[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]

PROBLEMS AT THE INTERNAL REVENUE SERVICE: CLOSING THE TAX GAP AND
PREVENTING IDENTITY THEFT

=======================================================================

HEARING

before the

SUBCOMMITTEE ON GOVERNMENT ORGANIZATION,
EFFICIENCY AND FINANCIAL MANAGEMENT

of the

COMMITTEE ON OVERSIGHT
AND GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED TWELFTH CONGRESS

SECOND SESSION

__________

APRIL 19, 2012

__________

Serial No. 112-142

__________

Printed for the use of the Committee on Oversight and Government Reform

Available via the World Wide Web: http://www.fdsys.gov
http://www.house.gov/reform

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COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

DARRELL E. ISSA, California, Chairman
DAN BURTON, Indiana ELIJAH E. CUMMINGS, Maryland,
JOHN L. MICA, Florida Ranking Minority Member
TODD RUSSELL PLATTS, Pennsylvania EDOLPHUS TOWNS, New York
MICHAEL R. TURNER, Ohio CAROLYN B. MALONEY, New York
PATRICK T. McHENRY, North Carolina ELEANOR HOLMES NORTON, District of
JIM JORDAN, Ohio Columbia
JASON CHAFFETZ, Utah DENNIS J. KUCINICH, Ohio
CONNIE MACK, Florida JOHN F. TIERNEY, Massachusetts
TIM WALBERG, Michigan WM. LACY CLAY, Missouri
JAMES LANKFORD, Oklahoma STEPHEN F. LYNCH, Massachusetts
JUSTIN AMASH, Michigan JIM COOPER, Tennessee
ANN MARIE BUERKLE, New York GERALD E. CONNOLLY, Virginia
PAUL A. GOSAR, Arizona MIKE QUIGLEY, Illinois
RAUL R. LABRADOR, Idaho DANNY K. DAVIS, Illinois
PATRICK MEEHAN, Pennsylvania BRUCE L. BRALEY, Iowa
SCOTT DesJARLAIS, Tennessee PETER WELCH, Vermont
JOE WALSH, Illinois JOHN A. YARMUTH, Kentucky
TREY GOWDY, South Carolina CHRISTOPHER S. MURPHY, Connecticut
DENNIS A. ROSS, Florida JACKIE SPEIER, California
FRANK C. GUINTA, New Hampshire
BLAKE FARENTHOLD, Texas
MIKE KELLY, Pennsylvania

Lawrence J. Brady, Staff Director
John D. Cuaderes, Deputy Staff Director
Robert Borden, General Counsel
Linda A. Good, Chief Clerk
David Rapallo, Minority Staff Director

Subcommittee on Government Organization, Efficiency and Financial
Management

TODD RUSSELL PLATTS, Pennsylvania, Chairman
CONNIE MACK, Florida, Vice Chairman EDOLPHUS TOWNS, New York, Ranking
JAMES LANKFORD, Oklahoma Minority Member
JUSTIN AMASH, Michigan JIM COOPER, Tennessee
PAUL A. GOSAR, Arizona GERALD E. CONNOLLY, Virginia
FRANK C. GUINTA, New Hampshire ELEANOR HOLMES NORTON, District of
BLAKE FARENTHOLD, Texas Columbia

C O N T E N T S

----------
Page
Hearing held on April 19, 2012................................... 1

WITNESSES

Mr. Steven T. Miller, Deputy Commissioner for Services and
Enforcement, Internal Revenue Service
Oral Statement........................................... 4
Written Statement........................................ 7
Ms. Nina E. Olson, National Taxpayer Advocate, Internal Revenue
Service
Oral Statement........................................... 18
Written statement........................................ 20
The Honorable J. Russell George, Treasury Inspector General for
Tax Administration
Oral Statement........................................... 42
Written Statement........................................ 44
Mr. James R. White, Director, Stategic Issues, U.S. Government
Accountability Office
Oral Statement........................................... 69
Written Statement........................................ 71

APPENDIX

The Honorable Edolphus Towns, Ranking Member, A Member of
Congress from the State of New York: Opening Statement......... 110
Appendix I: 2006 Tax Gap estimate data and methodology........... 112
The Honorable Gerald E. Connolly, A Member of Congress from the
State of Virginia: Written Statement........................... 113

PROBLEMS AT THE INTERNAL REVENUE SERVICE: CLOSING THE TAX GAP AND
PREVENTING IDENTITY THEFT

----------

THURSDAY, APRIL 19, 2012,

House of Representatives,
Subcommittee on Government Organization, Efficiency
and Financial Management,
Committee on Oversight and Government Reform,
Washington, D.C.
The subcommittee met, pursuant to notice, at 10:007 a.m. in
room 2154, Rayburn House Office Building, the Honorable Todd
Russell Platts [chairman of the subcommittee], presiding.
Present: Representatives Platts, Towns and Connolly.
Staff Present: Michael R. Bebeau, Majority Assistant Clerk;
Adam P. Fromm, Majority Director of Member Services and
Committee Operations; Mark D. Marin, Majority Director of
Oversight; Tegan Millspaw, Majority Research Analyst; Staff
Member; Jaron Bourke, Minority Director of Administration;
Beverly Britton Fraser, Minority Counsel; Devon Hill, Minority
Staff Assistant; Jennifer Hoffman, Minority Press Secretary.
Mr. Platts. Today's hearing of the Subcommittee on
Government Organization, Efficiency and Financial Management
will come to order.
I certainly thank everyone for being here today, both
witnesses and guests, and my Ranking Member, Mr. Towns from New
York.
Our hearing today focuses on two key issues at the Internal
Revenue Service. First, our hearing will address the tax gap
between what people owe in Federal taxes and what the IRS
ultimately collects. Second, the hearing will review the
increasing problem of identity theft related to tax fraud.
Federal taxes make up about 96 percent of the Government's
total revenues each year. Because of this, it is very important
that the IRS is able to effectively collect taxes and enforce
Federal policy. The majority of Americans pay their taxes
voluntarily and on time. But every year, there is a gap between
the amount of Federal taxes owed and the amount the IRS
collects.
Earlier this year, the IRS released its most recent
analysis on the tax gap using data from the 2006 tax year. That
data shows a $450 billion gap between taxes owed and taxes
voluntarily paid. IRS recovered approximately $65 billion of
this amount, making the net tax gap $385 billion.
According to the National Taxpayer Advocate, the average
household must pay approximately $3,400 or more for the
Government to raise the same revenue it would have collected if
everyone paid their taxes in full.
There are many causes of the tax gap, including intentional
under-reporting, failing to file taxes or math errors on those
taxes that are filed. Because of this, we need a multi-faceted
approach to achieve an effective and appropriate response, and
to close the tax gap. Using third party information to verify
tax returns could increase voluntary compliance. The Treasury
Department has recommended increasing penalties for people who
purposely do not comply with Federal tax law, especially
egregiously, and maybe more so, repeatedly failing to comply.
Simplifying the Federal tax code could also help by making
it easier to file taxes and reducing the opportunity to commit
willful tax evasion. We will hear more from our witness today
about solutions on how to close the tax gap and better serve
all of our taxpayers.
This hearing will also address identity theft-related tax
fraud. Identity theft affects thousands, as we are learning
more and more, hundreds of thousands of taxpayers each year,
and has a significant impact on its victims. Identity thieves
often steal personal information from taxpayers, including
names, social security numbers and addresses. With this
information, the thieves can file fraudulent tax returns with
the IRS and receive the refunds that are owed to the legitimate
taxpayer. Victims may not even know they have had their
identity and tax returns stolen until they go to file their own
returns and the IRS notifies them that somebody has already
fraudulently filed on their behalf.
It can often take months for IRS to resolve these cases and
issue refunds to the legitimate taxpayer, the victim of the
crime. Identity theft-related tax fraud is a serious and
rapidly growing problem that has been the focus of two prior
hearings of this Subcommittee. While significant work is being
done to address this problem, and I certainly commend the IRS
for their efforts, we must do more to protect taxpayers from
criminals who steal their identities and their refunds and do
harm to not just that individual victim, but also to America
and the hard-earned tax dollars of lawful citizens.
Just this week, authorities reported that a man working for
a health care non-profit stole the identities of more than 50
brain injured patients to steal funds from the American people
through fraudulent returns. The American people deserve a
government that protects the taxes they pay and fairly and
equitably enforces the law. We need solutions to ensure that
honest taxpayers are not unduly burdened because others do not
pay their share. We must also work to reduce identity theft and
prevent it before payments are issued to criminals.
Today we are joined by four experts regarding these issues,
who have extensive knowledge about the problems that exist
within the Federal tax systems. I look froward to the testimony
of our witnesses and to continuing to work with each of them
and all our partners, including here within the Subcommittee,
to better prevent tax fraud and fairly administer the tax code.
With that, I yield to the previous chairman of the full
Committee and the Ranking Member of the Subcommittee, and
previous chairman of the Subcommittee, my good friend and
colleague from New York, Mr. Towns, for the purpose of an
opening statement.
Mr. Towns. Thank you very much, Mr. Chairman. Let me thank
the witnesses as well. I think this is a very timely hearing.
This is the third hearing in a series held by this
Committee to examine how the IRS handles the growing problem of
identity theft and tax fraud. As of March 3rd, 2012, the IRS
had already identified over 440,000 tax returns with $2.7
billion claims in fraudulent refunds. Fortunately, IRS
screening prevented 97 percent of those fraudulent claims from
being paid.
Today the IRS is doing a better job of protecting the
taxpayer and the Treasury from criminals than ever before, and
we salute you for that. But more is required of us to stay
ahead of the criminals and to help the victims. One of the
first priorities we must address is the quality of assistance
given to taxpayers victimized by employment or tax refund
fraud. The Inspector General does not paint a pretty picture of
how the IRS will be able to handle this problem going forward.
It seems as if taxpayers will have fewer walk-in help
centers, with shorter business hours, and longer hold time on
the phone with IRS agents. Budget cuts are the primary reason,
but I hope we can find alternate solutions to these issues.
Today we will also focus on the $450 billion tax gap. This
tax gap equals nearly 20 percent of our forecasted deficit for
this fiscal year. We simply cannot afford to look the other way
and just not do anything.
Part of the tax gap is a result of tax cheats who simply
refuse to comply with the law, which increases burden on the
rest of us. But a portion is due to taxpayers' confusion and
unintentional errors as well. I am sure that we can all agree
that the tax code is extremely complex. This complexity makes
it hard for taxpayers who honestly want to pay their taxes to
figure out what they actually owe. And as a result, they can
accidentally overpay or underpay.
We must do more to understand the sources of the tax gap
and compliance burdens, so we can make progress in uncovering
new, creative solutions. We cannot close the tax gap by
enforcement against the average American who is doing their
best to comply with the tax laws. We all have to share the
burden and do more. And let us work to reform our tax code in a
way that will help us collect more of the taxes that are owed
but not paid. And let us continue our work to make the tax code
more fair and simple. In order to do that, we must work
together.
I thank our witnesses today, Inspector General Miller, Mr.
White, Ms. Olson, for your appearance here today, Mr. George, I
thank all of you for being here. I look forward to the
testimony with great anticipation. We need to make certain that
people are protected, and that is our obligation and
responsibility to do it. I think that working together, we can
do a lot better than what we are doing. This is not a Committee
here to blame you and you blame us, this is a Committee to come
up with some solutions.
Thank you so much, Mr. Chairman.
Mr. Platts. I thank the gentleman and would echo your final
comment there as well, that we are about working with you and
all to solve problems, not to pay gotcha. And all the more, we
appreciate our witnesses being here with us today.
We will keep the record open for seven days for any
additional statements or extraneous materials to be submitted
for the record.
We are now glad to move to our witnesses and we are honored
to have four very dedicated public servants who day in and day
out seek to serve the American people with great distinction
and honor, and who bring great expertise to the benefit of the
Subcommittee today. So we thank each of you for being here.
We are honored to have Mr. Steven Miller, Deputy
Commissioner of Service and Enforcement at the Internal Revenue
Service, Ms. Nina Olson, National Taxpayer Advocate, the
Honorable J. Russell George, Treasury Inspector General for Tax
Administration, and Mr. James White, Director of Strategic
Issues at the United States Government Accountability Office.
Again, we thank each of you for being here. We have had a
chance to review your written testimony and appreciate your
submitting that ahead of time. That allows me to go through,
and I am famous for my blue marker and making notes in things I
want to try to get to in the time we will have. But we do
appreciate having that in advance and welcome your testimony
today. If we can try to stay to about the five-minute window,
and hopefully that will allow us again to go through all of
your opening statements before running to the Floor for votes
and then coming back for questions.
Commissioner Miller, if you would like to begin. I
apologize, if I could ask all four of you to stand. Pursuant to
our Committee rules, I need to swear you in. If you could stand
and raise your right hand.
Do you solemnly swear or affirm that the testimony you are
about to give this Committee will be the truth, the whole truth
and nothing but the truth?
[Witnesses respond in the affirmative.]
Mr. Platts. Thank you, you may be seated. Let the record
reflect that all four witnesses affirmed the oath.
We will now begin with Commissioner Miller. You are
recognized.

