[Senate Hearing 115-191]
[From the U.S. Government Publishing Office]
FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL
YEAR 2018
----------
WEDNESDAY, JULY 26, 2017
U.S. Senate,
Subcommittee of the Committee on Appropriations,
Washington, DC.
The subcommittee met at 10:01 a.m., in room SD-138, Dirksen
Senate Office Building, Hon. Shelley Moore Capito (chairwoman)
presiding.
Present: Senators Capito, Moran, Boozman, Lankford, Daines,
Coons, Durbin, Manchin, and Van Hollen.
DEPARTMENT OF THE TREASURY
STATEMENT OF HON. STEVEN T. MNUCHIN, SECRETARY
OPENING STATEMENT OF SENATOR SHELLEY MOORE CAPITO
Senator Capito. Want to go ahead and come up. We will just
go ahead. Oh, we are going to do Secretary--I am sorry--
Secretary Mnuchin first. Okay. Well, welcome to everybody and
good morning. Senator Coons and Senator Lankford.
Today we had the opportunity to review the budget requests
of the Department of Treasury and the Internal Revenue Service.
As we begin this important hearing, we welcome our witnesses
today, Treasury Secretary Steven Mnuchin, IRS Commissioner John
Koskinen--I should know that from our common alma mater--and
the Treasury IG for Tax Administration, Russell George. Thank
you for being here.
The Department of the Treasury has an important mission.
Its work is to promote economic growth and stability and
safeguard our financial system, which is critical to
maintaining a strong economy and creating economic opportunity.
Equally important is its work to combat terrorism, the
proliferation of weapons of mass destruction, money laundering,
drug trafficking, and other national security threats.
The Internal Revenue Service has the significant role of
administering our Nation's tax laws. To carry out these
responsibilities effectively, taxpayers must have the faith
that the IRS will do its job without regard to an individual's
exercise of their constitutional rights. The IRS must also
protect taxpayers' personal information and privacy. As the IRS
continues to evolve and make changes to its service delivery
systems, there must be improvements in its ability to manage
that change without adversely affecting taxpayers or
compromising their personal information. We look forward to
hearing from all of our witnesses today about the details of
your budget requests, as well as your plans to address cyber
security threats and vulnerabilities within Treasury and in our
Nation's financial sector.
In addition, we also want to learn more about Treasury's
plan to make a comprehensive approach to regulatory relief.
Hopefully those efforts will help spur economic growth and job
creation.
Thank you and I will now turn to my Ranking Member, Senator
Coons, for his opening statement.
STATEMENT OF SENATOR CHRISTOPHER A. COONS
Senator Coons. Thank you, Chairwoman Capito, for convening
this hearing. I appreciate the opportunity we have on this
subcommittee to examine a very wide diverse range of interests
across many agencies, and in particular, the Department of
Treasury. And I look forward to finding common ground and
strengthening our partnership. And I would like to welcome our
witnesses, Secretary Steve Mnuchin, Commissioner John Koskinen,
and Inspector General Russell George. Thank you for joining us
this morning and for your service to our Nation.
Today we are considering the budget request by the Treasury
Department, a Department that is central to our Government's
stability and operations, that helps sustain our country's
fiscal health and protect our national security from collecting
taxes and processing over $3 trillion in Federal payments to
pursuing financial crimes here in the United States and
identifying individuals here and abroad that would promote
terror.
I am concerned the budget request we are considering would
undermine the Department's ability to fulfill all these
critical roles. In the non-IRS parts of Treasury, the budget
requests $1.3 billion, 26 percent less than current levels, and
to achieve that reduction, the budget would rely on staff cuts
achieved through Department wide hiring freeze. My concern is
that this might not result in a strategic realignment of
resources, but instead drain the Department's best and
brightest to meet an arbitrary budget goal.
The budget also cuts some common-sense investments like
cyber security improvements and upgrades to financial systems
that I think the entire Federal Government relies on for
Treasury services. I am also concerned about proposed cuts to
the Office of Terrorism and Financial Intelligence, which it
helps enforce economic sanctions and reductions in the
Financial Crimes Enforcement Network, which combats domestic
and international money laundering. I think these are all areas
of your Department worthy of full investment.
I have continually called upon this administration and its
predecessor to crack down on Iran and North Korea and other
regimes that support terror. And although there have been some
mixed signals, I believe the administration shares and strongly
supports these goals and I would be interested in hearing
whether the requested funding levels are sufficient for these
vital bureaus.
The budget also proposes to eliminate grants to CDFIs, to
Community Development Financial Institutions, which support
development and create jobs in underserved neighborhoods around
our country and cuts funds for entities created in the wake of
the financial crisis, an 8 percent cut for FSOC, or Financial
Stability Oversight Council, and 25 percent to the Office of
Financial Research, both of which I think have real value. But
let us look at the majority of the budget before us, which is
the IRS.
No government agency is more visible, more impactful to the
American people than the Internal Revenue Service, which
collects the revenues that fund more than 95 percent of the
Federal Government's operations and public service. And each
year more than 80,000 public servants at the IRS make hundreds
of millions of contacts with American taxpayers. There have
been 7 consecutive years of either budget freezes or budget
cuts to IRS. And the proposal we are reviewing today would
continue that trend by cutting I think $260 million from an
under resourced agency. And my concerns are not based on the
partisan politics of this.
To put the scale of this proposed cut in context, President
Trump's level for the IRS falls $400 million short of what
President Bush asked for in 2009. And I think the predictable
impact of this reduction would be the loss of more than 4,000
staff in taxpayer services, which would significantly diminish
the services for taxpayers seeking pre-filing and post-filing
guidance in order to timely and accurately meet their tax
obligations.
The level of service in the upcoming year if this cut is
enacted would drop to nearly 40 percent, 45 percent during peak
filing. That would mean more than 6 out of 10 callers--that
more than 6 of 10 callers will not be helped on toll-free lines
as they seek guidance. My office hears from Delawareans
frustrated when their calls to IRS go unanswered and when it
takes a long time to connect with an IRS official. I imagine
many other Senate offices hear from constituents with similar
concerns. And I think the solution is to give the agency the
resources to meet these constituent needs.
So I look forward to hearing more about why the Department
and the IRS think it is a good idea to reduce service delivery
rates and what we might do together to address that. We have a
lot more to discuss today. Let me just move to the end and say
in the absence of a funding agreement on our subcommittee, we
will continue to work here. I am grateful for your service and
look forward to your testimony. And I know that our respective
constituents expect no less than a highly efficient and well-
functioning IRS and Department of Treasury. And I look forward
to working with you, Chairwoman Capito, as we move forward in
our 2018 process. Thank you.
Senator Capito. Thank you, Senator Coons.
And Secretary Mnuchin, I now invite you to present your
remarks on behalf of the Department of the Treasury.
SUMMARY STATEMENT OF HON. STEVEN T. MNUCHIN
Secretary Mnuchin. Thank you and good morning. Chairwoman
Capito, Ranking Member Coons, and Members of the subcommittee,
thank you for inviting me today. I look forward to working with
this subcommittee on funding key priorities for the benefit of
the American people.
One of the President's promises to the American taxpayer
was that he would make sure that their money was spent wisely.
A budget should not be an end in itself, but a means of
improving the lives of Americans. More money does not
necessarily translate into better policy. The President has
challenged every agency and department to identify greater
efficiencies and savings that can be realized both immediately
and in coming years.
The administration is proud to submit a budget that
achieves this goal. This budget makes some difficult choices
because of some necessary constraints. We carefully evaluated
the allocation of resources to each of the Department's
important functions and made prudential reductions where
needed. These choices in no way diminish our ability to operate
the Government effectively. The President made it clear:
national security is a top priority, and in accordance, the
Treasury's request prioritizes national security and cyber
security programs.
Another top goal of Treasury is creating sustained economic
growth. This much-needed growth will be achieved through a
combination of tax reform, regulatory reform, and trade. We
will work with Congress to pass legislation that allows
American taxpayers to keep more of their hard-earned paychecks.
If we develop the right policies today, we will secure a
prosperous future for our children and grandchildren. The
difference between recent sluggish growth and a return to 3
percent or higher GDP is trillions of dollars into the economy,
making a meaningful difference in the lives of all Americans.
This budget prioritizes funding for Treasury's wide array
of economic and financial tools, including sanctions. As our
enemies have changed, so too have our weapons to combat them.
We are honing the economic and financial tools in our arsenal
to disrupt the financial resources and procurement capabilities
of those who wish to do us harm. This includes actions against
destabilizing regimes, terrorist networks, and drug
traffickers. Stopping the flow of funding to dangerous non-
state actors, working with foreign partners to keep their
financial systems secure, protecting our own financial system--
these key programs are critical to the continued safety and
stability of the Nation.
Protecting Treasury and the financial system from cyber
attacks is critical to our financial stability. Cyber attacks
against our agency or the financial system have the potential
to impact markets, the economy, and our national security. The
Cybersecurity Enhancement Account makes investments into
enterprise-wide cybersecurity capabilities that allow Treasury
to better defend against cyber attacks and more efficiently
respond and recover when they do occur. This account also makes
investments in critical infrastructure protection, allowing
Treasury to work collaboratively with the financial services
sector to increase their operational resilience.
In recent months, our Office of Terrorism and Financial
Intelligence agreed with the Gulf counterparts on the intent to
establish a Terrorist Financing Targeting Center, a bold new
initiative to fight terrorist financing. The TFTC is a key
outcome of the President's Summit in Saudi Arabia and will
enhance cooperation with Gulf countries. It will support the
administration's priority to fight terrorism, counter Iran's
influence, and deprive terrorists globally of the access to
Gulf countries.
As I mentioned earlier, tax and regulatory reform are
marquee items for economic growth and job creation. It has been
over 30 years since we have had comprehensive tax reform in
this country. We are committed to changing that. Such reform
means a simplified code that will provide simpler taxes and
relief to middle income Americans, while making our business
competitive again.
We have taken a comprehensive approach to regulatory
relief, meeting with hundreds of business people across the
financial industry, including community, regional, and large
financial institutions, consumer advocacy groups, academics,
think tanks, trade groups, and insurers. We have heard about
what works and what does not. Our reforms will spur economic
growth by increasing access to credit and providing relief for
community banks and making regulations more efficient,
effective, and appropriately applied. We will do this while
ensuring that our financial system is secure and stable and
does not put taxpayers at risk.
We have the opportunity to do great things for the American
people and I look forward to working with Members of this
subcommittee on these important issues. Thank you very much and
I am happy to answer any questions today.
[The statement follows:]
Prepared Statement of Hon. Steven T. Mnuchin
Chairwoman Capito, Ranking Member Coons, and Members of the
subcommittee, thank you for inviting me to meet today. I look forward
to working with this subcommittee on funding key priorities for the
benefit of the American people.
One of the President's promises to the American taxpayer was that
he would make sure that their money is spent wisely. A budget should
not be an end in itself, but a means of improving the lives of
Americans. More money does not necessarily translate into better
policy. The President has challenged every agency and department to
identify greater efficiencies and savings that can be realized both
immediately and in the coming years.
The administration is proud to submit a budget that achieves this
goal. This budget makes some difficult choices because of necessary
constraints. We carefully evaluated the allocation of resources to each
of the Department's important functions and made prudential reductions
where needed. These choices in no way diminish our ability to operate
the government effectively. The President has made it clear: national
security is a top priority, and in accordance, Treasury's request
prioritizes national security and cyber security programs.
Another top goal of Treasury is creating sustained economic growth.
This much-needed growth will be achieved through a combination of
tax reform, regulatory reform, and trade. We will work with Congress to
pass legislation that allows American taxpayers to keep more of their
hard-earned paychecks. If we develop the right policies today, we will
secure a prosperous future for our children and grandchildren. The
difference between recent sluggish growth and a return to 3 percent or
higher GDP growth is trillions of dollars into the economy--making a
meaningful difference in the lives of all Americans.
This budget prioritizes funding for Treasury's wide array of
economic and financial tools, including sanctions. As our enemies have
changed, so too have our weapons to combat them. We are honing the
economic and financial tools in our arsenal to disrupt the financial
resources and procurement capabilities of those who wish to do us harm.
This includes actions against destabilizing regimes, terrorist
networks, and drug traffickers. Stopping the flow of funding to
dangerous non-state actors, working with foreign partners to keep their
financial systems secure, protecting our own financial system--these
key programs are critical to the continued safety and stability of the
Nation.
Protecting Treasury and the financial system from cyber attacks is
critical to our financial stability. Cyber attacks against our agency
or the financial system have the potential to impact markets, the
economy, and our national security. The Cybersecurity Enhancement
Account makes investments in enterprise-wide cybersecurity capabilities
that allow Treasury to better defend against cyber attacks and more
efficiently respond and recover when they do occur. This account also
makes investments in critical infrastructure protection, allowing
Treasury to work collaboratively with the financial services sector to
increase their operational resilience.
As I mentioned earlier, tax and regulatory reform are marquee items
for economic growth and job creation. It has been over 30 years since
we have had comprehensive tax reform in this country. We are committed
to changing that. Such reform means a simplified code that will provide
simpler taxes and relief to middle income Americans, while making our
businesses competitive again.
We have taken a comprehensive approach to regulatory relief,
meeting with hundreds of people across the financial industry,
including community, regional, and large financial institutions,
consumer advocacy groups, academics, think tanks, trade groups, and
insurers. We have heard about what works and what does not work. Our
reforms will spur economic growth by increasing access to credit,
providing relief for community banks, and making regulations more
efficient, effective, and appropriately applied. We will do this while
ensuring that our financial system is secure and stable and does not
put taxpayers at risk.
We have an opportunity to do great things for the American people
and I look forward to working with Members of this subcommittee on
these important issues. Thank you very much and I am happy to answer
your questions.
Senator Capito. Thank you, Mr. Secretary.
And at this time, we will proceed to our questioning where
each senator will have 5 minutes. So I am going to begin the
questioning and I would like to welcome you and thank you also
for the visit, recent visit to my office. I appreciate the
opportunity to get to know you and see your vision of where the
Department of Treasury is going to go.
Let us talk about regulatory reform. You mentioned it in
your remarks. I know that you have talked to stakeholders all
around the country: independent, regional, and large banks,
regulators, FSOC members, consumer advocates, academics,
analysts, and investors, the whole range, to get a clearer
picture of what the regulatory framework is now. What would you
say is your most significant challenge that you have
encountered to this point to getting real meaningful regulatory
relief?
Secretary Mnuchin. Thank you very much. First of all, let
me just say under the President's Executive order, we have
examined regulatory changes for the financial system. While
this looks at many aspects of Dodd-Frank, it goes much further
than Dodd-Frank. So we are pleased we delivered the first
report on banks and credit unions and we look forward to
delivering three more reports as it impacts other areas.
I think for us the biggest challenge is making sure we deal
with the issue of regulatory overlap and making sure that the
regulators are working together. And that is something that as
Chair of FSOC, I am very focused on. I am pleased to report
that we have had very good reception from both sides of the
aisle on our suggestions in the report and we look forward to
working with Congress on some meaningful changes, particularly
for community banking.
I think, as you know, the top institutions account for
about 50 percent of the assets in the banking system in the
United States. We need to create a system where community banks
and regional banks can thrive. We also look forward to working
with the regulators on many of the proposals.
Senator Capito. Thank you. And I appreciate your emphasis
on community banks, as somebody from a smaller State where
community banks really are the life blood of a small community,
by providing access to credit, familiarity with regions and
areas, and customers. We want to preserve that model for those
of us who do not have large bank entities, you know, close by.
And I know, as a former member of the Financial Services
Committee on the House side, this was a topic of great concern
to all of us to make sure that we can provide flexibility and
reasonable regulation and not a one size fits all. So I
appreciate that.
I would like to, first of all, we talked the other day that
I am proud of the work that is being done in Parkersburg, West
Virginia at the Bureau of Fiscal Services. We have 2,000 folks
there that are doing a lot of great things. And one of the
things that they are doing is to promote Government efficiency
through a shared services model. And I would like to, first of
all, invite you to come and visit Parkersburg and the Bureau of
Fiscal Service there, but also would like to see a commitment
from you that you are willing to kind of push this concept of
shared services. I think it has been rather successful in the
beginning and we would like to see it grow for obvious reasons.
Do you have any comments on that?
Secretary Mnuchin. Well, first of all, thank you for the
invitation. I will take you up on that.
Senator Capito. Great.
Secretary Mnuchin. I look forward to visiting the facility.
It is a very important facility of ours. I very much appreciate
the model we have at the Fiscal Service, where it provides
shared services across the government. I think that it is our
obligation to look at other areas that we can use a similar
approach. One of them, I believe, is technology. We have too
many different technology departments in the different
agencies. We do not have consistent technology. I fully support
a shared services model for technology across the executive
branch, amongst other ideas.
Senator Capito. Sounds great. Thank you very much. I know
we are going to have other questions on cybersecurity, so I
would like to kick it off because I think we are all very--
probably each one of us on the dais here has been affected by,
in some way, a breach of our own personal information or our
financial access to maybe one of the cards that we have. Very
frustrating from a consumer standpoint and at the same time it
can be very frightening and damaging to an individual's
financial stability.
I know you are doing a lot. Is there one particular thing
you would like to highlight that might make us rest a little
bit easier at night on this particular issue?
Secretary Mnuchin. Well, unfortunately, I do not want to
let you rest too easy on it because it is a significant issue.
I will tell you it is something I have spent a lot of time on.
I do have experience in technology, having served as the CIO of
Goldman Sachs. I do bring technology experience to the
Treasury.
I am very focused on two aspects of it. One is our internal
infrastructure, whether it be at the IRS or at Treasury. We
obviously are responsible for keeping many taxpayers'
information secure. So within the budget, we have prioritized
technology spending within the IRS. I have also worked very
closely with the financial infrastructure of our banking
systems, whether it is with the Financial and Banking
Information Infrastructure Committee (FBIIC) or through our
other interagency processes. We are very focused on various
mechanisms to make sure we can respond to a technology crisis
within the financial sector.
Senator Capito. Thank you so much.
Senator Coons.
Senator Coons. Thank you, Chairwoman Capito. I would just
like to ask unanimous consent that a written statement
submitted by Anthony Reardon, President of the National
Treasury Employees Union, be included in the record.
Senator Capito. Without objection.
[The statement follows:]
Prepared Statement of Anthony M. Reardon
National President
National Treasury Employees Union
Chairwoman Capito, Ranking Member Coons and distinguished Members
of the subcommittee, I would like to thank you for allowing me to
provide comments on the administration's fiscal year 2018 budget
request for the IRS. 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.
Madam Chairwoman, since fiscal year 2010, IRS funding has been cut
by almost $1 billion. The funding reductions have forced the IRS to
operate under an exception-only hiring freeze since December 2010, and
has forced the Service to reduce the total number of full-time
employees by approximately 18,000 across every State in the country.
The lack of sufficient staffing has strained IRS' capacity to meet its
mission of providing America's taxpayers top quality service by helping
them understand and meet their tax responsibilities, and to enforce the
law with integrity and fairness to all.
The drastic cuts to IRS' budget come at a time when the IRS
workforce is already facing a dramatically increasing workload with
staffing levels down almost 20 percent below what they were just 6
years ago. In 2010, the IRS had 92,148 full-time employees to
administer tax laws and process 230 million tax returns. By the close
of 2016, that number had fallen to 74,151 to administer a more
complicated tax code and process 244 million much more complex tax
returns and other forms.
In addition, over the last several years the IRS 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 (FACTA), the
Achieving a Better Life Experience (ABLE) Act, reauthorization of the
Health Coverage Tax Credit (HCTC), the seriously delinquent debt
certification program and the 2015 Protecting Americans from Tax Hikes
(PATH) Act.
NTEU was disappointed that the administration's fiscal year 2018
budget calls for reducing IRS funding by an additional $260 million
below the fiscal year 2017 enacted level and reducing overall staffing
by more than 4,200. NTEU knows any further reductions in funding and
staffing will further exacerbate the adverse impact previous cuts have
had on IRS' ability to provide taxpayers with the service they need and
enforcement of our Nation's tax laws. We believe that in order to
continue to make improvements in taxpayer services while handling a
growing workload and increasing collections, it is imperative to
reverse the severe cuts in IRS staffing levels and begin providing
adequate resources to meet these challenges. With the future workload
only expected to continue to rise, the IRS will be under a great deal
of pressure to improve customer service standards while simultaneously
enforcing the Nation's tax laws.
impact of inadequate funding on taxpayer services
Madam Chairwoman, providing quality taxpayer service is a critical
component of the IRS' efforts to help the taxpaying public understand
its Federal tax obligations while making it easier to comply with the
tax system. Unfortunately, the IRS' ability to provide excellent
taxpayer service has been severely challenged due to reduced funding in
recent years. Since fiscal year 2010, overall funding for the IRS has
declined by more than $900 million (7 percent), while the number of
individual taxpayers has increased by 10 million, or more than 6
percent. These reductions have resulted in a reduction in the number of
employees assigned to answer telephone calls from 9,400 in 2010 to
6,200 in 2015, a 34 percent drop.
In a letter to Congress following the close of the 2015 filing
season, the IRS highlighted some of the adverse impacts these
reductions had on its' ability to deliver taxpayer services during the
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 fiscal year 2010.
--Taxpayers waited about 23 minutes on average for an IRS
representative to get on the line, and more than 60 percent of
calls were never answered. 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 filing season, and now that the
filing season is over, 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 in
2014 the IRS announced it would no longer prepare returns at
all.
Additionally, because funding reductions forced the IRS to shorten
the period of employment for their seasonal employees who help answer
taxpayer correspondence, the IRS' inventory of correspondence from
taxpayers in 2014 and 2015 grew significantly above what it normally
would have been to more than 900,000.
For fiscal year 2016 and fiscal year 2017, the IRS was provided
with $290 million to improve the customer service representative level
of service (LOS) rate, among other things. With this funding, the IRS
was able to hire additional temporary telephone assistors which
drastically reduced taxpayer wait times and helped the IRS raise the
phone level of service from 38 percent during the 2015 filing season to
72 percent during the 2016 filing season and to 79 percent during the
2017 filing season. The additional funding also freed up more resources
to help the IRS reduce the correspondence inventory to 690,000 by the
end of fiscal year 2016, a drastic reduction from just 2 years prior.
Despite the clear evidence that providing the IRS with additional
funding enabled them to drastically reduce taxpayer wait times and
improve the phone level of service during the 2016 and 2017 filing
seasons, the administration's fiscal year 2018 budget request actually
calls for reducing taxpayer services seasonal staffing costs by $239
million and overall taxpayer services staffing by almost 2,200 FTEs.
The administration's request seems to acknowledge the adverse impact
that these reductions will have on IRS' ability to provide quality
service by noting the target level of service for all of fiscal year
2018 is just 39 percent, a drop of 25 percent from the fiscal year 2017
level. It is clear that the administration's proposed reductions in
funding and staffing for taxpayer services will simply reverse the
gains made in recent years and leave the IRS unable to provide
taxpayers with the assistance they need.
The importance of providing taxpayers with timely assistance over
the phone or in person is also 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, to investigate identity theft-
related crimes when they do occur, and to help taxpayers who have been
victimized by identity thieves as quickly as possible.
Madam Chairwoman, it is clear that drastic funding reductions in
recent years have seriously eroded the IRS' ability to provide
taxpayers with the services they need. Without additional funding,
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.
impact on enforcement & efforts to reduce the federal deficit
NTEU believes a strong enforcement program that respects taxpayer
rights, and minimizes taxpayer burden, plays a critical role in IRS'
efforts to enhance voluntary compliance, combat the rising incidence of
identity theft, and reduce the tax gap.
Unfortunately, funding reductions in recent years are undermining
the Service's ability to maximize taxpayer compliance, prevent tax
evasion and reduce the deficit. The adverse impact of insufficient
funding on IRS' capacity to collect revenue critical to reducing the
Federal deficit is clear. In fiscal year 2016, operating on a budget of
$11.2 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 decline in enforcement revenue since fiscal year 2007. In
fiscal year 2016, IRS enforcement activities brought in $54.3 billion,
down almost $5 billion from the $59.2 billion of fiscal year 2007.
The reduction in revenue can be partly attributed to a reduction in
the total number of IRS enforcement personnel, including revenue
officers and revenue agents--two groups critical to efforts to reduce
the Federal budget deficit. Since fiscal year 2010, the total number of
revenue officers and revenue agents fell more than 32 percent from
20,510 to 13,791, a reduction of almost 6,800 positions.
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.
Despite the clear evidence that reductions to enforcement funding
and staffing have had on the Service's efforts to generate revenue and
to enforce our Nation's tax laws, NTEU was disappointed to see the
administration's fiscal year 2018 budget request would slash funding
for enforcement by $50 million from the current level, and result in
the loss of more than 2,100 enforcement FTEs. With enforcement staffing
already down by more than 30 percent since fiscal year 2010, these
additional proposed reductions will simply further reduce IRS' ability
to enforce our Nation's tax laws, maximize taxpayer compliance, combat
identity theft and other types of fraud, and generate revenue
collection that is critical to reducing the Federal deficit.
Madam Chairwoman, the adverse impact of recent funding cuts on the
IRS' ability to provide taxpayers with the service they need and
enforce our Nation's tax laws is clear. NTEU strongly believes that
only by providing the IRS with additional resources will the IRS be
able to meet the rising workload level, stabilize and strengthen tax
compliance and customer service programs, and allow the Service to
address the Federal deficit in a serious and meaningful way.
private tax collection
Madam Chairwoman, I would also like to note NTEU's strong
opposition to the resumption earlier this year of the use of private
collection agencies (PCAs) to collect taxes on a commission basis. NTEU
believes this twice failed program is a waste of taxpayer's dollars,
invites overly aggressive collection techniques, jeopardizes the
financial privacy of American taxpayers, and may ultimately serve to
undermine efforts to reduce the deficit.
As you know, in late 2015, Congress approved a long-term highway
funding bill which offset part of the costs of the bill by requiring
the Treasury Department to contract with PCAs to collect Federal tax
debt on a commission basis despite the objections of the
administration, the National Taxpayer Advocate and a coalition of civil
and consumer rights groups.
The use of PCAs to collect tax debts has repeatedly been shown to
be a waste of taxpayer dollars. The first attempt to use PCAs to
collect Federal taxes came in 1996 and 1997, when Congress authorized
IRS to conduct a 2 year pilot project testing the use of PCAs to
collect tax debts. The 1996 pilot was so unsuccessful it was cancelled
after 12 months. Contractors participating in the pilot programs were
found to have regularly violated the Fair Debt Collection Practices Act
(FDCPA), and the program resulted in a $17 million net loss.
Under legislation enacted in 2004, the IRS again attempted the use
of PCAs to collect Federal taxes in 2006. In September of that year,
the IRS began turning over delinquent taxpayer accounts to three PCAs
who were permitted to keep between 21-24 percent of the money they
collected. While the program was projected to bring in $2.2 billion in
new revenue, data from the IRS showed that the program resulted in a
net loss of almost $4.5 million to the Federal Government, after
subtracting $86.2 million in program administration costs and more than
$16 million in commissions to the PCAs.
Before terminating the program in March 2009, an independently-
reviewed study by the IRS found that IRS employees are three times more
efficient at collecting taxes than private tax collectors.
In addition to being fiscally unsound, allowing PCAs to collect tax
debt on a commission basis led to taxpayer abuse. According to the IRS,
between September 2006 and March 2009, the IRS received dozens of
taxpayer complaints against the PCAs, five of which were confirmed by
an IRS Complaint Panel to be serious violations of law. In addition,
one of the three original private contractors was dropped by the IRS
for dubious practices despite the Service's previous assurance that its
oversight would prevent abuse, and penalties totaling at least $10,000
were imposed by the IRS on the PCAs for violations against taxpayers.
In one instance, private collectors made 150 calls to the elderly
parents of a taxpayer after the collection agency was notified he was
no longer at that address. I would note that one of the four companies
currently under contract with the IRS to collect taxes lost its
contract with the U.S. Department of Education in 2015 for providing
inaccurate information to student loan recipients.
Concerns that this latest attempt to turn over tax collection to
private contractors could lead to taxpayer abuse were reinforced
recently after a review of the call scripts used by the PCAs to contact
taxpayers exposed potential violations of taxpayer privacy protections.
The review, undertaken by a group of four Senators concerned the PCA
program could lead to taxpayer abuse, showed the scripts may include
implied threats to taxpayers, violations of taxpayer privacy
protections due to information shared with third parties, and
inadequate responses to taxpayer cease and desist requests. Concerns
over their findings led the group of Senators to recently request the
Federal Trade Commission to investigate whether the collection agencies
are violating the Fair Debt Collections Practices Act.
In addition to concerns that the PCAs could be violating the FDCPA,
NTEU is concerned that given the proliferation of tax schemes in recent
years, allowing private companies to contact taxpayers on behalf of the
IRS will lead to confusion among taxpayers and invite aggressive tax
schemes.
In February the IRS released its annual ``Dirty Dozen'' list of tax
scams for 2017 which highlights various illegal schemes that taxpayers
may encounter throughout the year. Among the top scams the IRS warned
taxpayers to guard against were aggressive and threatening phone calls
from criminals impersonating IRS agents. The IRS has seen a surge of
these phone scams in recent years as con artists threaten taxpayers
with police arrest, deportation and license revocation, among other
things. While the IRS has historically preferred to contact taxpayers
by letter and not by phone, often saying that ``if you are surprised to
be hearing from us, then you're not hearing from us,'' under the
private debt collection program, private collection firms are now
calling taxpayers directly and identifying themselves as contractors of
the IRS. This will simply confuse taxpayers that have been told
repeatedly they will not receive calls from the IRS.
I would note that in April the Treasury Inspector General for Tax
Administration (TIGTA) announced 11 people had been charged with crimes
involving schemes to impersonate IRS agents and steal money from
innocent taxpayers by claiming they owed back taxes. Furthermore, in
recent testimony before Congress, both TIGTA and the National Taxpayer
Advocate warned that the use of private debt collectors could
exacerbate or widen the impersonation scam and noted their offices
would be closely watching this issue as the outsourcing of taxpayer
cases to PCAs continues to ramp up.
We also believe this latest attempt to turn over tax collection to
private contractors will unfairly target low-income taxpayers. The IRS
has estimated that almost 80 percent of the cases that would be
referred to the PCAs would involve taxpayers with incomes below 250
percent of the Federal poverty level. Furthermore, a review by the
National Taxpayer Advocate of returns of those taxpayer cases to be
assigned to the PCAs showed the median reported income was about
$32,000 and more than one-third of the returns reported incomes of less
than $20,000.
Subjecting taxpayers that are struggling to make ends meet and
can't afford legal representation to private contractors whose sole
motivation is to maximize their own profits at the taxpayers' expense
is simply unfair. In the words of the National Taxpayer Advocate, this
would ``place a bulls-eye on the back of low income taxpayers.''
IRS employees, unlike the PCAs, have a variety of tools at their
disposal with which they can help delinquent taxpayers meet their tax
obligations, in particular, those facing financial difficulties. These
include the ability to postpone, extend or suspend collection
activities for limited periods of time; making available flexible
payment schedules that provide for skipped or reduced monthly payments;
the possibility of waiving late penalties or postponing asset seizures
and Offers In Compromise (OIC), an agreement between a struggling
taxpayer and the agency that settles a tax debt for less than the full
amount owed.
In contrast, the PCA's sole interest is to collect from a taxpayer
the balance due amount they have been provided. They have no interest
in whether the taxpayer owes other taxes or may not have filed required
returns, nor do they have access to any other taxpayer records, so they
are unable to answer any questions, provide any advice or use any of
the tools IRS employees have, such as extensions or offers in
compromise. In the current economic climate, it is more important than
ever that taxpayers be able to deal with the IRS directly to work
through any financial hardships they may be experiencing.
Upon ending the latest attempt to use PCAs in 2009, the IRS
committed to working the tax cases recalled from the PCAs. As part of
its 2013 Annual Report to Congress, the National Taxpayer Advocate
undertook a study that analyzed the results the IRS obtained while
working the inventory recalled from the PCAs and analyzed whether the
IRS or the PCA performed better when working the PCA inventory. The
study found the IRS collected about 62 percent more than the PCAs
($139.4 million compared to $86.2 million), and was significantly more
effective in collecting taxes. The study noted that the results likely
understated the difference in effectiveness, since the PCAs worked the
cases first and collected the easy dollars while the IRS only got cases
the PCAs had already handled.
NTEU is not alone in our opposition to private tax collection
program. Opposition to allowing private companies to collect taxes on a
commission basis has been voiced by a number of public advocacy groups,
tax experts, former IRS Commissioners as well as the National Taxpayer
Advocacy Panel. In addition, the National Taxpayer Advocate, an
independent official within the IRS, previously identified the IRS
private tax collection initiative as one of the most serious problems
facing taxpayers and repeatedly called on Congress to repeal the IRS'
authority to outsource tax collection work to private debt collectors.
