[House Hearing, 106 Congress]
[From the U.S. Government Printing Office]




OVERSIGHT OF THE INTERNAL REVENUE SERVICE'S FISCAL YEAR 1998 FINANCIAL 
                               STATEMENTS

=======================================================================

                                HEARING

                               before the

                 SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,
                      INFORMATION, AND TECHNOLOGY

                                 of the

                              COMMITTEE ON
                           GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 1, 1999

                               __________

                           Serial No. 106-72

                               __________

       Printed for the use of the Committee on Government Reform


     Available via the World Wide Web: http://www.house.gov/reform

                                 ______

                   U.S. GOVERNMENT PRINTING OFFICE
61-839                     WASHINGTON : 2000


                     COMMITTEE ON GOVERNMENT REFORM

                     DAN BURTON, Indiana, Chairman
BENJAMIN A. GILMAN, New York         HENRY A. WAXMAN, California
CONSTANCE A. MORELLA, Maryland       TOM LANTOS, California
CHRISTOPHER SHAYS, Connecticut       ROBERT E. WISE, Jr., West Virginia
ILEANA ROS-LEHTINEN, Florida         MAJOR R. OWENS, New York
JOHN M. McHUGH, New York             EDOLPHUS TOWNS, New York
STEPHEN HORN, California             PAUL E. KANJORSKI, Pennsylvania
JOHN L. MICA, Florida                GARY A. CONDIT, California
THOMAS M. DAVIS, Virginia            PATSY T. MINK, Hawaii
DAVID M. McINTOSH, Indiana           CAROLYN B. MALONEY, New York
MARK E. SOUDER, Indiana              ELEANOR HOLMES NORTON, Washington, 
JOE SCARBOROUGH, Florida                 DC
STEVEN C. LaTOURETTE, Ohio           CHAKA FATTAH, Pennsylvania
MARSHALL ``MARK'' SANFORD, South     ELIJAH E. CUMMINGS, Maryland
    Carolina                         DENNIS J. KUCINICH, Ohio
BOB BARR, Georgia                    ROD R. BLAGOJEVICH, Illinois
DAN MILLER, Florida                  DANNY K. DAVIS, Illinois
ASA HUTCHINSON, Arkansas             JOHN F. TIERNEY, Massachusetts
LEE TERRY, Nebraska                  JIM TURNER, Texas
JUDY BIGGERT, Illinois               THOMAS H. ALLEN, Maine
GREG WALDEN, Oregon                  HAROLD E. FORD, Jr., Tennessee
DOUG OSE, California                             ------
PAUL RYAN, Wisconsin                 BERNARD SANDERS, Vermont 
JOHN T. DOOLITTLE, California            (Independent)
HELEN CHENOWETH, Idaho


                      Kevin Binger, Staff Director
                 Daniel R. Moll, Deputy Staff Director
           David A. Kass, Deputy Counsel and Parliamentarian
                      Carla J. Martin, Chief Clerk
                 Phil Schiliro, Minority Staff Director
                                 ------                                

   Subcommittee on Government Management, Information, and Technology

                   STEPHEN HORN, California, Chairman
JUDY BIGGERT, Illinois               JIM TURNER, Texas
THOMAS M. DAVIS, Virginia            PAUL E. KANJORSKI, Pennsylvania
GREG WALDEN, Oregon                  MAJOR R. OWENS, New York
DOUG OSE, California                 PATSY T. MINK, Hawaii
PAUL RYAN, Wisconsin                 CAROLYN B. MALONEY, New York

                               Ex Officio

DAN BURTON, Indiana                  HENRY A. WAXMAN, California
          J. Russell George, Staff Director and Chief Counsel
   Bonnie Heald, Director of Communications/Professional Staff Member
                          Mason Aliner, Clerk
            Faith Weiss, Minority Professional Staff Member


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on March 1, 1999....................................     1
Statement of:
    App, Steven O., Deputy Chief Financial Officer, Department of 
      the Treasury...............................................    47
    Cunninghame, Donna H., CPA, Chief Financial Officer, Internal 
      Revenue Service............................................    42
    Kutz, Gregory D., Associate Director, Governmentwide 
      Accounting and Financial Management Issues, Accounting and 
      Information Management Division, U.S. General Accounting 
      Office, accompanied by Steven J. Sebastian, Assistant 
      Director, Governmentwide Accounting and Financial 
      Management; and Joan B. Hawkins, Assistant Director, 
      Governmentwide Accounting and Financial Management.........    10
Letters, statements, et cetera, submitted for the record by:
    App, Steven O., Deputy Chief Financial Officer, Department of 
      the Treasury, prepared statement of........................    49
    Cunninghame, Donna H., CPA, Chief Financial Officer, Internal 
      Revenue Service, prepared statement of.....................    44
    Dalrymple, John, Chief Operations Officer, Internal Revenue 
      Service:
        Information concerning earned income tax credit..........    56
        Information concerning trust funds.......................    66
    Horn, Hon. Stephen, a Representative in Congress from the 
      State of California, prepared statement of.................     3
    Kutz, Gregory D., Associate Director, Governmentwide 
      Accounting and Financial Management Issues, Accounting and 
      Information Management Division, U.S. General Accounting 
      Office, prepared statement of..............................    14
    Turner, Hon. Jim, a Representative in Congress from the State 
      of Texas, prepared statement of............................     6

 
OVERSIGHT OF THE INTERNAL REVENUE SERVICE'S FISCAL YEAR 1998 FINANCIAL 
                               STATEMENTS

                              ----------                              


                         MONDAY, MARCH 1, 1999

                  House of Representatives,
Subcommittee on Government Management, Information, 
                                    and Technology,
                            Committee on Government Reform,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10 a.m., in 
room 2154, Rayburn House Office Building, Hon. Stephen Horn 
(chairman of the subcommittee) presiding.
    Present: Representatives Horn and Turner.
    Staff present: J. Russell George, staff director and chief 
counsel; Bonnie Heald, director of information/professional 
staff member; Matthew Ebert, policy advisor; Larry Malenich, 
GAO detailee; Mason Alinger, clerk; Paul Wicker, Kacey Baker, 
and Richard Lukas, interns; Faith Weiss, minority professional 
staff member; and Earley Green, minority staff assistant.
    Mr. Horn. A quorum being present, the Subcommittee on 
Government Management, Information, and Technology will be in 
order.
    Today's hearing is the first in a series of hearings the 
subcommittee will conduct to examine the audits of financial 
statements of selected Federal agencies.
    In the late 1980's, Congress recognized that one of the 
root causes of waste in the Federal Government was that 
financial management leadership policies, systems, and 
practices were in a state of disarray. Financial systems and 
practices were obsolete and ineffective. They failed to provide 
complete, consistent, reliable, and timely information to 
congressional decisionmakers as well as executive branch agency 
management.
    In response, Congress passed a series of laws on a 
bipartisan basis designed to improve financial management 
practices and to ensure that tax dollars are spent for the 
purposes that Congress intends. The Chief Financial Officers 
Act, enacted in 1990, represented the most comprehensive 
financial reform legislation of the last four decades. It 
established a leadership structure for Federal financial 
management, including the appointment of Chief Financial 
Officers in the 24 largest Federal departments and independent 
agencies.
    In 1994, the Chief Financial Officers Act was amended to 
require agencywide audited financial statements covering the 
agencies' accounts and associated activities. March 1st is the 
due date for these statements, and it is appropriate that the 
first hearing we are conducting is on the Internal Revenue 
Service's financial statements. That will bring joy to many 
taxpayers as they struggle through April 15th.
    The Internal Revenue Service is the government's revenue 
collection arm. It has undergone financial auditing since 1992 
under a pilot program created by the Chief Financial Officers 
Act. Each year these audits have shown significant weaknesses 
in the agency's financial management. Despite these weaknesses, 
the General Accounting Office [GAO], the fiscal and program 
auditor for the legislative branch, gave the Internal Revenue 
Service a clean opinion in its 1997 financial statements. 
However, the auditors rendered this opinion only after the 
Internal Revenue Service spent several months and hundreds of 
thousands of taxpayer dollars to prepare the statements. This 
special effort was necessary because the Internal Revenue 
Service's accounting systems cannot provide basic accounting 
information in an efficient manner.
    On April 15th of last year, this subcommittee held an 
oversight hearing on the results of the Internal Revenue 
Service's 1997 audit. At that hearing, we learned that IRS 
estimated it could only recover about 13 percent of the $214 
billion which taxpayers owed the Federal Government as of 
September 13, 1997; 13 percent out of the amount that is owed. 
That is not very good. In fact, that is what started me several 
years ago with Mrs. Maloney, then the ranking Democrat, on the 
debt collection law of 1996. And of course it does not apply to 
tax debt, it applies to all nontax debt. And I do want to go 
into that with you in terms of the question period. We will 
learn today whether the agency has improved its ability to 
collect the amounts owed to the Federal Government.
    Last year's hearing also illustrated the need for better 
controls in handling cash payments at the Internal Revenue 
Service centers. The 1997 audit provided the steps and 
direction the Internal Revenue Service officials needed to 
follow in order to gain stronger financial control of this very 
important agency.
    We are here today to determine what progress has been made 
in meeting this sizable challenge. We will hear testimony from 
representatives of the General Accounting Office, the Internal 
Revenue Service, and the Department of the Treasury.
    We have an excellent group of witnesses, and I thank each 
of them for coming on such short notice. I look forward to your 
testimony.
    [The prepared statement of Hon. Stephen Horn follows:]

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    Mr. Horn. And I think you know the routine of this 
committee is we swear in all witnesses, so if you will rise, 
raise your right hands.
    [Witnesses sworn.]
    Mr. Horn. The clerk will note that all five witnesses 
affirmed.
    Mr. Turner.
    Mr. Turner. Thank you, Mr. Chairman.
    I want to admit at the outset of this hearing, Mr. 
Chairman, that I started working on my tax return last night, 
so I am not in a very good mood. I am one of those taxpayers 
who still tries to do my own return, and it becomes 
increasingly challenging every year that passes.
    But it is good to be here this morning, and I appreciate 
the witnesses being here. I know it was very short notice for 
you. This hearing was only called last Friday, and so I know 
you were working diligently to prepare to be here today, and 
for that we are very grateful.
    The scope of your operations are, of course, very 
impressive. On an annual basis, your agency processes tax 
returns from over 200 million taxpayers, reviews more than 2 
billion documents, collects nearly $1.8 trillion in revenue, 
and issues $151 billion in refunds, which we all hope we are 
able to have a part of, Mr. Chairman. But your annual operation 
is over $8 billion, using Federal appropriations in that 
amount.
    The task that you undertake, you do so with technology that 
I understand dates back to the 1970's. It is very difficult, I 
am sure, for the IRS to comply with modern financial management 
standards with technology that is that old. We know the IRS is 
in need of technological modernization, and to meet that 
demand, Commissioner Rossotti is working toward modernizing the 
IRS, making it more consumer-friendly. This makes good business 
sense, and it should increase the level and quality of services 
provided to each IRS customer.
    However, without significant modernization of its financial 
systems, the IRS will continue to lack resources to ensure 
financial discipline. The audit being released today 
underscores the reasons why the IRS needs to implement a 
technological modernization program as quickly as possible.
    As evidenced by the audit, we hear about serious financial 
management deficiencies at the IRS. Although the year-end 
information provided by the IRS regarding its annual $1.8 
trillion in collections and its $151 billion in refunds is 
considered reliable, the General Accounting Office has 
identified several significant material weaknesses in the IRS 
financial systems which prevent the IRS from complying with 
several financial management laws and standards, and, 
therefore, it is in need of correction.
    The underlying financial problems with the IRS are chronic 
and long-standing and have spanned both Democrat and Republican 
administrations. The General Accounting Office documented many 
of the same financial problems in its first audit of the IRS 
financial statements for fiscal year 1992, and some of these 
problems go back, I understand, 17 years.
    However, this is no excuse. It is time for the IRS to 
implement modern financial systems that are capable of doing 
what the IRS expects the average American to do. Simply put, 
the IRS should be able to balance its checkbook, list its 
debts, and locate and identify its property and equipment. It 
is time for the agency to address some of the custodial 
concerns raised by the General Accounting Office, such as 
maintaining the security of the information submitted by 
taxpayers to the IRS and improving its ability to determine 
when it is owed money and when it has been paid.
    Many of the major financial problems that the General 
Accounting Office identifies would be resolved with more modern 
financial management systems. There are steps that the IRS can 
take now to improve its control over the cash, checks, and 
taxpayer information that it receives.
    At this time, we are experiencing a new era of Federal 
agency management. Agencies recognize that they must not only 
provide top quality Government services, but also achieve them 
in a cost-effective manner. Agencies must develop financial 
management systems capable of tracking their ongoing financial 
condition, assessing the financial vulnerabilities, and 
determining the most cost-effective approach.
    We can anticipate criticism today of the IRS; however, in 
the spirit of improving the agency, I believe that the IRS will 
consider and respond to the legitimate concerns that are raised 
by the GAO audit. We have been told that the IRS plans to 
address its weaknesses through actions being implemented over 
the next few years. Given the importance of financial 
management requirements, we must not let the implementation of 
IRS corrective action fall through the cracks. The GAO report 
is something that the IRS should pay careful attention to.
    In closing, again, I thank the witnesses for being here 
today, for the efforts that you have made to prepare for this 
hearing, and it is my hope that the hearing will be productive 
for the Internal Revenue Service.
    Thank you, Mr. Chairman.
    Mr. Horn. We thank you for that very fine statement.
    [The prepared statement of Hon. Jim Turner follows:]

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    Mr. Horn. We now start with the representative of the 
General Accounting Office. Mr. Gregory D. Kutz is the Associate 
Director, Governmentwide Accounting and Financial Management 
Issues of the Accounting and Information Management Division of 
the GAO.
    Mr. Kutz.

