Proposed legislation to restructure the Internal Revenue Service: September 17, 1997.

On September 17, 1997, TEI President Paul Cherecwich, Jr., testified before the House Committee on Ways and Means concerning proposals to restructure the Internal Revenue Service. The September 17 hearing focused on issues of Executive Branch governance and congressional oversight of the tax agency. Mr. Cherecwich's written statement is set forth below. The Institute's previous statements on restructuring the IRS are set forth in the November-December 1996 and July-August 1997 issues of The Tax Executive. For additional coverage of this issue, please see Mr. Cherecwich's "President's Corner" column.

Good morning. I am Paul Cherecwich, Jr., Vice President-Taxes and Tax Counsel for Thiokol Corporation in Ogden, Utah. I appear before you today as the president of Tax Executives Institute, the largest group of in-house tax professionals in North America. The Institute is pleased to submit these comments on proposals to restructure the Internal Revenue Service -- H.R. 2292 and S. 1087, which have been styled The IRS Restructuring and Reform Act of 1997 and embody the findings and recommendations of the National Commission on Restructuring the Internal Revenue Service, as well as the Clinton Administration's own proposals to enhance the management and oversight of the IRS, which have been set forth in H.R. 2427, The IRS Improvement Act.

I. Background

Tax Executives Institute is the professional association of corporate tax executives. Our 5,000 members are accountants, attorneys, and other business professionals who work for the largest 2,700 companies in North America; they are responsible for conducting the tax affairs of their companies and of ensuring their compliance with the tax laws. Hence, TEI members deal with the tax laws and with the Internal Revenue Service on almost a daily a basis. (Most of the companies represented by our members are part of the IRS's Coordinated Examination Program, pursuant to which they are audited on an ongoing basis.) They also have day-to-day dealings with senior corporate management and corporate boards of directors, and accordingly, know firsthand the strengths and weaknesses of the corporate governance model. TEI believes that the professional training and experience of our members enable the Institute to bring an important, and balanced, perspective to the issues involved in efforts to restructure and reform the Internal Revenue Service.

II. Setting the Tone for a Constructive Debate

At the outset, TEI commends the members of the National Commission on Restructuring the Internal Revenue Service and the Commission's staff for their efforts in identifying issues of concern, seeking out the views of interested parties, and crafting proposed solutions. We also commend the members of Congress who have cosponsored H.R. 2292 and S. 1087, which contain an integrated set of proposals to improve the management and administration of the IRS. Even though TEI disagrees with certain provisions of these bills, the Institute is convinced that the proposed legislation holds great promise. Finally, we commend the members of the Clinton Administration (and the Treasury Department in particular), the sponsors of H.R. 2427, and commentators in the private sector, who have offered constructive comments on the Commission's proposals. We pledge our support for efforts to refine the proposals and to enact a meaningful set of reforms.

As the legislative process moves forward, TEI believes it is imperative that all parties -- Congress, the Administration, members of the Commission, and stakeholders in the private sector -- acknowledge that consensus has already been attained on a wide variety of issues. More fundamentally, except in a few, isolated quarters, everyone agrees that we cannot stay where we are: The need to effect significant changes at and in respect of the Internal Revenue Service in order to bring greater continuity, accountability, and expertise to the management and oversight of the IRS cannot be denied.

Change, however, should not be embraced merely for its own sake. Moreover, care must be exercised to ensure that whatever changes are adopted, especially in the management structure of the IRS, do not impede the agency's ability to do its job -- collecting the revenue necessary to run the government in the manner that Congress decides and the American people demand -- today and into the future. TEI recognizes that there are sharply divergent views on how best to provide effective oversight of the IRS, and we agree it would be unwise to minimize or paper-over the differences in philosophy that animate the ongoing debate. We nevertheless believe that it is time to tone down the rhetoric and focus on the substance of the various proposals. Hence, we urge the advocates of wholesale change, as well as those supporters of the current system, to check their contempt for one another's views at the door. The key is not -- or should not be -- "whose proposal wins" but rather which proposal (or combination of proposals) holds the most promise for improving the management of the IRS and restoring rationality to the critically important roles of Administration and congressional oversight. TEI remains confident that common ground can, and will, be found.