Outsourcing the collection of taxes to private companies has also
been opposed by a number of public advocacy groups including, Consumer
Federation of America; NAACP; National Active and Retired Federal
Employees Association; National Consumer Law Center; National Consumers
League; Citizens for Tax Justice; OMB Watch, AFSCME, National Council
of La Raza; and the U.S. Public Interest Research Group.
Madam Chairwoman, NTEU understands and commends efforts to ensure
that all taxpayers pay their fair share of taxes. Without a doubt, rank
and file IRS employees are committed to achieving this goal in the most
cost-effective manner while providing a high level of customer service
to American taxpayers. But the facts make clear that the use of private
tax collection companies is not in the best interest of American
taxpayers, could potentially undermine future efforts to close the tax
gap, and should be terminated immediately.
conclusion
Madam Chairwoman, thank you for the opportunity to provide NTEU's
views on the administration's fiscal year 2018 budget request for the
IRS. We believe that to ensure the IRS is able to continue making
improvements in taxpayer services while handling a growing workload and
increasing collections, it is imperative that the agency is provided
with the resources necessary to meet these challenges. With the
complexity of tax administration and future workloads only expected to
rise, the IRS will be under a great deal of pressure to improve
customer service standards while simultaneously enforcing the Nation's
tax laws.
Senator Coons. Secretary Mnuchin, thanks for our
conversation before this hearing and for your service. I just
want to ask five questions quickly, if I might.
First, just there has been some concern that the
administration is directing Cabinet secretaries to not respond
to requests from the minority party despite a longstanding
tradition upheld by both parties. Will you commit to responding
to questions from both the majority and minority?
Secretary Mnuchin. I will and I believe we have been
responsive----
Senator Coons. You have.
Secretary Mnuchin [continuing]. To that already, but we
will continue to do so.
Senator Coons. Thank you very much, Mr. Secretary. I wanted
to talk about the Office of Terrorism and Financial
Intelligence and the Financial Crimes Enforcement Network and
the TFTC that you mentioned in your opening remarks. I view
these as highly valuable. As we spoke about, I think enforcing
sanctions is a critical role that your Department plays, but
the budget proposes modest, but reductions in these funding--
funding in these agencies.
Do you think this budget provides sufficient funding for
these two bureaus given their vital missions and given that
there is other places--we talked about South Sudan, but there
is places in the world where you are not currently prioritizing
them because there is so many others, whether it is North Korea
or Russia or sanctions that are currently being enforced
against a whole range of other nations? Do you think you have
asked for sufficient funding for these two bureaus?
Secretary Mnuchin. Well, let me first comment. I very much
believe in the sanctions authorities and what we do within the
Treasury. I am probably spending 50 percent of my time on this
area because it is so important and so critical to what we are
doing.
When we submitted the budget, and again, we had to manage
the President's priority, which was additional money for the
military and look for cuts where appropriate. When we did that,
the intent was to keep TFI flat. I think actually it went down
slightly because we got a little bit more money this year than
we had expected at the time. So the intent was to keep it flat,
was not to reduce it.
Now, I might add, as I mentioned to you when we had the
opportunity to meet, since we submitted the budget, we do have
other requirements. One of them, as I mentioned, is the
Terrorist Financing Targeting Center, where we are seeking
additional funds for that. I think it is a very, very important
investment over the next 10 years and very effective. And this
is something that Secretary Tillerson and Secretary Mattis
fully support.
Senator Coons. Thank you. I look forward to exploring that
further, but I think we have a shared enthusiasm for vigorous
sanctions enforcement in partnership with our allies, both here
and in other parts of the world.
Let me move to the Community Development Financial
Institutions, CDFIs. The fund that supports them has strong
bipartisan support because CDFIs have a record of creating jobs
in underserved communities. They leveraged Federal funds
roughly 12 to 1 in the last oversight analysis, investing about
$3 billion a year. That is why last year's appropriations bill
increased their funding 6 percent, but the fiscal year 2018
budget proposes to eliminate them.
Would you commit to following congressional intent in fully
utilizing all of the funds that we provided in the fiscal year
2017 appropriations? And help me understand why you would
eliminate a program with a proven record of economic growth.
Was this making tough choices in the context of a difficult
budget environment or do you think they actually should not be
funded?
Secretary Mnuchin. This was, as I mentioned, in the context
of making difficult choices. I do agree that CDFIs have played
an important role in the community. This was merely a function
of us making difficult decisions across.
Now, the one thing I would also add is that when we came
out with our recommendation on financial reforms, one of the
areas that I recommended that we look at is the Community
Reinvestment Act. So one of the things we want to make sure is
as banks are dedicating significant money under the CRA that it
is being used appropriately. We want to make sure we meet with
community groups and advocates because that is a big area of
investment that we think can be more effective.
Senator Coons. Two quick questions if I might, Mr.
Secretary. First, I want to make sure you have answered the
question, but will you commit to follow congressional intent in
the funded----
Secretary Mnuchin. Yes.
Senator Coons. Thank you. There is also a proposed cut to
the Alcohol and Tobacco Tax and Trade Bureau, an area actually
strongly supported by industry because it helps them get their
products to market faster. Are you concerned that those budget
cuts would reverse an area where the industry actually supports
more action by the Treasury Department?
Secretary Mnuchin. Well, again, let me just emphasize. I
have personally met with that group. I think they perform a
very important function. It is actually quite effective what
they do. They manage it under a very reasonable budget. And
again, we have scaled back their budget slightly. This is in no
way intended to signal that it is not important. It is, quite
frankly, very important what they do.
Senator Coons. Thank you, Mr. Secretary. As we spoke about,
the U.S. reached the debt limit in March and you are using
extraordinary measures to avoid default. Do you agree allowing
the Government to default on its debts is a terrible idea that
would have significant consequences for our market and economy
and even the threat of default has the potential for costly
implications for the Government and undermines our credibility?
Secretary Mnuchin. Senator, yes. Thank you for asking that
question which is on one of my favorite subjects and was also
one of the previous Secretary's favorite subjects. So, let me
again emphasize that the United States credit is of utmost
important. We are the reserve currency and we must pay our
bills on time.
So as I have suggested in the past, based upon our best
estimate at the time, we do have funding through September, but
I have urged Congress to take this up before they leave for the
recess.
Senator Coons. I appreciate your leadership on that and I
will ask one last question if I might or should I----
Senator Lankford. You are the Ranking Member. I am the
fill-in Chairwoman.
Senator Coons. You are the fill-in Chairwoman for the
moment. I will ask one last question about level of service for
the IRS. As you heard in my opening remarks, I am concerned
that the cuts proposed to the IRS would reduce service levels,
but do you think it is acceptable to provide a level of service
where more than 4 out of 10 callers will not connect to an
account representative as they are trying to meet their legal
obligations to pay their taxes?
Secretary Mnuchin. So, let me just comment on that. First
of all, I think as you know, tax reform is a major focus of
ours. On the personal side, our objective is to simplify tax
reform, cutting down the number of brackets. Under our proposed
plan, 95 percent of Americans will be able to fill out their
taxes on a simple postcard. While I agree with you the service
levels are an issue, my view, the solution is two-fold. One is
let us simplify our tax system so not as many people need to
call, and two, how do we use technology more effectively as
opposed to having to use call centers, how can we communicate
with the taxpayers electronically.
Senator Coons. Thank you, Mr. Secretary.
Senator Lankford.
Senator Lankford. Thank you. Let me ask you a couple of
questions. I want to pick up where Senator Coons left off on
the issue on debt ceiling. We are currently using extraordinary
measures. Do extraordinary measures have a cost to the
taxpayer?
Secretary Mnuchin. Yes, they do.
Senator Lankford. Give me a good guess of what
extraordinary measures cost the taxpayer when we move past the
debt ceiling limit time period and wait and delay that decision
on that action.
Secretary Mnuchin. Well, there is a significant cost and it
is two-fold. The first cost is a real cost, which is right now
effectively, as opposed to borrowing in the market at lower
rates, we are borrowing and making our trust funds whole at
slightly higher rates, so there is a real cost to doing that.
There is also an implied cost of uncertainty into the market.
The longer we wait, the more than uncertainty will be. So,
again, I full urge Congress to deal with this issue as soon as
possible.
Senator Lankford. So I will talk through a couple of things
on that. The best guess that I have in working with your team
and trying to get an accurate number of the cost of
extraordinary measures is around $2.5 billion to the taxpayer
in real dollars that we pay in because we are covering our own
interest to be able to do that. That is a significant cost and
a loss to the taxpayer.
The second thing is, as you and I have spoken about before,
we should and will do a debt limit issue because that is taking
care of already when budget decisions are made. There is
something that has to be resolved at that point. My request to
you is to be able to work with Congress to be able to figure
out a way that when we get to a debt limit moment we do address
the issue of debt because we cannot just ignore that and
continue to be able to pile on debt and assume there is no
consequence. But those key moments should be with the fiscal
year decisions that we make and how we resolve those issues and
to be able to find some sort of a consistent calendar.
What I have recommended is a 2-year debt limit time period
that every 2 years we have to address this and it has to come
up and to try to determine do we have the deficit going up or
down. If the deficit is going down, then the President has the
authority to be able to make the decision on the debt limit. If
the deficit is rising or is static, then Congress has to debate
it. That forces us to get back to how are we dealing with the
issue of deficit.
For me, we have half a trillion dollars in overspending
this year. We cannot just pretend that is going to go away. We
do have to address it and I believe a debt ceiling moment is a
moment to address it, but if we are actually cutting away at
the deficit, I think that should be a process that is ongoing
and very, very predictable. The only time it is not predictable
is the moment when the deficits are rising or static because
then there is something has to be addressed at that moment and
we have to be able to take that on. We will have further
conversations on this because I want to continue to press on
this.
Let me ask you a question, again, following up on some of
the things that Senator Coons was saying as well about some
international actions. Outline the steps for me that Treasury
is taking right now to deal with the finances of Hezbollah.
This has been a focus in previous administrations that I think
needs continued attention. What are we doing currently to be
able to deal with the finances of a known terrorist
organization like Hezbollah and what are we doing to be able to
limit their access to the world market?
Secretary Mnuchin. Well, let me just assure you that it is
a major focus of ours. I do not want to go through in this
public environment the specifics of what we are doing, but I am
happy to meet with you privately and provide you a classified
briefing.
Senator Lankford. Great.
Secretary Mnuchin. I can assure you that it is a major
focus of mine and this administration.
Senator Lankford. Terrific. We will get a chance to visit
another time in a closed session on that. You have mentioned to
Senator Capito as well some of the actions that you are taking
to deal with community banking. I would like to ask you two
specific issues on that. If we are going to release the economy
and some of the regulatory issues that you have mentioned both
in public statements and in your written statement today, one
of the things is going to be community banking and community
lending again.
What recommendations would you make to Congress of actions
that we need to take that you are limited on and cannot respond
to the issues with community banking that we need to respond
to? And the second one is the Qualified Mortgage issue, what
can be done to be able to help? In my State, there are very few
banks now that do mortgage lending anymore which used to be the
anchor for a rural State like Oklahoma, but few banks can do it
anymore because of the QM rules. So recommendations you would
make to Congress for things that we need to do for community
banking and the QM rules.
Secretary Mnuchin. Thank you. Those are very important
issues and I look forward to working with you on it.
We do have a laundry list of items that we recommended to
Congress. Some of them, I would highlight, are raising the $50
billion threshold so that we can have regional banks that can
continue to grow. I think that is too low of a limit under the
current Dodd-Frank rules. I know there has been bipartisan
support for raising that, so I look forward to working with
Congress on that.
You also mentioned the Qualified Mortgage exemption. That
is also something we think needs to be looked at, and more
importantly, housing reform. Right now we have Fannie Mae and
Freddie Mac that have existed in conservatorship. As I have
said publicly before, I am committed that we have a long-term
solution to housing and that these are not controlled by the
Government for the next 4 years, and also looking at FHA as a
part of that.
I am concerned that FHA has gone from a 10 percent market
share to 20 percent market share and has displaced proper bank
lending. Community banks know how to make loans. They should be
encouraged to make loans and keep them on their balance sheet
and not be forced to make loans to be securitized or turned
into FHA or Fannie or Freddies.
Senator Lankford. Well, I would completely agree. They can
keep it on their books and that's a very safe way to be able to
protect the economy and what is happening within that bank.
Forty percent of the banks in Oklahoma no longer make mortgage
loans any more, 40 percent and rising because of the QM rules
that have been put on them. That is very toxic for those
communities. Thank you.
Senator Capito. Thank you.
Senator Manchin.
Senator Manchin. Thank you, Madam Chairman, and thank you,
Secretary, for being here.
First of all, the national debt is almost $20 trillion now,
100 percent of GDP, and no end in sight. I think it is
projected by 2027 that we would have an annual debt of $1.5
trillion. And I know you all worked on a proposal, tax proposal
overhaul, which I agree wholeheartedly. I am concerned about
the seriousness of working on this debt. I mean, that debt is
going to eat us alive. And the question I asked the first time
I was here and in Senate was Mike Mullins who was the head of
the Joint Chiefs of Staff, what was the greatest threat the
United States faces. And he says--I thought he was going to say
China or Russia, you know, one of the countries. He said, ``The
national debt will be the greatest threat we face.''
So, with that being said, you had a rate of, what, 15
percent corporate, kind of you all threw out and you were
talking about you had three rates of 10, 25, 35, and there was
no rate on repatriation. But it was kind of vague, but I know
that is--I can follow the path you all were going. But
everybody scored that as adding a tremendous more debt to us
and I knew you would probably be--you were probably looking at
more of dynamic scoring on that to help raise that or change
that, which we cannot score dynamically. What is your thought
process on the debt load we are carrying?
Secretary Mnuchin. Well, Senator, first of all, thank you
because I think that is a very important question that you have
raised.
First of all, I do share your concern about the national
debt. The fact that it has gone from $10 trillion to $20
trillion is very concerning. I think it is critical for
Congress to look at this in the long-term issues, and that is
one of the reasons why the administration submitted a budget
that eventually gets to a balanced budget. So I think that is
critical.
I would say that the number one threat is not the debt. The
number one threat is economic growth. If we continue to have
lackluster economic growth, that will not fund our economy and
opportunities for Americans and our leadership in the world. We
are very focused on creating economic growth. Having said that,
we are also sensitive to increasing the debt. And I look
forward to working with you and other Senators. We are very
close to releasing a detailed plan and I can assure you that we
believe that that detailed plan will be responsible as we look
at the impact on the economy and the cost to the debt.
Senator Manchin. Well, the Bowles Simpson movement a few
years back was the only one that went in depth, I think, in
trying to find a pathway for bipartisan. And it failed, but it
was close. I am thinking some type of a commission. Do you all
support some type of a Bowles Simpson, or call it whatever you
may, commission that would look at this and try to support the
movement you are having? To gain more support here might be of
help.
Secretary Mnuchin. Well, I do not have a view as to whether
it should be a commission or not a commission, but I do have a
view of getting towards a balanced budget is something that is
a very important goal.
Senator Manchin. Let me say--ask another question.
Marketplace fairness.
Secretary Mnuchin. I am sorry.
Senator Manchin. Marketplace fairness, which is basically
the taxation through the Internet. Probably 50 percent or more
of the goods that are being sold or purchased in States and we
receive no income from that to support our local State
functions, but we expect every small business and every
established business in our State to collect that tax for us.
Do you all support fair taxation on Internet States for State
by State, which is marketplace fairness?
Secretary Mnuchin. This is an issue that we have been
looking at very carefully within the administration and we
expect to come out with a position shortly. I will tell you
that I think, as you know, many States do have a use tax that
goes along with the sales tax, so this is really more of a
function of collection. I am encouraged that Amazon is now
charging tax I believe on their own sales, but not the
Marketplace. Not sure I understand the consistency----
Senator Manchin. Right.
Secretary Mnuchin [continuing]. On that, but I respect the
States' ability that there is an awful lot of money that is not
being collected that is in fact due to them under a use tax.
This could be a very important means for the States to fund
infrastructure, which is critical.
Senator Manchin. It is going to be almost a salvation to
most of the States, especially rural States that do not have
the expertise or the far-ranging ability to chase down all
these Internet sales that are coming in. But if it was a
State--if it was a national movement we think it would give us
the support we need to make sure that collections would be
made. And I would hope that you would look at that seriously
for the salvation of our States.
The final question I have is on CFIUS. You all just--you
have oversight on CFIUS. This subcommittee examines the
national security implications of certain foreign investment
transactions. It usually involves critical infrastructure,
proximity to national security assets or sensitive trade
secrets. You all just recently--CFIUS approved the sale to a
Chinese conglomerate of the Chicago Stock Exchange. Can I have
your thoughts on that?
Secretary Mnuchin. Again, let me assure you that I take my
role as chair of CFIUS very seriously, that I have examined
many transactions since I have been in office. There are many
transactions that have been withdrawn. It is a confidential
process, so I am not comfortable talking about any one
transaction, but I can assure you it is something that I take
very seriously.
Now, one other thing I may advocate is I have had the
opportunity to meet with Members in Congress about talking
about certain changes to the legislation of CFIUS that I think
are important to consider. One of the areas in particular are
joint ventures are not covered and I think they should be.
There is other areas. I know that there is many people in
Congress who want us to look at a lot more transactions. And
one of the things I think perhaps as we get through the next
budget cycle is perhaps CFIUS should have central funding,
because it is a very important function, that can be doled out
on the inter agencies. But again, we fully support the CFIUS
function and think this is something that we need to work with
Congress to review.
Senator Manchin. I was just concerned about CFIUS taking
the approach maybe of not national security, but having a
Chinese conglomerate having all this information into our
financial economic wherewithal. It is just very concerning to
me that we allowed that.
Secretary Mnuchin. Again, I can assure you that when we
look at CFIUS cases we take into account national security very
seriously. Again, in this setting, I cannot comment on any----
Senator Manchin. Well----
Secretary Mnuchin [continuing]. Particular transaction, but
look forward to working with you.
Senator Manchin. Maybe we can talk further on that in
closed session. Thank you.
Senator Capito. Thank you.
Senator Moran. Thank you, Chairman. Mr. Secretary, thank
you for joining us. I would join Senator Manchin's comments
about CFIUS. I corresponded with you on a CFIUS issue, a case.
You responded. I appreciate that. I am pleased to hear how
seriously you take those responsibilities. I applaud the
seriousness behind my request.
I also would follow up with the Chairwoman as well as
Senator Lankford's comments about community banks. Your
predecessors have been in front of this subcommittee and then
as a Member of the Banking Committee I visited with your
predecessors and all the variety of regulators that affect our
financial institutions, credit unions, and banks, in
particular. But I would highlight just so that you would know
how important it is, so that you have heard at least from a
third Senator this morning.
Senator Lankford talked about lack of mortgage lending. To
me, that is one of the most egregious examples of
overregulation. Banks do not make--do not not make loans
because it is not a creditworthy borrower. They do not make
loans because of the overregulation, the burden, the cost, and
the associated penalties of a minor error. That is not anything
that rural America in particular can withstand. We have looked
to our local lenders to be the pillars of our community to
provide that funding for someone who wants to buy or remodel or
build a home and it is not happening.
And then secondly, particularly today with commodity prices
in the agriculture sector at the levels that they are, I have
great concern that because of consequences of Dodd-Frank and
just the regulator environment generally, that what has
happened in the past when times are tough is that long time
relationships between lenders and farmers and ranchers, know
the family, know the business plan, have a sense of their
character. That has been a part of the decisionmaking that has
occurred when loans are made.
If we get to the point in which community banks are making
loans based upon some kind of computer program and you punch in
the numbers and none of the other factors are taken into
account, we will not survive the agriculture crisis that we
face today with low commodity prices. We will have a financial
crisis as well, particularly damaging to places like my home
State. So I am pleased to hear you reiterate, and you do not
need to do it a third time, the efforts that are under way to
alter.
I am here to encourage, insist, demand. I have asked every
regulator that has been in front of me, give me an example of
something you have done that reduces the burden to a community
bank. And without exception, no regulator has been able to give
me an example. They will talk about how they have a committee,
a task force, someone to advise them on community banking, but
nothing seems to happen much at the Fed, at the FDIC, or the
Office of the Comptroller of Currency. So I would ask you to
redouble your efforts in that regard.
On a much more specific topic, let me turn to a question
that I asked the SEC Chairman Clayton in a similar setting here
just a few days back. I am concerned about the negative impact
that the European Union's MiFID II regulations could have on
the ability of U.S. firms to provide investment research in the
EU. Many small and mid-cap companies depend on that research to
attract investment. And EU rules that impede the provision of
research could have a direct impact on job creation here in the
United States.
I just wanted to gauge your awareness of that issue. And
given your broad responsibilities at Treasury, would you commit
to me that you are willing to work with EU and the SEC to find
a path forward that could prevent negative impacts to
investments in U.S. markets and companies? Do you see a role
for the Treasury Department in potentially brokering some kind
of agreement so that U.S. entrepreneurs and innovators are not
excluded from this important analysis?
Secretary Mnuchin. Thank you. Well, let me first say I will
take an opportunity to mention for the third time how much I
appreciate the support for community banking that there is from
this subcommittee. This is an area that I have had personal
experience in having managed banks, and I look forward to
working with this subcommittee and others to making sure that
we get the right regulatory balance that community banks can
lend and that they are safe, particularly in the agricultural
communities.
These are the parts of our country that need to have access
to credit and community banks know how to lend. They do this.
It is not a function of just relationship lending. It is a
function of they understand the agricultural market. These are
not loans that should be securitized and sold off. These are
loans that should be on the books of the banks and be held, so
look for it.
Senator Moran. I liked your previous two answers and I
especially appreciate your third. Thank you, Mr. Secretary.
Secretary Mnuchin. Okay. Now, on the EU issue, I very much
look forward to working with you and Treasury is happy to be
helpful in brokering a solution.
Senator Moran. Thank you very much.
Senator Capito. Thank you.
Senator Van Hollen.
Senator Van Hollen. Thank you, Madam Chairman. Mr.
Secretary, good to see you here in Appropriations. We have had
a chance to talk a little bit in the Budget Committee and
Banking Committee. And I had not planned to say anything about
the overall budget, but you made the statement that the Trump
administration budget balanced in 10 years. I think it is
important that the public and Members know that the CBO looked
at that and said that just is not so and that you were way off.
So I do want to say I appreciate your efforts on the debt
ceiling and I do think it is really important that the Congress
not engage in political games with something that has such an
impact on our economy, so thank you for your voice in that
debate.
I want to reinforce the comments that Senator Coons made
regarding CDFIs. I was pleased to hear that was not a cut made
on the merits, but it just did not--I guess it just did not
meet your overall priority list in the budget. I would say in
Maryland and I think many communities around the country CDFIs
have played a really important role in local economic
development, so I hope this committee will work to restore
those cuts.
Just on inversions, and Senator Durbin has been very
involved in this, I know we are looking to tax reform. In the
meantime, I hope we can do everything possible to prevent
people engaging in inversions and the Obama administration put
in place some provisions, some rules to reduce that. I hope you
will preserve those rules. I think we would like to go further
in shutting down some of these inversions.
Let me say a word about North Korea. And first I want to
thank your team at Treasury. Senator Toomey and I have been
working on bipartisan legislation. In fact, we have introduced
a bill on North Korean sanctions that will be in the Banking
Committee and we appreciate the input we have gotten from your
team on that.
As you know, and another report in the Washington Post
today about the North Korea and the ICBM program moving at a
faster pace than people previously anticipated, they already
have nuclear weapons. I appreciate the action that
administration took with respect to the Bank of Dandong. We
also know from the February report of a U.N. panel of experts
that there is incredible leakage in the international sanctions
regime against North Korea. China is clearly the number one
culprit in this effort.
I think we are going to need to move much more aggressively
with respect to letting China know that if they are going to
continue to evade the international sanctions that they are not
going to have such access, their banks, to our markets. I
understand the challenges there. Let me ask you this. The House
has passed a sanctions bill on North Korea. Does the
administration support that part of the bill?
Secretary Mnuchin. Again, thank you for your comments. I do
want to just comment first on the CBO scoring, and I think the
issue of the CBO is they just believe in lower growth than we
do, but----
Senator Van Hollen. Mr. Secretary, it is not a question of
belief. It is a question of reasonable projections.
Secretary Mnuchin. Well, we----
Senator Van Hollen. I was going to let that--but your
projections are out of line with the projections of every
institution in our country and overseas with respect to growth
rates. And I know you are going to say all the policies you
guys are going to put forward are going to somehow change that
trajectory. All we have is a one page document about your tax
reform bill. So can we just go to North Korea because I have
limited time?
Secretary Mnuchin. Well, we can, but I am just going to
say----
Senator Van Hollen. Okay.
Secretary Mnuchin [continuing]. We will note for the record
that we respectfully disagree on this. I would just comment
that our financial projections of growth are significantly
lower than what the Obama administration used. I hope we all
have a goal to get back to 3 percent GDP and can work together
on that.
But, in any event, on North Korea. I will tell you I have
spent a lot of time on this issue. We have had various
significant discussions at the National Security Council. I
participated in a trilateral meeting with the President in
Hamburg with Japan and with South Korea, the Republic of Korea.
I can tell you this is a very big issue that the President is
focused on.
The Bank of Dandong was a very significant effort. That is
something that had been considered previously and there were
concerns. When this action came to my attention, we moved
forward with it very quickly. I can assure you without
highlighting what we will do going forward, there are lots of
things we are looking at and we will continue to use sanctions
to the maximum amount allowable by law independent of what
bills get passed by Congress.
Senator Van Hollen. If I could, do you--does the
administration support the North Korean sanctions legislation
passed by the House which I actually think is not as strong as
it should be, but it is an important first step? And do you
also support the Russian sanctions passed by the House? It is
just a question, yes or no, at this point.
Secretary Mnuchin. Yes. Again, what I will say on this is
we will use sanctions to the maximum amount available. We have
certain concerns about the reach into the executive powers and
certain limitations, but we fully support sanctions on North
Korea, on Russia, on Iran. We will use these super
aggressively.
Senator Van Hollen. Will the President sign the legislation
that passed by the House if adopted by the Senate and sent to
the President?
Secretary Mnuchin. I do not know the answer to that. I have
not had that discussion with the President, so I cannot comment
on it. But again, there is concern about limitations on the
executive authority on sanctions which through both Democrat
and Republican Presidents they have previously had.
Senator Van Hollen. Thank you.
Senator Capito. Senator Boozman.
Senator Boozman. Thank you, Madam Chair, and thank you for
holding this important hearing. We appreciate you being here. I
appreciate also your obvious knowledge of community banks and
what they represent. We hear a lot about small business being
the backbone of America, but the backbone of small business is
the community bank. So, again, thank you for understanding and
continuing to work on that.
I would like to talk a little bit about Iran and tell us
the steps that Treasury is trying to respond to in the sense
of, their illicit activities with all of the things we know:
terrorism, arms trafficking, human rights abuses, et cetera.
Can you tell us what exactly you are doing in regard? What is
Treasury's response in helping out in that area?
Secretary Mnuchin. Sure. Well, let me first comment. The
activities in Iran are very concerning. As the President has
said and I agree with him, we have significant concerns about
the JCPOA. My opinion is that sanctions worked. That is the
only reason why they came to the table and I wish we had held
out for a significantly better deal. Having said that, at the
moment we are working within the constraints of the agreement
which allow us to do sanctions outside of the nuclear efforts.
We have just continued to roll out sanctions on areas of
ballistic missiles, on areas of terrorism. So we will continue
to aggressively pursue sanctions.
I have also had conversations with all my foreign
counterparts about this and our view of working together. And I
can assure you, as you have heard from the President, the
agreement is top of mind every time it comes to the
certification. There is a lot of discussion and we will
aggressively pursue our options against Iran.
Senator Boozman. Part of the Omnibus appropriations bill
that, many of us supported requested that you review all
sanctions, designations over the past 2 years and determine
whether these entities have engaged in any prohibited
activities since the removal of sanctions. Then also Treasury
was requested to either sanction entities engaged in prohibited
activity or explain why not. Are you committed to following
through with that process now?
Secretary Mnuchin. Again, we look forward to working with
you whether the bill is passed or not. I will comment. Just as
we did not have the TFTC, the Terrorist Financing Targeting
Center request, to the extent the bill is passed we will come
back for additional funding to work with you, but we believe in
the sanctions, as I have said, to the maximum amount available.
Senator Boozman. Right. So that is current law though.
Secretary Mnuchin. I am sorry.
Senator Boozman. So that is current law.
Secretary Mnuchin. Yes. And under the current law, we will
continue to work with you as we are, absolutely.
Senator Boozman. Do you have an estimate of what--has
Treasury done an estimate of what sanctions relief, the impact
that that has had on their economy?
Secretary Mnuchin. Again, we have done analysis on both the
impact of the JCPOA and other areas on their economy. Again, in
a classified session we are happy to come and talk to you about
some of the intelligence issues.
Senator Boozman. Okay. Thank you very much. And again,
thank you for being here. Thank you, Madam Chair.
Senator Capito. Thank you.
Senator Durbin.
Senator Durbin. Thank you, Madam Chair. Let me say at the
outset that with you in the Chair seat and the Acting Ranking,
this is the boldest move by West Virginia since Robert Byrd
left the Appropriations Committee.
Senator Capito. Are you saying it takes two of us?
Senator Durbin. I will let you be the judge of that.
Senator Capito. I got it.
Senator Durbin. Mr. Secretary, thank you for being here.
Let me mention a couple of things. First, on the Marketplace
Fairness Bill, which I have been cosponsoring with Senator Enzi
for years and we have passed in the Senate, bogged down in the
House. The use tax problem I want to tell you is pretty
obvious. We have a use tax in Illinois and you know what it
says? When I file my income tax, I decide to voluntarily
declare how much I owe in sales tax to my State. And you can
imagine, compliance is very low. So if you have collection at
point of sale, it is dramatically different.
And I might also add that Amazon does collect. They support
marketplace fairness and Amazon does collect sales tax on their
sales. On third party vendors, no. On their sales, yes. So I
hope that you will take a look at that. It is very important.
Secretary Mnuchin. Yes. I can assure you we are looking at
it. We have had a lot of discussions on it. Again, I may be one
of the few people in the world who have actually filed use tax,
so I am aware of that.
Senator Durbin. Well, because----
Secretary Mnuchin. Again, I am not sure why Amazon is not
collecting on the Marketplace. They can voluntarily start doing
that.
Senator Durbin. They did voluntarily on their own direct
sales, but it is a policy.
Secretary Mnuchin. But we----
Senator Durbin. But they support the bill. In fairness to
them, they support the bill.
Secretary Mnuchin. As I said, the administration is looking
very closely at this issue. We look forward to having
discussions with you and we understand the issue and we do
think that the States getting more money in one format or
another is very important.
Senator Durbin. Thank you. I would like to hit two issues
and I have 3 minutes, so it may not be possible, but I will
try. Economic growth. Here is the reality. Corporate profits in
the United States of America as a share of GDP have never been
higher. Corporate taxes as a share of GDP have never been
lower. Now we are talking about cutting corporate tax rates.
What we are missing in this conversation is an element of
growth that really touches people, and it is this. Despite the
growth in corporate profits in America, there has not been a
parallel growth in earning power and wages of the people who
are working for these corporations.
Simply devising a strategy to reduce corporate taxes and
increase corporate profits and CEO salaries is no guarantee
that the average working family in America will feel this
growth. And they have not for more than a decade. So I urge you
as you take a look at economic growth look at it not in terms
of the boardroom, but look at it in terms of the family room
and the families that are working and falling further and
further behind despite their best efforts. I hope you will
translate your thinking in economic growth in that area.
Secretary Mnuchin. Well, thank you, Senator, and I assure
you I am. I had the opportunity to travel extensively with the
President during the campaign and I did see that. The last 8
years have been a terrific time for rich people and financial
markets, but the average American has not seen their wages
increase and that is something we are very, very focused on
with economic growth.
I will just tell you the problem we have right now with the
corporate tax system. We have one of the highest corporate
taxes in the world, but the effective rate is much, much lower.
Many of our corporations leave money offshore because they get
to defer the tax and not pay anything here. Our main priority
is to change that system to a territorial system so trillions
of dollars come back, can be invested here, and it will benefit
workers.
Senator Durbin. And our last experience in repatriation
proved that unless you are careful in how you do that the money
profits will be repatriated and will go out the back door in
dividends and corporate salaries instead of what you just said,
reinvestment in our economy. I want to work with you to make
sure the reinvestment takes place.
