- FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR 2016

[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]

FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR 2016

_______________________________________________________________________

HEARINGS

BEFORE A

SUBCOMMITTEE OF THE

COMMITTEE ON APPROPRIATIONS

HOUSE OF REPRESENTATIVES

ONE HUNDRED FOURTEENTH CONGRESS

FIRST SESSION

______

SUBCOMMITTEE ON FINANCIAL SERVICES AND GENERAL GOVERNMENT
APPROPRIATIONS

ANDER CRENSHAW, Florida, Chairman

TOM GRAVES, Georgia JOSE E. SERRANO, New York
KEVIN YODER, Kansas MIKE QUIGLEY, Illinois
STEVE WOMACK, Arkansas CHAKA FATTAH, Pennsylvania
JAIME HERRERA BEUTLER, Washington SANFORD D. BISHOP, Jr., Georgia
MARK E. AMODEI, Nevada
E. SCOTT RIGELL, Virginia

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.

Winnie Chang, Kelly Hitchcock,
Ariana Sarar, and Amy Cushing,
Subcommittee Staff

___________________

PART 5

Page
Oversight Hearing: Internal Revenue Service..................... 1

Internal Revenue Service, FY 2016 Budget Request................ 123

Department of the Treasury...................................... 205

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

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Printed for the use of the Committee on Appropriations

PART 5--FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR
2016

FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR 2016

_______________________________________________________________________

HEARINGS

BEFORE A

SUBCOMMITTEE OF THE

COMMITTEE ON APPROPRIATIONS

HOUSE OF REPRESENTATIVES

ONE HUNDRED FOURTEENTH CONGRESS

FIRST SESSION

__________

SUBCOMMITTEE ON FINANCIAL SERVICES AND GENERAL GOVERNMENT
APPROPRIATIONS

ANDER CRENSHAW, Florida, Chairman

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.

Winnie Chang, Kelly Hitchcock,
Ariana Sarar, and Amy Cushing,
Subcommittee Staff

________

PART 5

Page
Oversight Hearing: Internal Revenue Service.................. 1

Internal Revenue Service, FY 2016 Budget Request............. 123

Department of the Treasury................................... 205

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

_____

U.S. GOVERNMENT PUBLISHING OFFICE
96-927 WASHINGTON : 2015

COMMITTEE ON APPROPRIATIONS

----------
HAROLD ROGERS, Kentucky, Chairman

RODNEY P. FRELINGHUYSEN, New Jersey NITA M. LOWEY, New York
ROBERT B. ADERHOLT, Alabama MARCY KAPTUR, Ohio
KAY GRANGER, Texas PETER J. VISCLOSKY, Indiana
MICHAEL K. SIMPSON, Idaho JOSE E. SERRANO, New York
JOHN ABNEY CULBERSON, Texas ROSA L. DeLAURO, Connecticut
ANDER CRENSHAW, Florida DAVID E. PRICE, North Carolina
JOHN R. CARTER, Texas LUCILLE ROYBAL-ALLARD, California
KEN CALVERT, California SAM FARR, California
TOM COLE, Oklahoma CHAKA FATTAH, Pennsylvania
MARIO DIAZ-BALART, Florida SANFORD D. BISHOP, Jr., Georgia
CHARLES W. DENT, Pennsylvania BARBARA LEE, California
TOM GRAVES, Georgia MICHAEL M. HONDA, California
KEVIN YODER, Kansas BETTY McCOLLUM, Minnesota
STEVE WOMACK, Arkansas STEVE ISRAEL, New York
JEFF FORTENBERRY, Nebraska TIM RYAN, Ohio
THOMAS J. ROONEY, Florida C. A. DUTCH RUPPERSBERGER, Maryland
CHARLES J. FLEISCHMANN, Tennessee DEBBIE WASSERMAN SCHULTZ, Florida
JAIME HERRERA BEUTLER, Washington HENRY CUELLAR, Texas
DAVID P. JOYCE, Ohio CHELLIE PINGREE, Maine
DAVID G. VALADAO, California MIKE QUIGLEY, Illinois
ANDY HARRIS, Maryland DEREK KILMER, Washington
MARTHA ROBY, Alabama
MARK E. AMODEI, Nevada
CHRIS STEWART, Utah
E. SCOTT RIGELL, Virginia
DAVID W. JOLLY, Florida
DAVID YOUNG, Iowa
EVAN H. JENKINS, West Virginia
STEVEN M. PALAZZO, Mississippi

William E. Smith, Clerk and Staff Director

(ii)

FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR 2016

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Wednesday, February 25, 2015.

INTERNAL REVENUE SERVICE--OVERSIGHT

WITNESSES

HON. J. RUSSELL GEORGE, TREASURY INSPECTOR GENERAL FOR TAX
ADMINISTRATION, DEPARTMENT OF THE TREASURY
NINA E. OLSON, NATIONAL TAXPAYER ADVOCATE, INTERNAL REVENUE SERVICE
Mr. Crenshaw. Well, it is 10 o'clock, and we will start the
meeting. I want to say good morning to everyone. The hearing
will come to order.
Today's hearing is the first of the year for our
subcommittee. I want to welcome all returning subcommittee
members. We appreciate all of your hard work. A warm welcome to
a couple of new members. They are in another hearing, but they
will be along in a little bit.
Today this subcommittee is going to hear about activities
and operations of the IRS from the Treasury Inspector General
for Tax Administration, J. Russell George, and the National
Taxpayer Advocate, Nina Olson. We appreciate their willingness
to share their expertise with us again and to appear before the
subcommittee exactly 364 days since they were here last time.
As a matter of housekeeping for the members, we will follow
the 5-minute rule during the question-and-answer period. I do
not plan on cutting anybody off in the middle of their
sentence. But if everyone could keep their comments and
questions to about 5 minutes, that would be appreciated.
We will recognize the members in order of seniority based
on who was seated at the beginning of the hearing, going back
and forth between the parties, and latecomers will be
recognized in the order that they arrive, going back and forth.
Now, last year was a good year for this subcommittee. It
was the first time since 2008 that the subcommittee's bill was
brought to the House floor under open rule. And that is thanks
to the leadership of Mr. Rogers, the chairman of the full
committee.
And we do not know when the Budget Committee will complete
its work on the budget resolution, but both the House and the
Senate Appropriations full committee chairmen have said they
intend to bring all 12 bills to the floor this year under
regular order.
And, by that, I mean the process by which appropriations
bills that reflect our funding priorities are marked up. They
are subject to amendment in the committee and on the House
floor, and then they will be conferenced with the other
chamber.
And for the first time since 2010 the Administration
submitted its budget request on time in accordance with the
Congressional Budget Act on the first Monday of February. While
timeliness is always appreciated, a budget that spends more,
taxes more, and borrows more is not.
Within the President's request is a massive $2 billion, or
18 percent, increase for the IRS. Earlier this month the IRS
Commissioner told the Senate Finance Committee that the IRS was
not asking for an increase. No. They were just asking for the
money that was taken away.
Well, if the Commissioner believes that the IRS is just
automatically entitled to $13 billion, I think he is making a
mistake, because entitlements are for programs like Social
Security, Medicare, and Medicaid. Providing for the national
defense is a Constitutional obligation, but even the Department
of Defense has to come in and appear before the Appropriations
Committee.
They have to justify and defend their requests. They have
got to provide reports and briefings and subject themselves to
Congressional oversight hearings before Congress and that is
before we provide them any funds. So the IRS will have to do
the same thing.
I think we all want the IRS to answer the phone most of the
time. We want them to prepare forms and instructions. We want
them to process returns and process refunds. We want them to
pursue criminals and tax cheats.
But I also think we all want the IRS to administer the Tax
Code in a fair and objective manner. We want them to respect
the Constitutional rights of taxpayers. We want them to
safeguard taxpayers from identity theft. We want them to be a
good steward of the funds that are provided by this Congress.
And while the IRS has exhibited a litany of questionable
practices and expenses over the past 5 years with regard to
processing tax exempt applications, bonuses, conferences,
videos, and now hiring, what I really want to hear today from
you all is how the IRS has or could change its ways.
After 5 years of budget cuts or freezes, I would hope that
the IRS has turned over a new leaf, studying its budget line by
line, identifying its highest priorities, reengineering its
business practices, and concentrating its resources, both
people and money, on what matters most.
For example, the Commissioner frequently complains about
the audit rate going down. But my question is: Could the IRS do
a better job of selecting which cases to audit and which ones
not to audit? Has the IRS refined its selection criteria to
reduce the rate of false positives, cases that are selected for
audit, but do not result in tax liability? Why expend limited
resources and burden taxpayers if they are ultimately found to
be tax-compliant?
We deliberately lowered the IRS funding to a level to make
them think twice about what they are doing and why they are
doing it. They do not have a dime to spare on anything
frivolous or foolhardy or mediocre. The IRS should and must
focus on the most important and most egregious and the most in
need.
So, again, we welcome General George and Ms. Olson. We look
forward to your testimony and working with you on improving the
IRS.
And now I would like to turn to my ranking member, Mr.
Serrano. I thank him for all the work that he has done last
year as we worked together. We didn't always agree, but we
brought a bill to the floor. And I appreciate his efforts and
insights.
And so I would like to yield to you for any opening
statement you might like to make.
Mr. Serrano. Thank you, Mr. Chairman.
And on that note, I just want to say that, had it not been
for that last airdrop from the Senate on our bill, you might
have seen a different behavior on our side on our bill, which
would have been historic in recent times. But, nevertheless, I
appreciate the work.
We also have, besides Mr. Quigley, Mr. Fattah and Mr.
Bishop; Fattah and Bishop being new members of the subcommittee
who will be here sometime during the hearing.
Thank you, Mr. Chairman. I would also like to welcome the
Department of the Treasury Inspector General for Tax
Administration, J. Russell George, and National Taxpayer
Advocate, Nina Olson, back to the committee. I know you all are
very busy; so, I thank you for making the time to be here
today.
The IRS ensures the collection of taxes and provides
taxpayer services. Approximately $3 trillion in Federal revenue
is collected by the agency each year. The agency employs a
staff of around 100,000. These individuals help millions of
Americans who file their taxes, process 237 million tax
returns, and conduct tax audits and investigations.
Without the work of the IRS staff, the Federal Government
would not be able to function, since they collect the vast
majority of the revenue that allows that to happen. As many of
us are aware, the IRS has implemented the recommendations of
the Treasury Inspector General for Tax Administration to remedy
problems resulting from the inappropriate targeting of liberal
and conservative 501(c)(4) entities.
I applaud the agency's undertaking to implement reforms and
prevent problems from repeating. With that being said, there
are many challenges that the IRS is currently facing. The IRS
has been severely underfunded for several years due to budget
cuts made by this committee, which I strongly oppose. These
budget cuts have made it difficult for the agency to hire and
maintain personnel who are essential to carrying out taxpayer
services and enforcement and who are the ones who are charged
with fixing the problems at IRS.
As a result of understaffing, the IRS is anticipating that,
in fiscal year 2015, it will only be able to answer around 50
percent of the calls they receive from taxpayers seeking
assistance. That percentage goes up or down, depending on when
they release seasonal workers. That is a 57 percent decrease
from the level the agency was able to function at over a decade
ago in 2004.
The IRS also anticipates being unable to collect $2 billion
in taxes owed to our Nation's Government as a result of these
cuts. I hope we will get a chance today to discuss the impact
of these cuts in your eyes.
The current operating budget is at its lowest since fiscal
year 2008 and the lowest funding level since 1998. When
adjusted for inflation, since then, the number of filers has
increased by 22 percent. New tax responsibilities set forth by
the Affordable Care Act and the Foreign Account Tax Compliance
Act passed by Congress are adding to the IRS's growing
workload.
The President's fiscal year 2016 request recognizes the
need to provide the agency with a workable budget by requesting
more than $1.3 billion over fiscal year 2015. I hope this
subcommittee will take that request seriously. We, as lawmakers
and as members of this subcommittee, are charged with the task
of ensuring that the IRS is able to do its job effectively.
And, as a result of these cuts, they increasingly cannot.
I am also concerned with the problems families who claim
the earned income tax credit, or EITC, face. EITC is a
successful national anti-poverty program that helps low-income
families obtain much needed financial support. These families
make up a large percentage of the IRS audits due to
unintentional errors and not fraud. This is mostly attributed
to the complexity of the EITC rules and to errors made by
commercial preparers. The IRS should implement several changes
in order to reduce the EITC error rate and has made some good
steps in this process.
As I stated before, cutting the IRS budget will hinder any
progress that has been made. I hope that we can assure that the
IRS maintains a reasonable budget and is able to make sure that
taxpayer programs like the EITC are able to fulfill their
mission. I look forward to discussing these and other issues
with you today.
And I thank you, Mr. Chairman.
Mr. Crenshaw. Thank you, Mr. Serrano.
Now we will turn to General George for your testimony. If
you could keep it in the neighborhood of 5 minutes, it will
allow us time for questions. The floor is yours.
Mr. George. Thank you, Chairman Crenshaw, Ranking Member
Serrano, members of the subcommittee. Thank you for the
invitation to discuss ways for the Internal Revenue Service to
perform its mission more efficiently and effectively.
We have reported that a trend of lower budgets and reduced
staffing has affected the IRS's ability to deliver its priority
program areas, including customer service and enforcement. In
addition, it has the increased responsibilities of implementing
certain provisions of the Affordable Care Act.
The IRS also continues to dedicate significant resources to
detect and review potential identity theft tax returns and
assist victims. IRS employees who work the majority of identity
theft cases are telephone assisters who also respond to
taxpayer calls to the IRS's toll-free telephone lines. This has
contributed to the IRS's inability to timely resolve victims'
cases as well as the continued decline in its ability to timely
respond to taxpayers' written correspondence.
While the IRS faces many resource challenges, TIGTA has
recently reported on several areas where the IRS can operate
more efficiently. For example, we determined that electronic
filing of amended tax returns could save the IRS money and
prevent the issuance of erroneous tax refunds.
We believe the IRS could save about $17 million per year if
it allowed taxpayers to electronically file amended tax returns
rather than only allowing paper returns. Electronic filing of
amended returns would also enable the IRS to use the processes
it currently uses to verify originally filed tax returns.
TIGTA estimates that using these same processes could
prevent the issuance of more than $2 billion in potentially
erroneous refunds associated with amended returns over the next
5 years.
TIGTA also found that the IRS's field work collection
process is not designed to ensure that cases with the highest
collection potential are identified. With the significant
growth in delinquent accounts and the reduction in the number
of IRS employees, it is essential that cases with the highest
risk and potential for collection are identified.
The IRS could also make more informed business decisions
when determining how to use its limited resources. For example,
the IRS eliminated or reduced services at Taxpayer Assistance
Centers. Although the IRS stated that the services eliminated
or reduced were, in part, the result of the IRS's anticipated
budget cuts, the IRS's plans did not show the extent of how the
reduction in services would lower costs. Moreover, it later had
to reverse certain decisions.
Furthermore, timelier reporting of third-party data and
additional authority would assist the IRS in improving tax
administration. Each year, the IRS receives information returns
filed by third parties, such as employers and educational
institutions.
These returns provide the IRS the information needed to
verify taxpayers' claims for benefits, such as the Earned
Income Tax Credit and the American Opportunity Tax Credit.
However, information returns are generally not filed with the
IRS until after most taxpayers have filed their annual tax
returns.
Requiring third parties to file information returns earlier
would provide the IRS the opportunity to use the information
contained in these forms to verify tax returns at the time they
are processed rather than after refunds are issued.
For example, the IRS issued more than $3 billion in
potentially erroneous education credits in Tax Year 2012 to
taxpayers who claimed students for whom the IRS did not receive
a Form 1098-T tuition statement from a post-secondary
educational institution. However, even if the third-party
information returns are received more timely, the IRS still
needs certain authorities to more efficiently and effectively
use this data.
Generally, the IRS must audit any tax return it identifies
with a questionable claim before the claim can be adjusted or
denied, even if the IRS has reliable data that indicates the
claim is erroneous.
The Department of the Treasury has included a legislative
proposal as part of the IRS's budget requests since Fiscal Year
2013 to obtain correctible error authority, which would permit
the IRS to systematically deny all tax claims for which the IRS
has reliable data showing the claim is erroneous.
TIGTA estimates the use of correctable error authority,
along with expanded use of the Department of Health and Human
Services National Directory of New Hires, could have prevented
the issuance of approximately $2 billion in questionable Earned
Income Tax Credit claims in Tax Year 2012.
Chairman Crenshaw, Ranking Member Serrano, members of the
subcommittee, thank you for the opportunity to share my views.
Mr. Crenshaw. Well, thank you very much.
[The information follows:]

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Mr. Crenshaw. Now we will turn to Ms. Olson.
Ms. Olson. Chairman Crenshaw, Ranking Member Serrano, and
distinguished members of this subcommittee, thank you for
inviting me today to share my concerns about the problems
taxpayers are facing in their dealings with the IRS.
In my 2014 annual report to Congress, I designated
inadequate taxpayer service as the number one most serious
problem facing taxpayers. This year, taxpayers are receiving
the worst levels of taxpayer service since at least 2001, when
the IRS implemented its current performance measures.
Taxpayers call and write the IRS not only to get the
answers to tax law questions, refund status or transcripts, but
also to request penalty abatements, respond to math error
notices, and make payment arrangements.
Yet, from January 1 through February 14 of this year, the
IRS answered only 43 percent of the calls it received from
taxpayers seeking to speak with a customer service
representative, and those taxpayers who managed to get through
sat on hold for an average of about 28 minutes.
By comparison, during the same period last year, 77 percent
of taxpayers got through and waited on hold an average of 10
minutes. The IRS is now only answering the most basic of tax
law questions through April 15 and none after that date, and it
is no longer preparing tax returns for the most vulnerable
taxpayer populations, namely, the elderly, the disabled, and
the low-income.
This performance decline is huge and results from a
combination of more work and reduced resources. On the workload
side, the IRS is receiving 11 percent more returns from
individuals, 18 percent more returns from business entities,
and 70 percent more telephone calls (through fiscal year 2013)
than a decade ago, not to mention the Affordable Care Act
implementation.
On the funding side, the IRS's budget has been reduced by
about 17 percent in inflation-adjusted terms since fiscal year
2010. As a consequence, the IRS has reduced its workforce by
nearly 12,000 employees and it projects it will have to reduce
its workforce by several thousand additional employees during
fiscal year 2015.
Like any agency, I believe the IRS can operate more
effectively and efficiently in certain areas. However, I do not
see any substitute for sufficient personnel if high-quality
taxpayer service is to be provided.
The only way the IRS can assist the tens of millions of
taxpayers seeking to speak with an IRS employee is to have
enough employees to answer the phones. The only way the IRS can
timely process millions of taxpayer letters is to have enough
employees to read the letters and act on them. And the only way
the IRS can meet the needs of the millions of taxpayers who
visit its walk-in sites is to have enough employees to staff
them.
Now, while I believe the IRS requires more funding on the
taxpayer service side, I also believe it is incumbent on the
IRS to spend the resources it has as effectively and
efficiently as possible. Reductions in services always should
be made with the goal of minimizing the impact on taxpayers and
on performance. I find it difficult to ascertain exactly how
the IRS made its resource allocation decisions with respect to
taxpayer service or what data it relied upon.
I have proposed a ranking methodology for the major
taxpayer service activities for individuals. This new
methodology will take taxpayer needs and preferences into
account while balancing them against the IRS's need to conserve
limited resources.
Frequently, taxpayer needs are best met by personal
services that are more costly to the IRS than automated
services, such as Internet-based services. While it may be
tempting to migrate taxpayer service toward low-cost self-
assistance options in the current budget environment, such
efforts may ultimately be wasted and costly if the IRS does not
properly address taxpayers' actual service needs.
In the absence of a ranking methodology that takes into
consideration the taxpayers' needs, the IRS will continue to
make difficult resource allocation decisions based on limited
data and gut instinct rather than through comprehensive
analytic rigor.
In my testimony and in my 700-page annual report to
Congress, I have provided numerous other examples of programs
in which I believe the IRS can utilize its resources more
effectively and efficiently, including the math error program,
identity theft, the automated substitute for return program,
audit selection, and collection case selection.
The best way for Congress to hold the IRS accountable for
how it allocates resources and makes decisions is through
active, consistent oversight of the agency not just on the
issue du jour, but on the routine work the IRS does. This
hearing is an example of just such effective oversight.
It is critical that the IRS take steps to rebuild
Congressional trust. It is also critical, in my opinion, that
Congress provide the oversight and funding that the IRS needs
to do its important work of helping taxpayers meet their tax
obligations and collecting the revenue on which the rest of the
Government depends. In my written statement, I have tried to
offer some recommendations to help in this regard.
[The information follows:]

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Mr. Crenshaw. Well, thank you both for those words. Let me
start by thanking you both for being here.
Inspector George, we heard from you about how the IRS could
take some actions to be more efficient. They have got limited
resources. We know that.
And, as Ms. Olson pointed out, I have to question--I think
we all question--how they are allocating and, frankly, how they
are prioritizing the resources they have.
I think there is a lot of misperception in the media. And I
want to be, you know, clear. This subcommittee is not here to
punish the IRS. We are just trying to hold them accountable.
We all want to be more efficient and more effective. And
that is what we are trying to do, as you point out, and that
includes everything from justifying the taxpayer-funded dollars
to the highest level.

IMPLEMENTING RECOMMENDATIONS

So let me ask you all. You all have kind of talked about
some things that you have uncovered and suggested. I ask both
of you all: How is the IRS receiving these thoughts? Are they
implementing some of your recommendations? And, maybe, what do
you see as the most immediate that they can do to really help
in this 2015 tax season?
Could you start, General George? Just how is that being
received? Because you all have really thrown out some pretty
good ideas and save a lot of money and be more efficient. Is it
working? What do you hear? How are they doing?
Mr. George. If I may, Mr. Chairman, I have had the
privilege, actually, of knowing John Koskinen for almost 20
years. I was staff director of the subcommittee overseeing the
transition to the Y2K conversion.
He is a serious, conscientious public servant who realizes
the challenges facing one of the most important government
entities in the world and, obviously, for this Nation.
He obviously has new responsibilities that the ACA and some
extraneous items that he inherited before him, but he is
literally willing to call me at home and meet with me at any
time to discuss issues that we raise of concern.
We list, as you know, required by the Reports Consolidation
Act, a list of the top 10 management challenges. And we listed
security as the top management challenge confronting the IRS
this year.
He is providing resources to address that, in addition to,
obviously, FATCA, in addition to many of the other areas that
are confronting the IRS.
So I am not here to advocate for him in terms of additional
resources. But, candidly, they are being requested to do a lot
more with a lot less. And that is something that, again, needs
to be considered.
Mr. Crenshaw. Do you sense that some of the thoughts that
you have outlined to us--are they trying to implement those?
Are they pretty receptive to some folks that say, ``Here is a
better way to run the railroad''?
Mr. George. Very much so, sir. And, again, not to violate
any confidences, but literally--today is Wednesday. So on
Monday he called me at 5 o'clock in the afternoon to indicate
that the initial response they had to a recommendation that we
made to them to better conduct business--that he reversed--you
know, they--the staff pushed back. He changed that view and
adopted our recommendation 100 percent.
Mr. Crenshaw. Great.
Mr. George. Yeah.
Mr. Crenshaw. Thank you.
Ms. Olson.
Ms. Olson. I would second what Mr. George says about the
Commissioner. Obviously, I report to him, but I have reported
to many commissioners. And this Commissioner has very much an
open door and does seek my advice.
I would say about half of our recommendations in our annual
report to Congress are adopted by them--they agree to it every
year. Now, the problem is the devil is in the details. How do
we get them implemented?
And what I see and I continue to see after 14 years in this
job is a cultural mindset that really is based on historical
practices and it is very difficult to get people to look at
data that might show that their assumptions are no longer based
in reality. And that is not a problem that is limited to the
IRS. It is in any large entity. But with the budget where it
is, that becomes a critical problem.
And I have advised the Commissioner and identified for him,
as I have in my testimony and in my report, programs that I
would say to him to take offline and do basically an audit of
those programs to really look at, ``What are you doing? How are
you selecting cases? How are you getting your false positives?
What are you learning from those false positives?'' and then
come back and say, ``Okay. We took this program offline. Didn't
bring in a lot of revenue from this program this year. But we
can prove through pilots going forward that we are going to put
so much less taxpayer burden out there, but be much more
effective with the resources that we have.''
And I think there is a lot of low-hanging fruit in the IRS
that you can do this with and some more difficult, but they are
known and they should be worked on.
Mr. Crenshaw. Great. Great. Growth and change are difficult
at times.
Let me ask one quick question that has to do kind of with
this Affordable Care Act because I know that is creating a
burden on the IRS.
You know, the Administration delays the employer mandate
from time to time. And they have extended the enrollment
period, I guess, this year. And they are struggling on the
front end of the Affordable Care Act. But I have always had
concerns for a long time about the back end that might be even
in worse shape.

INCORRECT TAX INFORMATION

And I guess we all saw what happened. The Administration
announced that 800,000 low- to moderate-income households were
sent incorrect tax information, or these new 1095s, and that is
about 20 percent of all the people that receive subsidies under
the ACA.
Then I also read that, I think, 50,000 people filed their
tax returns based on the wrong information as part of that
800,000.
And then I learned last night that the IRS has already said
that they are not going to pursue the collection of any
additional taxes from the estimated 50,000 people that already
filed a return based on the incorrect information. So I guess
the IRS has decided they will just turn a blind eye to that.
So I was just wondering, have you asked about that yet or
have they talked to you about that? You know, how do they just
ignore this situation? Is that something that you are going to
ask about or have asked about?
Mr. George. This is such recent news, Mr. Chairman. Most
definitely we will ask about it. We will inquire about it. But
it is so new to me that I do not have any additional
information at this time.
Ms. Olson. I would say that, first, I wasn't consulted in
this decision. And so I am still trying to figure out what it
means. But the IRS always makes a determination of who it is
going to go after, who it doesn't. Unless we want a 100 percent
audit rate, we are selecting who we go after.
I do have concerns about equity of the 50,000 who have
filed and they are not having to pay back, but the people who
haven't filed are going to get corrected 1095-As and their
taxes will be adjusted downward. And we have the California
folks who have gotten some incorrect information.
And the incorrect information is expected in the first year
of any program. We get incorrect information from private
businesses all the time. And my office has recommended that
there be a de minimis figure so that it doesn't cost more to
process a corrected return than it does to recoup the tax from
it.
And my understanding is, for many of these 800,000, the
actual dollar amount is very minimal and some of them will get
refunds. But, still, it raises concerns. And I will be having
conversations about that. I only wish I had been able to have
those conversations before the decision was made.
Mr. Crenshaw. I guess that will all be added to the tax
gap. But I look forward to hearing what they have to say.
Mr. Serrano, do you have some questions?

