Nearly 50 percent of Americans say they'd rather have their wallets stolen than be audited by the Internal Revenue Service (IRS). That factoid, highlighted in a recent mailing sent out by once and future presidential candidate Steve Forbes, dramatically illustrates the public sentiment that led the White House to execute a striking about-face. On Oct. 21, Treasury Secretary Robert E. Rubin declared that the Clinton Administration would support an IRS restructuring bill it had been denouncing for months.
Treasury officials tried to shrug off their unexpected maneuver as a reasonable response to altered circumstances. The latest version of the measure, which had just been unveiled by House Ways and Means Committee chairman Bill Archer, R-Texas, included several deal-making changes, they insisted. Chief among them: the President would retain his ability to hire and fire the IRS commissioner--a power the original proposal would have handed to a new IRS oversight board dominated by private-sector members.
"We felt it was very important to maintain central principles," deputy Treasury secretary Lawrence H. Summers told reporters. "Relative to some of the proposals that were circulating as recently as a few days ago, we have made very substantial progress in getting this bill to be something that with further evolution we can be very comfortable with."
Nevertheless, as insistently as the Administration rationalized its reversal, a number of experts on the IRS complain that maintaining "central principles" is precisely what it didn't do. "This was a stampede, and they had a choice of either being trampled or joining in--and they decided to join it," said Donald F. Kettl, director of the LaFollette Institute of Public Affairs at the University of Wisconsin (Madison). G. Jerry Shaw, a lawyer who spent a decade at the IRS and who now represents senior federal civil servants in his private practice, agreed that the shift was "the least exercise of a profile in courage I've seen for a long time," adding, "I think the Administration just took a dive on this."
With House passage of the restructuring package virtually assured and Senate action likely in the new year, some specialists fear that Washington is rushing headlong into an unprecedented IRS overhaul that represents the triumph of politics over substance. "There's an often-disturbing tendency in Washington," Kettl said, "to leap quickly into management reforms without thinking whether those reforms are going to solve the problems, and I think that's the case here."
Yes, Politics Was Involved
Treasury officials say they negotiated several key compromises that made the bill palatable. Along with the changed hiring and firing provision, the Administration welcomed language in the revised bill stating explicitly that the new oversight board wouldn't control the IRS's law enforcement activities and that the Treasury Secretary would retain authority over the IRS commissioner.
Treasury officials still worry about a provision in the bill that would shift the burden of proof in tax court cases from the taxpayer to the IRS. But, they emphasized, unlike more- radical proposals that have been floated over the years, this provision would still require taxpayers to keep records that substantiate the income and deductions they claim on their tax returns.
For all the substantive details cited by Treasury, there's no great mystery behind the politics driving the White House's change of heart. To many analysts, the only surprise was that the Administration didn't act sooner to jump on the anti-IRS bandwagon.
White House and Treasury opposition to the IRS overhaul bill had become increasingly hard to sustain following the Senate Finance Committee's showy September hearings, where taxpayers recounted harrowing tales of mistreatment by the IRS. Although the overhaul legislation grew out of recommendations made in June by the bipartisan National Commission on Restructuring the IRS, co-chaired by Sen. Robert Kerrey, D-Neb., and Rep. Rob Portman, R-Ohio, the Finance Committee hearings led Republicans to redouble their efforts to seize the tax issue as their own.
Because Hill Democrats didn't want to get left in the dust, it became ever more likely that the restructuring bill would pass the House with a veto-proof majority. To cap it all off, Vice President Al Gore's likely No. 1 opponent in the 2000 presidential primary season, Minority Leader Richard A. Gephardt, D-Mo., announced his support for the measure. The words were barely out of his mouth when Rubin declared that the Administration would back the bill, letting the White House cut its losses and--maybe--robbing Republicans of a midterm campaign issue.
But while the populist appeal of shaking up the tax- collecting agency is widely understood, there is less consensus among experts that the restructuring legislation will really accomplish much. To be sure, students of the IRS applaud many parts of the measure, including proposals to improve procurement and personnel practices and to beef up congressional oversight. But by far the most radical and contentious element of the shake- up plan, the provision that once seemed certain to be a deal breaker for the Administration, continues to be the oversight board.
The commission Kerrey and Portman headed initially recommended a seven-member board. Now the revised legislation calls for 11 members: eight private citizens from outside the federal government with expertise in such areas as "management of large service organizations," information technology and federal tax laws; the Treasury Secretary or deputy secretary; a representative of the tax agency's employees' union; and the IRS commissioner. The private-sector and union members would be appointed by the President and confirmed by the Senate.
The board would have significant powers. It would oversee the agency's strategic plans, review its basic operations and approve its annual budget request. The President would be required to submit the board-approved budget to Congress each year, although he could also submit his own separate budget for the agency.
Boosters of the oversight board maintain that the Treasury Department simply has too much else to do for it to adequately ride herd on the IRS.
"Treasury also oversees U.S. domestic and international financial, economic and tax policy, including the specific responsibilities for managing at least 10 other major agencies and bureaus, such as the Office of the Comptroller of the Currency; the Bureau of Alcohol, Tobacco and Firearms; the Customs Service; the Office of Thrift Supervision and the Secret Service," Portman said in a July 31 statement that accompanied his bill. "The lack of focus on the IRS is a natural result of these distractions and the disconnect between the important policy functions of the Treasury Department and the operational challenges of the IRS."
