[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR 2015
_______________________________________________________________________
HEARINGS
BEFORE A
SUBCOMMITTEE OF THE
COMMITTEE ON APPROPRIATIONS
HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRTEENTH CONGRESS
SECOND SESSION
________
SUBCOMMITTEE ON FINANCIAL SERVICES AND GENERAL GOVERNMENT
APPROPRIATIONS
ANDER CRENSHAW, Florida, Chairman
MARIO DIAZ-BALART, Florida JOSE E. SERRANO, New York
TOM GRAVES, Georgia MIKE QUIGLEY, Illinois
KEVIN YODER, Kansas MARCY KAPTUR, Ohio
STEVE WOMACK, Arkansas ED PASTOR, Arizona
JAIME HERRERA BEUTLER, Washington
MARK E. AMODEI, Nevada
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
________
PART 7
Page
Oversight Hearing: Internal Revenue Service...................... 1
Internal Revenue Service, FY 2015 Budget Request................. 199
Department of the Treasury....................................... 279
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
________
U.S. GOVERNMENT PRINTING OFFICE
88-602 WASHINGTON : 2014
COMMITTEE ON APPROPRIATIONS
HAROLD ROGERS, Kentucky, Chairman
FRANK R. WOLF, Virginia NITA M. LOWEY, New York
JACK KINGSTON, Georgia MARCY KAPTUR, Ohio
RODNEY P. FRELINGHUYSEN, New Jersey PETER J. VISCLOSKY, Indiana
TOM LATHAM, Iowa JOSE E. SERRANO, New York
ROBERT B. ADERHOLT, Alabama ROSA L. DeLAURO, Connecticut
KAY GRANGER, Texas JAMES P. MORAN, Virginia
MICHAEL K. SIMPSON, Idaho ED PASTOR, Arizona
JOHN ABNEY CULBERSON, Texas DAVID E. PRICE, North Carolina
ANDER CRENSHAW, Florida LUCILLE ROYBAL-ALLARD, California
JOHN R. CARTER, Texas SAM FARR, California
KEN CALVERT, California CHAKA FATTAH, Pennsylvania
TOM COLE, Oklahoma SANFORD D. BISHOP, Jr., Georgia
MARIO DIAZ-BALART, Florida BARBARA LEE, California
CHARLES W. DENT, Pennsylvania ADAM B. SCHIFF, California
TOM GRAVES, Georgia MICHAEL M. HONDA, California
KEVIN YODER, Kansas BETTY McCOLLUM, Minnesota
STEVE WOMACK, Arkansas TIM RYAN, Ohio
ALAN NUNNELEE, Mississippi DEBBIE WASSERMAN SCHULTZ, Florida
JEFF FORTENBERRY, Nebraska HENRY CUELLAR, Texas
THOMAS J. ROONEY, Florida CHELLIE PINGREE, Maine
CHARLES J. FLEISCHMANN, Tennessee MIKE QUIGLEY, Illinois
JAIME HERRERA BEUTLER, Washington WILLIAM L. OWENS, New York
DAVID P. JOYCE, Ohio
DAVID G. VALADAO, California
ANDY HARRIS, Maryland
MARTHA ROBY, Alabama
MARK E. AMODEI, Nevada
CHRIS STEWART, Utah
William E. Smith, Clerk and Staff Director
(ii)
FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR 2015
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Wednesday, February 26, 2014.
OVERSIGHT HEARING: INTERNAL REVENUE SERVICE
WITNESSES
HON. JOHN KOSKINEN, COMMISSIONER
HON. J. RUSSELL GEORGE, TREASURY INSPECTOR GENERAL FOR TAX
ADMINISTRATION
NINA E. OLSON, NATIONAL TAXPAYER ADVOCATE
Mr. Crenshaw. The hearing will come to order.
This is the first hearing of the year for our subcommittee.
Welcome to all our returning subcommittee members. Glad to have
you back. A warm welcome to our subcommittee's newest member,
Mr. Amodei, who is not here yet. He is down at the end. But we
look forward to having him work with us.
Today, the subcommittee is going to hear from two panels.
We are going to hear about the activities and the operations of
the Internal Revenue Service. Our witness for the first panel
is IRS Commissioner John Koskinen.
Welcome to you, sir. We appreciate your return to Federal
service, and we thank you for taking on this responsibility,
which I think we would all agree is a difficult time.
Our second panel of witnesses are Treasury Inspector
General for Tax Administration Russell George and National
Taxpayer Advocate Nina Olson. Mr. George is a regular witness
for the subcommittee, and we appreciate his careful and
constant oversight of the IRS. We have not heard in some time
from Ms. Olson, so we are especially eager to hear from her.
Now, as a matter of housekeeping, I am going to be
following the 5-minute rule for the Members. I don't plan on
cutting anybody off in the middle of their sentence, but if
everybody could keep their questions and comments when we get
to that part of the hearing to 5 minutes, that will give us a
chance to hear from everybody and have maybe more than one
round of questions.
I am going to recognize the Members in order of seniority
for those that were here when the gavel went down. For the
latecomers, we will recognize them based on their arrival. And
we will go back and forth between the parties.
Now, I think most of you know that the 2014 appropriations
cycle tested our endurance. It was only after the fiscal year
had started and after we had a government shutdown that the
Budget Committees came to an agreement on the discretionary
spending. And once we had that agreement enacted, we rolled up
our sleeves, we went to work very quickly, and got a bipartisan
omnibus appropriations bill enacted, thanks in no small part to
our distinguished Chairman, Mr. Rogers, who is here with us
today.
So we hope that this year it is going to go a little more
smoothly because we already have an agreement on the total
discretionary spending that is in place, and so we can have
regular order. And by that, I mean the way we are supposed to
work and that we will mark up our bills, we will subject them
to amendments at the full committee and on the House floor, and
then we will conference them with the Senate.
Now, the Administration hasn't submitted their budget for
2015 yet, but we will have that soon. We have invited the
Commissioner to come back probably in April to talk about how
much money, his wants and his needs. Today, this is an
oversight hearing. And that really gets into how do you spend
the money that you have been appropriated? The ``how much''
will come a little bit later. But I would suggest that the two
are very interrelated because how you spend the money that you
have impacts how much money you will receive in the future.
I think that we all know that you have come to the IRS in
what would be described as a difficult time. Some would say you
have inherited a pretty big mess. We have had a situation, I
would say it is one of the dark periods in the IRS history. You
had at a time when the IRS was awash with money, their
horseplay harassment started, lavish conferences were held,
millions of dollars were wasted, silly videos were made, and
that was not good for anybody. At the same time, we found out
the IRS was singling out individuals, groups of individuals,
subjecting them to harassment, to intimidation, bullying, if
you will, in an effort, it seemed, to shut down their
involvement in politics. And that is what you inherited, and
also probably inherited an agency that wasn't doing a very good
job of dealing with the customer, the folks that call the IRS
and have questions.
And so, when your predecessor was sitting in the chair you
are sitting in, I asked him at a hearing like this, do you
think the IRS has betrayed the trust of the American people?
And he said, yes. He said, but I want to try to help rebuild
that trust. And I am sure that one of your goals as the new
guy, as the new Commissioner, is to rebuild the trust that has
been lost with not only in some part with this committee, but
also the American people. And that is what you are about.
And I must tell you that some of the decisions that you
have made early on are of some concern to me as you try to
rebuild that trust--for instance, $63 million of bonuses that
were paid. Reversing a decision that your predecessor made to
not pay those bonuses is troublesome.
I know that you didn't begin this 501(c)(4) rulemaking
process. There is a rule that has been proposed that some would
say puts in rule form what the problem was with the IRS
harassing people and trying to cut off their political
involvement. And the same people that were using the Tax Code
to try to quiet people's political involvement are now
proposing a rule that some would argue does the same thing and
infringes upon their First Amendment right. And you didn't
start the process, but you are continuing the process.
One of the things that I have read from time to time--I
know you were in my community; you were kind of on a whirlwind
tour to talk to all the different IRS offices. One of your
constant messages seems to be that we don't have enough money
to do the things that we need to do. And one of the things that
I read about from time to time is the fact that you can't
answer all the phone calls, that I think it is 61 percent of
the phone calls are probably going to be answered. I have heard
you say, if we had more money, we could hire more people, we
could answer more phone calls. And I know in Jacksonville, my
hometown, when you were there, there was an article in the
paper that said that you had said we don't have enough money to
answer more than 61 percent of the calls and you found that, I
think, unacceptable or intolerable or outrageous or something.
But I must tell you that what I find unacceptable is that
in this $11.3 billion appropriation that the IRS received this
year that you can't find the money to answer more than half the
phone calls and yet you can find the money to pay $63 million
in bonuses. And it seems to me that that might be a slap in the
face to the taxpayers, because their customer services, as they
try to find answers from the IRS, they are going to find that
that is going down, and yet the salary and bonuses of the
employees are going up. And I would think that is hard to
tolerate as a taxpayer or as an individual saying, I would like
better customer services.
It bothers me to see that you don't have enough money to
answer those phone calls but you have the money and the time
and the energy to pursue this rule. I read today, I think there
are nearly 100,000 comments on this rule. And the XL pipeline,
which is pretty controversial, there may be 7,000 comments. So
here is a rule that is wildly controversial and has to be
taking some time and energy and money, but you continue to
pursue that, or whoever started it continues to pursue it, and
yet there is not enough money to answer the phone.
And then I know that we hear from time to time the
argument, well, if you just give the IRS more money, then they
will collect more revenue. In fact, the argument is that if you
give the IRS $1, then you will get back $4 or $5----
Mr. Serrano. Six.
Mr. Crenshaw [continuing]. Maybe $6, in revenue, and if
you don't give the IRS money, then the revenues will go down
and the deficit will go up.
Well, it makes intuitive sense to say, if you give the IRS
more money, they can collect more revenue. It sounds like it
makes sense. But there is no empirical evidence that that is
true. In fact, at times, just the opposite is true. In 2001-
2009, the appropriations was increased for the IRS and the
revenue collections went down.
So, obviously, there are other factors than just how much
money the IRS got. You have to look at inflation, you have to
look at population, you have to look at tax policy, you have to
look at a lot of different factors. In fact, last year, 2013,
that is the best year ever. We collected $2.8 trillion, the
most money the United States of America has ever collected, and
that is at a time when the sequester was going on and so there
was less money for the IRS to have.
So all of that is to say, I don't necessarily believe that
a higher level of spending equals a higher level of service.
And that is why I think we are holding an oversight hearing to
see how are you spending the money. Because it is not just how
much you have, but how you spend it.
I think how you spend it can actually improve even if you
don't have as much as you might like to have. Because everybody
knows the government needs money to provide services, right?
But everybody also knows that these are difficult times in our
country. We have $17 trillion in debt. We have an annual
deficit. This year it is going to be less than a trillion
dollars, and we are all excited about that. It is the first
time in 5 years it has been less than $1 trillion, but it is
still probably the fourth- or fifth-largest deficit we have
ever had on an annual basis.
So, yes, the government needs money, but I would say today
government needs something more than that. It needs discipline
to rein in spending. It needs courage to make tough decisions.
It needs the commitment to make sure that we do everything more
efficiently and more effectively than we have done it before.
And we want to work with you to help you do that, to help
you set the right priorities, to help you spend the money that
we appropriate to you. And so we thank you for being here
today. We will have questions, I know.
And before we do that, I want to turn to my friend, the
Ranking Member, Mr. Serrano. And first let me say to him,
because it has been a whirlwind time when we finished the
omnibus bill, but he has been a great partner. We don't always
agree on everything, but as we went through the final
negotiations with our Senate counterparts to come to this
conclusion, it was a team effort. And I want to thank him for
that and ask him for any comments he might have.
Mr. Serrano. Thank you, Mr. Chairman. And I want to thank
you for your willingness to work with us, and especially your
staff and our staff. They did a great job under a lot of
pressure.
And let's hope that the last omnibus puts us back on the
road to regular order, something that Chairman Rogers and I
love and you love, something that some of the younger, newer
Members on the Committee and Congress may not have ever
witnessed--you know, the days when we could pass a bill with
400 votes and actually predict what the final count would be,
350 or 400. Those days are long gone, but they may come back
based on what we saw.
I would also like to welcome the new Internal Revenue
Service Commissioner, John Koskinen, for his first hearing
before the Subcommittee. I thank you for your service to our
Nation and for undertaking this endeavor at a very challenging
time for the IRS.
By now, most Americans know that last year it was reported
that the IRS had used inappropriate criteria to decide what
501(c)(4) entities should be subject to greater scrutiny. As I
said at the time, all Members of Congress were appalled by
these actions, which affected liberal and conservative groups
alike. We all believe that the IRS must enforce our tax laws in
a fair, evenhanded manner, and that did not occur here.
At a hearing soon after the controversy came to light, the
question I asked was, where do we go from here? What must be
done to prevent something like this from happening again?
I think that the IRS has made a good start at answering
those questions. The IRS has implemented all of the
recommendations suggested by the Treasury Inspector General for
Tax Administration in this area. The IRS has also implemented
numerous internal reforms that have brought more accountability
and oversight to the review decisions that are being made. And
perhaps most importantly, the IRS is making an effort to
further clarify for 501(c)(4) organizations what is and what is
not political activity.
There is no doubt that in recent years a number of groups
have abused their claims to 501(c)(4) tax-exempt status by
primarily engaging in political activities. This tax-advantaged
status is not a right but, rather, a responsibility, and too
many organizations have been claiming it as a way to avoid
transparency and taxes.
Last year, I suggested that the IRS needed to revisit these
rules to provide greater clarity to organizations and to their
own auditors as to what is considered a political activity for
purposes of making a 501(c)(4) designation. The rules proposed
late last year by the IRS have attempted to do just that, in my
opinion. I cannot say whether the IRS has struck the exact
balance necessary in these proposed rules, but I do know that
they will take any and all concerns seriously before finalizing
them.
However, this Committee cannot help the IRS in these
reforms if we do not adequately fund the Agency. The fiscal
year 2014 appropriations act gave the IRS $92 million more than
the sequester level, but the IRS is still being funded at its
lowest level since fiscal year 2008.
If we care about the fair implementation of our tax laws,
then this is simply unacceptable. We all know that at this
level of funding every additional dollar given to the IRS
allows them to bring in at least $6 from tax cheats. We cannot
keep asking more and more of the IRS while providing them with
less and less. That is not a good recipe for tax compliance or
for this Nation.
I hope this hearing will be of use to members of this
Subcommittee as we discuss funding levels for the IRS in the
fiscal year 2015 appropriations process, but I am concerned
that we might be here to just engage in election-year politics.
So let me simply state the facts that are on the record
already, and these are facts that have already been proven
after significant congressional investigation.
Yes, the inappropriate targeting affected both liberal and
conservative groups alike, not just one side. No, this
targeting was not orchestrated by any political appointee or by
any individual outside the IRS. And, yes, the IRS has been
forthcoming in helping numerous investigations by using more
than 150 employees to engage in 70,000 hours of work to provide
the various investigations with more than 500,000 pages of
documents.
These are issues that simply do not need to be rehashed at
this point again. Rather, this hearing must look forward. The
fiscal year 2015 appropriations process is upon us, and the
focus of this committee needs to be on ensuring that proper
reforms are in place and that the IRS has the resources to
complete its mission of serving the American taxpayer and
ensuring that everyone follows the law. We all know the
importance the IRS has in ensuring that we have the funding to
pay for everything from national defense to Head Start. Using
this controversy to cut further resources from the agency will
not just harm the IRS but the American people as well.
Commissioner, once again, welcome to the subcommittee, and
I hope that when we meet again in April it will be under better
circumstances.
Thank you.
Thank you, Mr. Chairman.
Mr. Crenshaw. Thank you, Mr. Serrano.
And now I would like to turn to the chairman of the full
committee, who has joined us, Mr. Rogers, for any opening
statement he might have.
Mr. Rogers. Thank you, Chairman Crenshaw, for yielding me
this time.
Thank you, Commissioner Koskinen, for being with the
Committee for its first hearing of this year. This is the very
first of what will be probably 100 to 120 hearings our
Committee will conduct during the course of this spring season.
You are the very first one, so you have the privilege and honor
of sitting in the dunk tank for the first time, the first one
there.
Before we get to the important business at hand today, let
me first echo the Chairman's sentiments regarding the
appropriations process in general terms. The omnibus bill for
fiscal 2014 that we all worked on to pass last month is a true
product of compromise. I value my partnership with Ranking
Member Lowey, her counterpart on the Senate side, Chairwoman
Mikulski, as well as Ranking Member Shelby. Together, along
with the subcommittee Chairs and Ranking Members, we made
responsible choices to realign our Nation's funding priorities
and target precious tax dollars where they are needed the most,
all the while continuing the 4-year trend of reducing Federal
discretionary spending.
While the 2014 omnibus is certainly a testament to this
Committee's longstanding tradition and practice of bipartisan
workmanship, now is not the time to rest on our laurels. As
Chairman Crenshaw has mentioned, I expect the Committee to move
forward under regular order to draft legislation for Federal
spending in 2015 that continues to right-size our Federal
Government, that prioritizes spending on programs that are
demonstrating results, and that is a product of thoughtful,
rigorous oversight. We have much difficult work ahead of us,
but I am hopeful that the process will move swiftly and
smoothly, given the Ryan-Murray budget agreement.
I think it is fitting that this commitment to regular order
and transparency in the appropriations process is reaffirmed at
today's hearing with the IRS. Just as the Congress has a
supreme responsibility in stewardship of the taxpayer dollar,
so, too, does the IRS have that special duty to apply our
country's tax laws fairly and uniformly.
Commissioner Koskinen, you have taken the helm of this
agency during a tumultuous time, to say the least, as I fear
that in recent years there have been grave violations of the
public's trust that should give all Americans cause for
concern. And I hope that you are the right person to right the
ship.
In particular, as I wrote to you earlier this month, I have
serious concerns about the proposed regulation published by
your predecessor in November. This rule would continue to
target the First Amendment rights of the same conservative
grassroots organizations that were unfairly scrutinized in
applying for tax-exempt status in the run-up to the 2010-2012
elections.
Given the agency's recent track record of improper
politicization and intimidation, I strongly believe this rule
is a step in the wrong direction for an agency struggling to
regain the American public's faith and confidence. I look
forward to hearing from you about your intentions in this
respect today--in particular, your plans to cooperate with the
Congress to ensure these dark days in the IRS history books are
truly behind us.
Acting Commissioner Werfel last came before the committee
on the heels of a report detailing the IRS's wasteful spending
on frivolous conferences and the revelation that the senior
executives who oversaw the 501(c)(4) debacle in Cincinnati had
received significant performance bonuses.
Listening to Chairman Crenshaw's remarks feels like deja vu
all over again. As the IRS is charged with the massive
undertaking of enforcing the individual mandate of the
Affordable Care Act, the greatest intrusion of this agency into
personal healthcare decisions in history, combating identity
theft and refund fraud, and addressing international compliance
issues, among many other competing priorities, you can
understand why the Committee views your proposal for additional
performance awards and more training conferences with
heightened scrutiny.
We hope to ascertain how the IRS will go about planning its
training conferences to ensure that they are goal-oriented and
effective as well as compliant with the IRS's procurement
processes. Also, if you can explain to the satisfaction of this
Committee how and why $63 million in performance bonuses are
appropriate or beneficial to the taxpayer. As we are all
painfully aware, we are in the middle of some grim budget
times, and every Federal agency, especially the IRS, is duty-
bound to rout out excess and waste. When we provide you with
more than $11 billion annually to fulfill these duties, we
expect you to spend it wisely and effectively.
And, Mr. Commissioner, I hope that we have your commitment
to work with this Committee to achieve our shared mission of
protecting the taxpayers and their hard-earned dollars. We look
forward to hearing your testimony, and we wish you the best of
luck.
Mr. Koskinen. Thank you.
Mr. Crenshaw. Thank you, Mr. Rogers.
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Mr. Crenshaw. And now we will turn to the Commissioner for
his testimony.
If I could ask you, if you have any written remarks you
would like to submit, but if you could keep your oral testimony
in the neighborhood of 5 minutes, it will give us more time to
ask questions.
So the floor is yours.
Mr. Koskinen. Thank you, Chairman Crenshaw, Ranking Member
Serrano, and members of the Subcommittee, and the committee
chairman Congressman Rogers. Thank you for the opportunity to
appear before Congressman Rogers.
Mr. Crenshaw. Turn on your mike.
Mr. Koskinen. That would also help.
Mr. Chairman, Ranking Member Serrano, Chairman Rogers, and
members of the subcommittee, thank you for the opportunity to
appear before you today to give you an overview of IRS
operations.
I am honored to serve as the IRS Commissioner, and to have
the opportunity to lead this Agency and the dedicated employees
because I believe the success of the IRS is vital for this
country. I want to outline for you what I believe are the IRS's
key challenges and what I will focus on, moving forward.
First and foremost, we just started a new filing season 4
weeks ago, and over 39 million returns have already been filed.
We sometimes lose sight of what a tremendous accomplishment it
is for the Agency to process efficiently 150 million individual
taxpayer returns, with 120 million of those being filed
electronically. I am confident that, thanks to the hard work of
our employees, the filing season will continue to go well.
Another priority for our Agency is to put to rest all of
the issues and concerns surrounding applications for tax-exempt
status. The management problems associated with the 501(c)(4)
application process have, as noted, shaken public trust in the
IRS. Under the leadership of former Acting Commissioner Danny
Werfel, the IRS has already made great progress in this area,
and it is my job to help make sure we complete that work. In
every area of the IRS, taxpayers need to be confident they will
be treated fairly, no matter what their background or their
affiliations. Public trust is the IRS's most valuable asset.
The IRS also needs to build on the progress that has been
made to improve tax compliance in a number of areas. One of the
most critical of these is refund fraud caused by identity
theft. The IRS has gotten much better at resolving identity-
theft cases. We closed 963,000 cases last year of individuals
who had had their identity stolen, which is almost double the
number for 2012. And we are resolving those cases for taxpayers
much faster. On average, it now takes about 120 to 135 days to
resolve new cases, compared to more than 300 days in prior
years. But we can and will do better.
Along with enforcement, the IRS also needs to keep looking
for ways to improve the service we provide to taxpayers, which
is critical to ensuring that our system of voluntary compliance
works properly.
I am deeply concerned, as the Chairman noted, about the
significant reduction in the IRS budget over the last years.
Our current funding level, at just under $11.3 billion, is
roughly $900 million below what it was 4 years ago. We now have
about 10,000 fewer employees than 4 years ago, including 3,500
fewer Revenue Agents and Officers.
As a result of fewer staff and reduced enforcement
activities, the IRS estimates it will not be able to collect
billions of dollars in enforcement revenues. In fiscal year
2014, we expect audits conducted by the IRS will decline by an
estimated 100,000 and the number of collection activities will
decline by an estimated 190,000.
One of our biggest concerns is being able to deliver the
services taxpayers need during the filing season. Last year, as
noted, for example, almost 40 percent of taxpayers who called
were unable to reach an IRS employee, and, as the Chairman
noted, that is unacceptable. Our employees are doing their best
to answer every call they can, and our level-of-service goal
during the filing season is 70 percent. For the full year,
however, we estimate 18 million taxpayer calls will not be able
to reach us.
Another area of concern is the amount of time people are
having to wait to get in-person help at our Taxpayer Assistance
Centers. We have had reports from field staff of taxpayers
lining up outside those centers well before they open in the
morning to make sure they receive service the same day. The
best of employee efforts and expansion of our online offerings
can only go so far to ameliorate those problems.
Amid our budget difficulties, I do recognize that there has
been a loss of confidence within Congress and this Committee in
regard to the way the IRS has managed its operations. One of my
responsibilities is to ensure that we quickly solve management
and operational problems that may arise so that Congress and
this Subcommittee can be confident our funding will always be
used wisely, that we understand the need to be careful stewards
of taxpayer dollars entrusted to us.
I look forward to working with Congress and this
Subcommittee to solve our budget problems. I hope that one of
my legacies at the end of my 4 years as IRS Commissioner will
be that we have put the Agency on a more solid and sustainable
funding level.
This concludes my statement, and I would be happy to take
your questions.
Mr. Crenshaw. Well, thank you very much.
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SPENDING PRIORITIES
Mr. Crenshaw. Let me start the question process. You know,
in my opening statement, I mentioned the issue about responding
to the questions that people have. You just mentioned that 40
percent of the calls, I think, went unanswered.
As we have this oversight hearing and we talk about how you
spend the money, I want to pursue how you make decisions in
terms of priority. In other words, where do you decide to spend
money and where do you decide you are not able to spend money
when you have limited resources?
By the way, this subcommittee oversees about 30 different
agencies, and your agency receives the largest amount of money.
In fact, it receives more than half of all the money that we
are allocated to distribute to these agencies. So we have to
make decisions in terms of priority--who is spending their
money wisely, who is not. You obviously have a lot of leeway to
make those decisions with the IRS.
And it seems to me that one of the most important things
you do is deal with customer services. You are like the front
door; the phone call is the entryway to the IRS. That is a lot
of people's first contact with the IRS, when they make a phone
call. If they find that half of their phone calls aren't going
to be answered and if they do get answered they are going to
have to spend up to 20 minutes waiting, then that is not a very
good perception of the general public to have about the IRS and
its operations of business.
Now, I want you to tell this Committee how you make that
decision. Because here is what bothers me. There is an old
trick in this town where, anytime you need more money, you pick
out the most visible service that you offer and one that maybe
inflicts the most pain on people, and then you say, ``We can't
do that unless we have more money.'' It is like you turn out
the lights in the Washington Monument because we don't have
enough money. When the sequester came, people said, well, we
can't have tours of the White House because we don't have
enough money; we won't let the veterans go visit the World War
II Memorial because we don't have enough money.
I am not suggesting that you are using that old trick, but
sometimes I have to wonder, when you have $11 billion and you
have to make these decisions, it seems to me that one of the
priorities ought to be to interact with people.
So tell the subcommittee how you go about making that
decision. Because I looked back 10 years; in 2004, 87 percent
of the phone calls got answered. And that was a time when the
IRS had $1 billion less than it has today. I know you have more
responsibility and all those kind of things, but my point about
how you spend the money is just as important sometimes as how
much you have to spend.
So tell us, if you will, do you ever think about, well, we
have rent, we have technology, we have certain other things--
and, obviously, in this case, you had $63 million to pay the
bonuses, and you are pursuing a rule that arguably clarifies
things but some people would say it goes in the wrong
direction. So what goes through that decision-making process to
decide where the money gets spent?
Mr. Koskinen. That is a good question. We spend a lot of
time worrying about that question, especially trying, as I say,
to make sure we spend the money most effectively.
We do some things about which we have no choice. We have no
choice about a filing season, which is why we spent a
tremendous amount of time and effort making sure it went well
this year. Part of the reason it is going well is we haven't
had any major tax law changes. So I agree with you that the
simpler the Tax Code is, the better the filing season would go.
But that is a critical function--that is our highest priority.
We also do have statutory mandates. If you tell us to do
something, we will do it. So this year we are spending a
significant amount of time implementing the Affordable Care Act
and the Foreign Account Tax Compliance Act. We don't feel we
have any choice about that; the mandate comes from Congress
that we should perform that.
Seventy-five percent of our budget is personnel. As I said,
we have 10,000 fewer people than we had 4 years ago doing
significantly more work, including the requirements that we
implement those statutes.
So we have to make decisions, and the only places we have
discretion are, in fact, in tax enforcement and in taxpayer
services. We have 3,500 fewer people doing enforcement, Revenue
Agents and Revenue Officers. We have 1,500 fewer people
answering the phones. So we have made more cuts on the
enforcement side than on the call side.
But they are two sides of the same coin. Ultimately, we
depend upon voluntary compliance. And I am concerned, as you
are, that if we can't provide adequate taxpayer service, we are
going to undercut the core mission of the Agency. As you noted,
98 percent of our money, as the Taxpayer Advocate has said,
comes from voluntary compliance. Only 2 percent of the revenues
come from our enforcement efforts, although that is $50 billion
to $60 billion, which is a lot of money.
So we need to protect the process as it goes forward. But
it is not a question of just a few dollars one way or the
other. We did have, and our goal would be to return to, those
days when we had 85, 80 percent service on telephone calls, so
you don't have to wait more than 5 or 7 minutes and your call
will go through.
Mr. Crenshaw. But is it a priority? And when you look at
rent and you look at your contracts, do you say, gee, if we
could save some money here, save some money there, we could
actually answer more phone calls? Is that pretty high up in
your priority list?
Mr. Koskinen. By the end of this year, we will already be
using 1,300,000 square feet less of office space. We will save
$40 million a year with that. At the end of this year, we will
save $60 million by not producing all the publications we used
to, and by not mailing them out to everybody. You know, none of
us anymore get the old 1040 forms in the mail. That saves us
$60 million. We have cut the use of contractors by $200 million
a year.
So we already have $300 million a year in annual savings.
And we are continuing to look at ways to do better than that,
and we will be happy to share that information as we develop
it.
But what we are thinking about--
Mr. Crenshaw. My time is up. I appreciate that. I just
think that that ought to be a big priority, and I hope it is.
So let's go now to Mr. Serrano.
EMPLOYEE MORALE
Mr. Serrano. Thank you, Mr. Chairman.
You have been on the job now at the IRS just over 2 months,
but you have spent 21 years in various public- and private-
sector leadership positions. Because of your previous
experiences, I would be interested in hearing what your first
impressions of the IRS are.
In particular, I understand that you have been going on a
listening tour in the district offices. What have you been
hearing from employees? And I would also like to know what the
morale is of the employees after the hits that----
Mr. Koskinen. Right.
Mr. Serrano [continuing]. Many have taken for the behavior
of a few.
Mr. Koskinen. It is an important question. I am on, as I
have said, the ``join the IRS, see the United States'' tour of
the 25 major IRS offices. I am doing that primarily because my
experience in the 20 years in the private sector as well as my
20 years in the public sector, has been the people who know
best about what is going on in an organization are the people
actually doing the work on the front lines. So I am listening
to employees. I hold a town hall at everyplace I go, with 200
to 300 employees, who will ask me any question they want. I
have lunch with 15 randomly selected employees to listen to
what they have to say.
And after the couple months I've been here--and I have had
briefings, obviously, with everybody running any department of
any significance at the IRS--I have been thoroughly impressed
with the professionalism, the skill, the dedication to the
mission of all of the employees.
What surprised me a little when I went through these
meetings--I started in Cincinnati, I have talked with the
Chairman and I was in Jacksonville, and I have been in others.
I have been in eight cities; I am off to Fresno tonight--What
has surprised me is the level of energy and enthusiasm that
remains. These are employees, like all Federal employees, who
haven't had a pay raise in 4 years, who suffered through the
government shutdown, who suffered with furlough days, and then
had to endure the criticism over the last 8 to 10 months about
the Agency. So you would expect that what I would hear would be
a lot of grumbling or complaining.
What I have heard continually across those 10 cities I have
been to already is that the employees' primary concern is there
aren't enough people in the offices for them to help taxpayers.
I have sat in call centers in Baltimore, call centers in Saint
Louis. The people, their concern is not that they are
overworked; they are working as hard as they can. Their concern
is that there aren't as many people as there used to be
answering phone calls, and, therefore, they don't feel they are
delivering taxpayers the services they deserve. The people at
the Taxpayer Assistance Centers who run those centers,
oftentimes with empty desks, are also concerned about the
people standing in line.
So, to me, it is a refreshing indication of the dedication
the 90,000 employees working for the IRS have to meeting, and I
think the Chairman is exactly right, the mission of the Agency
to provide taxpayers the services they deserve if we expect
them to be able to comply with the Tax Code.
Mr. Serrano. So, in general, you think that the feelings of
the staff is one of, let's get the job done, notwithstanding
the bad publicity caused by some and the shortage in personnel?
Mr. Koskinen. That has been my experience, and it has
surprised me. I thought I would hear either more grumbling
about the fact they hadn't had a pay raise in 4 years or about
the fact that they were working overtime because of the lack of
personnel. And, as I say, I have seen, at last count, and
personally talked to over 3,000 employees in offices with
20,000 employees in them, and the constant theme has been: We
need more people to allow us to do the work.
Mr. Serrano. Well, I think it is always a good time, and so
I will take it now, to thank our Federal workers. I know there
is a small number of Members of both parties who would like to
see no Federal Government, but that is another issue for
another hearing, not this one. I have great respect for the
Federal workers and the work that they do.
REVIEW RECOMMENDATIONS
Let me ask you a question. Former Acting Commissioner
Werfel conducted an internal review that President Obama
requested to restore trust in the IRS. Have the recommendations
in that review been carried out? Are there other changes that
you think would be helpful? If so, how can this committee
assist you?
Mr. Koskinen. We have implemented and responded to,
positively, all of the nine recommendations from the Inspector
General focused on the 501(c)(4) situation. We also have done
broader reviews of efficiencies in the organization, again,
trying to be able to respond more effectively to the demands
that have been placed on the organization.
Mr. Serrano. How is my time, Mr. Chairman?
Mr. Koskinen. I think it is a yellow sign.
Mr. Crenshaw. There is a yellow sign, which means
``caution,'' and there are 30 seconds left.
SEQUESTRATION
Mr. Serrano. Just one more question then. The IRS budget
was reduced $660 million due to the sequester. What was the
effect on your operations based on that reduction?
Mr. Koskinen. We expect that if we had had the pre-
sequester number--not the President's request for 2014, the
pre-sequester number--we would have been able to answer this
year another 3\1/2\ million calls, we would do another 100,000
audits, and we would collect approximately $3 billion more in
our enforcement activities.
[The information follows:]
Customer Service Representative Level of Service
calculation.
The numerator equals the assistor calls answered plus the
automated calls answered through subject matter messages. The
denominator equals the numerator plus emergency close
disconnects plus taxpayers that abandon in queue waiting for
Customer Service Representative assistance plus busy signals
and disconnects generated by announcements that advise the
taxpayer of high demand and request the taxpayer return his or
her call at a later time.
Mr. Serrano. All right.
Thank you, Mr. Chairman.
Mr. Crenshaw. Thank you, Mr. Serrano.
We will turn to Mr. Diaz-Balart.
Mr. Diaz-Balart. Thank you very much, Mr. Chairman.
I am glad to have you here, sir.
Mr. Koskinen. Thank you.
TECHNICAL ADVICE MEMORANDUM
Mr. Diaz-Balart. Let me throw out two issues, if I may.
One is one that I have been dealing with your predecessors,
frankly, for quite a long time. And, unfortunately, the IRS has
not always acted in good faith, actually at one time admitting
to me in front of a number of people that they had been
instructed to not tell me the truth, in other words, to mislead
Members of Congress. The issue pertains to a specific IRS----
Mr. Koskinen. I am not aware of that situation.
Mr. Diaz-Balart. I know.
Mr. Koskinen. That will never be my circumstance----
Mr. Diaz-Balart. Right.
Mr. Koskinen [continuing]. I can assure you of that.
Mr. Diaz-Balart. Right. Right. Well, I will tell you, I
was pleased that they at least admitted to me that they were--
the person said, I was not authorized to tell you the truth,
which I thought was a sad day, but you better believe that is
something that I hope will never happen again.
It pertains to an IRS-specific ruling. It is a technical
advice memorandum, or TAM, that all of the outside experts say
it calls into question 70 years of settled law on the
definition of political subdivisions, which is a--you know,
there are many of them around the country, including in
Florida.
This TAM effectively makes changes--makes a change to the
law, and it is retroactive. So, obviously, this is not
something the IRS should be doing in a TAM. If it wants to
change a law, it should either come to Congress or at the very
least propose regulations to make the changes prospective.
It is calling into question millions of dollars of tax-
exempt bonds already in the hands of investors, not only, by
the way, of this individual group, this entity that is affected
by it, but also many, many others around the country, to the
point where economic development projects in Florida and other
States have been halted as a result of this TAM. And those who
have gone forward are having to pay higher interest rates
because of the vagueness of this TAM.
So, Commissioner, I have been trying to deal with this with
your predecessors, and we have been misinformed. The chairman
is very aware of this. I just need your commitment that you are
going to look at this in a serious way to make sure that the
IRS is not doing things in a way that--and retroactively in a
way that is, in essence, changing 70 years of State law through
a TAM.
Mr. Koskinen. I will be pleased to look into that and get
back to you.
