NEW YORK STATE SOCIETY

OF CERTIFIED PUBLIC ACCOUNTANTS

 

New York State Society of

Certified Public Accountants

Testimony Before the

National Commission To Restructure the Internal Revenue Service

April 17, 1997

 

 

Representing the Society are

Michael J. Knight, CPA
and
David L. Evans, CPA

NYSSCPA
1996-1997 Tax Division Executive Committee

David L. Evans, Chair

Anthony F. Dannible

Franklin H. Federmann

Joseph L. Ferst

Howard S. Fleischman

Steven S. Goodman

John O. Hatab

Nadine Gordon Lee

Edward A. Slott

Harold F. Soshnick

Warren Weinstock

NYSSCPA
IRS Restructuring Task Force

Michael J. Knight, Chair

Robert S. Fink

Robert L. Goldstein

Arthur S. Hoffman

Mark R. Imowitz

Janice M. Johnson

Peter J. Medina

Eugene M. Nadel

Alan E. Weiner

Warren Weinstock

 

NYSSCPA
Director-Tax Policy
James A. Woehlke

 

Table of Contents

Introduction

Root Causes
Structural Dysfunction
IRS Self-Image
IRS Siege Mentality
Plenty of "Oversight" — Lack of Accountability
Hiring and Training Needs
Some Closing Thoughts on Root Causes

Programmatic Symptoms
Information Technology Mismanagement
Education and Training of Personnel
Taxpayer Advocacy
Peripheral Tax-System Issues Affecting the IRS

Paths to Resolution
Management and Structure
Structural Dysfunction
IRS Self-Image
IRS Siege Mentality
Accountability
Education and Training
Taxpayer Advocacy
Peripheral Tax System Issues

 

 

Introduction

 

The New York State Society of Certified Public Accountants (hereinafter "Society" or NYSSCPA"), with over 32,000 members is the nation’s largest state CPA professional association. Celebrating its centennial this year, the Society is also among the oldest professional associations representing CPAs. Our members practice locally, nationally, and internationally as the primary tax advisors to millions of individual and business taxpayers. It is from this unique vantage point that we appear here today.

Before proceeding, we should note that we have long been supportive of the basic mission of the Internal Revenue Service. We are not among those calling for abolishing or substantially weakening its role. Though we have often criticized the Service for what we believe to be compelling reasons, we believe that the IRS plays a vital role in our self-assessment tax system, the chief beneficiary of which is our "civil society," to paraphrase Justice Holmes.

However, we also believe that over a long period, the public’s faith in the Service’s ability to carry out its mission has been shaken. More than almost any other agency, the IRS must instill broad public confidence and respect. It must be viewed as effective and impartial. It should be feared only by those who would illegally evade taxes and should otherwise be a supportive presence to the vast majority of taxpayers and their professional advisors, seeking to comply with a tax system rooted in a law of unparalleled complexity and ambiguity.

As participants in the trenches, we have seen first-hand examples of IRS inability to carry out its mission. We have also seen other examples where the Service is a model of government effectiveness. From this perspective, we will comment on both.

We applaud Congress for establishing this much needed Commission and herewith offer our experience and expertise to the Commission to help create an IRS that instills the utmost public confidence and respect.

 

Root Causes

We studied much of the testimony you received and compared it with our base of experience. Much of what you have heard targets specific programs and practices of the IRS. We attempted to reach beyond what is wrong with specific programs in an attempt to distill the issues that are at the root of the IRS’s decline in public confidence. These root causes are

After explaining why we believe these are root causes, we illustrate how they are reflected in some of the programs the Commission has studied.

 

Structural Dysfunction

At the time the U.S. tax law was revised in 1954, the IRS structure was revamped. To lessen the harm caused by partisan commissioners, the decentralized regionalized commissioner structure was established.

As in any large enterprise, however, the proper balance between centralization and decentralization is a delicate one. We believe the decentralized management system has created systemic problems. Regions were created by the decentralization, where national coordination of important functions, including employee training, tax administration, and taxpayer education is impossible to achieve.

