Toward an IRS for the twenty-first century.

On March 17, 1997, Lawrence Summers, Deputy Secretary of the Treasury, addressed the Midyear Conference of Tax Executives Institute in Washington, D.C. Mr. Summers chose the occasion to present publicly for the first time the Treasury Department's five-point plan to correct problems at the Internal Revenue Service. The text of his remarks follows.

Good morning. Thank you for that kind introduction. It is an honor to be here among tax professionals to discuss the vital question of improving the way in which the IRS collects our nation's taxes.

Nobody likes to pay taxes, but, as Oliver Wendell Holmes once said, they are the price we pay for civilized society. They have been at the center of our nation's greatest debates from Revolutionary times to today. They fund our armed forces, our children's education, and our parents' health care, and they finance advances in science and technology that benefit us all.

Collecting taxes has always posed a difficult challenge. Because of the nature of the work they do, tax collectors will never win popularity contests. Recently, announcements we have made about continuing problems in computer systems have focused attention on the Internal Revenue Service. Continuing improvements in the service provided by banks, brokers, credit card companies, and other users of information technology bring even more sharply into focus the IRS's problems with customer service. At Treasury and the IRS we recognize that the IRS could do much better at providing the kind of cost-effective, high quality service that the American people deserve.

We have, I believe, reached an important turning point. Over the last year, the Treasury Department has focused intense efforts on improving the IRS. The National Commission on Restructuring the IRS, led by Senator Bob Kerrey and Congressman Rob Portman, has already made a significant contribution to the ongoing discussion. A consensus has emerged among a wide group of stakeholders, from business executives to Members of Congress to leaders of the National Treasury Employees Union. The message is clear: it is time for change.

I believe that in the next year or so we have the opportunity and the obligation to bring about the most far-reaching changes in the way the IRS is managed and in the way it does its business in decades. The IRS needs to be more responsive to taxpayers, to use technology more effectively, and to be more efficient. However you feel about structural tax reform, I suspect that most of you share my conviction that for the foreseeable future, the United States will have an income tax that taxes people based on their ability to pay. Given this, it is not possible to eliminate the IRS, and it is vital that we have an IRS that functions effectively. We must all work constructively towards this end. What we must not do is attack the IRS in order to promote other agendas.

It will be the task of management at the IRS to manage information technology better and to harness it toward the goal of better customer service. What I would like to provide today is the Treasury Department's view of how to establish a framework within which the IRS can best get its mission accomplished. I use the phrase "get its mission accomplished" deliberately to underscore the fact that the IRS of the future will have to contract out, outsource, partner with the private sector, and rely on outside vendors to a much greater extent than the IRS of the present.

Last year in testimony before Congress, Secretary Rubin and I recognized that the modernization program was, as we put it at the time, off track. We called for a sharp turn and made clear our determination to bring about change in the way the IRS uses information technology and provides customer service. And there has been change.

We have appointed a new Chief Information Officer at the IRS Art Gross. Following his review of technology projects, we canceled or collapsed 26 programs into nine.

The IRS has increased outsourcing. The percentage of contractors, as opposed to IRS staff, working on tax systems modernization has increased from 40 to 64 percent over the past two years. The number of IRS staff working on tax systems modernization has decreased from 524 to 156. And we expect to pursue a prime contractor for systems modernization and integration and to develop an outsourcing strategy for submissions processing.

The IRS has made progress in eliminating paper. This year, we estimate that 19.2 million Americans will file electronically by telephone or computer, up from 11.8 million taxpayers in 1995.

While there is a long way to go, the IRS has made progress in being able to respond to all incoming calls.

The IRS has improved customer service by beginning to change the internal culture of the IRS. Last summer, President Clinton signed bi-partisan legislation enacting the Second Taxpayer Bill of Rights, which vastly increased our number of taxpayer advocates. After interviewing our head Taxpayer Advocate on NBC'S Today show, Katie Couric proclaimed that Americans have a friend at the IRS.

Steps such as these are obviously only the beginning. Everyone involved in this process at Treasury, the IRS, Congress, and the union has recognized that the problems at the IRS have developed over decades and will not be solved overnight or even over a couple of filing seasons. Only if we confront problems directly -- from protecting taxpayers' privacy to using technology to making sure the phones are answered -- will we build an IRS for the 21st century.

The Five Point Plan

As we chart our new course, we will focus on five critical areas -- oversight, flexibility, budgeting, tax simplification, and leadership.

Let me address each of these in turn.

I. Institutionalize Oversight

First, we at the Treasury Department have strengthened and made proactive our oversight of the IRS, and we take responsibility for reforming the institution. We will devote the necessary resources, both managerial and financial, to do the job.

Oversight of the IRS by the Treasury department is the best way to ensure the IRS'S accountability to the American people and to coordinate tax collection with tax policy. Through the Treasury, the IRS is able to bring concerns about the difficulty of administering tax changes to senior Administration officials; I raise these concerns frequently in tax policy discussions with policymakers in the White House and throughout the Administration. In addition, the IRS is able to draw upon Treasury resources for critical projects, as demonstrated by our current cooperation on the Year 2000 conversion.

Going forward, we will take two concrete steps to institutionalize oversight of the IRS. Over the last year, we have set up a Modernization Management Board comprised of senior officials from Treasury, the IRS, and other parts of the Administration. The Modernization Management Board is directed at overseeing the information technology programs and functions in many ways like a corporate board, approving major strategic decisions and investments. Based on its success, we will ask the President to issue an Executive Directive that will make this board permanent and extend its mandate to cover the broad range of strategic issues facing the IRS.

