Carl Levin

Mr. LEVIN

Mr. LEVIN. This report not only sets out the scope and causes of the growing enforcement problems at the IRS, it also identifies practical and immediate steps that can be taken by Congress to avert an enforcement breakdown. Essentially, it comes down to Congress' providing the IRS with a steady increase of 2 percent per year over the next 5 years in resources for audits, investigators, and enforcement actions. This increase is not only modest, the numbers show that it will more than pay for itself through the collection of taxes that have improperly been withheld. Federal tax reform is an important goal, but any reform effort must include a clear-eyed recognition of the growing problem of tax compliance and the need to revitalize the agency charged with ensuring all Americans pay their fair share. Mr. Rossotti was scheduled to bring the enforcement problem to the attention of Congress at a hearing in October, but that hearing was cancelled after, according to press reports, he was asked by the administration not to disclose his report or recommendation for increased enforcement resources. To further contribute to an understanding of the scope and nature of tax noncompliance, my staff on the Permanent Subcommittee on Investigations has been digging into the problems of offshore tax evasion and tax promoters shopping improper tax shelters. I hope to have more to report on these issues early next year. In the meantime, I urge all my colleagues to read Mr. Rossotti's report in full and take its warnings and advice to heart as we approach tax reform issues in the coming year. Exhibit 1 Report to the IRS Oversight Board--Assessment of the IRS and the Tax System As the Board requested, and as my term of office draws to a close, I want to share with you my thoughts on the current state of the IRS, our tax administration system, as well as the opportunities and challenges that the agency and new commissioner will face. The IRS is today capable of executing its mission with increasing effectiveness and efficiency. We made measurable progress on a number of high priority areas, such as e- filing, telephone and in-person taxpayer service, protection of taxpayer rights and burden reduction. We stabilized and refocused our key compliance activities to make the best use of our limited resources and are identifying and attacking systematic areas of non-compliance, such as the promotion and use of abusive tax devices. Financial management improved, as evidenced by unqualified audit opinions. Internal morale, which was heavily affected by criticism and internal and external change, turned around. Perhaps most importantly, we regained the confidence of the public and other stakeholders. For the longer term, the IRS created a firm foundation upon which to make further progress. It includes: a modern organization structure with clear accountability for meeting the widely varying needs of specific taxpayer segments; information systems and support organizations capable of supporting operations efficiently while managing modernization; and a planning and management process for allocating resources, assigning goals to managers and measuring progress. Our Business System Modernization Plan is beginning to deliver tangible benefits to taxpayers and practitioners. Equally important, we have a complete vision and architecture to guide the continuing modernization of every IRS business process and supporting technology. The plans in place for FY 2003 and FY 2004 reflect aggressive but achievable productivity gains, exceeding those that were historically achieved in the private financial sector. Taken together, these achievements demonstrate the progress we made over the past five years in the entire way we serve taxpayers, although finishing the job will still take the full decade I originally projected. However, amidst what I believe is justified optimism for continued improvements in the performance of the IRS lies a critical problem. We are winning the battle, but losing the war. Over the last ten years, the size and complexity of the tax system increased enormously. Beyond the simple increase in number of taxpayers and revenue dollars, the majority of tax revenues now come from sources that are more subject to manipulation by those who wish to pay less than the law requires and much more difficult and time consuming for our agents to uncover. Meanwhile, the size of the IRS declined, not just relatively but in absolute terms, because of budget constraints. The cumulative effect of these conflicting trends over a 10-year period has been to create a huge gap between the number of taxpayers whom the IRS knows are not filing, not reporting or not paying what they owe, and our capacity to require them to comply. Recognizing the IRS' diminished capacity, promoters and some tax professionals are selling a wide range of tax schemes and devices designed to improperly reduce taxes to taxpayers based on the simple premise they can get away with it. When this perception becomes increasingly widespread, the essential pillar of our tax system is lost--namely, the belief of honest taxpayers that if someone does not pay what he or she owes, then the IRS will do something about it. If the trend of the last ten years is allowed to continue, it is only a matter of time until this problem will emerge into the forefront of public consciousness, likely leading to an eruption of criticism such as has occurred periodically in the last 50-year history of the IRS. Fortunately, it is not too late to solve this problem, nor is it an open-ended problem. In fact, in the past year we succeeded in quantifying better than ever the resources we need. Modernization and internal productivity improvements will provide a major part of the needed gains. However, these alone will not be sufficient to close the gap, even if we assume greater productivity gains than the private sector was able to achieve over a decade. To succeed, we need more trained personnel to close the known compliance gap while continuing to protect taxpayer rights and provide essential services. Specifically, we must add approximately 2 percent annual net increase in staffing over five years. Even with this increase, the size of the IRS by 2010 would be smaller than it was 20 years earlier in 1990 while the economy will have increased 86 percent. Over the same period, we must also fund adequate increases for computer modernization programs to accelerate the delivery of key projects and benefits that will provide for greater service, efficiency and productivity. Together with effective management of the IRS, this modest level of resources can reverse the dangerous trend the tax system is currently taking--but only if it is consistently provided. If, on the other hand, the trend of the past ten years is maintained, in which the demands on tax administration increase and the capacity of the IRS declines, the eventual cost for our nation is certain to be enormous. Starting Point Before I discuss the opportunities and challenges that lie ahead, it is helpful to place them in their proper historical context. By the mid-1990s, the public, Congress and most key stakeholders had lost confidence in the IRS. According to the Roper Starch surveys, favorable public opinion of the IRS steadily declined since the early 1980s, reaching an all-time low of 32 percent in 1998. The results of the American Customer Satisfaction Index of key federal agencies were similarly alarming. The IRS measured the lowest of any agency or institution in both surveys. Taxpayers were not alone in their negative perceptions. Congress and many of our stakeholders also lost confidence in the agency's ability to do its job at an acceptable level. In 1995, the Tax Systems Modernization program was terminated after several billion dollars were spent. Handling complaints about IRS treatment of constituents became a time-consuming duty in many congressional offices, and many stakeholders, especially those representing small business, had an adversarial relationship with the agency. Poor quality service to taxpayers over the telephone or in person contributed to the public's low perceptions. At the nadir in the mid-1990s, the IRS registered 400 million busy signals a year on its toll-free lines, and when taxpayers did reach the IRS, the likelihood of getting an accurate answer or resolution to a problem was low. A number of external factors also buffeted the IRS. Budget and staff cuts, rapid economic growth and the shift in the tax base from middle-income wage earners and domestic corporations to upper-income entrepreneurs, passthrough entities and global corporations, all contributed to a diminished capacity to cope with service and compliance demands. The IRS responded to this pressure by emphasizing enforcement revenue and statistics as a way of justifying its budget. The IRS measured the success of its compliance activities by direct enforcement revenues. This is like a police department assessing its success by the number of traffic tickets written rather than by the safety and security of the community it