Nuns and Monks Wouldn't Do
Until its recent flip-flop, the Administration argued strenuously that the oversight board would give the private sector unacceptable power over a fundamental function of government. It singled out for concern what Treasury Department general counsel Edward S. Knight, during remarks in August to an American Bar Association (ABA) gathering, called "the potential conflicts of interest and appearance problems created by this private-sector board with vast power over every American." He raised the specter of "the CEOs of IBM (information technology), American Express (customer service), GE (organization development) and H & R Block (service organization) meeting to discuss the appropriate audit policy for the IRS."
Knight also told the ABA tax section's annual meeting that under the legislation, the part-time commissioners would be treated as "special government employees." Such employees are subject to ethics rules different from those that apply to full- time government officials and, with some restrictions, may represent private parties before the agencies they serve. "Therefore," Knight said, "the chairman of XYZ can serve on the IRS board on Monday, in which general procurement policies and strategies are discussed, and then turn around on Tuesday and represent XYZ in a procurement contract pending before the IRS. He can get a bonus from his company for his procurement work at the IRS. How long would the American people stand for that?"
The latest version of the restructuring legislation says the board would have no involvement in "specific procurement activities," but that restriction might not address Knight's concern. In theory, a board member who works for IBM could still participate in a general board decision about whether the agency should switch from mainframes to PCs. If PCs got the nod, IBM's IRS board member could then be permitted to go to bat for IBM against Compaq in his private role.
Knight's concerns aren't all that far-fetched, according to Donald C. Alexander, IRS commissioner from 1973-77 and now a partner at Akin, Gump, Strauss, Hauer & Feld. If a former airline CEO is named to the board and the IRS has to make a major decision on, say, how it treats airline taxes, Alexander said, "is anybody going to believe that there wasn't undue influence there?" The board will represent "a field day for the Washington press, because of the perception, if not the reality, of conflicts of interest," he maintained.
Kettl, who heads the Brookings Institution's Center for Public Management, recently wrote a critical assessment of the Kerrey-Portman commission's blueprint. Despite the changes that have been made in the current legislation, he calls the private- sector board "a terrible idea that may also be irrelevant."
Kettl's complaint is partly practical and partly philosophical. He believes that the IRS has three central problems: providing better customer service, ensuring better taxpayer compliance and solving its $4 billion computer mess. There's no reason to believe that simply creating an oversight board will fix these, he said. The board won't have an easy time "grabbing the IRS by the scruff of its bureaucratic neck" and forcing changes in problems deep within the agency, he said. What's more, Kettl noted, changing burden-of-proof rules could well make it harder to improve compliance.
Philosophically, he argues, private-sector IRS oversight simply goes too far. "A public board on the outside can play a valuable role in focusing attention" on the agency, he said. "But the problem is that creating a board that has authority over the IRS crosses the line over what should and shouldn't be in the hands of the private sector." Backers of the overhaul have noted that the private-sector members won't necessarily come from the corporate world--some might be academics, state tax officials or executives of nonprofit organizations. But Kettl says if he were to serve on such a panel and the subject of tax treatment of donations to universities came up, he'd have to recuse himself, or he would create "at least the appearance" of a conflict of interest. "Even if you had nothing but nuns and monks" on the board, he said, "you'd still get questions about charitable donations to religious organizations."
Restructuring proponents say that plenty of safeguards would be in place against conflicts of interest--including the public nature of the oversight board's work and the fact that nominees to the panel would undergo Senate scrutiny. "The Secretary of the Treasury himself was CEO of Goldman, Sachs and now is managing a significant part of the fiscal policy of the United States," said Kerrey in an interview, "and nobody accuses Bob Rubin of having a conflict of interest." That might not be true, of course, if Rubin had continued working for Goldman, Sachs while overseeing major Treasury activities on a part-time basis.
Yale Law School professor Michael J. Graetz, a former Bush Administration Treasury Department official, agrees that the conflict-of-interest concern has been overblown. "Corporate managers are always being accused by their shareholders of looking out for themselves and not their corporations--so now we're going to accuse them of looking out for their corporations and not themselves?" he said. In general, he thinks attention has focused too much on the oversight board--"it's hard to believe it's going to make management worse"--and not enough on the other reforms proposed in the legislation.
The overhaul would also improve executive branch oversight by requiring that the Treasury Secretary, the IRS commissioner and the oversight board "actually sit down and have meetings and converse about a budget," Graetz said. "Without this structure, it's up to the Secretary of the Treasury to decide how much time he wants to spend on the IRS budget--and it may be very little, given other demands on his time."
In an interview, Summers said the Administration will still press to change the legislation in such areas as "addressing the nature of the ethics restrictions on the members of the board" and "clarifying the approach on burden of proof." But he said the White House agreed to support the overhaul because it didn't want lingering disagreements in these areas to overshadow the "huge amount that hasn't been controversial that's contained in these bills"--including provisions that provide greater personnel flexibility, institute longer-term budgeting and establish a five-year term for the IRS commissioner.
The Administration's reversal--combined with the friendly reception that its nominee to head the agency, technology executive Charles O. Rossotti, has received in the Senate--has certainly frustrated some Republicans, who fear losing their lead over Democrats on tax issues. But damage-control doesn't necessarily make good policy. If the new private-sector board becomes a reality, but doesn't produce the promised results and instead generates problems of its own, a few years from now plenty of policy wonks will be saying "I told you so," to politicians who should have known better.
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