       STATEMENT OF GREGORY D. KUTZ, ASSOCIATE DIRECTOR, 
  GOVERNMENTWIDE ACCOUNTING AND FINANCIAL MANAGEMENT ISSUES, 
 ACCOUNTING AND INFORMATION MANAGEMENT DIVISION, U.S. GENERAL 
    ACCOUNTING OFFICE, ACCOMPANIED BY STEVEN J. SEBASTIAN, 
  ASSISTANT DIRECTOR, GOVERNMENTWIDE ACCOUNTING AND FINANCIAL 
     MANAGEMENT; AND JOAN B. HAWKINS, ASSISTANT DIRECTOR, 
       GOVERNMENTWIDE ACCOUNTING AND FINANCIAL MANAGEMENT

    Mr. Kutz. Mr. Chairman and Congressman Turner, good 
morning. It is a pleasure to be here this morning to discuss 
the results of our audit of IRS's fiscal year 1998 financial 
statements, which is being released today in accordance with 
the March 1st statutory requirement. These financial statements 
are significant because they report the nearly $1.8 trillion in 
tax revenues, $151 billion in refunds, and $26 billion in net 
taxes receivable, which I will refer to throughout this 
statement as IRS's custodial activities. These statements also 
show IRS's fiscal year 1998 appropriations of nearly $8 billion 
and the related activities, which I will refer to in this 
statement as IRS's administrative activities.
    With me today is Steve Sebastian, who was responsible for 
our work on the IRS' custodial activities, and Joan Hawkins, 
who was responsible for our work on the IRS' administrative 
activities.
    I would like to summarize my statement, but I would ask, 
Mr. Chairman, that my entire statement be made part of the 
record.
    Mr. Horn. I would say every witness, their documents and 
appendices, everything, are put in the record when they start 
talking. But take your time on this.
    Mr. Kutz. OK. I would also like to thank IRS senior 
management for the courtesy that they provided to me and the 
GAO staff throughout the country during this year's audit. They 
were very courteous in all respects.
    The bottom line of my testimony is that IRS continues to 
experience serious financial management and internal control 
problems. Many of these problems date back to our first audit 
in fiscal year 1992, as Congressman Turner noted.
    This morning I will focus on three areas: First, our 
opinions on IRS's fiscal year 1998 financial statements; 
second, issues impacting those opinions; and third, issues 
impacting taxpayers and resulting in lost revenue to the 
Federal Government.
    The audit we performed of IRS's financial statements is 
similar in nature to audits done of all major publicly traded 
corporations in the United States. In addition, our audit 
included extensive testing of IRS's internal controls. My first 
point relates to our opinions on IRS's six main financial 
statements. And for reasons I will discuss in a moment, our 
opinions on these six financial statements vary.
    Our opinion on IRS's statement of custodial activities for 
this year is unqualified. This means that IRS's reported 
revenue of nearly $1.8 trillion and refunds of $151 billion are 
reliable. Our opinion on IRS's balance sheet is qualified. 
Although IRS's net tax receivable number of $26 billion is 
reliable, we were unable to determine the reliability of fund 
balance with Treasury and accounts payable. In addition, 
another key balance sheet account, property and equipment, is 
likely materially understated.
    Our opinions on the other four main statements, the 
statements of net cost, changes in net position, budgetary 
resources, and financing, are disclaimers. This means that 
because of the problems we found with IRS's balance sheet, 
along with errors and weaknesses relating to nonpayroll 
expenses and budgetary accounts, we were unable to determine 
the accuracy of these financial statements.
    In addition, because of the severity of these problems, GAO 
was unable to determine whether IRS complied with the 
Antideficiency Act, which restricts agencies from spending more 
than they are appropriated.
    Let me now move on to my second issue, which is that the 
problems negatively impacting our opinions for fiscal year 1998 
relate to the IRS' administrative activities. Some of the 
reasons for the opinion qualifications and the four disclaimers 
include, first, IRS did not reconcile the accounts related to 
its reported $1.8 billion fund balance with Treasury accounts. 
Think of this as not balancing your checkbook to the monthly 
bank statement and at the same time having a recordkeeping 
system that was prone to error.
    Second, IRS was unable to properly safeguard or reliably 
report property and equipment. For example, when verifying the 
items in IRS's inventory, we noted a missing Chevy Blazer, 
laptop computer, and $300,000 printer. We also found items 
including a television, a fax machine, and a VCR that were not 
included in IRS's records. At one IRS field office, 19 of 130 
computer assets costing over $50,000 each could not be located 
by IRS staff. IRS has itself reported property and equipment as 
a major internal control problem for 17 consecutive years.
    Third, IRS could not provide adequate support for accounts 
payable, nonpayroll expenses, and budgetary data. Mr. Chairman, 
I have done dozens of audits in my career of corporations, 
State and local governments, and not-for-profit organizations, 
and IRS is the first entity that I have audited that could not 
provide a listing of accounts payable at year end.
    In addition to systems problems related to this issue, IRS 
has an suspense account with amounts that date back to 1989 
appropriations. IRS has not investigated nor resolved amounts 
in this account.
    My third and most important issue is that many of the 
problems we are reporting today have the potential to touch the 
everyday lives of taxpayers and result in lost revenue to the 
Federal Government. As I mentioned earlier, IRS was able to 
reliably report its custodial activities; however, this 
achievement required extensive, costly, and time-consuming ad 
hoc procedures to overcome chronic internal control and systems 
weaknesses. IRS cannot produce reliable custodial information 
on a routine basis.
    Despite the reliable custodial information, we found three 
significant weaknesses that impact taxpayers and result in lost 
revenue for the Federal Government. First, we found systems 
problems relating to amounts due from taxpayers that have 
resulted in taxpayer burden and lost revenue. For example, we 
found that IRS was pursuing and collecting amounts from 
individuals whose taxes had already been paid. We also found 
instances where delays in recording transactions resulted in 
IRS missing opportunities to offset refunds paid to taxpayers 
against amounts that those taxpayers owed to the Federal 
Government.
    Next, we noted deficiencies in preventive controls over tax 
refunds that have permitted the disbursement of millions of 
dollars in fraudulent refunds. IRS has procedures in place to 
identify erroneous or fraudulent tax returns claiming refunds; 
however, these controls occur months after the refunds have 
been disbursed. Once a refund has been disbursed, IRS is 
compelled to expend its resources to recover it, with dubious 
prospect of success.
    In addition, vulnerabilities and controls over cash, 
checks, and taxpayer data do not adequately protect the 
Government and taxpayers from loss or inappropriate disclosure 
of sensitive data. For fiscal years 1997 and 1998, IRS reported 
over 150 actual or alleged employee thefts of receipts at IRS 
field offices and lockbox banks. These cases only represent IRS 
employees that were caught. The magnitude of thefts not 
identified by IRS is unknown.
    The vulnerabilities we noted include, but are not limited 
to, IRS not receiving results of background checks on new 
employees until well after they were placed in positions to 
handle tax receipts and taxpayer data. Fifteen percent of 
thefts of taxpayer receipts committed at IRS service centers in 
recent years were by individuals who had previous arrest 
records that were not identified prior to their employment.
    In addition, we observed the use of single, unarmed 
couriers in ordinary civilian vehicles, including in one 
instance a bicycle, to transport hundreds of millions in 
taxpayer receipts to the bank. At the service center that Mr. 
Sebastian and I visited, the courier left over $200 million of 
endorsed taxpayer checks with sensitive data in a Ford Explorer 
that was unlocked with the windows down while he returned to 
the service center. Theft of taxpayer checks and other data can 
result in access to bank accounts and identity fraud, which can 
create significant taxpayer burden.
    One other matter that you mentioned in your opening 
statement, Mr. Chairman, of great importance to the Federal 
Government is the collectibility of IRS's unpaid assessments.
    The poster board to my right and the last page of my 
written statement show the components of IRS's $222 billion of 
unpaid assessments at September 30, 1998. Please note that, 
based on a statistical projection done jointly by GAO and the 
IRS, that $26 billion, or only 11 percent, of IRS unpaid 
assessments will ultimately be collected.
    In summary, IRS cannot do many of the basic accounting and 
recordkeeping tasks that it expects American taxpayers to do. 
And, several of the problems I discussed have resulted in 
unnecessary taxpayer burden and losses to the Federal 
Government. We agree with the IRS that this situation is not 
acceptable.
    The problems I have described this morning are chronic in 
nature and, despite past attempts and corrective action plans 
by IRS, have not yet been successfully resolved.
    Some of these problems can be resolved quickly with 
improvements in basic internal controls. However, for other 
problems, tax system modernization will need to be part of a 
longer-term solution. We have provided IRS with a series of 
recommendations to resolve these weaknesses. The agency agrees 
with the facts discussed in our report and has reacted in a 
very constructive manner. In its written response to our 
report, IRS committed to executing the changes necessary to 
improve its operations. We are committed to working with the 
IRS in fiscal year 1999 and future years to develop lasting 
solutions to these pervasive problems.
    Mr. Chairman, this concludes my testimony. My colleagues 
and I will be happy to respond to any questions.
    Mr. Horn. Well, we thank you for that very succinct 
statement of your testimony.
    [The prepared statement of Mr. Kutz follows:]

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    Mr. Horn. I take it at this point neither of your 
colleagues have anything else to add to the presentation?
    Mr. Kutz. We can hold that to Q and A.
    Mr. Horn. We will wait for the questioning until everybody 
has a chance to get their statement in.
    Mr. Horn. So let us go then to the next witness, which is 
Ms. Donna Cunninghame, Chief Financial Officer of the Internal 
Revenue Service.

    STATEMENT OF DONNA H. CUNNINGHAME, CPA, CHIEF FINANCIAL 
               OFFICER, INTERNAL REVENUE SERVICE

    Ms. Cunninghame. Mr. Chairman and Mr. Turner, I thank you 
for this opportunity to testify on the GAO report. I must sadly 
state that the findings contained in this report have merit, 
and I am deeply disappointed that we failed to meet our 
obligations.
    While many of these problems, as you have heard repeatedly, 
are not new and require long-term solutions, the GAO has also 
outlined several new issues that we need to address. The GAO 
correctly raised significant concerns and identified 
substantial weaknesses and deficiencies that prevented the IRS 
from reliably reporting on several of its required principal 
financial statements in the timeframe allowed.
    This is unacceptable to the IRS, to the Congress, and to 
the taxpayers that we serve. We must first acknowledge and 
understand how and why we failed. Second, we need to create and 
implement, in the process of doing so, short- and long-term 
plans that will address the challenges raised. And third, we 
need to followup with these plans with an ongoing commitment 
from the highest level of IRS management.
    I want to stress, too, Mr. Chairman, that this will not be 
a plan developed behind closed doors, but will be an open and 
shared enterprise on behalf of America's taxpayers. We are 
developing it with the assistance from OMB, the Treasury 
Department and their Inspector General, with outside 
contractors, and with the assistance of the GAO. I plan to 
present it to you in the final draft and submit it to you and 
to the subcommittee to seek your comments to ensure that you 
agree with our approach. We will welcome any suggestions you 
have and we will report to you regularly on our progress.
    Mr. Chairman, I became the Chief Financial Officer at the 
Internal Revenue Service on August 16, 1998. During the 6 
months that I've held this position, our vulnerabilities became 
particularly apparent in the loss of several qualified 
individuals who previously managed the preparation of our 
administrative financial statements. Unfortunately, we did not 
replace them in time. Results of this personnel shortfall have 
become painfully obvious and the consequences unacceptable.
    We have also learned the painful lesson that solutions left 
unattended quickly become problems again. We must follow 
through on problems. We need to repeatedly review our 
performance and build upon our successes while learning about 
our failures.
    In the short term, we are addressing many of the problems 
raised by the GAO. In the past month, I have hired five new 
professional employees to fill key slots on the administrative 
side, and we are contracting with two large public accounting 
firms to assist us in providing the human resources and the 
expertise that we must have to meet the needs identified in the 
GAO report.
    Although we were pleased to obtain an unqualified opinion 
on our $1.8 trillion custodial financial statements, we do 
agree with the GAO that it was the result of extensive ``work 
around'' procedures. We recognize the system's deficiencies, 
and we have ongoing initiatives aimed at correcting these 
problems in both the short and the long term.
    Mr. Chairman, there will be noticeable improvements in our 
financial statements, but I need to emphasize that these are 
nevertheless short-term fixes with the inherent deficiencies 
that go along with them. Our systems solutions will take 
several years to put into effect.
    In the long term, the inadequacies of our financial 
reporting systems must be addressed through our broader efforts 
under Commissioner Rossotti to modernize both the system and 
the structure of the IRS as mandated by the IRS Restructuring 
and Reform Act of 1998. But like our troubled financial 
statements, most solutions, as I said previously, will require 
years to plan and to implement.
    One key to better financial management at the IRS is 
improved technology. The IRS must replace nearly its entire 
inventory of commuter applications and convert its data on 
every taxpayer to new systems. This must be accomplished in 
conjunction with redesigned business practices as part of our 
overall modernization program, at the same time while we 
continue to provide service to taxpayers and to respond to 
ongoing tax law and other changes. This is vast, complex, and a 
risky undertaking that will require many years to accomplish.
    Mr. Chairman, in conclusion, I would again like to thank 
this committee for providing us with this opportunity to review 
and acknowledge the issues set forth in the GAO's report and to 
discuss with you the IRS's plans to address these serious 
shortcomings. The IRS must work every day to earn the trust of 
the American public. To do that I pledge to you today that we 
will continue to improve our financial reporting system and 
modernize so that the IRS can provide America's taxpayers top-
quality service for the decades to come.
    Thank you.
    Mr. Horn. Thank you very much.
    [The prepared statement of Ms. Cunninghame follows:]

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    [GRAPHIC] [TIFF OMITTED] T1839.036
    
    Mr. Horn. Our last witness is Mr. Steven App, the Deputy 
Chief Financial Officer of the Department of the Treasury.