IRS BUDGET CUTS

Mr. Serrano. Thank you, Mr. Chairman.
Mr. George, IRS employees collected over $3.1 trillion in
tax revenue, processed over 242 million returns and other
forms, issued $374 billion in tax refunds during fiscal year
2014, which is really nothing short of amazing when you think
about it.
In fiscal year 2014, their budget was $850 million less
than it was in fiscal year 2010. And with the fiscal year 2015
cut of $346 million, it is now down to 1998 levels when you
take into account inflation.
You acknowledge this in your testimony and say that
sequestration increased mandates from Congress, and reduced
budgets have affected the ability of the IRS to deliver in key
areas like enforcement and customer service.
You say in your testimony that--and I quote you--``Budget
cuts have resulted in significant declines in the performance
of the IRS collection program.''
Let's go into more detail about those cuts. You say that,
from fiscal year 2010 to 2014, the budget for the Automated
Collection System, ACS, operations and field collections were
reduced by $269 million.
Can you explain what ACS is and how those cuts affected it?
And, Ms. Olson, you could also comment on that.
Mr. George. Well, what we need to keep in mind, sir, any--I
have argued throughout my tenure here, if you can make it as
easy as possible for the American people to comply with their
tax obligations, they will do so.
As you pointed out, with the Earned Income Tax Credit, the
instructions are almost 30, if not more, pages. And for most
people, whether they are college-educated or not, trying to
understand the Tax Code is one of the most difficult challenges
that they face.
When you have a system that allows for electronic filing,
as I indicated both in my written and oral statement, that
assists taxpayers in complying with the Code, and when you have
instances, as was pointed out both by Ms. Olson as well as
myself, where they are not answering the telephones, where they
are closing Taxpayer Assistance Centers and the like, it makes
it more difficult for people who either do not have the
resources or the ability, meaning a lot of senior citizens, to
go to an H&R Block or what have you.
So the point being is we need to ensure that the IRS,
again, applies the limited resources that they have to
providing assistance to taxpayers and, secondly, that they are
getting accurate information. As you may recall, we have done
examinations in the past which showed, at some points, almost
half of answers to the questions that taxpayers posed to the
IRS by way of a telephone call--to the 800 number, as well as
the most available Taxpayer Assistance Centers, were
inaccurate. They were wrong.
And then we have tax preparers in the private sector who
either intentionally or unintentionally, again, provide
incorrect information, the American people overall are harmed
because of the reduction in the resources--or revenue, rather,
that is collected.
So the bottom line is we need to make sure that the IRS is
able to bring on competent people, have, you know, adequate
resources in terms of responding to phone calls, but that
people can get answers accurately by way of using the irs.gov
system. And I am concerned about all of those areas, sir.
The first for us--whenever--and it is very rare now because
I do not travel. But when I used to speak to tax preparers, I
would implore them, they are the front guard for all of this.
So if someone is seeking a credit for which they are not
entitled, these men and women are the ones who, you know, if
they are honorable people, should tell that taxpayer, ``We
cannot and we will not fill that form out for you.'' And I am
very concerned that that is not happening to the extent that it
should.
Ms. Olson. The Automated Collection System is a centralized
call site, and it was originally set up decades ago to be a way
in a sort of a production environment to be able to reach out
to taxpayers with relatively modest debts and come up with ways
of collecting it.
But over the years what it has turned into is a way of
using automated levies, et cetera, to go out and, instead of
making outgoing calls to taxpayers and talking through
collection alternatives, using a few letters and levies to get
the taxpayer to call us. And so you are already in a
confrontational environment when you are in ACS.
And our research has shown that, actually, ACS is not very
effective in collecting dollars. The most effective way that we
have got is actually refund offsets, where a taxpayer gets a
refund in a year and we have a debt on the books and we just
grab the refund, and then through installment agreements.
And our data has shown that, even as the resources
available to Automated Collection System have dropped, that
revenue collected through collection has remained stable,
inflation-adjusted.
And what we think is the most effective way is if the IRS
could get to those cases early when the dollars are low and
then continue to both send letters, like a credit card company
does, to taxpayers, but also make some outgoing calls to talk
the taxpayer through their collection alternatives, get them in
an installment agreement, get it to be a debit agreement from
their checking account so it is automatic, and then get them,
even more importantly, on the road to future compliance. That
should be our focus. Go and sin no more.
But this is one of those areas where I have not been able
to make headway with the IRS to really review this perceived
wisdom that ACS is cost-effective. I think it is not cost-
effective. It brings in some money, but it causes problems for
taxpayers later on. And we are not working the right cases in
ACS either. So that is my assessment.
Mr. George. And if I may just add, Congressman, it is so
much more inefficient and costly for the IRS to collect money
once it is out the door.
They have to do a cost-benefit analysis, and they have
elected, for the most part, to--and whether it is right or
wrong--since it is going to be more costly for us to collect X
amount of money from a taxpayer, let it go.
Mr. Serrano. Right.
Mr. Chairman, can I ask one more question?
Mr. Crenshaw. Sure.

AFFORDABLE CARE ACT FUNDING

Mr. Serrano. You know, on one hand, we hear that record
numbers of people are signing up through the Affordable Care
Act, and that is a good thing. Yet, there are still many people
in both houses who would like it to disappear and others would
like it to disappear not off the books, but by defunding it or
not funding it properly.
So my question to you may sound like the simplest question
or a set-up question. What could go wrong if we do not fund
properly the Affordable Care Act? I mean, it is the law of the
land. It has been, you know, commented on by the Supreme Court.
It is not going to go away.
What do we do if it doesn't get--what happens to it--if we
begin to talk about bad news where people can't sign up or get
hurt, what happens? I mean, we talk about it, but people really
haven't analyzed what the full effect would be.
Ms. Olson. Well, I think you are seeing some of what could
go wrong by not funding it with the 43 percent level of service
on the phones and a 70, 75 percent over-age percentage on
correspondence, where correspondence that the IRS gets they
can't get through in their timeframes and so taxpayers do not
get responses.
I have thought a lot about the Affordable Care Act and the
administration of it in the IRS, and there are some actual
positive things from it. This is the one program where we
actually get information returns, like Mr. George was talking
about, early in the process and we can use them as we match
these returns.
And so, in some ways, the IRS has been able to use the work
that it has done on the Affordable Care Act to create a model
for what we should be doing once we get the legislative
authority to receive other information returns earlier in the
process and can, as Mr. George says, prevent dollars from going
out the door that shouldn't. And I think the ACA has really
helped us, you know, get there. We are doing that with the
Affordable Care Act.
You know, one thing I have really thought about is that I
am very--I am not a healthcare analyst, but I am a practical
tax lawyer and I think that aligning the sign-up period with
the actual filing season. If you are really going to run this
through the Tax Code, it makes sense. If taxpayers are going to
get a penalty, they see that impact between now and April 15,
and that might drive their behavior to sign up the next year.
And having that sign-up period not aligned with it doesn't make
sense from a behavioral perspective. And that is one thing I
have thought about.
Mr. George. And I would just add, sir, that, one,
obviously, this is unprecedented in terms of the history of
this country. And from the perspective, as I view it, of the
IRS, they have invested a lot of money, a lot of energy, into
this. And so it would be a waste to the IRS if it is repealed.
Ms. Olson. The other thing that has happened, if I might
add this, is that a lot of IT projects, small information
technology projects, that would be good for taxpayers have been
put on hold because the IRS has a limited IT staff and they are
focusing on the Affordable Care Act and FATCA. And that has had
impact to the taxpayers. It increased burden on taxpayers for
delayed initiatives that would minimize burden on taxpayers in
other areas.
Mr. Serrano. Well, I thank you for your testimony. And, of
course, as the chairman said before, I thank you for being here
today and for the work you do and your service.
Mr. Crenshaw. Thank you.
Mr. Graves.
Mr. Graves. Thank you, Mr. Chairman.
Mr. George, good to see you again.
Mr. George. Morning, sir.

ID THEFT AND TAX FRAUD

Mr. Graves. Mr. George, I saw in your testimony comments
about identification fraud and wanted to talk about that just
for a little bit.
You indicated in your testimony that it totals about $5
billion a year, estimated, that is still out there with
identity theft.
And just thinking through the process--and I am trying to
kind of learn how this happens. Maybe I could just ask some
questions and, hopefully, you could help us, as a committee,
see through this a little bit.
When is the earliest that one can file his or her taxes in
a given year?
Mr. George. It technically varies, depending upon when the
IRS decides to open. I mean, of course, the tax years begins--
--
Mr. Graves. Right.
Mr. George [continuing]. At the beginning of the calendar
year. We are speaking generally because you have corporations,
too, that have different----
Mr. Graves. I am just speaking of individuals.
Mr. George. Individuals.
So I believe this year it was the second or third week of
January, although last year it was delayed because of funding
issues. But, then again--and this is not public--I mean, it is
not private information.
But, as I indicated and, I believe, as Ms. Olson indicated,
also, people can file before employers or others who are
required to report how much money they have reported that
information to the IRS, sir.
Mr. Graves. So that would be my second question.
So an individual could theoretically, this year, have filed
their taxes the second week of January--so we will just pick a
date--by the 14th of January.
And when are the W-2s due to be submitted by employers to
the IRS?
Mr. George. I believe it is March. It is March. So yes.
Mr. Graves. So there is a period of time, then, in which
one can file their taxes and then there is a gap, a delta,
until the business owner or the corporation submits their
backup data to reconcile that. And this can be done
electronically. I assume an individual can file electronically
that second week of January.
And then what is the quickest they could get a return, a
refund?
Mr. George. There is a statutory deadline for that.
Ms. Olson. I think within 4--electronically, there have
been some refunds going out within 4 days. But, generally, a
week. And if they file on paper, it could take anywhere from 10
to 14 days to even more weeks.
Mr. Graves. Okay. Let's stay with electronic, then, for a
second.
Ms. Olson. Yes.
Mr. Graves. So 4 to 7 days.
Ms. Olson. Yeah.
Mr. Graves. So on January 14 one who might have somebody
else's identity, which could only include a name and a Social
Security number, if I am correct, could submit an electronic
filing fraudulently and have a return within 7 days without any
corresponding information that would reconcile that, and the
IRS would deposit that money.
Ms. Olson. If I could just insert here, the IRS, over the
last few years, has been working with some of the largest
employers and getting voluntarily their records on the W-2s,
for example, before they are required to--we would get them
from Social Security.
And so the IRS has built some databases for use during a
filing season that we will run returns through to see whether
the information reported on them matches. But it is basically
asking people a favor.
Mr. Graves. I am just trying to get to the $5 billion in
improper payments----
Ms. Olson. Yes.
Mr. Graves [continuing]. That still exists out there and
why this occurs.
So electronically one can file a return. All they need is a
couple of pieces of data to file a return. The IRS will then,
without reconciling it, deposit money onto a debit card, if I
understand properly, that could have been purchased at a local
retail store, a convenience store, or not even had to be
purchased. It could have been given to them without any
identification required there as well.
So it sort of creates a system that leads me to ask the
question: Can an IP address allow an unlimited amount of
returns to be filed through one IP address or are there any
governing measures on that? And is it domestic only, or can
it--throughout the world can electronic filing occur?
Mr. George. There is no limit that is received only in the
United States. The IRS recently gave people the opportunity to
have, you know, multiple accounts receive refunds.
And, sir, I just want to make sure we are clear. It is not
even just a Social Security number. An individual taxpayer--
what is called an ITIN, an Individual Taxpayer Identification
Number, can also be used to file and to receive a refund.
Ms. Olson. If I could just add here, your statement is
correct. The IRS has got filters that would help it identify
questionable things, so looking at things from certain IP
addresses or the volume coming from IP addresses or the volume
of requested deposit refunds into one account or on one debit
card or things like that.
So, you know, we have built filters to identify
questionable returns. The problem is, no matter how smart the
IRS gets, you know, others are out there moving one step ahead
of us. And so you are always sort of tracking behind. And that
is one way you get to that large, you know, fraud number.
Mr. Graves. Right.
A couple more, if I could.
Mr. Crenshaw. One more.
Mr. Graves. One more?
I just have a few questions on my mind about it.
So you mentioned not overseas, though, Mr. George.
Mr. George. Oh, no.
Mr. Graves. Okay. So a filing can occur----
Mr. George. Yes.
Mr. Graves [continuing]. Outside of our country?
Mr. George. Yes.
Ms. Graves. Okay. And multiple filings can occur from one
IP address, unless captured by this filter.
And you say with certainty, though, IP addresses or
multiple filings through one IP address is monitored and
filtered?
Ms. Olson. Well, I can't discuss specific filters.
Mr. Graves. Okay.
Ms. Olson. But that is something----
Mr. Graves. I thought you just did. I'm sorry.
Ms. Olson [continuing]. That anybody would raise questions
about.
But I will note preparers legitimately have an IP address
that they would be preparing multiple returns through. So----
Mr. Graves. Preparers who put their name on the form.
Ms. Olson. On the return. Right.
Mr. Graves. Right.
But I am speaking of those who do not.
Ms. Olson. Right. That would not. That is correct.
Mr. Graves. So I would like to clarify that.
Ms. Olson. And that would raise eyebrows.
Mr. Graves. And then might I ask, Do you know how many
filings do occur during this period where there is that delta
in which one can file a return and which the corresponding data
that would reconcile that is filed as well? Is there a number
that might correspond there?
Mr. George. I am going to give you a chance.
Ms. Olson. Well, I think there are two peaks in our filing
season. And so one would be just right out of the gate for,
like, the first 2 or 3 weeks. And that is in your delta period.
Right from the start of the filing season to about 3 weeks into
it, people rush to get their refunds.
And then the second peak is at the very end, when everybody
is like, ``Okay. Now I owe money and I have got to meet this
deadline.'' So your problem is in the delta.
And if I could just make one point here, one thing that I
have recommended in the past--and it is difficult--is not only
moving up the dates for us getting that 1099 and W-2
information, but some countries around the world and some
States actually do not pay out refunds until after the end of
the filing season.
So they have, ``File your returns from this date to this
date.'' And then there is a pause for like a month and a half
while the tax agency is able to sort through all this stuff so
they can see, ``Oh, we have got two returns coming in from this
Social Security number'' or, ``Two people are claiming the same
child as a dependent.''
And you have that period to sort out before you are paying
any refunds. And then they start paying refunds after a certain
date. That is really changing the culture in our country, but
it is one way that other countries have been able to combat
fraud, to have that pause.
Mr. George. Okay. And if I just may say, I find it
appalling, Congressman, when the message from the IRS is,
``File early so that the criminals can't take advantage of
you.''
That is extremely troubling. And it may be common sense,
again, with resource limitations and what have you, but I am
actually very shocked and disappointed by that message.
Mr. Graves. Thank you.
Mr. Chairman, might I note for the committee that the $5
billion in identity theft that the General has pointed out is
nearly half of the entire IRS budget for one year.
Mr. Crenshaw. Yeah. That is quite a number. General George,
I can remember when that question was asked, ``How do we
prevent this fraud?'' and the answer was, ``File early.'' We
have got to do better than that.
Mr. Amodei.
Mr. Amodei. Thanks, Mr. Chairman.
And thank you both for the briefing.
Ms. Olson, I am trying to get a sense for--I mean, I hear
the part about budget cuts and resource allocation. I am trying
to get a sense--the IRS has been cut 17 percent.

TAXPAYER ADVOCATE BUDGET

Can you give me a feel for what your operation has been
cut? Has it been 17? More? Less?
Ms. Olson. My operation this year--you all were very kind
to my operation and sustained us and actually gave us a little
bit more.
And I can only think that the thinking was that, since we
are the safety valve for the IRS, that when the IRS isn't
meeting taxpayer needs, there are more taxpayers with
significant hardship, and that means they come to us. And, in
fact, our cases have increased by 6 percent so far this year
over the year before. We are seeing that.

TAXPAYER ADVOCATE CLIENTELE

Mr. Amodei. And then can you give me a profile of the folks
that kind of hit in the middle of the driveway that you help.
And let me tell you why I am asking the question. Because I
know there are statistics out there that the top 10 percent of
the population pays X amount of the tax, but it is a large
amount.
So I would assume, in any organization, when you are, as
you should be, pursuing collections, that you go to where those
collections are the most in need of pursuit.
So I am assuming that the Warren Buffets and the Bill Gates
of the world aren't calling you up and saying, ``Hey, what do I
do on my Schedule''--blah, blah. It is most of those folks who
probably fall into however it breaks down.
Can you give me an idea of who it is, the demographic or
where on that rainbow those folks fall that you are serving.
Ms. Olson. Yeah. You know, it is really interesting. We
definitely get low- or middle-income working families and then
small businesses coming in.
Now, we are always getting--there is always some large
business that can't get an issue resolved. It is usually an
account issue that can't get resolved because they are talking
to a different person each time they call and then they end up.
But the bulk of our cases, you know, 90 percent of our
cases, are middle-income, low-income working folks and small
businesses who are having problems with the IRS. And those
problems can range from collection problems to earned income
tax credit problems to other audit problems, account problems.
And certainly identity theft has been for the last 3 or 4
years the largest portion of our case receipts each year, going
anywhere from 20 percent to 27 percent of our case receipts in
any given year. That is thousands and thousands of identity
theft cases.
Mr. Amodei. So you are serving--if these aren't your words,
do not adopt them.
But you are serving predominantly people who represent,
generally, what portion of income to the IRS----
Ms. Olson. We have actually never really done----
Mr. Amodei [continuing]. Percentage-wise?
Ms. Olson [continuing]. An income thing. But I would say,
you know, middle to low income and, again, small business--very
small business, sole proprietors.
Mr. Amodei. Okay. Would it be possible, if you had some
time, to----
Ms. Olson. Yes. Absolutely.
Mr. Amodei. Okay.
Ms. Olson. We could pull a sample of our population and
look at their most recent returns.
Mr. Amodei. Okay.
Ms. Olson. I would be glad to give that to you.
Mr. Amodei. Thank you.
I yield back, Mr. Chairman.
Mr. Crenshaw. Thank you.
Mr. Yoder.

CONSTITUTIONAL RIGHTS

Mr. Yoder. Thank you, Mr. Chairman.
Inspector George, welcome to the committee.
Ms. Olson, thank you for being here today.
I note in your testimony, Ms. Olson, your comments
regarding the culture at the IRS. And I think it is a concern
that has grown from a concern to an outrage amongst Americans
in the country and the lack of trust between the citizens and
their Government, and a lot of it stems from the abuse of that
trust by the IRS.
And I note certainly the ongoing abusive practices related
to--or at least the--hopefully, not ongoing abusive practices
related to targets and auditing and harassing of Americans
based upon their free speech rights and their engagement in
standing up for their beliefs, that they might be targeted by
the taxing entity in the United States.
I note that in recent years there have been reports of the
IRS reading the private emails of Americans without a warrant
in violation of their Fourth Amendment rights, and the IRS's
response--or their position was, ``Americans do not have an
expectation of privacy in their email accounts.'' Americans do,
and they disagree.
I note the presence of Congressman Roskam, who has been
very outspoken on this issue, that in recent weeks there have
been much light shed on the fact that the IRS has been seizing
the assets of Americans without due process, without any crime
required, without any allegations, without any representation.
This is more than a culture. This is an agency that has
destroyed the trust between it and the American people,
believes it is above the law, and believes it can ignore the
Constitutional rights of Americans.
And it is just a wonder every day to pick up the newspaper
and read about what Constitutional rights are being violated by
the IRS, whether it is the First Amendment, the Fourth
Amendment, the Fifth Amendment.
It is beyond a culture. It is a broken agency. And maybe it
is time to consider wholesale change. Maybe it is time to
consider the Fair Tax. Maybe it is time to consider something
completely different. Because what is happening at the IRS is
not working, and Americans are outraged.
And so I look towards the Inspector General and Ms. Olson
for your ideas. But I note that there has been many throughout
history who have noted that the power to tax is the power to
destroy. And that is what is happening in this country today,
and American are outraged.
And I want to know what the--Inspector General, Ms. Olson,
what you think should be done and how we correct these abuses
of Americans' freedom and Constitutional rights?
Mr. George. Go ahead, please.
Ms. Olson. All right, well, I think there is a lot in your
statement. I too share the concerns about the civil asset
forfeiture, and I think some of the oversight that this
Congress is doing on that, and looking at the due process
protections that may need to be added to that process, are very
important. I think that in terms of the culture, I make a
distinction. I think in each of the instances that you have
raised, it is a very small portion of the 90,000 IRS employees
who are involved in that. And I think there we really need to
look at those actions and see what more would need to be done.
I will also note that the IRS adopted, after I had recommended
it for years, in June, a Taxpayer Bill of Rights. And among
those rights are the right to privacy, the right to
confidentiality, the right to a fair and just tax system.
And you know, Mr. Roskam, and this House passed it last
summer, and I believe there will be some action this year. And
I have recommended that you actually codify that, and hold the
Commissioner accountable for making sure that those rights are
worked and honored in every aspect of tax administration. And
frankly, only then will you get back the trust of the American
taxpayer.
Mr. George. And I would simply add, sir, I think that you
were quoting Lord Acton about the power to tax being the power
to destroy. There is no question at all, that that resonates
with people. I, again, although I should have prefaced my
statement by saying, since President Reagan's administration,
sir, the Secretary of the Treasury has issued a directive--to
discuss tax policy for the Department of the Treasury. It has
given sole authority to the Assistant Secretary for Tax Policy,
so I need to adhere to that. The bottom line is, it has to be
fair. People have to know that they are being treated
respectfully. And I will note this because, again, I was a
staffer on Capitol Hill, when the IRS Restructuring and Reform
Act was passed which created TIGTA, and I don't know whether--
--
Ms. Olson. And my office.
Mr. George. And Ms. Olson's office. So it seems that
periodically, the IRS experiences this period where things are
amiss, and I am not sure, sir, whether you were here or not,
but I earlier, again, gave a lot of credit to the current
Commissioner who is an extraordinarily experienced executive
and who is taking these matters quite seriously, and I think
will hopefully have a positive impact on the workings of the
IRS.
Mr. Yoder. Well, I appreciate your response. There is a lot
of work to be done here and I think beyond just a bill of
rights, I think there need to be wholesale changes of how we
operate the IRS and maybe looking at complete reform, things
like the Fair Tax.

EITC IMPROPER PAYMENTS

I do want to ask one other question, Mr. Chairman, thanks
for a little more time here, to just ask about the Earned
Income Tax Credit. It now ranges in fraud or misapplied
payments in the amount of $16- to $19 billion. It is 24 to 29
percent of the entire program. And I think about some of the
priorities I have in Congress, helping educate young children
through Head Start. We spend $9 billion on that; NIH funding,
we spend $31 billion on that. The ability to invest in things
that matter to this country by those lost dollars and the
impact it has on children, or cancer research, I think is
heartbreaking, and it also speaks the inability of the IRS to
solve this problem because it goes on year after year.
We have been working on trying to get to the heart of what
causes this, and we see that there is a rise in the misapplied
payments and the fraud from folks who file on their own, don't
file through a preparer, and there are different standards that
are applied in those cases. And so I guess my question would
be, do you believe that tax filers make when online self-
filing, that those certifications are best designed to prevent
fraud and prevent improper payments? Do you have any further
suggestions for eliminating improper payments across the board?
And what are the consequences for knowingly filing and EITC
certification via a paid preparer? Are they the same as
falsifying online self-preparation?
Mr. George. Again, sir, I don't recall whether you were
here. The instructions for filing the Earned Income Tax Credit
are extraordinarily complicated. And so, obviously, if somebody
wants to commit fraud--we have a voluntary compliance system,
so if someone wants to cheat on their taxes, unless you
required third-party reporting on everything that anyone earns,
people will be able to do so. The key, of course, would be for
the IRS to make examples of people who are caught having
cheated on any aspect of their tax return. That, obviously,
practically cannot work because of the millions of people
involved and the billions of dollars involved.
I will say this: For over 20 years, the Earned Income Tax
Credit has been one of the most abused credits in the tax
system. And while some progress was made at one point, not
enough has been done. And the Commissioner knows this, Congress
knows this. So I--again, unless you are going to start
arresting people and prosecuting and parading them in front of
cameras, I really don't have a definitive answer for you.
Ms. Olson. Could I make a comment about that? I think that
there are multiple sources of error and fraud in the Earned
Income Tax Credit. And I have--I owned a tax practice when the
Earned Income Tax Credit was enacted, so I sort of feel like we
are good buddies from 1975 on. I have wondered about that
decline in preparer prepared returns, and I think really there
are preparers involved. They are just no longer signing them.
And that might go to an IP address thing. Can you find out
whether you are getting a number of these returns from one
address, or going into one bank account?
But preparer regulation for this unenrolled population is
going to be huge. Because if you can deal with a preparer
strategy, if you can deal with one preparer who is doing bad
returns, you are not going just one taxpayer by one taxpayer,
you are getting the whole bunch of those returns. The other
thing is, we have made legislative recommendations for changing
the statute itself that might help minimize some of the
opportunity for fraud. And the third thing that I would say, we
have done research that shows that the IRS is actually not
auditing the right issue when they are doing their audits of
EITC. They are not auditing the issue that actually our own--
the IRS's own research has shown has the most dollars
associated with it. So they are sort of going after the lowest
hanging and easiest fruit rather than the area where you might
be able to move the dial on improper payments. And those are
just three things that I would comment on.
Mr. Yoder. Thank you. Thank you, Mr. Chairman.
Mr. Crenshaw. Thank you, and also, I remind the members
that the Commissioner will be coming before the subcommittee
and a lot of these questions can be directed to him. I think
for those that missed the opening statement, I think Ms. Olson
and Inspector George really brought out some of the things that
they are working on in ways to improve and that is kind of
their job, and we appreciate that very much. Let's go to Ms.
Herrera Beutler.
Ms. Herrera Beutler. Thank you, Mr. Chairman. And I
apologize. I had--it is like the constituent visit time, on top
of hearing time. So multiple places at once. So I apologize. I
have a couple of questions and I find this horribly
fascinating. It is terrifying to me that this is what we are
having to deal with and work through. I mean, each one of the
issues raised is a giant tragedy of a play unto itself. So I
thank you both for the work that you are doing.

