Statement of Fred T. Goldberg, Jr.
National Commission on Restructuring the IRS
Before
House Committee on Ways and Means

September 16, 1997

Mr. Chairman and Members of the Committee: My name is Fred Goldberg. I served as IRS Chief Counsel from 1984-1986, as IRS Commissioner from 1989-1991, and as Assistant Secretary of the Treasury for Tax Policy during 1992. I was appointed to the IRS Restructuring Commission by Senate Minority Leader Tom Daschle. I am appearing today as a Member of the Commission and not on behalf of any client interest.

For the most part, I believe the Commission's Report speaks for itself, and I will limit my comments to several observations that I urge you to keep in mind as you review our recommendations.

The Context

The IRS is the one institution of government that directly affects everyone. It is essential that it meet the demands and expectations of the American public. It does a very difficult and important job; that job is made close-to-impossible by a complicated and unworkable Internal Revenue Code. Most IRS employees are hard-working and well-meaning, and the IRS still collects most of the revenue that is due and owing at a lower cost than its counterparts around the world.

At the same time, however, there is widespread frustration that something is terribly wrong -- from phones that aren't answered and audits that go on forever to correspondence that is often incomprehensible; from employees who lack the training and tools to do the job to employees who view all citizen-taxpayers as crooks and cheats; from a large and growing tax gap to legendary computer troubles. Above all, there is one, incontrovertible fact: the IRS fails to meet the minimum acceptable standards that citizens have come to expect and demand from service companies in the private sector. This failure does not mean that the IRS is doing "worse" -- it means that the IRS has not kept pace with changes that are transforming the private sector.

The Causes and Criteria for Change

By and large, the problems result from two causes. First is the complexity of the tax law. This issue was beyond the scope of the Commission's charge, but it is important to emphasize our finding that simplification of the tax law is essential.

Second is the need for fundamental change in the management, governance and oversight of the IRS. Regardless of the "problem" under review, the same themes kept recurring. What's missing is agreement on what the Administration and Congress want from the IRS -- and the expertise, accountability, and continuity to deliver on those expectations.

This is the most important point to bear in mind. All of our recommendations were focused on these criteria: what do we want from the IRS, and how can we provide for the expertise, accountability and continuity to get the job done? I urge you to test our recommendations -- and consider alternatives -- against these standards.

The Commission's Recommendations

When viewed in this light, I believe that the case for the Commission's recommendations in the areas of management, governance and oversight is overwhelming:

Appoint the Commissioner for a five-year term.

Give the Commissioner authority and tools to build his or her own senior management team, and hold those individuals accountable for performance.

A Board of Governors -- fully accountable to the President of the United States -- with the expertise and continuity to focus on strategic, long-term objectives, and hold the Commissioner accountable for performance. Coordinated Congressional oversight among those responsible for all aspects of the IRS, with a specific focus on strategic and long-term issues.

Stable financing over a three year period and explicit Congressional authority to provide additional IRS funding outside the budget caps, subject to the express understanding that the IRS will use that three year period to get its house in order, develop appropriate performance measures and obtain "clean" financial audits.

Workforce flexibility that will enable the IRS to recruit and retain those who measure up -- and get rid of those who don't.

These recommendations comprise an integrated package. Each of these elements is essential to provide the requisite expertise, accountability and continuity; no single recommendation standing alone would be sufficient.

With respect to the question of vision -- what's expected of the IRS -- the Commission believes that this is ultimately a matter for the Administration and Congress to decide, on behalf of the American people. A primary purpose of the reforms we are recommending is to create a structure that will force agreement on this all-important issue.

Nonetheless, I believe that the Commission's Report reflects a view that is shared by most Americans. There are many ways to describe this consensus -- for example, customer service comparable to the best that is available from the private sector. What needs emphasizing is that this choice has consequences. For example, we recommend that the IRS adopt two fundamental principles in its dealings with the American public: (1) The IRS should not contact a taxpayer unless the IRS is prepared to devote the resources necessary to provide that taxpayer with a prompt, high quality resolution of the matter in question. (2) The IRS should not force the taxpayer to deal with an IRS employee unless that employee is adequately trained and has the tools to do the job properly.