This structural dysfunction can be seen in several specific areas. We believe that one recent case illustrates the "disconnect" between national level policy setters and regional management. Regionally produced IRS pronouncements, including Market Segmentation Specialization Program [MSSP] papers and Market Segment Understandings [MSUs], have been issued with strident commentary regarding worker classification, while at the same time new training methods and legislation at a national level are implemented expressing conciliatory and taxpayer-friendly approaches to the worker classification issue.

Structural dysfunction exemplified by the lack of coordination between policies emanating from the National Office and independent field initiatives are a frequent lament of CPAs. For example, the national 1997 IRS audit plan for worker classification is designed to target (1) egregious misclassification and (2) instances of nonfiling of information returns. However, a new program has arisen outside of the National Office whereby whole life insurance salespeople are required to include in taxable income fringe benefits paid to them as employees. These salespeople, though employees for fringe-benefit and income-tax purposes, are statutorily allowed to file as "Schedule C taxpayers" — sole proprietors — for employment-tax purposes. Not only is it statutorily incorrect for the IRS to require inclusion of these taxpayers’ fringe benefits in income but it flies in the face of the previously announced 1997 audit plan suspending all worker classification issues except for the two mentioned.

It is time to review decentralization — and the structural dysfunction it created. Ongoing efforts should be geared to improving communication and coordination between the National Office and the Regions.

 

IRS Self-Image

Another root cause is the IRS’s self image as a law enforcement agency. When the Deputy Chief, Taxpayer Service — note taxpayer service in the title — testified to this Commission that the IRS is in the "law enforcement business . . . combating financial crime" he graphically illustrated that the IRS misunderstands its primary mission. It is the collector of the government’s revenue. In that capacity, it should recognize and act on the reality that the vast majority of taxpayers are honestly, voluntarily attempting to comply with the tax laws. Commissioner Richardson identified the IRS Mission as follows:

The purpose of the Internal Revenue Service is to collect the proper amount of tax revenue at the least cost; serve the public by continually improving the quality of our products and services; and perform in a manner warranting the highest degree of public confidence in our integrity, efficiency and fairness.

 

We agree that this is an excellent statement of the IRS’s proper mission. Yet we are convinced that individual IRS employees’ self-image as pseudo-G men impedes their ability to achieve the customer service objectives outlined by Commissioner Richardson. The Problems Resolution area offers an example of how different attitudes by IRS personnel and taxpayers emerge when the customer-service model is used.

We are not blind to the fact that an important function of the IRS as currently designed is the collection of information for use in civil and criminal trials against taxpayers. This is clearly a law enforcement function. But it is not the dominant function and should not dominate the enterprise’s culture. To keep this from happening, the Commission should consider measures to build a thicker wall between the IRS’s law enforcement function and other functions or sever the law enforcement function entirely.

 

IRS Siege Mentality

This misconception regarding the primacy of the IRS’s law enforcement role directly leads to our third root issue: the IRS’s siege mentality — its overly insular nature. When the Deputy Assistant Secretary (Departmental Finance and Management) testified,

As a law enforcement agency at heart, the IRS has been protected from improper external influence on how it does its job. While such insulation is appropriate, the downside is that it can foster an inwardly focused culture. Such an environment all too easily becomes resistant to change and too dependent on its own internal resources to accomplish whatever it takes on, even major systems implementation and technology-based process change, which lie outside its domain of expertise. [Emphasis added.]

 

The Deputy Assistant Secretary believes insulation is "appropriate" because he perceives the Service to be in a law-enforcement business not the taxpayer-service business. This perception must change to cure the IRS’ siege mentality.

 

Plenty of "Oversight" — Lack of Accountability

Our fourth root cause is lack of accountability, not merely for financial but also policy matters. In her testimony, Commissioner Richardson correctly identifies thirteen groups with IRS oversight responsibilities, including six Congressional committees and subcommittees, the Department of the Treasury, the Office of Management and Budget, and the General Accounting Office [GAO]. All of this oversight, however, is ineffective, as exemplified by the Tax Systems Modernization (TSM) debacle. Two examples of lack of accountability in policy areas can be found in the ill-conceived economic reality program and in the administration of the worker classification program. As we will later suggest, an independent body dedicated to IRS oversight needs to be created.

