Hearing on Internal Revenue Service Operations and the 2014 Tax Return Filing Season _____________________________________ HEARING BEFORE THE SUBCOMMITTEE ON OVERSIGHT OF THE COMMITTEE ON WAYS AND MEANS U.S. HOUSE OF REPRESENTATIVES ONE HUNDRED THIRTEENTH CONGRESS SECOND SESSION ________________________ May 7, 2014 __________________ SERIAL 113-OS8 __________________ Printed for the use of the Committee on Ways and Means

 

COMMITTEE ON WAYS AND MEANS DAVE CAMP, Michigan,Chairman
SAM JOHNSON, Texas KEVIN BRADY, Texas PAUL RYAN, Wisconsin DEVIN NUNES, California PATRICK J. TIBERI, Ohio DAVID G. REICHERT, Washington CHARLES W. BOUSTANY, JR., Louisiana PETER J. ROSKAM, Illinois JIM GERLACH, Pennsylvania TOM PRICE, Georgia VERN BUCHANAN, Florida ADRIAN SMITH, Nebraska AARON SCHOCK, Illinois LYNN JENKINS, Kansas ERIK PAULSEN, Minnesota KENNY MARCHANT, Texas DIANE BLACK, Tennessee TOM REED, New York TODD YOUNG, Indiana MIKE KELLY, Pennsylvania TIM GRIFFIN, Arkansas JIM RENACCI, Ohio	SANDER M. LEVIN, Michigan CHARLES B. RANGEL, New York JIM MCDERMOTT, Washington JOHN LEWIS, Georgia RICHARD E. NEAL, Massachusetts XAVIER BECERRA, California LLOYD DOGGETT, Texas MIKE THOMPSON, California JOHN B. LARSON, Connecticut EARL BLUMENAUER, Oregon RON KIND, Wisconsin BILL PASCRELL, JR., New Jersey JOSEPH CROWLEY, New York ALLYSON SCHWARTZ, Pennsylvania DANNY DAVIS, Illinois LINDA SÁNCHEZ, California
JENNIFER M. SAFAVIAN, Staff Director and General Counsel JANICE MAYS, Minority Chief Counsel

   

 

SUBCOMMITTEE ON HUMAN RESOURCES CHARLES W. BOUSTANY, JR., Louisiana, Chairman
DIANE BLACK, Tennessee LYNN JENKINS, Kansas KENNY MARCHANT, Texas TOM REED, New York ERIK PAULSEN, Minnesota MIKE KELLY, Pennsylvania	JOHN LEWIS, Georgia JOSEPH CROWLEY, New York DANNY DAVIS, Illinois LINDA SÁNCHEZ, California

Advisory of May 7, 2014 announcing the hearing

WITNESSES


The Honorable John Koskinen
Commissioner, Internal Revenue Service
Testimony
 

The subcommittee met, pursuant to call, at 10:30 a.m., in Room 1100, Longworth House Office Building, Hon. Charles Boustany [chairman of the subcommittee] presiding.

 [The advisory of the hearing follows:]

_________________________________________________________________

 

Chairman Boustany.  In the interest of time, we are going to go ahead and get started.  We are still waiting on the ranking member Mr. Lewis.  He should be here shortly.  The subcommittee will now come to order, and good morning to everyone.  Welcome to the subcommittee on oversight's hearing on the Internal Revenue's operation budget and filing season. 

This filing season, millions of taxpayers across America have struggled to meet their tax filing obligations.  Doing so has become harder over time as the tax code grows in complexity, forcing taxpayers to spend over $6 billion and $160 billion every single year to comply with its filing requirements.  At the IRS, hard‑working public servants also bear the weight of America's outdated tax code. 

Despite these challenges and another late start to the filing season, the IRS appears to have carried out the 2014 filing season with success.  Initial reports suggest the 2014 filing season was free of problems that have marred previous filing seasons.  As of early April, the Service processed over 98 million returns, issued 80 million refunds, responded to nearly 40 million calls with lower wait times, and all of these are improvements over last year. 

Members of subcommittee and I congratulate Commissioner Koskinen and the thousands of dedicated career IRS employees on a successful filing season.  We thank them for their hard work under difficult circumstances.  In IRS offices across the country, public servants work hard to administer the Nation's tax laws fairly and accurately.  This is not an easy task, and we thank them for their service

However, these successes have occurred against the backdrop of the ongoing investigation into the agency's targeting of conservative groups applying for tax‑exempt status.  As the agency works to recover from the scandal, these kinds of successes will help the agency regain the trust of the American people.  It is still a long road, and how the IRS responds to the ongoing investigation will affect the pace of recovery for better or worse.  But I have to say, we still have serious concerns with regard to the integrity of the agency based on three findings so far in this investigation. 

First, Lois Lerner defied internal IRS controls to target certain taxpayers.  This is a serious concern.  On April 9th, the committee sent a letter referring former executive ‑‑ or Exempt Organization Division Director Lois Lerner to the Attorney General Holder for potentially engaging in criminal wrongdoing in her capacity as EO director.  One of these actions, in particular, has serious implications for the IRS as it rebuilds.  The committee uncovered evidence that shows Ms. Lerner acted in defiance of internal controls developed to ensure that no single IRS employee could target an organization for adverse determination or exam.  Ms. Lerner was not only familiar with these internal controls, they were policies she created and touted publicly as a way of commending her agency's impartiality. 

The evidence shows that Ms. Lerner knowingly bypassed these controls, reached into her division, and directed that specific organizations be subjected to audit.  And yet, as official IRS reports declare ‑‑ an official IRS report declared, quote, "we have not found evidence of intentional wrongdoing by IRS personnel," end quote. 

Given the evidence the committee has uncovered ‑‑ given the evidence the committee has uncovered so far, this is to the contrary, and I call on the IRS to review the agency's internal controls to ensure that this type of targeting can never happen again. 

Second, donors whose names were inappropriately requested by the IRS were audited.  Equally troubling is new evidence uncovered by the committee that shows the IRS' exam function may have been used for political purposes.  It is well known that the IRS improperly requested donor information from scores of conservative groups.  For months, this committee has asked the IRS what it did with these improperly obtained lists and whether those lists were used to target individual donors to right leaning groups.  Recently, the committee uncovered new information indicating that after groups provided the information to the IRS, nearly 1 in 10 donors were subject to audit, and the abuse of discretion in audit selection must be identified and stopped. 

Because of failures in IRS policy exploited by Lois Lerner and the possible targeting of conservative donors, I have requested that the Government Accountability Office undertake a thorough review of the policies and procedures for audit selection by the IRS' small business and self‑employed division.  Last year, I made a similar request that GAO audit the Exempt Organizations Division.  I understand that audit is already under way.

And Commissioner Koskinen, I call on you to give GAO your unqualified cooperation to the ‑‑ with these audits so we can shed sunshine on this to begin to restore the public confidence in the IRS. 

Third, the IRS has denied some applicants for exempt status their right to an independent appeal.  Through the committee's investigation, we have also found the IRS was, until recently, denying certain applicants with tax‑exempt status their right to an independent appeal process as guaranteed by the IRS Restructuring and Reform Act of 1998.  Ordinarily, if an applicant for exempt status is denied, the applicant can appeal to an independent appeals division.  This was mandated by the 1998 IRS Restructuring Act.  However, if Washington, D.C., selected an applicant for additional review, an adverse determination was not appealable.  The most a disappointed applicant could actually do was protest to the very same officials who denied the group in the first place.  Noteworthy is that all of the applicants were subject to extra scrutiny based on the name "Tea Party" or "policy objective" to "Make America a Better Place to Live."  These groups had their appeal rights taken away. 

This practice would never have come to light but for the committee's thorough oversight of the agency, and as a consequence, the IRS has now pledged to change its practice, and I know, Commissioner, we discussed some of this yesterday.  We are gratified by this change, but I call on the IRS, Mr. Commissioner, today, to ensure that all applicants who were denied their right to a fair independent appeal process receive one.  Some of these are left sort of in limbo on this, and we hope they will be given due consideration with a fair appeals process. 

The IRS cannot be an agency in which one senior executive can easily circumvent policies designed to safeguard taxpayers' due process rights.  It cannot be an agency in which taxpayers are denied their right to an appeal based on the location of their file, and it cannot be an agency that audits taxpayers based on improperly obtained information. 

