[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
THE INTERNAL REVENUE SERVICE OPERATIONS AND THE 2010 TAX RETURN FILING
SEASON
=======================================================================
HEARING
before the
SUBCOMMITTEE ON OVERSIGHT
of the
COMMITTEE ON WAYS AND MEANS
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION
__________
MARCH 25, 2010
__________
Serial No. 111-46
__________
Printed for the use of the Committee on Ways and Means
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COMMITTEE ON WAYS AND MEANS
SANDER M. LEVIN, Michigan, Acting Chairman
CHARLES B. RANGEL, New York DAVE CAMP, Michigan
FORTNEY PETE STARK, California WALLY HERGER, California
JIM MCDERMOTT, Washington SAM JOHNSON, Texas
JOHN LEWIS, Georgia KEVIN BRADY, Texas
RICHARD E. NEAL, Massachusetts PAUL RYAN, Wisconsin
JOHN S. TANNER, Tennessee ERIC CANTOR, Virginia
XAVIER BECERRA, California JOHN LINDER, Georgia
LLOYD DOGGETT, Texas DEVIN NUNES, California
EARL POMEROY, North Dakota PATRICK J. TIBERI, Ohio
MIKE THOMPSON, California GINNY BROWN-WAITE, Florida
JOHN B. LARSON, Connecticut GEOFF DAVIS, Kentucky
EARL BLUMENAUER, Oregon DAVID G. REICHERT, Washington
RON KIND, Wisconsin CHARLES W. BOUSTANY, JR.,
BILL PASCRELL, JR., New Jersey Louisiana
SHELLEY BERKLEY, Nevada DEAN HELLER, Nevada
JOSEPH CROWLEY, New York PETER J. ROSKAM, Illinois
CHRIS VAN HOLLEN, Maryland
KENDRICK B. MEEK, Florida
ALLYSON Y. SCHWARTZ, Pennsylvania
ARTUR DAVIS, Alabama
DANNY K. DAVIS, Illinois
BOB ETHERIDGE, North Carolina
LINDA T. SANCHEZ, California
BRIAN HIGGINS, New York
JOHN A. YARMUTH, Kentucky
Janice Mays, Chief Counsel and Staff Director
Jon Traub, Minority Staff Director
______
SUBCOMMITTEE ON OVERSIGHT
JOHN LEWIS, Georgia, Chairman
XAVIER BECERRA, California CHARLES W. BOUSTANY, Jr.,
RON KIND, Wisconsin Louisiana, Ranking Member
BILL PASCRELL, Jr., New Jersey DAVID G. REICHERT, Washington
JOHN B. LARSON, Connecticut PETER J. ROSKAM, Illinois
ARTUR DAVIS, Alabama PAUL RYAN, Wisconsin
DANNY K. DAVIS, Illinois JOHN LINDER, Georgia
BOB ETHERIDGE, North Carolina
BRIAN HIGGINS, New York
Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public
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C O N T E N T S
__________
Page
Advisory of March 18, 2010 announcing the hearing................ 2
WITNESS
The Honorable Douglas H. Shulman, Commissioner, Internal Revenue
Service........................................................ 5
SUBMISSIONS FOR THE RECORD
Cheryl Latos, Statement.......................................... 38
Colleen Kelly, National Treasury Employee Union, Statement....... 41
INTERNAL REVENUE SERVICE OPERATIONS AND THE 2010 TAX RETURN FILING
SEASON
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THURSDAY, MARCH 25, 2010
U.S. House of Representatives,
Committee on Ways and Means,
Subcommittee on Oversight,
Washington, DC.
The Subcommittee met, pursuant to notice, at 10:04 a.m., in
Room 1100, Longworth House Office Building, the Honorable John
Lewis [Chairman of the Subcommittee] presiding.
[The advisory of the hearing follows:]
HEARING ADVISORY FROM THE COMMITTEE ON WAYS AND MEANS
Lewis Announces a Hearing on
Internal Revenue Service Operations and
the 2010 Tax Return Filing Season
March 18, 2010
House Ways and Means Oversight Subcommittee Chairman John Lewis (D-
GA) today announced that the Subcommittee on Oversight will hold a
hearing on Internal Revenue Service (IRS) operations, the 2010 tax
return filing season, and Fiscal Year 2011 budget proposals. The
hearing will take place on Thursday, March 25, 2010, at 10 a.m., in the
main Committee hearing room, 1100 Longworth House Office Building.
The Commissioner of the Internal Revenue Service, the Honorable
Douglas Shulman, will be the only witness at the hearing. Any
individual or organization not scheduled for an oral appearance may
submit a written statement for consideration by the Committee and for
inclusion in the printed record of the hearing.
FOCUS OF THE HEARING:
In 2009, the IRS collected $2.35 trillion and processed 236 million
tax returns, including 144 million individual income tax returns. The
Subcommittee will review, and discuss any challenges arising during,
the current tax return filing season with a focus on: the availability
of assistance to taxpayers; the most common taxpayer questions and
errors; tax return processing; and recent tax refund scams. Further,
the Subcommittee will consider how the economy has affected taxpayers
this filing season.
The Subcommittee also will review overall IRS operations.
Specifically, the Subcommittee will focus on: (1) the adequacy of
taxpayer services, including toll-free telephone service; (2) fairness
in the examination and collection programs, including increased
reliance on correspondence examinations and liens; (3) efforts to
reduce the $345 billion tax gap; and (4) needs related to security at
IRS facilities. As part of its consideration of IRS operations, the
Subcommittee will review the Administration's Fiscal Year 2011 budget
proposal for the IRS of $12.6 billion, an increase of 4 percent over
Fiscal Year 2010 levels.
In announcing the hearing, Chairman Lewis said, ``A successful
filing season is critical to confidence in our federal tax system. It
is important for taxpayers to know that their returns will be processed
efficiently and refunds will be issued quickly. I look forward to
hearing from the Commissioner on the status of the filing season and
services that are available to low-income taxpayers or those
experiencing economic difficulties.''
