I. Executive Branch Governance

A. IRS Restructuring and Creation of IRS Oversight Board

1. IRS restructuring and mission

Present Law

IRS organizational plan

Under Reorganization Plan No. 1 of 1952, the Internal Revenue Service ("IRS") is organized into a 3-tier geographic structure with a multi-functional National Office, Regional Offices, and District Offices. A number of IRS reorganizations have occurred since then, but no major changes have been made to the basic 3-tier structure. Presently, as a result of a 1995 reorganization, there is a Regional Commissioner, a Regional Counsel and a Regional Director of Appeals for each of the following 4 regions: (1) the Northeast Region (headquartered in New York); (2) the Southeast Region (Atlanta); (3) the Midstates Region (Dallas); and (4) the Western Region (San Francisco). There are 33 District Offices, 10 service centers, and 3 computing centers.

IRS mission statement

The IRS mission statement provides that:

The purpose of the Internal Revenue Service is to collect the proper amount of tax revenue at the least cost; serve the public by continually improving the qualify of our products and services; and perform in a manner warranting the highest degree of public confidence in our integrity and fairness.

Description of Proposal

The IRS Commissioner would be directed to restructure the IRS by eliminating the present law 3-tier structure and replace it with an organizational structure that features operating units serving particular groups of taxpayers with similar needs. The legality of IRS actions would not be affected pending further appropriate statutory changes relating to such a reorganization (e.g., eliminating statutory references to obsolete positions).

The IRS would be directed to revise its mission statement to provide greater emphasis on serving the needs of taxpayers.

Effective Date

The proposal would be effective on the date of enactment.

2. Establishment and duties of IRS Oversight Board

Present Law

Under present law, the administration and enforcement of the internal revenue laws are performed by or under the supervision of the Secretary of the Treasury.

Federal employees are subject to rules designed to prevent conflicts of interest or the appearance of conflicts of interest. The rules applicable to any particular employee depend in part on whether the employee is a regular, full-time Federal Government employee or a special government employee, the length of service of the employee and the pay grade of the employee. A "special government employee" is, in general, an officer or employee of the executive or legislative branch of the U.S. government who is appointed or employed to perform (with or without compensation) for not to exceed 130 days during any period of 365 days, temporary duties either on a full-time or intermittent basis. Violations of the ethical conduct rules are generally punishable by imprisonment for up to 1 year (5 years in the case of wilful conduct), a civil fine, or both. The amount of the fine with respect to each violation cannot exceed the greater of $50,000 or the compensation received by the employee in connection with the prohibited conduct.

Under the ethical conduct rules, all Federal Government employees (including special government employees) are precluded from participating in a matter in which the employee (or a related party) has a financial interest. In addition, special government employees cannot represent a party (whether or not for compensation) or receive compensation for representation of a party in relation to a matter (1) in which the employee has at any time participated personally and substantially, or (2) which is pending in the department or agency of the Government in which the special government employee is serving. In the case of a special government employee who has served in a department no more than 60 days during the immediately preceding 365 days, item (2) does not apply. Thus, for example, such an individual can receive compensation for representational services with respect to matters pending in the department in which the employee serves, as long as it is not a matter involving parties in which the employee personally and substantially participated.

The conflict of interest rules also impose restrictions on what a Federal Government employee can do after leaving the Government. Under these rules, senior level officers and employees (including special government employees) cannot represent anyone other than the United States before the individual's former department or agency for 1 year after terminating employment. Whether an employee is a senior level officer or employee is determined by pay grade. The one-year post employment restriction does not apply to special government employees who serve less than 60 days during the 365-day period before termination of employment.

Federal employees with pay grades above certain levels are required to file annually public financial disclosures.

Description of Proposal

Duties, responsibilities, and powers of the IRS Oversight Board

The proposal would provide for the establishment within the Treasury Department of the Internal Revenue Service Oversight Board (referred to as the "Board"). The general responsibilities of the Board would be to oversee the IRS in the administration, management, conduct, direction, and supervision of the execution and application of the internal revenue laws. As part of its oversight responsibilities, the Board would have the responsibility to ensure that the organization and operation of the IRS allows it to carry out its mission. The Board would sunset September 30, 2008.

