TREASURY SECRETARY ROBERT E. RUBIN
HOUSE WAYS AND MEANS COMMITTEE
Restructuring the IRS
September 16, 1997

I'm pleased to have this opportunity to talk to you today about what the Administration is doing to improve the IRS and the proposals on this subject put forward by Senator Kerrey and Congressman Portman. Under their leadership, the National Commission on Restructuring the IRS has given serious thought to the issues confronting the IRS. Its report, which I have read, has made an important contribution to dealing with these issues.

Mr. Chairman, we know there are real problems at the IRS which have developed over many years -- and we have devoted a great amount of time and resources to fixing those problems. We have made real progress, but we also know that there is much to do and that the full job will take time. We're committed to change and to building the fair, efficient and accountable IRS the American people deserve.

We agree with the Commission on the goals: fair treatment for all taxpayers, strong customer service, and effective use of technology, all while collecting the taxes due. And we agree that achieving these goals requires better oversight, greater continuity of leadership, and improved access to expert advice from the private sector.

But, Mr. Chairman, there is a right way and a wrong way to achieve change. I believe the Commission's proposal 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.

RR-1929

A Core Government Service

No one likes to pay taxes and through the ages tax collectors have not been popular. But

taxes are inevitable: they pay for the core public services upon which our society relies. The IRS collects 95 percent of the Federal government's revenues that provide benefit checks for the elderly, Pell grants for colleges students, and the manpower and equipment for our national defense.

The question, then, is how best to reform this pivotal government agency. Building the IRS that the American people deserve has been the sole test for all of our activity and views in this area.

Change and Progress

More than a year ago we established a Treasury oversight board which proved to be the most significant change in IRS governance in 45 years. The Modernization Management Board has greatly enhanced Treasury's capacity to provide effective oversight of the IRS. As a consequence of this improved oversight, we have made significant strides in improved use of technology and better customer service.

To list just a few examples, Americans now 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. There were more than 140 million hits on the IRS web site in 1997, and response to telephone calls increased very substantially. 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 and well received Chief Information Officer, has received favorable response from both Congress and the private sector; Representative Kolbe, for example, has called it a "step in the right direction".

Much has been done, much remains to be done, but we must proceed in a sensible way.

Improved Governance

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. This bill strengthens oversight, increases accountability and continuity, and provides for increased and continuing advice from the private sector. And I believe it will assure that future Treasury Secretaries and their deputies take their responsibilities with respect to the IRS with the utmost seriousness.

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 of the operations of the IRS, the modernization of its systems, customer service, IRS strategy, and relevant matters. It meets monthly, but its members are available as needed on an on-going basis to deal with IRS issues. That close, ongoing involvement also produces important synergies: as we have seen, for example, in the recent close and continuing cooperation between the IRS and Treasury on the Year 2000 computer conversion.

This legislation will also require the Secretary and Deputy Secretary to report on the IRS in person to Congress each year, although I believe it should perhaps be twice a year. Speaking personally, I can tell you there is no question that 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 make that a top personal priority. I believe this to be the key to institutionalizing an effective approach to reaching the goals we all have for the IRS.

Second, the legislation recognizes the critical value of private sector input by creating an IRS Advisory Board made up of individuals selected to represent a wide range of relevant expertise, including information technology and customer service. This board would report to the Secretary of the Treasury, and make an annual report to Congress and the American people.

Third, to provide for increased continuity at the IRS, our legislation calls for the appointment of the IRS Commissioner to a fixed, five-year term. As now the Commissioner will be appointed by the President with the advice and consent of the Senate, and removable at will. 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 commitment to continuing the process of change.

This governance structure, working in partnership with the committed and well-informed oversight of Congress, can provide the kind of oversight needed to build the IRS the American people deserve. And, as I said before, improved governance, in conjunction with strong involvement of Congressional oversight and appropriations and the commitment and dedication of the men and women of the IRS, is already making a real impact.

A Private Sector Board

Mr. Chairman, I would now like to turn to the proposal to put a board of private sectors individuals in charge of the IRS, with great power with respect to the budget, evaluation and compensation of senior personnel, and strategy.

