PROPOSALS FOR RESTRUCTURING THE IRS
Statement before the Committee on Ways and Means
United States House of Representatives

September 16, 1997
C. EUGENE STEUERLE
Senior Fellow

Any opinions expressed herein are solely the author's and should not be attributed to The Urban Institute, its officers or funders.

THE URBAN INSTITUTE
2100 M Street, N.W.
Washington, DC 20037

PROPOSALS FOR RESTRUCTURING THE IRS⁽¹⁾

Mr. Chairman and Members of the Committee:

Using the Recommendations of the National Commission on Restructuring the IRS as a starting point, this Committee has a real opportunity to improve tax administration. Although a large portion of my written testimony will focus on the particular question of whether a board of directors, or some alternative type of board, might be part of an effort to restructure the IRS, I will speak briefly, to a few other issues: streamlining Congressional oversight, setting salaries for IRS personnel, reporting on the complexity of existing and proposed law, and releasing preliminary tax forms, when feasible, as part of the legislative process.

A summary of my recommendations is as follows:

(1) IRS administration can certainly be improved, as suggested in different draft bills, if Congressional oversight is streamlined, and (b) IRS is given greater authority to hire necessary expertise and move away from a salary structure that emphasizes management to the exclusion of other skills.

(2) Some attention should be paid to one of the primary causes of the IRS' problems: inadequate attention in the legislative process to issues of simplification and enforcement. Thus, I support efforts to require (a) that the IRS, Treasury, and the Joint Committee on Taxation report regularly on taxpayer complexity and enforcement difficulties of both current and proposed laws, and (b) that mock-up tax forms, within bounds of feasibility, become a regular part of the legislative process.

(3) Both an IRS Board of Directors and the IRS Management Board favored by the Treasury Department could easily confuse lines of responsibility and involve individuals who would weaken, rather than strengthen, the decision-making process.

(4) The primary merit in the Restructuring Commission's arguments for a board, it seems to me, is for greater accountability. The focus on shifting responsibility outside of IRS and Treasury has tended to detract from this primary concern. As a reasonable compromise, I suggest that private sector individuals be brought into the process, but not in a way that would confuse lines of authority and responsibility nor confuse the role of advisor from that of monitor, auditor, or critic. In effect, I suggest that a small number of private sector individuals be asked to monitor IRS progress and partake in reporting publicly on its successes and failures. However, they should not be given decision-making power, and their role should be separate from that of advisors.

In the remainder of my testimony, I provide some background on these recommendations.

Congressional Oversight

While I do not have strong opinions on the exact mechanism that should be adopted to streamline Congressional oversight, my experience in Treasury was that the constant reporting by top IRS officials to many parts of the Congress often so pre-occupied them that it detracted from their ability to focus on internal management. The simple fact is that Commissioners are called to testify so quickly and often -- in addition to the time they spend reporting to 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. Fewer testimonies and the ability to work through expert staffs, such as the Ways and Means Oversight Subcommittee, might not only give the Congress better information, but allow top IRS managers more time to do their job better.

Personnel Policy

The Restructuring Commission recognized that the personnel policies of the IRS, many of which are imposed from the outside, tend to prevent it from hiring the expertise it needs. This is especially true in quantitative areas, such as computer science and statistics. 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 number of persons managed, not knowledge and ability. For instance, anyone who thinks that the IRS or the government's problems with computers is going to go away as long as agencies cannot hire top notch computer experts is crazy. Note, however, that these types of problems are not unique to the IRS.

Reporting on IRS Ability to Enforce Tax Policy

The Restructuring Commission acknowledged that many of IRS' problems were due to the inordinate requirements placed on it by tax legislation. The demand for changes in federal 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 the tax law and administration. I suggest that a role also be determined for IRS and Treasury, as well. They have much of the expertise and knowledge, while the Joint Committee staff is quite small. Perhaps a biennial reporting requirement should be placed on the Executive Branch, but with a follow-up report by the Joint Committee which could also assess weaknesses and strengths these earlier reports. Some effort must be made to insure that these efforts are not token and that, over a course of several years, they are comprehensive in nature.

The Release of Tax Forms During the Legislative Process

One needs also to figure out ways to give simplification more attention during the legislative process. One method would be to designate someone from the Joint Committee or the Treasury to sit at the witness table during markup and report only on simplification aspects. Another suggestion I have made for years is that mock-up tax forms be made available at certain stages in the legislative process. I recognize that there has to be a rule of reason here, as time constraints are severe, but more can be done than currently. My one anecdotal piece of evidence goes back to the debate over Catastrophic Health in 1987, when as a Deputy Assistant Secretary of the Treasury I was able to get some forms up to Congress to show just how complicated were going to be the new premiums/taxes it was starting to enact. The effort did lead Congress to alter the legislation in conference, but insufficiently. This example demonstrates that releasing forms can improve the process, but certainly does not suggest that it would or should be the sole determinant of final outcomes.

