[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]


 
                  INTERNAL REVENUE SERVICE OPERATIONS
                           AND THE TAX GAP

=======================================================================

                                HEARING

                               before the

                       SUBCOMMITTEE ON OVERSIGHT

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 20, 2007

                               __________

                           Serial No. 110-25

                               __________

         Printed for the use of the Committee on Ways and Means



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                      COMMITTEE ON WAYS AND MEANS

                 CHARLES B. RANGEL, New York, Chairman

FORTNEY PETE STARK, California       JIM MCCRERY, Louisiana
SANDER M. LEVIN, Michigan            WALLY HERGER, California
JIM MCDERMOTT, Washington            DAVE CAMP, Michigan
JOHN LEWIS, Georgia                  JIM RAMSTAD, Minnesota
RICHARD E. NEAL, Massachusetts       SAM JOHNSON, Texas
MICHAEL R. MCNULTY, New York         PHIL ENGLISH, Pennsylvania
JOHN S. TANNER, Tennessee            JERRY WELLER, Illinois
XAVIER BECERRA, California           KENNY HULSHOF, Missouri
LLOYD DOGGETT, Texas                 RON LEWIS, Kentucky
EARL POMEROY, North Dakota           KEVIN BRADY, Texas
STEPHANIE TUBBS JONES, Ohio          THOMAS M. REYNOLDS, New York
MIKE THOMPSON, California            PAUL RYAN, Wisconsin
JOHN B. LARSON, Connecticut          ERIC CANTOR, Virginia
RAHM EMANUEL, Illinois               JOHN LINDER, Georgia
EARL BLUMENAUER, Oregon              DEVIN NUNES, California
RON KIND, Wisconsin                  PAT TIBERI, Ohio
BILL PASCRELL JR., New Jersey        JON PORTER, Nevada
SHELLEY BERKLEY, Nevada
JOSEPH CROWLEY, New York
CHRIS VAN HOLLEN, Maryland
KENDRICK MEEK, Florida
ALLYSON Y. SCHWARTZ, Pennsylvania
ARTUR DAVIS, Alabama

             Janice Mays, Chief Counsel and Staff Director

                  Brett Loper, Minority Staff Director

                                 ______

                       SUBCOMMITTEE ON OVERSIGHT

                     JOHN LEWIS, Georgia, Chairman

JOHN S. TANNER, Tennessee            JIM RAMSTAD, Minnesota
RICHARD E. NEAL, Massachusetts       ERIC CANTOR, Virginia
XAVIER BECERRA, California           JOHN LINDER, Georgia
STEPHANIE TUBBS JONES, Ohio          DEVIN NUNES, California
RON KIND, Wisconsin                  PAT TIBERI, Ohio
BILL PASCRELL JR., New Jersey
JOSEPH CROWLEY, New York

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 March 12, 2007, announcing the hearing...............     2

                                WITNESS

The Honorable Mark W. Everson, Commissioner, Internal Revenue 
  Service........................................................     4

                       SUBMISSIONS FOR THE RECORD

Colleen M. Kelley, National Treasury Employees Union, statement..    51
Electronic Transactions Association, statement...................    57
Gerald E. Scorse, New York, NY, statement........................    59
James R. White, letter...........................................    61
Janine Valdivieso, letter........................................    64
Nancy L. Shoemake, Burnsville, MN, statement.....................    65
William David Kebshull, statement................................    67


                  INTERNAL REVENUE SERVICE OPERATIONS
                            AND THE TAX GAP

                              ----------                              


                        TUESDAY, MARCH 20, 2007

             U.S. House of Representatives,
                       Committee on Ways and Means,
                                 Subcommittee on Oversight,
                                                    Washington, DC.

    The Subcommittee met, pursuant to notice, at 10:10 a.m., in 
room 1100, Longworth House Office Building, Hon. John Lewis 
(Chairman of the Subcommittee), presiding.
    [The advisory announcing the hearing follows:]

ADVISORY FROM THE COMMITTEE ON WAYS AND MEANS

                       SUBCOMMITTEE ON OVERSIGHT

                                                CONTACT: (202) 225-5522
FOR IMMEDIATE RELEASE
March 12, 2007
OV-3

                      Lewis Announces a Hearing on

                  Internal Revenue Service Operations

                            and the Tax Gap

    House Ways and Means Oversight Subcommittee Chairman John Lewis (D-
GA), today announced that the Subcommittee on Oversight will hold a 
hearing on Internal Revenue Service (IRS) operations, the 2007 tax 
return filing season, and the ``tax gap.'' The hearing will take place 
on Tuesday, March 20, 2007, in the main Committee hearing room, 1100 
Longworth House Office Building, beginning at 10:00 a.m.
      
    The Commissioner of IRS, the Honorable Mark W. Everson, will be the 
only witness at the hearing. 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.
      

FOCUS OF THE HEARING:

      
    The IRS is responsible for administering federal tax laws. In 2006, 
IRS collected $2.4 trillion in taxes and processed 140 million 
individual and corporate income tax returns. The Subcommittee will 
review overall IRS operations, the status of the current tax return 
filing season, and the ``tax gap,'' which is a term used to describe 
the amount of unpaid taxes owed to the federal government.
      
    The Subcommittee will review IRS operations and tax administration 
priorities in the areas of taxpayer services, examinations, 
collections, and modernization. As part of this review, the 
Subcommittee will examine the Administration's budget and staffing 
levels for IRS as proposed in the President's Fiscal Year 2008 Budget 
for the IRS.
      
    The Subcommittee will discuss the status of the current tax return 
filing season, including the large number of unclaimed telephone tax 
refunds, and consider areas where IRS can better assist taxpayers in 
their efforts to comply with their tax obligations. Also, the 
Subcommittee will discuss tax fraud schemes and tax scams that IRS has 
identified this year.
      
    The Subcommittee will examine the estimated annual $345 billion tax 
gap, identify components of the tax gap, and discuss ways IRS can 
improve individual and corporate tax compliance. Specifically, the 
Subcommittee will review the Administration's proposals for addressing 
the tax gap as recommended in the President's Fiscal Year 2008 Budget 
for IRS.
      