These standards are a business necessity and a moral imperative in our system of government. They may sound obvious, but make no mistake about it: at present, and for all too many years, the IRS has failed to live up to these standards. I can tell you from personal experience, if the IRS did adhere to these standards, it would transform tax administration.

The reasons for this failure go to the essence of our recommendations: First, there has been no explicit acceptance -- by either Congress or the Executive Branch -- that these standards embody first principles of tax administration. Second, the current management, governance and oversight of the IRS does not provide the expertise, accountability and continuity that would be necessary to meet these standards.

To prove the point, ask yourselves the following questions: What if adhering to these standards meant lower audit coverage and a short-term reduction in revenue? What if adhering to these standards meant increased funding for the IRS? What measures are in place to assess whether the IRS is meeting these standards? How do the Administration's budget request and Congressional appropriations align themselves with these standards? How many Congressional oversight hearings have focused on these standards? Who's accountable for meeting these standards?

IRS Oversight Board

Most of the controversy surrounding the Commission's Report has focused on its recommendation for an IRS Oversight Board. As a preliminary matter, it is important to reemphasize that this is only one in a series of integrated recommendations to provide expertise, accountability and continuity. While I understand that some question whether the Board will have any real impact, I want to emphasize that most Commission members, myself included, believe that some type of Board -- with most or all of the formal duties and responsibilities we identified, and with private sector representatives who serve for fixed terms -- is essential to provide the continuity, expertise, and accountability that the IRS requires. If this basic concept is rejected, then efforts to reform the IRS will fail.

Having served as IRS Commissioner and as Treasury Assistant Secretary, I can understand why this particular proposal makes the Treasury Department uneasy. But I am absolutely certain that any discomfort or skepticism is well worth enduring for the sake of the other reforms being recommended by the Commission. In my view, it's not even a close question.

Since the Commission's Report was issued, the primary criticism of the Commission's Board recommendation relates to the role of the private sector, and the prospect for, or appearance of, conflicts of interest. Mr. Chairman, this is an issue that the Commission took seriously, and addressed with care. In light of the following, these criticisms are, at best, erroneous and misleading. In particular, any suggestion that the Commission recommended turning IRS management over to the private sector is absurd.⁽¹⁾

First, the President would remain ultimately and unambiguously accountable for tax administration. Private sector members of the Board would be appointed by the President for five year terms; however, the President could remove any Board member at any time, and for any reason -- including inadequate performance or conflicts of interest.

Second, the proposal would not alter Code 7801(a), which 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. Nothing would change in this regard.

Third, by statute, the Board would have no involvement in (much less authority over) tax policy matters, tax law enforcement, procurement decisions, and day-to-day administration of the tax laws. Moreover, by statute, the Board would have no access to tax return information.

Fourth, the express function of the Board is to provide oversight. As introduced, the legislation makes this clear: It establishes an "Internal Revenue Oversight Board" and that Board resides "within the Department of Treasury." The Board's duties are delineated in a manner consistent with that responsibility.⁽²⁾ A primary area of expertise that Board Members from private life should bring to the job is their ability to distinguish between legitimate oversight activities, and the epidemic of micromanagement that makes government so inefficient and ineffective.

Fifth, by their very nature, the Board's "products" -- review and approve strategic plans, review annual business plans, appoint and remove the Commissioner, review and approve the IRS budget for transmittal to the Administration and Congress, periodic reports to the Congress and the American public -- end up in the public domain.

Sixth, as introduced, the Board will have nine members. This means that each member's conduct will be subject to review by his or her colleagues -- including representatives of the Administration and IRS employees.

Seventh, while those of us supporting the Commission's recommendation are confident that the Administration will be able to attract business leaders of the highest competence and integrity, we also assumed that at least some Board members from outside the Federal government would come from other walks of life. If this (or any other) Administration has so little trust in the integrity or competence of the business community, it could, of course, draw on Board members from other pursuits (including academia; state or local government; the consulting community; individual taxpayers; retirees from the public and private sectors; etc.)

