we would appreciate
it if you would help us with that.
Mr. Cherecwich.
STATEMENT OF PAUL CHERECWICH, JR., INTERNATIONAL PRESIDENT, TAX
EXECUTIVES INSTITUTE, INC., AND VICE PRESIDENT, TAXES AND TAX
COUNSEL, THIOKOL CORP., OGDEN, UTAH
Mr. Cherecwich. Thank you, Mr. Chairman.
Chairman Archer. Also, will you personally identify
yourself for the record before you begin to testify.
Mr. Cherecwich. Thank you, Mr. Chairman. Although I am
employed as vice president, Taxes and Tax Counsel for Thiokol
Corp. in Ogden, Utah, I am here today as the president of Tax
Executives Institute, the largest group of in-house tax
professionals in North America.
The Institute's members work for the top 2,700 companies in
the United States and Canada and interact with the Internal
Revenue Service on a daily basis. We have day-to-day dealings
with senior corporate management and corporate boards of
directors, and accordingly, we know first hand the strengths
and weaknesses of the corporate governance model. TEI is
pleased to participate in this hearing on proposals to
restructure the IRS.
TEI commends the National Commission on Restructuring the
IRS for its efforts in identifying the issues of concern,
seeking out the views of interested parties and crafting
proposed solutions. Even though TEI disagrees with certain
provisions of H.R. 2427, we are convinced that the proposed
legislation holds great promise for bringing continuity,
accountability and expertise to the management and oversight of
the IRS.
Mr. Chairman, I believe it is appropriate to begin by
acknowledging and asking the Committee to acknowledge that
consensus has already been attained on a wide variety of
issues, such as a fixed 5-year term for the Commissioner and,
indeed, that significant progress has been achieved, for
example, in improving the modernization of the IRS' computer
systems.
TEI recognizes that there are sharply divergent views on
how best to provide effective oversight of the IRS. We
respectfully suggest that it is time to tone down the rhetoric
on both sides of the debate and to focus on the substance of
the various proposals. Hence, we urge the critics of the
current system not to demonize the IRS or its employees,
because unfounded and exaggerated attacks on the IRS not only
undermine the public's trust in an agency that, like it or not,
is indispensable, but also erode the people's faith in the
entire government. The key is not or should not be scoring
debate points or whose proposal wins, but rather on improving
the management of the IRS and giving the American people the
tax system they deserve.
That said, Mr. Chairman, I want to turn to particular
proposals for improving the management and oversight of the
Internal Revenue Service.
TEI is especially pleased that nearly all parties recognize
that there is no single solution to what ails the IRS. What is
needed is a balanced, integrated approach. One change, say the
appointment of an oversight body, will not transform the agency
unless it is effectively coupled with others, including
coordinated and streamlined legislative oversight and
simplifying the tax laws. Indeed, unless the horrendous
complexity of the Tax Code is addressed in a meaningful way,
the best management structure in the world will not enable the
IRS to do its job efficiently and effectively.
Mr. Chairman, as has already been noted, the most
significant disagreement between the administration and the
Restructuring Commission lies in the area of executive branch
oversight. With due respect, TEI believes there is an
acceptable, workable middle ground between restructuring the
Commission's private-sector-dominated board and the
administration's government-only board.
Specifically, TEI recommends the establishment of a
reasonably balanced Oversight Board whose members are appointed
by the President and charged with the responsibility for
overseeing the administration of the Internal Revenue laws. In
our view, having representatives of both government and the
private sector on the Board would afford the IRS the benefit of
private-sector expertise in a large number of areas, which
would be lacking on a government-only board, while recognizing
the unique mission of the IRS as a tax collection agency.
Similarly, a board of limited size, say no more than 10 or
12 members, would likely operate more efficiently than a larger
group.
Unlike the Restructuring Commission, TEI believes that the
Commissioner of Internal Revenue should serve as a full member
on the Oversight Board, as should the Secretary or Deputy
Secretary of the Treasury. Beyond these two individuals, we
believe members should be selected solely on the basis of their
expertise in areas such as, general management, finance,
technology and personnel. In other words, no particular group
should be guaranteed a position on the Board.
TEI believes that the Oversight Board should be involved in
reviewing the IRS' strategic plans, the Commissioner's plans
for reorganizing the IRS and the agency's plans pertaining to
modernization, training and education and other operational
functions. The Board should also ensure that the IRS' budget
supports the agency's annual and long-range plans and should
also ensure appropriate financial audits of the IRS.
TEI agrees with the Restructuring Commission that the Board
should have no tax policy responsibilities, though we note that
the dividing line between policy and administration is not
always easy to discern and maintain. For example, budgetary
decisions regarding research or compliance programs could well
affect how the tax law is interpreted or applied, thereby
affecting policy. Hence, we acknowledge that the presence of
private-sector representatives on the Oversight Board raises
conflict-of-interest issues of real concern.
While these issues cannot be minimized or ignored, they
should not be overstated. Institutional protections can and
should be implemented, just as they have been in the private
sector where the same individuals serve, for example, on
multiple boards of directors. Moreover, it should be remembered
that with or without a board, it is the Secretary of the
Treasury who will remain ultimately responsible and accountable
for the management of the IRS.
This brings us to another area where our views diverge from
those of the Restructuring Commission. TEI strongly believes
that the Commissioner should continue to be appointed by the
President with the advice and consent of the Senate and not by
the Oversight Board. Providing for Presidential appointment of
the Commissioner would not only address certain legal and
constitutional issues that have been raised, but would also
recognize that the Commissioner will be responsible for all
functions of the IRS, including those beyond the Board's areas
of responsibility, such as specific enforcement and customer
service functions.
TEI also believes that the President should retain the
authority to dismiss the Commissioner, but suggests that the
Board should play an advisory role in both the selection and
retention of the Commissioner.
Hence, TEI believes that the IRS can learn much from the
private sector. Even though the corporate governance model is
not perfect, an oversight board will help to ensure that the
IRS is held accountable for its operations. In the final
analysis, however, it is not the oversight board to which the
agency can or should answer; it is to the administration, to
Congress, and to the American people.
Mr. Chairman, before concluding, I want to address one
additional issue: the need to streamline congressional
oversight of the IRS. TEI agrees that responsible oversight by
the legislative branch is absolutely essential. We suggest,
however, that steps can be taken to streamline congressional
oversight activities and to make it at once less reactive, more
constructive, and more integrated. Changes are needed not only
to conserve the agency's resources but to ensure that mixed
signals are not being sent about what the IRS' priorities
should be.
Mr. Chairman, Tax Executives Institute appreciates this
opportunity to provide its comments on proposals to restructure
the IRS. I should be pleased to respond to any questions you
may have.
Thank you.
[The prepared statement follows:]
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Mr. Portman [presiding]. Thank you, Mr. Cherecwich.
I would urge all members of the panel to try to keep their
oral statements to 5 minutes so we have more time for
questions.
Mr. Mann.
STATEMENT OF PHILLIP L. MANN, CHAIR, SECTION OF TAXATION,
AMERICAN BAR ASSOCIATION
Mr. Mann. Thank you. My name is Phillip Mann, and I am
appearing before you today on behalf of the American Bar
Association, Section of Taxation. The section has been
privileged to work with the Commission members and staff as
they have developed the Commission's report. We particularly
appreciate the courtesy that Congressman Portman extended to us
during this process.
As a preliminary matter, we endorse the conclusions of the
Commission that the complexity of the tax law leads directly to
difficulties in tax administration and frustration with the
IRS. Simplification of the tax law is an urgent necessity.
But let me move now to the topic of executive branch
governance and congressional oversight, which is the purpose of
today's hearing. First, governance. The recommendations that we
present today are guided by seven current needs for our tax
system. These are the needs for clear accountability within the
IRS and within the executive and legislative branches,
effective oversight of the IRS by the executive and legislative
branches, continuity of IRS management, integrity assurance for
the IRS, Presidential responsibility for Federal revenues,
private-sector assistance for IRS management, and oversight and
better integration, not separation, of tax administration and
tax policy. These ideas are further developed in the written
testimony, but I want to move now to our proposed
recommendations.
Taking into account these needs, the section believes that
the following management and oversight structure would be
appropriate:
We believe the President should remain the ultimate
authority over the Internal Revenue Service, appointing the
Commissioner and Chief Counsel and controlling its budget.
Therefore, we recommend that the Service remain an agency
within the Treasury Department, subject to its authority and
accountability. Consistent with our view that private-sector
expertise should be made available to the Service's senior
management and should be involved in the oversight process, we
recommend that Congress create an Internal Revenue Service
Board of Review.
This Board would be made up exclusively of private-sector
members serving staggered terms. Either the President or the
President and the Congress would appoint the board members, who
would be subject to existing laws relating to disclosure,
recusal and conflicts of interest. The precise tasks of the
Board would be specified by Congress in the implementing
legislation.
The most important power of the Board would derive from its
duty to make periodic independent reports directly to the
President and to the Congress concerning its assigned tasks. It
would also provide a consultative resource for the IRS on major
management issues and, in addition, the Board would be
available to consult directly with and testify before the
Congress on the progress and problems of the agency.
We do not support the Commission's recommendation that
approval of certain management decisions be shifted from the
Treasury to the Board and neither do we support membership on
any IRS Board by other executive branch personnel. We believe
this would raise concerns about potential political influence,
as well as confuse loyalties.
As a result, we do not support the IRS Management Board
created in President Clinton's recent Executive order and
proposed in H.R. 2428.
Finally, we believe that Congress should establish the new
position of Under Secretary of Taxation. While we concur in the
Commission's assessment that oversight of the Service has been
limited and uncoordinated, we are skeptical that its proposed
Oversight Board is the answer. Instead, we believe a new Under
Secretary of Taxation, charged specifically with that
responsibility, together with the task of coordinating the
entire tax system, both tax administration and tax policy,
would work.
Creation of a new position of Under Secretary of Taxation
would avoid the prospects of management by Committee, assure
greater coordination of fiscal management of the Service tax
administration and tax policy, and together with the Board of
Review reporting directly to Congress, the Under Secretary
would provide a clear focus of responsibility, authority and
accountability.
Let me switch briefly to congressional oversight. We
strongly agree with the Commission's conclusions that within
both the executive branch and the Congress the proliferation of
entities responsible for some aspect of the tax system makes
the development of a coherent legislative, administrative and
budgetary policy virtually impossible, and we endorse the
Commission's proposal to establish a joint oversight panel.
In conclusion, we have attempted to set out for the
Committee a plan for the future governance and oversight of the
Service that we believe will be most successful. We do so with
only one objective and that is to improve the Nation's tax
system for the benefit of all Americans. We will do our best to
assist the Ways and Means Committee as it works to craft a plan
for the future of the Internal Revenue Service.
Thank you, Mr. Chairman, for the opportunity to appear
today.
[The prepared statement and attachments follow:]
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Mr. Portman. Thank you, Mr. Mann.
Mr. Mares.
STATEMENT OF MICHAEL E. MARES, CHAIR, TAX EXECUTIVE COMMITTEE,
AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS
Mr. Mares. Good morning, Mr. Chairman, Members of the
Committee. My name is Michael Mares, and I am the chair of the
Tax Executive Committee of the American Institute of Certified
Public Accountants. Our 331,000 members provide tax preparation
and tax advice for millions of American businesses, individuals
and not-for-profit organizations. It is from this base of
experience that the AICPA offers its comments.
First, we strongly believe that the structure on oversight
that has served the Service in the past will not serve it in
the future. Thus, we support the creation of an independent IRS
Oversight Board as referenced in the legislation. But we oppose
the reservation of any seat on such a board for any special
interest group.
We believe the IRS must change the way it is governed.
Today, and for the foreseeable future, the IRS faces
multifaceted challenges such as technology, improving customer
service and enforcing compliance with the tax laws. These
challenges are not easily separated into the traditional tax
policy or tax administration camps, but cross several
boundaries. There is a need for additional different and
creative ways to address these challenges, something we believe
the Board will provide.
We see several advantages to the creation and
implementation of the Board. First, we believe the Board will
improve tax policy deliberations and perhaps the legislative
process. A more independent IRS will provide input on the
administratability of legislative proposals, perhaps even
suggesting improvements based upon the practical experience and
implementation of tax laws. Tax policy decisions would remain
with Treasury. Treasury or the Congress could elect to pass
legislation, irrespective of difficulty with
administratability, but at least the Congress and Treasury
would recognize if administratability is going to be difficult.
We also believe the Board will create continuity of
oversight and accountability. The 5-year staggered terms that
are proposed will, as in the private sector, enable the Board
to provide continuity of oversight.
Second, we see a real advantage in that the staggered terms
will allow the appointment of members to specifically address
the problems that the IRS faces at that particular point in
time.
