[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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                      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

                              ----------                              


                        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.
---------------------------------------------------------------------------
    \[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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \[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.
---------------------------------------------------------------------------
            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.
---------------------------------------------------------------------------
    \[4]\ U.S. General Accounting Office, High-Risk Series: An Update, 
GAO-03-119 (Washington, D.C.: January 2003).
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \[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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \[7]\ See 42 U.S.C. sec. 1382c(a)(1)(B)(i).
    \[8]\ See 42 U.S.C. sec. 1382(f).
---------------------------------------------------------------------------
    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
---------------------------------------------------------------------------
    \[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).
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
    \[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).
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \[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).
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \[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.
---------------------------------------------------------------------------
    \[15]\ GAO-03-119.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \[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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \[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).
---------------------------------------------------------------------------
    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]
---------------------------------------------------------------------------
    \[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).
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
    \[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.
---------------------------------------------------------------------------
    \[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).
---------------------------------------------------------------------------
      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.
---------------------------------------------------------------------------
    \[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).
---------------------------------------------------------------------------
      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.
---------------------------------------------------------------------------
    \[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.
---------------------------------------------------------------------------
    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]
---------------------------------------------------------------------------
    \[32]\ These two questions were new in the 2001 survey so there are 
not comparative figures from 1999.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \[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.
---------------------------------------------------------------------------
    \[34]\ Department of the Treasury, Office of Tax Policy, Corporate 
Inversion Transactions: Tax Policy Implications, (Washington, D.C.: May 
17, 2002).
---------------------------------------------------------------------------
    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]
---------------------------------------------------------------------------
    \[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.
---------------------------------------------------------------------------
   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]
---------------------------------------------------------------------------
    \[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).
---------------------------------------------------------------------------
    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]
---------------------------------------------------------------------------
    \[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).
---------------------------------------------------------------------------
    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' 
Acquisition Cost. GAO-03-184. Washington, D.C.: January 10, 2003.
    Major Management Challenges and Program Risks: Department of Health 
and Human Services. GAO-03-101. Washington, D.C.: January 2003.
    High-Risk Series: An Update. GAO-03-119. Washington, D.C.: January 
2003.
    Skilled Nursing Facilities: Medicare Payments Exceed Costs for Most 
but Not All Facilities. GAO-03-183. Washington, D.C.: December 31, 
2002.
    Medicare Financial Management: Significant Progress Made to Enhance 
Financial Accountability. GAO-03-151R. Washington, D.C.: October 31, 
2002.
    Skilled Nursing Facilities: Providers Have Responded to Medicare 
Payment System by Changing Practices. GAO-02-841. Washington, D.C.: 
August 23, 2002.
    Medicare: Challenges Remain in Setting Payments for Medical 
Equipment and Supplies and Covered Drugs. GAO-02-833T. Washington, 
D.C.: June 12, 2002.
    Medicare: Recent CMS Reforms Address Carrier Scrutiny of 
Physicians' Claims for Payment. GAO-02-693. Washington, D.C.: May 28, 
2002.
    Medicare: Using Education and Claims Scrutiny to Minimize Physician 
Billing Errors. GAO-02-778T. Washington, D.C.: May 28, 2002.
    Medicare Home Health Care: Payments to Home Health Agencies Are 
Considerably Higher than Costs. GAO-02-663. Washington, D.C.: May 6, 
2002.
    Medicare: Communications With Physicians Can Be Improved. GAO-02-
249. Washington, D.C.: February 27, 2002.
    Medicare: Payments for Covered Outpatient Drugs Exceed Providers' 
Cost. GAO-01-1118. Washington, D.C.: September 21, 2001.
    Medicare: Comments on HHS' Claims Administration Contracting Reform 
Proposal. GAO-01-1046R. Washington, D.C.: August 17, 2001.
    Medicare Management: CMS Faces Challenges to Sustain Progress and 
Address Weaknesses. GAO-01-817. Washington, D.C.: July 31, 2001.
    Medicare: Successful Reform Requires Meeting Key Management 
Challenges. GAO-01-1006T. Washington, D.C.: July 25, 2001.
    Medicare Contracting Reform: Opportunities and Challenges in 
Contracting for Claims Administration Services. GAO-01-918T. 
Washington, D.C.: June 28, 2001.
    Medicare: Higher Expected Spending and Call for New Benefit 
Underscore Need for Meaningful Reform. GAO-01-539T. Washington, D.C.: 
March 22, 2001.
    Medicare Management: Current and Future Challenges. GAO-01-878T. 
Washington, D.C.: June 19, 2001.
    Medicare Reform: Modernization Requires Comprehensive Program View. 
GAO-01-862T. Washington, D.C.: June 14, 2001.
    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, 
D.C.: May 20, 2003.
    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. 
Washington, D.C.: April 8, 2003.
    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-
39. Washington, D.C.: December 11, 2002.
    Student Aid and Tax Benefits: Better Research and Guidance Will 
Facilitate Comparison of Effectiveness and Student Use. GAO-02-751. 
Washington, D.C.: September 13, 2002.
    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 
Declines on Taxpayers. GAO-02-674. Washington, D.C.: May 22, 2002.
    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 
Agencies' Collection of Support Payments. GAO/HEHS-97-11. Washington, 
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. 
GAO/HEHS-98-36. Washington, D.C.: January 28, 1998.
    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/
RCED-96-6. Washington, D.C.: November 28, 1995.
    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 
Action. GAO/HEHS-96-4. Washington, D.C.: November 2, 1995.
    Federal Assistance: Grant System Continues to Be Highly Fragmented. 
GAO-03-718T. Washington, D.C.: April 29, 2003.
    Multiple Employment and Training Programs: Funding and Performance 
Measures for Major Programs. GAO-03-589. Washington, D.C.: April 18, 
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
    Flood Insurance: Information on Financial Aspects of the National 
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.
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Graetz, Michael. 1997. The Decline [and Fall?] of the Income Tax, W.W. 
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Greenstein, Robert. 2003b. ``What is the Magnitude of EITC 
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            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;
---------------------------------------------------------------------------
    \[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]
---------------------------------------------------------------------------
    \[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;
---------------------------------------------------------------------------
    \[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).
---------------------------------------------------------------------------
    \[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?''
---------------------------------------------------------------------------
    \[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.
---------------------------------------------------------------------------
    \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
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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.'' [ii]
---------------------------------------------------------------------------
    \[ii]\ Strinati, Dominic (1995), An Introduction to Theories of 
Popular Culture, pg. 168-169. Routledge, London.