  STATEMENT OF STEVEN O. APP, DEPUTY CHIEF FINANCIAL OFFICER, 
                   DEPARTMENT OF THE TREASURY

    Mr. App. Thank you, Mr. Chairman, Mr. Turner. Good morning. 
Thank you for inviting me here again today to discuss financial 
management in the Department of Treasury and in the Internal 
Revenue Service. It was 2\1/2\ years ago in September 1996 that 
I last appeared before the committee on the eve of the first 
required agencywide financial statements being prepared by 
Treasury and by other agencies. Today I would like to limit my 
oral remarks to just three points submitted in my written 
testimony.
    First, in terms of departmental oversight, we are 
disappointed in the fiscal year 1998 audit results due to the 
IRS problems even though we are expected to receive an overall 
qualified opinion on Treasury statements for the second year in 
a row. Frankly, based on the success of 1997, with a clean 
opinion of the IRS, one qualification and a March 30 delivery 
date, we were optimistic that 1998 would be our break-through 
year in terms of a quality clean opinion for the Treasury 
Department.
    In late January 1999, when it became apparent that the 
General Accounting Office identified problems in the IRS that 
would result in a less than desirable audit, we immediately 
contacted the Office of Management and Budget, GAO, IRS to 
discuss what could and should be done for the 1998 audit: 
Extend the audit for 1998 in hopes of getting better results, 
or stop the audit and focus on the future.
    The Department and IRS, supported by GAO and OMB, chose to 
focus on the future, developing an action plan for fiscal year 
1999 for the financial statement and audit process. The 
Department is fully cognizant that IRS is the key issue for 
1999 financial statements. And on behalf of the Assistant 
Secretary for Management and CFO, I can assure you that we are 
using the full weight of our office to help ensure better 
results for 1999.
    In short, we are committing that the fiscal year 1999 
reporting initiative will be better focused by IRS and the 
Department, that our partnership with GAO will continue to 
improve, and that we will do everything within our power to 
allow GAO to begin as early as possible with the interim audit 
work.
    The second area I would like to mention is regarding the 
risk factors that we have identified for the IRS audit. One of 
those risk factors in the administrative statements involves 
three new statements that all agencies are facing: The 
statement of net cost, the statement of financing, and the 
statement of budgetary resources; as well as certain balance 
sheet items, like property, plant and equipment that deal with 
capitalization thresholds. In fairness to the IRS, these 
problematic issues are not restricted to them alone, but are 
governmentwide issues as well. While many of Treasury's bureaus 
successfully negotiated these issues, I think you will find in 
future hearings with other agencies that these also pose a 
problem for them.
    Finally, in terms of progress, while we freely acknowledge 
the financial statement and preparation problems at the IRS and 
its significant impact on the Department, we have made 
considerable progress over the past three required audit cycles 
both in terms of quality of results and in terms of timeliness 
of completion, in 1996 moving from a disclaimer on our 
Treasurywide statements, to 1997 with a qualified opinion, and 
again for 1998, with increasing convergence on the March 1st 
delivery date, from April 30th to March 30th to mid-March this 
year.
    In addition, as was previously mentioned, the Treasury 
again received unqualified opinions in 1998 on its primary 
governmentwide functions, collecting revenue, managing the 
public debt. GAO is rendering unqualified opinions on the IRS 
revenue collection of $1.8 trillion and Bureau of Public Debt's 
Federal debt of $5.5 trillion.
    With the exception of the IRS administrative statements, 
all other Treasury-audited bureaus and entities this year are 
also receiving clean audit opinions, including our other 
revenue bureaus, Customs and ATF, which will have clean audit 
opinions for 3 years in a row, as well as with the other parts 
of Treasury.
    I would like to conclude by emphasizing again that our 
renewed focus on the IRS administrative accounts and action 
plan for 1999, coupled with the demonstrated 3-year track 
record of converging on a clean opinion by March 1st, makes the 
CFO and myself remain optimistic and committed to making 1999 
our break-through year for both fronts.
    I would be pleased to answer any questions. That ends my 
prepared remarks. Thank you.
    Mr. Horn. Thank you very much.
    [The prepared statement of Mr. App follows:]

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    [GRAPHIC] [TIFF OMITTED] T1839.038
    
    Mr. Horn. Let me start with 5 minutes. Mr. Turner and I are 
going to alternate every 5 minutes, probably to rest our 
throats with what is diseased in this city. Let me start in 
with the obvious one, because it just sort of glaringly shows 
up in this property management, and that is the printer.
    I take it it was worth $300,000; is that correct, Mr. Kutz?
    Mr. Kutz. According to IRS's records, yes.
    Mr. Horn. How big was a printer like this? I am just 
curious how you get that out of an office and down through the 
elevator and all the rest of it. How big was this thing? Do we 
know?
    Mr. Kutz. Let me defer to Ms. Hawkins on more specifics if 
she has them.
    Mr. Horn. You are the printer chaser. Has anybody ever 
found it, by the way?
    Ms. Hawkins. In the case of the printer, it was disposed 
of. We did receive a document saying it was disposed of in 
1994. So we haven't seen it, and we don't know what it looks 
like. The IRS did not post the disposal on it's property 
records. So even though they could give us a document saying it 
had been disposed of in 1994, it was still being counted as one 
of the assets on their records.
    Mr. Horn. Well, when you say ``disposed,'' I am just not 
clear on what that means. Does that mean somebody walked out 
with it, and they wrote it off like they have written off the 
receivables and write-offs of $119 billion?
    Ms. Hawkins. In this case it probably means they turned it 
over to another agency, such as the General Services 
Administration, for disposal according to proper procedures. 
What they failed to do was to record that disposal.
    Mr. Horn. OK, so nobody took it, then; is that correct?
    Ms. Hawkins. No, I don't think anyone took that printer.
    Mr. Horn. So they were turning it in for a new one?
    Ms. Hawkins. They were turning it in because they no longer 
needed it. I assume they probably also got a new one.
    Mr. Horn. They went through this last year with the 
Pentagon in terms of ``where are their ships'' and ``where are 
their missiles'' and so forth. Do the IRS offices have security 
from, say, the General Services Protective Service, or do you 
have your own?
    Ms. Cunninghame. Yes, we do have security.
    Mr. Horn. Do you have your own people, or do you use GSA's?
    Ms. Cunninghame. We do have our own people who are 
certified.
    Mr. Horn. Are they armed?
    Ms. Cunninghame. Yes, they are.
    Mr. Horn. Are they there at night when different shifts are 
coming on and off?
    Ms. Cunningham. Yes, sir, they are.
    Mr. Horn. And would they mark down something if somebody is 
walking through a door with a personal computer, or a printer 
as the case may be?
    Ms. Cunninghame. I believe the answer to that is an 
unqualified yes.
    Mr. Horn. So what does GAO say? Did you look at their 
security system on how things can go out the back door? Every 
firm in America has that problem, so there are ways to solve 
it.
    Mr. Kutz. Whether it relates to security or recordkeeping, 
at this point we are unclear. We did look at their records. We 
did inventories from the IRS' records to the floor and from the 
floor to the IRS' records, and we found errors both ways. We 
aren't sure exactly what is.
    They do take inventories periodically of these assets and 
adjust their records for the inventories, but whether the 
problem relates to physical security as you're describing it, 
we're not sure at this point.
    Mr. Horn. Do they have a standard time in which they take 
inventory, or is it an unstandard time in the sense that you 
surprise everybody and say, where is the typewriters? Where is 
the personal computers? Where are anything of much value? How 
does IRS deal with that? And who does it; does some outside 
firm come in, or does IRS do it?
    Mr. Kutz. We believe that they take cycle inventories. So I 
think they try to hit everything once a year, is my 
understanding, across the country.
    Mr. Horn. At the same time?
    Mr. Kutz. No, cyclically. Different places get an inventory 
at a different point in time.
    Mr. Horn. Did you ever find the Chevy Blazer?
    Ms. Cunninghame. Yes, sir.
    Mr. Horn. Who had that one?
    Ms. Cunninghame. The Chevy Blazer highlights two problems 
we have with our fixed asset inventory records. One is that we 
have two systems that we use that are not integrated, do not 
talk to each other. We also have employees who sometimes are 
less diligent than they should be about following the 
procedures that have been established.
    With regard to the Chevy Blazer, it was a leased vehicle. 
It had been returned to the company that owned it, I think, a 
month or so before the inventory was to take place. Where we 
failed is two places. We did not remove it from the inventory 
listing as we should have; and second, we were not able to 
account for it in a timely manner when GAO first raised the 
issue. We should be able to do both of those, and we failed.
    Mr. Horn. That was 17 years ago. How long has this problem 
been out there and not addressed?
    Ms. Cunninghame. It has been there for a period of time. 
And we do take a lot of manual activities that we try to bridge 
the gap between the two systems. I have not been here long 
enough. I don't know if somebody can answer that for me. I 
guess it has just been an ongoing problem, sir.
    Mr. Horn. Well, I realize IRS has downsized about 6,000 
employees since 1993. I think there is 102,000 employees now?
    Ms. Cunninghame. That's accurate.
    Mr. Horn. What is needed in terms of having an effective 
and efficient accounting service and an inventory service?
    Ms. Cunninghame. Our basic problems stem to our systems. We 
do not have the types of systems we need that talk to each 
other, that are up-to-date, state-of-the-art, integrated 
systems that will readily post to our general ledger system.
    As you are aware, I know, we are doing a number of things 
on trying to fix that. I do have Paul Cosgrave, who is our 
Chief Financial Officer, and if you will allow me, I would like 
him to tell you a little bit about what we are doing with our 
systems, including the financial systems.
    Mr. Horn. Fine. I will tell you, let's do it on my round. I 
want to have Mr. Turner right now, and then we will get back to 
that.
    Mr. Turner. Thank you, Mr. Chairman.
    I want to address the issue of refunds a little bit with 
you. I guess I need to ask the General Accounting Office first 
to address the problem of refunds. You have identified several 
problems in that area. And I guess first if you could just give 
us an estimate of the amount inappropriately paid out in 
refunds in the last year, and if you will also maybe identify 
what types of refunds we are talking about in those improper 
refunds.
    I noticed last year there was testimony from Ms. 
Cunninghame's predecessor about several steps that the IRS was 
taking to try to correct the problems of improper refunds, and 
I would like to ask the General Accounting Office if you have 
noted any improvements as a result of the efforts that were 
testified to a year ago by Ms. Cunninghame's predecessor?
    Mr. Kutz. Congressman Turner, we have seen some 
improvements, and I will defer to Mr. Sebastian to give you 
some details on the improvements and specifically the first 
question you had asked about the known number.
    I will mention that the actual amount of fraudulent or 
inappropriate refunds disbursed is unknown. There is no way to 
determine for sure what that number is. But there is a known 
number that is reported by the IRS, and I will defer to Mr. 
Sebastian for that.
    Mr. Sebastian. The IRS has actually identified $17 million 
in fraudulent refunds that were disbursed in the first 9 months 
of calendar year 1998. In addition, the IRS had actually 
stopped the disbursement of inappropriate refunds amounting to 
$65 million over that same time period.
    As Mr. Kutz points out, the exact number or exact amount of 
inappropriate refunds disbursed is unknown, and it is, in fact, 
one of the issues that we have raised with the IRS dating back 
to our fiscal year 1997 audit, when we recommended that the IRS 
consider conducting a comprehensive cost benefit study to 
determine whether it was cost-beneficial to add additional 
preventive controls to the up-front processing of tax returns 
prior to the issuance or disbursement of refunds.
    To date, we have seen some estimates of the up-front 
additional cost associated with adding additional preventive 
controls, such as verifying information from the tax returns to 
certain third-party information such as wage and tax 
statements. However, what we have yet to see is an actual 
estimate of the dollar value of inappropriate refunds that are 
disbursed on a yearly basis as well as the additional cost 
associated with identifying and then pursuing collections on 
those refunds. So, again, there is no dollar value out here 
that we could point to that would give you the magnitude of 
this problem.
    Now, the IRS has made some improvements. As I pointed out a 
few moments ago, the IRS was able to identify and stop the 
disbursement of $65 million in potential fraudulent claims. In 
addition, with respect to their earned income tax credit 
program, the IRS examined roughly 290,000 tax returns claiming 
EITC claims. The dollar value associated with those EITC claims 
amounted to about $662 million. The IRS determined that roughly 
68 percent of that dollar value, or $448 million, were found to 
be not valid, and those amounts were not disbursed.
    So there are some additional procedures that are in place 
that are flagging and identifying some of these potentially 
fraudulent or erroneous returns.
    Mr. Turner. So do I understand, you said the IRS examined 
290,000 earned income tax credit claims, and out of those they 
found $448 million of them to be improper?
    Mr. Sebastian. The dollar value associated with the claim, 
$442 million out of a total of $668 million in the EITC claims 
were associated with those 290,000 tax returns.
    Mr. Kutz. Congressman Turner, let me mention that those 
were actual EITC claims that were flagged for having some 
characteristics that were unusual. So that is not a 
representative percentage of earned income tax credit claims 
that are invalid. It is the percentage of those that look 
suspicious that were invalid. That is an important distinction 
here.
    Mr. Turner. Just to give me a little perspective here, how 
many earned income tax credit claims do we have each year?
    Mr. Sebastian. Well, in total, in fiscal year 1998, the IRS 
processed earned income tax credit claims amounting to $29 
billion, of which $23 billion actually resulted in refunds. The 
other $6 billion resulted in a reduction of the tax liability.
    Mr. Turner. So the percentage that we are examining of that 
290,000 is really a very small portion of earned income tax 
credit.
    Mr. Sebastian. That's correct.
    Mr. Turner. But they do represent a group that was 
identified as having potential problems, so it is not fair to 
say 68 percent of all EITC claims are probably fraudulent.
    Mr. Sebastian. That's correct.
    Mr. Turner. It seems to me, as I recall, doesn't the law 
require these refunds or all refunds to be made within 45 days?
    Mr. Sebastian. Yes, it does. And that is a problem, a 
perplexing situation the IRS finds itself in. They are required 
to process tax returns involving refunds and issue the refunds 
within 45 days. Any refunds issued beyond that date would 
include interest payments to the taxpayer.
    Mr. Turner. And you say there really has been no 
determination as to whether or not it is cost-effective to add 
additional staff at IRS to be sure we are not refunding 
billions of dollars in inappropriate refunds?
    Mr. Sebastian. There is no comprehensive study that we have 
seen at this time. We have seen initial estimates of the 
additional up-front cost in terms of staff days in validating 
certain information on the tax returns with other third-party 
information prior to disbursing the refunds. What we haven't 
seen is the back-end savings associated with preventing 
disbursements of inappropriate refunds and any additional costs 
associated with trying to recover those inappropriate 
disbursements.
    Mr. Turner. I want to suggest something here that obviously 
may not be consistent with what you just shared with me, but it 
seems to me that if we have fraud going on in the Internal 
Revenue Service, if there are people who are claiming refunds 
to which they are not entitled, that we have an obligation to 
uphold the law and to be sure that that is not happening even 
if it is not cost-effective. And it disturbs me somewhat to 
think that those of us who have fought very hard to be sure 
that we have a tax system that has the trust and confidence of 
the American people would be told that we are not going to 
collect those taxes and we are not going to prevent improper 
refunds unless it is cost-effective.
    I think the American people who are paying their taxes are 
entitled to know that everyone is paying what they properly owe 
and no one is getting anything back that they are not due. And 
I really think that the Service needs to take a new look if 
that is the philosophy of the Internal Revenue Service as you 
have shared it here today.
    Mr. Horn. Let me pursue the earned income tax credit. I 
would like to know does the IRS and the Treasury have a view on 
that, and what do they think can be done in a reasonable way to 
get at the fraud that clearly exists in the program? Everybody 
that writes about it says, gee, there is great fraud here.
    The fact that we took millions off the tax rolls in the 
1986 act just seems to me--how do we differentiate between 
those we simply took off the tax rolls? And in a sense this is 
a welfare system, and that is what it was designed to be. I 
think this was a Nixon administration creation, wasn't it?
    Ms. Cunninghame. If I might, Mr. Horn, I would like to 
defer to our Chief Operations Officer, John Dalrymple, who can 
share his experience on the EITC with you.
    Mr. Horn. OK. We are going to have to swear him in.
    [Witness sworn.]
    Mr. Horn. The clerk will note the witness has affirmed it.
    Mr. Dalrymple. With regard to EITC, actually we've tried to 
take sort of a two-pronged approach here. One is to eliminate 
as much of the overclaim rate as possible. On the other hand, 
make sure that all the people who are eligible for EITC 
actually claim it, because we really have a problem on both 
ends of that.
    But just to give you some numbers, in 1998, we actually did 
800,000 examinations on prerefund returns. Now, what that means 
is that before the refund went out, we actually examined those 
tax returns. We also did 600,000 math errors, which Congress 
gave us the authority to treat these as math errors. Again, 
those are prerefund.
    Together we believe we stopped somewhere around $977 
million going out in overclaims that would have gone to folks 
that shouldn't have gotten them in 1998. So this is actually a 
payoff for the investment that the Congress made in this 
program 2 years ago, and 1998 was the first year that we 
actually spent, I believe, $138 million to try to deal with 
this issue.
    On the other hand, we also sent out several million 
notifications to those people who we had fairly good knowledge 
should have been claiming or could have been claiming this 
credit and didn't. And in addition to that, we had several 
programs this last year that we tried to take an alternative 
approach to these folks as opposed to the examination routine 
or any other sort of enforcement activity. We actually 
identified some people who we thought may have been involved in 
using someone else's Social Security number. In other words, 
they were used more than once, a duplicate identification 
number. And we sent out about 300,000 of those notices, and we 
got very good compliance of people actually going back and 
amending their returns, and then, in the subsequent year, this 
year, not claiming that dependent that they shouldn't have. 
Many of these instances were spouses who were separated, et 
cetera, and really didn't know who was claiming the child. And 
in addition we have done a substantial amount of outreach 
around this program this year.
    This law is not a simple piece of legislation, the EITC 
credit, in terms of determining whether or not you qualify or 
not. So we have done quite a bit around this in terms of 
outreach to make sure people understand when and when they do 
not qualify for this credit.
    Mr. Horn. What is the range of payments that one can get 
under the earned income tax credit? What is the scale?
    Mr. Dalrymple. I think the maximum you could probably get 
is somewhere around $3,000. The lowest range, I believe, is 
down to several hundred dollars. I could get that, though, for 
you for the record.
    Mr. Horn. Could you? Without objection, it will be in the 
record at this point.
    [The information referred to follows:]