STATEMENTS OF WITNESSES

STATEMENT OF STEVEN T. MILLER

Mr. Miller. Chairman Platts, Ranking Member Towns, my name
is Steve Miller, as you have mentioned, Deputy Commissioner of
the Internal Revenue Service. I appreciate the opportunity to
testify on the tax gap today and also to update the
Subcommittee on our identity theft work this filing season.
The tax gap is the difference between the amount of tax
owed by taxpayers for a given year and the amount that is paid
voluntarily and on time. The amount includes the complete
spectrum of behavior from confusion to fraud. The tax gap
analysis itself is best seen as a directional tool to provide
insights into areas where non-compliance exists and the means
by which we can impact compliance.
As better explained in my written testimony, our work shows
that compliance is most prevalent where there is withholding
and/or third party reporting.
The IRS recently received an updated tax gap study covering
the tax year 2006, which shows that the Nation's compliance
rate for that year is a little over 83 percent. This is
essentially unchanged from the last review covering tax year
2001. The report also showed that the net tax gap in dollars
for 2006 was $385 billion.
The tax gap is comprised of three components: under-
reporting, non-filing and under-payment, of which under-
reporting is by far the largest. As indicated, the largest
parts of the under-reporting category are where there is little
withholding or third party reporting.
In our view, any discussion on how to reduce the tax gap
must consider three guiding principles. First, both
unintentional taxpayer error and intentional taxpayer evasion
must be addressed. Thus, both enforcement and service are
necessary.
Second, different sources of non-compliance require
different approaches. And third, any major attempt to address
the tax gap by legislation, regulation or through increased
enforcement must be considered within a context that fully
recognizes taxpayer burden and taxpayer rights.
In keeping with these principles, our strategy involves not
only increasing enforcement activities but also educating
taxpayers about their tax obligations, improving customer
service in order to make it easier for individuals and
businesses to get the help they need to meet their filing
requirements, reducing opportunities for tax evasion, expanding
compliance research and improving information technology.
With respect to enforcement, the IRS is making significant
headway in increasing tax compliance. Over the last decade, tax
collections have gone up significantly and audit rates have
risen. But some of these gains are deteriorating as our budget
atrophies. Thus, we would ask for your support for our 2013
budget. We believe the best way to impact the tax gap is
through a combination of responsible discussions on legislative
change and responsible investments in the IRS.
Turning now to identity theft. In November I testified
before the Subcommittee and described our ongoing work. In my
written testimony today I provided an update on IRS actions.
What you will see is that we have implemented the many
initiatives we outlined in November.
As before, our approach is two-pronged. First, we need to
stop false refunds before they get out. Second, we need to help
those who have been victimized. We are in fact stopping much
more refund fraud generally and identity theft specifically. We
have put various new identity theft screening filters in place
to improve our ability to spot false returns before they are
processed and before a refund is issued. The numbers are in my
testimony and I am obviously more than willing to discuss any
questions that you have in a particular area.
On our work with victims, we have trained 35,000 of our
employees to recognize and be sensitive to identity theft. We
have also expanded a program for identity protection personal
identification numbers, or IP PINS. For the 2012 filing season,
we issued IP PINS to over 250,000 i.d. theft victims, which
will allow unfettered filing for 2012 for those individuals. We
continue to increase staffing to assist identity theft victims
and we are revising and streamlining our process to determine
who the real taxpayer is when duplicate filings occur.
Again, I will say that we are not done, but we have made
real progress in the area.
Mr. Chairman, this concludes my oral testimony. I would be
more than happy to answer any questions.
[Prepared statement of Mr. Miller follows:]

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Mr. Platts. Thank you, Commissioner Miller.
Ms. Olson?

STATEMENT OF NINA OLSON

Ms. Olson. Chairman Platts, Ranking Member Towns and
members of the Subcommittee, thank you for inviting me to
testify today about the subjects of the tax gap and tax-related
identity theft. Both of these issues present challenges to tax
administration.
Regarding the tax gap, the IRS recently released an updated
net tax gap estimate of $385 billion in 2006. And the size of
this estimate has understandably attracted considerable
attention.
There are many causes of non-compliance, including
difficulty understanding and complying with the law, inability
to pay due to financial hardships, and deliberate
understatements of tax. I believe the complexity of the tax
code is responsible for a considerable portion of non-
compliance, and I have repeatedly recommended in my reports to
Congress that you all simplify the code.
While you are working on that, and I am ever the optimist
in that regard, that there are other steps that can be taken.
First, the IRS should be given the resources to substantially
improve its taxpayer services. The percentage of calls the IRS
answers, known as the level of service, has been declining in
recent years. For the year to date, about one out of every
three calls seeking to reach an IRS representative hasn't
gotten through. When taxpayers have managed to get through,
taxpayers have waited an average of about 14 minutes on hold.
The IRS is also behind in timely processing taxpayer
correspondence, with the percentage of letters classified as
over age at nearly half of all correspondence by the end of
fiscal year 2011. There is no doubt in my mind but that some
taxpayers give up in frustration or in anger when the find
nobody is home and simply don't file or pay. This state of
affairs may cause the tax gap to increase by converting
formerly compliant taxpayers into non-compliant ones, simply
because the IRS doesn't timely pick up the phone or look at its
mail.
Second, while the IRS will never be the Government's most
popular agency, I believe its funding levels should be
substantially increased. Overall, the IRS is an extraordinary
investment. On a budget of $12.1 billion, it collected $2.4
trillion in tax revenue last year, bringing in about $200 for
every dollar invested. Yet the Congressional budget rules
generally require that the IRS be funded like all other
spending programs, with no direct credit given for the funds
the IRS brings in. That makes little sense.
In my view, simplifying the tax code, improving taxpayer
service and giving the IRS sufficient funds to expand its
enforcement programs in the proper way would go a long way
toward maximizing the tax compliance.
Regarding tax-related identity theft, the IRS has made
significant progress in this area in recent years, including
adopting many of my office's recommendations. Notwithstanding
these efforts, it is clear that combating identity theft
continues to pose significant challenges for the IRS.
Three points deserve particular emphasis. First, the IRS
should continue to work with the Social Security Administration
to restrict public access to the Death Master File. Second, I
am aware that some State and local law enforcement agencies
would like access to taxpayer return information to help combat
identity theft. I have significant concerns about loosening
taxpayer privacy protections and believe this is an area where
we need to tread carefully.
But as I describe in my written statement, the IRS is
developing a procedure that would enable taxpayers to consent
to the release of their returns in appropriate circumstances.
In my view, giving taxpayers a choice strikes the appropriate
balance.
Lastly, I note that even as the IRS is being urged to do
much more to combat identity theft, taxpayers are clamoring for
the IRS to process returns and issue refunds more quickly.
While there is still room for the IRS to make improvements in
both areas, the two goals are fundamentally at odds. If our
overriding goal is to process tax returns and deliver tax
refunds as quickly as possible for the vast majority of persons
who file legitimate tax returns, it is inevitable that some
identity thieves will get away with refund fraud and some
honest taxpayers will be harmed.
On the other hand, if we decide to place a greater value on
protecting taxpayers against identity theft and the Treasury
against fraudulent refund claims, the IRS will need more time
to review returns and the roughly 110 million taxpayers who
receive refunds will have to wait longer to get them, perhaps
considerably longer.
Alternatively, the IRS will require a considerably larger
staff to enable it to review questionable returns more quickly.
There is no way around these tradeoffs.
I appreciate the opportunity to testify today and would be
happy to answer your questions.
[Prepared statement of Ms. Olson follows:]

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Mr. Platts. Thank you, Ms. Olson.
Inspector General George?