Secretary Mnuchin. Well----
Senator Durbin. I would like to raise, if I could--I am
sorry, but I am running out of time here, but one last issue
which has already been noted. Corporate inversions. When
corporations decide to move their headquarters, strictly a
paper transaction, to some foreign capital to avoid paying U.S.
taxes it is hurtful to our revenues, hurtful to our economy,
and fundamentally unfair. They are still doing business in the
United States. They still have the best market in the world.
They still use our infrastructure. They still count on our
national defense. They just do not want to pay taxes.
So the Obama administration decided to go at that head on
and they changed regulations in the Department of Treasury and
made it more difficult for these inversions to take place and
they slowed down dramatically. President Trump on the campaign
trail was outspoken on this issue. I think he may have even
tweeted on this issue, he feels so passionately about it, about
these inversions. So how do we explain the Executive order from
this administration which really weakens the regulations and
changes that came out of the last administration when it came
to inversions? It seems like the President is saying we do not
want them, yet his Executive order is saying we are going to
start to look the other way.
Secretary Mnuchin. Well, Senator, I look forward to working
with you on this, and first of all, let me say that I assure
you that the President is very focused on us fixing the
problem, not just through a regulation, but as I mentioned, to
changing the tax system.
Now, I can tell you this may be the first President that
has ever picked up the phone and called CEOs when factories
move, so I can assure you----
Senator Durbin. Good for him.
Secretary Mnuchin [continuing]. It catches his attention
when headquarters move. He is going to do everything in his
power, whether it is in our trade negotiations or whether it is
in our tax plan to make sure that----
Senator Durbin. May I stop you there? Everything in his
power?
Secretary Mnuchin [continuing]. American companies are
here.
Senator Durbin. Excuse me, but everything in his power? Why
would he weaken existing regulations which are helping to
lessen the number of inversions? If he is using everything in
his power, it would be not only his regulatory authority and
his statutory suggestions. Wouldn't he do both?
Secretary Mnuchin. Well, again, I look forward to talking
to you more about this. I can assure you that we are going to
make sure that American companies stay here.
Senator Durbin. Thank you.
Senator Capito. Senator Daines.
Senator Daines. Thank you, Madam Chair. Secretary Mnuchin,
welcome. Nothing is more iconic of self-defeating policy than
our Tax Code. And I say that as somebody who has spent most of
my professional career in the private sector, most of that time
running global operations. It is a relic of 1986. No one in
Congress will stand by the status quo. From base erosion to
fundamental fairness, the Tax Code's seven bracket overall
rates simply are not competitive in the 21st century global
economy.
I spent a lot of time in Asia. I spent 6 years living in
China with Proctor & Gamble. I just was over there in April. I
will tell you what. More Americans need to go over and see what
is going on around the world. We need to wake up as a nation
and recognize it is game on in terms of global competitiveness
for American companies to win. And I applaud your efforts going
forward here on reforming our Tax Code. Tax policy has a
tremendous impact on appropriations because it determines
Congress' ability to reinvest through public funds, whether it
is healthcare or defense.
The question, Secretary Mnuchin, is this. As you stated, we
are one of the few countries with an overall corporate tax rate
in excess of 35 percent. In fact, 75 countries, 75 countries
have corporate tax rates between 0 and 20 percent. How much
economic growth do you estimate will accrue by reducing overall
rates to 20 percent?
Secretary Mnuchin. Thank you, Senator. I think
significantly. My comment, as you have highlighted, although
our tax rate is 35 percent, many, many multinational companies
do not pay anything close to that, as I have mentioned, because
of either the issue of deferrals or tax havens, so we look
forward to working with you on that. And now that you have
highlighted you spent 6 years in China, I am going to come and
visit you and we will put you to help us on our China
negotiating team.
Senator Daines. Well, thank you. I would be happy to do
that. I believe it is--they are the second largest economy in
the world now. When I was over there with Proctor & Gamble in
the nineties when we first moved there, their GDP was about
$500 billion. Today, $11.3 trillion. So I would be happy to
work with you together as we go forward.
The question is what place does overall tax rate reduction
play in President Trump's efforts and the administration to
attain a 3 percent plus economic growth?
Secretary Mnuchin. Tax reform is an enormous part of that,
as I mentioned. It is a combination of tax reform, regulatory
relief, and trade, but tax reform is critical. I very much look
forward to very soon working with Congress. As I mentioned, we
have been working since January on coming out with a combined
plan with the House and the Senate and we look forward to
working with you and getting this passed this year.
Senator Daines. One of your observations which I completely
agree with is that a high tax rate drives behaviors. And one
issue of particular interest to me is certainly keeping us
competitive and doing that by having a territorial tax system.
We are the only developed country with a worldwide tax system,
which incentivizes foreign takeovers. Since 2015 alone, at
least 12 corporations have inverted overseas. In your
discussions with the White House, where is the transition to
territorial tax system in your priorities?
Secretary Mnuchin. Very, very, very high.
Senator Daines. I like the additional two verys on that.
Thank you. Has Treasury calculated the economic growth spurred
by adopting such a policy?
Secretary Mnuchin. So we have over 100 people working on
the tax plan in Treasury. We are scoring lots of different
scenarios, and yes, we are working closely on that. We look
forward to working with you, sir.
Senator Daines. Thank you for the three verys. I will add
one more. Add me for the fourth very on that.
My last question relates back to an issue I have back in
Montana. Winter wheat is one of our biggest crops. Montana
truly does feed the world. Seventy percent of our wheat harvest
goes overseas, most of that to Asia. Low grain prices are
dogging our farmers in this country. Think about who put
President Trump in the White House. It was hardworking American
people fighting day to day where the month is often longer than
the paycheck, and that includes our farmers and our ranchers.
One of the provisions in the House tax blueprint was immediate
expensing and it can achieve two tax objectives, simplification
as well as helping rancher's and farmer's bottom lines. Based
on your tax reform discussions, how likely is it that immediate
expensing would be included?
Secretary Mnuchin. Well, it is something that we are having
active discussions on. Although no decisions have been made, I
will tell you we are very sensitive to this as it relates to
farms and agricultural and small businesses. So we are very
focused on that issue, even more so than we are on that issue
for giant multinationals.
Senator Daines. All right. Thank you, Secretary Mnuchin.
Senator Capito. Well, thank you for your testimony today,
Secretary Mnuchin. We are going to excuse you, Secretary
Mnuchin, and call forward our next panel, Commissioner Koskinen
and Inspector General Russell George.
Secretary Mnuchin. Thank you very much.
Senator Capito. Thank you so much for your testimony. Given
our time constraints, I ask that you summarize your statements
so that we can have an opportunity to proceed with questioning.
Thank you very much, Mr. Secretary.
All right. Let's get started. Commission Koskinen, thank
you for coming, and I now invite you to summarize your remarks
on behalf of the Internal Revenue Service.
----------
INTERNAL REVENUE SERVICE
STATEMENT OF HON. JOHN KOSKINEN, COMMISSIONER
Mr. Koskinen. Chairman Capito, Ranking Member Coons,
Members of the subcommittee, thanks for the opportunity to
appear before you today for the last time to discuss the IRS
budget and current operations. I am happy to summarize my
opening statement, but I would like the full opening statement
admitted to the record if that would be appropriate.
Senator Capito. We will submit that without objection.
Thank you.
THE PRESIDENT'S FISCAL YEAR 2018 BUDGET REQUEST
Mr. Koskinen. We look forward to working with Congress as
you continue to determine the IRS' appropriate funding level
for the next fiscal year. As you know, my term as IRS
Commissioner ends in November, so all but a few weeks of the
agency's fiscal year 2018 budget will cover the term of the
next IRS Commissioner. I feel it is my obligation to do
everything I can to make sure the new Commissioner starts with
sufficient resources for the agency to meet its
responsibilities to the Government and to taxpayers.
The President's fiscal year 2018 budget request for the IRS
is $10.975 billion, a $260 million cut from our 2017 budget.
While we support the administration's budget reform efforts, it
is also important to note that years of sustained funding
reductions have left the IRS with critical personnel and
infrastructure requirements. Our budget is now $900 million
below the level 8 years ago in 2010. We are now 18,000 full-
time employees fewer than we had in 2010. And under the
proposed budget, we expect to lose another 3,000 employees this
year.
The effects have been felt throughout the agency. For
example, by not hiring any significant number of new employees
since 2010, we now have only 3,000 employees under age 30 out
of a workforce of 80,000, creating a major challenge in years
to come as we look for the next generation of IRS managers and
executives. We have lost over 5,500 revenue officers, revenue
agents, and criminal investigators, resulting in a proposed
overall audit rate for the fiscal 2018 year of .5 percent, down
from 1.2 percent in years past, and a decline of hundreds of
criminal investigations and prosecutions.
The IRS fiscal year 2018 budget submission seeks less
costly ways of delivering taxpayer service and maintaining
enforcement using technology, training, and internal
efficiencies. However, even with these efforts to maintain
current performance levels in fiscal 2018, the IRS' budget
would need to be $220 million above fiscal year 2017 just to
cover scheduled pay raises and inflationary costs.
IRS INITIATIVES TO IMPROVE EFFICIENCY
In highlighting these critical needs, I would point out
that the IRS understands how important it is for us to be
careful stewards of the fundings we receive from Congress. In
that regard, the IRS for several years has achieved major
savings and efficiencies in a number of areas. For example, tax
return processing. As more people file their returns
electronically, we have reduced the number of locations where
we process tax returns from 10 to 5. Over the next several
years, we will further reduce those locations from 5 to 2.
With regard to real estate, since 2012, the IRS has reduced
its space inventory by approximately 3 million square feet. If
we still occupied that space, the cost would be $81 million
more for rent.
The fourth area is taxpayer services. In response to
taxpayer demand, we have been increasing options for taxpayers
to get information and interact with us online. We have
hundreds of millions of hits on our IRS application Where's My
Refund? Online services are also a source of significant
savings. It costs us about $50 to answer a question on the
phone or in person and less than 50 cents to provide that same
information online.
IDENTITY THEFT REFUND FRAUD
Finally, I would note that a critical problem facing the
IRS and mentioned earlier and taxpayers when I began as
Commissioner about 4 years ago was the amount of identity theft
and the filing of false refund claims. Thanks to the good work
of IRS employees and the contributions made through our new
partnership with the private sector and State tax
administrators, the number of taxpayers identifying themselves
as victims of identity theft for tax season 2016 dropped by 46
percent from the previous year. We were delighted and somewhat
amazed to see that number of victims dropped another almost 50
percent this past filing season so that the overall decline in
victims over the 2 years has been reduced by about two-thirds.
PROPOSED LEGISLATIVE CHANGES
Along with providing adequate funding for the IRS, Congress
can also help the agency by passing legislation to improve tax
administration. In that regard, the President's budget request
contains a number of legislative proposals that I urge Congress
to approve including: renewing streamlined critical pay
authority, adding correction procedures for specific areas, and
giving the IRS authority to require minimum qualifications for
paid tax preparers.
Chairman Capito, Ranking Member Coons, and Members of the
subcommittee that concludes my statement. I would be happy to
take your questions after you hear from the Inspector General.
[The statement follows:]
Prepared Statement of Hon. John A. Koskinen
introduction
Chairwoman Capito, Ranking Member Coons, and Members of the
subcommittee, thank you for the opportunity to appear before you today
to discuss the IRS's budget and current operations.
Let me start by saying we look forward to working with Congress as
you continue to assess the IRS's appropriate funding level. It is
important to note that, since my term as IRS Commissioner ends in
November, all but a few weeks of the agency's fiscal year 2018 budget
will cover the term of the next IRS Commissioner. I want to do
everything I can to help ensure that the budget situation for the
agency will be as strong as possible for the new Commissioner.
The IRS remains very appreciative of Treasury Secretary Mnuchin's
support for the IRS to have appropriate resources, and in particular
for upgrading our information technology (IT) systems. We also strongly
support the administration's efforts to reduce the Federal budget
deficit. We recognize that the IRS must always appropriately analyze
and control our expenditures, and continue to be as efficient as
possible with the funding granted by Congress.
At the same time, I would note that the IRS remains one of the most
cost-effective investments in the Federal Government; resources
invested in the IRS increase revenue collections. This unique and
critical role is vital to the function of the Government and to keeping
the Nation and economy strong. In fiscal year 2016, the IRS collected
more than $3.3 trillion in tax revenue, processed more than 244 million
tax returns and other forms, and issued more than $426 billion in tax
refunds. The IRS's enforcement programs collected more than $54.3
billion in fiscal year 2016, a return on investment (ROI) of about $5
for every dollar invested in the agency.
While we will continue to look for efficiencies in our operation,
it is important to recognize that the IRS remains one of the most
efficient tax administrators in the world. For every $100 collected in
taxes, the IRS spends about 35 cents, which is far less than most other
developed countries, according to statistics compiled by the
Organization for Economic Cooperation and Development (OECD).
As the IRS budget has declined over recent years, we have
consistently found ways to increase our efficiency to meet expanding
workloads and new challenges. From 2010 to 2015, the number of returns
filed grew by more than 10 million (or nearly 7 percent).
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. This list includes: the
Affordable Care Act (ACA); the Foreign Account Tax Compliance Act
(FATCA); the Achieving a Better Life Experience (ABLE) Act; a new
certification program for professional employer organizations;
reauthorization of the Health Coverage Tax Credit (HCTC); the
registration requirement for newly created 501(c)(4) organizations; and
the Private Debt Collection program. Legislative mandates carry
significant costs, in particular the technological changes required to
successfully integrate them into the tax system.
Because more than 70 percent of the IRS's budget is personnel, the
agency has dealt with the funding cuts through an exception-only hiring
freeze that has been in effect since fiscal year 2011. This has left us
unable to replace most employees who retire or leave for other jobs in
government or the private sector. As a result, the agency has lost
about 18,000 full-time employees since 2010.
I am concerned that continued erosion of the IRS workforce will
threaten the agency's effectiveness and its ability to provide
appropriate taxpayer service, enforcement of the tax laws, and
ultimately, our ability to collect the revenues the Government depends
upon for operations.
Against this backdrop, we are appreciative of the funding
flexibility provided by Congress in 2016, which continued in 2017 to
improve taxpayer service, increase cybersecurity and improve our
efforts against identity theft.
In the cybersecurity area, we implemented the use of monitoring and
other capabilities that are more sophisticated than what we had used
previously. This has helped us detect suspicious activity in our
various online tools and applications more quickly.
In regard to identity theft, we put many new taxpayer protections
in place for the 2016 tax filing season that produced significant
results. We had fewer false returns entering our systems, fewer
fraudulent refunds issued, and fewer tax-related identity theft
victims. Most important, the number of people who reported to the IRS
that they were victims of identity theft declined from 698,700 in
Calendar Year 2015 to 376,500 in 2016--a drop of 46 percent.
Preliminary indications are that this number is again declining in
2017.
the president's fiscal year 2018 budget
The President's fiscal year 2018 budget request for the IRS is
$10.975 billion, which is $260 million, or 2.3 percent, below the
fiscal year 2017 enacted budget. The IRS will continue to seek less
costly ways of delivering taxpayer service and maintaining enforcement
using technology, training and internal efficiencies. Major areas
outlined in the President's budget request include the following:
Operations Support
A priority in the President's budget is helping the IRS improve
information services by addressing its antiquated IT systems.
Approximately 63 percent of IRS IT hardware systems are aged and out of
warranty, and 32 percent of software products are two or more releases
behind the industry standard, with 15 percent more than four releases
behind. The importance of keeping systems updated was demonstrated
recently with the spread of the ``WannaCry'' virus to IT systems around
the world.
The President's budget request includes $3.9 billion for operations
support. Within that total, $2.07 billion is allocated for information
services, $216.1 million, or 11.6 percent, above the fiscal year 2017
enacted budget. This funding will allow the IRS to take the initial
steps needed to bring our IT infrastructure up-to-date.
With the growing reliance on IT as an integral part of the solution
to provide improved taxpayer service and enforcement, the IRS will
continue to modernize to harness new information delivery models and
manage data. Infrastructure modernization is necessary to increase
agility, efficiency and service quality, ultimately reducing
operational cost.
Taxpayer Services
The President's budget includes $2.21 billion for taxpayer
services, which is $153.4 million, or 6.5 percent, below the fiscal
year 2017 enacted budget. While the IRS will continue to provide
service to taxpayers across all channels, we will emphasize improving
and expanding the use of online tools and offerings such as virtual tax
assistance sites, which will help the agency operate in a cost-
effective manner.
The IRS has, in fact, been working to increase our online offerings
for several years, in response to increasing taxpayer demand. We
provide a wealth of tax information on IRS.gov, which was visited more
than 500 million times during fiscal year 2016, and more than 354
million times so far in fiscal year 2017. Taxpayers use IRS.gov to get
forms and publications, find answers to their tax questions, and
perform transactions such as paying their tax bill. The most heavily
used part of our website is the ``Where's My Refund?'' electronic
tracking tool, which was used about 300 million times in fiscal year
2016, and more than 264 million times already this year.
The IRS will continue working toward a more proactive and
interactive relationship with taxpayers by enhancing and expanding our
communications with them. This includes offering taxpayers and tax
professionals more services, tools and support that are both innovative
and secure, and specific to their needs, especially in relation to
online and virtual interactions.
Enforcement
The President's budget includes $4.71 billion for enforcement
programs, which is $153.5 million, or 3.2 percent, below the fiscal
year 2017 enacted budget.
The IRS remains committed to increasing compliance and reducing the
tax gap, while minimizing burden on the vast majority of taxpayers who
pay their taxes accurately and on time. The tax gap represents the
difference between taxes owed and taxes paid on time. In fiscal year
2016, the IRS released updated tax gap estimates for tax years 2008
through 2010, and found that the annual average gross was an estimated
$458 billion, and the estimated voluntary compliance rate was 81.7
percent.
Business Systems Modernization
The President's budget includes $110 million for business systems
modernization, which is $180 million, or 62.1 percent, below the fiscal
year 2017 enacted budget. As noted above, this decline is a result of
reallocating funding to IT infrastructure systems to decrease the
backlog of deferred software and hardware updates, which is a critical
priority, and must be accomplished before development and modernization
of new systems.
With the fiscal year 2018 request, the IRS will continue operating
the Return Review Program (RRP) which has significantly enhanced fraud
detection capabilities. In fiscal year 2018, RRP will make a wider
array of data available to other systems for expanded fraud detection.
The IRS will also continue developing web applications to simplify
the taxpayer's online experience, provide secure digital communications
and add more interactive capabilities to existing web self-service
products. This includes continuing the development of online account
capabilities for taxpayers. The initial features of the online account,
launched during fiscal year 2017, include allowing taxpayers to check
if they have a balance due, make payments and see prior payment and
other tax records.
legislative proposals in the president's budget
Along with the funding request, we are also asking for Congress's
help legislatively. In that regard, let me highlight several important
legislative proposals in the President's fiscal year 2018 budget that
would improve tax administration and support the IRS in fulfilling its
mission:
Streamlined Critical Pay Authority
The IRS Restructuring and Reform Act of 1998 increased the IRS'
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 move quickly to
hire well-qualified individuals to fill positions deemed critical to
the agency's success, and that required expertise of an extremely high
level in an administrative, technical or professional field. Executives
hired under this authority included our former Chief Information
Officer, a senior cybersecurity expert, our system architect, the
director of our online systems development team and other senior IT
executives. After having been renewed several times by congressional
appropriators, this authority expired at the end of fiscal year 2013
without being renewed. The President's fiscal year 2018 budget proposes
reinstating this authority through fiscal year 2021. It is my hope that
this critical program, which ran effectively for 14 years before it
expired, will be renewed.
Correction Procedures For Specific Errors
Under current law 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 a proposal in the President's budget
to replace the existing specific grants of this authority with
authority to correct specific errors instead. This would allow the IRS
to fix errors where we have reliable information that a taxpayer has an
error on their return in areas such as the Earned Income Tax Credit
(EITC) program, educational tax credit programs or child tax credit
programs.
Authority To Require Minimum Qualifications For Return Preparers
The President's budget proposes providing the Secretary with
authority to require all paid tax return 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 service from return
preparers, improve voluntary compliance, and foster taxpayer confidence
in the fairness of the tax system.
Chairwoman Capito, Ranking Member Coons and Members of the
subcommittee, that concludes my statement. I would be happy to take
your questions.
Senator Capito. Thank you. Thank you. And next we will turn
to the Inspector General, Russell George. I now invite you to
summarize your statement. Thank you.
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TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION
DEPARTMENT OF THE TREASURY
STATEMENT OF HON. J. RUSSELL GEORGE, INSPECTOR GENERAL
Mr. George. Thank you.
Senator Capito. Thank you for coming.
Mr. George. Chairwoman Capito, Senator Manchin, thank you
for the opportunity to appear today.
My testimony addresses the Fiscal Year 2018 IRS budget
request and significant cyber security challenges confronting
that agency. The proposed IRS budget is a decrease of $260
million from the Fiscal Year 2017 enacted level. In the
request, the IRS realigned approximately $179 million from the
business systems modernization appropriation to the operation
support appropriation to address needed technology hardware and
software updates.
There are many challenges facing the IRS, the top challenge
of which is protecting security over taxpayer data. The IRS
processes and stores a vast amount of taxpayer data that is a
prime target for domestic and international criminals.
For example, in March 2017 because of significant
suspicious activity, the IRS deactivated the online Free
Application For Federal Student Aid Data Retrieval Tool. This
tool is designed to be used by students and parents to obtain
tax information needed to complete a student aid application.
This incident is just the latest in several brazen attempts by
bad actors to steal taxpayer data, to file fraudulent tax
returns, and receive illegitimate tax refunds.
Since May 2015, the IRS has experienced breaches to its Get
Transcript and Identity Protection Personal Information Number
applications. For online taxpayer access, the IRS has a
difficult task of balancing the need to authenticate a
taxpayer's identity with the need to make the applications
accessible when taxpayers need them.
The threat landscape against the IRS is ever changing. Bad
actors continually seek different ways to take advantage of
systems and processes and in an effort to access tax
information without proper authorization. Therefore, the IRS
must continually update its systems and processes to combat the
threat. The risk of unauthorized access to tax accounts will
continue to be significant as the IRS increases its efforts to
deliver new online tools to taxpayers via its Future State
initiative. These current efforts to exploit online systems
have also highlighted the need to seek the capability to
improve or build better systems. One element toward that end is
hiring individuals with proven skills, knowledge, and abilities
related to cyber security.
The IRS's streamlined critical pay authority expired at the
end of 2013. We reviewed whether the IRS subsequently used the
government wide critical pay position authority which has been
available since 1990 to fill technical positions such as those
within a cyber security operation. We found that the IRS had
not used this authority which could assist in recruiting highly
qualified experts.
TIGTA also continues to be concerned about cyber security
in general at the IRS. Our audits have shown some problematic
areas. An audit from 2016 showed that significant improvements
are needed with security monitoring to detect deficiencies
which could leave its computing infrastructure vulnerable to
intrusion by hackers and malicious software. We also found that
improvements are needed to ensure that all systems have secure
configurations and that security vulnerabilities are addressed
on a timely basis.
We are also concerned about the significant percentage of
information technology infrastructure at the IRS that is beyond
its useful life. Such hardware is prone to failure over time.
Moreover, older technology brings unnecessary security risks to
an organization because manufacturers may not provide active
support and hackers have a longer period to identify and
exploit vulnerabilities.
We have an ongoing audit that will evaluate how effective
the IRS is addressing the operational challenges of replacing
outdated hardware in the computer area. We expect to issue this
report in September of this year.
This concludes my statement. Chairwoman Capito, Senator
Manchin, thank you for the opportunity to share my views.
[The statement follows:]
Prepared Statement of Hon. J. Russell George
Chairwoman Capito, Ranking Member Coons, and Members of the
subcommittee, thank you for the opportunity to testify on the Internal
Revenue Service's (IRS) fiscal year \1\ 2018 budget request, our recent
work related to the most significant challenges currently facing the
IRS, and the Treasury Inspector General for Tax Administration's fiscal
year 2018 budget request.
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\1\ The Federal Government's fiscal year begins on October 1 and
ends on September 30.
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The Treasury Inspector General for Tax Administration (TIGTA) was
created by Congress in 1998 to ensure integrity in America's tax
system. It provides independent audit and investigative services to
improve the economy, efficiency, and effectiveness of IRS operations.
TIGTA's oversight activities are designed to identify high-risk
systemic inefficiencies in IRS operations and to investigate exploited
weaknesses in tax administration. TIGTA plays the key role of ensuring
that the approximately 85,000 IRS employees \2\ who collected more than
$3.3 trillion in tax revenue, processed more than 244 million tax
returns, and issued more than $400 billion in tax refunds during fiscal
year 2016,\3\ have done so in an effective and efficient manner while
minimizing the risk of waste, fraud, and abuse.
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\2\ In fiscal year 2016, the IRS employed, on average,
approximately 85,000 people, including more than 16,000 temporary and
seasonal staff.
\3\ IRS, Management's Discussion & Analysis, Fiscal Year 2016.
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TIGTA's Office of Audit (OA) reviews all aspects of the Federal tax
administration system and provides recommendations to: improve IRS
systems and operations; ensure the fair and equitable treatment of
taxpayers; and detect and prevent waste, fraud, and abuse in tax
administration. The OA places an emphasis on statutory coverage
required by the IRS Restructuring and Reform Act of 1998 (RRA 98) \4\
and other laws, as well as on areas of concern raised by Congress, the
Secretary of the Treasury, the Commissioner of Internal Revenue, and
other key stakeholders. The OA has examined specific high-risk issues
such as identity theft, refund fraud, improper payments, information
technology, security vulnerabilities, complex modernized computer
systems, tax collection and revenue, and waste and abuse in IRS
operations.
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\4\ Public Law No. 105-206, 112 Stat. 685.
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TIGTA's Office of Investigations (OI) protects the integrity of the
IRS by investigating allegations of employee misconduct, external
threats to employees and facilities, and other attempts to impede or
otherwise interfere with the IRS's ability to collect taxes. The OI
investigates misconduct by IRS employees which manifests itself in many
ways, including extortion, theft, taxpayer abuses, false statements,
financial fraud, and identity theft. The OI places a high priority on
its statutory responsibility to protect all IRS employees located in
approximately 540 \5\ offices. In the last several years, threats
directed at the IRS have remained the second largest component of the
OI's work. Physical violence, harassment, and intimidation of IRS
employees continue to pose challenges to the implementation of a fair
and effective system of tax administration. The OI is committed to
ensuring the safety of IRS employees and of taxpayers who conduct
business in IRS facilities. As will be discussed in more detail later
in the testimony, over the past several years, the OI has been
conducting an investigation of a massive IRS impersonation scam that
has impacted over 2 million people.
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\5\ IRS, Management's Discussion & Analysis, Fiscal Year 2016.
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TIGTA's Office of Inspections and Evaluations (I&E) provides
responsive, timely, and cost-effective inspections and evaluations of
challenging areas within the IRS, providing TIGTA with additional
flexibility and capability to produce value-added products and services
to improve tax administration. The I&E's work is not a substitute for
audits and investigations. In fact, its findings may result in
subsequent audits and/or investigations. Inspections are intended to
monitor compliance with applicable law, regulation, and/or policy;
assess the effectiveness and efficiency of programs and operations; and
inquire into allegations of waste, fraud, abuse, and mismanagement.
Evaluations, on the other hand, are intended to provide in-depth
reviews of specific management issues, policies, or programs.
overview of the irs's fiscal year 2018 budget request
The IRS is the largest component of the Department of the Treasury
and has primary responsibility for administering the Federal tax
system. The IRS's role is unique within the Federal Government in that
it collects the revenue that funds the Government and administers the
Nation's tax laws. It also works to protect Federal revenue by
detecting and preventing the growing risk of fraudulent tax refunds and
other improper payments.
The Department of the Treasury (Treasury) is in the process of
developing a new strategic plan for fiscal years 2018-2022. The IRS
will publish its fiscal year 2018-fiscal year 2022 strategic plan by
June 2018, which will serve as a roadmap to guide future IRS
operations. To achieve these goals, the proposed fiscal year 2018 IRS
budget requests appropriated resources of approximately $11 billion.\6\
The total appropriation amount is a decrease of $260 million, or 2.3
percent below the fiscal year 2017 enacted budget level of
approximately $11.2 billion.\7\ A comparison of next year's request
with the current budget is shown in Table 1.
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\6\ The fiscal year 2018 budget request also includes approximately
$122 million from reimbursable programs, $30 million from non-
reimbursable programs, $526 million from user fees, and $269 million in
available unobligated funds from prior years for a total amount of
$11.9 billion in available resources.
\7\ The fiscal year 2017 enacted budget of $11.2 billion includes
$290 million in Section 113 Administrative Provision funding in the
following amounts: $209 million in Taxpayer Services and $81 million in
Operations Support.
TABLE 1.--COMPARISON OF IRS FISCAL YEAR 2018 BUDGET REQUEST TO FISCAL YEAR 2017 ENACTED BUDGET LEVEL
[In thousands]
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Fiscal Year
Appropriations Account 2017 Enacted Fiscal Year $ Change % Change
Budget 2018 Request
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Taxpayer Services........................................ $2,365,544 $2,212,311 ($153,233) -6.5%
Enforcement.............................................. $4,860,000 $4,706,500 ($153,500) -3.2%
Operations Support....................................... $3,719,446 $3,946,189 $226,743 6.1%
Business Systems Modernization........................... $290,000 $110,000 ($180,000) -62.1%
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Total Appropriated Resources....................... $11,234,990 $10,975,000 ($259,990) -2.3%
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Source: IRS's Fiscal Year 2018 Budget Request, Operating Level Tables and Fiscal Year 2017 Enacted Budget.
The three largest appropriation accounts are Taxpayer Services,
Enforcement, and Operations Support. The Taxpayer Services account
provides funding for programs that focus on helping taxpayers
understand and meet their tax obligations, while the Enforcement
account supports the IRS's examination and collection efforts. The
Operations Support account provides funding for functions that are
essential to the overall operation of the IRS, such as infrastructure
and information services. Finally, the Business Systems Modernization
account provides funding for the development of new tax administration
systems and investments in electronic filing.
Appropriations Changes
As shown above, the Taxpayer Services, Enforcement, and Business
Systems Modernization appropriations decreased by $153 million, $154
million, and $180 million, respectively, for an overall decrease of
$487 million compared to the fiscal year 2017 level.
The IRS realigned approximately $179 million and 266 Full-Time
Equivalents (FTEs) \8\ from the Business Systems Modernization
appropriation to the Operations Support appropriation to address a
backlog of deferred information technology hardware and software
updates. The Business Systems Modernization appropriations request
decreased by 62 percent from fiscal year 2017.
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\8\ A measure of labor hours in which one FTE is equal to 8 hours
multiplied by the number of compensable days in a particular fiscal
year.
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As a result, the Operations Support appropriation request for
fiscal year 2018 increased by $227 million compared to the fiscal year
2017 level. The largest component of this increase is the realigned
funds of $179 million to address deferred information technology
updates. Overall, the IRS's fiscal year 2018 budget request reflects a
total decline of appropriated resources of $260 million compared to
fiscal year 2017.
challenges facing the irs
In this section of my testimony, I will briefly discuss several of
the key challenges now facing the IRS as it administers our Nation's
tax laws.
Security Over Taxpayer Data
As cybersecurity threats against the Federal Government grow,
protecting the confidentiality of taxpayer information will continue to
be a top concern for the IRS. The increasing number of data breaches in
the private and public sectors means more personally identifying
information than ever before is available to unscrupulous individuals.
Many of the data are detailed enough to enable circumvention of most
authentication processes. For example, in March 2017, as a result of
significant suspicious activity, the IRS announced that it was
deactivating its online Data Retrieval Tool (DRT) to protect sensitive
taxpayer data.
The DRT allows students and parents to access their adjusted gross
income (AGI) information from the IRS to complete the Free Application
for Federal Student Aid (FAFSA) by transferring the data directly into
their FAFSA application form from the IRS website. Identity thieves
used personal information of individuals that they obtained outside the
tax system to start the FAFSA application process form in an attempt to
secure the AGI tax information through the DRT. On March 3, 2017, the
IRS reported that they disabled the DRT due to privacy concerns and to
protect sensitive taxpayer data. As of April 25, 2017, the IRS reported
that it identified approximately 8,000 suspicious returns with refunds
issued totaling $32 million that it was reviewing for fraud. In
addition, as of May 16, 2017, the IRS reported it stopped 67,000 tax
returns filed in 2017, before refunds were issued, that appeared to
have been filed using stolen taxpayer identification information from
the incident. According to the IRS, they confirmed that 31,000 of those
tax returns were fraudulent because the true taxpayers indicated they
did not file them. The remaining 36,000 tax returns were still being
evaluated to determine if they were fraudulent.
Recently, TIGTA Special Agents conducted search warrants and
arrested two individuals for their use of stolen DRT information in
furtherance of a Stolen Identity Refund Fraud scheme. TIGTA is
conducting a joint investigation of this exploitation with IRS Criminal
Investigation and the Department of Education Inspector General.