Mr. Diaz-Balart. And, again, I don't expect you to have
the details right now. We will get back to--we will--but I do
expect to get together with you, and let's try to solve that.
Mr. Koskinen. That is fine. I will be delighted to talk
with you about that further.
REAL TIME TAX SYSTEM
Mr. Diaz-Balart. Thank you.
The other issue is, let me switch gears, it is the IRS's
plans--there are no plans to move forward with the Real Time
Tax System. This subcommittee has placed report language in our
annual appropriations bills, by the way, since 2009,
prohibiting the IRS from using any funds on a simple tax return
pilot program associated without seeking specific authorization
or appropriations from the Congress. That language has been
there.
In February 2013, I sent a letter to Acting Commissioner
Miller then requesting that he confirm in writing that the IRS
expenditures to convert to a Real Time Tax System had ceased.
The Commissioner wrote back saying that, quote, ``The IRS is
not in the process of implementing a conversion to a Real Time
Tax System.''
Unfortunately, later I learned that there has been money
spent on that and that there have been plans under way. I tried
to find out how much it was. I asked the IRS how much funding
had been spent on a total Real Time Tax System. The response
was that there was a contract for approximately $3.54 million
to explore a system, sir, that Congress has specifically said
it can't do and the IRS had told us that they weren't going to
do.
Later I hear from other Committees--the House Government
Reform Oversight Committee has recovered additional documents
from the IRS that shows that the amount spent by the IRS in the
Real Time Tax System could be as much as $30 million. I can't
confirm that.
So two final questions. Are you aware of any further
exploration and implementation by the IRS of any data-
collection system related to the Real Time Tax System, number
one? And, again, because that language in the appropriations
bills since 2009 seems to have been absolutely systematically
ignored. And will you pledge to adhere to the report language
in the current fiscal year 2014 omnibus?
And, again, what I am asking is also 100 percent
transparency to this subcommittee, to members of this
subcommittee, on the other issue but also on the Real Time Tax
System.
Mr. Koskinen. I am happy to commit that we will follow all
of the instructions, whether you give them to us personally or
in legislation, because I think that is important for us to be
able to do.
With regard to the Real Time Tax System, part of the
problem is that all sorts of different systems have been called
``Real Time Tax.'' The thing that has been the focus of a lot
of external discussion is the idea of the IRS pre-populating a
return form--get the information in, pre-populate the return so
you could look at it, and then you could make decisions, or the
IRS could even file your return for you. And that is what a lot
of people have talked about as being the Real Time Tax System.
Mr. Diaz-Balart. Correct.
Mr. Koskinen. We are not doing anything with that. It
would take a long time to be able to do that.
We do have work going on to try to figure out how to get
better third-party information into our system earlier so, as
we actually match up tax returns for identity theft or are
engaged in audits, we will have more data available in a more
timely manner. Right now we don't get the W-2 forms from Social
Security or the 1099 forms until late in the spring, which
doesn't do us much good, as everybody is filing in January or
February.
So some people internally have called that a Real Time Tax
System, but it has nothing to do with the program that you are
talking about. And we have no program going forward that I know
of. Certainly we don't intend to do anything like that without
talking to you.
[The information follows:]
The IRS is not pursuing and has no plans to implement a
Real Time Tax system to create pre-filled forms or software/
products for simple tax return preparation. Our exploration
during 2011-2013 of earlier use of available data complies with
the U.S. House of Representatives Committee on Appropriations
statement (House Report 112-550) that prohibits the IRS from
pursuing a simple tax return program.
The Deputy Chief Information Officer, Strategy and
Modernization; the Deputy Commissioner of the Wage and
Investment Division; and the Director of Wage and Investment
Business Modernization Office led an ad hoc team to explore the
earlier use of available information return data during 2011-
2013, which then-Commissioner Shulman referred to as ``Real
Time Tax.'' This concept is very different than creating a pre-
filled form or software/products for simple tax return
preparation, which is often referred to as a Real Time Tax
system, and which we are not pursuing nor have any plans to
implement. The team included approximately ten employees that
developed and refined a working vision statement and identified
a preliminary set of business focus areas. Contractor support
was provided by Booz Allen Hamilton and Accenture. The total
contract costs were approximately $3.54 million. IRS Real Time
Tax exploration concluded in 2013 and there have been no other
costs.
Mr. Diaz-Balart. Thank you, Mr. Chairman.
I look forward to working with you, Commissioner, on these
two areas, also on identity theft and other issues.
Mr. Koskinen. Good.
Mr. Diaz-Balart. Thank you, sir.
Mr. Crenshaw. Thank you.
Mr. Quigley.
EDUCATION AND ASSISTANCE
Mr. Quigley. Thank you, Mr. Chairman.
Welcome, Commissioner.
In addition to everything else you have going with the IRS,
this is an historic filing period. The Defense of Marriage Act
was struck down last June by the Supreme Court, and so, for the
first time, same-sex couples will be filing Federal tax returns
together. This is the first filing period that that is taking
place.
What education within the IRS and outside the IRS is taking
place? How are you helping to educate the public and making
resources available to people, particularly with some of the
complexities involved? As you know, different States have
different laws, and I have residents in my district and in my
State who were married in Iowa, for example. Illinois is just
now beginning to recognize same-sex marriages. So what is the
IRS doing to deal with these complexities?
Mr. Koskinen. Well, I think it is important. One of the
things that did surprise me back there in Congressman Serrano's
question is the amount of outreach the IRS does, as a general
matter, to taxpayers. We have a Web site which, if you look at
it today, is a very different Web site than it was a year ago,
in the sense of trying to be more user-friendly, to provide
information taxpayers need directly.
We have wonderful partnerships with tax preparers, who
actually advise tax payers--we give them information. We share
information about what information their clients will need.
We have a YouTube channel with over 100 instructional
videos about what you should worry about. We just put out our
first advice to taxpayers this week about starting to look
forward to how to deal with the Affordable Care Act,
particularly advising taxpayers, if their circumstances change
during the year, they need to adjust whatever Premium Tax
Credit they are getting.
In regards to the Defense of Marriage Act, we have been
putting out reminders to people, like we remind people when it
is time to pay their estimated taxes. So there is a tremendous
amount of time spent reaching out to taxpayers, trying to
educate them as much as we can about the Tax Code.
As I somewhat facetiously said, it may take a while before
I can convince people that we are from the IRS and we are here
to help you. We do spend a significant amount of time doing
just what you are talking about, which is, prior to the filing
season and during the filing season, to give people as much
information as they can get.
So this year, for instance, we are advising people: don't
call if you need to find about where your refund is; go to the
Web site, push the tab. And last year 250 million people got
information about, quote, ``Where is my refund?'' This year,
for the first time, you can go to the Web site, authenticate
who you are, get transcripts of your previous filings, and you
can print them out at home. You don't have to come to an
assistance center; you don't have to call.
So it goes partially to the Chairman's concern, which I
have, which is we can't just sit around and say, ``Gee, what
will we do?'' We have spent a lot of time trying to say, what
information do taxpayers need, what do they call about, how
much of that could we give them in some other channel of
communication?
We also have tweets--I mean, we do things that I don't know
how to do.
Mr. Quigley. But, sir, you recognize these are unique
circumstances.
Mr. Koskinen. Those are unique----
Mr. Quigley. This is----
Mr. Koskinen [continuing]. Circumstances.
Mr. Quigley [continuing]. The first time in history this
is taking place----
Mr. Koskinen. Yes.
Mr. Quigley [continuing]. And a lot of taxpayers need
additional assistance. All the resources you are talking about
are helping these new filings.
Mr. Koskinen. Right. And the people who are on the phones
have information about that. So if taxpayers call and get
through, they will be able to get that kind of information. But
it is also on the Web site. We have, as I say, tried
proactively in all of these areas to get information out to
taxpayers before they fill out their returns, and even before
they feel they have to call.
IDENTITY THEFT
Mr. Quigley. Well, we appreciate that.
Your predecessor talked about the cases of identity theft,
said that there were nearly 250,000 reported to your agency in
2011 and 816,000 in 2012. Obviously, this is an alarming
increase. What are you attributing this to, and what is the
agency doing?
Mr. Koskinen. It has been an explosion since 2010 through,
actually, last filing season in terms of people either
borrowing, stealing, going to the Death Master Files, getting
Social Security numbers, and filing false returns and trying to
get refunds early.
We have spent time, as I was telling the Chairman earlier,
in Jacksonville with the wonderful task force that, jointly
between the IRS Criminal Investigation Division and State and
local law enforcement in Jacksonville and Florida, have become
much more aggressive at pursuing this. We last year had 1,500
investigations, up from 300 the 2 years before. We have a
substantially more sophisticated filter system that identifies
suspicious returns as they are filed electronically.
Last year, we actually saw a plateauing in the number of
returns that came through that we were able to attack. So we
had 1,000 indictments recommended last year, up from 165 two
years earlier. We think we are getting some of the people off
the street. We are, I think, getting the message out that this
is not a free game, it is not a free good, that you can't
simply buy or steal a Social Security number and get a refund
without being prosecuted for that.
But it is a significant problem. We had in the budget
proposed $100 million of IT work that was not included in the
Omnibus, but we are figuring in some other ways to fund it. And
part of the $92 million additional funding provided was for
just this purpose, and we are spending it that way.
But it is going to be a problem--we think we have it under
control. As I noted, we are able to resolve for taxpayers the
identity-theft problems much faster than we used to, but it is
one of the three or four highest priorities we have in tax
administration.
Mr. Quigley. Thank you.
Thank you, Mr. Chairman.
Mr. Crenshaw. Thank you.
Mr. Graves.
501(C)(4)
Mr. Graves. Thank you, Mr. Chairman.
Mr. Commissioner, a lot of discussion about the 501(c)(4)s
earlier. What are some specific examples of 501(c)(4)s?
Mr. Koskinen. 501(c)(4)s cover a wide gamut. You know,
they are everything from garden clubs to, in fact, advocacy
groups. And, in fact, the vast majority of 501(c)(4)
applications have nothing to do with political activity as they
go forward. A relatively small percent are in that area.
So one of the issues, as we talk about the proposed draft
regulations that everybody is focused on, is it really just
political organizations that are involved. But, as I say,
probably 90 percent of the 501(c)(4)s have nothing to do with
political advocacy.
Mr. Graves. What is a specific example of a 501(c)(4), an
organization that might come under scrutiny under this rule?
Mr. Koskinen. Well, under this rule, there would be any
organization that is a social welfare organization, providing
information to the public, that engages in political activity
in a political campaign. So if you are an organization and you
are providing information about any particular subject matter,
that would be viewed as social welfare. If you then start
running ads for a candidate in a campaign, supporting that,
that would be political activity or campaign activity.
POLITICAL ACTIVITY
Mr. Graves. So is it not true, though, under the proposed
definition, that it is any public communication that is made
within a certain time period before an election would be
considered candidate-related political activity if it
identifies that candidate or a political office?
Mr. Koskinen. Right. Well, your question was what about a
(c)(4) and what had historically been there. There is a draft
regulation out, as the Chairman knows. We actually expect to
have over 100,000 comments on it. And it is asking for just
this discussion. That is what I assume the 100,000 comments are
doing.
Mr. Graves. All right.
Mr. Koskinen. And it has three issues. One is, what should
be the definition of political activity? What should be
included as not appropriate for a social welfare organization,
and what would be in that pool?
Then the next question is----
Mr. Graves. Is that not part of the proposed definition?
Mr. Koskinen. Pardon?
Mr. Graves. Is there not a proposed definition?
Mr. Koskinen. No, there is a proposed definition----
Mr. Graves. Okay.
Mr. Koskinen [continuing]. And comment is being asked for
that.
Mr. Graves. Right, right.
Mr. Koskinen. So my position on it is----
Mr. Graves. But is that the proposed definition right now,
the one I just read that deals with political activity as it
relates to a candidate for a political office in the time
period before an election?
Mr. Koskinen. Right, as has been out there and as
proposed. The comment that people are making is, what are the
options to that? Should it be applied at all? Should we stay
with the facts-and-circumstance test we have had?
Mr. Graves. Let's assume that that proposed definition
stays in place as it has been proposed by your----
Mr. Koskinen. I would like to not assume that, because I
think that what we need to do is review the 100,000 comments,
which I am going to be involved with----
Mr. Graves. Right.
Mr. Koskinen [continuing]. Because it is a joint
regulation from Treasury and IRS. And as I have said in my
prepared testimony, my goal is that whatever comes out of this,
if there is a regulation--it is not guaranteed there will be--
it be one that is clear, fair to everyone, and easy to
administer. The IRS is not a political organization, and we
ought to do whatever we can to get out of the politics of all
this.
Mr. Graves. Right. So I just heard you say, then, that
although it is a proposed definition right now, you hope that
that is not the final definition.
Mr. Koskinen. Well, I hope you wouldn't put those words in
my mouth. What I said was I hope that whatever regulation comes
out, if there is one, is one that is clear, fair, and easy to
administer.
Mr. Graves. I thought I heard you say----
Mr. Koskinen. That does not take a position on what is out
there as draft.
Mr. Graves. I thought I heard you say you hope that is not
the final definition.
But under that current definition, if it were final, it
would mean no faith-based organization can issue a voter guide
on public positions that have been taken by candidates to
consolidate that information to assist voters. Is that not
accurate?
Mr. Koskinen. If candidates are mentioned and that is
within, as I understand, 30 to 60 days, depending whether it is
a primary or an election, that is what the proposed definition
would be.
Mr. Graves. It would mean that Planned Parenthood wouldn't
be able to----
Mr. Koskinen. Pardon?
Mr. Graves. It would mean organizations such as Planned
Parenthood would not be able to issue voter guides, as well, or
the national abortion rights could not issue----
Mr. Koskinen. Within the ambit of a campaign, within a
campaign. That is what the draft would be discussing, and that
is what the comments are about. And there will be, ultimately,
after the comments are reviewed, there will be a public hearing
at which Congressional Members, as well as the public, will be
invited to attend.
Mr. Graves. Under the current definition, does that mean
that the, I guess, let's say the American Legion or the VFW,
would they be able to make phone calls to notify voters that
want to register to vote, maybe a potential voter, or to notify
voters about candidates and their positions on military or
defense positions or expansion or defense in general?
Mr. Koskinen. Again, the proposed draft up for comment--
about which we have 100,000, and we are looking forward to
reviewing them--would say that voter registration drives within
the context of a campaign would not be allowable.
And the other question that needs to be answered, I would
hope everybody would understand, A, it is a question of what
the definition is going to be, should it be. And, B, how much
of that activity is permitted. Again, it is not proposed that
people have no activity. The question is, how much of that
activity, as it is defined, can an organization engage in
before it jeopardizes its tax-exemption?
Mr. Graves. Uh-huh.
Mr. Koskinen. And the third important question is to what
501(c) organizations should the regulation, if there is one,
apply?
Mr. Graves. Okay.
One last question, Mr. Chairman.
How many in the department have been reprimanded or
terminated as a result of that latest scandal of scrutiny of
various organizations?
Mr. Koskinen. That process is still--there is a review
board. The leadership from the top on down is all gone at this
point, and several of the people are no longer at the IRS.
Mr. Graves. Is there a number you can place on that?
Mr. Koskinen. There is not a number. I am actually not at
liberty to talk about personnel actions. All I can tell you is
Danny Werfel appointed a special review board; it reviewed it.
The leadership, starting at the ground level all the way up
through the Exempt Organizations leadership structure, has all
been changed.
Mr. Graves. And you feel like it has been, I guess,
substantially, it has been justified, all the actions have
been--all the reprimands have been taken care of, and you are
satisfied with the direction the organization is going now and
with the way it has handled the review?
Mr. Koskinen. I am satisfied that, as I say, the IG had
very good recommendations for training, for guidance, for
better review of how organizations, if there are questions, are
handled. All of that has gone on. I went to Cincinnati and
talked to people to make sure that people are comfortable that,
in fact, whatever the issues were before have been solved.
So, again, I think, as I said, it is important, going
forward, not waiting. We have six investigations going on. And
as I have said, I am looking forward to having at least one or
two of them finish sometime soon, so we can see what the actual
determination of the facts are. And we will respond
appropriately and accordingly, and we will let you know how the
response is to that.
But I think people need to understand that going forward
from, as I say, this point forward, anyone dealing with the
IRS, any taxpayer, should be comfortable that they are going to
get treated fairly in the same way anybody else is, no matter
what their political affiliation; whatever their organization
is; whoever they voted for in any election recently; whether
they go to church or don't go to church. If they deal with the
IRS, they are going to be treated in the same way everybody
else is.
If you get audited--we still, even with limited resources,
will do 1,400,000 audits this year, a lot of them just by
correspondence. But if you get a letter or you get
correspondence, you need to be confident and comfortable that
that is because there is something in your return that if it
was in somebody else's return would get the same response. That
it has nothing to do with who you actually talked to 2 weeks
ago, what meeting you went to, what organization you belong to.
[The information follows:]
I have verified that the Shared Responsibility Payment
(SRP) established in 5000A to which you referred is payable
when the IRS issues a notice and demand for payment. Therefore,
an individual is not required to pay the SRP as part of the
quarterly estimated tax payments, and the IRS will not impose
estimated tax penalties for failure to pay the SRP with
estimated taxes. The statute provides special rules for the
assessment and collection of the SRP. A taxpayer who does not
timely pay the SRP is not subject to criminal prosecution or
penalty for the failure; however, interest accrues on the SRP
from the due date for payment specified in the notice.
Mr. Graves. Thank you.
Thank you, Mr. Chairman.
Mr. Crenshaw. Thank you.
We will turn to Mr. Amodei.
And, in your absence, we welcomed you, so we welcome you
again in your presence.
Mr. Amodei. Thank you. Thank you, Mr. Chairman. I hope my
presence will be better than my absence, but the jury is out on
that, so we will go from there.
Thank you, Mr. Commissioner. I want to follow up where Mr.
Graves was going. And, first of all, I have looked at your
statement, and so I assume you have looked at it. And this is
your statement; I am assuming you had help preparing it, but
this is your statement that you stand by for purposes of the
hearing today.
Mr. Koskinen. I wouldn't have submitted it if I weren't
going to stand by it.
Mr. Amodei. Very good.
You have indicated at the bottom of page 1 that the IRS
needs to continue to fulfill responsibilities to implement tax-
related provisions, major legislation. You have referenced the
ACA and the FATCA.
501(C)(4)
I would like to focus for a minute on the genesis of the
regulation rewrite, in that, do you know when 501(c)(4) was
first put on the books as legislation, generally?
Mr. Koskinen. I----
Mr. Amodei. Let me tell you why I am asking you to help
you out. Because we are talking about redoing a regulation now
as a result of what happened, I don't believe in Cincinnati,
but all the way up the line. And so I am wanting to know how
501(c)(4) worked before this latest round of stuff that started
with Cincinnati----
Mr. Koskinen. That has been around for a while. The
regulation was drafted in the Eisenhower administration in
1959.
Mr. Amodei. Are you aware of any problems, major problems,
where it has been looked at by the IG from Eisenhower forward
until what we are talking about now?
Mr. Koskinen. I am not.
Mr. Amodei. Okay. Thank you. I appreciate that. And so,
can you--and I know you weren't there, so I am going forward.
Congratulations on your timing, by the way. It is excellent.
Mr. Koskinen. Some people would say that, actually, the
timing isn't so good.
Mr. Amodei. Well, it is better than others.
Can you tell me the genesis of how it was decided within
the IRS, we need to take a look at 501(c)(4) and do new
regulations?
And let me tell you why I am asking that, to help you out,
is that I get that you want to restore confidence in the IRS
and all its procedures and processes. And good for you. But it
is like, there was no, as you indicated in earlier questioning,
there was no major tax legislation recently which has aided in
your folks' preparation for stuff, so why is 501(c)(4) now on
the top of the regulatory heap?
Mr. Koskinen. Well, it is on top of the heap now because,
A, there was the IG report noting that there were difficulties
in the 501(c)(4) determination process. And one of the strong
recommendations by the IG in his report and in his subsequent
testimony was that the Treasury Department and the IRS should
put on their priority plan review and clarification of the
requirements. So it was--
Mr. Amodei. So that was generated internally as a result
of IG operations at Department of Treasury?
Mr. Koskinen. No, what I am saying is all I know is that
there was the issue in the IG report reported and that his
recommendation, strong recommendation, was that a regulation be
considered as part of the priority process at Treasury and IRS,
and that is what has happened. What happened before that, I
wasn't there and I don't know.
Mr. Amodei. Okay. Are you curious as to anything before?
Mr. Koskinen. No, at this point, mostly--I have spent 40
years, 20 in the private sector----
Mr. Amodei. Okay.
Mr. Koskinen [continuing].--20 in the public sector----
Mr. Amodei. And I don't want to cut you off----
Mr. Koskinen. No, let me just tell you my--can I just give
you my answer?
Mr. Amodei. You are not curious--you can't on my 5 minutes,
I am sorry.
Mr. Koskinen. Okay. I will answer in my 5 minutes, then.
Mr. Amodei. But I endeavor to play by the rules, so----
Mr. Koskinen. Okay.
Mr. Amodei. And I know you are not trying to evade anything
there.
Can you tell me what percentage of the IRS's budget is
devoted to 501(c)(4) staffing and operations? And let me tell
you why I am asking that question. Because you talk about
resource challenges and priorities. So what percentage of your
operations go to 501(c)(4) administration, enforcement,
investigation, whatever?
Mr. Koskinen. Well, off the top of my head, I would say it
has to be under 1 percent, significantly, in the sense that we
have 90,000 employees; only 800 work in the entire Exempt
Organizations itself.
Mr. Amodei. Okay. Fair enough.
Mr. Koskinen. So it is a very small number.
Mr. Amodei. So it is 1 percent of your budget. I appreciate
those numbers----
Mr. Koskinen. No, I would say it has to be--it is 1 percent
or less.
Mr. Amodei. Okay.
Mr. Koskinen. But that is an estimate that I would have to
go take a look at. It is clearly, at this point, you know, only
1 percent of the employees working the entire Exempt
Organizations, and the 501(c)(4)s are probably 5 percent of
that. So you are talking about, I don't know----
Mr. Amodei. Okay.
Mr. Koskinen [continuing].--0.2 percent?
[The inforamtion follows:]
The Exempt Organizations function within the Tax Exempt and
Government Entities division is responsible for both service
and compliance activities related to all tax-exempt
organizations, including IRC 501(c)(4) social welfare
organizations as well as employee plans and government
entities, such as Indian tribal governments. Total FY 2013
expenditures of that function were $95 million, or 0.85 percent
of our overall budget of $11.2 billion. However, most tax-
exempt organizations are 501(c)(3) charitable organizations. Of
the approximately 1.6 million tax-exempt organizations active
in FY 2013, less than 6 percent were 501(c)(4) social welfare
organizations.
Mr. Amodei. So let me ask you this. I am going to read off
about four or five things here, and the context is priorities.
You have the ACA that you are working on. You have issues with
conferences and spending money. Less than 1 percent, I will do
the math on generally what that is of your budget. You have
bonuses that are in the news. You have 501(c)(4)s. And then you
have taxpayer assistance, which you have devoted a lot of time
to.
Number-one priority for regulatory reform out of those is
501(c)(4)?
Mr. Koskinen. It is a priority because it has been the
issue----
Mr. Amodei. Is it the number-one priority reform or not out
of those five things based on----
Mr. Koskinen. I am sorry, you were asking about regulatory
reform. We are not reforming ACA; we are just implementing ACA
and FATCA. So, in terms of regulatory reform, there is a set of
regulations that----
Mr. Amodei. No, I understand that.
Mr. Koskinen. If you are talking about my priorities, I
would say that, if we can solve the 501(c)(4) problem, put it
behind us, that clearly is one of the five or six priorities I
have.
Mr. Amodei. Well, then, I guess you see my question, where
it is less than 1 percent, and you are talking to this
committee about our concerns about taxpayer service, our
concerns about getting this filing season right, which are all
great; the ACA, which happens to be a small project that is
floating around. And you have some internal management problems
that you have inherited, I appreciate all that, in terms of
conferences and bonuses and stuff like that. And it is like,
really? A law that has been around for 50 years, and this is
what is going on top of the regulatory thing?
My time has expired. Mr. Chairman, thank you.
But I will look forward to interacting in more than a 5-
minute context----
Mr. Koskinen. I would be delighted to sit down and have a
longer discussion with you.
Mr. Amodei. Great. Look forward to it.
Mr. Crenshaw. Thank you.
Mr. Yoder.
PRIVACY
Mr. Yoder. Thank you, Mr. Chairman.
Commissioner, welcome to the Committee. We are pleased to
have you come before us today to talk about certainly a variety
of issues that are important to constituents at home and many
hardworking American taxpayers that interface with the IRS.
You know, last year, in the midst of the outcry over the
NSA and the IRS targeting of specifically conservative groups
based upon ideology, there was a little-known, I think, breach
of public trust that was occurring at the IRS and at other
Federal agencies that was brought to light which I think is as
stunning or more stunning than some of the other concerns that
are constantly raised in the media. The IRS and other Federal
agencies admitted that they were reading the emails and
electronic correspondence of Americans without a warrant,
without respect for Fourth Amendment privacy protections. And
the IRS went so far as to be brazen enough to say that
Americans do not have a reasonable expectation of privacy when
it comes to their email correspondence. That is stunning.
And so, under your leadership, I guess my question would be
for you: Is the IRS continuing to read the emails or other
electronic correspondence, the private correspondence, of
Americans without a warrant in contravention of Fourth
Amendment rights? And, secondly, when it was reading those
emails, are you aware if it was reading both conservatives' and
liberals' private emails equally, or was it also targeting
those private readings without warrants just on conservatives,
as it was targeted by other portions of the IRS?
Mr. Koskinen. This is the first time I have heard that the
IRS read anybody's email, so I can't give you any further
information. But I will definitely look into that, and I will
get back to you with answers to your questions.
Mr. Yoder. Well, I appreciate it. And I am sure that if
that is occurring, sir, would you, I guess to the Committee,
agree to ensure that it no longer occurs at the IRS?
Mr. Koskinen. I would be happy to say if we have no
authority to do it, then we should not be doing it.
Now, Criminal Investigations does investigate. You know, we
have had 4,500 recommendations for indictments last year. So
there is a whole enforcement arm of the IRS that, you know, has
law enforcement authority, works with Justice Department and
States and local governments.
[The information follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Yoder. Well----
Mr. Koskinen. So I don't know how much of this is in their
domain. But let me----
Mr. Yoder. Well, the IRS, the SEC, and other agencies have
argued that they have legal authority under a 1986 law that
does not treat electronic correspondence the same way it treats
paper correspondence. This is outrageous to a lot of our
constituents on both sides of the aisle, and, in fact, many
interest groups and entities across the country have spoken out
about this.
I have introduced a bill, along with Congressman Graves, my
colleague here, and Democratic Members, that has over 175
bipartisan cosponsors to ensure that this practice stops in a
variety of Federal agencies.
And so I guess, in your leadership, I would hope that you
could ensure that you would head that off at the pass, that the
IRS would not be engaged in that practice, and that Americans
could trust that their private correspondence is not being read
by some IRS agent without a warrant, at least, or following the
normal due-process protections that are outlined in the Fourth
Amendment of the United States Constitution.
Mr. Koskinen. I think it is a very serious matter, and I
take it seriously. I will look into it, and I will personally
get back to you.
FAIR ENFORCEMENT
Mr. Yoder. Good. I appreciate that, sir. Thank you for your
testimony on that.
The issue has been raised regarding 501(c)(4) groups. That
has certainly been discussed in this Committee and many
Committees, and it is an issue that many Americans are
concerned about. I understand that the IRS is attempting to
write regulations that might make the enforcement potentially
easier on the IRS.
I think the biggest concern that many of us have is that
most Americans didn't have a lot of trust already and now they
have very little trust that the IRS is being fair in their
enforcement of the law. I have had folks say that they don't
want to get involved in campaigns or be associated with any
groups because they are afraid they are going to be personally
subjected to audits.
Now, I am sure you would say today and I hope that is not
happening. Regardless of what rules we write at the IRS, it is
not the rules themselves, it is how they are enforced, and it
is whether they are enforced fairly and whether we can trust
the people, the individuals, in their private moments to do the
right thing.
What can you do to ensure that the folks like Lois Lerner
and others, that even if the rules are there, that they enforce
them fairly? That is the biggest concern for my constituents,
not new rules, but that the rules are enforced fairly and----
Mr. Koskinen. I agree with you. And that is a situation, as
I say, in which the public needs to have to that comfort and
confidence. One of the reasons I am spending as much time
talking to frontline employees is I am trying to make sure that
our IRS culture encourages everybody at all levels of the
organization to raise issues and problems and concerns whenever
they have them.
Danny Werfel set in motion the beginnings of a program of
risk management, and I have told people that everybody has to
be a risk manager in the Agency. And one of the important risks
to mitigate is to make sure that we are following the law and
we are treating taxpayers fairly. We have a lot of rules to
make sure that happens, a lot of review processes, but it does
depend on people.
And my concern is to make sure that any employee that is
concerned or has a problem or sees anything going on that they
feel does not reflect well on the IRS or doesn't treat
taxpayers fairly, they need to be comfortable they can raise
that directly, either to me or anyone else----
ACCOUNTABILITY
Mr. Yoder. Well, and to that end, sir, we had Commissioner
Shulman come before us and confirm long before this became an
issue, we asked him in this Committee, is this happening, would
you ever allow this to happen? And he assured us that it
couldn't happen, it wouldn't happen.
And so we have heard these assurances before. So just be
aware that the trust is not there between Congress and the IRS
either, because we have had folks sit in your chair and say,
you can trust me, this isn't happening. And so----
Mr. Koskinen. And what I would say to that--again, my point
earlier was, when I get parachuted into these things, my rule
is play the hand you are dealt----
Mr. Yoder. Uh-huh?
Mr. Koskinen [continuing]. And not spend a lot of time
second-guessing decisions.
But as I have told employees, our goal is not to have any
mistakes. We have 90,000 employees and complicated tax laws, so
some things are not always going to go perfectly. And I have
told them that my view of running an organization is, if there
is a problem, it is my problem, and we will work on it
together. If there is a mistake, it is my mistake, and we will
work on it together. And if there is a problem I don't know
about, that is my fault, because that means we have not built a
culture where issues, problems, difficulties, mistakes get
raised through the system.
So my view is I am responsible for and accountable for
everything the Agency does. And whenever we make a mistake, we
are going to find it, we are going to fix it quickly, and we
will be transparent about it. And if I don't know about it, as
I say, that is my fault, because I am trying to get the
organization comfortable that every individual needs to feel
bad news is good news. I can't help a problem, solve the
problem, unless I know it exists.
Mr. Yoder. I appreciate those statements of personal
accountability and responsibility. And I look forward to good
results from your leadership, sir.
Thank you.
Mr. Crenshaw. Thank you.
Ms. Herrera Beutler is recognized.
SOCIAL MEDIA
Ms. Herrera Beutler. Thank you, Mr. Chairman.
Thank you, Commissioner, for being here. I have a couple
questions, not quite where Mr. Yoder was coming from, but on
the issue of social media, Twitter and Facebook.
Last year, the IRS noted it was in the process of reviewing
and updating its policies on the use of social media. Quote,
``Specifically, the IRS is considering what limitations, if
any, should be placed on the use of publicly available''--so it
is a little bit different-- ``social media information in a
civil examination or collection action. Any new internal
procedures would be made public.''
I guess I was curious--I have two thoughts about that--how
you go about deciding who you are going to read up on, if you
are going to go that route. You know, is it someone that you
are trying to collect information about for a collection
action? Or is it that people--you are looking at putting
together part of your division that is going to specifically
troll online spaces? What is your thought process going in this
route?
Mr. Koskinen. Our thought process is, when we do
examinations, when we send you a letter about something in your
return, we deal with you about the return. We do not go and
look for whatever your Facebook account might look like. That
doesn't seem to me to be efficient, effective, or appropriate.
When we are in criminal investigations, the Criminal
Investigation Division will use all of the information
available when they are tracking down people, trying to track
down assets. And so there I think it is appropriate for them to
use whatever information they have that they need to. But that
is when we are tracking down people who, in fact, have violated
the law, not paid the taxes that they owe, and are----
Ms. Herrera Beutler. Uh-huh.
Mr. Koskinen. One Revenue Agent made a good point to me in
Philadelphia. He said, we have to distinguish between the
willing to pay who have difficulties, and the unwilling to pay.
And the willing to pay who have difficulties haven't paid, but
that is because they have some problem in their family. We
ought to deal with them, as we try to, with Installment
Agreements or Offers in Compromise.
They are very different than the people who are unwilling
to pay, hiding assets, moving them around, storing them
offshore. My view is we should chase them to the end of the
Earth, and if we can use social media to find the assets or
find them, we ought to do that.
Ms. Herrera Beutler. So you are saying you exclusively used
Facebook and Twitter for unwilling-to-pay criminal
investigations?
Mr. Koskinen. That is where I think it is appropriate and
important. I don't know----
Ms. Herrera Beutler. So you are not using Facebook and
Twitter for people who are not in criminal investigations?
Mr. Koskinen. I do not know about that. I will find out the
answer to that.
Ms. Herrera Beutler. I would love the answer to that
question.
Mr. Koskinen. It is an important question.
Ms. Herrera Beutler. Yeah.
Mr. Koskinen. And I will be delighted to find out and share
with you that answer.
Ms. Herrera Beutler. Please share it with the Committee. We
would all like to know that information.
Mr. Koskinen. I would be delighted to share it with the
Chairman and everyone.
[The information follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
FOREIGN ACCOUNT TAX COMPLIANCE ACT
Ms. Herrera Beutler. This is kind of switching gears. I got
a letter from a constituent who lives abroad and obviously has
some serious concerns about the Foreign Account Tax Compliance
Act. And his observation was that a large number of Americans
who are voluntarily compliant with this, with our Tax Code--and
this law is really detrimentally impacting those folks.
Obviously, you are wanting to go after people who are not.
But what he was saying and what he is seeing is that, you
know, his bank account has already been closed, he has other
accounts that--and, specifically, his bank cited this law as
the reason. So he is losing different services, and he is
concerned about other accounts he has. And here he is trying to
be compliant, he is being compliant. And basically his comment
to me was, I am being punished for having an American
citizenship. I am following the spirit of the law, not just the
letter, and here I am losing services in the countries that I
am living that have these accounts because they are citing this
law.
What are you doing about--so you talked a little bit before
about going after criminal investigations. What are you doing
to make this easier on law-abiding citizens, who are trying to
comply, who are getting these--you know, we don't want them to
have to disavow their American citizenship.
Mr. Koskinen. I think that is exactly right. And one of
the things that we are looking at as we start to get the
information is how to make sure that we impose as little a
burden as we can on the people you are talking about who have
been compliant for some time.
The problem he is running into isn't from the IRS or from
the United States. The problem he is running into is that some
banks in some countries are saying, rather than actually
determining who is native and who is a foreign-born
participant, we are simply going to only deal with resident
citizens. And they are saying if you are not a resident
citizen, we are not going to provide you services.
That is not a widespread activity because banks obviously
are anxious in this global economy to deal with citizens
wherever they are coming from. And we are not the only country
engaged in this effort. But it is unfortunate wherever a bank
in a country X decides that they are only going to deal with
their own citizens. You would think it would be pennywise and
pound-foolish, because they are missing out on people like your
constituent correspondent.
Ms. Herrera Beutler. Can I----
Mr. Koskinen. But, anyway, whatever we can do for people
who have already been compliant, to try to make sure we don't
impose unnecessary burdens on them and that we ameliorate it,
to the extent we can, we will. But, obviously, we don't control
what foreign banks----
TAXPAYER COMPLAINTS
Ms. Herrera Beutler. And, really quickly, if someone has a
challenge, whether it is this person overseas or whether it is
the small-business man I sat next to on my flight over here,
who did tell me he feels like he has received retribution for
speaking out politically in the form of a beautiful audit, if
someone has that concern or they feel like they have been
unfairly targeted, who do they redress their grievances to? Is
there a third, independent group? Or do they have to come back
to you all and say, hey, wait a minute, you are doing this
unfairly?
Mr. Koskinen. No, they could feel free to contact me
personally, but they have the Taxpayer Advocate, who has been
set up independently by a statute. You will hear from her a
little later. They can contact her.
