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Congressional Testimony

STATEMENT OF THOMAS H. STANTON,
VICE CHAIR
STANDING PANEL ON EXECUTIVE ORGANIZATION AND MANAGEMENT

ACCOMPANIED BY
HERBERT N. JASPER
STANDING PANEL MEMBER

NATIONAL ACADEMY OF PUBLIC ADMINISTRATION

BEFORE THE
SUBCOMMITTEE ON GOVERNMENT MANAGEMENT, INFORMATION AND TECHNOLOGY
COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT
U.S. HOUSE OF REPRESENTATIVES

HEARINGS ON PROPOSALS TO RESTRUCTURE
THE INTERNAL REVENUE SERVICE

APRIL 15, 1998

Chairman Horn and Members of the Subcommittee:

Thank you for your invitation to testify on the management and organization of the Internal Revenue Service (IRS). My name is Thomas H. Stanton. I am Vice Chair of the National Academy of Public Administration's Standing Panel on Executive Organization and Management. Another panel member, Herbert N. Jasper, is accompanying me today.

Standing panel members have extensive experience and knowledge about the relationship of organizational structure to the quality of federal management. The panel or its members have often testified on issues such as those presented by the IRS Commissioner's reorganization plans and by H.R. 2676, including those considered in connection with the governance structure for the Social Security Administration and the Resolution Trust Corporation. This statement does not necessarily represent the views of the National Academy as an institution.

The Congress has a vital stake in assuring that IRS carries out the law in an accountable, effective and humane manner. The country will always need an IRS. Whether we have some form of today's tax system, a flat tax or a consumption tax, issues of implementation and good management will always be important to the American taxpayer.

In our testimony today we would like to make four major points:

• We support the recommendations of the National Commission on Restructuring the Internal Revenue Service and the provisions of H.R. 2676 to strengthen congressional oversight of IRS and dedicate greater congressional attention to management issues.
• H.R. 2676 would create an Oversight Board that would greatly limit the accountability of IRS to the Congress, the President and the Treasury Secretary, and damage the professional independence of the agency. These problems can be overcome if the Congress would alter the role of the Oversight Board to be advisory in nature.
• Management improvements must enhance, rather than detract from, the professionalism of IRS.
• Reorganizing a large and essential agency such as IRS is a process that is fraught with pitfalls. The Congress should refrain from specifying internal organization details in legislation.

Let's consider each of these points in turn:

IT IS IMPORTANT TO STRENGTHEN CONGRESSIONAL OVERSIGHT OF IRS

Similar to other large agencies, IRS receives oversight from a large number of committees and subcommittees. Most oversight tends to focus upon particular aspects of tax policy, not on the management implications of those policies. The Joint Committee on Internal Revenue Taxation has played a useful and continuing role in coordinating tax policies, but has not taken a similar role in considering tax system operations and IRS management.

Title IV of H.R. 2676 requires that representatives from three House and three Senate committees, including the House Committee on Government Reform and Oversight, conduct a twice-yearly joint hearing to review the strategic plans and budget of IRS. Further, the Joint Committee is directed to report annually to the six committees upon those matters, as well as on the state of our tax system, taxpayer service and compliance, and technology modernization. We believe those provisions offer an opportunity for constructive oversight of IRS management, as well as for review of tax policies.

This subcommittee could make a substantial contribution to such oversight. For example, the Senate Finance Committee has raised the specter of overbearing IRS collection of taxes. Needed is a congressional mandate for IRS to achieve effective collection of taxes owed while treating taxpayers fairly and decently. The provision of such a balanced mandate could occur through this subcommittee in the context of the Government Performance and Results Act of 1993 (GPRA). A first step would be to ensure that performance goals for the agency relate to the quality of IRS taxpayer service, and not merely to the amount of tax revenue to be collected. In enacting GPRA, the Congress cautioned agencies about the problem of distorted performance goals. The Senate Governmental Affairs Committee stated in its report on the act that, "It is very important that annual performance plans include goals, not just for the quantity of effort, but also for the quality of that effort." ("Government Performance and Results Act," report of the Committee on Governmental Affairs, United States Senate, to accompany S. 20, Report 102-429, September 29, 1992, p. 15. )

The then-House Committee on Government Operations similarly stated that: "The Committee believes agencies should develop a range of related performance indicators, such as quantity, quality, timeliness, cost and outcome. A range is important because most program activities require managers to balance their priorities among several sub-goals." ("Government Performance and Results Act of 1993," report of the Committee on Government Operations, U.S. House of Representatives, to accompany H.R. 826, Report 103-106, Part I, May 25, 1993, p. 17.)