The risk of unauthorized access to tax accounts will continue to be
significant as the IRS proceeds with its Future State initiative \9\
which includes expansion of online tools it makes available to
taxpayers. The IRS's goal is to eventually provide taxpayers with
dynamic online tax account access that includes viewing their recent
payments, making minor changes and adjustments to their tax accounts,
and corresponding digitally with the IRS. Increased online access will
increase the risk of unauthorized disclosure of tax data. As such, the
IRS's processes used to authenticate individuals' identities must
promote a high level of confidence that tax information and services
are provided only to individuals who are entitled to receive them.
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\9\ Preparing the IRS to adapt to the changing needs of taxpayers
is described generally as the IRS Future State initiative. A key part
of this effort is for taxpayers to have a more complete online
experience for their IRS interactions.
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TIGTA reported in November 2015 that the IRS had not established
effective authentication processes and procedures for its online
services.\10\ This includes not performing risk assessments when
required or, when performed, not ensuring authentication processes and
procedures are implemented that are commensurate with the assessed
level of risk. For example, we reported that the IRS did not complete
the required authentication risk assessment for its Identity Protection
Personal Identification Numbers (IP PIN) \11\ application. In March
2017, we further reported that the IRS also did not complete a
sufficient risk assessment for the IP PIN application after
discovering, on May 17, 2015, that this application had been breached
by unauthorized users.\12\
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\10\ TIGTA, Ref. No. 2016-40-007, Improved Tax Return Filing and
Tax Account Access Authentication Processes and Procedures Are Needed
(November 2015).
\11\ An IP PIN is a six-digit number assigned to taxpayers that
allows their tax returns/refunds to be processed without delay and
helps prevent the misuse of their Social Security Numbers to file
fraudulent Federal income tax returns.
\12\ TIGTA, Ref. No. 2017-40-026, Inconsistent Processes and
Procedures Result in Many Victims of Identity Theft Not Receiving
Identity Protection Personal Identification Numbers (March 2017).
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In addition, we reported that the level of authentication that the
IRS uses for its various services is not consistent, increasing the
risk of unscrupulous individuals accessing and obtaining personal
taxpayer information and/or defrauding the tax system. This was one of
the main factors in the Get Transcript breach in which hundreds of
thousands of tax accounts were accessed by unauthorized users. We
reported that the IRS assessed the risk of the Get Transcript
application as required but concluded that the risk was low to both the
IRS and taxpayers. As a result, the IRS implemented single-factor
authentication to access the Get Transcript application. The IRS now
knows that the authentication risk was in fact high to both the IRS and
taxpayers and should have required multifactor authentication.
We have an ongoing review of the online Transcript Delivery System,
which also provides access to tax return and tax account information,
to assess whether authentication controls protect against unauthorized
disclosure of tax information.\13\ We expect to issue our final report
in October 2017.
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\13\ TIGTA, Audit No. 201640032, Review of the IRS's Transcript
Delivery Service, report planned for October 2017.
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The IRS continues to take steps in response to TIGTA's
recommendations to provide for more secure authentication, including
strengthening application and network controls.\14\ However, we remain
concerned about the IRS's logging and monitoring abilities over all
connections to IRS online systems. We are currently assessing the IRS's
efforts to improve its authentication.\15\ This includes evaluating
whether the IRS has properly implemented secure eAuthentication in
accordance with Federal standards for public access to IRS online
systems and whether it has effectively resolved identified control
weaknesses. We expect to issue the final report in September 2017.
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\14\ TIGTA, Ref. No. 2016-20-082, Improvements Are Needed to
Strengthen Electronic Authentication Process Controls (September 2016).
\15\ TIGTA, Audit No. 201720004, Review of E-Authentication to IRS
Online Services, report planned for September 2017.
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Providing Quality Taxpayer Service
For the 2017 Filing Season, the IRS began accepting and processing
individual tax returns on January 23, 2017, as scheduled at five Wage
and Investment Division Submission Processing sites.\16\ As of May 5,
2017, the IRS received approximately 138.9 million tax returns--123.2
million (88.7 percent) were filed electronically and 15.7 million (11.3
percent) were filed on paper. The IRS has issued 101.6 million refunds
totaling approximately $281.7 billion.
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\16\ IRS Submission Processing sites in Fresno, California; Kansas
City, Missouri; and Austin, Texas, will process paper-filed and e-filed
tax returns. Sites in Andover, Massachusetts, and Philadelphia,
Pennsylvania, will process only e-filed tax returns.
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Similar to prior filing seasons, the IRS was challenged with the
implementation of new tax law changes. For the 2017 Filing Season, tax
law changes include the continued implementation of the Patient
Protection and Affordable Care Act and the Health Care and Education
Reconciliation Act of 2010 \17\ (collectively referred to as the
Affordable Care Act or ACA), and those provisions of the Protecting
Americans from Tax Hikes Act of 2015 \18\ (PATH Act) specifically
intended to reduce fraudulent and improper refundable credit claims.
TIGTA has multiple reviews \19\ to evaluate IRS actions to implement
key provisions of the PATH Act.
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\17\ Public Law No. 111-148, 124 Stat. 119 (2010) (codified as
amended in scattered sections of the U.S. Code), as amended by the
Health Care and Education Reconciliation Act of 2010, Public Law No.
111-152, 124 Stat. 1029.
\18\ Consolidated Appropriations Act of 2016, Public Law No. 114-
113, Div. Q, (2015).
\19\ TIGTA, Ref. No. 2017-40-042, Processes Do Not Maximize the Use
of Third-Party Income Documents to Identify Potentially Improper
Refundable Credit Claims (June 2017), TIGTA, Audit No. 201640023,
Individual Taxpayer Identification Number Deactivation Process, report
planned for August 2017; TIGTA, Audit No. 201740005, 2017 Filing
Season, report planned for September 2017; TIGTA, Audit No. 201740031,
Implementation of Refundable Credit Integrity Provisions Phase 2,
report planned for October 2017.
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Providing quality customer service that taxpayers expect will
continue to present significant challenges for the IRS. At the same
time the IRS is actively steering taxpayers to its website and other
online tools to obtain assistance, the IRS is continuing to cut its
traditional services. The IRS offers self-assistance options that
taxpayers can access 24 hours a day, seven days a week. The IRS reports
329.4 million visits to IRS.gov this filing season, as of May 6, 2017,
as well as continued increases in the use of various other social media
channels (e.g., Twitter, Facebook, and YouTube).
However, the IRS continues to receive many more calls than could be
answered. As of May 6, 2017, the IRS reports that 40.6 million call
attempts were made to its various customer service toll-free lines
during business hours from taxpayers seeking help to understand the tax
law and meet their tax obligations. A total of 19.6 million calls were
answered with automation, and telephone assistors answered nearly 11
million calls and provided a 78.9 percent Level of Service\20\ with a
6.9 minute Average Speed of Answer. In comparison, the Level of Service
for the 2016 Filing Season was 72 percent.
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\20\ The primary measure of service to taxpayers. It is the
relative success rate of taxpayers who call for live assistance on the
IRS's toll-free telephone lines.
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In addition to telephone assistance, many taxpayers also seek
assistance from one of the IRS's 376 Taxpayer Assistance Center (TAC)
walk-in offices. Although the IRS reported that it had 376 TACs for the
2017 Filing Season, 24 TACs were not open because they had not been
staffed. The IRS estimates that the number of taxpayers it will assist
at its TACs will continue to shrink this fiscal year. The IRS plans to
assist approximately 3.4 million taxpayers at the TACs in fiscal year
2017, which represents an approximately 23.6 percent decrease from
fiscal year 2016.
However, the IRS has implemented initiatives in an effort to better
assist those individuals seeking assistance from a TAC. For example, in
Calendar Year 2015, the IRS began providing services at select TACs by
appointment. For the 2017 Filing Season, the IRS has transitioned all
TACs to appointment service. The IRS reports that, as of April 29,
2017,\21\ IRS employees answered over 2.1 million calls from taxpayers
seeking to make an appointment, resulting in approximately 945,000 that
necessitated an appointment. The IRS notes that taxpayers who travel to
a TAC without an appointment are assisted if there is availability. As
of April 29, 2017, the IRS reported that they provided a walk-in
exception to the requirement for an appointment to nearly 264,000
taxpayers.
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\21\ For fiscal year 2017--October 1, 2016, through April 29, 2017.
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The IRS also offers Virtual Service Delivery, which integrates
video and audio technology to allow taxpayers to see and hear an
assistor located at a remote TAC. For the 2017 Filing Season, the IRS
is offering Virtual Service Delivery at 28 partner site locations,
which represents a decrease from the previous year when this service
was offered at 35 locations.\22\ The IRS reports that as of April 29,
2017,\23\ 1,673 taxpayers have used the service. Finally, the IRS has
an initiative to co-locate staff with the Social Security
Administration (SSA) to better assist taxpayers. For the 2017 Filing
Season, the IRS has placed employees in four SSA locations. TIGTA is
planning a follow-up audit to assess the IRS's efforts to expand
customer service options to taxpayers seeking face-to-face assistance.
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\22\ For the 2017 Filing Season, the IRS is no longer offering
Virtual Service Delivery at IRS locations. Access to this service is
only available through external partner locations.
\23\ For fiscal year 2017--October 1, 2016, through April 29, 2017.
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The IRS also continues to devote significant resources to assisting
victims of identity theft. Tax-related identity theft occurs when an
individual uses another person's name and Taxpayer Identification
Number (TIN) \24\ to file a fraudulent tax return. This adversely
affects the ability of innocent taxpayers to file their tax returns and
timely receive their tax refunds, often imposing significant financial
and emotional hardship. Individuals can also learn that they are
victims of employment-related identity theft if they receive a
notification from the IRS of an income discrepancy between the amounts
reported on their tax returns and the amounts employers reported to the
IRS.
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\24\ A nine-digit number assigned to taxpayers for identification
purposes. Depending upon the taxpayer, the number can be an Employer
Identification Number, a Social Security Number, or an Individual
Taxpayer Identification Number.
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In July 2015, the IRS created the Identity Theft Victim Assistance
(IDTVA) Directorate to combine into one directorate the skills of
employees working tax-related identity-theft cases in multiple
functions. In June 2017, we reported that the centralization of
identity theft victim assistance reduced case closure timeframes and
tax account errors.\25\ However, we also reported in March 2017 that
the IRS did not consistently update the tax accounts of victims to
ensure that IP PINs were generated as required.\26\ We identified more
than 2 million taxpayers for which the IRS did not update their tax
accounts even though they confirmed that the taxpayer was in fact a
victim of tax-related identity theft.
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\25\ TIGTA, Ref. No. 2017-40-036, Centralization of Identity Theft
Victim Assistance Reduced Case Closure Time Frames and Tax Account
Errors (June 2017).
\26\ TIGTA, Ref. No. 2017-40-026, Inconsistent Processes and
Procedures Result in Many Victims of Identity Theft Not Receiving
Identity Protection Personal Identification Numbers (March 2017).
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Our work has also identified that further improvements are needed
by the IRS to improve its assistance to victims of employment identity
theft. In August 2016, we reported that, during the period February
2011 to December 2015, the IRS identified almost 1.1 million taxpayers
who were victims of employment-related identity theft, but were not
notified of that fact.\27\ During this audit, the IRS announced that it
would reverse its existing position and would begin notifying victims
of employment identity theft in January 2017. However, the IRS plans to
limit its notification to only those newly identified victims and not
include the almost 1.1 million identified prior to January 2017. TIGTA
is currently conducting a review to assess the IRS's actions to notify
victims of identity theft, and we plan to issue our draft report in
November 2017.\28\
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\27\ TIGTA, Ref. No. 2016-40-065, Processes Are Not Sufficient to
Assist Victims of Employment-Related Identity Theft (August 2016).
\28\ TIGTA, Audit No. 201740033, Notification Letters to Victims of
Employment Identity Theft, report scheduled for November 2017.
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In June 2017, we further reported that the number of employment-
related victims is significantly greater than what the IRS
identified.\29\ For example, IRS processes do not identify employment
identity theft when processing paper tax returns. We reviewed a
statistically valid sample of paper tax returns filed in Processing
Year 2015 and projected that the IRS did not identify 272,416 victims
of employment identity theft for the 685,737 paper tax returns filed by
Individual Taxpayer Identification Number (ITIN) \30\ holders reporting
wages in Processing Year 2015. The IRS agreed to establish processes to
identify employment identity theft when processing paper tax returns.
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\29\ TIGTA, Ref. No. 2017-40-031, The Number of Employment-Related
Identity Theft Victims Is Significantly Greater Than Identified (June
2017).
\30\ The IRS created the ITIN to provide Taxpayer Identification
Numbers, when needed for tax purposes, to individuals who do not have
and are not eligible to obtain an SSN.
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Nonetheless, we have certain concerns with the IRS's response to
our June 2017 report. Management did not agree to establish a process
to notify the parents or legal guardians of 229,755 dependents whose
Social Security Numbers (SSN) were used by an ITIN filer to gain
employment. We believe the IRS has this capability and has taken this
action in other instances. For example, the IRS issued letters to the
parents or guardians of dependents involved in the Get Transcript
breach to notify them of the risk to their dependents' Personally
Identifiable Information.\31\
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\31\ Any information that, either alone or in combination with
other information, can be used to uniquely identify an individual.
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Detecting and Reducing Refund Fraud
For the 2017 Filing Season, the IRS transitioned fraud detection
and selection capabilities from the Electronic Fraud Detection System
(EFDS) to the Return Review Program (RRP). The IRS stated that the RRP
provides real-time new and improved capabilities in its fraud detection
and prevention processes. It should be noted that the IRS did not fully
retire the EFDS, as it continues to use the EFDS case management
functionality because the RRP does not have this capability. We have an
ongoing review to ensure that the EFDS fraud detection capabilities
were incorporated into the RRP.\32\
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\32\ TIGTA, Audit No. 201740029, Processing Year 2017 Fraud
Detection Activities, report planned for January 2018.
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Refund fraud continues to evolve and become more sophisticated for
both individual and business tax return filings. As such, the IRS will
need to continue to adopt strategies to address the perpetrators of
this crime. As of May 6, 2017, the IRS reported that it identified
195,941 tax returns with over $2.1 billion claimed in fraudulent
refunds and prevented the issuance of nearly $2 billion of those
refunds. The IRS continued to expand its processes to prevent
fraudulent tax returns from entering the tax processing system. For
example, as of May 15, 2017, the IRS locked approximately 33.9 million
taxpayer accounts of deceased individuals. The locking of a tax account
results in the rejection of an e-filed tax return and the prevention of
a paper-filed tax return from posting to the Master File if the SSN
associated with a locked tax account is used to file a tax return.
According to the IRS, as of April 30, 2017, it rejected 24,474
fraudulent e-filed tax returns and, as of May 4, 2017, it stopped 4,672
paper-filed tax returns from posting to the Master File.
Unscrupulous individuals stealing identities to file individual and
business tax returns for the sole purpose of receiving a fraudulent tax
refund continue to be prevalent. Our ongoing audit work shows that the
IRS is making progress in detecting fraudulent identity-theft tax
return filings. Most recently, we reported in February 2017 that IRS
efforts are resulting in improved detection of identity-theft
individual tax returns at the time returns are processed and before
fraudulent tax refunds are released.\33\
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\33\ TIGTA, Ref. No. 2017-40-017, Efforts Continue to Result in
Improved Identification of Fraudulent Tax Returns Involving Identity
Theft; However, Accuracy of Measures Needs Improvements (February
2017).
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For the 2017 Filing Season, the IRS used 197 identity-theft filters
to identify potentially fraudulent individual tax returns and prevent
the issuance of fraudulent tax refunds. These filters incorporate
criteria based on characteristics of confirmed identity-theft tax
returns, including amounts claimed for income and withholding, filing
requirements, prisoner status, taxpayer age, and filing history. Tax
returns identified by these filters were held during processing until
the IRS could verify the taxpayer's identity. As of April 29, 2017, the
IRS reported that it had identified and confirmed 75,797 fraudulent tax
returns and prevented the issuance of $581.6 million in fraudulent tax
refunds as a result of its identity-theft filters.
However, the IRS recognizes that new identity-theft patterns are
constantly evolving and that, as a result, it needs to continuously
adapt its detection and prevention processes. These evolving identity-
theft patterns affect not only individuals, but also businesses. The
IRS defines business identity theft as creating, using, or attempting
to use, a business's identifying information without authority, in
order to claim tax benefits. In September 2015, we reported that the
IRS recognized the growing threat of business-related identity theft
and, in response, was implementing processes to detect identity theft
on business returns at the time tax returns are processed.\34\ For
example, in response to TIGTA's recommendations, the IRS expanded its
filters to identify business identity theft for the 2017 Filing Season
and used 25 identity-theft filters to identify potentially fraudulent
business tax returns and prevent the issuance of fraudulent tax
refunds. As of June 1, 2017, the IRS reported that it had identified
and confirmed approximately 4,000 fraudulent tax returns for Tax Years
2015 and 2016 and prevented the issuance of $390 million in fraudulent
tax refunds as a result of these business identity-theft filters. TIGTA
is conducting a follow-up audit to assess the IRS's efforts to expand
on its processes and procedures to detect business identity theft.\35\
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\34\ TIGTA, Ref. No. 2015-40-082, Processes Are Being Established
to Detect Business Identity Theft; However, Additional Actions Can Help
Improve Detection (September 2015).
\35\ TIGTA Audit No. 201740037, Business Identity Theft Follow-Up,
report planned for May 2018.
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Finally, refund fraud associated with the use of prisoner SSNs
continues to remain a significant problem for tax administration. The
IRS identified more than 24,000 fraudulent tax returns using a prisoner
SSN in Calendar Year 2015. The refunds claimed on those tax returns
totaled more than $1.3 billion. Since 2005, my office has issued a
number of reports that address the IRS's efforts to identify and
prevent prisoner tax fraud. Although the IRS has taken a number of
steps to improve its processes in response to TIGTA's recommendations,
further improvements are needed in the IRS's identification of prisoner
returns.
To combat refund fraud associated with tax returns filed using
prisoner SSNs, the IRS compiles a list of prisoners (the Prisoner File)
received from the Federal Bureau of Prisons and State Departments of
Corrections. The Prisoner File is the cornerstone of the IRS's efforts
to prevent the issuance of fraudulent refunds to individuals filing
false tax returns using a prisoner SSN. To further its efforts to
identify prisoner tax returns, the Bipartisan Budget Act of 2013,\36\
enacted in December 2013, amended the Improper Payments Elimination and
Recovery and Improvement Act \37\ to authorize the IRS to use prisoner
information provided by the Social Security Administration (SSA). The
IRS is using the SSA prisoner file as part of the 2017 Filing Season
prisoner identification process.
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\36\ Public Law No. 113-67, Sec. 204.
\37\ Public Law No. 112-248, 126 Stat. 2390.
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In July 2017, we reported IRS processes do not effectively ensure
that the Federal Bureau of Prisons and the State Departments of
Corrections comply with prisoner reporting requirements.\38\ TIGTA
identified 861 prisons that reported to the SSA but did not report to
the IRS. TIGTA also identified 272,931 prisoners who were in Federal
Bureau of Prisons or State Departments of Corrections but were not
reported to the IRS. Approximately $48 million in potentially
fraudulent refunds were claimed by 16,742 individuals incarcerated in
institutions that did not report to the IRS.
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\38\ TIGTA, Ref. No. 2017-40-041, Actions Need to be Taken to
Ensure Compliance with Prisoner Reporting Requirements and Improve
Identification of Prisoner Returns (July 2017).
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In addition, we identified that the IRS processes to validate and
use prisoner data limits the ability to detect potentially fraudulent
tax returns. For example, the IRS does not use prisoner records where
the information provided by the reporting institutions for a prisoner
is not valid to process tax returns. As such, any return filed using
the mismatched prisoner information will not be evaluated for potential
prisoner fraud. Our review of the 1.1 million records that the IRS
identified as having a mismatch found 471,864 (41 percent) contained a
valid SSN (i.e., SSN was issued by SSA) in IRS files, which could be
indicative of a prisoner's use of a stolen SSN.
TIGTA also identified that the validation process incorrectly
identified 4,158 prisoner records as not matching IRS records when in
fact the information provided by the Federal Bureau of Prisons and
State Departments of Corrections did match IRS records. As a result,
any tax return filed using one or more of these prisoner identities
will not be assigned a prisoner indicator or evaluated using the
prisoner fraud filters. TIGTA identified 1,113 tax returns with refunds
totaling more than $1.7 million that were not identified as prisoner
tax returns as a result of this error.
Reducing Refundable Credit Improper Payments
Although refundable credits provide benefits to individuals, the
unintended consequence of these credits is that they can result in the
issuance of improper payments and can be the targets of unscrupulous
individuals who file erroneous claims. Refundable credits can result in
tax refunds even if no income tax is withheld or paid; that is, the
credits can exceed an individual's tax liability. Consequently, they
pose a significant risk as an avenue for those seeking to defraud the
Government.
The IRS issued an estimated $25 billion in potentially improper
Earned Income Tax Credit (EITC),\39\ Additional Child Tax Credit
(ACTC),\40\ and American Opportunity Tax Credit (AOTC) \41\ payments in
fiscal year 2016. This represents a significant loss to both the
Federal Government and taxpayers. TIGTA remains concerned with the
IRS's inability to significantly reduce these payments.
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\39\ The EITC was created in 1975 as part of the Tax Reduction Act
of 1975 Sec. 204, 26 U.S.C Sec. 32. The EITC is used to offset the
impact of Social Security taxes on low-income families and to encourage
them to seek employment.
\40\ The ACTC is intended to reduce the individual income tax
burden for families, better recognize the financial responsibilities of
raising dependent children, and promote family values.
\41\ The AOTC is intended to help offset the costs of higher
education for taxpayers, their spouses, and dependents who qualify as
eligible students.
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In April 2017, we reported that the IRS concluded that the ACTC and
AOTC presented a medium risk of improper payments for fiscal year
2016.\42\ However, the IRS's medium risk rating continues to be
contrary to its own compliance data, which shows in fact that both the
ACTC and AOTC programs present a high risk of improper payments. Our
review of these revised assessments found that they still do not
include the use of available IRS compliance data to quantify erroneous
payments. Because the IRS does not rate these programs as high risk, it
is not required to establish a corrective action plan to reduce the
improper payments.
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\42\ TIGTA, Ref. No. 2017-40-030, Revised Refundable Credit Risk
Assessments Still Do Not Provide an Accurate Measure of the Risk of
Improper Payments (April 2017).
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Using the IRS's own compliance data, we computed the fiscal year
2016 potential estimated improper payment rate for the ACTC and AOTC.
We estimate that 25.2 percent ($7.2 billion) of ACTC payments were
improper \43\ and 24.1 percent ($1.1 billion) in AOTC payments were
improper.\44\ The IRS is not required to perform a risk assessment of
the EITC because the EITC is designated as a high-risk program by the
Office of Management and Budget. For fiscal year 2016, the IRS
estimates EITC payments totaling $16.8 billion were issued improperly.
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\43\ We estimate that the potential ACTC improper payment rate for
fiscal year 2016 is between 22.7 percent and 27.8 percent and the
potential improper payment dollars is between $6.5 billion and $7.9
billion.
\44\ We estimate that the potential AOTC improper payment rate for
fiscal year 2016 is between 19.6 percent and 28.7 percent and the
potential improper payment dollars is between $900 million and $1.3
billion.
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Congress enacted the PATH Act on December 18, 2015, which includes
``program integrity provisions'' intended to reduce fraudulent and
improper EITC, Child Tax Credit,\45\ ACTC, and AOTC payments. For
example, one of the PATH Act's provisions is intended to ensure that
the IRS has the information and time needed to verify the income of
individuals claiming the EITC and ACTC before the related refund is
issued. According to the House Committee on Ways and Means, these
integrity provisions are projected to save roughly $7 billion over 10
years by reducing fraud, abuse, and improper payments in refundable
credit programs.
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\45\ A tax credit for families with dependent children that is used
to reduce the individual income tax burden for families, better
recognize the financial responsibilities of raising dependent children,
and promote family values.
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In September 2014,\46\ we reported that the IRS has developed a
strategy to reduce EITC improper payments. This strategy focuses on
early intervention to ensure that individuals who claim the credit are
in compliance with the EITC rules and includes education and outreach,
enforcement actions, a paid tax return preparer compliance initiative,
and legislative proposals. The IRS also performed compliance studies
which found that EITC improper payments primarily result from two root
causes--authentication and program design.
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\46\ TIGTA, Ref. No. 2014-40-093, Existing Compliance Processes
Will Not Reduce the Billions of Dollars in Improper Earned Income Tax
Credit and Additional Child Tax Credit Payments (September 2014).
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Authentication errors include errors associated with the lack of
available data to which the IRS can verify self-employment income,
authenticate qualifying children, and verify filing status.
Verification errors relate to instances in which the IRS's is unable to
identify underreporting and overreporting of income, and errors that
arise when more than one individual can claim a qualifying child. Our
analysis of Tax Year 2012 EITC claims, for which taxpayers claimed
wages as the source of income to support the EITC, identified 676,992
tax returns for which third-party Forms W-2 were not sent to the IRS by
the employer for either the taxpayer or spouse listed on the tax
return. These tax returns claimed EITCs totaling more than $1.7
billion.
However, as we continue to report, IRS compliance resources are
limited and consequently, the IRS does not address the majority of
potentially erroneous EITC claims. This is despite the fact that the
IRS has established processes that identify billions of dollars in
potentially erroneous EITC payments. Although the PATH Act gives the
IRS more time to verify EITC and ACTC claims before refunds are issued,
it did not expand the IRS's authority to systemically correct erroneous
claims at the time tax returns are processed. Currently, under the
Internal Revenue Code, the IRS's math error authority is limited to
systemically addressing erroneous EITC claims to correct mathematical
or clerical errors on such claims. For example, it can correct entries
made on the wrong line on the tax return or mathematical errors made in
computing income or the EITC. However, the majority of potentially
erroneous EITC claims that the IRS identifies do not contain the types
of errors for which it has math error authority. To address those
potentially erroneous EITC claims identified that cannot be addressed
using math error authority, the IRS must conduct an audit. The IRS
estimated that it costs $1.50 to resolve an erroneous EITC claim using
math error authority compared to $278 to conduct a pre-refund
audit.\47\
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\47\ Cost to use math error authority as of June 25, 2014, as
provided by the IRS. The IRS provided the cost of a pre-refund audit
based on fiscal year 2010 financial data, which is the most current
estimate available.
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The IRS, in conjunction with the Assistant Secretary of the
Treasury for Tax Policy, has each year since fiscal year 2013 set forth
a legislative proposal requesting additional error correction authority
as part of its annual budget submission. Such authority, if provided by
law, would allow the IRS to correct, during processing, tax returns
when the information provided by the taxpayer does not match the
information contained in Government databases (e.g., income information
reported on the tax return does not match Forms W-2 from the Social
Security Administration). Without this additional error authority,
billions of dollars in identified potentially erroneous claims will
continue to go unaddressed each year.
Tax Compliance
Despite IRS efforts to reduce it, the Tax Gap remains a serious and
persistent challenge. The IRS estimated that the average annual Tax Gap
for Tax Years 2008 through 2010 to be $458 billion. TIGTA reviews have
identified several areas that have contributed to the IRS's inability
to reduce the Tax Gap. For example, in September 2016 we reported that
nearly $9 billion in backup withholding tax was not withheld as
required by payers \48\ submitting information returns with missing or
incorrect TINs based on our review of TY 2013 information returns.\49\
Our review identified that the IRS's use of its authority provided by
law has been extremely limited. IRS management speculated that the
subsequent restructuring of the IRS in Calendar Year 1998, and other
reorganizations that have followed, have resulted in unintended gaps in
the enforcement of backup withholding as responsibilities were
separated among multiple programs/organizations without adequate
coordination. Enforcing payer backup withholding requirements is
essential to ensuring that the Government is able to collect taxes on
all appropriate income, particularly income that is not usually subject
to withholding.\50\
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\48\ ``Payers'' making certain payments to payees must withhold and
pay to the IRS a specified percentage of those payments under certain
conditions. For example, financial institutions (such as banks and
brokerage firms) are payers that are required to withhold taxes.
\49\ TIGTA, Ref. No. 2016-40-078, Due to the Lack of Enforcement,
Taxpayers Are Avoiding Billions of Dollars in Backup Withholding
(September 2016).
\50\ Examples include interest income, rents, royalties, and
certain gambling winnings.
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In addition, employment tax noncompliance is steadily growing. As
of December 2015, 1.4 million employers owed approximately $45.6
billion in unpaid employment taxes, interest, and penalties. In March
2017, TIGTA reported that the Trust Fund Recovery Penalty (TFRP) is an
enforcement tool the IRS can use to discourage employers from
continuing egregious employment tax noncompliance and provides an
additional source of collection for unpaid employment taxes.\51\ In
fiscal year 2015, the IRS assessed the TFRP against approximately
27,000 responsible persons--38 percent fewer than just 5 years before
as a result of a decline in the number of revenue officers. In
contrast, the number of employers with egregious employment tax
noncompliance (20 or more quarters of delinquent employment taxes) is
steadily growing--it has more than tripled in a 17-year period.
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\51\ TIGTA, Ref. No. 2017-IE-R004, A More Focused Strategy Is
Needed to Effectively Address Egregious Employment Tax Crimes (March
2017).
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We also reported in July 2017 that billions of dollars of potential
employer underreported taxes are not being addressed because most
discrepancy cases identified by the IRS are not worked.\52\ Discrepancy
cases result when employers' wage and withholding information reported
on filed Forms W-3/W-2 do not match what was reported on the employers'
employment tax return. Our analysis found that the IRS did not work
discrepancy cases that had a potential underreported total tax
difference of more than $7 billion.\53\ We plan to perform a separate
review to assess the IRS's actions to resolve these cases.
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\52\ TIGTA, Ref. No. 2017-40-038, Case Selection Processes Result
in Billions of Dollars in Potential Employer Underreported Tax Not
Being Addressed (July 2017).
\53\ This includes Social Security tax, Medicare tax and Federal
income tax.
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Telephone Impersonation Scam
Since the fall of 2013, a significant amount of our OI workload has
consisted of investigating a telephone impersonation scam in which over
2 million intended victims have received unsolicited telephone calls
from individuals falsely claiming to be IRS or Treasury employees. The
callers demand money under the pretense that the victim owes unpaid
taxes. To date, over 10,800 victims have reported to TIGTA that they
have been victims of this scam. Our investigations have determined that
victims have paid almost $58 million to the scammers.
The telephone impersonation scam continues to be one of TIGTA's top
priorities; it has also landed at the top of the IRS's ``Dirty Dozen''
tax scams. The numerous complaints we have received about this scam
have cemented its status as the largest, most pervasive impersonation
scam in the history of our agency. It has claimed victims in every
State.
Here is how the scam works: the intended victim receives an
unsolicited telephone call from a live person or from an automated call
dialer. The caller, using a fake name and sometimes a fictitious IRS
employee badge number, claims to be an IRS or Treasury employee. The
scammers use Voice over Internet Protocol technology to hide their
tracks and create false telephone numbers that show up on the victim's
caller ID system. For example, the scammers may make it appear as
though the calls are originating from Washington, DC, or elsewhere in
the United States, when in fact they may be originating from a call
center located in India.
The callers may even know the last four digits of the victim's SSN
or other personal information about the victim. The caller claims that
the intended victim owes the IRS taxes and that, if those taxes are not
paid immediately, the victim will be arrested or charged in a lawsuit.
Other threats for non-payment include the loss of a driver's license,
deportation, or loss of a business license. They often leave ``urgent''
messages to return telephone calls and they often call the victim
multiple times.
According to the victims we have interviewed, these scammers often
demand that the victims immediately pay the money using Apple iTunes
gift cards, Target gift cards, prepaid debit cards, wire transfers,
Western Union payments, or MoneyGram payments in order to avoid being
immediately arrested. They are typically warned that if they hang up,
local police will come to their homes to arrest them immediately.
Sometimes the scammers also send bogus IRS e-mails to support their
claims that they work for the IRS. By the time the victims realize that
they have been scammed, the funds are long gone.
TIGTA has made several arrests in connection with this scam and has
numerous investigations underway. In July 2015, in one of the largest
prosecutions on this scam that we have had to date, an individual pled
guilty to organizing an impersonation scam ring. He was sentenced to
over 14 years of incarceration and ordered to forfeit $1 million. In
October 2016, after an extensive 3-year investigation, TIGTA, the
Department of Justice, and the Department of Homeland Security
announced the indictment of 56 individuals and five call centers
located in India.
