Folded, Spindled . . .

Democrats, Republicans and even Ross Perot have vowed to transform--and perhaps eliminate--the IRS. They cite inefficient management, ineffective modernization, intrusive collection methods. Yet some critics also say that many of the agency's problems are not its fault.

Vol. 28, No. 40

Democrats, Republicans and even Ross Perot have vowed to transform--and perhaps eliminate--the IRS. They cite inefficient management, ineffective modernization, intrusive collection methods. Yet some critics also say that many of the agency's problems are not its fault.


roud, secretive, powerful--and, some charge, incompetent--the Internal Revenue Service (IRS) has been challenged by a Democratic Administration and a Republican Congress to either roll into the 21st century--or get rolled.

A veritable posse has formed to run it down. In just one day in mid-September, a fusillade sprayed the revenue boys: A Senate oversight committee held hearings critical of the IRS's management; a special congressional commission convened to examine the agency's future; and two reports from Congress's investigative arm, the General Accounting Office (GAO), questioned its capabilities. By summer's end, the GAO had issued at least 14 such reports since early this year.

And while the candidates bandy tax cuts and reforms about the hustings in this presidential campaign season, it is the tax man who gets caught in the cross fire. GOP presidential nominee Robert Dole has pledged to ``eliminate the IRS as we know it'' and has called the service ``intrusive'' and ``oppressive.'' Reform Party candidate Ross Perot titled one of his recent infomercials ``Power to the People, the End of the IRS.''

The Republican Congress would, if not ``tear the tax system up by its roots,'' as House Ways and Means chairman Bill Archer of Texas has urged, at least prune its branches. The Senate version of the fiscal 1997 budget called for $1.1 billion less than the Administration's $8.06 billion IRS budget request. The House would have cut even more. IRS spokesman Frank Keith said, ``That would be devastating.'' In the end, the amount Congress appropriated--$7.03 billion--came closer to the Administration's request but was $315 million less than the fiscal 1996 appropriation.

Congress has come to see the IRS as a money pit: Its budget has nearly tripled since 1979, but tax returns haven't been processed much faster than in the past, nor have collections increased significantly. Modernization has seemed ``chaotic'' and ``ad hoc,'' according to language in the fiscal 1996 appropriations bill. Worse, for four years running, the IRS has flunked the very sort of financial audits for which it penalizes taxpayers.

The ``IRS has not yet been able to provide support for major portions of the information presented in its financial statements, and in some cases where it was able to do so, the information was found to be in error,'' Comptroller General Charles A. Bowsher wrote in a July GAO report.

The IRS is aware that it has some problems but also notes that politics is involved. ``There's a presidential election under way,'' an IRS spokesman said in response to the recent criticisms. ``We're an agency in transition, and there have been things that the IRS hasn't done well.''

The IRS spokesman referred to recent comments by deputy Treasury secretary Lawrence H. Summers, who told a congressional committee that the agency's efforts to modernize had gone ``badly off track. . . . The criticisms are fundamental, and they go to the heart of the program.''

Still, rebukes of the IRS are not aimed at its integrity, as was the case during the Watergate era. Critics reproach the IRS for its management or, some say, mismanagement of a transition into a consumer-oriented universe.

Reform is the word of the hour. Until now, it was expected that the IRS would reinvent itself. Beginning in January, for instance, the sprawling bureaucracy that employs 106,000 people will trim 5,000 jobs, largely on its own initiative.

But the core program in the IRS's 10-year-old streamlining effort has foundered, to the tune of billions of dollars. ``A $500 toilet seat,'' a congressional aide said of the super-project known as Tax Systems Modernization (TSM), an effort to bring the IRS's paper jam of an operation into the digital era.

The problem, according to critics and supporters, is that the IRS is an overweening hierarchy dishing out a menu of intransigence and inefficiency. Its management structure was bred in the 1950s; its forms are too complicated for many to read; its telephone help lines often go unanswered or provide incorrect information. Too often, the IRS can seem to be an enigmatic bureaucracy functioning beyond due process or appeal.

