[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
THE INTERNAL REVENUE SERVICE AND SMALL BUSINESSES: ENSURING FAIR
TREATMENT
=======================================================================
HEARING
before the
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRTEENTH CONGRESS
FIRST SESSION
__________
HEARING HELD
JULY 17, 2013
__________
[GRAPHIC] [TIFF OMITTED]
Small Business Committee Document Number 113-030
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HOUSE COMMITTEE ON SMALL BUSINESS
SAM GRAVES, Missouri, Chairman
STEVE CHABOT, Ohio
STEVE KING, Iowa
MIKE COFFMAN, Colorado
BLAINE LUETKEMER, Missouri
MICK MULVANEY, South Carolina
SCOTT TIPTON, Colorado
JAIME HERRERA BEUTLER, Washington
RICHARD HANNA, New York
TIM HUELSKAMP, Kansas
DAVID SCHWEIKERT, Arizona
KERRY BENTIVOLIO, Michigan
CHRIS COLLINS, New York
TOM RICE, South Carolina
NYDIA VELAZQUEZ, New York, Ranking Member
KURT SCHRADER, Oregon
YVETTE CLARKE, New York
JUDY CHU, California
JANICE HAHN, California
DONALD PAYNE, JR., New Jersey
GRACE MENG, New York
BRAD SCHNEIDER, Illinois
RON BARBER, Arizona
ANN McLANE KUSTER, New Hampshire
PATRICK MURPHY, Florida
Lori Salley, Staff Director
Paul Sass, Deputy Staff Director
Barry Pineles, Chief Counsel
Michael Day, Minority Staff Director
C O N T E N T S
OPENING STATEMENTS
Page
Hon. Sam Graves.................................................. 1
Hon. Nydia Velazquez............................................. 2
WITNESSES
Hon. Daniel I. Werfel, Principal Deputy Commissioner, Internal
Revenue Service, Washington, DC................................ 3
APPENDIX
Prepared Statements:
Hon. Daniel I. Werfel, Principal Deputy Commissioner,
Internal Revenue Service, Washington, DC................... 35
Questions and Answers for the Record:
Questions and Answers from Hon. Sam Graves to Hon. Werfel 41
Questions and Answers from Hon. Blaine Luetkemeyer to Hon.
Werfel 53
Questions and Answers from Hon. Mick Mulvaney to Hon. Werfel 53
Questions and Answers from Hon. Chris Collins to Hon. Werfel 66
Questions and Answers from Hon. Tim Huelskamp to Hon. Werfel 72
Questions and Answers from Hon. David Schweikert to Hon.
Werfel 77
Questions and Answers from Hon. Tom Rice to Hon. Werfel 78
Questions and Answers from Hon. Donald Payne, Jr. to Hon.
Werfel 83
Questions and Answers from Hon. Yvette Clarke to Hon. Werfel 86
Additional Material for the Record:
Additional Questions and Answers from Hon. Sam Graves to Hon.
Werfel..................................................... 88
THE INTERNAL REVENUE SERVICE AND SMALL BUSINESSES: ENSURING FAIR
TREATMENT
----------
WEDNESDAY, JULY 17, 2013
House of Representatives,
Committee on Small Business,
Washington, DC.
The Committee met, pursuant to call, at 1:00 p.m., in Room
2360, Rayburn House Office Building. Hon. Sam Graves [chairman
of the Committee] presiding.
Present: Representatives Graves, Chabot, King, Coffman,
Luetkemeyer, Mulvaney, Tipton, Hanna, Huelskamp, Schweikert,
Bentivolio, Collins, Rice, Velazquez, Clarke, Hahn, Payne,
Meng, Schneider, Chu, and Barber.
Chairman GRAVES. Good afternoon, everyone. I would like to
call this hearing to order.
Under the House rules, one of the responsibilities of this
Committee is the study and investigation of the problems of all
types of businesses, including those concerning tax issues.
Today we are carrying out that duty and we are very pleased to
have Acting Commissioner of the Internal Revenue Service, Mr.
Werfel, here with us.
Small businesses are vital to job creation and innovation
in the U.S. economy, accounting for over 60 percent of new net
private sector jobs. At the same time, these businesses have
fewer resources than large firms to deal with an increasingly
complex maze of tax laws and regulations.
Over the past few years, the IRS has increased the number
of small businesses that it audits. This has been explained as
a way for the IRS to close the ``tax gap;'' that is, the
difference between what the IRS believes is owed and what
taxpayers pay voluntarily on time. We certainly support
taxpayers paying what is due, and most small business owners do
pay their taxes. As the IRS Taxpayer Advocate has recommended,
Congress should vastly simplify the tax code to increase tax
compliance.
In May, the Inspector General for Tax Administration issued
a report that found the IRS had used inappropriate criteria to
target certain conservative organizations that sought nonprofit
status. Since that time, Congressional investigations have
raised additional questions about the IRS's improper targeting,
and whether the IRS may have also improperly targeted the tax
returns of small businesses for added scrutiny or audit.
We must ensure that all taxpayers, including small
businesses, are treated fairly. In May, I sent a letter to Mr.
Werfel requesting information about how the IRS selects and
classifies small business taxpayers for closer review and
audit, the number of small businesses it audits, and the cost,
duration, and yield from all of those audits. Who decides which
small businesses are selected? How is the criteria developed?
When does it change? And last evening, after a month delay, I
did receive a letter providing responses to some of those
questions, and we hope to learn more of those answers today.
As elected representatives, we must make sure that our
government is accountable, and restore the American people's
faith in their leaders.
And with that, I will now yield to Ranking Member Velazquez
for her opening statement.
Ms. VELAZQUEZ. Thank you, Chairman Graves.
One of the focuses of this committee is to ensure small
businesses are given the tools to comply with regulations
without increasing their costs. No place is this more true than
when it comes to taxes. In the past, small businesses have told
us that complexity and uncertainty create difficulty when
filing tax returns. Many business owners worry that one simple
mistake can lead to a costly and timely audit, and at a time
when many businesses are striving to expand, every hour and
dollar counts. Small firms spend up to 66 percent more on tax
compliance than their larger competitors and face constant
changes to the tax code, creating further confusion and
hindering job creation. They should not also have to face
intense scrutiny from the IRS through business audits.
Nevertheless, audits of small businesses, particularly pass-
through companies, continue to rise.
While the vast majority of small business taxpayers comply
with tax laws, it seems they may be under increased scrutiny by
the IRS, all because a few bad actors misreport their income.
Seeing as our nation's fiscal constraint are an ongoing
priority, I understand that closing the 450 billion tax gap is
critical to our long-term prosperity, but so are small
businesses. Any effort to increase tax compliance must be done
in a way that is responsible, fair, and not unduly burdensome
to small firms.
I am grateful that the IRS commissioner took time out of
his schedule to testify before us today, but it is unfortunate
we are turning a relevant topic into political theater. It is
my hope we can move past the unsubstantiated belief that the
IRS politically targeted certain small firms and instead have a
productive discussion to ensure small businesses are not
unfairly harmed by overzealous auditing.
Today's hearing will give us a better grasp of the amount
and scope of small business audits since it is necessary to
have an accurate picture of enforcement policies. I am looking
forward to learning about the factors considered in deciding on
an audit and about the average result. I believe this data is
even more important right now as the agency seeks to be more
efficient due to financial realities.
We will also discuss whether the private costs and burdens
of an audit are contemplated and thereby justified in light of
potential revenue gains of an audit. This hearing will also
allow us to examine what is being done to minimize this burden
for small entities.
Small firms should be able to look to the IRS for help in
answering questions quickly and accurately. For this reason, it
is vitally important that we encourage better taxpayer service.
The agency's move to increase staff levels in its Taxpayer
Assistance Program is an important step in delivering these
resources, and I am also pleased to see a greater emphasis on
ACA education activities.
With the proper tools, America's small firms can sustain
the economic growth currently underway by investing in their
operations without fear of an onerous audit.
With that I would like to thank Commissioner Werfel for
being here today, and I yield back the balance of my time.
Chairman GRAVES. Thank you.
And our first witness, or obviously our only witness today,
is Daniel Werfel, who is the acting commissioner of the
Internal Revenue Service. Commissioner Werfel was appointed to
lead the IRS in May of 2013 and prior to his appointment he
held several positions with the Office of Management and
Budget, including controller and the Department of Justice.
Thank you for being here again and I look forward to your
testimony.
STATEMENT OF DANIEL I. WERFEL, PRINCIPAL DEPUTY COMMISSIONER,
UNITED STATES INTERNAL REVENUE SERVICE
Mr. WERFEL. Thank you, Chairman Graves, Ranking Member
Velazquez, and members of the Committee. Thank you for the
opportunity to appear before you today to discuss tax matters
affecting small businesses.
The IRS takes seriously the need to provide excellent
service to small business taxpayers. This service includes
helping them understand and meet their tax obligations. Our
assistance takes many forms. For example, to increase
understanding of changes in tax law and in filing requirements,
we sponsor meetings, symposiums, and seminars for small
business owners and the tax practitioner community each year.
We also provide virtual assistance through our website,
IRS.gov, which contains a section devoted to small businesses.
It has a wealth of videos, audio presentations, and seminars on
a wide range of tax topics. Even as we work to ensure that our
service to small businesses meet high standards, the IRS must
also carry out a rigorous enforcement program.
In fiscal year 2012, the IRS audited approximately 1.65
million returns, of which 21 percent were small business
returns. The 2012 small business audit rate equates to only 0.2
percent of all returns filed and 1.3 percent of all small
business returns filed. In going about our work in the
enforcement area, the IRS strives to ensure the taxpayers
receive fair treatment. For instance, we recognize that
individual taxpayers and businesses being audited may be
dealing with financial hardships, and we have encouraged our
employees to be flexible in these situations.
One major example of our efforts in this regard is the
Fresh Start Initiative. Under Fresh Start, we have added
flexibility to our collection program in 2011 and 2012 to help
taxpayers who are struggling financially. We are also focusing
on reducing taxpayer burden through such efforts as simplifying
forms and publications and streamlining policies and
procedures. For example, in January of this year, we announced
a simplified method for claiming the Home Office Deduction.
This new option will significantly reduce the paperwork and
recordkeeping burden associated with calculating the deduction.
Ensuring fair treatment also involves making sure
taxpayers, including small business owners, have recourse in
tax disputes with the IRS. We are taking action to raise
taxpayers' awareness of the tools at their disposal for
resolving issues such as the Taxpayer Advocate Service. We need
to be sure taxpayers know how to engage the Taxpayer Advocate
Service when they feel they are being treated inappropriately
or encounter excessive bureaucratic obstacles. It is important
to note that all of our initiatives for assisting taxpayers
depend on the IRS receiving adequate funding. It is imperative
that we have the ability to continue reaching out to small
business owners to provide the help they may need in meeting
their tax obligations.
Since fiscal year 2010, the IRS has absorbed cuts and
appropriated funding that totaled nearly $1 billion or nearly 8
percent. This includes a reduction of $618 million as a result
of sequestration this year. At the same time, we have made
major strides in reducing costs and finding efficiencies in our
operations. We estimate that we will have achieved $1 billion
in budget savings and efficiencies between 2010 and 2013. But
additional significant cuts to the IRS budget have the
potential to weaken our ability to deliver our service and
enforcement programs, including those dedicated to assisting
small business owners.
Before I conclude, I want to want to briefly mention the
work we have been doing over the past several weeks to chart a
new path forward for the IRS as these efforts are important to
all taxpayers, including the small business community. We have
initiated a robust action plan to address needed improvements
that we believe will help restore and sustain the public's
trust in the IRS. The report we released last month describes a
number of important findings, aggressive actions, and next
steps for the IRS. The problems with the 501(c)4 application
process that were uncovered by the Treasury Inspector General
for Tax Administration have created significant concerns for
individuals and taxpayers, and it is incumbent upon us to take
swift action to fix the problems that occurred. We are also
reviewing the full range of IRS operations, processes, and
practices to focus on how we deliver our mission today and how
we can make improvements in the future. And that way, we will
better understand organizational risks wherever they exist in
the IRS. The IRS is committed to correcting the problems that
have occurred and to continuing the important work of the
agency on behalf of the taxpayers.
Mr. Chairman, Ranking Member Velazquez, that concludes my
statement. I will be happy to answer your questions.
Chairman GRAVES. Thank you very much, Commissioner. You
obviously do not have an easy job; that is for sure.
The first question, real easy, has anyone in the IRS ever
improperly targeted small businesses for additional scrutiny?
Mr. WERFEL. I am not aware of improper targeting of small
businesses. Let me explain the context of how I am answering
that question because I think it is important.
