Mr. Chairman and members of the committee, thank you for requesting my testimony. I very much appreciate the opportunity to appear before this distinguished body.
The record clearly demonstrates that the lack of effective oversight of the Internal Revenue Service -- by Congress, the courts, reporters, tax practitioners, and other concerned individuals - has done grievous harm to the American people for many years. While it has become a cliche, it nevertheless remains a basic truth: the price of liberty is eternal vigilance. Because we have routinely failed to hold the IRS accountable for its actions, the agency has too often operated in abusive, sloppy, unresponsive, improperly political and occasionally corrupt ways that are a threat to our society.
The IRS's continuing problems are costly to the nation in two ways. First, a badly managed agency does not collect as much as might be expected of the relatively small, but still significant, portion of the federal taxes owed by noncomplying taxpayers. The second cost is harder to measure, but probably more important. A badly managed agency is unfair: substantial numbers of individual citizens are erratically subject to wrongful actions. Such treatment contributes to the growth of a corrosive public cynicism that undermines public confidence in government in a fundamentally dangerous way.
My belief that strong oversight can have positive impact on government is not theoretical. It is based on direct experience. As a reporter who has investigated large powerful bureaucracies like the New York City Police Department, the National Security Agency, the FBI and the IRS for the last 30 years, I have seen clear and certain examples where public exposure of serious government problems has led to genuine improvements in government operations. We need the New York Police Department, we need the FBI, we need the IRS. But when such powerful organizations are allowed to operate without continuous constructive review, history tells us that almost certainly they will go wrong, sometimes in very serious ways.
The IRS, of course, is the subject of the committee's hearings. More than ten years ago, I began an investigation of that agency that led to the 1989 publication of A Law Unto Itself: The IRS and the Abuse of Power. This book was a unique and highly praised examination of the agency's historic and continuing failure to well serve the American people. To my astonishment, shortly after its publication, Fred Goldberg, the IRS commissioner at the time, told a national television audience that my critique of the agency had got it right.
Perhaps one reason the commissioner did not condemn my book is that it did not heap blame on the Bush Administration alone. My research, in fact, found that the IRS has suffered mishaps and misadventures under almost every president, Republican and Democrat, going back at least to Herbert Hoover. I found authoritative government documents clearing showing numerous multiple abuses:
- Herbert Hoover, irritated by political criticism of his budget- cutting policies by an organization of weapons manufacturers, ordered a secret FBI investigation of the group that was partly based on supposedly confidential tax information.
- Franklin Delano Roosevelt regularly used the IRS as a political hit squad. He ordered the agency to mobilize its enforcement powers against former Treasury Secretary Mellon, Senator Huey Long, the singer Paul Robeson, Republican Representative and neighbor Hamilton Fish, Father Charles Coughlin and many others.
- During President Truman's watch, a massive and long-festering IRS corruption scandal erupted during which hundreds of agency officials and agents were implicated, including one secretary of treasury, one commissioner and one assistant attorney general. A good number were convicted and sent to prison for taking bribes or forced to resign from government service.
- With the full knowledge of President Kennedy and his brother, the IRS Commissioner of that administration established a program to go after "extremist organizations." Although the memos describing the program said the extremists of concern were on both the right and the left, it appears that all of those who lost their tax exempt status in connection with this program were fundamentalist conservatives who had been criticizing the president.
- President Nixon, among other abuses, established within the IRS the SSS --the Special Service Staff--to use tax records to track "dissident groups and individuals." One of the impeachment counts approved by the House Judiciary Committee involved the president's misuse of the IRS.
- During the Reagan years, the IRS forgot the lesson of the Truman era, and cut back on agency efforts to discover and punish corruption. The result was what appears to have been a mini-surge in willingness of IRS officials and agents to use their governmental powers for private gain in cities like Philadelphia, Chicago and Los Angeles.
Although it may not at first be obvious to you, my point here is not that the IRS is inevitably a corrupt and badly-run organization. On the contrary, growing out of the exposure of the problems of both the Truman and Nixon Administrations came periods of serious public concern and genuine reform.
This truth -- that large and powerful organizations desperately need outside review by informed critics -- is one that Congress has often ignored. As the chairman and members of the Senate Finance Committee know, the historical record proves that oversight of the IRS has rarely been a major concern of this committee. It must be acknowledged -- and it should be celebrated -- that the breadth and depth of this hearing on the basic performance of the IRS is unusual, although perhaps not unprecedented. I contend that the record of the House Ways and Means Committee and the Joint Tax Committee and the General Accounting Office is not much better. For Congress, re-writing tax laws and imposing new sanctions to enhance the collection of tax dollars have almost always overwhelmed concerns about the fairness and effectiveness of the IRS.
In America, however, oversight is not a Congressional monopoly. Thanks to the First Amendment of the Constitution, news organizations are free to investigate and publicize the failures of government. But when it comes to the IRS, the media has rivaled Congress in its failure to audit America's largest and in some ways most powerful enforcement agency. More than twenty years ago, two very good reporters from the Philadelphia Inquirer undertook a ground breaking and prizewinning investigation of the IRS. Very recently, the New York Times has assigned David Cay Johnston to focus on the agency and its enforcement activities. Other than that -- and the flurry of IRS reporting after Watergate -- coverage of this agency that touches the lives of almost every American has for many years been largely ignored by both print and television reporters.
