Statement of Commissioners Edward S. Knight, Larry Irving, and James W. Wetzler



Over the past year the National Commission on Restructuring the Internal Revenue Service (Commission) has performed a valuable service for this nation. Under the leadership of Chairmen Kerrey and Portman, the members of the Commission have worked hard to understand the complex problems facing the Internal Revenue Service (IRS) and have offered constructive suggestions for change. We commend our colleagues for this important effort, and we also appreciate the hard work and long hours dedicated to this Commission by its staff.

While there is much in the report that we agree with, we cannot join the Commissionís majority because of our strong opposition to some of their recommendations. Our intent in writing this separate report is to inform the public debate on the IRS as the actions now being taken to improve the agency continue. Our goal is the same as that of the rest of the Commissionís members: to recommend how the IRS might better serve the American taxpayer both now and as we move into the 21st Century.

In our view, one of the Commission's primary achievements is that it has identified and defined key problems with the IRS that demand prompt attention. We share the Commissionís view of the identity of these key problems. For example, there is consensus within the Commission that:


· The IRSí customer service lags behind when compared to the service the American people receive from the best private sector financial services organizations, and that the IRSí goal should be to adopt the best customer service practices of the private sector.
· The IRS needs to continue to improve its use of technology for the benefit of American taxpayers and the IRS.
· The IRS needs to change its culture to one that is more oriented toward customer service and reducing unnecessary burdens on taxpayers.
· There should be increased use of electronic filing for income tax returns and information reporting.
· More can be done to build on recent reforms enhancing taxpayer rights.
· Simplification of the Internal Revenue Code is critical to improved performance by the IRS.
· The IRS needs adequate and stable funding and budgeting to ensure continuity in its effort to upgrade customer service.
· The IRS needs greater flexibility to attract and retain high caliber personnel, and it needs to take greater advantage of the management flexibilities that currently exist.
· The IRS needs additional institutional support to ensure the success of its employee training plan.
· The IRS needs greater continuity in its leadership.
· There needs to be enhanced and institutionalized oversight of the IRS by the Executive Branch.


We also agree that one of the most critical goals is to make the IRS more accountable. The questions are: 1) How to make it more accountable? and 2) To whom should the agency be accountable?

The IRS is a large and complex organization which has a vital mission that touches virtually every American. It collects 95 percent of this nationís revenue -- revenue that funds everything from fighter jets to Medicare checks to grants for college education. As the majority points out, the IRS is viewed as a model by the tax collection agencies of many countries. In addition, the majority states that Commission interviews with over 300 IRS employees left them with an overall impression of competent, hard working people who want to deliver a high quality product to the American taxpayer.

Despite these positive features, we all agree that the IRS has problems that need to be addressed. These problems have developed over decades and will not be resolved overnight. This consensus on the need for fundamental change is an important step in the national debate as we continue on the path to solving the problems at the IRS. It is vitally important, however, that we not delay or impede the wide-ranging reforms that have been initiated thus far.



Over the last two years, the Treasury Department, working in partnership with the IRS, has spent an enormous amount of time studying and implementing wide-ranging reforms at the Internal Revenue Service. Actions taken by the Department and the IRS have been guided by the following principle: to continue making the IRS more effective, efficient and taxpayer friendly while ensuring the flow of revenues that fund vital government programs.

Treasury Secretary Robert E. Rubin and Deputy Secretary Lawrence H. Summers recognized at an early stage the seriousness of the problems facing the IRS and the need for rapid reform. In particular, they identified the critical role of Treasury oversight, the need to augment that oversight and the necessity of bringing about real reforms. These reforms include:

Technology Modernization. Utilization of technology has been critical to the effectiveness of the IRS for decades. Recent public attention has focused on the Tax System Modernization (TSM) program which began in 1988 when the IRS put into effect a plan to upgrade and modernize the agencyís technological system. In the years following, however, studies by the IRS, the National Research Council and the General Accounting Office (GAO) uncovered serious problems in the modernization program. A 1995 GAO report called for massive changes in planning, management and implementation of TSM. Congress called on the IRS by May 15, 1997 to produce a plan for correcting and updating its technological capabilities.