The TIGTA report that was released in May dealt in the area
of 501(c)4 review. That is a particular part of the law where
the political activities of the entity under the law are
relevant to their application for benefit. In this case, a tax
exempt status. So the IRS, it is incumbent because it is in the
law. We have to do an evaluation. Now, that evaluation involves
assessing the degree to which the entity is involved in
political campaign intervention. And in this case, as the IG
reported, the way in which that was carried out was done
inappropriately.
But shifting over to small businesses, as a general matter,
throughout our small business--throughout the tax code and
throughout our implementation efforts under the small business,
it is rare or virtually nonexistent that the political activity
of an entity would be relevant in terms of any increased
scrutiny that we would provide. So separating the two in terms
of is there a risk that what was found in the IG report
transfers over to small businesses, I have two responses to
that. One is the risk of inappropriate political labels being
used is extremely low because political activities are not
relevant to the evaluation that we do. And second, as the
report that we issued last month indicates, because of the
importance of the findings in the IG report and because of the
public concern about those findings which I think are very well
justified, we are engaging in a process right now with each of
our operating divisions, including our small business and self-
employed division, to review the criteria by which small
businesses or any taxpayers--but in this case small
businesses--are selected for additional scrutiny. To do
basically a fairness review, are we doing it exactly right or
is there any evidence of any problems, we will surface them. So
we are going through that review right now.
Chairman GRAVES. And again, I am glad you are talking
obviously to the folks below you. That is what I am worried
about, is if you can be sure that they are not, without your
knowing it or whatever the case may be, that they are not
improperly targeting those small businesses.
Mr. WERFEL. I think one of the things we do is we have
procedures in place for how a small business or other taxpayer
may be selected for an exam, and we review those procedures on
an ongoing basis, and we are going to do a special review as a
result of what happened in the IG report of those procedures
and those protocols, to make sure they are fair in design. They
also have to be fair in implementation and effective in
implementation. But that is part of it. It is about training.
It is about making sure the architecture of the protocols that
we use to essentially select taxpayers for additional scrutiny,
is that architecture fair, reasonable, effective? And is it
being carried out fair, reasonably, and effective? And we are
dedicated to making sure, and I think the IG report is a
helpful reminder in some ways to make sure how important it is
that we are diligent about that in all areas of the IRS.
Chairman GRAVES. Well, and that is obviously what I am very
interested in, too, is the process of how you select, or what
goes into that criteria on how you select, small businesses for
additional scrutiny. I know you cannot tell us what those
triggers are or what those specific items are on a tax return,
but my question is when a small business is identified for
further scrutiny or a tax return is kicked out based on
whatever trigger that is, well, what happens then? What is the
next step in that process?
Mr. WERFEL. Let me start with--make sure that everyone on
the Committee understands that so much of the footprint of that
work in terms of reviewing returns and selecting is automated
and based on a computer application. And that is helpful in a
certain regard because to the extent you can take some of the
human element out of it, you create a better sense of
objectivity about how things may be selected.
And so we have this process. We call it discriminate
function or in the halls of the IRS it is called DIF for short.
And it basically establishes a set of scores that based on the
information that is on a return, just what is on its face, it
basically gets us a risk score for potential noncompliance. And
the key is how do we structure and program the DIF for what
returns may be selected? And that is informed based on ongoing
literature and analytics around where we have tended to see
noncompliance over time. And critical to that is something
called the National Research Program, which is a broader,
statistically based study of taxpayer compliance across the
broad spectrum of the tax code. And based on those findings,
which we get periodically, we learn, okay, this is an area that
is growing the tax gap because we are having areas of
noncompliance here and then we can translate that into our
computer program and say if you see something similar--trend,
pattern, behavior--then it should be flagged for a potential
audit or exam. That does not mean the taxpayer necessarily did
something that was noncompliant but we need some type of
mechanism to make sure our resources are most effectively
following where the risks may be and that is the process. So
once that is flagged then it would go into our exam phase and
we would initiate a process and it could be either a field exam
or a correspondence exam. We have a great many number of more
correspondence exams than field exams because the
correspondence exams are less burdensome on the taxpayer, less
burdensome on the individual. We found over time that by
sending a letter to a taxpayer informing them of certain
questions or flags we see in their tax return, that can be a
very effective mechanism in terms of reconciling a difference
that we want understood rather than going through and sending a
team of IRS people out to a particular location.
Chairman GRAVES. Well, sooner or later there is a
subjective component to that. I mean, somebody has to make a
decision on whether or not that business is going to be audited
or given further scrutiny. Who does that? What division?
Mr. WERFEL. So there is a process in place. You are right.
It is a combination. We have structures in place that will
enable us to target our resources to higher risk areas, and
what we try to do is make sure that those structures are as
objective as possible based on substantive analytics, based on
an automated review of returns which is becoming much and much
easier and more effective as e-file numbers increase. And so we
are heading into, you know, we are in there but we are really
in a modern era now where we can get tax return information
electronically. They come in and we can do automated reviews of
them immediately.
And where does the human element come in? It comes in in a
couple of places. First of all, it is humans. It is IRS
employees that are designing these protocols and programming
the computer in terms of how it structures its risk. And then
at some point when you determine a problem and you start to see
that you have interacted with the taxpayer and you are starting
to see how the information is arising between the problem we
think may exist and the taxpayer's reaction, then the human
intervention comes in to make sure that we are managing this to
a successful resolution. And to make sure the process has as
much integrity as possible there has to be a series of reviews
and checks and balances to make sure that the technology that
we are using is fairly structured and architected and that the
individuals carrying out on that technology are carrying out in
a fair and effective way. And we have existing mechanisms in
place to do those reviews. We have an inspector general as an
example who, in this one case in 501(c)4, found a major problem
and now obviously we have a lot of cleanup to do and fixes to
do in that area, but that also, as part of a checks and
balances, has led to us now reviewing all the various
procedures that I just outlined. We are now doing special
additional reviews to make sure that there is fairness in the
entire lifecycle.
Chairman GRAVES. Is there any other reason that you know of
why a small business would be targeted other than some of the
things you just told us?
Mr. WERFEL. I really do not. I think if the program is
working as designed and as intended--and I think there is
always a risk of variation, there is always a combination of a
mistake that could happen, and unfortunately, there have been
cases within the IRS where someone acts inappropriately and
there is underlying malfeasance or misconduct. Those are rare
but they happen, and I am not aware of any of that happening
with respect to the selection of a small business. But what I
am suggesting is that we do not have any particular evidence at
this time that the objective and analytical criteria that we
put in place to review small businesses for potential increased
scrutiny has any fundamental flaw that would lead one to the
conclusion that there was unfair targeting. I do not have any
evidence of that but the review that I have asked the new chief
risk officer at IRS to carry out--and by the way, that new
chief officer I hired away from the Government Accountability
Office and he was a leader within GAO and has a lot of
knowledge and experience in terms of understanding risk and how
to review these types of activities--he is the one that is
leading this review. And my commitment has been--it is to this
Committee and to other Committees, we want to share the results
of that review with Congress because when I go back to that
audit report that we have referenced, one of the concerns that
I have in looking backwards at this and seeing what happened
and dissecting it is that there was not enough sharing of
information with appropriate committees as these risks were
emerging. And so I want to change that dynamic within the IRS
so that not only are we more systemically evaluating our risks
on an ongoing basis, but as we are learning information we are
bringing it to the attention of the appropriate committees.
Clearly, the review that we do within our small business and
self-employment area is highly relevant to this Committee and I
look forward to sharing the results of our reviews with you so
you can kind of roll up your sleeves and help us make sure that
we are doing things appropriately.
Chairman GRAVES. Who is it that is doing that review?
Mr. WERFEL. Well, we have, again, I have a chief risk
officer named David Fisher. He was my first hire when I arrived
at IRS on May 22nd. Previously, the IRS had not had a chief
risk officer position, and based on what I was perceiving
coming into the job as this situation, I felt it needed a chief
risk officer. That individual is working with our various
operating division heads. So in this case, for Small Business,
he will work with Faris Fink and Ruth Perez, the commissioner
and deputy commissioner for our Small Business operation.
Chairman GRAVES. Well, we would like to continue to work
with you on that process as it moves forward.
Mr. WERFEL. Absolutely.
Chairman GRAVES. Ms. Velazquez.
Ms. VELAZQUEZ. Thank you, Mr. Chairman.
Commissioner Werfel, the Taxpayer Advocate recently
conducted her own study of small business audits and that
report identified geographies and industries where business
owners are more likely to game the system. For instance, low
compliance was correlated to taxpayers who have less trust in
the government and belong to associations whose members had
similar feelings. With that in mind, was there politically
motivated targeting of small businesses through audits?
Mr. WERFEL. Again, I do not believe--I certainly do not
have any evidence of it, and I think part of the risk that
created the problem with the IG report on 501(c)4 was that
there was relevancy to the political activities that were going
on and that created additional risk. We have to operate within
that risk because that is the law. In this case, we did not
manage that risk effectively and that is part of the findings.
But to your point, to the extent--and that is why this is
so important. To the extent that an individual or a small
business or a large business has a lack of trust in the IRS,
that does a lot of damage to our voluntary compliance tax
system. So maintaining that trust is our bottom line, and right
now we have some work to do but I would point out that one of
the jobs I have in building that trust is making sure that the
public, this Committee, and other committees understand the
nature of the problem that we had in the tax-exempt
organizations world and whether it was systemic throughout IRS.
And as I have mentioned in my report, we do not have evidence
that those types of issues with respect to the use of
inappropriate political labels for screening is systemic
throughout the IRS. There is no evidence of that but we are
doing extra due diligence to look at potential other areas just
to make sure that we are answering taxpayer questions.
Ms. VELAZQUEZ. So let me ask you, does the IRS intend to
use those findings as a blueprint for auditing specific types
of businesses in certain locations around the country?
Mr. WERFEL. I do not think there is any--I would have to go
back. I do not believe or have specific knowledge that some of
the risk factors that would be placed into our audit selection
programming would involve the type of criteria that you
mentioned. I will go back, but I do not believe they do. I
think it is more about we do research. We randomly select as
part of a statistical study tax forms and we look at them and
we conduct audits of them and we learn where there is
underreporting. We learn where there is underreporting of
income. We learn where there may be a lack of filing or
something like that. And it could be things like confusion over
how to fill out a schedule. There is a whole host of reasons
why you might see a material difference between what should
have been reported on a tax return and what is not. And we use
that study. I do not believe we use kind of the feelings about
the IRS in any way, shape, or form as a basis by which to
audit.
Ms. VELAZQUEZ. Thank you.
Commissioner, the most recent Enforcement and Service
Results report revealed that returns examined by the IRS of
large firms has remained pretty steady over the last few years,
even as more large corporate returns were filed. Yet, audits of
small businesses have increased even though fewer returns were
filed. Can you please explain why more attention is given to
smaller firms rather than larger companies despite the fact
that there was a reduction in the small corporate returns
filed?
Mr. WERFEL. So I think it is something that we will have to
work with you on to understand those numbers because as I
understand those numbers, and Mr. Chairman, we responded to
your letter and I apologize for the delay in getting that
response, but the statistics that we provided to this Committee
in that response show a relatively stable audit coverage rate
for small businesses over the last few years. We are holding
essentially steady that the audit footprint is roughly 1.4
percent of all small business returns and roughly 0.2 percent.
And that is true from fiscal year 2010, 2011, and 2012. There
are slight increases or decreases in the numbers, but from a
macro standpoint our audit footprint over small businesses has
remained relatively constant. And so I want to learn more about
the data and statistics that you are referring to that point to
an increase. We do not have that same information.
Ms. VELAZQUEZ. I just would like to see some reconciliation
between your numbers and this report.
Mr. WERFEL. Yes. I think we need to work through that, the
numbers. And maybe the response that I provided to the chairman
can be a first step in making sure that there is a consistent
understanding of what the trend might be with respect to the
audit coverage on small businesses. What I am reporting to you
now, based on the best information I have available, is that
that audit coverage footprint has remained relatively constant
between 10, 11, and 12. When you get----
Ms. VELAZQUEZ. I guess you need to do a better job at
putting that out there.
Mr. WERFEL. That could be true. We may need to publicize
that. To the extent we can, we can certainly work with----
Ms. VELAZQUEZ. Because otherwise you are going to be
hammered constantly, and the constant comment is that the IRS
goes after small businesses because you need to close that gap.
And that is what is out there. That is the perception. And time
and again that is what people hear.
Mr. WERFEL. I understand.
