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I am pleased to be here today to talk with you about Treasury's plan to implement lasting solutions to difficulties the IRS has encountered and, more specifically, the issue of unauthorized access by IRS employees to tax returns and taxpayer records. I understand that this is the first of a series of hearings your Committee will be holding over the next two months on Treasury operations as you begin your review of the Department's budget requirements for the next fiscal year. This Committee has been very supportive of the key role Treasury plays in Government as tax administrator, revenue collector, law enforcer, financial manager and regulator. Secretary Rubin and I look forward to working with you and members of your Committee throughout the coming year.

This is the day that Americans fulfill their annual obligation to pay their taxes. As such, it is an appropriate moment to recall both the purpose of taxation as well as what Americans ought to demand of their system of tax collection. Taxes funds our armed forces, our children's education, and our parents' health care, and they finance advances in science and technology that benefit us all. They play a critical role in sustaining our society.

However, recent announcements about problems in modernizing the computer systems of the IRS have focused attention on its shortfalls and provoked an important debate about how best to improve it. I would like to begin this morning by addressing the specific topic of today's session, the issue of unauthorized access by IRS employees of tax returns and taxpayer information. I want to thank the Congress and others for their continued focus on this matter, which is helping to ensure that it gets the attention it deserves. In turn, I will also discuss specific elements of the Administration's five-point plan for reform of the IRS.

Unauthorized Access of Tax Returns

From the Department's perspective, total respect for the privacy of information provided by taxpayers is integral to high quality service and voluntary compliance -- the foundation of our system of taxation. That iswhy, in 1995, in response to incidents of violation of that privacy, the IRS announced what was intended to represent an aggressive policy to combat unauthorized access to taxpayer records. Two years later, however, it is clear that this policy was not effectively designed or implemented and penalties are neither sufficiently consistent nor severe to put an end to unauthorized access.

A key problem is that unauthorized access or inspection is not itself a criminal offense. In our view, it should be. We, at Treasury, as well as Commissioner Richardson, believe that the anti-browsing legislation introduced by Senator Glenn, and a companion bill introduced by Congressman Archer in the House, developed with our active participation from the beginning of the process, a bill we worked together to draft, should be enacted as soon as possible.

As the Congress has recognized, appropriate penalties for IRS employees engaged in unauthorized access must be swift and sure if the IRS is to convince its employees and the public that unauthorized access to taxpayer information will not be tolerated. Unauthorized access represents a fundamental violation of the public's trust in the confidentiality of tax returns and return information.

Significant progress was made on this issue last year when the Economic Espionage Act of 1996 amended the Federal wire fraud statute, to make unauthorized access by computer to information from any department or agency of the United States a separate misdemeanor offense. In view of these provisions, "browsing" a Federal computer is already punishable as a crime.

However, the bills before the House and Senate today would amend the Internal Revenue Code to specifically prohibit the unauthorized access or inspection of tax returns and return information, whether or not the information is relayed to someone else, criminalizing activities not punishable under current law. For instance, they would prohibit the unauthorized inspection of non-computerized tax information, such as "hard-copies" of paper returns or return information. They would also prohibit unauthorized inspection of State or local government computers (not covered by the Economic Espionage Act amendments last year) when Federal tax information has been conveyed to them. Finally, even in cases that are already prohibited under current law, the new misdemeanor will provide prosecutors with an additional tool to obtain a plea bargain or to use in cases where they feel that other provisions of the law should not be invoked.

While the new legislation would strengthen our hand in putting an end to unauthorized access, it is important to remember that penalties are only a deterrence. In addition, the IRS needs to strengthen its computer systems to detect and prevent unauthorized access before it occurs. Secretary Rubin and I have ordered the IRS to report within one month on what it proposes to do both managerially and technically to better address this problem. Let us be clear, however, that this problem is not one confronted by the IRS alone. Every organization that depends on complex computer systems faces a similar challenge. Therefore, the Secretary and I have also asked the IRS to identify in its report what best practices might be copied from other enterprises, both public and private, which acquire and process sensitive information, such as medical and financial records.As soon as that report is complete, we will convene a special meeting of the Modernization Management Board to agree on appropriate action.

In short, Mr. Chairman, Our policy is simple; Willful unauthorized access will not be tolerated. Our goal is also simple; We want quick, appropriate and severe penalties for those who violate these rules.

While it is vitally important that Congress pass the legislation I have mentioned, let me share with you some of the administrative steps we have already taken.

We expect that these actions as well as others enumerated in the GAO report issued last week will exert a strong deterrent effect on employees who might otherwise be tempted to perform unauthorized inspection of taxpayer records.

Management Reform

To improve our ability to handle this and the other issues facing the IRS, significant changes are needed. I would now like to turn to our plan to improve the management and operation of the IRS.

Over the last year, the Treasury Department has focused intense efforts on improving the IRS. The National Commission on Restructuring the IRS, led by Senator Bob Kerrey and Congressman Rob Portman, has already made a significant contribution to the ongoing discussion. A consensus has emerged among a wide group of stakeholders, from business executives to Members of Congress to leaders of the National Treasury Employees Union. The message is clear: it is time for change.

I believe that in the next year or so we have the opportunity and the obligation to bring about the most far-reaching changes in the way the IRS is managed and in the way it does its business in decades. It will be the task of management at the IRS to manage information technology better and to harness it toward the goal of better customer service. What I would like to provide today is the TreasuryDepartment's view of how to establish a framework within which the IRS can best get its mission accomplished. I use the phrase "get its mission accomplished" deliberately to underscore the fact that the IRS of the future will have to contract out, outsource, partner with the private sector, and rely on outside vendors to a much greater extent than the IRS of the present.

