DEPUTY INSPECTOR GENERAL
U.S. DEPARTMENT OF THE TREASURY
BEFORE THE SENATE FINANCE COMMITTEE
FEBRUARY 5, 1998
Mr. Chairman and members of the Committee, I appreciate the opportunity to appear before you today to testify on legislation for restructuring the IRS. Specifically, I have been asked to discuss the importance of establishing independent oversight of IRS. Let me start off by saying I commend this Committee?s efforts to reform the IRS. The proposals that are under consideration by this Committee and contained in House bill H.R. 2676, clearly signal a desire to see the IRS become a better managed, more customer driven agency that works for, not against the American taxpayer. I think it is critical that a strong, independent oversight function be part of that reform. It can help Congress, the Secretary of the Treasury and the Commissioner of IRS ensure that these reforms are taking hold and no unintended consequences result.
The discussion regarding an Office of Inspector General (OIG) for Treasury goes back a long time. When the Inspector General Act of 1978 was being debated, the question of having an Inspector General for the Department of the Treasury was discussed extensively. A major item of debate at that time was the Inspector General?s access to the programs, activities and functions of the Department of the Treasury law enforcement bureaus (Alcohol, Tobacco and Firearms; Customs; Secret Service; and IRS). At the time, it was decided not to have a statutory OIG for the Treasury, but this debate continued for the next 10 years.
In the meantime, the Treasury Department did establish an Administrative Inspector General, but it was small and did not include the internal audit and internal investigative units of the four law enforcement bureaus. In 1986, GAO issued a report entitled, "Treasury Department: An Assessment of the need for a Statutory Inspector General." GAO was critical of Treasury for only giving the administrative Inspector General direct responsibility for about one tenth of the Department. GAO recommended that the Congress establish a statutory Office of Inspector General at the Department of the Treasury. In making that recommendation, GAO also suggested the Congress consider special legislative provisions to accommodate the Department?s concerns over the possible disclosure of sensitive law enforcement and tax information.
When the Inspector General concept was expanded with the Inspector General Act Amendments of 1988, Congress created a statutory Inspector General in Treasury despite continued concerns about access to the law enforcement bureaus. As with other departments that handle sensitive matters, Congress acknowledged that some special provisions were required. Accordingly, Congress created a unique structure for the Treasury Inspector General. Under the 1988 Amendments, the internal audit functions of the Bureau of Alcohol, Tobacco and Firearms, the Customs Service and the Secret Service were transferred to the Department of the Treasury?s Office of Inspector General, with the Office of Inspector General providing oversight. However, those three bureaus retained their internal investigative units. The Office of Inspector General was given oversight, but not supervisory authority, for those internal investigative units.
With respect to the IRS, the internal audit and investigative functions were retained by the IRS Chief Inspector. As defined by the Congress and the Department?s implementing procedures, the Inspector General?s authority is carried out through an oversight function that determines the degree of compliance with applicable professional standards and with Departmental and Service policies and procedures. Additionally, the OIG is authorized to investigate alleged misconduct by senior-level IRS officials (officials in positions at the grade 15 level or higher) and employees in the Office of the Chief Inspector and the Office of the Chief Counsel. The Act did not provide the new statutory OIG with any resources for IRS oversight. However, subsequent to passage of the 1988 Amendments, 21 Full-Time Equivalent positions (FTEs) were provided to the OIG through a Memorandum Of Understanding between the IRS Commissioner and the Inspector General.
The end result of this is that the IRS Chief Inspector has primary cognizance for internal audit and investigative activities in the Service. The purpose of the Chief Inspector?s Office is to promote public confidence in the IRS by providing management with professional audit and investigative products. The Chief Inspector pursues his mission through two major organizational components - Internal Audit and Internal Security. The IRS Office of the Chief Inspector carries out its duties with approximately 1200 FTEs located in the four IRS regional offices and headquarters. The IRS Office of the Chief Inspector performs one of the most important audit and investigative functions in the Government, but has none of the elements of independence provided to the Presidentially-appointed Inspectors General. The more significant of these are that the Inspector General:
- Is nominated by the President and confirmed by the Senate.
- Can be removed only by the President.
- Reports to the head or deputy head of the agency.
- Generally, cannot be prevented from conducting an audit or investigation. (In the case of some departments, including Treasury, the Secretary may, in unusual situations, prevent an audit or investigation by giving written notice which the Inspector General must provide to Congress.)