Ms. VELAZQUEZ. As you may have already guessed, one of the
most frequently asked questions from our nation's employers is
how the employer mandate will affect their business.
Unfortunately, we cannot adequately address their concerns
because the final rules have yet to be released. Can you
provide any information as to when we can expect the final rule
on the employer mandate so that employers can get some
certainty?
Mr. WERFEL. So the employer mandate, let me comment on
that.
First of all, part of the challenge and approach on the
Affordable Care Act implementation from the IRS's perspective,
and I think from HHS's perspective, is to have a back and forth
with the business community in terms of the impact of this
legal impact the ACA is going to have on them. So there are a
lot of moving pieces with respect to our readiness for ACA
implementation. We have systems that we need to deploy. We need
to get our tax filing that are relevant to the ACA ready to go,
and we are making good progress and are hitting all our
milestones.
But also, employers have to get ready as well. And so we
have an ongoing dialogue with them. And based on that ongoing
dialogue regarding what the law requires and based on that what
we think employers are going to need to do to meet the
statutory mandate, they reached back to us and said we have
concerns about the start of this occurring in year one. And we
made a judgment, or the Treasury Department made a judgment
call that there was a need to have a transition period before
those employer requirements would trigger.
In terms of the regulations, there are a lot of different
regulations so I want to make sure that I am answering which
question--which regulation you are asking for, but I can get
you--I can do it now or I can do it later--but I can get you
information in terms of what the exact schedule is on any given
ACA regulation.
Ms. VELAZQUEZ. Thank you.
Chairman GRAVES. Mr. Rice.
Mr. RICE. Thank you, sir.
Thank you, Mr. Werfel, for being here today.
What is your history with the IRS?
Mr. WERFEL. I am a career civil servant. I joined the
government in 1997 and I am coming up on my 16 year anniversary
in the government. My main interaction with the IRS, prior to
joining the IRS in my current capacity, was I spent a large
part of my career on financial management, and in particular,
efforts to reduce fraud, error, and waste in the federal
government. My prior position, which is a Senate-confirmed
position of controller of OMB, that is one of the main things
you do at OMB as the controller--you work on government-wide
efforts to reduce fraud and error. So my main interaction with
the IRS was around things like EITC improper payments and
things like that.
Mr. RICE. In your last job, you were managing a department
or a bunch of people?
Mr. WERFEL. Yes. When I achieved my highest level within
the Office of Management and Budget, let us say as of May of
this year, I was managing somewhere between 100 and 150 people.
Mr. RICE. And you achieved that in May of this year?
Mr. WERFEL. Well, no, I started January of 2012, I think is
when I started managing a larger footprint of people within
OMB.
Mr. RICE. How many people work for the IRS?
Mr. WERFEL. Roughly 85,000.
But I would point out, just based on your question, that
one of the things about the position that I held within OMB is
I had leadership responsibilities over the entire financial
management community. I ran the day-to-day operations of the
Chief Financial Officer's Council and coordinated the
activities of all CFO offices across government. And when you
are doing things like implementing the Recovery Act or
preparing for a potential government shutdown, the reality is
the project management of that and the scope of what I was
leading was large. Much larger than just----
Mr. RICE. You know, it seems to me--I do not know you. I
have only met you today and I have seen you in testimony and
other things, but you seem to be a very forthright and
competent guy. But man, you have stepped into a big mess here.
And I sure hope that you are a good manager because they need a
good manager. This entity is completely out of control as far
as I can tell. You have had your past commissioner just resign.
You had two directors plead the fifth in the last month. You
have had disclosures. You spent $50 million on conventions at
some of the worst economic downturn in United States history in
the last 80 years, and disclosures that the IRS cannot even
tell us what they spent because their accounting records are
not that good. And at a time when we are lambasting corporate
executives for money they spend on conventions and denying
their deductions and lambasting them for the mode of travel
they take, and yet we are spending an average of $250,000 per
convention at the IRS. So this entity is completely out of
control as far as I can tell.
Mr. WERFEL. Can I respond to that?
Mr. RICE. Okay, go ahead and respond.
Mr. WERFEL. I think one of the reflections that I have,
having arrived at the IRS and coming up on my two month mark,
is that it is complex. There is a mixture----
Mr. RICE. Well, yes, it is complex. How many employees?
Mr. WERFEL. There is a mixture--there are very, very
effective managers and leaders within the IRS. There are a lot
of results that I can point to at the IRS that are extremely
commendable and impressive that we need to build on. And I
think it is worth noting----
Mr. RICE. My friend, when you have got three of your top
people either resigning or pleading the Fifth to avoid criminal
prosecution in the last month, this thing is completely out of
control. And somebody, some strong manager is going to have to
go in there and grab control or I do not know where we are
headed with this thing.
Let me ask you this. Do you think they are ready to add to
their responsibilities significantly? Do you think they are
ready to take on the administration of the Affordable Care Act?
Mr. WERFEL. I think what the IRS does is it carries out the
laws that are passed and it more often than not--in fact, a
great majority of the time does so effectively. When we make a
mistake, it is very public and very significant and we take it
seriously. We are going to be ready to implement the ACA. That
I am convinced of based on everything I have seen in terms of
the project plan, the schedule, the milestones we have hit.
Mr. RICE. Let me reclaim my limited time.
As a taxpayer and a CPA for 25 years, I can point to
numerous examples where the IRS is absolutely unresponsive and
incapable of handling the job that it already has. And then you
add to this all these disclosures and confusions and scandals
that have come out in the last three months, and I am really,
really concerned about the IRS doing its existing job, much
less taking on further responsibilities. Thank you very much.
Mr. WERFEL. Okay.
Chairman GRAVES. Ms. Hahn.
Ms. HAHN. Thank you, Mr. Chairman.
I just was going to follow up on the Affordable Care Act
question. Clearly, the IRS has a huge role to play, but I even
think before this law is rolled out and implemented, I think
you have a role to play in reaching out to Americans,
particularly small businesses. I hold small business workshops
in my congressional district out of Los Angeles all the time,
and I have done several specifically on the Affordable Care
Act, what it means to small businesses, and when the tax issue
comes up, you know, there is a lot of uncertainty, there is a
lot of anxiety. I think there is a lot of misinformation out
there, so I am happy to do my part to educate folks on the
Affordable Care Act.
But it is not just negative, right? There are some tax
credits that are going to be very valuable to small businesses
as this is rolled out. What are you all doing to partner with
HHS, Small Business Administration, to help educate and
possibly diffuse some of these misconceptions and anxiety that
is out there, particularly as it relates to small businesses? I
do not see you out there yet.
Mr. WERFEL. Well, that is a good question. Certainly, let
me distinguish between myself personally and the IRS team. The
reason why I say that is because I was in Atlanta last week and
I met--not only did I go and visit with the Wage and Investment
employees in the Atlantic campus in the Atlantic region, but I
also had the opportunity to meet with members of the public,
members of the tax professional community, tax preparer
community, university community. It was a diverse group. And
one of the points that was raised to me, and it was raised in
several different ways, was concerns about small business. And
the reality is that in order for small businesses to maintain
their competitive edge to be sustainable in today's economy,
they need an effective IRS that they can work with. And we did
not get perfect scores from the small businesses that I met
with, but they are extremely appreciative of the important role
that we play and they are very concerned about, for example,
our resources and the diminution of our resources and how that
impacts their ability to do a bunch of things, not only contact
someone at the IRS but also the way in which we modernize our
forms and our files, et cetera.
So I have started that dialogue and I am finding it useful.
And I think it is something useful that I can bring back to
Congress, and in particular the Budget Committees, and explain
that significant cuts to the IRS budget, certainly they impact
the IRS but they also impact small businesses within all of
your jurisdictions.
In terms of the Small Business Division, they do a lot of
outreach. I was very impressed with the number of symposiums
and meetings, and whether they are done electronically or in-
person, and obviously, the Affordable Care Act is on everyone's
mind right now because it is new and because it creates a
different footprint of requirements. Their tax forms are going
to start looking different in the coming years and obviously
there are implications for them. So we are definitively
committed to having an open dialogue with small businesses and
large businesses for that matter about their responsibilities
under the ACA. And if there are other suggestions you have--but
I think if I walked you through the series of symposiums and
forms and meetings you would find them overly impressive, but
you would also see that we are somewhat constrained by our
resources in terms of how much we can do.
Ms. HAHN. I got it. But I do think it is important and I
just have not seen any of these out in the Los Angeles area.
Let me just quickly follow up on one more question. More
and more businesses are shifting their operations onto computer
and Internet platforms, from sales to accounting, invoices,
inventory tracking, and other operations. So it is more
important for the IRS's e-platforms to work well. I know,
again, sequestration, really, you guys have taken a big hit on
that. But, and I know you face a lot of obstacles, but within
the constraints that you have, what procedures are you
considering to operate a more efficient tax administration
system as it relates to our new emerging technologies?
Mr. WERFEL. Well, I will tell you, I have a lot of budget
meetings as the head of the IRS, and it is often about how are
we going to apply a diminishing resource base to a growing set
of responsibilities and requirements.
Just to give you an example, there is a lot of concern out
there from certain parts of our constituents in terms of the
pace by which we are putting forms in an online way because it
makes their life much easier if they can do things in a digital
environment versus a paper environment. But we have resource
constraints in terms of our ability to modernize those forms,
and we have to make choices, like am I going to invest in
modernizing this particular form or am I going to have more
people at the call center so that we can improve our overall
service numbers? Or am I going to keep the Taxpayer Assistance
Centers open for a longer period of time so members of a local
community can come in and get direct feedback on their tax
questions? These are the types of issues that behind the scenes
at the IRS we are grappling with.
One part of the answer that I wanted to provide you is we
try to make really smart decisions about these tradeoffs. So,
for example, if we see a form that has usage rate of 12 percent
versus a form that has a usage rate of 78 percent we are going
to say, okay, well let us not digitize the 12 percent one even
though there is a very loud community of concern if we do not,
we are going to go with the 78 percent one. Those are the types
of tradeoffs we are making behind the scenes, but ultimately,
taxpayers are concerned because they are not getting the full
complement of modernization and service that they are hoping
for.
Ms. HAHN. Thank you. Thank you. I yield back.
Chairman GRAVES. Mr. Collins.
Mr. COLLINS. Thank you, Commissioner.
I would like to maybe rock-n-roll through a little bit of
this. I am chairing the Subcommittee on Health so I get more
calls from small business on the Obamacare than anything else.
But I would like to begin by just asking--if you could be
quick and direct that would be good--do you do your own tax
return?
Mr. WERFEL. I do.
Mr. COLLINS. Good. A lot of people do not.
When we get to the 50 workers, there is a lot of confusion.
Is it 30 hours a week or 130 hours a month?
Mr. WERFEL. So orient me back. You are talking about the 50
FTE cutoff?
Mr. COLLINS. We have 12 buckets. Each month we create a new
bucket of whether or not, you know, how many FTEs we had in
January, February, March, April, May. Then we add them up,
divide by 12, and see if that averages 50 or more. And a lot of
companies, to set the stage, are very worried about weeks.
Monday through Wednesday are in one month; Thursday through
Sunday are in another month; their payroll records are by week.
So right now there are 12 buckets. Each month you have to do
the calculation. And people are doing it right now because I
should say the employer mandate has not been eliminated. The
employer mandate is the law of this country and it goes into
effect January 1. And if people are going to comply, they have
to be complying in about five months. You may not enforce the
penalty, but that does not mean the law has been delayed. Most
of the companies I talked to want to--they do not want to be
lawbreakers, so you need to be able to define for them how they
are not lawbreakers whether or not you enforce the penalty.
So for each bucket each month, is it 130 hours in the month
as opposed--so if you worked 40 hours, 42, then 26, and 12, as
long as it added up to less than 130?
Mr. WERFEL. I apologize. I am not going to be able to speak
specifically to the tech--I can certainly get you an answer to
that question but the underlying technicalities of how you
would evaluate your status of having 50 FTE versus 49 FTE in
terms of whether your responsibilities trigger for the employer
responsibilities, that is something I am going to have to get
back to you on with more technicality. I just do not have that
at my fingertips.
Mr. COLLINS. So the acting commissioner of the IRS does not
know the rules today which we are demanding small businesses
adhere to and they are lined up at my office, whether it is a
donut shop or a franchise, they are desperately wanting to
comply with a law that takes place January 1; the fact that you
are not enforcing it until a year from January 1, it is still
the law, and I am certainly disappointed that you cannot answer
something. That is one of the most fundamental basic questions
I had to ask.
But let me keep going here.
Mr. WERFEL. Please.