STATEMENT OF J. RUSSELL GEORGE

Mr. George. Thank you, Chairman Platts, Ranking Member
Towns, Mr. Connolly. Thank you for the opportunity to testify
on the tax gap and the efforts by the Internal Revenue Service
to enforce compliance with the tax code.
My comments will also address the growing risk of identity
theft and tax fraud. In January 2012, the IRS released updated
estimates of the tax gap for tax year 2006, which indicated
that the Nation's 83 percent voluntary compliance rate was
essentially unchanged from prior estimates. The IRS estimated
that the gross tax gap increased from $345 billion to $450
billion, as was indicated by Mr. Miller.
My written statement includes a table that shows the
comparison between the prior and current tax gap estimates.
As also stated earlier, the IRS reports that the gross tax
gap is comprised of three primary components, again, $376
billion in under-reporting of tax liabilities, $28 billion due
to non-filing of tax returns, and $46 billion in under-payment
of tax liabilities. The IRS reported that the growth in the tax
gap from tax year 2001 to 2006 was concentrated in the under-
reporting and under-payment forms of non-compliance, which
jointly account for more than nine out of ten tax gap dollars.
The IRS also reported that the tax gap is caused by both
unintentional taxpayer errors, whether due to tax law
complexity, confusion or carelessness, and willful tax evasion,
or cheating.
The IRS needs to overcome institutional impediments to more
effectively address the tax gap. These impediments refer to the
established policies, practices, technologies or business
requirements that add unintended costs or are no longer
optimal, given today's society. We at TIGTA believe the current
institutional impediments the IRS faces can point the way to
improved opportunities, namely, address incomplete compliance
research, re-assess insufficient compliance strategies,
determine how best to fix incomplete document matching
programs, and find a way to handle the insufficient enforcement
resources.
Every year, more than one half of all taxpayers pay someone
else to prepare their Federal tax returns. Third party
reporting and transparency is crucial to high compliance among
individual taxpayers. Business reporting associated with the
buying and selling of securities was an area that needed third
party reporting based on previous studies that showed low
levels of compliance. The new merchant card reporting
requirements were established in 2011. They provide third party
reporting data on business receipts for the first time, making
it much easier for the IRS to identify businesses that are
either under-reporting receipts or not reporting at all.
Globalization of the U.S. economy has been a major trend
for many years. The scope and complexity of the international
financial system creates significant enforcement challenges for
the IRS. The IRS continues to be challenged by a lack of
information reporting on many cross-border transactions. The
mis-classification of millions of employees as independent
contractors is a nationwide problem that continues to grow and
contribute to the $72 billion under-reporting employment tax
gap.
TIGTA identified more than 74,000 taxpayers who may have
avoided paying approximately $26 million in Social Security and
Medicare taxes in 2008.
TIGTA has continued to assess the IRS's efforts to identify
and prevent identity theft. Unscrupulous individuals are
stealing identities at an alarming rate for use of submitting
tax returns with false income and withholding documents. For
processing year 2011, the IRS reported that it had detected
940,000 tax returns involving identity theft and prevented the
issuance of fraudulent tax refunds totaling $6.5 billion. The
amount of fraudulent tax refunds the IRS detects and prevents
is substantial. The IRS does not know how many identity thieves
are filing fictitious tax returns and how much revenue is being
lost, resulting from the issuance of fraudulent tax refunds.
We have fond that the issuance of fraudulent tax refund
based on false income documents goes beyond the amount detected
and prevented by the IRS. An upcoming report will provide
further data.
Access to third party income and withholding information at
the time tax returns are processed is the single most important
tool the IRS could have to identify and prevent tax fraud.
Chairman Platts, Ranking Member Towns, thank you for the
opportunity to share my views.
[Prepared statement of Mr. George follows:]

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Mr. Platts. Thank you, Inspector General George.
Mr. White?

STATEMENT OF JAMES R. WHITE

Mr. White. Chairman Platts, Ranking Member Towns and
members of the Subcommittee, I am pleased to be here to discuss
the tax gap, i.d. theft-based fraud and how to reduce them.
The gross tax summarized on pages 4 and 5 of my statement,
as you have heard, was recently estimated by the IRS to be $450
billion for tax year 2006. This is the amount the taxpayers
should have paid but did not pay on time. Note that this is the
amount unpaid for just one year.
Of this, the IRS estimates, as you have heard, that it will
ultimately collect $65 billion from its enforcement actions and
from late payments by taxpayers, leaving a net gap of $385
billion. One piece of context is that the tax gap has persisted
at about the same level as a percent of total tax liability for
decades, this despite a myriad of Congressional and IRS efforts
to reduce it.
Key for thinking about how to reduce the tax gap is
understanding its nature. The tax gap is spread across various
types of taxes, taxpayers and taxpayer behavior. Most of the
tax gap is for the individual income tax. But the corporate
income tax and employment tax are also significant
contributors. Much of the tax gap is due to misreporting of
business income, even for the individual income tax. But non-
business income also contributes.
Even for a certain category of taxpayer, there is a variety
of misreporting behavior. For example, in a recent report, we
found that sole proprietors misreport both their receipts and
their expenses, and some of each is unintentional, while some
is intentional.
At one level, as you have heard, the cause of the tax gap
is easy to understand. Income subject to withholding and/or
information reporting to IRS by third parties, such as
employers or banks, has low misreporting. Only about 1 percent
of wage income withholding is misreported. On the other hand,
56 percent of rent, royalty and sole proprietor income, with
little or no information reporting, is misreported.
There are opportunities to reduce the tax gap. But because
of the variety of non-compliance, multiple approaches will be
needed. No single approach is likely to fully and cost
effectively address the tax gap.
Opportunities include more third party information
reporting. Third party reports to IRS about a taxpayer's income
allow IRS to easily verify through computer matching and
without an audit that the taxpayer's return is accurate. As I
already noted, compliance is high when income is reported by
third parties, such as employers or banks. The challenge with
increasing third party reporting is identifying new third
parties. They must have knowledge of taxpayers' income or
expenses and have tolerable reporting costs.
Also, IRS must be able to enforce the reporting
requirements. So, for example, a small number of reporting
entities, like banks, can be an advantage. The problem is that
most third parties that meet these requirements are already
required to report.
Another opportunity is improving service to taxpayers.
Service has declined. For example, wait time to get through to
an IRS telephone assister has been around 16 minutes this year.
The model of human assisters responding to taxpayers may not be
sustainable given its high cost. Different strategies for
answering taxpayer questions, such as on the IRS website, or
through paid tax preparers or tax preparation software, will be
needed.
Another opportunity is additional resources. With tight
budgets, if IRS's efforts to innovate don't keep up with
workload growth, then the risk is that enforcement, and with it
voluntary compliance, will go down. That could snowball. If
taxpayers lose faith in the fairness of the system, they could
become less willing to comply themselves.
Another opportunity is increasing pre-refund compliance
checks. Doing more computerized checks before refunds are
issued could reduce improper payments and might also limit
refund fraud based on i.d. theft. Leveraging external
resources. Such resources include paid preparers, tax software
companies and whistleblowers. We have made recommendations to
help IRS leverage all three to reduce the tax gap.
Modernized information systems. Such systems can route
phone calls to help taxpayers get the answers they need and
support IRS's enforcement staff with timely access to data.
Simplifying the tax code, which has also been discussed.
Simplification can make it easier for taxpayers who want to
comply do so successfully, and make it harder for those
intentionally trying to evade their tax obligations to hide
from IRS.
In closing, I want to highlight the value of research on
the nature and causes of the tax gap. Such research is costly,
but without it, Congress and IRS are left struggling to reduce
the tax gap without a fact-based understanding of its causes.
Mr. Chairman, this concludes my statement. I would be happy
to answer any questions.
[Prepared statement of Mr. White follows:]

