Home Legislative Action Congressional Testimony The Federal Workforce

The Federal Workforce

3/06/2007

House Subcommittee on Financial Services and General Government Appropriations

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Chairman Serrano, Ranking Member Regula, distinguished members of the Subcommittee; I would like to thank you for the opportunity to testify on the subject of federal workforce issues under consideration by the Subcommittee. As President of the National Treasury Employees Union, I have the honor of representing over 150,000 federal workers in 30 agencies and departments throughout the government.

Workforce Issues

There are several items I would like to discuss today that pertain to a number of federal agencies. There has been a good deal of discussion lately in the federal agencies, the popular press and Congress about the future of the federal workforce. The subcommittee has pointed out -- and we have all read in the media -- that a surge in federal retirements could occur in the next several years. The Council for Excellence in Government & Gallup Organization recently reported that 60 percent of the federal government’s General Schedule employees and 90 percent of the Senior Executive Service will be eligible to retire in the next ten years. (Within Reach . . . But Out of Synch: The Possibilities and Challenges of Shaping Tomorrow’s Government Workforce,” December, 5, 2006).

While no one knows for sure whether all of those eligible to retire will actually do so, I do know that the federal government had better be prepared to compete for the best and brightest of the young new workers. Just as importantly, however, it must be prepared to use its many existing authorities and flexibilities to retain the hundreds of thousands of talented public servants who have the knowledge and expertise to continue contributing to the federal workforce. The failure to pay competitive salaries, the constant focus on downsizing and outsourcing and the bashing of federal bureaucrats have put the federal government at a disadvantage when it comes not only to hiring the best new college graduates, but also to retaining its current employees.

Unfortunately, many federal agencies have been lax in utilizing their existing authorities and administrative personnel rules to retain the thousands of dedicated public servants who are currently working in our federal agencies.

During the debate over the Bush Administration’s ill-conceived civil service reform proposals, I pointed out there are a host of provisions on the books that allow the federal government to reward high performers, including recruitment and retention bonuses, quality step increases and paid time off awards. These options are often not used because agencies are not given the resources to fund them.

The Office of Personnel Management (OPM) must play a more involved role in making sure agencies are aware of these existing provisions and are given the necessary tools to use them to their maximum capacity.

OPM and Flexibilities

The Office of Personnel Management (OPM) issues a manual of authorities and flexibilities that are currently available to the different federal agencies under Title V of the US Code, entitled Human Resources Flexibilities and Authorities in the Federal Government. It essentially contains a list of flexibilities and authorities under which federal agencies can make personnel accommodations to attract candidates to the federal government or to offer incentives for federal employees to remain in their government jobs.

The Government Accountability Office (GAO) has undertaken a number of studies focusing on the importance of designing and using human capital flexibilities. In one report (GAO-03-02), the GAO found that the flexibilities that are most effective in managing the federal workforce are those such as time off awards and flexible work schedules. In other words, flexibilities that allow employees to take time off from work – when it is most convenient for both the agency and the employee – that better balance work life and family responsibilities.

Unfortunately, OPM has not focused extensively on advertising existing authorities and flexibilities. OPM states in the Preface of its handbook, “We serve as a resource for you as you use existing HR flexibilities to strategically align human resources management systems with your mission.” (p.i) Yet, most federal agencies do not take advantage of existing flexibilities. Agencies can offer numerous awards as incentives to employees. These range from things like cash awards to individuals and groups; to quality step increases; to group suggestion/inventions to improve an agency; to foreign language awards; to travel incentives; to referral bonuses and others. Before Congress moves to pass new laws, it should require OPM to promote existing authorities, and aggressively require federal agencies to examine current avenues available to them to recruit and maintain their federal employees.

I would like to address just a couple of options the agencies now have available. First, Telecommuting. Agencies can now offer telecommuting, also known as telework, or programs that allow employees to work at home or another approved location away from the regular office. While existing flexibilities exist on telecommuting, Congress has also acted to promote its use. In the FY 2006 State, Justice Commerce Appropriations bill, language was included in Sec. 617 requiring each department or agency to report to Congress on telecommuting and to maintain a telework coordinator. Earlier, in 2000, thanks to two members of the House Appropriations Committee, Representatives Moran and Wolf of Northern Virginia, Congress passed legislation requiring executive agencies to establish telecommuting policies to the extent possible. And NTEU has negotiated telework agreements with management in many federal agencies.