Finally, we believe that the governance limitations
proposed in the legislation reduce the potential for conflicts
of interest. Obviously, a board must not have any conflicts of
interest. Obviously, it is important that the Board be viewed
with integrity as an integral part of the tax system.
The Board's focus would not be on the day-to-day
management, but on the overall governance of the Internal
Revenue Service. Also, the statutory controls, specifically the
appointment of board members and designation of board members
as special government employees, are sufficient to address the
issue. We are also confident that if it is determined that
that, in and of itself, they are not sufficient, additional
safeguards can be implemented that would avoid the problems.
Finally, we believe that, even if it is deemed that such
conflicts of interest for active participants in businesses,
tax practitioners, and so forth, could not be avoided, there is
a large pool of qualified individuals in this country who could
be appointed, such as retired executives, practitioners who are
out of practice, educators, and so forth, who have the
qualifications and could provide distinguished service without
raising the specter of a conflict of interest.
We believe very strongly that all board members should be
selected for their expertise based on the criteria set forth in
the legislation, not because they represent any specific group.
We believe that anything less than this will create the
impression that the Board is comprised of special interest
groups and not a board of integrity, as we have discussed
previously.
It is our firm belief that public confidence must be
restored in the Internal Revenue Service. An independent board
focusing on the IRS problems, on strategic issues that must be
addressed and faced, bringing to the table diverse private-
sector experience, is the catalyst for this effort. We believe
that the Board is a good way to move the IRS back to both
credibility and to effectiveness.
Another issue I would like to address briefly is the issue
of congressional oversight. While we support the concept, as
specified in the legislation, of two joint hearings a year for
representatives of the current oversight committees, this
should not be allowed to result in more meetings than are now
being held, but should serve as the focal point for reducing
the meetings that Congress has dealing with IRS oversight.
Finally, I would like to thank this Committee for the
opportunity to present our views today. The AICPA, as always,
stands ready to offer our assistance and whatever additional
comments we can to the Committee.
Mr. Portman. Thank you, Mr. Mares.
Mr. Loengard.
STATEMENT OF RICHARD O. LOENGARD, JR., CHAIR, TAX SECTION, NEW
YORK STATE BAR ASSOCIATION, NEW YORK, NY
Mr. Loengard. My name is Richard Loengard, Jr., and I am
appearing as chair of the Tax Section of the New York State Bar
Association.
First, I would like to thank the Committee for giving us
the opportunity to express our views on the recommendations of
the National Commission on Restructuring the IRS with respect
to executive branch governance and congressional oversight of
the Service. The Tax Section wrote letters to, among others,
Chairman Archer, Congressman Rangel, and Congressman Portman on
August 13, 1997, commending the Commission for its analysis of
the issues and commenting on certain of its proposals.
A copy of the letter to Chairman Archer has been attached
to our written statement. We ask that it be included in the
record.
As we noted in that letter, we are attorneys who practice
in the tax area, but we are neither management consultants nor
computer experts, and our comments are limited to those areas
of the Commission's report and the IRS Restructuring and Reform
Act of 1997 as to which our professional activities have given
us some insight.
I think that the principal comments contained in our letter
may be summarized as follows:
We recognize the difficulty of the task facing the Internal
Revenue Service. It is a tax collection agency, and those who
deal with it do not come to it voluntarily or necessarily with
a desire to cooperate with it. Although we think most IRS
personnel try to be helpful to taxpayers, the Internal Revenue
Service will never be universally popular.
Having said that, we recognize that the Internal Revenue
Service has not always done as good a job as it might in
facilitating taxpayer compliance with our laws. IRS personnel
are occasionally peremptory or even abusive to taxpayers. Lack
of funding results in inadequate staffing, which diminishes the
Service's ability to assist taxpayers, as well as its ability
to carry out its audit function.
Especially we recognize that the Service's use of computer
technology has not been successful, and that this has made both
voluntary compliance and IRS enforcement more difficult.
However, in reviewing the work of the Service, we agree with
the Chairman that the complexity of the tax law lies at the
heart of the problem, not only impeding the Service's ability
to function, but also impeding voluntary compliance with the
law by taxpayers. We heartily commend the Commission's emphasis
on the need for simplification, as well as its concern for the
frequency of substantive changes to the law. These factors make
it vastly more difficult for the Service to cope with its
interpretive function and to train its personnel. We note,
however, with dismay that the recently adopted amendments to
the Code, while including some simplification provisions, have
added other provisions introducing significant additional
complexity affecting many taxpayers.
So long as the Code continues to be as complex as it is and
is changed so frequently, it will be difficult for taxpayers to
understand the rules needed to calculate their tax and it will
be difficult for the Service to give guidance on the
application of those rules. Under such circumstances, conflicts
are bound to arise, and taxpayer frustration with the Internal
Revenue Service is certain to increase. To place the blame for
this situation primarily on the Service is clearly unfair.
Hence, we commend section 6 of the Commission's report
dealing with the need to simplify the Internal Revenue Code. We
also note with favor that section 422 of the Restructuring and
Reform Act provides for a ``Tax Complexity Analysis,'' although
we do not have enough relevant experience to enable us to
evaluate the likelihood that it will successfully reduce the
complexity of the Code. However, we do have some reservations
with provisions of that act which create an independent role
for the Internal Revenue Service in making the ``Tax Complexity
Analysis.''
While we think that the Treasury Department should consult
with the Internal Revenue Service on such matters and should
incorporate the views of the Service in the Treasury's tax
complexity analysis presented to Congress, we think it is
better that the executive branch speak with one voice on issues
of complexity as these necessarily involve questions of policy
and enforcement, areas in which the Treasury Department retains
ultimate responsibility.
We have also considered the proposal of the Commission, as
incorporated in the proposed act, to establish a board of
directors, with a small staff, to oversee the management of the
Internal Revenue Service. The Board will appoint the
Commissioner, but it will not have oversight over several
aspects of the Service's activities, including issues of tax
policy and enforcement activities, such as examinations,
criminal investigations and collection.
On the other hand, the Board will have a role in creating a
budget for the Service, which it will send to the Treasury
Department and which will accompany the President's budget for
the Internal Revenue Service when that is submitted to
Congress. It will not appoint the Chief Counsel, who will be
appointed by the President. The board of directors will have
nine members, seven of whom will be from the private sector and
will serve on a part-time basis.
We note that many have expressed reservations about the
board of directors on the grounds of conflicts of interest and
similar issues. We do not disagree with those comments. For
example, we are concerned that no matter how careful the
members of the Board are to insulate themselves from issues in
which they or their companies have an interest, the perceived
possibility of such conflicts will further weaken, rather than
enhance, the public's regard for the Internal Revenue Service
and its faith in the Service's impartiality.
However, our principal concern with the proposal is that we
do not think that the dividing line between the administration
on the one hand and policy and enforcement on the other is
easily identifiable, nor do we think such a division will be a
practical one. Furthermore, we do not see how issues of policy
and enforcement can be separated from the budget process.
Hence, we believe that there will inevitably be jurisdictional
and budgetary conflicts between the Treasury Department and the
Board, which will share responsibility for a single
administrative agency.
The position of the Chief Counsel, whose work is primarily
in tax policy and enforcement, areas for which the Treasury has
responsibility, but who will report to the Commissioner, who in
turn reports to the Board, seems unclear at best. We are
concerned that this division of authority between those
responsible for the tax policy and enforcement functions of the
Service and those responsible for its administrative functions,
including its budget, will lead to confusion within the Service
as to who is in charge and what policies are to be implemented.
If this occurs, the act, rather than enhancing the ability of
the Service to function, will reduce it.
Again, we thank you very much for the opportunity to appear
here today, and we will be happy to answer any questions you
may have.
[The prepared statement follows:]
[GRAPHIC] [TIFF OMITTED] T8922.625
[GRAPHIC] [TIFF OMITTED] T8922.626
Mr. Portman. Thank you, Mr. Loengard.
Mr. Rangel would like an opportunity to welcome you and to
initiate the questioning. He has another commitment, so I would
like to yield now to Mr. Rangel.
Mr. Rangel. Mr. Loengard, let me thank you for coming and
also say thanks to the New York State Bar Association for
giving the Congress guidance, but more importantly, giving me
guidance.
We are dealing with a subject matter that the whole country
agrees has to be dealt with. In addition to that, we are
dealing with the perception of the IRS. If everyone starts
saying, just pull the IRS up by the roots, and that the tax
collection system is not working, we on the Committee must
continue making every attempt to correct this situation, but at
the same time not make it partisan. We are splitting America as
to what we should or should not do.
Mr. Portman, in his Commission, worked with Mr. Coyne and
Ben Cardin. Mr. Coyne--he is the Democratic leader. We try not
to get partisan here. All of us are working together to make
certain we end up on the same page. The only way the American
people are going to believe that we are serious is that we have
a bipartisan solution. That is where the New York Bar, I hope,
will continue to work with me until we reach a conclusion. That
is, who is going to establish tax policy and who is going to be
in charge of the tax collection system of this country?
Now, we have got preconceived ideas about this issue.
People come to this with their own experiences as to what they
are going to do and what they are going to concentrate on. Some
of us believe that a person as high as the IRS Commissioner is
the person or the body that should control tax administration
policy. If you can help us to reach the correct conclusion, and
include the safeguards that people could believe in,
remembering that the government is accountable for what we are
trying to do here, it would be very helpful.
I see a situation where there is bipartisan support for the
objective. As always, there's a possibility of a clash in terms
of how we reach the end result. I hope that you would help me
to make certain that this is a bipartisan effort, and that what
we send to the President will work. So I am going to thank you
for your leadership, as well as other Members of the Committee.
But most important, we are so close to the forest--you know, we
work with the IRS every day, and we hear taxpayers' complaints.
You are out there maybe better able to see the solution.
Thank you, Mr. Chairman.
Mr. Portman. Thank you, Mr. Rangel.
Mr. Cardin.
Mr. Cardin. Thank you, Mr. Chairman. I want to join Mr.
Rangel not only in welcoming you but welcoming your advice on
these issues. And we are struggling to pass legislation that
will be bipartisan in the way that it restructures the Internal
Revenue Service.
Mr. Loengard, I want to, if I might, just ask you to
clarify some positions in your statement. You point out in your
August 13 letter that the bill that was filed was different
from the Commission's report but did not materially affect the
views that you expressed. And then you go on expressing your
concern about the jurisdictional and budgetary conflicts
between the Treasury Department and the Board, talking about
tax policy.
The bill that was filed is different from your letter in
that the Chief Counsel is appointed by the President, not by
the Commission. The Board does not have an independent staff;
it uses the staff of the IRS. And there were two points that
you had mentioned in your August 13, 1997, letter. It seems to
me that they are significant changes; at least it was
highlighted in your letter to us. But yet your footnote
indicates that there were no significant changes. That concerns
me a little bit.
But I guess I would ask that you tell me where in the
legislation you draw a concern about the jurisdictional and
budgetary conflicts.
The legislation is pretty specific in saying that the Board
has no power over tax policy and the budget submitted--like the
Social Security Administration, for informational purposes to
Congress, the budget goes through the Secretary of the Treasury
and the OMB and the President to Congress.
Mr. Loengard. Well, if I can address a few of those
questions in order.
First, we--I thought with respect to the legislation and to
some extent I am speaking here without having discussed it with
other people in the New York State Bar, Tax Section, we thought
with respect to the legislation that while it did change the
status of the Chief Counsel as to who appointed him, as I
mentioned in my testimony today, he still reports to the
Commissioner. He still has a sort of bifurcated role in which
part of him is reporting, it seems to us, to the Treasury, part
of him is reporting to the Commissioner and the Commissioner,
in turn, seems to be responsible to the Board.
Mr. Cardin. And where do you draw that from in the
legislation, where he would be responsible to the Board and
potentially involved tax policy in--I don't see that in the
legislation. And if there is a need to clarify it, I would
appreciate if you could, because the legislation is pretty
clear that the appointment is by the President.
The Chief Counsel is involved with the policy--the policy,
the Board has no role to deal with it. The Chief Counsel
actually works with the Secretary, more so than the
Commissioner. The Secretary clearly doesn't report to a board.
I am not sure I understand where you draw the conclusion that
the Chief Counsel has to report at all to the Board.
Mr. Loengard. Well, I thought--perhaps I am in error. I
thought that the Chief Counsel would, under the legislation,
continue to report to the Commissioner. He would be evaluated
by the Commissioner, that the Commissioner would recommend
whether he should be retained or was otherwise doing a suitable
job. And in that sense, I thought that there was a problem
there for the Chief Counsel, as to whether his loyalties were
to lie with the Treasury or to lie with the Board, and to some
extent that might confuse the lines of authority. I don't know
whether that is an answer, and I think maybe it could be dealt
with by clarification.