serves. As we well know from the ensuing fallout, this grave mistake further alienated the public, yet failed to address the systematic, emerging compliance and budget problems. While emphasizing enforcement statistics, the IRS was also slow to update its compliance practices, such as models used to select returns for audits and the management of the exam and collection processes. Until we changed it recently, $100,000 was the highest income class used by the IRS in assigning exam cases, although people with incomes over $100,000 pay more than 60 percent of the income tax. Moreover, although exam coverage was declining, many of these examinations concentrated on relatively straightforward issues of deductions or timing differences, such as the use of cash versus accrual accounting by small businesses. Very little emphasis was placed on partnerships and trusts, high- income individuals or offshore accounts, although vast sums of income flow through these entities. There was no specific program to identify and combat promoters of abusive tax devices. The IRS succeeded in winning some tax shelter court cases, but there was no overall strategy for dealing with corporate tax shelters. achieving a turnaround The IRS addressed, although certainly not completely solved, the major problems and internal constraints it faced five years ago. Some are resolved; clear plans are in place to correct the remaining ones over the next five years. This work provided the foundation for steady improvement in the effectiveness and efficiency with which the IRS carries out its mission. Public confidence in the IRS rebounded. The Roper Starch surveys found our rating increased each of the past three years after 1998's historic low. The University of Michigan's American Customer Satisfaction Index survey released in December 2001 showed greatly improved customer satisfaction among individual taxpayers--the largest favorable gain of the 30 federal agencies surveyed. In May 2002, the Federal Performance Project, a collaboration of Government Executive Magazine and George Washington University's Department of Public Administration, released its scorecard on federal agencies. The IRS earned a ``B-'', as compared to a ``C'' three years ago. While the trend is good, much more remains to be done. The IRS can be and should be managed at the ``A'' level and is on its way to achieving this. This turnaround in public confidence reflects the clear progress in five distinct areas: (1) customer service, (2) stakeholder relations, (3) compliance, (4) internal management, and (5) technology and modernization. Customer service The customer service improvements were the most visible to individual taxpayers. The upward trend in telephone service was particularly important given how far we had to climb. By the end of the 2002 filing season, taxpayers were receiving correct responses to 83.6 percent of tax law questions and 89.9 of account questions. Access to service and time spent waiting, while still below private sector standards, improved substantially. Average wait time is down 26 percent from the previous year. Assistor access rose from 56 percent only two years ago to nearly 70 percent this year. Last year, Web site usage smashed all records with 2.7 billion hits and 336 million files downloaded. We are well on our way to a new record this year. Also, in January 2002, we introduced a newly designed and more accessible Web site. E-filing tripled over the past five years, and this filing season, was up 16 percent over the previous one. We are systematically removing the remaining barriers to e-filing. For example, this year, virtually all 1040 forms and schedules could be filed electronically, and no paper signature document was required. Improved electronic tax administration is also critical to better serving business taxpayers, especially given the number of forms and payments they must file and make. In September 2001, we launched Electronic Federal Tax Payment System On-Line that allows businesses large and small to save precious time by making their federal payments on-line. We are also building a new e-file system that will grow and serve taxpayers for years to come. Scheduled to start in 2004, it will address the current system's problems. For example, it will accept complex business returns, such as 1120s, eliminate software barriers and resolve standardization issues, such as reject codes and validations. Service in local taxpayer assistance centers, which was extremely poor in many places, improved in both quality and consistency. However, it will still take several more years to reach fully acceptable standards. Taxpayers can now schedule appointments in more than 400 locations for face-to- face meetings with IRS employees to resolve account or case problems. This helps make the well-received idea of ``Problem Solving Days'' a regular part of IRS everyday operations. While making these improvements, we are also requiring fewer personnel details from the compliance functions to filing season duty--an expensive and very unpopular practice. Within the limits of a complex and changing Tax Code, the IRS acted to reduce taxpayer burden. For example, we simplified forms, such as the Schedule D for reporting capital gains. We also rewrote and simplified procedures, such as those for distributions from qualified retirement plans. We removed 2.6 million small business taxpayers from the time-consuming reporting and record-keeping requirements of reconciling tax returns with balance sheets. We eliminated the need for most small businesses to use the more burdensome accrual method of accounting for tax purposes. We implemented a new and much more reliable way of measuring taxpayer burden. In the newly created Office of Taxpayer Burden Reduction, we also have an organization dedicated to continuously measuring and reducing burden. The IRS implemented 71 taxpayer rights provisions of RRA 98, including such major provisions as collection due process, expanded innocent spouse relief, third party notification and expanded opportunities for offers in compromise. The Taxpayer Advocate Service was established as an effective independent entity within the IRS. It assists taxpayers with hardship cases and makes recommendations to improve the way IRS works for them. Because of these efforts, the number of taxpayers with serious unresolved cases, such as those that generate a need for intervention by a congressional office, declined. More generally, our improved service helped to reduce the numbers of cases needing TAS intervention. In 2002, case receipts fell from 194,790 to 169,390 compared with the same 9-month period in 2001. Stakeholder relations In the past, relations with IRS stakeholders were often strained and adversarial. Through improved communications and frequent, substantive meetings, our relationship with Congress, oversight bodies and business groups--especially small businesses--greatly improved. Congressional hearings, once contentious, have been almost universally positive and constructive--although not without tough questioning. Much closer relationships were formed with organizations representing practitioners and small businesses. A consortium was forged with the software industry on the thorny issue of no-cost e-filing. One of our basic strategies is to develop the kind of stakeholder relationships that can improve the efficiency and effectiveness of our services. Over the past few years, we developed a method of engaging stakeholders as part of our decision-making process. We call the new approach, ``Engage and Then Decide'' as contrasted with ``Decide and Then Explain.'' Seriously engaging key stakeholders as a regular part of the decision-making process has shown that it improves the final product, shortens the time for decisions and implementation, and strengthens relationships. Although we successfully used this engagement approach, and have much experience with the hazards and costs of the opposite approach, IRS top management must continue to work hard to ensure that it is employed in all decision-making processes because it is so different from traditional practice in the federal government. Compliance As the Board is well aware, we do not have the resources to attack every case of non-compliance. Therefore, we must apply our resources to where non-compliance is greatest while still maintaining adequate coverage in other areas. We must also use carefully, but effectively, the enforcement tools available to us. After careful study, we identified some of the most serious and current compliance problem areas. These include: (1) promoters of tax schemes of all varieties, (2) the misuse of devices such as trusts and offshore accounts to hide or improperly reduce income, (3) abusive corporate tax shelters, (4) underreporting of tax by higher-income individuals, and (5) accumulation and the failure to file and pay large amounts of employment taxes by some employers. To address these problems, we revamped our compliance programs to refocus our resources and to use a full scope of tools and techniques. They range from educating the