Commissioner Koskinen, I do appreciate your hard work under difficult circumstances, but this subcommittee cannot simply take the IRS' assurances at face value.  The IRS' problems must be addressed through frank and serious conversations, so I look forward to discussing these matters and more during today's hearing.  And again, I applaud the commissioner and the IRS for the good work during the 2014 filing season, and I hope the agency will continue with this success and continue all the work that it is going to take to rebuild the trust of the American people. 

With that, I now am very pleased to yield to my dear friend and distinguished ranking member Mr. Lewis.

Mr. Lewis.  Thank you very much, Mr. Chairman. 

Mr. Chairman, I want to apologize to you and other members of the committee for being a little late here.

Chairman Boustany.  No need for apologies.

Mr. Lewis.  Well, thank you very much. 

Thank you, Mr. Chairman, for holding this important hearing. 

Mr. Commissioner, thank you for joining us today and congratulations to you and the IRS staff on a successful filing season.  Over the past year, the IRS has dealt with many serious challenges.  I commend you for taking the time to get out into the field to visit and connect directly with IRS staff across the country.  Your thoughtful work and outreach has restored the morale of thousands of IRS employees, and I speak for many when I thank you for your efforts to tackle the serious challenges facing the agency. 

As we all know, many issues remain.  Chief among them is the need to increase the IRS budget.  Last month, the Government Accountability office released a report that makes it clear that reducing the IRS budget has cut thousands of staff and hurt taxpayers.  The agency sorely needs adequate resources in order to provide our taxpayers with the service they expect and deserve. 

When you can't get an answer on the telephone for 20 minutes, taxpayers hang up.  When you don't get an answer to your letter for 30 or 60 or even 90 days, you get aggravation.  Taxpayers deserve better.  There are hard‑working Americans who need a functioning IRS and want to have faith in our government. 

For the very first time, the Affordable Care Act has opened the doors for millions of Americans to access for healthcare.  This will mean more work for the IRS, and we need to make sure that the agency has all of the necessary resources to do their part in a fair and transparent manner.  The administration had requested $12.5 billion for the IRS fiscal year 2015 budget.  Although that may seem like a lot, the IRS is getting less funding today than they did in 2009, and even if they were fully funded, which we know is unlikely, the GAO estimates this would only bring the IRS back up to 2012 staff levels.

It is important to highlight that providing the IRS with the necessary resources also helps crack down on identity theft and tax cheats.  Last year, the IRS examination on individual tax returns declined 5 percent and collection activity declined 3.3 percent ‑‑ rather, 33 percent.  That is a great deal.  When we don't fund the IRS enforcement effort, we essentially endorse an unfair playing field and reduce compliance across the board. 

Mr. Chairman, I am hopeful that this committee, with us working together, we can find a way to work together and with the commissioner to provide the IRS with adequate resources and to make the IRS the best Federal agency in our government. 

Again, Mr. Chairman, thank you for holding today's hearing, and I look forward to working together, as I stated before, in a bipartisan manner for the good of our country and the good of all of our taxpayers.  Thank you, and I yield back. 

Chairman Boustany.  I thank the gentleman for his comments. 

Now, it is my pleasure to welcome our one witness for this hearing today, the Honorable John Koskinen, Commissioner of the Internal Revenue Service. 

Commissioner Koskinen, thank you for your time today.  We welcome the opportunity to discuss a whole host of issues, the state of the IRS with you today, how you see things going forward.  The committee has certainly received your written statement, which will be made part of the formal hearing record, and as is customary, we will give you 5 minutes to make an opening statement to deliver your oral remarks, and then we will go forward with questioning. 

So, sir, you may begin.

STATEMENT OF THE HONORABLE JOHN KOSKINEN, COMMISSIONER, INTERNAL REVENUE SERVICE, WASHINGTON, D.C. 

Mr. Koskinen.  Thank you, Mr. Chairman. 

Ranking Member Lewis, members of subcommittee, thank you for the opportunity to discuss the 2014 filing season and our actions to reduce improper payments.  The IRS, as noted, delivered another successful filing season this year, rising to the challenges posed by an incredibly tight budget. 

Through April 25th, the IRS received more than 134 million individual income tax returns, of which 87 percent were file electronically.  We will have processed nearly 150 million individual returns and sent out well over 100 million refunds when we close the books on this filing season next fall.  This is a tremendous accomplishment that does not happen automatically or by accident, but as the chairman noted, as a result of the efforts of our highly experienced, capable, and dedicated workforce. 

During this filing season, we were able to improve our phone service somewhat, despite our funding limitations.  This was done in large part to the diligent efforts of our employees as well as our improved ability to provide information to taxpayers on our Web site, IRS.gov, and the lack of major tax legislation in 2013. 

Because of the dropoff in call volume, we maintained a level of phone service during the filing season of about 71 percent, which is better than last year's average of 60.5 percent but still an unacceptable level of service since it means that about 30 percent of calls did not go through. 

Furthermore, now that filing season is over and we no longer have extra seasonal employees, we will have fewer people on the phones, and we expect wait times to increase significantly between now and the end of September.  For all of this fiscal year, we expect our level of phone service to drop below 70 percent and end up closer to last year's number. 

Looking beyond the filing season, we are concerned that levels of service and enforcement will continue to decline as a result of budget constraints.  Our funding for this year was set at $11.29 billion, more than $850 million below our fiscal 2010 level, and $500 million below our presequestration level.  We have 10,000 fewer employees today than we did in 2010, even as our responsibilities have continued to expand. 

Turning to improper payments, one of our major areas of focus, it remains the fight against refund fraud, especially fraud caused by identity theft.  I am pleased to report that over the last couple of years, the IRS has made important progress in this area.  In 2013, we suspended or rejected 5.7 million suspicious returns worth more than $17.8 billion in refunds.  Through April 18th of this year, more than 3 million suspicious returns have been stopped. 

We have also opened more than 500 new investigations into identity theft and refund fraud screens thus far in fiscal 2014, bringing the total number of active cases to more than 1,800.  We will remain vigilant, given the propensity of fraudsters to adapt to changing circumstances and to develop new and more complicated schemes.  Even with the progress we have made thus far, I have recently asked our senior leadership team to reevaluate everything we are doing in this area and to consider additional steps we could take to prevent refund fraud, especially that caused by identity theft. 

Another way we are working to reduce improper payments is by improving compliance with regard to refundable tax credits, especially the earned income tax credit program.  Our programs that focus on EITC combine to protect approximately $4 billion annually.  Even so, we continue to be concerned that the improper payment rate for EITC remains unacceptably high.  We now have a working group assessing our past and current efforts in this area and exploring new possibilities for improving compliance. 

Congress can help us on both refund fraud and EITC by enacting several proposals in this year's budget for the IRS.  One would accelerate the due dates of third‑party information returns, which would allow us to match up those documents against income tax returns earlier in the tax filing process and to more quickly spot errors and potential fraud.  Another proposal would provide the IRS with greater flexibility to address correctable errors, which would allow us to automatically fix more errors on returns than we can do now, thus avoiding costly audits or allowing errors to go uncorrected. 

We also urge Congress to enact our proposal to explicitly authorize the IRS to regulate paid tax return preparers.  Given that more than half of the returns claiming an EITC refund credit are done by paid preparers, this proposal would be an important addition to our efforts to improve compliance in this area.

Even with these legislative changes, which would be very helpful, the biggest challenge to our efforts to reduce improper payments remains our ongoing lack of adequate resources.  Without sufficient funding, our ability to proceed with any new initiatives in this area will be constrained, and it will be increasingly difficult even to maintain current levels of service and enforcement. 

This concludes my opening statement.  I will be happy to take your questions.

Chairman Boustany.  Thank you, Commissioner.

[The statement of Mr. Koskinen follows:]

Chairman Boustany.  I want to cover some of the information and concerns we have with regard to the investigation to start with.  I know we had a wide‑ranging conversation yesterday, and I do appreciate talking about all of the issues, but the committee's investigation of targeting has yielded a number of insights into operations during that timeframe of the Exempt Organizations Division, and the committee found that EO has been run in a manner that was inconsistent with the IRS Restructuring and Reform Act of 1998, as mentioned in my opening.

The act calls for an independent appeals function that would ensure taxpayers' due process rights.  And during the course of the investigation, we found that some groups whose applications were sent to IRS headquarters in Washington automatically lost their right to an independent appeal.

Commissioner, isn't it true that the groups that TIGTA said were targeted on the basis of their name or policy position were sent to Washington, D.C., for review?  In other words, bypassed the determinations process in Cincinnati, went straight up to, I think it was EO Technical for review; is that true? 