TEI is especially pleased that nearly all parties recognize that there is no single solution to what ails the IRS. What is needed is a balanced, integrated approach. One change -- say, the appointment of a board of directors -- will not transform the agency unless it is effectively coupled with others, including coordinated and streamlined oversight, stronger leadership by the Commissioner and senior IRS management, an increased focus on customer service, and the assurance of balanced, effective performance measures. Indeed, one of TEI's primary concerns is that the establishment of an oversight board (whatever its composition) not become merely the insertion of yet another layer of bureaucracy into the IRS; by itself, such a board will not make the agency more responsive and may even impede the government's ability to improve the development and administration of our tax laws. In tandem with other changes, however, enhanced Executive Branch oversight of the IRS can increase management accountability and contribute to a tax system that properly focuses on customer service without minimizing the importance of ensuring taxpayer compliance.

Once again, TEI submits that the focus of these hearings should be on the future -- on clearly defining expectations, on streamlining and strengthening oversight of the agency, and on providing the IRS with sufficient (and stable) budget resources to modernize its systems, to serve the public, and to ensure compliance with the tax laws. To the extent that we have a criticism of the Restructuring Commission's report (and the reaction it has provoked by members of Congress and other commentators), it is that its language sometimes "plays to the gallery" and is unnecessarily critical of the Internal Revenue Service and its personnel. To be sure, the management of the IRS can be improved, but there is plenty of blame to go around. For example, it is Congress that bears a full measure of responsibility for the unbelievable complexity of the tax laws and the burdens they impose on taxpayers and the IRS alike. Unfounded, misplaced, and exaggerated attacks on the agency may have surface appeal and score well in public opinion polls, but in our view, they are not constructive; they are part of the problem, not the solution. The key is to be forward-thinking and to give the American people the tax system they deserve.

III. The Emerging Consensus: Necessary Steps to Improving Tax Administration in the 21st Century

H.R. 2292 and its Senate counterpart (S. 1087) are intended to implement the findings and recommendations of the National Commission on Restructuring the Internal Revenue Service. H.R. 2427, which was introduced on September 8, represents the Clinton Administration's own proposals for improving the management and administration of the IRS. In many respects, the competing proposals for improving the day-to-day management and operation are similar. Indeed, consensus appears to exist on many, if not most, of the recommendations to increase the continuity, accountability, and expertise of IRS senior management. The most significant disagreement lies in the area of Executive Branch oversight, where the Restructuring Commission has proposed the establishment of an independent board of directors (whose members would overwhelmingly come from the private sector) and the Clinton Administration has issued Executive Order No. 13051 (62 Fed. Reg. 4607) establishing an IRS management board (whose members would be drawn exclusively from the Treasury Department and other federal departments). (H.R. 2427 would codify the Administration's management board proposal, as well as its intention to establish a private-sector advisory board.) After setting forth our views on the principal area of disagreement -- ensuring effective oversight of the IRS -- TEI -- offers its comments on other issues addressed in the legislative proposals.

A. Ensuring Effective Oversight of the Internal, Revenue Service

As previously explained, Tax Executives Institute supports the Restructuring Commission's efforts to bring continuity, accountability, and expertise to the management and oversight of the Internal Revenue Service. To this end, the Institute supports the proposals to institutionalize enhanced Executive Branch oversight of the IRS. Specifically, TEI recommends the establishment of an oversight board, whose members are appointed by the President and charged with responsibility for overseeing the administration of the internal revenue laws, not the establishment of tax policy.(1) We note that both the Restructuring Commission and the Clinton Administration have offered proposals to establish oversight bodies, and although their proposals differ significantly in terms of the board's composition and duties, we view their agreement that some type of board is required as a positive. We also believe that the establishment of a board by itself will not solve the IRS's problems. Indeed, unless care is taken in establishing the board, it may become just another layer in the bureaucracy, impairing the IRS's ability to manage its affairs rather than facilitating it.

1. Composition of the Oversight Board. TEI believes that the boards proposed by the Administration and the Restructuring Commission both suffer from a similar flaw: Their composition is not balanced. Hence, H.R. 2292 and S. 1087 call for the establishment of a nine-member board with all but one of the members (the Secretary or Deputy Secretary of the Treasury) coming from the private sector,(2) whereas the Administration's board would consist of at least 20 Executive Branch employees. In our view, the composition of the oversight board should be reasonably balanced between private-sector and government representatives and ideally have fewer than a dozen members. Having representatives of both government and the private sector on the board would afford the IRS the benefit of private-sector expertise in a large number of areas (which would be lacking on a government-only board) while recognizing the unique mission of the IRS as a tax-collection agency. Similarly, a board of limited size would likely operate more efficiently than a bloated board.

