[Senate Hearing 114-488]
[From the U.S. Government Publishing Office]
S. Hrg. 114-488
PRESIDENT'S FISCAL YEAR 2017 BUDGET
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HEARING
before the
COMMITTEE ON FINANCE
UNITED STATES SENATE
ONE HUNDRED FOURTEENTH CONGRESS
SECOND SESSION
__________
FEBRUARY 10, 2016
__________
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Printed for the use of the Committee on Finance
______
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COMMITTEE ON FINANCE
ORRIN G. HATCH, Utah, Chairman
CHUCK GRASSLEY, Iowa RON WYDEN, Oregon
MIKE CRAPO, Idaho CHARLES E. SCHUMER, New York
PAT ROBERTS, Kansas DEBBIE STABENOW, Michigan
MICHAEL B. ENZI, Wyoming MARIA CANTWELL, Washington
JOHN CORNYN, Texas BILL NELSON, Florida
JOHN THUNE, South Dakota ROBERT MENENDEZ, New Jersey
RICHARD BURR, North Carolina THOMAS R. CARPER, Delaware
JOHNNY ISAKSON, Georgia BENJAMIN L. CARDIN, Maryland
ROB PORTMAN, Ohio SHERROD BROWN, Ohio
PATRICK J. TOOMEY, Pennsylvania MICHAEL F. BENNET, Colorado
DANIEL COATS, Indiana ROBERT P. CASEY, Jr., Pennsylvania
DEAN HELLER, Nevada MARK R. WARNER, Virginia
TIM SCOTT, South Carolina
Chris Campbell, Staff Director
Joshua Sheinkman, Democratic Staff Director
(ii)
C O N T E N T S
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OPENING STATEMENTS
Page
Hatch, Hon. Orrin G., a U.S. Senator from Utah, chairman,
Committee on Finance........................................... 1
Wyden, Hon. Ron, a U.S. Senator from Oregon...................... 3
ADMINISTRATION WITNESS
Koskinen, Hon. John A., Commissioner, Internal Revenue Service,
Washington, DC................................................. 5
ALPHABETICAL LISTING AND APPENDIX MATERIAL
Hatch, Hon. Orrin G.:
Opening statement............................................ 1
Prepared statement........................................... 31
Koskinen, Hon. John A.:
Testimony.................................................... 5
Prepared statement........................................... 32
Responses to questions from committee members................ 39
Wyden, Hon. Ron:
Opening statement............................................ 3
Prepared statement........................................... 53
Communications
Federation of Genealogical Societies............................. 55
National Treasury Employees Union (NTEU)......................... 61
(iii)
PRESIDENT'S FISCAL YEAR 2017 BUDGET
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WEDNESDAY, FEBRUARY 10, 2016
U.S. Senate,
Committee on Finance,
Washington, DC.
The hearing was convened, pursuant to notice, at 2:05 p.m.,
in room SD-215, Dirksen Senate Office Building, Hon. Orrin G.
Hatch (chairman of the committee) presiding.
Present: Senators Grassley, Crapo, Roberts, Thune, Burr,
Isakson, Portman, Heller, Wyden, Cantwell, Nelson, Menendez,
Carper, Cardin, Brown, Bennet, and Casey.
Also present: Republican Staff: Chris Armstrong, Deputy
Chief Oversight Counsel; Kimberly Brandt, Chief Oversight
Counsel; Eric Oman, Senior Policy Advisor for Tax and
Accounting; and Justin Coon, Detailee. Democratic Staff: Joshua
Sheinkman, Staff Director; Adam Carasso, Senior Tax and
Economic Advisor; and Tiffany Smith, Senior Tax Counsel.
OPENING STATEMENT OF HON. ORRIN G. HATCH, A U.S. SENATOR FROM
UTAH, CHAIRMAN, COMMITTEE ON FINANCE
The Chairman. The committee will come to order.
Today, the committee welcomes the Commissioner of the
Internal Revenue Service, John Koskinen. Commissioner Koskinen
comes before us this afternoon to discuss his agency's
operations and President Obama's budget proposal for fiscal
year 2017.
Commissioner Koskinen, today's hearing is the fourth time
you have appeared before this committee during my chairmanship.
Over the past year, we have seen both progress and setbacks at
the IRS. As you well know--and as I think everyone here knows--
I tend to be first in line to challenge and critique your
agency when I believe it is wrong. But, for today, I would like
to change things a little bit. Let me be the first to offer
praise for the IRS where it is due.
Here are some successes I would like to acknowledge.
Last spring, the committee launched an investigation of the
online tax return software industry. We were looking
specifically at how the industry deals with stolen identity
refund fraud and to what level the industry cooperates with the
IRS to combat that fraud. In the wake of our investigation, the
IRS and industry leaders launched a Security Summit and agreed
to new initiatives to prevent and counter fraud. So I want to
applaud these efforts, and I do look forward to continuing the
committee's oversight of its implementation and results.
Let me mention one more. Last year, this committee issued a
report following a 2-year bipartisan investigation of the IRS's
treatment of organizations applying for tax-exempt status. Our
report included a number of recommendations for changes at the
IRS, and, as of right now, all signs indicate that the agency
is taking appropriate steps toward implementing those
recommendations. So I appreciate your ongoing work there as
well and am grateful for your responsiveness.
There is, of course, more to be done, and I look forward to
working with you to ensure that taxpayers are never again
targeted because of their political beliefs.
While these are all signs of progress, a number of great
challenges still lie ahead. The most obvious challenge facing
the IRS is the need for modernization. On the one hand, the
agency must be brought into the digital age in a way that
provides the greatest convenience and efficiency for taxpayers.
But on the other hand, the agency must also better protect
against data thieves that thrive in the digital age.
We were reminded of these risks last year when data thieves
breached the IRS's own website through the Get Transcript
portal and successfully stole the tax records of 330,000
taxpayers. Now, that is 330,000 taxpayers who now have their
most sensitive tax information sitting out there in the hands
of criminals waiting to use that information to do further
damage this tax year, or the next, or even 10 years from now.
We were reminded of this threat yet again just yesterday, when
news broke of another large-scale attack against the IRS, but
thankfully it appears that that attack was unsuccessful. The
Get Transcript breach is going to haunt us for years to come,
and, unfortunately, it is only one of many.
On the customer service front, we look forward to hearing
more about the IRS's comprehensive ``Future State'' plan to
modernize how taxpayers interact with the agency. I applaud
this initiative, but I will be watching very closely to see how
it is carried out and how it does impact taxpayers. Once again,
modernization is probably the central challenge facing the IRS,
and it requires a careful balance of sometimes competing
priorities. Much hangs in the balance of how these efforts are
carried out.
Another issue I look forward to hearing about today is a
provision of the recently enacted FAST Act--specifically, the
provision dealing with the inactive tax debt collection
program. As noted in the conference report to the bill and as
we will hear today from Senator Grassley and perhaps others,
Congress's intent was that Treasury and the IRS would
expeditiously implement the provision by utilizing private
collection contractors and debt collection centers that are
approved by the Bureau of the Fiscal Service at the Department
of Treasury. Further, the statute requires that contracts be
entered into and signed within 3 months after enactment of the
FAST Act. That deadline of March 4th is fast approaching. So I
look forward to hearing an update today on your efforts to get
those contracts signed and cases released and to ensure that
the taxpayers are made aware of the program and how it will be
implemented.
With that, I will now turn to Senator Wyden for any remarks
that he cares to make.
[The prepared statement of Chairman Hatch appears in the
appendix.]
OPENING STATEMENT OF HON. RON WYDEN,
A U.S. SENATOR FROM OREGON
Senator Wyden. Thank you very much, Mr. Chairman, and thank
you for holding this hearing. And as I noted this morning, I
think it is very good that we are having multiple hearings this
week, because I think that is a big part of launching the year,
to really start the debate with these hearings. With tax season
underway and the President's final budget at hand, there are
obviously important issues to discuss with the IRS, and we want
to thank the Commissioner for joining us today.
The first is the big, ongoing challenge for the IRS, and
that is, providing the best possible service to taxpayers, even
though this is a tough budget environment. The good news is,
the Congress recently made a badly needed investment in ID
protection, telephone service, and cybersecurity for 2016. I
think--and the Commissioner would probably be the first to say
this--no one should think that the fraudsters and organized
criminals who have made headlines preying on taxpayers have
somehow vanished and moved on. It is my view that we are going
to have an ongoing challenge as the criminals continue to get
more sophisticated and inventive, which is something that the
Commissioner has emphasized.
And my view is that budget cuts that hobble our ability to
fight back against these tax ripoffs are tantamount to
kickbacks to the criminals. So the down payment that the
Congress made is going to help protect taxpayers and improve
services.
I also want to note at the outset, there is a lot more that
needs to be done, particularly with respect to upgrading our
information technology. The Commissioner has been quite
forthright in saying that this is a very large challenge for
the Internal Revenue Service. First of all, processing the
universe of taxpayer data is a year-round job. There is no
opportune time for the IRS to say, well, let us just go dark
and now we can have a big chunk of time, months and months, to
put in a new batch of servers and software. And this is a
particular challenge given the fact that some of the systems in
use date back to the Kennedy era. Decades of modified
technology and programming code have built up like layers in an
onion. When Congress updates a complicated policy like the
alternative minimum tax, the IRS has to figure out a way to dig
through all those layers to adjust the system and then correct
everybody's tax bill.
For these reasons and more, upgrading information
technology at the Internal Revenue Service is going to be
demanding and time-consuming. And you cannot get all this done
when you have a tight budget, which in effect means that when
you are going up against the fraudsters, you have one hand tied
behind your back.
Now, there is one issue--and we started talking about it
this morning with Secretary Lew, and I have discussed it with
the Commissioner--that I think very much deserves bipartisan
attention here in the Finance Committee, and that is, what is
going to be done to tackle this issue of corporate taxes going
unpaid? Now, the latest estimate with respect to the tax gap
comes in at $385 billion per year. And my sense is, when it
comes to individuals skipping out on their taxes, the IRS is
moving to make real progress in terms of sharing information
that the Congress can use to crack down on these shady
avoidance strategies and cheaters on the individual side. When
it comes to the corporate tax gap, however--and that adds up to
two-thirds of a trillion dollars over a decade--it is my view
that the Internal Revenue Service has some heavy lifting to do.
I sent a letter last week to the Commissioner asking how
the IRS studies the corporate tax gap, what it knows and what
it is going to do about it. We got a limited response to that
question yesterday, and today I hope we will hear more details
about how we can have an aggressive action plan to root out a
significant portion of this corporate tax gap and particularly
the most serious areas of growth in this gap.
We have 5 million Americans today living in deep poverty.
Assistance for the hungry has been cut. We have veterans across
the country on wait lists for health care. Wildfire prevention
in my part of the world is neglected while the fires get bigger
and hotter. And again and again, you have painful cuts being
proposed for services that are essential to older people and
families of limited means.
So, if you can come up with an effective, targeted, all-
hands-on-deck approach to reducing this corporate tax gap, you
are not going to meet all the revenue needs certainly in this
country, but you could make a real difference in terms of
getting our priorities straight. And my sense is, this is going
to require much bolder action and more information than the IRS
currently provides about how companies dodge their
responsibilities.
I have talked to the Commissioner about this, and my hope
is, this afternoon we will hear how the agency and the
Commissioner can, in concert with us, on a bipartisan basis,
put in place a strategy that ups the ante in terms of dealing
with the most serious aspects of corporation tax avoidance.
Mr. Chairman, thank you for scheduling this hearing.
Commissioner, we thank you for coming.
The Chairman. Well, thank you, Senator Wyden.
[The prepared statement of Senator Wyden appears in the
appendix.]
The Chairman. Our witness today is Internal Revenue Service
Commissioner John Koskinen. Commissioner Koskinen has been
serving as the head of the Internal Revenue Service since
December 2013. Mr. Koskinen has broad public-sector experience,
including having served as Chairman of the Board of Freddie
Mac, City Administrator for the District of Columbia, and
Deputy Director for Management at the Office of Management and
Budget. Mr. Koskinen also has extensive private-sector
experience, including working as the president of the United
States Soccer Foundation and as the president and CEO of
Palmieri Company. Mr. Koskinen graduated with a J.D. from Yale
University School of Law and a B.A. in physics from Duke
University.
I want to thank you, Mr. Commissioner, for being here
today, and please go ahead with your statement.
STATEMENT OF HON. JOHN A. KOSKINEN, COMMISSIONER, INTERNAL
REVENUE SERVICE, WASHINGTON, DC
Commissioner Koskinen. Thank you, Mr. Chairman, Ranking
Member Wyden, and members of the committee. I appreciate the
opportunity to join you today to discuss the IRS's budget and
current operations, and I particularly appreciate the
chairman's recognition of the progress we are making in several
areas.
But I want to begin by thanking the Congress generally,
including the members of this committee, for approving the $290
million in additional funding we received for fiscal year 2016.
These funds were specifically designated, as Senator Wyden
noted, for improving taxpayer service, strengthening
cybersecurity, and expanding our efforts against identity
theft. This is the first time in 6 years that the IRS has
received significant additional funding. It is a major step in
the right direction, and I can assure the Congress that we will
use these resources wisely and efficiently.
But the IRS is still under significant financial
constraints. Even with the additional $290 million, our budget
for this year is still about $900 million below where it was 6
years ago in 2010. Our budget as a whole is actually down for
this year when you consider that the Service must absorb about
$300 million in mandated cost increases and inflation.
As a result, we have no choice but to continue the
exception-only hiring policy that began in fiscal year 2011.
That leaves us unable to replace most employees we lose this
year through attrition. In fact, we expect the IRS workforce to
continue to shrink by another 2,000 to 3,000 full-time
employees this year, for a total loss of over 17,000 employees
since 2010.
We recognize the importance of spending taxpayer dollars
wisely and will continue working to find efficiencies in our
operations. But a fact that often gets overlooked is that the
U.S. is much more efficient in its tax collection than
virtually all other countries. The average OECD member country
spends $8.87 to collect $1,000 of revenue while the U.S. spends
only $4.70--about half of what the average is. So I believe it
is important to understand that we already are one of the most
efficient tax administrations in the world.
The IRS is also continuing to strengthen our operations as
we move forward. In that regard, as the chairman noted, we have
addressed a number of management problems that have developed
in the past, especially in the tax-exempt area. For example, we
welcomed this committee's bipartisan report issued in August
and accepted and are implementing all of its recommendations
that are under our control. The last report I have is that we
have implemented 82 percent of the recommendations of this
committee.
In developing our funding request for fiscal year 2017, we
felt it was important to be as specific as possible in
describing our priorities and the cost of each one. So, while
the President's 2017 budget for the IRS requests a total
increase of about $1 billion, we have broken that down into 15
separate initiatives. We believe this will give Congress a good
sense of how we intend to spend any increase in funding we
might receive, and we are prepared to be held accountable for
achieving the goals related to each initiative. Let me briefly
highlight some of the major areas covered by these initiatives.
First, of concern to everyone is taxpayer service. The
additional funding in the new budget will help us improve
service delivered through traditional channels and allow us to
continue modernizing the services we offer to help transform
the taxpayer experience.
Second, stolen identity refund fraud. The additional
funding in the fiscal year 2017 request will allow us to keep
investing in resources and tools to stay ahead of criminals who
continue to become more sophisticated in stealing identities
and filing false returns.
Third, our core enforcement programs. With this additional
funding, we would, for example, be able to increase audits and
collections. This is critical, because the ongoing decline in
enforcement activities we have seen in the last several years
has translated into billions of dollars of lost revenue for the
government.
Fourth, the Affordable Care Act. We must continue to invest
in the IT infrastructure to support implementation of the ACA's
major tax-related provisions. I would point out that for the
past 4 years, the IRS has received almost no funding for
implementation, and we have had to use over $1 billion of
resources needed for other critical IT functions in order to
meet our statutory obligations.
And fifth, electronic records management. Although we have
been making progress in preserving and protecting e-mails and
other electronic records, we need to continue making
improvements so we can respond faster to legal and
congressional inquiries as well as FOIA requests.
While providing adequate funding to these and other areas
is critical, Congress can also help us by passing legislation
to improve tax administration. We appreciate the efforts of
this committee last year to secure passage of a number of
important measures. The President's 2017 budget request
contains additional legislative proposals that would further
improve tax administration. They include: renewing streamlined
critical pay authority, which is critical for us; allowing us
to extend the matching program for Taxpayer Identification
Numbers; granting us authority to require minimum
qualifications for paid tax preparers; and expanding electronic
filing requirements for businesses.
That concludes my statement, Mr. Chairman, and I would be
happy to answer your questions.
[The prepared statement of Commissioner Koskinen appears in
the appendix.]
The Chairman. Well, thank you, Mr. Koskinen. As I said in
my opening statement, this is the fourth time you have appeared
before the committee during my time as chairman, and each time
we have discussed the issue of cybersecurity and the threat
from data thieves who steal and abuse taxpayer information.
In the past year alone, cyber-criminals have conducted a
number of breaches that are aimed at stealing personal
information, including 1.1 million identities of CareFirst Blue
Cross Blue Shield customers, 80 million Anthem customers,
330,000 taxpayer records through the IRS's own Get Transcript
portal, and thousands of records from the online tax
preparation site, TaxSlayer. Just yesterday, we learned of
another large-scale attack against the IRS, though thankfully
this one appears to have been unsuccessful, and that is the
botnet cyber-attack last month.
Commissioner Koskinen. Right.
The Chairman. Commissioner Koskinen, these attacks are not
going away. What can you tell us about this latest attack? And
how can the IRS be sure that it has fully identified and
contained this attack and other attacks that may come? Attacks
of this nature can often result in malware or a virus being
embedded in a compromised system even after the event is known.
And my second question would be, can you assure this committee
that the IRS is doing everything it can to ensure the security
of taxpayer information following this attack?
Commissioner Koskinen. It is a serious question, as we have
discussed before. As you note, the caliber of the enemy we are
facing is increasingly more sophisticated and more global. We
are dealing with organized crime syndicates all around the
world. We are attacked or pinged over a million times every
day, which means that people continue to probe and push and try
to figure out how to get into our database.
I would note that both the Get Transcript difficulty and
the more recent attack in the last couple weeks were
sophisticated forms of identity theft. The criminals already
had all of the personal information of the taxpayer that they
needed. None of those attacks breached our system itself. They
were not cyber-breaches in the sense that our database was
accessed. The more recent one was simply an attempt by
criminals to get a filing PIN to allow them to, in fact, use
information that they have stolen to try to file for a false
refund. And as you note, fortunately, with our improved
systems, we were able to catch it quickly, and we think we will
be able to shut it down equally as quickly.
But it is axiomatic that we and every financial institution
in the world are under attack, and that is because criminals
already have a vast amount of personal information, and they
are trying to figure out how to monetize that information. I
think it is safe to say, as you say, that we cannot solve it by
ourselves, which is why we did create this partnership with the
private sector and the States to try to jointly this year and
going forward permanently share information and develop
standards and protections. Already we see, as the filing season
begins, the advantage of the information we are sharing on a
regular basis, particularly with the private sector, as we go.
Ultimately, I think we have to recognize this is going to
be an ongoing problem. We have been attempting to move from
being solely reactive to pulling together the resources we need
and the partnerships we need to try to get ahead of the game,
get ahead of where the criminals are going.
It is clear that as we close off one avenue of attack, the
criminals simply move to another. We could see that in this
particular attack as they moved from country to country, as
they were shut down, you could actually see the attacks then
moving around the world.
The Chairman. Well, let me just ask you another question.
In your written statement, you note that the IRS had to defer
hundreds of millions of dollars from critical information
technology projects because of Obamacare. The agency's budget
justification shows that over $400 million and nearly 2,000 IRS
employees are dedicated to Obamacare implementation, a sizable
amount in this time of budget constraints. But even with all
this spending, we still have serious problems regarding the
integrity of Obamacare tax credits.
So I have two questions about how we might better protect
taxpayer dollars from Obamacare problems. Yesterday, Senator
Grassley and I sent a letter to the Centers for Medicare and
Medicaid Services about the agency's failure to provide the IRS
with advanced premium tax credit payment data which would help
improve the integrity of these credits. What additional
information does the Service need to make sure that these
credits only go to those who qualify for them?
And then the second question is, you wrote to Congress
that, of the 4.6 million people who received subsidies and are
required to reconcile their advance premium tax credit, roughly
1 million either have not filed a tax return or have not
reconciled those payments. Now, this represents billions of
dollars. What is the IRS doing to ensure these payments went
only to people who qualified for the credit?
Commissioner Koskinen. The determination of who qualifies
for premium tax credits is made by HHS and CMS. What we do is,
we provide them income information so that they can then
validate the projections to see if people are eligible on their
income basis, and then we get data from the marketplaces each
year. And this year we are getting the data in real time, so we
will actually be able to have the data that shows what were the
premium tax advance payments made to individuals and compare
them against the reconciliations that are made. Last year, we
got the so-called VP data on a rolling basis through the filing
season.
So, once CMS decides they are qualified and the applicant
makes an estimate of what their earnings are going to be and,
therefore, what their advance payment will be, all that
information is recorded, and for the first time really in a
major program, we get that information before we get the tax
returns. Last year, what happened was a number of taxpayers did
not realize, because they had low incomes, that they actually
had to file a return because they had not filed in the past. We
have written to all of those people. We actually have decreased
the number of people who did not file by over 50 percent in
response to our letters--one of our better compliance
activities.
This year, going forward, we will not process, we will
actually be able to pull out of the processing queue, anyone
who has not reconciled the information we have about the
advance premiums they have gotten with the payments they got.
In addition, last year we actually had a very successful
compliance activity of those who did reconcile, where we
actually were able to figure out who had overpaid and who had
underpaid. Those who owed us funding, we have collected about
98 percent of the additional money owed.
The Chairman. Great. Well, my time is up. Let us all try to
stay within the 5 minutes. I am sorry I did not. We will turn
to you, Senator Wyden.
Senator Wyden. Thank you very much.
Commissioner, let us go to the tax gap question that we
have talked about, two-thirds of a trillion dollars over a
decade. It is obviously lots of money. That is what we are
losing. According to the most recent numbers, it is probably
higher in terms of the corporate tax gap. We have been talking
to the IRS office, and I was particularly struck by the agency
indicating that it has no mechanism to track the specific
sources of the corporate tax gap. So I have written you on it,
and I just want to highlight a couple of the areas and see if
we can, particularly with Democrats and Republicans having an
interest in this, find some ways to get started.
Because you have told me that you agree this is a serious
problem, what would you do to get started? What are the areas,
coming out of the box in an effort to turn this around, where
you would start?
