Ms. STILLMAN. I don't think that is the problem.
Chairman STEVENS. Senator Pryor?

OPENING STATEMENT OF SENATOR PRYOR

Senator PRYOR. Well, let me take up there, if I might. What is the basic problem, then, if the civil service is not? I bet this question has been asked. What is the basic problem?

Mr. DODARO. Well, there are two basic areas. One is a management problem.

Senator PRYOR. All right.

Mr. DODARO. And it needs to be put in place in terms of having an effective business strategy that makes sense and that is going to produce a return and improvement on your mission and your performance. That management process also involves rigorous investment control techniques that you can put in before you make the investment, that you are sure that the cost is going to stay within the cost that is achieved and you are going to get the benefits out of it.

Then there is a technical side of this. We mentioned, Senator, before you came in that IRS' ability to develop software in-house is at the lowest level on a five-scale level set up by the Software Engineering Institute. That means that they don't have good confidence that they could build systems in a repeatable fashion using all the resources that are available to them and they need to have efforts in place to manage software requirements and software quality assurance programs. So there are technical issues throughout, and that is just one example, and there are managerial issues.

Senator PRYOR. One problem you did not mention that I will mention is that one of the problems is us, and when I say us, I am talking about the Congress. I don't think that we engage in enough oversight. I think we appropriate the money for the Internal Revenue Service and we have a hearing on privacy issues, or whatever. I have participated in several hearings in the Finance Committee regarding the new computer age of the Internal Revenue Service and tax collection efforts.

Frankly, people kind of go to sleep and yawn and we say, OK, let's give them $2 billion more or $3 billion more. It was almost like Vietnam. We are in there to stay and let's just give a little more money and hopefully we will eventually win. We don't engage in oversight of the IRS to the necessary extent, and I must say that I think some of the blame is ours.

The second thing—and I got in when Senator Glenn was talking about the mind set of the Internal Revenue Service. I think that we have got to realize that a commissioner of the Internal Revenue Service stays in that job on the average of 2.5 years and then he or she is gone. The IRS commissioner gets to hire about five people. The 117,000 other IRS employees stay in place.

Now, it is going to take a miracle worker for a commissioner to come into that job, determine what the problem is, digest what the problem is and then try and find a solution. Then about the time they start sort of getting a hold of it, they are gone. I think that is part of the problem. I don't know if there is a cure for that, but I think oversight right now is something that we should engage in

more. I compliment the Chairman for holding this hearing on the IRS and looking into this to see if we can't rectify this.

Mr. DODARO. I think, Senator, on your two points-first, on oversight, I think it is essential and I think more needs to be done. Also, this Committee is to be congratulated. The oversight tools in this past year through amending the Paperwork Reduction Act and also the information technology management reform legislation really puts in place a good set of tools that the Congress can use, as it has put in place in the Chief Financial Officers Act in the financial arena.

So I think the foundation has been laid now to bring into legislative requirements good, modern management practices for information technology, and what needs to be done is to have the oversight to ask the tough questions and to require the data to be put in place. Everything I have talked about today in terms of the management of the process, the investment controls, all that data—all of that is now imbedded in legislation and what needs to be done is to follow up to make sure it is implemented.

On the issue of turnover, I think we are making here is that if these things are broken down into modular components, 2 years should be plenty of time to go in and look at what has been implemented, to have a good process in place to evaluate that, and to follow through. We have also suggested, and the legislation calls for, a good management team to be put in place to assist the commissioner, to have a chief information officer with the qualifications that can provide assistance.

So you do need some continuity. You do need leadership talent in a team, but in a short period of time, if the right questions are asked and the tough questions are asked, I think you can achieve something.

Senator PRYOR. My warning light is on and I will just make one other comment, if I may, before the red light goes on. I think, Mr. Chairman, we are also going to have new areas to look at if we actually implement something the Congress approved recently, which I think we are going to come to regret, and that is to allow the IRS to use private collection services and law firms to collect back taxes. To me, this is going to get us in great trouble. It is going to violate the very basic confidentiality rights of the taxpayers.