I thought with respect to the Board's staff, which you
mentioned, that it wasn't clear to me, when I read the
legislation, for how long people were to be transferred to the
Board by the Commissioner, whether that was to be a temporary
assignment or a permanent assignment. I also think that to some
extent for a board to function effectively, whether it is a
board such as the Treasury is suggesting or a board such as
included in H.R. 2292, there is a need for some staff if the
Board is not to be wholly dependent on what it gets from the
people that it is supposed to be administering. And that is a
problem which I think is inherent in any board structure,
whether it is the Board structure recommended by the Treasury
or the Board structure recommended in the legislation.
Mr. Cardin. I thank you for that.
Let me just read from page 19 of H.R. 2292, the duties of
the Chief Counsel. ``The Chief Counsel shall be the chief law
enforcement officer of the Internal Revenue Service and shall
perform such duties as may be prescribed by the Secretary of
the Treasury.'' I think--so it is--I don't know how we could
make it much clearer than that.
We are always open for more clarification, but we have
said, no, the responsibility for tax policy is not in the
Board. The Chief Counsel is appointed by the President; duties
prescribed by the Secretary of the Treasury.
For the life of me, I just don't see the concern that you
raise here; and we are always open to try to clarify these
points, and we welcome any additional information that you
could bring forward on this issue.
Mr. Loengard. Well, if we were mistaken, I apologize.
Mr. Cardin. Thank you.
Mr. Loengard. I think in response to one of your other
questions, we do see that the distinction between tax policy
and tax enforcement on the one hand and the management of the
IRS on the other is not a clear line; and we also do think that
the budget process is inherently intertwined with the issues of
tax policy and tax administration, which are being left in the
hands of the Treasury Department.
Now, we recognize that the budget is merely an advisory
budget, and yet, nonetheless, it would seem to me that people
in the Internal Revenue Service will play a role in creating
the budget that is going to be presented by the Board to the
Secretary.
Mr. Cardin. But it is going to be passed by the Congress.
The Congress is going to make that decision. The budget that is
submitted by the President is the President's budget. The
information submitted by the Board is additional information
for the Congress in order to be able to act on what it thinks
is appropriate budget support for the agency.
Again, the Social Security model has shown that it is
useful to have more information in Congress as to what is
necessary, what an independent group believes is necessary in
order to carry out a mission.
I don't see the conflict, but I am always willing to, if
you have specific recommendations for change in the
legislation, that may be useful. But I can tell you, we
agonized over this to be extremely careful to maintain the
legal authority within the President and the Secretary of the
Treasury as it relates to the budget, with ultimate
responsibility resting with the Members of Congress.
Mr. Portman. Thank you.
Mrs. Johnson.
Mrs. Johnson of Connecticut. Mr. Cherecwich, I was pleased
to hear Mr. Mann comment that he didn't think executive branch
participants on the Board was a good idea. I think in these
hearings, we really haven't focused enough on the difficulties
created by executive branch people from other agencies
participating in an advisory board, both the political
implications of that number of political appointees being
involved in the governance of the IRS and also the dearth of
evidence that they in their own departments have been able to
meet the kinds of challenges the IRS is faced with.
But I think both you and Mr. Mann carry a burden that you
have not yet met today.
You know, the proposal to change is in response to the
failure of the current system. The current system includes an
advisory board. It includes independent studies by the GAO. The
GAO has come to us for years. This is my third year as Chairman
of the Oversight Committee, and my predecessor heard reports,
too.
The GAO does excellent work. They bring reports. It is very
hard for the Congress to use those reports to force change,
because we are not close enough to the problem. And an advisory
board that has the kind of expertise envisioned by this
advisory board, every month sitting down with the Commissioner
and saying, what progress are you making, what progress are you
making, it seems to be very important.
Now, you are in the business. I don't know how familiar you
are with the Taxpayer Bill of Rights, but we asked in the
Taxpayer Bill of Rights to have the taxpayer advocates report
to us what problems they were seeing, so we could get a better
understanding of what problems ought to be resolved.
The bureaucracy is so ladened that we couldn't get that.
Now, it is going to take us another year, but we are going
to get that. But it does seem to me that an outside board would
have understood what we were asking for.
Now, that is only one example. We also asked for IRS to
develop a system of overseeing--you know, of tracking personnel
performance, so that those agents that are abusive to taxpayers
out there would be held accountable. At least we would know who
was receiving complaints. To this date, they haven't.
It does seem to me there are some routine management
practices that an outside board would bring to this, that the
advisory board hasn't been able to because the appointments
don't last. People are in for 1 year, they are in for 2 years,
they are in and out. They meet quarterly. It simply doesn't
work.
The board members proposed by the Commission aren't just
casual appointees. These folks are appointed by the President,
confirmed by the Senate, which is a very big deal, and have a
real responsibility for 5 years. That is entirely different
from any kind of private-sector involvement or input or
conversation that we have ever tried to bring to this agency.
If anything stands out from past experience, it is that we need
oversight--we need to make plans and we need to implement
plans.
We make plans; we don't implement plans. That takes
constancy. It takes continuity. It takes experience, broad
experience, outside of government bureaucracies.
So I think the burden is on you to demonstrate that your
advisory committee is going to perform differently than those
in the past, and that outside reports are going to have any
more effect than the excellent outside reports we have already
had.
After all, if this doesn't work, we will fix it. If there
are problems, we will fix it. But really, you are not dealing,
I don't believe, seriously enough with the failure of the very
mechanisms you are recommending.
So I wish you would address yourself to those, why you
think they will work when they have not in the past.
Mr. Cherecwich. Thank you for your comments, Mrs. Johnson.
I think that we are not that far apart in our perception of
what needs to be done. We do believe that an oversight board,
rather than an advisory board, is very, very appropriate. In
our written testimony, we take care to distinguish these terms
because we, too, are concerned that we do more than just the
same old solution and the same old Band-Aid. I think that
oversight board, that has some very specific responsibilities
as suggested by the Commission, is very, very appropriate.
About the only major difference we are having with this is
that we think that the Board's composition should be more
balanced.
As Mr. Rangel said a few moments ago, perception of the
public is very important, and we do have to recognize that the
Internal Revenue Service is responsible for tax collections in
this country. By having a more balanced board, I think we would
be able to take advantage of private-sector expertise while
still maintaining the role of the executive branch and
performing the basic functions of the Internal Revenue Service.
So I do believe that we are very, very close in what your
concerns are.
Mrs. Johnson of Connecticut. And would your board have
essentially the same powers, except for the appointment of the
Commissioner, as the Board in the Commission's report? You
didn't go into that in great detail in your testimony.
Mr. Cherecwich. In our written testimony, we do lay out the
role that we thought the Management Board should have, and we
do think that they should be responsible for oversight and
review of the strategic plans, giving guidance to the
Commissioner on budgetary matters and other things like
training of employees.
Mrs. Johnson of Connecticut. How about----
Mr. Cherecwich. I think that the Board should have some
responsibility for accountability, yes. The manner in which
they would exercise that responsibility ultimately would be in
making some strong recommendations to the President to remove
the Commissioner if the Commissioner is not doing his or her
job.
Mrs. Johnson of Connecticut. I would ask you to have your
people do some research and see if there is any instance in
which an advisory board has ever made recommendations to either
the Congress or the President that have been implemented. I say
that in seriousness. I have seen excellent people serve. I
helped to establish the Expert Council in the Department of
Commerce to try to get private-sector input and saw their
terrible frustration.
Help us make sure. We have to have an effect here. So if
you can help us account, and you can look yourself at powers
and what has actually--where we can see a model of action, I
think that is what we are looking for.
Mr. Mann. Mrs. Johnson, let me say that I share your
concern that an advisory board of the kind that we have had in
the past is not adequate. I have served on those advisory
committees and I know exactly what you are talking about.
I think that the Tax Section's ideas are a little different
from TEI's ideas. We have the same concern that you have
expressed in terms of wanting private-sector expertise added to
the management expertise of the Service. But also with respect
to the oversight. We think that private-sector oversight is
very, very significant. What we have proposed is a kind of two-
headed approach to that. The first would be a review board
appointed by the Congress with specific statutory duties with
reviewing and reporting directly to the President and the
Congress, probably semiannually. We think that that is very
likely to be the prescription that we need for true
accountability and oversight.
We have added to that what we also believe is important,
which is daily oversight by recommending that we have an Under
Secretary of Taxation whose personal responsibility is to
assure that the oversight function is continuous and effective
within the Internal Revenue Service, and he will be the person,
or she will be the person, where the buck stops. There will be
no way to avoid the accountability there.
Mrs. Johnson of Connecticut. Unfortunately, my time has
expired, but I think you need to ask yourself what are our
hiring practices? How effective has anyone been in overseeing?
Even this Secretary, who really has been very interested,
hasn't had the time to be proactive. I worry about having one
person. What breadth of experience will he bring to the
oversight activity? How much will he be listened to? You will
still have that Deputy Secretary and the Commissioner. Will
there be conflicts there? Now, you have hired two people to do
basically the same job.
I think we have to look at hiring practices, who we would
be able to make available in that niche and whether or not they
could bring to the table, without actually being the
Commissioner, that breadth of pressure and outside view.
So I appreciate your thoughtfulness, and we look forward to
working with you on a solution that I hope will be impressive
to all. Thank you.
Chairman Portman. Mr. Coyne.
Mr. Coyne. Thank you, Mr. Chairman. I thank the panel for
their helpfulness.
I wanted to ask Mr. Cherecwich questions relative to your
concerns about the Management Board. You referred to the
Management Board outlined in the administration's proposal as a
government board staffed by government employees and indicated
you didn't think it could be as effective as the Oversight
Board in H.R. 2292. But I was wondering if you were aware that
there is also an advisory board proposed in 2428 that would
fill some of the obligations that are proposed for the
Oversight Board in 2292. So it is not just a management board--
the Advisory Board in 2428 would fulfill some of those
oversight roles.
Mr. Cherecwich. I am aware of that, Mr. Coyne. Part of the
concern that TEI has is that the Advisory Board might be no
more effective than other advisory boards, as Mrs. Johnson has
just challenged me on. And for that reason, we strongly believe
that we need to have an oversight board that is reasonably
balanced between the government and the private sector. I think
we are going to get the best of both worlds with a small
oversight board that has representatives from both government
and the outside world.
Mr. Coyne. Do you have trouble with the proposed Advisory
Board in 2292 approving the budget? It seems to me that what
you have attempted to provide for us today is that the
Oversight Board in 2292 would review and have some oversight,
but would not be able to approve the budget of the IRS.
Mr. Cherecwich. We believe that ultimately the budget has
to be the responsibility of the President and the Secretary of
the Treasury--and, of course, Congress. We see the role of the
oversight Committee in working with the Commissioner in the
development of the budget and helping the Commissioner to
ensure that the budget is there to achieve the strategic plans
that have been established.
Mr. Coyne. Thank you.
Mr. Mares, you indicated that you were somewhat concerned
about any oversight board that would have special interest
groups represented.
Could you define what you mean by a special interest group?
I mean, it seems to me that anyone who comes into a board like
that is going to have some special interests of their own.
Mr. Mares. There are two points I would like to make. First
of all, we believe that Treasury should have a seat on the
Board or any board as it may ultimately be constituted. So
Treasury, we specifically exclude from our definition of
special interest groups.
I think what our concern is that a board member should be
chosen based upon that particular board member's meeting the
legislatively mandated criteria, not because that member
represents a specific group or a specific group has the right
to select someone who then, in turn, is appointed to the Board,
subject to the approval of the Senate, and so forth. So our
concern is not that individuals will come to the Board with
their own experience, which will give them certainly some bias;
our concern is with any specific group having an assigned seat
on the Board.
Mr. Coyne. Thank you. Thank you, Mr. Chairman.
Mr. Portman. Thank you, Mr. Coyne. Mr. Hulshof.
Mr. Hulshof. Thanks, Mr. Chairman.
Mr. Mann, in your written statement and testimony you
mention the Internal Revenue Service must be free from improper
political influence and the potential for corruption, and I
couldn't agree with you more. It has been testified or
mentioned by a couple of you, I think Mr. Cherecwich just
mentioned public perception. I think there is a growing
perception among the American people that politics too often
plays a role in IRS' decisions. Recently, the press headlines
that an individual who has litigation ongoing with the
President of the United States is now being subject to audit,
being one of those examples.
Let me ask you, do you think that the Treasury's idea of a
management board, which consists largely in my mind of
political appointees, many of whom may have scant knowledge of
tax administration law, do you believe that that creates a
greater risk of politicizing the IRS?
Mr. Mann. Well, Mr. Hulshof, I think that the testimony
says that we think that one of the risks of having the Board
with other executive branch personnel on it is that it raises
at least the perception that there may be political influence,
as well as confused loyalty. So both of those points I think we
would make in opposing other executive branch personnel on any
kind of a review board.