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Mr. Platts. Thank you, Mr. White, and again, I thank all
four of you.
Perfect timing, clock is at zero on the Floor, so I am
going to run over. Mr. Towns, Mr. Connolly and I will return
very quickly, as soon as the vote is concluded. And then we
will get into questions with you. I appreciate your testimony.
This hearing stands in recess until the call of the Chair.
[Recess.]
Mr. Platts. The hearing will come to order.
I appreciate everyone's patience while we concluded Floor
votes. We will move right into questions, and I will yield
myself five minutes to begin.
Certainly the numbers are pretty staggering when you think
of a tax cap of almost $400 billion, even after netting some
recovery of taxes that were not properly paid. When we talk
about taxpayer identity theft, fraud, the fact that we have
hundreds of thousands of Americans being victimized and again,
billions of dollars at risk. So the issues that we are trying
to address today are real issues that are about real money for
the American people, and about trying to protect American
people as well, that they are not paying $3,400 of somebody
else's tax bill, or they are not being victimized by criminals.
Starting with the area of the tax gap, Commissioner Miller,
I guess kind of a structural question or framework, the data we
are looking at, it is 2006 data, we are in 2012. Prior to that
it was 2001, five years back before we had similar data. One,
is there a plan that, this year you are going to update it
again, five years, now six years, to update the data about the
tax gap? And what is the difficulty in having it be more
current? Having six-year old data certainly is helpful, but it
wouldn't be as helpful as if it was one-year old or two-year
old data.
Mr. Miller. I think that is right, Mr. Chairman. The
process has been to do examinations. So for example, if we were
to do 2011 year, those returns are now coming in. It would be a
while before we do our statistical sample. And using 1040s as
an example, we are doing 14,000 research audits per year to try
to update this. So it is a continuing path we are on.
It will be a while, it will be a few years, before we
complete those audits, before we are able to roll up the
information with respect to those audits. Two thousand and six
is a long time ago, but I am not sure how much better we would
be able to get. I think we will have an easier time going
forward than we had in 2001. We did a better job in 2006, we
had better data, better estimating models. And we will get more
current. But I don't think we will ever be, the 2011 gap is, as
we said, in 2012.
Mr. Platts. And I certainly don't expect that in 2012 we
could look and say, in 2011, this was what the tax cap was. But
it is, the fact that it is six-year old data that we are still
using, especially with technology and I guess what concerns me
a little bit is that we are still doing audits and haven't
really completed and compiled the information from audits from
2006, well, 2007, 2008, so four year back, five years back that
we still have that.
Because I think that is one of the issues that I think the
Inspector General raises in the ability to use the data we
have. And whether it deals with identity theft, whether it
deals with the tax gap is that, I understand that it costs
money. But if we do it well and then act on what we learn it
will save money in the long run by helping us to close that tax
gap in this case.
So that is a concern that jumps out, is that we are relying
on six-year old data and the need to make that more current so
we can be more effective in how we can respond to whatever that
data tells us.
Ms. Olson. Mr. Chairman, if I may add, jump in here. I do
think that the IRS is doing a rolling research study. So they
are going to be doing three years rolled up at a time. So you
would be able, even though you may be a bit behind, when 2006
is done, you would do 2007, 2008 and 2009 rolled together. And
then you just move one year on as you go along.
And to the point about how long it really does take, if you
have even 2006, some people are filing in October 15th and you
may want those people in your random sample, because they may
be some complex returns. So you are waiting for those to go
through the processing. And then taxpayers have rights. So even
those 14,000 audits that we have, they may want to go to
appeals before they go to tax court. If they go to tax court,
it may take a year and a half before they are out of tax court.
And we have to wait until we are final on the whole issue. We
don't know what is going to be in that 14,000 case sample,
whether there are going to be some tax court ones or not.
So it is not an easy thing. But I do think that the IRS's
proposal about the rolling sample really will work, that will
give us, even though we will have some years of lag, it will
give us good data going forward.
Mr. Platts. I certainly appreciate that some of these cases
are going to be very complex, especially those that go into tax
court. But again, we don't need the data from all 14,000 to be
able to assess what is working or not. If we lost 4,000, we had
10,000 to look at. But it is three-year old data instead of
six-year old data, that certainly would be more beneficial.
Inspector George?
Mr. George. I was just going to add, sir, that there are
certain segments of the tax gap that the IRS just really hasn't
adequately addressed, too. For example, the international tax
gap. Our office estimates that is in the hundreds of billions
of dollars, again, per year, that is due to the American
taxpayer, the Treasury, and isn't being paid on time, if at
all.
So again, it is an enormous task, as was pointed out, that
does need additional resources. But it is something that needs
to be addressed.
Mr. Platts. Commissioner Miller, do you want to comment on
that? I know that is an area where we have, in my
understanding, the most limited information regarding what
efforts are. Again, I realize this is an issue of resources. I
am not an appropriator, although I want to look at how we can
try to make the case, and the Taxpayer Advocate well documents
the return on investment if we invest in taxpayer services and
what a dramatic return on investment that is compared to
enforcement and how we can help to promote what your needs are.
But when we hear hundreds of billions of dollars that maybe
we are not getting in that one category, how can we do better?
Mr. Miller. On the international tax gap, I am not familiar
with the Inspector General's numbers, to be honest with you. So
I am not going to speak directly on that.
On international, I can say two things. Really, you are not
looking at a single number, you are looking at different
components. You are looking at what is cross-border activity of
large corporations, and that is one set of documentation that
we would look at. And we are doing operational audits there,
and we do look at that. That is our window into that world.
The other world is offshore accounts, which as you may be
aware, we have done a remarkably good job in. We have 33,000
people that have come into us in the last two years, three
years, with over $4.4 billion of declared money coming into the
Treasury as we go out and attack bank secrecy jurisdictions.
Do we know the total number? Do we know the full pie in
either case? Probably not. But we are on our way doing good
things in both areas.
Mr. Platts. I don't want to suggest that we are not moving
in the right direction, but I think to the American people that
are paying their taxes and doing their best to pay, whether it
is $5,000 or $3,000 or $10,000, and then when they see numbers
that are, if it was even tens of billions, but it is hundreds
of billions that is not being paid, that we need to do a better
job, out of fairness to those who are complying with the law
and paying their fair share.
One other question before yielding to the Ranking Member.
One of the issues, Ms. Olson, you talked about, is in the
current system, we use an electronic system of collection,
especially for the withholding of income taxes and employment
taxes. And we have a mandatory 94 percent requirement for IRS
in using electronic collection. Can you expand on that. The way
I understood it is, your suggestion and recommendation is, if
we apply that same approach to estimated tax payments, it would
not just help the taxpayer be more compliant but ultimately
generate more collection if we took that approach?
Ms. Olson. With estimated, we were very successful once the
IRS was given sort of a little nudge to say, achieve this goal
in employment taxes, in getting electronic payments, which
saves the whole government money, obviously, because you are
not processing checks. But it also makes it easier for the
taxpayer, after they get used to it.
But we should apply that to estimated taxes. I think that
in some areas, it is very hard for taxpayers to save up money
to pay estimated taxes quarterly. So if they can pay it monthly
like they pay other bills, and most, they pay lots of bills
through their bank accounts, just setting up payments. And we
don't have a good interface. So I think that if we could get
some kind of a nudge from Congress that sets a goal, the IRS
has always responded well with that and developed a strategy.
Then we would get the different parts of Treasury together to
make it a really good user interface for the taxpayer.
Mr. Platts. Is it kind of the same argument on making it
clear that voluntary withholding agreements would achieve, in
essence, that same goal?
Ms. Olson. Yes. And that proposal actually came from some
trade associations that met with me that said, for example, the
hair salons, they do have an employee like the receptionist. So
they are already in the payroll tax system. And the people who
cut hair really are independent contractors, they are renting
booths from them. But they get in trouble, and then they move
on, because they don't pay their estimated taxes.
So the hair salon was saying, if we could enter into an
agreement where these are not our employees, because they are
renting and everything, but we are already in the system, we
will withhold a percentage and keep them in compliance, we will
have these people stay with us and we won't have so much
upheaval. And when we worked with counsel, they have said that
we don't have the legal authority to enter into those
agreements the way that particular code section is written.
Mr. Platts. The IRS general counsel?
Ms. Olson. Yes, the IRS general counsel.
Mr. Platts. They need additional statutory authority?
Ms. Olson. They need additional statutory authority. And so
this really was a user-friendly, taxpayer-friendly proposal.
Mr. Platts. Something that we are glad to look at as a
committee and try to see if we can work to allow that. I think
it sounds like a win-win for the person who has those
independent contractors working in their facility. They don't
get the turnover, the independent contractor is more----
Ms. Olson. And it is not mandatory. It is totally
voluntary.
Mr. Platts. Right, and ultimately the taxes that are owed
are better collected.
Ms. Olson. Right.
Mr. Platts. I yield to the Ranking Member, Mr. Towns, for
the purpose of questions.
Mr. Towns. Thank you very much, Mr. Chairman.
Let me begin with you, General George. Your testimony
indicates that the IRS has institutional impediments that
prevents them from effectively addressing the tax gap. And of
course, you mention specifically that even when the IRS
examines a tax return that needs improvement, often there is no
change made to the return. And this increases the burden on
compliant taxpayers.
Could you just elaborate on this just a little bit more?
Mr. George. Certainly, Mr. Towns.
The IRS, the bottom line is the IRS has incomplete
compliance research. Specifically, the IRS does not know all
the sources of non-compliance, so the IRS's resources cannot be
targeted appropriately. The research which is needed is on the
relationship between the taxpayers' burden and compliance and
on the impact on customer service on voluntary compliance.
These are various studies that they may have engaged in in
the past, but we don't believe they have done so adequately.
Additional research is also needed to measure how establishing
benchmarks and other measures to assess the effectiveness of
some of the efforts that IRS has engaged in in the past,
whether something is working or isn't working.
So for example, we know for a fact that when they reach out
to a taxpayer by letter, the initial contact normally results
in a relatively high response from the taxpayer. That is, the
taxpayer will either acknowledges that he or she owes the tax
and pay it. Yet if the IRS delays reaching out to the taxpayer
by, I don't have the exact numbers yet, whether the number of
weeks or number of days, we know that the response rate
declines.
So in a recent report, we encouraged the IRS to increase
the frequency in which they communicate with taxpayers. The