public, to systematically identifying promoters and participants, to reinvigorating enforcement actions such as summons enforcement, injunctions and criminal investigation of promoters. If we can eliminate confusion and errors before a return or form is ever filed, America's taxpayers will be spared countless numbers of notices and communications with the IRS. If we can warn taxpayers not to participate in ``too good to be true'' tax schemes, we can save taxpayers from penalties and more. Moreover, the agency will be in a better position to use its limited compliance resources on the most serious cases of non-compliance. To achieve these purposes, we created dedicated taxpayer education and pre-filing organizations in our operating divisions, e.g., TEC and SPEC in SB/SE and W&I respectively, and pre-filing technical staffs in LMSB and TEGE. We also created new pre-filing tools, such as pre-filing agreements and industry issue resolution published guidance. We greatly stepped up our output of traditional forms of published guidance, including revenue rulings and notices, by increasing their emphasis in Chief Counsel and forging an effective working relationship with Treasury's Office of Tax Policy. For example, this past year, both the TEC and SPEC organizations worked to raise public awareness about the slavery reparation schemes. Materials were distributed nationally and locally to African-American churches and religious coalitions, fraternities, sororities and associations, including the NAACP and the Urban League. As a result, the average weekly number of incoming slavery reparation claims declined from 1,538 in CY 2001 to 63 this year. Although these preventive measures hold great promise, we must still detect, correct and deter non-compliance. We must focus resources, improve efficiency and use our enforcement powers appropriately, all of which we are doing. As identified through our research and strategic planning, both SB/SE and LMSB are directing their examination resources at the most important cases and issues. Exam and collection reengineering are focused on improving the efficiency with which these cases are carried out. For example, SB/SE is tackling business tax cases, such as unpaid, in-trust taxes, including employment and withholding taxes, much earlier than in the past. Within two years, our new Filing and Payment compliance modernization program will begin to reduce from several years to six months or less the time required to resolve most collection cases. Other initiatives, first outlined in our Strategic Plan, are taking effect. Earlier this year, we began matching information reported on Schedule K-1 with income or losses reported on Form 1040 and other schedules. We also reinvigorated the use of long dormant enforcement tools that are needed to deal with serious cases of non-compliance, and especially, promoted tax schemes. For example, we are aggressively identifying promoters and schemes through summonses of records, including John Doe summonses on credit card accounts in offshore tax havens and vendor summonses to refine that data. Multiple approaches were taken to aggressively attack the use of abusive tax shelters. The LMSB organization initiated 43 contacts of promoters to uncover lists of taxpayers participating in their shelters. In addition, a tax shelter disclosure initiative was launched earlier this year. As of August 1, 2002, the IRS processed 1,664 disclosures from 1,206 taxpayers who came forward. These disclosures cover 2,264 tax returns and involved more than $30 billion in claimed losses or deductions. Moreover, we announced a new policy in June 2002 to request tax accrual work papers when we audit returns that claim a tax benefit from certain tax avoidance transactions that we identified as abusive. Civil and Criminal Lead Development Centers (LDC) were also established to identify cases of abusive tax promoters. For example, the Civil LDC works leads received from within the IRS, or from external sources, and conducts Internet searches looking for abusive tax promoters and promotional materials. Also, the Webster Report gave a detailed blueprint for making Criminal Investigation a more effective component of tax administration. The need to refocus CI's resources on tax cases was the centerpiece of this report. CI's top priority is now investigating promoters and participants in illegal tax schemes. We also established a closer working relationship between field counsel and the operating divisions on compliance work. This new emphasis on action against promoters has already shown results. The numbers of actions related to promoters went from ``none'' to a vigorous program. As of July 8, 2002, we had nine promoter injunctions granted, 11 promoter injunctions pending in District Court and three pending at the Department of Justice, 150 promoter exams and information requests underway, and 51 ongoing criminal investigations (numbers are for FY 01 through 02). Also, key to successfully executing our compliance program is better data. As I discussed, the IRS failed to detect new areas of non-compliance in part because of a reliance on increasingly obsolete data from the old Taxpayer Compliance Measurement Program. (TCMP was last conducted in 1988.) In addition, we designed and are now implementing a National Research Program that will obtain the essential information with far less burden on the taxpayer. New scoring models are being developed using 21st century techniques, with interim models already deployed. Obviously, our success in compliance also depends on a cadre of highly qualified trained individuals to perform tasks that require a high level of judgment. After a freeze of nearly six years, recruitment for professional occupations, such as revenue agent and revenue officer, restarted; training was completely revamped and improved; and employee engagement became part of balanced measures and everyday management. Internal management The IRS successfully made the transition to a modern customer-focused organization in which a management team has clear responsibility for meeting the needs of a specific set of taxpayers. The service needs and compliance issues of the 90 million taxpayers with wage and investment income are vastly different from those of large and mid-sized businesses, which in turn are different from those of small businesses and tax-exempt organizations. One team now works full time to understand and meet the needs of each set of taxpayers and has nationwide authority to execute its plans, eliminating the historically deep and counterproductive organizational separation between the ``field'' and the ``national office.'' Supporting these operating divisions are specialized functional units and shared services organizations to provide information technology and common support services throughout the organization. As part of the reorganization, the number of management layers was reduced and the role of executives and senior managers is being redirected towards substantive engagement in tax administration, rather than predominantly administrative duties. A new model of executive recruitment was successfully established, which includes a recruitment of a limited number of highly experienced top executives from private industry and other government agencies to complement our internally-developed executives. Many specialized programs, ranging from processing business returns to handling innocent spouse claims to answering tax law calls, are being consolidated into fewer locations with fewer management layers. This enables greater standardization and faster implementation of improvements. An entirely new system of balanced measures has been designed and implemented, aligning goals throughout the organization down to the territory and site level. The gains in service and the widespread redirection of compliance programs over the last two years reflect the benefits of a more customer-focused and accountable organization. The major benefits are still to come, in the form of continuous improvements in productivity and quality in every major program. The improvements in customer service and other programs can also be linked to increased employee engagement in our mission and goals, increased and improved training and heightened focus on employee concerns. Among the most important of these concerns was the fair and careful administration of Section 1203--the so called ten deadly sins--so that no employee was wrongly disciplined under this section. In addition, legislative proposals were formulated and are under consideration by Congress to alleviate employee anxiety over Section 1203. Because of these actions and focus, and according to a recent Gallup survey of IRS employees, the level of engagement within the Service increased from 49th to the 56th percentile of all public sector organizations tracked by the organization. The IRS is also the steward of massive taxpayer revenue and budget and financial resources, and we are expected to properly account for the government's money and property. To this end, internal accounting standards were raised to a