A New Board Structure: The Two Sides

In its report on "A Vision for a New IRS," the National Commission on Restructuring the IRS suggested that executive branch governance of the IRS should be placed with a new Board of Governors. Tired of the inability of the Executive Branch and the Treasury Department to solve many of IRS' problems, the Commission sought to set up a new governance structure that would hold someone more firmly responsible for its successes and failures. The Treasury Department vehemently opposed this suggestion, arguing among other matters that this type of board would usurp the powers of the Executive Branch. It suggests instead that 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 will probably create more problems that it will 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 the clear lines of authority associated with a private sector board. Perhaps there is a better organizational structure than offered by either of these options. The primary goal, as set by the National Commission, should be to raise the level of accountability, as well as oversight, of the IRS. This structure must be able better to reward success and to penalize failure.

Both the National Commission and the Treasury make a strong case for their respective positions. The National Commission seeks an efficient, service-oriented, IRS with the authority and management oversight to get its job done well. The members of the Commission struggled with the failures of both Congress and the Executive Branch and argued that the current governance structure is often reactive rather than strategic. Within the Treasury Department, they noted that much attention is paid to matters of international economic affairs, economic and tax policy, and other fiscal matters. Attention to strategic issues within IRS received secondary attention both because of other priorities and because the IRS grew to gain a fair amount of independence in recent decades out of concern over attempted interference from politicians such as Richard Nixon. The Commission does note that some new focus was given to the IRS over the past year, but it does not see how this is guaranteed for the future, and it does not believe that groups such as the Modernization Management Board (MMB) "provide the necessary focus, expertise, and continuity."

The Board of Directors, as proposed, would not have any control over tax policy, but it would have overall responsibility for IRS governance, including appointing and removing senior leadership. It would review and approve of many of the Commissioner's recommendations on business and organizational plans and budget. Its seven members would include 5 individuals from the private sector, along with the Treasury Secretary and a representative from the National Treasury Employees Union. Very importantly, it would be required to provide annual stewardship reports to the public.

Representatives from the Executive Branch, along with a former head of tax administration for the State of New York, defended recent Administration efforts. They pointed to an expanded IRS Management Board that would include representatives from relevant Executive Branch agencies and to the establishment of an IRS Advisory Board that would provide other expertise. Very importantly, it, too, would issue an annual report on the IRS.

Treasury's problem with a board of directors, however, are several-fold. It questions whether an independent board is consistent with accountability to an elected President and cited related "constitutional" concerns raised by the Justice Department's Office of Legal Counsel. It also cites a GAO report that concluded that boards did not run well large government organizations and that "the board form of organization has not proven effective in providing stable leadership [or] in insulating decisions from political pressure..."

Each side has merit. Treasury's attention to tax administration has always been weak. There is nothing in most traditional executive branch committees or advisory committees that insures that greater attention would be paid, absent such bad press and political pressure as exists today. Despite the extra attention given to the IRS by this particular Administration, it has still ended up with a more complex tax Code than when it started, has been unable to solve many of IRS' problems, and, like all Administrations before it, puts its tax policy and administration staffs into public positions of having to defend the President's legislative efforts, no matter how good or bad for tax administration. Even if a new structure is not perfect - - and none is -- realignment of responsibilities often can serve as a catalyst toward doing new things and operating more efficiently.

By the same token, management by committee is almost never efficient, and the Constitutional creation of an executive branch was designed partly to avoid that problem. Donald F. Kettl, director of the Brookings Center for Public Management, reinforces this view when he asserts that private management "fails to take account the problems of conflicts of interest, accountability, and even weaker governance that such a system of part-time private board members would inevitably entail."

An Alternative Structure

Perhaps there is a better organizational structure than either of the options on the table right now. The primary goal should be to raise the level of accountability, as well as oversight, of the IRS. The goal might be achieved through some intermediate structure that still included private persons with greater stature and power than advisors or commission members, but less control than directors. Such individuals might serve more or less as "trustees" for the public and share oversight responsibility with Treasury and other parts of the Executive Branch to report on the successes and failures, the capabilities 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 IRS, both its successes and failures.

