[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]
WASTE, FRAUD, AND ABUSE
=======================================================================
HEARING
before the
COMMITTEE ON WAYS AND MEANS
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
FIRST SESSION
__________
JULY 17, 2003
__________
Serial No. 108-16
__________
Printed for the use of the Committee on Ways and Means
_____
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90-270 WASHINGTON : 2003
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COMMITTEE ON WAYS AND MEANS
BILL THOMAS, California, Chairman
PHILIP M. CRANE, Illinois CHARLES B. RANGEL, New York
E. CLAY SHAW, Jr., Florida FORTNEY PETE STARK, California
NANCY L. JOHNSON, Connecticut ROBERT T. MATSUI, California
AMO HOUGHTON, New York SANDER M. LEVIN, Michigan
WALLY HERGER, California BENJAMIN L. CARDIN, Maryland
JIM MCCRERY, Louisiana JIM MCDERMOTT, Washington
DAVE CAMP, Michigan GERALD D. KLECZKA, Wisconsin
JIM RAMSTAD, Minnesota JOHN LEWIS, Georgia
JIM NUSSLE, Iowa RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas MICHAEL R. MCNULTY, New York
JENNIFER DUNN, Washington WILLIAM J. JEFFERSON, Louisiana
MAC COLLINS, Georgia JOHN S. TANNER, Tennessee
ROB PORTMAN, Ohio XAVIER BECERRA, California
PHIL ENGLISH, Pennsylvania LLOYD DOGGETT, Texas
J.D. HAYWORTH, Arizona EARL POMEROY, North Dakota
JERRY WELLER, Illinois MAX SANDLIN, Texas
KENNY C. HULSHOF, Missouri STEPHANIE TUBBS JONES, Ohio
SCOTT MCINNIS, Colorado
RON LEWIS, Kentucky
MARK FOLEY, Florida
KEVIN BRADY, Texas
PAUL RYAN, Wisconsin
ERIC CANTOR, Virginia
Allison H. Giles, Chief of Staff
Janice Mays, Minority Chief Counsel
Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public
hearing records of the Committee on Ways and Means are also published
in electronic form. The printed hearing record remains the official
version. Because electronic submissions are used to prepare both
printed and electronic versions of the hearing record, the process of
converting between various electronic formats may introduce
unintentional errors or omissions. Such occurrences are inherent in the
current publication process and should diminish as the process is
further refined.
C O N T E N T S
__________
Page
Advisory of July 10, 2003, announcing the hearing................ 2
WITNESSES
U.S. General Accounting Office, Hon. David M. Walker, Comptroller
General; accompanied by Mike Brostek, Director for Tax Issues,
Leslie Aronovitz, Director for Healthcare, and Barbara
Bovbjerg, Director of Education, Workforce, and Income Security 6
Internal Revenue Service, Joseph R. Brimacombe, Deputy Director,
Compliance Policy, Small Business and Self Employed Operating
Division....................................................... 73
Social Security Administration, Hon. James G. Huse, Jr.,
Inspector General.............................................. 78
U.S. Department of Justice, William H. Jordan, Senior Counsel to
the Assistant Attorney General, Civil Division................. 86
______
Burman, Leonard E., Urban Institute, Tax Policy Center, and
Georgetown Public Policy Institute............................. 94
Taxpayers Against Fraud, James W. Moorman........................ 106
United Council on Welfare Fraud, Michael G. Rice................. 110
SUBMISSIONS FOR THE RECORD
U.S. Department of Labor, Office of Inspector General, Hon.
Gordon S. Heddell, statement................................... 125
______
Applied Information Sciences, Inc., Greenbelt, MD, David Mucka,
statement...................................................... 128
Avallone, Anthony, Blackwood, NJ, statement and attachment....... 131
Callaway, Martha, Wichita Falls, TX, letter...................... 132
Center for Parental Responsibility, Roseville, MN, Molly K.
Olson, statement............................................... 134
Cloer, Steve, Norcross, GA, statement............................ 135
Fathers Rights Association of New Jersey & Mid-Atlantic Region,
Wayne, NJ, Bruce Eden, statement............................... 143
Hatfield, Malcolm, Franksville, WI, statement and attachments.... 150
Indiana Civil Rights Council, Whitestown, IN, Torm L. Howse,
statement...................................................... 152
Klubertanz, Theresa, National Association of Disability
Examiners, Madison, WI, statement.............................. 163
Lorsbach, Michael, On Point Technology, Inc., LaGrange, IL,
statement...................................................... 169
McLeod, Keith, Richmond, VA, statement........................... 154
Mucka, David, Applied Information Sciences, Inc., Greenbelt, MD,
statement...................................................... 128
National Association of Disability Examiners, Madison, WI,
Theresa Klubertanz, statement.................................. 163
Olson, Molly K., Center for Parental Responsibility, Roseville,
MN, statement.................................................. 134
On Point Technology, Inc., LaGrange, IL, Michael Lorsbach,
statement...................................................... 169
Paul, Margaret, Redlands, CA, statement.......................... 171
Spence, William L., Ben Lomond, CA, statement.................... 171
Untershine, James D., Long Beach, CA, statement.................. 172
Wood, Bill, Charlotte, NC, statement............................. 182
WASTE, FRAUD, AND ABUSE
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THURSDAY, JULY 17, 2003
U.S. House of Representatives,
Committee on Ways and Means,
Washington, DC.
The Committee met, pursuant to notice, at 10:17 a.m., in
room 1100, Longworth House Office Building, Hon. William M.
Thomas (Chairman of the Committee) presiding.
[The advisory announcing the hearing follows:]
ADVISORY
FROM THE
COMMITTEE
ON WAYS
AND
MEANS
CONTACT: (202) 225-1721
FOR IMMEDIATE RELEASE
July 10, 2003
No. FC-8
Thomas Announces Hearing on Waste, Fraud, and Abuse
Congressman Bill Thomas (R-CA), Chairman of the Committee on Ways
and Means, today announced that the Committee will hold a hearing on
waste, fraud, and abuse in programs under the Committee's jurisdiction.
The hearing will take place on Thursday, July 17, 2003, at 10:00 a.m.,
in the main Committee hearing room, 1100 Longworth House Office
Building.
In view of the limited time available to hear witnesses, oral
testimony at this hearing will be from invited witnesses only. However,
any individual or organization not scheduled for an oral appearance may
submit a written statement for consideration by the Committee and for
inclusion in the printed record of the hearing.
BACKGROUND:
One of the important responsibilities of the Committee on Ways and
Means is to conduct oversight of programs within its jurisdiction to
guard against waste, fraud, and abuse. Misuse of taxpayer funds
undermines confidence in government programs, hurts legitimate
beneficiaries, and squanders scarce resources.
Already this year, the Committee has taken legislative action on a
number of measures to protect taxpayer monies, including: closing the
loophole that allows some government workers to avoid the Government
Pension Offset, thereby protecting the Social Security Trust Funds;
denying Social Security benefits to fugitive felons and probation/
parole violators; facilitating the proper payment of unemployment
benefits by better sharing new hire data; subjecting payment for
durable medical equipment and off-the-shelf orthotics to competitive
bidding; reforming Medicare payment for certain outpatient prescription
drugs currently covered; and reforming the Medicare secondary payor
system to prevent companies from improperly billing Medicare. This
hearing will provide the Committee with further opportunities to
identify measures to improve existing programs.
In addition, the Committee will consider the extent to which
programs within its jurisdiction ought to be modernized. Many of these
programs are approaching 50 years of age or more, and the Committee has
a responsibility to ensure that they are meeting the needs of
beneficiaries today and tomorrow. In the last eight years, this
Committee has made great strides modernizing welfare programs and
Medicare. Other programs need to be closely scrutinized to ensure they
are providing the best possible service at the least cost to taxpayers.
In accordance with H. Con. Res. 95, the Concurrent Resolution of
the Budget for Fiscal Year 2004, the Committee will submit findings
from this hearing to the Committee on the Budget by September 2, 2003.
In announcing the hearing, Chairman Thomas stated, ``The tax
dollars that working Americans send to Washington should be used wisely
and for their intended purpose. That is why Congress has a
responsibility to root out waste, fraud, and abuse where it exists in
Federal Government programs.''
FOCUS OF THE HEARING:
The Committee will review programs in its jurisdiction to identify
waste, fraud, and abuse. The findings of the Committee will be
submitted to the Committee on the Budget in accordance with the
Concurrent Resolution of the Budget for Fiscal Year 2004.
DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:
Please Note: Due to the change in House mail policy, any person or
organization wishing to submit a written statement for the printed
record of the hearing should send it electronically to
[email protected], along with a fax copy to
(202) 225-2610, by the close of business, Thursday, July 31, 2003.
Those filing written statements that wish to have their statements
distributed to the press and interested public at the hearing should
deliver their 200 copies to the full Committee in room 1102 Longworth
House Office Building, in an open and searchable package 48 hours
before the hearing. The U.S. Capitol Police will refuse sealed-packaged
deliveries to all House Office Buildings.
FORMATTING REQUIREMENTS:
Each statement presented for printing to the Committee by a
witness, any written statement or exhibit submitted for the printed
record or any written comments in response to a request for written
comments must conform to the guidelines listed below. Any statement or
exhibit not in compliance with these guidelines will not be printed,
but will be maintained in the Committee files for review and use by the
Committee.
1. Due to the change in House mail policy, all statements and any
accompanying exhibits for printing must be submitted electronically to
[email protected], along with a fax copy to
(202) 225-2610, in Word Perfect or MS Word format and MUST NOT exceed a
total of 10 pages including attachments. Witnesses are advised that the
Committee will rely on electronic submissions for printing the official
hearing record.
2. Copies of whole documents submitted as exhibit material will not
be accepted for printing. Instead, exhibit material should be
referenced and quoted or paraphrased. All exhibit material not meeting
these specifications will be maintained in the Committee files for
review and use by the Committee.
3. Any statements must include a list of all clients, persons, or
organizations on whose behalf the witness appears. A supplemental sheet
must accompany each statement listing the name, company, address,
telephone and fax numbers of each witness.
Note: All Committee advisories and news releases are available on
the World Wide Web at http://waysandmeans.house.gov.
The Committee seeks to make its facilities accessible to persons
with disabilities. If you are in need of special accommodations, please
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four
business days notice is requested). Questions with regard to special
accommodation needs in general (including availability of Committee
materials in alternative formats) may be directed to the Committee as
noted above.
Chairman THOMAS. The Chair apologizes to the Members for
his tardiness.
As a Committee with jurisdiction over programs that affect
and improve the lives of nearly every American, we have a
responsibility to ensure that these programs operate
responsibly and effectively.
Not that the Chair is paranoid about whose mike works and
whose doesn't--does that work any better?
The reason we are meeting today is to take a look at what
programs we have and ways in which we might identify waste,
fraud and abuse that might be in these programs. I know that is
a hackneyed phrase, but given the size of the Federal
Government, given any project that is at the level of our
activity, for anyone who says that there is no waste or fraud
or abuse simply doesn't realize that a little bit of an
examination will sometimes turn up some interesting behavior.
The current budget resolution for fiscal year 2004
instructed all congressional Committees to identify waste,
fraud and abuse and report back the findings to the Budget
Committee. They will then analyze and perhaps make some
adjustments based on that information. That doesn't mean
Committees in identifying these areas can't make changes on
their own.
I commend our colleague and Chairman of the Budget
Committee, Mr. Nussle, for his work to protect taxpayers, but
basically all of us are responsible, not just one Committee,
for finding waste, fraud and abuse in our own jurisdiction. In
fact, we have done that. We have taken legislative action to
guard the Social Security trust funds by closing the loophole
that allows some government workers to avoid the government
pension offset. We have said that individuals who are fugitive
felons and parole violators should not receive their Social
Security benefits. The Committee has acted to implement
improved sharing of new-hire data to ensure unemployment
benefits are properly distributed. Most recently we took
legislative action in H.R. 1, the Medicare Prescription Drug
and Modernization Act, to reform the Medicare secondary payer
system, to halt improper billing practices, fix the Medicare
payment system for outpatient prescription drugs, and inject a
little bit of competitive bidding structure into the market for
durable medical equipment. These, although sounding modest,
would produce $33 billion in savings.
Joining us today are witnesses from the U.S. General
Accounting Office (GAO), Administration officials, and
representatives from outside groups to help us examine other
areas that perhaps we haven't focused on. So, we are pleased to
have all of you with us this morning.
Part of the problem is that many of the government programs
within our jurisdiction go back more than half a century or
longer, and so if, in examining these programs, we do want to
retain them, I do think we ought to continue to examine them to
make sure that they are relevant and cost-effective in carrying
out the activities that we continue to support.
With that, I would recognize the gentleman from New York,
Mr. Rangel, for any comments he may wish to make over his
microphone.
[The opening statement of Chairman Thomas follows:]
Opening Statement of The Honorable Bill Thomas, Chairman, and a
Representative in Congress From the State of California
As a Committee with jurisdiction over programs that affect and
improve the lives of nearly every American, we have a responsibility to
ensure that these programs operate responsibly and effectively. The
reason we're meeting today is to help identify waste, fraud and abuse
entrenched in the programs we oversee.
The Concurrent Budget Resolution for Fiscal Year 2004 instructed
all Congressional Committees to identify waste, fraud and abuse, and
then report the findings back to the Budget Committee. They will
analyze the findings and perhaps implement program reforms. I commend
our colleague and Chairman of the Budget Committee, Mr. Nussle, for his
work to protect taxpayers. But removing waste, fraud and abuse from
government programs is all of our responsibilities--it doesn't just
rest with one Committee.
This Committee has taken legislative action to guard the Social
Security Trust Funds by closing the loophole that allows some
government workers to avoid the Government Pension Offset. We have said
that individuals who are fugitive felons and parole violators should
not receive Social Security benefits. The Committee has acted to
implement improved sharing of new hire data to ensure unemployment
benefits are properly distributed.
Most recently, we took legislative action on H.R. 1, the Medicare
Prescription Drug and Modernization Act of 2003, to reform the Medicare
secondary payer system to halt improper billing practices, fix the
Medicare payment system for outpatient prescription drugs and inject a
little bit of competitive bidding structure into the market for durable
medical equipment. Although sounding modest, we've been told these
Medicare reforms, and others, save nearly $33 billion.
Joining us today are witnesses from the General Accounting Office,
Administration officials and representatives from outside groups to
help us examine other areas perhaps we haven't focused on yet.
Perhaps part of the problem is that many of the government programs
within our jurisdiction are nearly half a century old, or older. As
these programs continue to develop, we retain an ongoing responsibility
to guarantee the taxpayer dollars funding them are spent wisely.
Mr. RANGEL. Thank you, Mr. Chairman. Mr. Chairman, when I
saw the press release from the Budget Committee saying it was
going to root out waste, fraud and abuse in this
Administration, I thought it was put out by the Democratic
Campaign Committee. We got to get to the bottom of all of this
criminal activity. I know it is outside of our jurisdiction,
but I don't know whether you got the Intelligence Committee
listed on this. If you were just talking about our Committee, I
would have thought the Inspector General would be here from
Social Security and someone from the Internal Revenue Service
(IRS), but you have got the U.S. Department of Justice here.
That is serious business, which means we are going to put
someone in jail for fraud and abuse. Mismanagement we accept
over the last few years.
Having said that, I think this is far more serious than
just putting people in jail. I am so sorry that Mr. Nussle is
not here because what a time to be the Chairman of the Budget
Committee. We got a $450 billion deficit, and we got the GAO in
front of us. This is going to be very interesting as you share
with us, Mr. Walker, how we can balance the budget, because I
know that is why you are here.
Now, somehow I think that through this testimony we are
going to send a letter to the Chairman of the Budget Committee
saying somehow we will be saving $71.4 billion. This could be
the most important hearing that you have ever called, Mr.
Chairman, because if we have these hearings every month, for
the next few years imagine how dramatically we can really
eliminate the deficit. All you have to do is send a letter to
Nussle when he is here, and then at the end of the day we would
have rooted out not only corruption in government, but saved a
lot of money.
Mr. Chairman, we got serious things to do. We got to take
care of our foreign sales corporation problems, we got to try
to see whether we can bring our conferees closer together on
Medicare. You and I are going to have to stop the other
committees from taking Medicaid and making that a block grant.
We've got to bring peace in the Middle East. We've got a lot of
things to do. If you want to send a letter to Mr. Nussle, I
assure you the Democrats on our side would agree with you. We
will support you, send him a letter, say, what have you to say?
These letters have no consequence on us politically or on the
economy.
I am a little embarrassed to be here, but in all due
respect to our witnesses, I hope you will get immunity from any
names that you might feel free to identify--people involved in
waste, fraud and abuse. I hope the Department of Justice will
take the time out, having been a Federal prosecutor myself, not
to give us broad general terms and not to get involved in the
accounting of how much savings we got to have by putting people
in jail. That you should do without the encouragement of our
Committee, but if the Department of Justice is here to talk
about fraud--fraud, waste and abuse, I want names. I don't want
departments and agencies just to be humiliated and just to be
insulted with a broad brush. We want names, we want to put
people in jail, and if this works, who knows, we may have
something to do with the Intelligence Committee, and we all can
move forward.
I wondered why so many Members were absent today, Mr.
Chairman, until I looked at the agenda, and I know you want to
be here just as badly as I do, so let's get on with it, and
thank you for this opportunity.
Chairman THOMAS. The Chair thanks the gentleman from New
York for his unbridled enthusiasm. One of the things we all
know is that people who may be well-intentioned, but are
involved in waste, fraud and abuse aren't always involved in
criminal activity.
It is my pleasure to start the hearing off with introducing
our seventh Comptroller General of the United States, who does
serve a 15-year term, which clearly insulates and isolates him
to a very great degree from the political winds that may be
blowing hot or cold.
I believe you are finishing the first one-third of your
term. Just let me say briefly from his biography, that GAO's
mission is to help improve the performance and assure the
accountability of the Federal Government for the benefit of the
American people, and if that is what your duty is as head of
the GAO, I can think of no more appropriate hearing than this
one to invite you to, Mr. Walker. It is a pleasure to have you
in front of the Committee once again. Any written testimony you
may have will be made a part of the record. You may address us
as you see fit for the time that you have. Thank you very much.
STATEMENT OF THE HONORABLE DAVID M. WALKER, COMPTROLLER GENERAL
OF THE UNITED STATES, U.S. GENERAL ACCOUNTING OFFICE;
ACCOMPANIED BY MIKE BROSTEK, DIRECTOR FOR TAX ISSUES, LESLIE
ARONOVITZ, DIRECTOR FOR HEALTHCARE, AND BARBARA BOVBJERG,
DIRECTOR OF EDUCATION, WORKFORCE, AND INCOME SECURITY
Mr. WALKER. Thank you, Chairman Thomas, Ranking Member
Rangel and other Members of the Committee. I do appreciate the
opportunity to be here as an officer of the United States in
the legislative branch. The GAO and I take seriously our
responsibility to try to help the Congress discharge its
constitutional responsibilities and to improve the performance
and assure the accountability of the government for the benefit
of the American people.
Today's hearing is about fraud, waste, abuse and
mismanagement. I will touch on that, but I also want to touch
on a broader perspective as well. Let me summarize.
The Federal Government is the largest, the most complex,
the most diverse, and arguably the most important entity on the
face of the Earth, bar none. With an entity like that, waste,
fraud, abuse and mismanagement will never be zero, but we
should have zero tolerance for it, and we should try to do
everything that we can to minimize fraud, waste, abuse, and
mismanagement.
Even if we do everything that we can, and I will give you
several examples of where I think additional action is
necessary, it won't be enough to close our large fiscal gap and
our structural deficit. We are going to have to look at how we
can do things more economically, more efficiently and more
effectively, and we are going to have to ask some tough
questions about what is the proper role of the Federal
Government in the 21st century, how should the government do
business in the 21st century, and in some cases who should do
its business, because there is a huge difference between wants,
needs, affordability and sustainability looking into the
future.
With that, let me go into the three tiers and give you a
few examples, then open it up for questions and answers, Mr.
Chairman.
This Committee has jurisdiction over some incredibly
important programs to the American people: Social Security,
including its sub-elements such as the disability insurance
program; Supplemental Security Income (SSI); Medicare;
Temporary Assistance for Needy Families (TANF); and also
jurisdiction over the tax system, including the many different
tax preferences. You have a huge responsibility, and obviously
periodically conducting oversight over this portfolio is a
very, very critical element to try to help deal with our
structural deficit and growing fiscal gap.
I have with me today several executives from GAO who can
get into more detail if you would like through the question and
answer period, but let me hit the highlights and give you
examples of the three categories that I mentioned.
First with regard to fraud, waste, abuse and mismanagement,
I will give three examples. Many more are in our testimony. In
the SSI Program additional efforts are necessary in order to
try to deal with overpayments to individuals who are violating
residency requirements; in other words, they are citizens of
the United States, but they are not resident domestically,
therefore they should not be eligible for these benefits, but
are receiving these payments.
Secondly, with regard to the Medicare Program. Much
progress has been made to reduce improper payments from over
$20 billion a year to approximately $13 billion a year, but
needless to say, much more progress needs to be made in order
to deal with that issue.
On tax compliance, both on the individual and the corporate
side, there is a need to strengthen enforcement and to provide
for more accountability, both as it relates to the individual
side, such as earned income tax credit (EITC), as well as
corporate tax shelters and employment taxes.
With regard to economy, efficiency and effectiveness, this
Committee has taken steps on the government pension offset
provision as it relates to Social Security, which is a positive
step. Disability claims must also be improved. Disability
programs represent only about 20 percent of Social Security
Administration's (SSA) benefit expenses but take up about 55
percent of SSA's administrative costs. With regard to the
Medicare Program, opportunities for additional competitive
contracting for claims administrators; opportunity to improve
pricing with regard to prescription drugs; the need to look at
reasonable reimbursement payments for home health care; and the
need to hold contractors, third-party administrators who
administer health care claims, more accountable for their
actions. Clearly there are a range of tax preferences that
could and should be looked at.
As far as fundamental reassessment, reexamination of the
government's role in programs, the Federal disability programs
were designed for 50 years ago. The world has changed.
Fundamentally they need to be reviewed, reexamined, and
reengineered for the modern world and looking forward.
Medicare is not sustainable in its present form. The
Hospital Insurance Trust Fund alone has a $5.9 trillion
discounted present value gap. That is only one part of
Medicare. Tax preferences, some of which were implemented years
ago, may or may not be achieving their intended purpose,
including tax preferences for health care, which comprise over
$100 billion per year.
In summary, Mr. Chairman, the Chinese have a curse that
says may you live in interesting times. We clearly do, but I
would prefer not to look at this as a curse, but as a challenge
and an opportunity. Tackling fraud, waste, abuse and
mismanagement is tough work, but it needs to be done, because
if there is fraud, waste, or abuse, it means that we have less
money to benefit intended beneficiaries, and it means our
fiscal challenges are even greater.
This will not be enough. We will have to address economy,
efficiency, and effectiveness, and engage in a fundamental
review and reassessment of government policies, programs, and
activities. Hard work will be required. Tough choices will have
to be made. We also need to quit digging, because the hole is
getting deeper with regard to our fiscal gap.
Thank you, Mr. Chairman. I would be happy to answer any
questions you may have, and needless to say, GAO stands ready
to help this Committee and other committees in addressing these
issues.
[The prepared statement of Mr. Walker follows:]
Statement of The Honorable David M. Walker, Comptroller General of the
United States, U.S. General Accounting Office
Mr. Chairman, Mr. Rangel, members of the Committee.
It is a pleasure to be here today as you deal with one of your
important obligations--to exercise oversight over the use of taxpayer
funds. No government should waste its taxpayers' money, whether we are
operating during a period of budget surpluses or deficits. And, as you
all recognize, waste, fraud, abuse, and mismanagement are not
victimless activities. Our resources are not unlimited, and when they
are diverted for inappropriate, illegal, inefficient, or ineffective
purposes, both taxpayers and legitimate program beneficiaries are
cheated. Both the Administration and the Congress have an obligation to
safeguard benefits for those that deserve them and avoid abuse of
taxpayer funds by preventing such diversions. Beyond preventing obvious
abuse, government also has an obligation to modernize its priorities,
practices, and processes so that it can meet the demands and needs of
today's changing world. More broadly, the Federal Government must
reexamine the entire range of policies and programs--entitlements,
discretionary spending, and tax preferences [1]--in the
context of the 21st century. Both the Congress and the executive branch
have a fiduciary and stewardship obligation to gain control over our
fiscal future.
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\[1]\ In this testimony the term ``tax preferences'' is used to
describe provisions in the tax code sometimes referred to as ``tax
incentives'' or ``tax expenditures.'' ``Tax expenditures'' are defined
under the Congressional Budget and Impoundment Control Act of 1974 as
``revenue losses attributable to provisions of the Federal tax laws
which allow a special exclusion, exemption, or deduction from gross
income or which provide a special credit, a preferential rate of tax,
or a deferral of tax liability.'' The Joint Committee on Taxation
describes tax expenditures as including any reductions of income tax
liabilities that result from special tax provisions or regulations that
provide tax benefits to particular taxpayers.
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Periodic reexamination and revaluation of government activities has
never been more important than it is today. Our nation faces large and
growing long-term fiscal challenges. Increased pressure also comes from
world events: both from the recognition that we cannot consider
ourselves ``safe'' between two oceans--which has increased demands for
spending on homeland security--and from the U.S. role in an
increasingly interdependent world. Government also faces increased
demands from the American public for modern organizations and
workforces that are results-oriented, capable, responsive, agile, and
accountable.
This committee has jurisdiction over some of the most important
programs in the Federal Government: Social Security--including related
programs such as SSI--Medicare, and TANF. As the committee with
jurisdiction over our tax system--over raising the revenue to finance
government's activities--you also oversee the growing number of
``programs'' conducted through the tax code in the form of tax
preferences. By anyone's definitions, your oversight agenda is massive.
It is important that you take it seriously. Today's hearing is a
positive step in this regard.
And, of course, as everyone on this committee knows well, today
discretionary spending makes up less than 40 percent of the budget. Net
interest and other mandatory spending [2]--including the
programs under your control--represent over 60 percent of the federal
budget. Figure 1 shows the composition of federal spending in 2003.
Including the Iraq war supplemental mandatory spending makes up 54
percent of the budget--up from 25 percent in 1963 before the creation
of Medicare and 45 percent in 1983.[3] If you look only at
programmatic spending (i.e., excluding interest on the debt) the shares
are 58 percent mandatory and 42 percent discretionary.
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\[2]\ While Social Security and Medicare are the largest direct
spending or mandatory programs, this category also includes such others
as farm price supports, insurance programs, food stamps, TANF block
grants to the states, federal civilian and military pension and health.
\[3]\ Excluding the Iraq war supplemental the figures are 56
percent mandatory and 37 percent discretionary.
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Figure 1: Composition of Federal Spending, 2003
Source: GAO analysis of data from the Congressional Budget
Office.
Note: Includes $41 billion in discretionary spending and
about $1 billion in mandatory spending for the Iraq war
supplemental. Includes $11 billion in mandatory spending for
the 2003 tax cut package.
Direct, or mandatory, spending programs and tax preferences are by
definition assumed in the baseline and not automatically subject to
annual congressional decisions as are appropriated discretionary
programs. In our view, a periodic reassessment of these programs and
tax preferences is critical to achieving fiscal discipline in the
budget as a whole. Moreover, such a review can help ascertain whether
these programs are protected from the risk of fraud, waste, and abuse,
and are designed to be as economical, efficient, and effective as
possible.
As you know, the Budget Resolution directs GAO to prepare a report
identifying ``instances in which the committees of jurisdiction may
make legislative changes to improve the economy, efficiency, and
effectiveness of programs within their jurisdiction.'' My testimony
draws in part on some of the items that will be included in that
report, which is due August 1, 2003. You asked me today to focus on
several areas within this Committee's jurisdiction: Social Security and
disability, unemployment insurance, Medicare, and tax preferences and
compliance activities.
With me today are four GAO Directors with detailed knowledge in
these areas: Barbara Bovbjerg of our Education, Workforce and Income
Security Team [Social security, disability], Leslie Aronovitz and Laura
Dummit of our Health Care Team [Medicare] and Michael Brostek who is a
Tax Director in our Strategic Issues Team.
In this testimony, I will discuss program reviews, oversight, and
stewardship of taxpayer funds on three levels:
First are those areas vulnerable to fraud, waste, abuse,
and mismanagement. Payments to ineligibles drain resources that could
otherwise go to the intended beneficiaries of a program. Everyone
should be concerned about the diversion of resources and subsequent
undermining of program integrity.
Second, and more broadly, policymakers and managers need
to look at ways to improve the economy, efficiency, and effectiveness
of federal functions, programs, and policies--including specific tax
preferences. Even where we agree on the goals, numerous opportunities
exist to streamline, target, and consolidate programs to improve their
delivery. This means looking at program consolidation, at overlap, and
at fragmentation. It means improved targeting in both spending programs
and tax preferences.
Finally, a fundamental reassessment of government
programs, policies, and activities can help weed out programs that are
outdated, ineffective, unsustainable, or simply a lower priority than
they used to be. In most federal mission areas national goals are
achieved through the use of a variety of tools and, increasingly,
through the participation of many organizations, such as state and
local governments and international organizations, that are beyond the
direct control of the Federal Government. Government cannot accept as
``givens'' all of its existing major programs, policies, and
operations. A fundamental review, reassessment, and reprioritization of
what the Federal Government does, how it does it, and in some cases,
who does the government's business will be required, particularly given
the demographic tidal wave that is starting to show on our fiscal
horizon.
Before turning to the three program areas on which you asked us to
focus today, let me briefly discuss each of the three levels of review.
Addressing Vulnerabilities to Fraud, Waste, Abuse, and Mismanagement
Programs and functions central to national goals and objectives
have been hampered by daunting financial and program management
problems, exposing these activities to fraud, waste, abuse, and
mismanagement. These weaknesses have real consequences with large
stakes that are important and visible to many Americans. Some of the
problems involve the waste of scarce federal resources. Other problems
compromise the ability of the Federal Government to deliver critically
needed services, such as ensuring airline safety and efficiently
collecting taxes. Still others may undermine government's ability to
safeguard critical assets from theft and misuse.
In recent years, GAO's work across the many areas of government
program and operations has highlighted threats to the integrity of
programs which prompt potential for fraud, waste, abuse, and
mismanagement. As the sections in this testimony on social security
programs and unemployment insurance, health care, and tax issues
illustrate, much of our work for the Congress is in fact dedicated to
helping redesign programs and improve management to address these long
standing problems, in areas ranging from uncollected taxes--both
corporate and individual--to critical entitlement programs that provide
health and social services.
In 1990, GAO began a program to report on government operations we
identified as ``high risk.'' This label has helped draw attention to
chronic, systemic performance and management shortfalls threatening
taxpayer dollars and the integrity of government operations. Over the
years GAO has made many recommendations to improve these high-risk
operations. We discovered that the label often inspired corrective
action--indeed 13 areas have come off the list since its inception. For
each of these areas, we focus on (1) why the area is high-risk; (2) the
actions that have been taken and that are under way to address the
problem since our last update report and the issues that are yet to be
resolved; and (3) what remains to be done to address the risk.
In January of this year we provided an update for the 108th
Congress, giving the status of high-risk areas included in our January
2001 report and identifying new high-risk areas warranting attention by
the Congress and the administration.[4] GAO's 2003 high-risk
list is shown in Attachment I. This Committee has jurisdiction over a
number of these areas. Lasting solutions to high-risk problems offer
the potential to save billions of dollars, dramatically improve service
to the American public, strengthen public confidence and trust in the
performance and accountability of our national government, and ensure
the ability of government to deliver on its promises. We have noted
that continued congressional interest and oversight, such as that
exemplified by this hearing today are of crucial importance. In
addition, perseverance by the administration in implementing needed
solutions is needed. The administration has looked to our
recommendations in shaping government-wide initiatives such as the
President's Management Agenda, which has at its base many of the areas
we have previously designated as high risk.
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\[4]\ U.S. General Accounting Office, High-Risk Series: An Update,
GAO-03-119 (Washington, D.C.: January 2003).
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Clearly progress has been made in addressing most of the areas on
our current high risk list, both through executive actions and
congressional initiatives. However, many of these problems and risks
are chronic and long standing in nature and their ultimate solution
will require persistent and dedicated efforts on many fronts and by
many actors over a period of time. Some will require changes in laws to
simplify or change rules for eligibility, provide improved incentives
or to give federal agencies additional tools, such as additional tools
to track and correct improper payments. Continued progress in improving
agencies' financial systems, information technology, and human capital
management will be vital in attacking and mitigating risks to federal
program integrity. Some areas may indeed require additional investments
in people, process, and technology to provide effective information,
oversight, and enforcement that protects programs from abuse.
Ultimately, a transformation will be needed in the cultures and
operations of many agencies to permit them to manage risks and foster
the kind of sustained improvements in program operations that is called
for. Continued persistence and perseverance in addressing the high-risk
areas will ultimately yield significant benefits for the taxpayers over
time. Finding lasting solutions offers the potential to achieve
savings, improve services, and strengthen public trust in government.
Improving Economy, Efficiency, and Effectiveness
Important as safeguarding funds from fraud, waste, abuse, and
mismanagement is, I believe that for long-lasting improvements in
government performance the Federal Government needs to move to the next
step: to pursue widespread opportunities to improve the economy,
efficiency, and effectiveness of existing federal goals and program
commitments. The basic goals of many federal programs--both mandatory
and discretionary--enjoy broad support. That support only makes it more
important for us to pay attention to the substantial opportunities to
improve cost effectiveness and the delivery of services and activities.
No activity should be exempt from some key questions about its design
and management.
Key Questions for Program Oversight
Is the program targeted appropriately?
Does the program duplicate or even work at cross purposes
with related programs and tools?
Is the program financially sustainable and are there
opportunities for instituting appropriate cost sharing and recovery
from nonfederal parties including private entities that benefit from
federal activities?
Can the program be made more efficient through
reengineering or streamlining processes or restructuring organizational
roles and responsibilities?
Are there clear goals, measures and data with which to
track progress, results costs, and benefits?
GAO's work illustrates numerous examples where programs can and
should be changed to improve their impact and efficiency.
For example, our work has shown that scarce federal funds could
have a greater impact on program goals by improving their targeting to
places or people most in need of assistance. Poorly targeted funding
can result in providing assistance to recipients who have the resources
and interest to undertake the subsidized activity on their own without
federal financing. Moreover, lax eligibility rules and controls can
permit scarce funds to be diverted to clients with marginal needs for
program funds. Federal grant programs with formula distributions to
state and local governments could be better targeted to places with
high needs but low fiscal capacity. Other programs should be re-
examined for perverse incentives (e.g. flood insurance, which provides
an incentive to rebuild in areas vulnerable to flooding).
GAO's work over the years has also shown that numerous program
areas are characterized by significant program overlap and duplication.
In program area after program area, we have found that unfocused and
uncoordinated programs cutting across federal agency boundaries waste
scarce resources, confuse and frustrate taxpayers and beneficiaries and
limit program effectiveness.
And finally, the allocation of costs that once made sense when
programs were created needs to be periodically reexamined to keep up
with the evolution of markets. In some cases, private markets and
program beneficiaries can play greater roles in financing and delivery
of program services.
Reassessing What Government Does
I have talked about the need to protect taxpayer dollars from
fraud, waste, abuse, and mismanagement and about the need to take
actions improving the economy, efficiency, and effectiveness of
government programs, policies, and activities. However, to meet the
challenges of today and the future, we must move beyond these levels to
undertake a more fundamental reassessment of what government does and
how it does it.
In part, this requires looking at current federal programs--both
spending and tax--in terms of their goals and results. Why does the
program/activity exist? Is the activity achieving its intended
objective? If not, can it be fixed? If so, how? If not, what other
approaches might succeed in achieving the goal/objective? More
fundamentally, even if a program or activity is achieving its stated
mission--or can be ``fixed'' so that it does so--where does it fit in
competition for federal resources? Are the taxpayers getting a good
``return on investment'' from the program? Is its priority higher or
lower today given the nation's evolving challenges and fiscal
constraints?
A fundamental reassessment also requires asking whether an existing
program, policy, or activity ``fits'' the world that we face today and
will face in the future. It is important not to fall into the trap of
accepting all existing activities as ``givens'' while subjecting new
proposals to greater scrutiny than existing ones undergo. Think about
how much the world has changed in the past few decades and how much it
will change in future years. We need a fundamental reassessment and
reconsideration of ``the base.'' We need to ask: What is the purpose?
What tools are used? What resources? What are the results? What are the
costs and benefits? Who benefits? What other programs or activities
exist in the same area or with the same goal? How do they compare?
I do not need to tell this Committee that any discussion about the
role of the Federal Government, about the design and performance of
federal activities, and about the near-term federal fiscal outlook
takes place within the context of two dominating facts: a demographic
tidal wave is on the horizon, and it, combined with rising health care
costs, threatens to overwhelm the nation's fiscal future. The numbers
do not add up. The fiscal gap is too great for any realistic
expectation that the country can grow its way out of the problem.
Figure 2 is just one illustration of this.
Figure 2: Composition of Federal Spending as a Share of GDP
Source: GAO's March 2003 analysis.
Note: Assumes currently scheduled Social Security benefits
are paid in full throughout the simulation period.
Now, Mr. Chairman, Mr. Rangel, members of the Committee, let me
turn to each of the areas that are the subject of this hearing: Social
Security programs and unemployment insurance, Medicare, and tax
compliance activities and preferences. In each of these areas the three
levels of review I described are relevant: vulnerability to fraud,
waste, abuse, and mismanagement; improvements in economy, efficiency,
and effectiveness; and, finally, re-examining what government does, how
it does business, and sometimes who does the government's business.
Needless to say, I will not be discussing all the challenges faced in
these program areas or by the departments and agencies that administer
them.
SOCIAL SECURITY PROGRAMS
The Social Security Administration (SSA) faces a number of
difficult management and policy challenges. This Committee has shown
great leadership in pressing SSA to address such concerns, and indeed
has achieved many management improvements that have saved millions of
dollars, but much remains to be done. First, the agency needs to ensure
the integrity of its three programs--Old Age and Survivors Insurance
(OASI), Disability Insurance (DI), and Supplemental Security Income
(SSI). In particular, it needs to provide continuing management
attention to problems in the SSI program, including monitoring new
initiatives to correct program weaknesses, and addressing the
continuing problem of program complexity. Second, SSA must focus on
improving the economy, efficiency, and effectiveness of these programs.
SSA urgently needs to address the disappointing results of its efforts
to improve the disability claims process it currently uses. Further,
the Government Pension Offset (GPO) and the Windfall Elimination
Provision (WEP) both need attention to assure they are administered
effectively and equitably. Third and finally, SSA must focus on
modernizing its disability programs. GAO has placed modernizing federal
disability programs on its high-risk list in recognition of the
transformation these programs must undergo to serve the needs of 21st
century Americans.
SSA Needs to Continue to Strengthen the Integrity of the SSI Program
of SSA's Programs
SSI is the nation's largest cash assistance program for the poor.
The SSI program poses a special challenge for SSA because, unlike its
insurance programs (OASI and DI), SSI is a means-tested program. For
this reason, SSA must collect and verify information on income,
resources, and recipient living arrangements to determine initial and
continuing eligibility for the program.
We designated SSI a high-risk program in 1997, after several years
of reporting on specific instances of abuse and mismanagement,
increasing overpayments, and poor recovery of outstanding SSI
overpayments. In response to our high-risk designation, SSA made
sufficient progress in improving SSI's financial integrity and
management to warrant removing its high-risk designation earlier this
year. SSA's actions included developing a major legislative proposal
with numerous overpayment deterrence and recovery provisions. Many of
these provisions were incorporated into the Foster Care Independence
Act, which passed in 1999 thanks to the leadership of this Committee.
The act directly addresses a number of our prior recommendations and
provides SSA with additional tools to prevent and recover overpayments.
SSA also took a number of internal administrative actions to strengthen
SSI program integrity, many in response to GAO
recommendations.[5] These include using tax refund offsets
for collecting SSI overpayments and more frequent automated matches to
identify ineligible SSI recipients living in nursing homes and other
institutions.
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\[5]\ U.S. General Accounting Office, Supplemental Security Income:
Action Needed on Long-Standing Problems Affecting Program Integrity,
GAO/HEHS-98-158 (Washington, D.C.: Sept. 14, 1998).
---------------------------------------------------------------------------
Although SSA's current initiatives demonstrate a stronger
management commitment to SSI integrity and have the potential to
significantly improve program management, challenges remain. In prior
work, we have reported that SSI living arrangement and in-kind support
and maintenance policies used by SSA to calculate eligibility and
benefit amounts were complex, prone to error, and a major source of
overpayments.[6] We also recommended that SSA develop
options for simplifying the program. Although SSA is considering
various options, it has not moved forward in recommending specific
proposals for change.
---------------------------------------------------------------------------
\[6]\ GAO/HEHS-98-158.
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Our current work, to be issued by the end of this month for the
Human Resources Subcommittee, suggests that some of these complex
policies--such as living arrangements--remain a problem. In recent
years, SSA has identified a general increase in the amount of annual
overpayments made to (1) individuals who are found to have violated
program residency requirements, or (2) recipients who leave the United
States and live outside the country for more than 30 consecutive days
without informing SSA. The Social Security Act requires that an
individual be a resident of the United States to be eligible for SSI
benefits.[7] SSA guidelines define a resident as a person
who has established a dwelling in the United States with the intent to
live in the country. The Act also stipulates that no individual is
eligible for SSI benefits for any full month that the individual is
outside the United States.[8] Further, an individual who is
outside the United States for 30 consecutive days cannot be eligible
for SSI benefits until he or she has been back in the country for 30
days. SSA detected overpayments of $118 million for residency
violations between 1997 and 2001, but interviews with OIG and agency
officials suggest that the agency detects only a portion of the
violations that occur each year, at least in some parts of the country.
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\[7]\ See 42 U.S.C. sec. 1382c(a)(1)(B)(i).
\[8]\ See 42 U.S.C. sec. 1382(f).
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We identified three kinds of weaknesses which impede SSA's ability
to detect and deter residency violations: First, in asking SSI
recipients about their current residence, field staff often rely on
recipients' own assertions and may accept only minimal documentation
from them, such as rent receipts and statements from neighbors or
clergy. Recipients who wish to misreport their residency can manipulate
such documents. Second, the agency makes limited use of tools at its
disposal to detect possible violators. For example, while SSA routinely
employs a risk analysis system to identify SSI recipients who are more
likely to incur overpayments, it does not use this tool to specifically
consider and target potential residency violators. Finally, SSA has not
adequately pursued the use of independent, third party data, such as
recipient bank account information, to help detect residency
violations. Although SSA is currently working with an independent
contractor to obtain access to SSI recipients' financial data, the
agency plans to use the information only to verify their financial
resources. It does not plan to use the information to detect those who
may be living and making financial transactions outside the United
States for extended periods of time.
As a consequence of the SSI program's problems, we believe that
sustained management attention continues to be necessary to improve SSI
program integrity. Following our most recent review of SSA's
progress,[9] the agency agreed with our recommendations to
(1) sustain and expand its program integrity activities underway and
continue to develop additional tools to improve program operations and
management, (2) identify and move forward with implementing cost-
effective options for simplifying complex policies, (3) evaluate
current policies for applying penalties for individuals who fail to
report essential eligibility information and remove barriers to their
use and effectiveness, and (4) reexamine its policies for waiving
recovery of SSI overpayments
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\[9]\ U.S. General Accounting Office, Supplemental Security Income:
Progress Made in Detecting and Recovering Overpayments, but Management
Attention Should Continue, GAO-02-849 (Washington, D.C.: Sept. 16,
2002).
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Improving the Economy, Efficiency, and Effectiveness of SSA's Programs
As important as ensuring the integrity of SSA's programs is, the
agency also faces difficult challenges in improving the economy,
efficiency, and effectiveness of its programs, including administering
certain provisions of the Social Security Act such as the Government
Pension Offset (GPO) and the Windfall Elimination Provision (WEP). Most
importantly, the agency must place greater emphasis on improving its
flawed disability claim process.
Administration of the Government Pension Offset and Windfall
Elimination Provision Remains a Concern
The GPO and the WEP reduce Social Security benefits for those who
receive noncovered pension benefits.[10] The GPO affects
spouse and survivor benefits and the WEP affects retired worker
benefits. Both provisions depend on having complete and accurate
information on receipt of noncovered pension benefits. However, such
information is not always available for the state and local pension
plans that do not participate in Social Security. In particular, our
prior work found that SSA is often unable to determine whether
applicants should be subject to the GPO and WEP because it does not
have access to any independent source of noncovered pension
information. Thus, both the GPO and WEP have proven difficult for SSA
to administer. To help correct this situation, we previously
recommended that SSA work with the Internal Revenue Service (IRS) to
revise the reporting of pension information on IRS Form 1099R, so that
SSA would be able to identify people receiving a pension from
noncovered employment, especially in state and local
governments.[11] However, IRS does not believe it can make
the recommended change without new legislative authority. Thus, in a
recent testimony before the Ways and Means Social Security
Subcommittee, we recommended that the Congress consider giving the
Service the authority to collect this information.[12] We
estimate that millions of dollars in reduced overpayments could be
achieved by implementing such payment controls.
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\[10]\ Social Security's provisions regarding public employees are
rooted in the fact that about one-fourth of them do not pay Social
Security taxes on the earnings from their government jobs. Even though
these noncovered employees may have many years of earnings on which
they do not pay Social Security taxes, they can still be eligible for
Social Security benefits based on their spouses' or their own earnings
in covered employment.
\[11]\ See U.S. General Accounting Office, Social Security
Administration: Better Payment Controls for Benefit Reduction
Provisions Could Save Millions, GAO/HEHS-98-76 (Washington, D.C.: Apr.
30, 1998).
\[12]\ See U.S. General Accounting Office, Social Security: Issues
Relating to Noncoverage of Public Employees, GAO-03-710T (Washington,
D.C.: May 1, 2003).
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In addition to this administrative problem, we continue to be
concerned about the GPO ``last day'' exemption. As you know, the GPO
prevents workers from receiving a full Social Security spousal benefit
on top of a pension earned from government employment not covered by
Social Security. However, the law provides an exemption from the GPO if
an individual's last day of state/local employment is in a position
that is covered by both Social Security and the state/local
government's pension system. In a recent study, we found instances
where individuals performed work in Social Security covered positions
for short periods to qualify for the GPO last-day exemption. The
practices we identified in Texas and Georgia alone could increase long-
term benefit payments from the Social Security Trust Fund by $450
million. In response to a recommendation we made, this committee--and
subsequently the full House--passed the Social Security Protection Act
of 2003 (H.R. 743), which includes a provision to lengthen the time
period to qualify for the GPO exemption from 1 day to 5 years. The bill
is still pending in the Senate, and if passed, will narrow this
loophole significantly.
Efforts to Improve the Disability Claims Process Have Been
Disappointing
SSA's disability determination process is time-consuming, complex,
and expensive. Although the agency has been working for years to
improve this process, ensuring the quality and timeliness of its
disability decisions remains one of SSA's greatest unmet challenges.
Individuals initially denied benefits by SSA who appeal their claims
may wait a year or more for a final decision on their eligibility.
These long waits result, in part, from complex and fragmented decision-
making processes that are laden with many layers of reviews and
multiple handoffs from one person to another. The demanding nature of
the process can be seen in the cost of administering the DI and SSI
programs. Although SSI and DI program benefits account for less than 20
percent of SSA's total benefit payments, they consume nearly 55 percent
of the annual administrative resources.
SSA has also had difficulty ensuring accurate and consistent
decisions regarding a claimant's eligibility for disability benefits
across all levels of the decision-making process. Our work shows that
in fiscal year 2000, about 40 percent of the applicants whose cases
were denied at the initial level appealed this decision and about two-
thirds of those who appealed were awarded benefits at a
hearing.[13] The large proportion of cases awarded benefits
at the hearings level and the potential inconsistency of decisions at
these two levels has raised questions about the fairness, integrity,
and cost of SSA's disability programs.
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\[13]\ U.S. General Accounting Office, Social Security Disability:
Efforts to Improve Claims Process Have Fallen Short and Further Action
is Needed, GAO-02-826T (Washington, D.C.: June 11, 2002).
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SSA is at a crossroads in its efforts to redesign and improve its
disability claims process. SSA's new Commissioner has acknowledged the
limited progress to date, has made the issue one of the agency's
priorities, and has taken the first steps to address this problem.
However, as we testified in May 2002, the agency's past experience may
argue for SSA to undertake a new and comprehensive analysis of the
fundamental issues impeding progress.[14] Such an analysis
should include reassessing the root causes contributing to the
programmatic weaknesses in the agency's disability determination
process that we noted earlier. The outcome of this analysis may, in
some cases, require legislative changes to the disability determination
process.
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\[14]\ U.S. General Accounting Office, Social Security
Administration: Agency Must Position Itself Now to Meet Profound
Challenges, GAO-02-289T (Washington, D.C.: May 2, 2002).
Reassessing What Government Does: Disability Programs Must be
Modernized
Although SSA's disability claims process requires urgent management
attention, the policies underlying federal disability programs also
require transformation. Federal disability programs represent an
example of a disconnect between program design and today's world--a
disconnect great enough to warrant our designation as a high-risk area
this year.[15] Already growing, SSA's disability programs
are poised to surge as baby-boomers age, yet the programs remain mired
in outdated economic, workforce, and medical concepts and are not well
positioned to provide meaningful and timely support to Americans with
disabilities. These outdated concepts persist despite scientific
advances and economic and social changes that have redefined the
relationship between impairments and the ability to work. In addition,
while SSA has taken some steps in trying to return beneficiaries to
work, it has not developed, as we have recommended, a comprehensive
return-to-work strategy that focuses on identifying and enhancing
beneficiaries' work capacities.
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\[15]\ GAO-03-119.
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Over the last 10 years, the number of working-age beneficiaries of
the DI and SSI programs has increased by 38 percent even as changes in
medicine, technology, society, and the nature of work have increased
the potential for some people with disabilities to return to, or remain
in, the labor force. In addition, legislative changes have also focused
on returning disability beneficiaries to work. Specifically, the
Americans with Disabilities Act of 1990 supports the premise that
people with disabilities can work and have the right to work and the
Ticket to Work and Work Incentives Improvement Act of 1999 increased
beneficiaries' access to vocational services.
About 12 years ago, SSA began reviewing relevant medical advances
and updating the criteria used to evaluate disability
claims.[16] SSA's efforts to update the criteria were
curtailed in the mid-1990s by staff shortages, competing priorities,
and lack of adequate research on disability issues. The updates resumed
in 1998, but progress has been slow and the lengthy time frames could
undermine the very purpose of an update.
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\[16]\ These updates include adding or dropping conditions that
qualify one for benefits, modifying the criteria needed to establish
the presence and severity of certain medical conditions, and wording
changes for clarification and guidance in decision making.
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Using outdated information calls into question the validity of
disability decisions and raises the risk of overcompensating some
individuals while under compensating or inappropriately denying
compensation entirely to others. SSA needs to reexamine the criteria--
both medical and vocational--it uses to determine whether individuals
are eligible for benefits.
Even if SSA modernizes its criteria, it will continue to face
difficulties in returning beneficiaries to work, in part, due to
weaknesses in the design of the disability programs.[17] The
current process produces a strong incentive for applicants to establish
their inability to work to qualify for benefits. Moreover, instead of
receiving assistance to stay in the workforce or return to work--and
thus to stay off the long-term disability rolls--an individual can
obtain assistance through DI or SSI only by proving his or her
inability to work. And even in its efforts to redesign the decision-
making process, SSA has yet to incorporate into these initiatives an
evaluation of what an individual may need to return to work.
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\[17]\ U.S. General Accounting Office, SSA Disability: Program
Redesign Necessary to Encourage Return to Work, GAO/HEHS-96-62
(Washington, D.C.: Apr. 24, 1996).
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Although the agency has taken a number of actions to improve its
return-to-work practices, it has achieved poor results in this arena
and few DI and SSI beneficiaries leave the disability rolls to work. As
we have recommended previously, SSA still needs to move forward in
developing a comprehensive return-to-work strategy that integrates, as
appropriate, earlier intervention, including earlier and more effective
identification of work capacities and the expansion of such capacities
by providing essential return-to-work assistance for applicants and
beneficiaries.[18]
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\[18]\ U.S. General Accounting Office, SSA Disability: Return-to-
Work Strategies From Other Systems May Improve Federal Programs, GAO/
HEHS-96-133 (Washington, D.C.: July 11, 1996).
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Modernizing and fully incorporating work-oriented policies in the
disability programs requires fundamental change, such as revisiting the
programs' basic orientation. Such a reorientation would require
examining complex program design issues such as beneficiaries' access
to medical care and assistive technologies, the benefits offered and
their associated costs, mechanisms to return beneficiaries to work, as
well as the integration of SSA's programs with other programs and
policies affecting people with disabilities. Success in implementing
fundamental change to the orientation of the disability programs will
be dependent upon consultation and cooperation between the executive
and legislative branches as well as cross-agency efforts, and will
likely require statutory as well as regulatory action.
UNEMPLOYMENT INSURANCE
We have identified program integrity weaknesses similar to those we
have identified in the SSI program in another program that falls under
this committee's jurisdiction: the Department of Labor's (Labor)
Unemployment Insurance (UI) program. We found problems at both the
federal and state level that contribute to overpayments in this
program, including an insufficient balance between the need to process
and pay UI claims in a timely manner with the need to control program
payments.
Of the $30 billion in UI benefits paid in calendar year 2001, Labor
estimates that a total of about $2.4 billion in overpayments occurred,
including about $577 million (24 percent) attributable to fraud or
abuse. Overpayments in the UI program result from management and
operational practices we identified at both the state and federal
level. At the state level, we found that many states do not
sufficiently balance the need to quickly process and pay UI claims with
the need to control program payments. For example, we found that five
of the six states we visited had diverted staff from benefit payment
control operations to claims processing activities over the past year
in response to increases in the volume of UI claims. Moreover, while a
number of states we visited routinely use independent automated data
sources to verify key information that can affect claimants'
eligibility for benefits--such as an individual's wages and employment
status--they also rely heavily on self-reported information from
claimants for other important data, such as a claimant's receipt of
other federal or state program benefits and whether they are citizens
of the United States. Many of these states lack access to data sources
for verifying claimants' identity in a timely manner and thus rely on
verification processes that are incomplete or information sources that
are only checked periodically.
In addition to the practices we identified at the state level that
contribute to overpayments, we found that policies and directives from
the Department of Labor affect states' priorities and procedures in a
manner that makes overpayments more likely. For example, the
performance measures that Labor uses to gauge states' operations tend
to emphasize payment timeliness more heavily than payment accuracy.
Labor has also been reluctant to link the states' performance on
payment accuracy to the annual administrative budget as a way of
providing incentives or sanctions for good or poor performers. Despite
these problems, we found that Labor has taken actions to improve UI
program integrity by working to obtain data from additional sources
that could help states make more accurate eligibility decisions and
developing a performance measure in its fiscal year 2003 performance
plan for gauging state payment accuracy in future years. In addition,
under the leadership of this committee, the House recently passed the
Welfare Reform bill of 2003 (H.R. 4), which authorizes state
unemployment insurance agencies to obtain wage and new hire information
from the Department of Health and Human Service's National Directory of
New Hires.[19] These data could be used to more effectively
verify individuals' eligibility for UI benefits.
---------------------------------------------------------------------------
\[19]\ This bill is currently pending in the Senate.
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MEDICARE
Medicare is one of the largest and most complex programs in the
Federal Government, making it highly vulnerable to waste, fraud, abuse,
and mismanagement. We placed Medicare on our list of high-risk programs
more than a decade ago and it remains on that list today. In fiscal
year 2002, Medicare paid about $257 billion for a wide variety of
inpatient and outpatient health care services for over 40 million
elderly and disabled Americans. The Centers for Medicare & Medicaid
Services (CMS) contracts with 38 health insurance companies to pay and
process about 1 billion fee-for-service claims submitted each year by
over 1 million hospitals, physicians, and other health care providers.
Over the years, we have reported on challenges the agency has faced to
safeguard billions of program dollars and obtain current and reliable
data to set payments and monitor its programs. While CMS has made
progress in improving Medicare's financial management, much more could
be done to improve Medicare's operations.
Oversight of Contractor Performance Critical to Program Integrity
Medicare contractors are charged with ensuring that claims are paid
properly and that fraud or abuse is prevented or detected. However,
contractors' performance has varied and CMS has not always overseen
their efforts effectively, as the following illustrates:
Medical review--Medical review is a program safeguard
designed to detect improper billing and payment. Medical reviews
involve detailed examinations of a sample of claims by clinically
trained staff and require that physicians submit medical records to
substantiate their claims. Although our assessment found that claims
administration contractors' decisions to pay or deny claims were
generally accurate, contractors were less effective at targeting for
review those claims most likely to be billed
inappropriately.[20] Furthermore, CMS did not guide the
contractors in selecting the most effective criteria for medical review
or encourage them to share best practices--two steps that could help
reduce improper payments.
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\[20]\ U.S. General Accounting Office, Medicare: Recent CMS Reforms
Address Carrier Scrutiny of Physicians' Claims for Payment, GAO-02-693
(Washington, D.C.: May 28, 2002).
---------------------------------------------------------------------------
Communication with physicians--In order to bill Medicare
correctly, physicians need to understand program rules and how to
implement billing changes as they occur. We found that contractors'
communications with physicians were often incomplete, confusing,
untimely, or even incorrect--making it more difficult for physicians to
bill correctly.[21] For example, only 15 percent of the
calls we placed to contractors' call centers asking ``frequently asked
questions'' were answered accurately and completely by contractors'
staff. CMS has set few standards to guide claims administration
contractors' communications with physicians.
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\[21]\ U.S. General Accounting Office, Medicare: Communications
With Physicians Can Be Improved, GAO-02-249 (Washington, D.C.: Feb. 27,
2002).
Weaknesses in contractor performance and agency oversight increase
the risk of improper payment. Since 1996, the Department of Health and
Human Services' (HHS) Office of the Inspector General (OIG) has
estimated that Medicare's contractors improperly paid claims worth
billions of dollars each year--more than $13 billion in fiscal year
2002 alone. While useful to focus attention on the extent of the
problem, this error rate did not provide CMS with information to target
improvements. To address this shortcoming, in August 2000, CMS began
implementing a new error rate measurement methodology that will provide
national error rates beginning in fiscal year 2003, as well as error
rates by contractor, provider type, and benefit category. Better error
rate data is a first step toward enhancing CMS's ability to hold
individual Medicare contractors accountable or help contractors
identify and take steps to correct problematic billing practices.
Difficulties in Setting Appropriate Payment Rates Increase Medicare
Spending
We have reported in many instances that Medicare has paid too much
for items and services provided to its beneficiaries. Such wasteful
spending is disturbing news for both the American taxpayer and Medicare
beneficiaries, who pay higher co-payments when the amount Medicare pays
is too high. While the problem of excessive Medicare payments has been
clearly identified, solutions may not be quick or easy.
Skilled nursing facilities and home health agencies--
Medicare payments are significantly more than the cost of caring for
beneficiaries in most skilled nursing facilities and by most home
health agencies.[22] In 2000, Medicare paid nearly one
quarter of skilled nursing facility providers over 30 percent more than
costs.[23] In the first 6 months of 2001, Medicare paid, on
average, 35 percent more than providers' costs for home health
care.[24] We have recommended that CMS minimize excessive
payments to home health agencies by introducing risk
sharing.[25] Risk sharing would limit the total losses or
gains a home health agency could experience by sharing them with the
Federal Government. Such an approach would protect the Medicare program
from overpaying for services and home health agencies from the
financial risk of serving beneficiaries with greater than average
needs, when those service costs are not accounted for under the current
payment system.
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\[22]\ In fiscal year 2001, Medicare paid $13 billion to skilled
nursing facilities and $9 billion for home health services.
\[23]\ U.S. General Accounting Office, Skilled Nursing Facilities:
Medicare Payments Exceed Costs for Most but Not All Facilities, GAO-03-
183 (Washington, D.C.: Dec. 31, 2002).
\[24]\ U.S. General Accounting Office, Medicare Home Health Care:
Payments to Home Health Agencies Are Considerably Higher than Costs,
GAO-02-663 (Washington, D.C.: May 6, 2002).
\[25]\ U.S. General Accounting Office, Medicare Home Health Care:
Prospective Payment System Will Need Refinement as Data Become
Available, GAO/HEHS-00-9 (Washington, D.C.: Apr. 7, 2000) and U.S.
General Accounting Office, Medicare Home Health Care: Prospective
Payment System Could Reverse Recent Declines in Spending, GAO/HEHS-00-
176 (Washington, D.C.: Sept. 8, 2000).
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Medical equipment and supplies--Over the years, studies
have shown that Medicare has been paying too much--in some cases more
than three times suppliers' acquisition costs--for certain medical
equipment and supplies.[26] For example, we estimated that
Medicare could have saved over $500 million in fiscal year 1996 if it
paid rates for home oxygen services comparable to those paid by the
Department of Veterans Affairs (VA).[27] Since then, the
Balanced Budget Act of 1997 reduced oxygen payment rates by 25 percent
effective in 1998, and by an additional 5 percent effective in 1999.
Nevertheless, in a demonstration of competitive acquisition, CMS was
able to reduce Medicare's payments by at least 16 percent more in the
demonstration areas, while requiring suppliers to meet additional
quality standards. Medicare pricing for medical equipment and supplies
is problematic because payments are based on fee schedules that are
generally tied to suppliers' historical charges to the program--not to
current actual or market prices. Moreover, the process for adjusting
these fees nationally has been cumbersome and rarely used.
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\[26]\ Medicare fee payments and beneficiary cost sharing for
medical equipment and supplies, which includes prosthetics (or
artificial limbs or other body parts) and orthotics (or braces) totaled
approximately $9 billion for calendar year 2002. This category includes
some drugs covered under part B, such as drugs used in a piece of
equipment--for example, a nebulizer or an infusion pump.
\[27]\ U.S. General Accounting Office, Medicare: Home Oxygen
Program Warrants Continued HCFA Attention, GAO/HEHS-98-17 (Washington,
D.C.: Nov. 7. 1997).
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Covered prescription drugs--The pricing of covered
prescription drugs--for which Medicare and its beneficiaries paid more
than $8.2 billion fiscal year 2002--is particularly problematic. In
2000, Medicare paid over $1 billion more than other purchasers for
outpatient drugs that the program covers.[28] Medicare's
method for establishing drug payments is flawed because it is based on
95 percent of the average wholesale price (AWP), which is neither an
average, nor a price that wholesalers charge. For example, in January
2003, we reported that Medicare paid significantly more than the two
major types of suppliers for blood clotting factor, which is used to
treat people with hemophilia. While Medicare received a 5 percent
discount from AWP, one type of supplier acquired the clotting factor at
a discount of 35 percent to 48 percent.[29] Similarly, we
reported in 2001 that pharmacy suppliers could acquire the two most
common inhalation drugs, which are among the five drugs with the
highest Medicare payments, for a 78 percent to 85 percent discount from
AWP.[30] As a consequence of Medicare's pricing method, its
payments are not related to market prices that physicians and suppliers
actually pay.
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\[28]\ While Medicare does not have a comprehensive outpatient drug
benefit, certain drugs and biologicals are covered under part B of the
program, which also provides coverage for certain physician, outpatient
hospital, laboratory, and other services to beneficiaries who pay
monthly premiums. See U.S. General Accounting Office, Medicare:
Payments for Covered Outpatient Drugs Exceed Providers' Cost, GAO-01-
1118 (Washington, D.C.: Sept. 21, 2001).
\[29]\ Hemophilia treatment centers and homecare companies are the
two major providers of clotting factors to beneficiaries. See U.S.
General Accounting Office, Medicare: Payment for Blood Clotting Factor
Exceeds Providers' Acquisition Cost, GAO-03-184 (Washington, D.C.: Jan.
10, 2003).
\[30]\ GAO-01-1118.
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We made two recommendations to improve drug pricing that could also
be applicable to pricing for medical equipment and supplies. They are
to: 1) use information on market transactions already available to VA
and HHS as a benchmark for Medicare payment and 2) examine the benefits
and risks of expanding competitive bidding.
CMS's recent competitive bidding demonstration to set fees for
selected medical equipment, supplies, and covered outpatient drugs
suggests that such competition can lead to lower prices. Preliminary
annual gross savings from competitive bidding were estimated to range
from 17 percent to 22 percent for the products bid compared to fee
schedule amounts. However, CMS would need statutory authority to use
this method of setting fees on a wider scale.
Current Legislation Introduces Operational Changes To Address Certain
Program
Administration and Payment Issues
In this session of the Congress, both Houses have passed
major legislation that--if reconciled and signed into law--would
restructure Medicare through adding a prescription drug benefit.
Depending on how it is finalized, this legislation may also introduce
significant operational changes to the Medicare program.
Competitive contracting for claims administration--Under
Medicare's current statute and regulations, its contracting authority
and practices differ from those embodied in standard federal
contracting law and regulations. One key difference is that CMS
generally does not competitively bid for the services of its claims
administration contractors. Both the Senate and the House bills amend
the Medicare statute to require competitive contracting for claims
administration. This authority has the potential for significantly
improving Medicare program administration. Nevertheless, managing the
transition to a competitive contracting environment will be an enormous
new challenge. Federal agencies that manage large procurements of
contracted services--such as the departments of Energy and Defense--
have had problems with cost and schedule overruns and have failed to
hold their contractors accountable for performance.[31] CMS
would need to carefully manage its own contracting efforts to avoid
some of the pitfalls experienced by other agencies.
---------------------------------------------------------------------------
\[31]\ U.S. General Accounting Office, High-Risk Series: An Update,
GAO-01-263 (Washington, D.C.: January 2001).
---------------------------------------------------------------------------
Setting payments for medical equipment and supplies and
covered outpatient drugs--The House and the Senate bills have taken
different approaches to this issue, but both have sections that are
designed to address payment-setting for medical equipment, supplies,
and currently covered prescription drugs. The House passed legislation
that would give CMS authority to use competitive bidding to set
payments for certain medical equipment, supplies, and certain drugs. It
would also allow market information from these efforts to be used as a
benchmark for national payments. The Senate bill continued to rely on
AWP as a pricing mechanism for currently covered outpatient drugs.
However, it allowed CMS to substitute payment amounts that differed
from those linked to AWP, using amounts developed through a new process
and based on market price information from a number of specified
sources.
Medicare Reform Calls for Aligning Incentives and Strengthening
Accountability
The 2003 Trustees' annual report reminds us that Medicare as it is
currently structured is not fiscally sustainable. The retirement of the
baby boom generation will place huge fiscal pressures on the program.
Between now and 2035, the number of people age 65 and older will
double. Federal health and retirement spending on Medicare and Social
Security are expected to increase, as people live longer and spend more
time in retirement, as shown in figure 3.
Figure 3: Medicare Is Projected to Grow Dramatically As A Share of GDP
Source: CMS, Office of the Actuary
Notes: Projections are based on the intermediate assumptions
of the 2003 Trustees' Reports for Hospital Insurance (HI) and
Supplemental Medical Insurance (SMI).
Moreover, the baby boomers will have fewer workers to support them
in retirement. Further fiscal pressures will be placed on the program
by a new prescription drug benefit, although adding coverage that
includes protection against financially devastating drug costs will
help beneficiaries who lack prescription drug coverage.
While the demographic trends will affect both Medicare and Social
Security, Medicare spending growth also reflects rising health care
costs. The growth of medical technology has contributed to the number
and quality of health care services, but has helped increase health
care costs, which have risen faster than inflation. Consumers are less
sensitive to those costs when third parties pay most of the price tag.
As figure 4 shows, the percentage of health care costs paid through
out-of-pocket spending has declined in the last 40 years, with private
and public insurance paying a larger share.
Figure 4: Out-of-Pocket Spending Has Declined Substantially Over The
Last Four Decades
Source: CMS, Office of the Actuary, National Health
Statistics Group
Note: The figure for 2002 is estimated. Out-of-pocket
spending includes direct spending by consumers on coinsurance,
deductibles, and any amounts not covered by insurance. Out-of-
pocket premiums paid by individuals are not counted here, but
are counted as part of Private Health Insurance.
Providing tax preferences for health insurance further masks the
full costs of care and can work at cross purposes to the goal of
moderating health care spending. This suggests that some of the
solutions to Medicare's dilemma reside outside the program--in the
larger arena of the health care system, its cost drivers, and the tax
preferences that support them.
Given this context, aligning incentives to restrain spending growth
and strengthen accountability within the program--while not sufficient
by themselves--are still necessary. This is an ongoing effort that has
to be accomplished in myriad small and large steps in the current
program and as changes are made to it. At present, 84 percent of
beneficiaries are in the traditional fee-for-service Medicare program.
As a consequence, traditional Medicare is likely to have a significant
role for years. Addressing its flaws--such as billions in improper
payments and sometimes overly generous payments--is critical to any
effort to restrain spending growth.
Unfortunately, addressing these flaws is unlikely to be sufficient
to restrain Medicare's growth. Substantive financing and programmatic
reforms will be necessary to put Medicare on a sustainable footing for
the future. Without such fundamental reforms, Medicare's growth
threatens to absorb ever-increasing shares of the nation's budgetary
and economic resources. As we seek to bring our government in line with
21st century challenges, we must be mindful that health care costs
compete with other legitimate priorities in the federal budget, and
their projected growth threatens to crowd out future generation's
flexibility to decide which competing priorities will be met. The
public sector can play an important role in educating the nation about
the limits of public support. In this regard, we are preparing a health
care framework that includes a set of principles to help policymakers
in their efforts to assess various health financing reform options. By
facilitating debate, the framework can encourage acceptance of changes
necessary to put us on a path to fiscal sustainability.
