"Recommendations of the National Commission on Restructuring
the International Revenue Service (IRS) with Regard to
Executive Branch Governance and
Congressional Oversight of the IRS"
Committee on Ways and Means,


September 16, 1997


Robert B. Stobaugh
Charles Edward Wilson Professor of Business Administration, Emeritus
Harvard University

Thank you for the invitation to appear here today to comment on H.R. 2292, the Internal Revenue Service Restructuring and Reform Act of 1997.

Because of my area of expertise, I will focus on the sections of the Commission's Report and the Bill that propose an Internal Revenue Service Oversight Board. The key points of these sections are:

1. The Secretary of the Treasury will continue to maintain full control over tax policy.

2. A newly created Oversight Board will have overall responsibility for overseeing the IRS.

3. The Board will guide the direction of long-term strategy, appoint and remove the IRS Commissioner, and hold IRS management accountable.

4. The Board will have the following powers:

a. Review and approve:

Mission and objectives, and standards of performance relative to either

Annual and long-range strategic plans

Selection, evaluation, and removal of the Commissioner of Internal Revenue

Budget (The budget will be sent to the Treasury and to OMB to be re-worked into the President's budget. In essence, the Board budget is an advisory budget, but copies go through Congress for information.)

a. Review items on which the Commissioner must consult with the Board (Board approval not necessary):

Operational plans, including modernization of the operations of the tax system, outsourcing and managed competition, and training and education

Commissioner's selection, evaluation, and compensation of senior managers

Plans for reorganization of IRS

1. The Board will have no involvement in specific matters in the areas of interpretation or enforcement of the tax laws and have no access to taxpayer returns.

1. The Board will consist of seven members from private life and two members from the U.S. Government--the Secretary of the Treasury (or a designee) and a representative from the National Treasury Employees Union.

2. The President, with the advice and consent of the Senate, will appoint the Board members and can remove Board members at will.

3. The Board members from private life will be high stature, nonpartisan professionals, with experience particularly relevant to a 100,000 employee organization.

4. The Board will make an annual stewardship report to the President, the Congress, and the American public.

The activities of the Oversight Board are consistent with the activities of boards of directors of large firms, including those with strategies to provide services efficiently. True, the actual authority of the Oversight Board is somewhat less than the authority of a board of directors of a large firm. In fact, the Secretary of the Treasury will have considerable authority in the functioning of the IRS Oversight Board--through being a Board member, making recommendations to the President to appoint or remove Board members, and having a veto over the budget. Still, I believe these proposed powers of the IRS Oversight Board are appropriate. I would not, however, lessen the proposed powers because such an action would have a negative effect on the ability to attract the most qualified persons as Board members and on the ability of the Board to function effectively.

Thus, I strongly support the Commission's plan for the governance of the IRS.

The Administration has an alternative plan. Under its plan, the Secretary of the Treasury will maintain full control over all aspects of the IRS, and be responsible for "oversight of the management and operation of the IRS." The Secretary of the Treasury will be assisted by an IRS Management Board, chaired by the Deputy Secretary of the Treasury and composed of other senior government officials. There also will be an IRS Advisory Board composed of 14 private-sector professionals with no real authority.

I find three major defects with the Administration Plan. As a result, it is far less desirable than the Commission's proposal.

First, history indicates that the Secretary of the Treasury will be extremely busy on other important matters. And since the IRS Advisory Board of private-sector professionals will have no real authority, the IRS Management Board (composed solely of government officials) will provide most if not all of the oversight the IRS will receive. This will muddle the accountability picture.

Second, even though the IRS has historically been part of the Treasury Department, Treasury officials have not shown great interest in providing oversight of the management and operations of the IRS. Indeed, it is my understanding that the Administration's plan for increased oversight did not surface until after the Commission began its work. This is not intended as a criticism of the Treasury Department but a reflection of the reality of the situation. It is only natural for Treasury officials to be interested in matters for which their expertise is renowned: capital markets, international affairs, economic and tax policy, and other important fiscal matters. Has there been a true change in the interests of the Treasury Department's top officials? Are they now really interested and willing to make the commitment of time and energy needed to oversee properly the IRS? Even if the answer to these questions is "yes," there remains another major defect in the Administration's plan.

Third, and perhaps the most important defect of all, members of the IRS management Board proposed by the Administration will not have the qualifications to do an outstanding job in overseeing the IRS. To support this conclusion, I will discuss the qualification of the types of people who likely will be nominees for this board: For illustration, I have considered and will discuss the experiences of Lawrence H. Summers, Donald Lubick, and Edward S. Knight.