    In announcing the hearing, Chairman Lewis said, ``Our tax system is 
based on honesty and integrity. It is the Subcommittee's responsibility 
to ensure that our voluntary tax system operates properly and Americans 
pay their fair share.''
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Please Note: Any person(s) and/or organization(s) wishing to submit 
for the hearing record must follow the appropriate link on the hearing 
page of the Committee website and complete the informational forms. 
From the Committee homepage, http://waysandmeans.house.gov, select 
``110th Congress'' from the menu entitled, ``Committee Hearings'' 
(http://waysandmeans.house.gov/Hearings.asp?congress=18). Select the 
hearing for which you would like to submit, and click on the link 
entitled, ``Click here to provide a submission for the record.'' Once 
you have followed the online instructions, completing all informational 
forms and clicking ``submit'' on the final page, an email will be sent 
to the address which you supply confirming your interest in providing a 
submission for the record. You MUST REPLY to the email and ATTACH your 
submission as a Word or WordPerfect document, in compliance with the 
formatting requirements listed below, by close of business Tuesday, 
April 3, 2007. Finally, please note that due to the change in House 
mail policy, the U.S. Capitol Police will refuse sealed-package 
deliveries to all House Office Buildings. For questions, or if you 
encounter technical problems, please call (202) 225-1721.
      

FORMATTING REQUIREMENTS:

      
    The Committee relies on electronic submissions for printing the 
official hearing record. As always, submissions will be included in the 
record according to the discretion of the Committee. The Committee will 
not alter the content of your submission, but we reserve the right to 
format it according to our guidelines. Any submission provided to the 
Committee by a witness, any supplementary materials submitted for the 
printed record, and any written comments in response to a request for 
written comments must conform to the guidelines listed below. Any 
submission or supplementary item 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. All submissions and supplementary materials must be provided in 
Word or WordPerfect format and MUST NOT exceed a total of 10 pages, 
including attachments. Witnesses and submitters are advised that the 
Committee relies 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. All submissions must include a list of all clients, persons, 
and/or organizations on whose behalf the witness appears. A 
supplemental sheet must accompany each submission 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 LEWIS. Good morning. The hearing is now called to 
order, the hearing of the Subcommittee on Oversight. Today, we 
will examine the administration of our tax laws. Today, the 
Subcommittee on Oversight is holding its annual hearing on 
Internal Revenue Service (IRS) operations. We will examine the 
current tax return filing season, the tax gap and the IRS 
budget.
    We are very pleased to have the Internal Revenue Service 
Commissioner Everson before the Subcommittee for the first time 
this year. I look forward to hearing his views on the estimated 
tax gap of $345 billion.
    I am also interested in learning whether the IRS proposed 
budget of $11 billion is enough to protect the honesty and 
integrity of our tax system.
    As Members of Congress and Members of this Committee, we 
have a responsibility, along with the commissioner, to 
administer our tax laws properly and efficiently in a manner 
that is fair to all Americans.
    Now I am pleased to recognize the distinguished ranking 
Member, my dear friend, Mr. Ramstad of Minnesota, for his 
opening statement.
    Mr. RAMSTAD. Thank you, Mr. Chairman. You are a dear 
friend. I thank you for convening this important hearing on 
Internal Revenue Service operations.
    Commissioner, it is good to see you again. As I said 
before, I believe you are doing a tough job very well. Being in 
charge of such a vast bureaucracy, responsible for collecting 
two and a half trillion dollars in revenues is no easy 
assignment. I certainly appreciate your commitment to this 
important job and your leadership.
    I noted that your agency is only answering 58 million phone 
calls this year and you are only getting 200 million hits on 
your website. I think that underscores what I just said about 
the large responsibility that you have as the commissioner.
    One of my main concerns, Commissioner, I know we will get 
into it here today after your testimony, but certainly one of 
my major concerns and I think it is a major concern of everyone 
on the Subcommittee, and that is the tax gap. I know the 
Administration's budget includes several proposals to help 
close the tax gap and I look forward to the discussion on that 
important issue.
    I know additional enforcement tools are probably necessary 
to close the tax gap or to reduce it, but I think we must 
remember bottom line the most effective way to close the tax 
gap would be to simplify the Tax Code. I hope we can work 
together to simplify the tax code with the new Congress. I know 
this is a goal of members on both sides of the aisle and I know 
the American taxpayer would welcome a simplified tax system.
    Again, Commissioner, thank you for being here today. Mr. 
Chairman, thank you for calling this hearing. I yield back.
    Chairman LEWIS. All right, thank you very much, Mr. 
Ramstad.
    Now we will hear from our witness. I ask that you, Mr. 
Commissioner, limit your testimony to 5 minutes. Without 
objection, your entire statement will be included in the 
record.
    It is now my great pleasure to introduce the Commissioner 
of the Internal Revenue Service, Mark Everson. Mr. 
Commissioner.