Mr. Koskinen.  Yes.  I am not sure whether all of them went but certainly a number of ‑‑ significant number went to Washington to that Technical review process.

Chairman Boustany.  Right.  Did any of those groups that were referred to EO Technical, did they lose their right to an independent appeal as a result ‑‑ for an adverse determination? 

Mr. Koskinen.  Yes.  It is my understanding that in lieu of an appeal, as you noted, they were referred ‑‑ they did have a right to appeal, but it was to a set of 3 IRS executives, not the appeals process.

Chairman Boustany.  Right.  And so can you give us your commitment, because part of this oversight activity is to understand where there were breakdowns.  Can you give your commitment to these groups that were treated unfairly in this independent appeals process, will they be given an opportunity to have due process? 

Mr. Koskinen.  Yes.  We have changed the process.  Anyone that comes to Washington ‑‑ well, retain their appeal rights that they would have had if they were in Cincinnati, and anyone who would like to avail themselves of that appeal process will have it open to them. 

Chairman Boustany.  Okay.

Mr. Koskinen.  And going forward, everyone who is given a proposed denial will have the right to appeal.

Chairman Boustany.  And I appreciate that reform, and that is going prospectively forward.  What about those who are caught in this problem?  Will they be given due process? 

Mr. Koskinen.  Yes.  Anyone who was caught in that process, would like to come back through and appeal their ‑‑ the decision.  There were relatively few denials.  The biggest problem in the process was the lengthy, far too lengthy time that people were stuck in the process, but the handful of those that were denied, if they did not have their appeal right out of the Washington, they can come, and we would give them that.

Chairman Boustany.  I thank you for that answer.  Now I am going to give you a sampling of some kinds of statements Congress has heard from key IRS officials over the past couple of years.  At a hearing before the House Appropriations Committee Subcommittee on Financial Services and General Government in March of 2012, former Commissioner Shulman said, and I quote, "we have the safeguards built into this process so that no one person can decide to examine an organization based on political activities.  You can't just get a case, go off in a corner, and run with your own agenda," end quote. 

Then, separately, as we embarked on the investigation, Joseph Grant, the former IRS commissioner for TEGE, Lois Lerner's former boss, was asked by our staff in a transcribed interview if it would be appropriate for an IRS manager to refer a specific taxpayer to Exams, and he said, and I quote, "I believe it would not be appropriate to intervene on their own," end quote.

So, Commissioner, the IRS has long insisted, and we have gotten numerous documentation through letters and responses that our subcommittee has received, IRS has long insisted that Americans should not worry about political targeting at your agency because the IRS has layers of internal protections to guard against it. 

But in the course of our investigation, however, we found that Lois Lerner acted in defiance of these internal protections to select groups ‑‑ in order to select groups for adverse determination or audit.  She was doing all of this while IRS officials were assuring Congress it wasn't happening.  But those assurances ring hollow now, and you have got the responsibility of restoring the trust. 

How will you assure the American people that no one IRS employee is going to decide whether or not they are audited and that there are safeguards in place? 

Mr. Koskinen.  I think it is a critical issue.  As I said in the past, every taxpayer deserves the right to assume that they will be treated fairly, no matter what their political beliefs, what organization they belong to, who they voted for in the last election. 

As I said, if you hear from us, you are hearing from us because of something in your application or in your return, and anybody else with a similar issue would be treated similarly.  So there are ‑‑ and we have reviewed and we look forward to the GAO, and we are delighted to cooperate with the GAO reviews of the entire examination process, the controls that are in place.  They are significant controls.  No situation and no system self executes, so one of the reasons I have been out to all 25 of the major offices, I have talked to over 10,000 IRS employees is to encourage employees to understand that we need the benefit of their advice and their insights, their suggestions for improvements, but we also need to hear from them when they think something isn't going the way it ought to go.  We need to have that information flow easily from the bottom up. 

I also, as you know, am a great support of inspectors general.  I once chaired the cross‑agency Council of Inspectors General for 3 years, and when I was in the private sector, I had the same view that internal auditors, as I tell employees, and inspectors general are management's best friends because they find problems before they get bigger. 

So we have to be open to all flows of information and concerns.  I have said in the past and I truly believe it, that when we hear from Members of Congress, if we hear from one Member, it is probably about an anecdotal issue.  If we hear from several Members of the Congress, that means there is an issue that we should investigate, so I think the process that I hope will reassure Americans is that not only do we have a structure in place, but we are trying to build a culture that will accept and be welcoming to people who say there is a problem you need to look into.  Whether that information comes from frontline employees, managers in the middle, whether it comes from Members of Congress and their constituents, whether it comes from GAO or the IG, we have to be open to that and be prepared to respond. 

Chairman Boustany.  And then my final line of questioning.  I want to address this issue that received some media attention recently with regard to bonuses of IRS employees. 

The Treasury Inspector General for Tax Administration recently published an audit report on bonuses awarded to IRS employees who had tax compliance issues themselves.  Of course, every agency, most employers have employers ‑‑ or have employees who owe taxes or may be late in paying their taxes or errors and those kinds of things, but unlike other employers, the IRS has the ability to look into employee tax compliance.  It is a special ability, so to speak, because you are ‑‑ you are bringing in employees who deal with very, very personal tax matters, and a highest level of integrity is necessary in all of this. 

So, in fact, I know it is a condition for employment.  It is something that ‑‑ reviews are done several times a year, but the recent TIGTA audit found that in 2011, the IRS awarded 1,100 IRS employees more than $1 million in cash awards, over 10,000 hours of time off, and 69 quality step increases, despite the fact that these employees all had a substantial record of noncompliance with the tax laws, and these were not just employees who paid late or had some issue or they were disputing an issue.  These were actually employees who were actually disciplined for their tax delinquency, disciplined by the agency. 

I understand that these bonuses were awarded before you became commissioner.  I know we are dealing with something in the past, but can you explain the steps you are taking to make sure that IRS employees don't get performance awards if they are disciplined for nonpayment of taxes?  I think the American people deserve an explanation, and they also deserve to know what steps are going to be taken to put a halt to this egregious behavior.

Mr. Koskinen.  I think it is an important issue.  We take tax compliance, obviously, very seriously.  I think it is fair to say that if we are encouraging others to pay their taxes, we should ensure that IRS employees are paying theirs.  The compliance rate at the IRS is over 99 percent, so we have less than a 1 percent noncompliance rate, which is higher than the rest of the Federal Government and Congress and certainly much higher than the public, but that is not the standard.  We ought to have the public confident that IRS employees are held to the highest standard. 

As you say, when IRS employees join the agency, they sign up to that.  We monitor all 90,000 employees to make sure that they are compliant.  We have a separate disciplinary proceeding.  You are subject to termination if you have a willful violation of the tax code, and all of that we take seriously. 

As the IG noted, there is no policy across the government or in the IRS that conjoins performance issues with disciplinary issues.  We have a program that says for senior executives, if you are behind in your taxes, you are not compliant, you are not eligible for an award.  We are now ‑‑ timing turns out to be good.  We are in the middle of negotiations, near the end of them with the union about a new 5‑year agreement.  Under the union agreement, we did not take ‑‑ it was not allowed, we are not allowed to take into consideration tax compliance.  We are developing a policy that we will be sharing with the union this week.  They have indicated they understand the issue and are willing to negotiate that with us, and I expect we will have that included in the contract so that going forward, if someone has been disciplined for failure to comply with the tax code, they will be ineligible for a performance award.  I would note again, these are performance awards, so when the pool is established, generally 30 to 35 percent of the employees do not get an award.  It is not an automatic bonus.  So even if you are in the pool, it doesn't mean you will get one, but I do think it is important for the public to be confident that we take this very seriously. 

As I say, we just can quote ‑‑ conclude by reminding everyone that we are over 99 percent compliant to begin with, but our view is that, in fact, as you say, while ‑‑ people need to be committed that employees will not be eligible for an award if they are not compliant with ‑‑ if they have been disciplined for not being compliant with the tax code. 

Chairman Boustany.  And I would agree with you.  There are a lot of hard‑working people at the IRS.  They do their jobs day in and day out.  They pay their taxes.  Compliance level is high overall.  But when you have employees who have actually been disciplined for tax related matters and yet they receive performance awards, that is problematic.  And so I am glad to see that you are taking steps to address this.  And we will follow up with you and follow it closely, but I appreciate your answer on this.

And now I am pleased to yield to ranking member, Mr. Lewis. 

Mr. Lewis.  Thank you very much, Mr. Chairman. 