    Through a systematic attack of these institutions he termed the 
``slow march through the culture,'' Gramsci theorized that once these 
institutions were sufficiently damaged the people would insist on an 
end to the madness allowing totalitarian control of the Western world. 
A similar form of these theories was tried before America by the 
National Socialists (Nazis) headed by Hitler.
    Many of the Gramscian Marxist Communist ideals have been 
implemented in government, education, and law. In practice, women have 
become the vehicle deceived and used in this quest to tear down and 
destroy Western culture. This has been done by enlisting their help in 
ripping apart marriage and the traditional family.

           Since economic Marxism was a failure, Gramsci reasoned that 
        the only way to topple . . . Western institutions was by, what 
        he called, a ``long march through the culture.'' He repackaged 
        Marxism in terms of a . . . ``cultural war'' . . .
           ``Gramsci hated marriage and the family, the very founding 
        blocks of a civilized society. To him, marriage was a plot, a 
        conspiracy . . . to perpetuate an evil system that oppressed 
        women and children. It was a dangerous institution, 
        characterized by violence and exploitation, the forerunner of 
        fascism and tyranny. Patriarchy served as the main target of 
        the cultural Marxists. They strove to feminize the family with 
        legions of single and homosexual mothers and `fathers' who 
        would serve to weaken the structure of civilized society.''
           . . . [A]nother cultural Marxist (George Lukacs) brought the 
        Gramscian strategy to the schools . . . As deputy commissioner 
        in Hungary . . . his first task was to put radical sex 
        education in the schools . . . it was the best way to destroy 
        traditional sexual morality, and weaken the family. Hungarian 
        children learned . . . free love, sexual intercourse, and the 
        archaic nature of middle-class family codes, the obsolete 
        nature of monogamy, and the irrelevance of organized religion 
        which deprived man of pleasure. Children were urged to deride 
        and ignore . . . parental authority, and precepts of 
        traditional morality. If this sounds familiar, it is because 
        this is what is happening in our public . . . schools.
           . . . Under the rubric of `diversity,' its hidden goal is to 
        impose a uniformity of thought and behavior on all Americans. 
        The cultural Marxists, often teachers, university professors 
        and administrators, TV producers, newspaper editor and the 
        like, serve as gatekeepers by keeping all traditional and 
        positive ideas, especially religious ideas, out of the public 
        marketplace.
           Herbert Marcuse was largely responsible for bringing 
        cultural Marxism to the United States . . . He believed that 
        all taboos, especially sexual ones, should be relaxed. ``Make 
        love, not war!'' was his battle cry that echoed through ivy-
        covered college campuses all over America. His methodology for 
        rebellion included the deconstruction of the language, the 
        infamous ``what does `is' mean?'' which fostered the 
        destruction of the culture. By confusing and obliterating word 
        meanings, he helped cause a breakdown in the social conformity 
        of the nation, especially among the . . . young of America . . 
        .
           Marcuse said that women should be the cultural proletariat 
        who transformed Western society. They would serve as the 
        catalyst for the new Marxist Revolution. If women could be 
        persuaded to leave their traditional roles as the transmitters 
        of culture, then the traditional culture could not be 
        transmitted to the next generation.
           What better way to influence the generations than by 
        subverting the traditional roles of women? The Marxists 
        rightfully reasoned that the undermining of women could deal a 
        deadly blow to the culture.
           If women were the target, then the Cultural Marxists scored 
        a bullseye . . . Women have traded the domestic tranquility of 
        family and the home for the power surge of the boardroom and 
        the sweaty release of casual sex. Divorce court statistics, 
        wife and child abandonment, abortion and even spousal murder 
        can be laid at [the feminists] doorstep to a large 
        degree.[iii]
---------------------------------------------------------------------------
    \[iii]\ Borst, William, Ph.D. American History. A Nation of Frogs, 
The Mindszenty Report Vol. XLV-No. 1 (January 2003) Cardinal Mindszenty 
was imprisoned by the Nazi's and later by the Communists in Hungary. 
Online version can be seen at http://www.mindszenty.org/report/2003/
mr_0103.pdf

