Section 1—Congressional Oversight, Executive Branch Governance, IRS Management, and Budget


The problems throughout the IRS cannot be solved without focus, consistency and direction from the top. The current structure, which includes Congress, the President, the Department of the Treasury (Treasury), and the IRS itself, does not allow the IRS to set and maintain consistent long-term strategy and priorities, nor to develop and execute focused plans for improvement. Additionally, the structure does not ensure that the IRS budget, staffing, and technology are targeted toward achieving organizational success. Without a change in the current structure, the Commission does not foresee an IRS able to meet the expectations of the American taxpayer.

The following discussion outlines a comprehensive package of fundamental reforms necessary to make the IRS a respected, stable institution that everyday Americans find to be fair and efficient. First, the Commission recommends more coordinated congressional oversight, so that the IRS receives clear and consistent direction from Congress. The Commission also recommends a Board of Directors, to bring accountability, continuity, and expertise to executive branch governance and oversight of IRS. In addition, the Commissioner of Internal Revenue should be appointed to a five year term and be given greater control over personnel decisions. It is essential that this governance and management structure drive fundamental change throughout the organization. That change will involve recruiting and retaining skilled personnel, better training, breaking down functional stovepipes, a shift in culture, and revamped internal measures. Finally, the Commission recommends that the IRS receive a stable budget so that it can undertake the proper planning to rebuild its foundation. None of the changes alone will fix the system, but as an integrated package they provide a blueprint to set the stage for a renewed IRS.



The IRS governance, management and oversight structure, including Congress, the President, Treasury, and IRS senior management must:


· Develop and maintain a shared vision with continuity;
· Set and maintain consistent priorities and strategic direction;
· Impose accountability on senior management;
· Develop appropriate measures of success;
· Ensure that budget and technology support priorities and strategic direction; and
· Coordinate oversight and identify problems at an early stage.


The present dynamic between the IRS, Treasury, and Congress makes it difficult for the IRS to perform adequately. The average tenure of an IRS Commissioner is under three years and the average tenure of senior Treasury officials responsible for oversight is similarly short. Many of the key issues that need to be addressed to move the IRS into the twenty-first century, including shifting the culture to better meet the needs of taxpayers, reengineering business processes, and modernizing information technology, will require greater continuity, authority, experience, and accountability of leadership and management. No organization with a $7.3 billion annual budget and 100,000 employees can perform to its full potential without a well functioning governance and management structure which ensures that top leaders focus on important issues and have the longevity and expertise to plan and implement strategic initiatives. With a new structure and heightened accountability, the Commission expects that the IRS will find Congress more receptive to stable funding to support IRS operations.

The current IRS governance structure is often reactive rather than strategic. The IRS reacts to pressures applied by the Congress through seven different oversight committees, often focusing issue by issue, rather than on an integrated and consistent strategic direction. Treasury reacts to problems at the IRS, typically after the IRS has been unable to resolve them. While the Government Performance and Results Act (GPRA) is helping Congress to communicate better with the IRS on strategy and direction, the traditional congressional role has been to respond to specific complaints or problems with particular programs or initiatives. The result is inconsistent and inadequate attention to the core issues facing the IRS, and scattered attention to a host of non-strategic issues. Moreover, the result is an IRS and Treasury that cannot be held accountable for achieving the IRS mission.


1. Congressional Oversight

Congressional oversight of the IRS should be coordinated through a new entity which ensures that key Members and staff discuss strategic issues comprehensively and ensures that Members have sufficient information to make informed decisions regarding tax legislation and tax administration.

Congressional oversight has had some productive consequences in recent years. For example, a number of committee Members and staffs helped to uncover the Tax Systems Modernization (TSM) problems. Effective congressional oversight is essential to ensure that the IRS meets the public’s expectations for their tax system. However, this effort must be coordinated for Congress to hold the President, Treasury, and the IRS accountable.

The inherent diversity of interests within Congress makes it difficult for that body to give clear and consistent direction to the IRS on macro issues. Congressional committee Members and staff generally do not see their role as defining and integrating high level management and governance issues. They believe this is the role of the IRS and Treasury. Instead, congressional committees focus their attention on specific issues and incidents, such as browsing or TSM. The seven committees (and their respective subcommittees) most responsible for IRS oversight—House Committee on Ways and Means, House Committee on Appropriations, House Committee on Government Reform and Oversight, Senate Committee on Finance, Senate Committee on Appropriations, Senate Committee on Government Affairs, and the Joint Committee on Taxation—focus on different issues that change from year to year. While the issues they address are important, there is a lack of coordinated focus on high level and strategic matters. Because the IRS tries to satisfy requests from Congress, this nonintegrated approach to oversight further blurs the IRS ability to set strategic direction and focus on priorities.

