Fiscal Year 2007 IRS Budget

4/14/2006

House Appropriations Subcommittee on Transportation, Treasury and Housing and Urban Development, the Judiciary, District of Columbia

NTEU represents l50,000 federal employees in 30 federal agencies and departments, including the men and women who work at the Internal Revenue Service. I appreciate the opportunity to provide the Subcommittee with comments on the IRS budget for fiscal year 2007.

There are several items in the Administration’s IRS budget that NTEU believes would be detrimental to the IRS’s mission. The two most egregious items include the Administration’s plans to contract out tax collection to private collection agencies starting this summer, and an inadequate budget request that will prevent the IRS from continuing to improve its customer service record while bolstering enforcement.

Budget

The IRS budget forms the foundation for what the IRS can provide to taxpayers in terms of customer service and how the agency can address the ever-increasing tax gap through enforcement. Without an adequate budget the IRS cannot expect continued IRS customer service performance ratings and to shrink the tax gap. I commend the Administration for acknowledging in its Fiscal Year 06 Budget in Brief (page 12) that the “IRS yields more than four dollars in direct revenue from its enforcement efforts for every dollar invested in its total budget.” However, I must criticize the Administration for failing to request a budget for Fiscal Year 2007 (FY 07) that is commensurate with the needs of the Agency to meet its customer service, as well as enforcement challenges.

NTEU supports the IRS Oversight Board’s overall IRS budget recommendation which calls for an increase of $732 million over the enacted Fiscal Year 2006 IRS budget. The Board’s budget represents a 6.9% increase over the FY 06 budget and includes increases in enforcement and taxpayer service programs, in contrast to the President’s budget request which calls for a cut of 2,500 full-time equivalent (FTEs) employees and relies on unrealistic assumptions such as an increase of $135 million in user fees. NTEU specifically supports the increased enforcement budget proposed in S. Con. Res. 83, the FY 07 Budget Resolution, as passed by the Senate. The Senate Budget Resolution quadruples the President’s enforcement request from a $137 million increase over FY 06 to an additional $500 million increase for IRS enforcement in FY 07.

NTEU believes that if the IRS is going to continue to ask for improved performance from its employees then it must request a realistic budget that is commensurate with the Agency’s goals. The President’s budget request falls short and I would urge the Subcommittee for an appropriation that is commensurate with the IRS’s goals of bolstering enforcement and improving customer service.

Span of Control

I realize that Congress does not operate in a vacuum and it must consider all federal government budget needs. In its FY 2006 IRS Budget/Special Report, the IRS Oversight Board stated that it “agrees that investing in enforcement does pay for itself many times over, not only in increased revenues but by reinforcing the belief that all taxpayers are paying their fair share.” Although it’s widely recognized that additional funding for enforcement may provide a great return on the investment, the Administration seems reluctant to request an adequate budget for the IRS enforcement budget. Thus, the agency must look toward other cost-cutting measures within its budget framework.

NTEU recommends the IRS look at the management to bargaining unit employee ratio to find much needed resources for additional collection work. Although the number of frontline employees who do the work at the IRS has decreased by 5.1 percent since 2000, the number of managers who supervise these employees has increased by 1 percent over this same period. If the IRS decreased the number of managers and management officials at the same rate as it has decreased its rank and file employees, the Agency could put the savings toward bolstering Collections work, and avoid cuts to customer service.

Customer Service

Congress must continue to reject IRS’s plan to implement draconian cuts to customer service. I was pleased that the Subcommittee decided to halt IRS’ plans to move forward with cuts to customer service at the end of last year with language in H.R. 3058 (Section 205), the Transportation, Treasury, Housing and Urban Development, the Judiciary, the District of Columbia, and Independent Agencies Appropriations Act, 2006. H.R. 3058, Section 205, uses broad language that prohibits any of the appropriated funds to “be used to reduce taxpayer services as proposed in fiscal year 2006 until the Treasury Inspector General for Tax Administration completes a study detailing the impact of such proposed reductions on taxpayer compliance and taxpayer services…” The IRS decided to move forward with cuts to the toll-free service by reducing hours of service and closing call sites, despite the language this Subcommittee imposed in H.R. 3058. In response, the Subcommittee followed-up with additional language to clarify its intent in H.R. 2863, Section 5021 (the FY ’06 Defense Appropriations bill) further explaining that “reduced taxpayer services” in the Transportation-Treasury Appropriations bill included—but was not limited to—any reductions in telephone service.

Despite these two explicit directives from Congress not to make any taxpayer customer service cuts, the IRS closed the Chicago and Houston telephone call sites. Furthermore, the IRS continues with its plans to make cuts to Taxpayer Assistance Centers (TACs) as confirmed in a recent TIGTA report (Reference Number: 2006-40-061). The report also indicates that management does not have reliable data on the TACs to make decisions about TAC operations. TIGTA also points out that 47 of the 400 TACs nationwide—nearly 12 percent—are “critically” understaffed—meaning that they would be in danger of closing were it not for the dedicated IRS employees who are filling in from nearby TACs and through the use of seasonal employees. In its first report responding to the congressional mandate in Section 205 of H.R. 3058, TIGTA sharply criticizes the business model the IRS used to justify the TAC closings last year (see TIGTA Reference Number: 2006-40-067). Clearly, the IRS lacks the management information necessary to provide adequate oversight of its TAC operations—much less make a decision to close any of them.

