[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR 2014
=======================================================================
HEARINGS
BEFORE A
SUBCOMMITTEE OF THE
COMMITTEE ON APPROPRIATIONS
HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRTEENTH CONGRESS
FIRST SESSION
________
SUBCOMMITTEE ON FINANCIAL SERVICES AND GENERAL GOVERNMENT
APPROPRIATIONS
ANDER CRENSHAW, Florida, Chairman
JO BONNER, Alabama JOSE E. SERRANO, New York
MARIO DIAZ-BALART, Florida MIKE QUIGLEY, Illinois
TOM GRAVES, Georgia MARCY KAPTUR, Ohio
KEVIN YODER, Kansas ED PASTOR, Arizona
STEVE WOMACK, Arkansas
JAIME HERRERA BEUTLER, Washington
NOTE: Under Committee Rules, Mr. Rogers, as Chairman of the Full
Committee, and Mrs. Lowey, as Ranking Minority Member of the Full
Committee, are authorized to sit as Members of all Subcommittees.
John Martens, Winnie Chang, Kelly Hitchcock,
Ariana Sarar, and Amy Cushing,
Subcommittee Staff
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PART 7
Page
Treasury Inspector General for Tax Administration................ 1
Internal Revenue Service......................................... 81
Department of the Treasury [Secretary]........................... 131
Internal Revenue Service [Oversight]............................. 219
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U.S. GOVERNMENT PRINTING OFFICE
82-627 PDF WASHINGTON : 2013
COMMITTEE ON APPROPRIATIONS
HAROLD ROGERS, Kentucky, Chairman
C. W. BILL YOUNG, Florida \1\ NITA M. LOWEY, New York
FRANK R. WOLF, Virginia MARCY KAPTUR, Ohio
JACK KINGSTON, Georgia PETER J. VISCLOSKY, Indiana
RODNEY P. FRELINGHUYSEN, New Jersey JOSE E. SERRANO, New York
TOM LATHAM, Iowa ROSA L. DeLAURO, Connecticut
ROBERT B. ADERHOLT, Alabama JAMES P. MORAN, Virginia
KAY GRANGER, Texas ED PASTOR, Arizona
MICHAEL K. SIMPSON, Idaho DAVID E. PRICE, North Carolina
JOHN ABNEY CULBERSON, Texas LUCILLE ROYBAL-ALLARD, California
ANDER CRENSHAW, Florida SAM FARR, California
JOHN R. CARTER, Texas CHAKA FATTAH, Pennsylvania
RODNEY ALEXANDER, Louisiana SANFORD D. BISHOP, Jr., Georgia
KEN CALVERT, California BARBARA LEE, California
JO BONNER, Alabama ADAM B. SCHIFF, California
TOM COLE, Oklahoma MICHAEL M. HONDA, California
MARIO DIAZ-BALART, Florida BETTY McCOLLUM, Minnesota
CHARLES W. DENT, Pennsylvania TIM RYAN, Ohio
TOM GRAVES, Georgia DEBBIE WASSERMAN SCHULTZ, Florida
KEVIN YODER, Kansas HENRY CUELLAR, Texas
STEVE WOMACK, Arkansas CHELLIE PINGREE, Maine
ALAN NUNNELEE, Mississippi MIKE QUIGLEY, Illinois
JEFF FORTENBERRY, Nebraska WILLIAM L. OWENS, New York
THOMAS J. ROONEY, Florida
CHARLES J. FLEISCHMANN, Tennessee
JAIME HERRERA BEUTLER, Washington
DAVID P. JOYCE, Ohio
DAVID G. VALADAO, California
ANDY HARRIS, Maryland
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1}}Chairman Emeritus
William E. Smith, Clerk and Staff Director
(ii)
FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR 2014
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Tuesday, March 5, 2013.
OFFICE OF THE TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION
WITNESS
HON. J. RUSSELL GEORGE, TREASURY INSPECTOR GENERAL FOR TAX
ADMINISTRATION
Mr. Crenshaw. This is the first meeting of the Financial
Services and General Government Subcommittee of this year's
Congress, and we have a lot of work to do. I served on this
Subcommittee in the 111th Congress, and, at the time, Mr.
Serrano was the chairman. We have some new members, and I am
glad to be back, and I am honored to be asked to be the chair
of this important Subcommittee. So I want to welcome Mr.
Quigley, who is a new member. I think Ms. Kaptur is a new
member as is Ms. Herrera-Beutler. And we have got returning
members Mr. Bonner, Mr. Diaz-Balart, Mr. Graves, Mr. Yoder, Mr.
Womack, and Mr. Pastor.
One of the things that we will do as we begin is finish up
some of the work we have got to do for the 2013 Appropriations
Bill. As you all know, we got a lot of challenges as we start
2014 as appropriators, and I think most of us recognize that a
continuing resolution is probably not the best way to run the
railroad. But that is where we are. In the last session of
Congress, we had to deal with 2011-2012, and if you all will
remember, we actually reduced spending by $95 billion, which
has not been done in about 50 years. By 2013, because the
Senate did not pass any of their bills through the Senate
floor, we have not finished our work for 2013. And, as you
know, on March the 27th, the continuing resolution runs out,
and hopefully later this week, at least on the House side, we
will try to provide for the funding for the rest of this year.
And I hope that we get back to regular order.
It is also compounded this year by the fact that the
sequester kicked in last Friday, and $85 billion was taken out
of the 2013 spending bill. I think as appropriators, number
one, we would rather see the appropriation process work, where
you have hearings like this and where we conduct oversight,
where we mark up bills, take them to full committee, have
amendments, go to the House floor under an open rule, and see
legislation passed, and then conference with the Senate. That
is the right way to run the railroad, and I think when you are
talking about making cuts, the sequester is not a very good way
to do that when you just have across-the-board kind of meat-ax-
type approach. I think we would all agree that it is better to
conduct our business like we do. Sometimes we spend more money
on important programs and we spend less money on less important
programs, and that is the right way to do it. But that is where
we find ourselves. And in 2014, it is compounded by the fact or
complicated by the fact that we do not have a budget from the
administration yet, so we hope that we will get that sooner
than later.
But I thought rather than just sitting around waiting, that
we would have some hearings and have Inspector Generals come in
and talk to us about things. We will hear from the Judiciary,
because they are not under the oversight of OMB. And then, when
we get the budget from the White House, we will have hearings
with some of the agencies, as time permits. So that is where we
find ourselves.
Just a couple of housekeeping comments for you all. We are
going to try to start on time. I would like to observe the
five-minute rule, where everybody can ask questions and make
comments, but keep those to about five minutes, so everybody
will have a chance to ask questions. I am sure we will have
time to go around the room and have more than one series of
questions, but let's work on that. Also, our witnesses, we
encourage them to keep their comments short and sweet so that
we can all do the things we need to do. It is my intention to
recognize people in the order in which they arrived, who was
here when the meeting started. We will go back and forth based
on seniority, and when people straggle in late, we will
recognize them based on when they arrived. So that is kind of
where we are now.
Before we hear from our witness today, I would like to
recognize Mr. Serrano, and by the way, a special welcome to
him, because he has been either the chairman or the ranking
member of this Subcommittee ever since it was first started.
And so that means either it is a young Subcommittee or an old
guy. Mr. Serrano.
Mr. Serrano. Thank you, Mr. Chairman. Let me first do
something totally, somewhat out of order, and that is to
congratulate you on your chairmanship. I know you banged the
gavel once but that did not count.
Mr. Crenshaw. Okay, I will again.
Mr. Serrano. Now it counts. And I know how exciting it is
to be a cardinal, especially this week. You should be in Rome,
seeing what you can do. I was a cardinal; I am now an
archbishop, I guess, or a bishop. This Subcommittee, under your
leadership, can accomplish great things because it is a
Subcommittee where, when you look at the budget and the
allocation, it may not be as large as other committees, but oh,
my God, does it have issues to deal with. And it is through
this Subcommittee that people that support certain programs and
others oppose those same programs can move to work on those.
Many people do not identify, for instance, Obamacare with a
Subcommittee, as it is here where some folks have tried, and I
am sure may try in the future to defund it, if you will. We
oversee the District of Columbia, and it is there where people
deal with a lot of social issues, rather than deal with just
our role. And, for me, that has always been a very, somewhat a
touchy, if not, at times, an emotional issue, because I was
born in an American territory and I probably was the first
chairman of a committee who said I wanted to give up power; I
did not want to have more power over the seat, I wanted to have
less, to where some of my colleagues said, ``No, that is not
how politics is.'' But I lived with it well.
But I want to congratulate you. I know that you are a
serious member of Congress; the years that you have been on the
committee you have served well, and I know that with very
little effort, you and I can be good partners. And I totally
agree with you that what is missing from the appropriations
process is regular order. I have no problems with having a bill
come on the floor; I do not have a problem if it takes seven
days to do that bill as long as it gets done. In fact, I was a
Democrat that always opposed when Democrats would agree on a
rule, then say we are going to debate this appropriations bill
for five hours, and then would ask unanimous consent to bring
it down to an hour. I would say, ``No, what is wrong with just
debating and debating and debating? That is what democracy is
about and that is what makes us different.'' And so we may
disagree but we do not have to be disagreeable, and you have my
support as your ranking member.
Mr. Crenshaw. Well, thank you very much. And by the way, I
know there are a lot of controversial issues that we will face,
but when I was chairman of the legislative branch subcommittee,
I reduced the office accounts for all the members.
Mr. Serrano. You became very unpopular.
Mr. Crenshaw. That is right. So I can handle all this
stuff. And I know that we are not going to agree on all the
issues that face us, but one thing I know for sure is that we
are going to respect the witnesses, respect each other, and
hear from everybody. So today we are pleased to have Treasury
Inspector General for Tax Administration, Russell George. He is
going to share his observations about the economy and the
efficiency of the IRS. I want to welcome him and let you all
know that the IRS is the largest Treasury bureau, and TIGTA is
the largest of the three Treasury Inspector Generals, so we
look to you for some wise counsel. I would like to recognize
you to make an opening statement; you can maybe limit those
remarks, but certainly feel free to submit anything you would
like for the record. So the floor is yours.
Mr. George. Thank you, Mr. Chairman. I appreciate the
invitation to be here. Chairman Crenshaw, Ranking Member
Serrano, members of the Subcommittee, once again, thank you for
the opportunity to provide my views on the Department of the
Treasury and Internal Revenue Service as it administers the tax
code. As you noted, the Treasury Inspector General for Tax
Administration, which is commonly known as TIGTA, provides
oversight of the nation's system of tax administration, and as
I reported last year, the IRS faces a significant number of
challenges in its efforts to administer the code.
Once again, the Tax Gap, the difference between the amount
that the taxpayer is estimated to owe and what they voluntarily
and timely pay in a tax year, remains a serious challenge for
the IRS.
Despite an estimated voluntary compliance rate of 83
percent, the most recent IRS assessment is that the gross Tax
Gap equates to approximately $450 billion each year.
Every year, more than one half of all taxpayers pay someone
else to prepare their Federal tax returns. During the 2012
filing season, the IRS processed approximately 70 million
individual Federal income tax returns which were completed by
paid tax return preparers. Given the importance of paid
preparers to the tax system, the IRS began implementing reforms
to improve oversight of the return preparer community. However,
as you may be aware, most of these changes have been put on
hold by a Federal district court ruling.
Furthermore, I remain very concerned about the amount of
fraudulent refunds associated with identity theft, and the
IRS's effectiveness in providing assistance to victims of
identity theft. The inadequate processes used by the Service in
this area are quite troubling. Despite making some progress on
the issue, the IRS is still challenged in detecting and
preventing identity theft. As TIGTA previously noted, the IRS
could issue approximately $20 billion in fraudulent income tax
refunds over the next five years.
IRS-administered refundable tax credits remain vulnerable
to noncompliance, including incorrect or erroneous claims
caused by taxpayer error or resulting from fraud. Repeated
reviews of these credits concluded that the IRS does not have
effective processes to ensure that claimants qualify for these
credits. In fact, the IRS estimates that it has made over $100
billion in improper payments over the last 10 years on many of
these credits.
As I also reported last year, demand for taxpayer
assistance continues to rise while resources have decreased,
thereby affecting the quality of customer service the IRS is
able to provide. While the IRS does provide various options for
taxpayers seeking assistance, most still rely on the telephone
to contact the Service. With any increase in calls, there is a
corresponding increase in the delay of reaching an IRS
representative, and, ultimately, getting the help the taxpayer
needs. Each year, more taxpayers also seek assistance from one
of the IRS's 397 walk-in offices known as Taxpayer Assistance
Centers. The IRS assisted almost 7 million taxpayers in Fiscal
Year 2012; however, the IRS plans to help 15 percent fewer
taxpayers at these centers in the current fiscal year due to
resource concerns.
Lastly, the Affordable Care Act contains an extensive array
of tax law changes that will present many challenges for the
IRS. These include incentives and tax credits to individuals
and business to offset health care expenses. They also impose
new taxes and penalties administered through the tax code. In
June of 2012, my office issued a review that concluded that the
IRS had appropriate plans to effectuate tax-related provisions
of the health care law. We will continue to closely monitor the
IRS's actions to implement this legislation. The IRS estimates
that at least 50 provisions will either add to or amend the tax
code, and at least eight will require it to build entirely new
processes that do not currently exist within the tax
administration system.
Chairman Crenshaw, Ranking Member Serrano, members of the
Subcommittee, thank you for the opportunity to share my views.
I look forward to your questions.
[The information follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
SEQUESTRATION
Mr. Crenshaw. Well, thank you very much for those comments.
Let me start by asking a question that is probably on
everybody's mind, and that has to do with the sequester. I
mentioned earlier in my opening statement that from 2010-2012,
we actually reduced discretionary spending by $95 billion. And
as we all know, there was a special committee set up to find
some additional savings in discretionary spending. That did not
happen, so we find ourselves in this sequester mode. And,
again, I think we all agree that is not the best way to try to
cut spending, if indeed that is what our goal is. And so my
question to you, initially, is, tell us the impact the
sequester is having on your operations and on the operations of
the IRS. And maybe the second part of that is, which I think is
very important, do you think that the fact that you are having
to live with sequestration, is that motivating the IRS managers
to find more efficient ways to do their jobs? So if you could
comment on those two things, please.
Mr. George. Thank you, Mr. Chairman, I certainly will. Let
me start with TIGTA. Like most Federal agencies in government,
a vast majority of our resources, our appropriations, is
dedicated to the realm of human capital. To be precise, over 80
percent of the appropriations that we receive, roughly $150
million a year, again, is for payroll, for pensions and
benefits, and the like. And that is the historic trend, for the
most part, throughout Government. I need to note that TIGTA,
when it first stood up as an independent office of Inspector
General in 1999, after they passed it through the Reform Act in
1998, we had approximately 1,100 full-time equivalent, or FTEs,
in government-speak. We are now under 800; we are in the 700
level, so over a 20 percent decrease. And believe me, the
workload has followed respectively in terms of that.
That said, what we are able to do is find savings where
possible; meaning we have eliminated many of the contracts that
we had, some of which, I have to say, are very hard to tolerate
for me. I mean, we have a mission, unlike any other Inspector
General in the entire Federal Government, in that we have to
protect the integrity of the Nation's system of tax
administration, and by integrity, it also includes security. So
if someone is threatening an IRS employee or an employee of
TIGTA, we literally have a nationwide jurisdiction to identify
the threat and to help eliminate that threat, which requires
travel, which requires people to be in remote parts of the
country, which, again, with just 800 people, and with about
approximately the high 300s who are law enforcement types, we
are stretched for resources in that regard. But we,
nonetheless, still have cut travel significantly; we have
imposed a strict hiring freeze. The irony is, when I talk about
the need for additional employees, we are coming upon that wave
that is affecting all of Government with retirees. And these
are retirees with significant skills, both in terms of tax
administration and criminal law enforcement types of
activities. And it really does not help us conduct our mission
if these experienced people leave and there are no individuals
to take their place.
So that's a lot to talk about in terms of TIGTA. Now
imagine the Internal Revenue Service facing very similar
situations. While I have not seen the IRS's sequestration plan,
the acting commissioner, Steven Miller, did issue a memorandum
last week to all IRS employees in which he outlined the steps
that the IRS plans to take to address sequestration. And among
the items that he noted were hiring freezes, reduced funding
for grants and other expenditures, and cuts in cost areas, such
as training, travel, facilities, and supplies. Now, the one
thing that he has stated directly is that IRS employees will be
requested to take approximately five to seven furlough days
beginning sometime after the filing season. And, by the filing
season, he is referring to the April 15 deadline. As all of you
know, that is not truly the end of the filing season; it is for
individual tax returns, unless you received an extension to
file your return. But, as you know, the tax filing season is a
year-round process, as it relates to corporations and, again,
individuals in certain circumstances.
Mr. Crenshaw. It sounds like, for you, it helps motivate
you to do things more efficiently. I mean, it is tough. Would
you say that is true, and you would say that is true as best
you can tell when the IRS, if you are going to have to live
with that, then you are just forced to find more ways to be
more and more efficient; is that a true statement?
Mr. George. It is a true statement, sir, but it does not
reflect the fact that, and I did not want to outline this or
advertise it for people who might engage in some mischief, but
we are about to eliminate our contract for security guards at
our facilities. And so my difficult choice is: Do I get rid of
somebody who could potentially thwart off a threat to us, or do
I harm long-term employees, some of whom do live paycheck-by-
paycheck and who are dedicated, and, again, whose mission is so
closely aligned to that of the overall goal of securing the
system of tax administration? But it is a choice we had to
make, and so we are going to get rid of our security guards. I
would not advocate doing that in a normal set of circumstances,
but, obviously, we are in unusual times.
Mr. Crenshaw. I got you. Mr. Serrano.
Mr. Serrano. Thank you, Mr. Chairman, and thank you, sir,
for your service and for coming before us three years in a row,
right?
Mr. George. I think more than that.
IRS RESOURCES
Mr. Serrano. I think we are doing things right, either that
or we force you to come, I do not know how that works. Let me
ask you a question. Given the cuts of the IRS budget for the
last two years, compounded by sequestration, do you have
confidence that the IRS can tackle the many challenges it
faces? Can they implement your recommendations, or are we just
treading water here?
Mr. George. Well, I have to, just at the outset, point out
that, obviously, the IRS is in the best position to respond to
that question. From the body of work that we have done, I start
out with the statement and the proposition that the IRS, like
other Federal agencies in this circumstance, it is a zero sum
game. They have a charge that they acknowledge and that all of
you and all of us acknowledge they have to meet: administer the
Nation's tax code. They were given additional responsibilities
under the ACA, and their attitude, in discussions that I have
had, is ``We are going to do what the law requires us to do.''
Now, that said, given the limited resources and the fact
that they are not receiving additional resources any longer to
implement, for example, the ACA, they will have to decide what
areas need to be sacrificed. So will it be customer service?
Will it be enforcement? They are very difficult choices that
they will have to make, and I know that they will make those.
Now, what will the outcome be? Longer lines at Taxpayer
Assistance Centers? Longer hold times on the telephone by those
seeking assistance from people who can help taxpayers comply
with their tax obligations by answering questions? So there are
a motley of negative outcomes as a result of that.
Mr. Serrano. Right. Based on that comment, let me go back.
We realize, both the chairman and I, that these questions are
better answered by the agency themselves, but you have
knowledge of its functions and what goes on, and so the purpose
of this hearing is also not only to find out about your
particular agency, but how the IRS will be affected. And piggy-
back on that, we realize that the IRS may be the only agency
that Americans deal with on a regular basis at least once a
year. And so based on what you started to speak about, what
else can citizens expect to be missing because of sequestration
and these continued budget cuts?
Mr. George. Well, again, I have to repeat myself because it
is key, Mr. Serrano. My view is that most people understand
that they have an obligation as citizens, as good citizens of
this Nation, to pay the taxes that they owe, and are willing to
do so if they can. And by saying ``if they can,'' if they are
in that position where they have to file tax returns on their
own, it is a complicated process. For example, those who have
to determine what the cost basis is of a share of stock and
whether it is an individual company or whether it is a mutual
fund, that can become very complicated. And so while Congress
did pass legislation which, you know, forward is requiring
stock brokerages and the like to help provide that number, the
cost basis, it is not retrospective to the extent that it would
be able to help taxpayers. So if someone has to call the IRS to
inquire as to how to determine this, it is going to take quite
a while.
I mean, years ago the IRS was even requesting that people
leave their number and name and would call them back, and they
committed to do so at least within a day. I would guess that
that would take a lot longer. And if someone is determined to
get their tax return in by a certain date because they feel
they want to get their refund, are they going to take
shortcuts? That is a possibility. Are they going to make sure
they are 100 percent accurate in the amount of income that they
report or, again, how they compute certain tax obligations? I
certainly hope so, but human nature being what it is, who
knows?
Mr. Serrano. Thank you, Mr. George.
Mr. Crenshaw. Mr. Bonner.
Mr. Bonner. Thank you, Mr. Chairman. Mr. George, good to
see you again.
Mr. George. Likewise.
IRS SEQUESTRATION PLANNING
Mr. Bonner. You may have this in your statement that I have
just not discovered yet, but from where you sit, when do you
think the IRS began preparing for sequestration?
Mr. George. I have no idea, Mr. Bonner. I do not know the
answer to that question. I know that in the case of TIGTA, when
this was first discussed in 2011, there was some discussion as
to what would happen if this occurred. And candidly, we did not
anticipate that this would occur, and we were not given
direction from OMB and the Department on how to proceed. We did
not know what the percentages would be and the like. So a lot
of this really did not occur until, relatively, the last
minute.
Mr. Bonner. The reason I ask, I do not think you are alone;
I think several Federal agencies have indicated that, even
going back to the last Presidential debate, the President said
that Sequestration would not take effect. And, of course, it
is. He signed it into law, and we are now into the first full
week of it. And so I was not trying to throw you a curve ball
in terms of you speaking for the agency; I know that you do not
do that. But I was just wondering from your perspective as the
Inspector General, if you think that the Service has been
preparing for what we now find ourselves.
Mr. George. You know, in many respects, what an IG does
throughout government, and myself included, a lot of times that
is retrospective. It is a look back. So I am sure that I will
be able to answer your question the next time I am before you.
Or the moment we have some information on that, we could supply
it to the committee and to you.
[The information follows:]
Sequestration Planning
According to IRS officials, the IRS has been preparing to operate
at reduced funding levels since 2011, based on the reduced budget for
FY 2012, the FY 2013 continuing resolution, and the sequester.
CYBER SECURITY
Mr. Bonner. I am going to shift gears now. Recent news
reports have detailed the extensive penetration by advanced and
potentially state-sponsored cyber espionage threats against
American businesses and government agencies. Obviously, the tax
and financial information of American businesses and
individuals would be highly valuable to cyber criminals and
other hackers. Can you give us any perspective in terms of what
the IRS is doing to protect its systems, and perhaps more
importantly, the financial data, personal data of the American
people from cyber espionage and hacking by criminals and
foreign threats.
Mr. George. Thank you, Mr. Bonner, very important question,
very timely. Fortunately, I am in a position to say that we
have not uncovered any incidents of infiltration or hacking by
foreign entities. Again, I cannot give you a definitive
statement because of the sophisticated nature that many of
these foreign countries who have, ill intent engage in, but
again, our work thus far, and we do look at this, has not
indicated that that has been the case.
Now, what is very important to point out is that many times
a threat is not necessarily an external threat. In some
instances, it is an internal threat. And while it is not
widespread, there are still bad actors within the IRS who may
access information, not necessarily on a wide-scale basis, but
people who are having domestic issues or are doing things for
friends, or for remuneration. The IRS needs to be on the look-
out for that. That does occur. There are mechanisms in place to
try to locate them, but, again, with limited resources, the
extent to which that is complete, it varies.
BUSINESS SYSTEMS MODERNIZATION
Mr. Bonner. Let me try to get another question, and, again,
shifting even more, but going back to testimony that you gave
to the Subcommittee in 2011 about the slow pace of business
systems modernization at the IRS. I believe in your testimony
this year you mentioned that the modernization could help close
the tax gap by facilitating the examination process and
expediting tax payer contact. Between 2011 and today, in your
view, has the IRS addressed the concerns you had that you
raised then with business systems modernization from your past
testimony?
Mr. George. I am pleased to report, Mr. Bonner, that the
IRS has made significant progress in the area of business
systems modernization. There are a number of benchmarks that we
have been able to certify to show that the IRS has achieved
those, and to add to that, the General Accountability Office
even noted the progress the IRS has made in this area by
eliminating it as a high-risk area, and the Department overall
has noted this by removing this as a material weakness on the
part of the Internal Revenue Service.
Is it perfect? No. You may recall that recently the IRS
requested that taxpayers stop going to the ``Where's My
Refund'' link on the irs.gov website because it was being
overwhelmed by people visiting that. And there are a couple of
other areas which are minor in the big picture, but if you want
to know where your refund is, I think that is an important
factor. And, actually, I want to know where mine is, and I do
not know where it stands.
Mr. Bonner. It is troubling when the Inspector General does
not know where his stands. Makes you feel all good. Thank you,
Mr. Chairman.
Mr. Crenshaw. Thank you. Mr. Quigley.
MEASURES TO INCREASE REVENUE
Mr. Quigley. Thank you, Mr. Chairman. Good morning, Mr.
George. Thank you for your service. Could you respond a little
more to the GAO report about the IRS ability to boost its
revenues through a couple different means? They highlighted
two, particularly shifting from fewer field exams to more
correspondence exams, and shifting over to resources of more
productive groups than they do currently. The Chairman
discussed the issues of the IRS being forced to be more
efficient. What is your sense of the GAO report in this vein?
Mr. George. While I am not well versed in what the IRS
reported that you are quoting from, Mr. Quigley, I can say, in
general, the IRS, again, with limited resources, has to
determine where they get the biggest bang for the buck, and at
the same time, they have to ensure that they are fair to all
taxpayers. So, for example, as I pointed out in my oral
testimony as well as in my written testimony, tax credits,
refundable tax credits, are being abused at a rate that many
view unacceptable, and the IRS believes that is the case. Is it
relatively easy to identify people who are taking those credits
inappropriately? Yes. Is this a longstanding problem? Yes. But
when you look at a cost-benefit analysis, many times these
credits are in the low 2000s. Now, there are examples where
people have abused the system and it is much greater than that,
but in general, it is a relatively low figure that people
inappropriately request these refunds.
However, is it the cost benefit of the IRS expending a lot
of resources going after these small amounts as opposed to
spending additional resources going after the big picture,
meaning corporations and other, large tax-paying individuals
and entities that would require much more resources for the IRS
to determine the nature of the method being employed by that
particular entity or person to avoid their tax obligation. If
it will help stem further activity by people, in effect as a
deterrent, so you make an example of a tax entity or person,
payer, who is cheating the Government of hundreds of thousands
of dollars, if not more, that is a determination that they have
to make.
But the bottom line is, throughout this entire realm,
where, as I said at the outset, they have to determine what
enforcement mechanisms that they are going to employ versus
what customer service that they are going to employ versus
implementing new processes a la the ACA, these are very
difficult choices that they have to make, and I know that they
are in the process of determining those.
How it is that they go about determining who to audit and
who not to, that is a very, and I hate to use the word, but it
is a very secret process. There is something called the DIF, D-
I-F, and it is a method that the Internal Revenue Service
employs to determine who most likely is cheating on their
taxes. They will not share with me or with many people how it
is that they make that determination. We have, overall,
reviewed whether or not these selections are accurate; have not
found problems with that without having all the inside
information as to exactly how it is done.
Mr. Quigley. Must have shared some of this with the GAO.
Mr. George. I am sure they did but, again, I do not have
access to their internal information.
Mr. Quigley. Mr. Chairman, I assume I am out of time, will
come back. Thank you.
Mr. Crenshaw. Thank you. Mr. Graves.
Mr. Graves. Mr. Womack might have been here before I was,
if you want me to yield to him.
Mr. Crenshaw. Were you here when the meeting started?
Mr. Graves. Yes, sir.
Mr. Crenshaw. Then you are senior to Mr. Womack.
Mr. Graves. I understand the rules now. I tried, Mr.
Womack. Mr. George, thank you for being here.
Mr. George. Thank you, sir.
Mr. Graves. I want to go back to what Mr. Quigley was
talking about.
Mr. Crenshaw. Mr. Graves, if Mr. Womack has to leave and
you want to ask.
Mr. Graves. I would be happy to yield to him.
ACA
Mr. Womack. Thank you, Mr. Chairman. I just had a couple of
quick questions, and you spoke to it just a minute ago with Mr.
Quigley. We have piled a lot of duty on top of the IRS. In
looking at your expanded remarks, things like tax gap and
identity theft, and so on and so forth, and then we add the
Affordable Care Act to this mix; are these issues going to get
broader? I mean, we obviously have some pretty serious issues,
and we do not have the resources to accomplish the things that
we are already asking the Internal Revenue Service to do. And
even though this may be a question more appropriate to the
acting commissioner, in your professional opinion, with the
additional burden of the Affordable Care Act, notwithstanding
the number of people that will be employed to help administer,
are we going to be sitting here a couple of years later asking
why these issues have gotten worse not better?
Mr. George. Yes, is the short answer. There is no question
about that. Fortunately for the IRS, the ACA is being phased in
over the course of many years, with, of course, this year being
one of the first years of which it really kicks in. But it is
unprecedented in recent history the amount of responsibility
that the IRS is being given in an area that most people do not
anticipate as an IRS tax-related function. Most people assume
this is HHS's area of responsibility, and it is a huge HHS area
of responsibility, but the tax implications are substantial.
Most Americans do not realize this yet, and once they do
and once the requirements kick in, in terms of determining
whether or not you are to receive a penalty because you failed
to acquire health insurance, and then, ultimately, the
possibility of having tax refunds offset as a result of the
penalty that will need to be paid, this is something that the
IRS is going to have to be able to address in a very simple way
so that Americans understand what is going on. But, as I
pointed out earlier, because of the interrelationship with all
of this they are most likely going to start calling that 1-800
IRS number, or going to that website, and if you have limited
people answering the phone calls and/or the website is
overwhelmed, this is going to lead to problems, sir.
TAX REFORM
Mr. Womack. I wholeheartedly agree. My next question is,
there has been a lot of talk about tax reform. In your
professional opinion, if we were to be successful in tax
reform, both corporate and individual, or either/or, in your
professional opinion, what impact would that have on,
particularly, the tax gap, which I know was the IRS's number
one concern.
Mr. George. Let me preface my response by saying that the
Secretary, and this actually has been every secretary since the
Reagan Administration, has delegated tax policy to the
Assistant Secretary for Tax Policy, and has indicated that it
is that individual who is the only person who can proffer an
opinion on tax policy. But given my responsibility to report to
Congress under the Inspector General Act I can say this, and
that is that if you make it as simple as possible for people to
meet their tax obligations, the vast majority will do so, Mr.
Womack. And so how that goes about, obviously, is within the
jurisdiction of the Congress. But there is no question that tax
simplicity would, I think, help people comply, would encourage
people to comply more with their obligation, and, ultimately,
would reduce the Tax Gap.
Mr. Womack. Would it be a small improvement, a medium
improvement, or a large improvement? Your professional opinion
only.
Mr. George. Yes, no, no, because this touches on something
that, again, I have shared with Mr. Crenshaw and I believe with
this committee last time I was before it, but it is so relevant
to what you are saying, and it answers your question. The issue
that is addressed in this little handout of mine is about
third-party reporting, and I am just going to cut right to the
chase here. The IRS estimates that individuals whose wages are
subject to withholding report 99 percent of their wages for tax
purposes, and at the opposite end of the spectrum, while this
particular statistic is somewhat dated, but it is the most
recent that we have, self-employed individuals who operate
businesses on a cash-only basis report just 19 percent of their
income for tax purposes. So if what Congress considers would
help address the issue of who is reporting income, I think it
would significantly help in the terms of addressing the Tax
Gap, sir.
Mr. Womack. Thank you for your comments. Mr. Chairman, I
yield back.
Mr. Crenshaw. Thank you. Mr. Graves.
ACA: NEW TAXES
Mr. Graves. Thank you, Mr. Chairman, Mr. George. Two lines
of thinking, but first just going back to the implementation of
the President's health care law, how many taxes have phased in
since its implementation?
Mr. George. Sir, I have that information, and I beg your
indulgence.
Mr. Graves. These are all new taxes?
Mr. George. Yes, and I would like to be as precise as
possible and then also offer to provide a much more detailed
answer for the record. Thank you, okay, yeah. The ACA contains
$438 billion of revenue provisions in the form of new taxes and
fees which extend from Fiscal Year 2010 to Fiscal Year 2019.
Seventeen revenue provisions equate to over $409 billion, and
then there are eight other provisions which add up to $25
billion, roughly $26 billion dollars, which include the
adoption credit and the fee imposed on insured and self-insured
health plans.
[The information follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Graves. So these are all new taxes which the American
people have not been charged. So, a total of, you were giving
dollars there, but probably 21 new?
Mr. George. Yes, if not more. I mean, you have the excise
tax on tanning, indoor tanning, the excise tax on medical
devices, the net investment income tax, an additional Medicare
tax, among many others.
Mr. Graves. Right, a lot of different, a wide variety. And
what income brackets do you suppose these new taxes impact? Is
it about 2 percent or is it everyone?
Mr. George. I do not have the answer to that. We do not
have the answer to that, but we will get it for the record, Mr.
Graves.
[The information follows:]
Tax Brackets Impacted by the ACA Tax Provisions
This information is not available and cannot be determined until
each tax becomes effective and tax returns associated with the tax have
been filed and processed.
ACA: TANNING EXCISE TAX
Mr. Graves. Okay. So you brought up tanning bed tax.
Mr. George. Yes.
Mr. Graves. I would suggest that a wide variety of income
brackets use tanning beds, would you not?
Mr. George. Yes.
Mr. Graves. Outside of the top 2 percent, I would imagine.
We heard about tax reform momentarily a minute ago from Mr.
Womack, and tax reform is all about eliminating winners and
losers. Tanning bed tax is somewhat picking winners and losers.
The sun is not taxed; that is the winner in all of this, right?
But tanning beds now are taxed. A report was given to Chairman
Emerson, I guess it was last year, because it was the very
first tax, a 10 percent excise tax, and it shows that over the
seven quarters in which the tax was collected, the tax is
actually diminishing, the filers are diminishing over time,
and, in fact, the actual tax collection is about a third of
what was estimated, which, I guess, that brings up a whole
other topic for another day. But in your explanation, are
people just not reporting or are they just not able to report
anymore?
Mr. George. It is more the former, because we conducted
that review, Mr. Graves, and we found that the IRS did not do a
very good job in explaining to people who were subject to that,
meaning the tanning businesses, on what the tax, what the law
requires on how to go about doing it, complying with it. And,
in addition, enforcement following up on this is something that
was lacking.
Mr. Graves. But each and every quarter the number of filers
declined over time, and if I am not mistaken, in Georgia, it is
estimated about 15 percent of operators of tanning beds have
closed their business since implementation of that this tax. So
is it not possible that the fewer filers are a result of fewer
business owners today?
Mr. George. I was unaware of that figure, so I am not sure.
Mr. Graves. But it is possible.
Mr. George. That is a possibility, most definitely.
Mr. Graves. You are not insinuating that people are not
filing any more. I mean, I guess the IRS has been asking for
more money, they have been getting it, but filing has decreased
over time. So it is possible that the filers just do not exist
any longer.
Mr. George. That is a possibility, sir, yes.
Mr. Graves. Thank you, Mr. Chairman.
Mr. Crenshaw. Thank you. Mr. Yoder.
PROGRAM EFFICIENCIES
Mr. Yoder. Thank you, Mr. Chairman. Sir, I appreciate you
being here today. I have listened closely to the questions of
my colleagues. I wanted to follow up on a couple of items.
There has been some discussion of the enforcement issues
related to audits and noncompliant taxpayers, and the old
notion that has been spun in Washington and even in State
capitals is the idea that the more money you spend on your
local Department of Revenue or the IRS the more revenue comes
into the Federal Government or State government, and that,
essentially, I have had folks argue that it is an investment by
spending money in the IRS.
And I guess I would like to question you on that
conventional wisdom that has permeated this town for
generations. I noted on Page 10 you went through some extensive
discussion here about the ineffectiveness of some of the audits
that are occurring, which would sort of throw cold water on the
notion that spending money in this regard actually brings more
money into the Federal Government. You noted that, The IRS is
spending a significant amount of resources on unproductive
audits and compliant taxpayers are unnecessarily burdened by
audits.
You also then note in the previous paragraph that the IRS
identified and confirmed identity thieves approximately 1.5
million in undetected tax returns with potentially fraudulent
tax returns total in excess of $5.2 billion. So, your analysis
here to me speaks less about needing additional resources and
more about the processes that are used internally to find
delinquent taxpayers, or fraudulent taxpayers.
Mr. George. I do not disagree with a single word that you
said, sir. It is somewhat complicated. If the question were,
and it was not, but if it were what is the return on investment
for every dollar given to the IRS versus the amount of revenue
that they generate, the IRS estimates that their return on
investment is roughly in the $4 to $1 range, and that is a
rough estimate.
Have we validated that number? No. Do we think it is
completely, you know, off the wall? No. It sounds relatively
close.
Going back to the direct matter that you raised regarding
the inappropriate refunds and the like: There is no question
that when prisoners and when people are seeking and receiving
refunds that, especially people serving for life are getting
literally thousands of dollars in refunds, which is
extraordinarily unlikely given the fact that if they do receive
pay in prison it is nothing that would entitle them to that
type of refund, or when you have children of the ages of five
and six and seven seeking, and receiving, credits for
supposedly purchasing their first home, and then you, and also
parents receiving credits for children who are in grade school,
and yet they are receiving credits for these children
supposedly being in college, that is problematic. That is
something that the IRS should definitely improve its processes
to address. Again, from a deterrent point of view and in terms
of the fact that they could do this relatively simply by asking
more questions. In the case of the first time homebuyer's
credit, it was a result of our work that we identified this
massive problem and, to their credit, that the IRS implemented
changes, but they did not even ask for paperwork to prove that
a home was purchased. And so once we pointed that out and once
the IRS made that change, the amount of fraud in that area
almost evaporated rather quickly completely.
TIGTA RECOMMENDATIONS
Mr. Yoder. Does your department have specific
recommendations to the IRS to fix some of these problems? You
pointed out the DIF system as maybe being one that is less
effective and wasteful and burdensome on taxpayers. Is there an
idea of how the IRS could, instead of asking for additional
dollars in the appropriations process, figure out a way to use
internal dollars and be more efficient with the processes they
use and the enforcement mechanisms?
Mr. George. The answer is yes. It has to be pointed out
because I am sure when they are before this committee they will
point this out, they do collect over $2 trillion in revenue
every year, and yet we are talking, while it is a very large
amount of money, it is not 10 percent of that.
Mr. Yoder. I guess the most problematic point was where you
just described they are spending a significant amount of
resources, in your words, significant amount of resources on
unproductive audits and compliant taxpayers are unnecessarily
burdened by audits. I think that is the type of thing that
drives people mad at home to know that we are wasting money on
unproductive audits. And when we are talking about the
sequester it falls on a lot of deaf ears when they understand
that money is being wasted.
Mr. George. Again, while this is best responded to by the
IRS, they have to make determinations as to areas that they
believe are best for, again, either the deterrent effect or
that they can get the biggest bang for the buck, meaning, you
know, for X number of dollars they can receive X amount in
recovered monies.
ACA COMPLIANCE COSTS FOR TAXPAYERS
Mr. Yoder. And if I might, Mr. Chairman, I had a follow up
on the conversation you were having with Mr. Graves related to
the burdens on taxpayers when we talk about tanning beds and
different things that are being taxed and the impact of all
that. Are there estimates and did you provide estimates on the
estimated cost of these new things to taxpayers? I mean, we
talk a lot about what is the cost to the IRS to enforce
compliance. Do we have really good estimates on what the
burdens will be on compliance for all of these entities as we
implement the new health care act?
Mr. George. I do not believe we do have that information,
but we will double check, sir, and if so supply further
records.
[The information follows:]
ACA Compliance Costs on Taxpayers
This information is not available.
Mr. Yoder. I just think that is a lost conversation in this
debate about the implementation of these acts. It is not just
the cost on the government which is obviously sizeable and is
impacting our ability to enforce other parts of the tax code
and is going to cause complications for other portions, but
what are the administrative costs on small businesses and
individuals across this country, and can there be or do we have
an effective analysis of what that unquantifiable cost is? Or
unquantified cost is?
Mr. George. Again, if we have that we will supply it for
the record, sir.
[The information follows:]
ACA Compliance Costs on Taxpayers
This information is not available.
Mr. Yoder. I appreciate it, sir. Thank you, Mr. Chairman.
Mr. Crenshaw. Ms. Herrera Beutler.
IRS TV STUDIO
Ms. Herrera Beutler. Thank you, Mr. Chairman. Let me
rearrange this. You know, I am really interested, I heard a
statistic, it was one of those fact of the week type things
this last week about the IRS having a 24/7 television studio in
their satellite TV studio that they operate and consequently
that the EPA has a similar studio that they operate across the
street. They do not share or coordinate, but it costs about $4
million a year for the IRS, which I thought was kind of, you
know, I am not going to say small money because it is not our
money, but in the scheme of the grand federal budgets, but as I
am looking through the achieving program efficiencies and cost
savings section that you have here, I mean, you are noting $3
million on reduction of nontechnical travel or $9 million in
savings from increased electronic filing so $4 million is not a
small amount and could be added to this. Is that actually true?
They really do have said satellite studio?
Mr. George. They have more than one studio for television
and for audio types of messages, and I have to acknowledge that
we at TIGTA once utilized it when we were trying to get a
public service announcement done to warn people about phishing
schemes, and these were activities by bad guys which targeted
mainly the elderly and others.
Ms. Herrera Beutler. With that, that is an important thing.
That is something that we would want out there as consumers, as
individuals, right? You want to know, and you are grateful when
the IRS will take a step like that. Is that something that
could be consolidated, perhaps? I mean, when we do PSAs as
public officials they are free, the Broadcaster's Association
likes it when we do them, so I would imagine there might be
other ways to do this. Or is that such a needed function in the
IRS that they need to have their own studio that they operate.
Mr. George. Once again, while they are in the best position
to respond as to whether or not they could use other facilities
or, more importantly, because of the restrictions on tax
information, whether others could use their facilities, there
is no question, especially in times like these, where
everything has to be determined, looked at and determined
whether or not this is a good expenditure of taxpayer dollars,
it is certainly something I am sure they could and would look
at.
IRS WORKSTATION PROGRAM
Ms. Herrera Beutler. In following up with that because you
had some great findings here about other areas we could save
money. One of them in your testimony you identified
recommendations for shared workstation program for those who
telecommute or telework. The audit report notes that the IRS
negotiated a program with the Treasury Union to take effect in
October of last year. Has that actually taken effect?
Mr. George. I was told it has taken effect. So, yes.
Ms. Herrera Beutler. Okay. Very good. Well, that is all I
had. Thank you, Mr. Chairman.
MEASURES TO INCREASE REVENUE
Mr. Crenshaw. Thank you. Well, I think we will have time,
maybe, if other members have some more questions, for another
round.