In early 1996 the Treasury Department, taking into account the serious problems with TSM, took a "sharp turn" in modernizing IRS technology systems through a series of dramatic, concrete steps. The Department, working with the IRS:

· Created in March 1996 the Modernization Management Board (MMB) to oversee the creation and implementation of new IRS technology systems. The MMB, which includes representatives from Treasury, OMB and the National Performance Review and has a professional staff, meets monthly and is chaired by the Deputy Secretary of the Treasury.
· Hired a new IRS Chief Information Officer, Arthur Gross, who brings to the IRS extensive experience directing technology change in tax organizations. Mr. Gross immediately launched a nationwide search for new technical managers.
· Halted work on existing TSM projects in order to review and reevaluate the modernization program.
· Canceled or collapsed 26 disparate modernization projects into a more targeted and manageable 9 projects, thus avoiding significant unnecessary future costs.
· Reduced the number of IRS employees on these projects from 524 to 156.
· Drafted a Modernization Blueprint to guide the overhaul of IRS technology programs.


Modernization Blueprint. In May 1997, the new IRS Blueprint for Modernization was announced. The Blueprint for Modernization represents the first comprehensive attempt to form a strategic partnership with the private sector in order to address the problems of the past and to ensure that the IRS has the flexibility to meet future challenges.

This Blueprint describes a centralized, flexible system that permits easier access to data to provide superior service to the taxpayer, to move toward paperless operations, and to increase compliance with the law. The Blueprint includes plans for centralized data bases that will ensure taxpayer privacy and minimize cost while providing IRS customer service and compliance personnel easy access to accurate and timely information. As each part of the Blueprint is implemented, its effectiveness will be verified before work proceeds on the next part of the Blueprint.

Today, for example, when taxpayers call the IRS with questions about their taxes, IRS employees may need access to data from up to nine different computer terminals to answer the questions. The system described in the Modernization Blueprint will enable all data to be accessible through a single terminal.


Electronic Filing. In July the IRS will issue a Request for Information (RFI) on electronic filing, launching the most comprehensive effort to date to solicit input from all constituencies in the electronic filing process. The response to this request will be used in efforts to evaluate current electronic filing processes and will help determine IRS budget requirements in this area.


Tax Simplification. On April 14, 1997, Secretary Rubin announced a revenue-neutral package of more than 60 tax simplification and taxpayer rights proposals for consideration by Congress. As Secretary Rubin said at the time, these measures are designed to save individuals, families and businesses millions of hours now spent filling out tax forms and to reduce the complexities and paperwork burdens of the existing Internal Revenue Code. The proposals include:

· Corporate AMT Reform. The proposal would exclude altogether from AMT (alternative minimum tax) corporations with gross receipts below $5 million. Under this proposal, roughly 95 percent of all corporations (more than 2 million) would be spared the trouble of calculating the AMT. More than 15,000 corporations pay the corporate AMT each year, and of these, more than 6,000 no longer would have to calculate and pay the AMT.
· Exclusion For Gains on Sale of Principal Residence. The proposal exempts up to $500,000 of gain on the sale of a principal residence. This provision would lower the number of taxpayers paying capital gains taxes on residences from 150,000 per year to roughly 10,000 per year. It also would reduce substantially the recordkeeping requirements for over 60 million households who own their own homes.
· Simplification of Child Dependency Exemption Rules. Under this proposal, many taxpayers no longer would have to demonstrate that they provide over half the support for children in order to claim them as dependents. Instead, taxpayers could claim their sons, daughters, grandchildren or foster children as dependents if the children were under the age of 19 (24 if full-time students) and resided with them for over half the year (a full year in the case of foster children). Filing requirements and recordkeeping would be simplified for most of the 40 million taxpayers who claim 70 million children in their homes as dependents.


The ongoing changes and improvements noted above are beginning to address the core concerns identified by the Commission. We believe that Treasury efforts in the last two years to change the governance of the IRS has been the crucial component in making IRS reforms to date.


Governance. As stated previously, the Treasury Department identified the critical role governance plays in driving change. In particular, the Department sought to bring increased continuity, institutionalization and outside input to the IRS governance structure without unnecessarily risking the core functions of the IRS. This has been achieved with a series of concrete and significant governance changes and proposals:


· IRS Commissioner/Five-Year Term. On May 20, the Secretary Rubin announced that the Administration will seek legislation to provide the IRS Commissioner with a fixed, five-year term. Providing a five-year term is designed to bring greater continuity and independence to the position without diluting the Executive Branch accountability for management of the IRS. This Administration also will seek legislation providing expanded personnel authority for the IRS Commissioner to better manage and compensate IRS employees.

