Oversight Overkill

After working for months on restructuring measures intended to set the Internal Revenue Service straight, Congress is poised to revolutionize federal management by putting a board dominated by private-sector executives in a position of authority over the IRS. The new board is part of a reform package that public administration experts almost unanimously describe as both confused and wrong-headed.

Not that the status quo at the IRS has any defenders. Even the agency's commissioner, Charles O. Rossotti, acknowledges that "the IRS today does not meet the public's legitimate expectations of service." Members of Congress tell Rossotti their hometown offices are overwhelmed with complaints about the tax agency. "The IRS, in its current form, represents the worst of impersonal, antiquated and inefficient Washington bureaucracy," says Rep. Rob Portman, R-Ohio, who co-chaired a congressional commission on restructuring the agency.

Then there's the $3.4 billion the agency has spent to little avail on upgrading its inadequate information systems, which still have vintage 1965 technology at their core.

It's clear that something needs to be done about the IRS, but in Washington, opinions about what to do are as common as tourists. The commission that Portman chaired with Sen. Robert Kerrey, D-Neb., last summer put in play the idea of establishing a board of directors for the agency. The presidentially appointed board should select the top IRS executives, the commission said, and be responsible for "overall governance of the agency," but not for specific decisions on enforcement of the tax laws.

The Clinton administration criticized the proposal as risky and counterproductive. The White House maintained that it could fix the agency's problems with better management. But in October, the White House changed its tune and joined the ranks of those supporting an oversight board, as long as its members were appointed by the President and approved by the Senate.

The 11-member board as constituted in the House bill, approved on a 426-4 vote in November, would oversee "administration, management, conduct, supervision and implementation of the internal revenue laws and tax conventions," but its involvement in IRS operations would be limited. The oversight board would recommend a commissioner to the President, who would continue to appoint the IRS chief.

Even with this limitation in its authority, the board would represent "another layer of management, which we really don't need," says Ken McDaniels, an IRS manager in New York. McDaniels heads up the IRS section of the Federal Managers Association, which favors agency restructuring for the most part.

After the House bill passed last fall, it went to the Senate Finance Committee, where chairman William V. Roth Jr., R-Del., let it be known that he thought the House measure was too weak to solve the IRS' problems. In a bill that was headed for the Senate floor in April, Roth's committee decided to give the board more budget and investigative authority than it would have in the House version, and added more taxpayer protections.

Meanwhile, Rossotti moved ahead with his own plans for IRS management reform. He wants to restructure the agency into four lines of business, corresponding to major segments of the taxpaying public:

• Individual wage earners and investors.
• Small businesses and self-employed people.
• Large corporations.
• Exempt organizations such as nonprofits and state and local governments.

The new divisions would replace the classic regional organization, where each IRS office deals with all kinds of cases that arise within its geographic area. That approach has slowed down the agency and contributed to its reputation for poor service to taxpayers, Rossotti says, arguing that customer service and responsiveness to market needs are the driving forces behind his plan.

The founder and former chairman of American Management Systems Inc., a Fairfax, Va., technology company, Rossotti told a House Appropriations subcommittee in February that as the IRS reviews its business practices, "in most cases, there are very close parallels in the private sector that we can draw on." One example: IRS debt collection activity focuses first on the oldest overdue accounts. "This is the reverse of practices in the private sector," where the emphasis is on setting up payment plans before customers slip far into default, Rossotti said.

Such testimony is music to the ears of members of Congress. Roth commented with obvious pleasure during Rossotti's confirmation hearing last year: "Your background is uniquely suited to the task. You are not a career civil servant. You are a successful businessman."

Worse Than the Disease?

But other observers are not so sure the private-sector prescription will cure all that ails the IRS. The idea of focusing on customer service has drawn criticism from the likes of former IRS Commissioner Donald C. Alexander, who told Roth's committee in January:

"The job of the Internal Revenue Service is to try to collect the proper amount of revenue due under the Internal Revenue Code. While this job necessarily includes assisting taxpayers to understand and meet their responsibilities and to assert their rights, should taxpayer service be the primary function of the Internal Revenue Service? I continue to differ with those who push the . . . notion, unrealistic to me, that substantially all taxpayers will comply if the Internal Revenue Service is warm and fuzzy and educates them about their rights. Moreover, I question whether 'taxpayer satisfaction' must be IRS' sole goal, for I don't believe that the Internal Revenue Service has an obligation to satisfy such taxpayers as [former New York hotelier] Leona Helmsley."