    For tax year 1998, the maximum earned income tax credit for 
one child was $2,271; two or more children $3,756; and no 
qualifying children $341.

    Mr. Horn. Obviously, we want to know how the formula works, 
how many people access the formula at one end as opposed to the 
other end.
    Mr. Kutz. Mr. Chairman, that's consistent with what we saw 
in our financial audit, in the sample items from the 1998 
audit.
    Mr. Horn. Does GAO have anything else to comment on this 
particular program?
    Mr. Kutz. No. But the size of the EITC refunds you are 
talking about, or actual claims, is consistent with what Mr. 
Dalrymple said.
    Mr. Horn. Any other comments you want to make on that?
    Mr. Dalrymple. The only other thing I would say is to sort 
of buttress what the GAO said about our whole strategy around 
refund fraud is to put a system up front. And several years ago 
we contracted with a fairly substantial vendor to try to put on 
our up-front systems an electronic fraud detection system, and 
we have been enhancing that each year. We have contracted with 
Malcolm Sparal to come in and review that system, and he has 
given us some advice on how we might make it better, et cetera.
    So we agree with the GAO, the real crux here is to have a 
system on the front end that would over time be smart enough, 
intelligent enough, to actually see trends, et cetera.
    The other point I would make is that our refund detection 
teams, we have over 500 employees now employed in that system, 
and they are literally looking for schemes. And just this year, 
for example, we found a scheme where promoters were telling 
taxpayers to go out and claim all of their Social Security 
payments that they have ever made back against a refund this 
year. And so far we have stopped over $50 million in refunds on 
that scheme alone just in this filing season. So the fact is we 
are catching schemes.
    Mr. Horn. Now, who is investigating that? Is the FBI?
    Mr. Dalrymple. Our Criminal Investigation Division is 
investigating that.
    Mr. Horn. And what is happening as a result of that 
investigation?
    Mr. Dalrymple. It is just unfolding as we speak, Mr. Horn.
    Mr. Horn. How extensive do you think that is?
    Mr. Dalrymple. We are trying to find that out right now. We 
found the scheme in the centers. We stopped the refunds. And 
now we are trying to go back up the trail.
    Mr. Horn. Was it in one area?
    Mr. Dalrymple. No. It is wider than that, sir.
    Mr. Horn. What do you think caused it? I mean, is there 
somebody that is scamming nationwide?
    Mr. Dalrymple. I would say that that would be my initial 
reaction. But again, I don't have enough data to tell you that 
for sure.
    Mr. Horn. Well, keep us informed on that one.
    Mr. Turner.
    Mr. Turner. I am not sure I understood the scheme that you 
are now investigating. Explain what is happening.
    Mr. Dalrymple. Let me look to make sure I give it to you 
exactly correctly. It's a scheme in which individual taxpayers 
file a fraudulent return claiming significant refunds. They are 
being told that for a paperwork fee of about $100, they can 
receive a refund of all of their Social Security taxes withheld 
during their lifetime. So they are being directed to obtain a 
printout from the Social Security Administration of their 
lifetime Social Security earnings for themselves and their 
spouses. Then fraudulent returns are then filed, which computes 
a refund based on the current tax rate during the times of the 
lifetime earnings. Basically, it is preying on people's lack of 
knowledge of the Social Security system and the tax laws.
    Mr. Turner. So you are saying that someone is out there 
telling folks to claim a refund of all the Social Security 
contributions they have made during their lifetime?
    Mr. Dalrymple. That's right.
    Mr. Turner. And they are actually filing that kind of 
return, and they are getting a refund?
    Mr. Dalrymple. They are not getting a refund. We have been 
stopping the refunds, but they are filing the returns. And 
you're right, someone is promoting it, Mr. Turner.
    Mr. Turner. It is hard to imagine that anyone would think 
that that is possible, but perhaps somebody is doing a pretty 
good sales job. And they are being compensated for advising 
folks to do this?
    Mr. Dalrymple. That's the information I have with me today.
    Mr. Turner. Another area that is a problem, as I understand 
it, in refunds is that taxpayers are getting refunds when they 
may owe the Federal Government money in either taxes or some 
other venue. Is that a finding of the General Accounting 
Office, and what is the extent of that particular problem?
    Mr. Kutz. We found that this year in our sample results 
where there were several instances of inappropriate refunds 
found in the unpaid assessment sample. I will defer to Mr. 
Sebastian to give you the details of that. But, yes, we did 
find that.
    Mr. Sebastian. I cannot give you the specific number of 
cases. We did look at a total of 700 unpaid assessment sample 
items. But the instances that we did identify were simply those 
where actual assessments, i.e., additional tax liabilities, had 
not posted to IRS's systems prior to the disbursement of a 
refund. Had those assessments posted on a timely basis and been 
on the books, the IRS would have been able to offset or retain 
the refund to pay down the additional tax liability that should 
have been on the books.
    Mr. Turner. You correct me if I am wrong, but it appears to 
me that because the law requires a refund to be made by the IRS 
within 45 days, that all that is going on is the IRS is sending 
out the refund within 45 days, and there is not much else 
happening before the refund goes out. Am I misinformed here, or 
is that actually what is taking place?
    Mr. Sebastian. Well, again, in the cases that we looked at, 
these were assessments that should have been posted and on the 
books at the time the return with the refund claim had been 
filed. So had they been on the books at that point in time, the 
IRS would have been able to offset.
    Mr. Kutz. There is no way that the IRS would have known 
that these assessments were there, because we found that some 
of the assessment posting delays are several years.
    Again, the IRS is in a difficult position with the 45 days 
and the timing of processing these returns. Especially during 
the peak season you are getting--I will let them tell you how 
many, but millions of pieces of mail a day in the April filing 
season. So the IRS is under a lot of pressure to get the 
refunds out. I'm sure you probably have gotten some calls from 
your constituents on where their refund checks are. I know 
other Members probably have at least. The IRS is in a difficult 
position. It doesn't excuse what is happening, but it is a 
tough position.
    Mr. Turner. It just seems to me that we have a problem that 
is brought about by the 45-day time limit that either has got 
to be remedied by extending the time for a refund, which 
taxpayers would not like, or staffing at a level that will 
allow us to recover these fraudulent refunds.
    Mr. Kutz. One of the long-term solutions that IRS is 
looking at is the electronic matching up front, and this, I 
believe, is part of their tax system modernization program. I 
don't know if they have any comment on that.
    Ms. Cunninghame. He is correct on that. And if I may, I 
would like to ask Paul Cosgrave, our CIO, to explain to you 
what we are doing in that area.
    Mr. Horn. He has not been sworn in. Next time, if you have 
got 25 assistants with you, let us swear them all in.
    [Witness sworn.]
    Mr. Horn. The clerk will note the witness has affirmed it.
    Mr. Cosgrave. Thank you, Chairman Horn and Mr. Turner, for 
allowing me to speak on this issue.
    First of all, I think as has been stated, the age of the 
IRS's systems is correct, quite old. I believe you referred to 
them dating back to the 1970's. In fact, some of them date back 
to the 1960's, and that is at the root cause of some of these 
problems. However, let me try to correct a few things.
    First of all, as it relates to refund checking, we do have 
a process in place that goes against a debtor file that is not 
just IRS debtor file, but debtor file to the government as a 
whole, and most refunds are run around up against that file 
before, in fact, they are issued. So, as you stated, it is not 
just that these refunds are being issued without any checking, 
there is, in fact, a check against that.
    Mr. Horn. What is the authority of Treasury and/or IRS in 
terms of checking other government debts that that person might 
have incurred and have they repaid them? Is there a law that 
permits you to do that?
    Mr. Cosgrave. Yes, there is. I can't give you specifics of 
it, but I will say it exactly follows the process that you just 
described. And, in fact, this year with this filing season, we 
actually transferred that function over to FMS, who now 
performs that across all the government. We performed it 
ourself across all the government, but the improved process is 
where FMS is doing it all.
    Mr. Horn. I'm all for you, because when our Debt Collection 
Act of 1996 became law, it applied only to nontax areas. So if 
you're collecting it, God bless you. I was outraged by the 
millions that were going under the table, and nobody ever had 
to pay around here.
    Mr. Cosgrave. In 1998, we offset 2.7 returns through this 
vehicle. So----
    Mr. Horn. And that boiled down to what? I'm looking at that 
chart, and if we can just go over it again. You've got the 
taxes receivable collectible, $26 billion is the estimate; 
taxes receivable uncollectible is $55 billion; compliance 
assessments at $22; but the one that has always annoyed me, and 
that's what led to the 1996 act, writeoffs of $119 billion.
    If I was listening to this or reading about it in the 
paper, I would say, ``gee,'' all you've got to do is wait them 
out, and pretty soon, they will just forget about me. That's 
sort of amazing, because I wouldn't think anybody would forget 
about the IRS, but your bulldog appearance does not necessarily 
say that they were recognized, because these people just sit 
there. And I would love to know the makeup from both GAO and 
the IRS as to these writeoffs of $11 billion.
    I realize people go into bankruptcy and all that, but if 
it's a pattern and practice, I think we ought to amend the 
bankruptcy law or something and get some of that money back for 
the taxpayers when the rest of us are paying the bills.
    Mr. Kutz. To the extent that refunds have been offset, the 
amounts would no longer be included in the unpaid assessment 
inventory. And I don't know what the actual dollars are. I 
believe over a billion dollars is associated with the 2.7 
million items Mr. Cosgrave mentioned.
    But with respect to the writeoffs, those are primarily 
failed S&Ls, RTC entities and defunct corporations that date 
back in some instances to the 1970's. There is no hope of 
collection. Also individuals that are in prison for life 
sentences with no assets, or persons that have passed away that 
have no estate are included in that amount. The reason it gets 
to be so large is that IRS is required to keep these amounts on 
its books for 10 years or more, if you go through a bankruptcy 
court, et cetera.
    So each of those years that goes by you have the accrual of 
a lot of interest. For example, the S&Ls and those types of 
entities, I don't know--do you have the numbers?
    Mr. Sebastian. No, I don't.
    Mr. Kutz. The actual amount of those initial assessments 
was less than $10 billion, but it's going to grow to over $40 
billion by the end of the statute period--fiscal year 2003.
    Mr. Horn. In other words, they're applying the interest and 
putting that into the writeoff?
    Mr. Kutz. That's correct. There's interest.
    Mr. Horn. At the end of 10 years, it just goes away?
    Mr. Kutz. Right, it comes off the books completely. So most 
of the items in the writeoff category are very old.
    Mr. Horn. Well, but the--you know, they can't forever blame 
the S&Ls. When was the peak of the S&L robbery against the 
American taxpayers?
    Mr. Sebastian. Well, you're looking at large S&L and then 
bank failures from the period of about 1984, 1985 through 1991.
    Mr. Horn. Well, OK. Is this a sort of another year 2000 
problem, they're all going to explode at once or come back to 
life at once?
    Mr. Sebastian. To the extent they're not in the midst of 
bankruptcy proceedings, what should end up happening after that 
10-year period is the balance of the taxes receivable and all 
associated penalties and interest will come off the books. It 
could be a significant writeoff of the writeoffs.
    Mr. Horn. Does my colleague want to pursue anything on 
this?
    Mr. Turner. Well, I certainly share your concern, Mr. 
Chairman. It disturbs me, when we try to analyze the actions 
that the IRS has taken to improve their financial management 
practices, that we may not be seeing the emphasis placed where 
I really believe the emphasis should be placed, and that is on 
building a credible tax system that has the confidence of the 
American people.
    And as I mentioned in my remarks earlier, there are certain 
things that seem to me that must be done to be sure that we 
have a tax system we can all have confidence in and believe 
that we're all paying our fair share. And in those areas, if 
the IRS would simply try to identify the credibility areas and 
move aggressively in those areas, I think we at least might 
have a tax code that will survive for a few more years.
    As we all know, the tax code is under increasing stress. 
There are those who would like to simply abolish the aggressive 
income tax, which has served us for many, many years. And I 
think those who would like to accomplish that can certainly 
cite some good examples that we've heard here today of what is 
wrong with the Federal income tax system as we know it. And I 
think we've got an obligation to make some changes.
    I also think the Internal Revenue Service has an obligation 
to this Congress. When we find areas where there is abuse and 
fraud, you know, 45 days is not working, maybe we need to talk 
about refunding half of the taxpayers money 45 days and the 
other half in 90, something to allow this tax system to work 
fairly and credibly. If we keep going down this road, I'm 
really concerned that we're not going to have a system that is 
going to survive.
    One other problem that was mentioned in the testimony that 
I have a hard time understanding, and that is why we can't 
reconcile our trust fund collections that are received by the 
IRS with what the Treasury has, and that seems to me to be a 
simple accounting problem. I understand you accomplish that at 
the end of the year by some ad hoc methodology, but it's beyond 
me as to why we can't keep up with what is supposed to be in 
the trust funds between the IRS and the Treasury Department.
    Could you expand on that just a little bit from the 
perspective of the General Accounting Office?
    Mr. Cosgrave. Could I first address your first point, if I 
may?
    Mr. Turner. Sure.
    Mr. Cosgrave. I think, as you're well aware, the IRS is in 
the midst of a transformation of significance. We have a new 
Commissioner, Commissioner Brodham; Ms. Cunninghame as new 
Chief Executive Officer; myself as new Chief Information 
Officer all within the past year. We're recommitted to 
restructuring the organization in a great way. We're changing 
the organization, as you know, to align ourselves with the 
taxpayers. That's a major effort that's going on.
    We're developing new measures of performance for the 
Service. We have a new mission statement, which clearly 
recognizes the need to provide service to its taxpayer, at the 
same time providing fairness to all the points you raised 
earlier. We're revamping business processes, and we're 
modernizing the technology. All of these things are occurring 
simultaneously, and the costs of the age and the serious 