People talked about the question of do we fully fund the
IRS and there is always that question of the Tax Gap. If we
gave the IRS more money, then do we get more money? In fact, I
have got a report here from the National Taxpayer Advocate and
it says some good things but one of the things it says was it
says that the IRS is significantly underfunded. They go on to
say that reducing the IRS's funding means reduced revenue
collections and a larger deficit. But when you look at the
facts, you say how can that be? Because we reduced the IRS
budget, I guess from 2011 to 2012, by 2.5 percent, but revenues
increased 6.3 percent. The deficit decreased by 16 percent and
so, obviously, there are other variables than the amount of
money that we spend on IRS. We have kind of pointed that out.
Could you talk a little bit about some of the other
variables that are certainly as important as the funding for
the IRS, maybe even more so? What are some of those?
Mr. George. In terms of the ways that they can relate.
Mr. Crenshaw. In other words, could you talk about
refundable tax credits or if you simplify the tax code? There
are other things we could probably do rather than just spend
more money in the IRS that maybe would make it easier to
collect more revenue.
Mr. George. It is, I think, a tool that would dramatically
assist the Internal Revenue Service. It is more access to
third-party information, and it goes back to what I quoted you
in terms of the 99 percent versus the 17 or 19 percent. If the
IRS had access to the database that the Department of Health
and Human Services has, it is called New Hire Directory, it
could compare what types of income information that HHS has and
then using the processes that it has employed in the past
determine whether or not there is a correlation between income
that is declared on the one hand and the amount of taxes
declared on the other hand. There is no question that that type
of information would be extraordinarily beneficial.
More agreements with nations outside of the United States
would be extraordinarily helpful. While there have been steps
taken recently and very publicly by the IRS as it relates to
certain banks in other countries that needs to be done on a
much more wide-scale basis. That would certainly help the IRS
have information and then, income that flows from that
information from people who otherwise are able to obscure or if
not just plain hide revenues or income that they have achieved
outside of the United States that they should be paying and
reporting within the United States. There are a hodgepodge, Mr.
Crenshaw, of ideas along this line that I would, with your
indulgence, like to submit for the record to this committee for
its consideration.
[The information follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
IDENTITY THEFT AND TAX FRAUD
Mr. Crenshaw. That would be great. Let me ask you, you
talked a lot in your opening statement about tax fraud,
identity theft and it is like amazing to me when you hear these
numbers. When I heard that there may be 900,000 tax returns
that were just fraudulent, I am thinking, ``Was that people
cheating on their tax returns?'' And you said, ``No, that is
actually people that steal somebody's Social Security number
and name, file a fraudulent return and then get a refund.'' I
think it was last year they identified about 900,000 of those;
totaling $6.5 billion dollars in fraud.
I guess the question is the IRS, in your view, are they up
to this task because they estimate, I think I heard somebody
say that TIGTA estimated another million, or million and a
half, and it seems to be the only thing they can do is say,
``We will help you as a victim,'' but I am not sure they can
actually have the tools to stop the fraudulent claims, other
than say, ``File early.'' If you file first and then the guy
comes behind you and files a fraudulent return, then you are
protected, but if you are a procrastinator like most people and
you filed late, somebody has already stolen your identity,
filed a return and gotten a refund and then they say, Well, we
will work with you. Is it time for us as legislators to give
them some tools that they might need because it sounds like
this is getting worse and worse.
Mr. George. You identified the problem precisely, sir. It
is growing and it is growing exponentially. It is very
troubling. And the one aspect of this that bothers me most is
it is not only, again, a domestic problem, it is an
international problem given the wide scale use of electronic
filing and people in certain countries around the world, which
most people in this area know about, meaning the countries,
where this problem is more prominent than in others. Unless you
have the assistance of those governments to help stem these, it
is something that is just going to continue to grow. They prey
upon lonely people. They prey upon the elderly, and it is
something that the IRS is very much aware of but, again, in
their defense, with the declining resources how much can they
allocate to this problem?
LEGISLATIVE RECOMMENDATIONS
Mr. Crenshaw. Do you think they need maybe to talk to us
about some assistance? There are things we do legislatively to
make it easier to coordinate law enforcement or do whatever?
Obviously, we will ask them that but is there anything that
comes to mind that we can help them with?
Mr. George. Yes, there are portions of the tax code which
severely, under criminal penalties restrict the type of
information that the IRS can share with law enforcement
individuals at one end of the spectrum, to State tax
enforcement officials at the other end and, of course, with
foreign governments. And so, again, this being a tax policy
issue and the like, I would have to defer to them for the
details, but that type of assistance would help this problem
tremendously.
Another issue, sir, and I spoke about this in my previous
appearance before this committee and it also touches on your
earlier question about what could be done to help the IRS, the
law as it stands now does not require a lot of the income
information from the payor until a month and a half after the
tax filing season begins. So in other words, a criminal could
file a tax return, an improper tax return using the identity of
someone else in January or February and have that processed and
the IRS accepts that information and will release a refund and
yet, the business, whatever entity is supposedly paying this
person, is not required to provide the IRS that information
until months later, generally in March. So it is that period in
between the two when the bad guy files and when the IRS has
information to confirm the information that the bad guy filed
that all this mischief can take place. It would seem like a
very logical, a relatively easy quote unquote area to address,
but it just has not been done.
Mr. Crenshaw. Well, I am filing early this year. I tell you
that. Mr. Serrano.
COST SAVINGS AND PROGRAM EFFICIENCIES
Mr. Serrano. I already filed. I have not heard back from
them but I already filed. Just two comments on things I have
heard discussed here. My first maybe partisan statement of the
year and probably be one of my last, but we could have put in
more money for the IRS for those who think they cannot do the
job in yesterday's CR and we did not. So they asked for more
that they are not getting.
The other thing is, my understanding and maybe you could
clear this up, that the studio is not only used for PSAs and so
on but the studio is also used for training so rather than
sending folks out in the field, training takes place at the
studio. Is that correct?
Mr. George. That is correct and when you are reducing
travel for training purposes, it seems a logical, and we are
doing the same in terms of using WebEx and other devices.
LEVEL OF SERVICE
Mr. Serrano. Right, right which is a money saver. That
should make some people happy. Mr. George, due to the budget
cuts, the IRS operated at a level of service of 67 percent in
2012, down from more than 80 percent in fiscal year 2007. This
translates to approximately 16 minutes of hold time for phone
calls. That is a long time to wait.
Further, appointments will not be offered at taxpayer
assistance centers which make it nearly impossible for those
with onerous work hours to get assistance. Does a low level of
service provision, in your opinion, relate to the level of tax
compliance?
Mr. George. Yes, it does. Now, the irony is notwithstanding
what I said in my written statement which is completely
accurate about the level of service declining, it just seems
ironic that the number of telephone calls thus far in this tax
filing season has decreased tremendously. So I do not know what
is causing that. We are going to look at it in our tax filing
season report, but the nightmare situation has not arisen yet.
I guess that could change overnight.
Mr. Serrano. Do you think it has decreased maybe because
people gave up on trying to call?
Mr. George. That certainly is a possibility.
LEVEL OF SERVICE AFTER SEQUESTRATION
Mr. Serrano. I am very interested in detailing the real
world impact of these sequester; that is, how these sequester
impacts Americans a day-to-day basis. Would it be possible for
your office to identify over the next few years a decline in
the level of service due strictly to sequestration? Likewise,
can your office detail the level of decline in compliance due
to the sequester?
Mr. George. We will do so, sir.
ITINS
Mr. Serrano. We would appreciate that. As we discuss each
year, identity theft is an enormous and growing problem for the
IRS. We are told that the improvements in the information
technology systems are helping to flag potential fraud. There
is a long way to go. With an inventory of more than 228,000
identity theft cases in the pipeline, what is it going to take
to really attack and resolve this problem?
Let me add something that I just thought of as I was
listening to your comments before. It looks like we are going
to get immigration reform and just for the record, I am for it.
I have been for it since day one. I think we have to stop all
the mean talk and deal with an issue and get these folks out of
the shadows and you know the rest of the statement. Part of
immigration reform would be securing the border, will be Do you
speak some English? Have you paid your taxes? and obviously,
some of that has to do with some folks maybe not having their
own identity as such, working under their own identity. Is that
an added burden to the IRS? Has the IRS at all, in your
knowledge, begun to deal with the possibility of this happening
or of them being called to play a role and if such, what role
do you think they will be called?
I mean, I am asking the wrong person in a way because we
will write the legislation and we will determine what role they
play, but it seems to me they will play some role in all of
this.
Mr. George. I agree completely in terms of the role that
the IRS will play, but the interesting part is, Mr. Serrano,
that the IRS has played a role here. For some time now, the
Internal Revenue Service issues what is called an ITIN, an
individual taxpayer identification number, and the sole purpose
of that is to allow people who do not have Social Security
Numbers, it gives them the ability to comply with their tax
obligation. So it is a number which is identical in length to
the Social Security Number, but it is not supposed to be used
for any other purpose other than to file taxes. And, as you
certainly are aware, many people who may not be in this country
and legally able to work are nonetheless compliant with tax
obligation with the hope that that would ultimately benefit
them if they do eventually have the opportunity to apply for
citizenship.
Mr. Serrano. That is true. That is one of America's little
secrets, the fact that there are so many folks who are not here
documented, paying taxes nonetheless and the joke around
different neighborhoods is the IRS does not care who they get
money from as long as they collect taxes. So they have been
doing this already and those records we feel are in good enough
shape for someone to say, Hey, look. I may be here undocumented
or illegally as you call me but I did pay my taxes over these
years.
Mr. George. The short answer is yes. Now, I have to point
out that the number which is supposed to be used solely for tax
purposes is sometimes used by others for non-tax purposes which
is contrary to the intent and the purpose of that.
Mr. Serrano. Such as?
Mr. George. Such as it is being used as a substitute for
the Social Security Number.
Mr. Serrano. I have a card. I am paying taxes. Therefore, I
am here okay to work. Okay. Thank you, Mr. Chairman.
Mr. Crenshaw. Thank you. Mr. Graves.
CONSUMPTION TAX
Mr. Graves. That was fascinating. I want to get back to the
abuse side as you spoke of their and the statistic that Mr.
Yoder and I were talking about is fascinating to us was that 99
percent of those who withhold taxes, I guess pay them or send
them in to the IRS on a timely manner then there were 19
percent small businesses who would, I guess, voluntarily do
that, only do that. That was the statistic you shared a minute
ago.
Mr. George. Yeah, actually, but I just want to make sure I
am clear here. It is for those who have their withholdings made
by a third-party. So in other words, if your job, you know,
withholds your tax.
Mr. Graves. And then hearing all the fraud and abuse
statistics you shown as well or given, you make a compelling
argument for a consumption-based tax.
Mr. George. That is a tax policy question, sir.
IMPROPER PAYMENTS
Mr. Graves. Very compelling argument for that and so, you
know, that is something you might want to consider making a
recommendation to the IRS to support the fair tax or some other
consumption base.
Back to the refundable tax credit abuse; I have heard a lot
about this in my area and I am interested to know what you
think the solution might be and really, just about three or
four questions within this. One, how do you quantify? What is
that dollar figure per year, and I know you talked about $2,000
increments potentially but globally, what is the dollar figure?
So how to resolve that and then maybe share to the committee
how is it done. Is it individuals doing it or is it
organizations during this?
Mr. George. That latter question I can answer immediately
and that is that it is done by both. And the troubling aspect
of this is many times, paid preparers, and they are at the
front line, we consider them team players in the effort to have
a fair system of tax administration and many times, these paid
preparers will simply say to someone, If you have children, you
are entitled to a tax credit, or an additional tax credit for
each child. And so without necessarily requesting birth
certificates or other proof that these children actually exist,
they will submit that to the Internal Revenue Service which
then willy-nilly processes them.
ITINS
Mr. Graves. And before you answer those other couple, does
any of this tie into the number you were sharing with Mr.
Serrano that ITIN number? Is that a component of this
potentially as well?
Mr. George. Yes, we have in recent work uncovered that the
Internal Revenue Service issued billions of dollars to people
using ITINs for credits that they were not entitled to under
the law.
IMPROPER PAYMENTS
Mr. Graves. Yeah, so serious problem. Okay, so I am sorry
to interrupt. So quantifying globally with the dollar figure is
and then maybe what your recommendation, your solution would
be.
Mr. George. Well, the solution is more information, sir.
The IRS requires that proof of a child or that the child
exists, proof that the child is going to the college. The IRS
got to the point and again, with the home purchases that
Congress in the wake of our report had to pass legislation
saying that someone under the age of 18 was not entitled to the
First-Time Homebuyer's Credit, which because most likely
someone under the age of 18 is not purchasing a home so it
would make sense.
In Fiscal Years 2011 and 2012, we reported that the
American Opportunity Tax Credit, the education credit, that the
IRS erroneously allowed, most likely, $3.2 billion in the 2010
calendar year. Under the adoption credit, we reported that the
IRS paid an estimated $11 million in erroneous adoption
credits, again, another example of the IRS simply not
requesting information that a child was actually adopted.
Now they may argue how we process these forms? Well,
sometimes the deterrent is simply requesting the information
because it would actually require somebody to be a little more
sophisticated in making up an official looking document and
probably just would not take the chance of both submitting a
false Federal document which could get them in trouble as well
as seeking credits that they are not entitled to. I already
addressed the issue of identity theft cases. So again, about $5
billion in 2010 actually, so over $20 billion.
Mr. Graves. And the child tax credit?
Mr. George. Excuse me, $108 million in erroneous.
Mr. Graves. Million or billion?
Mr. George. The adoption credit or the child credit?
Mr. Graves. Child.
Mr. George. Yeah, the additional child tax credit and last
year, we estimated that the IRS refunded $108 million in
erroneous additional child tax credits during the tax years
2006 to 2009.
[The information follows:]
Refundable Tax Credit Fund
The IRS has not determined how many erroneous tax refunds it issues
each year. The only program the IRS has identified for improper payment
reporting is the Earned Income Tax Credit (EITC). The IRS reported that
it issued between $11.6 billion and $13.6 billion in erroneous EITC
payments in Fiscal Year 2012.
However, we think the amount of erroneous tax refunds issued is
significant based on recent audit work.
American Opportunity Tax Credit--$3.2 billion in
erroneous payments in Tax Year 2009 (through May 28, 2010).
Adoption Credit--$11 million in erroneous payments
in Processing Year 2011.
Identify Theft--$5.2 billion in erroneous payments
in Tax Year 2010.
Additional Child Tax Credit--$108 million in
erroneous payments during Tax Years 2006 through 2009.
Mr. Graves. Thank you, sir, thank you. And, potentially if
he has time to answer what a solution might be and you just
said ask for more information.
Mr. George. More information. And then, ultimately,
especially if third parties are involved in this, meaning paid
tax preparers, some type of penalty towards them to discourage
that type of activity.
Mr. Graves. Thank you,. Thank you, Mr. George.
Mr. Crenshaw. Actually, Mr. Graves, I think the earned
income tax credit, every year, about 25 percent of those
payments are fraudulent. It is about $15 billion on their
earned income, so that is one of the big problems that we
pointed out.
Mr. Serrano. Does that compare at all with corporation
fraud?
Mr. George. I do not know.
Mr. Serrano. Just checking.
Mr. George. I will check it out.
[The information follows:]
Refundable Tax Credit Fraud
The IRS estimates that corporations underreported $67 billion in
income and underpaid $4 billion in tax in Tax Year 2006. In comparison,
the IRS estimates it issued $10.4 billion to $12.3 billion in improper
Earned Income Tax Credit payments for Fiscal Year 2007 (when Tax Year
2006 tax returns were filed and processed).
Mr. Serrano. Yes
Mr. Crenshaw. Mr. Quigley.
IRS RESOURCES
Mr. Quigley. Thank you, again. Mr. George, to summarize, at
least from my point of view, your suggestions are we need to
help with tax simplification, we need to help deal with issues
of fraud, access to third party information. Among other
things, the IRS has to avoid waste, follow the suggestions,
including additional documentation, modernizing the equipment
as an ongoing basis, and effectively target their resources.
With all that being said, and let's assume all acting in
accordance with that, do they still need more bodies? And how
many more resources do they need in terms of revenue dollars
for that staff? And at what point are there diminishing
returns?
Mr. George. Very good question. Again, the IRS in the last
five or so years had 100,000 full-time equivalents, and as I
indicated earlier, they are roughly at 92,000 now. As the
chairman pointed out, there are reports of increased revenue
collections now, so you would not necessarily see a direct
correlation between fewer FTEs and additional revenue
collections. We do not know if this is an aberration;
additional information will need to be gathered and research
done to see why this is happening.
The common thought is, of course, if you had more people
you could do more. There is no question that especially both
in, again, the customer service area, as well as in the
enforcement areas, fewer people mean you are going to have
fewer opportunities to conduct quote, unquote, ``audits.''
Fewer people mean that you are going to have less telephone
calls answered, or less people staffing these Taxpayer
Assistance Centers. So there is a practical impact to having
fewer employees.
Let me back up, this is so important I need to make this
point. The United States has, in my view, the most effective
tax system in the world. There is no question about that. And
most people who were surveyed, just in the last week or two,
the IRS oversight board issued a survey result which showed
over 90 percent of people believe they should pay all the taxes
that they owe.
Now, there was a separate survey done a number of years ago
which posed, in effect, that very same question, ``Should you
pay all the taxes you owe?'' and had a very similar result,
meaning about 90 percent said yes. But then a second question
was posed, and that was, ``Well, what if your neighbor down the
street is not paying everything he or she owes, should you,
then, pay everything that you owe?'' The number dropped
dramatically from 90 percent. I do not have the exact figure,
but it was a dramatic drop.
So what that suggests, going back to your question, is what
I view as the deterrent effect. And the deterrent effect is an
audit. And some people seem to be under the misconception that
an audit is sitting across a table similar to this, or a
smaller one, in an IRS building or another Federal building.
Mr. Quigley. A hot lamp over your head.
Mr. George. Among other devices. But in reality, and one of
the members of this committee pointed out, when the IRS sends
you a letter, that is considered an audit process, or an audit.
If they are asking you information about the income that you
reported or deduction that you claimed, that technically is an
audit. So audits can take different forms, they can cost
varying amounts, but they can be done in ways that are cost-
effective.
Mr. Quigley. Thank you, Mr. George. Thank you, Mr.
Chairman.
COST SAVINGS
Mr. Crenshaw. Mr. Yoder, do you have any more questions?
Just following up on Mr. Quigley, I mean, sometimes it does
take money to make money, sometimes it takes money to save
money. Following up on what he talked about, I guess you could
spend money on automation, maybe that you do not need as many
people; maybe you could look at leased office space and
consolidation. What is your observation about some of the
areas? That original question that I asked you, when you are
forced to look at how you spend money, it makes you spend money
more wisely. Are those some of the things that you have
observed when you look at IRS, could automation be of help?
Could office space consolidation be of help, or some of those
things or any other things that you see?
Mr. George. Yes, Mr. Chairman, and everything you noted I
agree with, that would help. And I have to admit, the one area
in the Business System's Modernization effort that the IRS
abandoned, which could have been of great assistance was, in
effect, a device called, ``My IRS,'' and it was similar to what
the private sector uses. If you manage bank accounts online or
your credit cards accounts on line...
Mr. Crenshaw. Do not tell me there is an app for that.
Mr. George. Well, I am sure there is an app for ``Where is
my refund from the IRS?'' They were in the process of
developing a website where you could literally click to see
what your tax obligations are in advance of April 15 and make
payment arrangements. It had a multitude of possibilities, and
it fell victim to resources, the bottom line. And I do not know
what factor they used to precisely not to do it, but I would
contend, again, going back to my earlier point about making it
as simple as possible for people to comply with their tax
obligations, would enhance the number of people who do so. And,
again, address the many problems associated with people not
paying what they owe.
Mr. Crenshaw. I do not have any more questions. Other
members, Mr. Serrano?
ACTC
Mr. Serrano. I will submit some questions for the record. I
just have a little statement for Mr. Graves and, of course, for
the chairman.
Current law allows the additional child tax credit to be
claimed by all individuals who file taxes, regardless of
whether they use Social Security number or ITIN number. IRS
guidance regarding this tax credit concentrates on the
eligibility of the child, not the parent. Children must be U.S.
citizens, U.S. nationals, or U.S. resident aliens. This means
that on a 1040 tax form, someone filing with an ITIN number
must provide the dependent child's Social Security number to
prove their eligibility for the additional child tax credit.
The current IRS strategy makes sense, since the true
beneficiary of these tax credits is the dependent child. My
office has seen estimates that show that currently 4.5 million
citizen children benefit from this tax credit. My point being
that I know that there are two issues that always come up with
the IRS that motivate many of us, and I certainly look at it to
see if there is fraud going on; we have to be careful, because
this one helps citizen children. So in the process of making
sure it works properly we should maybe look at those people who
are claiming that they qualify when they do not, or those who
are being induced, as you said, by someone else to claim
something that they do not deserve. When the program works
right, it services and helps a lot of people, young people in
our country, and children.
Mr. Crenshaw. Thank you.
Mr. Serrano. Thank you.
FURLOUGH
Mr. Graves. One comment and a question. First, let me just
say, I know the IRS has a very difficult job and you have
probably an even more difficult job in what you do. In our
district we had an IRS workshop day just a few weeks ago, and
folks from the agency came and offered their time, free
counsel, advice in sorting through the tax code, and that was a
great assistance to our constituents. Through that I found out
that there were even many more groups that are offering free
tax preparation services, so there are a lot of groups working
together, including agency, to try to help folks navigate. And
I recognize that and I appreciate what they do.
You mentioned furloughs and this I just a question because
sequester is new and we are hearing a lot of hypotheticals and
it is hard to reconcile hypotheticals with reality and what we
are all about to go through. In the state of Georgia we went
through a lot of furloughs, including teachers, everyone
participated.
And one question that came up was, when you have a lot of
sick days or vacation days, they were considered banked days,
banked, B-A-N-K days. Is that the same case, say, with IRS? You
said five to seven furlough days. Could they draw down from
their days that might be banked for future use?
Mr. George. That is not my area of expertise, Mr. Graves,
and I am just told by staff we do not believe that is the case,
but I am not sure.
Mr. Graves. Okay. Something we could probably look into, I
guess.
Mr. George. Yes.
[The information follows:]
Furlough
Per Office of Personnel Management guidance, IRS employees may not
substitute paid leave for any hours designated as furlough time off,
which is a non-paid status.
Mr. Graves. Well, thanks for your time, Mr. George.
Mr. George. Thank you, sir.
Mr. Crenshaw. Mr. Inspector, thank you so much for being
here today. Thank you for your wise counsel. As we all know,
IRS has a tough job and you got a tough job looking at the
people that have a tough job, so thank you for the work that
you do. We appreciate you being here today. So that hearing is
adjourned.
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Tuesday, April 9, 2013.
INTERNAL REVENUE SERVICE
WITNESS
STEVEN MILLER, ACTING COMMISSIONER
Mr. Crenshaw. Well, the hearing will come to order. Today
the Subcommittee is going to look at the activities and the
operations of the Internal Revenue Service, and we are going to
hear testimony from Acting Commissioner Steve Miller.
Welcome, Mr. Miller. Thank you for being here today to
spend the afternoon with us. I want to thank you for all your
years of service with the IRS and to our country and all IRS
employees as well. I want to specifically compliment the agency
on being removed from GAO's high risk list with regard to
business systems modernization. I think that is a giant step
forward.
Now, according to the IRS Oversight Board, 72 percent of
Americans believe that they have a civil duty to pay their fair
share of the taxes, but because our tax code is so complicated,
that this is easier said than done sometimes. And so because of
that, it falls to the IRS to help individuals correctly file
their tax returns and to pay their taxes. It also falls on you
to investigate and find individuals who are trying to cheat. I
know that the authorizing committees are working on tax reform,
and hopefully this effort will include making the tax code a
little more understandable, a little more simple, and
therefore, easier for them to comply with it and easier for you
to enforce.
You are also responsible for administering numerous
complicated tax credit programs. Improper payments in those
programs, however, exceed over $15 billion a year and
obviously, that is a very troubling number, and I don't think
we ought to tolerate that. The IRS is the largest agency funded
by this Subcommittee. You have over 90,000 employees.
Now, we don't have the President's budget yet. I don't know
that you have it yet. We are supposed to get it tomorrow.
Better late than never, as they say. But we don't know what is
going to be in that, but we do know that the House resolution,
the budget resolution from the House, the budget resolution
from the Senate, both, I guess, include the sequester as part
of that budget resolution.
So what that means is that it may be unrealistic to think
that there is going to be much of an increase this year. We
don't know that yet, but certainly this Subcommittee wants to
work with you and your staff to work judiciously and
selectively to make investments where we need to make
investments and to make cuts where we need to make cuts. We
want you to be able to meet your obligation to obviously
collect the taxes and also to pursue the people that cheat.
So, again, welcome Acting Commissioner Miller. We look
forward to your testimony. I think the whole committee is going
to be interested in learning how you are coping with the
sequester, how you are identifying this identity theft, which
seems to be growing every year. We have talked about reducing
the burden of tax compliance, and just, I think overall,
understanding how you are making use of the resources that you
have.
So, with that, I would like to yield to my ranking member,
Mr. Serrano, for any opening statement he might like to make.
Mr. Serrano. Thank you, Mr. Chairman, and welcome back.
We both welcome each other back. I join you in welcoming, I
think, Commissioner Miller, before the Subcommittee. The
President's Fiscal Year 2014 budget request does not come out
until tomorrow. While you may be unable to share the details
with us here today, it is my hope that you will be able to
discuss some of the IRS' general priorities with us.
Obviously, as a result of the sequester and flat funding in
the continuing resolution, the IRS has been left with a number
of enormous budgetary holes that must be filled. We will
hopefully get a chance to discuss the impact of the sequester
and whether you expect revenue to be lost as a result of the
funding cuts to the IRS.
Unfortunately, I think that the reduced budget for the IRS
will, simply put, help increase our deficit. I find it
difficult to believe that we encourage greater tax compliance
with less money for the enforcement agents and less funding for
the very people who answer the many tax questions the taxpayers
have. Resources at the IRS are used to assure that people
follow the laws that Congress has passed and that Americans pay
the taxes they owe. It is self-defeating to ask people to obey
the law and then to reduce the number of people we have to
ensure compliance.
One particular area of concern is a continued
implementation of the several tax related provisions contained
in the Affordable Care Act. Many of the tax credits are due to
come online this year, and unfortunately, the recent continuing
resolution did not include the requested additional funding to
help the IRS implement these necessary changes.
The Affordable Care Act recently celebrated its third
anniversary, and yet there are some in Congress who seem to
forget that it is the law of the land. The IRS needs funding to
update the computer systems and answer any questions that
taxpayers have about these new provisions. Ignoring the reality
will not stop the fact that the Affordable Care Act is law. It
will only create confusion for taxpayers and divert IRS
resources from other initiatives. Hopefully, we will get a
chance to discuss what the IRS is doing to implement the
Affordable Care Act and how your efforts have been impacted by
both the continuing resolution and the sequester.
Mr. Chairman, the IRS remains the one organization that
most Americans interact with in some form. For many
individuals, it is the only interaction they have with the
government. We need to do our utmost to ensure that the IRS has
the resources to do the job we in Congress have given them and
that they have the ability to serve the American people in a
way that is responsive, efficient, and fair.
I hope that as we move forward with the fiscal year 2014
appropriations, all of us here can agree to do that, and I
thank you, Mr. Chairman.
Mr. Crenshaw. Thank you, Mr. Serrano.
Now we will recognize Acting Commissioner Miller for your
opening statement. If you could keep it in the neighborhood of
about 5 minutes, we will be happy to submit your written
statement for the record. The floor is yours.
Mr. Miller. Absolutely, sir. Chairman Crenshaw, Ranking
Member Serrano, members of the Subcommittee, thank you for the
opportunity to appear today.
The Fiscal Year 2014 budget, as you mentioned, has not been
released yet, but there is still much that I can report to you.
As you are aware, the IRS is vital to the functioning of
government, collecting $2.5 trillion in gross revenue in 2012.
That is 92 percent of all Federal receipts.
Let me start by stating that the current filing season is
running very smoothly. Through March 29th, the IRS received 88
million individual returns and issued 72 million refunds for a
total of $202 billion back into the economy. This feat has
unfolded despite the difficult challenges that were presented
by substantial tax law changes that were not enacted until
January 2nd of this year.
It is important to understand, however, that these
accomplishments and those that I outlined in my testimony may
not be sustainable within the current budget environment. I
think we will continue to succeed with the filing season, and
we will continue our efforts to maintain excellence in
performance, but that performance will begin to reflect the
impact of the large budget cuts of the last few years. This
means that there will be a steady erosion of the service we
provide to taxpayers and in the amount of money that we
collect. We will continue to find efficiencies, and you will
see that we have been aggressive in this regard, and we will
continue to dedicate staff and resources where they are most
essential.
Thus, for example, we will continue to commit staff to
resolving identity theft cases even at the cost of fewer people
on our toll free 1040 line and fewer people on our collection
lines. And if these cuts continue, future service and
enforcement levels will in fact reflect a more austere reality.
In this regard, let me note the effects of sequester. We
have said publicly that the IRS faces up to seven furlough days
this fiscal year. We anticipate the first day that the IRS will
be closed to be around the Memorial Day holiday. Due to
sequester, we anticipate a considerable reduction in the
revenues we collect and the calls that we can take.
Notwithstanding difficult budgets, we have accomplished much,
however. We delivered smooth filing seasons and successfully
carried out core duties while making important progress on a
number of our initiatives, and our efforts to address identity
theft and refund fraud are having an impact.
Over 3,000 IRS employees are working on identity theft as
we speak. That is more than double the number at the start of
last filing season. Last fiscal year, the IRS expended nearly
$330 million of its budget on identity theft, and it was money
well spent. During fiscal year 2012, the IRS protected more
than $20 billion in revenue, up from $14 billion in the prior
year. So far this filing season, the IRS has suspended or
rejected over 2 million suspicious returns, and we have been
more efficient, even as our budget has been reduced about $1
billion since 2012. That represents an almost 8 percent cut in
our budget.
We have been asked to tackle significant new challenges,
some of which Mr. Serrano mentioned, including identity theft,
ACA and the new foreign reporting rules under FATCA. We
addressed some of these cuts by cutting expenses by almost half
a billion dollars in recent years, and we have also been
strategic in our hiring decisions, using buyouts last year and
reducing expenses in nonlabor categories as well.
By closely managing hiring, we have seen a reduction in the
total number of full-time permanent IRS employees by almost
7,000 between the end of 2010 and 2012. Note that we are
currently running nearly 10,000 employees below where we were
at this time during the 2010 filing season. In our nonlabor
spending, we limited operating travel expenses to mission
critical needs, and we have increased the use of virtual
delivery for meetings and training. This has allowed the IRS to
reduce travel costs by almost $159 million, a 55 percent
decrease from 2010.
We have also reduced spending on professional and technical
service contracts by $200 million and reached $60 million in
printing and postage savings, as well as achieved aggressive
reductions in rent payments.
Mr. Chairman, we will continue our efforts to be fiscally
prudent and will make wise investments in our strategic
priorities and enforcement service and business modernization.
However, as I noted, without a change in the current budget
environment, the American people will see erosion in our
ability to serve them and the Federal government will see fewer
receipts from our enforcement activities.
Thank you, sir, and I would be glad to take any comments or
questions.
[The information follows:]
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SEQUESTRATION
Mr. Crenshaw. Well, thank you very much for your testimony.
Let me start the questions. I am going to pursue the sequester
a little bit more. This Subcommittee oversees maybe 30
different agencies that we are charged with providing the funds
for, and so I think it is always important that we talk about
sequester as it relates to efficiency and effectiveness. It
sounds to me like that you saw it coming and you prepared for
it.
One of the things on this Subcommittee, most of the members
agree that if you want to reduce spending, there is a better
way to do it than simply have across-the-board cuts. That is
why we have an Appropriations Committee. That is why we have
hearings like this to look at budgets and to set priorities and
make tough decisions and then fund the programs that need to be
funded and reduce funding on programs that don't need to be
funded, but we are where we are.
As I mentioned in my opening statement, I think that our
budget resolution as well as the Senate budget resolution
anticipates that the sequester is going to stay here. As you
probably know, we actually reduced spending from 2010 to 2012
by $95 billion. That was all discretionary, but that was a
pretty giant step. I don't think it has happened in the last 50
years, but we are still living in difficult economic times.
So, I appreciate what you are working on and what you are
doing. Talk a little bit more about how you prepared for the
sequester. What kind of information did you take into
consideration when you decided how you were going to deal with
this?
I guess for nondefense agencies, about 5 percent. Defense
is more like 8 percent. So, number one, tell us a little bit
more about how you kind of decided what you were going to do
and then talk a little bit more, too, about whether or not you
think that if you have to live with the sequester, that this
actually forces agencies like yours to do things it sounds like
that you are trying to do that. You are actually forced to,
because of these across-the-board cuts, forced to make some
tough decisions to maybe be more efficient.
When we were here before the Treasury Inspector General for
Tax Administration, Ms. Herrera Beutler asked a question about
the IRS TV video/studio, and I know there has been a lot of
discussion about that and how important that is in the long
term. So, touch on those two points as they relate to
sequester, if you would.
Mr. Miller. Well, I would say that your surmise is correct.
We did see this coming. We certainly saw tighter budgets coming
for a couple of years. In December of 2010, we put in place an
exception-only hiring freeze at the IRS, which has allowed us
to be at a place where we are only considering 7 days of
furlough.
That was a large step. That was a way for us to invest in
those areas where we felt we needed to invest. For example, as
you will see in the written testimony, the identity theft area
is obviously one area that we needed to fund, and we have done
so. We funded other priorities as well, including our return
preparer area, our offshore work, and beginning this year, the
ACA work that we need to do under the statute and the FATCA
work, which is coming on as well.
We have tried to save and invest in various ways. We have
trimmed quite drastically in travel and training. We have cut
back, as I mentioned, in postage. We have cut back in several
other ways to help get us to the point where sequester is
manageable, but not easy. It is not the way I would want to do
it. If we, in fact, have to end up at a given lower level, I
would like a little more time to prepare for that lower level,
rather than have it all come in one year, frankly, because that
is not a way to plan. That is just a way to basically take time
off, but we have worked on it.
TV STUDIO
You mentioned the studio, Mr. Chairman. Let me touch on
that. I know there has been quite a bit of noise on that. We
think the studio is an efficient use of our resources,
actually. It is about 15 years old, and it allows us to train
our people virtually, and to educate taxpayers through YouTube
and other types of things like that, rather than face to face.
It has allowed us to move away from face-to-face travel, to the
point where, in 2013, we are spending about 80 percent less in
training travel than we were in 2010, and that has allowed us
to do quite a few things.
On a personal basis, the studio allowed me to go online,
over the Web, to 4,000 of my managers this fall and walk them
through the priorities of the Internal Revenue Service. That
was the opportunity for them to have a face-to-face with me
online, ask their questions, and get an understanding of where
the Service stands right now. That is kind of essential for us,
and we do think with the cuts in travel, that the studio--which
always can be more efficient, and I am not going to say that it
can't be because we need to work on that and we will work on
that--has allowed us to do these sorts of cost savings things.
AFFORDABLE CARE ACT
Mr. Crenshaw. Well, thank you. And let me ask one final
question. I think today we will have time for probably a second
round of questions, but you touched on the Affordable Care Act,
and I think more and more that is going to be coming to the
forefront.
People are starting to realize that it is coming quicker
than they might have anticipated, and of course, you are right
in the middle of all that. Starting in 2015, people have to
report to you about their health insurance, and if they don't
have insurance or if they don't have adequate insurance, then
that is going to be a tax penalty. And I guess the question is,
are you prepared to collect all this information, assess the
penalties, administer the subsidies, I guess, that people are
going to have to understand?
And I guess the big question is, as you prepare for this,
do you think the general public understands all that is going
to be required of them about the penalties and the non-
penalties?
And finally, where is all the money going to come from? I
understand HHS has transferred some money to you all. But it
sounds like you know it is coming and you are gearing up for
it, but it seems to me that the general public probably doesn't
understand all this. And I just wonder what you think about
that and how prepared you are to deal with this because it is
fairly complicated as it starts impacting people's daily lives.
AFFORDABLE CARE ACT
Mr. Miller. There is no doubt, Mr. Chairman, that the
healthcare provisions are a large lift for the Internal Revenue
Service. I would say that, with respect to healthcare, HHS
really is the face of ACA to the taxpayer because they will be
working with the exchanges as early as this October to start
signing people up for health coverage. We are involved in that
but only tangentially. It is our job, and we will be ready, to
make sure that the exchanges have the information they need to
make intelligent decisions in terms of who qualifies for the
advanced premium and other subsidies under the ACA. We will be
doing matching of taxpayer identification numbers and other
information that will flow back to the exchanges through HHS in
order to get that information to them. That is really our
front-end obligation with respect to ACA.
Our people are aware of it. Yet, I think some taxpayers
are, some are not, and the big ramp up is going to have to
happen this summer so people that need it are ready in the fall
to go to the exchanges. Many people are already covered by
employer insurance fortunately, and they will not be as
impacted. We will be ready on the back-end as well. Most of the
reporting is not actually going to be from the taxpayer. Most
of the reporting to us will be from the exchanges and from
insurance companies, and we will be ready to process that and
see who is covered and who is not. I don't anticipate problems
in that area. That is a competency that the Internal Revenue
Service has in many other areas as well. That is the nature of
the 1099 matching.
Mr. Crenshaw. So the individuals won't be required to give
information to the IRS about whether they have insurance and
whether it is adequate or not?
Mr. Miller. Adequate, no. They will probably have a
checkbox or something of that nature to say, ``yes, I am
covered, my family is covered by insurance.'' But on the
coverage information, I really do want to correct a
misimpression. We are not going to be looking at what kind of
healthcare they have. That really is up to HHS to set up those
standards, and the insurance company will be telling folks
whether it is the right----
Mr. Crenshaw. Are they the ones that are going to be
explaining to them about the subsidies that they might get, and
ultimately doesn't that get put somewhere on the tax form?
Mr. Miller. If you have an advanced payment, then, yes,
that information will be somewhere on the tax form. If you are
claiming the credit with your tax return, obviously that, too,
will be reflected on the tax form, but the information that
will be given should be well in advance of that, and that
should be through the exchanges.
Mr. Crenshaw. Seems like a lot of people are going to end
up in 2015, and for the first time realize they got penalized
for not having healthcare in 2014 and they thought they were
going to get a refund and they might owe some more, but I guess
you are working through all that.
Mr. Miller. I don't think that is right, Mr. Chairman, but
I understand. We have a lot of work to do, there is no question
about that, to ensure that doesn't happen.
Mr. Crenshaw. Thank you.
Mr. Serrano.
BUDGET CUTS
Mr. Serrano. Thank you, Mr. Chairman.
Commissioner Miller, from fiscal year 2010 until fiscal
year 2013, the IRS has been cut by nearly $1 billion, including
$600 million from sequestration in the current CR. Those were
about severe cuts in staff. As you have noted in your
testimony, now what do you believe is the long-term impact of
this? Because, you know, we keep talking about these cuts that
are taking place in all Federal agencies, but you have a unique
role. You have to implement new laws, including one I am going
to mention in my second question if it becomes law, and you
have to do the regular work that you do every year, which is
incredibly important and big and yet you are getting less and
less staff to do this. So what do you think the long-term
impact will be?
Mr. Miller. I think, Mr. Serrano, that we are going to
see--you know, we have been able to maintain coverage levels at
a good place for the American public in terms of our
examination program. We have been able to maintain a level of
service on our phones that, quite frankly, I would like to see
higher, but is right now, in the 70% for the filing season, for
people calling in. That is not bad, frankly, given the budget.
Those are the types of things, I think, that we are going to
see some degradation on, that we are going to see some erosion,
as we have somewhere in the realm of 7,000 fewer permanent
folks on board.
Mr. Serrano. Right.
Mr. Miller. And we have perhaps as many as 5,000, or more,
of those in the enforcement area. There will be an impact, a
real impact on revenues, on the level of service on the phones,
and our ability to engage the taxpayers when they come into our
walk-in sites. All of these are going to be impacted. There is
no question about that.
Mr. Serrano. And at what point do you believe we could have
a crisis in the collection, if you will, in the enforcement,
because this is what is happening with other hearings where we
ask the courts, for instance, you know, do you see a crisis
coming, and they were very open about it, and they said, yes,
it could.
Do we reach a point here anytime soon where you are having,
if you will, a lot of dollars out there that are not being
collected because we just don't have the folks to collect them?
Mr. Miller. I think we already have a lot of dollars out
there that we are not getting through at current levels. I
would tell you I don't think that there is a crisis
immediately. I don't. I do think that you are going to see some
erosion in our performance metrics, and that isn't good for
voluntary compliance, because as people realize that they have
a better chance of winning the lottery than getting audited,
they are not going to worry quite as much about what they do on
their return.
I don't think that is immediate, Mr. Serrano. I do think if
the trend line continues in the fashion that it is today, then
you may get a different answer out of me. But at this point, I
don't see a crisis. I do see severe erosion happening.
IMMIGRATION REFORM
Mr. Serrano. All right. I have one more question, Mr.
Chairman, in this round, and it came about as I am listening to
you. I just thought, by the end of this week, hopefully, all
Members of Congress should be celebrating the introduction of a
bill, but certainly, I can tell you Mr. Diaz-Balart and I will
be celebrating, which will be comprehensive immigration reform.
It looks like it is going to happen soon, at least the
introduction in the debate.
As you know, the discussion has been for you to be able to
stay in this country and be put perhaps on a path to
citizenship, you have to have no criminal record, you have to
speak some English, you have to pay back taxes. In addition to
the fact that this will be yet another Affordable Care Act sort
of, you know, type new law that you now have to deal with, and
I realize you are not writing the bill, neither am I--Mr. Diaz-
Balart may be writing parts of it, but I am not--we each have a
Senator who is writing a part of it, I guess, from our States,
but do you have any clue, any understanding at this point, any
fear, any apprehension as to what role you will be asked to
play? Because if you pay back taxes, at one point, somebody in
the government is going to have to say he is up to date, she is
up to date.
Mr. Miller. There have been some discussions with the
Internal Revenue Service on this matter and mostly those
discussions are with the Department of Treasury's Office of Tax
Policy, who really deal with the legislative work of the
Administration.
Do I have concerns? I don't know enough about what is going
to be asked of the Service to really express a concern, one way
or another. There obviously would be issues around taxpayer
information in Section 6103. That could be handled
legislatively. There, obviously, will be issues around
resources, depending on what we are asked to do, but it is
something that we need to be cognizant of, and I would hope, at
the appropriate time, we would be brought to the table for
those discussions, so people can make informed decisions about
that.
Mr. Serrano. Mr. Chairman, an additional point. If at some
future date, you could give the Committee, with the Chairman's
permission, I understand there are folks, I know there are
folks who are here undocumented but who get an IRS number, if
you will, and they pay taxes. Couldn't we have an understanding
in the future of how many folks have been doing that already?
And I know, in many cases, they are business people. I think in
all cases they are business people.
Mr. Miller. I can endeavor to do that. I don't think our
data is perfect in that regard, as you might guess,
Congressman, but we can certainly give it a estimate.