S CORPORATIONS

Mr. George, you estimate that in the 2013 season, as much
as $2.3 billion were erroneously given to corporations in
carryforward credits. However, the IRS doesn't plan, as best I
can tell, to follow your recommendations to address it. We have
talked a little bit about that. And then you went on to say
that the IRS is dedicating significant resources toward
addressing what it believes is the most significant risk to
compliance, the use of flow-through entities, such as
partnerships. Flow-through entities, S corporations, from my
experience, and just in my region, in my district, are the
small family-owned businesses. In fact, I got to tour one this
last week. And obviously, some of the biggest users of
carryforward credits are giant corporations, publicly traded.
Correct?
Mr. George. Yes.
Ms. Herrera Beutler. Do you have any idea why the IRS is
ignoring that $2.3 billion? I mean, as we were talking about
NIH funding, and cancer funding, and all of these other things,
it is hard to understand their priorities here.
Mr. George. And please, I hate to punt here, but that is a
policy question, Congresswoman. And I am going to have to defer
on that one.

REHIRING FORMER EMPLOYEES

Ms. Herrera Beutler. Okay. Okay. Well, we look forward to
the Commissioner joining us. Let me switch. I actually have a
couple more questions for you, if that is okay. Your testimony
highlights several of the shocking behaviors. We have been
talking about it all morning. Most notably to me is that the
IRS is rehiring those that it fired, those specific employees
who were, I feel, acting as predators. They are supposed to be
protecting and at the very least adhering to the law, but in
many cases were selling folks out.
Help us understand the IRS' response to this, and possibly
how we could, I mean, we have brought--this committee has
brought this up to the Commissioner in years past. How do we
make a dent here?
Mr. George. Again, Congresswoman, before you arrived, I
pointed out the fact that the Commissioner, John Koskinen and I
speak, if not every day, every other day. And while I don't
want to steal his thunder on this very issue, he called me
Monday and issued to me a statement about the fact that they
saw the report and while initially his staff pushed back, it is
part of, again, what occurred under the Restructuring and
Reform Act of 1998, which issued a listing of things that if
IRS employees did or violated, they were subject to everything
from just, you know, excuse me admonition to removal.
[The information follows:]

``The report that Commissioner Koskinen called about, where his
staff initially pushed back, was not the report on rehiring employees
with prior performance and conduct issues. Instead, it was about a
report that we will be issuing shortly on IRS employee tax
compliance.''

And so to make a long story short, they are going to change
their policies as it relates to that and I think at his
appearance before this committee, you know, he will make a
formal statement as to what those changes are. Obviously, it
is--it was, you know, repellent that they would allow people
who were accused of engaging in the behavior that we
identified, were able to be rehired. A lot of these people were
seasonal people. As you may know, during the filing season, the
IRS hires tens of thousands of people to help process tax
returns, and the bulk of the people that we identified in that
report were in that pool.
And now, in all candor, you know, he has to make some
choices because if he can't hire 30,000 people, they can't
process tax returns unless everyone files electronically. But,
and then there are some instances--I mean, you are innocent
until proven guilty. If you are accused of a tax violation, you
have the right to appeal it and some people win their appeals.
So you have to be fair to people, and yet, at the same time,
just the appearance.
Ms. Herrera Beutler. Well, and I think that is it. When we
were talking about credibility here, this at the IRS has to be
above reproach. It is not--there are so many reasons, and so I
think if it takes more time and effort to make sure they get it
right, it is worth it.
Mr. George. I agree.
Ms. Herrera Beutler. Thank you. I yield back.
Mr. Crenshaw. Thank you. I would like to now recognize one
of the new members of the subcommittee, Mr. Rigell, who is from
Virginia.
Mr. Rigell. Thank you, Mr. Chairman and I am delighted to
be here. And like some of the other members, my preference
would have been, of course, to have been here from the very
beginning, but the schedule just didn't permit that. So if what
I ask, if there is a bit of redundancy here, I apologize in
advance for it. But this is an important topic and I thank you
both for being here and for your service. I do.

CUSTOMER SERVICE

I was raised by a NASA engineer, and so this idea of how we
view the Federal employee to me is very important, I see as
fellow Americans trying to do the right thing. Now, that said,
we are in a tough spot here with the IRS on multiple levels.
And I would like to draw your attention, Inspector George, to
the first, really the first contact that a taxpayer can have
with the IRS, and a hardworking American trying to get it
right, trying to pay his or her taxes, trying to get guidance
on this. And you know where I am going with this. The trends
are just not good in terms of response time. We are heading in
the wrong direction, and it is a serious thing. You get to
where you are on hold for 30 minutes. This is very
discouraging, and it does breed a lack of confidence, if not
contempt, you know, for the agency. So if you would, in a
concise way as you can, try to explain, to help me to
understand why that is the case, and we will see where we are
going with the follow-up question.
Mr. George. It is resources, sir.
Mr. Rigell. Okay, I thought so. Let me ask you this: This
is something that I think is really important here. And I don't
go to work every day at the IRS, clearly. But it seems like
there is this consistent pattern of it is always more money.
Now, if you could provide some objective metric, some table
that shows, you know, cost per call, the number of applications
or tax returns that have been filed on the ratio of the number
of IRS employees, for example; you could show some linkage
here, I would be more open to the argument. But what has to
happen certainly in the private sector, and I think it must
happen in the public sector, is this belief that productivity
and increased customer service are not mutually exclusive. And
if the leaders themselves don't believe that, then there is no
way the organization is going to move in that direction. So if
you would, please, address that whole mindset that it is not
always more resources. Help me to understand your view on that.
Mr. George. Sir, and I beg the chairman's indulgence--
because he has heard me, I think, recite the following. You
haven't, but----
Mr. Rigell. Okay, thank you for your patience and saying it
to me.
Mr. George. Well, but this is so important.
Mr. Rigell. All right.
Mr. George. It is called third-party reporting, sir. There
is a high correlation between tax compliance and third-party
information reporting and withholding. The IRS itself estimates
individuals whose wages are subject to self-reporting--
withholding, rather--so reporting by a third party--report 99
percent of their wages. So if a business or you know, anyone
else reports to the IRS----
Mr. Rigell. Right.
Mr. George [continuing]. We pay, you know, Russell George,
you know, $100, you will get 100 percent from me, but 99
percent from most people.
Mr. Rigell. There you go. For the record. Okay.
Mr. George. Now, self-employed individuals who operate
nonfarm businesses are estimated to report only 68 percent of
their income for tax purposes. So again, these are people who
are not given--that information is not given to the IRS, at
all, and they are estimated to report only a little more than
two-thirds. But here is the most, I think, shocking figure.
Self-employed individuals who operate businesses on a cash
basis are estimated to report only 19 percent.
Mr. Rigell. The numbers don't surprise me. And let me pivot
back though for a moment, because I know you are trying to
answer my question. But I think we passed each other on this.
Because what I was seeking clarification on is the culture, the
ethos, the mindset of the senior leadership within the IRS,
that productivity and increased customer service to the
taxpayer are not mutually exclusive. That is, that with the
same number of staff or the same amount of resources, that if
we maybe have a different workflow, we leverage technology,
that we can have both, increased productivity. We can reduce
the amount of time it takes to answer a call, which is now--
well, less than half are being, you know, to where the taxpayer
is actually speaking to the representative, and then they are
on hold waiting for that for about 30 minutes. So I don't think
you answered that part. And I don't see that my clock is
winding down so I am not exactly sure how the time works here
on the committee yet, but the chairman will remind me.
Mr. Crenshaw. Well, you are almost out of time.
Mr. Rigell. I imagine.
Ms. Olson. May I attempt to answer that?
Mr. Rigell. Please. That is really, to me, we are in an
area and a time of increasing austerity, principally because
healthcare cost, and that is just a whole other subject. But we
are going to have compression on the rest of the budget into
perpetuity because of mandatory spending, defense,
transportation, education, and on agencies like the IRS. So
this mindset of getting more and having higher productivity has
got to be part of how we think.
Ms. Olson. I think that the IRS leadership is actively
working on a concept of operations for the years to come that
will incorporate online taxpayer accounts, so that taxpayers
can see what is going on. They can communicate with the IRS
electronically. They can send documents to the IRS, trying to
drive some of the traffic on the phones over to the electronic
environment. And I think that will then leave--that will then
allow the resources on the phones to be able to address the
issues that people really need to talk to somebody about.
Mr. Rigell. Ms. Olson, just out of respect for the
Chairman, I think he is about to hit the button. But I just
wanted to tell you, I thank you both. My parting thought is
that this idea of increasing productivity and simultaneously
increasing response rates, if the leaders themselves don't
believe it, it will never happen. And so I just want to be sure
that that message is dispersed to the extent that it can be. I
thank the chairman, and yield back.
Mr. Crenshaw. Thank you. Yeah, we have taken a little
liberty with the clock today and I think everybody has had a
chance to ask as many questions as they might want. I know Mr.
Serrano has another question.
Mr. Serrano. Well, let me first turn to our new colleague
that what the chairman is doing, he had an eraser, and he was
just erasing things he had written on the wall there. And--you
know, Crenshaw was here, that kind of thing.
On a lighter level, I just read where Floyd Mayweather and
Manny Pacquiao are going to make close to $250 million. I think
the IRS is going to have with that and Pay-Per-View with HBO
and Showtime. I think there will be a little income coming into
the Nation's Treasury. I wish I knew what percentages they pay
for that kind of money, you know, and does Manny have to pay in
the Philippines, and do we have an arrangement with that. But I
will ask the Commissioner that.

TAX EXEMPT AND GOVERNMENT ENTITIES

Let me just talk to you about the EO unit, and follow up on
some of the questions that were asked before. That was an area,
believe it or not, where we saw bipartisan outrage, and there
was a discussion about whether one side was targeted and
another side was targeted. It didn't matter. We felt both sides
were targeted. On this side we felt both sides were targeted.
And we didn't like it. And now your testimony says that changes
have taken place in that unit. Then we hear that we are
rehiring some people that might have been part of the problem.
So my question to both of you is: What changes have taken
place? Should the American people and the Congress feel more
confident that this will not happen again, or certainly, you
know, can be prevented in the future because it was
embarrassing to everyone? And like I said, it was a bipartisan
outrage. It wasn't, you know, us against them or them against
us. And secondly, budget cuts. Are there now enough people in
that unit to be able to take care of the changes that need to
be made?
Mr. George. As to the second question, sir, I will have to
defray--defer, rather, to the Commissioner. He needs to--I
don't know the answer to that question.
As to your first question, the IRS has agreed to every one
of the recommendations that we issued in that report which
preceded his arrival, out of fairness to him. We are in the
process now of validating whether or not that is actually the
case. We also made a commitment to Mr. Cummings, and I informed
then-Chairman Issa, of the fact that we were going to and we
are in the process of looking at how the IRS treated groups
that were not related to Tea Party, Patriot, and the other
groups that were identified initially by the IRS as being part
of the groups they had, you know, I am going to use the word
targeted now just as because you used it, but that is not the
word we used.
I cannot--we are human beings, sir. So you can have every
rule in the world, and if someone wants to disregard the rule,
they can. And again, with the IRS, ranging from 80-plus-
thousand, to at its height, 100-plus-thousand, there are bad
apples everywhere. So I cannot sit here and, you know, before
Congress say that nothing could ever reoccur.
Mr. Serrano. Right.
Mr. George. But you know, I think in this environment, you
know, you are dealing with some smart people now at the head of
that organization. And I am optimistic that they will avoid a
repeat of this type of behavior.
Mr. Serrano. Well, I think that statement is a good one. I
mean, I don't expect you to, of course, say you know, what
human nature will be like, or human behavior will be like. But
if you in your position feel that it has tightened up, that
there are people trying to make sure it doesn't happen again,
that certainly is satisfactory to me. I don't know if it is to
other members of the committee. Like you say, you can't judge
what people will do. I mean, you can certainly put in place
rules that make it harder for them to practice it or to do it.
Ms. Olson.
Ms. Olson. Well, I view what had happened, and I say this
not trying to minimize it, as really managerial malpractice;
that there was a lack of serious attention and assistance being
given to the frontline employees who were trying to get
answers. And that is why entities that were selected and
targeted did not get action on them. And those kinds of
managerial failures have been corrected. There are processes in
place for review and getting answers and information that
didn't exist when all of that was going on.
I would say that right now, what is happening with the
returns is that the IRS has changed the rules saying all you
have to do is attest that a certain percentage of your activity
will not be, or will not be put, to political activity,
electioneering, and you are fine. And then they are going to
rely on audits on the back end to see if they have got any
abuses there. And so we are not really out of the woods here
yet because we don't know how they are going to be auditing
these entities, what they are going to think is an abuse later
on. And that brings us back to: I really do believe that
Congress needs to act to give a little bit better definition
and guidance to the IRS about what constitutes political
activity and what is the incorrect or the untolerated level of
political activity.
I have made a legislative recommendation in my report to
Congress this year about that, and I think that will help
enormously. But I do think we will have to see how the IRS
selects entities for audit before we can say, you know, where
we are on this.
Mr. Serrano. Thank you. Thank you, Mr. Chairman.
Mr. Crenshaw. Thank you, Mr. Serrano, and I thank everyone.
I have got some more questions, but I will submit them to the
record, and I know others as well. But let me again thank you
all for being here, because I know you have got a tough job. As
you stated your testimony, there are things that you are doing
to try to help us. We are all trying to help the IRS even
though the IRS has never been one of the most endearing
agencies to most people in America. And it seems like when we
started all this, when Commissioner Werfel was the new guy, and
I asked him, I said, do you think the IRS has betrayed the
trust of the American people? He said yes. I think there is a
lot that goes into restoring that trust, and quite frankly, I
don't think complaining about the lack of money, or not
answering the telephone, or things like that, is the best way
to restore trust. But I do think the things that you all have
come up with, the recommendations that you see every day, if
the Commissioner were to implement those, I think it will help.
The Commissioner is going to come before us, and we will have a
lot of questions for him. But you have done a great job, a
great service, in the work that you do to let us know your view
of the world as it relates to the IRS. We want to do a better
job and ultimately we want the IRS to do a better job. So
again, thank you for being here today. This meeting is
adjourned.
Mr. George. Thank you, sir.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

Wednesday, March 18, 2015.

INTERNAL REVENUE SERVICE--BUDGET

WITNESS

HON. JOHN A. KOSKINEN, COMMISSIONER, INTERNAL REVENUE SERVICE
Mr. Crenshaw. Good morning, everyone. The meeting will come
to order.
I want to welcome the Internal Revenue Service Commissioner
John Koskinen to our committee here today to discuss the 2016
IRS budget request.
This is a busy time for the IRS. And so, Mr. Commissioner,
we appreciate you being here today to share your testimony and
answer any questions we might have.
Now, for 2016, the IRS is requesting a massive $2 billion
or 18-percent increase. Commissioner, last month, you told the
Senate Finance Committee that the IRS was not asking for a
budget increase but just for the money that was taken away from
you, presumably, by this committee. And it came as a surprise
to me to learn that you might believe the IRS is entitled to
$13 billion because entitlements are for programs like Social
Security and Medicare and Medicaid.
National security, it is a Constitutional duty, but even
the Department of Defense has to appear before the
Appropriations Committee. They have to justify their budget
request. They have to subject themselves to the Congressional
oversight before Congress provides DOD with any funds.
And so IRS has to do the same.
Now, contrary to what we all read in the media from time to
time about this Committee, we are not here to simply punish the
IRS. We are here to hold the IRS accountable for the use of the
taxpayer dollars. We deliberately--yes, we deliberately lowered
the IRS funding to a level that would make the IRS think twice
about what you are doing and why you are doing it because you
don't have a single dime to spare on anything frivolous or
foolhardy or even mediocre.
Now, the IRS should focus on its core mission of providing
taxpayer services such as processing returns and issuing
refunds, providing customer service like answering the
telephone, and catching tax cheats. If the IRS wants more solid
and sustainable funding, then the IRS needs to show Congress
and the American taxpayers that it can manage its funding
responsibly and administer the Tax Code in an objective way.
But, unfortunately, it seems like we read week after week
after week about one form of IRS mismanagement or another, such
as overlooking 50,000 tax returns filed using incorrect
information; hiring former employees with known conduct
problems; paying bonuses to tax-delinquent employees; frequent
and costly executive travel; lacks oversight of purchase cards;
lavish spending on conferences; and last but not least,
applying extra scrutiny to certain tax-exempt organizations.
And then, to add insult to injury, the budget request seeks
to eliminate some of the key provisions that we on this
committee added to help the IRS move past this series of
mismanagement. A provision that says you cannot target, well,
that is not in the request. A provision that requires videos to
be reviewed for appropriateness, that is gone. A provision that
requires compliance with the Federal Records Act, that is gone.
A provision that guards against excessive conference spending,
that is not in the request. There is a provision that we put in
to uphold the confidentiality of tax returns, that is gone.
Now, to me, these are just commonsense good government
reforms that we put in the bill to help restore the trust in
the IRS. So I hope that when you submit your 2017 budget that
you might think about adding them back to your budget request.
Now, we talk about doing more with less around here. These
are tough economic times. And, Commissioner, I have heard your
complaints about doing less with less--it is hard to do less
with more. But I want to remind you that additional dollars are
not the only solution. In fact, last month, the Government
Accountability Office, or the so-called GAO, a nonpartisan
agency, said, quote, ``Although resources are constrained, IRS
has flexibility in how it allocates resources to ensure that
limited resources are utilized as effectively as possible,
magnifying the importance of strategically managing operations
to make tough choices about what services to continue providing
and which services to cut,'' end quote.
So, instead of asking for the money that has been taken
away from you, what I would hope that you would do is to study
your budget line by line, prioritize your activities, and
reengineer your business processes to deliver these priorities.
This is your opportunity to show this committee and to show all
Americans that it is no longer business as usual with the IRS.
This is an opportunity to show that you have shaken things up
and turned things around. We hope you will do that.
And, finally, I just want to highlight some landmark
legislation that was enacted last year, called the Achieving a
Better Life Experience Act, or the so-called ABLE Act. The ABLE
Act opens the door to a brighter future for millions of
Americans with disabilities, allows them to set up a tax-free
savings account similar to a 529 to save for college.
Now, States are responsible for administering this program
and some of the States have already started the legislative
process to create these ABLE accounts, but the IRS is required
to issue regulations by June 19. So I fully expect the IRS is
going to meet that statutory guideline.
So, again, let me thank you, Mr. Commissioner, for being
here today.
Let me turn to my distinguished ranking member, Mr.
Serrano, for any comments he might have.
Mr. Serrano. Thank you, Mr. Chairman.
And I join you for welcoming the Commissioner back before
the subcommittee.
We are here today at a very serious time for the Internal
Revenue Service. Last year, the IRS budget was cut by $346
million, leaving the Agency at the lowest level of funding
since fiscal year 2008. Since fiscal year 2010, the IRS has
been cut by more than $1.2 billion. And if some in the other
party had their way, it would have been cut even further.
The results of these cuts are predictable. Is it a surprise
to anyone that the IRS telephone response rates have plummeted?
Is it news to anyone that the IRS is unlikely to collect as
many taxes when we reduce their funding in such a ham-handed
way? This subcommittee has a constant debate about the impact
of additional dollars in the IRS budget. But today we debate
the converse: What is the impact of less dollars to the IRS and
to this Nation?
We are already finding out. In this fiscal year, the cut of
$346 million is expected to result in a $2 billion reduction in
taxes collected. The math is simple: For every dollar this
subcommittee cuts from the IRS last year, the country lost
almost $6 in tax revenue that is owed to it. These are not
numbers that can simply be made up by efficiencies, no matter
how hard people may try. That is not a sustainable course. As
the responsibilities of the IRS grow, we simply cannot keep
pretending the IRS can do more with less. The numbers already
tell us that they cannot.
And this brings me to the IRS fiscal year 2016 budget
request. Your budget requests significant investments in the
agencies to reverse the cuts sustained by the agency over the
last few years. Your proposal plans to invest in much needed
efforts to assist taxpayers to fight against identity theft, to
implement the Affordable Care Act and the Foreign Account Tax
Compliance and to go after offshore tax cheats.
From your proposed enforcement efforts alone, you expect to
collect an additional $3.47 billion by fiscal year 2018. It is
our job on the Appropriations Committee to vet the budget
request of the administration. And that is what we will do here
today. But it is also our job to make sure that agencies have
their resources to run effectively. And, with regard to the
IRS, we have failed in that responsibility. Moreover, the cuts
to the IRS don't just impact the agency or even the American
taxpayer; they impact our deficit.
No one here can claim the mantle of fiscal responsibility
if they plan to support excessive and harmful cuts to the very
agency that brings in more than 90 percent of our revenue. It
is time to stop punishing the IRS and time to start reinvesting
in the one part of the Federal Government that most Americans
have an interaction with.
Commissioner, welcome back, and I look forward to your
testimony.
Thank you, Mr. Chairman.
Mr. Crenshaw. Thank you.
I now would like to recognize the Chairman of the full
committee, Mr. Hal Rogers, for any opening statement he might
make.
Chairman Rogers. Mr. Chairman, thank you very much for your
courtesy in yielding me time.
Mr. Commissioner, we are glad to see you here. I am not
sure you feel mutually the same way. But it is always good to
see someone with strong Kentucky roots in the hearing room,
particularly during basketball season, and particularly----
Mr. Koskinen. It looks like a good year for you.
Chairman Rogers. Yeah, it looks like it, but we will see.
While I think much of you personally, Mr. Commissioner, I
unfortunately find many aspects of the budget request
troublesome. Since fiscal year 2011, this Committee has pared
back IRS' astronomical budget requests on a bipartisan basis.
This is largely a result of this committee's concerted effort
to reduce discretionary spending government-wide; justifiable
concern over the implementation of Obamacare and the Foreign
Account Tax Compliance Act; and various objectionable
management decisions at the agency--for example, targeting
certain groups and holding lavish conferences at taxpayers'
expense. It is therefore surprising to see that the fiscal year
2016 budget request that you have for the IRS is $12.9 billion,
a significant 18-percent increase over the current level. The
majority of this proposed increase, $2 billion, would be
utilized to implement Obamacare and the Foreign Account Tax
Compliance Act, and towards a discretionary cap adjustment.
There are a number of issues with this request, but three
in particular stand out. First, the Budget Control Act does not
allow for a discretionary cap adjustment for the IRS. As you
know, that would require a statutory change outside the
jurisdiction of this committee--a legislative change that has
been rejected by both the House and Senate Budget Committees
for 4 consecutive years. If the activities funded by the
discretionary cap adjustment are important to this
administration, then you ought to operate within the amount
allowed under the Budget Control Act. The IRS needs to
prioritize its spending like every other federal agency.
Second, this Congress has repeatedly rejected additional
funding for the implementation of Obamacare. I am concerned, as
are many of my colleagues, that the IRS, through CMS, recently
made $2.7 billion in payments to insurance companies without
the approval of Congress. The courts will be the ultimate
arbiter of this issue, but I can say without a doubt that this
committee has never appropriated a single penny to permit the
administration to make any Section 1402 Offset Program
payments.
Speaking of the courts, I would be remiss if I did not
acknowledge King v. Burwell, currently under consideration by
the Supreme Court, which will determine whether the IRS can
extend taxpayer subsidies to individuals who purchase coverage
through the healthcare exchange developed by the Federal
Government. While the Supreme Court probably won't rule on the
case until this summer, now is a good time to start thinking
about the potential impact of the case on the IRS.
Finally, I am disappointed that the IRS requests to
eliminate the three administrative provisions that have been
enacted on a bipartisan basis for several years. Since the IRS'
targeting and spending scandals, Appropriations bills have
included prohibitions against: targeting U.S. citizens for
exercising their First Amendment rights, targeting groups for
regulatory scrutiny based on their ideological beliefs, and
making videos without advanced approval. We are dealing with
taxpayers' money, and these provisions lay out what most people
would consider common-sense policies.
Finally, Mr. Commissioner, I want to mention, in the last
couple of days, we have seen press reports that there are
literally billions of dollars annually that are being paid
fraudulently to people who don't deserve or earn them under the
law, a good chunk of that in the IRS. I mean, this is an open
sieve. It seems to me, that people who do not qualify for
assistance are gaining lots of money for doing nothing except
lying and your agency is responsible for cleaning up most of
that. It is not all in the IRS, but a big chunk is. And so I
would hope that we would hear from you today about how you want
to tackle that huge problem that is ongoing.
Mr. Commissioner, I thank you for being with us today. This
committee takes seriously our role in overseeing the budget and
policies of the IRS and the other Federal agencies, and I
appreciate your continued engagement with us. Thank you.
Thank you, Mr. Chairman.
Mr. Crenshaw. Thank you, Mr. Chairman.
And now I would like to recognize the Commissioner for an
opening statement. If you could keep that in the neighborhood
of 5 minutes, it will give us more time for questions and
answers. The floor is yours.
Mr. Koskinen. Thank you. Chairman Crenshaw, Chairman
Rogers, Ranking Member Serrano, members of the subcommittee,
thank you for the opportunity to discuss the IRS budget and
current operations.
I remain deeply concerned that the significant reductions
in our budget over the past 5 years are undermining the
agency's ability to continue to deliver on its mission. As you
all know, IRS funding has been reduced $1.2 billion over the
last 5 years. At the same time, the number of taxpayers has
increased over 7 million and the IRS has been given significant
additional responsibilities. These include the statutory
mandates that we implement, the Foreign Account Tax Compliance
Act, or FATCA, and the Affordable Care Act.
The disconnect between our funding levels and our increased
responsibilities is illustrated to some effect by the fact that
3 days after our budget was cut by $350 million, Congress
passed legislation requiring the IRS to design and implement
two new programs by July 1. Implementation of the ABLE Act,
mentioned by the Chairman, and the certification requirement
for professional employer organizations is occurring while we
are in the middle of our most complicated filing season in
years. But I would assure the Chairman, we will continue to do
our best to implement these two new programs.
In discussing our need for adequate funding, I understand
we have an obligation to be careful stewards of the taxpayer
dollars we receive, and we must be as efficient as possible.
The IRS has, in fact, made considerable efforts for several
years to find efficiencies in our operations, both in regard to
personnel and in nonlabor spending. Through cuts in office
space, contracts, printing, and mailing, we are saving over
$200 million a year. We have also made significant progress
over the past few years in moving millions of taxpayer
inquiries from our call centers and walk-in sites to our
significantly updated and improved Web site.
Already this filing season, there have been more than 215
million visits to IRS.gov and more than 3.6 million visits to
the section devoted to the Affordable Care Act. We have had
over 164 million hits on our ``Where's My Refund'' electronic
tracking tool, and more than 11 million copies of previously
filed tax information has been obtained online with our ``Get
Transcript'' application. In the past, all of these inquiries
would have inundated our phone lines and resulted in even
longer lines at our walk-in sites. But the efficiencies we have
created, even in the limited-funding times we have had, have
made significant improvements for taxpayers.
I would also emphasize that we take seriously issues raised
about the inappropriate actions and activities in the past. We
have done that by making necessary changes and improvements in
our policies and procedures to ensure these situations do not
recur. We have cut conference spending by over 80 percent. We
have established review boards for video productions and
training expenses. We have ensured that those who willfully
failed to meet their tax obligations are not eligible for
performance awards as well as being subject to other
discipline.
We are reviewing our hiring process to ensure, to the
extent permissible by law, that former employees with prior
conduct issues are not rehired. We now require that all
contractors maintain the same high standard for tax compliance
as employees. And we have implemented the recommendations of
the Inspector General with regard to the serious management
failures surrounding the review of applications by
organizations seeking to achieve social welfare status.
But there is a limit to how much we can do in finding cost
efficiencies. This year, we reached the point of having to make
very critical performance tradeoffs, which have had a negative
impact on service, enforcement, and IT. The funding cuts have
also limited our ability to work toward giving taxpayers a more
complete online filing experience. We think taxpayers ought to
have the same level of service from the IRS that they now have
from their financial institutions, whether it is a bank,
brokerage or mortgage company.
We have been taking steps to try to close this year's
significant budget gap, and one of our major concerns, as you
know, was the possibility of a shutdown of the IRS operations
later this fiscal year to help close the budget gap. As a
result of a review earlier this week, a meeting I had 2 days
ago, it is now clear that our elimination of all hiring and
overtime, along with cuts in other areas, has generated enough
savings that we will no longer need to plan for a shutdown of
the agency this fiscal year.
The President's fiscal year 2016 budget request for the
IRS, which totals, as noted, $12.9 million, would help the
Agency move ahead in all of these critical areas. For example,
we would be able to bring our level of phone service up from
the current 43 percent to 80 percent. We would also
significantly increase enforcement and collection activities,
generating over $2 billion more in increased government
revenues. And we would be able to take steps toward building a
more modern interface between the agency and taxpayers.
I understand and appreciate the concerns raised over the
past few years about activities at the agency. But I took this
job 15 months ago because I also understand the critical role
the IRS plays in the lives of taxpayers and in the collection
of revenues that fund the government. I know I speak for the
thousands of professional, experienced, and dedicated employees
of the agency when I say we are committed to working with you
and the other Members of Congress to lead the agency
effectively and appropriately into the future. But we need your
help and support if we are going to be successful.
That concludes my statement, and I would be delighted to
take your questions.
[The information follows:]