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noted above.
Chairman LEWIS. Good morning. The hearing is now called to
order.
Today the Oversight Subcommittee will review the operation
of the Internal Revenue Service and the tax filing season.
Before we begin, I would like to express our continued
sympathy to the IRS employees in Austin and throughout our
country. I want them to know that their safety is our top
concern. I also want them to know that we value the good work
that they do to help taxpayers, process tax returns, and
collect our federal revenue.
Mr. Commissioner, we want to thank you for your leadership,
for your vision, and for your deduction. We are pleased to have
you before us. First we would like to thank you for coming to
this hearing today, and for holding hundreds of open houses
this filing season to help taxpayers who are having serious
financial problems. We also would like to learn if there is
more that can be done to help taxpayers this season, either in
person or on the telephone.
We thank you, Mr. Commissioner, again for your leadership
on the regulation of tax return preparers. I believe that the
regulation of tax return preparers will protect taxpayers and
enhance compliance.
Finally, we will explore the agency's proposed budget. We
will consider what must be done to provide the agency with the
resources that it needs to meet its core tax mission and its
increasing responsibilities, including those under the health
reform legislation.
We on this subcommittee have full confidence that the IRS
can balance taxpayer service and enforcement with the support
of the Congress. I am hopeful that others on the subcommittee
and in the Congress will join me in pledging their support
today.
Now I am pleased to recognize the distinguished Ranking
Member, Dr. Boustany, for his opening statement.
Dr. BOUSTANY. Thank you, Mr. Chairman, and thank you for
holding the hearing. And I thank you for yielding time to me.
Commissioner Shulman, welcome. Thank you once again for
appearing before this Subcommittee. And more generally, I want
to thank you and every IRS employee who works for you for their
hard work and their dedication to public service.
And I want to make it clear that even when we in Congress
criticize certain IRS operations and question certain
responsibilities and how they are handled, we are doing this in
the context of our job in oversight. And we are not--I want to
emphasize not--personally attacking the fine public servants
who work at the agency, and we are not attacking your
leadership on a personal level.
I also want to mention the horrific attack on the IRS
offices in Austin, Texas on February 18th. Let us continue to
honor the memory of Mr. Vernon Hunter, the IRS employee and
Vietnam veteran who lost his life in this very senseless
attack. And as I said on the House floor on March 3rd, we also
should recognize the courage and heroism of those men and
women, including IRS employees, first responders, and others,
who responded to the attack to ensure that our country did not
suffer even greater losses.
And I want to offer my pledge to work with you, and that
pledge also to the agents and employees of the IRS, that we
will work to ensure that all safety needs are met with your
agency. So I just wanted to offer that. I enjoyed our
conversation yesterday, and I look forward to future
conversations as well on this issue.
Mr. Chairman, I want to say though our debate is often
sharp and contentious, as we saw during the health care debate
over the weekend, clearly there is no license for violence in
our society, nor is there license for the kinds of racial slurs
and other slurs that we heard about.
And so, you know, we should continue a vigorous debate on
the issues and try to stay aboveboard and keep it from
degenerating to, you know, a total lack of civility. So I
wanted to offer that publicly.
Before Commissioner Shulman begins his testimony, I want to
highlight two issue sort of importance to me. The first is the
IRS's role in health legislation that the President just signed
into law. This legislation envisions the IRS having a central
role in administering a new national health insurance system
and enforcing the rules.
During the 2008 presidential campaign, then-Senator Obama
and Candidate Obama attacked Senator McCain's health care
reform plan on two main points. In an October 4, 2008 memo,
then-Candidate Obama argued against the McCain approach
because, ``It pays for its new tax credit by taxing employee
health benefits for the first time in history,'' and, ``The new
tax credit would go directly to insurance companies, not
individuals.''
I find this ironic that the Democrats' government health
care plan, in the bill that was now signed into law, does
precisely these two things. The health care bill imposes a 40
percent tax on what the Democrats call ``excess benefits,'' and
turns the IRS into a collection agency for health insurance
companies. These so-called tax credits won't actually end up in
the taxpayers' pockets. Instead, they will end up in the
insurance companies' profits.
The second topic I would like to mention involves the
Democrats' failed stimulus bill. This past Monday, Commissioner
Shulman, you joined Vice President Biden and Treasury Secretary
Geithner in celebrating this year's increase in average tax
refunds.
And you said, I quote, ``The average tax refund has reached
$3,036 this year, a $266 increase from a year ago. The Recovery
Act is a major factor behind these larger record refunds.'' And
then you went on to suggest that the tax benefits provided in
the stimulus bill were putting more money in people's pockets.
But we have done some analysis on the economic data, and we
see a different story. In fact, higher refunds provide further
proof that the stimulus bill was a failure. The economic data
show that people earned less income in 2009 than in 2008 due to
job losses and wage cuts.
For instance, between the end of 2008 and the end of 2009,
the unemployment rate, we all know, went from 7.4 percent to 10
percent. Non-farm private sector employment dropped by 5
million jobs over the course of 2009. Yet many people who first
became unemployed in 2009 probably over-withheld during the
period they were working because they set their withholding
based on an analyzed salary that either later disappeared or
was diminished.
And as a result, their year-end income was lower than
expected, and now they are entitled to a tax refund. Thus,
larger refunds are evidence of a worsening economy in 2009,
which in turn is evidence of a failed stimulus bill.
So, Commissioner Shulman, I look forward to your testimony
today, hearing your thoughts on these and other issues. And Mr.
Chairman, I yield back.
Chairman LEWIS. Thank you very much, Dr. Boustany, for your
statement and for your extended remarks on the climate and
atmosphere here in Washington.
Dr. BOUSTANY. Thank you, Mr. Chairman.