TAX COMPLIANCE AND PREFERENCES
Ensuring that taxpayers meet their tax obligations under an
increasingly complex tax code has long presented the IRS with daunting
challenges. Although the majority of taxpayers voluntarily and timely
pay the taxes they owe, regrettably high levels of noncompliance by
some taxpayers persist. Some noncompliance is intentional and may be
due to outright fraud and the use of abusive tax shelters or schemes.
In other cases, noncompliance stems from unintentional errors and
taxpayers' misunderstanding of their obligations. Regardless of the
cause or type of taxpayer--corporate, individual, or other--we have
designated the collection of unpaid taxes as a high-risk area. This
high-risk area includes detecting noncompliance and collecting taxes
due but not paid. More broadly, Congress has created an increasing
number of tax preferences that IRS must administer. In some cases,
those tax preferences are among the largest federal efforts to address
social and other problems. Yet the economy, efficiency, and
effectiveness of those preferences in achieving their purposes are
often not well understood. A better understanding of how well these
preferences work would both support improving them as well as
reconsidering whether certain preferences should be retained.
Tax Compliance and Collection Activity Declines Are Of Increasing
Concern
Because of the potential revenue losses and the threat to voluntary
compliance, the collection of unpaid taxes is a high-risk area.
Collecting taxes due the government has always been a challenge for
IRS, but in recent years the challenge has grown. Collecting taxes due
includes both compliance programs, like audits, that identify those who
owe more than they self-report, and collection programs that seek
payment of taxes assessed but not timely paid. However, IRS compliance
and collections programs have seen larger workloads, less staffing, and
fewer cases closed per employee.
For the last several years, Congress and others have been concerned
that the declines in IRS's enforcement programs are eroding taxpayers'
confidence that their friends, neighbors, and business competitors are
also paying their fair share of taxes, which may put at risk their
willingness to voluntarily comply with the tax laws. Further, there is
some evidence that willingness to voluntarily comply with the tax laws
may be declining. A survey conducted by the IRS Oversight Board in 2001
found that the percentage of respondents who thought it was never
acceptable to cheat on their income taxes was 76 percent, which was
down from 87 percent who felt that way in a 1999 survey. Also, 42
percent of respondents to the 2001 survey said that they believed it
was more likely than in it was in the past that people do not report
and pay their fair amount of taxes and 9 percent said that they were
more likely to take a chance on being audited than they had been
before.[32]
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\[32]\ These two questions were new in the 2001 survey so there are
not comparative figures from 1999.
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Unfortunately, not enough is known at present about the extent of
noncompliance and where problems are the most serious. IRS only
recently restarted the research program necessary to develop this
information after many years without such research. When last IRS last
conducted detailed compliance research using tax year 1988 data, some
types of taxpayers were found to have especially serious compliance
problems. For example, small business noncompliance was about 40
percent, farm and non-farm sole proprietor noncompliance was about 32
percent, and informal suppliers' noncompliance was about 81
percent.[33] While specific, current data is not yet
available, the IRS Commissioner said in May 2002 congressional hearings
that IRS was not providing taxpayers with adequate assurance that their
neighbors or competitors were complying with the tax laws and paying
what they owed.
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\[33]\ Informal suppliers are sole proprietors who operate in an
informal business style, such as door-to-door sales and individuals who
moonlight to augment their wage income.
---------------------------------------------------------------------------
The number of tax returns increases every year. Between 1993 and
2002, the number of individual returns filed went from 114.7 million to
approximately 130 million--a 13 percent increase over those 10 years.
IRS projects the number of total individual returns filed will be 132.3
million in 2003 and continue to increase at an annual rate of 1.5
percent until 2009. Such a rate of increase would lead to 145.3 million
total individual returns filed in 2009. Returns from businesses and
other entities have also increased substantially.
While the number of tax returns has increased, key compliance
program rates have declined. In testimonies and reports, GAO has
highlighted large and pervasive declines in IRS's compliance programs.
These programs, not all of which have seen declines, include
computerized checks for nonfiling and underreported income as well as
audits of both individual taxpayers and business entities. Between 1996
and 2001, key programs generally experienced growing workloads,
decreased staffing, and decreases in the number of cases closed per
employee. Figure 5 shows the decline in audit rates for different types
of taxpayers.
Figure 5: Change in Percentage of Returns Audited, 1996-2001
Even as these audit rates decline, IRS has faced new challenges in
ensuring that individuals, small businesses, and corporations pay the
taxes they owe. IRS's Chief Counsel has said that, in the 1990s,
thousands of corporations and wealthy individuals participated in
abusive tax shelters promoted by accounting firms, law firms,
investment banks, and others, and the tax benefits claimed per taxpayer
were significant. To deal with this and other problems, the President's
fiscal year 2004 budget proposal noted that IRS is shifting enforcement
resources from the tax returns of lower-income individuals and small
corporations. One recent IRS initiative resulted in 1,206 taxpayers
disclosing transactions involving $30 billion in claimed losses and
deductions.
IRS faces challenges in executing its strategy for dealing with tax
shelters and schemes. As the former Commissioner of Internal Revenue
noted, abusive shelters have been factually and legally complex,
accompanied by tax opinions legitimizing transactions and encouraging
litigation. Also, in a September 2001 report, the Treasury Inspector
General for Tax Administration recommended that IRS start laying a
better foundation for its strategy by more precisely estimating the
shelter problem. IRS agreed to estimate abusive corporate shelters'
potential tax revenue effect.
Another increasingly challenging area is that of corporate
inversions. According to a 2002 Department of a Treasury report,
corporate inversions are transactions that change a U.S.-based
multinational group's structure ``so that a new foreign corporation,
typically located in a low- or no-tax country, replaces the existing
U.S. parent corporation as the parent of the corporate group.''
[34] The report stated that although such transactions were
not new, they were growing in frequency, size, and profile. Instead of
being motivated by market conditions, they were motivated largely by
available tax savings and involved little or no immediate operational
change. According to Treasury, the fact that our tax law operates so
that substantial tax reductions are available through transactions of
more form than substance is troubling to both policymakers and the
public.
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\[34]\ Department of the Treasury, Office of Tax Policy, Corporate
Inversion Transactions: Tax Policy Implications, (Washington, D.C.: May
17, 2002).
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IRS collections programs are also increasingly stressed. As we
reported in May 2002, between fiscal years 1996 and 2001 trends in the
collection of delinquent taxes showed almost universal declines in
collection program performance in terms of coverage of workload, cases
closed, direct staff time used, productivity, and dollars of unpaid
taxes collected.[35] Although the number of delinquent cases
assigned to collectors went down during this period, the number of
collections cases closed declined more rapidly, creating an increasing
gap. During that 6-year period, the gap between the new collection
workload and collection cases closed grew at an average annual rate of
about 31 percent, as shown in figure 6.[36]
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\[35]\ U.S. General Accounting Office, Tax Administration: Impact
of Compliance and Collection Program Declines on Taxpayers, GAO-02-674
(Washington, D.C.: May 22, 2002).
\[36]\ Workload is the number of delinquent accounts assigned to
field and telephone collection. Work completed is the number of
delinquent accounts worked to closure, excluding accounts for which
collection work has been deferred.
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Figure 6: Percentage Gap Between New Collection Workload and Work
Completed, Fiscal Years 1996-2002
The increasing gap between collection workload and collection work
completed led IRS in March 1999 to start deferring collection action on
billions of dollars in delinquencies. Officials recognized that they
could not work all collection cases, and they believed that they needed
to be able to deal with taxpayers more quickly; particularly taxpayers
who were still in business and owed employment taxes.[37]
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\[37]\ IRS considers employment tax compliance to be among the most
challenging issues for small business, since delinquent tax can rapidly
compound beyond the employer's ability to pay. See U.S. General
Accounting Office, Tax Administration: IRS's Efforts to Improve
Compliance with Employment Tax Requirements Should Be Evaluated, GAO-
02-92, (Washington, D.C.; Jan. 15, 2002).
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By the end of fiscal year 2002, after the deferral policy had been
in place for about 3 and one-half years, IRS had deferred taking
collection action on about $15 billion in unpaid taxes, interest, and
penalties that are likely collectable. IRS's deferral of collection
action has declined somewhat since the deferral policy was adopted.
Although the rate has declined from 45 percent in 2000, in 2002 IRS was
still deferring collection action on about one out of three collection
cases--about 32 percent.
IRS is working to reverse these declines. One key element of
improving IRS's compliance programs is obtaining current measures of
compliance to use in targeting IRS's scarce resources to known
compliance problems. The National Research Program (NRP) is a major
effort now underway at IRS to identify the extent and sources of
noncompliance. The current NRP initiative includes individual returns,
including taxpayers reporting income from small businesses. IRS plans
to conduct future iterations of NRP for different types of returns and
to return to individual filers every 3 years. We have reported that the
program's design is likely to yield the detailed information IRS needs
about the extent and causes of noncompliance and enable IRS to improve
its targeting of compliance programs.[38]
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\[38]\ U.S. General Accounting Office, Tax Administration: New
Compliance Research Effort is on Track, but Important Work Remains,
GAO-02-769, (Washington, D.C.: June 27, 2002); and U.S. General
Accounting Office, Internal Revenue Service: Assessment of Fiscal Year
2004 Budget Request and 2003 Filing Season Performance to Date, GAO-03-
641T, (Washington, D.C.: Apr. 8, 2003).
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Another key to improving IRS's compliance and collections programs
is to make more efficient use of its resources. IRS has a number of
reengineering efforts underway to improve its compliance and collection
processes. These efforts range from relatively small-scale improvements
to much more ambitious changes. For example, IRS is seeking to
substantially increase the amount of information available to its
auditors before they first contact a taxpayer. The goal is to make the
best use of the information IRS already has available to it before
commencing an audit. IRS is also seeking to change the way it
identifies collections cases to pursue in order to improve targeting of
scarce collections resources towards cases that it is most worthwhile
to pursue.
Yet another key to ensuring that taxpayers meet their obligations
is adequately staffing IRS's compliance and collections programs. Since
2001, IRS's budget requests have made increasing its compliance and
collection staff one of several key priorities. However, staffing in
two key compliance and collection occupations--revenue agents and
revenue officers--was lower in 2002 than in 2000. This continues a
general trend of declining staffing in these occupations for a number
of years.
While tax compliance and collection issues can be found in many
areas, I would like to give a few examples of persistent compliance
issues. This is by no means an inclusive list. For example, compliance
issues are also pervasive in the area of excise taxes, such as fuel tax
evasion.
Employment Tax Compliance
In fiscal year 2000, IRS collected $1.3 trillion in amounts
withheld by employers from employees' salaries to cover individual
federal income tax, Social Security, and Medicare taxes; and in
employers' matching amounts for Social Security and Medicare taxes.
Although the majority of employers withhold, match, and deposit these
taxes as required, for those who fail to do so, the amount of unpaid
employment taxes, penalty and interest has grown significantly. As of
September 30, 2001, IRS data showed that employers owed about $49
billion in delinquent employment taxes, penalties and interest.
The businesses that failed to remit payroll taxes were typically in
wage-based industries and had few available assets from which IRS could
recover these taxes. They were usually small, closely held businesses
using a corporate structure. The most common types of businesses or
industries with unpaid payroll taxes included construction companies
and restaurants, although other types of businesses (including computer
software, child care, and professional services such as legal, medical,
and accounting firms) also have unpaid payroll taxes. Most unpaid
payroll taxes are not fully collectible, and there is often no recovery
potential as many of the businesses are insolvent, defunct, and
otherwise unable to pay.
To the extent that withholdings are not forwarded to the Federal
Government, the business is liable for these amounts, as well as its
matching contributions. Under the Internal Revenue Code, individuals--
typically officers of a corporation such as a president or treasurer--
who are determined by IRS to be ``willful and responsible'' for the
nonpayment of federal income taxes and the employee's Social Security
and Medicare taxes can be held personally liable for the unpaid taxes
and assessed penalties. More than one individual can be found willful
and responsible for a business's failure to pay the Federal Government
withheld payroll taxes and can be assessed a penalty. IRS considers
employment tax compliance to be among the most challenging issues for
small businesses, since delinquent tax may rapidly compound beyond the
employers' ability to pay--ultimately placing their business in
financial jeopardy.
In 2002, we reported that IRS had four programs to prevent or
reduce employers' tax delinquencies. Two of these programs were
designed to achieve early contact with employers and two were designed
to identify employers with existing, multiple employment tax
delinquencies and help them to return to compliance. However, we found
that IRS had not successfully evaluated these programs. We recommended
IRS do so since without an evaluation IRS does not know the benefits,
if any, of the programs, whether they need to be improved, or whether
the programs should even be continued.[39]
---------------------------------------------------------------------------
\[39]\ U.S. General Accounting Office, Tax Administration: IRS's
Efforts to Improve Compliance with Employment Tax Requirements Should
Be Evaluated, GAO-02-92 (Washington, D.C.: Jan. 15, 2002).
---------------------------------------------------------------------------
Levies of Federal Payments
Many taxpayers who are delinquent in paying their federal taxes are
receiving billions of dollars in federal payments annually. IRS and
federal payment records indicate that nearly 1 million taxpayers owed
about $26 billion in delinquent taxes as of February 2002 and were
receiving some type of federal payments. To help the IRS collect these
delinquent tax debts, provisions in the Taxpayer Relief Act of 1997
gave IRS authority to continuously levy [40] up to 15
percent of certain federal payments made to delinquent
taxpayers.[41] Payments subject to IRS's continuous levy
program include Social Security, federal salary and retirement
payments, and federal vendor payments. According to IRS, the program
resulted in collecting over $60 million in fiscal year 2002 by directly
levying federal payments.
---------------------------------------------------------------------------
\[40]\ Levy is the legal process by which IRS orders a third party
to turn over property in its possession that belongs to the delinquent
taxpayer named in a notice of levy. A continuous levy remains in effect
from the date such levy is first made until the tax debt is fully paid
or IRS releases the levy.
\[41]\ Specifically, the 1997 legislation allows continuous levy of
``specified payments,'' including nonmeans-tested federal payments, as
well as certain previously exempt payments.
---------------------------------------------------------------------------
GAO has issued three reports including several recommendations
focused on increasing collections and assuring that safeguards are in
place so that only taxpayers with valid tax debts are levied. Although
progress has been made in establishing the continuous levy program,
several changes to the continuous levy program, which have yet to be
implemented, could yield millions of dollars in additional revenue. For
example, in our 2000 report we estimated that as much as $77.7 million
[42] annually in additional revenue could be generated if
IRS broadened the program to include spouses held by IRS to be liable
for joint tax delinquencies and individuals with multiple IRS
identification numbers.[43] IRS has not yet implemented this
recommendation.
---------------------------------------------------------------------------
\[42]\ The 95-percent confidence interval for the $77.7 million
ranges from $73.5 million to $81.9 million.
\[43]\ U.S. General Accounting Office, Tax Administration: IRS's
Levy of Federal Payments Could Generate Millions of Dollars, GAO/GGD-
00-65, (Washington, D.C.: Apr. 7, 2000).
---------------------------------------------------------------------------
In our 2001 report, we found that several large agencies were not
included in the continuous levy program.[44] We found, that
as of June 30, 2000, about 70,400 individuals and businesses that
received an estimated $8.2 billion annually in federal payments
collectively from three large agencies--the United States Postal
Service, the Department of Defense, and CMS, which disburses Medicare
fee-for-service payments--owed over $1 billion in federal taxes. We
estimated that IRS could recover at least $270 million annually in
delinquent federal taxes if these payments were included in the
continuous levy program.
---------------------------------------------------------------------------
\[44]\ U.S. General Accounting Office, Tax Administration: Millions
of Dollars Could be Collected if IRS Levied More Federal Payments, GAO-
01-711, (Washington, D.C.: July 20, 2001).
---------------------------------------------------------------------------
In our 2003 report we found that IRS blocks many eligible
delinquent accounts from being included in the Federal Payment Levy
Program, missing an opportunity to gather information on which debtors
are receiving federal payments.[45] IRS officials imposed
these blocks because of concerns that the potential volume of levies--
about 1.4 million taxpayer accounts--would disrupt ongoing collection
activities. However, we estimate that about 112,000 would actually
qualify for levy. These taxpayers were collectively receiving about
$6.7 billion in federal payments and owed about $1.5 billion in
delinquent taxes. In January 2003, IRS unblocked and began matching
delinquent taxpayer accounts identified as receiving a federal salary
or annuity payment. IRS officials will not unblock the remaining
delinquent accounts until sometime in 2005.
---------------------------------------------------------------------------
\[45]\ U.S. General Accounting Office, Tax Administration: Federal
Payment Levy Program Measures, Performance, and Equity Can Be Improved,
GAO-03-356, (Washington, D.C.: Mar. 6, 2003).
---------------------------------------------------------------------------
Earned Income Credit (EIC) Noncompliance
For tax year 2001, about $31 billion was paid to about 19 million
EIC claimants. Although researchers have reported that the EIC has
generally been a successful incentive-based antipoverty program, IRS
has reported high levels of EIC overpayments going back to 1985. IRS's
most recent study, released in 2002, estimated that between $8.5 and
$9.9 billion should not have been paid out to EIC claimants for tax
year 1999, and earlier IRS studies also found significant problems with
the program. Table 1 shows the rates of EIC overclaims estimated by IRS
in three EIC compliance studies.
Table 1: EIC Overclaim Rates for Selected Years--Overclaim rate
estimates
------------------------------------------------------------------------
Tax year Lower-bound Upper-bound
------------------------------------------------------------------------
1994.............................. -- 23.5
------------------------------------------------------------------------
1997.............................. 23.8 25.6
------------------------------------------------------------------------
1999.............................. 27.0 31.7
------------------------------------------------------------------------
Source: IRS reports.Notes: All overclaim rates were adjusted by IRS to reflect dollars
recovered from ineligible recipients. For 1994 only a single estimate
was available. In 1997 and 1999, because not all individuals responded
to audit contacts, IRS used certain assumptions to estimate an
overclaim rate range. The lower bound assumes that the overclaim rate
for nonrespondents is the same as for the respondents, while the upper
bound assumes that all nonrespondents are overclaims.
Administering the EIC is not an easy task--IRS has to balance its
efforts to help ensure that all qualified persons claim the credit with
its efforts to protect the integrity of the tax system and guard
against fraud and other forms of noncompliance associated with the
credit. Further, the complexity of the EIC may contribute to
noncompliance. The EIC is among the more complex provisions of the tax
code, which can contribute to unintentional errors by taxpayers. In
addition, unlike other income transfer programs, the EIC relies more on
self-reported qualifications of individuals than on program staff
reviewing documents and other evidence before judging claimants to be
qualified for assistance.
Early in 2002, the Assistant Secretary of the Treasury and the IRS
commissioner established a joint task force to seek new approaches to
reduce EIC noncompliance. The task force sought to develop an approach
to validate EIC claimants' eligibility before refunds are made, while
minimizing claimants' burden and any impact on the EIC's relatively
high participation rate. Through this initiative, administration of the
EIC program would become more like that of a social service program for
which proof of eligibility is required prior to receipt of any benefit.
According to IRS, three areas--qualifying child eligibility,
improper filing status, and income misreporting (i.e.,
underreporting)--account for nearly 70 percent of all EIC refund
errors. Although the task force initiative is designed to address each
of these sources of EIC noncompliance, many of the details about its
implementation are still to be settled. A significant change to the
initiative was announced on June 13, 2003, when IRS said that its pilot
effort to precertify the eligibility of qualifying children for the EIC
would not include requesting claimants to show their relationship to
the qualifying child. Because planning and implementation for the EIC
initiative will proceed simultaneously, its success will depend on
careful planning and close management attention.
As with other tax compliance issues such as corporate tax evasion,
Congress has focused oversight attention on the EIC initiative and
continued oversight can help ensure that the initiative balances
efforts to reduce EIC overpayments with continued efforts to maintain
or increase the portion of the EIC-eligible population that receives
the credit. Further, Congress can consider making the several
definitions of children in the tax code more uniform. The differing
definitions contribute to the complexity taxpayers face and complexity
is widely believed to contribute to errors taxpayers make in claiming
the EIC. As early as 1993 we had suggested that Congress consider
changes that would have made the definitions for children more similar
for several tax purposes. More recently, IRS's Taxpayer Advocate, the
Joint Committee on Taxation, and the Department of the Treasury have
made proposals as well.
The Economy, Efficiency, or Effectiveness of Tax Preferences Are Often
Not
Well Understood
Tax preferences are often intended to achieve policy goals that may
be similar to those of federal spending programs. However, data on the
economy efficiency, and effectiveness of tax preferences is often
lacking. Further, tax preferences are not subject to some review
processes that would support more integrated and informed decisions
about what the government does and how it does it.
Tax preferences refer to departures from the normal tax structure
designed to favor a particular industry, activity, or class of persons
through special deductions, credits, and other tax benefits. Tax
preferences currently in place include programs to encourage economic
development in disadvantaged areas, build affordable housing, make
education more accessible, reduce pollution, and stimulate capital
investment, research, and development. Many tax preferences have
counterparts in direct spending programs created to accomplish similar
goals. In some cases, a tax preference may be among the largest federal
efforts dealing with a social issue. For instance, we reported in 1997
that the Low-Income Housing Tax Credit was the largest federal source
of federal funds to develop or substantially rehabilitate rental
housing for low-income households.
Tax preferences have become a growing part of the federal fiscal
picture over the past 30 years. Based on Joint Committee on Taxation
estimates, the total revenue loss due to tax preferences increased by
twice the rate of overall federal outlays over the last 10 years. Tax
preferences grew about 50 percent, from about $488 billion in 1993 to
about $730 billion in 2003, while federal outlays grew about 25
percent, from $1.7 trillion to $2.1 trillion over the same
period.[46]
---------------------------------------------------------------------------
\[46]\ All dollar figures are reported in 2003 adjusted dollars.
Though it is not precisely correct to add up all tax expenditures
because some have interactive effects though they are reported
individually, these figures provide a useful gauge of the general
magnitude of these provisions. The tax preference figures only include
the portions of the refundable child tax credit and EIC that offset
income taxes paid.
---------------------------------------------------------------------------
Not only has the dollar sum associated with these tax preferences
grown over the past 10 years, but the number of programs has also
increased. The number of tax preference programs has doubled since the
Joint Committee on Taxation started reporting on them in 1974, growing
from 74 to 148. As shown in figure 7, this growth continued over the
past 10 years, from 124 tax preference programs in 1993 to 148 programs
in 2002.[47] Table 2 lists the ten largest tax preference
programs in terms of dollars claimed in 2002.
---------------------------------------------------------------------------
\[47]\ Although we refer to them as tax preferences, these annual
figures come from the Joint Committee on Taxation's annual reports on
tax expenditures.
---------------------------------------------------------------------------
Figure 7: Growth in the Number of Tax Preference Programs Listed In
Joint Committee on Taxation Reports, 1993 through 2002
Table 2: 10 Largest Tax Preferences by Estimated Dollars Claimed in 2003
------------------------------------------------------------------------
Dollars projected for FY
Provision 2003 (in billions of Description
dollars)
------------------------------------------------------------------------
Net exclusion of pension 83.5 Certain
contributions and earnings: employer
Employer Plans. contributions
to pension
plans are
excluded from
an employee's
gross income
even though
the employers
can deduct the
contributions.
In addition,
the tax on the
investment
income earned
by the pension
plan is
deferred until
the money is
withdrawn.
------------------------------------------------------------------------
Exclusion of employer 79.6 (a) Employer's can
contributions for medical deduct
insurance premiums and employer-paid
medical care. health
insurance
premiums and
other medical
expenses
(including
long-term
care) as a
business
expense, but
they are not
included in
employee gross
income. The
self-employed
may also
deduct part of
their family
health
insurance
premiums.
------------------------------------------------------------------------
Deductibility of mortgage 69.9 Owner-occupants
interest on owner-occupied of homes may
homes. deduct
mortgage
interest
limited to
interest on
debt no
greater than
the owner's
basis in the
residence; for
debt incurred
after October
13, 1987, it
is limited to
no more than
$1 million.
Interest on up
to $100,000 of
other debt
(less than
market value
of residence)
secured by a
lien on a
principal or
second
residence is
also
deductible.
------------------------------------------------------------------------
Capital gains (except 55.3 Currently, the
agriculture, timber, iron capital gains
ore, and coal) (normal tax rate has been
method). reduced from
20 percent to
15 percent and
from 10
percent to 5
percent for
taxpayers in
the 10 percent
and 15 percent
marginal
income tax
bracket. The
special tax
rates (18
percent top
rate, 8
percent for
taxpayers in
the 10 and 15
percent tax
brackets) for
assets held
over 5 years
have been
removed.
------------------------------------------------------------------------
Deductibility of nonbusiness 50.9 Taxpayers may
state and local taxes other deduct state
than on owner-occupied homes. and local
income and
property
taxes.
------------------------------------------------------------------------
Depreciation of equipment in 49.8 A tax
excess of alternative expenditure
depreciation system. provision that
arises from
the
depreciation
of machinery
and equipment
in excess of
the normal tax
baseline.
------------------------------------------------------------------------
Step-up basis of capital 38.1 Currently the
gains at death. cost basis for
an appreciated
asset is
adjusted up to
the market
value at the
owner's death.
With the
repeal of the
estate tax for
2010, the
basis for
property
acquired from
a decedent
will be the
lesser of
market value
or decedent's
basis.
------------------------------------------------------------------------
Deductibility of charitable 34.2 Taxpayers may
contributions, other than deduct
education and health. charitable,
religious, and
other non-
profit
contributions
up to 50
percent of
Adjusted Gross
Income.
Corporations'
deductions are
limited to 10
percent of pre-
tax income.
------------------------------------------------------------------------
Earned Income Credit......... 34.1 (b) The EIC is a
refundable tax
credit that
offsets the
impact of
Social
Security taxes
paid by low-
income workers
and encourages
low-income
persons to
seek work
rather than
welfare. The
EIC is
available to
taxpayers with
and without
children and
depends on the
nature and
amount of
qualifying
income and on
the number of
children who
meet age,
relationship,
and residency
tests.
------------------------------------------------------------------------
Tax credit for children under 27.1 Taxpayers with
age 17. children under
age 17 can
qualify for a
$600
refundable per
child credit.
The credit is
phased out for
taxpayers at
the rate of
$50 per $1,000
of modified
Adjusted Gross
Income above
$110,000
($75,000 for
singles).
------------------------------------------------------------------------
Sources: Ten largest tax preference programs taken from program cost
estimates identified in the Joint Committee on Taxation's December
2002 report, Estimates of Federal Tax Expenditures for Fiscal Years
2003-2007, report number JCS-5-02. Tax preference descriptions from
the U.S. Office of Management and Budget, Analytical Perspectives,
Budget of the United States Government, Fiscal Year 2004 (Washington,
DC: Government Printing Office) 2003 and Congressional Research
Service, Taxation Briefing Book, Individual Capital Gains Tax Issues;
and Federal Taxes: Information on Payroll Taxes and Earned Income Tax
Credit Noncompliance, GAO-01-487T, March 7, 2001.Note (a): This is the single largest health-related tax preference
reported by the Joint Committee on Taxation. The Joint Committee on
Taxation reports also includes other health-related tax preferences.
Note (b): The tax preference figure for the EIC only includes the
portion of the EIC that offsets income taxes paid.
Despite the importance of tax preferences, the economy, efficiency,
and effectiveness of tax preferences in achieving their purposes is
often not well understood, in part because data on their use and
effectiveness may not be available. For example, we recently studied
business tax preferences to encourage the hiring, retention, and
accommodation of workers with disabilities and found that information
on the effectiveness of the programs was limited and
inconclusive.[48] In 2002, we studied the use of tax
preferences intended to help families meet the costs of postsecondary
education and found that Congress did not have the information it
needed to weigh the relative effectiveness of the range of tools
created to accomplish this goal.[49] In 1999 we reviewed
businesses' use of empowerment zone tax preferences and had to conduct
our own survey to find information about businesses that were and were
not using the preferences.[50]
---------------------------------------------------------------------------
\[48]\ U.S. General Accounting Office, Business Tax Incentives:
Incentives to Employ Workers with Disabilities Receive Limited Use and
Have an Uncertain Impact, GAO-03-39, (Washington, D.C.: Dec. 11, 2002).
\[49]\ U.S. General Accounting Office, Student Aid and Tax
Benefits: Better Research and Guidance will Facilitate Comparison of
Effectiveness and Student Use, GAO-02-751, (Washington, D.C.: Sept. 13,
2002).
\[50]\ U.S. General Accounting Office, Community Development:
Businesses' Use of Empowerment Zone Tax Incentives, GAO/RCED-99-253,
(Washington, D.C.: Sept. 30, 1999).
---------------------------------------------------------------------------
When critical information about the economy, efficiency, and
effectiveness of tax preferences is made available, it can be very
valuable to congressional decision makers. For example, in 1993 we
described the impacts of a tax credit designed to encourage investment
in Puerto Rico.[51] This tax preference effectively exempted
income earned by U.S. firms from operations in U.S. possessions from
federal corporate income taxes. We found that the credit per employee
was, on average, slightly higher than the wages paid per employee and
in some industries was considerably higher. Congress subsequently chose
to phase out the tax credit program.
---------------------------------------------------------------------------
\[51]\ U.S. General Accounting Office, Tax Policy; Puerto Rico and
the Section 936 Tax Credit, GAO/GGD-93-109, (Washington, D.C.: June 8,
1993).
---------------------------------------------------------------------------
A decade ago we concluded that greater scrutiny of tax preferences
is warranted. We made a number of recommendations intended to achieve
that end, including recommendations to OMB to incorporate tax
preferences, to the extent possible, into the annual budget review
process. Our intent was that tax preferences be assessed and considered
along with related federal efforts so that the relative effectiveness
of both spending and tax preferences could be considered jointly.
However, tax preferences are still excluded from important review
processes that apply to spending programs. Tax preferences are not
explicitly covered by the Government Performance and Results Act (GPRA)
of 1993 and therefore are not subject to its requirements that are
intended to help ensure that federal programs are achieving their
intended results. However, the Senate Governmental Affairs Committee
Report on GPRA says that tax preferences should be taken into
consideration in a comprehensive examination of government
performance.[52] Nevertheless, tax preferences often are not
currently covered by agencies or executive branch processes that
consider the effectiveness of government programs. For example the new
program performance reviews conducted by OMB in connection with the
annual budget process generally do not cover tax preferences.
---------------------------------------------------------------------------
\[52]\ Report of the Committee on Governmental Affairs, United
States Senate, Government Performance and Results Act of 1993, (June
16, 1993, Report 103-58).
---------------------------------------------------------------------------
According to OMB, the Executive Branch is continuing to focus on
the availability of data needed to assess the effects of the tax
expenditures designed to increase savings.[53] Treasury's
Office of Tax Analysis and IRS's Statistics of Income Division have
developed a new sample of individual income tax filers as one part of
this effort. This new ``panel'' sample will follow the same taxpayers
over a period of at least 10 years. Data from this sample will enhance
OMB's ability to analyze the effect of tax expenditures designed to
increase savings. Other efforts by OMB, Treasury, and other agencies to
improve data available for the analysis of tax expenditures are
expected to continue over the next several years, according to OMB. In
practice, data availability is likely to be a major challenge, and data
constraints may limit the assessment of the effectiveness of many
provisions. In addition, such assessments can raise significant
challenges in economic modeling.
---------------------------------------------------------------------------
\[53]\ U.S. Office of Management and Budget, Analytical
Perspectives, Budget of the United States Government, Fiscal Year 2004
(Washington, DC: Government Printing Office) 2003.
REASSESSING WHAT THE GOVERNMENT DOES SHOULD INCLUDE TAX
PREFERENCES
Given their growth and importance, tax preferences must be part of
any comprehensive review of existing programs and activities to adapt
government for the challenges of this century. Any reassessment of
federal missions and strategies should include the entire set of tools
the Federal Government can use to address national objectives. These
tools include discretionary and mandatory spending, tax provisions,
loans and loan guarantees, and regulations. Spending is most visible
and it is all too easy when we look to define federal support for an
activity to only look at the spending side of the budget. Federal
support, however, may come in the form of exclusions or credits in the
tax code. It may come in the form of direct loans or loan guarantees.
It may come in the design of regulations. Yet none of these tools
should be ignored if we are to get a true picture of federal activity
in an area. So, for example, if we are evaluating federal support for
health care we need to look not only at spending, but also at tax
preferences. Figure 8 shows federal activity in health care and
Medicare budget functions in FY 2003: $48 billion in discretionary BA,
$419 billion in entitlement outlays, $177 million in loan guarantees,
and $129 billion in tax expenditures.[54]
---------------------------------------------------------------------------
\[54]\ This represents the sum of a number of different tax
provisions.
---------------------------------------------------------------------------
Figure 8: Relative Reliance on Policy Tools in the Health Care Budget
Functions (FY 2003)
Source: GAO analysis of data from the Office of Management
and Budget.
Note: Loan guarantees account for about $177 million or 0.03
percent of the approximately $597 billion in total federal
health care resources.
CONCLUDING REMARKS
There is a Chinese curse that goes ``May you live in interesting
times.'' We clearly do. I would prefer to see this not as a curse--but
as a challenge and an opportunity.
Tackling areas at risk for fraud, waste, abuse, and mismanagement
will require determination, persistence and sustained attention by both
agency managers and Congressional committees. Large and complex federal
agencies must effectively use a mixture of critical resources and
improved processes to improve their economy, efficiency, and
effectiveness, Congressional oversight will be key.
We should be striving to maintain a government that is effective
and relevant to a changing society--a government that is as free as
possible of outmoded commitments and operations that can
inappropriately encumber the future. The difference between ``wants,''
``needs,'' and overall ``affordability'' and long-term
``sustainability'' is an important consideration when setting overall
priorities and allocating limited resources.
Government must operate in the context of broader trends shaping
the United States and its place in the world. These include:
National and global response to terrorism and other
threats to personal and national security;
Increasing interdependence of enterprises, economies,
civil society, and national governments--also know as globalization;
The shift to market-oriented, knowledge-based economies;
An aging and more diverse U.S. population;
Advances in science & technology and the opportunities &
challenges created by these changes;
Challenges and opportunities to maintain & improve the
quality of life for the nation, communities, families & individuals;
and
The increasingly diverse nature of governance structures
and tools.
In addition to the above trends, large and growing fiscal
challenges at the federal, state, and local levels are of great
concern. Furthermore, known demographic trends, and rising health care
costs and other health care related challenges (e.g., access, quality)
are of growing concern crossing all sectors of the economy and all
geopolitical boundaries.
Government leaders are responsible and accountable for making
needed changes to position the Federal Government to take advantage of
emerging opportunities and to meet future challenges. Focusing on
accountable, results-oriented management can help the Federal
Government operate effectively within a broad network that includes
other governmental organizations, nongovernmental organizations, and
the private sector.
In view of the broad trends and large and growing fiscal challenges
facing the nation, there is a need to fundamentally review, reassess,
and reprioritize the proper role of the Federal Government, how the
government should do business in the future, and--in some instances--
who should do the government's business in the 21st century. It is also
increasingly important that federal programs use properly designed and
aligned tools to manage effectively across boundaries work with
individual citizens, other levels of government, and other sectors.
Evaluating the role of government and the programs it delivers is key
in considering how best to address the nation's most pressing
priorities. Existing programs, policies and activities cannot be taken
as ``givens.'' We need to look at ``the base'' across the board--
mandatory and discretionary spending and tax preferences/incentives.
Such periodic reviews of programs can prompt not only a healthy
reassessment of our priorities but also changes needed in program
design, resources and management to get the results we collectively
decide we want from government.
Needless to say, we at GAO are pleased to help Congress in this
very important work.
CONTACTS AND ACKNOWLEDGMENTS
For further information regarding this testimony, please contact
Barbara D. Bovbjerg, Director, Education, Workforce, and Income
Security Issues, at (202) 512-7215 or [email protected] regarding
Social Security and disability issues; Leslie G. Aronovitz, Director,
Health Care, at (312) 220-7600, or [email protected] and Laura A.
Dummit, Director Health Care, at (202) 512-7119, or [email protected]
regarding Medicare; Michael Brostek, Director for Tax, Strategic
Issues, at (202) 512-9110, or [email protected] regarding tax issues; or
Susan J. Irving, Director for Federal Budget Analysis, Strategic
Issues, at (202) 512-9142 or [email protected] regarding general budget
and oversight issues in this testimony.
Individuals making key contributions to this testimony included
Sheila Avruch, Sabrina Birnbaum, Jeremy Cox, Carlos Diz, Sandra Gove,
Leon Green, David Lewis, Carol Dawn Petersen, Susan Ragland, Tamara
Stenzel, Melissa Wolf, and Robert Yetvin.
Attachment I: GAO's 2003 High-Risk List
------------------------------------------------------------------------
Year Designated
2003 High-Risk Areas High Risk
------------------------------------------------------------------------
Addressing Challenges In Broad-based Transformations
------------------------------------------------------------------------
Strategic Human Capital Management* 2001
------------------------------------------------------------------------
U.S. Postal Service Transformation Efforts 2001
and Long-Term Outlook*
------------------------------------------------------------------------
Protecting Information Systems Supporting 1997
the Federal Government and the Nation's Critical
Infrastructures
------------------------------------------------------------------------
Implementing and Transforming the New 2003
Department of Homeland Security
------------------------------------------------------------------------
Modernizing Federal Disability Programs* 2003
------------------------------------------------------------------------
Federal Real Property* 2003
------------------------------------------------------------------------
Ensuring Major Technology Investments Improve
Services
------------------------------------------------------------------------
FAA Air Traffic Control Modernization 1995
------------------------------------------------------------------------
IRS Business Systems Modernization 1995
------------------------------------------------------------------------
DOD Systems Modernization 1995
------------------------------------------------------------------------
Providing Basic Financial Accountability
------------------------------------------------------------------------
DOD Financial Management 1995
------------------------------------------------------------------------
Forest Service Financial Management 1999
------------------------------------------------------------------------
FAA Financial Management 1999
------------------------------------------------------------------------
IRS Financial Management 1995
------------------------------------------------------------------------
Reducing Inordinate Program Management Risks
------------------------------------------------------------------------
Medicare Program* 1990
------------------------------------------------------------------------
Medicaid Program* 2003
------------------------------------------------------------------------
Earned Income Credit Noncompliance 1995
------------------------------------------------------------------------
Collection of Unpaid Taxes 1990
------------------------------------------------------------------------
DOD Support Infrastructure Management 1997
------------------------------------------------------------------------
DOD Inventory Management 1990
------------------------------------------------------------------------
HUD Single-Family Mortgage Insurance and 1994
Rental Assistance Programs
------------------------------------------------------------------------
Student Financial Aid Programs 1990
------------------------------------------------------------------------
Managing Large Procurement Operations More
Efficiently
------------------------------------------------------------------------
DOD Weapon Systems Acquisition 1990
------------------------------------------------------------------------
DOD Contract Management 1992
------------------------------------------------------------------------
Department of Energy Contract Management 1990
------------------------------------------------------------------------
NASA Contract Management 1990
------------------------------------------------------------------------
* Additional authorizing legislation is likely to be required as one
element of addressing this high-risk area.Source: GAO
Attachment II: Selected Reports Regarding Specific Areas in Testimony
Overall
Federal Budget: Opportunities for Oversight and Improved Use of
Taxpayer Funds. GAO-03-922T. Washington, D.C.: June 18, 2003.
Social Security Programs
Social Security Administration: Revision to the Government Pension
Offset Exemption Should Be Reconsidered. GAO-02-950, Washington, D.C.:
August 15, 2002.
Social Security: Congress Should Consider Revising the Government
Pension Offset ``Loophole.'' GAO-03-498T. Washington, D.C.: February
27, 2002.
Supplemental Security Income: SSA Could Enhance Its Ability to
Detect Residency Violations. GAO-03-724. Washington, D.C.: July 31,
2003.
Social Security: Issues Relating to Noncoverage of Public
Employees. GAO-03-710T. Washington, D.C.: May 1, 2003.
Major Management Challenges and Program Risks: Social Security
Administration. GAO-03-117. Washington, D.C.: January 2003.
High Risk Series: An Update. GAO-03-119. Washington, D.C.: January
2003.
Supplemental Security Income: Progress Made in Detecting and
Recovering Overpayments, but Management Attention Should Continue. GAO-
02-849. Washington, D.C.: September 16, 2002.
Social Security Administration: Agency Must Position Itself Now to
Meet Profound Challenges. GAO-02-289T. Washington, D.C.: May 2, 2002.
SSA and VA Disability Programs: Re-Examination of Disability
Criteria Needed to Help Ensure Program Integrity. GAO-02-597.
Washington, D.C.: August 9, 2002.
Social Security Disability: Efforts to Improve Claims Process Have
Fallen Short and Further Action is Needed. GAO-02-826T. Washington,
D.C.: June 11, 2002.
SSA Disability: Other Programs May Provide Lessons for Improving
Return-to-Work Efforts. GAO-01-153. Washington, D.C.: January 12, 2001.
Supplemental Security Income: Action Needed on Long-Standing
Problems Affecting Program Integrity. GAO/HEHS-98-158. Washington,
D.C.: September 14, 1998.
Social Security: Better Payment Controls for Benefit Reduction
Provisions Could Save Millions. GAO/HEHS-98-76. Washington, D.C.: Apr.
30, 1998.
SSA Disability: Return-to-Work Strategies From Other Systems May
Improve Federal Programs. GAO/HEHS-96-133. Washington, D.C.: July 11,
1996.
SSA Disability: Program Redesign Necessary to Encourage Return to
Work. GAO/HEHS-96-62. Washington, D.C.: April 24, 1996.
Unemployment Insurance
Unemployment Insurance: Increased Focus on Program Integrity Could
Reduce Billions in Overpayments. GAO-02-697. Washington, D.C.: July 12,
2002.
Medicare
Medicare: Financial Challenges and Considerations for Reform. GAO-
03-577T. Washington, D.C.: April 10, 2003.
Medicare: Observations on Program Sustainability and Strategies to
Control Spending on Any Proposed Drug Benefit. GAO-03-650T. Washington,
D.C.: April 9, 2003.
Medicare: Payment for Blood Clotting Factor Exceeds Providers'
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Major Management Challenges and Program Risks: Department of Health
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High-Risk Series: An Update. GAO-03-119. Washington, D.C.: January
2003.
Skilled Nursing Facilities: Medicare Payments Exceed Costs for Most
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Medicare Financial Management: Significant Progress Made to Enhance
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Skilled Nursing Facilities: Providers Have Responded to Medicare
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Medicare: Challenges Remain in Setting Payments for Medical
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Medicare: Recent CMS Reforms Address Carrier Scrutiny of
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Medicare: Using Education and Claims Scrutiny to Minimize Physician
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Medicare Home Health Care: Payments to Home Health Agencies Are
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Medicare: Communications With Physicians Can Be Improved. GAO-02-
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Medicare: Payments for Covered Outpatient Drugs Exceed Providers'
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Medicare: Comments on HHS' Claims Administration Contracting Reform
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Medicare Management: CMS Faces Challenges to Sustain Progress and
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Medicare: Successful Reform Requires Meeting Key Management
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Medicare Contracting Reform: Opportunities and Challenges in
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Medicare: Higher Expected Spending and Call for New Benefit
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Medicare Reform: Modernization Requires Comprehensive Program View.
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Medicare: Opportunities and Challenges in Contracting for Program
Safeguards. GAO-01-616. Washington, D.C.: May 18, 2001.
Nursing Homes: Aggregate Medicare Payments Are Adequate Despite
Bankruptcies. GAO/T-HEHS-00-192. Washington, D.C.: September 5, 2000.
Tax Policy and Administration Issues
IRS Modernization: Continued Progress Necessary for Improving
Service to Taxpayers and Ensuring Compliance. GAO-03-769T. Washington,
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Compliance and Collection: Challenges for IRS in Reversing Trends
and Implementing New Initiatives. GAO-03-732T. Washington, D.C.: May 7,
2003.
Internal Revenue Service: Assessment of fiscal year 2004 Budget
Request and 2003 Filing Season Performance to Date. GAO-03-641T.
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Tax Administration: Federal Payment Levy Program Measures,
Performance, and Equity Can Be Improved. GAO-03-356. Washington, D.C.:
March 6, 2003.
Tax Administration: IRS Should Continue to Expand Reporting on Its
Enforcement Efforts. GAO-03-378. Washington, D.C.: January 31, 2003.
Performance and Accountability Series: Major Management Challenges
and Program Risks--Department of the Treasury. GAO-03-109. Washington,
D.C.: January 2003.
Business Tax Incentives: Incentives to Employ Workers with
Disabilities Receive Limited Use and Have an Uncertain Impact. GAO-03-
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Student Aid and Tax Benefits: Better Research and Guidance Will
Facilitate Comparison of Effectiveness and Student Use. GAO-02-751.
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Tax Administration: New Compliance Research Effort is on Track, but
Important Work Remains. GAO-02-769. Washington, D.C.: June 27, 2002.
Tax Administration: Impact of Compliance and Collection Program
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Tax Administration: IRS's Efforts to Improve Compliance with
Employment Tax Requirements Should Be Evaluated. GAO-02-92. Washington,
D.C.: January 15, 2002.
Tax Administration: Millions of Dollars Could Be Collected If IRS
Levied More Federal Payments. GAO-01-711. Washington, D.C.: July 20,
2001.
Tax Administration: IRS' Levy of Federal Payments Could Generate
Millions of Dollars. GAO/GGD-00-65. Washington, D.C.: April 7, 2000.
Unpaid Payroll Taxes: Billions in Delinquent Taxes and Penalty
Assessments are owed. GAO/AIMD/GGD-99-211. Washington, D.C.: August 2,
1999.
Community Development: Business Use of Empowerment Zones Tax
Incentives. GAO/RCED-99-253. Washington, D.C.: September 30, 1999.
Tax Credits: Opportunities to Improve Oversight of the Low-Income
Housing Program. GAO/T-GGD/RCED-97-149. Washington, D.C.: April 23,
1997.
Tax Credits: Opportunities to Improve Oversight of the Low-Income
Housing Program. GAO/GGD/RCED-97-55. Washington, D.C.: March 28, 1997.
Tax Policy: Tax Expenditures Deserve More Scrutiny. GAO/GGD/AIMD-
94-122. Washington, D.C.: June 3, 1994.
Tax Policy: Puerto Rico and the Section 936 Tax Credit. GAO/GGD/-
93-109. Washington, D.C.: June 8, 1993.
Child Support Enforcement
Child Support Enforcement: Clear Guidance Would Help Ensure Proper
Access to Information and Use of Wage Withholding by Private Firms.
GAO-02-349, March 26, 2002.
Child Support Enforcement: Effects of Declining Welfare Caseloads
Are Beginning to Emerge. GAO/HEHS-99-105. Washington, D.C.: June 30,
1999.
Welfare Reform: Child Support an Uncertain Income Supplement for
Families Leaving Welfare. GAO/HEHS-98-168. Washington, D.C.: August 3,
1998.
Child Support Enforcement: Early Results on Comparability of
Privatized and Public Offices. GAO/HEHS-97-4. Washington, D.C.:
December 16, 1996.
Child Support Enforcement: Reorienting Management Toward Achieving
Better Program Results. GAO/HEHS/GGD-97-14. Washington, D.C.: October
25, 1996.
Child Support Enforcement: States' Experience with Private
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D.C.: October 23, 1996.
Child Support Enforcement: States and Localities Move to Privatized
Services. GAO/HEHS-96-43FS. Washington, D.C.: November 20, 1995.
Child Support Enforcement: Opportunity to Reduce Federal and State
Costs. GAO/T-HEHS-95-181. Washington, D.C.: June 13, 1995.
Grant Programs
Formula Grants: Effects of Adjusted Population Counts on Federal
Funding to States. GAO/HEHS-99-69. Washington, D.C.: February 26, 1999.
Medicaid Formula: Effects of Proposed Formula on Federal Shares of
State Spending. GAO/HEHS-99-29R. Washington, D.C.: February 19, 1999.
Welfare Reform: Early Fiscal Effect of the TANF Block Grant. GAO/
AIMD-98-137. Washington, D.C.: August 22, 1998.
Public Housing Subsidies: Revisions to HUD's Performance Funding
System Could Improve Adequacy of Funding. GAO/RCED-98-174. Washington,
D.C.: June 19, 1998.
School Finance: State Efforts to Equalize Funding Between Wealthy
and Poor School Districts. GAO/HEHS-98-92. Washington, D.C.: June 16,
1998.
School Finance: State and Federal Efforts to Target Poor Students.
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School Finance: State Efforts to Reduce Funding Gaps Between Poor
and Wealthy Districts. GAO/HEHS-97-31. Washington, D.C.: February 5,
1997.
Federal Grants: Design Improvements Could Help Federal Resources Go
Further. GAO/AIMD-97-7. Washington, D.C.: December 18, 1996.
Public Health: A Health Status Indicator for Targeting Federal Aid
to States. GAO/HEHS-97-13. Washington, D.C.: November 13, 1996.
School Finance: Options for Improving Measures of Effort and Equity
in Title I. GAO/HEHS-96-142. Washington, D.C.: August 30, 1996.
Highway Funding: Alternatives for Distributing Federal Funds. GAO/
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Ryan White Care Act of 1990: Opportunities to Enhance Funding
Equity. GAO/HEHS-96-26. Washington, D.C.: November 13, 1995.
Department of Labor: Senior Community Service Employment Program
Delivery Could Be Improved Through Legislative and Administrative
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Federal Assistance: Grant System Continues to Be Highly Fragmented.
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Multiple Employment and Training Programs: Funding and Performance
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2003.
Managing for Results: Continuing Challenges to Effective GPRA
Implementation. GAO/T-GGD-00-178. Washington, D.C.: July 20, 2000.
Workforce Investment Act: States and Localities Increasingly
Coordinate Services for TANF Clients, but Better Information Needed on
Effective Approaches. GAO-02-696. Washington, D.C.: July 3, 2002.
Fundamental Changes are Needed in Federal Assistance to State and
Local Governments. GAO/GGD-75-75. Washington, D.C.: August 19, 1975.
Flood Insurance Losses
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Flood Insurance Program. GAO/T-RCED-00-23. Washington, D.C.: October
27, 1999.
Flood Insurance: Information on Financial Aspects of the National
Flood Insurance Program. GAO/T-RCED-99-280. Washington, D.C.: August
25, 1999.
Flood Insurance: Financial Resources May Not Be Sufficient to Meet
Future Expected Losses. GAO/RCED-94-80. Washington, D.C.: March 21,
1994.
Mr. SHAW. [Presiding.] Thank you, Mr. Walker. Mr. Crane.
Mr. CRANE. Thank you, Mr. Chairman. Mr. Walker, my
understanding is the IRS' estimate in 1998 was that $232
billion in taxes were due, but never collected. Is that
correct?
Mr. WALKER. That sounds about right, Mr. Crane.
Mr. CRANE. Can you explain a little bit how the $232
billion was never collected?
Mr. WALKER. Well, part of the problem is that the IRS to a
great extent--and Mike Brostek may be able to come up with some
more details--has been focused over the past few years on
improving customer service, and a lot fewer resources have been
dedicated to compliance. They have not updated a lot of their
programs to be able to look for noncompliance. In addition to
that, they have growing backlogs with regard to looking at
issues that they have identified.
Mike, could you provide a little bit more detail here?
Mr. BROSTEK. Yes. I am Mike Brostek, and I am Director for
Tax Issues for the GAO.
The trends that Mr. Walker has talked about are in part
behind the uncollectability of those taxes. In part there are a
lot of taxes owed by people who will not be able to pay them,
corporations and individuals who have gone bankrupt or have too
few assets to actually pay all the taxes that are owed. The
collectable amount of the taxes is a smaller amount. It is
around $112 billion.
Mr. CRANE. Still substantial. The former Commissioner
Rossotti estimated that in a given year, the IRS assesses
almost $30 billion of taxes that it will never collect. Does
that sound correct?
Mr. BROSTEK. I believe what the Commissioner was saying was
that they have identified about that level of taxes that could
be collected if they had additional resources to work them.
Those would be cases where they have identified that someone
owes taxes, but they haven't been able to work the cases.
Mr. CRANE. He estimated further it would cost about $2.2
billion to collect that money, and that would give us a net
gain of almost $28 billion.
Mr. WALKER. Sounds like a good return on investment to me.
Mr. CRANE. Right, yes. Let me know if you know of any
investments that I can make in the market that I would get that
kind of return. Thank you. I yield back the balance of my time.
Mr. SHAW. Mr. Rangel.
Mr. RANGEL. Thank you. Mr. Walker, let me join with the
Chairman in lauding the fine work that you do, and the GAO over
the years have been so dependable in a bipartisan way.
Is there such a thing as civil fraud? I am not certain, but
I know that most of the fraud that I have come across has been
criminal in nature, and it would seem to me that while we are
investigating for fraud--and obviously you have said that when
a business is this large, it has to be there--have you referred
in the course of your oversight--have you referred any cases to
the Department of Justice?
Mr. WALKER. When we end up doing work, Mr. Rangel, and come
across issues that we think could be violations of the law,
then we do refer them to the appropriate authorities. If we
think it is a criminal matter, then we would refer it to the
Department of Justice. As you know, the Inspectors General are
on the frontline of fighting fraud, waste, and abuse with
regard to their respective departments and agencies.
Mr. RANGEL. Well, if I didn't care about you and respect
you so much, I would ask why would not the frontline people be
testifying today?
Mr. WALKER. I think at least one Inspector General is going
to be on the next panel, but I am not sure.
Mr. RANGEL. Well, he is a good man, but I think he would
agree that the people from IRS would be able to be in a better
position to help us out as to how we can save money. You don't
come here telling us how much money you are going to save us,
do you?
Mr. WALKER. We have given in our testimony specific items
that we think that Congress should consider taking action on.
We don't give you a specific bottom line total, but there is no
question that it is billions of dollars.
I will say, however, I think you are putting your finger on
an important point. If you look at fraud, waste, abuse and
mismanagement, most of it is waste and mismanagement, not
fraud.
Mr. RANGEL. Okay.
Mr. WALKER. In addition, if you look at improper payments,
all improper payments don't represent fraud, and some of them
are payments that we should have made, but we don't have
appropriate documentation.
My personal view is there is a lot of money that can be
saved in fraud, waste, abuse and mismanagement, but there is
much more money in the next two categories I mentioned, much
more money. That is why I say we need to address all three
tiers.
Mr. RANGEL. Well, you do realize that you are being called
today because we have a budget deficit, and we have to save
every dollar that we can and make certain that we eliminate
every wasteful act. It would just seem to me that while you do
an excellent job with the overview, that this Committee's
interests could be better served if we had the front-line
troops that deal with the problems every day and not only tell
us what we are losing, but to suggest to us legislatively how
we can correct it, because so much--so many of these issues we
have jurisdiction over, and all we can do is thank you for the
fine work that you have done over the years. It doesn't really
allow us in our Committee, assuming that we legislate, to
correct the errors that may exist.
You do a great job. The GAO has historically provided a
great service for the Congress. Thank you for making yourself
available.
Mr. WALKER. Thank you, Mr. Rangel. We do have specific
items that we would recommend that this Committee and other
committees should consider, such as requiring competitive
contracting in certain areas and a few other activities that
could save money.
Mr. RANGEL. Why don't you just send them to me and the
Chairman, because clearly, this hearing is not for that
purpose, but it would be that we could do something about it
and remedy it if you would do that. I will make certain that
the Minority gets these things, and we may be able to put them
in the form of amendments in legislation. Thank you so much.
Mr. WALKER. I would be happy to do that, Mr. Rangel. Thank
you.
[An attachment is being retained in the Committee files.]
Mr. SHAW. Mr. Houghton.
Mr. HOUGHTON. Thank you very much. Well, thanks for the
work that you are doing. I think this is a worthy meeting. I
disagree a bit with the Ranking Member. It is not just because
of the budget deficit; we always ought to be monitoring what is
going on to make the government more efficient.
I guess the thrust of my basic question is this: There are
certain things legislatively that must be done. For example, in
order to collect more money for the IRS, we need more people,
and we want to have a private collection agency. That has to be
legislated, but--and I am not talking about fiscal gaps
either--there are certain things that ought to be the function
of the administrative department to stay on top of all the
time. So, my question, whether it is in Medicare or Social
Security or some of these other things, is the slippage really
a part of people--because we don't give them enough money to
have enough people, or is it attitude? What is it?
Mr. WALKER. It is a combination of things. I do think that
one of the challenges that we have in government is there has
been an assumption for years that the base of spending, the
base of tax preferences, the base of programs and policies,
functions and activities of government are okay, and,
therefore, there is a lot of time spent each year by both the
executive branch and the legislative branch just debating
incremental pluses or minuses from that base.
There has not been enough transparency and scrutiny and
accountability with regard to the base. For example, why does
this program exist? How does it measure success? How is it
making a difference? What type of return on investment is it
generating?
I think the same thing has to happen for tax preferences.
What impact are they having? What incentives are they creating?
That has not happened for many years, and I think it needs to
happen, because our fiscal gap is large and growing. It is
structural, and we are not going to grow our way out of it.
Mr. HOUGHTON. Yes, but does the remedy rest with us, or
does it rest with the administrative departments?
Mr. WALKER. It rests with both. There are actions that need
to be taken, and we are trying to work in a constructive way on
good government issues with the Office of Management and Budget
(OMB) on things like how to link resources to results. One of
the things the Administration is doing right now is trying to
look at 20 percent of major government programs each year and
assess the effectiveness of those programs and what type of
outcomes are being achieved. Last year was the first year for
this.
We are trying to work in a constructive way, but clearly
there are legislative issues that have to be addressed as well.
There has to be more data-sharing to try and minimize improper
payments, to be able to require or encourage competitive
contracting for things like Medicare payment administrators and
things of that nature.
Mr. HOUGHTON. Yes, but you said there used to be a slippage
of about $20 billion in Social Security. Now it is down to $13
billion.
Mr. WALKER. Medicare. That was for Medicare.
Mr. HOUGHTON. I thought you said Social Security.
Mr. WALKER. No, sir. Medicare.
Mr. HOUGHTON. Medicare, okay. What should we do? Is there
something we should do, or what is the proper target? Should it
be $7 or $5 billion. Is this an administrative or a function of
the Committee on Ways and Means?
Mr. WALKER. Well, for one thing, with regard to Medicare,
there are a lot of things that have been done. I think in some
cases this is an example similar to the IRS. The U.S.
Department of Health and Human Services (HHS) may not be
dedicating enough resources to be able to try to deal with
improper payments.
I think the other thing that can be considered is that a
vast majority, if not all, of Medicare payment responsibilities
are placed with third-party administrators. We need to look at
the contractual arrangements with those third-party
administrators. We need to look at competitive bidding. We need
to provide incentives in those contracts and accountability
mechanisms for contractors to be able to get better control of
improper payments.
I think there is also additional transparency that is
needed over some of these payments to try to look for improper
billings or upcoding of certain services. More rigorous
enforcement is going to be part of it as well. There is no
doubt about that. It may cost a little money to save money, but
in the net you could be a lot better off.
Mr. HOUGHTON. Thank you very much.
Mr. SHAW. Mr. Walker, could you be a little more specific
in pursuing what Mr. Houghton is speaking of? You talk about
upcoding, and I guess services that weren't rendered, perhaps
like overpayments in hospitals for certain drugs that are
administered to patients. Exactly what is it we are looking
for?
Mr. WALKER. There are several issues. Number one, sometimes
you will end up having services that weren't rendered that are
being billed for. Sometimes more expensive services are being
billed than are actually provided. That is called upcoding,
where providers say they did something more expensive than they
actually did. Alternatively they may claim that they did
something that was more expensive that wasn't necessary.
Sometimes you can have a circumstance in which something is
paid twice, which we may or may not catch down the road.
Leslie, you want to come up and give a couple of more examples?
Ms. ARONOVITZ. My name is Leslie Aronovitz. I am one of the
directors in health care.
In terms of the error rate, there are a lot of categories
of payment errors. In addition to what Mr. Walker was talking
about, one is the category of uncovered services. This is where
Medicare is paying erroneously for services that should not be
covered. Also, there are documentation errors, where there is
insufficient documentation to support the medical necessity of
that particular service. Under Medicare, if a service is not
proven to be medically necessary, it is not supposed to be paid
for.
Mr. SHAW. I think all of us in Congress from time to time
receive something from constituents, a Medicare bill in which
they sent it in and says, hey, this said you paid for this
particular service, and I don't think I got it. I have one
sitting on my desk right now from a dermatologist to a
constituent in which Medicare paid for several procedures. The
constituent said he was in there 10 minutes, and the procedures
didn't happen.
What would be your advice as to people that think that they
are probably the patient that has been victimized, in effect,
through Medicare payments for services that weren't rendered,
and what could Congress do legislatively in order to change
that?
Mr. WALKER. My understanding is--and I would like for
Leslie to provide more detail--that many times the recipient of
the services does not receive adequate information in order to
be able to do what you are talking about. Therefore, part of
the problem that we have in health care, which, as you know, is
a huge part of our budget and of our economy, is that we don't
have adequate transparency over who allegedly provided what to
whom. Therefore we are not able to have a check and balance,
where the individual can say, exactly as you said, I was there
for 10 minutes, there is no way he or she did all these
different things. Leslie.
Ms. ARONOVITZ. That is absolutely correct. In addition to
that, when a beneficiary is aware that Medicare is paying for a
service on their behalf that they did not obtain there is a
phone number, on the explanation of Medicare benefits for
reporting those discrepancies. The discrepancies would be
reported to the Medicare Claims Administration contractor. The
contractors have an obligation to pursue those matters and to
make sure that, in fact, the provider was not paid erroneously.
Mr. WALKER. I believe, Mr. Shaw, that there needs to be
more transparency. We need to look at what can be done to make
sure that the person who received the services has an
understanding in general terms of what the taxpayers are being
billed for, which may or may not have been provided, and we
need to have better accountability over the contractors to make
sure they are following up on this. We need to look at related
contract provisions to find out what kind of financial
incentives or accountability mechanisms can be put in place if
they don't already exist.
Mr. SHAW. We ought to put in some type of standard
accounting and billing principles. Anyone who has been in a
hospital lately knows that you get a flood of bills if you are
lucky enough to be insured. I just went through some major
surgery at the beginning of this year, and the bills keep
coming in. Believe me, when I think the whole thing has settled
down, I will check my credit rating and be sure nothing fell
through the cracks. It is very confusing, but luckily I can try
to match it up with my Blue Cross/Blue Shield coverage to make
sure everything has been done correctly, but sometimes it is
not.
My wife had a cataract operation just at the end of last
year, and the insurance carrier on a preferred provider let a
charge go through for $8,000 when it should have been
negotiated down to $2,000 and something, and it was a mistake.
We called it to the attention of Blue Cross/Blue Shield. They
corrected it and went back and got it straightened out.
I can tell you, in particular for older people, it is so
confusing, you end up with just a big wad of bills, and you
have no idea what they are. There ought to be some uniformity
put in place.
Nancy, I think this is something that your Subcommittee
could really address, and it would do a great service not only
in Medicare, but for other people. The uninsured are the ones
that would have gotten that $8,000 bill instead of the $2,000
and something bill. The uninsured are those that least can
afford to pay for these type of services. I think this would be
something that would be certainly on the fringe of your
jurisdiction, if not squarely within your jurisdiction. I would
hope that you might want to take a look at it. Mr. Cardin.
Mr. CARDIN. Thank you, Mr. Chairman. Mr. Walker, it is
always a pleasure to have you before our Committee. I will
change gears a little bit and look at another area.
You issued a June 2003 report in regards to the Medicaid
home--and community-based waiver program under the Social
Security Act, and, of course, the waiver program not only
affects Medicaid, many individuals receive Medicare covered
services as well. The waiver program is a very valuable
program. It allows our constituents to get long-term care
services in a more convenient and a more acceptable way. It
also, we hope, saves the Federal Government money under the
total health care costs of our country. So, it is an important
program, provides States flexibility.
Your report, though, pointed out a couple points. First the
amount of Federal funds in the waiver program has increased
dramatically from fiscal year 1991. The total amount spent on
the waiver program was $1.6 billion or 5 percent of our long-
term care Medicaid cost. Ten years later that grew to $14
billion--about $4 billion and 19 percent of all of our long-
term care Medicaid costs. Eight hundred thousand people are
currently being served.
Now, I am not going to go through all the findings of your
report, but it was pretty damning as to the quality assurance
standards, that the Centers for Medicare and Medicaid Services
(CMS) was not even inquiring into a significant number of the
cases on quality assurance; that the amounts, I think, were--we
had 42 waivers, or 18 percent of all waivers in effect for 3
years or more serving 132,000 beneficiaries were never
reviewed. The application process does not give us any real
comfort level as to what is happening as far as quality
assurance itself. The local reports were--in many cases one-
third were at least 1 year late in being filed.
I guess my point is as we look at waste, fraud, and abuse,
as we look at our responsibilities on oversight, it is always
convenient to try to give more flexibility to the States, to
look at changing programs from specific Federal required
programs to a block grant type of expectations of the States.
If we are not providing the oversight, if we are not providing
the quality assurance, to me that also falls under waste,
fraud, and abuse. I am just interested as to whether you have
any further help for us or guidance to us as to how we can do a
better job in one of our principal responsibilities of
oversight.
Mr. WALKER. I think one of the things we have to recognize
is that there has been an increase in the number and types of
activities involving a partnership between the Federal and
State governments. These may be block grants or other
approaches, but Federal taxpayers are paying money and the
programs are being administered solely or partially by the
States. One of the things that we have to do is to recognize
that the Federal Government has a responsibility to make sure
that there is adequate transparency, appropriate accountability
and enforcement mechanisms to make sure that the Federal
dollars are being used for the intended purpose. I will tell
you that this is one area where more action needs to be taken,
and expect that there are others as well.
Mr. CARDIN. I might ask you to give us some more specifics
on this. This is a $14 billion program currently, and the
report indicated that there were faults both at the Federal
agency level, CMS, and in not oversighting the way it should,
as well as with local government. I think we need more guidance
from GAO as to how we can make sure the quality assurances are
built into these programs without overburdening the intent of
the program to give flexibility to the States, but if we don't
have any--the purpose of these programs are to provide quality
service to our constituents for long-term care. If that is not
happening, then we are not carrying out our responsibilities.
So, I think we need some help from you as to what we can do
with CMS or what we can do with local governments in this
waiver process to make sure that we have a greater expectation
on quality.
Mr. WALKER. Let me note now for the record that we are
required by the budget resolution to send a report to the
Congress by August 1, 2003 with some specific suggestions of
areas that Congress may want to look into. I will make sure
that we try to include something in this area.
Mr. CARDIN. I thank you for that, Mr. Walker. I yield back.
Mr. SHAW. Mr. Ryan. Ms. Dunn.
Ms. DUNN. Thank you very much, Mr. Chairman, and welcome,
Mr. Walker. It is good to have you with us today.
I liked very much your point you made in your opening
statement about how it is difficult in a government the size of
ours to have zero fraud, waste, abuse and mismanagement, but we
should have zero tolerance. I think that is well worth
remembering. We on this Committee want to support you in that
principle and make sure that we watch over our government in
every way where we can be in control to make sure that
mismanagement, fraud, waste, and abuse are eliminated, and
efficiency and integrity continue as part of the government
which we oversee.
Your testimony goes into detail about noncompliance, the
stress on IRS collection programs and complexity in the Tax
Code, abuse of tax shelters, and the cost of tax preferences.
Can we fix these problems without major reform or
simplification of the Internal Revenue Code? In other words,
are the complexities of the Tax Code and the problems with
compliance simply two sides of the same coin?
Mr. WALKER. Well, I think there are several steps that will
be necessary. Clearly there are things that can and should be
done administratively through placing a higher priority on
enforcement, possibly some targeted resources to try to be able
to make sure that the IRS does that and captures the return on
investment that Mr. Crane talked about before.
I do, however, believe that some of the problems with this
area has to do with the complexity of our laws. I am a
Certified Public Accountant (CPA). I will tell you I do my own
tax return. I cannot imagine somebody that doesn't have a
degree of financial expertise even trying to do their tax
return and doing it properly. If you look at the EITC, where
the error rate is estimated at about 30 percent, a lot of it is
because of the complexity and because it is intended to help
generally less educated and poorer individuals. We need to
recognize reality--that our laws are overly complex, and,
therefore, even people in good faith may not be able to comply
because of that complexity. So, ultimately we are going to have
to streamline and simplify a lot of the Tax Code.
Ms. DUNN. As Congressman Shaw was talking about his
experience, it reminded me of a fairly recent experience I had
helping my father through a surgical operation with the piles
and piles of bills that came in for months after the surgery.
It made me very distressed about the effect, especially on
seniors who don't have anybody to help them work through the
process. In a quick discussion we just had with one of our
excellent staff who said when she retires, she is going to go
into the business of helping seniors wade through this morass.
These are folks who have paid their bills through their lives
and in some cases are threatened by the threat of them turning
these bills over to collection agencies, and that is a very
frightening thing for them.
I don't know if there is anything we can do about this, but
maybe, Congressman Shaw, we ought to think about making a law
against turning over those bills to collection agencies.
Another problem, of course, is that seniors tend to pay
those bills as soon as they come in because they wish to be
living their lives with integrity and making sure that they are
responsible for what they have to endure. Yet then you move
into an area where you are trying to get the refund because the
insurance company is really going to pay that check. So, that,
too. I wanted you to know how concerned I am about that same
issue. I would like to delve into it further. Are there any
suggestions you have?
Mr. WALKER. Absolutely. I think there has to be more
transparency over what the government is being billed for.
Secondly, I think we have to have more accountability in the
contracts with the administrators who administer the Medicare
payments system. Thirdly, I think we have to recognize reality
that some of the individuals involved, the senior citizens, may
need help. They may need help in trying to be able to ascertain
whether or not this is a legitimate charge or not. We may have
an interest in trying to make sure that they get help, because
if they get that help, it could end up saving us money.