    Careful study and review shows that Gramscian Marxist Communism 
encompasses today's ``feminist'' movement.[iv] Feminism's 
goals are to use women to undermine and destroy the culture by 
abandoning marriage and by not carrying on the critical task of 
``transmitting the culture'' to the next generation. Today's feminists 
use women to advance the destruction of women, children, and families 
while convincing them they are somehow a ``victim'' of the patriarchal 
structure. And the patriarchal structure is nothing but Orwellian 
NewSpeak for the social structures and institutions that have kept 
Western civilization together long before the social decay we see 
today.
---------------------------------------------------------------------------
    \[iv]\ ``Marxism and Feminism are one, and that one is Marxism'' 
Heidi Hartmann and Amy Bridges, The unhappy marriage of Marxism and 
Feminism.--opening page of Chapter 1, Toward a Feminist Theory of the 
State. Catharine A. MacKinnon, 1989, First Harvard University Press 
(paperback in 1991)
    ``Sexuality is to feminism what work is to Marxism . . .'' --Toward 
a Feminist Theory of the State. Catharine A. MacKinnon, 1989, First 
Harvard University Press. Page 3
    Feminism, Socialism, and Communism are one in the same, and 
Socialist/Communist government is the goal of feminism.--Toward a 
Feminist Theory of the State. Catharine A. MacKinnon, 1989, First 
Harvard University Press. Page 10
    ``Our culture, including all that we are taught in schools and 
universities, is so infused with patriarchal thinking that it must be 
torn up root and branch if genuine change is to occur. Everything must 
go--even the allegedly universal disciplines of logic, mathematics, and 
science, and the intellectual values of objectivity, clarity, and 
precision on which the former depend.'' A quote from Daphne Patai and 
Noretta Koertge, ``Professing Feminism: Cautionary Tales from the 
Strange World of Women's Studies'' (New York, Basic Books, 1994), p. 
116
---------------------------------------------------------------------------
    America's socialists and communists make no pretenses about their 
goals to promote the destruction of a cohesive society by advancing a 
welfare state and the complete breakdown of the family. Socialists have 
openly adopted the ``counter hegemony'' taught by Gramsci which is 
designed to destroy Western culture. ``[T]he stronger the `counter-
hegemonic' strength of unions and left parties, the stronger the 
welfare state . . . When we argue for `decommodifying' (i.e., taking 
out of private market provision) such basic human needs as healthcare, 
childcare, education, and housing, we have in mind a decentralized and 
more fully accountable welfare state then [sic] exists in Western 
democracies.'' [v] This statement comes from one of the MANY 
American college professors indoctrinating students today. As noted by 
William Gregg in the New American:
---------------------------------------------------------------------------
    \[v]\ Schwartz, Joseph. Toward a Democratic Socialism: Theory, 
Strategy, and Vision. Joseph Schwartz, a member of the National 
Executive Committee of the Democratic Socialists of America, teaches 
political science at Temple University.