We will also establish a blue ribbon Advisory Committee, reporting directly to the Secretary of the Treasury, to bring private sector expertise to bear on the management of the IRS. This committee, composed of senior business executives, experts in information technology, small business advocates, tax professionals, and others, will meet regularly to make recommendations on major strategic decisions facing the IRS.

II. Increase Flexibility

Second, we will enhance and strengthen the IRS's ability to manage its operations. The IRS faces a multitude of restrictions -- restrictions that would be unacceptable in the private sector -- that hamper its ability to provide efficient service. For example:

The Commissioner should not have to wait four months to hire the management team he or she needs.

The IRS should be able to attract and retain the highest quality information technology specialists and other professionals.

The IRS should not face rules that make restructuring the workforce needlessly difficult for employees and the employer.

To strengthen the Commissioner's ability to effect change, we at Treasury will work with Congress, the Commission, and the union to improve flexibility: to bring on people with specific skills more quickly ... to pay them more competitively ... and to give them the training they need. Many of these changes will require legislation, and we expect to propose this legislation to Congress later this year.

In return, if legislation is passed, employees of the IRS, as in any well-managed business, will be held accountable for results.

Let me add that in taking these steps, we are committed to maintaining the independence and freedom of the IRS from political influence.

And a crucial part of any strategy for improving flexibility has to be outsourcing. Just as private industry has found that outsourcing enables an organization to focus on what it does best and to rely on others for what they do better, so government can benefit from outsourcing as well. Inevitably, resources hired from private companies will be more flexible than those that become part of the IRS's overhead. Where it is cost effective, but only where it is cost effective, we will pursue outsourcing strategies vigorously.

III. Reform Budgeting Procedures

Third, we will work with Congress to help the IRS get the stable and predictable funding it needs to operate more effectively.

Multi-year budgeting for capital projects is already in use in other federal agencies. For example, the Department of Defense uses multi-year funding for many procurement projects, and the Department of Housing and Urban Development uses this funding method for housing construction.

Today, the IRS operates in a low-trust, short-tether budgeting environment. This makes rational planning for capital projects such as information technology very difficult. As we re-establish trust and demonstrate that the IRS is investing resources wisely and prudently, we are examining longer term approaches to budgeting. This year we have proposed funding for the next two years for systems modernization, funding which can be used when needed. As evidence that we recognize our responsibility to Congress and the American people, we have committed not to spend these funds until and unless we demonstrate the clear benefits of our funding proposals.

Over time, the Administration and Congress will have to give careful consideration to the appropriate size of the IRS budget. The budget has declined by more than nine percent in real terms over the last two years. On the one hand, efficiency improvements are surely possible through information technology, which should enable us to reduce the budget. On the other hand, more customer service requires more people serving customers, and experience demonstrates that investments in improving compliance have pay-offs in extra revenues that far exceed their costs.

IV. Simplify Taxes

Fourth, we will work to simplify the tax code.

There is no double that we can do a better job of administering the tax laws than we have. But our job, and yours, would be far easier if we, working with Congress, were able to streamline our 9,451-page tax code.

Our administration has already taken several steps toward simplification. This audience knows first hand how our "check-the-box" regulations have simplified tax planning and compliance, particularly for small business. The President's current proposal to exclude up to $500,000 of capital gains from the sale of a home will dramatically simplify record keeping for more than 60 million families. The President's budget also states our intention to introduce new tax simplification legislation in this year's budget cycle.

There are some who, based on the complexity of the tax code and on problems at the IRS, argue for extreme measures such as a flat tax. I believe that such proposals would not only unfairly increase the tax burden on the middle class and hamper economic growth, they would not simplify the administration of the tax code.

V. Leadership

Ultimately, every business executive knows that leadership is crucial to performance. Leadership is particularly important when there is a need to change the culture of the organization.

Over, the last four years, Commissioner Richardson has guided the IRS through difficult times and has made progress in many areas. Now, as we move forward, we are committed to appointing a new Commissioner who has experience with the challenges of organizational change, customer service improvement, and information technology management that the IRS faces. While technical excellence in tax matters must be maintained, the greatest challenges facing the IRS in the coming years are managerial.

We will charge the new Commissioner with developing a detailed strategic plan for change. And we will work to give the new Commissioner the flexibility and tools he or she needs to effect change and to recruit a first-rate management team.

Conclusion

These steps -- institutionalizing oversight, increasing flexibility, obtaining predictable funding, simplifying taxes, and introducing new leadership -- provide a framework for the kind of tax administration system that American taxpayers deserve. Of course, there are other critical issues that we must address. But I believe that progress on these five fronts will give the IRS a solid foundation on which we can build.

In the coming months, the nation will engage in a discussion of how to reform and renew the IRS. It is essential that we proceed constructively. The problems may lie in many places, but the 103,617 dedicated people of the IRS perform a difficult and unpopular job for our country. It does not serve our country well to attack their professionalism or integrity.

As we evaluate and improve the way we administer our taxes, you, as tax professionals, have an important role to play. We at Treasury and the IRS want and need your suggestions and help. I look forward to working closely with Congress, the Commission, and members of the public such as yourselves to set the Internal Revenue Service on a new course for change as we enter the 21st Century.