   STATEMENT OF THE HONORABLE MARK W. EVERSON, COMMISSIONER, 
                    INTERNAL REVENUE SERVICE

    Mr. EVERSON. Thank you, sir. Chairman Lewis, Ranking Member 
Ramstad, and Members of the Subcommittee, thank you for the 
opportunity to testify today on IRS operations and on the 
Administration's budget proposal for fiscal year 2008. It is 
always a pleasure to be before the Subcommittee.
    Chairman Lewis, I look forward to working with you as you 
direct the operations of the Subcommittee, and expect to enjoy 
the same constructive relationship that the IRS had with 
Congressman Ramstad when he was the chair and you were the 
ranking Member.
    First, let me say a few things about the filing season 
currently under way. At the IRS we recognized some time ago 
that this would be a challenging filing season. Two of the 
reasons were Congress's late action on the extender legislation 
and the fact that we did not have an operating budget until 
well into February. The one time refund of the telephone excise 
tax and the initiation of the split refund were also of 
concern.
    Taken together, we anticipated the most difficult filing 
season in a number of years. Sitting before you today with 
about a month to go, I would say so far so good. We are keeping 
up with the work and the system is functioning well. The 
extenders were successfully implemented, our software updates 
were taken care of by early February. Electronic return filing 
continues to grow and our service indicators are healthy.
    On the other hand, we have seen a lower than expected claim 
rate for the telephone excise tax refund. Thus far, I would 
characterize as minimal interest in the split refund program.
    Along with the increase in the e-file rate, we are seeing 
healthy gains in our volunteer prepared returns, a cornerstone 
in our outreach programs. As you know, this helps eligible 
participants claim the earned income tax credit.
    Probably our most significant disappointment is the fact 
that, while we have successfully made our planned upgrade to 
Customer Account Data Engine (CADE), the new individual system 
faster file, we completed our work a number of weeks late. Our 
volumes, while still expected to be more than double compared 
to last year, will fall short of what we had hoped to do for 
the season.
    Let me now turn to enforcement. As you know, we enjoyed 
significant increase in our enforcement results in fiscal year 
2006. I am pleased to report we are making continued strides in 
fiscal year 2007. One of the things that I am proudest of is 
that the IRS has restored the credibility of its enforcement 
programs without generating a significant amount of noise or 
increased allegations of infringement of taxpayer rights.
    The President's 2008 budget builds on these results. I am 
pleased that the President's request provides additional moneys 
for IRS systems infrastructure and modernization as well as for 
enforcement, notably, for increased research. There is also a 
modest increase for taxpayer services. This is the best budget 
that I have seen in my four years on the job.
    I ask the Members of the Subcommittee to support the 
President's budget and to enact an appropriation before fiscal 
year 2008 actually starts. These requested moneys will help us 
generate continued progress in attacking the tax gap. However, 
they are not the only things we need to do. The Administration 
has made 16 legislative proposals. I would direct your 
attention to four that I think are particularly important.
    First, reporting of credit card gross receipts. Second, 
making willful failure to file a tax return a felony rather 
than a misdemeanor. Third, requiring basis reporting for sales 
of securities. Fourth, lowering the threshold for mandatory 
electronic filing for large corporations and partnerships.
    I think these proposals are an important step and I hope 
the Congress will enact them swiftly.
    Thank you, sir.
    [The prepared statement of Mr. Everson follows:]

              Statement of The Honorable Mark W. Everson,
                 Commissioner, Internal Revenue Service

Introduction
    Chairman Lewis, Ranking Member Ramstad, and members of the 
Subcommittee, thank you for the opportunity to testify today on the 
2007 Income Tax Filing Season. I would also like to update you on the 
progress we have made in the areas of taxpayer service and enforcement, 
our FY 2008 budget request, and our latest efforts to improve voluntary 
compliance and reduce the tax gap.
2007 Filing Season
    This filing season presented the potential to be one of the most 
challenging in recent memory. The Tax Relief and Health Care Act of 
2006 (TRHCA), which passed late last year, included the extension of 
several significant tax benefits. Since forms and publications for Tax 
Year 2006 were printed and distributed prior to enactment, we were 
required to notify taxpayers on IRS.gov as to how to modify those forms 
to claim the allowable benefits. We are also faced with implementing 
the Telephone Excise Tax Refund Program (TETR). This was the first 
filing season that we allowed taxpayer refunds to be split and 
deposited into separate accounts. And, because the normal April 15th 
filing date falls on a Sunday and the following Monday is a legal 
holiday in the District of Columbia, we had to adjust our programs to 
provide taxpayers an extra two days to file and pay this year.
    Despite these challenges, I am proud to report that thus far the 
filing season has gone very well. By early February, we were able to 
begin processing tax returns claiming the tax benefits authorized by 
the enactment of TRHCA in December. We have also taken a number of 
steps to make sure that taxpayers understand how to claim the benefits. 
For example, we provided instructions on IRS.gov and conducted 
extensive outreach and media events to publicize these provisions. In 
addition, we sent a special mailing of Publication 600, which included 
the state and local sales tax tables and instructions for claiming the 
sales tax deduction on Schedule A (Form 1040), to 6 million taxpayers 
who had previously claimed the state and local sales tax deduction.
    I will discuss the TETR Program later in my testimony, but let me 
first give an update on some of the numbers we are looking at 
approximately one month from the return due date.
Numbers Thus Far
    We expect to process almost 136 million individual tax returns in 
2007, and we anticipate a continued growth in the number of those that 
are e-filed. In the 2006 filing season, 54 percent of all income tax 
returns were e-filed. We fully expect to exceed that number this year. 
As of March 10, we have received almost 45.5 million tax returns 
electronically, an increase of 4.87 percent compared to the same period 
last year.
    This increase in e-filing is being driven by people preparing their 
own returns using their personal computers. The total number of self-
prepared returns that are e-filed is up by over 8 percent compared to 
this time a year ago. Over 13.3 million returns have been e-filed by 
people from their personal computers, up from over 12.3 million for the 
same period a year ago.
    Overall, 75 percent of the 60.9 million returns filed thru March 
10th have been e-filed. Encouraging e-filing is good for both the 
taxpayer and for the IRS. Taxpayers who use e-file can generally have 
their tax refund deposited directly into their bank account in two 
weeks or less. That is about half the time it takes us to process a 
paper return. For the IRS the error reject rate for e-filed returns is 
significantly lower than that for paper returns.
    More people are choosing to have their tax refunds directly 
deposited into their bank account than ever before. So far this year, 
we have directly deposited over 39 million refunds, or 77 percent of 
all refunds issued this tax filing season. This is up from 73 percent 
for the same period in 2006.
    People are also visiting our web site, IRS.gov, in record numbers. 
We have recorded almost 83.4 million visits to our site this year, up 
over 9 percent from 76.4 million for the same period a year ago. The 
millions of taxpayers that have visited IRS.gov have benefited from 
many of the services that are available through the web site. We have 
made it easier for taxpayers to get answers to many of their tax 
questions online. The web site:

      Assists the taxpayer in determining whether he or she 
qualifies for the Earned Income Tax Credit (EITC);
      Assists the taxpayer in determining whether he or she is 
subject to the Alternative Minimum Tax (AMT);
      Allows more than 70 percent of taxpayers the option to 
file their tax returns at no cost through the Free File program;
      Allows taxpayers who are expecting refunds to track the 
status via the ``Where's My Refund?'' feature; and
      Allows a taxpayer to calculate the amount of their Sales 
Tax Deduction.