Secretary Rubin and I recognized last year in testimony before the Appropriation Committees that the IRS's modernization program was, as we put it at the time, off track. We called for a "sharp turn" and made clear our determination to bring about change in the way the IRS uses information technology and provides customer service. And there has been change. Specifically:

Steps such as these are obviously only the beginning. Everyone involved in this process at Treasury, the IRS, Congress, and the union has recognized that the problems at the IRS have developed over decades and will not be solved overnight or even over a couple of filingseasons. Only if we confront problems directly -- from protecting taxpayers' privacy to using technology to making sure the phones are answered -- will we build an IRS for the 21 st century.

As we chart our new course, our focus will center on five critical areas to effect broad change: (1) oversight; (2) flexibility; (3) budgeting; (4) tax simplification; and (5) leadership. Let me address each of these in turn. First, Treasury has strengthened and made proactive our oversight of the IRS. We will consolidate the success to date of the Modernization Management Board (MMB) by making it permanent and extending its mandate to cover the broad range of strategic issues facing the IRS. We will also establish a Blue Ribbon Advisory Committee to bring private sector expertise to bear on the management of the IRS.

Oversight of the IRS by the Treasury department is the best way to ensure the IRS's accountability to the American people and to coordinate tax collection with tax policy. Through the Treasury, the IRS is able to bring concerns about the difficulty of administering tax changes to senior Administration officials; I raise these concerns frequently in tax policy discussions with policymakers in the White House and throughout the Administration. In addition, the IRS is able to draw upon Treasury resources for critical projects, as demonstrated by our current cooperation on the Year 2000 conversion.

Going forward, first, we have set up a Modernization Management Board comprised of senior officials from Treasury, the IRS, and other parts of the Administration. The Modernization Management Board is directed atoverseeing the information technology programs and functions in many ways like a corporate board, approving major strategic decisions and investments.

Second, we will also establish a blue ribbon Advisory Committee, reporting directly to the Secretary of the Treasury, to bring private sector expertise to bear on the management of the IRS. This committee, composed of senior business executives, experts in information technology, small business advocates, tax professionals, and others, will meet regularly to make recommendations on major strategic decisions facing the IRS.

Second, we will enhance and strengthen the IRS's ability to manage its operations, working with Congress and the union to improve management flexibility in personnel and procurement. In return, employees of the IRS, as in any well-managed business, will be held accountable for results. Second, we will enhance and strengthen the IRS's ability to manage its operations. The IRS faces a multitude of restrictions -- restrictions that would be unacceptable in the private sector -- that hamper its ability to provide efficient service. For example:

To strengthen the Commissioner's ability to effect change, we at Treasury will work with Congress, the Commission, and the union to improve flexibility: to bring on people with specific skills more quickly...to pay them more competitively... and to give them the training they need. Many of these changes will require legislation, and we expect to propose this legislation to Congress later this year.

In return, if legislation is passed, employees of the IRS, as in any well-managed business, will be held accountable for results. Let me add that in taking these steps, we are committed to maintaining the independence and freedom of the IRS from political influence.

And a crucial part of any strategy for improving flexibility has to be outsourcing. Just as private industry has found that outsourcing enables an organization to focus on what it does best and to rely on others for what they do better, so government can benefit from outsourcing as well. Inevitably, resources hired from private companies will be more flexible than those that become part of the IRS's overhead. Where it is cost effective, but only where it is cost effective, we will pursue outsourcing strategies vigorously.

Third, we will work with Congress to help the IRS get the stable andpredictable funding it needs to operate more effectively. To this end, the FY 1998 budget proposes multi-year investments for technology.

Fourth, we will work to simplify a tax code that covers 9,451 pages. Just yesterday, the Administration proposed a series of simplification proposals as part of our plan for improve IRS operations. These proposals represent a continuation of efforts to provide IRS with a simpler tax code to administer.

There are some who, based on the complexity of the tax code and on the problems at the IRS, argue for extreme measures such as a flat tax. I believe that such proposals would not only unfairly increase the tax burden on the middle class and hamper economic growth, they would not simplify the administration of the tax code.

Fifth, leadership is crucial to performance. Commissioner Richardson has guided the IRS through difficult times and has made progress in many areas. As we move forward, we are committed to appointing a new Commissioner who has experience with the challenges of organizational change, customer service improvement, and information technology management that the IRS faces.


This morning I have discussed some of the specific steps we are taking and must take to put an end to unauthorized access to taxpayer information. In turn, I have discussed the broad five point plan that we believe represents the best way to reform the management of the IRS.

Let us be clear about one thing. In any discussion of the performance of the-IRS, we must recognize the unswerving professionalism and dedication of the 100,000 loyal IRS employees who are just completing this year's filing season. They are not the problem.

Let us also recognize that while the IRS needs to be more responsive to taxpayers, to use technology more effectively, and to be more efficient, it is likely that for the foreseeable future, the United States will have an income tax that taxes people based on their ability to pay. Given this, it is not possible to eliminate the IRS, and it is vital that we have an IRS that functions effectively. We must all work constructively toward this end. What we must not do is attack the IRS in order to promote other agendas.

While we have further to go, the filing season which is about to end has been our most successful to date. Let me share with you three statistics which I believe demonstrate that IRS performance is on the upswing. To date:

Reflecting the success of this past filing season, Americans are recognizing that the IRS has improved. A poll by the Associated Press released last week reported that 7 out of 10 taxpayers give the IRS a positive rating on its ability to handle returns and inquiries. I have attached to this statement summary statistics on the current filing season.

In conclusion, we are making progress. But we have a long way to go. As we go forward, we, at Treasury and the IRS, want and need your suggestions and help, and I Iook forward to working closely with this Committee to set the right course and stay on it. I will now be happy to answer any questions the Committee may have.