Mr. COLLINS. If a company had a husband, a wife, and three
kids under 26--so that is five full-time workers--is that one
health plan they have to offer? Let us say they do not offer a
health plan. Husband, wife, and three kids under the age of 26.
Do they get penalized five times $2,000 or one family times
$2,000?
Mr. WERFEL. I mean, again, we are going to start to devolve
into a situation where there is going to be a lot more facts
that are going to need to be asked, and I am going to have
particular subject matter expertise as the head of the IRS, the
but the head of the IRS is not going to be the one doing those
calculations and providing that legal and technical advice. So
it is a question of how we use our resources effectively. You
can go through the tax code in great detail and catch me in a
lot of things that I am not going to know, especially being two
months on the job, but my commitment here, what I am saying
here as the acting commissioner and what I am very committed to
you is making sure that your constituents or you, yourself,
have the answers to those questions because I have
professionals at the IRS who are ready, willing, and able to
make sure that those answers are as crystal clear as possible.
That is the commitment I can make as the head of IRS.
Mr. COLLINS. What I would like to do after this is give you
a very detailed list.
Mr. WERFEL. Please.
Mr. COLLINS. These are the exact questions the owners of
the donut shops and small businesses, they are the exact
questions they are asking because they want to comply with the
law. They do not want to be lawbreakers. And it starts right
now. I mean, here we are in July. This is the qualifying year,
and today the IRS cannot tell them whether these employees
qualify or not. How do you calculate a bonus? If I give someone
a bonus, do I back that into so many hours because somebody has
done well? W-2 wages, 9.5 percent of W-2. What about 401(k)
deductions? Where do they enter in? These folk want to comply
with the law. We cannot get any answers out of your
organization. So the fact that you are not going to enforce the
penalty does not mean the law does not go into effect.
And I know most people, if they are driving down the street
and the speed limit is 45, they adhere to the speed limit. They
do not go 100 miles an hour because somebody said the state
police was not going to be there. So I am very concerned
because the clock is moving. Come January 1, that starts the
next year so I would like to follow up with these questions and
hopefully in a very prompt manner you can get them back so I
can answer the questions of my desperate small business owners.
Thank you.
Chairman GRAVES. Ms. Meng.
Ms. MENG. Thank you, Mr. Chair and Mr. Werfel for being
here.
The fiscal year 2014 IRS budget request provides for an
increase of over 7 percent for taxpayer services. I understand
better taxpayer service and education leads to higher
compliance rates. Could you explain if and how this increase in
taxpayer service will be used to assist our small business
taxpayers?
Mr. WERFEL. Yes, certainly.
The reality is, not to oversimplify but to provide you kind
of the basic frame, the way we think about it, two of our core
basic missions are services and enforcement. And on the
enforcement side, you know, we have a very robust analytic
frame that shows that for every dollar that we spend on
enforcement activities there is a very significant return on
investment for that dollar. And so when we defund our
enforcement activities, ultimately it means less receipts to
the federal government and that has real deficit impact.
In terms of our service levels, we invest in a whole
variety of different ways to make sure that we are serving our
taxpayers--small businesses in particular. Those involved, for
example, our phone banks. One of the main ways in which people
get answers to the questions and get peace of mind and a sense
of what they need to do and cut down on the amount of time that
they have to spend trying to figure out what the tax code means
is calling up an IRS individual and getting them on the phone
and working through the issues. And what our budgets are
intended to reflect is we aim to meet certain levels of service
metrics. We have metrics for everything, and our levels of
service metrics are down. They are down significantly because
of the inability of us to fund individuals and hire individuals
to train them to be in our call centers to answer these
questions. It also limits our ability to invest in web tools
and other technologies so that a small business can say, well,
I can either call or now the IRS has this new format on the web
that makes my life a lot easier. This is great. Let me go on
and access it. And when we defund the IRS we miss out on
opportunities to help taxpayers navigate what I think we can
all agree is a complex set of laws and regulations.
And so when I am sitting here on other committees defending
the president's budget, I am not doing so I think without
strong analytics that tie these increases to both return on
investments for the taxpayers so that more receipts come into
the federal government as appropriate and we have a better
situation bottom line on our deficit and that we are financing
and funding the right activities within the IRS to improve our
service to small businesses, to families, to corporations, et
cetera. And I think we could spend time, and I am happy to do
so, in terms of how the specifics of the president's 2014
budget, what that buys you in terms of improved service levels.
But it is really about services and enforcement and there is a
modernization element to all of it because as we improve
services and enforcement, a lot of that is about investing in
new technologies and make sure the IRS is along in the 21st
century with other government entities and corporations.
Ms. MENG. Thank you. I yield back.
Chairman GRAVES. Mr. Bentivolio.
Mr. BENTIVOLIO. Thank you very much, Mr. Chairman.
Mr. Werfel--did I pronounce that correctly?
Mr. WERFEL. You did.
Mr. BENTIVOLIO. Thank you very much for being here today.
You said you had 85,000 employees in the IRS, plus or minus
roughly.
Mr. WERFEL. There are part-time employees. There are
contractors, but we usually rely on about 85,000 as a rough
estimate.
Mr. BENTIVOLIO. One of the prerequisites for becoming an
IRS agent, if I am not mistaken, is you have to have a
background in accounting. Is that correct?
Mr. WERFEL. I think it depends on what type of work you are
going to do.
Mr. BENTIVOLIO. But pretty much accounting.
Mr. WERFEL. Accounting is an important part, yes.
Mr. BENTIVOLIO. Could you tell me again what you said
earlier today during the introduction on the sequester?
Mr. WERFEL. Yes.
Mr. BENTIVOLIO. How it affected the IRS?
Mr. WERFEL. Yes. Under the Budget Control Act, between the
sequester and something called the 0.2 percent rescission, it
is about a little over 600 million. But just the sequester
itself, $594 million reduction in our budget authority for this
year as a result of the sequester.
Mr. BENTIVOLIO. And so how much is that in relation to your
overall budget?
Mr. WERFEL. It took our budget from 11.9 billion down to
11.2 billion, both the sequester and the rescission.
Mr. BENTIVOLIO. What percentage would that be?
Mr. WERFEL. It is in and around 8 or 9 percent.
Mr. BENTIVOLIO. Eight or 9 percent. People in my district
have been taking cuts of 15-20 percent. In some cases, now they
have to work part-time. That is the only job they can get
because, well, the employer mandate, you can only have so many
hours and then they have got to kick in a lot of money.
Amazing. And you cannot find a 9 percent cut in the IRS budget
when you are doing all these fancy conventions and videos?
Mr. WERFEL. We found the cuts. We are operating on that
lower base. It is a question of making sure we are transparent
about what we are giving up by operating at that lower base.
And ultimately, if the powers that be decide we should operate
at that lower base that will happen, but I want to make sure
that we are transparent with you and the American people about
what tradeoffs are involved in operating at that lower budget
level.
Mr. BENTIVOLIO. And in regards to picking and choosing
winners and losers conservative groups, so on and so forth, you
said, if I am not mistaken, you do not believe that small
businesses, or any business for that matter, is being singled
out because of their political beliefs in any way, shape, or
form.
Mr. WERFEL. What I am suggesting is that other than the
TIGTA report which shelved the 501(c)4 applications, I have no
other evidence at my disposal. And I do not want to speculate,
but I have no other evidence of similar type of targeting of
other entities. But I have asked my chief risk officer to help
coordinate a review across the IRS to look at that question so
I can provide a more definitive answer.
Mr. BENTIVOLIO. In that review, would you employ, let us
say, cross-referencing somebody who donated to a political
campaign from a FEC report to whether or not their small
business was audited?
Mr. WERFEL. Again, I would say if there are any types of
flagging of a taxpayer for additional scrutiny that was based
on political activity, I think that is something that we should
be extremely concerned with.
Mr. BENTIVOLIO. What would raise the red flag--10 to 1? For
every, you know, maybe 10 businesses because the employer or
the owner of the business contributed to a campaign or was
involved in some tea party group or something like that?
Mr. WERFEL. A single instance of inappropriate behavior by
the IRS should be flagged and addressed. I mean, we have
situations in which we have employees that unfortunately at
times--you know, it is 85,000 people, so we have TIGTA reports
that demonstrate a situation of employee misconduct. TIGTA can
write an entire report and spend a lot of resources about one
instance of employee misconduct. That is important to us not
only to enforce accountability for that individual and to be
transparent about it, but also to make sure there is no other
systemic behavior going on similar to that particular issue of
misconduct. So we care about every incident.
Mr. BENTIVOLIO. Okay. So you are going to check and cross-
reference?
Mr. WERFEL. Well, what we are going to do--well, then you
are getting into the feasibility about what we can do, and what
we are going to do is a variety of different steps, including
evaluating the architecture of our screeners, our filters, how
things are flagged for additional scrutiny. We can evaluate
that architecture. We can make sure that we are documenting it,
updating it frequently, benchmarking it against other parts of
the IRS and other ways of looking, doing checks and balances to
make sure it is appropriate. There is a whole process that we
can go through that I think reflects very strong management
approaches in terms of how you mitigate risk and error in your
operations. It is very difficult to eliminate risk and error,
but I think high-functioning organizations work on very robust
and sophisticated frameworks to understand their risks and
errors and put in place compensating controls to mitigate them
to appropriate levels. And that is what we are engaging with in
the IRS right now.
Mr. BENTIVOLIO. I see I am out of time. Thank you very
much.
Mr. WERFEL. Thank you.
Chairman GRAVES. Mr. Barber.
Mr. BARBER. Well, thank you, Mr. Chairman. And thanks to
you and the ranking member for convening this important
hearing. And thank you, acting commissioner, for being here.
And I have to say thank you for taking on this really sweet
opportunity you have been given. It is always good in my mind
when someone is willing to step up in the middle of a crisis
and say I am going to tackle it and try to get things done. I
really have to say from what I have seen and heard today and
what I have seen and heard you say in other hearings, I think
you are very forthright, and I believe you are doing everything
you can to restore public trust in the IRS. The citizens of
this country have to trust their government. And what happened
at the IRS, I think we would all agree, was egregious. The
behavior undermined confidence and trust. It was wrong. It has
been acknowledged that it was wrong and I believe you are doing
what you can to restore trust and good management. And I
appreciate the fact that you have hired someone to take a look
at risk who will keep an eye on those things for you.
I have a couple of questions because I think it has been
asked and answered, the questions related to targeting, and I
am not going to go over that same territory, but I have a
couple of questions related to other matters that I think
impact adversely or make things difficult for small businesses.
For example, recent IT reports have indicated that there is
a very high rate of IRS audits that lead to no significant
increase in revenue. In fact, in 2011, 62 percent of S corps
cases were closed with no recorded change in revenue, and yet
these audits, as you can imagine, cost affected businesses a
great deal of money and time. So what steps can you take in
your position as acting commissioner to ensure that small
businesses are not unnecessarily audited? I mean, there has to
be a cost-benefit analysis here of the amount of investment we
have in audits and the end result with 62 percent cases closed
without a recorded increase or change in revenue seems to me
that there might be some overreaching here. So could you
respond to how you might take another look at this?
Mr. WERFEL. Yeah, absolutely. I think if you are going to
evaluate your mechanisms to enforce compliance, you want to
evaluate them across a series of different variables. One of
the ones that we are obviously prioritizing right now is
fairness and selection and I think that is appropriate given
the IG report raised significant questions and it provides us
and inspires us to want to look across the IRS and give
taxpayers comfort that we are doing that review and sharing our
findings and rooting out any potential areas of concern.
But I think you also want to look at the effectiveness of
your selection. And I mentioned earlier that we have ways of
improving on a continuous basis our models for how we would
select a taxpayer for audit. In a limited resource
environment--this is very intuitive--in a limited resource
environment, when you are trying to do your best and spend the
taxpayer dollars as wisely as possible, you are going to try to
target those dollars in a way that has the highest impact in
terms of driving greater compliance. And if we see issues,
whether it is identified by the inspector general, GAO, or
internally we discover it, audits that we are doing are not
resulting in any change or any additional revenue collected.
And that is relevant data in terms of updating how you are
going to do your selection going forward. So it is a continuous
model of trying to make sure that we are as focused as we can
on the areas of noncompliance because one of the goals here is
to narrow the tax gap that we have because I think small
businesses, they certainly do not want to be audited. They
certainly do not want to be audited excessively. I completely
understand that and we support that, but I think they also want
to make sure that everyone is playing on the same fair ground
and that if they are complying with the tax laws, which a vast,
vast majority of them are voluntarily without ever having
gotten audited, they want to make sure that the IRS is doing
our part to make sure the other small businesses are being
compliant as well on a voluntary basis.