higher level. For the past two fiscal years, we received unqualified GAO opinions on our financial statements for both the Revenue and Administrative accounts. This year, we have plans in place to close the books months earlier than in prior years and to address remaining material weaknesses over the next two years. As our FY 2003 and 2004 budget requests demonstrate, strategic planning, budgeting, resource allocation and performance goals were aligned. For the first time, we fully integrated development of our budget with the establishment of performance measures. Technology and modernization Critical to our success was better managing our massive technology and Business Systems Modernization program. From 15 separate information systems operations, we created one MITS organization that has the job of serving all of our operating units and managing our modernization program. As part of this major transition, standards were established and largely implemented for hardware and software. We consolidated mainframes from 12 centers to three and established one standard for desktop and laptop hardware and software. We implemented a nationwide e-mail and voice messaging systems, standard office automation software, and security certifications and standards. We deployed important interim applications systems, including Intelligent Call Routing, Integrated Case Processing and the Integrated Collection System. Business Systems Modernization laid the foundation for success of this massive program. Both the long-term vision and enterprise architecture were established and embedded as a living blueprint for all business and technology improvement programs. BSM began delivering projects with tangible and meaningful benefits to taxpayers, such as moving the first set of taxpayers to a modern, reliable database early next year. Over the next five years, all individual taxpayers will be moved to it, cutting times for refunds on e-filed returns to less than a week and allowing us to provide taxpayer and employees with up-to-the-minute accuracy on their accounts. Of paramount importance, we implemented the first project on our new security system, which provides one standard for ensuring the security of all future IRS data and systems. All major management processes, which are needed to manage this program on a continuing basis, were improved. Our goal is to obtain certification in the near future as only the second agency in the federal government to reach Level Two in the Software Engineering Institutions Capability Maturity Model. Steady Progress Can Continue Year after Year The aforementioned progress and achievements do not mean that the IRS solved all of its problems, or that there are no more opportunities to improve. Rather, it means that the IRS addressed the major impediments and obstacles that previously stood in the way of progress and has a clear committed plan to continually reach even higher levels of performance. There should be no doubt that the IRS can be raised to a level of quality and efficiency comparable to the best managed financial services organizations. Winning the Battle but Losing the War Despite significant improvements in the management of the IRS, the health of the federal tax administration system is on a serious long-term downtrend. This is systematically undermining one of the most important foundations of the American economy. The source of this problem is two conflicting long-term trends: one, ever increasing demands on the tax administration system due to rapid growth in the size and complexity of the economy; and two, a steady decline in IRS resources due to budget constraints. The cumulative effect of these conflicting trends over a 10-year period has been to create a huge gap between the number of taxpayers who are not filing, not reporting or not paying what they owe, and the IRS' capacity to require them to comply. As seen in the next chart, ``Trends in Indicators of IRS Workload and Resources,'' from 1992 to 2001, weighted average returns filed, a measure of overall IRS workload, increased by 16 percent because of the economy's growth. However, during this same period, FTEs dropped 16 percent from 115,205 in FY 1992 to 95,511 in FY 2001. Since more and more of the IRS' declining resources are required to perform essential operational functions--such as processing returns, issuing refunds and answering taxpayer mail--a disproportionate reduction occurred in Field Compliance personnel, falling 28 percent from 29,730 in FY 1992 to 21,421 in FY 2002. In assessing these trends, it is extremely important to recognize a critical fact: tax administration workload increases every year because of increased filings by taxpayers related to the long-term growth of the economy. These workload increases affect every facet of tax administration, from processing returns to answering correspondence to collecting delinquent returns to accounting for payments and refunds. In addition to this growth related to the economy, tax legislation often adds additional workload. Looking more closely at the most recent five years (see chart), we see that the number of income tax returns increased by 12 million, while 19 tax bills were passed that changed 292 tax code sections and required 515 changes to forms and instructions. On the average, IRS workload grows at a compounded rate of 1.8 percent per year. Therefore, just to handle this increased workload, the IRS would either have to add staff--which is what occurred fairly consistently for the 45-year period from 1950 through 1995--or would have to increase productivity by 1.8 percent per year just to stay even. Federal Tax System Has Been Growing and Changing Rapidly From 1997 Through 2002 Volume of activity has been growing rapidly Income Tax Returns: 12 Million Increase--9.4%. IRS Gross Collections: $527 Billion Increase--32.5%. IRS Refunds Issued: $121 Billion Increase--61.3%. Tax Code has been changing rapidly 19 Public Laws passed. 293 Tax Code provisions changed. 171 (58%) of provisions with concurrent or retroactive effective dates. 515 completed changes to forms and/or instructions. Restructuring and Reform Act added many taxpayer rights 71 taxpayer rights. 1,900 implementing actions. Hundreds of thousands of new transactions per year. Innocent spouse. Collection due process. Offers in compromise. Third party notification. Section 1203 allegations. Special events created additional activity and change Century date change required massive three year project. Advance rate reduction credit--126 million notices, 91 million taxpayers, $39 billion. Returns of political organizations (section 527)--new reporting to IRS. September 11th terrorist attack--victims relief, IRS security response, money laundering task forces. Anthrax threat--rapid response required prior to 2002 Filing Season. Globalization is increasing international tax activity U.S. controlled foreign corporations up 25%. Foreign controlled corporations up 31%. Resources have been shrinking IRS full-time equivalent personnel: -2,952. This is no different from a car company producing 1.8 percent more cars or a hospital servicing 1.8 percent more patients. But, rather than increasing staff, IRS staff decreased during this period, creating a major gap in IRS capacity to administer the tax system. In addition to growth in raw numbers, the tax revenue stream is now dominated by sources that provide greater opportunities for manipulation by those who wish to take advantage of the decline in IRS compliance resources. For example, returns for taxpayers with incomes exceeding $100,000 grew by 342 percent over 1991 levels. The enormous amounts of money that flow through ``passthrough'' entities-- such as partnerships, trusts and S-corporations--also adds to the complexity of tax administration and increases the opportunities for underreporting of income. In Tax Year 2000, these ``passthrough'' entities filed 4.78 million returns with gross revenue of $6 trillion and income to partners/ shareholders of more than $660 billion. The IRS Restructuring and Reform Act of 1998 added major new or expanded taxpayer rights programs, such as innocent spouse relief, third party notification and collection due process. The rights are very important to taxpayers but created very substantial additional resource demands on the IRS to process hundreds of thousands of new transactions and additional steps in existing audits and collection actions. Business globalization creates another administration complexity and more opportunities for reducing U.S.-reported income. From 1997-2002, U.S.-controlled foreign corporations and foreign-controlled corporations grew respectively by 25 and 31 percent. Looking at this imbalance, one fact emerges. The IRS is simply out-numbered when it comes to dealing with the compliance risks. As noted, IRS employment (FTEs), and in particular, Field Compliance FTE steadily declined. With the decline in personnel came a decline in the coverage of all types of returns (see chart). Even after we refocus on the most egregious non-compliance cases, we can only handle a small fraction of them.