Mr. Hulshof. Let me ask, Mr. Cherecwich, putting aside the
issue of the governance, the executive branch governance, does
TEI believe that the rest of the recommendations in especially
H.R. 2292, does that help us put the IRS on the right course?
Mr. Cherecwich. There are a very large number of
recommendations that we think are very, very appropriate that
we detailed in our written testimony. We think that the
continuity of management with a 5-year term is very important.
We think the concepts of stabilized funding, consideration of a
3-year budget so the IRS can get on with the job is extremely
important. Streamlining of congressional oversight in order to
avoid many of the demands that have taken place on the people
trying to get the job done is really significant to us. We
think, for example, that the GAO ought to have to come to
Congress for permission to do yet another audit of the Internal
Revenue Service.
And speaking specifically of oversight, we do know that the
legislation includes the requirement for independent reports
back to Congress, not only from the Oversight Board but from
advisory groups and various offices within the IRS. We really
think that Congress needs to think twice about legislating the
requirement for additional reports from the IRS and take care
of it through an oversight board.
We think that some of the items in there for strengthening
taxpayer rights are really very, very appropriate. For
instance, we urge you to carefully weigh proposals to eliminate
the net worth limitations on awarding costs and fees to
taxpayers when the IRS has been proven in court to have
absolutely no basis. There should be no reason why, just
because a corporation has been raked over the coals
inappropriately, that they should be treated any differently
from an individual who has been raked over the coals
inappropriately.
We also think that the comments regarding interest that are
in the legislation are a step in the right direction, although
we have some specific concerns about equalizing interest
between overpayments and underpayments based upon some sort of
revenue neutrality has us a bit confused. We would like to
address that issue and help you work with that.
Mr. Hulshof. I appreciate that. My time is expiring.
Mr. Mares, the American Institute of CPAs states that one
fundamental aspect of public accounting is providing
independent objective advice to clients. And I think your
organization--certainly members have significant experience in
resolving potential conflict of interest situations.
Are you comfortable with the idea of private-sector experts
helping to provide oversight to an agency like the IRS? There
has been a lot of talk about conflict of interest or potential
conflict of interest and I would like to have your thoughts.
Mr. Mares. First of all, I think that the point is not only
conflict of interest but also the perception of conflict of
interest. And yes, we are comfortable with the proposal that
this outside or oversight board can accomplish its goals
without violating the conflict of interest rules.
And again I go back to my comments, which include the fact
that the designation of these individuals as special government
employees, thereby putting them under the auspices of title 18,
certainly goes a long way toward that. If it is believed that
that is not enough alone to deal with the perception of a
conflict of interest, we feel very confident that additional
safeguards can be presented so that there isn't an issue over
that.
Mr. Hulshof. Thank you, Mr. Chairman. I yield back.
Mr. Portman. You were actually past your time but your
questions were so good that we were happy to have them. Mrs.
Thurman?
Mrs. Thurman. I don't have any questions.
Mr. Portman. Mr. Neal.
Mr. Neal. Thank you, Mr. Chairman.
I think during the 2 days of testimony that we have
received here that the term that has been most frequently used
and applied has been the term ``accountability'' and how best
to ensure the integrity of the agency, and at the same time
maintain a sense of accountability to the taxpayers as a whole.
What you find around here these days under the guise of
accountability is that we ought to have term limits so that
there won't be accountability, and then when we think the
public is not looking we ought to be able to change that rule
so that the Chairman can stay on afterward.
Then we think we should have the line-item veto so that we
are less accountable, and then we transfer that power down to
the White House. Then, we think we ought to have a balanced
budget amendment so that we are less accountable for the day-
to-day expenditures, even though we have demonstrated we can
balance the budget. Now, the IRS becomes the latest example of
what we ought to focus on.
I thought yesterday Chairman Archer did a very good job in
a very even-tempered manner in which he said that there are an
awful lot of problems that confront the IRS today, we hear
about them frequently in our congressional offices and this
raises accountability. Accountability is what has contributed
to this discussion and has, I think, helped to shape and change
the national debate.
As I listen to some of the witnesses this morning speak to
these various issues, I thought again that the term
``accountability'' was applied regularly. Now, the argument is
made that if we simply take tax compliance away from the
Federal Government of the United States and turn it over to a
private-sector board, who will also be allowed to appoint the
Commissioner, that that is going to give the taxpayer more
accountability. When the truth is that many of us complain here
about rules that are typically made by agencies of the Federal
Government who we argue are less accountable, despite the fact
that it has been Congress that has relinquished their authority
time and again for making those very decisions.
The best accountability remains your ability to get ahold
of your Congressman or your Congresswoman to protest the action
of a Federal agency which in the end brings about this sort of
hearing.
Now, Mr. Mann, in your testimony, I heard you speak to the
issue of accountability and how best to do that. Would you
argue today that turning the appointment authority for the IRS
Commissioner over to a private board is accountability?
Mr. Mann. Well, it is certainly one kind of accountability.
We recommend quite a different kind of accountability. We
believe that because the President really is responsible for
the revenues, and the Treasury is responsible for the revenues,
that we think the Commissioner ought to be appointed by the
President, and responsible to the Treasury Department. That is
our view of what is the best accountability.
Mr. Neal. The idea that the President who has to stand for
reelection and Members of Congress who have to go back home and
face the public, that somehow that accountability doesn't make
any difference anymore. That if we simply do not like the IRS,
we give it to a private board and let them do it, that somehow
all will be well.
Mr. Mann. I think that is right. And I think the confusion
comes that people want the Internal Revenue Service to have an
integrity about the way they go about doing their business, and
they are confusing the word ``integrity'' sometimes with
``independence'' from the President and the Treasury
Department. We would urge that there is that tension between
accountability and integrity, but it can be done, and we would
urge that this relationship remain in the Treasury Department.
Mr. Neal. Thank you. In democracy, there is supposed to be
some tension. That is, in the end, what sheds light on an
issue. A little bit of sunshine and accountability and standing
in front of the public at election time is still the best
description of a viable democracy.
The other members of the panel, I hope that you would feel
free to comment within the limited time that I have left.
Mr. Cherecwich. Thank you, sir. I believe that the
President should appoint the Commissioner, that we should
maintain an accountability much in the same manner that you do,
and that the Commissioner should be on the Oversight Board.
I sincerely believe that the private sector can be of some
assistance, and hope that the proponents of both pieces of
legislation could resolve their differences, because we are not
very far apart in achieving something truly good for the IRS
and for the country.
Thank you.
Mr. Mares. We have recommended to the Commission, after the
release of the reported legislation, that the Commissioner be
appointed by the Board, but subject to confirmation by the
Senate in line with the way effectively the Chief Counsel,
under the legislative proposal, would be.
But I think it is important to point out that there is
still executive branch accountability throughout this. The
President would have the right to appoint and dismiss the board
members. The Secretary of Treasury or the Deputy Secretary
would serve on the Board as created. As to the budget process
and tax policy--ultimate approval of budget process for the
agency would remain with Treasury and tax policy would remain
with Treasury. So there is plenty of accountability. I think
what the Board does is create an accountability source for the
management of the Internal Revenue Service, and management of
the IRS is one of the problems that we see needs to be
addressed.
Mr. Loengard. I think that we agree with everybody on the
panel that the Commissioner and the Chief Counsel should be
essentially people who are appointed by and eventually report
to the executive branch, the Secretary of the Treasury and
through the Secretary of the Treasury to the President. And
that the Secretary and the President are ultimately responsible
for tax policy and the enforcement of the tax laws and that
that probably, because we feel it is a web, includes the
administration of the Internal Revenue Service ultimately. We
do not think those functions can be divided.
We also, I think, have no opposition to the setting up of
an advisory board, a board which would include non-Internal
Revenue Service or Treasury people, outsiders, private people,
who would play a role in oversight of the Internal Revenue
Service and its various functions.
Mr. Neal. Thank you. I don't know if you noticed or not
that I was attempting to needle my colleagues in this
institution and point out to them that the best accountability
is still standing in front of the voters every 2 years. Thank
you.
Mr. Portman. Thank you, Mr. Neal. I think that was not an
advertisement for term limits. And I appreciate the panel.
I would point out, Mr. Neal, two things. One, you talk
about the regulatory agency needing to be accountable. Treasury
retains, as you know, the ability on the regulatory side that
they have now. So you have that accountability. And, second,
what you propose, and what all our constituents are not happy
with, is the status quo with regard to the other side of the
accountability.
What we are talking about with accountability is keeping
the IRS' feet to the fire and making the computer systems work
and the phones work and so on. And this is the great challenge
that we have before us. And all four of you have given us a lot
of input today and you have helped shape the proposal in H.R.
2292.
As you know, we have heard testimony from three other
organizations extensively, before the Commission, and we heard
it at the Committee level and the Subcommittee level. We thank
you for your help on that.
You agree on a lot, not only among yourselves but with
regard to what is in H.R. 2292 regarding congressional
oversight on simplification. I think it is fair to say that
every one of your organizations has made that a top priority
over the years, and you continually tell us it is your number
one or number two priority.
This was not necessarily, as Mr. Coyne will confirm, in the
mandate of the Commission. And yet we did it. We took it on.
And I would hope that you not only acknowledge that but now
support us in this effort, because it is not going to be easy
to get what we were able to get through the Commission and to
this level with regard to making the Tax Code less complex. And
I think that is one of the great things about the proposal and
we need your help on that. I hope you will help.
I would also make one other comment, and that is that we
very much appreciate hearing from the bar and the tax lawyers
represented by other groups, very much appreciate hearing from
the folks in the corporate world who handle the tax function,
the executive vice presidents for tax, Mr. Cherecwich, such as
yourself, as well as from the accountants.
The major challenge at the IRS, though, is, in my view,
really an operational challenge, an organizational challenge.
And as I mentioned earlier with respect to what my friend, Mr.
Neal, was concerned about, which I am too, the accountability.
This is really about, again, a computer system that works,
phones that work, taxpayer service.
Have all of you been to service centers?
Mr. Mann. I have.
Mr. Mares. I have.
Mr. Cherecwich. I have.
Mr. Portman. Have you been to a service center, Mr.
Loengard?
Mr. Loengard. No, I have not.
Mr. Portman. I happen to have one in my area, so I have
been there a lot.
Again, I greatly appreciate your comments on the Oversight
Board, and the computers and the information technology
challenge, and the other challenges we have. But we have to
keep in mind that, as Mr. Loengard said in his testimony very
clearly, you are not computer experts, you are not management
experts, you are tax lawyers. And just to keep that in mind, I
think the Committee needs to keep that in mind as we hear this
testimony.
Having said that, again, I think we are all very much in
agreement on 90 percent of the report. Actually, we are very
close on the proposal.
I would ask one general question of all four of the
panelists, if I could. As you know, yesterday, the Secretary
testified about Treasury's proposal, which has been introduced
here in the Congress now, and it includes a management board,
as Mr. Hulshof said, made up largely of political appointees.
That is factual. It would probably also have some career civil
servants on it. We have heard Mr. Mann's concerns with that and
that he would not support such an approach.
Is there anyone on the panel who does support that
approach? I hear a deafening silence.
Mr. Cherecwich. Mr. Portman, TEI has recommended that we
have a balanced board.
Mr. Portman. OK. My question was, do you support the
Treasury proposal, yes or no?
Mr. Cherecwich. No, sir.
Mr. Portman. Thank you.
Just quickly with some of the specific issues, Mr. Mann, I
think your Under Secretary for Tax idea sounds intriguing. I
have talked to you privately about it and you raised it
publicly now. You have made the point to me that back in the
seventies we had such an Under Secretary and I think again in
the eighties for a short period of time.
Why didn't it succeed before? And what were the problems
with having an Under Secretary? Why did it not continue? Why do
you think it would succeed today?
Mr. Mann. I am going to have to speculate with you a little
bit, Mr. Portman, because I actually don't know. But I think it
is my information that it had more to do with the number of
Under Secretary slots that the Treasury Department was
permitted under whatever deal that they made with OMB and the
Budget Committees, and that there was no Under Secretary slot
left over to be this.
I do not think that you should regard that as particularly
a comment on this proposal, because of the difference in the
times. I believe that faced with the difficulties that the
Internal Revenue Service has today and the need in a global
economy to keep our tax administration and tax policy
coordinated better, I believe it makes all the sense in the
world to have an Under Secretary of Taxation with the oversight
responsibility and the responsibility to coordinate tax policy
and administration.
Mr. Portman. Let me ask you a followup question. I heard
your testimony this morning and read it and I understand how
you come down on the management side. But my question to you is
the Under Secretary for Tax, this idea of really coordinating
Treasury's role in this, is that inconsistent in any way with
the Oversight Board notion that is in H.R. 2292?