IRS, to my understanding, has declined to do so, again, citing
resources. But that is just one example.
Incomplete compliance strategies, the IRS's systems that
identify returns for examination need improvement to identify
potentially non-compliant returns. The collection activity that
extends for years has a lower rate of collection for delinquent
liabilities. The IRS has something called the queue, which is a
data base in which tax returns for people who owe taxes which
aren't handled by IRS revenue officers or any other method
within the IRS literally are put in line. And that line
contains millions of tax returns.
Keep in mind, there is a statute of limitations on when
someone has to comply with their tax obligations. So millions
of dollars are potentially, and in reality, being lost because
the IRS has not simply addressed these returns, had someone
assigned to them to look at them.
But one of the most disconcerting aspects of all of this is
that the IRS has an incomplete document matching program. So
the IRS does not have reliable third party data for taxpayers,
for all taxpayer sectors, at least, and for all types of tax
returns. Most notably, income earned by the self-employed.
I carry this card with me and I cite this at every
opportunity that I can, because this is information that comes
from the IRS that is just very compelling. You heard earlier
today, there is a very high correlation between tax compliance
and third party reporting. The IRS estimates individuals whose
wages are subject to withholding report 99 percent of their
wages for tax purposes. Self-employed individuals who operate
non-farm businesses are estimated to report only 68 percent of
their income for tax purposes.
But the most striking number is self-employed individuals
who operate businesses on a cash basis are estimated to report
only 19 percent of their income. So there is no question that
if the IRS, and again, it would have to have authority from
Congress in some of these instances, were able to mandate third
party reporting, the levels of compliance would go up,
astronomically, I would argue.
Mr. Towns. Right. Mr. Chairman, I just need a minute to
give Mr. Miller an opportunity to respond to some of that. Also
Mr. White, very quickly.
Mr. Miller. Thank you, Mr. Towns. There is a whole batch
that was wrapped into General George's comment. A few things I
would like to clarify. One, our national research program that
comes up with the tax gap is also used on an annual basis to
improve our filters. So it has a benefit to us to do these
things to improve our selection process. Because we have a
living process that filters back in the results, so that we can
target better our non-compliance. There is no doubt that we can
improve, and we are improving on an annual basis.
Other things I will mention, the queue in the collection
area exists, no question about that. Cases go to the queue when
they are lower priority than other cases. Other cases can be a
high priority, one, because we think they are better dollar
cases, or two, because we don't have the resources to reach
them at this point.
We are doing a better job of selecting cases for
collection. It is not first in first out, I do want to make
that very clear. It is based on the attributes of the given
case.
Mr. Towns. Let me ask you this very quickly. I appreciate
your generosity. Has anybody ever estimated or looked at the
fact that you indicate you have 35,000 employees who detect
identity theft. What would happen if you had 55,000 or 45,000?
Would the resources increase? I am not sure that not having
more staff is an economical way to go.
Mr. Miller. Mr. Towns, I would agree with you. I think that
Nina has said, and others at this table have said, that we
believe the IRS is a pretty good investment, in that we are in
essence the people who bring in $2.4 trillion and in the 90
percent, upper 90 percentile of every dollar that comes into
the government on an annual basis.
So I think that as we pull people, and we have pulled many
people to work on identity theft, as we had to and as we
should, that does impact other programs.
Ms. Olson. Sir, if I might comment on some of the earlier
points from the Inspector General. The IRS does have a project
right now that is looking into the impact of service on
compliance. My office is working very closely with the Office
of Research and with the Wage and Investment Division. We are
doing a lot of surveys of taxpayers. It will be very
interesting what we find out. And this is a constantly
developing area.
I have been very critical of the IRS's collection strategy
and their use of automation and their failure to just pick up
the phone and talk to taxpayers. Because I think you can really
get resolution. But the notice stream, where we send out
notices to taxpayers early in the system, or in the process is
very effective. But what that leaves us with are those
taxpayers who aren't going to willingly come forward. And they
need maybe a little nudging. And it is how you do the nudging.
The main point I want to talk about is the comment about
our incomplete document matching. We have been given some
significant tools with the merchant card reporting. But you all
just repealed a provision that would have given the IRS more
information about the purchases that businesses made. But the
upshot, and we really criticized the provision, because it
imposed so much burden on the businesses who are going to have
to do the reporting. I think that is the tradeoff.
And in the self-employed area, the way to get information
reporting on the self-employed is to get the householder to
report on the person who is cutting their grass every week. And
you are not going to get that done. That is just not something
we can impose on those taxpayers.
So that is why you have to do vigorous audits and look at
areas of risk and then think of some alternative strategies. I
am not convinced that information reporting is the end all, be
all for this tough area that we have.
Mr. Towns. Right.
Mr. White, just before you answer or respond, also include
in your response getting back to the third party reporting. Do
you think the IRS is taking full advantage of third party
reporting? And then whatever else you have to add, I would
appreciate it.
Mr. White. Let me start with a quick example that
highlights the importance of research. I want to follow up on
Mr. Miller's point there.
The recently-enacted basis reporting requirements for
financial transactions, financial securities, that policy
proposal was based in significant part on research that was
done using the compliance data that IRS develops to estimate
the tax gap. So that is an example of how you can use that data
to make changes to reduce the tax gap. It is estimated that the
first seven years of that basis reporting proposal bring in $7
billion. That is a reduction in the tax gap.
In terms of information reporting, third party information
reporting, one of the advantages there, as I think has been
discussed somewhat, is that IRS can match that information to
tax returns rather than having to do an audit. Audits are
labor-intensive, very costly for IRS. More importantly, they
are very burdensome on taxpayers. So this is an alternative to
audits for enforcement processes.
The difficulty is in identifying new information reporting
sources. There are some that we have raised in recent reports,
some additional sources. One is payment for services.
Mr. Platts. Mr. White, if I can ask you, Mr. Towns, if you
don't mind, Mr. Connolly needs to run for a Floor statement. IF
we can kind of come back, let Mr. Connolly get in and then we
are going to come back to those examples of additional sources.
Is that okay?
Mr. Towns. That is fine.
Mr. Platts. Yield to the gentleman from Virginia.
Mr. Connolly. I thank my colleagues.
Mr. Chairman, I would ask unanimous consent that my opening
statement be entered into the record in full.
Mr. Platts. Without objection, so ordered.
Mr. Connolly. I would further request that Colleen
Kelley's, the President of the National Treasury Employees
Union, statement prepared for this hearing also be entered into
the record in full.
Mr. Platts. Without objection, so ordered.
Mr. Connolly. I thank the Chair.
Mr. George, you talked about, I think you said a $450
billion tax gap?
Mr. George. Gross, yes.
Mr. Connolly. That is this year?
Mr. George. That is as of 2006.
Mr. Connolly. 2006 and it is growing?
Mr. George. Yes, it is. I believe it is a lowball figure,
and again, part of the earlier discussion indicated that is an
ongoing review. And it doesn't include aspects such as the
international tax gap.
Mr. Connolly. Understood. Do you think there could be some
relationship between that growing gap and the fact that we have
had a 20 percent reduction since 1995 in revenue offices and
revenue agents?
Mr. George. There is no question that if the IRS had
additional resources, they would be able to collect additional
tax receipts.
Mr. Connolly. I would point out to my colleagues, just for
the sake of argument, $450 billion in money owed the Government
we are not collecting. That is what the tax gap is, correct?
Mr. George. Roughly.
Mr. Connolly. Times ten is $4.5 trillion.
Now, here we are sweating can we go big at $4 trillion,
sweating a sequestration that would be $1.2 trillion. This
would be a big dent in the debt if we simply put the resources
into IRS to collect the money that is owed.
Now, over and above that, this Subcommittee, led by my
colleagues, Mr. Platts and Mr. Towns, has done a lot of work on
the issue of improper payments. And Mr. Miller, I think you
were covering that in your testimony. What is the estimate of
annual improper payments, mistakes get made, refunds get sent
to people who really didn't qualify for them or the amounts are
wrong or whatever it may be? What is the estimated annual
improper payment for IRS?
Mr. George. Just to give two examples, under the----
Mr. Connolly. Well, no, is there a global figure? You have
$450 billion as the tax gap. What is the comparable figure for
annual improper payments?
Mr. George. Let me respond by saying that I can tell you
definitively that under the additional child tax credit it is
estimated at $4.2 billion a year, although the IRS under an
interpretation from Treasury disputes whether or not that is an
actual improper payment. We don't believe we, the IG's office,
don't believe that Congress, the law, authorizes the payment of
the additional child tax credit to people who are not U.S.
citizens and who don't have----
Mr. Connolly. Yes, but we are trying to deal with global
numbers here. It would be useful to have a number. The total
amount estimated for the entire Federal Government is $125
billion a year.
Mr. George. And then of course the earned income tax credit
is estimated at about $13 billion a year. But no, I do not have
a golden number.
Ms. Olson. Our tax gap numbers say that tax credits as part
of the under-reporting gap are about $28 billion of that $450
or 6 percent of the gross tax gap. So that includes a number of
refundable tax credits.
Mr. Connolly. Mr. Miller?
Mr. Miller. Sir, the only thing I would caution is, there
is a difference between the improper payment, which is what
went out that shouldn't have gone out, and the tax gap which
includes all sorts of different pieces.
Mr. Connolly. Yes, I agree with you. I am making that
distinction, and I am trying to get what is the number for the
former.
Mr. Miller. And I don't have that number. We can come back
to the Committee with that.
Mr. Connolly. That would be helpful. Because again, if you
set a goal of making it zero, understanding that that is
probably an impossible task, but backing into that, what would
be required? What would be required to close that $450 billion
gap and to better get our handle on the improper payments?
Because we are making incredible and, in my opinion, sometimes
egregious policy decisions that are going to do real damage to
the United States of America. We are cutting back on
investments that are very important if we are going to stay
competitive.
And here right in front of us is a source of revenue we are
owed. Except this body is not willing to make the investments
in IRS that we need to make. And what is very clear from your
testimony is that for every dollar we invest in IRS, especially
in terms of compliance, we have a big return without pain and
suffering. It puzzles one why Congress wouldn't seize on that
opportunity as one measure to put a real dent in the debt
without having to create weeping and gnashing of teeth.
Let me ask a question of Mr. Miller. Oops, if I may, Mr.
Chairman?
You talked about offshore tax havens, is that correct?
Mr. Miller. Yes, sir.
Mr. Connolly. That is kind of something every ordinary,
average American taxpayer has, right?
[Laughter.]
Mr. Miller. I hope not, actually.
Mr. Connolly. Well, what percentage of tax filers have
offshore accounts?
Mr. Miller. We know the ones, and I don't have the
percentage with me, but we don't know, we know the ones who are