Mr. LEVIN

Mr. LEVIN. Will the Senator yield on that? Actually, both the amendments have tax revenue implications. Stock options have been, in my judgment, excessively used in an inconsistent way, where a tax deduction is given to a stock option which is not shown as an expense on the books but is taken as an expense on the tax return. So there are very significant tax issues on the stock option issue. Also, on the auditors and executive issue, there are tax revenue implications because in both cases we have lost significant amounts. Because of violation of regulations by auditors and by executives, we have lost tax revenue.

Mr. LEVIN. Mr. President, let me ask the Senator from Pennsylvania about the third amendment to which I referred, which wasn't particularly controversial but yet precluded when we considered the Sarbanes bill, which has to do with administrative enforcement by the SEC of their regulations. The only area that the SEC cannot now administratively enforce with civil fines is the area of regulations involving corporate executives and auditors. When it comes to the stockbrokers, they are able to enforce administratively their regulations with the use of civil fines, of course subject to the appeals courts. But the area which has been so crucial and so sensitive--violations of regulations which have contributed so much to the suffering in the economy, violations by corporate executives and by auditors--in that area, the SEC does not have the authority to proceed administratively. They want it. I do not know of folks who oppose it. But unless we can act on it this year, there will be another delay. I ask the Senator from Pennsylvania whether or not his offer to go halfway would include the second of the three amendments relative to the SEC administrative enforcement.

Mr. LEVIN. I withdraw that--favors an extension of unemployment compensation, we may be able to sit down and work out something that the Senator from Pennsylvania does favor in the area of unemployment compensation extension and include that in his unanimous consent. But it seems to me it is absolutely reasonable to ask for a more certain way of getting an unemployment benefit extension passed through this Congress. It is critically important to hundreds of thousands of people who are suffering. It is immediate. It is urgent. I therefore renew my request that those three amendments be added to the unanimous consent request of the Senator.

Mr. LEVIN. Is my understanding correct that an unemployment benefit extension is part of a larger package which has many controversial issues in it? If so, then that bill may not go anywhere because of the other parts of it--not because of the unemployment extension, which purportedly everyone favors around here but then wants it to be used to produce other achievements and successes that are highly controversial. This is not a controversial amendment. This extension we are talking about is not a particularly controversial amendment. The Senator from Pennsylvania favors it. And yet, when I am asking whether he favors an extension----

Mr. LEVIN

Mr. LEVIN. That is correct, the regulations must prescribe measures to minimize, mitigate and monitor impacts of military training activities on migratory birds, so that the regulations are consistent with section 3(a) of the Migratory Bird Treaty Act. The two key changes made by the conferees to the House provisions: (1) require the Department of the Interior to exercise its regulatory authority over DOD activities impacting migratory birds and (2) require appropriate actions to mitigate the impact of DOD actions on migratory birds. The Senate conferees agreed to accept the provision only because of these changes.