In surveying the thirty agencies represented by NTEU, we found mixed results in terms of management’s commitment to the concept. Experience has shown that telework can bring increased productivity due to uninterrupted time for employees to plan work. It also saves energy, reduces air quality problems and congestion on our roads while enhancing the quality of family life. We found successful programs at the IRS and Patent and Trademark Office. We also found resistance to telecommuting at the Bureau of Alcohol, Tobacco and Firearms (AFT), the Security and Exchange Commission (SEC) and the Office of the Comptroller of the Currency (OCC).

There is no doubt in my mind that OPM could be playing a more prominent role in assisting agencies to move forward on their telecommuting and telework policies.

Second, Compensation and Salary. Mr. Chairman, A quick look at OPM’s handbook will show the many areas in which OPM and federal agencies have the authority to offer special salary and compensation without requiring additional legislation. I have called upon the OPM Director, for example, to grant Special Salary Rates under Title V to federal workers in the New Orleans areas who continue to face skyrocketing expenses like higher rents, gas and commuting costs, insurance premiums after the devastation of the Gulf Coast Hurricanes. No legislation is needed for this. Federal agencies simply need to make their case to OPM and OPM can grant special salary relief. So far, we have been unsuccessful in this and I ask the Committee’s help on it.

Many, many other compensation flexibilities exist at federal agencies and I won’t go into all of them here. But The Government Accountability Office (GAO) reported in its study of human capital flexibilities a few years ago that “monetary recruitment and retention incentives, such as recruitment bonuses and retention allowances…and incentive awards for notable job performance and contributions, such as cash and time-off awards” ranked as among the “most effective flexibilities” (GAO-03-2).

Third, Student Loan Repayments. This benefit could be critical to recruiting top notch qualified public servants. Under this existing authority, agencies may repay federally insured student loans as an incentive for attracting candidates. An agency may pay up to $6,000 per employee in any calendar year or a total of $40,000 per employee. I would like to see, Mr. Chairman, a report from the agencies on how many are using this excellent opportunity to recruit federal employees. Unfortunately, I suspect, not many are.

Administration’s Fiscal Year 2008 Budget

I would now like to address some provisions in the President’s Fiscal Year 2008 budget. Included are a number of provisions that are harmful to federal employees and their families. Proposals surrounding the proposed federal pay raise, pay-for-performance, health insurance cutbacks, and IRS staffing are major problematic areas.

Pay Raise

The President’s Fiscal Year 2008 budget includes a 3.0 percent pay raise for both civil servants and the military. While at first blush, this looks like a reasonable increase from the 2.2 percent afforded to federal employees and the military in FY 2007, it is important to remember that last year’s average 2.2 percent increase for both groups amounts to the lowest pay increase in eighteen years and most federal employees received only a 1.8 percent pay raise at the end of the day. The 3 percent proposed raise, reflecting the Employment Cost Index (ECI), does nothing to close the 13 percent gap between private sector and public sector pay, the stated goal of the 1990 Federal Employees Pay Comparability Act (FEPCA) which created a system of locality pay still not yet implemented. Last year the House Appropriations Committee and full House passed a half percent increase to the recommended level and although the Senate reported an additional half percent for federal employees, the bills died before adjournment.

Now, the President is recommending another inadequate pay raise for FY 2008. If we are serious about addressing the workforce issues discussed above, fair and adequate pay is the first place to start. Our calculations are that federal civil servants and the military deserve another half percent above the recommended level to bring the pay raise to 3.5 percent to at least make a small dent in the pay gap. With the impending retirement tsunami soon to engulf the federal government it makes no sense to keep depressing the wages of federal employees. Soon there will be fewer and fewer people interested in applying for jobs with federal agencies or keeping them, and the capacity and the ability for these agencies to perform their missions will be severely diminished. Let’s not forget that federal and military employees keep our government systems running, protect our homeland and health, and defend our borders. I urge the Subcommittee to restore fairness by increasing the recommended pay increase to 3.5 percent.