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

ABLE ACT AND 501(C)(4) REGULATIONS

Mr. Crenshaw. Well, thank you very much.
Let me start the questions. You know, I mentioned the ABLE
Act in my opening statement. You mentioned ABLE Act. That is
something new that you are going to have to do to write the
rules and regulations by the middle of June; that is 6 months
away. Now, as you probably know, the ABLE Act is patterned
after what we call a 529, that is where parents can set aside
money in a tax-free savings account, let it grow, and as long
as they use it to go to college.
So it seems to me that writing regulations that are
consistent with what you already have in terms of the 529
shouldn't be a massive undertaking. So I hope that you can work
on that and get that done in a timely fashion. Because on the
other hand, there is something called the 501(c)(4) regulations
that are not statutory mandated, but if you recall, when we had
all the problems with the extra scrutiny that some of the tax-
exempt organizations were getting, IRS decided they were going
to redraft the 501(c)(4) regulations.
And, as you know, the regulations were put out there, and
there is a lot of discussion about that. And at the end of the
day, there were over 150,000 comments. And that regulation
tended to offend just about everybody, on the left, on the
right, nobody liked it. And so I guess that has been set aside.
But one of the concerns that people had was that if those
regulations suppressed what people would consider to be freedom
of expression, that wouldn't be a good thing. And they were
criticized, again, from the left and the right, because of
that.
So now that as you, I understand it, are going to redraft
those rules and regulations, the concern was in 2013 that they
were going to be out there right about election time and people
would be concerned about how they would be perceived under this
new regulation. Now we are past 2014. Now 2016 elections stare
us in the face. And there is some concern that are we going to
go through this process again? Are we going to put that
regulation out there right about election time? And people are
going to be concerned that somehow these new regulations are
going to impact their ability to be involved in the political
process.
So my question is, what is the plan on this 501(c)(4)
regulations? Are they going to be submitted right about
election time and have a period of comment, or are they going
to be put off until after the elections? Can you tell us
exactly what is the plan on this next draft for the rules?
Mr. Koskinen. As I said in my testimony, we are going to do
our best to meet the ABLE Act requirements and to get that
program up and running. Policy is not our domain, but able is a
good law. It will help a lot of people. It is not quite exactly
the 529. It is the same framework, but, obviously, we have to
determine with Social Security what appropriate disability
payments are. We will have to get forms and regulations out.
But you are right; it is not something that is brand new. We
have already given guidance to the States that they can start
developing those plans, and if the final rules vary a little,
they will get transition protection. So we are encouraging the
States to start working on those plans now.
With regard to the 501(c)(4) regulations, as you know, the
previous draft was prepared before I showed up. My position has
been from the start that any regulation needs to have several
qualities. It needs to be fair to everybody. It needs to be
clear and easy to administer. The IG reported that part of the
problem that they found when they did their report on the
management problems surrounding those applications was that the
facts and circumstances test was vague, hard to administer,
hard to understand.
Part of my concern has been if you are running a 501(c)(4)
or (3), (5), (6) or (7), you need to have a clear roadmap so
you know what you are doing. You don't have to worry that
someone is going to come in, look over your shoulder and
second-guess you. It is very complicated, you are right. We
actually had about 160,000 comments. We have been going to
great lengths to make sure they all get reviewed and treated
carefully.
I have read about 1,200 pages of the best comments on both
sides of all of those issues. It is complicated. We are looking
at--I say to be fair--application across the entire spectrum.
So it shouldn't be just (c)(4)s. We need to make sure, as
Congress has legislated in all of these areas, that there is a
consistent and appropriate framework for (c)(3), (c)(4),
(c)(5), (c)(6)s, 527s.
Mr. Crenshaw. And I appreciate all that, but just in terms
of the timeframe----
Mr. Koskinen. Timeframe is, I haven't got a timeframe we
are conscious of. I made it clear last year that we were going
to be anxious not to do anything to interfere with the 2016
elections. This is a change that will last for a long time. I
think it is important for people to understand it, be
comfortable with it, understand it is fair. And so our goal is
not to do anything that looks like we are trying to impact the
next election.
Mr. Crenshaw. But you don't know, you don't have a
timeframe to say we are going to publish the next draft in the
next 6 months or next year? You got any idea of when you are
going to do that?
Mr. Koskinen. No. We had hoped actually to have made more
progress than we have, but we are trying to make sure that we
do it right. I have talked to several very interested
Congressmen and Senators and told them we are not planning on
surprising anyone. When we move this forward, even as we are
developing the final forms, my proposal and plan is to talk to
you, Congressman Ryan, Senator McConnell, and others who are
interested.
I think people actually may--there has been a concern, on
the one hand, that there are people who think all political
activity ought to be covered.
Mr. Crenshaw. Yeah, I understand that.
Mr. Koskinen. Anyway, so the timing. The answer is I don't
have a clear timeline for you. I would like to get it out. It
will then have 90 days for comment. We have committed to hold
public hearings.
Mr. Crenshaw. The only thing you can tell me is that you
hope it won't impact the 2016 elections, but we don't know that
for sure?
Mr. Koskinen. I don't control the whole process. It is a
joint venture with the Treasury Department and the IRS, but we
have a commitment that we do not plan to do anything to impact
the 2016 elections. It should not be motivated by politics, and
it shouldn't impact any particular election----
Mr. Crenshaw. I appreciate that, but I also want to say,
the ABLE Act that we talked about, that is a statutory mandate.
Congress said go do that by June, okay. We didn't tell you to
go do the 501(c)(4). You want to do that, and I hope you will
get your priorities right, do what the statute says, and then
if you have time, you can do the 501(c)(4)s somewhere along the
way.
Mr. Koskinen. As I have said on numerous occasions, we
implementation statutory mandates. We are focused on
implementing the ABLE Act. We also have other statutory
mandates. I know Chairman Rogers noted that we haven't got much
funding for the Affordable Care Act. We don't have a choice
upon implementing FATCA or the Affordable Care Act. They are
all statutory mandates.
Mr. Crenshaw. Thank you very much. I am out of time. I want
to turn to my Ranking Member Mr. Serrano for any questions.
Mr. Serrano. Thank you so much. I am really interested in
your concern about the impact on the next election because the
gentleman who could take credit for it is not going to run for
reelection. We are going to have a new Presidential election.
So it is really interesting who it would affect or help in any
way.

BUDGET CUTS

For 2015, Commissioner, Congress put the IRS at below the
sequester level with a reduction of $346 million at the fiscal
year 2014 level. Since 2010, the IRS' funding has been cut by
$1.2 billion or 10 percent. When adjusted for inflation, the
IRS is now down to 1998 levels. I would like to ask you a
question in three parts: What personnel actions do you
anticipate having to take in response to these cuts? Secondly,
what do you believe the long-term impacts of these cuts will
be? And, lastly, how does your request of $12.3 billion begin
to repair the damage done by these cuts?
Mr. Koskinen. Thank you. I frequently refer to us as having
been double sequestered. After the sequester went into effect
and cuts were across the board, all the major agencies except
for the IRS were restored to their pre-sequester levels. So we
operated at the post-sequester level before the additional cut
last year in our budget. So we have actually had two cuts while
other major agencies are basically at the pre-sequester level.
The impact is 75 percent of our budget is personnel. So as
we get cut, we have no choice but to cut personnel. We have
lost 13,000 people since 2010. Our estimate is--and part of the
way we are dealing with the cut this year--is we are going to
lose another 3,000 people. So we will have 16,000 fewer people.
That means we have fewer people answering the phones. We are
trying to get everybody not to call and try to get them onto
our Web site.
We will have, over that period of time, 5,000 fewer revenue
agents, officers, criminal investigators. So our rate of audit
is dropping. My concern is that it is not just a question of
how much money we collect. We collect $50 billion to $60
billion with our own activities. It is, in fact, that
enforcement and taxpayer services are two sides of a compliance
coin. And what the real number is we should all be focusing on,
that I am concerned about, is that $3 trillion that we collect.
We are a tax-compliant society, but we are much more compliant
if there is third-party information available to us and if
people know we are going to use it.
If, as a result of these cuts, we have a 1-percent drop in
the overall compliance rate in the United States, it will cost
the government $30 billion a year or $300 billion over the 10-
year measuring period that people have. My concern about the
impact is that it is not a short-term impact--do we answer
phone calls quickly enough or not--it is, over time, do the
cuts ultimately corrode the compliance atmosphere in the United
States in terms of people feeling the system is fair, that
everybody is paying their fair share? If people begin to think
that, because we are not enforcing the law adequately, some
people are cheating, some people are getting away with it, it
won't be helpful.
In terms of the budget, one of the things I would stress--I
think the Chairman is correct, the comment about giving us a
lack of money--our goal is not to go backwards. In other words,
we ought not to be looking at this in terms of, if we get
funding, we are going to go back to doing business the way we
did before. One of the things I said in my prepared testimony,
and I summarized briefly in my oral testimony is, we need to
look at--and the Chairman is right--is becoming more efficient
and trying to go forward.
And one of the things we spent a lot of time in the last
year looking at is, what should the taxpayer experience be 3 to
5 years from now? What it can't be is still dealing with us on
the phone all the time, having to walk into our sites, trying
to figure out the right way to deal with us. People ought to be
able to have an efficient way in the digital economy and the
digital world in dealing with us the way they deal with their
banks and with their financial institutions today.
So, as I say, we are not talking about going to the moon.
And it is not as if we don't know how to do online
applications. The ``Where's My Refund'' application, the ``Get
Transcript'' application, the fact that you can do an online
installment agreement means that we have started to move in
that direction. And as I have detailed in my presentation on
the budget, if we get additional funding, and particularly in
the IT area, we will become more efficient.
So my goal is not to say, give us the money and we will add
16,000 people back to the IRS. The goal is, if we can get
additional funding and support, we should be able to run the
organization with the number of people we have. And we should
be able to have better taxpayer service, and taxpayers should
be more easily able to contact us. We should be able to help
them fix their returns without amendments. They should be able
to do it online.
So I think it is really a question--I agree with that
totally--of are we going forward rather than looking back and
asking how do we get back to where we were. The taxpayer
advocate says, we should be doing more preparation of returns
in our taxpayer assistance centers. Well, over time, those
diminished to about 60,000. Our VITA centers do 3 million
returns for people. We ought to move more people into the VITA
centers. We ought to move more people online. We ought to get
people off the phone, except for those who need to be on the
phone because they can't find the answer to their complicated
question online.
So my hope is to work with this committee. We need to solve
the problems of the past. I couldn't agree more with both
Chairman Rogers and Chairman Crenshaw about that. And I hope we
are building a record you can see that we are solving those
problems, whether they are in the budget language or not. But,
also, I hope we can work with you trying to figure out what is
the IRS of the future we are trying jointly to build together.
Mr. Serrano. And that is my last comment. I think we have
all, probably all of us on this panel, have experienced the
changes in the last few years. I remember when filing meant
sending in this envelope, you know, that you had to, include a
return receipt and hope it would get there on time and that
they would tell you that they got it. And now I sign papers and
give a check--if I have to give a check--and then I don't see
it again until it gets settled. So that is where we want to go,
to give everybody an opportunity to do it efficiently, quickly.
But my last comment is, you are so right: If people begin
to think that not everybody is being treated equally because we
don't have the resources to look like we are or to actually do
it, then you are going to have havoc all over the place. And
that is not good for us; it is not good for the country; not
good for your agency.
Thank you, Mr. Chairman.
Mr. Crenshaw. Thank you. And let me just remind you, my
distinguished Ranking Member, that with the appropriations that
IRS received last year, they collected more revenue than ever
in the history of the United States of America. Just a thought.
And the other thing I would just say, and I don't want to
get into an exchange, but the 501(c)(4) regulation don't have
anything to do with who is the President. They have to do with
whether or not, I think, that first draft, a lot of people felt
like was going to put a wet blanket on political participation.
I don't think anybody wants that to happen. So I think they are
working on that, and I am sure they will do well.
I want to recognize Chairman Rogers now.

EMPLOYEE MISCONDUCT

Chairman Rogers. Thank you, Mr. Chairman.
Mr. Commissioner, as you are laying off people, I have a
group that I would recommend be included in that pattern. Some
300 past employees of the IRS who have been forced out or left
while under investigation for performance or misconduct issues,
300 of those people were rehired between January 2010 and
September 2013. According to the IG's audit, 141 former
employees with prior substantiated tax issues, including five
who the IRS found had willfully failed to even file a tax
return, were rehired.
Other substantiated issues from previous IRS employment
included unauthorized access to taxpayer information, leave
abuse, falsification of official forms, unacceptable
performance, misuse of IRS property, off-duty misconduct, and
so on; 300 of them rehired. Those should be the first ones laid
off, it seems to me, as you are going through this process that
you are. Twenty percent of those, by the way, that came back to
work, that you rehired, had new conduct or performance issues.
One in five of them that you rehired are back in trouble again.
I am no great administrator, but I think I see a chance
here to make the world better. What do you think?
Mr. Koskinen. I agree. I have told the IG and, in fact, our
formal response states that we have taken their
recommendations.
As the IG noted, in that time period, there were 53,000
employees hired, so the 300 were a relatively small portion of
the 53,000. Doesn't mean it isn't an important problem. Part of
what it is, is the vast majority of those are seasonal or
temporary employees that get hired during filing season. So the
volume of people coming through is high.
But we have agreed with the IG that, in fact--and we are
working with our personnel people in OPM and our lawyers to
make sure that we stay within the law--but we agree. If you
have had a prior serious performance or misconduct issue, you
shouldn't be eligible for being rehired. As I say, the bulk of
those people are temporaries. The time period was 2012, and, in
fact, in 2012, we increased our focus on this, and we now agree
with the IG that we should review this matter to try to do
everything we can to make sure that we don't, in fact, repeat
that practice.
Chairman Rogers. Well, you know, it doesn't do your agency
a lot of PR good out in the country.
Mr. Koskinen. I agree.
Chairman Rogers. When people who pay taxes, see somebody as
a tax evader trying to collect their taxes, you admit that is
not very good PR----
Mr. Koskinen. Exactly. In fact, separately from this, there
is the issue of tax compliance by our employees. And we have a
compliance rate slightly above 99 percent, much higher than any
other Federal agency, our employees take that seriously. They
understand if you willfully don't pay your taxes, you are
subject to dismissal.
And a question has been raised in the past, well, if you
are not in compliance with your tax obligations, if you are in
that small percentage, you shouldn't be eligible for
performance awards. And we have adopted that policy and spread
that around the agency. People understand that not only are you
subject to discipline, but if you aren't current with your
taxes, you are not eligible for a performance award as well.
And I agree with you that we need to--if I were a taxpayer,
I agree the people collecting taxes ought to take it seriously
and ought to be compliant. And our employees understand that.
And I would stress, over 99 percent of them are compliant, and
we monitor that every year and with every employee.
Chairman Rogers. I would audit that more frequently than
every year.
Mr. Koskinen. Well, they only pay taxes once a year, so it
is a little hard to.
Chairman Rogers. Yeah, well, there are other sins that many
of them have committed that are immediately----
Mr. Koskinen. On the nontax issues, as I said, we agree
with that, and we are going to do everything we can to ensure
that while it was a relatively small number, the number really
should be zero.

CUSTOMER SERVICE

Chairman Rogers. Because of multiple poor management
decisions and other matters, your budget has either been cut or
held flat since 2010. Blame for long phone wait times and the
decline in customer service is often placed on those budget
cuts. We have heard that. However, nothing in the
appropriations bill for your agency explicitly reduces funds
for customer service. On the contrary, the taxpayer service
account was increased in 2014 and not cut in 2015. Given that
case, you have had plenty of money for customer service. How do
you explain the decline in customer service?
Mr. Koskinen. Two things: First, as I explained to this
committee last year, when I predicted that if we didn't get the
additional money we were requesting, our service level was
going to drop, we knew--and it has been true--that we would get
a significant number of increased inquiries on the Affordable
Care Act since this is the first year that the filing goes
through. Secondly, as we advise the committee each year, we
have user fees that we collect, subject to OMB review and
approval, that we apply. Historically, we have applied
somewhere close to $200 million of the user fees to customer
service.
Because of the underfunding or the zero funding for
Affordable Care and FATCA, the only way we could implement
those statutory mandates in the last few years, and
particularly last year, was to move a significant part of that
support for taxpayer service into the IT accounts because we
needed $300 million and got zero. We still left $50 million of
those user fees to apply to taxpayer services, but in effect,
the taxpayer service account is $100 million less this year
than it has been in the past. We have 3,000--over this
timeframe, 3,000 fewer people answering the phones.
But I would stress, one of our goals has been to try to
become more efficient, try to provide more information and
support for taxpayers not on the call service. I think in the
long run, the answer to dealing with the call centers is not
just more people; it is, in fact, to continue to provide
alternatives so that people, in fact, don't feel they have to
call. Most of us never call our bank. If you have a question,
you just go online, look at your account, make an electronic
communication. Airlines now penalize you if you call them for a
reservation. They expect that you will do it efficiently
online.
We need to get to that same space. I am concerned about
taxpayer service, but, again, my point is, we shouldn't just
put money into taxpayer service and keep doing business the
same old way. As everybody agrees, we need to get to be more
efficient and we need to give a taxpayer a better experience
than having to wait in line, either for the phone or in our
walk-in centers.
If we could get a system to run as efficiently as the
private sector does, which is just a question of investment in
IT, then the people calling the phones would be the people who
really need to be there and our service level would go up even
with the same level of employees. So I agree with you. It is
not just a question of--and if we have more money--just putting
people on the phones. We, at the same time, need to get them
the information they need as efficiently as we can. Most people
would much rather get it off the Web, download their forms off
the Web.
Chairman Rogers. Mr. Commissioner, I leave you with two
words: Go Cats.
Mr. Koskinen. Well, as an old Kentuckian, for everybody
else, I grew up about 5 miles outside of the Chairman's
jurisdiction in Kentucky. I share that sympathy. Although, as a
Duke guy, you know, I do have these mixed emotions about how
this goes.
And then I am looking--Congressman Yoder promised me last
year he was going to hang a Kansas flag outside his office on
the building, and I don't see that there yet. But it is a great
time of year.
Mr. Crenshaw. Thank you very much.
And now I would like to turn to Mr. Quigley.
Mr. Quigley. Thank you, Mr. Chairman.
Welcome, Commissioner. How are you?
Mr. Koskinen. I am having an interesting time in an
interesting stage in my career.

DEFENSE OF MARRIAGE ACT

Mr. Quigley. We understand.
I thought about the fact that after DOMA was struck down by
the Supreme Court, this must have changed some of the work that
your fine people do. Can you explain some of the changes and
how they have impacted your workers and what we try to do for
folks to educate taxpayers about the change? Obviously, there
is filing status that many people have never had the ability to
enjoy.
Mr. Koskinen. Right. With DOMA, as well as Affordable Care
and other issues, tax extenders when they are passed, we have a
very active program of reaching out to taxpayers to try to get
them as much information as we can about everything. We have
tax tips. We put out press releases. We do--I don't know how to
Twitter, but we do Twitter. We have YouTube videos. All trying
to make sure that it is as easy as possible that taxpayers now
understand their circumstances. And, for DOMA, we have done
that, trying to explain to taxpayers what the impact of the
decisions are.
In short, from the standpoint of processing, if you are
legally married and therefore eligible to file a tax return
jointly, the filing and the processing of that goes smoothly.
So the real issue has been to try to make sure taxpayers
eligible to do that understand that. And so----
Mr. Quigley. Were there questions from some constituents
about whether they were eligible, given the fact that it is not
applicable in every State?
Mr. Koskinen. That is right. And we have frequently asked
questions. Again, we provide that on our Web site. We provide
that in our information and our outreach. We have tax forms
every year in which we try to make that clear, to make it easy
for people to figure out whether they are eligible or not and
to answer their questions. The questions are fairly
straightforward, and thus far, we have had no indication that
there is, you know, unnecessary confusion out there.
We do monitor, you know, what is going on during a filing
season and try to pick up on both in our call centers what the
questions are that we are getting asked to try to figure out,
if people have a recurring set of questions, can we provide
them that information not just individually but as a group. So
we adjust our Web site throughout the tax filing season. We put
out, for instance, on tax scams and concerns about fraud and
identity theft, we continue to put out updates.

FRAUD AND IMPROPER PAYMENTS

Mr. Quigley. Well, and let me talk about that for a second,
given our limited time. GAO report, the IRS is estimated to
have paid out $5.8 billion in fraudulent refunds last year.
That is about a 60-percent increase over 2011. And if you could
also comment on the improper payments EITC, you know, what are
you doing about both issues?
Mr. Koskinen. On identity theft refund fraud, as GAO
reported, we stopped about over $20 billion of false returns.
It is a battle right now with organized crime syndicates here
and around the world. We have spent as much money as we could
find to improve our IT filters and detections, but we are
talking about people who are filing hundreds of returns and
reverse engineering, trying to figure out what our filters are,
and they adjust and then we adjust. And so it is a real battle
at a very high level.
Mr. Quigley. You said ``infrastructure,'' is that
investments in IT, or do you have the ability you just have to
keep up with them?
Mr. Koskinen. We actually are moving more slowly than we
would like, and the budget makes clear the amount of money that
would help us deal with this, but even additional investments
are never going to get it to zero. We are dealing with
organized criminals.
On EITC improper payments, Chairman Rogers raised that
point, it is a problem I am very concerned about. Of all the
issues we deal with, we made great progress in identity theft
and refund fraud. We have made progress implementing the filing
seasons so that they go well and we made progress implementing
FATCA and ACA. We have not made progress on EITC. We have had a
high level of improper payments for 10 years even with all of
the things we have tried.
Over a year ago, I said I want everybody who knows anything
about EITC to come to my office, and we are going to talk about
why is it that we can't make a dent in the problem. And,
ultimately, what we came away with is that we need legislative
help. We need your help. We need to get W-2s earlier so we can
match them up at the front end as well.
We need what is called correctable-error authority. We know
when there are errors in these returns, especially compared
against our dependent database, but the only way we can make a
change under the present law is to do an audit. So we do almost
500,000 audits in the EITC area, but we have 27 million
participants.
We know there are hundreds of thousands of additional
returns where we know there is a mistake, but we can't change
it without an audit, and we simply can't audit our way out of
the problem. If we had correctable-error authority, we could
make the correction, send the corrected return back to the
taxpayer. They could then say, you know, I have really got
three kids as opposed to one child, but we would be able to
actually move it much farther along.
Mr. Quigley. And just to finish the thought--and I hear
what you are saying--is it just--to discourage this, this is
really a question of whether they think they are going to get
caught. Are the penalties severe enough, or they just don't
think they are going to get caught?
Mr. Koskinen. It is a complicated statute. So if somebody
wanted to streamline the statute, that would help. But what you
have is some tax preparers who mean well and simply are making
honest mistakes, and you have some tax preparers who are
crooks, who are advertising, come with me, and I will get you a
bigger refund, and they are consciously filing false returns in
effect. I am confident that we will catch some of them but not
all of them. We prosecute tax preparers when we catch them
doing that. But, again, over half the returns in EITC are
prepared by preparers; 28 million of those returns come in and
our ability independently to deal with them is limited.
So the third piece of the triangle is we would like to have
authority to provide a requirement of minimum competence by tax
preparers, basically that they should take continuing education
the way lawyers and CPAs do. At this point, anybody can set up
shop down the street in a community center and start preparing
tax returns whether they know anything about the Tax Code or
not. The ones that concern us are the ones in immigrant
communities and low-income communities who hang out a shingle
and say, Come with me, I will get you a bigger refund than
anybody else. And that, obviously, can't be legal.
Mr. Quigley. Thank you, sir.
Mr. Crenshaw. Thank you.
Mr. Rigell.