Mr. Commissioner, thank you for your testimony. 

Now, Mr. Commissioner, I am deeply concerned about the lack of adequate funding for the IRS.  Your workload is getting heavier.  The issues you are facing are becoming more and more complex, but your appropriations keep getting smaller.  I said it before and I will say it again this morning, you can only get out what you put in, and you cannot get blood out of a turnip. 

Identity theft is an important national concern.  Tax preparation for low‑income, elderly, and disabled taxpayers is on the chopping block, and as a constant increased workload, how would the IRS be able to even to begin to address the real needs of taxpayers?  How will your staff be trained and prepared for the challenges and work ahead?  Are you being stood up for failure, for disaster? 

Mr. Koskinen.  While we have a very can‑do agency of ‑‑ full of employees dedicated to the mission who will, I think, go down swinging doing their best with the resources, but I am very concerned.  As I have said in the past, I spent 20 years in the private sector managing large failed enterprises.  I have never dealt with an organization, even major ones in bankruptcy, that is so consistently understaffed across the board.  We don't have enough people in any division of the organization, and it is not just a few.  Everyone, from counsel on across, is down 10 to 15 percent.  We have 4,500 fewer revenue agents and revenue officers than we had 4 years ago.  We have 350 fewer criminal investigative officers than we had 4 years.  The head of Criminal Investigation is ‑‑ projection is that he will lose 150 more agents every year. 

So, it is ‑‑ as you say, we are doing more and more, I think, with less and less.  There comes a point at which you hit the wall, and the wall isn't because we don't have good employees, and it is not because they are not working hard.  It is a wall that you hit because you simply don't have the resources.  So this coming year, we are very concerned.  We have a statutory obligation to implement the Foreign Account Tax Compliance Act and the Affordable Care Act, and we will do that, but to the extent that our resources remain constrained, the way we will have to fund that is out of declining taxpayer services and taxpayer enforcement. 

Mr. Lewis.  Thank you, Mr. Commissioner.

Mr. Commissioner, I have a letter here from a group of civil rights organizations, consumer groups, including the NAACP, the National Council of La Raza, the Consumer Federation of America, and the National Consumer Law Center.  They are opposed to a proposal to require the use of a private collection agency to collect taxes.  This is an issue on which this subcommittee worked greatly, spent so much time in the past.  We listened to examples, a call from private debt collectors, and discussed 130 years of this committee oversight on this issue.  It was clear that the best interest of taxpayers was not being upheld and that the collection of Federal income tax is a core government function.  It is the mission and purpose of the IRS. 

Do you have any views on whether we should have ‑‑ any feeling or thoughts whether we should have private groups collecting taxes? 

Mr. Koskinen.  While having spent 20 years in the private sector.  I am a big believer in the private sector.  My concern is ‑‑ about private debt collection for taxes is we have done that a couple of times in the IRS, in 1996 and in 2006, and part of the problem is that it has a huge expense to it beyond the debt collection because the IRS does have to monitor very carefully the work of people that are not their employees.  And private debt collectors are limited because they do not have enforcement authority, so they cannot apply liens or levies when they go out to collect, so almost by definition they are going to be less effective than they would be if they had the tools of the IRS available. 

So, the experience in the 1996 experience and 2006 was that it was an inefficient way for the government to collect taxes, that you would be much better off if you hired a few more revenue agents and officers to proceed.  In fact, the analysis of 2006 is we actually ended up losing money because of the information technology changes we had to make and the amount of monitoring we had to do to try to make sure the taxpayers were not abused in the process. 

An additional problem now that it was not then is, over the last year, one of the major tax scams that we have been trying to warn the public about have been people calling up saying they represent the IRS and demanding that people either make immediate payments to them or provide them personal information.  We normally don't contact people by phone to begin with.  We send you notices and letters, so as I have said, as I have traveled across the country, if you are surprised to be hearing from us on the phone, you are probably not hearing from us, which means that it is going to be an additional burden for private debt collectors, if they are retained, to convince the taxpayer that they are legitimate on the phone, and they won't have other means of actually dealing with the taxpayers. 

So I think it is going to be an inefficient way to proceed, and it does have problems that we all worried about, which is how do we monitor what the conversations are that those people are having with taxpayers.  Our employees are held personally accountable.  If there is an issue, taxpayers can complain to us, they can complain to the taxpayer advocate.  They can write Congressmen and Senators and will respond.  For employees that are not our employees, it is a more complicated oversight problem.

Mr. Lewis.  Well, thank you very much, Mr. Commissioner. 

I yield back, Mr. Chairman.

Chairman Boustany.  I thank the gentleman. 

We are now ‑‑ we are also joined today by Sam Johnson, who is a subcommittee chairman, and I am going to break precedent and allow him 5 minutes for questioning.

Mr. Johnson.  Well, thank you. 

Thank you, members. 

Welcome, Mr. Commissioner.  It is good to see you again.

In your prepared testimony for your confirmation hearing before the Senate, you said public trust in the IRS is most important, their most important asset.  I couldn't agree more. 

Unfortunately, it seems, each week goes by, we learn yet another problem at the IRS which further undermines Americans' trust in the agency.  For example, just last month, we learned from the Treasury Inspector General for Tax Administration that the IRS rewarded tax ‑‑ IRS workers with tax problems with bonuses and other awards, such as time off, and that is outrageous, and you have more or less talked to that.  But let me start off by asking, is the IRS right now still paying out bonuses and other awards to those who owe back taxes, yes or no? 

Mr. Koskinen.  Right now, we are not paying bonuses to anyone because we are between the bonus period, and as I said, we are negotiating ‑‑ about to negotiate with the union to make clear, assuming we can negotiate that out with them, but they have expressed an interest in it that, going forward, anyone disciplined for not paying taxes will not be eligible for a performance award.

Mr. Johnson.  Okay.  Now, for the record, do you agree that the IRS workers who owe taxes should not be getting performance‑related awards, and you just said no.  Is that in your regulations now? 

Mr. Koskinen.  No.  In other words, there is ‑‑ the IG appropriately noted there are no regulations that the IRS or across the government that did not ‑‑ would cause someone not to get a performance award if they were not compliant.  We have that process for senior executives.  We are about to negotiate with the union about making sure that that rule applies to all IRS employees, and I am ‑‑

Mr. Johnson.  Well, then will it be in law? 

Mr. Koskinen.  It will actually be in the contract, and it will be in our regulations and policies.

Mr. Johnson.  Good. 

Now, according to the IG, examples of workers with tax related problems include, quote, willful understatement of tax liability over multiple tax years.  As you well know, the IRS Restructuring and Reform Act of 1998 includes the so‑called deadly IRS sins for IRS workers.  One of those sins is a willful understatement of Federal tax liability.  According to the 1998 Act, the commission ‑‑ commissioner, you, shall fire a worker for this, but instead what happened is that all the IRS rewarded the workers.  It is hard for my constituents and folks across the country to understand how this could happen.  Do you agree that this was wrong for the IRS to do that? 

Mr. Koskinen.  As I said, we take it very seriously, and I think that going forward ‑‑ I can't look backwards.  I don't know what the decisions were. 

Mr. Johnson.  I hear you.

Mr. Koskinen.  But going forward, if you have willfully not paid your taxes, you are subject to termination, and we have terminated employees for that.  We have a separate disciplinary review, but clearly, going forward, it is our policy, and we hope to be able to negotiate with the union about this, that you will not be eligible for a performance award if you have willfully violated ‑‑ not been in compliance.

Mr. Johnson.  But you would fire them if you caught them doing that?

Mr. Koskinen.  Pardon?

Mr. Johnson.  You would fire them if you caught them doing that.  Is that true? 

Mr. Koskinen.  We have the ability to fire every ‑‑ you know, there is a wide range of situations in which people find themselves, but the indication, if it is someone for several years willfully underreported, they would in fact be terminated.

Mr. Johnson.  Finally, you come with a reputation as Mr. Fix‑it.  I appreciate that.  And you certainly have your hands full, so I will close by saying I have introduced a bill, No Bonuses for Tax Delinquent IRS Employees Act, to help you restore the public trust in the IRS.  It is a simple and commonsense bill, prohibits the commissioner from paying out bonuses and other performance‑related awards to workers who owe back taxes.  So we are going to try to help you.