Similarly, Donald F. Kettl of the Brookings Institution observes that "most private companies are not in the business of making their customers do what the customers don't want to do"-such as obey the tax laws.

In another initiative borrowed from the private sector and supported by Roth, Rossotti is proposing to hire between 20 and 40 senior IRS managers who would be paid as much as $175,400 a year-an amount equal to the Vice President's salary. The new jobs would not be open to current IRS employees, would be outside the civil service and the Senior Executive Service, and would not last more than four years. The commissioner also wants the authority to pay existing senior managers up to $175,400, with approval from the Office of Management and Budget.

This would be a striking departure from the current situation, where Rossotti is allowed to appoint only three non-career employees to the service's top jobs. He says the high pay is necessary to attract "the highly skilled and motivated workforce" he needs to straighten out the service.

Because of the agency's concerns about improper political influence and the confidentiality of its work, the IRS hasn't welcomed managers from outside for decades. When former chief financial officer Morgan Kinghorn joined the agency in 1990 from OMB, he says he was the first person to come aboard at the assistant commissioner level in a quarter-century. Even today, "I don't think they've brought in enough outside people," says Kinghorn, now the director of government consulting at Coopers & Lybrand. Of the agency's 73 most senior executives, 68 have been with the agency at least 15 years, Rossotti says.

Management Breakthrough

IRS commissioners almost always have been senior accountants or tax lawyers, rather than people with experience managing large organizations. With 100,000 employees who collect 95 percent of the federal government's revenues, about $1.7 trillion this year, the IRS needs a skilled executive at its helm. Rossotti's appointment last year is considered a breakthrough because of his expertise in corporate management and information technology, rather than tax law.

Whether good managers or not, IRS commissioners have tended to stay for relatively short terms. Rossotti's predecessor, Margaret Milner Richardson, served four years. Before her, Shirley D. Peterson was on board less than a year. Fred Goldberg was commissioner from 1989 to 1992. The pending legislation calls for a fixed five-year term for the IRS commissioner, and Treasury officials say Rossotti has committed to stay that long-and possibly longer. He has said it will take a decade to get the agency on track.

If Rossotti doesn't stay longer than his predecessors, one reason might be the time he'll have to spend testifying before Congress. Seven different committees have explicit IRS oversight responsibilities. Between Jan. 28 and March 12 of this year, Rossotti made five appearances before House and Senate committees to explain his budget and management proposals. Ex-commissioner Richardson says that such a pace is not unusual, and each committee can have a different oversight agenda. Constant visits to Capitol Hill can make it hard to keep a firm hand on the tiller, some say. "The oversight that now exists is just stifling, in my opinion," says former IRS chief information officer Henry H. Philcox, now an executive with Dyncorp, a Virginia technology company.

To reduce oversight overlap, the congressional commission called for the creation of a joint committee on IRS administration, without eliminating any of the existing committees' jurisdiction. But the House-passed bill simply calls for expansion of the scope of the work of the Joint Committee on Taxation to include administrative issues. Ironically, the joint committee was formed in 1926 precisely to keep an eye on the IRS, much like the proposed oversight board would do. In recent years, the joint committee has focused instead on estimating the costs of proposed tax code changes and analyzing tax policy issues.

When the joint committee was created, conflicts of interest and politicization were the compelling issues. Political appointees remained at the heart of the income tax collection apparatus until the 1950s. Since the Watergate scandal of the mid-1970s, few if any charges of political interference in tax administration have been substantiated. But some experts are warning that the oversight board and the push to bring in outside managers could result in a return to that unsavory climate. At the least, they say, the board's hybrid nature-neither public nor private, neither in the official chain of command nor purely advisory-will raise questions.

Conflicts, Real or Perceived

One such warning comes from former commissioner Sheldon S. Cohen. "The board will have many inherent conflicts, both real and perceived, and the commission and the House and Senate bills fail to recognize how these may undermine the credibility of the IRS," he says. "Some conflicts will be so obvious that recusal may work, but some will be so subtle that they may not be recognized until it's too late. . . . Suppose the audit of the company employing one of the board members ends fantastically well. Suppose further that the board member comports himself perfectly and never mentions it at any meeting. Who will believe it when the great result comes out and the news-making journalist draws the coincidence to its illogical conclusion?"