TECHNOLOGY AND PRODUCTIVITY

Mr. Rigell. Thank you, Mr. Chairman.
And, Commissioner, thank you for being here. I was struck
by this cover of The Economist, where it refers to this
``Planet of the Phones.'' And, by 2020, 80 percent of adults
will have a supercomputer in their pocket. I think we are all
in agreement that the rate of change in technology is just
stunning. It truly is exponential. I think it does stand in
contrast to the testimony that you provide, the written
testimony.
By the way, I sincerely appreciate your service to our
country. That said, I really am troubled by what I read in here
because it is just a litany of woes of funding. And what I
think the disconnect that I see is the recognition that
technology has allowed for such sharp increases in
productivity. When we reference that inflation adjusted, we are
going back to 1998 levels, yet we have a 23-percent increase in
the amount of activity or returns filed, well, at first this
sounds compelling. And you would have to pause at that moment.
But when you take into account the incredible increase in
technology, seems to me that a 23-percent increase in the
number of returns, for example, could easily be handled. And if
a leader doesn't believe that change can take effect and be
moved throughout an organization, it won't happen.
Mr. Koskinen. I agree.
Mr. Rigell. And I question--and I think based on what I
have read and what I am seeing here--your real belief that you
can accomplish the IRS' essential mission within the budgetary
constraints that we have as a country and the funding that you
have now.
Mr. Koskinen. If you read, as I am sure you already have,
the last part of the testimony, it sketches out--particularly
in IT--the changes that we need to make, as I have talked about
here. We need to--in fact, as our IT head, who is terrific,
says, ``We don't need to be an early enabler; we just have to
be a fast follower.'' In other words, we do not need to be at
the cutting edge. But we need to get, as I call it, into the
21st century and not still be back in the 20th century.
So a big chunk of the IT expenditures, which are a big
chunk of the budget, would be and are devoted toward, as I
said, building toward improving the taxpayer experience. In
fact, as I noted, if we hadn't made the improvements we already
have with sort of a clunky system of, you know, 150 million
people asking where their refund is, even if some of those are
obviously punching the app more than once, even if it is only 5
million or 10 million or 15 million people, they used to call
us. They used to call to say, ``Where is my refund? How soon
can I get it?'' I couldn't agree with you more. We need to get
more into that area. But you can't get there for free. You have
to actually make the investments to go there.
Now, this committee has been very supportive of the
business system modernization part of our budget, and it has
made great progress. What we are suggesting is that we could,
with an increase in information technology, get to a future
state, where as I said, I don't think we need to get back to
100,000 employees. But we can't end up with the old technology
system and----
Mr. Rigell. We will try to help you get there. And I try
not to approach every hearing like this in just a flatout
confrontational adversarial way. My father retired from NASA,
and I never saw someone work any harder than he did. So I don't
start out with some disparaging comments about a Federal
employee.

LEADERSHIP

Now, the agency has got real issues. And I would suggest to
you that, as I read your written testimony, and I certainly
read about the specific IT improvements that you want to make,
I just was left troubled--and I have shared this with you--that
how you see the organization and your ability to transform it.
A company that is in rough shape, like Ford Motor Company was
so many years ago, Alan Mulally, I mean, came in there and just
did what others didn't think could be done. I want you to be
that person, but you need to be constructively disruptive in
how you approach the leadership and really push the people in a
good sense to let them know that they can do more with less.
And this is needed, and this is expected by the American
taxpayer.
Thank you for your testimony today.
Mr. Koskinen. I appreciate that. If you look back in my
background, I spent 20 years in the private sector managing
some of the largest bankruptcies and turnarounds in the history
of the country. And I firmly believe that it all starts at the
top. You need to, in fact, affirmatively lead an organization.
I would just conclude by saying, as I have said and I mean
it, of all the organizations I have dealt with, this is the
best workforce. It is a dedicated group of people who take the
mission seriously, particularly the mission of helping
taxpayers. But you are right. We can't--and I feel strongly of
that--we can't keep doing business in the old way. So my
thoughts about the budget are not, gee, we need to build
backwards. My thought about the budget is that we need to build
forward, and I couldn't agree with you more.
Mr. Rigell. Thank you. And I thank the Chairman for letting
us roll over a minute there.
Mr. Crenshaw. Thank you.
Mr. Bishop is recognized.

INFORMATION TECHNOLOGY SECURITY

Mr. Bishop. Thank you very much.
Mr. Commissioner, the IRS, which is the world's largest
financial accounting institution gathers very sensitive and
personal data on millions of taxpayers every year. In the past,
the security of taxpayer information has been one of the top
three management challenges facing the IRS and this has likely
worsened with the current funding levels, as you have not been
able to fully modernize your IT infrastructure.
Considering the recent high-profile computer security
incidents, such as the Sony hack and the Anthem Health
Insurance hack last month, I am concerned about any
deficiencies that may make the IRS systems vulnerable to
unauthorized access or attack on a broad scale, particularly
now that the ACA implementation is underway and the State and
Federal exchanges are sharing increasingly more personal
taxpayer information with the IRS.
What are your priorities for improving the information
security measures that the IRS has in place to protect against
these kinds of cyber attacks?
Mr. Koskinen. It is the highest priority we have. We have
been fortunate--I will knock on wood--that we have not had a
breach. As I have said, there are over 100 million attacks a
year on our system. If you could get a hold of a database, ours
is the database that would be attractive and people know it is
there. So, even in a time of constrained funding, one of the
things I have and our IT people have said, we need to do
whatever it takes to protect that database. And, to some
extent, you always worry about are you buying belts and
suspenders and you try to be efficient and careful with the
money.
Well, one area where we are trying to make sure that we are
doing everything we can with an antiquated system is to protect
taxpayer data because it is a fundamental, basic responsibility
we have. And so it is the highest priority, and it is one of
the things that does figuratively keep me awake at night. I
manage to sleep, but it is a concern I have. And as you see the
increasing sophistication of the criminals engaged in all of
this, you know that it is an ongoing battle and race.
Mr. Bishop. Are you sufficiently satisfied that the
infrastructure is strong enough to withstand an attack?
Mr. Koskinen. I have put it in other testimony that we are
driving what I call a Model T. It has got a great GPS system
and a sound system and we have built wonderful applications,
but it is still a Model T. We are running applications that we
were running when John F. Kennedy was president.
So one of the limitations--while we have got security, one
of the limitations of our budget is that we can't replace old
applications--we have about 50 of those applications. We need
to replace them and get rid of them, the old legacy systems.
When I was the Year 2000 czar for the country, we were worried
about the declining number of Cobalt programmers. Those
programs I am talking about were designed in assembly language,
which preceded Cobalt programming. So we are running a system
that most people don't even know how to program.
Mr. Bishop. We have got dinosaurs, in other words?
Mr. Koskinen. Right. We have IT people that have done a
great job. We continue to make progress, and again, with
additional support, we are not going backwards. If we had the
additional support, particularly for IT, we hope to go forwards
effectively. But I would add that--I can assure you----
Mr. Bishop. So that makes us sleep a little less at night,
too----
Mr. Koskinen. Well, we are all----
Mr. Bishop. I mean literally----
Mr. Koskinen [continuing]. With our own personal systems--
Mr. Bishop. Let me change gears----
Mr. Koskinen. Sure.

ENGLISH AS A SECOND LANGUAGE

Mr. Bishop [continuing]. Just a moment. My time is about to
run out.
Most taxpayers and even many tax professionals would agree
that the Tax Code is complex and confusing enough in English.
While the Taxpayer Advocate Service provides services to
individuals who speak English as a second language, what
programs or mechanisms do you have in place to assist taxpayers
who speak English as a second language and how effective are
those programs? What measures do you have in place to protect
taxpayers with limited English proficiency from becoming
victims of identity theft, tax scams, and impersonation?
Mr. Koskinen. It is a challenge. Obviously, in this
country, it is more than English as a second language with one
language. There are, in some schools in the Washington area, 30
to 35 languages spoken. We translate as much of our Web site we
can, not only into Spanish but into other languages. We have
employees who are fluent. There are somewhat esoteric languages
where it is difficult and people need to have translators to be
able to work through it.
We are concerned that a lot of people speaking another
language are recent immigrants, are low-income people, and they
are the ones most subject to attack by either criminal tax
preparers or tax scammers because they are the ones that
somebody calls them on the phone and says it is the IRS. They
actually get very nervous and are the ones most susceptible to
being taken advantage of. So we do our best across the board to
publicize that, to warn taxpayers at all levels about phishing
expeditions: how you can be taken advantage of; what you ought
to be careful about when some tax preparer says, ``Sign a blank
form and I will file it for you'' or ``I will get you a bigger
refund that you know you are entitled to.''
And so we take that responsibility seriously to reach out
to taxpayers to try to make sure that they know what their
responsibilities are but also that they get as much help as
they can to know what how to file effectively and how to be
protected.
Mr. Bishop. Thank you, sir.
Mr. Crenshaw. Thank you.
Mr. Graves.

FRAUDULENT REFUNDS

Mr. Graves. Thank you, Mr. Chairman.
Commissioner, good to see you. I wanted to follow up on Mr.
Quigley's point about fraud and identity theft. You know, it
strikes me that the number he cited was $5.8 billion----
Mr. Koskinen. Correct.
Mr. Graves [continuing]. Which is more than half of your
entire agency's budget. And we use the term ``fraud,'' in
reference to identity theft. But, in effect, it is your agency
sending refunds to people in that amount. Is that not correct?
It is $5.8----
Mr. Koskinen. Right. It is the $5.8, in effect, illegal--
Mr. Graves [continuing]. Billion dollars of taxpayers'
money being sent to people whom do not deserve it and who are
criminals?
Mr. Koskinen. Exactly.
Mr. Graves. And it is permissive in some aspect through
this agency and enabled through this agency.
Mr. Koskinen. Well, it is--that is right. We process--we
will process this year 150 million tax returns. We have already
processed about 75 million, and 60 million of them got refunds.
And that's one of the reasons I have said we need to get W-2s
earlier. When I got to this agency, I assumed the IRS got the
W-2s at the same time we all get them as workers and taxpayers.
We get them in March. So we are actually able to match, but it
is pay and chase in that regard. We have very sophisticated
filters.
Mr. Graves. And that was my follow up. So what is the
percentage of these tax payments or refunds that you are
issuing that occur during that window in which one can earliest
file and when you receive the corresponding documents that
verify the income and the identity of the person?
Mr. Koskinen. Well, as I have said, we have already--we
haven't gotten the W-2s yet, and we have already sent out 60
million refunds. You know close to 80 percent of people get a
refund with their return.
Mr. Graves. And so, within just a few days of one filing
online, they could have this fraudulent payment or refund from
the IRS within a few days deposited onto a debit card that they
might have purchased at a convenience store without any match
of identity whatsoever, and there is no policy that prevents
that?
Mr. Koskinen. You have got it right. The policy that--the
only thing that prevents it, the way we stop $20 billion of
that is with a sophisticated set of filters that look at the
return coming in. And each year we get better at figuring out
which ones look like they are fraudulent. We hold them. We
write taxpayers. We ask for authentication. We have fixed part
of the problem.
In the old days when we sent out checks, you know, you
would get your refund in the summer and well after the filing
season. By being more efficient, by getting almost 90 percent
of people to file electronically, we tell people we will get
you a refund within 21 days. And so for the vast majority of
people, that is terrific. They get their refund in January or
February.
One suggestion we are looking at is, if we can't get the W-
2s earlier to do the matching, the question is, can we actually
go to a situation where we don't give people refunds? The
problem with holding 60 million, for instance, refunds until we
get the W-2s is we would be trying to process them, by the time
you get done with 100 million returns, in about a 2-week period
and even our system can't do that. So----
Mr. Graves. It strikes me rather odd--I imagine, also the
committee and the American people--that the Internal Revenue
Service would, without verification, send out a refund just
because they received a submission online through an online
portal without verification whatsoever of the person's identity
and deposit that money to an unverified account without being
able to track it to an individual. But that is what happens,
and it amounts to $5.8 billion just in 1 year.
Mr. Koskinen. Right. And $20 billion didn't go out because
the filters were able to determine that those refunds were
fraudulent and, in fact, shouldn't go out. That is one of the
reasons I have pushed--and we have gotten a lot of support but
not final legislation--the need to get those W-2s in January,
not in March. We need to be able to get that----
Mr. Graves. So that is not----
Mr. Koskinen [continuing]. 1099s earlier.
Mr. Graves. That is not something that is handled through
the agency, but that is actually law.
Mr. Koskinen. That is law.
Mr. Graves. And there is nothing that your agency can do.
So it is just a wide open field during that period of time.
If I could add just a couple more questions to this. So you
would accept a request for refund in this same time period from
an overseas IP address as well?
Mr. Koskinen. Right. We have filters, without getting into
details. Depending where the return comes from, we now can
identify devices they are coming from. We have limited the
number of refunds that can go to a card so everybody doesn't
get totally treated the same way. So if you are filing for a
refund from someplace else, we take that into consideration.
Mr. Graves. Is there a limit to the number of returns that
can be requested through a single IP address?
Mr. Koskinen. Not at this point. It is just a filter that
we use. There is a limit. You can only get three refunds to one
bank account.
We can't distinguish between debit cards and bank accounts.
We are working with the industry to try to figure out if we
could. If we knew it was a debit card, it would be another item
that we could add to our filters. And the industry is starting
to cooperate with us. And we hope that, at some point, we will
be able to use that as an indicator. Right now we have no idea.
The numbers are the same. It could be a bank account. It could
be a debit card.
Mr. Graves. Well, and I wouldn't at all put the blame on
the industry. I don't believe it is the industry. I believe
that it is an agency that, without verification, sends out
refunds very rapidly, very quickly, to folks who are criminals,
and have no verification whatsoever and deposit that money
knowing that it will never get it back. And, all the same,
knowing that $5.8 billion could go to defense. It could go to
so many other needs within our country right now. It could go
to lowering taxes on hard-working Americans, but instead
criminals all across the country, if not across the world, are
receiving these tax refunds.
And I will just make one other note. I heard you bring up a
minute ago tax preparers as one of the issues. I don't believe
that to be so. I know tax preparers from a professional
perspective are very respected in their community. They are
registered oftentimes with the IRS and other associations and
do a great job. It is the criminals who are the problem, not
the tax preparers who, from a professional perspective, work
very hard and have a small business and are just trying to
provide a portal for individuals to file their taxes lawfully
in a very complicated tax system.
Mr. Koskinen. If I could explain. I think that is exactly
right. There are 700,000 registered return preparers who have
PTINs and can file returns with us. Over 350,000 are
accountants, CPAs, and enrolled agents who clearly do a great
job. A big chunk of those 400,000 who don't have any
certifications or qualifications are educated and mean well and
do a good job. But there is a chunk of them at the edge, that
unfortunately is larger than anybody would like, who either
have no knowledge about the Tax Code at all and are simply
winging it or are consciously trying to cheat. And those are
the people we, for some time now, do not have the ability to
regulate. We spend a lot of time monitoring them. We have
thrown some in jail. We look for schemes. But, again, it is
kind of a pay and chase. And that is the only reason I think
that taxpayers would be better off if they knew that a return
preparer filing their return had some minimum level of tax
knowledge.
Mr. Graves. Thank you, Mr. Chairman.
Thank you, Mr. Koskinen.
Mr. Crenshaw. Thank you.
Mr. Koskinen. It takes more qualifications to cut your hair
than to prepare your taxes.
Mr. Crenshaw. Thank you.
Mr. Yoder.
Mr. Yoder. Thank you, Mr. Chairman.
Commissioner, welcome back to the committee. Thanks for
your testimony today. I appreciate your testimony and your
stated efforts to try to run the department more efficiently
and try to clean up some of the challenges culturally that have
occurred within the IRS in recent years. But I would think, you
would agree, the IRS is still a troubled agency. And things
that trouble me are continued abuse of the Constitutional
rights of Americans.
You know, it has been often said that the power to tax is
the power to destroy. And I believe that the continued efforts
to destroy the Constitutional rights of Americans is still a
problem that plagues your agency. In the past, we have dealt
with the reading of emails of Americans against their Fourth
Amendment rights. I believe that is a practice the IRS has
stopped. We have discussed this before.
But I still have concerns regarding groups who have
applications before the IRS being delayed because of their
ideological beliefs, therefore, in violation of their First
Amendment rights. We have headline after headline about the IRS
seizing accounts and assets of Americans with no crime
required, with no due process, with no right to have their
issues heard, their assets just seized.

501(C)(4) BACKLOG AND ASSET SEIZURES

And so my question would be for you: In terms of the groups
that have been delayed, there is an article the other day that
is entitled ``Death By Delay.'' And it says there are numerous
groups who are still waiting multiple years or long lengths of
time to have their application reviewed. How many groups are
still in the queue, have not had their applications reviewed,
or are having their applications denied?
And then, on the issue of seizing assets of Americans
without due process, how many assets of the American people are
you holding without giving them a chance to speak on their
behalf? And what can the IRS do to allow Americans to have
greater rights to stand up for themselves before their assets
are seized?
Mr. Koskinen. With regard to the delays, virtually all of
the organizations that had been delayed were cleared. We did an
expedited process. If anybody would simply say they weren't
going to spend more than 40 percent of their money on politics,
they would immediately be cleared. Actually, the (c)(4)s don't
need to be cleared. They can actually self-declare and go out
and operate.
So the handful--and, I mean, it is literally a handful,
less than 10 or 12 that are still there, a number of them have
chosen litigation, which is their right and they can do it. But
it has struck me a little ironic that people have said, ``Well,
we didn't want to sign the 40 percent. We have a right to
litigate.'' And my sense was, well, you can do that, but it is
a little hard to argue that there wasn't a path forward that
would get you through it.
But we take it seriously. Back to the issue of whether it
is in the budget request language or not, my sense is--and I
feel very strongly--people need to feel confident they are
going to get treated fairly whoever they are. We should not
care and we don't care who they are. And as they apply, one of
the things about the regulations is the rules ought to be very
clear and easy to understand and people ought to see them as
fair so that they are not being, in fact, inhibited in their
political activities. But they ought to also feel comfortable
that they know what they can do and nobody will question them
about it.
With regard to the seizures, we had a long hearing a couple
of months ago. First, the IRS never had ability to seize
anybody's assets on their own. Any time there was a seizure,
whether civil or criminal, it had to go to a U.S. Attorney. A
U.S. Attorney then had to make an application to a magistrate
or a judge. The judge had to issue an order.
Notwithstanding that, last year, after reviewing it and
being concerned about this, we changed the policy. And we have
done that in the sense that, if you have structured, which is
what it is about, if you have in fact structured your deposit
in the bank in a way that it causes you not to have to report
or the bank not to report transactions in cash above $10,000--
so if you keep putting in $8,000 and, in effect, are avoiding
the reporting, and that is called structuring--if there is no
indication that those funds have come from illegal sources, we
will no longer seize them. And we haven't seized them and are
not doing that this year at all. And my understanding is
Justice is considering that same policy.
Whenever the assets are seized--now they will be seized
only if there are indications it is from criminal processes--
taxpayers have an immediate right to go to court. They have an
immediate right to come to us within 30 days, but they have an
immediate right to go to court to contest the issue and, in
fact, put the burden of proof on us to demonstrate that, in
effect, it is appropriate. So taxpayers are not left on their
own, even in the old days. As I say, first, there were
restraints on what we could do. We had to get third parties to
approve, but in this particular situation now, there is a lot
of those that no longer happen. But wherever it happens,
taxpayers always have the right--and it has been clear to
them--to go to court.

EITC IMPROPER PAYMENTS

Mr. Yoder. Commissioner, my time is running short. I wanted
to cover one more topic, to follow up on the conversation
regarding the earned income tax credit.
And you stated in your testimony today that it is an area
where you have made no progress. You admitted that it is an
area that needs to be fixed. It is now $16 billion to $19
billion in either fraudulent payments or misapplied payments to
folks who don't deserve the resources. Your entire budget is
$11 billion. So as we have this debate about where to find
resources for the IRS or any other budget, we have $16 billion
to $19 billion sitting out there in fraudulent or misapplied
payments. That is 24 to 29 percent of the entire earned income
tax credit amount. So it is certainly something that is a huge
problem.
In last year's appropriations budget, we actually directed
the IRS to fix this. And we raised an issue that had been
raised by tax preparers in my district and across the country
directing the IRS to ensure that the same questions are being
asked of taxpayers whether or not they are preparing their
returns, if they paid a tax preparer, or via do-it-yourself
methods, such as paper forms, preparation software, or online
preparation tools.
My tax preparers tell me that if we treated individuals who
don't use tax preparers the same way and held them to the same
standards, that we would be able to eliminate a lot of this
waste and fraud. And that has been the directive of this
committee. So I do think there are tools at your disposal. We
would like to see you utilize those to recover this money.
Mr. Koskinen. We are going to pursue that. But in my
meeting a year ago when I started with this, it was clear that
our biggest problems were the discussions about matching. If we
had the W-2 earlier, we could actually match them to our
databases. If we could correct the returns rather than having
to audit them, we could make a big dent. We are never going to
get it to zero, partially because 30 percent of the population
changes every year, people move, get jobs, get pay raises, and
they are not eligible anymore. But we certainly need to get
improper payment down. My sense is, if we could correct the
errors we see, we think there are several million returns where
we could make an adjustment without having to do an audit. If
we got the W-2s earlier, we could match it.
We are not trying to put anybody out of business--but you
know, it doesn't seem to me it is too much to ask that you have
to have a minimum amount of knowledge about the complicated Tax
Code. If you want to change the Tax Code and simplify it, I
think that is a great idea. But, in the meantime, those three
things are the help that we need from you all. We are going to
continue monitoring preparers. We are going to continue
auditing people and checking them. But we are not going to be--
without the additional statutory support--we are not going to
be able to make the dent in the program that we need to make.
Everybody supports the program because it helps people
working and it encourages them to get jobs. But we have got to
get this problem under control, or ultimately it is going to
kill the program. And so we need your help to do that.
Mr. Crenshaw. Thank you.
I see that we have been joined by the distinguished Ranking
Member of the full committee, Mrs. Lowey. So I would like to
recognize her for any questions she might have.
Mrs. Lowey. Well, I thank the Chairman and I want to
apologize to our distinguished Commissioner, but there are
several hearings going on.
Mr. Koskinen. I could tell that by the cars parked outside.
Mrs. Lowey. So thank you and welcome.
First of all, thank you so much, as a distinguished
graduate of Duke, thank you so--not me. You.
Mr. Koskinen. That is right.
Mrs. Lowey. Thank you so much for taking on this
responsibility. We are very, very appreciative and honored.

CUSTOMER SERVICE

Taxpayers need clarity in the Tax Code and responsiveness
from the IRS. The fiscal year 2016 request would address the
funding shortfalls at the IRS, which are projected to result in
as many as 57 percent of phone calls going unanswered in 2015,
by raising the level of service on phones to 80 percent. The
IRS is at its lowest funding level since fiscal year 2008. And
if you take into account inflation, it is now at the fiscal
year 1998 level. And, since that time, the number of filers has
increased by 23 percent. I should repeat those statistics
again. I know the Chair and all of my colleagues would quickly
give you all the money that you would like to have so you can
do your job effectively.
Nina Olson, the National Taxpayer Advocate, and the
Treasury Inspector General for Tax Administration, J. Russell
George, both testified before this subcommittee a few weeks ago
and mentioned their concern about the impacts of the cuts to
the IRS' ability to function properly. The American people
deserve better. We can only be hopeful that this Congress will
start to be reasonable and realize that it is harming taxpayers
with these ill-considered cuts.
So I have three quick questions: If you could, explain how
this budget request will increase services to taxpayers. Number
two, 75 percent of this budget request is vested in staffing.
How does this level of staff funding impact taxpayer services?
Specifically, how will this impact call wait times for
taxpayers? And, thirdly, how much revenue are we losing
annually due to enforcement cuts? And ultimately, what would
this budget request do to facilitate voluntary tax compliance?
Mr. Koskinen. As I have said, I agree with the Chairman and
the Members of the committee, we need to be efficient with the
funds we get. If we obtain these funds, you are exactly right.
I know we have made it clear, last year and this year as well:
If we had the funds, in the short run, we would be able to, in
fact, get a level of service on the phones up to 80 percent.
People wouldn't be waiting for half an hour to get an answer
from us. The hold times would drop. We used to, in the old
days, back at about the 2008 time and before, you used to wait
for about 2 minutes to get somebody on the phone. Now the waits
are 25 to 30 minutes. And it applies to practitioners as well.
As I have said, the practitioner priority line is an
oxymoron these days. It takes you as long to get through there
as it does on the normal phone line. So it is clear that on
both the revenue-producing side as well as the taxpayer-service
side, the cuts at some point begin to become negative and very
visible and that is really where we are.
The estimate is that with the 5,000 revenue agents,
officers, and criminal investigators we will have lost by the
end of this year over the past five years, that that is costing
us $7 billion to $8 billion a year in audits. But as I said
earlier, the concern I have is the combined impact of lowered
enforcement and lower taxpayer services. The impact that I am
concerned about isn't just about whether we collect more or
less. And the Chairman and I will have a discussion about that
in terms of what the pipeline looks like. It really is, what is
the impact if, as a result of that, you have a decline of 1
percent in compliance and you are suddenly talking about losing
$30 billion?
I understand the constraints. I spent 4 years working in
the Senate and 3 years at OMB. So the deficit overall is a real
issue. Trying to figure out--as I have told our staff--we have
to figure out how to get people to want to give us the money
and then work with them to figure out how to get that money.
But ultimately my concern is that we are not talking about a
short-term issue here. At some point, we are going to put at
risk the entire compliance system, and that is not an on/off
switch. When people get an idea that, you know, the system
isn't working very well and they can take their chances, you
can't turn that around overnight.
Mrs. Lowey. Thank you very much.
And thank you, Mr. Chairman. And I do hope that in a
bipartisan way we can respond to your real concern. The cuts
are really hurting taxpayers. We are all concerned about the
deficit, but we have to figure out, if we want to collect the
revenue and collect the taxes, how do we provide better
services? Thank you very much.
And thank you.
Mr. Crenshaw. Thank you.
Ms. Herrera Beutler.
Ms. Herrera Beutler. Thank you, Mr. Chairman. You know in
listening to this--and I apologize, too. I have been in a
couple different committee hearings today. 'Tis the season.
Everybody is asking for their budgets.
You know, I know that the budget says that you all are
advocating for a would-be an increase for your operating
expenses. And as the department overseeing the IRS or as the
person overseeing it, I completely understand why. I know that
you have received pretty steep funding cuts from this
Congress--or in the previous Congress. And it is probably
getting pretty tough to swallow. I completely understand that.