Mr. LEVIN. That is correct, the Secretary of Defense must not only take measures to minimize and mitigate adverse impacts on migratory birds, they must also ensure that such measures are implemented.

Mr. LEVIN. I thank the Senator from Hawaii for his invaluable service to our committee as well as his statement. He has been the chairman of our Readiness Subcommittee and has done it with a wonderful spirit and great success. I thank him. We do not know what the subcommittee structures will look like next year, but hopefully he will continue to be a valuable part of our committee. I thank him for it.

Mr. LEVIN. Madam President, I can assure also the Senator from Nevada that even though he might not physically be on the Armed Services Committee, he was very much present every step of the way even when he wasn't present. Everyone is very much aware of his effort here, and of Senator Bob Smith's effort. Senator Hutchinson was extremely active, too. Senator Wellstone, of course, on this kind of veterans issue, was deeply involved.

Mr. LEVIN. I will also mention the role of Senator Cleland, Senator Carnahan, and others on this issue on the Armed Services Committee in a few moments. Again, I thank the Senator for that.

Mr. LEVIN. Madam President, how much time, may I ask the Chair, is remaining?

Mr. LEVIN. Are 10 minutes exhausted?

Mr. LEVIN. I thank the Chair. I yield myself 5 additional minutes. There are a number of other important initiatives in this bill we will enact into law shortly. Here are just a few of them. In the area of missile defense, the conference report, such as the Senate bill, authorizes the President to reallocate $814 million, should he choose, from missile defense expenditures which, at least to some of us, appears to be unjustified or duplicative in combating terrorism. And he can reallocate the $814 million to the effort to combat terrorism. Again, that is left to his discretion. But this bill does, this year, require that he identify whether or not he has made that choice. The bill also would ensure better oversight and management of missile defense programs in a number of ways. We are going to require programmatic information on ballistic missile defense programs with the budget justification materials that come to Congress. We are going to require the Joint Requirements Oversight Council, the so-called JROC, to perform a review of the cost, schedule, and performance criteria for ballistic missile defense programs so that the validity of those criteria in relationship to military requirements can be assessed. We are going to require the Department of Defense to establish a more disciplined process for the evolutionary acquisition and spiral development of major defense acquisition programs, including missile defense programs, by issuing guidance and instituting a process for the approval of acquisition plans. Second, in the area of nuclear weapons, we have taken a number of steps to ensure that the Department of Defense and the Department of Energy do not take any precipitous actions to develop new nuclear weapons. First, we rejected a House provision that would have repealed the current law prohibiting the research, development, and production of low-yield nuclear weapons. Second, we included a Senate provision that would require the Secretary of Energy to specifically identify any funds requested for new or modified nuclear weapons. If there is such a request, it cannot be buried in some other subject. It has to be identified as such in the budget material. Third, we prohibited the Secretary of Energy from spending any funds for the Robust Nuclear Earth Penetrator unless and until the Secretary of Defense submits a report setting forth the requirements for such a system and the employment policy behind such a system, as well as the potential for conventional alternatives to that Robust Nuclear Earth Penetrator. And we prohibited the use of any funds authorized in the bill for nuclear-tipped missile defense interceptors. We have a number of initiatives to ensure that the resources our taxpayers provide for national defense are spent wisely. Some of these initiatives include a major initiative based on the recommendations of the Defense Science Board and the Department of Defense Director of Operational Test and Evaluation to address budget shortfalls and organizational shortcomings in the Department's test and evaluation infrastructure that have led to inadequate testing of major weapons systems. We have advanced last year's initiative by the committee to improve the way in which the Department manages its $50 billion of services contracts, which we anticipate will save $600 million. We included a provision that will address the Department's inability to produce reliable financial information and to achieve $400 million of savings by deferring spending on new financial systems that would be inconsistent with a comprehensive financial management enterprise architecture that is currently being developed by the Department. We also have required, in this bill, that the Department establish new internal controls to address recurring problems with the abuse of purchase cards and travel cards by military and civilian personnel. In the area of efforts to combat terrorism and to lessen the danger posed by weapons of mass destruction, we have taken the following initiatives: A title of the bill sets aside $10 billion to fund ongoing operations in the war against international terrorism during fiscal year 2003. This is a very important provision in the Senate bill. It was very important to the administration that we not use those funds for some other purpose. We did not. This will be the subject of the later appropriation, but, nonetheless, we set aside that $10 billion fund for the ongoing operations in the war against terrorism. Next, we fully funded the Nunn-Lugar Cooperative Threat Reduction Program, including funding for the destruction of chemical weapons in Russia. And we fully funded the proliferation preventions at the Department of Energy. We took an important step to give the President greater flexibility to waive any of the conditions precedent to carrying out that CTR program or the Freedom Support Act programs for three fiscal years. So now the President can proceed with the Comprehensive Threat Reduction programs even if they do not meet technical criteria for spending that money if it is in the national interest that he do so. He has that waiver authority under this bill for 3 years. He has not had it before. This is an important addition to the fight against proliferation, particularly of chemical and biological weapons. In addition, and finally, we addressed a number of very difficult environmental issues. The conference report includes, first of all, some environmentally sound provisions that we adopted in the Senate. Two of these provisions would authorize the Department of Defense to enter into agreements with non-Federal entities to manage lands adjacent to military installations and to create buffer zones between training areas and the surrounding population. Those are two provisions which will help protect the environment. A third one requires the Department to strengthen its program for the acquisition of procurement items that are environmentally preferable or are made with recycled materials. We also, in the environmental area, succeeded in removing two ill- advised House provisions. One would have exempted some DOD activities from the Endangered Species Act. That is not within the jurisdiction of our committee. We were able to obtain the removal of that provision. And the other provision which we were able to remove would have provided special exemptions from environmental controls for the training range in Utah. We were able to modify a House provision which authorized the exemption of certain Department of Defense activities from the provisions of the Migratory Bird Treaty Act. That was a highly controversial action on the part of the House. We were able to obtain some important concessions in the conference relative to that provision, including an agreement to structure the provisions so that the Department of Interior will be required to exercise its regulatory powers over the Department of Defense activities impacting migratory birds and to require appropriate actions to mitigate the impact of Department of Defense actions on migratory birds. I hope and believe that the tradeoff that we made in dropping the endangered species provision and the Utah provision and getting a modification of the migratory bird provision was a sound one. I believe that we made some real progress, given the point that we were starting with in the Senate, which was facing all this language on the House side, which we had to either remove or to modify, as well as preserving our own provisions which were very supportive of environmental protection. I was very disappointed that we were unable to include a Senate provision that would repeal the statutory prohibitions on the use of Department of Defense facilities for legal abortions so that military women overseas could get a legal abortion, at their own expense, in a DOD medical facility overseas. This was a provision that, if we were able to maintain it, would have led to a veto of this bill. Again, we faced the House conferees who were determined that there would be no bill if this provision was in it. So now we continue for another year what I consider to be the absurdity of forcing women who are obtaining a legal abortion to come home. These are women in the military, committed to the service of their country, who are going to be required, for another year, until we face this issue again next year, to return home to obtain an abortion, which is legal, which they have chosen to obtain. I find this to be an unconscionable provision in our law. And we are going to continue to try, to the best of our ability, to change that provision. But this year we did not prevail, did not succeed, and we would have faced a veto of this bill. The Office of Management and Budget was very clear in a letter that they would recommend the veto of this bill if the Senate provision, which removed this impediment to legal abortions, at their own expense, by women who are serving this Nation--if that, in fact, prevailed, there would have been a veto. Madam President, our Armed Forces are ready to help keep the peace, to deter traditional and nontraditional threats to our security and our vital interests around the world. And they are prepared to win any conflict decisively. The success of our forces in Afghanistan is a tribute to the men and women of the Armed Forces and the investments in national defense that Congress and the Department of Defense and administrations over time have made for many years. The investments in previous years, indeed in previous decades, in equipment, in treating our personnel properly, in raising morale, in readiness-- these investments by prior Congresses, by this and prior administrations, have paid off. And future success on the battlefield will likewise depend upon the success of Congress and the Department to prepare and to train and to equip our military for tomorrow's missions. So as we stand on the brink of possible conflict in Iraq, the conference report builds on the considerable strengths of our military forces and their record of success by preserving a high quality of life for U.S. forces and their families, by sustaining readiness, and by our efforts to transform the Armed Forces to meet the threats and the challenges of tomorrow. Madam President, I yield the floor.