 

Hiring and Training Needs

A fifth cause is rooted in inadequate and sometimes inappropriate hiring and training policies. For instance, we understand that in the past, entry-level personnel were subjected to an examination and this policy has been abandoned. An example of such inappropriate training is the much vaunted economic reality (now known as financial status) auditing program. To introduce this highly intrusive auditing technique, agents were indoctrinated in an anti-taxpayer mentality using roleplaying and game training techniques impugning the honesty of average taxpayers. As a second example, we are aware of a recent incident involving the training of internal discussion leaders at which a potential trainer told his audience to ignore newly implemented, taxpayer-friendly worker classification rules and continue older practices. (Because this trainer was recorded giving this advice in a practice session, IRS was able to identify the problem and removed him as an instructor. Nevertheless, this example illustrates deep-seated cultural biases that impede a healthy taxpayer-service mentality.)

Problems in the hiring and training of employees exist in industry and other government agencies as well. An example of such a problem in the training of government employees — this one involving the training of federal prosecutors in Philadelphia — was recently exposed and resulted in the reversal of hundreds of cases. Certainly the American taxpayer in a voluntary system should expect honesty and objectivity — not a predisposition of suspicion — from the representatives of the government who interact with the taxpayer so routinely. An excellent guide to hiring can be found in the following excerpt from a recent Wall Street Journal article about the Federal Trade Commission (FTC) by Holman Jenkins, Jr.:

[E]ven in the best of all regulatory states, we’ll never devise administrative and legal procedures that are so transparent and predictable as to eliminate human discretion. Such being the case, it would be proper to question not just the professional competence of regulators. It would also be proper to question their temperament and whether they have what is decidedly beneficial to a democratic society: an instinct of hesitancy about swiping people’s rights.

 

Some argue that the IRS budget is stretched and, therefore, higher standards for entry-level employees are unattainable. We reject this logic. The IRS must hire people with enough acumen to accomplish its task. With a given number of sufficiently skilled employees the issue narrows to one of management. Without a sufficient number of competent employees, the IRS mission simply cannot be achieved.

 

Some Closing Thoughts on Root Causes

We are careful to note that one of the root problems at the IRS is NOT the complexity of the tax system, which is discussed in greater detail below. The complexity of the tax system is not an excuse for lack of customer-conscious behavior. There IS a problem with complexity in the tax system, but that problem, which is the fault of the Congress and the legislative process, should not serve as an excuse for mismanagement and lack of customer focus at the IRS.

Our profession commended the work of Former Commissioners Gibbs, Goldberg, and Peterson to alter the IRS’s culture by viewing the taxpayer as a "customer" and not a tax-cheating sociopath. We lament the loss of pressure from the top to continue the cultural overhaul envisioned by these farsighted commissioners.

The Commission has already received reams of testimony about the following programmatic ills afflicting the IRS. We mention them here only to illustrate how the root issues we identified help to explain the programmatic failures.

 

Programmatic Symptoms

Information Technology Mismanagement

In the area of information technology the IRS has prominently illustrated several of the root causes we identified: insular mentality, lack of accountability, and inability to overcome structural dysfunction. The 1984 IRS annual report states, "Within the next five to ten years we will have a totally redesigned tax administration system. Paper tax returns can largely be a thing of the past." On March 14 of this year, the Treasury Department conceded to Congress that after spending over $4 Billion, TSM was badly off track. Arthur Gross, IRS Associate Commissioner for Modernization, conceded that TSM, as currently configured would have to be substantially scrapped and that the IRS did not have the technical or intellectual capacity to implement TSM or to even supervise outside contractors. Mr. Gross was echoing the substance of various GAO reports on the subject.