Chairman LEWIS. Now we will hear from our witness, IRS
Commissioner Doug Shulman. I ask that you limit your testimony
to five minutes. Without objection, your entire statement will
be included in the record. Welcome.
STATEMENT OF DOUGLAS H. SHULMAN, COMMISSIONER, INTERNAL REVENUE
SERVICE
Mr. SHULMAN. Thank you, Mr. Chairman, Ranking Member
Boustany, Members of the Subcommittee. I appreciate this
opportunity to testify about the filing season and our 2011
budget.
2010 filing season has proceeded smoothly thus far.
Telephone-assisted levels of service have improved since last
year, when they declined due to unprecedented demand and
enactment of tax-related legislation.
Accuracy rates and customer tax law account questions
remain very high. Overall, filing is down a little bit at this
point, which we think is due to the severe snowstorms and
weather. E-File remains up, and the trend continues in the
right direction, where we are getting more electronic filing. I
would also mention that in this challenging economy, average
refunds are up by about $266 this year, to about $3,036 this
year.
We have taken several steps this year, building on steps we
took last year, to help taxpayers through some of these
unprecedented difficult times. The most notable that I would
mention is I announced earlier this month that we are changing
the eligibility rules for our offer and compromise program,
where someone can settle a tax debt.
In the past, you looked at three-year average earnings, so
you looked back. And someone who lost a job would average in,
when they had a job, their earnings. Now we are just looking at
current income, making settlement offers with people. And then,
if they get a job, we will do an adjustment in the future.
We also mentioned, Mr. Chairman, as you mentioned as well,
we are holding special Saturday open houses. We are assembling
all the people needed to make a decision and solve taxpayer
decisions on the spot. We will hold about a thousand of those
this year, the first one this Saturday.
We are also working hard to implement the recent Hiring
Incentives to Restore Employment Act, also known as the Jobs
Act, where people receive a 6.2 percent payroll tax incentive
that goes directly to small businesses. We are working on
guidance; by second quarter, people will be able to claim that,
and that should help with jobs in this economy. We are looking
forward to supporting that legislation.
In recognition of the critical role that the IRS plays in
this economy, the President has given us a judicious investment
in both service and enforcement programs in his 2011 budget.
That budget is going to allow us to carry out things like our
continued focus on offshore tax evasion; our focus on making
sure high income individuals and corporations pay the proper
amount of taxes; our effort to oversee the tax return preparer
community, which is integral to our strategy for compliance and
service; and will also give us the funds to finish our tax
account database projects, which is going on for a number of
years. We will be able to complete it for the 2012 filing
season, assuming Congress approves the budget.
Let me end by giving you a quick update on the incident in
Austin where an individual flew a plane into an IRS building,
killing one of our employees. This was an incredibly sad event
for the IRS. But it is also an event that reminded me of the
important work that the men and the women of the IRS do every
day, and that it is work that is sometimes not appreciated by
those who would blame this agency for the nation's tax laws.
First, I will tell you we have no reason to believe that
this attack could have been prevented. And we have no
recollection to believe that this was part of any organized
opposition to the agency. However, I am very concerned that
this incident not fan the flames of ignorance about the IRS's
core mission and our approach.
While we do engage in compliance activities for the small
portion of Americans who aren't paying their fair share of
taxes, the vast majority of our work is serving the hardworking
taxpayers of this country--processing returns, sending out
refunds, answering questions on the phone, trying to help
people navigate a complex tax system.
I am incredibly appreciative of the support that this
committee has shown the agency during the difficult days after
Austin. And I request that all Members of the Committee join me
in explaining to the public that the vast majority of Americans
experience an IRS that is merely trying to help them process a
tax return and get a refund; and that at its core, we are an
agency of public servants working to serve the American people.
Mr. Chairman, this concludes my oral testimony. I am happy
to answer questions.
[The prepared statement of Mr. Shulman follows:]
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Chairman LEWIS. Mr. Commissioner, thank you for your
statement. And as Chair of this Subcommittee, and the Ranking
Member and I think all Members of the Subcommittee and our Full
Committee, will do our part in explaining the role of the
Internal Revenue Service, all of the employees, in doing the
job that they are authorized and committed to do. So thank you
again for your service.
At this time we will open the hearing for questions. I
would like to remind members that we will follow the Givens
rule for questions. And I ask that each member be brief and
abide by the five-minute rule.
Mr. Commissioner, are you concerned that there has been an
increase in the number of extensions and the use of credit
cards to pay taxes this filing season? What advice does the IRS
have for taxpayers in financial distress this filing season?
Mr. SHULMAN. You know, we haven't seen any major trends
that are troubling to us thus far. I think the advice I give
people this filing season is similar to other advice, with one
caveat, given that there are more people unemployed than in the
past who may be unable to pay their tax obligation.
I mean, in general we tell people, pay on time. If you
can't pay on time, still file a return and we will work with
you. We are encouraging people to electronically file and
direct deposit because if you do, you can get your refund in
ten days, get cash into people's pockets.
I think the important thing for this year is, you know, I
have instructed all of our people in all of our operations,
especially our collections operations where people have--are
actually owing the IRS money and due to the government, that we
need to--while we need to collect the money needed to fund the
government, we also have to meet each taxpayer based on their
individual circumstances.
And so the best advice I can give people is if they can't
pay, they should still file. They shouldn't disappear. They
should call us. Our people can work with folks. They can put
them on an installment plan. If they qualify, they can get an
offer in compromise. We can work through people's issues with
them, and it is important for people to remember that.
Chairman LEWIS. Mr. Commissioner, I notice that the budget
proposal shifts $9 million to toll-free telephone assistance
from low-income services such as the VITA program and low-
income taxpayer clinics.
Would this affect the IRS' service to low-income taxpayers?
Mr. SHULMAN. As you know, Mr. Chairman, we are in tight
budget times, with deficits higher than the President would
like. He asked every agency to try to be as efficient as we
could and make a series of tradeoffs.