inadequacies in many of the base systems are requiring an awful 
lot of work and aren't going to happen overnight.
    But I just want to assure you that the Commissioner and all 
of his direct reports are absolutely committed to what you've 
laid out in terms of generally supporting the system that we 
have in place. And I think some of the loopholes that have been 
brought up here are simply that; they're weaknesses in the 
system that can be corrected, but they're not overall massive 
failure of the system.
    I think you need to understand it in that context, that 
we've taken some specific examples, such as a refund check 
going out that may have slipped through the process, but in 
general, we're processing and controlling the vast majority of 
the payments properly as indicated by the clean opinion and the 
historical statements.
    Mr. Horn. Let me pursue an example. Our employer takes out 
the amount of money out of every paycheck for the Social 
Security Trust Fund and the Hospital Insurance Trust Funds. 
Now, when that comes in, let's say he's got five employees, and 
half is met by the employer under Social Security and Medicare, 
and that money comes into an IRS center. What happens? Do they 
actually assign it to ``a trust fund''? Tell me where the 
reconciliation comes in. Does somebody keep it on a paper bag 
at lunch and say, ``gee,'' we owe that trust fund something at 
the end of the year. When does reconciliation and love occur?
    Mr. Cosgrave. I will let Mr. Dalrymple give you the answer 
to that. The service centers are under his direction.
    Mr. Horn. OK. Well, you've been sworn in.
    Mr. Dalrymple. I've been sworn in, thank you.
    If I understood your question correctly, it is when do we 
actually certify the moneys over. Two years ago, I believe it 
was 2 years ago, it may have been 3 years ago, we got a 
recommendation from the GAO when we actually start reconciling 
this to when it was paid, as opposed to when it was reported, 
because, as you know, there are times when this money is not 
paid over, and so then it goes into a collection activity, and 
we end up collecting it.
    Mr. Horn. Well, let's make that very clear. When it is 
paid, by whom?
    Mr. Dalrymple. By the employer.
    Mr. Horn. OK. When the employer's half comes in and the 
employee's half--they're really coming in at different 
timetables, aren't they?
    Mr. Dalrymple. Actually, they come in at the same time, but 
they're--you know, they're withheld, as you know. This is 
witholding taxes, so they--but we are now certifying twice. 
We're certifying what we expect is in the--on the books at the 
end of each quarter, and then we certify later when we verify 
that the payments have actually come in, so what was actually 
paid.
    Mr. Horn. Now, this is whose books at this point? Is it on 
the provider's books or your books?
    Mr. Dalrymple. I'm sorry, I'm misunderstanding the 
question.
    Mr. Horn. Well, when the money is deducted in the paycheck, 
the employee has it at that point, he's supposed to turn it in 
to the IRS.
    Mr. Dalrymple. He turns it in quarterly.
    Mr. Horn. Quarterly. And you get also the employee's half 
quarterly. Now, do those come in in one check or two; the 
employee sends one?
    Mr. Dalrymple. They come in in one check. They come in one 
time, one deposit by the employer, because the employer----
    Mr. Horn. So the full 15 percent or whatever it is----
    Mr. Dalrymple. Exactly.
    Mr. Horn [continuing]. Is paid on Mr. Jones.
    Mr. Dalrymple. Yes.
    Mr. Horn. And at that point what do you do with it? Do you 
have something called a trust fund? The fact is you don't, do 
you?
    Mr. Dalrymple. We don't have a----
    Mr. Horn. There is no trust fund?
    Mr. Dalrymple. Right, that's correct.
    Mr. Horn. Right. Does that come as a surprise to anybody on 
Capitol Hill? What we want to do, frankly, in this Congress is 
make sure that every single dime comes in to a trust fund, and 
that the President can't borrow it, no matter who the President 
is, and it's going to sit there, and it's going to be a trust 
fund. So tell us how it works right now.
    Mr. Dalrymple. Well, it comes in, we make an estimate based 
on the filings, the total amounts, and then later we go back 
and verify that through collections, and then that is what is 
certified, as I understand it.
    Mr. Kutz. Mr. Chairman, what he's speaking about is 
actually excise taxes. I believe you're speaking about payroll 
taxes; is that correct?
    Mr. Horn. Right, that is correct.
    Mr. Kutz. That is a different process. The IRS is now doing 
their certifications of excise taxes based on collections. 
However, for the Social Security taxes, that is not what's 
being done. It's basically being done on IRS wage information. 
Let me defer to Mr. Sebastian to give you a detailed discussion 
of that process just to clarify the difference.
    Mr. Horn. I would like to know how the system works, 
because I think it's an illusion in many cases.
    Mr. Sebastian. Yeah. As Mr. Kutz pointed out, what is 
actually happening with regard to the distribution of moneys 
into the Social Security, Hospital Insurance Trust Funds, those 
distributions are actually based on a certification of wage 
information that is done by the Commissioner of the Social 
Security Administration.
    There may be no relationship between what's certified and 
what's actually collected on a quarterly basis. And, in fact, 
IRS's systems currently don't capture information as payments 
are being received that would allow you to actually affect the 
distribution to the specific trust funds.
    It's important to point out that the process of 
distributing into the Social Security and Hospital Insurance 
Trust Funds using wage information versus actual collections is 
actually in accordance with the law.
    Mr. Horn. Now, is that what you would call an audit in the 
sense of the word? Can you trace them and get a fix between the 
wage determination that is made and the actual payment that's 
made? Is there a gap there at all?
    Mr. Kutz. Yes, there is a gap, and we reported on that as 
part of the audit.
    Mr. Horn. That's my point. In which direction is the gap 
going, more money than they should collect or less money than 
they should collect?
    Mr. Kutz. The way it's working is the general fund is 
essentially subsidizing the Social Security Trust Fund, because 
the IRS, as you can see on the poster board, look at the 
writeoffs--many of those writeoffs are probably related to 
payroll taxes, as I recall.
    Mr. Sebastian. In fact, about $47 billion of the amounts in 
there relate to payroll taxes.
    Mr. Kutz. To the extent those are not collected, the Trust 
Fund gets the money anyway. And we reported an estimated 
subsidy of about $38 billion this year. That is a low end of 
the estimate of what the cumulative subsidy would be to the 
Social Security Trust Fund from the general fund.
    Mr. Horn. Well, it seems to be that you're talking about 
employers and employees paying in taxes at a certain time 
schedule, and it's going into one big pool of money. And 
hopefully you're depositing it fast so the Treasury can earn an 
interest on it and save the taxpayers a little bit of money.
    So what I'm trying to get at is what is certifiable, what 
is auditable, and what does the GAO think as to the time period 
for that audit? Is it simply an annual audit? And it seems to 
me there's an estimate made here, and on what basis is the 
estimate made? It seems to me that a lot of good people might 
have another way to do it. And I'm just curious how firm that 
estimate is.
    And is that simply a decision of the Secretary of the 
Treasury as to what happens with the money when it comes in; 
where's the bread, where's the money?
    Mr. Kutz. There are two separate audit issues. The Social 
Security Trust Fund is an audit that we are not involved in; 
however, we have done some work for the Department of Labor and 
Transportation Inspectors General related to the amounts that 
get distributed to the Highway and Airport and Airway Trust 
Fund. And so we have done some audit procedures in the excise 
tax area.
    The Social Security audit is done by their Inspector 
General. I think they contract with PriceWaterhouseCoopers to 
do that audit. And so the actual audit of the Social Security 
information is done as part of that audit.
    But we do assist the Labor and Transportation Inspectors 
General in auditing the certifications that Mr. Dalrymple 
talked about with respect to the Highway and the Airport and 
Airways Trust Funds.
    Mr. Horn. Well, let's take that, since I sit on the 
Transportation Committee. You've got a Highway Trust Fund, an 
Airport Improvement Fund, and the fact is you don't get the 
exact amount that is going--run up on that gasoline pump, let's 
say, when somebody takes their car in to fill the tank. And the 
company presumably is supposed to be keeping track of the 
Federal tax and sending them a check, I assume, what, 
quarterly?
    Mr. Dalrymple. It's quarterly, yes.
    Mr. Horn. What is the case of your friendly local oil 
company. Maybe you should tell us how it works. You're awful 
quiet on this. I think it's because the emperor has no clothes 
or something. What can you tell us about how the money is 
deposited into those funds? Presidents sit on them and the 
taxpayers pay them, Congress authorizes the fund for a purpose; 
namely, to maintain the interstate highway system or maintain 
and expand the airport system in America. And yet we don't know 
how much is coming in accurately, do we; or don't we? Don't all 
jump at it.
    Mr. Kutz. You want us to answer that?
    Mr. Horn. I want both of you to answer it.
    Mr. Kutz. With respect to the excise taxes, we have done 
work for 2 years now, what is called agreed upon procedures 
work. And we did find problems with the IRS certification 
process in fiscal year 1997. In fiscal year 1998, as a result 
of recommendations by GAO, the IRS did make improvements in its 
certification process, and we found during this year's audit 
work that there were more accurate distributions to the Highway 
and Airport and Airway Trust Fund. However, there are still 
some control problems that exist and IRS is working on our 
recommendations.
    Mr. Horn. Well, let me ask you, what is the current state 
of our tax on, let's say, airports, the Airport Improvement 
Fund or the Highway Trust Fund? What's the tax that's levied in 
that area?
    Mr. Dalrymple. I wouldn't have any idea exactly what it is 
in that particular area or any individual area, but just to 
reiterate what Mr. Kutz has said----
    Mr. Horn. What I'm after is what's the methodology of 
saying--do you add up all the gallons of gasoline that have 
been sold, or how does one check where the money is?
    Mr. Kutz. Mr. Chairman, I think it would be helpful if Mr. 
Sebastian walked you through the actual process here, because 
it's fairly complicated. But he's done it many times, so let me 
give him a chance to do that. He's a pro at this.
    Mr. Sebastian. I'm not a pro at it, and it is a complicated 
process. Let me start first by saying that as deposits--excise 
tax-related deposits are made, they are going directly into the 
general revenue fund of the U.S. Government. They are then 
being initially distributed to the various excise tax-related 
trust funds, such as highway, airport and airways. Those 
distributions are based on estimates done by the Office of Tax 
Analysis within the Department of the Treasury, and they 
essentially use much of the information that they use to derive 
the President's budget in making those initial distributions.
    What occurs roughly 6 months after a particular quarter 
ends is as the IRS receives the tax returns, excise tax 
returns, much of the information that you had mentioned, 
gallons of fuels, airport ticket tax, et cetera, is 
identifiable by the taxpayer on the tax returns. The IRS then 
matches--and this is a relatively new process this fiscal year, 
but the IRS matches the information on the returns to the 
amounts it has in its records with respect to what was 
collected by that taxpayer for that particular quarter. And 
bear in mind, up to that particular point, the IRS can't break 
the amounts that have been received down into the specific 
taxes, they have to wait for the tax return to come in.
    As a result of matching the information on the return to 
what was collected, the IRS then certifies the amounts that 
should have been deposited into the respective trust funds for 
that particular quarter. That information then goes over to the 
Department of Treasury's Financial Management Service, which 
compares the amounts the IRS is certifying for a given quarter 
against what was actually distributed based on OTA's initial 
estimation process, and----
    Mr. Horn. Why don't you define OTA's?
    Mr. Sebastian. The Office of Tax Analysis.
    Mr. Horn. Right.
    Mr. Sebastian. It's a detailed estimation model. It looks 
into patterns of revenue streams.
    Mr. Horn. Do their estimates come into a phase of reality 
with the audit, and to what degree is there a difference?
    Mr. Sebastian. I would say that we've looked at the OTA 
estimation process from a standpoint of what controls they have 
in place to factor in tax law changes, et cetera. We haven't 
done a detailed analysis getting into the adequacy of the 
underlying assumptions, but our sense is that the OTA's 
estimation process presents reasonable estimates of the amounts 
that would be distributed. That doesn't mean--again, because 
they're estimates, they are subject to change, and that's a 
part of what the IRS subsequent certification process attempts 
to measure is the degree of change between the estimate and the 
actual.
    Mr. Kutz. But the root cause of this problem is when the 
money comes in the door, the taxpayer is not required to and 
does not break out the details of the different pieces for the 
fuel tax, et cetera. So IRS does not know at that point in time 
where the money should go. Because of that root cause problem, 
this elaborate process that Mr. Sebastian just described takes 
place at this point.
    Mr. Horn. It seems to me it ought to be very simple; how 
many gallons of gasoline did you sell at what price or 
whatever, and here's your share of the tax. Now, I take it that 
the individual gas station owner or franchise does not do that. 
The company, I take it, does the actual amount of the Federal 
tax; is that correct? Anybody know?
    Mr. Kutz. You mean the big oil companies?
    Mr. Horn. Yes.
    Mr. Kutz. Most of the returns coming in are from the major 
oil companies and the chemical companies, yes, et cetera.
    Mr. Horn. OK. And is there a way that the IRS has audited 
them to see if they're producing the right numbers off all of 
their stations? There's thousands of stations some of them 
have, and they get a weekly report, or almost daily, on 
inventory. So you can tell. I remember working my way through 
college, you posted the report at 7 a.m. before you went off 
the 11 to 7 shift, and it was how many gallons had come in on 
the shift, how many had you pumped out. So those data all are 
everywhere, I'm sure.
    Mr. Dalrymple. As part of our large case examination 
program, when we audit one of these large companies, we have an 
excise team that's part of that examination, and they do just 
that. They literally go out and do some checks and some local 
calls to determine whether or not there's any reason to go 
further in terms of checking, and then assess additional excise 
tax if appropriate or not, depending on how the examination 
goes.
    Mr. Horn. What's the most difficult trust fund to deal with 
in terms of the estimate?
    Mr. Dalrymple. I'm probably not qualified to answer that 
question, Mr. Horn, but I suspect that someone from Office of 
Tax Analysis would probably be the one.
    Mr. Horn. We will save a little spot in the record, without 
objection, to see what the experts are going to do.
    [The information referred to follows:]