These risks will be mitigated, Cohen and others say, if Congress makes the board largely advisory. When President Clinton endorsed the idea of a "board of trustees" in October, it was an advisory body. The Senate bill clearly makes the new board a governing body, while the meaning of the House-passed language is open to dispute. These differences will have to be resolved in a House-Senate conference.

Another criticism that surfaced at congressional hearings was the prospect that seats on the oversight board will become just another patronage plum. The House bill calls for the President to appoint board members with professional expertise and experience, but public administration experts predict political considerations will overshadow the desire for expertise in such appointments.

More fundamentally, experts have criticized the board as decreasing and diffusing accountability, as well as putting the fox-the corporations that pay a lot of taxes-in charge of the hen house.

If all these potential dangers are associated with the oversight board, why have Congress and the White House expressed a rare unanimity about its desirability? Political expediency no doubt played a part. But Nancy Killefer, Treasury's assistant secretary for management, and the IRS' Rossotti make a strong case for the need to open up the agency and change its internal culture. They view the board as one mechanism for bringing contemporary perspectives and management concepts into the IRS.

Killefer, a management consultant with McKinsey & Co. before joining Treasury, describes a "relatively insular culture" at IRS that isn't competitive and accepts out-of-date business practices even though the rest of the world is changing its ways at an ever-faster clip. To her, the recent clamor for jettisoning the tax code altogether is a wake-up call for the IRS, proving that it cannot coast along the way it has for the last 40 years.

Rossotti, meanwhile, told the Finance Committee that "we must shift our focus, as many large companies have already done, from expecting our customers, the taxpayers, to understand and navigate the IRS according to our internal operations, to thinking about everything from the taxpayers' point of view." The oversight board could contribute to that shift in perspective, he says.

Why pay attention to the IRS culture? Besides generating in some employees an attitude that the taxpayer is always wrong, the culture has had practical consequences for the agency's operations. For example, unlike virtually every American business, the IRS does not supply its customer service employees with fax machines, so they must mail out forms and instructions.

Of course, the agency has already tried several times to change its culture through reorganizations, total quality management initiatives, performance measurement programs, labor-management partnership projects, and so on. It has been working with Vice President Al Gore's reinvention crew to improve customer service, in a year-long project involving front-line employees.

Last June, President Clinton created an IRS Management Board consisting of more than a dozen top Treasury, IRS and administration officials. Congressional critics have dismissed the board as simply part of the administration's futile public relations campaign to stop IRS reform legislation in its tracks. But Killefer, a Management Board member, insists that it has helped in developing customer service initiatives, expanding electronic filing of tax returns and other management projects.

The board's creation is widely viewed as a tacit admission of management failures not just within the IRS, but also in Treasury and on Capitol Hill. When the computer systems modernization was pronounced a failure last year, for example, it came as no surprise to some. GAO had been reporting for years that the effort was misguided and needed high-level attention. Moreover, Congress seems just to have discovered in the last few months that the 3,000-page tax code it has enacted over the years is too complex to administer.

Too Many Wonks

Asked how such a situation could develop for years without much notice, a few observers blame the Washington culture as much as the IRS culture. In the land of "policy wonks," nuts-and-bolts administration is beneath the notice of many decision-makers. "Management to many people seems inherently uninteresting," says Brookings' Kettl. But if agency operations should grind to a halt, he says, "there's a question about what all the policy debates have truly accomplished."

John Koskinen, the former management chief at OMB, made a similar point when talking with reporters recently about the year 2000 flaws in federal agencies' systems. Some agency chiefs' eyes glaze over during any discussion of computer systems, he said, but "nothing is more important to your agency's policy outcomes than to have the agency keep functioning."

Treasury's Killefer, asked whether top managers might have neglected administration in favor of policy responsibilities, says if it ever was true, "it's not any more!" She launches into a list of management initiatives and plans to improve the IRS over the coming months. As the management chief at Treasury, she meets with Rossotti almost daily, she says.

Congress remains unconvinced. "There's a well-established history of accusations, congressional hearings, minor reforms and then nothing-no further oversight, no follow-through, no real effort to get to the core of the problem that plagues the agency," Sen. Roth says, adding that it's largely the fault of Congress. "This time around, I'm determined to change business as usual."