    As of March 10, we have received almost 60.9 million returns, a 
very slight increase over the same period as last year. We have issued 
50.5 million refunds so far this year, for a total of $128.7 billion. 
The average refund thus far is $2,548, approximately $125 more than 
last year. In addition, over 16.8 million taxpayers have tracked their 
refund on IRS.gov, up 15.19 percent over last year.
    As of March 10th, our Taxpayer Assistance Centers (TACs) are 
reporting a very slight 0.6 percent decline in face-to-face contacts 
this filing season as compared to last year. We have also seen a 
decline in the number of calls answered (-2.54 percent) as well as 
automated calls (-5.13 percent). We believe that the decline in visits 
to our TACs is largely attributable to taxpayers increasing their use 
of IRS.gov, volunteer services, and other more convenient means of 
obtaining tax forms, filing their returns or getting their questions 
answered. The decline in the number of calls answered can be attributed 
to a few weather-related temporary call site closures earlier this 
winter and a slight decrease in overall caller demand.
Free File
    Almost 2.5 million people have utilized Free File as of March 9th, 
down 5.5 percent from last year. This year anyone with adjusted gross 
income of $52,000 or less is eligible for Free File. This would include 
95 million taxpayers. The number of Free File returns compared to the 
prior year has been steadily increasing and we expect to meet or exceed 
2006 totals by the end of the filing season.
    A key difference in this year's Free File program is that Alliance 
members are no longer offering ancillary products, such as refund 
anticipation loans (RALs) through the Free File program. IRS data from 
the last filing season shows that only 0.5 percent of Free File users 
chose to utilize a RAL. The Free File Alliance may still offer 
customers the option of having their state tax return prepared for a 
fee though some Alliance members are offering to do the state return at 
no cost as well as the Federal.
    In the 2006 filing season an indicator was included for the first 
time on Free File returns, which allowed the IRS to identify those 
taxpayers using Free File. As a result, the Service was able to obtain 
important information such as customer satisfaction and demographic 
data that had never before been available.
    This information allowed us to verify that there was a high level 
of customer satisfaction with Free File. According to a survey 
conducted for the IRS, 94 percent said they intend to use Free File 
again next year; the same number said they found Free File very easy or 
somewhat easy to use; and 97 percent said they would recommend Free 
File to others. Convenience, not the free cost, was the most appealing 
factor of Free File.

VITA/TCE Sites and Other Community Partnerships
    The use of tax return preparation alternatives, such as volunteer 
assistance at Volunteer Income Tax Assistance (VITA) sites and Tax 
Counseling for the Elderly sites (TCEs), has steadily increased while 
the numbers of TAC contacts have decreased. In FY 2006, over 2.2 
million returns were prepared by volunteers. As of March 10th, 
volunteer return preparation is up 7.6 percent above last year's level. 
Volunteer e-filing is also up slightly, by 0.6 percent over the same 
period in the last tax filing season. This is reflective of continuing 
growth in existing community coalitions and partnerships.
    We have also made a concerted attempt to improve outreach to 
taxpayers, particularly those taxpayers who may be eligible for the 
EITC. For example, we sponsored EITC Awareness Day on February 1, in an 
effort to partner with our community coalitions and partnerships to 
reach as many EITC-eligible taxpayers as possible and urge them to 
claim the credit.

Telephone Excise Tax Refunds
    In the middle of 2006, the IRS announced plans to refund at least 
$13 billion in telephone excise taxes to more than 160 million 
taxpayers. To do this, the IRS modified every individual and business 
tax return form, retooled our systems to handle the forecast demand, 
and launched an extensive communications campaign to increase awareness 
and encourage people without a filing requirement to request a refund 
anyway.
    One difficulty in administering this refund was that taxpayers 
could have experienced significant burden if they had been required to 
find 41 months of old phone bills in order to obtain the information 
they needed to compute their refunds. For this reason, the IRS created 
a set of standard amounts that individuals can claim in lieu of actual 
amounts. For businesses and non-profits--faced with potentially more 
paperwork than individuals--the IRS developed an estimation method that 
could require significantly less paperwork than requesting an actual 
amount.
    A review of returns filed so far this year turned up a surprising 
fact: nearly 30 percent of returns we have received did not include a 
telephone excise tax refund request. Though one of our communications 
goals was to encourage taxpayers not to overlook the telephone tax 
refund, it appears many taxpayers are missing out. In response, to 
these early numbers, we consulted with tax professionals, citizens 
groups and tax software companies to determine potential causes for the 
low take up rate. The only logical reason we were given was that 
despite our best efforts, some taxpayers were still not aware of the 
credit and how to claim it. We then conducted additional media outreach 
to increase awareness of the refund and were able to generate broad 
national media coverage, including CNN, the Associated Press, and USA 
Today.
    As we monitored the initial returns, we also noticed some problems. 
Even though 99.5% of all taxpayers who are requesting the refund are 
claiming the appropriate standard amount, some tax-return preparers are 
requesting thousands of dollars of refunds for their clients in 
instances where clients are entitled to only a tiny fraction of that 
amount. This may indicate criminal intent on the part of the return 
preparer. In some cases, taxpayers requested a refund in the thousands 
of dollars, suggesting that the taxpayer paid more for telephone 
service than they received in income. While some of the large claims 
may be the result of misunderstandings--a number of refund requests 
appear to be for the entire amount of the taxpayer's phone bill, rather 
than just the three-percent long-distance tax--others may be deliberate 
attempts to scam the system.
    To address this problem, in late February, IRS special agents 
executed search warrants seeking evidence from a small number of tax-
preparation businesses suspected of preparing returns on behalf of 
clients requesting large, improper amounts in telephone excise tax 
refunds. Special agents temporarily closed these businesses, seizing 
computers and documents to use in their investigations. In addition, 
IRS revenue agents (auditors) and special agents also visited other tax 
preparers who were suspected of preparing questionable telephone tax 
refund requests.
    On a positive note, the number of returns with seemingly high 
telephone excise tax refunds dropped significantly this month. This 
suggests our enforcement actions, along with increased communications, 
may be having the desired effect.