Mr. Mann. The problem that we have identified, Mr. Portman,
is that on page 12 in the general responsibilities, and the
exception itself says that the Board has no responsibility for
the formulation of tax policy or specific law enforcement
activities and some other specifically delegated things having
mostly to do with procurement policy, I believe.
We do not actually think that you can separate tax
administration, tax policy, and these procurement activities
very easily. There can be specific instances when you can do it
easily, but there are so many more when you cannot. So we are
worried that when you try to make an artificial or
nonfunctional kind of a division of authority like that, that
it may not work. So I would say just in that sense there may be
inconsistencies there.
Mr. Portman. But one could follow that by saying that your
notion of an Under Secretary for Tax at the Treasury Department
who combines some tax administration with tax policy functions
would, in fact, complement what is in H.R. 2292 for the very
reason that you state.
Mr. Mann. You can----
Mr. Portman. In a sense it would be an improvement from
today.
Mr. Mann. I think we would agree that that is an
improvement from where we are today, yes, sir.
Mr. Portman. Yesterday, as you know, we had testimony from
various experts and much of what they said is consistent with
what we are hearing today. These are people from academia,
Commissioners who were involved in this yearlong process and so
on.
One of the aspects of your testimony today, Mr. Mann, that
I thought was interesting, was that you said with regard to the
private sector that they do have a role to play. Your testimony
says the oversight process will benefit from private-sector
input. The Commission makes a compelling case that bringing the
appropriate expertise from the private sector to bear on major
management issues could greatly assist the service.
Later in response to a question from Mrs. Johnson you said
you think private-sector oversight is very important and it has
to be true accountability, not advisory.
Given all that, your views on the private sector and their
input, do you think it is accurate to say that the American Bar
Association specifically rejects the transfer of important IRS
management decisions to an outside board?
Mr. Mann. Well, in the first place I speak for the Tax
Section and not the whole ABA. But I think that the Secretary's
testimony yesterday, in which I believe that testimony is
present, doesn't accurately state what the ABA's or the
section's position is. What we said was we don't support the
Oversight Board that you have in H.R. 2292. Neither do we
support the notion that the Treasury Department has in 2248 or
whatever it is. We do not support the Treasury's Board.
Mr. Portman. But do you reject that the private sector has
a role to play in the management of the IRS?
Mr. Mann. We do not. No, I think that the only quibble we
have, Mr. Portman, is whether the powers of the Board are as we
suggest, which are to review and to report to the Congress and
the President or whether the Board has the power to, for
example, appoint a Commissioner, approve the budget or
something of that nature.
Mr. Portman. How about approving the strategic plan of the
IRS?
Mr. Mann. As I remember what the legislation says now, that
is one of the functions where there is approval, the strategic
plan of the IRS. And I don't think we have a position that
directly addresses that.
In my personal opinion that wouldn't be a bad idea. I don't
know that we need to--I guess our institutional view, Mr.
Portman, is that we don't need to do that once they review it
and report directly to the Congress.
Mr. Portman. I would just make the suggestion that the
Secretary's comments yesterday, which were quoted from by
myself earlier, are not accurate, and also make a further
comment that the American Bar Association is indeed a different
body than the Tax Section and we need to keep the Tax Section
focus on this because you really are the experts among the bar.
Mr. Mann. Indeed, sir.
Mr. Portman. Thank you for that clarification.
Mr. Cherecwich, again as I go through your written and oral
statement today, you agree with most of where we are, if not
almost all of it. And your strong statements on simplification,
congressional oversight and so on, some of which could have
been taken from my testimony yesterday--maybe I plagiarized
from you, I am not sure. But we are there. The strong support
that you have for an oversight body is consistent with H.R.
2292.
The two things that I see are, one, balance. That you would
like to see more government political appointees on this Board
than we currently have. Now it is at two--arguably two to three
depending on how you view the National Treasury Employee Union
representative. So balance is number one. And the second is the
appointment of the Commissioner.
With regard to the budget, you said, in essence, in
response to a direct question, that you were not sure you
supported H.R. 2292 and then you proceeded to say what you
supported, something which sounded to me precisely like H.R.
2292.
Just to clarify that for a moment, I don't think we are
going to get any agreement on the appointment of the
Commissioner or the balance issue necessarily today, but on the
budget let's be very clear.
The Commissioner, as you know, would be responsible for
putting together the budget just as he or she is now. That
budget would then go to the Board, which would include the
Secretary of the Treasury. That Board would then be in a
position to review that budget, work with the Commissioner to
approve a budget for the IRS that is then sent to the
Secretary, and goes through the same vetting process the
current budget does, which would include competition with
Customs Service and ATF and other functions of Treasury, and
then into the unified budget process with OMB and competing
with all the rest of government. And then it would come up here
as part of the President's request.
When the President's request came, Members of Congress,
TEI, the American public, also would have the benefit of seeing
what the Board, with the Secretary on the Board, thought was
the appropriate budget for the Internal Revenue Service.
Do you disagree with that?
Mr. Cherecwich. We still have a few little qualms about
requiring the submission of the Board-approved budget directly
to Congress, because in the final analysis, accountability for
the IRS and the budget does rest with the Treasury Department.
We are also concerned that the proposed legislation might blur
the lines of accountability or might heighten the possibility
of conflict between the Board and the administration. We do,
however, certainly believe that the IRS can benefit from having
the Oversight Board heavily involved in the development and
review of its budget.
Mr. Portman. Thank you. We will leave it at that.
Mr. Mares, thank you, again, for giving us input on this
again. You were helpful in putting together the proposal that
we have before us.
One of the fundamental aspects of public accounting, of
course, is providing independent objective advice to clients,
and, as such, your members have a lot of experience in
identifying and resolving potential conflict of interest
situations. Let me ask you again, are you comfortable with the
idea of the private-sector experts helping in an oversight role
in the IRS?
Mr. Mares. Yes, we are, Mr. Portman.
Mr. Portman. Mr. Loengard, Mr. Cardin went over some of the
points that I was going to make just to clarify where we are
now in the legislation. I think we have made some progress
since your last thorough analysis, and I just wanted to make
that further point. Chief Counsel, I think, the dialog between
you and Mr. Cardin will be helpful to the staff in putting
together their final mark on that.
I think we are where you want us to be. I understand your
difference with regard to the appointment of the Commissioner,
but I think you will find it more acceptable to you.
The idea of a staff with the Board, as you know, is
something that we looked at in the Commission. I think it was
part of the Commission recommendation. We chose to not pursue
that in the legislation for a number of reasons, including the
fact that we do not view this as a kind of exercise which would
be contrary to the Commission; rather, it would be working with
the Commissioner of the IRS and we think that kind of overlap
of staff through delegating staff is consistent with that idea.
The New York State Bar has consistently said the most
significant problem facing the IRS is the complexity of the tax
law and basically your statement spends 80, 90 percent of your
time talking about that. And although I can suggest to you
being a Member of Congress now and looking at it from the
inside as opposed to where I was before, trying to practice law
and take clients through some of this, it is unlikely that in
the short term we are going to see the kind of complexity that
you advocate, although I do believe that if legislation is
passed would urge Congress to move toward that. I don't think
this latest tax change would have been as complicated if this
discipline had been in place.
But do you think that the IRS also needs substantial
reform, even given the fact that we are going to have a rather
complicated Tax Code at least for the short term?
Mr. Loengard. We believe that there are several facets to
the problem. One is, of course, funding. Dealing with taxpayer
questions, answering phones and all the rest of it, you need
staff. You need staff to issue the regulations that
Congresswoman Johnson referred to as sometimes being very long
delayed after legislation gets enacted. So that is one facet of
the problem.
There is no question in our view that the computer
technology that the Service has is inadequate to its task and
that that needs improvement from whatever source it can get
help. We understand--as we said earlier, we are not computer
experts, that there has been progress made there. So certainly
the Service could be improved in the way it functions. And we
certainly believe that. And we think that--I have not had a
chance to fully study the proposal made by the American Bar
Association, but it is probably, speaking personally now, not
for the New York State Tax Bar, not very different from what we
might consider and propose.
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Mr. Portman. Gentlemen, I thank you very much.
Are there any other questions of the Committee Members?
Thank you gentlemen very much. We will continue our dialog.
I would like to call the next panel. We are now pleased to
have before the Committee Donald C. Alexander, former
Commissioner of the IRS, a partner in Akin, Gump, Strauss,
Hauer & Feld; Sheldon S. Cohen, former Commissioner of the
Internal Revenue Service and a partner in Morgan, Lewis &
Bockius; Morgan Kinghorn, Jr., former Controller and former
Chief Financial Officer of the IRS and now director of
Government Consulting Practice of Coopers and Lybrand; and Phil
Brand, director of Internal Revenue Service Policies and
Dispute Resolution at KPMG Peat Marwick and former Chief of
Compliance at the Internal Revenue Service.
Gentlemen, thank you for being here and again for all the
input you have already given us through the Commission and
these proceedings.
Mr. Alexander, I would like you to begin your testimony.
And I urge you to keep your oral statement to 5 minutes. You
can submit anything longer to the record.
STATEMENT OF HON. DONALD C. ALEXANDER, FORMER COMMISSIONER,
INTERNAL REVENUE SERVICE, AND PARTNER, AKIN, GUMP, STRAUSS,
HAUER & FELD, L.L.P.
Mr. Alexander. Thank you, Mr. Chairman. I will not repeat
any of my statement.
I was delighted to hear this morning the dialog between
Mrs. Johnson, the Chairman, and Mr. Kies about actually doing
something useful about not imposing burdens on individual
taxpayers like some that have been imposed in the 1997 act, and
having mockups of individual tax returns. I am not talking
about a corporate return or a narrow issue; I am talking about
broad matters that affect millions of individual taxpayers and
vastly increase the burdens on those taxpayers and on the
Internal Revenue Service.
If the committees, the taxwriting committees, would
actually look at mockup returns before they make final
decisions, it would be extremely helpful to make sure that the
system would not be gamed by IRS apparently trying to make the
returns too complicated. Joint staff should have the right,
maybe the duty, to review those mockups, and both Majority and
Minority staff of the taxwriting committee should have that
duty.
I hope that comes about because I continue to believe that
many of the problems that the Restructuring Commission
addressed in its constructive report and its constructive bill
are laid at the incredible complexity of current tax law.
I support much of H.R. 2292, and I want to note that much
of it is paralleled in H.R. 2428. I think the Commissioner
ought to have a 5-year term. The President who appointed me
decided to fire me less than 3 months after I was in office,
and I don't want others to have to endure that sort of
precarious existence. Presumably, the President can rid of a
Commissioner, but he or she would have to show cause rather
than pure personal dislike.
And I support many of the other constructive proposals that
have been made to implement the Restructuring Commission's
concerns, its findings, its views. But I do have some
questions, as I mentioned before, about the Board as presently
constituted and with its present duties. I do not think that a
board composed largely of private individuals should have the
right to discharge the Commissioner. I hope that that will be
reconsidered.
Thank you.
[The prepared statement and attachment follow:]
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Mr. Portman. Thank you, Mr. Alexander.
Mr. Cohen.
STATEMENT OF HON. SHELDON S. COHEN, FORMER COMMISSIONER,
INTERNAL REVENUE SERVICE, AND PARTNER, MORGAN, LEWIS & BOCKIUS,
LLP
Mr. Cohen. Mr. Portman, these are my views, not my firm's
nor my clients'. I will start by saying that.
I do not think anybody disagrees with. The goals of the
Commission as outlined, there are a number of bullet points on
my submission that reflect the ones of the Commission. I think
everybody wants a better Internal Revenue Service. They want
better management, more control, they want more strategic
planning, all of those things.
What I have heard this morning, and what I have read
before, and what my testimony says is I don't think they have
the right way to get there. That is, this outside board is
going to create more problems than it is going to solve. There
are enough conflict of interest issues that arise every day in
the Revenue Service with one Commissioner and one Chief Counsel
than with a board of nine people who have a variety of
interests, political and otherwise, and social and otherwise,
business and otherwise.
I have pointed out in my testimony a number of ways I think
they will get into deep trouble and that trouble will then
reflect on the Revenue Service. Nobody will say it was the
Board or the board member; they will say it is the management
of the Revenue Service, and I think that is a deep problem, and
I don't think it is susceptible to cure by the techniques
suggested by the Commission.
Having said that, I need to come up with an answer. The
Revenue Service is a good organization. I think there is a lot
of dirt being dumped that isn't meant to be dumped. The system
that collects $1.6 billion or $1.7 billion, is a model for most
of the rest of the world. So something down there is going
right. Now, a lot of things are going wrong. And in a big
organization on any given day, a lot of things are going to go
wrong. They had a lot of bad starts on their electronic data
processing system. That is clear.
Now, major changes have been made in the management of the
Revenue Service by hiring and bringing in new people. The new
Commissioner has skills in this area. That problem seems to be
on the road to being cured.