I won't be here, but I hope that Congress will exercise a lot of oversight in that area before it takes off and really gets a lot of people not only embarrassed, but embroiled in situations that don't have to exist. I am scared to death of trying to have our tax collection farmed out and privatized, and I think it is a very, very grave threat to confidentiality.

Thank you.

Chairman STEVENS. Thank you, Senator. I assure you you will be here if you want to be here because we are going to go through this through the year. I think this is one of the major projects that affects the country and we should continue this oversight not just from this business of the basic reports of the audits, but I want Mr. Dodaro and the Council to help us say who should we bring in here and look into this about what went wrong here.

We may see some basic changes in the laws, is what I am looking at, and this is my watch. Next year, I may be in another watch,

God willing, but we will continue it. One of my good friends told me, you don't want to do this, Stevens; you don't want to get involved in investigating the IRS. But that is one of the things we are just going to have to do.

Incidentally, gentlemen, I promised the commissioner she would be on by 10:45, so we will just finish up this panel if we can. Let me just ask you one quick question, Ms. Willis. What went wrong on the program side of this? Is that your function?

Ms. WILLIS. Yes, sir. Where we get involved in TSM is in looking at whether the systems that are designed and put in place actually help IRS achieve its program goals. We are specifically interested in such things as whether the telephones are getting answered more frequently and quickly for taxpayers, whether the forms and notices that go out are more comprehensible to taxpayers because of tax systems modernization.

What we are finding in a number of areas is that we are not receiving the benefits yet; that there have been some marginal improvements in some areas, but that accessibility continues to be a problem, that people continue to have problems understanding basic notices from the IRS, and that the level of customer service being received by taxpayers is not what they have come to expect from the private sector.

Chairman STEVENS. Thank you. Mr. Holloway, are you finished with the audits now?

Mr. HOLLOWAY. I wish. Not yet. Basically, we are under a lot of restraints in just getting information to conclude the audits.

Chairman STEVENS. When do you think you will be finished with those?

Mr. HOLLOWAY. Shortly after we get the information from the Internal Revenue Service. It is difficult to say. Where we are at right now is at a point where we are awaiting a lot of information to resolve differences, or what we typically call exceptions, either favorably or unfavorably, to bring final results and conclusions to the work.

We still have not received the financial statements on the custodial side, which is the revenue and the receivables. We have not yet received a full complement of the financial statements on the administrative side. So it is difficult to conclude at least until you see the full breadth of financial statements that our opinion is based on.

Chairman STEVENS. Well, this is what I would like to do, and I will yield to Senator Glenn and Senator Pryor. Mr. Dodaro, I would like to go ahead now in the future and take Dr. Stillman's team and bring them in here and have us get the IRS group in here that reviewed her recommendations and find out why they were not implemented.

Ms. Willis, I want to get you in here and have your people with the program aspects and outline the deficiencies in this program concept.

Mr. Holloway, I hope you are going to give a date one of these days when the audit will be finished because once you are finished, then I want you to come in here and have the people from IRS tell us where they disagree with the audits and what we are going to do about it.

I think it is essential that we push IRS to get into the 21st Century along with everyone else, but in a way that we don't have people dealing with machines only. I will talk about that later.

Senator Glenn?

Senator GLENN. Thank you, Mr. Chairman.

Where is OMB in all this? They were supposed to be managing some of this, or overseeing it and giving advice, and so on. We did away with the Brooks Act on computer acquisition. It seems to me it is up to OMB to do some oversight of this. Have they done anything?

Mr. DODARO. I think OMB shares in some of the problem here. I think they have been approving large budgets for IRS without requiring enough information to make decisions that are going to produce the benefits. OMB has a new investment guide out asking the right questions based upon the best practices research we did of the private sector, but they need to use that guide as it relates to IRS and really make some tough decisions.

Senator GLENN. What has happened on accounts receivable? As I understand it, it has gone up from $29 to $34 billion last year. Why is that, not enough agents, or what is the deal?