Tax Scams
    Each year, we alert taxpayers about the ``Dirty Dozen'', 12 of the 
most blatant tax scams affecting American taxpayers. This is in part an 
effort to alert taxpayers so that they may be wary if approached and 
encouraged to participate in any of the listed schemes. It also alerts 
promoters that we are aware of the scam and will be taking steps to 
prevent them from getting away with it.
    This year the ``Dirty Dozen'' highlights five new scams that IRS 
auditors and criminal investigators have uncovered. Topping the list 
this filing season are fraudulent refunds being claimed in connection 
with TETR, which I have already discussed. Other scams making the list 
include:

      Abusive Roth IRAs: Taxpayers should be wary of advisers 
who encourage them to shift under-valued property to Roth Individual 
Retirement Arrangements (IRAs). In one variation, a promoter has the 
taxpayer move under-valued common stock into a Roth IRA, circumventing 
the annual maximum contribution limit and allowing otherwise taxable 
income to go untaxed.
      Phishing: This is a technique used by identity thieves to 
acquire personal financial data in order to gain access to the 
financial accounts of unsuspecting consumers, run up charges on their 
credit cards or apply for loans in their names. These Internet-based 
criminals pose as representatives of a financial institution--or 
sometimes the IRS itself--and send out fictitious e-mail correspondence 
in an attempt to trick consumers into disclosing private information. A 
typical e-mail notifies a taxpayer of an outstanding refund and urges 
the taxpayer to click on a hyperlink and visit an official-looking Web 
site. The Web site then solicits a social security and credit card 
number. It is important to note the IRS does not use e-mail to initiate 
contact with taxpayers about issues related to their accounts. If a 
taxpayer has any doubt whether a contact from the IRS is authentic, the 
taxpayer should call 1-800-829-1040 to confirm it.
      Disguised Corporate Ownership: Domestic shell 
corporations and other entities are being formed and operated in 
certain states for the purpose of disguising the ownership of the 
business or financial activity. Once formed, these anonymous entities 
can be, and are being, used to facilitate underreporting of income, 
non-filing of tax returns, listed transactions, money laundering, 
financial crimes and possibly terrorist financing. The IRS is working 
with state authorities to identify these entities and to bring their 
owners into compliance.
      Zero Wages: In this scam, which first appeared in the 
Dirty Dozen in 2006, a Form 4852 (Substitute Form W-2) or a 
``corrected'' Form 1099 showing zero or little income is submitted with 
a federal tax return. The taxpayer may include a statement rebutting 
wages and taxes reported by the payer to the IRS. An explanation on the 
Form 4852 may cite statutory language behind Internal Revenue Code 
sections 3401 and 3121 or may include some reference to the paying 
company refusing to issue a corrected Form W-2 for fear of IRS 
retaliation.
      Return Preparer Fraud: Dishonest return preparers can 
cause many headaches for taxpayers who fall victim to their schemes. 
Such preparers make their money by skimming a portion of their clients' 
refunds and charging inflated fees for return preparation services. 
They attract new clients by promising large refunds. Some preparers 
promote filing fraudulent claims for refunds on items such as fuel tax 
credits to recover taxes paid in prior years. Taxpayers should choose 
carefully when hiring a tax preparer. As the old saying goes, ``If it 
sounds too good to be true, it probably is.'' Remember that no matter 
who prepares the return, the taxpayer is ultimately responsible for its 
accuracy. In recent years, the courts have issued injunctions ordering 
dozens of individuals to cease preparing returns, and the Department of 
Justice has filed complaints against dozens of others. During fiscal 
year 2006, 109 tax return preparers were convicted of tax crimes and 
sentenced to an average of 18 months in prison.
      American Indian Employment Credit: Taxpayers submit 
returns and claims reducing taxable income by substantial amounts 
citing an American Indian employment or treaty credit. Although there 
is an Indian Employment Credit available for businesses that employ 
Native Americans or their spouses, there is no provision for its use by 
employees. In a somewhat similar scam, unscrupulous promoters have 
informed Native Americans that they are not subject to federal income 
taxation. The promoters solicit individual Indians to file Form W-8 BEN 
seeking relief from all withholding of federal taxation. A recent 
``phishing'' variation has promoters using false IRS letterheads to 
solicit personal financial information that they claim the IRS needs in 
order to process their ``non-tax'' status.
      Trust Misuse: For years unscrupulous promoters have urged 
taxpayers to transfer assets into trusts. They promise reduction of 
income subject to tax, deductions for personal expenses and reduced 
estate or gift taxes. However, these trusts do not deliver the promised 
tax benefits. There are currently more than 150 active abusive trust 
investigations underway and 49 injunctions have been obtained against 
promoters since 2001. As with other arrangements, taxpayers should seek 
the advice of a trusted professional before entering into a trust.
      Structured Entity Credits: Promoters of this newly 
identified scheme are setting up partnerships to own and sell state 
conservation easement credits, federal rehabilitation credits and other 
credits. The purported credits are the only assets owned by the 
partnership and once the credits are fully used, an investor receives a 
K-1 indicating the initial investment is a total loss, which is then 
deducted on the investor's individual tax return.
      Abuse of Charitable Organizations and Deductions: The IRS 
continues to observe the use of tax-exempt organizations to improperly 
shield income or assets from taxation. This can occur when a taxpayer 
moves assets or income to a tax-exempt supporting organization or 
donor-advised fund but maintains control over the assets or income. 
Contributions of non-cash assets continue to be an area of abuse, 
especially with regard to overvaluation of contributed property. In 
addition, the IRS is noticing the return of private tuition payments 
being disguised as charitable contributions to religious organizations.
      Form 843 Tax Abatement: This scam rests on faulty 
interpretation of the Internal Revenue Code. It involves the filer 
requesting abatement of previously assessed tax using Form 843. Many 
using this scam have not previously filed tax returns and the tax they 
are trying to have abated has been assessed by the IRS through the 
Substitute for Return Program. The filer uses the Form 843 to list 
reasons for the request. Often, one of the reasons is: ``Failed to 
properly compute and/or calculate IRC Sec 83-Property Transferred in 
Connection with Performance of Service.''
      Frivolous Arguments: Promoters have been known to make 
the following outlandish claims: the Sixteenth Amendment concerning 
congressional power to lay and collect income taxes was never ratified; 
wages are not income; filing a return and paying taxes are merely 
voluntary; and being required to file Form 1040 violates the Fifth 
Amendment right against self-incrimination or the Fourth Amendment 
right to privacy. Taxpayers should not believe these or other similar 
claims. These arguments are false and have been thrown out of court. 
While taxpayers have the right to contest their tax liabilities in 
court, no one has the right to disobey the law or else they may subject 
themselves to increased penalties. As part of the Tax Relief and Health 
Care Act of 2006 [Public Law No. 109-432], Congress amended the Code to 
increase the amount of the penalty for frivolous tax returns from $500 
to $5,000 and to impose a penalty of $5,000 on any person who submits a 
``specified frivolous position.'' Last week, we released guidance 
identifying these and other frivolous claims that, when asserted by a 
taxpayer on a tax return filed with the Service or submitted in a 
collection due process request, offer-in-compromise, application for an 
installment agreement, or application for a Taxpayer Assistance Order, 
expose the taxpayer to the $5,000 penalty.