Mr. Chairman, I spent 26 years in the private sector, much at a very senior level, before entering public service at the beginning of this administration, and I would be the last person to question the value of private sector input. However, having now spent nearly five 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 high regard for private sector input and my understanding of these differences have informed both the structuring of the IRS Improvement Act, supported by the Administration, 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 other serious commentators. The New York State Bar Association, for example, said that the proposed board was a poor idea, with many problems. A recent Brookings Institution report said the proposal was "fundamentally flawed... [that] it confuses the undeniable need to strengthen the IRS's leadership with a plan to turn the agency over to a board dominated by private officials." A recent Business Week editorial called it a "truly bad idea". Citizens for Tax Justice said the board proposal was rife with conflicts. And in prepared testimony for presentation later today the tax section of the American Bar Association specifically rejects the transfer of important IRS management decisions to an outside board.

We see five major problems with this proposal: that it would weaken accountability, give private sector individuals control over a major public law enforcement agency, raise the virtual certainty of serious, real and apparent conflicts of interests, separate tax administration from tax policy, and very likely not work to provide the effective oversight necessary to accomplish what needs to be done at the IRS.

Limited Accountability

First, our constitution envisions substantial governmental functions being 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 the 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.

Private Control

Second, a private sector board would give private citizens control over a major law enforcement agency. More than half of the IRS's $7.2 billion budget goes to civil and criminal enforcement -- both to collect taxes and to work alongside other government agencies in their efforts to combat drugs, money laundering, health care fraud, financial fraud, organized crime and other illegal activities.

While the proposed board would not have access to specific law enforcement cases, the decisions it would take about the IRS's budget priorities, personnel and overall strategic direction would have a 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".

Outsider Control, Outsider Interests

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 interests 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, based on an adult lifetime involved with large organizations, I don't think there is any question that the people who work in a large organization are affected by the outlook of people on the top -- such as those who have the powers of this Board -- and by the desire to satisfy those people. That is just human nature -- and it is right at the core of the conflict of interest problems raised by this proposal. The board, for example, would have authority to review hiring and compensation decisions affecting senior managers. I know of nothing more ripe with conflict than the power to review compensation and dismissal decisions. The fact that the agency was being run by private sector individuals would almost surely have what lawyers call a "chilling effect" on IRS employees, and influence audit policy, enforcement policy, and the like.

Under the proposed board system, the public would also almost inevitably feel the IRS was responding to the views of a private sector board, and 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. If I were still in the private sector, Mr. Chairman, I could not in all conscience serve on such a board.

Separating Tax Policy From Tax Administration

Fourth, this proposal would separate tax policy from tax administration -- two functions which are inextricably intertwined. For good reason, in our government the making of policy and its implementation are almost invariably conducted by the same government organization. Policy considerations help inform decisions about administration, and factors related to administration naturally inform policy development.

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.

Unlikely to Work

Finally and very importantly, Mr. Chairman, I believe that this board is unlikely to work in providing the pro-active oversight that is needed. I've been around boards of directors a great deal. Private sector boards vary, but in almost all cases the oversight function of private sector boards is more removed from the issues of the organization than the intense oversight the IRS requires. What the IRS needs is the 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 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 on the IRS.

Summary

To conclude, Mr. Chairman, we must continue reforming the IRS, 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, year out perform the difficult and often unpopular job of collecting the taxes that fund or government's services. 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: we 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 must deal with these instances -- and do everything possible to prevent them

-- but always in the context of continued support for the people and mission of the organization as a whole. We believe in a fair tax system -- and compliance and enforcement are both important sides of that fairness.

Mr. Chairman, in all we have done Deputy Secretary Summers and I have had but one guiding objective: to build the IRS the American people deserve. We have made real progress, but there is much to be done. The IRS Improvement Act, supported by the Administration, would take the steps necessary to continue to reform the IRS without posing the many serious risks that control by a private sector board would bring. I look forward to working with the members of this Committee, members of the Commission, with the National Treasury Employee's Union, the men and women of the IRS and with other interested parties as we work to continue the process of change. I would now welcome any questions.