Another pay problem with the FY 2008 budget submission is the President’s proposal to fund special rate pay out of the increase. Special rate pay is used for hard to fill positions by occupation or geographical area. It has traditionally been funded by agencies, not out of the funds appropriated for the annual pay raise. This is a back door approach to reducing federal pay and it should be rejected as it has been in the past.

Pay- for-Performance

Included in the FY 2008 budget submission is language to continue pay-for-performance projects with the ultimate goal of replacing the current General Schedule, the system by which most federal employees are currently paid. The idea of alternative pay and personnel systems using a new pay and performance management system has been one promoted by the Administration for several years. But there is no hard evidence that these alternative pay systems work.

To quote Robert Behn, author and lecturer at Harvard University’s John F. Kennedy School of Government, “Systems don’t improve performance; leaders do.” In his book, The Human Equation: Building Profits by Putting People First, Jeffrey Pfeffer, of Harvard Business School says, “Although variable pay systems that attempt to differentially reward individuals are clearly currently on the increase, such systems are frequently fraught with problems. Incentives that reward groups of employees or even the entire organization…are customarily preferable.” (p.203)

I believe that leadership that solicits, values and acts on the ideas of frontline employees in efforts to achieve agency missions is missing in many agencies today. Providing that kind of leadership would do more to improve the quality of applicants and performance of employees than alternative personnel systems and pay for performance projects as proposed by this Administration.

I would like to comment specifically about a couple of alternative pay systems that NTEU has been involved with: The Department of Homeland Security (DHS) and the Internal Revenue Service (IRS).

Despite being ranked at the bottom of the Partnership for Public Service’s annual survey of “Best Government Places to Work,” DHS is insistent on moving forward on its alternative personnel and pay system. While the pay for performance system at DHS has not yet been implemented, we are very concerned that it will push employees who are already demoralized out of the agency when the importance of keeping experienced, skilled employees is greater than ever. Let me be clear, the employee opposition to the proposed DHS system is not about “fear of change,” as some have tried to portray it. I know firsthand that this group of employees, entrusted with protecting our country from terrorists and other criminals, is not a fearful group. What they most object to about the proposed DHS system is that it will make it harder, not easier, to accomplish the critical mission of the agency.

There are several reasons for this: 1) The system is not set by statute or subject to collective bargaining, so there is nothing to provide it credibility among employees; 2) The system will have employees competing against each other over small amounts of money, discouraging teamwork, which is critically important in law enforcement; 3) The system is subjective, which will lead to at least the appearance of favoritism; 4) The system is enormously complex, the administration of which will require huge amounts of money that is so much more desperately needed in frontline functions, not to mention siphoning off money that could go for more pay in a less administratively burdensome system; 5) the draft competencies for the new DHS system do not recognize or reward the real work that these employees do to keep our country safe.

And while I am on the subject of DHS, I want to divert for a moment on the first point I raised, the issue of collective bargaining. This is a timely subject as your subcommittee knows. The courts have thrown out DHS regulations that relied on provisions in the Homeland Security Act of 2002 (HSA) allowing limits on collective bargaining. Similar DHS efforts to promulgate regulations based on the HSA that would make the pay system less fair and objective and more open to abuse have faltered, but are continuing. NTEU believes these provisions of the HSA should be repealed. In addition, screeners in the Transportation Security Administration should be afforded the same collective bargaining rights as other DHS employees as provided for in the House-passed 9/11 Commission bill.

With respect to the IRS and pay for performance, while bargaining unit employees represented by NTEU are not covered by a pay banding performance based system, managers are. The Hay Group did a Senior Manager Payband Evaluation on this system for the IRS last year. Here are some of the results: 1) 76% of covered employees felt the system had a negative or no impact on their motivation to perform their best; 2) 63% said it had a negative or no impact on the overall performance of senior managers; 3) “Only one in four senior managers agree that the SMPB is a fair system for rewarding job performance or that ratings are handled fairly under the system;” 4) “Increased organizational performance is not attributed to the SMPB.”

The results of this system are dismal, yet it is pointed to as a model for moving the whole federal government to a similar system. In fact, there is a dearth of information to indicate that alternative pay systems have had any significant impact on recruitment, retention or performance. A GAO report on “Human Capital, Implementing Pay for Performance at Selected Personnel Demonstration Projects” from January 2004 included virtually no evidence that the systems improved any of those measures. In fact, the Civilian Acquisition Personnel Demonstration Project, reviewed in that report, had as one of its main purposes, to “attract, motivate, and retain a high-quality acquisition workforce.” Yet, attrition rates increased across the board under the pilot.