A Commitment to Service and Enforcement
    In FY 2006, we continued making improvements in both our service 
and enforcement programs. This is not just our assessment, but also 
that of the IRS Oversight Board in its most recent annual report. 
According to the Board, the IRS has made steady progress towards 
``transforming itself into a modern institution that provides efficient 
and effective tax administration services to America's taxpayers.''

Improving Taxpayer Service
    According to a survey commissioned by the Board in 2006, taxpayers 
increasingly recognize that the IRS provides quality service through a 
variety of channels, such as its web site, toll-free telephone lines 
and Taxpayer Assistance Centers (TACs). This is supported by the 
metrics that we use to determine the effectiveness of our taxpayer 
service efforts. In category after category, we continue to see 
improvement in the numbers in our telephone services, electronic 
filing, and IRS.gov access. This is demonstrated by the following FY 
2006 business results:

      Electronic filing by individuals continued to increase. 
It rose three percentage points from FY 2005, to 54 percent of all 
individual returns.
      The level of service for toll-free assistance was 82 
percent, about the same level of FY 2005 and up substantially from FY 
2001. The level of customer satisfaction with the toll-free line 
remains 94 percent.
      The tax-law accuracy of toll-free responses improved to 
91 percent and account accuracy increased to over 93 percent.
      Visits to the IRS web site jumped nearly 10 percent in FY 
2006 to more than 197 million visits.
      More taxpayers used the online refund status tool 
``Where's My Refund.'' In FY 2006, there were 24.7 million status 
checks, up nearly 12 percent from FY 2005.

    At the IRS, we continue to work to improve services. Clearly, we 
are making progress, and these numbers underscore that point.
    Another development in our taxpayer service program is the Taxpayer 
Assistance Blueprint (TAB). This collaborative effort of the IRS, the 
IRS Oversight Board, and the National Taxpayer Advocate began in July, 
2005 in response to a Congressional mandate to develop a five year plan 
that outlines the steps we should take to improve taxpayer services. We 
sent Phase 1 of the Blueprint to Congress in April, 2006. Phase 1 
identified and reported the following five strategic service 
improvement themes for increasing taxpayer, partner, and government 
value:

      Improve and expand education and awareness activities: 
This theme addresses the critical need for making taxpayers and 
practitioners aware of the most effective and efficient IRS service 
options and delivery channels for meeting their tax obligations and 
receiving benefits they are due.
      Optimize the use of partner services: This theme 
emphasizes the critical role of third parties in the delivery of 
taxpayer services, and calls for improving the level of support and 
direction provided to partners to ensure consistent and accurate 
administration of the tax law.
      Enhance self-service options to meet taxpayer 
expectations: This theme focuses on providing clear, standard, and 
easily customized automated content to deliver accurate, consistent, 
and understandable self-assistance service options--particularly for 
transactional tasks.
      Improve and expand training and support tools to enhance 
assisted services: This theme highlights the need for ensuring accurate 
information across all channels by improving and expanding training, 
technology infrastructure, and support for employees, partners, and 
taxpayers.
      Develop short-term performance and long-term outcome 
goals and metrics: This theme provides for the development of a 
comprehensive set of performance goals and metrics to evaluate how 
effectively the IRS is meeting taxpayer expectations, and how 
efficiently it is delivering services.

    Phase 2 of the Blueprint will be sent to Congress soon. Throughout 
this project, extensive research allowed us to refine our understanding 
of taxpayer and partner needs, preferences, and behaviors and to 
identify current planning documents, decision processes, and existing 
commitments affecting IRS service delivery. Certain recurring findings 
emerged from the wealth of data analyzed. These findings, combined with 
agency-wide considerations and priorities, led to the development of 
the five-year Strategic Plan for taxpayer service.
    The Strategic Plan includes a suite of service improvement 
initiatives across all delivery channels, a portfolio of performance 
metrics, and an implementation strategy, which recommends numerous 
future research studies. The Strategic Plan outlines a decision-making 
process for prioritizing service improvement initiatives based on 
taxpayer, partner, and government value and ensuring continued 
stakeholder, partner, and employee engagement. This process is designed 
to help the IRS to balance quality service with effective enforcement 
to maximize compliance. More details on TAB Phase 2 will be available 
when the report is delivered to Congress.
    While the TAB remains a work in progress, the FY 2008 budget 
request includes the funding necessary to implement some of the 
telephone service and web site enhancements recommended by the 
Blueprint. Enhancing telephone service will contribute to the goal of 
increasing taxpayer, partner, and government value. Improving IRS.gov 
will help us to make the web site the first choice of individual 
taxpayers and their preparers when they need to contact the IRS for 
help.
    The Blueprint also recommends a suite of multi-year research 
studies to continue to refine and improve our understanding of optimal 
service delivery. In addition to funding for research regarding non-
compliance, the FY 2008 budget includes funding for research to 
understand better the effect of service on compliance.