The Inspector General does a very good job of pursuing
specific issues and complaints. My view is that those are
important sources of information. I chaired the Interagency
Council of Inspectors General for 3 years while I was at OMB,
and I think Inspectors General provide a valuable service and a
lot of information. As I told the Chairman earlier, IGs don't
create the problem, they actually just discover it for you
before it gets bigger and more complicated. And the same with
GAO.
Ms. Herrera Beutler. Okay.
Mr. Koskinen. So I would think that anytime they feel that
way, they should feel comfortable contacting the Taxpayer
Advocate.
Because I do think--going back to this issue, if I could
take just 30 seconds, we are going to do 1.4 million audits.
Some of those people are going to be Republicans; some are
going to be Democrats; some are going to be people who never go
to church, some are going to be people who go to church
regularly. And what is important, and all we can do is continue
to emphasize it and actually perform, is for those people to
understand they are not getting that letter from the IRS
because of who they voted for, where they were last week at a
symposium or a meeting; they are getting that letter because
there is something in their return that we are asking
information about.
Ms. Herrera Beutler. Well, let me--to that point, we are
going to have to just say--and I will cut it off here--you are
going to have to prove it to us. Because they have received
that letter because of political ideology before; it has
happened. That is part of what this whole controversy was. So
we look forward to you proving it to us as we move forward.
Mr. Koskinen. We will----
Ms. Herrera Beutler. With that, I yield back.
Mr. Koskinen. It is intolerable for anybody to have it
actually happen. And I think it is extremely corrosive for the
tax system for people to think it might happen. And they have
to understand that we take this seriously. Going back to the
priorities, my highest priority is to do whatever I can to
restore whatever trust has been lost by the American public in
the IRS. We should be viewed as fair. We want people to pay the
right amount, not more, not less, and if you deal with us, we
are going to deal with you fairly in the same way we would deal
with anyone else.
501(C)(4) REGULATION
Mr. Crenshaw. Thank you very much.
We have some time for another round of questions, if
Members have them. Let me start that by asking actually two
questions.
One has to do with the 501(c)(4). There has been a lot of
discussion about that. And my main concern, as I said in my
opening statement, is that it seemed to be premature, in the
sense that all these investigations were going on and we didn't
have all the information. I think this subcommittee will
recall, we put a provision in our markup that said that we
wouldn't spend any money that was appropriated under this bill
to work on that rule.
That was adopted by the full committee but it didn't make
it into the omnibus bill. There was concern that, when we have
limited resources, that maybe that is something we could wait
until we had all the information. But that didn't happen, and
it is going along, and I assume that you don't plan on stopping
that any time soon.
So let me just ask you when you anticipate finalizing the
draft regulation. For instance, are you going to finalize the
draft before the November elections?
Mr. Koskinen. I think the chances of it getting finalized
before the November election are fairly slim. We have an
overwhelming amount of comments to take into consideration.
There will be a public hearing; there will be more
opportunities for people to provide information to us.
If there is going to be a regulation--and I would say
``if.'' Nothing guarantees, when you start the process, you end
up with a product at the end. If there is going to be a
regulation and it has changes in it, it would very likely be
republished for more comments.
So, my hope would be that at least some of the six
investigations would be done well before we get to anything
that looks like finality in whatever regulation might come out.
Because I think it is right, we need to know what the facts
were in that particular circumstance.
Although, again, the general issue is, how do we provide
clarity, not just for the IRS. My concern is, if I were
organizing an advocacy operation, I would be appreciative if I
had clear guidelines as to how to organize it, but most
importantly if I had clear guidelines as to how to operate it.
Two or 3 years down the road, the more clarity we can provide
to those people as to what you can do and what you can't do,
and how much of it you can do without being in jeopardy, it
seems to me is very important.
The facts-and-circumstances test and the lack of clarity
about how much political activity can you do means that
everybody is sitting out there worrying and wondering, well,
how does it get measured? Is this going to count on one side of
the equation or on the other side of the equation? Am I above
if I am 45 percent? Is that now no longer ``primarily''? And I
just don't think it is helpful for us, but it certainly isn't
helpful for people running those organizations.
Mr. Crenshaw. Well, it is good to hear that you don't
think it will finalized before the elections. I guess it could
be, you know, if there is some speed-up process.
But maybe an equally important question is, do you think
these draft regulations, have they already produced a chilling
effect, as people decide, gee, maybe we better avoid political
activities because we don't want to jeopardize our tax-exempt
status or have it denied or have it revoked? Might that happen?
Mr. Koskinen. I don't know. I haven't seen any studies or
surveys about that.
We have tried to emphasize that we have revised and taken
all the IG recommendations into consideration. We are
providing, we think, appropriate training and oversight for the
process. And we are encouraging people to continue to file, if
they have an interest in doing that, applications.
In fact, we have a streamlined process that was set up to
solve the backlog, which says, if you will simply say that you
are not going to spend more than 40 percent of your time on
what has been historically viewed as political activity, you
can get a streamlined approval, so that you won't even have to
worry about the backlog.
Mr. Crenshaw. And the last question is--you, I think,
answered this a little bit--whether you will wrap up all these
loose ends and be one final regulation or maybe it might be a
series of regulations that are, you know, adopted over the next
couple of years. Do you have any judgment about that?
Mr. Koskinen. I have no idea. As I said, from my
standpoint, I am trying to keep an open mind about the whole
thing, see what the comments are. There is a complicated
question of, what should the definition, whatever it be, apply
to? Should it apply to 501(c)(3)s, 501(c)(5)s, (6)s, (7)s? And
I think those are important questions that you can't know an
easy answer to.
Again, my instinct is the clearer it is and the more simple
and administratable it is, and the fairer to everyone it is,
the better off we will all be.
FREE FILE
Mr. Crenshaw. Well, let me ask you one quick happy
question, and that is that I found out for the first time this
last week that there is a program called Free File that the IRS
has in conjunction with a lot of folks that prepare tax
services. We had an event in my home district to try to make
more people aware of it, because I am not sure everybody is
aware. But if you make less than $58,000 a year, you qualify
for the Free File, and you can actually file your tax return
for free because of some arrangement the IRS has with this
alliance of folks.
They told me that they have to renew that every 5 years
with a memorandum of understanding. And so, in an effort to
make more and more people aware--they said 70 percent of the
taxpayers might be aware, or might be eligible for this Free
File. So tell us very quickly if you think that is a good idea
and if you plan on signing a new memorandum of agreement to
extend it for another 5 years.
Mr. Koskinen. It is a good idea. I should take you on the
hustings with me, because every time I do a filing season
discussion with the press, I try to emphasize that we have this
agreement with 14 providers, all the major ones you would think
of. You can go on the Free File Web site. A hundred million
Americans are eligible. You can pick whichever of the 14 you
like, and you can file for free. You don't have to pay
anything. You get the same treatment you would if you were
actually in one of their offices.
And it is a wonderful partnership, and we do plan to renew
it and try to give more visibility to it, because I think
taxpayers comfortable doing their returns without a provider
should take advantage of this. And it is one of the services we
are happy to provide.
Mr. Crenshaw. Well, you are from the IRS, and you are here
to help us. So thank you for that.
Mr. Serrano.
PRIVACY
Mr. Serrano. Thank you, Mr. Chairman. I hope you give me a
little leeway because I may shock the Committee and the
Congress, using a little more time to say that I totally agree
with Mr. Yoder. And I know that is shocking to some folks.
I cosponsored his bill. As Ranking Member, I participated
in a voice vote on his amendment last year. Because, whether
Democratic or Republican, I don't believe that our privacy
should be lost. And so, when you hear about government perhaps
reading emails, that is unacceptable--unacceptable to us, and
it is unacceptable to our democracy.
And I am beginning to hear some people say, well, if you
have nothing to hide--it has nothing to do with having anything
to hide. It has to do with the Constitution and what this
country is known for and the fact that so many other people
throughout the world would like to imitate who we are, or who
they think we are. And I know who we are, and we shouldn't have
that.
Now, that doesn't mean I sign up with those who don't
believe in a Federal Government or those who would like to
disable government agencies to the point where they can't
function. But on this, we agree that Americans have a right to
privacy and that it should be something that we protect.
So I think the big headlines tomorrow in one of the Hill
papers will be ``Serrano and Yoder agree on something,'' and
that is a good sign.
Mr. Koskinen. I am happy to be the catalyst for that.
Mr. Serrano. Yes. Well, someone should tell me where the
hustings are. I have no idea if they are near the Bronx or
anywhere like that.
501(C)(4)
So let me get this straight. If you have 501(c)(4) status,
you are not supposed to engage primarily in activities that are
political. If your activities are primarily political, then my
understanding is that you can register as a tax-exempt
organization under another part of the Tax Code, Section 527.
The problem for some organizations is that if they do this,
they will have to disclose who their donors are, as opposed to
being registered under a 501(c)(4), where you don't have to
disclose who funds you.
So even though these groups could choose to be registered
under 527 as a PAC, they don't want to do so because they would
have to disclose their donors. Am I correct in that?
Mr. Koskinen. That is correct.
Mr. Serrano. And, not putting you in a spot where you have
to try to figure out what happened in the past, was that part
of the problem, that people were doing this and, therefore,
there had to be some scrutiny, and maybe that scrutiny went
overboard?
Mr. Koskinen. Well, as I say, I have not spent a lot of
time looking backwards because we have six investigations going
on. There was an increase in organizations and the flow of
money into public discussion and debate and political
activities after the Supreme Court case in 2010. So the volume
went up, to some extent, it became more visible. Back to the
question--you know, for a long time nobody paid much attention
because most of these organizations weren't particularly
visible.
But I do think that, again, if the process is clear, then
people who will meet the criteria ought to be able to make that
choice. But a major factor in the choice, I understand, is that
if you were a 527, you could spend all your time and money on
political activity, but contributions would be visible. If you
are a 501(c)(4) social welfare organization, you can only spend
a certain percentage of your time. And nobody has quite known
what the percentage is, but you have to be primarily a social
welfare organization, not engaged in whatever is the definition
of ``political activity.''
POLITICAL ACTIVITY
Mr. Serrano. Now, do you think that--or maybe I missed
something. Do your rules define once and for all what is
political activity? Do you think we will reach the day when we
can define what is political activity?
Mr. Koskinen. Well, that is the whole purpose of the
draft, and that is the whole purpose of 100,000 comments back
to us and the public debate, which I think is an important one,
about what should be the definition, and whatever the
definition is, how much of that activity should you be allowed
to do before you jeopardize your status as a social welfare
organization.
And it is not a simple set of questions. It is a
complicated issue to figure out how to deal with that in a way
that is fair to everybody. I don't think we should be in some
way--I think the criticism needs to be considered, and the
comments, that we ought to make sure that this applies fairly
to people and is not viewed as singling out any particular
group of people, which is why you also have to take a look at
which sections of the 501(c) statute will, whatever rule, if
there is one, comes out, apply to. And so those are important,
difficult questions.
As I say, as somebody new to the game, my goal would be,
guidance that is clear, fair, and, most importantly, easy to
administer. It will be better for the IRS and it will
ultimately be better for the groups that meet those standards
and are operating. Because they ought not to, 2 or 3 years down
the road, have to be continually trying to figure out, well,
what does this really mean?
Mr. Serrano. Right.
Mr. Koskinen. And that is my concern about the facts and
circumstances test that always have you in a position of trying
to judge, well, what are the facts and circumstances? How have
they changed? What is somebody going to say? And it just seems
to me that is not good for them, and it doesn't do us any good.
It gets us involved in a lot of decisions that I think we would
be better off not making.
TRAINING
Mr. Serrano. One quick last question. I supported
including $200,000 in the Omnibus appropriations bill for
training for enforcement employees in the Exempt Organizations
unit. Please explain how you will use these funds to prevent
the type of problems experienced previously from happening in
the future.
Mr. Koskinen. Training is important. I know there has been
a concern about, and I share that concern, that we train
appropriately. The training session that went on was in 2010,
and OMB in 2011 and 2012 has made it clear that those sessions
aren't going to happen, and training has to be approved at a
very high level.
In the particular case of 501(c)(4)s, in response to the IG
recommendations, we provide clearer guidance to employees, we
have provided more training. One of the recommendations was to
provide training before any election, so we will make sure that
people understand what is appropriate and not appropriate in
terms of reviewing these organizations as we go forward.
And so we are comfortable that, while the standard is still
facts and circumstances, which is a little hard to know about,
we are comfortable that we have much better training and much
better visibility and oversight of this issue. Before--this
goes back to 50 years ago--nobody paid a lot of attention to
it, which is I think part of the problem.
Mr. Serrano. Well, I thank you for your testimony. I thank
you for appearing here today.
I know you have a very difficult job ahead of you, but if
it makes you feel any better, understand that all the years I
have been in public office, and it is 40 now, that the IRS has
never been a very popular agency. The IRS and the INS were
right up there with some folks. So, yes, you have a challenge
to bring back the confidence the President wants, but know this
is not new. There has been a distrust for many years of the IRS
by the public, and this is something we have to keep working
on.
So thank you so much for your service.
Mr. Koskinen. Thank you.
Mr. Crenshaw. Thank you.
Mr. Amodei.
TRANSPARENCY
Mr. Amodei. Thank you, Mr. Chairman.
And, Mr. Commissioner, thank you for your answers, and I
appreciate that.
I guess, I want to just--a couple of things. One is, when
we talk about transparency and all that other sort of stuff,
any plans to release the Lerner emails to any of the other
committees in the near future?
And let me tell you why I am asking that.
Mr. Koskinen. No, that is a good question.
Mr. Amodei. The context of the proposed regulation, the
context timing-wise that it comes forward in is something that
I don't think anybody in this room can ignore. So, actually,
you know, the 50 years may not be very important, but on the
heels of what has happened in 501(c)(4)s and then--because if
that hadn't have come to light, the IG probably wouldn't have
taken a look into that. And if that hadn't have come to light--
you know, so you sit here and you say, going forward--and I
respect that--we want to be open, transparent, all that other
sort of stuff. But when you say, and, by the way, as part of
that, we are going to define political activity--and God bless
you for your courage. Sounds about like defining obscenity to
me. And the Supreme Court had a hell of a time trying to do
that a long time ago. So good luck. I mean, I wish you success.
But I sit there and look at that and say, the timing of
when this is going--and we are going to define political
activity. With all due respect, that is something the
legislative branch probably ought to undertake if it needs to
be done, because the regulation will have the effect of
subsuming whatever the 50-year-old law is when you define
political activity in the executive branch. And we are sitting
here trying to go, I agree with it, disagree with it. If that
needs to be done, then we ought to have this debate----
Mr. Koskinen. Right.
Mr. Amodei [continuing]. With all due respect.
Mr. Koskinen. No, that is right.
Mr. Amodei. So when are those Lerner emails going to those
other meaner committees than this one?
Mr. Koskinen. First, I would just correct a slight
technicality. What has been in place for 50 years is the
regulation. In other words, in 1959, it was an IRS regulation
that set in motion the definition that we have today. The law
has been there for a long period, longer than that.
But you are exactly right. Even if we end up with a
regulation, the Congress always has the authority to either
change the statute or overrule the regulation. So it is not as
if the IRS and Treasury have carte blanche to do whatever they
want.
With regard to the investigations, I am in the process of
having further conversations with Chairman Camp of the House
Ways and Means Committee about just your question. And we are
anxious to provide materials, as I told Chairman Camp when I
met with him about a month ago. And he gave me, which I think
was very helpful, a list of things that were the last items or
the items that they needed to have to get to closure, and we
are very anxious to get him all the information he needs to
make his decisions.
And so we are working with the Committees. We are working
with the Senate Finance Committee, as well, and the other
Committees. We have four other Congressional investigations
going forward, and----
Mr. Amodei. And I appreciate that.
Mr. Koskinen. And we want to satisfy them that they have
the information they need to reach the determination they are
making about the determination process.
Mr. Amodei. But let me tell you why I think it is
important. It is not important in terms of who did what to who
or who shot the sheriff. It is important in terms of looking at
this regulatory proposed action and going, was this a flaw in
the regulation or was this something out of the ordinary for
purposes--because, I mean, to listen to this today, it is like,
``Yeah, we are changing the regulation.'' Not you, but I mean
generally.
So, anyhow, I think it is important in terms of examining
how the existing regulatory body was working before this latest
issue came up, not in terms of who got caught doing whatever.
So, with that, I thank you, look forward to visiting with
you.
And thank you, Mr. Chairman. And I yield back.
Mr. Koskinen. And let me just say a couple things to make
sure we have clarity.
The regulation was drafted pursuant to and after the IG
report. And the IG report, by my understanding, had been under
way when the IRS acknowledged that it, in fact, had been
inappropriately highlighting organizations for review in the
501(c)(4) area. But the IG investigation had been going on for
some months, and the draft of the regulation was a
recommendation from the IG. But you are exactly right, we need
to actually provide as much transparency as we can.
My goal on the investigations is to do whatever we can to
get all of the investigators the information they need for the
determination process. When you start a new investigation
saying, well, actually, don't worry about the regulatory
process, that is, you know, a different investigation than what
we have been dealing with for the last 8 to 10 months. And my
only thought about that is we are happy to try to get you
information about that, but we can't do a series of
investigations all at the same time.
Mr. Crenshaw. I guess it would be nice to have a rule to
just say you can't pick out people based on their political
philosophy and bully them and intimidate them and harass them.
That would be a pretty clear rule, but----
Mr. Koskinen. I think that is the rule.
Mr. Crenshaw. Well, then I guess that got violated.
Mr. Koskinen. And I think there are investigations going on
to find out exactly whether they were and how.
Mr. Crenshaw. Let me recognize Mr. Yoder.
Mr. Yoder. Thank you, Mr. Chairman.
And, at this point, I would be happy to yield to Mr.
Serrano to say anything else nice he would like to say about
me.
I mean, I don't know. If you ran out of time, I would be
happy to provide additional time for you.
Mr. Serrano. Don't push it.
Mr. Yoder. All right. Okay.
I want to thank my friend, Mr. Serrano, for his comments.
And, as you can see, on that issue, we have strong bipartisan
support. I know we have your assurances that we are going to
try to fix that.
There are a lot of issues, I think, that we agree on in
this Committee and across Congress that don't always get the
media headlines. And so it is nice to find more and more of
those that we can work together on to fix in this country. And
I appreciate Mr. Serrano and other folks on both sides of the
aisle working on that and other issues.
And I want to give another one, I think, that maybe we have
some bipartisan agreement on. And this comes from a
constituent, as I asked, what question should I ask the IRS
Commissioner? Right? This could be fun. What would you like me
to ask? And I think this is a very important question and one
probably felt by a lot of Americans.
We have talked this morning about the trust deficit that
exists between the Internal Revenue Service and Americans,
particularly in light of what I will term as much more
egregious than maybe we have heard from my colleagues on the
other side of the aisle this morning, the abuse of the Code to
attack people based on ideology. And we are going to continue
to investigate, not only your investigations you have
internally, sir, but here within Congress, serious
investigations. And people need to be held accountable more so
than they have been.
That being said, John, a CPA in my district, makes the
point that he is a CPA and the Tax Code is very difficult to
navigate. I think we would all agree with that. Four million
words, you know, 10,000 pages.
TAX PREPARERS
How can the IRS make it easier for qualified preparers and
regular taxpayers to efficiently manage their taxes and provide
quality service without the threat of onerous penalties for
unintentional oversights or misinterpretations or unintentional
errors?
Additionally, how can there be less of an adversarial
relationship between the professionals and the IRS when dealing
with problem taxpayers, as well? Absent new dollars, because it
is not just a function of money, how can you operate the IRS in
a different way to improve that relationship, which, as you can
imagine, for even a CPA or a regular hardworking American who
has to pay their taxes, it is a nightmare trying to figure out
how to sort through all this. Many of us in this country, I
think on both sides of the aisle, believe we need tax reform.
And I would like your comments on that, sir.
Mr. Koskinen. Well, as I told the Chairman earlier, I
strongly believe in tax simplification and tax reform to make
it easier for people to figure out how much they owe. I mean,
most Americans, if you could tell them what they owe, they are
happy to pay it--or not overly happy, but willing to pay it.
But when you impose all sorts of complexity and make it
difficult, they get a little less happy.
We have, I think, an important partnership with preparers
and those who are qualified to file returns. You know, we are
always concerned about unregulated preparers around the
periphery, who sometimes engage in fraud, sometimes are
uneducated and really don't provide good service. But for
people like your constituent, we have a lot of programs trying
to reach out to preparers, trying to provide them as much
information as we can.
I would hope that as we make the Web site more user-
friendly--it used to be clunky in the extreme. And we are
spending some of our resources there, because we do think it is
important for taxpayer service. But we value the work that
preparers do. As I say, they are our outreach to clients. If we
can have them comfortable that they understand the intricacies
of the Tax Code, it will make it easier for their clients.
One of the things we have is a special tax-preparer line
they can call. One of our concerns is even there the resources
constraints have made people wait longer than we'd like. We
have heard from preparers that they have to sit on the line
longer. And I don't think that is fair to them. I mean, they
have businesses to run. If they have to wait half an hour or 45
minutes on the special line, if they have five or six clients,
they could waste a significant amount of time.
So all I can say is we value the preparer community. We
will continue to reach out to them. The best thing we can do
for them is to try to provide them as much information and
guidance as we can, and we will keep doing that.
Mr. Yoder. And, sir, it is also a function of style. As
you know, they take their cues from the person leading the
organization. And so, efforts that you can make to ensure that
the relationships are less adversarial and more supportive--I
think we see this at all levels of the Federal Government,
where Americans feel that these Federal agencies are not there
to work with them but, rather, to work against them.
Mr. Koskinen. Right.
Mr. Yoder. And this is a common problem at every agency.
And I hope that you will do your best to try to fix those
problems at the IRS.
Mr. Koskinen. Right. Well, one of the advantages of this
tour I am on is I do get to talk to people doing the work.
And in Philadelphia I had a very nice and a very productive
meeting with a half a dozen Revenue Agents and Revenue
Officers. And that is where I got the willing-to-pay/unwilling-
to-pay distinction.
And their point--these are Revenue Officers. You think they
are sort of banging on your door to collect--they were saying,
we need to make sure that if you are willing to pay and you
just have difficulties, that we work with you, that we don't
actually make you feel uncomfortable.
And, in fact, their concern is, the biggest problem they
have is, a lot of times, people don't respond to notices from
the IRS because they are very nervous about it and concerned.
And their point was we ought to have a way of making sure
people understand that if you are just having trouble paying
your taxes, we are going to try to work with you.
The people we don't like are the people who, are
consciously trying to avoid paying taxes, trying to hide their
assets, moving around the country, engaged in fraud. Those
people, you know, we don't have to be very nice to.
But I think the point is well-taken. If there is an honest
mistake made, if people didn't understand things, and they are
trying to pay, we ought to have a productive working
relationship with them.
EXPENSES FROM 501(C)(4) INVESTIGATION AND AFFORDABLE CARE ACT
Mr. Yoder. And then, if I might, Mr. Chairman, one real
quick budgetary question.
Mr. Amodei asked this question earlier in a different way,
but I would like to know--and maybe you could just follow up
with information for the committee--how many hours and how many
dollars have been spent related to the controversy created by
the investigation related to 501(c)(4) groups last year and the
reforms or the changes that you are looking at now. And I know
you said it was less than 1 percent of your budget. If you
could let us know the impact. I know this is prior to your time
there, but these things do have an impact on time that could be
spent elsewhere.
And how much money has been spent and how much are you
needing and requesting related to the enforcement of the
Affordable Care Act, and the impact that is having on your
agency. I know several years ago and throughout their hearings
the IRS has repeatedly asked for hundreds of millions of more
dollars to hire more agents to go out to make sure that small
businesses and Americans are following the new big government
mandates on them regarding this law. And I would like to know
the cost to the IRS and where you are finding those resources.
Mr. Koskinen. I can answer that question, because it is a
question I have been asking. And that is, the 2014 Presidential
budget for the IRS proposed $440 million for the Affordable
Care Act. $330 million of that was for information technology.
None of that funding was provided. One of the constraints we
have is we have to pay for the IT, particularly, out of the
other IT projects we otherwise would have funded, as we go
forward.
The $100 million is primarily for preparing for and dealing
with the information issues, designing of the systems, making
sure that they work. As you can imagine one of the reasons it
is my priority is I am committed that we will, at this time
next year, have an effective filing season, which means we will
be effectively implementing our responsibilities under the
Affordable Care Act. We did that at the front end; the rollout
difficulties were not IRS difficulties.
It is a major challenge, and we are finding the funds. It
is one of the things that we have to then find ways to fund in
other areas of the IRS.
[The information follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Yoder. Just a clarification point, Mr. Chairman.
So the amount requested was 440. How much does the IRS
spend annually on the implementation of the Affordable Care
Act? And how much does it project to spend in the next years?
Mr. Koskinen. I can get you that in terms of what we have
spent for the last couple years, what we are spending this
year, and what our estimate is for next year.
Obviously, one of the issues that is going to happen to us,
as I have talked with people about it, is that starting late in
the fall, but certainly during filing season next year, because
it is a new requirement, we are going to have a lot of
inquiries from preparers, as well as taxpayers, if they are
eligible for a Premium Tax Credit. And even if they aren't,
making sure they are comfortable filling out that return. And
we have started that public information campaign this week. We
will spend all the rest of this year trying to, again, get
preparers and taxpayers comfortable that they understand.
Now, 70 or 80 percent of the taxpayers aren't going to have
anything to do with it at all. They are just going to check a
box to say, ``I have insurance,'' and they will move on their
way. So a big chunk of people won't be affected by it.
But we will be glad to get you and the Committee the
information about over the last 2 or 3 years how much have we
spent for IT or personnel on Affordable Care, what are we
spending this year, and what do we expect the requirements are
going to be in the next year or 2.
[The information follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Crenshaw. I am sure that when you next appear before
us, then there will be a lot of discussion about the dollars
that are necessary.
Thank you.
Ms. Herrera Beutler.
BONUSES
Ms. Herrera Beutler. I wanted to ask about bonuses really
quickly and making sure that bonuses are being given to
employees who actually have shown improved performance or goals
that they have met.
I don't know if you have seen, have you taken--we put some
report language together. Have you taken our guidance within
the House report language to ensure that bonuses would be
awarded to those who actually show improved employee
performance and productivity?
Mr. Koskinen. Yes, they are performance awards. The pool
is 1 percent of compensation. The performance judgments are
made by managers, not by the employees themselves, obviously.
And the history is that those awards have gone to about two-
thirds of the employees, so a third don't get any. The average
size of those awards is about $1,200, so nobody is making a lot
of money.
And if I could, hold her time, if I could respond to the 1
percent, in terms of how did I come to this decision: After the
decision was made last year, trying to reach the sequester
levels, that performance awards would not be paid to IRS
employees, OMB had issued a government-wide edict that 1-
percent performance awards could be made.
My predecessor decided that while the contract provided the
Bargaining Unit performance awards a pool of 1.75 percent, that
we had, we thought, negotiating ability to change that number,
and the number went to zero. The Union then, understandably,
filed a grievance, an Unfair Labor Practice, and a lawsuit, all
of which were pending when I started.
In the course of negotiating a new agreement, which we are
in the process of--and I hope sometime in the near future we
will have that agreement settled--we have been negotiating
about what the performance pool ought to be going forward,
and----
Ms. Herrera Beutler. When you say the ``performance
pool,'' what does that mean?
Mr. Koskinen. That means that----
Ms. Herrera Beutler. Like, the number of people that are
eligible?
Mr. Koskinen. The Bargaining Unit is whatever-thousands of
employees it is, and you take the salary. And then the question
is, what is the performance award pool? It doesn't go to every
employee. And----
Ms. Herrera Beutler. So wait a minute. These aren't merit-
based?
Mr. Koskinen. These are performance awards based on merit.
They are determined by the manager. But the size of the pool
available for awards was set by the contract at 1.75 percent--
--
Ms. Herrera Beutler. So that meant--that is a floor. That
many will get a performance award?
Mr. Koskinen. No. 1.75 percent was the pool. Then each
individual Bargaining Unit was evaluated. A judgment was made.
And, as I say, about two-thirds of them were eligible for
awards, performance awards. The average award was about $1,200.
One-third of them were not eligible because they had not
performed, determined by their manager.
And the question is what is the size of the pool or whether
there would be a pool at all. The decision then was no pool. We
ultimately negotiated a settlement with the Union that they
would drop the grievance, the Unfair Labor Practice, and the
lawsuit, and we would pay not 1.75 into a pool for performance
awards but 1 percent.
In terms of how we are able to do that, we had in our
budget, post-sequester, funding for that because as a result of
the sequester, we have actually lost another 1,300 people. And
on an annualized basis, that provides us part of the revenues
we need. We have made more assumptions about cuts in our other
overhead expenses of about 4 percent.
And the arrangement with the Union is that we won't pay
those awards in the fiscal year the way we have always done it.
We pay managers 2 or 3 months after the fiscal year, into the
next one. So we are moving the Bargaining Unit awards into the
next fiscal year. So this year we are only going to pay one
pool award; there won't be two. And that is how it fits within
the budget.
So we had----
Ms. Herrera Beutler. So can I, really quickly, reclaiming
my time. I----
Mr. Koskinen. I was going to give you back 2 minutes.
Ms. Herrera Beutler. What I am interested in understanding
is--I think if someone is eligible for an award because they
have shown based on their merit and their hard work that they
deserve it, I am fine with that.
Mr. Koskinen. Good.
Ms. Herrera Beutler. My issue is understanding--you said
that the managers make the decision. So I assume, you know, you
have issued guidance whereby they can use, you know, some kind
of criteria to make this?
Mr. Koskinen. Yes, there are----
Ms. Herrera Beutler. And----
Mr. Koskinen. There is an agency-wide performance plan run
by the Human Capital Office.
Ms. Herrera Beutler. And then there is a follow-up for
quality control to make sure that it is not a manager saying--
right? So that people have actually met these awards. Because
we have seen people receive these performance awards who, for
crying out loud, are the subject of investigations.
So I guess I want to make sure that, moving forward, that
these awards are appropriately--that that is where my question
is.
Mr. Koskinen. I have asked that question myself to make
sure that, for managers as well as Bargaining Unit employees,
when we pay a performance award, we need to be comfortable that
the system is actually rewarding performance. Employees know
who is performing and who is not. And if you are making awards
to people who aren't performing, that is not good for morale
either.
So we have a very sophisticated system. And I think your
point is well-taken, that we need to--and I have said the same
thing--we need to evaluate it to make sure that we are
comfortable that this just isn't Lake Wobegon and everybody is
above average. That basically we need to be rewarding
performance.
And that is my final reason for making this decision. We
could do it within the budget. And these are, again, employees
who haven't had a pay raise in 4 years, have been subject to a
lot of difficulties over the last year. And, ultimately, as I
say, 75 percent of our budget is people. Without the people,
the work isn't going to get done.
Part of the reason I am out wandering around the country in
the middle of the wintertime is to remind those employees, who
are dedicated to the mission, that we value their work. They
are terrifically dedicated; some of them have been around 20,
25, 30 years, working on this area. And their only concern is,
can we get them the resources so they could provide better
taxpayer service.
So if, in the course of settling with the Union and saving
us the risk of having to pay more in that pool and being able
to time it in a different way, I can send a signal to the
employees that we value their work, it seemed to me that was
appropriate.
Ms. Herrera Beutler. All right.
With that, I yield back.
Mr. Crenshaw. Anybody have any other questions? I think we
are about ready to move into panel two.
So let me just say to you, Commissioner, thank you. I know
how busy you are. Thank you for being here today.
And we know what a difficult job you have. I think
sometimes we lose sight of the good things that the IRS does,
that you do every day under difficult circumstances. Collecting
the revenues, talking to folks, answering questions, chasing
down the bad guys, all the things that you do every day, we
very much appreciate. And we are here to help you do that even
better.
So thank you for the time.
This concludes the first panel, and we will have the second
panel come along.
Thanks so much.
Mr. Koskinen. Thank you, Mr. Chairman.
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Panel #2--IRS Oversight
Mr. Crenshaw. Well, let me welcome our second panel today.
I want to thank you for your patience and for being with us
today. We appreciate both your time and your expertise.
I am pleased to welcome back the Treasury Inspector General
for Tax Administration, Russell George, to share his
observations of compliance and recommendations about the
efficiency of the IRS. Since the IRS is the largest Treasury
bureau, then TIGTA is accordingly the largest of the three
Treasury inspector generals. And to whom much is given, much is
expected.
We are relying on your office and your counsel to help us
assess and understand the IRS's management and use of
taxpayers' funds. So welcome back, Inspector George.
I am also pleased to welcome back Nina Olson, the National
Taxpayer Advocate.
This is your first appearance before the subcommittee since
2007. I am hoping today we can hear from you about services you
provide to the taxpayers, what you are doing to help those
taxpayers who may have been victims of tax fraud and abuse, how
the IRS can make the most of its funding. So welcome, Ms.
Olson.
I appreciate the service of both of you all and look
forward to your testimony. But first let me yield to Mr.
Serrano, the ranking member, for any opening statement he would
like to make.
Mr. Serrano. Well, I also want to welcome you both here.
We just had a very interesting conversation with the
Commissioner, and I would be interested to hear, Mr. George,
what your recommendations are and how things are falling into
place or not, and of course from you, Ms. Olson, on how we can
better serve the public and maybe bring down some of that fear
everybody has of the IRS.
And so we thank you, and we look forward to your testimony.
Mr. Crenshaw. Thank you.
Let me start by asking both of you all a question. Oh, I am
sorry. I would like to ask you to make your opening statements.
I got carried away. Mr. Serrano was so brief, I just got so
confused.
But, please, take your time and tell us what is on your
mind. Mr. George, will you begin?
Mr. George. Thank you, Chairman Crenshaw. Ranking Member
Serrano, Members of the subcommittee, thank you for the
opportunity to discuss significant challenges currently facing
the Internal Revenue Service.
Let me start with the topic of providing quality customer
service, which is the first step to achieving taxpayer
compliance. We have seen a decline in the IRS's ability to
provide a sufficient level of customer service in each of the
channels that taxpayers use, including telephone, walk-in, and
correspondence.
Many taxpayers use the telephone to contact the IRS.
Meeting demand with reduced staffing continues to be a
struggle, resulting in long wait times, abandoned calls, and
taxpayers redialing the IRS toll-free telephone lines for
service.
At its walk-in offices, known as taxpayer assistance
centers, the IRS has decided to eliminate certain services,
such as tax-return preparation, that can be obtained through
other channels. The IRS assisted over 6\1/2\ million taxpayers
at these service centers in Fiscal Year 2013 but plans to
reduce that number by 14 percent this year.
The IRS's ability to process taxpayer correspondence in a
timely manner has also declined. The backlog of paper
correspondence inventories has substantially increased. The
over-age inventory rose from approximately 593,000 at the end
of 2012 to almost 1.2 million at the end of 2013.
As with all Federal agencies, the IRS is required to
estimate the amount of improper payments made each year and
report to Congress on the causes of and steps taken to reduce
these payments. The IRS limits its reporting to improper
payments associated with the Earned Income Tax Credit. However,
in our view, the IRS's assessment should also include payments
due to refund fraud, such as identity theft.
Tax-fraud-related identity theft continues to be a growing
problem which results in billions of dollars in improper
payments. The total impact is significantly greater than the
amount the IRS detects and prevents. Using the characteristics
of tax returns that the IRS confirmed as involving identity
theft, we analyzed tax year 2011 returns and identified
approximately 1.1 million undetected returns that have
potentially fraudulent refunds totaling approximately $3.6
billion.
While this is a decrease of $1.6 billion from the prior
year, indicating that the IRS is making progress, significant
improvements are still needed. Expanded access to the National
Directory of New Hires could immediately provide the IRS with
information needed to make substantial improvements in its
fraud-detection efforts. Legislation is needed to expand the
IRS's authority to access this data.
The Tax Gap is also a continuing challenge. The most recent
IRS assessment is that the gross Tax Gap is about $450 billion
annually. Most of this amount, $376 billion, is attributable to
taxpayers underreporting their tax liability. The law provides
for certain new reporting requirements, including merchant card
reporting and foreign account reporting, to help the IRS
identify unreported income. TIGTA will be evaluating the
implementation of these requirements this year.