Now, whether the other problems are deep enough to require
this great change--I mean, here we are dealing with a system. I
used to sit down there in sheer terror that anything I did
would deteriorate the system by as much as 1 percent, because 1
percent of the revenue is so big, my budget would pale beside
it. And here we are trying to make this major surgery on an
organization I just don't think is warranted, and that is what
I have said.
The 5-year term for the Commissioner I think is fine,
although I don't believe it is going to happen. That is--I am
one of those three since the reorganization who served for a
full 4 years. No agency I know of that has fixed terms has
anybody who really served that, except for the Controller
General. The Controller General is about the only one. But for
20 years now we have had a 10-year term for the head of the FBI
and no one has served as much as 4. So we will see. Maybe Mr.
Freeh will break the record.
I am going to skip most of the rest of this.
The complications problem is very serious and the
communications with the Revenue Service is very serious. When I
was Commissioner, Mr. Mills used to invite me to his office
probably as much as once every 4, 5, or 6 weeks and we would
talk about administrative problems and pending legislation. So
it can be done. It can be done informally; you don't need
change in law--there was no law, there was no great mechanism,
he just invited me to come up and talk.
We need more respect for the Internal Revenue Service. We
need more respect for government employees generally. The
deterioration of service has something to do with that. But it
has something to do with the complications that you folks pile
on. Nobody on the private side of the aisle--our side of the
desk is ever going to complain about a complex provision that
benefits them. It is only a complex provision that causes them
problems.
The Revenue Service's curse has been its ability, in most
instances, to be able to handle those complex provisions. So
you pile on more. You say, oh, they are pretty good at doing
this. They will find a way to handle it. They will develop a
form or procedure that will get through these complications and
we do not have to worry about it. But, you see, you do have to
worry about it because you have piled on so many that it is
beginning to break the system. And I applaud any of those
efforts that, by oversight or otherwise, would do to simplify
the system.
Now, I testified before an oversight committee in 1987 on
the use of foundations in political campaigns. Recently,
somebody called me when this problem arose and said, do you
have anything, and I said, yeah, I testified before an
oversight committee in 1987, and I xeroxed it and sent it to
this reporter, and she said to me, you wrote that 10 years ago?
It reads like it was written for yesterday.
Well, the point was that the Congress knew about the
problem and was concerned about it. The hearing report
expressed concern, but Congress never did anything. So those
kinds of issues where you could clean up an area are not sexy
enough. There is really no constituency out there lobbying you
to clean those areas up. You have to be self-starters in that
respect.
One of the problems, of course, here is that the Revenue
Service doesn't send you a report on legislation. You get the
report from the Treasury. The report that the Service sends to
the Treasury might be enlightening on occasion because they
sometimes say different things, because they are not concerned
so much with the overall policy as with the administration. And
if you are really concerned about administration, you ought to
get involved. You have to. I mean, you have to get your hands
dirty, unfortunately.
You know, customer service is great, but remember, you are
dealing with an organization that is not helping me finance my
credit card purchases; they are taking money away from me, or
at least I view it that way. So I am not going to be kindly
toward them no matter how good the service is. If they give me
an answer I don't like, the answer could be courteous or kind
or fast, I am still not going to like it if it wasn't the
answer I wanted to hear.
There are some alternatives, by the way, to oversight and I
have suggested a couple, and I am sure there are others in
which you can get an outside group which has some
accountability and which has answerability to you or to
whomever you think is appropriate, but would not overly burden
the structure and management of the Revenue Service, which I
think is a problem.
And I think I will stop right there and maybe we will have
more time for questions.
Thank you, sir.
[The prepared statement follows:]
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Mr. Portman. Mr. Kinghorn.
STATEMENT OF C. MORGAN KINGHORN, JR., FORMER CONTROLLER AND
FORMER CHIEF FINANCIAL OFFICER, INTERNAL REVENUE SERVICE, AND
DIRECTOR, GOVERNMENT CONSULTING PRACTICE, COOPERS AND LYBRAND
CONSULTING, McLEAN, VIRGINIA
Mr. Kinghorn. My name is C. Morgan Kinghorn, and from April
1990 until August 1995, I was honored to serve as the first
Controller of the IRS and then its Chief Financial Officer. I
am currently employed with Coopers and Lybrand Consulting, but
my attendance here reflects my own views as a former IRS
employee and not necessarily those of Coopers and Lybrand.
I think I have some unique opportunities to share with you.
I was the first outsider to be appointed a chief, reporting
directly to the Deputy Commissioner and Commissioner. Sheldon
tells me there was another outsider that he appointed several
years ago. But, in effect, in recent years I was certainly the
first outsider to be brought in on at senior executive level.
And I was an outsider who was anchored in one of the functions,
financial management, but took a key interest in using those
functional powers to help the core mission of IRS and help
bring about fundamental reform.
I would like to touch today on the key areas and I agree
with the Chairman, are the key issues, and those are the
governance questions facing the IRS. You cannot talk about
governance really without talking about culture. This is not
some fuzzy management concept. The cultures of organizations--
and I have learned this certainly in the last 2 years in my
consulting work--really affect the management and the
decisionmaking powers and authorities within an organization.
IRS, as I think you have learned, is a closed-loop system,
or has been, and by that I mean there has been no consistent
insertion of external perspectives through the recruitment of
individuals at the executive level except, of course, for the
Commissioner, who can truly bring new ideas or different ideas
to the Service.
While the Service has certainly attracted excellent
individuals at all levels, the numbers who have been able to
make it through the system have not been sufficient, in my
mind, to make much of a difference for the long term.
I also observed the closed-loop nature of the Service has
helped to make the Service a very risk-averse organization,
generally distrustful of new ideas that were not generated from
within its own ranks. That is probably because the Service for
decades and decades was best at what it did and probably did
not see the need to have outside expertise.
But I believe the intense internalization of discussions
within the organization and, in effect, among others who talked
the same way and have been brought up in the organization for
25 to 30 years, can greatly limit the perspective and, over
time, limit choices that are available to senior executives
making decisions in a very difficult environment.
On accountability, which was discussed today, it is hard to
find accountability in most large public sector organizations,
and this is no less true in the IRS. Obviously, the
Commissioner is the single focus, at least in a political
sense, but what about the accountability of the 110,000 people
at IRS at the executive managerial level? It is one of the most
difficult tasks in the public and private sector to define.
At IRS there is, I think, a primary reason for some
confusion on accountability, and, again, I believe that is the
functional stovepipe organization structures that really
minimize accountability, because no one really manages an
entire large-scale process. Problems in returns processing can
be blamed on the system's failures; low collection rate
downstream can be blamed on examinations done earlier; the
failure of a new systems initiative can be blamed on the fact
that the program office was constantly changing its
requirements. So it is difficult to pin down accountability.
An executive at the IRS once told me, the good news is, the
IRS is politically naive; that is why we have a Commissioner;
but the bad news is that the IRS is politically naive.
IRS is in many ways very ill-prepared for the kinds of
challenges to its mission that are currently under way. It
traditionally does not deal well with outside oversight. It has
for so long operated in isolation; yet it is a fragile machine
that belies its tough image. In order to better deal with the
governance issues that result from a bureaucracy that is
inherently inward looking and an operating environment that is
strategically and constantly changing, there are several key
questions surrounding governance that you have focused on and I
think are generally consistent with your approach in the
legislation.
First, and I think most important, we do need to develop
the mechanisms that you discuss in the legislation to bring new
and diverse talent from the outside into the IRS executive and
managerial ranks at the earliest possible timeframe. I think
that is probably one of the most essential moves that can be
done.
We need to look at mechanisms to inject on a more regular
basis practical and useful oversight and outside views of the
core activities of the Service to inject at a strategic level
outside views of operations, customer service, and technology.
I think the Board concept that you are recommending is part and
parcel of that approach.
The closed-loop system is beginning to change, and I think
we have to give IRS credit. My experience is 2 years old, and
in very recent weeks, for instance, clearly the process for
technology investments has been opened up to outside views and
there is tremendous interest in looking at alternative ways of
partnering with the private sector to look at approaches.
IRS is now looking for outside assistance and advice in
restructuring its entire training programs and executive
development efforts, and very recently the IRS is moving out
beyond its own expertise generally anchored in paper processing
to get outside views on approaches on expanding electronic
filing. I think these are evidence of the fact that the
organization is listening and beginning to respond to some of
the criticisms and some of the objectives that you are trying
to reach.
IRS needs organizational structures that reflect broad
business practices rather than bureaucratic fiefdoms. Some work
was done on that in the IRS over the last 5 years, and I think,
hopefully, will be reexamined when the new team comes in.
Finally, structure increasing amounts of flexibility and
discretion in day-to-day business process and improvements for
the field; in effect, empowering people in the field to make
changes that will not affect the issue of unfairness and tax
treatment but will get to being able to manage some of the
management processes in ways that make most sense for those
particular working environments.
What is most critical at this juncture is to move on and
with some due haste, provide the government's framework for the
IRS, and give the IRS room to respond and change to the new
mandates, and I am sure it will.
Thank you, Mr. Chairman.
[The prepared statement follows:]
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Mr. Portman. Thank you, Mr. Kinghorn.
Mr. Brand.
STATEMENT OF PHIL BRAND, DIRECTOR, INTERNAL REVENUE SERVICE
POLICIES AND DISPUTE RESOLUTION, KPMG PEAT MARWICK, LLP,
WASHINGTON, DC
Mr. Brand. Mr. Chairman, I am Phil Brand. I am director of
IRS policies and dispute resolution for KPMG Peat Marwick. The
views I express today, however, are my own and do not represent
the views of KPMG.
I was employed with the Internal Revenue Service for 26\1/
2\ years. I retired in 1995. I most recently held the position
of chief compliance officer for the IRS in the Washington
national office. My perspective was influenced by the fact that
I enjoyed my career at IRS. I was treated extraordinarily well
by Treasury officials, by the Commissioners and Deputy
Commissioners, and the other people I worked with. I have fond
memories of the men and women I was privileged to lead and
enormous respect for the difficult job that tax administrators
must undertake.
I followed the work of the National Commission on
Restructuring the IRS closely from its establishment to the
final report. I worked with the AICPA and the National
Association of Enrolled Agents in helping them understand and
respond to the Commission's review support report.
I am hopeful that the upcoming debate and any resulting
legislation, structural change, and guidance will be the
product of congressional and administration consensus on the
future of the IRS. Improving the efficiency, the effectiveness,
and making the IRS more user friendly are important goals. Once
clarity is reached on how best to achieve these goals, I urge
that the IRS be given the breathing space to implement the
reforms in a constructive environment of oversight.
The past 2 years have produced unprecedented criticism of
the IRS. I know that IRS career employees understand the need
for the agency to renew and refresh itself. The men and women
of the IRS need the opportunity to do so over a period of time,
with the constructive help of stakeholders, but in a less
intense environment.
There must be more stability in the IRS budget process. The
tax system and the revenue flow it produces are a vital part of
the Nation's infrastructure. This infrastructure requires
ongoing investment and replenishment. Just as our highway and
air transportation systems require continuous maintenance and
upgrading, so does the tax system.
In summary, I am pleased to be a part of this debate. I
appreciate the difficult task that Congress has in deciding on
how to renew the tax administration infrastructure. I encourage
you to rethink the process in this context. I will, of course,
be available to answer questions at this particular point in
time.
[The prepared statement follows:]
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[GRAPHIC] [TIFF OMITTED] T8922.655
Mr. Portman. Thank you, Mr. Brand. And thank you,
gentlemen, for all of your good input. I am going to yield to
my colleagues here. Some of them may have other commitments.
Mr. Coyne.
Mr. Coyne. I have no questions. Mr. Chairman.
Mr. Portman. Mr. Hulshof.
Mr. Hulshof. Mr. Alexander, I looked for some softballs,
and I couldn't find any. I know you feel strongly that the
primary job of the IRS is to, in your words, collect the proper
amount of revenue due under the Internal Revenue Code. And I
take it you question the Commission's goal of turning the IRS
into, ``a world class service organization.'' Is that a fair
summary of your belief?
Mr. Alexander. It is fair. One of the goals set forth in
the bill is to convert the IRS into a world class service
organization. And I am not sure that that is the primary duty,
anyway, of the IRS. The duty of the IRS is to try to make the
system work, and that duty is a very difficult one. And since
most of our revenues come in voluntarily over the transom to
the IRS, the IRS has a duty to those taxpayers to try to
educate them and try to support them.
However, if IRS is directed, as a notion called Compliance
2000 that was recently espoused by a couple of former
Commissioners, that its primary goal is to educate taxpayers
and turn a happy face toward taxpayers, I am skeptical that the
many that comply voluntarily may not believe that they are
being played for suckers, because IRS would not be then in a
position to call on taxpayers that do not meet their
obligations, like Leona Helmsley, to step up and pay their
taxes.