So, I would be happy to work with Mrs. Johnson and her
Subcommittee to try to come up with some ways to look at this
area, because I think it is a large and growing problem.
Ms. DUNN. Good. I appreciate your answers. Thank you very
much, Mr. Walker. Yield back.
Mr. SHAW. Thank you, Ms. Dunn. I think that this is
something that we desperately need to attack. What really
happens on these billings is that you expect to get one from
the hospital, maybe one from the anesthesiologist, and one from
the surgeon, but there are so many subcontractors within the
hospital, you get all of these things. I think some central
billing agency within the hospital should be set up so someone
says, here is my bill, and here is what I spent, instead of
this stuff trickling. It trickles in, I can tell you by my
experience. Mine is still trickling in from 6 months ago. We
are still getting bills. You kind of go crazy. Thankfully we
set up a file when they first started coming in so we could try
to keep up with them. If we hadn't done that, we would be
totally lost.
I had trouble. I, too, was a CPA, but to try to wade
through these hospital billings and the physician billings and
try to figure out what they are doing is really next to
impossible.
Ms. DUNN. Would you yield for a moment? I wonder, I
remember our former Chairman of this Committee Mr. Archer was
about the only person on the whole Committee who did his own
income taxes. I wonder sometimes if it wouldn't be interesting
to inquire that the point--if there is anybody on our Committee
that does his own income taxes.
Mr. SHAW. I think the next question is if you do your own
taxes, could you do it without a computer. This is one of the
big, big problems. I talked to my CPA, and I said when the
alternative minimum tax (AMT) came in, that is it, I will have
to do something else. Of course, I didn't practice--I practiced
law for all those years and didn't practice accounting, but I
did my own tax return until the AMT came in. At that point I
turned it over to a CPA. My CPA says that he couldn't do many
of the tax returns that he does without the computer.
Mr. WALKER. I will tell you, if I may, Mr. Chairman, a
recent personal frustrating experience. As you know, both you
and I are CPAs. I can't imagine how a typical American would
deal with this. I do my own tax return. You are right; with AMT
it is a lot more complicated, but that is not the only
complication. I ended up sending mine in. I got a notice back
from the IRS saying I overestimated my income and
underestimated my taxes, which obviously doesn't make sense,
and I don't agree with them, and so I called them to say, well,
there is obviously a problem here, let's fix it. This was 4
months ago. They still haven't assigned it to anybody yet, and
so there is nothing that I can do. In the meantime I am trying
to file my return for this year. I am not going to accept what
they say because I know they are wrong, and I am a CPA. So, I
can just imagine what the typical taxpayer has to deal with
here.
Mr. SHAW. That would be very interesting to see who is
assigned your return.
Mr. WALKER. I know the Commissioner, but I am resisting
calling him. Hopefully the system will work in time.
Mr. SHAW. Interesting exercise. Now we are going to hear
from a physician. Mr. McDermott.
Mr. MCDERMOTT. Do you know if they are doing A-76 at IRS?
Mr. WALKER. I don't know, Mr. McDermott. I can try to find
out.
Mr. MCDERMOTT. It would work much better if it was
privatized, don't you think?
Mr. WALKER. No, I don't necessarily think that.
Mr. MCDERMOTT. Why are you, a government official, sitting
there trashing them?
Mr. WALKER. Oh, no, no. I am not trashing them. Let me
clarify what I said. What I am saying here is a real life
experience. It is a fact. It may be an exception. I am not
saying it is representative of what they do. I am saying it is
frustrating.
Mr. MCDERMOTT. Did you look into whether we had cut the
budget such that there were not sufficient agents to handle all
this stuff? We made about a 19-percent reduction in the budget
with an increase in number of claims filed. How does that work?
Mr. WALKER. Mr. McDermott--you brought up a good point. I
mentioned before that one of the problems that the IRS has,
while they haven't been able to do as much in enforcement, is
because, first, it hasn't been as high a priority, and second,
they don't think they have enough resources to do that. In any
case it is not an enforcement issue. I would say it is a
taxpayer service issue.
Mr. MCDERMOTT. Well, let me move to another issue because I
listen to this, and I have read your report. On page 24 you
say, well, this is where we got the problem with the EITC.
Maybe it is not page 24, but when I look at this tax gap map
that came from the IRS Office of Research, 2003, they say that
out of that $232 billion, $65 billion of it is business income
that is badly reported in unpaid amounts, and self-employment
tax is $45 billion. Now, that is almost half, but instead what
you recommend or what you comment on is that the IRS is looking
at EITC, which is $7.8 billion. Now, I don't understand why you
would look for the big savings of waste, fraud, and abuse in
$7.8 billion when apparently the business and self-employment
and if you add to that the non-business income, which is
another $30 billion, you have got way over half of the money in
those three areas, and the IRS is focusing on EITC. Why that?
How do they set that as a place to look for the money?
Mr. WALKER. There is absolutely no question that there are
problems on the corporate side. In many cases the problems on
the corporate side are much greater than the problems on the
EITC, and there is absolutely no question that more time,
attention, and resources need to be allocated there. The
uncollected taxes area is individuals, partnerships, and
corporations, but one of the things I tried to mention in my
opening statement is there is increasing concern with regard to
tax shelters and tax schemes involving corporations and high-
income individuals, and that is real money.
Mr. MCDERMOTT. I think that you are really raising the
question--the former IRS Commissioner Rossotti said the most
serious tax noncompliance areas are promoters of tax schemes of
all varieties, misuse of devices such as trusts and offshore
accounts to hide or improperly reduce income, abusive corporate
tax structures, under-reporting of tax by high-income
individuals, and the failure to file and pay large amounts of
unemployment tax by employers.
It seems to me if you are looking to save money--when I
used to write budgets at the State level, it must be different
up here at the Federal level, but we always used to go where
the big money was when looking at Medicaid and the school
budgets and because there is no sense in looking at the State
part. The State part is 0.07 percent of the State budget. You
don't waste your time over there.
This looks like the IRS is wasting its time for some
reason. I would like to understand how they made that decision.
Is there a Committee in the IRS that says, let's look and see
where we should go after--where we should look?
Mr. WALKER. Well, Mr. McDermott, I think you would have to
ask Commissioner Everson that. I will tell you this: Recently
there has been an effort on behalf of Commissioner Everson to
allocate more time, attention, and resources to corporate tax
shelters and to tax schemes involving high-income individuals.
It is clearly needed and necessary. I question whether or not
that they have an adequate amount of resources, time, and
attention focused on that. There is big money there, and there
are a lot of people who are trying to do what is arguably legal
and acceptable rather than what is ethically and economically
right. Mike, do you want to provide some details there?
Mr. BROSTEK. Well, I would just like to add that the IRS
has had a structured process for deciding that those items that
you read off were their priority items. They do an annual
survey of their chief officers in the IRS to get their opinion
on where are the largest problems; and in order to come up with
that list, they followed a systematic voting process to decide
that those were among the largest issues that they should
address, and they have been trying to adjust their internal
resources to focus on those areas.
Mr. MCDERMOTT. May I just say, in closing, Mr. Chairman, in
fiscal year 2004, the IRS put in $200 million for auditing,
$100 million to EITC, and $100 million to all the rest of that
system. Now, I don't know who is running this Committee, but,
boy, somebody has got a fix on EITC that doesn't make much
sense. Thank you, Mr. Chairman.
Mr. SHAW. Mr. Herger.
Mr. HERGER. Thank you, Mr. Chairman. Mr. Walker, I note in
your testimony that you have focused on residency fraud in the
SSI program, which occurs when individuals claim to be living
in the United States for purposes of collecting SSI benefits,
but actually are living outside of the country, which is not
allowed under the program.
Can you review for us what else your investigation found,
and what steps you recommend for the SSA, or us here in the
Congress, to take to prevent continued abuse of this type?
Mr. WALKER. With your permission, Barbara Bovbjerg is the
executive responsible for this work, and I will ask her to
address that.
Ms. BOVBJERG. My name is Barbara Bovbjerg; I am Director of
Education, Workforce, and Income Security.
As you know, Mr. Herger, we are about to issue a report to
you at the end of this month on this important topic. This is a
place where the SSA has had difficulty addressing some of the--
it may be fraud, it certainly is abuse--issues in the SSI
Program.
This is the program in Social Security where beneficiaries
are required to maintain residency in the United States. Social
Security reports that it has identified $118 million in
overpayments associated with this requirement. Based on our
work for you, we have reason to believe the overpayments are
much higher.
We have found that there are really three weaknesses in
this program. The SSA relies on self-reported residency
information, and we believe they need to verify that. The SSA
also doesn't make full use of tools that it has to look at
residency. It can make home visits, for example, and it could
do a more risk-based assessment of which beneficiaries it maybe
ought to take a closer look at, like, for example,
beneficiaries who are using post office boxes. The Agency also
hasn't pursued independent sources of information, like
recipient bank account information, to detect non-residents.
We are planning to make recommendations to the SSA to
address these issues; perhaps unannounced home visits, a more
targeted review of beneficiaries; or use of the entry/exit data
that Homeland Security is developing. Our report will be issued
at the end of the month, and we would be happy to talk with
this Committee about that at any time.
Mr. HERGER. Thank you very much. I might ask, Mr. Walker,
are there implications of this same sort of abuse of other
programs under the jurisdiction of the Committee on Ways and
Means?
Mr. WALKER. There is no question that there is a
significant issue associated with improper payments beyond SSI
and Medicare. This is an area that we are working on, along
with the Inspectors General and OMB. The OMB is requiring
additional transparency with regard to improper payments and
also requiring, at our suggestion, that there be a plan for how
you are going to try to go about estimating them and reducing
them. I believe this is both appropriate and long overdue.
Mr. HERGER. Well, thank you very much. Mr. Chairman, I want
to thank you again for having this hearing. We are certainly a
very generous people, the American people, but the taxpayers do
have the right to see that their dollars are spent in the way
they were intended and not spent in ways that are breaking the
law. Again, I thank you for your work, and I look forward to
working with you.
Mr. WALKER. Thank you.
Mr. HERGER. Thank you.
Mr. SHAW. Mr. Neal.
Mr. NEAL. Thank you very much, Mr. Chairman. I know some of
the Members of the Committee have spoken earlier; they left,
but I would point out that I have got a great tax
simplification bill that we could all sign on to. I have got a
great piece of legislation that deals with AMT that we could
all sign on to. They should be bipartisan measures.
Most importantly, in the 11 years I have been on this
Committee, we have talked a lot during the last few years about
tax simplification. We have done very little, and--very, very
little. We did have hearings here at one point, I remember,
some years ago in which we were going to pull the Tax Code up
by its roots and change it, but I regret to tell you today we
have made very little progress on it.
Our former friend and colleague on this Committee--my
classmate, incidentally--Mr. Hancock, did a great job here some
years ago of pointing out some of the abuses that he believed
were occurring at the IRS. In fact, they were documented by
``60 Minutes'' and a number of other instances. In particular,
he had some constituents who felt that the IRS had overreached
in its effort to collect back taxes from this family; and once
they got into this web, there was little opportunity for them
to get out.
The issue at the time was from the majority here, that the
IRS was too assertive in collecting taxes that were owed to the
government. In fact, the argument here was that the IRS acted
like thugs; in particular, this contracting out had become a
problem.
Now, in your testimony, you suggest that there has been an
increase in people who, you believe, cheat on taxes or those
who believe that the IRS is no longer going to do anything to
them. Is it your position that this Committee and perhaps the
majority in the House of Representatives overreached in its
effort? Or are you arguing today that we should consider a more
aggressive effort to step up what was the best voluntary tax
compliance system in the history of the world?
Mr. WALKER. First, I think it is fair to say that
historically there may have been some abuses. The fact of the
matter is--is that we have issued several reports on this issue
and found that while clearly there will be some abuses from
time to time, given the nature of the responsibility IRS has,
there was not pervasive abuse as some asserted years ago.
Culturally what ends up happening is that Congress passed a law
that said, you shall not do certain things.
Obviously people want to comply with the law, but
culturally what happened is, the pendulum, in my view, swung
dramatically to where the IRS is now focused overwhelmingly on
customer service, not on compliance. I believe that in a
voluntary tax system you need to simplify to try to help
provide reasonable assurance that people can comply in good
faith, more needs to be done there.
You also need to have an effective enforcement program so
that people know that they are at risk if they don't comply.
You need to do that not only civilly, but in appropriate
circumstances, criminally, because otherwise it has a very
adverse effect on the willingness of corporations, individuals,
and others to comply.
As we have said, the IRS needs to be spending more time and
allocating more of its resources, and may need additional
resources, to enforce areas including, in the corporate high-
income areas.
Mr. NEAL. Thank you, Mr. Walker. The second question: I
know many of our colleagues in this body are going to spend a
lot of energy and a lot of time on ensuring that lower income
workers don't get a penny more than they should from the EITC.
I understand that the zeal that they undertake in asserting
that there is some abuse as it relates to the EITC, but let me
direct your attention to your testimony, Mr. Walker, about
corporations that move to Bermuda for the purpose of escaping
American corporate taxes. Now, a year ago the Speaker was
quoted in a column by David Rogers of the Wall Street Journal
saying that there would have to be a vote in the Congress on
the issue.
That is a year ago; we haven't had a vote on this issue
yet. Members of this Committee who were all worked up about it
during the election season last year scheduled as kind of a
hasty matter a couple of small hearings, and the issue kind of
fell off the table.
Today you are acknowledging that corporate inversions have
become a problem and that those who move to Bermuda for the
purpose of escaping corporate taxes really get away with it.
We have estimated up to $5 billion due in taxes, it has
been suggested, could be collected over the next 10 years--$5
billion at a time when we have 146,000 troops in Iraq; and we
are going to need that money for Afghanistan, we are going to
need it for Iraq, and we are going to need it perhaps to do a
better job of collecting through the IRS.
Would you talk a little bit about corporate inversions and
this notion of those who move offshore with a post office box
for the purpose of avoiding their tax burden share?
Mr. WALKER. At the high level--and Mike can provide some
more detail--there are a number of tax techniques that
corporations have followed in order to try to minimize their
taxes, one of which has to do with their legal structure and
where they are domiciled. There has been an interest, for legal
purposes, in being domiciled in other countries in order to
minimize U.S. taxes. This is a problem that has grown.
We do live in a globalized world; there is no doubt about
that. There is a lot of activity going on where people are
trying to dot the I's and cross the T's to be able to say that
arguably, legally they are okay, but from an ethical and
economic substance standpoint, one would have to raise real
questions whether this is appropriate. I think it is an area
that needs more attention and more enforcement activity, but,
Mike, do you want to elaborate?
Mr. BROSTEK. The only thing I would add on that is, the IRS
does face a large problem in policing corporate tax shelters
and other sophisticated shelters, in part because they are
deliberately constructed to walk the fine line between what is
legal and what is not legal many times; and it takes an intense
amount of investigation to determine whether a situation is
problematic. The inversion situation is a case where it is not
necessarily illegal for a corporation to do that type of thing.
Mr. NEAL. Mr. Chairman, could I have 30 more seconds?
Mr. SHAW. You are already 2 and a half minutes over. I
would tell the gentleman that the House has already passed an
inversion moratorium, and on April 3, 2003 the House passed 247
to 175 the energy bill which contained this provision, and it
is awaiting action in the Senate.
Mr. NEAL. I appreciate that, Mr. Chairman, but the truth
is, we have not done what we pledged to do a year ago. Could I
have 30 seconds more?
Mr. SHAW. Well, this Committee has and the House has. We
are awaiting action by the Senate. Very, very quickly, because
we have got to move on.
Mr. NEAL. Thank you, Mr. Chairman. What would you do to an
individual taxpayer who moved to Bermuda and set up a post
office box and said that they were no longer going to pay their
individual taxes?
Mr. WALKER. I would have to think about what I think the
appropriate action is there. I do believe that, as we have seen
of late with some of the accountability failures in the private
sector, we are facing a troubling trend in this country where
people are trying to do what is arguably legal and what is
minimally acceptable rather than what is ethically and
economically the right thing to do. I don't have an easy
answer, but I do think it's a problem.
Mr. NEAL. Thank you for those 30 seconds, Mr. Chairman.
Mr. SHAW. Mr. McCrery.
Mr. MCCRERY. Thank you, Mr. Chairman.
Mr. Walker, I just have one question and it relates to the
question of employment taxes. In your testimony, you point out
some figures that are rather startling. You say that as of the
close of fiscal year 2002, there were approximately $49 billion
in delinquent, unpaid employment taxes.
Can you suggest anything that the Congress ought to do to
change the law or encourage the IRS to change regulations which
would make us more efficient in collecting those taxes?
Mr. WALKER. Mike Brostek, please.
Mr. BROSTEK. The thing that we have found when we have
looked at the employment tax situation is that in many cases
these are smaller businesses who get themselves into financial
difficulties, and they don't pay their employment taxes because
they are a source of funds to stay in business.
The effective way of trying to deal with that is to stop
the problem before it grows out of hand. So, the IRS has
created various programs to intervene early when a taxpayer
gets into that type of situation, to try to educate them that
they need to be paying those taxes, or even to take enforcement
action early on. However, those programs have been very small
in IRS, and they haven't been evaluated to see if they are very
effective.
I think encouraging IRS to determine what are the effective
tools to use in addressing the situation is an appropriate
thing to do.
Mr. MCCRERY. Well, what about using technology to have a
more direct submittal of those taxes, filing them
electronically or something like that?
Mr. BROSTEK. Currently, the IRS does make available
electronic payment of employment taxes through the Internet to
all businesses that want to. It is not a requirement that all
do. You might want to consider whether there should be an
expansion of the requirement.
One thing to keep in mind in considering such an expansion
is the burden that smaller businesses might face in being
required to file in that fashion.
Mr. MCCRERY. What would the burden be? Buying a computer
and having an Internet service?
Mr. BROSTEK. It may be a fairly minimal burden, but not all
small businesses do have computers and Internet connections.
Mr. WALKER. I think one other thing that we have to look
at--and this is an example of it--is how, leveraging
technology, can the IRS become aware in a more timely manner
when somebody has not paid unemployment taxes, who has
previously paid unemployment taxes.
Frequently what ends up happening is, as Mr. Brostek said,
you will have a small business. This is a significant amount of
cash by the time you take the employee's portion and the
employer's portion, if they are having cash flow problems. They
may have paid their payroll taxes for both the employer and
employee for a period of time, then all of a sudden they don't
transmit it in a timely manner, hoping that things are going to
turn around; and they may not turn around.
So, I think one of the things that has to happen is, how
can we get more timely notification, leveraging technology, of
who is not paying so we can intervene earlier.
As to the other question, I would say, you may want to
consider additional penalties that you can bring to bear that
would encourage people not to use that option. They knew that
if they really thought they were going to turn around, that
they were going to end up paying a big price and, therefore,
that wouldn't be something that they might do as a first
resort. It was something that they would do more as a last
resort.
Mr. MCCRERY. Well, I agree with the first part of your
statement, that is, that we ought to think of ways to encourage
employers not to get in that trap in the first place.
The second part with respect to increasing penalties
doesn't seem to me to be an effective tool since we know that
we are already assessing substantial penalties and we are not
collecting those. So, I don't think that is a very effective
way to address this.
I would rather we try to think of innovative ways to make
the collection smoother, quicker, more practical, and not tempt
those employers to dip into that and misappropriate those funds
for purposes that were not intended.
Mr. WALKER. I agree. I think realistically we have to be
able to help them be able to do it, but we have to know when
they are not doing it; in other words, when they discontinue,
we need to be able to intervene in a timely manner. Quite
frankly, I don't know that the IRS has that capability right
now.
Mr. BROSTEK. It is something that IRS is hoping to do a
better job of, identify when that pattern of payments is
broken.
As you are probably aware, there are a number of fairly
complex filing requirements for employment taxes that are
graded according to the size of the business. If you are a very
large business, you have a daily filing requirement, and it is
easy to track patterns there. The smaller firms may only have
to file on a monthly or a quarterly basis. Since those are
often the ones that have the filing problem, detecting when
they have broken a pattern can be a little difficult for IRS.
Also, because those smaller businesses often are seasonal
businesses--a lawn-mowing business in the summer, a Christmas
sale at the Christmas season--the payment pattern may have some
natural fluctuation that has to be discerned, but the overall
point is correct. The more progress that can be made in
determining when the pattern has been broken, the better,
because that is when the IRS needs to intervene.
Mr. WALKER. We ought to be able to leverage technology more
in that regard. Technology that is working for us, not against
us.
Mr. MCCRERY. Right. Good. Thank you, Mr. Chairman.
Mr. SHAW. Mr. Portman.
Mr. PORTMAN. Thank you, Mr. Chairman. I want to thank Mr.
Walker for being with us again and providing us some good,
hard-headed analysis, particularly raising again the concern
about entitlement spending and the degree to which mandatory
spending over the next 20 years is going to take over our
budget. We need to look at Medicare and Social Security.
I think, though, in the short term probably our best chance
of dealing with some of the issues before this Committee today
is looking at the tax side, looking at the Tax Code. I
appreciate your raising the SSI issue again, however--also,
some other tough issues.
On tax compliance, you just responded to some of Mr.
McCrery's good questions. In general, if you could, give us a
sense of the degree to which you think the compliance problem
is related to the complexity of the Tax Code. I ask this
question because I think there are a couple of ways the GAO
could help us in this regard.
Mr. WALKER. First, I think there are two dimensions of the
complexity problem. One is that if our laws are very complex,
then even individuals who want, in good faith, to do the right
thing, have difficulty sometimes in doing the right thing,
because they don't understand the law.
The second is, if our laws are very complex, then that
provides opportunities for legal and financial engineering to
be able to do things that you can try to dot the I's and cross
the T's in order to be able to argue that this is legal, and
therefore it is tax minimization rather than tax evasion. So, I
think complexity is relevant in both dimensions.
Mr. PORTMAN. To the extent you can put a finer point on
that, I think that would be very helpful in going forward.
Obviously, we have not done much in terms of simplifying
the Tax Code in the last several years. We talk about it a lot,
and it is something I think that is on the agenda for, I hope,
Members of the Committee on both sides. I think that one of the
issues here with regard to fraud and abuse and with regard to
mispayments is complexity.
Let me skip quickly to electronic filing. Some of the
complexity of the Tax Code and some of the mistakes and
erroneous payments are due to the fact that people file paper
returns. I am amazed by those numbers. You get a 22 percent
error rate with paper returns, less than a 1 percent error with
electronic. We have got an 80 percent goal by the year 2007.
We have come up with some creative ways to try to deal with
that, some of which is controversial. Anything you can do, I
think, to help continue to keep us focused on that would be
helpful. Electronic filing is part of the answer, and I don't
think we have an adequate focus on it, although we are now up
to, I think, 42 percent this year on electronic filing.
Quickly, in terms of the Tax Code, we talked a little about
the small business side and some of the concerns here on
compliance. We are increasing funds on compliance, as you know;
we are trying to get that pendulum to swing back not just on
taxpayer service, but on enforcement compliance.
With regard to EITC, a perennial problem. We now know that
in food stamps, for instance, you have, what, about a 6 or 7
percent error rate. With regards to SSI, a big program, a
problem, as you stated earlier, we have got a 6 percent error
rate. We think--based on the 1999 figures from the IRS and U.S.
Department of Treasury--we think there is a 28 to 32 percent or
34 percent error rate. So, about a 30 percent error rate in the
EITC, which is now between, we think, $8.5 and $10 billion; and
that is based on 1999 figures.
We have talked about this certification process. Can you
give us a sense of where you think the IRS is on EITC? Are we
getting a hold of this problem? We have heard concerns raised
by this Committee on the other side that we are doing too many
audits of EITC, yet I am told only 4 percent of EITC returns
are being audited in any respect.
What is your solution to this, and what have you guys come
up with to try to help us with regard to EITC compliance?
Mr. WALKER. Well, first, I think that clearly the IRS has
been noted as dedicating a significant amount of resources to
try to get a handle on the EITC. I would respectfully suggest
that they need to be dedicating more resources on some of the
other areas where there are a lot of dollars involved, whether
it be corporate tax shelters or high-income tax devices.
Mr. PORTMAN. Let me follow up on that, though. Are you
saying that a 30 percent error rate is not a problem?
Mr. WALKER. No, no, I am not saying that at all. I am
saying it is a problem, and I am saying----
Mr. PORTMAN. They should divert resources from that to
other areas?
Mr. WALKER. Well, not necessarily. I think we need to look
at it as return on investment. Thirty percent is unacceptable.
On the other hand, where do we believe the biggest problem is?
As was mentioned before, Commissioner Rossotti, who is on GAO's
audit Committee, has estimated that there is a lot more money
in some of these areas where IRS has not dedicated enough time,
attention, and resources.
So, yes, we need to get the 30 percent down, but we also
have to make sure that we recognize that there are other areas
that involve a lot more money that we need to start getting on
the beat more.
Mr. PORTMAN. You think there is a 30 percent error rate in
some of these other areas, for instance, even small business,
where probably the biggest number of dollars is involved?
Mr. WALKER. Well, 30 percent is one of the highest error
rates that I have seen, no doubt about it. On the other hand, I
think there are a couple of ways to look at it, one of which is
the error rate, the other of which is how much money is
involved, and thirdly, what type of individuals are involved.
Mr. BROSTEK. One of the significant issues there is that we
don't have current information on the compliance rate in most
areas of the Tax Code because IRS has not been doing standard
statistical measurements of that component.
Mr. PORTMAN. We are moving ahead with the new compliance
measurement?
Mr. BROSTEK. Yes. They have a measurement program for the
individual taxpayers. That is updating work that was last done
in 1988, for tax year 1988. There were significant areas of
noncompliance found in the tax measurement in 1988. Small
businesses had a noncompliance rate, if I recall correctly,
around 30 percent. Independent businessmen--informal suppliers,
I believe they called them--had a noncompliance rate of 81
percent. So, there were other pockets of compliance problems
that were detected through that compliance measurement program.
We are very pleased that they are doing it, because when
they get the data, it will help them in allocating the
resources to where the problems are. We are looking forward to
them rolling forward and doing similar compliance measurements
not just for the individual taxpayers, but for the small
businesses and others as well.
Mr. PORTMAN. Well, there is no question we need the
compliance data. My time is up--and I apologize, Mr. Chairman--
but I think it--it concerns me that you are saying that we
should divert resources away from an area where we know we have
got a problem with 30 percent noncompliance based on 1999
figures.
It is not a matter of resources, it is a matter of focus.
This certification program, for instance, would simply have
people say in advance what their residence is, how many
children they have, and so on. It concerns me that GAO would
say this is not a big enough problem, that we ought to be
diverting resources because there might be more money somewhere
else, even though we don't know as much about that problem.
So, I would hope that GAO would continue to help us to get
a hold on this and on the small business front, and on
compliance in general and on complexity. Thank you, Mr.
Chairman.
Mr. WALKER. I agree. Let me just say, Mr. Portman, we know
what we know. We know that this is a problem, but we are also
confident that there are other problems, and that is why it is
important that the IRS do what they are doing now. They are
focusing their time and attention on this area because they
know about it. They need to continue to do that, but there
could be other areas that are problems that they need also to
be focused on. That is what we are saying.
Mr. PORTMAN. This Committee has been supportive of them
moving ahead with this new compliance data, which was a
political problem over the last two decades almost.
Mr. SHAW. Ms. Tubbs Jones is recognized.
Ms. TUBBS JONES. Oh, I didn't think I would get a chance
right behind my colleague from Ohio. What I want to say, ask a
question about is, you are saying that because in EITC, the
amount of money is smaller compared to the possible or likely
noncompliance in larger areas; so 30 percent of $10 is not a
lot compared to 10 percent of $100 million, for lack of a
better explanation?
Mr. WALKER. That is correct.
Ms. TUBBS JONES. Thank you. Let me, first of all, say I am
pleased to be a part of this hearing today. I agree entirely
that we need to take a direct approach to address fraud, waste,
and abuse as it relates to the issues that fall within our
jurisdiction, and that a mindset of passing the buck along to
others, as was said, just doesn't cut it.
I am reminded that when I was a Cuyahoga County prosecutor
and I took over a unit that dealt with welfare fraud, we
focused all these dollars on women who got a second check
because the first one came late, and they had children who
needed to get to school with clothes and needed to have food to
eat.
So, we prosecuted these women for a check for $330, and
then when they were indicted. After we went through the process
of indicting them and using the grand jury and the prosecutors,
we then took them to court; then we assigned them a lawyer for
which we paid more dollars. Then, after we assigned them a
lawyer, we then put them on probation. Then they had review for
that. Then we spent more money and we took their next welfare
check and used it to reimburse them for the loss of the last
welfare check.
I don't want to minimize looking at the fraud, waste, and
abuse, but I applaud you for understanding the importance of
allocating the resources where they need to be allocated, not
just rolling it around, particularly on the people who are at
the lower rung of the ladder. Even if we looked at all the
money that is expended in some of these lower areas, if we just
focused on maybe two or three larger pockets, we would get much
more money back than we are getting right now.
So, I just applaud you for understanding what we are
talking about with regard to EITC. The difficulty in
establishing some of the preliminary issues that are being
proposed by the administration to try and cut off the payments.
So, I am just so happy to hear you say those kinds of things.
I am almost forgetting what else I wanted to ask you. Oh, I
do have a question. What if, in the area where we are dealing
with employers, we were to require that employers pre-certify
to the IRS, before filing their tax return and claiming
deductions for having paid their employees' tax dollars into
the government, that they have turned over to IRS all of the
money that they owe IRS with regard to tax withholding for
their employees? Do we require them to pre-certify them right
now?
Mr. WALKER. No, we don't.
Ms. TUBBS JONES. Wouldn't that be a heck of an idea, to
require them to pre-certify that? That might deal with some of
the issue of taxes not--employees' dollars not being paid in?
Mr. WALKER. Well, part of the question would be, what is
the sanction if they certify falsely?
Ms. TUBBS JONES. Well, we can think about that, too. Don't
think that I am just sitting here trying to think of ways to
lock up people. That was my job before I came here, and I guess
I think about it sometimes still, but I am just suggesting that
might be something that you might include as you go through the
process of looking at this. What else do I want to ask you
about?
Mr. WALKER. I think your point is, take a concept and see
if we might be able to apply it in a broader way, and we will
look at that.
Ms. TUBBS JONES. Absolutely, Mr. Walker. In fact, I am
going to--if any of my colleagues who ran out of time want to
use some more time, you just answered the perfect question I
wanted to ask about EITC and allocation of resources. So, Mr.
Chairman, even though you don't think I ought to do this, I am
yielding back the balance of my time, and I have time left.
Mr. SHAW. Miracles do happen. Mr. Hulshof.
Mr. HULSHOF. Thank you, Mr. Chairman. Really a couple of
follow-ups to my friend, Mr. Neal from Massachusetts, who is
very passionate about corporate inversions and asked you some
questions about that. I know that is really beyond the scope of
this hearing, Mr. Walker, and your appearance today, but I
would commend to him or others that are interested in this area
of international tax policy, 2 days ago Pamela Olson testified
before the Senate Finance Committee on this subject, and I will
just read one sentence from the testimony:
``Both the increase in foreign acquisitions of U.S.
multinationals and the corporate inversion activity of the past
few years evidence the potential competitive disadvantage
created by our international tax rules.''
The reason I point this out is because our Committee, I
think, is going to be charged with dealing with international
taxation, with the foreign sales corporation situation and the
World Trade Organization.
So, I commend this testimony to any Member of this
Committee that has focused on corporate inversions because I
think this is a symptom of a larger problem that our Committee
will have the opportunity to address in the future. Let me say
to my friend from Ohio----
Ms. TUBBS JONES. Which one?
Mr. HULSHOF. You, Ms. Tubbs Jones, my good friend, which
would be you, as opposed to my semi-good friend here.
I can assure the gentlelady that no one on this Committee
wants to cut off payments from the EITC. I dare say that there
are things that--it might be that this error rate in the EITC
is our fault.
In fact, Mr. Walker, let me move to you, because in your
testimony, in your written testimony or report--specifically on
page 39 if you need to reference it--you mentioned that, for
instance, the several definitions that we have of, ``children''
in the Tax Code, if we were to make simple changes in the
definition of what is a child and make that uniform, that
somehow might impact positively the ability to be compliant
with the EITC. Would you elaborate on that just a bit?
Mr. WALKER. For example, one could have a child, but it may
not be a dependent child; this could be a broken family; you
could have two people who, it is their child but only one has
responsibility for the care and feeding; and so, therefore,
both could end up trying to claim credit for something that
only one is entitled to.
So, this is an example of where even if people want to in
good faith be able to comply, they may not be able to.
Mr. HULSHOF. I would say, in prior hearings--and I just
know this, Ms. Tubbs Jones, because this happens to be an area
of inquiry when we had representatives from the Department of
Treasury under President Clinton's Administration; and I
remember the discussion about the EITC, about noncompliance and
what have you.
I seem to recall that then, a couple years ago, there was a
23 percent error rate with EITC. Now, unfortunately, the
pendulum is swinging in the wrong direction; that is, now we
have between, as was pointed out by my other friend from Ohio,
27 and 32 percent.
So, I think that is the gist of this inquiry; we have
identified an area of noncompliance, and if it is our fault, we
should help fix it. So, that is the point of the inquiry. Any
additional comments?
Mr. BROSTEK. Your recollection is, I believe, correct, that
there was an estimated 23 percent error rate in the past for
the program. The only caution I would have is that the
methodology for measuring it at that time differs from now, so
it is not clear that there is a trend.
Mr. HULSHOF. Thank you for making that clarification to us.
Specifically, and again focusing on this area a little further,
you mentioned, Mr. Walker, citing the IRS, that three areas--
qualifying child eligibility that we discussed briefly,
improper filing status, and income misreporting--account for
roughly 70 percent of refund errors. Is that right?
Mr. WALKER. That is my understanding, yes.
Mr. HULSHOF. Are there individuals or families out there
that should be getting the EITC that aren't?
Mr. WALKER. Oh, I am sure there are some that aren't filing
for it that are eligible for it.
Mr. BROSTEK. We did an estimate of that about a year and a
half or so ago, and the extent to which people are not claiming
it who appear to be qualified varies based on whether you are a
married couple with children or whether you are a single
individual.
Overall, about 75 percent of those eligible, we estimated,
were receiving the EITC. So, one out of four who was eligible
is not. For those with children, around 90 percent of those
eligible are receiving EITC. For single individuals, that
declines to the 40 percent area, as I recall.
Mr. WALKER. Let me quickly say that when I was practicing
public accounting in the private sector I used to provide
assistance to low-income individuals a couple of days a year to
try to help them file their tax returns; and this was one of
the issues that was a key issue. Namely, who was eligible for
the EITC. Most people who came in had no idea what it was, and
so you had to end up asking some tough questions with regard
to, well, do you have a child? Is it a dependent child? You
also had to look at what their income level was.
So, yes, there is a problem both ways. Some people are
getting it who aren't eligible, and some people who aren't
eligible are getting it.
Mr. HULSHOF. Thank you. Thank you, Mr. Chairman.
Mr. SHAW. Mr. Becerra has agreed for Mr. Lewis to go next.
Mr. LEWIS OF GEORGIA. As a matter of fact, I don't want to
get into the debate with the gentleman from California or you,
Mr. Chairman, but I think I was sitting here when the gentleman
from California came in.
Mr. SHAW. Well, I am recognizing you.
Mr. LEWIS OF GEORGIA. Thank you very much, Mr. Walker.
Thank you very much for your testimony.
I agree that we need to root out waste, fraud, and abuse in
these problems, but I have one question. Could you tell me or
tell Members of this Committee whether there is a greater
degree of waste, fraud, and abuse in the basic human needs
programs than in the programs of the U.S. Department of
Defense?
We make a great deal about waste in Social Security,
Medicare, Medicaid, and we heard about EITC. Now, I would like
for you to elaborate and make some comparison.
Mr. WALKER. There is a lot of waste, fraud, abuse, and
mismanagement in both, including in defense programs. If you
look at our high-risk list, which we publish every 2 years, the
most recent being in January 2003, there are 25 high-risk
areas. The Department of Defense has 9 of the 25 high-risk
areas.
Areas such as contract management, financial management,
and acquisitions. The Department of Defense is an ``A'' on
effectiveness in fighting and winning armed conflicts, however,
they are a ``D''--and I am grading on a curve--in economy,
efficiency, transparency, and accountability. There are
billions of dollars wasted there.
Mr. LEWIS OF GEORGIA. What are your recommendations?
Mr. WALKER. Well, we have had numerous recommendations.
Part of the recommendations are, greater contractor
accountability, following commercial best practices with regard
to how we go about designing and developing weapons systems,
and part of which is asking tougher questions about what
systems do we really need versus systems that people want.
Another issue you can look at is, I don't know if it is
still true today, but we were paying $4 million a day to former
Iraqi military and civilians. I will double-check that, but I
think that should not be coming out of taxpayer funds. It
should come out of Iraqi funds or Iraqi oil revenue.
Mr. LEWIS OF GEORGIA. Are the people in the Department of
Defense responding to your recommendation?
Mr. WALKER. I will say that these problems are
longstanding. They have been there for years; they have spanned
Administrations, they have spanned Congresses.
Some are going to take years to solve, but I will also say
that Secretary Rumsfeld and his team are spending more time and
energy on trying to deal with some of the basic management
problems in Department of Defense than has happened in years.
The problem is, as you know, they are also focused on Iraq
and Afghanistan and other problems around the world, and so we
are not making as much progress as we would like to. They are
trying hard.
Mr. LEWIS OF GEORGIA. Would you say to this Congress and to
the administration that we should have the same zeal about
doing something about waste and fraud and abuse in the
Department of Defense program as we do in these basic human
needs programs?
Mr. WALKER. We should have zero tolerance wherever it is.
Mr. LEWIS OF GEORGIA. Thank you, Mr. Walker.
Mr. SHAW. Ms. Johnson is recognized.
Mrs. JOHNSON OF CONNECTICUT. Thank you, and welcome, Mr.
Walker. You said in your opening comments that Medicare needs
to do a lot better job, and pointed at drug pricing,
contracting reforms, and a couple of other areas. We do have in
our proposed bill both pricing reforms, contractor reforms, an
ombudsman, a number of things that you mentioned. Have we done
it satisfactorily? Or if you have recommendations as to how
that language could be strengthened, would you be able to
provide that to us?
Mr. WALKER. We will take a look at it, and we will respond
directly, Mrs. Johnson.
Mrs. JOHNSON OF CONNECTICUT. There is more reform--and I
wish there were more Members of our Committee to hear this.
There are more reforms to the system and management of Medicare
in this bill than in any bill we have ever brought to the floor
of the House. So, I hope the record will note that clearly.
Then you also mentioned some of the problems with
undercoding and the need for aggressive enforcement.
It is also true that we have a growing problem with--you
talked about overcoding. We have a growing problem with
undercoding, and if you have a big problem with undercoding, it
means that your providers are too afraid to code accurately
and, therefore, err on the side of coding at a lower level.
Then they get paid less, and there are a lot of reasons to be
concerned about the systemic undercoding problem that is
developing. Would you agree with that?
Mr. WALKER. Well, I think we need to try to get it right.
It is similar to what we talked about--the EITC. You want to
keep people who are ineligible from getting it, but you want to
make sure people who are eligible do get it.
Mrs. JOHNSON OF CONNECTICUT. I agree, but when we go in and
do audits, we penalize physicians, hospitals, others if they
have overcoded. We do not repay them if they have undercoded.
We don't offset undercodes with overcodes.
So, there is a fundamental reform in our audit effort that
we need to make, because right now we are just looking at the
half of the glass that is either full or empty and not
balancing off. So, I urge you and your people to begin
considering that, because I believe we are doing not only
damage in terms of morale, but in terms of guaranteeing the
resources that are necessary to support the services that we
put so much stake in.
Then on to this issue of transparency, and particularly in
billing, you have got to help us. The reason you can't
understand the bills--and I found it frankly downright
embarrassing that, as Chairman of the Subcommittee on Health
and being Medicare eligible myself, for a simple break of the
ankle, I could not follow the bills that came to me. I could
not tell from the ones that said ``This is not a bill'' whether
it was or was not, or how it had paid or who got paid what and
whether anybody got paid what they ought to have gotten paid.
It is shameful.
The billing system is the outward consequence of the
underlying payment system. So, I can't make it--I will work at
it. I take Clay's comment very seriously. I can imagine, with
the complexity of his medical issues, it must have been
horrendous. It is unfair, because our seniors have no idea
where they are in--and, therefore, they have no sense of the
cost of service and so on and so forth.
We need your help. How do we straighten this out? What are
the inter-overlapping circles? Why do we get so many pieces of
paper that seem to relate to similar, varied, or different
things?
So, what is that relationship between this terrible billing
experience that we have and the underlying payment systems,
which we experience differently even in this bill? We talk
about doctor reimbursements, we talk about hospital
reimbursements, and so on, and yet that is not how the system
works itself out. So, we do need a lot of help on that.
Then, just lastly, let me ask you to go over a little more
clearly than you did at one point in your testimony about this
tax not collected. How much of it actually represents taxes
that cannot be collected because somebody went bankrupt, but we
are required to hold that liability on our books for 10 years
in case they hit the jackpot?
So, how much of it is the kind of debt that is very
unlikely to be collected? How much of it could be collected,
for instance, by applying the continuous levy policy all across
the board to government agencies as well as the private sector?
Give us a little more insight into what is the realistic
number, rather than $232 billion.
Mr. BROSTEK. As I think I may have mentioned earlier, I
believe my recollection is that the estimate is around $100
billion to $112 billion in uncollected assessments that has
some collection potential. It is obviously much less than the
full number. Tax debts are statutorily required to be carried
on IRS' books for 10 years. So, there are a lot of old debts
that are on there that are never going to be collected.
Mrs. JOHNSON OF CONNECTICUT. I believe you should change
the way you report this, so that you report $100 billion, and
then you report this other amount that is held on the books in
case something miraculous happens and a taxpayer can repay,
because I think it is misleading to taxpayers and to
legislators.
Mr. WALKER. I think that is a good point, Mrs. Johnson.
There are really two numbers here. One number is what the IRS
is statutorily required to keep on its books; the other is what
is realistic as far as being collectible. That is really the
financial statement number, and I think we can provide greater
transparency there.
Mrs. JOHNSON OF CONNECTICUT. Thank you. There is one other
comment that I want to make, and that is that you also need to
give us more help on this issue of clarity of the law. In the
EITC, we have had fraud estimates. Sometimes fraud has been up
to 34 or 35 percent; then it has been down to 20 or 21 percent.
It is a function of how we write the law.
There is no way the IRS can possibly enforce this so that
the fraud rate is down in any reasonable area, and I think you
ought to take all those sections of the law where we have an
80/20 percent noncompliance rate, and help us straighten out,
how do we fix the law so it is enforceable. If you think we are
going to do this all with technology, Chairman Rostenkowski
used to say, ``Simplicity is the enemy of equity,'' and in
politics, we like to pursue equity and fairness.
It is true, the fairer the bill, the more hopelessly
complex it becomes. So, you need to begin posing for us the
reforms that would make the law enforceable and, therefore,
more equitable; at least then everybody covered by the law
would be paying.
So, I hope that you will both be taking more seriously your
responsibility to help us get to the first cause rather than
just trying to get heavier and heavier systems to go after the
money.
Mr. WALKER. I think, Mrs. Johnson, there are certain things
we can do although I will argue that this is part of the IRS'
basic responsibility. We are happy to help the Congress look at
this independently, when they get done with their analysis that
they are updating from 1998 as to where they believe the
compliance problems are. I think your idea is excellent.
That is, the IRS ought to be asked, and then we can look at
it independently, for those areas where there is estimated to
be high noncompliance, to what extent is that because of
complexity in the law, to what extent is that because of
administrative issues. There ought to be a focused effort on
that.
In the longer term, I think one of the things that this
Committee and this Congress is going to have to consider is, to
what extent do we want to consider more consumption-based
taxes? I think the experience of most other major democracies
around the world is, eventually you need to move in that
direction, given the economic trends that are going on in the
world.
Mrs. JOHNSON OF CONNECTICUT. Can you consider that a
question asked, that that kind of analysis be done of the IRS
report? Or do we have to put that in writing to you?
Mr. WALKER. Consider that we will do it.
Mrs. JOHNSON OF CONNECTICUT. Thank you.
Mr. WALKER. I also think that it is part of IRS' basic
management responsibility to do that in allocating their
resources to get the biggest return on investment.
Mrs. JOHNSON OF CONNECTICUT. Thank you.
Mr. SHAW. Mr. Becerra.
Mr. WALKER. I will do that under my own authority.
Mr. BECERRA. Thank you, Mr. Chairman. Mr. Walker, thank you
very much. I guess with the 5 minutes, let me try to focus a
bit more on the EITC, because we have said so many things about
it. I want to make sure we have these numbers that we have
being throwing about somewhat correct.
We estimate that about $8 to $10 billion are in
overpayments; we pay more than we should. That is an estimate
based on 1999 data, which does not, of course, take into
account some of the changes we have made to try to make some of
those corrections. So, it could actually be less that we are
overpaying people under the EITC, correct?
Mr. BROSTEK. That is true. The Department of Treasury in
doing a study last year looked at the statutory changes, and
they estimated that the change that was made to the adjusted
gross income tie-breaker rule would reduce that problem by
about $1.4 billion, I believe. They didn't believe that the
other statutory changes that had been made would have reduced
the remainder materially.
Mr. BECERRA. So, it could be between $8 to $10 billion, but
it could be less because of the new changes that have been put
into effect. That corresponds to the $230-plus billion that we
don't collect that is due to the Federal Government, which
means that all of America's taxpayers who voluntarily and in
good faith pay their taxes, they are paying and having to carry
a load through their tax payments for all the people who are
not paying the $230-plus billion that they owe the Federal
Government in taxes. That comes out--the $8 to $10 billion or
so comes out to about 3 or 4 percent of that $230-plus billion
that is not paid to the Federal Government.
We heard numbers of $100 million being spent for compliance
purposes under the EITC to try to reduce that number of
overpayments out of about $200 billion that the IRS will be
spending for compliance purposes. So, if I have got this
correct, we are spending close to 50 percent of the IRS' budget
to go after the tax cheats, to go after less than 4 percent of
the problem.
When you take into account that EITC is a program that, for
the most part, helps working Americans who earn likely less
than $30,000 or $32,000, because you don't qualify for the EITC
unless you are a working American earning less than about
$30,000 to $35,000, we are going after those folks--spending
half of our resources for noncompliance to go after our modest-
income working families. Yet, if I have this correct, we have
in the case of the estate tax, where we are talking about only
the 2 percent wealthiest families in America, costing the
Federal Government in non-tax payments almost half of what we
believe we are not collecting or we are overpaying in the EITC.
So, here we spend 50 percent of our resources to go after
our modest-earning families, American families, and I don't
know of anything that has been said that we do to try to go
after the taxes that are owed by the 2 percent wealthiest
families in America. Can you tell me what is wrong with that
picture?
Mr. WALKER. Well, let me say several things. First, the
$200 to $300 billion is a balance sheet number. That is an
accumulated number. In addition to that, some of that is not
likely to be collected because the reasons that have been
stated before.
Number two, the IRS for years has not updated its
estimation of compliance in some of the areas that you refer
to, which they are doing now. I would respectfully suggest
that, when they do that, one of the things that this Congress
needs to do is to try to make sure that, first, they have
adequate resources to try to enforce all the laws where there
are big dollars involved; and secondly, that they are
allocating their resources in a prudent manner to try to get
the most recovery with whatever resources they are given.
Mr. BECERRA. I think you have already answered this,
because you mentioned something earlier, but do we believe that
the--do you believe that the IRS is currently allocating its
resources to attack noncompliance in a prudent manner?
Mr. WALKER. No. I think they can do much better.
Mr. BECERRA. One of our witnesses to come, Mr. Burman from
the Urban Institute, will mention--at least he mentions in his
testimony, that half of noncompliant taxpayers with incomes
over $100,000 get off scot-free, and we don't fine them. These
are taxpayers with over $100,000 in income. Yet we are devoting
this money, and we should go after all tax cheats, those who
do. Isn't it true that two-thirds of all the folks who file for
the EITC, the tax credit, actually use professional tax
preparers?
Mr. BROSTEK. Yes, sir. It may be 70 percent this year.
Mr. BECERRA. So, either we have a whole bunch of tax
preparers who are trying to commit fraud--and I don't think
that is the case--or we have just a very complex program under
the EITC, and a lot of folks are making genuine mistakes. If
that is the case, then it makes it even more difficult to
understand why we are devoting so many dollars--and, again,
these are taxpayer dollars--for the purposes of seeking out the
tax cheats.
We are forgetting over half of the $100,000 income earners
and above who are cheating the tax system, and we are going
after those who are making $30,000 or less in working income.
So, I appreciate your testimony, and I hope we come up with
some prudent solutions because it seems like we are going after
the folks who work hard and make innocent errors, for the most
part, and avoiding all the folks who are making big money and
could pay some real taxes to make it fair for all of those who
are paying their fair share. Thank you, Mr. Chairman.
Mr. SHAW. Mr. Collins.
Mr. COLLINS. Thank you, Mr. Chairman. I find it of interest
to listen to my colleagues as they talk about different
categories of people who either falsely or by error file their
tax returns for payment or for receiving a credit. My question
to you revolves around something that you said you were going
to voluntarily do just a few minutes ago, and that is run a
study on the consumption angle of collecting taxes.
Mr. WALKER. Mr. Collins, I think what I agreed to do was
that when the IRS gets done updating their analysis of where
they believe there are compliance problems--in other words, the
estimated noncompliance rate--then try to be able to look at
what might be some of the reasons for that noncompliance--to
what extent might it be complexity in the law and, therefore,
Congress needs to think about making changes in the law; to
what extent might there be administrative issues associated
with it--not on consumption taxes, per se, just with regard to
compliance under the current tax law.
Mr. COLLINS. I understood you to say you were going to look
at and evaluate a consumption tax. Be that as it is, in
analyzing the different taxes, you talked--you have spoken a
good bit about the EITC and the income tax, the corporate tax.
I know we have a panelist that is going to follow you that is
going to be speaking on compliance of fuel taxes. What about
other areas of excise tax that we levy at the point of sale?
Have you done a study to see where or how much there is fraud
or abuse involved in the collection of those taxes?
Mr. BROSTEK. No, we have not, Mr. Collins.
Mr. WALKER. The point that I made before on a consumption
tax, you are correct, I did say something about consumption
tax. It was in a little bit different context. I believe I said
on that, that ultimately we may need to look to go more toward
consumption taxes rather than income taxes as many other
industrialized nations have already done around the world.
Mr. COLLINS. Well, that is exactly what you said, yes, and
that was my point. But you haven't done a study to determine
the difference between fraud or errors in the collection of
taxes or filing of taxes based on the income tax versus an
excise tax, which is just a consumption tax within itself, have
you?
Mr. WALKER. No, sir, we have not.
Mr. COLLINS. Well, I think it would be a good idea to look
in that direction, because you talk about other industrialized
nations, many of them have a consumption tax. That is a border
correction provision when it comes to trade in exports and
imports. We don't have that; and that is something that I am
very interested in, and a lot of other people are very
interested in, particularly a lot of people in Georgia. I think
it is a good idea and a good opportunity for us to begin to
look in that direction.
I know one of our colleagues from Georgia has introduced
the fair tax, which is a national retail sales tax measure, for
that purpose.
If we can find that we have better compliance there, better
collection, less complexity, less cost in compliance, then that
is something that we should be looking at and reviewing. I
think it is something that you should take a real strong look
at and do some study in.
Mr. WALKER. I think it is not only relevant to look at it
from the standpoint of domestically, but also, what are the
experiences of other countries as well, because others have
done more of this than we have.
Mr. COLLINS. Well, they have. Our Tax Code is a large
portion of the overall cost of producing in this country; it is
built into the cost of production. Whether you are producing a
good or delivering a service, the Tax Code is built into that
cost, and if you have no way to correct it, if you export it,
or you have no tax that you are levying on something that is
being imported, it is very difficult for the products that the
American worker is producing or the service they are delivering
to compete in the world market.
So, I think it is of utmost importance that you and others
and the IRS review how the consumption tax compares to the
income tax, and how it would better our position as a workforce
in the marketplace.
Mr. WALKER. I believe we have done some related work.
Mr. BROSTEK. We have looked at various issues involved in
implementing a consumption tax; a value-added tax, in
particular, is what we looked at. We can send you a list of the
reports we did there. Those reports, as I recall, didn't look
at the amount of evasion that might occur in a consumption tax
versus an income tax.
[The information follows:]
GGD-98-37; Tax Administration: Potential Impact of Alternative
Taxes on Taxpayers and Administrators
GGD-93-55; Tax Policy: Implications of Replacing the Corporate
Income Tax With a Consumption Tax
GGD-93-78; Tax Policy: Value-Added Tax: Administrative Costs Vary
With Complexity and Number of Businesses
GGD-90-50; Tax Policy: State Tax Officials Have Concerns About a
Federal Consumption Tax
GGD-89-125BR; Tax Policy: Value Added Tax Issues for U.S.
Policymakers
GGD-89-87; Tax Policy: Tax-Credit and Subtraction Methods of
Calculating a Value-Added Tax
Mr. COLLINS. Well, the implementation, cost of compliance
of what we have today is another thing, and also, errors in
compliance is another. So, I think it would be a good work for
you if you would do some studying and reporting in the overall
area of how we transfer from this, what the results would be to
go to a consumption tax.
Mr. WALKER. We will see what we have done and speak with
you, Mr. Collins. I will say that, as you pointed out before,
the primary responsibility for tax policy and the primary
responsibility for tax administration, at least in the
executive branch, would presumably be the Department of
Treasury and the IRS respectively. They should be looking at
these issues, too, but we are happy to look at what we have
done and what the gaps might be and what might make sense in
that regard.
Mr. COLLINS. My response to that, David, is don't pass the
buck.
Mr. WALKER. Oh, I am not. I didn't say I was. I just said
that I think other people should be working here, too.
Mr. COLLINS. You are here in front of me, and I am
suggesting that you do it, sir.
Mr. WALKER. I hear you, Mr. Collins.
Mr. SHAW. Mr. Pomeroy.
Mr. POMEROY. Thank you. Mr. Walker, it is good to see you
again. It seems to me like this is a room, the Committee on
Ways and Means room, where we hear an awful lot about tax
simplification except when we mark up a major tax bill. Seems
there that we are much more interested in getting in every
ideological, partisan, or special interest giveaway that might
be in the minds of the Majority, and the end is a Tax Code
that, far from being simpler, is even more complex.
We passed a couple lollapalooza tax bills in the last few
years. In your opinion, have we made the Tax Code simpler or
more complex by the addition of the tax reforms of the 2001 and
2003 packages?
Mr. WALKER. Without making a judgment of those two
packages, let me just say, Mr. Pomeroy, that I believe that
there have been problems for years, and it spans both parties.
I believe that our tax system is overly complex, and we have a
long way to go in really and truly simplifying it. We have not
helped a lot lately, but it is a bipartisan problem.
Mr. POMEROY. I will certainly acknowledge that the
majorities of either party have had the same tendency. It just
happens that the Majority at the present time is on the other
side of the aisle.
I gleaned from your parsed answer that we have not made
things easier. We have made the Tax Code more complex. A
consumption tax is pretty simple. It is also pretty regressive.
Generally speaking, under a consumption tax format as opposed
to the present array of revenue provisions in our Tax Code, you
would move toward a system where the wealthiest would pay even
less, and everyone else would pay more. Is that generally how--
--
Mr. WALKER. Well, it depends on how the consumption tax is
designed. Obviously there are ways to design a consumption tax
where basic essentials could be exempt from that consumption
tax. I think one of the things we have to keep in mind is not
only what is administratable and what is equitable and the fact
that we have--how does our system promote savings, because with
savings you get investment, with investment you get improved
productivity, with improved productivity you get more economic
growth, with that you get better quality of life.
I would respectfully suggest we have a problem now because
our system is not promoting savings. In many cases you have
people with significant net worth and significant assets that
are consuming a lot, but may not be earning a lot of taxable
income. So, it doesn't necessarily have to be regressive if you
take steps to exempt certain types of things that would
otherwise bear a greater burden on lower-income individuals.
Mr. POMEROY. I believe a fair reflection of consumption-
based systems globally would in the end find them more
regressive than progressive.
Let's look at the issue before us, which is where the money
is that we might collect, and I am particularly interested in
your thoughts as a former accountant, major accounting firm. A
friend of mine who was serving as a partner in one of the major
accounting firms expressed privately to me his discomfort with
a new realm of professional responsibility, the marketing of
tax shelter schemes. It was all--he felt like a life insurance
salesmen, not to make that--that was too pejorative. He felt
like a salesman in terms of going out to market stuff. He views
the accountants in providing services needed to help companies
with complex financial matters, not hawking tax avoidance
schemes of questionable merit.
Now recently we heard from some of your--by the way, I
think your tax staff is excellent in many different areas where
I have heard them testify. I heard testimony about the tax
avoidance schemes and marketed by major accounting firms in the
areas of avoiding unemployment tax, shifting the status of
permanent employees to temporary employees and moving them back
and forth for purposes of bringing it down. Unethical, indeed
illegal under State laws, but these are the schemes being
marketed by, again, major, well-identified, highly credible
firms. There are other examples of where tax shelters of a
highly questionable nature have been marketed aggressively by
these accounting firms.
Have you watched this phenomenon, and, if so, do you
believe that this might be an area where the IRS ought to
significantly enhance its enforcement activities?
Mr. WALKER. We have done some monitoring and do have
concern about tax shelters and tax schemes. This is an example
of what I said before, where there is an attempt to engineer
through law and through financial transactions things such that
they are arguably legal and--but they are on the edge. There
are a variety of dimensions here. One dimension is that under
the new independence rules that we promulgated and also that
are in Sarbanes-Oxley, there are restrictions on what kind of
tax services CPAs can provide that deal with, in effect,
structured transactions.
I think it is important to note that CPAs aren't the only
ones doing this. There are a variety of professionals,
including lawyers, investment bankers, and a variety of others
are marketing these types of schemes. So, this is not something
that is just an issue with regard to CPAs.
Mr. POMEROY. I noted in the last GAO testimony they did not
name names, but I want anyone paying attention to this
representing a well-established name carrying high public trust
and goodwill for which they have invested an awful lot of money
and marketing that we ought to be coming to a point where we
are not going to take this anymore. We will name names. The
quickest way for you to tarnish the reputation of fine firms is
to engage in this tawdry marketing of inappropriate tax
shelters and schemes. I really do think that ought to be an
area beyond the IRS even where the GAO and Congress can play a
useful role.
Mr. WALKER. Having practiced public accounting in the
private sector for a number of years, there are firms, and they
aren't CPA firms, I might add, that are in the business of
marketing tax schemes and tax shelters where they will take a
percentage of the savings achieved through the scheme. They are
not typically CPA firms. So, I think it is important to note.
I will tell you this: I am a CPA. I recently met with
leaders in the profession to say that while the profession took
a recent hit on the auditing side, that they better be
concerned about the tax side, too, because there is growing
concern that there are a lot of these schemes and shelters that
are being entered into that are arguably legal, but they don't
pass a straight face test. I think this is a matter of
reputational risk for a variety of parties.
Mr. POMEROY. The Chairman has been very indulgent with my
time. I would close by saying I would like to work with you on
fashioning a request for a GAO study. The one on unemployment
was just targeted to that area. I would like a broad review of
the promotion and marketing of these kinds of schemes, study by
the GAO. It might give both guidance to Congress and the IRS in
terms of an enforcement response. Thank you.
Mr. SHAW. I think this concludes the questioning by the
Members of Mr. Walker. I want to be able to set the record
straight because there has been a great deal of discussion by
Members up here as to how much money we are spending for
enforcement of the EITC. It has been pointed out to me that the
total fiscal year 2004 budget request contains $3.976 billion
for general tax law enforcement and only $251 million for EITC
compliance. This means that only 6 percent of the total
enforcement budget is being spent for EITC compliance,
according to the figures that are before me. So, I don't think
there is this lopsided going after low-income people. I think
clearly it would show--assuming these figures are correct, I
think clearly it would show that we are trying to go where the
money is and where the fraud is. Mr. Walker, you might comment
on that briefly, and then we are going to move.
Mr. WALKER. I don't have the numbers in front of me. I will
say this: That I think one of the things we have to do is to
reinforce that the IRS needs to update, and they are updating
their methodologies to try to ascertain where the compliance
problems are. After they do that, we then need to look at to
what extent is it because of its complexity, and to what extent
is it because of administrative or other issues. Then they need
to reallocate their resources on a more informed basis to where
they are likely to get the best return for the taxpayer. I
think that is a principle that is just a basic management 101
that needs to be followed.
Mr. SHAW. Many people don't really realize it, but in some
of these large corporations IRS agents actually have offices
within the corporation to perform audits on a daily basis. I
was speaking to one of the tax staff of one of the large
corporations last night, and he was telling me that 10,000 man-
hours a year are spent just on trying to keep things together
as far as the income tax return and the reporting process. So,
it is an expensive proposition for business, and also I think
it shows that the IRS is trying to do its best, although not
perfect, as none of us are, I think, that----
Mr. WALKER. I wouldn't want my remarks to in any way, shape
or form be viewed as negative against the dedicated public
servants of the IRS who are trying to do their best. I also
will acknowledge that the current Commissioner, Mark Everson,
who I know well and have worked with in his prior capacities,
is trying to place additional time and attention in some of the
areas that we have talked about today. There is no question
about that.
Mr. POMEROY. Would you yield just for a moment?
Mr. SHAW. Very, very quickly. We really have to move on.
Mr. POMEROY. Not to quibble with what you said, but maybe
give the other side of the coin in terms of additional revenue
sought this year, about $200 million additional noncompliance
money sought, half for the EITC noncompliance issues, half for
other noncompliance, and that does not comport with lost
revenue. That would appear like we are really loading up the
audit and compliance enforcement activities on the low end and
not making a similar effort on other areas of taxed on
compliance.
Mr. CARDIN. I would ask unanimous consent that we could put
in the record at this point charts that are attached to Len
Burman's testimony that deals with the outlays for enforcement
of EITC and all taxes for fiscal year 1997 through 2004, and
also a chart showing the amount of taxes that are not collected
versus the individual corporate and EITC.
Mr. SHAW. Without objection.
Dave, it is nice as always to see you. You have been a good
friend of this Committee. You can see that you have earned a
great deal of respect from both sides of the aisle.
Mr. WALKER. Thank you, Mr. Chairman.
[Questions submitted from Mr. Herger to Mr. Walker, and his
responses follow:]
Questions from Representative Wally Herger to the Honorable David M.
Walker
Question: The 1996 welfare reform law included provisions to
prohibit felons and probation and parole violators from receiving SSI
and TANF benefits. What are the results of this provision? Does
Congress need to look at ways to strengthen it? If so, how?
Answer: As you know, the Personal Responsibility and Work
Opportunity Reconciliation Act 1996 (PRWORA) amended the authorizing
language in statutes governing the Supplemental Security Income (SSI),
Temporary Assistance to Needy Families (TANF), Food Stamp, and housing
assistance programs by prohibiting fugitive felons and probation and
parole violators from receiving benefits under these programs. In a
September 2002 report, we found while there has been some progress in
implementing the provisions in the welfare reform law, we also found
that the law has not been implemented aggressively in all
programs.1 In particular, the Department of Housing and
Urban Development (HUD) has done little to ensure that fugitive felons
do not receive housing assistance. We made a number of recommendations
to the Secretaries of HUD, Health and Human Services (HHS), and
Agriculture aimed at strengthening the oversight and implementation of
the fugitive felon provisions. At this time, we do not believe that the
Congress needs to take additional steps to improve the fugitive felon
provisions pertaining to the SSI and TANF programs.
---------------------------------------------------------------------------
\1\ See U.S. General Accounting Office, Welfare Reform:
Implementation of Fugitive Felon Provisions Should Be Strengthened,
GAO-02-716 (Washington, D.C.: Sept. 25, 2002).
---------------------------------------------------------------------------
Question: Earlier this year GAO added Federal disability programs
to its list at high risk of waste, fraud, and abuse. This includes the
Supplemental Security Income (SSI) and Social Security Disability
Insurance (DI) programs. Why were these programs added to the high-risk
list? How much is fraud in these programs costing the taxpayers each
year? Do you have specific recommendations for addressing this problem?
Answer: As you know, GAO's high-risk program has increasingly
focused on those major programs and operations that need urgent
attention and transformation in order to ensure that our national
government functions in the most economical, efficient, and effective
manner possible. As such, we added modernizing federal disability
programs to our high-risk list because the existing programs--including
SSA's DI and SSI Programs and the disability programs administered by
the Department of Veterans Affairs--are grounded in outmoded concepts
of disability. In particular, these programs are not in line with the
current status of science, medicine, technology, law, and labor market
conditions. Moreover, the programs have been growing and are poised to
grow even more rapidly as more baby boomers reach their disability
prone years. This growth is taking place despite greater opportunities
for people with disabilities to work and is occurring at the same time
that agencies such as SSA are struggling to provide timely and
consistent disability decisions. While SSA is taking some actions to
address these problems in the short term, longer-term solutions are
likely to require fundamental changes including legislative action.
In prior work, we have noted a number of actions that SSA should
take to modernize its disability programs. GAO believes that SSA should
take the lead in examining the fundamental causes of program problems,
such as outmoded disability criteria. It should also seek both
management and legislative solutions as appropriate to bring their
programs in line with the current status of science, medicine,
technology, law, and labor market conditions. At the same time, SSA
should continue to develop and implement strategies for improving the
accuracy, timeliness, and consistency of disability decisionmaking.
Further, the agency should pursue more effective quality assurance
systems.
While we are not able to accurately estimate the overall extent of
fraud in the disability programs at this time, we are initiating work
that will examine overpayments and other potential problems in SSA's DI
program.
Question: In a September 2002 report, GAO indicated that
information was ``not available'' regarding erroneous payments reported
by the TANF program in 2000. Such information was available from other
needs-based Federal programs such as SSI, Food Stamps, and housing
assistance. Reported erroneous payments in those three programs totaled
nearly $4 billion. Unfortunately, it just doesn't make sense that there
wouldn't have been any erroneous payments in the TANF program. Since
the report came out last year, is there any better information about
erroneous payments in the TANF program? Are states actively working to
detect and prevent fraud and abuse in their TANF programs? Is there
anything we can do to help them?
Answer: Data on erroneous payments were available under the TANF
program's predecessor--Aid to Families with Dependent Children--through
the Federally required quality control system. That quality control
system is no longer required under TANF. However, HHS is taking steps
to develop an error rate for the program as requested by the Office of
Management and Budget (OMB). OMB Circular No. A-11 requests information
on erroneous payments for selected agency programs and specifies
reporting requirements for the programs where erroneous payment data
currently are not available. HHS recently testified that it would seek
legislation to authorize the collection of data necessary for
determining an error rate in TANF.
GAO is beginning a study on state and federal internal controls in
place to address fraud and improper payments for Administration for
Children and Families (ACF) programs. This study is being done for the
Chairman of the Senate Committee on Finance. This work will provide a
broad overview of control activities in place for all ACF programs, as
well as more in-depth information for selected ACF programs, which may
include the TANF program.
Question: Mike Rice of the United Council on Welfare Fraud said
that a survey they conducted found that ``40 of 42 fraud directors
polled were of the opinion that child care fraud posed a problem in
their states.'' Further, his group ``recommends that, due to the
substantial increase in child care fraud funding made available to the
states and the growing number of instances of fraud in Child Care
Assistance,'' various measures should be taken to better prevent fraud
in this area. Have you done any work that would provide background for
us on child care fraud and abuse issues? If not, would you be willing
to explore such issues in cooperation with us?
Answer: While GAO has not done any work on fraud related to the
Child Care and Development Block Grant, it is considering addressing
the issue as part of the ongoing study--noted above--on state and
Federal controls to address improper payments in ACF programs. We would
also be happy to work with you to identify any additional work that
would meet your needs. It is also important to note that OMB has
requested HHS to develop information on erroneous payments for the
Child Care and Development Fund, along with the TANF program and other
ACF programs. In response, HHS has said it is considering how to
develop an error rate for this program in a cost-efficient manner.
Question: The Social Security Administration recently began a pilot
project requiring photo identification for individuals applying for
disability benefits. Do you know why that was initiated? Do other
benefit programs (i.e. cash welfare/TANF, child care, foster care and
adoption payments, and unemployment benefits within Ways and Means
jurisdiction) use photo identification to confirm that people claiming
benefits are who they say they are? Should they?
Answer: We are aware that SSA is developing a photographic
identification pilot as part of its broader efforts to improve SSI
program integrity. However, we are not currently aware of similar steps
being taken in other benefit programs. We would be happy to work with
this subcommittee to help determine the scope and nature of such
procedures in other programs, and whether such tools might help improve
the integrity of other benefit programs.
Question: Current law provides for automatic offsets of Federal
income tax refunds to cover child support debts, among other purposes.
It has been suggested to the Committee that it makes sense to also
allow offsets of such refunds to recover welfare and unemployment
benefit overpayments. What are your thoughts on this?
Answer: In a recent report, we noted that the Social Security
Administration began using tax refund offsets in 1998 to recover
outstanding debt in the SSI program.2 At the end of calendar
year 2001, this initiative has yielded $221 million in additional
overpayment recoveries for the agency. While we have not specifically
recommended that the tax refund offset be used in other programs such
as welfare or unemployment insurance, our work suggests that
administrative offsets can be a useful tool to recover overpayments and
strengthen the integrity of benefit programs.
---------------------------------------------------------------------------
\2\ See U.S. General Accounting Office [Supplemental Security
Income: Progress Made in Detecting and Recovering Overpayments, But
Management Attention Should Continue,] GAO-02-849 (Washington, D.C.:
Sept. 16, 2002)
---------------------------------------------------------------------------
Mr. SHAW. The next two panels have agreed to combine their
testimony. I have been told that there is going to be a vote on
the floor. There will probably be a series of votes at about
1:00 p.m. I will try as hard as I can to complete this hearing
before those votes because there will be a substantial number
of votes, and I would like for the Committee to be able to move
on.