- Has a legislative mandate to communicate directly with the Congress.
- Has a separate line item in the Administration?s budget.
- Generally has its own legal counsel.
Without these elements of independence, the Office of the Chief Inspector continues to face public and internal perceptions of its lack of independence. The current arrangement for OIG oversight of the Office of the Chief Inspector does little to mitigate the lack of structural independence. The present oversight arrangement is cumbersome and the resources provided us for this function are too few to offset the perception of lack of independence and the concerns that have resulted. In fact, this has been implicitly recognized by the Congress as it has requested the OIG to perform more and more assignments at the IRS over the years, several of which are ongoing.
ORGANIZATIONAL STRUCTURE AND RESOURCES FOR OVERSIGHT COMMITMENTS
Let me briefly describe for you how we are organized to carry out our oversight responsibilities for the IRS. Most of the work we do at IRS is performed by our audit and investigative units, although we also perform work out of our evaluations and information technology groups. Within our Office of Audit, we have 168 FTEs to conduct audits at ten Treasury Bureaus and the Department. This includes 65 FTEs devoted full time to helping improve financial management in the Department and across government through financial statement audits. Within the Office of Audit, we have one unit of 13 auditors responsible for conducting and coordinating audit work at IRS as well as the Financial Management Service (FMS) and the Bureau of the Public Debt. This group also performs oversight reviews of the Chief Inspector?s internal audit operations.
Within our Office of Investigations, we have approximately 60 FTEs to conduct investigations at the ten Treasury bureaus and the Department. With that staffing, we have responsibility for investigating all employees at the six non-law enforcement bureaus and the Department, as well as senior level officials and all employees in the Offices of Inspection, Internal Affairs and Chief Counsel at the four law enforcement bureaus. The Office of Investigations has an oversight unit
with a current staff of 11 which conducts oversight reviews of the four law enforcement internal investigative functions, including IRS. In addition, this unit handles most of our special reviews which result from congressional requests and hotline complaints. Currently, almost all of that unit?s staffing is devoted to issues involving IRS.
BENEFITS OF THE OVERSIGHT FUNCTION
With its organizational placement in the IRS, the Office of the Chief Inspector has encountered problems that could have been avoided if it had been structurally independent. In this regard, the Office of Inspector General has had to serve as the vehicle for maintaining the Office of Chief Inspector?s independence.
For example, the Office of Inspector General twice stepped in to inform the Secretary of the Treasury about the Chief Inspector?s position on Tax System Modernization (TSM) problems that should have been classified as material weaknesses under the Federal Managers? Financial Integrity Act (FMFIA). The Service had taken a different position and did not initially report the TSM problems as material weaknesses, despite the Chief Inspectors? objections. Without Inspector General intervention, two material weaknesses identified by the Office of the Chief Inspector would probably not have been included in the Secretary?s assurance letter to the President. In both instances, once the position of the Chief Inspector was communicated to Department management, the FMFIA assurance letter was changed to reflect this position.
PROBLEMS WITH THE OVERSIGHT ARRANGEMENT
Should the Congress decide to continue the Inspection Service in its current organizational context, there are important issues to be considered regarding improvement of the current oversight arrangement. We have grouped issues on oversight of the IRS audit and investigative functions into four general categories; resources, the definition of oversight, access and legislative impediments.
One of the most significant problems with the current oversight arrangement is resources. The OIG this year has an FTE ceiling of 292 from which we must provide audit and investigative coverage to the nine other Treasury bureaus and the Department. We have established a number of processes to keep us apprised of significant audit and investigative activities by the Chief Inspector. Within our existing resources, we have reviewed the Chief Inspector?s operations, conducted numerous investigations of senior IRS officials and performed our own audits of IRS programs where it was more appropriate for us to do so. While all of this in total has given us some presence in IRS, with the size, complexity and highly decentralized nature of an agency such as IRS, it does not provide the level of independent oversight that most other agencies are given with the more traditional Inspector General structure. A good example of the difficulties we face is the current work being performed on the inappropriate use of enforcement statistics. The Chief Inspector?s office has close to 80 auditors assigned to this project. The size of this undertaking makes it impossible for the OIG to perform the assignment, work in partnership or perform meaningful oversight on a real time basis. This is just one of many significant reviews the Chief Inspector?s office is performing.