Finally, there is apparently some confusion regarding the Board's role in setting the IRS budget. The Board will make its own independent determination regarding proper funding for the Agency, and will communicate that determination to the Administration and the Congress. However, the Administration will also present its proposed IRS budget to the Congress. The IRS budget will then go through the normal appropriations process. In other words, the IRS budget will not be determined by the Board -- it will be determined by the Congress and the Administration.

The Commission decided that the foregoing was fully responsive to legitimate concerns regarding the role of the private sector. By the same token, however, the Commission was well aware that there are no perfect answers to any of the difficult issues we considered. They require a balance among competing concerns and objectives. What's important to keep in mind is what we were trying to accomplish: provide IRS with expertise, accountability and continuity -- while avoiding the pitfalls that accompany any change. There are any number of modifications to the Board proposal that would maintain the basic concept (a group with independent and formal oversight responsibilities that includes private sector members who serve fixed terms) and therefore meet the overall objectives of expertise, accountability and continuity. Thus, for example, it would be possible to alter the role of the Board in selecting the Commissioner, or change the composition of the Board, and still achieve the Commission's objectives.⁽³⁾

The Administration's Proposal

I would also like to comment briefly on the Administration's Proposal as recently introduced in Congress. As a preliminary matter, it is encouraging that there is so much agreement on so many areas. On the other hand, while the omission of any provisions regarding Congressional oversight may show commendable deference, it ignores an area where change is required.

The biggest area of disagreement relates to Executive Branch governance. The Administration proposes creating an IRS "Management Board" consisting of an unspecified number of career government employees and political appointees from throughout the Federal government. The Management Board will assume some significant (but ill-defined) responsibility for management of the IRS. It will also have its own independent staff, outside the IRS. The Administration's Proposal also creates an Advisory Board, reporting to the Secretary, that is much like the current Commissioner's Advisory Group. While this approach may address some issues, it fails to address others.

In particular, it will not satisfy the three criteria that should be used to evaluate any reform proposal. First, these groups will not bring to bear the kinds of expertise that the IRS requires -- at least in a way that has any hope of making a real difference. Second, they will diffuse, not focus accountability. Finally, the likely turnover in membership will undermine any hope for continuity.

On balance, the Administration's proposal, in its current form, will do little more than visit the mother of all micromanagement plagues on the IRS, and undermine any IRS effort to meet the expectations of the American public.

It is also somewhat surprising and troublesome that the Administration's 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 frightening thought, at least for those who recall why Section 6103 was enacted in the first place. As compared to the Executive Order, the legislation as introduced compounds these problems because there is no limit on who or how many Executive Branch employees can be involved in such matters.

Conclusion

I have spent most of my professional life dealing with taxes and tax administration; I consider myself extremely fortunate to have served in a number of senior government positions in the world of taxes. Based on my experience, I am certain of the following:

Fundamental change in IRS management, governance and oversight is essential.

That change must result in a shared vision of what we want from the IRS, and the expertise, accountability and continuity to deliver that vision.

You and your colleagues, and the Administration, have a unique opportunity -- one that doesn't come along very often. A well-functioning IRS is not a partisan issue, or a turf issue, or a question of hidden agendas. The IRS occupies a unique role in our system of government. It is essential that it meet the legitimate demands and expectations of the American people.

1. I should note, however, that several Commissioners favored removing the IRS entirely from Treasury, and placing control of the Agency in the hands of an independent board with private sector representatives. This suggestion is not as dramatic as it may sound. Indeed, Canada, Japan, and Mexico are moving in precisely that direction.

2. By way of comparison, the Administration's proposal establishes a Management Board whose duties and authority are not circumscribed.

3. Whatever Congress may decide, I think it is important to limit the number of Board members (if anything, nine may be too many). I also think it would be a terrible mistake to put individuals from "Main Treasury" (other than the Secretary or Deputy Secretary), or from elsewhere in the Executive Branch, on any type of management, governance or oversight board.

[THE OFFICIAL COMMITTEE RECORD CONTAINS ADDITIONAL MATERIAL HERE.]