That budget tried to do that. Our telephone service serves
a number of low-income, elderly citizens, and so it wasn't
where we wanted it to be. Some money was shifted from the VITA,
the low-income taxpayer clinics, et cetera. I think it is a
very reasonable discussion to debate whether that should be
shifted or not.
Chairman LEWIS. Thank you. Now I turn to the Ranking
Member, Dr. Boustany, for his questions.
Dr. BOUSTANY. Thank you, Mr. Chairman.
Commissioner Shulman, with regard to the increase in
average refund that I referenced in my opening statement, can
you share with us evidence that you might have that the higher
utilization of stimulus tax credits is driving the refund data?
Mr. SHULMAN. So I was listening closely when you gave your
opening statement, and hadn't--not familiar with the analysis
you did around employed/unemployed. You know, there are a
number of things going into refunds, including 1.4--or almost 2
million people have gotten the first-time home-buyers' credit
already, which is $7500, which clearly increases refunds. The
Make Work Pay credit, most Americans are getting $400, or $800
if they are a married couple. I would be happy to work with
your staff afterwards and give you our analysis.
Dr. BOUSTANY. I appreciate that because it would seem to me
that some who--or perhaps many who started the year with a
certain level of income and saw a decline over the course of
the year and had withholdings on the front end, that could be a
major factor in driving up the percentage of their--of refunds,
or the increase that we have seen. So we would like some data
just to sort of, you know, really dig into that, to understand
what is going on, in the interest of oversight.
And before I get--I have a couple of health care questions.
But in a previous subcommittee hearing, we talked a lot about
the first-time home-buyer tax credit, and some of the fraud
issues. I know we have worked with you to address this problem
to help with tools that you might need.
And could you give us an update on the correction of some
of the problems we were seeing with that tax credit?
Mr. SHULMAN. Yes. I mean, the first thing I would say, any
time there is a very short term for implementation, narrow
window, and a $7500 or $8000 credit, you are going to see
fraud.
What we try to do is balance getting the money out to
people, where the intent was to get money to people to help
stabilize the home market and help them buy a home, and
minimize fraud. An important tool for us is to have math error
authority. And so we had no authority if we saw an indicia of
fraud to actually stop and change your refund. We either had to
do a full-blown audit, which can take time; stop a refund, and
sometimes stop a refund from someone if we find out that the
indicia doesn't come through; or we needed to put the refund
out and not do anything.
We came back and asked Congress to give us audit authority,
which they did, or math error authority, which was very
important. We have also now asked for more documentation from
home buyers, to see actual closing documents. And so some of
the past problems, we think, are solved.
I will tell you we have taken a major number of audit
resources and shifted them to first-time home-buyer credit. We
have shifted--we probably, by the end of this year, will have
opened 200,000 audits to make sure that there is not fraud in
that program.
Subsequently, Congress passed a second first-time home-
buyer credit bill that also had a--people who had owned their
home for five years, lived in it for three consecutive years,
et cetera. That is going to cause similar issues for us.
And I think it is important for people to know, when there
are short-term things and use the IRS to stimulate the economy,
we are going to do our job. We are going to be a distribution
mechanism. But there is also opportunity for fraud, and we are
going to have to make those tradeoffs and resource tradeoffs.
Dr. BOUSTANY. Thank you. And going to health care now, I
referenced the premium tax credit and how it will go directly
to insurance companies. Is it true that those taxpayers who do
receive this premium tax credit will not actually see the money
in their refund checks, but rather the IRS will send tax
dollars directly to the health insurance companies under the
new law?
Mr. SHULMAN. Let me just say something about kind of our
role around health care. You know, our role is to administer
the tax portions of the health care law. And I really think of
us as, you know, the payor bank that needs to process and do
lots of financial transactions around that to make sure the
benefits are going to the right place.
My understanding is--if you are talking about the tax
credits to help people buy insurance, yes, my understanding is
that we are going to try to work that out in a way that is the
most efficient for the system.
I think the law contemplates that people will work through
the exchange. The exchange will give us whatever information is
needed. And instead of them sending money to the health care
provider, that money will be sent directly.
Dr. BOUSTANY. All right. Thank you. And one final question,
Mr. Chairman, if you don't mind.
The CBO came out with some estimates, and the figure of $10
billion over the next decade in additional funding was cited,
on top of the base budget, to carry out the new authorities
that you are going to need to deal with the new health care
law.
Do you agree with this estimate, or have you done some
internal work? Were you consulted on this?
Mr. SHULMAN. We were not consulted by CBO. That is their
estimate. Their tradition is to come up with their own
estimates of administrative costs. But that is--I think it is 5
to 10 billion is the number that is accounted for in the
overall cost of the legislation.
What we do is watch legislation. Clearly, we have been
involved in planning. Now that the legislation is passed, I
have a staff working on the actual numbers that it will cost
for us to implement the tax portion of the health care bill.
And we will be coming up with those numbers, you know, as quick
as we can.
Dr. BOUSTANY. And given that a lot of these provisions
don't go into effect until 2014 that affect the agency, so this
is really a six-year figure, in effect.
Mr. SHULMAN. Again, it is a CBO figure, so I don't know how
they came up with them.
Dr. BOUSTANY. Okay. Well, one final thing. You mentioned
the additional resources going into dealing with the first-time
home-buyer tax credit. And I just want to express my deep
concern about the resource demand on IRS as this new law is
implemented. And we will work hopefully very closely with you
to examine those requirements.
Mr. SHULMAN. Yes. No, what is interesting about the tax
system is, over time, it has become a very efficient
distribution mechanism, not just in this country; all tax
authorities are asked to do things. We have proven quite adept
at it, with the stimulus checks under President Bush, Recovery
Act under President Obama, the earned income tax credit we have
administered for years.