          Writing in the Winter 1996 issue of the Marxist journal 
        Dissent, Michael Walzer enumerated some of the cultural 
---------------------------------------------------------------------------
        victories won by the left since the 1960s:

      ``The visible impact of feminism.''
      ``The effects of affirmative action.''
      ``The emergence of gay rights politics, and . . . the 
attention paid to it in the media.''
      ``The acceptance of cultural pluralism.''
      ``The transformation of family life,'' including ``rising 
divorce rates, changing sexual mores, new household arrangements--and, 
again, the portrayal of all this in the media.''
      ``The progress of secularization; the fading of religion 
in general and Christianity in particular from the public sphere--
classrooms, textbooks, legal codes, holidays, and so on.''
      ``The virtual abolition of capital punishment.''
      ``The legalization of abortion.''
      ``The first successes in the effort to regulate and limit 
the private ownership of guns.''

          Significantly, Walzer admitted . . . these victories were 
        imposed upon our society by ``liberal elites,'' rather than . . 
        . ``by the pressure of a mass movement or a majoritarian 
        party.'' These changes ``reflect the leftism or liberalism of 
        lawyers, judges, federal bureaucrats, professors, school 
        teachers, social workers, journalists, television and screen 
        writers--not the population at large,'' noted Walzer . . . 
        [T]he left focused on ``winning the Gramscian war of 
        position.''
          Cultural commentator Richard Grenier [notes Gramsci 
        formulated] ``the doctrine that those who want to change 
        society must change man's consciousness, and that in order to 
        accomplish this they must first control the institutions by 
        which that consciousness is formed: schools, universities, 
        churches, and, perhaps above all, art and the communications 
        industry. It is these institutions that shape and articulate 
        `public opinion,' the limits of which few politicians can 
        violate with impunity. Culture, Gramsci felt, is not simply the 
        superstructure of an economic base--the role assigned to it in 
        orthodox Marxism--but is central to a society. His famous 
        battle cry is: capture the culture.''
          Gramsci recognized that the chief [obstacles] impeding . . . 
        the triumph of Marxism were . . . those institutions, customs, 
        and habits identified by Washington and the other Founding 
        Fathers as indispensable to ordered liberty--such as the 
        family, private initiative, self-restraint, and principled 
        individualism. But Gramsci focused particularly on what 
        Washington described as the ``indispensable supports'' of free 
        society--religion and morality. In order to bring about a 
        revolution, Gramsci wrote, ``The conception of law will have to 
        be freed from every remnant of transcendence and absoluteness, 
        practically from all moralist fanaticism.'' [vi]
---------------------------------------------------------------------------
    \[vi]\ Grigg, William. Toward the Total State. The New American 
Vol. 15, No. 14. July 5, 1999. http://www.thenewamerican.com/tna/1999/
07-05-99/vo15no14_total.htm

    Gramsci's Marxist communist philosophy, with its goal and aim to 
completely destroy ``Western'' civilization is best summed up in the 
feminist phrase ``THE PERSONAL IS THE POLITICAL!''
FAMILY LAW, CHILD SUPPORT, AND WELFARE FROM MARXISM?
    Many people would be shocked to learn that much of the current 
``family law'' system we have today, which is at the heart of so much 
of our modern social upheaval and America's ``welfare state,'' was born 
in the Soviet Union. Still more shocking would be the revelation that 
when the Soviet Union discovered its system was a disastrous failure, 
it instituted serious reforms in the early 1940's to try to restore the 
family and the country. The Soviets made these changes when 
fatherlessness (which included children from divorced fathers) reached 
around 7 million children and their social welfare structure (day 
cares, kindergartens, state children's facilities, etc.) was 
overburdened. Yet in America, some studies suggest that we are 
approaching 11 or 12 million such children. All the while, the social 
and financial costs of welfare and fatherlessness are just now gaining 
more widespread attention. America's fatherlessness crisis is primarily 
by judicial making with the cooperation of the legions of lawyers and 
bureaucrats who profit from family destruction which rips America 
apart.
    Unfortunately, the Soviet reforms came too late and never brought 
about the extent of social reconstruction that would have allowed 
recovery from its self-inflicted social destruction. It was unable to 
stave off its widely celebrated collapse when the Berlin wall came 
down. Even though the Soviets tried in vain to restore the social 
values they had worked so hard to eradicate, America only pays ``lip 
service'' to much-needed massive social reform. Serious social reform 
has been largely absent from political debate. On the other hand, the 
systematic deconstruction of all of the social values that had made our 
nation great is being pursued passionately as one of our nation's 
primary socio-political goals.
    ``Family law'' is one of the key tools of the ``counter-hegemony'' 
which is used to advance the social welfare state through the promotion 
of the social structural collapse of America. The early Soviet system 
focused on personal happiness and self-centered fulfillment with its 
roots in class warfare. When it was determined that this type of class 
warfare directed at the family was a complete failure, the Soviets 
worked quickly to restore the traditional nuclear family in the 1940's. 
Shortly after this, the NAWL (National Association of Women Lawyers) 
began their push for adopting these failed Soviet policies in 
America.[vii] America's version of ``family law'' has 
adopted much of the early Soviet failed version of class warfare, while 
adopting new and more insidious Gramscian versions with gender, 
cultural, and social warfare components.
---------------------------------------------------------------------------
    \[vii]\ Selma Moidel Smith, A Century of Achievement: The 
Centennial of the National Association of Women Lawyers, pg 10. (1999); 
See also ABA's Family Law Quarterly, 33 Fam. L.Q. 501, 510-511. Family 
Law and American Culture--Women Lawyers in Family Law, Section B. The 
Crusade for No-Fault Divorce. (Fall, 1999)