In the face of pressures to strengthen tax collection efforts, and thereby to reduce the federal budget deficit, this emphasis on balance became lost. In congressional hearings, a General Accounting Office report, and appropriations hearings for the 1995 compliance initiative, IRS was pushed to become more effective at increasing revenues, both from additional audits and through collections from delinquent taxpayers. The need to assure fair treatment of taxpayers was neglected in this emphasis on revenue-raising.

Therefore, we recommend that Congress-and this Committee in particular-take an interest in the balanced implementation of GPRA by IRS, and the development and application of an even-handed set of performance goals. IRS must still be directed to collect the maximum amount of taxes owed, but should also deal reasonably and equitably with those who owe money to the government. GPRA, properly applied with assistance from this subcommittee, can help to set a balanced agenda for IRS.

With a clear set of balanced goals, IRS should then carefully review its internal rules and procedures. It must assure that any guidance to staff, as well as performance standards, and evaluation and reward systems and practices are consistent with the desired combination of effective tax collection and fair treatment of taxpayers. Perhaps a new code of conduct should be developed to embody this balanced approach.

THE PROPOSED OVERSIGHT BOARD WOULD
GREATLY REDUCE THE ACCOUNTABILITY OF IRS

The report of the National Commission strongly influenced the content of the bills now being considered by the Congress. Commission members or staff consulted several Fellows of the Academy because of their knowledge of IRS as well as the organization and management of large subcabinet agencies.3 These Fellows include Jonathan Breul, Sheldon Cohen, Alan Dean, Ronald Moe, and Edward Preston.
Since its release in June 1997, the report and the ensuing legislation have been discussed at length by Academy members.

We are pleased that the House substituted an Oversight Board for a board of directors. But, we do not think that the House-passed bill went far enough. H.R. 2676 gives the proposed Oversight Board authority to approve strategic plans, reorganizations, and budgets of the IRS. The bill gives private parties a voice in determining the deployment of the nation's tax collection apparatus and thereby invites self-serving actions by the private board members, or-at a minimum-the perception of such actions. Under this governance structure, the Secretary, the Commissioner, and individual board members, all will share accountability. Therefore, all will be able to point to others who hold partial responsibility for any actions that engender criticism.

Needed instead is a board whose role is advisory in nature to help infuse IRS with fresh points of view on behalf of the private individuals and companies that must pay taxes, while trying to comply with an immense amount of instructions, paperwork, and rules. Such a board could add its voice to those of the Taxpayer Advocate, and perhaps the Chief Inspector, to help inform the process of congressional oversight and raise timely issues of importance to taxpayers and lawmakers. To the extent that a board with an advisory role gives sound advice, and has the ear of the Congress and the Secretary as well, its recommendations will very likely be persuasive to the Commissioner.

Experience shows that, except for independent regulatory agencies with quasi-legislative and quasi-judicial functions, programs are most effectively managed when a single head is responsible and, of utmost significance, held accountable for performance. There is a real danger that subjecting the IRS Commissioner to additional demands and disagreements generated by the proposed Oversight Board may further compromise his ability to concentrate on essential management tasks such as the effective implementation of the Taxpayer Relief Act of 1997, modernization of the agency's technology, and the resolution of the year 2000 problem.

We believe that the provisions regarding the proposed Oversight Board would seriously jeopardize accomplishment of some of the principal objectives of the legislation. Most important, H.R. 2676 would give powers to the Oversight Board's powers that would make it impossible to hold anyone fully accountable for IRS' performance.

We do think the basic concept of having a group of very well qualified persons to review IRS strategic planning, management and operations, and to provide informed advice, is sound and helpful. A board with an advisory role to the Commissioner and the Secretary of the Treasury could open the agency to new ideas. Specifically, it could:

• help assess how the agency is perceived by its customers
• help think outside of the box, by assuring that genuine innovations receive full and fair evaluation and are not rejected out of hand by the bureaucracy
• suggest new management, organizational or administrative ideas or approaches
• provide a sounding board for innovations or changes that the Commissioner is considering

All of these functions could be performed by a board that is advisory in nature. Although the bill uses the term oversight to describe the board that it would establish, under H.R. 2676 the board would, in fact, be a governing board. We think it would be a serious mistake to make the Commissioner accountable to a part-time board dominated by eight private citizens.

The kind of board that we are proposing would differ greatly from the current Commissioner's Advisory Group. We are recommending a board that would have substantially more status and authority than the existing advisory group. That group is appointed by the Commissioner and its members serve for single two-year terms. It has no assured access to information, and it reports only to the Commissioner. By contrast, creating a board in statute would give its members more visibility and longer tenure and could guarantee them access to all pertinent documents and data. The provisions in H.R. 2676 could well be expanded and strengthened to assure the board's full access to information beyond the scope of strategic and operational plans, reorganizations and budgets, as now provided in H.R. 2676.