The Board would have the following specific responsibilities: (1) to review and approve strategic plans of the IRS, including the establishment of mission and objectives (and standards of performance) and annual and long-range strategic plans; (2) to review the operational functions of the IRS, including plans for modernization of the tax administration system, outsourcing or managed competition, and training and education; (3) to provide for the review of the Commissioner's selection, evaluation and compensation of senior managers and executives; (4) to review and approve the Commissioner's plans for major reorganization of the IRS (other than the reorganization provided for under the proposal); and (5) to review operations of the IRS in order to ensure the proper treatment of taxpayers. In addition, the Board would review and approve the budget request of the IRS prepared by the Commissioner, submit such budget request to the Secretary, and ensure that the budget request supports the annual and long-range strategic plans of the IRS. The Secretary would be required to submit the budget request approved by the Board to the President, who would be required to submit such request, without revision, to the Congress together with the President's annual budget request for the IRS. The proposal would not affect the ability of the President to include, in addition, his own budget request relating to the IRS. As discussed below, the Board would also recommend candidates for the positions of IRS Commissioner and Taxpayer Advocate, and could recommend removal of either.

It is intended that the Board would reach a formal decision on all matters subject to its review. With respect to those matters over which the Board would have approval authority, the Board's decisions would be determinative. The Board shall consult with representatives of organizations that represent a substantial number of IRS employees on matters that impact IRS employees before it concludes its review and/or approval process.

The Board would have no responsibilities or authority with respect to the development and formulation of Federal tax policy relating to existing or proposed internal revenue laws. In addition, the Board would have no authority (1) to intervene in specific taxpayer cases, including compliance activities involving specific taxpayers such as criminal investigations, examinations, and collection activities, (2) to engage in specific procurement activities of the IRS (e.g., selecting vendors or awarding contracts), or (3) to intervene in specific individual personnel matters.

Board members would have limited access to confidential tax return and return information under section 6103. This limited access would permit the Board to receive such information (i.e., information that has not been redacted to remove confidential tax return and return information) from the Treasury Inspector General in connection with reports made to the Board or as provided by the Commissioner. The Board members would be subject to the anti-browsing rules applicable to IRS employees under present law.

In exercising its duties, it is expected that the members of the Board shall maintain appropriate confidentiality, e.g., regarding enforcement matters.

The Board would be required to report each year to the President and the Congress regarding the conduct of its responsibilities. In addition, the Board would be required to report to the Ways and Means and Finance Committees upon a determination that problems identified by the Board are not being adequately addressed by the IRS.

Composition of the Board

The Board would be composed of 7 members. Six of the members would be so-called "private-life" members who are not otherwise Federal officers or employees. These private-life members would be appointed by the President, with the advice and consent of the Senate. The other member would be the Commissioner of the IRS.

The private-life members of the Board would be appointed based solely on their expertise in the following areas: management of large service organizations; customer service; the Federal tax laws, including administration and compliance; information technology; organization development; and the needs and concerns of taxpayers. In the aggregate, the private-life members of the Board should collectively bring to bear expertise in these enumerated areas. The private-life members would be appointed to the Board without regard to political affiliation.

The private-life members could be removed at the will of the President. The IRS Commissioner would be removed from the Board upon his or her termination of employment as the Commissioner.

Compensation of Board members

The private-life members of the Board would be compensated at a rate of $30,000 per year, except that the Chair would be compensated at a rate of $50,000 a year. The IRS Commissioner would receive no compensation for his or her services as a Board member. The members of the Board would be entitled to travel expenses in connection with attending Board meetings.

Ethical conduct rules

Under the proposal, the private-life Board members would be subject to the public financial disclosure rules applicable to Federal government employees above certain pay grades.

The ethical conduct rules applicable to private-life Board members would depend on whether such members are determined to be "special government employees" under the present law rules. It is expected that they generally will be. In that case, they will be subject, at a minimum, to the ethical conduct rules applicable to special government employees. In addition, during their term as a Board member, a private-life Board member could not represent any party (whether or not for compensation) before the Board, the IRS, or with respect to any tax-related matter before the Treasury department . Thus, for example, the day after appointment to the Board, the Board member could not meet with representatives of the IRS or Treasury on behalf of a client or the Board member's corporate employer with respect to proposed tax regulations. On the other hand, the Board member could, for example, represent clients before the U.S. Customs Service. The special rules applicable to private-life Board members would not preclude the Board member from sharing in compensation from representation of clients by another person (e.g., a partner of the Board member) before the IRS. In addition, private-life Board members would be subject to the 1-year post employment restriction applicable to individuals above certain pay grades (whether or not the members are special government employees under the present-law rules).