          When the Bolsheviki came into power in 1917 they regarded the 
        family . . . with fierce hatred, and set out . . . to destroy 
        it . . . [O]ne of the first decrees of the Soviet Government 
        abolished the term ``illegitimate children'' . . . by 
        equalizing the legal status of all children, whether born in 
        wedlock or out of it . . . The father of a child is forced to 
        contribute to its support, usually paying the mother a third of 
        his salary in the event of a separation . . . At the same time 
        a law was passed which made divorce [very quick] . . . at the 
        request of either partner in a marriage . . .
          [Marriage became a game where it] was not . . . unusual . . . 
        for a boy of twenty to have had three or four wives, or for a 
        girl of the same age to have had three or four abortions. [T]he 
        peasants . . . bitterly complained: ``Abortions cover our 
        villages with shame. Formerly we did not even hear of them.''
          Many women . . . found marriage and childbearing a profitable 
        occupation. They formed connections with the sons of well-to-do 
        peasants and then blackmailed the father for the support of the 
        children . . . The law has created still more confusion because 
        . . . women can claim support for children born many years ago.
          . . . Both in the villages and in the cities the problem of 
        the unmarried mother has become very acute and provides a 
        severe and annoying test of Communist theories.
          . . . Another new point was that wife and husband would have 
        an equal right to claim support from the other . . . The woman 
        would have the right to demand support for her child even if 
        she lived with several men during the period of conception; 
        but, in contrast to previous practice, she or the court would 
        choose one man who would be held responsible for the support. 
        Commissar Kursky seemed especially proud of this point because 
        it differed so much from the ``burgeois customs'' of Europe and 
        America.
          Another speaker objected to the proposed law on the ground 
        that some women would take advantage of its liberal provisions 
        to form connections with wealthy men and then blackmail them 
        for alimony.[viii]
---------------------------------------------------------------------------
    \[viii]\ The Atlantic Monthly; July 1926; The Russian Effort to 
Abolish Marriage; Volume 138, No. 1; page 108-114.

    The Federal Government continues to participate by paying the 
states incentives encouraging them to practice these draconian Soviet 
style, anti-family, child destroying policies. What a frightening use 
of our ``tax dollars at work'' to undermine and destroy the social 
order of America. Even going so far as to pay incentives on a slightly 
reformed version of Article 81 of The Russian Family Code. This was 
promoted in the United States by Irwin Garfinkel as ``The Wisconsin 
Model'' for child support and welfare reform. ``The Wisconsin Model 
then became a center-piece for the national child support and welfare 
reform movement.'' [ix]
---------------------------------------------------------------------------
    \[ix]\ The Child Support Guideline Problem, Roger F. Gay, MSc and 
Gregory J. Palumbo, Ph.D. May 6, 1998.
---------------------------------------------------------------------------
ADOPTING THE FAILED SOVIET ATTEMPT TO DESTROY THE FAMILY
    Instead of our constitutionally guaranteed ``Republican form of 
government,'' we now have a thoroughly entrenched Marxist Communist 
judiciary in the civil court system masquerading as ``family law.'' 
America's family law courts are no longer about the law, they represent 
complete perversions of numerous legal maxims and common law traditions 
that American law was founded upon.[x] These abandoned 
maxims represent the ``hegemony'' of American culture and historical 
tradition in civil family matters. 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.
---------------------------------------------------------------------------
    \[x]\ Jus ex injuria non oritur. 4 Bin 639--A right cannot arise 
from a wrong; Lex nemini operatur iniquum; nemini facit injuriam. Jenk. 
Cent. 22.--The law works injustice to no one; does injury to no one; 
Lex deficere non potest in justitia exhibenda. Co. Lit. 197.--The law 
cannot be defective in dispensing justice; Lex non deficit in justitia 
exhibenda. Jenk. Cent. 31.--The law is not defective in justice; 
Commodum ex injurie sue non habere debet. Jenk. Cent. 161.--No man 
ought to derive any benefit of his own wrong; Lex non favet delicatorum 
votis. 9 Co. 58.--The law favours not the vows of the squeamish; Nemo 
punitur sine injuria, facto, seu defalto. 2 Inst. 287.--No one is to be 
punished unless for some injury, deed, or default; Legis constructio 
non facit injuriam. Co. Lit. 183.--The construction of law does no 
injury; Nemo punitur sine injuria facto, seu defalto. 2 Co. Inst. 
287.--No one is punished unless for some wrong act or default
---------------------------------------------------------------------------
    No-fault divorce, ``the child's best interests,'' and other 
components of family law in America were imported from the worst of the 
Soviet family law system. For example from a 1975 Louisville Law School 
review:

          ``Few members of the American legal community are aware of 
        the fact that the Soviet Union has had, for some period of 
        time, what can be described as a no-fault divorce legal system 
        . . . [A]t a meeting with a group of Soviet lawyers in 1972, 
        one of them asked, `Is it for a long time that you (California) 
        have that system?' When informed of the January 1, 1970 
        effective date of the California law she remarked, `I think it 
        is the influence of our law . . . [T]here are a number of 
        similarities between Soviet and California divorce laws that 
        suggest a ``borrowing'' or a remarkable coincidence.' (pg 32)
          ``For the Bolsheviks, with their Marxist disdain for 
        religion, the influence of the ecclesiastical authorities over 
        the family was an outrage. Since the family represented the 
        major institution through which the traditions of the past were 
        transmitted from generation to generation, the new regime had 
        to destroy the old bourgeois notions of the family and the 
        home. There was also a very urgent practical reason for 
        disassociating family relations from the influence of the 
        religious authorities . . . [T]he first task of the new regime 
        in relation to the family was to break the power of the church 
        and the husband.'' (pg 33)
          ``Birth alone was declared the basis of family ties, and all 
        legal discrimination against illegitimate children was 
        abolished . . . Early Soviet policy was intended to attack 
        these evils [of ``patriarchy''] and to transfer the care, 
        education and maintenance of children from home to society. 
        This would mean the end of the family's socialization 
        functions, and would remove the child from the conservative 
        atmosphere of the patriarchal family to a setting that could be 
        entirely controlled by the regime.'' (pg 34)
          The Soviet press reported in the mid-thirties that 
        promiscuity flourished . . . juvenile delinquency mounted, and 
        statistical studies showed that the major source of delinquents 
        was the broken or inattentive home . . .  Additional public 
        homes for children were established, and propaganda campaigns 
        sought to persuade the public that a strong family was the most 
        communistically inspired one. (pg 38, 39)
          There was also the matter of seven to nine million fatherless 
        and homeless children, according to Russian estimates of the 
        early twenties. In derogation of Marxist ideology, the state 
        had been unable to assist single mothers, and there existed 
        almost no children's homes, nurseries or kindergartens. Because 
        of more pressing tasks and limited personnel and material 
        resources the state had not been able to fulfill the conditions 
        Engels had specified for extrafamilial facilities. (pg 40)
          More seriously, anti-family policies were leading to a 
        situation where many children in the first Soviet urban 
        generation simply lacked the kind of socializing experience to 
        fit them intellectually or emotionally to the new society the 
        regime was attempting to build, with its emphasis upon self-
        discipline and control, perseverance, steadiness, punctuality 
        and accuracy. While the family influence had been undermined, 
        extrafamilial agencies had failed to provide a workable 
        substitute, leaving the child prey to the noxious and deviant 
        influences of ``the street.'' (pg 41)[xi]
---------------------------------------------------------------------------
    \[xi]\ No-Fault Divorce: Born In The Soviet Union? University of 
Louisville School of Law, Journal Of Family Law. Vol. 14, No. 1 (1975). 
ppg. 32-41

    The US Library of Congress Country Studies on Romania also shows 
---------------------------------------------------------------------------
direct parallels noting;

          ``Family law in socialist Romania was modeled after Soviet 
        family legislation . . . [I]t sought to undermine the influence 
        of religion on family life. [Previously] the church was the 
        center of community life, and marriage, divorce, and recording 
        of births were matters for religious authorities. Under 
        communism these events became affairs of the state, and 
        legislation designed to wipe out the accumulated traditions and 
        ancient codes was enacted. The communist regime required 
        marriage to be legalized in a civil ceremony at the local 
        registry prior to, or preferably instead of, the customary 
        church wedding.
          Because of the more liberal procedures, the divorce rate grew 
        dramatically, tripling by 1960, and the number of abortions 
        also increased rapidly. Concern for population reproduction and 
        future labor supplies prompted the state to revise the Romanian 
        Family Code to foster more stable personal relationships and 
        strengthen the family. At the end of 1966, abortion was 
        virtually outlawed, and a new divorce decree made the 
        dissolution of marriage exceedingly difficult.