Implementation of tax law changes associated with the
Affordable Care Act will also present many challenges for the
IRS in the coming years. For example, the Affordable Care Act
provides for a refundable tax credit, known as the Premium Tax
Credit, to offset an individual's health insurance expenses. As
with other refundable credits, there is a risk of improper
payments.
Further, in September 2013, we reported that a fraud-
mitigation strategy is not in place to guide Affordable Care
Act systems development, testing, initial deployment, and long-
term operations. The IRS informed us that two new systems are
under development that will address fraud risk. However, until
these new systems are successfully developed and tested, TIGTA
remains concerned that the IRS's existing fraud-detection
system may not be capable of identifying and preventing refund
fraud. We are also concerned about the protection of
confidential taxpayer data that will be provided to the
exchanges.
Our review of the IRS's customer service strategy
determined that it provides sufficient plans to assist
individuals in understanding the tax implications of the
Affordable Care Act. The IRS's role in providing customer
service in this area will become more prominent in 2015. We
will continue to monitor and correct any problems early in the
process.
Chairman Crenshaw, Ranking Member Serrano, members of the
subcommittee, thank you for the opportunity to share my views.
Mr. Crenshaw. Thank you.
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Mr. Crenshaw. Ms. Olson.
Ms. Olson. Chairman Crenshaw, Ranking Member Serrano, and
distinguished members of the subcommittee, thank you for
holding this hearing and inviting me to testify today.
As you know, the IRS has faced some significant management
and funding challenges over the last year. In my written
testimony, I have outlined both the IRS's progress and my
continuing concerns regarding exempt-organization applications
and implementation of the Affordable Care Act. Today, I will
focus on four other areas of particular concern.
First, I believe it is critical that we adopt a taxpayer
bill of rights. From time to time, the IRS, which is
fundamentally an enforcement agency, will do things that are
administratively convenient for itself but not fair to
taxpayers. In fact, in the preface of my June report to
Congress, I analyzed the IRS's actions in dealing with
organizations seeking tax-exempt status under 501(c)(4) in the
context of the 10 rights I have proposed, and I concluded the
IRS's actions would have violated eight of those rights.
The enactment of a taxpayer bill of rights constitutes one
important step to prevent similar situations from arising in
the future. I am pleased that the House of Representatives
passed the bill of rights I have proposed on a voice vote last
summer, and I hope the Senate acts, too, because I think that
the taxpayer bill of rights should have the force of law. But
the IRS itself has the authority to adopt the taxpayer bill of
rights, and in case the Senate does not act, I have been
working with the IRS leadership to try to get agreement to do
so.
Second, I am deeply concerned about the decline in the
IRS's ability to meet the service needs of the taxpaying
public. Even with the widespread use of tax preparers, the IRS
received more than 109 million telephone calls on its customer
service lines last year. Among taxpayers seeking to talk to a
live assister, the IRS could not answer two out of every five
calls, and those taxpayers who got through had to wait an
average of 17.6 minutes on hold.
For the first 4 months of the current fiscal year, the IRS
is running behind last year's pace. And to make matters worse,
the IRS has announced it will only answer basic tax law
questions on its phone lines and in its walk-in sites until
April 15th and then no--I repeat, no--tax law questions at all
after April 15th, including questions from the millions of
taxpayers who obtain filing extensions and prepare their
returns later in the year.
In the light of events of the past year, I understand that
calls for more IRS funding may meet with skepticism, but I must
tell you that I don't see any way the agency can begin to meet
taxpayer needs without more funding. At the end of the day, IRS
funding reductions don't punish the IRS; instead, they punish
the nearly 150 million individual taxpayers and more than 10
million business-entity taxpayers who are trying their best to
comply with the monstrously complex Tax Code we have imposed on
them and who are not receiving the help they need from their
government.
Thus, as you start to make funding decisions for fiscal
year 2015, I implore you to keep in mind the nearly 20 million
phone calls the IRS didn't answer last year, the tens of
millions of taxpayers who had to wait on hold for an average of
nearly 18 minutes, also after calling several times, and the
IRS's new policy of not answering many tax law questions. If we
don't do a better job of assisting taxpayers, noncompliance
will increase, and taxpayers and the public fisc will be
harmed.
Third, while the IRS is doing a better job of detecting and
stopping identity theft and other refund fraud returns, I
remain concerned that victims of tax-related identity theft are
not being assisted as quickly and as seamlessly as they could.
I have recommended for many years that the IRS provide victims
with a single employee who would serve as his or her sole
contact and who would coordinate crossfunctional work to
resolve cases more quickly and painlessly. The IRS should stop
dithering and just do this.
Fourth, in my written testimony, I provide a detailed
analysis of the sources of Earned Income Tax Credit errors and
make practical, concrete proposals for reducing the improper
payment rate, even as we ensure that eligible taxpayers are not
deterred from receiving the EITC.
These recommendations include emphasizing personal contact
during audits, regulating tax preparers to improve return
accuracy and protect taxpayers, imposing penalties on preparers
who fail to comply with due diligence requirements, using a
third-party affidavit form to verify the residence of a child
in the EITC audits, and accelerating the use of third-party
information reports so the IRS can verify income data before
paying out refunds.
This last recommendation will help address identity theft,
refund fraud, and improper payments combined--namely, that
Congress direct the IRS to develop a plan to enable it to match
information return data against tax return data before paying
out refunds. At the same time, it could make the data available
to taxpayers and thereby help them prepare their returns more
accurately and easily.
I appreciate this opportunity to share my thoughts with
you, and I would be happy to answer any questions you may have.
Mr. Crenshaw. Well, thank you very much.
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LEVEL OF SERVICE
Mr. Crenshaw. Thank both of you all.
And let's ask a few questions. It is interesting to me to
hear both of you all talk about the fact that one thing that
IRS doesn't do very well, and that is answer the telephone. We
just had the Commissioner before us, and it was one of my main
concerns as I talked to him.
I know it is always easy to just say, if we had more money,
we could hire more people, we could answer the phone more. But
as I told him, when you have $11.3 billion, then you have to
decide how to spend the money. And it seems to me that one of
the priorities ought to be customer service. When you look
through the entire budget, somehow, some way you ought to be
able to find the money to do the things that are most
important. And if that is the--it is kind of the face of the
IRS, answering the telephone. If you only get half the calls
answered, and when you get answered, you wait 20 minutes--
somewhere, somehow, in all of that $11 billion, there ought to
be money.
I told the Commissioner, it bothered me to find $63 million
were paid out as bonuses, reversing a decision that his
predecessor had made because there wasn't enough money. But
those are the kind of priority decisions that are being made,
and that is what we talked about today.
So maybe, particularly Ms. Olson, maybe as the Taxpayer
Advocate, as you advocate for those people that are trying to
get through to the IRS, maybe there are some things that you
can do as you look through that $11 billion and say, here is an
idea about how you could save some money here, whether it is in
your computer contracts or your rentals.
I know they will say they are saving money, they are
doing--and I appreciate that, because it is tough. But, still,
it seems like you have to do the most important things first of
all. I hope maybe both of you all can assist us in finding
places where there is a little more money to move to the
customer service side, and we will see how that goes.
IMPLEMENTATION OF RECOMMENDATIONS
Let me just very quickly ask you all, because we have these
recommendations that were made, particularly Mr. George, we
have the scandal going on and the recommendations that we
made--and each of you actually made them, and the President
said they are going to implement those.
Tell us how the IRS is doing in implementing each of those
recommendations, in general. And tell us, do you believe that
some of the groups that are applying for tax-exempt status, are
their people still being subjected to this kind of bullying and
scrutiny? And then, finally, what work do you plan to do to
kind of make sure that this doesn't go on any further?
So maybe each of you could kind of touch on that.
Mr. George. Thank you, Mr. Chairman. If I may start first.
The IRS has reported to us that they have adopted all of
the nine recommendations that we issued in our report on the
inappropriate treatment of certain groups seeking tax-exempt
status. We are in the process now of engaging in a review to
determine the adequacy of the corrective actions that the IRS
purports to have taken. We are in the middle of that. I don't
have a deadline yet as to when we will complete that.
But one of the issues that we did recommend was catching up
on the backlog of these applications that were still
outstanding. And so, as my comments suggest, there are still
outstanding applications for groups seeking an up or down from
the IRS. I don't know, I wasn't here for the entire portion of
the Commissioner's comments, but he, I know, in private has
acknowledged that that is the case and that is a priority, but
our report will give a thorough response as to the adequacy of
their response to our recommendations.
Mr. Crenshaw. Thank you.
Ms. Olson.
Ms. Olson. We have been really closely focusing on the
process of getting an exempt-org application through, which
creates some of the backlog, the amount of review that they
were doing or the steps that they were taking. And we have been
working very closely with them.
We have also trained my employees so they do better
advocacy when they get cases in. And we have seen a significant
number of cases. We have issued a significant number of
taxpayer assistance orders on these cases, including several
that involved (c)(4)s where we felt we were not getting the
attention. Most of it was timeliness, getting a decision.
Something that my organization really focused on was the
key point in Mr. George's report, where the frontline employees
were asking for guidance on these issues for over a year, and
no guidance was coming back. And we found that the Exempt
Organizations function had no process for tracking the age of
these guidance requests, for tracking the requests and saying,
this is 3 months old, this is 6 months old. And when you leave
employees to their own devices for a year and the backlog is
continuing and continuing, they are going to come up with a
solution. And we all know what that solution was: a BOLO list.
And so we have really been focusing with them to be
responsive on their guidance, to track the guidance so they
have the management controls in place, and, as well, to look at
their process and say, what do we really need to know?
501(C)(4) DRAFT REGULATION
I would comment, if I could, on the prior discussion about
the regulations. I spent a fair amount of time over the last
week really looking at the proposed regulations, and what I saw
in that was the IRS responding to a recommendation of mine and
I think Mr. George's, to get greater clarity, see if there are
some bright-line tests you can do. But when you go to the
bright-line tests, there are winners and losers, and you have
that tradeoff of doing facts and circumstances, which is
subjective in a way, versus bright-line test, which is
objective but you are going to get some results that we may not
want to get.
So I view these as an opportunity to begin a dialogue with
people and hear back what the country really wants in these
organizations.
Mr. Crenshaw. Well, it is interesting to hear that
perspective, because I do think, as you probably know, they are
expecting 100,000--they have already had over 90,000--comments
on one of the most controversial, toxic proposals ever been
made. The good news from hearing the Commissioner say, at least
in his opinion, they wouldn't be put in place anytime soon, but
he didn't really say when.
But I think your point that there ought to be a lot of
dialogue about that, because it certainly may have a chilling
effect on these elections coming up now. And it certainly is
arguable that people's freedom of speech could be limited, so
it is very important, I think, as we go down that road. So
thanks for that.
Mr. Serrano.
Mr. Serrano. Thank you.
And thank you both for your testimony.
TIGTA INVESTIGATION RESULTS
Mr. George, your lead investigator reviewed 5,500 emails
and concluded that there was no indication of political
motivation, yet you failed to mention this until months after
your audit was published. Furthermore, you never mentioned that
progressive groups were targeted for scrutiny, as well. Your
report repeatedly emphasized the Tea Party and other
conservative groups while using the term ``other'' to refer to
the two-thirds of the applications that were examined that did
not involve Tea Party groups. External studies of similar
information have found that terms like ``progressive'' and
``Occupy'' were also used as part of the inappropriate criteria
in subjecting groups to extra scrutiny.
Are you concerned about how your initial report has been
used? Do you think you should have been more forthcoming or
comprehensive in your analysis? At last year's hearing, I
thought that you said you planned to take another look at the
groups. Have you done so?
And I should have prefaced my comments by saying that I
join my colleagues in denouncing anything that went wrong, in
terms of scrutinizing people and groups. But your report
indicates basically that it was the Tea Party when, in fact, it
has been proven that there were other groups. And we want to
know why you omitted that and why you did not clarify later on
when it was known not to be the case.
Mr. George. There are obviously a number of issues there,
and I beg your indulgence, Mr. Serrano; I may ask you to
repeat, you know, one or two of them.
But let me start with the initial comment that you made,
and that is about the 5,000-plus emails. It was during the
course of the initial report when I was informed by staff that
there existed a, quote/unquote, ``smoking gun memo,'' which I
haven't seen, which perhaps--which purported to say, hey, IRS,
do this as it relates to the groups that were the subject of
this, for lack of a better word, poor treatment by the
determination unit in Cincinnati and, as we subsequently
learned, some of the people in Washington.
My auditors indicated to me that they did not have system
access to employee emails. My Office of Investigations did have
software and access which would allow them to do a quick-scan
search to see if that memorandum existed and could be located.
And so I did not learn about the memo that you noted in
your comment until I was literally sitting in a hearing, I
believe it was before the House Oversight and Government Reform
Committee, and so was not aware that that assertion was made by
the Deputy for Investigations. And I am not going to say that
it is invalid in its conclusions, but I was just as surprised
to learn about that conclusion as many others were.
So it is not that I was hiding anything; it was that I was
unaware that that review of the documents had been completed
and that that was the opinion of that member of my staff.
Now, as it relates to progressive groups----
Mr. Serrano. So this was a member of your staff who came
to this conclusion but didn't tell you?
Mr. George. Did not tell me directly, correct. That is
correct.
Now, as it relates to whether progressive groups, you have
to keep in mind, sir, this was an extraordinarily fluid period
in which we found ourselves. And it was literally 6:30 p.m. the
night before my first testimony before the Senate Finance
Committee in which my former chief counsel indicated that there
was a hidden tab in one of the documents that the IRS had
supplied to us that indicated that there were other be-on-the-
lookout lists. At that time, we had no idea until then, at
least I didn't, that it existed, but we certainly did not have
any indication as to how they were being used.
Now, from the outset of our review, we did know that groups
with the names ``Tea Party,'' ``9/12 project,'' and ``Patriot''
were being identified using BOLOs and other criteria and that
the IRS had set those aside for special processing.
Now, when we learned about the existence of these other
BOLOs with ``progressive'' and a few other names on it, there
are two factors. One--and this is the key--Title 26, Section
6103 of the United States Code has criminal penalties if I or
anyone else with access to that information releases the names
or, in effect, its tax-return information, with very limited
exceptions. So the Chairman of the House Ways and Means
Committee can receive that and the Chairman of the Senate
Finance Committee can receive that information without
restriction. No other committee, including this one, has access
to that information. And if I were to reveal that information,
not knowing, one, whether they were protected by Section 6103,
could be subject to penalty.
And so in the late hour of receiving that information and
during the course of that period while we are trying to
determine what, if anything, the IRS did with this information,
I felt it best to--we had our facts in place before opening up
what could have been a big issue and what could not have been a
big issue; we did not know at that time.
And, lastly----
Mr. Serrano. Yeah, but let me tell you what troubles me
about your testimony. It seems, unless I am hearing it
incorrectly, and that is possible, that you knew early,
according to your report, that certain groups were being
targeted, but you found out other things the night before you
were ready to testify. And so I have to ask myself, how come
you were not aware in your investigation, in the ongoing
investigation, that other groups and other issues were at play?
It seems to me from what I heard from you on two occasions
is that, right before you were ready to testify, you found out
about this or found out about that or were told that this was
taking place or not. Yet my big question to you is, are you now
ready or have you done anything in the past few months to say
more than the Tea Party was targeted, if you will?
And remember, remember, sir, that I am one of those liberal
Democrats who denounced this practice if it did exist, while
also saying that there are people who have misused these breaks
they get by not having to put forth who their donors are. And
that is at the bottom, or at the center of the problem. So you
are not talking to one who is defending everything that
happened.
But it seems to me that you are not telling me either
everything you know now or everything you have done to correct
the misconception that went out there that only certain groups
were targeted, when, in fact, that is not what happened, and
that has not been the history of this country anyway.
Mr. George. I understand what you are saying, sir, but,
there is something that I neglected to mention at the outset of
my response. And that is, the very evening, so it must have
been around 7:00 p.m., the night before that first testimony, I
instructed my auditors to open up an audit to determine how
these other groups were treated. And we are in the process of
engaging in that review.
Now, just to be clear, there is an ongoing FBI
investigation, and so we are restricted in terms of the people
to whom we can speak----
Mr. Serrano. About all groups or about the other groups,
as you refer to them?
Mr. George. About the previous--the existing--the initial
group of people that we identified.
But we are doing an audit, and we have spoken to a few
people who have already gone through that process, but I don't
have a due date for that.
And I also need to stress, too, sir, that the BOLO list,
the be-on-the-lookout list, that we identified, some of which
had these progressive groups listed on them, our mandate was to
look at the political advocacy or the campaign activities of
these groups, approximately 298 of them, and only 3 had the
name ``progressive'' in them.
And I have to again--I have made this point before. I was
not in a position to determine, just because a group had the
name ``progressive'' in it, automatically meant that it had one
political affiliation or persuasion or another. That was not
the purpose of this review. Others interpreted it that way.
That certainly was not in our report nor in any of my public
comments. I have never said that just conservative groups were
targeted.
Mr. Serrano. Okay. Let me just say this to you. I think
that your department made a grave error in letting people
believe that only certain groups were targeted. Because now,
even if you fix that and get to the bottom of the truth, the
fact is that there is a political issue in this country that is
running amok about only certain groups or one certain group
being targeted. And we are going to hear about this until the
November elections. That is a fact. That is a fact. That is why
there will probably be a thousand more hearings about the IRS,
and most of them will focus not on the budget but on what
happened here.
So I just hope you understand that, by going the way you
did, you might have helped to create this kind of a situation.
Mr. George. If I may, though, Mr. Serrano, because the one
thing that is getting kind of lost in all this, my audit was
not formally complete before Lois Lerner spoke before a group
in which she planted a question to ask about this.
So it was someone from within the IRS who acknowledged that
they engaged in this inappropriate behavior and treatment. The
IRS had full access to our audit months before it was released,
and they did not question the findings that we ultimately
released, and of course then preempted us in terms of releasing
that information, which is unprecedented.
And so it is not as if we intentionally went out of our way
to cast a pall on any particular, group. But they acquiesced in
this, sir.
Mr. Serrano. Okay.
Sorry, Mr. Chairman. I know I went over.
Mr. Crenshaw. No problem. We will have time to pursue
that.
Mr. Yoder.
Mr. Yoder. Thank you, Mr. Chairman.
And thank you both for coming to testify today. We have had
an eventful morning, both visiting with the new Commissioner
and then certainly hearing your updates on what is going on at
the IRS.
Certainly, the last year or so has put the IRS and their
rulemaking authority on the front page of nearly every paper in
America. And I think many Americans are concerned to this day
about the trust deficit that lies between those who are to
enforce the law fairly and impartially. And we know that hasn't
been occurring.
And I know, Mr. Serrano and Mr. George, you had a dialogue
here. Your point was one that I was going to make, in that I
first learned about this back in May of 2013 when Ms. Lerner
came out and essentially apologized, said it was inappropriate
and made comments to that regard. And so I think that
regardless of the original motives--and I think that is what we
are still trying to determine, is how all this happened, who
put these things on, and motivations.
Let's talk about what has happened since then. And we are
going to go back and relitigate who did what, and we have to
continue to do that. But in this moment I, at least, want to
move forward a bit and say, what are we doing to ensure that
this doesn't happen again? We have talked about the nine
recommendations and their implementation. You have, in your
testimony, both written and in answer to the chairman's
questions, stated they are following the nine recommendations.
501(C)(4) DRAFT REGULATION
I would like to talk about the 501(c)(4) rules that are now
being proposed. There is going to be legislation before the
House on this. Interestingly, this has become a bipartisan
moment of condemnation. You have the ACLU arguing that these
are essentially putting a muzzle on public speech, and you have
some liberal and conservative groups doing this.
I would like to know, are the 501(c)(4) rules that the IRS
is proposing, are those the result of your recommendations? And
if not, where are they coming from?
Mr. George. One of the proposed recommendations did come
directly from our audit report on inappropriate treatment of
groups, and that was we proposed that there be guidance on how
one should measure the primary activity of the 501(c)(4). All
of the other provisions within the proposed rule we have had no
role in developing, sir.
Mr. Yoder. As these rules are developed, is it your opinion
that the Treasury Department can finalize an IRS rule without
the approval of the IRS Commissioner?
Mr. George. I am not privy to the procedures that the
Treasury Department follows, except to say that for over 50
years there have been guidance or a directive issued by the
Secretary of the Treasury, who has deemed that it is the
Assistant Secretary of Treasury for Tax Policy who has the
ability to determine the final position of the Department of
the Treasury as it relates to Internal Revenue Code or tax
policy. And so I would have to defer to them in response to
that question.
Mr. Yoder. So you are not aware of an instance where the
Treasury Secretary would make a rule or regulation in this
regard without the consent or the participation of the IRS
Commissioner?
Mr. George. As I have never been a part of that, I can't
definitively state it.
Mr. Yoder. Okay.
Mr. George. But one can assume that he would seek--he or
she would seek guidance from the Commissioner.
Ms. Olson. Sir, the current proposed rules are submitted
under the signature of the Deputy Commissioner of Services and
Enforcement in the IRS. So, I don't know who signs the final
rules, but that is whom the proposed rules are signed by.
Mr. Yoder. Regarding, sir, your recommendations on how to
fix this problem, do you believe if the IRS follows the
recommendations of the Inspector General that Congress could
sleep at night, they could be rest assured, that the American
people could be rest assured and sleep at night, knowing that
there is no possibility that agents within the IRS could
utilize ideology or some other perspective that goes against
their mandate that would target individuals in any way, both as
individuals for audits or groups for audits?
How ironclad are these reforms and these changes to
ensure--because, sir, it is not just on this issue. We have
people--essentially, there is a chilling effect across the
country now, a fear of individuals that if they even got
involved politically and endorsed Mr. Serrano or the Chairman
or me or made a donation, that now they are on a list, and that
means that, maybe not today, but some other administration
might utilize the subjective powers that exist, that human
individuals have, that can be riddled with fraud or error or
malfeasance, that they could use that to subject them to an
audit in the future. And now they have to worry every time they
get one, why are they getting an audit?
How do we fix that?
Mr. George. Well, allow me to answer your question,
Congressman, by saying we are dealing with human beings.
Mr. Yoder. Right.
Mr. George. And so we still officially have not had a
chance to take a formal review of the implementation that the
IRS says it has adopted. And we are going to go one by one
through each one to determine to what extent they have complied
with what we recommended and any ways that they may have
diverted, improved, or not met up to that recommendation.
But this is somewhat of an aside, it is an ironclad rule
that IRS employees are not supposed to access the tax-return
information of people that they officially have no
responsibility to work on that particular case, and yet on a
daily basis they do that, some of them. Not a lot, but some of
them do. So you could have the most ironclad rule in place, but
you are dealing with human beings, who are imperfect.
Mr. Yoder. I think this is why a lot of Americans are
concerned about the IRS getting involved in their healthcare
decisions and determining whether they have the proper health
insurance to meet Federal mandates. And having that sort of
relationship that they might think of with their doctor or
someone else in the healthcare world now with an IRS agent I
think scares a lot of people that this agency has become too
powerful and it has too many opportunities to commit these
types of anti-freedom, anti-American type of actions.
So we are going to continue, hopefully in a bipartisan way.
I know my colleagues on both sides of the aisle are concerned
about this, because it can happen as easily to a conservative
group as a liberal group or a group based upon religion or race
or anything. And so we have to rout this out, no matter where
we are, and make sure this doesn't ever happen again and that
people don't feel like it could happen. Your recommendations
are an important part of that, and we will look to move forward
on additional recommendations as we try to fix this problem.
TAX COMPLIANCE
The second topic is one which has come up today, both in
the Commissioner's hearing and your hearing, is what is the IRS
doing to ensure that it has better resources to deal with
taxpayer concerns and complaints, to ensure that the phone is
being picked up. The Chairman made that comment. Others have
made a comment regarding your data, that it is not being--the
responses are pretty weak in terms of handling concerns for
consumers.
I would like to maybe turn this question a little bit in
that, is the problem that we have not enough people to answer
all of the questions and concerns that taxpayers have? Or is
the problem that the Code is so cumbersome and riddled with
exemptions and loopholes and problems that average, everyday,
working Americans couldn't possibly attempt to figure out on
their own and so they have to hire accountants and lawyers? And
we have 4 million words in this Code, and it grows, you know,
by the second with the regulatory side as well.
I guess, is the problem that we need more people to answer
the problems Americans have with the Code, or is the problem in
the Code itself?
Mr. George. Yes. It is all of the above, Congressman. And I
will defer to Ms. Olson in a moment, but it is a zero-sum game
here.
I mean, they have a finite amount of resources. They have
to make sure that the American people understand how to comply
with the Tax Code. It has been my belief and findings of many
of our audit reports that it is important people understand
what the rules are. If the IRS--and this is a key component,
and I alluded to this in the testimony--had access to third-
party information about the income of people who have tax-
reporting obligations, that increases dramatically the
compliance rate.
I use this figure, and I believe I have in previous
testimonies before this committee, but it is so important that
I feel I have to repeat this. Again, there is a high
correlation between tax compliance and third-party information
reporting and withholding. The IRS itself estimates that
individuals whose wages are subject to withholding report 99
percent of their wages for tax purposes. Self-employed
individuals who operate nonfarm businesses are estimated to
report only 44 percent of their income for tax purposes. And
the most striking figure, and while it is dated, it is the most
up-to-date information that we have: Self-employed individuals
opertaing businesses on a cash basis report just 19 percent of
their income for tax purposes.
So if the IRS had the ability to gain more information from
third parties to attest to the income of the taxpayer, you
would have a massive positive impact on reducing the tax gap
and increasing the revenue that is due to the Federal
Government.
I want to leave enough time for Ms. Olson to respond, but
you have to have enforcement. That is the second aspect of it.
So the IRS has to be in a position--and whether it is by
correspondence audit--most people don't realize that if they
receive a letter from the IRS questioning their income tax or
their tax return, that is an audit. An audit is not just some
IRS person coming to your office or your home and sitting
across from you and going line by line through receipts and
what have you. And, also, a telephone call from the IRS making
the same inquiries, that is an audit.
So if you don't have those individuals in a position to do
that--and most people who are contacted by the IRS do respond.
So if they had more resources, more people to be able to do
that, I think it would have a very beneficial impact on revenue
collection.
Mr. Yoder. Ms. Olson.
Ms. Olson. If I may, I think there are a number of things
operating here.
One is the sheer volume of the work that the IRS has
undertaken. Just even its core work has increased dramatically
in the last 10 years. The number of phone calls we have
received has increased by 53 percent between fiscal year 2004
and this last fiscal year. So just the volume has increased.
Our taxpayer service budget hasn't increased that much to be
able to meet the demand that taxpayers have.
In terms of what the IRS could do to get savings in one
place and move them to these taxpayer service needs, I think
you have to look at the appropriations format itself. We have
the two categories of service and enforcement and then a number
of others like IT, and it is very difficult to move dollars
between those categories.
And in the taxpayer service category is essentially the
filing season. So all of those 150 million individual returns
and 10 million business returns have to be processed, and that
is the big chunk of the taxpayer service budget, and whatever
is left over is for the phones.
And, in fact, this last year, one of the reasons why the
IRS was able to get its phone level of service even up to the
abysmal level of service that it was was by taking people off
of answering the phones for the automated collection system,
where taxpayers were calling in to say, we would like to pay
you money. We took them off of that system and put them on the
regular 1040 line just to answer the calls during the filing
season. If we hadn't done that, we would have been in much
worse shape during the filing season.
I think that there are lots of things that the IRS does--I
mean, I write a 500-, 700-page report every year identifying
things that the IRS could do better. And I think one of the
things that I spend a lot of time with and I would encourage
this Committee to really urge the IRS to look at is the work
that they do up front that creates downstream consequences,
that because they are not addressing issues correctly up front
or resolving the whole issue up front, you are having many more
touches downstream. And that wastes resources. And often those
downstream resources are higher-graded employees than the
person at the first line of contact. And my office has done a
number of studies actually tracing things through the process
to show what work is generated by not getting that right answer
up front.
So I think there is a lot of work that can be done in that
area, and I think we should look at what are we categorizing as
enforcement versus service, do we have the right allocations
between the budget categories, and things like that. But the
bottom line is the amount of work. Leave aside Affordable Care
Act, leave aside anything that is new. Just the volume of
returns that are coming in.
And I would say one last point. After this recession, we
are seeing more and more people becoming self-employed. They
are not being hired back as wage earners. They are either
putting themselves into business--and so that issue of
unincorporated self-employed people not reporting becomes a
larger issue for our tax gap and our business going forward.
There is a huge taxpayer service side on that component,
too--educating people, being out there, talking to them about
their responsibilities, et cetera. It is not just all
enforcement that brings in compliance.
TAX CODE COMPLEXITY
Mr. Yoder. Well, I appreciate both of your comments on that
topic, and it is one that requires a lot of study and certainly
changes from Congress.
I would say, Ms. Olson, that the biggest upstream factor of
all this is--you know, you mentioned dealing with problems
upstream and not letting them continue to have to cause
problems down the road and have more individuals have to touch
it more, staff have to deal with it. The biggest upstream issue
I think is the complexity of the Tax Code.
Ms. Olson. Uh-huh.
Mr. Yoder. If we had a simplified Tax Code, one in which
taxpayers knew the obligations they had, they were very clear
and easy, it would not only be easy for taxpayers, it would be
so much easier on the enforcement side. It would require less
people. It would require a smaller budget for the IRS.
And so I don't think you are going to see a lot of us say,
you know, the answer for tax complexity is we just need more
staff, we need more bureaucrats. That is not going to be the
angle I think we are going to take. It is, how do we simplify
the Code to make it easier on taxpayers and easier to enforce?
Mr. George.
Mr. George. Mr. Yoder, I would just--because Ms. Olson
raised a very important point, and I don't know whether or not
this was going to come up later. But one of the unintended
consequences of the IRS having to shift people from one
function to answer telephone calls, one of the areas in which
they do this is especially troubling because they take people
who were working identity-theft cases, who are working to help
identity-theft victims, and literally having these individuals
stop in midstream and move to telephone answering, how do you
complete a return and what have you, which causes immense
delays in helping victims of identity theft, which, as members
of this Committee know, is a massively growing problem and,
especially if you are the subject, if you are the victim
involved, is very frustrating.
And so it is just a point, again, of it being a zero-sum
game. They need resources to do it all. This ACA role, most
Americans have no idea of the massive role that the IRS is
going to play in the implementation of the Affordable Care Act.
And the IRS once again will have to make some tough choices as
to what to focus upon.
Mr. Yoder. Thank you, Mr. Chairman.
Mr. Crenshaw. Thank you.
I don't have any further questions, but I want to make a
couple comments.
501(C)(4) DRAFT REGULATION
One, Mr. Yoder, you asked about when could they finalize
this rule. If you look at the Administrative Procedure Act,
there is nothing to stop the IRS from finalizing the regulation
the day after they have the comment period end. Now, that is
not practical, but it is procedurally possible. And we heard
the Commissioner say that he didn't think that was going to
happen. That is, kind of, his opinion.
But I think, in light of what Ms. Olson said, I think it is
clear, with all the implications that that has, that would be,
I think, outrageous if that were to happen. This needs to be
talked about, thought out, discussed, whatever. And I hope that
is the plan as they receive these, literally, 100,000 comments.
SPENDING PRIORITIES
The other thing I would just say, based on--you know, we
talk a lot about how much money the IRS needs. And everybody
talked about it earlier, you need money to provide services.
But one of the problems, we get criticized from time to time,
people say, well, you are punishing the IRS, but you are really
punishing the people. We are not here to punish anybody. When
we asked the Commissioner, how are you spending the money--and
then when you look back and you see millions of dollars wasted
on lavish conferences, you see the harassment that has gone on.
It was back in 2010, I think, that I think the
appropriations to IRS was more than they asked for, and yet
that is when all the horseplay and harassment started. In fact,
as I recall, some of the money that was being spent on the
conferences, since they had a little extra money, they just
went ahead and spent it. And then there were times when they
would ask for more money, the enforcement would be asking for
more money, while money was being wasted somewhere else.
So I don't think this subcommittee or the Appropriations
Committee ever wants to punish anybody, but I think this
Committee wants to make sure that, just like your role, Ms.
Olson, that we are advocates for the taxpayer. And when we see
the money being misspent or spent on the wrong priorities--and,
as Mr. Yoder said, it might be nice to simplify the Tax Code.
If you got it really simple, you wouldn't even need the IRS
anymore. You would have a fair tax, as they say.
But I don't know whether it is harder to appropriate more
money to the IRS or to simplify the Tax Code. Neither one of
them is very easy. But we are actually working on both of them.
But I just wanted to make those comments.
Mr. Serrano, do you have any final questions or comments?
Mr. Serrano. No tax is good tax.
Actually, I have three questions that I am going to briefly
put into one question.
One is about you. How do the taxpayers make their way to
you? How can we better make taxpayers aware of your existence?
Because you have a lot to offer, and yet the Advocate is not
seen on a daily basis or heard from, except maybe before
Congress. That is one.
Secondly, I understand that you started your career when
the Earned Income Tax Credit began under President Ford. So
could you tell us a little bit about that program? Because that
gets a lot of grief in Congress also, because sometimes people
get it who don't deserve it. And, you know, how does that
compare to all the other people who are overseas and in other
places who don't pay any taxes at all?
So that is the question in a couple of parts.
TAXPAYER ADVOCATE SERVICE
Ms. Olson. Well, first, in terms of getting in touch with
us, as you all have mandated in the law, we have one office, at
least, in each State. And I have to thank you for that, because
we are probably the only part of the IRS that really has one
office in each State.
And we try to keep the cases that are worked, that arise in
the State in our office there. I guess there is an exception
right now for Florida because we are so inundated with identity
theft that my employees in Florida would only work identity-
theft cases, and I think they would kill themselves if that is
all they were doing. So we spread some of them out throughout
the United States.
And my local taxpayer advocates work very closely with
taxpayers. They are in the news; they work with local media to
make sure that the groups know about us, taxpayers know about
us. And they have a requirement to reach out to at least 40
grassroots groups in their locale every single year, and 40
different ones, to let them know about us, whether it is
domestic violence shelters, homeless shelters, small-business
groups. You know, they go to trade associations for truckers.
It is very creative, what they do to let people know.
So we can always do more. We enjoy working through the
congressional offices, and we are getting more information out
about our organization, getting you all some posters and
brochures.
EARNED INCOME TAX CREDIT
I would say about the Earned Income Tax Credit that in my
testimony for today we shared some information of some recent
results of IRS audit data that shows the sources of the error.
We have the improper payment rate, but what is really important
in order to move that improper payment rate, lower it, is
understanding what is causing these errors. How much of it is
fraud, but how much of it is just the complexity of the
statute?
And it also helps the IRS learn how to educate taxpayers
better, and also go after preparers. One of the things that we
know is that unenrolled preparers, the category of preparers
who are the ones that are not CPAs, attorneys, or enrolled
agents--you know, just anybody can hang up a shingle--they
prepare the vast majority of EITC returns that are prepared by
preparers. About 60 percent of EITC returns are prepared by
preparers, and 75 percent of those prepared returns are
prepared by these unregulated people.
One thing that I would like to say about the EITC, I know
that we focus on the improper payment rate, but the EITC, to
administer it costs about 1 percent of all of--it is a very
low-cost program for the IRS to administer. And that contrasts
to food stamps or welfare or anything like that, which has
caseworkers, et cetera. Food stamps and welfare may have a
lower error rate. Where we have our high cost is in the
improper payment rate. But if you look at error and cost of
administration, it really evens out.
I am not defending the improper payment rate, and I have
real pragmatic suggestions about how to address that. But I am
just saying, to put it in context, there is a cost one way or
another in these kinds of benefit programs. And it is cheap to
administer it through the Internal Revenue Code, but the cost
is on the improper payments side.
Mr. Serrano. Thank you so much.
Mr. Crenshaw. Well, thank you both, if that answers the
question.
Time has expired. Thank you all. We were having such a good
time, time just flew by. But thanks for being here. Thanks for
all the work that you do.
And, with that, this hearing is adjourned.
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Monday, April 7, 2014.
INTERNAL REVENUE SERVICE
WITNESS
HON. JOHN KOSKINEN, COMMISSIONER
Mr. Crenshaw. Good afternoon, everyone. This hearing will
come to order.