Additionally, like Congress, the Government Accounting Office (GAO) tends to focus on many lesser matters and does not integrate its myriad audits into a constructive, focused package. In the last four years, the IRS has been the subject of 140 GAO reports. At present, GAO has forty-three audits in progress. GAO’s oversight is quick to point out problems, but often neglects the important work of recommending solutions, and frequently fails to provide adequate context or frame of reference for its assessments.


Congressional Oversight Recommendations

The Commission recommends that Congress create a joint committee on IRS administration to coordinate ongoing, high level oversight of the IRS. Selected Members from six committees with jurisdiction over the IRS should conduct joint hearings in areas of primary importance to tax administration, including: IRS strategic and business plans; IRS progress in meeting its objectives; IRS budget and how it is aligned with the agency’s objectives; progress in improving taxpayer service and compliance; progress on technology modernization; and the annual filing season. These joint hearings also would serve as the primary forum for interaction between the Congress and the IRS Board of Directors, as described below.

It is the Commission’s belief that this structure will help to coordinate oversight and reduce redundancy. To this end, the Commission recommends that that this new entity issue an annual report on IRS budget and operations to assist the committees of jurisdiction in making decisions about IRS issues. Staff from the existing committees of jurisdiction will assist in coordinating this new entity, along with the staff of the Joint Committee on Taxation. As part of this arrangement, the staff of the Joint Committee on Taxation would reassume its statutory role as the focal point for IRS oversight. The staff of the Joint Committee on Taxation should be expanded to meet this responsibility, and the Committee should have authority to contract with the private sector for oversight reports. Furthermore, the new consolidated entity should approve all requests to the GAO for investigations of the IRS, with the goal of eliminating overlapping reports, ensuring that the GAO has the capacity to handle the report, and ensuring that investigations focus on areas of primary importance to tax administration, as outlined above.

The Commission believes this approach will help achieve the following objectives: continuity and accountability within the IRS and within the Congress; increased focus on priorities and strategic direction; alignment of budget and technology with priorities and strategic direction; and earlier identification of significant problems. It also would result in substantial cost savings to the Congress and the IRS.

While this new oversight structure would allow Congress to better coordinate some efforts, it would not replace the traditional roles of the committees of jurisdiction. For example, the Committees on Ways and Means and Finance would retain jurisdiction over tax policy, and the Committees on Appropriations would retain jurisdiction over spending.


2. Executive Branch Governance

Congress should create an independent Board of Directors to oversee the IRS within the Department of the Treasury. Board members will be appointed by the President, confirmed by the Senate, and removable at will by the President.

Treasury is renowned for its expertise in capital markets, international economic affairs, economic and tax policy, and other fiscal matters. The Commission had extensive interactions with Treasury officials and found them to be honest and competent in their realm of expertise. Since the 1952 reorganization of the IRS, however, Treasury has limited its role in IRS affairs to major problems and tax policy. The generally independent structure of the IRS within the department evolved over time in response to concerns brought out in hearings in the 1920s and 1950s, which uncovered significant politicization of the agency. In addition, the expansion of section 6103 of the Internal Revenue Code in 1976 was a direct response to concerns of White House involvement in specific tax cases during the 1960s and 1970s. It is essential that the IRS be insulated from political interference and that the public have complete confidence that the tax laws are being administered in a fair and impartial manner. While Treasury retains its rightful place as the developer of tax policy for the executive branch, it generally is, and should remain, removed from tax administration.

While in the past year Treasury has taken a more active role in IRS oversight, the IRS generally has received little consistent strategic oversight or guidance from the department. The Commissioner of Internal Revenue reports to the Secretary of the Treasury through the Deputy Secretary of the Treasury, as do eleven other direct line reports. Traditionally the Secretary and Deputy Secretary focus on other responsibilities and activities, including monetary policy and capital markets, leaving the IRS largely independent. There are other interactions between the IRS and Treasury, including operational discussions through the Assistant Secretary for Management and budget negotiations through Treasury’s Budget Office. These activities, however, have been limited and uncoordinated, often amounting to little more than costly and sporadic exercises in micro-management that lack the necessary strategic and long-term focus. Given that the IRS collects virtually all of the government’s revenue and touches the majority of citizens, this level of attention is inadequate. The Commission is confident that Treasury, the President, and IRS would save resources and improve tax administration if the Treasury spent less time "in the details," and more time focused on priority matters and overall accountability at the IRS.