[The information follows:]
The IRS does not have information regarding the number of IRS
employees using a professional or computer software to file their
taxes.
Below is the information for the entire taxpayer population:
In Filing Season 2012, through the week ending 05-12-2012:
70.34 million taxpayers used a professional
(approximately 52 percent of total taxpayer population)*
44.78 million taxpayers self-prepared using
software and e-filed (approximately 33 percent of total
taxpayer population)**
In Filing Season 2013, through week ending 05-11-2013:
70.38 million taxpayers used a professional
(approximately 52 percent of total taxpayer population)*
43.57 million taxpayers self-prepared using
software and e-filed (approximately 32 percent of total
taxpayer population)**
* does not account for taxpayers who used a professional and
submitted a paper return.
** does not account for taxpayers who used software and submitted a
paper return.
Mr. Serrano. All right. Thank you.
And thank you, Mr. Chairman.
Mr. Crenshaw. Thank you.
Mr. Womack.
SOCIAL MEDIA
Mr. Womack. Thank you, Mr. Chairman, and my thanks to the
Acting Commissioner for his testimony here today, and I have a
couple of questions that I want to get to, but the first thing
on my mind is, as I was preparing for work this morning, I am
alerted via the media that the Internal Revenue Service is
planning to use social media as in some enforcement mechanism,
and I was hopeful that the Acting Commissioner could give us a
window in to just what the utilization of social media actually
means to the discriminating taxpayer out here as they continue
to work with the IRS.
Mr. Miller. We do not, at the current time, use social
media. It is--it is possible. We are actually talking about it
because on some basis, it does make some sense to look at all
public information. We would not be using it to select people.
It is a possibility, and I think we are talking about whether
in our collection area, for example, a Collection Officer could
take a look at a person's publicly available information to see
whether that person is, frankly, showing assets that they might
not otherwise be talking about. I don't think we are doing it
yet. In fact, I know we are not doing it yet. We are going to
have a long conversation before we do it, but I think it makes
some sense for us to at least have the conversation.
Mr. Womack. Interesting. So it would be somewhat of a micro
targeting tool, perhaps, that you would use? I don't want to
put words in your mouth.
Mr. Miller. I don't think I would describe it that way. It
would not be targeting at all. In fact, it would be a tool we
would utilize once we had a person that we are working with
already. It wouldn't be something that we would be using to go
out and find people. That is not a discussion we are having
right now.
Mr. Womack. So, if I am hearing you correctly, you would
not use the tool in such a way to prospect potential----
Mr. Miller. Correct. Absolutely correct.
Mr. Womack [continuing]. Customers, if you will. You would
use it basically as an extraordinary means to follow up with
already existing persons, businesses, or otherwise that are on
social media.
Mr. Miller. I think that is correct. First of all, we
haven't made a decision one way or another, but secondly, to
the extent we are talking about it, we are absolutely not
talking about prospecting. We are talking about whether it
would be a tool in our tool belt if we were engaged in a
conversation with an existing taxpayer.
BUDGET AND RECEIPTS
Mr. Womack. Earlier in your testimony, you talked about the
fact that you, I think it was in 2012, collected $2.5 trillion,
92 percent, thereabouts, of total Federal tax receipts, and we
have had a pretty extensive discussion already in this hearing
about the effects of sequestration, so I have a couple of
questions related to resources.
And so, on the first question, it would be, how would we
calculate the total amount of resources necessary to have an
optimum collection of what is due the Federal government? Is
there a--I know you submit information to the White House and
ask for certain things to be in your budget. And the second
part of the question maybe asking it a different way. Is
there--along the concept of diminishing returns, is there an
amount of money out there that would not prove to be
beneficial, i.e., would not yield back the results that you
would be looking for? So, help me sort out the resource
question.
Mr. Miller. The first question of whether there is a
perfect amount of money that we could be given to collect the
maximum amount of revenue? That is an impossible question. I
don't think we have an answer to that. It is clear we could use
more resources. It is clear we are down 14 percent in our
Revenue Officer cadre since 2010, and then that begins to show
holes in our geographic coverage and our ability to collect.
What we would be asking for, and the way we would ask for
it, truly is a combination of looking at what our priorities
are, looking at what is reasonable for us to be able to do in a
given year in terms of hiring. We are nowhere near any of those
things. But there is analysis that shows if you give us a
dollar, and whether that dollar goes for enforcement service or
otherwise, the numbers tell us, and GAO supports this, that we
are a $4 return to the government, more than $4.
Mr. Womack. It is not my intent to ask you an impossible
question. It is my intent to establish, however, that at $2.5
trillion, that is equal to or greater than Federal receipts in
the past comparatively, right? I mean, is that is a record
number?
Mr. Miller. It is around that. It floats in that area,
whether it is $2.3 trillion or $2.5 trillion.
Mr. Womack. Okay. So, as we look over the ensuing months
under sequestration, is it fair to assume, based on your
testimony, that that number is going to be substantially lower
than $2.5 trillion dollars?
Mr. Miller. No, no, I don't think I want to say that. What
I want to say is it will be, it could be billions of dollars
less, but that is not much against this $1.5 trillion amount.
Mr. Womack. Okay. So----
Mr. Miller. But remember, the amount of money we take in is
mostly voluntary; the 83 percent voluntary compliance rate,
most of it comes in voluntarily. Now there are two aspects of
providing more money for us. One is we can draw out the other
17 percent, a certain portion of that, and secondly, over a
long period, that 83 percent may fall to the extent we are not
out there. Those things are intangibles that I can't really
give you a number around, but we are not talking in the
trillions here, Congressman, that is clear.
Mr. Womack. But it is your testimony that under
sequestration, we will collect less money. The question is
whether it will be substantially less.
Mr. Miller. And substantially is, of course, sort of a
subjective term.
Mr. Womack. I would understand that, yeah.
Mr. Miller. Yes, I think we will collect, unfortunately,
substantially less. We are working on numbers now, but I don't
have those today, unfortunately, because we just got our $600
million cut.
Mr. Womack. Thank you.
BUDGET AND RECEIPTS
Mr. Crenshaw. One thing, I think in 2001 and 2009, we
actually increased the funding for IRS and actually the
revenues went down, so I mean, that--I think your point is that
intuitively you would think if you just spend more money on
IRS, you get more money; you spend less, you get less, which
sometimes, I think, doesn't always work out. Like the GAO says,
if you spend a dollar on the GAO, you get back $69. And
somebody said, well, why don't you give them a trillion
dollars, and they will give us back $69 trillion, and we can
all go home. So it doesn't quite work that way. Maybe that is
the what you are getting at. I think the Acting Commissioner
will probably say that it doesn't always work exactly the way--
--
Mr. Miller. That is exactly right. It is, in general, based
on history, it is a $4 return to 1 dollar we get. In the
enforcement area, it is higher than that. It might be as much
as $6 to $8 back, but what the Chairman says is exactly right.
By the way, if you give us money this year, it is unlikely to
have an immediate impact. In fact, it may actually erode a
little bit because we have to hire and train, and that takes
people off of the revenue generating activities.
So, it always is a lagging impact, just as reduction in
budget has a lagging impact. We are doing fewer exams as we
speak, and those closures will not occur this year necessarily;
they may occur next year, so sequestration will not be an
immediate hit on our numbers. It will tail out in 2014 and
become much more evident then.
Mr. Crenshaw. Thank you.
Mr. Quigley.
Mr. Quigley. Thank you, Mr. Chairman.
Mr. Chairman, to your point and to the gentleman's
questions, I think they are absolutely fair.
And Commissioner, to the extent that you can move toward
understanding what those numbers are, certainly helps us with
appropriations. You know, you refer to it, to an extent, as a
performance matrix. Well, we can figure out there are other
variables. I think the Chairman pointed out the revenues
between 2001 and 2009, clearly, a lot of that had to do with
the economic downturn, correct?
Mr. Miller. Right.
Mr. Quigley. What other variables exist out there how your
collections go?
Mr. Miller. There are a number of variables. Obviously, the
number of folks we have and where we put them is a key
variable. But also, as you mention, economic downturns and
economic surpluses will impact receipts and will impact our
ability. The number of balance dues that show up on our books
during a recession is alarming. It is a large number, and that
changes the way we do our work, and it will have an impact.
Also, obviously, to the extent law is changed, that has an
impact as well.
AUDITS
Mr. Quigley. GAO talked about--and I just want to get your
reaction to it. They did a study December last year talking
about shifting $124 million from field exams to correspondence
exams for certain businesses with the possibility of increasing
revenue collections by about a billion dollars per year. I am
sure you hear of studies like this, and I am sure you are
constantly analyzing the most efficient way to target, given
less resources. What was your reaction to this particular
analysis?
Mr. Miller. I would have to go back, Mr. Quigley, and take
a look at that one. I don't remember it off the top of my head.
GAO does a nice job of giving us some help. I think, whether we
would swap out work, is an interesting question. We have
increased in the last 5 years the number of correspondence
examinations we do. They are very efficient. They are not
necessarily as weighty in terms of the amount of revenue they
bring in, and you have to maintain coverage in the field
because it is a different source of coverage than
correspondence coverage. You need both. Could we swap out some?
Absolutely, and we have done that, and I will take a look at
that particular study and come back to you, sir.
[The information follows:]
We agreed with the GAO's recommendation that we ``review
disparities in the ratios of direct revenue yield to costs across
different enforcement programs and across different groups of cases
within programs and determine whether this evidence provides a basis
for adjusting IRS's allocation of enforcement resources each year.'' To
do that, GAO recommended that we ``develop estimates of the marginal
direct revenue and marginal direct cost within each enforcement program
and each taxpayer group.'' We have begun a study to estimate marginal
(rather than average) revenues and costs of correspondence exams, and
expect that the methodologies we develop in that study will help us
estimate the marginal revenues and costs of other enforcement programs.
These will then enable us to compare the marginal revenue-to-cost ratio
of each enforcement program as the proper basis for making resource
allocation decisions.
INFORMATION TECHNOLOGY
Mr. Quigley. Sure. Thank you. Continuing the focus on
efficiencies, given the absolute necessity, where are you and
how do you analyze the need for modernizing your electronic
cargo and software and how that might help or how it has
helped?
Mr. Miller. Sir, I think we have done really very well, and
we rolled out a new Master File system last year. We have had a
great deal of success in our Modernized Electronic Filing.
Electronic filing, by the way, right now is at 89 percent for
individuals. That will come down as the year continues, but
that is as high as we have seen it, and that is wonderful, and
our systems are working quite well.
I would say we are nowhere near done, and we are getting
better at it, as GAO as acknowledged. If you were to ask me, if
you had one last dollar to give me and that dollar was for
bodies or for IT, I would take it for IT because that is the
lifeblood of our efficiency.
Mr. Quigley. Thank you.
Thank you, Mr. Chairman.
Mr. Crenshaw. Thank you. Mr. Diaz-Balart.
Mr. Diaz-Balart. Thank you, Mr. Chairman.
Commissioner, good to see you, sir. Let me just first thank
you for being so accessible, and also, we all recognize that
you have a very difficult job to do, and thank you for your
willingness to do that.
Very briefly, I also want to thank you for particularly
your concern, your involvement on identity theft, and you and I
have talked about that and I think some good steps were taken.
I know you are frustrated that more needs to be done, but I
really appreciate the fact that you really are focussing on
that, and I think we share the importance of that.
Mr. Miller. Thank you, sir.
TAX-EXEMPT BONDS
Mr. Diaz-Balart. Let me talk about another issue that you
and I talked about briefly, but I really kind of want to throw
this out for my colleagues, and then I want to throw out five
questions for the commissioner. But I do need to add again,
because the commissioner has been extremely accessible, that I
think we have a conference call with some of your staff on
Thursday, and again I want to thank you. Thank you for that.
Mr. Miller. Thank you.
Mr. Diaz-Balart. I understand, Mr. Chairman, that the IRS
is now considering declaring that the bonds of a special
district, a particular special district in Florida, are taxable
on the basis that at the time that the bonds were issued, the
board of that special district was controlled by one or a few,
a few people. My understanding is that no bonds have been
considered to be taxable on this basis before and that the IRS
has never articulated this requirement before. So this would
seem to be a retroactive change from the law governing these
special districts, and by the way, there are hundreds, if not
thousands of them, throughout this country.
The burden of this ruling, obviously, would fall on the
homeowners in those districts who would ultimately have to pay
any settlements. The resident investors in the bonds, by the
way, of other districts would also be affected by if this
ruling were to take place. So, Commissioner, a few questions I
can throw your way.
Mr. Miller. Uh-huh.
Mr. Diaz-Balart. Has the IRS ever made such a determination
in the past? And if so, when and where? Has the IRS--let me
just throw those out at you.
Mr. Miller. Throw them at me.
Mr. Diaz-Balart. I will throw them at you, and again, has
the IRS ever considered this issue before? If so, what was the
outcome?
Has the IRS audited a local government before where one or
a few people controlled that local government and where the IRS
did not declare the bonds to be taxable?
Has the IRS considered the effect on similar issuers in
Florida and, frankly, in other States and on the residents of
those issuers, and obviously the investors in the bonds of
those issuers?
And finally, would this not be an issue appropriate for
notice and for comments during the rulemaking process?
Now, I understand those are a lot of questions, and again,
I want to thank you for meeting with me on this before, also
for, again, allowing and setting up that conference call, but
really I just need to make sure that we all here understand
that what we are trying to do, what I am trying to do, is get a
handle on this before it becomes a major issue, because
obviously, imagine those special districts around the country
if all of a sudden this will take place, the impact could be
devastating, it could be huge, so again, I thank you,
Commissioner, for your indulgence and again meeting with me and
speaking to me, but those are issues that I think we need to
resolve.
Mr. Miller. I think, Congressman, I am going to have to
come back to you on the specifics, as you might have guessed.
Mr. Diaz-Balart. I understand.
Mr. Miller. There are, obviously, to the extent it is an
individual district that we are dealing with, Section 6103
rules that would prevent discussion here, but what I can
certainly guarantee you is that we will have further
conversations as we move forward in this area.
Mr. Diaz-Balart. And Commission and Mr. Chairman, I look
forward to the conference call. I just wanted to make sure that
these are some of the issues that I think need to be answered,
and obviously, we will have many more. But again, I do want to
thank you for meeting with me and I look forward to continue
working with you. I think, obviously, we need to make sure that
we can avoid a catastrophe of this nature because I think the
impact nationally and in Florida will be, frankly, potentially
catastrophic for folks who live in those districts, and as you
know, there are thousands of them. But again, I thank you, and
I look forward to continue our conversation.
Thank you, Mr. Chairman.
Mr. Crenshaw. Thank you.
Mr. Bonner.
SEQUESTRATION
Mr. Bonner. Thank you, Mr. Chairman.
Going back to sequestration, Mr. Acting Commissioner, you
had indicated that May would probably be the first month where
you would have a day where the furloughs might come into
effect.
Mr. Miller. Right.
Mr. Bonner. Have you yet identified how many of the 90,000
plus employees at the IRS will actually be furloughed?
Mr. Miller. A couple of things. It is our intention, and we
do need to talk to the National Treasury Employees Union, we
need to tell our folks more formally, but right now it looks
like the first of those days will be in May. It is our
intention that everybody is going to be taking a furlough day.
It may be that there are certain areas where we need to stagger
them a little bit to protect the fisc, to protect our systems.
There may be IT folks that have to be on in order to ensure
that we are protected. There probably have to be cyber-security
people on duty as well, but those would be very limited numbers
of folks, and they would be taking days. They would just be
taking different days, but it is our intention that everyone
would be taking a day.
COMPLEXITY OF TAX CODE
Mr. Bonner. Okay. Thank you.
Shifting gears. In a few days, a couple of weeks, I am
going to be holding another round of town meetings in my
district. I am from Mobile, Alabama, along the Gulf Coast, and
like most Members of Congress, I enjoy going home and talking
to the people that I work for that hired me for a 2-year
contract, and so I look forward to town meetings. But I am
going to ask you this question because I have asked this
question previously to your holding this acting post of
inspector generals and previous commissioners as well. Do you,
by chance, happen to know, since these meetings will occur
right after the 15th of April, do you by chance know how many
of the current number of IRS employees actually have to employ
professional help to file their taxes or use Turbo Tax or some
type of other means other than just the old-fashion taking the
shoe box out of the closet and the receipts and putting them
together themselves?
Mr. Miller. Unfortunately, I would have no way really of
knowing that, sir.
[The information follows:]
The IRS does not have information regarding the number of IRS
employees using a professional or computer software to file their
taxes.
Below is the information for the entire taxpayer population:
In Filing Season 2012, through the week ending 05-12-2012:
70.34 million taxpayers used a professional
(approximately 52 percent of total taxpayer population)
*
44.78 million taxpayers self-prepared using
software and e-filed (approximately 33 percent of total
taxpayer population) **
In Filing Season 2013, through week ending 05-11-2013:
70.38 million taxpayers used a professional
(approximately 52 percent of total taxpayer population)
*
43.57 million taxpayers self-prepared using
software and e-filed (approximately 32 percent of total
taxpayer population) **
* does not account for taxpayers who used a professional
and submitted a paper return.
** does not account for taxpayers who used software and
submitted a paper return.
Mr. Bonner. It would probably be instructive. As we deal
with the complexity of the tax code, it might be enlightening
for even the acting commissioner to know how many of his own
employees have to deal with the frustrations that hard working
taxpayers around the country have to deal with, especially as
we get closer to the 15th. I think there has been a report in
previous years. It might be available. It might be possible to
update.
Mr. Miller. Okay.
Mr. Bonner. When we met with former--with an inspector
general a few years ago back when I think Mr. Serrano was
chairman, I asked that question and suggested maybe you could
even do some type of online survey so your employees could say
whether or not they do it. It is just an idea because I promise
you it is a question--you know, a lot of people actually don't
think Members of Congress pay taxes or have other
responsibilities that we do have, but I think it would be
interesting to know how many of the employees of the service
actually have to seek professional help like many hardworking
taxpayers do.
Mr. Miller. We can take a look at that, sir.
[The information follows:]
Under the Internal Revenue Code (Code), a resident alien's income
is generally subject to tax in the same manner as a U.S. citizen. An
individual is a resident alien if he or she is physically present in
the U.S. a sufficient number of days to meet the substantial presence
test under section 7701(b) of the Code.
The Code requires an individual that has a tax filing obligation to
obtain a taxpayer identification number (TIN) in order to file an
income tax return. The SSA does not issue SSNs to resident aliens who
are not authorized to work in the U.S. Therefore, the IRS issues
Individual Taxpayer Identification Numbers (ITINs) to individuals who
are required to file federal income tax returns but who are not
eligible to obtain an SSN. The IRS issues an ITIN so that resident
aliens can comply with their income tax return filing requirements.
However the IRS does not obtain any information on the immigration
status of individuals applying for an ITIN. Thus, we are unable to
provide any information on the number of undocumented workers.
AFFORDABLE CARE ACT
Mr. Bonner. That would be great. The other question that
just comes to mind is you were talking a little bit, I think,
in response to either the Chairman or the Ranking Member about
the Affordable Care Act, and most of the responsibility for
that will be on the Department of Health and Human Services.
While we all, perhaps, probably everyone in this room, does pay
taxes and will have that obligation to, on the 15th, do you
know how many of the employees of the IRS will actually be
impacted by the Affordable Care Act in terms of--will you be--
will you, like Members of Congress and staff, will you be
available to go into the Federal exchange? I have not been able
to get a lot of help from Health and Human Services about how
this is going to work, and I was just wondering if the Service
will be under the Affordable Care Act as well.
Mr. Miller. Yes and no, I think, if I understand the
question. We are part of the Federal Employees Health Benefits
Program, and that is coverage that is acceptable under the
Affordable Care Act, and so, yes, we are covered. Yes, you are
covered by the provisions, and yes, you have employer coverage
and therefore you are not----
Mr. Bonner. So you will stay under--Members of Congress and
their staff, not committee staff or leadership staff or
Executive Office of the President.
Mr. Miller. Yeah.
Mr. Bonner. There was a carve out, unfortunately, and I
just was wondering, so you will be able to continue
participating in the Federal Employees----
Mr. Miller. I believe so, but that is a better question for
OPM, than it is for the IRS because we do like everyone else in
the Federal government.
Mr. Bonner. Very good. Mr. Chairman, I am going to save my
second question for the second round of questions if we go to
it. It deals with cyber security.
Mr. Crenshaw. Thank you. Mr. Yoder.
Mr. Yoder. Thank you, Mr. Chairman.
Mr. Commissioner, thanks for joining us today. We
appreciate your testimony, and I wanted to follow up on some
questions the Chairman was asking regarding the implementation
of the health insurance or healthcare legislation. You may have
covered this, so just some brief follow ups here.
Do we have an estimate on the cost to the IRS specifically
related to implementation of the healthcare act?
Mr. Miller. We have what we have spent so far, and we have
what we think we will spend this year. I think tomorrow you
will see what the President is asking us to spend next year. To
get through 2012, we have spent something in the range of $488
million; $405 million of that was for IT. All of that has been
from the HIRIF fund, which is the HHS fund, to implement ACA.
This year, we had asked in our budget for something in the
middle $300 millions, whether it was $360 million or something
like that. We did not get that, obviously, and so we will have
to trim that back. And with sequestration we could get it down
to $300, something in the realm of $309, $300 million, but with
sequestration, it may be lower than that. Those are the ranges.
Mr. Yoder. Is that an ongoing cost, an annual?
Mr. Miller. It will differ going out. And I think the only
estimate that I am aware of for a full 10-year period, is the
CBO original estimate of $5 billion to $10 billion for the IRS
to implement ACA. I think if you look at the $488M we have had
so far, actually $300M this year, we may be looking at
something in the lower end of that range, but I really don't
have and we don't budget on a 10-year basis. We come to you
every year.
Mr. Yoder. And are all the forms ready? Are we at a
position where the IRS will be on time with all the documents
and forms that taxpayers need to fill out throughout the
country?
Mr. Miller. Yes, I believe so.
Mr. Yoder. And do we have an estimate of what the cost of
compliance is, not the healthcare cost itself, but just the
administrative cost to small businesses, to the American people
who are going to be affected by this?
Mr. Miller. I don't have a specific cost. I don't know that
there is one, to be honest with you. I don't know it. We can go
back and check on that for you.
[The information follows:]
The IRS does not have any information regarding the administrative
cost to small businesses resulting from new ACA Code provisions.
Mr. Yoder. I think it would be helpful to know because we
talk a lot on this committee about the cost to government to
implement the acts that are passed in Congress, but we probably
don't spend enough time really diving into what is the cost,
particularly related to your agency on the compliance side; how
much do Americans, how much are they going to be spending just
filling out the paperwork that the IRS requires to ensure that
there has been proper compliance? Do we have an estimates of
what the cost of compliance with the Internal Revenue Code is
overall in this country?
Mr. Miller. I think that there are those studies, but we
would have to go probably to the Department of Treasury for
that. I don't have that with me, but I don't doubt that there
are probably several of those. I don't know them off the top of
my head, sir.
RETURN ON INVESTMENT
Mr. Yoder. Okay. And then to follow up on the conversation
was being had regarding the tax gap and tax compliance and
really the bang for the buck in terms of where we spend dollars
at the Federal Government and where those dollars have the most
value to the American people, I think--certainly, I think your
testimony is, sir, that for every dollar we were to place into
the IRS, we would receive $4 back into the Treasury; is that
how I understood your testimony?
Mr. Miller. That is the minimum. To the extent they are
enforcement dollars, it is larger than that, but for any
dollar, the agreed upon amount is $4-plus.
Mr. Yoder. And Mr. Womack and the Chairman were both sort
of following up on that question. Certainly your testimony then
isn't that if we put a trillion dollars into the IRS, we get $4
trillion back, so how does that actually work itself out versus
the law of diminishing returns? I think Mr. Womack was trying
to get at that question.
Mr. Miller. And I appreciate that, sir. I don't think I
answered that one well because I don't think there really is an
answer. We are limited in the amount we could manage, right? We
couldn't manage a trillion dollars, even if you wanted to give
it to us, because it is well beyond that amount with which we
could accomplish anything. So what we ask for is what we think
we could spend, and those amounts are manageable, and we will
see tomorrow what those are.
This year we were funded at $11.8 billion in the CR, and
above that for the President's ask. Certainly those are amounts
for which I believe the 4:1 ratio is absolute. Beyond that, it
will depend, because we will get to the point--you are
absolutely right--where we cannot spend it all.
TAX GAP
Mr. Yoder. The tax gap in this country, I think, is
estimated at, what, 400-some billion dollars? What is that, the
number the IRS uses for those dollars that are out there that
should be being paid that are not being paid?
Mr. Miller. So we can come back to you on tax gap.
[The information follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Miller. It is in the middle $400 million. After you net
everything else out, including voluntary payments and
involuntary payments, it is much less than that. But the
voluntary compliance rate, which is on 2006 numbers, is in the
83 percent range.
Mr. Yoder. So leaves about a $400 billion, $450 billion tax
gap number.
Mr. Miller. That is the gross gap, I think.
Mr. Yoder. The gross gap.
Mr. Miller. The net gap is less than that. And I can come
back on those numbers.
Mr. Yoder. The total budget of the IRS that is going to be
requested tomorrow, that number is not public. The current
2013, the estimate the IRS will spend after sequester is how
much?
Mr. Miller. $11.19 billion.
Mr. Yoder. $11.19 billion. So the tax gap is roughly $480
billion. I think Mr. Womack said 485 over here--385--I
apologize--385. So your budget right now is about $11 billion.
On a 4:1 ratio then would it take about $100 billion then to
get that other $400 billion at a 4:1 return?
Mr. Miller. No, that is not my testimony, because we could
not do that, obviously. What we can do is close the gap through
a batch of ways, including some legislative. There is more
money out there could be gotten with more bodies. There is no
question about that. It will not be a pretty thing to give us
the ability to go farther down the line of some of that money.
But there will always be a tax gap, and it varies place to
place.
It will be interesting to see what some of the reporting
that you have given us will do to the tax gap in the next
couple of years, such as the foreign account reporting, the
credit card reporting and the basis reporting. Those are going
to be interesting things which should make us much more
efficient. We would not need as many people to get at that
money.
EFFICIENCIES
Mr. Yoder. So I am glad you said efficiency, because I
think that is something we can all agree on, that if we could
actually get a greater efficiency in terms of dollars that IRS
spends in its return and closing that gap, that would be
something that certainly everyone would think would be a
beneficial use of taxpayer funds in a more effective way.
I know you are investing in technology and IT, and I have
had constituents write in, one constituent sent me a note with
an article, I think it was in 2011, that said investigators
found an address in Michigan that was used to file 2,137
separate returns. We have had some cases where hundreds of
refunds are deposited into the same bank account.
Those do not seem like manual mistakes; those seem like
mistakes that would be caught by greater technology. And I
guess a couple questions for you. One, how are your
technological advancements going to make it more effective so
that we can avoid those fraudulent transactions, those
fraudulent claims in a way that does not required us to invest
in more people but to invest in a more effective use of the
dollars we have?
And then I just note in the Inspector General's report that
they cite hundreds of millions of dollars of reforms, including
reducing office space by almost a million square feet,
resulting in potential rental savings over $100 million over 5
years, and a variety of other things. And I guess are those
items being implemented? Do you have disagreement with some of
the items in that report? And what are things that, beyond just
saying if we give you a dollar you are going to return $4, but
what are other things that the IRS can do to turn the resources
we are using now to greater results through using efficiencies
and greater effective policies?
Mr. Miller. That is a set of questions. Let me hit the
first one of those if I could, the technology question. I will
be specific in answering the one that you raised. In an
identity theft world, where we were seeing a lot of refunds
going into an account or a lot of refunds going to an address,
we have the technology fixes in place for that this year and it
seems to be working.
That is something that we saw happening and we took
technological action on that through clustering sorts of
filters. We are doing more of that and I think we are doing it
much better. I would say we did much, much better last year
than we did the year before on identity theft, and we are doing
better still this year. We still have work to do. Do not get me
wrong.
On the Inspector General's report, I am not familiar with
each and every one of the recommendations. I can speak to rent.
We have been very aggressive, and you will see in my written
testimony just how aggressive we have been. We have closed, or
are in the process of closing, 43 posts of duty; 600,000 square
feet of space has been returned this year. We have stopped
paying rent on 600,000 square feet. Over the next 2 years, 1.4
million square feet of rental space is going to be turned back.
So we are pretty aggressive on that.
I outlined in my written testimony, and even in here, the
contract savings we have, the travel and training savings that
we have. We have been aggressive over the last couple of years,
Congressman.
Mr. Yoder. I appreciate that.
Thank you, Mr. Chairman.
Mr. Crenshaw. Thank you.
I think we have time for another round of questions. I
would like to ask a couple of quick ones. One, as we talk about
this, the tax gap, you know, it is kind of intuitive, you spend
more money then you would get more money. But I think we have
talked about the fact that bracket creep and population and
GDP, all these things have an impact, and I think we all are
aware of that.
TAX SIMPLIFICATION
One of the interesting things is, I read not long ago that
former Commissioner Shulman, here is what he said. He said,
making the tax code less complex is the single most important
thing we could do to improve taxpayer service and boost
compliance. So it is interesting, you know, it is almost like
you could say we could appropriate more money or we could make
the tax code more simple, because if we make it more simple, it
is easier to comply with, it is easier to comply with, then it
is easier to enforce. And that may be one way that we could
increase the revenues that would not cost any money if we get
around to actually simplifying the tax code.
I do not think anybody disagrees with the fact that it is
pretty complicated, hard to understand. I think somebody said
it is thicker than the Bible but it does not have any good news
in it. Something like that. I had a law professor in law school
say, he called it the thicket of verbiage.
So I guess I would ask you as we talk about, ways to
collect more revenue, do you agree with that, that there is a
relationship between complexity of the tax code and compliance?
Because at the end of the day the question might be, if we
could simplify the tax code and make it easier to comply with,
and make it easier to enforce, then you would not be as
overworked as you are today.
Mr. Miller. I think that is right. That is an absolutely
valid set of comments, Mr. Chairman. I think that the Code is
way too complex. I could not agree more with Doug's commentary
in terms of making it simpler. Certainly the number of calls we
would get would be diminished. Our difficulties in processing
and matching should be lessened. So, yes, I agree, I would love
to see a simpler tax code.
Mr. Crenshaw. And I guess maybe we could report to our
friends on the authorizing committee, if they could simplify
the tax code then that would reduce some of the need to spend
the money we have to spend to help people comply and also to
catch the people that are not complying.
IDENTITY THEFT
Just one last question, because we have talked all around
this, and we talked a little bit about it when the Inspector
General was here, about that whole question about fraud, filing
tax returns. As I remember, it was something like maybe 900,000
stolen IDs. People filed the tax return based on identification
theft and then maybe $6.5 billion was paid out. And I guess can
you talk about it from your standpoint firsthand? And are there
things that we can do? Do you need more resources? Do you need
more authorization? How can we get a handle on that?
Because as I understand it, once it takes place, I mean,
one of the things the Inspector General said, well, the best I
can do is tell you to file early. But if you file after he
files, as I understand it, you can be caught up in a big mess
that might take 6 months, even though you have not done
anything wrong, somebody stole your ID, filed a tax return,
ended up getting a refund, and when you file your tax return
somebody says, you are not that person. So you have got to now
prove you are, which in fact you are, and you are stuck with a
6-month process of trying to get out of this mess. So obviously
if we could stop it on the front end. Are there things that we
can help you do from a legislative standpoint?
Mr. Miller. I think that the budget will include a few
things that will help with identity theft. I could argue with
the $6.5 billion. I think that that is based on old schemes
that we have taken care of. I do not know what the number is,
to be honest with you. I think a million people probably is not
far from being wrong, in terms of the number of people who have
had their identities stolen.
I mentioned in my testimony that we have gotten better at
this, and I think I mentioned it earlier, in Q&A. We have
improved. We stopped $14 billion in fraud in 2011. We stopped
$20 billion last year. Five million returns were stopped. And
you are absolutely right, you have got to stop it up front or
it creates all sorts of problems.
But you are also right that if you are the second one into
the system, you will run into an issue with us. We will have to
work with you through having you file on paper, through having
you file an affidavit with us. And the sheer number of those
has caused us some delay. But I can tell you that we are
getting much better at that, too, that we are closing many more
than we are receiving, for the first time in quite a while, and
that by the end of this year we should be in a much better
place, and that 6 months, hopefully, will be the exception and
not the rule. I hope to have 60 to 90 days to report to you. It
is still going to take a while. It is not going to be immediate
that we can get the right person through.
In the future, the gold standard here, Mr. Chairman, would
be that when you come in to file your return, you prove you are
who you are. When you go through our filtering system, we have
an aggressive set of filters that will help us. And that will
get us to the point where we have many fewer people running
into the wall here. We have 770,000 PINs now that allow a
person who has been the victim to get through our system much
easier, and that is going quite well. We are doing this as we
speak. We are doing some work around so-called out-of-wallet
questions, which means there is something that you know, but
that somebody who steals your identity probably does not. We
are running a test right now--the financial industry does this
now--on asking what was your car, what was your first car,
where did you live on a certain date? Questions that a thief is
not going to know the answer that you probably will, and that
will give us the sense that you are who you say you are, and we
can move you through the system faster.
We are testing that now. That is the gold standard going
forward, I hope. And next filing system we will see whether we
can get there. But it is not an easy task for us, and while we
are doing much better, I do not want to give the impression
that we are done because we are not.
Mr. Crenshaw. Is there any kind of authority that we can
help with, other than obviously in terms of resources, but just
in terms of any kind of administrative issues or----
Mr. Miller. There are some issues in terms of what we can
share with State law enforcement in the 6103 area. There are
also some issues around--and we will be glad to work with staff
on this--there are some issues that will be addressed, I think,
in the budget. They are generally around the strength of
penalties in the criminal area. In the civil area there is the
Death Master File which has caused consternation in terms of
the forced publication of people's names and Social Security
number after they have passed, that people then scoop up and
use to file. There are things of that nature on which we can
work with you, and there is a whole list of them, sir.
Mr. Crenshaw. We will be happy to help where we can.
Mr. Miller. And we could use resources.
Mr. Crenshaw. I understand. You already said that.
Mr. Serrano.
EARNED INCOME TAX CREDIT
Mr. Serrano. Thank you, Mr. Chairman.
You know, one of the questions that has come up throughout
the years--I was tempted to quote one of my favorite subjects--
not favorite subjects, the result was never one of my favorite
ones--was that there was a lot of discussion around the Earned
Income Tax Credit, which in my opinion in some cases was
targeting a certain part of the community. And at one point the
numbers were pretty bad. Forty-five percent of the audits were
being conducted on 17 percent of the taxpayers and
disproportionately those obtaining the EITC deduction.
So in keeping in line with the discussion about IT and the
improvements you are making, are those improvements that you
have made going to enable you to make better decisions about
where the IRS should do the audits?
Mr. Miller. I would hope so, Mr. Serrano, I would hope so.
I think our percentage is lower now in the EITC area than it
was. I think also I should mention that we have tried to be
balanced in our approach across income levels. We have a fair
amount of coverage in the upper income levels as well.
I do think we still see a good deal of error and fraud in
the EITC. We are trying to leverage resources. We have not
talked about that this afternoon, but we should. We have been
working on our return preparer leverage. Another way for us to
be more efficient is in our regulation of the return preparer
community, many of whom are working on the EITC. We have done
work with that community to try to have them exercise more due
diligence, to talk to them on a basis that gets them to create
better EITC returns. Hopefully that will have a beneficial
impact for the recipient and for the government, in terms of
being able to leverage our efforts with respect to a preparer
of hundred returns instead of return by return. That is less
burdensome on the taxpayer as well.
Mr. Serrano. In the past there were comments made to this
Committee about this issue in the sense that in some cases it
was not the individual who went in. And I am not saying one is
not to blame. If there is something going on here that should
not be going on people have to pay the price for that. But that
they were encouraged by some of the people who prepare these
forms to claim something that they were not supposed to be
claiming.
Do you know that to be a fact? Is that growing? Is that
part of what you are discussing, to work with those communities
so that in fact it may not be something they are doing to do
the wrong thing but actually encouraging people to do the wrong
thing by not being informed.
Mr. Miller. I think the EITC is a difficult provision. It
is complex. It is not evident to us, from the face of the form,
exactly what is happening. I do think we have seen some return
preparers, for good or bad, doing the wrong thing with respect
to the EITC returns. We began last year something called the
Real Time pilot. It is a technology improvement as well. We
look at returns as they are coming in. We look to see who has
prepared them and are they bad returns. And if they are bad, as
quickly as we can, we are going out and talking to the preparer
to try to drive them in the right direction.
That is the kind of thing we are trying to do to be more
efficient in our EITC work, not necessarily to burden the
taxpayer, but to get the return preparer on the straight and
narrow. Whether they are making errors or whether they are
doing something worse than that, I do not know. But we are
trying to be more aggressive in early intervention here.
OFFSHORE VOLUNTARY DISCLOSURE PROGRAM
Mr. Serrano. Well, I appreciate that and I appreciate that
approach. So for my last question, Mr. Chairman, we go from the
lower income tax earner to the folks who have money offshore in
the Offshore Voluntary Disclosure Program. You highlighted the
success through which $5 billion was collected through the end
of fiscal 2012.
So my question is, you know, how is that program doing now?
What is your evaluation, other than $5 billion is a great
number? And with the cuts we are making to the IRS, or not
increasing the funding at the proper level, is this program in
danger of not being able to continue the success story so far?
Mr. Miller. Well, I think I will start with a discussion.
It has been a success story, 38,000 folks have come in, $5
billion-plus over the last few years. It has been a success.
That said, how will resources impact it? Not everybody
comes in voluntarily. Where we receive information through a
whistleblower, where we receive information from another
source, a treaty or otherwise, where we receive information, in
the next couple of years, from foreign financial institutions,
there will be a lot of work to do in those cases. Those will
not be voluntary cases. There will be examinations and those
traditionally are very difficult and time-consuming
examinations that use some of our best agents. That could be an
issue. And to the extent that that does not happen, then I am
not sure the voluntary compliance program will continue to be a
success, because you do need, in addition to the open window, a
bit of enforcement behind that. I would also say you do need
both an aggressive enforcement arm, as well as the opportunity
for people to come in voluntarily.
Mr. Serrano. Well, I would hope that we could continue to
grow the program. I know that is a bad word around here. But it
is a fact that this one gets a return, and deals with fairness,
too, so that the person who is working in an office or a
factory is being treated the same way as the person who has got
money somewhere else.
Well, thank you, sir, and thank you for your service and
thank you for your answers today.
Mr. Miller. Appreciate it sir.
Mr. Crenshaw. Mr. Womack.
EMPLOYEE PRODUCTIVITY
Mr. Womack. I want to go back to efficiency for just a
minute, and I am going to zero in on what I call a productivity
model. I assume that the IRS, like other agencies, has some
criteria by which they judge the performance of their
personnel. And I call it a productivity model. Call it what you
want. Do you study those models?
Mr. Miller. We have a goodly number of measures,
Congressman, that we do look at. We look at everything from the
number of examinations per person, all the way through coverage
in certain areas. So we have no lack of measures, most of which
are productivity measures.
Mr. Womack. Generally speaking, on what day are your people
most productive? Are they as productive on Monday, say, as they
are on Friday? Are they more productive Tuesday, Wednesday and
Thursday? I mean have you gotten down----
Mr. Miller. We have not done that. I can say that on the
phones, Monday is our busy day, so we are more productive on
the phones on Monday out of necessity. But outside of that, I
am unaware of us doing something like. I am aware of some of
the manufacturing firms that do that sort of analysis on a
daily basis. That is not what we have done.
Mr. Womack. So going back to your testimony originally
about furloughs, what will be the rationale to use on just when
the IRS subjects its people to a furlough?
Mr. Miller. So, the analysis will be severalfold. One, we
will have to decide when it makes sense to do it. There is no
doubt, obviously, that a day around a holiday may be a less
productive day at the Internal Revenue Service.
Mr. Womack. You think?
Mr. Miller. I do not doubt that the Service is like many
other institutions that way. And so that is going to be
something we are going to think about, obviously.
We are also going to have to think about the well-being of
our employees, which means we are not going to bunch these
things in a fashion. It is okay for me to take this time off. I
can afford it. It is a little different for a grade 4 or a
grade 5 in one of our processing facilities, living hand to
mouth, to afford it. We are going to have to space them out for
that reason. So we would not do more than one in a pay period,
for example. We have to try to space that out a little bit.
We also would think about what day and how we do this. Does
the IRS close for that day, or do we sort of do this on a
graduated basis? We are still talking about that. But I can
say, I think in terms of our call sites, that we will close for
the day. Otherwise people will be frustrated with a continued
lack of service on the remaining days, because we will be down
throughout the week instead of just closed on a given day. Our
judgment is that is the better way for the Agency to operate.
It may be that we choose to close entirely because that is more
efficient in terms of our security and other ancillary costs.
Those are the kind of things we are talking about.
Mr. Womack. Who will make the ultimate decision on when?
Will it be pushed down to the managerial level, subordinate
managerial levels, or will it----
Mr. Miller. No, it will be my senior staff and I that will
make the decision. To push it down, I think, invites a sort of
madness and inconsistency, and puts managers in a bad place as
well. So I think we will make a decision at the highest levels
of the Service.
Mr. Womack. Sir, I do not want to put you on the spot but
let's say it is time to make that decision, would you say that
the principal guidance, the cornerstone principle in the
decision is going to be based on productivity or protection of
the, I think you said the class 4, class 5 employee? How would
you----
Mr. Miller. It is going to be a mix of all those things,
including what is best for the taxpayer, sir. It will be all of
those things.
Mr. Womack. In your own opinion do you think it would make
more sense if, say, we dealt with the lower performing
employees first, whether to retain them at all, as opposed to
furloughing our highest performing employees?
Mr. Miller. That is probably a question best given to OPM
because those are rules that are across government.
Mr. Womack. And if they were here I would ask them for
their opinion, but I was asking for yours.
Mr. Miller. In my understanding of the rules, I am not
going to be able to effectuate something like that.
Mr. Womack. Mr. Chairman, thank you for the time.
Thank you, Mr. Commissioner.
I yield back.
Mr. Crenshaw. Thank you.
Mr. Diaz-Balart.
IDENTITY THEFT
Mr. Diaz-Balart. Thank you, Mr. Chairman.
Commissioner, going go back to identity theft, and South
Florida, as you know, is, frankly, ground zero, right, for
identity theft, and whether it is IRS or any other kind of
identity theft. And I know there have been some pilot programs
in cooperation with the State's attorney's office and local law
enforcement.
Could you give us any idea as to, is it working as well as
you had hoped? Is it yielding any results? Is there anything
else that we could be doing and anything that we could do to
help you do that?
Mr. Miller. I think it is. We would have to talk to the
States and local governments about this. This speaks to the
fact that, in Florida in particular, there is no income tax,
and as a result, we do not have a natural way of communicating
with law enforcement. In many other States, it is easier to
collaborate because we can talk about taxes to other tax
people. But in Florida and some other States, it is more
difficult and local law enforcement does not have the right,
under section 6103, to get that information. So what we did was
create a waiver process for victims who wanted to help out.
They give a waiver to local law enforcement to come to us and
allow us to share the information.