NTEU is not averse to change. We have welcomed, including at the FDIC where we have bargaining unit employees, and elsewhere, the opportunity to try new ways of doing things. Based on my experience, these are the things I believe will have the most impact on the quality of applicants and the motivation, performance, loyalty and success of federal workers.

1) Leadership. Rules and systems don’t motivate people. Leaders do.

2) Opportunities for employees to have input into decisions that affect them and the functioning of their agencies. They have good ideas that management is currently ignoring.

3) A fair compensation system that has credibility among employees, promotes teamwork and is not administratively burdensome.

Unfortunately, I do not believe the systems currently being pursued by this Administration follow these standards.

Health Insurance Reductions

I regret to report the FY 2008 budget contains language that allegedly makes a “technical change” to federal workers’ health benefits by reducing the amount of the government contribution for new annuitants with fewer than ten years of service. On the one hand, the Administration purports to seek innovative ways to attract new workers, but on the other hand it seeks to cut the very benefits that might attract them. While legislation must be passed to implement this proposal, this is not a new idea and is one NTEU will vehemently oppose.

Changing the rules now and reducing the government contribution in these cases will only raise the premiums for retirees. This is a misguided attempt by the administration to generate revenues on the backs of retired federal employees. It affects retirees and active workers at numerous federal agencies and should be defeated.

Finally, on a less ominous note, the Administration did include language in its budget which could correct the calculation of retirement annuities for individuals with part-time service. Thousands of civil servants who are eligible under the Civil Service Retirement System (CSRS) and have worked part-time in their careers are in jeopardy of losing credits for the years they worked full-time, because of a glitch in a 1986 law which changed the formula calculation. I have long supported correcting this problem which affects thousands of employees who choose to work part-time, often because of family obligations or illness. They should certainly receive the proper credit for their earlier full-time service.

While the President deserves commendation for indicating he will send corrective legislation, we need to hold him to this promise. Last year’s budget also included this proposal and no legislation materialized. While I realize this is primarily an authorizing committee issue, I do want the subcommittee to be aware of it since it touches employees who worked in many different agencies. We backed legislation in the last Congress introduced by Mr. Moran of Virginian and we will continue to lend support again this year.

Additional Health Care Needs

Mr. Chairman, in addition to these health care changes addressed in the President’s budget, NTEU will be working with the appropriate oversight committees to save funds in the Federal Employee Health Benefits Program (FEHBP). This program which serves more than eight million federal employees, retirees and their families should use every available avenue to keep costs down while continuing to offer its notable quality health care plans.

I recently wrote to the OPM Director expressing concern and asking for an explanation as to why OPM failed to apply for the Medicare drug subsidy to which it is entitled. The Government Accountability Office (GAO), recently reported that the subsidy would have lowered the average 2006 FEHBP premium by 2.6 percent had OPM received the subsidy. Some of the individual health plans that serve a high number of retirees could have realized a slowdown in premium growth by as much as 3.5 to 4 percent. These savings could have been passed on to keep the enrollee portion of the premium down.

OPM should take advantage of every opportunity to keep health costs down for employees and retirees. Instead, OPM simply turned its back on the retiree Medicare drug subsidy and enrollees in the Federal Employees Health Benefits Program are paying the price. From my viewpoint, this is an easy way to save program costs and help federal retirees at the same time.

Another FEHBP reform we will be pushing will be in support of a higher federal contribution towards premiums. Right now, the government pays roughly 72 percent of FEHBP premium costs and employees and retirees pay the remainder. This contrasts sharply with most large private sector and state and local government employers who routinely pay an average of 80% of their employees’ health insurance premiums. NTEU backs the Hoyer (D-MD) bill to increase the federal share of the premium to 80%, thereby reducing costs to enrollees.

Finally, NTEU will be working with the appropriate parties to seek ways to keep premium costs down for both parties. Premiums rose last year by 6.4 percent and by over fifty percent since 2001. At the current time, OPM is not allowed to directly negotiate for lower prescription drug prices. This is something we believe Congress needs to look at to see if program costs can be reduced.