So, first of all, we have Mr. Joseph R. Brimacombe, Deputy
Director, Compliance Policy, Small Business Self-Employed
Division, IRS, New Carrollton, Maryland; and the Honorable
James Huse, who is the Inspector General of the SSA. We also
have Bill Jordan, who is the Senior Counsel to the Assistant
Attorney General for the Civil Division of the Department of
Justice. All of these people are the frontline people that Mr.
Rangel said he wanted to hear from.
We also have Len Burman, who is a Senior Fellow at the
Urban Institute; Hon. James Moorman, President and Chief
Executive Officer of the Taxpayers Against Fraud; and Michael
Rice, who is the President of the United Council on Welfare
Fraud (UCOWF), from Rochester, New York.
We welcome all of you gentlemen. We have all of your
written testimony, which will become a part of the record.
Because of the length of this hearing, any way that you might
be able to summarize would be appreciated. As I said, your
entire statement will be made a part of the record. Thanks for
your patience.
I think there is probably a little more interest than we
thought with regard to the first witness, and, therefore, we
ran a little longer than usual.
Mr. Brimacombe, I hope I am pronouncing your name
correctly. You are going to have to speak directly in the
mikes. As Chairman Thomas says, this is 1950s technology, and
we really need to update it, and some of these mikes are
beginning to break down up here, so I hope you can hear me.
STATEMENT OF JOSEPH R. BRIMACOMBE, DEPUTY DIRECTOR, COMPLIANCE
POLICY, SMALL BUSINESS AND SELF EMPLOYED OPERATING DIVISION,
INTERNAL REVENUE SERVICE, NEW CARROLLTON, MARYLAND
Mr. BRIMACOMBE. Mr. Chairman and Members of the Committee,
my name is Joseph Brimacombe, Deputy Director of Compliance
Policy, Small Business and Self Employed Operating Division. I
appreciate the opportunity to describe recent compliance trends
and issues in highway-related excise taxes and to highlight IRS
activities to address them.
The IRS is responsible for the administration of more than
40 separate excise taxes including motor fuel. Motor fuel
excise taxes are an important source of Federal and State
revenues and finance a large share of the improvement to the
Nation's transportation system. Motor fuel, which includes
gasoline, diesel fuel, kerosene and special fuels, accounts for
more than 90 percent of trust fund receipts. Tax receipts
deposited in the Highway Trust Fund account totaled $34.2
billion in fiscal year 2002.
Increased excise tax rates at the Federal and State levels
have created incentives for tax evasion. The IRS uses its
enforcement power to collect the taxes due; however, we simply
do not have the resources to attack every case of
noncompliance.
The IRS currently has 140 employees to monitor 1,400
terminals, all fuel wholesalers and retail outlets and U.S.
border crossings. They also conduct periodic inspection of on
road vehicles.
The IRS has identified and is addressing critical areas of
noncompliance. The first problem is the continued misuse of
dyed diesel fuel. The IRS has assessed over 900 penalties
totaling over $1.8 million since October 1, 2002 for this
misuse.
Another compliance challenge is the smuggling of motor
fuel. This occurs at the border crossing at ports of entry for
ocean-going vessels.
A further critical compliance problem is the use of altered
fuels through cocktailing. This evasion technique increases
profits by extending the taxable fuel with used motor oil and
other petroleum-based products.
The diversion of aviation jet fuel to highway use to avoid
motor fuel taxes is an ongoing compliance problem. Exempt
removal of undyed jet fuel from the rack creates tax evasion
incentives and opportunities that result in loss to the Federal
and State aviation taxes as well as diesel fuel excise taxes.
Last, the Committee asked that we address the mobile
machinery exception from the definition of a highway vehicle.
In creating the Highway Trust Fund, the Congress expressed its
intention that the highway program be funded on a pay-as-you-go
basis, apportioning the cost of the highway program among those
vehicles that use the highway. The mobile machinery exception
was intended to apply to vehicles that make minimum use of the
highways and serve solely as a permanent mount for job site
machinery, such as a job site crane. The Department of Treasury
has delayed issuance of regulations pending congressional
action and is working with Congress to develop a statutory
definition of highway vehicles.
In the last decade there have been four major excise tax
compliance success stories. The first of these is moving the
point of taxation for motor fuel to the terminal rack. Second
is requiring home heating oil and other diesel products to be
dyed red if sold tax free. The third is the taxation of undyed
kerosene at the same basis as diesel fuel; and finally, the
development and implementation of the excise files information
retrieval system.
In conclusion, Mr. Chairman, I believe that we are making
progress in our goals to ensure that the Federal motor fuel
taxes are reported, paid, collected, and made available to the
highway trust fund. We are using technology in the
administration of the excise tax program more efficiently and
effectively than ever. I want to thank you for your continued
support.
[The prepared statement of Mr. Brimacombe follows:]
Statement of Joseph R. Brimacombe, Deputy Director, Compliance Policy,
Small Business and Self Employed Operating Division, Internal Revenue
Service, New Carrolton, Maryland
Mr. Chairman and Members of the Committee, I appreciate the
opportunity to describe recent compliance trends and issues in highway-
related excise taxes and to highlight Internal Revenue Service
activities to address these matters.
Background
The Internal Revenue Service is responsible for administration of
more than 40 separate excise taxes, including motor fuel. Motor fuel
excise taxes are an important source of federal and state revenues and
finance a large share of improvements to the nation's transportation
system. Six separate excise taxes are levied to finance the Federal
Highway Trust Fund program. Three of these taxes are imposed on highway
motor fuels. The remaining three are a retail sales tax on heavy
highway vehicles, a manufacturers' excise tax on heavy vehicle tires,
and an annual use tax on heavy vehicles.
Motor fuel, which includes gasoline, diesel fuel, kerosene and
special fuels, account for more than 90 percent of trust fund receipts.
It is taxed when it moves out of the bulk transportation and storage
network--a refinery, pipeline, barge, or terminal and into tanker
trucks at the terminal rack. At this point, generally all gasoline is
taxed and diesel fuel is either taxed or dyed if it is intended for
nontaxable purposes. The owner of the fuel as it passes the terminal
rack--the position holder--is liable for payment of the tax. All
persons owning taxable motor fuels before tax is paid must be
registered with the IRS. Additionally, terminal operators must be
registered with the IRS. This policy of taxing fuel at the terminal
rack is an important part of our overall compliance system.
One major fuel component is not subject to the tax at the rack
system. Most aviation jet fuel is a special grade of kerosene. The
Internal Revenue Code allows undyed aviation grade kerosene (jet fuel)
to be removed from terminals without payment of the Highway Trust Fund
tax if the Secretary determines that the kerosene is destined for use
as a fuel in an aircraft. Under Treasury regulations, this exemption is
generally allowed if the buyer of the jet fuel at the terminal rack
certifies, in writing, that the jet fuel will be used as a fuel in an
aircraft. If the jet fuel is later diverted from aircraft use, the
seller of the jet fuel at that time is liable for the Highway Trust
Fund tax.
Taxpayers report their excise tax liability quarterly on Form 720,
which is due one month following the close of the quarter. On the Form
720, taxpayers itemize their liability; for example, reporting the
number of gallons of each type of fuel and the tax due, and claims of
nontaxable use of the fuel. Any balance due or overpayment is settled
at the time the Form 720 is filed. Highway motor fuels are taxed as
follows: 1) gasoline at a rate of 18.4 cents per gallon, 2) diesel fuel
and kerosene at 24.4 cents per gallon; and 3) special motor fuels, such
as propane, at various rates up to 18.4 cents per gallon. Gasohol, a
mixture of ethanol and gasoline, is taxed at rates ranging from 13.2 to
15.436 cents per gallon, depending on the concentration of ethanol in
the mixture.
Tax receipts deposited in the Highway Trust Fund Account totaled
$34.2 billion in FY 2002.
Compliance Problems
Maintaining the flow of receipts into the Highway Trust Fund
requires continuing efforts to secure better tax compliance. Federal
and state excise tax rate increases over the years have increased
incentives for tax evasion with the tax exceeding the profit margin
and/or the cost of the product in many instances. The corresponding
ongoing revenue losses are a significant problem for tax administrators
and honest business taxpayers facing competition from tax evaders.
When taxpayers do not voluntarily meet their tax obligations, the
IRS must use its enforcement powers to collect the taxes due. It is not
possible to seek out every case of non-compliance, therefore we must
apply our resources to where non-compliance is greatest while still
maintaining adequate coverage of all other areas.
The IRS has identified, and is addressing, critical areas of excise
tax non-compliance. These include the continued misuse of dyed diesel
fuel, ``bootlegging'' to evade payment of taxes at a higher rate,
``smuggling'' to evade payment of any and all taxes, ``cocktailing'' to
illegally reduce the effective tax rate, and the diversion of aviation
jet fuel to highway use to illegally evade motor fuel taxes. Another
issue that affects the funds flowing into the Highway Trust Fund is the
loss of revenue from taxpayers claiming exemptions from tax for off-
road highway use.
The first of these critical compliance problems is the continued
misuse of dyed diesel fuel despite the numerous legislative and
regulatory steps taken by Federal and State Governments. The IRS
currently has approximately 140 Fuel Compliance Officers (FCOs) to
monitor 1,400 terminals, all fuel wholesalers, thousands of retail
motor fuel outlets, and U.S. border crossings. Additionally, these
personnel are charged with conducting periodic inspections of on-road
vehicles on highways throughout the country.
The FCOs continue to uncover fuel misuse. For example, since the
start of the fiscal year beginning October 1, 2002, the IRS FCOs have
assessed over 900 penalties, totaling over $1.8 million for misuse of
dyed diesel fuels. Over 70% of the penalties involved the misuse of
fuel by taxpayers in the construction and agriculture industries. Both
of these industries are subject to broad-based tax exemptions for non-
highway use of motor fuels thereby presenting opportunities for abuse.
A second significant compliance problem is motor fuel
``bootlegging''. This form of tax evasion occurs when a low tax
jurisdiction is near a high tax jurisdiction and taxpayers scheme to
evade payment of taxes at a higher rate, ``bootlegging'' the fuel from
a lower-taxed rate jurisdiction. It frequently occurs between states--
costing states tax revenues and their share of the Federal Highway
Trust Fund. For example, if the tax rate in Georgia is 7.5 cents,
taxpayers may illegally bootleg the fuel to North Carolina where the
tax rate is 24.2 cents. This difference is huge in an industry where
over 30 million gallons are transacted daily.
A third critical compliance problem is smuggling of motor fuel that
involves the illegal introduction of fuel within the United States to
evade payment of excise taxes. This problem occurs at border crossing
points and ports of entry for ocean-going vessels. There are 55 border
crossing points between Canada and Mexico and more than 9 million
trucks crossing these borders each year. Currently, illegal smuggling
activity can only be detected by conducting border checks. This
includes detaining a truck, reviewing the manifest, extracting a sample
of the cargo, and analyzing the sample to determine if the substance
matches the description on the manifest. The 140 FCOs perform all fuel
compliance activities throughout the country, including periodic border
checks. These border checks are further constrained by potential
disruption of international traffic due to the time required for each
truck inspection under the existing processes. In addition to the
border crossing points, the U.S. Army Corps of Engineers reports that
there are over 300 facilities throughout the U.S., capable of receiving
fuel products from water-borne traffic.
Another critical compliance problem is the use of adulterated fuel
through ``cocktailing'' or blending the product. This tax evasion
technique increases profits by extending diesel fuel with used motor
oil and other distillates including pollutants, cleaning agents, and
unfinished refinery products. This form of tax evasion is attractive
for two reasons. First, the substances used to extend the fuel are
often not regulated; therefore, these quantities are not in any fuel
reporting system. Second, in some cases, the substances are regulated
as waste materials, providing an unscrupulous individual an opportunity
to get paid to dispose of the product(s) and then blend them into
gasoline and get paid again. This tax evasion technique results in an
ongoing revenue loss and also may be dangerous to the public when
hazardous waste is blended with taxable fuels.
The diversion of aviation jet fuel to highway use to avoid motor
fuel taxes is an ongoing compliance problem. Exempt removal of undyed
jet fuel from the rack creates tax evasion incentives and opportunities
that result in loss of federal and state aviation taxes, as well as
diesel fuel excise taxes, because the ``jet'' fuel can readily be used
in on-road diesel trucks.
Lastly, the Committee has asked that we address the issue
concerning the Mobile Machinery Exception from the definition of
highway vehicle and how funds are diverted from the Highway Trust Fund.
In creating the Highway Trust Fund, the Congress expressed its
intention that the highway program be funded on a pay-as-you-go basis,
apportioning the cost of the highway program among those vehicles that
use the highway. Thus, the taxes on fuel, the sale of heavy vehicles
and tires, and heavy vehicle use are the sources of revenue for the
Highway Trust Fund because these taxes apply to ``vehicles used on, or
suitable for use on, highways.'' The Treasury Department has delayed
issuance of regulations regarding mobile machinery pending
congressional action and is working with Congress to develop a
statutory definition of a highway vehicle as part of the
reauthorization of the Highway Trust Fund.
Compliance Strategies and Successes:
In the last decade there have been four major Excise Tax compliance
success stories. First, moving the point of taxation for motor fuels to
the terminal rack significantly reduced opportunities for tax evasion,
some of which had been carried out on a multi-million dollar scale by
sophisticated criminal organizations. Second, requiring home heating
oil and other diesel products to be dyed red if sold tax-free
eliminated another key source of evasion. The third has been the
taxation of undyed kerosene on the same basis as the regular diesel
fuel with which it is often mixed. The fourth, and most recent, was the
implementation of the Excise Summary Terminal Activity Reporting System
(ExSTARS) to collect and share information about the movement of all
fuel and related products throughout the country.
What is ExSTARS?
?Matching information received from employers, financial
institutions, and other businesses with information reported by
taxpayers has long been recognized as one of the most powerful tools
that the IRS has used to ensure income tax compliance. In fact, third
parties report approximately 80 percent of the personal income received
by taxpayers. Through its document matching programs, the IRS is able
to use this data as an effective compliance tool.
Recognizing that compliance with the excise tax laws of this
country would be greatly enhanced by a similarly constructed excise
information matching system, the Congress, in response to industry
concerns, mandated the development of such a system in the 1990s.
ExSTARS is the information reporting system created as a result of this
congressional mandate that enables the IRS to track all fuel
transactions that occur within the fuel industry's bulk shipping and
storage system--refineries, pipelines, barges, and terminals. It
provides tracking capabilities of fuel from the pipeline system to the
point of taxation for the Federal Excise Tax at the terminal rack. This
information will then be matched by the IRS to fuel sales transactions
reported by the terminals and to verify the tax liabilities reported on
the quarterly Forms 720.
The design, development, and implementation of ExSTARS is a tribute
to the working collaboration between the IRS, contractors, Federal
Highway Administration, state tax administrators, and industry
stakeholders over more than a five-year time period. This success story
was a direct result of the sustained investment provided by the
Congress through the Transportation Equity Act for the 21st Century.
ExSTARS was initially implemented in April 2001 and imposed
information reporting requirements on the 1,440 terminals registered to
transact fuel sales in this country as well as the pipelines and barge
carriers that transport the fuel from the refineries to the terminals.
The IRS is currently receiving information reports on 10 to 14 million
fuel transactions monthly. Approximately 60% of these are filed
electronically. It is both impractical and cost prohibitive to work
with the remaining 40% that are filed on paper documents. The
implementation of ExSTARS caused the petroleum industry and the related
petroleum product carriers to incur significant new reporting
requirements. During this initial period of implementation, the IRS has
worked closely with the affected companies to ensure that the
information we receive is accurate. Some companies encountered problems
in meeting the filing requirements to ensure accuracy. Therefore, the
IRS has worked with the industry to extend filing requirements. This
extension was provided to facilitate electronic filing and allow each
impacted taxpayer the opportunity to be compliant with electronic data
information (EDI) filing requirements.
Other Key Internal Revenue Service Compliance Strategies
While ExSTARS will enhance compliance efforts, including misuse of
dyed fuel--there will remain those instances of willful non-compliance
that will continue to require IRS intervention. In several of these
areas, the IRS is developing sophisticated and state-of-the-art
technologies to address excise tax evasion techniques such as
smuggling, bootlegging, and cocktailing.
For example, the IRS has developed a ``fuel fingerprinting''
technology to combat fuel tax evasion occurring ``below the rack''--
particularly bootlegging, smuggling, and adulterated fuel through
``cocktailing'' or blending the product. Fuel fingerprinting is a
technique that examines the ``chemical fingerprint'' of samples taken
from retail stations for adulteration or for a mismatch with samples
taken from the terminal racks that normally supply those stations. This
technology allows for the detection of untaxed kerosene intended to be
used as aviation fuel, ``transmix'' taken out of pipelines, waste
vegetable oils, used dry-cleaning fluids, and other chemicals that may
be mixed with diesel fuel and find their way into the tanks of trucks
on the road. Fuel fingerprinting provides a more efficient and
comprehensive method to monitor compliance compared to traditional
audit techniques.
In another example, the IRS is also developing state-of-the-art
technology to identify smuggling of motor fuel at U.S. border points of
entry and ocean-going vessels and barge traffic over intercoastal
waterways. Under existing processes, illegal smuggling activity can
only be detected by physically detaining a truck at the border,
reviewing the manifest, extracting a sample from the propulsion tank,
and analyzing the sample to determine if the substance matches the
description on the manifest. The IRS is working with the Department of
Energy's Pacific Northwest National Laboratory (PNNL) to design,
develop, and test a new technology called an Acoustical Identification
Device (AID) that uses hand-held sonar technology to identify the
liquid contents of sealed containers, such as tanker trucks. Concurrent
with this effort, PNNL is working with the United States Customs
Service to use the same technology for other purposes, such as drug
interdiction and border inspections for security purposes.
The IRS has initiated efforts in response to emerging findings and
concerns regarding the exempt removal of undyed jet fuel from the rack
for use in on-road diesel trucks. Through use of its fuel
fingerprinting technology, the IRS has identified instances of jet fuel
being sold as diesel fuel in retail outlets and in highway diesel
trucks.
Additionally, in recent years, the IRS has expanded its compliance
efforts by making the Form 637 Registration Program--that allows a
taxpayer to engage in tax-free transactions--the cornerstone and first
step in compliance. Fuel is taxed when it moves out of the bulk
transportation and storage network--a refinery, pipeline, barge, or
terminal--and into tanker trucks at the terminal rack. The IRS conducts
periodic compliance checks with these taxpayers to ensure that the
taxes are collected consistent with the statutes and that, any and all,
transactions involving a tax exemption are accounted for. By
strengthening this up-front compliance activity, downstream compliance
problems can be minimized.
Surface Transportation Reauthorization Proposal
The Administrations surface transportation reauthorization
proposal, the Safe, Accountable, Flexible, and Efficient Transportation
Equity Act of 2003 (SAFETEA), was submitted to the Congress in May 2003
and contains a number of modifications to the collection highway-
related excise taxes. These proposals would provide more resources to a
collaborative government-wide enforcement effort at Federal, state, and
local levels. In addition, more than $200 million would be directed to
highway use tax evasion projects over the six-year reauthorization
period.
Conclusion
Mr. Chairman, in conclusion, I believe that we are making progress
in our goals to ensure that federal motor fuels taxes are reported,
paid, collected, and made available to the Highway Trust Fund. We are
using technology in the administration of the excise tax program more
efficiently and effectively than ever before.
The progress we have made to date is due in no small measure to
your continued leadership, guidance, and active support of our Excise
Tax Programs. We are pleased to report the successes described here
today, and I thank you for your continued support of our efforts to
address and eliminate noncompliance with federal excise tax
requirements.
Mr. SHAW. Thank you, sir. Mr. Huse.
STATEMENT OF THE HONORABLE JAMES G. HUSE, JR., INSPECTOR
GENERAL, SOCIAL SECURITY ADMINISTRATION
Mr. HUSE. Good afternoon, Mr. Chairman, Mr. Cardin, and
Members of the Committee on Ways and Means. Our efforts to
identify and prevent fraud, waste, and abuse in Social Security
programs are at the core of our mission in the Office of the
Inspector General of Social Security. In the interest of
brevity, I ask that my written testimony be entered into the
record.
Today I would like to focus on my office's efforts to
reduce improper payments in all of Social Security's programs
and spend a moment discussing the provisions of H.R. 743. Our
office aims to not only identify fraudulent and erroneous
payments, but also to prevent such payments from being issued
in the first place. Our audits focus on ways SSA can better
manage its programs in order to realize dollar savings.
Although the Agency has made progress in improving payment
accuracy in recent years, more needs to be done. Considering
the $483 billion volume of benefit payments SSA makes, even the
smallest percentage of fraud, waste, and abuse can result in
the loss of millions of dollars.
In fiscal year 2002, SSA identified and reported $3.6
billion in overpayments in its programs. These statistics
represent only the identified overpayments in these programs.
Although a portion of these overpayments could not be prevented
under current laws and regulations, another portion can be
attributed to fraud, waste, and abuse. The SSA also collects
only a small portion of these overpayments and also has the
authority to waive collections of overpayments under the Social
Security Act. I have provided you additional details on waivers
in my written testimony. Again, I reiterate that because of
these circumstances, prevention is the key.
Our Cooperative Disability Investigations teams have proven
to be an effective tool in fraud prevention, because the teams
prevent payments from ever being made to those who are
undeserving. To further our efforts to assist SSA in preventing
and detecting improper payments, we plan to conduct a
comprehensive review of about 1,500 disabled cases to determine
the appropriateness of the payments to these individuals. This
review should take between 12 and 15 months to complete.
We also have audit work both completed and underway to
address improper payments. In one review, we recommended that
SSA strengthen its controls to prevent SSI payments from being
paid to recipients outside the United States who are ineligible
for payment. We also have work underway to evaluate situations
where recipients repeatedly claim that they did not receive
their monthly payment, and then negotiate both the original and
the replacement checks SSA provides. In one case we
investigated, a woman filed false non-receipt claims in 16 of
19 months for benefits payable to her son. In another
investigation a parent filed false non-receipt claims 14 times
in 30 months.
Our investigators are involved in a nationwide project to
uncover such fraud, and we are also conducting an audit on
SSA's procedures for controlling these double check
negotiations. When these two projects are completed, we will
report on their results to Congress.
We worked closely with you and your staff during the last
legislative session to develop a proposal that provides greater
oversight of representative payees and expands the Title XVI
fugitive felon provisions to the Title II program.
I am pleased that the provisions in H.R. 743 will address
some of the issues we have identified over the years with
respect to both fugitive felons and representative payees. If
enacted, it will provide greater protection to some of the most
vulnerable individuals in our country and enhance SSA's ability
to be a good steward of its programs. It will also allow my
office to ensure fraud, waste, and abuse are minimized.
Mr. Chairman, I would be remiss if I did not briefly
mention Social Security number integrity and our efforts to
protect the number from misuse.
Last week I testified before the Subcommittee on Social
Security on the need for legislation to strengthen protections
for the integrity of the Social Security number, an area where
we have worked with the Subcommittee for a long time. I would
also comment to this Committee that misuse of the Social
Security number--which plays so critical a role in problems
ranging from identity theft to homeland security--remains one
of the key tools for those whose fraudulent acts cause some of
the erroneous payments we are trying to reduce.
With that I will conclude my remarks by saying that we have
worked with the Subcommittee on Social Security of this
Committee a long time to accomplish the goals with fugitive
felons and representative payees. This legislation will give us
some of the key tools we need to do our job well. At this time,
I would be happy to answer any questions the Committee might
have. Thank you.
[The prepared statement of Mr. Huse follows:]
Statement of The Honorable James G. Huse, Jr., Inspector General,
Social Security Administration
Good morning, Chairman Thomas, Ranking Member Rangel, and Members
of the Committee on Ways and Means. Last week, I submitted testimony
for the record to the House Committee on the Budget on our efforts to
identify and prevent fraud, waste, and abuse in the programs that
Social Security administers. Since these issues are at the core of our
mission in the Office of the Inspector General (OIG), I welcome the
opportunity to testify before you today.
I want to first reiterate what I told the Budget Committee last
week: that the prevention of program fraud, waste, and abuse is more
cost-effective and more meaningful because it occurs before benefits
are ever paid. To that end, our office has focused not merely on
identifying erroneous payments, but also preventing such payments from
being issued in the first place. My office endeavors not only to deter
and punish those who would defraud the Social Security Administration
(SSA), but also to find those savings that may be realized through
better management and less waste.
Today's hearing will give me the opportunity to discuss the
fugitive felon, prisoner, and representative payee provisions in H.R.
743, as well as our efforts to improve SSA's payment accuracy and
reduce improper payments in all of SSA's programs. It will also allow
me to discuss how important it is that we all protect the integrity of
the Social Security number (SSN).
First, we must recognize that the Agency has made progress in
improving payment accuracy in recent years as demonstrated by the
removal of the Supplemental Security Income (SSI) program from General
Accounting Office's (GAO) high risk list this year, a place it held
since 1997. SSA has undertaken many projects to identify how it could
do more to reduce improper payments and/or to recover amounts overpaid
due to fraud, waste and abuse. For instance, the Agency has been
working to improve its ability to prevent overpayments by obtaining
beneficiary information from independent sources sooner and/or using
technology more effectively. In this regard, SSA has initiated new
computer matching agreements, obtained on-line access to wage and
income data, and implemented improvements in its debt recovery program.
SSA has also made great progress in reducing benefit payments to
prisoners. SSA's Actuary estimated $3.46 billion in savings for the 7-
year period covering calendar years 1996 through 2001 due to Social
Security Act provisions prohibiting SSI and Old Age, Survivors and
Disability Insurance (OASDI) benefits to prisoners. In addition, we are
currently completing an audit involving SSA's fugitive felon program
that will report on SSA's savings and recoveries since this program's
inception. The preliminary results from our current fugitive audit
found that SSA has saved and/or recovered an estimated total of $79.9
million in SSI funds through its joint effort with OIG to match
fugitive warrant data from Federal, State, and local law enforcement
agencies against SSA's payment records.
Despite significant strides, more needs to be done. In fiscal year
(FY) 2002, SSA issued $483 billion in OASDI and SSI benefit payments to
53.1 million people. Considering the volume and amount of payments SSA
makes each month, even the smallest percentage of fraud, waste, and
abuse can result in the loss of millions of dollars. It can also harm
SSA's stewardship of its programs and weaken America's faith in
Government overall.
In FY 2002, SSA identified and reported $1.6 billion in
overpayments in the OASDI program and $2 billion in overpayments in the
SSI program--a total of $3.6 billion in overpayments. The Agency must
now expend scarce resources to recover these overpayments and return
them to the OASDI Trust Fund and the General Fund. Although a portion
of these overpayments could not be prevented under current legislative
or regulatory requirements, another portion of these overpayments is
attributed to fraud, waste, and abuse. These statistics represent only
the identified instances of overpayments in SSA's program. They do not
represent ``undetected'' overpayments stemming from fraud, waste, and
abuse.
According to SSA, it collected about $1.9 billion in overpayments
in FY 2002 for periods prior to and including FY 2002, but waived about
half a billion dollars in overpayments and deemed a similar figure
uncollectible. (See the charts attached to this testimony.)
By way of definition, SSA has the authority under the Social
Security Act to waive collection of an overpayment. If collection is
waived, the individual is no longer liable for the debt and SSA can not
collect the overpayment amount at a later date. In contrast, SSA may
recover at a later date funds that SSA deemed uncollectible. But if
that person comes back into pay status or other circumstances arise
that indicate the person can repay the debt, SSA can try to recover the
funds. For example, once a debt is determined to be uncollectible, SSA
can still recover the funds through the tax refund offset program with
the Department of the Treasury.
We need to gather additional information about the fraud in SSA's
various programs by quantifying the amount through in-depth audit work
and investigation. To initiate this process, we are going to focus on
SSA's disability programs because GAO designated the modernization of
Federal disability programs as a high risk area and because SSA's
disability programs attract so much fraud and abuse.
We will conduct a comprehensive review in which we will sample and
analyze about 1,500 disabled cases to determine the appropriateness of
the payments to these individuals. This work will focus on four
disability diagnosis codes that our prior audit and investigative work
have shown to be the most problematic. Due to the comprehensive nature
of our planned review and the resources needed to investigate this type
of activity, we expect this study to take between 12 and 15 months to
complete.
In addition to our planned work to quantify the amount of
unidentified improper payments due to fraud, waste, and abuse in SSA's
disability program, our Cooperative Disability Investigations (CDI)
teams--which first opened in FY 1998--are at the forefront of our
efforts to identify and prevent fraud. The CDI teams investigate
suspicious disability claims under the DI and SSI programs. These teams
combine the talents of OIG special agents and personnel from SSA, the
State DDS, and State and local law enforcement. Today, 17 CDI units
have been opened in 16 States and we plan to add CDI units on a year-
to-year basis, depending on availability of funds. In the first six
months of this year, we reported that the CDI units had confirmed 733
fraud cases out of 1,483 referrals, obtained recoveries and restitution
totaling $879,235, and saved the Social Security program over $43
million.
Our work on the audit side has also identified fraud, waste, and
abuse in other areas of SSA's programs. For example, last year we
recommended to SSA that it strengthen its existing controls to prevent
SSI payments from being erroneously paid to recipients who are outside
the United States and therefore ineligible for payment. Our work showed
that SSA's systems generate a foreign address alert for individuals
receiving both SSI and OASDI benefits when the OASDI record shows an
address outside the country. This alert notifies SSA that it needs to
investigate and determine whether the individual is still eligible for
SSI payments. However, we found that if individuals had their payments
direct-deposited to a bank outside the U.S., an alert was not
generated. Although SSA agreed with the intent of our recommendation,
the Agency did not want to implement it until it conducted a cost-
benefit analysis. We continue to urge SSA to implement our
recommendation.
Another area of concern to me is the practice of recipients who
claim repeatedly that they did not receive their monthly payment. They
then negotiate both the original and the duplicate check that is
provided by the Agency. In one case investigated by our office, a woman
filed false non-receipt claims in 16 of 19 months for benefits payable
to her son, an SSI recipient. Sentenced to 5 years probation, she was
ordered to pay restitution of over $7,000 and there were program
savings of $34,000.
In another case, over $13,000 in overpayments appear on two
children's records due to their mother filing false non-receipt claims
14 of 30 months, or 47 percent of the time. Based on these and other
cases, our investigators are involved in a nationwide project to
comprehensively uncover those who abuse the replacement check process.
In addition, we are currently conducting an audit on SSA's procedures
for controlling duplicate SSI checks issued to and cashed by the same
recipient and for recovering overpayments resulting from these double
check negotiations. When these two projects are completed, we will
report on their results. Based on our work, SSA has already revised its
procedures to improve its controls over double check negotiations and
recovery of related overpayments.
Now I would like to turn our attention to the provisions of H.R.
743. We worked closely with your staff during the last legislative
session to develop a proposal that provides greater oversight of
representative payees and expands the Title XVI fugitive felon
provisions to the Title II program.
First, let me address the representative payee provisions. There
are currently about 5.4 million representative payees who manage
benefits for about 7.6 million beneficiaries. I have previously
recounted in testimony before this committee, several instances in
which representative payees misused funds intended for beneficiaries in
their charge. The effect on the lives of the beneficiaries in those
cases was catastrophic.
I applaud H.R. 743's improved oversight provisions, as well as
additional civil and administrative penalties to allow my office to
more effectively combat this problem.
As we have pointed out in audit reports and prior testimony,
legislation is needed to ensure the integrity of the representative
payee process at several stages. This includes a spectrum of activities
ranging from selection, monitoring, and oversight to proper accounting
when funds are misused and measures designed to punish and deter such
misuse. I believe this legislation makes important strides in each of
these areas.
At the outset, closer attention to the initial selection process
can resolve many potential problems before they arise, so it is
critical that SSA more thoroughly screen potential representative
payees. In October 2002, we issued a report that identified 121
individuals serving as representative payees for others whose own SSI
benefits were stopped by SSA because they were fugitive felons or
parole or probation violators. As you know, current SSA policy permits
fugitive felons and parole or probation violators to serve as
representative payees. We also completed an additional audit in March
2003 wherein we quantified the number of representative payees who were
fugitive felons regardless of whether they were receiving SSI payments.
In this audit, we estimated that fugitives would manage approximately
$19 million in Social Security funds each year if SSA does not take
action to replace them as representative payees.
Our work also shows that once an appropriate representative payee
is selected, it becomes incumbent upon SSA to adequately monitor that
individual or organization to ensure that benefits are being used as
intended to aid the beneficiary and that the representative payee
continues to be suitable. We published an audit report entitled
``Nonresponder Representative Payee Alerts for Supplemental Security
Income Recipients'' on September 23, 1999. That report recommended that
SSA develop procedures to redirect benefit checks to field offices and
require representative payees to provide accounting forms before
releasing checks when attempts to obtain required forms have failed.
SSA agreed with this recommendation in principle, but chose not to take
action until the supporting legislation was enacted. This is also the
case with our fugitive representative payee audit recommendations.
Enactment of this legislation will result in SSA's implementation of
some important prior recommendations in this area.
In April 2003, we issued a report on SSA's oversight of
representative payees and concluded that SSA's representative payee
review methodology should be modified to ensure that representative
payees are using Social Security funds only for the benefit of the
vulnerable beneficiaries they represent. We made several
recommendations for SSA to improve its oversight of representative
payees, and the Agency generally agreed with most of them.
Even with improved oversight, there will always be representative
payees unable to resist the temptation to misuse individuals' funds.
When this occurs, SSA should reissue the funds, and the representative
payee who misused the funds should be held liable to repay them.
Unfortunately, under current law, SSA has authority to reissue misused
benefits only if the Agency finds that it has been negligent. This
withholds benefits from those who need and deserve them.
H.R. 743, however, would eliminate the requirement that benefits
can be reissued only upon a finding of SSA's negligence. Instead, the
Agency would be able to re-issue benefits to those who are vulnerable
even absent a finding of negligence. Further, this legislation makes
the representative payee liable for the amount of benefits misused.
Once the beneficiary's needs have been addressed, attention then
turns to punishing and deterring misconduct by representative payees.
We have found the Civil Monetary Penalty (CMP) program to be an
effective tool against fraud in other areas. Unfortunately, as
previously reported to you, we have reviewed potential cases for
enforcement under the CMP program and found that the current CMP
statutes do not adequately address some of the most egregious
situations involving representative payees. To remedy this, we proposed
two amendments to the CMP statutes, both of which are included in H.R.
743.
The first is amending Section 1129 of the Social Security Act to
allow the imposition of CMPs for the willful conversion of a
beneficiary's funds by a representative payee. For example, the
benefits of a disabled child whose mother (as a minor herself) could
not serve as her son's representative payee, were instead paid to the
father. The father, who did not live with the child and the child's
mother, converted more than $10,000 of his child's benefits to his own
use. The U.S. Attorney declined to prosecute the father criminally, and
the case was referred to my office for consideration under the CMP
statutes. Unfortunately, the current CMP statutes do not provide for
penalties to be imposed for conversion of benefits by representative
payees. H.R. 743 provides this much needed authority.
I would now like to turn your attention to the Title II fugitive
provisions included in H.R. 743. We have always believed that criminals
fleeing from justice should not have the support of Federal benefits.
Therefore, we support H.R. 743's expansion of the Title XVI fugitive
felon provisions to the Title II programs. Preliminary results from our
current audit on the SSI program show that there are significant
potential savings if the fugitive prohibition is extended to the Title
II program.
Finally, I would like to discuss briefly the SSN integrity issue
and our efforts to protect the number from misuse. The SSN has grown in
stature to where it is no longer merely a social insurance number, but
an instrument for financial crimes and a potential weakness in homeland
security as well.
In addition to its direct impact on SSA's programs, SSN misuse can
have significant financial implications for the number holder--not to
mention enormous consequences for our Nation and its citizens in the
context of homeland security. The critical role of the SSN in our daily
lives provides a tempting motive for unscrupulous individuals to
fraudulently acquire SSNs and use them for illegal purposes.
Now more than ever, SSA must be particularly cautious in striking a
balance between serving the public and implementing SSN integrity
measures that admittedly delay the processing of SSN applications.
However, we believe the Agency has a duty to the American public to
safeguard the integrity of the enumeration process. Given the magnitude
of SSN misuse, we believe SSA must employ effective front-end controls
in issuing SSNs. Likewise, additional techniques, such as data mining,
biometrics, and enhanced systems controls, are critical in the fight
against SSN misuse. SSA and its OIG have taken steps and continue to be
committed to improve procedures for ensuring SSN integrity, thereby
strengthening our link in the homeland security chain.
These efforts also pay off in increased cost effectiveness. During
questioning at the June 18th hearing of the House Budget Committee,
Comptroller General David Walker cautioned Congress to adopt the
recommendations of the various Offices of the Inspector General and to
hold agencies accountable for not adopting OIG recommendations--
especially those which have not been implemented over time and could
save Federal funds. Twice each year we report to Congress on
recommendations we have made to save money or to deliver Agency
services more effectively. Our semiannual reports are required by
statute to advise you on what SSA has done to put our recommendations
into effect, and what they have left undone or done differently.
The savings we propose year after year represent great sums of
money that could be used better elsewhere, whether within or outside of
Government. We exist not only to capture frauds and cheats, but equally
to find those savings that may be realized through better management
and less waste. Our ability to do all of this is limited only by our
resources, and we return more in savings than we cost in outlays by a
return-on-investment figure most corporations would envy. While we are
currently working to make our internal measurements of our own cost
effectiveness more sophisticated, our best estimate today of our return
on investment is that we save or recover about $8 for every dollar we
are given. Our FY 2002 budget was $83 million, and we saved or
recovered over $647.5 million.
We continue making excellent progress in preventing fraud, waste,
and abuse in SSA's programs, as well as in identifying and recovering
erroneous benefit payments. I am pleased that the provisions in H.R.
743 will address some of the issues we have identified over the years
with respect to fugitives and representative payees. This legislation
will not only provide greater protection to some of the most vulnerable
individuals in our country, but will also enhance SSA's ability to be a
good steward of its programs and allow the OIG to ensure that fraud,
waste and abuse are minimized.
I appreciate this committee's continued interest in improving the
OASDI and SSI programs. We will continue to focus our resources on
preventing and detecting fraud, waste, and abuse.
I would be happy to answer any questions the committee might have.
Thank you.
----------------------------------------------------------------------------------------------------------------
OASDI Overpayments FY 1998 FY 1999 FY 2000 FY 2001 FY 2002
----------------------------------------------------------------------------------------------------------------
Collected $1,103.4 $1,191.3 $1,343.6 $1,121.1 $1,036.1
----------------------------------------------------------------------------------------------------------------
Waived $159.5 $201.8 $233.5 $260.2 $278.0
----------------------------------------------------------------------------------------------------------------
Uncollectible $128.7 $110.5 $120.7 $95.1 $150.7
----------------------------------------------------------------------------------------------------------------
The bar chart shown above--which was provided by SSA--illustrates
the disposition of SSA's OASDI overpayment debt for the past 5 years in
terms of what has been collected (the green bar), what has been waived
(the yellow bar) and what has been terminated as uncollectible (the red
bar).
Collections peaked in FY 2000 at $1.34 billion. However, they
decreased the last 2 years, and collections were only a little over $1
billion dollars in FY 2002.
This chart shows that if SSA were to collect just 10 percent of the
OASDI funds it waived or wrote off as uncollectible for the last 5
years, the Agency could save about $174 million. (Breakdown: If SSA
collected 10 percent of the funds it waived, savings would be $113.3
million. If SSA collected 10 percent of the funds it deemed
uncollectible, savings would be $60.6 million).
The chart also shows the savings if SSA collected 30 percent or 50
percent of the erroneous payments it waived or wrote off over the last
5 years (from 1998 to 2002).
----------------------------------------------------------------------------------------------------------------
SSI Debt FY 1998 FY 1999 FY 2000 FY 2001 FY 2002
----------------------------------------------------------------------------------------------------------------
Collected $539.2 $639.9 $701.6 $795.5 $859.7
----------------------------------------------------------------------------------------------------------------
Waived $91.1 $145.2 $194.4 $174.3 $196.7
----------------------------------------------------------------------------------------------------------------
Uncollectible $215.2 $349.5 $301.2 $410.6 $326.6
----------------------------------------------------------------------------------------------------------------
As shown in the chart above (which was also provided by SSA), the
Agency's collection of SSI overpayments has been increasing slightly
each year. For example, SSA collected of $795 million in FY 2001 and
$859 million in FY 2002.
However, waivers and uncollectible debt make up a larger percentage
of the SSI program than the OASDI program. This is not unexpected since
the SSI program is a needs-based program and it is difficult to collect
overpaid funds from those who are financially needy in the first place.
Also, the general limitation of only collecting 10 percent from current
SSI benefits impacts the Agency's ability to collect SSI overpayments.
This chart shows that if SSA were to collect just 10 percent of the
SSI funds it waived or wrote off as uncollectible for the last 5 years
that the Agency could save about $240 million--$80 million from waivers
and $160 million from funds deemed uncollectible.
The chart also shows the savings if SSA collected 30 percent or 50
percent of the overpayments it waived or wrote off over the last 5
years (from 1998 to 2002)--$721 million in savings if 30 percent of
waivers/uncollectible funds recovered and $1.2 billion in savings if 50
percent of waivers/uncollectible funds recovered.
Mr. SHAW. Thank you, Mr. Huse. Thank you for mentioning one
of my favorite subjects. Mr. Jordan.
STATEMENT OF WILLIAM H. JORDAN, SENIOR COUNSEL TO THE ASSISTANT
ATTORNEY GENERAL, CIVIL DIVISION, U.S. DEPARTMENT OF JUSTICE
Mr. JORDAN. Mr. Chairman and Mr. Cardin, thank you very
much. I wanted to focus my testimony today on the efforts of
the Department of Justice to combat fraud and abuse in Federal
and State health care programs arising from schemes that
implicate pharmaceutical and biologic products as well as
durable medical equipment.
Last September President Bush spoke to a group of
prosecutors at the Department of Justice from across the Nation
regarding the administration's commitment to root out and
punish corporate wrongdoers. In that context of financial and
accounting fraud, the President stated:
``A few dishonest individuals have hurt the
reputations of many good and honest corporations and
their executives. They have hurt workers who have
committed their lives to building the companies that
hired them, they have hurt investors and retirees who
place their faith in the companies' growth and
integrity. For the sake of our free market, these
corporate criminals must pay.''
This statement applies equally to health care fraud that is
committed against the taxpayers of this country. That is why
the Department of Justice through the Civil and Criminal
Divisions and through the U.S. Attorney's Office is fully
committed to the fair and vigorous enforcement of the various
laws at our disposal to deal with those companies and with the
individuals that steal from the taxpayers.
By no means is the Department of Justice alone in this
fight to combat fraud and preserve the integrity of the
country's Medicare and Medicaid systems. We work very closely
with our colleagues at HHS, at CMS, Office of General Counsel
at the Food and Drug Administration, the HHS Office of the
Inspector General, and with the various State law enforcement
partners, the National Association of Attorneys General, and
the National Association of Medicare Fraud Control Units.
In working with our colleagues, we obtained last year
judgments that exceeded $1.6 billion in health care fraud
cases; the year before that $1.2 billion. Last year alone we
filed 361 criminal indictments in health care fraud cases
against 480 defendants. This year--excuse me, also last year
1,529 civil health care fraud matters.
This Committee and this Congress are considering a variety
of ways to reform the Medicare system. However, it is
indisputable that Medicare now pays too much for durable
medical equipment, it pays too much for pharmaceuticals.
Recently the HHS Office of the Inspector General reports have
concluded that the Medicare programs sometimes pay an amount
for durable medical equipment that is greater than market
prices.
The pricing of prescription drugs and durable medical
equipment has been at the heart of a number of the Department
of Justice's fraud cases. Although I provided them in greater
detail in my prepared statement, let me just provide a summary
of some of those.
With Bayer Corporation we resolved allegations that arose
from Bayer's sale of pharmaceutical products to Federal health
care programs. Allegations against Bayer came to the Department
of Justice from a relator under the False Claims Act that
alleged that Bayer had inflated its drug prices for infusible
and injectable drugs that can't be purchased over the counter.
These drugs are often used to treat life-threatening illnesses
such as AIDS, cancer and hemophilia.
State Medicaid programs reimbursed providers for the
purchase of these drugs for covered beneficiaries using the
average wholesale price (AWP) or wholesale acquisition cost as
a benchmark. The government alleged that Bayer reported
inflated wholesale average cost to First DataBank, which is a
national drug-pricing reporting service used by most States.
The government also alleged that Bayer falsely reported to the
First DataBank that certain products were not sold to
wholesalers, and, therefore, no wholesale average cost, in
fact, existed. Bayer paid $14 million to settle those
allegations.
In a separate case Bayer paid $257 million to settle
allegations of private labeling where certain drugs for some of
its health maintenance organization customers were used to
evade the Medicaid rebate liability portion and, therefore,
deprive Medicaid of needed funds. Private labeling is a method
used by manufacturers to affix a customer's label and, more
importantly, the customer's national drug code to the drug to
avoid the manufacturer's statutory reporting and payment
obligations.
Although private labeling has certainly legitimate uses in
the industry, for example where a chain pharmacy wants to offer
a store brand in connection to a brand name product, this
practice can run afoul of the Medicaid rebate program where it
is done to avoid the manufacturer's best price reporting
obligations to the Federal Government.
There are a variety of other cases. We have recovered $875
million against TAP Pharmaceuticals, $87 million against
GlaxoSmithKline, and these cases are set forth more thoroughly
in my prepared remarks.
I also wanted to thank the Committee and express again the
Department of Justice's strong support for section 301 of H.R.
1; that is, the Medicare secondary payer provision that the
Committee has put into its bill. Congress enacted that
provision to make sure that Medicare was the secondary rather
than the primary payer of health benefits. The provision that
is in that bill will serve to clarify the certain judicial
decisions that we have received that ask for Congress to
intervene and clarify the obligations of the government in the
situations under the Medicare secondary payer provision. Thank
you very much.
[The prepared statement of Mr. Jordan follows:]
Statement of William H. Jordan, Senior Counsel to the Assistant
Attorney General, Civil Division, U.S. Department of Justice
Mr. Chairman, I appreciate the opportunity to appear before you to
discuss some of the important issues which are the focus of today's
hearing. We are grateful for this Committee's leadership on this
important topic.
I have been asked to provide testimony today concerning the efforts
of the Department of Justice to combat fraud and abuse in Federal and
State health care programs arising from schemes implicating
pharmaceutical and biologic products, as well as durable medical
equipment (``DME''). Last September, President George W. Bush spoke to
a group of prosecutors from across the nation regarding the
Administration's commitment to root out and punish corporate
wrongdoers. In the context of financial and accounting fraud, the
President stated that: ``a few dishonest individuals have hurt the
reputations of many good and honest corporations and their executives.
They've hurt workers who committed their lives to building the
companies that hired them. They've hurt investors and retirees who
placed their faith in the companies growth and integrity. For the sake
of our free market, corporate criminals must pay.''
This statement applies equally to health care fraud committed
against the taxpayers of this country. And that is why the Department
of Justice, through the Civil and Criminal Divisions and through the
U.S. Attorney's Offices, is fully committed to the fair and vigorous
enforcement of the various laws at our disposal to deal with those
companies and individuals that steal from the taxpayers. By no means,
however, is the Department of Justice alone in the fight to combat
fraud and preserve the integrity of the country's Medicare and Medicaid
system. We work closely with our colleagues at the Department of Health
and Human Services, including those at the Centers for Medicare and
Medicaid Services, at the HHS Office of General Counsel, the
Administration on Aging, the Food and Drug Administration's Office of
Criminal Investigations, and at the HHS Office of Inspector General,
and with our State law enforcement partners at the National Association
of Attorneys General and the National Association of Medicaid Fraud
Control Units.
Working with our colleagues, the Department last year obtained
judgments or achieved settlements in health care fraud cases exceeding
$1.6 billion. The year before that, we obtained judgments or achieved
settlements in health care fraud cases exceeding $1.2 billion. Last
year alone, Department prosecutors filed 361 criminal indictments in
health care fraud cases and a total of 480 defendants were convicted
for health care fraud-related crimes. Also last year, 1,529 civil
health care fraud matters were pending and we filed 221 new civil
cases.
This Committee and the Congress now are considering ways to
implement and make more affordable a Medicare prescription benefits
program. It is clear from our experience that government healthcare
programs continue to pay too much for prescription drugs. This is due
to several factors, including flaws in the Medicare reimbursement
system and to the illegal behavior of those who seek to manipulate the
system. The Acting Principal Deputy Inspector General of the Department
of Health and Human Services testified before the House Budget
Committee last week that published wholesale prices of drugs used to
establish Medicare payments often bear no resemblance to the actual
wholesale prices available to physicians, suppliers, and other large
government purchasers. Instead, the current system of reimbursement
actually provides an incentive to manufacturers to exaggerate their
wholesale prices and, in so doing, inflate the Medicare cost.
It also is indisputable that Medicare now pays too much for durable
medical equipment (DME) based on reimbursement rates that were, in some
cases, set in 1987. Recent HHS Inspector General reports have concluded
that the Medicare program sometimes pays an amount for DME that is
greater than market prices. The pricing of prescription drugs and DME
has been at the heart of a number of the Department's fraud cases. The
lessons learned from these cases about the pharmaceutical industry and
how some in that industry have manipulated the pricing of their
products may be helpful as you consider new legislation.
Bayer Corporation entered into two settlements with the Department
to resolve allegations arising from its sale of pharmaceuticals and
biological products to Federal health care programs. Allegations
against Bayer initially came to the Department from a relator under the
False Claims Act who alleged that Bayer improperly inflated its drug
prices, causing Medicare and Medicaid to pay inflated reimbursement.
Infusable and injectable drugs that cannot be purchased over the
counter by the public at a retail pharmacy were at issue. These drugs
are often used to treat life-threatening illnesses, such as AIDS,
cancer, and hemophilia.
State Medicaid programs reimburse providers for the purchase of
these drugs for covered beneficiaries and use either the Average
Wholesale Price (AWP) or Wholesale Acquisition Cost (WAC) as a
benchmark for their drug reimbursement rates. WAC is a State-created
concept, generally defined as the price that a drug wholesaler pays to
purchase the drug from a drug manufacturer for subsequent sale to a
provider. The Government alleged that Bayer reported inflated WACs to
First DataBank (FDB), a national drug pricing reporting service used by
most States. The Government also alleged that Bayer falsely reported to
FDB that certain products were not sold to wholesalers and, therefore,
no WACs existed.
We alleged that Bayer's WACs were inflated because its purported
wholesale acquisition cost calculations did not take into account the
price at which Bayer was selling its drugs to specialized wholesalers
known in the industry as ``distributors.'' Distributors function
exactly as other wholesalers do. As stated above, Bayer either reported
WACs without factoring in the distributor prices or did not report WACs
at all--asserting that distributors are not wholesalers and, thus, no
WACs existed. Bayer agreed to pay a total of $14 million to settle the
allegations that it had inflated the WAC of certain of its drugs.
In a second case, Bayer paid $257,200,000 to settle allegations of
``private labeling'' of certain drugs for some of its HMO customers to
evade Medicaid rebate liability, and derivative Public Health Service
(PHS) liability. ``Private labeling'' is a method used by manufacturers
to affix the customer's label and, more importantly, the customer's
National Drug Code (NDC) to the drug to avoid the manufacturer's
statutory reporting or payment obligations with respect to that drug.
Although private labeling has legitimate uses in the industry, for
example, where a chain pharmacy wants to offer a store brand in
addition to a brand name product, the practice may run afoul of the
Medicaid Rebate program, 42 U.S.C. 1396r-8, where it is done to avoid
the manufacturer's best price reporting or rebate obligations.
In a scheme commonly referred to as ``lick and stick,'' Bayer
private labeled two of its most popular drugs, Cipro and Adalat CC. The
Department alleged that Bayer's private label arrangements were
intended to provide deeply discounted prices on these drugs to the HMOs
while evading its statutory and contractual obligations to provide the
same favorable prices to the Medicaid program. In addition, Bayer
submitted false statements to the Office of Audit of the Inspector
General for the Department of Health and Human Services (HHS-OIG) and
to the Food and Drug Administration (FDA) to further conceal its
obligation to pay additional Medicaid rebates in connection with
private labeling.
As part of the Medicaid rebate program, manufacturers such as Bayer
enter into a rebate agreement with the Health Care Financing
Administration, now known as the Centers for Medicare and Medicaid
Services (CMS). Under the rebate program, manufacturers such as Bayer
agree to report their best price to CMS on a quarterly basis. This best
price is defined as the lowest price available from the manufacturer to
any ``wholesaler, retailer, provider, health maintenance organization,
nonprofit entity or governmental entity within the United States'' with
certain specified exclusions. Bayer further agreed to determine best
price ``without regard to special packaging, labeling, or identifiers
on the dosage form or product or package.'' 42 U.S.C. 1396r-
8(c)(1)(C)(ii)(II). In addition, Bayer agreed to pay rebates to each
State Medicaid program each quarter, calculated as the product of (i)
the total number of units of each dosage form and strength paid for
under the State plan in the rebate period, and (ii) the greater of
either the difference between average manufacturer price and best
price, or a minimum rebate percentage of the average manufacturer.
42 U.S.C. 1396r-8(c)(1)(A) and (B). The purpose of the rebate program
was to ensure that the nation's insurance program for the poor received
the best price for drugs available in the marketplace.
The Government's investigation concluded that Bayer failed to pay
rebates owed to the Medicaid program and overcharged certain Public
Health Service entities at least $9.4 million.
Bayer pled guilty in the District of Massachusetts to a one count
criminal Information of violating the Federal Food, Drug & Cosmetic
Act, 21 U.S.C. 331(p), 333(a)(2), and 360(j), and failing to list
the private label product with the FDA, and it paid a criminal fine of
$5,590,800. Together with the agreed upon civil settlement amount of
$251,609,200, the global resolution in this second Bayer matter was
$257,200,000.
In a related investigation, GlaxoSmithKline (GSK) paid $87,600,922
to settle similar charges based on its relationship with the HMO,
Kaiser Permanente Medical Care Program (Kaiser). As I indicated
earlier, Federal law requires drug manufacturers participating in the
Medicaid program to report their ``best prices'' to the Federal
Government, and to pay rebates to Medicaid to ensure that the nation's
insurance program for the poor receives the same favorable drug prices
offered to other large purchasers of drugs.
Kaiser provides care and treatment to more than 6 million persons
and often purchased drugs directly from drug manufacturers to save on
costs for its members. GSK (together with Bayer) provided discounted
prices to Kaiser for its drugs and engaged in ``private labeling'' for
Kaiser, affixing different labels to its drug products to avoid
reporting the low prices to CMS. GSK also repackaged and privately
labeled Paxil, an anti-depressant, and Flonase, a nasal spray for
Kaiser at discounted prices and failed to report these lower prices as
``best prices'' to the Government.
GSK settled its civil False Claims Act liabilities and paid
$87,600,922 to the United States, 49 States, the District of Columbia,
and Public Health Service entities as civil damages for losses suffered
by the Medicaid programs and the Public Health Service entities. When
added to the previous Bayer settlement, Bayer and GSK paid over $344
million to resolve these related allegations. Like Bayer, GSK also
executed a corporate integrity agreement with HHS-OIG, designed to
ensure that GSK (like Bayer) will accurately report its ``best price''
information to the Government.
TAP Pharmaceutical Products Inc. (TAP), a joint venture between
Abbot Laboratories and Takeda Chemical Industries, paid $875,000,000 in
2002 to resolve criminal charges and civil liabilities in connection
with its fraudulent pricing and marketing of the cancer drug, Lupron.
Under an agreement with the Department, TAP pled guilty to a conspiracy
to violate the Prescription Drug Marketing Act paid a $290,000,000
criminal fine. To resolve its civil liability under the False Claims
Act, TAP agreed to pay the United States $559,483,560 for filing
fraudulent claims with Medicare and Medicaid, and to pay the fifty
States and the District of Columbia $25,516,440 for filing fraudulent
claims with the States. Thirteen individuals were indicted for their
role in the scheme. In addition, four physicians and one individual
pled guilty to related crimes. Additionally, TAP entered a sweeping
corporate integrity agreement with the Inspector General of the
Department of Health and Human Services which significantly changes the
manner in which TAP supervises its marketing and sales staffs, and
ensures that TAP will report to the Medicare and Medicaid programs the
true average sale price for drugs reimbursed by those programs.
While Medicare does not pay for most drugs, Medicare does cover
those, such as Lupron, that must be injected under the supervision of a
physician. Medicare presently reimburses covered drugs at the lower of
95% of the average wholesale price (AWP) or the physician's actual
charge. AWP is a list price set by manufacturers. The Government
alleged that TAP set and controlled the price at which the Medicare
program reimbursed physicians for the prescription of Lupron by
misreporting its AWP as significantly higher than the average sales
price TAP offered physicians and other customers for the drug. TAP
allegedly ``marketed the spread'' between its discounted prices paid by
physicians and the significantly higher Medicare reimbursement based on
AWP as an inducement to physicians to obtain their Lupron business. The
Government further alleged that TAP concealed from Medicare the true
discounted prices paid by physicians, and falsely advised physicians to
report the higher AWP rather than the real discounted price for the
drug. The ``marketing the spread'' practice was recently addressed in
the HHS-OIG's Compliance Guidance for Pharmaceutical Manufacturers.
AstraZeneca Pharmaceuticals LP (AstraZeneca), a major
pharmaceutical manufacturer headquartered in Wilmington, Delaware, pled
guilty last month in Federal district court in Wilmington, Delaware to
a healthcare crime and agreed to pay $355,000,000 to resolve criminal
charges and civil liabilities in connection with its drug pricing and
marketing practices arising from its sales of Zoladex, a drug used
primarily for the treatment of prostate cancer.
AstraZeneca pled guilty to conspiring to violate the Prescription
Drug Marketing Act by causing to be submitted claims for payment for
the prescription of Zoladex which had been provided as free samples to
urologists. This criminal conduct caused losses of $39,920,098 to
Medicare, Medicaid and other federally funded insurance programs. As
part of the plea agreement, AstraZeneca paid a $63,872,156 in criminal
fines, paid $266,127,844 to resolve allegations that the company caused
false and fraudulent claims to be filed with the Medicare, TriCare,
Department of Defense and the Railroad Retirement Board Medicare
programs, and paid $24,900,000 to resolve allegations that its drug
pricing and marketing misconduct resulted in false state Medicaid
claims. Finally, AstraZeneca entered into a corporate integrity
agreement with the Inspector General of the Department of Health and
Human Services which ensures, among other things, that AstraZeneca will
report to the Medicare and Medicaid programs the average sale price for
drugs reimbursed by those programs and will promote, through internal
training and other programs and policies, marketing and sales practices
that are in full compliance with the law.
AstraZeneca marketed Zoladex primarily for the treatment of
prostate cancer, as is the drug Lupron which is produced by TAP. The
United States alleged that from January 1991 through December 31, 2002,
employees of AstraZeneca provided thousands of free samples of Zoladex
to physicians, knowing and expecting that certain of those physicians
would prescribe and administer the free drug samples to their patients
and thereafter bill those free samples to the patients and to Medicare,
Medicaid, and other federally funded insurance programs. In order to
induce certain physicians, physicians' practices, and others to
purchase Zoladex, AstraZeneca offered and paid illegal remuneration in
various forms including free Zoladex, unrestricted educational grants,
business assistance grants and services, travel and entertainment,
consulting services, and honoraria.
Also, to induce physicians to purchase Zoladex, the United States
alleged that AstraZeneca marketed a ``Return-to-Practice'' program to
physicians. This program consisted of inflating the Average Wholesale
Price used by Medicare and others for drug reimbursement, deeply
discounting the price paid by physicians to AstraZeneca for the drug
(``the discounted price''), and marketing the spread between the AWP
and the discounted price to physicians as additional profit to be
returned to the physician's practice from Medicare reimbursements for
Zoladex. AstraZeneca set the AWP for Zoladex at levels far higher than
what the majority of its physician customers actually paid. As a
result, AstraZeneca's customers received reimbursement from Medicare
and State Medicaid programs and others at levels significantly higher
than the physicians' actual costs or the wholesalers' average price.
Finally, the Government alleged that AstraZeneca misreported and
underpaid its Medicaid rebates for Zoladex used for treatment of
prostate cancer, under the Federal Medicaid Rebate Program. AstraZeneca
was generally required on a quarterly basis to rebate to each State
Medicaid program the difference between the Average Manufacturer Price
and its ``Best Price''. AstraZeneca falsely reported the ``Best Price''
for Zoladex used for treatment of prostate cancer by failing to account
for off-invoice price concessions provided to non-government customers
in various forms, including cash discounts in the form of grants,
services, and free goods contingent on any purchase requirement.
Three physicians also were charged in the Federal court in Delaware
for their role in this scheme; two pled guilty to conspiring to bill
for Zoladex samples. Dr. Saad Antoun, a urologist practicing in
Holmdel, New Jersey, was charged on January 15, 2002, and pled guilty
to conspiracy on September 18, 2002. Dr. Stanley Hopkins, a urologist
practicing in Boca Raton, Florida, was charged on September 30, 2002,
and pled guilty to conspiracy on December 17, 2002. Dr. Robert Berkman,
a urologist practicing in Columbus, Ohio, was charged on May 19, 2003,
and those charges remain pending.
As I mentioned earlier, in April of this year the Inspector General
of the Department of Health and Human Services issued Compliance
Program Guidance for Pharmaceutical Manufacturers that seeks to
encourage companies that manufacture and market pharmaceutical drugs
and biological products to adopt internal controls and procedures to
avoid the risk areas I have outlined above. The IG did so after seeking
our comments. This is but a first step in assuring protection from
predatory pricing schemes that inflate costs to already cash-strapped
Government healthcare programs. As these cases illustrate, the
financial stakes are high as we seek to reform the reimbursement
system.
The Department has also actively pursued schemes implicating
durable medical equipment. We have devoted considerable resources and
personnel to an undercover operation we refer to as ``Operation
Headwaters.'' This investigation targeted DME manufacturers across the
United States in the area of enteral feeding, diabetic footwear, and
wound care products. The Federal Bureau of Investigation held itself
out as a national distributor of medical equipment having access to
over 6,000 Medicare patients. Over 300 consensual recordings and video/
audio tapes reflecting the criminal intent to commit health care fraud
on the part of corporate officers and employees of several different
national and multi-national DME manufacturers were captured.
On February 10, 2003, the United States Attorney for the Southern
District of Illinois announced indictments against Augustine Medical
Incorporated (AMI), charging numerous felony violations, including
Conspiracy to Defraud the United States, Mail Fraud and Health Care
Fraud, related to the fraudulent marketing of a wound care system known
as ``warm-up active wound therapy.'' In addition to AMI, Paul Johnson,
Director of Reimbursement for AMI, Tim Henley, Vice President of the
Wound Care Division, and Phillip Zarlengo, owner of Strategic
Reimbursement, were indicted in the conspiracy. This investigation is
ongoing and we expect to announce additional developments with respect
to other manufacturers in the near future.
After investigating the billing practices of Rotech Medical Corp.
(Rotech) and one of its subsidiaries, Community Home Oxygen, Inc., we
learned that at least with respect to Region D, one of four DME regions
in the United States, Rotech and CHO submitted false claims to the
Medicare, Montana Medicaid, Veteran's Administration (VA) and Indian
Health Services programs for services and supplies that were not
provided, not properly documented or not medically necessary, or were
provided to patients who were not properly qualified to receive such
services. We recovered $17.5 million in false claims in the context of
a bankruptcy proceeding.
An Alabama-based nursing home operator, Crowne Investments, Inc.,
and Gericare Medical Supply, Inc. paid the United States $1,071,000 to
settle allegations that they participated in a scheme to overbill the
Medicare program. The settlement resolved allegations that from
February 1993 to August 1993, the two Monroeville, Alabama-based
companies caused the submission of false or fraudulent claims for
Medicare reimbursement for enteral (intestinal) feeding supplies. The
Government asserts that the supplies were duplicates of others already
reimbursed by Medicare directly to Gericare for the same patients and
that the overcharged supplies were not medically necessary.
Lincare, Inc., a medical supply company based in Clearwater,
Florida, with offices in Redding, California, paid $3,150,000 to settle
allegations that it submitted false home oxygen therapy claims to
Medicare for therapeutic ventilator claims and unit dose albuterol
sulfate claims during the period January 1, 1995 through December 31,
1997, that did not comply with Medicare requirements governing
reimbursement for those products.
Red Line Healthcare Corp. (Red Line), a Minnesota medical supply
corporation, and its parent, Medi Mart, Inc. (Medi Mart), paid $5.6
million in 1999, to settle, among other things, allegations that their
Medicare claims were not properly documented to support the need of
Medicare patients for nutritional products, that they intentionally
``shopped'' their claims for urological supplies to the wrong
Government contractor to maximize Medicare reimbursement, and that Medi
Mart knowingly retained payments exceeding what Medicare should have
paid for the product or supply.
In 2002, the Department entered into a civil settlement of
$2,286,752 with Salvatore Galioto, Bryan Barrish, Michael Giannini and
Scott Sandler, based on allegations that they submitted false claims
under Medicare Part B for incontinence supplies, including irrigation
syringes and sterile saline irrigation solutions, that were neither
medically necessary nor reimbursable under Medicare.
The incontinence supplies in question were provided to residents at
Chicago area nursing homes by Specialized Healthcare Products, Inc.
(SHP), a durable medical equipment supply business. The nursing homes
were owned and operated by Barrish and Giannini. Galioto, through a
company called Advanced Vital Med., Inc. (AVM), acted as sales agent
for SHP. Various individuals at AVM and SHP completed false
Certificates of Medical Necessity for Medicare beneficiaries. The
Government alleged that, to gain access to the nursing homes to furnish
the unnecessary incontinence supplies that were billed to Medicare, SHP
supplied free of charge adult diapers and/or adult undergarments to the
Medicare beneficiaries at the nursing homes. These adult diapers/adult
undergarments are not reimbursable by Medicare under any circumstances.
From December 1994 through May 1995, Medicare paid $1,524,073.79 to
SHP. A portion of the funds were then transferred from SHP to AVM.
Galioto and others, through AVM, received a portion of the proceeds.
Galioto, Barrish, Giannini and Marc Siebzener were indicted on
February 24, 2000 in the Eastern District of Missouri, for mail and
wire fraud, money laundering and conspiracy to violate Medicare's anti-
kickback statute. Barrish and Giannini each pled guilty on February 23,
2000, to one count of money laundering, in violation of 18 U.S.C.
1341, 1957 and 2. Each was sentenced to three years probation and
jointly ordered to pay $46,573.04 in restitution and a fine of
$68,478.72.
Galioto pled guilty on May 16, 2000, to conspiring to violate the
anti-kickback statute, 42 U.S.C. 1320a-7b(b)(1) and (2). He was
sentenced to ten months and ordered to pay restitution of $120,000 and
a fine of $30,000. Siebzener pled guilty to one count of wire fraud, in
violation of 18 U.S.C. 1343 and 2, on July 10, 2000. He was
sentenced to five years probation and ordered to pay $100,000.00 in
restitution. The Court found that Siebzener lacked the financial
ability to pay a fine.
Medicare Secondary Payer Provisions: Finally, I would like to
restate the Department's support for section 301 of H.R. 1, the
``Medicare Prescription Drug and Modernization Act of 2003,'' which
would protect the integrity of the Medicare Trust Fund by clarifying
that Medicare must be reimbursed whenever another insurer's
responsibility to pay has been established. The section is consistent
with the litigation positions taken by this Department and the
Department of Health and Human Services in numerous court cases.
Congress enacted the Medicare Secondary Payer (``MSP'') statute in
1980 to protect the fiscal integrity of the Medicare program by making
Medicare a secondary, rather than a primary, payer of health benefits.
To ensure that Medicare would be secondary, Congress precluded it from
making payment when a primary plan has already made payment or can
reasonably be expected to pay promptly. Congress recognized, however,
that in contested cases, payments under such plans would be delayed. To
protect providers, suppliers, and beneficiaries, Congress authorized
Medicare to make a ``conditional'' payment when prompt resolution of a
claim cannot reasonably be expected. The Medicare Trust Fund must be
reimbursed, however, once the primary insurer's obligation to pay is
demonstrated.
Some recent court decisions have held, however, that Medicare has
no right to reimbursement unless the primary insurer could reasonably
have been expected to make prompt payment at the outset. See, e.g.,
Thompson v. Goetzmann, 315 F.3d 457 (5th Cir. 2002); Fanning v. United
States, 202 F.R.D. 154 (E.D. Pa. 2001). These rulings make the
statute's reimbursement mechanism inoperative in some jurisdictions.
Section 301 of this legislation would end this costly litigation and
provide clear legislative guidance regarding Medicare's status as a
secondary payer of health benefits. The technical changes in Section
301 make clear that Medicare may make a conditional payment when the
primary plan has not made or is not reasonably expected to make prompt
payment.
On July 7, 2003, in response to the government's petition for
rehearing, the Goetzmann court agreed to delete the ``prompt payment''
analysis from its decision. Although this amendment to the opinion
provides temporary relief within the Fifth Circuit, the court's
reasoning highlights the need for corrective legislative action. The
court acknowledged that its reading of the statutory text arguably
creates the ``absurd result'' described by the government, essentially
nullifying the government's right to reimbursement whenever an
insurance company disputes a claim, but explained that it ``remained
convinced'' that its analysis of the plain language was correct. The
court stressed that courts are not in the business of amending
legislation to prevent absurd results, and urged the government to take
its complaint to Congress, rather than to the courts.