I want to thank everyone for being here today. This is our
second IRS hearing of the year. Our hearing in February focused
on the IRS operations, whereas today our hearing will focus on
the IRS 2015 budget request.
So welcome back, Commissioner. We appreciate your
willingness to come see us again.
Similar to the IRS 2012, 2013 and 2014 budget requests, the
Administration is seeking discretionary spending for the IRS
well above the discretionary caps that are in current law.
So absent a change in either the Budget Control Act or the
Ryan-Murray agreement, $480 million of the IRS request is both
meaningless and pointless because, if the $480 million was of
importance to the Administration, then the President would have
found a way to pay for it from the $1.014 trillion allowable
under the Ryan-Murray rather than use a gimmick that the Budget
Committees have rejected now for four consecutive years.
Perhaps even more troubling, the Service is asking this
Committee for language to pay IRS employees bigger salaries and
bigger bonuses than are allowed under the civil service system
and, also, to eliminate some language that we put in the
Omnibus Bill last year.
Specifically, the language that we put in to prohibit the
IRS from targeting groups from additional scrutiny based on
their ideological beliefs is not in the Administration's budget
request.
We put in language to prohibit the IRS from targeting
citizens of the United States for exercising their rights
guaranteed under the First Amendment, and that language has
been eliminated, too.
We also had language that would prohibit the IRS from
producing videos without being reviewed for cost, topic, tone
and purpose, and that has been eliminated as well.
So on its face, Mr. Commissioner, your request appears to
ask for a $1 billion increase in order for the IRS to silence
the Administration's critics and to make silly videos. I am
sure that is not your intent.
But I would like to hear why you propose to eliminate these
good government provisions, which were intended to help restore
credibility and confidence to the IRS.
And as you can tell from the roughly, I guess, 150,000
comments on the draft 501(c)(4) regulation, Americans are still
angry about the additional scrutiny that the IRS gave to
certain organizations.
Explaining how the inappropriate criteria came in to use,
how they were allowed to go on for years, and who was
responsible for them is what is needed to assure the public
that the IRS can administer the Tax Code in an impartial and
nonpartisan manner.
Requesting a $1 billion increase, eliminating prohibitions
against targeting that were negotiated by this Committee, and
proposing a new rule for the 501(c)(4) before investigations by
Congress and the Department of Justice have been completed will
not build trust in the IRS, the Department of the Treasury or
the Federal Government in general.
So now let me turn to Ranking Member Serrano.
And, again, Commissioner, we thank you for being here
today.
Mr. Serrano.
Mr. Serrano. Thank you, Mr. Chairman.
I would also like to welcome our Internal Revenue Service
Commissioner back to the subcommittee. It has been a whole 5
weeks since we last saw you. So welcome back.
We are here today to discuss your fiscal year 2015 budget
request in which you request significant new resources in order
to better do the job that we in Congress have given you.
But before we do that, I think it is important to have some
historical context. In fiscal year 2010, the IRS was funded
$12.146 billion. In fiscal year 2011, the first year the other
side was in charge of the House, that number dropped $25
million to $12.121 billion. Fiscal year 2012, that number was
reduced even further to $11.8 billion. And in 2013, because of
the sequester, the IRS was forced to operate at a level of
$11.199 billion.
Last year we were able to restore some funding to the IRS,
but the Agency is still funded at levels well below previous
years. Since Republicans took over the House, there has been a
cut of close to $1 billion in funding.
I am sure some of my colleagues think that cutting funding
for the IRS is a good thing, and I am sure some of them are
proud of this effort. But I am not sure we want the tax laws
with no one able to answer questions when our constituents have
them and with no one around to ensure justice for those who
attempt to evade the law.
And today I am sure we will hear complaints about the
reduction in the level of service or the reduction in the
ability of our taxpayer service centers to accept tax
applications.
Well, we need to be clear as to the reason why. We can talk
about conference waste all we want to. But when you cut almost
$1 billion in funding, then people should not be surprised when
the IRS cannot do all that we ask of them.
No one here debates that ensuring efficiency in any
government agency is important. But, at a certain point, the
level of cuts overwhelms the ability of an agency to streamline
their operations, which is why your budget request is so
important.
Your request seeks to restore significant funding to the
Agency both to help rebuild needed services and to help enforce
some of the most abused areas of our Tax Code.
You are asking for money to prevent identity theft and to
address the backlog of cases where we know money is owed to the
government. You ask for resources to implement the tax
provisions of the Affordable Care Act and to expand audit
coverage.
In my mind, these all seem like important and worthy
investments in the Agency that brings in the vast majority of
our Nation's revenue.
I know the IRS is an easy Agency to beat up on, especially
after last year's controversies, but it seems to me that it is
much more responsible to ensure that we are adequately funding
the Agency rather than hindering its ability to function
properly.
Mr. Chairman, since you brought it up--I had not intended
to bring it up--I think that the recent report that came out
about the alleged abuses, the timing was excellent. It came
right before this hearing, and maybe there was a reason for
that.
Secondly, I am on record here three, four, five, maybe even
more, times saying that, if, indeed, abuses were committed
against organizations or any groups, that I am as outraged and
upset and lack tolerance of it as much as any Republican or any
American.
But at the same time, we seem to know, we are pretty sure,
that different groups were targeted. And why we continue to
argue that only conservative or Tea Party groups were targeted
only makes this hearing and these kinds of conversations much
more difficult.
So I would hope that, as time goes on, people will stop
politicizing this issue and get to the facts, number one, and
number two, get to the point where we understand that the IRS
is charged with a special responsibility, they must meet that
obligation, and we must be supportive of it.
Thank you, Mr. Chairman.
Mr. Crenshaw. Thank you.
And I see that we have been joined by the Ranking Member of
the full Committee, Mrs. Lowey. So I would like to recognize
her for any opening statements she might like to make.
Mrs. Lowey. Well, I certainly would like to thank Chairman
Crenshaw, Ranking Member Serrano for holding this hearing.
And I would like to thank Commissioner Koskinen, a
distinguished graduate of Duke University, for coming before
the Committee this afternoon.
As we know, the IRS fiscal year 2015 budget request calls
for $12.477 billion in funding, an increase of 10.5 percent
above the fiscal year 2014 enacted level. This includes $2.317
billion for taxpayer services, $639.25 million for prefiling
taxpayer assistance and education. In addition, the request
includes $5.134 billion in enforcement initiatives.
As we know, funding for enforcement not only holds tax
frauds accountable, it also brings in more than a 5-to-1 return
on investment.
I am concerned that the Republican majority's efforts to
continually underfund the IRS makes it easier for tax cheats to
go undetected and more difficult for law-abiding members of the
public to get questions answered and the resources they need
from the IRS.
And I want to also thank you because I know you have been
traveling around the country visiting various offices, talking
to employees and trying to get as much information as you can
so you could certainly do the job appropriately and continue
your distinguished career.
As we saw last year with the reports of inappropriate
screening criteria, funds for proper training and taxpayer
services are severely needed so that employees know proper
procedures and, most important, American taxpayers can have
confidence in the IRS.
Commissioner Koskinen, to put it simply, you have a lot on
your plate. In addition to the budget and Affordable Care Act
implementation, this year for the first time gay and lesbian
married taxpayers will be able to file jointly as well as amend
past tax returns, as some States such as New York recognize
same-sex marriage and some, unfortunately, do not, leading to
more confusion for taxpayers who look to the IRS for guidance.
I look forward to discussing some of these matters in more
detail with you shortly. And thank you again for your service.
Mr. Crenshaw. Thank you very much.
Now we will have some time for some questions. Oh, I almost
forgot to call on the Commissioner for his opening statement.
So, if you could, limit your remarks to about 5 minutes.
You can certainly submit your written statement for the record.
And I apologize for almost not recognizing you.
Please be recognized. And we would love to hear what you
have to say. Thank you.
Mr. Koskinen. Chairman Crenshaw, Ranking Member Serrano,
Congressman Lowey, Congressman Womack, thank all of you for the
opportunity to provide you with an overview of our proposed
Fiscal Year 2015 budget and what we hope to accomplish with
those resources.
In discussing the IRS budget, we remain concerned about the
constraints under which the IRS has been operating since 2010.
Our funding for Fiscal Year 2014 was set, as noted, at $11.29
billion, more than $850 million below the rate for Fiscal Year
2010.
It is important to note the IRS is the only major Federal
Agency operating at close to our post-sequester level rather
than returning to the higher, pre-sequester level, as many
other agencies were allowed to do.
The ongoing funding shortfall has major implications for
taxpayers and the tax system. This year, millions of taxpayers
are finding unacceptably long wait times on the phone and at
our Taxpayer Assistance centers to get basic questions answered
and to resolve tax issues.
Further, as a result of fewer staff and reduced enforcement
activities, the IRS estimates it will not be able to collect
billions of dollars in enforcement revenues.
We estimate this year we would have returned to the Federal
Government over $2 billion more in collections had we received
the remaining $500 million cut from our budget by the
sequester.
The solution of the funding problem faced by the IRS begins
with the administration's Fiscal Year 2015 budget request,
which totals $12.64 billion. That is approximately $1.35
billion above the fiscal year 2014 enacted level.
American taxpayers deserve to know what value they would
receive for the $1.35 billion increase in funding requested for
the IRS. Let me give you a few details.
About $400 million would go to taxpayer service programs.
We estimate this would allow us to answer an additional 12
million taxpayer calls and cause our level of phone service to
exceed 80 percent, which would be 20 points higher than last
year's level of 60.5 percent.
The additional calls answered would include calls from
those seeking help with the tax-exempt provisions of the
Affordable Care Act.
We would also improve phone service by, for example, making
our system capable of retaining taxpayers' identifying
information so they wouldn't have to repeat it after being
transferred from one operator to another.
Part of the funding would also go to technology investments
for such things as further improvements to our Web site at
irs.gov.
Another $334 million of the total additional request would
go to enforcement programs. With this funding, we estimate
closing more than 500,000 additional cases, including
individual audits, employment tax exams and collection
activities.
We would also be able to do other things, like increase our
document matching program which we use to spot underreporting
of income.
Through these activities, we estimate we would collect an
additional $2.1 billion a year in enforcement revenues. That
would more than pay for the entire amount of additional funding
being requested for the IRS for fiscal year 2015.
An important subset of enforcement is the fight against
refund fraud caused by identity theft. About $65 million of the
additional request would go to this area.
We estimate that, through improved identity theft fraud
detection, we would protect an additional $360 million a year
in revenue from going out the door. We would also close an
additional 13,000 cases where taxpayers have been victimized by
identity thieves.
Another major priority for us is implementing enacted
legislation. We would use $394 million of the additional
request to continue implementing the Affordable Care Act and
FATCA.
A large portion of this is for IT upgrades. For example, we
need to build new technology systems to process and analyze the
reports coming to us from financial institutions under FATCA.
Investments in IT are also needed to continue implementing
two major ACA provisions, the Premium Tax Credit and the
Individual Shared Responsibility provision. I want to stress
that we are mandated to implement ACA and FATCA; so, if we
don't receive this funding, we must take it from either
taxpayer service or enforcement or both.
With respect to information technology, we would use
another $100 million of additional requests to invest in a
number of longer-term IT projects on the drawing board that are
designed for such things as providing a more stable and secure
computing environment and taking us to the next level of
digital services for taxpayers.
I want to emphasize that we take very seriously the need to
be careful stewards of the funding we receive. Congress and the
American public need to be confident that this money will be
used wisely.
It is my responsibility to ensure that happens, and I would
be delighted to report back to the Committee as Fiscal Year
2015 unfolds to discuss with you what the American taxpayer, in
fact, receive for any additional investments in our Agency.
That concludes my statement. And I would be happy to take
your questions.
Mr.Crenshaw. Thank you very much.
[The information follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
SPENDING PRIORITIES
Mr. Crenshaw. Let me start out by asking a question about
spending priorities. When you were here before, we talked about
the fact that how you spend the money is just as important or
almost important or pretty close to as important as how much
money you have.
And I guess Mr. Serrano mentioned that 2010 you not only
received a record high amount of funding, it was actually more
than the IRS had asked for. You weren't at the IRS at the time.
But, actually, instead of hiring more revenue agents, like
it said it was going to do, the IRS spent a record amount of
money on travel and training.
And so now we find out that you have been struggling to
come up with $30 million to finish migrating to Windows--I
think they call it Windows 7----
Mr. Koskinen. Yes.
Mr. Crenshaw [continuing]. Even though Microsoft announced
in 2008 that it would stop supporting Windows XP past 2014.
So I know you probably wish you had already done that
instead of making those videos and wasting that money, that is
all hindsight.
But just tell the subcommittee how we can be confident that
you have got the correct spending priorities when, in the past,
some of the excess funding got spent on silly videos and things
like that.
So, for instance, the $30 million that is going to Windows;
I think you are going to take that from enforcement, but tell
us what that means. Is that more important to the IRS than the
revenue agents?
If you ask for a $350 million increase for enforcement next
year, then part of that money is going to come out for the IT.
Just talk a little bit about how you decide what are the
priorities and how you spend the money.
Mr. Koskinen. It is an important question that I am
delighted to answer and, as I say, keep you advised.
Wherever you think we were in 2010, we are now 10,000 fewer
people and, depending how you count, $850 to $1 billion less.
So whatever might have been excessive in that budget has
clearly been squeezed out.
At the same period of time, over the 4 years, the number of
taxpayers has increased by somewhere in the range of 6 to 8
million. Plus, we have additional responsibilities provided by
Congress, including implementation of the Foreign Account Tax
Compliance Act and the ACA.
So our problem right now is not around the edges. Our
problem goes to the fundamental issues of what we can do. And
that is one of the reasons I tried to highlight in my oral
statement the priorities we have.
If you think about it and step back, we have two major
areas of activity. We do taxpayer services--trying to make it
as easy as possible for taxpayers to figure out what they owe
and to make the payments. And we have tax enforcement and
collection--trying to make sure that those not willing to pay,
those who are actually trying to cut corners, pay their fair
share, so that when you pay your taxes, you are confident that
everybody is paying their fair share.
So those are two sides of the same coin, as far as I am
concerned, and we are understaffed in both areas. As you know,
our telephone service level is about 60 percent for 2013.
During the filing season now, it is a little above 70, 72
percent, because we spent a lot of time and effort answering as
many calls and questions as we could.
But for the year, because we don't have much more money now
than we had then, we think it is going to be at 60 percent,
which means 40 percent of the calls, over the course of the
year, don't go through.
There are long lines at our assistance centers, and we
think, again, it is unfair to taxpayers not to provide them the
level of service, I think we would all agree, they deserve.
On the enforcement side, we have close to 5,000 fewer
revenue agents and officers than we had 4 years ago. So under
this budget, we wouldn't replace all of them, but we would
replace a significant number of them.
In terms of our Criminal Investigation department, they
have 350 fewer people than they had 4 years ago. They are
concerned that they will be down 500 people at the rate we are
going. All of that personnel would generate significantly
increased revenues.
As noted, our estimate is, if we had the additional
funding--the $1.2 billion, $1.3 billion--in the budget, we
would return $2.1 billion to the government, significantly more
than the amount of money we are seeking.
In information technology, this year we have close to $300
million of projects on the board to improve the operations of
the IRS, but they are not being done because of the funding
shortfall.
I view it as, and refer to it as, driving a Model T with a
lot of things on top of it. We are the classic fix-the-
airplane-while-you-are-flying-it attempt.
Windows 7 is part of that. You are exactly right. It has
been some time since people knew Windows XP was going to
disappear.
The problem with Windows 7 is, if we don't make that fix,
which we are trying to finish up now, Windows XP will no longer
be serviced. So all of the security issues that are continually
updated no longer will be updated.
So we are very concerned that, if we don't complete that
work, we are going to have an unstable environment in terms of
security.
So we are significantly understaffed virtually everywhere.
We are not talking about doing anything very exotic. We are not
talking about making new videos.
Last year we cut training by over 85 percent. Now, whatever
you thought about the training budget, cutting it over 80
percent couldn't have been the right answer. So we are going to
spend more money on training. We will spend more money on
travel.
But it is all going to be focused on trying to make sure
that new and existing IRS employees are appropriately trained
to be able to deal effectively with the taxpayers, whether they
are dealing with them as taxpayer services representatives or
they are dealing with them as revenue agents and officers.
So they are, for me, fairly simple, straightforward
priorities, things we have to do that we want to do better than
we are doing now. And at the back of all of that, behind it, is
we have to implement FATCA and the ACA. We have no choice about
that.
BONUSES
Mr. Crenshaw. Well, thank you.
When you were here before, we talked about some of these
issues about how you spend the money. And one of the things
that we talked about at that time was that only 60 percent of
the telephone calls were being answered, but we also talked
about the fact that you had decided to pay $63 million in
bonuses that your predecessor had decided he wasn't going to
do.
And if you look at fiscal year 2015, I think the travel
budget increases by $58 million which is in addition to a $44
million increase this year.
And so you have to ask the question: Is the travel more
important than answering the phone calls? Is it more important
than upgrades and IT? Talk about those priorities.
Mr. Koskinen. Again, a good question.
We have 90,000 employees spread across 500 offices. As
Congresswoman Lowey mentioned, I have now been to 20 of them
and talked to over 8,000 employees.
The travel we are talking about is related to both managers
being able to visit and see their employees. It's about
employees, when we are not able to appropriately and
effectively do training with regard to computerized or video
conferencing, actually having to travel someplace with trainers
to gain the training as we go forward.
And this is training not just for new employees. This is
training to upgrade the skills of existing employees in the
Agency. So there is nobody going to fancy places.
The last training we did was in New Carrollton. As I told
somebody, it was pretty easy for me to approve it. And we have
much more rigorous approval levels than we have ever had
before.
And so all of that is focused on trying to make sure,
again, that the employees working for the Agency have the right
tools to be able to deal effectively with the public.
LEVEL OF SERVICE
Mr. Crenshaw. For instance, is there an increase in the
money that will be used to answer the phone this time?
Mr. Koskinen. Yes.
Mr. Crenshaw. If there is more money for travel, but is
there also--there probably is. Tell us a little about that.
Mr. Koskinen. Yes. The level of service last year in 2013
was about 60.5 percent. We worked very hard to raise it. We
have got a better Web site. We think it is going to be a little
higher, but it is going to still be in the low 60s.
With these funds, we would have a level of service--
including an additional 11 million call demand for ACA up to 80
percent.
In the golden days in the mid-2000s, we were at an 88
percent level of service. Probably we would never go above 90
because then you have people waiting for the call.
But we think we could get to 80 percent. That would be our
goal. And we would be willing to be held accountable to see if
we couldn't do that. It would mean, overall, we would answer
about 12 million more calls.
And I think that, beyond that--we used to measure how long
you had to wait on the phone in seconds. In fact, we still do
it, but the seconds now are running into anywhere from 15 to 25
minutes for the calls to get through. So it is one of the
highest priorities.
I have given you in this statement our priorities. One is
to raise the service level from 60 to 80 percent. The other is
to increase enforcement. We think we will collect $2 billion
more from people who are cutting corners or not paying at all,
including foreign tax cheats and avoiders. And the third would
be to improve our information technology system to allow us to
effectively absorb the responsibilities for ACA.
I would note the ACA implementation requires us to change
our tax filing process. For the vast majority of Americans,
they are going to check a box that says they have insurance and
they won't be affected either way by the Affordable Care Act.
But for those who have gotten Premium Tax Credits paid to
the insurance company, not to them, we have to reconcile those.
They are based on an estimate the individuals have made of what
they would actually make in 2014, just the way we all estimate
how much money should be withheld.
All of that has to be reconciled, all of that in the middle
of the filing season. So one of the reasons I have tried to
make it clear that we have no choice, if we can't implement the
Affordable Care Act, it means we won't be able to run the
filing season effectively.
And, as you know, we collect, net of the $300 billion in
refunds we sent out, about $2.5 trillion, so any negative
impact on the filing season dwarfs--the potential loss--dwarfs
anything else we are talking about.
Mr. Crenshaw. Well, thank you.
And I am happy to hear that the phone calls are a priority
because, as you know, that is kind of the front door to the IRS
and that is the first contact people have and it drives people
crazy.
Just in today's world, people always want to talk to, like,
a real live person, and I appreciate the fact that you are
making that a priority because I think that would go a long way
toward making people feel like they are getting the response
they need. And I appreciate that.
Mr. Koskinen. Well, I just got an email yesterday. I have
talked to over 8,000 employees now, and I have encouraged them
to have information flow from the bottom up. And I have a
mailbox so they can send things to me.
A common concern across all of those employees is just this
issue. They feel badly that they can't answer the questions and
provide the service to taxpayers that they want to provide. The
email yesterday was to say, one of the things, to try to allow
us to answer more calls.
We have told our call center operators that they cannot
answer complicated tax law questions. We have to send people to
our Web site. We can answer straightforward questions. You
know, the common, ``How do I file?'', ``Who is the head of
household?'' standard questions, but anything at all
complicated, which we up until this year answered, we can't.
So this email was kind of a plea from a call center person
saying, ``You know, I just feel badly when I can't tell people
this. Isn't there some way we could actually answer those
calls? Because we know how to do it.''
And I had to write her back and say it was a difficult
choice people had to make to try to figure out how to process
as many calls as we can.
And the problem with complicated questions is they take
longer so that, to try to keep the call level service up, we
have had to tell people to go to our Web site, which is far
improved over where it was a year ago, but still isn't the
state-of-the-art Web site that we would like to have.
So, again, when we go to 80 percent, that would include the
ability for us now, next year, and 2015 to answer those
complicated tax law questions at the same time.
Because I couldn't agree with you more. The face for most
taxpayers of the government and, really, the IRS, is when they
call. And if they can't get through, they are unhappy. If they
can get through and then can't get an answer, they are unhappy.
But we have people working in call centers for 15 or 20
years, which I always thought, ``Gee, that can't be the most
fun in the world.''
They do it because they feel that they are providing a
service and, when they can answer a question, provide help to a
taxpayer, they find that very rewarding and satisfying.
So I couldn't agree with you more. It is an immensely
important priority for us.
Mr. Crenshaw. Thank you.
Mr. Serrano.
Mr. Serrano. Thank you, Mr. Chairman.
Speaking of phone calls, you may have a few when you get
back to the office because you are now quoted as saying that
New Carrollton is not a fancy place and----
Mr. Koskinen. I am sorry about that.
Mr. Serrano. You might be getting some from New Carrollton.
LEVEL OF SERVICE
Let me ask you a couple of questions about restoration of
services. In 2014, Congress kept the IRS at the sequester level
with the addition of $92 million for certain specific purposes.
How far does that go to us restoring services to the
taxpayer that were reduced by the sequester?
And as a follow-up, the start of the filing season was
moved back 10 days due to the 16-day government shutdown.
Please tell us why the shutdown had that effect.
And are there other lingering effects that the shutdown had
and, also, how the fact that we were still trying to restore
services that we lost before affected you?
Mr. Koskinen. I would note, even with my concerns about the
underfunding, we did appreciate the $92 million of additional
funding.
I don't want anybody to think that wasn't real money and
that hasn't been used well. It was designated for customer
service, Foreign Account Tax Compliance Act implementation, and
then information technology. So $34 million of it is going to
customer service.
I will tell you, the complication is they estimate it takes
$6- to $8 million to improve customer service levels by 1
percent. So part of the reason we think the tax filing season
is going so well, in terms of an increased level of customer
service, is we are able to spend that money and will continue
to spend it through this year.
$39 million will go to FATCA. And the reason we haven't
provided the Committee with an operating plan yet for the $92
million is the other $19 million we are looking at is tied to
the $300 million of deferred IT projects we are trying to find
which $19 million are going to be the highest priority. And
part of it may be in additional support for Windows 7.
We will give you the spending plan and then show you. We
are using the money very well, but there are a lot of other
things that are not being done that the $92 million won't let
us reach.
Mr. Serrano. Right.
Mr. Koskinen. The shutdown, obviously, delayed the start of
filing season. And so we didn't start until January 31. So it
compressed it a little.
But, thus far, I am delighted to report the filing season
has gone very smoothly. We have over 100 million returns
already processed. Over 90 percent of them have been filed
electronically. 70 percent or so of those returns are getting
refunds electronically that they have already gotten.
So it is going very smoothly. Partially, it is going
smoothly because there were no significant tax law changes for
the average taxpayer. So for preparers and people filing
returns, that went well.
It is also going better because a lot of people go to our
Web site now and get information there that they used to get on
calls, and that has helped us maintain a very low level, but
still maintain it.
So our hope would be that we don't do it again because what
happens in the shutdown is the entire IT department goes away
for 2 weeks, 18 days, whatever the shutdown period is, and then
simply can't make that up. That is why we had to delay the
start this year.
TAX PREPARERS
Mr. Serrano. Okay. You know, one thing that we have
discussed on this committee for years--and this still bothers
me--is these--I don't know how else to call them--fly-by-night
storefront operations that seem to continue to creep up in many
communities throughout this country and hurt the taxpayer.
I don't know if you read--there was a story that recently
came out--maybe it was today--where a person went to get their
taxes done and they were being charged $400 for a very simple
form and they said, ``No. Don't file that. Forget it'' and the
person went ahead--the tax preparer went ahead and filed it
anyway and took a fee.
I don't know how that happens that you take a fee from a
return. And the person then was caught between two different
places. This seems to be an ongoing problem, and I know the IRS
has dealt with it.
Where are we with that or is that one that is out of hand?
Mr. Koskinen. It is a concern to us. Most tax preparers are
well trained and they do a good job. 56 percent of people use
tax preparers. Another 34 percent use tax preparer software. So
the vast majority of them do fine.
There are people who are uninformed and undertrained and
then are still preparing returns. Anybody in this room could go
outside tomorrow morning and set up as a tax preparer. There
are no requirements, no standards.
As somebody has noted, we regulate and register
hairdressers in every one of 50 States, and in three States we
register and regulate preparers.
And as H&R Block had said, you would think that you would
care as much about your tax preparer as you do about your
haircut.
So what happens is we have cases where we have fraudulent
returns prepared by tax preparers. We have cases like the one
you said, where they file a return, get the refund sent to
them, then they either take their fee out and give the
remaining part of the refund to the taxpayer, or they keep the
refund totally themselves.
We have many numbers of cases of tax preparer fraud where
the taxpayer then has to come to us and said, ``I had a refund
coming and I have never seen it. Where did it go?''
We had set up in 2010 a program to provide minimum
standards and certification for preparers, and the courts
earlier this year ruled we had exceeded our authority to do
that.
So there is a hearing tomorrow in the Senate on tax
preparers, and we will be supportive--I will testify and be
supportive--of legislation from the Congress that would give us
the ability and the authority to provide and guarantee minimum
standards for anybody who is going to prepare a tax return.
And in low- and middle-income communities, particularly
immigrant communities, people are comfortable working in the
community. So if somebody sets up shop in the community center
or refers to somebody's brother-in-law, a lot of returns are
filed.
And our concern is not only the fraud or the excessive
charges to the taxpayer, but if the tax preparer doesn't know
what he is doing, we can get an inaccurate return.
So we than have to process back, talk to the taxpayer,
trying to get just the right amount paid, which the taxpayer
probably wanted to have paid to begin with.
Mr. Serrano. Right.
Very briefly, do you think this is something that has to be
done State by State or, from your viewpoint, could it be done
from the Federal Government?
I mean, I know that we want less and less government, but
this is one where I think both parties could agree that it is
abuse.
Mr. Koskinen. There are at least three States who regulate
locally. The tax preparer community has been supportive of a
national standard, so you don't end up with 50 different
standards. And if you are a company operating in two or three
States or more, you have to then meet a whole lot of different
standards.
We cleared the program--it was up and running for a while--
with all the constituents and all the parties, and designed
testing and the minimum standards it would require.
It wouldn't be a CPA exam. It would not be that difficult.
You just have to show some minimal amount of competence, like
a----
Mr. Serrano. And what boundaries was it that the Court said
you had overstepped?
Mr. Koskinen. Pardon?
Mr. Serrano. What was it that the Court said you had done
wrong?
Mr. Koskinen. The Court said we didn't have the authority.
We could require people to register and get a preparer PTIN,
which 600,000 preparers now have, but we couldn't require them
to also take an exam--a competency exam--at the same time
because there was not statutory authority for that.
So we still hand out PTINs. And a number of people took the
test. As I noted, you know, about 75 percent of them passed it.
The other side of the coin is that means a significant
number of people couldn't pass a relatively minimum test, which
is an indication that maybe a little more education would be
helpful.
Mr. Serrano. Thank you.
Mr. Chairman, this is a very serious issue and I think one
that maybe the Committee should take a closer look at. I don't
know what we possibly could do at the Federal level.
And I know that the trend--and this is not a knock--is for
less involvement by the Federal Government, but people are
getting ripped off all over this country. And it makes their
work harder. It makes the tax system look like a monster to a
lot of people who want to pay their taxes.
When you have happen what the Commissioner just said,
somebody capable of taking the refund--the full refund for
themselves--I mean, I had no idea. I thought refunds went to
somebody's house--they can go to a preparer and then he or she
keeps it, that is fraud at the highest level and abuse at the
highest level, and maybe we should look at it as something the
Committee could speak on or do something about.
Mr. Crenshaw. I think you are right. I think any kind of
reasonable regulation to protect taxpayers is what we are all
about. So that is a great point.
Mr. Womack.
Mr. Womack. Thank you, Mr. Chairman.
Commissioner Koskinen, welcome, and good to see you again.
Funny you would mention hairdressers a minute ago. Every time I
factor my--figure my taxes, I feel like I am getting a haircut.
So, you know, it is kind of an interesting parallel there.
MEASURING LEVEL OF SERVICE
In your testimony, you said that, of the $1.4 billion
increase that you would request in 2015, that a couple hundred
million of that, $222 million, I think, would go to improve
taxpayer service, and you said that it would allow you to
answer 12 million more calls, get you to a service level of
like 80 percent.
So can you share with the subcommittee on what metrics you
used to kind of reach that. Was that just a simple math
problem? How would we actually get to the 12 million additional
calls? And how many personnel are we talking about? That sort
of thing.
Mr. Koskinen. I asked the question myself, ``How do we
measure the level of service?'', and you won't be surprised to
find that it is a little complicated because you have to figure
out, when you hang up, does that count or not count?
We actually electronically count every call that comes in.
We count which ones then don't get an answer, where people wait
and wait and then they just hang up. We count then the
processing and who goes into our automated system, as opposed
to who gets a representative. And it is a very detailed system.
We would be happy to get you the more complicated--you
know, the way it actually works.
[The information follows:]
Customer Service Representative Level of Service
calculation.
The numerator equals the assistor calls answered plus the
automated calls answered through subject matter messages. The
denominator equals the numerator plus emergency close
disconnects plus taxpayers that abandon in queue waiting for
Customer Service Representative assistance plus busy signals
and disconnects generated by announcements that advise the
taxpayer of high demand and request the taxpayer return his or
her call at a later time.
But, actually, every call that comes in gets measured. We
also measure how long it takes for that call to get through.
And then, in our call centers, we measure how long the
responses take, and we try to make sure that the call-takers
are efficient so they don't spend a lot of time just chatting
with the taxpayer. So there is a balance of wanting to give the
right information, but as efficiently as we can.
It is a fully monitored system in which we are confident
that we can measure exactly how many calls we are going to
answer, and in what order, and how long it takes you to get
through.
We used to be able to say you wouldn't have to wait more
than 10 seconds to 20 seconds to get an answer. Now that is up
into the minutes. So all of that is measured.
Mr. Womack. I think you said that people sitting in the
queue sometimes 15, 20 minutes or more----
Mr. Koskinen. Yes.
Mr. Womack. That was part of your testimony.
Mr. Koskinen. Yes.
AFFORDABLE CARE ACT TELEPHONE CALLS
Mr. Womack. And I am assuming that part of the new line of
questioning that you are beginning to receive is referenced to
the ACA. Is that correct?
Mr. Koskinen. Haven't gotten much now because it doesn't
affect anybody in terms of their tax return. But we estimate
that, starting late in the fall and then into the filing season
next year, as people look at the forms, we will get calls. Most
Americans are going to check a box and they are going to move
on.
But for those who have questions, preparers as well as
people filling out the returns, our estimate is that we will
get another 11 million calls just by the number of people in
the program.
Because a lot of people who will be calling signed up. A
lot of people will be calling who don't have insurance and will
want to figure out exactly how they should be responding.
We already have started this year. We will work through the
summer and into the fall to put out as much information to
taxpayers as we can.
We are developing our Web site so it will be easy for
people to get information. There will be a special section on
the Affordable Care Act, to try to make the answers as easily
accessible as we can for people, so they don't have to call.
But, inevitably, our experience is, whenever there is a new
provision, you get a significant number of calls asking about
it.
Mr. Womack. So to kind of preempt the anticipated surge in
phone calls you are going to get regarding the ACA, I am glad
you mentioned that you are going to do some things preemptively
to try to push information out.
CHANNELS OF COMMUNICATION
What are the best management practices today in trying to
reach the clientele that are trying to communicate with you?
Are there any things that we have learned over the last 3
or 4 years about people and their questions and the origin of
their questions or their socioeconomic status or whatever that
might help us better pinpoint how we direct and leverage the
limited money we have to answer a lot of those questions?
Mr. Koskinen. It goes across a set of communication
channels. We have now an online services group--small, but
lovable--who are looking at just those questions. That is, how
can we move people into the least expensive channel to get them
the most information.
And the least expensive channel is, obviously, a Web site
because, if you come there, the information is there. Other
than just the cost of maintaining it, it is a relatively
inexpensive way to get information out. So we spend a lot of
time trying to improve it.
If you looked at the Web site a year ago and looked at it
today, it is like it is a different entity, but it is still
clunkier than we would like it to be. We would like it to be
easily searchable, so that anybody used to going to Web sites
could go there and find the information they need.
A lot of people and a lot of information goes out over
things that I don't know much about: Twitter, Tumblr, YouTube.
We have 100 videos on our You----
Mr. Womack. Those are kind of new to me, too.
Mr. Koskinen. Yeah. So we all have the same experience.
But there are YouTube videos telling you all sorts of
information that you otherwise would be calling us to ask
about.
On our Web site we have a ``Where's My Refund?'' app. Last
year it had over 200 million hits. Not 200 million taxpayers.
As I tell people, some people just can't resist pushing it and
seeing each day how their refund is doing. But those are the
people that used to have to call.
This year, for the first time, you can authenticate
yourself and ask for previously filed returns. So instead of
having to call us or come to our assistance centers, you can
actually print out your last year's tax return and, if you need
it for a mortgage or for employment or anything else, you don't
have to call us about it.
So what we have discovered is kind of axiomatic, that
younger people tend to be in social media, so as much of our
outreach goes there as we can. Significant portions of the
population are now used to using Web sites. They go to shop on
Web sites. They do their banking on Web sites. So, again, we
have been way behind and we need to be better at that.
There will be, inevitably, a percentage of the population
uncomfortable with all of that, who will be uncomfortable
filing electronically. They are in a paper generation and they
are going to stay there.
And part of our commitment is we need to be able to deal
with those people as well. I never want anybody to feel they
have got to do something they don't know how to do or are
uncomfortable with.
NEW HIRES
Mr. Womack. How many new people are we talking about?
Mr. Koskinen. Pardon?
Mr. Womack. Taxpayer service, how many new people?
Mr. Koskinen. How many new people? We are talking about as
many as a couple thousand.
Mr. Womack. And then, to take one of those couple of
thousand people, to get them from zero to trained, what kind of
a timeframe are we looking at?
Mr. Koskinen. We have what we call seasonal employees. We
are, to some extent, a seasonal business. We obviously are in
the middle of that season right now.
And so we have people who work, sometimes, anywhere from 6
to 8 to 10 months in that filing season. And we hire those
people and train them, and it takes 4 to 6 weeks to get them
just the basic training they are going to need.
And, usually, the way we have streamlined it, is people get
trained in answering certain questions. So when you go to the
phone, it will ask you to select what your question is, and
then that will send you to somebody who knows that area.
Now, with our more experienced call center people, they can
actually answer some other questions as well. So part of the
challenge for us is, if I am very good at answering head of
household questions and the fundamentals, and you have another
question, if I haven't been trained in that, I have to say,
``Excuse me. I have to send you to--'' and then there is a
place where you send them to somebody who is an expert in that.