Commissioner Koskinen. Well, we actually have already
agreed with you and are moving forward. Our large business and
high-net-worth-individual division--we have four operating
divisions pertaining to taxpayers' incomes--has spent the last
2 years really looking at an aspect of this. The number of
people available and enforcement agents there are down about 20
percent, and so they have looked at how we can become more
efficient and effective at dealing with corporations,
collecting those taxes. They have had a very visible
restructuring that is really just now being completed in which,
instead of just auditing companies one at a time or looking at
specific issues on a one-off basis, they have decided the more
efficient and effective way to do it is to look at just the
point you are raising. Where are the areas where we are seeing
either noncompliance or basic issues that are being raised? And
so they are actually designing our exam program so we will look
at the tax gap in what they call campaigns. That is, if there
is a problem in transfer pricing, we look at transfer pricing
internationally. But one of the areas that we do track directly
nationally is, many corporations have divisions, separate
corporations, that are owned, and they engage in transactions
back and forth. They buy and sell services, buy and sell
products. Oftentimes you can skew the tax results according to
what the charges are, which may or may not be at the market
rate. There are other ways that people have of increasing
compensation as opposed to dividends if it is a closely held
corporation. So the compensation is a deduction; the dividends
are not a deduction.
So going forward--and we have been very visible about this.
We are not trying to sneak up on anybody. And in fact, to the
extent people know what we are looking at, we will get better
compliance. We think if we look at issue-based auditing rather
than simply individual organizational auditing, we will be able
to begin to make a dent in that tax gap.
I would note, as we discussed, that overall in our
enforcement and collection activity, we are down over 5,000
revenue agents, officers, and criminal investigators. So no
matter how good we are at highlighting issues, we have to have
the personnel to go and audit them. And thus far, our
experience is that each revenue officer generates over $1.5
million a year just in collections of taxes that are owed to
the government. So we need to actually be more efficient in
highlighting areas we are pursuing, but ultimately we need more
people.
Senator Wyden. As you and I have talked about, I think we
will be better positioned to get the resources when Democrats
and Republicans on this committee understand exactly what the
action plan is to turn this around. And in the letter I wrote
you yesterday that we will await an answer on, we said 60 days.
Is that reasonable to get a sense of what the action plan is
for turning around the corporate tax gap?
Commissioner Koskinen. We will get you--because, as I say,
we are already moving, I think, in this direction. We would be
delighted to get you a response and an explanation. That
explanation will continue, though, to understand that no matter
how creative we are with identifying where we are going,
ultimately it all depends on audits, and audits depend on
people, and we do not have enough people.
Senator Wyden. Point appropriately taken.
One last question on something else that the committee has
been interested in, and that is this question of the tax return
preparers who prey on vulnerable taxpayers and pocket their
money. And as you know, there have been some recent news
reports on this. Why don't you give us the latest on what you
see in terms of these fraudulent tax preparers and just kind of
update us on the latest?
Commissioner Koskinen. I think it is important for
everybody to understand, our view is that the vast majority of
tax preparers are honest, informed, and try to do the best they
can. There are a cadre of tax preparers who sort of set up shop
in the spring who do not have much background. The tax code is
very complicated, and so they are making a lot of mistakes that
we find. And then there is a small percentage, very small, who
are crooks who, in fact, file returns on behalf of taxpayers
who do not know they are being filed, file for refunds that
they take that the taxpayers do not get, hold out false
expectations as to how much money they are going to get the
taxpayer. And so our view is that we are not going to put the
crooks out of business by actually requiring minimum standards,
but taxpayers at least have to have a better indication for the
300,000 or 400,000 unregulated tax preparers what their minimum
qualifications are.
So we think that it would be helpful--we are not requesting
a big regulatory program. We just think that taxpayers ought to
be comfortable that there is a minimum set of qualifications
anyone preparing their return has to meet.
Senator Wyden. My time has expired. In your seat or perhaps
the one right next to you, we had a preparer from the State of
Oregon talk about how Oregon has put in place in effect exactly
what you have described, those minimum standards, and it has
been well accepted by the vast majority of preparers who, as
you appropriately note, are honest and scrupulous. So we will
look forward to working with you on both counts.
Thank you, Mr. Chairman.
The Chairman. Thank you, Senator.
Senator Grassley?
Senator Grassley. Welcome. The chairman brought up this
issue in his opening comment, so you know that, if it is
important to him, it is important to somebody besides Chuck
Grassley. He brought up the necessity of Treasury and the IRS
working expeditiously to get the IRS private debt collection
program up and running. Provisions in the law require that the
IRS partner with the Bureau of Fiscal Services within Treasury
and the private-sector companies that it employs to collect
inactive tax receivables. The law requires further that you
begin signing contracts and agreements with the Bureau of
Fiscal Services collectors no later than March 1, 2016 and
releasing cases soon thereafter.
Is the IRS on schedule to meet the March 4th deadline
provided by Congress?
Commissioner Koskinen. As a normal matter, even off a
schedule, getting a procurement done in 90 days, let alone
setting up a whole program and getting procurement up, is
really impossible. What we are committed to doing--and I
personally am committed--is, we are going to do everything we
can to make this program work, to get it up and running as
quickly as we can. We are planning and are organizing and have
gotten a positive response to have a bidders conference this
month, and, within the 90 days, we are committed to providing
this committee and the Congress a timeline as to when the
program will actually be up and running and implemented. The
bidding conference is to get us started with bidders to get
their input back in terms of what they are looking for, how we
can actually put this together to make it work.
Our goal, if we can pull it off, is to actually design this
program, learn from the past and what were the mistakes, what
were the problems and the challenges, so we give this program
the best chance we can to succeed. And as it stands now, in the
normal procurement process plus developing the program, we
expect and hope to have contracts with those acceptable
collectors before the end of the fiscal year.
But we will provide you with that update, and I can only
stress to you that we are going to do everything we can to make
it work. I cannot help but note that this is yet another
unfunded mandate. Nobody has given us any of the funding we
need to actually design the program or oversee it, but we are
going to do it anyway, because we do statutory mandates.
Senator Grassley. Did you just tell me that you are not
intending to partner with your fellow agencies at the
Department of Treasury to save time and money? It seems to me
that you have people there you can contract with who are
already in that business, and we did it for the sole purpose
that the excuse you just gave us, that it gives us time to get
it up and running, would not----
Commissioner Koskinen. You have to understand, Senator,
there is no program yet. We have to design the IT to take the
cases that the statute provides appropriately go. We have to be
able to monitor those. Private debt collectors have to be able
to collect money and actually provide back through that IT
system where they go. We have to provide them training, we have
to educate them----
Senator Grassley. Okay. Let us stop there. I will go on to
another question.
Commissioner Koskinen. Okay. Anyway, we are going to do our
best. I have told our people I want no stone left unturned, and
I want it to be done as quickly as we can. But it will not do
us any good to put it together in a way that does not work and
then have people say, well, we did that purposely. We are going
to make the best effort we can to make sure that it works.
Senator Grassley. Well, remember, in this case you might
make the chairman unhappy if it does not work out.
Commissioner Koskinen. If it does not work out, it will not
be our fault.
Senator Grassley. You might not worry about me, but you had
better worry about Chairman Hatch.
Commissioner Koskinen. Listen, I worry about every member
of Congress.
The Chairman. And I am unhappy all the time. [Laughter.]
Senator Grassley. Yes. In 2014, I was successful in getting
the bipartisan Small Business Efficiency Act passed into law.
The legislation establishes a voluntary certification program
for professional employer organizations. These PEOs are
certified, and it gives them the authority, rather than the
small businesses that hire them, to take sole liability for the
collection and remittance of Federal employment taxes for
worksite employees. Last year, the IRS failed to meet the
statutory July 1, 2015, deadline for establishing the
certification program. The IRS announced at that time that it
intended to begin accepting applications by July 1, 2016, a
full year behind schedule. I am concerned that another failure
to meet the new deadline will penalize small businesses that
work with PEOs and could even result in double taxation.
So will the IRS stick to that new self-imposed deadline and
begin accepting applications by July 1st this year? If not,
when do you expect to have the program up and running?
Commissioner Koskinen. We expect to meet that deadline. We
have been aiming for it since the program was established.
Again, I would simply note in passing, this is a program we
have to set up. People have to be able to register. We have to
be able to get their bonds. We have to be able to certify
them--all of this with no additional funding at all and a very
tight time frame. But it is a statutory requirement, and I
would stress, whether it is ACA or the ABLE Act or this act, we
do statutory mandates, and we will get this up and running
because it is, in fact, an important program for small
businesses to be able to be comfortable that the people they
are dealing with in certified professional employee
organizations actually have the financial capacity to meet
their needs. There have been unfortunate examples where small
businesses, much like with tax preparers, have been taken
advantage of or where people they have dealt with have gone out
of business and left the small business responsible for all of
those tax payments.
Senator Grassley. Thank you, Mr. K.
The Chairman. Senator Menendez?
Senator Menendez. Thank you, Mr. Chairman. And thank you,
Commissioner, for your service.
I want to explore with you the question of unregulated paid
preparers. As you know, in 2011 the IRS created a certification
program that required paid preparers without specialized
training or education to register with the agency, to pass a
competency test, and to meet continuing education requirements.
But even those most basic standards were struck down by a
Federal appeals court in 2014, which ruled that the IRS did not
have the statutory authority to regulate those paid preparers.
To fill this void, several of us have been working for
several months to pass bipartisan legislation that would give
the IRS the power to regulate paid tax preparers. The idea is
simple: make sure that those who are handling sensitive
financial information and filing returns on behalf of taxpayers
have some training and actually know what they are doing. It is
critically important, as unenrolled preparers have
disproportionately high error rates as well as troubling levels
of outright fraud, particularly when filing for the Earned
Income Tax Credit. This problem is so pervasive, the IRS once
again included it on its annual ``Dirty Dozen'' list of scams,
and the National Taxpayer Advocate Nina Olson noted that
unenrolled return preparers overclaimed the EITC on 49 percent
of the returns they submitted. And when asked about combating
EITC improper payments, she made very clear that regulating
paid preparers is the best way to improve accuracy and reduce
overpayments. So, quite simply, if you are serious about
addressing improper payments, refund fraud, and taxpayer
schemes, you have to be serious about regulating paid
preparers.
Now, unfortunately, some of our friends are concerned that
the IRS would somehow abuse its authority to impose minimal
standards on paid preparers, this despite a poll conducted last
month by the Consumer Federation of America that indicated 80
percent of Americans wanted paid tax preparers to pass a test
administered by the government that would ensure that those
preparers have the knowledge and training to complete taxpayer
returns correctly.
So, Commissioner, is it necessary to regulate paid
preparers in order to reduce improper payments, fraud, and
identity theft?
Commissioner Koskinen. The short answer to that is ``yes.''
I have tried to stress--in fact, in an answer in an earlier
hearing before this committee--that we are not proposing a new
regulatory scheme. We have actually set up--and people know
what it would look like--a requirement of minimum capacity,
minimum standards. And all we are talking about is requiring
minimum standards of those who practice. We do not plan any
audits or anything else. It is just a question of, can we ask
them to demonstrate some minimum capacity to understand the
code and perform appropriately? We have a voluntary program
where we have about 60,000 people who went through the minimum
requirements and met them and now get a certificate of
completion, a record of completion. But clearly, unless there
is a requirement that everyone pass an exam voluntarily, we are
not going to be able to get through it. And we do need to have
that minimum level of competency if we are going to deal with
and make a dent in the improper payment rate, particularly in
the EITC program.
Senator Menendez. So there is no reason to have any concern
about an abuse by the IRS of such minimum standards?
Commissioner Koskinen. No. As I have tried to make clear,
everybody knows what the program would look like. We had it
running for a year before the court said we did not have the
statutory authority. And I do not think anyone participating in
that program felt that there was anything untoward done by the
IRS. We set up vendors who gave the exams. If you passed the
exam without any other questions, you got the certificate.
Senator Menendez. I hope we can do that, because I know
many of my colleagues on this committee are worried about fraud
across the board and certainly in the EITC program. Well, if
preparers who are not ultimately meeting a minimum set of
standards are 49 percent of the time more likely to be
committing fraud, then it would seem to get to a significant
heart of the problem.
The other thing I am concerned about is scams, and I have
been concerned now that the IRS has been given the power to use
independent collectors to go collect against taxpayers who are
due and owing. And I am all for collecting, but we already had
a big problem before this power was given to the IRS, with
scammers calling individuals telling them that they owe the IRS
money and threatening them with all types of actions. And of
course, it is not you; it is not the IRS. But nonetheless,
hundreds of thousands if not millions of dollars have been paid
to individuals who are using this scam.
So my question is, now that you have been given the
authority to go ahead and use outside collectors--and when I
see the other scam that is being pursued where people who have
no health insurance are getting scamed as well, which affects
minority communities disproportionately--what is the IRS doing
and what will it do to ensure that we maximize the protection
against such scams?
Commissioner Koskinen. It is a new challenge. The last two
times we have used private debt collectors, we did not have
phone scams going on at the same time. Part of my response is,
Senator, the reason it takes time to set this program up is, we
think, at a minimum, we need to write a taxpayer when we are
turning their account over to a collector to tell them their
account is being turned over to a specific collection agency.
Part of the training and the requirements in our contract will
be that the debt collector will then have to write the
taxpayer, will have an obligation to write the taxpayer,
introduce themselves, and say, ``We have been assigned your
account, as you know, and we will be calling you,'' so that no
calls should be made before the taxpayer gets two letters.
Now, crooks are pretty good about trying to figure out how
to masquerade behind the letters and do their own false
letters. But we do need to--and we are focusing on trying to do
everything we can to give taxpayers as much information to
protect them against the scams. At the same time, for the last
2 years we have been working with everyone to try to get the
information out that, as I have said, if you are surprised to
be hearing from us, the chances are pretty good you are not
hearing from us. We never threaten people. We never say, make a
payment of your taxes to a bank account or to a debit card. We
never threaten you that you are going to lose your house or you
are going to go to jail. That is just not the way we operate.
And so our concern is that people are still picking up
those phones. It is a low cost-of-entry scam. You just have to
start dialing robocalls. We work with the IG. We are tracking
down, we are criminally prosecuting some people when we catch
them. But it seems to be a persistent scam that we just simply
cannot stamp out.
Senator Menendez. Well, I appreciate your attention to it.
We have a series of law enforcement entities in New Jersey that
have shared the experiences of individuals who have been
scammed. And it is pervasive, and it is a challenge. And under
the new authorities, I just hope we do not exacerbate the
problem.
Thank you, Mr. Chairman.
The Chairman. Thank you, Senator.
Senator Cardin?
Senator Cardin. Thank you, Mr. Chairman.
It is a pleasure to have you back before our committee.
Thank you very much for your service, and I was pleased to see
the President's budget did provide for a modest increase in
your budget. It is clear that you need the resources to get the
job done, and given the resources, you are not only going to do
it more effectively for the taxpayers of this country as far as
service is concerned, you also will be more efficient in the
collection of the revenues.
I also understand that your budget is asking Congress to
pass the authorization for your streamlined critical pay
authority. You and I have talked about that, and I hope we can
act on that to give you the ability to bring in the type of
expertise that you need.
I want to go on to one area that was in the omnibus bill
that was signed by the President 2 months ago that dealt with
the Work Opportunity Tax Credit. The President's budget would
make that program permanent. We extended it for 5 years,
including that the long-term unemployed now qualify for the
Work Opportunity Tax Credit. The challenge is, there are a lot
of people who would like to be able to participate in it, but
you have not issued the guidelines necessary to give clear
direction as to how that will be implemented with the long-term
unemployed.
Can you just give the committee some guidance as to when
you believe that will be available to the taxpayers?
Commissioner Koskinen. We have been working on it. Again,
the statute had a whole series of suggestions and requests and
requirements. Our hope is before the month is out--certainly if
not then, shortly thereafter--we will have that guidance out,
because we do understand that it is critical to have the
guidance out so people can respond accordingly. So we have a
number of guidance projects, obviously, but it is at the top of
our list, and with any luck at all we will get it out in the
next 3 or 4 weeks.
Senator Cardin. Thank you. I appreciate that. If it is the
end of the month, you only have about 2 weeks or 2\1/2\ weeks.
It is a short month.
Commissioner Koskinen. It is a short month, plus 1 extra
day.
Senator Cardin. One extra day this year.
We also have talked about this Taxpayer Rights Act where we
have tried to deal with some of the significant issues
affecting taxpayers. One is their retirement savings and the
IRS policies of going after retirement savings on flagrant
activities. There seems to be a lack of certainty in this area
and maybe even a different view as to what is appropriate or
not in regards to retirement security, a lien attachment by the
IRS.
Can you just share with us how we could try to harmonize
this? We have the Taxpayer Advocate who is working with us on a
Taxpayer Bill of Rights. We have the IRS working on this. Are
we going to be able to come together and try to have a meeting
of the minds on this?
Commissioner Koskinen. I hope so and I think so. I know the
Taxpayer Advocate's basic view would be that she would rather
not have any liens on retirement accounts, and, you know, her
role is to be the advocate. Our role under the statute is, we
have to collect taxes. We do not reach retirement accounts
until we have exhausted a lot of other remedies with taxpayers.
And in particular, the situation of concern to us is where
people are making additional contributions into their
retirement account rather than using those funds to pay the
taxes they owe right now. And that is one of the indicators
where clearly that is of great concern to us, because
everybody, small businesses and individuals, has an obligation
to pay their current taxes. And if you are taking money that
should be paying your taxes and putting it in your retirement
account, that should not be shielded, because otherwise there
are going to be a lot of contributions to your retirement
account.
So we need to work out an appropriate protection to make
sure that we are doing it in a way that protects taxpayers to
the extent possible as we go. As I say, it is not the first
place we go. We look at other sources of repayment. We have
online installment agreements that people can make with us. We
only end up with this situation where, in most cases, we have a
very recalcitrant taxpayer.
Senator Cardin. And I understand that is the policy. I just
would urge you to be a little more transparent. Then we might
be able to reach a common position on this if we understand how
you are applying the flagrant conduct standard.
Commissioner Koskinen. I think we ought to be able to come
to an agreement as to what the appropriate standard is.
Senator Cardin. And I know Senator Portman is here, and he
and I are working on retirement issues. One of the issues is,
obviously, we are trying to strengthen retirement savings.
Senator Portman and I joined forces on the Work Opportunity Tax
Credit to extend it to the long-term unemployed. So there is
bipartisan interest in all these issues.
Thank you.
The Chairman. Senator Burr?
Senator Burr. Thank you, Mr. Chairman.
Commissioner, welcome. I think we all share your
understanding that you need to increase the number of
individuals working at the IRS. I want to explore in my time
whether those individuals have the qualities to work at the
IRS. And this really goes back to the Inspector General's
report that showed between 2010 and 2013 the IRS hired 7,000
former employees, of which 824, or 11 percent, had prior
substantiated employment issues, meaning they had been let go
by the IRS; and 141 had a prior tax issue, including 5 who were
found to willfully have failed to file their tax returns, which
requires automatic termination of employment under section 1203
of the 1998 IRS Restructuring and Reform Act.
The Inspector General then took a sample of 50 of those 824
and found this: other types of prior misconduct included
unauthorized access of taxpayer accounts, 11 employees; fraud,
4 employees; falsification of documents, 17 employees; threats,
sexual harassment, and criminal misconduct, 5 employees.
Now, that is a sample of 50 of the 824 and what they were
let go by the IRS for, and these are all people who were then
hired back by the IRS. Let me just ask you something. What do I
say to a North Carolinian who asks me, how can they have a
practice like this when the private sector would never think of
hiring somebody with a prior employment track record like that?
Commissioner Koskinen. You can tell your constituents that
is not going to happen again. Basically, what we are talking
about is, when we hire seasonal and temporary employees, we
hire 8,000 to 10,000 a year to staff filing season, and
historically that is a process that takes a lot of time. And
once the IG released that report, we went back through and made
sure that if there is a prior substantial performance issue, or
if someone has not complied with their taxes, or certainly if
anybody has actually had unauthorized access to returns, they
are not eligible to be rehired.
Senator Burr. None of these people I have described, though
their names are not here, currently works at the IRS? Is that
what you are telling me?
Commissioner Koskinen. Most of those were temporary, and if
they came back again the next year, they would not be working
for the IRS. We do not hire people with prior issues--anymore.
Most of that report was before I got here. We do not hire
people with prior performance issues. We do not hire people who
certainly, as I say, abused any taxpayer record.
Senator Burr. Well, let me go to a quote in the Inspector
General's report where the IRS stated that, ``During the
process of evaluating qualifications of applicants, prior IRS
conduct and performance issues do not play a significant role
in deciding the candidates who are best qualified for hiring.''
Then in answer to a question from Congressman Roskam, this
was your response this month, with reference to the Inspector
General's Recommendation 1. Congressman Roskam asked, ``Does
the IRS consider conduct and performance issues before an offer
is made to a candidate, and if not, why?'' Your response was:
``Yes, we consider prior conduct and performance issues before
making a final offer to a candidate.''
Now, I interpret the response to the IG to mean that we do
not take into account, when deciding who we are going to
interview, their prior work experience with us. Your answer I
take to mean that we go through a lengthy process, we narrow it
down, but before we offer them a job, we will look at their
prior conduct. Explain for me, if----
Commissioner Koskinen. We get applications in, and at that
point, we do not know who they are, and they may or may not be
there. Before we make an offer to anyone, our process now is--
--
Senator Burr. Before you make an offer. Do you interview
before you look at their prior experience at the IRS?
Commissioner Koskinen. That I do not know for sure. All I
can tell you is, they will not get a final offer----
Senator Burr. One of the individuals out of the 50 who were
sampled, in their employment record at the IRS, it stated this:
``Do not rehire.''
Commissioner Koskinen. And they will not get rehired again.
Senator Burr. Well, they got rehired with that in their
record.
Commissioner Koskinen. That was under the old process, and
that will not happen again.
Senator Burr. So share with me what you have done to make
sure that does not happen. And share with me and the committee,
if you will, how have you changed the personnel who make up
your hiring process? Who lost their job over this--anybody?
Commissioner Koskinen. People who actually, at that point
in time, were following whatever the IRS rules at that time
were, those people were operating under a different set of
rules and regulations, which they understood. If people do not
follow the rules, they are subject to personnel actions. I have
no indication that anybody working for the IRS has not followed
the updated procedures, and they understand that if they do not
follow the procedures--we dismiss a reasonable number of people
every year for not following our employment procedures or our
operational procedures. I would be happy to share that data
with you.
Senator Burr. I thank you for that answer, and I wish you
would share the data, and I wish you would share the procedures
that have changed.
Commissioner Koskinen. I would be delighted to do that.
Senator Burr. Thank you, Mr. Commissioner.
Thank you, Mr. Chairman.
The Chairman. Thank you, Senator.
Senator Carper?
Senator Carper. Mr. Chairman, I would just like to get
something off my chest while we are here today.
I think we are lucky that you are willing to take on this
job. This may be among the most thankless jobs in the Federal
Government, and we needed somebody who was smart and honest,
hardworking, a great leader, and I think you are that person.
Commissioner Koskinen. Thank you.
Senator Carper. Can I go on?
Commissioner Koskinen. Well, no, perhaps we should quit
while we are ahead.
Senator Carper. All right. [Laughter.]
The Chairman. If you keep that up----
Senator Carper. If I keep that up, my time will have
expired.
