AUDIT ON IRS MAY BRING AGENCY OVERHAUL.

Byline: Frank James Chicago Tribune 

The Internal Revenue Service, which with a simple audit notice can transform even a hard-nosed tycoon into a quivering wreck, now finds itself on the hot seat.

The tax agency, never popular with many Americans, is facing the greatest scrutiny and criticism of its finances and management in its 134-year history. Besides bungling a massive, multibillion-dollar modernization effort meant to improve services to taxpayers, the IRS also can't fully account for the tax money it receives.

As a new commission considers how the 105,000-employee agency should be remade, Congress has shown its ire in a way all bureaucrats understand: cutting the budget. Congress sliced the IRS budget last year for the first time in nearly 50 years.

Some congressional Republicans are fighting among themselves over just how tough to get with the IRS - an agency which, while demanding that Americans account in detail for their finances, has been unable to do likewise.

``Believe me, the irony is not lost on anyone in this agency,'' said Anthony Musick, the Internal Revenue Service's new chief financial officer.

Much of the attention is provoked by the IRS' attempt to modernize outdated computer technology. Since 1988, the agency has spent $2.5 billion - some lawmakers say much more - to bring its procedures into the 1990s.

But eight years after the project began, the agency still processes most tax returns as it did in the 1960s, with an army of clerks who manually stamp, sort and enter information from returns into computers.

In addition to voting for an 11 percent cut, the House Appropriations Committee has refused to fork over more money for the IRS' modernization project until the agency revamps its deals with private contractors.

The committee also wants to figuratively send in the Marines - actually the Defense Department - to manage the project for the IRS.

For the federal government's fiscal year 1995, which ended in September, the IRS could not reconcile the accounting records it maintains for individual taxpayers with the $1.4 trillion it collected or the $122 billion in refunds it paid.

Musick is quick to note that the discrepancies do not mean money ``has simply disappeared or somehow been misappropriated.''

The accounting problems have so frustrated Congress that Sen. Ted Stevens, an Alaska Republican, mused at a recent hearing that tougher measures might be needed. Perhaps Congress should place an all-powerful independent body over the agency to run its affairs, he said, as it did with the dysfunctional District of Columbia government.

Congress also is rankled by what annoys taxpayers. The IRS is still far from taxpayer-friendly. By the IRS's own estimates, only 52 percent of taxpayers who called the agency for help between October and April 15 got through.

Not surprisingly, the list of mandates for the 17-member commission of lawmakers, citizens advocates and tax experts includes improving taxpayer service.

``The ultimate customer is 200 million taxpayers and if they, 10 years from now, say that the changes in law enacted as a consequence of (the commission's) effort made the system better, then I'm happy,'' said Sen. Bob Kerrey, D-Neb., who sponsored the law that created the National Commission on the Restructuring of the Internal Revenue Service.

Among other things, Kerrey's panel will examine the possibility of transforming the IRS into a quasi-governmental, private entity with profit incentives for improved performance.

All of this comes, of course, against an election year backdrop. The IRS becomes a special target during campaigns since the agency elicits the same response from Americans as dentists. Lambasting it scores political points.

Earlier this year, boosters of the single-rate, or flat, income tax said a prime benefit of its adoption would be the end of the IRS.

No fan of the flat tax, Bob Dole, the presumptive GOP nominee, nonetheless called the IRS ``intrusive'' and ``oppressive,'' citing overly aggressive collection agents during an appearance last year at the Chicago Economic Club.

``I would end the IRS as we know it,'' he said. ``I know a lot of tears will be shed but Americans will just have to live without it.''

IRS supporters say that while the IRS makes an easy target, much criticism is unfair or excessive.

``It's not a system in meltdown,'' said Fred Goldberg, former IRS head under President Bush and a member of the new commission. ``If you compare our system to other tax administration systems around the world, our system is, and is generally viewed as, the best.

``Do we have a system that works? Yeah, it's working pretty well,'' Goldberg added. ``We lose sight of that because there are problems and the inevitable screw-ups.''