TEI believes that the Secretary (or Deputy Secretary) of the Treasury and the Commissioner of Internal Revenue should both serve on the oversight board: the Secretary (or Deputy Secretary) because he or she is ultimately accountable for the proper oversight of the IRS, and the Commissioner because he or she effectively serves as Chief Executive Officer of the agency. Beyond these two individuals, however, members should be selected solely on the basis of their expertise in areas such as general management, finance, technology, and personnel. In other words, no particular group should be guaranteed a position on the board. We also believe that in-depth knowledge of the tax laws could beneficially be among the skill sets of one or more board members.

2. Duties of the Oversight Board. The principal function of the oversight board should be to oversee the Internal Revenue Service in the administration, management, conduct, direction, and supervision of the execution and application of the internal revenue laws, related statutes, and tax conventions to which the United States is a party. The board should be involved in reviewing the IRS's strategic plans, the Commissioner's plans for reorganizing the IRS, and the agency's plans pertaining to modernization, training and education, and other operational functions. The board should also ensure that the IRS's budget supports the agency's annual and long-range strategic plans, and should also ensure appropriate financial audits of the IRS.

TEI agrees with the Restructuring Commission that the board should have no responsibilities with respect to (i) the development and formulation of federal tax policy relating to existing or proposed internal revenue laws, related statutes, and tax conventions; and (ii) specific law enforcement activities of the IRS, including compliance activities such as criminal investigation, examination, and collection. We note, however, that the dividing line between policy and administration is not always easy to discern and maintain. (For example, budgetary decisions regarding research or compliance programs could well affect how the tax law is interpreted or applied, thereby affecting policy.) Hence, we agree that the presence of private-sector representatives on the oversight board raises conflict-of-interest issues of real moment. While these issues cannot be minimized or ignored, they should not be overstated. Institutional protections can and should be implemented Oust as they have been in the private sector where the same individuals serve, for example, on multiple boards of directors). Moreover, it should be remembered that, with or without a board, it is the Secretary of the Treasury who will remain ultimately responsible and accountable for management of the IRS.

TEI disagrees with the Restructuring Commission, however, in respect of the appointment of the Commissioner of Internal Revenue. TEI strongly believes that the Commissioner should continue to be appointed by the President, with the advice and consent of the Senate. The President should also retain the authority to dismiss the Commissioner, who will be responsible for all functions of the IRS, including those beyond the board's areas of responsibility (such as specific enforcement and customer service functions). We nevertheless believe that the board should play an advisory role in the selection and retention of the Commissioner.

In summary, in TEI's view the board should serve in an oversight rather than a decision-making capacity, more in the nature of trustees of the agency rather than managers. Hence, although we believe the IRS can learn much from the private sector, we recognize that the corporate governance model is not perfect. The board can help ensure that the IRS is held accountable, but given the IRS's critical governmental function, it is not the board to which the agency can or should answer: It is to the Administration and Congress. That said, we believe the establishment of a reasonably balanced board would benefit tax administration.

B. Other Measures to Improve Tax Administration

TEI believes that there is an emerging consensus on a number of other issues raised by the Restructuring Commission, and we urge Congress to move responsibly to enact legislation addressing the following subjects.

1. Continuity of Management. TEI agrees that the Commissioner of Internal Revenue should be appointed for a five-year term, and that the Commissioner should be given greater flexibility in hiring, firing, and salary decisions. The goals of continuity and accountability at the top of the agency will be advanced by appointing the Commissioner for a fixed term.(3)

Equally important, however, are proposals to accord the Commissioner greater discretion in recruiting, rewarding, and retaining the agency's top managers. Indeed, continuity among the IRS's senior managers -- assuming they are qualified to do their jobs -- is essential if the IRS is to operate efficiently and regain the trust of Congress and the American people. Thus, we believe care must be exercised to balance the twin goals of flexibility and stability; in our view, the last thing the IRS needs is massive turnover in senior management ranks whenever a new Commissioner is appointed.

2. Stability of Funding. TEI agrees that the Internal Revenue Service should receive stable funding. If the leaders of the IRS are to undertake the proper planning to rebuild the agency's credibility and effectiveness, the agency must be assured that programs initiated and funded in one year in furtherance of the IRS's strategic plan are not eviscerated in the next.

To be sure, the nature of government is such that Congress will retain authority to set the IRS's budget and to readjust priorities as times change and developments warrant. At the same time, more can be done to stabilize the IRS's operational budget and insulate the agency from the political winds. Hence, TEI supports the Restructuring Commission's recommendation that the IRS be afforded certainty in its operational budget by providing that funding for tax law enforcement and processing, assistance, and management will be maintained at current levels for the next three years; we are also supportive of the Commission's recommendations concerning Congress's increasing spending limits for the IRS in appropriate circumstances. Finally, although recognizing that Congress remains ultimately responsible to the American people for how the IRS is managed (and how it spends appropriated funds), we believe the overall management of the agency would benefit from the implementation of multiyear budgets.