We spend time in this room, more than I would like to think
about, trying to figure out how to pay for things. We want to
extend tax breaks, tax credits, whatever. We are looking for
pay-fors. We are looking at other programs that we want to pay
for like transportation, and we end up doing crazy things to
pay for roads, highways, and bridges that have nothing to do
with roads, highways, and bridges. And yet we have all these
pay-fors that you and your colleagues at the IRS sort of give
us on a silver platter, and we ought to take fuller advantage
of them.
You mentioned one of them. For every person we hire to do
audits and that sort of thing, compliance, how much did you say
that person is worth? How much money?
Commissioner Koskinen. Over a million and a half dollars a
year.
Senator Carper. A million and a half. So if we were to hire
just 1,000 of them, that would be a billion and a half dollars
a year.
Commissioner Koskinen. Right.
Senator Carper. That would pay for a lot of stuff--and good
stuff.
Commissioner Koskinen. And in the President's budget this
year, it is called the ``program integrity cap'' for $500
million. Over a 10-year period, the hiring in the programs
under that would generate a net after expenditure of $46
billion for the government.
Senator Carper. Go back and talk to us about something that
does not cost money, and that is, to try to better ensure that
the folks who are actually doing tax preparation work for some
Americans actually know what they are doing, they are capable,
qualified, going to do good work, honest for the person whose
taxes are being reported, but also fair to the Treasury. Just
talk about what we can do to help there.
Commissioner Koskinen. Again, as we have been discussing,
our proposal is not to have a regulatory program. Our proposal
is to reinstitute the program we had before which simply
requires minimum qualifications, the demonstration of minimum
qualifications, and continuing education, a modest number of
hours----
Senator Carper. Can you give us some idea of what that
might include, minimum qualifications?
Commissioner Koskinen. Minimum qualifications would be, you
would take a test to show an understanding of the tax code, and
you would take 18 hours a year of continuing education on tax
developments, much like the continuing education requirements
for lawyers and accountants and others.
Senator Carper. Okay. All of us have constituent services
operations in our offices back home in our respective States,
and every Friday at the end of the work week, I get a report
from my constituent services team. Every month we send out a
questionnaire to a representative sample of the people we have
served in Delaware just to say, ``How was the service that we
provided for you? Was it excellent? Was it good? Was it fair?
Was it poor?'' And one of the issues that we get graded on is
the IRS. And it is uneven. Sometimes it is pretty good.
Sometimes people are pretty disappointed.
We like to think that in our own office we provide
excellent service. I am sure we can always do better. But for
the last 15 years, we are running 98 percent excellent and
good, 1.5 percent fair, a half percent poor. But we know we can
do better. And in terms of how we could help you do better--you
have already answered this question, but I just want you to
continue to repeat it. What can we do to help provide better
service?
I spend a lot of time focusing on the Postal Service, and
one of our goals in Postal Service reform is to put the
``service'' back in Postal Service. And one of the things that
we need to do--and I know you are trying to do, and others--is
put the ``service'' back in the Internal Revenue Service.
Commissioner Koskinen. The whole goal of what we call our
Future State is not to look at what the IRS ought to look like
3 to 5 years down the road. It is, what should the taxpayer
experience be 3 to 5 years down the road? How can we expand and
improve on taxpayer service for all taxpayers? That ought to be
our primary measure of where we are going. And I think we are
moving in that direction. The support we need is obviously the
resources, it is a lot of technology to make life easier and
simpler for most taxpayers.
Senator Carper. All right. If you could just ask one thing,
if you had a magic wand and you could wave a magic wand and get
one thing out of the Congress this year--one thing out of the
Congress this year that would help you and your folks, the
members of your team, do a better job for the American people,
what would it be?
Commissioner Koskinen. It would be the same thing I told
you at my confirmation hearing almost 2\1/2\ years ago, and
that is, if we could simply put the budget of this agency on a
stable, sustainable basis, it would make a huge change and
improvement in taxpayer service and enforcement. And that is
really my goal. I got asked by an employee--I do employee town
halls. I have talked with over 20,000 IRS employees personally
since I started. One of them asked me recently, ``What is your
goal? How are you going to measure your time?'' And I said,
``If we could just have stable, sustainable funding for this
agency before I leave, I would feel that I had accomplished a
major goal.''
Senator Carper. Okay. Well, hopefully you will do a lot
better than that. Thank you for your leadership and for being
with us today.
Commissioner Koskinen. Thank you.
The Chairman. Senator Roberts?
Senator Roberts. Well, thank you, Commissioner. I want to
thank Senator Carper for his comments with regards to the task
that you have before you, a lot of brickbats but not many
``attaboys.''
I think one thing I can do for you is, I will sit down with
Senator Grassley and see if he cannot pronounce your name.
[Laughter.] This should not take too long.
Commissioner Koskinen. I always say it took me 4 years to
learn.
Senator Roberts. ``Koskinen,'' that is not that hard,
really. Maybe if you changed your middle name to ``ethanol'' it
might help. I am not quite sure. [Laughter.] That is easy to
say. And Senator Hatch does not get mad. He just maybe
sometimes is pleasantly irascible. So do not worry about that
either.
I want to bring up something from the not-so-thrilling days
of yesteryear. You are familiar with the topic. I know we
thought it was behind us. But I have pledged not to rest until
we fully understand the actions concerning our conservative
social welfare organizations, the 501(c)(4) business. This to
me has always been about the First Amendment and protecting
those rights and preventing the government from restricting
them. And the exercise of those rights does not threaten our
democracy, nor does it threaten the tax system or the tax base.
It is the attempt to restrict these rights that I think we must
fear.
I still remain deeply disturbed over how the IRS responded
to this committee's investigation. I still remain concerned
that the issues we explored in the Finance Committee's report
that was just issued last summer still remain unresolved. As
recently as last month, the IRS was still processing exemption
applications that had been held up while we investigated the
(c)(4) issue.
So, basically, what I would like to do--I know we have
stopped the agency from moving forward with new rules that
would have revised how social welfare groups are able to
participate in political discourse, and I think you would agree
the agency should be directed back to its core mission, which
is tax enforcement and taxpayer services.
Do you have any comment with regards to where we are or
where you think the IRS is in regards to this whole situation?
Commissioner Koskinen. I certainly do. As I said when I
started, the delays the organizations faced should never have
happened. I was not here, but I apologize for that. I think
taxpayers deserve prompt and fair answers and consideration.
The management structure that caused that problem to exist for
as long as it did without it being seen needed to be changed,
and we have done that. As I said, we have taken every
recommendation of the IG except for updating the (c)(4)
regulations, which were not under the congressional constraint.
As I said, we did not do it willy-nilly. We went through
and decided we would take and implement every recommendation
this committee made in that report and every recommendation in
the majority report and every recommendation in the minority
report as well, because I do think they were thoughtful and
they will be helpful, and we have implemented all but a couple
of them. We have 82 percent of them up and running and
implemented. But I think it is important, because we need to
make sure that situation does not happen again of the lengthy
delays which then lead people to wonder why are they being
selected for that delay.
But beyond that, people need to be comfortable that the
organization, the IRS, is going to treat every taxpayer fairly
and the same. And as I said, we do not care who you voted for,
what party you belong to. If you hear from us, it is because of
an issue in your tax return, and subject to resource
constraints, if somebody else had that issue on their return,
they would hear from us as well. And it is critical for
compliance processes in the United States to work for people to
feel and understand and be comfortable that the IRS is not
targeting them, is not selecting them for any reason other than
something to do with their tax return.
Our goal in the (c)(4) regulation since I have been here,
if we are going to do it, as I said, was not to change the
rules. It was to try to provide greater clarity to the
organizations and the IRS. The ``facts and circumstances'' test
that we now still have is confusing. It is not only at the
front end. It means every year you have to wonder, is somebody
else going to look at the facts and circumstances differently?
What we wanted to do was provide a clearer line of sight, not
change the rule, just make it easier for everybody to comply,
because I agree with you. We ought to be in the tax compliance
and tax enforcement area. We certainly do not want to be any
closer to political issues than we have to be under the tax
code, and people should be comfortable with that.
Senator Roberts. Well, I thank you for that answer, and it
is a very complete answer, and I hope we can see some progress
in that whole situation or simply put it behind us.
My time has expired, but I did want to point out that I do
agree with Senator Menendez. I do not want bad incentives to
result in aggressive behavior on your minimum standards on tax
preparers. And I am just thinking, while you were talking about
small-town and rural America, a person who has been preparing
taxes for a long time probably, you know, would like to get out
of this business, but at any rate, be a little careful there.
You know, taking a test and 12 hours of education for some
secretary who got into this and then got into tax preparation
and probably operates out of her home, we do not want to deny
that. And contracting out, I am concerned about that as well.
I am way over my time. Thank you, Mr. Chairman.
Commissioner Koskinen. Well, let me--if I could respond,
Mr. Chairman----
The Chairman. Sure.
Commissioner Koskinen [continuing]. Because I think that is
an appropriate concern. We have over 12,000 VITA sites,
Volunteer Income Tax Assistance sites. We train 90,000 people a
year to work in those sites. A lot of them are part-time
people. Some are, fortunately, IRS former executives or
existing executives. But the training program is
straightforward. You do not have to be a rocket scientist to be
able to understand it, and those people provide great service.
They prepared 3.5 million returns last year for free for
taxpayers who came in. And the experience on the exam--when we
were running the program before it was shut down--was nobody
complained the exam was too difficult or it was hard to deal
with. Because I agree with you: our goal here is not to put
people out of business, except the crooks. Our goal really is
to provide people an opportunity across the board,
standardized, to keep up with the tax code, to be able to
provide appropriate advice to people where they are actually
completing their returns.
One of the reasons we have an advantage, I think, in
considering this is, we have seen what the program looked like.
So I want people to know that is what it is going to look like.
We do not have some new idea for more regulations or audits or
anything else. It is just a simple question of, can people
demonstrate a minimum ability to provide assistance to the
people whom they are getting paid to prepare the return for?
The Chairman. Senator Thune?
Senator Thune. Thank you, Mr. Chairman.
Commissioner, I understand one of the biggest issues facing
South Dakotans when it comes to their Federal taxes--at least
this is what we hear in many of our offices across the State--
is the problem of tax-related identity theft. I know you have
talked a little bit about this already and probably responded
to some questions about it, but it not only impacts those who
have their identities stolen, but also those who find their
refund delayed while the IRS verifies their identity.
So I am wondering if maybe you could talk about the steps
the IRS is taking to fight ID theft, and can we expect that the
IRS will improve its capabilities to fight fraud so that the
process will be quicker and, over time, fewer refunds will be
delayed?
Commissioner Koskinen. That is one of the major challenges
we have had for some time. As I noted earlier, we have created
a partnership with the private sector, tax software developers,
tax preparers, payroll providers, 40 State tax commissioners,
because, as I told them when we got together, the goal was not
for me to tell them what to do. The goal was, we cannot solve
this problem without everybody working together. And we have
made significant steps forward. The private sector and the
States and we have all agreed on minimum standards for
authentication for taxpayers. Most taxpayers will not notice.
It is a few more questions. It is a way of making sure we know
who they are. We are sharing data in a way that has never been
done before. But suspicious patterns of activity--we had, as
you know, a recent activity where we had organized criminals
trying to figure out just how to get a filing PIN. All of that
data and all of those Social Security numbers that we know
people have, have been shared with States and preparers so they
all can, in fact, advise their clients to take appropriate
actions.
I appreciate the Congress requiring us to get W-2s next
year in January. Because of this partnership we have, we have
had volunteers in the private sector already providing us this
month 20 million W-2s. When we have a W-2 that is verified, it
means when we have a suspicious return, if we can verify it
with a W-2, we can release that return for a refund. Over 80
percent of people who file with us electronically get a refund.
So it is important for them to get them as quickly as they can.
Last year, we stopped over 3.5 million suspicious returns.
Now, some of those were false positives. They were legitimate
taxpayers. To the extent we can process through those
suspicious applications faster and get the legitimate taxpayers
out of them, they will get their refunds faster, and we will be
able to apply our resources to the truly suspicious returns. Of
the funding we got under the $290 million, a significant
amount, $60 million, will go toward improving cybersecurity,
$16 million of it will go to identity theft, and $10 million of
that will go to implementing a lot of the recommendations from
this private-sector partnership we have. So our goal is to do
the best we can.
We also have a challenge, if your identity is stolen, you
then have to go through a lot of steps for us to ascertain you
are really the taxpayer. Taxpayers have trouble understanding
that, but we have criminals who file secondly and then are
trying to figure out why they cannot get their refund. I mean,
talk about chutzpah.
So we recognize that there is nothing more aggravating or
angst-producing than having your identity stolen and your
refund held up. And so, we are trying to prevent that, to the
extent we can, at the front end by stopping suspicious returns
with better filters and trying to improve and speed up at the
back end. If your refund is held up because somebody has filed
before you, we want to be able to process that. Our goal is 120
days or less. Even that is a delay for people, but we are doing
our best to try to get that faster.
Senator Thune. As a follow-up, you may know the National
Taxpayer Advocate has recommended the IRS provide a single
point of contact for someone who has their identity stolen, and
I have heard the frustration of taxpayers in my State who have
had to deal with various IRS employees on multiple occasions in
trying to fix a single ID theft problem. Is the IRS moving
toward giving each taxpayer a single point of contact when it
comes to tax-related identity theft? And is this a
recommendation that the IRS plans to implement?
Commissioner Koskinen. We do conceptually, but not in the
way the Taxpayer Advocate has suggested. We have consolidated,
since she started making this recommendation, all the ID theft
and all the contact points for taxpayers into a single office.
Anybody you deal with in the private sector when you call and
get service, you do not get a number to call back, because what
happens, if you have Sam Jones and Sam is on vacation, he is
out, he is on the other phone, then you are held up. And our
goal is to be able to make it so you do not have to explain the
situation twice. There ought to be a single office and a
coordinated office where you call, and when you call the next
time, they know what your situation is and you can pick it up,
and you can get somebody immediately rather than depending on
vacation schedules, who is at lunch, where they are.
So I think having an individual--in the old days, when we
were all over the place and we were pulling this together in
five different places, then I think it was difficult for
taxpayers. But as it is now, as we have consolidated, we think
we actually have a single organizational response to taxpayers.
Our goal in the longer run is to, as I say, move that as
quickly as we can so that the taxpayers actually get the
service they deserve.
Senator Nelson. Would the Senator yield for an observation
on that issue?
Senator Thune. Yes, sir.
Senator Nelson. There is legislation a number of us have
filed that the chairman's staff is working on very hard right
now that would address a number of the issues that you just
raised.
Senator Thune. Good. We will look forward to----
Commissioner Koskinen. Just again, as I say, requiring a
single individual to track each taxpayer is probably, I think,
in the long run not going to be good for the taxpayer. They are
going to take more time to find out where Sam Jones is today as
opposed to if we can just be more efficient when they call--
some of it is IT--that your record is there and anybody can
look at it who needs to talk with you.
Senator Thune. Thank you.
Thank you, Mr. Chairman.
The Chairman. Thank you.
Senator Isakson?
Senator Isakson. Thank you, Mr. Chairman.
Thank you, Mr. Commissioner, for your service to the
country. We appreciate it. And I also appreciate your printed
testimony and your acknowledging of the $290 million that we
appropriated to enhance cybersecurity and the identity theft
effort. I hope that is paying off for you. I appreciate your
acknowledging that.
I want to ask you a question about that. On Monday,
February 8th, the Columbus Ledger-Enquirer, which is the local
newspaper in Columbus, GA, reported on the sentencing trial of
one Sawan Shah, who pled guilty to one count of operating an
illegal monetary transmitting system where he admitted to
cashing 567 fraudulent tax refund checks from the IRS worth
more than $1.3 million, and he was part of a ring that cashed
more than 4,000 checks for a total of more than $24 million.
In the sentencing hearing, Judge Land, who is the Federal
judge who did the sentencing, made the comment that this was
one of very few tax cases he had even seen, and he had learned
Columbus, GA, was number 2 in the United States in terms of tax
fraud in the country.
My question to you would be, if in fact that is true, that
they are number 2--and I have the statistics that show that--
and if, in fact, the Federal judge who did the sentencing in
the Federal case had seen very few cases, are we making enough
cases based on tax fraud and the theft of these returns?
Commissioner Koskinen. I am not sure we ever make enough
cases. We have thrown 2,000 people in jail for identity theft.
We have several hundred cases pending right now. We work
collaboratively with U.S. Attorneys across the country in those
prosecutions. I think it is important for us, wherever we can,
to engage in those prosecutions.
I am a little surprised that the judge in that part of
Georgia was surprised that he had not seen relatively the
number of prosecutions that he should, because we have a
significant number in Florida, obviously, which has been the
epicenter of this. But in Georgia, we have had a number of
prosecutions. I get a list every day of the prosecutions that
are public of people who are being prosecuted for identity
theft and refund fraud.
Senator Isakson. I would love to see that. If you could
send me that information, I would love to see that information,
because I am asked about this subject all the time.
Commissioner Koskinen. I would be delighted. As I say, it
is over 2,000. I would be happy to get you, to the extent I
can----
Senator Isakson. I understand--privacy respected; I know
that.
Commissioner Koskinen [continuing]. A breakdown as to where
those people live.
Senator Isakson. Now, Florida is first, Miami-Dade County,
Fort Lauderdale area. Columbus, GA is second, and the District
of Columbia is third in terms of tax fraud. You all created the
IP PIN system a couple years ago to issue IP PIN numbers to try
to stop the amount of theft. Is that program working?
Commissioner Koskinen. The IP PIN works very successfully.
We have about 2.7 million people who over time have either had
identity theft or suspicious activity on their account, about
half of each. We have offered a pilot program to see what it
would be like and what the burden on taxpayers would be,
because, once you have an IP PIN, you have to use it. And so,
if you forget it, you have to get us to mail you a new one.
We are in the third year of that pilot. Actually, I have an
IP PIN, because I thought, well, I am the Commissioner, I live
in the District, I should actually see how it works. It turns
out I am one of the few people in the District with an IP PIN.
There has been a relatively small take-up, even though we
publicized it and we have had a lot of people interested in it.
If you have an IP PIN, you have much more security because that
is not a number that is available anywhere else. Millions,
literally millions, hundreds of millions of Americans who have
their data stuck in the Dark Net with criminals, do not have IP
PINs in that area.
One of the things when I first started, I thought, well,
why don't we just give the Social Security numbers and have a
new identifier? It turns out that is easier said than done.
So we have been a little surprised that the take-up has
been so small in Florida, Georgia, and the District. But
whenever there is a suspicious occurrence, in the case of
three-quarters of the attempts in the last couple weeks to get
a filing PIN--you know, there were 460,000 Social Security
numbers they had in their possession--three-quarters of them
did not do them any good. All of those people are going to get
letters from us saying your Social Security number is out
there, and for anyone who has been at risk, we offer them an IP
PIN.
In the long run, we are working on authentication programs
as a result of our Get Transcript issue that we think are
probably going to be the more efficient, effective way to
protect taxpayers, and that is to, in fact, do what people call
``multifactor authentication,'' so that anytime you interact
with us, we will double-check who you are.
Senator Isakson. We talked to your office regarding how IRS
is promoting the IP PIN number, and I think there is probably
some additional work you all could do to expose that benefit to
the public, either through notifications that you send out
normally that have that attached to it or something, because I
think it is out of sight, out of mind. I think some more
promotion of it would get you a lot more users.
Commissioner Koskinen. That is a good point. We should look
into that, because, as I say, we are hoping to learn from the
pilot, and one of the things we have learned is nobody seems
very interested. So we need to do more outreach.
Senator Isakson. Thank you for your service.
The Chairman. Thank you, Senator.
Senator Casey?
Senator Casey. Thank you, Mr. Chairman. Commissioner, thank
you for your service, and thanks for being here with us today.
I want to reiterate two of the numbers that your testimony
pointed to in terms of your budget and your workforce. By the
end of this fiscal year, am I correct in saying that you are
going to be down 17,000 employees and $911 million? Is that
right?
Commissioner Koskinen. Yes. Since 2010.
Senator Casey. Since 2010, right. They are big numbers, and
that is a substantial hit. So those of us who call on you to do
more have to be mindful of those numbers.
I just really have one question. I want to get into tax
scams, because I am on the Aging Committee, and we are dealing
with that issue of scams there, so I am trying to be in both
places at one time. But I did want to ask you a question about
taxpayer services, the so-called Tax Forms Outlet Program.
Everything has an acronym--T-F-O-P. Just as society is trying
to get away from too much paper, whether it is tax forms or
instruction books, we do know that as many as 20 million
returns, about 14 percent of the total, were filed on paper. So
there is still a need and a demand for some of these paper
instructions or forms. And I know that you have a toll-free
number to deal with this issue.
I just want to ask you, in terms of the toll-free number--
that is where we get a lot of complaints about long wait times.
I just want to ask you, with regard to the new funding that you
got at the end of the year from the so-called omnibus, if you
can tell us how specifically that additional funding is being
used to improve taxpayer services, at least on this particular
issue.
Commissioner Koskinen. Of the $290 million, about $178
million will be devoted to taxpayer service. We are in the
process of hiring up to 1,000 more people who will be able to
provide service for us on the phone and in correspondence. In
particular, with the number for ordering forms, we want to make
sure people get to it quickly and get those forms. They are
free, so you can get forms either by downloading them online,
or you can get them from libraries. But we want that phone line
to work better. Already we have gotten indications that thus
far in the filing season, our level of service is up as high as
in the low 70s. So that means that people are getting through
much faster and better than they were last year.
Senator Casey. When you say ``low 70s,'' you mean----
Commissioner Koskinen. Low 70 percent. That means that when
you call, 70 percent of people are getting right through. And
so it is going to make a big difference. My hope is, we will be
able to establish that, (a) we can spend the money wisely and
carefully, and (b) if you give us money, you get a result. If
you gave us more money for taxpayer service, you would get an
even better result, because we will not solve the taxpayer
service problem at the level we think taxpayers deserve with
the additional funding, but the funding is a great help.
Senator Casey. How do you measure, just on the question of
a good level of improvement in service, how do you measure that
over the next year or two?
Commissioner Koskinen. We measure the number of people who
get through without difficulty, and we measure how long they
have to wait. Our ultimate goal in the old days, in the mid-
2000s, was an 80-percent level, which meant 80 percent of the
people got through and they waited less than 5 minutes,
sometimes on average 2 minutes. So last year's average wait
time at 25 to 30 minutes really was unconscionable for
taxpayers.
Our focus is, taxpayers ought to get the best service they
can. As I said, the money we are going to put into it will make
a big difference this year, but it will not get us to the level
we want. It is not the amount--we requested an additional $700
million for the three areas and got $290 million. The $290
million is a great help, but that means there is still another
$410 million that we could have spent to apply to those three
areas.
Senator Casey. Great. Thank you very much.
The Chairman. Senator Nelson?