A result of the IRS's Kafkaesque image, not to mention its all-too-real failings, is that the initiative for reform is slipping away from the agency. Increasingly, appropriations and oversight committees, special commissions and private consultants are determining its future.

This movement from internal to external reform marks a turning point, but it may also be the agency's last, best hope, according to Christopher E. Bergen, the editor of Tax Notes, the tax practitioners' answer to the entertainment industry's Variety. ``The IRS has a bunker mentality,'' he said in an interview. ``It may even be an agency in danger of going out of control.

``But,'' he continued, ``it should not be made a part of the debate surrounding the tax system. The IRS and the flat tax are separate issues. The complexity of the tax system isn't its making; it's Congress's. But [IRS officials] get sucked into the debate because they make themselves a target.'' In many ways, the agency is its own worst enemy. ``You don't necessarily need a tax lawyer to run the IRS,'' Bergen said. ``You need a general. Someone who won't be captured by the bureaucracy.''

Congress, Heal Thyself

In the last days of summer, the IRS and its plans for reform ran out of time. Congress began laying down ultimatums and ordering budget cuts. The era of self-reform had passed.

A tough House Appropriations Subcommittee on Treasury, Postal Service and General Government last year forced the first real budget cuts in the IRS's 60-year history, lowering its fiscal 1996 appropriation by 2 per cent. Subcommittee chairman Jim Lightfoot, R-Iowa, has called the agency's TSM project a ``$4 billion rat hole.''

The Treasury-Postal appropriations bill, which finances the IRS, had stalled in the Senate but was folded into the omnibus appropriations bill that Congress passed on Sept. 30 to avoid the preelection debacle of a government shutdown.

The total TMS appropriation of $336 million is almost half what the Administration had sought for fiscal 1997, and the measure has fenced off the fourth-quarter apportionment for TMS--about $50 million. ``The money is there,'' Lightfoot said in an interview, ``but for the IRS to get it, they're going to have to bring forward for the first time in their history a design showing how they intend to use and spend this money, and the time frame in which they're going to complete their effort.''

The Senate has shown little sympathy for the IRS. Governmental Affairs Committee chairman Ted Stevens, R-Alaska, has conducted four hearings this year on IRS modernization problems. A GAO report prepared for the panel's final hearing found that Cyberfile, a $22 million project designed to allow taxpayers to submit returns through their home computers, was a failure. Stevens called it a ``fiasco.'' Cyberfile, the GAO said, was ``hastily initiated,'' its development was ``undisciplined'' and the project was ultimately ``poorly managed and overseen.'' As a result, Cyberfile was not delivered on time and was suspended after $17.1 million had been spent on it.

Ironically, taxpayers may already file by home computer, as was planned under Cyberfile, but through private on-line services, which typically charge a fee of about $15. The chief virtue of Cyberfile was that it would have eliminated this small fee.

Governmental Affairs ranking Democrat John Glenn of Ohio, considered by many to be a friend of the IRS, has long tried to work the bugs out of the modernization. ``The problem for the IRS is complexity,'' he said. ``They do hundreds of millions of transactions each year, and by and large, they do an amazingly good job with outworn equipment.''

A sampling of the IRS's own figures shows that it processes 200 million tax returns annually and handles 1.1 billion information returns, such as correspondence and collection notices. In addition, the service annually determines the tax status of some 60,000 employee compensation plans and examines the status of 90,000 exempt organizations. The $1.4 trillion a year it takes in as tax revenue dwarfs the bottom line of even the largest multinational corporations.

Glenn said, ``Our tax code has gotten so complicated, it's difficult to think that anyone could run it. In fact, the problem with the IRS starts right here in Congress. We're the ones who keep changing the rules. It's up to us to clean up the tax code.''

Customer Service

The first public meeting of the National Commission on Restructuring the Internal Revenue Service, on Sept. 10, marked perhaps the most ambitious bid to take over reform of the IRS. An amendment by Senator Robert Kerrey, D-Neb., to the fiscal 1996 Treasury-Postal appropriations bill established the 17-member, bipartisan commission, which Kerrey co-chairs with Rep. Rob Portman, R-Ohio.