A statutory charter would also provide the new board a formal reporting channel to the Secretary, the Congress and the President. The board could be charged by law with such an important and sensitive function as reviewing complaints of abuse, a responsibility not assigned to the existing advisory group.

The Congress would very likely pay as much attention to the views of a board with a review and advisory role as it would to a board that had decision-making authority. Indeed, the Congress could expect more candid views from such a board than from one that had already approved the decisions that the Congress might be inquiring about, or challenging.

In short, we see many benefits flowing from a strong board with an advisory, rather than governing, role. It could provide the fresh view of outsiders. Those benefits can best be achieved without the dilution of accountability and the additional "layering" that would occur if the board is part of the decision-making process.

Finally, we urge that the provisions respecting the Oversight Board be made subject to a sunset provision. Perhaps a five-year trial period would be appropriate since that is the term proposed for the Commissioner. The ten-year sunset provision, as recently proposed by the Senate Finance Committee, appears to us to be too long a period of time.

MANAGEMENT IMPROVEMENTS MUST
ENHANCE, RATHER THAN DETRACT FROM,
THE PROFESSIONALISM OF IRS

Here, we would like to consider three issues raised by H.R. 2676: (1) freedom of IRS from political influence, (2) merit principles and personnel flexibility, and (3) the need to evaluate the consequences of the sweeping changes contemplated by H.R. 2676.

Prohibiting political influence in tax enforcement. This subcommittee is well aware that the nation's tax system must be administered by an impartial, non-political, and competent workforce. Such professional administration has not always been the case at IRS. In the early 1950s, the American public was shocked by numerous reports of IRS employee embezzlement and bribery. To halt this corruption, the Congress enacted the 1952 requirement that all IRS employees under the Commissioner be hired, trained, evaluated, and promoted under the merit system.

Experience since 1952 has demonstrated the wisdom of that congressional decision. The subsequent change in IRS' image was striking. For decades, IRS was viewed as one of the better-managed and professional agencies. The recent Senate Finance Committee hearings and the year-long investigation of IRS by the National Commission have not shown-or even alleged-the kinds of employee embezzlements and bribery that precipitated the 1952 reforms. The revealed abuses were related to overzealous efforts to collect money for the Treasury, not to put money in the employees' own pockets. So we urge that this bill continue to stress the importance of a non-political, highly qualified workforce.

We strongly support the prohibition in Section 104 of any attempt by some future President or other Executive Branch official to influence tax audits or investigations. Some of the recently released "Nixon tapes" reveal his anger and frustration over the fact that he had been unable to get IRS career personnel to audit taxpayers whom he regarded as his political enemies, and that he wanted to get a new Commissioner who would bend the career people to his wishes. There have been reports suggesting that similar efforts were made by other presidents or White House staff as well.

We believe that the prohibition on influencing tax audits is so significant that the Congress ought to extend it to cover all political appointees in the Executive Branch except for specified officials, such as those in appropriate posts at the Justice Department, whose official functions would require such involvement. In addition, we respectfully suggest that similar provisions be applied to the legislative branch.

Merit principles and personnel flexibilities. We recommend that Congress strengthen the provisions to assure that merit principles are applied to the hiring of all IRS employees below the level of Commissioner. Otherwise, over time, the agency is likely to be offered a remarkable array of politically well-connected, but marginally qualified, people for positions that were intended to be filled by experts.

H.R. 2676 provides an excellent opportunity to take further steps toward fulfilling the congressional intent of the Civil Service Reform Act of 1978. That legislation was designed, on the one hand, to encourage development of a far simpler civil service system which provided agencies and managers with the flexibility to modernize federal human resource management so the federal workforce could be more responsive to contemporary challenges.

On the other hand, the Congress also included among the 1978 reforms a series of provisions designed to prevent the new flexibilities from being manipulated in ways that undermine the principles of a professional workforce chosen on merit and protected from politicization. Such protection is of the utmost importance in administering our tax laws.

A set of merit principles was included in the 1978 law, together with a Merit Systems Protection Board (MSPB) and Special Counsel, to guard against violation of these safeguards as well as to prohibit discrimination. These provisions were included because of earlier experiences when the lack of safeguards permitted the positive steps of streamlining federal operations to be manipulated in ways that brought political intervention, resulting in scandal and lowered confidence of citizens in their government.