declaring them either under the FBAR rules or under our new
rules that call for a check box on the 1040. We will find that
out when the 2011 returns fully come in.
Mr. Connolly. And that is a legal loophole in the law that
somebody can take advantage of?
Mr. Miller. It is a permissible act. Obviously, we have
made inroads on offshore, and we also have the FACA rules now
that are going to require banks to report to the United States
those who have foreign bank accounts.
Mr. Connolly. Can't think of anybody who has those kinds of
accounts--oh, yes, I can think of one.
According to one study, the percentage of income paid in
taxes for the top one-tenth of 1 percent of taxpayers in that
top bracket has declined from 70 percent to 40 percent. And if
you look at the middle income quintile, it has increased from
15.9 percent to 20 percent. That suggests a rather dramatic
regression in taxes paid and the de facto tax code we are
living with. Would you comment?
Mr. Miller. I really wouldn't be able to comment on that.
Mr. Connolly. Well, are those numbers accurate?
Mr. Miller. I don't know. I would have to check on that.
Mr. Connolly. Well, would you not agree that if the top
one-tenth of 1 percent, which used to pay 70 percent of the
percentage of income paid in taxes is now 40 percent, that is
certainly not progress that is called regression?
Mr. Miller. That is outside of what the Deputy at the
Internal Revenue Service would be speaking about, sir.
Mr. Connolly. Ms. Olson?
Ms. Olson. Sir, I don't have those numbers. I would be glad
to look into them and get back to you.
Mr. Connolly. Would you agree if those numbers are
accurate, that would suggest that the de facto income tax in
this Country is becoming more regressive, not more progressive?
If the top one-tenth of 1 percent is paying almost half of what
it used to pay and the middle quintile is paying more?
Ms. Olson. Sir, the reason why it is difficult to answer
that question is that I have just been looking at historical
data. And it is not clear to me that the highest income tax
payers are paying less than what they might have done
historically. So that is why I am saying I would need to look
at what you are asking me and look at the charts that I have
and be able to answer for the record.
Mr. Connolly. I have to say to you, Ms. Olson, the numbers
available to me are quite clear. They are not ambiguous. They
have declined significantly in terms of the total percentage of
income tax collected by the IRS.
Mr. Chairman, I thank you, and I thank you, Mr. Towns, for
your indulgence.
Mr. Platts. I thank the gentleman. And before coming back,
Mr. Towns, I would associate myself with the gentleman's
comments about the need for us to do a better job of making
that investment with the revenue officers to get the return on
that investment for the American taxpayers. And similar to how
the three us worked together on the funding levels for the
Government Accountability Office and advocating to the
Appropriations Committee members and staff on the return, I
think there was like $86 for every dollar spent at GAO, glad to
work with you and Mr. Towns on something similar to that that
makes a case. The Advocate's numbers really presented pretty
well on what that return on investment is.
With that, I will come back to Mr. Towns, and if it is
okay, Mr. White, if you wanted to conclude. You were
referencing some examples of additional data collection that
would be helpful.
Mr. White. This would be additional information reporting.
Two things we have recommended in recent reports, one is
payments for services to corporations. This is not payments for
goods, but this would be purchases of services from perhaps,
from contractors, outside contractors who may be incorporated.
If you are incorporated, that does not have to be reported to
IRS. If you are not incorporated, it does have to be reported
to IRS.
So one suggestion for additional information reporting
there is to extend that to contractors who are incorporated.
Payments for services by owners or rental real estate is
another area where we have recommended increased reporting.
And then there are also cases where reporting is done now
but where additional information could be provided. One example
is on reporting on mortgages. Currently the 1098 forms that
report mortgage information do not include the address of the
mortgaged property. That creates problems for IRS in sorting
out suspicious returns from correct returns. Because it is not
easy to tell even how many properties somebody owns. So there
are both sorts of opportunities there.
One other point I would mention is, there has been quite a
bit of discussion about return on investment. This is
something, our recent work, we have highlighted with IRS the
importance of doing more estimates of return on investment,
both for proposed initiatives, which the Service is now doing,
and then after the fact, trying to calculate, trying to measure
the actual return from investment on compliance initiatives. So
that the Service learns what has been effective, what has been
more effective than they thought it would be, what has been
less effective than they thought it would be. That raises then
the possibility of redirecting resources to areas to get the
biggest bang for the buck.
Mr. Towns. Thank you. Mr. George?
Mr. George. Mr. Towns, I beg your indulgence just to touch
on what Mr. White discussed. Throughout this session, we have
talked about the need for the IRS to receive additional
information, third party information and how that would enhance
revenue collection. But what is just as important is, once the
IRS receives this information, what it does with it. And that
is a problem that we have reported on before, whether it is a
1099 or what have you. The IRS will receive this information
from an employer and then will receive a tax return or return
seeking a refund, and it won't match the two in time to ensure
that the information is accurate.
So if someone wants to commit tax fraud, they are able to
claim more in a refund than they are entitled to, because the
IRS didn't on a timely basis compare the information. That is a
major problem, yes, it is a resource, you don't derive in terms
of their having fewer computer systems or revenue officers. I
will defer to Mr. Miller to address how they handle that
internally. But it is a significant problem.
Mr. Towns. Right. Mr. Miller?
Mr. Miller. Mr. Towns, I agree with General George that it
is a significant problem and it stems from a number of reasons,
the key of which is timing. We don't have the 1099 or the W-2
often when the return comes in for refund. We do what we can.
But under the current systems, we don't have the information to
match.
We have recently started talking to the community about
being more real time, which would, has in mind exactly what
General George is talking about. The most information we can
have at the time of that refund, the better off we will all be.
We should have the W-2, we should have the 1099s with
respect to that person, so that we can validate, one, that it
is the person that should be getting the refund and two, that
the amount is correct.
Mr. Towns. Why can't we get that?
Mr. Miller. We receive, many 1099s are due March 30th, and
we already are 70 million into the refund stream by that time.
Mr. Towns. What changes would have to be made? This is why
we are having this hearing, to see in terms of what we can
correct. That is the purpose. So what needs to be done?
Ms. Olson. This is something that my office has proposed
several years ago. We did a study, looked at many different
countries around the world. Many countries, and I alluded to
this in my testimony a little bit, don't start the filings,
they don't issue refunds until the filing season is closed and
they have received all the returns and they have had a chance,
including information returns, and they have had a chance to
run everything against, and do matching. And then they issue
the refunds.
Now, in the United States, people are showing up the first
week of January to file their returns to get a refund. And it
would mean a major shock to the system.
I do understand, I understand that some of the payroll
processing companies have said that if all we needed was gross
wages and withholding on the W-2s, they could basically provide
us that information within the first couple of weeks of
January. It is all the information classifying non-taxable
health insurance and retirement plans. That is what takes a
little bit longer for them to process.
So I think that the IRS is looking, as Commissioner Miller
said, we are engaging in conversations now with the information
reporting sector to see what we can get early.
I could also tell you that Australia took a very
interesting approach, sort of what the United States is doing.
They sat down with many of their partners, like the major banks
and some of the major employers, and they said, what
information can you get us very quickly. And people voluntarily
came in and said, we can get you this very quickly. And then
they told the taxpayers, if you wait until this date, filing
season starts here, but if you wait until this date, you can go
online and you can see the information that we have, so you can
be sure about what you get.
So they voluntarily asked taxpayers to sort of wait in the
filing season. And because they had a pre-filled return, so
that taxpayers could just sort of download that information and
fill in the rest of the stuff, it was viewed as a very positive
thing.
Now, they are really getting about 40 percent of their
taxpayers are actually waiting and using the information that
the agency is getting voluntarily. And they are getting to the
point where they might be able to say, okay, now we are
changing deadlines, because we are seeing people move to later
in the filing season.
And that is the approach that we have recommended. Use if
voluntarily, make it as a desirable thing, taxpayers will wait
because they want the certainty. Negotiate with your partners
like the IRS is beginning to do. And rather than bringing a
huge shock to the system where taxpayers are really desperately
waiting for their refunds up early.
Mr. Towns. Right. Mr. White?
Mr. White. I would just add a little bit to this. A few
other considerations in addition to the burden on the third
parties, changing the filing date for the information returns,
there does need to be enough time allowed for them to ensure
that those information returns are accurate. If they are not
accurate, if they have errors in them, then they are much less
useful for IRS, because it means they are finding false
positives. At that point, contacting taxpayers about a mismatch
when there may not be a true mismatch.
One other point about the value of this kind of information
return matching early on, before refunds are issued, is that it
would to some extent be a long-term solution, or at least a
partial solution to the i.d. theft problem. IRS would be able
to do more verification before issuing refunds to detect
illegitimate claims.
Mr. Towns. You mentioned, and this is it for me, Mr.
Chairman, you mentioned in terms of statute of limitations.
There is no statute of limitation on fraud.
Ms. Olson. Correct.
Mr. George. That is correct.
Mr. Towns. Okay, Mr. Chairman.
Mr. George. But proving the fraud, it is which comes first.
So it is in the queue. If it is there for five years, and that
is the statute of limitations for it, for someone having to pay
their tax obligation, if the IRS hasn't gotten to it, it is out
of the queue. That is my understanding, and you can correct me
if I am wrong, Commissioner.
So if they haven't proven it by then, how do they know it
was fraudulent?
Mr. White. And much of the tax gap is not in that queue.
There are significant parts of the tax gap that IRS does not
detect in the sense of identifying the particular taxpayers
that owe that amount.
One of the issues here is that a significant portion of the
tax gap is in very small amounts of money spread over millions
of taxpayers. There are a lot of small businesses that have
reporting problems, both intentional and unintentional. They
are small, by definition the tax liabilities there are small.
And it raises the question of whether it is worth going after
them. Because to find the unpaid taxes, in many cases, you
would have to audit them.
And then another question is how intrusive you want the tax
system to be to find those relatively small amounts spread
over, again, millions of taxpayers.
Mr. Miller. Sir, if I could, just one correction to General
George. There is a 10-year statute for us to collect the money.
And actually, I think I would agree that the older and colder
the debt, the less likely it is we are going to collect it. It
is just like any other debt.
But we do have offsets that occur constantly and we have
other liens and other tools that do make use of that data. And
those accounts are collected on.
Ms. Olson. Something that Mr. White said, there are things