Contracting Out

Another budget issue pertinent to the Subcommittee’s jurisdiction is the general area of contracting out government positions and responsibilities. While I will speak later in my testimony about the Internal Revenue Service’s (IRS) misguided program to contract out its inherently governmental duty of tax collection, I want to commend and thank the subcommittee for incorporating important privatization language in the continuing appropriations bill for FY 2007 to help level the playing field for federal employees. As you know this language modifies the Office of Management and Budget’s (OMB) revised A-76 Circular as the guideline for competitive sourcing. In essence, the language gives federal employees the right to bid on work and affords them a step toward equal treatment. It:

• 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.

My request of you today is: First, retain these important provisions that allow federal employees the ability to fairly compete. These changes, however, must be made permanent and NTEU will work with all the appropriators and relevant committees to make these changes permanent. Secondly, we support strengthening and improving amendments such as prohibiting contractors from receiving a cost advantage in a competition due to inferior health benefits, and providing the same legal standing before the Government Accountability Office (GAO) and the Court of Federal Claims for appeals purposes. These strengthening provisions will surely help the federal workforce compete for positions and work they are qualified to perform.

IRS Issues

Private Tax Collection. Mr. Chairman, NTEU continues to strongly oppose the Administration’s private tax collection program, which began in September of last year. Under the program, the IRS is permitted to hire private sector debt collectors to collect delinquent tax debt from taxpayers and pay them a bounty of up to 25 percent of the money they collect. NTEU believes this misguided proposal is a waste of taxpayer’s dollars, invites overly aggressive collection techniques, jeopardizes the financial privacy of American taxpayers and may ultimately serve to undermine efforts to close the tax gap. We anticipate its complete failure as witnessed in a similar 1996 pilot program and will continue to work towards its repeal.

Let me be very clear: NTEU strongly believes the collection of taxes is an inherently governmental function that should be restricted to properly trained and proficient IRS personnel. When supported with the tools and resources they need to do their jobs, there is no one who is more reliable and who can do the work of the IRS better than IRS employees.

As you may know, under current contracts, private collection firms are eligible to retain 21% to 24% of what they collect, depending on the size of the case. By comparison, it only costs the government 3 cents for every dollar collected by an IRS employee. In testimony before Congress, the IRS Commissioner Mark Everson himself has twice acknowledged that using private collection companies to collect federal taxes will be more expensive than having the IRS do the work themselves. The Commissioner’s admission directly contradicts one the Administration’s central justifications for using private collection agencies --- that the use of private collectors is cost efficient and effective.

In addition to being fiscally unsound, the idea of allowing private collection agencies to collect tax debt on a commission basis also flies in the face of the tenets of the IRS Restructuring and Reform Act of 1998. Section 1204 of the law specifically prevents employees or supervisors at the IRS from being evaluated on the amount of collections they bring in. But now, the IRS has agreed to pay private collection agencies out of their tax collection proceeds, which will clearly encourage overly aggressive tax collection techniques, the exact dynamic the 1998 law sought to avoid. Furthermore, the IRS is turning over tax collection responsibilities to an industry that has a long record of abuse. For example, in 2005 (the latest year statistics are available), the Federal Trade Commission received 66,627 consumer complaints about debt collection agencies – giving debt collectors the impressive title of the FTC’s most complained-about industry.

NTEU believes that a better option would be to provide the IRS with the resources and staffing it needs. There is no doubt that IRS employees are – by far – the most reliable, cost-effective means for collecting federal income taxes. The IRS Commissioner himself has admitted that using IRS employees to collect unpaid tax debts is more efficient than using private collectors. In addition, the 2002 budget report submitted to the IRS Oversight Board, former Commissioner Charles Rossotti made clear that with more resources to increase IRS staffing, the IRS would be able to close the compliance gap.

This is not the first time the IRS has tried this flawed program. Two pilot projects were authorized by Congress to test private collection of tax debt for 1996 and 1997. The 1996 pilot was so unsuccessful it was cancelled after 12 months, despite the fact it was authorized and scheduled to operate for two years. A subsequent review by the IRS Office of Inspector General found that contractors participating in the pilot programs regularly violated the Fair Dept Collection Practices Act, did not adequately protect the security of personal taxpayer information, and even failed to bring in a net increase in revenue. In fact, a 1997 GAO report found that private companies did not bring in anywhere near the dollars projected, and the pilot caused a $17 million net loss.