Senator Nelson. Mr. Chairman, I want to go back to the
issue that Senator Roberts raised, which was the 501(c)(4)s. He
was asking about the big brouhaha that occurred a couple of
years ago, but there is another side to the brouhaha, and that
is, the statute says that these 501(c)(4)s are ``exclusively
for the promotion of social welfare.'' And in a Treasury
Department reg, ``exclusively'' was changed to ``primarily''--
``primarily for the promotion of social welfare.'' Now, that
seems to me to be changing, on its face, the intent of the
statute, but it is what it is. So there is a reg there.
Well, there is one of these groups that has the tax-exempt
status, 501(c)(4), and they list in their promotional materials
to donors that for political campaigns they need $3 million for
research, $2 million for polling research, $18 million for
issue advocacy, $5 million for acquisition of campaign lists,
and $15 million for targeted grass-roots activity in political
campaigns.
Now, it seems like it defies common sense that under the
Treasury reg, and certainly the statute, whether you use the
word ``exclusively'' or ``primarily'' for the promotion of
social welfare, do you have any idea how you would classify one
of those activities as ``social welfare''?
Commissioner Koskinen. Well, part of the reason I was
hoping we would be able to clarify the regulations would be to
make the answer to that question much simpler for the
organizations as well as the IRS. We ought to get out of the
discussion, as much as we can, about determining what is
political and what is not political. If we had a clear set of
guidelines, the organizations would benefit, and we would
benefit.
Right now, we have pages of examples of what the facts and
circumstances mean, so you cannot take any particular category
and say by definition it is either social welfare or it is not.
Clearly, a lot of issue advocacy is social welfare, and people
take positions on both sides of issues, and that has been
viewed over time as appropriate social welfare activity. The
question is, when does the issue advocacy fold over into
political activity? And then you have to say, what are the
facts and circumstances, and then you get into a very muddy
area.
Senator Nelson. Right. But you are surely aware that
501(c)(4)s are primarily engaged in political activity instead
of social welfare.
Commissioner Koskinen. There has been some misunderstanding
that perhaps, while the regs were pending, we were not actually
in business. We actually have a statutory responsibility to
review and enforce the code, and our Exempt Organization
division continues to review activities of all tax-exempt
organizations, not just (c)(4)s. We have (c)(3)s, (5)s, and
(6)s.
Senator Nelson. I understand that. You look at everything.
Commissioner Koskinen. And we look at everything.
Senator Nelson. Are you aware in general by reading the
newspaper or watching TV that some of these 501(c)(4)s are
being used primarily for political activity?
Commissioner Koskinen. I cannot tell that by the publicity.
I am aware that there are some 501(c)(4)s that are very active
politically, but what I do not know by the reading of that is
what else they are doing. Are they actually involved in other
activities that are social welfare? That is the requirement.
The requirement, as you note, is that 51 percent of your
activity or the majority, ``primarily,'' has to be social
welfare.
Senator Nelson. And you cannot examine them as the IRS
Commissioner to determine that?
Commissioner Koskinen. The IRS Commissioner does not get
involved in the selection of any examination for any reason. So
whether it is----
Senator Nelson. Well, how are you going to make sure that
the laws are being faithfully executed then if you, as the
administrative agency, are not going to look at it?
Commissioner Koskinen. No, no. You talked about the
Commissioner. The Commissioner personally does not get involved
in selecting anybody for an audit or review.
Senator Nelson. Doesn't your agency?
Commissioner Koskinen. The agency has a responsibility to
review and audit across the board everyone who is required
either to pay taxes or has tax exemption. And one of the issues
we have with our resources is trying to make sure we marshal
those appropriately. In the 1023, the tax-exempt area, we now
have a streamlined program for small organizations that allows
them to get through without filling out a 27-page application--
--
Senator Nelson. You know, Commissioner----
Commissioner Koskinen [continuing]. Which allows us to have
more people who can actually be involved in reviewing what
people are actually doing out there. And so we do that. We
review people. We have a selection process. One of the
recommendations from the IG and from this bipartisan report was
to make sure that those reviews were appropriate, that people
were appropriately trained, that when we select someone for a
review, there is a review of that decision--because they are
all active in one way or another--to make sure when somebody
hears from us, it is a fair process and they have not been
selected by one category or another, whatever they were
involved in. It is, are you spending all of your resources
primarily on social welfare activities, and we do review them.
Senator Nelson. Now, if you have concluded with your
answer, I just want to respectfully suggest to you that that is
a non-answer. You are the head of an agency. If there are
abuses, just like Senator Thune was talking about with regard
to ID theft, you have a responsibility as a leader to see that
the laws are faithfully executed and followed.
Commissioner Koskinen. Exactly, and I take that
responsibility seriously and willfully and fully.
Senator Nelson. Well, I have been asking the IRS on this
committee for the last 4 years about following this statute,
even as it is interpreted by the Treasury Department,
``primarily for the promotion of social welfare,'' in order to
be tax-exempt as a 501(c)(4), and I have yet to get an answer.
Commissioner Koskinen. Well, if you will take whatever that
last letter was, I have given an answer, as the chairman knows.
My view is, I read every letter, and you get an answer within
30 days. So, if you would like to send me that letter, I will
be happy to respond to you. But I would just emphasize, my
responsibility is to make sure the processes are effective----
Senator Nelson. Right.
Commissioner Koskinen [continuing]. The processes are fair,
and that we follow them. And I am doing that and taking it
seriously. But with regard to any particular case, no one at
the IRS----
Senator Nelson. Would you stop just a minute?
Commissioner Koskinen. Yes.
Senator Nelson. We are way over my time.
Commissioner Koskinen. Okay. Sorry.
Senator Nelson. I will write you a letter.
Commissioner Koskinen. Good.
Senator Nelson. But you are in front of the committee that
has the jurisdiction for overseeing the execution of the laws,
and we are--we, this Senator, is asking you a simple question.
So, if you say that I cannot get you to respond in front of the
Senate Finance Committee, I will write you another letter.
Commissioner Koskinen. Right. What I cannot respond to,
even if you write me a letter, is a question about any specific
taxpayer.
Senator Nelson. I am not asking you--I am asking you in
general.
Commissioner Koskinen. In general, and I will tell you--and
you can send me that letter. As I told you, the problem with
facts and circumstances is when you say ``issue advocacy,'' as
a general matter, issue advocacy is social welfare. It can in
some facts and circumstances be issue advocacy that is directly
involved in a political campaign and which is political
activity. And that is what the IG said: we ought to clear all
that up and try to give clear guidelines. So I can tell you
that, in fact, we have, as I say, pages of regulation trying to
give people guidance about what counts, what does not, what is
on which side of the line and on the other.
So I am happy to give you as much information as I can in a
context where I would remind people we are still in business,
our process is upgraded in response to all the recommendations
to make sure it is fair and aboveboard. But it does not mean
that people do not get reviewed.
The Chairman. Senator, I have to bring this to a close.
Thank you.
Senator Nelson. Oh, I understand, Senator, and I apologize.
The Chairman. You do not have to apologize.
Senator Nelson. I apologize for going over time. But I am
just trying to get a direct answer.
The Chairman. I understand. Well, I thought he gave you a
direct answer. But maybe your letter will----
Senator Nelson. I doubt it.
Commissioner Koskinen. No, I would like a little more
confidence that our goal is to try to respond as effectively
and quickly as we can to any inquiry.
The Chairman. Well, let me say, I want to thank
Commissioner Koskinen for appearing here today as well as all
of our colleagues who have participated in this hearing. It is
my hope that the issues we discussed today can be addressed as
we work to improve the Nation's tax code and ensure that the
IRS has sufficient resources to do their job properly. Now,
this is something we owe to the dedicated taxpayers and
citizens of this great country.
I would ask that any written questions for the record be
submitted by Wednesday, February 24, 2016.
With that, we thank you, Mr. Commissioner, and the hearing
is adjourned.
[Whereupon, at 3:35 p.m., the hearing was concluded.]
A P P E N D I X
Additional Material Submitted for the Record
----------
Prepared Statement of Hon. Orrin G. Hatch,
a U.S. Senator From Utah
WASHINGTON--Senate Finance Committee Chairman Orrin Hatch (R-Utah)
today delivered the following opening statement at a hearing examining
the Obama Administration's Fiscal Year (FY) 2017 budget request for the
Internal Revenue Service (IRS):
Today, the committee welcomes the Commissioner of the Internal
Revenue Service, John Koskinen. Commissioner Koskinen comes before us
this afternoon to discuss his agency's operations and President Obama's
budget proposal for Fiscal Year 2017.
Commissioner Koskinen, today's hearing is the fourth time you've
appeared before this committee during my chairmanship. Over the past
year, we've seen both progress and setbacks at the IRS.
As you well know--and as I think everyone here knows--I tend to be
first in line to challenge and critique your agency when I believe it
is in the wrong. But, for today, I'd like to change things up. Let me
be the first to offer praise for the IRS where it is due.
Here are some successes I'd like to acknowledge:
Last Spring, this committee launched an investigation of the online
tax return software industry. We were looking specifically at how the
industry deals with stolen identity refund fraud and to what level the
industry cooperates with the IRS to combat that fraud. In the wake of
our investigation, the IRS and industry leaders launched a Security
Summit and agreed to new initiatives to prevent and counter fraud. I
want to applaud these efforts and I look forward to continuing the
committee's oversight of its implementation and results.
Let me mention one more.
Last year, this committee issued a report following a 2-year
bipartisan investigation of the IRS's treatment of organizations
applying for tax-exempt status. Our report included a number of
recommendations for changes at the IRS, and, as of right now, all signs
indicate that the agency is taking appropriate steps toward
implementing those recommendations. I appreciate your ongoing work
there as well and am grateful for your responsiveness.
There is, of course, more to be done, and I look forward to working
with you to ensure that taxpayers are never again targeted because of
their political beliefs.
While these are all signs of progress, a number of great challenges
still lie ahead. The most obvious challenge facing the IRS is the need
for modernization.
On the one hand, the agency must be brought into the digital age in
a way that provides the greatest convenience and efficiency for
taxpayers. But on the other hand, the agency must also better protect
against data thieves that thrive in the digital age.
We were reminded of these risks last year when data thieves
breached the IRS's own website through the Get Transcript portal and
successfully stole the tax records of 330,000 taxpayers. That is
330,000 taxpayers who now have their most sensitive tax information
sitting out there in the hands of criminals waiting to use that
information to do further damage this tax year, or the next, or even 10
years from now. We were reminded of this threat yet again just
yesterday, when news broke of another large-scale attack against the
IRS, but thankfully it appears that the attack was unsuccessful. The
Get Transcript breach is going to haunt us for years to come, and,
unfortunately, it's only one of many.
On the customer service front, we look forward to hearing more
about the IRS's comprehensive ``Future State'' plan to modernize how
taxpayers interact with the agency. I applaud this initiative, but I
will be watching very closely to see how it is carried out and how it
impacts taxpayers.
Once again, modernization is probably the central challenge facing
the IRS and it requires a careful balance of sometimes competing
priorities. Much hangs in the balance of how these efforts are carried
out. Another issue I look forward to hearing about today is a provision
of the recently enacted FAST Act--specifically, the provision dealing
with the inactive tax debt collection program.
As noted in the conference report to the bill and as we'll hear
today from Senator Grassley and perhaps others, Congress's intent was
that Treasury and the IRS would expeditiously implement the provision
by utilizing private collection contractors and debt collection centers
that are approved by the Bureau of the Fiscal Service at the Department
of Treasury.
Further, the statute requires that contracts be entered into and
signed within three months after enactment of the FAST Act. That
deadline of March 4th is fast approaching. So, I look forward to
hearing an update today on your efforts to get those contracts signed
and cases released and to ensure that taxpayers are made aware of the
program and how it will be implemented.
______
Prepared Statement of Hon. John A. Koskinen, Commissioner,
Internal Revenue Service
introduction
Chairman Hatch, Ranking Member Wyden, and members of the committee,
thank you for the opportunity to discuss the IRS's budget and current
operations.
Let me begin by expressing my appreciation to Congress, including
the members of this committee, for approving $290 million in additional
funding for the IRS for Fiscal Year (FY) 2016, to improve service to
taxpayers, strengthen cybersecurity and expand our ability to address
identity theft. This brings the total IRS budget for FY 2016 to $11.2
billion. It is an important development for the IRS and for taxpayers,
and is the first time in 6 years that the agency has received
significant additional funding. It is a major step in the right
direction, and I can assure the Congress that we will use these
resources wisely and efficiently.
Even with this additional funding, however, the IRS is still under
significant financial constraints. This is illustrated by the fact that
the IRS appropriation remains $911 million below the FY 2010 enacted
level and that the $290 million increase is less than half the amount
that had been requested for FY 2016 in the three critical areas
mentioned above. In addition, the IRS must absorb mandated cost
increases and inflation during FY 2016 that are greater than the
additional funding provided.
As a result, we will need to continue the exception-only hiring
policy that began in FY 2011, leaving us unable to replace most
employees we lose this year through attrition. In fact, we expect the
IRS workforce to continue to shrink by another 2,000 to 3,000 full-time
employees during FY 2016, equaling a loss of over 17,000 since FY 2010.
While this decline in our workforce has been occurring, the number
of individual returns filed grew by more than 10 million (or nearly 7
percent), from 153 million in 2010 to 163 million in 2015. Further
increasing our workload, the IRS during this period has had to
implement a number of significant legislative mandates, nearly all of
which came with no additional funding. These include: the Affordable
Care Act (ACA); the Foreign Account Tax Compliance Act (FATCA); the
Achieving a Better Life Experience (ABLE) Act, which includes a new
certification requirement for professional employer organizations; and
reauthorization of the Health Coverage Tax Credit (HCTC). In FY 2016,
several additional legislative mandates were put in place that carried
no implementation funding with which to execute them--for example, new
passport restrictions, a private debt-collection program and a
registration requirement for newly created 501(c)(4) organizations. We
have had to defer hundreds of millions of dollars worth of important
information technology (IT) projects and improvements since FY 2014 in
order to meet our statutory requirements to implement the ACA.
Against this backdrop, a fact that often gets overlooked is that
the U.S. is much more efficient in its tax collection operations than
most other countries. According to statistics compiled by the
Organization for Economic Cooperation and Development (OECD), the
average OECD member country spends $8.87 to collect $1,000 of revenue,
while the U.S. spends only $4.70. The tax administrations of Germany,
France, the United Kingdom, Canada and Australia each spend twice as
much as the IRS to collect a dollar of revenue. So while the IRS will
continue to look for efficiencies in our operations, it is important to
understand that we are one of the most efficient tax administrators in
the world.
We continue to recognize the importance of spending taxpayer
dollars wisely and working to strengthen our operations as we move
forward. In that regard, the IRS has addressed a number of management
problems that had developed in the past. Actions taken to solve these
problems have in some cases been in place for several years. For
example, spending on conferences has been reduced by 80 percent since
2010. In order to achieve this, since 2012, any division planning to
spend more than $20,000 on a conference is required to obtain prior
approval from the IRS Commissioner. Any proposed conference expense
over $50,000 must also be approved by the Secretary of the Treasury or
his designee. With regard to videos, any IRS division seeking to make a
video must receive prior approval from an executive review board the
agency created in 2013 for this purpose. As for performance awards, the
IRS no longer pays such awards to IRS employees who are disciplined for
serious misconduct issues or who have willfully failed to pay their
taxes. In addition, processes are in place to ensure the IRS does not
rehire former employees who had significant conduct or performance
problems during prior employment with the agency.
In the tax-exempt area, the IRS has acted on all of the
recommendations made by the Treasury Inspector General for Tax
Administration (TIGTA) in his May 2013 report describing the use of
improper criteria in reviewing applications for tax-
exempt status under section 501(c)(4). The changes we made in response
to those recommendations include: eliminating the use of inappropriate
criteria; implementing improved and expanded training for employees;
expediting the processing of section 501(c)(4) applications; and
establishing a new process for documenting the reasons why applications
are chosen for further review, with appropriate oversight of the entire
process.
In addition, the Department of the Treasury and the IRS followed
TIGTA's remaining recommendation and began the process of drafting
guidance on how to measure social welfare and non-social welfare
activities of section 501(c)(4) organizations. In light of language in
the appropriations legislation for FY 2016, the IRS halted work on
those proposed regulations.
Along with responding to TIGTA's May 2013 report, the IRS also has
been working to address the recommendations by this committee in its
report issued last August. As we advised the committee in October, the
IRS accepted all of the recommendations in the report that are within
our control--those that did not involve tax policy matters or
legislative action. They include 15 of the report's 18 bipartisan
recommendations and also six of the recommendations in the separate
sections prepared by the Majority and Minority. Moreover, I am pleased
to report that the IRS has substantially completed action on all of
these recommendations.
planning for the future of the taxpayer experience
Within our tight budget constraints, the IRS has also continued to
analyze and develop plans for improving how the agency can fulfill its
mission in the future, especially in delivering service to taxpayers
and, along with that, maintaining a robust compliance program. Our goal
is to improve and expand taxpayer services for all taxpayers, no matter
what their circumstances.
In requesting adequate resources to allow the IRS to improve
taxpayer service, it is important to point out that our goal is not to
fund today's staff functions at historically high levels. We need to
be, and are, looking forward to a new, improved way of doing business
that involves a more robust online taxpayer experience. This is driven,
in part, by business imperatives; when it costs between $40 and $60 to
interact with a taxpayer in person, and less than $1 to interact
online, we must reexamine how we provide the best possible taxpayer
experience, in response to taxpayer expectations and demands.
The improvements we are planning are a natural outgrowth of
modernizations made to our business systems over many years. These
include the development and implementation of the Customer Account Data
Engine 2 (CADE2), which allowed the IRS to migrate to daily processing
and posting of individual taxpayer accounts, enabling faster refunds
for more taxpayers, more timely account updates and faster issuance of
taxpayer notices. Another advance put in place several years ago was
Modernized e-File (MeF), which processes tax returns electronically in
real time, rather than in several batches a day. MeF has reduced
turnaround time, and allows acknowledgments to be sent much more
quickly to those who transmitted the returns.
After years of study, and in response to taxpayer demand, the IRS
has also worked to improve our website, IRS.gov, and to provide more
web-based tools and services. These include the ``Where's My Refund?''
electronic tracking tool, which was used nearly 235 million times in FY
2015, and the IRS2Go smartphone application. In FY 2015, there were
more than 2.3 million downloads of the application.
With regard to compliance programs, an excellent example of actions
the IRS has taken to improve interactions with taxpayers involves our
Large Business and International (LB&I) division. LB&I recently
restructured its operations to center around issues, rather than
organizations, which will focus resources to better meet taxpayers'
evolving needs in a global environment.
An important change in the compliance area has been the development
and phase-in of the Return Review Program (RRP), which delivers an
integrated and unified system that enhances IRS capabilities to detect,
resolve, and prevent criminal and civil tax non-compliance. Continued
investment in the RRP will allow the IRS to retire the legacy
Electronic Fraud Detection System (EFDS), and save between $10 million
and $15 million a year.
Going forward, the IRS intends to further improve compliance
programs through investment in an Enterprise Case Management (ECM)
system, which will address the need to modernize, upgrade, and
consolidate over 100 aging IRS case management systems. A unified case
management environment will yield efficiencies by implementing standard
case management functions, providing visibility across all types of tax
transactions and improving data accessibility and usability.
Even with the improvements we have made and continue to make, we
are at the point where we believe the taxpayer experience needs to be
taken to a new level. Building on improvements made and new
applications provided over the past 10 years, our goal is to increase
the availability and quality of self-service interactions, which will
give taxpayers the ability to take care of their tax obligations in a
fast, secure, and convenient manner.
As I have discussed in numerous congressional appearances and
speeches, the idea is that taxpayers would have an account with the IRS
where they, or their preparers, could log in securely, get all the
information about their account, and interact with the IRS as needed.
Most things that taxpayers need to do to fulfill their obligations
could be done virtually, and there would be much less need for in-
person help, either by waiting in line at an IRS assistance center or
calling the IRS.
As we improve the online experience, we understand the
responsibility we have to serve the needs of all taxpayers, whatever
their age, income, or station in life. We recognize there will always
be taxpayers who do not have access to the digital economy, or who
simply prefer not to conduct their transactions with the IRS online.
The IRS remains committed to providing the services these taxpayers
need. For example, while the IRS will continue to offer more web-based
services, taxpayers will still be able to call our toll-free help lines
or obtain in-person assistance if that is their preferred method of
receiving service from the IRS.
A good example of our commitment to serving all taxpayers, whether
or not they participate in the digital economy, involves the return
filing process. While the number of taxpayers who e-filed their income
tax returns exceeded 85 percent last year and is expected to do so
again this year, millions of people still choose to file paper returns.
The IRS will not leave any taxpayer behind as we move into the future
and will continue to offer taxpayers who prefer filing on paper the
option to do so.
In moving toward the future of taxpayer service, it is also
important to note that actions the IRS takes to help taxpayers
increasingly will have a positive impact in the enforcement area, and
will in turn help improve voluntary compliance. An excellent example of
such an action is the Early Interaction Initiative we launched last
December to help employers.
Under this initiative, the IRS seeks to identify employers who
appear to be falling behind on their interim employment tax payments
before they file their annual employment tax returns. The IRS will
offer helpful information and guidance through contacts such as letters
and automated phone messages. In the past, the first attempt by the IRS
to contact an employer having payment difficulties often did not occur
until much later in the process, after unpaid tax obligations were
already beginning to mount. This initiative is designed to help
employers stay in compliance and avoid needless interest and penalty
charges. You could call this initiative a form of improved taxpayer
service, or a more efficient enforcement activity. We believe that it
is both.
This initiative illustrates why I believe it is important to view
taxpayer service and enforcement as two sides of the same coin. While
the IRS collects $50 billion to $60 billion a year as a result of our
enforcement operations, those numbers pale in comparison to the more
than $3 trillion that is collected each year as a result of taxpayers
voluntarily fulfilling their tax obligations. That is why we continue
to be extremely concerned about the decline in both taxpayer service
and enforcement as a result of the continued cuts in IRS funding. These
declines threaten to undercut the basic voluntary compliance fabric of
our tax system. If you consider that a 1-percent drop in the compliance
rate translates into a revenue loss of approximately $30 billion a
year, or $300 billion over the 10 year budget window often used, then
declining voluntary tax compliance results in a cut to the funds the
government needs to operate.
the administration's fy 2017 budget request
In preparing the FY 2017 budget request, the IRS's senior
leadership recognized the need to prioritize funding of key activities
that help support enhanced digital service delivery discussed earlier
in this testimony, while preserving the agency's core mission
functions. As a result, the IRS established a new investment process
and created six key strategic themes that outline how the agency will
execute tax administration to meet the needs of taxpayers in the
future. IRS leadership set priorities for new investments based on how
those investments align with these themes:
Facilitating voluntary compliance by empowering taxpayers with
secure innovative tools and support;
Understanding non-compliant taxpayer behavior and developing
approaches to deter and change it;
Leveraging and collaborating with external stakeholders;
Cultivating a well-equipped, diverse skilled workforce;
Selecting highest-value work using data analytics and a robust
feedback loop; and
Driving more agility, efficiency and effectiveness in IRS
operations.