Mr. Koskinen.  As always, legislation is kind of a blunt instrument.  That bill, for instance, says even if you have an installment program, which many taxpayers take advantage of when they have difficulties, and we have low‑paid employees, like everybody else who aren't tax experts, that legislation as drafted would say even if you are in effect compliant, you are on an installment plan, you would not be eligible for a performance award.  I am not sure that those nuances can ever be built in successfully to statute, and as I said, I think you will be satisfied, I hope, with our union negotiations that the policies we have are appropriate and that the public can be satisfied.  If you are disciplined for not being compliant with taxes, you are not eligible for a performance award.

Mr. Johnson.  Thank you, sir. 

Thank you, Mr. Chairman.

Chairman Boustany.  I think the gentleman. 

By the way, Commissioner, I am going to send a letter to you regarding the Foreign Account Compliance Tax Act with a number of questions because I ‑‑ we are not going to have the time to get into detail on that here today, but I wanted to give you notice.  I will be sending you a letter with a number of questions and look forward to your response.

Mr. Koskinen.  I will be happy to do that, and I will do my best to respond promptly.  As you know, I have a strong view that when I hear from a Member of Congress, A, I should read the letter personally, and B, we should get back to you quickly.

Chairman Boustany.  I appreciate that. 

All right.  Ms. Sanchez, you have 5 minutes.

Ms. Sanchez.  Thank you, Mr. Chairman, for this hearing today.

And thank you, Commissioner Koskinen.  It is good to see you again.  I want to begin by commending you for the hard working and ‑‑ the hard‑working Federal employees of the IRS for a successful tax filing season on what we know is a very challenging and inadequate budget for everything that you are being asked to do.  I know that working for the IRS is oftentimes a thankless jobs, and I want to take an opportunity to thank you and the dedicated men and women who are working hard to try to process claims, get information to taxpayers and make the process as painless as possible. 

I know that you have been asked to do more and more with less and less, and if I am not mistaken, your current budget is under the sequester level budget.  Is that correct? 

Mr. Koskinen.  That is correct.  We are about $500 million below where we were before the sequester.  We are the only major agency that is operating, in effect, at the post‑sequester level rather then that the pre‑sequester level.

Ms. Sanchez.  I think it is important for people to bear that in mind when they ask you to do more and more with less and less. 

Because of that cut in funding to your agency, I know that IRS was forced to make many service cuts, and you know, the constituents that I represent, very, you know, hard‑working American families, many of them low income or elderly, they are doing their best to file complete and accurate tax returns, but I don't think that we can ‑‑ we are doing them a big ‑‑ we are doing them a tremendous disservice when we slash the budget of the IRS and take some tools out of their toolbox in order to help them complete their returns in an accurate way. 

I was hoping that you could perhaps speak directly to how the budget cuts at the IRS hurt all of our constituents in terms of the services that they are able to get from the agency.

Mr. Koskinen.  Well, as I noted, to begin with, I have been surprised.  One of the surprises that I have had is how much time, energy, and resources we devote to trying to help taxpayers, trying to make it easier for them to pay, figure out what they owe, respond to their questions, so the most immediate problem and concern I have heard from employees, as I have talked to over 10,000 IRS employees in the 25 offices I have visited, their major concern is that not that they are overworked, although they probably are, it is that they don't have enough resources to provide taxpayers the services that our employees think the taxpayers deserve. 

So, even at 71 percent as a level of service, as I noted, that means 30 percent of the calls aren't going through, and then that builds because if you call and can't get through, then you call again.  So now we have got two calls for the price of one.  This year, also, in addition, for the first time, we had to tell people we could not answer complicated tax questions, and they are relatively simple complicated tax questions.  We had to tell people they either had to go to the Web site, which we are trying to improve, or get private ‑‑ you know, hire somebody to help them.

Our employees are concerned because I have heard from several of them in call centers saying, But we know how to answer those questions, and I had to explain, but it takes longer, and the longer we take with that person, the more people are sitting in the queue.  So, we have had to do that.  We don't prepare.  We used to, in our taxpayer assistance centers, for people who would walk in, we would help them prepare their returns.  We don't do that anymore because we don't have the resources.

On the enforcement side, as I have said, not facetiously, I don't know who got our $500 million of sequester funds, but I am sure they are not going to give back the government the $2 billion to $3 billion we would have given had we had those funds.  In our request for 2015, to just hire another 1,200 people, we think we would provide the government $2.1 billion more, which would be more than the entire budget increase we are talking about. 

Ms. Sanchez.  So, if the money were well spent on the enforcement end, you could make up that money and then some in terms of lost revenue that currently we are not able to get because nobody is looking at this.

Mr. Koskinen.  That is right.  Our estimate is that we historically, and nobody is ‑‑ the argument is whether it is four or six or eight times the amount of investment, but the government, we are only agency where if you give us money, we give you more money back, and whether it is four times as much, six times as much depends on the issue, but we are the revenue arm of the government.  We collect over 90 percent of the money that runs the organization. 

So when we have fewer enforcement agents, fewer criminal investigative divisions, it means we are collecting fewer dollars.  And when I talk to revenue agents and officers, those that are left, across the country, their concern as well is it is not theoretic.  They know that there are returns that owe us money that they can't pursue because we simply don't have enough people.

Ms. Sanchez.  Right.  Really quickly, because my time is almost up.  I want to ‑‑ you and I have discussed EITC ‑‑ EITC payments and the issue of correctable error authority.  I just would like you to quickly, if you can, summarize for the committee how narrowly tailored authority could help the IRS process EITC claims more effectively.

Mr. Koskinen.  What we have now is what is called math authority, so if your columns don't add up, we can make a correction and send you a notice and say we have adjusted to make sure the columns add up.  Correctable error authority would allow us, when we have independent verification of information that is wrong or your return, would allow us to correct it.  So if you say, particularly in the EITC program, I have three children, and we have independent information that you have got one, we would, with correctable error authority, be able to make that correction, send you the notice.  You wouldn't lose any appeal rights.  If you really thought we had made an error, you could call us up, if you get through, but send us the information and we could make an adjustment, but what happens now is we, in many returns, see that there are errors that we could correct, but the limitation we have is we have to audit you before we can make that correction.  If we had correctable error authority for the obvious errors, beyond math authority, we would make those corrections, advise the taxpayer, send a smaller refund, give them an explanation, they could then appeal to us if they disagreed, but we estimate that there are several billion dollars out there that, again, because of resources, we can't audit our way out of it, improper payments are being made, and I think it is a wonderful program, but as I made it clear to people, we need to attack the problem of the rate of improper payments and the amount of improper payments.

Ms. Sanchez.  Thank you so much for your time. 

I appreciate your thoughtfulness. 

I yield back.

Chairman Boustany.  Thank you.  Ms. Jenkins. 

Ms. Jenkins.  Thank you, Mr. Chair, thank you for holding this hearing. 

Commissioner, thank you for being here. 

Mr. Koskinen.  Thank you.

Ms. Jenkins.  Commissioner, you suggested that resource constraints affect the ability of the IRS to stop fraud and provide customer service, but the committee understands that the IRS allows employees to spend a total of more than 500,000 hours a year on union activity on the taxpayers' dime.  Were you aware that taxpayers were paying for union activity on official time? 

Mr. Koskinen.  Yes.  Actually, taxpayers pay for union activity across the government.  Wherever there are employee unions, part of the organizational structure of the entire government is that union representatives represent employees, and they do that while they are working, and that is, in effect, on government time.

Ms. Jenkins.  But wouldn't you agree that some of those 500,000 hours might have been better spent stopping fraud.  For example, how many phone calls do you think the IRS could answer with 500,000 hours of worker time? 

Mr. Koskinen.  That is a little hard to know, but then you would have to ask what would happen to labor‑management relationships, the operation of the agency if employees didn't have the ability to deal with their unions when they have problems and issues.  As I say, one of the issues, and I have talked to the union about that, is sometimes employees are nervous about reporting a problem directly for fear that, you know, their manager won't like that, and I have encouraged them, A, I have a separate mailbox, they can call me ‑‑ or contact me, not call me, but email me directly, but the union performs a very valuable role for us as an intermediary in that area. 

So, as I say, it is a little like saying, well, if I didn't pay anybody any awards or if I didn't pay them any pay increases, I would have more money for something else, you would, but you would have to look at the negative implications of what happened when you moved that money.  And all I can tell you is, at the budget levels we are, even if I didn't ‑‑ if I got rid of the union and had those 500,000 hours, I still wouldn't get back to the level of customer service we think is appropriate, and I would have changed significantly the way the organization operates. 