And despite IRS assurances that it has learned from its past mistakes, two recent reports indicate otherwise. A March 2004 report by the Treasury Inspector General for Tax Administration raised a number of questions about IRS’ contract administration and oversight of contractors. The report found that “a contractor’s employees committed numerous security violations that placed IRS equipment and taxpayer data at risk” and in some cases, “contractors blatantly circumvented IRS policies and procedures even when security personnel identified inappropriate practices.” (TIGTA Audit #200320010). The proliferation of security breaches at a number of government agencies that put personal information at risk further argue against this proposal. These security breaches illustrate not only the risks associated with collecting and disseminating large amounts of electronic personal information, but the risk of harm or injury to consumers from identity theft crimes.

In addition, a September 2006 examination of the IRS private collection program by the Government Accountability Office (GAO) reveals that like the 1996 pilot, the program may actually lose money by the scheduled conclusion of the program’s initial phase in December 2007. The report cited preliminary IRS data showing that the agency expects to collect as little as $56 million through the end of 2007, while initial program costs are expected to surpass $61 million. What’s more, the projected costs do not even include the 21-24 percent commission fees paid to the collection agencies directly from the taxes they collect.

Aside from the direct costs of the program, I am greatly concerned about the potential negative effect that the private tax collection program will have on our tax administration system. In her recent report to Congress, the National Taxpayer Advocate voiced similar concern about the unintended consequences of privatizing tax collection. Olson cited a number of “hidden costs” that private tax collection has on the tax system including reduced transparency of IRS tax collection operations, inconsistent treatment for similarly situated taxpayers, and reduced tax compliance. Clearly the negative effects of contracting out tax collection to private collectors hampers the agency’s ability to improve taxpayer compliance and will only serve to undermine future efforts to close the tax gap.

NTEU is not alone in its opposition to the IRS’ plan. Similar proposals allowing private collection agencies to collect taxes on a commission basis have been around for a long time and have consistently been opposed by both parties. In fact, the Reagan Administration strongly opposed the concept the concept of privatizing tax collections warning of a considerable adverse public reaction to such a plan, and emphasizing the importance of not compromising the integrity of the tax system. (Treasury Dept. Statement to House Judiciary Comm. 8/8/86). More recently, opposition to the private debt collection program has been voiced by a growing number of members of Congress, major public interest groups, tax experts, as well as the Taxpayer Advocacy Panel, a volunteer federal advisory group—whose members are appointed by the IRS and the Treasury Department.

In addition, the National Taxpayer Advocate, an independent official within the IRS recently identified the IRS private debt collection initiative as one of the most serious problems facing taxpayers and called on Congress to immediately repeal the IRS’ authority to outsource tax collection work to private debt collectors (National Taxpayer Advocate 2006 Report to Congress).

Instead of rushing to privatize tax collection functions which jeopardizes taxpayer information, reduces potential revenue for the federal government and undermines efforts to close the tax gap, the IRS should increase compliance staffing levels at the IRS to ensure that the collection of taxes is restricted to properly trained and proficient IRS personnel.

IRS Staffing Challenges. Mr. Chairman, while the Administration will tell you it has added additional funds for the IRS, the agency is, in fact in a sorry state. In April 2006, the IRS released updated estimates showing that the tax gap was approximately $345 billion in Tax Year 2001. As Nina Olson, the National Taxpayer Advocate noted, this amounts to a per-taxpayer “surtax” of some $2,000 per year to subsidize noncompliance. And while the agency has made small inroads and the overall compliance rate through the voluntary compliance system remains high, much more can and should be done. NTEU believes that in order to close the tax gap, the IRS needs additional employees on the frontlines of tax compliance and customer service. In addition, we believe Congress should establish a dedicated funding stream to provide adequate resources for those employees.