With regard to the definition of oversight, the 1988 Inspector General Act Amendments did not specifically define what oversight is or how it would be carried out. One key question has always been at what point does OIG recommended action become "line management" and therefore fall outside of the intent of the Act. There have been some situations where the OIG recommended actions that in its view fit within the meaning of oversight, but the Chief Inspector?s office thought constituted exercise of line management. Resolution of these problems has taken a considerable amount of effort and delayed completion of the assignments.
Some current examples where this has occurred include:
Reviewing a Chief Inspector report prior to issuance. There were important issues being reported that the OIG thought should be commented on before the report became final. The OIG was not provided the opportunity to do this.
Recommending that a Chief Inspector report be issued to an official in line management above the IRS Commissioner. All the officials in line management, including the then Commissioner, had been interviewed for the report. The OIG recommendation was not followed.
Supervising Office of the Chief Inspector employees on the OIG audit of the IRS? administrative financial statements. When the OIG assumed responsibility for this audit from GAO, this became an issue which needed to be resolved.
Reviewing a Report of Investigation sent to the Office of the Assistant Chief Counsel (Disclosure Litigation). The position of the Chief Inspector was that oversight authority did not cover this. The OIG was eventually allowed to review the Report of Investigation, but could not obtain a copy.
With regard to access, the Inspector General does not have the same level of access to IRS information that is afforded to the Chief Inspector. While for the most part we have been able to obtain the needed information, we have had instances where access was refused or delayed and we had to expend unnecessary time and effort to resolve the matter or find alternatives to accomplish our objectives.
Legislative impediments center around two provisions in the 1988 Inspector General Act Amendments. First, the OIG is required to provide notice to the IRS of its intent to access return or return information, such as taxpayer returns. Second, with reference to Chapter 75 of the Internal Revenue Code, the OIG may report to the Attorney General only offenses under section 7214 without first obtaining the consent of the Commissioner of Internal Revenue. This provision restricts the authority of the Treasury OIG to refer violations of Internal Revenue Code, such as section 7213 pertaining to unauthorized disclosures of return or return information to the Department of Justice.
Both of these provisions have affected our work. For example, on some assignments, repeated notices of intent are required as the OIG is informed that the notice on file does not quite cover records it is trying to obtain. This can be frustrating and time consuming. More importantly, it is a process totally inconsistent with normal investigative procedure because it requires OIG investigators to notify others of the direction in which their investigations are going. Such a process risks compromising audits and investigations, particularly in situations where Office of Chief Inspector employees may be under review or in some way related to the review.
Similarly, the requirement for obtaining IRS Commissioner consent on referrals to the Department of Justice creates the potential for conflicts of interest. This situation also precludes the opportunity for an objective review by a party outside of the Department, namely the experienced Department of Justice prosecutors. Revision of these two provisions, which would require either an amendment to the Inspector General Act or enactment of separate legislation, would greatly enhance our independence and the effectiveness of our operations.
These issues also need to be considered if the Congress decides to leave the structural arrangements between the Office of the Chief Inspector and the OIG as they are.
I would like to add that I met recently with Commissioner Rossotti and discussed these issues and he assured me of his full cooperation in helping to resolve them. In the long term, I believe more direct OIG authority to access IRS information is a better solution.
BENEFITS OF AN INDEPENDENT STRUCTURE
An independent Inspector General function for the IRS has a number of benefits. Among these benefits are organizational objectivity that is independent of management control (and particularly independent from the program function) in performance of audits and investigations, departmentwide perspective, and greater accountability to the Congress. I would like to elaborate a little more on each of these benefits.
First, having an Inspector General function that is not under the direct supervision of the top program manager places the office in a structurally independent position. By its very design, this arrangement helps ensure organizational objectivity because the Inspector General is established as a separate line of business with its own mission, vision and values reporting directly to the Secretary or Deputy Secretary.
Second, an independent Inspector General helps avoid the real or perceived conflicts of interest often present when the activity is an internal function of another program area. By having control over its own resources, the independent Inspector General structure would be less prone to interference or influence by IRS management.
Third, the organizational independence places the OIG in a position where it can maintain a departmentwide perspective of issues and problems. The OIG is the focal point for audit and investigative activity in the Department. From this vantage point as an independent bureau within the Department of the Treasury, the Inspector General is less likely to view issues from a parochial level and it can bring the broader knowledge of departmentwide activities into play.