Done well--and that is where we would like to get back to--
you would have people at the call centers who have a broader
base of information.
So when somebody calls, even though they pushed, ``My call
is `Where is my refund?' '', if that caller has another
question, I would like to increase the likelihood the person on
the phone could answer that other question for you. But for the
basic training, 4 to 6 weeks.
Mr. Womack. Thank you.
Mr. Crenshaw. Thank you.
Mrs. Lowey.
Mrs. Lowey. Thank you.
Mr. Commissioner, I would like to follow up with my
colleague's question before because I would like you to get a
little outraged about these scams out there and I wonder what
you are doing either in social media or signs.
The storefronts open up and innocent people come in. They
don't know whether that person is legitimate or not. And then
suddenly, after April 15, the storefront closes and there are
an awful lot of people who are just taking the refunds and
going off.
IDENTITY THEFT
And a similar scam that I have been hearing about which is
of great concern to me, criminals are using the IRS to steal
the identity of innocent taxpayers. They claim large refunds.
They profit by the fraud. And the number of taxpayers affected
by identity theft has more than doubled since 2011 alone.
A recent Inspector General report released last year stated
that billions of dollars had been fraudulently paid as a result
of identity theft. And, shockingly, it is my understanding that
amounts to as much as $21 billion in fraudulent refunds could
be paid out in the next 5 years. You know, this is just a slap
in the face to hardworking taxpayers, and I wonder what you are
thinking about that.
What steps has the IRS taken to halt these criminal
actions? Does the budget request include adequate funds for
enforcement to adequately combat this problem?
Mr. Koskinen. It is a critical problem. I would start by
noting that people are not stealing identities from the IRS.
What is happening in refund fraud is criminals--and it is
increasingly organized crime and organized syndicates--are
stealing, borrowing, buying, however they get it, Social
Security numbers outside the IRS. We have never had any
incident, of any size, where somebody got that information from
us. But they do get it.
Sometimes it is from the Death Master File. Sometimes it is
for kids. They get the Social Security number, fill out
fraudulent numbers that show they are entitled to a refund,
file it electronically, and then get paid.
And they are not filing one or two of these. Some of these
people are filing hundreds or thousands at a time. It exploded
in 2010 to 2012. Overwhelmed law enforcement. Overwhelmed our
resources as well.
We have devoted 3,500 people who do nothing but work on
this problem. We are working with State and local law
enforcement, with all the financial institutions, with the
Bureau of Prisons, because that is where some of it started,
with people in prison. We have developed sophisticated filters
that identify where the scams are coming from.
Last year, we estimate, we stopped just a little less than
$18 billion in fraudulent refunds from going out the door.
But, of course--and in the IG report, we are all trying to
figure out, ``What does that mean in terms of you don't know
what you don't know? How much is going out?'' And we have done
audits and we are doing algorithms that project that.
Part of the additional funding here would allow us to
upgrade our IT because right now our filters can only be
adjusted in between filing season. This Model T does not allow
us, on the run, to adjust the filters. Some portion of the IT
money here would go to what we call the Return Review Program,
which would allow us, as we see scams, to adjust immediately.
We also are taking a hard look at, and one of our
legislative proposals is, moving the filing of W-2s with the
IRS up to the end of January, the way it is for employees. We
don't get the W-2s that go through Social Security until the
middle of March.
As I have told people, we have gotten to be too efficient.
In the old days, when I was younger, you sent a check, it took
a while to get it deposited, and it took months before you got
your refund. Now we tell you that, if you file electronically
or on paper, we will get you a refund in 21 days, but the
problem is we have leapfrogged the third-party information.
And then the final piece is we have ramped up, from 2012 to
2013, by multiples of four and five the number of
investigations, indictments, prosecutions and convictions. Last
year we recommended over 1,000 prosecutions. We had 400 people
sent to jail for a long time. These are not 6-month sentences.
I just met Friday with U.S. Attorneys for Indiana and
Northern Illinois about our cooperative efforts prosecuting
refund fraud and other cases, and we have got partnerships
across the country.
It is a significant problem. If you ask me what are the
four or five things we focus most on, refund fraud and identity
theft is one of them.
Mrs. Lowey. Do you have adequate resources in order to do
what you have to do?
Mr. Koskinen. Well, as I said, right now we have this
mechanical clunky system that doesn't allow us to respond on
the spot. A significant part, $65 million or more, of the IT
request would allow us to, in fact, become quicker on our feet.
If we don't become quicker on our feet, we will still get
better because the filters are very sophisticated. We just
can't adjust them. And part of what is happening is people are
reverse-engineering.
You know, you file 1,000 fraudulent returns and see which
ones go through. You can pretty quickly try to figure out,
okay, what we are looking at, and then you adjust on the run.
They can adjust faster than we can adjust.
Mrs. Lowey. Well, thank you, Mr. Chairman.
I do hope that we will give you the resources so you can
continue to pursue these crooks out there, and I thank you very
much for your attention to it.
Mr. Crenshaw. Thank you, Mrs. Lowey.
And I think somewhere I read that some address like in
Atlanta, Georgia, got like 2,000 refunds. Somebody stole their
identities, listed the address in Atlanta.
Is that close to the truth?
Mr. Crenshaw. A, it is true. B, there are some places where
multiple refunds legitimately go. Some preparers get the
refunds. Some retirement communities. There are groups of
people who file and it all goes to a single address.
But one of the issues is being a little slow in responding.
As we go forward, we think we have got a way to stop that. It
is all mechanical.
I went to Detroit just Thursday and watched. We send out
200 million notices a year to people. And I watched the
computer program at work. I mean, it is like an assembly line,
this big set of machines that have to crank out those notices
and file them.
You process 150 million tax returns, as we will this year.
I mean, it is a stunning number when you try to figure out what
does that look like.
So part of the reason and the way we are able to process
refunds so quickly is they are processed automatically. So we
have to build in the filters that say, it makes no sense to
send a whole lot of refunds to that address. Banks are stopping
refund fraud when they see it and sending us the money back.
But, you know, it is like the old Whack-a-Mole. You knock
him down here and it comes up over there. But one of the big
issues was looking at it and saying, ``Well, you know, if there
are more than 10 refunds going there, there has got to be some
issue worth looking into.''
Mr. Crenshaw. Yeah. And the point being, we all know it
takes money to do these things, but more money is not the only
answer to all the problems in the world.
Mr. Koskinen. Right.
Mr. Crenshaw. And I appreciate the fact that you are trying
to kind of figure out process efficiencies, all those kind of
things, trying to stay ahead of the bad guys.
Mr. Koskinen. Right.
Mr. Crenshaw. Mr. Graves has joined us.
Mr. Graves. Thank you, Mr. Chairman.
Commissioner, good to see you again.
AFFORDABLE CARE ACT PREPARATIONS
I know your statement references your preparation for how
the Department will begin handling the healthcare law
implications within your arena. And I guess we are about 53
weeks away from the individual side beginning----
Mr. Koskinen. Actually, less than that. The individual side
has to be up and running at the start of filing season, so
January.
Mr. Graves. Could you maybe tell us a little bit about that
and some of your preparations, and I know you indicate in your
comments here that a lot is under way, and maybe, bring some
clarity to how the verification process works, whether
individuals in fact do have the appropriate health care
coverage that is demanded under the law.
Mr. Koskinen. Right.
Mr. Graves. How the penalties will be assessed, or I guess
you refer to them now as the individual shared responsibility
provision. Is that only through a refund, or is that outside of
a refund? Is there some other mechanism that occurs? And then
when you are finished with that, maybe clarity on the
differences between individuals and then small business owners
who are currently filing this year for 2014's taxes as well.
So a couple of different things there, but to bring
clarity, and I will be happy to follow up.
Mr. Koskinen. I will do my best to do that. As you can
understand, it is a multifaceted issue.
On the front end, in terms of just how the program runs and
refund fraud that we are talking about there, what are the
fraudulent filings, let's say for the vast majority of
Americans, they have got insurance, they have got Medicare,
whatever it is, so this is all going to be beyond them. They
won't be affected by it.
If you apply for an Advance Premium Tax Credit, the money
doesn't go to you, it goes to the insurance company from whom
you are buying the policy. At the front end, there is less
incentive for people to fraudulently try to claim the money
because it doesn't go to them, unless you have got an uncle at
Blue Cross you would like to get a bigger premium. Everybody is
making a guess, an estimate, as to what they are going to earn
this year to figure out what Premium Credit they are entitled
to, and that is going to the insurance companies.
In filing season next year, when those people file, they
are going to actually know how much they made and they are
going to have to reconcile the amount of the credit, and they
will either owe us money or we will owe them money. Some people
could not get the advance credit during the year and would
apply and say, ``okay, I bought this insurance policy, here is
my income, I now get a refund.'' That refund would go directly
to them, but it only goes to them if the insurance company
which is sending us all this data verifies that the filer
actually had a policy. So you can't get a credit independent of
the policy.
Now, the processing of all that is, as I say, just in the
middle of filing----
Mr. Graves. You will receive information from the insurance
company.
Mr. Koskinen. We are going to get information starting
through the year.
Mr. Graves. To begin pairing that together----
Mr. Koskinen. And we are going to be able to verify
coverage. It is like getting W-2 information. It is third party
information that will verify that you had a policy.
Mr. Graves. Okay.
Mr. Koskinen. So that the chances of your figuring out how
to get money beyond what you are entitled to are slim in that
case.
The problem for us, the challenge, IT challenge, is that
all of this has to be built into our normal computerized filing
system. So there are something like over 50 systems that have
to be adjusted to take into account these calculations.
Then getting to the question about what do we do about
enforcement? If you got too much credit, you will owe us the
money and we will take it out of your refund, or you will pay
it as a tax due. If you got too little, we will add it to your
return and refund, or subtract it from the amount you owe as
you go forward.
The question will be, ``okay, I didn't buy. I was supposed
to buy insurance, I didn't buy it. I have a responsibility
payment, penalty, however you would call it, of $95 or 1
percent.'' The statute limits our ability to collect on that.
We can deduct it from a refund, so if you owe us $95 and
otherwise would have gotten a $500 refund, we will subtract it.
But if you owe taxes and pay taxes, but now you don't pay
the $95 and we assess it, we can't levy against you. We can't
do the usual enforcement. We can write you a letter and say,
``hey, you owe us the money,'' and next year take it out of a
refund, but we have limited enforcement ability against you. It
is easy to understand, but that is another complication for our
filing return systems because then we have to be able to
identify that what you owe us is tied to the responsibility
payment, not normal taxes. Because if it is normal taxes, you
go into our normal collection and enforcement process.
Mr. Graves. Which is a penalty system----
Mr. Koskinen. We have to have a computer system. The
penalty system goes into a modified collection process. So the
computer system has to recognize all that and be able to say,
``all right you owe us $95 but that is what you owed us because
you earned and didn't pay enough in withholding,'' or ``you owe
us $95 and that is because you didn't buy an insurance
policy,'' and now we are actually going to collect from you in
a different or modified way than before. So that the----
Mr. Graves. Could I ask another question on that?
Mr. Koskinen. Sure.
Mr. Graves. So, if you have unpaid taxes there is penalties
and interest.
Mr. Koskinen. Right.
Mr. Graves. That date back to the time the taxes were due.
Is that the same that the Supreme Court ruled----
Mr. Koskinen. My understanding is if you owe the money, you
owe the money. There are limits of what we can do to chase you
for it.
Mr. Graves. Okay. So are there penalties and interest if
somebody doesn't pay their $95?
Mr. Koskinen. Yes. My understanding, although that is the
first time anybody has asked that specific question, so I will
double-check to make sure I am right, but my understanding----
Mr. Graves. And the reason I asked is because the Supreme
Court I thought ruled this a tax--
Mr. Koskinen. Yes.
Mr. Graves. And you continue to use, and everybody does I
guess, the individual shared responsibility provision. And so I
am curious if it is being treated the same as a tax.
Mr. Koskinen. It is. It is partially because we can collect
from you in the way we normally do, short of filing a levy or
chasing you. That is my understanding. It is like money you owe
us. We will take it out of next year's refund and there are
penalties and interest applied.
[The information follows:]
I have verified that the SRP established in section 5000A
to which you referred is payable when the IRS issues a notice
and demand for payment. Therefore, an individual is not
required to pay the SRP as part of quarterly estimated tax
payments, and the IRS will not impose estimated tax penalties
for a failure to pay the SRP with estimated taxes. The statue
provides special rules for the assessment and collection of the
SRP. A taxpayer who does not timely pay the SRP is not subject
to criminal prosecution or penalty for the failure; however,
interest accrues on the SRP from the due date for payment
specified in our notice.
Mr. Graves. Okay, and if I could ask one more, Mr.
Chairman.
And then as far as small business owners who are filing
quarterly currently, are they required to begin that process
now, seeing how they are paying their quarterly taxes today?
Because I think there has been some dispute as to whether or
not they wait to----
Mr. Koskinen. Until the end of the year.
Mr. Graves. To the end of the year, to the 2015 filing
backwards, but because they pay quarterly now as small business
owners, as individuals or sole proprietors, I assume?
Mr. Koskinen. That I don't know the answer to, but I will
get back to you very quickly because that is a straightforward
simple question and I will get back to you in the next few
days.
Mr. Graves. Okay, thank you, Mr. Chairman.
Mr. Crenshaw. Mr. Yoder just walked in. He is collecting
his thoughts.
Mr. Koskinen. He and I are suffering from the NCAA
tournament together.
Mr. Crenshaw. I hope you didn't have anything to do with
Duke losing to Mercer, because I think that knocked out about
99 percent of all of the people.
Mr. Graves. What is wrong with Mercer?
Mr. Crenshaw. Nothing, but I don't think anybody other than
you, Mr. Graves, picked Mercer to beat Duke. So a lot of
unhappy people.
TARGETING PROHIBITIONS
Okay, well let me ask a quick question. I mentioned in my
opening statement that we had the omnibus bill last year that
was bipartisan and we put language in there that said you can't
use the funds to target certain groups. We said you can't use
money from the funding to target certain citizens for rights
guaranteed under the First Amendment. We said that we were
going to require videos that were produced by you all to be
subject to appropriate review.
And so my question is, why didn't your budget request
include those three prohibitions?
Mr. Koskinen. Because for years, OMB, whoever the
Administration was, has always opposed riders on appropriation
bills, whatever they say. This was a decision made by the
Administration and OMB to, again, continue to oppose any
riders.
I would note, that as far as I am concerned, I think
taxpayers have a right to expect to be treated fairly, not only
under the Constitutional rights, but they need to understand
that no matter who they are, whatever organization they belong
to, whoever they voted for in the last election, when they deal
with the IRS in any way, they need to feel they are going to be
treated the same way everybody else is. If we contact you it is
because we have a question about something in your return, and
that is the only reason you are going to hear from us. And if
somebody else had that same issue in their return, they would
hear from us in the same way.
So my sense is we don't need a rider. If you want to put
another one in, that is fine, but I don't think we ought to
need a rider, and we certainly don't as long as I am there. I
will just say I think people ought to be treated fairly. They
ought not be singled out because of anything other than
whatever they are filing with the IRS. And so my strong view--
--
Mr. Crenshaw. So you don't, you know, plan on doing those
activities this year.
Mr. Koskinen. No.
Mr. Crenshaw. You wouldn't have any problem if we were to
prohibit those activities in this year's bill?
Mr. Koskinen. No. As I say, I know, having been at OMB 20
years ago, although I was on the management side, and even when
I was in the city, any time riders are put into appropriations
bills, the recipients say you ought to do that separate from
it. And so they will continue. It will always be that dialogue
and response back.
But as I say, we are not going to do it anyway. Whether you
add the rider or leave it out or change the language in it, it
is not going to affect the way we behave.
Mr. Crenshaw. That is good to hear. I do think sometimes
riders make their way into requests, but that is not your call
to make and I appreciate that. But I think there are probably
some things, in the request the Administration made this year,
so whoever makes that decision is not always absolutely
consistent. But, again, that is above your pay grade.
Mr. Koskinen. Right.
501(C)(4) DRAFT REGULATION
Mr. Crenshaw. Let me ask you about the 501(c)(4)
regulation. We talked a little bit about this when you were
here before. And as you know, the Chairman of the full
Committee, Mr. Rogers, and some others, the House leaders,
wrote a letter to ask you to withdraw the draft of the
501(c)(4) regulation, which I would probably agree with but I
don't think you agree with that, and as far as I know, you
continue to move ahead. We talked about the fact that the
number of comments grows almost daily. Last report I had was
there were 150,000 comments. Are we getting higher than that
now?
Mr. Koskinen. Well, the last estimate I had from Treasury
which keeps of track of these, although I don't know who counts
them, but anyway is it is just above 150,000.
Mr. Crenshaw. Got you. As kind of a perspective, I
understand the XL Pipeline, which is pretty controversial, had
about 7,000 comments, and so, evidently there are a lot of
people that are interested in this regulation.
And so, you talked before that maybe something that
controversial you might republish the rule and ask for even
additional comments. Can you give us an update on what your
plans are?
Mr. Koskinen. Yes, as you know, this draft proposal was put
out, it is actually convenient, two weeks before my
confirmation hearing just to make it more interesting to have
that confirmation hearing. I don't know how it about came about
and what they did with it.
My view and I have said publicly on numerous occasions, is
that I do think clarity would help. While I don't control the
process, I do think that any regulation that comes out finally
ought to be fair to everybody, ought to be clear and ought to
be easily administrable.
In light of the comments, which are voluminous, there will
be a public hearing at which people in the public, as well as
the Congress, can testify. They will have to figure out a way
to screen everybody, otherwise we could be there for weeks.
There will be a public hearing.
In light of the comments, a lot of them I haven't seen, but
I know that some of them are long and thoughtful, and I assume
a number of them will be. I think there is a reasonable
possibility we will have to reissue, redraft a proposal which
would go out again for public comment.
I originally said, when we had about 25,000 comments, that
I thought the chances of getting a final regulation through the
process before the end of the year were slim. At 150,000
comments, all of which we have an obligation to consider, I
think that it will be the end of the year, probably, before we
get to it.
But I do think that we should be moving from a ``facts and
circumstances'' test which doesn't give people running the
organization any more clarity than it does IRS people trying to
figure out whether they apply or not. If you had a regulation
that was fair to everybody--it didn't discriminate one group
against another, it didn't encourage you to form yourself one
way or another, it was just a fair, straightforward, clear and
easy to administer set of rules--you would then make it a lot
easier for people running these organizations to feel
comfortable that they know what to do, and they can do every
day, and they are not risking their exemption. Again, wherever
they are in the political spectrum, they are all in the same
boat.
Mr. Crenshaw. Well, you know, there was a lot of concern
when it was first published whether it was going to happen
before this year's election cycle, was on the tip of everyone's
tongue, and from your testimony it sounds like it won't happen
before the end of this year which won't happen before the
elections in November. Is that still your best judgment?
Mr. Koskinen. That is my best judgment.
COST OF PREPARING 501(C)(4) REGULATION
Mr. Crenshaw. Tell us, and this has to do with priorities,
but how much staff time have you at the IRS spent on preparing
the regulation and reviewing the comments? Because that gets
into where your priorities are, but have you got have an idea
of how much time and energy and money has been spent on
promulgating this and then reviewing this?
Mr. Koskinen. I don't. The promulgation was all done and
the discussions were before late November when it was issued.
We are in the review process now. A lot of the comments are
electronic. You can measure it. You go to the website and it
will tell you how many they have counted on the electronic
side, and then we have got paper ones to boot. So we are at the
front end of that process of segregating them into who is in
favor of what.
There are three big questions. One is what is the
definition of political activity; the second is to which
organizations should it apply across the 501(c)(3), (4), (5),
(6), (7)s; and what is the amount of activity that you can
engage in without jeopardizing whatever your qualification is.
The regulation only proposed a definition of political
activity. It left open, and asked for comments, on the other
two questions.
So we have to bucket as it were, there is probably a better
verb than that, but anyway take these comments, put them into
processes so we can actually know. Some of them will be
repetitive, so you will know, okay, there were 5,000 that say
this. I have seen a couple that are very thoughtful, like five
page intellectual analyses of what should count, what the
impact would be.
One of the questions is, ``what is the impact on somebody
who is a 501(c)(3) or a 501(c)(5)?'' There are 1.6 million tax
exempt organizations out there, and part of the reason for
asking for comments was nobody knows exactly what all of them
are doing. Garden clubs, obviously, one would think would not
be involved.
So at this point, I could get you an estimate, but the time
that it is going to take is really going forward, which is to
try to work through all of those comments, then take them into
consideration, have a public hearing, and then figure out what
is an appropriate response to both the public hearing, all of
the debate that has gone on, but in particular, an appropriate
response to the comments.
Because, as I say, the purpose of them is you should read
them, listen to them and benefit from them.
Mr. Crenshaw. Well, my only point is that, that obviously
costs something and in terms of you figure out your limited
resources, you have got to make those judgments, that to try to
do a rule like this fast would probably cost more money
devoting more people you know, early on as opposed to doing it
you know, in maybe a more thoughtful way that might take a
little more time but also it might let you spread out the
expense through all the staff.
Mr. Koskinen. Right. Well, that is the way we are going. I
mean, there is no rush to judgment on this, to say ``we got to
get it out,'' and in fact, I think, personally, not the guy who
controls it all, but the goal here is not to end up rushing to
see if we can get it out in October, which would seem to me----
Mr. Crenshaw. You still have to answer the phone along the
way, right?
Mr. Koskinen. That is right. So we got to answer the phone.
I think you are right, that we ought to address it in an
appropriate, thoughtful way. Because I want people to feel
comfortable when we come out with whatever we are coming out
with, that it wasn't something that we just went through the
motions with. That we actually listened and read and heard what
the comments were, and the concerns were across all three
questions; about the definition of political activity, to whom
it ought to apply, and how much of it you could do without
jeopardizing your exemption.
Mr. Crenshaw. Thank you.
Mr. Serrano.
PURPOSE OF 501(C)(4) REGULATION
Mr. Serrano. Thank you, Mr. Chairman.
Following up on that, you have released proposed
regulations intended to provide clarity to the standards for
determining the tax exempt status of 501(c)(4) organizations.
I understand that you have received over 150,000 comments
and that public hearings will start soon on the proposed
regulations; why did the IRS issue these proposed regulations?
Mr. Koskinen. Why?
Mr. Serrano. Why?
Mr. Koskinen. I wasn't around so I can't tell you why. I
can tell you, from my standpoint as a new guy on the block,
having a standard that says ``facts and circumstances,'' is
difficult to administer, difficult for people running an
organization to understand, on a rolling basis, how it runs,
how to measure how much of it, it is.
So, just from outside the ongoing debate, it does seem to
me if we came up with a rule that is fair to everybody, clear,
easily administered, everybody would benefit. So I think it is
worth the effort. But what was going on when people decided to
promulgate it, it was a recommendation of the Inspector
General.
Mr. Serrano. Okay. That is what I was going to say. My
understanding was----
Mr. Koskinen. One of his nine recommendations was the IRS
and Treasury ought to put on their priority plan clarity, and
so I am sure that was the major driver last fall.
Mr. Serrano. Well, that is what I understood, that it was
the recommendation of the IG, and while some may differ in a
respectful way on how much time you spend on regulations, I
think this particular one has caused enough heartache in this
country, this whole issue, that we need to clarify clearly what
is allowed and what is not allowed as much as we can so that
people have guidance and so that we can stop talking about as
much as we talk about it too.
Mr. Koskinen. Well, again, I would hope the public would
feel comfortable of that, in light of the volume of the
comments, but also that they come from everywhere. So we
managed to generate interest across the entire political
spectrum, across a lot of different organizations. It is a
broader, which I think is appropriate, review and discussion
than it might have been viewed, perhaps, in the past.
So I hope people would understand that everybody is going
to be heard, and that, ultimately, while we may not satisfy
exactly everybody, I think if it is a fair result, and
balanced, and deals with everybody fairly, most people will, I
think, be comfortable and think it is an improvement.
TAX GAP ESTIMATE
Mr. Serrano. All right. Let me ask you something about an
issue that we deal with all the time and sometimes I think
doesn't get the attention it should. The tax gap, which was
last updated in 2006, will the IRS be updating this statistic
and if so when will you do so? And please talk about your
efforts to address it, which can cost taxpayers or is costing
taxpayers $450 billion a year right now.
Mr. Koskinen. Actually, the tax gap was updated either in
2011 or 12, but it is on the basis of 2006 data. And the
problem is it is a long, complicated process, so you are always
out of sync and out of check with it. I have asked that
question, to see, when is it meaningful? The tax gap number
didn't change significantly between the earlier update. When is
it meaningful for us again, with the resources we have, to
undertake the research project it takes? It is a long analysis;
you have to worry about taking into consideration all the
information you get from audits. You do some additional audits
to try to test where the compliance taxpayers are, how many
other people are out there who should look like them.
One of the big improvements in attacking the tax gap is
thanks to legislation passed by the Congress, which requires
credit card companies to file what is called a 1099-K with
anybody who has clients who use a credit card as well as with
the IRS. So for the first time we will have third party
information about what is going on in a big chunk of the
economy. And the estimate has been about one-third of the tax
gap is in that area. Everybody from gas station owners to mid-
sized companies, who basically have been operating without
knowing that we don't have any independent way, other than
auditing them and going through their books and records, to
know exactly how much they had in revenues and what their
expenses were. Our experience is that compliance goes up
significantly when people know you have got the data.
We are a tax compliant Nation. I think we deserve great
credit for that. But part of it is because everybody knows we
got your W-2. Sooner or later we are going to get your 1099.
Now with FATCA we are going to find out who has assets in the
Cayman Islands and in Switzerland. So my guess is that
compliance is going to go up a lot, voluntarily abroad as well.
I think we are going to make inroads in the tax gap. It may
actually make more sense a year or two from now, as we have
begun to complete our pilots about how to use this information,
how to deal with small and medium size businesses, to see what
difference it makes. Because we know kind of where we were.
There is no indication that the gap has changed significantly
from about $425 billion, less about $50 billion that we
collect. A lot of the collections are part of the tax gap
obviously because those are people who weren't paying or didn't
want to pay. So about $375 billion was the net, and as I say
about $135 billion of that was the estimate in this area, and
we are now able to deal with that thanks to the support we have
gotten from Congress.
Mr. Serrano. Do I have time for one more question?
Mr. Crenshaw. A quick one.
BITCOIN
Mr. Serrano. Sure.
You know, when you are in this room for sure you are on TV.
I don't know if you are aware of this. The big room gets seen
by the public, and hearing the word Bitcoin, could you tell us
from a IRS perspective what is a Bitcoin, why did you decide to
tax it as property and how challenging will that be in going
through the returns and finding out the information you need?
Mr. Koskinen. I feel like Congressman Womack here. He and I
are looking at Bitcoin just about the same way we are looking
at some of the social media issues.
Bitcoin is a fascinating kind of intellectual challenge.
The question is, ``what is currency?'' In the old days, really
old, thousands of years ago, currency was whatever you
bartered. Salt was a very valuable commodity. People bartered,
used salt as a currency. The Romans had old coins.
So the question is, ``how does currency function?'' and
particularly here, ``how does currency function when it is not
issued by a government?'' It doesn't have anything behind it
other than the transaction nature.
So, I think we are at the beginning of the discussion about
what Bitcoin is and how it is going to work or what online non-
governmental currencies are. The position that the IRS Treasury
regulation took was, at this point, it is not a currency in the
way we think of currency because it is not supported by any
visible means and, therefore, it is a commodity. When you trade
it, you can't pay your taxes with it, but we recognize people
are in commerce, trading it back and forth.
And what it says is you have to treat it as property, and
that is, if you are making a profit or a loss as you trade the
Bitcoin and buy something with it, you have to keep track of
that, which will be complicated needless to say.
But it is not that different. Normally if you go to Europe
and you buy Euros and they go up or down in value, you don't
pay any attention to that, you just use the Euro. You are, in
effect, making or losing money, but you are not keeping much
track of it.
Currency traders--people who trade currencies and treat
them as property--they are making money on the change in the
value. So, in effect, everybody who is in the Bitcoin business,
it is as if they are a currency trader in Bitcoin and it is
property, so you have to keep track of it.
Now, in the paper I read, there are people saying, ``well,
they are going to figure out ways to make it easy for you to
figure out how much did you pay for your Bitcoins? And when you
held them for a while and used them, did you make money on them
or lose on them?''
As it is now, it is like a stock you have to keep track of
yourself. In the old days that is what everybody had to do. You
bought the stock and then if it went up or down, you had to
keep track yourself as to what its value change was.
On the one hand, the IRS Treasury regulation accepts or
validates that Bitcoins are out there and people are using
them. There is enough real about them that, in fact, the IRS
would say they are property. But it is an understandable
position for the experts on this, of which I am not one, to
take the position but it is not a currency at this stage.
Now, at some point in the evolution of time will it become
a currency? Will it be traded or treated or supported as such?
You know, who knows? But I think we are at the front end of
Bitcoins. The issue recently was about whether you could
suddenly lose track of where they are. They are electronic, so
when whatever it was--Cox or whoever the company was that went
under--if you suddenly had hundreds of millions of dollars of
Bitcoins disappear, it gave you some idea that, well, this
isn't your normal currency.
And so I think at this stage the advice given by the
Treasury and IRS was an attempt to start moving down the path
of dealing with these currencies and transactions as they
unfold.
Mr. Serrano. Well, I thank you. If it doesn't make noise in
your pocket it is going to be hard for us to understand.
Mr. Crenshaw. Well, I will let you know, Mr. Serrano,
without divulging, I don't know what the IRS implications might
be, but as you look into the future, if you want to go take a
ride in outer space, there are people that will allow you to
pay for that with Bitcoins. So, just keep that in mind as we
look to the future.
Now I will recognize Mr. Womack.
Mr. Serrano. Is that where you are trying to send me?
Mr. Womack. Why would Serrano want to pay large Bitcoins to
go to outer space when he has already been there a few times?
That is a joke.
Mr. Serrano. I went. No, No, I did, on Saturday night, and
it was full of Republicans.
Mr. Womack. Yeah, I hear you.
Mr. Chairman, I think Mr. Yoder was next.
Mr. Crenshaw. Well, if he has gathered his thoughts.
Mr. Womack. He has had plenty of time.
Mr. Crenshaw. He didn't give me a signal.
Mr. Yoder. I have had more than enough time. Thank you, Mr.
Chairman.
Mr. Crenshaw. Okay, great. Mr. Yoder.
Mr. Yoder. Thank you, Mr. Chairman.
Commissioner, welcome back to the Committee. I want to
thank you for something. You know, after the University of
Kansas lost their second round basketball game in the NCAA
tournament, it took a while for me to be able to even speak of
that awful moment. But knowing that Duke had lost already
really made it a lot easier for me to be able to get through my
day. So, I want to thank Duke for losing and North Carolina for
losing as well.
Mr. Koskinen. Once your team loses, you root for everybody
else to lose. You become a great supporter of Dayton.
Mr. Womack. Remember the overall Chairman's team is playing
tonight, so----
Mr. Yoder. Well, and that is a problem for me as well
because my wife is a Kentucky grad. So we will just move on to
other topics.
FOREIGN ACCOUNT TAX COMPLIANCE ACT
I want to ask you a question on a few different topics. I
want to start with the Foreign Account Tax Compliance Act. I
understand that Treasury and the IRS have recently issued forms
and rules to help alleviate problems financial institutions are
phasing in complying with this new act. However, the Act is
scheduled to be in effect starting July 1 of this year but
existing law in some countries makes it impossible for some
financial institutions to comply without an intergovernmental
agreement, an IGA, in place to resolve those legal issues.
It is my understanding that fewer than 30 intergovernmental
agreements have been signed by the U.S. and fewer than 30 IGAs
have been tentatively agreed to. That unfortunately leaves many
dozens of countries that have not reached agreement with the
U.S. on how their financial institutions can comply with the
FATCA.
So I have a few questions for you. One, what guidance can
you provide to global financial institutions that are trying to
comply but cannot because the U.S. has not reached the
necessary agreements with many countries on compliance with
FATCA. Secondly, would the IRS take the view that the inability
to comply in one of many countries in which they do business
might affect the treatment of the entire organization?
In other words, should the fact that the U.S. has not
reached agreement with India, for example, mean that the entire
foreign financial institution cannot be in compliance with
FATCA even though it is in fact in compliance for all of its
operations in countries where the U.S. has negotiated the
necessary agreements?
And then lastly on this topic, would you be prepared to
offer accommodations to financial institutions that are as
compliant as they can be under the current law given the
complexities of achieving the necessary cooperation of
international taxing authorities?
Mr. Koskinen. Well, let me work in reverse.
Mr. Yoder. Sure.
Mr. Koskinen. I would note that, much like the 501(c)(4)
regulation, I don't control the guidance process. It is a joint
effort, and ultimately Treasury is responsible for those
things, and Treasury is responsible for tax policy as it
relates to that. We are tax administrators, tax collectors. So
the answers to most of your questions, which are very important
questions for, obviously, the financial institutions involved,
really are going to come out of the Treasury tax policy group.
But at this point, the good news is that Treasury has
announced that--I think they have announced anyway--my
understanding is if you have initialed the agreement and it is
just waiting for final adoption, that will count. So we are
getting close to 50 countries that either have a signed
agreement or basically a negotiated agreement, that has been
initialed by both parties and are now just moving toward a
conclusion.
Fifty is a good number in the sense that it covers a lot of
the countries that everybody has been focused on as we go. But
it does raise--and there are a lot of other countries, you
know, another 100, 125 easily--the questions you raise, and
particularly the one I had not heard people discuss yet, but it
does seem to me appropriate, is in this global economy, any
number of financial institutions are operating in a number of
different countries.
The good question is, ``if I am in 30 countries, 20 of
which have agreements and 10 don't, do I at least get credit
for the 20 I am in that have agreements?'' And, again, that is
a question that Treasury would have to answer, but it does seem
to me, logically, that you ought to be. If you are operating
and your accounts are in a country that is compliant, that
ought to count for something. But the problem is the penalty is
withholding payments made on accounts you have here.
So it is going to be a more complicated answer than the
logic of well, you ought to get some credit because you ought
to for that. I will be happy to find out from Treasury where
they are and whether anybody has asked that question. I know
they are working, and most of the countries, are working very
hard to get to the international agreement.
Some of the 50, a lot of the other countries, in effect
have rules that allow the banks to provide the information
directly. Some of the countries that had bank secrecy laws,
which were part of their attraction for people as a place to
have accounts, then discovered they were suddenly stuck in that
message. But a lot of countries basically will allow their
banks to provide that information.
So the real question is between 50 and 180, or whatever the
number of countries are, how many of them have bank secrecy
laws and no agreement, and that I don't know the answer to.
Mr. Yoder. Well, your efforts to clarify some of these
things will be helpful, and as I am sure you can imagine, there
is a lot of confusion going out and July 1 is coming quickly.
And there is this uncertainty. Our office gets questions, and
so I pass those questions along to you and to extent you can
help us clarify, great, and we appreciate your efforts in that
regard.
EARNED INCOME TAX CREDIT
Shifting gears for a minute, I want to talk a little about
the Earned Income Tax Credit. And I had some tax preparers in
my office recently and we were talking about just the amount of
fraud that goes on in this program. I know you are probably
well aware of it.
It is a pretty stunning number. When you look at a program
that has had upwards of 25 to 30 percent of the payments
fraudulent, I think reports now are 21 to 25 percent of the
earned income tax payments are fraudulent payments that go to
folks that are not entitled or eligible for those benefits. And
correct me if you have better more accurate numbers in a moment
here.
What tools do you need to fix this problem? You know, we
are talking $10 to maybe $13, $14 billion in lost revenue or
money that is going out basically from the Federal Treasury to
folks that don't deserve those dollars. That is a lot of money,
particularly when we are talking about trying to find money for
Head Start and cancer research and things that could really
help people, or reduce the tax burden for Americans that are
already struggling in this economy. How do we root out that
fraud, number one.
And then, two, the taxpayer suggested to me that there is a
little bit of a loophole in that when they help someone prepare
an earned income tax application they have to certify a list of
questions that they are on the line for determining were
accurately responded to, or at least that they asked the
questions and sought answers, and they have had people when
they have asked the question say, never mind, I am just going
to file it myself. That way I don't have to actually answer
those questions, and they described an online loophole that
allows people to basically not have to attest to all of the
same things they might have to attest to with the preparer.