I would say it got started slowly. Florida and about eight
other States were first. We have had 1,500-plus waiver requests
and it is working all right. And we just recently, in fact in
the last few weeks, we expanded it across the country, judging
that it worked well. We have, I think, more than 300 local and
State authorities that are participating with us at this point.
Mr. Diaz-Balart. That is good news. Before you were talking
about the issue about the PIN. And obviously the IRS is not the
only one who is subjected to this kind of theft, not only folks
that deal with the IRS. It is the private sector, it is credit
cards, et cetera. Coincidentally I went to get gas last night
at a gas station in Miami and it was declined because they
just--I guess it was a gas station that they did not know I
went to much or whatever. And it literally was declined, I had
to call, and then they are like, is this yours? Great. And then
they reestablished the credit card.
Now, they are not immune, I am sure we have all heard about
the, I guess, billions of dollars where the private sector was
hit on as well. But here is my question. When you are going
through your process, are you doing it internally or can you
contract some of this stuff out to others who are doing it? Are
you looking at what the private sector is doing? Are you
looking at contracting with the private sector? Or do you know
if you have a better record, frankly, than some of those credit
card companies--and I will just mention that--and therefore are
doing a better job internally if you are not contracting? How
does that work?
Mr. Miller. You ask a mix of questions again and I will
give a mix of answers, if I could, Mr. Diaz-Balart.
Mr. Diaz-Balart. Kind of throwing it out there for you.
Mr. Miller. I did mention earlier in the hearing that we
are doing some out-of-wallet work. And out-of-wallet work would
be to go to an outside contractor who has the sort of
information that says, ``where did you, Steve Miller, live in
1995?'' And do the comparison there. We are testing to see
whether that works, whether that is a way forward.
In a perfect world, again, you would prove that you are
Steve Miller before you file your return. When we receive your
return, you have everything that we know about you accessible.
We know that Steve Miller has lived in the same house for the
last 20 years, that he has the same wife and dependent, and
things of that nature, so that we could compare it to what
comes in. Right? Because it seems obvious that Steve Miller
probably does not have nine dependents and has moved to South
Florida, for example. That would be an odd sort of change and
that should raise flags for us. We are getting there. We are
not there yet. But that is where we need to get to.
I think financial institutions, and we are talking to them
all the time, financial institutions have a much richer
database of interactions. They know where you have been
shopping. They know what you have been doing with that credit
card. And it is much easier for them to flag discrepancies. We
need to get there. Our issue is it is only once a year, really,
that we have an interaction with you. It is not a series of
credit card transactions. We will get there.
Mr. Diaz-Balart. Thank you.
Thank you, Mr. Chairman.
Mr. Crenshaw. Mr. Bonner.
CYBERSECURITY
Mr. Bonner. Mr. Chairman, I am going to ask two more
questions. I want to veer off the identity theft per se and
talk a little bit broader about cybersecurity and specifically
with regard to foreign threats. When the Inspector General for
the Treasury for Tax Administration came before this
Subcommittee last month, I had the privilege of asking him a
question that I am going to ask you and I would very much
appreciate your response on this.
Recent news reports have detailed the extensive penetration
by advanced, potentially state-sponsored cyber espionage
threats against American businesses and government agencies.
Obviously the tax and financial information of American
businesses and individuals would be highly valuable to cyber
criminals and other hackers.
Can you give us an assessment about what the IRS is doing
to protect its systems, especially from foreign threats, if you
know of any?
Mr. Miller. I think we are probably better served coming
back to you in more detail and possibly, if you want, having
our cybersecurity guys come up and talk to you directly.
I can say I think we have a first-rate team, that we take
it incredibly seriously, that it is not necessarily about
penetration into the system. It is what you do once you are in
the system and how you get out again. And we are very good at
that, I think.
That said, it is not a perfect world. But I think we would
be better served, if you would like, if we can come up and have
a more direct conversation with you.
Mr. Bonner. Mr. Chairman, that is just an idea. I know we
both sit on the Defense Subcommittee and we have had numerous
hearings about cyber threats and especially from foreign
entities. So it is just an idea that the Committee might want
to consider.
I am going to shift gear in my last question. And I am not
trying to throw you a curve ball. I asked earlier if you knew
how many people who worked with IRS employ professional tax
preparer services. You said you did not, but you would try to
get that answer if possible and get back to us and that would
be great.
[The information follows:]
Please refer to the earlier response on page 107.
REGULATIONS
Mr. Bonner. From time to time, I do not know if the Acting
Commissioner of the IRS has ever run into this, but Members of
Congress sometimes are exposed to questions from their
constituents. Why would you knuckleheads pass this law that
would force me to do this thing, this act? Many times it is not
actually a law. It is not even legislation that ever moved up
here. It is some rule that has been promulgated by an agency or
a department that the law created. I will give you a quick
example that has nothing to do with you. We live on the Gulf
Coast, Mr. Diaz-Balart and Mr. Crenshaw and I do, and I know
Mr. Serrano would like to live on the Gulf Coast, but he lives
in the beautiful Bronx.
Mr. Serrano. Eventually he will.
Mr. Bonner. Eventually he will. But the Department of
Commerce, which again has nothing to do with you, but they have
the National Marine Fishery Services under the Department of
Commerce, and they have recently come out with a rule--not a
law, not a bill that we introduced, legislation we passed or
that President Obama signed into law--but a rule that says that
you can only catch red snapper for 27 days, two fish per day.
That has nothing to do with the IRS, but I am using that as the
example.
Do you have any idea how much of the tax code that is
enforced by the IRS and administered actually is a direct
result of legislation but became enacted into law versus how
much of it is enforced by some rule or regulation that is
interpreted by the IRS? Does that question make sense?
Mr. Miller. It makes sense. I do not think I have an answer
for you, though, Mr. Bonner. I do not. I mean, admittedly, I am
quite sure that there are places in the regulations where we
are more complex and more difficult than we need to be. The
regulations are more voluminous than the code is, and the code
is bigger than the Bible. So I am quite sure there are places
where that is the case. We try our best not to do that, and
succeed sometimes and do not succeed other times. But I do not
know what the balance of that is.
Mr. Bonner. It was a thought that came to mind as you were
answering some other questions and do not even know that it
would be possible to get a number on it. But it is, at least to
the people who live in my district, and I cannot believe I am
alone, it is very frustrating at times when people look at
Washington, look at government in a broad brush and think that
sometimes these crazy ideas that come down from this city,
actually that we even had a debate on it, much less a vote on
it. And I can just only imagine, because as I said, I am
getting ready to do town meetings, and every other town meeting
I have had always I get a question about the complexity of the
tax code, and I was just curious. Thank you very much.
Thank you, Mr. Chairman.
Mr. Crenshaw. Thank you. I understand, I am not sure, but I
am told that the word ``child'' has 19 different definitions
under the tax code and the regs that accompany that. So it is
not hard to imagine people having a tough time understanding
what is in there, whether it is a regulation or whether it is
actually in the code.
Mr. Yoder.
TAX REFORM
Mr. Yoder. Thank you, Mr. Chairman.
And following up on Mr. Bonner's line of questioning, I
guess when we look at tax reform, that is a fundamental, I
guess, discussion we have to have, which is how did all these
things get into the tax code, 70,000 pages, 4 million words. It
is very frustrating to small businesses and individuals who try
to comply.
I know the Chairman brought up tax reform earlier. What
extent is the IRS directly engaged in conversations regarding
tax reform? Does the IRS have a history of offering up specific
proposals?
Mr. Miller. We have offered up proposals in the past. And
we are asked one-offs, at this point. I do not think we are
part of any sort of organized discussion right now. I would
hope we would be in that, because to say tax reform is
wonderful is right. But it needs to be done with the knowledge
of what our systems can do and cannot do, and the time it would
take to get to a point where we catch up with the law. So there
are things that we do bring to the table. Again, tax reform
generally would be the Department of Treasury's Tax Policy arm,
they would be doing that.
Mr. Yoder. Both parties and folks from I think both ends of
the political spectrum are talking about tax reform. We know
the Ways and Means Committee is focused on it. It is going to
be a significant part of the policy debate in Washington, D.C.,
this year. Looking at State examples or other nations, are
there empirical data that shows that the simplicity of the code
relates to--I know the chairman asked about this already--tax
collection in particular? And are there examples of codes that
not only have greater compliance rates but are very simple and
yet effective in achieving the results? Do we have other
countries that have a good model?
Mr. Miller. I am unaware of that and I would not
necessarily be exposed to that. I would think, again, we would
be able to talk to the Tax Policy folks and the economists over
there who may have been doing much more work in that area than
I would have at this point.
AUDITS
Mr. Yoder. Okay. And then we can spend some time discussing
the audit procedures, the compliance related to that, and we
have talked at length about identification, folks stealing
identification. Looking at some of the audits, I was looking at
the Inspector General's report, just to quote from it a little
bit, it says, ``IRS statistics show that 50 percent of the
partnership returns audited after being selected by the
Discriminant Index Function system or related DIF-selected
returns were closed as a no-charge in fiscal year 2011. The IRS
has relied on the system to decide how to best allocate its
audit resources. According to the IRS, a high no-change rate
means the IRS is spending a significant amount of resources on
unproductive audits and compliant taxpayers are unnecessarily
burdened by these audits.''
Do you concur with those findings? And what are we doing to
fix that problem going forward? And how do we, maybe at least
in the case of these DIF system-related audits, how do we
create a system that burdens taxpayers who are obviously
following the rules properly less and targets those who are not
more?
Mr. Miller. Let me talk about partnerships after a more
general discussion on the selection of returns. I think it is
absolutely the case that it is actually a problem if we have a
high no-change rate, which means we have come to you and we
have found that you are generally compliant, we have no
adjustments to your return. We will always have some of that,
but something at the 50 percent level indicates we are probably
either doing it wrong or should not be there. And it could be
either, actually.
The partnership area has been difficult for us. I think
more recently that is not the case. I think we are doing better
in terms of audit selection. I would say the partnership area
has grown, that we are seeing huge growth in the number of
flow-through entities. And we need a presence there. We also
need to have a better selection mechanism. And we are getting
there. But the fundamental point is right. If you have a high
no-change rate, then you are probably either doing something
wrong or should not be there. And we need to move away from
those areas and better target our resources.
Mr. Yoder. We will look forward to those results.
Appreciate it, Mr. Commissioner.
Thank you, Mr. Chairman.
Mr. Crenshaw. Thank you.
And, Mr. Miller, we genuinely thank you for taking the time
to be here today. The largest agency that we provide funding
for. We appreciate your service, all the service of the 90,000
people. And in particular, as you know, in these difficult
economic times, the work that you do is so important to
providing the funds. The more we collect that is duly owed, the
better off we are. And so if there are ways in these difficult
times, if we can work together, we want to work with you. And
genuinely thank you for all the work that you do and for being
here today.
Mr. Miller. Thank you very much, Mr. Chairman.
Mr. Crenshaw. This meeting is adjourned.
[The information follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Thursday, April 25, 2013.
DEPARTMENT OF THE TREASURY
WITNESS
HON. JACOB LEW, SECRETARY, DEPARTMENT OF TREASURY
Mr. Crenshaw. Well, good morning, everyone. This meeting
will come to order. I want to thank our witness, Treasury
Secretary Jack Lew, for joining us this morning to give
testimony about the President's 2014 budget and to respond to
questions. As members of the Subcommittee have heard me say
before, my hope that, for fiscal year 2014, we will have
regular order. We will mark up bills that reflect our nation's
priorities. We will amend the bills in the Committee and we
will amend them again on the floor. And then we will go to
conference with the United States Senate. But regular order
begins with the timely transmittal of the President's budget on
the first Monday of February. That did not quite happen, but,
as I have said before, better late than never, and we are ready
to move forward.
Presidents rarely get the budget that they request, and
this year looks no different than normal. The House budget
resolution assumes sequestration within the discretionary
allocation, making the budget increases, such as a billion
dollar increase requested for the Internal Revenue Service,
improbable and maybe even impossible. But nonetheless, we want
to work with you and your staff to make informed investments
and cuts so that the Department may fulfill its many missions
with available resources.
Now, under Chairman Rogers' able leadership, this Committee
did a lot of heavy lifting back in 2011 and 2012, and we
actually reduced spending by some $95 billion. And then if you
throw in sequestration, you have another 5 percent from non-
security programs and almost 8 percent from the security
programs. My preference, and I am sure the preference of this
Subcommittee, would be to find the successful programs and fund
them, and then find the wasteful programs and either reduce
them or eliminate them. But we have to wait until the
Administration and the authorizing committees find agreement on
tax and entitlement reform policies.
In my view, the President's budget masks proposed increases
in mandatory and discretionary spending with even higher taxes.
I do not support this kind of approach to do deficit reduction
because I think that growing the government and taking more out
of the wallets of the American people does not lower
unemployment; it does not really get the economy moving again.
For instance, yesterday, the Special Inspector General for the
TARP program issued a report that highlighted some of the
shortcomings of the Treasury's programs to help homeowners and
small businesses. The report states that homeowners who
received mortgage modification from Treasury's HAMP, H-A-M-P,
program were actually defaulting at an alarming rate. In fact,
the report says that the longer a homeowner remains in HAMP,
the more likely they are to redefault out of the program. And,
in addition, this same report highlights how billions of
dollars provided to banks through the Small Business Lending
Fund were actually used to repay TARP loans, and some of the
banks actually paid dividends to shareholders and did not
increase their small business lending.
So these seem to be good examples of how using taxpayers'
funds to intervene into the private sector does not always work
the way it is intended. The Special Inspector General for the
TARP program outlines a number of recommendations, and I would
strongly encourage the Treasury to take a look at those and
seriously think about moving forward to implement them. And I
am sure at today's hearing, somebody is going to want to ask
about the controversy about the IRS, maybe, making warrantless
searches by reading folks' emails. I am sure there will be
questions about that.
A lot of questions, Mr. Secretary, and you have a
challenging job. And before the end of the year, Congress is
going to have to work with the Administration. We are going to
have to negotiate the debt ceiling. We are going to have to
talk about mandatory and discretionary spending and revenue.
And so you and your department are going to play a pivotal role
in all of these issues. We look forward to working with you
with these challenges, and we hope that you will always feel
free to have an open and frank relationship with us. And so,
once again, Mr. Secretary, welcome. I look forward to your
testimony. And with that, I would yield to Mr. Serrano for any
opening statement that he might like to make.
Mr. Serrano. Thank you, Mr. Chairman, and before I begin,
let me preface my comments by telling you that I also look
forward to the days when we have regular order. I remember when
Chairman Rogers was chairman of the Commerce Justice State
Subcommittee, and I was Ranking Member, and regular order meant
we were there for a couple of days on the House floor with
amendments, and even reached a point where there was a pool. No
money was involved by the staff as to how many votes the bill
would get, and it always went over 300 votes. Those were the
days when we worked things out ahead of time and presented a
good package to the floor. I hope those days come back.
Secretary Lew, you joined the Department, and I send you
greetings from the Bronx. Secretary Lew, you joined the
Department of the Treasury at a very important time for our
nation. Our economic recovery is underway, but it is being
hampered by sequestration. Our nation will soon reach its debt
limit, but there are members of Congress amending that we
should put our economy at risk by doing nothing at all. The
Treasury Department plays a vital role in keeping our economy
moving forward, our government functioning, and our financial
system secure. Unfortunately, many of these missions are being
undermined by congressionally-created crises.
The sequester is, of course, our primary focus on the
Appropriations Committee. Just two weeks ago, we heard
testimony from the largest component of the Department of the
Treasury, the Internal Revenue Service. Acting IRS Commissioner
Steven Miller told us that the sequester will result in
furloughs and in billions of dollars in revenue that is owed to
the United States that the IRS cannot collect. The Treasury
Department, through the IRS, collects that vast majority of the
revenue that our government uses to fund itself. This seems to
me to be a prime example of exactly the problem that the
sequester has created. We are underfunding the very agency that
provides us with the revenue necessary to operate our
government. Unfortunately, we have yet to see any real effort
from the other side to help alleviate the pain that many
agencies and many Americans are feeling as a result of the
sequester.
Your budget request in fiscal year 2014 has had to fill a
number of fiscal holes at the IRS and throughout your
Department. I look forward to discussing the impact of the
sequester and how the Department is attempting to continue its
primary missions in the face of these difficult circumstances.
In particular, I remain interested in the Department's efforts
to expand economic opportunities to underserved communities
like the one I represent in the Bronx. I have been a long-time
supporter of the Community Development Financial Institutions
Fund, and I continue to believe that it is an effective and
efficient way to promote economic development. I am heartened
that the fund will be bolstered by the start of the CDFI Bond
Guarantee Program, which I believe will provide local CDFIs
with an important new funding resource. Additionally, I am
interested in learning more about your newly-proposed Financial
Capability Innovation Fund.
The Treasury Department plays a vital role in ensuring
stability in our financial system, enforcing our tax laws, and
promoting economic opportunity. I hope that we will be able to
provide you with the resources necessary to accomplish these
important missions in fiscal year 2014. You have, as the
Chairman has said, a very difficult job, and we stand ready to
assist you. Thank you, Mr. Chairman.
Mr. Crenshaw. Thank you, and we are joined today by the
Chairman of the Full Committee, Mr. Rogers, and so, I would
like to recognize him for any opening statement he might like
to make.
Mr. Rogers. Thank you, Mr. Chairman. Congratulations on
being Chairman. Mr. Secretary, welcome in your new role, your
new hat that you are wearing. You have had several hats over
the last several years. It is good to see you and welcome to
the Committee. Forgive me a little bit for feeling as though I
am living through Groundhog Day, but each year in this hearing,
the Subcommittee points out just how unsustainable our nation's
fiscal situation has become, and each year, the Administration
has allowed it to get worse through inaction. As you know, Mr.
Secretary, the debt is approaching $17 trillion, having grown
about $1 trillion each year of the Obama Administration.
While we have a new Subcommittee chair, a new, albeit late,
budget request, and even a new secretary, we are back to where
we started. Accounting gimmicks, funny math, no real solutions
to getting our fiscal house in order, and our nation's debt
making us less competitive and less secure, ticking upward. As
these fiscal issues continue to mount, the American people
expect leadership from the President. Unfortunately, they will
be left wanting. Last year, the President argued then that his
Fiscal Year 2013 budget requests would have reduced deficits by
$4 trillion in a decade. In fact, CBO indicated it would add
$3.5 trillion in cumulative deficits over baseline projections,
and result in $8.7 trillion in additional debt over the next 10
years. That is moving backward, not forward. Unfortunately,
Fiscal Year 2014 looks to be more of the same, only this time,
with a budget two and a half months late. CBO has not had time
to score it ahead of this hearing. While the President is
making every effort to blame sequestration on Congress, he is
happy to claim that $1.2 trillion in projected savings over 10
years within his budget deficit reduction figures. But when you
delve into his spending recommendations, it leaves the true
intent of his budget proposal clear: over $600 billion in
additional new taxes in a year when your Department will take
in more tax dollars than any other year in American history.
Speaking of your department, the Fiscal Year 2014 Treasury
request is $16 billion, which is a $1 billion increase over
fiscal year 2013 CR, without taking into account sequestration.
The vast majority of the increase, as it has been in recent
years, is for the IRS for tax enforcement, primarily associated
with the implementation of ObamaCare, but also for enforcing
the President's proposed tax hikes; increases this Subcommittee
has zeroed out in the past.
So, Mr. Secretary, we are happy that you are here. Thank
you for your time. We look forward to hearing from you.
Mr. Crenshaw. Thank you. I would like to now recognize
Secretary Lew for an opening statement. If you could keep that
within the five minutes, we would be happy to submit your
written testimony for the record. The floor is yours.
Secretary Lew. Thank you, Mr. Chairman, Ranking Member
Serrano, Chairman Rogers. I have had the pleasure of working
with Chairman Rogers and Ranking Member Serrano for many
decades now, and I look forward to working, Congressman
Crenshaw, with you as well. I know the Treasury has got a good
relationship with this Committee, and I look forward to
continuing that.
It is a pleasure to be here today to have a chance to speak
about Treasury's budget, and I want to start by thanking the
talented public servants at the Treasury Department who have
been so helpful to me in these past few weeks settling into my
role as Secretary. They are thoughtful, dedicated, and focused
on furthering the mission of the Department. It is my honor to
work with them.
Now, I would briefly like to provide an overview about both
the economy and our budget. Our economy is much stronger today
than it was four years ago, but we must continue to pursue
policies that help create jobs and accelerate growth. Since
2009, the economy has expanded for 14 consecutive quarters.
Private employers have added nearly 6.5 million jobs over the
past 37 months. The housing market has improved. Consumer
spending and business investment have been solid, and exports
have expanded. But very tough challenges remain. Families
across the country are still struggling. Unemployment remains
high. Economic growth needs to be faster. And while we have
made progress, we need to do much more to put our fiscal house
in order.
At the same time, political gridlock in Washington
continues to generate headwinds, including harsh,
indiscriminate spending cuts from the sequester that will be a
drag on our economy in the months ahead if they are not
replaced with sensible deficit reduction policies. The
President has laid out a strategy to address these challenges.
His path forward strengthens the recovery by making important
investments in manufacturing, innovation, infrastructure,
education, and worker training, while taking a balanced
approach to restoring our nation's long-term fiscal health. As
our budget today demonstrates, Treasury helps shape and
implement the President's economic policies from streamlining
the tax system, to reforming the financial system, to securing
our interests abroad, and increasing lending for small
businesses here at home. And whether it is making Social
Security payments or producing our nation's currency, Treasury
touches the lives of virtually every American.
Now, while our responsibilities are broad, we are committed
to meeting our obligations as efficiently as possible and at
the lowest cost to the taxpayer. Over the last four years,
Treasury has made enormous progress to make the Department
leaner and more efficient. Today, we build on that momentum by
identifying nearly $400 million in additional savings. In this
budget, we wring out wasteful spending and consolidate
redundant programs. We cut travel costs and expenses. We use
materials more effectively at the Bureau of Engraving and
Printing. We save on rent at the Bureau of Fiscal Service, and
we provide more of our services electronically so we can
continue to cut down on paper and paperwork. In total, we
reduce spending by 2.3 percent when you exclude the IRS and
compare this year's budget to what was provided during the past
fiscal year.
As was noted, the IRS is the main area where we are
requesting an increase. The additional resources that we
request with the program integrity cap adjustment will allow
the IRS to improve enforcement. With this new funding, the IRS
will crack down on those who are evading the law, and bring in
more revenue. For every dollar we spend on our enforcement
initiatives, we expect to collect $6. The request for an
increase also includes additional funding so that the IRS can
meet its responsibilities under the health care law, which
lowers the forecast budget deficits by more than $1 trillion
over the next two decades. The Affordable Care Act is helping
to slow the growth of health care costs, and continued
implementation of the Affordable Care Act will help improve the
quality and efficiency of the health care system.
Nevertheless, in order for the IRS to carry out its
obligations as mandated by Congress under the health care law,
it needs the appropriate resources. Beginning in 2014, millions
of Americans will receive unprecedented tax benefits that will
make buying health insurance affordable. The IRS must have the
necessary funding to assist Americans as important provisions
of the law go into effect. For instance, the IRS must invest in
new technology and modify existing tax administrative systems.
These efforts will facilitate prompt and accurate application
of the premium tax credit while protecting taxpayer
information.
I would like to point out that the sequester has taken a
toll on Treasury, but we are doing everything we can to absorb
these cuts while maintaining service standards, even if delays
may be experienced. We have scaled back training, delayed
contracts, and limited purchases. Even with these measures, the
brunt of the cuts are being felt by Treasury's hard-working
public servants. At the IRS, for example, workers will be
furloughed without pay for as many as seven days between now
and the end of September. This will erode our ability to
provide quality service by forcing the IRS to answer fewer
calls, and creating delays in responding to taxpayer questions.
It will also lead to fewer enforcement actions and reduce
revenue collection. The fact is, the sequester is not only
hurting Treasury's employees, it is hurting taxpayers, too.
As I have said before, sequestration must be replaced as
soon as possible. The President's budget does that, and I hope
this Committee and your colleagues will take action so we can
get this done. Thank you, and I look forward to answering your
questions.
[The information follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Crenshaw. Thank you very much, Mr. Secretary, and we
will start the questions. We have got a pretty full panel here
today, so I am going to try and enforce the five-minute rule so
that everyone will have a chance to ask questions. We will
recognize the members in terms of their seniority that were
here when the hearing started and then when they arrived.
OFFICE OF TERRORISM AND FINANCIAL INTELLIGENCE
So I will go ahead and start. Mr. Secretary, I want to
follow up. Yesterday, when you were before the State and
Foreign Operations Subcommittee, I asked you a question about
the Office of Terrorism and Financial Intelligence. And since
this is the Committee that actually provides those funds, I
thought I would just bring that point up again, and not to ask
you to repeat your answer to the question as much as maybe give
some idea to the members of the panel. As you may know, there
is a request for a $1 billion increase, but I told the
Secretary yesterday I was surprised to learn that for Office of
Terrorism and Financial Intelligence, the budget request was $2
million less than last year. And this is the office, as you all
know, that helps make sure that our financial systems are not
used in criminal activities, and maybe even more importantly,
tries to make sure that we can fight some of the international
terrorism like we are doing with the sanctions in Iran. And
that is what prompted the question yesterday.
And I told the Secretary I was a little surprised, this is
pretty important stuff. The number one responsibility of the
federal government is to protect American lives, and I was
surprised to see that this office, which deals with terrorism,
and, of course, with all the things that are on our minds
today, why we would actually reduce spending there and increase
spending in other areas. And I think he said that it is an
important moment in history that the work that they do, I think
he knows about the work they do. He said it is central to our
national security. But maybe I wanted you to just maybe explain
to this panel what goes through your thought process as how you
decide on where you want to spend more money or less money. If
you could just respond to that.
Secretary Lew. Mr. Chairman, I could not agree with you
more that the work done by our Terrorist Financing Offices is
critically important, and I am very proud of the work they do,
and I work very closely with them. Clearly, budgets are about
making tough choices, and we have to ask the question, given
the growth in funding in TFI, and given the fact that it has
built up substantially over the last few years, not just with
people but with IT, whether they are staffed at a level that is
appropriate. Our budget maintains the level of effort, but we
do have lower costs associated with some of the IT
infrastructure because it has been built up in recent years.
There is enormously important work being done there. It has got
the support, not just of myself, but it has got the support of
the entire Administration. We are central to the work the
Administration does in many investigations and actions that are
taken, and the budget reflects what we believe is needed to
maintain that level of effort. It does not reflect any
lessening or diminution of importance.
Mr. Crenshaw. Could you maybe, for the Subcommittee, talk
about some of the things that that office does? I know they can
freeze the assets of drug cartels, things like that. We
obviously had the conversation regarding the sanctions. Touch
on just a couple of things that that office does to go after
some of these international conspiracies.
Secretary Lew. Well, it has got a varied range of
functions, as you know. When there are sanctions in place, that
is the office that coordinates the policy and the
implementation. We have OFAC, which is very much involved in
day-to-day management of the licensing issues that are
associated with areas where threats exist. We have
investigations that go on when there are specific threats or
actions that have to be investigated because there has been
either criminal activity, whether it has been in narcotics or
in terrorism. And, as you know, our investigative group is very
much part of the government-wide effort. When there are
questions that arise related to the flow of funds, it is our
team that does the work, tracing and analyzing how funds are
flowing.
Mr. Crenshaw. Well, thank you. And I think we want to work
with you at a time, I think, when international threats seem to
be on the increase rather than the decrease. That we can work
together, I am sure. And I appreciate the work that you are
doing to try to make those tough choices.
Secretary Lew. And, Mr. Chairman, I would say that the
threats we face as a country are not just threats of terrorism.
When you and I spoke, we talked at length about the economic
threats from the eurozone to the United States. Our
International Affairs Team is working every day, following the
economic developments in all areas of the world. We are very
conscious of the fact that if we did everything right in the
boundaries of the United States, threats economically from
overseas could be the kinds of headwinds that send our economy
in the wrong direction. So we have to maintain our effort in
areas like monitoring the eurozone, like working on issues
related to China currency, so we have a broad range of
activities that really get at the heart of America's economic
and national security. And we, in this budget, have tried to
balance those considerations and make the marginal investments
where we thought we had the most ability to do good.
FINANCIAL STABILITY OVERSIGHT COUNCIL
Mr. Crenshaw. And on that point, one quick final question,
the Financial Stability Oversight Council, the FSOC, so-called
FSOC. One of the things that council does is try to oversee a
lot of the different rules and regulations and help in
coordination. And, as you know, we had Dodd-Frank; that has
generated thousands and thousands of new regulations, and
forms, and things like that. And one of the things that I hear,
I think we all hear back home, is that the rules and the
regulations that come out of Washington tend to create a lot of
uncertainty in markets. And I think we all know there is a
place for reasonable regulation, but in that regard, with the
so-called FSOC, one of the things that I see, you got different
agencies now writing these new rules and regulations under the
Dodd-Frank. And your council that you chair, I think part of
its responsibility is to try to coordinate, because if you got
one agency writing a rule with one set of definitions, and
another agency writing a rule with another set of definitions,
and sometimes they do not really jive, then you throw in the
international aspect that you talk about, and you got other
countries, they are writing rules and regulations that deal
with financial instruments. So I saw a GAO report that said
that, actually, that Oversight Council is not doing as much as
it might do to help coordinate these interagency rules to kind
of bring some certainty and stability. Can you comment on it?
Would that be an appropriate role for that Oversight Council?
Secretary Lew. Mr. Chairman, I will be chairing my third
FSOC meeting today since becoming Secretary.
Mr. Crenshaw. Yeah, I heard it is at 2:30, get you ready
for it.
Secretary Lew. Just to give you a sense, on my eighth week,
I am chairing my third meeting of the group, and there have
been meetings of subgroups in between. Let me first address the
uncertainty question. I think on the question of uncertainty,
it is critically important that we complete the process of
implementing Dodd-Frank. In fairness, part of the uncertainty
was created by several years of extended debate over whether or
not to implement Dodd-Frank. Happily, that is over. I think now
we are in a place where the industry and the political process
are aligned, that we need to get the law implemented, and we
need to do it as quickly as possible. I made clear from
literally my first hour as Secretary that it was a matter of
urgency to me that we get this done, and we get it done
quickly, and I am driving the process. I do not have the
authority to write the rules. There are five independent
regulatory bodies that write the rules. It is more of a
shepherding authority than it is a direct authority to write
the rules. But I think it is an important role. And progress is
being made on very complicated matters. The convening of power
you have as chair is real, and I plan to use it, and to use it
as effectively as I can.
As far as the international piece goes, just last week we
had the spring meetings of the IMF and the World Bank. I met
with both my counterparts, and, as a group, with many of the
leaders from around the world implementing these rules. We
discussed at length many of the issues that are both questions
in the United States and internationally. I think it is a very
important role that Treasury plays, and it is not so much FSOC
as FSOC, but it is part of the broader role that we have. Our
team is engaged to make sure that, for example, rules in other
countries do not usurp on our ability to make rules here in the
United States, and to defend our right to have rules where
foreign banks have to meet the standards that American banks
meet. So we have to work on all fronts.
I have not seen the report you are referring to. I am happy
to look at it. My observation, as now having been through
almost two months of chairing the FSOC, is it is an important
instrument for moving the process forward. It does not have the
traditional tools that you have when you have the authority to
do things, and it calls upon one's skills not just analytically
but as a convener and a chair, trying to get others to do their
work as opposed to doing your own work. I am deeply invested in
it, and my goal is to be able to sit here next year and report
progress in all the key areas.
Mr. Crenshaw. Well, that is great because I think there is
a great opportunity for that interagency cooperation, and you
can help kind of work on it.
Secretary Lew. And I will say, Mr. Chairman, there is a
very good spirit of cooperation amongst the agencies. There is
not the kind of resistance that one often sees around
jurisdictional boundaries. The agencies want to get this right.
They approach it with different areas of expertise and
different processes. Some have the ability to do things by
virtue of one decision maker. Others require a majority vote.
And it is probably not the regulatory system one would have
designed if you were starting from scratch. But we have a
hundred years of history that came together and were updated in
Dodd-Frank. And it is an important challenge because the reason
Dodd-Frank was enacted was that the financial collapse in 2008-
2009 cannot be allowed to happen again because of the failure
of oversight. We need to make sure that our laws stay current
with the problems we face and our regulatory capacity is equal
to the task. And that is something that we are committed to.
Mr. Crenshaw. Thank you very much. Mr. Serrano.
BUDGET CUTS
Mr. Serrano. Thank you, Mr. Chairman. Welcome, once again.
As you know, there is a behavior, if you will, in Congress
these days to cut, cut, cut, cut, in my opinion, without really
thinking what those cuts will do to our economy and to the
future of this country. So on a subject that I spoke about in
my opening statement, and you touched on also, which is the one
that glares as me in terms of just a contradiction, at what
point does it become a crisis for the IRS to continue to
sustain cuts that do not allow them to then go and collect the
dollars that are out there? I think you said that for every
dollar we invest in the IRS, we can pick up six. It would seem
to me, and, again, you know, I can argue, I could give you 25,
education, housing, you know, social services; there are so
many things that I could be against. But this is the one that
brings money into the till on a daily basis, and yet we keep
cutting it. So at what point do you think it becomes a crisis?
Secretary Lew. Congressman, that is an interesting
question. It is a big problem. Where the line between problem
and crisis is really is hard to define. I think most
businesses, if they could see a 6 to 1 return, would say that
is a pretty good return on investment, and would not leave that
kind of low-hanging fruit out there.
This has been an ongoing debate. I remember when I was at
OMB in the 1990s, there were ridiculous multipliers that some
people used, 20 to 1, 15 to 1. The fact that we have got it
down to the point where we have a clear sense of what the
relationship of revenue to spending is, should make it much
easier for us to have the kind of agreement to find a mechanism
to fully fund the IRS. This allows us to both raise the revenue
that we need, but also make sure our tax system is fair so that
people who think twice about it know they are going to get
caught if they do not comply with the tax code. We have put
together our budget proposal in a way so that in the body of
our budget we do the things that kind of keep body and soul
together, taxpayer assistance and the basic mechanics of doing
our job. What is clear is we will not be able to be as
aggressive on the enforcement front as we should be if we do
not have the resources. And I think it is going to take
something like the cap adjustment to get that done, given the
very tight caps that constrain this Committee and all the
Appropriations Committees.
Mr. Serrano. Right, and we never have really been able to
get a straight answer. And I do not mean that people are
evading the question, but do we know what the numbers are of
money we could recover if it was fully funded? I mean, has
anyone done a study there that members on both sides could say,
``Okay, that sounds pretty correct''?
Secretary Lew. I think there are two questions. One is, the
6 to 1 ratio is pretty well-established based on what we see
are the results when we put out additional enforcement
resources. There is another question, which is the size of the
underground economy and how big the total is. That is a harder
question to answer. By definition, it is not fully visible. So
there is a lot of different estimates as to the size of it. It
is clearly large. My own view is that no matter how large it
is, we should be doing whatever we can do that is effective to
get tax dollars in when they legally are owed. So we do not
need to wait until there is the authoritative number. As long
as we know we can get 6 to 1 return if we put dollars into
enforcement, there is more that we can do there, and that is
why we put the proposal together that we did.
IMMIGRATION
Mr. Serrano. All right. Very briefly, there is a question I
do not have written down, but I just thought about it as I am
speaking to you. Immigration reform may happen this year. Is
the Treasury Department part of the secret eight, or nine, or
10 who are working in both Houses on this, because it would
seem to me that the minute people are out of the shadows of
society, two things happen. In order to be legalized, if you
will, you will have to go back and pay some taxes that you may
owe. Maybe you can talk about how that will happen, you know,
how to determine what you owe, being here 10 years, 15 years.
And then immediately those folks coming out of the shadows will
become regular taxpayers. I almost was tempted to say ``happy
taxpayers,'' but that is improper use of the language. What
role, if any, is Treasury being asked to play at this point?
Secretary Lew. Congressman, we are part of the conversation
in the executive branch on immigration. Obviously, until the
law is enacted, the issues that you are describing are things
that are just in the planning stages. So we are not in a
position to take the further steps. I can tell you from both an
Administration point of view and my own personal point of view,
it is an enormously important challenge that when immigration
reform passes, that we do it right, that we make sure that
people who come out of the shadows understand what their
obligations are, that they pay the taxes that they owe, and
that they become part of the system. That is the way we are
going to both solve the immigration problem and do it in a way
that is fair and balanced. I have worked on the immigration
issue for many decades.
Mr. Serrano. I know you have.
Secretary Lew. You and I have worked together on it for a
long time. I think this is something that should get done this
year, and we look forward, at Treasury, to doing our part to
implementing it effectively.
Mr. Serrano. One last comment. Would it be fair to say that
immigration reform will bring money into the Treasury?
Secretary Lew. Yes, I think that when we bring people out
of the shadows, and they are on the books, and they are being
paid, and withholding taxes in order, it should only lead to
more, not less revenue.
Mr. Serrano. Thank you.
Mr. Crenshaw. Thank you. Mr. Rogers.
COMMUNITY BANKS
Mr. Rogers. Mr. Secretary, you have touched on Dodd-Frank a
bit already, but let me take another tack with it. These small
community banks are being swamped with regulations intended for
the big banks that caused the problem that Dodd-Frank tries to
correct. These small banks are just not equipped to deal with
the flood of onerous regulations. And not only that, but rather
than reinforce bank competition and reverse ``too big to
fail,'' Dodd-Frank has so raised the costs of compliance for
these banks that the reforms themselves are acting as a driver
of consolidation, creating ever larger banks, in order to be
able to afford to live with these regulations. Have you given
any thought that there could be some regulations issued that
would be adaptive to small community banks who are swamped with
these new regulations? These banks had nothing to do with the
too big to fail problem that the country faced. Can you help
them in any way?
Secretary Lew. Mr. Chairman, I think there are very serious
issues regarding the small community banks where they are
different than the large money center banks that were taken
into account in the drafting of the legislation; they are being
taken into account as the rules are being written. I know that
they have commented heavily on intermediate stages of
rulemakings. I have talked to the regulators. I know they are
looking seriously at those comments.
The goal is to make sure that we are dealing with the core
charge of Dodd-Frank, which is to make sure that the soundness
of the system can be assured, and to the extent that there are
special circumstances where there is not a risk, and small
institutions can be treated in a way that reflects both the
risk and the size, I know the agencies are looking at that.
There is a balance that has to be struck because we have to
make sure that we are implementing the law in a way that avoids
areas of risk, but there is a great deal of sensitivity to the
fact that there are different kinds of risks coming from
different institutions. I know that there are several specific
issues that the community banks have raised. And when I have
followed up with the regulators after hearing those concerns
from the community banks, I certainly have the sense that they
are hearing the message and trying to figure out how to address
the issues that can be addressed. It is still a work in
progress.
Mr. Rogers. All of us on this Committee, I think, have
heard of this problem for the small and community banks, which
are the backbone of our communities out there. They are being
swamped and they are hiring people that they cannot afford to
live with these regulations that were designed for the big
banks--the money centers--who caused the problem in the first
place. So these are innocent bystanders who are getting
slaughtered along the way, and I would hope that you would
exert some real action on giving some relief.
Secretary Lew. Mr. Chairman, I have met with the community
banks. I have listened to the arguments and the case that they
have made, and I have taken those issues back to the
regulators. Obviously, the regulatory agencies have authority
in each of their own respective areas, but I do have the strong
sense that they are thinking hard about how to deal with this.
CHINESE CURRENCY
Mr. Rogers. Quickly, on another subject entirely, the
currency manipulation by China: there is not a soul in the
world that does not believe that the renminbi is being
manipulated by the Chinese for trade practice purposes, and it
is working. Very smoothly, as a matter of fact. The Department
of Commerce cannot move until you have taken action. What is
your thinking about Chinese currency manipulation and its
impact.
Secretary Lew. Mr. Chairman, I was in China just about
three weeks ago, raising these issues with all of China's
senior leaders. I think that they were making some progress in
terms of the value of the currency.
Mr. Rogers. Three percent.
Secretary Lew. No, it was more than that. Overall I think
it was considerably more correction than that. But it did
flatten out. And I made a very strong case that we were
watching this very carefully, and that they needed to expand
the band that they were using in making their decisions in
terms of the exchange rate with the dollar. And there are signs
that there is some movement there. We put out a currency report
just about 10 days ago where we went through these issues in
great length. The challenge that we have is to make the case
and to get countries like China to adhere to the principle that
has been agreed to in the kind of G7 and G20 context, that
interest rates should be market-determined, that they should
not be exchange rate targeted. And we will continue to make
that case very forcefully in both the bilateral and the
multilateral settings.
Mr. Rogers. Well, Commerce cannot levy countervailing
duties unless Treasury registers China as a currency
manipulator. And this been going on for decades now, and we are
getting beat, our economy is absolutely suffering tremendously
because of the undervalue of the Renminbi. In fact, I am told
that it is set now at 6.14 renminbi to the dollar, which is
from my information, a reduction of about 3 percent from this
time last year. Is that not correct?
Secretary Lew. I would have to check the current figures,
but over the last couple of years there has been substantial
progress in terms of the appreciation against the dollar. These
numbers move on a daily, month-to-month basis. So I would be
happy to follow up with you, Mr. Chairman. The thing I would
just add is that when it comes to trade actions between the
United States and China, this Administration has been quite
aggressive, whether it is in areas like auto parts, or tires,
or rare earths, we have used the tools available to bring
actions and to prevail on them. We take fair trade and
defending the rights of the U.S. worker and the U.S. economy
very seriously. We are trying to do it in the way that is most
effective, where we actually can change the practices. As you
can see from the report we put out, we are not pulling any
punches in terms of what we analyze, how we make the case, and
how we drive towards action. So I would look forward to working
with you on it.
Mr. Rogers. Well, we will keep an eye on it, and I hope and
expect action. Quickly, Mr. Chairman, do I have time for one
more?
Mr. Crenshaw. Certainly.
EITC IMPROPER PAYMENTS
Mr. Rogers. IRS issued more than $11 billion in faulty
refunds through the Earned Income Tax Credit last year
according to an IG report released this week. Treasury Deputy
Inspector General Michael McKenney found that the IRS has
failed, for the past two years, to comply with a federal law
requiring agencies to reduce payment errors to a rate of less
than 10 percent. The President signed that statute in 2010. IRS
says that at least 21 percent of its EITC payments in 2012 were
faulty--21 percent, $11 billion, money thrown down the drain.
Can we fix that?
Secretary Lew. Mr. Chairman, this is obviously an area that
we have been working on with Congress for years. There has been
substantial progress in reducing the error rate. I think that
we need to take a step back and remember that in the context of
the Earned Income Tax Credit, which is one of the most
effective programs that we have had in getting people off of
welfare onto work since the Nixon Administration, it is a very
complicated program. The laws that are set up make it necessary
for low income people to go to tax preparers, for the most
part, in order to file their tax returns. One of the things
that we are doing now is reaching out to the tax return
preparers and giving them a checklist of all the things that
they need to do to reduce their error rate. I think that by
working diligently at that end, we will make more progress. We
are committed to reducing error rates throughout our
enforcement of the tax code, not just with regard to these tax
credits, but with regard to corporate taxes, and regards to the
tax deductions and credits taken by high income taxpayers. I
think if you look at the dollars that tax enforcement could
produce, there are much larger numbers in the areas of
corporate and high income taxpayers. All of it has to be of
equal concern to us, and it is.