And so I think there is mutual interest in making sure that
our models for how we select taxpayers for audit are effective,
sophisticated, fair. And so I think we are on the same page in
terms of improving not just the fairness but also the
effectiveness of them. And those TIGTA reports are relevant as
we go back and relook at those models.
Mr. BARBER. Just a quick follow-up on that. You talked
about closing the tax gap, and I agree we need to do that. So
the than auditing small businesses, which may produce limited
results, what other measures can the IRS take to close the tax
gap?
Mr. WERFEL. Well, I mean, it is in large measure around a
combination of enforcement activities. What we try to
demonstrate each year as we are planning and showing Congress
our budget and the American people our budget, you know, these
are the types of enforcement activities that we would engage
in. We can do things like increase our efforts on identity
theft. We can increase our computer sophistication when a
return comes in in terms of identifying a return that might
have fraud in it or might have an understatement of their
income leading to a higher refund than they were otherwise
eligible for.
But remember earlier when I was answering a particular
question before I said there are two arms to this. There is
enforcement and services. And services are important as well
because effectively serving our taxpayers does two key things.
It helps them navigate the complex tax code more effectively
and allows them to be compliant, but it also builds trust to
the sense that they are having a positive experience, they are
getting the answers they need from the IRS, we are helping them
navigate. It inspires that type of voluntary compliance
framework to work more effectively.
So again, when we talk about our budget and the investments
that we make, my goal is to just make sure that there is a
substantive discussion around the tradeoffs that are involved
at our different budget levels. I understand we are in a tight
budget environment, and I understand that small businesses
around the country are tightening their belts. We have to
tighten ours. There are ways in which we are. It is a public
dialogue about those tradeoffs involved in our budget.
Mr. BARBER. Thank you. And thank you, Mr. Chairman, for the
additional time.
Chairman GRAVES. Mr. Tipton.
Mr. TIPTON. Thank you, Mr. Chairman. Thank you, Mr. Werfel,
for taking the time to be here.
You had commented in your oral testimony about being
committed to good service, having knowledge of struggling
taxpayers, and trying to be able to develop policies to be able
to help them. You certainly understand that the IRS is not
viewed as warm and cuddly and caring. You know, it gets back to
actually paying these taxes.
Mr. WERFEL. I understand that. I definitely understand
that.
Mr. TIPTON. You know, but you followed that up with needing
adequate resources to be able to help those taxpayers. We
actually calculated it out. Even with sequestration, it was 5.8
percent reduction. Can you assure this Committee, can you
assure this Congress, and most importantly, can you assure the
American people that you are not going to have any more Star
War parodies; that you are not going to have any more line
dances? And you had noted that you had gone through in part of
your previous life in terms of looking out for waste, fraud,
and abuse in government, what is being done to make sure that
we really are spending those taxpayer dollars correctly?
Mr. WERFEL. I am glad you asked that question. I have a
couple of responses.
First, when I arrived at the IRS, what I found is that
while there are incidences out there--things like videos and
the expensive conference in Anaheim--and videos are okay but we
want to make sure that the videos are for the appropriate
purpose and at the appropriate level of funding for those
videos because we use videos to train our employees. It helps
us cut down on travel. There can be a lot of value to videos.
But we have to eliminate our extraneous expenditures. And what
I found was a lot of procedures were put in place before I
arrived. The IG report that came out on the Anaheim conference,
the videos that are garnering some attention were made in some
cases 2010, in some cases 2011. I am not excusing them, I am
just saying what has the IRS done since then and where are we
today? In July of 2013, what does our footprint look like? And
we do not do conferences like we did in Anaheim anymore. That
is a vestige of a past. We have new controls in place around
video costs and content. Again, not excusing the prior
activities, and there may be more that come out that occurred
in 2010, 2011 before these procedures were put in place. But
what I can assure you is that strong, robust procedures have
been put in place to constrain both conference spending and any
spending of extraneous costs on videos, I cannot say we are at
zero risk but we are at a significantly lower risk than we were
previously. And that is part of the trust building with the
American people, is demonstrating how we are cutting our costs
in those areas. There are very impressive results in this area.
Mr. TIPTON. But the bottom line, I guess, and I know you
can understand this, what the American people's frustration, my
frustration is, when we look at the IRS, just saying, ``Hey, we
are going to correct the problem. We are sorry. It will not
happen again,'' and they move on down the road, do you apply
those same standards to American taxpayers?
Mr. WERFEL. Again, as I said, I am not excusing the
behavior. I am just providing an explanation of what steps are
taken when a problem occurs. There are varying different types
of mistakes and we can talk about mistakes from the IG report
that led to a change in leadership at five positions within the
IRS from the commissioner down to the lowest senior executive
within that managerial chain. They are all----
Mr. TIPTON. Maybe we ought to move maybe to the root of the
problem really because when we look at it you noted with Mr.
Collins you do your own taxes. Do you do TurboTax or do you do
the long form?
Mr. WERFEL. I do not want to give any favorite to anybody.
I use a provider. I use a software.
Mr. TIPTON. You use a provider for that.
Do you know how many small businesses fill out their own
tax returns and send them in? Is there any kind of data on
that?
Mr. WERFEL. I think small businesses are roughly about 80
percent professional preparers.
Mr. TIPTON. Eighty percent. How many pages are there in the
tax code?
Mr. WERFEL. Oh, gosh.
Mr. TIPTON. Seventy thousand plus? Seventy thousand plus?
Mr. WERFEL. Something like that. It is a very high number.
Mr. TIPTON. If I call up the IRS today wanting to be able
to pay my taxes, to be able to do it lawfully, will whoever
answers that phone guarantee me that their answer is correct?
Mr. WERFEL. That is not the way the process works.
Mr. TIPTON. That is not the way the process works when we
sign the tax return. So the IRS cannot figure it out. The IRS
cannot guarantee us that they understand the policies that are
in place, and yet we are trying to tell the American people you
must obey the law. Does this not really call for legitimate tax
reform to get a flatter, fairer, and simpler tax code and to
reduce the number of employees that you would need to manage
just by making it sensible for the American people to work
with?
Mr. WERFEL. I will answer that question. I have been asked
that question numerous times. It is a very important and good
question. Two things. One, as a general principle, the IRS
administers whatever law Congress passes, and we rely on the
Treasury Department to articulate----
Mr. TIPTON. That is not completely true though, is it,
simply from the standpoint? Do you not issue rules and
regulations that are not approved by Congress? It is your
assumption that it meets the legislative directive?
Mr. WERFEL. Right.
Mr. TIPTON. But you do not come back and ask us if it meets
the legislative directive.
Mr. WERFEL. We get feedback if there is a concern about it
but the reality is--I want to answer your original question.
Mr. TIPTON. I will tell you, as a member of Congress, a lot
of the frustration really is we give the feedback and it falls
on deaf ears. It is kind of the assumption we are going to be
here longer than you are and we are going to do it our own way.
And that is the real frustration I think with a lot of the
bureaucracies here in D.C.
Mr. WERFEL. If that is the message you are getting that is
unfortunate. We want to partner with Congress. These are not
easy issues. As you mentioned, the tax code is complex. Our
responsibility at the IRS is to do what we can to carry out
those complexities in the most efficient and effective
mechanism. Very often we are successful. There are situations
in which we are not. Those situations are normally publicized
and raised as significant concerns and it is all valid.
I think we have the same objective. Our collective
objective is to provide a fair and efficient and effective tax
system for the American people. From IRS's standpoint, we do
deal with a lot of complexities. We want to partner with both
the public and Congress and others in terms of how we can
continuously improve. We have problems. I understand that.
Whether it is the conferences or the IG report, what I am here
to say is not to excuse them. I am here to provide transparency
on the nature of the problem, what we are doing to try to fix
it, how we are holding people accountable--we can certainly
talk about that--how we are fixing it, and what are our future
barriers right now. What barriers do we face right now to that
goal of more effective tax administration? I just want to have
a dialogue about that. And we are working on solutions at the
IRS right now and we want to work with you on those solutions.
Mr. TIPTON. Thank you, Mr. Chairman. Far past time.
Chairman GRAVES. Ms. Chu.
Ms. CHU. Thank you, Mr. Chair.
We know that small firms, especially those that are already
complying with the tax laws, fear an audit as they are
expensive and time-consuming, and I know that the average
amount of time an employee spends on a correspondence audit in
2008 was 1.6 hours while for a field exam was 46.4 hours. So
that is quite a difference.
Does the IRS estimate the audit costs for taxpayers? And
how will you ensure that increased audits do not unnecessarily
burden compliance small businesses?
Mr. WERFEL. Well, we certainly look at--we certainly track
the duration of an audit. I do not know whether we have an
information mechanism that can give us detailed costs on an
audit. I mean, we would want to be sensitive to the community
in terms of not asking them for information that would increase
their burden in terms of having them tracking their costs for
complying with a particular audit. But I think the goal here is
to achieve the right footprint. What is the optimal? The audit
footprint that we maintain should have the right mixture of
both correspondence and field. It should have the right mixture
because the audits serve multiple purposes; right? They
establish a base by which a voluntary compliance system is
going to work more effectively because they deter bad behavior
and incentivize good behavior. But they also, if they are
driven effectively by the right risk algorithms and the right
analytics, can really uncover a lot of money. And I think our
revenue that we brought in from the IRS based on our
enforcement activities exceeded $50 billion last year. So there
are multiple benefits there and I think the goal is to evaluate
the various policy tensions that are involved in structuring
those and making sure that we are making the appropriate
adjustments, whether it is to Congressman Barber's question of
making sure that if we are having fruitless audits, I mean, the
shame of it would be if we did not learn from those fruitless
audits and incorporate into our process going forward. And so
that is the goal. These are some of the guiding principles that
the IRS has. And again, there are a lot of imperfections but
the objectives I think are the right objectives. And in many
cases we are successful.
Ms. CHU. Well, one of those big decisions for a small
business is the classification of workers and it continues to
be a daunting decision for many small employers as to whether
to work as an employee or an independent contractor. As part of
the Fresh Start Initiative, which helps taxpayers and
businesses address their tax responsibilities, the Voluntary
Classification Settlement Program was introduced. Can you
describe this program and also tell us how successful this
settlement program has been and what about the Fresh Start
Initiative as a whole?
Mr. WERFEL. That is a good question. One of the messages we
have is about the IRS looking to work with taxpayers in a way
to help them navigate our system. But it is not just complying
with every letter of the law. It is, are there changes that we
can make and adjustments we can make to provide increased
flexibility. So if something like they owe a debt to us and
they are having trouble making up that debt, we have programs
in place, like you mention, like the Fresh Start Initiative
that can help kind of relevel--understand the financial
hardships that a particular taxpayer might be having right now;
adjusting, whether it is the payment schedule or the approach
we take with that taxpayer. It is one of those things--and
there is also, as you mention, voluntary reports that taxpayers
can come in and provide us if they think they have a concern
with their taxes. We open up our doors for them to talk about
it. We create, to the best of our ability, a nonthreatening
environment for them to come in and go over those issues. And
we work with them collaboratively on a path forward that makes
sense, that gives them peace of mind but also brings them
closer into compliance. It is that type of work that I think is
very critical. It demonstrates that the IRS is not in a place
where if it is not--every I is not dotted and T is crossed
exactly the way it is supposed to be that some kind of hammer
comes down. It is demonstrating that there are avenues that you
can take with the IRS to work through issues. And in
particular, if there is an entity or an individual with
financial hardship, we have programs in place that have proven
successful over the years in providing whether it is a safe
harbor or a new approach for taxpayers. They are very
successful. They are very popular. I am concerned about their
sustainability based on budget. It is another one of those
areas where I would like to present a potential tradeoff
depending on our budget levels. But I think you are raising an
important point about our programs and our ability to work with
taxpayers in this way.
Ms. CHU. Thank you. I yield back.
Chairman GRAVES. Mr. Schweikert.
Mr. SCHWEIKERT. Thank you, Mr. Chairman.
Mr. Commissioner, in some of the discussion you have had
here today you have talked about noncompliance and triggers,
what sets off inquiries. I would like to do something a little
bit different in some of the questions. Let us paint a scenario
and then see if you can help me work through it.
I am a small business and all of a sudden I have a spike in
business or a crash in my business or whatever it may be, so I
have more money flowing into my bank accounts. Does the IRS in
their data collection see that?
Mr. WERFEL. Likely, no. I mean, we do not access private
bank accounts. There could be situations--we have third-party
reports, like a 1099. So we might see a change in their
interest income.