History has shown that the IRS has the expertise to improve taxpayer compliance but lacks the necessary personnel and resources. The President’s own fiscal 2008 budget proposal trumpets the increased tax collections produced by IRS’s own employees and cites the increased collections of delinquent tax debt from $34 billion in 2002 to $49 billion in 2006, an increase of 44 percent. Unfortunately, instead of providing additional resources to hire more enforcement staff, IRS personnel resources have been slashed in recent years resulting in a 36% decline in combined collection and examination function enforcement staff between 1996 and 2003. In addition, these staffing cuts have come at a time when the IRS workload has dramatically increased.

According to IRS’s own annual reports and data, taxpayers filed 114.6 million returns in 1995. After a steady annual climb, eight years later, the Service saw 130.3 million returns filed. In addition, between 1997 and 2005, the number of individual tax returns with $100,000 in reported income, which are generally more complex returns, increased by more than 52 percent. Yet, between 1995 and 2003, total numbers of employees shrunk from 114,000 to 94,000. Even more alarming is that during that period, revenue officers and revenue agents – two groups critical to reducing the tax gap – shrunk by 40 and 30 percent respectively. Revenue officers went from 8,139 to 5,004 and revenue agents fell from 16,078 to 11,513. Unfortunately, instead of reversing this trend, the IRS has continued efforts to reduce its workforce.

Just last year the IRS announced plans to eliminate 157 estate and gift tax lawyer positions – almost half of the agency’s estate tax lawyers -- who audit some of the wealthiest Americans. The Service pursued this drastic course of action despite IRS reports that show tax evasion and cheating among the highest-income Americans is a serious and growing problem and internal data showing that estate and gift attorneys are the most productive enforcement personnel at the IRS collecting $2,200 in taxes for each hour of work. In addition, we have seen the focus of enforcement efforts turn away from high-income individuals and large corporations that account for a significant amount of unpaid taxes in recent years. IRS data shows that IRS audits of high-income individuals have dropped dramatically over the past decade. The audit rate for face-to-face audits fell from 2.9 percent of high-income tax filers in FY 1992 to 0.38 percent in FY 2001 and then drifted down to 0.35 percent in FY 2004. While the audit rate has rebounded somewhat in the last two years, it is still far below the level of the mid-1990’s.

In addition, there are reports that top IRS officials are pushing auditors to prematurely close audits of large companies, leaving billions of dollars of taxes owed on the table. This disturbing fact is backed up by recent IRS data which shows the thoroughness of IRS enforcement efforts for the nation's largest corporations — measured by the number of hours devoted to each audit — has substantially declined since FY 2002. IRS data also show that the annual audit rate for these corporations, all with assets of $250 million or more, while increasing in FY 2004 and 2005, receded in 2006 to about the level it was in 2002 and is much lower than levels that prevailed a decade or more ago.

Although the number of the largest corporations is small, they are a very significant presence in the American economy. In FY 2002, the largest corporations were responsible for almost 75 percent of all additional taxes the IRS auditors said were owed the government. By comparison, low and middle income taxpayers in the same year were responsible for less than 10 percent of the total.

Despite this fact, agency data shows that audit attention given those with $250 million or more in assets has substantially declined in the last five years. In 2002, an average of 1,210 hours were devoted to each of the audits of the corporations in this category. And despite the IRS’ efforts to increase "coverage" or the number of large corporations audited, the time devoted to each audit dropped sharply in 2004. By 2006 the number of hours per audit remained 20% below what it was in 2002.

Mr. Chairman, in the face of a rising tax gap and exploding federal deficits, it is imperative that the agency allow IRS professionals to pursue each and every dollar of the taxes owed by large corporations. Allowing these large corporations to pay just a fraction of what they owe in taxes greatly hinders efforts to close the tax gap and is fundamentally unfair to the millions of ordinary taxpayers that dutifully pay their taxes.

Mr. Chairman, it is clear that drastic reductions of some of the agency’s most productive tax law enforcement employees has undermined agency efforts to close the tax gap and directly contradicts the Services’ stated enforcement priority to discourage and deter non-compliance, particularly among high-income individuals.

NTEU’s position on closing the burgeoning tax gap is supported by tax experts from both the Government Accountability Office and Citizens for Tax Justice, who recently told the Senate Budget Committee that adequate staffing and resources is “the most essential step that needs to be taken” to boost taxpayer compliance and reduce the tax gap.

