IRS commissioner (1997-2002)

You barely got into the IRS [when] there were hearings on Capitol Hill. What [was] the impact of the Capitol Hill hearings on the IRS?

I think there were some very dramatic hearings just before I took office and then continuing afterwards. That actually was just the sort of the last step in about two years of studies and criticisms and press stories and horror stories complaining about various things at the IRS. So it was in a situation where people were a little bit hunkered down. They were like people that were in a foxhole with a lot of incoming artillery shells coming in.

Did it inhibit the IRS to have that kind of public pressure, particularly from Congress?

It definitely created a morale impact, definitely created confusion over what was going on. People thought that they had been doing things that were expected of them for many years, particularly with respect to collections of taxes, where there had been pressure from the administration, previous administrations as well as through Congress to make sure the collections stayed up and to collect overdue debts, which is part of what the IRS is supposed to do. So they felt, "Gee, we're doing what we're supposed to do. Now we're under attack." They begin to question everything about what they were doing. …

Is the IRS playing catch-up ball here all the time? … You've got very bright and very able people getting paid lots of money, and probably lots of them had a bunch of different companies, accounting firms, law firms, big banks, corporations. This seems like a very uneven fight.

… Yes, I think that the problem was that, as I looked at it, we were playing man-to-man defense, one-on-one. In a lot of cases, I think the bar association used -- I could use the example. It said the IRS was like taking a knife into a gunfight. We had a couple of agents here fighting against major well-staffed, well-organized corporations and tax advisers, and we were kind of doing it one case at a time, one agent at a time. So we were not in an even fight and in an even strategy there, a winning strategy. …

How serious is the problem of resources for the IRS?

Then you've got the resource issue. One of the things that we did, because this was such a top priority, was to reallocate resources to do this. But it then leaves everything else uncovered. The IRS simply does not have enough resources broadly to cover even the most serious compliance cases.

I would say that when we looked at it, if you look at all of the different kinds of non-compliance that we knew people were not paying -- not just these designer-type shelters, but people hiding money on offshore accounts, people just not filing returns at all -- all those categories, even the most significant ones that we knew about, we were probably only covering maybe 30 percent of them. So we're leaving 70 percent of them uncovered, which means that people are robbing banks on all four corners and we'll only be able to stop one robber.

One out of four?

Yes. That's just not good enough, I think. …

Treasury assistant secretary for tax policy (2002-2004)

Does the IRS have enough resources … to deal with these kinds of complex and often clandestine kind of efforts to beat the tax code?

Well, we did request an increase in the budget in this area last year, which is part of the 2004 budget. I would guess that there's probably going to be a requested increase for the 2005 budget as well, because of concerns that the IRS does need to put more resources into insuring compliance.

Are you satisfied they've got enough resources now to deal with this problem, keep up with it?

Well, I'm not sure whether they do or not, but in some ways it's a little bit early to tell. The IRS's effort to reshuffle its resources is really just getting underway. To a certain extent, we need to see how they do in reshuffling the resources and whether they are able to increase the amount of effort that goes into compliance in these areas before we're going to be able to assess whether or not they need still more money. My guess is that eventually we're going to decide that, in fact, they do need more money.

But they're also constrained by the fact that they have to train the new people coming in. The tax code is very complicated. The IRS's procedures are very complicated, and if you put too many resources into it, you end up pulling off all of the people that you had doing the work to train the new ones. So what you've got to try to do is find a balance so that you're bringing in more resources at a fairly steady level that you're getting them trained so that they can do the work, and then they can move out and take care of a ramped up effort in the compliance area.

… How much of what we missed in the '90s was the IRS keeping its head down after being blasted on Capitol Hill in 1998? People talk about the IRS morale being shattered, the attitude being, "Don't be aggressive. We've got to put the emphasis on service, not on enforcement." How much of the IRS being behind the curve is technical? How much of it is being the lacking enough talent and resources? And how much of it is just the political climate was pretty negative against the IRS at a time when there was a lot of shelter activity going on?

Yeah I think it's some of each. I think that the IRS has had difficulty keeping up with what's going on in the outside world. As somebody who has advised clients where I have lots of resources that I can bring to bear to understand what's going on in a complicated transaction -- and I'm not necessarily talking about a tax shelter transaction, but just a complicated transaction -- I know how difficult it can be to sort through those things. The IRS doesn't have that kind of expertise in house. And it's difficult sometimes for them because they tend not to trust what they hear from taxpayers. Well that just compounds the difficulty for them in trying to keep up with things.