Ms. Jenkins.  It just seems like with limited choices, we have to ‑‑ or limited resources, we have to make good choices in government.  And this seems like maybe a less than optimal use of taxpayer dollars.  And my main concern isn't with your relations necessarily with your employees but looking out for the hard‑working taxpayers that I represent, and I am just sad for them that they are having to underwrite that cost. 

The Affordable Care Act's premium tax credit subsidy will be based on folks' income estimates, and these estimates will often use the prior year's tax returns.  Taxpayers will eventually have to reconcile the premium subsidies that they received with amounts that they are eligible to receive based on their actual income.  So in many cases, whether it is due to a salary increase, a move across State lines, or another change in their individual situation, they could find themselves owing thousands of dollars back to the IRS. 

So I am just curious, first of all, do you believe that the taxpayers fully understand this risk, and can you explain to us how your agency will handle the reconciliation process? 

Mr. Koskinen.  All right.  On the first issue, we are concerned that taxpayers need to understand that.  We have already started publicizing the issue.  In my ‑‑ every city I have been to, I have talked with the press and said one of the issues we hope taxpayers will be aware of, if their situation changed for the better ‑‑ they get a promotion, they get a pay increase, their wife gets a job ‑‑ something happens and they earn more, they need to call back the exchange and adjust their premium tax credit so they don't owe us a refund. 

We will continue to do that through the year to try to make sure that we get taxpayers as much information about this as possible so that they are not surprised when, fortunately, would be a good event on their part if they made more money than they assumed when they first calculated the credit, but we are anxious for them to make those adjustments as they go forward.  So we will do the best we can to publicize that.  We thought and talked with some about perhaps even providing frequently asked questions and answers for Members of the Congress so they could share that information with their constituents.  We have got YouTube video.  We have got a Web site that does it.

Secondly, the way the reconciliation will happen is in the filing season, which is why we have a major challenge to make sure next year's filing season is at least as good as this, because everyone is making an estimate.  In fact, we all do when we make an estimate for our W‑2s, about what they earn.  We provided information about the income for 2012, but the premium credit will be based on what you actually earned in 2014. 

So we will, when you file, you will have a form you will fill out, and we will make the adjustment.  If you have got too small a credit, you underestimated because you wanted to be careful or some change in your financial circumstances, we will owe you a refund for that, in other words, the additional credit.  If you withheld too much, which is the concern we are concerned about with you, you will then have an additional tax owing, and our hope is to minimize that to the extent we can by providing as much public information as we can. 

Ms. Jenkins.  Thank you. 

I yield back. 

Chairman Boustany.  Mr. Marchant. 

Mr. Marchant.  Thank you, Mr. Chairman. 

Commissioner, just recently, I sent you a letter and would like to compliment you.  You gave me a very prompt reply, which has not been the case with the last three of your predecessors, and we had a very good visit last week, and I appreciate it. 

The issue, as I explained to you in my office that day, is that there are still a number of groups out there that have not received a final determination on their 501(c)(4) request.  We are approaching the political season again, and all of these groups are involved in primaries.  They are involved in educating the public about candidates.  They are involved in educating them on getting out to vote, et cetera, and I just wonder if there is being any progress made on clearing up the backlog of those groups that continue to not have a determination.

Mr. Koskinen.  We are sensitive to that.  We are trying to proceed.  Of the more or less 145 backlogged organizations a year ago when the issue was raised, 90 percent of those have been cleared through, so we are down to a relatively small number.  Some are suing us, so you know, it depends on what the process of litigation is.  As you know, we did have a streamlined proposal Acting Commissioner Werfel put in place last summer that any organization that made a commitment that it was going to spend no more than 40 percent of its resources on political activity would automatically be approved, and about 40 to 45 organizations immediately accepted that process. 

So there are a handful left.  We are doing our best; although if they are in litigation, it is harder for us to try to resolve those because my sense on all of these is whether we are voting up or down, whether we are saying you are approved or denied, what we need to do is be as quick as we can, as prompt as we can, and so, going forward, that is our commitment.  We are trying to redo the 501(c)(3) area, again, to make sure that one way or the other, you get an answer as quickly as we can.  And so, as you and I have talked, we will review, and I have asked people to review to make sure that we are doing everything we can to resolve issues that are pending.

Mr. Marchant.  In this letter that you sent me, and I made it available to my constituents so they could see the response, it was indicated that if a lawsuit was pending, that that could be a factor in the determination.  Is that still the case? 

Mr. Koskinen.  If you have got a lawsuit pending and you are suing us, then you know, you can always settle that.  We settle litigation without forcing everybody to go to trial.  In fact, a lot of these we would be delighted to settle.  Litigation is a complicated, expensive way to resolve any issue.  So the fact that you have sudden us doesn't necessarily mean you can't actually negotiate with us to settle the case. 

Mr. Marchant.  So to be clear, can you issue a determination letter if you are in active litigation? 

Mr. Koskinen.  Well, that gets more complicated.  If you have actually sued us and it is in litigation, then you know, we are sort of caught in the litigation process back and forth and there are issues that if we could have resolved them we would have.  And so if you are suing us, then it makes it much more difficult while the lawsuit is going on to actually then issue independently that determination. 

But it is a case‑by‑case issue.  There probably are some where the issues in the lawsuit are separate from, the determination process in which we could do that, and I have asked people to take a look to make sure that we are not holding things up unnecessarily.  As you and I discussed think there are probably some people who are happy to sue us because it keeps the issue alive longer.  We have actually I think reached out as much as we could to organizations trying to resolve issues as quickly as we could. 

Mr. Marchant.  We also, I use the same rule that you do.  If I receive any mail from a constituent about a subject, sometimes it is an isolated situation and it is anecdotal and I treat it that way.  But, when I receive half of my emails, are on a particular subject, then I actually take that one much more seriously and I think that it does represent a greater slice of what my constituents are thinking. 

And I can, without duplicating what other members have said up here today, this issue of bonuses to IRS employees that have delinquent taxes, is a big issue in our constituencies and in your negotiations with the labor unions, it is something that needs to be resolved, it needs to be addressed.  There may be legislation, there may be a law passed before that gets done. 

But thank you for your time. 

Chairman Boustany.  I thank the gentleman. 

We will go to Mr. Davis next. 

Mr. Davis.  Thank you very much, Mr. Chairman, and Commissioner, thank you for being here.  And I appreciate the work that you have done. 

Everything that I have read, seen or heard suggests that we have had a pretty smooth tax filing system and experience this year, notwithstanding any shortages that there may have been relative to man or woman power.  So let me compliment you and the agency on that. 

I also detect from people I speak with, news reports that I get and what I read, that there has already begun, even though your tenure has been quite brief, a different level of confidence that people feel in the agency and that their experiences and problems are being resolved far more quickly than what they may have experienced in the past, and I want to compliment you and the agency on that. 

I want to follow up a little bit on a question that was raised by Representative Sanchez.  It is my understanding that maybe 70 to 80 percent of the individuals who are entitled to make use of the Earned Income Tax Credit are doing so.  Because of the fact that there is such a large number of individuals who could in fact and do qualify, many of them live in my Congressional District, which has lots of low income people, are there any ways that we can think of that might increase utilization of that opportunity? 

Mr. Koskinen.  It is a major challenge.  As I say, we have both sides of the question.  On the one hand we want to make sure the payments are properly made to the right people for the right amount and on the other hand we want to make sure that everybody eligible participates.  So we do again a significant amount of outreach.  I was in Baltimore at the start of filing day.  There is an EIT awareness day that we hold across the country in January. 

Part of the challenge is that, and it is probably a good sign for the program, about one‑third of the people every year rotate in and out of the program, which means they are in the program, they earn enough that they no longer need that subsidy.  So part of the challenge is, if it were a stable population, we could probably make bigger inroads.  Right now about 80 percent of the eligible people participate.  But with a third of them rolling over, it means we have got to keep 20 to 25 percent new people coming in just to sustain ourselves. 

So we are again spending a reasonable amount of time and effort trying to give visibility to the program, publicize it through our local sites, work cooperatively with people in communities.  But it is a significant challenge to make sure that everybody eligible is aware of the program and participates. 

Mr. Davis.  Thank you very much. 

And of course we know that next year the Internal Revenue Service is going to have some additional responsibility for assisting taxpayers with the Affordable Care Act. 

Mr. Koskinen.  Correct. 

Mr. Davis.  How have you been preparing for that? 