In April 2017, 10 individuals were charged in an indictment with
conspiracy to commit wire fraud in connection with this scam. The
defendants traveled to 30 different States to collect money wired by
unsuspecting taxpayers. Eight of the 10 individuals were arrested by
TIGTA special agents and our law enforcement partners. Using
approximately 80 different false identities, the defendants and their
coconspirators received monies totaling over $8.8 million from more
than 7,000 taxpayers.
Although the investigations and prosecutions have reduced the
number of scam calls being placed by over 90 percent, we are still
receiving reports that between 5,000 and 10,000 people are receiving
calls each week. Fortunately, thanks to extensive public outreach
efforts, some of which are described below, the vast majority of those
called are now simply hanging up on the scammers.
In addition to the criminal prosecutions, to thwart scammers using
robo-dialers, we have created and instituted an ``Advise and Disrupt''
strategy. The strategy involves cataloguing the telephone numbers that
have been reported by intended victims. We then use our own automated
call dialers to make calls to those telephone numbers to advise the
scammers that their activity is criminal and to cease and desist their
activity. Using this technique, we have placed more than 145,000
automated calls back to the scammers. We are also working with the
telephone companies to have the scammers' telephone numbers shut down
as soon as possible. Of the 1,253 telephone numbers that have been
reported by victims, we have successfully shut down 93 percent of them,
some of them within one week of the numbers having been reported to us.
TIGTA is also publishing those scam-related telephone numbers on
the Internet. This provides intended victims an additional tool to help
them determine if the call is part of a scam. All they have to do is
type the telephone number in any search engine, and the response will
indicate whether the telephone number has been identified as part of
the impersonation scam. These efforts are producing results; our data
show that it now takes hundreds of calls to defraud one victim, whereas
in the beginning of the scam it took only a double-digit number of
attempts.
Further, TIGTA is engaged in public outreach efforts to educate
taxpayers about the scam. These efforts include publishing press
releases, granting television interviews, issuing public service
announcements, and providing testimony to Congress. The criminals view
this scam as they do many others; it is a crime of opportunity.
Unfortunately, while we plan on arresting and prosecuting more
individuals, the scam will not stop until people stop paying the
scammers money. Our best chance at defeating this crime is to educate
people so they do not become victims in the first place. Every innocent
taxpayer we protect from this crime is a victory.
In 2015, a law was enacted that mandated the IRS's use of private
collection agencies (PCAs) to collect certain ``inactive receivables.''
\54\ Certain inventories were specifically excluded from the definition
of inactive receivables. \55\ TIGTA initiated an audit soon after the
enactment of the legislation to evaluate the IRS's establishment of
policies, procedures, and other infrastructure necessary to operate
this program, as well as to assess the IRS's efforts to mitigate risks
to the program.\56\ We have identified numerous concerns during our
audit, including the IRS's lack of commitment to assisting taxpayers
who may be concerned that the PCAs calling them are actually part of an
impersonation scam, as well as our concerns related to the IRS's
process for receiving taxpayer complaints about PCAs. In addition,
TIGTA is planning a future audit related to the operations of the
program, as well as a review evaluating the PCA contractors'
performance.
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\54\ Fixing America's Surface Transportation Act, Public Law No.
114-94, Div. C, Title XXXII, Sec. 32102,129 Stat. 1312, 1733-36 (2015),
codified in Internal Revenue Code (I.R.C.) Section (Sec. ) 6306. The
term ``inactive receivables'' means: receivables removed from active
inventory due to inability to locate the taxpayer; inventory in which
one-third of the collection statute of limitations has expired; or
assigned inventory in which more than 365 days have passed since
contact with the taxpayer occurred.
\55\ I.R.C. Sec. 6306(d) excludes inventory that is: subject to a
pending or active offer-in-compromise or installment agreement; is
classified as an innocent spouse case; or involves a taxpayer
identified as deceased, under the age of 18, in a designated combat
zone, a victim of tax-related identity theft, is currently under
examination, litigation, criminal investigation, or levy, or is
currently subject to a proper exercise of a right of appeal.
\56\ TIGTA, Audit No. 201630029, Planning and Implementation of the
IRS's Private Debt Collection Program, report scheduled for September
2017.
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TIGTA provided the IRS with insight on how the widespread IRS
impersonation scam might impact the Private Debt Collection program.
Specifically, based on what TIGTA learned during its investigation of
the impersonation scam, we provided the IRS with different ways it
could consider notifying taxpayers about the program and that their
accounts have been assigned to the PCAs. In addition, we have provided
integrity and safety briefings to the PCAs' employees. TIGTA will
closely monitor incoming impersonation complaints involving the PCAs,
and we will work to take appropriate action and notify the IRS, the
PCAs, and the public if we identify an impersonation scheme growing
within the Private Debt Collection program.
tigta budget request for fiscal year 2018
As requested by the subcommittee, I will now provide information on
TIGTA's budget request for fiscal year 2018.
TIGTA's fiscal year 2018 proposed budget requests appropriated
resources of $161,113,000, approximately a 5 percent decrease from the
fiscal year 2017 enacted budget. TIGTA will continue to focus on its
mission of ensuring an effective and efficient tax administration
system in this lean budget environment. The fiscal year 2018 budget
resources requested include funding to support TIGTA's critical audit,
investigative, and inspection and evaluation priorities, while still
enabling it to maintain a culture that continually seeks to identify
opportunities to achieve efficiencies and cost savings.
During fiscal year 2016, TIGTA's combined audit and investigative
efforts recovered, protected, and identified monetary benefits totaling
over $15.1 billion, including cost savings, increased revenue, revenue
protection,\57\ and court-ordered settlements in criminal
investigations, and affected approximately 1.1 million taxpayer
accounts. Based on TIGTA's fiscal year 2016 budget of $167 million,
this represents a Return on Investment of $90-to-$1.
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\57\ Recommendations made by TIGTA to ensure the accuracy of the
total tax, penalties, and interest paid to the Federal Government.
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TIGTA's Audit Priorities
TIGTA's audit priorities focus on assessing key areas in which the
IRS faces major risks, including the risk of unauthorized access to tax
account information, identity-theft detection and prevention, customer
service to taxpayers, the use of private debt collectors, and
international tax compliance.
TIGTA will continue to provide oversight related to cybersecurity.
The proliferation of data breaches reported in recent years and the
types of information available on the Internet has compromised the
effectiveness of controls used to authenticate individuals when they
access their account information. Providing taxpayers with more avenues
to obtain answers to their tax questions or access their own tax
records online also creates more opportunities for exploitation by
hackers and other fraudsters. TIGTA will evaluate the changes being
considered for authenticating taxpayer access to their account
information, the effectiveness of controls to mitigate external and
internal threats to IRS systems, the security of data file transfers to
third parties, and the effectiveness of controls to address
cybersecurity incidents.
Stopping identity theft and refund fraud also continues to be a top
priority for the IRS and for TIGTA in our oversight role. As identity-
theft patterns are constantly evolving, the IRS needs to continuously
adapt its detection and prevention processes. The risk for unauthorized
access to tax accounts for the purpose of filing fraudulent tax returns
will continue to grow as the IRS focuses its efforts on delivering
taxpayers self-assisted interactive online tools. Tax account
information obtained through unauthorized accesses, such as the Data
Retrieval Tool breach, can be used to file fraudulent tax returns that
more closely resemble a legitimate tax return, making it more difficult
for the IRS to detect. TIGTA will continue to assess the IRS's efforts
to detect refund fraud committed by identity thieves and authenticate
individual taxpayers' identities at the time tax returns are filed and
when services are provided.
Additionally, TIGTA will be auditing the IRS's implementation of
the new legislative requirement to mandate the use of PCAs to collect
inactive tax receivables. As mentioned previously, TIGTA has ongoing
audit work to address the IRS's use of PCAs. Further, pursuant to
I.R.C. Sec. 306(j), TIGTA will also biannually provide an independent
review of contractor performance.
International tax compliance also remains a significant area of
concern. As the IRS noted in its most recent strategic plan, the
evolution and proliferation of virtual commerce has expanded the
exchange of goods, services, and currencies--real and virtual--across
jurisdictions, further complicating tax administration. We will be
continuing to assess the IRS's compliance efforts in this area,
including its use of the tools that the law provides to assist in its
efforts. One of the most significant tools is the Foreign Account Tax
Compliance Act,\58\ which mandates reporting obligations for certain
U.S. taxpayers with foreign accounts and also provides for the sharing
of information between the U.S. and foreign financial institutions to
ensure compliance with those obligations.
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\58\ Public Law No. 111-147, 124 Stat. 71 (2010).
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TIGTA's Investigative Priorities
TIGTA's investigative priorities include investigating allegations
of serious misconduct and criminal activity by IRS employees; ensuring
that IRS employees are safe and that IRS facilities, data, and
infrastructure are secure and not impeded by threats of violence; and
protecting the IRS against external attempts to corrupt or otherwise
interfere with tax administration.
IRS employees are entrusted with the sensitive personal and
financial information of taxpayers. It is particularly troubling when
IRS employees misuse their positions in furtherance of identity theft
and other fraud schemes. TIGTA will continue to process and investigate
complaints from taxpayers, the Congress, and IRS employees and
managers, as well as continue to use sophisticated data mining tools to
proactively search for internal and external criminal activity. This
includes proactively reviewing the activities of the 56,000 IRS
employees who access taxpayer accounts for an indication of
unauthorized accesses that may be part of a larger identity-theft fraud
scheme.
Between fiscal years 2011 and 2016, TIGTA processed 14,095 threat-
related complaints and conducted 7,067 investigations of threats made
against IRS employees. TIGTA will continue to aggressively investigate
individuals who threaten the safety and security of the IRS and its
employees.
The recent large-scale cybersecurity incidents in which criminals
were able to obtain the information of hundreds of thousands of
taxpayers from IRS systems continue to be a major investigative focus
for our investigators. We are in the midst of a multi-agency
investigation into these incidents and we are, as able, sharing what we
are learning from these investigations with the IRS. As mentioned
earlier in my testimony, TIGTA has received almost 2 million reports
from taxpayers claiming that they were contacted by individuals
impersonating IRS employees in an effort to defraud them. TIGTA will
continue to investigate these crimes against taxpayers and alert the
public to this scam to ensure that taxpayers are not harmed by these
criminals.
We at TIGTA take seriously our mandate to provide independent
oversight of the IRS in its administration of our Nation's tax system.
As such, we plan to provide continuing audit coverage of the IRS's
efforts to operate efficiently and effectively and to investigate any
instances of IRS employee misconduct or other threats to tax
administration.
Chairwoman Capito, Ranking Member Coons, and Members of the
subcommittee, thank you for the opportunity to share my views.
RURAL IN-PERSON TAXPAYER SERVICES
Senator Capito. Thank you both very much for your opening
statement and I will begin the question portion. In your
opening statement, Commissioner, you talked about taxpayer
services and the ease at which to do an automated reply as
opposed to a person replying to an individual request for
assistance, how an auto--or how an online reply is much
cheaper. Obviously, we know that. Senator Manchin and I are
from a very rural State. We do have challenges on our broadband
deployment, deep challenges to our access.
And, you know, I guess I would put a plug in for that
person to person assistance still being a very vital part of
taxpayer services. How do you view this and how do you balance
it and what do you see for the future in terms of being able to
maintain that personal assistance?
Mr. Koskinen. It is an important issue. As I have said,
while we are trying to give taxpayers who would like to have an
online account equivalent to what they have already with their
banks or financial institutions, we are not like a bank or a
financial institution. We cannot take a group of customers and
say, ``Well, let's forget about them. They do not provide
enough revenue. They are difficult to deal with.''
We have an obligation we happily accept to deal with every
American to provide them communication opportunities in a way
that they desire. We have tried to make it clear as we are
moving people who want to be aligned with us in a digital
environment, that what that does is not cause us to do away
with call centers or taxpayer assistance centers. What it
allows us to do is provide better services on the phone and in
person for those people who need to be there, but also those
people who want to be there or have to be there.
This last year we had almost 88 percent of people file
electronically. That meant that we will receive 15 to 18
million paper returns. And if that is the easiest and most
appropriate way for people to file, we are happy to have them
do that. We recognize all of us know people who are either do
not have the availability to the Internet or have really a
great concern about using it and we are always willing and able
to provide them those services.
So going forward I would just stress we will always have
call services available. We will always have in person services
available because what will happen is we will be able to
provide those much better if, for instance, like Where's My
Refund, the application, we had 300 million hits on it. Those
used to be calls. They are no longer calls, so we can now deal
more effectively with people.
Senator Capito. Let me just say that the taxpayer advocate
and the assistance center that we have in Parkersburg, West
Virginia, a lot of times we will get calls into our office
asking for assistance and as soon as we call them they have
been very responsive. And I just want to thank them, and you
are the head of the ship there, so I want to thank them on my
behalf for West Virginians because I have--they have really--I
think they are sort of a hidden jewel in some ways. People do
not know they are there and can be accessed as quickly, so we
do know they are there and we appreciate they are there and I
am sure we keep them very busy, so thank you for that.
INCREASES IN THE NUMBER OF FILED RETURNS
I did notice in the paper the other day a little paragraph
that said more filings than ever had been filed at the IRS. Are
you familiar with that statistic?
Mr. Koskinen. Well, the number of individual tax returns
this year will be, we estimate, 152 million, so we are every
year getting more returns. When you go back to the famous 2010
which I keep citing, since then we have 10 million more
taxpayers. So part of our challenge is keeping up not only with
technology, it is keeping up just with the increased volume.
Senator Capito. And, Inspector General, you talked a lot
about cyber or security of data, and I shared a personal story
with you on the way in about an issue on something that I was
very familiar with. And you mentioned something to me I thought
was really interesting, that the more the agency changes, the
more the bad actor can change ahead of it. Are you satisfied
that the IRS is on the cutting edge of all of this or is it
more of a reactive situation?
Mr. George. Well, the IRS has certainly made progress in
this area and to its credit, we have not found a single
instance in which the IRS's systems itself have been breached,
so that is something that needs to be pointed out and lauded
and credit given to the IRS.
That said, it is imperative that taxpayers have complete
trust in the integrity or security of the information which
they provide to the Internal Revenue Service. And to that end,
there is still a major concern about the ability of the IRS to
authenticate who it is that they are dealing with as it relates
to tax information.
Now, authentication could be in the form of e-
authentication. As the IRS progresses to more online types of
activity, that presents a set of problems, but even prior to
that if an individual because they either rifled through
somebody's garbage or was able to convince someone in a
different forum completely to provide name, Social Security
Number, date of birth, they, in the past, have had the ability
to gain information from the IRS or engage in transactions that
they should not have or they should not be able to.
Now, in the context of the e-authentication, the IRS has
learned through trial and error that they need to do more
checking than just name, date of birth, Social Security Number.
There have to be a multi factor way of gaining information to
confirm that the person they are giving information to or
ultimately giving refunds to is a person who deserves that
information. So the bottom line is the more that the IRS does,
great, but again, the bad guys are still very aggressive----
Senator Capito. Right.
Mr. George [continuing]. And there is an international
problem.
Senator Capito. Right. Thank you.
Senator Manchin.
Senator Manchin. Inspector George, what is the greatest
risk facing IRS today and what can Congress do to support the
mitigation of these risks?
Mr. George. That is a massive area in which to address your
question.
Senator Manchin. You have got about 30 seconds.
Mr. George. Oh, well, and I would then point to
authentication now, sir. And, again, I do not need to repeat
everything I have just said, but so----
Senator Manchin. Sure. I know that. That is the greatest
risk?
Mr. George. That, in my view, yes.
Senator Manchin. Okay. And to Commissioner----
Mr. George. Oh, excuse me. I am sorry. With the addition of
additional resources, sir. It is imperative that taxpayers be
able to comply with their tax obligation. And if the tax code
is too complicated or if they cannot get through to the IRS to
try to get a simple question answered, they are less likely to
comply than if the opposite were the case.
IRS USE OF MAIL TO COMMUNICATE WITH TAXPAYERS
Senator Manchin. Thank you. And, Commissioner, you know,
Senator Capito just touched on it. In rural American, rural
West Virginia, sometimes broadband is not what it could be and
should be and people are unfamiliar or not comfortable, elderly
population. So I appreciate, you know, you all still
understanding the importance of us receiving the mail and
working through the traditional lines of communication.
Mr. Koskinen. No, I understand. Chairman, I grew up in
Ashland, Kentucky, not far from you.
Senator Manchin. You are right across the river.
Mr. Koskinen. So those are people I understand and----
Senator Manchin. Well, however they are--well, it is still
frustrating to many the way that we communicate by mail. Ten
percent of our IRS notices do not reach their intended
audience, which represents a total failure of communications at
roughly twice the industry average. When a taxpayer receives a
notice, it is often an indecipherable block of text using stock
language and no visual or graphical clues as to what the
taxpayer should do or why.
Moreover, ISR plans to address its high failure rate which
involved moving to online communications are destined to be
incomplete solutions at best because of what we just talked
about.
Mr. Koskinen. Right.
Senator Manchin. So my recommendation, for what it would be
worth to the IRS, is to learn from the best practices as used
in industry. When we all get statements from credit card or our
utilities, they use a colored modern, iconographic in a clear
text because the credit card utility knows it is in the best
interest for all of us for me to be able to understand the
information. So does the IRS have plans to implement color and
iconographic in order to make its notices more understandable
to this population we just spoke about?
Mr. Koskinen. At this point, we are looking at--we have had
a longstanding plain English goal, to have--when you get a
letter from the IRS, be clear----
Senator Manchin. Make sense.
Mr. Koskinen [continuing]. Why you are getting the letter.
We are not at the stage of going to color. Again, that is a
resource issue as much as anything. We have an antiquated
system. We have applications that----
Senator Manchin. Right.
Mr. Koskinen [continuing]. Were running when John F.
Kennedy was President, but it is critical and I think your
point is well taken that when people get a notice from us, it
should not be unnecessarily confusing or unnecessarily
frightening. It ought to say, ``You are getting this letter for
the following reason.'' Our experience has been even when we
are sending just an update notice to people that they have had
a mistake and in the future they should ignore it. Whatever we
say when even we say, ``This is just for information,'' people
always call us. We expect that probably half the people who get
any communication will call, and that is appropriate, but what
is most important is for the letter to be clear, for the notice
to be understandable by anyone.
Senator Manchin. What about the 10 percent that are not
even receiving their notices by mail?
Mr. Koskinen. Well, our biggest problem is people move. It
used to be that 20 percent of people moved every year. It has
dropped somewhat because people are less mobile than they used
to be, but they will often leave a forwarding address for the
post office, but we never quite get that notice. And so it is a
problem, and especially when we are trying to provide
information to taxpayers, knowing where they are and where they
were last year is important to us.
TAX ADMINISTRATION IN THE GIG ECONOMY
Senator Manchin. My final question is going to be about the
gig economy----
Mr. Koskinen. Yes.
Senator Manchin [continuing]. Because it is a whole other
challenge. And where many people are freelance drivers with
Uber or Lyft or freelance innkeepers with Airbnb, the nature of
employment has drastically shifted, as we all know. In addition
to the labor and benefits concerns this shift has created, we
must also find a way to classify this type of work that both
adjusted to growing portions of Americans engaging in this work
and is appropriate for the workers themselves. So how does the
Treasury and the IRS plan to ensure fair tax treatment for the
incomes of those engaged in the new gig economy?
Mr. Koskinen. It is an important question. It is a growing
area of the economy. Many of the people in that economy,
whether they are in Airbnb, Uber, or Lyft, whatever it might
be, do not realize they are in fact taxpayers and if you make
money, you are supposed to pay taxes on it. So over a year ago
we put up a special section of our website that said, you know,
if you are in the gig economy here are obligations. Here is
advice as to how you can in fact make sure you have good
records, make sure that you are in fact meeting your
obligations, and what you do not have to do.
One of the things worth looking at is whether for people
who are regularly in that business even on an irregular basis,
whether if they got a 1099 at the end of the year it would help
them understand how much revenue they had and if they kept good
records and we tried to help them with that, they would know
what their expenses were and they would know what their tax
obligation was. Most people want to be compliant, so part of
our jobs is trying to help them understand what their tax
obligations are and then try to make it as easy as we can for
them to meet those obligations.
TAX COMPLIANCE IN THE DIGITAL ECONOMY
Senator Manchin. I know I am out of time here real quickly,
but since it is just the two of us, maybe I can have some
exception here. Finding some of these people, let us say that
some of them just do not know, just do not understand. They
have to get a business license usually, whether it be Airbnb. I
am sure you have to have a business license to be an Uber
driver, is that correct?
Mr. Koskinen. Well, I am not sure. It is a matter of State
law. They have to have a driver's license obviously.
Senator Manchin. Right.
Mr. Koskinen. But we do not have control over whether they
have a business license.
Senator Manchin. Do we know that from you alls--I am sure
you are auditing Uber. You are going to hit the big boys, I
would think.
Mr. Koskinen. Yeah. So, no, no. We obviously track that,
but in terms of licensing, that is really a State and local
issue as to what business license they have.
Senator Manchin. So, so----
Mr. Koskinen. If you are renting your house out, it is a
question of what the local business license and requirements
are.
Senator Manchin. But if I am renting it through Airbnb who
you are going to be targeting because you know who they are----
Mr. Koskinen. Yes.
Senator Manchin [continuing]. Do you all not check in to
find out how the people register? If I want to be a part of
Airbnb and on their Internet, that I had to have a license, am
I filing and?
Mr. Koskinen. No. We actually are happy to have you file
whether you are properly licensed or not.
Senator Manchin. Oh, I know----
Mr. Koskinen. What our job is----
Senator Manchin [continuing]. That, but again, coming from
a rural State, sometimes we would prefer not to.
Mr. Koskinen. I understand that. So that is again why one
of our thoughts is with----
Senator Manchin. Can you catch me if I prefer not to?
Mr. Koskinen. With the coordinating bodies at Uber, the
headquarters and that, if they provided 1099s to you, they
would be providing 1099s to us as well. And having that third
party information, we do have a reasonable number of people
every year who are non-filers. And we know that because we get
third party information. And with those people, we reach out to
them. Sometimes we----
Senator Manchin. The only thing I would say to that is that
when I was Governor of the State of West Virginia and we had
budget constraints and we would have to adjust our budgets a
little bit, I never would cut back on my auditing staff. I
would always increase their budget because for every dollar I
spent, I got $100 in return. So I made sure that we were
auditing and targeting and making sure those people----
Mr. Koskinen. Yes.
Senator Manchin [continuing]. Were paying. And the big guys
are who you can hit who basically I have got to be connected in
to them one way or another. And I am using the Uber or Lyft----
Mr. Koskinen. Right.
Senator Manchin [continuing]. Or Airbnb because----
Mr. Koskinen. It is one of my great concerns, and as I am
leaving, I am trying to make sure everybody understands that
concern at your point.
Senator Manchin. Well, continue to keep----
Mr. Koskinen. People want to be compliant.
Senator Manchin. Continue to keep helping us.
TAX COMPLIANCE RATES
Mr. Koskinen. Right. People want to be compliant, but part
of the reason people are compliant is because they think the
system is fair, fair in the sense that everybody is paying.
Senator Manchin. Sure.
Mr. Koskinen. To the extent that our audit rate drops from
1.2 to .5, we do not have the resources, in fact, to track the
people who are trying not to be compliant. At some point, it is
corrosive to compliance.
Mr. George. And I would just simply not too, add to what
the Commissioner stated, Senator, we have had numbers that
demonstrated that when income is reported by a third party via
1099 or other source, compliance rates are in the upper 90
percent, but when people operate on a cash only basis, the
compliance rate falls dramatically, meaning 20 percent, around
that area. So that is the key issue that we have raised.
Senator Capito. Thank you. Well, I thank you all for
participating and preparing for this. I will have to say as a
recipient of a letter from the IRS, we all recognize that black
and white print and the little envelope, who it is from, and so
I appreciate your service to the IRS and to this country. And
if we do not meet again, I want to thank you for your service.
I appreciate hearing from the top officials at Treasury,
IRS, and Inspector General's office and having the opportunity
to explore a number of important issues. Today's discussion
will be helpful as we look at the 2018 funding, so at this time
I ask unanimous consent that a statement by the taxpayer
advocate, Nina Olson, be included for the hearing record. Since
I am the only one here, I will give myself unanimous consent.
[The statement follows:]
Prepared Statement of Nina E. Olson, National Taxpayer Advocate
Chairman Capito, Ranking Member Coons, and distinguished Members of
this subcommittee:
Thank you for inviting me to submit this statement regarding the
proposed budget of the Internal Revenue Service for fiscal year
2018.\1\
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\1\ The views expressed herein are solely those of the National
Taxpayer Advocate. The National Taxpayer Advocate is appointed by the
Secretary of the Treasury and reports to the Commissioner of Internal
Revenue. However, the National Taxpayer Advocate presents an
independent taxpayer perspective that does not necessarily reflect the
position of the IRS, the Treasury Department, or the Office of
Management and Budget. Congressional testimony requested from the
National Taxpayer Advocate is not submitted to the IRS, the Treasury
Department, or the Office of Management and Budget for prior approval.
However, we are providing courtesy copies of this statement to both the
IRS and the Treasury Department.
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The collection of revenue for the U.S. Government is a critical
job, and the IRS has been forced to do it with substantially reduced
resources in recent years. From fiscal year 2010 through fiscal year
2017, we estimate the IRS's budget has been reduced by nearly 20
percent on an inflation-adjusted basis.
The combination of reduced resources and more work has eroded the
IRS's ability to serve taxpayers and promote voluntary compliance. The
additional $290 million in funding that Congress provided in fiscal
year 2016 and fiscal year 2017 has been very helpful, and because of
it, the IRS has done a much better job of answering taxpayer telephone
calls than it did in fiscal year 2015. But taxpayer service is still
not what it should be.
Partly because of resource constraints and partly because the IRS,
like all large organizations, engages in long-term planning, the agency
has developed a ``Future State'' plan that envisions how it will
operate in 5 years and beyond. While I have previously expressed and
continue to harbor concerns about aspects of the plan, I commend the
agency for the time and effort it has put into this planning, and I
encourage a continuing dialogue about refining the plan so that it
reflects the needs and preferences of U.S. taxpayers.
To improve taxpayer service, I recommend the IRS take the following
steps:
1. Continue to expand its digital service offerings but
simultaneously ensure that in-person and telephone services remain
available for tens of millions of taxpayers who require or prefer to
interact with the IRS in those ways.
2. Improve its telephone technology.
3. Answer a broader range of tax-law questions during the filing
season--and throughout the year.
4. Improve the level of service on its ``Installment Agreement/
Balance Due'' telephone line.
5. Establish a telephone line to answer questions about the
eligibility and computational rules for the earned income tax credit
(EITC).
6. Serve taxpayers without appointments at its Taxpayer
Assistance Centers (TACs).
7. Expand outreach and education, particularly to small
businesses, to improve tax compliance.
8. Assign at least one Appeals Officer and one Settlement Officer
to every State.
9. Mail monthly bills to taxpayers who owe money, as private
sector businesses routinely do.
10. Assign a single employee to work complex identity theft cases
and correspondence examinations where a taxpayer calls the IRS or
submits documentation.
11. Reduce the false positive rates produced by its identity theft
and anti-fraud filters.
In the following pages, I will provide additional information
regarding these recommendations. I believe the rationale for each one
is strong and that most can be implemented immediately. In a few cases,
however, it may be appropriate for the IRS to conduct a research study
or pilot, in collaboration with the National Taxpayer Advocate, before
moving to full implementation.
In addition, I recommend that the subcommittee continue to provide
minimum funding levels in the Financial Services and General Government
bill for the Tax Counseling for the Elderly (TCE) program, the Low
Income Taxpayer Clinic (LITC) program, the Community Volunteer Income
Tax Assistance (VITA) program, and the Taxpayer Advocate Service (TAS).
In the case of the TCE, LITC, and Community VITA programs, a minimum
funding level helps ensure that low income and elderly taxpayers
receive the service and support they need when filing their tax returns
and working with the IRS to resolve disputes. In the case of TAS, a
minimum funding level helps ensure that TAS can fulfill its statutory
mission as a ``safety net'' for taxpayers who are experiencing a
``significant hardship'' \2\ and helps protect TAS's independence in
advocating for taxpayers both individually and systemically.\3\
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\2\ See Internal Revenue Code (IRC) Sec. 7811(a)(2) (defining the
term ``significant hardship'').
\3\ See IRC Sec. 7803(c)(2)(A) (functions of TAS) and
Sec. 7803(c)(4) (independence of TAS).
I. The IRS Should Continue to Expand Its Digital Service Offerings But
Simultaneously Ensure That In-Person and Telephone Services
Remain Available for Taxpayers Who Require or Prefer to
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Interact with the IRS in Those Ways.
A central component of the IRS's ``Future State'' plan is to
migrate taxpayers away from interacting with the agency by phone or in
person and toward interacting with the agency through online accounts.
I believe online accounts are a beneficial addition to the IRS's
service offerings; in fact, I have advocated in the past that the IRS
develop online accounts.\4\ However, online accounts should be viewed
as a supplement to, not a replacement for, telephone and in-person
assistance, as it is clear that many taxpayers either cannot utilize
online accounts or do not feel comfortable using them for complex
transactions.
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\4\ See, e.g., National Taxpayer Advocate 2013 Annual Report to
Congress, vol. 2, at 67-96 (Research Study: Fundamental Changes to
Return Filing and Processing Will Assist Taxpayers in Return
Preparation and Decrease Improper Payments).
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During 2016, TAS undertook a series of steps to learn more about
taxpayer needs and preferences. I myself traveled the country and held
12 Public Forums on Taxpayer Needs and Preferences.\5\ Together with
Members of Congress, I heard directly from taxpayers and their
representatives about the challenges they face in complying with the
tax laws and dealing with the IRS.\6\ TAS also held focus groups
consisting of tax return preparers and practitioners at the IRS Tax
Forums.\7\ Additionally, TAS conducted a nationwide survey of U.S.
taxpayers to hear directly what they need in the way of taxpayer
service.\8\ Finally, my immediate staff identified significant research
on topics that have relevance for tax administration, including
approaches to voluntary compliance, worldwide taxpayer service,
alternative dispute resolution, taxpayer rights, fraud detection,
online accounts, and the impact of geographic presence and focus.\9\
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\5\ See National Taxpayer Advocate 2015 Annual Report to Congress
xv. National Taxpayer Advocate Public Forums were held in the following
locations: Washington, District of Columbia (February 23, 2016); Glen
Ellyn, Illinois (March 9, 2016 with Congressman Roskam); Bronx, New
York (March 18, 2016 with Congressman Serrano); Hendersonville, North
Carolina (April 4, 2016 with Congressman Meadows); Harrisburg,
Pennsylvania (April 8, 2016); Red Oak, Iowa (May 5, 2016 with Senator
Grassley); Baltimore, Maryland (May 13, 2016 with Senator Cardin);
Washington, District of Columbia (May 17, 2016); Parma, Ohio (August
16, 2016 with Congressman Renacci); Portland, Oregon (August 18, 2016);
Los Angeles, California (August 22, 2016 with Congressman Becerra); and
San Antonio, Texas (August 30, 2016 with Congressman Doggett).
\6\ For information about, and full transcripts from, the National
Taxpayer Advocate Public Forums, see https://taxpayeradvocate.irs.gov/
public-forums (last visited April 25, 2017).
\7\ TAS Communications and Liaison, 2016 IRS Nationwide Tax Forums
TAS Focus Group Report: Preparers' Thoughts About IRS's Proposed Future
State (October 2016), https://taxpayeradvocate.irs.gov/Media/Default/
Documents/ResearchStudies/2016_TaxForum_Future
State_FocusGroup_Report.pdf.
\8\ See National Taxpayer Advocate 2016 Annual Report to Congress,
vol. 2, at 1-30 (Research Study: Taxpayers' Varying Abilities and
Attitudes Toward IRS Taxpayer Service: The Effect of IRS Service
Delivery Choices on Different Demographic Groups).
\9\ These literature reviews are published in Volume 3 of the
National Taxpayer Advocate's 2016 Annual Report to Congress.
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Based on what we learned about taxpayer needs and preferences and
in light of the IRS's data security protections, we believe taxpayer
demand for telephone service and in-person service is not likely to
diminish in the near future. First, many taxpayers have technology
limitations. Approximately 33 million U.S. taxpayers have no broadband
access,\10\ and taxpayers with Internet service connections slower than
broadband will likely experience delays when attempting to access large
files or complex web pages. Further, we estimate 14 million U.S.
taxpayers have no Internet access at all.\11\
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\10\ See National Taxpayer Advocate 2016 Annual Report to Congress,
vol. 2, at 1-30 (Research Study: Taxpayers' Varying Abilities and
Attitudes Toward IRS Taxpayer Service: The Effect of IRS Service
Delivery Choices on Different Demographic Groups).