Mr. LEVIN. Mr. President, I thank my good friend from Virginia. I had no doubt he would be back. I am glad to see him back. We kept the chair warm for him. The gavel will be handed over with--I will not say with unmixed feelings because, obviously, there are mixed feelings, but I cannot think of anyone I would rather hand the gavel to, if it is not on our side of the aisle, than my dear friend from Virginia.

Mr. LEVIN. Let me again thank my dear friend from Virginia. I yield 5 minutes to the Senator from Hawaii. If the Senator needs additional time, it will now be available.

Mr. LEVIN. This conference report is named after Congressman Bob Stump, who will be retiring, in honor of all the work he has done, for the dedication of his entire congressional career supporting our men and women in uniform. The bill is deservedly named in his honor. Of course, Ike Skelton on the House side, the ranking member of the House Armed Services Committee, made an absolutely essential contribution as well. Last month, we passed H.J. Res. 114 that authorized the President to use the Armed Forces of the United States as he determines to be necessary and appropriate to defend the national security of the United States against the continuing threat posed by Iraq and to enforce all relevant U.N. Security Council resolutions in that regard. It has been widely reported that the United States has already started the prepositioning of forces and supplies in anticipation of possible military action against Iraq in accordance with this resolution. As we stand poised on the brink of possible military action, hopefully action that will not be necessary but nonetheless possible military action, this bill will provide the men and women in uniform with the tools they need and the pay and benefits they deserve. For instance, this bill approves a significant military pay raise, including an across-the-board pay raise at 4.1 percent, with an additional targeted pay raise for midcareer personnel that would result in pay raises ranging from 5.5 percent to 6.5 percent. The bill will authorize a new assignment incentive pay of up to $1,500 per month to encourage service members to volunteer for hard-to-fill assignments. It will authorize $10.4 billion for new construction of military facilities and housing, which is an increase of about $740 million above the requested level. The bill will add more than $900 million to the Navy shipbuilding account. It will authorize an increase of $42 million in funding for the U.S. Special Operations Command. It provides an increase--and we are talking about increases above the requested budget level from the administration, but when I make reference to increase, that is the reference I am making. Here is a reference of more than $100 million for defense against chemical and biological weapons, in addition to approving the budget request of $1.4 billion for such efforts. We approved $2 billion which was requested for force protection improvements to DOD installations around the world and in order to help address shortfalls in the Department's high-demand, low- density assets, including the EC-130 Commando Solo aircraft and the EA- 6B electronic warfare aircraft fleet. Depite all of these important provisions, we came very close to not having a conference report this year, because of the opposition of the White House to a single provision that was included in both the authorization bills passed by both the Senate and the House of Representatives. This provision would permit retired members of the Armed Forces who have a service-connected disability to receive both military retired pay earned through years of military service and disability compensation from the Department of Veterans' Affairs based on their disability. Currently, military retirees who receive VA disability pay have their military retired pay offset by the amount of their VA disability pay. Both the House and Senate versions of our bill included provisions phasing in the payment of both military retired pay and VA disability pay to qualifying military retirees, although the Senate provision was more generous and more expensive than the House version. In June, the Office of Management and Budget issued a Statement of Administration Position indicating their opposition to authorizing concurrent receipt of military retired pay and VA disability pay. As a result of this veto threat, the House conferees then decided that they would not accept even their own concurrent receipt provision. The House conferees took this position despite the fact that the House voted 391 to 0 to instruct the conferees to agree to the Senate position on current receipt in conference. When it became clear that the President's veto threat would make it impossible for us to achieve a conference report containing either the Senate concurrent receipt provision or the House concurrent receipt provision, we had the choice of giving up on the defense bill for the year, or finding an alternative that would be acceptable to the White House and the Republican leadership of the House of Representatives. With the yeoman services and the extraordinary efforts of Senator Warner, we finally agreed to include a provision that would authorize an enhanced special compensation for certain military retirees with 20 years of service equal to the amount of retired pay forfeited because of the receipt of veterans' disability compensation. That is just a part of what we tried to accomplish. I commend Senator Reid of Nevada and others who have fought so hard for this provision. There are many members of our committee and many Members of this Chamber who have really tried for years to address this concurrent receipt problem. We moved the ball forward perhaps 20 yards this year. It is, as I think Senator Warner has described, a beachhead. We are glad we were able to do this much. But it is disappointing that the veto threat that was hurled at us by the Office of Management and Budget made it impossible for us to do even more, despite all of our efforts. Again, I thank Senator Warner. Without some provision on this subject, frankly, this bill would not have been brought back to the floor. We had to make some progress on this issue before we could, in good conscience, bring a bill back to the floor. But I emphasize it is just some progress. It is not anywhere near what the Senate did. It is not even close to what the House did. But it is clearly better than not making any progress at all. The special compensation that is provided for in the bill would be available to retirees who incur a disability attributable to an injury for which a Purple Heart was awarded--that is one group--regardless of the percent of disability, and the other group is a service-connected disability rated at 60 percent or higher that was incurred as a result of any of four circumstances: Either the result of armed conflict, while engaged in hazardous service, in the performance of duty under conditions simulating war, or through an instrumentality of war. Any of those four circumstances, if the disability is rated at 60 percent or higher, will result in the special compensation being made available to our veterans. These disabilities are sometimes called ``combat-related'' disabilities for short. But that is really a misnomer. It is actually misleading to call certain of them ``combat-related disabilities'' because the categories are far broader than simply combat-related. I see Senator Reid on the floor. Again, I extend my thanks to him. Without his driving concern on this issue of concurrent receipt, we would not have been able to even advance the bill to the 20-yard line at which perhaps we are right now. It is progress--but minimal progress. Again, it was the only way we could obtain this bill. We would not have gotten to this point without the tenacity of Senator Harry Reid. There are others who joined with him over the years. But it is that persistence which has gotten us to this point.

