DEPARTMENT OF THE TREASURY

    The Department of the Treasury collects taxes, taking in 98 percent of the federal government’s $2 trillion in revenue. Treasury also helps the President make economic policy by regulating financial institutions and managing the government’s finances. Its law enforcement bureaus protect citizens from illegal drugs, financial crime, violence and terrorism, and provide protection for government officials and foreign dignitaries.

Homeland Security and Law Enforcement

    Treasury is redoubling its efforts to fight terrorism while continuing to implement critical programs to guard against other threats, such as violent crime and illegal drug use.

Financial Crimes and Terrorist Fundraising

    Treasury leads the nation’s war against the financing of global terrorism. Treasury’s Financial Crimes Enforcement Network (FinCEN) and Office of Foreign Assets Control (OFAC) identify the numerous methods used by terrorist networks to finance their operations and move quickly to freeze those assets and provide information to law enforcement agencies.

    Armed with suspicious activity reports and financial transaction records maintained by financial institutions and required by the Bank Secrecy Act, FinCEN assists law enforcement efforts to prevent and detect money laundering and other financial crimes. These data, along with other commercial and law enforcement information, allow FinCEN to link business associates, bank accounts, property records, and other information to form a more complete financial trail. FinCEN also works with foreign financial intelligence units to extend its reach beyond U.S. borders. The budget provides $52 million for FinCEN’s operations.

    The complex task of blocking transactions and freezing assets held by terrorist and other criminal organizations and individuals is carried out by OFAC. OFAC uses information from FinCEN and the law enforcement and intelligence communities to identify terrorist groups that threaten our national security and to assess their methods of transferring funds. This information is then used to deny these groups access to international financial systems, impair their fundraising capabilities, and expose their financial backers. OFAC also assists the nation’s allies in similar actions. Since September 11, 2001, OFAC has frozen $34 million in terrorist assets (Taliban, Hamas, and al Qaeda) and assisted our nation’s allies in freezing $33.9 million. Prior to September 11^th, OFAC successfully froze $236 million in Taliban assets. The budget provides $22 million for OFAC’s operations.

Border Control

    The U.S. Customs Service is one of the primary enforcement agencies protecting the nation’s borders, deploying an extensive air, land, and marine interdiction force supported by an investigative division. It enforces trade and tariff laws (2001 tariff collections were $20 billion) and interdicts illegal drugs and contraband. On a typical day, the Customs Service processes 1.3 million passengers, 51,000 trucks/containers, 590 vessels, 2,600 aircraft, and 355,000 vehicles. The budget provides $3.2 billion for Customs operations.

    Protecting our borders from illegal entry of narcotics is a core mission of the Customs Service. Drug trafficking often raises the funds terrorists need to operate. American demand for contraband unwittingly aids their efforts. However, it is difficult to assess the effect of Customs’ drug interdiction actions on the war against drugs, since Customs uses the amount of illegal drugs seized as a performance measure.

    In 2001, 191,000 pounds of cocaine, 3,600 pounds of heroin, and 1.5 million pounds of marijuana were seized by Customs. However, seizures do not tell how much contraband gets through the nation’s borders. Customs is working with the Office of National Drug Control Policy to craft better measures to evaluate effectiveness.

    Customs’ mission includes both facilitating trade and ensuring compliance with import and export laws. Customs’ efforts have been largely successful. In 2001, an estimated 91 percent of imports were compliant with trade and tariff requirements. To cope with trade activity that it expects to double by 2005, Customs is modernizing its automation systems and using risk management to target high-risk cargo.

    Customs' current automation systems are outdated, often break down, and cannot dependably handle an increasing volume of trade. The replacement system, the Automated Commercial Environment (ACE), will enable Customs to convert to a paperless process for importers and an account-based system. Customs is working with partners in the trade industry and government to ensure that ACE is completed promptly and effectively. The budget supports this modernization effort with $313 million for the third year of ACE investments.