Mr. Rogers. Well, 21 percent is unacceptable. I can
understand, you know, something less than that. But 21 percent,
that is one out of every $5 that is faulty. I expect heads to
roll on this one. This is ``too big to fail,'' if you will.
Thank you.
Mr. Crenshaw. Thank you. We have been joined by the Ranking
Member of the Full Committee, Ms. Lowey. She is going to wait
one second to catch her breath, and I am going to call on Mr.
Bonner. Some of the members were not here earlier. We are going
to try to abide by the five-minute rule. And also I am going to
recognize members by seniority that were here when the meeting
started, and then after that, the order in which they arrived
at the Committee meeting. So I would recognize Mr. Bonner right
now.
BUDGET INCREASES
Mr. Bonner. Thank you, Mr. Chairman. And I am going to try
to get three questions in during my five minutes. So let me see
if I can speak fast, which is a challenge for a kid from
Alabama. Mr. Secretary, the other day I got a standing ovation,
which members of Congress do not get very often, when I told
some people in my district in Alabama that under the leadership
of the Speaker of the House, we have cut our budget almost 20
percent over the last two and a half years. And yet the budget
that you probably had a hand in when you were still at OMB, and
certainly you were discussing in your testimony today, some of
the departments in this budget that the President has submitted
calls for double digit increases in spending. Is it that hard
for the executive branch to find ways to save the American
taxpayers hard-earned money when the legislative branch has
shown a way to do it?
Secretary Lew. Congressman, I think if you look at the
areas of growth in the executive branch, it is very much
correlated to where there have been new legislative enactments
and new programs, and where the rate of activity has gone up.
So, yes, there has been an increase in spending to implement
things like the Affordable Care Act and Dodd-Frank. There has
also been increases in areas like Veterans Affairs, where we
have returning Wounded Warriors that are creating burdens that
we should share and happily pay for to thank them for their
service. If you go through the budget, the areas of growth
really track the areas where there is a need for more federal
activity. In general, this is the tightest discretionary budget
in a generation. We are going into a period where discretionary
spending, as a percentage of the economy, will be at the lowest
level it has been since Eisenhower was President. And we have a
population that is growing, and challenges that the American
people expect us to meet. So I think we have done actually a
very effective job tailoring our budgets to the needs of the
time and the shrinking availability of resources.
RESTORE ACT
Mr. Bonner. Let me shift gears for a minute, and ask you to
think for a minute about the RESTORE Act. The budget was not
the only thing that is late. The RESTORE Act, as you know, is
legislation that we passed in response to the worst
environmental oil spill in the history of mankind that affected
the five Gulf Coast states, Alabama being one of them. It is my
understanding that Treasury was supposed to, on January 2,
provide draft regulations for the RESTORE Act. I think you
mentioned this in your written testimony. Could you give us any
idea, we are into April now, when Treasury is planning to
release its draft regulations as required by law, and when they
would be available for public comment?
Secretary Lew. Congressman, I would have to check on the
exact date, but I would say this about the RESTORE Act: It is a
complicated piece of legislation which we are determined to
implement, and we are determined to implement correctly. And if
it takes a little bit longer to write the rule so that that is
the case, I think it is important to do it right. There has
only been one recovery into the RESTORE Act fund. Those funds
will remain available, and will be used as intended in the
RESTORE Act for the states that were designated. So none of the
money will go to other purposes. And we are working as quickly
as we can, and I would be happy to follow up with you on the
schedule.
IRS INVESTIGATIVE TACTICS
Mr. Bonner. We would appreciate that. And I know it is
complicated, but it is important for the public to have access
to the draft. The last question, the Chairman mentioned this in
his opening comments, we had the opportunity to visit with the
Acting Commissioner of the Internal Revenue Service a few days
ago. And he did say that while the Service was examining the
use of social media information as part of investigations, he
implied that the IRS was looking at the new technology, new
social media as ways that it could be used. After he left,
however, it was reported in the press that the IRS, based on
the 2009 employee handbook and in the 2010 policy statement,
does not believe that emails are protected by the Fourth
Amendment. And recognizing that a spokesman for the IRS is not
necessarily the same thing as the Commissioner, or, in this
case, the Secretary, could you share with us your thoughts
about whether the IRS would be required to obtain a warrant
before gaining access to a taxpayer's emails, and does the IRS,
in your view, have the authority to investigate the emails of
taxpayers who are not already under investigation?
Secretary Lew. Congressman, protecting the privacy of
taxpayers is of paramount importance. In criminal matters, I do
not think there has been any question on the need for warrants
for searches of email. I understand that in the past there may
have been some uncertainty in limited cases on civil matters.
That has been clarified, and it is clear that it is not policy
to go into private email in civil or criminal matters. And
going forward, I will work with our team to make sure that that
remains the case.
Mr. Bonner. You could just imagine a scenario where you
were emailing your accountant and asking, you know, ``Is there
any relief in this loophole or that loophole where I can
legally pay what I have to pay but no more than what I am
obligated to pay?'' and it just, I think, sent a streak of fear
down, and perhaps it was just misunderstood in the
communication in the press, but it sent a streak of fear down a
lot of taxpayers' spines so close to April 15 when they had to
write those big checks.
Secretary Lew. My understanding, Congressman, is that there
were limited cases of misunderstandings on the civil side. That
has been clarified, and you can be assured that we will
continue as I have described.
Mr. Bonner. Thank you, Mr. Chairman.
Mr. Crenshaw. Thank you. Mrs. Lowey.
ALTERNATIVE MINIMUM TAX
Mrs. Lowey. Thank you very much, Mr. Chairman, and welcome
again, Secretary Lew. One of the highlights of the bipartisan
tax compromise this past December was the inclusion of a
permanent patch for the AMTs so that middle class families
would not be hit by this unfair and unnecessary tax scheme. The
tax compromise increased a patch of 50,600 for individuals and
78,750 for married couples, and, of crucial importance, indexed
these levels to inflation. This saved 28 million families from
paying thousands of dollars in unfair taxes. This tax
compromise was a big step forward, and I am pleased that it
will protect middle class families from the fear of the AMT in
the future. Could you share with us how the Administration
would address the AMT for individuals and families as part of a
comprehensive tax reform once and for all?
Secretary Lew. Congresswoman, the need to simplify our tax
code is clear from the question that you asked. It was never
intended that middle class taxpayers would get caught up in a
web of the AMT. The tax reform should result in a world where
people can do their own taxes, where they do not need
accountants and lawyers, where you know your income, you know
your deductions, and you know your taxes. I think the AMT is
the kind of evidence of how the system grew not to be what we
meant for it to be.
So as we look at individual tax reform, simplification is a
big goal, fairness is a big goal, because if you have access to
accountants and lawyers, you should not get better treatment
than if you are doing your own taxes. So in a world where we
need to have simplicity but we need to have revenue, one of the
features in the President's budget that I think is very
important is the provision called the Buffett Rule. We propose
a simple rule, that if you earn more than a million dollars,
you should pay at least 30 percent tax rate. Simple rules are
easier to implement, and we would look forward in tax reform to
simplifying the rules, making them more fair, and, ultimately,
raising the revenue we need in a fair way.
Mrs. Lowey. Well, that is a good answer, but I understand
you might not want to lay out the whole thing now, but as you
well know, there are people making mega-millions who are still
not paying any taxes because of the way the tax process works.
So I hear from people making $100,000, $80,000 who are really
stuck with this, and paying a lot more than they should. So I
hope you keep that in mind.
Secretary Lew. The Buffett Rule would end that. I mean, if
you had a simple rule that income over a million dollars is
taxed at a 30 percent rate, you would make sure that people who
are making multiple millions of dollars were paying at least
the same tax rate as the people working for them.
Mrs. Lowey. I get that, but I am hoping you address the
phenomenon, you know, that exists with people who are not
making close to a million dollars and they are stuck with the
AMT, which originally was designed to catch people who are
paying no taxes.
Secretary Lew. Yes, and we are going to need to replace the
AMT with a system that raises the revenue we need without
having the unintended consequence.
Mrs. Lowey. Okay, as a native New Yorker, there are many
benefits to having New York as a home, as a New Yorker myself,
but one of the few disadvantages is that New Yorkers pay
substantially more in federal taxes than the state receives in
return. On top of that, New Yorkers pay high state and local
taxes, which are often exponentially higher than other areas of
the country. And I am very concerned about efforts to eliminate
or substantially limit the state and local tax deduction, and
doing so would have a disproportionate impact on New Yorkers as
well as others who live in high cost of living areas, many of
which are also financial, transportation, and commercial
centers of the country, that contribute so heavily to our
national economy. Taxpayers should not have to pay taxes on the
money they have already sent to a government. Is the
Administration considering limiting or eliminating the state
and local tax deduction as a way to generate revenue for tax
reform? And, if so, are there concerns that eliminating this
deduction could have a negative impact on the regional
economics of the nation's highest-taxed areas?
Secretary Lew. Well, as a proud New York taxpayer, I
understand the tax burdens in New York, and we are very aware
of how important state and local taxes are to finance the
critical services that our people need, and to finance the
infrastructure investment that is key to our future. Our budget
did not propose eliminating the state and local tax deduction.
Our budget has a broad cap on deductions at 28 percent,
essentially saying that if you are in the top tax bracket, you
should only get the same value for your tax deductions as
somebody who makes $250,000 a year. I do not think that would
have the kind of dramatic effect that people have been worried
about in the context of a repeal of the state and local
deduction. We have also made it clear that any action we would
take in this area is part of a budget where we are also
investing in areas that are very important for state and local
governments in terms of infrastructure in particular.
So I think that we have to look at this in its totality,
both in terms of the tax code and our overall federal effort.
But I think you can rest assured that this Administration is
very concerned that state and local governments continue to
have the ability to make the investments they need in our
communities and to provide the services that are needed.
Mrs. Lowey. Thank you. And thank you, Mr. Chairman.
Mr. Crenshaw. Thank you. Mr. Yoder.
Mr. Yoder. Thank you, Mr. Chairman, Mr. Secretary. Welcome
to the Committee. Good to see you again. I have several
different topics I want to cover, so I will try to move quickly
here. First of all, in the last several years, the
Administration has supported, and Congress has supported, tax
increases in a variety of areas. The Obama health care bill
raises over a trillion dollars in new taxes. On January 1, we
had $600 billion in new taxes, plus another trillion in Social
Security tax increase. And I know in your budget that there is
another trillion dollars proposed in new taxes on the American
people. And the budget also removes any of the spending cuts
that have been currently put in place. And it is a hard thing,
I think, for my constituents to understand that the sequester
cuts, when looked at in the total expenditures of the federal
government, amount to about a penny. It is about $40-some
billion of actual expenditures that will not be spent this
year. And so it is pretty hard, I think, to explain to
taxpayers why the federal government cannot find a penny of
savings.
TAX INCREASES
And so I note in your budget you remove the sequester, but
replace it with additional tax increases, so spending goes up
overall and federal government taxes go up. And so my question
for you on this topic is, does the Administration believe that
raising taxes on the American people helps the economy? And do
they think it is fair, given the economic challenges the
country is facing, to take more dollars from the American
people? And does the Administration believe the American people
pay enough in taxes?
Secretary Lew. Congressman, I do not think that was an
accurate description of our budget. So let me just take 30
seconds to describe what our budget does. Our budget says we
need to do more spending reduction and we need more revenue for
a balanced approach because the sequester was never intended to
take effect because it was designed to be bad policy, and it is
bad policy. We are seeing every day stories of unintended
consequences. I do not think that you can look at it as a
percentage of the total budget because we cannot reduce Social
Security checks or Medicare payments to make up for a dollar in
either air traffic control or the Defense Department. They are
different parts of the budget. These are deep cuts to our
agencies, and the question will be ``Are the American people
prepared to live with the reduction in service that comes from
having the kinds of across-the-board cuts that sequester puts
in place, or would they prefer to have the kinds of sensible
reforms in entitlement programs that would help these programs
in the future, and the kinds of revenue that would get us back
to a 2:1 ratio of spending cuts to revenue, which is what the
President has been trying to do, to do $4 trillion of deficit
reductions?''
Mr. Yoder. Does the Administration believe that raising
taxes helps the economy?
Secretary Lew. I think that our fiscal policy reaching the
kinds of deficit reduction that we proposed would help the
economy. I think having the right balance between spending and
revenue is key. And I think the package the President has
proposed would help the economy.
Mr. Yoder. Does the Administration believe that Americans
pay enough money in taxes to the federal government?
Secretary Lew. I think that if you look at 2001, 2003,
Congress enacted tax cuts we could not afford. And we, in
January, took an important step to reducing the benefit for
wealthy taxpayers that we, frankly, could not afford to lose
the revenue. What we have proposed is, finishing the job of
getting the revenue we need in the balanced package, so it is 2
to 1 spending cuts to revenue.
Mr. Yoder. I would just say that with the taxes that went
up about 12 weeks ago, and the new proposed taxes in the
President's budget, the taxes that went up with the Affordable
Care Act, I think it is a hard sell to the American people, for
them to understand that we believe they can pinch pennies and
send us more of their dollars, but we cannot pinch ours in any
way to reduce spending. I know you feel that is a
mischaracterization, but the American people believe we can
actually cut spending. And so I think they would like to see
us, if we are going to undo the sequester, replace it with
other spending reductions, not asking them for more of their
hard-earned tax dollars that they get up every morning to earn.
And we tell them, ``You can pinch more of yours. We cannot
pinch ours.'' And I think that is a message that many of our
constituents do not agree with.
Secretary Lew. I would just say that we had pretty robust
debate, where the American people heard this debate for months.
And there was an election, and I think the result of the
election was consistent with what surveys tell us, which is the
American people want a balanced approach. They want us to reach
a conclusion and solve the problem, which is what the President
wants to do.
DERIVATIVE RULES
Mr. Yoder. Switching subjects to subject related to CFTC,
Chairman Gensler was before the Ag Appros Committee two weeks
ago; I, along with other members of the Subcommittee, raised
concerns about his development of cross-border guidance and the
lack of coordination with the SEC. Since that hearing, 10
finance ministers from G20 countries wrote you a letter
expressing concern about fragmentation in the derivatives
market, because of a lack of regulatory coordination. What can
you do to ensure that these regulators better coordinate their
international derivative rules, particularly between the CFTC
and the SEC?
Secretary Lew. Congressman, I told many of those ministers
what I am about to tell you, which is that their letter does
not reflect where our process is. There is actually very good
coordination going on, conversations between the CFTC and the
SEC, so I do not think the letter is correct in its
characterization of where things stand. These are two
independent regulatory agencies that are going to have to write
rules that they can pass by majority in each of their
commissions. They are important issues, and I think they are
working through them. I would look over what the CFTC and the
SEC are doing, not that letter.
Mr. Yoder. And we are following that. I think it is a great
concern to American businesses and to investors when 10 finance
ministers from G20 countries express this concern. And so I
would just ask that you take another look at that and do
anything you can to ensure that we have consistent policies
between the CFTC and the SEC as they implement these derivative
rules. As you can imagine, if they go in different directions,
you know, the SEC uses rule-making authority, CFTC creates
guidances, and they are inconsistent in their application, that
is going to be a real problem.
Secretary Lew. I think as a broad principle, I totally
agree that that is one of the things that FSOC was created to
do, was to be a place where these kinds of issues can be
discussed so that agencies know what each other are doing, and
they can coordinate. I totally agree that there needs to be the
kind of effort to have sensible rule-makings. I guess what I am
saying is that that is what is going on. And the letter was
not, I think, well-advised.
Mr. Yoder. Well, obviously, there is a disagreement on
that. Anything you can do to provide leadership in that regard
would be much appreciated. Thank you, Mr. Secretary. Thank you,
Mr. Chairman.
Mr. Crenshaw. Thank you. Ms. Herrera Beutler.
BALANCED BUDGET
Ms. Herrera Beutler. Thank you, Mr. Chairman. And I
actually would like to follow up. You know, I heard you respond
to my colleague's question about you know, the President would
like to find the right balance between spending and taxes. And
that this budget is balanced. He wants a balanced approach.
And, honestly, I believe in balance. I think a lot of people
do. I think that is what people voted for last November. Part
of our challenge is there was no balance in the President's
budget. Does it actually come into balance at any point? Does
the budget actually balance?
Secretary Lew. I do not think that it would be the right
policy right now to necessarily reach balance in the next 10
years. But the President's budget reduces the deficit.
Ms. Herrera Beutler. I think that is fair. If the answer is
``no,'' that is fair.
Secretary Lew. That is different from a balanced policy.
Ms. Herrera Beutler. That is fair. See, I do not think so.
You know, I have heard the talking points from every secretary
now, and the committees on which we serve. They come in and
say, ``Balance, balance, balance.'' And when the American
people hear ``balance,'' they think that you mean spending
reductions and tax increases, right? But the truth is, this
budget represents zero, a net zero reduction in government
spending. How is that balanced? So neither does it actually
ever come into balance, which the American people know, a
balanced budget helps us grow jobs. But it does not even have
the balance that you all are walking around with the talking
points on.
Secretary Lew. Congresswoman, that is not a fair
characterization of the budget. The budget has, $400 billion of
savings in Medicare. Those are very real. If you are either a
provider or a beneficiary, there are going to be changes that
are very real. It has additional savings in other mandatory
programs of $200 billion.
FAIRNESS
Ms. Herrera Beutler. Well, I guess when you are talking
about ``fair,'' so is it true, then, am I wrong? It is not a
net zero in spending reduction? Is that not true?
Secretary Lew. I am not sure what baseline you are looking
at. The fact that the baby boom is retiring, and Social
Security and Medicare are growing, is something that we all
have known for a generation was going to happen. That does not
mean that we are not reducing spending from where spending
would be if we did not take action.
Ms. Herrera Beutler. You use the word ``fair.'' And I
believe in fair. You know, I voted for the compromise bill at
the beginning of the year. So I am not afraid to put my money
where my mouth is, so to speak. But when you talk about fair, I
think about my own folks. My dad is an American of Mexican
descent. He has worked his entire life. He started in poverty,
and my folks, together, working very hard, raised six of us.
And today, they should be planning their retirement. They are
both working. They are working more for less. And you know
what? They are sending more dollars to the IRS.
That, to me, is not fair. What is fair is more Americans
should get to keep more of their money. My biggest challenge
with this budget is it does not balance, and it is not
balanced. If you had brought us something that truly reduced
spending, you are not going to hear the argument about raising
taxes in other places or closing loopholes. But the problem is,
the problem is, you do not reduce spending anywhere. The IRS,
this is one I love to bring up. The IRS has a 24/7 satellite TV
studio in its building that it uses for training employees and
so forth. Okay. The EPA across the street from the IRS has the
same 24/7 satellite TV studio. Must cost $4 million or so a
year. Rather than limit those, or limit the President's
vacations, we are limiting air traffic controllers. That, to
me, is not the balance and the fairness that the American
people voted for. And I guess I am frustrated with what I feel
like was total politics.
SEQUESTRATION
Secretary Lew. Well, Congresswoman, if I could respond. The
cuts that you are referring to with the air traffic controllers
are a result of sequestration, which we think should be
replaced.
Ms. Herrera Beutler. Well, let me hit you on that one,
because what I have here, and, as you know, you were in the
middle of the controversy, it has been reported that that was
between you and Rob Nabors. That was your idea. So I hear this
often as well, ``Balanced budget, and sequestration's awful.''
Well, for crying out loud, if you do not like it, why did you
propose it?
Secretary Lew. I think the record is clear. We were in a
negotiation where we thought the right answer was to have
revenue increases and spending cuts that would take effect if
there was not an agreement. The only thing agreeable to the
Republican leadership of Congress was all spending cuts.
Ms. Herrera Beutler. I understand.
Secretary Lew. The sequester was designed to be a bad
outcome to get Congress, through the super committee, to act.
Ms. Herrera Beutler. I am not arguing that you were up
against people who wanted more cuts than you did. I am not
saying that that is not accurate.
Secretary Lew. It was not meant to become policy. It was
meant to force action.
Ms. Herrera Beutler. The point is, is it fair and
appropriate to come up here and to totally decry sequester when
you proposed it?
Secretary Lew. Absolutely. It was never meant to take
effect. It is bad policy.
Ms. Herrera Beutler. I guess that is one of those things
that people hate about politics in Washington, D.C. It does not
pass the straight face test.
Secretary Lew. I think people hate that there has not been
the kind of balanced agreement reached through the super
committee.
Ms. Herrera Beutler. I agree.
Secretary Lew. And they would like us to do it. So we
should be talking about the balance of spending cuts and
revenue increases to make sensible policy.
Ms. Herrera Beutler. I agree. I have shared with you, I
voted for the compromise legislation.
Secretary Lew. Which I appreciate. Which I appreciate.
Ms. Herrera Beutler. So I am not afraid to do that. My
frustration is you send us a budget that is 10 weeks late, that
never balances, and has no net spending reductions. And I guess
my message back, as you go back and as you are continued to
task with a very difficult, I am not going to say that leading
the Treasury Department is easy. I understand. But I would urge
you, there are those of us here who want to make this work, but
when we get brought something that we do not feel is balanced,
or fair, or appropriate, or that makes the American people take
it on the chin, we are going to reject it. And with that I
yield back my time.
Secretary Lew. If I could make one final point, Mr.
Chairman. You know, in years of discussions between Republican
leaders and the White House, over and over again I heard that
there were three things that needed to be in any plan for there
to be more revenue on the table. One of them was chained CPI; a
second was means testing Medicare. The President's budget does
chained CPI, and it puts in an income-related premium which
means you would have to pay for your own Medicare benefit if
you can afford to. I think that it is not fair to say that
there is no tough medicine in this budget. There is very tough
medicine, and we would look for the conversation to get the
right balance between spending and revenue to get the job done.
We do not want to have a disagreement here. We want to get the
job done.
Mr. Crenshaw. We are going to have time for another round
of questions, so we will keep going. Mr. Graves.
BASEL III CAPITAL REQUIREMENTS
Mr. Graves. Thank you, Mr. Chairman, and I appreciate Ms.
Herrera Beutler's passion. She expresses what many of us feel,
and dealt with it correctly. Mr. Secretary, I just want to talk
a little policy a second because I think, as we all know, the
economy is number one on our mind, and making sure that it
recovers correctly and sustainably. And I want to talk a little
bit about Basel III, something that the American people maybe
do not hear about a lot, but I think could have a very negative
impact on the financial sector in the future. You are probably
aware that Senators Vitter and Brown recently, very recently,
introduced some legislation to exempt all financial
institutions based in the United States from Basel III, from
the requirements there, and instead put in place some different
capital requirements. I wanted to get just sort of your
thoughts on their proposal as well as the timeline, or do you
support, I guess, exempting United States financial
institutions from Basel III as their legislation proposes, and
if not, what impact do you think it is going to have on our
economy in the future?
Secretary Lew. Congressman, I am going to have to take a
look at the details in the legislation, so let me, if I could,
just take a step back and talk a little bit more broadly about
what we have done, what we are doing, and what Basel III would
do. We had a serious problem in 2008 that our banks were
undercapitalized and our regulatory structure was not able to
see what it needed to see to make the sensible regulatory
decisions to supervise. We are in the process of fixing that
through our domestic laws, through Dodd-Frank, and by complying
with Basel III. I think we have done a much better job than
much of the world building capital over the last four years,
and we are now in a better, stronger position to be able to say
that we are not going to face the same kinds of problems that
existed in 2008. So I think that we need to continue on the
course we are on, building the capital requirements so that we
are complying with both the U.S. and Basel standards, and look
at proposals that would provide for more security if there are
ideas out there, we should be looking at.
Mr. Graves. So their proposal exempts financial
institutions in the United States from Basel III, in effect
exempting our financial institutions from an international
agreement in which, I guess, it is about 27 countries come
together in a location in which none of the details are
disclosed about the deliberations that take place, nor the
agreements, nor the politics. It is very closed-door, smoke-
room-filled agreement that comes into being, and which then is
implemented by our agencies here in the United States without a
lot of input and without a lot of oversight from Congress. Is
that something you support?
Secretary Lew. Congressman, what I tried to say, and I will
say again, I think the combination of implementing Dodd-Frank
and complying with Basel III leaves the U.S. financial system
in a safer, sounder place, and, I think we need to continue to
do that.
Mr. Graves. So you would not support exempting United
States financial institutions from this.
Secretary Lew. I am refraining from commenting on a bill
that I have not had a chance to read, but I am trying to state
what my policy is.
TOO BIG TO FAIL
Mr. Graves. So it sounds a little European to me, and I
have seen what has happened there, and do not think that is
very healthy. Okay, changing topics a second, and talking about
Dodd-Frank, which you referenced, and not only do we have it,
but now pulling in something international to overlay on top of
that, being the Basel III side, but Dodd-Frank was supposed to
address the ``too big to fail,'' and, in fact, I guess the five
largest money centers have increased in size over the last
couple of years, while, at the same time, as the Chairman
mentioned, community banks have taken a larger hit, and, in
fact, I imagine there have probably been zero new community
banks net across the nation being created. Do you believe too
big to fail is, in fact, in place?
Secretary Lew. I think that Dodd-Frank established very
clearly the principle that too big to fail is unacceptable, and
it put in place policies, which we are in the process of
implementing, to achieve the goal of being able to say too big
to fail is no longer the case. We are not yet fully
implemented. I think a lot of the commentary that I have read
mixes up today as a moment in time to where will we be when
Dodd-Frank is fully implemented. I can tell you that when it is
fully implemented, we need to continue to ask the question,
because if our policy is that too big to fail is unacceptable,
we have to make sure that we make that the case.
Mr. Graves. So you believe Dodd-Frank ended too big to
fail.
Secretary Lew. I would just say this about the question you
asked about consolidation and large money center banks. In the
course of the financial crisis, there were a lot of
institutions in the resolution process that disappeared, and
there was a growth of some of the large institutions as they
were failures that were resolved during the financial crisis. I
think that is separate from the question that you asked about
community banks, and as I tried to indicate in my response to
Chairman Rogers, we are very much aware of the concerns raised
by the community banks, and I know the regulators are as well.
Mr. Graves. Right. So you believe that Dodd-Frank has ended
too big to fail?
Secretary Lew. Well, I will just restate very clearly that
Dodd-Frank established the policy that it is unacceptable for
banks to be too big to fail.
Mr. Graves. Well, I understand that it implemented the
policy.
Secretary Lew. We are implementing those policies, and we
have not yet completed the process of implementing those
policies. We are determined to do so, and we will continue to
ask the question as it is implemented, and if, in fact, I
cannot sit here a year or year and a half from now and say
that, we will have more work to do, but I cannot tell you that
today, and I am determined to do the very best we can
implementing the laws so the answer that will be positive.
Mr. Graves. Thank you.
Mr. Crenshaw. Ms. Kaptur.
Ms. Kaptur. Thank you, Mr. Chairman. Glad you looked down
this side. I want to welcome the new Secretary and wish him the
very best in his important new duties, and we know your
background, and we have great confidence in your
levelheadedness and your deep commitment to service.
COMMUNITY BANKS
I wanted to associate myself first with Chairman Rogers'
remarks relating to banks across our country that did not abuse
their privilege, and I wanted to implore that Treasury, in its
rule-making, find a way to distinguish between banks that were
the worst abusers versus those that maintained stellar records
and prudent lending practices. I can tell you in my own
district the Bank of Lorraine, the First Federal Bank of
Lakewood had none of this as a part of their portfolio, and
perhaps there is a way for Treasury to provide recognition to
these types of institutions for their prudent practices, and
think about that as you proceed forward. I do not really have a
question on that, Mr. Secretary, I am just encouraging you to
recognize the best in our country as we try to restrain those
who abuse their privileges, and I think that many of these
banks that are local do not get any recognition. We figured out
how to give FDIC seals on the door to give confidence to the
public, and maybe there is something special Treasury could do.
So I just wanted to put that on the record.
HARDEST HIT FUNDS
My questions really center on important topics you have
raised right in the first and second paragraph of your
testimony relating to the housing market. And housing has
always led the way in most modern recoveries except this one,
and ever since the mortgage securitization instrument was
invented, unfortunately, the housing crisis lands at Treasury's
door now. And regions such as I represent have been deeply,
deeply harmed because of the crisis, as many others have as
well, and there has been a tremendous market adjustment that
has been occurring. And so I appreciate your mentioning housing
in your very early remarks in your testimony, and I have some
questions relating to one of the programs that Treasury
operates called The Hardest Hit Fund. Treasury's budget request
indicates that the Department has only dispersed about $1.76
billion out of a possible $7.6 billion under the Hardest Hit
Fund as of December of last year.
My question is, and I have a couple of them, so let me just
run through them, please explain why less than 25 percent of
the funds have been allocated despite the fact that we are
still seeing high foreclosure rates, certainly in our area in
northern Ohio. For years I have been urging Treasury to allow
states to use their Hardest Hit Funds for demolition, as well
as rehab, or try to work out the mortgage. That is the best
alternative, if it can be done, but Treasury has yet to give a
yes or no answer on that. And could you possibly enlighten us
on what Treasury is doing to determine if Hardest Hit Funds can
be used for demolition? I can tell you across northern Ohio
from Cleveland to Toledo, a region that the Administration
knows well, we literally have 50,000 units we have to rip down.
Local governments, because of the sputtering of the economy,
have difficulty in finding the funds to do that. And I am
wondering if you might address that, or one of your staff who
is with you today.
Secretary Lew. Congresswoman, I would be happy to address
it. As you know, this has been a very difficult area for both
federal and local policy and we have been working very hard to
get the resources out into the places where it could do good.
In the almost two months that I have been at Treasury, the
issue of demolition has come up, and we have not reached a
final determination, but the argument is, I think, a strong
one, that in a community where houses are underwater, and the
only way for them to get above water is to remove the blighted
properties that need to be demolished, that there may well be
savings, and therefore ability, for the homeowners to get above
water to pay their mortgages, if the demolished properties were
addressed. We are looking at whether or not the Hardest Hit
Fund can be used for that. We have a great deal of sympathy for
the policy, and I think there is a strong argument. It is not
resolved yet, so I cannot speak to a final decision, but it is
something that I am personally paying a great deal of attention
to.
Ms. Kaptur. I thank you very much. Could you give us any
window? I mean, are we talking about by June?
Secretary Lew. Yes, I would have to get back to you on the
timeframe, but I can tell you that in my first two months it
has been the subject of more than a couple of conversations.
Ms. Kaptur. I thank you very much for that, and we also
have a bipartisan bill that has been introduced here dealing
with the challenges that regions like ours face in trying to
readjust our housing markets. Deputy Assistant Secretary Graves
has actually come out to our region trying to figure out what
do we do with this situation, and I would urge you to take a
look at our bill, perhaps there might be something in there the
Department would find useful, and as we try to readjust our
marketplace. So, I thank you very much for that.
HEALTHY FOOD FINANCING INITIATIVE
And I just want to ask one additional question on the
Healthy Food Financing Initiative that is a part of the budget
submission, could you provide now, or for the record, the
eligible institutions that the CDFIs could link to? Are they
just for-profit institutions? Or if you have, for example, a
Cleveland foundation working with local non-profits trying to
raise food in communities that sell at farmer's markets, would
they be eligible for assistance? So I am looking for how that
fund is going to be used.
Secretary Lew. Congresswoman, I am probably going to have
to get back to you as to who the entities to be funded are, but
certainly the idea is to try and get into the communities
through the entities that have the ability to achieve the
goals. I would be happy to follow up with you. I cannot speak
to the question of a farmer's market, but it is a kind of
activity that certainly does address the problem. So I would be
happy to get back to you.
Ms. Kaptur. All right. Very good. Thank you. Thank you, Mr.
Chairman.
Mr. Crenshaw. Thank you. Mr. Diaz-Balart.
Mr. Diaz-Balart. Thank you, Mr. Chairman. Good to see you
again, sir.
Secretary Lew. Good to see you.
Mr. Diaz-Balart. You are kind of stuck with us, right?
Secretary Lew. Yes, it feels like it was only yesterday.
TAX INCREASES
Mr. Diaz-Balart. Yeah, right. Deja vu all over again. Just
want to go back to the conversation that you had with my
colleague here, and you mentioned some of the things that
Republicans wanted to put on the table as a condition to
potential revenues. And you talked about that. You know, my
memory may not be that good, but, you know, the American people
have already gotten hit with a number of tax increases.
Revenues were already increased. Taxes already went up. I do
not recall the President saying that taxes were going to
increase all the time, continuously. He talked about, during
the campaign, increasing taxes on what he called, you know, the
high earners. That already took place. But not only that; there
has been a huge tax increase on the middle class because of the
Affordable Care Act, known commonly as ObamaCare, huge tax
increase on the middle class. And nobody has gotten hit more
than the middle class, based on the payroll tax increase. And
do not take my word for it, but I will just pose a question.
Mr. Secretary, I know you know that people feel the payroll
tax increase. It is a huge tax increase, not on the wealthy, on
everyone. So revenues already were increased. Taxes went up,
whether we care to admit it or not, they went up. The American
people know they went up. There are others that are coming, by
the way. So is there ever a limit to tax increases? Because
that argument, that debate took place already. The President
got his tax increases, and now it seems that the American
people are supposed to forget that they are receiving less
money because of the payroll tax increase, because of other tax
increases, and that now that did not happen, so now tax
increases have to be on the table again. You know, is this
going to be the constant discussion no matter what we do?
There's always going to be an effort to increase taxes?
Secretary Lew. Well, Congressman, first of all, I
appreciate your strong support for the payroll tax, which we
fought for in 2010 and 2011. We heard a lot of arguments that
the payroll tax cut was a bad idea and took an awful lot of
work to get that passed, and it was only passed because it was
short-term, and it was to deal with the economic conditions of
the time. It was never considered as part of the overall
dealing with our deficit.
Mr. Diaz-Balart. But the American people are feeling it.
Secretary Lew. We spent money on the payroll tax cut to
have it in place for the two years.
Mr. Diaz-Balart. And the American people are feeling it
now.
Secretary Lew. The American people are better off for the
growth that we got for the brief period of lowering the payroll
tax. Look, the challenge in getting a balanced spending cut
revenue package is that we are doing a lot of spending cuts. We
have done, $1.8 trillion in spending cuts. We have done $600
billion of revenue as part of the package. If we need to do $4
trillion, and the ratio should be 2:1, we are not coming back
for more revenues, we are coming back to finish the work on
both the spending side and the revenue side. I think it was a
very good thing that Congress passed in January, the
legislation that rolled back the tax cut on the very wealthiest
Americans. It did not finish the job, and we said so at the
time, and there should be no surprise that when you only do
half of the job, half of the job is left. So we collectively
have more work to do on both the spending and the revenue side
if we are going to deal with the deficit in the long-term
fiscal policy in a fair and balanced way.
AFFORDABLE CARE ACT PENALTIES
Mr. Diaz-Balart. Mr. Secretary, the $600 billion, I know
where that number comes from, does that include the tax
increase that the middle class is subject to because of
ObamaCare? The Supreme Court said it was a tax increase.
Secretary Lew. We can have a debate.
Mr. Diaz-Balart. No, I'm just asking.
Secretary Lew. That $600 billion is raising rates on the
highest income taxpayers above $250,000. I think that the whole
question of the Affordable Care Act is a legitimate question to
have a conversation about, but it was not a set of revenues
that was part of a deficit reduction package. It was a set of
policies to make sure Americans have access to health care, and
that when they do not choose to get health care, rather than
shifting the cost to other people, they pay a penalty.
Mr. Diaz-Balart. I understand that.
Secretary Lew. So it would be shifting the cost. Very
different.
Mr. Diaz-Balart. Right. So just very simple. That $600
billion in tax increases, do we know what the expected tax
increases, how much money the tax increase on the middle class
is supposed to bring in?
Secretary Lew. I am not sure what you are asking,
Congressman.
Mr. Diaz-Balart. Well, I mean, I do not always agree with
the Supreme Court, and I know you do not either, the Supreme
Court made it very clear that the tax increase, that the fine
that the middle class, thousands or millions of people in the
middle class are probably going to have to pay, is a tax
increase. Do we know how much that is supposed to bring in?
Secretary Lew. I would be happy to follow up with you on
Affordable Care Act penalties.
Mr. Diaz-Balart. Okay, well, so the penalties, the Supreme
Court, whether you or I like it, has said it is a tax on the
middle class. So, again, I know that government, you know,
going back to what my colleague was saying, sometimes it is
frustrating. Government likes to kind of pretend if a different
agency takes money from your pocket, that that is not real
money, or that you do not count that. But the reality is, the
American people are feeling tax increases. They are feeling
those tax increases, and they are going to feel that tax
increases of ObamaCare in a pretty immediate sense, and I think
it is important to remember that the President got huge tax
increases. There are other huge tax increases that are coming,
and the question is, is there ever going to be enough new tax
increases?
Secretary Lew. Congressman, I think the American people
appreciate the fact that they have access to health care
coverage that they did not have; that their children graduate
from college, they can stay on their health care plan; and if
they have someone in their family with a pre-existing
condition, that they can afford to get health care coverage. I
think that the entire package of the Affordable Care Act, when
it is implemented, will be something that the American people
see as having been one of the most important set of policies
and a very good value. That is a separate question from what we
do to get our fiscal house in order, and I think everyone on
this Committee knows that the tax cuts in 2001 and 2003 were
not part of the Affordable Care Act. Those were tax cuts we
could not afford. The President has said all along that as part
of a balanced deficit reduction plan, we need to have some
correction where, for people at $250,000 and above, we take
back some of the benefit that we just cannot afford to give to
the wealthiest people in America. That is what the President
has proposed.
Mr. Crenshaw. Thank you. Hopefully we get a little more
time. Mr. Quigley.
Mr. Quigley. Thank you, Mr. Chairman. And in a moment of
kumbaya qualities, I, too, want to associate my remarks with
the Chairman of the Full Committee as it relates to community
banks. I think Illinois is second in the whole country, and
many of them in the heart of my district are suffering because
of what happened, but also because of unintended consequences.
So I certainly appreciate, Mr. Secretary, your efforts as you
have outlined previously.
CONFORMING LOAN LIMITS
And in a related point, one of your colleagues, Mr.
Donovan, and I exchanged questions about conforming loan
limits, and he has pledged to help. Now I understand there are
different jurisdictions here, but as he clearly understands and
outlined in our discussion, the way the lines are drawn for
conforming loan limits creates a skewing, and are
disproportionate, so that certain areas that are drawn in with
dramatically lower numbers have their numbers drawn so that the
loan that is otherwise a jumbo is way, way low, and, frankly,
it just kills sales of certain types of housing. So I would
certainly appreciate your comments and thoughts about trying to
help Mr. Donovan and ourselves affect that change.
Secretary Lew. Congressman, I would be happy to look at the
conforming loan question. It is largely in Housing and Urban
Development's area, but I will say this, that in the last
number of years since the financial crisis, we have seen the
loan limits go way up, and we have seen federal lending become
a predominant form of lending. One of the things that we are
concerned about is getting private lenders back into the
marketplace. So as we look at these questions, I think our goal
has to be maintaining access to housing finance, but also
reducing the prevalence of the federal government as the
predominant lender or guarantor. And it is something we look
forward to working with you on.
Mr. Quigley. Absolutely, and I think the reality of the
situation is when this discussion goes forward, now, it is not
just is HUD going to be asked about this, they are going to
look in your direction for your thoughts.
Secretary Lew. I look forward to working with my colleagues
on that.
IRAN SANCTIONS
Mr. Quigley. On an unrelated point, correct me if I am
wrong, but I think, to date, the Treasury Department has
sanctioned just two non-Iranian foreign banks for conducting
significant financial transactions with sanctioned banks
relating to doing business with Iran. Can you explain a little
bit about what the agency is doing now, because there seems to
be a lot of information about other banks doing this, about
what you are trying to do to address this issue?
Secretary Lew. Congressman, we are working vigorously to
implement and enforce what is the toughest set of sanctions
ever put in place by the international community, and
unilaterally, by the United States. Importantly we have the
cooperation of, the U.N., including China and Russia. We are
working with our European allies. This is not just the United
States. In order to really tighten the pressure on Iran's
economy, we need that kind of full cooperation. I think if you
look at the economic conditions in Iran, it is showing that it
is having effect. We see it in Iran's GDP. We see it in their
unemployment rate. We see it in their exchange rate. We see it
in the availability of food on the shelves.
Now, sanctions alone do not change policies. Governments
have to change policies. What sanctions can do is they can send
a very clear message that we are serious. When the President of
the United States says we are going to keep the pressure on,
and all options remain on the table, we are very serious. We
are taking our enforcement responsibility equally seriously.
These are case-by-case matters that our team follows up on. As
Secretary, I will remain vigilant watching the work they do,
being part of it, and making sure that we meet that standard.
Mr. Quigley. Well, I would certainly appreciate hearing
about, especially given the information we are hearing about
other banks who should be the subject of these investigations
or sanctions, but I certainly appreciate your efforts. Mr.
Chairman, if I might, and I am sure at this point you will
probably tell me since I am new I have no business to say this,
but on a personal point of view, I have served four years now,
maybe not on this Committee, but often in the minority, and
often with Republican and Democratic witnesses.
DECORUM
And I would just like to encourage my colleagues, in no way
associating with my friend, Mr. Diaz-Balart's exchange, because
I think that is very healthy, but I do think there is a line
where we show a courtesy and decorum, and allow witnesses to
answer questions. They may disagree.
Ms. Herrera Beutler. Did the gentleman yield?
Mr. Quigley. No, I would like to finish if I could. They
may disagree, and I appreciate passion, and I also respect the
fact that in four years I have seen witnesses filibuster for
their five minutes, and so there is a priding that goes along
there. All I am saying is, in as gentle a way as I can, is I
think it adds to the decorum and the value of the discussion if
we allow witnesses to answer a question, and if we disagree, we
can say so then. I yield.
Mr. Crenshaw. Mr. Womack.
BUFFETT RULE
Mr. Womack. Thank you, Mr. Chairman. I am going to try to
be a kinder, gentler questioner. Try. Thank you, Mr. Secretary,
for being here. Earlier, the Buffett rule came up. Refresh my
memory. How much revenue, assuming the Buffett rule or law, how
much over 10 years would that raise? Round numbers. Round
numbers.
Secretary Lew. I would have to check the exact number. It
is not an enormous number.
Mr. Womack. That is where I am going.
Secretary Lew. And I know that is where you are heading. It
is a principle as much as it is a number, because, frankly, it
is just a matter of basic fairness that the tax rates should
reflect fair distribution of burden.
Mr. Womack. I knew you knew where I was going with that. It
is not a significant number, and I think it is quite generous
to say that it is just a principle. It is really more of a
talking point to divert attention away from the real problems
facing our country and try to convince people that that is the
real problem. And that is not the real problem. But anyway, I
will not have enough time to drill down terribly on that. Over
the proposed budget, over the next 10 years, now let me back
up. This year, what will the net interest on the debt be? Round
numbers.
Secretary Lew. Congressman, I did not bring all my numbers
on the budget with me because I was here testifying about the
Treasury budget.
Mr. Womack. Well, easily over a couple of hundred billion,
right?