What do you know about that, is that accurate, and what can
we do to fix that problem as well?
Mr. Koskinen. Right. As I talk with employees, I tell them
that even with our constrained resources there are a set of
things we need to address, and they are what I call the visible
issues. So we need to make sure filing season, which is the
most visible, goes well, as it has this year. And the challenge
for implementing the Affordable Care Act and FATCA next year,
is to make sure that it goes well because it ties directly into
the filing season. So we are going to do that and I am
committed to that.
In terms of other issues, we need to get the (c)(4) issue
behind us. We are providing voluminous documents to the six
investigative groups. It is not a resource issue, it is just,
``can we ever get the document production completed and
somebody issue a report.'' Because I said, once we have the
report, we will take the facts, whatever they are, do whatever
we need to do in addition to the things we have already done,
and then we will move on. We need to do that.
We need to deal with a (c)(3) backlog that requires us--we
are redoing the way small PTAs, as I call them, get processed.
There is no reason they should get the same 31 page application
as somebody that is going to spend $2 million. And those are
all visible and those are things we need to deal with. I think
we have a program and we are in good shape for that.
We have a good story, as I just talked about, around a huge
problem of refund fraud, where we have programs going. We are
making a dent in it. I think we are going to--with a little bit
more funding--actually make a bigger dent.
The area that is the last area that is visible where I
don't think we have had a good story, is in fact the Earned
Income Tax Credit. As you note, the improper payment rate has
been 20 to 22 percent, and the amount of money improperly going
out is $12 billion to $14 billion, and it has been that way for
several years.
And it is not that the IRS has not tried a lot of things.
They have tried a lot of different things and it seems to have
made no difference. So I have told people that is an untenable
position to be in. We need to let people know that we know it
is a problem, that we recognize that. We think it is important
to solve the problem, and we think that, in fact, there ought
to be a way to deal with it.
I have had two long meetings with anybody who ever thought
of this problem in the IRS to say, okay, don't tell me what we
have done, that is fine, it didn't work. You know, we can't
keep doing it expecting it to be different. What are the
changes we need?
So your question is my question, and there are several
things. One, have we disaggregated where does the improper
payment comes from? Some of it is fraud by refund preparers who
take the money and run off.
Some of it is improper payment, definitionally. The statute
is very complicated about where the children are. There is
relatively little fraud in the single taxpayer with no
children. The maximum payment there is about $600, so it is not
a huge incentive to cheat, and the fraud there is just the
understatement of income to try to make yourself qualify, and
we have the usual ways of tracking that.
The real problem is the complexity around dependents and
how many children you have and where are they. Are they with
you, are they with your wife if you are divorced, are they with
somebody's grandmother? How many different people are claiming
them? And that is where the attestation comes in and people
have to certify, ``okay, I have got this many children and this
is where they are.''
We have spent a lot of time auditing these people, but it
is clear we are not going to audit our way out of the problem.
We have dealt with tax preparers because over 50 percent, 57,
at one point over 60 percent of the returns were filed by
preparers, and so they were a group we could educate about the
problem. We could ask for their assistance to make sure they
are comfortable that they are filing.
And your report is right, some people have said well, in
that case I won't go to the preparer. I will just do it myself.
And so, part of it goes to our goal of providing minimum
standards in regulating preparers, but part of it is there are
legislative things that would help us.
Two of them are--one is what is called correctable error
authority, which would allow us if we see beyond just math
errors, if we see an error in a return--we see them in
particular in this area where we have information that says we
don't think you have got the right number of children here--now
we can't adjust that refund without actually auditing you. We
don't have the authority to adjust it.
Now, if we adjusted it and had that authority we would tell
you that we adjusted it. You would still have the normal rights
to appeal or complain or explain. But we haven't got enough
resources, and it wouldn't make sense for us in all of those
returns where we see there is a problem, to then go out and try
to audit. We do half a million audits in this area already. It
is about one-third of the audits we do. So if we had
correctable error authority it would be a big step forward.
The other thing we are asking for is authority to move
the W-2 filings to the IRS by the end of January. We would
collect some of the understatement of income from people. It
would allow us to make sure that the fraudulent filers are out
of there. The problem is a lot of EITC filers don't have W-2s.
They make money and they file schedule C's, they are gardeners,
they are working in assistance places where they don't get W-
2s.
The third piece we are looking at is where we can get third
party information, particularly about children. We have some of
that in our dependent database. We need to make that improved
and better.
And then the fourth, and we haven't gotten that far yet, is
whether there is a way to simplify the statute. I have got to
tell you, I have read it, I read the requirements, and even I
have trouble figuring out what some of the rules are. You know
you can't be filing a return above a certain age if you are
already on somebody else's return or you are older than the
taxpayer who is filing. And I mean, you look at it and I am
thinking what kind of situation is that?
So I understand how these things grow, but one of the
things I have asked for, and we don't have it in our
legislative proposal yet is, is there a way to make the statute
simpler so that people trying to make the right decision and
make the right filing would be able to do it without a lot of
complications?
But I do think it is an important problem, and as I have
told our employees, we have to have a better story, and it is
not a better story to talk about. We have to have a better
story on beginning to make a dent in the improper payment rate
and in the amount of money that is being paid out.
Mr. Yoder. If I might just on this topic follow up, Mr.
Chairman, and I will yield back.
Is it accurate they don't have to, these applicants don't
have to attest the same information that they might have to
attest through a preparer? Wouldn't that be something we could
clear up, clean up very easily?
Mr. Koskinen. That is one of the issues and that is one of
the questions. Some of these things we can do on our own. Some
we need legislation for, and one of the questions we are
looking at is everybody sensitive, appropriately, to the burden
we place on individual taxpayers----
Mr. Yoder. Absolutely.
Mr. Koskinen [continuing]. And so we don't want to
gratuitously, suddenly, make a group of people do more. But on
the other hand, this is an important program. I remember when
it was passed, it supports the working poor, it gives people
incentives to work. It is a great program and it turns over.
Part of the problem is a third of the eligible people turn over
every year. They get a better job, something changes in their
circumstances. So we have this irony. We have to be out trying
to make sure eligible people sign up, an odd thing for tax
collectors to be doing.
Mr. Yoder. On that specific point----
Mr. Koskinen. On that point, my view is I am sensitive to
the burden, we have to be careful about it. But on the other
hand, we can't live with these numbers. So if it means that
there is going to be a little more burden to file, and if it
means the refund maybe comes a couple weeks later, so we can
actually process third party information, we need to take a
hard look at doing that.
Mr. Yoder. I just think when a program has 20, 22, and it
has been up to--I have read maybe 25 or 30 percent over the
years in fraud----
Mr. Koskinen. It has always been--somehow magically 20-22
is the number. That is not up to the 30 percent.
Mr. Yoder. Either way, that is a stunning amount of fraud,
and I would think something as simple as you have to attest to
certain facts before you are eligible, the same facts you would
have to attest through a preparer when you fill out your form,
to me seems a minimum burden to root out what is essentially a
fraud that cheats and hurts every other taxpaying American who
isn't cheating the system.
Mr. Koskinen. Not all of it is fraud. It is improper
payments, to a lot of extent. It is not necessarily people
consciously trying to do it. It is in fact complicated to
figure out.
Mr. Crenshaw. If we simplify the Tax Code, then we don't
need to spend as much money on the IRS.
Mr. Womack.
OFFSHORE TAX NONCOMPLIANCE
Mr. Womack. Real quickly, what is the amount of money that
the Treasury is losing to offshore tax noncompliance?
Mr. Koskinen. I am not sure anybody knows the answer to
that.
Mr. Womack. What do you think it is?
Mr. Koskinen. We don't know--now we do know that the
Voluntary Disclosure Program has flushed out 43,000 people that
have paid about $6 billion already, and obviously some of the
more hard-core people are still hanging out there, figuring
maybe we won't get to their country or their assets. But I have
never seen an estimate as to what is out there.
My concern about it has been, or my view of why it is
important, is it is important to have collected the $5 or $6
billion, which is a lot of money.
Mr. Womack. But it is more than that.
Mr. Koskinen. Yes, It has got to be more than that.
Mr. Womack. A multiple of that.
Mr. Koskinen. I think that is right. There are estimates
that it is multiples of that. I think we need to. It rankles me
when people don't pay, so I am happy, as I have said publicly,
to take the unwilling to pay. Willing to pay people who have
trouble, we ought to work with. We have installment agreements.
There are ways we can help you try to get to be compliant if
you want to be compliant. We ought to work with you.
If you are unwilling to pay, I am happy to chase you to the
end of the Earth and throw you in jail, if we can, because it
rankles me when you don't pay. And one of the advantages, the
important signals we send with FATCA, is to the average
taxpayer who is paying his taxes, he no longer has to think,
``if I had a really fancy attorney and had a lot of money and a
really fancy accountant I could hide my money and I wouldn't
have to pay those taxes.''
Mr. Womack. Just like those other guys do.
Mr. Koskinen. Just like those other guys. And so what I
want the average taxpayer to feel, is if they are trying to do
that, the IRS is out after them, and then we are going to be
out after them too.
PRIVACY
Mr. Womack. Back in our oversight hearing in February you
mentioned a couple of things that piqued my curiosity.
First, you said you that weren't at liberty to discuss
personnel issues, and then second because of some union
agreements you are basically forced to pay these bonuses that
have already been brought up once in this hearing.
So what exactly is it that precludes you from being able to
discuss with the Oversight Committee personnel issues?
Mr. Koskinen. Personnel issues is not just the IRS. No
agency can talk, in fact no private sector company that doesn't
want to get sued, can talk about personnel questions. You see
it in universities all the time. That, basically, if there is
an individual personnel action, privacy protections don't allow
people to discuss it. Obviously you don't have privacy if you
are indicted and have a public trial. But across the
government, if somebody has a personnel action taken, that is a
private matter.
Mr. Womack. Is there anything that could be done from our
standpoint? You know, you were talking a minute ago about
seeking approval for things like correctable errors, certain
types of authority that you don't presently have. Is there
something along the lines--I guess what I am getting to is
doesn't it make sense that the commissioner of the IRS should
be able to be able to have a conversation with a Committee like
this in the eyes of the public when there are personnel
shortcomings, obvious personnel shortcomings that for a variety
of reasons are just not being properly addressed?
I will leave it there.
Mr. Koskinen. Well, the decision has been made far beyond
the IRS or this area that, in fact, personnel matters are
personal, and in the private sector as well. If actions are
taken against individual people, as a general matter those are
held to be private, to protect the privacy of the individual.
WHISTLEBLOWER PROGRAM
Mr. Womack. Do you guys have a whistleblower program?
Mr. Koskinen. Pardon?
Mr. Womack. Do you have a whistleblower program?
Mr. Koskinen. We have a whistleblower program of which I am
a big supporter.
Mr. Womack. How long has it been in place?
Mr. Koskinen. The whistleblower program has been there for
some years.
Mr. Womack. Does it reward people for helping discover,
expose, if you will, people that are conducting themselves
improperly?
Mr. Koskinen. Yes, it does. But one of the complications of
it is that we can't just release data. The whistleblower report
just came out and it has taken awhile to aggregate enough
statistics so we were not reporting, in the whistleblower
report, the taxpayers that were in fact identified.
Again, taxpayer information is protected under section
6103, so when we deal with the whistleblowers, it is more
complicated than it would be if we could just say. Because if
somebody says General Motors has been cheating, General Motors
may or may not have been cheating, and to have that out in the
public domain at the front end is a problem.
But we do pay a lot of money. I am a big believer in it,
primarily because when there are large complicated
corporations, and if somebody is deciding to cut corners, I
would like them to worry a little that there are a lot of
people that know about that--lawyers, accountants, people in
the finance department--and somebody might turn them in and get
a big payment. That might be an incentive, and so that is why I
think it is a great program.
IDEAL TAX RETURN
Mr. Womack. Finally, my last question, in a perfect world,
if you were running things, king for the day, whatever you call
it, although I think there are some people that think that the
IRS is a monarchy, what would the ideal, and I am only talking
on the individual side now--what would the ideal return look
like to you?
Mr. Koskinen. I would preface this by saying, as I always
do, tax policy is the Treasury Department, the Administration
and the Congress.
Mr. Womack. I get that.
Mr. Koskinen. But having said that, the ideal return would
say this is my gross income----
Mr. Womack. Send it to us.
Mr. Koskinen. Not send all of it, no, just send part of it.
This is my gross income, I might say, and this is my family
situation, a few deductions. I multiply it by a number and I
send in a check.
Mr. Womack. Okay. That is kind of like flat tax. That
sounds like flat tax.
Mr. Koskinen. Well, the problem with the flat tax is it got
a bad name because people called it a flat tax. Because most
flat taxes are progressive. They would say there is a 10
percent rate, a 12 percent, 14 or 18. You know, there are
usually three rates. And I have always thought people who
support simplification would do better not calling it a flat
tax, just calling it a simple tax, because nobody would propose
that the millionaire ought to pay the same amount of tax as
somebody who makes $20,000 a year.
So all of the simple tax proponents have usually said 10
percent, 16, 18, whatever you want. Somehow three always seemed
to be the number. So at the bottom of my simple return you
would say, ``okay, I am above this, so I multiply it by 12, 16,
18 or 10,'' whatever it might be.
I only say that because I do think tax simplification is an
important strategy, and I don't want people to think if it
really got simple, it would be just a single flat tax, and then
you have a whole lot of arguments, progressive or non-
progressive. I think the best argument to have is by complexity
and non-complexity.
Mr. Womack. Thank you, Mr. Chairman.
And thank you, Mr. Commissioner.
Mr. Crenshaw. Thank you.
I think we have had most of the answers today. I have some
questions I will submit for the record and Mr. Serrano may as
well.
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Mr. Crenshaw. One thing I would remind you, we asked in the
February hearing there were some requests made for the record
for some information that is still forthcoming. So I just want
to remind you of that.
Mr. Koskinen. I am unhappy about that. My view is we ought
to be responsive and try to get back to you as quickly as we
can. Again, those answers are prepared. Some other people are
involved, you know, as the normal process, every agency goes
through. Treasury gets to look at it and then OMB gets to look
at them and they always end up not getting changed very much.
But it is a process. But all I can tell you is that I don't
think the response time is appropriate. We ought to get back to
you quickly. And if you will send me these questions, I commit
to you I will do the best we can to get you answers quickly.
Mr. Crenshaw. We appreciate that, and we know you have a
tough job, I think, ultimately, to restore the confidence and
credibility of the IRS, and so we want to work with you anyway
we can to make that happen.
Thank you for being here today. This meeting is adjourned.
Tuesday, April 29, 2014.
DEPARTMENT OF THE TREASURY
WITNESS
HON. JACK LEW, SECRETARY
Mr. Crenshaw. Good morning. The hearing will come to order.
Welcome members of the Subcommittee and to our witness Jack Lew
from the Department of the Treasury. Mr. Secretary, glad you
are here to consider the President's 2015 budget request. We
also welcome yesterday's announcement about the many new
Treasury sanctions against individuals and businesses
undermining Ukraine's stability and sovereignty. We expect the
Department to use its powers both fully and forcefully against
those who threaten Ukraine's security.
Mr. Secretary, I know you are pleased that the deficit
dropped to 4.1 percent of the GDP last year, but the deficit is
still the highest it has ever been both in real and constant
dollars other than the four past consecutive deficits that
exceeded $1 trillion under this Administration. That string of
$1 trillion deficits is why the gross Federal debt last year
exceeded 100 percent of the GDP and will remain there, it looks
like, for the rest of this Administration. I doubt that you or
the President should be pleased about this legacy.
When we look at the mandatory spending in the President's
budget, it is estimated to grow from $2.5 trillion in the
fiscal year 2014 to $3.6 trillion by the fiscal year 2019. By
then, the gross interest payments on the debt alone will exceed
$750 billion which will dwarf our defense spending. And because
of that, it troubles me, and I wonder why the Administration
didn't propose any serious entitlement reforms to prevent
further intergenerational inequality.
And so I hope that you will work with the Budget Committees
and the authorizing Committees to give the next generation the
opportunity to forge their own way forward rather than saddle
them with the debts of their grandparents and their parents. As
a member of the Appropriations Committee, we have driven down
discretionary spending every year since fiscal year 2011, and I
am a little concerned that more progress has not been made on
the mandatory side of the ledger.
The Department's own budget request also raises some
questions. The request seeks to add more than $1 billion to the
IRS; it seeks to authorize language to pay certain IRS
employees bigger salaries and bonuses than are allowed under
the civil service system. It seeks to eliminate language
enacted in the omnibus to prohibit the IRS from targeting
groups for additional scrutiny based on their ideological
beliefs and to prohibit the IRS from targeting citizens of the
United States for exercising any right guaranteed under the
First Amendment. It also seeks to eliminate language requiring
the videos produced by the IRS to be appropriately reviewed.
Requesting $1 billion more, eliminating prohibitions against
targeting that were negotiated by this Committee, and proposing
a new rule for the 501(c)(4)s before investigations by Congress
and the Department of Justice had been completed will not build
trust in the IRS, the Department of the Treasury, the Federal
government, or overall government.
So I think that if you were to explain how the
inappropriate criteria came into use, how they were allowed to
be used for years, that's what we need to bring back some trust
in the IRS and make sure the IRS can administer the tax code in
an impartial and nonpartisan manner.
Similar to the Department's 2012, 2013, and 2014 budget
requests, the Department is seeking discretionary spending for
the IRS above the spending caps by relying on discretionary cap
adjustments that are not part of current law. Absent a change
to either the Budget Control Act or the Ryan-Murray agreement,
$480 million of the IRS request is both pointless and
meaningless. If the $480 million is of importance to the
Administration, then the President would have found a way to
pay for it from the $1.14 trillion allowable under the Ryan-
Murray rather than use a gimmick that the Budget Committees
have rejected for the past three years.
In addition, I am interested to hear from you today an
update on the final regulations to implement the Foreign
Account Tax Compliance Act which will take place on July 1 of
this year. The so-called FATCA has profound and far-reaching
impact on U.S.-based companies as well as foreign companies
with assets in the United States or clients. And I am concerned
with the amount of time that's going to be available to comply
with these regulations when the final rules were not released
until the end of February. That's going to give a lot of the
global companies less than five months to comply. But again I
want to thank Secretary Lew for being here today and I would
like now to turn to the Ranking Member, Mr. Serrano, for his
comments.
Mr. Serrano. Thank you Mr. Chairman. I would like to join
you in welcoming Secretary Lew before the Subcommittee for the
second time. You lead a department with a variety of missions
important to our economy, our government, and our nation as a
whole. The Treasury Department plays a central role in
promoting economic growth and opportunity through programs like
the CDFI Fund, ensuring financial stability through the
implementation of Dodd-Frank, enforcing our tax laws fairly,
and managing our nation's finances. Your budget request for
fiscal year 2015 promotes all of these things. Most of the
agency is held to pretty austere budget levels, but there are
significant requested investments at the IRS which is the
largest part of your budget. And those requested increases are
much needed.
As I said at our hearing on the IRS a few weeks ago, almost
$1 billion has been cut from their budget over the past four
fiscal years, and we should not be surprised that the result is
we do less service and an increased tax gap. Since that hearing
we have even more evidence of the negative impact that these
budget cuts are having on the IRS. A recent GAO report found
that the budget cuts to the IRS instituted over the last few
years had resulted in reduced enforcement and reduced taxpayer
services. This comes on top of reports the IRS audit rates are
at their lowest levels since the 1980s. As it currently stands,
these cuts have had the perverse effect of promoting
noncompliance for those who want to cheat the system while at
the same deterring people who want to file their taxes
correctly from getting their questions answered. Your budget
request for the IRS attempts to reinvest in the agency restore
those losses, and reverse these wrong-headed incentives.
On a different topic I am a strong supporter of the
Community Development Financial Institutions Fund, which has
help promote economic investment in traditionally underserved
areas. I understand that you re-proposing a small decrease in
the FY 2015 Budget Request for the CDFI Fund. Although I hope
we will get to discuss this in more detail, I am particularly
concerned by a separate proposal within this request to
eliminate the Bank Enterprise Award Program within the CDFI
Fund. I have heard numerous concerns about this idea from
various stakeholders and just recently visited a CDFI that has
been able to do great work in my district with funding from the
BEA. This part of the program is long-standing and I don't know
that it makes sense to try and eliminate it at this time.
Secretary Lew, there remain great challenges for your
agency in the year ahead with the continued implementation of
the tax provisions of the Affordable Care Act, the ongoing
stewardship of our economic recovery, and the need for further
investment in key areas. We will work with you to ensure that
you have the resources to accomplish all of these goals. As you
know, you and I have worked together through this
Appropriations Committee and other committees many times
before. I have great respect for you and for your abilities and
we hope that we can continue to have that as we move forward.
Thank you, Mr. Chairman.
Mr. Crenshaw. Thank you. I would like to now recognize the
Chairman of the Full Appropriations Committee, Mr. Rogers, for
any opening statement he might like to make.
Chairman Rogers. Mr. Chairman, thank you for yielding.
Having marked up our first two bills in full committee before
we broke, that's the earliest by the way since 1974 the
adoption of the present Budget Act. So we are well underway
with the fiscal year 2015 process and, Mr. Secretary, we are
pleased to have you with us this morning to discuss the
President's budget for Treasury. Like the Chairman, I have some
very significant concerns about the request. We have worked on
this Committee in a very nonpartisan way for the most part to
construct bills that comply with the Budget Control Act and the
Ryan-Murray agreement. The Administration's request for
Treasury seemingly cast these statutory budget caps--just cast
them aside as merely suggestions. We, obviously, understand
that it is more difficult to operate in these constrained
budget environments, but these challenging times calls for
leadership and tough choices, not a $480 million gimmick that
the Congress has patently and repeatedly refused and rejected
on a bipartisan basis. It is sort of like deavu all over again.
In contrast, the fiscal year 2014 Omnibus Package is a
prime example of what we can accomplish by working together.
Under regular order, this Committee was able to provide every
facet to the Federal government with adequate responsible
funding while continuing to reduce Federal spending, totaling
$165 billion in cuts since fiscal year 2010. As we have
collaborated to reduce spending on the discretionary side of
the ledger, I would be absolutely remiss if I did not echo the
sentiments of Chairman Crenshaw and others in calling for some
leadership from this Administration, and your department
specifically, on the problem of mandatory spending that's
squeezing aside everything else.
Today, mandatory spending, as you know, accounts for two-
thirds of Federal spending. When I came to Congress in 1981, we
appropriated two-thirds and mandatory was one-third roughly.
Now, it is just the reverse and zooming. We have managed to
control discretionary. We have reduced discretionary over these
last two or three years, but, in the meantime, the mandatories
are zooming skyward and crowding out everything that you and we
want to do on the discretionary side. And I see no leadership
out of the Administration, particularly Treasury, about trying
to wrestle the mandatory growth to the ground. Mr. Secretary,
unless we do something, it is going to completely eat us alive
along with the interest on the debt. From transportation
projects, medical research, housing assistance, criminal
justice, everything else, including military, are going to be
shoved aside.
Second, Mr. Secretary, I have some very strong issues with
the posture the Administration has taken towards coal-fired
generation in developing countries and I simply cannot support
many of the policies emerging from Treasury in that regard.
Simply put, these policies are bad for domestic industries in
America and they are bad for areas in the developing world in
dire need of a reliable, low-cost energy source. To be blunt,
the U.S. Environmental Protection Agency has thrown up
roadblocks at every turn to diminish our domestic producers'
ability to mine coal and burn coal. In my region of southern
eastern Kentucky, these regulatory attacks have resulted in
some 8,000 miners laid off in just the last several months. Men
who were making a very skilled wage, $80,000 to $90,000 a year
now trying to find a job at McDonald's, unsuccessfully, and
trying to support children and families because of the
regulatory attacks from this Administration. Like salt on an
open wound, Treasury has now sent a clear message that the U.S.
should no longer be in the business of exporting coal. Your
department issued new rules last year and now the United States
will vote against financing any new coal power plant by the
World Bank, unless it is in one of the poorest countries or the
project uses carbon capture technologies that are not readily
available even in the U.S. These policies deny our companies
the ability to provide developing countries with more efficient
technologies and they encourage these countries to look for
financing from investors with lower environmental standards,
particularly China.
I would even go far as to say these policies show that this
Administration is in denial about the reality of expanding
energy access to the poorest nations. For example, I do not
understand how the Administration can possibly meet its goal of
providing more power for African countries if coal is left out
of the equation. I hope that you could help us understand that.
Finally, in response to Russia's continued threats against
Ukraine, we want to hear about the Administration's efforts to
support our friends and allies, particularly yesterday's
announcement of additional sanctions. Unquestionably, the U.S.
must send a strong signal and demonstrate leadership in the
international community that such acts of aggression in
violation of Ukraine's territorial sovereignty are unacceptable
and should not be allowed to continue with impunity. Mr.
Secretary, we look forward to hearing your testimony. Welcome
to the Committee.
Mr. Crenshaw. Thank you. I would like now to recognize Mrs.
Lowey, who's the ranking member of the Full Committee for any
opening statements she might have.
Mrs. Lowey. Thank you Mr. Chairman, and I would like to
thank you and Ranking Member Serrano for holding this hearing.
And to my friend, Secretary Lew, thank you for joining us
today. We are indeed fortunate to have a person with your
wisdom and your talent in public service today. We appreciate
it.
Mr. Secretary, your fiscal 2015 budget requests $13.8
billion to support the Department of the Treasury. As you note
in your testimony, businesses have added more than 8.9 million
jobs over the last 49 months and the economy and housing
markets continue to improve, and yet much more must be done to
provide access to capital and get people back to work.
Taxpayers need clarity in the tax code and responsiveness from
the IRS. The budget would address the funding shortfalls that
the IRS, which amazingly have resulted in 39 percent of phone
calls going unanswered in FY 2013. This is unacceptable. The
American people deserve better. I am pleased that your budget
would address this deficiency.
I am also pleased to see that the budget proposes to extend
the Terrorism Risk Insurance Program or T-R-I-A, TRIA. This
vital program, which is scheduled to expire at the end of this
year, provides a federal backstop for insurance claims
resulting from acts of terrorism. If TRIA were to expire
infrastructure investments and capital projects throughout the
country would come to a halt. My friends on the other side of
the aisle often say that the government should not be in the
business of doing the private sector's job, as there is no
affordable and accessible Terrorism Risk Insurance Program in
the private sector. TRIA is very much a federal responsibility
and TRIA should be reauthorized without delay.
Unfortunately, your hearing before the Subcommittee on
State and Foreign Operations could not be rescheduled. I want
to take the opportunity now to reiterate my strong support for
IMF reforms. The IMF is an excellent tool to help stabilize
struggling economies and protect our own financial institutions
from getting directly involved in bailouts caused by foreign
financial emergencies. We need to maintain our leadership
within the IMF, expand its lending capacity, and support the
quota reforms in order to protect our own economic and security
interest.
I also want to commend your department's work, specifically
Under Secretary Cohen's office in disrupting terrorist
financing networks and enforcement of sanctions against
countries such as Iran and North Korea. In particular,
sustained implementation of these efforts must remain the
backbone of our Iran policy especially while nuclear
negotiations continue. I hope to hear what additional economic
actions and sanctions the Administration will seek if
negotiations with Iran fail to yield an agreement permanently
denying Iran nuclear weapons capability.
And before I close, I want to apologize not because of lack
of interest, but I have another hearing directly across the
hall. So thank you again for appearing before us.
Mr. Crenshaw. Thank you. And now I would like to recognize
the Secretary for his opening statement. Your written statement
will be made part of the record and if you could limit your
oral testimony to about five minutes it will give us more time
for questions. So the floor is yours.
Secretary Lew. Well thank you Mr. Chairman, Ranking Member
Serrano, members of the Subcommittee and thank you for the
opportunity to speak about the Treasury budget. I appreciate
your cooperation on rescheduling the hearing and I will keep my
opening remarks brief.
Let me start by saying what an honor it is to work with the
dedicated men and women at the Treasury Department. They are
talented public servants who are focused on strengthening our
country and they have performed with excellence under quite
difficult conditions over recent years and I want to thank them
for their service and commitment.
The president's budget addresses the fundamental challenges
our nation faces, and the request for Treasury is part of that
comprehensive strategy. This request will allow the Department
to help maintain a strong economy, sensibly manage the
government's finances, foster a greater investment in American
communities and small businesses, protect our national
security, monitor risks to the financial system, and promote
conditions that support economic growth and stability at home
and abroad. Over the past five years Treasury has met its
responsibilities efficiently and at lower cost. Today's Budget
Request builds on that progress. It includes even more ways to
cut costs and achieve savings while offering carefully designed
proposals to increase the Department's effectiveness.
For instance, we are seeking a second round of funding for
the State small business credit initiative which has been
enormously successful in strengthening small businesses across
the country. We are working to reduce the risks from cyber
security attacks by helping to improve the financial sector's
resilience to such attacks and investing in Treasury's own
defenses and infrastructure. And we are requesting sufficient
funding for the Internal Revenue Service so it can provide the
kind of quality service that American taxpayers deserve.
As we consider what's in the best interest of taxpayers it
is important to note that it is been five and a half years
since Fannie Mae and Freddie Mac went into conservatorship. Now
is the time to reform our housing system, and I am encouraged
that the Senate Banking Committee is making bipartisan progress
on this very complex issue. Since the financial crisis,
Treasury has played a central role in designing and
implementing the most comprehensive reforms to the financial
system since the Great Depression. One major piece of
unfinished business is housing finance reform, and we need
legislation that protects taxpayers, ensures continued
widespread availability of consumer friendly mortgage products
like the 30-year fixed rate loan, it provides liquidity during
times of economic stress and facilitates the availabity of
affordable housing in an explicit and transparent manner.
Before I take questions, I would like to talk briefly about
Ukraine. The United States and the international community have
made it clear that we will continue to stand with the Ukrainian
people during this critical time. That's why we are united in
our effort to impose costs on Russia for its unlawful and
provocative acts. On Monday, the United States responded to
Russia's latest actions with additional sanctions which will
increase the impact we have already begun to see on Russia's
economy from U.S. and international sanctions. We urge Russia
to pursue a diplomatic solution to the situation especially as
Ukraine moves forward with presidential elections next month.
Finally, we continue to vigorously enforce our highly
effective Iran sanctions regime. As a result, earlier today we
sanctioned individuals and entities for providing support to
the government of Iran and evading oil sanctions and
facilitating Iran's ballistic missile procurement.
With that, let me thank you for the opportunity to appear
before you today, and I look forward to answering your
questions.
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PROPOSED 501(C)(4) REGULATION
Mr. Crenshaw. Thank you very much. And Members, we are
going to try to conclude our hearing in an hour and a half so
we'll observe the five-minute rule and we'll have as many
questions as we can possibly have. Let me start, Mr. Secretary,
just a follow up question when Commissioner Koskinen was here
with the IRS, we asked a lot of questions about this proposed
501(c)(4) regulation and he told the Subcommittee that he
didn't think that the draft would be finalized before November
and, I wonder, is that your view as well?
Secretary Lew. Mr. Chairman, I have said on a number of
occasions that there are many steps from where we are now to a
final rule. There have been extensive comments as you know,
roughly 150,000 comments. There is a process for reviewing
those, and there is going to be a need for the administrative
process to go step-by-step as revisions are reviewed. So I
think, yes, his estimate of the timeframe is consistent with
our expectation. You know the challenge is to have a
conversation about what to do to limit the discretion in this
area so that we don't ever see the kind of problems that were
reported last year.
Mr. Crenshaw. I know that you mention 150,000 comments and
that's fairly a large number, maybe historic, do you know yet
will there be any further hearings when you have that kind of
comment?
Secretary Lew. Well I expect that there will be further
opportunities for public comment both on the written material
that's issued subsequently and potentially with hearings.
Mr. Crenshaw. So it is hard for you to say when you think
it might be finalized?
Secretary Lew. Yes, I think it is going to take a while.
You know I have been very clear about that. The goal here is to
get this done right. This is a very controversial and
complicated area. The proposed rule made clear that there was
an active request for comment. So we were not surprised by the
comment. The rule is not even complete in every regards because
it says there are some areas that without comment it was very
difficult to pave a path forward. So it was meant to open a
process. I would just point out that last year when this whole
issue came to light through the IG report there were a number
of recommendations in the report one of which was to clarify
this rule and the proposed rule was a first step in that
process.
FATCA
Mr. Crenshaw. I appreciate that. Let me ask you--I mention
in my opening statement about the Foreign Account Tax
Compliance Act, that's going after tax evasion, and it is an
extensive regulation. It is going to have a profound and far
reaching impact on our economy, but sometimes I think when
those kind of rules are proposed they have unintended
consequences. For instance, you don't want people hiding cash
off shore, but if you have a non-cash value insurance, in other
words like property and casualty insurance, that's basically a
promise by the insurer to provide payment to cover a specific
event. Now, in Florida, we have hurricanes and we have
catastrophic events, so people buy insurance, non-cash value
insurance, property casual insurance, and re-insurance.
And so it seems like they cannot be used for the purposes
of tax evasion and, you know, I don't know that the IRS can see
any additional money there. And so the question becomes how did
they happen to include premiums that have no cash value in this
regulation? Do you know that? And for instance, I am told that
these companies are going to have to spend an awful lot of
money to demonstrate that there is no cash there and I wonder
if somebody did an economic analysis of the proposed rule
before.
Secretary Lew. I am happy to go back and look at this
specific issue about insurance. The general goal
[unintelligible] is one that I know we all support which is to
make sure taxpayers cannot evade U.S. taxes or taxes anywhere
by hiding their income in overseas accounts. It is a
complicated area. One of the reasons that we extended the
period was to make sure that we had time to enter into
agreements with other countries. There was a great deal of
interest in having bilateral agreements. I think it actually
has been a tremendous success.
As I go to international meetings, I don't like to use
acronyms at meetings, so I would not use an acronym like FATCA
but in various accents I heard people saying we need FATCA for
all. You know we need it to become a global standard. And so we
will work on getting the details right, I am not familiar with
the specific issue on insurance premiums but I am happy to look
at and get back to you.
[Clerk's note.--The Department of the Treasury was either
incapable or unwilling to answer this inquiry prior to the
publication of this hearing volume.]
Mr. Crenshaw. I appreciate that because I do think we all
think that it is a great concept that we want to stop the tax
evasion. But if you think about it, if somebody's buying re-
insurance or property insurance, there is no way, as I
understand it, they can hide any cash in there. It would
probably be appropriate just to revisit that and do some sort
of economic analysis and if it is not something then they could
not be part of that. But certainly it is a great concept
overall.
Secretary Lew. I am happy to look at it and get back to
you.
Mr. Crenshaw. Thank you. Now let's turn to Mr. Serrano.
BANK ENTERPRISE AWARD PROGRAM
Mr. Serrano. Thank you, Mr. Chairman. I am going to try to
get in at least two questions because I know we have a short
time and, Mr. Secretary, you draw a big crowd, as you can see.
Great attendance. Your request eliminates the Bank Enterprise
Award Program, something I am very concerned about. I have
heard very good reports about the impact program is having in
my district and elsewhere. In FY 2014, we provided $18 million
for it. Why are you proposing to zero it out this year? And I
must tell you that it is been a while since I have gotten so
many comments from constituents on an issue as I am getting on
this one.
Secretary Lew. Congressman, we had to make a lot of tough
choices in this budget as you have to make in the
appropriations process. And based on the current fiscal
environment we thought that concentrating the CDFI funds in
other areas was the right trade off. You know the appropriated
funding level for the BEA Program has decreased over time and
it really was a question of concentrating our effort in other
very important areas, but we understand that there are some
concerns because of this decision.
Mr. Serrano. Well the big issue here is that you've got
programs up and running. You have situations, for instance, in
my district, an area that for years the biggest complaint was
that there were no banks around and through this kind of
funding that this Committee put forth you know local banks were
able to spring up and that's a bad pun because one of them is
called Spring. But anyway so now they run the risk of falling
apart and I don't know what process you have going forward. We
certainly have our role to play but I must tell you that this
is one that has support in the community and support on this
Committee. And so you should keep that in mind as we move
forward.
Secretary Lew. I appreciate that Congressman and I know
there is support for the other activities that CDFI funds as
well.