We note that the effort to shield IRS from politically-motivated actions would be strengthened by assuring that all of its personnel, including those placed in newly authorized management or specialist positions, are not hired because of their own political connections. The 1952 requirement that all employees below the Commissioner be hired on merit has worked well, and we recommend that it be retained in this bill. We, therefore, urge that Section 7804(a) of the bill be amended to require that all such employees: (1) be selected on a non-political and non-partisan basis; and (2) be selected strictly on the basis of merit and qualifications.

In a number of panel reports, the Academy has urged that federal personnel rules be made more flexible, as contemplated in the civil service reform law. (E.g., "Revitalizing Federal Management: Managers and Their Overburdened Systems," Report of an Academy Panel, 1983, and "The Role of the Office of Personnel Management," Academy Standing Panel on the Public Service, 1991. )

Therefore, we were glad to see that the House bill provides such flexibilities. And, we strongly support the provision that these authorities must be exercised in a manner consistent with merit system principles.

We recognize that IRS, from time to time, needs to hire experts from the private sector in such fields of expertise as information technology and customer service. But many federal agencies, including IRS, itself, as well as NASA, FAA and the Defense Department, have already demonstrated that such experts can and should be selected and hired on a merit basis. Indeed, some agencies have found that political pressures to hire marginally qualified or even unqualified people sometimes can be avoided only by requiring merit hiring. Since tax policy responsibilities will remain with Treasury Department officials, we think such new hiring should, like all other IRS employees, be carried out on a merit basis.

To be sure a proper balance is maintained between using the new flexibilities and observing merit principles, we urge that Section 9301(a) be revised. It must make clear that the organizations with responsibility for dealing with violations of merit principles through appellate and oversight processes under the 1978 civil service reform and earlier legislation (MSPB and its Special Counsel, as well as the Office of Personnel Management (OPM)) still retain this responsibility with respect to IRS.

The need to evaluate the consequences of H.R. 2676. The Congress is developing legislation that, in its current form at least, would fundamentally change IRS, and the agency's performance. Therefore, an organized independent evaluation of these changes and their effectiveness should be planned. The evaluation should be conducted once the changes are in place, and sufficient time has elapsed to measure their effects, for two reasons.

First, it will be important to see whether the changes are achieving the objectives sought by the Congress -and if not, why not. The good intentions of the legislation may be thwarted by the unintended consequences that so often bedevil public administration. An evaluation would allow the Executive Branch and the Congress to take corrective action.

Second, several of the changes may provide lessons for other agencies. A thoughtful evaluation will allow the Executive Branch and the Congress to determine which lessons are specific to IRS and which could be generalized.

If a comprehensive evaluation is desired, it will be important to authorize it in the current legislation. The evaluation needs to measure agency performance both now and after changes have been adopted, using a common set of metrics. Equally important, it must start with the objectives sought by the Congress, understood not in the imperfect mirror of hindsight, but with the freshness and accuracy that only contemporary involvement can provide.

REORGANIZING A LARGE AGENCY
IS FRAUGHT WITH PITFALLS

We have read with great interest Commissioner Rossotti's Fact Sheet describing his plan to modernize IRS, and his letter to Chairman Horn. We have also met with the Deputy Commissioner, who explained to members of the National Academy's Standing Panel on Executive Organization and Management the purposes and principal features of the modernization effort.

We applaud the Commissioner's desire to put in place reforms that will overcome or mitigate identified deficiencies in the way in which this large and vital agency functions. Rapid changes in technology alone make it imperative that IRS adjust to take advantage of the opportunities to expedite the handling of returns.

Fellows of the National Academy have been involved in most of the major reorganizations which have taken place since the first Hoover Commission (1947-1949). That experience leads us to give this advice to the Congress and to the Commissioner. We urge that legislation dealing with the internal structure and management of IRS be confined to matters of policy and the governance of the tax collection agency. The Congress should refrain from the detailed prescription of the agency's headquarters or field structure. The Commissioner has indicated the complexity of the changes he is considering. He has also stated in his letter to Chairman Horn that, "Much study is required to validate this modernization concept and to decide on hundreds of details."

It has been our experience that few major efforts to reform large agencies escape the need for significant adjustments. Thus, any legislation that prescribes the internal structure of the IRS is more likely to place impediments in the way of needed reforms than to facilitate them. The Department of Transportation Act, as overwhelmingly approved by the Congress in 1966, provides a good model. That legislation created the department and placed in it such major entities as the Federal Aviation Administration (FAA) and the Federal Highway Administration; but it did not go beyond providing for the administrators and their deputies. This approach has enabled the Department of Transportation and its components to adjust, from time to time, to changes in practices, priorities and technology.