As the head of the agency, the important thing for me is to
be given plenty of leave time, being given administrative
flexibility, and then being given the right resources to
implement it. And so I feel very confident we can implement
well what Congress passes, given that we have those three
things, which I have confidence we will have in the case of the
health care legislation.
Dr. BOUSTANY. We shall see. Thank you.
Chairman LEWIS. Thank you. Now we turn to Mr. Davis for his
questioning.
Mr. DAVIS OF ILLINOIS. Thank you very much, Mr. Chairman,
and thank you, Commissioner, for being here.
Following up a little bit on the question just raised by my
friend from Louisiana, would this also count as jobs being
created, the number of additional employees that you might need
for Internal Revenue Service?
Mr. SHULMAN. You know, I don't know. Sure. If there are
jobs, you know, if I hire someone, that is a job in the Federal
Government. I think generally the President's approach has been
to have jobs bills focused at the private sector, growing small
businesses, growing the economy that way.
Mr. DAVIS OF ILLINOIS. Well, I think a job is a job,
especially if it is one that is needed, and it becomes part of
the job creation.
But let me ask you: There is some concern about how helpful
the Service is being to low-income taxpayers, given that we are
in the season, earned income tax credits and those kinds of
things.
Could you explain how impactful you think the Service is
being right now for low-income taxpayers?
Mr. SHULMAN. Sure. We are very focused on trying to do
outreach, help people get their returns prepared, work with
volunteer organizations across the country. My belief is, you
know, while we are a large financial service organization for
many people, we are not like a financial service company who
gets to choose its customers and decides which customers it
wants to serve and which it doesn't want to serve. We need to
serve every last taxpayer, and we need to serve them well.
And so some people want internet service. Some people are
going to go hire an accountant. But often elderly, lower-income
taxpayers need specialized help by the IRS. We have low-income
taxpayer clinics which can help people resolve issues, which we
fund.
We have an extensive VITA program, which is the Volunteers
in Tax Administration, where we train people, give them
computers, et cetera. Our biggest VITA partner is AARP, but we
work with any number of nonprofits across the country, 10,000
sites.
We have tax clinics for the elderly. We do earned income
taxpayer outreach events. One was done with the Chairman; we
would love to do it with other folks. We have taxpayer
assistance centers all over the country.
If a low-income taxpayer clearly can't meet their
obligation, I mentioned in my opening statement, we have some
special programs like an offer in compromise program. We are
adjusting that during these really difficult economic times. We
are holding a thousand open houses, where people can come in
and get their tax problem resolved.
You know, we do have limited resources, and we need to
balance the resources across all of our demands. But I think
that this agency has a special obligation to meet people who
can't afford an accountant or don't have a computer to use tax
software. So we have got a number of programs, and we spend a
lot of time, a lot of effort, on outreach, education, and
service.
Mr. DAVIS OF ILLINOIS. There has been some concern in the
past about the ability of people who are incarcerated to
perpetuate scams in terms of filing, getting checks, having
relatives and friends cash them.
Can you give us an update on how that has been handled?
Mr. SHULMAN. Yes. You know, before I came into the job, I
know this was a major focus. The IRS has stepped up its efforts
working with state and federal law enforcement agencies, prison
systems, et cetera, to make sure we can try to match and make
sure that someone incarcerated isn't perpetrating fraud.
Sometimes, I will tell you, though, someone was employed
for half a year, is then incarcerated, and actually can file a
return from prison. So that happens.
The big problem, sir, really, at the end of the day, is now
if someone perpetrates fraud, the biggest penalty we can have
is we have--they are under criminal investigation and they go
to jail. Once somebody goes to jail, that penalty has already
been taken care of. And so the question is: When someone
perpetrates fraud in jail, what is the penalty for them?
We also have limitations around we can't share with the
warden someone's tax information because of tax privacy laws.
And so we think we have made great progress. It is never going
to be fully eradicated. But, you know, we have been quite
focused on this.
Mr. DAVIS OF ILLINOIS. Thank you. Mr. Chairman, can I have
a second here? I have got--there is some concern that has been
expressed by secondary filers that your computer system may not
pick up the information as readily. I will submit that in
writing, and see if we can get a response to it.
Mr. SHULMAN. Absolutely.
Mr. DAVIS OF ILLINOIS. Thank you. Thank you, Mr. Chairman.
Chairman LEWIS. Thank you.
Now we turn to Mr. Etheridge for his questioning.
Mr. ETHERIDGE. Thank you, Mr. Chairman.
Mr. Shulman, thank you for your testimony. Thank you for
being here this morning.
Let me just mention an issue with IRS that is very
pleasant. Last month I was able to participate in an IRS free
file event that we held in North Carolina at Fayetteville Tech.
And I was pleasantly surprised.
We had over 20 community-based organizations, and roughly
60 students and a number of families from Fort Bragg, which is,
as you probably know, right adjacent there and a large
installation. They came and used the free file system that you
are working with. And North Carolina is a free file state, as
you probably know.
So let me thank you and all your people who were able to
help because this is a great process between the federal and
the state, doing taxes online for free. And I personally
enjoyed it. I think the folks there really appreciated the
outreach and the help.
And let me just congratulate you because I am glad that you
have now signed, I think, a new five-year deal with the Free
File Alliance to provide this service to the American
taxpayers. And I think that is a great help to people who
really don't have a real sophisticated--but it helps them get
it done quickly. They can do it online and get the returns
quickly. So I congratulate you on that.
Let me move to another point now because I am pleased that
you mentioned the HIRE Act in your testimony a little while
ago. And I know that these credits are going to and can make a
big difference for businesses. And I think it will help our
economy grow.
But one of the biggest criticisms of the 1977 to 1978 Tax
Credit Act was that folks didn't know about it, or at least
said they didn't. I was in business, happened to know something
about it, and used it.
But my question to you this morning is: What has IRS done
and what are you doing to make sure through groups that
businesses are aware that this is available to them and can use
it to their advantage?