This spring the Administration announced that it would seek appointment of a new kind of Commissioner: a private sector manager with expertise in customer service and technology.

The Administration is moving aggressively to nominate someone as IRS Commissioner who has these qualifications.


· IRS Management Board. To institutionalize further the Treasury Department's IRS oversight role, Secretary Rubin announced on May 20 that he will recommend that the President sign an Executive Order to create an Internal Revenue Service Management Board composed of high ranking government officials from all relevant Executive Branch agencies. This Board will replace and expand the scope of the current MMB. Board members will provide ongoing oversight of all major IRS decisions. The Executive Order also will require the Board to meet at least monthly and to prepare semi-annual reports to the President and the Congress, which shall be transmitted by the Secretary of the Treasury.


· Reporting to Congress. Secretary Rubin has stated that he supports the notion of the Secretary and Deputy Secretary of the Treasury reporting to Congress semi-annually on the operations of the IRS as a further means of institutionalizing Treasury oversight. It would be appropriate to include this proposal in any legislation dealing with the governance issue.


· IRS Advisory Board. To provide him and future Treasury Secretaries additional advice on technology, customer service, taxation and other relevant areas of expertise from the private sector, Secretary Rubin also announced on May20 that he will issue an order establishing an IRS Advisory Board. Comprised of prominent citizens from outside government, this Board will function much like public trustees and will issue an annual report on the IRS to the American people and the Congress. The Advisory Board will help institutionalize the provision of outside input into the Departmentís oversight of IRS matters.


· IRS Customer Service Review. On May 20, Vice President Gore announced the formation of a new task force, as part of the National Performance Review, to address customer service problems at the IRS. Comprised of front line IRS employees and officials from other agencies, this task force has a mandate to find ways to eliminate waste and raise productivity to give the American people the customer service they deserve from the IRS.


These steps to improve the governance of the IRS are making real progress, and the proposals outlined above would further the progress made without jeopardizing the core functions performed by the IRS.



The American people rightly demand an IRS that is responsive to the public and is led by officials who are held accountable for achieving success. While we pursue this objective, we also must ensure that any change at the IRS minimizes risk to the vital flow of revenues that fund our government and allows current progress on reform to continue. We believe the majorityís recommendations for governance fail these crucial tests.


The Commissionís Proposal. The Commission has proposed that the Internal Revenue Service be governed by an outside board of private sector executives who would serve on a part-time basis and who would keep their private sector jobs and private sector salaries. The board would be a very powerful governmental body, affecting every American citizen, and without the level of direct accountability that the Treasury Secretary has to an elected President.

Everything that the President, the Treasury Secretary and the Treasury Department now do with regard to the IRS would be subject to the boardís authority, including the President's current power to appoint the IRS Commissioner and the Chief Counsel. There is a vague reference in the majority report to removing IRS enforcement matters from the proposed boardís purview, but the specific authority that would be given the proposed board in the report would place the part-time, private sector executives on the board knee-deep in enforcement. The board would do everything from approving all the top IRS law enforcement officials -- the Chief Compliance Officer and the Assistant Commissioner for Criminal Investigations -- to determining the level of enforcement expenditures.

We believe the proposed board structure, the majorityís recommended instrument of change, would be ineffective, would violate basic principles of our democracy, and would delay and even derail efforts to improve the agency.


Private vs. Public Sector Boards. There is little argument that in most cases boards work in the private sector. Private sector boards have shareholders, directors' liability and the discipline of the marketplace to keep them in check and hold them accountable. But the IRS board recommended by the majority would have none of these private sector incentives or protections. The IRS is not and cannot be an entity that succeeds or fails based on its market performance. It performs one of the most essential functions of our government, upon which all others depend. Failure, or even the risk of failure, is not an option.

After an extensive review of models for running federal agencies, the General Accounting Office (GAO) reported in 1989 that the need for stable and effective leadership is more critical in the management of large government organizations than it is in relatively small regulatory agencies. It further found that "[t]hough boards may be useful in operating some small regulatory agencies where deliberation in a quasi-judicial environment is valued, . . . a board running a large operational organization . . . is inappropriate and not feasible." The GAO summed up the problems with boards running large government organizations in straightforward language: "the board form of organization has not proven effective in providing stable leadership, in insulating decisions from political pressures and in assuring that diverse viewpoints are considered in the decision-making process."