The technical amendments of section 301 clarify other provisions of
the MSP statute, as well. They make clear that a primary plan may not
extinguish its obligations under the MSP statute by paying the wrong
party (i.e., by paying the Medicare beneficiary or the provider instead
of reimbursing the Medicare Trust Fund). The section clarifies that a
primary plan's responsibility to make payment with respect to the same
item or service paid for by Medicare may be demonstrated, among other
ways, by a judgment, or a payment conditioned upon the recipient's
compromise, waiver or release of items or services included in the
claim against the primary plan or its insurer; no finding or admission
of liability is required. In addition, section 301 makes clear that an
entity will be deemed to have a self-insured plan if it carries its own
risk, in whole or in part. Finally, the section makes clear that the
Medicare program may seek reimbursement from a primary plan, from any
or all of the entities responsible for or required to make payment
under a primary plan, and additionally from any entity that has
received payment from the proceeds of a primary plan's payment. These
provisions of section 301 will resolve contentious litigation and are
designed to protect the fiscal integrity of the Medicare program.
Conclusion
Again, I thank the Committee for seeking the views of the
Department of Justice on these issues. The Committee can be assured
that the Department will continue to play a lead role in policing the
healthcare system for fraud and abuse, and will work with this
Committee in addressing the myriad issues which I have briefly
discussed this morning.
Mr. SHAW. Mr. Burman.
STATEMENT OF LEONARD E. BURMAN, SENIOR FELLOW, URBAN INSTITUTE,
CO-DIRECTOR, TAX POLICY CENTER, AND RESEARCH PROFESSOR,
GEORGETOWN PUBLIC POLICY INSTITUTE
Mr. BURMAN. Mr. Chairman, Mr. Cardin, thank you for
inviting me to share my views on waste, fraud, and abuse in the
tax system. I applaud the Committee's effort to reign in waste,
and its recognition that fraud isn't just a problem on the
spending side of the ledger, but also appears on the tax side.
The tax evasion numbers are staggering. The former IRS
Commissioner Charles Rossotti estimated in a given year the IRS
assesses almost $30 billion of taxes that it will never
collect. This isn't theoretical tax evasion. The $30 billion
represents underpayments of tax that the IRS has identified but
can't collect because its staff is spread so thin. It is
serious money. If we could collect those assessments, we could
raise enough over the next decade to pay for the new
prescription drug benefit under Medicare. It is more than the
entire cost of the jobs and growth tax bill passed last month
as scored by the Joint Committee on Taxation.
Even this amount is tiny when compared with the entire tax
gap the IRS has estimated of total taxes due, but not
collected. The IRS estimated that $232 billion in taxes, almost
15 percent of the total due in 1998, were never collected. With
respect, I believe Mr. Walker misstated this morning when he
said that that was a stock of uncollected taxes. My
understanding is that that is an annual shortfall. Every year
we come up short by 15 percent, or about $232 billion.
My written testimony discusses several reasons why the gap
is so big and growing. The main reason is that the IRS does not
devote enough resources to audits and compliance activity. The
IRS views its main responsibility as returns processing and
customer service. Compliance is a residual category and always
gets squeezed when there are budget cuts or the IRS is asked to
do other things, as often happens. For example, the tens of
millions of special refund checks that the IRS is rushing to
get out right now are likely to draw resources out of tax
compliance.
Tax evasion matters not just because it costs the
government money, it is unfair. It costs revenues that could be
used to make the tax system better, pay down the debt, or
provide additional government services. It wastes resources;
that is, it hampers economic growth, and it feeds on itself,
reducing respect for the integrity of the tax system and
leading to more cheating.
While Mr. Rossotti identified five priority areas for
enforcement, which were mentioned this morning, the EITC wasn't
one of them. It is at most 3 percent of the compliance gap.
Figure 3, which Mr. Cardin asked to have read into the record,
shows that spending on EITC compliance far outstrips the rest
of EITC enforcement. This is at the same time the $30 billion
per year of identified tax debts go uncollected because of a
lack of resources.
Now, the apparently high rates of noncompliance for the
EITC are troubling for at least two reasons. First, cheating is
wrong no matter who does it; and second, noncompliance
threatens to undermine political support for a program that
helps millions of people. It is necessary to put the
noncompliance statistics in perspective. As my written
testimony documents, the EITC noncompliance largely reflects
compliance problems that are endemic to the entire tax system.
We get the impression that EITC compliance is especially low
because we only systematically audit poor people, but there is
a lot of evidence that many of the EITC problems are broad-
based. Thus, targeting compliance activity at EITC participants
alone doesn't make much sense.
In my remaining time I would like to comment on the new
EITC pre-certification program proposed by the IRS. Certain
people will have to prove that they are eligible before they
can claim the credit. No other provision of the Tax Code is
implemented this way, and it raises some real issues.
The IRS' proposed strategy now is to select about 45,000
single fathers, grandparents and other adults who claim to care
for a qualifying child for a pilot test of the pre-
certification process. The pre-certification requirements
create a catch 22 for many grandparents and fathers who are
lawfully eligible for the credit. For example, a grandparent
who leaves her grandchild with a non-licensed family day care
center can't rely on an affidavit from the day care provider, a
relative or a neighbor to prove that the child lived with her
for the year since most low-income people can't afford
expensive licensed day care facilities. This means that many
eligible people will not be able to prove it to the IRS.
Add to this the problems of establishing eligibility for
people who are transient or have language problems, and you
have a recipe for excluding many eligible recipients. At a
minimum the IRS should be required to develop and implement a
clearly defined research design for its pre-certification pilot
project. The research questions should include: what are the
costs to participants of this program, what are the
characteristics of those who fail the pre-certification
process, how many eligible people choose not to complete pre-
certification forms or are not able to complete them. When
someone is found to be ineligible for the EITC, is someone else
eligible to claim the credit? Are there more accurate ways to
target potentially noncompliant taxpayers than gender profiling
and harassing grandparents? These questions should be answered
before the pilot program is expanded to include 2 million or
more EITC families.
[The prepared statement of Mr. Burman follows:]
Statement of Leonard E. Burman, Senior Fellow, Urban Institute, Co-
Director, Tax Policy Center, and Research Professor, Georgetown Public
Policy Institute
Mr. Chairman, Mr. Rangel, and distinguished Members of the
Committee:
Thank you for inviting me to share my views on waste, fraud, and
abuse in the tax system. The views I express are mine alone and should
not be attributed to any of the organizations with which I am
affiliated.
I applaud the Committee's efforts to rein in waste, fraud, and
abuse, and its recognition that fraud is not only a problem on the
spending side of the ledger, but also appears on the tax side. Indeed,
there is overwhelming evidence that tax fraud is epidemic, and the IRS
has already identified tax underpayments that dwarf all of the waste,
fraud, and abuse ever identified in a spending program. The main issue
is whether the IRS can deploy its resources effectively to collect a
larger share of taxpayers' legal obligations without unduly infringing
on taxpayers' rights.
In brief, here are my main points:
Tax evasion is a huge problem, costing the Treasury--and
honest taxpayers who get stuck with a disproportionate burden--hundreds
of billions of dollars a year.
The IRS needs more resources and it needs to be able to
focus those resources on addressing the most serious elements of
noncompliance.
Although the IRS is doing many things right in this area,
its preoccupation with EITC noncompliance is not one of them. For
example, EITC errors amount to less than 3 percent of all
noncompliance, but would garner 45 percent of the IRS's new enforcement
dollars.
More generally, EITC noncompliance is, unfortunately, a
symptom of systemic problems and the appropriate solution is a broad-
based attack on noncompliance and the causes of noncompliance
throughout the income tax system.
I. The Scope of the Tax Evasion Problem
Former IRS Commissioner Charles Rossotti (2002) estimated that in a
given year, the IRS assesses almost $30 billion of taxes that it will
never collect. This is not theoretical tax evasion. The $30 billion
represents underpayments of tax that the IRS has identified, but cannot
collect because its staff is spread so thin. Rossotti estimated that it
would cost about $2.2 billion to collect that money. Based on that
estimate, the IRS could net almost $28 billion from tax fraud and
errors that are identified and ripe for collection.
According to IRS estimates, 60 percent of identified tax debts are
never collected. These unclosed cases include:
75 percent of identified nonfilers,
79 percent of taxpayers who use ``known abusive devices''
to avoid tax, and
78 percent of taxpayers identified through document
matching programs.
It is possible that some of these people simply cannot afford to
pay their tax debts, but more than half--56 percent--of noncompliant
taxpayers with incomes over $100,000 get off scot-free.
It is demoralizing to honest taxpayers, and encouraging to tax
scofflaws, that your odds are better than even of avoiding your tax
bill, even if you are caught.
The uncollected $28 billion is serious money. Assuming that the
amount grows with the economy, collecting on those assessments could,
over the next decade, cover the entire cost of the new prescription
drug benefit under Medicare (although not the superfluous new savings
accounts in the House version of the bill). It is more than the entire
cost of the Jobs and Growth Tax Relief Reconciliation Act of 2003 as
scored by the JCT (although not enough to finance the extension of the
myriad expiring provisions).
But it is tiny compared with the entire ``tax gap''--the IRS's
estimate of total taxes due but not collected. The IRS estimated that
$232 billion in taxes were due in 1998, but never collected. (See
Figure 1.) These estimates are highly uncertain because the IRS stopped
systematically measuring tax compliance for all but working poor people
after 1988, but it suggests that tax compliance is a huge problem, and
it has been growing.
According to Commissioner Rossotti, ``Despite significant
improvements in the management of the IRS, the health of the federal
tax administration system is on a serious long-term downtrend. This is
systematically undermining one of the most important foundations of the
American economy.''
Why is the gap growing? To begin with, the number of tax returns
has been growing much faster than the IRS staff. This has occurred for
several reasons. There are more head of household and single returns
and fewer married filing joint returns because couples are marrying
later, if at all, and the divorce rate is rising. Also, many more
children are filing tax returns. (Plumley and Steuerle, forthcoming)
Moreover, after a surge in compliance resources through most of the
1980s, IRS staff dedicated to compliance and enforcement plummeted in
the 1990s. Between FY1992 and 2001, the IRS workload increased by 16
percent while its staff declined by 16 percent. Field compliance
personnel fell by 28 percent--more than 8,000 FTEs--between FY 1992 and
2002.
The effect on examinations is even more striking. According to the
Internal Revenue Service (2001), the number of field examiners fell by
almost two-thirds between 1997 and 2000. The number of collection cases
closed fell by nearly half over the same interval. The number of
criminal tax cases not related to income from illegal activities fell
by more than two-thirds, from 1,498 in 1997 to 409 in 2000.
Looked at over a longer time frame, the audit rates for both
corporations and individuals have plummeted over the past quarter
century. Plumley and Steuerle (forthcoming) report that eight percent
of corporations were audited in 1977 compared with less than one
percent in 2001 (see figure 2), despite a well-publicized epidemic of
questionable and illegal corporate tax shelters in the late 1990s.
Indeed, one suspects that the corporate tax shelter boom was fed by the
IRS's apparent indifference.
The likelihood of a face-to-face individual audit has fallen even
more precipitously, from 2 percent in 1977 to 0.1 percent in 2001. (See
figure 2.) Even correspondence audits, which require the fewest staff
resources, have been cut by more than half. And the audit rates for
self-employed individuals, who are known to be a comparatively
noncompliant group, have also been slashed. From 1995 to 2001, their
audit rate fell from 4 percent to 2 percent. (Internal Revenue Service,
2001)
A large part of the problem, according to the Commissioner, is
budgets with ``unrealistic assumptions about such items as pay raises,
inflation and other mandates, including specific mailing and
notification requirements.'' When there is a squeeze, compliance tends
to come up short. In the late 1990s, a key factor was the Taxpayer Bill
of Rights, which required the IRS to answer its telephones and focus
its efforts on ``customer service.'' The better service, while surely
welcome, came at the expense of audit activity. This decade, Congress
has twice mandated that the IRS interrupt its ordinary operations to
mail out springtime checks to most taxpayers--advance payments on the
low-end tax rate cut in 2001 and on the child credit increase in 2003.
Without a supplemental appropriation to pay for additional hiring, the
staff managing these huge mailings must come out of existing employees,
typically compliance staff.
The opportunities for evasion have also been growing. While the
overall number of returns grew by 16 percent, the number of tax returns
reporting more than $100,000 of income grew by 342 percent. These
people who face the highest marginal tax rates have the most to gain
from tax evasion, and the most opportunities to engage in it.
Commissioner Rossotti reported that ``enormous amounts of money . . .
flow through `pass-through entities'--such as partnerships, trusts, and
S-corporations,'' which are ideally suited to hiding income. In tax
year 2000, pass-throughs accounted for 4.8 million tax returns with
over $660 billion of income.
In sum, Commissioner Rossotti identified five serious compliance
problems: ``(1) promoters of tax schemes of all varieties, (2) the
misuse of devices such as trusts and offshore accounts to hide or
improperly reduce income, (3) abusive corporate tax shelters, (4)
under-reporting of tax by higher-income individuals, and (5)
accumulation and the failure to file and pay large amounts of
employment taxes by some employers.'' (Rossotti, 2002, p. 8)
Rossotti concluded his assessment by noting that the complexity of
the tax code requires the IRS to divert resources away from compliance
simply to administer the unwieldy tax system. In addition, complexity
contributes to noncompliance two more ways. First, complexity may make
it hard for honest taxpayers to figure their tax accurately. Their
mistakes, while technically noncompliance when they work in the
taxpayers' favor, reflect a failure of the tax system rather than
deliberate evasion. Second, complexity creates real and perceived
asymmetries in the tax law that may invite aggressive taxpayers to try
to exploit them to reduce tax.
Commissioner Everson has taken up where Mr. Rossotti left off
calling for a renewed focus on enforcement: ``. . . (T)he IRS is
committed to ensuring everyone pays his or her fair share, including
those who have the resources to move money offshore or engage in
abusive schemes or shelters. We must focus our efforts on achieving
greater corporate accountability and ensure that high-end taxpayers
fulfill their responsibilities. Honest taxpayers should not bear the
burden of others who skirt their responsibility.'' (May 20, 2003)
II. Why Tax Evasion Matters
Tax evasion undermines the tax system in many ways. It is unfair.
It costs revenues that could be used to make the tax system better, pay
down the debt, or provide additional government services. It wastes
resources--i.e., hampers economic growth. And it feeds on itself,
reducing respect for the integrity of the tax system and leading to
more cheating.
Tax evasion is fundamentally unfair: unless they are caught,
cheaters pay less tax than their law-abiding neighbors. Audit rates are
at historic lows. According to the IRS (figure 1), of the $282 billion
of taxes not paid on time in 1998, only about $50 billion was
eventually collected, and about half of that was voluntarily remitted
by tardy taxpayers. Thus, the IRS only collects about 10 percent of
underpaid tax through enforcement activity.
Tax evasion undermines both Republicans' and Democrats' notion of a
good government. The lost tax revenue inevitably means higher taxes on
law-abiding citizens, less government services, or both. If we could
close half of the tax gap, the IRS could raise close to $150 billion on
tax year 2003 returns (assuming that the tax gap grows at the same rate
as GDP). Over the decade, collections would increase by something like
$1.7 trillion--the entire cost of the 2001 and 2003 tax cuts as scored
by the JCT. With that money, we could (1) eliminate more than two-
thirds of the public debt according to CBO projections, or (2) cut
income tax rates across the board by more than 10 percent, or (3)
provide health care for the uninsured and a generous prescription drug
benefit under Medicare, or (4) fully fund the transition to individual
accounts under Social Security. I don't mean to endorse any of these
policy proposals (my four kids, however, think that paying down the
debt is a very good idea), but they illustrate that this huge hole in
our income tax is keeping us from getting the government any of us
wants.
Second, some argue that tax evasion might be okay because it lowers
tax burdens. That argument is obviously false in the aggregate--tax
evasion simply reallocates tax burdens from noncompliant to compliant
taxpayers. But, it also is a uniquely inefficient way to cut taxes.
Companies alter their business practices to hide income from the IRS,
as Bob McIntyre explained in his testimony before the House Budget
Committee. A good tax system interferes as little as possible in
businesses' and individuals' decisions, but abusive tax shelters
virtually always involve substantial distortions. Some companies now
view their tax departments as profit centers--that is, they make money
by hiding it from the IRS rather than by producing more and better
products. Individuals make investment decisions not based on where they
will earn the highest pre-tax rate of return, but where they can make
the most money after subtracting taxes, promoters' fees, and legal
fees. Thus, money is not going to where it can produce the most return,
but to where it can produce the most tax savings. Moreover, the fees
paid to tax shelter promoters, unethical lawyers, financial wizards,
etc. are a pure waste of resources. Most of these intermediaries could
be doing productive work if lax enforcement did not make tax evasion so
lucrative.
In contrast, if the IRS stemmed tax evasion and used the money to
pay for debt reduction or tax rate cuts, the economy would surely grow
faster. First, there would be fewer distortions from the tax shelter
arrangements. Second, debt reduction would reduce government crowding-
out of private investment: that is, it would lower interest rates,
making capital less costly for businesses. Or tax rate reductions would
reduce the incentive to avoid tax by working less, saving less, or
engaging in legal or illegal tax shelters.
Finally, tax evasion can create a vicious cycle of growing
disrespect for the tax system, which undermines voluntary compliance.
The IRS has some evidence that this is happening now from Roper surveys
they commissioned in 1999 and 2001. In 1999, 87 percent of respondents
said that cheating on taxes was unacceptable; in 2001, only 76 percent.
In 1999, 96 percent of respondents agreed that it is everyone's duty to
pay their fair share of taxes; in 2001, 91 percent.
III. Solutions
What can be done about the epidemic of tax evasion? Two things can
deter those who are inclined to cheat: a high probability of detection
and a high penalty if caught. In this regard, the first order of
business ought to be to make sure that, barring extenuating
circumstances, everyone who is caught underpaying their tax is made to
pay what they owe.
One option would be to raise the penalties and/or interest for
taxpayers once they are identified as noncompliant. The clock on these
excess penalties could stop for nonfrivolous legal challenges, but
taxpayers who decided to try a rope-a-dope strategy with the IRS would
find it unprofitable. A second option would be to allow the IRS to
divert a fraction of the revenues it collects from enforcement action
into a trust fund that could be tapped to pay for other enforcement
activities. (Since money is fungible, this strategy only works if the
Congress does not cut the rest of the IRS's budget to offset
expenditures out of the trust fund.)
The IRS is taking steps to raise the probability of detection, both
by expanding its document-matching program and increasing the number of
examiners (although the latter might be derailed by the rebate program
and other competing demands for scarce resources). It is well known
that compliance is much higher when the IRS has an independent source
of verification. IRS statistics suggest that compliance is almost
perfect for wages subject to information reporting and withholding--
i.e., where a tax payment is automatic. (Steuerle and Plumley,
forthcoming) The noncompliance rate declines to 4.2 percent for income
and deductions subject to information reporting, 5.7 percent for
amounts subject to ``some information reporting,'' and 31.8 percent for
income subject to ``little or no information reporting.'' It is likely
that compliance increases further when the IRS uses the information
generated by information reports, because the probability of detection
increases.
The IRS has also taken several steps to improve the odds of
detection of corporate tax shelters. In 2000, it created the Office of
Tax Shelter Analysis, with a mandate to track down abusive tax
shelters. New regulations promulgated the same year require taxpayers
to disclose transactions that look like possible tax shelters, such as
those expected to generate a loss of $10 million in a single year or
$20 million altogether, and transactions of certain publicly traded
companies where tax and book accounting differ by more than $10
million. Because corporate tax shelters are sold to many clients,
Bankman (forthcoming) speculates that these regulations might result in
the detection of as many as 85 percent of corporate tax shelters. (When
a single client discloses an illegal tax shelter, the IRS can subpoena
the promoter's books and find all of the other clients.) If Bankman's
estimate is close to accurate and the IRS actually assesses the
statutory penalties on promoters and participants in undisclosed tax
shelters, the payoff for corporate tax shelters could decline so much
that few would remain profitable.
There are several problems, however, with this rosy scenario as
Bankman notes. One is that, to avoid costly litigation, the IRS often
settles with taxpayers on very favorable terms, even when the taxpayer
is caught red-handed. The second is that there are generally no extra
penalties on taxpayers who fail to make disclosures and are found to
have engaged in an abusive tax shelter. The third is that the line
between legal tax avoidance and an abusive tax shelter is often unclear
in the law. The solution to the first problem is to provide the IRS
with additional litigation resources. The other problems would be
addressed in legislation that was first detailed in a Treasury
Department white paper (Treasury 1999), elements of which have passed
the Senate (most recently in the ``Relief For Working Families Tax Act
Of 2003,'' in June) and considered by the Ways and Means Committee, but
never enacted.
There is, of course, a risk that compliance activity could go too
far. Arguably, that is why the Congress terminated the taxpayer
compliance measurement program (TCMP), which involved highly intrusive
random audits. The Taxpayer Bill of Rights was also aimed at redressing
a system that favored the tax collector too much at the expense of law-
abiding citizens. Unfortunately, the resources to protect taxpayer
rights came out of the resources used for enforcement, so the balance
may have shifted too far in the other direction.
Given scarce resources, it is important that the IRS targets them
where the payoff is greatest. The TCMP was designed to allow that, but
was terminated because it was too intrusive on lawful taxpayers. The
IRS is now engaging in a new audit strategy called the National
Research Program (NRP), which will adjust audit rates based on the
yield from less intrusive audits--many of which will not involve any
taxpayer contact unless a problem is discovered. This is clearly a
promising approach to balancing taxpayer rights with the imperative to
improve collections. In particular, the NRP may be able to shed light
on how the IRS's processing of information returns affects taxpayer
compliance. It can also put various forms of noncompliance, such as
that attributed to the earned income tax credit, in perspective.
IV. The EITC Compliance Program
Amid all this enlightened activity by the IRS, one example stands
out as a misallocation of resources and a failure to balance the rights
of taxpayers against the need for enforcement--the EITC compliance
initiative. EITC noncompliance appears to be a problem. The IRS
estimates that somewhere between 27 and 31 percent of earned income tax
credits were issued erroneously in 1999, either because of taxpayer
confusion or fraud. They estimate the EITC compliance gap at $7.8
billion in 1998 (See Table 1), about 0.5 percent of revenues and about
2.8 percent of the total tax gap. But EITC enforcement accounts for 3.8
percent of total enforcement budget in 2003. Indeed, the IRS has
requested a 68.5 percent increase in its EITC enforcement budget, while
increasing other enforcement by only 3.3 percent. In fact, the increase
in EITC enforcement would account for 45 percent of all new compliance
dollars. (Internal Revenue Service 2003)
And the IRS's disroportionate focus on the EITC is not new. Figure
3 shows outlays on tax enforcement as a share of the amount of money at
stake since the EITC compliance program began. In 1998, when the IRS
started a program of random audits of EITC recipients--much like the
discredited TCMP program--that program cost almost 0.4 percent of all
earned income tax credits claimed. By comparison, the total enforcement
budget was less than 0.2 percent of tax revenues from all sources, and
27 percent less than the prior year. The President's budget would
increase EITC enforcement spending to over 0.60 percent of credits
issued, while the overall enforcement budget remains about 0.2 percent
of total revenues.
On its face, this seems like an inefficient way to spend scarce
compliance resources.
The apparently high rates of noncompliance are troubling, but it is
necessary to put them in context. Indeed, it is likely that much EITC
noncompliance reflects compliance problems that are endemic to the
entire income tax. If that is true, then targeting compliance activity
at EITC participants alone may not be the most effective use of IRS
resources.
A. EITC Noncompliance in Perspective
Two Treasury economists (Holtzblatt and McCubbin, forthcoming) used
data from the IRS's 1999 EITC compliance study to draw out some
comparisons between EITC compliance and compliance with other tax
provisions that require some definition of an ``eligible child.'' Of
children claimed for both the EITC and the dependent exemption (97
percent of ``qualifying children'' claimed for EITC were also claimed
as dependents), more tax filers failed the test for dependency status
(for the exemption) than the test for qualifying child (for the EITC).
It is striking that one-third of children were claimed in error for the
dependent exemption, the EITC, or both. However, while six percent
qualified as a dependent but not as an EITC-qualifying child, 11
percent (almost twice as many) were eligible for qualifying child
status but not for a dependent exemption. That is, there were more
children claimed in error as a dependent for purposes of the exemption
than as an EITC-qualifying child. An additional 17 percent of children
were ineligible for both.
While this level of noncompliance with both provisions is
disconcerting, the statistics only apply to low-income tax filers who
were audited as part of the EITC compliance program. These statistics
raise the question of whether higher income people have the same
propensity to claim dependent exemptions for children who do not
qualify. There is some historical evidence (from 1986) that people are
prone to cheat with dependent exemptions when they think they can get
away with it. In that year, five million children disappeared when the
IRS started requiring reporting of Social Security numbers to verify
dependent exemptions. (Graetz 1997)
The ineluctable conclusion is that there are likely to be many
dependents claimed incorrectly at all income levels--not just among the
poor. Thus, the relevant policy response would be to study compliance
in the entire taxpaying population, not just among low-income people.
Another fascinating set of statistics drawn from the EITC
compliance data relates to homemade marriage penalty relief. In 1999,
0.5 million people filed as head of household when they were actually
married and living together, possibly to avoid EITC marriage penalties.
Another 0.4 million filed as single when they should have claimed
another unspecified status. Three-quarters of a million filed as head
of household when they lived apart from their spouse for at least part
of the year, but were still married and should have filed as married
filing joint or married filing separate. The obvious question is the
extent to which this type of roll-your-own marriage penalty relief
occurs among higher-income taxpayers who often have a far greater
incentive to misstate their filing status.
Some EITC recipients with income in or beyond the phase out range
of the credit underreported their income and thus increased their tax
refund. Half of the unreported income was from self-employment,
consistent with ancient evidence from the TCMP that self-employment
income is an area of rampant evasion. In 1987 and 1988, the IRS
estimated that self-employed people understated income by 32 to 49
percent. (Slemrod, forthcoming) Those in the informal sector did so by
between 81 and 87 percent. Farm income was also understated by an
estimated 30 percent in 1998 (data were not available for 1997).
Thus, while the noncompliance among EITC recipients is troubling,
there is no reason to think that it is any worse than exists among the
taxpaying public generally, and is probably lower than the
noncompliance rate for certain classes of individuals and businesses.
B. How Much Noncompliance is Intentional?
A key question is how much of EITC noncompliance is intentional,
and how much inadvertent. If intentional tax evasion is rampant, then
the solution is to ramp up enforcement. However, if a major source of
noncompliance comes from taxpayer confusion, then education, assistance
in preparing tax returns, and simplification of the tax law would be
better-targeted policy responses.
Janet McCubbin (2000) reported that at least 28 percent of
qualifying child errors are systematic, and thus intentional attempts
to overclaim the EITC. Some of the remaining 72 percent may be
influenced by other elements of code, such as the dependent exemption.
How many of the 72 percent are simply confused tax filers?
There's certainly evidence of confusion. As Holtzblatt and McCubbin
report, the IRS mailed notices to 194,000 taxpayers who appeared to be
eligible for the EITC based on income and the presence of dependent
children reported on their 1998 return. About one-third responded
requesting the credit. The IRS also sent 680,000 notices to low-wage
single filers notifying them that they appeared to be eligible. About
45 percent of them responded requesting the credit. The people who only
requested the credit after being notified by the IRS almost surely
underclaimed the credit unintentionally. Some of those who overclaimed
are probably similarly uninformed.
It is also worth mentioning that not all of the EITC tax gap would
be collected if EITC enforcement were perfect. In many cases where one
person wrongly claims the EITC as the eligible custodial adult, another
person might be eligible for an EITC, albeit possibly a smaller one. We
have no evidence on whether someone else is eligible for the EITC when
a person is found to be disqualified, although this is clearly an
important measure of the costs of noncompliance to the Treasury. In
addition, because of flaws in the design of the compliance studies, it
is possible that actual noncompliance is much less than the IRS
estimates. (Greenstein 2003b)
C. Addressing EITC Noncompliance
As in other areas of the tax law, there is a trade-off between
administration and compliance costs on the one hand and targeting,
compliance, and participation on the other. The question for policy
makers is how to strike the right balance. The IRS could audit every
return, which would minimize noncompliance, but would maximize
enforcement and compliance costs. At the other extreme, the IRS could
make all low-earning families eligible for EITC, without regard to
children, which would also reduce noncompliance, but at great cost in
terms of tax revenues. In that context, one might argue that the
current system does not do a bad job of balancing competing objectives.
The compliance problems with EITC may be viewed as comprising two
parts, each of which has a specific policy implication: systemic
problems and those specific to the EITC. There are errors and fraud
that are endemic to the income tax, such as children claimed
incorrectly, understated income, and incorrect filing status. The
solution to that problem is system-wide enforcement, not a specific
EITC compliance program. Indeed, targeting scarce enforcement resources
on low-wage returns to catch systemic noncompliance would be a highly
inefficient audit strategy, since so much more money is at stake on the
high-income returns.
Certain errors are specific to the EITC. For example, a major
factor in the 1999 data involves parents who violated the confusing AGI
tie-breaker rule or were disqualified because of too much non-cash
earned income (such as pensions, parsonage benefits, and the like). In
these cases, Congress ultimately decided that the targeting rule was
not worth the cost and the rules were simplified to reduce chances of
inadvertent errors. Holtzblatt and McCubbin estimated that those
simplifications, in combination with a new program to identify
noncustodial parents, could reduce EITC overpayments by about $2
billion per year.
A similar example is the inconsistent definition of a child for
different purposes. The Treasury has proposed rules to make the
definitions more consistent and intuitive (Treasury 2002), and the
Senate included them in the Relief for Working Families Tax Act Of
2003, but they have not yet been enacted. Further simplifications would
be possible, such as automatically allowing a dependent to be a
qualifying child for EITC purposes so long as the other parent does not
claim the child for the EITC. These simplifications all involve some
cost in terms of tax revenues, but they would significantly reduce
confusion for low-income working families who do not tend to think like
tax lawyers.
Another promising approach is to enlist the help of those who
prepare tax returns for low-income people. Almost two-thirds of EITC
returns are prepared by paid preparers. IRS statistics show that more
competent preparers--accountants, lawyers, enrolled agents, major tax
preparation firms--produce returns with fewer errors than less
competent preparers. Volunteer tax preparers have the lowest error
rate, although the sample is too small to draw firm inference. It is
possible that spending more time on tax returns reduces the likelihood
of errors. It is also possible that differences in performance among
preparers reflect self-selection--that noncompliant taxpayers are more
likely to seek the help of disreputable tax preparers--but this
conjecture should be tested.
In 1999, the IRS initiated a large-scale outreach program aimed at
tax return preparers who had recently prepared at least 100 EITC
returns. During those visits, preparers (other than national firms,
CPAs, lawyers, and enrolled agents) received one-on-one instruction
from Revenue Agents on EITC compliance and preparers' due diligence
responsibilities. Because most EITC claimants use paid preparers, such
a strategy could prevent both unintentional and intentional errors on
tax returns claiming the EITC. The value of this approach could be
measured by comparing the accuracy of trained preparers with similar
preparers who did not get training. However, no data are available yet
and it is not clear that the IRS followed up. If not, they lost an
important opportunity to improve compliance without adding extra
burdens for low-income taxpayers.
The other tool to improve compliance is to strengthen EITC
enforcement. The IRS is about to start a new pre-certification program
for the EITC. This probably would improve compliance, but also could
significantly reduce participation, and might not save the government
much money. Cash assistance programs such as food stamps cost about as
much to administer as the EITC, including both the administration and
compliance costs and the revenues lost due to noncompliance, but EITC
participation is much higher than participation in direct transfer
programs. (Holtzblatt and McCubbin, forthcoming). So the result of the
IRS's EITC compliance offensive may be less payments to low-income
families, including many who are eligible but deterred by the new
hurdles to participation, but little or no overall budget savings.
The proposed pre-certification program is supposed to be non-
intrusive, but it is not clear how the IRS can accomplish that. How can
they determine that the residency requirement is met in advance,
especially for households that are highly mobile? Arguably, it is
unfair to single out the EITC. Eligibility for other tax benefits, such
as head of household status and the dependency exemption, also
theoretically require extensive record keeping. Resolving filing status
errors would require fairly intrusive tests, which again might be hard
to certify in advance. The fear among those who care about the EITC is
that the pre-certification strategy is tantamount to a 100 percent
audit rate (in advance) for certain people who claim the EITC.
There are also real issues in subjecting EITC recipients to a pre-
certification process that does not apply to any other tax filers.
People do not need to pre-certify before taking a charitable deduction
for a used car or clothing, even though there is ample evidence that
these deductions are overstated. Sole proprietorships do not need to
pre-certify that they are not hiding cash from the tax authority before
claiming deductions for inventories, rent, and equipment, even though
they are notoriously noncompliant. And so on.
The IRS's proposed strategy now is to select about 45,000 single
fathers, grandparents, and other adults who claim to care for a
qualifying child for a pilot test of the pre-certification process. Bob
Greenstein (2003a) has documented the ways in which the pre-
certification requirements create a Catch-22 for many grandparents and
fathers who are lawfully eligible for the credit. For example, a
grandparent who leaves her grandchild with a nonlicensed family daycare
center cannot rely on an affidavit from the daycare provider or from a
relative or neighbor to prove that the child lived with her for the
year. Since most low-income people cannot afford expensive licensed
daycare facilities, this means that many eligible people will not be
able to prove eligibility to the IRS. Add to this the problems of
establishing eligibility for people who are transient or have language
problems and you have a recipe for excluding many eligible recipients.
At a minimum, the IRS should be required to develop and implement
clearly defined research design for its precertification pilot project.
The research questions should be clear. They should include:
What are the costs to participants of this program?
What are the characteristics of those who are not
precertified?
In particular, how many are found to be
ineligible in error? The IRS Taxpayer Advocate Service reported that
more than half (51 percent) of EITC claimants who were initially
rejected by IRS audits were able to prove eligibility when they had
help from the taxpayer advocate. (Greenstein 2003b)
How many eligible people choose not to complete the
precertification forms or are not able to complete it?
Are Hispanics and others whose first language
is not English disproportionately deterred from applying?
How are those with cognitive disabilities or
low levels of education affected?
How does precertification affect those who are
highly transient and those who experience spells of homelessness? (Do
precertification notices even reach these families?)
When someone is found to be ineligible for the EITC, is
someone else eligible to claim the credit?
Are there more accurate ways to target potentially
noncompliant taxpayers than simply tagging all single fathers and
grandparents?
Another question is whether a sample of 45,000 is necessary to
answer the research questions accurately. It is likely that they could
be answered accurately with a smaller sample, which would free up staff
to follow up on those who do not participate or are deemed to be
ineligible.
These questions should be answered before the pilot program is
expanded to include two million or more EITC families.
Conclusion
Noncompliance is a serious issue that undermines the tax system and
carries a huge cost in terms of higher taxes on law-abiding citizens,
fewer government services, and more government debt. The IRS is taking
a number of important steps to improve tax compliance. However, the
IRS's preoccupation with EITC recipients seems like a poor use of
scarce audit resources, is likely to undermine the EITC program, and is
unfair. It would be better to address the endemic problems in the
income tax at all income levels. EITC compliance, and compliance in
other areas, could also be improved by simplifying the tax law.
References
Bankman, Joseph. Forthcoming. ``An Academic's View of the Tax Shelter
Battle,'' in Henry Aaron and Joel Slemrod, The Crisis in
Tax Administration, Brookings Institution Press.
Graetz, Michael. 1997. The Decline [and Fall?] of the Income Tax, W.W.
Norton and Company.
Greenstein, Robert. 2003a. ``The New Procedures for the Earned Income
Tax Credit,''
Center on Budget and Policy Priorities. http://www.cbpp.org/5-20-
03eitc2.pdf.
Greenstein, Robert. 2003b. ``What is the Magnitude of EITC
Overpayments?'' Center on Budget and Policy Priorities.
http://www.centeronbudget.org/5-20-03eitc3.pdf
Holtzblatt, Janet and Janet McCubbin. Forthcoming. ``Complicated Lives:
Tax Administrative Issues Affecting Low-Income Filers,'' in Henry Aaron
and Joel Slemrod, The Crisis in Tax Administration,
Brookings Institution Press.
Internal Revenue Service. 2001. ``IRS Strategic Plan: Fiscal Years
2000-2005,''
http://www.irs.gov/pub/irs-utl/irs_strategic_plan.pdf.
Internal Revenue Service. 2003. ``Budget in Brief, Fiscal Year 2004,''
http://www.irs.gov/pub/irs-utl/budget-brief.pdf
McCubbin, Janet. 2000. ``EITC Noncompliance: The Determinants of the
Misreporting of Children,'' National Tax Journal, 53(4):
1135-1164.
Plumley, Alan H., and C. Eugene Steuerle. Forthcoming. ``What Should
the Ultimate Objective of the Internal Revenue Service Be?
A Fresh Look from an Historical Perspective,'' in Henry
Aaron and Joel Slemrod, The Crisis in Tax Administration,
Brookings Institution Press.
Rossotti, Charles O. 2002. ``Report to the IRS Oversight Board:
Assessment of the IRS and the Tax System,'' Internal
Revenue Service.
Slemrod, Joel. Forthcoming. ``Does the Tax System Penalize, or Favor,
Small Business?'' in Henry Aaron and Joel Slemrod, The
Crisis in Tax Administration, Brookings Institution Press.
U.S. Department of the Treasury. 1999. ``The Problem of Corporate Tax
Shelters: Discussion, Analysis and Legislative Proposals,''
http://www.ustreas.gov/
offices/tax-policy/library/ctswhite.pdf.
U.S. Department of the Treasury. 2002. ``Proposal for a Uniform
Definition of a Qualifying Child,'' http://www.ustreas.gov/
press/releases/docs/child.pdf, April.
Figure 1: Tax Gap Map for Tax Year 1998 (in $ Billions)
Figure 2. Examination Coverage Rates, 1977-2001
Examinations Closed Per 100 Returns Filed the Previous Calendar Year
Source: IRS Commissioner's Annual Report FYs 1978-92; IRS
Data Book FYs 1993-2001 as cited by Plumley and Steuerle
(forthcoming).
Figure 3. Outlays for Enforcement on EITC and All Taxes, Fiscal Years
1997-2004
Source: Total tax revenues and outlays on EITC enforcement
and total enforcement are from the U.S. Budget for fiscal year
2004. EITC claims in 1997 to 2000 are from the Statistics on
Income, Internal Revenue Service. EITC projections for 2001-
2004 were computed using the Urban-Brookings Tax Policy Center
microsimulation model.
Mr. SHAW. Thank you. Mr. Moorman.
STATEMENT OF JAMES W. MOORMAN, PRESIDENT, TAXPAYERS AGAINST
FRAUD
Mr. MOORMAN. Thank you for providing Taxpayers Against
Fraud with the opportunity to make a statement on fraud in the
Medicare Program. My organization is a nonprofit organization
devoted to the False Claims Act and its qui tam provisions.
Those are the provisions that allow whistleblowers to bring
suits in the name of the United States against those that
defraud Medicare and other government programs.
There has been a great deal of activity under the False
Claims Act in the area of Medicare fraud, and that is what I
will talk about. I will just make three points here quickly.
First, using the False Claims Act, the Department of Justice
and the HHS Office of the Inspector General working, with
whistleblowers, have recouped over $5 billion in Medicare fraud
judgments and settlements since fiscal year 1997 to the
present. The data we have developed shows that the government
is getting back $9 for every $1 spent in this effort. In
addition, there is undoubtedly an unmeasured but significant
deterrence effect of these cases that has contributed to the
decline, the noticeable decline, in the Medicare error rate.
Second, I would like to say that whistleblowers are the key
to the success of this Medicare antifraud effort. Almost all
the big cases now pursued by the Department of Justice are
those brought by whistleblowers. For example, the Department of
Justice indicated that over 90 percent of its False Claims Act
recoveries in fiscal year 2002 were from cases initiated by
whistleblowers.
Third, the False Claims Act cases have been very useful in
spotlighting areas of the Medicare reimbursement scheme that
facilitate fraud. One such area is the misuse of the AWP
mechanism to pay for drugs administered by physicians. Drug
companies, or at least some of them, inflate the AWP they
report it to Medicare, then charge doctors far less without
telling the government. The point of this appears to be to
induce doctors to buy their drugs by creating as big a spread
as possible between what they charge the doctors and what the
doctors are reimbursed by Medicare. They are reimbursed by
Medicare at 95 percent of the AWP number. This is called
marketing the spread.
Two recent very large settlements of False Claims Act cases
brought by whistleblowers illustrate the problem: One, the TAP
Pharmaceutical settlement, and the other, the Astra-Zeneca
settlement. The companies make competing chemotherapy drugs. To
induce doctors to use their drugs and gain market share, they
each inflated their AWP. Apparently they each sent letters to
the other demanding that the other stop doing what they were
both doing. Neither quit, but instead competed to jack up their
AWP. When they were caught, they each had to pay back hundreds
of millions of dollars to Medicare.
I can't tell the Committee how to do it, but it is clear
that the current Medicare drug reimbursement scheme needs to be
fixed, and fixed as soon as possible. Thank you.
[The prepared statement of Mr. Moorman follows:]
Statement of The Honorable James W. Moorman, President, Taxpayers
Against Fraud
I wish to thank the Committee on Ways and Means for inviting me to
present a statement at this important hearing on waste, fraud and abuse
in programs under the Committee's jurisdiction. My name is James W.
Moorman and I am the President of Taxpayers Against Fraud, also known
as ``TAF'' and as The False Claims Act Legal Center, a position I have
held for the past three and a half years. I am an attorney by training
and served as an Assistant Attorney General of the Department of
Justice under Attorneys General Griffin Bell and Benjamin Civiletti.
Between my service at Justice and TAF, I was a partner in the law firm
of Cadwalader, Wickersham & Taft.
Taxpayers Against Fraud and its sister organization, Taxpayers
Against Fraud Education Fund (``TAFEF''), are non-profit charitable
organizations dedicated to combating fraud against the Federal
Government through the promotion of the use of the qui tam provisions
of the False Claims Act, 31 U.S.C. 3729-33(``FCA''). Qui tam is the
unique mechanism in the FCA that allows persons with evidence of fraud
in federal programs or contracts to bring suit on behalf of the
government. TAF and TAFEF serve to inform and educate the general
public, the legal community and other interested groups and entities
about the FCA and its qui tam provisions. Based in Washington, D.C.,
TAF and TAFEF serve to increase understanding of the FCA's importance
in suppressing fraud. They provide information to whistleblowers and
their attorneys, publish the False Claims Act and Qui Tam Quarterly
Review and other educational materials, file amicus curiae briefs in
important cases, and provide testimony on issues where the workings of
the FCA are relevant. TAF and TAFEF maintain a comprehensive FCA
library for public use, and a professional staff available to assist
anyone interested in the FCA and qui tam. For more information, see
www.taf.org.
Though I understand this hearing concerns waste, fraud and abuse
with regard to all the programs within the Committee's jurisdiction, I
will restrict my remarks to fraud in the Medicare program. In September
of 2001, TAF published a detailed report addressing Medicare fraud,
titled Reducing Health Care Fraud, prepared by economist Jack A. Meyer,
President of New Directions for Policy. Last month we published an
update of that report, titled Fighting Medicare Fraud: More Bang for
the Buck, also by Dr. Meyer. Both reports can be found at www.taf.org.
Based on the analyses set forth in these reports, for the five-year
period FY1997-FY2001, the Federal Government's civil healthcare fraud
recoveries totaled $3.1 billion. Most of this $3.1 billion involved
fraud against Medicare, though a small part involved other health care
programs. The government's cost to recover the lost Medicare funds was
an estimated $315 billion, so the government got back about nine
dollars for every dollar spent to investigate, prosecute and recover
funds lost to fraudulent Medicare billings.
I should note that the Justice Department has publicly stated it
recovered $980 million in healthcare fraud cases in FY 2002, most of
which involved Medicare. I also note that False Claims Act settlements
announced so far this year involving Medicare appear to be in the
billion dollar range, bringing the amount of Medicare funds recovered
through the use of the FCA during the seven years from FY 1997 through
FY 2003 to over $5 billion.
I would like to make three points about these developments:
FIRST, the Federal Government has, through the use of the FCA, a
highly successful tool for fighting Medicare fraud. In addition to the
actual money recovered, which is significant in itself, FCA suits have
created a powerful deterrent to fraud among healthcare contractors
doing business with the Federal Government. Anecdotal evidence points
to changes of behavior and the reduction of fraud in many sectors of
the healthcare industry. Factors that have led to changed behavior
include increased provider awareness of the False Claims Act, increased
awareness on the part of internal watchdogs and whistleblowers in
health care organizations, regulatory targeting of reimbursement
problem areas revealed by FCA cases, and the inclusion of stringent
corporate integrity agreements, or CIAs, in FCA settlements. All of the
activity to fight fraud on the part of the Justice Department, the
Office of the Inspector General at HHS and whistleblowers has
contributed to a dramatic reduction in the Medicare error rate as
calculated by the Office of Inspector General, which fell from 14
percent of fee for service payments in 1996 to 6.3 percent in 2001, a
reduction of 55 percent over six years.
SECOND, the qui tam provisions of the False Claims Act are the key
to the success the government has had in fighting Medicare fraud.
Whistleblowers provide the Federal Government with the inside
information it needs to uncover complex business frauds--frauds that
are otherwise invisible to federal regulators. For example, the FCA
settlements with the Hospital Corporation of America (HCA) involved
allegations stemming from the hospitals' use of two sets of books, one
for the benefit of federal regulators, and one for internal purposes.
According to the Department of Justice, of the $1.2 billion in False
Claims Act recoveries in FY 2002 in all fields, ``Recoveries associated
with suits brought by whistleblowers . . . accounted for $1.1 billion
in settlements and judgments during the fiscal year.''
A number of aspects of the False Claims Act are responsible for the
mobilization of whistleblowers to spark successful actions on behalf of
the Medicare program, but none more so than the combination of the
provisions for treble damages and the provisions allowing
whistleblowers to receive anywhere from 15 to 30 percent of the awards
against fraudfeasors, depending on the circumstances. Historically, the
whistleblower awards have run about 16 percent, but I have been
informed that they may have averaged 19 percent in FY2002.
THIRD, FCA cases frequently reveal flaws in the Medicare
reimbursement systems that foster fraud. A recent example are cases
involving drug company fraud against Medicare that reveal an urgent
need to devise an alternative to the current use of the ``Average
Wholesale Price,'' or ``AWP'' mechanism as the basis for reimbursement
for prescription drugs.
Consider the case of drugs that are administered to patients by
physicians, the principal category of drugs Medicare now pays for. One
fraudulent marketing technique that has been uncovered by
whistleblowers through FCA cases is called ``marketing the spread.''
Under this technique, a manufacturer offers the physician a deep
discount on the price of the drug that the manufacturer does not
disclose to the Medicare program. The concealment yields a windfall
gain to physicians at the expense of taxpayers because the physician
keeps the ``spread'' or difference between the amount the government
program pays for the drug and the discounted price charged by the
manufacturer. For example, if Medicare reimburses a physician at 95
percent of the AWP for a drug, and the manufacturer, in order to induce
the physician to prescribe the drug, charges him only 25 percent of
AWP, the physician keeps the spread (70 percent of AWP). This revenue
is in addition to whatever reimbursement the physician receives from
Medicare for actual physician services provided during the encounter at
which the drug was prescribed.
A manufacturer can increase either the size of the ``spread'' or
the amount of revenue it receives under such an arrangement (or both)
by raising the AWP for the drug. If the AWP is $100 in the above
example, the physician receives $95 from the government for
administering a drug he buys for only $25, making $70 on the spread. To
increase the amount the manufacturer makes on a prescription while
enabling the physician to continue to receive the same spread, the
manufacturer simply raises the AWP to, say $110. The government now
pays the physician 95 percent of $110, or $104.50. The physician still
keeps the $70 spread but now the manufacturer receives $34.50, an
increase of $9.50. Alternatively, if the manufacturer wished to
increase the prescribing physician's revenue, it could increase the
physician's spread to $79.50 by continuing to charge him only $25 for
the drug. In either case, the increase is at the taxpayers' expense.
The impact of marketing the spread is not limited to the federal
treasury. It also affects Medicare beneficiaries to whom such drugs are
prescribed. Under Medicare, beneficiaries are responsible for a co-
payment of 20 percent of the price that Medicare pays--in the case of
prescription drugs, 20 percent of 95 percent of AWP. Thus, if the AWP
is $100, the beneficiary's co-payment requirement is 20 percent of $95,
or $19. If the doctor only pays $25 to the manufacturer, the patient's
co-payment is equal to three-fourths of the amount the doctor pays. In
some cases, patients have paid doctors more in co-payments than the
drug company charged the physicians.
Two very significant settlements of cases involving these issues
illustrate the scale of the problem created when drug companies choose
to market the spread. Both cases were first brought to the government's
attention by whistleblower suits under the False Claims Act. The first
settlement, involving TAP Pharmaceuticals, was announced by the U.S.
Attorney in Boston on October 3, 2001. TAP agreed at that time to pay
the United States $559 million for marketing the spread on an inflated
AWP for Lupron, a prostate cancer chemotherapy drug. TAP also agreed to
pay back additional money to states for Medicaid fraud and also to pay
the United States a hefty criminal fine.
Then, on June 20 of this year, the second settlement was announced
by the U.S. Attorney in Wilmington, Delaware against Astra-Zeneca for
doing the same thing for its drug, Zolodex, also a prostate cancer
chemotherapy drug. Astra-Zeneca paid $355 million for a number of
fraudulent pricing schemes, the largest and most troubling of which was
for marketing the spread on Zolodex in the same way as TAP marketed the
spread for Lupron.
While I do not have the documents, it has been reported that TAP
Pharmaceutical and Astra Zeneca exchanged letters, each accusing the
other of what they were doing and demanding the other stop. That is an
amusing sidelight to a very serious problem. What is really of interest
here is a very malignant incentive to commit fraud. Because Medicare
reimbursed on the basis of AWP numbers as reported by the companies,
and because the companies sold their drugs to physicians and the
physicians were reimbursed by Medicare, the companies saw they could
increase their market share by increasing the spread between what they
charged the doctors and what Medicare reimbursed the doctors. They did
this by inflating the AWP number, effectively using the taxpayers'
money to bribe doctors to use their drugs. Thus TAP and Astra-Zeneca
apparently entered into a perverse competition to see which could out-
fraud the other, with the idea that the company with the most
fraudulently inflated AWP would gain the largest market share.
I wish to say in closing that I am not competent to advise this
Committee as to how Medicare should pay for drugs. But, I am competent
to say that the current system fosters fraud and Congress should take
corrective action as quickly as possible.
Thank you again for providing me with this opportunity to present
my statement.
Mr. SHAW. Thank you, Mr. Moorman. Mr. Rice.
STATEMENT OF MICHAEL G. RICE, PRESIDENT, UNITED COUNCIL ON
WELFARE FRAUD, PHOENIX, ARIZONA
Mr. RICE. Mr. Chairman, Mr. Cardin, on behalf of the UCOWF,
thank you for the opportunity to speak to you today regarding
child care assistance fraud.
A major goal of UCOWF is to provide maximum efforts towards
the prevention, detection, elimination and prosecution of
welfare fraud, and to effect recovery of lost taxpayer moneys.
As the direction and manner of providing assistance to the
needy have changed, our Members have consistently been the
first to encounter and address the program integrity aspects
inherent in those changes.
The block grants to the States established under TANF were
aimed in part in providing assistance to needy families so that
children could be cared for in their own homes or in the homes
of relatives. Although recognizing child care is essential in
welfare to work, Congress limited the percentage of block
grants to be used for administrate costs, which include the
expense of detecting and investigating fraud and abuse. A child
care fraud case is more time-consuming and labor-intensive than
investigation of other kinds of welfare fraud. Local agencies
are partly reimbursed for fraud unit costs from Federal
administrator funds, but they are not permitted to credit child
care fraud overpayment recoveries to their fraud funds. As a
result, child care fraud programs are given a lower priority
than those that provide a monetary incentive.
The cost of providing child care is significant, and a case
of child care fraud can result in a substantial financial loss
in a very short period of time. The extent of the problem
nationwide is still being evaluated, and many States have not
kept statistics. Therefore, recently UCOWF conducted a
nationwide survey of State program integrity directors. Forty-
two States responded. Forty directors were of the opinion that
child care fraud posed a problem in their States. Those States
that maintain statistics, fraud was discovered in upward of 69
percent of the investigations conducted, with total annual
discovered fraud amounts ranging from $10,000 to over $1
million. Eighteen States administratively penalized program-
violating child chare recipients, and only eight penalized
violating providers.
There is little uniformity in the manner in which child
care fraud is addressed by the States apart from the
utilization of the criminal justice system. Where
disqualification of TANF and food stamp program violators is
mandated, no such provision exists regarding child care
recipients or, notably, providers. In most States violating
providers remain eligible to provide government-paid services.
Child care fraud can be committed by both recipients and
providers individually or in collusion with each other. A
Rochester, New York, recipient who I prosecuted claimed that
her brother was caring for her 11 children. Provider checks
were sent in her brother's name to her mother, who cashed them
and split the money with the recipient. The brother was in
State prison, and her husband was, in fact, residing unreported
in the household, and he was caring for the children.
Restitution was limited to $77,000 because agency records
failed to cover the entire period of the fraud.
A Wyoming provider got $41,600 over 1 and a half years,
claiming services for children who were not there and padding
the hours for those that were.
A Minnesota woman applied for child care assistance in one
county, claiming to support four children on an income of
$3,100 a month. In another county, however, she operated an in-
home day care center; was paid $854,000 over 6 years. She
pleaded guilty to receiving more than $134,000 and fraudulently
received child care reimbursements.
The UCOWF asked the Congress to demonstrate its commitment
to child care program integrity by requiring all States to
prepare a child care fraud control plan which requires at a
minimum procedures for recovery of child care overpayments,
Federal tax intercepts for child care overpayments,
disqualification penalties for child care recipients and
providers who have committed an intentional program violation,
and establishment of an incentive to promote anti-child-care
fraud activity by crediting child care fraud overpayment
recoveries to the fraud investigation funds of the individual
States.
Child care assistance is the new pot of gold in welfare
fraud. It must be ensured that uniform and reasonable criteria
are established to provide and receive child care assistance,
that applications for assistance in provider status are
properly evaluated, that funds are available for thorough
investigations and penalties imposed on intentional program
violators, and finally, that vehicles are in place for recovery
of overpayments.
On behalf of the UCOWF, I thank the Committee for the
opportunity and honor of addressing you on this subject.
[The prepared statement of Mr. Rice follows:]
Statement of Michael G. Rice, President, United Council on Welfare
Fraud, Phoenix, Arizona
Chairman Thomas, Congressman Rangel, members of the committee: On
behalf of the United Council on Welfare Fraud, I wish to express my
gratitude for the invitation to provide written and oral testimony for
you today and for your concerns on the topic of welfare fraud and
abuse, particularly in the area of child care assistance.
About the United Council on Welfare Fraud and the information provided
today:
For 32 years the major goal of the United Council on Welfare Fraud
(UCOWF) has been to provide maximum effort towards the prevention,
detection, elimination and prosecution of welfare fraud in its many
forms and to effect recovery of taxpayer monies lost through waste,
fraud and abuse in government programs designed to aid the needy.
UCOWF's membership currently consists of welfare investigators,
administrators, and recovery specialists, as well as fraud prosecutors
from 47 states, the District of Columbia and 7 Canadian provinces,
establishing a network from Hawaii to Newfoundland.
A primary purpose of our organization has always been the promotion
of effective and efficient administration of public welfare. As the
direction and manner of providing assistance to the needy have changed
over the years, our members have consistently been the first to
encounter and address the program integrity aspects inherent in those
changes; for despite how well-intentioned and generous a program may be
in aiding people truly in need, there will always be those who will try
to capitalize on opportunities and cheat the system.
The information I provide to you today has been compiled from a
survey of state welfare fraud directors across the United States
recently conducted by the United Council on Welfare Fraud and from the
submission of anecdotal case experiences and observations by
investigators, prosecutors and administrators who have been dealing
directly with the problem of child care fraud. I do not presume to
speak for any governmental agency, federal, state or local, I am merely
relaying information provided by our members and other interested
people who have dealt with this burgeoning problem.
Summary of the problem:
The passage of the Personal Responsibility and Work Opportunity
Reconciliation Act of 1996 established block grants to the states for
``Temporary Assistance to Needy Families,'' popularly known as
``TANF'', aimed in large part at promoting job preparation and work
among needy families and providing assistance to those families so that
children could be cared for in their own homes or in the homes of
relatives. It was thus clearly recognized that child care was a
significant factor behind the ``welfare to work'' concept underlying
the legislation. Additionally, steps were taken to address program
integrity issues such as public and nutritional assistance to fugitive
felons and parole violators, individuals convicted of drug-related
felonies and sanctions were established for intentional violators of
means-tested public and nutritional assistance programs. Incentives
were provided to encourage the states to pursue delinquent child
support payments.
Although recognizing child care as essential to TANF and creating
therewith Title VI, the Child Care and Development Block Grants
Amendment of 1996, Congress also restricted the use of any TANF block
grants to carry out state programs pursuant to Title XX and the Child
Care and Development Block Grant Act of 1990. A limitation of 15
percent of the TANF grant to a state was placed on administrative
costs. Administrative costs include the expense of detecting and
investigating fraud and abuse. Further, while the Child Care and
Development Block Grants Amendment of 1996 appropriated monies to be
used to establish and fund child care programs, it limited the amount
available for administrative purposes to 5 percent of a state's grant
and the only penalties created were those to be imposed on the states
for improper utilization of the funds allotted to them.
The emphasis on child care accompanying TANF resulted in an
increase in the amount of monies expended by welfare agencies to child
care providers of many forms. Not all child care providers are state-
licensed day-care centers. A large portion consists of licensed in-home
providers and a larger percentage is ``informal providers.'' In
Minnesota, for example, ``legal non-licensed'' providers represented
nearly 37 percent of child care providers in 2002, compared to 32.8
percent for licensed centers and 27.6 percent for licensed home
providers.
Staff reductions caused by economic conditions and grant
restrictions have resulted in insufficient screening of applications to
receive and to provide child care services by many social services
agencies. Further, the investigation of child care fraud is more time
consuming and labor intensive than that of other types of welfare
fraud, such as TANF and Food Stamp fraud cases. Local agencies are
reimbursed their fraud unit costs from federal administrative funds and
their state share of fraud and non-fraud overpayment collections but
they are not permitted to credit child care fraud overpayment
recoveries to their fraud funds. As a result, child care fraud programs
are given a lower priority than those that provide a monetary
incentive.
The UCOWF Child Care Fraud Survey:
The cost of providing child care is significant, to say the least,
(Virginia's Child Care Program budget for FY 2003 is $115,000,000), and
the potential for fraud is high. From my own experience as a welfare
fraud prosecutor, I can assure you that a case of child care fraud can
result in a substantial loss of taxpayer monies in a very short period
of time. The extent of the problem nationwide, while recognized
generally, is still being evaluated, but many states have not kept
statistics. The United Council on Welfare Fraud, in an effort to reach
a better understanding of the extent, nature and impact of child care
fraud across the nation, conducted a survey in 2002.
A questionnaire was sent to the state fraud directors of each of
the states and the District of Columbia seeking information on whether,
in their view, child care fraud was a state problem, the types of child
care fraud experienced in the state, if statistics were kept,
prosecution was pursued, recoveries made and penalties imposed in cases
of child care fraud. Forty-two states responded. The document
containing the full list of questions, eleven in all, and the responses
is too large to include with my written testimony, however it may be
viewed on the organization's website, ucowf.org.
Forty of the 42 state fraud directors polled were of the opinion
that child care fraud posed a problem in their states and of the two
answering in the negative, one still provided examples of the types of
child care fraud that has occurred within its boundaries.
Eighteen states had not been keeping statistics on child care
fraud, but of them, several responded that the local county agencies
administering the services did maintained fraud databases. In those
states that did maintain detailed statistics, fraud was discovered in
upwards of 69 percent of the investigations conducted with total annual
discovered fraud amounts ranging from $10,000 to over $1 million.
All but three states referred fraud cases for criminal prosecution,
with 17 having specific state laws regarding child care assistance
fraud. Twenty-three relied on other state statutes to address criminal
activity. Thirty-three states pursued administrative recovery of
overpayments of child care assistance to recipients, although some
could only collect through voluntary repayments, and four were capable
of recovering from providers through a reduction in subsequent
payments.
Eighteen states administratively penalized program-violating
recipients by disqualification or other sanctions; seven undertook
disqualification or de-licensing action against violating providers;
one state penalized only providers but not recipients and the remainder
had no penalty provisions or relied on criminal or civil restitution
procedures.
An analysis of the results of this survey leads me to the
conclusion that there is little uniformity in the manner in which child
care fraud is addressed by the states, apart from the utilization of
the criminal system. Where TANF mandates disqualification of program
violators, there is no such provision in the area of child care
assistance, particularly with respect to violating providers. A non-
licensed, or informal, child care provider convicted of receiving
fraudulent child care monies, in many states, is still eligible to
provide child care services and receive government payments without
regard to his or her previous fraud.
The types of fraud observed in the states were evenly divided
between recipient (client) fraud and provider fraud, recognizing
instances where there was collusion between both parties to defraud the
system.
Types of Child Care Assistance Fraud and Various States' experiences:
Child Care Assistance fraud can be committed by both recipients and
providers individually or in collusion with each other.
A recipient may understate income to the household, rendering the
household eligible for services. This can be done by underreporting the
amount of hours worked or wages earned by the client, failing to report
the presence of a responsible wage earner in the household, falsely
claiming residence in the county or falsely claiming a child care
expense when none exists. Failing to report a loss of employment or
claiming non-existent employment, rendering a client ineligible for
child care services also constitutes a fraud on the system.
In one recent Colorado case a client forged her pay stubs reducing
the claimed amount of income to her household. As a result she received
over $12,000 in child care assistance over 14 months to which she was
not entitled.
Two Virginia women failed to report that their husbands were
employed and residing in their homes resulting in losses of $16,482.00
and $15,962.00, respectively.
A Minnesota woman falsely reported living alone when her able-
bodied husband was, in fact, in the household and collected more than
$91,000 in child care assistance over four years.
In another Colorado case, a client claimed residence in one county
while residing in another. A recovery of $33,553.00 was established for
a two year period.
A Rochester, New York woman, whom I prosecuted, claimed that her
brother was caring for her 11 children. Payments were sent in her
brother's name to her mother's address. The brother, in fact, had been
incarcerated for over 10 years on a rape conviction and her husband
was, in fact residing in the household and caring for the children. The
loss amount was limited to $77,000 because agency records failed to
cover the entire period of the fraud. The illegally obtained money made
the client ineligible for the food stamps the family received and the
Section 8 housing in which they resided.
Another Rochester woman stole an acquaintance's social security
card, established a vendor account using the acquaintance's social
security number and her own mother's address. Twenty-seven thousand
dollars in child care payments were sent to her mother who signed the
checks and gave them to the recipient over a two year period. Free care
for five children was provided by the client's mother and her 85 year
old grandmother.
In Wyoming, two sisters claimed a third was providing day care for
their children when, in fact, the third sister was fully employed and
they were not. This resulted in a loss of $6,700 over a period of 14
months.
Similarly, two Virginia clients, employed by the same company,
claimed each provided services for the other when, in fact, they worked
the same hours. A claim of $36,474.00 was established.
Another Virginia woman failed to report that she had lost her job
on three separate occasions, yet continued to send her children to
child care each time. The overpayments totaled nearly $4000.
Providers can commit fraud by claiming children who aren't being
watched, by misrepresenting the number of hours that services were
provided or by charging more to care for government funded children
than private pay children. They also engage in collusion with
recipients and split payments to which they are not entitled.
A Wyoming provider got $41,600 over 1\1/2\ years claiming services
for children who were not there and padding the hours for those that
were there.
A Colorado provider billed $6,685 for children who had not been in
his care for 4 months.
Another Wyoming provider filed claims for children who were not in
attendance at a rate higher than that charged to non-child care
assistance covered children; a claim was established for $112,800 for a
three year period of fraud.
A Minnesota couple is under investigation for taking kickbacks from
a child care center that billed the system for over $41,000 from
November 2001 through December 2002 under the pretense of caring for
the couple's five children.
A California client sent her children to a free child care center
and claimed that the services were provided by a family member. The two
split $15,900 in illegal child care payments.
Cheats can take both forms. In a particularly egregious case, a
Minnesota woman applied for child care assistance, claiming to support
four children on an income of $3,100 a month. In another county,
however, she operated an in-home day care center and was paid $854,000
over six years. She pleaded guilty to receiving more than $134,000 in
fraudulently received child care reimbursements.
Recommendations:
The above is but a smattering of ``horror stories'' I have compiled
from around the nation; I have omitted dozens more. They add up to a
tremendous loss of taxpayer monies set aside for legitimate child care
purposes and point out the need for adequate checks and balances in the
system.
The United Council on Welfare Fraud recommends that, due to the
substantial increase in child care funding made available to the state
and the growing number of instances of fraud in the Child Care
Assistance, Congress should demonstrate its commitment to Child Care
program integrity by requiring all states to prepare a child care fraud
control plan which, while allowing flexibility to address state-
specific needs, requires, at a minimum:
Procedures for recovery of child care overpayments.
Federal tax intercepts for child care overpayments.
Disqualification penalties for child care recipients and
providers who have committed an intentional program violation. These
penalties would be modeled after and be similar to those formerly in
place in the AFDC program (45 CFR 235.112) and currently in place in
the Food Stamp program (7 CFR 273.16 [b]).
Establishment of an incentive to promote anti-child care
fraud activities by crediting child care fraud overpayment recoveries
to the fraud funds of the individual states.
UCOWF gladly offers its assistance in drafting these changes to
existing legislation and regulatory provisions.
Conclusion:
Child Care Assistance has been described by one of our member
investigators as ``the new pot of gold'' in welfare fraud. It must be
acknowledged, pursued and prevented. Efforts must be made by both the
states and the Federal Government to insure that uniform and reasonable
criteria are established to provide and receive child care assistance,
that applications for assistance and vendor status are properly
evaluated, that funds are available to ensure thorough investigation of
suspected cases of fraud and penalties imposed on intentional violators
of the program, and that procedures and vehicles are in place for
recovery of child care program overpayments.
Again, ladies and gentlemen, on behalf of the United Council on
Welfare Fraud, I thank you for the opportunity and honor of addressing
you on this subject.
Mr. SHAW. Thank you, Mr. Rice. Mr. Cardin.
Mr. CARDIN. Thank you, Mr. Chairman. Let me thank all of
our witnesses for their testimony. I found it very helpful to
hear the different problems and the different areas that are
under the jurisdiction of this Committee.
Mr. Rice, let me, if I might, start on the child care and
on the welfare system. In 1996, Congress made a decision to
change the Federal program on welfare. The basic philosophical
change was to give the States maximum flexibility, give them a
set amount of resources, no longer an entitlement based upon
the number of people receiving services, but a predictable
funding source that they had discretion to use as they saw fit,
basically.
A lot of the child care money comes out of the TANF funds.
Although we are very concerned about any waste, fraud or abuse
in the system as it relates to child care, it is basically a
State resource issue, because if the moneys are not used
properly, the moneys could have been used for other purposes.
So, I guess my question to you is, based upon your
observations, is it your testimony that States are not doing as
good a job as they should in making sure that the funds are
properly used? Obviously, they can determine a lot of the
eligibility issues. They can also set up their own internal
systems, as some States have done--Georgia would be one good
example; but is it your testimony that States should be doing a
better job in this area?
Mr. RICE. Well, sir, I think there are a number of factors
involved here. I think there is a certain naivete among the
evaluators. I think there is an entitlement mentality that
exists in some States where the moneys are there, and there is
little care about going into the program integrity aspects of
it and verifying eligibility.
Recent economic conditions have caused a lot of States to
reduce their manpower, so that the opportunity isn't----
Mr. CARDIN. They have also reduced the number of people in
the programs. My understanding is that the State of Maryland
has frozen any new individuals from getting on child care
unless they are on welfare.
Mr. RICE. I think, sir, with regards to this particular
type of program, with regards to the child care programs, I
believe that has increased. I think there have been a fair
number of new cases that have come in where people have
actually gone to work and have gotten day care. There are a
number of types, of different types of day care that can be
provided, and a large percentage of them involve informal day
care where relatives and other friends are actually taking care
of other people's children without----
Mr. CARDIN. My question is, are the States looking into
these issues?
Mr. RICE. Yes, sir, they are beginning to look at them now.
It has only come up in the last couple of years that we have
noticed the increase in the amount of loss in the child care
area.
Mr. CARDIN. Thank you. Mr. Burman, the EITC was actually, I
think, the first major reform in welfare. We want to make sure
that welfare--that work paid, that people could live out of
poverty on a paycheck; and I think it has been a very
successful program.
We are obviously concerned about any fraud or any waste in
any of our programs. I must tell you I have looked at this
letter that the IRS intends to send out to a select group of
individuals that they believe, I guess, are higher risk; and
the form itself, I don't know what I would think if I received
this form. I am somewhat puzzled as to what the reaction would
be, as to how I was selected; it is not really spelled out in
the letter. The form, I just looked at quickly, I have not
looked at the instruction sheet; maybe we expect these people
to read these instruction sheets, but I would have trouble
filling out this form.
I don't know what--what is your reaction to this effort?
Mr. BURMAN. My reaction is the same as yours. Actually, the
American Bar Association tax section produced a long and
detailed set of suggestions, one of them was, right at the top
of the form to say what is the form, why were you selected. I
think Mr. Rangel wrote a letter saying that the IRS should tell
people right off that they are not being selected because the
IRS thinks they are cheating, that in fact if you fill out the
form and you are eligible, they want you to take the credit.