[What about] the political climate?

Well, that's the other side of it. The other side of it is in the '97 hearings followed by the '98 act, the IRS did clearly lose sight of what its mission was for a while.

Meaning what?

Meaning that for a while they were such the whipping boy on the Hill that they were afraid to go out and do what they should be doing.

Chase down shelters?

Chase down shelters, chase down tax cheats in general. I think that what Congress in fact expected, notwithstanding the rhetoric, was that the IRS would continue to do its job. But what the IRS heard was that Congress didn't want them to be aggressively pursuing tax problems. And I think they did back off to a certain extent in how hard they pursued things.

IRS Commissioner (2003-present)

Does the IRS have the resources it needs? Does it have the manpower? Does it have a pay schedule that will attract the talent from the marketplace? Does it have a modern computer system that can keep up with however people are operating in today's world, the 21st century?

We're working to modernize our technology, and we've made strides in that area. As to people, we have a challenge because of the fact that, as we've talked about, there are so many folks on the other side buying the best talent. We've got a lot of very competent people, professionals, who work at the IRS, and no one should underestimate our resolve or their competence or their knowledge.

But you talk about resources. The blunt reality is that, under presidents and Congress -- Republican and Democratic alike -- the IRS struggles to get funding from the Congress. If you look at, again, what's happened in fiscal year 2004, we're hundreds of millions of dollars short of what the president requested for the IRS.

We're not an agency like something to do with highways that gets topped up in the legislative process. That causes a real challenge for us in terms of making sure we devote enough resources to the frontline.

So when you say you're "millions of dollars short," in the end, that means people; people means your ability to follow and track the abusive shelters as well as other things.

Right. In the end, that has an impact on people, no doubt, because the president requested money for this fiscal year that we're in now, Fiscal Year 2004, to support enforcement. The principal priority of the president's budget was to support enforcement in the corporate arena and for high-income individuals. That's what President Bush asked for.

But Congress cut the funding by hundreds of millions of dollars. In the end, what that does is it hurts our ability to pay for the technology that will improve our processes. It also causes a real squeeze in terms of how many people we can afford to have on the job. …

U.S. Representative, (D-Texas)

The campaign against tax shelters has been going on now for five or six years. Has it been effective?

Relative to the billions of dollars that have been lost to the Treasury, I think what the IRS has done recently is to issue a series of parking tickets. They are assigning some penalties to these firms that is nothing compared to what was raked in the way of tax dodges.

Now what's the problem here? Is the IRS playing catch-up? Is it behind the curve? Does it lack resources? What's the heart of the problem?

… There is a shortage of resources at the IRS. These are very complex transactions that require talented auditors. They have a shortage of those. These are secret proposals. All of these are factors that prevent the IRS from doing an effective job.

But the policy for the IRS is coming from the Treasury Department. I think the Treasury Department is sending forth a signal that they don't really care how effective this job is that the IRS does. …

Now you're presenting a picture of the IRS and the taxpayer that is almost totally at odds with the last view we had of this world. In 1998, there was a series of congressional hearings in which the IRS looked like the big, bad big brother coming after people unfairly, treating them in almost dictatorial fashion, overpowering. What wrong with the picture?

Maybe both views are right. Much of the focus of 1998 was on the way the IRS treated some individual and small business taxpayers. None of that focused on abuse of the giants of industry. I think the IRS has misallocated some of its resources in the past, and I think some of the hearing of 1998 was totally unjustified. It was part of an effort here by some in Congress to demonize the IRS and the entire system of progressive taxation in this country. …

You have a picture then, I guess, of the IRS, in terms of dealing with the big-time tax shelter business, as being outgunned, outmanned, outshot.

The IRS is totally outgunned. Some of the same people that are blocking reform here in Congress are the ones that want to tie the IRS's hands by giving it inadequate resources to police corporate tax shelters.

Who are you talking about?

I'm talking about the leadership of the House of Representatives -- specifically Tom DeLay, my colleague from Texas.

And committees?

The Appropriations Committee as it relates to the IRS adequacy; the Ways and Means committee and Bill Thomas, as it relates to tax shelter administration. …

Let me be sure I'm hearing you right. What you're saying is that there's a deliberate effort in Congress, by the Republican leadership in the House, to sabotage the ability of the IRS to effectively monitor tax cheating?

I believe that is what happens here. I think there are many people in this House of Representatives who don't believe in progressive taxation. They want to substitute an entirely different system, and to the extent the IRS cannot do its job, it helps make their case for a total rejection of the progressive tax system.