Expanding Enforcement Efforts
    Another reason for the Oversight Board's positive assessment of our 
work in FY 2006 is that IRS enforcement efforts have increased in 
virtually every area. According to the Board, ``As demonstrated by a 
variety of measures, the IRS' performance on enforcement has improved 
considerably, and real progress has been achieved over the past six 
years.''
    One of the most obvious measures is the increase in enforcement 
revenue, which has risen from $34 billion in FY 2002 to almost $49 
billion in FY 2006, an increase of 43 percent. Since 2003, Federal 
government receipts have also increased by $600 billion. In FY 2006, 
the Federal government collected over $2.4 trillion in total receipts. 
This is an historic level, with annual receipts up 12 percent over FY 
2005 alone. From FY 2005 to FY 2006, the U.S. has seen the highest 
year-to-year revenue growth in 25 years. This growth is primarily the 
result of a strong economy supported by sound economic and tax policy. 
But, corporate and high-income individual taxpayers are also both areas 
where we have substantially increased our enforcement presence in 
recent years.
    In FY 2006, both the levels of individual returns examined and 
coverage rates have risen substantially. We conducted nearly 1.3 
million examinations of individual tax returns. This is almost 75 
percent more than were conducted in FY 2001, and reflects a steady and 
sustained increase since that time. Similarly, the audit coverage rate 
has risen from 0.58 percent in FY 2001 to more than 0.97 percent in FY 
2006.
    While the growth in examinations of individual returns is visible 
in all income categories, it is most visible in examinations of 
individuals with incomes over $1 million. The number of examinations in 
the category rose by almost 78% compared to FY 2004, the first year the 
IRS began tracking audits of individuals with income over $1 million. 
The coverage rate has risen from 5 percent in FY 2004 to 6.3 percent in 
FY 2006.
    Growth in audit totals and coverage rates extend to other taxpayer 
categories. Preliminary estimates show that the IRS examined over 
52,000 business returns in FY 2006, an increase of nearly 12,000 over 
FY 2001. The coverage rate over the same period rose from 0.55 percent 
to 0.60 percent. For corporations with assets over $10 million, 
examinations rose from 8,718 in FY 2001 to 10,578 in FY 2006, an 
increase in the coverage rate from 15.1 percent to 18.6 percent. For 
the largest corporations, those with assets over $250 million, 
examinations have increased by over 29 percent growing from 3,305 in FY 
2001 to 4,276 in FY 2006.
    Finally, examinations of tax exempt organizations have also risen. 
In FY 2001 5,342 tax exempt examinations were closed. This number rose 
to 7,079 in FY 2006.

President's FY 2008 Budget Maintains the Balance between Taxpayer 
        Service and Enforcement
    The IRS and its employees represent the face of the Federal 
Government to more American citizens than any other government agency. 
The IRS administers America's tax laws and collects 95 percent of the 
revenues that fund most government operations and public services.
    The IRS' taxpayer service programs provide assistance to millions 
of taxpayers to help them understand and meet their tax obligations. 
The IRS' enforcement programs are aimed at deterring taxpayers inclined 
to evade their responsibilities while vigorously pursuing those who 
violate tax laws. Delivering these programs demands a secure and 
modernized infrastructure able to fairly, effectively, and efficiently 
collect taxes while minimizing taxpayer burden.
    The IRS FY 2008 President's Budget request supports its five-year 
strategic plan and Treasury's compliance improvement strategy. These 
documents underscore the IRS' commitment to provide quality service to 
taxpayers while enforcing America's tax laws in a balanced manner. The 
IRS' strategic plan goals are:

      Improve Taxpayer Service. Help people understand their 
tax obligations, making it easier for them to participate in the tax 
system;
      Enhance Enforcement of the Tax Law. Ensure taxpayers meet 
their tax obligations, so that when Americans pay their taxes, they can 
be confident their neighbors and competitors are also doing the same; 
and
      Modernize the IRS through its People, Processes and 
Technology. Strategically manage resources, associated business 
processes and technology systems to effectively and efficiently meet 
service and enforcement strategic goals.

Budget Request
    Our total budget request for FY 2008 is for $11.1 billion in 
appropriated resources and represents a 4.7 percent increase over the 
recently enacted FY 2007 Joint Resolution (JR) level of $10.6 billion.
    The IRS' taxpayer service and enforcement activities are funded 
from three appropriations: Taxpayer Services (TS); Enforcement (ENF); 
and Operations Support (OS). The total FY 2008 Budget request for these 
three operating accounts is $10.8 billion supplemented by the $180 
million from user fee revenue, for a total operating level of $10.9 
billion, or 5.5 percent increase over the FY 2007 JR level. As in FY 
2006 and FY 2007, the Administration proposes to include IRS 
enforcement increases as a Budget Enforcement Act program integrity cap 
adjustment, and I am pleased that the Senate Budget Committee mark for 
the 2008 resolution includes the full cap adjustment for this activity, 
recognizing the return on investment from these enforcement 
investments.
    The Budget also includes $282.1 million for Business Systems 
Modernization (BSM) and $14.2 million to administer the Health 
Insurance Tax Credit program, a 32.6 percent and 2.6 percent increase, 
respectively, over FY 2007 JR level.
    Our FY 2008 Budget request provides $409.5 million for new 
initiatives and $340.0 million for the pay raise and other cost 
adjustments needed to sustain base operations. The IRS' initiatives 
focus on the most significant needs for FY 2008:

      $20.0 million to enhance taxpayer service through 
expanded volunteer tax assistance, increased funding for research to 
determine the most effective means to help taxpayers, and implementing 
new technology to improve taxpayer service;
      $246.4 million to expand enforcement activities targeted 
at improving compliance; and
      $143.1 million to improve the IRS' information technology 
(IT) infrastructure, including $62.1 million for the BSM program and 
$81.0 million for security and infrastructure enhancements.

    This request also includes several program savings and efficiencies 
that reflect the IRS' aggressive efforts to identify and deploy work 
process and technology improvements that will benefit both taxpayer 
service and enforcement programs. Collectively, these cost savings 
total $120.0 million:

      Taxpayer Service Efficiencies -$23.4 million/-527 FTE: 
These savings will result from operational efficiencies achieved 
through on-going efforts to automate and enhance IRS taxpayer service 
programs' workload distribution such as the implementation of automated 
issuance of Employer Identification Numbers and Correspondence Imaging 
System. Additional efficiencies and savings are expected to be achieved 
through the implementation of optimal service channels identified from 
the Taxpayer Assistance Blueprint.
      Enforcement Program Efficiencies -$60.2 million/-620 FTE: 
These savings will result from productivity and efficiency improvements 
realized through the implementation of enhanced technology and business 
processes such as improved case selection tools and techniques. In 
addition, the completion of initial training and transition of the FY 
2006 new hires back to their front-line enforcement activities will 
result in additional efficiencies for the examination and collection 
programs.
      Shared Service Support Efficiencies -$36.4 million/-37 
FTE: These savings will result from several efforts including the 
optimization and consolidation of space projects, implementation of 
cost-efficient government-wide contract support, and postage savings 
achieved through the consolidation, automation, and renegotiation of 
contract services for correspondence delivery.