In response to problems with TSM, Treasury created the Modernization Management Board (MMB) in June 1996. As originally structured, the MMB was not a permanent structure with the longevity and expertise to assist the IRS in setting and maintaining priorities, developing appropriate measures for success, holding management accountable for results, and aligning budget and technology with priorities. In response to discussions at the Commission and in Congress, Treasury announced plans to make the MMB permanent by executive order, to expand its scope beyond technology issues, and to assemble a blue-ribbon panel of outside experts to advise the Secretary on IRS affairs. While Treasury’s efforts to take responsibility for IRS technology efforts through the MMB are commendable, the Commission believes the current Treasury initiative will not provide the necessary focus, expertise, and continuity that will be necessary for the IRS to meet the legitimate expectations of the American public.


Governance Recommendations

The Commission recommends that the Secretary of the Treasury maintain full control of tax policy, but that overall responsibility for IRS governance be placed with a Board of Directors that will be appointed by the President, confirmed by the Senate, and removable at will by the President. The Board will be responsible for overall governance of the agency, but will have no involvement in specific matters in the areas of interpretation or enforcement of the tax laws.

The role of the Board of Directors will be to guide the direction of long-term strategy at the IRS, appoint and remove its senior leadership, and hold IRS management accountable. The experience, independence, and stability of the Board also will give Congress more confidence in IRS operations. While IRS management will be responsible for day-to-day operations, the Board will ensure that the IRS is moving forward in a cogent, focused direction. Currently there is no body accountable for bringing a long-term perspective to tax administration—the result is that short-term priorities and emergencies are given attention, and longer-term initiatives like training, TSM, and re-thinking the relationship between the IRS and taxpayers are neglected. The role of this Board will be to ensure that decisions around operations, personnel, budget, and technology support an approved long-term plan.

As stated previously, the Board of Directors would be appointed by the President, with the advice and consent of the Senate. It would include seven members, five of whom would be from private life. The Board should include the Secretary or Deputy Secretary of the Treasury and a representative from the National Treasury Employees Union. The members from private life should sit for staggered five year terms, receive appropriate compensation, and be removable at will by the President. These members will be special government employees and will be subject to existing laws relating to disclosure, recusal, and conflicts of interest. It is critical that the members from private life be high stature, nonpartisan professionals, with experience particularly relevant to a 100,000 employee organization. These individuals collectively will bring to bear expertise in the following areas: (1) management of large service organizations, (2) customer service, (3) information technology, (4) organization development, and (5) the needs and concerns of taxpayers.

The Board of Directors should elect a chairperson for a two year term and meet regularly to oversee and guide the IRS. The Board should not be involved in tax policy—an area that should remain within the domain of Treasury—but instead should be focused on providing strategic direction to the IRS. The Board’s powers should be enumerated by the Congress, as follows:


1. Review and approve the Commissioner’s recommendations regarding IRS strategic and business plans, and IRS goals and measures relative to those plans.
2. Review and approve the Commissioner’s recommendations regarding major operational and organizational plans (e.g., plans for modernizing technology systems; training; outsourcing; managed competition; reorganization of the Commissioner’s office; reorganization of IRS business units).
3. Appoint and compensate the Commissioner and review and approve the Commissioner’s recommendations regarding the appointment, evaluation, and compensation of senior IRS executives.
4. Review and approve the Commissioner’s recommendations regarding the IRS budget, with particular emphasis on ensuring that the budget supports the IRS strategic and business plans. The Board will send the budget to Treasury to incorporate with the budget prepared by Treasury and the President, and simultaneously send a copy of the Board’s budget request directly to Congress. Of course, either Treasury or the Congress may modify the budget as they deem appropriate.
5. Review the IRS annual financial audits.
6. Provide annual stewardship reports to the President, the Congress and the American public regarding the matters under its jurisdiction.


The Board’s review should lead to formal decisions on the matters enumerated above. If the Board disagrees with the Commissioner’s recommendation regarding a particular matter, the Board will work with the Commissioner to resolve those differences. The Board of Directors will retain final authority regarding all such matters.

