Commentary: Irs Reforms Are Only A Good Start

Spring is in the Washington air. And as Apr. 15 nears, the atmosphere is redolent with those perennial pledges by politicians to fix the agency everyone loves to hate: the Internal Revenue Service. They're all looking for ways to make the nation's tax collector more efficient--and, as they say in the marketing biz, more "customer-friendly."

To get ahead of the parade, the Clinton Administration has come up with its own plan. The Treasury Dept. is aiming to improve the IRS's overall structure rather than just tinker. Among the useful suggestions: strengthen management by creating an independent oversight board and giving Treasury tighter control over the quasi-independent operation; hire a manager instead of a tax lawyer as IRS commissioner; and give the new boss unprecedented flexibility to hire, fire, and set pay. Says former IRS Commissioner Fred T. Goldberg Jr.: "They have acknowledged that there are fundamental management issues, and they are moving in the right direction."

FEW HOWLS. This year, the agency is rolling through tax season with few problems. As of Mar. 7, 20% more taxpayers had filed either by phone or computer than at the same time last year. And with less than a month to go, there have been few howls about delayed refunds.

But one crisis-free tax season can't mask the agency's long-term woes. The IRS figures that more than $100 billion in back taxes have gone uncollected. The percentage of audited returns has been cut in half--to a mere 1%--in recent years. The $3.3 billion the IRS has spent in the past decade on computer modernization has been a bust. Worst of all, the agency still has no coherent plan for upgrading all those creaky computers. On Mar. 5, the IRS conceded that at least $440 million earmarked for computer upgrades has simply been wasted.

As a first step, the Administration plan is a good one. Bringing in an outsider with management experience, instead of another member of the clubby tax bar, recognizes that the IRS's role isn't just to write regulations but to extract money from taxpayers in the least painful way possible. The plan also reflects what business has learned in recent years: Solving information-technology problems isn't a matter of buying the fastest whiz-bang gear. It requires first figuring out what you want to do, then designing the hardware and software to make it happen.

The farthest-reaching reform may be the commissioner's new management flexibility. Today, with the IRS in the midst of major layoffs, it is forced to protect jobs on the basis of seniority rather than competence. At the same time, it struggles to get top-notch lawyers and computer specialists, because it can't come close to competing with private market pay. Treasury's plan would free the agency to be more businesslike in how it fires and allow it to break through government pay ceilings when it hires. More important, these proposals could be copied elsewhere in the bureaucracy.

But the IRS faces some problems that are beyond the current fix-up plan. The changes, laid out on Mar. 17 by Treasury Deputy Secretary Lawrence H. Summers, are a good start. But they don't get at the underlying problem: The IRS must administer a devilishly complex tax code that gets worse each year.

The culprits are not bureaucrats but the politicians who write the tax laws. House Ways & Means Committee Chairman Bill Archer (R-Tex.) is right when he says "the crux of the problem is the tax system itself." Trouble is, while he eventually wants to scrap the income tax for a simpler consumption levy, these days he's pushing new complexities, such as cutting the capital-gains tax. And while Clintonites pay lip service to simplicity, their budget is loaded with complicated new tax breaks--for children, education, and savings.

If Congress and the White House really want to make filing a tax return simple, they should stop junking up the code with new goodies. And they should pledge to clean out much of the rubbish that is already there. In the meantime, following through with Treasury's plan will at least repair the IRS itself.

Before it's here, it's on the Bloomberg Terminal.