I urge the Subcommittee to continue to oppose the IRS’s plan to drastically cut customer service until the IRS has the data to justify its customer service cuts and can explain the effects of such cuts on taxpayers.

Private Tax Collection

NTEU strongly opposes the Administration’s plan to privatize IRS debt collection, as authorized by Congress in 2004 in H.R. 4520, the American Jobs Creation Act of 2004. Under the statute, the IRS is permitted to hire private sector debt collectors and pay them a bounty of up to 25 percent of the money they collect. NTEU opposes this short-sighted proposal, anticipates its complete failure as witnessed in a similar 1996 pilot program and will continue to work towards its repeal.

The IRS has said that it has learned from the 1996 project and is better equipped to address the problems raised. However, a revealing report by the Treasury Inspector General for Tax Administration (TIGTA Audit #200320010) provides evidence to the contrary. It shows how IRS contractors, revamping IRS computers, put taxpayers’ data at risk.

The objective of the TIGTA audit was “to determine whether the Internal Revenue Service (IRS) has adequately protected Federal Government equipment and data from misuse by contractors.” The review found: “The involvement of non-IRS employees in critical IRS functions increases the risk of misuse or unauthorized disclosure of taxpayer data, and could lead to loss of equipment or sensitive taxpayer data through theft or sabotage.” The TIGTA audit found that the “lack of oversight of contractors resulted in serious security vulnerabilities.” The report, found that, “contractors blatantly circumvented IRS policies and procedures even when security personnel identified inappropriate practices.”

A more recent report by the General Accounting Office (GAO-06-328) highlights the continuing failure of the IRS to ensure the internal security of sensitive taxpayer data. GAO reported the IRS has corrected only 41 of the 81 information security weaknesses it previously discovered at two of the agency’s critical data processing sites; moreover, GAO said it has identified “new information security weaknesses that threaten the confidentiality, integrity and availability of IRS financial information systems and the information they process.” These include, for example, the agency’s failure to implement effective “electronic access controls related to network management, user accounts and passwords; user rights and file permissions; and logging and monitoring of other information security controls to physically secure computer resources, and to prevent the exploitation of vulnerabilities.” Its report added: “Collectively, these weaknesses increase the risk that sensitive financial and taxpayer data will be inadequately protected against disclosure, modification, or loss, possibly without detection, and place IRS operations at risk of disruption.”

The GAO report presents yet another warning signal about the dangers of the IRS effort to move ahead with plans to hire private sector debt collectors to pursue tax debts. Rather than seek to move personal and sensitive taxpayer information into private hands the IRS needs to devote time, attention and resources to ensuring it can protect these vital data when the information is in its own hands. I don’t think anyone can realistically be satisfied right now that the agency has accomplished that.

Clearly, the IRS does not have sufficient oversight of the current contractors or technology it employs. Combine this fact with a 25% bounty incentive paid to the contractors and you have a recipe for disaster, resulting in overly aggressive and abusive tactics on the part of the private debt collectors.

While the IRS is currently liable for damages caused by an IRS employee’s misuse of sensitive taxpayer information, taxpayers would not have proper redress with the federal government for misuse of their confidential information by contractors. Instead, taxpayers would be left to seek damages against the private collection agency while the reputation of the IRS and the federal government is tarnished.

Furthermore, the debt collectors won’t be given the same training that is given to IRS Collections employees. Even the National Taxpayer Advocate in her 2005 Annual Report to Congress recognizes the problems with implementation of the private debt collection initiative:

“However, the current plan shortchanges taxpayers by exempting private collectors from the type of training required of IRS employees in similar functions…Yet, the private collectors will not receive even a small fractions of the training that is given to the IRS employees in similarly situated positions. Moreover, the private collectors themselves will administer the PDC training.”(Volume 1, page 78).

Not only will the private debt collectors not be given the same training as IRS employees, but the contractors will be administering the training. IRS collection professionals have a wealth of tax knowledge that they have at their disposal in every case where they deal directly with the taxpayer. The private debt collectors on the other hand, will only be given a fraction of the training and not have that same level of expertise as the IRS employee.

One of the most often heard arguments in favor of the use of private collection agencies is that if they are paid out of the proceeds of what they collect, IRS’ enforcement capabilities increase without having to increase appropriations. Numerous Congressional supporters said they would prefer to have tax collection done by federal employees, but would go along with the use of private collection agencies solely because it avoids the difficult issue of getting Congress to approve additional appropriations for the IRS.