In addition to its annual stewardship report, the Board may submit reports to (and may be called to testify before) the congressional committees of jurisdiction at other times. The Commission also anticipates that the Board will interact from time to time with other parts of the Executive Branch and Congress, and with stakeholder groups.

The Board should hire a small, permanent staff and have a budget to contract with outside experts and consultants to review matters under its jurisdiction. Congress also should specify certain limits on the Board’s authorities and responsibilities. In particular, the Board should have no access to taxpayer information. While the Board will be responsible for overall governance of the IRS, it will have no involvement of any kind in specific matters in the following areas: interpretation or enforcement of the tax laws; tax legislation; procurement decisions; or routine and customary operational decisions. Moreover, the Board’s activities will be subject to existing government safeguards designed to ensure that there is neither the perception, nor reality, of a conflict of interest, including disclosure and recusal. Additionally, the Board’s activities will be subject to Treasury scrutiny and congressional oversight. The matters in which the Board will be prohibited from involvement should remain within the purview of the IRS itself, Treasury, other parts of the Executive Branch, and Congress. The duties of the Board, as outlined above, are those of governance rather than management, a distinction that is practiced effectively by most large corporations.


3. IRS Management

Congress should provide the Commissioner of Internal Revenue expanded authority over personnel and should hold the Commissioner and senior management accountable for IRS success.

Senior IRS managers have devoted significant time and effort developing long-term plans and connecting them with daily operations, and the Commission commends the IRS for those efforts. Unfortunately, there has been little or no buy-in on these efforts from Treasury, Congress, the organization as a whole, and outside stakeholders. Absent this buy-in, the IRS efforts have limited impact, and the perception is that the IRS is neither sensitive nor accountable to the American people.

Internally, the IRS Executive Committee, which is comprised of top management, is a forum for exchange of information rather than for decision making. The Executive Planning Board, which is comprised of lower level managers, tries to ensure that the budget supports priorities, but does not have the authority to direct organizational resources. In reality, the Commissioner and Deputy Commissioner are the only IRS officials accountable for the entire organization. Most successful $7.3 billion organizations have a larger group of top level managers and board members accountable for the "whole" of the organization.

The Commission is encouraged that the Government Performance and Results Act may start to connect IRS internal planning with congressional expectations and allocation of resources. The Commission encourages the IRS management and its new Board of Directors to work with Congress to ensure that the IRS budget reflects organizational priorities.

There has been a high turnover rate of IRS Commissioners over the past twenty years and in recent years many senior IRS leaders have retired, exacerbating the problems of continuity and accountability. Furthermore, the hiring practices of the IRS often stymie the Commissioner from shaping the culture and direction of the organization. Only five of the current 73 most senior executives have been at the IRS for less than fifteen years, and the IRS has encountered significant difficulties in its efforts to recruit outsiders into its executive ranks. Since the early 1950s, in an effort to insulate tax administration from political influence, the IRS has only two political appointees—the Chief Counsel and the Commissioner. Other large government agencies usually have more political appointees, making it easier to fundamentally change the institution to reflect the will of the people through the President and Congress. While institutional memory is valuable and keeping politics out of the IRS is essential, the dearth of outside thinking can limit the IRS management’s ability to bring new perspectives to organizational challenges.


Senior Management Recommendations

The Commission has developed a set of recommendations in the area of IRS management. First, Congress should provide for the appointment of the Commissioner by the Board of Directors for a five year term, providing continuity of leadership at IRS. Moreover, the Board should be given flexibility to pay the Commissioner a more competitive salary, and the Commissioner should be given greater flexibility to appoint and remove all high-level executives at the IRS (including the Deputy Commissioner, Chiefs, Assistant Commissioners, Regional Commissioners, District Directors, and Service Center Directors). If the Commissioner is to be held accountable, the Commissioner must have the flexibility to recruit his or her own management team. While the Commission anticipates that many of the executives will be selected from the ranks of the IRS, a mix of insiders and outsiders would be desirable. Because these appointees cannot be political in nature, the IRS should recruit top flight professionals to join its cadre of career Senior Executive Service managers. The Board of Directors, with five year rotating terms, will insulate the organization from politics. Because the Board will appoint the Commissioner to a five year term, the new appointees for senior management positions will not be subject to political pressure. The Commission further recommends that the Commissioner recommend the nomination of a Chief Counsel to the Board of Directors; the Board will make the final appointment of the Chief Counsel. This process will maintain the current parity in which the Commissioner and Chief Counsel are appointed independently. If, however, during the course of IRS business, the Commissioner and Chief Counsel cannot reach agreement on an issue, the Commissioner continues to have final decision making authority, as under the existing delegation orders.