If the Board members are determined not to be special government employees under the present-law rules, then they would be subject to the ethical conduct rules relating to regular Federal Government employees.

Administrative matters

Term of appointments

The 6 private-life Board members would be appointed for 5-year terms. The private-life members could serve no more than two 5-year terms. Each 5-year term would begin upon appointment. Board member terms would be staggered, as a result of a special rule providing that some private-life members first appointed to the Board would serve terms of less than 5 years. Under this rule, 2 members first appointed would serve for 2 years, 2 for 4 years, and 2 for 5 years.

Chair of the Board

The members of the Board would elect a Chair from the private-life members for a 2-year term. Except as otherwise provided by a majority of the Board, the authority of the Chair would include the authority to hire staff, call meetings, establish subcommittees, establish the agenda for meetings, and develop rules for the conduct of business.

Meetings

The Board would be required to meet on a regular basis (as determined necessary by the Chair), but no less frequently than quarterly. The Board would be able to meet privately, and would not be subject to public disclosure laws.

A quorum of 4 members would be required in order for the Board to conduct business. Actions of the Board could be taken by a majority vote of those members present and voting.

Staffing

The Board would be authorized to have its own permanent staff. In addition, the Board would have such staff as detailed by the Commissioner or from another Federal agency at the request of the Chair of the Board. The Chair could procure temporary and intermittent services under section 3109(b) of title 5 of the U.S. Code.

Claims against Board members

The private-life members of the Board would have no personal liability under Federal law with respect to any claim arising out of or resulting form an act or omission by the Board member within the scope of service as a Board member. The proposal would not limit personal liability for criminal acts or omissions, wilful or malicious conduct, acts or omissions for private gain, or any other act or omission outside the scope of service as a Board member. The proposal would not affect any other immunities and protections that may be available under applicable law or any other right or remedy against the United States under applicable law, or limit or alter the immunities that are available under applicable law for Federal officers and employees.

Effective Date

The provisions of the proposal relating to the Board would be effective on the date of enactment. The President would be directed to submit nominations for Board members to the Senate within 6 months of the date of enactment. The legality of the actions of the IRS would not be affected pending appointment of the Board.

B. Appointment and Duties of IRS Commissioner and Chief Counsel

1. IRS Commissioner

Present Law

Within the Department of the Treasury is a Commissioner of Internal Revenue, who is appointed by the President, with the advice and consent of the Senate. The Commissioner has such duties and powers as may be prescribed by the Secretary. The Secretary has delegated to the Commissioner the administration and enforcement of the internal revenue laws. The Commissioner generally does not have authority with respect to tax policy matters.

The Secretary is authorized to employ such persons as the Secretary deems appropriate for the administration and enforcement of the internal revenue laws and to assign posts of duty.

Description of Proposal

As under present law, the Commissioner would be appointed by the President, with the advice and consent of the Senate, and could be removed at will by the President. The Commissioner would be appointed to a 5-year term, beginning with the date of appointment. The Board would recommend candidates to the President for the position of Commissioner; however, the President would not be required to nominate for Commissioner a candidate recommended by the Board. The Board would have the authority to recommend the removal of the Commissioner.

The Commissioner would have such duties and powers as prescribed by the Secretary. Unless otherwise specified by the Secretary, such duties and powers would include the power to administer, manage, conduct, direct, and supervise the execution and application of the internal revenue laws or related statutes and tax conventions to which the United States is a party and to recommend to the President a candidate for Chief Counsel (and recommend the removal of the Chief Counsel). The Commissioner would exercise the IRS' final authority concerning the substantive interpretation of the tax laws. If the Secretary determines not to delegate such specified duties to the Commissioner, such determination would not take effect until 30 days after the Secretary notifies the House Committees on Ways and Means, Government Reform and Oversight, and Appropriations, the Senate Committees on Finance, Government Affairs, and Appropriations, and the Joint Committee on Taxation. The Commissioner would consult with the Board on all matters within the Board's authority (other than the recommendation of candidates for Commissioner and the recommendation to remove the Commissioner).

Unless otherwise specified by the Secretary, the Commissioner would be authorized to employ such persons as the Commissioner deems proper for the administration and enforcement of the internal revenue laws and would be required to issue all necessary directions, instructions, orders, and rules applicable to such persons. Unless otherwise provided by the Secretary, the Commissioner would determine and designate the posts of duty.