Following from these themes, the administration's FY 2017 budget
request includes a number of initiatives that provide the building
blocks to move the IRS into the future. These initiatives represent a
large portion of the increased funding requested in the IRS budget for
FY 2017. They are as follows:
Additional funding to improve taxpayer service: $48 million. Under
this initiative, the IRS will work both to improve taxpayer service
delivered through traditional channels and continue modernizing the
services we offer in order to help transform the taxpayer experience.
The additional staffing funded by these resources by itself will
deliver phone level of service (LOS) for the full year on our toll-free
helplines at 53 percent; if the President's Budget is enacted in full,
the IRS will be able to combine this funding with additional resources
through user fees to achieve a 70 percent LOS throughout the year. It
is worth noting, however, that we expect to have the lowest user fee
balance available for carryover into FY 2017 since FY 2008, meaning
that we will not have that contingency available to boost service if
other needs are not sufficiently funded.
In terms of modernizing the taxpayer experience, the additional
funding will allow the IRS to continue moving toward the development
of: secure online taxpayer accounts; secure online digital
communications between the taxpayer and the IRS; and new web-based
self-service products and more interactive capabilities to existing
products, so that taxpayers would potentially be able to, for example,
securely authenticate their identity, view and print tax records
online, pay outstanding debts, enter into installment agreements,
establish powers of attorney, and get tax law information.
Taken together, these improvements will ultimately allow taxpayers
to resolve more issues online, leaving our employees more time to
support the transactions that are best completed by phone or in person.
Additional funding to continue implementing the Affordable Care
Act: $153 million. The additional funding provided by this initiative,
above current resources, will allow the IRS to develop advanced
technology infrastructure and applications support and to modify
existing IRS tax administration systems, so the agency can continue
implementing the tax-related provisions of the ACA.
For example, the funds will improve the IRS's ability to: validate
taxpayer claims for the premium tax credit; collect penalties, taxes
and fees related to the ACA provisions that the IRS administers; and
administer the individual shared responsibility provision. The
additional funding also supports administration of the new reporting
requirement for health coverage providers, as well as the employer
shared responsibility provision, both of which took effect in 2015.
To further illustrate the importance of funding this initiative, I
would note that over the last several years the IRS has had to divert
resources from other critical functions, including taxpayer services
and IT, and expend user fees to fund ACA implementation. In particular,
these diversions have depleted user fees and made it difficult to use
those fees to help fund core mission activities and other unfunded
legislative mandates.
Additional funding to leverage new technologies to advance the IRS
mission: $53 million. Under this initiative, the IRS will continue
using new technologies to develop critical IT systems needed to support
the IRS's taxpayer service and enforcement programs. This includes
making improvements to such systems as CADE2 and MeF. The IRS will also
be able to provide the necessary IT infrastructure to support efforts
to improve the online taxpayer experience, including the infrastructure
portions of secure digital communications and more interactive
capabilities to existing web-based self-service products.
Another major component of this initiative is the implementation of
the Event Driven Architecture (EDA) framework, which is designed to
improve return processing by allowing the IRS to process and share data
internally from returns more easily. Through the use of EDA, for
example, returns with minor errors can be addressed at the time of
filing. Implementation of EDA is a prerequisite for a number of planned
improvements to the online taxpayer experience, including immediately
notifying taxpayers of errors on a return as soon as it is filed, and
allowing taxpayers to self-correct return errors through an online
tool.
Additional funding to help prevent stolen identity refund fraud and
reduce improper payments: $90 million. The IRS has made significant
progress in combating stolen identity refund fraud over the last
several years, though it has been a challenge to find the resources for
investments in this area because of the ongoing cuts to our budget. We
therefore appreciate the additional funding Congress approved for FY
2016 for cybersecurity and identity theft.
Nonetheless, the IRS needs to continue investing in resources and
tools to stay ahead of criminals. The additional funding requested
under this initiative will allow the IRS to invest in the additional
staffing and technology to continue improving our efforts to: detect
and prevent refund fraud related to identity theft; assist identity
theft victims; and apprehend the criminals who perpetrate these crimes.
With this additional staffing, the IRS will be able to, for
example: resolve taxpayer cases of tax-related identity theft more
quickly, and expand the capacity of the IRS's Identity Protection
Specialized Unit (IPSU) to handle additional cases; expand the IRS
External Leads program, through which the IRS works in cooperation with
financial institutions, state agencies and other external sources to
recover fraudulent refunds; and do a better job of detecting prisoner
refund fraud through the use of Prisoner Update Processing System
(PUPS) data.
Technology investments under this initiative will allow the IRS to
make a number of other improvements, including: reducing the use of
Social Security Numbers (SSN) on IRS mailings to taxpayers;
establishing a centralized fraud repository within the IRS to expand
the agency's ability to identify significant tax cases and streamline
and standardize the fraud referral process; and accelerating IRS access
to employment tax data from the Social Security Administration (SSA).
Additional funding to improve electronic enterprise records
management: $19 million. The additional funding provided under this
initiative will allow the IRS to continue its efforts to manage
official records more effectively through the implementation of new
systems to maintain unified records of IRS policy, program and project
development, and to create a unified searchable archive of IRS e-mails
to avoid redundant archiving. By making these improvements, the IRS
will be able to respond in a timelier manner to legal and congressional
inquiries and requests under the Freedom of Information Act (FOIA).
These improvements, which will be phased in over several years, will
allow the IRS to more easily comply with various recordkeeping
requirements under the Federal Records Act.
The investment-related increases I have just described must be
viewed in the context of the overall budget request for the agency. The
President's FY 2017 Budget provides $12.3 billion for the IRS, an
increase of $878.5 million in investments and an additional $167
million in funding for inflation for a total of $1.045 billion over the
FY 2016 level. This amount includes $11.8 billion in base discretionary
resources and an additional proposed $514.7 million program integrity
cap adjustment to support program integrity efforts aimed at restoring
enforcement of current tax laws to acceptable levels and to help reduce
the tax gap, which is the difference between taxes owed and taxes paid
on a timely basis. This multi-year effort is expected to generate $64
billion in additional revenue over the next ten years at a cost of $18
billion over that 10-year period, thereby reducing the deficit by $46
billion.
Enactment of the program integrity cap adjustment proposal would
facilitate funding for several initiatives, including the following:
Additional funding to strengthen enforcement programs: $399
million. This set of initiatives allows for investment to strengthen
core enforcement programs to help the IRS improve the resolution of
non-compliance with fairness and integrity. Budget cuts over the last
several years have led to rising case inventories and call volumes,
preventing the IRS from bringing into compliance taxpayers who fail to
pay their tax debt, and reducing individual audit coverage to levels
below 0.8 percent.
With this additional funding, the IRS will be able to: increase
collection and audit coverage; conduct compliance activities related to
FATCA; pursue employment tax noncompliance and abusive tax schemes;
increase investigations of transnational organized crime; and develop a
digital version of the Form 990, Return of Organization Exempt from
Income Tax.
The investments made through this initiative will, for example
allow us to: handle more than 30,000 additional collection cases; close
more than 32,000 additional individual audits; expand the Automated
Underreporter (AUR) program to process more than 400,000 additional
cases; and implement a quality review program for penalty and interest.
Additional funding to maintain the integrity of revenue financial
systems: $10 million. The current revenue financial systems do not use
commercial software, so the IRS is reliant on internal resources to
maintain them. This investment will merge multiple financial systems
into one repository to ensure the integrity of the IRS's financial data
and make necessary changes to ensure that systems comply with
accounting standards and requirements. This will automate
reconciliations of the IRS ledger systems and assist in the gathering
of data to respond to audits by TIGTA and the Government Accountability
Office (GAO). Savings and efficiencies will be achieved in future years
through the reduction or elimination of the resources required to
maintain the multiple systems supporting operational decision making
and the financial audit. This will close a material weakness.
Additional funding for operations and maintenance of deployed
Business Systems Modernization (BSM) projects: $92 million. The IRS
receivesfunding for major IT modernization projects through the BSM
appropriation, but BSM funds can only be used for developing new
systems. Once development is completed, regular operations and
maintenance begins, and the IRS is required to pay for this maintenance
through its Operations Support appropriation. Since 2013, the IRS has
incurred more than $95.5 million in unfunded increased annual
requirements to its Operations Support appropriation as a result of BSM
systems deployments. The additional funding requested partially
restores the Operations Support base so that the funding will not have
to be redirected from other areas to pay for the operation of deployed
BSM projects. Resources will fund additional staff, hardware and
software, and contractual services for these deployed systems.
legislative proposals to improve tax administration
The IRS appreciates the actions taken by Congress last year to
approve legislation designed to improve tax administration. These
measures include: accelerated filing dates for information returns;
allowing SSNs to be masked on W-2 forms and other information returns;
creating a safe harbor for minor errors on information returns; and
expanding the due diligence requirements for paid tax return preparers.
The President's FY 2017 Budget contains several additional
legislative proposals that would further improve tax administration and
enhance IRS operations. They include:
Streamlined critical pay authority. The IRS Restructuring and
Reform Act of 1998 increased the IRS's ability to recruit and retain a
small number of key executive-level staff by providing the agency with
streamlined critical pay authority. This allowed the IRS, with approval
from Treasury, to hire well-qualified individuals to fill positions
deemed critical to the agency's success in areas such as international
tax, IT, cybersecurity, online services and analytics support. This
authority, which ran effectively for 14 years, expired at the end of FY
2013. The loss of streamlined critical pay authority has created major
challenges to our ability to retain employees with the necessary high-
caliber expertise in the areas mentioned above. In fact, there are only
10 IT senior executives and leaders hired under this authority
remaining at the IRS and we anticipate there will be no staff left
under critical pay authority by next year. The President's FY 2017
Budget proposes reinstating this authority.
Authority to expand the Taxpayer Identification Number (TIN)
matching program. The IRS operates a voluntary program under which
entities that issue payments subject to backup withholding can confirm
with the IRS that the name and TIN of the person receiving the payment
match the name and TIN on file with the IRS. Although IRS code section
6103 generally prohibits the IRS from disclosing taxpayer data, the
agency is permitted to disclose this information to payers under
authority of section 3406. But this authority only covers instances
where payments are subject to backup withholding. The proposal would
broaden the agency's authority to cover any situation where a person is
required to provide the TIN of another person to the IRS.
Correction procedures for specific errors. The IRS has authority in
limited circumstances to identify certain computation mistakes or other
irregularities on returns and automatically adjust the return for a
taxpayer. At various times, Congress has expanded this limited
authority on a case-by-case basis to cover specific, newly enacted tax
code amendments. The IRS would be able to significantly improve tax
administration--including reducing improper payments and cutting down
on the need for costly audits--if Congress were to enact the proposal
in the President's Budget that replaces the existing authorities that
specify specific tax code amendments with authority to correct specific
errors instead. This would allow the IRS to fix errors where the IRS
has reliable information that a taxpayer has an error on his/her
return. Thus, for example, the IRS could use data from completed state
tax return audits to adjust information on the federal return.
Authority to require minimum qualifications for return preparers.
The proposal would provide the agency with explicit authority to
require all paid preparers to have a minimum knowledge of the tax code.
Requiring all paid preparers to keep up with changes in the Code would
help promote high quality services from tax return preparers, improve
voluntary compliance, and foster taxpayer confidence in the fairness of
the tax system. It would thereby help the IRS to focus resources on the
truly fraudulent returns.
Expanded electronic filing requirements for businesses. The
proposal would require all corporations and partnerships with $10
million or more in assets to file their tax returns electronically. In
addition, regardless of asset size, corporations with more than 10
shareholders and partnerships with more than 10 partners would be
required to file electronically. Paid tax return preparers who expect
to prepare more than 10 corporate income tax returns or partnership
returns annually would be required to file these returns
electronically. Additionally, all tax-exempt organizations required to
file Form 990 series returns would be required to file electronically.
Chairman Hatch, Ranking Member Wyden, and members of the committee,
this concludes my statement. I would be happy to take your questions.
______
Questions Submitted for the Record to Hon. John A. Koskinen
Questions Submitted by Hon. Orrin G. Hatch
Question. Commissioner Koskinen, TIGTA recently made seven separate
recommendations to the IRS, in a report dated December 22, 2015,
regarding reliability of Federal Unemployment Tax Certification Files
and Work Multi-State Cases. TIGTA indicated that a review of the data
submitted by State Agencies identified that 49 of the 50 States,
District of Columbia, and the U.S. Virgin Islands submitted data that
contained formatting errors in one or more of the key data fields used
in the IRS's automated comparison process. In fact, the report
indicated that the IRS does not have a process to ensure that State
certification data are even complete.
Additionally, the TIGTA report identified potential discrepancies
for 3,729 multi-State employers totaling more than $200 million. What
is more, the TIGTA review of FUTA discrepancy cases involving TY 2011
Forms 940 identified that the IRS incorrectly assessed 12,171 employers
more FUTA tax than what the employer owed. The total amount of excess
assessments exceeded $3.2 million. And these, Commissioner, are just a
few highlights in a report totaling more than 30 pages.
Commissioner, while there were corrective action monitoring plan
responses submitted by the IRS to this TIGTA report, I am curious why
the IRS is apparently resisting some of these important changes and
updates. For example under Recommendation #1, the IRS claims that lack
of funds prohibit developing a process to identify errors in key data
fields that have already been identified in this report. Has the IRS
done a cost estimate of what it would cost to implement this
recommendation? If so, what is the estimated cost of enacting this
recommendation? Is there not some way to utilize the work already done
by TIGTA to identify at least some of the errors materially affecting
the calculation of allowed FUTA tax credit? And if the IRS has
discovered a means of responding to the issue without increasing costs
to taxpayers, would you please include that in your response? If not,
when does the IRS anticipate having the funding available to address
this recommendation?
Has the IRS done a cost estimate of what it would cost to implement
this recommendation? If so, what is the estimated cost of enacting this
recommendation?
Answer. The IRS has identified the information technology
requirements to implement this recommendation and is in the process of
completing a cost estimate. Funding was not available for additional
programming due to budgetary constraints when this recommendation was
made so the IRS did not commit to implementation. When the cost
estimate is complete, we will determine the feasibility of implementing
the recommendation. The 2017 President's Budget provides for
modernizing many IRS systems, which would make it easier for IRS to
address these types of data quality issues.
Question. Is there not some way to utilize the work already done by
TIGTA to identify at least some of the errors materially affecting the
calculation of allowed FUTA tax credit?
Answer. The IRS is using the information provided by TIGTA
regarding the incorrect FUTA tax assessments that resulted from
programming errors: (1) Actions are currently being taken to correct
these accounts and notify taxpayers of the corrective action; (2)
Additionally, changes to existing programming have been identified and
corrections were submitted to Information Technology in a Unified Work
Request.
Question. And if the IRS has discovered a means of responding to
the issue without increasing costs to taxpayers, would you please
include that in your response? If not, when does the IRS anticipate
having the funding available to address this recommendation?
Answer. The IRS Information Technology organization is developing
the requirements that will determine the cost of the changes necessary
to improve the up-front validation process of State certification data
files. We will pursue cost effective programming changes to the extent
we are able, but continued funding constraints mean that we cannot
provide an implementation date.
______
Question Submitted by Hon. Orrin G. Hatch and Hon. Ron Wyden
Question. In Western States, appropriative water rights derive from
beneficial use and are fundamentally state-defined real property
rights, and they are independent and separate from the land. Entities
or persons possessing these rights are able to purchase, lease, or
donate them in the stream of commerce. Management and transferability
of western water rights are important to economic vitality in the West,
where growing municipalities, new businesses, and regional quality of
life depend on viable water supply.
The lack of published guidance over the tax deductibility of
donations or bargain-sold water rights has created ambiguity and
uncertainty, diminishing potential donations of water rights and
stymying the many benefits of those transactions. Clarification on this
issue by the Internal Revenue Service (IRS) will enhance the critical
role of private conservation stewardship, which aids the efforts of
charitable organizations working for sustainable water supplies.
In light of the need for clarity regarding the federal tax
deductibility of a contribution of an appropriative water right to a
charitable organization, will you commit to directing the IRS and other
appropriate officials within the Treasury Department to publish
guidance on the deductibility of a contribution of both: (1) an entire
interest of an appropriative water right, and (2) an ``an undivided
portion of the taxpayer's entire interest'' in an appropriative water
right under the Internal Revenue Code Section 170(f)(3)(B)(ii)?
Answer. Generally, a donor can claim a section 170 deduction for a
contribution of real property to a charitable organization if the donor
contributes its entire interest in the property, or an undivided
portion of the donor's entire interest in the property, and it
satisfies other requirements in section 170. In many Western States,
state law treats water rights as separate interests in real property.
Whether a taxpayer may claim a section 170 deduction for a charitable
contribution of an appropriative water right depends on applicable
state water rights law and various facts and circumstances.
We understand that guidance in this area is important to taxpayers
in Western States. We have participated in numerous meetings with
outside stakeholders and personnel from the Treasury Department, the
Department of the Interior, and the Council on Environmental Quality to
better understand the issue. States have created and implemented a
considerable body of law relating to the transfer, permitting, and use
of appropriative water rights that is unique to each state. The lack of
uniformity in the state laws regarding water rights raises challenges
in the development of general guidance that will be useful and
equitable for the array of taxpayers across the Western States.
Given the importance of this issue to taxpayers in Western States,
we will continue working with our colleagues in the Treasury Department
to develop meaningful guidance in this area and will recommend
including this guidance project on the Treasury Department's Priority
Guidance List for the 2016-2017 fiscal year.
______
Questions Submitted by Hon. Ron Wyden
Question. Nina Olson, the National Taxpayer Advocate, has raised
concerns about the IRS moving to provide more online services. One of
her main concerns is by doing so, the IRS will decrease telephone and
in-person services. There is also concern about identity theft and the
security of the system.
Please tell us your plans for the future state of the IRS.
Answer. Taxpayers expect to be able to interact with the IRS the
same way that they interact with their banks and financial
institutions. The IRS future state will meet this expectation by making
services quickly, consistently, and securely available online. The IRS
will continue to offer individuals the option of interacting with us
over the phone, in person, or by mail. Better and more widely available
self-
service options will free up in-person resources and enable shorter
wait times, greater availability, and improved quality for those
taxpayers who choose conventional service options.
The IRS remains committed to servicing the needs of all taxpayers.
A cornerstone of the future state is for taxpayers to have an
account at the IRS where they, or their authorized representatives, can
log in securely, get information about their account, and interact with
the IRS as needed. Under the future state, most things that taxpayers
need to do to fulfill their federal tax obligations could be done
virtually, and there would be much less need for in-person help, either
by waiting in line at an IRS assistance center or calling the IRS.
The future state also includes efforts to make IRS interactions
with taxpayers about anomalies or potential noncompliance more timely,
which means identifying issues earlier, contacting taxpayers sooner,
and resolving issues faster. This would be accomplished in part through
a more robust anomaly detection capability that leverages available
information, historical patterns, service and enforcement results, and
established precedents. Once it is determined that taxpayer contact is
warranted, taxpayers could be informed, either through their account or
other
communications and outreach channels, and would be afforded the
opportunity to self-correct errors, provide additional information, or
explain the anomaly. Self-
correction and early opportunities to provide additional information
and explain anomalies could help reduce contentious compliance issues
in later years.
Question. What's your time frame for implementation and changes?
Answer. It's important to note that our future state development is
an evolutionary process that began over 10 years ago. We have already
taken steps toward implementation of the future state, including
expansion of our website, IRS.gov, which receives nearly 400 million
hits a year, development of self-service online applications such as
``Where's My Refund?'', which received about 280 million hits this
filing season, and providing access to other services online, such as
installment agreements, offers in compromise, and direct payment of tax
obligations. To move this process forward, we recently formed seven
initiative groups made up of individuals from various offices within
the IRS to develop plans to deliver the capabilities and
functionalities necessary to get us to the envisioned future state.
These planning efforts, which are expected to take several months, will
help identify the prioritization, sequencing, dependencies, and other
needs to get from our current state to the envisioned future state. We
are also consulting with our stakeholders to ensure that the Future
State addresses taxpayer needs and concerns. The next update to the IRS
Strategic Plan, covering FY 2017 through FY 2021, will include
information developed by these groups. How far and how fast we can go
toward the envisioned future state will be, in part, dependent on our
ability to make the investments in people, process and technology
needed for implementation.
Question. What type of resources are needed for these plans?
Answer. For this future state to become a reality, we must have
sufficient budgetary resources to invest in the right information
technology building blocks along with the right skills and alignment
for our workforce to effectively apply the technology. Adequate funding
for these building blocks is necessary to provide a vastly improved
experience for taxpayers and increase the efficiency and effectiveness
of IRS services and enforcement actions. The 2017 Budget includes
funding for online accounts to modernize and improve self-service
options for individual taxpayers, and ultimately business and
international taxpayers, by creating an integrated and easy-to-use
source for timely, accurate, and consolidated tax filing and tax
account information as well as up-front error resolution. Here are some
of the key building blocks of the improved taxpayer experience we
envision that the future state will allow the IRS to deliver.
the building blocks to achieve the future state
Virtual Taxpayer Assistance Center
One of the central components of the future state vision is a
taxpayer account. In the virtual taxpayer assistance center, taxpayers
would be able to access and control their account information. They
would be alerted to updates via their preferred communication channel.
Taxpayers and, if permitted by the taxpayer, their representatives
could be able to see in their account history, return and refund
status, amounts due, payment confirmations, letters mailed, and
completed actions on a taxpayer's account. We plan for the virtual
taxpayer assistance center to include easy-to-use self-service tools
for taxpayers and their representatives, with clear instructions on how
to resolve most errors and issues, resolve issues with refunds, view
amounts due, and make payments if needed. Taxpayers under an
examination would be able to upload information directly to the virtual
taxpayer assistance center to more efficiently communicate with agents.
As a result of these self-service options made possible by the virtual
taxpayer assistance center, phone calls or correspondence would not be
needed as often to handle these account issues for taxpayers who are
comfortable interacting with the IRS online. The IRS will continue to
fully support traditional communications channels, including phone
support, mail correspondence, and walk-in assistance, but demand is
expected to decrease as more taxpayers interact with the IRS online.
Identity Authentication
While we have made significant strides in protecting taxpayers'
information, we continue to look for ways to expand our capabilities to
authenticate taxpayer identities and secure their data to ensure a
secure environment to interact with taxpayers online and on mobile
devices. Taxpayers deserve to have confidence in the security of their
information, and adoption of technology to ensure identity
authentication being implemented today and in the future will help the
IRS deliver secure access whenever and wherever taxpayers need it,
including access to the virtual taxpayer assistance center. IRS
recently made available a new capability, secure access, which allows
taxpayers to securely authenticate and conduct business with the IRS
online. The Get Transcript application, which allows taxpayers to
access their tax return information online, is once again available for
use by taxpayers who establish accounts using secure access. This
application is the first of many IRS hopes to make available to
taxpayers so they can securely interact with IRS online and feel
confident in their transactions.