    The Customs Service is responsible for collecting several user fees for services provided by Customs and other agencies that aid the traveling and importing community. The Administration proposes increasing two of these Customs fees: the Air/Sea passenger fee and the Cruise Vessel Passenger fee. The costs incurred by Customs have increased due to inflation, and the fees should reflect this reality. The Air/Sea passenger fee has been in place since 1986, but has not been increased. The budget proposes to increase this fee from $5 to $11 per passenger. The Cruise Vessel passenger fee would increase from $1.75 to $2 per passenger. The increased receipts from these fees will enhance Customs’ Homeland Security efforts through payment of inspector overtime and related expenses.

United States Secret Service

    Our country and its leaders live in a world of increasing domestic and global threats. The Secret Service is incorporating new technology to accomplish more effectively its unique mission of protecting the President and other public officials. In response to increasing homeland security threats, the Secret Service now protects more people, and its protection workload has increased significantly. To support the Secret Service’s expanding responsibilities during the war on terrorism, the budget proposes additional funding for the travel and overtime of current Secret Service agents and officers. Funding proposed in 2003 also supports over 400 new agents and officers being hired in 2002.

Secret Service agents must remain vigilant at all times to protect our leaders.

    While much of what the public knows about the Secret Service relates to protecting the President, the Secret Service also plays a major role in protecting our nation’s currency and financial integrity. Over the last several years, the percentage of Secret Service financial crimes cases adopted for federal prosecution has remained relatively stable at around 50 percent. The looming threat of cyber-terrorists and increasingly sophisticated counterfeiters makes it more critical that the Secret Service make more efficient use of its current resources to reduce the vulnerability of our nation’s currency and financial networks.

    The budget provides $1 billion for the Secret Service.

Alcohol, Tobacco, and Firearms

    The Bureau of Alcohol, Tobacco, and Firearms (ATF) enforces the federal laws and collects revenue relating to alcohol, tobacco products, firearms and explosives (2001 revenues were $14 billion).

    ATF stands in the front ranks of the nation’s battle against terrorism. Explosives are a preferred terrorist tool, and ATF is in the unique position of not only regulating commerce in explosives, but also of having the requisite expertise and authority to investigate explosives-related crimes. Through these programs, ATF investigators are positioned to thwart terrorist activity at every level of the execution process—from the theft or illegal purchase of explosives to the interdiction and neutralization of those explosives for terrorist purposes at public events. The budget provides $913 million to support ATF.

    The budget reflects the Administration’s strong commitment to use coordinated community efforts to prevent youth and gang violence. This is epitomized by ATF’s Youth Crime Gun Interdiction Initiative (YCGII), which provides ATF agents and technical support to work with local law enforcement to develop firearms trafficking cases against those supplying guns to youths and to initiate comprehensive tracing of firearms. In 2001, for example, the number of YCGII defendants increased to 1,342 from a total of 535 in 2000. The initiative currently includes 50 participating sites located in 32 states and the District of Columbia. The budget proposes to expand YCGII and includes $96 million, an increase of $11 million above 2002 for ATF, to add 10 additional YCGII sites.

Tax Administration

    The Internal Revenue Service (IRS) serves as the principal revenue collector for the government, collecting $1.9 trillion in 2001. The budget provides $10.4 billion for IRS operations.

IRS workers process millions of tax returns by hand each year.

    IRS runs the tax filing process despite being saddled with outdated and often ineffective technology and an increasingly complex tax code. In 2001, it processed 220 million tax returns and over 1 billion information returns (e.g., W-2 wage reports from employers), and it delivered 97 million refunds. IRS has successfully responded to recent challenges by updating its systems to avoid the Year 2000 problem and collaborating with the Treasury’s Financial Management Service to deliver 86 million tax rebate checks in 2001.

    IRS has trouble providing minimally acceptable customer service and ensuring that all taxpayers pay what they owe under the law. Due to outmoded technology and management practices, IRS’s $775 million telephone service program is unable to answer millions of phone calls each year. IRS has worked hard in recent years to improve this situation. The percentage of calls answered was only 49 percent in 1997. Its goal is to improve to 76 percent in 2003 (see accompanying chart). However, more progress is needed—what business would survive for long if it failed to pick up the phone one time in four? In addition, even when IRS answers, it often provides incomplete or incorrect answers. In 2001, only 75 percent of tax law answers fully met IRS’s strict quality standards.