Mr. SHULMAN. Thanks for the question. So we immediately,
you know, put out press around this, worked with press offices
around the country. Frankly, the whole administration is
mobilizing around this, is supporting it.
And so, you know, sometimes a tax provision gets passed and
the IRS publicizes it. Now, you know, we have got the advantage
of important jobs acts. We have got the White House. We have
got the Treasury. Everybody is mobilized to get the word out.
We are also working with practitioners. Most small
businesses use an accountant or a tax preparer, someone else to
work on their taxes. And so we are getting the word out through
our extensive practitioner network, which is important, and the
payroll providers. A lot of people, you know, do the payroll
tax through the payroll providers, and so we are holding
regular conference calls. We are pushing that information out.
I would also note, in the health care legislation, the
first thing we are going to need to implement is a tax credit
for small businesses who put--to help them offset their costs
of providing health care to their employees. And so we are
immediately mobilizing around that effort.
Mr. ETHERIDGE. And how much is that? How much is that?
Mr. SHULMAN. It is 35 percent----
Mr. ETHERIDGE. Thank you.
Mr. SHULMAN [continuing]. Now and it will go to 50 percent,
I think, when it is--you know, by 2014.
Mr. ETHERIDGE. And what is the starting date on it?
Mr. SHULMAN. Starting date was last January 1, so it is for
this tax year.
Mr. ETHERIDGE. Thank you. One other question. I just think
it helps to get--every time we get an opportunity to get it
out, we need to remind folks when it is.
As you know, many Americans are struggling, and that is why
we are doing many of the things we are doing. And I think all
of us talk about our experiences, and certainly, as you know,
North Carolina is really above the national average in terms of
unemployment, which is a little unusual for us in our state. I
have counties in my district where it is approaching 15
percent.
So my question is, I guess, what additional steps can we
take and are you able to take to help make folks know what tax
cuts that have been passed are available to many of these
people? You have talked about it some already. And how can
taxpayers reduce their taxes currently as a move forward?
Because I think--I notice that you talked about compromise,
and that the IRS offers in its compromise, it dropped to about
72 percent during the last administration. Is this a measure
that you plan to implement more often as we move into these
very difficult times we now have?
Mr. SHULMAN. So a couple things. We actually just started a
program this month where we are partnering with state
unemployment offices to promote the tax credits people can get,
to promote our open houses, et cetera.
And so recognizing that unemployment is a problem everybody
is trying to tackle, we are actually going to the unemployment
offices so when people show up there, they will be able to get
IRS literature. They will be able to understand that they
should claim the Make Work Pay Credit. If they get out of work,
they can get a COBRA subsidy, things like that.
We are also letting them know about the changes in offers
in compromise, the open houses. We are publicizing in state
unemployment offices at a local level. And so we are going to
go the extra mile.
I mean, we have this fine line to walk. I mean, I am
responsible to raise all the money to fund the government. And
people who can pay need to pay, and we need to run our programs
for that. But again, we also need to walk in taxpayers' shoes.
And if you are struggling and trying to put food on the
table and have medicine and put your kid through college, if we
can be helpful and use our flexibilities to help people through
this tough time to keep them, you know, in good financial
condition for the long term, for their own benefit and also to
be taxpayers, that is good for the IRS and it is good for them.
On offers in compromise, that program has declined
dramatically. I think it is a good program. We are looking very
hard at what we can do to reverse this. I think the single most
important one is one that I compliment the Chairman and the
rest of the committee for supporting, which is repealing the 20
percent down payment, which came into effect at about the same
time this started plummeting. I don't think there is any reason
people should have to put a 20 percent down payment when, by
definition, they are having a hardship situation.
We are also looking to see when in the collection process
is the appropriate time to introduce it. How can we streamline
the program, potentially have some online tools so people can
go in and figure out if they are eligible. And so I actually
have a whole team looking at this because I think it is a
program that is under-utilized. I would like to figure out how
to get the utilization back up.
Mr. ETHERIDGE. Mr. Chairman, thank you for your time and
your patience because we do want everyone to pay what they are
due to pay but, you know, fairness to help those who need help,
too. Thank you, sir, and I yield back.
Chairman LEWIS. Thank you.
Now we turn to Mr. Kind for his questioning.
Mr. KIND. Great. Thank you, Mr. Chairman.
Mr. Shulman, thank you again for being here to testify. We
appreciate the job you and everyone at the IRS does on behalf
of the country.
You know, Dr. Boustany raised the issue of the health care
reform bill, and I think there is a lot of misinformation and a
lot of misperception about the role that the IRS is going to
play in the implementation of the recently passed health care
bill. So let me ask you a series of questions, and as much as
you can, just answer yes or no to clarify some questions that I
have about the exact role that the IRS will play.
The health care bill that was just signed by the President
is not going to fundamentally alter the relationship of the IRS
with the American taxpayer, will it?
Mr. SHULMAN. No.
Mr. KIND. And you said that right now you are moving
forward as far as doing calculations as far as the costs and
the staffing needs that the IRS has. But you haven't made any
of those final determinations yet, have you?
Mr. SHULMAN. That is correct.
Mr. KIND. And the IRS agents are not going to be going out
and auditing taxpayers to verify if they have obtained
acceptable health insurance, will they?
Mr. SHULMAN. No.
Mr. KIND. In fact, it is going to be the insurance
companies that will be merely certifying whether or not an
individual has obtained health care coverage. And they will be
certifying that to the IRS?
Mr. SHULMAN. Yes. Let me--it is probably worth me just----
Mr. KIND. Sure.
Mr. SHULMAN [continuing]. Being very clear because I think
there have, you know, been some misconceptions out there.
The way we envision this working is HHS, Department of
Health and Human Services, and the exchanges will be working
with the insurance companies to determine what is acceptable
coverage. All that will happen with the IRS is similar to a
current 1099, where a bank sends the IRS a statement that says,
here is the interest someone has, and they send it to the
taxpayer.