To enable the Commissioner to build a management team that will help shape the direction of the IRS, Congress should allow the Commissioner to negotiate specific performance objectives with each senior executive, and to reward executives with bonuses for meeting those objectives, subject to Board approval. Moreover, the Commissioner and senior managers should develop organizational performance measures to which they will be held accountable. Current law does not allow individual IRS employees to be evaluated based on their own tax enforcement results or quotas, and the Commission does not intend that bonuses be based on this type of data.


4. Budget Process

The budget process must ensure that the IRS has an adequate long-term plan for financial resources, recognizing the IRS unique role as the nation’s revenue collector and the only federal agency that interacts with almost every citizen.

The Commission believes that the IRS has an ethical obligation to serve the American people well, as it is the only federal agency that interacts with almost all citizens. Funding, therefore, should be adequate to allow the agency to accomplish its mission. Until recent years, the agency received steady increases in its appropriated funds. Beginning in 1996, however, the IRS entered into a period of uncertainty in its funding, which has made it difficult to allocate resources in a cogent, strategic manner.

In discussions with congressional leadership, the Commission found a lack of confidence in IRS abilities to accomplish strategic initiatives, from TSM to taxpayer services. In order for the IRS to regain the trust of Congress and the American people, it must prove that it is financially accountable. Additionally, with the expertise and stature of the new Board of Directors and management, the IRS will be positioned to regain the trust of Congress.

The Commission is not convinced that current IRS budget resources are allocated optimally to support strategic priorities. As discussed earlier, the IRS has had difficulty redistributing budget resources to reflect organizational focus. Furthermore, the Commission found that there may be some inefficiencies in current operations, including excess middle management in the field operations and possibly in the national office. Section 3 of this Report makes specific recommendations to introduce managed competition into IRS operations, which will help the IRS find efficiency gains. Furthermore, the Commission found that increased electronic filing will lead to cost savings. The Commission encourages the IRS to continue to use its budget to support its operational goals and to streamline operations wherever possible. The new Board of Directors will be integral to this effort, because it will be the first time that a consolidated governance body has been fully accountable for aligning IRS budget and strategy.


Budget Recommendations

The Commission recommends that Congress provide the IRS certainty in its operational budget in the near future. We recommend that the IRS budget for tax law enforcement and processing, assistance, and management be maintained at current levels of funding for the next three years. To the extent, however, that Congress is satisfied that the IRS can provide it with accurate cost and revenue information, the Commission recommends that Congress be given the discretion to decide on an annual basis whether to increase the discretionary spending limits to the extent that revenue is collected consistent with taxpayer protected rights. If the Congress increases funding for information systems, the Commission recommends that any increases in the information systems budget be targeted toward building an integrated database of taxpayer information accessible to front-line personnel and toward certain success in handling the century date change.

Over the next three years, the Commission recommends improvements in financial management at the IRS. The IRS must obtain a clean opinion on its financial audit of appropriated accounts and make significant progress in receiving a clean opinion on the custodial accounts (revenues); have independent verification that its compliance and taxpayer service statistics are reasonably accurate; and gather accurate taxpayer focused operational cost data that is verified as reasonably accurate by an independent organization.

To the extent that the IRS finds savings from efficiencies, the Commission recommends that Congress allow the IRS to use these savings to reward employee performance and invest in priority IRS operations. Additionally, after the IRS regains the confidence of Congress, the Commission recommends that IRS managers be provided with expanded authority to manage the IRS budget. The Commission also believes there needs to be greater stability to the IRS budget. To this end, the Commission recommends that the IRS submit a multi-year budget to Congress. While Congress only will be required to appropriate one year at a time, it will appropriate with the knowledge of the long-term budget requirements in mind. Once Congress feels comfortable with IRS financial accountability, Congress should consider providing multi-year appropriations for technology and other important investments.

These recommendations for consolidated congressional oversight, a Board of Directors, increased authority over personnel for the Commissioner, and a stable budget are prerequisites for changes throughout the IRS. As a comprehensive package, these recommendations will begin the process of making the IRS an institution that everyday American’s find to be fair and efficient. With clear accountability and new leadership, the IRS will have the focus and direction required to drive changes throughout the organization.