The Battle Over Fixing the IRS

In a dozen B-movies from the 1950’s cowboys formed a posse, saddled up, and rode around shooting into the air. There was always a lot of noise and bad dialogue, but little real action. The battle over reforming the Internal Revenue Service has much the same character. There is no doubt that the IRS is a troubled agency that badly needs fixing, but there is serious doubt that the reform bill Congress is considering will do much to solve the problem – and a good chance it will make things worse.

The movement to fix the IRS got huge boosts from a June congressional commission report and September congressional hearings featuring testimony by wronged taxpayers and by IRS agents, veiled behind confessional screens, who admitted taxpayer abuses. The House Republican leadership seized on the hearings and the public’s eternal distrust of tax collectors to embarrass the Clinton administration into big concessions. In November, with only four dissenting votes, the House passed a major IRS reform bill.

The bill contains many solid proposals, but two issues are troublesome: creating a new board, dominated by individuals from the private sector, to make key decisions about IRS governance; and putting the burden of proof on the government in tax-court cases. There is little evidence that these changes would cure the IRS’s problems – and strong evidence that they could deepen the agency’s predicament.

To attack the IRS’s governance problems, the House voted to create a new 11-member board that includes the secretary of the Treasury, the IRS commissioner, a representative of Treasury Department employees, and eight representatives from the private sector. The IRS reform commission had concluded that top Treasury officials had failed to provide effective leadership to correct mounting IRS problems and that private-sector ideas and a corporate-style board could provide a firmer hand and better ideas.

The new board, however, poses three big problems. First, it would create serious and unavoidable conflicts of interest. The problem is not so much having experienced private-sector officials set the IRS’s course. It is having them serve on the board part-time – probably only a day a month. Sooner or later – probably sooner – every private-sector member would face a vote that would affect the operations of the business or organization from which he or she came. Such conflicts of interest are unavoidable. Even monks and nuns would have to recuse themselves from decisions shaping IRS policy on auditing nonprofit charitable organizations. No private-sector company would fill its board with competitors or others who might have conflicts of interest in setting corporate policy.

Second, no private-sector company would focus so strongly on structuring its board without also rethinking its operations, from top to bottom. Tales of failed corporate shakeups, triggered by changes concentrated at the top, litter the private sector. Nothing in the IRS will change until senior managers find a way to grab the agency by its bureaucratic lapels and shake reform into it. The private-sector board is an unlikely tool to accomplish this.

Third, the bill gives the board considerable power over IRS operations. The board would have broad authority to approve the IRS strategic plan and the agency’s budget. But there are serious problems in putting such governmental powers into the hands of a board dominated by private-sector officials. And there is also the likelihood of serious confusion over managerial responsibility and democratic accountability. While the board would approve the IRS budget, the Treasury secretary would retain the power to submit the budget to the Office of Management and Budget. The board, meanwhile, would have the power to approve the IRS strategic plan (including decisions like how to target audits and what balance to set between compliance enforcement and taxpayer assistance). The likely result of such divided responsibilities is confusion – what to do and how to pay for it – that could well further undermine the public’s already shaky confidence in the IRS.

The proposal to reverse the burden of proof, likewise, creates serious problems. The argument for the shift is this: why assume defendants are innocent until proven guilty in most courts, but assume taxpayers are guilty until they prove themselves innocent before the IRS? In fact, the bill would reverse the burden of proof only in tax court and only on questions of fact (not of law). Taxpayers would still be responsible for demonstrating good-faith compliance in all the steps leading up to trial.

Despite the bold rhetoric, the proposal would probably affect only a few thousand taxpayers a year. Unscrupulous taxpayers might be tempted to destroy records – the IRS could not prove guilt without finding the evidence. The IRS in response would have to be even more aggressive in audits to ensure it collected evidence it needed to win in court, even as it tried to be warmer and fuzzier in dealing with taxpayers.

Both the bill’s flagship reforms, therefore, are much less than they seem, yet they create the potential for great mischief – precisely what the IRS needs least. The agency does have huge problems to solve: a customer-service effort that too often leaves taxpayers unsatisfied; an enforcement program that too often has trampled on taxpayers’ rights; and an information system that, even after a $4 billion investment, does not equip the agency for the job it must do.

What would a genuine reform look like? First, inconsistent political leadership has crippled the IRS. The IRS will never change until top Treasury officials make reform a top priority and until Congress provides the necessary support. In recent years both Treasury Secretary Robert Rubin and Congress have put strong efforts behind reform. The key from here lies in a continued steady hand.

Second, the IRS needs strong management. The appointment of information management expert Charles O. Rossotti to head the agency is a good start, but the commissioner needs room to work and a mandate for action. The commissioner should be hired on a five-year contract that holds him or her accountable for performance and provides rewards for work well done. The performance goals, in turn, ought to guide agency operations from top to bottom. That strategy drove reform of New Zealand’s tax agency and could vastly improve the IRS.

Third, IRS managers need far more flexibility: managerial, budgetary, personnel, and procurement. Up against the world’s smartest tax experts, they need the ability to stay even by building the best systems, hiring the best people, training them effectively, and motivating them to perform.

Fourth, the IRS badly needs the insights of both citizens and smart private-sector managers. There ought to be a board to provide such counsel – but it ought not to be placed in the chain of command. That could only disrupt the accountability of public officials for public programs.

On one level, of course, no change can ever truly “reform” the IRS. Since revolutionaries tossed English tea into Boston Harbor, Americans have never liked tax collectors. Trying to extract payments that taxpayers really don’t want to make will never be easy or pleasant, no matter how strong the IRS’s commitment to friendly, solid advice. But shooting guns into the air is not the answer. The troubled IRS needs solid reforms that solve the real problems.