3. Streamlining of Congressional Oversight. TEI agrees that congressional oversight of the agency should be streamlined. Reforming the Internal Revenue Service requires more than the IRS -- and the Executive Branch officials who oversee it -- getting its own house in order. With due respect, it requires Congress to get its house (or houses) in order. The Restructuring Commission noted that currently there are seven congressional committees and subcommittees that engage in oversight activities and, further, that the U.S. General Accounting Office not only undertakes projects assigned to it by one of those bodies but also "self-initiates" numerous projects each year. And each of those projects -- regardless of whether they lead to hearings or legislation -- consumes considerable IRS resources and may send mixed signals to the agency and the public about the proper direction for tax administration.

While responsible oversight is absolutely essential, TEI agrees that steps can be taken to streamline congressional oversight activities and to make it at once less reactive, more constructive, and more integrated. In our view, coordinated, as opposed to reactive, sometimes disjointed, oversight by Congress must be part of the drive toward continuity and accountability. Thus, TEI believes that the Restructuring Commission's recommendations that the Joint Committee on Taxation coordinate GAO studies and that joint hearings be held annually to review the IRS's strategic plans and budget merit careful consideration. In our view, the involvement of the oversight board in reviewing the IRS strategic plans and budget should imbue them with greater credibility and contribute to a more positive reception of the agency by Congress.(4)

Finally, we recommend that Congress carefully weigh the potential benefits of requiring the IRS (or its constituent offices or advisory groups) to complete numerous studies (as H.R. 2292 and S. 1087 would do) and to make periodic reports on various specific subjects (such as electronic filing). Congress's role should be to provide oversight and ratify the IRS's strategic decisions, not become involved in managing day-to-day operations. In our view, the oversight board's involvement in the IRS's strategic planning and budget processes should help restore congressional confidence in the agency, thereby facilitating coordinated and streamlined legislative oversight.

4. Strengthening Taxpayer Rights. TEI agrees that further steps should be taken to preserve and strengthen taxpayer rights. Thus, we support the Restructuring Commission's goal of ensuring that "taxpayers are treated fairly and impartially by the IRS, are able to seek redress or review of IRS actions by the courts, and are able to resolve conflicts creatively and expeditiously with IRS cooperation."

TEI is especially supportive of proposals to expand the Internal Revenue Code's current provisions relating to awarding taxpayer costs where the IRS's position is not substantially justified and to rectify the harsh inequities that flow from the Code's imposing a higher interest rate on tax deficiencies than it pays on tax refunds. As to the former issue, we urge Congress to carefully weigh proposals to eliminate the "net worth" limitations on awarding costs and attorneys fees (which currently operate to deny most corporations any relief even where the IRS's position is wholly unsupportable). We also commend the Restructuring Commission for proposing to eliminate the so-called interest rate differential which penalizes taxpayers who simultaneously owe and are owed funds by the IRS. We note with concern, however, that H.R. 2292 and S. 1087 would effect this change by periodically adjusting the single rate to be charged on underpayments and overpayments in order to ensure that the change is revenue neutral. TEI respectfully submits that the Code's interest provisions should be designed without regard to their transitory (and possibly ever variable) revenue effect; instead, they should be reformed to generate (for either taxpayers or the government) no more and no less than an appropriate charge for the use or forbearance of money.(5)

5. Encouraging Electronic Filing. TEI agrees that the IRS must develop a strategic marketing plan to make paperless filing the preferred and most convenient means of filing for taxpayers. Although we have some qualms about deferring the filing deadline for electronically filed returns (on the ground such an action might be viewed as encouraging procrastination more so than electronic filing), we believe all options should be fully explored and that appropriate incentives, for taxpayers as well as return preparers, should be considered. We also strongly believe that electronic filing must become a viable option for corporate taxpayers as well. To this end, TEI pledges its continuing support to the IRS in streamlining Form 1120 and developing corporate electronic filing systems.

6. Ensuring a Competent, Qualified, Well-Equipped, and Respectful Workforce. TEI agrees that the IRS must address training, operations, technology, culture, and taxpayer education if the agency is to operate more efficiently and with greater customer focus. To this end, TEI believes it is critical that the IRS refine its performance measures. The IRS must also update its technology and treat taxpayer information as a strategic asset to improve both its customer service and compliance functions. Hence, although customer service is and must remain a key, the IRS's compliance and enforcement efforts should not be given short-shrift. In other words, the fundamental difference between government and business cannot be lost. Hence, TEI submits that if one of the first principles of tax administration is customer service, another surely is compliance and enforcement. That said, it is clear that the IRS can improve. It is clear that taxpayers should be treated with respect and efficiency by a workforce that is competent, courteous, and accountable.