\11\ Id. TAS survey research also found that such vulnerable groups
as the low income, seniors, and taxpayers with disabilities are less
likely to have broadband access at home.
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Second, many taxpayers--even millennials with strong computer
skills and access--do not feel comfortable using online accounts to
handle complex matters. While these taxpayers readily use the Internet
to download tax forms or seek out instructions, many report that they
want to speak with an employee when dealing with account-specific
matters, such as an audit or an identity-theft problem.
Third, the IRS has imposed stringent authentication requirements
that taxpayers must satisfy when attempting to create online accounts.
As a result, most taxpayers cannot establish an online account. As of
July 22, 2017, of the nearly 2.2 million account registration attempts
since the online account application launched, only about 22 percent
were successful.\12\ I am not suggesting that the IRS reduce its
security protections. I believe protecting the security of taxpayer
information is absolutely essential. However, the IRS must recognize
that providing necessary security has implications for how many
taxpayers will be able to access online accounts and how many will need
to use other service channels, such as telephones or TACs.
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\12\ IRS, Wage and Investment Division, Joint Operations Center
(JOC), Online Account External Launch Weekly Report (week ending July
22, 2017).
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For these reasons, I urge the IRS to continue to maintain high
levels of service on its telephone lines and in its TACs. The IRS
should not assume it can reduce these services--even over the long-
term--unless and until it sees that taxpayers are willingly and
comfortably migrating to online services and the demand for telephone
and in-person assistance is diminishing. In my view, it is not clear
this will happen. The tax law is complex, and the consequences of
making a mistake on one's tax returns are considerable. Therefore, many
taxpayers will continue to want to speak with an IRS employee, so they
can ask follow-up questions and be certain they understand the answers.
By maintaining and strengthening the ability of taxpayers to obtain
assistance by telephone and in person as well as online, the IRS would
further the provision in the Taxpayer Bill of Rights that taxpayers
have ``The Right to Quality Service.'' \13\
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\13\ ``The Right to Quality Service'' is one of the ten rights
included in the Taxpayer Bill of Rights that the IRS adopted in 2014
and that Congress cross-referenced in subsequent legislation. See IRS,
Taxpayer Bill of Rights, https://www.irs.gov/Taxpayer-Bill-of-Rights;
see also Consolidated Appropriations Act, 2016, Public Law No. 114-113,
Division Q, Sec. 401 (2015) (codified at IRC Sec. 7803(a)(3)).
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II. The IRS Should Improve Its Telephone Technology.
The IRS receives more than 100 million telephone calls every year,
yet its telephone technology is old and prevents it from serving
taxpayers efficiently. The IRS should conduct a study of best practices
and technology in private industry call centers and then develop a plan
to modernize its telephone operations.
One example of a technology improvement would be the addition of
customer callback technology. Many private businesses and Federal
agencies, including the Social Security Administration and the
Department of Veterans Affairs, have deployed customer callback systems
that allow callers to choose between waiting on hold and electing to
receive a call back when their place in the telephone queue is
reached.\14\ We believe a customer callback system would substantially
improve the taxpayer experience at a reasonable cost.
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\14\ See Government Accountability Office (GAO), GAO-17-140,
Financial Audit: IRS's fiscal years 2016 and 2015 Financial Statements
116-117 (November 2016).
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In the President's fiscal year 2015 and fiscal year 2016 budgets,
the IRS proposed this initiative and estimated it would cost about $3.3
million.\15\ In November 2015, Commissioner Koskinen said that although
the customer callback technology itself would cost about $3.5 million,
the IRS had determined its phone system would need to be upgraded at a
cost of about $45 million to allow the customer callback technology to
run.\16\
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\15\ IRS, Congressional Justification for Appropriations
accompanying the President's fiscal year 2015 budget at IRS-20 (2014);
IRS, Congressional Justification for Appropriations accompanying the
President's fiscal year 2016 budget at IRS-22 (2015).
\16\ See Lisa Rein, IRS Customer Service Will Get Even Worse This
Tax Filing Season, Tax Chief Warns, Washington Post.com, November 3,
2015.
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Even if that is accurate, we think customer callback technology
would be a prudent investment. For context, the IRS's fiscal year 2016
budget proposal requested about $186 million to increase the Level of
Service (LOS) on its toll-free lines to 80 percent.\17\ The significant
majority of that funding would have paid for additional customer
service representatives and other costs that recur annually. By
contrast, the deployment of a customer callback system would
essentially be a one-time cost, and it would permanently improve the
IRS's LOS.
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\17\ IRS, Congressional Justification for Appropriations
accompanying the President's fiscal year 2016 budget at IRS-22 (2015).
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It should be emphasized that a high percentage of taxpayers who
don't reach the IRS on their first attempt keep calling until they get
through. The LOS during fiscal year 2016 averaged 53 percent, and those
taxpayers who managed to reach an IRS telephone assistor had to wait an
average of 18 minutes on hold.\18\
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\18\ IRS, JOC, Snapshot Reports: Enterprise Snapshot--Accounts
Management lines (week ending September 30, 2016).
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With customer callback technology, unsuccessful calls would be
substantially reduced--as would hold times. Most taxpayers would only
have to call the IRS once. Thus, this one-time cost would improve
taxpayer service and substantially increase the LOS for years into the
future.
In my view, customer callback would substantially strengthen the
IRS's telephone operations, and there likely are other improvements the
IRS can make. The IRS should develop a detailed plan to modernize its
telephone operations.
By improving its telephone technology to better serve taxpayers,
the IRS would further the provision in the Taxpayer Bill of Rights that
taxpayers have ``The Right to Quality Service.''
III. The IRS Should Answer a Broader Range of Tax-Law Questions During
the Filing Season--and Throughout the Year.
When a government asks its citizens to pay over large portions of
their income, it has a responsibility to make the process of doing so
as simple and painless as possible. One way to do this is to answer
questions about how to comply with the requirements of computing and
paying taxes. Given the complexity of the Internal Revenue Code, U.S.
taxpayers understandably have a lot of questions.
Beginning in 2014, largely citing funding limitations, the IRS
sharply curtailed the scope of tax-law questions it would answer. It
now answers only ``basic'' questions during the filing season. It does
not answer tax-law questions at all after the filing season, including
from the more than 15 million taxpayers who file their returns later in
the year.\19\ This policy applies both on the IRS's telephone lines and
in its TACs.
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\19\ During 2016, the IRS received nearly 137 million tax returns
by April 22 and nearly 153 million by December 30, indicating that
nearly 16 million returns were received after the filing deadline. See
IRS Filing Season Statistics (weeks ending April 22, 2016, and December
30, 2016).
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In my view, answering tax-law questions is a fundamental
responsibility of a governmental tax agency, and the IRS's
unwillingness to do more constitutes a breathtaking abdication of a
core responsibility of tax administration.
By helping taxpayers comply with the tax laws by answering their
basic and more complex tax-law questions throughout the year, the IRS
would further the provisions in the Taxpayer Bill of Rights that
taxpayers have ``The Right to Quality Service'' and ``The Right to Be
Informed.''
IV. The IRS Should Improve the Level of Service on Its ``Installment
Agreement/Balance Due'' Telephone Line.
Among the IRS's many telephone lines, one important one is the
``Installment Agreement/Balance Due'' line. During the 2017 filing
season, the IRS received about 2.7 million calls on this line. For the
most part, these calls come from taxpayers who are seeking to make
payment arrangements--the sort of calls most private businesses would
pick up in a heartbeat. Yet the IRS answered only 40 percent of these
calls, and the average wait time among taxpayers who got through was a
staggering 47 minutes.
The IRS's performance on this telephone line deteriorated markedly
as compared with the 2016 filing season. In 2016, the IRS answered 76
percent of these calls, and the wait time was 11 minutes. Thus, the
percentage of calls the IRS answered from taxpayers seeking to make
payment arrangements on this line during the 2017 filing season dropped
nearly in half as compared with last year, and wait times were more
than four-fold.\20\
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\20\ IRS, JOC, Snapshot Reports: Product Line Detail, Installment
Agreement/Balance Due (week ending April 22, 2017).
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The poor service on this and certain other telephone lines is
largely budget-driven. The additional funding the IRS has received over
the last 2 years to improve telephone service has been helpful but
limited, and the IRS has used that funding primarily to improve service
on its core filing season telephone lines. Still, both to improve both
taxpayer service and revenue collection, the IRS must do a much better
job of answering telephone calls from taxpayers who owe money and are
seeking information to enter into payment arrangements.
By promptly answering telephone calls from taxpayers seeking to pay
their debts through installment agreements, the IRS would further the
provisions in the Taxpayer Bill of Rights that taxpayers have ``The
Right to Quality Service,'' ``The Right to Privacy,'' and ``The Right
to a Fair and Just Tax System.''
V. The IRS Should Establish a Telephone Line to Answer Questions About
the Eligibility and Computational Rules for the Earned Income
Tax Credit.
The earned income tax credit (EITC) is one of the Government's
largest means-tested, anti-poverty programs. For tax year 2015, more
than 27 million taxpayers claimed nearly $67 billion in EITC benefits.
However, the EITC is plagued by an improper payments rate of about
24 percent. While some improper payments are due to intentional
overclaims, others are due to lack of knowledge about the law or how to
compute the correct amount. The EITC eligibility rules are complex, and
about one-third of taxpayers who claim it each year did not claim it in
the prior year, which means they need to learn the eligibility rules
for the first time or refresh their understanding if they qualified
previously.
The IRS devotes considerable resources toward reducing EITC
improper payments. For example, it audits taxpayers claiming the EITC
at about twice the rate of other taxpayers, even though these taxpayers
are disproportionately low income.\21\ The IRS could better serve
taxpayers and improve EITC compliance if it establishes a telephone
line to answer EITC questions that is staffed by employees
knowledgeable about EITC eligibility requirements and related rules.
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\21\ See IRS, 2016 Data Book 23 (Table 9a).
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By establishing a telephone line to answer questions about the
EITC, the IRS would further the provisions in the Taxpayer Bill of
Rights that taxpayers have ``The Right to Quality Service,'' ``The
Right to Be Informed,'' ``The Right to Pay No More Than the Correct
Amount of Tax,'' and ``The Right to a Fair and Just Tax System.''
VI. The IRS Should Serve Taxpayers Without Appointments at Its
Taxpayer Assistance Centers.
The IRS operates nearly 400 Taxpayer Assistance Centers (TACs). In
the past, the IRS has served more than five million taxpayers each year
in the TACs, and it provided a wide range of services, such as
assisting with tax return preparation and answering tax-law questions.
Historically, the TACs were known as ``walk-in'' sites. But this year,
the IRS has flipped its traditional approach toward serving taxpayers
on its head, requiring that taxpayers schedule appointments in advance
to receive service.\22\
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\22\ In response to complaints from TAS and others, the IRS has
given TAC managers the discretion to make exceptions to the policy. But
the general rule continues to require advance appointments.
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The IRS says that taxpayers are visiting the TACs less frequently
because when they call for appointments, telephone assistors are often
able to address their questions, obviating the need to visit. To some
degree, that is undoubtedly true. But many taxpayers with tax problems
still want to talk with an IRS employee face-to-face. If the IRS's
current trend continues, taxpayers soon may not have that opportunity.
The IRS has already reduced the number of TACs from 401 to 376 since
2011.\23\ In addition, 22 TACs have no staff, while 95 have only one
employee,\24\ and the IRS is considering closing a significant number
of additional TACs through fiscal year 2018. Because of its new
``appointment only'' policy, the IRS is projecting that the number of
taxpayers visiting a TAC will decline from about 5.6 million in fiscal
year 2015 to 3.5 million this year.\25\
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\23\ In 2011, the IRS operated 401 TACs. IRS response to TAS
information request (December 23, 2014). As of December 31, 2016, the
IRS operated 376 TACs, a reduction of six percent. IRS response to TAS
fact check (December 20, 2016).
\24\ IRS response to TAS fact check (December 20, 2016).
\25\ IRS Wage & Investment Division, Business Performance Review 7
(February 9, 2017).
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I am concerned that the IRS will cite the reduced number of
taxpayers served in the TACs as ``evidence'' of reduced taxpayer demand
and then close more TACs, when in fact a key driver of the reduced
number of taxpayers seeking services are the obstacles the IRS has
created to obtaining service.
This has happened before. On several occasions, the IRS has made
important services less accessible to taxpayers and then cited the
(predictable) decline in usage as a basis for making further reductions
or eliminating the services altogether. For example, the IRS prepared
nearly 500,000 tax returns for taxpayers in fiscal year 2004.\26\ Over
time, it placed significant limitations on the number and type of
returns employees could prepare, and it began to require advance
appointments. As a result of making the service harder to obtain, the
IRS prepared substantially fewer returns over time, reaching a low of
about 125,000 during the 2013 filing season. The IRS then eliminated
the service, citing low usage.
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\26\ See National Taxpayer Advocate 2014 Annual Report to Congress
3, 21 (Most Serious Problem: Taxpayer Service: Taxpayer Service Has
Reached Unacceptably Low Levels and Is Getting Worse, Creating
Compliance Barriers and Significant Inconvenience for Millions of
Taxpayers) (and GAO data cited therein).
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The same is true with answering tax-law questions in the TACs. The
Government Accountability Office has reported the number of tax-law
questions answered by the IRS during the filing season alone dropped
from 795,000 in 2004 to 110,000 in 2013.\27\ There is no evidence that
taxpayers had fewer questions. Rather, the IRS reduced TAC staffing and
reduced the scope of questions it was willing to answer, and wait times
became unreasonably long. As it became harder and harder to obtain
answers to tax-law questions, taxpayers became deterred from asking
them. The IRS's decision to restrict employees from answering tax-law
questions in 2014 was based partly on this ``reduced demand.''
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\27\ GAO, GAO-14-133, 2013 Tax Filing Season: IRS Needs to Do More
to Address the Growing Imbalance between the Demand for Services and
Resources 26 (December 2013); GAO, GAO-07-27, Tax Administration: Most
Filing Season Services Continue to Improve, but Opportunities Exist for
Additional Savings 29 (November 2006) (supplemented with more precise
IRS data provided to TAS by the IRS Wage & Investment Division for 2004
through 2006).
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The IRS should not take this approach to reduce TAC assistance.
Taxpayers often travel long distances to get to a TAC, not knowing that
advance appointments are required. Many are senior citizens. Turning
these taxpayers away or requiring them to come back at a later date to
receive service can cause tremendous inconvenience and frustration.
I previously recommended that the IRS allow taxpayers to schedule
appointments, and I am glad it is doing so. I realize that at times
scheduled appointments will limit the IRS's ability to assist others.
But the IRS should change its policies to direct the TACs to assist
walk-in taxpayers to the maximum extent possible. All TACs currently
have a large sign on their front doors declaring ``APPOINTMENT ONLY.''
This is a negative message to send to taxpayers seeking assistance to
comply with their tax obligations and have traveled sometimes long
distances to obtain that assistance. How much better it would be if
that sign instead read, ``APPOINTMENTS RECOMMENDED BUT WALK-INS
WELCOME.''
By assisting all taxpayers who visit Taxpayer Assistance Centers
for help, the IRS would further the provision in the Taxpayer Bill of
Rights that taxpayers have ``The Right to Quality Service'' and ``The
Right to Be Informed.''
VII. The IRS Should Expand Outreach and Education, Particularly to
Small Businesses, to Improve Tax Compliance.
As a result of the IRS Restructuring and Reform Act of 1998,\28\
the IRS created units of employees to conduct outreach and education to
individual and small business taxpayers. The rationale is, in essence,
that ``an ounce of prevention is worth a pound of cure''--i.e.,
educating taxpayers about tax requirements in a pre-filing environment
will improve return accuracy and reduce the need for (more costly)
post-filing audits and other compliance actions. Pre-filing outreach
and education is particularly important for small businesses, which
often need to learn and comply with complex rules that individual
taxpayers do not encounter, such as rules governing eligible business
expenses, equipment depreciation, and employment taxes. Yet the IRS has
whittled down these outreach units to the point where they are barely
functional.
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\28\ Public Law No. 105-206, 112 Stat. 685 (1998).
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The IRS dedicates only 365 employees to conduct outreach and
education to the nearly 125 million Wage and Investment taxpayers
(i.e., taxpayers who are classified as ``employees'') and only 98
employees to conduct outreach and education to the roughly 62 million
Small Business and Self-Employed taxpayers (i.e., taxpayers who are
self- employed or own small businesses). In fact, 14 States have no IRS
liaisons to small business taxpayers at all.\29\ By contrast, even
after the workforce reductions of the last few years, the IRS has more
than 8,800 revenue agents (who conduct field audit activities) and more
than 3,000 revenue officers (who conduct field collection
activities).\30\ Having at least one employee with a post of duty in
each State and responsible for the field outreach and education
activities in that State would ensure such activities are geared to the
economy, businesses, geography, and culture of that State.
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\29\ The 14 States are Alaska, Delaware, Hawaii, Kentucky,
Mississippi, Montana, North Dakota, Nebraska, New Hampshire, South
Dakota, Vermont, West Virginia, Wisconsin, and Wyoming. There also is
no liaison in the District of Columbia. IRS response to TAS fact check
(Dec. 15, 2016); IRS Human Resources Reporting Center, Report of Small
Business/Self-Employed (SB/SE) Job Series 0526, Stakeholder Liaison
Field Employees as of the week ending October 1, 2016 (December 1,
2016).
\30\ IRS response to TAS fact check (December 16, 2016).
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The IRS should do more to educate taxpayers about tax requirements
in a pre-filing environment both because it is the right thing to do
and because it likely will reduce the need for more expensive
compliance activities in a post-filing environment.
By expanding outreach and education, the IRS would further the
provision in the Taxpayer Bill of Rights that taxpayers have ``The
Right to Be Informed.''
VIII. The IRS Should Assign At Least One Appeals Officer and One
Settlement Officer to Every State.
Congress has long recognized that ``all taxpayers should enjoy
convenient access to Appeals, regardless of their locality.'' \31\ As a
result, Congress required the IRS, among other things, to ``ensure that
an appeals officer is regularly available within each State.'' \32\ Yet
today, the IRS reports that 12 States do not have either an Appeals
Officer or a Settlement Officer.\33\ That should change.
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\31\ S. Rep. No. 105-174, at 92 (1998).
\32\ Internal Revenue Service Restructuring and Reform Act, Public
Law No. 105-206, Title III, Subtitle E, Sec. 3465(b), 112 Stat. 685,
768 (1998).
\33\ An Appeals Officer conducts hearings when a taxpayer
challenges an IRS audit determination. A Settlement Officer conducts
collection due process (CDP) hearings. It is important that both
Appeals Officers and Settlement Officers be available for face-to-face
hearings and understand local economic conditions.
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The IRS has suggested in the past that requiring an Appeals Officer
and a Settlement Officer in each State would be costly. We do not
agree. Placing at least one Appeals Officer and one Settlement Officer
in each State would not require more Appeals personnel. It would simply
require the IRS to relocate a small number of Appeals personnel
currently posted in large IRS campuses to States with no Appeals
Officers or Settlement Officers, which can be accomplished through
attrition hiring.
The IRS has also suggested that virtual conferences or circuit
riding is sufficient. We do not agree with those contentions, either.
In many cases, it would be impossible for an Appeals Officer to judge
the credibility of a witness without an in-person conference, and
``circuit riding'' does not happen often, requiring taxpayers to wait
months, or even a year or more, to obtain a face-to-face hearing.
Moreover, while virtual conferences may be suitable in many situations,
having an Appeals Officer and a Settlement Officer reside in a State
would ensure the particular conditions, economy, and culture of the
State are understood, which can be relevant to a taxpayer's tax
situation and ability to pay.
By placing an Appeals Officer in each State, the District of
Columbia, and Puerto Rico, the IRS would comply with the congressional
directive and further the provisions in the Taxpayer Bill of Rights
that taxpayers have ``The Right to Challenge the IRS's Position and Be
Heard,'' ``The Right to Appeal an IRS Decision in an Independent
Forum,'' and ``The Right to a Fair and Just Tax System.''
IX. The IRS Should Mail Monthly Bills to Taxpayers Who Owe Money, as
Private Sector Businesses Routinely Do.
Most businesses, particularly large businesses, send bills at least
monthly to customers who owe debts. The IRS does not. After sending
taxpayers four notices, the IRS largely disappears. By statute, the IRS
is required to send taxpayers an annual statement,\34\ but that is
often all it does unless and until it chooses to work the case or
assigns it to a private collection agency, which often does not happen
for several years. Moreover, when a tax debt is sent to a private
collection agency, up to 50 percent of the taxes collected are diverted
from the public treasury to the private collection agency and the IRS.
Conversely, when the IRS receives payments in response to an IRS
notice, 100 percent of the taxes remitted go to the public fisc.
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\34\ See IRC Sec. 7524.
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As a general matter, the first few bills a creditor sends generate
more revenue than later bills. But later bills still generate revenue.
(If businesses didn't benefit from sending monthly bills, they would
stop sending them.) For example, an individual who loses his job may
experience financial hardship and fail to pay creditors for a period of
time but then begin to pay off his debts when he obtains a new job. If
he is receiving monthly bills from most creditors but has not heard
from the IRS in nearly a year, the IRS's ``invisibility'' is likely to
mean he will prioritize paying off others creditors who are
consistently making their presence known.
Government agencies frequently speak about adopting ``best
practices'' from the private sector. Sending monthly bills to debtors
is one ``best practice'' the IRS should adopt now.
By mailing monthly bills to taxpayers with tax debts, the IRS would
further the provision in the Taxpayer Bill of Rights that taxpayers
have ``The Right to Be Informed.''
X. The IRS Should Assign a Single Employee to Work Complex Identity
Theft Cases and Correspondence Examinations Where a Taxpayer
Calls the IRS or Submits Documentation.
When a taxpayer is audited in person, a single IRS employee
typically works with the taxpayer from start to finish. If the taxpayer
has questions or needs to provide follow-up information, he knows whom
to call. The employee is familiar with the taxpayer's case, so the
taxpayer does not need to start from scratch in every conversation. In
addition, the employee is responsible for the timely and accurate
resolution of the case.
When a taxpayer experiences an identity-theft problem or is subject
to a correspondence audit (and about three-quarters of all individual
audits were conducted via correspondence in fiscal year 2016), the IRS
generally does not assign a single employee to work the case. In many
cases, the taxpayer will not need to speak with an employee. But in
other cases, the taxpayer may call several times--perhaps to ask
additional questions, to provide requested documentation, or to check
on the status of his case.
I believe the IRS should assign a single employee to work a case
when either (i) the taxpayer has an identity theft problem that
involves more than one issue or more than one tax year or (ii) the
taxpayer calls in response to a correspondence examination notice or
submits documentation. If subsequent telephone calls are required, the
taxpayer should be given the opportunity to speak directly with that
employee whenever possible, and if the employee is not available, the
taxpayer should be given the option of either leaving a message for the
employee for a call-back or speaking with another available assistor.
Assigning cases to specific employees where a taxpayer calls or
submits documentation should improve the taxpayer experience and
improve case resolution.
By allowing taxpayers who have experienced identity theft or are
undergoing correspondence audits to work with a single IRS employee,
the IRS would further the provision in the Taxpayer Bill of Rights that
taxpayers have ``The Right to Quality Service'' and ``The Right to a
Fair and Just Tax System.''
XI. The IRS Should Reduce the False Positive Rates Produced by Its
Identity Theft and Anti-Fraud Filters.
The IRS has made considerable progress in combating stolen identity
refund fraud, and it deserves credit for doing so. However, the filters
it uses to identify suspicious returns have high false positive rates.
Notably, the filters used in the Taxpayer Protection Program, the
primary set of filters for identity theft cases, had a false positive
rate of 53 percent in 2016, and so far in 2017, the rate has risen to
60 percent as of July 5. That means the majority of returns stopped by
the filters have turned out to be legitimate.
High false positive rates can impose a significant burden on
taxpayers whose returns are frozen. The significant majority of
taxpayers receive refunds, and the average refund amount in 2016 was
$2,860.\35\ When the IRS stops a return due to suspicion of identity
theft, it often requires the taxpayer to prove his or her identity, and
that process can take several months. Thus, in addition to the time
taxpayers must spend proving their identities and the frustration they
experience in having to do so, they must wait extended periods of time
to receive their refunds. For some taxpayers, this delay can cause a
financial hardship.
---------------------------------------------------------------------------
\35\ See IRS, 2016 Filing Season Statistics (week ending December
30, 2016).
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In using filters to combat identity theft, the IRS must balance the
twin goals of blocking as many illegitimate returns as possible and
minimizing the number of legitimate returns it stops. The IRS has made
major strides in blocking bad returns, but it can and should do a
better job of refining its filters to stop fewer valid returns. In the
National Taxpayer Advocate's 2016 Annual Report to Congress, we
published a ``Literature Review'' of the various approaches taken to
minimize false positive rates in government, the military, and
business. We also made several recommendations to reduce the false
positive rates produced by the IRS's filters, but the IRS has not
agreed to adopt them.
I recommend the IRS undertake a study before the 2018 filing
season, in conjunction with my office, to identify best practices to
reduce false positive rates and describe what steps it will take toward
that end. This report should be shared with this Committee.
By reducing the false positive rates in its identity theft and
anti-fraud filters, the IRS would further the provision in the Taxpayer
Bill of Rights that taxpayers have ``The Right to a Fair and Just Tax
System.''
ADDITIONAL COMMITTEE QUESTIONS
Senator Capito. If there are no further questions, the
hearing record will remain open until August--Wednesday, August
2, at noon for subsequent questions from the subcommittee
Members who can submit statements and questions to the
witnesses for the record.
[The following questions were not asked at the hearing, but
were submitted to the Department of the Treasury and the
Internal Revenue Service for response subsequent to the
hearing:]
Questions Submitted to Hon. Steven T. Mnuchin
Questions Submitted by Senator Shelley Moore Capito
Question. Mr. Secretary, as you know, the National Association of
Insurance Commissioners (NAIC) will consider in August 2017 a proposal
to require a new, additional Risk Based Capital charge for all types of
insurance, on top of the existing State Risk Based Capital formulas.
Does the Treasury Department have a position on this proposal, and has
it been conveyed to global regulators and the NAIC?
Answer. Treasury does not currently have a view regarding the
additional operational risk charge that was added to the NAIC Risk
Based Capital formula by the Capital Adequacy (E) Task Force at the
2016 NAIC Spring National Meeting. Treasury is reviewing the additional
operational risk charge. Treasury, through the Federal Insurance
Office, continues to engage with stakeholders, including State
insurance regulators and the NAIC in order to further evaluate this
issue and to ensure appropriate coordination and consultation.
Question. Does the Department of Treasury believe that new Risk
Based Capital requirements are necessary, especially considering the
unique nature of U.S. health insurance markets? If so, can you provide
a report to the Committee detailing this evidence?
Answer. Treasury does not currently have a view regarding the
additional operational risk charge that was added to the NAIC Risk
Based Capital formula by the Capital Adequacy (E) Task Force at the
2016 NAIC Spring National Meeting. Treasury is reviewing the additional
operational risk charge. Treasury, through the Federal Insurance
Office, continues to engage with stakeholders, including the State
insurance regulators and the NAIC, to evaluate the issue and to ensure
appropriate coordination and consultation.
Question. Is the Department of Treasury aware of any justification
for this new, additional risk charge, since the current Risk Based
Capital calculations consider all elements of risk such as
underwriting?
Answer. Treasury does not currently have a view regarding the
additional operational risk charge that was added to the NAIC Risk
Based Capital formula. At this time, Treasury would refer you to the
NAIC's public justification for the operational risk charge, available
at http://www.naic.org/documents/cmte_e_capad_2016_
13_0.pdf. An August 2017 NAIC newsletter summarizing the operational
risk charge and its status is available at: http://www.naic.org/
documents/cmte_e_
capad_hrbc_1708.pdf.
Question. Will the Department of Treasury ask the NAIC how
operational risk has been quantified under this proposal, and
specifically what methodology and data was utilized? Did the NAIC use
comparisons from other countries with vastly different healthcare
systems to arrive at its conclusions?
Answer. Treasury, through the Federal Insurance Office, continues
to engage with stakeholders, including the State insurance regulators
and the NAIC, to assess the issue and to ensure appropriate
coordination and consultation.
Question. Similarly, will the Department of Treasury ask the NAIC
if they accounted for the fundamental differences in the health
insurance business compared to other insurance markets such as life and
property and casualty?
Answer. Treasury, through the Federal Insurance Office, will
continue to engage with stakeholders, including the State insurance
regulators and the NAIC, to assess the issue and to ensure appropriate
coordination and consultation.
Question. Will the Department of Treasury ask the NAIC to examine
the effects on the business of health insurance from this proposal
before it is considered in August 2017, in order to avoid disruption in
America's health benefits markets?
Answer. Treasury, through the Federal Insurance Office, will
continue to engage with stakeholders, including the State insurance
regulators and the NAIC, to assess the issue and to ensure appropriate
coordination and consultation.
__________
Questions Submitted by Senator Christopher A. Coons
ofr and fsoc
Question. One of the ``core principles'' established in President
Trump's Executive order on regulating the financial system is ``to
foster economic growth and vibrant financial markets through more
rigorous analysis on risk and market failures''--yet the budget
proposes a 25 percent cut for the very entity that was established to
conduct that research, the Office of Financial Research. Similarly, the
Treasury report submitted in response to that Executive order calls for
an expansion in the role of the Financial Stability Oversight Council
(FSOC) to better coordinate financial regulators, but the budget cuts
its funding by 8 percent.
What is your vision for the roles of FSOC and OFR, and how does
this budget support their mission for financial stability in the US
economy?
Answer. The estimates for the Financial Stability Oversight Council
(FSOC) and the Office of Financial Research (OFR) included in the
President's 2018 budget are consistent with accomplishing the important
missions of both entities in an efficient and effective manner. In
Treasury's June 2017 review of the regulatory framework for the
depository sector, Treasury recommended that Congress expand FSOC's
authority to play a larger role in the coordination and direction of
regulatory and supervisory policies. This can include giving it the
authority to appoint a lead regulator on any issue on which multiple
agencies may have conflicting and overlapping regulatory jurisdiction.
Treasury also recommended that Congress reform the structure and
mission of the OFR to improve its effectiveness and to ensure greater
accountability. The current Director of OFR has announced he will be
stepping down by the end of 2017. Treasury has appointed an interim
head of OFR to manage OFR until a new Director is nominated and
confirmed by the Senate.
cybersecurity
Question. As you explained in your testimony, one of your top
priorities is cybersecurity, but the budget proposes a 43 percent
reduction for the new cybersecurity enhancement initiative.
Do you believe the budget is requesting sufficient funds for this
important purpose?
Answer. Yes. The Cybersecurity Enhancement Account (CEA) for fiscal
year 2018 is funded at the President's budget request level of $27
million, which is in addition to the $47 million in multi-year money we
received in fiscal year 2017. This funding was not enacted until May of
2017. Treasury is in the process of implementing a targeted set of
strategic investments to improve its cyber defenses using these new
resources. The large majority of the requested fiscal year 2018 funding
is for operations and maintenance of the strategic investments
initiated in fiscal year 2017.
Question. What is Treasury's role in improving cybersecurity across
the financial sector, and what more can Treasury do on this issue?
Answer. Treasury's work through its Office of Critical
Infrastructure Protection and Compliance Policy depends on partnerships
with various stakeholders, including private sector institutions and
industry groups, and other government entities to enhance the security
and resilience of the U.S. financial services sector.
Treasury works closely with the Department of Homeland Security,
law enforcement, Federal and State financial regulators through the
Financial and Banking Information Infrastructure Committee (FBIIC), and
the private sector to reduce cybersecurity risk to the financial
sector. This work includes, for example, sharing cybersecurity
information, enhancing the baseline cybersecurity protections, and
supporting incident response and recovery efforts.
FBIIC serves as a venue for coordinating approaches among agencies
with different statutory authorities, and Treasury believes that FBIIC
should be the focal point to drive domestic regulatory harmonization
efforts. Within FBIIC, Treasury has supported efforts to promote the
National Institute of Standards and Technology (NIST) Cybersecurity
Framework as a common lexicon for regulatory agencies to incorporate
into their supervisory efforts; to expand and complete efforts to map
existing regulatory guidance to reflect and incorporate appropriate
elements of the Framework; and to advance work as to whether
cybersecurity examinations could be further coordinated.
Internationally, Treasury has also encouraged further collaboration
and partnership through the G-7 Cyber Experts Group in the financial
area.
Treasury is dedicated to working with the private sector and
regulators and coordinating with other government agencies to improve
the cybersecurity posture of the financial sector.
debt ceiling
Question. As you know, the United States reached the debt limit in
March and is now using extraordinary measures to avoid default.
