Mr. Chairman, Senator Moynihan, and Members of the Committee,

I am pleased to be able to testify today on the practices and procedures of the Internal Revenue Service. As Chairman, and now as Ranking Member of the House Appropriations Subcommittee on Treasury, Postal Service, and General Government, I have spent a great deal of time on the issues of tax compliance, IRS management, and customer service. It is a subject where the Members of this Committee have shown great leadership. I would like to commend Senator Kerrey, Senator Grassley, and the other members of the Commission on Restructuring the IRS for their leadership on this issue.

IRS employees are called upon to do an extremely difficult job. The 102,000 men and women of the IRS who are responsible for collecting 97 percent of the nation's revenues have one of the most difficult jobs in government. They collect the funds that pay to defend our freedom, educate our children, and take care of our old. At the same time that Congress has constrained their funding, it has also broadened their mission.

It is often said that it took an accountant to catch Al Capone. In recent years, because the profits of illicit activities such as drug smuggling and money laundering are often the best trail to those who perform them, the IRS has been given responsibility for assisting in criminal investigations. Each year, the IRS participates in some 5,000 criminal investigations.

If anything, the trend is asking the IRS to broaden its mission further. Recently, for example, Congress instructed the IRS to help in the important work of recovering child support payments from deadbeat parents who have refused to pay child support.

Against this backdrop, the Commission wisely recommended that "Congress provide the IRS certainty in its operational budget in the near future" and called for "greater stability" with funding levels.

As the Commission has pointed out, Congress' failure to pursue consistent policies regarding funding, its frequent changes of the tax code, and its efforts to micro-manage the IRS have all undermined the ability of the agency to manage efficiently in the long or short term.

In recent years, attacks on the agency's budget, while partially restored in Conference, have hurt morale and distracted management from the task at hand.

The Challenges Faced by the IRS

The vast majority of taxpayers pay their full taxes on time. Nevertheless, the IRS only collects about 83 percent of taxes owed through voluntary compliance. There is currently a balance due equal to $216 billion. When some do not pay their fair share, this increases the deficit and raises the burden for everyone else. From the point of view of fairness alone, it is necessary for the IRS to carry out enforcement.

Last year, of 119 million individual returns filed, 2.1 million or 1.6 percent of the total were selected for examination. Of the 89.4 million corporate returns filed, only 2.38 percent were selected for examination. In general, the vast majority of taxpayers are not subjected to any examination or collection measures at all.

Nevertheless, in any large organization with significant powers there will be instances each year where individuals behave improperly. Such abuses cannot be tolerated.

Two years ago, Congress revisited the problem of IRS abuse with the passage of the Omnibus Taxpayer Bill of Rights 2. In its report, "A Vision for a New IRS," the IRS Commission on Restructuring found that this law has "had an important effect on changing the culture of the IRS." The Commission went on to find "very few examples of IRS personnel abusing power."

Yet even one instance of abuse is one too many.

The IRS, the IRS employee's union, and the Department of the Treasury have stated that they are committed to a policy of zero-tolerance for taxpayer abuse. IRS management is following up on cases aggressively to determine what went wrong and to take appropriate action. But I believe that even appropriate action after-the-fact cannot erase the pain that some taxpayers have experienced.

I am therefore encouraged that the IRS is following up with a Service-wide program to stop this kind of abuse before it happens. This program includes centralizing and improving training on the provisions of both the first and the second Taxpayer Bill of Rights; creating taxpayer surveys that rate employees' treatment of taxpayers; eliminating unnecessary notices and clarifying those that remain so that taxpayers clearly understand their responsibilities; and implementing the modernization blueprint which will prevent the kinds of systems glitches that made these and other cases far more painful than they ever needed to be.

Treasury and IRS have reaffirmed their commitment to the original Taxpayer Bill of Rights which made it illegal to use records of tax enforcement results to evaluate employees or their supervisors.

A joint Treasury, IRS, National Performance Review task force is conducting a 90-day study of customer service.

And evaluations of both revenue officers and agents include measures of performance against a customer relations standard.

These changes underway are clearly steps in the right direction.

Governance

Ultimately, however, I believe that a solution to the problem of taxpayer abuse cannot be separated from the larger task of building the IRS of the future.

The Treasury Department, the IRS, the employees' union, and the IRS Commission on Restructuring have identified a common set of concerns. To build the IRS of the 21st Century, they have identified the need for a renewed focus on Oversight, Leadership, Flexibility, Improved Budgeting and Tax Simplification.

The Internal Revenue Service has been rightly criticized in recent years for its failure to manage its operations well. Particular focus has been directed at the attempt to modernize its information systems, an area severely criticized by the General Accounting Office until quite recently. The Treasury has also taken a new role in exercising oversight of the IRS. For the first time in the fifteen years that I have been reviewing IRS budgets, the Secretary of the Treasury and his Deputy are giving personal attention to IRS management issues. This new focus is clearly making a difference.

I am encouraged that Secretary Rubin has identified a candidate to head the IRS who has a non-traditional background in management and information technology - Charles Rosotti. New leadership at the IRS that focuses on modernization will help create the systems and practices needed to stop abuse of taxpayers before it happens. The enhanced oversight that the Treasury has begun to exert through the IRS Management Board and will exert through the new IRS Advisory Board will provide continuity, accountability and access to outside input from the public and private sectors. By preserving the ability of the Secretary of the Treasury, who is accountable to the President, to choose the Commissioner, Treasury's plan preserves accountability to the American people.

This program is embodied in legislation that I introduced together with Senator Moynihan, Congressman Rangel, Congressman Coyne, Congressman Waxman, and others at the Administration's request.

This legislation incorporates many of the findings of the IRS Commission on Restructuring and will give the IRS the new leadership and flexibility it needs to prepare for the future. Our legislation shares many provisions with legislation proposed by Senator Kerrey, Congressman Portman, and others.

And, based on conversations yesterday, we will soon be adding taxpayer rights provisions to our legislation. One example of that is equitable tolling, or in layman's terms, relaxing the expiration of the right to claim refunds after three years.

Let me note, however, that I am frankly concerned about one proposal embodied in their legislation. That provision would remove the IRS from Treasury oversight and make it accountable in part to private sector executives with loyalties to organizations other than the IRS. This proposal would raise difficult constitutional and conflict of interest concerns that might well provoke litigation. I am concerned that this proposal would place at risk the 97 percent of our federal revenues that are collected through taxes, at a time when we have just completed a historic agreement to balance the budget and put an end to federal deficits.

Conclusion

In conclusion, Mr. Chairman, the abuses that have come to light are intolerable and steps must be taken to end them.

At the same time, however, these abuses should not keep us from recalling the valuable service provided by the 102,000 dedicated men and women of the IRS who perform one of the most difficult jobs in government. It is important to point a spotlight on areas of abuse in tax collection activities. Our constituents rightly expect us to protect them from abusive and illegal actions. This objective is particularly important when such actions are done in the name of law enforcement. At the same time, we must do so in the way that does not undermine those who are performing crucial law enforcement missions.

As I stated, I believe that the measures underway at the IRS are an important step in the right direction. Ultimately, these problems cannot be separated from the broader challenge of continuing to reform the Service in which the Treasury Department, the IRS, the IRS employees' union, and the Congress are now engaged. I therefore thank the Committee for its leadership in this arena and for the opportunity to testify this morning.

I would be happy to answer any questions that you may have.