Mr. LEVIN. I yield myself 10 minutes.

Mr. LEVIN. Mr. President, I ask unanimous consent that the Senator from Alabama have whatever time he may need.

Mr. LEVIN. Mr. President, how much time do I have?

Mr. LEVIN. Mr. President, first of all, I thank my friend from Alabama for his very fine presentation as well as for his kind words about me. I enjoy working on the committee with the Senator from Alabama. He has always been willing to listen and try to work out issues. There are all kinds of issues that come up--thank God, rarely on a partisan basis--complicated issues that have to be worked out. He has worked not only on the Seapower Subcommittee but on the full committee to address those issues. I am grateful for that participation. Senator Thurmond was on the floor a few minutes ago. It reminded me that this will be, of course, his last term. No Senator serving today can appreciate what this body will be like when Strom Thurmond leaves this year. He has served longer in this body than any other Senator in history. His 48 years in the Senate span the terms of 10 Presidents of the United States. He keeps pictures of all 10 of those Presidents on his wall in the office. When I joined the Armed Services Committee in 1979, Senator Thurmond by then was on the committee already 20 years. His love for and dedication to the U.S. military goes back even further, though, to his commission as an Army Reserve second lieutenant of infantry in 1924 at the age of 21. He served with distinction in both the European and Pacific Theaters in the Second World War, receiving numerous decorations that include the Legion of Merit, the Bronze Star medal with ``V'' device, the Army Commendation Medal, the Belgian Order of the Crown, and the French Croix de Guerre. He landed in a glider on Normandy with the 82nd Airborne Division on D-Day and went on to win 5 battle stars. In 1959--the year that he joined the Senate Armed Services Committee--Senator Thurmond was promoted to major general in the U.S. Army Reserve. During Senator Thurmond's tenure on the Armed Services Committee, our Armed Forces have faced challenge after challenge in Western Europe, Vietnam, the Middle East, the Caribbean basin, the Persian Gulf, the Balkans, and Afghanistan. Through it all, Senator Thurmond has persevered in his unwavering support for our men and women in uniform. His steadfast commitment to our national defense has been a rock upon which they could all rely and has helped ensure that our military has always been ready to answer the call whenever and wherever needed. Senator Thurmond served as chairman of the Senate Armed Services Committee in the 104th and 105th Congresses. I had the honor and pleasure to serve as his ranking member in 1997 and 1998. I know from personal experience how seriously Senator Thurmond treated his duties as chairman and how hard he worked to be fair and even-handed with every member of the committee. I am sure that I speak for all of our colleagues in saying just how much we appreciate not only the commitment that Senator Thurmond brought to his duties as chairman, but also his lifelong dedication to the defense of our Nation and to the welfare of the men and women in uniform. He came to the floor a few minutes ago just to check things out-- basically to satisfy himself that this Defense authorization bill was moving along. So he made the effort to come to the floor just to see for himself that things were OK. I left the floor momentarily to just go out and thank him for coming over and to wish him well on behalf of the entire committee and the Senate, as we will not be seeing too much more of him because he is going to be moving on hopefully to other adventures.

Mr. LEVIN. Mr. President, if I could yield myself 5 additional minutes--if I am not taking the time of colleagues who are waiting to speak--to ask unanimous consent to add a word or two.

Mr. LEVIN

Mr. LEVIN. I move to lay that motion on the table. The motion to lay on the table was agreed to. Unanimous Consent Request

Mr. LEVIN

Mr. LEVIN. Mr. President, I ask unanimous consent that the Senate recess subject to the call of the Chair.

Mr. LEVIN

Mr. LEVIN. Mr. President, I ask unanimous consent that the order for the quorum call be rescinded.

Mr. LEVIN. I suggest the absence of a quorum.