Our advice to the Commissioner in proceeding with his modernization concept is to "look before you leap." Hence, our enthusiasm for his recognition of the need for further study of what he has proposed. Changes in the organization and systems of management of Federal agencies are inevitable, and this is certainly true of IRS. But reorganization involves costs as well as benefits. Employees must be retrained and must learn to cope with new approaches to their work and new relationships. Offices may have to be relocated. The users of the agency's services have to be informed of all aspects of the changes that will affect them. Major changes in large agencies also require several years to plan and implement, during which time management must cope with, one hopes, temporary losses of productivity.

We give this advice not to discourage needed reorganization, but to emphasize that it is essential that management assure itself that the changes are really needed, that they are the best that can be effectively implemented, and the benefits will clearly exceed the inevitable costs. Careful analysis and planning and pilot-testing should precede the commitment to proceed with an agency-wide reorganization.

An example of the total reform of a major sub-cabinet agency which was successfully designed and implemented was that of FAA in 1963-1966. In this instance, an over-centralized agency divided into "stove-piped" bureaus was adding several thousand employees per year and still having difficulty coping with the growth in aviation activity. A study was launched by the agency's Office of Management Analysis which concluded that the bureaus should be abolished and the bulk of operations delegated to a new group of regional directors. The plans for these radical changes were subjected to review and comment by both headquarters and field officials. This was followed by a three day conference of top officials of FAA.

When the Administrator decided that the decentralization should proceed, FAA established a new region to test the key elements of the reform. When the test proved successful, regional directors were chosen for five additional regions. Next, the bureaus were replaced by staff "services" and several hundred headquarters positions were abolished or moved to the field. The entire process was closely monitored by the agency's strong management analysis staff and agency orders and practices were revised to reflect the decentralized mode of operations. Four years later, the regional system was still being fine-tuned, but the resulting efficiencies had permitted the down-sizing of the agency from 45,000 to 41,000 employees, without compromising the quality of its operations.

By contrast, in our National Academy studies, and in our work with various agencies, we have encountered a number of instances in which haste in seeking to reorganize an agency has resulted in a disappointing outcome. Recent examples are abolishing the regions of the Department of Housing and Urban Development, the former Department of Health, Education, and Welfare and the Corporation for National Service. The unfortunate lesson here, Mr. Chairman, is that there is no agency in the Executive Branch so poorly organized or managed that a badly conceived or implemented restructuring cannot make it worse.

We believe it is essential that the pending legislation refrain from addressing the details of internal organization for IRS. Further study and pilot-testing may dictate the need for changes that could be barred by the provisions in statute. Such a legislative straitjacket would ill serve the agency, the public and the Congress.

CONCLUSION

We applaud the efforts of the National Commission and the Congress to reform IRS. We note that IRS is already undergoing substantial change under the direction of its new Commissioner. We believe that you should give the agency and its new leader an opportunity to show what they can do. Creating a governing board at this time (regardless of what it is called) can only delay the pace of progress and confuse responsibility and accountability.

In earlier legislation relating to agency governance structures, the Congress decided wisely to create advisory type boards for the Social Security Administration and the Resolution Trust Corporation, instead of governing boards. We strongly believe that the current reform efforts will be seriously compromised unless the Congress makes the same arrangement for IRS.

Following are ten principal changes that we believe need to be made to H.R. 2676, as it has been ordered reported by the Senate Finance Committee, to help assure that the broad purposes of the legislation can be accomplished:

• Convert the Oversight Board to a board that is advisory, rather than governing, in nature by deleting its approval powers, as well as the power to transmit IRS' budget.
• Eliminate the board's explicit power to recommend the Commissioner's removal.
• Vest in the President the power to name the board's chair.
• Require board meetings once a quarter rather than monthly.
• Make the detail of personnel to the board subject to the Commissioner's discretion, and delete the board's authority to procure temporary and intermittent services.
• Restate the continued authority of today's oversight and appellate agencies to assure the preservation of merit principles for all personnel actions, not just those taken pursuant to the new flexibilities granted.
• Preserve the "120-day" rule for the Senior Executive Service, with an exception allowed for only the Deputy Commissioner.
• Provide that the board shall be terminated after five years unless extended by statute.
• Commission an independent evaluation of the functioning of the board and the other innovative features of the bill.
• Delete the legislative prescription for a new organizational structure and encourage the Commissioner through report language to proceed cautiously and methodically toward developing and testing a structure that will enhance customer service while preserving efficiency and effectiveness.

Only with such changes do we believe that IRS, even under a strong Commissioner with long experience as a manager, will be able to measure up to your expectations.

Mr. Chairman, this concludes our statement. We will be glad to answer any questions.