My own experience on various advisory and interagency committees leaves me skeptical so far that either side has come up with an optimal solution. As an organizer of one effort at tax reform -- including many simplification efforts that did not survive the legislative process -- I was greatly dependent upon IRS efforts and contributions. That experience taught me that tax policy and administration are necessarily intertwined at almost every single level and in almost every single provision of the tax Code. I simply don't see how those functions can be easily separated. A significant portion of IRS problems today, moreover, involve tax policy, not administration. As much as I object to the inattention given to tax administration, I would probably object even more to giving it inordinate attention relative to other tax policy goals such as equal justice and efficiency. Since a balance must be reached, it must be made by someone who has responsibility for both policy and administration -- and that person, sometimes for better and sometimes for worse, is the Secretary of the Treasury.

By the same token, I have also served on innumerable interagency committees and almost none were effective. Large ones, such as the management board suggested by Treasury, are especially unwieldy. Inevitably these groups are composed of many individuals with only scant knowledge of the subject matter. Does anyone, for instance, really think that the relatively tiny office of the Vice-President typically will contain anyone with more than superficial knowledge of the IRS. The consequence of these interagency groups is often that real policy or administrative reform becomes harder because it isn't going through the best or most knowledgeable reviewers available. Indeed, these types of committees can severely deter IRS commissioners or Secretaries of the Treasury from making necessary decisions in a prompt and efficient manner. They also will take up the very scarce time of those top tax administrative officials who need to be running the agency, and who already spend an inordinate amount of time worrying about the next public testimony or statement to several committees of Congress, the Secretary of the Treasury, the Office of Management and Budget, and others to whom they already report.

One of the best examples I know of useful outside input into government comes from the "public" trustees of Social Security. These private- sector trustees represent the public and their job is primarily to report, as peers with several cabinet officials, on the status of the trust funds of Social Security. These public trustees have been successful over the years in making sure that the assumptions, data, and information in those reports are accurate and in no small way have brought Social Security to the front of the public debate. A few years ago, the public trustees went so far as to publish their own summary because they felt that the traditional reports left too much hidden from the public.

It is not at all clear that IRS problems are due to inadequate designation of responsibility. The Commissioner is the principal officer and she reports to the Secretary of the Treasury, who reports to the President. The lines of authority are clear. The principal tensions in lines of authority are twofold. First, the Congress really serves as a board of directors who constantly change the rules for tax administration, then blames the IRS because it cannot enforce all of these laws. The second tension is with personnel rules coming out of places like the Office of Personnel Management (as well as Congress). These tensions aren't going to be solved by new boards, but they might be alleviated if outsiders can report openly on them as problems.

Despite these tensions, it's not so much responsibility that causes problems, it's accountability. When things aren't working well, when the Congress is about to put on new unenforceable provisions, when Office of Personnel Management is a major obstacle to progress, when IRS itself fails, the responsibility is not all that hard to determine. But someone has to hold the officials accountable.

In a democracy, it primarily the citizen who holds officials accountable. But to do the job well, reliable sources of information are required. It is here that the current system breaks down. The Commissioner often feels like a pawn in reporting to various authorities and, constantly on the defensive, seldom will seek out and admit internal failure. The Secretary of Treasury won't report on a Congress making impossible tasks for tax administration if the President is about to sign a bill. The President won't point to his personnel management practices as a failure unless he can blame then on the last administration. Finally, the Congress will be the last to accept accountability for IRS failure.

Is compromise possible? It seems to me that the principal goal sought by the Restructuring Commission in suggesting a board of directors was to put some accountability back into the system. Greater accountability probably does require some private sector officials who can report to the public, without being held back by the political constraints and self-interest of existing officials. But a board of directors would have substantial self-interest and would itself be defensive of its own efforts.

If we can figure out a way to give that fuller reporting responsibility to private sector reviewers -- call them trustees, advisors, or a board of something or another -- then public officials would be held more accountable. Strictly speaking, then, a board of outside directors would not be required, and new confusion of lines of authority and responsibility avoided.

Conclusion

Constructed well, I believe that a package of reforms can be assembled by this Committee to improve tax administration. Among the items that I support most are (1) a streamlining of Congressional oversight, (2) greater authority within IRS to hire necessary expertise, especially in quantitative areas, (3) regular reports by IRS, Treasury and the Joint Committee on Taxation on taxpayer complexity and enforcement difficulties, (4) the release of mock-up tax forms during the legislative process, and (5) the selection of a small (not 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.

1. Portions of this testimony are taken from Economics Perspective, a column produced for Tax Notes Magazine.