In some ways, the lack of effective oversight is not all that surprising. The IRS is a very large and very complicated agency that is not easy to understand. And there are many people -- especially within the beltway -- who truly do not understand that the nitty-gritty of how the government rubs up against individual citizens is more significant in many ways than the grandest and most publicized federal "initiative." A couple of years ago, the senior lobbyist for a major national organization in Washington made the astonishing statement to me that he was only interested in government "policy," not government "enforcement."
This curiously obtuse attitude was a central reason why Susan Long, a professor at Syracuse University, and I decided in 1989 to form the Transactional Records Access Clearinghouse (TRAC). Our basic idea was that if Congressional committees, reporters, public interest groups, scholars and businesses were able to obtain comprehensive information about the day-to-day activities of federal enforcement agencies, they would undertake serious oversight studies. Since that time -- with the support of Syracuse University, the Knight Foundation, the Rockefeller Family Fund and The New York Times Company Foundation and other organizations -- TRAC has obtained internal administrative data tapes from the Justice Department and a number of federal enforcement agencies and provided it to the public in new and innovative ways.
In the spring of 1996, and again in 1997, for example, TRAC created a special site on the World Wide Web that gave viewers all over the nation many thousands of pages of maps, charts, graphs and tables about the civil and criminal enforcement activities of the IRS. The address is http://trac.syr.edu/tracirs For the first time ever, TRAC's site gives taxpayers, reporters, public interest groups, and scholars easy access to comprehensive and authoritative information about how, where and when the IRS is enforcing the law. With this information, it now is possible to examine and question the basic policies of the agency.
- DATA FACTS: From 1980 to 1995, IRS criminal enforcement underwent a dramatic shift in emphasis. In 1980, more than three quarters of all IRS prosecutions were aimed at individuals accused of traditional tax crimes like failure to file or the filing of a fraudulent return. By 1995, less than half of IRS prosecutions involved traditional tax violations, with crimes like money laundering, drugs and currency violations taking their place. From 1988 to 1995, civil audit rates for individual nonbusiness taxpayers with incomes over $100,000 declined by a factor of four.
- POLICY QUESTIONS: The sharp decline in IRS activities against wealthier individuals and traditional forms of tax violations is a striking change in national tax enforcement policy that has gone on under the Reagan, Bush and Clinton administrations. Why were these changes instituted? Was this important shift the product of conscious decisions by top policy makers or an accident? Is there any evidence that the change has resulted in the collection of more revenue? Or less?
- DATA FACTS: Government data show wide variations in the civil and criminal enforcement patterns of the IRS, some of which appear to make very little sense. The taxpayers in Manhattan, Brooklyn and Las Vegas, for example, all have something in common with taxpayers in northern Florida and the comparatively rural areas around the North Carolina cities of Greensboro and Ashville. In 1995, on a per capita basis, they all ranked among the ten most active districts when it came to the prosecution of IRS criminal cases. On the civil side, taxpayers in the IRS's San Francisco district, Mississippi, Idaho and New York City stood the highest chance of being audited. One curious fact about the taxpayers in these very different districts concerned their income. New York had the highest adjusted gross income and Mississippi had the lowest.
- POLICY QUESTIONS: Does the IRS have an effective national program to make sure that areas with the most problem taxpayers have most enforcement resources? Or is the effort in fact a random one involving the relative energy levels of different district managers? Has the combined impact of various forms of IRS enforcement actions -notices, audits, criminal indictments -- ever been studied? Given the high cost of moving IRS staff, has the agency developed a plan to continually use the natural forces of attrition to shift auditors and examiners to areas where they are most needed?
- DATA FACTS: In March 1996, TRAC mounted its first web site on the patterns and trends of IRS criminal enforcement. The information was based on data obtained from the Justice Department under the Freedom of Information Act. Although both the IRS and the Justice Department were given access to the site before it became publicly available, neither raised any questions. When news organizations began to publish articles based on the data, however, spokespersons for both agencies questioned the validity of the government's own information. The curious tactic of impeaching your own material prompted us to separately ask the agencies to meet with us to resolve whatever problems they had with our data analysis. Both refused. At this point, we undertook a new study in which we compared -- where it was possible -- the enforcement information from the Justice Department, the courts and the IRS. This study found that the portrait of criminal tax enforcement painted by the Department and court data were highly consistent. Surprisingly, however, the department and court data patterns were very different than reported by the IRS. In 1995, for example, the IRS claims it sent twice as many persons to prison as was recorded by the department and the courts. This discrepancy -- and several others -- led us to conclude that important information provided the public in the IRS's annual report about its criminal enforcement effort was "substantially misleading and inaccurate."
- POLICY QUESTIONS: Why is the IRS, of all agencies, unable to properly balance the books on what is in fact a low-volume part of its activities? Given the failure of the IRS to account for its criminal enforcement activities -- even with parallel information available from the Justice Department and the courts -- what faith can be placed in its accounting of civil audits? If the IRS enforcement information is in fact seriously flawed, how can Congress judge its basic competence? Has the General Accounting Office ever conducted a detailed audit of IRS enforcement counts published each year in the agency's annual report?
The hard numbers are there. The good questions are there. All that has been lacking are skeptical Congressional Committees, reporters, scholars and tax practitioners willing to invest the time and energy to understand the numbers and to ask questions.