At a time when we should be strengthening the accountability of the President and his senior officials for the IRS, the majority proposes to diffuse that accountability by spreading it over a multi-member part-time board.


Part-Time Board, Part-Time Attention. The IRS needs full-time oversight and attention from a dedicated group of women and men whose vocation, and not merely their part-time interest, is government service. Consider how the Commissionís part-time board would work in practice. At present, top IRS and Treasury officials meet daily to discuss IRS matters urgently requiring decision. Many of those matters require considerable thought, attention, and internal deliberation, and meetings sometimes must be called with little notice or on an emergency basis. This demanding, continuous process is greatly assisted by the synergy between the IRS and Treasury. Under the majorityís proposal, however, that synergy would be lost. In addition, urgent matters requiring immediate board input and decision presumably would have to wait a month or more until the next board meeting, by which time these busy business executives would somehow have to be fully prepared to deal with the issue -- if it were not too late.


Delays and Uncertainty in the Process of Reform. We believe the time and energy that it would take to draft and pass legislation to create a board, seek out, nominate, confirm and appoint board members, set up a board structure, and deal with the inevitable challenges to the statutory and constitutional authority for board actions would significantly detract from and delay the implementation of the changes needed to bring the IRS up to the standards we all want it to meet. Such delays and uncertainty are unnecessary and undesirable.


Conflicts of Interest. The proposed board quickly would be faced with the appearance, if not reality, of conflicts of interest. Everyone currently associated with the governance of the IRS is subject to some of the most intense ethical reviews in government in order to avoid even the appearance of self-dealing, and they also give up their private sector salaries. But under the Commissionís proposal, for example, corporate executives whose companies automatically may be subject to yearly audits will determine the audit budget for the IRS and its strategic enforcement priorities. In addition, members of the proposed board likely would have to be recused from a wide range of matters facing the IRS to avoid conflicts, reducing their ability to provide effective input, even on a part-time basis.


Conflicts With Law Enforcement. Although it is proposed that the board would only control certain IRS operations, decades of experience demonstrate that separating tax enforcement from tax collection, or tax administration from tax policy, cannot and will not work. No law enforcement agency of the United States government has ever been managed by corporate executives or other private citizens, much less on a part-time basis. It does not make sense to put such a sensitive and critical function in their hands. A person with a full-time private sector job simply does not have the sensitivities --or the insulation from special interests -- of a government official whose full-time, sworn responsibility is to uphold and enforce the law.


Independence from the President/Accountable to Whom? The majorityís recommendations repeatedly state that the proposed boardís members will be "independent" and will serve fixed terms intentionally different from the Presidentís term. The report is dangerously susceptible to a reading that is inconsistent with accountability to an elected President because it does not explicitly state that the President may remove the board at will.

The courts have held that any limitation on the President's power to remove officials performing core executive functions -- such as the IRS Commissioner or members of the proposed board -- impedes the President's ability to satisfy his constitutional obligation to take care that the laws be faithfully executed. Limiting the Presidentís authority to remove board members also would limit dramatically the accountability of the proposed board to the American people through their elected President.

This is a crucial point on which the majority report is ambiguous. This report may serve as guidance for the Congress as it drafts and considers legislation. We and the Department of Justice have vigorously asserted that the proposed board members must be removable at will by the President or the structure will raise grave constitutional concerns. If the Commission intends that legislation based on its recommendation comply with the Constitution, ambiguity is harmful. Even if this ambiguity were eliminated, it would not ameliorate the serious practical defects of the majorityís governance proposal.

This boardís actions would be subject to serious legal challenges that could impede the flow of 95 percent of our nationís revenues.

The Justice Department's Office of Legal Counsel recently wrote that "serious constitutional concerns" were raised by governance proposals such as the one proposed by the Commission. See February 26, 1997 letter from Dawn E. Johnson, Acting Assistant Attorney General, Office of Legal Counsel, to Edward S. Knight, General Counsel, Department of the Treasury, at 3.


Other Constitutional Concerns. The Commissionís recommendations ignore our Founding Fathersí wisdom in another significant respect. There are grave Constitutional problems with the board appointing or removing the IRS Commissioner and the IRS Chief Counsel. The Appointments Clause of the Constitution sets out the manner in which federal officers must be selected: principal officers must be appointed by the President with the advice and consent of the Senate; inferior officers must be appointed either in the same manner or by "Heads of Departments" or "Courts of Law." The Commissionís report does not comply with these mandates.