Do you agree that allowing the Government to default on its debts
is a terrible idea that would have significant consequences for our
markets and economy?
Answer. Honoring our outstanding debt is critical. Failing to meet
the Government's obligations could jeopardize the U.S. credit rating
and have serious ramifications for the U.S. economy as a whole.
Question. Do you agree that even the threat of a default has the
potential to have costly implications for the U.S. Government and
undermines our credibility?
Answer. Recent debt limit impasses have drawn increased scrutiny
from market participants as the date approaches when extraordinary
measures are projected to be exhausted. Some market participants avoid
holding Treasury securities (including collateral) with maturity or
interest payment dates within close proximity to such projected dates.
Additionally, a debt limit impasse can necessitate that Treasury draw
down its operating cash balance to below prudent levels, leaving
Treasury with increased risk exposure to a loss of market access.
Question. As Treasury Secretary, do you think it is good fiscal
stewardship to be engaging in a pattern where every year or 18 months
Congress manufactures a debt-ceiling showdown that leads to questions
about whether we'll pay our debts?
Answer. We need to issue debt to pay for the expenditures that
Congress has already authorized. Congress should address its concerns
during the annual budget and appropriations process, not after it has
already authorized expenditures.
Question. What are you doing to ensure that the limit is lifted as
soon as possible?
Answer. Throughout the most recent debt limit impasse, I worked
with Members of Congress on both sides of the aisle to ensure that the
debt ceiling was raised in a timely manner. On September 8, 2017, the
President signed into law Public Law 115-56, which suspended the
statutory debt limit through December 8, 2017. This will continue to be
a priority, and I will continue to reach out to Members as needed to
address any debt limit impasses that may occur in the future.
tax reform
Question. Since I first arrived in the Senate in 2010, I have
strongly supported tax reform that lowers rates, supports innovation,
and simplifies the code. Most of my colleagues share this view as well.
President Trump continues to advocate for tax reform, however much like
healthcare reform, I'm concerned that this may be another attempt to
make major policy changes without bipartisan engagement.
Will you commit to work with Democrats to develop and advance a tax
reform package that is bipartisan?
Answer. I have long said that the administration's hope is for the
tax reform process to be bipartisan. I am committed to continuing to
work with Congress and other stakeholders to accomplish the
administration's priority of creating a tax system that is fair,
simple, and efficient and that puts Americans back to work and puts
America first.
Question. Would you support advancing reform through regular order
(rather than reconciliation)? I stand ready to work with you, President
Trump, and my Republican colleagues to advance bipartisan tax reform.
Answer. Tax reform has been my number one priority since I was
appointed to serve as Secretary of the Treasury. This is the most
important issue for the American economy. I am committed to using
whatever means necessary to reform our tax system so that it better
serves and supports the American people.
fiscal service & wasteful payments
Question. Through Treasury's Fiscal Service, the department issues
payments and collects debt for nearly all other Federal agencies--
processing millions of dollars every day. Treasury has the ability to
reduce costs across the Federal Government by improving these payment
and collection systems, to reduce wasteful, improper payments and catch
fraud before it happens. In fact, Treasury's Do Not Pay Center
identified and prevent over $25 million in improper payments. Yet, the
budget proposes to eliminate funding for these types of investments in
the Fiscal Service, including addressing specific weaknesses identified
in the financial audit and known critical system weaknesses.
Are you concerned that eliminating these small investments now
could result in greater costs in future years?
Answer. From October 2014 through June 2017, the Do Not Pay
Business Center (DNP) has assisted agencies in identifying or stopping
$116 million in improper payments. Of this amount, almost $59 million
was identified or stopped during fiscal year 2016.
Treasury is confident that it can continue to address improper
payments at the funding level in the President's 2018 budget. Instead
of additional funding, DNP could be a more effective tool in addressing
improper payments if Treasury has explicit legislative authority to
obtain additional data sources. For example, Treasury, working with the
Office of Management and Budget and the Social Security Administration,
has sought explicit legislative authority to acquire and use for DNP
the Social Security Administration's full death file to prevent,
identify, or recover improper payments. This data source contains at
least 10 percent more death records than the public Death Master File
to which Treasury currently has access. An amendment to the Social
Security Act to allow Treasury to use the full death file for DNP would
improve the timely detection and prevention of payments to deceased
individuals. Treasury has also sought explicit authority to acquire
access to the Department of Health and Human Services' (HHS) National
Directory of New Hires for DNP. This HHS data source would increase the
efficiency and effectiveness of DNP efforts to prevent and detect
improper payments in means-tested programs.
Question. What do you believe is Treasury's responsibility over the
payments it makes for other Federal agencies?
Answer. Treasury's Bureau of the Fiscal Service (Fiscal Service) is
responsible for the centralized disbursement of almost 87 percent of
the Federal Government's payments to businesses, government entities,
and individuals throughout the world. In fiscal year 2016, the Fiscal
Service disbursed more than 1.2 billion payments, on behalf of Federal
agencies. These disbursements totaling $3.3 trillion included Social
Security, Veterans' benefits, and income tax refunds to more than 100
million people, vendor and loan payments supporting businesses; grant
monies; and State funding for critical infrastructure projects and
State-administered programs.
The Fiscal Service has established a robust set of internal
controls and data-centric electronic tests throughout the payment
lifecycle. The Fiscal Service controls and provides financial integrity
to the Federal payment process, including through its support of the
DNP Program, which helps agencies identify, prevent, and recover
improper payments, as well as through its post-payment activities, such
as reconciliation, accounting, claims activities, and the support of
law enforcement actions against criminals who have defrauded the
Government. Fiscal Service employs various techniques to protect the
payment system from direct deposit enrollment fraud and identity theft
fraud, preventing fraudsters from misdirecting Social Security,
Veterans', and other benefit payments.
In fiscal year 2016, Treasury processed 6 million ``exceptions'' to
the payment process so that monies erroneously paid to deceased
individuals were recovered; payee claims of non-receipt were processed;
stale uncashed checks were cancelled; misdirected electronic payments
were returned; and checks returned in the mail were properly
safeguarded with the funds redirected to the correct payee address or
held safely in the U.S. Treasury. In addition, Fiscal Service supports
inspectors general, Federal prosecutors, and State and local law
enforcement agencies in the investigation and prosecution of criminals
engaged in fraud related to the Treasury payment system. In fiscal year
2016, this collaboration resulted in 107 arrests, 83 convictions, and
$24 million recovered through fines, restitution, and seizures.
irs reporting requirements
Question. In November 2016, the IRS issued Internal Revenue Notice
2016-66. There have been numerous complaints that this notice imposes
burdensome and duplicative information reporting requirements on 831(b)
Captives, their owners and, in some cases, even their service
providers.
Will Treasury commit to carefully reexamine the requirements
imposed by this Notice, including meeting with small and medium-sized
businesses that are impacted by new reporting requirements to
understand their concerns?
Answer. The IRS issued Notice 2016-66 late last year to identify
certain micro-captive transactions as transactions of interest because
they have the potential for tax avoidance or evasion. As you note, the
notice requires disclosure from participants in the identified
transactions and their material advisors. These disclosures allow the
IRS to gather information to determine which transactions are or have
the potential to be abusive tax avoidance transactions. We have begun
to evaluate the information we have received in these disclosures to
determine what steps are appropriate as we work toward addressing
potential tax abuse in this area.
To minimize the burden of the disclosure requirements, we carefully
crafted the objective criteria in Section 2 of Notice 2016-66, which
describes the micro-captive transactions that are subject to
disclosure. Specifically, we require disclosure only if an insured
entity or a related party owns at least 20 percent of an electing
section 831(b) captive insurance company, and the captive insurance
company either has a loss ratio of less than 70 percent for the most
recent 5-year period or makes the captive insurance company's capital
available to the insured entity or a related party.
We requested comments from the public about the notice and received
27 comments and six congressional inquiries, including this question.
In addition, we met with those who requested meetings and responded to
telephone calls regarding the notice. Subsequently, the United States
Tax Court issued its first decision on a micro-captive transaction
challenged by the IRS (Avrahami v. Commissioner, 149 T.C. No. 7, filed
August 21, 2017), concluding that the entity purported by the taxpayers
to be a micro-captive insurance company was not an insurance company
and that payments made to that entity did not qualify as insurance
premiums. We will continue to evaluate the disclosures received and
developments in this area.
__________
Questions Submitted by Senator Joe Manchin, III
cfius
Question. I appreciate the Trump administration's commitment to the
security of our Nation. However, there are many facets that comprise
the security of a nation.
You have under your oversight, the Committee on Foreign Investment
in the United States (CFIUS). As you know, this Committee examines the
national security implications of certain foreign investment
transactions. This usually involves critical infrastructure, proximity
to national security assets, or sensitive trade secrets.
The Committee looks at various factors when determining if a
transaction is passable, however they are somewhat constrained by law
from doing what is necessary to complete their mission. For example,
though CFIUS may review any foreign investment, CFIUS reviews are
largely initiated on a voluntary basis by the foreign company.
In addition, they are constrained by making decisions purely on the
basis of ``national security.'' I would argue that the economic
security of our Nation is critical as well.
Do you think that these constraints are troubling, or do you think
the existing structure of CFIUS is adequate to ensure that the national
security of the United States is protected from troubling foreign
investment, especially from an adversary?
Answer. CFIUS is a robust process to address potential national
security risks arising from foreign acquisitions of U.S. businesses.
The statute already provides CFIUS with broad authority to determine
whether transactions pose a national security risk, including whether
the economic effects of a transaction pose a national security risk.
Maintaining CFIUS' nexus to national security is critical; expanding
CFIUS beyond national security could dilute the effectiveness of CFIUS
in addressing national security risks.
While the CFIUS process is voluntary, the Committee is not solely
dependent upon parties to a transaction voluntarily notifying
transactions to CFIUS. The CFIUS statute allows the Committee to
unilaterally initiate a review of any covered transaction. CFIUS
agencies monitor mergers and acquisitions activity to identify
transactions that have not been voluntarily notified to CFIUS and
consider whether the transactions may present national security
considerations that warrant CFIUS review.
However, there are certain steps that can be taken to enhance
CFIUS' ability to address national security concerns posed by certain
types of transactions. For example, CFIUS should have the ability to
review certain additional types of joint ventures that could raise
national security concerns. We are prepared to work with Congress to
ensure that CFIUS has the necessary and appropriate tools to address
these concerns.
following the opioid money
Question. As you know, West Virginia has been reeling from the
opioid and heroin epidemic for a number of years. I have been working
with FDA, NIH, DEA, CDC, and DOJ to ensure that they are making
combatting opioids, especially in rural underserved areas, a priority
in their programs and plans.
The Congress has allocated a lot of money to treatment and criminal
justice, but I believe we also need to be focused on cash flow that
supports the distribution and trafficking of the illegal uses of
opioids and heroin.
We need your help to cut off the supply and financing of these drug
operations.
What is Treasury doing to track the money that is flowing through
the economy as a result of these illicit opioid and heroin sales? Has
the Financial Crimes Enforcement Network (FinCEN) been involved or well
position to play a role in this effort?
Answer. Financial Crimes Enforcement Network (FinCEN) has exploited
keywords, typologies, and known trafficking networks to analyze and
expand upon fentanyl-related financial flows in Bank Secrecy Act data.
FinCEN is leveraging known precursor providers and opioid traffickers
to identify trafficking networks, characterize trends and behavior
patterns, and pinpoint nodes of vulnerability. We are identifying the
typical cost/payment structure of fentanyl-associated transactions and
what sets these transactions apart from the trafficking of other drugs.
FinCEN is paying particular attention to financial flows between
regions in the United States, China, Mexico, and the Dominican
Republic. FinCEN has also identified potential drug traffickers
marketing overtly and covertly online. These traffickers deal in
virtual currencies and online payment methods and falsely label illicit
drugs as ``research chemicals'' in an attempt to avoid detection.
FinCEN shares the results of its analysis with interagency and
international counterparts.
Question. Are you working with the DEA and DOJ to track illicit
financing of the drug trade?
Answer. The Department of the Treasury's Office of Terrorism and
Financial Intelligence works closely with both DEA and DOJ to track
illicit financing of the drug trade of both domestic and international
organizations. For example, the Office of Foreign Assets Control (OFAC)
works closely with DEA and DOJ to implement the Foreign Narcotics
Kingpin Designation Act and administer other authorities. OFAC, DOJ,
and DEA conduct joint investigations, which have allowed OFAC sanctions
investigators to build designation packages and DEA special agents to
carry out criminal cases simultaneously. These joint investigations
uncover foreign individuals and entities engaged in the laundering or
investment of drug proceeds. These discoveries in turn can lead to OFAC
sanctions, DOJ criminal cases, and further joint investigations into
other entities and individuals. In one instance in 2015, the DEA Denver
Field Division and the U.S. Attorney's Office for the District of
Colorado charged Mexican heroin trafficker Jose Luis Ruelas Torres with
running a Continuing Criminal Enterprise, along with related narcotics
trafficking and money laundering offenses. OFAC subsequently worked
with DEA Denver agents, which led to the May 2017 identification of
Ruelas Torres and his criminal organization as Tier I Kingpins along
with a network of key criminal associates. These collaborative
investigative efforts allow for the U.S. Government to not only target
U.S.-based drug trafficking activities but also use financial sanctions
to disrupt the efforts by foreign drug traffickers to invest their drug
proceeds and use their investments to fund future drug shipments.
Additionally, FinCEN assists in large-scale DEA investigations
through a number of initiatives, including detailing an analyst to
DEA's Special Operations Division. The collaboration provides
assistance in large-scale DEA investigations and fosters strategic and
tactical information exchange. For instance, FinCEN provides bulk data
access to the Organized Crime Drug Enforcement Task Force Fusion
Center, and has convened public-private information sharing meetings
regarding information requests made pursuant to Section 314(a) of the
USA PATRIOT Act in support of DEA money laundering investigations.
FinCEN also provides training to DEA analysts and agents regarding
illicit finance. To further facilitate close FinCEN-DEA collaboration,
the DEA Headquarters/Financial Operations Section has assigned a full-
time detailee to both the FinCEN and OFAC portfolios to support these
efforts as well as counter-illicit finance, counter-narcotics, and
other mission areas of mutual concern.
community development financial institutions (cdfis)
Question. In my State of West Virginia, community development
financial institutions (CDFIs) are critical in filling a large need
that just isn't met in many rural areas. For example, Woodlands
Community Lenders (WCL) in Elkins, West Virginia has leveraged in both
public and private financing at a 10:1 ratio. Since Woodlands Community
Lenders' inception in 2013, they have financed over 50 new and
expanding small businesses, leveraging in a total of $4.6 million in
outside investment, supporting over 100 jobs in our 3-county region.
WCL provides loans, business development services, and finance
packaging for small businesses that are otherwise ``unbankable.'' WCL
takes an alternative approach to assessing and mitigating risk,
allowing it to support small business development in ways that
traditional lenders often cannot.
The administration's budget zeroes out the CDFI Financial
Assistance Program.
Question. If these programs are eliminated, what do you believe the
will be on rural areas utilizing this program?
Answer. The budget eliminates discretionary grant funding for the
CDFI Fund to reflect the administration's priority to support fiscal
responsibility and to focus resources on activities that promote
national security and public safety. However, the budget provides
funding for the CDFI Fund to continue to operate the non-grant
programs, which provide support for CDFIs and other community
organizations lending and investing in economically-distressed
communities across the country, including those in rural areas.
The Budget also proposes to extend the Bond Guarantee Program to
allow $500 million in new guarantees in fiscal year 2018. This program
provides capital to CDFIs, at no cost to the taxpayer.
Question. How will Treasury ensure that the critical capital
injections needed to support the transitioning economies in West
Virginia continue?
Answer. I will work with the team at Treasury to be sure that all
CDFI Fund programs are operating consistent with all applicable laws,
rules, and administration policies.
Question. Has Treasury explored any special initiatives or
technical assistance programs to build capacity of CDFIs serving coal
communities?
Answer. Treasury would be happy to work with your office to
preserve access to low-cost capital in coal-impacted communities.
cybersecurity
Question. Recent estimates have found the cost of criminal data
breaches will cost global businesses $8 trillion over the next 5 years.
I continue to believe that a comprehensive approach to cybersecurity
best practices is necessary to properly work towards preventing,
detecting, and responding to cyberattacks.
I applaud efforts to centralize cybersecurity leadership within
Treasury to work collaboratively and transparently to protect critical
financial infrastructure. While cyberattacks have grown exponentially,
I am concerned that investments made in cybersecurity capabilities will
not keep up with the threat.
Beyond threat sharing, how can you work with small, rural
institutions to implement best practices and make these investments in
cybersecurity where necessary?
Answer. I cannot emphasize enough the importance of a public-
private partnership when it comes to our Nation's cybersecurity,
especially because the private sector owns and operates the bulk of the
critical infrastructure that Treasury and others in Government seek to
help protect. It is also critically important to highlight that
Treasury's cybersecurity mission is designed to support not just large
financial institutions, but also the smaller financial sector companies
that are the primary interface with the financial system for millions
of Americans.
Treasury works on a regular basis to assist all financial sector
companies large and small by encouraging the use of baseline
protections, assisting with response and recovery activities, and
facilitating information sharing. Treasury does this work in close
partnership with the Department of Homeland Security, the Federal
Bureau of Investigation, financial regulators, and industry groups such
as the Financial Sector Information Sharing and Analysis Center.
A great example of this work is the Hamilton Exercise Program. Over
the past 2 years, Treasury has carried out regional cybersecurity
exercises focused specifically on smaller financial sector companies.
These exercises are an opportunity for firms to practice incident
response procedures, share and refine good practices, and develop
stronger connections with similar firms in their communities. This
program, and others like it, benefits smaller firms, which are a key
component of our financial sector.
state small business credit initiative
Question. West Virginia found great success with the State Small
Business Credit Initiative (SSBCI) program created under the 2010 Jobs
Act. New companies were able to launch and existing companies were able
expand. Those activities created jobs, helped to retain jobs and
fostered private investment.
The $13 million West Virginia received created and/or retained
almost 1,000 jobs and fostered over $90 million in private investment.
WV's success was not the only successful State in the program. West
Virginia and other States in Appalachia have not seen the economic
recovery that other parts of the country have seen. The SSBCI program
allows these struggling States to help diversify their economies, grow
jobs and foster entrepreneurship. However, the President's budget
eliminated this program for fiscal year 2018.
Given the success seen by West Virginia and other States that lack
access to business capital, would it be beneficial to continue to fund
programs such as SSBCI?
Answer. The SSBCI was created by the Small Business Jobs Act of
2010 to support State-level small business financing programs to
improve access to capital in the wake of the Great Recession. As set
forth in the original statute, Treasury's administration of SSBCI ended
in September 2017. SSBCI funds will remain with the States to be
recycled to support more small businesses over time.
marketplace fairness
Question. I believe that restoring fairness in the tax system is
one of the most important things we can do to set this Nation on a
strong financial path, improve our economy, and get people back to
work. Businesses, no matter how they sell their goods, should compete
on a level playing field.
Over the last 25 years, brick-and-mortar businesses in West
Virginia and around the United States have found it increasingly
difficult to compete against out-of-state online retailers who offer
lower prices because they can avoid charging sales tax. This imbalance
is unfair to the hard-working small business owners who support our
communities and create good, local jobs.
Products ordered online are delivered to your door using the
airports, roads, and bridges often funded by State tax dollars.
Do you believe brick-and-mortar retailers in West Virginia should
be the only businesses funding State infrastructure, while their out-
of-state competitors take advantage of that infrastructure to put them
out of business?
Answer. Fairness and equity are important principles in evaluating
tax reform proposals, along with simplicity and the impact of the
proposal on economic efficiency and growth.
______
Questions Submitted to Hon. John Koskinen
Questions Submitted by Senator Thad Cochran
Question. Commissioner Koskinen, in your opening statement you
mentioned that the Internal Revenue Service (IRS) is gradually
transitioning towards online services to assist citizens. Many of my
constituents do not have access to computers or broadband service,
especially in rural areas of Mississippi. What is the IRS doing to
ensure taxpayers are not adversely affected by the IRS's focus on
online services? Please provide the Committee with data from the
previous three fiscal years about the number of in person and phone
interactions the IRS has conducted with taxpayers. Additionally, what
is the average wait time for taxpayers to reach an IRS employee through
in person visits or phone interactions? Does the IRS plan to transition
to online services only? If so, please provide a timeline and details
of such plan.
Answer. As we improve the online experience, we understand the
responsibility we have to serve the needs of all taxpayers, whatever
their age, income, or preferred method of communication. Although our
research tells us that taxpayers increasingly prefer to interact with
the IRS through digital channels, we recognize there will always be
taxpayers who do not have access to digital services, or who simply
prefer not to conduct their transactions with the IRS online.
Consequently, we remain committed to providing the services these
taxpayers need. While we will continue to offer more web-based
services, taxpayers will still be able to call our toll-free lines,
write to us, or obtain in-person assistance, if that is how they want
to interact with the IRS. In fact, we believe that providing more
online services for those who want them will free valuable resources to
allow us to further improve service on our other channels--phone, in
person, and correspondence, particularly for those taxpayers with more
complex issues.
The tables below provide the metrics requested for the previous
three fiscal years.
WAGE AND INVESTMENT PHONES
----------------------------------------------------------------------------------------------------------------
Fiscal Year 2017
Fiscal Year 2014 Fiscal Year 2015 Fiscal Year 2016 through July
----------------------------------------------------------------------------------------------------------------
Average Wait Time............... 19 min............ 30 min............ 17 min............ 8 min
----------------------------------------------------------------------------------------------------------------
Total number of Calls Answered 63.9 million...... 55.7 million...... 63.8 million...... 47.3 million
(assistor and automated).
----------------------------------------------------------------------------------------------------------------
TAXPAYER ASSISTANCE CENTERS
----------------------------------------------------------------------------------------------------------------
Fiscal Year 2017
Fiscal Year 2014 Fiscal Year 2015 Fiscal Year 2016 through July
----------------------------------------------------------------------------------------------------------------
Total Number of Face-to-Face 5.5 million....... 5.4 million....... 4.4 million....... 2.8 million
Contacts.
----------------------------------------------------------------------------------------------------------------
Percent of customers waiting 30 75%............... 68%............... 73%............... 94%
minutes or less **.
----------------------------------------------------------------------------------------------------------------
** Beginning in 2015, we started offering service by appointment at a small number of Taxpayer Assistance
Centers (TACs). In fiscal year 2017, all IRS TACs offered service by appointment.
Question. Commissioner, the understaffing and closure of Taxpayer
Assistance Centers (TAC) has been a cause of concern for this
Committee. In fiscal year 2017, this Committee directed the IRS to hold
public forums and notify the Senate and House Committees on
Appropriations before closing a TAC. Will you share with the Committee
what the IRS is doing to analyze the impact of closing a TAC? Describe
how the agency determines the impact in rural areas. What metrics is
the IRS using when deciding to close a TAC? Describe the process that
the IRS uses to notify communities of TAC closures.
Answer. To best use our resources and to meet the demand for
services in our Taxpayer Assistance Centers (TACs), in 2015 we started
offering service by appointment in a small number of locations. We
received favorable taxpayer response, and expanded the pilot. In fiscal
year 2017, all of our TACs offered service by appointment. As each
traditional TAC location comes under review, we compile data to
determine the most efficient methods to meet taxpayer face-to-face
service needs. For example, we have a service strategy that considers
items such as the services most requested by taxpayers at the TAC
location, available staffing, proximity of the next closest TAC,
availability of a partner to provide virtual assistance, availability
of Voluntary Income Tax Assistance and Tax Counseling for the Elderly
locations, and local demographic information.
If the IRS makes a tentative determination to change the method of
providing service (either through moving the TAC location or changing
from one service-delivery method to another--such as to virtual
assistance provided by a community partner), we will invite taxpayers
in the community to provide input in the decisionmaking process. Should
the data and preliminary public comments suggest that face-to-face
service is no longer required through any service channel, we would
schedule a formal public hearing to obtain further public comment. We
would follow the public hearing process with a report to oversight
agencies, as requested in previous and current committee reports.
We routinely review locations to promote more efficient use of the
Government's real estate assets and to comply with Executive Orders,
OMB directives, Federal Acquisition Regulations administered by the
General Services Administration, and congressional mandates regarding
real estate. This review includes evaluating small, mid-size, and large
posts-of-duty with a high percentage of vacant workstations, a high
number of field-based employees, and space reduction projects initiated
because of lease expirations, relocations, review of training space
needs, and other reasons. During these reviews, we analyze taxpayer
access to face-to-face service in the community and determine how to
effectively meet taxpayer needs and preferences for service.
Question. Commissioner, I am pleased to hear that the number of
tax-related identity theft has declined in the past 2 years. The
Taxpayer Advocate Service has recommended that constituents with
multiple identity theft issues be assigned one point of contact at the
IRS to assist them until the resolution of their case. What is the IRS
doing to help simplify assisting taxpayers affected by identity theft?
Has the IRS taken this proposal into consideration? When does the
agency plan to implement this proposal?
Answer. Our work on identity theft (IDT) and refund fraud touches
nearly every part of the organization. Helping victims and reducing the
time it takes to resolve cases is a top priority for the IRS.
During 2015, the IRS centralized IDT victim assistance policy,
oversight, and campus case work into a new Identity Theft Victim
Assistance (IDTVA) organization within the Wage and Investment (W&I)
Division. IDTVA can work IDT cases from beginning to end, providing an
improved taxpayer experience.
In the victim assistance area, we have reduced the time it takes to
resolve a case. For most cases, the average time is now less than 120
days, but for more complex cases, resolution can take up to 180 days.
This timeframe is substantially less than a few years ago, when cases
could take over 300 days to resolve. While this change marks a
significant improvement, we continue to look for ways to shorten this
time and ease the burden IDT places on these taxpayers.
Whenever possible, the same employee processes multiple claims
(often for multiple years) from the same taxpayer, to make sure there
is consistent processing. In January 2015, the IRS developed automation
to associate IDT documentation with existing IDT cases/category codes.
In April 2016, we expanded the programming to include the association
of documentation with new categories of work resulting from the
centralization effort under the IDTVA organization.
Centralization of IDTVA work significantly affected our ability to
resolve those cases more quickly. Since implementation, we resolve
those cases in less than 120 days 75 percent of the time, compared to
34 percent prior to implementation.
Our toll-free hotline for IDT victims helps taxpayers reach a
trained IDT specialist any time during business hours, without having
to rely on the availability of a single IRS employee. Customer service
representatives staffing this specialty line can review the taxpayer's
case file and respond to the IDT victim's call. While we believe this
approach provides the best possible experience for the victim, we are
aware that sometimes the customer service representative cannot respond
to the IDT victim's call. For these instances, beginning on August 1,
2017, we implemented a process for IDT victims to have direct contact
with the employee working their IDT cases. The customer service
representative will provide the IDT victim with a different toll-free
number to call to directly contact the employee working his or her
case. If the employee is unavailable to answer the IDT victim's call,
the victim can leave a message for the employee, and the employee will
return the victim's call within five business days. In addition, we
expanded procedures to provide a single point of contact when a
victim's case spans multiple years.
______
Question Submitted by Senator John Boozman
Question. Commissioner Koskinen, I would like to discuss taxpayer
services. There have been reports citing a continuing decline in the
level of service that IRS provides to taxpayers, especially those who
are victims of stolen identity refund fraud. Additionally, we have
heard of increasing wait times for taxpayers contacting IRS, and a rise
in the use of ``courtesy disconnects''--hanging up on a customer after
an excessive wait time. What has your office done to remedy this, and
going forward, what plans does your office have to improve on customer
service and taxpayer assistance?
Answer. We have had many notable achievements for 2017 in terms of
improving the level of service provided to taxpayers on the calls the
Wage and Investment (W&I) Division handles. Congress specifically
appropriated additional funding to help the IRS improve customer level
of service (LOS). This additional funding, along with effective
planning and monitoring, allowed W&I toll-free phone operations to
deliver a filing season telephone LOS of over 79 percent--the highest
telephone LOS since 2007. This change is an increase over the 72.1
percent achieved in this same timeframe in 2016. The 2017 fiscal year
LOS is at 76.7 percent through the beginning of August, a substantial
improvement over the 53.4 percent in 2016. We are on pace to have the
best fiscal year LOS in 10 years.
In the IDT victim assistance area, we have reduced the time it
takes to resolve a case. For most cases, the average time is now less
than 120 days, but for more complex cases, resolution can take up to
180 days. This timeframe is substantially less than a few years ago,
when cases could take over 300 days to resolve. In addition, we
continually improve our efforts to stop fraudulent refunds from being
paid. For example, we have improved the filters that help us spot
suspicious returns before we process them. The number of people
reporting to the IRS that they were victims of IDT declined from
698,700 in calendar year (CY) 2015 to 376,500 in CY 2016--a 46 percent
drop. This downward trend has continued into 2017.
------------------------------------------------------------------------
Taxpayer Assistance Taxpayer Assistance
Toll-Free Line Fiscal Toll-Free Line Filing
Year LOS Season LOS
------------------------------------------------------------------------
Fiscal Year 2007...... 82.08%................. 83.46%
Fiscal Year 2008...... 52.81%................. 77.41%
Fiscal Year 2009...... 70.02%................. 63.97%
Fiscal Year 2010...... 74.04%................. 75.28%
Fiscal Year 2011...... 70.07%................. 74.64%
Fiscal Year 2012...... 67.55%................. 68.31%
Fiscal Year 2013...... 60.50%................. 70.12%
Fiscal Year 2014...... 64.39%................. 70.88%
Fiscal Year 2015...... 38.10%................. 37.28%
Fiscal Year 2016...... 53.43%................. 72.11%
Fiscal Year 2017...... ....................... 79.12%
------------------------------------------------------------------------
Through April, filing season (FS) average speed of answer (ASA)
(wait time) was 6\1/2\ minutes on the taxpayer assistance toll-free
line. This wait compared to 11 minutes in FS 2016 and 23 minutes in FS
2015, and reflects a decrease of 16\1/2\ minutes. During this same
period, disconnects (calls terminated due to a lack of system or
assistor resources) were 834,000 compared to 1.3 million in FS 2016 and
8.8 million in FS 2015, a 90 percent (almost 8 million) decrease. Call
volume was also a factor in delivering a higher LOS. By implementing
robust communication and outreach strategies for filing season
initiatives, the IRS successfully brought awareness to taxpayers and
partners about key changes and programs, and equipped them to take any
action needed timely. These efforts greatly diminished expected
inquiries from taxpayers, media, and oversight resulting in reduced
impact on operations and demand on customer service.
The IRS also provides telephone assistance to other groups of
taxpayers, such as to taxpayers responding to a notice received in the
mail. Those phone lines may provide a different level of service than
the toll-free assistance line and reflect our resource challenges.
______
Questions Submitted by Senator Christopher A. Coons
electronic tax return filing--business returns
Question. Over the past decade, the rate for electronic filing of
individual tax returns grew exponentially from 54 percent in 2006 to
86.4 percent in 2016. In the recent 2017 filing season, 90 percent of
individual returns were submitted electronically. In contrast, in 2016,
only 50 percent of the nearly 30 million business returns were
electronically filed. The IRS fiscal year 2018 budget justification
indicates that the business e-filing target will increase to 51 percent
for fiscal year 2017 and to 52 percent for fiscal year 2018.
--Can you elaborate on this phenomenon and explain what the IRS is
presently doing or planning to do to improve the e-filing rate
for business returns?
--Is there a rational basis for not setting more ambitious targets as
an incentive to achieve a higher rate?
--Are there any particular advantages for a business taxpayer to file
electronically?
Answer. Our greatest challenge to achieving e-file increases in
business returns is the employment tax series (Form 94x). This family
of forms represents the greatest overall volume of business forms, and
therefore the greatest opportunity to increase overall e-filing of
business returns. During the past seven filing seasons, the Form 94x
series e-file rate has consistently seen the slowest or close-to-
slowest growth of all major return types. In 2015, the IRS released a
Federal Register request for comments on ways to increase the
electronic filing of employment tax returns. The digital signature
process was highlighted in the responses received as a key barrier to
increasing e-file rates across these returns. We are evaluating the
development of a Form 94x online signature preparer identification
number (PIN). After removing this key barrier, we will pursue a means
to offer free or low cost 94x e-file solutions with the goal of driving
greater e-filing of this high-volume family of forms.
We process e-file returns faster and with fewer errors. For
taxpayers, this means quicker refunds and less contact with the IRS.