It is clear that these are very smart men who have had outstanding professional careers with truly outstanding accomplishments. Unfortunately, none of them have had the experience that indicates they could do an outstanding job in providing oversight of the management and operation of the IRS.

First, consider the l training. One is an economist (and I might say that we at Harvard think that he is one of the best economists of his generation). The other two are lawyers. An economist's formal training tends to emphasize the prediction of economic behavior by using mathematical models based on summaries of quantities and prices. A lawyer's formal training tends to emphasize knowledge of the laws, drawing conclusions therefrom, and making logical arguments. This formal training is valuable but is not what is most needed for overseeing the management and operations of the IRS.

What about their work experience? Collectively, they have experience in university teaching, economic policy making, practicing law, tax policy making, serving as an assistant and advisor to a top elected official, and serving as General Counsel of the Department of the Treasury. Again, these experiences are not the types needed to qualify them to provide oversight of the management and operations of the IRS.

Thus neither the formal training nor the work experience of likely candidates for the IRS Management Board proposed by the Administration would qualify them to provide oversight of the management and operations of the IRS. Furthermore, a board made up of such people would not be well rounded--collectively it would not have the types of experiences necessary to provide proper oversight of the IRS. (To be sure ex-government officials often are elected to boards of directors of large companies, but they are not elected because of their experience in the managing or providing effective management of a large organization.)

To show the contrast between the type of expertise that would be represented on the Administration's proposed IRS Management Board and the type of expertise that would be available for the Commission's proposed Oversight Board, I will discuss briefly the experience of some of the persons in private life. There are people in private life with different types of experience who are qualified to serve on the IRS Oversight Board. An obvious category of people mentioned prominently in the press are active CEOs of large companies. Although such persons may be qualified, there are a sufficient number of people with other types of experience that a well qualified Board could be put together without including a single CEO.

Another logical type is an ex-CEO with extensive experience as an outside director--John G. Smale, the former CEO and Director of Proctor & Gamble, who as an outside director at General Motors, led the board in exercising its control over management. But there are many types of people who have not had any experience as a CEO but still would be highly qualified to be a member of the IRS Oversight Board. Barbara Scott Preiskel, for example, recently was honored by the National Association of Corporate Directors (a non-profit on whose Board I sit) for her outstanding work as a director of large companies as well as non-profit organizations. Professor Jay Lorsch, a colleague of mine at Harvard Business School is another example. He not only has served as a corporate director, but he has written a well known book on the subject, and he teaches practicing directors how to be more effective. I am not indicating that these three persons would be available, but I am only using them to illustrate the types of experience that are available in private life that would be relevant for the IRS Board of Directors. There are many outstanding people with similar experiences who would be pleased to serve their country by being a member of the IRS Oversight Board.

Indeed, I am confident that it will be possible to find many individuals who will meet the Commission's desirable goal of collectively bringing "to bear expertise in the following areas: (1) management of large service organizations, (2) customer service,

(3) compliance, (4) information technology, (5) organization development, and (6) the needs and concerns of taxpayers" Such expertise is much more relevant in providing oversight of the IRS than the expertise of the three government officials listed above. And, of course, the seven directors from private life will be joined on the Board by the two government employees.

In conclusion, I believe that having the seven persons from private life with relevant professional experience serve alongside the two government employees would provide a well-rounded Board--certainly a far better Board than one composed solely of government officials, even the outstanding ones illustrated above.

Three members of the Commission joined to voice a dissenting opinion to the recommendations in the Commission's report. This opinion also is reflected in a Brookings Policy Brief written by Professor Donald F. Kettl. They express concern about a conflict of interest between the directors' private interests and their responsibility on the IRS Oversight Board. Another dissenter is the New York State Bar Association. Its members are concerned about a board made up of "part-time managers with limited experience in the tax law"

I believe that these concerns are misguided. The dissenters fail to recognize (1) the difference between tax policy (Treasury Department) and oversight of strategy and management (the Board) and (2) the difference between those who exercise the oversight function (the Board) versus those who manage day-to-day operations (full-time managers). The Board's functions, listed above, clearly focus on oversight that is intended to produce efficiency and service, and are not involved with day-to-day operations. I do not believe that directors will be involved with decisions that will have a competitive effect on private-sector companies or the non-profits for which they are directors. Of course, I join others in hoping that all U.S. taxpayers receive better service at a lower cost. But this result would not be a conflict of interest.

In conclusion, I recommend adoption of the Commission's recommendation to create the IRS Oversight Board, with seven chosen from private life and two from the U.S. Government. It is very important, of course, that members from private life be chosen on the basis of merit and not on political affiliation.

Thank you again for the privilege of appearing before you. I would be pleased to answer any questions you may have.