Mr. Koskinen.  Well, we are preparing for it ‑‑ well first, we have a fairly significant technological challenge to adjust all of our systems to be able to absorb the data and process it appropriately in terms of matching what people thought they were eligible for in terms of an advanced premium credit and what they actually were entitled to. 

So the technology challenge in our budget for this year was $300 million of technology work.  We got zero dollars for it, so we have had to in effect postpone another $300 million worth of work.  So I meet every two weeks with the interagency, across‑agency group of IT people, policy people, operating people, to make sure we are on schedule to be able to implement. 

As I said earlier, we also are anxious to provide as much information to the public as we can about eligibility, about making sure that they are not over ‑‑ as their income gets better that they don't in effect get too large a premium credit so they will owe more taxes when they file as we go forward. 

So, we are doing the best we can.  Our concern is we estimate we are going to get 11 million more calls during the filing season next year about the Affordable Care Act, on top of the normal calls we get, and that is a major concern for us going forward.  We are trying to make sure our website is as user friendly as we can between now and then so that people will be comfortable, they can go to the website, get simple answers to their questions so they don't have to call us to the extent that we can avoid that. 

Mr. Davis.  Thank you very much. 

And I know that my time has run out but could I get a response in writing for this question.  2006 data suggests that there was a big gap of $67 billion unreported of corporate income and I would like to know how we are trying to figure out ways to recapture and collect some of that money. 

Mr. Koskinen.  I would be happy to provide that information. 

Mr. Davis.  Thank you very much.

Chairman Boustany.  I thank the gentleman. 

Mr. Reed. 

Mr. Reed.  Thank you, Mr. Chairman.

And thank you, Commissioner, for being here today, and thank you for the hard work you are doing in regards to the IRS and overseeing the IRS and I appreciate it.  I am glad to see the results of this tax season and your testimony and the stuff we read over last night in preparation for today. 

And I know my colleagues have asked about issues that are just important to me as it is to them, but I wanted to narrow down on a kind of a narrow issue that impacts my district and that deals with Native American sovereignty in particular. 

I represent the western portion of New York.  We have long heritage of the Seneca Nation being part of our area, and what I am concerned with is I have been getting reports from not just that nation, as well as other nations of a general sense or concern about the IRS' operation when it comes to challenging tribal general welfare programs, many of which are nearly identical to programs provided by Federal and State governments.  There is a sense that the IRS may be unfairly targeting these Native American nations, but is also not respecting tribal sovereignty, and that is something that I want to bring to your attention.

And I know in 2012, December 2012, the IRS issued guidance on the application of the general welfare exclusion to Indian nations and their citizens and that was viewed as a very positive development.  But the guidance still remains in draft form and is deficient in several important respects in my opinion and in the view of many Native American tribes across America. 

So my question, Mr. Commissioner, is this:  What can Native American nations expect of you as the new Commissioner and the agency you run with respect to these issues and the fundamental relationship between the IRS and tribal nations of America? 

Mr. Koskinen.  I think it is an important issue.  Obviously as you said I think it is critical for us to respect the sovereignty of tribal nations, to treat them appropriately, respectfully.  I am concerned across the board whenever things take too long, and so I can commit to you that if we have got a draft regulation that has been out since December of 2012, that we need to get that finalized and I will commit to you. 

It is a joint effort when we do regulations with the Treasury Department and the IRS tax policy, it is the domain of the Treasury Department, but I have been trying to make it clear, I have actually asked for a list of everything that has been around for more than a year just to see if we can't expedite it.  My experience has been in the private sector and my private life as well, everybody's, is that you are much better off giving people an answer even if it is "no" early than "yes" late, because by the time you get around to it late they are aggravated enough and disappointed enough that it doesn't get you much credit. 

So on the outstanding regulation, I am committed we will look at that and get it put into final as quickly as we can. 

Mr. Reed.  Well, I greatly appreciate it, and I greatly appreciate your comment about respecting the sovereignty of the tribal nations, and I think that is something that is critical to the future relationship with the nation and I am glad you shared that belief as I do.  So I appreciate the work there. 

I wanted to ask just a general operations points of view, and we have had this conversation before and I am a big believer in metrics and asking for, okay, you want more money, you want more staff, okay, what are you going to do with that type of thing. 

But one thing I was looking at in preparation, last night for your testimony today is, we have a lot of effort up here on this committee to engage in comprehensive tax reform, and I wanted to know from you as the Commissioner have you looked at what a revised simplified complete rewrite of the code would bring in regards to the relief on your resources, be it staffing, funding levels; that if you had a code, you know, the chairman has put out a graft, we put out a draft after 2‑1/2 years of work, that really in my opinion goes a long way to simplify that code, how much of that simplicity have you ever thought about, and if you haven't, I would ask you to consider it, would that mean in relief to your agency when it comes to funding and staffing requests that you are putting forward to us. 

Mr. Koskinen.  I don't have a number for you.  As you know, I am a big believer in tax simplification because I do think the most important impact would be it would make it a lot easier for taxpayers to figure out what they owe and compliance I think would go up and we would certainly spend a lot less time and money across the country and across the economy filling out tax returns. 

It clearly would make our life simpler, particularly in taxpayer service on the call centers.  If you had a relatively simple straightforward Tax Code, we would get a lot fewer calls.  It wouldn't mean we wouldn't get any because there will always be issues about filing status, heads of household, other issues.  But, a significant part of the calls are related to the complexity of the code.  So we would be able to without many additional resources significantly improve our level of service on that end. 

On the enforcement end, again, to the extent it was ‑‑ if compliance went up you would expect we would have somewhat lowered enforcement needs, but there again, no matter what it is, because it is not going to be a simple one line form, my expectation is that a lot of our enforcement activities against people who are actually are consciously trying to cut corners, and whatever the rules are they will keep trying to cut the corners.  But, again, I think that the willing‑to‑pay as we say who are trying to figure out the right amount would in fact be able to do it much more quickly. 

Mr. Reed.  I know my time has expired, and I so appreciate you saying that, and maybe we can work offline having a further conversation about it, what simplicity would mean to you in regards to that deficiency of the agency, and that is where I think there is a lot of common ground.  If we all agree that simplicity will result in less need for resources, there will be still be a need for that resource but a less need for that resource, be it staff or financial resources, where it is a win‑win situation in my opinion, and I look forward to working with you on that, and any information you have in regards to that from your day‑to‑day operations would be helpful. 

So, with that I yield back.  Thank you, Mr. Commissioner. 

Chairman Boustany.  I thank the gentleman. 

Mr.  Kelley. 

Mr. Kelly.  Thank you, chairman. 

Mr. Koskinen, good so see you again, and as Sam Johnson said, you are the fix it guy.  But I think Mr. Reed just hit on the issue.  It is the code.  It is the code.  That is the problem.  The problem isn't that you don't have enough people, you don't have enough money, the problem is the code is far too big to work with. 

You mentioned fraud, people out there are who are sending letters to people, to taxpayers, and they are unwittingly spending money in, and the reason they are doing it is because they are scared to death. 

Here is the problem.  Of all the things you are talking about, if we cannot restore faith and confidence in this model Government that we have, of the general public, everything we talk about is just chatter, just idle chatter. 

We talk about revenue.  We need more revenues.  Do we?  So let's make it really hard on the people who produce the revenues.  Let's make it so damn difficult for them that they are afraid to do their own tax return; not because they don't want to pay their fair share, but they are scared to death that somebody is going to come in and hold them accountable for a mistake they didn't mean to make but happened. 

And I got to tell you coming from the private sector as you had, you can be Mr. Fix it everywhere you want, but until this code gets fixed, there ain't no fix.  There is no way that anybody can look at our current situation and feel that somehow they can trust and have confidence in what we are doing with them.  It is just as impossible, it just can't be done. 

I know you are talking about giving credentials to people, now, what is the term, and this is a town that works on all these acronyms, the PTIN.  These are the preparers tax identification numbers.  In order to get that number you have to make a fee of $63 and take 15 hours of continuing education courses and that was shot down. 

Mr. Koskinen.  That was shot down. 

Mr. Kelly.  Yes.  Okay, so now, now what are we doing?  What is the IRS doing now?  Is this a suggestion, about having this PTIN or having the people who have the credentials to do these things? 

Mr. Koskinen.  No.  What happens is the court said we could ask people to register so we would at least know who was out there holding themselves out as a preparer, and this year we have about 667,000 of them out there, PTINs, as they are called, but we have no other ability to supervise them.  So they could be totally incompetent, which a few of them are.  Most preparers are well‑educated.  They do a good job. 