    These technology and process shortcomings also have reduced the effectiveness of IRS’s compliance programs. Audit numbers have fallen significantly in recent years, but there have been no improvements in IRS’s ability to target limited audit resources on the least compliant taxpayers.

    These problems burden honest taxpayers in two important ways. First, taxpayers often do not receive the help they need to accurately file their returns. Second, honest taxpayers bear a heavier financial burden because noncomplying taxpayers are not paying what they owe. The Administration is committed to solving the problems at IRS and ensuring that taxes are collected fairly, efficiently, and with minimum hassle for honest taxpayers.

    IRS is in the midst of a major reform effort required by the 1998 Restructuring and Reform Act. IRS has reorganized around operating divisions serving specific customer groups, and is in the process of modernizing its technology and management practices. The budget supports these efforts by providing $450 million for technology investments and $102 million for new customer service and compliance staffing. Modernization will yield substantial improvements in IRS’s efficiency and effectiveness because IRS staff will have up-to-date, accurate information about taxpayer accounts. Too often, IRS data is incomplete and out-of-date. In addition, IRS is now able to target services and employee training to specific types of taxpayers. For example, some groups of IRS employees now specialize in earned income tax credit issues while others specialize in helping small businesses. Until the reorganization, employees had to try to understand all areas of the highly complex tax system.

    IRS is also renewing its efforts to measure taxpayer compliance. This will allow it to focus more effectively its enforcement resources on noncompliant taxpayers, and reduce the burden of unnecessary audits on honest taxpayers. Finally, IRS will employ private sector contractors where appropriate and where they can more efficiently provide services currently provided by federal employees.

Fiscal Services

    The Financial Management Service (FMS) serves as the central financial management office of the government, disbursing nearly one billion payments each year ($1.2 trillion) and collecting $2 trillion in receipts (mostly IRS tax collections).

    In 1996, FMS became the government’s central debt collector. Agencies are required to transfer non-tax debt over 180 days delinquent to Treasury for centralized collection. Treasury employs two tools to collect this debt: payment offset and cross servicing. Offset involves matching federal payments (e.g., tax refunds, vendor payments) against debt owed to the government. Cross servicing involves issuing demand letters, referring debt to private collection agencies, and a variety of other methods. Treasury is working to ensure that agencies refer their debt that is eligible for cross servicing. Currently, they refer only 74 percent.

    Treasury manages the $5.9 trillion federal debt, including $3.4 trillion held by the public and $2.5 trillion in Trust Fund balances (e.g., Social Security). Each year, the Bureau of Public Debt sells approximately 43 million savings bonds and pays $360 billion in interest. Treasury also produces 23 billion coins and 7 billion currency notes per year.

Community Development Financial Institutions

    The Community Development Financial Institutions (CDFI) Fund seeks to expand the availability of credit, investment capital, and financial services in distressed urban and rural communities through assistance to CDFIs. Since the Fund’s creation, it has made more than $539 million in awards to community development organizations and financial institutions. However, the impact of these investments is difficult to measure. The key outcomes that the Fund monitors, such as businesses or housing units financed, do not consider that CDFIs and traditional financial institutions may have made some or all of these investments in the absence of government support. In response to this concern, the Fund's management plans to build a data repository on the CDFI industry. The Fund can then use this information to measure the impact of its awards on low-income communities and better target future assistance.

Status Report on Select Programs

    Treasury has a diverse set of programs, including manufacturing (producing coins and currency), financial management (managing public funds and borrowing), tax collection, and various law enforcement functions. The table that follows evaluates the current performance of several of these programs.

Strengthening Management

    While Treasury faces challenges to improve management and implement the President’s Management Agenda, the Department is committed to making improvements in these initiatives in 2002 and 2003.