The current system of some 50 different computer systems, many of which cannot communicate with each other, has brought tax administration to the point of breakdown. Shelly Davis in her book Unbridled Power, quotes one IRS computer expert as saying, "We lost sight of our mission. We thought we were supposed to be on the leading edge of technology. But we have no business being on the leading edge. We have no money for that. We need to be able to be flexible enough to adapt to new discoveries, not to discover new ways of doing business." Ms. Davis goes on to quote a reporter who wrote, "A computer meltdown at the IRS would ripple through the rest of the government and through the economy" and "will throw the government’s financial operations into chaos."

Where did the Service go wrong? We are convinced that the Service’s insular siege mentality, its staff’s insistence on being in the driver’s seat and distrust of outside solutions, is at the core of this $4 billion boondoggle. If General Motors or Boeing needs to modernize a computer system, they reach out to leaders in the information technology field. While the client identifies its information needs, it is the experts not the client who identify what is needed to solve the information needs. The outside expert defines the scope of the solution. With TSM, the IRS believed it knew better. Service personnel identified the scope of the problem, failed to understand the method of solving it, and sadly, and at great cost, missed the mark.

 

Education and Training of Personnel

Need for improved training both in technical tax areas and ethics is very apparent. In addition, we suggest that all IRS personnel receive training on how to treat taxpayers and their representatives The training should focus on dealing with the public as customers, and eliminate the purely adversarial "us vs. them" mentality. Considering how deep-rooted this attitude has become among IRS personnel, except for those in Problems Resolution, it is clear that help must be brought in from the outside.

The tax law is taught to the professionals who face IRS agents by educators, including practicing CPAs and attorneys, who are experienced instructors. From an educational viewpoint the Service is outgunned, and it shows in IRS employees’ lack of knowledge of technical areas, professional standards, and ethical guidelines. The IRS should be required to reach out to universities, foundations, and professional organizations to devise programs and provide discussion leaders.

In addition, those instances where the IRS has reached out to the practitioner community in its education efforts, such as with the professionalism forums that have been conducted around the country which were planned in collaboration with the IRS and many practitioner groups, have resulted in tremendous benefit to both the IRS and practitioners. Generally, the forums have promoted dialogue and increased understanding by each group of the other’s positions and problems. These joint efforts at interaction go a long way toward dispelling the perception and — in some instances the reality — of insular paranoia attributed to the Service.

 

Taxpayer Advocacy

The beneficial impact of the Taxpayer Advocate and the Problems Resolution process have been made abundantly clear in testimony received by the Commission. Yet there has been an ongoing policy debate about (1) whether the Taxpayer Advocate should be from within the IRS or not and (2) to whom the Taxpayer Advocate should report.

We begin by noticing that despite the fact the Ombudsman — the old title for this position — like the Taxpayer Advocate today, reported directly to the Commissioner, this position does not seem to be highly regarded as a career step. Both of the former ombudsmen after completing their activities moved on, not to regional commissioner positions, but to district director positions!

How can one advocate for the taxpayer when one reports to the nation’s chief tax collector, the IRS Commissioner? The Taxpayer Advocate should be someone who reports to the Commissioner’s superior, the Treasury Secretary (or his or her designee). From this vantage point, the Taxpayer Advocate could speak out on ill-advised IRS initiatives, such as the approach the IRS took toward economic reality auditing, and technical adjustments to legislative and administrative tax law. The Taxpayer Advocate should be independent of the IRS and the Taxpayer Advocate program should have its own budget and not be subject to potential interference by the District Directors or Regional Commissioners.

 

Peripheral Tax-System Issues Affecting the IRS

While we do not believe that the complexity of the tax system is at the root of the IRS’s problems, it does serve to exacerbate the IRS’s challenges in administering the tax system and the taxpayers’ challenges in meeting their tax obligations. The impact of complexity on the taxpayer probably tends to increase inadvertent noncompliance and, therefore, create the atmosphere of adversity between the taxpayer and the Service.

It is hypocrisy for members of Congress to criticize the IRS for such things as the tax gap and yet heap legislatively mandated complexities on tax administrators. The CPA and legal professions have previously submitted meaningful simplification proposals to Congress. These should be revisited. The AICPA developed a "complexity index" for use by policy makers in designing tax laws. Legislative aides should consult tools such as this index when drafting legislation.