Our concern is a lot of people ‑‑ as somebody once said, hairdressers are regulated in all 50 States, tax preparers are regulated in four, and you ought to be as at least concerned about who is doing your tax preparation as who is giving you a haircut. 

Mr. Kelly.  No, and I get that.  Again, it goes back it what?  A code that is so complicated that the average person is scared to death to do it themselves.  Now, I got to tell you, the problem isn't that ‑‑ they don't trust any of us, by the way.  You know, approval ratings are not very high and we are all getting painted with the same brush.  And I got to tell you, I serve with a lot of really outstanding people, on both sides of the aisle, by the way and I don't know that we talk about ourselves as strong Republicans or strong Democrats, but we talk about ourselves as strong Americans trying to protect something that was given to us.  This is a long, long process of people passing on to the next generation something that makes a lot of sense and is the envy of the world. 

This particular agency though, for as many good people as you have, you are getting painted with the same brush.  And I got to tell you, being from the private sector, if I got a letter in the mail and the outside of the envelope had the IRS address, I was scared to death to open it, because it was never good news. 

And we talk about improper payments.  Improper payments would also be defined not only underpayment or nonpayment but also overpayment.  Right?  I mean, so if we are using that definition.  I think what we are trying to get to, and, again, as Tommy talked about, and I think this is critical, if we don't get this Tax Code reformed, if we don't get it to the point where people it can actually read it and understand it, if we don't get it to the point where they have confidence that the people who are enforcing that code are on their side and not on the other side, then America loses and continues to lose and the gap keeps widening between what the American people have faith and confidence in and what they have been subject to.  

That is your toughest job.  I know you are a turnaround guy and you are a fix it guy, but, man, you are working with a pretty tough operation right now to get through it.  I had a flat tire on the way here yesterday.  I got out the owner's manual.  Hell, it took me almost 20 minutes just to find the section about changing the spare tire to find out where the tools were and I would have paid somebody else to do it at the time but there was nobody available.  So we are having the same problem with people when they do their tax returns. 

Mr. Chairman, we are doing a lot of good things here, but the one thing we better decide on really quickly is these are American problems.  This is not a Republican issue or a Democrat issue or a libertarian issue or an independent issue.  We are talking about revenues that supply all the vital monies that we need and you know who we are holding hostage and making the trouble maker in this?  The taxpayer. 

There is something wrong with the model where we continue to do that.  I got to tell you there is an old saying, is about don't worry about the mule, just load the wagon.  The mule is starting to unhitch himself.  He is going to walk away from it because there is just no upside to what we are doing.

Thanks for what you are doing.  Good luck and we will keep doing everything we can to make it easier for you to do your job and make it easier for the American people to actually put their head on the pillow at night and know it is not the Government they have to worry about or the IRS coming in their place or some other agency that can destroy their personal life with just a little bit of an investigation. 

So, thanks for what you are doing.  I yield back. 

Chairman Boustany.  I thank the gentleman. 

Ms. Black. 

Ms. Black.  Thank you, Mr. Chairman, and thank you for this hearing. 

This certainly is a very important issue.  I do want to just tag a little bit on what my colleague said about trust, and certainly that is something that I think right now the American people have had, broken trust.  And I appreciate what you are doing, the efforts that you are making to reestablish that trust in the IRS. 

In your opening comments you made a statement that you are making important progress in identity theft, and that, of course, is so, so important and we look at that from so many different realms, not just within the IRS but with a lot of other issues, and banking and even medicine, and identities are being stolen. 

Most recently we have started getting information, not particularly in the State of Tennessee but as I look at several of the States and territories that are affected by this and victims of fraudulent tax filings and stolen identities within State medical associations. 

Mr. Koskinen.  Yes. 

Ms. Black.  And it seems to me that this is really, as I look at the number of States, it is a growing issue and I think that certainly it is one that we have got to look at very quickly, because these are physician databases and being uncertain about just where they are getting the information from, how many people that are within this database are also potentially a victim for potential theft, ID theft, and some stolen refunds I understand are occurring right now. 

So my question is actually three parts on asking you about whether you will make this a priority, how you seek to resolve this and how you think you might be able to prevent it and whether as you look at this will you look at it as a national issue or because this seems to be regional will you be addressing it more regionally? 

How will you let the public know about this, whether this will be a public release that the people can be aware of and watching out for.  And then, finally, the concern of the Federal identification numbers, such as the Medicare's national provider ID or the DE registration numbers for those prescribers of controlled substances.  Will you take a look to see is this the cause that is occurring? 

So let me go back to the three.  Will you make this a priority?  Number two, how do you propose to resolve it?  And then looking forward, how would you prevent it? 

Mr. Koskinen.  Well, it clearly is a priority.  It became an explosion in 2010 to 2012, it overwhelmed law enforcement as well as the IRS, and we have made great progress.  It is a high priority.  We have 3,000 people who spend no time on anything other than worrying about refund fraud.  We have very sophisticated modelers who are developing our ability to look for schemes as they come through the system.  As I noted, we stopped three million suspicious returns in this filing season that didn't get through our filters. 

As somebody said, because as I noted, I pulled everybody together and said we are making progress but we have got to take a fresh look at what else can we do to fight this battle.  I want to see if we can change the rules of the game a little, so we are not fighting in their ballpark, we move it to our ballpark, which is why I have asked for some of the legislative changes we have got. 

But as somebody said, we have eliminated a lot of the amateurs who were doing this one or three or five returns.  We are we are now dealing with organized criminals and crime and some nefarious tax prepares.  The organized crime people are filing hundreds of these and as we develop filters they are just reverse engineering and figuring out what goes through, what doesn't go through, and they can pretty much figure out where we are and so we are again trying to figure out how to change that. 

One of the things that will help will be to get W‑2 information earlier.  We are a victim of our own success.  It used to be the refunds went out in August.  Now the technology is such we will say we will give you a refund in 21 days.  So we gave 90 million refunds out before the end of the filing season on April 15th, most of those before the third party information got to us.  Now, we have sophisticated filters.  W‑2s won't solve the problem by themselves, but they are very critical. 

We are looking at all sorts of E‑authentication methods so that in effect we circumvent Social Security numbers.  Because part of the problem with prepares, with medical services, as you note, everybody's Medicare card is their Social Security number, and so there are file cabinets around the country full of Social Security numbers. 

Hackers have now discovered if I could hack into a tax preparer's databases I have got all of their clients.  More important just their name and Social Security number, I have got all of their returns so I can prepare a false return that looks a lot better than the one I just make up as we go. 

So it is an ongoing battle.  I think that we are holding our own, I would say.  I am not sure which is better than we were doing a couple of years ago where we looked like we were overwhelmed. 

We have programs going on with financial institutions, with prisons, where it first started, with law enforcement.  We have task forces with hundreds and State and local law enforcement agencies.  When people get arrested we suddenly discover they have got all sorts of Social Security numbers or debit cards. 

You know, one of our problems is how to deal with debit cards.  When we send out the refund, the debit cards can all go ‑‑ you know, somebody can go get debit cards in a grocery store.  You just pull them off the rack.  And they are harder for us to track.  They are virtually untraceable. 

So it is a complicated problem.  There is no higher priority for us both to stop the fraud and the refund fraud, but also to deal with taxpayers.  There is nothing more I think anxiety producing for a taxpayer than to suddenly file their return and get it rejected because somebody already filed with their Social Security number. 

So there, as I have noted, we actually used to take almost a year to resolve those.  We are now down to 120 days in resolving them.  Our backlog has gone from over 600,000 to about 98,000.  But we are trying to do better there as well because we understand the burden on the taxpayer. 

Ms. Black.  Thank you. 

And Mr. Chairman, if I may, I have another question about minors' Social Security numbers being stolen and how that is being handled.  I will put that in a letter form and send it to you.  I would really like to hear back from you on that issue as well.  That is a really important issue we have to make sure we are addressing. 

Thank you. 

Chairman Boustany.  I thank the gentlelady. 

Commissioner, thank you for being here.  Thank you for the status report on a whole host of activities.  We want to continue to work with you to reform, make improvements, rebuild trust and right size the budget on all this.  So we appreciate you appearing before us today. 

Please be advised members will submit written questions as has been stated to be answered in writing.  All of that will be made part of the formal record as will be your formal statement. 

With that, the committee stands adjourned. 

[Whereupon, at 11:57 p.m., the subcommittee was adjourned.]


Member Questions For The Record


Public Submissions For The Record

Richard N. Brown
HR Block
RAC COALITION