other than direct enforcement that are very valuable tools.
Commissioner Miller mentioned the refund offsets. A large
percentage of collection occurs because a taxpayer has a debt
with us but they are also getting a refund in a future year.
That is just the computer seeing the refund and grabbing it.
And it goes into the public treasury.
But another thing that the IRS is doing this year is some
behavior modification, if you will. We had recommended several
years ago on the sole proprietorship return that you break out
the lines for reporting income where you say, here is income
from 1099s, that is reported on 1099s filed to me, and here is
other income. I just know as a former return preparer that my
client would come in and they would just show me their 1099
income. And I would say, well, clearly, I am not going to audit
your books, but clearly you have more money than this that you
earned, that you brought in. And they would go, oh, yes, $100
or something.
Well, if you force taxpayers to have to articulate, they
are going to look at, they have put all their money under the
1099, they are going to think, oh, the IRS is going to audit me
if I don't report some money on this other line, the non-1099
income. So suddenly you disappear, even if people were now
reporting $100 and they go up to $1,000, that is $900 per
taxpayer. And that is a lot of money.
So we have used that in the past, little behavior
modifications that drive people to a little bit more compliant
behavior because they think we are looking at them. That is a
very important tool. That is really the policy behind
information reporting, but you don't just need it for third
party. You could do it through what they have to report on
their returns.
Mr. Towns. Thank you, Mr. Chairman, for your generosity.
Mr. Platts. The gentleman is more than welcome. I want to
turn the discussion a little more toward specifically identity
theft and the issue that the Ranking Member and I have focused
a lot of time on with our staff, and both sides, with the
Subcommittee staff. I certainly want to commend the IRS for
increased focus on this issue. It certainly is a necessity as
we see the numbers going up each year of those who are seeking
to defraud the American people through identity theft related
to tax refunds.
I know one of the issue is the taxpayer protection units
that have been established. As someone who has been a victim of
identity theft, or believes they have, to have a designated
unit, I think that is an important step. But I will tel you,
one of the things that jumped out to me, and it was the
Taxpayer Advocate's testimony, that is just unacceptable, is
how I would say it, is the level of service numbers. I
understand that in general, the goal this year was about 60
plus percent level of service. And yet when the taxpayer
protection unit level of service in mid-March was under 12
percent, and even in this past week and kind of the heaviest
time was only at 35 percent.
I look at that as saying, we are going to create a special
unit for those who have been victimized, and I emphasize
victimized by criminals because of identity theft. And we set
up a special unit for them to call, and we are only helping not
even two-thirds, when we have the highest level of assistance
dedicated to their assistance. And even those who do get
through to get assistance, according to the Advocate's
testimony, the average wait on hold was one hour and six
minutes. That is not how we should be treating victims.
And it goes to our previous discussions here that we need
to recognize this for what it is. It is a crime and there is a
victim of the crime. And that we set up a special unit is a
good thing. But if the unit can't deliver to help the victims,
that is not a good thing.
So dropping to 60 percent level of service overall is of
concern. But dropping to 12 percent for those that are supposed
to help those who have been victimized, and even those who got
help had to wait over an hour on hold, anybody in this room
enjoy being on hold for over an hour? I don't think so. I am
amazed that anybody stayed on hold for over an hour, quite
frankly. That is just not acceptable. That is not how you treat
a victim of a crime.
So I want to recognize that you are trying to do the right
thing here, but we are far from where we need to be.
Ms. Olson. Chairman Platts, just to make a clarification,
the unit that that number went to is different from the unit
where taxpayers who think they have been identity theft victims
calls the IRS out of the blue. The unit that those statistics
go to is a unit where the IRS has sent taxpayers letters and
said, we think there is a question about your return and we are
not going to hold it. So I just wanted to make that
distinction.
Mr. Platts. Yes, absolutely. But where there is a belief
that there is identity theft here, and so we set up a special
unit for them then to respond, and then we put them on hold for
an hour, if they get through, and as the numbers show, the
overwhelming majority do not.
Mr. Miller. I agree, Mr. Chairman. I was unaware of the 35
percent, I wasn't aware of the earlier problems. I thought we
had resolved that. I know we have added more staffing, and
maybe we have not added enough.
Mr. Platts. Yes.
Mr. George. Not only do they not have adequate staffing and
extended wait times, if someone calls back to find out what the
status is of their case, they are assigned to someone who may
not have seen the case before. They are not handed to the same
person who has the institutional knowledge of their case.
In addition, in times such as recently, with the tax filing
deadline, people who are normally assigned to those types of
cases are reassigned to answering regular tax concerns from
other taxpayers who dial the 800 number or who walk into
taxpayer assistance centers. So there is a way that the IRS
could certainly run this system a lot better than it is.
Mr. Platts. And General George, you raise an important
point in whether the IRS has looked at this in the past or not.
Especially when you set up that special unit to respond to
specifically, and certainly at a fraction of the numbers here.
But I will equate it to my office or Ranking Member Towns'
office, we open about, over 4,000 new constituent cases a year
as an office. And that is individuals.
Now, if somebody calls in and the person they were working
with is not in, another member of my staff can pull up their
case to see if there has been anything updated in it since they
last talked to the staffers. But there is a dedicated staff
person that they are working with. And that does make a huge
difference than having to start over.
So I don't know if that is anything that the IRS has looked
at doing, so that when you call in, once you make that contact,
that you then have, all right, here is your case manager that
you should be dealing with, so you are not starting over and
having to re-educate every time you call in. Is that something
considered?
Mr. Miller. It is considered. And I don't know whether it
would work here or not, to be honest with you. Generally, and I
think the Taxpayer Advocate and I may disagree on this, we
don't necessarily have the resources to say, this is your
person. What we ought to be doing is to ensure whoever does get
on the phone with you has all the information in front of them,
and that is what we try to do.
Mr. Platts. Is that done through the case files
electronically, that whoever helps you, that they are then well
documenting?
Mr. Miller. That is our attempt. Our attempt is to have,
and remember, we are talking about, this is a microcosm of the
way we are doing business on the phone generally, where we
can't necessarily, our systems do not permit a single person,
we don't believe it is the most efficient way to do it, and we
can't do a single number to a single person at this point.
So we are looking at it. In a perfect world, yes, I would
have an individual who was assigned to my account. And we have
not been able to get there in terms of resources or systems to
date.
Ms. Olson. All I know is that, not just in identity theft,
but in correspondence exam and in automated collection, some of
the most significant and frequent complaints we get are
taxpayers saying, I have talked to four different people, I
have had to explain my situation over and over again for each
one. I have looked personally at some of the notes that people
take. And you cannot read, you can't build a story from the
notes. You don't know what the person before you did.
And to Mr. White's point, this is where you go into the
return on investment, to do the analysis to say, by saving
pennies by having anybody answer the phone, whoever is the next
available person, are you really saving money downstream, where
you get the wrong result and the taxpayer keeps calling back.
And then you go to a taxpayer advocate service, where you have
two employees working the case, mine and the IRS employer. You
go to appeals, which is a higher-graded employer, you go to tax
court, where you have the lawyers and the paralegals and the
tax court personnel involved. And can we really do a good
return on investment on that? I would say no, you are not
saving money.
Mr. Platts. And when you add to that the data that has been
shared here today, that we know that our best chance of
eliminating the tax gap is voluntary compliance. So the person
who is calling in is trying to figure out, I will use the
example of the victim calling in because they have been
defrauded or victimized. But for anybody calling in, the fact
that they are calling in is a good thing. They are trying to
resolve their case.
So we want to get them the assistance they need and the
data shows that. And that goes to that issue of taxpayer
services, the return on investment versus enforcement. And so
yes, I think it is a penny saved and a pound lost. It doesn't
seem to be a well thought-out approach.
An issue where I want to acknowledge what I think is a very
positive step in the area of identity theft, if I understand
this correctly, and this s something we raised in the first
hearing on identity theft last June, I guess it was. That is,
somebody files a return fraudulently. The legitimate taxpayer
then submits their return, finds out, hey, somebody already
filed and got a $4,000 refund, and it is going to take a while
for us to work through.
But even when that happens, and we are working on
shortening that time frame for the victim to be made whole,
that in the past, the victim couldn't get any information about
the fraudulent conduct, even though it was submitted in their
name, their Social Security number, as I understand, your
General Counsel has issued an opinion now that says, the
legitimate taxpayer has a right to that information, of the
fraudulent material that was submitted, and then can authorize,
I want that information and I want to be able to share it with
law enforcement.
I will use the example of a couple of the citizens who
testified last year. I guarantee you, if they had been given it
a year ago, the information, they probably would have gone to
New York with the information, gone to the NYPD and said,
listen, here is where the check went, let's go get the photos
from the bank that will show who came in and collected that
money, if they had that information. At that point, they were
being told no.
But is that correct that it has been changed, that they
have a right to that information?
Mr. Miller. It is correct, Mr. Chairman, that we have the
opinion of counsel that we can share that information. It will
require, and what we are doing, as we speak, we are rolling out
a pilot with some local law enforcement.
The real issue is, we cannot share this information with
local law enforcement.
Mr. Platts. But the taxpayer can authorize it to be shared,
right?
Mr. Miller. The taxpayer can authorize through waiver for
it to be shared. We are rolling that out as we speak.
Mr. Platts. That is great. I have heard of it being used in
cases in Tampa and local law enforcement in Florida. If the
legitimate taxpayer can say, hey, I want to work with the local
police, give them everything you have, I think that is going to
be an important step. Because I understand when we are talking
about an average of I think $3,500 or $4,000 as the fraudulent
return refund, that from a prioritization resources the cost
of, at the national level, trying to go after those.
But the local guys, that is what they do every day. That is
what my local police are doing, helping citizens every day with
those smaller types of crimes or fraudulent conduct. So I think
that is a very positive step. While I am very displeased with
the level of service on the TPU, the taxpayer protection unit,
I do want to recognize that is a very important step in the
right direction.
Maybe two other issues here before we wrap up and I
appreciate all our witnesses' patience, the issue of the Social
Security Death Master list and the fact that is pretty much
