From the October 1997 issue of Entrepreneur

The push is on to overhaul the IRS, making it more customer service-oriented. Sound too good to be true? It may be. But Congress is clamoring for change. A congressional commission that spent a year studying the IRS recently issued a series of recommendations on how to improve the agency. High on the list: simplifying the tax code.

If the commission's recommendations are enacted, small-business taxpayers will find it easier "to comply with their tax obligation with less intrusion from the IRS," states a commissional report. They'll also gain more rights and protections.

The IRS interacts with more citizens than any other government agency or private-sector business in the United States and collects 95 percent of the revenue needed to fund the federal government. Overhauling the IRS is a tall order--but it's long overdue, say Sen. J. Robert Kerrey (D-NE) and Rep. Rob Portman (R-OH), co-chairs of the National Commission on Restructuring the IRS. Among the commission's findings is that the agency lacks expertise and accountability, and there's not enough continuity among senior officials.

The IRS' attempts to update its computer system also received poor marks. The $4 billion wasted on ineffective computer modernization efforts is a perfect case study of the deficiencies that exist within the current IRS management and oversight structure, says Portman.

Attorney and CPA Mark Luscombe agrees. "The IRS botched up its conversion to technology. It spent a lot of money and [doesn't have] much to show for it," says Luscombe, principal federal tax analyst with CCH Inc., a Riverwoods, Illinois, publishing company specializing in federal laws and business finance. Despite these problems, he says, "the IRS is still probably the most efficient and effective tax collector in the world."

Independent's Day

Some argue the IRS' collection and enforcement roles have become too dominant, neglecting concerns as basic as providing efficient customer service. To make the agency more responsive and accountable, lawmakers want to place management of the IRS in the hands of a seven-member board independent of the agency.

Five of the board's members would be private citizens. "These members would [be required to] have backgrounds in customer service, computerization and organizational management because the IRS doesn't [currently] function with a customer or private-sector mentality," says a spokesperson for Rep. Portman. The two other members would be the treasury secretary and a representative from the National Treasury Employees Union, which represents IRS workers.

The board would have the authority to hire and fire personnel and hold IRS management more accountable than its sole current overseer, the U.S. Treasury Department. "Treasury kind of treats the IRS like a poor stepchild," says Portman's spokesperson. "It doesn't give it the attention it needs."

Treasury Secretary Robert Rubin, however, contends that because the board's members would not have full-time responsibility for IRS oversight, management of the agency would be less efficient than it is now. The Treasury Department has warned that an independent board would catapult the IRS into a maelstrom of legal challenges to its law-enforcement authority.

Secretary Rubin has also indicated there could be political motives behind the congressional plan to restructure the IRS. Reacting to the recommendations, Rubin says, "I think that in this debate about governance and the IRS, there are [those] who have other agendas. There is a desire on the part of some to undermine our progressive taxation system and replace it with a different system, and one approach to [doing] that is to attack the Internal Revenue Service.'

Spelling It Out

Lawmakers are not deterred. The commission's recommendations have been turned into legislation Congress will consider in the months ahead. In addition to setting up an independent board, the legislation would:

  • bolster taxpayers' rights by allowing them to recover up to $100,000 in damages caused by IRS negligence. This would include unintentional acts such as seizing the wrong taxpayer's or business's assets, explains Portman's spokesperson. "We [will] provide disincentives for the IRS to initiate contact except when it is absolutely sure it has its information straight,' he adds.
  • simplify the 9,451-page tax code by giving the IRS a voice in the legislative process, enabling agency representatives to comment on tax proposals before they are enacted. Currently, the IRS cannot comment on tax legislation or on whether it can administer various legislative proposals. In addition, 60 complex code provisions have been identified for Congress to review and either repeal, reform or simplify. The Alternative Minimum Tax and the Earned Income Tax are two such provisions on the list.
  • modernize the IRS' computer system to speed the process of resolving taxpayer problems. The congressional commission also recommends encouraging greater use of electronic filing; it would like to see 80 percent of all returns filed electronically by 2007. To accomplish this, lawmakers would extend the April 15 tax deadline to June 15 for electronic filing and to May 15 for paper returns.
  • provide the IRS with multiyear budgeting so it can plan several years into the future. This would help the agency better plan for the expense of technology and other large outlays.
  • increase flexibility in personnel, particularly in terms of compensation and job assignments. The aim is to make it easier to recruit capable workers from the private sector and to encourage more imaginative solutions to tax administration. The commission's report noted that the culture of the IRS is overly averse to risk.
  • create a single congressional committee to coordinate oversight of the agency, which now reports to six different Capitol Hill panels.

White House Wishes

While the Clinton Administration supports several of these proposals, it opposes establishing an independent board to administer the agency--so it has proposed its own board.

Using the authority of an executive order, President Clinton recently created an IRS Management Board made up of approximately 20 Treasury and IRS officials who are expected to oversee the management and operation of the service. The board's focus will be IRS operations, modernization and customer service.

The White House is also attempting to address the agency's computer problems: Plans have leaked out concerning President Clinton's intentions to nominate computer expert Charles O. Rossotti as IRS commissioner. Founder of American Management Systems, a Fairfax, Virginia, computer company, Rossotti has extensive knowledge and background in information technologies. The administration believes this expertise will help solve the computer troubles that continue to plague the agency.

The Administration has also proposed having the treasury secretary and deputy treasury secretary report to Congress twice a year on the status of the agency.

Striving For Simplicity

Of all the changes being proposed, simplifying the tax code stands out as the most important one for business owners, says Don Alexander, an attorney with the Washington, DC, law firm Akin, Gump, Strauss, Hauer & Feld LLP and a former IRS commissioner during the Ford, Nixon and Carter administrations.

"Companies spend a lot of money on tax compliance, and [much] of it is spent because the law is very complicated," says Alexander. Critics of the current code say simplification is the only way to reduce the taxpayer's burden and improve tax administration.

But simplification may be the most difficult objective to achieve. Alexander points to the tax bill recently passed by Congress. He maintains it will make an already complex tax code even more complex.

The nation's tax laws are being used to meet social goals, contends Alexander. "We ought to use the tax laws only for the purpose of determining what should be paid and providing for that payment in the simplest possible way," he says. Unfortunately, that goal may be a long time coming.

At this point, it's unclear whether Congress and the White House can resolve their differences and produce meaningful changes in IRS administration. Nevertheless, Portman and Kerrey are moving ahead and expect to gather the votes needed to enact a substantial portion of the commission's recommendations. "Taxpayer satisfaction must become paramount," they say. Only time will tell if that kind of transformation can be achieved.

Joan Szabo is a writer in McLean, Virginia, who has reported on tax issues for more than 11 years.