Mr. SCHWEIKERT. So you might see depending on the model of
the business because most of what we would call small
businesses are going to be pass-through type entities. So there
might be K1s or other types of partnerships or interlocking----
Mr. WERFEL. The nature of the changing circumstance of a
particular entity depends on existing mechanisms. So, for
example, we get 1099 forms that report to us, you know, things
like interest income and other things. So we might have
insight, and that is all about trying to use third-party data
sources.
Mr. SCHWEIKERT. And you are heading already where I wish to
go. I am trying to understand what data accumulation the IRS
collects to decide that I have a noncompliance or I have
something here I need to investigate or I have someone here I
need to send a letter of inquiry or someone here I need to
audit. How many layers of information collection are there out
there? Are you collecting from private sources? Are you
collecting through regulatory sources? How does the triggering
mechanisms end up working to now saying this business,
something different is happening. Let us go investigate them.
Mr. WERFEL. I want to keep it general because, again, there
are certain parts of our business operations that are
confidential.
Mr. SCHWEIKERT. And that is a different discussion whether
they should be confidential in the government.
Mr. WERFEL. But the answer to your question, again, it is
one that might not be able to be effectively answered in two
minutes. It varies. We might, you know, someone might come in
with information, a tip, or something like that that we would
use. That could be. But a large footprint of what happens is
that the taxpayer will file their tax returns and then we get
information after the filing is done through third-party
sources.
Mr. SCHWEIKERT. Walk me through that information because
you spoke earlier that much of what happens is automated in the
background. That sort of indemnifies bad acts from individuals.
I am now trying to understand what--not necessarily bad acts
but how much data accumulation is happening.
Mr. WERFEL. I will do my best.
Mr. SCHWEIKERT. And it is a fair question because we all
live in the databasing of America, but for you, does that
databasing trigger when my constituents get audited?
Mr. WERFEL. Let me answer to the best of my ability and
then I might want to bring in reinforcements to help me answer.
Mr. SCHWEIKERT. Okay.
Mr. WERFEL. And I am going to make the assumption that the
tax return is filed electronically. But even if it is not it
just takes a little bit more time as we process a paper return.
But there is an upfront review of the tax return that is done--
--
Mr. SCHWEIKERT. It is automated?
Mr. WERFEL. Most of it is automated. It picks up on math
error. It picks up on different indicators of potential fraud
or error. So that happens.
Mr. SCHWEIKERT. And then it is bounced against----
Mr. WERFEL. Well, then what happens is it is flagged for
potential--we might not process the return immediately. If we
think there is identity theft we might hold it before we just
all of a sudden process the refund. Different events would
occur. That is based on a data entry. I am just trying to give
you the difference because there are two points. There is data
entry and then there is later.
Mr. SCHWEIKERT. In my last 60 seconds, and I know this is
really complicated, let us go from the other side. You have
third-party vendors providing you data that all of a sudden
this business has a much greater velocity of deposits,
withdrawals, deposits, withdrawals.
Mr. WERFEL. Yes, we can get that. That information does
come in.
Mr. SCHWEIKERT. So it is not about what they filed; it is
we are picking up something else over here.
Mr. WERFEL. Well, we will run a comparison.
Mr. SCHWEIKERT. But does this set off a trigger to go look
at their filing?
Mr. WERFEL. It could. In other words, what happens is once
the filing is done and we get all the 1099 or the third-party
data in, we will basically run kind of an aggregate comparison.
And where we see material anomalies between what was reported
on the tax return versus this other information that maybe
dictates that it was a materially higher revenue amount for the
taxpayer than was put on their tax return, that could trigger,
for example, a correspondence. They might get a letter and they
might say we want you to look at this.
Mr. SCHWEIKERT. Just because I am thinking about it, as we
go through certain business cycles, you know, sometimes a
business gets a contract they may not be making a lot of profit
on it but that contract may have a lot of in and out, in and
out through their bank accounts, through their vendors, through
other mechanics.
Mr. WERFEL. Yes.
Mr. SCHWEIKERT. Does that trigger?
Mr. WERFEL. I do not know. It would depend on the
circumstances. In a very general matter, we would look for a
material difference between what a 1099 is telling us about
income going into a particular entity and what they reported on
their tax form. If we see a material difference we will flag it
and we will ask the taxpayer about it, whether it is through a
field exam or a correspondence exam, it will depend on the
situation.
Mr. SCHWEIKERT. Thank you, Mr. Commissioner. Thank you for
your patience, Mr. Chairman.
Chairman GRAVES. We have a series of three votes. Would you
be able to stay?
Mr. WERFEL. Yes. Whatever you need.
Chairman GRAVES. Okay. We will recess briefly and come
right back and start with Mr. Payne when we get back. And
please get back as quickly as possible. We are recessed.
[Recess]
Chairman GRAVES. We will go ahead and bring the hearing
back to order, and we will start off with Mr. Luetkemeyer.
Mr. LUETKEMEYER. Thank you, Mr. Chairman.
Mr. Werfel, on May 22nd we had Secretary Lew in front of us
in the Financial Services Committee, and at that time I brought
up to him an issue that was of concern to me with regards to
the activities of the department within your agency that
oversaw the--well, that Ms. Lerner was in charge of and oversaw
the applications for tax exempt organizations. And in
discussing those with him he said he was going to meet with you
that following afternoon with your new job and give you
directions on what he wanted to do and the situation you were
in. One of the things I brought up to him at that meeting was
that not only was it disclosed at that point that the IRS was
unfairly targeting conservative groups--tax exempt conservative
groups--but I wanted to make the point out to him that they
were not enforcing the law against some liberal organizations.
There was an instance that was brought up to me by a group
within my state of some activities with regards to a particular
group, and I spent three years working with Ms. Lerner to try
and get an investigation of that group. Myself and the other
group they are working with submitted over 3,000 documents to
her and never received a single remark from her with regards to
how the investigation was going, whether anything was done. And
so Secretary Lew pledged to me that day that he would talk to
you about that and have that be investigated and that be in the
report, the 30-day report that you submitted. I did not see it
in the report. Did he ask you to review that situation?
Mr. WERFEL. I think one of the first things I would respond
with is I have some restrictions in terms of what I can and
cannot talk about with respect to an individual taxpayer
because it seems that your question orients around an
individual taxpayer. And delving into the specifics of the
situation with that taxpayer would require a 6103 waiver or
something like that. So I apologize. I do not know the answer
to your question unless I can get more specifics.
Mr. LUETKEMEYER. My question is did he ask you to
investigate that situation?
Mr. WERFEL. He asked me--maybe this is a good way of
answering it--he asked me to broadly review a variety of
different activities within the IRS to ensure fair enforcement.
With respect to a particular activity, I do not have a
recollection of him raising a particular taxpayer or a
particular issue, but I have to go back and consult.
Mr. LUETKEMEYER. Well, one of the concerns I have is that
your report, the reports that you did over a 30-day period,
does not indicate any sort of investigation or oversight or
even a mention of looking at the fact that there may have been
a lack of enforcement by the IRS with regards to other
organizations. It would lead me to believe that there was not a
follow-up or he did not ask the question.
Mr. WERFEL. Let me respond in a couple of different ways.
First of all, the 30-day report is a point in time. More work
is needed and there is more evaluation that is underway. So to
the extent that there is some topic or area that is not as
robustly covered in the report that should be based on input
from this Committee and others, that is something long overdue.
That report was intended to set up a dialogue.
Secondly, I would have to reengage with Mr. Lew to kind of
remind ourselves of conversations we had two months ago. But as
a general matter, because the issue involves a specific
taxpayer, I may not be able to cover it in a public report. It
may be something that I need to deal with, and unless you have
a waiver from that taxpayer, it may be something that I cannot
even articulate in specifics with you just based on what the
law is, not because I do not want to help.
Mr. LUETKEMEYER. Okay. Will you pledge to me today to
investigate those folks if I send you a request?
Mr. WERFEL. I will pledge to certainly look into it. Look
into the matter.
Mr. LUETKEMEYER. And respond in a timely fashion?
Mr. WERFEL. I will respond to the extent I can permitted by
law. Yes.
Mr. LUETKEMEYER. But again, what my suggestion may be is
that it may be appropriate for the taxpayer to provide a waiver
so that I can talk directly about the situation with a
particular taxpayer to you, which is done.
Mr. WERFEL. Well, they are not going to do that because
they are of a different political ilk and so they are not going
to be willing to do that. That is the problem is that they are
being very punitive in the way they go about their activities.
They are in direct violation of something you said a while ago
to a degree in which they are engaged in political activities
that are absolutely in violation of their 501(c)3, I believe.
Mr. WERFEL. Let me make one point since you raised the
question, if I could, and that is one of the things that was in
my 30-day report but as circumstances evolve it merits more
discussion and attention. And I think this has been publicly
reported but the facts in this case as we review more documents
and talk to more people is that there is a diversity across the
political spectrum of entities that were, for example, included
on these lookout lists that were screened for additional
scrutiny. And the reason why I am raising it is just kind of in
response to the question of to the extent there was activity by
the IRS that leaned in one way, aggressive scrutiny towards one
end of the political spectrum and another way less aggressive
scrutiny, as the facts and circumstances emerge in this case, I
just want to make sure it is clear that there is a diversity
across the political spectrum of entities that had issues that
are covered by that TIGTA repot.
Mr. LUETKEMEYER. Well, the point I am trying to make, Mr.
Werfel, is this. Ms. Lerner had a political bent. She obviously
was trying to be punitive in the way she looked at the
conservative groups. I am saying that there is another side to
this that nobody has thought about, nobody has investigated,
nobody has said anything about. And that is a fact that she did
not enforce the law on the other side of the political spectrum
and let them get away with stuff that did not provide fair
treatment to all parties who were involved in this 501(c)3
exemption. That is the point I am trying to make is there needs
to be a realization and acknowledgment to the fact that she, as
a member of this organization, refused to investigate it and
that has to be investigated.
Mr. WERFEL. I am not aware of evidence that would support
your conclusion.
Mr. LUETKEMEYER. It is in the file. The IRS has got it.
Over 3,000 pages of documents. If you want me to send it again,
I will be glad to do it.
Mr. WERFEL. I am telling you I am not aware of the evidence
that would support it.
Mr. LUETKEMEYER. Okay. Are you willing to look into it
then?
Mr. WERFEL. Yes. I mean, one of my main objectives is to
look into this entire situation.
Mr. LUETKEMEYER. Okay. I am way over time. I will yield
back but I think there is an important question that also needs
to be asked today by somebody. Do you share your databases with
anybody?
Mr. WERFEL. We, under the law, we have certain legal
responsibilities to share our data, for example, for the
administration of tax purposes, yes, we share our data but we
do so in a way that has an enormous number of safeguards.
Mr. LUETKEMEYER. Could you share a list with the Committee
of all the agencies, all the departments across government that
you share your list with? And if anybody on the private sector,
any third-parties get access to that information?
Mr. WERFEL. I can. I can give you a head start on your
answer, too, which is if you go to section 6103 there is a
particular set of exceptions that dictate when the IRS can
share information outside the IRS.
Mr. LUETKEMEYER. Will you be willing, Mr. Werfel, to give
us a list?
Mr. WERFEL. Yes.
Mr. LUETKEMEYER. Of every agency in state government and
all the third-party contractors that collect data that you have
access to and that you have sharing agreements with?
Mr. WERFEL. We will do our best to provide you a
comprehensive list.
Mr. LUETKEMEYER. Okay. Thank you very much.
Chairman GRAVES. Mr. Huelskamp.
Mr. HUELSKAMP. Thank you, Mr. Chairman. I appreciate, Mr.
Commissioner, for you being here today. I would like to cover a
couple things that we have briefly discuss previously and want
to know under what specific statutory authority was the
employer mandate penalty delayed?
Mr. WERFEL. I do not have the details on the legal
analysis. The role of the IRS in that decision was to be
consulted on the operational implications of this transitional
relief period that the Treasury Department announced early in
July.
Mr. HUELSKAMP. And did the White House visit with you
directly about that period?
Mr. WERFEL. No.
Mr. HUELSKAMP. And so how did you find out about it?
Mr. WERFEL. It was a combination of two factors. One, the
first step was that Treasury engaged IRS staff and consulted
them on the, again, the administrative implications of a
transitional relief period. And then I, in a subsequent meeting
with the Treasury Department, learned that they were
considering it. And again, the IRS footprint in this is what
are the administrative implications?
Mr. HUELSKAMP. In the follow up to that, in the proposal
you talk about voluntarily complying. Obviously, the penalty
has been suspended. The 4 in 2014 has been changed to 2015 but
will there be any implications particularly for small
businesses if they do not voluntarily comply?