It is complicated. It is confusing. A lot of people that
are going to get the form don't speak English. A lot of them
are not very well educated. Some of them may have cognitive
impairments. A lot of them, the IRS is going have a hard time
finding, because low-income people are very transient. I
estimate that 100,000 low-income EITC recipients are homeless
at one point during the year. If they are when the IRS tries to
track them down, they will never even get the form.
Mr. CARDIN. I thank you for that. Mr. Jordan, if I might, I
thank you for your work. I think your agency has been extremely
helpful in bringing to our attention matters of particularly
the--in our health care reimbursement structures. I have heard
over and over again from physicians and from durable medical
equipment companies that, yes, I understand what you are saying
about questionable claims, but in many cases we are trying to
get needed services for the people that we are responsible to
treat, and that I don't know why you call it fraud or abuse if
I try to use creativity to get needed services for a senior who
needs particular health care needs.
Durable medical equipment companies point out often that
when you compare the cost of a product to what is on the
marketplace it doesn't include service, which is part of their
operations.
My point to you is this: We don't tolerate the misuse of
our system. There is no excuse for misusing the law. The law is
the law, and reimbursement should be matched to what is
appropriate, but in your work, do you come across areas that if
we had more sensitive reimbursement structures, the amount of
the mistaken claims might be significantly reduced? Is that
part of what you do? If you do or do not, would it be useful if
that information was made available to Congress?
Mr. JORDAN. Let me say that when--what we see at the
Department of Justice end up being what are called the sick
patients, that is, those individuals who are referred to us who
have already been through the system, or companies that have
been referred to us who have already been examined for--for
potential fraud.
On the HHS side, they will look and work with those
companies to try to determine whether there is something that
amounts to a paperwork error or a documentation error before
coming to us with a case. We take special care to make certain
that the fraud cases that are brought are against companies or
individuals who have really abused the system; that is, these
are folks who claim to have provided services or claim to have
provided equipment and simply didn't, or who have gone far
beyond what would be called a creative use of the system and
have really committed what amounts to intentional, knowing
fraud because that is the standard that we must use in order to
prove a case in the court.
Addressing the second part of your question with respect to
what information could be provided to you that would be
helpful, I would suggest that a system, or a reform to the
system, should not only address those individuals who commit
the most egregious fraud that we see, but the fraud that HHS
sees or the problems that HHS or the Office of the Inspector
General there sees. They would probably be better able to
address that concern than we could at the Department of
Justice, since we really see the worst of the offenders.
Mr. CARDIN. That is fair enough. I would urge a sensitivity
to try to get the right policy. There is, again, no excuse for
fraudulent activities, and there is certainly no excuse for
people even trying to game the system that is short of fraud.
It is useful if we could get information that would make the
system more acceptable to the people who participate; and,
therefore, they may be more willing to help us root out those
who are committing fraudulent practices. Thank you, Mr.
Chairman.
Mr. SHAW. Mr. Brimacombe, you testified about the diversion
of jet fuel into the trucking industry. How serious is this
question in terms of loss of Federal dollars?
Mr. BRIMACOMBE. With the jet fuel?
Mr. SHAW. Yes, sir.
Mr. BRIMACOMBE. Mr. Chairman, we don't have absolute
numbers on it. I know KPMG did do a study, and they identified
the potential loss per year of, low end, just under $1 billion.
Mr. SHAW. Repeat that.
Mr. BRIMACOMBE. One billion dollars to a maximum of $4
billion. However, the IRS doesn't have any good figures on
that.
Mr. SHAW. Do you think it would be helpful to start taxing
it at the refinery rather than at the pump?
Mr. BRIMACOMBE. Mr. Chairman, when we started taxing
gasoline at the rack, we substantially decreased the abuses. If
that is projected onto jet fuel, it seems like it may alleviate
some of the problems.
Mr. SHAW. Thank you. Mr. Moorman, we have--in H.R. 1 we
have a demonstration of a new kind of organization to track
down fraud and abuse. You mentioned H.R. 1 in your testimony;
it is recovery audit firms.
Does your organization support this provision and do you
believe that providing a percentage of the recoveries to a firm
might prove to be use a useful incentive?
Mr. MOORMAN. Yes, sir. We sent in a letter supporting that.
We believe that, like in the False Claims Act, in fields where
there were awards for people who do these things, there is a
tremendous incentive created. We did note that where the
evidence indicates that people are liable under the False
Claims Act they should also be prosecuted under that liability
Act, when these recovery auditors have uncovered that liability
in the appropriate cases.
Mr. SHAW. I thank you. Mr. Huse, throughout your testimony
you highlight the fact that the key to addressing waste, fraud
and abuse is often the enhanced use of technology. As the
Agency considers its priorities for computer system
enhancement, what priorities are programs to deter waste, fraud
and abuse given?
Mr. HUSE. I think that the SSA does a good job trying to
balance the competing requirements of service and stewardship,
Mr. Chairman, and certainly in this aspect they do that.
When you talk about the very expensive systems enhancements
that do add to the stewardship side, these have to be balanced
against the competing requirements that are similarly there in
systems enhancements for service. These are triaged and put in
a queue, depending upon their importance. In most instances,
service does trump stewardship because Social Security exists
to serve as a social insurance entity.
Mr. SHAW. We also know, and we have seen this particularly
in SSI and in some of those areas where computer technology is
almost nonexistent, that SSA really hasn't come out of the Dark
Ages as far as handling some of these filings that are going
from desk to desk.
I know we are making strides, studies are being taken. Do
you think that we are sufficiently funding the need for updated
equipment in tech in the Social Security system?
Mr. HUSE. Based on the budget process this year, it seems
that the appropriate investment is being made. Our work
indicates that those challenges are important. The Commissioner
would be in a better place to tell you whether Social Security
has gotten enough funding in its appropriations, but it appears
that it has.
Mr. SHAW. Thank you. Mr. Brimacombe, the Committee on
Transportation Infrastructure has expressed great interest in
this jet fuel. I am a little surprised that the figures you
give are as low as they are. Perhaps we should look to see
exactly how much tax evasion is taking place when jet fuel is
put into vehicles that are on the road and who should be paying
these types of taxes. What exactly is jet fuel, and does it go
into diesels? Is that where it is used primarily?
Mr. BRIMACOMBE. Mr. Chairman, jet fuel is a kind of
kerosene that diesel engines can run on various types of
products. Jet fuel is a kind of kerosene that is mixed with
diesel. Usually we find that the percentage of jet fuel
included in a load of fuel would probably run 10 to 15 percent,
sometimes as high as 50 percent.
Jet fuel is blended with regular diesel fuel. That is how
we find it on the highways. We actually stop trucks and we
conduct fuel fingerprinting, or we go to retail outlets or
wholesalers. That is how we discover it.
Mr. SHAW. We will make your testimony available to the
other Committee of interest on this to see whether we should
try to pursue this with legislation.
I want to thank all of you on the panel for being here, for
your patience in staying with us as long as you have, and I
thank Mr. Cardin for sticking with us on this hearing. It is a
most important subject.
I think the one thing that is the biggest deterrent against
someone paying their taxes is looking out and seeing that the
government is wasting the money or that somebody else isn't
paying their fair share. I think it is up to this Committee to
see that the dollars are spent as wisely as they can, as
efficiently as they can; and that everybody does pay their fair
share, and that this is done fairly and without prejudice to
anybody.
Thank you very, very much. I think it has been a great
hearing. We are now adjourned.
[Whereupon, at 1:12 p.m., the hearing was adjourned.]
[Questions submitted from Mr. English and Mr. Foley to Mr.
Brimacombe, and his responses follow:]
Question from Representative Phil English to Joseph R. Brimacombe
Question: Has the Administration, in its calculations on these HVUT
proposals, explored the cost to tax-compliant companies of complying
with the up-front payment mandate and decal proof-of-payment program?
What steps would the Administration take to avoid the creation of a
black market in HVUT decals?
Answer: We realize that there is a cost/burden for the time value
of money that will be imposed by eliminating the installment provisions
for the payment of this tax. Under the current system, a taxpayer pays
one fourth of the tax for each vehicle per quarter. The amount of the
tax per vehicle is based on the gross vehicle weight (GVW). The tax per
vehicle ranges from a low of $100 on a GVW of 55,000 pounds to the
maximum tax of $550 for vehicles with a GVW of over 75,000 pounds. The
maximum impact of this change would be the time value of money for
$137.50 for 90 days, $137.50 for 180 days and $137.50 for 270 days. The
overall impact would be determined by the applicable interest rate that
may be in effect at any given time. We currently have over $50 million
in defaulted installment agreements and we believe this is a compelling
reason to make a change in the current process.
There will not be a charge for the proof-of-payment decal. The only
burden imposed is the task of attaching the decal to the vehicle. Use
of the decal should substantially improve compliance and, in addition,
greatly reduce burdens for compliant taxpayers. Inspectors will be able
to determine through a simple visual examination whether a vehicle is
in compliance, sparing truck operators the time-consuming process of
producing proof that the tax has been paid.
We are aware that there may be attempts to counterfeit the decals.
We are pursuing several possible solutions that will make it easy for
us to determine if a decal is counterfeit. These approaches include the
use of current technology, use of bar coding and other identification
technologies that are widely used in private industry.
Questions from Representative Mark Foley to Joseph R. Brimacombe
Question: What has the IRS done in the past year in exploring
advanced technologies that will enable us to recover these lost
revenues?
Answer: We are making improvements in the reporting system that
tracks fuel distribution. ExSTARS is the information reporting system
that enables the IRS to track all fuel transactions that occur within
the fuel industry's bulk shipping and storage system--refineries,
pipelines, barges, and terminals. It provides tracking capabilities of
fuel from the pipeline system to the point of taxation for the Federal
Excise Tax at the terminal rack. This information will then be matched
by the IRS to fuel sales transactions reported by the terminals and to
verify the tax liabilities reported on the quarterly Forms 720.
The IRS has developed a ``fuel fingerprinting'' technology to
combat fuel tax evasion occurring ``below the rack''--particularly
bootlegging, smuggling, and adulterated fuel through ``cocktailing'' or
blending the product. Fuel fingerprinting is a technique that examines
the ``chemical fingerprint'' of samples taken from retail stations for
adulteration or for a mismatch with samples taken from the terminal
racks that normally supply those stations. This technology allows for
the detection of untaxed kerosene intended to be used as aviation fuel,
``transmix'' taken out of pipelines, waste vegetable oils, used dry-
cleaning fluids, and other chemicals that may be mixed with diesel fuel
and find their way into the tanks of trucks on the road. Fuel
fingerprinting provides a more efficient and comprehensive method to
monitor compliance compared to traditional audit techniques.
In another example, the IRS is also developing state-of-the-art
technology to identify smuggling of motor fuel at U.S. border points of
entry and ocean-going vessels and barge traffic over intercoastal
waterways. Under existing processes, illegal smuggling activity can
only be detected by physically detaining a truck at the border,
reviewing the manifest, extracting a sample from the storage tank, and
analyzing the sample to determine if the substance matches the
description on the manifest. The IRS is working with the Department of
Energy's Pacific Northwest National Laboratory (PNNL) to design,
develop, and test a new technology called an Acoustical Identification
Device (AID) that uses hand-held sonar technology to identify the
liquid contents of sealed containers, such as tanker trucks.
We are also testing various ``chemical markers'' that will assist
in our efforts to monitor the use of dyed fuel. We have encountered
instances of people attempting to remove the dye by chemical means or
hiding the dye by mixing other products with the fuel. The chemical
markers are invisible to the eye and cannot be removed from the fuel.
Using this technology we will be able to detect misuse of dyed fuel
despite all known attempts to remove or alter the dye. The use of these
markers would also assist in our attempts to monitor fuel that is
smuggled into the country.
Question: How much funding has been set aside for exploration and
implementation of these technologies, and when can we expect to see a
technology put into use?
Answer: The funding for the development of these technologies is
included in the Administration's request for funding in the Safe,
Accountable, Flexible, and Efficient Transportation Equity Act of 2003
(SAFETEA). We are currently using fuel fingerprinting and we are
training our personnel and state personnel from California in a
prototype deployment of the Acoustical Identification Device (AID). Our
plans are to expand the use of the AID to other locations that have a
proximity to the Canadian and Mexican borders in FY04. If our budgetary
resources permit, we will expand the use of this device to areas of the
country that are susceptible to smuggling through water-borne traffic.
Question: What, if any, hurdles remain to resolving the issue?
Answer: We still need certain legislative changes to provide us
with additional tools and reporting requirements on the movement of
fuel into and within the country. These changes and the funding to
implement them are part of the Administration's SAFETEA legislative
proposal.
[Questions submitted from Mr. Herger to Messrs. Huse and
Rice, and their responses follow:]
Questions from Representative Wally Herger to the Honorable James G.
Huse, Jr.
Question: How many dollars are waived each year? Why are SSI
overpayment waivers growing faster than overpayment collections? Are
waivers appropriate in all cases, in your view? What would you do to
tighten this process?
Answer: Table 1 shows the amount of overpayment dollars the Social
Security Administration (SSA) waived for each of the last 5 Fiscal
Years by program.1
---------------------------------------------------------------------------
\1\ The waiver statistics shown in Table 1 were provided by SSA.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Table 1 (in millions) FY 1998 FY 1999 FY 2000 FY 2001 FY 2002 5-Year Total
--------------------------------------------------------------------------------------------------------------------------------------------------------
OASDI $159.5 $201.8 $233.5 $260.2 $278.0 $1,133.0
Overpayments
Waived
--------------------------------------------------------------------------------------------------------------------------------------------------------
SSI $91.1 $145.2 $194.4 $174.3 $196.7 $801.7
Overpayments
Waived
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total $250.6 $347.0 $427.9 $434.5 $474.7 $1,934.7
Overpayments
Waived
--------------------------------------------------------------------------------------------------------------------------------------------------------
SSA grants Supplemental Security Income (SSI) overpayment waivers
under certain situations when the recipient is not at fault for the
overpayment. Recovery of an overpayment may be waived if such recovery
would be against equity and good conscience,
impedes effective and efficient administration because of
the small amount involved, or
defeats the purpose of the SSI Program.
We have an audit underway to evaluate SSA's controls over the SSI
waiver process and determine whether SSI overpayment waiver decisions
were appropriate.2 We expect this work to be completed and a
final report issued by the end of FY 2004. At that time, we can share
the results of the audit. Further, we will make appropriate
recommendations based on this work, if necessary, to ensure the waiver
process is working as intended and SSA is appropriately granting
waivers.
---------------------------------------------------------------------------
\2\ SSA's Controls Over the Title XVI Waiver Process (A-O6-03-
13077).
---------------------------------------------------------------------------
We also have a second audit underway assessing the overall picture
of SSI overpayments over the last 7 years.3 This audit
includes a review of SSI overpayment amounts--including amounts
collected and waived. We expect to issue a report on the results of
this audit in the second quarter of FY 2004; and, if appropriate, it
will also include recommendations to improve SSA's efforts to identify,
prevent, or recover SSI overpayments.
---------------------------------------------------------------------------
\3\ SSI Overpayments (A-O1-04-24022).
---------------------------------------------------------------------------
Question: Has Social Security shared its prisoner data with
agencies that provide food stamps, unemployment compensation, and
veterans and education benefits? Has the 1999 ticket to work
legislation kept these other benefits from flowing to prisoners? Do you
know how much has been saved in the process?
Answer: Each month, SSA obtains and processes prisoner data from
over 5,000 Federal, State, and local correctional facilities to
identify and stop Old-Age, Survivors and Disability Insurance (OASDI)
and SSI payments to those who are incarcerated and therefore ineligible
for benefits under the Social Security Act. SSA's Actuary estimates
$4.9 billion in savings for the 9-year period covering Calendar Years
1995 through 2003 because of the suspension of Social Security benefits
to prisoners.
SSA shares its prisoner data with other Federal or federally
assisted cash, food or medical assistance programs for purposes of
determining eligibility. Those agencies include, but are not limited
to, the Department of Veterans Affairs; Department of Education; and 50
State agencies administering the food stamp program under the
Department of Agriculture. However, we do not accumulate savings
attributed to other agencies' use of SSA's prisoner data.4
---------------------------------------------------------------------------
\4\ The Department of Veterans Affairs' Inspector General issued a
report--Evaluation of Benefit Payments to Incarcerated Veterans (9R3-
B01-031)--in February 1999 that included an estimate of $100 million in
overpayments to incarcerated veterans. Also, the Department of
Agriculture estimated in 1999 that over $50 million a year in food
stamps go illegally to convicted felons and prison inmates.
---------------------------------------------------------------------------
Our most recent report}5 on SSA's prisoner program was
issued on July 24,2003, and it can be found on our website at
www.ssa.gov/oig/ADOBEPDF/A-O1-02-12018.pdf.
---------------------------------------------------------------------------
\5\ Follow-up Review of Prior O/G Prisoner Audits (A-01-02-12018),
July 2003.
---------------------------------------------------------------------------
Question: Why is SSA piloting a project requiring photo
identification for individuals applying for disability benefits? Have
there been any results from this? Do you know if other government
benefit programs use photo identification to confirm that people
claiming benefits are who they say they are?
Answer: SSA is conducting pilot projects wherein it will request
photographic identification from individuals filing for Title II and
Title XVI disability and blindness benefits in specified geographic
areas covered by the pilot projects. In addition, SSA will require that
individuals allow the Agency to take their photograph and make these
photographs a part of the disability claims folder.
This pilot is being conducted to determine whether photographic
identification will strengthen the integrity of the disability claims
process by helping to ensure the individual filing the application is
the same individual examined by the physician conducting the
consultative examination. Specifically, the pilot is to test and gather
information in the use of photographic identification to address the
issue of complicit impersonation in the disability claims process.
Complicit impersonation is accomplished when an individual, posing as
the intended claimant, and with the consent of the claimant, responds
to a consultative examination appointment to misrepresent the
claimant's true medical condition or provides false or misleading
information that affects eligibility during interviews with SSA field
office employees.
SSA and the Office of the Inspector General have noticed an upward
trend in the number of such instances. It has become apparent that we
need to strengthen our procedures for identity verification. The
photographic identification process should give SSA an economical yet
effective means of providing improved identity documents to physicians
who conduct consultative examination.
Final rules for this 6-month pilot were published in the Federal
Register on May 1, 20036; and the pilot is scheduled to run
from June 1 through November 30, 2003. SSA will evaluate the results of
the pilot and expand or modify the procedures accordingly.
---------------------------------------------------------------------------
\6\ Federal Register, Volume 68, Number 84, Pages 23192 through
23195, dated May 1, 2003 (with an effective date of May 31, 2003).
---------------------------------------------------------------------------
To our knowledge, the Food Stamp Program--under the U.S. Department
of Agriculture--uses photographic identification to confirm that people
claiming benefits are who they say they are.
Questions from Representative Wally Herger to Michael G. Rice
Question: In general, once a child care fraud case results in an
overpayment and is successfully prosecuted, what percentage of the
overpayment is recovered? Are any child care fraud cases rectified
without court action or procecution? For the cases you have prosecuted,
do you think the penalties available were strong enough?
Answer: At this time most states have not maintained statistics on
the percentage of recovery as the local agencies, usually county-
administered, are responsible for providing care and payments.
Administrative recovery depends on whether the recipient is in receipt
of public assistance which can be reduced to recoup the loss. A
recoupment, usually anywhere from 10% to 20% of the public assistance
grant, is the primary means of recovering overpayments of assistance,
either fraud or non-fraud related. Some states, such as Maryland,
recover fraud losses at a higher recoupment percentage than non-fraud
losses. If the recipient is working, however, the base assistance grant
would not be very high and, therefore, the recovery amount would be low
and full repayment would take a long time.
If the recipient of the child care is not on assistance, or
disqualified from receiving assistance because of the fraud,
administrative recovery becomes impossible until such time as they
begin receiving assistance again. Counties have resorted to civil
judgments and collections and criminal court-ordered restitution, but
again, the percentages vary nationwide. Monroe County, New York DSS
estimates less than 50% of the fraud losses recovered, while Roanoke
City, Virginia claims to obtain full recovery, although that is
primarily done through the criminal justice system. Those cases that
Roanoke pursues civilly may take years, however. Fraudulent providers
are generally not subject to administrative recovery, although Colorado
and Wyoming do recover from subsequent payments to the provider. Again,
most states do not disqualify providers who have committed an
intentional program violation.
Whether a case is pursued criminally or administratively depends on
the arrangement the agency may have with the local prosecutor. Cases
are generally accepted for prosecution based upon the dollar amount of
the loss and strength of the proof. While I was prosecuting welfare
fraud, my threshold amount went from $5000 down to $1000 over a 6 year
period. Child care fraud is an area where the dollar amount of the loss
can rise rapidly, so thresholds are met easily. However, from the
responses I received from the Board members, the preferred response is
administrative action which may be coupled with criminal action. Some
states implement disqualification procedures similar to those for Food
Stamps and TANF, but not all.
For the cases that I prosecuted, the available penalties were
certainly strong enough; the difficulty was in convincing the judges to
utilize them. The general judicial feeling in the metropolitan areas in
New York State is against incarceration of welfare frauds, generally,
and very few of the hundred of defendants I prosecuted were
incarcerated. Mostly, the sentence was to probation and restitution.
The woman who stole $77,000 through child care fraud over a nine-year
period was sentenced to prison for 1\1/3\ to 4 years, but that was
primarily because the amount of the fraud was so great that the judge
felt compelled to send her to prison. Cases involving lesser amounts
would not result in jail time. This situation is usually different in
rural counties and in other parts of the country, however.
Question: Based on the examples cited in your testimony, there are
individuals out there devising and implementing schemes to, in effect,
take child care money from needy families to line their own pockets.
With $11 billion used for child care in fiscal year 2001, even a small
percentage of abuse could really add up. Just how widespread do you
think fraud is in the child care system? How many dollars are being
taken out of the system each year? What is the best way to stop it?
Answer: As I stated in my testimony, 40 of the 42 states responding
to the UCOWF survey stated that child care fraud was a problem. The
fraud is widespread. One worker from Virginia told me that 40% to 50%
of her child care cases involved some sort of fraud. This percentage
was echoed by workers in Minnesota. Other states reported lower
percentages of overpayments in general, but upward of 60% of those
overpayments were fraud-related. The consensus at the State Fraud
Directors' meeting last March was that 50% of child care cases involved
fraud. These figures, though, are just estimates. In my opinion, when
the 1996 legislation provided for child care monies to be available, no
one thought about the possibility of fraud in the system and the states
weren't ready for it. It wasn't thought to start keeping statistics on
child care fraud until it was suddenly realized that it was happening.
A dollar amount can't be placed on the losses because of this. A safe
educated guess would place the losses in the vicinity of at least one-
third of the $11 billion you refer to.
Because child care fraud takes on many forms, there is no one best
way to stop it. Part of the problem is in finding and investigating it.
This has become more difficult because of the economic downturn which
caused layoffs of the investigators whose job it was to prevent losses.
Also, the percentage of the TANF block grants created in 1996 which
could be used for administrative purposes was limited to 15% of the
grant and the amendment providing money for child care limited to 5%
for administrative purposes. These ``administrative'' purposes included
investigation funds and front-end, or eligibility, evaluations.
Throwing money at a problem has not been a solution I have endorsed in
the past, but allowing the states to maintain a portion of the
overpayment monies they recover and permitting recovery from violating
recipients and providers through income tax return intercepts would
fund the investigators and evaluators who could address the problem of
eligibility. Couple that with stricter requirements for establishing
recipient eligibility and provider accountability and a major portion
of the problem would be addressed.
Question: Would you please briefly review the general process an
individual goes through to get child care assistance and outline the
types of documentation about income, work schedule, number of children,
etc. that they might be required to show? In your experience, do you
find that most people are truthful? Please also review for us how child
care providers become eligible to provide services and be paid with
taxpayer dollars.
Answer: Application for child care assistance generally requires
the completion of an application outlining the household's size and
income. Most states require independent verification of this
information through birth certificates and wage stubs; some, however do
not. Most states do not require an in-person interview. Applications
and recertifications of eligibility are done over the phone, by mail
and, in some states, via the internet. This is the area where the
problem exists. Until my large case was discovered, the local DSS
agency was not verifying the information provided by the recipient
family and no steps were taken to validate the claims of eligibility or
the existence of the provider. ``Front-end'' eligibility determinations
were being conducted in TANF and Food Stamp claims, but not in child
care. Either through naivety or the existence of an ``entitlement
mentality'' on the parts of the administrators of the program, the
concept of fraud in that aspect of the system wasn't envisioned.
Needless to say, when the $77,000 fraud was discovered here in Monroe
County all cases were reviewed and several frauds discovered. Also, in-
person application procedures were implemented. Not all states are
doing that however.
Most people are truthful, in the opinion of UCOWF's Board members,
but some have found that as much as 50% of their clients have shown
themselves to be dishonest.
Child care providers may be state-licensed day-care center
providers who have complied with state regulations regarding safety,
diet, number of staff members, and so forth. These are regularly
inspected facilities. Each state has one or more classifications of
this type of provider and they are fairly well regulated.
States vary, however, on what New York calls ``informal providers''
or friends or family members who are retained to watch a recipient's
child(ren) while the recipient works or goes to school. In Monroe
County, the procedure simply required the provider to obtain a ``vendor
number'' from the county and for the recipient to name the provider on
the child care application. Monthly attendance records would be sent in
and payments made directly to the vendor. No in-person verification was
required. Some states, such as South Dakota, are stricter in requiring
proof of qualifications to provide care and receive payment, but
others, like Iowa, and Ohio, are like New York. This has led to a
number of child care cases involving identity theft.
Question: Are certain states using more aggressive techniques to
deter and penalize individuals participating in child care fraud? If
so, which states are they and what are they doing? What is the best way
for us to encourage states to be more proactive in finding and stopping
child care fraud?
Answer: Some states are being aggressive in their approaches to the
problem. Arkansas, Maryland, Minnesota, Nebraska and Ohio are among the
states that have implemented Administrative Disqualification procedures
similar to those in the Food Stamp Program. This addresses the problem
of the fraudulent recipient. I do not know of many states that utilize
a similar procedure for providers, although to do so would be
beneficial as a large percentage of fraud cases involve collusion
between recipients and providers and, in many states, a program-
violating provider is not sanctioned from being a provider in the
future.
Again, an incentive to prevent and pursue child care fraud in the
form of retained recovered child care overpayments would permit
agencies to hire more investigators and front-end evaluators. Tax
return intercepts would assist in effecting these recoveries, as court-
ordered restitutions and civil collections recover only so much of
fraud losses.
As I inartfully attempted to explain to Congressman Cardin on July
17th, while, in 1996, Congress did provide monies to the states to be
used as they deemed necessary to implement the programs, there appears
to have been no anticipation of fraud in the child care system and no
provision made to address it in addition to fraud in TANF and Food
Stamps. The limitations on funds available for administrative purposes
restricted investigations in the child care area and little was done to
address it until it became recognized as a major problem. While welfare
caseloads diminished, child care cases increased, and accordingly, so
did child care fraud cases. Economic conditions reduced the number of
agency staff to address child care fraud and the problem became bigger.
Efforts are being made to combat child care fraud, but the incentives I
mentioned are necessary, along with federally required responses to
fraud similar to those required under TANF and in the Food Stamp
Program.
Thank you for your interest. We in the United Council on Welfare
Fraud are honored and pleased that our input was sought. We are always
available to collaborate in finding ways to ensure that those who truly
need public assistance are the ones who receive it. I include as
attachments to the e-mailed version of this response, the UCOWF Child
Care Survey results and the responses of five of our members to your
questions.
[Submissions for the record follow:]
Statement of the Honorable Gordon S. Heddell, U.S. Department of Labor,
Office of Inspector General
In the statement we are submitting for the record, we focus on the
Unemployment Insurance (UI) program, and the Black Lung Disability
Trust Fund, which are both under DOL's jurisdiction. Our work in both
programs over the years has found instances of fraud, waste, or abuse.
Unemployment Insurance Program
The Unemployment Insurance (UI) program is the Department of
Labor's largest income maintenance program. This multibillion-dollar
program provides income maintenance to individuals who have lost their
jobs through no fault of their own. While the framework of the program
is determined by Federal law, the benefits for individuals are
dependent on state law and are administered by State Workforce Agencies
in 53 jurisdictions covering the 50 states, the District of Columbia,
Puerto Rico, and the U.S. Virgin Islands, under the oversight of the
Department of Labor.
1. A current estimate of the magnitude (in dollars) of waste, fraud,
and abuse within the Department's mandatory programs:
In fiscal year (FY) 2001, the states identified and
reported $699 million in actual UI overpayments. Of this amount, the
largest single cause ($227 million or about 32%) of detected
overpayments was unreported claimant earnings. Other causes for
overpayments include a variety of eligibility reasons such as, failing
to do a work search, being terminated by an employer for a reason that
does not qualify for UI, and not qualifying for the benefit amount
received because of insufficient base period wages. For FY 2002, the
states identified $908 million in overpayments.
The Employment and Training Administration's (ETA's)
Benefit Accuracy Measurement (BAM) system projected claimant
overpayments at $2.45 billion in FY 2001 and $3.4 billion in FY 2002.
Of the FY 2001 projected amount, ETA estimated fraud related
overpayments to be $580 million while non-fraud overpayments were
estimated at $1.865 billion.
For the one year period ending June 3, 2003, OIG
investigations involving the UI program have resulted in 68
indictments, 58, convictions, and $5.3 million in monetary results.
2. The general nature of these problems and how long they have
persisted:
According to ETA's projections, for FY 2001, fraud made
up about 25% of the projected overpayments. Fraud was perpetrated
through fictitious employer schemes, internal embezzlement, and false
claims established through identity theft.
The balance of overpayments, about 75%, is considered
non-fraud overpayments. Such overpayments can occur when a state
establishes and pays a claim, only to later discover that the claimant
was not eligible for other reasons. Non-fraud overpayments can also
occur when a claimant's earnings for a claimed week of unemployment
exceed state law minimum earnings.
ETA has projected unemployment benefit overpayments since
1987. Despite ETA's quality control program, including BAM, the UI
overpayment rate has remained steady at between 8-9% for the past 12
years.
From an investigative perspective, based on recent
casework, the OIG is concerned about organized crime fraud activity in
the UI program. We have conducted several investigations that
illustrate exploitation by organized crime groups of the UI program
through the use of identity theft.
3. Illustrative examples of these problems:
In addition to instances of millions of dollars of
overpayments resulting from unreported claimant earnings and a variety
of eligibility issues, the OIG continues to investigate fraud within
the UI program. Some recent examples include:
A Washington state man was sentenced and
ordered to pay nearly $700,000 in restitution in connection with UI
fictitious employer, private insurance, and credit card schemes he
orchestrated for more than 10 years. The investigation revealed that he
orchestrated these schemes using multiple identities and fraudulently
obtained Social Security numbers. He set up multiple fictitious
businesses in Washington state and submitted false quarterly wage
reports, enabling him to draw more than $100,000 in UI benefits.
A New Jersey man who used fictitious companies
to file false UI applications was sentenced and ordered to pay back
more than $320,000 he fraudulently obtained from the New Jersey UI
program.
A California man filed more than 30 fraudulent
UI claims totaling $130,000 using identities of Los Angeles City and
County employees stolen from a credit union.
Thirteen members of a Mexican non-traditional
organized crime group were indicted on charges of conspiracy, mail
fraud, identity theft, and money laundering in connection with more
than $10 million in fraudulent UI claims. The investigation revealed
that they defrauded the California, Washington, Nevada, and Arizona
Unemployment Insurance programs through the use of at least 3,000
stolen identities obtained from payroll-servicing companies.
Six members of a Mexican family living in
California were indicted on charges of conspiracy, mail fraud, identity
theft, and money laundering for defrauding the State of California UI
program. The investigation revealed that the family, which constituted
a criminal group, opened approximately 100 mailboxes and established
several business bank accounts to allegedly launder over $3 million
dollars obtained from fraudulent UI checks.
4. What actions are being taken to eliminate or reduce these problems:
In 1987, ETA implemented a Quality Control program to
address federal regulations (20 CFR 602.1) that directs the UI system
to implement a Quality Control program. A key component of this program
was the BAM system.
ETA increased the priority of preventing and detecting UI
overpayments by establishing a Government Performance and Results Act
overpayment measure.
As stated in question two, ETA has projected unemployment
benefit overpayments since 1987. Despite ETA's quality control program,
including BAM, the UI overpayment rate has remained steady at between
8-9% for the past 12 years.
ETA issued an UI Program Letter offering states grants to
enhance their state's connectivity to the State Directory of New Hires.
The New Hire database with current employment information can detect
``unreported earnings'' overpayments by matching the paid claims list
to the database. Such a cross match can detect unreported earnings far
quicker than traditional cross match methods which rely on employer
quarterly wage reports.
Most recently, the Department announced on July 2, 2003,
that it awarded $4.8 million in grants to help 41 state workforce
agencies implement or enhance systems to prevent and detect fraudulent
payments of unemployment insurance benefits. One of the systems will
allow state agencies to cross-match UI benefit claims against the state
new hire reports; the other system allows electronic data exchange
between state UI agencies and the Social Security Administration to
help prevent identity theft by individuals filing UI claims.
The OIG currently is auditing BAM to determine how well
it projects overpayments and whether it can be used to point the way to
program improvements.
The OIG periodically sponsors fraud awareness seminars
for state UTF program directors and staff to make them aware of fraud
problems within the UTF.
5. What additional actions, either administrative or legislative in
nature, are required:
Past GAO and OIG audit reports have acknowledged the
potential benefits of New Hire data in UI overpayment detection. Most--
but not all--states are using their respective state new hire
directories. However, the state directories alone do not afford the
states access to nationwide data. Moreover, legislative restrictions
currently bar states' access to the National Directory of New Hires
maintained by the Department of Health and Human Services. Through
connectivity to the National Directory, the states could establish
cross match procedures that detect overpayments early, thus preventing
future overpayments on the same claim and increasing the likelihood of
recovery.
Unemployment Trust Fund Administrative Costs
1. A current estimate of the magnitude (in dollars) of waste, fraud,
and abuse within the Department's mandatory programs:
Another cause of continuing waste affecting the
Unemployment Trust Fund (UTF) is the overcharging of the Trust Fund for
costs incurred by the Internal Revenue Service (IRS) in collecting and
processing employers' unemployment taxes.
The OIG's March 2003 report estimated that overcharges to
the UTF amounted to $174 million for Fiscal Years 1999 through 2002.
This occurred because IRS did not have a cost accounting system to
equitably recover its costs.
2. The general nature of these problems and how long they have
persisted:
The OIG first reported this problem 15 years ago. In
addition, in 1999, the OIG reported that the IRS did not have a cost
accounting system to capture actual UTF-related costs and had
overcharged the UTF in FYs 1996-1998. While the IRS returned these
overcharges to the UTF, ETA was unable to get the IRS to resolve the
issues regarding its UTF charging process.
The OIG recently completed a follow up audit of the IRS's
process for identifying administrative costs charged to the UTF. We
found that for FYs 1999-2002, the IRS did not have adequate support for
these costs. In addition the Treasury Inspector General for Tax
Administration (TIGTA) recently issued an audit report, which found
that Treasury could not support the expenses charged to the UTF. The
Treasury agreed with TIGTA's recommendations.
3. Illustrative examples of these problems:
Using FYs 1999 through 2002 as an example of IRS
overcharges to the UTF, our March 2003 audit report disclosed that the
IRS had charged the Trust Fund almost $300 million without adequate
support. Using an alternative methodology based on percent-of-revenue-
received, we estimated the amount charged should have been $126
million.
4. What actions are being taken to eliminate or reduce these problems:
The IRS recently proposed an alternative cost recovery
methodology. We raised questions with one aspect of this methodology,
and we recommended that ETA work with the IRS to address this issue and
adopt an acceptable methodology. Using the IRS's proposed methodology,
the IRS would have charged only $126 million rather than the nearly
$300 million it actually charged.
5. What additional actions, either administrative or legislative in
nature, are required:
We continue to recommend ETA negotiate with the IRS to
adopt an acceptable alternative methodology for charging the UTF for
the allocable administrative costs, and enter into a Memorandum of
Agreement to ensure consistent application of the agreed-upon
methodology. IRS should also reimburse the UTF $118 million ($174
million minus $56 million already recovered) in overcharges. ETA and
IRS are holding discussions to develop a mutually acceptable
methodology.
Black Lung Disability Trust Fund
The Black Lung Disability Trust Fund (BLDTF) provides benefit
payments to eligible coal miners disabled by pneumoconiosis when no
responsible mine operator can be assigned liability. These benefits,
along with administrative and other costs, are chiefly financed by
excise taxes from the sale of coal by mine operators.
1. A current estimate of the magnitude (in dollars) of waste, fraud,
and abuse within the Department's mandatory programs:
Outstanding advances to the BLDTF totaled $7.7 billion at
the close of FY 2002, up from $5 billion at the end of FY 1996. Of the
$7.7 billion in cumulative advances as of the end of FY 2002, only $2
billion had been spent for benefit payments, with the remaining $5.7
billion used to pay interest on past advances. The BLDTF continues to
be unable to repay any principal on these advances, and it must borrow
to pay the interest.
For the one-year period ending June 3, 2003, OIG
investigations involving the Black Lung program have resulted in 4
indictments, 3 convictions, and $7.1 million in monetary results.
2. the general nature of these problem and how long they have
persisted:
The OIG first reported on the chronic insufficiency of
Trust Fund revenues in our March 1997 Semiannual Report.
The Black Lung Benefits Revenue Act provides for
repayable advances to the BLDTF from the U.S. Treasury when Trust Fund
resources are inadequate to meet obligations, as continues to be the
case. Currently, coal excise taxes are sufficient to pay benefits and
administrative costs; however, the fund must continue to borrow from
the Treasury to pay the interest due on past advances. The Omnibus
Budget Reconciliation Act of 1987 significantly reduces coal excise
taxes after the year 2013, exacerbating the deficit. The Department's
projections through September 30, 2040, indicate that, when the payment
of interest on advances is taken into account, the Trust Fund will
experience a negative cash flow--necessitating more borrowing--in each
of the next 38 years, culminating in a projected $49.3 billion deficit
by the end of FY 2040.
From an investigative perspective, our investigations
have shown that a problem exists with the fraudulent conversion of
deceased claimants' black lung payments by family members and friends.
Our investigations have also demonstrated that the Black Lung program
is susceptible to fraud by doctors and other medical providers.
3. Illustrative examples of these problems:
In addition to the outstanding advances and mounting debt
to the BLDTF, the following are examples of fraud against the program:
A Virginia doctor, who was a provider to the
Federal Black Lung Program, was sentenced to nearly six years in jail
and fined $42,700 after being found guilty of 427 counts of dispensing
narcotics, including Oxycontin, without a legitimate medical purpose. A
joint investigation revealed that the doctor was unnecessarily
dispensing prescription narcotics to Black Lung claimants. This
investigation is part of a larger probe into medical provider fraud in
rural Virginia.
In another case, two physicians were sentenced
for defrauding the Black Lung program of over $1.5 million and were
ordered to jointly pay $2 million in restitution. The investigation
found that the doctors billed and received payment from the Black Lung
program for excessive office visits and unnecessary medical treatments
and supplies.
4. What actions are being taken to eliminate or reduce these problems:
The OIG continues to investigate fraud within the Black
Lung Program. Our work has led to the Black Lung program saving at
least $4 million through our investigations of medical suppliers'
inflated billing of an oxygen supplying device. Medicare paid only a
fraction of the cost for the same devise. When the OIG brought this to
the Black Lung program's attention, the program immediately instituted
a new purchasing policy, which resulted in the savings.
5. What additional actions, of either an administrative or legislative
nature, are required:
Restructuring the BLDTF debt could address the mounting
debt caused by the large interest-bearing repayable advances received
from the U.S. Treasury. The Department's 2004 budget justification
states that the Administration will propose legislation to (1)
authorize a restructuring of the BLDTF debt, (2) extend, at the current
rate, BLDTF excise taxes set to expire in January 2014, and (3) provide
a one-time $2.3 billion appropriation to compensate the General Fund of
the Treasury for forgone interest payments.
Statement of David Mucka, Applied Information Sciences, Inc.,
Greenbelt, Maryland
I want to begin by thanking the Chairman and the Ranking Member for
the opportunity to submit testimony on ways to address the problem of
waste, fraud, and abuse in government programs. My name is David Mucka,
President and Chief Executive Officer (CEO) of Applied Information
Sciences, Incorporated (AIS). AIS is an Information Technology (IT)
consulting services firm incorporated in the State of Maryland in 1982.
As Congress looks for ways to cost-effectively reduce the incidence of
fraud, waste, and abuse in federally funded public assistance programs,
we would like to share with the Committee our experience in helping
state governments to better manage public assistance funds and to
maintain the integrity of public assistance programs through the
process of tracking and recovering assistance benefit overpayments.
We understand the Committee has primarily focused on finding ways
to prevent errors in public assistance programs, and other major
government spending initiatives, before they occur. We strongly support
these initiatives, however we recommend that the Committee consider
broadening its focus to include the subject of overpayment recovery.
Each year, the Federal Government provides billons of dollars in
funding to the states for numerous public assistance programs that
provide a critical safety net for millions of needy Americans. Given
the large sums of monies involved, state government agencies are
required to maintain significant levels of operations staff to properly
manage these programs so they meet the needs of their constituents.
As is the case for most organizations, even the best trained
employees will inevitably make mistakes, and the issue of fraud is
always present. While it is vital that the Federal Government provide
states with incentives to reduce and eliminate benefits determination
``errors'' (i.e. overpayments, underpayments, or improper granting or
denial of benefits) before they occur, we think it is also important to
define policies and rules that provide states with incentives to
aggressively pursue recovery of improper payments due to errors and/or
fraud once it has already happened.
A dual track approach of incentives 1) to reduce the frequency and
magnitude of improper benefits assistance payments; and 2) to promote
the recovery of the benefit overpayments that will inevitably occur
affords the Federal Government with the highest opportunity for
realizing the ``best use'' of appropriated funds to meet the intended
goals of the specific public assistance programs.
To illustrate this point, we believe our experience supporting the
Department of Human Services for the State of Texas in the recovery of
benefits overpayments for public assistance programs is a compelling
example of how industry and government can partner to significantly
reduce fraud, waste and abuse of government funds.
Our Experience Supporting the Texas Department of Human Services
(TDHS)
AIS has been engaged with the Texas Department of Human Services
(TDHS) since 1993 to develop and enhance an information technology
system that assists TDHS staff in the recovery of benefits overpayments
to public assistance recipients and providers across a wide range of
programs, including such major programs as Temporary Assistance to
Needy Families (TANF) and Food Stamps. This system handles benefit
overpayment recovery claims that are a result of fraud, recipient
error, and/or state agency worker errors, and provides automated
support in the notification and collections of overpayment claims.
Since 1995, TDHS employees have used the system to recover over
$281 million in overpayments across most major public assistance
programs. In particular, we would like to point out TDHS' success
recouping Food Stamp overpayments, since statistics in this program are
methodically tracked and monitored by the Agriculture Department and
therefore can provide a useful case study on the effectiveness of our
system.
During the last 8 years, the State of Texas combined Food Stamp
Program error rate, which includes both over- and underpayments, has
fallen from being well above the national average error rate, to being
far below the national average error rate in 2002 (4.85% for Texas,
8.26% nationally).[1] This outstanding performance has
earned Texas millions of dollars in incentive bonus funding for its
Food Stamps Program from the USDA.
---------------------------------------------------------------------------
\[1]\ Sources: 2001 GAO Report to Secretary of Agriculture #GAO-01-
72 and Congressional Agriculture Subcommittee on Department Operations,
Oversight, Nutrition, and Forestry July 24, 2003 Testimony exhibit.
---------------------------------------------------------------------------
Further analysis of the data in the 2001 GAO Report shows that in
FY1999, Texas had a Food Stamp Program overpayment error recovery rate
that was more than 3 times better than the national average.
Specifically, Texas recovered $24.9 million of the estimated $40.7
million in Food Stamp Program overpayments, yielding a recovery success
rate of 61.4%. In contrast, the national recovery success rate for
FY1999 was 19.2%, in which $213 million of $1.107 billion in total Food
Stamp Program overpayments across all 50 states, District of Columbia,
Guam, and the U.S. Virgin Islands was recovered.
Moreover, as shown below, the GAO data reveals that the Texas
recovery rate in FY1999 far exceeds the recovery rates of the top 4
states in total food stamp benefits issuance.
----------------------------------------------------------------------------------------------------------------
FY 1999
State FY 1999 FSP FY 1999 Overpayment Recovery Rate
Issuance Overpayments Recovery
----------------------------------------------------------------------------------------------------------------
TX.................................. 1,255,473,000 40,677,000 24,957,000 61.4%
----------------------------------------------------------------------------------------------------------------
CA.................................. 1,805,881,000 143,026,000 25,513,000 17.8%
----------------------------------------------------------------------------------------------------------------
NY.................................. 1,464,474,000 93,873,000 14,984,000 16.0%
----------------------------------------------------------------------------------------------------------------
FL.................................. 819,257,000 47,435,000 8,162,000 17.2%
----------------------------------------------------------------------------------------------------------------
We believe the success that Texas has experienced in the recovery
of Food Stamp overpayments is due in no small part to the information
technology system that AIS helped develop and maintains for the TDHS.
This system aids in the recovery of overpayments by improving the
administration and management of overpayments recoupment in public
assistance programs. Specifically, the system:
Provides state benefits caseworkers with an automated
tool to manage the recovery of benefit overpayments. The system
supports recovery by either direct restitution (payment) and/or by
automated recoupment of benefits through allotment reduction or
government payment offsets;
Strengthens internal accounting controls by automating
the establishment of claims, centralizing collections and billings, and
providing comprehensive payment and claim histories;
Provides automated tracking and notification of required
communication and correspondence with individuals who have outstanding
debts, aiding in the pursuit of repayment;
Facilitates information sharing between different state
and Federal Government agencies, enabling outstanding debts to be
deducted from other sources of government money an individual might
receive (tax refunds, lottery winnings, other benefits, etc);
Enhances accounts management by substantially
streamlining compliance with federal and state reporting requirements;
and
Improves program integrity by increasing data
consistency, completeness and accuracy through an integrated approach
to accounts receivable operations, eliminating calculation errors.
The end result of these system improvements is that, in just the
first 18 months that our system was in operation in Texas, it enabled
the state to completely recoup the cost of development of the system
through increased revenue collections, recover $7,068,444 in Food Stamp
overpayments, and recover $2,193,251 in AFDC overpayments. Over a 6
year period, the system has assisted in the recoupment of $138 million
in Food Stamp overpayments and $40 million in AFDC/TANF overpayments
alone.
Our Recommendations to the Committee
Based on our experience working with state officials in Texas, we
have made the following observations that we believe would be useful to
the committee as it considers specific recommendations to reduce
wasteful and erroneous spending in programs under its jurisdiction.
State caseworkers are hard-working and diligent but need
assistance to manage large caseloads involving hundreds of
beneficiaries and thousands of dollars in claims.
Information technology offers Federal and State
Governments innovative and cost-effective ways to tackle these problems
by offering fully automated personnel support.
Let technology do what it does best: Managing and
cataloging large amounts of data.
Free human beings to do what they do best: Making
personal contacts and exercising judgment and decisionmaking.
Tracking down the status of an overpayment is time-
consuming and cumbersome if done manually. Automating the overpayment
recovery process saves valuable time and ensures that erroneous claims
will not fall through the cracks.
Centralizing billing and collections operations enables
caseworkers to better track the status of claims.
Utilizing information technology to enable communication
between state agencies, and between Federal and State Governments, is
critical to the success of efforts to recoup overpayments. Coordinating
information sharing can also eliminate redundancy and facilitate the
resolution of discrepancies.
Conclusion
Given our success in Texas, AIS believes the Federal Government
should not only provide states with recommendations on how to reduce
errors, but with incentives to invest in information technology systems
that assist with the recoupment of overpayments. This investment will
likely pay for itself within a short time, and will return needed funds
to federal and state treasuries.
Please feel free to contact us if the committee requires further
information about AIS, or about our experience in Texas. We would be
happy to discuss our experience and views in more detail with the
committee.
REDACTED
______
Wichita Falls, Texas 76310
July 12, 2003
The Honorable Bill Thomas (CA)
Washington, D.C.
Re: Hearing on Waste, Fraud, and Abuse of the Social Security System
Dear Representative Thomas:
I am a retired Texas teacher, and because you, as Chairman of the
House Ways and Means Committee, have announced a hearing on waste,
fraud, and abuse of the Social Security system and have requested
input, I am writing to you.
Because of the GPO/WEP, many retired Americans are victims of
waste, fraud, and abuse from the Social Security system. I have found
personally that the GPO/WEP laws are cruel and harsh laws which have
ruined retirement for me, a retired Texas English teacher, and for many
other hardworking, innocent Americans who have paid into the social
security system for a lifetime.
We planned responsibly throughout our working years so that we
would have adequate retirement, and we counted on receiving all our
social security benefits which had been outlined for us over the years
in our social security statements. However, upon retirement, we lost
our ability to have a financially secure retirement because the GPO/WEP
laws put an end to our life time of planning. We retirees paid in but
are not receiving!
I believe that all Americans should pay into social security;
however, I have had to accept the fact that as a teacher in Texas I was
not allowed to pay into social security. Accordingly, I realize that I
should not receive social security benefits based on my teacher salary.
HOWEVER, I did pay into social security and had my earned my forty
quarters and my social security retirement before I started teaching in
1979, yet I can only receive half of these retirement benefits because
of the WEP.
In addition, and most cruelly, because of the GPO I am being denied
social security spousal benefits from my husband who has contributed
faithfully to social security for over 50 years, believing all along
that this would help both of us in retirement. However, the GPO has
destroyed my husband's plans for my security. I cannot receive any
spousal benefits now from him, and should he die before I, I will only
be able to draw $21 a month as his widow. The GPO has placed thousands
of widows around the country in dire financial circumstances. I do not
understand how my government can legally deny me benefits earned by my
husband for my benefit, regardless of whether or not I worked--but this
was done by the GPO.
I want to call attention to three statements made in your ADVISORY
of July 10, 2003:
1. ``Misuse of taxpayer funds undermines confidence in government
programs, hurts legitimate beneficiaries, and squanders scarce
resources.'' Yes, our confidence in government programs has been
underminded. Yes, we as legitimate beneficiaries have been hurt; Yes,
the taxes which we paid in for our use are being squandered and spent
on others, and we cannot receive our full, earned benefits. All of this
happened because of two laws--the GPO/WEP--which were passed hurriedly
and without thought of what would happen to the average American.
2. ``Many of these programs are approaching 50 years of age or
more, and the Committee has a responsibility to ensure that they are
meeting the needs of beneficiaries today and tomorrow.'' No, the social
security program is not meeting our needs. We paid into the system but
are not receiving and this has left many retired Americans in dismal
financial condition. Again, all of this happened because of two laws--
the GPO/WEP--which were passed hurriedly and without thought of what
would happen to the average American.
3. ``The tax dollars that working Americans send to Washington
should be used wisely and for their intended purpose.'' No, the tax
dollars that my husband and I and thousands of other Americans sent in
are not being used for their intended purpose, which was to help in our
retirement years. All of this happened, again, because of two laws--the
GPO/WEP--which were passed hurriedly and without thought of what would
happen to the average American.
Representative Thomas, I am asking that as you chair this Committee
on Ways and Means and as you and your fellow congressmen search for
ways to eliminate waste, fraud, and abuse, that you remember that it is
not WASTE to give us our rightful benefits, which were taken away by
two quietly passed laws which have proven to be unfair.
I also ask that you remember that it is FRAUD on the part of our
beloved government to take our money designated for our benefits and
then to deny benefits to us, which benefits before 1983 were perfectly
legal.
Finally, I ask that you remember that one group of American
retirees, those who happened to live in states where they could not pay
into social security and those who happened to choose such jobs as
teachers, firemen, and other service jobs, are being ABUSED financially
even though they or their spouses paid into the system.
Please use your influence to help correct and update the social
security system so that American retirees will no longer be denied
their earned benefits.
Please help eliminate the waste, fraud, and abuse which these
dedicated, tax-paying retirees have had to endure.
Please contact me if you have any questions. I want to help. Even
if I won the Texas Lottery, I would still battle for the elimination of
the GPO/WEP because these laws are just UNFAIR.
Thank you for all the work you have done for America and its
citizens.
Sincerely yours,
Martha Callaway
Retired Texas English Teacher
Statement of Molly K. Olson, Center for Parental Responsibility,
Roseville, Minnesota
U.S. Government Exceeds Spending Powers Exacerbating the Federal
Deficit Which Is Excessively Burdening the States with Coercive and/or
Vague Mandates for the Title IV-D Welfare Program
FACT #1 Title IV-D of the Social Security Act was meant to provide
collection and enforcement services for only two specific reasons. The
intent and purpose is clear in all historical government IV-D records;
eligibility ends here:
Eligibility Standard #1: Reimbursements to the Public
Welfare agency, to recover welfare cash payments being expended for
TANF and other Title IV benefit programs.
Eligibility Standard #2: Protect those who would be At
Risk of going on welfare (TANF), if they didn't receive the child
support payment directly from the parent who had abandoned the family
in need.
PURPOSE OF THE PROGRAM To Lower Cost to the Taxpayer
FACT #2 Title IV-D services were meant for ``dependent'' children
only, not individuals with private cases where there is no compelling
state interest and no need for government aid. The phrase ``dependent
child'' is a term of art and is defined by Social Security Act as any
child who requires government services to self-sustain for their basic
needs.
FACT #3 82% of all Title IV-D cases do not comply with the original
intent and purpose of the program. Title IV-D collection and
enforcement services are currently being subsidized by the federal
taxpayer in cases where there is no public interest. No eligibility
standards are being implemented by the states, causing excessive
taxpayer expense for this federally funded program. Participants are
fully subsidized for all over 50 services for up to 20 years.
Total Former Public Assistance (56%) & Never 13,995,919 (82%)
Assistance Cases (43%)
Total Public Assistance Cases 3,109,417 (18%)
------------------
Total Title IV-D Case Load in U.S. 17,105,336 cases
Source: MN Child Support Performance Report FY 2002 (July 2001-June
2002)
FACT #4 Federal law requires no state to conduct means-testing for
this federally funded welfare program; all 50 States are acting under
the current misunderstanding that the Federal Government requires the
state to allow anyone into the program regardless of their income and
regardless of need. Therefore, federal money is subsequently provided
to subsidize those who are fully capable of self-sustaining without
government assistance. No other welfare program is absent means
testing. This program requires no initial means-testing nor any ongoing
verification of need.
CONSEQUENCE OF CURRENT APPLICATION--Increased and Unnecessary Cost to
the Taxpayer
Citizen Group Interested in Family Autonomy Requests a Full
Investigation and Immediate Clarification by the Federal Government to
ensure state Compliance with eligibility standards for Title IV-D
welfare services for this federally funded program.
Please call to find out more about our 7 years of research. Please
acknowledge receipt of this letter and provide our non-profit family
organization with an explanation, before August 29, 2003, so we can
determine next steps.
Statement of Steve Cloer, Norcross, Georgia
The information presented in this document is my personal
submission only and not on behalf of any group or organization.
Taxpayer Waste, Fraud and Abuse
After several years of research on the family, marriage, social
policy and legal issues related to the family, this is a brutally
candid assessment of one of the greatest areas of social collapse of
our age. Today's family law and child support system, coupled with many
of the other social policies surrounding male--female relationships
results in the government subsidizing the breakdown and eventual
collapse of the family. Divorce and ``Child'' support serves as a major
primary support tools to promote single-parent families, resulting in
the decay of the cornerstone of our society; an intact, functioning
family.
Introduction
We know that today through social science evaluations of the
numerous maladies it promotes, fatherless families are one of the most
destructive arrangements for children in society.[1]
America's fatherlessness crisis is primarily by judicial making with
the cooperation of the legions of lawyers and bureaucrats who profit
from family destruction. Current child support practices across the
country, in nearly every state, promote fraud and abuse. Most of the
state practices promote and encourage the same fatherlessness mess to
collect child support--under the Trojan Horse of the ``best interests
of the children'' we're subsidizing the most child destructive system
in our nation's history. Today's child support system exists to
subsidize single-mother households at the expense of their children and
society's interest in marriage for the purpose of financial gain by the
state as well as those facilitating the creation of this situation such
as lawyers, psychologists, case workers, child support recipients, and
many others.
---------------------------------------------------------------------------
\[1]\ US House Testimony on Child Support and Fatherhood proposals
(Hearing 107-38). June 28, 2001, online House version; http://
waysandmeans.house.gov/legacy.asp?file=legacy/humres/107cong/6-28-01/
record/chillegalfound.htm)--Father absence, a byproduct of divorce,
illegitimacy, and the erosion of the traditional family, is responsible
for; filling our prisons, causing psychological problems, suicide,
psychosis, gang activity, rape, physical and sexual child abuse,
violence against women, general violence, alcohol and drug abuse,
poverty, lower academic achievement, school drop-outs, relationship
instability, gender identity confusion, runaways, homelessness,
cigarette smoking, and any number of corrosive social disorders.
---------------------------------------------------------------------------
There are a number of verifiable examples of serious fraud and
abuse by the states in the following areas:
States fraudulently certifying child support collection
practices pursuant to 42 USC 602 et seq., while there is a substantial
amount of public information to demonstrate that these certifications
are false.
Refusing to prosecute for FELONY PERJURY in relation to
paternity fraud with married (or formerly married) spouses so as not to
have to report these births at any time as ``out of wedlock''. Thereby
fraudulently collecting additional bonus monies for compliance under 42
USC 603 et seq. (for reducing illegitimate births)
Perjury in and of itself has been repeatedly held to be a
type of fraud in every court (state or federal) in the land. Refusal to
prosecute welfare recipients for fraud in paternity actions is a
violation of 42 USC 608.
Lack of the states to ``ensure that their application
results in the determination of appropriate child support award
amounts'' pursuant to the requirements of 42 USC 667(a), following the
requirements under 45 CFR 302.56(c)(1) and (h).[2]
---------------------------------------------------------------------------
\[2]\ A Georgia trial court judge recently found the state of
Georgia had NOT complied with these requirements, and under the
Supremacy clause ruled the state's use of the guidelines
unconstitutional (See McFall v. Ward, trial court decisions in 02-CV-
2287N). This is in no way unique to Georgia, nearly every state in the
union has not complied with these provisions. Is this the wrong case
cited?
---------------------------------------------------------------------------
Suspending the Non Custodial Parent's (NCP) driver's
license even after a petition had been timely filed in violation of 42
USC 666(a)(16) regarding drivers license suspensions.
Refusing to comply with 45 CFR 303.8 to review and adjust
child support obligations downward.
Refusing to comply with the Federal Consumer's Credit
Protection Act and protect a Non Custodial Parent's (NCP's) self
support reserve from garnishment.
Violating Fair Federal Consumer Credit Reporting by not
reporting arrearages, so that NCP's are unable to contest them.
Refusing to adhere to public record laws, and refusal to
produce copies of the non-custodial parent's own records with the child
support agency.
Violating basic principles of law such as jailing non-
custodial parents for civil contempt when they do not have the
resources to purge--, reinstituting a ``debtor's prison''.
Jailing non-custodial parents without providing them with
a public defender when there is a threat of jail.
Denying equal access to an attorney for non-custodial
parents as the custodial parents have the attorneys of the state Child
Support Enforcement. The non-custodial parents frequently have no
attorney, and legal aid will not help.
Refusal by state courts to allow or enforce basic legal
discovery so a true and correct child support obligation could be
determined, based on both parents incomes.
Today's practices all across the country are analogous to the
circumstances that gave rise to the Civil Rights acts 1 and 2 (later
partially codified as 42 USC 1983 through 1986). These protections were
necessary because of the widespread abuse by the courts and the entire
legal system.[3] Today, it is mainly fathers who are today's
political targets, and the data bears out that the majority of these
fathers are blacks and minorities.
---------------------------------------------------------------------------
\[3]\ BRISCOE v. LaHUE, 460 U.S. 325, 365 note 31 demonstrating
that Congress, when enacting the Civil Rights legislation was hostile
to the considerable CORRUPTION of the Judiciary and the Legal system.
Cong. Globe, 42d Cong., 1st Sess., App. 78 (Rep. Perry)
(``Sheriffs, having eyes to see, see not; judges, having ears to hear,
hear not; witnesses conceal the truth or falsify it; grand and petit
juries act as if they might be accomplices''); id., at 394 (Rep.
Rainey) (``[T]he courts are in many instances under the control of
those who are wholly inimical to the impartial administration of law
and equity''); id., at App. 186 (Rep. Platt) (judges exercise their
``almost despotic powers . . . against Republicans without regard to
law or justice''); id., at App. 277 (Rep. Porter) (``The outrages
committed upon loyal men there are under the forms of law. It can be
summed up in one word: loyal men cannot obtain justice in the courts .
. . ''); id., at 429 (referring to ``prejudiced juries and bribed
judges'').
---------------------------------------------------------------------------
America's family law courts are no longer about the law, they
represent complete perversions of the legal maxims and ideals that
American law was founded upon. We have a system which no longer obeys
its own laws. The reprehensible evil of being rewarded for one's
wrongs, and of punishing the innocent have been firmly entrenched in
the state's family courts.
When will federal legislation hold governmental and non-
governmental individuals (judges included) personally liable for these
abuses as well as the attendant taxpayer fraud and waste? Colonel Mason
from the Federal Convention on July 20, 1787 best summed this up asking
``Shall any man be above Justice? Above all shall that man be above it,
who can commit the most extensive injustice?''
Draconian enforcement and police powers have been given to the
states and Federal Government to persecute parents, for nothing more
than being parents and having children. There are NO checks or balances
to correct the widespread abuses at all levels of government. Many of
these abuses underlie today's crisis of fatherlessness, a crisis almost
exclusively of government making through social policies and government
programs such as child support enforcement which results in the
corrosion of the family.
States exercise an unprecedented power and control over the most
intimate details of people's lives. A power and control that Alexander
Hamilton repudiated when he said that ``a power over a man's
subsistence amounts to a power over his will.'' [4] Free
societies repudiate such actions against a man's subsistence. Our
Founding Fathers understood well that it was the means to tyranny in
government.
---------------------------------------------------------------------------
\[4]\ The Federalist No. 79, at 472
---------------------------------------------------------------------------
Widespread Paternity Fraud promoted by the States
The paternity fraud problem is very serious with indications that
paternity tests show that nearly 30% of the fathers named are not the
parent.[5] While paternity establishments have hit record
levels, in LA County over 70% of those paternity establishments are by
default.[6]
---------------------------------------------------------------------------
\[5]\ American Association of Blood Banks 1999 Annual Report. ``Who
is daddy and Who is Not, February 25, 2000. See also ``In Genetic
Testing for Paternity, Law Often Lags Behind Science,'' New York Times,
March 11, 2001.
\[6]\ Los Angeles Times, April 12, 1998, B1.
---------------------------------------------------------------------------
California has frequently exceeded a 100% compliance rate since
welfare reform made it profitable [7] California led the
nation in collecting $198 million ABOVE their administration costs for
establishing paternity in 1998, which becomes a windfall to the
state.[8] Governor Gray Davis of California has demonstrated
an AMAZING paternity establishment rate of 123% in 1998, somehow
finding some 34,000 paternity establishments in excess of the out of
wedlock births! And just how does one exceed a 100% compliance rate and
gain more than 100% of administrative costs in a program that does not
pay 100% of the administrative costs except by fraud? In fact, a
paternity fraud bill made it to the Governor's desk to be signed, in
his veto, he FULLY ACKNOWLEDGED THAT HE WAS AWARE OF THE FRAUD THAT WAS
TAKING PLACE when he said ``I recognize that paternity fraud is a
serious issue and has the potential of damaging an individual's
livelihood . . . ''. He also recognized his state's dependence on the
Federal Child Support incentive money to CONTINUE THE FRAUD!!
---------------------------------------------------------------------------
\[7]\ US House Ways and Means Committee, Greenbook, Section 8, CSE.
Table 8-20 ``Paternities Established'', Table 8-21 ``Out-Of-Wedlock
Births'', Table 8-22 ``Percentage of Paternities Established''.
\[8]\ Table 8-4 US House Ways and Means Committee, Greenbook,
Section 8, CSE. ``Financing of CSE Program, Fiscal Year 1998'' US House
Ways and Means Committee, Greenbook, Section 8, CSE.
---------------------------------------------------------------------------
One California CBS television station's promo on paternity fraud
noted ``[i]t's like you're in a debtor's prison at the hands of the
government, in this case the D.A.'s office.'' [9]
California's example is certainly one of the more egregious making it
easier to document, yet this type fraud and abuse takes place to some
extent in virtually every state in the Nation.
---------------------------------------------------------------------------
\[9]\ California CBS Channel 2 News, Special Assignment: ``Not The
Father'' aired Tuesday, February 7, 2001 at 11 p.m
---------------------------------------------------------------------------
The Boston Globe, a New York Times Company, has condemned the state
run child support racket. Commenting on a surprising opinion, the
Massachusetts Supreme Judicial Court ignored a mother's perjury then
demanded an innocent man pay child support after proof the child wasn't
his, refused to correct the matter, and set a precedent promoting
perjury and fraud.
SHE TOLD HIM he was the little girl's father, and he believed
her . . . [W]hen Cheryl was 5 . . . he finally took her for a
DNA test. When it confirmed that he wasn't her father, he asked
to be released from child support. Now that the truth was
known, he argued, it wouldn't be fair to keep making him pay
for another man's child.
Last week the Massachusetts Supreme Judicial Court gave him
its answer: Shut up and keep paying.
``The law places on men the burden to consider carefully the
permanent consequences that flow from an acknowledgment of
paternity,'' the court held. ``He waited too long to challenge
his paternity.''
And what burden, you might wonder, does the law place on
women? A burden to tell the truth when asked to identify a
child's father? A burden not to trick a young man into
forfeiting tens of thousands of dollars that he doesn't owe? A
burden not to deceive the courts?
Nope, none of the above. To judge from the court's opinion, a
woman like Cheryl's mother is under no obligation at all. The
justices who decided this case say nothing_not one word_about
her dishonesty or the immense hardship she has inflicted on an
innocent man. There is no hint that they disapprove of a woman
who bears a child out of wedlock, then falsely names a former
boyfriend as the father so she can go on welfare.
She may have been the liar, the court seems to believe, but
he is the one who is guilty_guilty of not seizing the
``opportunity to undergo genetic testing before he acknowledged
paternity'' and of not having ``promptly challenged the
paternity judgment'' once he suspected he might not be Cheryl's
real father
None of that gives the justices pause because they are
focused on something else . . . His money . . . [Commenting on
the need for him to continue paying for someone else's child
the reporter noted]. In short, it's OK to keep ripping him off
because she needs the money.
But the swindle must go on, says the court, because someone
else needs his money. In the court's view, he is not a wronged
man with a compelling plea for relief. He is an ATM machine.
But how the mighty are fallen. There was a time when the
Massachusetts Supreme Judicial Court was renowned for its legal
brilliance, when it was the court other courts relied on in
abandoning unworthy precedents. Today it is a follower, not a
leader, hiding behind unjust decisions elsewhere to rationalize
injustice of its own.[10]
---------------------------------------------------------------------------
\[10]\ SJC to paternity victim: Keep paying, chump. Boston Globe,
pg 11. Jeff Jacoby, April 30, 2001.
This precedent encourages the erosion of trust in relationships and
marriages that is necessary for these relationships to survive--; if a
man practices the Massachusetts prescription for paternity testing on
suspicion of the other spouse at child birth, a very stressful time in
a relationship, the erosion of trust could destroy marriages and
families. On the other hand, if a father does NOT do this, and it is
later determined that the mother was unfaithful and/or a perjurer (a
FELONY in most states), she is REWARDED WITH PAYMENT FOR SEX. One
lawyer, who wishes not to be named for fear of
retaliation,[11] has even referred to civil courts dealing
with family issues all across the country as ``PERJURY PALACES!'' To be
candid here--; this is nothing more than legalized prostitution,
sanctioned and enforced by the state judicial courts through their
contempt and police powers--, under threat of jail for non-compliance.
Even much worse is the using of a child, and sometimes the creation of
a child, to obtain financial gain--one of the most severe and immoral
types of child abuse imaginable!
---------------------------------------------------------------------------
\[11]\ Retaliation against those lawyers who would dare challenge
the corrupt system has become routine practice by the Court run bar
systems all across the country. For example, Barbara Johnson of
Massachusetts is in the midst of disbarment proceedings for daring to
publicize the corruption of the Massachusetts courts, Linda Kennedy of
Virginia was recently disbarred for not being quiet about PROOF of
altered transcripts in court proceedings, Bob Hirschfeld of Arizona was
disbarred many years ago for daring to challenge the legal
establishment and aggressively represent fathers in custody actions, Ed
Truncellito believes he was disbarred for bringing a civil RICO actions
against the Texas State Bar for the fraudulent construction of statutes
related to no-fault divorce, and the list goes on and on.
---------------------------------------------------------------------------
The General Accounting Office
The General Accounting Office (GAO) has also found problems with
mismanagement of Child Support Funds. ``[I]n an audit of the D.C.
Superior Court, the GAO found that the court did not properly account
for funds in half of its 18 bank accounts, including the child support
account. In its October 1999 report to Congress, the GAO concluded
there was no assurance that funds collected for child support were
appropriately disbursed, nor could the court provide assurance that
there were no duplicate payments or misappropriated funds. In other
words, even when support payments were withheld from their wages and
forwarded to the court, non-custodial parents could still have fallen
into the deadbeat category. Worse, the money might not have reached the
children for whom it was intended.'' [12]
---------------------------------------------------------------------------
\[12]\ Grant, Rennie J.; When the Court Is the Deadbeat. The
Washington Post. Wednesday, June 12, 2002; Page A30
---------------------------------------------------------------------------
Child Support
Howard University Political Science professor Stephen
Baskerville,[13] has written an insightful piece on the
divorce and child support ``industry'';
---------------------------------------------------------------------------
\[13]\ Drummond, Daniel. Professor ousted from child-support panel,
The Washington Times August 4, 2001. Dissent apparently is not allowed
in states when it comes to child support and family preservation. This
article outlines how Howard University Political Science professor
Stephen Baskerville was ousted from the Virginia Child Support Advisory
Panel because of an Op-Ed piece he wrote for The Washington Times.