    The Highway Trust Fund has the most tax items appropriated 
to it. Each of these items has a different tax rate and a 
single tax may be apportioned to several accounts. For example, 
tax paid for gasoline is appropriated to the Highway Account of 
the Highway Trust Fund, the Mass Transit Account of the Highway 
Trust Fund, and the Leaking Underground Storage Tank Trust 
Fund. In addition, a portion of the gasoline receipts is 
subsequently transferred to the Aquatic Resources Trust Fund to 
reflect that some gasoline is used in motor boats. The large 
number of tax items and multiple accounts make the Highway 
Trust Fund the most difficult to administer.

    Mr. Kutz. Mr. Chairman, I would say it would be the Highway 
Trust Fund. If you look at the form that comes in from the 
taxpayer, the form 720, the Highway Trust Fund is made up of 
numerous different taxes, whether it be diesel fuel, alcohol 
fuel, whatever the case may be, versus the Airport and Airway 
Trust Fund is only four actual taxes.
    So I think the answer to your question would be the highway 
would be the most complicated because it consists of the most 
different types of taxes.
    Mr. Horn. Do you want to pursue anything on this?
    Mr. Turner. Not on this. I have other questions.
    Mr. Horn. Mr. Turner has some questions to ask.
    Mr. Turner. When we passed the IRS reform legislation last 
year, there was a lot of comment from the Internal Revenue 
Service to the effect that making the agency more taxpayer-
friendly was going to make it harder to collect taxes 
rightfully due. And I would like to hear from each of you, Ms. 
Cunninghame, or any of the others that you brought with you, 
about your assessment of that claim at this point in time, 
because it's my hope that what the Congress did was make the 
IRS a more responsive agency to the taxpayer.
    But at the same time I hope it did not keep your agency 
from collecting taxes rightfully due. Could you comment on that 
and whether or not you believe that we are going to have some 
problems with collection, or can we overcome those problems and 
rightfully collect what is due?
    Ms. Cunninghame. I'm not sure we have the total answer, but 
I do think John can address those issues as well.
    Mr. Dalrymple. Actually, I think that the Service's 
position was and is and will be, on a forward-going basis, is 
that we actually believe that by putting our activities on the 
front end of the system, making ourselves much more taxpayer-
friendly in the sense that we are out in front trying to inform 
people about what their responsibilities are actually impacts 
compliance on the back end in a positive way, and that if we 
can get people to change their behaviors, because we understand 
them better, because we're organized around the way the 
taxpayers actually do their business, whether it's small 
business, or wage and investment, or exempt organizations, or 
large and midsized businesses, I think what we anticipate now 
and in the future is that we will be much better able to serve 
them and that we will reserve our enforcement resources for the 
most egregious cases, and that we're actually helping more 
people to comply by having more resources on the front end than 
on the back end.
    In fact, I think many of the people that end up on the 
chart over there if we could have gotten to much, much earlier 
in the process would not be on the chart.
    Mr. Turner. Do I take it then that you're trying to 
reassure me that what the Congress did to make the agency more 
customer-friendly is not going to have an adverse impact upon 
collections?
    Mr. Dalrymple. I think if there's any adverse impact on 
collections, specifically on collections, it'll--whatever it 
will be, it will be short-lived, and that over time certainly 
the right thing to do is to help people comply with the tax 
laws as opposed to waiting for them not to comply up front and 
then try to use resources on the back end to try to get them 
back into compliance. That's just not a very smart way to do 
business.
    Mr. Turner. Ms. Cunninghame, I was reading your statement 
again that you delivered to us earlier, and you attempted to 
reassure us that you were going to work diligently to address 
the concerns of the General Accounting Office; that you were 
going to bring in some independent help. A comment was made by 
one of your colleagues that, you know, that the Commissioners 
knew.
    I guess I get the sense that even though the IRS is going 
through some reorganization, I don't sense that there's been a 
real significant effort to deal with these financial management 
systems problems that we're talking about here today. And I 
guess first maybe I should ask you if the IRS has contracted 
out for the work to modernize its systems, and whether or not 
we're getting the kind of independent advice and the emphasis 
that is needed to overcome these problems, rather than simply 
coming in here every year after an audit and having, you know, 
someone in your position as the Chief Financial Officer saying, 
yes, I'm going to respond to this.
    These problems seem to be running pretty deep. As we said, 
some of the systems have been in place since the 1970's and 
before, and I just don't get the sense that there has been an 
emphasis internally at the IRS to really deal with this 
seriously enough. Would you comment on that, and then perhaps I 
would ask the GAO to also respond?
    Ms. Cunninghame. Certainly, Mr. Turner. I think that we 
have put a great deal of attention on enhancing our systems, 
and certainly with the release of the prime contract that we 
made a few weeks ago. I think that there is a big emphasis on a 
number of top priorities at the IRS, one of which is the 
financial systems.
    I would like Mr. Cosgrave to have an opportunity to be more 
specific about what those are and to assure you that the 
financial systems are in queue to be dealt with with the other 
systems that are top priorities for the service.
    Mr. Cosgrave. Very briefly. The overall plan that we've 
been executing against for the last 2 years since we presented 
the technology blueprint for modernization was aimed primarily 
at the tax processing systems. With the audit, the GAO audit 
from the last year, where there was some deficiencies pointed 
out in the way we processed data for the custodial accounts, we 
took some action that's been going on now for a year to, in 
fact, improve those custodial systems in the way we provide 
data to support that analysis up there. With this report, we 
will now start additional efforts in terms of the 
administrative systems that frankly were not being addressed as 
forcefully as custodial systems.
    Now I need to put all of that in the context, that, first 
of all, we have hired outside expertise in the form of computer 
science corporations and the partnership that we have put 
together, which includes IBM, UNISYS, among other players, 
KPMG, et cetera, to help us deal with all of this issue. And, 
in fact, they are the systems integrator that is driving the 
program going forward.
    So we definitely reached out to the private sector for this 
assistance. However, we haven't made progress in these areas in 
terms of the inventory examples, for example, brought up 
earlier. We have had a problem that was recognized in terms of 
particularly getting assets that have been disposed of through 
proper channels off of our books. We have been slow in terms of 
doing that. And this presented some problem to us, particularly 
in terms of confirming everything that we had for Y2K 
compliance.
    So over the last 4 months, since the effective date of the 
audit, we have invested over $5 million in actually improving 
the basic inventory system to address that one fundamental 
problem, so I suspect we will see some short-term improvements 
here the next time we have the inventory analyzed. However, I 
can't emphasize more once again that these are very long-term 
problems in their nature. They have been long-standing 
problems, and we will continue to work on them.
    The other point that was raised earlier in the testimony 
was related to security, and I would just like to point out 
there that GAO had reported that IRS had long-standing problems 
in the security area. But 2 years ago we implemented our own 
system, standards and evaluation office. This office is led by 
two SES executives, who were former GAO employees, and over 60 
employees. And we've actually reported, and GAO reported in 
their audit, in fact I can quote here, that they acknowledged 
that 75 percent of the improvements--75 percent of the 
weaknesses that were identified in the April 1997 report have, 
in fact, been mitigated.
    So we clearly are making progress; however I can't 
emphasize more the long-term nature of some of these. 
Particularly because of Y2K you will not see a lot of immediate 
results in terms of the systems changing, because clearly Y2K 
is our top priority at this time.
    Mr. Turner. I would also ask, Mr. Kutz, if you would 
respond to that. Again, what I'm looking for is your assessment 
of the degree of the commitment and the effort by the IRS to 
remedy these financial systems problems that you have 
identified.
    Mr. Kutz. Yes, I would concur with Mr. Cosgrave in that the 
focus of IRS over the last year or 2 has been fixing the 
custodial systems, and I would also concur that is a very long-
term prospect that is going to take numerous years. So we will 
be talking about these problems for the foreseeable future. I 
don't think there was as much emphasis placed on the 
administrative control issues with respect to the property and 
equipment, being able to produce things like an accounts 
payable listing at year end, or listing the budgetary accounts, 
for example, your undelivered orders at year end. And I do 
believe IRS now recognizes the administrative-related problems 
and is going to build a plan to try to fix those systems-
related problems.
    Mr. Turner. Thank you.
    Mr. Horn. Let me go back to debt collection for a minute. 
Could you tell me as Chief Financial Officer, Ms. Cunninghame, 
the degree to which you tell the taxpayer that money is owed, 
and how you do it, and in what time period? How does that 
system work, and have you had a chance to look at it?
    Ms. Cunninghame. I have had a chance to look at it, and we 
do have a system that works, but, again, the expert on that is 
Mr. Dalrymple, if you would let me defer to him.
    Mr. Horn. Well, I would hope you would also know about 
this.
    Ms. Cunninghame. I do, sir, but, you know, I'm relatively 
new, and I don't know it to the extent of Mr. Dalrymple, who 
has been with the Service for 23 years.
    Mr. Horn. OK. How's the process work?
    Mr. Dalrymple. Well, the process works once there's a valid 
debt, whether you file your return and just didn't--weren't 
able to pay it, or whether there was an examination of your 
return and there was an amount due or some other means, once 
that happens, then a notice is generated, and it's a statutory 
notice of deficiency, and that's by law. And you receive a 
first in a series of notices saying, would you please pay the 
tax that is here.
    Mr. Horn. When does the first notice go out? Is it a 30-
days? Once you notice a default, how does that work?
    Mr. Dalrymple. Well, notice and default refers to the 
examination process. But just, in general, let's just take a 
normal taxpayer who files their tax return on April 15th. 
Generally those notices go out in June and July for our returns 
that were due to be filed on April 15th, and we ask that the 
taxpayer pay that account then within--I believe within 30 days 
on the first notice. At the end of that period of time, we send 
a second notice and then a third notice.
    Mr. Horn. A second notice goes out roughly 60 days after 
April 15th?
    Mr. Dalrymple. Roughly--actually, it's probably later than 
that, because the first notice goes out about 60 days after 
April 15th.
    Mr. Horn. OK.
    Mr. Dalrymple. So about 45 days after that first notice 
goes out, a second notice would occur.
    Mr. Horn. Now, that's a written notice?
    Mr. Dalrymple. That's a written notice.
    Mr. Horn. None of this has been telephone so far?
    Mr. Dalrymple. Nothing telephone at this point in time. And 
a third notice is generated to the taxpayer asking them to pay. 
At the end of this point in time--now, there are certain types 
of accounts that go directly to our telephone contact units 
primarily. It would be trust fund accounts that--where 
withholding has been made, and the employer didn't turn that 
withholding over, but just the general run-of-the-mill April 
15th filer. Now you're under a fourth notice. Finally, you will 
get a final notice before that says it is a levy action. That's 
actually what the notice says. Once that has been out, then we 
send it to our telephone system for a collection. And then 
telephone calls--actually, then some sort of telephone call 
system is set up for outcalls and/or to receive calls from the 
taxpayers, depending on what action we may have taken, such as 
sending a levy out to an employer or a bank account.