Mr. WERFEL. No. Again, the definition of small business is
one that we have to make sure that we are clear on because if
you have more than 50 FTE, then you have these employer
reporting requirements and particular responsibilities. If you
have less than 50 FTE, the situation for you as an employer is
very different. But there will be no penalty. We encourage
voluntary reporting but no penalty for not reporting and no
responsibility payment in the first year.
Mr. HUELSKAMP. Will there be any implications in terms of
your algorithms in terms of selection for audit if folks do not
voluntarily comply? You can guarantee that will not be part of
that.
Mr. WERFEL. No, I will talk to the team about it and make
sure but there is no intent to do that at all.
Mr. HUELSKAMP. Well, speaking of determining who receives
an audit, a few weeks ago it was noted that approximately
24,000 refunds were sent to one address in Atlanta.
Mr. WERFEL. Yes, I am aware of that situation.
Mr. HUELSKAMP. How exactly does your algorithm ignore
addresses? That does not show up? You do not compare addresses?
That is not in the algorithm to determine whether or not we
have some fraud going on?
Mr. WERFEL. That is a very important question. And what
happened there, I think there was illegally obtained taxpayer
identification numbers and the way in which this individual or
entity sought to defraud the government, they were able to
orient those in a way that we did not pick up on it as quickly
as we should have. We are learning from that experience but I
agree.
Mr. HUELSKAMP. Do you know how they missed it? I mean, this
is not just--that is the one big instance. There are 154
different addresses that received more than 1,000 refunds to
those addresses. So you do not take the address into account at
all in the algorithm in determining who to audit?
Mr. WERFEL. I think we do but I have to get back to you to
answer the question why this particular fraud scheme alluded
us.
Mr. HUELSKAMP. And these folks that put this algorithm
together or are investigating that, are they the same folk that
will put together the Obamacare reporting system that will be
implemented obviously for individuals beginning January 1st?
Mr. WERFEL. Not exactly. But there will be some overlap
between the work that is done in terms of our enforcement of
ACA and those that would look at individuals. It depends on the
nature of the ACA enforcement, but there will be some overlap.
Yes. Because the way it works in the IRS is we set up by wage
and investment deals with individuals, small businesses deal
with small businesses, so I would have to go back and
understand exactly how that Atlanta-based scheme played out and
who was involved. But there could be some overlap. Yes.
Mr. HUELSKAMP. Well, again, it was not just Atlanta. There
were 153 other addresses.
Mr. WERFEL. Yes. No, I understand.
Mr. HUELSKAMP. And I want to make sure that we are clear on
the IG report.
I have very specific, a couple regulations that are very
detrimental to small businesses. One is regulation by the IRS
that will require businesses with non-audited financial
statements to evaluate each and every expense over $100 to
determine whether that item must be depreciated; that will kick
in on January 1st. And the second one would require that any
small business spending more than $100 to repair any buildings,
unit, or property subject, every single expenditure over $100
up to nine different tests to determine if the amount spent is
an improvement. Now, that is a mouthful. I mean, that is your
mouthful, not mine.
But as an absolutely ridiculous example, if a small
business owner, for example, would replace a toilet in a
building at a cost of $400 under this guidance, they will be
forced to depreciate that toilet over 39 years for a net
deduction of $10 every year. Now, there are a couple of very
specific regulations coming on January 1st impacting small
businesses. Can you explain the rationale behind these?
Mr. WERFEL. No. What you described sounds nonsensical. I
would like to look into it.
Mr. HUELSKAMP. Okay. Can you provide a written response to
the Committee?
Mr. WERFEL. Yes.
Mr. HUELSKAMP. Again, I believe one of these, perhaps both
of them, were delayed for a year. And again, there is no
specific, I do not believe, statutory authority, which is much
different than the Obamacare penalty delay. But this is coming
January 1st. I am hearing this from small businesses, and it is
an absolute paperwork nightmare. I would appreciate very quick
response.
Mr. WERFEL. I appreciate you raising the question.
Mr. HUELSKAMP. Because they are preparing for that. We are
already, obviously, into the month of July and they have to
start gathering this information to prepare for next January
1st.
Mr. WERFEL. I appreciate you raising the concern.
Mr. HUELSKAMP. I yield back, Mr. Chairman. Thank you.
Chairman GRAVES. Mr. Mulvaney.
Mr. MULVANEY. Thank you.
Mr. Werfel, I am going to ask you a couple of questions
about the revelations that came out of Senator Grassley's
office in the last couple of days.
Mr. WERFEL. Yes.
Mr. MULVANEY. Do you know the donors or candidates whose
information was supposedly improperly scrutinized?
Mr. WERFEL. I talked to my staff and I think my staff spoke
to the inspector general shop, so we were able to learn that
information.
Mr. MULVANEY. Do you intend to tell those folk that their
information was inappropriate?
Mr. WERFEL. I think that is consistent with the appropriate
process.
Mr. MULVANEY. Have you all figured out yet, I think there
is a report today saying that there were several instances
where the disclosure may have been inadvertent, one where it
was intentional and that that was conducted by a person who was
not a member of your agency?
Mr. WERFEL. We have been able to confirm that the one
willful, unauthorized disclosure did not occur within the IRS.
Mr. MULVANEY. How is it possible that somebody who is not
within the IRS had access to that information to begin with?
Mr. WERFEL. It is a good question. As I mentioned earlier,
there are legal frameworks, programs, and policies in place in
which the IRS will share taxpayer information with other
federal agencies and with state agencies. In particular, for
example, for the implementation of Medicaid. These are the way
the programs work. We set up safeguards to ensure that those
informations are not breached.
Mr. MULVANEY. But you do not think it was a hacker? You
think it was somebody who was--without telling me who it was
because I do not want to know who it was because that is an
ongoing investigation I take it.
Mr. WERFEL. That is right.
Mr. MULVANEY. It is somebody that was properly given the
information; they improperly shared it beyond that?
Mr. WERFEL. It could be one of a number of things but it
may be that you have, let us say, hypothetically an individual
in a state revenue office who did not have a need to know the
information but accessed it anyway. Something like that.
Mr. MULVANEY. Gotcha.
Mr. WERFEL. Is what we are talking about.
Mr. MULVANEY. In the cases where it was inadvertently
scrutinized, do you know which members of your agency
participated in that?
Mr. WERFEL. I do not have the full details yet, but in any
case in which the IG reports that situation to us, we look into
it and we make sure that we are taking the appropriate
procedures to make sure that such an inadvertent disclosure
does not happen again.
Mr. MULVANEY. Switch with me for a second to your Internet
e-mail policy. According to the 2009 IRS employee handbook,
your agency says the Fourth Amendment does not protect e-mails
because Internet users do not have ``a reasonable expectation
of privacy in such communications.'' Especially in light of the
fact that your agency is going to be overseeing or implementing
large portions of Obamacare, is it still the position of the
IRS that it has the right to search, collect, and review
Internet or e-mail data without a search warrant?
Mr. WERFEL. I think there is a Supreme Court decision on
this.
Mr. MULVANEY. It is a Sixth Circuit case. It is not a
Supreme Court case.
I am not exactly sure.
Mr. MULVANEY. Would you mind letting us know in writing as
to what the policy is?
Mr. WERFEL. I will. I will.
Mr. MULVANEY. Thank you very much.
If a small business owner who also happens to be either a
participant in a conservative group or a donor to a
conservative group or a donor to a conservative candidate has
been audited in the last say 48 months and they are naturally
suspicious as to whether or not they have been targeted
improperly, what is the appropriate steps for them to take to
answer that question to their satisfaction?
Mr. WERFEL. I would offer two, and several are taking these
steps.
One, if they believe it was inappropriate, they can refer
the matter to the Treasury Inspector General for Tax
Administration. And I believe TIGTA is receiving those and
doing the appropriate investigations. Or they can go to the
National Taxpayer Advocate and raise the issue. Now, the
National Taxpayer Advocate is more aligned to--``not that I
necessarily feel I was treated inappropriately'' but ``I am
having trouble with the bureaucracy.'' So it really depends on
the circumstance. But if the taxpayer believes that there was
really wrongful conduct going on, they should refer the matter
to the IG. If I find such an issue, I certainly would refer it
to the IG and have them do the appropriate investigation.
Mr. MULVANEY. So if a large donor to Mr. Huelskamp, for
example, was audited for the first time in his history and is
concerned that he has been targeted, you think the appropriate
step is to call the inspector general?
Mr. WERFEL. If the person has a basis to believe that there
was something inappropriate going on, but just based on the
fact pattern that you provided, it would be very difficult for
the IRS to know.
Mr. MULVANEY. How would they know if there is a basis?
Mr. WERFEL. Well, it is a good question. But I would
articulate, I mean, I think out of an abundance of caution, if
they felt that they were being mistreated by the IRS, they
should raise the issue. But I would also articulate that I am
not sure the IRS would have that information, nor know how to
influence the audit footprint.
Mr. MULVANEY. Are you all worried and have talked about any
potential legal liability that you may have to folks that have
been targeted?
Mr. WERFEL. We have several lawsuits pending as a result of
the IG report that was issued in mid-May.
Mr. MULVANEY. Have you budgeted for any losses related to
that lawsuits?
Mr. WERFEL. Well, the budgeting process around litigation
loss in the government is somewhat complicated. There are
judgment funds that are reserve funds that pay out for those
things. So the answer to your question is I have to go back and
look at how we are dealing with our litigation exposure. This
would not be the first time we are under litigation and we have
certain budgetary procedures in place.
Mr. MULVANEY. That makes sense. And finally--and I
appreciate the extra time, Mr. Chairman--I was a little bit
surprised because, again, I never worked for the government--
when Ms. Lerner was asked to resign several weeks ago, she
declined and then she was placed on administrative leave, I
believe, with pay. Okay, this is something that is completely
foreign to those of us who came up in the private sector. Why
was she not fired?
Mr. WERFEL. So if I could, can I lift up the discussion?
Mr. MULVANEY. Sure.
Mr. WERFEL. Because the Privacy Act----
Mr. MULVANEY. Better than dragging it down. Yes, go ahead.
Mr. WERFEL. I have to lift it up to more generalities
because the Privacy Act would preclude me from commenting on a
particular employee's status with respect to a disciplinary
action.
Mr. MULVANEY. Understood.
Mr. WERFEL. But let me say this. It is a good question, and
I am glad you raised it.
There are very specific laws and regulations in place that
govern civil servant employment--how you hire them, how you pay
them, how you potentially separate from the government from
them, whether it is retirement, buyout, or a disciplinary
action leave. And what we do in the IRS and what I am making
sure that we do is to the extent appropriate we will take the
most aggressive possible action we can where we believe an
individual can no longer hold a position of trust within this
agency. And that is generally the steps we take. Now, there is
a process, a due process that goes on and it was built to
protect federal employees for a whole variety of different
reasons, and there is probably a valid public policy debate we
could have on those rules where if you have concerns that an
individual can no longer hold the position of public trust
within the government, the first step in that process is to
place them on leave--it is paid leave--while you build the
record and give them a chance to respond to that record about
what the ultimate disposition of their employment should be.
The rules and regulations are just set up that you default
while that discovery is being done and while that due process
is being done, the individual is paid. It would be a violation
of the law for me in a situation where I felt that an
individual could no longer hold the position of public trust to
move to immediate termination. There are circumstances where
you can do it but it has to do with criminal violations.
Mr. MULVANEY. Just to wrap up and try to bring it back to
Ms. Lerner, is that due process still ongoing or have you all
made a determination as to whether or not she is able to stay
with the organization within a position of trust?
Mr. WERFEL. I cannot comment on that particular situation.
I will say that as a general----
Mr. MULVANEY. You can tell me if it is still ongoing or
finished, can you not, without telling me any of the details?
Mr. WERFEL. No. I can tell you in a setting that is not
public. I can share that information.
Mr. MULVANEY. Is she still employed by the IRS? You can
tell me that.
Mr. WERFEL. Yes, she is still employed by the IRS.
Mr. MULVANEY. Thank you, Mr. Chairman. I appreciate the
additional time.
Chairman GRAVES. Thank you very much. And with that I want
to thank acting commissioner Werfel for being here today. We
are going to continue to monitor the IRS and its treatment of
small businesses. And I appreciate the fact that you designated
Faris Fink as our point person and included us as a part of
this review process that you are talking about. He is obviously
the commissioner of Small Business and Self-employed Division
and we want to interact with him.
In addition, we are also going to have some questions.