We expect to get a simple form that we won't look behind
that says, this person has acceptable health coverage. There
are not going to be any discussions about health coverage with
an IRS employee.
Mr. KIND. In fact, I would envision that the major role the
IRS will play is trying to get information into the
individuals' hands and businesses about the various tax
incentives that the health care reform bill has, and how they
can best access those incentives and utilize them. Is that
right?
Mr. SHULMAN. Yes. I mean, the role of the IRS is going to
be, again, the tax portions of this, not the health portions of
this. And what we are going to do is try to make sure people
are educated. There is information. We process payments
quickly. We also will make sure that there is no fraud and
abuse in the system, as we always do.
Mr. KIND. So the IRS is still going to pick up the phone
and answer questions in regards to tax incentives under health
care bill?
Mr. SHULMAN. Yes.
Mr. KIND. And I assume the IRS will try to build some type
of online education service, too, for people to access as far
as what they are eligible for?
Mr. SHULMAN. Absolutely.
Mr. KIND. And you will probably be performing some
additional outreach services with businesses and taxpayers
about the health care bill?
Mr. SHULMAN. Absolutely.
Mr. KIND. And as you indicated to Mr. Etheridge, you are
already moving forward on the 35 percent tax credit that small
businesses are going to be getting this year already with the
enactment of the health care bill?
Mr. SHULMAN. That is our first move.
Mr. KIND. And no taxpayer is going to be subject to any IRS
liens or levies or jail time for failing to disclose insurance
requirements to the IRS?
Mr. SHULMAN. That is what the legislation calls for, yes.
Mr. KIND. And as soon as your internal review is done, I
assume you are going to report back to Congress what type of
resources you will need for staffing or for additional funds in
order to implement the health care bill?
Mr. SHULMAN. Yes. I do want to be clear, as I was with Mr.
Boustany. We will need resources to implement the tax
provisions in this legislation. And we will look forward to
working with the committee to make sure we have the proper
resources to serve the American people.
Mr. KIND. Thank you. And let me just ask you a final
question, that reports are coming out that there is roughly a
10 percent increase in the average return for taxpayers filing.
And I think you have indicated and made public statements that
that in large part is attributed to the various tax relief that
taxpayers are receiving under the American Recovery Act. Is
that your opinion?
Mr. SHULMAN. Yes. I mean, clearly the Recovery Act is a
major portion of that.
Mr. KIND. So more money in taxpayers' pockets during this
tough economic time due to the Recovery Act. And the only
proviso to that is that the returns coming in are a little bit
slower. And so we don't have the complete returns, or even the
typical number of returns, at this point of the year. Is that
right?
Mr. SHULMAN. Yes. It is 3 percent down. We have about half
the tax returns have come in at this point, which is more or
less average. It is a small decline, but it is not
statistically significant.
Mr. KIND. The number that I am looking at here, that in
2009 the average tax return was about $2,770. But now in 2010,
that jumped up to $3,036, so roughly a $266 additional refund
to the average taxpayer.
Does that sound about right to you?
Mr. SHULMAN. That is the current run rate, yes.
Mr. KIND. Great. Thank you, Mr.----
Dr. BOUSTANY. Would the gentleman yield?
Mr. KIND. Yes. I would be happy to yield.
Dr. BOUSTANY. Just for clarification on the health care
issue, Commissioner, could you talk to us about the compliance
side with regard to the individual mandate? Obviously, in terms
of being able to enforce compliance, what is going to be your
role with regard to any penalties paid in this?
Mr. SHULMAN. Yes. So my understanding of the bill--and
again, you know, this is a bill that some of it has passed; a
big portion has passed, but there are still some, you know,
pieces of the reconciliation which adjust things--you know, the
insurance company will send to us whether or not somebody has
coverage or not. People will do their self-filing, as they
always do.
If they file, they will--if they file, and they have to
have insurance if they have money to have insurance, so not
everybody has a requirement, as I understand it; there is also
an exception for lower-income people who can't afford
insurance--it will come in and they will adjust their tax rate,
and based on whether they have insurance or not.
And the Tax Code is used, and the tax return is used, as
the financial incentive around this. So our role will be people
will either pay their taxes or not. If they don't pay their
taxes, then they will get a letter from us saying what you owe.
Mr. KIND. Mr. Chairman, just one last question, reclaiming
my time.
Just so we are clear, there is no mandate for individuals
to have to go out and purchase insurance under the health care
bill. They can choose to purchase insurance. But if they don't,
we are going to be asking them to contribute a little bit so
that if they do get sick or injured and they do go into the
emergency room, that those costs aren't going to be passed on
to people who are paying for insurance or swallowed by the
health care providers themselves.
But it is going to be an individual choice whether they
want to have insurance or not. But if they don't, for the first
time we are asking them to contribute a little bit so that the
cost of the uninsured isn't passed on to Americans who have
insurance in our current system.
Thank you, Mr. Chairman.
Dr. BOUSTANY. If the gentleman would yield?
Mr. KIND. My time is expired.
Chairman LEWIS. Thank you.
Now we turn to Mr. Becerra for his questioning.
Mr. BECERRA. Thank you, Mr. Chairman.
Commissioner, good to see you. Thank you for being here.
And I want to congratulate you and offer you our support--I
won't say condolences, but support. Because condolences,
support, are required because you are now going to be tasked
with additional work to try to make sure that the $40 billion
in tax credits, tax cuts that small businesses will receive
under this health care bill, and the close to around $400
billion in tax cuts that individuals will receive to help them
cover the cost of health insurance because of their tax
credits, will be administered through your shop.
And so support because we need to make sure that you do
this well, and condolences because we always expect you to do
more than is humanly possible, given the time and the resources
that you have. So make sure that it is more support than
condolence that we ultimately give you in that regard.
Mr. SHULMAN. I will ask of that, sir.