Now, perhaps that is an archaic, outmoded view, but it
remains mine.
Mr. Hulshof. And I guess we toss around the acronym ``IRS''
so often, I think we forget, though, that IRS stands for
Internal Revenue Service, and certainly by collecting taxes as
part of the Service. But I think the Commission's
recommendations regarding being more accessible or taxpayer
friendly is one of the goals.
Let me follow up. I know you have some concerns, Mr.
Alexander, about the union representative on the Board. I think
that under H.R. 2292, you have some concerns about the Board's
authority to appoint a Commissioner. But putting those aside
just for a second, do you believe that a board with members
from the private life, with expertise, say, in management or
technology issues, could they not bring or help bring greater
continuity and expertise to the Internal Revenue Service?
Mr. Alexander. Of course, they could. Of course, they could
bring very valuable skills, knowledge, experience, and judgment
to the IRS. So a board itself is probably necessary at this
particular time when IRS is under such severe attack; some of
it justified, some of it not, of course.
The problems that I have, as I mentioned, are to some
extent with the composition of the Board but largely with the
powers and authority of the Board.
Mr. Hulshof. OK.
Mr. Cohen, you mentioned--and you are nodding your head
because you also mention, I think, at page 6 in your written
testimony, the appointment of Mr. Gross, Arthur Gross, to
manage the computer system. He has testified in front of our
Committee--again, someone from the private sector to try to get
a handle on Tax Systems Modernization efforts.
So would you also then agree generally that outside
individuals could provide some additional continuity and
expertise?
Mr. Cohen. Yes, sir. I said in my testimony when we had an
advisory group back in the sixties, it was not subject--there
was no act that required those Committees to meet in public,
and, therefore, we had candid discussion. We could talk about
sensitive subjects and not worry about it being on the front
page of the New York Times or one of the tax publications the
very next day.
Once the Advisory Committee Act came in, the Commissioner's
advisory meeting became ``show and tell.'' Everybody looked to
the back of the room, although they may not have physically
looked, but mentally they were looking to the back of the room,
and they would not say anything that they didn't want to be on
the front page of the tax publications the very next day.
Yes, it is wonderful to have smart people who are involved
in the system or who have a stake in the system to comment on
it, whether it is by an advisory group or whether it is by some
kind of oversight group. I mean, you can play with that kind of
design.
But I have the same fears that others have expressed that
the Board, as composed, is likely to have serious conflict-of-
interest problems, I don't think it is going to help that much,
because it is going to involve the Service in that much more
controversy. Just those kind of innocent things that I
mentioned and other people have mentioned in their testimonies
are going to come up, and then we are all going to be diverted
to worrying about those kinds of things instead of what really
is going on.
The Service is a big organization, 100,000 people out
there. If each one of them made one mistake a month, you could
spend forever looking for the mistakes. The point is to try to
find a system that minimizes the mistakes and has a technique
for correcting them when they are made, because you cannot
focus on the hole in the donut, you ought to focus on the
donut.
Mr. Hulshof. Thank you, Mr. Portman.
Mr. Portman. Mrs. Thurman.
Mrs. Thurman. Thank you, Mr. Chairman.
First of all, I want to thank our witnesses on this panel.
I think having people who have been there and have seen, they
come with a little more candor, because they are not being
threatened anyway, I guess, in the debate with what happens
with the Board and what doesn't happen with the Board.
I particularly am interested because, Mr. Alexander, I
actually do kind of agree with you that I think that we do use
certain agencies and departments, depending on what Committees
we serve on, to beat up on them to protect our own kingdoms or
fiefdoms or whatever. So I do believe that we are part of the
problem. So now we are here to be part of the solution.
In the time that any of you spent there, let me use the
idea of the issue of the computers and the modernization, if
you had the right to go in--I have looked at the way we do RFPs
and how we are able to get equipment. It takes us 3 years to
get through getting the equipment. By the time we get the
equipment, it is outdated and we are already behind the curve
instead of in front of the curve.
Are there some suggestions, just using that instance that
you saw working there, from your perspective, that as Congress
tries to move ahead, that we can be doing that would satisfy
and help IRS become more modern?
You could take it from Mr. Kinghorn, who talks about
thinking out of the box; to Mr. Alexander, who believes that we
might potentially be some of the problem. And, Mr. Brand and
Mr. Cohen, I would love to hear some of your comments and
suggestions that you could give us that would work.
Mr. Alexander. That would work. Perhaps you want us to go
in order?
Mrs. Thurman. I don't care. Flip a coin. It doesn't matter.
Mr. Alexander. I don't have any coins. We might then go in
order.
First, I think there are some pretty good recommendations
to try to meet some of these problems in both bills,
particularly the budget recommendations in H.R. 2292. You have
to plan long-term even though, in my tenure at least, I had to
be ready to step out of the office any day. But I stayed almost
4 years.
You also have to try to sell the administration and
Congress on the need for long-range planning and particularly
for a long-range approach toward a data processing system.
I was lucky on selling the administration. I was unlucky
that Congress decided they did not want the IRS have to an
efficient and up-to-date data processing system because of the
concern about ``Big Brother watching over you.'' So we missed
out during my tenure--I think Sheldon did better in his earlier
tenure--because of the Big Brother syndrome and perhaps some
concerns by unsuccessful bidders.
The IRS is badly in need of the new Commissioner coming on
soon with his data processing background and with his
acceptability to what is needed now in room 3000, someone with
a managerial and data processing background. IRS is lucky to
have hired Art Gross, who I am sure will be helpful in turning
around IRS' recent problems, frequently overstated, with its
data processing upgrade.
Mr. Cohen. I was lucky. The beginning of the design of the
computer system was started with Dana Latham--to give you an
illustration of time lines, when Dana Latham was Commissioner
of Internal Revenue, and that was 1959-1960. I became Chief
Counsel in 1963, and I became Commissioner in the beginning of
1965. We were beginning to install the system. We finished in
about 1967 or 1968. We had state-of-the-art equipment. We were
first in line. Every computer designer wanted to do it, because
we were big and we were an example.
The Congress did not know much about computers, so they did
not bother us. Luckily, about the time the Congress began to
ask me questions, it was working. The first few months, we were
having an awful time. When I left, I had instructed the staff
to prepare a system that would be installed sometime in the
midseventies. That is the system that Don was talking about.
The staff began design work in about 1967 or 1968, right
along there, and, as he indicated to you, it was not installed
in the seventies. Again, in the eighties, a new system was
thought about, designed, and the President, President Reagan in
that instance, would not ask for it. So the Service was
basically stuck with an archaic system which was state of the
art when it was put in, and worked well, and fell into
disrepair.
And Roscoe Eggers put in some peripheral changes to the
system, but basically the design was the old design. And if you
are going to think about this long term, as I say in my
testimony, it is like building an aircraft carrier; it is not
any different. You have got to think about it in terms of 2 or
3 years in design, 3 or 4 years in installation. That is what
it takes. This is a great big system you cannot turn around on
a dime, and if you tried, you would have a collapse. These
fellows can tell you better than I can.
Mr. Kinghorn. There are really sort of three perspectives
on sort of the technology. One is technical, and one of the
issues that IRS and many other Federal public agencies have is
that we do not have a very good record in this area; the
requirements keep moving. No one can lock anybody in the room
and come out with an agreement between the information
technology folks and the program staff: ``This is what we are
going to do, and we are not going to change, at least until you
build the first one.''
Second, things got too big in terms of growth and what we
want this thing to do, and there were times at IRS where we
basically all at the end of the day said ``let TSM do it.'' No
one knew quite what that meant. So there was tremendous growth
in the size of these thing and which also increased the
timeframes and all the problems associated with that.
And then the problem of trying to be first on the block
with some technology that you are going to be the beta test on;
those are the technical issues. And I think what you are doing
in terms of bringing in outside experience through a board
mechanism and other mechanisms will help bring some reality to
the discussion.
The second is looking outside, and when I was there, then--
this was quite a while ago--I tried to get the head of the
taxpayer service and the call site programs to come with my
staff to American Express in North Carolina. We had a contact
with American Express. They were providing some help to us. I
couldn't get anyone in IRS to go except a district person from
Baltimore. They just didn't get it.
And I think, again, what you are doing bringing in outside
expertise is to have an environment where people will be
questioned. There may be a conflict of interest, as you hear,
but we have to get people in a room with IRS who understand
customer service at the call site and have done it
successfully. IRS does some of it successfully, but there are
elements it does not.
Finally, you cannot put this all on the back of Art Gross
or the CIO. Everyone is thinking Art is going to do it. That is
the same thing as, ``TSM's going to do it.'' I think the
program offices--I think this is happening, and I give Art
credit for it--have got to get them back in the room, as they
are doing, and get the requirements solidified.
I think your approach of opening up the IRS and getting a
variety of mechanisms where there will be additional
substantive questions at a strategic level, much like Mrs.
Johnson was suggesting, I think is the approach to go.
Mr. Brand. Mrs. Thurman, just to point out two quick
examples. I think the multiyear budgeting--in 1995, as Chief
Compliance Officer, I was authorized to hire, and did hire,
5,000 additional compliance officers. In 1996, my successor was
told to get rid of 5,000 compliance officers. That is hard to
do in terms of managing, and it doesn't make sense in the way
you manage an agency strategically.
I think the second part is the need for the IRS at the
drafting table in the legislative process. I think of the
earned income tax credit. I make no value judgment on the
goodness or badness of it, but I think about the complexity of
the earned income tax credit and the fact that the IRS was not
at the drafting table during the initial drafting of that
legislation, and it has turned out to be a tremendous burden
both administratively and in terms of the cost to the
government over the years. Two examples.
Mrs. Thurman. Thank you.
Mr. Portman. Mr. Neal.
Mr. Neal. No questions.
Mr. Portman. Gentlemen, again, I thank you for the input.
Mr. Alexander, I have to start off by full disclosure. You
are not only a close friend, but you are a former resident of
the district I now represent. Notwithstanding that, we don't
agree on everything, but yet we have learned a lot from you
through this process.
I want to start off by just asking you a question that
relates to your optimal solution to the IRS. You have written,
I think publicly now through an op-ed that I saw, and I think
privately we have talked about this, that you think
independence from Treasury altogether might be the better
route. Is that your thought as to where the IRS should
optimally be placed?
Mr. Alexander. At times, I have pretty strongly promoted
the idea of the IRS as an independent agency. If it were an
independent agency today, a board of some sort would be an
absolute necessity. I don't think IRS would be permitted to
function independently without it.
There is much, I think, to be said for IRS as an
independent agency, with private-sector input, with very strong
and continuous oversight by the proper Committees, the
taxwriting committees, more than Gov. Op. Committees in the
Congress.
Mr. Portman. We always appreciate hearing that on this
Committee. So thank you.
Mr. Alexander. I am strongly opposed and, frankly, quite
surprised at the American Bar Tax Section proposal for an Under
Secretary of Tax in Treasury. That idea was abandoned back in
the Eisenhower years. It was not reinstituted in 1980. The
gentleman given that particular title was kicked sideways
upstairs on his way out, I think, as ABA people of long tenure
would well know. And I don't think that would work at all.
If IRS stays a part of the Treasury Department, the
Commissioner ought to report to the Secretary of the Treasury,
sometimes through the Deputy. But that ought to be the
reporting mechanism, not to some subordinate official in
Treasury. It is bad enough now.
Mr. Portman. Thank you.
The issue raised earlier by Mr. Hulshof with regard to
customer service is interesting. In your testimony, you say
that you believe the quality of IRS' interaction with taxpayers
has deteriorated since you were Commissioner. And I understand
your response to Mr. Hulshof that this is, after all, a
collection agency and an enforcement agency. But given that
comment, which I have no reason to believe is not correct,
don't you think improving customer service should be a priority
in this day and age?
Mr. Alexander. Of course it should be ``a'' priority. The
question is whether it should be ``the'' priority. Back in my
day when we strengthened customer service, or taxpayer service,
as we then called it and I still think might be a better name,
we had strong resistance from the private sector. They thought
that we were competing unfairly with them. And some of the tax
preparation organizations lobbied strongly to try to get rid of
any taxpayer service element in IRS on the grounds that we were
intruding on their domain and, even more important, on their
wallets.
That, thank God, has diminished, if not disappeared, and
now the question is what IRS' role is. Certainly, IRS has a
role in taxpayer service, and a strong one. Certainly, IRS
could not demand that millions of individuals file accurate tax
returns and tell them, by the way, we are not going to help you
in that difficult job.
But does IRS also have a duty, and perhaps some slightly
more significant duty, to make sure that the proper amount, not
too much, but hopefully not too little, will be collected.
There is no one else out there, there is no one in the
private sector, that fills that particular role. And that role
remains a very demanding, difficult problem of IRS, because
many taxpayers do not like to be separated from that which they
rightfully owe their government.