Fourth, the independent Inspector General structure provides more direct accountability to the Congress. This is accomplished through semiannual reports to the Congress, budget submissions and other statutory reporting requirements, and Congressional hearings.
There are several options for the Committee to consider. From our point of view, there are serious considerations pertaining to each option. In our view, the predominate consideration should be to provide as much independence to audit and investigative functions as is consistent with practical considerations. There are trade offs in this analysis. Historically, in this mix of trade offs, the Congress has properly established Inspector General-style independence as the standard. The options, as I see them, are:
1. Maintain the Chief Inspector within the IRS and retain the current oversight structure for the Treasury Inspector General.
Both the internal and external perception of a lack of independence will continue because of the lack of structural independence.
If this is the result, Congress will need to at least resolve the difficulties in the current oversight arrangement, particularly the restrictions on OIG access to Internal Revenue Code 6103 material and related restrictions on referrals to the Department of Justice.
The Congress will also need to provide the OIG with legislative authority to designate its investigators full law enforcement authority to at least provide the OIG investigators comparable standing with those in the Office of the Chief Inspector.
Consideration should be given to adding some of the OIG elements of independence to the Office of the Chief Inspector, such as independent legal counsel and a line-item budget.
2. Establish an IRS Office of Inspector General with most or all of the Inspector General independence elements, and incorporating the IRS Office of the Chief Inspector into it.
This would be a unique arrangement. No other department has two presidentially nominated and Senate confirmed Inspectors General. (Consideration should be given to the IRS Inspector General reporting directly to the Treasury Deputy Secretary to remove many of the difficulties presented under the following points.)
Under this arrangement, the IRS Inspector General would continue to be part of the IRS whether it reports to the Commissioner, the Board, or the Deputy Secretary. (The Treasury OIG is a separate bureau reporting directly to the Secretary or Deputy Secretary.)
There would be serious difficulties with the IRS OIG reporting to a part-time board that lacks access to Internal Revenue Code 6103 material. The amount of knowledge the Board could have of specific program issues would be seriously limited.
If the IRS OIG reported to the Commissioner or the IRS Board, some oversight or coordinating arrangement with the Treasury OIG would continue to be appropriate to provide for a focal point in the Department for audit and investigative activity.
The question would have to be resolved as to which of the two Inspectors General would have authority and responsibility to perform the financial statement audit of IRS. This could impact our ability to render the opinion on the Treasury Consolidated Financial Statement.
3. Move the IRS Office of the Chief Inspector under the Treasury OIG.
The Commissioner would lose the direct control of audit and investigative staff. This is a practical management disadvantage which would be offset by the added credibility of the audit and investigative products produced in a structurally independent OIG.
There would be practical difficulties with reorganizing, such as the differences in comparative size between the OIG and the Office of the Chief Inspector, differences in organizational structure, differences in authorities to access Internal Revenue Code 6103 material, law enforcement authority, and so forth. Because the Office of the Chief Inspector does not have legal counsel under its own supervision, additional legal staff should be provided to the new combined OIG.
4. Move a part of the Office of the Chief Inspector under the Treasury OIG, retaining an internal affairs unit and possibly other internal review or evaluation functions reporting directly to the Commissioner.
This would strengthen the independent oversight of IRS, while recognizing that the Office of the Chief Inspector has certain responsibilities that should remain in IRS. It can also give the Commissioner resources under his control that he can use to assess how well the agency is being managed.
This would be more consistent with the other three Treasury law enforcement bureaus which have their own internal affairs units. Also, the Chief Inspector performs some functions in IRS which are traditionally not part of an Inspector General function. This includes protection of IRS employees and conducting background investigations. This would enable the Commissioner of IRS to retain these functions and have resources available to perform special reviews. This option would have to be carefully studied to determine appropriate staffing levels and how to establish clear lines of jurisdiction between this function and the Treasury Inspector General.
In conclusion, let me say that establishing the right structure for strong independent oversight of the IRS is as important as any of the other organizational and tax law changes currently under consideration. Many of these are significant departures from the way IRS has done business in the past. This same thinking needs to be applied to changing the oversight structure. My office would be happy to work with this Committee to come up with the best possible solution.