Up-Front Issue Identification
Establishing ways for IRS to find errors and issues during filing
and provide a means to resolve them soon after they are discovered
would be central to the power of the virtual taxpayer assistance
center. This is in contrast to today, where it takes a significant
amount of time for the IRS to identify issues and contact the taxpayer,
meaning that resolution is also delayed. Up-front issue identification
would allow the IRS to sift through huge amounts of return information
and identify errors and anomalies on tax returns at the time or soon
after taxpayers file their returns. Early identification of errors and
anomalies would not only accelerate resolution of issues with
legitimate taxpayers, it would also help the IRS take immediate actions
that are beneficial to taxpayers, such as keeping a false refund out of
the hands of an identity thief or finding an unclaimed tax credit on
the taxpayer's return. With this up-front issue identification
capability, the IRS would be able to assure more taxpayers that they
will not have future contact from the IRS regarding issues on that
return.
Newly enacted legislation and better access to data sources will
help us detect issues earlier in the filing season, such as recently
enacted acceleration of the due date for filing Form W-2 information
with the IRS, which assists in validation of income reporting. Other
statutory changes and access to other data sources would also be
helpful to authenticate taxpayer submissions and protect against
identity theft and refund fraud, such as easier access to the National
Directory of New Hires and enhanced math error authority to correct
specific errors using reliable government data.
End-to-End Taxpayer Experience
Under the future state, we would be building integrated case
management capabilities to ensure that taxpayers experience seamless
interactions with us, no matter which of our employees or teams is
working on their issue. An integrated case management capability would
allow us to move information to and among the right workgroups. It
would also allow us to have multiple expert employees work on complex
audits.
Expanded Data Analytics Capabilities
With the expanded use of data analytics envisioned under the future
state plan, the IRS could continuously improve the taxpayer experience,
enhance our compliance efforts, and learn as much as we can from tests
and data. Data analytics enables the IRS to improve the efficiency and
effectiveness of our interactions. Through expanded use of data
analytics, we would get early warning of new tax compliance issues and
could help taxpayers avoid issues, confusion, or misunderstanding of
the tax laws before errors are made. Expanded use of these data
analytics capabilities will also allow us to work with tax software
providers and return preparers to identify and implement technology
solutions to reduce taxpayers' mistakes. During an audit, expanded use
of data and data analytics would help us better identify issues to
avoid wasting the taxpayer's and IRS's time working on the wrong
issues. The future state itself would not be possible without these
expanded data analytics capabilities.
______
Questions Submitted by Hon. Rob Portman
aca reporting requirements for businesses; reporting health coverage
information on irs forms 1094-b/1095-b and 1094-c/1095-c
Question. Senator Warner and I have been working with your office
to ensure the employer reporting requirements, as mandated by the
Affordable Care Act, are not overly burdensome--and that your agency
will collect useful information rather than rushed information that
would possibly need to be re-submitted. Our constituents appreciate the
extra time provided by the automatic extension, but we think more
should be done to simplify the reporting process.
Can you provide further detail on the reason(s) why these deadlines
were extended? Was the extension motivated by concerns that the IRS
will be unable to process the Forms the agency will receive
electronically or on paper? Under what circumstances will the IRS
further extend these deadlines, if at all?
Will you personally commit to working with me on my bill to achieve
a streamlined and simplified reporting approach that also ensures your
agency gets the information needed?
Answer. Notice 2016-4 extended the deadlines for furnishing the
statements and filing the returns required by sections 6055 and 6056 of
the Internal Revenue Code. As noted in the Notice, the Service has been
prepared to accept returns for filing since January 2016, and in fact
has been processing returns since that time. Following consultation
with stakeholders, however, Treasury and IRS determined that some
employers, insurers, and other providers of minimum essential coverage
needed additional time to adapt and implement systems and procedures to
gather, analyze, and report this information to the Service, and to
furnish the required information to employees and covered individuals.
In addition to consultation with stakeholders, the Service received
hundreds of written requests to extend the furnishing and filing
deadlines. Notwithstanding the extensions provided in the notice,
employers and other coverage providers were encouraged to furnish
statements and file the information returns as soon as they were ready,
and coverage providers have been doing so since mid-January.
I am committed to working with you to explore simplified reporting
methods that ensure the Service gets necessary information to enforce
the applicable provisions of the Code. The IRS supports simplification
efforts that reduce taxpayer burden, and we would be happy to work with
you or your staff in determining the implications of simplification to
IRS operations. As always, changes to existing IT systems would require
adequate resources to implement those changes within a reasonable
period of time.
employer reporting requirements
Question. The ACA reporting requirements compel employers to report
significant amounts of data detailing information about employees,
their health plans and who had access to employer sponsored insurance
to the IRS after the end of each year. This information will be used to
levy the individual mandate penalties. It will also be used to levy
penalties on low-income workers who were erroneously granted an
advanced premium tax credit by the Exchanges when the employee had an
existing offer of employer-sponsored insurance.
Unfortunately, because employers are reporting information on the
availability of employer-sponsored insurance up to 17 months after the
exchange granted the erroneous advanced premium tax credit--these
lower-income employees could be left with a shocking tax bill over a
year and a half later.
When will the IRS notify individuals of their potential tax
liability?
Answer. As you know, applicable large employers (ALEs) must report
to the IRS information about the health care coverage, if any, they
offered to full-time employees. ALEs are also required to furnish a
statement to each full-time employee that includes the same information
provided to the IRS. The IRS will use this information to administer
compliance with the employer shared responsibility provisions and the
premium tax credit provisions. Individuals who purchased health
insurance coverage through the Marketplace may use this information to
verify their eligibility for employer-sponsored coverage. Like other
information reporting, this information is provided after the
conclusion of the year, reflecting that coverage may change over the
course of the year.
Tools are used to help employers determine whether an individual
enrolling in Marketplace coverage is eligible for employer-sponsored
coverage.
For example, starting in 2016, the Federally-facilitated
Marketplace (FFM) will notify certain employers whose employees
enrolled in Marketplace coverage with advance payments of the premium
tax credit (APTC) because the employee attested that he or she was
neither enrolled in employer sponsored coverage nor eligible for
employer coverage that is affordable and meets the minimum value
standard. The FFM will send notices to employers if the employee
received APTC for at least one month in 2016 and if the FFM has a
complete address for the employer. Employers receiving this notice may
appeal the Marketplace's eligibility determination.
APTC eligibility is based on the Marketplace's estimate of the
premium tax credit the individual will be able to take on his or her
tax return. If APTC is paid for an individual or a member of his or her
family, the individual must reconcile (or compare) the APTC paid during
the year with the actual premium tax credit for which the individual
qualifies at the time the individual files his or her tax return. If
the APTC is more than the premium tax credit, the individual must repay
the excess APTC, which occurs as part of the individual's tax filing
process. However, the amount that an individual is required to repay
may be limited based on the individual's household income and filing
status. Individuals calculate the amounts they are owed or owe a result
of reconciliation on their tax returns. The IRS compares the
information on the tax returns with information reported by the
Marketplaces to verify the taxpayers' calculations and eligibility for
the premium tax credit.
Question. Wouldn't it help low-income individuals and improve tax
administration if the Administration used up-to-date information about
the availability of employer-sponsored insurance at the time
individuals were applying for tax credits rather than 17 months later?
Answer. The question of whether this data would be useful in
determining eligibility for the advance premium tax credit (APTC) at
the time an individual enrolls in Marketplace coverage is a question
best addressed to CMS. As to whether this data would be useful in
determining eligibility for the premium tax credit at the time the
taxpayer files his or her income tax return, it generally would not.
Knowing whether an individual had access to employer-sponsored coverage
at the time a tax return is filed is not sufficient information to help
either taxpayers or the Service determine eligibility for the premium
tax credit (PTC) as it would not include information about
affordability and minimum value. The general rule is that individuals
are not eligible for the premium tax credit if they are eligible for
employer-sponsored coverage that provides minimum value and is
affordable. Whether available employer-sponsored coverage is affordable
or provides minimum value is determined at the time of enrollment in
Marketplace coverage, and the Service's rules and instruction provide a
safe harbor for taxpayers who provide accurate current information on
their Marketplace application. The instructions for Form 8962 and
Publication 974 explain this process. The instructions tell taxpayers,
``Employer-sponsored coverage is not considered affordable if, when you
or a family member enrolled in a qualified health plan, you gave
accurate information about the availability of employer coverage to the
Marketplace, and the Marketplace determined that you were eligible for
APTC for the individual's coverage in the qualified health plan.'' Pub.
974 expands on that statement and provides six examples to help
taxpayers determine whether available employer-sponsored coverage was
affordable at the time of enrollment.
aca tax credit notices
Question. Obamacare requires HHS to send a notice to an employer
when an employee is deemed eligible for an advanced premium tax credit.
These notices are important because they allow employers to warn
employees that they may be subject to a surprising tax bill when the
employer has already offered the employee health coverage.
Would a more up-to-date and substantiated data base help decrease
the number of erroneous advanced premium tax credit determinations?
Employers expected to receive notices beginning in 2015. What date
will you begin sending employers notices so they can help their low
income workers avoid unexpected tax penalties?
Answer. HHS is best able to answer these questions. The 2016
Employer Notice Program is described here: https://www.cms.gov/CCIIO/
Resources/Fact-Sheets-and-FAQs/Downloads/Employer-Notice-FAQ-9-18-
15.pdf.
enrolled agent fee increase
Question. The Service is proposing to increase its user fee for the
enrolled agent Special Enrollment Exam from $33 to $297, bringing the
total cost of taking the exam cost close to $600. Isn't such a large
increase unprecedented, and won't it act as a deterrent to increasing
the number of enrolled agents?
The proposed regulations are rather opaque on why the sudden
increase. Could you provide me with details on how the IRS arrived at
this figure?
IRS suggests in the proposed regulations that part of the reason
for the increase is that the number of tests administered annually is
much lower than originally forecast--the difference is 34,000 v.
approximately 20,000. What has IRS done to encourage unenrolled
preparers to take the enrolled agent exam?
In the wake of the Loving decision, why did the agency choose to
create the Annual Filing Season Program Record of Completion, which is
not a credential at all, rather than promote its own existing enrolled
agent credential? Encouraging more preparers to take the comprehensive
enrolled agent exam just seems like a better investment for taxpayers.
Answer. Per OMB Circular A-25, the IRS is required to recover the
full cost for user fee programs, unless there is a waiver granted by
OMB to charge less than full cost, which in some cases is a waiver of
the fee entirely. As required by OMB Circular A-25, the IRS reviews
biennially its user fee programs and recalculates the full cost to the
agency of providing the services subject to those fees. Through the
IRS's 2015 review of the Enrolled Agent (EA) program, the IRS
determined that the current testing fee of $11.00 per part does not
reflect the costs to the agency of providing, maintaining and
monitoring this testing program. In order to comply with Circular A-25,
which requires the IRS to charge a user fee that reimburses the full
cost of the service, the IRS proposed increasing the testing user fee.
The EA is a nationally recognized credential for tax professionals.
The proposed increase to the testing user fee is not inconsistent with
the testing costs for securing other professional credentials. Based on
our research, the average cost for state bar exams and certified
professional accountant exams are consistent with the proposed EA
testing fee, but with the EA testing fee at the lower end of this
spectrum. For example, in Ohio it costs $743 to take all four parts of
the Uniform CPA exam, plus a $140 application fee. The costs for the
state bar exam totals $737.
Any fee increase to any program may, of course, deter some from
participating in the program. The user fee for Special Enrollment Exam
for EAs, however, has remained consistent for 10 years at a level below
the full cost to the IRS. The low agency testing fee alone has not
caused large numbers of individuals to sit for the test. The number of
parts of the EA test taken each year has also been very consistent,
which reflects the fact that the EA designation is respected as a
credential that may only be obtained by those who are highly qualified
and who pass the examinations. The fact that applicants must engage in
significant preparation for and pass a rigorous examination likely
limits the number of EA test takers, regardless of the fee. In calendar
year 2013, there was an increase in the number of EA test applicants
following the announcement of the mandatory Registered Tax Return
Preparer test. The increase in those numbers immediately declined in
2014 following the appellate decision in Loving v. IRS. The rollout of
the Annual Filing Season Program and the promotion of both the Annual
Filing Season Program and the EA program by the IRS (see below) again
resulted in a spike in interest in the EA exam in 2015.
Question. The proposed regulations are rather opaque on why the
sudden increase. Could you provide me with details on how the IRS
arrived at this figure?
Answer. The current user fee proposal is consistent with OMB
Circular A-25, which requires calculating both direct and indirect
costs associated with the testing program. The proposed user fee
reflects the estimated salary and benefits of 6.4 full time equivalent
positions used to carry out the various activities or benefits
necessary to deliver the testing program. It also reflects the indirect
costs that are applied to labor and benefits costs as a corporate
overhead factor. The overhead factor is used to allocate to the testing
program a share of the organizational expenses that are commonly
consumed by multiple business unit activities, but that are not
specifically identifiable to any one activity or program. The overhead
factor includes costs for services such as:
General management and administration services
Facilities management and ground maintenance services (rent,
utilities, security and building maintenance)
Procurement and contracting services
Financial management and accounting services
Information technology services
Research, analytical and statistical services
Human resources and personnel services, etc.
As background checks for the employees of the vendor providing the
testing are required, these costs are also amortized into the proposed
user fee.
The projected total cost of the program for a 3 year period, which
includes all the elements above, is then divided by the number of tests
estimated to be delivered over that same period to determine the
proposed user fee.
Question. IRS suggests in the proposed regulations that part of the
reason for the increase is that the number of tests administered
annually is much lower than originally forecast--the difference is
34,000 v. approximately 20,000. What has IRS done to encourage
unenrolled preparers to take the enrolled agent exam?
Answer. The IRS is fully committed to the EA program, and we have
and will continue our efforts to encourage participation.
In the last year alone, the IRS Return Preparer Office made 19
presentations to preparer groups, all of which started with a
description of the EA program as an elite professional status with
unlimited representation rights, included a discussion of the benefits
of the EA program, explained the requirements for becoming an EA and
concluded with an endorsement of the program for all non-credentialed
preparers holding themselves out as tax professionals. We distributed
approximately 20,000 EA brochures at the IRS Nationwide Tax Forums and
other events in the past year, provided staff for a minimum of 2 of the
3 days at each Forum to address any questions that preparers may have
about the EA program, and encouraged non-credentialed preparers to
consider the benefits of the EA credential in the 10 Forum cities in
the last 2 years. In our promotional e-mail communications to non-
credentialed preparers, 390,000 tax return preparers received
information about the EA program and its benefits.
We also established a toll free telephone line for EAs and
applicants of the program. We have ensured that EAs receive printed
certificates and enrollment cards reflecting the elite status of their
credential so that taxpayers and other tax professionals can readily
identify an EA and possibly aspire to that same status. We also
deployed new Preparer Tax Identification Number (PTIN) identity
monitoring functionality and made it available only to the EA community
during the last two filing seasons. As part of a pilot program, EAs
preparing 50 or more 1040 returns were provided access to information
on the number of tax returns processed by the IRS with their PTIN. This
allowed EAs to determine and report possible misuse of their PTINs. We
welcome ideas about other ways we could promote this program.
Question. In the wake of the Loving decision, why did the agency
choose to create the Annual Filing Season Program Record of Completion,
which is not a credential at all, rather than promote its own existing
enrolled agent credential? Encouraging more preparers to take the
comprehensive enrolled agent exam just seems like a better investment
for taxpayers.
Answer. As indicated above, the IRS has taken steps to promote the
Enrolled Agent credential and encourage unenrolled preparers to apply
for the EA credential. Enrolled Agents make up about 7% of all active
return preparers (50,000) and they prepare about 12% of all tax returns
prepared for a fee. The EA program has been in existence since 1959 and
the number of active enrolled agents has consistently been at or around
50,000 for a number of years. Last year more than 150 million
individual tax returns were filed and over half that number were
prepared with the help of a paid tax return preparer. Of the over
700,000 individuals with a PTIN, 60% are non-credentialed preparers.
The fact that EA enrollment has remained constant, attracting and
maintaining on average 50,000 practitioners each year, demonstrates
that it is unlikely that this program is going to attract substantially
larger numbers of participants in the near term. In addition, we
believe that the existence of the Annual Filing Season Program has
resulted in increased interest in the EA program, which has resulted in
applicants taking an additional 2,000 parts of the EA test in 2015. The
increased numbers for EA testing were about the same during 2013 when
the mandatory competency testing program was in existence.
There may come a time when all tax return preparers aspire to be
elite tax professionals like Enrolled Agents and when the market will
demand such credentials, but that is not the situation today. While we
continue to advocate for authority to require that all tax return
preparers meet minimum standards of competency, we have a
responsibility to taxpayers and our tax system to keep moving forward
under existing authority with efforts to improve the quality of tax
return preparation. The Annual Filing Season Program is an interim step
in that forward path. While the Annual Filing Season Program does not
provide participants with an elite professional credential, it is an
incentive program to encourage non-credentialed tax return preparers to
improve their knowledge of federal tax law and filing season
requirements through continuing education, enabling them to better
serve taxpayers.
business examinations
Question. The IRS recently announced a sweeping reorganization of
its Large Business and International Division including significant
examination process reforms. We've heard from many taxpayers that this
reorganization will make it difficult to complete an examination, and
that exams could drag on for years. Officials with the IRS have
publicly stated that timely closure of audits is a lower priority under
the reorganization. Are you open to discussing these examination
process reforms with the taxpayer community before you complete this
sweeping reorganization?
Answer. The Large Business and International Division of the IRS
(LB&I) is making significant changes to streamline post-filing
examinations to focus resources strategically on the complex issues we
encounter with our taxpayer base. LB&I recently initiated a new
examination process to replace the former Quality Exam Process for
cases starting as of May 1. For cases already in progress as of May 1,
LB&I will adopt the changes to the execution and resolution phases of
the exam process.
The LB&I Exam Process (LEP) was jointly developed with external
stakeholders such as the American Institute of Certified Public
Accountants and the Tax Executives Institute and includes significant
input from the LB&I workforce. It is based on best practices of
examination teams observed during peer reviews. LEP establishes roles
and responsibilities for both LB&I examiners and taxpayers and sets
specific expectations with respect to claims for refund. Under the new
process, once LB&I determines the issues to be examined, it will work
together with the taxpayer to establish effective steps to complete the
examination in a timely manner. Case timelines will be determined by
the most complex issues. The new issue development process relies on
active dialogue and fact sharing between the taxpayer and LB&I. Both
LB&I and the taxpayer are expected to make a clear commitment of
resources to be provided to achieve the established case and issue
timelines. One of the goals of the LEP is for both the taxpayer and
LB&I to achieve tax certainty at the earliest appropriate point by
reaching agreement on the tax treatment of each issue examined and
resolving tax controversies. These changes to the examination process
are incorporated in the recently released Publication 5125 and IRM
section 4.46. As reflected in the changes to LEP discussed above and
the process by which they were developed, LB&I will continue to
maintain an open, transparent relationship with stakeholders and will
endeavor to do so into the future.
Question. Since 1996 (Sec. 1003 of TBOR2, Pub. L. No. 104-168), the
IRS has been required to submit a report each year to both the Senate
Finance Committee and the House Ways and Means Committee on the number
of designated summonses issued under section 6503(j) of the Internal
Revenue Code. We have been unable to locate any such report. Have any
such reports been issued, and if not, would you please provide this
information to the committee for each year since and including 1996?
Answer. During the period 1995 through 2015, only three designated
summonses were issued and they were issued in 1996, 2013, and 2014. The
first annual report was issued on February 8, 2016. We are not aware of
any prior annual reports.
Question. There are press reports that the IRS has hired an outside
law firm by the name of Quinn Emmanuel to assist the IRS in auditing
U.S. taxpayers. I don't recall that the IRS has ever outsourced the
audit of an American taxpayer to a private law firm. Could you tell me
if an outside law firm has ever before been hired to audit a private
taxpayer? Have you hired Quinn Emmanuel or any other law firm to
participate in the audit of any other taxpayers? Could you tell us how
much you have paid the law firm of Quinn Emmanuel to assist you with
IRS audits to date and how much you may pay them if that audit actually
goes to trial? Could you tell this committee the hourly billing rates
that are charged by Quinn Emmanuel to the American taxpayers? Do you
intend to renew this contract?
Answer. The IRS typically hires expert contractors such as
economists and industry experts and, on occasion, it has also hired
attorneys where there is an issue of foreign law, state law, or non-tax
subject matter law (e.g., intellectual property or food and drug law)
that requires specialized expertise that either is not found within the
IRS or is limited and must be supplemented to effectively scrutinize an
issue. It is important to emphasize that the IRS is not outsourcing the
audit of taxpayers when it hires experts to assist it in an audit;
those contractors hired do not conduct the audit of the taxpayer but
simply provide support to the IRS employees managing the audit. We are
unable to respond to questions concerning the examination of any
particular taxpayer because of the restrictions in I.R.C. Sec. 6103.
Question. Businesses tell us that the IRS has been using tactics,
such as designating cases for litigation and issuing immediate
statutory notices of deficiency, to prevent taxpayers from going to the
IRS Appeals Office. These tactics also impede taxpayer rights under our
international treaties to engage the ``competent authority'' process
which is designed to avoid double taxation of income by the U.S. and
another country. When the IRS choses to go straight to litigation
rather than allow the IRS Appeals Office to review a case before going
to litigation or to block a taxpayer from the competent authority
process, please provide to me the estimated additional cost to the IRS
of resolving a case in litigation versus the cost of using the IRS
Appeals Office or competent authority to resolve a disagreement.
Answer. The procedures for designating an issue for litigation are
set forth in the IRS Chief Counsel Directives Manual (CCDM) 33.3.6.
These procedures have been in the CCDM since at least 1993. See
35.3.14.2 (2000) (amending CCDM provisions from 12-08-1993). The
procedures are used when there is a critical need for enforcement
activity with respect to such issues. Cases are designated for
litigation in the interest of sound tax administration to establish
judicial precedent, conserve resources, or reduce future litigation
costs for the Service and taxpayers. We do not perform a comparative
analysis of how much it costs to litigate a case versus to settle a
case at Appeals. This analysis should not be done on a case-by-case
basis because designation is meant to develop precedent that can be
used to resolve other cases. When viewed from that perspective, the
designation process was designed as a resource and cost saving measure.
Moreover, even if a case proceeds to litigation, a taxpayer still has
the ability to use the competent authority process to relieve double
taxation after the Court has rendered a decision.
Question. Staying on the concept of cases being ``designated for
litigation,'' as I understand the concept, it means that there is
precedential value for both the IRS and a class of taxpayers if the
case is resolved through a court ruling, rather than through the IRS
Appeals Office. Can you explain to me how large a class of taxpayers
you think would generally warrant designating a dispute for litigation?
When are taxpayer informed that an issue is being designated for
litigation by the IRS?