INDOCTRINATING LAWYERS AND JUDGES TO DESTROY AMERICA
    Gramsci wrote, ``The conception of law will have to be freed from 
every remnant of transcendence and absoluteness, practically from all 
moralist fanaticism.'' Law schools across America teach Gramscian 
``critical theory'' as well as other communist ideals. A Westlaw or 
Lexis search reveals not just dozens, but hundreds and hundreds of 
legal articles, law reviews, and other materials on feminism, 
homosexuality, and various forms of Gramscian class ``victimology.''

          ``The revolutionary forces have to take civil society before 
        they take the state, and therefore have to build a coalition of 
        oppositional groups united under a hegemonic banner which 
        usurps the dominant or prevailing hegemony.'' [xii]
---------------------------------------------------------------------------
    \[xii]\ Strinati, Dominic (1995), An Introduction to Theories of 
Popular Culture, pg. 169. Routledge, London.
---------------------------------------------------------------------------
    Today's Gramscian Marxists have numerous ``oppositional groups'' 
headed by lawyers and promoted by judges and bureacrats. They advance 
such ``counter-hegemonic'' (culturally corrosive and culturally 
destructive) positions as homosexuality, abortion, the complete FRAUD 
of the non-existent ``separation of church and state,'' the (it only 
applies to destroying marriage and relationships) Violence Against 
Women Act, ``outcome based education,'' and the fictitious ``global 
warming.'' They passionately HATE the initiatives that undermine their 
attempts to destroy America such as Title IX reform, Faith based 
initiatives, the 300 million for marriage, vouchers and accountability 
for education reform, and the Ten commandments along with ANY other 
reference to a moral Judeo-Christian code, and private property rights.
    High profile court rulings openly display this Gramscian Marxist 
theory in practice: the attack on the pledge of allegiance, the ACLU 
suing Judge Roy Moore over the Ten Commandments, and the recent 
Lawrence v. Texas pro-homosexual ruling. At the root of all of these 
rulings and many others is a violation of the judge's oath to uphold 
the constitution. That constitution says that we have a Republican form 
of government, NOT a socialist or communist form.
CONCLUSION
    Today's Marxist Communists operate in law, government, religion, 
media, entertainment and education. They use Orwellian NewSpeak with 
words such as ``tolerance'' which actually means intolerance of things 
that prevent the destruction of all social structures and societal 
``norms''. Gramscians preach the religion of division, class warfare 
and social warfare while spouting their hatred of anything traditional, 
conservative, moral, or values centered--their battle cry is ``the 
personal is the political.'' They want all of Western culture 
completely destroyed and centralized government control erected in the 
place of the structure they seek to tear apart and discard. The fruits 
of the culture war they have engaged on America can be seen in the 
corrosive remnants of broken families, broken children, filled prisons, 
and a host of other ills underwritten by America's taxpayers.
    Those who deeply care about this country and our constitution must 
fearlessly engage in this culture war--; the war for America's heart 
and soul. It's not too late yet. There is still a critical mass and 
majority of Americans who are not ready for the horrors of the type of 
communism or national socialism that Gramscians promote. No form of 
Marxism or communism (even its most radical form of National Socialism) 
has ever survived without totalitarian control. If the support were 
there for these Marxist Communists and National Socialists, history has 
shown that they would not hesitate to attempt a forceful or violent 
overthrow of American government.
    ``If the family trends of recent decades are extended into the 
future, the result will be not only growing uncertainty within 
marriage, but the gradual elimination of marriage in favor of casual 
liaisons oriented to adult selfishness. The problem . . . is that 
children will be harmed, adults will probably be no happier, and the 
social order could collapse.'' [xiii] ``In his book, The 
American Sex Revolution, Harvard sociologist Pitirim Sorokin reviewed 
the history of societies through the ages, and found that none survived 
after they ceased honoring and upholding the institution of marriage 
between a man and a woman.''[xiv] Marcus Tullius Cicero, in 
a speech in the Roman senate recorded by Sallust said;
---------------------------------------------------------------------------
    \[xiii]\ David Popenoe, ``Modern Marriage: Revisiting the Cultural 
Script,'' Promises to Keep, 1996, p. 248.
    \[xiv]\ Linda Bowles. Damage for the Children. June 13, 2000. 
Worldnet Daily online.