7. Simplifying the Tax Law. TEI agrees that simplification of the tax law is necessary to reduce taxpayer burden and facilitate improved tax administration. Indeed, we believe that the complexity of current law is a primary impediment to the effective operation of the tax system and the efficient management of the Internal Revenue Service. (If the law is unadministrable, how can the IRS be expected to administer it in an efficient manner?) Thus, TEI commends the Restructuring Commission's proposals to require Congress to focus more finely on the complexity of tax law proposals. We have long supported proposals such as those contained in H.R. 2292 and S. 1087 to require the preparation of a "tax complexity analysis" in respect of proposed tax law changes, to enable members of Congress to raise a point of order where such an analysis is not prepared, and to have representatives of the IRS testify on the administrability of proposed changes. While no single change will operate as a panacea, taken collectively the proposals may effect meaningful incremental changes. Hence, we support proposals to devote part of the legislative process to exploring the relative complexity of a proposal and whether less complex alternatives exist. And often the IRS will be the best suited entity for addressing complexity (for example, by designing a prototype form). At the same time, we believe it would be imprudent to divorce totally the IRS's role in evaluating the administrability of legislation from the Treasury's tax policy responsibilities; it should be the Treasury that is ultimately responsible -- and accountable -- for determining the Administration's position on proposed legislation.

In addition, we would be less than candid if we did not express some pessimism over the effect of such changes (even if they were enacted), based in large measure on the undeniable complexity visited on practically all taxpayers by the recently enacted Taxpayer Relief Act of 1997. In our view, the recent tax bill takes complexity to new heights. As Winston Churchill might have said, never have so many provisions inflicted so much complexity for so (relatively) few tax benefits. We respectfully submit that the availability of tax law complexity analysis, with or without a complementary point-of-order mechanism, would not have solved the problem: the troublesome provisions were enacted not because their mind-numbing complexity was unknown but because it was ignored. TEI well appreciates that other policy objectives may sometimes outweigh the goal of tax law simplification, but until the Administration and members of Congress (and, concededly, private-sector interest groups) go beyond paying lip service to simplification and exercise self-discipline in championing complex measures, the goal of tax law simplification will remain illusive.

IV. Conclusion

Tax Executives Institute appreciates this opportunity to provide its comments on proposals to restructure the Internal Revenue Service. I should be pleased to respond to any questions you may have.

(1) TEI employs the term "oversight board" advisedly. We share the concern expressed by some that there are far too many governmental "advisory boards" and that far too few of them are constructive. We thus believe that using the term "advisory board" might signal too much a business-as-usual approach toward the IRS, and that is clearly not what is needed. At the same time, we believe that the key to improving the IRS is enabling it to manage itself, by providing strategic direction, managerial flexibility, stable funding, and finely honed oversight from both the Executive Branch and Congress. Thus, we eschew the term "management board" because it may bespeak too bureaucratic an approach to an issue that is multidimensional and the term "board of directors" because in our view it does not adequately reflect the fundamental differences between government agencies and profit-oriented enterprises. In the final analysis, what the body is called is irrelevant; what it does is critical.

(2) One member of the Restructuring Commission's board would be a representative of an organization representing a substantial number of IRS employees; hence, although representing the IRS workforce, the member would not be a government employee.

(3) As previously discussed, TEI believes that the Commissioner should continue to be appointed by the President with the advice and consent of the Senate.

(4) Under H.R. 2292 and S. 1087, the board is to review and approve the IRS's budget, which would then be submitted to the Secretary of the Treasury; the legislation further provides that the Administration is to provide a copy of that board-approved budget, without revision, to Congress at the same time it submits the President's annual budget request for the IRS. Although TEI agrees that the IRS can benefit from having an oversight board involved in the development and review of its budget, we have qualms about requiring the submission of the board-approved budget directly to Congress. In the final analysis, accountability for the IRS -- and its budget -- properly rests with the Treasury Department and the President, and we are concerned that the proposed legislation might blur the lines of accountability or heighten the possibility of conflict between the board and the Administration.

(5) In addition to our policy concerns about the interest equalization proposal in H.R. 2292 and S. 1087, we are concerned about the administrative burdens spawned by frequent interest rate adjustments and, more fundamentally, the various parameters that might be taken into account by the Secretary in determining the appropriate interest rate to ensure revenue neutrality and the effect any of those parameters might have on the interest rate swing from one period to another.