Professor Baskerville said ``he was removed from the panel because of
his politically incorrect views about child support and its
enforcement.'' Apparently the State of Virginia believes what the US
Supreme Court says about free speech in relation to flag burning,
pornography, and foul language, but does not believe this free speech
extends to press published commentary critical of the child support
industry. For a review of Professor Baskerville's piece, please see
Appetite for Family Destruction, The Washington Times commentary
section, p. B5. June 17, 2001.
The government claims a crisis of unpaid child support. Leading
scholars have declared these claims to be everything from a ``myth'' to
a ``hoax.'' Yet some in the Bush administration seem determined to
continue the failed policies of the Clinton years. Health & Human
Services Secretary Tommy Thompson recently announced mass arrests of
parents he says have disobeyed government orders.
The Clinton administration's ``Project Save Our Children''
illustrates that more political chicanery is perpetrated in the name of
children than any other cause. The secretary has begun a ``nationwide
sweep'' to arrest (what he calls) the ``most wanted deadbeat parents.''
By the government's own figures, however, the ``worst of the worst''
amount to only 69 fathers worthy of prosecution.
Even assuming these few men may be scoundrels, why don't
authorities simply arrest them and be done with it? Why all the fanfare
from the Federal Government? Perhaps because these prosecutions are
political.
``We will find you,'' President Clinton would intone against
fathers. ``We will make you pay.'' In Maryland, government billboards
announce, ``We're Looking for You, Child Support Violators.'' No
government warns bank robbers or drug dealers that the government is
watching them. This is not law enforcement: It is terrorism.
``More notable than any one arrest,'' we are told, is the
``message that the administration is sending'' that it will use federal
agents to enforce divorce. In other words, the aim is not to prosecute
lawbreakers but to spread fear. Terrorizing citizens into obeying its
orders is not an appropriate role of government in a free society, even
when the orders are legitimate.
In this case, the orders are not legitimate. They are creations
of a divorce industry eager to encourage divorce by making it more
lucrative. A child support ``obligation'' is simply what judges and
bureaucrats decide a father must pay to have his children taken away.
Most divorces are filed by women (70-80%), usually with no legal
grounds. Most obligors have therefore done nothing to incur the imputed
obligation, which is set by the same enforcement personnel who collect
it. These officials have a financial and political interest in
separating children from their fathers, imposing impossible child
support burdens, and then arresting parents who inevitably fail to pay.
These activities are all being subsidized by the Federal Government in
the way of financial incentives and reimbursements to the state
pursuant to 42 USC 655, 655a, 658, 658a.
By the government's own account, what is billed as ``child
support'' is little short of plunder. Among those arrested was a man
earning all of $39,000 a year and ordered to pay $350 a week for one
child, almost two-thirds of his likely take-home pay.
These men have no hope for a fair trial; they have already been
pronounced guilty in the media by the Secretary of Health and Human
Services, with no platform to reply in their own defense.
The divorce industry has corrupted local government throughout
America. Now its poison is reaching up to the highest levels of our
government. The administration is soiling its hands in some of the
worst sludge left by the Clintons.[14]
---------------------------------------------------------------------------
\[14]\ Baskerville, Stephen; Tommy Thompson's Reign Of Terror. Free
Congress Research and Education Foundation, Inc., September 12, 2002.
And in deference to the Free Congress Foundation, the article contains
a disclaimer stating ``This publication is a service of the Free
Congress Research and Education Foundation, Inc. (FCF) and does not
necessarily reflect the views of the Free Congress Foundation nor is it
an attempt to aid or hinder the passage of any bill.''
In the Georgia 2002 legislative session a bill was under
consideration for changes in the child support guidelines, in part to
make them adhere to the actual cost of raising a child. As a reaction
to this the Marietta Daily Journal reported Assistant Attorney General
Nina Edidin stating that; ``Georgia will loose millions in child
support enforcement if the guidelines are changed''. What this
statement has effectively exposed is that the current guidelines are so
unfair, that it is lucrative for the state to have guidelines that
cannot be reasonably met by those who are subjected to them. The unfair
guidelines result in financial incentives and necessary child support
enforcement efforts that are reimbursed by the Federal Government's
Temporary Aid to Needy Families (TANF) funding to the state pursuant to
42 USC 655, 655a, 658, 658a.
My Personal Experience
In my own personal experience with the courts in Gwinnett County
Georgia, I have found that established law is generally ignored at will
and the courts do as they desire. In one of my own cases, #02-A-9061-6,
I filed a modification for child support and alimony in August 2002.
The court ignored all of my motions, including two motions requesting
temporary hearings to provide temporary relief. These motions were
never responded to by the court in any way despite their duty to do so
within 90 days under O.C.G.A. 15-6-21(b). This is one of the few
statutes that identify a violation of this statute by a judge to be an
impeachable offense. A review of the court records revealed that this
particular court had ruled on motions for temporary hearings in other
similar modification cases but the judge, Gwinnett County Georgia
Superior Court Judge Fred A. Bishop, refused to do so in my case. In
addition to the Georgia statue, the Federal statute, 42 U.S.C.
666(a)(2), requires the state to be expeditious with child support
modifications. Needless to say, the resulting delay of my modification
put me in a position where my situation grew worse and I fell behind in
child support and alimony payments. After seven months from filing this
modification action, with no relief, I was incarcerated for civil
contempt for failure to pay child support (case 03-A-1899-6).
Although O.C.G.A. 9-11-12 provides 30 days in which to respond to a
complaint, the contempt was heard by the court only 24 days after the
complaint was filed. I objected to the hearing continuing and requested
my 30 days, but Judge Bishop continued with the hearing anyway. If I
had been allowed the 30 day period I am entitled to under Georgia law,
I would have purged myself of the arrears from resources from my
retirement account as well as completed my defensive answer. It is
interesting that the Georgia Statutes define the source of child
support as coming from income, not retirement accounts, but this method
of access to an obligor's additional assets are accomplished everyday
in the courts. Additionally interesting is that that a modification
can't be heard in seven months after numerous requests to do so but a
contempt that will produce income for the state can be heard in about
three weeks. A result of this intentional delay was that the state
received child enforcement reimbursements for the State from Federal
TANF funding pursuant to 42 USC 655, 655a, 658, 658a. If the motions
were heard in a timely manner the arrears would not have been as
great--and the state would not have received amounts in proportion to
the amount of arrears. Is this the operation of justice or an act of
abuse to acquire funding for the state at the expense of taxpayers?
Regardless of the actual intent of the delay, the result was the
acquisition of funds by the state from TANF funding by the unfair
manipulations of the process of law in this case.
The most expensive WAR ON FAMILIES, FATHERS, AND MARRIAGE in history
Child support constitutes the most expensive war waged on the
family the world has ever known. If we are to accept current claims by
politicians that some $100 BILLION dollars in child support is owed
(though US House records indicate it may be some $78+ BILLION), then we
must look at the corollary to this claim. How much HAS been paid?
Approximately 80% of all child support has been paid historically
in America.[15] America also has one of, if not the highest
rate of child support compliance in the world and the remainder of
child support is owed by those who generally are unable to
pay.[16] The difference in today's lower compliance rates
for child support can be attributed to a number of factors;
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\[15]\ Current Population Reports, Series P-23, No 173 (1989)--
Census Bureau data from 1989 indicated that 75 percent of all child
support owed is paid. The TOTAL amount of Child Support owed was 14.8
BILLION dollars. Of that amount, 11.1 BILLION had been paid (7.6
BILLION was paid in full, and 3.5 BILLION was partially paid); Non-
Custodial Parent's Report of Child Support Payments, Braver, Sanford,
Pamela J. Fitzpatrick, and R. Curtis Bay, (1988) presented at the
Symposium ``Adaptation of the Non-Custodial Parent: Patterns Over
Time'' at the American Psychological Association Convention, Atlanta,
GA, August, 1988. Compared Bureau of Census custodial parents reports
(approx. 70% received) with father survey (approx. 90% paid); Judi
Bartfeld and Daniel R. Meyer, ``Are There Really Deadbeat Dads? The
Relationship Between Ability to Pay, Enforcement, and Compliance in
Normal Child Support Cases.'' Social Service Review 68 (1994)--95% of
fathers having no employment problems for the past five years pay
regularly; 81% in full and on time; 1988 Census ``Child Support and
Alimony: 1989 Series'' P-60, No. 173 p. 6-7--90% of fathers with joint
custody pay the ordered child support. 79.1% of fathers with visitation
rights pay the ordered child support. 44.5% of fathers with no
visitation rights pay the ordered child support.
The father of today's child support public policy, his personal
exploitation of the system, and the fallacy of his ``income shares''
model, James R. Johnston, August 1998.
\[16]\ GAO/HRD-92-39FS, January 9, 1992; page 19--According to a
1992 report by the Government Accounting Office, Child Support non-
payment is NOT by choice This report showed that 66% of those fathers
with delinquent child support obligations were not able to pay, 5% were
unable to be located, and 29% were classified as other. These were
custodial mother SELF REPORTS (which are likely to be skewed against
the party paying child support); Journal of Contemporary Policy Issues,
Garfinkle and Klawitter, 1992--after instituting mandatory wage
withholding of child support in Wisconsin, 10 pilot counties collected
only 2.89% more of what was owed than the ten control counties that
didn't garnish.
The amount of paternity fraud throughout the United
States with judicial refusals to prosecute for FELONY perjury (as it is
a FELONY in many states).
The sheer number and staggering percentage of default
judgments in several states.
Continued arrearages for deceased obligors, those in jail
or prison, and those with wages so low and debt so high that it can
never be repaid (as interest continues to accrue in many states
ensuring they will NEVER be able to comply).
Judicial refusal to allow downward adjustments even when
obligers are unemployed.
The refusal of nearly every state in the country to
comply with the quadrennial reviews required by 42 USC 667 and provide
real economic data for child support awards, thereby relying on
inflated and arbitrary ``guidelines''.
The intensifying of misandrist (male hating) propaganda
by judges, lawyers, feminists, and politicians promoting ruthless
``child'' support which includes hidden alimony by way of guidelines
based on no foundation of what it costs to raise a child but clearly
exceeding any reasonable such expense.
Judicial promotion of fatherlessness and its attendant
social disorders by refusing to enforce visitation or custody orders
while jailing for a child support order. Even though there is a
considerable amount of social studies data indicating that ENFORCING
VISITATION ORDERS SUBSTANTIALLY INCREASES CHILD SUPPORT COMPLIANCE
RATES! [17]
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\[17]\ ``Paying child support, visiting and participating in
childrearing decisions are activities that `go together' . . . Fathers
who engage in any one of those three activities are likely to engage in
the other two activities perhaps to maintain parallel responsibilities
with those fulfilled by fathers who live with their children.'' (pg.
96, Col. 2, 3, Lines 4-11) Relationships between Fathers and Children
Who Live Apart: The Father's Role after Separation--Judith A. Seltzer,
University of Wisconsin-Madison, Journal of Marriage and the Family,
Vol. 53, No. 1, February 1991.
``Paternal visitation has been found to consistently be positively
related to payment of child support'' (pg. 134, col. 1, 2, lines 16-18)
The Role of Paternal Variables in Divorced and Married Families--Amanda
Thomas and Rex Forehand, American Journal of Othopsychiatry, Vol. 63,
No. 1, January 1993.
``90.2% of fathers with joint custody pay the child support due.''
(pg. 7, col. 1, 2, lines 1-2) U.S. Bureau of the Census: 1988.
``79.1 % of fathers with visitation privileges pay the child
support due.'' (pg. 7, col. 1, 2, lines 2-3) U.S. Bureau of the Census:
1988.
See also Daniel R. Meyer, Compliance with Child Support Orders in
Paternity and Divorce Cases (Institute for Research on Poverty,
Madison, Wisconsin, 1997).
Deena Mandell, Fathers Who Don't Pay Child Support: Hearing Their
Voices, 23 Journal of Divorce and Remarriage 85 (1995).
This last statement is important. It is essentially the crux of the
issue. If child support compliance is the goal, there is a considerable
amount of research demonstrating compliance is DIRECTLY tied to both
parenting time by BOTH PARENTS AND enforcement of visitation orders.
American courts routinely award custody to mothers approximately
85-90% of the time thereby disenfranchising fathers and turning them
into child support obligors.[18] Historical data shows about
66%-80% or more of compliance with child support. Yet many politicians
harp about a $100 BILLION dollar arrearage amount. If this were true,
it would translate into the $100 BILLION representing the remaining
20%-34% of all child support obligations. Therefore, the amount of
``child'' support that HAS BEEN PAID (for the purpose of ``privately''
subsidizing single-parent homes) is approximately;
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\[18]\ U.S. Dept. of Commerce, Current Population Report 3/99 (P60-
196 Child Support For Custodial Mothers and Fathers: 1995), there are
11.6 Million Custodial Mothers (85%).
$100 BILLION / 34% = $294,117,647,058 $100 BILLION / 20% =
---------------------------------------------------------------------------
$500,000,000,000
If we consider the $78 BILLION that the US House indicates is the
accurate arrearage, applying the same formula demonstrates;
$ 78 BILLION / 34% = $229,411,764,706 $78 BILLION / 20% =
$390,000,000,000
Somewhere around \1/4\ to \1/2\ of a TRILLION dollars has been
collected JUST IN CHILD SUPPORT! This does not even include the legal
fees, property distributions, expert fees, CSE fees, judges,
administrators, jail cells for delinquent obligers, police, alimony,
taxpayer funded poverty lawyers, prosecutors, costs of maintaining two
residences, costs of separation, etc., extracting fees from broken
relationships or from destroying families. If it were possible to
factor in all of the costs, including the social costs of
fatherlessness on destructive social behaviors, this figure could
easily be many times higher, possibly exceeding ONE TRILLION DOLLARS!
American government at all levels (state and federal, legislative
and judicial) has waged the most ruthlessly brutal and expensive war on
fathers and families in the history of the world. The financial costs
America's state and Federal Governments are paying to obliterate
families and fathers is mind numbing. All of this has been paid for by
the American taxpayer!
Child support is our system for replacing fathers with money.
Everyone, including mothers, would be better off if we replaced money
with fathers. Replace child support with a supporting parent. Children
would get the emotional benefit of a father, and the [benefit] of all
the father's resources.'' [19] The social costs of
fatherless children include: filling prisons, causing psychological
problems, suicide, psychosis, gang activity, rape, physical and sexual
child abuse, violence against women, general violence, alcohol and drug
abuse, poverty, lower academic achievement, school drop-outs,
relationship instability, gender identity confusion, runaways,
homelessness, cigarette smoking, and any number of corrosive social
disorders (see footnote 1).
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\[19]\ K.C. Wilson in ``Where's Daddy? The Mythologies behind
Custody-Access-Support.''
---------------------------------------------------------------------------
Ron Paul has noted that ``[w]ithout the destructive effects of the
welfare state, there would be little need for federal programs to
promote responsible fatherhood.''}[20] When will we finally
begin to correct ``the vast left wing conspiracy?''
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\[20]\ Statement of Rep. Ron Paul (R-TX), September 7, 2000. Child
Support Distribution Act Of 2000.
---------------------------------------------------------------------------
The More Important Costs
With the divorce rate rising daily and in the range of 1,000,000
per year, a fourfold increase since 1950, the effects can be seen in
the increase of our society's ills. Such increases track the divorce
statistics in parallel. Using the 1,000,000 conservative figure, and
considering 2.3 children per household, there are 2,300,000 children
that are victims of divorce each year. Custody of children is awarded
to the mother in 85% of cases. This means the system creates 1,955,000
children per year that will grow up in a household without a father!
This translates to over 7,500 children per day the courts remove
children from their fathers for each of the 260 days a year courts are
in session! The fatherless situation produces this;
85% of all children that exhibit behavioral disorders
come from fatherless homes (Source: Center for Disease Control)
90% of all homeless and runaway children are from
fatherless homes (Source: U.S. D.H.H.S., Bureau of the Census)
71% of all high school dropouts come from fatherless
homes (Source: National Principals Association Report on the State of
High Schools.)
75% of all adolescent patients in chemical abuse centers
come from fatherless homes (Source: Rainbows for all God's Children.)
63% of youth suicides are from fatherless homes (Source:
U.S. D.H.H.S., Bureau of the Census)
80% of rapists motivated with displaced anger come from
fatherless homes (Source: Criminal Justice & Behavior, Vol 14, p. 403-
26, 1978)
70% of juveniles in state-operated institutions come from
fatherless homes (Source: U.S. Dept. of Justice, Special Report, Sept
1988)
85% of all youths sitting in prisons grew up in a
fatherless home (Source: Fulton Co. Georgia jail populations, Texas
Dept. of Corrections 1992)
The costs to society as a result of a system that encourages broken
families and removes fathers by providing taxpayer funding to do so
exceeds any amount that can be expressed in dollars.
Policy Considerations
Federal Child Support programs must be tied more directly
to the enforcement of existing court orders for parental access
(visitation). Peer reviewed study after study has shown that as much as
90% of the child support is paid when disenfranchised parents have
joint custody, and nearly 80% compliance when with access to their
children (see footnote 19).
Child support funding rules must require states to
penalize litigants for ignoring the routine perjury all across the
country. Not only is it a FELONY in many states, and the ignoring of it
technically MISPRISON OF FELONY, it promotes the misuse of both federal
and state taxpayer funds. The routine allowance of un-prosecuted
perjury in state courts gives incentives for family breakdown and
societal disorder by promoting a type of ``banana republic best liar
wins'' legal system--; it is then backed with the full police power of
the state for enforcement encouraged and rewarded by financial
incentives at the tax payer's expense.
Conclusions
Paternity fraud can no longer be tolerated or funded with federal
taxpayer money. When considering the technicalities of paternity fraud,
it is a form of repackaged prostitution supported and enforced with the
police power of the state. Suggesting that there are ``common law
traditions'' for this, as some courts have, is a fallacy. It is little
more than an ignorant, or worse yet, intentional misconstruing of
maxims of law to promote the fraudulent and immoral collection of
taxpayer money at the expense of families and especially children.
The current taxpayer funded child support system does not only
encourage taxpayer fraud by the states at the expense of our society's
health but also encourages the abuse and atrocities to the family that
are a companion element of a system that is depreciating day by day any
confidence and faith the American people have in a fair and impartial
judicial system and government.
Statement of Bruce Eden, Fathers Rights Association of New Jersey &
Mid-Atlantic Region, Wayne, New Jersey
A. The Waste
In June of 2003, the State of New Jersey conducted a statewide
sweep arresting over 1000 parents allegedly owing child support. These
statewide sweeps are conducted through a Cooperative Agreement between
the New Jersey Division of Family Development, the New Jersey child
support enforcement agency and welfare agency funded for this purpose,
and the county sheriffs' departments throughout the State. Based on
these agreements sheriffs go out and arrest parents (in 98-99% of all
cases the parent is usually the male--gender discrimination fraud) on
computer-generated ``bench warrants''.
Below is the story of the latest New Jersey statewide sweep showing
that the arrests are an abject failure, a waste of hard-earned
taxpayers' monies, a fraud being perpetrated on taxpayers and innocent
people through the violation of their constitutional rights to be
protected under the Fourth Amendment of the Constitution for the United
States of America, and abuse of the people by the government that is
supposed to protect them.
http://www.nj.com/search/index.ssf?/base/news-2/
1058683869141900.xml?starled
ger/nmr
Sunday, July 20, 2003
BY JUNE KIM
Star-Ledger Staff
Last month, county sheriff's officers arrested hundreds of
``deadbeat parents'' over a three-day period known as the
``Non-Support Sweep.'' But while the dramatic operation may
have garnered much-needed attention for the problem, results
show it is not the most efficient method of collecting money
for children of broken homes.
In five counties surveyed by The Star-Ledger, approximately
$2,225,240 was owed by 157 people rounded up during the sweeps,
but only $71,258 was collected, according to court records.
Collection rates varied in the counties surveyed by the paper,
but all reported low-yielding results.
In Morris County, 26 people were rounded up. Together, they
owed $208,338, but only $14,518 was collected, averaging
payments of approximately $558 each. In Union County, 23 people
were rounded up. Together they owed $406,811, but only $30,834
was collected, averaging payments of approximately $1,341 each.
County law enforcement receives state funding for the
operation based on the amount of debt collected during previous
sweeps. The funding reimburses the cost of the sweeps as well
as money for child-support operations throughout the year.
While money collected during the sweeps may not be significant,
state officials believe the biannual raids spur publicity that
sparks others to pay. ``It's hard to quantify, but we do
believe that there is an effect from the raids,'' said Joe
Landers, chief of client and central services in New Jersey's
Child Support Enforcement unit. ``If there's someone who's
teetering, `Am I going to pay or not,' all of a sudden, some of
these people start paying.''
The sweep process involves not only the early morning
arrests, but also the coordination of municipal law enforcement
as well as county probation and court officers. Finding the
individuals falls under the jurisdiction of the sheriff's
offices, but extracting the money comes down to the courts.
``Once we do our job, then it's up to the judge to listen to
the story in front of them as to how to handle it,'' said
Middlesex County Sheriff Joseph Spicuzzo. ``Obviously there are
circumstances that I don't know about.'' After being arrested,
individuals are given a hearing and are held in jail until 10
percent of the arrears are paid.
But Essex County Sheriff Armando Fontoura said there are
cases where people simply cannot afford to pay and keeping them
in jail costs taxpayers more money.
``With no one making any payments or restitution, it doesn't
make any sense,'' Fontoura said. ``There's the additional
burden of housing them, feeding them and taking care of them,
which is very expensive for taxpayers.'' Fontoura sees these
cases quite often in Essex County, which has the highest
percentage of individuals in poverty in New Jersey.
``In our county, we offer what America offers--the poorest of
the poor and richest of the rich. Usually the poorest of the
poor are not working, have no prospects for employment or might
be on welfare. After awhile we start to spin our wheels,'' said
Fontoura. Sheriff's offices are given the freedom to conduct
the raids with methods they feel work best in their county. The
Essex County Sheriff's Department does not assign many officers
to the raids and instead tries to take a more strategic
approach during their sweep.
``We try to be practical and reasonable and direct ourselves
to those who might have some ability to meet their
obligation,'' Fontoura said.
The problem seen in New Jersey reflects a national trend.
According to 2002 data from the federal office of Child Support
Enforcement, two-thirds of those who owe child support earned
less than $10,000 last year.
Morris County, on the other hand, has one of the highest
median income levels in the state (second only to Hunterdon)
and one of the lowest populations of individuals in poverty.
Instead of spending money on sending out officers to knock on
doors, the sheriff's office has had some success simply calling
people at home. During the June raids, 19 of the 26 warrants
satisfied in Morris County were for individuals who had turned
themselves in after phone calls to their residences.
``It's a more efficient use of our time instead of going all
around the county knocking on doors,'' said Morris County
Sheriff Edward Rochford. ``We're a different kind of county--
one of the most affluent counties in the United States,'' said
Rochford. ``And I think that's why we have a little bit of
success with the child support.''
Along with the raids, however, sheriffs in several counties
emphasized the importance of attacking the problem on a daily
basis. For some counties, executing child-support warrants
while serving warrants on suspects in other crimes is more cost
effective.
To help the unemployed with family support obligations, New
Jersey's Office of Child Support has established the Benchcard
Initiative. The program provides job development skills to help
parents meet their child-support payments.
The most successful method of collecting child support is by
withholding the amount directly from a parent's paycheck. In
fiscal year 2002, the New Jersey Office of Child Support
collected $554,940,301 through this method. Child-support
payments also are intercepted through unemployment checks,
federal and state tax returns, license suspensions and even
lottery winnings. In 2002, $639.4 million of the estimated
$983.7 million due in support was collected.
However, according to the Office of Child Support, there is
approximately $1.9 billion of payments in arrears since the
late 1970s, when the office began tracking the data. Some of
this debt can be tracked to inefficiencies in the child-support
enforcement system, which is working with approximately 296,100
child-support cases.
Probation offices charged with enforcing the payment orders
from the court are understaffed and are working with antiquated
computer systems from the 1980s, Landers said.
Karen Sims, a single mother of three, has been working with a
probation officer since 1993, when she first filed a motion for
child-support enforcement. She is owed $55,431.70 in back
payments from her ex-husband, but continues working with her
case worker despite the frustration.
``He's got his hands tied because he's got so many cases''
said Sims, an Old Bridge resident. ``He can't say, `Mr. Sims,
we need that dollar today.' ''
In the case of South Plainfield resident Debbie Kamen, the
frustration built to a point where she began looking for other
avenues of help. She approached a private investigator to help
find her ex-husband, who owed her $57,766. Private investigator
John Carroll agreed to take her case pro bono and tracked down
her husband, Jerry Kamen, in North Livingston on July 14. After
her long wait, it took four minutes for the Union County court
to rule that her husband must come forward with at least 10
percent of the unpaid child support. As of Friday, unable to
come up with the $5,780, Kamen was still being held in jail.
Sims, who cannot afford the help of a private investigator,
still hopes that her husband will be caught in one of the
sweeps. But she's not expecting to see any of the child-support
money anytime soon. ``I call it my retirement fund. Maybe by
the time I retire, I'll get some of it.''
June Kim works in the Union County bureau. She can be reached
at [email protected] or (908) 302-1500.
On average most states do not collect child support or minimal
amounts by arresting alleged ``deadbeat dads''. However, the so-called
``deadbeat dad'' hysteria is non-existent. In an 8-year longitudinal
study done by Dr. Sanford Braver of the University of Arizona, it was
found that less than 5% of all child support debtors are true
``deadbeats''. The rest are unable to comply with onerous orders not
based on the reality of costs of raising children, but on the parents'
incomes. This method of calculation is derived from former Soviet
communist family law and does not comport with our republican form of
government. Use of child support guidelines on the basis of Soviet-
style income-shares guidelines is treasonous and anti-American. It is a
waste of taxpayer's money to force people to pay more than they can and
then arrest them and incarcerate them at a cost that ranges between $75
per day to $200 per day on average.
Plus, taxpayers are footing the bill for sheriffs' officers to go
out an use overtime, wear and tear on police cars, etc. Based on recent
numbers in New Jersey, each county expends $60,000 per month to go out
and arrest child support debtors. They rarely ever collect that total
amount from those arrested.
B. The Fraud
Arresting parents who are child support debtors is an immense
fraud. It is a violation of Constitutional Rights, most specifically
the Fourth Amendment to the Constitution for the United States of
America. Arresting someone for owing a divorce-related child support
debt is arresting someone for a ``civil'' matter. In New Jersey, as in
every other state, there are laws that prohibit all law enforcement
officers from arresting people in civil matters. Why? Because there is
no probable cause that a crime is being committed or has been
committed. And, in every case, there is never a sworn affidavit
attached to the purported ``warrants'' that they use to arrest people
for child support. There are never any true ``warrants'' for arresting
for child support. They are in fact orders of the court that purport to
be made into warrants--all without probable cause or complaining
witnesses. Herein lies the abuse.
C. The Abuse
Every violation of a fundamentally secured right costs the
taxpayers in some shape or form. These violations, in arresting child
support debtors, is abusive to those arrested and to the taxpayers
footing the bills to run the wasteful child support enforcement
bureaucracy and the sheriffs going out and jailing people in a civil
matter.
There is no probable cause in a civil matter to arrest. One cannot
escape that fact. In New Jersey, it is prohibited to arrest women in a
civil matter. N.J.S.A. 2A:17-77(a). Pursuant to the Equal Protection
Clause of the Fourteenth Amendment of Constitution of the United
States, men cannot be arrested in a civil matter either. Yet, they are.
And at great taxpayer expense. This happens all over the country.
Whether the matter is deemed civil or the particular State somehow
fraudulently converts a civil matter into a criminal matter to jail men
for owing child support. By fraudulently converting a divorce/child
support matter, which is civil, into a criminal matter, always occurs
without the man being read his rights at the time the divorce is
initiated. Men are forced into giving up financial information, how
much they make, where they work, where they live, and all other kinds
of disclosures, without ever being told of their rights to remain
silent, rights to counsel, rights to a full and fair hearing before a
jury of twelve of their peers of the community, etc., at the inception
of the divorce proceedings.
Men are routinely arrested for child support. Since over 95% of all
child custody awards go to women and the concomittant number of child
support obligations go to men, there is a blatant gender discrimination
in this country.
Based on this and the fact there was no probable cause to arrest in
a civil matter, and that women cannot be arrested in New Jersey on
civil process, a police officer loses qualified immunity to a claim
that a facially neutral policy is executed in a discriminatory manner
only if a reasonable police officer would know that the policy has a
discriminatory impact on men, that bias against men was a motivating
factor behind the adoption of the policy, and that there is no
important public interest served by adoption of the policy. For a
similar argument, see Hynson v. City of Chester, Legal Dep't., 864 F.2d
1026, 1032 (3rd Cir. 1988). If police officers are to be sued for these
constitutional violations of persons owing child support, then
taxpayers are going to bear the brunt of this.
However, ``probable cause'' to arrest requires a showing that both
a crime has been, or is being committed, and that the person sought to
be arrested committed the offense. U.S.C.A. Const.Amend. 4. In child
support enforcement matters, no probable cause can exist, because the
entire matter arose out of a civil context.
It is asserted that by definition, probable cause can only exist in
relation to criminal conduct. It follows that civil disputes cannot
give rise to probable cause. See, Illinois v. Gates, 462 U.S. 213
(1983)(Test for police officer's sufficient basis for probable cause--
did the officer have a sufficient basis to make a ``practical, common
sense'' decision that a ``fair probability of crime existed,''--once
the officer's actions fail to satisfy this test, it may appear that no
reasonably objective officer could have believed that probable cause
existed to make an arrest); Allen v. City of Portland, 73 F.3d 232 (9th
Cir. 1995), the Ninth Circuit Court of Appeals (citing cases from the
U.S. Supreme Court, Fifth, Seventh, Eighth and Ninth Circuits) held
that ``by definition, probable cause to arrest can only exist in
relation to criminal conduct; civil disputes cannot give rise to
probable cause; Paff v. Kaltenbach, 204 F.3d 425, 435 (3rd Cir.
2000)(Fourth Amendment prohibits law enforcement officers from
arresting citizens without probable cause (citations omitted)); New
Jersey District Court cases and other nearby district courts, Santiago
v. City of Vineland, 107 F.Supp.2d 512, 561-62, 564 (D.N.J. 2000); Hill
v. Algor, 85 F.Supp.2d 391, 397-98 (D.N.J. 2000)(arrest made without
probable cause violates the Fourth Amendment); Rzayeva v. Foster, 134
F.Supp.2d 239, 248-49 (D.Conn. 2001) (holding involuntary civil
confinement is a ``massive curtailment of liberty'', is tantamount to
the infringement of being arrested and can be made only upon probable
cause, citing Vitek v. Jones, 445 U.S. 480, 491, 100 S.Ct. 1254, 63
L.Ed.2d 552 (1980); Schneider v. Simonini, 749 A.2d 336, 163 N.J. 336,
361-65 (2000)(detailed explanation of probable cause standard in New
Jersey).
In Schneider, the New Jersey Supreme Court set the standard for
probable cause. It shows us that probable cause to arrest ``requires a
showing that both a crime has been, or is being committed, and that the
person sought to be arrested committed the offense''. Schneider, 163
N.J. at 363. It was further held that a probable cause determination
could only be made if a warrant had a ``supporting affidavit, as
supplemented by sworn testimony before the issuing judge that is
recorded contemporaneously. Id. at 363.
It has been held that under the Fourth Amendment to the
Constitution for the United States there are two categories of police
seizures: (1) A police officer may seize a citizen for a brief
investigatory stop if he/she has reason to believe that he/she is
dealing with a dangerous, armed individual, regardless of whether he/
she has probable cause to arrest the individual for a crime; (2) a
seizure which is a full-scale arrest, must be supported by probable
cause. To determine whether a seizure has ripened to a full-scale
arrest, the courts must consider the ``totality of circumstances''.
In order to satisfy the requirements of the Fourth Amendment, an
arrest must be supported by probable cause to believe that a crime has
been committed. Probable cause can only exist in relation to criminal
conduct. It follows that civil disputes/civil matters cannot give rise
to probable cause. Over thirty years ago, the United States Supreme
Court warned of the danger and the threat to liberty if the requirement
of probable cause is not strictly abided by:
``The history of the use, and not infrequent abuse of the
power to arrest cautions that a relaxation of the fundamental
requirements of probable cause would `leave law-abiding
citizens at the mercy of the officers' whim or caprice.' ''
Wong Sun v. United States, 371 U.S. 471, 479, 9 L.Ed.2d 441, 83
S.Ct. 407 (1963).
The subject ``warrant'' is not a legitimate warrant or a legitimate
exercise of judicial power. New Jersey statute, N.J.S.A. 40A:14-152,
(as well as similar statutes around the country) expressly forbids
police officers from arresting people in civil causes:
``. . . police officers shall have the power to serve and
execute process issuing out of the courts having local criminal
jurisdiction in the municipality and shall have the powers of a
constable in all matters other than in civil causes arising in
such courts''.
State, county and/or municipal law enforcement officers are only
empowered to act for the arrest, detection, investigation, conviction,
detention or rehabilitation of persons violating the criminal laws of
the State. Pursuant to N.J.S.A. 40A:14-152.2 states:
``As used in this section, `law enforcement officer' means
any person who is employed as a permanent full-time member of
any State, county or municipal law enforcement agency,
department, or division of those governments who is statutorily
empowered to act for the detection, investigation, arrest,
conviction, detention, or rehabilitation of persons violating
the criminal laws of this State and statutorily required to
successfully complete a training course approved by, or
certified as being substantially equivalent to such an approved
course, by the Police Training Commission pursuant to P.L.
1961, c. 56 (C.52:17B-66 et seq.). `Law enforcement agency'
means any public agency, other than the Department of Law and
Public Safety, any police force, department or division within
the State of New Jersey, or any county or municipality thereof,
which is empowered by statute to act for the detection,
investigation, arrest, conviction, detention, or rehabilitation
of persons violating the criminal laws of this State.'' [Bold-
face added]
Further, according to N.J.S.A. 2A:17-77(a) females in this State
cannot be arrested on civil process. Under the Equal Protection Clause
of the Fourteenth Amendment of the Constitution for the United States,
males cannot be arrested on civil process either. Yet, the State of New
Jersey, through its county and municipal law enforcement personnel,
allow for gender biased hate crimes in the arresting of males for owing
child support. Males are arrested in 98-99% of all arrests for child
support. This statistic has been cited in various newspapers and
periodicals throughout the nation during highly publicized statewide
child support enforcement raids.
The law is clear. Arresting someone in a civil matter is
unconstitutional and unlawful, notwithstanding a fraudulent ``Order for
arrest warrant'' issued by purported Judges allegedly acting as Judges.
If a person is arrested on less than probable cause, the United States
Supreme Court has long recognized that the aggrieved party has a cause
of action under 42 U.S.C. 1983 for violation of Fourth Amendment
rights. Pierson v. Ray, 386 U.S. 547, 87 S.Ct. 1213 (1967). Law
Enforcement officers cannot claim ``objective reasonableness'' in these
actions. The law is clearly established regarding arresting and
imprisoning a person in a civil debt matter where there is no probable
cause:
1. Harlow v. Fitzgerald, 457 U.S. 800, 818 (there can be no
objective reasonableness where officials violated clearly established
constitutional rights such as--
a. United States Constitution, Fourth Amendment (including
Warrants Clause), Fifth Amendment (Due Process and Equal
Protection), Ninth Amendment (Rights to Privacy and Liberty),
Fourteenth Amendment (Due Process and Equal Protection);
b. N.J. Constitution, Article I, Paragraph 13--Prohibition
against Imprisonment for Debt in any action;
c. Allen v. City of Portland, supra, and other U.S. Courts
of Appeals citations (probable cause can only exist in the
criminal context; it can never exist in civil matters/disputes;
d. Illinois v. Gates, 462 U.S. 213 (1983)(U.S. Supreme Court
held test for police officer's sufficient basis for probable
cause--did the officer have a sufficient basis to make a
``practical, common sense'' decision that a ``fair probability
of crime existed,''--once the officer's actions fail to satisfy
this test, it may appear that no reasonably objective officer
could have believed that probable cause existed to make an
arrest);
e. Rzayeva v. Foster, 134 F.Supp.2d 239, 248-49 (D. Conn.
2001) (holding involuntary civil confinement is a ``massive
curtailment of liberty'', is tantamount to the infringement of
being arrested and can be made only upon probable cause, citing
Vitek v. Jones, 445 U.S. 480, 491, 100 S.Ct. 1254, 63 L.Ed.2d
552 (1980)];
The ``child support warrants'' that are used to arrest for child
support debtors, are unconstitutional warrants as they do not meet the
criteria necessary to pass muster under the Warrants Clause of the
Fourth Amendment: (1) It is derived out of a civil matter and,
therefore, no probable cause exists for arrest; (2) there are no
attached affidavits sworn to under oath by any complaining witnesses.
Again, men are never indicted, charged, arraigned, tried or convicted.
They are summarily jailed in a civil matter without probable cause.
This bodes badly for the taxpayers, notwithstanding they are paying for
people to be housed in jails for never committing any real crime, but
also, if falsely arrested and falsely imprisoned people start suing the
government entities for damages for violations of their secured rights.
The Supreme Court ruled in Malley v. Briggs, 475 U.S. 335, 344
(1986), that the mere fact that a judge or magistrate issues an arrest
warrant does not automatically insulate the officer from liability for
an unconstitutional arrest. ``Only where the warrant application is so
lacking in indicia of probable cause as to render official belief in
its existence unreasonable . . . will the shield of immunity be lost''.
Malley at 344-45.
Where officers in fact know that they are holding an innocent
person, even where they have a facially valid warrant for his arrest,
plaintiff has a cause of action for false arrest. Gay v. Wall, 761 F.2d
175 (4th Cir. 1985).
Furthermore, the law is unclear on civil and criminal contempt. In
fact, it is a mess. ``The judicial contempt power has had a long but
sordid history''. Richard C. Brautigam, Constitutional Challenges to
the Contempt Power, 60 Geo. L.J. 1513 (1972). In fact the contempt
power of the court should be abolished as a biased procedure and tool
of government oppression. R. Goldfarb, The Contempt Power 1-2 (1963).
The act of holding someone in contempt for owing a civilly-related
child support debt is an anathema to the history of our Nation.
The New Jersey Supreme Court, in N.J. Dept. of Health v. Roselle,
34 N.J. 331 (1961) eradicated the distinction between civil and
criminal contempt and held that all contempts are essentially one in
the same. Therefore, if both civil relief (collection of a commercial
debt) and criminal punishments (arrest and imprisonment for debt) are
imposed in the same proceeding, the ``criminal feature of the order is
dominant and fixes its character for review''. Hicks v. Feiock, 485
U.S. 624, 108 S.Ct. 1423, 99 L.Ed.2d (1988); Nye v. United States, 61
S.Ct. 810, 813 (1941). Civil contempts or violations of court orders/
violations of litigants rights, are civil in name only, entailing what
are in reality criminal punishments. U.S. v. Rylander, 460 U.S. 752,
757 (1983); Uphaus v. Wyman, 360 U.S. 72 (1959).
The New Jersey Appellate Division held in Lusardi v. Curtis Point
Property Owners Assoc., 138 N.J. Super. 44, 50 (App.Div. 1975) that
there are grave doubts whether a defendant's rights can be adequately
protected in a ``double-barrelled proceeding'' where charges of both
contempt and deprivation of private rights are tried in a common
proceeding.
Under U.S. v. Rylander ignorance of the order or the inability to
comply with the order, or as in this case, to pay, would be a complete
defense to any contempt sanction, violation of a court order or
violation of litigant's rights. In such cases the risk of erroneous
deprivation for civil contempt/violation of litigant's rights, from the
lack of a neutral factfinder, may be substantial. Under these
circumstances, criminal procedural protections such as the right to be
notified, right to a pre-deprivation hearing (or in this case, pre-
deprivation ability to pay hearing), right to proof beyond a reasonable
doubt, right to counsel are both necessary and appropriate to protect
the due process rights of parties and prevent the arbitrary and
oppressive exercise of judicial power. International Union, United Mine
Workers of America v. Bagwell, 114 S.Ct. 2552, 2561, 129 L.Ed.2d 642
(1994).
The caselaw history on this subject is extensive. It would be
absurd to distinguish criminal and civil incarceration. From the
perspective of the person incarcerated, the jail is just as bleak no
matter what label used. In addition, the line between civil and
criminal contempt, or violations of litigant's rights or violations of
a court order, is a fine one, and is rarely as clear as the state would
have us believe. If the party does not have the present ability to pay,
or if he has paid and is unlawfully jailed for it, he does not have the
``keys to his jail''. What is nominally a civil contempt proceeding (or
in aid of litigants rights enforcement proceeding) is in fact nothing
more than a criminal proceeding, with the defendant being punished and
not coerced. It is the fact of the incarceration and not the label
placed upon the proceeding which determines if someone was unlawfully
arrested and imprisoned.
Given the way government goes after child support debtors to fill
its coffers, by maximizing federal reimbursement incentive funding, for
costs expended and amounts collected, this presents not only a conflict
of interest, but fraudulent and treasonous government abuse of power
and government oppression.
Every U.S. Court of Appeals that has addressed this issue, has held
that child support is a common, commercial (and civil) debt subject to
all debt collection procedures under the Fair Debt Collection Practices
Act. See, U.S. v. Lewko, 269 F.3d 64, 68-69 (1st Cir. 2001) (citations
omitted) and U.S. v. Parker, 108 F.3d 28, 31 (3rd Cir. 1997). Based on
this fact, imprisonment based upon a debt is prohibited absent clear
evidence of fraud, under every states' constitutions prohibiting
Imprisonment for Debt.
New Jersey Constitution, Article I, Paragraph 13:
``No person shall be imprisoned for debt in ANY action, or on
any judgment founded upon contract, unless in cases of fraud''.
The Supreme Court of New Jersey takes this point one step further
in State v. Madewell, 63 N.J. 506, 512 (1973):
``Statutes or ordinances, designed as debt collecting devices
under the guise of penal laws, contravene the constitutional
prohibition against imprisonment for debt. Thus, the
legislature may not circumvent the prohibition by rendering
criminal a simple breach of contract, the nonpayment of debt,
or the failure to use one's own money for a purpose other than
for payment of debts. However, statutes against false
pretenses, frauds, cheats, and the like, are sustained as
against the constitutional objection that such statutes impose
imprisonment for debt, on the theory that one who violates the
act is punished for the crime he has committed, although
civilly the acts may also constitute a breach of contract or
the nonpayment of a debt. (16 C.J.S., Constitutional Law,
Section 204(4), p.1011).'' [bold, underline and italics added]
Pursuant to the September 1998 amendment to N.J. Court Rule, R.
1:10-3, 2002 Gann Edition, Comment: ``The evident purpose of this
amendment is to make clear that enforcement by incarceration was never
intended to create a so-called debtor's prison.''
No family court in New Jersey or any other state can be unbiased
because they have a financial conflict of interest in the outcomes of
child support awards, collections and enforcement of same. That
conflict of interest involves the Federal reimbursement and incentive
funding to the State for the enforcement and collection of support in
order to maximize the funding they receive from the Federal Government
to fill their treasuries and to supplement judicial and state employee
pension plans. The more child support awarded, collected and enforced
upon, the more federal funding the State receives. It behooves State
Family Court Judges to award as much as possible, notwithstanding the
true costs of raising children. This fictitious awarding of child
support obligations based on a fraudulent child support guideline
designed by judges, and those who are child support advocates and
bureaucrats, creates a fraudulent presumption and conflict of interest.
Once this funding is paid to the State, based on overinflated child
support awards and collections, it is then forwarded to the general
treasury and subsequently into the pension plans of judges, sheriffs
and sheriff's deputies, law enforcement officers, politicians and other
public servants.
To simplify: If the State Family Courts couldn't tell me how much
support I needed for my family and children during the marriage, how
can they tell me how much to support them after my divorce? If the
State Courts are admitting they are a party to my divorce, then they
also are responsible for the support of my family, and are also liable
for violations of nonpayment to my family. This is an equal protection
violation and a violation of absolute liberty rights protected under
the Ninth Amendment. This is an equal protection violation and due
process violation to use extortion practices and kidnapping for profit
and gain to get financial incentives from the state and Federal
Government.
The 2001 Cooperative Agreement between the New Jersey Division of
Family Development (DFD) and the County Sheriffs' Offices
The 2001 Cooperative Agreement between the New Jersey Division of
Family Development and the various County Sheriff's Offices, refers to
``Definitions''. The terms of ``Arrest Services'' and ``Arrest'' are
defined.
a. ``Arrest Services''--will include all reasonable attempts to
apprehend the individual identified in the bench warrant and produce
the individual before a judge or other specified officer of the court.
b. ``Arrest''--will refer to the physical act of taking into
custody the individual identified in the bench warrant. Such term shall
not apply to voluntary surrender to the court or in instances where
warrants are vacated.
According to the ``Purpose'' Section of the Cooperative Agreement:
The purpose of this Agreement is for the DFD to establish a
procedure with the Sheriff's Office for arrest services in
those IV-D cases where a bench warrant pertaining to child
support and paternity matters has been issued by a court of
competent jurisdiction.
As per the bench warrant, the Sheriff's Officer will take
the Non-custodial parents into custody for the purpose of
establishing paternity and support obligations including health
insurance coverage and for payment of arrearages owed.
As can be seen by the Cooperative Agreement, it is nothing more
than a debt collection device, using law enforcement personnel in the
capacity of debt collection agents with guns. No probable cause can be
found and no sworn affidavit or affirmation is used as bench warrants
are issued directly from the bench in these civil matters. The use of
bench warrants presumably is a method to ``streamline'' arresting
people in a summary proceeding for child support and circumventing the
First, Fourth, Fifth, Sixth, Seventh, Ninth, Thirteenth (Anti-Peonage
Amendment) and Fourteenth Amendments to the United States Constitution
and the New Jersey
Constitution, Article I, Paragraph 7 (Prohibition Against Unlawful
Searches and
Seizures) and Article I, Paragraph 13 (Imprisonment for Debt
prohibition).
The New Jersey Appellate Division held in Lusardi v. Curtis Point
Property Owners Assoc., 138 N.J. Super. 44, 50 (App. Div. 1975) that
there are grave doubts whether a defendant's rights can be adequately
protected in a ``double-barrelled proceeding'' where charges of both
contempt and deprivation of private rights are tried in a common
proceeding.
Also, based on this and the fact there is no probable cause to
arrest in a civil matter, and that women cannot be arrested in New
Jersey on civil process, a law enforcement officer loses qualified
immunity to a claim that a facially neutral policy is executed in a
discriminatory manner only if a reasonable officer would know that the
policy has a discriminatory impact on men, that bias against men was a
motivating factor behind the adoption of the policy, and that there is
no important public interest served by adoption of the policy. See,
Hynson v. City of Chester, Legal Dep't., 864 F.2d 1026, 1032 (3rd Cir.
1988) on the discrimination argument.
As part of the Duties and Functions of the Sheriff's Office, the
Cooperative Agreement states that: ``All pertinent information shall be
submitted to authorized personnel and entered onto the State Criminal
Information Center (SCIC) system.'' Since the matter emanates from a
civil matter, how does one get put into the ``CRIMINAL'' information
system without having ever committed a crime?
The Cooperative Agreement goes on and states:
``As per the procedure outlined in Attachment B of this
Agreement, the Sheriff's Office shall submit detailed reports
pertaining to arrest services on a quarterly basis in order to
obtain payment for services. Payment for services shall be
based on the collection performance standards specified in
Attachment B.''
As part of the Duties and Functions of the Sheriff's Office, and
Part III Performance Standards, the Sheriff's Office will participate
in two (2) statewide coordinated raids per year. These raids involve
the arrest of non-custodial parents in which men make up 98-99 percent
of the ``arrestees''. This is ``gender profiling'', ``gender biased
discrimination'' and a ``gender biased hate crime'' in that it violates
the Equal Protection Clause of the Fourteenth Amendment.
Based on the foregoing, the child support enforcement bureaucracy
is an abject failure, a massive waste of taxpayer's hard-earned monies
(in the billions of dollars), perpetrates government abuse and
government oppression against innocent citizens, creates an
unconstitutional class of outlaws which are comprised of almost
entirely of male parents, and perpetrates fraud to collect child
support debts at the point of a gun, in order to maximize profits for
the states and its support enforcement bureaucracies.
The taxpayers in this country would be best served if the
government stopped its fraudulent, abusive and oppressive anti-male/
anti-family practices that it uses to create child support obligors and
child support debtors under communist-Soviet style child support
guidelines, eliminated the entire child support enforcement
bureaucracy, and took the billions of dollars saved from eliminating
the bureaucracy and sent it in the form of child support checks to the
recipients in the same manner it sends out Social Security checks.
Statement of Malcolm Hatfield, M.D., Franksville, Wisconsin
My child support assessment is not based on economic data and
represents fraud.
Attachments:
Franksville, Wisconsin 53126
March 25, 2003
Ms. Susan E. Pfeiffer
201 E. Washington Ave
E200, DWD
Madison, WI 53703
Dear Ms. Pfeiffer:
This is written to summarize my opinion given in today's public
hearing regarding the DWD's child support proposed guidelines. I
limited my talk solely to high income payers. I first defined high
income payers as having a combined income of over $50K per year . . . I
defined the word combined as being both parents. I made the following 4
points:
1. There is no economic data to support their assumptions for all
levels of income above the $50k threshold. As the income of one or both
parents increases, the disparity between the economic data and proposed
obligation increases. In addition, the majority of States and all of
our neighboring States have guidelines that are clearly different, with
the disparity increasing significantly as combined income increases.
There is no economic data to support this discrepancy.
2. Once a parent ``wins'' primary custody, there is no mandatory
work provision for the custodial parent (CP) and therefore, the
custodial parent with a high income non-custodial parent (NCP) is not
only allowed to receive a windfall profit, but also is allowed to forgo
his/her obligation to provide for their half of the financial
obligation to their children.
3. The assumptions do not address the significant tax advantages
that the CP has, which are especially beneficial in the high income
case. This includes head of household filing status and child care
credit as well as other tax breaks. High income NCP's are not allowed
any of these tax advantages.
4. Lastly, there is no allowance made when the CP is allowed to
move out of State for the high income NCP to voluntarily decrease his/
her child support obligation when he/she must take a lower paying job
to move to be close to his/her kids. High income NCP cannot obtain high
income jobs anyplace or anywhere. Current proposal forces NCP's to face
possible felony charges (due to federalization of child support
enforcement) and deadbeat parent status merely because he/she wants to
live near their kids.
I summarized my comments by stating that these and current
guidelines give strong disincentive for high income parents to raise
their kids in Wisconsin because they can and will lose their kids
through no fault of their own. They are then forced to pay outrageous
amounts of child support that is not based on economic data and is not
in keeping with neighboring States. This serves as a windfall profit
for the CP and harms children because the windfall profit is inversely
proportional to the amount of time the kids spend with the NCP. Kids
need and deserve a strong relationship with BOTH parents, regardless of
income.
Sincerely,
Malcolm Hatfield, MD
______
Franksville, Wisconsin 53126
July 28, 2003
Senator Carol Roessler
8 South
Madison, WI 53702
RE: CR03-22, the DWD 40 administrative rule change proposal.
Dear Senator Roessler:
I was unable to attend the hearing on July 22 regarding this
proposed change in child support. My husband did attend the DWD's
public hearing in Milwaukee and made the attached comments. The DWD
completely ignored his testimony.
Malcolm's ex-wife filed for divorce in Racine County in 1993. They
have a daughter named Mary who is now 14. She currently lives in
Illinois with her mother, because Racine County Family Court allowed
her to move. In 2000, we married. My daughter Dana is 2 years younger
than Mary. Since 1993, Malcolm has been assessed $5,123.00 per month in
child support. He has paid over $600,000.00 to date. This is paid to a
physician mom for one child. He has fought a tremendous uphill battle
since 1993 so that he can be a father to Mary. Each and every time he
asks for more time with Mary, he is first served with a subpoena to
show his tax return, with the implication that they will demand more
support, and soon thereafter, another false allegation of abuse arises.
Malcolm's drop off/pick up time with Mary serves as a useful time to
serve him with this subpoena. On the other hand, Dana has a liberal
parenting relationship. Her dad pays $400 per month in child support.
This is used for fixed expenses. Dana is well adjusted and is thriving.
Mary was hospitalized in 2001 with inflammatory bowel disease. Her bone
age was over 2 years delayed, and her height and weight for age were
below the 5th percentile. She is committed to 2 prescription
medications until she is 20 years old. She clearly needs a father and
is not flourishing. What is more important to a child? Money or a
father?
Ironically, the DWD recommends lowering child support for low
income payers. They justify this by saying that child support serves as
a wedge between children and their parents. Why isn't this true for all
incomes? I would like to see the department lower the income threshold
to a level more representative of just what it takes to raise a child
for Wisconsin families. My husband and I support the provision of AB
250/SB 156 for parents with combined incomes over $4000.00 per month.
We also support the DWD proposal for low income payers because we share
their opinion that child support serves as a wedge between parents and
their children. Please do not hesitate to contact us if you have any
questions.
Sincerely,
Jeanie Hatfield, MEPD
Statement of Torm L. Howse, Indiana Civil Rights Council, Whitestown,
Indiana
My name is Torm L. Howse, President, of Indiana Civil Rights
Council, and a resident of Indiana, and I have a ``Win-Win Plan'' for
the State of Indiana, which I believe will also be good for all other
States and our Nation, as follows:
We need new legislation outlawing the awarding of sole child
custody, which is mostly to women, except in cases of abuse and/or
neglect, and, instead, enact legislation for joint child custody and
the elimination of child support, mandating that each parent take care
of their own financial needs when the child is with him or her. The
family-friendly legislation, combined with serious welfare reform, will
turn the state budget around, so that all other desperately-needed
services will have funding again.
Indiana currently spends about 40% of its entire annual budget--a
whopping FOUR BILLION DOLLARS every year--on welfare hand-outs to
continually do little more than ``band-aid'' the myriad of devastation
that still echoes from the fallout of sole-custody divorce, long after
the dust settles upon a court's closed files.
While a portion of welfare money is honestly spent on the true
needs, the majority can be phase-transferred into sorely-needed funding
for such things as: education, including teacher salaries, and
increasing the number of teachers; health care, including family-
friendly partnerships with medical service providers, and increased
support for the elderly; public safety, by increasing the visibility,
strength, and tools of firefighters, police, and EMTs; public
transportation, including development and expansion of rail and
monorail systems, in combination with any restructuring of busing--even
adding popular city-city and suburban routes; fighting drug abuse more
efficiently, with better technology and more personnel; and creation of
new jobs, because of all of the above, and other incentives.
In fact, there can easily be enough savings realized by serious
welfare reform to invest in all of the above, in other programs, and to
LOWER TAXES in various ways--like property and income taxes, for
example, and providing NEW TAX CREDITS that are designed to promote and
maintain stable, healthy families--the backbone of any SUCCESSFUL
ECONOMY.
One quick look at our Indiana budget reveals the simple truth: if
we reform welfare a mere 25%, we've already permanently fixed our
approximate $1 Billion deficit--without having to touch anything else.
And, any reform we achieve past that (which should not be too
difficult) is literally ``money in the bank'' to be put to profitable
use.
Only by facing the problem honestly, can the problem be truly
fixed. When you begin to really understand the horrific financial
nightmare that the aftermath of divorce wreaks upon society in general
(and, therefore, the government, and therefore--ultimately--upon the
individual taxpayer), not to mention the actual damage itself, then you
will surely wonder why we haven't practically started a civil war or
something, to get the problem fixed TODAY . . .
Your belief about welfare may be that it is basically a never-
ending handout to those that refuse to get off their duffs, and work to
support themselves. You would be partially right, and this situation
definitely is an important, widespread problem that must be dealt with,
using permanent measures for abusers of the system.
However, the constant drains upon welfare come from several
sources, and most of those sources are the direct result of the mortal
blows that divorce weighs heavily upon our population, especially based
and rooted in the fundamental problem of awarding sole custody of
children to mothers--a national average of some 90% of the time, versus
about 5% sole custody to fathers, and only about 5% awarded as true
joint custody.
Consider the following facts:
1. The continuing annual reports from the federal National
Clearinghouse on Child Abuse and Neglect Information (``missing kids on
milk cartons'') consistently document that 60-62% of all murders of
children, 17 years old and under, is committed by single mothers--more
than all other different classifications of perpetrators combined.
2. The continuing reports from numerous Federal and State Government
agencies have been documenting--for many years--that children raised by
single mothers are several times more likely to be drug abusers,
suicidal, homosexual (think ``AIDS'' . . .), high school dropouts,
violent criminals, criminals in general, imprisoned, pregnant while
teenage, repeating the domestic violence cycle, homeless runaways, and
etc.--serious problems that COST TAXPAYERS A LOT OF MONEY, every single
day. Think about all the different welfare, and even other, programs it
takes to ``combat'' and treat these many problems we have created, by
allowing the awarding of sole custody to women 90% of the time in
divorce--and thereby, fatherless children--for any reason . . . even no
reason (i.e., ``no-fault'' divorce).
3. The massive costs of administering (single mother) welfare hand-
outs, combined with the actual staggering costs of the various forms of
welfare themselves (TANF, Medicaid, food stamps, and etc.), including
the whopping 40% of Indiana's annual budget, and not to even mention
the enormous amount of welfare fraud experienced by government, are
single-handledly responsible for financially destroying America and its
working-class citizens, as evidenced by the present, overwhelmingly
critical budget crises in virtually every state in the union. Moreover,
there exists a viciously repeating cycle of welfare dependence,
inevitably taught to young girls by these welfare single mothers
themselves.
4. Long-term studies show and prove that high amounts of child
support attract, induce, and encourage mothers to divorce, and fuel the
nationally destructive trend of the rampant, large-scale breakup and
breakdown of American families.
5. Sometimes, women involved in a legal custody dispute for children
will falsely accuse the fathers of various things--even false abuse
allegations--to gain an ``upper edge'' in order to secure that child
custody, but with the real motive being to rape the father for child
support, to advance and support her lifestyle, while simultaneously
robbing the financial ``breath'' out of him to fight back (attorneys =
$$), and maybe even to sabotage his ability to afford an occasional
``visit'' with his own children--that is, if she even allows him to see
them, at all.
6. The financial strength to stay alive, in the face of child
support, triggers many men to resort to various methods of crime--just
to exist--and which also eventually costs taxpayers even more, by
paying for prison spending increases, and other losses to society by
the effects of drug abuse, or whatever cause and effects go with a
given criminal activity.
7. And, if fathers can't keep up with child support payments, they
are put in jail or prison--further eroding our taxbase, and insanely
causing taxpayers to foot an even higher share.
8. Propaganda about ``deadbeat dads'' is just like the media's
frenzy over airplane crashes--as travel by air is actually
statistically far safer than travel by automobile, so the percentage of
``deadbeat moms'' is much higher than that for fathers . . . and, the
vast majority of child support orders against men are crippling
amounts, levels that are unethical, immoral, and that actually violate
the limits of written law.
9. Even more importantly, fathers have absolutely equal
constitutional rights to custody of their children.
The ongoing, national, overwhelming practice of typically awarding
sole custody of children to mothers is: 1) illegal under federal
(constitutional) law; 2) destroys children with nazi-concentration-camp
efficiency; 3) wipes out society tangibly, FINANCIALLY, and needlessly;
and 4) is BAD BUSINESS FOR AMERICA.
Ironically, the State of Indiana is way behind the times, and
itself. In 1973, the Hoosier State became the first to pass any
legislation that even suggested the possibility of joint custody of
children. Tragically, that's about as far as it ever went, while over
the past decade, several states have finally figured out, through years
of studies, that most soaring costs to the financial, moral, and
physical health of society could be directly traced back to the
breakdown of the family . . . It doesn't take a rocket scientist to
understand that the real strength, security, and prosperity of America
is directly linked to the same stability factors of the average
American family.
Recently, over the past several years, states like Wisconsin,
Kansas, Louisiana, Pennsylvania, and others passed laws making equal
and full JOINT CUSTODY of children the standard to be applied in
divorce, separation, and similar actions regarding kids. Guess what
happened? No longer able to expect ``default'' control of the children,
and without the guaranteed ``second income'' (child support . . .),
actions for divorce involving children--agreed by most experts as being
filed by mothers some 70-80% of the time--rapidly plummeted in rate,
marriages survived, families remained intact, children retained the
guidance and support of their fathers in their lives, crime dropped,
youth in trouble dropped, court caseloads dropped, bankruptcies
dropped, drug abuse dropped, suicides dropped, child abuse and neglect
dropped, and, needless to say: THE AMOUNT OF TAXPAYER DOLLARS NEEDED
FOR WELFARE DROPPED. Doesn't INDIANA want the same for its families,
finances, and future? Doesn't AMERICA want the same for its families,
finances, and future?
Statement of Keith McLeod, Richmond, Virginia
Introduction
Thank you for the opportunity to address the Committee on Ways and
Means about waste, fraud, and abuse. The waste and abuse I wish to
raise is child support enforcement, per Title IV-D of the Social
Securities Act, administered by the Office of Child Support Enforcement
(OCSE) of the Department of Health and Human Services (DHHS).
For my figures and information I draw upon the e-book my company
publishes, The Multiple Scandals of Child Support [KC Wilson, Harbinger
Press, Richmond, VA, 2003]. It is thoroughly researched and verified;
all facts, figures, and citations in this brief are fully provided and
expanded upon there. It is submitted with this brief as Exhibit A.
[http://harbpress.com]
The Problems
There are a very large number of problems with child support
enforcement as practiced by DHHS. They are:
1) There was never a problem with child support compliance.
There is a problem with poverty in the US, and denial of it.
While over 30% of American children and their single mothers live
in poverty, what is the state of the fathers? While enforcement has
been enacted without any study of them (problem 3, below), limited
studies suggest that the same number of fathers are just as poor. For
instance, the Urban Institute found that at least 23% of non-custodial
parents live below the poverty line[1], so probably the
majority of those not paying simply can't. They can barely support
themselves.
---------------------------------------------------------------------------
\[1]\ Elaine Sorensen & Chava Zibman, ``Poor Dads Who Don't Pay
Child Support: Deadbeats or Disadvantaged?'' Urban Institute, Series B,
No. B-30, April 2001.
---------------------------------------------------------------------------
If those poor single mothers married the fathers of these children,
the same number of children would still be just as poor. There is a
problem with poverty in America, from which men equally suffer.
Men in poverty are being used as scapegoats for an array of
political agendas. One is to avoid admitting to systemic problems of
income distribution and poverty in our economy, less politically
acceptable to admit and address. Child support enforcement is blaming
poverty on the poor which has never proved effective, and is not
proving so now.
2) Now, there is a problem with child support compliance.
The two decades of child support enforcement have seen a steady
decline in child support payments using all measures except one. This
has occurred during the economic boom of the 1990s, so imagine what is
happening now, whose figures will not be available for 5 years.
Appendix A of this brief provides all Census Bureau data on
compliance, in charts and tables in consistent, 1999 dollars. In 1978
the average child support paid was $3,098.55. In 1997 it was $2,527.79,
a fall of 18%.
From 1983 to 1991, the percentage of the total of child support
owed that was paid, fell from 70.4% to 67.1%. The formula for these
values was then adjusted in 1992, but the downtrend still shows since
then.
Urban Institute researcher Elaine Sorensen, in a Washington Post
article published June 1, 1999, admits, ``The sad fact is that children
living with single mothers are no more likely to receive child support
today than they were two decades ago.'' [2]
---------------------------------------------------------------------------
\[2]\ Elaine Sorensen, ``Dead-Broke Dads,'' Washington Post, June
1, 1999.
---------------------------------------------------------------------------
If anything, child support enforcement has proven counter-
productive: a waste of money and effort only resulting in tens of
thousands, possibly hundreds of thousands of more men in jail, driven
to suicide, driven from their children, and/or hopelessly in debt, each
year.
Child support is being used to avoid the issue of poverty.
3) There has never been a study on the target: fathers who are not
paying child support.
Not Congress, nor DHHS, nor OCSE, nor any government body has ever
commissioned or performed any study on the target and imagined reasons
for these measures. Five billion federal dollars a year (the OCSE
budget), plus billions more by the states, are spent on something with
no definition.
The only knowledge about them is inferred by other Federal
Government data. The Census Bureau only polls custodial parents, never
non-custodial ones. The Urban Institute's studies extrapolate data from
the Department of Agriculture and DHHS. Yet billions are spent
persecuting these unknown members of society every year.
Who are they, what are their circumstances, and what are their
stories? What percentage are actually capable of compliance with their
orders? (Indications are that this number may be as low as 10%, but
there is no authoritative source.) While the poor cannot pay, why are
those who can pay not doing so? Is it a protest because the mothers,
courts, and social agencies do not allow or protect meaningful
involvement with their children? Have they new families they are
protecting? Have they legitimate complaints that are being ignored,
meaning we are trying to solve the wrong thing or just not all the
right things in their full context?
We are spending billions of dollars each year on something we know
little about but have many assumptions.
4) The 1986 Bradley Amendment to Title IV-D forbids any reduction of
arrearage or retroactive reduction for any reason, ever.
This reinforces the approach that inability to pay is no excuse.
Needless to say, there are endless stories of men who are now crushed
by a debt they will never be able to pay because they were:
In a coma.
A captive of Saddam Hussein during the first Gulf War.
In jail.
Medically incapacitated.
Lost their job but were confident of another so did nothing
until it was too late.
Did not know they could not ask for retroactive adjustments and
waited too long.
Cannot afford a lawyer to seek adjustment when adjustment was
warranted.
Wouldn't use the legal system even if they could, feeling it
alien from their world, so don't ask for a reduction when the legal
establishment expects them to.
Some say this measure is a violation of due process and cruel and
unusual as it removes the use of human discretion from dealing with
individual cases. (Not to mention removing human compassion.). But non-
custodial fathers do not have the money to fight a constitutional case.
One way or another, this is an abuse.
5) The return of debtor's prison.
A common ``solution'' for non-payment is jail. Since the Federal
Government only tracks numbers of people in jail for one year or more
there are no reliable figures for how many men are in jail at any point
in time, or in one year, for child support non-compliance. There they
can hardly pay debts, and, indeed, their debt mounts, plus the
incarceration adds to the cost to taxpayers.
This despite the fact that in 1798, John Adams signed into law the
elimination of debtor's prison. But wanting to send ``bad men'' to jail
for child support, irrespective of its paying no money but incurring
pure cost, is why many want failure to pay child support added to
criminal law, even though it is clearly a civil matter. This is a
national hysteria.
The use of jail is also an abuse and a waste of still more millions
of tax dollars, for no benefit to anyone. It is only blood-lust.
6) States hire consulting firms to act as administrator of their child
support program. These companies set child support awards in
individual cases, then are paid on the amount they collect, a
clear conflict of interest.
Policy Studies Inc. is one of three companies in this business and
its worst offender. Either the state or county will hire them as
administrator of their child support system, which means they
adjudicate default child support awards. (Called administrative awards,
they are made without the alleged father present, after minimal effort
to find him.)
This firm is then paid on the basis of collections, meaning they
have a vested interest in making awards as high as possible
irrespective of facts and circumstance. Not only does Policy Studies
Inc. act as administrator, but it hires itself out to the states as
consultants to develop the state guidelines. Again, a conflict of
interest.
Three Supreme Court rulings have found that no one can be
considered an objective adjudicator where much of the revenue that pays
them comes from that over which they adjudicate.[3]
---------------------------------------------------------------------------
\[3]\ Tumey v. Ohio, 273 U.S. 510 (1927), Ward v. Monroeville, 409
U.S. 57 (1972), and Gibson v. Berryhill, 411 U.S. 564 (1973).
---------------------------------------------------------------------------
7) Child support agencies are not regulated as financial
intermediaries.
State child support agencies are financial intermediaries. They
create and manage accounts of assets on behalf of private citizens
Financial intermediary are normally strictly regulated and subjected to
disciplined accounting and auditing practices.
Not these. They may be audited every 3 years by OCSE, only for
compliance with federal regulation, not financial fidelity.
Needless to say, the cases of errors and failure to correct them
are legion. They include having the money but not paying it to the
custodial parent; not registering receipt of money and taking legal
action against those who are fully paid; as well as failure to act when
they could. In the October 22, 2000 Free Lance-Star, Cathy Dyson
reported that $560 million had been collected but not distributed. OCSE
said that was only 4% of what they administer. Had any other financial
institution made a 4% error, they would be shut down.
This government bureaucracy not only solves nothing but creates
difficulties for those who used to get regular payments.
8) OCSE was set up to recover welfare payments that had been made to
mothers, from the fathers, to reduce the cost of welfare.
But as the table below shows, the OCSE budget itself has rarely
been met by its collections, so is making welfare cost more.
Table 4: Paying for Welfare
----------------------------------------------------------------------------------------------------------------
Yr. OCSE Expenditures ($ Billions) TANF Collections ($ Billions)
----------------------------------------------------------------------------------------------------------------
1991 1.8 2.0
----------------------------------------------------------------------------------------------------------------
1992 2.0 2.3
----------------------------------------------------------------------------------------------------------------
1993 2.2 2.4
----------------------------------------------------------------------------------------------------------------
1994 2.6 2.5
----------------------------------------------------------------------------------------------------------------
1995 3.0 2.7
----------------------------------------------------------------------------------------------------------------
1996 3.0 2.8
----------------------------------------------------------------------------------------------------------------
1997 3.5 2.8
----------------------------------------------------------------------------------------------------------------
1998 3.6 2.6
----------------------------------------------------------------------------------------------------------------
1999 4.0 2.5
----------------------------------------------------------------------------------------------------------------
2000 4.5 2.6
----------------------------------------------------------------------------------------------------------------
9) Family law is a state jurisdiction. Federal involvement in child
support is justified by a nexus between it and welfare, but
this has been stretched beyond all reason.