The statute that gives the IRS the authority to use PCAs allows 25 percent of collected revenue to be returned to the collection companies as payment and 25 percent to be retained by the IRS for enforcement efforts, thereby circumventing the appropriations process altogether. There is nothing magical about revenues collected by private collection companies. If those revenues could be dedicated directly to contract payments and IRS enforcement efforts, there is no reason some small portion of other revenues collected by IRS employees couldn’t be dedicated to IRS enforcement efforts. This would allow for increased enforcement by IRS employees, which most people indicate is the preferable route and eliminate large payments (up to 25% of collections) to private collection companies, significantly increasing net revenue to the General Treasury. While legislation would be required to allow for this kind of dedication of revenue, I believe the precedent has now been set with the private collection agency funding provisions. Congress should consider supporting this approach as a common sense way to make real progress in closing the tax gap, lowering our deficits and making more funding available for our Nation’s critical needs.

It is a plain and simple fact: This plan to privatize tax collection at the IRS will hurt U.S. taxpayers, will hurt IRS workers and will erode the great gains the IRS has made with improved customer satisfaction ratings. I urge the Subcommittee to scrutinize the IRS’s accountability of its contractors and hold the private collection agencies to the same standards as IRS employees.

Pay Parity

The Administration has asked Congress to provide only a 2.2% pay raise for federal workers in FY 07. This would be the lowest raise since 1998, at a time when the cost of living rate is steeply increasing and health insurance premiums are going up dramatically. While in past proposals the Bush Administration did not honor the historic practice of parity between the civilian and military workforce, this year’s proposal provides an equally insufficient pay raise to both parts of government service.

Not only are federal employees taking an effective pay cut once inflation and health care costs are considered but the pay gap between them and the private sector is widening. The Federal Employees Pay Comparability Act (FEPCA), enacted in 1990 to close the gap between federal and private sector pay, has never been fully implemented. Today, federal pay lags 13% behind the private sector. Bringing federal worker pay into line with the private sector would be the most effective cure to the federal government’s hiring crisis.

Further reducing the potential FY 07 pay raise, the Administration proposes to reduce pay in FY 07 by funding special rate pay out of this meager increase. While agencies should have the resources they need to provide special rate pay, it should not come by raiding the locality adjustments and annual pay increase for federal workers.

NTEU urges the Subcommittee to oppose the Administration’s legislative proposal to fund special rate pay by diverting part of the locality and annual pay raise. I also seek your continued support for a fair and equitable pay raise for the Nation’s federal civilian and military workforce for FY 07.

Contracting Out

Last year, the House and Senate Transportation-Treasury HUD Subcommittees worked in a bipartisan, bicameral fashion to enact legislation in H.R. 3058, Section 852 that begins to level the playing field for federal employees. NTEU supports the provisions and thanks the Subcommittee for its work last year. The legislation allows federal employees to offer their own realistic best bid with a most efficient organization (MEO) in job functions being performed by more than 10 federal employees; requires a 10% or $10 million cost savings of the contractor in order for the work to be contracted out; and allows executive agency heads to conduct public-private competitions to bring contracted work back in-house. NTEU would strongly recommend that the same provisions be included in the FY 07 Transportation-Treasury Appropriations bill and additional flaws in the process be examined.

For example, the process should prohibit the contractor from receiving a cost advantage in the competition by offering an inferior employer-sponsored health benefit than the federal employees receive. Contractors have an incentive to cut benefits to their workers in order to reduce labor costs when offering their best bid. However, contracting out should not be a race to the bottom. If contractors want to offer inferior benefits to their workers, they should not be rewarded for this by being given an advantage in the competition for the work. Congress must also make sure that federal employees are treated fairly throughout the competition process by allowing us the same legal standing before GAO for appeals purposes as has long been enjoyed by contractors.

This list is by no means exhaustive but it’s a good starting point. If the Administration is going to insist on using its flawed revised A-76 Circular, then Congress must insist on correcting those flaws in the competitive sourcing rules.

RIFs

I commend Congress for acknowledging the IRS’s haphazard approach to reorganizing the agency and directing “the IRS to consult with the Committee prior to elimination, consolidation, or reorganization of its workforce, and prohibits the IRS from proceeding with matters relating to such job movement prior to the Committee's action on the IRS budget.” (Senate Rept. 109-109- Transportation, Treasury, the Judiciary, Housing and Urban Development and Related Agencies Appropriations Bill, 2006).

Despite the Committee Report language, the IRS moved forward with its planned reductions in force (RIFs) in several different areas. Generally speaking, NTEU believes that the IRS would benefit both in terms of cost savings and human resource satisfaction by placing a greater emphasis on retraining current employees for other positions within the IRS. Unfortunately, this has not been the approach taken by the IRS with regards to RIFs at the agency. A more sensible downsizing model is needed if the IRS wishes to keep the talented workforce it currently has but also in order to attract new talent. A more comprehensive, thoughtful approach to RIFs will also ensure that the improved customer service gains made since 1998 are not lost.

Conclusion

It is indisputable that the IRS workforce is getting mixed signals regarding its value to the mission of the Service and the level of workforce investment the Service is willing to make. Without a doubt, the frontline employees are committed to working with management to increase efficiency and customer satisfaction. NTEU is committed to striking a balance between taxpayer satisfaction, business results and employee satisfaction. I invite Congress to join us in this endeavor.