Mr. BECERRA. Absolutely, and please. The last thing I think
anyone in this committee would like to see is that we delay the
ability of Americans to purchase affordable and quality health
care simply because we are unable to get them their credits,
tax credits, quickly enough. So let us know how we help you
administer this as you go on and do your business.
I also wanted, as I said, to congratulate you because you
just issued regulations on something I think is very, very
important for those of us who represent a large population of
middle class and modest income families.
What you issued recently as regulations is critical, saves
hundreds of dollars, in some cases thousands of dollars, and
perhaps lots of headache for a lot of these families that end
up filing returns using tax preparers and thinking that they
have now done the right thing by using a tax preparer, who
should be more skilled and knowledgeable on the preparation of
tax filings.
And yet they find out that they were either incorrect in
their filing or they were duped in their filing, and certainly
in many--and too often in the cases that they were overcharged
for the filing.
And so I wanted to just make sure I understand what your
regulations call for that are now out there for consideration
and comment. It is the case--it is the case today that just
about anyone can put out a shingle and say, I will prepare your
taxes and charge any amount. In fact, in most states there is
more regulation over who cut your hair or my hair than there is
over who prepared your taxes or my taxes.
And you issued some regulations to try to help us provide
some sanity within this industry because more often than not,
we find Americans who could have filled out the simple 1040
form being charged hundreds of dollars to do what could have
been done by a basic computer program, or perhaps the person by
himself or herself, just reading the basic instructions of the
IRS instruction manual.
And so I am hoping you give me a quick synopsis of what
your regulations are proposing.
Mr. SHULMAN. Sure. So we put out a report which gave a road
map over about three years of moving from a place where we
largely have minimal oversight over tax return preparers to
really trying to bring a minimal level of competency to all tax
return preparers. We think there are about a million of them.
We think that is a good, efficient use of leveraging our
resources for service and effort.
The basic road map is this. People will have to get an
identification number if they prepare returns, which we call a
PTIN in those regulations we just put out yesterday. And we are
hoping to get the PTINs up and running for next filing season.
Next, people will have to take a minimum competency exam,
basically that they can do a 1040. And then we are looking at
doing a small business exam, too, to make sure small businesses
are receiving the same level of service.
They will have to have continuing education, which is
general tax education except for some of that will have to be
ethics and some of that will have to be tax law changes;
because of the pace of tax law changes, it is an important
thing where people can make mistakes.
We will then put a database out. This will come down the
road, once people take the test and have continuing education
responsibilities, so the American people can look up and say,
are they working with a registered return preparer, give them
some level of confidence, their working with them.
And then we are going to shift some oversight and
enforcement resources into this area because there will be
people who go underground, and we want to find them and make
sure they are not preparing returns.
And so that shift will happen over time. But immediately,
we actually did thousands of visits to preparers this season to
remind them of their obligations. We sent out 10,000 letters to
remind people of their obligations. So we are already starting
to make that kind of education and enforcement shift.
Mr. BECERRA. And let's be clear. The legislation I have,
which would move in the direction that you are proposing in
your regulations, and I believe the regulations you have
issued, would not apply to a tax accountant or an attorney who
we already can tell, from their education and their work
experience, are prepared or are versed in the preparation of
tax filings.
This is for folks who we are not certain what type of
educational background they have, what type of experience they
have. And so what we are trying to make sure is that there is
level of competency that gives them the right and the
opportunity to go out there and sell themselves and tax
preparers.
Mr. SHULMAN. That is correct. We exempted people who
already have a professional competency test, a minimal level of
competence. They need to prove ongoing education--attorneys,
enrolled agents who are enrolled with the IRS, and CPAs.
With that said, I did say that over the next couple of
years, once we start tracking people, we are going to see and
be able to see what differences there are between the accuracy
of returns. And it is something we are willing to revisit if,
you know, we go down the line.
But we didn't think we should put an extra level of
requirements on a group that already has requirements.
Mr. BECERRA. And, Mr. Chairman, one final question, if I
may.
Commissioner, when we say we are going to require this
competency of people who prepare these forms, someone could try
to get away by saying, well, I am the one that signed the form,
but I have a shop of people who help prepare these.
How do you make sure that the people who actually do the
preparation will be required to have the competency so that we
make sure that someone can't try to skirt this new regulation
by saying, I signed it, I prepared it, yet in fact they have a
whole bunch of folks who don't have experience who are actually
doing the work?
Mr. SHULMAN. There are a couple of things. One is we want
to make sure the people you are talking about, who are sitting
in a shop actually coaching taxpayers through their return,
helping them with their return, get registered. We also don't
want to make someone who is a front office receptionist, who
takes tax returns and types in the information and doesn't use
any judgment calls and doesn't have any conversations with the
taxpayer--we don't want to put the requirement on everyone who
ever touches a return.
And so we have tried to craft these regulations carefully.
One is, you know, if someone is sitting there and you think
they walked you through your return and they are your preparer,
then they are going to need to sign.
We can usually see--there is usually a threshold number of
what is humanly possible as far as sending in returns in a time
basis. So if we see somebody sending in, you know, a couple
thousand returns under their name, we are going to send
somebody out to see, you know, who is really doing all those
returns.
We will also be doing, you know, random blank audits of
folks. And we will also be looking for lots of mistakes. And so
we will be putting in place compliance programs on the back end
around this requirement.
Mr. BECERRA. Commissioner, thank you. Chairman, thank you.
Chairman LEWIS. Mr. Commissioner, thank you for your time
and for your testimony. We wish you well. The Subcommittee
appreciates your views, and we look forward to another meeting
with you in the days and months and years to come.
Also like to thank the staff on both sides of the aisle for
your help on this hearing, and thank the Ranking Member and all
of the Members for attending.
There being no further business, the hearing is now
adjourned.
[Whereupon, at 10:57 a.m., the Subcommittee hearing was
adjourned.]
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