The commission, whose members also come from the executive branch and the private sector, officially began work on Aug. 28 and is to report its findings on June 15, 1997. In an interview, Kerrey said that its goal is to structure an IRS that treats taxpayers as customers. He said he thinks the agency should provide the same level of services as do private corporations. Citing a prominent credit and financial services company as an example, Kerrey said, ``I don't think it's utopian at all to imagine an IRS working as well as that.''

The Portman-Kerrey panel will address six ``core'' issues that the commissioners say will ``ensure an effective and user-friendly federal tax administration system'': high-quality service to taxpayers; a fundamental review of the agency's organizational structure; a review of employee training and creation of incentives to motivate and retain a skilled workforce; a systematic move toward state-of-the-art technology; improved financial accountability for the agency; and the simplification of tax administration.

As Kerrey sees it, Glenn is correct. Congress is as much a part of the IRS's problem as it is a part of the solution.

Kerrey said that during the Sept. 10 session he asked IRS commissioner Margaret Milner Richardson ``if it was the Congress that had made her work at reforming the IRS more difficult, and she replied yes. But when I asked her if she ever appealed to the President to veto problematic legislation, she said no.''

Kerrey said he had not expected the commissioner to defy President Clinton or make his job more difficult. Kerrey sees a complicity of silence on the part of both Democrats and Republicans to go along to get along. ``A conspiracy,'' he called it. ``We go out and explain to citizens that the IRS isn't doing a good job,'' he said acidly, ``then we enact changes to make its job harder.''

Commission co-chairman Portman also zeroed in on Congress. ``We have to look at the tax code, in which Congress could help the IRS do its job through simplification and fewer changes in the law each year or each month.''

But finding the silver bullet necessary to end the tribulations of the tax agency will be difficult at best. Bergen, Treasury Department union chief Robert M. Tobias and others involved with the IRS say that it may be asking far too much of the Portman-Kerrey panel.

And a well-regarded expert on the Treasury and IRS said, ``The structure of this commission is disastrous. It's very politicized, and it could be pulled apart ideologically. Here's a classic instance where a balanced view is necessary to sort out complex programs. You need people with analytical expertise, and that's not here. With the people appointed to this commission, that sort of ideological crap will always be on the table. It's frustrating.''

One of those appointed to the commission is Grover G. Norquist, president of Americans for Tax Reform, who has taken radical stands on tax issues.

Norquist is a close adviser to House Speaker Newt Gingrich of Georgia. A political conservative and economic libertarian, he has long maintained that slashing revenues is the most direct route to downsizing government. He sees the IRS, for example, as an organization that intrudes on people's privacy. But simply shrinking the IRS would not solve the problem, he said.

Norquist recounted an allegorical joke he told recently at the annual meeting of the Christian Coalition: ``A fellow walks into a bar and orders a bourbon and Coke, and immediately becomes ill. The next day he goes to the bar and orders a bourbon and branch water. He gets sick again. On the third day, he tries bourbon and soda, but still gets sick. Suffering, the man mumbles to the bartender, `One of these days I'm going to find a mixer that doesn't make me sick.' ''

Norquist concluded, ``The central question is how much money the federal government takes, and that certain taxes are more intrusive than others. That's not the fault of the IRS, that's the fault of the tax code.''

There are those, however, who suggest that the commission's ideological diversity may work in its favor. Of the panel's wide-ranging makeup, former IRS commissioner Lawrence B. Gibbs said, ``That's real life out there.'' He noted that there are ``thoughtful'' members on the commission and that much of the responsibility for its success lies with its staff.

And even Norquist allows that the tax agency's travails are not a partisan issue. He applauded the commission's chief of staff, Jeffery S. Trinca, former chief tax counsel to Senator David Pryor, D-Ark.