Mr. DODARO. I am going to ask Mr. Holloway to talk about that. Mr. HOLLOWAY. I would answer you a couple of ways. The fundamental problem with accounts receivable is what underpins the fundamental problems of financial management at IRS. Your very question articulates the core problem. Because of the way their records are set up, they can't adequately explain whether it has gone up or down or why it has gone up or down. Most of those are statistical projections. They do not have the capacity to separate from their compliance assessments their true receivables.

One of the big problems you have with receivables, period-if you can make the analogy or comparison to the private sector, in a private sector environment you would have an individual subsidiary record of accounts receivable of who owed you the money and you would design your collection efforts to go get that money.

IRS has those things commingled with some of the compliance initiatives that they have, one of which was the type talked about earlier with the Alaskan panel where they talked about what is typically called a substitute for return. Those aren't designed to be receivables to be collected, and I think there is some question, Senator, at least on the amounts that we talk about being collectible, how much of that isn't already set up to be collected or represents a deferred amount that is owed.

Senator GLENN. OK. In the 1997 budget request, there is included $359 million for a revenue enhancement initiative. That will provide for over 3,800 new enforcement full-time employees, bringing the total level to about 69,000. Are all those 3,800 FTEs going into compliance?

In times past, I remember 8 or 10 years ago we got them some new agents over there when they wanted new agents and wound up that about two-thirds of them went into administrative functions. So we sort of raised cain the next year and that didn't happen again, but that is way back; that is 8 or 10 years ago now.

These 3,800 new enforcement FTEs-do you recommend that we approve that?

Ms. WILLIS. Senator, we think there are a couple of things that the Congress should consider before it approves the revenue enhancement initiative. First, as you recall, prior to 1995, IRS success in using that money to finance compliance initiatives was actually limited. Typically, the money went to fund other unfunded budget issues, and therefore very little of the money actually went to fund compliance positions.

The Congress addressed this issue in 1995 when it fenced the compliance initiative and required that IRS spend that money for compliance positions, etc. So, that would be one thing the Congress would want to consider doing again.

Senator GLENN. Would you think the 3,800 positions would be good if we fenced it and said these are to be compliance people, period, nothing for administrative purposes and things?

Ms. WILLIS. You would want to fence the money around that, but recognizing that within the 3,820 for the revenue initiative, that is offset by a reduction that is in the baseline budget of approximately 1,300 positions in the collections area. So within the budget, you only actually have a net of about 2,500.

Senator GLENN. You mean we are firing 1,300 while we are hiring 3,900, is that right?

Ms. WILLIS. Well, I am not sure we are firing people, but we are reducing the number of positions in that area.

Mr. HOLLOWAY. If I could amplify on one of her statements, though, I would like in the compliance initiative-similar to the discussion we had on TSM, I think the difficulty of judging whether to approve or not approve that is a lack of information, and if we continue to make decisions about budgetary dollars without better information, I just don't think that is a good investment.

It is not a question of whether or not it will result in revenues because I don't think at this point anybody can tell because I don't think there is sufficient information to determine that. I think that the demand has to be on better information and, to use the phrase that Dr. Stillman talked about, a clear justification that demonstrates that you, in fact, are going to get the outcome. I would argue that without better information, you don't know if you don't have too many already.

Senator GLENN. Well, OK. My time is up.

Chairman STEVENS. Senator Pryor, do you have any further questions?

Senator PRYOR. I just have one question. Senator Glenn may want to take

Chairman STEVENS. We are trying to get to the commissioner. We told her we would get to her at 10:45.

Senator PRYOR. How many employees does IRS have today versus, say, 1 year ago? Do you have a figure on that?

Mr. HOLLOWAY. IRS could better speak to that, but I would-
Senator PRYOR. We will ask the commissioner that.

Mr. HOLLOWAY. I think they can probably provide a more accurate number. I know it was over 100,000.

Senator PRYOR. OK. I was going to try to compare if there is a reduction of Federal personnel and an increase of those in the private sector being contracted to perform services. I was just trying to get a little picture of that. I know in the Treasury Department,