IMPROPER PAYMENTS AND EFFICIENCIES

It is hard for me to reconcile this to my constituents
when, you know, a couple weeks ago, we had the Inspector
General, General George, testify in front of the committee and
hearing what he highlighted--and even some of it has been
referenced today. You know, we talk about the $5.8 billion. He
has cited mismanagement of service software licensing costing
$100 million. He highlighted, you know, more erroneous tax
returns. Office space, he said that, you know, the IRS could
reduce office space by nearly 100 million square feet, saving
us about $111 million over 5 years without sacrificing
performance.
So it is difficult to reconcile, you know, that $5.8
billion would more than take care of--I believe it is about 10
times what you are requesting in terms of an increase. So it is
hard--how do we answer to taxpayers a very rational question:
If you wouldn't--just wouldn't send out the money that you had
in erroneous errors or if you would make some of these kind of
streamlined--the office space, so on and so forth--if you would
streamline some of the recommendations that another agency is
already taken care of, then you would have that part--then you
would have that money back. I mean, we could--we could even
agree to probably let you keep the money if you went back and
collected it or kept it. Do you know what I mean?
Mr. Koskinen. I was going to say, unfortunately, as we get
better at collecting money or tracking down fraudsters, we
don't get to keep it. And that is probably right. We shouldn't
be----
Ms. Herrera Beutler. I bet you we could make you a deal.
What do you think, Mr. Chairman?
Mr. Koskinen. That is right. Well, we do collect a lot of
money that way.
The point I would make is I spent actually 3 years chairing
the Interagency Council of Inspectors General. I am a great
supporter and believer in the internal audit function and the
IG function.
The IG has a series of reports and does a great job in
pointing out where we could be more efficient. GAO does the
same thing. The Taxpayer Advocate. We have a lot of people
giving us suggestions. We take them all seriously as we go
forward.
All three--the Inspector General, GAO, and the Taxpayer
Advocate--have said, notwithstanding all of that, the budget of
the IRS is substantially underfunded and puts taxpayers and the
system at risk. So they have all said there are things we could
do, and we are continuing to try to do them. Office space is
one. We have cut 1.8 million square feet. We have more people
telecommuting. Telecommuting turns out to work very well and
efficiently, and we need to do more of it.
We have a standing rule right now, if a lease comes up, it
doesn't get renewed automatically. We take a look at, and ask,
is there a way not to renew it. We just, in midtown Manhattan,
saved $4.5 million a year by not exercising a lease and moving
people into other space.
So I think you are exactly right. And I agree with the
Chairman. We need to be as efficient as we can. And when
somebody comes up with a suggestion, rather than being
defensive, my view is, if it is a good idea, we just ought to
take it. And the fact that we didn't do it last year or 2 years
ago shouldn't mean we shouldn't do it going forward.
So I read the IG reports regularly. I read our responses to
make sure that we are not ducking out on those. Some of the
issues have been about hiring employees, who the IG noted, had
prior performance records. I told our people, that is exactly
right. We shouldn't do that, and we are actually going to
change that.
But, ultimately, as I said, we save about $200 million a
year now that we didn't used to save because of space and
contractors and others. And if we could move that to $300
million, I would be delighted. But the gap is bigger than all
of those efficiencies. But my point is----
Ms. Herrera Beutler. Well, wait. It is not, though, I mean,
if you look at the dollar number.
Mr. Koskinen. Well, I can't take the $5.8 billion and if I
get it down to $2 billion, take some portion of that----
Ms. Herrera Beutler. Hey, I would advocate for you on this
side.
Mr. Koskinen. I need to talk with you more about this.
Ms. Herrera Beutler. You get to keep what you save. I meant
it. I am working with the Forest Service on a similar idea.

S CORPORATIONS

Let me switch gears. We hear a lot about tax reform and
loopholes, particularly from the administration. That has been
kind of a hallmark of talking about making the big guys pay
their fair share and not taking it out on the small guys. The
IRS IG reported in 2013 as much as $2.3 billion was erroneously
given to corporations in carry-forward credits. However, the
IRS does not plan to follow recommendations to address that. At
the same time, the IRS is, to quote Inspector George,
``Dedicating significant resources towards addressing what it
believes is the most significant risk to compliance, the use of
flow-through entities, such as partnerships,'' unquote. Flow-
through entities or S Corps--and more often not, they are small
family-owned businesses. Meanwhile some of the biggest users of
the carry-forward credit are large, publically owned,
publically traded corporations. So what it looks like--correct
me if I am wrong--is that the IRS, by extension the Treasury
Department, is ignoring $2.3 billion per year in improper
awards to some of the biggest corporations on the planet on top
of the billions they legally save through existing loopholes so
that the government can, on the other hand, dedicate
significant resources to auditing those small, family-owned
businesses. Help me understand that.
Mr. Koskinen. Well, first of all, we try not to reveal too
much regarding audit selection. But the bigger you are, the
more likely you are going to be audited. Major corporations are
under constant regular audit. And so we have an audit plan, and
we look at what the impact is. If we only wanted to collect
money, we would simply audit the biggest corporations and the
most wealthy individuals. But that would mean--because the
preparers are pretty smart, everybody would understand, if you
are below this threshold, you can do whatever you want because
they are not auditing you. So that is why we audit low-income
people and middle income people as well.
So, first of all, we don't ignore corporations. Our pass-
through issue is a subject to have a long hearing about. Again,
we need authority.--The TEFRA rules that were great 30 years
ago don't apply now because the problem we have is not small
partnerships. It is the partnerships with over $10 million in
assets and 100 partners. We have 5,000 that have over 1,000
partners. Some of the partners are partnerships. And what it
takes to get through all that to conduct an audit means that
most of them don't get audited. It is a big problem. And,
again, there is a legislative fix that is a Treasury Department
proposal that we hope will get enacted that would allow us to
balance that out.
Because I agree with you, we need to be fair across the
board. No one should feel that they are out from under and that
they are never going to hear from us. On the other hand, as I
said earlier, if you hear from us, you should hear from us
because of something in your return. You shouldn't hear from
us--you shouldn't have to worry that you went to some meeting,
you wrote an op-ed, you belong to a particular party, that is
why you are hearing from us.
Even with our constrained resources, we will do over a
million individual audits this year. And my concern is
everybody should understand those are selected automatically
because of something in the return. I don't want anybody
feeling that somehow they were picked on because of who they
are or what they do outside of filing their tax returns.
So your concerns are appropriate, as I say. On the
partnership passthroughs, it is a fascinating problem. More and
more organizations are forming as passthroughs rather than as C
corporations. So the volume of business being done at all
levels in partnerships, Master Limited Partnerships, et cetera,
is growing. And it is, at this point, growing beyond our
ability to effectively keep track of it.
Ms. Herrera Beutler. I yield back.
Mr. Crenshaw. Thank you. I think we have a little time for
some additional questions.
I don't know, Mr. Serrano, do you have additional
questions? Please.
Mr. Serrano. Thank you. Let me first comment on something
you said before because you were pretty fast with the--quick
with the microphone.
The reason that the IRS collected more taxes is because
more people were filing on their own because the economy is
doing better and because we have more taxpayers every day. If
the majority party, as I think it will, does something about
immigration reform before 2016 election, there will still be
even more people paying taxes. And the question is, will they
have the resources to be ready to deal with it? And so it is
not that we cut their budget and they collected more money and,
therefore, we need to keep cutting their budget. It is that
more people are filing and many more will file, if we ever do
immigration reform, which I have got a little hint that
something will happen before the Presidential election on
immigration reform. Just a little hint.

TAX EXEMPT AND GOVERNMENT ENTITIES DIVISION

And since this subject was brought up, I wasn't going to
comment on it. I do have to address it. The 501(c)(4) issue is
2 years old. Despite the numerous personnel changes made at the
IRS, new leadership being brought in, and intense scrutiny from
numerous investigations that themselves have caused the
taxpayers millions of dollars, the majority party acts as if
every day is Groundhog Day anytime the IRS is brought up.
Furthermore, they exaggerate the number of employees involved.
They blame everyone at the IRS for the mistakes of a very small
number of individuals. The employees who are there now are the
ones we are tasking with turning things around. You would think
we would want to help them so they can be successful rather
than mindlessly attacking them.
And let me remind this committee that if you look at the
comments I have made, which we keep records of, I was as
outraged as anyone else that something like this could have
happened, did happen, or was happening, you know. I mean, I was
not making excuses.
J. Russell George, the IG for tax administration, who
looked into the 501(c)(4) issue, indicated that you have been
very open with him and that you have an open line of
communications with him. We are very pleased to hear this.
Please tell us about the changes in the Exempt Organizations
Unit and update us on the cost incurred to taxpayers due to all
of the investigations.
Mr. Koskinen. Well, as you note, if you go back to who was
around at that time and you start at the top, the entire chain
of command is gone. So we have new people, the Commissioner at
the Tax Exempt and Government Entities Division who is running
that Division, the Deputy Commissioner for Services and
Enforcement and the Commissioner. And you make a good point,
the entire Exempt Organization Division of the IRS is about 900
people. Even with the cuts, we have 87,000 people total at IRS.
So again generalizing from a management problem that
shouldn't have happened and it was a mistake and it has created
concerns that I share, but saying that that exemplifies what
the other 86,000 employees are doing obviously doesn't help.
But we are dedicated to making sure that the situation doesn't
occur again. We do work very closely with the Inspector
General. As I said, I view internal audits and oversight and
ideas from third parties as important. We are trying to build a
culture in the IRS where every employee views themselves as a
risk manager and knows my view that bad news is good news. The
only problems we can't fix are the ones we don't know about.
And as I said at my confirmation hearing, it would be nice to
say we will never have a problem, but obviously, it is a
complicated code. We deal with almost every American, and we
have 87,000 employees.
So my commitment is, if there is a problem, we will find it
quickly, we will fix it quickly, and we will be transparent
about it. And part of the problem in the whole (c)(4) issue has
been, you know, some lack of transparency. And I don't think
the system can survive with that. So my view on all of these
questions, whether it is seizures or hiring employees with
problems, is we need to deal with it, if the facts are there.
We shouldn't be arguing about the facts. We should be deciding
what are we going to do to fix that problem. And I want people
to be comfortable that when a problems arises, we are going to
take it seriously, we are going to fix it, and we will be
transparent about it.
Mr. Serrano. Thank you.
Thank you, Mr. Chairman.
Mr. Crenshaw. Thank you.
Mr. Graves.

QUARTERLY WAGE RETURN

Mr. Graves. Thank you, Mr. Chairman.
I just had a quick follow up, if I could, on the topic we
were discussing a minute ago about the tax refunds being sent
to criminals.
Just from a reconciliation perspective--It has been awhile
since I have been in the private sector and thought through all
the reports that were filed. But, if I recall, there is a
quarterly wage report that is required to be filed--maybe it is
the 941--and it is required each quarter, 30 days after the end
of a quarter, which indicates the person's Social Security
number, his or her name, and wages. Taxes associated with that
individual would have been deposited within a banking
institution and then forwarded on to the Internal Revenue
Service. Is that not correct?
Mr. Koskinen. We get the quarterly returns. I am not sure
whether we get all that subset detail. In fact, one of our
problems is to try to make sure we get the quarterly returns.
[The information follows:]

The Form 941 is a quarterly return that transmits summary data of
wages paid to employees and does not include a listing of the
individual employee's information (name, Social Security Number, wages,
taxes withheld, etc.). Therefore, Form 941 cannot be used as a
substitute for the Form W-2.

Mr. Graves. It seems like the information from quarterly
returns is data. Those are data points which could reconcile,
at least in the interim until you get the final W-2, which is
required to be filed by the end of March 31st as you
indicated--that might provide a little bit of data there to
work with. And if I am not mistaken, the fourth quarter 941 was
required to be filed by the end of January, which should
conclude all four quarters of the previous year. It should be
on file with the Internal Revenue Service, I would suspect.

TAX SIMPLIFICATION

And then just one other comment. If we could just provide a
little clarity, you have spoken a few times today saying that
your preference would be that there is minimal training for
individual preparers, or professional preparers who file
returns on behalf of individuals. And that might be your
opinion.
And my opinion of that perspective is that when you make
that determination, then, maybe the Tax Code is just a little
too complicated. And that if it is required of a professional
to have minimal training, how can we expect the average, hard-
working American to fill out these tax returns as well? But I
can tell you this, without minimal training, the criminals have
got it figured out, and they are the ones who are filing these
fraudulent returns and the ones that are receiving these
payments from taxpayers--from the IRS.
Mr. Koskinen. I always preface my comments by saying tax
policy is the domain of the Treasury Department, the White
House, and the Congress. We are in the tax administration
business.
Having said that, I am a great believer in tax
simplification. I agree with you, when all of us are using
preparers to file our returns because we are not confident we
can do it ourselves correctly, the Code is too complex. I
thought Congressman Camp was right that the Tax Code is bigger
than the Bible with none of the good news. I have told him for
a year, I am going to give him credit, and then I am stealing
that quote.
But I think it is totally right, and I have nothing against
tax preparers. They provide a great service. But some taxpayers
ought to be able to have an idea that the Code is simple enough
that you can not spend--the amount of time--it has been
estimated we spend 6 billion hours of time filling out our tax
returns. If you think of the intellectual capital, you have to
be smart to be a tax accountant, tax preparer, or tax lawyer.
If you think of all the intellectual capital spent just trying
to figure out what the right amount to pay is, and if we put
that intellectual capital to some other use, it would be a
great thing for the country. So whatever we can do to help tax
simplification, we are delighted to do that.
Mr. Graves. Thank you.
Mr. Chairman, how about that? Ending on common ground.
What do you think, Mr. Serrano?
Mr. Serrano. Are you done?
Mr. Graves. Yes, sir. Absolutely. Yes, sir.

TAX PREPARERS

Mr. Serrano. I understand your point about the criminals,
and we all agree on that. But some of the criminals are tax
preparers. And if you go into certain neighborhoods, you will
see blasted on the window, ``Come in here, and we will get you
the best break.'' You know, that is not what they are supposed
to advertise. They are supposed to advertise, ``We will file
your return.'' And so not everybody goes in saying to a tax
preparer in a storefront operation, ``I want to cheat on my
taxes.'' But, in many cases, you have someone who says, ``Come
in and we will get you the better deal'' and the better deal is
the one that he thinks should send some people to--at least to
be scrutinized by the authorities.
Mr. Graves. And I understand the gentleman's point.
Reclaiming my time.
My point is that those individuals clearly have above
minimal training in order to figure out how to evade the tax
system. My point is, for all the law-abiding tax preparers,
professionals out there that work hard everyday and have a
small business and are trying to help folks, I think they are
doing it the right way, and their minimal training shouldn't be
a requirement of the Federal Government. And if it is required,
maybe the Tax Code is just a little too complicated.
Mr. Serrano. And they are the largest group, the fair-
minded.
Mr. Graves. Right.
Mr. Serrano. The clean guys and ladies are the largest
group. But there is still that small group that creates a
problem for everyone.
Mr. Graves. Thank you.
Thank you, Mr. Chairman.
Mr. Crenshaw. Ms. Herrera Beutler, do you have any more
questions?

MATCHING INFORMATION

Let me just--a couple of quick questions before we go. And
we talked a lot about fraud, the $5.8 billion. And you
mentioned that the administration wants to move up the W-2s.
And then you said maybe if we waited later on, after we have
all of the information, then process those returns, you would
have more information and maybe there would be less fraud. But,
on one hand, I have always--I have thought about that. The
taxpayers might not like that. They love getting their refunds
early.
Mr. Koskinen. We would have 60 million who already got
their refunds calling us and saying, whose idea was that?
Mr. Crenshaw. But is that something you would really think
about, now?
Mr. Koskinen. Yeah.
Mr. Crenshaw. You mentioned maybe one of the problems is
that all of a sudden you will have to process all of those at
the end. But I imagine you staff up when you are, you know,
processing now. If you staffed up a little bit later. But,
obviously, there is a concern of the taxpayers, I file my tax
returns, I want to get my refund.
Mr. Koskinen. Right.
Mr. Crenshaw. But what is the biggest objection to that, to
say--rather than you call it chasing a file, but say you file
your tax return and then maybe sometime 3 months after that,
when all this information has come in and you can even do a
better job of weeding out the fraud, what prevents you from
suggesting that?
Mr. Koskinen. We have actually--because I have said we need
to start from scratch. So we have looked at that in terms of
what the impact is.
Part of the problem is, it is not just a question of more
IRS employees because the filings really are electronic. If we
get 100 million--you know, it is about 100 million to 110
million out of 150 million are going to get refunds. If we put
them all into that last couple of weeks, the system simply
won't be able to----
Mr. Crenshaw. Well, do they have to be in the last couple
of weeks?
Mr. Koskinen. Well, because if we don't get the information
until the end of March and filing season deadline is April 15,
we don't have a large window of time. But we are----
Mr. Crenshaw. I mean--and this is, I would say, after you
file returns in April, right, and right now if you file a
return early, you can get a refund pretty quick. But what if it
were, you file your return by April 15, but you are not going
to get a refund until, let's say, 3 months later because you
got more time to do all of the due diligence.
Mr. Koskinen. We actually have looked at that and are
considering, is there a way to, in fact, delay refunds, and
what is the impact on taxpayers? Part of what happens is, of
the 80 percent getting refunds, a group of them who are middle-
and upper-income people, do it primarily because it is a pain
in the neck to write a check in April and you would rather just
get a refund.
A larger group of people getting that refund, it is the
biggest check they get all year. And they are acclimated now,
at least used to, in January and February to have it. They are
paying for rent or other expenses. Now, even having said that,
if you got everybody acclimated, then, instead of being
February, it is April or it is May, you have a tough year and
then you would have everybody--every 12-month cycle would go
that way. And we have actually looked at--it is somewhat
draconian for people who expect that. We have to pay interest
if we haven't given you your refund within 45 days of April
15th if you file a timely return. But even that, at today's
interest rate, isn't very much.
So we have continued to look at, are there ways to modulate
or adjust. Recently, this week, there was a survey in the Wall
Street Journal that they reported on and it said, well, you
know, the majority of taxpayers say they would be happy to wait
a while for their refund if that meant that they were less
likely to be subject to identity theft.
So it is part of this package of, okay, how do we deal with
this, again, recognizing that we are fighting a battle with
very sophisticated criminals with very high-tech equipment? And
so, you know, delaying refunds is something that we are going
to have to look at.
Even if we get the W-2s by the end of January, it means, by
definition, you are not going to get them, your refunds--you
know, filing season usually starts January 20th. So there is
going to be a delay built in, even if we had the information
returns earlier. The advantage of getting the W-2s earlier is
we could spread that delay out over a period of time, which
would be much more manageable.
Mr. Crenshaw. And it might even help with the earned income
tax credit. If you had delayed refunds, whatever, it might give
you a little more time to----
Mr. Koskinen. Yes.
Mr. Crenshaw [continuing]. Deal with that because that is,
like, $6 billion and $19 billion and somehow if you could----
Mr. Koskinen. Like half.
Mr. Crenshaw. You know, part of that, it might be worth
taxpayers saying, well, we will wait a little bit.
Mr. Koskinen. Yeah.
Mr. Crenshaw. Maybe their taxes will go down if we--if we
collected all those.

FILING WITH INCORRECT INFORMATION

The last question real quick, and this is just--this is--
and I am just curious about this. When I read about the 50,000
folks that filed tax returns based on the incorrect information
they got, I think there were 750,000 people that got that
incorrect information. The 50,000 that filed, you all decided,
well, if they owed additional taxes or whatever, you are just
going to kind of let that go.
I just wonder, is that going to be a problem? What about
the next batch? I mean, all the people that got incorrect
information, the next 700,000 that file, is there any kind of
due process issue with them? Or how do you decide we are just
going to--they got wrong information, they filed a return,
maybe they got a refund, maybe they are going to owe back
taxes? On the other hand, maybe they will--you know, it might
be a wash. But how do you make that decision?
Mr. Koskinen. Well, it is a policy decision that actually
is made by the Treasury Department in terms of where it goes.
Obviously, we have had other programs where you have a
transition year. In fact, we have even talked with the States,
you know, if you get your program not quite right, you can have
a transition time. So the idea for the 50,000 has been made
clear, this is a one-time this-year-only issue.
But the point you raise is a good one. If there are other
corrections in 1095-As, you know, what do you do with that? You
can make a policy decision, but one problem is the
administration of it in terms of, you know, you can complicate
our processing issue enough that you actually put it at some
risk. But those issues are, fortunately, affecting a relatively
small amount, about 50,000, out of the 75 million who have
filed. The other 750,000--there were about 800 to start with--
have been advised and they are apparently waiting. They are
going to get their corrected form--just like you get a
corrected W-2, and they will file their return with the
correction. But it is clearly possible there are going to be
other errors.
We have encouraged taxpayers to look at their 1095-A and
make sure that it corresponds with their experience. And some
of them will, obviously, at some point, find an issue. I think
the Treasury concern was this was a, you know, not a mistake
the taxpayers made. It was a mistake by the government. And so,
you know, if you have already filed and the differential
amounts generally are relatively small, we shouldn't give
taxpayers that burden.
But I think the point is a good one that if there are going
to be other, you know, 2,000 people here and 1,000 people
there, in some sense, our view is that we need to administer
the Tax Code in an orderly way. And I think Treasury is
sensitive to that.
Mr. Crenshaw. Well, thank you. And let me--any other
questions?
Mr. Serrano. Just one further comment on the subject I
mentioned before, just to show you the need to look at this
agency as a department that needs resources in the next few
years. If we get immigration reform--and this is something my
colleague and I have discussed at times--it is pretty much
bipartisan belief that you will pay a fine--who they will pay
that fine to, the IRS or the Treasury, but that has to be
processed. But then a process will be worked out to pay back
taxes. It certainly is to them, and that will be huge numbers
of people. Then you have people who have been working with a
TID number, which is totally proper. And you have people who
have been working with somebody else's Social Security number.
You know, all of that will have to be sorted out. So when we
look at this agency, we don't look at an agency that will have
less work to do in the next generation but rather much more
work to do.
Mr. Crenshaw. Unless we simplify the Tax Code and then----
Mr. Koskinen. That would help. That would help.
I would note, just a response to that, as I have talked to
our employees about it, one of the ironies but good signs is,
when there is a program and there is an attempt to do
something, a lot of times people give it to the IRS because the
assumption is the IRS will do it. And it has a history--it has
got a great workforce. It has really got, as I said, a
dedication to the mission that is reassuring and amazing to
watch. But it hasn't escaped me over time, including the ABLE
Act and the Professional Employer Organization requirement,
that people are comfortable and confident--if you give us a
responsibility, we will do whatever it takes to try to get it
done, even in constrained resources.
And I think that is important for the public to remember
that, with all the appropriate discussions about are we doing
it right, are we being efficient, there is a confidence that if
you give us a responsibility, we will take it seriously. And we
won't make a judgment; such as do we like this or don't like
it? If you say to do it, we will do it. And I think it is
important for taxpayers to sense that degree of confidence in
the agency because ultimately it goes back to my real concern,
as I say, people have to be comfortable and confident in the
system if the compliance rate is going to continue and the
process will be continued to be viewed as fair.
Mr. Crenshaw. Well, thank you. And let's just end on a
positive note. Let me thank the Commissioner. He has been
working with a group called the Free File Alliance.
Mr. Koskinen. Right.
Mr. Crenshaw. And they just entered into an agreement, a 5-
year agreement, that about 70 percent of all the taxpayers are
going to have access to filing their taxes free. That is
something he has been working on.
And I want to congratulate you for that. Thank you for
that. And thank you for being here today.
And we will all adjourn the meeting right now.
Mr. Koskinen. Thank you.

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Wednesday, March 4, 2015.