    Mr. Horn. Do you ever use the telephone first?
    Mr. Dalrymple. No, we haven't. And----
    Mr. Horn. In other words, you don't, say, if this looks 
like a big taxpayer?
    Mr. Dalrymple. That's right, actually we do not. We treat 
everyone the same. That's one of the things I believe that is 
wrong with the system. I talked about earlier how we need to 
get up front. I'm not just talking about up front with our 
taxpayers' education, corrective, but we need to move 
everything up front in the process what we're going through 
now, and Mr. Rossotti has done some of this through his prior 
life in this other company, is to go through a risk assessment 
for taxpayers to determine who is not at risk at all, who will 
pay just through an installment agreement process, et cetera; 
others who are at real risk and need telephone calls 
immediately or should be--may even need a field contact 
immediately, as opposed to going through the notice routine.
    So our long-range view here is to do a total risk 
assessment of all of the accounts that we do and move that 
collection process on a much, much more timely basis. Right now 
we basically treat all taxpayers the same way, go through a 
methodology. Now, we do short-cut some of the systems on some 
basis of risk now, as I mentioned, trust fund taxpayers, et 
cetera, but generally speaking, we do not have a very good risk 
assessment process right now for the general population.
    Mr. Horn. What about the private collector? At what point 
do you involve private collectors to collect your debt?
    Mr. Dalrymple. We don't at all.
    Mr. Horn. You don't?
    Mr. Dalrymple. No.
    Mr. Horn. Did you ever look at that?
    Mr. Dalrymple. Yes, sir, we did.
    Mr. Horn. As I remember, you put out a 5-year-old debt for 
them to bid on, which I thought was one of the sillier things I 
had seen in the bureaucracy. That's bound to not be 
collectible. The question is when you get in there early--and I 
went through this with the previous Commissioner, and that's 
what lead to the Debt Collection Act of 1996. I said it's a 
national scandal, as far as I'm concerned, when you've got $100 
billion written off, and you have no process to really do it.
    None of your people were doing what they should have done, 
and you've put your finger on the risk assessment certainly, 
and the fact is that because little Willie Jones that only owes 
you $30, and somebody else owes you $30,000 or has a loan from 
the Farmers Home Administration, which was the example of 
several million, and they would go and had given him several 
other million, even though he even defaulted on the other 
several million, and so forth and so on, and that sufficiently 
got my Irish dander up as to why are we letting them steal from 
the taxpayers of the United States.
    And I just don't understand it, and I still don't. I think 
the world of Mr. Rossotti, and I hope he will, you know, face 
up to this. I think he's got the common sense. Because when I 
said, why not turn it over to the private collectors, to his 
predecessor, the answer was, oh, well, we have privacy laws. 
Baloney. You give them the amount, you give them the address, 
and say, go to it. If they've got a beef with IRS, fine, you 
use your people. But we're losing billions of dollars.
    I don't know what GAO's thinking about it, but I must say 
when I see that that thing keeps going up, up and up, and 
there's no--not too many S&Ls going under now as an excuse to 
not collect it, and that's all I regard it as is an excuse, and 
it seems to me you had that experiment, I don't know who put 
that one together, on the 5-year debt to have private 
collectors bid on it, but it just means you're passing it up. 
You're passing it up. And I don't understand why you can't use 
private collectors.
    Mr. Kutz. Mr. Chairman, one thing I would say, those 
private collectors would be basically stuck with the same 
system that IRS has for collecting from taxpayers. So that 
would certainly hinder their efforts to go after some of these 
amounts. In other words, if the system doesn't properly 
identify who to go after when the tax was incurred, et cetera, 
that would create some problems for private sector collectors. 
So a better system would also help no matter who goes after the 
collections.
    Mr. Horn. What would the General Accounting Office suggest 
as a rational system?
    Mr. Kutz. I think that as part of their long-term tax 
system modernization plan, they're trying to put together an 
appropriate subledger similar to what you would have in the 
private sector that appropriately identifies the amounts due 
from taxpayers along with other detailed subsidy information on 
those individuals or corporations. And they do plan to do that 
as part of their tax system modernization. The problem is that 
is a very long-term effort.
    Mr. Horn. Well, yeah, but, my heavens, we have been at this 
now for 4 years or--yeah, 4 years of trying to get them to face 
up to how you run an organization. Now, I think Mr. Rossotti 
has those credentials, so I've got great faith in him, but it 
seems to me you get people working for you, and when you can't 
collect it now and a private collector could collect it, I 
don't understand why somebody over in IRS doesn't say, hey, 
let's reorganize this operation. Are they afraid of the union 
or what? If not, get the union to go out and knock on the 
doors. But it has to be something that is delaying people from 
common sense in administration.
    Now, does anybody got a plan at that table in terms of the 
Treasury which--by the way, who is the Chief Financial Officer 
of the Treasury?
    Mr. App. Nancy Killefer, sir.
    Mr. Horn. Is she full-time Chief Financial Officer, or is 
she also Assistant Secretary?
    Mr. App. She's Assistant Secretary for Management and Chief 
Financial Officer, and she has spent considerable time with the 
whole IRS modernization plan.
    Mr. Horn. Well, I don't see how you can when you're holding 
an 18-hour-a-day job also, which is the Assistant Secretary for 
Management. But that's another story of why I think Treasury 
has been out of sync for a long time.
    Well, I'm not happy with the answers on debt collection, 
and it just seems to me you shouldn't let people off like that. 
And if I were listening to this out there, and I was sort of 
worried about do I know where my next payroll is--and that's 
where a lot of the problems come, somebody tries to not 
contribute on what the match is for Medicare and Social 
Security and all the rest. And then the problem here is, you 
really don't know what's in those trust funds or what should be 
in. You're making estimates.
    And now have we ever done an actual audit of this on a 
random--you do a random sample. Does IRS?
    Mr. Kutz. Mr. Chairman, could you rephrase the question, a 
random sample of what specifically?
    Mr. Horn. On the trust funds, I think we're pretty clear 
that you don't have a record that you can follow on the 
taxpayer that had certain things deducted from their payroll 
and that the employer sent in a check to IRS; nobody has an 
account down there. It's sort of almost like when you finally 
draw on it, that somebody says, gee, we better get some more 
money in there, a lot of people are drawing this quarter.
    There is no relationship into what they deduct in relation 
to what you get. And you can't seem to audit it, either at the 
GAO level or the IRS level.
    Mr. Kutz. That's right. The IRS and the Federal Government 
do not know how much is collected for Social Security, 
individual, and hospital insurance taxes.
    Mr. Horn. Right.
    Mr. Kutz. They must combine those for their financial 
statements.
    Mr. Horn. Is that basically your recommendation? Your 
recommendation is, what, to make sure that the money is there?
    Mr. Kutz. We have recommended to them in the past to try to 
get the information from taxpayers up front so that that 
information can be--so the estimate process over at the 
Department of Treasury that Mr. Sebastian described would no 
longer be necessary. And they do have a study that they have 
performed that we have not seen the results of that as soon as 
we begin our 1999 audit of IRS's financial statements, we will 
review.
    Mr. Horn. Mr. Turner, do you have any more questions on 
this?
    Mr. Turner. There is one item I want to briefly address, it 
seems to be something that would be manageable in the short 
term, and that's the problem that was raised in the audit 
regarding the hiring of individuals. I assume this occurs a lot 
during peak seasons of employment at the IRS, hiring people 
with criminal records and ways in which that could be 
prevented. It seems to me there ought to be a short-term 
solution to that particular problem.
    Am I correct, is there one, Mr. Kutz, and did you recommend 
one to the IRS?
    Mr. Kutz. I think there is a reasonably short-term fix to 
this with new machines that can provide on-line fingerprint 
checks, and we saw one of these in Philadelphia. Actually, it's 
a machine that they can do an on-line fingerprint check with 
the Philadelphia City Police and get a turnaround in maybe 24 
to 48 hours. They don't have that capability yet with the FBI, 
but I believe that is part of the IRS short- to longer-term 
solution to this problem.
    Mr. Turner. I notice that----
    Ms. Cunninghame. Excuse me, Mr. Turner, if I might, we have 
worked with the FBI, and we are currently--we've just 
implemented the FBI electronic system to check those 
fingerprints in a more thorough and quick turnaround basis.
    Mr. Turner. And so that--you think that will remedy this 
particular problem in the short term?
    Ms. Cunninghame. We're in the process of implementing that 
system currently, and we will have results known in a little 
while. But, yes, we think this is going to be a very big help 
in checking very quickly whether these people have criminal 
records, and not relying on a 2- or 3-week wait as we have done 
in the past.
    Mr. Turner. Thank you.
    Mr. Kutz. I think the problem in the past was not a 2- or 
3-week wait. I think the time delays were much more 
significant. I think this solution would provide, again, a 1- 
or 2-day turnaround, which would mean that you're not going to 
have people going into the service centers and handling cash 
and checks and taxpayer data until you know that they don't 
have a derogatory background.
    Mr. Turner. Thank you.
    Thank you, Mr. Chairman.
    Mr. Horn. Thank you.
    Mr. Kutz, elaborate on the Antideficiency Act which you 
mentioned and the IRS's accounting procedures in relation to 
it, because criminal penalties are provided in the act, but I 
don't think in the history of the country they've ever been 
invoked, or am I wrong on that?
    Mr. Kutz. I don't know.
    Mr. Horn. You don't know. Do you ever remember a case?
    Mr. Kutz. Of actually reporting?
    Mr. Horn [continuing]. That someone reported on the 
Antideficiency Act.
    Mr. Kutz. I do believe several years ago that we did report 
at the IRS there was an Antideficiency Act issue.
    Mr. Horn. I'm not thinking of the IRS, I'm thinking of the 
whole executive branch.
    Mr. Kutz. I can't speak to that otherwise.
    Mr. Horn. Anybody got history of that in the Treasury? 
Usually they move money around, so there isn't a deficiency 
such as there is.
    Mr. Kutz. Right.
    Mr. Horn. How does that relate then in the implications to 
the IRS accounting procedure?
    Mr. Kutz. Well, Ms. Hawkins has been left out of this, so I 
want to give her a chance to answer this one here. I will pass 
it to her and give her an opportunity to see----
    Mr. Horn. Give her a chance to commit to this committee, I 
see. Glad to have you experts.
    Ms. Hawkins. I think, as Mr. Kutz mentioned, we disclaimed 
on the budgetary statement, and part of the reason for that is 
we could not get the data we needed to verify a lot of those 
accounts like the undelivered orders. On the suspense account, 
that had a net balance of disbursements of $100 million as of 
September 30, 1998. That gave us concerns, because basically 
those are amounts other agencies in the government through a 
treasury system can basically take the money out of your fund 
balance. With Treasury, if you owe money----
    Mr. Horn. When you say expense account, what does that 
define? Is that per diem and travel?
    Ms. Hawkins. No. For example, for telecommunications, if 
GSA, the General Services Administration, is providing those 
services for you, when they determine the amount that you owe 
for a particular month, they will withdraw this amount through 
the OPAC system.
    Mr. Horn. And spell that one out, please, for we 
uninitiated nonbureaucrats.
    Ms. Hawkins. It's basically a computerized system, they 
automatically deduct money from your fund balance with your 
Treasury account, the funds from your appropriation that you 
have with the Treasury. They transfer money to themselves to 
cover your expenses such as telecommunications or rent.
    Mr. Kutz. It's kind of like an electronic bill-paying 
system.
    Ms. Hawkins. Yes. We found in our sample where we tested 