NTEU Staffing Proposal

In order to address the staffing shortage at the IRS, NTEU supports a two percent annual net increase in staffing (roughly 1,885 positions per year) over a five-year period to gradually rebuild the depleted IRS workforce to pre-1998 levels. A similar idea was proposed by former IRS Commissioner Charles Rossotti in a 2002 report to the IRS Oversight Board. In the report, Rossotti quantified the workload gap in non-compliance, that is, the number of cases that should have been, but could not be acted upon because of resource limitations. Rossotti pointed out that in the area of known tax debts, assigning additional employees to collection work could bring in roughly $30 for every $1 spent. The Rossotti report recognized the importance of increased IRS staffing noting that due to the continued growth in IRS’ workload (averaging about 1.5 to 2.0 percent per year) and the large accumulated deficit in work that should be done but could not be, even aggressive productivity growth could not possibly close the compliance gap. Rossotti also recognized that for this approach to work, the budget must provide for a net increase in staffing on a sustained yearly basis and not take a “one time approach.” Because it takes time and careful management to hire, train, and deploy qualified professional staff, consistent but modest annual increases are necessary.

Although this would require a substantial financial commitment, the potential for increasing revenues, enhancing compliance and shrinking the tax gap makes it very sound budget policy. One option for funding a new staffing initiative would be to allow the IRS to hire personnel off-budget, or outside of the ordinary budget process. This is not unprecedented. In fact, Congress took exactly the same approach to funding in 1994 when Congress provided funding for the Administration’s IRS Tax Compliance Initiative which sought the addition of 5,000 compliance positions for the IRS. The initiative was expected to generate in excess of $9 billion in new revenue over five years while spending only about $2 billion during the same period. Because of the initiative’s potential to dramatically increase federal revenue, spending for the positions was not considered in calculating appropriations that must come within annual caps.

A second option for providing funding to hire additional IRS personnel outside the ordinary budget process could be to allow IRS to retain a small portion of the revenue it collects. The statute that gives the IRS the authority to use private collection companies to collect taxes allows 25 percent of collected revenue to be returned to the companies as payment, thereby circumventing the appropriations process altogether. Clearly, there is nothing magical about revenues collected by private collection companies. If those revenues can be dedicated directly to contract payments, there is no reason some small portion of other revenues collected by the IRS could not be dedicated to funding additional staff positions to strengthen enforcement.

But while NTEU agrees with IRS’ stated goal of enhancing tax compliance and enforcement, we don’t agree with the approach of sacrificing taxpayer service in order to pay for additional compliance efforts. NTEU believes providing quality services to taxpayers is an important part of any overall strategy to improve compliance and that reducing the number of employees dedicated to assisting taxpayers meet their obligations would only serve to exacerbate, not shrink, the tax gap. The Administration’s own budget proposal for 2008 notes that in FY 2006, IRS’ customer assistance centers answered almost 33 million assistor telephone calls and met the 82 percent level of service goal, with an accuracy rate of 91 percent for tax law questions. In addition, a recent study commissioned by the Oversight Board found that more than 80 percent of taxpayers contacted said that IRS service was better than or equal to service from other government agencies. And while these numbers show that IRS taxpayer services are being effective, more can and should be done.

Mr. Chairman, in order to continue to make improvements in taxpayer services while simultaneously processing a growing number of tax returns and stabilizing collections and examinations of cases, it is imperative to reverse the severe cuts in IRS staffing levels and begin providing adequate resources to meet these challenges. With the future workload expected to continue to rise, the IRS will be under a great deal of pressure to improve customer service standards while simultaneously enforcing the nation’s tax laws. NTEU strongly believes that providing additional staffing resources would permit IRS to meet the rising workload level, stabilize and strengthen tax compliance and customer service programs and allow the Service to address the tax gap in a serious and meaningful way.

With respect to the tax gap, NTEU believes that frontline IRS employees are the best defense. But it is up to the Administration to request the funding necessary for these employees to do their job and then up to the IRS to utilize these employees to their fullest potential. Without a doubt, rank and file employees are committed to working with management to increase efficiency and customer satisfaction while decreasing the U.S. tax gap. If the Administration and Congress are serious about lessening the tax gap, it will provide IRS with the necessary staffing and a dedicated funding stream to support those additional workers.