Trinca largely crafted Pryor's 1988 Taxpayer's Bill of Rights, which built more due process into the public's dealings with the IRS. Trinca marshaled support for the successful measure through a coalition that included Norquist, Republican Senator Charles E. Grassley of Iowa and conservative David L. Keating, the executive vice president of the watchdog National Taxpayers Union--all of them Portman-Kerrey commission members. (Clinton signed an updated version of the bill this summer.)

Trinca operates the commission with a $1 million budget and 10 paid employees. He also has volunteer help. He said of his volunteers, ``These are top-flight people willing to work for free to fix the system.''

``The IRS was due for a commission like this one,'' Keating said. ``The IRS believes its mission is to collect taxes whether they are owed them or not. Getting them to change its culture is a difficult and hard task.''

Gibbs, who served during President Reagan's second term, testified at the commission's first public meeting. In an interview, he expressed confidence in the panel members' approach. ``That they chose quality and customer service as the focus of their first public meeting was good news to me,'' he said. ``It's time we begin to ask the question, what do we want from the IRS? There's no magic fix. You have to motivate, train and equip.''

In 1985, the year before Gibbs became commissioner, the agency's computer problems were so serious that 85 million tax refunds were delayed.

Gibbs told the Portman-Kerrey commission that although he overcame that problem, fixing the IRS was not an organizational or management issue. Rather, he said, it was a matter of ``empowering'' the agency's workforce.

Gibbs believes that too much responsibility is foisted on the IRS. It becomes the organization of last resort for solving the problems of other branches of government. He cited the agency's oversight of charitable contributions, pensions, student loans and child support, as well as its role in tracing funds used by drug dealers and money launderers. ``It was left to the IRS to catch [Al] Capone and [Jimmy] Hoffa, because they were the only . . . agency that could,'' Gibbs said, citing the income tax evasion cases of the Chicago mobster and the Teamsters Union leader.

IRS Makeup or Makeover?

Tobias, president of the National Treasury Employees Union, which represents IRS workers, said in an interview that the IRS has a problem with public perception. Agreeing with Gibbs's assessment, he said, ``The IRS should be focusing on customer satisfaction so the public will understand the need for compliance.''

Polls conducted for the Portman-Kerrey commission show that customer satisfaction with the IRS is falling. Yet the IRS's own evaluations indicate steady improvement in agency performance.

So where is the disconnect?

Tobias noted that most taxpayers are compliant. He quoted IRS figures that show 80 per cent of taxpayers are 99 per cent compliant. ``Those are people using standard deductions,'' he said. ``They aren't complaining about the tax code. It's the rich who complain and use the IRS as an excuse. They just want to change the tax code in their favor.''

According to a poll conducted by the Roper Organization Inc. in June, the IRS's favorability rating among the public rose 5 percentage points to 41 per cent from 1995-96, although this figure is still below the 50 per cent approval rating it received in 1990. Since 1983, the popularity of the IRS has been in close lockstep with that of other federal agencies.

``The performance of the IRS has not been getting worse,'' Portman-Kerrey commissioner James W. Wetzler said. ``In fact, it's been improving by almost any measure.'' Wetzler, a director in the New York City office of the Big Six accounting firm Deloitte & Touche, said the problem is that the IRS has not been keeping pace with the private sector. ``So, in the public's view, the IRS is losing ground.''

In 1987, C. Eugene Steuerle, then deputy assistant Treasury secretary for tax analysis, tried to achieve many of the same administrative reforms that the Portman-Kerrey commission seeks. ``Our aim then was tax simplification,'' he said.

Steuerle, now a tax expert at the Urban Institute, pointed to Clinton's and Dole's tax proposals: ``Those changes aren't going to simplify the tax code. They're going to make it vastly more complex.''

Simplifying the tax code is ``very tedious work,'' Steuerle said. ``It's not at all glamorous. It's line-by-line, and every change creates winners and losers. So you pay a political cost to get there.''

And that is the irony that the IRS and those who would change it face, Steuerle said. ``In an effort to bring fairness into the system, you can't avoid complexity.''

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