One could theoretically argue that if all child support was paid
there would be fewer people on welfare. If you look only at aggregate
numbers it makes sense, but is an example of what economists call the
fallacy of composition. (What holds true at one scale does not at
another. Looking at aggregates and composites masks micro-level
realities.)
It is only true if all fathers can, in fact, pay whatever amount is
assigned, but they are resisting and just need to be forced. But
evidence strongly suggests that the majority who are not paying cannot
pay at all. The failure of this theory is shown by item 8, above. Very
little is collected from poor fathers and there is no evidence that
what is collected was any more than was previously being paid. It is
just going to the government now instead of under the table to
individual mothers who would still need welfare with or without the
meager child support payments.
Still, in the late 1980s OCSE performed a legal slight of hand. The
nexus with state jurisdiction over family matters like divorce was
federal welfare, but there was increasing political pressure to show
higher returns, which could only be done by adding non-welfare cases to
their docket and become collection agent for the middle and upper
classes. During the years that followed this move they kept claiming
they were collecting more child support than ever before, only because
they were collecting it, it was no longer going directly to the
mothers. As we have seen, less child support was actually being paid,
and government intervention may itself be one of the reasons.
To justify this expansion, a departmental memo to state agencies
declared that all mothers (some 80% of adult women in the US) are
potential welfare recipients, hence fall under their jurisdiction.
Government policy holds an unflattering perception of American
women. And why are not all men as much in danger of going on welfare?
This is an abuse of many things (like equal protection, state
jurisdiction, etc.) and justified a budget increased from $2 billion to
$5 billion without increasing child support compliance by the rich any
more than by the poor.
OCSE is not only ineffective, but very expensive. The hidden costs
beyond the OCSE budget include: state governments pay at least 35% of
the costs of administering child support enforcement; other government
agencies are incurring costs such as the State Department in collecting
bank account balances and employment records, and reporting all
applications for passports; the even more crowded jails. There is also
new cost to companies in reporting accounts and new hires, with no
evidence of benefit to anyone except the government bureaucrats.
10) All divorce fathers are monitored and regulated as though
criminals.
On what basis, and to what end?
Conclusion: Fixing the Wrong Thing
One statistic the Census Bureau is careful to include in many of
its new releases on child support compliance figures is an 87% to 90%
compliance rate when there is joint custody.
One must wonder if child support enforcement is one of those
misguided social hysterias that are causing more harm than they are
solving exactly because we are, yet again, addressing the wrong thing;
the wrong end of the stick. Perhaps government policy should change to
ensuring any child's family remains intact irrespective of what happens
between its parents. (Whether its parents are married, divorced, or
never married, the child's family are the same people and allowed
normal parental roles unless a clear and present danger from one can be
proved. Current policy is to intervene upon divorce to prevent one
parent from parenting.)
At the very least, and as a first step if only to stop the carnage,
we advocate the repeal of Title IV-D. It is counter-productive and
costing a fortune, not only in money but human toll to both children
and fathers.
______
APPENDIX A
Child Support Compliance Data
The Census Bureau has surveyed custodial households every 2 years
since 1978 to provide an independent reading on their state.
(Independent of other agencies and the figures meaningful to them.)
These are all their child support compliance figures, only as
reported by the recipients themselves, converted to consistent 1999
dollars. (There is no survey of non-custodial parents and what they
claim to have paid. There was one academic study that suggested there
are different versions about how much is both owed and paid. Still,
using only these numbers can show trends, if not accurate absolute
amounts.)
There is an anomaly in the data that must be understood. For the
1993 survey and thereafter, one question was changed to include
arrearage in the tally. That is, ``How much were you owed last year''
was changed to ``How much were you owed last year plus was already in
arrears.'' (Arrearage should have been tallied separately.)
Therefore, there is a blip that is marked on all charts. It does
not effect the average payment values, but does effect the others. Even
still, a consistent down-trend is clear, except for the number of
custodial parents getting all child support.
1999's data was only released in October of 2002. That's how long
it takes to gather and release it.
For the years 1978 to 1999 there are charts for:
Number of cases having child support orders, and the
number of cases (claiming to get) all, and all or some, child support.
This shows the rising case load and absolute values that are converted
into percentages in the following charts.
Average child support due and average amount received.
Percent of custodial parents receiving some of their
child support, and percent receiving all.
The unemployment rate, from the Department of Labor. This
allows visually accounting for economic conditions over those decades.
One would expect child support payments to rise during low
unemployment, but by how much? What we find is, during extremely good
times, maybe a slight rise in only the custodial parents getting all
their ordered child support. Other measures of compliance continued to
fall.
The charts are followed by a table showing the raw numbers,
including their conversion to 1999 dollars.
----------------------------------------------------------------------------------------------------------------
Re-
Rebased rebase
# Court Total Due Avg Due Total Paid Avg. All 4 CPI-U-R, CPI-U-R
Orders ($ *** ($ Payment Amts' 1989 = From
(,000) Billions) Billions) Yr's $ 100 1989 to
1999
----------------------------------------------------------------------------------------------------------------
* 1978 3,424 12.6 $3,679.91 8.1 $2,370.00 1989 55.6 1.30740
54342
----------------------------------------------------------------------------------------------------------------
* 1981 4,043 13.7 $3,388.57 8.4 $2,080.00 1989 73.9 1.30740
54342
----------------------------------------------------------------------------------------------------------------
* 1983 3,995 12.5 $3,128.91 8.8 $2,215.00 1989 81.6 1.30740
54342
----------------------------------------------------------------------------------------------------------------
* 1985 4,381 12.6 $2,876.06 8.3 $1,892.00 1989 87.8 1.30740
54342
----------------------------------------------------------------------------------------------------------------
* 1987 4,840 15.9 $3,285.12 10.9 $2,247.00 1989 92.5 1.30740
54342
----------------------------------------------------------------------------------------------------------------
* 1989 4,953 16.3 $3,290.93 11.2 $2,252.00 1989 100.0 1.30740
54342
----------------------------------------------------------------------------------------------------------------
1991 5,326 17.7 $3,323.32 11.9 $2,227.00 1991 108.9 1.30740
54342
----------------------------------------------------------------------------------------------------------------
** 1993 6,685 23.9 $3,575.17 14.7 $2,203.00 1993 114.6 1.30740
54342
----------------------------------------------------------------------------------------------------------------
** 1995 6,966 28.3 $4,062.59 17.8 $2,555.00 1995 120.2 1.30740
54342
----------------------------------------------------------------------------------------------------------------
** 1997 7,006 29.1 $4,153.58 17.1 $2,440.00 1997 126.2 1.30740
54342
----------------------------------------------------------------------------------------------------------------
** 1999 6,791 32.3 $4,756.30 19.0 $2,791.00 1999 130.7 1.30740
54342
----------------------------------------------------------------------------------------------------------------
* All $ values reported in 1989 $s by US Census.
** Census added past due amounts. Previously, only tracked amounts due that year.
*** From 1993, ``Avg Due'' is NOT the amount of the child support award since it includes past due.
------------------------------------------------------------------------
Avg Due In 1999 $s
------------------------------------------------------------------------
1978 $4,811.13
------------------------------------------------------------------------
1981 $4,430.24
------------------------------------------------------------------------
1983 $4,090.76
------------------------------------------------------------------------
1985 $3,760.17
------------------------------------------------------------------------
1987 $4,294.99
------------------------------------------------------------------------
1989 $4,302.59
------------------------------------------------------------------------
1991 $4,344.93
------------------------------------------------------------------------
1993 $4,078.70
------------------------------------------------------------------------
1995 $4,418.85
------------------------------------------------------------------------
1997 $4,303.02
------------------------------------------------------------------------
1999 $4,757.77
------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Total Due ($ Billions) Total Paid ($ Billions)
--------------------------------------------------------------------------------------------------
% of
In 1989 In 1999 % Change In 1989 In 1999 % Change % Paid # Paid % Paid # Paid Total
$s $s From '78 $s $s from '78 All All All or All or Due,
Some Some Paid
----------------------------------------------------------------------------------------------------------------
1978 12.6 16.5 0.00 8.1 10.6 0.00 48.9 1674 71.7 2455 64.3
----------------------------------------------------------------------------------------------------------------
1981 13.7 17.9 8.73 8.4 11.0 3.70 46.7 1888 71.8 2903 61.3
----------------------------------------------------------------------------------------------------------------
1983 12.5 16.3 -0.79 8.8 11.5 8.64 50.5 2017 76.0 3036 70.4
----------------------------------------------------------------------------------------------------------------
1985 12.6 16.5 0.00 8.3 10.9 2.47 48.2 2112 74.0 3242 65.9
----------------------------------------------------------------------------------------------------------------
1987 15.9 20.8 26.19 10.9 14.3 34.57 51.3 2483 76.1 3683 68.6
----------------------------------------------------------------------------------------------------------------
1989 16.3 21.3 29.37 11.2 14.6 38.27 51.4 2546 75.2 3725 68.7
----------------------------------------------------------------------------------------------------------------
1991 16.3 21.2 29.00 10.9 14.3 34.91 51.5 2743 75.2 4005 67.1
----------------------------------------------------------------------------------------------------------------
1993 20.9 27.3 65.52 12.8 16.8 58.36 34.1 2280 69.0 4613 62.7
----------------------------------------------------------------------------------------------------------------
1995 23.5 30.8 86.86 14.8 19.4 82.82 39.0 2717 68.4 4765 63.0
----------------------------------------------------------------------------------------------------------------
1997 23.1 30.1 83.01 13.5 17.7 67.28 40.9 2865 67.4 4722 58.8
----------------------------------------------------------------------------------------------------------------
1999 24.7 32.3 96.14 14.5 19.0 79.47 45.1 3063 73.7 5005 58.7
----------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------
Average Payment
-------------------------------------------------------------------------
In 1989 $s In 1999 $s % Change From '78
------------------------------------------------------------------------
$2,370.00 $3,098.55 0
------------------------------------------------------------------------
$2,080.00 $2,719.40 -12.24
------------------------------------------------------------------------
$2,215.00 $2,895.90 -6.54
------------------------------------------------------------------------
$1,892.00 $2,473.61 -20.17
------------------------------------------------------------------------
$2,247.00 $2,937.74 -5.19
------------------------------------------------------------------------
$2,252.00 $2,944.28 -4.98
------------------------------------------------------------------------
$2,045.00 $2,673.64 -13.71
------------------------------------------------------------------------
$1,922.34 $2,513.28 -18.89
------------------------------------------------------------------------
$2,125.62 $2,779.05 -10.31
------------------------------------------------------------------------
$1,933.44 $2,527.79 -18.42
------------------------------------------------------------------------
$2,135.42 $2,791.87 -9.9
------------------------------------------------------------------------
Statement of Theresa Klubertanz, National Association of Disability
Examiners, Madison, Wisconsin
The National Association of Disability Examiners (NADE) commends
the Committee on Ways and Means for focusing public and congressional
attention on ``Waste, Fraud and Abuse'' within the many programs under
the Committee's jurisdiction and appreciates the opportunity to present
our perspective on this topic.
WHO WE ARE
NADE is a professional association whose mission is to advance the
art and science of disability evaluation and to promote ongoing
professional development for our members. The majority of our members
are employed in the State Disability Determination Service (DDS)
agencies and are responsible for the adjudication of claims for Social
Security and Supplemental Security Income (SSI) disability benefits.
However, our membership also includes personnel from Social Security's
Central Office, its Regional Offices and its Field Offices. Included
among our members are claimant advocates, physicians, attorneys, and
others. The diversity of our membership, combined with our immense
program knowledge and our ``hands on'' experience, enables NADE to
offer a perspective that is both unique and reflective of a pragmatic
realism.
THE PROBLEM
While it is our firm belief that the vast majority of applicants
are not out to defraud these programs, every disability examiner is
aware of at least some level of questionable activity on the part of
some applicants and/or their representatives. The disability programs
are labor intensive and can be difficult to administer. Both medical
eligibility and exact payment amounts are determined by complex rules
and regulations which can foster an environment for waste from inside
the programs and fraud and abuse from outside the programs. Our unique
perspective and expertise provides insight into these problems and
allows us to offer solutions.
PROGRAM INTEGRITY AND THE DISABILITY CLAIMS PROCESS
For the past decade, SSA has attempted to redesign the disability
claims process in an effort to produce a new process that will result
in more timely and more accurate decisions. The Agency's success in
this endeavor thus far has been minimal. NADE believes that the key to
program integrity lies in the basic design of the claims process
itself. One of the most important challenges facing the Commissioner of
Social Security is the development and subsequent implementation of an
effective and affordable disability claims process that will
necessarily take into consideration the need for fair and timely
decisions and the need for the American public to have confidence that
only the truly disabled are awarded benefits. The basic design of any
new disability claims process should ensure that the decisions made by
all components and all decision-makers accurately reflect a
determination that a claimant is truly disabled as defined by the
Social Security Act. In previous correspondence with the Commissioner
of Social Security and in previous testimony before Congress, NADE
submitted a practical proposal for a new design of the disability
claims process which we believe ensures that the decisions made by all
components and all decision-makers accurately reflect a determination
that the claimant is truly disabled as defined by the Social Security
Act. We believe that this proposal is both cost effective and is fair
to the claimant and taxpayer (NADE testimony presented before the
Subcommittee on Social Security on May 2, 2002 and June 11, 2002). For
the convenience of this Committee, we have included a copy of our
proposal for a new disability claims process as an attachment to this
testimony.
Securing the necessary medical, vocational and lay evidence to
assess claimant credibility and fully document a claimant's subjective
complaints and then accurately determine the degree of functional
restrictions is currently a complex, time-consuming process. It will be
made even more so in the future with increased focus on functionality
in the medical listings. SSA and the Congress must realize the
tremendous impact that increasing the need to assess claimant function
will have for decision-makers in terms of time and resources. NADE is
not opposed to such inclusion but the necessary resources must be
provided to adequately cover the additional time and personnel that
will be necessary to evaluate claims. The failure of SSA and/or the
Congress to address the need for additional resources will lend itself
to the development of waste, fraud and abuse in these programs.
Pain and fatigue are legitimate restrictions that can affect an
individual's ability to work. As a result, their severity is often the
deciding factor in the decision as to whether disability benefits
should be awarded. Unfortunately, the lack of any objective method to
measure the severity of these symptoms creates opportunities for fraud
and abuse. Knowledgeable, well-trained and experienced staff is
required to investigate and accurately assess the severity of symptoms
such as pain and fatigue. There has been insufficient training of
current staff to consider potential fraud and there has been too little
attention devoted to the need to retain experienced staff, especially
in the DDSs where turnover has been high, so as to not only provide the
level of customer service that claimants have a right to expect, but
also to provide for a front-line defense against fraudulent claims.
PROGRAM INTEGRITY AND QUALITY ASSURANCE
Program integrity requires accurate and consistent disability
decisions from all components in the adjudication process. An effective
quality assurance process provides an effective deterrent to
mismanagement and fraud in the disability programs. NADE believes that
SSA must incorporate a more uniform quality assurance process into the
basic disability claims process to ensure program integrity. Program
integrity and public confidence is undermined by a quality assurance
process that concludes that the disability decisions made by the DDSs
to deny benefits are correct but then offers the same conclusion for
ALJ decisions that reverses these decisions.
The decision regarding an individual's eligibility for disability
benefits should be objective and unbiased. For that reason, NADE has
long supported equal federal quality assurance review of both allowed
and denied claims at all levels of the adjudicative process. We are
concerned with recent SSA and congressional initiatives to require pre-
effectuation reviews in 50 percent of State agency allowances of SSI
adult cases, ``in order to correct erroneous SSI disability
determinations . . .'' NADE does not believe that the increased review
of DDS allowance decisions represents an appropriate use of scarce
resources. We question the rationale for increasing the federal
quality review rate for DDSs, a component that allows approximately 40%
of initial claims, while there is no such corresponding review of
decisions made at the Administrative Law Judge (ALJ) level, a component
that allows approximately 65% of claims. We are not aware of any study
that evaluates the end result of claims appealed to the Administrative
Law Judge level that were initially allowed by the DDS but later denied
after the claim was returned by the federal quality review component.
Anecdotal evidence suggests that many of these claims are eventually
allowed during the appeals process. We recommend that such a study be
authorized. We believe that data from such a study would support the
argument that increased federal quality reviews of DDS allowance
decisions are not cost effective and actually serve to undermine public
confidence in the disability program.
Targeting DDS allowances sends a message to the DDSs to deny more
claims, forcing claimants to ``pursue their claims to the ALJ level.''
This ``message'' only serves to increase the appeal rate and the
overall administrative costs of the program. In addition, if the review
concludes the DDS allowance to be correct, the review process itself
delays payment to disabled citizens who are frequently in dire
financial straits.
PROGRAM INTEGRITY AND PROCESS UNIFICATION
We believe that the decision as to whether a claimant is disabled
and unable to perform any work for which their age, education, and past
work experience may qualify them is a medical decision made within
parameters that have been defined by law and SSA regulations. As such,
these decisions should be made only by those especially trained to make
such decisions. Claimants and/or their representatives could possibly
present a convincing argument that the claimant is more disabled than
is really the case when the individual making the disability decision
is not properly trained. Administrative Law Judges receive little
medical training but are expected to make decisions as to whether a
medical condition is or is not disabling. We believe that the potential
for misrepresentation of the severity of a claimant's medical condition
is greater at this level and we believe that the high allowance rates
by ALJs are partly a reflection of their lack of medical training.
Consequently, NADE supports requiring similar medical training for all
decision-makers at all components in the disability claims process.
Efforts launched by SSA in the past decade to bring DDS and ALJ
decisions closer together have been largely unsuccessful. Process
unification was the cornerstone of this effort. Decision-makers in the
DDSs and OHA were brought together in 1996 for joint training. However,
SSA's failure to follow up on this training initiative in the years
since has eroded any potential benefits that may have been derived.
NADE believes that such joint training is critical to the ultimate
success of anti-fraud efforts and we concur with the opinion expressed
by the Social Security Advisory Board that: ``The most important step
SSA can take to improve consistency and fairness in the disability
determination process is to develop and implement an on-going joint
training program for all . . . disability adjudicators, including
employees of the State disability determination agencies (DDSs),
Administrative Law Judges (ALJs) and others in the Office of Hearings
and Appeals (OHA), and the quality assessment staff who judge the
accuracy of decisions . . .'' (Social Security Advisory Board report,
August, 1998, p.19)
PROGRAM INTEGRITY AND THE DEFINITION OF DISABILITY
The General Accounting Office (GAO) has testified that federal
disability programs represent an example of a disconnect between
program design and today's world. For that reason, it has placed
modernizing federal disability programs on its high risk list ``. . .
in recognition of the transformation these programs must undergo to
serve the needs of 21st century America.''
In previous correspondence and in testimony presented before the
Subcommittee on Social Security, NADE has stated:
NADE does not support changing the definition of disability at this
time. Fundamentally, we believe that:
All who are truly disabled and cannot work should receive
benefits
Those who can work but need assistance to do so should
receive that assistance, including comprehensive, affordable health
care coverage and medical services
Vocational Rehabilitation and employment services should
be made readily available and claimants and beneficiaries should be
properly educated as to the availability of such services and receive
needed assistance in their efforts to take advantage of them
SSA's definition of disability has proven to be a solid foundation
for a program that has become characterized by increasingly complex
changes in its rules and administrative procedures. We believe that,
with the expectation of a significant increase in the number of initial
claim filings in the coming years while, at the same time, the level of
institutional knowledge within the disability program will decrease
significantly, this foundation is needed more than ever. However, we
also believe that it is critically important that disabled individuals
who have the capacity to return to work, should be identified as early
in the process as possible and given the assistance necessary that will
make it possible for them to return to work. We acknowledge that this
may require changing the definition of disability. However, any change
in the definition will have significant ramifications, not only for
those applying for benefits, but also for those who are processing
those applications. It is essential that the impact of any changes be
fully researched and evaluated. Because of the diversity of our
membership and our ``hands on'' experience, we believe that NADE is in
the best position to recognize and assess the potential impact of any
proposed changes in the definition. We offer our expertise to any
governmental agency to which Congress would assign the task of
researching and evaluating the impact of proposed changes in the
definition of disability.
INITIATIVES TO COMBAT FRAUD AND ABUSE
We believe that the resources required to provide for increased
pre-effectuation reviews would be better spent at the beginning of the
process to ensure that quality information is obtained from the
claimant during the initial disability interview. These resources would
then be better utilized in ensuring quality throughout the disability
decision-making process.
We also believe that a more effective use of resources to ensure
program integrity would be to increase the number of Cooperative
Disability Investigation (CDI) units which, since the first CDI units
became operational in 1998, have allowed SSA to avoid improper payments
of nearly $159 million. Rather than sending a message to the public
that encourages appeals and increases administrative costs, the message
sent to the public would be that it is not worth the risk to try to
defraud the program.
CDI units effectively utilize the combined strengths and talents of
OIG, disability examiners and local law enforcement, offer a visible
and very effective front-line defense for program integrity and serve
as a visible and effective deterrent to fraud. Our members have a
unique opportunity to observe and assist in the process of detecting
fraud and abuse within the disability program. SSA's Inspector General,
Mr. James Huse, Jr. has attributed the success of the CDI units to
investigate fraud allegations to the efforts of, ``. . . those most
qualified to detect fraud--DDS adjudicators.'' NADE supports the
continued expansion of the CDI units to combat fraud and abuse in the
disability program.
An experienced disability examiner can be one of the most effective
deterrents to fraud and abuse. NADE urges Congress and SSA to take the
necessary action to ensure that the experience level in the DDSs can be
maintained. Adequate resources should be allocated to the DDSs to
reward experience and maintain a highly knowledgeable, well-trained,
and fully equipped staff.
In addition to providing adequate staff and other resources for
administration of the disability program, NADE supports the immediate
suspension of benefits in CDR claims where the DDS proposes a cessation
of benefits because the claimant has failed to cooperate or cannot be
found. Currently, claimants can subsequently appeal these decisions and
elect to continue receiving benefits under the benefit continuation
provisions. By failing to initially cooperate with the DDS, claimants
can continue receiving benefits for many years beyond the time period
in which their medical condition made it impossible for them to
continue working. Rewarding this type of behavior is hardly beneficial
to ensuring program integrity and severely interferes with the proper
conduct of the CDR process.
CONCLUSION
NADE supports the removal of SSA's administrative budget from the
domestic discretionary spending caps. Congress would continue to retain
oversight authority of SSA's administrative budget but it would not
have to compete with other programs for limited funds. Removal of SSA's
administrative budget from the domestic discretionary spending caps
would allow for the growth necessary to meet the increasing needs of
the baby boomer generation for SSA's services while allowing the Agency
to expand its anti-fraud efforts to ensure program integrity.
NADE is opposed to increased federal quality reviews for DDS Title
XVI (SSI) allowance decisions and encourages that these federal quality
reviews include an equal percentage of allowance and denial decisions.
We also strongly encourage that an equal percentage of allowance and
denial decisions made by Administrative Law Judges should be subjected
to a federal quality review. To reduce the possibility that claimants
may misrepresent the severity of their medical condition at an ALJ
hearing, NADE supports increased medical training for administrative
law judges and we support having an official representative at these
hearings to explain the DDS decision and to pose and address questions
and other issues for consideration by the ALJ in making their
determinations.
NADE believes that the efforts undertaken by SSA and supported by
Congress to combat fraud and abuse are cost-effective and also provide
valuable protection to the victims of those who purposely attempt to
defraud the program. For this reason, we support the expansion of the
CDI units and we support increasing the penalties for unintentional and
intentional acts of fraud.
Maintaining program integrity is a vital part of effective public
administration and a major factor in determining the public's view of
its government. The Social Security Administration must provide more
direction in the development of anti-fraud policies and these policies
should reflect pragmatic reality that will make them enforceable. SSA
must recognize that more direct guidance is needed from its top levels
of management if fraud and abuse are to be effectively curtailed. SSA
should be given the congressional support necessary to make the
appropriate changes that will recommit the Agency to its primary
purposes of stewardship and service.
______
NADE Proposal for New Disability Claims Process
1. Intake of new disability claims at the Social Security Field
Office would not be significantly altered from the current practice
with the following exceptions:
a. Greater emphasis would be placed on the inclusion of
detailed observations from the claims representative.
b. The claimant would be provided with a clear explanation
of the definition of disability by the claims representative.
The definition would also appear on the signed application.
c. SSA's web site should clearly indicate that this is a
complex process that would be better served if the claimant
filed the application in person at the Field Office.
d. Quality review of the Field Office product would be added
to demonstrate SSA's commitment to build quality into the
finished product from the very beginning of the claims process.
e. SSA's outreach activities would combine education with
public relations. The Agency's PR campaign would remind
potential claimants of the definition of disability with the
same degree of enthusiasm as the Agency's efforts to encourage
the filing of claims.
f. Greater emphasis would be placed on claimant
responsibility.
2. DDS receipts the new claim and assigns the claim to a disability
examiner. The Disability Examiners initiates contact with the claimant
to:
a. The Disability Examiner will verify alleged impairments,
medical sources and other information contained on the SSA-
3368.
b. The Disability Examiner will provide a clear explanation
of the process and determine if additional information will be
needed.
c. The Disability Examiner will inform the claimant of any
need to complete additional forms, such as Activities of Daily
Living questionnaires.
3. Expand the Single Decision Maker (SDM) concept to:
a. Include more claim types
b. Allow more disability examiners to become SDMs
c. Standardize national training program for all components
of the disability process
d. Establish uniform criteria for becoming SDMs
e. Standardize performance expectations for all components
of the disability process
4. If the initial claim is denied by the DDS, the denial decision
will include an appeal request with the denial notice that the claimant
may complete and return to the DDS.
a. The requirement for a clear written explanation of the
initial denial will remain a major part of the adjudicative
process.
b. Process Unification rulings should be reexamined and, if
necessary, modified to clarify how the initial disability
examiners should address credibility and other issues.
c. Claimant responsibility will be increased in the new
process
5. The denied claim will be housed in the DDS for the duration of
the period of time the claimant has to file an appeal. During this
period of time, claims could be electronically imaged (with adequate
resources--this would further the electronic file concept).
6. The appeal of the initial denial will be presented to the DDS.
Upon receipt of the request for an appeal, the claim will be assigned
to a new disability examiner. Under this proposal:
a. This appeal step would include sufficient personal
contact to satisfy the need for due process.
b. The appeal decision, if denied, would include a Medical
Consultant's signature.
c. The decision would include findings of fact.
d. There would be a provision to include an automatic remand
to DDS on appeals for denials based on failure to cooperate.
7. The record should be closed at the conclusion of this appeal
(including allowing sufficient time for explanatory process before the
record closes).
8. Appeal to the Administrative Law Judge must be restricted to
questions of law rather than de novo review of the claim.
a. The DDS decision needs to have a representative included
in the hearing to defend the decision.
b. There must be an opportunity to remand to DDS but such
remand procedures must be carefully monitored to prevent abuse
and remands should only occur for the purpose of correcting
obvious errors.
9. There needs to be a Social Security Court to serve as the appeal
from OHA decisions.
a. The Social Security Court will serve as the final level
of appeal.
b. The Social Security Court will provide quality review of
ALJ decision.
c. The Appeals Council would be eliminated, limiting the
total number of appeal steps within SSA to three. Appeals
beyond the ALJ level would be presented to the Social Security
Court.
d. The Social Security court would be restricted to
rendering only a legal decision based on the application of the
law.
This proposal is submitted to SSA following the unanimous vote of
NADE's Board of Directors on February 23, 2002 to endorse this design
for a new disability claims process.
Explanation of New Disability Claims Process Proposed by NADE
NADE considered various alternatives to the current disability
claims process before deciding on this process as representing the hope
for a claims process that truly provided good customer service while
protecting the trust funds against abuse. It was our intent to develop
a vision for what the total program should look like and not just the
DDS piece of the puzzle. We believe in the concept of ``One SSA'' and
our proposal is submitted based on the belief that all components
within the disability program should be united in the commitment to
providing good customer service at an affordable price. Quality
claimant service and lowered administrative costs should dictate the
structure of the new disability program.
The critical elements identified in the NADE proposal are:
The expansion of the Single Decision Maker concept to all
DDSs and expanding the class of claims for which the SDM is able to
provide the decision without medical or psychological consultant input.
Continuing Disability Review cases (CDR's) and some childhood and
mental cases can easily be processed by SDMs.
More early contact with the claimant by the DDS to
explain the process and to make the process more customer friendly. The
Disability Examiner is able to obtain all necessary information while
clarifying allegations, work history, and treatment sources. The
claimant is educated about the process so they know what to expect.
Housing the initial claim folder on denied claims in the
DDS pending receipt of an appeal of that denial. This will effectively
eliminate significant shipping costs incurred in transporting claims
from the DDS to the Field Office and then back to the DDS. Costs of
storage in the DDSs would be significantly less than the postal fees
incurred by SSA in the current process. Housing the claims at the DDS
instead of the Field Offices could save as much as $20 per claim in
shipping costs. It will also reduce processing time by eliminating a
hand-off.
Closing the record after the appeal decision is rendered.
NADE believes that closing the record prior to any subsequent ALJ
hearing is critical to generating consistency, providing good customer
service, restoring public confidence and reducing the costs of the
disability program. Without it, there will continue to be two programs,
one primarily medical and one primarily legal, with two completely
different outcomes. We are unclear as to the degree of personal contact
that would be required to satisfy the due process requirement at this
appeal level and would defer to SSA the decision as to how much contact
is needed and how the requirement could be met. Is a face-to-face
hearing necessary or can a phone interview suffice? Even the former,
conducted in the DDS, would be substantially less costly than the
current hearing before the ALJ. The DDS hearing would allow the
claimant to receive a much more timely hearing than the current process
allows. NADE also believes that the role of attorneys and other
claimant representatives would be significantly diminished as the
opportunity for reversal of the DDS decision would be lowered
substantially. The DDS hearing would be an informal hearing, lessening
the impact attorneys have at this level.
NADE believes that the current 60 day period granted to
claimants to file an appeal should be reexamined in light of modern
communication and greater ability of claimants to file appeals more
quickly. Reducing the time allowed to file an appeal would produce cost
savings to the program and aid the claimant in obtaining a final
decision much more quickly.
The additional costs incurred by the DDSs in this new process would
be paid for from monies reallocated from OHA and from the cost savings
created by less folder movement between the DDSs and the Field Offices.
Political decisions will have to be made to reallocate these funds and
these decisions will not be popular. Because of turf guarding by the
various components within SSA and a general unwillingness to accept
change, NADE believes that the victim in past efforts to develop a
comprehensive disability claims process has been the claimant. The
question must be asked, ``Who do we serve, ourselves or the claimant?''
NADE envisions a claims process that would reinforce the medical
decision made by the DDS and limit the OHA legal decision to addressing
only points of law. NADE believes this proposal would produce a high
level of consistency for the disability decisions rendered by the DDSs
while significantly reducing the opportunities for OHA to reverse DDS
decisions. This would help restore public confidence in the system,
provide good service to the claimant and reflect good stewardship since
the entire process should prove to be less costly than prototype or the
traditional process. The decision as to whether a claimant is disabled
would rightfully remain primarily a medically based decision. Claimants
who appeal the DDS decision to an ALJ would be entitled to hire legal
counsel if they wish. SSA would have an official representative at any
such hearing to define the merits of the DDS decision. Unless the law
was incorrectly applied, the DDS decision would be affirmed. Any appeal
of the ALJ decision would be made to the Social Security Court and
either side could appeal.
The proposal is predicated on the assumption that sufficient
staffing and re-
sources would be made available to the DDSs. It is also predicated on
the need for SSA to clearly define the elements that will satisfy the
process unification initia-
tives. It is critical that SSA should provide clarification of what
steps must be followed and provide the funds necessary or modify these
rulings in accordance with practical experience.
The current prototype experiment was begun in ten states nearly
four (4) years ago. Although this process has since been modified and
the claimant conference portion of this experiment abandoned, it still
continues in force for those states affected. Clearly, an exit strategy
for those states involved in this experiment must be developed quickly
and a new disability claims process put into place nationwide that will
avoid the ongoing necessity of SSA having to operate two distinctly
different disability programs. Significant training and reallocation of
resources will be needed. Therefore, it is imperative that decisions
are made as soon as possible as to what course of action is deemed
acceptable.
Thank you.
Statement of Michael Lorsbach, On Point Technology, LaGrange, Illinois
As a 27 year veteran of Unemployment Insurance adjudication and
fraud investigations, I deeply appreciate your continuing efforts to
resolve issues of waste, fraud and abuse of the Unemployment Insurance
(UI) program. In my discussions with UI agency staff, I can definitely
state that the impact of the House Committee on Ways and Means taking
responsibility for aggressively resolving these issues has been
dramatic. In years past I have heard comments referring to programs to
combat UI fraud as ``window dressing'' or more cleverly ``an island off
the coast of UI''. But you have turned the tide. It seems everyone now
is discussing how to increase program integrity and reduce fraud and
abuse.
Secretary Chow recently announced the release $4.8 million ``aimed
at long-standing overpayment problems and is part of an aggressive
departmental plan to address fraud, waste and abuse in the unemployment
insurance system.'' This money has been earmarked for auditing UI
claims and payments against New Hire (Report of Hire) files and against
Social Security Administration files. An additional grant was also made
available for other special detection activities.
The state UI agencies and in particular their Benefit Payment
Control (BPC) units, which are responsible for the detection,
processing, and collection of improperly paid benefits, are much abuzz
with discussions of where the fraud lies and how to detect it. There
are discussions about data mining and finding fraud in many places.
Presentations have been made at UI conventions on the presence of
organizations dedicated to defrauding the program. The DOL grants will
result in the discovery of new and expanded sources of fraud.
But while fraud detection is one of the hottest topics in UI, there
is as of yet little attention being given to the myriad additional
steps required before the problem can be solved. Detecting potential
overpayments is not difficult, nor is the detection of potential fraud.
However, an overpayment is not an overpayment and a fraud is not a
fraud until a determination has been made according to state law; how
this long and often complex traversal from potential to actual is
handled will determine whether efforts to achieve a successful program
to control fraud and abuse will ultimately succeed or fail.
At the beginning of the process, use of intelligently developed
detection algorithms ensure that investigations of potential fraud
achieve the highest possible success rate. Considerable historical data
exist which are studied in order to constantly improve the selection
process. Cross-matching of benefits with wages has been employed for
decades to detect overpayments and fraud. As new weapons, such as New
Hire matching and Social Security Number verification are brought into
the battle, experience gained over the years becomes critical to making
these detection techniques as accurate as possible.
Despite being armed with the assurance that the potential cases
detected are those most likely to yield overpayments, the effort
founders unless resources exist to carry the investigations forward.
Any BPC manager across the nation would agree that the number of fraud
determinations made could be easily doubled if only they had the
resources to investigate and adjudicate more of these cases. However,
the process is not simple and can be incredibly labor intensive.
Information must be elicited from employers, with multiple requests for
the same information often required. The returning data must be
expertly interpreted. Claimants and employers are sent notices and
determinations. Interviews might be scheduled and conducted. All case
activity must be tracked, with reports sent regularly to management to
ensure efficiency. And, most complex of all, each adjudication issue
must be resolved in accordance to state law. Even cases detecting the
smallest of overpayments--or no overpayment at all--require that
adjudication be conducted. In fact, using the New Hires registry or the
SSA match to stop benefits before the occurrence of an overpayment
could well result in some of the most complicated adjudication of all.
In this day and age, adding resources almost always means enhancing
a computer system, not hiring additional staff. However, a significant
number of states are still using a variation/rewrite or modification of
a system distributed to the states in 1974 by the Employment and
Training Administration. In some states this system collapsed during
Y2K and nothing has replaced it. A system which efficiently automates
significant portions of the fraud overpayment detection and
determination processes will enable a state to realize dramatic
increases in the amount of overpaid benefits detected and ultimately
returned to the Trust Fund.
Solutions exist. It has been State proven that a six fold increase
in overpayment detection and processing, with no increase in staff, is
a perfectly realistic goal. The adjudication process that commonly
takes from one to two hours per case can be automated so that over 50%
of cases are completely computerized with another 35% of cases taking
10 minutes or less. The return on investment for such software is in
excess of 100% per month. It was in 1974 that the ETA last funded
software upgrades to attack the problem of unemployment insurance fraud
and abuse.
You have states' attention. The DOL has redesigned state goals
establishing integrity and the reduction of fraud and abuse as a
priority. The states are now working on how to implement this policy.
Adjudication case management software is the final step in the solution
to reducing fraud and abuse in the unemployment insurance program.
Thank you for this opportunity to respond to your inquiry.
Statement of Margaret Paul, Redlands, California
As a school psychologist in an inner city area with an estimated
84% poverty rate, I routinely get pressured by parents to label their
children as handicapped. In many cases, this is not done so they can
help their children with their disability, but so the family can get
their ``crazy money''. If a child is getting a monthly check because he
cannot read, then what is the motivation in helping him improve his
reading? Many times the parent does not want to hear about the results
of their child's evaluation as much as they want ``some papers'' to
help get SSI. It would be a far better idea for school-aged children to
receive some sort of vouchers for counseling or tutoring or equipment
which could be obtained at authorized centers. I am concerned that we
are not only wasting some of our funds this way, but also that it
promotes the creation of children who are labeled handicapped early in
life and who are encouraged to continue to qualify as such by their
dependence at an early age on ``the system''.
Let me also clarify that there are many families of disabled
children that truly need and use SSI appropriately. These are the
families that would do anything to help their children be functioning
members of society and able to live independently. I can assure you
that they would not mind that some of the SSI benefits would be in the
form of vouchers so as to maximize their benefits, because they are the
ones that access tutoring, counseling, etc. and do not consider the
money a paycheck.
I know it is difficult to implement change. However, I wish there
was some way to require parents of school aged children who want and
eventually receive SSI benefits to document what they are actually
doing with the money that is to be used for their child's handicapping
condition. Another option (which I am inclined to believe is happening
somewhat due to increased parental demand and some threats) would be to
tighten the criteria and amount of money a child receives; i.e. a mild
articulation disorder does not qualify for a monthly check.
Thank you for your attention.
Statement of William L. Spence, Ben Lomond, California
It's been noted in California, at least, that the child support
enforcement program--among all governmental activities--is second only
to the public school system in terms of the number of children whose
lives it touches.
Supporting one's children financially and nurturingly is a solemn
duty commanding the highest priority: first for parents as individuals,
and second for the community as a social and institutional matrix--and
when it must at times take a more involved interest. Sadly it is only
one of several fronts on which the nation is in too great a measure
currently failing its children.
Current child support policy, federal and state--both shaped
overarchingly by federal law and regulations under Title IV-D of the
Social Security Act--is based in significant part on serious
misconstruals of problem areas and misdiagnoses of root causes,
occasioned in part unfortunately by the distorting effects of short-
sighted concerns which have all along been accorded inordinate
influence in its construction.
The California `Collectibility Study' (E. Sorensen et al.,
Examining Child Support Arrears in California, March 2003, http://
www.childsup.cahwnet.gov/pub/reports/2003/2003-05collectbility.pdf) is
the most comprehensive and probing investigation of its kind to date:
it makes clearer than ever what's long been suspected, and paints a
picture differing sharply from that that has animated federal policy.
Daddy Warbucks is as rare as the condor: instead most chronically-in-
arrears child support obligations have been assessed arbitrarily
against individuals who have never been financially productive at the
level presupposed; in consequence the bulk of casework and enforcement
actions are counterproductive: being not only of little assistance but
perversely creative of additional, very much un-needed impediments to
responsible parenthood.
Moreover, and in particular--but by no means exhaustively--we note:
The federally mandated professional and driver's license
suspension programs have been vastly over-zealously implemented--often
to absurd effect.
In California, and by hearsay in most or all states, the
required periodic state guideline reviews have been largely dishonestly
conducted; in particular the important charge to examine the economic
aspects of child rearing has received at best token observance:
guidelines remain as they were set, often hastily and to satisfy
political exigencies, when the federal requirement to have one was
first imposed.
Cost reimbursement, and especially the performance
incentive formulae, instill a narrow focus on short-term, aggregate
collections that almost certainly reduce long-run benefits to many
children, and encourage neglect of the often-neediest cases in which
the parent's financial prospects promise little in terms of distinction
for efficiency to the agency.
Federal caseworker training, and operations and practices
guidelines appear to have contributed to the fostering of a culture of
marginalization, denigration, and abuse of ``noncustodial'' parents,
that's highly inappropriate and unbecoming to a responsible
governmental agency.
In my view rather urgent Congressional action is in order; thank
you for affording me the opportunity to express it.
Statement of James D. Untershine, Long Beach, California
Jim Untershine previously submitted ``Family Law Design Review'' to
the Ways and Means Committee on 07-04-01, during the Welfare and
Marriage Hearings.
Jim Untershine holds a BSEE from Mississippi State University and
has 13 years experience in feedback control system design while
employed by Northrop/Grumman Electronics Division. Mr. Untershine was
the Responsible Engineer for the Platform Stabilization and Angle
Measurement subsystems used on the B2B bomber, as well as the Attitude
subsystem used on the Peacekeeper missile. Mr. Untershine is currently
using the Heisenberg Uncertainty Principle and the teachings of Henry
David Thoreau (civil disobedience) to expose Family Law in California
as the exploitation of children for money and the indentured servitude
of heterosexual taxpayers who dare to raise children in this country.
(see Appendix Two: ``Family Law Baseline'', page 10).
Summary
The Legislature must realize the ways and means by which implements
of our own creation are being used as a weapon of mass destruction
against our nation's families by organizations that are funded by the
US taxpayers.
The common denominator regarding welfare reform is
reducing the number of custodial parents who cannot financially support
their children.
The common denominator regarding violence in our schools
and communities is giving the children an authority figure other than
teachers or law enforcement.
The common denominator regarding anything involving
church or state is, and forever shall be, our children.
Promoting ``Healthy Marriage'' will not be effective in
states that financially reward custodial parents (CP) for separating
the children from the family breadwinner.
Promoting ``Responsible Fatherhood'' will not be
effective in states that are allowed to profit by denying custody of
the children to the family breadwinner to maximize the cash flow
between parents.
Promoting ``Employment of Custodial Parents'' will be
devastating in states that are allowed to profit by ignoring federal
protection of noncustodial parents from employer discrimination due to
family law proceedings or judgements to interrupt the cash flow between
parents.\1\
---------------------------------------------------------------------------
\1\ USC 42 666 b6D--Provision must be made for the imposition of a
fine against any employer who--
(i) discharges from employment, refuses to employ, or takes
disciplinary action against any noncustodial parent subject to income
withholding required by this subsection because of the existence of
such withholding and the obligations or additional obligations which it
imposes upon the employer; or
(ii) fails to withhold support from income or to pay such amounts
to the State disbursement unit in accordance with this subsection.
---------------------------------------------------------------------------
Promoting ``Accountability'' will not be effective in
states that are allowed to profit by allowing state Child Support
Enforcement (CSE) agencies to (see Appendix Two: ``Family Law
Baseline'', page 10):
Ignore civil and criminal court orders
regarding child support obligations imposed on
noncustodial parents (NCP).
Ignore filings for enforcement by other CSE
agencies regarding child support obligations involving
the same children.
Ignore court ordered cash transfers from
the NCP made directly to the CP.
Elicit fraudulent amounts of money from
NCPs using the US Postal Service.
Deprive the rights and privileges of NCPs
without due process of law across counties, across
states, and across oceans.
Welfare System
The welfare system implemented in this country is designed to
provide the taxpayer a diminished level of accountability regarding
assistance paid to families. Housing subsidies and food stamps that are
paid for by the taxpayers can only be used for one purpose, which
protects the taxpayers from consumer fraud.
The maximum welfare benefit, provided to families for all states,
is reported by the Committee on Ways and Means in Table 7-9 of the 2000
Green Book. The welfare benefits provided by each state are intended to
reflect the cost of living in that part of the country. A custodial
parent with 2 children could receive welfare benefits as low as $490/
month in Alabama or as high as $1,101/month in Alaska (See Figure One:
``TANF & Food Stamps'', page 7).
Welfare benefits provided to families across all states, provides
the baseline for the cost of raising children. The baseline could be
made more accurate if all purchases made by the parent could be
itemized and scrutinized to increase taxpayer accountability regarding
how their money is spent to support each family (see Appendix One:
``Custody Free Child Support'', page 9).
Family Law System
The Family Law system implemented in this country is designed to
provide the children with financial support due to the absence of the
only parent financially capable of supporting the children. Money paid
directly to the CP to support the children represents a projected
schedule of restitution that is awarded to the children resulting from
the damages incurred by the Family court.
The child support guidelines that specify child support awards
demanded of noncustodial parents for all states can be obtained from
AllLaw.com (except New Hampshire and Vermont). The child support
guidelines demanded by each state are intended to reflect the cost of
raising children in that part of the country. A custodial parent with 2
children could receive child support payments as low as $660/month in
North Carolina or as high as $1,760/month in California (see Figure
Three: ``AllLaw.com Child Support Guidelines'', page 8).
ATTENTION: Table 8-2 of the 2000 Green Book entitled ``AMOUNT OF
CHILD SUPPORT AWARDED BY STATE GUIDELINES IN VARIOUS CASES'' is
completely erroneous and must be removed, corrected, or enforced. Table
8-2 is a desperate attempt by the Institute for Family and Social
Responsibility (FASR) to portray Indiana as the most aggressive child
support guideline in the nation. California leads the nation demanding
40% of an NCP's net income for 2 children but is only reported to
demand 18% by FASR (see Figure Four: ``FASR Child Support vs
AllLaw.com'', page 8). FASR is paid by the taxpayers to act as the
clearinghouse for CSE statistics and is based out of the University of
Indiana at Bloomington.\2\
---------------------------------------------------------------------------
\2\ Institute for Family and Social Responsibility (FASR), 1315
10th St, Bloomington, IN, http://www.spea.indiana.edu/fasr/
---------------------------------------------------------------------------
Family courts have become the delivery vehicle for family
destruction, targeting heterosexual taxpayers who dare to raise
children in this country. The confidence game that is perpetrated on a
``deep pockets'' parent involves a ``bait and switch'' scam regarding
due process. The family law system deprives both parents of federally
mandated rebutability by forcing both parents to battle for custody.
Parents are only allowed to prove to the Family court that the children
would be better off with someone else.
The profits made by CSE agencies across the nation can be
ascertained to a certain degree of accuracy. The profits made by the
Family court is completely invisible regarding attorney fees, custody
evaluation specialists, expert witnesses, psychiatrists, and other
Family court agencies that thrive on obstructing justice to guarantee
further litigation at the expense of the family.
Federal law demands that states review their child support
guideline every 4 years, to verify compliance with the federal mandate
that allows the state to practice Child Support Enforcement (CSE).
Child support guidelines are established by states with the assistance
of independent entities that are free to subvert the federal laws to
insure the state profits from the exploitation of children for money.
ATTENTION: Policy Studies Inc. (PSI) of Denver, CO was paid by
California to perform the 4 year review of the state's child support
guideline in 2001 at the behest of the Judicial branch.\3\ PSI was paid
by California to investigate the accounting practices of Los Angeles
CSE in 2001 at the behest of the Executive Branch.\4\ PSI claims to
have provided consultation to 49 states, Canada, Australia, Puerto
Rico, the Virgin Islands, and Mongolia. PSI aspires to ``do socially
useful work, have fun, and make money'', while attempting ``to create
an environment where employees can take risks without being punished
for their mistakes''.\5\
---------------------------------------------------------------------------
\3\ Judicial Council of CA, *Child Support Guideline Review 2000'',
Chapter 3, Exhibit 3-13, ``Monthly Child Support Order'', $369 for 1
child, $662 for 2, $921 for 3.
\4\ Greg Krikorian, LA Times, 06-03-01, ``County Child Support
Program's Accounting Under Scrutiny by State'', ``Services: Inflated
figures could affect funding statewide. A private firm is hired to
examine the system''
\5\ Policy Studies Inc. (PSI), 999 18th St, Denver, CO, http://
www.policy-studies.com/about/about--intro.htm
---------------------------------------------------------------------------
Child Support Enforcement System
The CSE system implemented in this country is designed to provide
the taxpayers a diminished level of accountability regarding assistance
paid to families that could have been paid for by a parent with the
ability to pay. Housing subsidies and food stamps that are paid for by
the taxpayers are reimbursed by a noncustodial parent, which protects
the taxpayers from welfare fraud.
CSE agencies in every state are paid incentives by the taxpayers
for collecting back child support from noncustodial parents. The back
child support collected by a state can force the taxpayers to pay as
much as 10% of the collection depending on the state's administration
costs.\6\
---------------------------------------------------------------------------
\6\ USC 42 658 (c)--Incentive payments to States
---------------------------------------------------------------------------
Child support arrearages owed by noncustodial parents are reported
by the Office of Child Support Enforcement (OCSE) in Table 76 to total
$84 billion across all states in 2000 and is an increase of $8.5
billion from 1999. If all the noncustodial parents miraculously paid
off all the child support arrearages, the taxpayers would be forced to
pay a total of $8.4 billion in incentives to the respective states who
allowed this condition to exist.
The Federal mandate forbids states to forgive any part of a child
support arrearage, which usually grows with 10% per annum interest. The
longer it takes to collect it, the larger the child support arrearage
grows, and the larger the incentive a state earns.
The worst case scenario would involve an NCP that never pays a dime
in child support, and is charged 10% per annum interest. After 18
years, the interest alone would equal 95% of the back child support
owed.\7\ When the current child support charges stop, the child support
arrearage increases by adding 10% of the 18 year back child support
owed every year.
---------------------------------------------------------------------------
\7\ I18 = Interest accrued after 18 year child support
arrearage
Let CS = Child support owed, n = Increments per year, tn
= Time increment, Iy = Interest per annum
1) NCP = [1 + Iy* (tn + n)/
(2*n)]*tn*CS
2) I18 = Iy*(tn + n)/(2*n) when n
= 1 inc/yr, tn = 18yrs, Iy = 10%/yr
2) I18 = (0.1)*(18+1)/(2*1)
2) I18 = 0.95
1) NCP = [1 + (0.95)]*(18)*CS
---------------------------------------------------------------------------
Aside from the interest driving the child support arrearage up, the
child support guideline imposed on NCPs by each state determines the
maximum 18 year back child support owed. The taxpayers are forced to
pay an incentive on money collected that is over and above the welfare
benefits that would be paid to a family for 18 years.
The spirit of the law that begged the creation of welfare reform
was to keep families off the welfare roles, not to empower the state to
insure a tax-free windfall for custodial parents (CP) and ripping off
the US taxpayers to do it. Since the CP is not required to account for
the money paid to support the children, the only method by which an NCP
or the state can insure the children receive support is to allow the
family to remain on welfare.
Child support guidelines that exceed the state's maximum welfare
benefits will serve to help the NCP fall behind in payments, while
setting the pace for an exorbitant incentive from the taxpayers when
the NCP is finally forced to pay years later.
To demonstrate the distinction between the ``Welfare Plus'' and
``Welfare Only'' child support guideline philosophies, the distribution
of collections follow.
Welfare Plus--Assume that a state's child support guideline exceeds
the state's welfare benefits, and the family received welfare for 18
years.
The state recoups their 30% share of the welfare owed
collection and then deducts the state's ``Welfare Plus'' incentive
before distributing the remainder to the US taxpayers.
The amount distributed to the CP includes the back child
support owed, minus the welfare owed, plus the interest on the back
child support owed, plus the interest on the welfare benefits that the
family received from the US taxpayers.
Welfare Only--Assume that a state's child support guideline is the
same as the state's welfare benefits, and the family received welfare
for 18 years.
The state deducts their 30% share of the welfare owed
collection and then deducts the state's ``Welfare Only'' incentive
before distributing the remainder to the US taxpayers.
The amount distributed to the CP includes the interest on
the welfare benefits that the family received from the US taxpayers.
California will pay a maximum welfare benefit of $988/month to a
family with 3 children, while demanding an NCP to pay 50% of net income
($2,200/month for NCP earning $52,800/year). If a family remained on
welfare for 18 years, the distribution after collection would be:
Welfare Only Welfare Plus CP $202,738 $713,232 \8\
ST $105,637 $156,686 \9\
US $107,771 $ 56,722 \10\
------------------------------------------------------------------------
NCP $416,146 $926,640
44% 18yr net income 98% 18yr net income
Comparing the distribution of collections between the two child
support guideline philosophies, it can be seen that the ``Welfare
Plus'' scheme allows the CP to receive a $510,494 increase courtesy of
the NCP, while allowing California to receive a $51,049 incentive
increase courtesy of the US taxpayers.
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\8\ CP = Custodial parent share of child support arrearage
collections
Let CS = W*(1 + A), where A = (CS/W--1) and W = maximum welfare
benefit
1) NCP = (1 + I18)*(1 + A)*tn*W
3) CP = [A + I18*(1 + A)]*tn*W
Let CS=W=988/mo=11,856/yr, A=0, I18=0.95,
tn=18yrs
3) CP = [0 + (0.95)*(1 + 0)]*(18)*(11,856)
3) CP = $202,738
Let CS=2,200/mo, W=988/mo=11,856/yr, A=[(2,200/988)-1]=1.23, n=1
inc/yr, tn=18yrs, Iy=10%/yr
3) CP = [1.23 + (0.95)*(1 + 1.23)]*(18)*(11,856)
3) CP = $713,232
\9\ ST = State share of child support arrearage collections
Let X=30% of welfare owed as state's contribution, and Y=10% state
collection incentive
1) NCP = (1 + I18)*(1 + A)*tn*W
4) ST = [X + Y*(1 + I18)*(1 + A)]*tn*W
Let CS=W=988/mo=11,856/yr, I18=0.95, A=0,
tn=18yrs,
4) ST = [(0.3) + (0.1)*(1 + 0.95)*(1 + 0)]*(18)*(11,856)
4) ST = $105,637
Let CS=2,200/mo, W=988/mo=11,856/yr, I18=0.95,
A=[(2,200/988)--1]=1.23, tn=18yrs
4) ST = [(0.3) + (0.1)*(1 + 0.95)*(1 + 1.23)]*(18)*(11,856)
4) ST = $156,686
\10\ US = US taxpayer share of child support arrearage collections
Let X=30% of welfare owed as state's contribution, and Y=10% state
collection incentive.
1) NCP = (1 + I18)*(1 + A)*tn*W
5) US = [(1-X)-Y*(1 + I18)*(1 + A)]*tn*W
Let CS=W=988/mo=11,856/yr, I18=0.95, A=0,
tn=18yrs
5) US = [(1-0.3)- (0.1)*(1 + 0.95)*(1 + 0)]*(18)*(11,856)
5) US = $107,771
Let CS=2,200/mo, W=988/mo=11,856/yr, I18=0.95,
A=[(2,200/988)--1]=1.23, tn=18yrs
5) US = [(1-0.3)- (0.1)*(1 + 0.95)*(1 + 1.23)]*(18)*(11,856)
5) US = $56,722
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Some greedy states will fraudulently exaggerate the welfare owed
since there is no summary of welfare benefits paid to the CP.
California refuses to adopt a federally approved accounting system
which allows the state to fraudulently assault CPs, NCPs, and the US
taxpayers. California loses $150 million in federal participation every
year for the ability to commit financial fraud.\11\
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\11\ CA Governor's Budget Summary 2002-03, ``Health and Human
Services'', CSA, pg 191
---------------------------------------------------------------------------
Taxpayers may feel that our legislators should have predicted this
inevitable problem of skyrocketing child support arrearages. However,
our legislators at the state and federal level are being told that the
child support guideline in their state is less than the welfare
benefits. California legislators have been misinformed by Policy
Studies Inc (PSI) of Denver, CO,\3\ while the Ways and Means Committee
have been misinformed by the Institute for Family and Social
Responsibility (FASR) of Bloomington, IN. (see Figure Four, page 8).
The US taxpayers are richly rewarding states (that impose an
outrageous child support guideline) for perpetuating welfare,
encouraging divorce, provoking domestic violence, and driving the only
parent capable of financially supporting the children into financial
insolvency.
Welfare Solution
Problem Identification
California reports 26% of all female homicide victims
were killed by their spouse.\12\
---------------------------------------------------------------------------
\12\ CA Dept. of Justice--``Homicide in California--2000'', Chart
15, ``Gender of Victim by Relationship of Victim to Offender''
---------------------------------------------------------------------------
States are paid incentives to impose child support
obligations on men who are not the father of the child in question.
Child support guidelines imposed on NCPs are erroneously
reported to legislators at the state and federal level.
States are paid incentives to impose outrageous child
support guidelines on NCPs to insure Child Support Enforcement (CSE)
involvement.
States are paid incentives for collecting child support
arrearages that exceed the welfare received by the custodial parent
(CP).
CPs are paid the interest accrued on money that never
existed as well as the interest on the welfare benefits they received
from the US taxpayers.
Children have no legal right to the money ordered for
their support even after they no longer reside with the CP.
Money received by the CP that is not spent to support the
children represents tax-free income and is a form of tax evasion
Damage Control
Paternity test all children that are the subject of child
support orders.
Release all victims of paternity fraud from child support
obligations without denying them contact with the children they chose
to mentor.
Release all NCPs currently being incarcerated for failure
to pay if it is obvious they couldn't pay if they wanted to.
Restore all licenses to NCPs who are supporting children
regardless of whether they are making payments to CSE.
Corrective Action
Perform paternity establishment upon the birth of any
child in this country.
Implement the ``Custody Free'' child support system (see
Appendix One, page 9).
Audit each state to establish the actual financial
demands being imposed on NCPs pursuant to the state's child support
guideline.
Audit each state's family code to verify compliance with
the federal mandate with regard to protecting NCPs paying child support
from employer discrimination prior to CSE involvement.\1\
Assign redundant ``Watchdog'' agencies to verify
statistics that are intended to provide legislative visibility of the
effects of the laws on their constituents.
Homicide statistics in each state must relate victims and
assailants who are the biological parents of the same child, regardless
of whether they are married.
Level of Involvement
Identify independent entities that are paid by state
taxpayers to poison the antidote to the welfare disease that has been
prescribed by our Legislature.
Identify independent entities that are paid by US
taxpayers to cover up the effects of an out of control family law
system to our Legislature.
Identify Secretaries that have sabotaged the intent of
the federally mandated child support guideline review by ``silencing or
eliminating all advocates of change amongst those who advise
legislation''.\13\
---------------------------------------------------------------------------
\13\ Daniel Drummond, Washington Times, 08-04-01, ``Professor
Ousted from Child Support Panel'', ``HHS Secretary Rossiter dismissed
political science professor Stephen Baskerville from the 2001 Virginia
Triennial Child Support Guideline Review panel''
---------------------------------------------------------------------------
Identify Judicial bodies who knowingly allow the
misapplication of the federal law to provide the means to exploit
children for money.
Identify Attorney Generals who refuse to enforce laws
uniformly throughout their state.
Identify state Governors who advocate paternity fraud for
profit.\14\
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\14\ Jasmine Lee, Daily Breeze, 09-28-02, ``Davis vetoes tests to
ID dads'', ``PATERNITY: Men forced to support children not their own
say bill would have offered relief. They vow to fight on''
Figure One.-- Figure Two.--
TANF & Food Stamps Benefits TANF Benefits vs Child Support
Awards
Source: Table 7-9 Green
Book Source: Table 7-9 Green Book
Figure Three.-- Figure Four.--
AllLaw.com Child Support
Guidelines FASR Child Support vs AllLaw.com
Source: AllLaw.com Source: Table 8-2 Green Book,
AllLaw.com
------
Appendix One: Custody Free Child Support
Source: James Untershine
``Custody Free'' child support is ``Welfare Reform'' and is
designed to allow parents to remain financially solvent, but it also
serves to remove the motivation for separation. It not only provides
accountability of money paid to support the children for a particular
family, it also provides data that can be used to estimate the cost of
raising children for a family of this type. Since either parent can
access the money set aside to support the children, then it really
doesn't matter who has custody, provided the money is being spent to
support the children.
A family that is functional before separation should be allowed to
function after separation. Developing a history of a particular
family's costs of raising children will eliminate any surprises after
separation. The following credit card account can be set up by parents
upon the birth of their child, rather than waiting until after
separation.
Cardholders--Parents and/or Children.
Depsitors--Parents, Employers, Health Insurance Providers, and
Government Agencies.
Summary Recipients--Parents, Arbitrator, and Government data gathering
Agencies.
Charges--Credit Card Company itemizes all authorized charges and
charges back any unauthorized charges to the offending cardholder.
Point of Sale (POS) software can allow itemization of all purchases to
be charged to the account rather than the transaction total.
Restrictions--Parents and Arbitrator enter into an agreement of
authorized charges intended to support the children. The contributions
of each parent may be decreased if funds exceed a certain level or can
be rolled over to a college fund account.
Authorized Charges--The purpose of the ``Custody Free'' account is to
establish a baseline for expenditures in supporting the children. Food,
Clothing, School Supplies, etc will be included as authorized charges.
Rent, Utilities, Services, etc can be agreed upon by the parents as
well as any other expenses that they may deem necessary. A case of
beer, a carton of cigarettes, or a crate of condoms would be charged
back to the offending cardholder, thereby increasing the contribution
amount for that cardholder.
The Arbitrator--The Arbitrator is not necessarily the Family Court, or
Child Support Enforcement. The Arbitrator could be a recognized
representative from the Credit Card Company, Church, Employer, School,
or any Privatized Agency. The Arbitrator will be responsible for
resolving any issues regarding funds not deposited into the account as
agreed, or disputes regarding inappropriate charges, or if it appears
that the children are naked and starving. The Arbitrator can allow
welfare money to flow into the account to make up for unemployment of a
parent or other irregularities that may threaten continuity of child
support. The Arbitrator can issue actions against employers who fail to
make scheduled contributions and act immediately to protect a parent
from employer discrimination regarding child support withholding.
Government Agencies--Government Agencies that may make deposits to the
account include Welfare, Unemployment Insurance, Disability Insurance,
Internal Revenue Service, etc. Government Agencies that receive the
Account Summary are data gathering agencies (US Census, USDA, etc) that
would only have visibility as to the statistics regarding a family of
this type, rather than who this family actually is.
``Roll it up'' Parenting--In the event of separation the family
residence stays intact and one parent resides there until they have to
``Roll it up'' and stay somewhere else. The children continue to reside
at the family residence and the parents take turns residing with them.
The parenting rotation will be agreed on by the parents or ordered by
the Arbitrator. Dad doesn't have to relocate his workshop, garden
center, or workout equipment, and Mom doesn't have to recreate her
culinary empire, or abandon her masterpiece of interior design. The
kids keep their room, their toys, their friends, and continue to go to
the same school.
The ``Separation Station''--Parents who must ``Roll it up'' may choose
to stay at the state of the art housing complex, subsidized by the
taxpayers and those who have been ordered to pay restitution resulting
from their exploitation of children for money. With a ``Gold Club'' on
one side and a ``Chippendales'' on the other, this sprawling oasis is
guaranteed to provide the means by which a parent can ``sow their wild
oats'' in the name of ``getting it out of their system''. This ``Club
Med'' for parents will allow them to discover what they have been
missing, or realize what they took for granted. Classes available to
``Roll it up'' parents include relationship, parenting, sex therapy,
and anger management, as well as career counseling, job training, and
job placement services. For the more extreme cases there is drug
rehabilitation, psychotherapy, and jail.
______
Appendix Two: Family Law Baseline
Source: James Untershine
The data that follows is a report generated by a database of
evidence that was obtained by a California NCP refusing to negotiate
with a Family Law system holding hostages (ie. Never lie, never say no,
never instigate issues, never refuse hostage release, never run away,
and never pay). Full discovery available upon request.
Data suggests that both Los Angeles and Monterey CSE agencies await
child support arrearage to reach $70,000 before requesting NCP to
appear in criminal court. Los Angeles County CSE waited 666 days while
Monterey County CSE waited 1,264 days.
Defendant = James D. Untershine
LBSC = Los Angeles County (Long Beach) Superior Court, Case #ND019431
NGESD = Northrop Grumman Electronic Systems Division, Employee #76724
LAMC = Los Angeles County Municipal Court, Case #9CR04751
MCSC = Monterey County Superior Court, Case #0020776
Statement of Bill Wood, Charlotte, North Carolina
A personal submission not on behalf of anyone else and these are my
own views.
ROOTS OF THE AMERICAN CULTURE AND COMMUNITY IN DISARRAY
Political leaders, religious leaders, conservatives, families
(especially fathers), judges, and interested lawyers, along with the
vast majority of Americans who believe in ideals of family and country
must understand that open WAR HAS BEEN DECLARED ON THEM AND THIS
COUNTRY. And it's coming from many of the institutions that our taxes
are funding and supporting! In terms of financial and human costs this
war on America has been the most destructive war in America's history.
When Nikita Kruschev banged his shoe on the table and
declared, `We shall destroy you from within' during the
infamous ``Kitchen Debate''--he knew what he was talking about.
[Comparing the culture of the 50's to that of 1998] violent
criminal offenses have exploded upward by 700%. Premarital sex
among 18 year olds has jumped from 30% of the population to
70%. Tax rates for a family of four have skyrocketed 500%,
consuming a fourth of their income. Divorce rates have
quadrupled. Illegitimate births among black Americans has
soared--from approximately 23% to more than 68%. Illegitimacy
itself has jumped from a nationwide total of 5% to nearly 30%
nationwide--a rise of 600%. Cases of sexually transmitted
diseases have risen 150%. Teen age pregnancies are up by
several thousand percent and teen suicides have risen by 200%.
Between 1950 and 1979--serious crime committed by children
under 15 has risen by 11,000% . . .
Most Americans would agree that our society has changed for
the worst over the last 30 years.'' [i]
---------------------------------------------------------------------------
\[i]\ King, Jennifer. Who are the Real Radicals? Rightgrrl,
December 1998. A brief exposition of Antonio Gramsci http://
www.rightgrrl.com/jennifer1.html
While there has been progress in moving people off of the welfare
rolls and into work, welfare still exists and many commentators note it
exists to promote the breakdown of the family. A myriad of today's
social ills can be traced to the breakdown of the family and the
undermining of marriage. Some of the testimony about the devastation of
American families as a result of today's culture war can be seen in
several pieces of testimony I have submitted to the Human Resources
---------------------------------------------------------------------------
Subcommittee:
US House Testimony on Welfare Reform Reauthorization
Proposals, H.R. 4090. April 11, 2002, 109 citations or references--
consequences of welfare practices on the family unit, and exploration
of the 1996 welfare reform bill's requirements for strengthening
families and marriage (http://waysandmeans.house.gov/
legacy.asp?file=legacy/humres/107cong/4-11-02/records/billwood.htm)
US House Testimony on Teen Pregnancy prevention PRWORA,
Public Law 104-193 (Hearing 107-48). November 15, 2001, 43 citations
and references--effects of fatherlessness and divorce on teen
pregnancy. (http://waysandmeans.house.gov/legacy.asp?file=legacy/
humres/107cong/11-15-01/Record/wmwood.htm)
US House Testimony on Child support and Fatherhood
proposals (Hearing 107-38). June 28, 2001, 83 citations or references--
Social consequences of failed divorce and child custody policies
(http://waysandmeans.house.gov/legacy.asp?file=legacy/humres/107cong/6-
28-01/record/chillegalfound.htm)--Father absence, a byproduct of
divorce, illegitimacy, and the erosion of the traditional family, is
responsible for; filling our prisons, causing psychological problems,
suicide, psychosis, gang activity, rape, physical and sexual child
abuse, violence against women, general violence, alcohol and drug
abuse, poverty, lower academic achievement, school drop-outs,
relationship instability, gender identity confusion, runaways,
homelessness, cigarette smoking, and any number of corrosive social
disorders.
US House Testimony on The ``Hyde-Woolsey'' child support
bill, HR 1488 (Hearing 106-107, pages 94-103). March 16, 2000, 75
Citations.
Concerning problems with nearly every state's child support
guidelines. Along with this testimony, I have written legal briefs for
the Federal District Court on the unconstitutionality of Ohio's custody
laws, a legal brief opposing psychology in the courtroom, and am
developing an extensive historical review of the rise of our current
``family'' law system. During several years of research, a disturbing
common thread continues to appear, tracing it back to its origins, it
led to one Antonio Gramsci.
THE PERSONAL IS THE POLITICAL
In 1926, an Italian communist named Antonio Gramsci ended up in
Mussolini's prison after a return from Russia. While there, he wrote
his ``prison notebooks'' and they laid out a plan for destroying
Western faith and culture. His plans included ways to undermine and
discourage Westerners through the intentional collapse of the existing
social structure from within.
Gramsci advocated not only Marxist class warfare, which was
economically focused, but also social and cultural warfare at the same
time. His theories and the ``slow march through the culture'' (or
institutions) which he envisioned to destroy the West are enshrined in
current American social policy. His theories surrounding ``hegemony''
and a ``counter-hegemony'' were designed to destroy Western social
structure and overthrow the ``West'' from within.
Hegemony, as defined by Gramsci is that widely accepted system of
values, morals, ethics, and social structure which holds a society
together and creates a cohesive people. Western social structures
holding society together (i.e. ``the hegemony'') include: authority,
morality, sexual restraint, monogamous marriage, personal
responsibility, patriotism, national unity, community, tradition,
heredity, education, conservatism, language, Christianity, law, and
truth. His theory called for media and communications to slowly co-opt
the people with the ``counter-hegemony'' propaganda message.
``. . . Hegemony operates culturally and ideologically
through the institutions of civil society which characterises
mature liberal-democratic, capitalist societies. These
institutions include education, the family, the church, the
mass media, popular culture, etc.''