IRS e-file provides proof of receipt within 24 hours of sending returns
to the IRS. Individuals and businesses can e-file balance due returns
and schedule an electronic funds transfer (EFT) from their account for
any date.
impacts of proposed cuts--diminished services for taxpayers
Question. The Trump budget request for the IRS of $10.975 billion
is expected to take a toll on the ability of the IRS to respond to
taxpayers' telephone calls. In the budget justification materials
submitted to Congress, the IRS states that the resources made available
in 2016 supported a 53.4 percent Level of Service (with a 72 percent
level during filing season which included a seasonal workforce). For
2017, a target LOS of 64 percent is specified, with the most recent
filing season achieving a 79 percent service level. But the IRS then
projects a 39 percent target for 2018, even with a planned infusion of
$58 million in user fees to augment appropriated dollars.
--Commissioner Koskinen, providing access to quality customer service
helps taxpayers understand their obligations so they can pay
the right amount on time. It is important for me that hard
working Delawareans are able to readily obtain assistance they
need to act in good faith and pay the taxes they owe. That's
why the 2018 service target of 39 percent deeply concerns me,
particularly given that the IRS has, to its credit, made
significant strides to turn around an abysmal level of service
recorded for 2015, when only 38 percent of 100 million calls
were answered and experienced an average waiting time of 30
minutes?
--Do you think it is acceptable to provide a level of service where
as many as 6 of 10 callers will not likely be able to connect
to an account representative or will be forced to spend
inordinate amounts of time waiting on hold?As Commissioner,
what do you consider to be an ``acceptable'' level of service
for taxpayers calling on the toll-free phones?
--Is it conceivable that the IRS could ever achieve the level of
service experienced in 2004 when the IRS answered 87 percent of
phone calls with an assistor and waiting times averaged just
2.5 minutes?
--What amount of funding would the IRS require in fiscal year 2018 in
order to sustain this year's results where there's a 64 percent
general target and a 79 percent service level during the filing
season?
Answer. I consider an acceptable level of service (LOS) to be
approximately 70 percent or above. Delivering a LOS much higher than 80
percent can result in inefficiencies as our call site assistors could
wait extended periods of time for the next call. Funding for Taxpayer
Services is just one of many variables that influence the LOS. Call
volume, often driven by external events such as the enactment of tax
legislation, and the availability and reliability of IRS technology
infrastructure, are other major factors the IRS would have to consider
before committing to new targets.
combating tax scams and identity thieves
Question. In recent years, thousands of people have lost millions
of dollars and their personal information to tax scams and fake IRS
communication. Scammers use the regular mail, telephone, fax or email
to set up their victims and regularly alter their tactics to perpetrate
crimes in new ways. Even tax professionals are being targeted by
identity thieves. On July 11, the IRS announced a new ``Don't Take the
Bait'' awareness campaign aimed at tax professionals who may be
vulnerable to sophisticated spear- phishing cybercrimes.
--What resources is the IRS devoting to fighting tax scams? Have
successful prosecutions of scammers provided any measurable
deterrent effect?
Answer. We have devoted significant resources to fighting tax scams
and our work has had a measurable effect. The prosecutions by India and
the United States resulted in a measurable drop in calls by scammers.
Initially, the number of calls reported to TIGTA dropped from 40,000 a
week to 1,000 a week. Unfortunately, the number of calls reported to
TIGTA is creeping back up to 7,000 a week, indicating that we still
have a problem.
The Criminal Investigation (CI) Division, specifically, continues
to devote significant resources in the battle against Tax Related ID
Theft. In fiscal year 2017, as of July 31, CI has dedicated 13.9
percent of its direct investigative time to this effort representing
over 295,000 investigative hours. During that time, CI initiated over
300 new investigations and over 450 identity thieves were sentenced.
Additionally, CI has worked with partners within the IRS Security
Summit to focus outreach efforts addressing the emerging schemes
targeting tax professionals and payroll service providers. Examples of
these efforts include generating a YouTube video warning tax
professionals of the need to maintain an Information Security Plan,
delivering presentations at regional and national conferences, and
working with private sector entities within the tax eco-system to
enhance information security. CI also works closely with IRS operating
divisions to ensure data losses involving tax preparers and payroll
service providers receive enhanced screening for ID Theft. As of August
17, 2017, CI forwarded information on over 431 incidents involving data
losses that affected 372,776 taxpayers.
CI has noticed a downward trend in the street level crime. However,
it has seen an increase in sophisticated and complex computer
intrusions, spear phishing, and remote accesses takeovers that resulted
in high consistency Stolen Identity Refund Fraud. As a result, IRS CI
will continue to provide RICS (Return Integrity & Compliance Services)
with updated information and personal identifying information for
revenue protection.
Question. What additional measures would help the IRS to better
detect fraud and halt refund fraud schemes in their tracks?
Answer. Several additional measures would help us to better detect
fraud and halt refund fraud schemes. Combating the sophisticated
criminals committing identity theft is a never-ending process that
requires significant resources. Over the last several years, we have
made steady progress against identity theft thanks to the collaborative
efforts of the Security Summit. This strong, unique partnership between
the public and private sectors has allowed us to coordinate efforts on
many different levels and put in place many new and productive
safeguards. These efforts to date have significantly affected the tax
ecosystem. We continue to devote significant time and attention to this
challenge and are committed to doing all that we can to prevent the
payment of fraudulent refunds, pursue the perpetrators, and assist the
victims.
While the PATH Act provisions are assisting us in effectively
administering refundable credits, we need further statutory authority.
Currently, the IRS lacks statutory authority to address, at the time of
filing, claims in excess of lifetime limits and the lack of required
documentation. Instead, we must address these errors through audits,
which takes longer and requires more resources. Granting the IRS the
authority to correct such errors at filing (correctable error
authority) would increase our ability to address more of the improper
claims and errors we identify and decrease improper payments of
refundable credits. We requested this additional authority in the 2018
budget.
In addition, since paid tax preparers prepare more than half of the
returns filed for refundable credits, requiring them to meet minimum
competency standards, through testing and continuing education, would
help promote high quality services from paid tax preparers, improve
voluntary compliance, and foster taxpayer confidence in the fairness of
the tax system. This requirement would benefit all taxpayers, including
those claiming refundable credits. We requested this additional
authority in the administration's 2018 budget.
Question. Is the IRS working in conjunction with other Federal
agencies, such as the Federal Trade Commission and the U.S. Postal
Service, to alert consumers?
Answer. We conducted an extensive consumer education effort on tax
scams and schemes for several years, making it a key part of filing
season information for taxpayers, as well as a central component of
communications work in the Security Summit effort. The Summit, a joint
project between the IRS, State tax agencies, and the private-sector tax
industry, has highlighted Identity Theft (IDT) and tax scams in joint
communications since 2015. This outreach effort has included working
with numerous private-sector partners as well as Government agencies,
including the Federal Trade Commission (FTC). We have actively
participated for several years with the FTC's identity theft efforts,
participating in panels, issuing joint communications, and sharing
information on their respective websites. For example, the IRS
participated in FTC IDT awareness weeks in January 2016 and 2017.
Similar communications efforts have been made with dozens of State tax
agencies participating in the Security Summit.
Question. To what extent is IRS working with paid preparers and the
software industry to leverage their resources and share information
about emerging threats? What are your expectations of the recently
launched ``Don't Take the Bait'' campaign?
Answer. We chartered the Identity Theft Tax Refund Fraud
Information Sharing and Analysis Center (IDTTRF-ISAC) in December 2016
and began pilot operations at the start of this filing season on
January 23, 2017. The IDTTRF-ISAC is a natural result of our Security
Summit activities, which began in 2015 to look holistically at the tax
refund IDT problem across the lifecycle of a tax return. The purpose of
the IDTTRF-ISAC is to share IDT tax refund fraud information, data, and
related analysis with public and private entities to detect, prevent,
and deter IDT tax refund fraud. As of late April 2017, the IDTTRF-ISAC
has 36 member organizations from State departments of revenue and tax
software and tax preparation industries. The two primary capabilities
being piloted this year are: sharing of tax ecosystem alerts and
analyzing leads generated by the tax software and tax preparation
industry, as well as other member data.
Tax ecosystem alerts are akin to a neighborhood listserv for the
tax ecosystem. Members report and share tax ecosystem threats they
encounter so that others can protect themselves against the same or
similar threat. Past threats have included employer W-2 breaches,
compromised return preparers, new schemes, and dark web chatter about
system vulnerabilities. Because of Security Summit workgroup efforts,
we are preventing more identity theft this year than last year, we are
detecting fewer fraudulent refund claims, and fewer people are
reporting that they have become tax-related identity theft victims. The
IRS continues to prevent more fraudulent refunds at the door, which has
a cascading effect on individuals reporting they've become victims of
identity theft. The number of people reporting to the IRS that they
were victims of IDT declined from 698,700 in calendar year (CY) 2015 to
376,500 in CY 2016--a 46 percent drop. This downward trend has
continued into 2017.
We have also worked with State and industry participants to
implement a Rapid Response team for the efficient communication of
emerging threats. These alerts are shared with partners and in the ISAC
functionality.
We designed the ``Don't Take the Bait'' campaign to warn tax
professionals to beware of spear phishing emails, a common tactic
cybercriminals use to target practitioners. The expectation is that
practitioners would become more aware of the types of cyber security
threats facing their businesses and clients. This awareness should also
lead to the establishment or improvement of cybersecurity plans to
protect taxpayers and the IRS from the loss of critical personally
identifiable information. We have been pleased at the significant media
coverage thus far to our weekly releases warning against various
threats to the public, tax preparers, and businesses.
improving services for tax refund fraud victims
Question. For several years, the National Taxpayer Advocate has
endorsed an approach that would assign a single designated IRS account
representative to tax-related identity theft and refund fraud victims
to help navigate the case through the process from intake through
disposition and maintain control of the taxpayer's case. This would
improve the current scheme whereby an already frustrated victim has to
often speak with multiple different assistors and frequently has to re-
explain or resubmit their cases.
--What consideration is the IRS giving to the National Taxpayer
Advocate's proposal to assign a designated IRS account
representative to victims of tax refund fraud for consistent
service from intake to disposition? Why is such an approach not
feasible or preferable?
--What other steps has the IRS taken to improve the handling of tax
refund fraud and identity theft and with what results?
--What more should be done to assist victims?
Answer. Our work on IDT and refund fraud touches nearly every part
of the organization. Helping victims and reducing the time it takes to
resolve cases is a top priority for the IRS.
During 2015, the IRS centralized IDT victim assistance policy,
oversight, and campus case work into a new Identity Theft Victim
Assistance (IDTVA) organization within the W&I Division. IDTVA can work
IDT cases from beginning to end, providing an improved taxpayer
experience.
In the victim assistance area, we have reduced the time it takes to
resolve a case. For most cases, the average time is now less than 120
days, but for more complex cases, resolution can take up to 180 days.
This timeframe is substantially less than a few years ago, when cases
could take over 300 days to resolve. While this change marks a
significant improvement, we continue to look for ways to shorten this
time and ease the burden IDT places on these taxpayers.
Whenever possible, the same employee processes multiple claims
(often for multiple years) from the same taxpayer to make sure there is
consistent processing. In January 2015, the IRS developed automation to
associate IDT documentation with existing IDT cases/category codes. In
April 2016, we expanded the programming to include the association of
documentation with new categories of work resulting from the
centralization effort under the IDTVA organization.
Centralization of IDTVA work enabled full capabilities to use the
Correspondence Imaging System in handling the IDT cases with current or
past compliance activity. This change has significantly affected our
ability to resolve those cases more quickly. Since implementation, we
resolve those cases in fewer than 120 days 75 percent of the time,
compared to 34 percent prior to implementation.
Our toll-free hotline for IDT victims helps taxpayers reach a
trained IDT specialist any time during business hours, without having
to rely on the availability of a single IRS employee. Customer service
representatives staffing this specialty line can review the taxpayer's
case file and respond to the IDT victim's call. While we believe this
approach provides the best possible experience for the victim, we are
aware that sometimes the customer service representative cannot respond
to the IDT victim's call. For these instances, beginning on August 1,
2017, we implemented a process for IDT victims to have direct contact
with the employee working their IDT cases. The customer service
representative will provide the IDT victim with a different toll-free
number to call the employee working his or her case directly. If the
employee is unavailable to answer the IDT victim's call, the victim can
leave a message for the employee, and the employee will return the
victim's call within 5 business days. In addition, we expanded
procedures to achieve a single point of contact when a victim's case
spans multiple years.
restoring irs streamlined critical pay authority
Question. As part of the 1998 restructuring of the IRS, Congress
authorized some unique special personnel flexibilities to help the IRS
recruit and retain highly skilled employees with specialized expertise.
``Streamlined critical pay authority'' permits the IRS to bring in up
to 40 uniquely qualified experts for 4 year appointments to revitalize
and enhance the IRS workforce. The original authority had a 10 year
sunset and was renewed in the fiscal year 2008 FSGG bill for 5
additional years, but has now lapsed as of September 30, 2013. The
President's fiscal year 2018 budget seeks language to reinstate the
authority.
--I understand that other than addressing funding requirements, one
of the IRS's top priorities for the fiscal year 2018
appropriations cycle is the reinstatement of streamlined
critical pay authority. How has the IRS used streamlined
critical pay authority and what have been the primary benefits?
--What types of positions has this authority enabled the IRS to fill?
--What are the ramifications if this now-expired authority is not
renewed?
Answer. Since its inception under the Restructuring and Reform Act
of 1998 (RRA '98), the IRS has found the Streamlined Critical Pay (SCP)
authority to be an enormously valuable tool in recruiting top tier
talent from private industry. The tool has been particularly valuable
in recruiting for positions in the Information Technology (IT)
organization where external talent has contributed greatly to our
keeping pace with the technological advances needed to provide world
class service to the American taxpayer. We have used the authority to
recruit individuals with specific expertise in sensitive, high-level
initiative areas such as:
--IT Engineering
--IT Architecture
--Cybersecurity
--Online/Web Services
In addition to being a useful tool in Information Technology, the
hiring authority has also been invaluable in helping to fill positions
in sophisticated and complex areas of international taxation, risk
management, and data analytics. Because the IRS has not been able to
approve new SCP appointments since the authority expired on September
30, 2013, we have lost all SCP appointees through either appointment
expiration or separation.
The incumbents were sitting in technical, highly-specialized
positions where internal successors with the requisite skills to fill
the position are not readily available to backfill behind the SCP
appointee. Reinstating the SCP authority would allow us to recruit and
hire other highly-specialized executives for critical positions to help
deliver our mission and achieve modernization. To remain with the IRS
absent SCP authority, SCP appointees would have to competitively apply
to an open Senior Executive Service (SES) vacancy announcement and
obtain SES certification from the Office of Personnel Management (OPM)
prior to the end of their appointment. This process can take upwards of
6 months to complete. To bring their salary in line with the pay cap
limitations set under the Executive Schedule, SCP appointees would
incur a significant pay cut to their annual rate of basic pay by 20 to
30 percent. Due to each appointee's high-level of expertise and
technical abilities within his or her related fields, each will be more
than capable of obtaining salaries and compensation packages far
exceeding IRS's capabilities in the private sector.
The SCP authority allowed the IRS to hire top-caliber executives
under an abbreviated timeline. Once a candidate has accepted an SCP
position, IRS can bring the individual on-board within four to 6 weeks.
This includes time to complete the required background and tax checks,
as well as allowing the individual to provide sufficient notice to his/
her current employer. In rare cases, due to the critical nature of the
position, IRS on-boarded a SCP appointee in as few as 2 weeks.
This streamlined hiring capability was crucial in recruiting
highly-skilled professionals. Particularly in the information
technology and cybersecurity fields, the demand for top recruits can be
so aggressive that a speedy hiring process, along with a competitive
compensation offer, can be the difference between hiring a ``game
changing'' executive and losing one to a competitor in either the
public or private sector. Additionally, the SCP authority allows the
Commissioner to set pay up to, but not exceeding, the Vice President's
salary. This flexibility allows the IRS to attract candidates we would
normally not be able to reach due to the pay limitations under the
Executive Schedule.
We used the SCP authority for 171 appointments between October 1,
1998, and September 30, 2013, when the authority expired. The IRS has
three SCP executives on-board; the last of whose term will expire on
September 29, 2017. Since SCP was extended in 2008, the number of SCP
positions has ranged between three (as of August 17, 2017) and 30
(March 2010).
irs management and performance challenges for fiscal year 2017
Question. Each year, the Treasury Inspector General for Tax
Administration (TIGTA) evaluates IRS programs, operations, and
management functions to identify the areas of highest vulnerabilities
to the Nation's tax system. On October 6, 2016, TIGTA issued its
assessment enumerating the top 10 management challenges for 2017. The
number one priority challenge TIGTA cited is security over taxpayer
data and protection of IRS resources.
TIGTA reported that while the IRS recognizes the growing challenge
it faces in establishing effective authentication processes and
procedures, the IRS has not established a service-wide approach to
managing its authentication needs. Consequently, the level of
authentication the IRS uses for its various services is not consistent.
TIGTA emphasized that while the IRS is evaluating potential
improvements to existing authentication methods to prevent identity
theft, the IRS is not developing overall strategies to enhance
authentication methods across IRS functions and programs.
--Mr. Koskinen, what are your perspectives on TIGTA's identification
of the most challenging management concerns facing the IRS?
Answer. Each year, TIGTA identifies the IRS's major management and
performance challenges based on the findings and results of prior audit
work and other analyses. TIGTA then designs and delivers an audit plan
with audit work focused in each of the top 10 areas. In fiscal year
2017, TIGTA reported IRS top management and performance challenges, in
order of priority, as:
1. Security Over Taxpayer Data and Protection of IRS Resources
2. Identity Theft and Impersonation Fraud
3. Implementing the Affordable Care Act and Other Tax Law Changes
4. Improving Tax Compliance
5. Reducing Fraudulent Claims and Improper Payments
6. Improving Tax Systems and Expanding Online Services
7. Providing Quality Taxpayer Service Operations
8. Impact of Global Economy on Tax Administration
9. Protecting Taxpayer Rights
10. Achieving Program Efficiencies and Cost Savings
TIGTA included identity theft as a new challenge in fiscal year
2017, removing human capital from the list. We certainly agree these
areas represent important challenges and opportunities for the IRS.
TIGTA's Fiscal Year 2017 Annual Audit Plan contained 168 new or in-
process audits focused on these 10 challenges. Leadership and
management enterprise-wide are actively engaged throughout the audit
process and appreciate our auditors' objective reviews of IRS programs
and processes. We carefully consider all reported findings and
recommendations.
I personally appreciate TIGTA's insightful and continued attention
to the most challenging concerns the IRS faces, and consider TIGTA a
partner in helping the IRS achieve its mission.
Question. How does the IRS under your leadership integrate the
findings and recommendations for corrective action suggested by GAO and
TIGTA audits into strategic management decisionmaking and budget
planning processes?
Answer. As mentioned above, we carefully consider all reported
findings and recommendations by TIGTA and the Government Accountability
Office (GAO). We must ensure we use our budget and resources to address
the most significant vulnerabilities identified. Since 2015, the GAO
has provided a list of its Priority Recommendations, asking us to focus
on the recommendations it cited as having the highest priority.
Responsible officials at the management and executive level must
assess whether taking corrective action in the finding area is mission-
critical and if funding is available. If funding is not available when
management is responding to the reported findings, a business unit may
place a recommendation on hold and leadership may periodically assess
its status throughout the budget cycle. As of August 15, we have 219
outstanding corrective actions in our inventory, with another 18 on
hold. More than 100 new corrective actions will be added to our
inventory as fiscal year 2017 audit activity concludes.
irs reporting requirements
Question. In November 2016, the IRS issued Internal Revenue Notice
2016-66. There have been numerous complaints that this notice imposes
burdensome and duplicative information reporting requirements on 831(b)
Captives, their owners and, in some cases, even their service
providers.
--Will the IRS commit to carefully reexamine the requirements imposed
by this Notice, including meeting with small and medium-sized
businesses that are impacted by new reporting requirements to
understand their concerns?
Answer. We issued Notice 2016-66 late last year to identify certain
micro-captive transactions as transactions of interest because they
have the potential for tax avoidance or evasion. As you note, the
notice requires disclosure from participants in the identified
transactions and their material advisors. These disclosures allow the
IRS to gather information to determine which transactions are or have
the potential to be abusive tax avoidance transactions. We have begun
to evaluate the information we have received in these disclosures to
determine what steps are appropriate as we work toward addressing
potential tax abuse in this area.
To minimize the burden of the disclosure requirements, we carefully
crafted the objective criteria in Section 2 of Notice 2016-66, which
describes the micro-captive transactions that are subject to
disclosure. Specifically, we require disclosure only if an insured
entity or a related party owns at least 20 percent of an electing
section 831(b) captive insurance company, and for the most recent five-
year period the captive insurance company either has liabilities less
than 70 percent of its premiums earned or has made its capital
available to the insured entity or a related party.
We requested comments from the public about the notice and received
28 comments and 6 congressional inquiries, including this Question for
the Record. In addition, we met with those who requested meetings and
responded to telephone calls regarding the notice. Subsequently, the
United States Tax Court issued its first decision on a micro-captive
transaction challenged by the IRS (Avrahami v. Commissioner, 149 T.C.
No. 7, filed August 21, 2017), concluding that the entity purported by
the taxpayers to be a micro-captive insurance company was not an
insurance company and holding that payments made to that entity did not
qualify as insurance premiums. We will continue to evaluate the
disclosures received and developments in this area.
______
Questions Submitted by Senator Joe Manchin, III
modification of tax documents
Question. Commissioner Koskinen, IRS taxpayer notices are the
primary mode by which the IRS communicates with taxpayers. As you often
say, in an effort to prevent phone scams involving people impersonating
IRS officials ``If you are surprised to be hearing from us, you aren't
hearing from us.''
However, the way that IRS communicates with taxpayers by mail is
frustrating to many. Ten percent of IRS notices don't reach their
intended audience, which represents a total failure of communications
at roughly twice the industry average. When a taxpayer receives a
notice, it is often an indecipherable block of text using stock
language and no visual or graphical clues as to what the taxpayer
should do or why.
Moreover, IRS plans to address its high failure rate, which involve
moving to online communications, are destined to be incomplete
solutions at best.
My recommendation would be for IRS to learn from the best practices
at use in industry. When I get a statement for a credit card or
utility, it uses color, modern iconography, and clear text because that
credit card or utility knows that it is in their interest and my
interest for me to be able to understand the information that is being
conveyed.
--When will IRS implement color and graphics in order to make its
notices more understandable?
Answer. I agree that we need to ensure that our communications with
taxpayers are as clear as possible. We began to revise notices in 2010
to comply with the Plain Writing Act of 2010. Since 2010, we have
reviewed all new and revised notices for compliance with the Plain
Writing Act on a continuing basis. Our goal is to create notices that
are clear, concise, and well-organized and that follow best practices.
We do not have the color printers necessary to produce color notices.
We need to conduct more in-depth analysis of the requirements necessary
to determine a full implementation schedule and cost.
Question. What is IRS doing to reduce its undeliverable mail
problem?
Answer. Over the past several years, we have implemented several
mailing best practices to reduce undeliverable mail. To obtain the most
current valid address, we run a series of address update routines.
Following industry best practices, we use commercial address hygiene
software approved by the United States Postal Service (USPS) that
validates each address. We also consult the USPS National Change of
Address (NCOA) dataset so our records are updated to reflect the most
current address available. In 2013, we began using USPS Full Service
Intelligent Mail barcodes that provide the ability for enhanced
tracking and improved address quality. We are also exploring several
other address initiatives, including providing a secure method for
taxpayers to change their addresses online.
We have improved since 2010 when TIGTA issued its report about
undeliverable mail. The report stated that IRS fiscal year 2009
undeliverable mail volume was 19.5 million (201 million mailed). The
fiscal year 2016 undelivered mail volume was 16.3 million (215 million
mailed). The current fiscal year 2017 IRS deliverability of mail rate
is 92.6 percent. This rate is lower than the industry average. Most
undeliverable mail is caused by a taxpayer moving and not providing a
forwarding address or providing a bad, uncorrectable address.
tax-payer assistance
Question. Commission Koskinen, as you mention in your testimony,
there's no question that the efficient operation of the Internal
Revenue Service is integral to the functioning of our Government. Plain
and simple, our Government needs revenue to work.
For many citizens, especially those in rural areas like West
Virginia, the Internal Revenue Service has, in fact, become less of a
service. As the IRS continues to find ways to cut costs, access to
paper forms and assistance has continually been reduced. Furthermore,
the switch to offering online services may be favorable for some--but
only for people who have broadband access and feel comfortable using
the Internet. Unfortunately, this is not the case for many West
Virginians.
Many West Virginians simply want to pay what taxes they owe and
comply to the best of their ability. It just makes sense that the IRS
would want to help people comply before they need to file so that we
don't waste resources on the back end through enforcement measures and
cause our citizens unnecessary headaches.
--In the budget justification, a cut of $153 million is proposed to
the office of Taxpayer Services. How does this funding
reduction contribute to improving the service aspect of the
Internal Revenue Service?
Answer. We provide service through a variety of channels, including
toll-free service, walk-in assistance, correspondence, and a growing
range of online self-assistance tools funded by the Operations Support
account, not from the Taxpayer Services account. We support the
Administration's efforts to reform the Federal Government and deliver
services in the most efficient manner possible. Funds are provided to
help us update our out-of-date IT infrastructure. We are committed to
providing services that will satisfy taxpayer needs by taking advantage
of the latest tools and technology aimed at transforming the entire
taxpayer experience. We continue to develop ways to provide our
services so taxpayers can conveniently and securely engage us at the
time and place of their choosing.
To do that, we need to continue to invest in new information
technology and services. Reducing funding in Taxpayer Services may
affect level of service on the phones and in-person interaction,
depending on the volume of interactions. However, investing in our
online capabilities will improve our ability to provide our services as
more and more taxpayers choose to interact with us online in a secure,
virtual environment in the same manner they do with other financial
institutions. The more often taxpayers successfully obtain the
information and help they need by visiting IRS.gov and using our online
tools, instead of calling or visiting, allows for greater capacity to
help those taxpayers who prefer or need to interact with us on the
phone or in person.
______
Questions Submitted to Hon. J. Russell George
Questions Submitted by Senator Christopher A. Coons
implications of funding cuts
Question. In your fiscal year 2018 budget request, you seek
$161.113 million in appropriated funds. This proposed level represents
a cut of $8.521 million (5 percent) below the $169.6 million in current
year resources, and would appear to necessitate a significant reduction
in TIGTA's workforce.
Can you describe the implications of this funding level on staffing
of critical TIGTA audits and investigations?
Answer. Nearly 75 percent of TIGTA's budget supports labor and
benefit expenses so that a cut in the fiscal year 2018 budget requires
a reduction in labor costs and Full-Time Equivalents. Staffing for both
the Office of Audit and the Office of Investigations will be reduced
resulting in a decreased number of investigations and audits. TIGTA's
Office of Investigations will be limited in its ability to respond to
every allegation of Internal Revenue Service (IRS) employee misconduct
and it will extend the amount of time it takes to investigate all of
the allegations received by TIGTA. The budget cut will also affect
TIGTA's ability to conduct investigations and audits of the IRS's
electronic taxpayer data sharing programs. This is critically important
as international criminals continue to target and exploit the IRS's
data systems. TIGTA's Office of Audit will have a higher percentage of
staff devoted to mandated audits versus high-risk audits.
Question. With less resources, could TIGTA expect to experience a
decline in the high-risk audits currently conducted that have had
quantifiable positive outcomes such as cost savings, revenue
protection, and taxpayer privacy and security benefits?
Answer. Yes, with less resources, the Office of Audit will initiate
less audits in areas such as information security, international tax
compliance, and identity theft. Additional resources would allow TIGTA
to more fully support critical audit priorities.
Question. In fiscal year 2016, TIGTA realized several laudable
accomplishments including $14.6 billion in increased or protected
revenue, $40.8 million in cost savings; and $487 million through
significant investigative work, for a commendable return on investment
of $90 for every $1 invested. Do you believe a funding cut could
adversely impact TIGTA's ability to sustain those successes?
Answer. Yes. With less resources, the Office of Audit will initiate
less audits in high-risk areas identified through our risk-based
strategic planning. A reduction in the number of audits would adversely
impact the amount of financial benefits resulting from the Office of
Audit's work. Similar to the Office of Audit, the budget cut will
reduce the number and complexity of TIGTA's investigations, especially
in the IRS's automated environment where the majority of high-level
criminal exploitations are occurring.
safeguarding taxpayer information
Question. Like Inspectors General in other Federal departments and
agencies, TIGTA issues an annual report regarding the top management
challenges facing agencies. In TIGTA's top management challenges report
of October 6, 2016, protecting the confidentiality of taxpayer
information by the IRS was identified as the #1 priority concern for
fiscal 2017.
Why do you consider protecting the confidentiality of taxpayer
information by the IRS to be the most critical challenge and what
recommendations do you have for responding to this challenge?
Answer. The threat landscape has become more prominent than ever.
Bad actors are relentless and persistent in their pursuit of monetary
gain. Recent cyber events against the IRS have illustrated that these
bad actors are continually seeking new ways to attack and exploit IRS
systems and processes in order to steal tax information for the purpose
of identity theft and filing for fraudulent tax refunds. From the IRS
Get Transcript incident to the FAFSA IRS Data Retrieval Tool incident,
we have witnessed where the IRS closed one systemic weakness only to
find that these criminals discovered another means to pilfer tax
information from the IRS. Our investigations and audits have also
identified significant internal threats to protecting the
confidentiality of taxpayer information.
For these reasons, we believe protecting the confidentiality of
taxpayer information remains the top management challenge for the IRS.
To assist the IRS in meeting its fiduciary responsibility to protect
taxpayer data, we perform an array of cybersecurity audits and
investigations of the IRS and make recommendations so the IRS can
improve its security posture.
Our audits have assessed the IRS's ability to protect its systems
and data from external threat. For example, we have conducted audits of
the Get Transcript online application and electronic authentication
platforms and made recommendations to develop a Service-wide strategy
that establishes consistent oversight of all authentication needs
across IRS functions and programs, ensures that the level of
authentication risk for all current and future online applications
accurately reflects the risk, and ensures that the authentication
processes meet Government Information Security Standards. In just one
of our investigations involving the Get Transcript exploitation,
TIGTA's agents and analysts were able to identify and cause freezes on
tax accounts that could have resulted in over $168 million dollars in
fraudulent IRS tax refunds.
In addition to external threats, the IRS must ensure its systems
and data are protected against internal threats. These threats may
appear in the form of malicious insiders or disgruntled employees who
seek to misuse their access privileges for personal gain. These threats
may also come in the form of employees who unintentionally or
accidentally do something that may create a security weakness that may
be exploited by others or unnecessarily expose data to unauthorized
access and/or disclosure.
For example, TIGTA audits of various internal systems have
highlighted the following problems: users have been given more access
privileges than their job requires; systems have not been updated with
security patches on a timely basis, and high-risk security
vulnerabilities have not been mitigated as required. OI's data analysis
techniques are instrumental in identifying IRS employees who access
taxpayer records without authorization, then use the information for
illegal activities. In one recent investigation, TIGTA identified an
IRS employee who accessed the IRS data of thousands of names, dates of
birth, and Social Security Numbers from IRS data systems and then filed
hundreds of fraudulent returns that claimed over $550,000 in fraudulent
tax refunds. The IRS employee worked with two co-conspirators to cash
the refunds. As a result of TIGTA's investigation, the former employee
was sentenced to serve over 9 years in Federal prison and was ordered
to pay over $438,000 in restitution.
Question. Do you believe the IRS is doing enough to address
deficiencies in the security and effectiveness of authentication
methods for access to information systems?
Answer. Our audits have found that the IRS has performed well at
protecting its perimeter network against cyberattacks. In that regard,
we believe the IRS is doing enough to ensure hackers are not successful
in their attempts to directly attack the IRS's Internet-facing
applications. However, the IRS must make significant gains in its
deployment of audit trails for all of its data systems to enable TIGTA
and the IRS to identify IRS employees who abuse their access authority
in order to steal or improperly manipulate taxpayer data (i.e., prevent
insider threats). In addition, other audits have shown that much work
needs to be done to strengthen the IRS's internal security posture.
In regards to the effectiveness of authentication methods for
access to information systems, we have found that the IRS continues to
take steps in response to TIGTA's recommendations to provide more
secure authentication, including the implementation of two-factor
authentication, and strengthening application and network controls.
However, as noted, we remain concerned about the IRS's logging and
monitoring capabilities over all connections to IRS online services. We
currently have two audits in process that will provide updated progress
and assessments on authentication controls to online services: Review
of the Online Transcript Delivery System and Electronic Authentication
to IRS Online Services. Both audit reports are expected to be issued in
October 2017.
CONCLUSION OF HEARINGS
Senator Capito. Again, I thank you all and this
subcommittee is hereby adjourned.
[Whereupon, at 11:35 a.m., Wednesday, July 26, the hearings
were concluded, and the subcommittee was recessed, to reconvene
subject to the call of the Chair.]