Much tax complexity results from the insularity and lack of practical experience not of the IRS but of the professional staff of Congress. Because of the complexity of the tax law, Members of Congress rely increasingly on their legislative aides, who are generally well educated but have little practical experience. We encourage members of Congress to hire tax staff, not merely with good academic credentials, but with extensive real-world experience.

We also encourage Members and committees of Congress to have their tax staff persons make district visits to learn from businesses and other taxpayers "what they hath wrought." In addition, these tax staff members should be encouraged not only to speak at, but also to register at and participate in, continuing education offered by the legal and CPA professions.

 

Paths to Resolution

To this point, we have been more involved in laying out issues and problems for you. Frankly, we don’t know the solutions to those problems. But we have identified a number of avenues you should explore. We begin this section with an in-depth analysis of IRS management and structure issues. Following that is a brief summarization of other suggestions distilled from our analysis to this point.

 

Management and Structure

The fundamental question here is what management and structural changes need to be made to eliminate the ingrained, insular, self-protective culture of an organization dominated by careerists whose success is measured by their duration near the top of the organization chart. The current system makes for mediocrity and absence of measurable goals. Oversight purportedly is exercised by legislators who are often too busy to sit through testimony by the Commissioner of Internal Revenue.

Clearly, the regional commissioner system should be reviewed. A new mechanism should be found to depoliticize the IRS Commissioner’s position. The IRS should determine the degree of centralization appropriate for each program. Unless taxpayers are better served through the decentralization of a program, it should be centralized to assure uniform treatment throughout the country.

A new IRS governing body should be formed. This group would serve as a single oversight body with independent direct reporting responsibility to the Treasury Department and the Congress. This oversight body would be the guardian of the public trust. The governing body would have access to all information and be consulted with before any major actions should commence, such as TSM, economic reality auditing, or a Taxpayer Compliance Measurement Program (TCMP).

Many have proposed a governing body in the form of a corporate-styled board, perhaps like the one formed to manage the Postal Service. We agree with this recommendation. However, we understand some are concerned with the constitutionality of such an approach. Other, less efficient but perhaps more constitutional, approaches are available. For instance, the governing body could take the form of a National Commission such as yours which would be established on a permanent basis. Yet another approach would be to use a multiple commissioner model similar to the Securities and Exchange Commission and the Federal Communications Commission. We make this last suggestion hesitantly because we doubt the solution to the IRS’s problems lies in additional political appointees. Nevertheless, if a Tax Commission were established with commissioners having six-year, overlapping terms, political influence would be substantially diluted, as with the SEC and FCC. This could also permit the President, with the advice and consent of the Senate, to diversify the skills of the commissioners, drawing from the top technical tax, management, and technology experts in the country.

Restructuring should be made only after careful study. We believe that the National Commission’s term should be extended for a sufficient period, perhaps a year, for the purposes of (1) making a final recommendation about a new governing structure for the IRS, (2) setting a pattern for the IRS’s new governing body, and (3) following up on its other recommendations.

Many have written that the Commissioner should be an outside executive, expert in the management of large enterprises. We are not convinced that this person should be in the IRS Commissioner’s position. We believe the Commissioner bears the ultimate responsibility for carrying out the tax law and therefore needs an in-depth understanding of the tax law. Nevertheless, such an executive, whether serving as the Commissioner or the Deputy Commissioner, should be in place and empowered to take advantage of the large-enterprise management techniques available in the private sector.

Finally, we note that a management problem has developed in the IRS well below the level of the Commissioner. Middle-level management has been subjected to more and more administrative duties which consume their days, and less and less technical involvement occurs. We recommend more involvement of the managerial chain, beyond just the group manager, to ensure that taxpayers are being treated fairly and that the examination and collection activities are appropriate to the task.

To sum up our recommendations regarding IRS management and structure:

 

Structural Dysfunction

 

IRS Self-Image

 

IRS Siege Mentality

 

Accountability

 

Education and Training

 

Taxpayer Advocacy

 

Peripheral Tax System Issues