There will be Committee members on both sides of the aisle that
will have questions and I want you to commit to respond to
those in a timely manner and as quickly as possible and as
fully as possible.
With that, I would ask unanimous consent that members have
five legislative days to submit statements and supporting
materials for the record.
Without objection, that is so ordered. And with that the
hearing is adjourned. Thank you.
[Whereupon, at 3:33 p.m., the Committee was adjourned.]
A P P E N D I X
WRITTEN TESTIMONY OF
DANIEL WERFEL
PRINCIPAL DEPUTY COMMISSIONER
INTERNAL REVENUE SERVICE
BEFORE THE
HOUSE SMALL BUSINESS COMMITTEE
ON THE IRS AND SMALL BUSINESSES: ENSURING FAIR TREATMENT
JULY 17, 2013
Introduction
Chairman Graves, Ranking Member Velazquez and Members of
the Committee, thank you for the opportunity to appear before
you today to discuss tax matters affecting small businesses.
The mission of the IRS in regard to small businesses, and
indeed to all taxpayers, is to provide quality service by
helping them understand and meet their tax responsibilities,
and to enforce the law with integrity and fairness to all.
The IRS takes seriously the need to provide excellent
service to small business taxpayers. Small businesses and self-
employed taxpayers in the U.S. are vital to our country as
engines of economic growth, and the IRS needs to do its part to
ensure that they can move full speed ahead and flourish. This
assistance takes a number of forms to help taxpayers avoid
unintentional errors in attempting to comply with the tax laws.
Small businesses, from sole proprietors who file Form 1040 with
a Schedule C to small corporations and partnerships,
continually must face the task of familiarizing themselves with
complex aspects of the tax code. Some of these provisions
change from year to year, making it important for taxpayers to
update their understanding each year. Assisting taxpayers with
questions before they file their returns prevents inadvertent
errors and reduces burdensome post-filing notices and other
correspondence from the IRS.
The IRS believes it is important to conduct outreach to
small businesses on changes to the tax law and the latest in
filing requirements. The operation of this outreach reflects
the widespread use of tax professionals by small business
owners. Because the vast majority of small businesses and self-
employed individuals use professional return preparers, the IRS
partners with thousands of industry and small business
organizations, including minority-owned business associations,
tax professional and payroll associations and other government
agencies to extend and amplify our outreach and education
efforts.
A major component of our outreach efforts involves the
meetings, symposiums and seminars we sponsor for small business
owners and the tax practitioner community each year. In FY
2012, the IRS held more than 2,000 of these events, which were
attended by more than 163,000 business owners and tax
professionals.
Increasingly, the IRS is employing technology to reach
small business owners and help them fulfill their tax
obligations. Our website, IRS.gov, includes a section that is
devoted to small businesses and contains a wealth of videos,
audio presentations and webinars on a wide range of tax topics,
such as employment taxes, electronic filing and retirement
plans geared toward small business.
We also assist business taxpayers by operating a special
toll-free telephone line dedicated to small businesses,
corporations, partnerships and trusts. Callers can get help
with, for example, business returns or business accounts,
employer identification numbers and federal tax deposit issues.
A separate toll-free line for practitioners is staffed by IRS
representatives specially trained to handle their questions and
resolve their clients' account-related issues.
IRS-published products are also important resources for
small business taxpayers. These include the Tax Calendars which
provide highlights on tax topics, resources, instructions and
important dates. Our electronic publication, e-News for Small
Businesses, includes the latest IRS news releases and
announcements. The quarterly SSA/IRS Reporter is a
collaborative effort with the Social Security Administration
that provides information on payroll taxes and other employee
issues.
IRS Enforcement Programs
Even as we seek to ensure that our service to small
businesses meets high standards, the IRS also must carry out a
rigorous enforcement program. This includes administering a
balanced examination program that helps ensure that taxpayers
accurately report their income, deductions and credits. This
also includes administering our collection program, which seeks
to collect assessed tax liabilities.
The IRS collected more than $50 billion in total
enforcement revenue in Fiscal Year (FY) 2012, the third year in
a row the enforcement revenue exceeded that level. The amount
collected in 2012 was actually lower than in 2011 and 2010, for
a number of reasons. For example, the economic slowdown
contributed to lower enforcement figures, as most enforcement
dollars collected resulted from audits of returns for years
during the slowdown. Another factor behind the FY 2012 numbers
reflected changes in agency staffing and budget resources.
After a nearly flat budget in FY 2011, the IRS' FY 2012 budget
was reduced by $305 million. This reduction affected the level
of staffing available to deliver service and enforcement
programs. Overall full-time staffing has declined by more than
8 percent over the last two years, and staffing for key
enforcement occupations fell nearly 6 percent in the past year.
In 2013, the IRS absorbed an additional $618-million reduction
in its budget due to sequestration, which will have further
negative impacts on IRS performance, including performance in
enforcement programs.
In FY 2012, the IRS audited approximately 1.65 million
returns, of which 21 percent were small business returns. For
FY 2011 the percentage was 22 percent, and for FY 2010, 21
percent. This group includes filers of Schedule C and Schedule
F, along with small corporations, S corporations and
partnerships. The 2012 small business audit rate equates to
only 0.2 percent of all returns filed, and 1.3 percent of small
business returns filed.
In conducting its examination program, the IRS uses a
variety of techniques to focus exam resources on the areas of
greatest compliance risk. As returns are processed, a majority
of them are scored by a computer program for compliance risk,
with a higher score indicating a higher probability that a
change will be recommended during an examination. While the
computer score is the most frequent reason for selecting a
return for examination, there are other reasons a return may be
selected. These include the need to reconcile what is reported
on a taxpayer's return with third-party information provided on
forms such as W-2s or 1099s.
In addition, a small business may be randomly selected for
audit under our National Research Program. The results from
examinations conducted under this program are used for research
purposes. The information gained from these audits helps us
improve our audit selection criteria and update our estimates
of the tax gap, which is the amount of taxes owed but not paid
on time.
The type of audit a taxpayer may undergo depends on the
number and complexity of issues involved. A single issue
questioned on a return will generally give rise to a
correspondence audit, while multiple issues will likely result
in a face-to-face exam.
For all exams, the average additional tax recommended in FY
2012 was $23,345. Within that total, the average additional tax
recommended for self-employed individuals was $11,880 and for
small corporations, $28,988. For all taxpayers, the average
cost to the IRS of a correspondence exam in FY 2012 was $400,
compared with $324 in FY 2010. The average cost of a field exam
to the IRS in FY 2012 was $6,232, down from $7,248 in FY 2010.
Ensuring Fair Treatment for Small Business Taxpayers
In going about our work in the enforcement area, the IRS
realizes that many small businesses face substantial economic
challenges, even as the economy recovers. We have worked
diligently to communicate to our employees the importance of
recognizing that individual taxpayers and businesses being
audited may be dealing with financial hardships, and we have
encouraged our employees to be flexible in these situations.
Increasing our employees' flexibility allows them to
respond appropriately to taxpayers with financial troubles.
Even as our economy recovers, too many small business owners
continue to struggle to make their payrolls, secure lines of
credit, contribute to their employees' retirement plans and
stay current with their taxes. For that reason, we will
continue to make sure that our employees have the guidance and
the discretion they need to assist small businesses with the
service they need and deserve.
One major example of our efforts to help individuals and
small business owners in this regard is the Fresh Start
initiative, which began in 2011. Under this initiative, we have
increased flexibility in our collection program to help
taxpayers who are struggling financially. For example, we made
it easier for taxpayers to obtain lien withdrawals after paying
back taxes owed, and allowed liens to be withdrawn when a
taxpayer signs a Direct Debit Installment Agreement (DDIA).
Another provision helps more small businesses get access to
Installment Agreements if they sign up for a DDIA and have less
than $25,000 in unpaid taxes. We also changed our rules for
Offers in Compromise (OIC) so that more taxpayers could qualify
for a streamlined OIC.
We have continued to refine the Fresh Start initiative, and
further increased flexibility in our collection program in
2012. This includes easing failure-to-pay penalties for
unemployed taxpayers, and expanding our Allowable Living
Expenses (ALE) standard. The standard is used to provide
taxpayers a fair and consistent amount to live on while they
repay tax debts.
As part of our work to ensure fair treatment for small
business taxpayers, we continue our focus on taxpayer burden
reduction, through such efforts as simplifying forms and
publications and streamlining policies and procedures. For
example, as part of our effort to implement Executive Order
13610, ``Identifying and Reducing Regulatory Burdens,'' in
January 2013 we announced a simplified method for claiming the
home office deduction. This new option is expected to help
owners of home-based businesses by significantly reducing the
paperwork and recordkeeping burden associated with calculating
the deduction for business use of a home.
Another aspect of ensuring that small business owners
receive fair treatment involves ensuring that they have
recourse in tax disputes with the IRS. It is important to note
that my plan of action for improving IRS operations, which I
will describe in more detail later in my testimony, includes
enhancing mechanisms for taxpayer recourse. The IRS does have
the Taxpayer Advocate Service (TAS) to assist taxpayers having
difficulty resolving issues with the IRS, but we concluded in
our recent report that these mechanisms are not well understood
by taxpayers and therefore are not being sufficiently
leveraged.
Therefore, we are taking action to raise taxpayers'
awareness of their rights and of the tools at their disposal
for resolving issues, such as TAS. We need to be sure that all
IRS employees are aware of their responsibilities with respect
to ensuring taxpayers know their rights, and in particular,
ensuring that taxpayers know how to engage TAS when they feel
they are being treated inappropriately or are encountering
excessive bureaucratic obstacles. The IRS leadership is
committed to working with the National Taxpayer Advocate to
evaluate the training provided to all IRS employees in this
regard and modify it, as appropriate, to make necessary
improvements to fill whatever gaps may exist in the current
process or actual behavior.
It is important to note that all of the outreach, education
and burden-reduction initiatives I have described in my
testimony depend on the IRS receiving adequate resources to
fund them. It is imperative that we be able to continue to
reach out to small business owners to help them file income and
payroll taxes, understand tax law changes and seek help from us
in cases of financial hardship. The IRS has absorbed
significant cuts in our budget in the last few years, and we
have made major strides in reducing costs and finding
efficiencies in our operations. Additional significant cuts to
the IRS budget have the potential to weaken our ability to
deliver our service and enforcement programs, including those
dedicated to assisting small business owners.
Charting a Future Path for the IRS
Before concluding my testimony, I want to give the
Committee a brief overview of the work we have been doing over
the past several weeks to chart a new path forward for the IRS,
as these efforts are important to all taxpayers, including the
small business community. We have initiated a robust action
plan to address needed improvements that we believe will help
restore and sustain the public's trust in the IRS.
The report we released last month describes a number of
important findings, aggressive actions and next steps for the
IRS. The problems with the 501(c)(4) application process that
were uncovered by the Treasury Inspector General for Tax
Administration (TIGTA) have created significant concerns for
individual and business taxpayers, and it is incumbent upon us
to take swift action to ensure accountability, fix the problems
that occurred and thoroughly examine other aspects of IRS
operations.
Over the past month, an ongoing review of the events
described in the TIGTA report has shed further light on the
management failures that occurred within the IRS and the causes
of those failures. There was insufficient action by IRS leaders
to identify, prevent, address and disclose the problems that
emerged with reviews of applications for tax-exempt status. Our
report outlines management deficiencies and the steps that must
be taken to correct them.
Of note, there is no current evidence of the use of
inappropriate screeners or other types of criteria in other IRA
operations beyond those discussed in the TIGTA report. We
recognize, however, that there is public concern over the
criteria the IRS adopted to review applications for tax-exempt
status, a concern shared by the Committee as expressed in its
recent letter to the IRS. Because we realize that more needs to
be done to evaluate our screening criteria and procedures, we
are establishing a review process by which screening criteria
and procedures across the IRS will be periodically assessed to
safeguard against any risks of inappropriate criteria.
We are also continuing to review the full range of IRS
operations, processes and practices to focus on how we deliver
our mission today and how we can make improvements in the
future. In that way, we will develop a better understanding of
organizational risks wherever they exist in the IRS. We have a
great deal of work ahead of us, and the IRS is committed not
only to correcting the problems that have occurred, but also to
continuing other important work of the agency.
Conclusion
Mr. Chairman, Ranking Member Velazquez, thank you again for
the opportunity to testify today on the IRS service and
enforcement efforts in relation to small businesses. As we
continue to chart a path forward for our agency and determine
what improvements are needed in IRS operations, we will do
everything possible to ensure that small businesses are treated
fairly and given the assistance they need to comply with our
nation's tax laws. This concludes my statement, and I would be
happy to answer your questions.
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