The Commissioner would be compensated as under present law.

Effective Date

The provisions of the proposal relating to the Commissioner would be effective on the date of enactment. The provision relating to the 5-year term of office would apply to the Commissioner in office on the date of enactment. The 5-year term would run from the date of appointment.

2. IRS Chief Counsel

Present Law

The President is authorized to appoint, by and with the consent of the Senate, an Assistant General Counsel of the Treasury, who is the Chief Counsel of the IRS. The Chief Counsel is the chief law officer for the IRS and has such duties as may be prescribed by the Secretary. The Secretary has delegated authority over the Chief Counsel to the Treasury General Counsel. The Chief Counsel does not report to the Commissioner, but to the Treasury General Counsel. As delegated by the Treasury General Counsel, the duties of the Chief Counsel include: (1) to be the legal advisor to the Commissioner and his or her officers and employees; (2) to furnish such legal opinions as may be required in the preparation and review of rulings and memoranda of technical advice and the performance of other duties delegated to the Chief Counsel; (3) to prepare, review, or assist in the preparation of proposed legislation, treaties, regulations and Executive Orders relating to laws affecting the IRS; (4) to represent the Commissioner in cases before the Tax Court; (5) to determine what civil actions should be brought in the courts under the laws affecting the IRS and to prepare recommendations to the Department of Justice for the commencement of such actions and to authorize or sanction commencement of such actions.

Description of Proposal

As under present law, the Chief Counsel would be appointed by the President, with the advice and consent of the Senate. The Chief Counsel would not be an Assistant General Counsel of the Treasury and would report directly to the Commissioner.

The Chief Counsel would have such duties and powers as prescribed by the Secretary. Unless otherwise specified by the Secretary, these duties would include the duties currently delegated to the Chief Counsel. If the Secretary determined not to delegate such specified duties to the Chief Counsel, such determination would be subject to the same notice requirement applicable to changes in the delegation of authority with respect to the Commissioner.

Effective Date

The proposal would be effective 90 days after the date of enactment.

C. Structure and Funding of the Employee Plans and Exempt Organizations Division ("EP/EO")

Present Law

Prior to 1974, no one specific office in the IRS had primary responsibility for employee plans and tax-exempt organizations. As part of the reforms contained in the Employee Retirement Income Security Act of 1974 ("ERISA"), Congress statutorily created the Office of Employee Plans and Exempt Organizations ("EP/EO") under the direction of an Assistant Commissioner. EP/EO was created to oversee deferred compensation plans governed by sections 401-414 of the Code and organizations exempt from tax under Code section 501(a).

In general, EP/EO was established in response to concern about the level of IRS resources devoted to oversight of employee plans and exempt organizations. The legislative history of Code section 7802(b) states that, with respect to administration of laws relating to employee plans and exempt organizations, "the natural tendency is for the Service to emphasize those areas that produce revenue rather than those areas primarily concerned with maintaining the integrity and carrying out the purposes of exemption provisions."

To provide funding for the new EP/EO office, ERISA authorized the appropriation of an amount equal to the sum of the section 4940 excise tax on investment income of private foundations (assuming a rate of 2 percent) as would have been collected during the second preceding year plus the greater of the same amount or $30 million. However, amounts raised by the section 4940 excise tax have never been dedicated to the administration of EP/EO, but are transferred instead to general revenues. Thus, the level of EP/EO funding, like that of the rest of the IRS, is dependent on annual Congressional appropriations to the Treasury Department.

Description of Proposal

Because the funding formula for EP/EO set forth in section 7802(b)(2) would, if utilized, result in an unstable level of funding that may bear little or no relation to the amount of financial resources actually required by the EP/EO division, the proposal would repeal the funding mechanism. Thus, the appropriate level of funding for EP/EO would, consistent with current practice, be subject to annual Congressional appropriations, as are other functions within the IRS. In this regard, however, given the magnitude of the sectors EP/EO is charged with regulating, as well as the unique nature of its mandate, an adequately funded EP/EO is extremely important to the efficient and fair administration of the Federal tax system. Accordingly, financial resources for EP/EO should not be constrained on the basis that EP/EO is a "non-core" IRS function; rather, EP/EO, like all functions of the IRS, should be funded so as to promote the efficient and fair administration of the Federal tax system.

Effective Date

The proposal would be effective on the date of enactment.