          ``A nation can survive its fools and even the ambitious. But 
        it cannot survive treason from within. An enemy at the gates is 
        less formidable, for he is known and he carries his banners 
        openly against the city. But the traitor moves among those 
        within the gates freely, his sly whispers rustling through all 
        alleys, heard in the very halls of government itself. For the 
        traitor appears no traitor; he speaks in the accents familiar 
        to his victim, and he wears their face and their garments and 
        he appeals to the baseness that lies deep in the hearts of all 
        men. He rots the soul of a nation; he works secretly and 
        unknown in the night to undermine the pillars of a city; he 
        infects the body politic so that it can no longer resist. A 
        murderer is less to be feared. The traitor is the plague.''
POLICY IMPLICATIONS
    Gramsci's ``march through the culture'' can be turned back once the 
roots and methods are known. Recognizing the foundations of the current 
class and culture warefare, promoted in many levels of government, law, 
religion, media, and education provides relatively easy answers to 
solve these problems and to turn back the tide of the curruption and 
desturction.

      Institute non-coercive national unity and patriotism in 
public policy. The national unity issue destroys the divisive class 
warfare while reviving patriotism helps to restore some of the 
``hegemony'' the Marxists so passionately hate.
      Mandate abstinence training in schools for states to 
receive health funds. Stop allowing the natural inhibitions of children 
to sexual advances to be torn down by the current trend of pro-sexual 
education brought to them by their teachers who are also authority 
figures.
      Conservative politicians should take some of their 
campaign time and effort to tap into and lobby for more than just 
money. Conservatives must lobby large businesses to partner with inner 
city churches and schools to create programs of opportunity in 
disadvantaged areas. This takes the race baiting and class warfare 
issue away from the left, and gets socialist government programs out of 
the involvement in people's lives.[xv]
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    \[xv]\ A similar program which has been very successful is DAPCEP 
(the Detroit Area Pre-College Engineering Program http://
www.dapcep.org/). The difference is that a program to undermine Gramsci 
should have BOTH parent's involvement as its centerpiece. While it 
would be ideal if they were married, requiring BOTH parents is a start 
in the right direction.
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      Tie clear mission statements to EVERY government program 
and agency which include: promoting traditional marriage and family, 
restoring national pride, reducing divorce, reducing illegitimacy, 
promoting abstinence, and encouraging strong morals and values. Force a 
public debate on these issues and it will destroy the liberal Marxist 
establishment. Ever since welfare reform the liberal establishment has 
been slowly crumbling. Press the issues and accelerate their demise.
      CAREFULLY identify several congressional staff members 
who have a proven track record of being pro-family, with proven 
integrity, and have shown a level of frustration over today's social 
problems. Assign them to a special research project to study Gramsci's 
version of Marxist communism and how it has been implemented in 
America. Publish their reports and develop strategies based on those 
reports. (And if the lefties cry ``McCarthy,'' let the public debates 
begin! An honest reading of McCarthy's record completely vindicates him 
and exposes them!)
      Press the Judiciary committee to amend Title 18 of the US 
Code to create provisions stating that no state or federal judge shall 
have any form of immunity whatsoever for engaging in actions which 
produce or promote taxpayer fraud. For any such act or acts, they shall 
be subject to both criminal prosecution and they shall be subject to 
suit in their personal capacity. Let the judges and lawyers scream 
about ``independence'' and then insist that they must interpret 
``independence'' to mean that they should be free to break the law and 
commit fraud against the taxpayers of the United States.
      If Title 18 cannot be amended, then insert the provisions 
under Title 42 related to the Public Health and Welfare.
      End taxpayer funding of PBS. Expand libel and slander 
laws to include distortions, manipulations, or unbalanced reporting in 
television and cable news programs. Let the trial lawyers have a field 
day with the liberal media.
      Codify in the USC the mission of senior level bureaucrats 
and their guiding principles with explicit provisions noting personal 
liability for not adhering to these provisions. Codify the requirement 
for annual reports by heads of agencies demonstrating how they have 
complied with these requirements. For example:

        Make the HHS Director's mission something like 
``to work to restore traditional marriage and family while reducing the 
number of single-parent and broken families who need to collect welfare 
or child support.'' Make it a mandatory reporting requirement on how 
this mission is being fulfilled.

                                  
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