Secretary Lew. Yes, I just do not like to do numbers
without having them in front of me.
Mr. Womack. But would you agree that it is safely over $200
billion?
Secretary Lew. Yes. It is a large number.
Mr. Womack. Okay.
Secretary Lew. Importantly, it grows over time, because,
interest rates go up in the forecast period.
INTEREST RATE NORMALIZATION
Mr. Womack. You know, not long ago in a town hall meeting I
had somebody ask me, ``Mr. Congressman, what keeps you up at
night?'' And I remember my response vividly, that,
internationally, it is a nuclear-armed Iran, and domestically,
it is normalized interest rates. So I want to ask you this
question. If it is safely over $200 billion this year, and as I
look at the budget over the next 10-year window, it explodes
even under assumptions that interest rates remain somewhat
artificially low, maybe not even somewhat, to three-quarters of
a trillion dollars. Now, to put that in perspective, as I noted
in an article recently, that number in 2023 is more than we
spent on any single program last year. And Social Security
being the big one at 700 and some change, does this alarm you?
Secretary Lew. Congressman, this is not my first time in
the administration. When I was in the Clinton Administration as
budget director, I balanced the budget, I ran a surplus three
years, and I came before the Congress on my last day, and I had
a plan for paying down the debt. There were a series of policy
decisions that were made in the next number of years where we
had several tax cuts we could not afford, we had wars we did
not pay for, we extended Medicare prescription drugs without
paying for it, and then we had an economic crisis, and revenues
went down and spending went up.
The President has laid out a plan that would stabilize our
deficit as a percentage of GDP and our debt as a percentage of
GDP. At the end of the 10 year window, our deficit would be
less than 2 percent of GDP; our debt would be in the 70s. Not
going through a barrier that all of us agree we have to try to
control.
I think this question of debt is a very important one. I
think we cannot kid ourselves into thinking that you can take
decisions that were made over a long period of time and reverse
them overnight. Our budget, I would beg to differ, in terms of
the assumption on interest rates; I think it is a realistic
assumption on interest rates. It is consistent with other
conservative assumptions. It shows a ramping up of interest
rates. We do not make the decision; the Federal Reserve Board
makes the decision in terms of timing a lot of these things.
But our policy, our projections are consistent with both the
mainstream Blue Chip projections and the Fed projections.
I think the reality is that we have accumulated a very
large debt because of the policies largely before this
Administration took place. And we have to first get our budget
to a place where we are not adding any new spending policy that
increases the debt burden before you can even think about
drawing down the debt as we did in the '90s when I was in
charge of the budget the first time. I hope that we are in a
position in my tenure to have that conversation. But the first
step is to stabilize the deficit and the debt as a percentage
of GDP, which is what the President's budget would do.
Mr. Womack. And I think we can kind of debate, and we will
not have time here for this session to debate whether or not we
actually stabilize this disparity between our income and our
expense ledger. And I am sure my time is about gone, but before
I close, maybe a yes or no question back to my original
question. Does it concern you that in 2023, based on what we
are seeing here in the President's proposed budget, that our
net interest on the debt, assuming those interest rates, would
be the better part of three quarters of a trillion dollars?
Secretary Lew. What concerns me, Congressman, is that we
need to reach agreement on a balanced plan so that we can hit
the debt and deficit as a percentage of GDP targets that are in
the President's budget, because I think that that would leave
us in the position that is sustainable where we could continue
to have the discussions that we need to have about policy for
the next generation.
Mr. Womack. I will take it as a yes. Thank you.
Mr. Crenshaw. Thank you. Well, Mr. Secretary, we have got
just a few minutes left, and some people have another question.
I just want to make sure, since some of you all were not here
when the meeting started, I announced that I would call on
people based on seniority if they were here when the meeting
started, and after that, we would go from side to side. But
after that, I would call on people in the order in which they
walked in the door. But now that everybody is here, we will go
back from side to side. I will waive my time and submit some
questions in writing so that we can have other members have
more time, so if it works out maybe we can ask another.
Mr. Serrano.
BUDGET CUTS
Mr. Serrano. Mr. Chairman, I will just ask one question,
and then I will join you in submitting my questions for the
record. The Ryan budget of $966 billion for discretionary
spending, what, in your opinion, or have you been able to look
at this? I know that you may, when we asked you have you looked
at this, we are talking about the two month period, but it is
also two decades of looking at this and other situations. So
what impact do you think it will have on our economy if we cut
back so severely on discretionary spending? Because, see, here
is my concern, and I may be on the Appropriations Committee,
but unlike you and a couple others on the Committee, I am not
an expert on these numbers, but I do notice something that is
happening here which is very dangerous. There is such a desire
to cut the budget and to balance it that we are hindering the
opportunity to invest in some areas.
Now, I know some of my colleagues call that spending, but
investing and spending may be the same thing, or it may not be
the same thing. But the best example I use is there is
somewhere right now, a man and a woman in a white coat, working
on perhaps finding a cure for cancer, or a cure for AIDS, or
something, and we are cutting across the board with no concern
for what happens. So what is the impact, or have you had a
chance to look at it over a period of time?
Secretary Lew. Congressman, I have looked at the budget,
and it is obviously not the first time the proposal has been
put forward. I would make two or three points.
First, the revenue policies in the budget create a much
bigger problem than they are a solution. There are over $5
trillion dollars of tax cuts that go largely to upper income
people that are not paid for. So there is a huge hole in that
part of the budget. So there would either have to be more pain
or tax increases on middle class people in order to pay for the
tax cuts. So I think, when we look at the magnitude of impact,
I always look at the things that are not paid for because that
tells you whether it is going to be better or worse. It would
be worse.
If you look at what is in the body of the budget, I think
on the discretionary side, it is eating our seed corn to not
invest in research, to not invest in infrastructure, to not
invest in education. And if you cut discretionary spending to
the levels that that budget would, it leaves you no choice. And
I cannot tell you the specific decisions; this Appropriations
Committee will make the specific decisions. But I think
everyone on this Committee knows that when you lower the caps,
something has got to go. And that we all like to talk about
cutting the things that are wasteful, and we all agree that
that is where we should go first, but we are getting beyond
that. We are down to really hard choices, really hard choices.
And I think that the next generation has a right to depend on
us to educate the next generations for the challenges they will
face, to make sure that they have an infrastructure so that
when they produce things they can get them to port and to
market, and that we maintain our cutting edge as being the
country that has led the world in scientific breakthroughs
which has been driven by federal research support.
So these are basic questions about what kind of country we
are going to be, when my grandchildren grow up in the Bronx.
Mr. Serrano. Right. And let me in closing, Mr. Chairman,
just say that that is what concerns me the most. And I know
that, as I look across the panel here, I know that everyone has
very serious concerns about the future of our country. My main
concern is that in this constant desire to cut, cut, cut, we do
not invest, and, in the process, we take away that which made
us great. We were able, always, to do both, to keep a budget
that made sense and also to invest. So I hope that we come to
our senses and realize that, yes, you have to cut the budget,
but also, you have to invest. And the best example I give you
is, is it a crisis if we can no longer find cures for disease?
Is it a crisis if we can no longer provide proper health care?
Yes. Well, we have had crisis. And one of them is always
wartime. And in wartime we never really stop to think about
what the cost will be, we just defend the country. There are
different ways to defend the country, and one of them is to
secure a future that does not cut, cut, cut, but invests in
some areas, and I thank you.
Mr. Crenshaw. Thank you. Mr. Yoder.
DEBT PRIORITIZATION
Mr. Yoder. Thank you, Mr. Chairman, Mr. Secretary.
A little different topic. Probably sometime in the next few
months we are going to be dealing with the issue of the debt
ceiling increase again. Your predecessor spent a lot of time on
media, on news, et cetera, making comments that I am assuming
you will be making soon enough that suggest that if Congress
does not acquiesce to the demands of the Administration to
raise the debt ceiling by whatever amount the Administration
says, that it will have the potential of causing economic ruin
across the world because of the potential for the U.S. to
default on their bond obligations. Nobody wants that scenario
to occur. And the main thrust of that argument, Mr. Secretary,
is that we need to protect the full faith and credit of the
United States, and that that is critical for our economy.
I got a great opportunity for you to have the
Administration join members in both parties and support
bipartisan legislation that would ensure that the full faith
and credit of the United States regarding those Treasury bonds
are always paid. There is legislation before Congress that
would prioritize the debt to ensure that that scenario would
never happen, which would, therefore, not have the economic
consequences, at least in that regard. There may be other
economic consequences for not raising the debt ceiling that I
am sure you can articulate, but can we join together as we have
this debate, recognizing that the President opposed raising the
debt ceiling when he was in the Senate, and was very clear
about his rationale for opposing that. Democrats have opposed
it; Republicans have opposed it. We know where this going to
go. We know how this debate is going to go. Can we work
together to not have the Administration sort of create a self-
fulfilling prophecy by going out and saying, If they do not
raise the debt ceiling, then we are going to have these
economic consequences. Therefore, the markets get edgy; then we
get the consequences anyway? I would so appreciate if we could
avoid all that, and actually have an honest debate.
The American people are very, very concerned about raising
the debt ceiling without a plan that we can agree on to pay it
back, and we have an obligation to do that. So it is a
legitimate debate to have. But can we take the full faith and
credit debate off the table, and support legislation that would
ensure those payments go out no matter what, and reassure
global markets?
Secretary Lew. Congressman, I have testified four times on
this already, so I think you are right to assume that I will be
saying things that I believe are very much true. You cannot
prioritize what obligations of the federal government to pay
without resulting in a default if the debt limit is not
extended. You are only going to be changing what it is we
default on. When this Committee appropriates money and agencies
commit to spend that money, they have an obligation to make
their commitments whole, whether it is to pay for rent or
utilities, or to pay a grant. There are obligations that go
with being the United States of America, making a commitment,
that has been authorized by Congress. Prioritization kind of
pretends that you can pick and choose amongst the commitments
and avoid defaulting on an obligation. You will be in default
if you do not extend the debt limit, and the United States does
not meet its obligations.
DEBT LIMIT
You know, it is not a new thing that we pay our bills.
When, the United States was formed, one of the challenges was
to pay the Revolutionary War debt. And since then, we have
always paid our bills, and I hope we always will. Congress has
to extend the debt limit. It does not incur a single penny of
new spending. All it does is pay the bills that Congress has
authorized, already-committed funds. And I think that, it has
historically never been the case that we have failed to do
that. And I think Congress will do what it has to do, which is
pay the bills.
Mr. Yoder. Well, with all due respect, Mr. Secretary, that
is not entirely accurate because the debt limit increase would
not only go to pay current obligations, it would also authorize
future spending for the future Congress to appropriate from.
And so it does not just pay the bills until the end of the
fiscal year, September 30th. The debt ceiling that increased in
August of 2011 increased the debt limit way beyond that fiscal
year and forward. And so it does not just go to pay prior
obligations. It also goes to allow Congress to spend additional
dollars.
We have had a fairly, you know, important debate this
morning regarding the finances of the country. We have clear
differences about the Administration's approach towards taxes
and increasing spending on the American people, versus the
balanced approach that the House is moving forward, which
actually balances the budget. That debate has been had.
But as we get into the debt ceiling debate, my hope is, and
I am sure this will not occur, but I will say it because I just
hope that you will consider this, that the rhetoric that the
Administration has previously used on this issue has created a
self-fulfilling result. And so if we could tone down the
hyperbole on default, knowing that there are dollars that will
come into this federal government that will pay our debt and
interest regardless of whether that ceiling is raised, if we
can tone that part of it down, that would be something we could
all work towards.
I get that, yes, there would be potential obligations that
would not be met elsewhere. But that is not nuanced in the
debate. The debate that is had is, we are going to default on
our Treasury bonds, and that is going to cause global economic
meltdowns. So if we can, and I will watch you on Sunday talk
shows, my hope is that you will take some efforts to tone that
down and maybe, potentially, support an approach that would
ensure that occurred.
Secretary Lew. The thing I would just urge you to consider
is that you enter a world that we have never been in once the
United States is not meeting its obligations. We cannot assume
that we know that markets will function in an orderly way if
that happens. And you cannot prepare for a scenario where you
can predict that we will have the ability to continue to go to
market and roll over debt if we stop paying our bills.
And the one point I would really urge you to think about is
the debt limit does not appropriate a dollar; it does not
extend an entitlement payment; it does not extend a tax cut.
All it does is say that all the other decisions Congress has
made, we can meet those obligations. And, you know, I
understand your point that the debt limit, covers the current
year as well. But, that is not what is driving the need for a
debt limit increase. What is driving the need for a debt limit
increase is the fact that, past decisions were made.
Mr. Yoder. Which, Mr. Secretary, is one of the reasons that
we are not going to be supportive of the President's budget,
because it drives those obligation up even further, therefore
increasing further demands on a debt ceiling increase. So it is
a bit circular to say, Well, you voted for a budget, therefore
you have to vote for our debt ceiling increase.
Secretary Lew. I wish I could say you voted for our budget.
Mr. Yoder. Well, sorry, we have not. But let's agree to
stop putting additional obligations on the American taxpayers,
therefore we do not have to increase the debt ceiling.
Mr. Serrano. Will the gentlemen yield for a second, Mr.
Chairman?
Mr. Yoder. I will yield back to the Chairman, I am sure my
time has expired.
Mr. Crenshaw. Yeah, I did not turn your mic off, it just
went off automatically. But there are four people left here
that maybe have a question. And I know it is 12:00, and you
have been very generous with your time, but I think if we all
kind of focused on maybe another question, then we would have
time and not take up too much room. So could we do that, Ms.
Kaptur?
Ms. Kaptur. Thank you, Mr. Chairman. Thank you, Mr.
Chairman, for allowing us another round. I have full
confidence, Secretary Lew, that you, having been a part of
balancing federal budgets when we were responsible as a
country, will help get us back on that path. And I served much
longer than some of the other members who are new on this dais
now. And we are a part of a Congress that saw very
irresponsible budgets set up by an Administration that
conducted wars and did not pay for them, passed bills dealing
with pharmaceuticals and Medicare and did not pay for them, and
then we got into the mess that we are in now, so trying to dig
ourselves out. But you have my confidence, Mr. Secretary.
I just wanted to point out that it is no secret that a few
big Wall Street banks and money center banks have actually been
expanding in our economy, taking a greater share of assets and
control of wealth, managing the wealth of this country since
the financial crisis. It is surprising how few there are,
actually, of very large ones, and how much they actually
control. Smaller local banks have been facing, interestingly
and troubling to me, many more regulatory burdens related to
what the big banks did, and their share is not growing.
COMMUNITY BANKS
And so I want to go back, Mr. Secretary, and see if there
are ways that Treasury can actually allow those financial
institutions that did not cause this crisis, and have the
ability to make housing loans at the local level, and have a
very, very good record, they do not have a stained record of
performance, that if there is some way that Treasury, as you
work through all this, could lighten their burden, actually
invite them in. Find those around this country, and I will give
you the Ohio list, to actually find a way for them to be more
robust partners with you as you move forward. Is this in your
thinking? Are you looking at those institutions around the
country that actually performed very prudently and trying, as
we recover, to engage them in additional lending, rather than
burdening them in a way that they simply are being displaced in
their marketplace by the very institutions that caused the
problem?
Secretary Lew. Congresswoman, we have tried over the last
number of years to create incentives for lending to small- and
medium-sized enterprises to make it easier for businesses to
get access to credit. I am not sure whether there is any
mechanism to do what you are describing. I am happy to go back
and talk to our team about it. Many of the rules that community
banks are worried about are not in the jurisdiction of the
Treasury Department squarely; they are either in the FDIC, or
the Federal Reserve, or another agency. As the chair of FSOC, I
have had discussions with the other members of FSOC, which
include all the regulators, and I know that they are sensitive
to the concerns of community banks. So I would look forward to
working with you on it. I would have to look at what tools, if
any, are available.
Ms. Kaptur. You know, I look at the Department of Energy,
and we have LEED-certified buildings, and I go out to all kinds
of ceremonies with local businesses that are very proud that
they have, you know, met this standard. And we think of ways
that we recognize top scholars in our country. Well, we have
banks that have done a good job, and we have some that have
done a very poor job. And it just seems to me, I can told you
at the local level, the lending is stuck. There is the
uncertainty about what is happening with the regulatory
process, and perhaps because of the multi-agency engagement in
this, unclear messages are coming down locally that is
restricting lending, but it is hurting the housing market right
now.
Mr. Crenshaw. Your five minutes is up.
Ms. Kaptur. Thank you, Mr. Chairman.
Mr. Crenshaw. Ms. Herrera Beutler.
Ms. Herrera Beutler. Thank you, Mr. Chairman, and, you
know, I would agree with a lot of what has been said here
today, and I think we can definitely point the blame at both
parties and administrations over the last umpteen years. I
certainly do not believe that this President created the debt
at all. And I share this, I share this at my Lincoln Day
dinners, and every head bobs, because we know it, it is the
truth. Most Americans know what is happening. I think the
difference is, and the reason I am here, is because we have to
course correct. We cannot do things as we have always done or
we are going to get the same result.
SMALL BUSINESS LENDING FUND
In that vein, more specifically to us, a program, and I was
not in office when this program got put in place, I do not know
if I would have supported it, but it is there, and I want to
see it used effectively. It was brought to my attention in a
recent SIGTARP, I do not know if I am saying that right, audit.
It shows a substantial number of banks use the Small Business
Lending Fund to exit TARP. However, other institutions, like
Craft3 in my district, effectively use that Small Business
Lending Fund that was created, and were able to leverage
significant other dollars, and then lend it to small businesses
in a hurting community. I guess I am interested in how the
Treasury is going to work to ensure more institutions are
effectively increasing lending to small businesses. And I have
a lot of numbers here that are kind of disconcerting about
folks who are using it to pay off things, not increasing their
lending.
Secretary Lew. Congresswoman, I read the report, and I am
familiar with the program. There have been a number of efforts
over the last number of years to really improve the
availability of lending for small businesses. That was the
purpose of the program. I guess a couple points. First, the
statute, the law that Congress passed, made repayment of loans,
including TARP loans, eligible. The purpose of the program was
not for the federal government to micromanage the book of a
local lending institution, but it is set up so the incentives
are all to lend more. So the dividends that go to the
institution are variable, depending on how much their profits
are kept versus returned to the federal government. The more
they lend, the more they keep. So it is very much set up to
encourage lending.
If you look at these institutions overall, tracking where
the dollars went is only half of the question. The other half
is, what have the institutions overall done? The performance in
terms of lending to small businesses is much higher than
tracking where the dollars in the program went, and we need to
go back, and I would be happy to follow up on this to be able
to answer in more detail, but, you know, the institutions have
been doing more small business lending, even if the dollars
were used partially to pay back their obligations under TARP.
Ms. Herrera Beutler. And again, I was not here when they
wrote that.
Secretary Lew. Nor was I in this role.
Ms. Herrera Beutler. So I am not sure all the ins and outs
of their intent, but it is called the Small Business Lending
Fund, and it was the only game in town there for a few years,
so I have had a lot of small businesses say, ``We cannot get
anything out of it.'' And I know that there are a good number
of banks who actually decreased their small business lending
over this last period of time based on the Inspector General's
report.
Secretary Lew. I do not think that has been the general. I
think the opposite has been more general.
Ms. Herrera Beutler. You think that is the outlier?
Secretary Lew. I believe so. But we should go through it in
detail and get back to you.
Ms. Herrera Beutler. That would be great. Thank you.
Mr. Crenshaw. Thank you. Mr. Graves.
INTEREST RATES
Mr. Graves. Thank you, Mr. Chairman. Mr. Secretary, thank
you for your time this morning. A couple of quick things. I
have heard a lot of concerns in the financial sector about what
you will be doing from the money supply side, easing off the
increase of the money supply as well as what the Fed will be
doing with interest rates that we can all agree are
artificially low and held low right now. What do you foresee as
the exit ramp that brings everything back together in a more
natural, free-market way of things being again?
Secretary Lew. Congressman, I think I am going to say the
same thing that all my predecessors before me have said, which
is that the Federal Reserve Board makes decisions in this area.
It is not an area where Treasury or the Executive Branch is the
decision maker.
Mr. Graves. What would be your recommendation to them?
Secretary Lew. Well, we do not recommend policies to each
other. I think there has been a balance between fiscal and
monetary policy that has worked very well, given the way our
system works, each making their own decisions.
Mr. Graves. Many experts would agree that right now the
environment is very artificial, and, at some point, it has got
to return to the norm, and I think there is a lot of concern at
how that happens. So I would, at some point, in the future be
interested in your, you have mentioned a couple of times, your
couple of decades of service and a lot of experience. We all
agree with that, and so it is some of that experience, I think,
we would rely on.
BALANCED APPROACH
And then quickly just to go back to the conversation
earlier about balanced approach, and I know it has been a
spirited debate about that today and through the election, as
you mentioned, and that you guys won the election based on
balanced approach, and yet you have commented that
sequestration was bad policy, never intended to take effect.
However, the President did sign it into law, so it was the law
of the land, which sort of implies it will take effect. And I
think that was part of the election as well. I mean, it was in
place, but yet, after the election, all of a sudden, no, no,
no, it is not supposed to happen, not supposed to take effect.
But, again, back to balanced approach, very strong claim
through the election, balanced approach, 2 for 1, whatever it
might be, all the formulas. But then after the election, we get
to the fiscal cliff, and as my counterpart here has mentioned
many times, my colleague, about the $600 billion in new taxes
that you guys received at the beginning of the year, as well as
the payroll tax that went up on all middle Americans, all
Americans that receive a paycheck. Can you remind us what
reductions in the size of government occurred as a result of
that, and that 2-for-1 balanced approach?
Secretary Lew. Congressman, I would just remind you that in
December, the President said he thought it was a mistake to do
revenues only. He thought there should be spending cuts. He
made an offer to the Speaker that had almost a trillion dollars
of spending cuts in it. This budget repeats the offer the
President made to the Speaker, so I think you have to explain
to me why the House and the Senate chose to do revenues only.
It is not our proposal.
Mr. Graves. The point of my question is that it was to be a
balanced approach. You got tax increases. You got it. But yet
today, you still want more tax increases, but yet are offering
zero reductions in the size of the government, saying that, no,
we need more revenues because it is a balance.
Secretary Lew. No. That is not correct.
Mr. Graves. But it was very imbalanced previously, if I
remember right. All tax increases, and, in fact, more
government spending, no reduction in the size of government or
reduction in spending whatsoever, Mr. Chairman.
Secretary Lew. That is just not a correct description of
the President's proposal. The President believed in December,
he believes today, that we should overall do $4 trillion of
deficit reduction, the ratio should be 2:1.
Mr. Graves. He signed it into law.
Secretary Lew. Of course he signed it into law. He signed
it into law as a step along the way. In 2011, he signed into
law spending cuts only. We may not be getting there all at
once, but if you look cumulatively, we have done about $2.5
trillion of the $4 trillion of deficit reduction. We need to
complete the job, and we look forward to working in a
bipartisan way to do it in a balanced way. But $600 billion in
revenue was, at the time, only half of what we were discussing
in a balanced approach. So the fact that Congress chose to pull
a piece of the revenue out and do it alone was not something
that we recommended. Obviously, as a step along the way, it is
very important to have had the rates go back to where they
should be.
Mr. Graves. So where are the $1.2 trillion in cuts, that 2
for 1? Where is that? I have not seen that proposal.
Secretary Lew. It is in the President's budget. I would be
happy to send you another copy of it.
Mr. Graves. Where was it then?
Secretary Lew. Oh, where was it?
Mr. Graves. Yeah. I mean, now it is part of the budget with
new tax increases.
Secretary Lew. No, no.
Mr. Graves. So it is like you are double dipping again
here, I think.
Secretary Lew. I think the President's position in December
was very clear. He was negotiating with the Speaker. He had an
offer that included, the spending reductions that I have
described, including the CPI, including means testing Medicare.
He has put those proposals in his budget. It is before the
Congress now, and we would really look forward to a bipartisan
discussion.
Mr. Graves. Mr. Chairman, I know my time has expired, could
the President show us $1.2 trillion in cuts, aside from new
revenues, aside from his budget, and say this was the other
half of the deal that I was proposing in December?
Secretary Lew. Well, that is not what the deal in December
was. The President has put in his budget what was the remaining
portion of the proposal he made in December. And we do not
think that the entire answer to the sequester is spending cuts.
It has to be a balanced approach, and we would really look
forward to having that conversation.
Mr. Graves. Thank you, Mr. Chairman. Apparently, it has not
been too balanced.
Mr. Crenshaw. Well, before I recognize Mr. Diaz-Balart, I
want to help Mr. Graves with the interest rate question, and I
think you can count on this, that rates will go up. They will
flatten out. They will go down. Not necessarily in that order.
Mr. Diaz-Balart.
CUBA
Mr. Diaz-Balart. Thank you, Mr. Chairman. Mr. Secretary,
let me go back to a discussion that we had yesterday, and I
will leave some of this with you, if that is all right, with
your staff. Yesterday we were talking about enforcing of
sanctions, and particularly Cuba. And, as you all know, tourism
is outright unlawful. So these are a couple of things that I do
not think are too subject to interpretation. If you go on
spring break and you go scuba-diving; if you go and you do
water sports; if you go snorkeling; if you go to take a swim in
the warm Caribbean waters; if you go dancing; and if you go on
eco-tourism, I mean, the word itself says tourism, that is
tourism.
So I will leave with you a couple documents of an entity
that is licensed, that that is what they talk about in their
brochure. They also have an itinerary that ends at noon, and
then after that, you are on your own. So, anyways, I will leave
that with you, and we will have continued talks. You know,
obviously, you have not seen this. But again, as you well
stated, you know, your role is to enforce the law, and tourism
is unlawful. Here are just some examples that I think we need
to kind of sit down and look at because there may be some that
are questionable, things like this, where they actually talk
about spring break, eco-tourism, snorkeling, bird-watching. But
I will leave that with you, if that is all right.
Secretary Lew. I am happy to look at it, Congressman. We
had a long discussion on this yesterday.
Mr. Diaz-Balart. Yeah, I know, and that is why I am not
asking you for something because you have not seen this. But, I
am saying, this is the kind of thing, however, that clearly
does not even come close to being, you know, under the law.
Secretary Lew. I would only say that our team at OFAC looks
at each application and makes sure that it complies with the
law. They review the manual, and they make sure they comply
with the law. I am happy to look at the materials.
Mr. Diaz-Balart. Sure.
Secretary Lew. But I know that they are very careful about
making sure that we comply with the law.
Mr. Diaz-Balart. Right, Mr. Secretary. I know this does not
surprise you, but nobody is infallible. And so, again, if
tourism is not legal, eco-tourism is not legal, and if you have
somebody that says eco-tourism on the front of their brochure,
the fact that it has not at least, you know, tossed up a red
flag leads me to believe that maybe, maybe, you know, but
nobody is infallible.
Secretary Lew. I will have our team take a look at that.
DECORUM
Mr. Diaz-Balart. Right, so we will sit down about that. And
Mr. Chairman, just the last thing, and it is too bad Mr.
Quigley is not here. I thank, by the way, I thank him for
always bringing up decorum. We always have to be reminded of
decorum. And you know, I say ``my friend'' Quigley. We usually
say that and do not really mean it. In this case, I do. He is
one of the people that I really, really like. He is a friend,
he is a personal friend, somebody that I greatly admire, so I
appreciate that. I do want to, however, just with great
decorum, tell the Chairman and everybody here, decorum is
important, but it is also important that people stay focused on
trying to answer questions. And I will never, ever be shy or be
apologetic about defending the interests of the folks that I
represent who are hurting because their taxes have been
increased, who are struggling to make ends meet. So do it with
decorum, yes, but I will also do it aggressively. I yield back.
Thank you, Mr. Chairman.
Mr. Crenshaw. Thank you, and Mr. Secretary, thank you so
much. You have been more than generous with your time. We know
you have a challenging job in front of you, and we look forward
to working with you. Thank you so much.
Secretary Lew. Thank you, Mr. Chairman. I look forward to
working with you.
Mr. Crenshaw. Meeting is adjourned.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Monday, June 3, 2013.
INTERNAL REVENUE SERVICE
WITNESSES
DANNY WERFEL, ACTING COMMISSIONER, INTERNAL REVENUE SERVICE
J. RUSSELL GEORGE, TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION
Mr. Crenshaw. This hearing will come to order. Well, good
afternoon, everyone. First let me say that it gives me no
pleasure to convene this IRS oversight hearing today because
the facts and the circumstances that bring us here are enough
to shatter anyone's faith and trust in government.
Targeting groups based on their names and political beliefs
is both chilling and outrageous. A voluntary tax system depends
on a fair and impartial collection process. Because as Chief
Justice Marshall once said, the power to tax is the power to
destroy.
But here is what we know. In an arrogant and absolute abuse
of power, the IRS office in Cincinnati singled out groups and
individuals based on their political philosophy for extra
scrutiny. They were harassed, they were intimidated, they were
bullied, and this went on for almost 3 years and no one spoke
up. We know that, but there is a lot that we don't know, and it
is time for the IRS to come clean.
It is time to talk about what happened, how it happened,
who came up with this plan and why, how widespread were these
abuses, who is responsible, who is going to be held
accountable, and how do we make sure this never happens again.
Because more than $10 billion, that is ``B'' as in billion, in
hard-earned taxpayers'' money get appropriated every year to
the IRS to conduct its operations, and before Congress spends
one more dime on the IRS, we need to know how it spends the
money it receives already. We need to know what safeguards the
IRS has in place or plans to put in place to make sure the
funds are used in a legal and appropriate way and are not
wasted, poured down the drain like we have just learned. That
is why we are holding this hearing today.
I have heard some say that the IRS has been underfunded and
that using names and political briefs to target these 501(c)(4)
applications for additional scrutiny was just a shortcut to
deal with the growing number of tax exempt applications. These
shortcuts, however, started in 2010 when the number of
501(c)(4) applications were basically static, and the total
number of applications for tax exemption were going down, and
the funds appropriated to the IRS in 2010 were not only a
record high amount, but also the second consecutive year that
funds appropriated to the IRS actually exceeded the budget
request of the IRS.
Doesn't it seem counterintuitive or seem strange that the
IRS had less work to do and more money than ever to do that
work that they would decide to take these shortcuts? And in
addition, sending abusive letters and asking for unnecessary
information from these applicants, doesn't sound like a
shortcut to me.
And now we learn of the flagrant waste of taxpayers'
dollars on conferences and videos, and the money came in part
from the unused funds from the IRS enforcement budget at the
same time the IRS was asking for more money for enforcement so
they could catch the so-called tax cheats.
For 2014, the IRS budget request is for $12.9 billion. That
is a $1 billion increase over the current year and of which
$440 million is to help implement this so-called Affordable
Care Act, the so-called ObamaCare. Now, even before the
Inspector General's report was released, any kind of increase
of this magnitude was going to be a challenge for some very
basic reasons. There are a lot of objections to the Affordable
Health Care Act, a lot of objections to ObamaCare. The
Subcommittee has limited money. We all know that. We are
looking at this breach of trust that we are talking about today
in this terms of this scandal, and now we have this newly
discovered incredible waste, so we are going to have to think
very carefully about the amount of money that we provide to the
IRS.
Nevertheless, I think we all know this, we need to fund
this agency so it can accurately answer questions from
businesses and individuals about tax matters. It needs to
produce tax forms and instructions that promote compliance. It
has got to process tax returns in a timely manner and it has
also got to investigate the criminals that are committing tax
fraud.
However, we cannot, in good conscience, continue to provide
hard-earned taxpayers' dollars to the IRS and have them use
those funds to abuse the rights of American citizens, and we
can't continue to provide the IRS with money and watch them so
flagrantly waste those dollars.
Now, today we are going to take testimony from Acting
Commissioner Daniel Werfel and Treasury Inspector General J.
Russell George. I hope that we will hear a little bit how we
are going to get to the bottom of all this and how we going to
prevent this from happening again.
But here are some things I can tell you already. We are
going to insist that the IRS implement all nine of the
recommendations in the Inspector General's report to the
satisfaction of the Inspector General. We are going to require
more frequent and in-depth reports from the IRS about how they
allocate their funds among their different offices, and we are
also going to demand that the IRS demonstrate to the committee
that the funds provided by this committee are used without a
hint of partisanship or ideology when it comes to the
application of the tax laws.
Now, this hearing is the Inspector General's second
appearance before the Subcommittee this year and we appreciate
your willingness to meet with us again. This is Mr. Werfel's
first congressional hearing in his new role as Acting IRS
Commissioner. I want to congratulate you, if that is the right
word, on your appointment and thank you for taking this
assignment at a very difficult time. We appreciate your
service.
And finally, let me say that this committee expects
witnesses to be candid and forthcoming. If additional
information about the practice of targeting or other topics
discussed here today comes to light after the hearing, we
expect General George and Mr. Werfel to keep this committee
apprised of the latest information.
Now, I want everybody to have a chance to ask questions
today and everybody to have a chance to have those questions
answered, so I am going to keep strict time in order to keep
the hearing moving. And we want to get as many rounds of
questions as we can, but right now I would like to recognize
the Ranking Member Serrano for any opening statement he might
like to make.
Mr. Serrano. Thank you, Mr. Chairman, and I, too, welcome
our guests to this hearing today.
I think all Members of Congress, Democrats and Republicans,
were appalled by the inappropriate actions taken by the IRS in
determining how to examine the tax exempt status applications
of various groups. The delays in processing applications, the
criteria used for further review of the information it asked
for indicates an organizational failure that is simply
unacceptable. The IRS is supposed to administer our tax laws in
a fair and impartial manner. Anything else, and the agency
loses the confidence of the American people.
The IRS has not helped the situation with a seeming lack of
clarity and forthrightness with Congress on these issues. In
March of 2012, this Subcommittee was told, in no uncertain
terms, that the IRS was not targeting particular groups for
further scrutiny and that there were several safeguards in
place to prevent biased or unfair examination policies of
501(c)(4) organizations. Both of these answers were terribly
wrong then and they are terribly wrong now.
While the information we have now does not indicate that
Commissioner Shulman believed these responses to be anything
less than truthful at the time, no subsequent effort was made
to ensure that this committee knew that there was more to the
story, especially in subsequent months when the leadership of
the IRS became aware of these problems. In other words, when
you folks at the agency knew that things had changed and were
not the way we were told, no one came back to tell us.
This past weekend we all read press reports about excessive
conference spending at the IRS. The lack of oversight and
accountability in both of these areas seems to point to larger
cultural issues at the IRS. Many of these issues have been well
documented by the Inspector General George and at several
committee hearings over the past few weeks. Today we ask the
next question. What do we do now?
I am not sure we have an easy response. We clearly need to
reform the process by which 501(c)(4) organizations are chosen
for further review. We need to provide more guidance as to what
is and is not allowable for 501(c)(4) organizations, and we
need greater accountability in the IRS management structure to
ensure safeguards are in place to prevent this type of
behavior.
We also need to do more research. The current TIGTA report
provides us with important analysis into the problems, but I
was struck by how much more we need to find out. We all know
that some one-third of the organizations that received further
scrutiny here were chosen for that review based on their
organization title. However, we still don't know how much,
about two-thirds of the organizations caught up in the process.
Beyond the recent incidents, I remember that these same
complaints were leveled at the IRS during the Bush
administration by groups that were opposed to the war in Iraq.
Clearly, this is an issue that has spanned a number of years
and this latest scandal is only the most recent one that we
know about.
I think we will all benefit from a longer and more in-depth
look at the actions within the tax exempt and government
entities division over a number of years and a number of
administrations.
We need to have a serious discussion about funding levels
at the IRS. This Subcommittee has been given an allocation of
$16.9 billion for fiscal year 2014, which is almost $3 billion
below the current sequester-impacted level. Undoubtedly, this
is going to result in massive cuts to the IRS and many other
Federal agencies.
While there are certainly efficiencies that can occur, the
conference spending issue comes to mind, the IRS simply cannot
sustain itself with this overall funding level. Although I am
certain there are some who would view this as a good step, I
disagree. There is no clearer way to promote more scandals than
by cutting funding that could be used for oversight, training
and reform. At the level this Subcommittee is funded right now,
we are just asking for more trouble at the IRS and elsewhere.
Lastly, we need to have a conversation about why we allow
groups who are primarily involved in politics to have a special
tax advantage status. I think it is clear that we have a number
of groups on both sides of the political spectrum that have
abused their tax status as either 501(c)(3) or 501(c)(4).
Freedom of speech certainly does not require these groups to be
tax advantaged. We need to ensure the integrity of both our tax
system and our political system, and the current practice allow
abuses of both. One step we should consider is to return to a
previous standard for 501(c)(4) applications which until 1959,
were required to be operated exclusively for the promotion of
social welfare. This would ensure that organizations could no
longer take advantage of the Tax Code in order to engage in
political activity without the transparency required by our
campaign finance laws.
As I said earlier, none of these questions have an easy
answer, and I hope that today, after we look at the report,
after we hear the answers to the questions, we can begin to
move in the proper direction.
And let me just end on a very personal note, Mr. Chairman.
I am second to no one in this Congress in asking for more
funding for the IRS, and so it hurts me both as a
representative of the American people, a member of this
committee, and personally that while I and others stood to
support the IRS, it was not doing what it was supposed to do. I
don't care who the groups were. No one should have been
targeted. No one should have been singled out for any bad
treatment. That is not the way the IRS should behave, and that
is certainly not the way our country should behave. Thank you,
Mr. Chairman.
Mr. Crenshaw. Thank you, Mr. Serrano. And we are joined
today by the chairman of the full committee, Mr. Rogers. I
would like to recognize him for any opening statement he might
make.
Mr. Rogers. Thank you, Mr. Chairman, and thank you for
hosting this session. We want to thank Commissioner Werfel for
making your first appearance on the Hill and Mr. George, thank
you for being here again with us.
I want to echo my colleague's deep concern about the
targeting scandal and other inappropriate spending at the IRS.
The IRS has committed grave violations of the public's trust
that should give all Americans cause for deep concern.
Today we are discussing at least a threefold misuse of
public funds. It is our duty as appropriators to get to the
bottom of any misuse of Federal dollars, particularly as this
Subcommittee drafts the bill that will fund the IRS for the
next fiscal year.
The alleged targeting of conservative organizations
applying for tax exempt status is a shameful violation of the
intent of the Constitution. I am deeply offended, as I am sure
all Americans are, at the notion that a Federal agency can
somehow pass judgment on an entire group of people simply based
on their political affiliation. This activity is even more
egregious because the agency, the IRS, has such power to ruin
the lives of every American. We will not tolerate another
political enemy's list. We have been there before.
Having an enemy's list harkens back to a dark page in our
past, and the arrogance of power that we have seen from those
involved in this instance is deeply, deeply disconcerting.
Furthermore, I am absolutely appalled at the apparent waste
of taxpayer dollars on frivolous conferences outlined in Mr.
George's forthcoming report. In no way, shape, or form is this
kind of excess ever appropriate. This bureaucratic largesse is
even more unsettling as we face budget shortfalls across the
board in critical areas of government, including our own
national defense. It seems we have a new misstep every day at
the IRS. I am very troubled at what may come to light next, so
we have got to take every step possible to figure out how we
can stop this kind of abuse in its tracks.
And Mr. Commissioner, you are the man. We are in the middle
of some very grim budget times. We simply cannot allow the IRS
or anyone else to waste precious tax dollars on improper, maybe
even illegal, practices that treat Americans unequally for any
reason or on frivolous activities or improper tax refunds, of
which I am told there is some $13 billion.
When we provide you with more than $10 billion annually to
fulfill your duties, we expect you to spend it wisely and
effectively. Commissioner Werfel, I know you have already
publicly stated that these conferences were inappropriate uses
of taxpayer dollars and that you intend to root out any other
inappropriate behavior at the IRS, and I hope that this
committee works with you to review how we can prevent spending
like this from ever happening again.
Mr. Chairman, we may want to consider putting conditions on
your funding that allow us to monitor your agency's compliance
with proper practices. This committee's done that before and we
very well may be in that mode again. My committee already has
and will continue to enact tough measures and oversight at
other agencies as we did with the GSA to root out this kind of
excess and abuse. If it takes legislation to stop these latest
misguided endeavors, so be it, that is what we will do.
This agency, allegedly an independent agency, should
operate in a nonpolitical, fair way to every American. That
rule has been violated. We look forward to your testimony and
your answers, more importantly, to Members' questions to help
this Subcommittee provide the vigorous oversight necessary to
prevent bad actors from running amok.
Thank you, Mr. Chairman.
Mr. Crenshaw. Thank you. I would now like to recognize Mrs.
Lowey, who is the ranking member of the full committee for any
remarks she might like to make.
Mrs. Lowey. Thank you, Mr. Chairman, and I want to join you
in welcoming Acting Commissioner Werfel and J. Russell George
here today. We thank you and we look forward to your testimony,
and I would like to thank, again, Chairman Crenshaw and Ranking
Member Serrano for holding this very important hearing.
We know that the IRS is the first line of defense in
ensuring that hard earned tax dollars of American citizens are
appropriately handled, and as my colleagues have said, I join
them in such shock that news that millions of dollars were
unnecessarily spent on conferences, videos, senseless
purchases, such as baseball tickets, presidential suites, along
with allegations that the IRS targeted ideological groups for
increased scrutiny raised serious questions regarding whether
the IRS is properly working for the people.
I, like so many citizens, am quite simply wondering, what
was the IRS thinking? What on earth were they thinking? It is
truly amazing to me, and I am furious that the IRS engaged in
ideological scrutiny which is absolutely unacceptable. We have
a responsibility to the American people to make sure this is
rectified and does not happen again. Our Nation was founded on
the principles of freedom of speech and expression. No position
or party has a monopoly in our public debate or government. The
IRS should never be used for any activities that come close to
partisan or political action, period.
The IRS' responsibility to evaluate applications for tax
exempt status, frankly, has been lost in this debate. A
dramatic increase in the number of 501(c)(4) organizations will
lead to more reviews, but those reviews should never target one
part of the ideological spectrum of others, and in this
hearing, I know we all want to hear what went wrong, what steps
are being taken to prevent similar practices in the future. And
again, I would like to thank Acting Commissioner Werfel and
Inspector General George for being here today.
Commissioner Werfel, I know you have been in this position
for a matter of weeks, did not manage the IRS or the division
in question during the time of these improper activities, so I
appreciate your assistance and hope that this hearing helps to
get to the bottom of this issue. And I thank you, Mr. Chairman.
Mr. Crenshaw. Thank you. I would like now to recognize Mr.
Werfel. If you could limit your statement to 5 minutes or less,
it will give us more time for questions, and we will be happy
to submit your written statement for the record.
Mr. Werfel. Thank you, Chairman Crenshaw, Ranking Member
Serrano, Chairman Rogers, Ranking Member Lowey, and members of
the Subcommittee. Thank you for the opportunity to appear
before you today to discuss the work we are doing to chart a
path forward for the IRS. This is obviously a difficult time
for the Agency, and the public is rightly concerned and upset,
as am I, about the inappropriate and unacceptable actions
highlighted in the recent Inspector General's report regarding
the 501(c)(4) application process. Working together, though, I
am confident that we can address the problems that exist and
move forward with a better and more effective IRS.