Answer. Certain cases present recurring, significant legal issues
affecting large numbers of taxpayers. In addition, cases are designated
for litigation in the interest of sound tax administration to establish
judicial precedent, conserve resources, or reduce litigation costs for
the Service and the taxpayers. In considering whether a case should be
designated under this framework, a variety of factors are considered,
including but not limited to: the absolute number of cases that the IRS
is aware of involving the issue, the potential number of taxpayers that
could be affected by the issue in the future, the significance of the
issue for overall tax enforcement, the size of the particular
adjustments in those cases and the litigation costs associated with
such cases, and the overall impact to the government's budget. As to
the timing of designating a case for litigation, IRS Counsel can
designate a case for litigation while the case is in examination,
appeals or even after the case has been docketed. The time of notice to
the taxpayer regarding designation depends upon whether the case is in
examination, appeals or docketed for litigation. In accordance with the
CCDM, the taxpayer is notified by IRS personnel of the proposal to
designate the case for litigation and the reasons for the proposed
designation. The taxpayer is also notified that its views on the
proposed designation may be presented, in a meeting, to IRS personnel
and Counsel.
______
Questions Submitted by Hon. Dean Heller
Question. Public trust is crucial to the IRS's success. Would you
agree? At the Finance hearing with Treasury Secretary Lew, I asked him
about the IRS's abysmal service record answering taxpayer's phone
calls. As many of my fellow colleagues have said, this past tax season,
the IRS provided ``the lowest level of telephone service during fiscal
year 2015,'' with only 38 percent of callers able to reach an IRS
representative. Additionally, the IRS has not developed any plans,
which we as lawmakers are aware, for a comprehensive customer service
strategy to address these problems.
Answer. I agree that public trust is critical to the IRS's success.
Additionally, I share your dissatisfaction with the level of service
provided to taxpayers during 2015. As you know, our appropriation for
fiscal year 2015 was $346 million less than the previous year's
appropriation. Additionally, we absorbed approximately $250 million in
unfunded inflationary costs because of mandatory pay raises, benefits,
and non-labor cost increases. Combined, this deficit of nearly $600
million required us to scale back activities across the agency.
Telephone level of service has improved substantially in 2016 as a
result of increased funding provided for that purpose, but is still
unacceptably low. The IRS achieved a telephone level of service of more
than 70 percent during filing season but expects the level of service
to dip to 47 percent for the full year.
The IRS's customer service strategy is embedded in the IRS future
state plans. Taxpayers expect to be able to interact with the IRS the
same way that they interact with their banks and financial
institutions. The IRS future state will meet this expectation by making
services quickly, consistently, and securely available online. The IRS
will continue to offer individuals the option of interacting with us
over the phone, in person, or by mail. Better and more widely available
online self-service options will free up in-person resources and enable
shorter wait times and greater availability when taxpayers choose
conventional service options. The IRS remains committed to servicing
the needs of all taxpayers.
A cornerstone of the future state is for taxpayers to have an
account at the IRS where they, or their authorized representatives, can
log in securely, get information about their account, and interact with
the IRS as needed. Under the future state, most things that taxpayers
need to do to fulfill their federal tax obligations could be done
virtually, and there would be much less need for in-person help, either
by waiting in line at an IRS assistance center or calling the IRS.
As we are moving toward this future state, we continue to adjust
and innovate in response to customer behavior and available
technological advances to improve the taxpayer experience and increase
security. We will continue working on improving the taxpayers'
experience by providing greater access through use of web applications.
We recently began offering scheduled appointments at our Taxpayer
Assistance Centers (TAC) to decrease wait times. Our experience with
the TAC appointment test indicates that up to 60% of customers calling
for an appointment determined that it was not necessary once we
explained how easily help was available on IRS.gov or the customer
service representative resolved their issue over the phone. For most
taxpayers, immediate answers and resources are available on IRS.gov and
the IRS2Go mobile application.
Question. I asked Secretary Lew what his expectation of IRS
telephone service level should be. I want to ask you as well. What is
the threshold you want to meet this tax filing season?
Answer. This filing season taxpayers were able reach us more
quickly, and with significantly fewer disconnects due to system
overloads. In particular, we expect to achieve a level of service of 47
percent for the FY 2016 full year, but this level is still unacceptably
low. We achieved a telephone level of service greater than 70 percent
during this filing season, which is a significant improvement over the
37 percent level during the last filing season. This improvement was
made using the additional $290 million that Congress provided for
improvements in taxpayer service, cybersecurity, and identity theft and
refund fraud prevention. We are using $178.4 million of this additional
funding to improve our service to taxpayers, including hiring
approximately 1,000 additional employees who have allowed us to
increase the telephone level of service during this filing season.
Question. Do you agree with the 70% threshold that Secretary Lew
suggested at the hearing earlier in the day?
Answer. Yes, I agree with the 70% threshold, and with the
appropriate additional funding for 2017, we could provide taxpayers
with phone service at this level for the entire year, rather than just
through the filing season.
Question. Are you personally invested in fixing this?
Answer. Yes, I am personally invested in fixing this and all facets
of the IRS's performance, but will need your help to secure proper
funding to achieve this level of service. We will continue to work
diligently to improve web-based services to give taxpayers more
electronic options to resolve their issues and we are constantly
looking at ways to improve existing services to enhance the customer
experience.
Question. As the overseer of this agency, how do you rate yourself
this year?
Answer. Thanks to the good work of an outstanding workforce, I
think we are making significant progress dealing with the challenges
the IRS faces, and I am pleased with all that we have been able to
accomplish, even with constrained resources. The IRS provides year-
round assistance to millions of taxpayers through many sources,
including outreach and education programs, issuance of tax forms and
publications, rulings and regulations, toll-free call centers, IRS.gov,
Taxpayer Assistance Centers (TACs), VITA sites, and Tax Counseling for
the Elderly (TCE) sites.
The IRS provided valuable services to millions of taxpayers while
making it easier for them to participate in the tax system. The IRS:
Partnered with 12,057 VITA/TCE sites that prepared more than
3.75 million tax returns in fiscal year 2015.
Launched the Free File campaign at the beginning of the 2015
filing season and received more than 650,000 visits in the first week.
Produced 117 Tax Tips (110 with Spanish translations) reaching
more than 632,000 e-mail subscribers in fiscal year 2015.
Issued 102.6 million refunds to individuals totaling $276.9
billion. Already this year through June 3 we have processed over 104
million refunds with more returns to be filed by those requesting an
extension.
Received more than 285 million hits this filing season through
June 4 on our ``Where's My Refund?'' application.
Provided information to taxpayers on our website, IRS.gov,
through almost 366 million hits this filing season through June 4.
We expect to achieve a level of service of 47 percent for the FY
2016 full year, a substantial improvement over FY 2015 full year
telephone level of service of 38 percent, but this level is still
unacceptably low. We achieved a telephone level of service greater than
70 percent this filing season, which is a significant improvement over
the 37 percent level during the last filing season. This improvement
was made using a portion the additional $290 million that Congress
provided for improvements in taxpayer service, cybersecurity, and
identity theft and refund fraud prevention.
The IRS is using $178.4 million of this additional funding, to
improve our service to taxpayers, including hiring approximately 1,000
additional employees who have allowed us to increase the telephone
level of service during this filing season. As of May 13, 2016, the IRS
has answered more than 14.5 million calls from taxpayers this filing
season, which is 5.5 million more than at this time last year. We also
received and processed more than 140 million individual income tax
returns this year. Even with our increased efforts to stop identity
theft and refund fraud in the battle against criminals around the
world, the IRS is still issuing 90 percent of all legitimate refunds
within 21 days from the date the return is filed.
With regard to the management failures that left numerous
organizations for social welfare status pending for 2 years or more, we
have implemented all of the Inspector General's recommendations as well
as those in this committee's bipartisan report, over which we have
control, including the recommendations in the majority report and those
in the minority report. We are committed to doing everything possible
to insure that this situation never happens again.
Our partnership with the private-sector tax community and the
states has been a success, increasing the amount of leads and
information that can be used to stop tax refund fraud and identity
theft being shared in real time. As a result of this partnership, the
private sector has also agreed to operate with standard security
protocols and this filing season has increased the authentication
requirements for taxpayers using their services, thus increasing
security of taxpayer information. As a result of these and other
efforts, in calendar year 2015, the IRS rejected or suspended the
processing of 4.8 million suspicious returns. The IRS stopped 1.4
million confirmed identity theft returns, totaling $8.7 billion.
Additionally, in calendar year 2015, the IRS stopped $3.1 billion worth
of refunds in other types of fraud. That's a total of $11.8 billion in
confirmed fraudulent refunds protected.
Question. Commissioner Koskinen, as you are aware, the National
Taxpayer Advocate released its annual report earlier this year and
discussed its strong concerns with the ``Future State'' of the IRS.
Many lawmakers, including myself, feel like we are in the dark on what
this ``Future State'' is. Can you walk us through what is your 5 year
plan?
It is my understanding that this long-term plan would have the IRS
getting out of the process of directly interacting with taxpayers, that
what the IRS wants to move to is taxpayers looking online or using
their phones to address concerns with their tax returns. I understand
your need to be efficient and save costs, but given a large population
of our state contains rural taxpayers, this would be catastrophic to
our state and I presume to many Finance members in rural states. Some
Nevadans may not have access to a computer or the Internet. Some do not
trust Federal agencies, including the IRS. How do you expect to address
these taxpayers in this new ``Future State''?
Answer. Our envisioned future state would provide better service to
taxpayers, not fewer services. This would be accomplished, in part, by
serving those taxpayers who are able and interested in interacting with
us through their secure online account, thereby easing the demand on
telephone and in-person service channels. This would enable us to
better serve taxpayers who are unable to interact with us
electronically or otherwise prefer telephone or other service channels
to online channels.
We recognize and are committed to meeting our responsibility to
serve all taxpayer through whatever means of communication they choose.
We have no plans to eliminate or decrease service through traditional
communications channels (telephone, written correspondence, and in-
person). Both taxpayers and the IRS benefit when we interact through
the channel most efficient for addressing the taxpayer's issue, which
in some cases means a telephone or in-person interaction. Currently,
rural taxpayers are typically served through telephone interactions as
Internet access is not always easily accessible or reliable. Those who
prefer in-person interactions may visit a Taxpayer Assistance Center
(TAC), but we understand that in rural areas our TACs may not always be
geographically convenient. We are testing ways to extend our in-person
services to those who live in rural areas. First, we now offer
taxpayers appointments, rather than requiring taxpayers to go to a TAC
and wait for an assister to be available. We are also exploring a
virtual TAC to allow assisters in one location to interact with
taxpayers in another location through a video connection. As more
taxpayers interact with us online, including through mobile devices,
contacts through traditional in-person or phone channels should decline
and allow us to focus on those who have to or prefer to interact with
us in traditional ways. Therefore, rural taxpayers, as well as others
who are more comfortable interacting with us by phone or in-person,
should be able to reach us and receive service more quickly than today.
Question. Following up on the ``Future State,'' I am disturbed to
hear that our IRS Vegas Walk-In Center will only accept appointments
later this summer.
Answer. The IRS is committed to providing the best customer service
for all taxpayers. In 2015, we tested in-person service by appointment
at 44 Taxpayer Assistance Centers (TACs). Test results show the
appointment approach not only eliminates long lines, but also helps us
serve even more taxpayers that need assistance as many callers receive
help before they arrive in the TAC. The appointment-based service
assures taxpayers they will be assisted, saves them from waiting in
line, and reduces the need for them to make multiple trips to the TAC.
The Las Vegas walk-in office was converted to appointment service
May 23, 2016. When we implement the appointment process in a TAC, we
notify taxpayers through media releases, IRS.gov, and by posted signs.
We also update the TAC's local telephone information message. IRS.gov
(under Contact Your Local Office) provides more information on the
appointment service process.
Question. How do you address vulnerable taxpayers who do not have
the Internet to make an appointment much less those that have the funds
for transportation to visit the walk-in center only to make an
appointment?
Answer. All taxpayers can schedule appointments at our appointment-
based service locations whether they have Internet access or not. To
make an appointment at these locations, taxpayers can call the
dedicated TAC Appointment toll free line at 1-844-545-5640. Taxpayers
do not have to drive to the TAC to make an appointment. However, if a
taxpayer arrives at an appointment-service location without an
appointment, we will try to accommodate them with a same-day
appointment if our schedules permit.
During the testing of the appointment-service location concept,
when taxpayers called to make an appointment, the assistor answering
the call was able to resolve the issue on the phone more than half the
time, or offer a convenient automated self-service option to allow the
taxpayer to get refund information, make a payment, or order a
transcript through IRS.gov or the IRS2Go mobile app. As a result, many
taxpayers who thought they would need to visit a TAC saved themselves a
trip by accessing the service they needed using a self-service option.
Taxpayers will find the vast majority of services offered at a TAC
are conveniently available online or by calling our toll free telephone
line (1-800-829-1040).
Question. What do you believe is the role of the IRS at this point,
if not to help those taxpayers who are the most in need of guidance?
Answer. Serving all taxpayers is a priority for the IRS and,
recognizing that some taxpayers lack Internet access or prefer not to
use the Internet, we offer a variety of ways to access the products and
services taxpayers need to meet their tax obligations. This year, more
than 25.5 million callers accessed our automated phone assistance
during filing season. The recorded messages accessed through the
automated phone assistance system answer many common questions and were
used by taxpayers nearly twice as often as live customer service
representatives. While the IRS will continue to offer more web-based
services, taxpayers will still be able to call our toll-free help
lines, obtain in-person assistance, or correspond with us via mail if
that is their preferred or only available method of receiving service
from the IRS.
The IRS also partners with local volunteers to provide filing
assistance for eligible taxpayers. Seniors and low to moderate-income
taxpayers can get free help with return preparation at one of thousands
of IRS Volunteer Income Tax Assistance (VITA) operated by community-
based organizations and Tax Counseling for the Elderly (TCE) sites
operated by AARP Tax-Aide. The IRS is currently exploring options for
assisting eligible taxpayers in areas that do not have VITA or TCE
sites.
Question. Commissioner Koskinen, as part of the December deal, you
are aware that the IRS received additional funding, approximately $290M
this tax year. Can you walk me through how you are using this
additional funding? What measurements are you taking to make sure your
use of the funds are the most effective?
Answer. The IRS is using the funds allocated under section 113 to
invest in high priority programs: Level of Service (LOS), Cyber
Security, and Identity Theft programs, as directed in the law. A
spending plan providing details of how the funds are being used was
forwarded to the Committees on Appropriations on January 27, 2016 (as
well as a small revision to the plan in May 2016).
The IRS established a mechanism to track the use of these funds in
our financial systems. This will enable IRS to ensure that funds are
used in accordance with the spending plan submitted to Congress and
will allow IRS to measure the improvement in performance achieved from
the availability of these additional funds.
Pursuant to the spending plan submitted to Congress, IRS is
investing the additional $290 million as follows:
Increase Telephone Level of Service (LOS) ($178.4 million)
Achieve over 70 percent LOS during the filing season
(January 1-April 23; up from 37 percent last filing season).
Achieve 47 percent LOS for full fiscal year 2016 (up from 38
percent in FY 2015).
Improved LOS will result in more calls answered and reduced
wait times for callers.
Improved performance on the Taxpayer Protection Program Line
(also known as the Identity Theft Toll Free Line).
Enhance Cybersecurity ($95.4 million). Enhancements to
cybersecurity also support identity theft prevention by improving
protections for taxpayer data. Planned investments include:
Network security improvements including new network
segmentation work, more effective monitoring of data traffic, and
replacement of outdated equipment.
Protection of taxpayer data from unauthorized access by
identity thieves through specific investments in network segmentation
and monitoring.
Insider threat detection by implementing a system to help
analyze IT system logs.
Prevent Stolen Identity Refund Fraud ($16.1 million)
Implement refund fraud mitigation actions established by the
Security Summit, including start-up costs for an Information Sharing
and Analysis Center (ISAC).
Implement Secure Access initiative to enable re-launch of
Get Transcript Online. (In addition, IRS will apply $30 million in
additional base resources for staffing to improve its ability to combat
identity theft and assist victims through the Taxpayer Protection
Program and the leads reporting process.)
Question. Commissioner Koskinen, first, I would like to take this
opportunity to address a key priority of mine and my home state. I've
heard from many of my constituents their strong concerns over the
proposed IRS changes to the filing of information returns to report
winnings from bingo, keno, and slot machine play (IRS REG-132253-11).
Due to the administrative burden imposed, thousands of customers have
signed a petition so that the reporting threshold for bingo, keno and
slot machine play would not be reduced. I, too, share their concerns
about these proposed rules. Phil from Vegas recently told me this
proposed rule would put an undue hardship on casinos and winning
patrons. Across the U.S., the gaming industry supports 1.7 million jobs
and $240 billion in activity. My staff has had multiple conversations
with your office and I've sent several letters including formal
comments in regards to these proposed rules. I was pleased that we
could discuss some of my concerns with you over the past year. I no
longer want myself or Nevadans to be kept in the dark in regards to
receiving responses from the IRS to better address these proposed
rules. When do you believe these proposed rules will be finalized?
Answer. The regulations for reporting winnings from bingo, keno,
and slots are on the 2015-2016 Priority Guidance Plan. These
regulations are something we are actively working this year. Let me
assure you that we have heard the concerns expressed by your
constituents and others in the over 14,000 comments received in
response to the proposed regulation, and, as with all regulations we
will take these comments into account as we work towards final
regulations.
Question. Can I get confirmation that you will inform our office
when these rules will be finalized, because I want to make sure I can
let Nevadans and the gaming industry know as soon as possible?
Answer. We will inform your office when these rules are finalized.
______
Prepared Statement of Hon. Ron Wyden,
a U.S. Senator From Oregon
Thank you, Chairman Hatch, for scheduling this hearing. And thank
you, Commissioner Koskinen, for joining the Finance Committee this
afternoon during a very busy time of year for the IRS.
With tax season underway and President Obama's final budget
proposal at hand, there are a few specific issues relating to the IRS
that I'd like to focus on today.
First is the biggest ongoing challenge for the IRS: providing the
best possible service to taxpayers, even though the IRS has limited
resources. The good news is, the Congress recently made a badly needed
investment in I.D. protection, telephone service, and cybersecurity for
2016. But you can bet that the fraudsters and organized criminals who
made headlines preying on taxpayers last year are still at it.
In my view, budget cuts that hobble our ability to fight back
against these schemes are tantamount to kickbacks to the criminals. So
the down payment from Congress will help protect taxpayers and improve
services. But there's a lot more to be done--particularly with respect
to upgrading IT.
It's important to understand how enormous a challenge IT is for the
IRS. First of all, processing the universe of taxpayer data that comes
in is a year-round job. There's no opportune time for the IRS to go
dark and install a new batch of servers and software. And second, some
of the systems in use date back to the Kennedy era. Decades of modified
technology and programming code have built up like layers in an onion.
When Congress updates a complicated policy like the Alternative Minimum
tax, the IRS has to dig through all those layers to adjust the system
and correct everybody's tax bill.
For these reasons and more, upgrading IT at the IRS is
extraordinarily demanding and time-consuming. It can't be done when a
tight budget means you have one hand tied behind your back.
The next issue I want to discuss today, Mr. Koskinen, has to do
with corporate taxes going unpaid. The most recent estimates put the
overall tax gap at $385 billion per year. When it comes to individuals
skipping out on their taxes, the IRS has done a good job of sharing
information Congress can use to crack down on shady avoidance
strategies and cheaters. But when it comes to the corporate tax gap--
which adds up to $67 billion per year--it's my view that the IRS has
dropped the ball.
I sent a letter last week asking how the IRS studies the corporate
tax gap and what it knows. My staff and I got a limited response
yesterday that I see as an initial step, and I expect a lot more.
This is a matter of more than two-thirds of a trillion dollars in
taxes going unpaid over the course of a decade. In my view, that's a
figure you have to weigh against the big economic challenges this
country faces and the rounds of belt-tightening Federal budgets have
recently gone through.
More than 5 million Americans today live in deep poverty.
Assistance for the hungry has been cut. Far too many veterans are on
wait lists for health care. Wildfire prevention is neglected while
fires in Oregon and across the West get bigger and hotter. Again and
again, lawmakers propose painful cuts to health care programs that are
vital to seniors and families of limited means.
The bottom line is that it's long past time for Congress to attack
the corporate tax gap. And that will require a lot more information
than the IRS is currently providing about how companies are dodging
their responsibilities.
I hope to get your commitment today, Commissioner Koskinen, to work
with us in the days and months ahead on this important issue.
______
Communications
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Federation of Genealogical Societies
P.O. Box 200940
Austin, TX 78720-0940
Linking the Genealogical Community
Statement for the Record
by
Frederick E. Moss, JD, LL.M.
Executive Summary
We add our commendations to those offered in the opening statement by
Chairman Hatch by noting that the IRS has dramatically improved its
ability to intercept tax fraud by identity theft (especially those
using the SSNs of deceased individuals.) We ask Senators to revisit the
wisdom of limiting access to and the content of the Social Security
Administration's Death Master File. While commending the work of the
Department of Commerce in crafting regulations implementing Section 203
of the Bipartisan Budget Act of 2013, as written, we suggest areas
where changes in legislative language might enhance the ability to (1)
achieve the stated goal of reducing the opportunities for identity
theft, and (2) minimize the unintended adverse consequences of limiting
access and content available to legitimate users. Further question
whether these provisions belong in permanent legislation and suggest
ways of assessing their effectiveness and the impact of more targeted
measures. Preliminary results of an ongoing case study are presented.
This statement for the record is filed on behalf of the Federation of
Genealogical Societies (FGS) in response to the invitation that
accompanies the Full Committee Hearing at: http://
www.finance.senate.gov/hearings/the-presidents-fiscal-year-2017-budget.
We greatly appreciate the opportunity to do so and to seize an
opportunity to commend the Internal Revenue Service (IRS) for
noteworthy progress in their effort to address tax fraud by identity
theft.
I serve as the legal advisor to the Federation of Genealogical
Societies and as a member of the Records Preservation and Access
Committee (RPAC), a joint committee of FGS, the National Genealogical
Society (NGS), and the International Association of Jewish Genealogical
Societies (IAJGS). This statement has been reviewed and endorsed by the
President of the Federation of Genealogical Societies.
Genealogists Share Privacy Concerns
Family Historians and their families are as vulnerable to the
predations of identity thieves as any other citizen. Our names appear
on the lists of those compromised by reported major data breaches at
Target, Home Depot, and Anthem among others. Some of our colleagues
have been issued PINS by the IRS to be used in filing their 2015
returns because fraudulent tax returns using their information have
been filed by identity thieves in the past. Those who believe that
genealogists are reckless with Personally Identifiable Information
might be pleasantly surprised at some of the measures taken by websites
and individual researchers.
Be assured that the genealogical community is prepared to be supportive
of measures which actually protect us from identity theft. We fervently
wish that we could believe that the measures mandated by Section 203 of
the Bipartisan Budget Act of 2013 limiting access to and the content of
the Social Security Administration's Death Master File would have that
effect. Our analysis has suggested otherwise.