Mr. Serrano. Right.
Secretary Lew. So it is a question of competing goods and
obviously with unlimited resources we might make other
decisions but we did try in this budget in a number of areas to
concentrate our effort in a world of very tight budget
resources. And this was a trade off that we made but I would be
happy to follow up and discuss the matter with you.
OFFICE OF FOREIGN ASSET CONTROL
Mr. Serrano. Thank you. My next question is one that Mrs.
Lowey wanted to ask you at her hearing--at this hearing and I
wanted to ask you so that merits being asked. The FY 2014
Omnibus required Treasury to submit recommendations for
reducing the response time for applications to the Office of
Foreign Assets Control, for a general license for humanitarian,
non-governmental organizations seeking to provide aide to
famine victims in South Central Somalia. While we appreciate
the response you've given us it doesn't really respond to the
report language. We like to see a more thorough response
delivered to the committee. What timeframe do you think you can
have to get that to us?
Secretary Lew. Congressman, I would have to go back and
check exactly what the timeframe is. I do know that the
issuance of licenses in Somalia has been a very challenging
undertaking. I have had the responsibility to work on it from
multiple different perspectives when I was at the State
Department and now obviously at Treasury. And the challenge is
to make sure that humanitarian goods are going where they need
to go and should go but that we are not seeing support for
organizations that are listed terrorist organizations. We have
tried very hard to work, to strike that balance to make sure
humanitarian supplies can continue to go forward. I am not sure
of the exact schedule. I would be happy to get back to you.
Mr. Serrano. Right, are you at liberty in terms of security
issues to tell us what the challenges have been?
Secretary Lew. Well the whole process is one that is some
things are public, some are not. Rather than cross the line
perhaps we should have the conversation separately but over
time there have been concerns about payments that were used to
support organizations essentially charging tolls on the roads
to raise funds for terrorist organizations. So there are real
concerns on both sides. Obviously our goal in the humanitarian
programs is to get the money in, to get it in safely, and to
get it in without having there be the kinds of collateral
support for people who are not intended to get benefit from
these programs. And I am happy to follow up on the timing;
obviously humanitarian licenses are very important.
Mr. Serrano. I realize I have put on your plate two
questions that some people would see them as being that far
apart because one is very local, one is part of our foreign
policy but both speak about growth and support for people so
we'll be talking in the future. Thank you, Mr. Chairman.
Mr. Crenshaw. Thank you. Mr. Rogers.
MARIJUANA
Chairman Rogers. Mr. Secretary let me ask you about
marijuana. Washington State and Colorado have legalized
recreational use of marijuana, but it remains illegal in most
States and certainly under Federal law. Nevertheless, the
Department of Justice told the governors that it will not
challenge their legalization laws and has told Federal
prosecutors to de-emphasize marijuana prosecutions.
In addition, and what I want to ask you about, the Treasury
Department's Financial Crimes Enforcement Network issued new
rules that give banks a green light to do business with
marijuana shops, illegal shops. The combination of this
guidance should allow both medical and recreational marijuana-
related businesses to make full use of banking services and
institutions even though they are dealing with an illegal
operation. The DEA Administrator recently told a congressional
hearing that cash is the driving force for these drug
trafficking organizations and the DEA has already seen signs
they say that gangs are attempting to exploit the new banking
rules.
The issuance for a green light for banking institutions to
do business with these illegal marijuana shops and subsequent
action by the Treasury Department to in effect rubber stamp
that gives me some pause because this is still an illegal
product in practically every State. Is it wise to offer
regulatory guidance from the Federal government on illegal
activity?
Secretary Lew. Congressman, this is a very complicated
area. Obviously when two States pass a law making an activity
legal in the State there is going to be an increase in activity
in that area. Obviously the Justice Department guidance
provided guidelines for how prosecution matters would be
considered. We believed it was important for there to be
clarity in terms of the consistency between the prosecutorial
guidelines and the banking guidelines.
The risk of cash transactions is actually something that we
were quite concerned about. Without any guidance there would be
a proliferation of cash only businesses and that would make it
impossible to see when there are actions going on that violate
both Federal and State law and would be of real concern. We
thought that the clarity, bringing it into daylight was a
better solution. Obviously the real clarity here would require
legislation that conformed with a policy. But since we don't
have that, it was an attempt to have as much clarity as one can
have given the complex situation with the State laws.
Chairman Rogers. What about cocaine dealers, should not
they be given the same break?
Secretary Lew. I am not aware of any State that has
legalized activity in that area.
Chairman Rogers. But are you not aware that practically in
every State marijuana still is considered illegal?
Secretary Lew. So the actions we took will really just
apply in the States where the state law makes these shops
legal. Where the business would be done with cash, if it were
not done through banks. And we think that the actions we have
taken provide greater transparency and less likelihood of the
kinds of behavior that I think we are all most concerned about.
I will note that there have been quite a number of BSA's,
the suspicious activity reports filed with us from Washington
and Colorado. These reports give us the ability to see where
there are transactions in those two states that would violate
both their State laws and Federal laws, and I think would
indicate the kinds of troublesome behavior and activity that we
would all want to be able to see.
Mr. Rogers. Well, the Department of Justice apparently
qualified its approval of legal marijuana only if that State
created strong and effective regulatory and enforcement
systems. Washington's medical marijuana dispensaries still are
not licensed or regulated by the State and yet you waive all of
that and allow these regulations and help with banks in doing
business with those shops, which are illegal under the State
law much less the Federal law.
Secretary Lew. I cannot conclude what is or is not illegal
under the State. Obviously the States have to enforce their
State law, but they did legalize the opening of these shops and
these transactions. The question was whether the transactions
would be in cash or through a transparent banking system. And
that really is the area where the guidance is meant to provide
some clarity.
Mr. Rogers. But as I saw in Washington State these
dispensaries are still not licensed by the State or regulated
by the State. If they are not licensed or regulated, from a
legal perspective how are they any different from a drug dealer
on a street corner?
Secretary Lew. Congressman, I am happy to follow up with
you on some of the details of how things are being done in
Washington.
Mr. Rogers. This is not complicated.
Secretary Lew. Most States passed laws that created a space
for transactions that under State law are legal. And the
guidance we put out was merely meant to facilitate having
transparency so that that would not become a kind of cash
economy, where there is no way to see when there are
transactions that suggest large scale transactions that would
actually violate the State law.
Mr. Rogers. Well, Mr. Chairman, my time is up I am sure.
But it is not complicated, Washington State is not regulating
those marijuana dealers and yet the U.S. government through
your Department are putting a stamp of approval on banks doing
business with illegal shops even in the State of Washington.
Secretary Lew. I would just note that when there are
suspicious activities that would violate State law, they are
being reported, and being followed up on. I think the
transparency is something that actually makes enforcement of
law more likely to happen in an effective way.
Mr. Crenshaw. Thank you. Mr. Quigley.
IRAN SANCTIONS
Mr. Quigley. Thank you Mr. Chairman, welcome Mr. Secretary.
Secretary, before I go on I would like to echo the Ranking
Member's concern about the Bank Enterprise Award Program. I
understand we all have different priorities, all we are doing
today is telling you this is a program that is a high priority
for our communities and we understand your response.
In the meantime, half a world away the President said
something that he thought the odds of the Iran talks succeeding
were about 50/50 and that if they broke that down, additional
sanctions could be underway and they could be passed by
Congress in a very short period of time. Do you have a sense of
what kind of additional sanctions might be in place? What kinds
of sanctions seem to be working right now?
Secretary Lew. Well Congressman, I think we have seen that
the sanctions that are in place on Iran's oil sector and their
financial sector have been very effective. There has been
consistent degradation to Iran's economy; you see it in their
GDP. You see it in their exchange rate, you see it in their
inflation rate, their unemployment rate, you see it in their
willingness to come to the table and negotiate.
Now we do not know the outcome of the negotiation.
Obviously the President put the assessment out there that made
it clear we are going into this with our eyes open. You know
sanctions cannot force an outcome, what they can do is create
an environment where a leader is feeling the pressure, so that
if they want to do what it takes to improve conditions for
their people, they have to change their policy.
If, in fact, the negotiations do not succeed, we will look
for other means to tighten the pressure. Working with the world
community is one of the reasons that the Iran sanctions have
been so successful and that we have not been alone. We are
working with most of the rest of the world to have it be a
sanctions system that has very little leakage. We obviously are
hoping and working hard to make those negotiations successful,
but we are very much aware of the fact that it could go either
way. I am not going to prejudge what steps we would take, but I
think the President's determination and mine is that if the
negotiations do not go well, we will have a full some set of
options to pursue.
UKRAINE SANCTIONS
Mr. Quigley. I appreciate that. In a different country,
looking at what has worked here the second round of sanctions
involving Ukraine, seem to be met with underwhelming response
by their stock market. Having just returned from there you get
the impression that the type of sanctions that would work
versus Russia might be the same, those dealing with, more
specifically, with the energy sector and the banking sector,
have those been considered or is this an issue with the
European Union?
Secretary Lew. Well Congressman, obviously they have been
considered because the President has signed an Executive Order
that creates the authority for us to designate sectors should
we make the determination that that is the appropriate step.
Mr. Quigley. It just would have been a stronger second
step, perhaps.
Secretary Lew. Well I think if you look at the impact on
Russia's economy, it is a little misleading to look at what
happens day by day, you have to look over the period of time
since Russia went into Crimea, since we have imposed sanctions.
There has been a quite substantial deterioration in Russia's
already weak economy. And we see it in their stock exchange, we
see it in their exchange rate, we see it in a number of
important economic indicators. They were downgraded to one
notch above junk and the rationale in the bond rating was in
part, the sanctions being imposed.
I think the question here is how do we proceed in a careful
way, step-by-step, building pressure. President Putin has
acknowledged that the sanctions are creating pressure on them.
Now obviously they did not change their policy. I think that we
need to continue to keep our options open. We are prepared to
take action and we have made clear we are prepared to take more
action if the policy of Russia does not change.
The reality is again working in partnership with our allies
is the most effective way to do it. We are seeing movement
there; we are seeing even yesterday that the Europeans made
additional designations. If you look at the individuals
designated in Russia, they are some of the leading business
people closest to the government. You know Igor Sechin is the
CEO of a huge oil business. You know Sergey Chemezov is the CEO
of a big industrial complex that includes arms deals. Gennady
Nikolayevich Timchenko is a CEO of Gunvor, which is the biggest
energy-trading platform. The Rotenberg are very close
personally and are part of the banking system that supports all
of the people who are in the inner circle. I think they have
gotten the message that we are serious. They have gotten the
message that we have more actions that we can and will take. We
need to remain determined and push ahead and work with our
allies to do it in a way that is an effective way to change the
situation on the ground.
Mr. Quigley. We appreciate that and look forward to working
with you in the future.
Mr. Crenshaw. Thank you. Mr. Womack.
FATCA
Mr. Womack. Thank you Mr. Chairman. And thank you,
Secretary, for your testimony here today. I want to go back to
FATCA for just a moment and then I have got a couple of other
more brief questions. But as has already been mentioned, and I
associate my remarks with that of the Chairman and others who
have indicated that our collective effort to collect and deter
offshore tax evasion is a goal that we all share. I know that
some Treasury officials have insisted that the July 1 FATCA
withholding deadline should remain in place, but can you
explain for the panel and for our constituents what the risks
are to U.S. financial institutions and the U.S. economy if
large numbers of banks are required to without the 30 percent
tax on routine cross border transactions?
Secretary Lew. The risk of not having the reporting is that
transactions go undetected and tax avoidance and evasion goes
ahead.
Mr. Womack. More to the concept of the regulatory
requirements, let's just go in that direction.
Secretary Lew. This is a new regulatory approach. The FATCA
law, which was a strong bipartisan law, put in place the
authorities that are being implemented. We have been very
cognizant of the fact that it is going to require new reporting
procedures to be put into place. We are also very cognizant of
the fact that it requires cooperation with banks and
governments oversees. We extended the deadline in order to
facilitate a smooth, effective transition. I think at whatever
point it goes into effect, there is going to be a new set of
requirements, but I think they are appropriate requirements
because if we do not have that reporting, we cannot see where
the tax avoidance is taking place. So the bipartisan effort to
make sure that we can see what is going on so that we can stop
illegal tax avoidance is the purpose of it. You know I wish it
could be done without any burden at all; obviously any
reporting program creates some extra work. We have tried to
keep it simple; we have tried to extend the timeline to do it
in a way that makes it as unburdensome as possible to meet the
higher goal.
DEFICIT
Mr. Womack. This year, what will be the estimated budget
deficit in this country?
Secretary Lew. I was not looking at budget numbers before I
came up here.
Mr. Womack. Round numbers.
Secretary Lew. It is around 600.
Mr. Womack. 600.
Secretary Lew. It has been coming down. The reason I am
hesitating is each time it is estimated we thought it was going
to come down 30 or 40; now it is coming down 70. It has been
coming down rapidly.
Mr. Womack. So $600 billion, we are going to throw that on
top of an already nearly $17.5 trillion public debt. When I go
home, and I have got the debt clock on my website as a lot of
my colleagues do, people are concerned about this public debt.
When I make my presentations, particularly in large groups, I
try to explain to them that as an appropriator, and much to the
credit of the people that are on this dias today, and
particularly our overall Chairman Mr. Rogers, we have done a
very credible job in trimming discretionary spending. But as
our overall Chairman said in his remarks, we still have
mandatory spending that has not been addressed. Honestly, I am
not seeing the leadership there.
I guess my question, Mr. Secretary, is, do you agree that
this debt under the interest rate structure that we have today
is a major national concern and that the sands in the hourglass
are running on us?
Secretary Lew. Congressman, I have spent much of the last
30 years of working on trying to have a responsible fiscal
policy, so I certainly agree that it is a critically important
issue. But we have made more progress reducing the deficit at a
faster speed than any time since the end of World War II and
the demobilization after World War II. We had an enormous
coming together of drivers that drove the deficit up, first we
have policies that created policy gaps in the early 2000s, than
we have the worst recession since the Great Depression. We are
not seeing recovery from that. We have seen policy. And I agree
that mostly, or very substantially, it has been discretionary
spending reduction, there were some tax increases at the
beginning of last year.
We have seen entitlement savings, but there are more. We
have in our budget proposals for Medicare savings; we look
forward to working on a bipartisan basis for many years to
reach agreements there. I think that we are on a path where the
deficit will be below 3 percent of GDP. We are in a place where
we have a little bit of time to deal with it. But I have always
believed that you should not wait until your time runs out. So
I am not going to say, let's wait 10 years to have the
conversation. But we are in a much better place than we were
just a few years ago.
Mr. Womack. I know my time is up. I yield back.
Mr. Crenshaw. Thank you. Ms. Kaptur.
Ms. Kaptur. Thank you. Mr. Chairman, I would like to
request at some point, with the Secretary's willingness, a
special briefing of our Subcommittee on our sanctions relative
to Ukraine and their implications. I do not know if the
Chairman would be open to that or not, but I think it is
terribly important and I just wanted to make the formal
request.
Secretary Lew, thank you so much particularly someone whose
career has spanned helping to restore the solvency of Social
Security in 1983 all the way up to the balanced budgets of the
Clinton Administration, President Obama has put the right
American in charge. So we welcome you before our Committee
today.
HOUSING
I wanted to focus in two areas in this round. First of all
in the housing sector where our secondary market is in a bit of
a jam at this point, we know that Wall Street's terrible
mortgage securitization record created the largest transfer of
capital from Main Street to Wall Street in our history. African
Americans lost all their accumulated equity since World War II,
Hispanic Americans similarly, working class people across this
country. I represent communities terribly impacted by the
securitization meltdown.
My question is what is Treasury doing, perhaps working with
the Justice Department, to recoup some of those assets for
these hardworking Americans in communities that have been so
devastated? By the way, those banks are doing very well, the
major ones that were a part of this. Everybody seems to be fine
up there. But have you considered, in addition to recompense
from those institutions back to the street, through the people
that are at Treasury, had you considered working to develop new
mechanisms, such as pilot efforts with county land banks in
places like Cleveland, Lorain, Sandusky, Toledo, to better
handle adjustment in the housing sector in these communities?
Does Treasury have a mechanism A) to bring the big banks to the
table and B) to get more recompense and to initiate working
with county organizations, local governments that are trying so
hard to prevent further abandonment and adjustment at the local
level?
Secretary Lew. Congresswoman, obviously the large dollar
settlements are out of the Justice Department's Office of
Litigation and we do not directly have a role in that, though
there have been some settlements that have put money back into
some of the programs, mostly in the Department of Housing and
Urban Development. We have a series of programs where we have
been actively engaged with local communities and homeowners to
help homeowners refinance their mortgages, to help them modify
their mortgages.
We have tried to be creative in using programs like the
Hardest Hit fund to help the community as well as individual
homeowners. I was just in Detroit last week and saw the first
demolitions done using Hardest Hit funds because if you have a
blighted house on a block that is struggling to stay above
water, you need to have the house that is dilapidated and
drawing down everyone's values dealt with.
So we are trying in every way we can with homeowner
assistance and with community assistance to be engaged in this.
We have seen millions of refinancings and modifications. There
is obviously a lot more work to do. We have a number of other
programs like the SSBCI where we are not dealing with the
housing piece of it, but we are dealing with the economic
development piece of it to create jobs in those communities. I
think we have had great success in that effort.
UKRAINE
Ms. Kaptur. I will have some follow-up for the record. I
wanted to shift to Ukraine for a second and just so the
Secretary of Treasury knows this, the agricultural sector of
Ukraine can pay all the bills as time goes on. I do not find in
what we are doing yet as a country we actually are thinking
about that power. I can guarantee you, under the corrupt
Yanukovych administration, ordinary farmers were being charged
19 percent interest rate, but the friends of the deposed
president, Yanukovych were being charged 4 percent. I hope in
the financing schemes that the IMF and others are thinking
about that the identification of grass roots farmers in that
country, not associated with the past regime, that somebody
pays attention to those and that competitive interest rates are
offered to those farmers because that sector can ultimately pay
the bills.
And finally for the record, because you get in meetings
that I do not get into, women of that country are feeding that
country, in little villages nobody sees them. We need a
humanitarian effort in my opinion that brings in good seed,
shovels, basic equipment. And I am talking about very humble
things like buckets like CARE does around the world, to help
these women; 75 percent of the food is raised in those small
towns, in those small villages. Nobody sees those women but all
you have to do is just look at the satellite over the weekend,
you see all the people drive out of Kiev and go out to these
little villages, go get food, and come back into the city
because prices have gone up.
So I wanted to put that on the record, because perhaps you
can be a voice in the meetings that are occurring to support
agriculture among those who really do want reform and help
those who are holding that country together at this point as we
weather this crisis. So I thank you very much for listening,
thank you Mr. Chairman.
Mr. Crenshaw. Thank you. Mr. Graves.
BENEFICIAL OWNERSHIP
Mr. Graves. Thank you, Mr. Chairman. Mr. Secretary, good to
see you and wish you well on your continued recovery. I wanted
to ask your thoughts on a recent proposal that was on the White
House blog and I am going to read a little bit about it, but it
was authored by Caroline Atkinson, the Deputy National Security
Advisor for International Economics. It described in her
proposal as requiring that all companies formed in any State to
obtain a Federal tax employee identification number in
requiring the Internal Revenue Service to collect information
on the beneficial owner of any legal entity organized in any
state; and for the IRS to allow law enforcement to access this
information without following the safeguards in current law
that generally require a showing of reasonable cause to believe
a criminal act was committed before the IRS shares taxpayer
information under Section 6103 of the code.
In light of, and the still unresolved questions and
scandals involving the IRS, targeting the opponents of the
administration, it concerns justifying the safeguards in
Section 6103 are as relevant today as they were right after
Watergate when they were implemented. It is incumbent upon
Congress to scrutinize the government's use of confidential IRS
data about citizens and in protections designed to safeguard
even when the administration asserts the national security
requires eliminating these safeguards.
I guess knowing that proposal has been issued as part of
the President's 2015 budget and it has been described now, just
a few weeks ago on the White House blog, would this proposal by
the president do away with the requirement that Federal, State,
and local agencies establish reasonable cause to believe a
crime was committed before sharing confidential taxpayer return
information.
Secretary Lew. Congressman, the protections of 6103 are
extremely important and we spend a lot of effort to make sure
that we honor 6103 in everything that we do. It has to do with
the basic trust the American people have in their system, and
that is something that is our obligation to maintain.
The issue of beneficial ownership is a very complicated
one; it is a complicated one internationally because there is a
huge demand internationally to see more transparency into
beneficial ownership because it is considered to be one of the
things driving base erosion and tax avoidance internationally.
We have taken the view that we have to protect individual
information and act in a way that is consistent with the
individual protections that are provided at 6103. So I have, on
a number of occasions, in international meetings said that we
would not make beneficial ownership broadly public but we would
only do it through proper channels, law enforcement agency, and
tax enforcement agency to one another. I am happy to look at
the blog post and answer any detailed questions that you have
about it, but that is our general policy.
Mr. Graves. So if 6103 is in place and there is currently a
process that requires reasonable cause, I guess my question
would be does it improve on protections for U.S. citizens or is
it removing protections for U.S. citizens?
Secretary Lew. I am happy to take a look at that blog post
and respond in more detail to you.
[Clerk's note.--The Department of Treasury was either
incapable or unwilling to answer this inquiry prior to the
publication of this hearing volume.]
Mr. Graves. Okay and so I guess just for clarity, do you
think it is the Administration's expectation that Congress will
curtail the protections in the current law as it relates to
6103 as we look ahead and we are going through the process of
some of the other questions dealing with the 501(c)s and such.
Secretary Lew. Well I think that the protection of
individual privacy and information and making sure that our
system is a fair one and transparent where it should be
transparent, but not transparent on personal matters where it
should not be is one of our very highest obligations. So I am
not aware of any effort for us to change that. As I offered I
am happy to look at this particular matter.
Mr. Graves. Okay, well, I would hope that the
administration would not be proposing any kind of concept that
would allow the Internal Revenue Service to serve freely
information to other agencies without reasonable cause; and
that is what I will be looking forward to your response on.
Mr. Crenshaw. Thank you. Mr. Diaz-Balart.
MARIJUANA
Mr. Diaz-Balart. Thank you very much Mr. Chairman. Mr.
Secretary, good to see you, sir. A few issues, one of them, and
I was not going to bring it up except that Chairman Rogers
brought it up, it got me thinking obviously. It is your
responsibility to enforce Federal law; my understanding is that
it has not changed that marijuana is illegal under Federal law.
And yet I understand that now your department is doing these
guidelines or giving guidance to banks as to how to deal with
something that is illegal under Federal law. Are those
guidelines going to at least have a very clear statement that
marijuana is illegal under Federal law?
Secretary Lew. Our guidelines in no way change Federal law.
Mr. Diaz-Balart. My question is this, sir, and I apologize,
is there in those guidelines, since it is not going to change
Federal law, is there a statement stating that this is illegal
under Federal law, which the Federal law is correct.
Secretary Lew. We are in no way telling people that things
that are illegal under Federal law are legal. The exact
language I would have to go back and look.
[Clerk's note.--The Department of Treasury was either
incapable or unwilling to answer this inquiry prior to the
publication of this hearing volume.]
Mr. Diaz-Balart. It would be interesting to note if, in
fact, since it is your responsibility is to enforce Federal law
and you are giving guidelines on something that is illegal
according to Federal law, that at least there should be an
indication that it is illegal under Federal law, which is what
your obligation is.
Secretary Lew. To be clear, the Department of Justice
guidelines make clear their prosecutorial priorities, it does
not say that things that are illegal are legal. So I do not
think any of the activities confuse the question of Federal and
State law. Our concern is that in a very complicated situation
where States have made certain activities legal, there will be
transactions. Cash transactions, rather than banked
transactions, create more risk of illegal behavior. So we tried
to put out guidelines so that there would be some clarity for
banks to be able to provide some transparency into these
transactions.
Mr. Diaz-Balart. I understand what you said, Mr. Secretary,
but I think if a banker receives guidelines on how to deal with
certain entities from the Federal government, I think that in
itself would make it very unclear whether it is something that
is illegal under Federal law. So I just think making that very
clear would be something that that would be helpful.
Secretary Lew. I actually think that they very much
understand that they are in an area where they are at risk, and
they are filing suspicious activity reports and a lot of banks
are not taking these accounts. I do not think there is any
ambiguity out there in the banking world. They have to walk a
very narrow line.
Mr. Diaz-Balart. Because you do believe that they are at
risk if they do so?
Secretary Lew. They are filing suspicious activity reports
for behavior that warrants suspicious activity reports.
DEBT RESTRUCTURING
Mr. Diaz-Balart. Secretary, let me bring you to a couple
other points that were brought up; one was not brought up, let
me start with this one. Last week, Mexico, I heard, was
considering filing an amicus brief with the U.S. Supreme Court
taking the side of Argentina in a case against U.S.
ambassadors. Now we have the Secretary of State and I asked him
whether the Department of State would intervene even if asked
and he said absolutely not. But now we know by press reports
that last July junior officials in your department urged the
IMF to file a similar brief before they were overruled, by the
way, all credit to senior department officials. The U.S. then
obviously withdrew such support. Again, that would have been an
unprecedented move by the IMF. Could you tell us with respect
to this Mexican brief, has any official in your department
encouraged Mexico or expressed approval to Mexico, contacted
Mexico at any point in the last year regarding them filing that
brief?
Secretary Lew. Well, Congressman, just to be clear we did
file in the lower court proceedings, a brief. I am not going to
defend Argentina's behavior in any general way but on this
narrow issue of law, we do think that the rights of creditors
warrants attention and we filed a brief. There is a general
policy in the executive branch to only file amicus briefs at
the Supreme Court when invited. So we did not file an amicus
brief at the Supreme Court.
Mr. Diaz-Balart. Right, I am aware of that. My question is
have you had contact with Mexico asking them?
Secretary Lew. I have had conversations with my
counterparts. I have told them exactly what I have told you,
which makes it clear what we think the right legal outcome
would be. I think the conversations with the IMF you know, last
year kind of reflected them just conforming to the fact that we
were not filing a brief, they did not file a brief.
Mr. Diaz-Balart. But Mr. Secretary, my question is
separate. My question is have folks in your department, as far
as you know, contacted Mexico, asking or encourage them to do
that?
Secretary Lew. I have just said I have had conversations
with my counterparts.
Mr. Diaz-Balart. Counterparts in Mexico?
Secretary Lew. Yes.
Mr. Diaz-Balart. So you have had those?
Secretary Lew. Yes.
Mr. Diaz-Balart. You have asked them to?
Secretary Lew. I just told you; they have asked us our
views. I have told them what I have told you.
Mr. Diaz-Balart. I think I am out of time, Mr. Chairman.
Thank you, sir.
Mr. Crenshaw. Thank you. Mr. Yoder.
SIFI DESIGNATIONS
Mr. Yoder. Thank you Mr. Chairman and Mr. Secretary welcome
back to the committee. I have a couple different areas I would
like to ask you about this morning. First of all is the SIFI
designation that the FSOC is going forward with. And I am
concerned that the FSOC is not undertaking a deliberate and
thorough process in reviewing the asset management industry for
potential SIFI designations. The only public report issued by
the OFR on the asset management industry was heavily criticized
for failing to demonstrate a complete understanding of the
asset management business and the unique characteristics that
differentiate it from banks and other financial institutions.
The FSOC has not defined what risks it is concerned about with
respect to asset managers or confirmed the specific metric and
thresholds it is using the evaluate asset managers.
In an apparent effort to deepen its understanding of the
industry, the FSOC announced it would hold a round table May 19
so they could hear directly from industry and other
stakeholders on this issue, yet last week the Wall Street
Journal reported that two asset managers have already been
moved to stage two of the SIFI designation process.
Can you please explain why the FSOC is advancing asset
managers through the process when it publicly admits it is
still gathering information? And what can be done to ensure
that proper decisions are made here and that all voices are
heard to make sure that we do not make problems worse through
improper designations?
Secretary Lew. Congressman, I think that if you look at
this issue it is one of many issues that FSOC will be
considering. The FSOC was created to look, not in the rear view
mirror, but forward at what are the potential risks to
financial stability. OFR was asked to do some analysis here, it
was not a regulatory action it was a piece of analysis. I will
not discuss any specific conversations regarding any entity, I
am just speaking to the review of the sector. There is no one
on FSOC who knows the outcome of this process because we are
still in the fact finding stages. There is going to be a public
session, where there would be views presented and some will
disagree with the OFR study and I am sure some will support it.
Our challenge is to make sure we ask hard questions and
that we are not afraid to ask questions when we do not know
whether the answer is yes or no. That is the only way we are
going to be able to detect the threats of the future. I think
that this is an area where it warrants attention. It is way
premature for anyone to be speculating on what the outcome is.
I can tell you as the chairman of FSOC, I do not know the
outcome, and I should not know the outcome until we are fully
informed.
DEBT AND DEFICIT
Mr. Yoder. I appreciate that. Returning to the national
deficit for a minute, my colleague Mr. Womack asked, I think,
some very pertinent questions and I wanted to follow up on your
responses. I think anyone in Washington that pats themselves on
the back for a $600 billion deficit clearly knows that that is
not an achievement that is going to create the fiscal
responsibility this country needs to get back to. We now have
revenue coming in over our 40-year average, into this
government. I believe we have more revenue coming in, dollar-
wise than any time in American history. We are running the
sixth largest deficit in history only because the last five
were the five were larger all within this current
Administration. CBO projects another $6.5 trillion in debt over
the next 10 years.
I cannot find anyone in my district, maybe one of my
colleagues can find people in their district that want to see
us borrow another $6-7 trillion. We have the President's budget
increasing spending beyond that, attempting to increase the
deficit to even greater and deficits going up over the rest of
the decade, which are attributable to mostly healthcare costs,
the Affordable Care Act, Medicare costs, debt, and interest
payments. I think many of our colleagues are tired of sending
more money to Washington, D.C.; they are tired of the constant
request for additional taxes, that Washington cannot live
within its means. I think estimates are there $3 trillion in
new taxes coming in over the next 10 years because of tax
increases that have occurred in the last couple of years.
I know we talked about the short-term, and congratulations
that the Administration feels that $600 billion is an
achievement in a deficit; that is short term. Long term will
the Administration get serious about our long-term debt
challenges or does it intend to leave this for the next
Administration? And if so, what are the specific ideas that the
Administration is going to put forward?
Secretary Lew. Congressman, I think that you have to look
at where we started and we have made enormous progress. I have
not said that I am happy that there is a $600 billion deficit,
but I am happy that we have reduced the deficit and we are on a
path towards keeping it coming down so that it will shrink as a
percentage of GDP.
I think when you talk about entitlements you have got to be
clear, the Affordable Care Act on net is reducing the deficit,
not increasing it. The thing that is driving entitlements up is
that the baby boom is retiring and people are claiming the
Social Security and Medicare that they are entitled to. These
are very challenging areas and unless somebody wants to stand
up and say they are going to do something other than pay Social
Security and Medicare, the solutions are very hard. We have
tried over a number of years to work on a bipartisan budget
agreement. The President put his every best effort into it; we
were not able to get an agreement on a bipartisan basis.
Notwithstanding that we have made enormous progress,
incrementally doing it on discretionary spending, doing it with
the tax bill at the beginning of last year.
I think that right now the most urgent thing facing
Americans is what can we do to promote more growth and job
creation in this economy. What do we do to get construction and
housing moving again? I think we have a little bit of time, I
am not saying decades; it is not today's crisis to deal with
the deficit. I think today for most middle class families what
they want to know is what are we doing to grow the economy. And
I think the kinds of things that we have been talking about in
terms of helping to make job creation more robust is frankly
what we should currently be paying attention to.
Mr. Yoder. Thank you, Mr. Secretary. Thank you, Mr.
Chairman.
Mr. Crenshaw. Thank you. Ms. Herrera Beutler.
DEBT COLLECTION
Ms. Herrera Beutler. Thank you, Mr. Chairman. I have a
couple of questions. The first one has to do with debt
collection. As you are aware the Washington Post reported on a
couple weeks ago, that the government was seizing State and
Federal tax refunds. I think they were on their way to about
400,000 Americans who had relatives who owed money to Social
Security. And in many cases the people whose refunds were
intercepted had never heard of the debts and the debts were as
far back as the mid-century. I realize that it was the Farm
Bill in 2008 that gave or set up the authority to go back and
get back taxes, but I wanted to ask, in my understanding of it,
I do not see anywhere where we have given you the authority to
offset payments from an individual to pay debts that are not in
his or her name, where did you get that authority?
Secretary Lew. Treasury's role is really as an agent of
other Federal agencies. The 2008 Farm Bill did create an
authority here. The Social Security Administration certified
valid claims and Treasury executes on those claims; it does not
create them. The Social Security Administration has said they
are changing their policy so this is not going to be happening
going forward. I think the concerns raised are worthy of
further investigation and, frankly, they are a concern that I
share in terms of how some of these notifications issues
develop.
Ms. Herrera Beutler. So those folks who had assets seized
on behalf of a debt that his or her father had before they even
perish when they were a kid, is that money going to be returned
then or how are you going to move forward with that?
Secretary Lew. I am not aware of how Social Security is
handling retroactively going back. If they are looking at it, I
am happy to follow up on that and get back to you.
[The information follows:]
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Ms. Herrera Beutler. I just find it concerning that with
your direction or under your permission a federal agency would
see it fit to read beyond what is in the law, which says you
can go back and appropriately when people owe money, go back
and get it, but to then take it a step beyond and say we are
going to get it from your kids and your grandkids, without that
actually ever having been given permission in the law.
Secretary Lew. Just to be clear, the specific collection
item is not something the Treasury exercises judgment over or
would exercise judgment over, so I am not the right person to
answer some of the questions about how the claim was
determined.
Ms. Herrera Beutler. But you do the collection, right?
Secretary Lew. It just triggers a responsibility, yes, but
it is not an independent action.
Ms. Herrera Beutler. No, I understand it is not
independent, but I guess if you are the one actually taking the
money then there is some shared responsibility for ensuring
that you are taking it appropriately. No?
Secretary Lew. I think that we all collectively have a
responsibility to make sure that we do business in a way that
we are comfortable with different direct lines of
responsibility and that is why I am not the right person to
answer some of these questions.
BONUSES
Ms. Herrera Beutler. Okay, switching gears. So let's see,
Treasury Inspector General for the Tax Administration recently
announced an investigation from October 2010 to December 2012,
more than 2,800 employees with recent substantiated conduct
issues that resulted in disciplinary action received more than
$2.8 million in bonus awards and more than $27,000 in time off.
Among these more than 1,100 IRS employees with substantiated
Federal tax compliance problems received more than $1 million
in cash awards with more than 10,000 hours in time off. Do you
believe that that poor performance and especially the failure
to pay taxes should be rewarded through bonuses to IRS
employees?
Secretary Lew. Congresswoman, our position is that
individuals who have been found to have engaged in significant
misconduct including nonpayment of taxes should not be eligible
for performance awards during the relevant time period. The IRS
has already had discussions with the union; this is a
collective bargaining agreement, this bonus program, about the
eligibility standards for performance awards. I understand that
the union has agreed to work with the IRS to address this issue
so clearly this has to change.
Ms. Herrera Beutler. So any chance you are going to go back
and collect that money that was paid if you believe it should
not have been given?
Secretary Lew. Well, let's first make the policy going
forward and then we can look at questions as to whether or not
there is any retroactivity to it. These bonuses were for
several years ago; the question is what happens with future
bonuses and this will govern that. We have already changed the
policy for things that are discretionary bonuses at executive
levels so that this kind of performance and misconduct are
taken into consideration. Now it will be taken into
consideration for all bonuses.
Ms. Herrera Beutler. Thank you. I yield back.
Mr. Crenshaw. Thank you. One thought, Mr. Secretary.
Someone mentioned the FSOC and I would just leave you with one
of the concerns that I hear from time to time that there are
complex issues that are dealt with by FSOC that some would
argue that other regulators that have the expertise in those
areas. So I just want to share that concern that you not
reinvent the wheel and duplicate regulatory aspects, just
something that we have heard from time to time.
I want to thank you very much for being here today, for
working with us to reschedule this hearing and being here under
less than ideal circumstances. I want to thank the Members for
their interest and their attendance today. And so with that the
meeting is adjourned.
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W I T N E S S E S
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