DEPARTMENT OF THE TREASURY

WITNESS

HON. JACOB J. LEW, SECRETARY, DEPARTMENT OF THE TREASURY
Mr. Crenshaw. The hearing will come to order. We are going
to vote pretty soon, but let's start the hearing.
Good afternoon to everyone. The subcommittee today welcomes
the Secretary of the Department of Treasury, Jack Lew, here to
discuss the President's fiscal year 2016 budget request, as
well as the Department's budget request.
The request was submitted on the first Monday in February,
in accordance with the Congressional Budget Act, for the first
time since 2010. While timeliness is appreciated, a budget that
spends more, taxes more, and borrows more is not.
At its peak in fiscal year 2009, the deficit was a record-
setting $1.4 trillion, or nearly 10 percent of the GDP. The
deficit declined in fiscal year 2014 to $485 billion, which is
a reduction of $928 billion. But only the most superficial
analysis would lead anyone to believe that this is a credible
policy accomplishment by the Administration because, as we
know, the deficit is the difference between spending--or
outlays, as we like to call it--and revenue. When you look
closely at what accounts for recent deficit reduction, you will
find that increased revenue accounts for about 99 percent of
that $928 billion deficit reduction, whereas decreased outlays
are only about 1 percent of that.
And if you look more closely at the decreased outlays, all
of it is attributable to the discretionary side of the
government's ledger. And so in fiscal year 2009 through 2014
discretionary spending decreased, actually went down by $58.8
billion, but mandatory spending increased by $47.3 billion. So
that means that all of the spending restraint for the past 5
years is the result of the hard work of the Appropriations
Committee under the leadership of our able full committee
chairman, Hal Rogers.
Nonetheless, even as the deficit has declined, total public
debt outstanding has grown to a record high of more than $18
trillion. The demographic changes underway in this country mean
that benefits like Social Security, Medicare, Medicaid enjoyed
today, are going to be bills that are paid tomorrow by our
children and our grandchildren. And, regrettably, the
President's budget does not address the unavoidable question of
how to distribute the economic cost of an aging population
across generations.
So because of this, Mr. Secretary, I urge you to work with
the Budget Committees and the authorizing committees to help
lift the yoke off the back of the younger generations of hard-
working Americans.
Now, the Treasury Department's budget request for this year
is strikingly similar to last year, with the exception of the
IRS. Instead of the $1 billion increase, the Department is now
requesting a $2 billion increase for the IRS. And you might
remember I described last year's request as troublesome, but
now that it is a $2 billion request, I would say it is even
more troubling.
We are going to have a separate hearing on the IRS, and
Commissioner Koskinen will come before the committee, and I
think we have made it clear that the IRS has betrayed the trust
of the American people. I think they would agree with that. We
talked about their need to restore that trust, to earn back
that trust. We want to see that happen.
But in spite of that, the request from the IRS this time
seeks to pay certain IRS employees salaries and bonuses that
are bigger than what is allowable under the civil service
system. The request also eliminates some of the requirements
that we put in our bill, such as prohibiting the IRS from
targeting. That is gone. Reviewing the appropriateness of IRS
videos. That is gone. Compliance with the Federal Records Act.
That is gone. Guarding against excessive conferences spending.
That is gone. Upholding the confidentiality of tax returns.
That is not there anymore.
To me, these are commonsense, good government reforms that
help heal some of the IRS' self-inflicted wounds. More reforms,
however, may be necessary if the incorrect information sent to
about 800,000 low-to-moderate-income households foreshadows yet
even more difficulties with the administration of the
Affordable Care Act.
I am also troubled by the Department's desire to cut
funding for the Office of Terrorism and Financial Intelligence.
It seems particularly ill-conceived when we are trying to deal
with ISIL. We want to cut off funding for that terrorist group.
We think that that ought to be a priority. Monitoring the
Iranian economy and financial transactions will be necessary
with or without the final nuclear deal and we might need
additional economic pressure on Russia if the Ukraine ceasefire
doesn't hold up.
The Administration's decision to normalize relations with
Cuba, that is causing some concern, especially with regard to
the increased people-to-people travel and the trafficking of
confiscated properties. That is something we are going to
follow closely and carefully.
But still I want to hear, Secretary Lew, what you think are
the most important aspects of the President's budget and the
Department's budget because I am hopeful we can find some
common ground to work together.
In addition, I am interested in hearing a little bit about
the Financial Stability Oversight Council, the so-called FSOC.
They have adopted some guidance that attempts to improve the
transparency with regard to entities under consideration for
the so-called SIFI designation, Systemically Important
Financial Institutions.
Now, I think that the transparency step is one in the right
direction, but the FSOC's actions, as I understand it, don't
really address some of the concerns about how it will mitigate
systemic risk. I question why the FSOC would not create a
process to allow companies, or primary regulators--why wouldn't
you let them address the identified risks before designation?
It seems to me that would save a lot of time and a lot of
resources for the Council, as well as allow everybody to enjoy,
and maybe ensure, more economic stability.
And so before you move into your testimony, let me just say
one thing about what is going on today in the Supreme Court. As
we all know, they were having oral arguments about King v.
Burwell, and that case has the potential to outlaw subsidies
that are inherent in the Affordable Care Act for millions of
Americans who enrolled in the health coverage through the
Federal exchanges. And if you recall, the Treasury Department
was unprepared under an earlier decision, it was called Loving
v. IRS, that determined that the IRS didn't have any authority
to regulate paid tax preparers.
King v. Burwell is a lot more consequential and a lot more
complicated than Loving v. IRS. And so I hope that the Treasury
has a contingency plan in the event of a ruling in King v.
Burwell that outlaws subsidies. So I would love to hear if you
have any thoughts about how you are going to prevent these
millions of Americans from entering a prolonged period of
uncertainty surrounding their health care and tax liability if
King v. Burwell is decided for the plaintiffs.
These are ordinary and customary questions that any prudent
organization would undertake to manage their legal risk, no
different than the contingency plans that Treasury, FSOC, and
other financial regulators are asking from the private sector
for all sorts of possibilities.
And last thing, Mr. Secretary, I just want to take a minute
to highlight some landmark legislation that was signed into law
late last year. It was called the Achieving a Better Life
Experience Act, or the ABLE Act. What that did was create 529
savings accounts for people with disabilities. It actually
levels the playing field for millions of Americans who are
going to be allowed to use tax-free savings accounts for
certain expenses, just like they can save money for retirement
or save money to go to college.
And as you may know, the States are responsible for
administering the program, but the Department needs to issue
regulations. And I am hopeful that the Department will meet
that statutory requirement and hopefully the States can move as
quickly as possible, because there are millions of Americans
that are going to have a door open to a brighter future.
So, again, let me thank you for taking the time to be here
today. I look forward to hearing your testimony.
And now let me turn to the ranking member, Mr. Serrano, for
an opening statement.
Mr. Serrano. Thank you, Mr. Chairman. I would like to join
you in once again welcoming Secretary Lew before the
subcommittee to discuss the Department's budget for fiscal year
2016.
The Treasury Department is at the center of our economic
recovery plan, plays an important role in the implementation of
some of our most important public policy initiatives, like the
Affordable Care Act and Dodd-Frank, manages our Nation's
finances, and works to enforce our tax laws fairly. I have not
mentioned everything, but it is plain to see that this is a
diverse set of responsibilities.
Your budget request attempts to improve funding levels for
many parts of your work, but let me highlight just a few. First
and foremost, your budget attempts to restore the devastating
budget cuts that hit the IRS in fiscal year 2015. The IRS
estimates that the $346 million in cuts suffered last year will
result in $2 billion less in revenue collected and in fewer
services to honest taxpayers trying to get their questions
answered by the IRS. In other words, we are increasing the tax
gap and making things more confusing for taxpayers.
Regardless of your feelings regarding the handling of the
IRS' problems, this is not a recipe for success. We cannot keep
pretending that less investment in the IRS is somehow going to
increase compliance and lower the tax gap. That is why I
applaud your efforts to restore IRS funding to more sustainable
and effective levels.
Additionally, you request a modest increase for the
Community Development Financial Institutions Fund. The CDFI
Fund has helped invest hundreds of millions of federal dollars
in my congressional district since its creation 20 years ago,
and it has been an important driver of economic development in
my district, in the Bronx, and in other underserved
communities. Although I am concerned the Department has once
again recommended the elimination of the BEA program, I am
heartened that we all agree about the importance of the work
that the CDFI Fund does every day.
Lastly, I would be remiss if I did not mention the
Department's important role in implementing the President's
groundbreaking change to our ineffective Cuba policies. I look
forward to working with you and with the Office of Foreign
Assets Control to make sure that there are no problems with the
implementation of these efforts.
Secretary Lew, I know that this change in Cuba policy is
historic. Some of us thought it would never happen. It entails
a lot of changes and a lot of great possibilities for both of
our countries, and we will be working with you to make sure
this goes as smoothly and possible. And I thank you for your
being here today.
Mr. Crenshaw. Thank you.
And now I would like to turn to the ranking member of the
full committee, my good friend Nita Lowey, for her opening
statement.
Mrs. Lowey. Well, thank you very much, Chairman Crenshaw
and Ranking Member Serrano for holding this hearing.
And to my friend Secretary Lew, thank you for joining us
today.
Mr. Secretary, your fiscal 2016 budget requests $14.3
billion for the Department of the Treasury's operating bureaus
and $2.9 billion for international programs, which is covered
by the Subcommittee on State and Foreign Operations. As you
have noted, the President's budget would achieve $1.8 trillion
of deficit reduction over 10 years, primarily from reforms to
our health, tax, and immigration systems. If it were adopted,
deficits would continue to decline to about 2.5 percent of GDP
over the 10-year budget window, which is down 75 percent from a
peak of 9.8 percent. And we added more jobs in 2014 than in any
year since the late 1990s. And yet, we can and must do more to
continue to provide access to capital and get people back to
work.
In other hearings some of my friends on the other side of
the aisle have stated their opposition to many of the revenue
portions of the budget request. While I believe Congress should
closely scrutinize and shape the final product, I would point
out the constraints that our committee has operated under. Even
excluding sequestration, Congress has passed and President
Obama has signed into law more than $2.5 trillion in deficit
reduction, $1.5 trillion of which has come from discretionary
spending cuts. In fact, discretionary investments are on a path
to be at their lowest level as a share of GDP since the
Eisenhower administration.
I ask my friends on the other side of the aisle, after this
committee has cut so much, are you really unwilling to close
tax loopholes in order to invest more in transportation
infrastructure, education, job training, biomedical research
and other R&D efforts, and the military as well?
Thank you very much.
Mr. Crenshaw. Thank you.
Mr. Secretary, they have called a vote. There are 11
minutes left. There is plenty of time if you would like to take
a few minutes to make an opening statement. We would be happy
to hear that. And then we might take a brief recess and come
back. But, please, the floor is yours, as long as you don't go
more than 5 minutes.
Secretary Lew. Well, thank you, Mr. Chairman. I would ask
that you include my complete testimony in the record. In the
interest of time, I would be happy to dispense with my opening
remarks and take questions right away since I know, with the
votes coming, it may be challenging for some members to come
back.
[The information follows:]

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

Mr. Crenshaw. If that is okay with you. Let me ask one
question, and then I think with 5 minutes to go, since we have
a series, we will all probably have to get up and leave, but I
think it will take less than 30 minutes.

SYSTEMICALLY IMPORTANT FINANCIAL INSTITUTIONS

Let me just ask you about the Financial Stability Oversight
Council that we talk a lot about, the FSOC. You remember last
year I asked you some questions because you are the chairman of
the FSOC, and it seems to me just over this last year that more
confusion has been added. A lot of people are trying to do the
right thing, but they don't know exactly where they stand. The
question of transparency, especially, has been raised.
FSOC ought to bring stability to the financial markets, but
it seems to be working the other way. And I have told you and I
have told SEC Chair White that I think the individual
regulatory agencies are actually better equipped than FSOC to
handle some of these things.
But, for instance, if the primary focus is to identify and
ensure systemic risks are adequately and appropriately
addressed, wouldn't that be better than just designating SIFIs,
and do you give companies the ability to address some of those
systemic concerns before they get designated as a SIFI? And if
not, why don't you do that?
And finally, tell me why it is better to have this new
Council as opposed to an agency that was set up, like the SEC,
to address those kind of risks. Just touch on that about how
the FSOC is actually working out.
SecretaryLew. Mr. Chairman, let me start by saying that I
think if you look at our financial system today and compare it
to the time before the financial crisis, it is a lot safer than
it was and there is a lot more protection for our economy and
for the American people than there was before. So I think the
steps that have been taken have done an awful lot to reduce the
level of risk.
With regard to why FSOC and not regulators, before the
financial crisis there was no regulatory agency that had
responsibility to look across the economy and ask the question,
is there systemic risk that needs to be addressed? Each had its
own siloed set of responsibilities. No one had responsibility
for the crosscutting question of systemic stability to be the
driving question. FSOC was created to bring the regulators
together and have a place where those questions could be asked
across the entire financial system.
The authority to designate a financial institution is
really based in the statute on finding that there is a level of
systemic risk. It does not say you can do things to prevent it.
It says if you find that there is systemic risk, the act that
FSOC takes is designation, and then there is a regulatory
procedure that follows.
In many cases, what FSOC looks at outside of the
designation process are issues that go back to the regulators
with primary jurisdiction. So, for example, on money market
funds, FSOC has looked at that issue, but it went back to the
SEC for rulemaking action. In the case of designations, that is
one authority that FSOC as a body across government, across
regulators, takes when the finding of systemic risk is made.
Mr. Crenshaw. Just on that point, do you think that the
SIFI designation, is that appropriate for non-bank entities?
Secretary Lew. You know, I think that the question really
has to go back to does the entity present a level of risk that
warrants the designation. That gets to a question of the
structure of the financial activities, the interconnectedness
of the entity with other financial entities and individuals,
and what the flow of risk would be if there were to be a
failure of the entity.
Obviously, since we have designated a variety of different
kinds of actors, it is more than just traditional financial
institutions. We have market utilities that have been
designated and we have several insurance companies that have
been designated.
You know, I do not think that we view it as kind of a
general directive to look at corporations, businesses,
activities that don't have to do with the financial system. So
there would have to be that connection to the financial system,
but the kind of entity, obviously, has varied.
Mr. Crenshaw. But, for instance, if you get designated a
SIFI, that can be costly. And if you designate, for example, an
asset manager or a mutual fund, then they will have costs
involved and they will pass those on to their investors. And a
lot of those are people that are just saving for college or
saving for retirement.
And under Dodd-Frank, these nonbank SIFIs, they can be
assessed to help pay for the resolution of the failing
financial institutions, banks, that is what we think of. So you
have got these provisions, but when you designate an entity
such as a mutual fund as a SIFI, then that means these fund
investors, they might be on the hook for bailing out the banks
who, I guess, were the bad actors in that case.
So, is that something you all have thought about when you
designate a nonbank as a SIFI? Some investors impacted might be
average Americans who are relying on their investments and they
might end up on the hook to pay for some bad actions of a bad
bank.
Secretary Lew. You know, the purpose of FSOC, the purpose
of financial reform is to protect individuals from the kinds of
instability that come when you have a financial crisis like
2008. In 2008, there were a lot of people who saved for college
and their retirement who saw their savings just evaporate
because of the financial crisis. So the goal is to see where
there is systemic risk and address it.
I do not want to say who is and is not going to present
that kind of risk, because one of the things I think FSOC has
done very well is it has looked at every matter as a case-by-
case review with a very diligent process where there has been
back and forth with the company. We have now, as you noted,
adopted some new rules to increase the level of engagement with
companies earlier on in the process.
I think that those findings will determine where
designations are appropriate. We should not have a rule going
in of what we will and we will not do. What I am committed to
is making sure that the FSOC is always fact- and analytically-
driven, that it be driven by where are the risks of the future,
not the risks of the past. Our job is to make sure we can tell
those savers that we are doing everything we can to make sure
that the financial system is safe and sound.
Mr. Crenshaw. Thank you. I just hope you keep in mind the
costs and benefits of these designations.
There are a couple of minutes left. I think it would be
good to recess now. There is one amendment, a motion to
recommit, and final passage. Should be less than 30 minutes. I
know the members have a lot of questions, and I appreciate you
working with us. So let's stand in recess. And come back as
fast as you can.
[Recess.]
Mr. Crenshaw. We will reconvene the hearing now. And I
would like to recognize Ranking Member Mr. Serrano for
questions.

IRS BUDGET CUTS

Mr. Serrano. Secretary Lew, before we move to your fiscal
year 2016 request, I would like to revisit momentarily 2014 and
2015 with you. Specifically, I would like you to speak about
the impact of the deep cuts in the IRS budget. When inflation
is taken into account, the IRS is now down to 1998 levels. What
are the short- and long-term ramifications of continuing to
reduce the ability of the IRS to accurately and efficiently
collect tax revenues?
Secretary Lew. Congressman, the funding levels at the IRS
are very troublesome. It ranges from not being able to do the
basic things, like answering taxpayer calls, putting them on
hold for so long that they drop, to not having the resources to
put into properly enforcing our tax laws. In a system like
ours, which is based on voluntarily compliance, it is a
dangerous practice to underfund enforcement for a long period
of time. It is very corrosive. It loses money. It loses
billions of dollars to underfund the IRS.
I must say that I am proud of the team at the IRS. The
career staff at the IRS do an extraordinary job under very
difficult circumstances. The inconveniences to taxpayers are
being mitigated because IRS has been effective at using Web-
based information systems to provide information and to be able
to respond to questions to reduce the call volume. But we
cannot count on that forever. At some point you need to get a
human being on the other end of the phone.
I think in the world of technology we have old systems,
which if we do not continue to improve them will become more
and more difficult to just operate normally. But they also
become more and more vulnerable to the kinds of threats that we
face in cyberspace nowadays.
So I think the underfunding of the IRS is shortsighted and
damaging to one of the important institutions of any democracy,
which is the organization that is responsible for making sure
we collect our taxes from people who legally owe them and do it
in a way that provides customer service that American taxpayers
deserve.
Mr. Serrano. Yeah, well, let me just go on the record once
again as saying that I agree with you, and I have agreed with
people in the past who have said the same or similar things to
what you just said.
You know, there are some cuts you don't like, some cuts you
don't like and you know they make no sense. These cuts make no
sense because eventually we hurt ourselves. We are supposed to
be collecting more money, not breaking it down so you can't
collect.

CUBA

Let me move on to one of my favorite subjects, one that I
am very pleased with, the new regulations and the attempt at a
new relationship with Cuba. Without telling me anything about
secret negotiations that you can't tell me, although we Members
of Congress think we should know everything, how is that going
and what are the changes that you feel your Department will
play a role in if we continue this road of normalizing
relations with Cuba?
Secretary Lew. Well, Congressman, the role that we play
obviously is in the sanctions area where for most of my
lifetime we have had limitations in place and they have not
worked. It was an ineffective tool to change Cuba.
And the President took actions, and we took actions with
our authority within the law to take steps to make it easier
for there to be contact between the American people and the
Cuban people, to make it easier to get information into Cuba so
that they are exposed to more media and more information from
the United States, and to make it easier to do certain kinds of
financial transactions, both because of bank correspondent
relationships and because of payment terms. We cannot eliminate
all of the restrictions because we had to operate within the
law, which we did.
But the purpose ultimately is to change Cuba. The purpose
ultimately is for the Cuban people to see that there is a
better alternative to what they have had. Since the old system
did not work, we are very hopeful that the new system will be
much more effective. I am not involved in the conversations
that are taking place between the State Department and their
counterparts in terms of the diplomatic relations, but I know
those conversations have been continuing.
Mr. Serrano. Mr. Chairman, let me just take a few seconds
to just get thoughts from the Secretary. And I know that this
is kind of out of left field. But one of the things that has
always stuck in my mind is that for 50-odd years Cuban artists
have not received royalties for the music we hear in this
country, for instance. I am sure it may happen with other
countries. That is not something that government is holding or
would do accounting for.
Do you think that that will be on the table as part of the
discussion? I mean, we are talking about a lot of money. And
who would hold that money on paper? Would it be ASCAP?
Secretary Lew. I am not actually familiar with the issue of
royalties for performing artists and where they reside. I am
happy to look into it and get back to you.
[The information follows:]

The amendments to the regulations have not changed the situation
with respect to the payment of royalties to Cuban musicians. To the
extent that the sanctions impose obstacles to the payment of these
royalties, OFAC has worked and is willing to continue to work with the
relevant parties to consider whether the issuance of a license is
necessary and appropriate.

Mr. Serrano. I would appreciate that. I would imagine it is
with ASCAP or one of these agencies. But we are talking about a
lot of money for over 50 years that not a cent has been sent
because we couldn't send money over there.
Secretary Lew. Right. I am happy to look into it.
Mr. Serrano. Thank you, sir.
Thank you.
Mr. Crenshaw. Mr. Graves.

OPERATION CHOKE POINT

Mr. Graves. Thank you, Mr. Chairman.
Mr. Secretary, always good to see you and always enjoy
having you before us. And it is always a spirited debate and
discussion in gymnastics, in some cases. A lot of important
issues we are all talking about and just wanted to, I guess,
revisit one, Operation Choke Point, that I know that this
committee and the Financial Services Committee in the House
have been very diligent about getting to the bottom of and its
effect that it has had on legally operating businesses that
have been unfairly targeted and in some cases have been shut
down.
Would you commit to this committee and to the House
Financial Services Committee and to the full Committee on
Appropriations, myself, the chairman, and ranking member, that
we will get to the bottom of this and resolve this totally?
Secretary Lew. Congressman, I know that there are ongoing
conversations. I understand the issues here. The objective has
been to protect people from harm, not to cause problems. I am
happy to follow up with you. It is not directly in my area to
respond to that question, but I am happy to follow up.
[The information follows:]

The Treasury Department is not directly involved in Operation Choke
Point.

Mr. Graves. Thank you. We would appreciate your assistance
in getting to the bottom of this. And I would hope you would
agree with us that really the Federal Government has no role in
picking winners and losers when it comes to legally operating
businesses, but we would hope that the focus would be on those
who are committing crimes against innocent Americans and other
financial institutions, that the focus would be there as
opposed to the legally operating.

VOLCKER RULE

As well, later this year, I guess it is in July, all sizes
of banks are going to be expected to be in compliance with the
Volcker Rule. And in December last year the financial services
industry submitted to the five regulatory agencies a proposal
that was aimed at safely reducing the compliance burden for
them and covered funds for legacy securitizations.
I am sure you are familiar with that proposal. And as the
chairman of FSOC, can you give us a little bit of an update on
that? And do you think these regulators will respond to these
individuals or these organizations and this industry who
submitted this proposal?
Secretary Lew. Congressman, when the Volcker Rule was
designed it was designed with an understanding that
institutions of different size had different situations. So it
does not apply equally to all financial institutions.
It is designed to reduce risk in the system so that
financial institutions do not take on the kind of risk in their
trading positions and the proprietary positions that they take
that helped contribute to the financial crisis in 2008. A
number of issues have come up that have been addressed
subsequent to the initial rules where the regulators have taken
a look at information as it has come in. I am not aware of
additional action that is being taken right now, but I am happy
to check on what the status is going forward.
[The information follows:]

The Volcker Rule is a key part of the Dodd-Frank Act that helps to
ensure that banking organizations are focused on serving their clients
rather than risky trading activities. The regulations adopted by the
five rulewriting agencies to implement the Volcker Rule tailor the
compliance program requirements to the size of an institution and the
extent of a firm's proprietary trading and investments in private
funds. The Chairperson of the FSOC had a statutory role to coordinate
the regulation, and we have been closely monitoring the implementation
of the Volcker Rule as it comes into effect. The agencies have taken
important steps to respond to questions and comments about the rule,
and the Treasury Department regularly seeks input from stakeholders
about the effects of the rule. But with respect to any particular
relief that may be considered, I would defer to the five agencies.

Mr. Graves. As chairman of FSOC, maybe you could encourage
the regulators to at least respond.
Secretary Lew. Well, they have been responding on a regular
basis. They do not always respond by taking the action that is
requested, and those are obviously different questions.
There are a lot of financial institutions that would like
the Volcker Rule to be either rolled back or withdrawn. We
continue to believe that it is a provision of law and there are
rules that make our financial system safer and that protect
Americans from the kind of risk that we faced. I do not believe
it was designed in a way that puts an undue burden on smaller
institutions. When an issue that was an anomaly came up, they
quickly addressed it in the early days, after the rules were
made. So I know that they are listening and paying attention.
But some of the things the financial institutions are asking to
have taken a look at have risk attached to it that would be
problematic.
So we can take a look at the specific request. But,
obviously, we do not at Treasury have the authority to make any
of these changes. There are five independent regulators that
wrote the Volcker Rule. We helped shepherd them through the
process, but they have the authority.

EFFECT OF REGULATIONS

Mr. Graves. Okay. Understand. And then just one more
question. Again, working with the House Financial Services full
committee, you were in a hearing last year. And afterwards Mr.
Hensarling had written you a letter in July outlining how
overwhelming evidence has shown that overregulation in the
corporate bond market has had negative effects on the economy.
And I believe in your testimony you downplayed it a little bit
and didn't see any adverse effects.
Can you help us today to know what would you be doing as
chair or have you done as chair to reexamine those cumulative
effects that many would report have occurred and maybe, since
you have had a different viewpoint, have noticed something in
the market?
Secretary Lew. Well, Congressman, we are constantly looking
at what not just the incremental impact is, but the cumulative
impact, because it is a fair question what is the cumulative
impact. I think the cumulative impact has been that it is more
costly for a financial institution to take more risky
positions. There are more costs associated with being, in both
size and activity, in riskier areas. And I think that makes the
financial system safer because what it does is it internalizes
a lot of the risk that had been borne essentially by the
American people.
I do not believe it has an adverse effect on the economy.
The economy is doing quite well right now. We would love for it
to be doing even better. But I do not think there is an--there
is a lot of evidence that it is because of financial reform
that we are seeing the economy do well. I am not saying it is
one way or the other being caused by financial reform.
I would say that having confidence in the market is
something that helps the economy. To the extent that there is
less uncertainty about where the rules are, that helps the
economy. To the extent that the burdens cumulatively are at the
level that makes institutions safer, I think that makes both
the economy and the American people safer. So I do not
subscribe to the theory that they have caused a lessening of
economic activity.
Mr. Graves. I understand.
Well, thank you for your explanation. And I agree it seems
the economy is doing better. I wouldn't suggest it is because
of additional regulation.
Secretary Lew. No, and I was not arguing one way----
Mr. Graves. In spite of the additional regulation is how I
might put it.
But thank you, Mr. Chairman.
Mr. Crenshaw. Thank you.
Mrs. Lowey.
Mrs. Lowey. Thank you very much.
Again, we appreciate your service.

IRAN

I would like to turn to Iran for a moment because I have
been very concerned by reports of various European commercial
delegations traveling to Tehran in eager anticipation of
sanctions relief and the prospect of doing business with Iran.
And I must say, by way of background, Stuart Levey and now
David Cohen have both been very professional and are doing a
very thorough job.
The Administration has pledged to continue to strictly
enforce existing sanctions on Iran, other than those relaxed
under the interim deal. Yet I understand that Iran's oil
exports are being offered from UAE trading firms acting as
middlemen.
A couple of followup questions. Can you tell us the current
status of overall Iranian oil exports? Are we talking to China
and India, both of whom are reportedly increasing their imports
from Iran this year? And if these trends continue, is the
administration going to sanction those countries? Specifically,
what are the exports to China, India, and Turkey? And will you
make publicly available the Department's country-by-country
estimates on Iranian oil imports?
So what is happening?
Secretary Lew. So, look, let me start with the general. I
think that if you look at the Joint Plan of Action agreement,
it has worked extraordinarily well. It has stopped Iran from
continuing to build its nuclear capacity, the first time in
over a decade that anything has slowed down, much less turned
back their progress. It had clearly denominated relief that was
granted that was not enough to even come close to the
additional burden ongoing sanctions are putting on their
economy. Forty billion dollars a year of additional burden are
the cost of sanctions going forward, and the Joint Plan of
Action was in the single-digit billions of relief.
So I think if you look at where we are right now with Iran,
Iran's economy is in still very difficult shape. It did not
recover from the damage that we caused by putting tough
sanctions in place and, frankly, I think the reason they are at
the negotiating table is they want that relief, but they are
only going to get it if it is an agreement that is a good
agreement that ensures that Iran will not have nuclear weapons.
We have been vigilant in the enforcement of sanctions, both
in terms of financial institutions and oil. I had conversations
with many countries where we made it clear that we are going to
continue to enforce sanctions as long as they are in effect,
and I have had the acknowledgement of that, and countries do
not want to get crosswise with us on that.
So I can get back to you on the specific details of what
the flows are. There are always some periodic ups and downs in
those numbers.
[The information follows:]

A comprehensive response can be provided in a classified setting.

Secretary Lew. But I think the bottom line is they got no
more than the relief we agreed to, and that is not enough
relief for the Iranian economy to turn around. The only way for
them to get the kind of relief they really desire is if they
concede on the key issues in a negotiation to make clear that
they will not have nuclear weapons.
I think that we have made equally clear that if those
negotiations fail we will be the first to call for additional
sanctions, and then all options would remain on the table in
terms of making sure that Iran does not have nuclear weapons.
So I am very proud of the work our team has done. I agree
with you that the directors of OFAC, and now Adam Szubin, the
acting director of TFI, under secretaries of TFI, have done an
extraordinarily good job. Their teams have done an
extraordinarily good job. They work very hard, and I think they
deserve the support that we and you give them. But I do not
think that there is a serious case that we have seen a
backsliding on the commitment to maintain the sanctions regime.
There is, obviously, the negotiation going on, which if it
reaches a conclusion would have to involve some modification.
But we have also been clear that there are multiple sanctions
regimes against Iran, because Iran has been a bad actor in
multiple different areas. The only sanctions that we have
talked about relief from are the ones related to the nuclear
issue, not the ones related to terrorism and other things.