open game for fraudulent conduct, or those who want to commit
fraudulent conduct. I know the IRS, I believe the position is
to restrict access to that. Is that correct, that you would
like legislative action to restrict who can access that
information?
Mr. Miller. I think we are working with the Social Security
Administration and the Administration more generally on
legislation that would do that.
Mr. Platts. So that is an ongoing effort, but not ready yet
to say, here is what we think is the right approach within the
Administration?
Mr. Miller. I think that is right. I think your question
would be very well answered to go to SSA and have that
discussion. I think they are actively engaged in talking to
people about it as we speak.
Mr. Platts. It is something that we want to look at, of how
to do that. To me, the fact that that information is too freely
shared, sometimes for legitimate purposes shared, but it is
just too big a target for those who are committing the identity
theft.
Mr. Miller. Yes.
Mr. Platts. The other final issue is more of a broad issue.
That is the balance, and if any of the four of you would like
to comment, when it comes to the fraudulent, and this goes to
the issue of the timing of matching documentation with returns,
I know it is a balance between a quick refund, which those who
are entitled to refunds want it to be quick, because they can.
Although I would also say that most taxpayers don't have to
wait for a refund if they wanted to adjust the filings and get
the money in their paycheck, so they could get an instantaneous
refund every paycheck rather than one lump sum.
Ms. Olson, you were talking about human nature and
behavioral management, I will admit I am one that, it is kind
of a forced savings and I would rather get $1,000 back than
have to write a check for $1,000. I think it is a mental psyche
of how you look at it.
But it is a choice that every taxpayer has, to try to
ensure that they don't have to get a refund. In fact, if they
want, they can owe money and come out ahead because they had
the money and then write a lump sum check.
But given that, how do we balance that quick refund against
the risk, and that we are not able to match? Today with
electronic filings, as the use of electronic filings more and
more the norm, more and more the norm also is that typical
individual doesn't just have a computer, but they also have a
printer that is also the scanner. That is the norm with
printers today. If you buy a printer, it can scan, fax and
print.
Have you looked at saying, if you want to file
electronically, and maybe it is not all refunds, maybe it is a
pilot to look at, but you have to scan in your W-2s, so rather
than waiting for anything to be mailed in or matched up from
the third party, if you want an electronic return, you scan in
your W-2. So when you electronically submit and especially when
it is paid taxpayers, what is the percentage, Commissioner
Miller, is it 65 percent or higher than use paid?
Mr. Miller. It is above 60, yes, in that range.
Mr. Platts. For those, it would especially be, I guarantee
you, if you are a paid provider, your ability to scan a
document is a given. Is that something that we should consider?
Mr. Miller. If I could start out, a couple of things. I
think two separate points altogether, which is enforce savings.
I think it is absolutely true for you and I, I think it is less
true as you go down the income scale, where you have the earned
income tax credit and maybe one-third of people float in and
out of on an annual basis. It is a changing circumstance.
Mr. Platts. I think that is a very relevant point.
Mr. Miller. On the second piece, I think we should look at
everything we possibly can. We need to get better at our
screening, we need to get as much information as fast as we can
to apply it to refunds as they come in.
On the scanning item, we certainly should look at it. I
think at this point, to be honest with you, we still get a lot
of paper fraud in. They have dummied up W-2s. So I am not sure
that that, in and of itself, it may be a piece of a larger
strategy and is absolutely worth looking at. But I am not sure
in and of itself that that will be a game changer for us.
Mr. Platts. Mr. White?
Mr. White. I agree. I have the same concern about the
scanning, that the i.d. thieves are making up W-2s. So getting
one from the taxpayer doesn't guarantee that it is legitimate.
What you need to do is get the information return, the W-2 from
the third party employers faster. That is where technology may
help, that a lot of the deadline that Mr. Miller mentioned
earlier, for due dates for those information returns were set
many years ago. With more modern technology it may be possible
for third parties, for at least certain kinds of information
returns, to submit them much earlier in the filing season, so
that they could be matched to returns.
Now, there are some other things that need to be in place
to make this work as well. IRS is modernizing its information
systems. But obviously you need systems in place that can
handle massive amounts of data. IRS gets billions of
information returns each year. So you are talking about a lot
of information that you would have to match very quickly so
that you are not making taxpayers wait for refunds.
Mr. George. Mr. Chairman, I would note though, certain
software tax packages, Turbo Tax being one, do allow for people
to download their W-2s electronically. So it does exist, but
again, you are right, it is $65 to purchase that package, and
some people just don't want to make that expense.
Ms. Olson. We have thought a lot about behavioral
modification. I think that the demise of refund anticipation
loans has, what refund anticipation loans did was tell
taxpayers, you can get your dollars tomorrow. So suddenly the
IRS getting you money through direct deposit and electronic
filing within 10 days looked like an enormously long time.
I think we have to really think hard about messaging and
communicating with taxpayers to talk to them about what is the
reality of the filing season, and that they actually really do
want us to do these refund screens. The first year it may be
hard because you are depending on this money like you have
always. But if you can adjust your behavior, then you can
depend on it in the future at the same time every year.
The lower income really used this for paying their heating
bills. The studies showed that they used it for things like
buying refrigerators, buying school clothes, stuff like that.
So I think we have to work with a larger community to get
people used to it. But I think the IRS has to step up to that
plate and really change expectations and behavior.
Mr. Platts. Mr. Towns, I just have two more questions, then
we will wrap up and conclude.
Two final questions here. One is, with the information that
is provided with the push on certified tax preparers that you
are moving forward with, when there is a professional tax
preparer, paid tax preparer, do they have to certify, I know
that they sign they prepared the document, the return. But do
they have to certify in some way that they have seen the W-2s
or the supporting documentation? Is there an affirmation they
have to make?
Mr. Miller. I don't think the signature means that, Mr.
Chairman. I can come back to you on a more detailed discussion
of under Circular 230 what exactly are they signing when they
sign the return. But the due diligence that they are required
to do I think is at a broader level than that.
But I can come back to you with a more specific answer on
that.
Mr. Platts. That would be great.
And the final thing is, in looking again at conduct and the
type of fraud, are we able today, when we talked last year, it
was about the issue of debit cards and what percentage of
identity theft fraud is paid out on debit cards versus a
deposit into a bank account, because of the ability for a
criminal that they have to go in and access money in a bank
account, there is much more of a trail to be followed if we are
going to pursue the criminal conduct, different than with a
debit card.
Mr. Miller. I will have to come back to you with that as
well. I think we have seen an increase in the use of debit
cards, and you are quite right, there are pluses and minuses to
that.
Mr. Platts. I think that goes to the broader issue of
assessment of the information that we have. If we are
identifying, say there is 400,000 possible cases or actual
cases of identity theft that were identified and stopped, what
percentage of those were asking for refunds on debit cards. And
as to, shall we be issuing debit cards.
Ms. Olson. I am not sure we would know that.
Mr. Miller. That is why I said----
Mr. Platts. That is what I am getting after is, I think we
need to know that.
Ms. Olson. I think that the debit card has an account that
is the same as a bank account.
Mr. Miller. And the Financial Management Services, actually
the part of Treasury that is making the payment, it sees an
account number. It does not know, I don't believe, whether it
is a debit card or a bank account. That would be something that
was known by the software providers. And those are discussions
that are ongoing. I agree, we need to get our arms around that.
Mr. Platts. Because when you hear the testimony or the
information from, like in Tampa, when they go in, and a former
drug dealer, I think, went in and they have 50 debit cards with
$4,000 in each of them that were fraudulent returns, that seems
like some evidence that the criminals, who are organized
criminals doing this, are using that method more likely than
any other method.
Again, it is a data analysis that's what I am after.
Mr. Miller. Right. I think one other point, because there
is one no doubt that we are seeing the same stories you are,
where there are rows of debit cards. I want to make it clear,
if we have stopped the refund, the criminal will have a debit
card, he or she will have a debit card, there will be nothing
loaded on it. And when he or she goes to load, there will be
nothing there, because it will have been stopped, either by us
or frankly, by the debit card company because it is finding
fraud as well.
Those stacks, I am sure some of them have money, don't get
me wrong, but it shouldn't be assumed that they all have money
on them.
Mr. Platts. I am going to make a final comment, then we
need to wrap up. On the issue of identity theft, I want to just
re-emphasize that this is about the victims, legitimate
taxpayers who are victimized by criminals. There is maybe no
more egregious example of what I heard reported this week of a
fallen hero of this Nation, who gave his life in defense of the
Nation, and then his parents come to learn that not only did
they lose their son, but their deceased son, who gave his life
in defense of this Nation, was victimized by identity theft
related to taxpayer refund. That just epitomizes the type of
victimization that is occurring. We need to do right by that
family and by every individual or family out there, that those
legitimate, hard-working, law-abiding citizens are not
victimized. And if and when they are, that we prioritize them.
So I know we can do a lot better in that regard.
I want to thank each of you for your testimony, your
patience here, especially with the break, with the Floor votes.
I thank the Ranking Member. As hopefully came through, we are
not about gotcha, we are about trying to work through this
issue with you and how can we help. Whether it is the issue of
adequate funding for the resources that make that return on
investment, that we invest and the taxpayers come out ahead,
whether it be on legislative authority that you don't have that
we need to provide. But on all aspects, we want to work with
each and every one of you and your offices.
General George, did you have a final comment?
Mr. George. I just wanted to clarify one thing. In response
to Mr. Towns' question about the statute of limitations, Mr.
Miller was correct in terms of it is 10 years to collect. There
is no statute of limitations on fraud if it is willful fraud.
But there is a three-year statute of limitations on the IRS's
ability to conduct examinations on tax returns.
So it is something that needs to be clarified here in the
overall record.
Mr. Platts. I appreciate the clarification.
Mr. Towns, did you want to make a closing remark?
Mr. Towns. Actually, I want to associate myself with your
remarks and thank the witnesses for being here. And to say that
if there is something that we need to do on this side, feel
free to let us know. I just think there are some areas here
that need to be dealt with. I think that working together, we
can deal with it.
I thank you very much, Mr. Chairman, for this hearing.
Mr. Platts. Again, we will have the record open for seven
days for some of that extraneous material or responses to some
of the questions. I appreciate our witnesses' testimony and
this hearing stands adjourned.
[Whereupon, at 12:15 p.m., the committee was adjourned.]

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