As commissioner of the Internal Revenue Service from 1997 to 2002, Charles O. Rossotti had a thankless task: modernize a bloated, inefficient organization that employs 100,000 people and collects $2 trillion annually. Now Rossotti, 64, may have an even tougher job: advise President Bush on how to overhaul the tax code. A senior adviser with The Carlyle Group, Rossotti will publish his book Many Unhappy Returns (Harvard Business School Press) next month.
You're on the President's Advisory Panel on Federal Tax Reform. Does that mean you're not cynical about overhauling the tax code?
I'm not cynical in the sense that it was done at least once in my lifetime — by Reagan in 1986. But it really depends on the President committing a great deal of political capital. And President Bush says he is willing to do that.
In your book, you say that overhauling family provisions, savings accounts, and the alternative minimum tax would go a long way. Is that what you will recommend?
It is certainly possible to construct a proposal along those lines. But I think the President now intends to go beyond that. It is not an impossible intellectual job to figure out how to raise the same amount of revenue with a simpler tax code.
As the first IRS commissioner with a business background, what were you least prepared for?
Dealing with outside constituents. When I got there, stakeholder relationships were at rock-bottom, and there are a lot of them. I testified [before Congress] 46 times during my five years there; we had 850 public audit reports. It's like everybody is your customer and your boss.
You spent 28 years in the technology business, yet you concluded that fixing the systems wouldn't fix the IRS. Why?
Technology is something that reflects the way an organization does business. At the IRS — how it processes returns, how it manages audits — all is embedded in the old systems. But it was evident that you would not be able to modernize the systems if you did not modernize the structure.
You reorganized the IRS into four divisions, with an eye toward increasing customer service. How did this work with corporations?
Most taxpayers are compliant. And if you have 80 percent or more that are compliant, you deal with them more on a transactional level. Then, by redirecting our enforcement resources to those taxpayers who were truly noncompliant, we became more effective.
That took a lot of focus away from enforcement, didn't it?
That's not true. There were some declines in enforcement statistics that went back 10 years, because of reduced resources. But when I was at the IRS, for example, we started the whole tax-shelter program. The point was not just to show that you are doing statistics across the board, but to go after the serious problems.
In first tackling the tax-shelter issue, what was your impression of its scope?
That was part of the problem — we didn't know. So we took actions to not only get more-effective enforcement, but more- effective information. [For example,] we instituted promoter audits, which [included] promoter summonses, and that was key. By the time I left, we had a much better picture of the magnitude of the problem — and it was big.
Is it less of a problem now?
A lot of progress has been made. The IRS has continued to be aggressive. Plus, there was also a recession, and Sarbanes-Oxley has generated more conservatism. At the same time, though, there has been a mixed record on some tax cases because the law is so ambiguous, and the economic substance doctrine, which is some of the basis for going after these shelters, has never been incorporated into statute.
Are you saying that the IRS cannot handle this problem on its own?
The risk is still out there. Clearly, it has been reduced by what the IRS has done and by the climate, but it will creep back unless there is more-effective legislation.
What advice do you have for CFOs working with the IRS?
CFOs are entitled to minimize their taxes within the law, and as long as they do that, they can work expeditiously with the IRS. But they have to recognize that the IRS is more effective now, and continues to find people who stray too far — people who are not just minimizing taxes within the law but minimizing taxes period.
Interview by Lori Calabro