The circumstances leading up to this legislation do, however, provide
an unique opportunity to gather the data needed to evaluate and develop
responses with the actual potential to effectively combat the scourge
of tax fraud by identity theft.
Initiatives to Restrict Access to Records--
Targeting the Data
In recent years, we have seen more than a thousand legislative
initiatives impacting access to records at the Federal, state and local
levels, the vast majority of which would have had the effect of
limiting that access for genealogical and other purposes. The rationale
used to justify these measures suggests an almost reflexive belief that
the best or only way to prevent the fraudulent use of such data by
identity thieves is to close the records. This logic carries with it
the unstated assumption that no harm or loss accompanies such closures
[about which we will have much more to say.]
Section 203 of the Bipartisan Budget Act of 2013 represents the most
dramatic modern example of this approach at the federal level. Although
it presented as an access issue, the provisions that reduce the display
of historically available data elements and diminishing the content of
the Death Master File trigger equally significant preservation
concerns.
Since 2011, representatives of the genealogical community have
monitored approximately a dozen Congressional hearings in which the
scourge of tax fraud by identity theft has been raised. In most of
those hearings, although not asked to actually testify, we have
provided Statements for the Record suggesting that better alternatives
might be available http://www.fgs.org/rpac/. In these hearings, we were
frequently informed of the acknowledged harm resulting from the theft
in the context of explaining why consideration was being given to
dismantling, closing, or otherwise limiting access to the Death Master
File. Rarely, if ever, during a hearing was concern expressed (or even
awareness of the possibility) that costs might be paid or harm might be
done by closing the record.
In the process of fulfilling their mandate to develop the Certification
program required by this statute, the Department of Commerce National
Technical Information Service (NTIS) has provided a forum for those
adversely impacted by the limitations of access to the DMF to begin to
document the fact that records closures come at a price.
Ninety contributors have offered their comments on a proposed final
rule at http://www.regulations.gov/
#!docketBrowser;rpp=25;po=O;dct=PS;D=DOC-2014-0001.
The most recent FGS contributions to this process are found at http://
www.regulations.gov/#!documentDetail;D=DOC-2014-0001-0093.
The IRS Experience
Although scattered incidents of fraudulent tax returns involving
identity theft were reported over a decade ago, their frequency and
magnitude prior to 2010 could be said to fall within the noise level on
the IRS radar. The emphasis within the IRS and on Capitol Hill was to
expedite refund payments to the point that checks were being issued
within days of electronic filing early in the filing season and well
before the IRS would have received information returns that would be
used months later to verify the accuracy of the data on the return
justifying a significant refund. Instead of taking steps designed to
prevent improper payments, the IRS practice as 2011 began was to pay
claimed refunds as quickly as possible and then chase the filer in a
labor intensive effort to recover the fraudulent or otherwise improper
payment; http://www.gao.gov/products/GAO-15-482T.
As stories began to make headlines during 2011 of thieves filing
fraudulent tax refund claims abusing the SSNs of recently deceased
children, the public was made to realize that the harm being
perpetrated was no longer just a manageable drain on the Treasury. The
disruption and pain inflicted upon the grieving parents (the legitimate
taxpayers) for them felt like losing their child all over again. The
IRS was prompted to revisit the wisdom of continuing the ``pay and
chase'' approach to correcting improper payments to possible identity
thieves. Prevention of fraudulent payments became a new focus of their
enforcement efforts.
The comparison between the TY 2010 and TY 2011 experience as reflected
in publically available data confirms the assertion that the IRS
enforcement policies changed in December of 2011 to institute practices
intended to prevent improper payments by diverting suspicious returns
for further scrutiny before they were processed for payment. The first
year impact of this change in policy was dramatic, especially where the
SSN of a deceased individual had been abused.
[GRAPHIC] [TIFF OMITTED] T21016.001
The dollar impact of this effort is equally informative:
[GRAPHIC] [TIFF OMITTED] T21016.002
IRS testimony in the Senate Finance Committee hearing held April 16,
2013 announcing the development of filters designed to intercept
potentially fraudulent refund returns prompted my previous supportive
RPAC Statement for the Record found at page 138 of the hearing record.
http://www.finance.senate.gov/download/2013/04/16/tax-fraud-and-tax-id-
theft-moving-forward-with-solutions.
Further, I was already on record more than a month in advance of the
current hearing with a series of blog posts documenting the basis for
the conclusion that the IRS filters were really working:
http://www.fgs.org/rpac/2015/12/22/irs-does-use-the-death-master-file-
now-since-2012/
http://www.fgs.org/rpac/2016/0l/08/death-master-file-impact-of-irs-
filters-ty2010-ty201l-ty2012/
http://www.fgs.org/rpac/2016/01/13/death-master-file-analysis-irs-
filters-really-work/
The legislative implications of these findings will be addressed
shortly.
The Department of Commerce Notice and Comment Process
NTIS has shown us what a robust notice and comment process really looks
like. Prior to the RFI and hearing no one really knew how long-time
legitimate users of the SSDI made use of the information therein or,
for that matter, how thieves were filing fraudulent tax refund claims
by identity theft. Providing insight into that initial issue may
represent the most lasting contribution to our understanding,
potentially informing future program decisions. Representatives of the
genealogical community have actively participated with many others in
(1) responding to the initial Request for Information, (2) a Public
Hearing on 4 March 2014, (3) Response to an Interim Final Rule, and now
(4) providing the Response to Proposed Final Rule.
Previous FGS Comments on Interim and Final Rule
Our previous Response to Interim Final Rule submitted April 25, 2014
(and incorporated herein by reference) documents several points we
there emphasized:
1. In 2011 the DMF was widely available on the Internet. The IRS
was employing very limited filters to intercept suspicious tax returns
before checks were issued. As needed data has become available, it
becomes clear that tax refund fraud by identity theft was much more a
reflection of the incredible vulnerabilities of the IRS on-line filing
system than an inevitable result of the ``burned'' social security
numbers of recently deceased children being made publically available
in the DMF.
2. In fact, if thieves had attempted to use numbers taken from the
Death Master File in most commercial transactions, they would have been
rejected. In their rush to expedite refund payments in 2011, the IRS
was not using the DMF to flag suspicious cases or to help validate
legitimate returns. When used, the DMF (listing what should be inactive
SSNs) is an effective fraud prevention tool.
3. More targeted measures than simply closing the DMF were
available.
4. In December 2011, all major genealogical sites making the DMF/
SSDI available to the public began masking the SSNs of recently
deceased persons for a minimum of three years. At about the same, the
IRS began to strengthen the use of filters designed to flag potential
fraudulent refund returns before payment was made.
What Have We Learned?
Timely information on death is of critical importance across a broad
spectrum of endeavors that exceed those of genealogists, the financial
interests represented at the 2014 public hearing, or even those of the
114 entities participating on-line.
When representatives from the financial sector voiced concerns about
the 2011 removal of data provided by the States from the DMF, and
feared a further degradation of that resource, they spoke for all
traditional subscribers. Pension Benefits Information:
http://www.regulations.gov/#!documentDetail;D=DOC-2014-0001-0092.
Members of the research community had previously voiced similar
concerns:
http://www.nvtimes.com/2012110/09/us/social-security-death-record-
limits-hinder-researchers.html.
We were all particularly alarmed by the possibility that administration
decision-makers believed that alternatives to the DMF were available
and that historical users of the DMF could readily find what they
needed from other sources. Those in attendance at the March 4, 2014
public hearing suggested otherwise, a posture also adopted by the
Council of Professional Associations on Federal Statistics in their
comment at http://www.regulations.gov/#!documentDetail;D=DOC-2014-0001-
0061.
For most financial purposes, verifying that an individual already known
to them has died enables the enterprise to begin ``closing the file''
on the deceased individual. For researchers (especially for
genealogical projects) finding an individual referenced in the DMF is
more likely to be the beginning of the project with a need for them to
continue the search for other relatives through the DMF. Locality
information in the DMF suggests where one might look for additional
documentation.
The challenges remaining between the already implemented Interim Final
Rules and the pending final rule may best be found in the comments of
the Consumer Data Industry Association at
http://www.regulations.gov/#!documentDetail;D=DOC-2014-0001-0088
and the Berwyn Group at
http://www.regulations.gov/#!documentDetail;D=DOC-2014-0001-0070.
What Have We Lost?
Limitations on access and the reduced utility of the Limited Use DMF
have already impeded the work of those genealogists:
Assisting the Department of Defense in locating heirs for the
repatriation of remains from previous wars,
Assisting county coroners in the identification of unclaimed
persons,
Working with attorneys in locating missing and unknown heirs
involving estates, trusts, real estate quiet title actions, oil and gas
and mineral rights, and other similar legal transactions,
Tracing and tracking heritable medical conditions where finding
distant cousins can facilitate early treatment and possibly prevent a
premature death,
Repatriating stolen art and artifacts, and
Identifying American Indians, Native Alaskans, and Native
Hawaiians to determine eligibility for tribal benefits and blood
quantum when required.
The academic research community and those engaged in medical-related
research can likely provide even more dramatic examples. American
Economics Association:
http://www.regulations.gov/#!documentoetail;D=DOC-2014-0001-0078.
Kaiser Permanente: http://www.regulations.gov/#!documentoetail;D=DOC-
2014-0001-0046.
Anesthesia Quality Institute: http://www.regulations.gov/
#!documentoetail;D=DOC-2014-0001-0065.
What Legislation Might Help?
Section 203 provides a very restrictive definition of those to be
authorized access to the Limited Use DMF and other measures adversely
impacting what most would consider legitimate users of the information.
We are prepared to work with the Congress and all interested parties
should changes in the statutory mandate be indicated. Possible areas
for consideration might include:
1. Other legitimate researchers authorized for timely access, to
include academics in recognized long term studies, federal program
evaluations, genealogical studies for which a three year delay would be
problematic.
2. Explore ways in which third-party providers might be able to
share non-
sensitive information and their state-of-the-art search engines by
masking the information needed by thieves (perhaps only the SSN.)
3. Explore whether security measures used for active SSNs are the
best way to protect from abuse those of the deceased.
4. Develop alternatives to this limitation on access and reduction
of content of the DMF.
5. Should the Section 203 program be considered for sunset?
The Path Forward--A Rigorous Case Study Indicated
The way in which the challenge of tax fraud by identity theft has
evolved in recent years presents a unique opportunity to evaluate the
effectiveness of several approaches to combating it.
1. Initial baseline period--TY 2010 and before
During the period immediately preceding December 2011, the DMF was
widely available on the Internet and the IRS was doing minimal
filtering that might have flagged fraudulent refund claims. Apparently
the IRS was not filtering against the SSA's Death Master File in 2010
before issuing potentially fraudulent refund checks. The data necessary
to initially determine the nature and magnitude of tax fraud by
identity theft cases first coming to public attention in 2011 would not
become available until the fall of 2013 with the publication of the
report of the Treasury Inspector General for Tax Administration drawn
from the TY 2011 data, issued September 20, 2013 and found at:
http://www.treasury.gov/tigta/auditreports/2013reports/201340122fr.pdf.
2. Period 2--December 2011 to April 2014
In December 2011, genealogical web sites began masking the SSNs of
recently deceased persons and the IRS reportedly significantly improved
their software filters. The IRS effort has included continuing
refinement of the filters to flag returns demonstrating characteristics
of those found to have been fraudulent. Thieves change; we learn.
3. Period 3--April 2014 to present
In April of 2014, the limitations on access and content of the DMF
mandated by the Bipartisan Budget Act of 2013 are implemented.
Having a comparable chart for TY 2012, TY 2013, TY 2014, (and possibly
a look back to 2010) could give visibility over where our challenges
still lie, what measures are working, and which measures may be of only
marginal utility. I appreciate that it may take a year or more for a
suspicious return to be fully resolved so we may be asking for TIGTA to
undertake an ongoing project.
A rigorous analysis could confirm that the measures taken by the IRS,
together with those measures taken by genealogical entities, have
largely intercepted this particular form of identity theft in advance
of this legislation. It might also suggest better approaches to
intercepting the far more prevalent misuse of the SSNs of the living.
Conclusions
1. Closing death records comes at a cost.
The IRS track record demonstrates that using the DMF and other filters
provides an effective counter to tax fraud by identity theft. Closing
these records have the potential of doing more harm than good in the
fight against identity theft.
2. NTIS has implemented the statutory mandate, as written.
Operating within the constraints of their current statutory mandate,
there is little more that NTIS can do to create a more functional
Certification program. We are prepared to work with appropriate
Congressional committees to suggest more effective statutory changes.
But, many clearly legitimate historical users of the DMF are currently
denied access.
Additionally, that content is no longer as comprehensive as it once was
prior to the 2011 decision to withhold state-provided content.
Financial services representatives voiced particular concern that the
on-going withholding of state data will further degrade the value of
the DMF resource and make their fraud prevention efforts less
effective. Pension Benefits Information:
http://www.regulations.gov/#!documentDetail;D=DOC-2014-0001-0092.
We are, in effect, seeing the incremental dismantling of the
historically valuable DMF. Most users would likely agree that the then
publically available pre-2011 DMF (even with all its flaws) came the
closest of any available death record to meeting the needs of the user
community when measured against comprehensiveness, timeliness, and
costs.
3. This statute may not be the final answer.
Limiting access to the DMF is not the ``silver bullet'' solution to the
scourge of tax fraud by identity theft. It could do more harm than
good.
Our strongest message is that steps already taken by the IRS and
genealogical entities to protect SSNs listed in the DMF had largely
intercepted this particular form of identity theft in advance of this
legislation. Its primary impact may be to burden legitimate users both
operationally and financially. Our suggestion for a case study provides
a way to assess the effectiveness of various measures taken.
4. The statutorily mandated Limited Use Death Master File is
inadequate.
Those of our genealogical colleagues who have been certified and begun
to work with the LUDMF resulting from this effort report that the
search engine and the data elements displayed for this product no
longer meet our needs. Genealogists were not the only DMF users
concerned that the DMF is being incrementally degraded. The new limited
access DMF needs a much improved search engine.
5. The path forward.
The genealogical community is anxious to work with all interested
parties in an effort to develop a truly comprehensive nation-wide death
index. The concerns of State Vital Records officials that led to the
ongoing removal of state data from the DMF in 2011 must be addressed.
We recognize a need to work with the Congress and other interested
parties to improve existing measures and suggest additional approaches
to combat the scourge of identity theft.
The SSNs of living people will remain vulnerable as long as the IRS
mandate is to rush payments of tax refunds before information returns
can be compared with the submitted return to assure its validity.
______
National Treasury Employees Union (NTEU)
1750 H Street, N.W. Washington, DC 20006 (202) 572-5500
Anthony M. Reardon
National President
Statement for the Record
Chairman Hatch, Ranking Member Wyden, and distinguished members of
the Committee on Finance, I would like to thank you for allowing me to
provide comments on the IRS budget request for FY 2017. As President of
the National Treasury Employees Union (NTEU), I have the honor of
representing over 150,000 federal workers in 31 agencies, including the
men and women at the IRS.
Mr. Chairman, NTEU strongly supports the Administration's FY 2017
budget request of $12.28 billion for the IRS, an increase of more than
$1 billion above the current FY 2016 level. We are particularly pleased
the Administration's request would provide the IRS with the additional
resources necessary to restore customer service levels that have fallen
in recent years due to funding cuts totaling $1.2 billion, and to begin
rebuilding its depleted workforce which is down more than 18,000 since
FY 2010. Without this additional funding, the IRS's ability to serve
taxpayers and enforce our nation's tax laws will continue to erode.
Taxpayer Services
Providing quality customer service to the taxpayer is an important
part of IRS efforts to help the taxpaying public understand their tax
obligations while making it easier to comply. Unfortunately, the IRS's
ability to provide excellent taxpayer service has been severely
challenged due to reduced funding in recent years and the cuts mandated
by sequestration. Without additional resources, further degradation in
taxpayer services will occur, jeopardizing our voluntary compliance
system.
Impact of Funding Reductions on IRS Taxpayer Services
Mr. Chairman, funding reductions in recent years have had a
devastating impact on IRS's ability to provide taxpayers, including
victims of identity theft, with the service they need in a timely
manner. Since FY 2010, the IRS has absorbed $1.2 billion in cuts
despite the fact that they are handling more than 10 million additional
tax returns a year, and the number and complexity of tax refund fraud
cases is on the rise. The funding cuts have resulted in a reduction of
about 34 percent in the number of assistors answering telephone calls
between fiscal years 2010 and 2015 and contributed to the lowest level
of telephone service in fiscal year 2015 compared to recent years. In
addition, reduced funding forced the IRS to implement a number of
service initiatives during FY 2015 that included reducing or
eliminating certain telephone and walk-in services, and redirecting
taxpayers toward other service channels such as IRS's website.
In a recent letter to Congress, the IRS highlighted some of the
adverse impacts these reductions had on the IRS's ability to deliver
taxpayer services during the most recent filing season. These include:
A reduction in the percentage of callers seeking live
assistance who received it (telephone level of service) to 38 percent--
down from 74 percent in FY 2010.
Taxpayers waiting about 23 minutes on average for an IRS
representative to get on the line, with more than 60 percent of calls
going unanswered. This represents a sharp decline from 2010, when the
IRS answered three-quarters of calls and had an average wait time of
just under 11 minutes.
The IRS was not able to answer any tax-law questions except
``basic'' ones during the last filing season, and now it will not
answer any tax-law questions at all, leaving the roughly 15 million
taxpayers who file later in the year unable to get answers to their
questions by calling or visiting IRS offices.
The IRS historically has prepared tax returns for taxpayers
seeking its help, particularly for low income, elderly, and disabled
taxpayers. Eleven years ago, it prepared some 476,000 returns. That
number declined significantly over the past decade, and last year the
IRS announced it will no longer prepare returns at all.
In addition, as a result of budget cuts, the IRS was forced to
reduce staff devoted to face-to-face assistance at walk-in sites by
about 4 percent in FY 2015 compared to the previous year, and directed
customers to self-service options. However, the percentage of customers
at walk-in sites waiting for longer than 30 minutes for service
increased by 7 percentage points in fiscal year 2015 (from about 25 to
32 percent) during the same period.
The importance of providing taxpayers with timely assistance over
the phone or in person is of particular importance for victims of
identity theft and other types of tax refund fraud. These cases are
extremely complex cases to resolve, frequently touching on multiple
issues and multiple tax years and the process of resolving these cases
can be very frustrating for victims.
While the IRS has made considerable progress in this area,
additional work remains. Fighting identity theft is an ongoing battle
as identity thieves continue to create new ways of stealing personal
information and using it for their gain. Therefore, it is critical that
the IRS has the resources and staffing necessary to prevent refund
fraud from occurring in the first place, investigate identity theft-
related crimes when they do occur and help taxpayers who have been
victimized by identity thieves as quickly as possible.
That is why NTEU strongly supports the President's request of $2.4
billion in funding for taxpayer services in FY 2017. This funding will
allow the IRS to increase the telephone level of service to 70 percent,
provide assistance to victims of identity theft in a timely manner, and
help taxpayers understand their obligations, correctly file their
returns, and pay taxes due in a timely manner.
Mr. Chairman, it is evident that drastic funding reductions in
recent years have seriously eroded the IRS's ability to provide
taxpayers with the services they need. Without the additional funding
proposed in the Administration's budget request, taxpayers will
continue experiencing a degradation of services, including longer wait
times to receive assistance over the telephone, increasing
correspondence inventories, including letters from victims of identity
theft and taxpayers seeking to resolve issues with taxes due or looking
to set up payment plans.
Enforcement
Mr. Chairman, NTEU believes a strong enforcement program that
respects taxpayer rights, and minimizes taxpayer burden, plays a
critical role in IRS's efforts to enhance voluntary compliance, combat
the rising incidence of identity theft and reduce the tax gap.
Impact on Efforts to Reduce the Federal Deficit
Unfortunately, funding reductions in recent years are undermining
IRS's ability to maximize taxpayer compliance, prevent tax evasion and
reduce the deficit. The adverse impact of insufficient funding on IRS's
capacity to collect revenue critical to reducing the federal deficit is
clear. In FY 2015, on a budget of $10.9 billion, the IRS collected $3.3
trillion, roughly 93 percent of federal government receipts. According
to the IRS, every dollar invested in IRS enforcement programs generates
roughly $6 in increased revenues, but reduced funding for enforcement
programs in recent years has led to a steady decline in enforcement
revenue since FY 2007. In FY 2015, IRS enforcement activities brought
in $54.2 billion, down $5 billion from the $59.2 billion of FY 2007.
The reduction in revenue can be partly attributed to a reduction in
the total number of IRS enforcement personnel, including revenue agents
and employees in the correspondence audit program, which have limited
the IRS's impact on voluntary compliance. The number of revenue agents
fell seven percent from 11,422 to 10,657 in FY 2015, the lowest it has
been since before 2005, when there were 20 million fewer taxpayers,
while reduced staffing in the correspondence audit program resulted in
the roughly 16,000 fewer case closures and potentially $75 million in
lost revenue.
Without sufficient staffing to effectively enforce the law to
ensure compliance with tax responsibilities and combat fraud, our
voluntary tax compliance system is at risk. And as the IRS Commissioner
has repeatedly noted, a simple one-percent decline in the compliance
rate translates into $30 billion in lost revenue for the government.
Sufficient enforcement staffing is also critical if the IRS is to
make further progress on closing the tax gap, which is the amount of
tax owed by taxpayers that is not paid on time. According to the IRS,
the amount of tax not timely paid is $450 billion, translating to a
noncompliance rate of almost 17 percent.
While the tax gap can never be completely eliminated, even an
incremental reduction in the amount of unpaid taxes would provide
critical resources for the federal government. At a time when Congress
is debating painful choices of program cuts and tax increases to
address the federal budget deficit, NTEU believes it makes sense to
invest in one of the most effective deficit reduction tools: collecting
revenue that is owed, but hasn't yet been paid.
That is why NTEU was happy to see the Administration's budget
request would provide a $587 million increase in funding for IRS tax
enforcement above the current level. This increase includes a program
integrity cap adjustment totaling $515 million which supports the
enforcement ($231 million) and operations support accounts ($283
million). This additional funding is designed to restore enforcement of
current tax laws to acceptable levels, investigate transnational
organized crime, pursue abusive tax schemes and enforce the new Foreign
Account Tax Compliance Act (FATCA). According to the Administration,
the additional funding provided via the cap adjustment is expected to
generate more than $2.6 billion in additional annual enforcement
revenue, resulting in a return on investment (ROI) of more than 6 to 1,
once new hires reach full potential in FY 2019. According to the
Administration, the $515 million cap adjustment will help generate $46
billion in net savings over the next 10 years. This estimate does not
account for the deterrent effect of IRS enforcement programs, estimated
to be at least three times larger than the direct revenue impact.
CONCLUSION
Mr. Chairman, thank you for the opportunity to provide NTEU's views
on the Administration's FY 2017 budget request for the IRS. NTEU
believes that only by restoring critical funding for effective
enforcement and taxpayer service programs can the IRS provide America's
taxpayers with quality service while maximizing revenue collection that
is critical to reducing the federal deficit.
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