SEQUESTRATION

Mrs. Lowey. Maybe I will give you one general question. You
have made clear that the President will not accept a budget
that reverses our economic progress by locking in
sequestration. What did you mean by this?
Secretary Lew. I think that the challenge is going to be
for Congress to come back and do another version of what was
done in the Murray-Ryan agreement.
Sequestration was never meant to take effect. It was
designed to be something that was so odious to both sides it
would make it possible to come together on the kind of balanced
policies that would be a reasonable way to reduce the deficit
as opposed to draconian cuts in discretionary spending. I do
not think it is good for domestic priorities. I do not think it
is good for our national security priorities.
I find it somewhat odd that something that was meant to be
so objectionable that it would be a motivation to do something
as an alternative is now seen by some as something that has to
be protected. Its purpose was to be a catalyst for different
action.
I think what the President is saying is Congress has to do
that. Congress has to go back and work on that kind of balanced
approach. It worked to provide some relief for 2014 and 2015,
but it did not cover 2016. So we are now back in the world of
those very, very low and we think unacceptably low levels. We
would look forward to working with you and others on getting
that done.
Mrs. Lowey. Well, I am delighted to have the offer to work
with you, and I hope our chairman and all the other members of
this committee will do the same.
Thank you very much.
Secretary Lew. Thank you.
Mr. Crenshaw. Thank you.
Mr. Rigell.
Mr. Rigell. Thank you, Mr. Chairman.
And, Secretary Lew, thank you for being here. And this is
really, I guess, principally one of my first hearings on this
committee. It is an honor to serve on this committee.

SEQUESTRATION

I read the mission statement of the Treasury and that is
certainly common ground. And let me pick up for just a moment
on this, the issue of sequestration and its reversal, or at
least, if not full, at least a substantive portion of it.
Just coming from my service on House Armed Services for 4
years, I have a clear understanding and our Joint Chiefs of
Staff and all of our uniformed officers and, indeed, the
President has said that this is going to hurt our military.
So you basically flipped it back to say it is exclusively--
you may not have used that term, but it was certainly implied--
that finding a way out of this is Congress' job. And I would
submit that indeed we do have a lot of responsibility here, but
I would say an equal one falls to the Administration. We don't
need to go back and forth and rehash how we got here exactly,
but I do recall--and I believe it has not been disputed--that
sequestration, at least the mechanism itself, was offered by
the administration. Of course, it became law as a result of
some votes here in Congress.
But I am submitting to you that the Administration itself
has a responsibility to lead in this area as well. And I would
like to know what, if anything, is on the table from the
Administration to provide even partial lift to it.
Secretary Lew. Well, Congressman, the President's Budget
provides the Administration's view as to where we would go to
put together an alternate path, which would be restoring levels
to presequestration levels and to hit the targets for fiscal
policy that we have set, which are consistent with the path.
Mr. Rigell. Well, let's walk through that then. I think a
lot of it comes down to just an assessment of risk and risk
tolerance. The budget deficits that the Administration has
built into its proposal to Congress are unacceptably high to
me. And I would like to know what your working, your internal
sense of risk is as it relates to a deficit as a percent of our
gross domestic product and also our aggregate level of debt as
a percent of our economy.
Secretary Lew. So, Congressman, the President's Budget
presents a path of deficits coming below 3 percent of GDP and
staying in a zone for the next 10 years, the immediate budget
window, that hits primary balance. You still have a deficit,
but the deficit is basically related to the service of old
debt, not the buildup of new debt. That is generally
internationally seen as something that is the goal for fiscal
sustainability. In terms of----
Mr. Rigell. Is that--and I just want to be clear--is it the
3 percent as a percent of the GDP?
Secretary Lew. Well, 3 percent primary balance, the number
depends on a number of calculations. It is about 3 percent or a
fraction of a point higher or lower,in that area.
Mr. Rigell. That is widely recognized by leading economists
and----
Secretary Lew. The International Monetary Fund, when it
goes internationally with targets.
Now, I am not saying that the goal over time should not be
in good times to have the ability to bring down the number
lower than that. I presided as director of the Office of
Management and Budget for 3 years in the 1990s when we had a
surplus and we were paying down the debt, so I fully understand
that when you have a strong economy and things are working the
way they should there is an opportunity to do better than that.
But in terms of fiscal sustainability, the norm of primary
balance is what economists look at as being a measure of
sustainability.
In terms of cumulative debt, we obviously are at a higher
level than we were before we ran the very large deficits
because of the spending and tax policies early in the 2000s and
because of the financial crisis and what it took to get out of
that. But we have slowed the growth, we have stopped the
growth, and we have kept it in a range that is not as low as
one would want it to be if we hadn't gone through the bad
decade that we went through but is also at a sustainable level.
So I think the President's Budget, if you look at the
growth in our economy, it reflects a confidence in our economy
that is coming back. It reflects a sense of a sustainable
economy. Very different from when we had 10 percent of GDP
deficits.
Mr. Rigell. I have got about a minute left. And I
appreciate your answer, and I am kind of wrestling with some of
the things that you shared. Time doesn't permit me to go back
and address all of them.

BALANCED APPROACH

But for the longest time the President would say we need a
balanced approach. And for a long while I was actually trying
to help out with that and advocated for Republicans to move
just a little bit on revenue. But so far as I can tell, in the
last 4 years that I have served we have had about $1.8 trillion
in tax increases, roughly a trillion dollars in the Affordable
Care Act, or as I think of it, the un-Affordable Care Act, and
about another $800 billion at the fiscal cliff.
Are you aware of any aggregate measure of any substance
that meets the definition of balanced approach? That is, to me
a balanced approach would mean nothing less than a one-to-one
ratio of revenue to expense reductions. And I don't think we
have met that standard any of the 4 years that I have been in
office. Do you? Are you aware of anything? I only have a few
seconds left.
Secretary Lew. Congressman, the discretionary cuts are
obviously very large and they are roughly comparable to the tax
increases that you have described. What is not there in a large
form are the kinds of savings in mandatory programs.
Mr. Rigell. I agree with you. We are in strong agreement
there.
Secretary Lew. The President's Budget has $400 billion of
savings proposed as part of a balanced plan in mandatory
programs. The challenge has been to put a balanced approach
together in one package and to finish the job.
Mr. Rigell. Secretary Lew, I thank you for your testimony.
And I am going to look for some common ground here, and I mean
that.
And I thank the chairman, and I yield back.
Thank you.
Mr. Crenshaw. Thank you.
Mr. Bishop.
Mr. Bishop. Thank you very much, Mr. Chairman.
Welcome, Secretary Lew.

PREPAID CARDS

Mr. Secretary, to the surprise of many in my home State of
Georgia, the State is the center of gravity for the entire
payments industry across the globe. In 2014, there were over
$4.4 trillion in credit card, prepaid card, and gift card
transactions. Back in 2012, the Consumer Financial Protection
Bureau released an advanced notice of proposed rulemaking,
primarily focused on general reloadable prepaid cards, GPRs.
On November 15, 2014, CFPB released a far-reaching 870-page
notice of proposed rulemaking seeking to regulate the prepaid
card products. Neither the prepaid card industry, nor
consumers, had any indication or forewarning that CFPB's
proposed rule would be so long and overwhelming.
The CFPB's NPR significantly expanded its rulemaking beyond
GPR cards by applying new regulations to other types of prepaid
cards that are currently regulated, such as student cards,
government benefit cards, and payroll cards.
After the notice of the proposed rule was released, the
prepaid industry and Members of Congress asked CFPB to extend
the 90-day comment period for an additional 60 days. Our
request was denied. In addition to the first congressional
request, the Georgia congressional delegation put forth its own
request, and we are still waiting for a reply.
As you may know, Federal and State governments comprise the
largest groups that use prepaid products because prepaid cards
are a cost-efficient payment option compared to paper checks.
According to Treasury, it costs $1.03 to issue a paper check
and only 10-\1/2\ cents to issue an electronic payment.
As a form of electronic payment, prepaid cards help
governments at all levels disburse benefits, child support,
WIC, SNAP, et cetera, in a very cost-efficient manner. Do you
know or can you tell us whether CFPB conducted a cost-benefit
analysis detailing the potential cost of the proposal and the
cost that it would have on Federal and State governments who
use prepaid cards to disburse benefits? Do you know what the
cost would be to the Federal Government if we had to return to
using paper checks to distribute and disburse Federal benefits?
Secretary Lew. Congressman, I do not think anyone is
proposing that there be a cessation of the use of prepaid
cards, and obviously, the CFBP rule is not in our direct
jurisdiction. I would refer to Director Cordray and the CFPB on
the details. But I know the purpose of the rule was to protect
consumers and to make sure that prepaid cards, which are a
growing form of a transactional tool, are managed in a way that
is consistent with protecting both individuals from charges and
other costs that they might not see.
I agree with you that prepaid cards are more efficient in
many cases for governmental transactions and was part of
turning some of our Federal benefit programs into smart cards
in earlier years. So I very much understand the value of them.
Mr. Bishop. Wouldn't the cost of compliance with an 870-
page rule be significant to the parties, the States, and local
governments, and any other parties that utilize the prepaid
cards?
Secretary Lew. I think the CFPB has been remarkably
effective in its short life designing rules that are well
thought through and that are managed well in the marketplace
that they are designed for. I do not think----
Mr. Bishop. Do you know if they did a cost-benefit
analysis?
Secretary Lew. I would have to defer to the CFPB on that
and be happy to put the question to them.
Mr. Bishop. The answer is, no, you don't know? You don't
know?
Secretary Lew. I am not aware of what analyses they did. I
do know that the purpose of the rulemaking was to protect
consumers. It was not to create a bar to the use of prepaid
cards on a broad basis. I would be happy to refer the question
to Director Cordray.
Mr. Bishop. I would appreciate that very much.
[The information follows:]

As a general matter, I would note that the proposed rule itself
contained a cost benefit analysis of the potential impact of various
provisions of the proposed rule. With respect to specifics regarding
how the CFPB conducted its analysis and what are its conclusions, I
would refer you to the proposed rule and the CFPB.
As for the federal government's delivery of benefits electronically
through programs such as Direct Express, I am fully confident that we
will be able to continue to deliver the vast majority of benefits
electronically once the CFPB finalizes its rule, and that we will not
have to return to a high volume of paper checks.

Mr. Bishop. I wasn't suggesting that it was designed to be
a bar to the use of prepaid cards. What I was suggesting was
that the burdensome rules and rulemaking could discourage their
use and could make it much more difficult. Of course, if States
that have found it very efficient continue to use prepaid
cards, it may increase their cost in doing it from the 10-\1/2\
cents to whatever the regulatory compliance cost would be to
comply with such rules. That was my concern.

TAX PREPARER FRAUD

Georgia is number two for identity theft cases and preparer
fraud. Forty-four percent of the cases in 2014 in Georgia were
ID theft-related cases, and IRS has not passed any guidance
regarding preparer fraud cases. Victims face financial and
economic hardship as a result of the preparer absconding with
refunds and leaving the taxpayer with an IRS balance due, in
addition to not ever receiving the refund that the IRS
rightfully owes them.
For example, there was a Georgia taxpayer in the process of
purchasing a home when a preparer diverted her refund to the
preparer. The taxpayer lost the home, she lost the downpayment
placed on the home, and she lost her car. The taxpayer stated
the preparer is getting ready to open a new tax preparation
business, giving plenty of opportunities to steal refunds from
additional unsuspecting victims.
As the IRS reduces tax preparation services, as your budget
indicates, taxpayers are forced to seek preparation services
for a fee, leaving them at risk of obtaining services from
unscrupulous tax preparers. What recommendations do you have
for a resolution for this problem? Is it solely an issue of
increasing the budget of IRS or are there additional reforms
that would be needed?
Secretary Lew. Congressman, the President's Budget requests
$101 million in investments to help combat tax-related identity
theft. It would include expanding the services and assistance
available to taxpayers who have been victimized by identity
theft. It is a very significant problem, and I think it is one
that we owe the American people to put the resources into to
deal with.
We know that, in general, in the area of cyberspace, cyber
crime, that there is an increasing level of activity out there.
We have to keep up and find the problems as they are developing
and address them because the American people deserve that. But
it does require funding the activity. So I would not say it is
just money. It is money that you put to the right purpose. But
we have a plan which, if it is funded, we think would continue
to make progress in this area.
Mr. Bishop. Is it contained in the President's budget?
Secretary Lew. Yes, it is.
Mr. Bishop. Thank you very much.
Secretary Lew. Thanks, Congressman.
Mr. Crenshaw. Thank you.
Mr. Womack.
Mr. Womack. Thank you, Mr. Chairman.
Thank you, Mr. Secretary, for your appearance today.
Interesting testimony.
When I read your bio I think there is probably not a better
person out there that could sit down in the Oval Office and
have a conversation, with as much know-how and experience as
you have based on your time at OMB, as a chief of staff and
even as the architect behind a program like AmeriCorps that I
have had some experience with, to talk about, to be of counsel
to the President of the United States so that when he sends a
budget--and I am the new appropriator on the Budget Committee--
that when he sends a budget up, that it is something that we
could all kind of rally behind and try to find some common
ground on and that sort of thing.

LONG-TERM BUDGET PLANNING

So here is my question for you. When you sit down in the
Oval Office with the President and you talk about the next 10-
year window, particularly as it concerns deficit spending and
the need for us to find meaningful and sustainable reforms in
our social safety net program that we all know, everybody up
here knows, is driving a lot of the deficit and contributing to
our national debt, what is that conversation like? What advice
do you give the President?
Secretary Lew. Well, Congressman, obviously any
conversations I have with the President in the Oval Office,
under any of the roles that I have served in the
Administration, deserve the privacy of the Oval Office.
But I think the actions that we have taken over the
Administration--I was part of it at OMB and part of it when I
was as chief of staff to the President--it was trying to find a
balanced approach where we did all the different things that
you needed to do to fix the fiscal challenges. That obviously
did not work, and we ended up doing things piecemeal. So we
have gotten discretionary cuts and we have gotten some of the
revenue measures. We have not had the conversation where all
the pieces came together and we had a comprehensive approach.
There were moments when I thought we were close to getting
that kind of an agreement. I thought at the time that it would
have been the right thing. As we look at the depth of the
sequestration cuts, I think it is clear that discretionary
spending has borne more of the burden than it should. My view
is that, on the revenues, we have not completed the job and we
have not really gotten where we need to go on some of the
mandatory programs.
I do think that what we have seen in healthcare costs has
been very meaningful in terms of the reduction in the rate of
growth of healthcare spending. Whatever one's view of the
Affordable Care Act--I, obviously, think it is a very important
initiative--the effect in the years since the passage of the
Affordable Care Act is to have the slowest rate of increased
cost in health care in a very, very long time, which has
enormous impact on budgetary projections given the size of
healthcare spending as a percentage of the budget.
So I think if you look at our actions, I will have to leave
your imagination the conversations in the Oval Office.
Mr. Womack. I will take that, I guess.
Yesterday, I went to the floor on a leadership hour and we
talked about budget with a couple of my colleagues. I threw up
a chart on mandatory spending and the squeeze that it is
putting on the discretionary piece. As an appropriator, I have
had a first-row seat to that, so I see the squeeze that is
happening.
And in the not-too-distant future it is obvious to me that
unless we have massive tax increases we are going to have a
very difficult time addressing even the basic functions of
government, including turning the lights on in this Capitol.

MANDATORY SPENDING

When you look at the net interest on the debt--and I know
that it is north of $200 billion today--as you look at the 10-
year window out to 2025, before my 2-year old grandson turns
12, and before my 8-year old can vote, the net interest on the
debt is projected to be--in the President's budget--$785
billion. That is a staggering number. I would argue that it is
an unsustainable number and that the markets will speak very
loudly long before we ever get to $785 billion.
So how serious are you about looking at the mandatory side
of spending, the two-thirds of spending that is on autopilot
right now that is getting worse by the day, how serious are you
about addressing that? And why do we not see a better depiction
of it in the President's budget?
Secretary Lew. Congressman, first of all, obviously nominal
dollars tell one story, but if you look at it in the context of
the size of the economy and what the world will look like 10
years from now, we are now in a $17 trillion GDP economy, it is
projected to be $27 trillion. So it is going to be a much
larger economy. The number, while it is a large number, is not
growing as a percentage of GDP anywhere near the rate that the
nominal dollars are growing.
I have thought for a long time that there needs to be a bit
of a space in the political debate for the conversation on
finishing the fiscal job to be done as required. We have not
seen that in the last few years. We have seen tremendous
progress, though, on reducing the deficit. While I am not happy
about the discretionary cuts and would like to see some
alternative budgetary measures to replace sequestration, there
is no question that bringing the deficit from 10 percent to 3
percent of GDP is an enormous, enormous accomplishment.
I couldn't be sitting here with confidence telling you that
at 10 percent of GDP we were in a sustainable place. When we
were looking at numbers, 9 percent, 8 percent, those were scary
numbers. Three percent is more of a normal number. I mean, it
is roughly primary balance given the size of our debt service.
The goal ought to be to do the things we can do now to grow
our economy because a growing economy is the best way to solve
the problem, and that is why we talk about things like
infrastructure. I mean, we are short selling infrastructure
now, which is necessary both for short-term and long-term
economic health, and at a time when I think there is a
bipartisan view that we should be doing more on infrastructure.
So I think that what we can do in the next year or two
should be to do the things we can do together to grow the
economy. I am not sure going back to the debate of 2011, 2012
would be the way to solve that problem right now. We have done
an awful lot. Right now doing the things that would grow the
economy I think are what really require our immediate
attention.
Mr. Womack. Mr. Chairman, can I ask one more quick
question?
Mr. Crenshaw. Sure.
Mr. Womack. I know we are into someone else's time, Chaka's
time. And I don't want to wear out my welcome.
Mr. Fattah. Go ahead.

INTEREST RATES

Mr. Womack. Real quickly, a word about what you see in the
near future on interest rates.
Secretary Lew. Well, I never predict interest rates beyond
what are the assumptions in our budget. Obviously, our budget
shows a gradual return to more normal interest rates. We do not
predict a time the Federal Reserve will make its decision on
when it will move to change monetary policy. Then the markets
will make their decision on how they react in terms of longer-
term rates.
I think that in an economy that is growing, in an economy
that is right now one of the healthiest in the world, it is a
question of when, not if, interest rates start to go back up.
The budget assumes interest rates that, if anything, are on the
high end of what is likely to happen.
So I think, for budgetary purposes, we have been
conservative and we have built in assumptions which, if I was
giving my honest best guess, are probably a little on the high
side. But I think that is the right thing to do for budgeting,
because I do not think we ought to be putting in numbers that
understate the cost of debt service.
Mr. Womack. I thank the Secretary.
And thank you for the additional time, Mr. Chairman. I
yield back.
Mr. Crenshaw. Mr. Secretary, I would suggest when you are
asked what will happen to interest rates, you simply respond
they will go down, they will stay level, they will go up, but
not necessarily in that order.
Mr. Fattah.
Mr. Fattah. Thank you, Mr. Chairman.
So the head of the International Monetary Fund this morning
said that America has the best economy of any of the economies
in the world in terms of our competitors. The Federal Reserve
just a little while ago, in the Beige Book, says the economy is
continuing to expand in almost every region and sector. We have
had now 59 months of consecutive job growth. In the last 11 or
12 months, 200,000-plus jobs a month. So there is a lot to be
thankful for in terms of the productivity of the American
private sector.
There are remaining challenges. I want to just raise an
issue that is not about now, it is about the future, and it is
about our competition. So I kind of sense that we are competing
with billion-plus-populated countries like China and India. We
see the EU has organized itself in a grouping. And we are
competitors and partners depending on the day of the week. But
that America's position in the world is that we are the leader,
but that lead is no longer absolute, it is relative, that there
are people who are seeking to eat our lunch. I mean, they liked
to have what we have. They would love to have the strength of
the American economy. And they are doing the things they need
to do, whether it is educating their populous, or so forth and
so on. And their budgets are growing.

CONSUMPTION TAX

Now, I am interested, like in NASCAR, these cars pull into
the pit, they've got all these different things. Our
competitors have something that in their pit that we don't
have. They have consumption taxes. 148 countries in the world
use a consumption tax. We don't. And much of the time when this
is discussed it is always about a VAT or something. I am not. I
assume we might even be innovative enough to have a consumption
tax that that wasn't a VAT or maybe an American form of a
consumption tax.
Our economy is primarily driven by consumption, however we
are seeking revenues as a government from areas that have much
smaller bases. So the first law of tax concepts and policy is
you want the broadest base possible so you can have the lowest
rate, so you can have less people trying to evade it.
And I am wondering, given all of your experience--and I
think my colleague raised this point about your bio--do you see
a point in America where in order to continue to lead the
world, to have the finest military, to do all the things that
we want to do as a country, which some people are starting to,
I think, understand we can't do on the cheap, I mean these
things actually cost money, that the government may have to
think anew about how we go about getting revenues?
We are chasing revenues in some very narrow alleys even
though we have an economy that is based on consumption. We have
our competitors using consumption taxes, and we don't use one
at all. Okay? So when Japan went through their thing, they
could say, look, we are going to raise our national consumption
tax and we are going to move in a different direction.
So I would love to hear your thoughts on this.
Secretary Lew. So let me start just with the broad view of
the world that you describe. I think that there is no question
that our economy is being looked at globally as the leader of
economic growth right now. There are other countries with
emerging economies that are growing at a faster rate, but there
are not any other mature developed economies that are doing as
well as we are.
I think that, if anything, the world is overreliant on the
United States right now, because if you look at the numbers, we
are not big enough to pull everyone along, even if we grew
another half a point or a point more. We can not make up for a
shortfall in growth in Europe. We can not make up for a
shortfall in growth in Asia.
So I think we have to want other countries to do well for
the global economy to do well. And that is what I say when I
meet with the Chinese: We want your economy to do well. We want
you to play fair. We do not want you to break the rules. But we
want you to do well. It is good for you when we do well. It is
good for us when you do well.
I think that right now, after the financial crisis, we are
at a moment in time where the world looked at the United States
for a few years as being the cause of the financial problem.
Now they look at the United States and they marvel at the
resilience and ability of the U.S. economy to bounce back.
There is something about the American spirit, the kind of
indomitable American will to pick yourself up and get going
again, but also the flexibility of our system. In a lot of
countries people will not pick up and move down the street to
take a job. In the United States, if there is a new industry
that emerges, people go to take the jobs. They want the work.
I think the core of your question is a very important one.
We need to have a revenue base that is sufficient to support
having us be the leaders in the generations to come. That means
we have to continue to have the best research and development.
We need to continue to have the best educated workers. We need
to continue to have the infrastructure that is needed for
commerce in the future. And without an adequate revenue base,
you can not support that.
We have put some ideas in our budget that our thoughts as
to how to expand the tax base in a way that gets at the
question of how do you go after a bigger, not a smaller base.
If you take one specific idea, stepped-up basis that we put in,
it is an attempt to get at taxing income that is never realized
in a generation when it is earned, it goes tax free from one
generation to another, because people do not need to take the
gains in their lifetime.
When you and I retire--I will speak for myself--when I
retire I will need to draw down my retirement savings. They
will not be something that just sits there to be passed on. And
I will pay taxes on them when I take down my IRAs and 401(k)s.
We thought it was entirely fair to say income should not be
accumulated and never subject to the income tax. So that was an
attempt to use our income tax-based system to broaden the base
in a way that reflects principles of fairness, not saying we
want to tax it more, but we want to tax it the way it would be
taxed if you needed to use it in your lifetime.
There are always questions about shifting to a consumption-
based or some different tax system. It is complicated,
obviously. The challenge would be to design a system that would
be progressive, and that is not straightforward in a
consumption-based tax because people at lower income levels
tend to consume a much higher percentage of their income than
people at higher income levels.
Mr. Fattah. We don't have to joust about it today, but you
could exempt certain income categories or look at other ways to
get at it.
The real point is, is whether, given that we have used this
income tax for over 100 years and given that in every survey
the American public is convinced that it is unfair--whether it
is the revenue source that can carry this country for the next
100 years. If the only way someone can get elected President is
to promise to cut taxes for everyone, at the same time that we
are going to be competing with the Chinas and the Indias of the
world to preserve our position in the world, these two things
may not work together. At some point we may actually have to
spend more money rather than have a debate about what we are
cutting.
And so I am just wondering whether or not, we can use a
tool that has some limits, the most important being that the
American public doesn't believe it is fair.
Secretary Lew. It is definitely something that we think
about and we always look at the academic work that is being
done. I think to in a practical way shift from an income tax to
a consumption tax is an enormously complicated undertaking. But
I would be happy to follow up with you on this conversation.
Mr. Fattah. I would love to talk to you about it. And,
again, not now, but in the future. I do think that there needs
to be some thinking about what directions the greatest country
on Earth might go so that we could have a reliable revenue
source. I think this might be worth having some discussions
about.
Thank you, Mr. Chairman.

ABLE ACT

Mr. Crenshaw. Thank you.
And let me ask you one final question. You have been very
generous with your time. But I want to ask you about the way
the IRS implements regulations, about two regulations. One was
statutorily mandated. I mentioned in my opening statement about
the ABLE Act. The States are going to administer that, but the
IRS has to write some rules and it is supposed to be ready by
July. And if you know a little bit about that bill, it is going
to bring peace of mind to millions of Americans that are facing
these challenges of disabilities. So a lot of States are
already moving ahead to begin to administer this kind of
program. And, just from your perspective, is that something,
the July deadline that is in the statute, will that be able to
be met?
Secretary Lew. Mr. Chairman, we are working very hard on
that rule and are trying very hard to meet the deadline. I am
hopeful we will. But I am happy to follow up with you as we get
closer to June to give you an update on where we are.
Mr. Crenshaw. I appreciate that. Because, again, this is
one of those pieces of legislation that is going to help
millions of Americans.
Secretary Lew. Yes.

501(C)(4)

Mr. Crenshaw. The other thing is a regulation that I don't
really care if you finish, and that has to do with the
501(c)(4)s. When it was promulgated, it had, like, 150,000
comments. It was pulled back. And as I understand it from the
Commissioner, there was some concern that it would be kind of a
wet blanket on the 2014 elections and it wasn't repromulgated.
I guess it is being worked on again. And I think the
Commissioner said that he doesn't want it to look like it will
impact even the 2016 elections. So it sounds like that is not
on the front burner anymore.
Have you got a view on the timing of that? Again, I don't
think that is statutory mandated. It is something that you all
want to write and promulgate and have comments, but it doesn't
sound like it is going to happen anytime soon.
Secretary Lew. Well, Mr. Chairman, the proposed rule that
was put out was meant to start a discussion. It started quite
a----
Mr. Crenshaw. Firestorm.
Secretary Lew [continuing]. Firestorm of a discussion, and
the 150,000 comments all require attention. There has been a
process by which work has been ongoing to understand and think
through the issues. I can not give you a schedule, but I can
tell you that there is going to be a very careful process as we
go forward, and we are always attentive to comments on
important matters.
Mr. Crenshaw. Great. Well, thank you very much. And thank
you for your time today. You have got a big job, tough job. And
if we can work together, we would like to do that.
Again, thank you for being here today.
Secretary Lew. Thank you, Mr. Chairman.
Mr. Crenshaw. The hearing is adjourned.

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W I T N E S S E S

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George, Hon. J. Russell.......................................... 1
Koskinen, Hon. John A............................................ 123
Lew, Hon. Jacob J................................................ 205
Olson, Nina E.................................................... 1