expense amounts, we found several cases where items went into 
the suspense account, because the amount being charged by the 
agencies, such as the General Services Administration, was for 
more than what was obligated. And in budgetary terms you 
obligate money to say we're reserving money from our 
appropriation to pay for what we expect to owe. An agency can't 
pay a bill until it obligates the funds.
    We found cases where items would go into suspense, and the 
suspense account is not charged against any individual 
appropriation that is given to IRS. The IRS uses a suspense 
account, and then when the obligation amount for a specific 
appropriation was increased, the money would come out of 
suspense.
    When we look at the budgetary statements as of September 
30, 1998, for the two major appropriations for IRS, the 
processing assistance and management had an unobligated balance 
available of $4 million, and the tax law enforcement had an 
amount of $8 million available. There was $100 million in the 
suspense account. We don't know whether or not all of those 
amounts have been obligated, so we don't know whether or not 
there was a violation of the Antideficiency Act.
    Mr. Horn. In other words, Congress gives them an 
appropriation. The President recommends an appropriation. We 
discuss it. We send back an omnibus appropriations bill or 
whatever it's called that year, and there is a target for IRS. 
And you're saying there's a separate account that is there that 
isn't really where--all the money for administration of the tax 
system is not in a particular account, is what I'm listening 
to, and if I'm wrong, and listening to you, let's get it a 
little clearer.
    Ms. Hawkins. No, I think what you're saying is correct.
    Mr. Horn. So they can pay the bills out of the--well, I 
guess the old term was using the float in terms of the interest 
that they accrue on other accounts. Has any of that been used 
by IRS to function as an agency when it wasn't appropriated by 
Congress or what? What are you finding?
    Ms. Hawkins. Because of the problems auditing this year, we 
didn't go into a lot of detail on this area. We did find cases 
like in one appropriation for fund balance from Treasury, a 
specific appropriation where there was a note saying we don't 
have enough of this appropriation, we need to transfer money 
from another appropriation to cover the needs that we have in 
this appropriation.
    Mr. Horn. And Congress has or has not given them the 
authority known as reprogramming money from one to the other?
    Ms. Hawkins. Well, in this particular case, the dollar 
amount was low enough that I don't think they had to come to 
Congress for the reprogramming authority. And, again, in some 
of these cases, it's related to the way the administrative 
activities are handled. These two appropriations were about $6 
billion and----
    Mr. Horn. Six?
    Ms. Hawkins. Billion.
    Mr. Horn. Million with an M, or billion with a B?
    Ms. Hawkins. Billion.
    Mr. Horn. We think only with B's around here, not M's.
    Ms. Hawkins. And yet when you look for just these two 
appropriations, the amount as of September 30th remaining to 
cover things that hadn't been identified was $12 million, which 
seems quite small. We do know there are some areas where the 
IRS will be collecting money that will increase available 
funding from these appropriations again, but we just don't know 
whether or not their budgetary accounts are accurate or not.
    Mr. Horn. You're saying it's hard for you to get an answer 
to them? Was that because agency employees did not want to give 
you an answer or what?
    Ms. Hawkins. No, I would say agency employees were very 
helpful to the extent that they could be. Some of the problems 
dealt with when we asked for a breakout of the suspense account 
at the end of January, they didn't have a listing of what made 
the suspense account, so we couldn't go into details in terms 
of trying to find out what was in suspense whether or not they 
were violating the Antideficiency Act.
    We could not obtain a list of undelivered orders, which 
affects the budgetary accounts as of September 30, 1998 or 
1997. So we could not say whether or not what they had was 
correct. Some of the problems dealt with the systems and the 
way they are set up, and some of them dealt with the timeliness 
of being able to provide this computer information.
    Mr. Horn. Who sets the budget accounts for Treasury? Is it 
the Assistant Secretary for Management or the Chief Financial 
Officer? In this case, one person is holding both jobs. Is that 
what they have to wait for once a new fiscal year comes in, or 
are these well-established accounts?
    Mr. App. They are well established, with some adjustment 
every year.
    Mr. Horn. Is that what the problem is? In other words, they 
are using this suspense account?
    Ms. Hawkins. Yes.
    Mr. Horn. To what extent are they using the suspense 
account? This is before allocation to a budget category; is 
that right?
    Ms. Hawkins. Right. As of September 30, 1997, there was a 
balance over $100 million, and also there was a balance over 
$100 million, net, as of the end of September 30, 1988. How 
many transactions are going in and going out during the year, I 
don't know.
    Mr. Horn. Well, it is OK unless it is criminal. Do you 
detect any criminality in it?
    Ms. Hawkins. I don't think that there was any criminality 
in terms of purposely overspending appropriations. I think 
because of some of the problems with the accounting systems and 
how they are used, that there is a potential that accidentally 
something could happen.
    Mr. Kutz. Right. But with the disclaimer opinion, we are 
saying that because of the difficulties and the problems we 
had, we don't know.
    Mr. Horn. Last year they had a very fine opinion, right, on 
the 1997?
    Mr. App. Unqualified opinion on both admin and revenue.
    Mr. Horn. And you amazed all of us because back in 1993-
1994 when that law was put on the books, we said there are two 
agencies that will never meet it: One is the IRS and the other 
is the DOD. And so we were only half right. You amazed us, so 
congratulations.
    I wonder why this year seems to be so different from last 
year when GAO goes in to audit things.
    Ms. Cunninghame. First of all, I would like to say that we 
have full confidence that we are appropriately obligating and 
expending our appropriated funds.
    Part of the difficulty we have had this year with the 
administrative audit is we did not set our own timetables to 
coincide appropriately with GAO's timetable. Our accounts are 
extremely laborious to audit. The number of transactions, 
because of the volume of business that we do, makes it very, 
very time-consuming to take each individual major account and 
provide a sufficient audit trail so that it can be fully 
audited by the GAO auditors.
    What we did do is we tried to do that. We have the new 
statements that called for new accounts to be audited that had 
not been audited previously. We feel that had we had--had we 
not run out of time and made the conscious decision to direct 
our attention to 1999, that we could have proven those numbers 
to a much greater extent. We just frankly ran out of time, and 
I think that is the reason that they have the disclaimer. We do 
feel that we are appropriately handling our appropriated funds.
    Mr. Horn. Does this mean that you have to have a new 
allocation of where you place people in the Department and 
within the IRS or what? What is your solution as Chief 
Financial Officer to get some of these problems done? Is it 
more training?
    Ms. Cunninghame. Are you talking about to get a clean 
audit?
    Mr. Horn. Yes.
    Ms. Cunninghame. Yes. Again, this is where we are talking 
about we have a multidimensional project team working currently 
to determine exactly what we need to do. We know that we cannot 
quickly bridge the long-term solutions required for our 
financial systems but we can do more manual preparation in a 
more timely fashion. We are getting started much earlier this 
year so when GAO comes in, we can provide them with auditable 
types of account analyses. We have talked to our contractor who 
provides us that accounting help and they are making some 
changes and accumulating data a little bit differently for us. 
It is auditable; it is just very time-consuming to get it 
audited.
    Mr. App. I think that was one of the conscious decisions 
that we made, because starting on the 1999 action plan, what 
that means is proving the 1998 balances. So that will be the 
first thing: to make sure that the opening balances for 1999 
were correct. So we will be working on that as well.
    Mr. Horn. Any other comments either side might have about 
the testimony you have listened to? What are we missing? Well, 
there will be a number of questions sent to both the General 
Accounting Office, IRS, and the Treasury that we haven't been 
able to get to, but we would appreciate any response you could 
give us on that. We have held a few things open for different 
exhibits, as you have noted.
    Let me, just before I make a few closing remarks, let me 
first thank the people who set up this hearing, and we 
appreciate you coming up here on such short notice and we know 
that is not easy, and we are sorry to disrupt your weekend.
    J. Russell George, our staff director and chief counsel, is 
behind me. Bonnie Heald, director of information, is also 
there. Matthew Ebert, policy advisory. Larry Malenich of the 
GAO, we appreciate that loan. Mason Alinger is the clerk, and 
then we have three able interns, Paul Wicker, Kacey Baker, and 
Richard Lucas; and for the professional staff for the minority, 
Faith Weiss and Earley Green, staff assistant. Knowing the 
complexity of this, we had three court reporters this morning: 
Ryan Jackson, Cindy Sebo, and Doreen Dotzler. We thank them.
    Let me just make a few comments. Today's testimony displays 
that there has been some financial waste by the Department and 
IRS, and that taxpayers too often believe that all agencies in 
the Federal Government have that. I don't happen to agree with 
that, but I think we need processes and systems to make sure. 
And some of them are just very simple, such as the segregation 
of duties when you get into accounting.
    I have learned a lot from auditors over the years, and you 
force people to take their vacations and somebody else sit at 
their desk, and you would be amazed to see what happens 
sometimes when they say, What is this authorization all about? 
And apparently $17 million--was it--in fraudulent refunds and 
misplaced vehicles, printers, and that needs to get more 
attention than just thinking it is an accounting procedure, 
because that wouldn't really be acceptable in most small 
businesses or medium businesses. And you are a very large 
business, with IRS having 102,000 employees alone. I believe 
that is the figure. I think the stockholders, the taxpayers, 
have every reason to demand an immediate change. And that 
includes debt collection, when we see that figure, the 
writeoffs at $110 billion, and that is 54 percent of the unpaid 
debts that are owed. Just think, we talk about a surplus, we 
talk about helping Social Security, it would be great to try to 
collect even 10 percent of that or 15 percent. We ought to set 
our goals higher.
    So I think there is a lot of work to be done and I am 
hopeful. It sounds like you are getting this up to speed, and I 
hope next year we have a clean opinion and the processes on 
handling property and equipment in particular will be improved. 
And the security force that you have at your field offices and 
processing centers, there ought to be ways to make sure that 
they can check that printers and personal computers are not 
just walking out the door, or if they are, there is an 
authorization where you have a name at checkout, and you check 
it in; very simple little procedure.
    Does my colleague have any more questions that he would 
like to ask, and if not, we will wrap it up.
    Mr. Turner. No questions, Mr. Chairman. I simply want to 
say, as the chairman did, that obviously there is work to be 
done. But on the other hand, I want to say here today as I have 
listened to some of the witnesses, that oftentimes we fail to 
acknowledge the contributions that the career employees of 
agencies like the IRS make to the people of this country. And 
for those of you who are career employees of the Treasury and 
the IRS, we owe you a debt of gratitude because you work in a 
very complex area with very difficult problems. And many times 
I think if we can provide the political leadership needed, you 
have the background and the dedication and knowledge to get the 
job done. So to all of those career IRS employees, some of whom 
were in my office a couple of weeks ago from my district in 
Texas, I thank you for the work that you do.
    Mr. Horn. That is well said.
    With that, ladies and gentlemen, we thank you for coming, 
and this hearing is adjourned.
    [Whereupon, at 12:10 p.m., the subcommittee was adjourned.]