With that in mind, in my first few days, I have initiated a
comprehensive review of the Agency and have taken immediate
actions to begin to address significant and alarming problems
identified in the report. In taking these steps, I am guided by
several principles.
First, we will ensure that we operate with the utmost
fairness and impartiality in administering and enforcing the
Nation's tax laws. Second, we will be open and transparent with
the American people. And third, we will operate in close
consultation and cooperation with the Inspector General and
Congress. Adhering to these principles will ensure that we
always act with the best interest of the taxpayers in mind.
Although additional investigations are underway that will
shed further light on what happened with the 501(c)(4)
application process, I have reached an inescapable conclusion
about the behavior described in the IG's report. The use of
certain political labels to determine how applications would be
handled resulted in applications being inappropriately singled
out for additional scrutiny.
Moreover, there was a fundamental failure by IRS management
to prevent this inconsistent treatment and ensure that it was
halted once management became aware. These failures have
undermined the public's trust in the IRS' ability to administer
the tax laws in a fair and impartial manner, and they must be
corrected. The Agency stands ready to confront the problems
that occurred, hold accountable those who acted
inappropriately, be open about what happened, and permanently
fix these problems so that such missteps do not occur again.
Clearly, ensuring full accountability for the actions taken
and the management failures that allowed them to occur must be
one of our first orders of business. That is why there is new
leadership at several critical levels of the managerial chain
of command. We now have new leadership in the Commissioner's
Office, and we have new leaders carrying out the duties of the
Deputy Commissioner for Services and Enforcement, the
Commissioner of Tax Exempt and Government Entities, and the
Director of Exempt Organizations. While this new leadership is
in place, a critical area where we are turning our attention is
the unacceptably large backlog of applications for 501(c)(4)
status, focusing initially on the ``potential political cases''
referenced in the IG report that are more than 120 days old.
Some of these applications are 400, 500 days old. That is
simply unacceptable.
I have directed my team to submit a plan to me by the end
of this week that contains specific milestones for
expeditiously resolving this group of cases. I have also made
clear that these applications must be examined in a manner
consistent with the IG recommendations so that the reviews,
while thorough, are also fair and impartial.
I further instructed my team to work swiftly to ensure that
all nine of the recommendations in the IG report are fully
implemented. I asked to receive, at a minimum, weekly updates
on their progress, and I intend to regularly update the public,
both on this effort and the progress being made to eliminate
the backlog of applications.
I am also reviewing the broad spectrum 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 within the IRS. For example, in line
with the IG report to be published this week on conference
expenditures, we must ensure that we continue to have the right
controls and oversight in place to prevent wasteful or
inappropriate spending in this and other areas.
Wherever we find management failures or breakdowns in
internal controls, we will move to correct these problems
quickly and in a robust manner. We will report to the
President, the Treasury Secretary, and the public by the end of
the month about our progress on all of these efforts.
We have a great deal of work ahead of us to review and
correct the serious problems that have occurred at the IRS, and
continue the important work of the Agency on behalf of
taxpayers. In the few days that I have been at the IRS, it has
already become clear to me that this Agency is populated by
thousands of dedicated public servants who are strongly
committed to carrying out the Agency's mission. It is an honor
for me to serve alongside them, and I am confident that
together, with Congress and other external stakeholders, we
will address the current challenges and move forward with the
indispensable work of this agency.
Mr. Chairman, Ranking Member Serrano, this concludes my
testimony. I would be happy to answer your questions.
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Mr. Crenshaw. And now we will turn to J. Russell George,
Inspector General, for any openings remarks he would like to
make.
Mr. George. Thank you, sir. Chairman Crenshaw, Ranking
Member Serrano, Chairman Rogers, Ranking Member Lowey, members
of the Subcommittee, thank you for the opportunity to discuss
our audit recommendations concerning the Internal Revenue
Service's treatment of groups that apply for tax exempt status.
As you know, our audit was initiated based on concerns
expressed regarding taxpayer allegations that they were
subjected to unfair treatment by the IRS. Our review confirmed
that the IRS targeted specific groups applying for tax exempt
status, it delayed the processing of these groups'
applications, and it also requested unnecessary information
from these groups. To its credit, during our audit, the IRS
took some actions to address these problem areas.
The IRS corrected the inappropriate criteria for selecting
applications for additional scrutiny as potential political
cases in May 2012. The revised criteria focused on indicators
of significant political campaign intervention, not on names or
policy positions. These revisions were still in place in
December 2012 at the end of our audit field work.
The IRS also put two new controls in place by having Exempt
Organizations headquarters in Washington, D.C. involved in
reviewing all criteria included on the ``Be On the Look Out''
listing and in reviewing all letters requesting additional
information for potential political cases.
However, we identified other areas needing improvement. We
reviewed two statistical samples of the Internal Revenue Code
section 501(c)(4) applications and estimate that the
determinations unit specialist did not identify more than 175
applications with indications of significant campaign
intervention that should have been referred to the team of
specialists for review.
Furthermore, of the 296 potential political cases we
reviewed, almost one-third, 91 cases, did not contain
indications of significant campaign intervention in the case
file.
As noted, we made nine recommendations in our report. The
IRS should formalize its new requirement for an Exempt
Organization's executive to approve all criteria on the ``Be On
The Look Out'' listing. The IRS plans to incorporate this
requirement in its manual by September 30th of this year. The
IRS should require that specialists document the specific
reasons why applications are chosen for review for potential
political cases. The IRS informed us that it would review its
screening procedures and determine what documentation can be
implemented by September 30th of this year.
The IRS should develop a process for formally requesting
assistance from the Exempt Organization's Technical Unit to
ensure that requests are responded to timely. The IRS indicated
that it would develop a formal process by June 30th of this
year. The IRS should provide oversight to ensure open cases are
approved or denied expeditiously. The IRS agreed to closely
oversee the remaining open cases as of April 30th of this year;
however, it did not provide a date for completing the cases.
The IRS should recommend to the Department of the Treasury
the guidance on how to measure the ``primary activity'' of
social welfare organizations be considered. The IRS agreed to
share this recommendation with the its Chief Counsel and the
Treasury's Office of Tax Policy by May 3rd of this year.
The IRS should provide training and guidance in four areas.
First, properly identifying applications requiring additional
review of campaign intervention activities; second, processing
applications for tax exempt status involving potential campaign
intervention; third, understanding what constitutes campaign
intervention; and fourth, requesting additional information and
how to word the questions. The IRS plans to develop a schedule
by January 31st, 2014, to provide the staff the recommended
training.
In closing, the IRS still has work to do to resolve these
troubling allegations and to ensure that they do not happen
again. We plan to conduct additional audits to assess the IRS'
progress in addressing our recommendations. We also plan to
review how the IRS monitors social welfare, agricultural,
labor, and business league organizations to ensure that
political campaign intervention does not constitute their
primary activity.
TIGTA is also continuing to look into whether any
violations of the Internal Revenue Service Restructuring and
Reform Act of 1998 have occurred and if any inappropriate
influence caused the change in criteria and the unnecessary
questions posed to applicants.
Chairman Crenshaw, Ranking Member Serrano, Chairman Rogers,
Ranking Member Lowey, thank you for the invitation to provide
my perspective on this issue.
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Mr. Crenshaw. Well, thank you very much. I thank both of
you all for your testimony. We are going to turn to questions
from the members of the Subcommittee, and I am going to
recognize the members in order of seniority who were here when
the hearing started, and then I will recognize those in order
which they arrived, and we will go from side to side.
TRUSTWORTHINESS
So, let me start out and let me ask you, Mr. Werfel. It is
good to hear your perspective, because you are the new guy. I
think, if you add them up, you have been here 12 days, that
probably counting weekends, and you have probably been working
on the weekends, and in another 18 days, you are expected to
give a kind of a first look at a 30-day review of what has gone
on here. I think we have all looked at the facts and we
recognize that what has happened here has really shaken the
trust of the American people in the IRS and in its ability to
be fair and impartial. As I said earlier, I think you have to
have a fair and impartial agency that is going to collect taxes
when you base the collections on volunteerism. People
voluntarily pay their taxes, but they need to be able to trust
the agency that is collecting those taxes.
One of the problems I have found is that this went on for
some time and yet no one spoke up. Now, there is some question,
is this some rogue agents in Cincinnati? It is hard to believe
that somebody just stood up one day and said, hey, here is a
way that we can really embarrass people of a particular
political philosophy. But we are trying to figure out what
happened, and I know you want to figure out what happened, and
you are going to conduct a top-to-bottom review of that. But
one of the problems we have had is that we never get straight
answers. The story seems to change from time to time. The facts
seem to change from time to time, and I think that is why we
all want to work with you to find out what happened.
Most importantly, we want to make sure it doesn't happen
again. We want to help you help us all figure out some way that
we can restore the trust of the American people in the IRS,
because as you know, and most people are just now realizing,
the IRS is going to be the face of this new Affordable Care
Act, the so-called ObamaCare. It is the IRS that is going to be
charged with making sure that people not only to have
insurance, but the right type of insurance. And when they don't
have the right type of insurance, the IRS is going to be the
agency to say we are going to collect a penalty.
It seems to me that more important than ever before, we are
in a critical time, we got to do everything we can do to make
sure that we let people know that you can trust the IRS, that
they are going to be fair and impartial, and that is what you
want to do.
So, let me start by just asking you, do you feel like the
IRS has betrayed the trust of the American people?
Mr. Werfel. I do, Mr. Chairman. I think that is why, in
thinking about this in terms of my primary mission, it is to
restore that trust. I am hopeful that by the end of this
hearing today, for the various questions that you ask, that I
can lay out our approach, but I think it has to start with a
recognition that the trust has been violated and it has to
start with the recognition that we have to get all the facts
out. And part of this process of restoring the trust, which is
a multi-step process, is to start with making sure that you are
getting those facts out, that you are understanding who needs
to be held accountable for the breakdowns that occurred, or the
missteps that occurred, that led to that violation of trust. We
have to fix the problem.
Part of the fact-finding is not only to get to the
accountability element, it is to understand the root of what
caused this breakdown to occur, because that is going to help
us fix it, in putting the right controls and processes in place
to make sure it never happens again.
And then I don't think it is smart to stop there. I think
that this type of problem, and when you look at the conference
report that just came out, it shows that there are other issues
throughout the IRS, other control issues, managerial oversight
issues that we need to thoroughly look at and start bringing
into the public light. I am planning to work very closely with
the Inspector General on this to make sure that we have an
understanding across the entire agency where the weaknesses are
and how do we fix them. And it is really not just me and the
Inspector General. It is a partnership with Congress----
COOPERATION
Mr. Crenshaw. I am glad to hear you say that because I do
think that bad news doesn't get better when time goes by, and I
think you are committed, we are committed to trying to find out
what went on and let those facts lead us where they lead us.
But let me ask you one more question, and I am glad to hear you
say that you do believe that the trust of the American people
been betrayed because it seems fairly obvious, but I want to
ask you if you are willing to cooperate fully with these
congressional investigations that are going on so that we can
find out what went on, and again, restore the trust the
American people need to have.
Mr. Werfel. Absolutely. You have my commitment for full
cooperation.
Mr. Crenshaw. Well, thank you very much. Now I will turn to
Mr. Serrano.
PREVENTING INAPPROPRIATE ACTIVITY
Mr. Serrano. Thank you, Mr. Chairman.
I am going to ask you a question that may sound easy, but
if analyzed, I think it is a more tougher question than it
would sound. I can assure you that there are many members of
Congress who would like to map out the future of the IRS. You
are not one of the most popular agencies now. You never were,
but you are certainly not one of the more popular ones now.
And so, rather than doing that, we on this committee are
charged with a special responsibility. We have to allocate
dollars and then we also have to make sure that those dollars
are spent properly. Others may just comment on how those
dollars are spent, but we have to come up with those dollars
and then oversee those dollars in many ways.
So my questions to you is, what concrete steps that we on
this committee, Appropriations Committee, can take to prevent
this sort of inappropriate activity from happening again? I am
giving you an opportunity, both of you, to tell this committee
what can be done by us to make sure this doesn't happen again.
Mr. Werfel. Well, I will start. I think first, holding
hearings like this, asking us the right questions to make sure
that there is transparency, from both the Inspector General and
the IRS in terms of the facts and circumstances that were in
existence when this happened, helping us evaluate what the
right fixes are. I mean, I have only been here for a few days,
and when I start to dig into this issue around how do you
appropriately set up a (c)(4) review process, there aren't a
lot of easy answers in terms of making sure it is set up right.
That doesn't mean we are not going to find those answers,
we will, but it strikes me that trying to find those answers
just within the IRS, in an insular way, is definitely not the
right answer. We have to surface these issues. There are
experts sitting across from me right now in terms of the IRS
and how it operates. There are experts in the Inspector
General's office. There are external experts that have been
looking at and evaluating the IRS for years. We need to bring
these people together and sort through what the issues are.
FUNDING
And since we are sitting here in front of Appropriators, I
think it makes sense to talk about funding, and one of the
important points I want to make is that the solution here is,
in my opinion, not more money. The solution here in this
situation is to understand what controls need to be put in
place, what oversight, getting the right leadership in place,
the right processes in a collective way, and then determining
what the resource footprint is that is needed to sustain those
in an effective way.
If you start with more money, it is the wrong starting
point. The right starting point has to be what is the optimal
footprint or framework for doing this right. Then we sit down
and we figure out what the resource allocation is, and that is
why what I offer to you is, I think, the right way to analyze
the situation, and I am very open and eager to work with you on
that.
Mr. Serrano. Thank you.
OVERSIGHT
Mr. George. Mr. Serrano, as our audit concluded, what
happened in this instance was a result of gross mismanagement
of a key program, a key function of the Internal Revenue
Service. That said, I associate myself with the comments that
the Commissioner indicated. I would add to that, something that
Chairman Rogers indicated, conditions on funding, regular
reports to the committees of jurisdiction, in this instance,
the House Appropriations Committee, for the IRS to regularly
report how they expended their funds, and of course, the
oversight responsibilities that the Inspector General's office
has in addition to that type of activity.
Mr. Serrano. So, you both would welcome or not oppose a
deeper oversight role by the Appropriations Committee in this
particular case?
Mr. George. I think it is very important that that occur,
sir.
MISMANAGEMENT
Mr. Serrano. And when you say ``gross mismanagement,'' and
I close with this, Mr. Chairman, was that mismanagement as
reported in the press, or as some have said, one that targeted
groups based on what those groups believed in, or do you
believe that it was so mismanaged that it didn't care who it
held up or who it asked silly questions of?
Mr. George. Sir, for me, I could not give you a definitive
answer at this time because there is an ongoing review of this
matter by my organization and others, obviously, on this, but
there is no question that there is a little of both in this
matter.
Mr. Serrano. All right. Thank you, Mr. Chairman.
Mr. Crenshaw. Thank you. Mr. Rogers.
Mr. Rogers. Mr. Werfel, I am beginning to like you when you
say you don't want more money. That is music to my ears, and I
am sure the chairman feels the same.
BONUSES
Now, in addition to the $50 million for conferences over
the last 3 years, the press is reporting that the IRS paid out
more than $92 million in bonuses during that 3-year period, and
within that sum, key figures in the current scandal got
bonuses. Sara Hall Ingram, the former Commissioner of the Tax
Exempt and Government Division that was responsible for
overseeing the 501(c)(4) applications, received bonuses of
$103,000 plus, which increased during the period of the
increased scrutiny of these conservative groups. In addition to
that, she was promoted now to head up the IRS involvement with
ObamaCare. Joseph Grant, former Deputy Commissioner of Tax
Exempt, 3 bonuses, 83-, almost $84,000, over the same period of
time. Lois Lerner, Director of the Exempt Organizations
Division, given $42,000 in bonuses during that period, and all
of these had to be approved by the President; isn't that right?
Mr. Werfel. My understanding is there is a small subclass
of bonuses called Presidential Rank Awards that are approved by
the President, but they are relatively a small number. There is
maybe a couple hundred throughout the entire government. The
net--the larger amount of bonuses in terms of quantity--are
typically approved by the Agency head.
[The information follows:]
All but one of the awards to the individuals you name were SES
performance awards. SES performance awards can exceed $25,000 without
Presidential approval. Sarah Hall Ingram received a Meritorious
Presidential Rank Award (PRA), for which she was nominated by the
agency head, recommended by the Director of OPM and selected by the
President. A PRA is not a performance award; it is an award recognizing
sustained accomplishments over at least a 3-year period as an SES. Ms.
Ingram's award was 20 percent of her annual basic pay, as set forth in
statute (Title 5 United States Code Sec. 4507).
I should also clarify that the amounts received by each individual
you mention are not single awards, but instead are aggregate amounts
received over multiple years.
All SES performance bonuses were not less than 5 percent and no
more than 20 percent of the basic rate of pay of each SES awardee, as
set forth in statute (Title 5 United States Code Sec. 5384(a)-(b)(2)).
Performance awards granted to SES employees under this statutory
authority can exceed $25,000 without Presidential approval; therefore,
the OPM guidelines were not violated.
Mr. Rogers. Well, OPM's guidelines say that bonuses over
$25,000 have to be approved by the President, so did the
President approve these bonuses of these very critical people
in this scandal that we are investigating?
Mr. Werfel. I am not sure of the answer to that question. I
am also not sure, from the way you phrased the question, if the
bonus totals that you articulated were individual bonuses that
added up to those numbers, or if there was an individual bonus
that exceeded $25,000, but that is something we can certainly
look into and get back to you.
Mr. Rogers. Would you let me know?
Mr. Werfel. Yes.
[The information follows:]
Sarah Hall Ingram received a meritorious Presidential Rank
Award (PRA), for which she was nominated by the agency head,
recommended by the Director if OPM and approved by the
President. A PRA is not a performance award; it is an award
recognizing sustained accomplishments over at least a 3-year
period as an SES (5 CFR 451.301(b)(3)). The other individuals
whom you named were granted SES performance awards under the
authority of Title 5 United States Code Sec. 5384, which do not
require Presidential approval.
Mr. Rogers. Now, looking forward, how do we--how do we set
up criteria for the awarding of promotions and bonuses to
employees at a time when every other Federal employees' pay is
frozen?
Mr. Werfel. This is a very important question, and as I
look at this situation, and we see the type of gross
mismanagement that the Inspector General spoke about, and then
you layer on top of that the existence of bonuses in this area,
it speaks to a larger issue that we have within the IRS to
improve our overall management oversight. That includes not
just making sure that we understand where the weaknesses are,
but making sure that our people are adequately trained. It
relates to compensation and fairness as well, and this has to
be part of the review.
Mr. Rogers. If these people received these bonuses, and by
OPM's guidelines, were required to be approved by the
President, and he did not approve them, should they not pay
those bonuses back?
Mr. Werfel. That is a--again, that is a question that I
have to go back and talk to HR experts and others about, but
certainly we can get an answer.
Mr. Rogers. Will you get back to me on that?
Mr. Werfel. I will.
[The information follows:]
SES Performance Awards, which were granted to the named
individuals, can exceed $25,000 without Presidential approval;
therefore the OPM guidelines were not violated.
Mr. Rogers. Mr. George.
Mr. George. Mr. Chairman I would just note that my
organization is conducting an ongoing audit on the issue of
bonuses paid at the Internal Revenue Service that is due some
time this fall, and we will certainly share those results with
this Committee and with you.
IMPROPER PAYMENTS
Mr. Rogers. Now, switching gears briefly, one scandal to
another. Mr. George, it was your report that the IRS had
overpaid low income tax credits by up to $13.6 billion in one
year, 2012. When Secretary Lew was before this Subcommittee in
late April, I made clear to him in no uncertain terms that this
was unacceptable. That sum is more than the entire budget of
the IRS. What steps are being taken, Mr. George, to tackle that
problem?
Mr. George. Sir, this is one of the most intractable
problems confronting the Internal Revenue Service. Refundable
tax credits, which again are credits that can be paid to people
who do not have tax obligations, once the money is out the
door, it is extremely difficult for the Internal Revenue
Service to collect it. And then I will defer to the
Commissioner to define their procedures and the policies, but
they conduct a cost benefit analysis, and in many instances, it
is more expensive for them to go after those who have gamed the
system or cheated the system than to, in effect, write it off.
And we are just talking one instance in terms of the earned
income tax credit, the additional child tax credit, the child
tax credit, among many other credits. This is a very, very
difficult issue for the IRS to confront, and it is a
longstanding one, sir. This is something that Congress has been
looking at for decades.
Mr. Rogers. Well, this is not a small problem. This is a
huge amount of money. It is more than the budget of the entire
agency, as I said. Has anyone been fired over this?
Mr. George. Not to my knowledge.
Mr. Rogers. Mr. Werfel?
Mr. Werfel. Not to my knowledge.
Mr. Rogers. Will there be?
Mr. Werfel. Again, on this particular question of improper
refund payment, let me, if you could indulge me, I think one of
the causes of these improper payments orients around the
complexity of the Code and the complexity of the eligibility
criteria.
If you look at, for example, the Earned Income Tax Credit,
one of the things that we look at in terms of determining
eligibility is whether the individual has lived with their
dependent child for more than 6 months or not. That is one of
the criteria. That is extremely difficult to validate. We don't
have a global childhood residency database. It is very
difficult to validate. When we go in and we check on things, we
find mistakes. I think, to answer your question, in terms of
whether anyone should be fired, it really goes to the question
of whether any of those payments were paid out advertently in
error, versus inadvertently in error. If there is some
underlying malfeasance associated with these improper payments,
then certainly. But in most cases, and this is an area that I
just coincidentally happen to have some expertise on from
earlier parts of my career in the Federal Government, in most
cases, the errors that are made are not due to malfeasance of
the underlying employee. It is due to complexity in the program
and complexity in identifying the right eligibility criteria. I
am not making excuses for it. I am just suggesting that there
are other fixes other than employee dismissal.
Mr. Rogers. Well, fix it, because $1 of every $5 of Earned
Income Tax Credit issue, 1 out of every 5 was improper. That is
not a very good record.
Thank you, Mr. Chairman.
Mr. Crenshaw. Thank you. Mrs. Lowey.
Mrs. Lowey. Thank you, Mr. Chairman.
POLITICAL APPOINTEES
Commissioner Werfel and Inspector General George, I would
like to get a few facts on the record. Is there any evidence,
to date, that political appointees at the IRS, directed,
requested, recommended, or in any way supported a review of
501(c)(4) applications based on a particular ideology?
Mr. George. The answer to your question directly is no from
our audit, but Mrs. Lowey, that was not the focus of our audit.
So as----
Mrs. Lowey. To date, it is no.
Mr. George. It is no.
Mrs. Lowey. Is that correct?
Mr. George. That is correct.
Mr. Werfel. That is my understanding, as well, of Mr.
George's audit, and the underlying support of that audit is
that there is no evidence of that at this time.
Mrs. Lowey. Now, is there any evidence that the White House
directed, requested, recommended, or in any way supported such
a review?
Mr. George. No.
Mr. Werfel. I am not aware of any evidence of that.
Mrs. Lowey. So, to be clear, as of this date, there is no
factual evidence that this was a politically motivated review
from senior officials at the IRS at the White House; is that
correct?
Mr. George. I can definitively say within the White House,
no, as of today. I cannot say that as of the IRS as a result of
the fact that we did not look at that aspect of it.
Mr. Werfel. And I am going to have to rely on Mr. George. I
am, for the most part, relying on his audit finding and his
audit work to help draw conclusions.
Mrs. Lowey. So, if that is the case, it seems to me that
the sorting and reviewing of these 501(c)(4) applications was
done by career IRS employees who made a series of incredibly,
incredibly bad decisions which reflect poorly on management who
should have known that these activities were taking place and
put an end to it immediately; is that correct?
Mr. George. As of the end of our audit field work and the
instant audit, that is correct. But again, Congresswoman, this
is an ongoing matter and we do not know. We are going to go to
wherever the facts lead us, ma'am.
PREVENTING INAPPROPRIATE ACTIVITY
Mrs. Lowey. So as of today, can you tell us why they didn't
realize there was a problem with their methodology, and correct
it? Is there no routine mechanism in place to prevent
discriminatory or ideological practices?
Mr. George. Well, keep in mind, once again, when this first
occurred, and when it eventually was brought to the attention
of senior officials in Washington, corrective action was
ordered, but subsequent to that the people in the
Determinations Unit reverted back to this very inappropriate
type of activity. So there was a breakdown, again, in
management here going back to the concept of gross
mismanagement, and it is something that they ultimately, as of
again at the end of our audit field work, seemed to have
addressed, but subsequent review will be necessary to confirm
that.
Mrs. Lowey. Now, since the Citizens United decision, which
I strongly oppose, removed limits on independent political
donations by corporations and other groups in Federal
elections, scores of new political organizations were created
and a record amount of money has flowed in in support of these
political activities. This is one of the primary reasons, in my
judgment, the number of organizations applying for 501(c)(4)
status more than doubled from 2010 to 2012 alone, an increase
of 226 percent. Meanwhile, the IRS budget has shrunk. Two
hundred twenty-six percent increase. The IRS has a
responsibility of making sure that those groups who applied for
501(c)(4) status are not primarily engaged in political
advocacy. Clearly, the reviews used were the wrong way to go
about this. Could you share with us, as you are reviewing the
process, what should be the process to review 501(c)(4)
organizations?
Mr. George. That is one of the recommendations that we have
issued in this report that the IRS seek further clarity both
from the Office of Tax Policy, and on its own, as to how to
undergo, undertake that type of evaluation. But it is important
to note, again, though, Congresswoman, that not all
organizations who operate like these are required to seek
501(c)(4) designation. They do so in the event that the IRS
later looks at their activities to determine whether or not
there is the tax liability matter. But they can still operate
the way they would like to without coming to the IRS for their
stamp of approval.
Mrs. Lowey. I see the red light is on. Thank you, Mr.
Chairman. We will continue this discussion.
Mr. Crenshaw. Thank you, Ms. Lowey.
Mr. Graves.
WHITE HOUSE EXPECTATIONS
Mr. Graves. Last week we were in our districts and I have
to tell you, my constituents are furious. They are angry about
what has occurred at the IRS. As I come into this meeting
today, there is a lot that is on my mind and their minds, but
the first thing I want to know, did you meet with anyone from
the White House to prepare for this meeting?
Mr. Werfel. I did not.
Mr. Graves. Were you briefed on this?
Mr. Werfel. I was not.
Mr. Graves. Have you spoken to the President on this
matter?
Mr. Werfel. I spoke to the President on May 16th or 17th,
around the day I was appointed. We had, about, a 20-minute
conversation, where he articulated his expectations for my
mission at the IRS.
Mr. Graves. Did he order you to clean house, to terminate
anyone, to hold anyone accountable?
Mr. Werfel. He ordered me to do an accountability review.
His primary order to me was to restore the trust. He offered
several guiding principles to me, such as operate in good
faith.
Mr. Graves. But he did not order you to terminate, clean
house, or hold anyone accountable, just to restore the trust?
Mr. Werfel. Essentially, he and Secretary Lew gave me a
first assignment. They asked for a plan, again, which I am
prepared to provide by the end of this month. And in that plan
there were three aspects. And that first aspect was get to the
bottom of this and hold the appropriate people accountable. So
that is the way the instruction was framed.
ACCOUNTABILITY
Mr. Graves. Regardless of whether the President asked you
to or not, do you plan on clearing house, terminating anyone,
or holding anyone accountable?
Mr. Werfel. I certainly plan on holding people accountable.
I don't know that----
Mr. Graves. What is your definition of accountable?
Mr. Werfel. That is a good question. Here is where we are
right now in the process. We have an audit report that the
Inspector General provided. And that audit report has
conclusions about mismanagement. And so the first part of the
review is to figure out whether any of that mismanagement would
lead one to the conclusion that that individual can no longer
hold a position of public trust in the IRS. And that is my
first order of business.
Mr. Graves. You have already stated publicly that the
public trust has been lost. You stated that in the beginning of
this meeting.
Mr. Werfel. Right.
Mr. Graves. You also stated that to the chairman's question
if somebody has done something wrong, would you terminate them?
And it was in accordance to the refundable tax credits. And you
said, advertently, if somebody knowingly, advertently, and
intentionally does that yes, you would fire them. So we know
that something has occurred here and yet we hear there is this
long review process and yet no one has been held accountable.
So for the committee, has anyone to date been held accountable?
Mr. Werfel. Well, let me answer you question this way. If
you look at the IRS organization----
Mr. Graves. That is a yes or no. Has anyone been held
accountable.
Mr. Werfel. I would say yes, and then I would like to
expand on that. If you look at the IRS organization today
versus the day the IG report was issued, we have new leadership
in the Commissioner's Office, Deputy Commissioner for Services
and Enforcement office, the Commissioner for Tax Exempt and
Government Entities, and in the Exempt Organizations office.
Mr. Graves. That is new leadership, but who has been held
accountable?
Mr. Werfel. Well, I think the leaders that were replaced,
certainly. I think the fact that they are no longer holding
positions of public trust, that is part of the accountability.
The critical point here----
Mr. Graves. Were they terminated?
Mr. Werfel. In most cases, they resigned.
Mr. Graves. Voluntarily or were they asked to resign?
Mr. Werfel. It is a combination, but for example, Steve
Miller was asked to resign.
Mr. Graves. So resignation is accountability? Is that what
you are telling the American people?
Mr. Werfel. Well, here is what I am saying.
Mr. Graves. Lois Lerner being on administrative leave is
accountability? Is Lois Lerner still being paid today?
Mr. Werfel. She is.
Mr. Graves. Is that your definition of accountability?
Mr. Werfel. Well, if you would let me, if you would indulge
me just to answer the question.
Mr. Graves. That is easy. Yes or no.
Mr. Werfel. There are two stages to accountability here.
The first stage is based on the facts we have now to determine
who can no longer hold a position of trust within the IRS, and
the second stage, which I know is where you are going, is to
determine whether there was any underlying malfeasance or
issues that would warrant dismissal. We are going to follow the
facts where they take us. We just do not yet have that
completed review. Inspector General----
Mr. Graves. If you don't know that there is underlying
malfeasance then why was somebody asked to resign?
Mr. Werfel. Because the decision was made that that person
could no longer hold a position of public trust because of the
failures of management oversight. Whether those failures were
motivated by something----
Mr. Graves. So they were asked to resign just to restore
public trust, for public perception purposes, or maybe
political purposes?
Mr. Werfel. No, I wouldn't say that. I would say that when
there is a breakdown in management, when there is gross
mismanagement, you have to make tough decisions about whether
that person can continue to hold their position of trust.
Mr. Graves. One last question, Mr. Chairman, I know my time
is expiring. Have either of you asked the individuals in
Cincinnati who ordered this? Who ordered them to use this extra
scrutiny to punish, or penalize, or postpone or deny? Has that
question been asked of any employee?
Mr. George. Yes, during our audit, Congressman, we did pose
that question, and no one would acknowledge who, if anyone,
provided that direction.
Mr. Graves. So no one would acknowledge who gave the
directive to do this?
Mr. George. That is correct.
Mr. Graves. That question was asked?
Mr. George. Questioned during the audit phase of this.
Mr. Graves. Mr. Werfel, are you satisfied with that
response from the individuals in Cincinnati?
Mr. Werfel. No, no.
Mr. Graves. Will you get to that bottom of that?
Mr. Werfel. We have to get to the bottom of that. I
completely agree.
Mr. Graves. No matter how high it goes up the chain, you
will find out who made this order?
Mr. Werfel. We will uncover every fact.
Mr. Graves. Thank you.
Mr. Crenshaw. Thank you.
Mr. Quigley.
ACCOUNTABILITY
Mr. Quigley. Thank you, Mr. Chairman. Acting Commissioner,
let me ask the same line of questioning in a different way. In
a sense what you are suggesting is that accountability is going
to happen, but there is a process to it that requires some time
and investigation.
Mr. Werfel. That is exactly right. We have to do this
fairly and thoroughly. But I, like everyone else, I am
frustrated too. I want these facts to emerge quickly.
Mr. Quigley. It is a complicated process and a complicated,
byzantine process that took place to get us here, correct?
Mr. Werfel. It is a complicated process, yes.
Mr. Quigley. And inasmuch as the anger exists and the anger
is justified, without knowing exactly what took place, it is
hard to find people accountable in the correct way. If you
don't know exactly what happened and who ordered what and who
did what, it is hard to immediately find people accountable.
And if the word ``fire'' and so forth, and ``prosecute'', and
``investigate'' is there, it is just going to take a little bit
of time, correct?
Mr. Werfel. That is exactly right. We have to get the facts
in a fair and thorough way.
Mr. Quigley. Listen, the Chairman began this hearing
talking about scandals and people being embarrassed and how far
this is. You know, it is hard to shock and awe someone who is
from Chicago, Illinois about scandals. My last two previous
governors either went to jail or are in jail; two of my last
four predecessors sitting in my seat are in jail or went to
jail. So I get it. But this is getting there, and clearly, this
makes--I am often asked what the real cost of corruption is.
Clearly, there is a loss of trust here. That loss of trust is
probably the greatest thing, because it makes it very difficult
to lead when you don't have the public's trust. So gentlemen,
that is your task.
PREVENTING INAPPROPRIATE ACTIVITY
Mr. George, let me just, and ours to follow-up. Let me just
ask you this, and I know your agency is the one that brought
out this stuff about collected and wasted, is there some sense
that it took too long to get this out, and to catch the other
scandal that is involved here? Since if we didn't catch it
before, how do we know we can prevent it again in the future?
Mr. George. That is a very good question, sir. We are the
ones who have to respond to allegations. You can only be so
proactive, especially in the context of the Tax Code that the
law will allow. And unless someone brings to your attention an
instance of malfeasance, or what have you, there is very little
that you can do, again, proactively to address it.
So for example, in this instance, Members of Congress as
well as media reports brought to our attention allegations that
certain groups were being targeted by the IRS. In the instance
of the report that we will be releasing tomorrow on
conferences, it was a whistleblower within the Internal Revenue
Service who brought that matter to our attention. So you can
only do so much in this type of circumstance, sir.
Mr. Quigley. Any comment, Mr. Werfel?
Mr. Werfel. You know, I think that it is incumbent upon
organizations, in particular public-sector organizations, to
ensure that they have the right controls, management,
leadership, processes----
Mr. Quigley. You agree, it shouldn't take a whistleblower,
right?
Mr. Werfel. It should not. It should not.
Mr. Quigley. Someone should be reviewing these conferences
on an ongoing basis to see if they are really appropriate.
Mr. Werfel. Yes, I think one of the lessons learned that is
going to emerge out of this process is we need a much more
sophisticated risk management and control structure within the
IRS. That is clear based on what happened here, and, obviously,
some of the emerging issues coming out of Mr. George's office.
Mr. Quigley. Thank you. Thank you, Mr. Chairman, I yield
back.
Mr. Crenshaw. Mr. Yoder.
Mr. Yoder. Thank you, Mr. Chairman. Mr. Werfel,
congratulations on your new position. Certainly, we have our
work cut out for us here.
Mr. Werfel. Yes.
Mr. Yoder. I wanted to start with some questions related to
the tense we are using in terms of past tense or current
regarding the targeting of specific political groups.
Mr. Werfel. Yes.
DELAYED 501(C)(4) APPLICATIONS
Mr. Yoder. Most of this hearing has been about the actions
that have occurred, the audits that were put in place, the
delays, the obstruction that was put in place for groups of
Americans that essentially wanted to exercise their First
Amendment rights.
How many Americans, how many groups of Americans continue
to have their applications delayed? How many groups continue to
be held under unjust, unconstitutional scrutiny by the IRS as
of today?
Mr. Werfel. That is a question that I want the answer to as
well. And what we are doing is initiating, as quickly and as
efficiently as possible, a review of the IRS across the entire
Agency, to see if there are any common elements of impartiality
in other parts that occurred in this particular area.
Mr. Yoder. But not just in other parts. How many groups
have applied for 501(c)(4) status, some of which in the
Inspector General's report have been over 2 years, now over 3
years had applied that are still at the IRS today waiting to
have their applications approved, or denied, or at least some
answer?
Now, I know you have been on there 12 days, but over the
past weeks as this has come about and become acknowledged, and
frankly, since IRS officials were alerted to this over a year
ago, many of these groups continue to have their applications
denied. And so we talk about this today in this hearing here in
Washington, D.C., as if this is something that has occurred and
we are going to investigate and we will hold those who did this
accountable. But sir, your agency, the IRS, continues today to
deny and block the Constitutional rights of Americans as we sit
here this very moment. How many Americans are having their
Constitutional rights blocked as of this afternoon?
Mr. Werfel. I don't know that a conclusion has been reached
on Constitutional rights. I think there is a legal review being
undertaken by the Justice Department, but to give you an answer
to your question, there are 132 cases that are in this grouping
of potential political advocacy that are referenced in the IG
report. 132 cases in that grouping that have not been acted
upon in over 120 days, which by IRS definition, is overdue. And
as I said earlier, I have directed new leadership, new
leadership that is heading Exempt Organizations, TEGE, and our
new Chief Risk Officer, David Fisher from GAO, to submit to me
by the end of this week--and I will share that with you--a plan
with specific milestones for how we are going to knock out that
backlog quickly and effectively.
[The information follows:]
My report ``Charting a Path Forward at the IRS: Initial Assessment
and Plan of Action,'' detailed our approach for eliminating the backlog
of 132 cases that TIGTA called ``potential political cases.'' That
approach includes two paths: first, adding resources and process
reforms to the ``traditional'' determinations process, and second,
adding a new, streamlined approval process allowing applicants to self-
certify their level of political campaign intervention. Both processes
are underway. As of August 8, 53 of the 132 cases were closed,
including 17 organizations that took advantage of the self-
certification process.
Mr. Yoder. You mentioned 120 groups. How many of these
groups have been in application process for more than 2 years?
Mr. Werfel. It is a number I don't have at my fingertips,
but there are groups and it is unacceptable.
Mr. Yoder. It seems like if there are 132 it would be
something that we could simply identify. Is that something you
can provide for the Committee today?
Mr. Werfel. Absolutely.
Mr. Yoder. Okay, you can do that by close of business
today, to inform us how many groups are waiting over 2 years to
have their applications approved.
Mr. Werfel. Yes, I think we have that data and we can
provide it to you.
[The information follows:]
As of May 28, 2013, there were a total of 136 501(c)(4) cases
segregated by the Exempt Organizations unit as requiring evaluation for
possible political campaign intervention activities. At that time, 132
had been open for 120 days or more, and 4 cases had been open less than
120 days. Of the 132 cases, 120 cases had been open more than 200 days.
The 120 cases included 28 cases open more than 200 days but less than 1
year, 73 cases open more than 1 year but less than 2 years, and 19
cases open more than 2 years. As of July 3rd, there have been 35
closures, which represents 27% of the inventory that has been open for
120 days or more (the 132 cases). These closures include 18 cases
approved, 4 taxpayer withdrawals, and 13 cases closed for ``failure to
establish'' (i.e., failure to provide necessary information). There
have been no denials as of July 3, 2013.
Mr. Yoder. Mr. Inspector, do you have any information
relevant to this?
Mr. George. I do, sir, but it is somewhat dated because it
is as of the end of our audit. And so as of December 17th of
last year, of the 296 cases that we identified in that
political category, 160, which is roughly 54 percent, were open
from 206 to 1,138 calendar days, and then 129 of the 160 open
cases have been open for more than 1 year as of December of
2012.
Mr. Yoder. Mr. Werfel, one of the reasons this is such an
important topic to this committee in particular, is because
these questions were asked of then Commissioner Shulman in
March of 2012 and he assured the committee at that time that
there were built-in safeguards; there was a culture and tone at
the top, and people knew it would not be tolerated. Today we
are having the opportunity to go through this same experience,
but going forward, we want to know that the positions you take
today, that the statements we make are accurate, and they are
based upon fact. Clearly, Mr. Shulman did not know, either
misled the committee, or knew it and didn't tell the committee
the truth, but either way, the facts were not presented to the
committee that day.
AUDIT SELECTION
We have heard there have been at least comments made that
the Audit Division could potentially be engaging in similar
practices. Do you have any awareness or any reason to believe
and can you investigate whether the Audit Division has targeted
individuals, specifically, for audits based upon donations, or
engagement in conservative political activities, or any
political activities?
Mr. Werfel. Let me answer that directly. I am not aware of
any such behavior. I have initiated a review to answer that
very question. And if I find anything that is similar in scope
to what is in this Inspector General report, I will make you
aware.
Mr. Yoder. Inspector, did you find anything related to this
in your review?
Mr. George. We have not conducted a review in this area,
Congressman.
Mr. Yoder. Thank you. Thank you, Mr. Chairman.
Mr. Crenshaw. Thank you.
Ms. Kaptur.
REVIEWING TAX EXEMPT APPLICATIONS
Ms. Kaptur. Thank you, Mr. Chairman. Thank you gentleman
for your testimony. Let me begin with this, Inspector General.
Some media outlets have been reporting that the IRS was
targeting conservative groups for political purposes. Your
report contradicts that claim. Could you please comment on if
you found any political motivation in reviewing tax-exempt
applications?
Mr. George. Congresswoman, let me respond to your question
in the following way: When we looked at the 298, well, there
were 298 cases that were put into a category for political
activities. We were able to look at 296 of them because 2
didn't contain enough information for us to base a review on,
we were able to identify 96 cases that were definitely put to
the side because they had Tea Party, 9/12, and Patriot in the
name of the group. The vast majority of the other
organizations, their names were so innocuous that we did not
deem it possible to determine whether or not they were
conservative groups, or whether or not they were groups that
might be on the other side of the political spectrum. And so
this is something that we are continuing to look at, but in the
instance of the political activity matter, we did not uncover
instances of groups that could readily be identified as being
liberal, for lack of a better term, that were treated in the
manner that these Tea Party cases were.
Ms. Kaptur. In your report, there is quite a pie chart that
shows that the vast majority of groups that were investigated
did not fall into so-called conservative category. Am I reading
the chart correctly?
Mr. George. You are, because they were not by the title of
the organization readily identifiable, Congresswoman.
527 ORGANIZATIONS
Ms. Kaptur. All right. Now, let me say this: In 2010 there
was a Supreme Court ruling, Citizens United, that allowed
unlimited amounts of money, as you well know, to be assembled
for political campaigns, many times by secret donors that don't
have to disclose under Section 501(c)(4). And I am wondering,
an organization that incorporates has many options if they want
to engage in civic life, and then if they move into donations
to campaigns, they could have incorporated as a 527. We have
had many groups that do that. But you were looking at
501(c)(4)s, am I correct? This is the--the Cincinnati office,
apparently, was looking at--why might an organization choose to
incorporate under 501(c)(4) rather than 527 if they are
political, if their intent is political?
Mr. George. I have no idea.
TAX EXEMPT APPLICATIONS
Ms. Kaptur. Well, you know it is interesting, because they
don't have to disclose donors, and so it is very interesting to
me that if one looks, and I am going to ask you for the record,
of the organizations that you were looking at there, after the
Citizens United ruling how much did your applications increase
in the 501(c)(4) category, did you say? I think Congresswoman
Lowey, or Ranking Member Lowey.
Mr. George. I would have to----
Mr. Werfel. I have that information. In 2010, the number of
(c)(4) applications was 1,735. In 2012, it was 3,357.
Ms. Kaptur. Yes. It is very interesting trends here, and
there isn't a person up here that doesn't understand what is
going on politically in this country and the hidden nature of
what is affecting campaigns today that is very unlike what many
of us faced when we first were engaged in political life. Yes,
sir.