Mr. Portman. Let me try to give you a little bit of comfort
on a couple of comments you made in your written statement. You
talk about the concern that there might be some mandates in the
electronic filing recommendations. Just to be clear on that,
because there was some confusion about that with Treasury's
testimony--I think it was 2 weeks ago now--there are no
mandates. We went through that and made a deliberate choice to
not put mandates in. And you make a good point there, I think.
That was covered in the Subcommittee under Chairwoman Johnson.
Your comment on the legislative language on demonstrating
ability in management, I think you make a good point there, and
I think it is something we might want to work on. And, as you
know, that certainly was not the intent of the Commission, to
require that as a way of precluding people from being
Commissioner, but it was a notion that management is important,
which I think you said earlier that you also would agree with.
Finally, your issue as to the Oversight Board. I do
appreciate your suggestion that private-sector input is helpful
and good and so on. Your main concern seems to be on the
advisory versus oversight role: How much oversight, how much
advisory. Your concern on that seems to be related to the
conflict of interest possibility.
Your question is: Would a skeptical public believe that a
budget decision to beef up taxpayer service and weaken
compliance activities directed at large corporations was done
entirely for proper reasons?
I would just again make the point that if you look at how
this budget would work, not just read the legislation--I know
you have, carefully--but how it actually works in practice,
these kinds of budget decisions I don't think would raise
conflict of interest, because this Board is not ultimately
deciding the budget.
As all of us have come to realize over the last few weeks
looking carefully at this budget issue, ultimately it is
Congress that makes that decision. But certainly it is not that
Board. The Board does send an advisory budget up with the
President's request, but the President's request goes through
Treasury, OMB, and that whole process. But I think if that is
really your concern, maybe I can give you some comfort there.
There are so many questions, Mr. Cohen, I would like to ask
you. Just quickly, because you talked about having served one
of the last full terms. In response to Mrs. Thurman's question,
you were talking about the need to turn around the information
technology challenge over time, making the analogy to turning
an aircraft carrier, I think. And yesterday we heard testimony
that this would be a 3- to 6-year project and that there is the
need for continuity.
You said that you were one of the last Commissioners to
serve a full term. When was that?
Mr. Cohen. From 1965 to 1969. I was the first appointment
of President Johnson in his full term, and I left on January
20, 1969.
Mr. Portman. The percentage of taxpayers at that time who
were audited was higher than today; is that correct?
Mr. Cohen. Yes, the numbers were counted differently, but
it was approximately 4\1/2\, though they counted some
computerization office audits a little differently than they do
now. But it was much higher than it is now.
The problem is like a traffic policeman. I think Don has
used the same illustration. If you drive out on interstate
route 270 or any of the other major highways around here, and
there are no traffic police, they are just nonexistent that
day, you will see everybody going 5 to 10 miles an hour above
the speed limit. If you see a traffic cop or there is a traffic
car parked on the side with a radar gun, everybody behaves.
They may go 4 or 5 miles above the speed limit, but they do not
go wild. The same analogy is here.
Mr. Portman. Do you think that the compliance resource
initiatives that we now have, the document matching and so on,
makes it unnecessary to have the level of auditing that we had
back in the sixties?
Mr. Cohen. I think that document matching is terrific. It
started with me. We were the first to do document matching. The
first year we put in the computers, interest and dividend
reporting went up 26 percent, 26 percent in 1 year. We could
have put a bale of straw out there and said it was a computer,
and it would have had the same effect. It just proves that
there was a lot of cheating.
Why do we have a lesser reporting of interest and dividends
than we do of salary today? It is not astronomically different,
but it is significantly different, because there is withholding
on salary. In other words, compulsion has an effect in this;
Don and I agreed on that. And the question is how much, and I
don't think 0.6 or 0.8 of 1 percent in auditing is enough.
I think the fact that I know my friend or my neighbor or
somebody I am acquainted with has been looked at this year
makes me behave a little more carefully. There is an old
Yiddish expression which, translated to English, my father used
to use it, and it is a wonderful expression. It says: He thinks
he is an honest man who is not given an opportunity to steal.
Windows--you put locks on your windows and you put locks on
your doors to keep honest people from becoming thieves. A good
thief can get in anyway. That is the object here, is to keep
the vast majority of citizenry who are relatively honest,
better--a little better than they would be if there were not
that system.
Mr. Portman. I appreciate and understand your concern on
the compliance enforcement side. I don't think it is
inconsistent with where we came out on the Commission. There is
some discussion as to whether we should have focused more on
that in terms of our objectives for the Commission for the IRS.
Mr. Cohen. Some of us had the impression that you thought
the money would come over the transom forever, and, believe me,
it will not.
Mr. Portman. Eighty to 90 percent of the taxpayers are
voluntarily complying with our system. We have got to pay
attention to that and make sure that does not fall apart. But
also, we need to target enforcement better, including on the
audit side.
There has been discussion here among all four of you about
political issues, political interference with the IRS. The
Treasury proposal is for a management board made up of 20
individuals perhaps, mostly political appointees. Do any of you
support the Treasury proposal?
Mr. Cohen. Well, you can ask that question: Do I support
the Treasury? No. But I don't support yours either. So to be
fair, if you were asking for Sheldon Cohen's support, which is
not terribly important, there would have to be modifications in
either proposal.
Mr. Portman. You made that statement in your testimony, but
my question is on the Treasury alternative.
Mr. Alexander, do you have comments on the Treasury
alternative?
Mr. Alexander. I have deep concerns about the Treasury's
Board and the Executive order, and I understand the Executive
order is still outstanding; I don't think it has been revoked.
And, sure, I have some deep concerns about that, because I
think it runs the risk of politicizing the IRS. There are some
people on there that shouldn't be on there.
Nobody from the Vice President's office should be on such a
board, whatever they call the National Performance Review, and
so forth, because the Vice President is always running for
President.
The Under Secretary for Enforcement has no business
whatever being on a board in charge of IRS, because that person
is always trying to get his hands on Intelligence Division, or
Criminal Investigation Division, as it is called today.
I could give further examples, but a brief answer to your
question is no, I don't support it. I think they have improved
it some in H.R. 2428, but I think it still has problems.
Mr. Portman. Do you support that legislation?
Mr. Alexander. H.R. 2428?
Mr. Portman. Yes, sir.
Mr. Alexander. No, I don't, for the reason that I
expressed. I would be concerned about that board. I think the
Commissioner, so long as IRS remains a part of Treasury, should
report to the Secretary of the Treasury, perhaps through the
Deputy, but I think the Commissioner should have direct access
to and reporting responsibilities to the Secretary of the
Treasury and no other person.
Mr. Portman. Mr. Kinghorn, do you support the Treasury
proposal?
Mr. Kinghorn. I don't. I have worked probably for 30
political people in my career and came to the IRS. One of the
reasons that I came was that I wanted to go to an organization
that was nonpolitical. And I worked for three Commissioners,
and you could not tell day to day, hour to hour, what political
party they were part of. That issue is important to me.
More substantively on the board, I saw the board basically
as an attempt to bring in again some special experience. And I
think on the Board you might want to have some career
expertise, say, from the Social Security Administration that
deals with the call centers and perhaps someone from the
Financial Management Service that deals with electronic
transfer of data. But that would be the level of board.
And I really saw predominantly as an external private-
sector board of people that would come in and assist the IRS
with sort of a sequence of tenure on issues that were important
over the next 2 years. Obviously, right now the use of
technology and information management is a key issue.
So I didn't quite understand the purpose of having a board
composed of political appointees in the administration,
particularly coming close to the IRS.
Mr. Portman. I will get back to your other points in a
moment.
Mr. Brand, do you support the Treasury proposal?
Mr. Brand. No, sir, I do not. And pragmatically, aside from
the other reasons that have been outlined here, I think the
size of the Board itself renders it almost impossible to be
effective. You cannot put 22 people or so in a room and
basically have that to be a very meaningful discussion or
oversight, in my judgment.
Mr. Portman. Mr. Kinghorn, a lot of the discussion in this
room over the last 24 hours has been about the Oversight Board.
I think it is important and a critical part of the overall plan
to push change through the system, but we have ignored a lot of
other important recommendations, one of which is allowing the
Commissioner to hire and fire his or her own top people and
bring in outside expertise. Have you had a chance to look at
H.R. 2292's proposals in that regard?
Mr. Kinghorn. I have had more opportunity to look at the
Commission's report. On hiring and firing people, I always
believed--and I think Phil probably felt the same way--if the
Commissioner came in and told me, ``We really don't want you to
be part of the team,'' I wouldn't want to work in that
environment and I would find something else to do.
But I do think the IRS in general--this is such an
important point--I think your budget recommendations are
critical. You have an organization that can return 5, 7, 10, 12
to 1 on revenue, and I think at this point the numbers are
pretty reasonably trustworthy. Those recommendations are fine.
I think bringing in new people--and I think the concept of the
Board makes a great deal of sense in terms of looking at these
issues.
I think there is already a lot of flexibility in the
Federal personnel system. But, again, we are at a crossroads
with the IRS that some of the recommendations, at least that I
saw in the Commission's report, probably make some sense to
give the Commissioner additional authority.
But I think the IRS is a very responsive place. I think
probably to a person, certainly in the executive level, if in
an appropriate and professional way the Commissioner says, ``I
really need someone else on my team''--you might have to find
them something else in IRS to do, and I think that is
legitimate--those people would be willing to move on. There may
be exceptions, but within the IRS I think there is a way to
make that happen now. But I think additional authority could be
useful.
Mr. Portman. I think the objective in the legislation is
precisely what you talked about in your written statement, and
that is bringing in people laterally that have experience, and
if you would take a look at H.R. 2292 and see if you have any
improvements that you might suggest--you are probably the
recent guinea pig at least on bringing in someone with
experience from the outside, and you have seen the culture from
the inside and the outside. It would be helpful to get your
comments on that.
Mr. Brand, you spent most of your career at the IRS and
succeeded there in the sense that you went up the ladder to be
chief compliance officer, I believe, and therefore your
testimony here today is very significant. You said you haven't
been there for how long?
Mr. Brand. Two years now.
Mr. Portman. And some things have changed in the last 2
years, but that certainly is a perspective that we need to hear
from.
The Oversight Board has received, again, probably too much
of the discussion over the last 2 days and not enough in terms
of changing the system. As you know, we have the National
Treasury Employees Union supporting this proposal for some of
the same reasons that you support it, which is, they really
think that the management has been insufficient and that if you
are going to create an IRS that works better for taxpayers, it
will also work better for the employees.
Do you have any thoughts on some of the changes that we
have recommended, some of which are not even in the
jurisdiction of this Committee but have to do with increased
personnel flexibility in the system?
Mr. Brand. One of the reasons that I have been supportive
in my work with the AICPA and the National Association of
Enrolled Agents is the thought process that I think the Service
will benefit immensely by additional outside perspective in its
management councils and in its thought processes.
Again, the example of Art Gross, the new CIO, being brought
in from the outside has the opportunity. I think the
appointment of a Commissioner with a different background has
the opportunity of creating a different set of perspectives and
debate and discussion which is extremely important.
It is sort of unfortunate in one respect. I understand why,
but the focal point of all this debate has been on the Board,
and yet when you go through this report, 90 percent of this
report I suspect you could get agreement on. And it is
frustrating to me to see the Congress and the administration
juxtaposed over probably what could come to a sensible
conclusion and bring this outside influence, which I think is
just paramount for the Service.
You need the right blend of the professional tax
administrators that are going to run the place and be there,
but with renewal and refreshment. I would like to see the
debate move beyond the Board, when possible, into these other
areas, because they are extremely critical and thoughtful
suggestions, and I am just hopeful it works that way.
Mr. Portman. I agree with you, and, as you know, through
our process, the Board has changed quite a bit in response to
Treasury's concerns. Now the President has the ability to
remove at will, which was not initially going to be in the
Commission report. That was changed at the last minute.
We also made some changes with regard to the
responsibilities of the Board, even in the legislation, in
essence giving it a more narrow set of responsibilities with
regard to approval as compared to advisory-type capacity with
the Commissioner.
The one final thing I want to ask you is one of the
specific things that I think is important. H.R. 2292 has a
provision that would seek to provide an independent source of
funding--which has been an issue Congress has dealt with in the
past--for the employee plans and exempt organizations function.
Do you think that is necessary?
Mr. Brand. Absolutely. I strongly endorse it. I have been
instrumental in trying to help people focus on it.
I think people are unaware--some people are unaware of the
size and scope and the complexity of exempt organizations and
the whole issue of employee plans. I think it is a real
requirement.
Mr. Portman. Thank you.
Thank you again, gentlemen, for all of your input. We look
forward to the continued dialog. And the Committee is now
adjourned.
[Whereupon, at 1:45 p.m., the hearing was adjourned.]
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