At a time when we are trying to balance the Federal budget for the first time in a generation and facing difficult decisions about our spending priorities, we should not create a legally suspect regime that could threaten funding for everything from national defense to health care to education.


Summary. We believe that the Commissionís proposal is fundamentally flawed and would pose unacceptable economic and legal risks to the American people while delaying ongoing and future efforts to improve the IRS. As Secretary Rubin recently pointed out, experimenting with the IRS in such a manner could impede the important task of collecting the revenue that runs the Federal government. The majorityís proposal would place at risk programs vital to the American people and make the IRS unaccountable to the taxpayers.




Because of the relatively small size of the Commissionís staff, the short time available to review and analyze the many complex problems facing the Internal Revenue Service, and the scope of the Commissionís mandate as stated in the Act creating the Commission, the range of topics upon which the Commission was able to provide adequate review and analysis was necessarily limited. Consequently, we strongly advise that the Commissionís recommendations be subject to intensive examination and analysis before being adopted in any significant measure.

For example, the Commission proposes a number of changes to the dates by which taxpayers must file returns or reports with the IRS. We wholeheartedly agree with the majority on the need to increase substantially the number of taxpayers that file electronically, because this will provide important cost savings to the IRS. However, sharing the projected savings with taxpayers -- as an incentive for increased electronic filing -- must be done in ways that are equitable for all taxpayers. The majorityís proposed changes with regard to filing dates would benefit primarily higher income taxpayers who owe taxes, because they would be allowed to delay an extra month or two (for electronic filers) before they had to pay their taxes. This delay in tax receipts would significantly increase the governmentís borrowing costs, a burden that would be imposed on all taxpayers. At the same time, the proposals would result in delays of refunds to millions of lower income taxpayers, and it is not likely that the proposals will appreciably decrease the IRSí workload or costs during the peak filing season.

The Commissionís report includes a number of tax simplification proposals that it received from various stakeholder groups and academics, and "urges that they be considered" by the tax writing committees of Congress. Some of the proposals have merit and are included among the 60 tax simplification proposals announced by the Administration earlier this year and discussed above. But others clearly reflect bad tax policy, would not simplify the law, would unduly benefit some taxpayers over others, and would involve large revenue losses.

The Commission also received proposals concerning additional taxpayer rights measures. Protecting taxpayer rights is critical to our voluntary compliance tax system. Congress and the Executive Branch have taken several steps in recent years to protect taxpayer rights and enhance the public's understanding of, and treatment under, our system. These steps include enactment of the Taxpayer Bill of Rights (TBOR) in 1988 and the Taxpayer Bill of Rights 2 (TBOR 2) in 1996. In addition, taxpayer rights proposals were included among the 60 tax simplification proposals announced by the Administration earlier this year. However, the Commission did not evaluate the merits of these proposals: no revenue estimates were prepared; possible adverse compliance effects of these proposals were not discussed; and collateral effects of such proposals on other policy areas were not considered. Some of the proposals in the Commissionís report were considered and rejected by Congress in TBOR 2.

Finally, the majority recommends a new Congressional oversight committee for the IRS. We note that there are long-standing processes of Congressional oversight of the IRS and the Internal Revenue Code, and believe that this issue is for Congress to decide. Thus, we do not make a separate recommendation on this subject. We would be concerned, however, with any modification of Congressional oversight that delayed the changes and improvements already under way at the IRS or that imposed institutional barriers could thwart future IRS efforts to make necessary changes to improve customer service. The IRS must have the flexibility to take advantage of changes in technology, taxpayer preferences, and the law to make it a high performance organization.



We wish to reiterate our thanks and appreciation to fellow Commission members and to the staff of the Commission.

As we have indicated, there are many recommendations contained in the report that we wholeheartedly endorse. But we cannot endorse the recommendation that the agency that collects 95 percent of the revenue that funds our government be subject to the control of a part-time board of executives from private companies.

Both we and the other Commissioners know that changes must continue to be made, without interruption, at the IRS. The critical disagreement is how best to ensure that these changes are made successfully. It is our firm conviction that they best can be made with enhanced executive direction provided by dedicated, full-time government officials combined with ongoing advice from the private sector. The future of vital government programs is much too important to risk on the untested, and in our view fundamentally flawed, governance scheme that the majority proposes.


Edward S. Knight Larry Irving James W. Wetzler