Mr. George. Congresswoman, I just want to elaborate. Of the
groups, the 298 that were put into that political category that
were singled out for specialized treatment, not all were
501(c)(4)s. Some were 501(c)(3)s also. So they were singled out
for treatment, which may or may not have been justified if
handled properly.
Ms. Kaptur. What percentage would you guess were 501(c)(4),
78?
Mr. George. Well, 89 of 298 were 501(c)(3)s.
Ms. Kaptur. So the majority were 501(c)(4)s?
Mr. George. Yes.
Ms. Kaptur. Were there any 527s?
Mr. George. Not to my knowledge.
Ms. Kaptur. Very interesting. How many--well, of that group
that you specifically investigated, what number, approximately,
fell into the Tea Party, 9/11--however that is described, that
so-called super conservative group?
Mr. George. Yes, one moment, please. There were 72 Tea
Party groups; there were 13 groups that were identified under
the Patriot category; and there were 11 that were identified
under the 9/12 category.
CINCINNATI
Ms. Kaptur. Thank you for providing that to the record. Why
the Cincinnati office? That happens to be in my home state. I
mean, was this a specific assignment of that office?
Mr. Werfel. The Cincinnati office is where the
Determinations Unit is housed, and they have the responsibility
to do the 501(c) review process for incoming applications.
Ms. Kaptur. For the whole country?
Mr. Werfel. Yes.
Ms. Kaptur. All right.
Mr. George. Although in this instance there were a few IRS
employees located outside of Cincinnati who also were engaged.
Mr. Werfel. That is right. As a general matter, most of the
work happens in Cincinnati in this unit.
Ms. Kaptur. All right, I am going to ask Mr. Chairman, as
these gentlemen provide information for the record, I am very
interested in knowing if the definition of political in
501(c)(3), (c)(4), or 527 is inadequate, and if there is some
rubber language in there that allowed for perhaps some
miscalculation. I don't know, but I am looking at the changes
in the law, and what has happened to us as a country, and the
fact that you have had so many more applications in that
category at a time when our economy is not doing that well. So
I am interested in which of those groups that are applying
would have a political nature of that, you said 3,357, the
additional ones.
Mr. Crenshaw. They will get you that information.
Ms. Kaptur. Thank you very much, Mr. Chairman.
[The information follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Crenshaw. Mr. Diaz-Balart.
Mr. Diaz-Balart. Thank you very much, Mr. Chairman. First,
Mr. Werfel, I must tell you that I am grateful for your
willingness to do this. Because I guess some people would say
the smart thing to do would be just to run away. And so,
seriously, exceedingly grateful for your willingness to now
jump in under very difficult circumstances.
Mr. Werfel. Thank you.
INAPPROPRIATE ACTIVITY
Mr. Diaz-Balart. Mr. Quigley mentioned, you know, that he
is not usually in shock and awe of corruption, I believe is
what he said, and that this one may do that. You know,
mismanagement, or incompetence, or missteps or corruption are
frankly always destructive, you know, and unacceptable. I will
tell you, and maybe this is just because I represent a
constituency, a very diverse constituency that come from
countries where the government targets people for their
beliefs. I think this is worse. As dangerous, as unacceptable
as those that I just mentioned are, and they are, when
government targets individuals for their beliefs, this is now
an affront on democracy, on our freedoms. And I just wanted to
see if you thought that I was exaggerating in my understanding
of how just how dangerous, how unacceptable this issue can be.
Mr. Werfel. I agree with you. It is completely inexcusable,
and it is inherently damaging. In particular, now that I have
been at the IRS for a few days, I have recognized that this
important Agency is founded on a principle of operating
impartially, and we failed in that most basic core principle
here. And it is devastating to us as an Agency, and to the
people in that Agency. They are very, very upset, and appalled
by this as well. I mean, a story I don't think has been told,
is that the people in the IRS, most of whom I would articulate
are hard working, are appalled.
The one point I would raise to you, and this is frustrating
for everyone involved, is that more analysis and investigation
is going to be needed to understand what motivated, if
anything, this behavior. What were the circumstances
surrounding it? And we have to get to the bottom of that, and
then I think we can better understand the problem. But on its
face, I agree, it is completely inexcusable, and it is a
violation of that fundamental tenet of the IRS which people
take so seriously, and it is very upsetting.
Mr. Diaz-Balart. Well, and I would just, you know, not
putting words in your mouth, but I would say not only the IRS,
but frankly, it is the basis of our country that you should not
fear the government because of your beliefs.
Mr. Werfel. I totally agree with you.
Mr. Diaz-Balart. And again, so I thank you for your
willingness to do this. Now, you know, some people are going to
talk about funding, and I think that is a bit of a joke. You
already mentioned that you don't think that more money is now
the way to do it. I think whether it is the, you know, what is
it, 220 conferences for employees between 2010 and 2012, would
state that funding doesn't seem to be a problem, or the bonuses
that the chairman mentioned doesn't seem that funding is an
issue.
TRANSPARENCY
I think people are going to also talk about legislation,
and all sorts of different excuses. Now, you know, you now have
a choice to make. And I am optimistic that you are going to
because you have agreed to take this on, that you are going to
make the right choice. But the choices are very simple. You can
either try to change the story and cover this up, and try to
give it a good spin, or you can make sure that you get to the
bottom of it, that people are held accountable, that proposals
are made to make sure that in the future this is more difficult
to do, and I know that is already starting, and that the
American people have a clear understanding when this is said
and done, as to who did, and ordered what, and for what reason,
and I just wanted to--obviously, I trust that you are going to
do the right thing. But the right thing means absolute
transparency. Would you agree with that?
Mr. Werfel. Yes. I have two reactions, if I could. One is,
as I have gotten to know the IRS and started to learn, I came
in with this notion that we have to be completely open in
everything we do. I quickly got a briefing on Section 6103, and
realized that there are certain parameters. We are getting
these congressional requests in. I want to push information out
as quickly and as expediently as possible to you, so we can get
to the bottom of this. And then I am learning that before we
send that information out, we have to review it from the 6103
standpoint, to protect taxpayer information. So my commitment
on transparency is absolute within the legal abilities I have.
And then, if I could, I need to make a clarification on the
budget. The point that I was making, and we haven't gotten to
that yet, and if we don't get to it that is fine. The
President's budget is out there. I am prepared to defend the
increases that we are asking for because I think they have
important return on investment benefits to the taxpayer.
FUNDING
With respect to this Exempt Organizations Unit, the point I
was making was, it would be a mistake for me to come in and ask
for more money as a solution. The right answer is for us to
figure out what the right processes are, and then figure out
what budget is necessary to sustain that. It could be the same,
it could be less, it could be more, but the Chairman started
this hearing by saying, ``how can we give you another dime?''
And my answer is, let's explore together what is going on in
this process and figure out what the right funding is. But I
can't come in here and say we need more money for that aspect
of IRS operations without working with you on the review. And
that is what I meant.
Mr. Diaz-Balart. My time is up, Mr. Chairman.
Mr. Crenshaw. Thank you very much.
Mr. Womack.
Mr. Womack. I thank the chairman and I thank the gentlemen
for their testimony today. Mr. George, you have been inspecting
the IRS for now the better part of 10 years.
Mr. George. About 8 years, sir.
Mr. Womack. You have been through a lot of inspections.
Mr. George. Yes.
TIGTA RELATIONSHIP WITH IRS
Mr. Womack. Characterize for me and for this panel your
relationship up to this point with the Service you inspect.
Mr. George. It is a symbiotic relationship, sir, in many
respects. While there is no question that we have a unique role
in terms of the IG relationship between an agency in that we
were once part of the IRS until the Restructuring and Reform
Act of 1998, and when that stood us up in our current capacity,
we retained some of the responsibilities and that is to protect
the integrity of the overall system of tax administration, but
it also vested us with the responsibilities of an independent
Inspector General.
Mr. Womack. Has there ever been an occasion when you made a
recommendation back to the hierarchy, not this gentleman, but
his predecessor and others, that have not been acknowledged,
honored, put into effect?
Mr. George. Very few. We take----
Mr. Womack. But it has happened?
Mr. George. It has happened, yes, sir.
Mr. Womack. Anything along this line?
Mr. George. No, sir. No, nothing of this sort.
PUBLIC TRUST
Mr. Womack. Did this particular circumstance surprise you?
Mr. George. Yes, very much so. This is unprecedented,
Congressman. And again, during the Nixon administration, there
were attempts to use the Internal Revenue Service in manners
that might be comparable in terms of misusing it. I am not
saying that what the actions that were taken are comparable,
but I am just saying that the misuse of the--causing a distrust
of the system occurred sometime ago, but this is unprecedented.
Mr. Womack. Thank you. Mr. Werfel, I don't know whether to
admire you or pity you because you have the weight of the
United States Constitution on your shoulders, literally and
figuratively. Because you said in your conversation with the
White House that job one was, I think in your words, restore
the public trust.
Mr. Werfel. Correct.
Mr. Womack. How do you do that?
Mr. Werfel. It is going to be a difficult process, but the
best thing I know how to do right now is articulate a roadmap,
and that roadmap includes several key principles and
ingredients. The principles revolve around openness, fairness,
expediency, cooperation.
Mr. Womack. All of the things that the people of this
country, citizens of the United States have always expected,
not just demanded, but generally an expectation of their
government. Those are the things that you have to restore.
ACCOUNTABILITY
Now, Mr. Graves a few minutes ago asked you about
consequences, about people that were part and parcel to this
whole process, some of whom are still drawing a Federal
paycheck, and I realize there are HR due process, and those
kinds of things. We get all of that. Has there been a
consequence taken off the table for any of the perpetrators of
this--of these processes?
Mr. Werfel. I am not taking any consequences off the table.
Mr. Womack. Has the White House suggested that there are
certain consequences that should be taken off the table for any
individual, or individuals----
Mr. Werfel. I am not aware of any.
Mr. Womack [continuing]. Deemed to be involved?
Mr. Werfel. I am not aware of any such thing.
Mr. Womack. Has the Treasury Department asked you to take
any potential consequences off the table for any of the
perpetrators involved in this process?
Mr. Werfel. No.
Mr. Womack. Now, or known, or to be discovered through the
investigation process.
Mr. Werfel. I think the key is, to do the job to get the
facts, and then figure it out together, collectively. Again, I
want to go back to my earlier point, and it is a point in
response to Congressman Yoder's question, are we going to find
similar problems? Are we going to realize what happened here?
And the answer is, it is a mistake if that process unfolds in
the IRS alone. We have to figure out a mechanism to make sure
that, as we discover issues and concerns within the IRS, it is
not discovered just within IRS. We are doing it collectively.
So I think the question is, and I have asked the Chairman about
this, can I call, to convene meetings, to give periodic updates
about what we are finding, so that we can collectively
determine what the right answer is and analyze these facts.
Because I think, as we get more facts, we are going to figure
out what happened. And it is not going to be an easy analysis,
but it is one I think we can do collectively.
Mr. Womack. Are you prepared for the worst possible
outcomes, that there may be a universe of people, a large
number of IRS employees caught in this, in this process that
have culpability?
Mr. Werfel. I am prepared to follow the facts wherever they
take us. I think it is the only way to restore the trust.
Mr. Womack. I thank the gentlemen. Thank you, Mr. Chairman.
I know my time is expired.
ACCOUNTABILITY
Mr. Crenshaw. Thank you very much, and I think we will have
time for another round of questions. So let me start, Mr.
Werfel, because on one hand, I am encouraged by what you say,
that you want to follow the facts where they lead, and you want
to hold people accountable. Because I think that is what we all
want to know. What happened? But it seems to me that it is not
just mismanagement. You can argue that the $50 million that
somebody spent on conferences, and videos, that is gross
mismanagement. But when an entire office of the IRS somehow
begins to single out conservative groups and bully them, and
harass them, and it occurs to me that commonsense tells you
that just doesn't happen. That is not bad management. That is
somebody gone wrong. And quite frankly, sir, if that office
just got together and somehow people started doing this, and as
I said earlier, and nobody spoke up, I mean, you have got a lot
of people watching this abuse take place, and nobody speaks up
and says this isn't right. And if that is all there is, in
other words, if somebody didn't say, here is a plan, go do
that, and then they just did that, that scares me more than
anything. It is like there is this culture of intimidation,
that people got together and they are just doing that, and
nobody, nobody steps up and says, this is wrong.
Now, that is what I think we all want to figure out. Did
this just happen, or did somewhere along the way, somebody give
some direction? Because I think that is what accountability is,
to find out somebody that is responsible. I don't know if
anybody came up with this plan or not, but it just doesn't seem
reasonable that it just happened that people just said, oh, and
all of a sudden you look back and say for the last 3 years, we
have been picking on people that happen to have a conservative
philosophy.
So I am concerned about when I hear you say, well, we just
want to kind of uncover the mismanagement, whatever. So here is
my question. If you are going to be there 120 days, what do you
want to happen? When you leave 120 days from now, what do you
want to be able to report to us?
Mr. Werfel. Those are all good questions. Let me start with
following the facts because that statement needs to be backed
up by the realities of what is going on. We have the Inspector
General conducting additional investigations, following up the
audit. We have the Justice Department investigating, we have
Congressional overseers investigating, and then there is my
review with my leadership team. So there are four separate
reviews. Critical to that is making sure that we are supporting
one another and reinforcing one another to get this
information.
I am not sure right now. I can't give you an answer in
terms of what the world looks like 120 days from now, what we
have uncovered. I know that we have already started sending
responses and information back to Congressional Committees,
based on questions that we have received. I know that the
Justice Department is actively engaged in the investigation, as
of a few days ago. So the process is unfolding, and it is real.
What is happening to uncover the facts is real. But it is going
to be a process, and as I said before, it is frustrating that
it is going to take time. But that process is underway, and for
all intents and purposes, I anticipate that Mr. George and
everyone else will ensure that that process is robust. I am
certainly going to do my job to make sure. What I want to get
accomplished while I am here, is to initiate this plan, this
roadmap. I want to talk with you and other Committees, and the
American people about what that roadmap needs to look like, or
do we have the key ingredients around accountability, around
fixing the problem, around a broader IRS review. My bottom
line----
ACCOUNTABILITY
Mr. Crenshaw. Let me, I mean, at the end of the day, the
best way to stop this is just to have it stopped. And so I am
asking you, what--who are you going to talk to? What kind of
questions are you going to ask? You got all of these people
down there that were participating in what most people would
say is really an absolute abuse of power, and it is going on,
and nobody, nobody, stood up and said, I don't think this is
right. But somehow, some way, we found out that is what going
on. And so are you going to talk to those folks and say, how
did all of this happen down here? I understand all of these
roadmaps and all these kinds of things, but it seems like it is
pretty simple. I would go ask those people and say look, how
did you all decide to do this? Did somebody stand up on their
desk one day or did somebody send a memo from somewhere? I
mean, it seems like that is, at the end of the day, we want to
find out who is responsible. I know you do, too.
Mr. Werfel. Yes.
Mr. Crenshaw. And I am just wondering how we do that
putting all of these systems in place. It seems like there are
some basic questions. That is why I want to know what you plan
to do, who you are going to talk to, and what kind of questions
are you going to ask.
Mr. Werfel. Let me answer that question, and maybe ask Mr.
George to talk about what he is doing. But the key is that
there is a lot of people asking questions right now, the
Justice Department, Mr. George's team, Members of Congress, you
know, I have to--I am asking questions as well. And----
Mr. Crenshaw. What kind of questions are you asking?
Mr. Werfel. I am asking my leadership team, for example, to
evaluate the management breakdowns that took place. I want to
understand. I am asking them to initiate processes to ensure
that these types of control breakdowns weren't occurring in
other parts of the IRS.
Mr. Crenshaw. Are you asking your management team like why
nobody on the management team watched what was going on and
didn't say is this right or wrong?
Mr. Werfel. It is new leaders that have been put in place,
including a top-ranking official from GAO that I brought over
to help do this. I can walk through with you in great detail
this plan and the roadmap. Part of it involves evaluating the
audit report. A lot of good work has been done by Mr. George,
which reveals certain elements of where the public trust was
violated in terms of gross mismanagement. There are further
questions to be asked, and the challenge that I have, and I
want to talk through that challenge with this Committee and
with others, is that I have to make sure that I am reinforcing
his work, and not stepping on the work of the Inspector
General, the work of the Justice Department, and the
Congressional oversight committees that are doing those
interviews.
Mr. Crenshaw. My time is up. But it either just kind of
happened, or somebody made it happen, and I hope we can figure
that out.
Mr. Serrano.
Mr. Serrano. Thank you, Mr. Chairman, and I say this, Mr.
Chairman, with all due respect, because I am not referring to
you, but I think the gentleman needs to know if he doesn't know
already that some folks in this Congress are not going to be
satisfied until the President gets blamed directly for this
taking place, when in fact both of you have stated that this
was gross mismanagement that created a problem.
Now, there are some people that have written articles in
different places that show different numbers. For instance, I
have some figures that indicate that of the aggrieved, if you
will, or the people that were further scrutinized, 26 were Tea
Party or Patriots, 76 were clearly conservative, 6 could not be
determined, and 48 were nonconservative groups. So let me be
clear that my outrage is about anyone being targeted, if anyone
was targeted, but I suspect that if anyone was targeted, it
might have been right across the border, not necessarily one
group.
Secondly, and most importantly, in answers to Ms. Lowey, or
ranking member, you, Mr. George, made it clear that there is no
direction showing, or any information showing that anyone gave
an order to this. This is why you have called it gross
mismanagement because people can get caught up in thinking they
are doing the right work, and not do the right work at all.
Now, again, for the record, if people were targeted we need
to know that eventually. And we will know that. But I think we
are spending too much time trying to figure out if someone said
do it, rather than why it was done, and who did it. And I think
that that is where we are wasting time; not necessarily today,
but in general in this Congress.
Now, can you repeat for us, again, what you said before? Is
there anything in your audits that indicate that this was
something that was set up at a larger level, with more in mind
than actually what we know happened?
Mr. George. Not in this audit, Congressman. But once again,
we are continuing a review of this matter, and we will go
wherever the facts take us.
FUNDING
Mr. Serrano. Thank you. Now, Mr. Commissioner, you made
some of us on this committee extremely happy, and others just
perplexed, and made our work a little harder. You see, the
easiest thing to tell this committee is, I don't want any more
money. We had an agency that did that before. It is called the
SEC. When I was Chairman they actually came before us and said,
we don't need any more money. Then we found out why they didn't
need any more money because they were not interested in
oversight, and that is part of the reason Wall Street and
everything fell apart. And they kept telling us, we don't want
any more money. And it was, I must tell you, and if you want to
classify me as people are being classified here today, I guess
as a liberal I was saying are you sure you don't want any more
money to go and do the work you are supposed to do? We don't
want any more money. And then later we found out they didn't
want oversight. Now, I am sure that is not what you are saying.
Mr. Werfel. No.
Mr. Serrano. But please understand, that there are
consequences to the fact that we are cutting this budget, your
budget all the time. Your job is not only to find out what went
wrong in this particular issue working jointly with Mr. George,
who by the way, I have to commend you for coming back, and
back, and back every time we invite you. One could say, well,
you have to, but you could be sitting there not smiling at all
ever. And you do it with great grace.
But there are other parts here. For instance, during the
year we will remind you to go find out who the tax cheats are.
During the year, we will go and tell you to find out where
missing dollars are that could come into the Treasury. During
the year we will tell you to make sure that people are not
banking money overseas. All of that costs money. And it has
been proven that for every dollar you get, seven are returned
when there is no mismanagement.
So what I am saying to you is, friendly advice, find
another way of saying that you will get to the bottom of this
without saying don't give me any more money. Because trust me,
there are folks here who don't want to give you more money. In
fact, there are some who would like to cut you to the bare
bones.
Mr. Werfel. I appreciate the question and an opportunity to
reclarify again. My testimony is not that I am not asking for
any money. My testimony is that I am prepared to defend the
President's budget request because I think the increase in
resources that we are requesting are going to have a very
positive impact on the Federal budget in terms of reducing
refund fraud, reducing identity theft, and improving overall
taxpayer service.
What I testified earlier was that, with respect to whether
there is a need for more money in the Determinations Unit
process to solve the (c)(4) issue, before we answer that
question, let's determine what the right approach is for (c)(4)
reviews, and then align our budget to that right process.
Mr. Serrano. Right.
FUNDING
Mr. Werfel. It could be an increase. It could be level or
it could be less. That is all I am suggesting because I wanted
to erase any notion that I think this problem can be fixed just
with more resources.
Mr. Serrano. And in closing, Mr. Chairman, and Mr.
Commissioner, yes, in answer to a question you said that there
is money that goes out that maybe shouldn't be going out to
people who don't deserve it. Those people usually under that
program fall into a category of folks with very few resources.
I am not suggesting at all that if they don't deserve the money
they should be getting it. But I think that we should not go
back to the days when 44 percent of the audits were being
conducted on 17 percent of the people; meaning that 44 percent
of the audits at one time in this committee in your agency were
being conducted on the EITC program, and the billionaires were
not getting audited at all.
So I would hope that as we go out to deal with what is fair
and unjust and what is unfair, we also remember the mission of
the IRS, which is to be fair to all taxpayers and to all
Americans.
Thank you, Mr. Chairman.
Mr. Crenshaw. I thank you for that clarification. I think
most people understand what you are saying and I think you
should be commended. Your first response is not everything gets
solved with more money. And that is all he is trying to say,
and I think you can look at the facts of this whole discussion
about mismanagement. If it started in 2010 when IRS got the
most money they had ever gotten, and they had less work to do,
that doesn't make any sense. Maybe IRS had too much money.
Maybe that is why the mismanagement started.
Mr. Serrano. Mr. Chairman, I appreciate his clarification.
I appreciate your clarification. I just wanted my clarification
to be clear that I have dealt with agencies that didn't want
more money, and that is because they had no interest in
oversight, which created the problems in Wall Street, I
believe.
Mr. Crenshaw. Thank you for your clarification of your
clarification.
Now, I would like to turn to Mr. Rogers.
Mr. Rogers. Well, the question of whether or not you want
or need more money is academic anyway, because we ain't got no
money.
Mr. Serrano. I hate life.
Mr. Rogers. My friend Joe.
CINCINNATI AND WASHINGTON
Whether or not the denial of the applications of
conservative groups was the product of a few rogue employees in
Cincinnati, or whether or not it was directed from on high, is
a matter of great importance. I am sure you appreciate that.
And that is the question that we want to track down. And
Commissioner Werfel, you say you will follow the facts wherever
they go. Well, we want you to push the facts to find out where
the orders came from. Surely, they came from somewhere. I can't
imagine two low-level employees taking on such a hefty
political policy decision on their own. That just doesn't hold
water, it doesn't make sense.
In fact, one of the junior agents told the investigators of
the Oversight Committee of the House that he believes the order
to target Tea Party groups came from the agency's Washington,
D.C. office, and that it was impossible, he said, for the
targeting of Tea Party groups to have originated with a few
rogue agents in the Cincinnati office. He went on to describe
how the agency's Washington office requested the files of
specific Tea Party groups that contained their applications for
tax exemption.
It is widely believed that the D.C. office was closely
involved in the targeting of these groups from the outset.
Intrusive questions and inappropriate requests were made of
these applicants. Some pro-life groups, most notably the
Coalition of Life for Iowa, were reportedly asked by an IRS
agent to pledge not to protest outside of a Planned Parenthood
office in exchange for granting tax exemption.
That is completely unacceptable. Do you agree with that?
Mr. Werfel. Let me start by saying I think your question
concerns a particular taxpayer, and therefore, I am restricted
by 6103 from commenting on that particular case. But yes, as a
broader matter, those types of questions are, from my vantage
point, and I know I am early in the job, inexcusable.
Mr. Rogers. There are numerous reports that we are hearing
now from investigators who have talked to staff that have, I
think, inclusively made the point that these orders came from
on high, from Washington, D.C., from the headquarters office.
Now, what we want to know is, who gave the orders? Where
did this come from? We will not rest, Mr. Werfel, until you,
somebody gets us those answers because that is terribly
important to the United States of America.
FUNDING
Now, on the funding. In the past, when we had an agency
that was not doing something that they were supposed to do,
this committee would put conditions on the financing of that
agency in installments so that your money would not come until
you do what you are supposed to do. That is a straight jacket.
I don't like to do that. But we have done with it the Coast
Guard, and GSA, and others.
And it very well may be that the Subcommittee may recommend
to the full Committee, and we may take it to the floor, the
proposition that your funding will be conditional on your
response to the questions that we are asking you. We will not
rest until this is done, and I don't need to remind you or
anyone else that the power of the purse rests in the Congress,
and we are prepared to use that purse to get to the truth.
Mr. Crenshaw. Thank you.
Ms. Kaptur.
501(C)(4) ORGANIZATIONS
Ms. Kaptur. I have been listening to this testimony today
and thinking a lot about the 501(c)(4) organizations. And I
agree with the members on both sides of the aisle here who
don't want to target any group based on political ideology, or
any kind of ideology. But I will tell you, this 501(c)(4)
category is one that demands serious attention by the IRS. And
I think because of the Supreme Court rulings, and perhaps
because of insufficiencies in the law itself, what is deemed
political and worthy of oversight is not well expressed
perhaps. Perhaps there is a shortcoming in the law.
I would like to place on the record two articles, one from
Forbes Magazine, and one from Mother Jones that relate to one
organization that I would guess is a 501(c)(4), Freedom Works,
in which their top leader resigned last year stating that it
appeared to him that the leaders of the organization were
trying to produce a book entitled Hostile Takeover, which would
jeopardize the organization's (c)(4) status.
Now, obviously, you can't give a lot of information here
today about the hundreds of organizations you have looked at.
But just on the hunch that there might have been some smart
people working in the Cincinnati office who were concerned that
there were a lot of new 501(c)(4) filings in this country, and
that there have been tax cheats in the history of this country,
that maybe somebody over there at IRS was actually doing their
job. And though your testimony can't reflect any of that, I
would like to say that there might be some of those people over
there and that in fact that they were trying to find people who
wanted to be hidden donors and not be on record, then I think
the American people ought to take a second look at this. And
you can't state a lot in your testimony today, but Inspector
General, you listed a couple of things here in your testimony,
inappropriate criteria were developed and stayed in place for a
total of more than 18 months. Of course, you don't say what
those inappropriate criteria were. You talk about substantial
delays in processing. Most Americans got their refund in time
this year despite the almost $1 billion that was taken away
from IRS. I think a lot of people at IRS are working very hard,
and then there were unnecessary information requests. Well, if
you are trying to figure out who secret donors are and if an
organization is really a 501(c)(4) and not overstepping its
boundaries under the spirit of the law, maybe there might be
some delays.
So I am asking myself some questions after listening to
you, and reading your testimony, and finding that I need more
that isn't in there. So let me ask you, of the hundreds of
organizations that you reviewed, will any of those names be
available for the record, or are those hidden to the public?
Mr. George. Title 26, Section 6103 places very severe
limitations on who we can reveal taxpayer information to. It is
limited to the Chairman of the Ways and Means Committee in the
House, the Chairman of the Senate Finance Committee, and the
Chairman of the Joint Tax Committee. They, in turn, can share
that information with various members of their committees. But
they too have restrictions, limitations on who they can share
taxpayer information with. So that is part of the reason why,
Congresswoman, a lot of the names are not provided in our
report.
Ms. Kaptur. I am glad to have that clarification, and I am
glad to know that the Constitution is working a little bit
here.
DELAYED 501(C)(4) APPLICATIONS
Let me ask you, Mr. Inspector General, some media outlets
have been reporting that the IRS targeted only conservative
organizations and your report does not state that the
organizations asked to provide additional information were only
conservative groups. Consequently, is it correct to assume that
organizations other than conservative organizations were
inappropriately asked to provide additional information about
their tax exempt applications and if so, approximately what
percent of the total that were reviewed?
Mr. George. Percent, I will see if one of my colleagues can
provide that information. But once again, Congresswoman, some
of the groups that were identified in the 296 that we were able
to look at who were placed in this category of political
activity, they, part of that group by name, were agnostic. We
couldn't tell one way or the other whether they were
progressive, conservative, what have you. But of that 296 that
we were able to examine who were placed in that category, 72
were identified as Tea Party, 13 were identified as Patriot
groups in their names, and 11 had the 9/12 date/name in their
name.
Ms. Kaptur. So theoretically, some liberal groups could
have been in the majority then, of the groups that were looked
at.
Mr. George. That is correct.
Mr. Crenshaw. Your time is expired. Please let's recognize
Mr. Graves.
Mr. Graves. Thank you. Following up on my last questions.
Mr. Werfel, have you asked any of the employees in Cincinnati
if they were ordered to carry out these targeted probes?
Mr. Werfel. Not at this time. I have not asked those
questions, yet.
COMMISSIONER POSITION
Mr. Graves. Who interviewed you?
Mr. Werfel. Who interviewed me?
Mr. Graves. For this position.
Mr. Werfel. I was first approached and asked about whether
I would be interested in going over and helping the IRS by the
White House Chief of Staff, Denis McDonough. He is the first
person who approached me.
Mr. Graves. Did you ask the White House Chief of Staff who,
in fact, had ordered the special targets here?
Mr. Werfel. I did not. I wanted to make sure that I
understood what the mission was, and what they were asking me
to do.
Mr. Graves. So you were willing to take the post without
knowing where it may go, what it involved, who was responsible
for the scandal? And then you have yet to even go to Cincinnati
and ask those employees who ordered it.
Mr. Werfel. By way of background, I have been a civil
servant in government for 16 years. I have deep respect for the
civil servants across the Federal Government, including those
at the IRS. The IRS is an agency in need right now. I have a
reputation for stepping in and helping solve government
problems. I took the job because I felt like I could be
helpful. That is why I took the job.
CINCINNATI
Mr. Graves. Okay. Well, I think one way to be helpful is to
go to Cincinnati and find out who ordered them to carry out
these targets. And then the earlier question to Mr. George, I
think your response, when I asked that to you, was they did not
respond or you did not get a response; is that correct?
Mr. George. They did, correct. They did not identify anyone
who gave the order.
Mr. Graves. So you can infer, then, that either they took
it upon themselves or they were hiding the identity of somebody
else. Which would you conclude?
Mr. George. Well, at this stage, Congressman, I would say
when we questioned them, it was in the guise of an audit, and
the circumstances, when you are conducting an audit, you are
really looking at, institutional.
Mr. Graves. So this should be Mr. Werfel's first question
then in Cincinnati is who gave you this order then?
Understanding yours was more of an audit; his end is seeking
out who actually made the call.
Mr. George. It could be, but this is an important fact that
I do need to bring up, Congressman. We, working with the
Department of Justice, are looking further into this matter,
and if Mr. Werfel were to exert himself too much into the
process, it might impact our ability and the Justice
Department's ability to continue our review. So, there are
also----
SENATE DEMOCRATS
Mr. Graves. Can I, Mr. George, just change lines here a
second. It has been reported recently that Senate Democrats at
various times over the last 3 years have been asked--had asked
the IRS to intervene or look into tax exempt status of various
groups. The New York Times reported it in March of last year.
It represented Democrats, sent a letter asking the IRS to crack
down on 501(c)(4)s, I guess, to sort of following up on Ms.
Kaptur's concerns there. In the course of your investigation
into the targeting of conservative groups and throughout all
the interviews and all the employees, senior officials, others,
did anyone indicate that they felt pressure from Senate
Democrats?
Mr. George. Nothing in our audit has revealed that type of
information, sir.
Mr. Graves. Have you seen any evidence at all?
Mr. George. I have not.
Mr. Graves. That the IRS reviews tax exempt status groups,
or tax exempt groups requested by the Senate Democrats
coincided in any way with the targeted groups that have been
identified?
Mr. George. In the course of conducting the instant audit,
no.
Mr. Graves. Do you anticipate that you will see?
Mr. George. We will go over wherever the facts take us,
sir.
Mr. Graves. I think truth is very important as we--as we
all sit here today, it is about the truth, and I appreciate
your focus on that as well. Fact-finding is very important, and
so I will just sort of conclude with two final questions, Mr.
Werfel.
POLITICAL OPPONENTS
Do you agree that those that have been targeted are not
political allies of the President?
Mr. Werfel. Let me make sure I answer that question as
directly as I can. I believe that certain applications were
singled out based on inappropriate criteria. Based on the
evidence that the audit provided, those applications were
associated with conservative groups. I think one of the
questions that has been raised, and I don't know the answer
right now----
Mr. Graves. So a 9/12, a Tea Party.
Mr. Werfel. Exactly.
Mr. Graves. A conservative group, is that an ally of the
President or would consider that a political opponent?
Mr. Werfel. I will just offer as a layperson and a citizen,
I would say that those are typically not allies of the
President.
Mr. Graves. So they are political opponents. And would you
agree then that Ms. Lerner, Mr. Shulman, Miller, senior staff
that admitted knowing this information previously are
subordinates of the President?
Mr. Werfel. Yes, they are subordinates of the President.
Mr. Graves. And so, therefore, we can conclude then that
they are either the President or the subordinates of the
President were well aware of or involved in the targeting of
political opponents, basic response?
Mr. Werfel. I don't know that I could jump to that
conclusion. I think there is more analysis and review that
needs to be done. I understand the question and I understand
the need to want to know the answer to that question. We are
asking for indulgence to make sure that we can review the facts
and get the information that you and this Committee needs to
help answer those questions.
Mr. Graves. Thank you, Mr. Chairman.
Mr. Crenshaw. Thank you. Mr. Yoder.
Mr. Yoder. Thank you, Mr. Chairman.
Well, this is quite a mystery. We spent a couple of hours
now. There has been a hearing today, there has been hearings
last week trying to determine how this came about, and I know
there has been some conversation today that it is not
necessarily relevant why these individuals took these actions.
I think it is very, very relevant, and determining the
motivation and determining the rationale is very critical to
preventing this from ever happening again.
EMPLOYEES
And so, as we go through this what seems to be a mystery,
we are left with the understanding that frontline employees,
based upon their own volition, determined that they were going
to scrutinize certain political groups based upon the ideology
of those groups, and so I would ask Mr. George, in your
opinion, who gave the order for the IRS to target conservative
groups?
Mr. George. I do not have an answer to that question yet.
Again, we are engaged in ongoing work and perhaps we will be
able to respond to that question.
Mr. Yoder. In your conversations, in your interviews with
the frontline employees that you have identified, did they
express particular political animus towards conservative groups
or any political groups?
Mr. George. I have not been engaged personally in those
interviews and nothing has been brought to my attention by
those who have that that is the case, sir.
Mr. Yoder. Are you aware that they are overly politically
active or attending rallies or somehow imbedded in the IRS
because they personally, on their own volition, determined that
they wanted to target specific groups?
Mr. George. I have no information on that, sir.
Mr. Yoder. Well, because we are left with the conclusion
that these folks are very politically active, yet people on
Capitol Hill, the administration, they are, wouldn't be
political at all, so somehow career line, frontline employees
are the political scapegoats here, yet the folks in Washington,
D.C., the folks who make policy, the folks who are very attuned
to politics somehow disavow any knowledge or any engagement in
this at all.
Mr. George, have they expressed in any of the interviews
that you are aware of, any awareness of the letters coming from
Capitol Hill or comments made by the President regarding
specific conservative groups?
Mr. George. Beg your indulgence.
That subject did not come up during our conversations thus
far, sir.
Mr. Yoder. In your investigation, in your reviews, did you
determine that the approximately 157 visits by then
Commissioner Shulman to the White House had any impact on this
policy to target conservative groups?
Mr. George. That was not a focus of the audit, sir, and
that did not come to my attention until media or a
congressional hearing at which that fact was revealed.
Mr. Yoder. Has there been any investigation by your office,
sir, as the independent investigator, related to any
conversations that the White House or any upper level officials
in the administration had with IRS officials regarding the
targeting of conservative groups?
Mr. George. Sir, that is a matter that would fall under the
aegis of this additional review that we are doing, so I am not
at liberty to discuss that information at this time, sir.
Mr. Yoder. Well, Mr. Werfel, given your quest for justice
in this matter and your expressed desire to get to the bottom
of this, you know, we certainly look forward to and hope that
your internal investigation will uncover what has occurred here
because it is certainly, I think, tragic and laughable to many
Americans that this would somehow be laid at the feet of some
frontline employees and that there would be no effort to push
them in any way from the political arm of this administration.
SPECIAL PROSECUTOR
Given that your role is going to be internal, given that we
have an investigation by the Inspector General that has not
uncovered many of these conversations, we still don't know who
gave the order, we don't really have any information regarding
this, would you welcome a special prosecutor or independent
counsel to look into these matters?
Mr. Werfel. I think it is a good question. I think right
now, as I mentioned, we have four layers of review ongoing:
Justice and the FBI, the Inspector General, Congressional
oversight committees, and myself and my new leadership team. My
position right now is that is, I believe, currently a
sufficient footprint of oversight and investigation to uncover
the facts.
What I would suggest is we let that process move forward as
expediently and as fairly and as federally as possible, and
revisit the question on a periodic basis of whether that is the
footprint for an investigation is getting the job done.
Mr. Yoder. But would you object to a special prosecutor or
independent counsel being moved forward?
Mr. Werfel. I am not the decision maker on that. Whatever
is decided in terms of necessary investigation footprint, I
will be cooperative and welcome any investigation. But as I
said, right now there are four layers of investigation, and
what I would suggest is let's monitor that. Some of it has just
gotten underway. Let's monitor that and see if we are getting
the progress that this Committee is demanding and then revisit.
Mr. Yoder. And that is fair, Commissioner, and certainly
you are brand new to this position, 12 days in. I will tell you
that for those of us who have been on this committee and been
working on what appear to be a lack of accountability on many
different fronts with this administration, whether it be Fast
and Furious, Benghazi, AP phone records, or now the IRS
situation, I think the idea that we would somehow trust that
the administration can internally investigate these matters and
successfully root out the cause, you are going to have to
understand there is going to be a healthy dose of skepticism
and many of us would like to see an independent investigation
of these beyond the administration, so we will hopefully have
your cooperation on that and we hope to do everything we can to
get your support to get to the bottom of this.
Thank you, Mr. Chairman.
Mr. Crenshaw. Thank you. Mr. Diaz-Balart.
LENGTH OF TAX EXEMPT REVIEWS
Mr. Diaz-Balart. Mr. Chairman, thank you very much. You
know, these (c)(3) and (c)(4) reviews, how long do they
usually--I mean, in a normal process, without this, how long
does that usually take?
Mr. Werfel. It is a good question, and my understanding is
that once it is longer than 120 days, we would characterize it
as longer than what the IRS expects the process to run, but I
don't know the average at my fingertips. We can certainly get
you that information.
Mr. Diaz-Balart. Do you have any idea of what would be like
a quick one, you know, what would be a fast one?
Mr. Werfel. I don't, but I can get you that information.
[The information follows:]
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Mr. Diaz-Balart. Just because I am--Mr. George, in your
report, you talk a lot about, and I understand why, you have
explained it, about this being a--basically a ineffective or
gross mismanagement. Now, if it was consistent, I would
understand that, but if it is targeted, and I think it is
pretty clear that it is targeted, it seems to be a little bit
more than just gross mismanagement. It is targeted
mismanagement, and in some cases, it would seem, that it is
very effective management.
Not a beacon of conservative ideals, The Washington Post
talks about IRS stalled conservative groups but gave speedy
approval to Obama Foundation. That, I believe is, I don't know
if it is (c)(3) or (c)(4), was processed in 1 month and then--
given to them in 1 month, according to this Post article, and
then they were given retroactively as well, which, according to
the Post, is very rare.
So, on one side, it would seem that you have very effective
management, in this case, to the Obama Foundation, while at the
same time you have ineffective management when it goes to, you
know, conservative groups. I don't know if I would--this is
just me personally. I don't know if I would call that
ineffective management. I mean, that seems to be targeted, is
it not?
Mr. George. Well, again, in this instance, the reason we
deem it ineffective management is because when identified by
the manager that there was a problem, she attempted or did
actually effect change, and later, just unbeknownst to her, we
assume, at this stage, people reverted back to the
inappropriate behavior. And then there seems to have been, for
quite awhile, a lack of accountability in terms of going back
to see whether they are doing what we told to them to do. The
answer was ``no'' for quite awhile, and then of course, there
were groups that were targeted in this instance. So, that is
how I come about to use of the term mismanagement.
Mr. Diaz-Balart. And I understand that. You have been very
clear of that. But again, when you have it on the other side,
and you know, this--I don't know how many of these cases there
are, but when the Obama Foundation gets taken care of in 1
month and then retroactively, this seems more than just by
omission. This took somebody to take action to do, and the
pulling out these conservative groups, it took somebody
actually doing it, so it actually was a, you know, an action
that was required, and again, that is why it is so troubling.
But this is another point that I have. The (c)(3) and
(c)(4) reviews, is it fair to say it is a relatively--it is a
pretty standard part of what the IRS does, correct?
Mr. George. That is correct.
AFFORDABLE CARE ACT
Mr. Diaz-Balart. And they do this quite a bit, and you
know, so on some of it is pretty basic, pretty standard. At
best, it is gross mismanagement. At best, it is, you know, and
at worst, it is frankly a lot deeper than that. Could you tell
me how I should feel good about giving the IRS now a totally
new complicated, above and beyond--you know, you are now
dealing with our health care, the ACA, or what is commonly
known as ObamaCare, can you just--how do I tell my
constituents, hey, on something that is pretty basic, look what
is going on, but don't worry about it, because now we are going
to give the IRS that we know we have all these issues, we are
going to give them now, in essence, control of a big part of
our health care, and then we will be able to determine who gets
fined and who doesn't, can you please tell me how I should be
able to feel good about that?
Mr. George. I can say that you can feel good about it in
this way, sir. We at TIGTA have conducted two and its thus far
looking at the steps that the Internal Revenue Service is
taking to prepare for the implementation of the Affordable Care
Act, and thus far, our reviews have been positive that the IRS
is doing what it needs to do in order to gear up for this.
That said, the IRS has to create many, many new computer
programs, and historically, they have had trouble instituting
new computer programs for implementing tax law changes, so that
is a risk. And, in all candor, unless the IRS receives
additional resources in order to implement the ACA, they truly,
it is a zero-sum game. They are going to have to make very
difficult choices in terms of customer service, in terms of
enforcement in order to take on this huge responsibility that
they have been presented with.
Mr. Diaz-Balart. Mr. Chairman, time is up.
Mr. Crenshaw. And one of the things they could do is when
we learn that the money that was wasted on the conferences and
the videos came from the unused portions that was appropriated
for enforcement while the enforcement division was demanding
more money, that tells us that IRS, just like every other
agency, can be more efficient and more effective, but you all
have been very generous with your time. Mr. Werfel, Mr. George,
thank you for being here today. You have got a tough job. We
want to work with you to make this thing work right, and I
thank the members and thank you for the time.
Mr. George. Thank you, Mr. Chairman.
Mr. Crenshaw. This meeting is adjourned.
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W I T N E S S E S
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Page
George, J. R.....................................................1, 219
Kelley, C. M..................................................... 322
Lew, Hon. Jacob.................................................. 131
Miller, Steven................................................... 81
Werfel, Danny.................................................... 219