A Strategic Plan to Improve Voluntary Compliance
Enhancing Taxpayer Service
    Taxpayer service is especially important to help taxpayers avoid 
making unintentional errors. The IRS provides year-round assistance to 
millions of taxpayers through many sources, including outreach and 
education programs, tax forms and publications, rulings and 
regulations, toll-free call centers, the IRS.gov web site, TACs, VITA, 
and TCE sites.
    Assisting taxpayers with their tax questions before they file their 
returns reduces burdensome post-filing notices and other correspondence 
from the IRS, and proactively addresses inadvertent noncompliance.
    The FY 2008 Budget contains three significant taxpayer-service 
initiatives. First, we are requesting $5 million to expand volunteer 
income tax assistance, a significant component of our effort to support 
taxpayers eligible to claim the Earned Income Tax Credit. This taxpayer 
service initiative will help expand our volunteer return preparation, 
outreach and education, and asset building services to low-income, 
elderly, Limited English Proficient (LEP), and disabled taxpayers.
    The budget also requests $5 million for additional resources to 
enhance our understanding of the role of the taxpayer service on 
compliance. This research will focus on understanding taxpayer burden, 
opportunities for enhanced service to help reduce errors made on 
returns, and the impact of service on overall levels of voluntary 
compliance.
    Finally, the budget requests $10 million for four of the 
initiatives recommended by the Taxpayer Assistance Blueprint (TAB). As 
part of the TAB effort, we conducted a comprehensive review of our 
current portfolio of services to individual taxpayers to determine 
which services should be provided and improved. Based on the findings 
of the Blueprint, the funding for this initiative will implement the 
following telephone service and web site interaction enhancements:

      Contact Analytics provides an analytical tool for 
evaluating contact center recordings for the purpose of improving 
business processes and lowering business costs, as well as improving 
customer service.
      Estimated Wait Time provides a real-time message that 
informs taxpayers about their expected wait time in queue, allowing 
them to make more informed decisions based on the status of their call 
and thus reducing taxpayer burden and increasing customer satisfaction.
      Expanded Portfolio of Tax Law Decision Support Tools 
enables taxpayers to conduct key word and natural language queries to 
get answers to tax law questions through the Frequently Asked Questions 
database accessed on IRS.gov, thereby steadily increasing customer 
satisfaction and operational savings.
      Spanish ``Where's My Refund?'' adds the ability to check 
refund status to the Spanish web page on IRS.gov, enabling the Spanish-
speaking community to receive the same level of customer service on the 
web as available to the English web page.

    Continued technological advancements offer significant 
opportunities for the IRS to improve the efficiency and effectiveness 
of call center services. Web site enhancements are designed to maximize 
the value of IRS.gov, making the site taxpayers' first choice for 
obtaining the information and services required to comply with their 
tax obligations.

Improving Compliance Activities
    The IRS is continuing to improve efficiency and productivity 
through process changes, investments in technology, and streamlined 
business practices. We will continue to reengineer our examination and 
collection procedures to reduce cycle time, increase yield, and expand 
coverage. As part of our regular examination program, we are expanding 
the use of cost-efficient audit techniques first pioneered in the 
National Research Program (NRP).
    We are also expanding our efforts to shift to agency-wide 
strategies, which maximize efficiency by better aligning problems (such 
as nonfilers and other areas of noncompliance) and their solutions 
within the organization. The IRS is committed to improving the 
efficiency of its audit process, measured by audit change rates and 
other appropriate benchmarks.
    There are six specific initiatives proposed in the FY 2008 Budget 
aimed at improving compliance. These initiatives provide:

      $73.2 million to improve compliance among small business 
and self-employed taxpayers in the elements of reporting, filing, and 
payment compliance. This funding will be allocated for increasing 
audits of high-risk tax returns, collecting unpaid taxes from filed and 
unfiled tax returns, and investigating persons who have evaded taxes 
for possible criminal referral. It is estimated that this request will 
produce $144 million in additional annual enforcement revenue per year, 
once new hires reach full potential in FY 2010.
      $26.2 million for increasing compliance for large, 
multinational businesses. This enforcement initiative will increase 
examination coverage for large, complex business returns; foreign 
residents; and smaller corporations with significant international 
activity. It addresses risks arising from the rapid increase in 
globalization, and the related increase in foreign business activity 
and multi-national transactions where the potential for noncompliance 
is significant in the reporting of transactions that occur across 
differing tax jurisdictions. With this funding, we estimate that 
coverage for large corporate and flow-through returns will increase 
from 7.9 to 8.2 percent in FY 2008, and produce over $74 million in 
additional annual enforcement revenue, once the new hires reach full 
potential in FY 2010.
      $28 million for expanded document matching in existing 
sites. This enforcement initiative will increase coverage within the 
Automated Underreporter (AUR) program by minimizing revenue loss 
through increased document matching of individual taxpayer account 
information. We believe the additional resources will result in an 
increase in AUR closures from 2.05 million in FY 2007 to 2.64 million 
in FY 2010. We expect $208 million of additional enforcement revenue 
per year, once the new hires reach full potential in FY 2010. In 
addition, the budget requests $23.5 million to establish a new document 
matching program at our Kansas City campus. This enforcement initiative 
will fund a new AUR site within the existing IRS space in Kansas City 
to address the misreporting of income by individual taxpayers. 
Establishing this new AUR site should result in over $183 million in 
additional enforcement revenue per year once the new hires reach full 
potential in FY 2010.
      $6.5 million to increase individual filing compliance. 
This enforcement initiative will help address voluntary compliance. The 
Automated Substitute for Return Refund Hold Program minimizes revenue 
loss by holding the current-year refunds of taxpayers who are 
delinquent in filing individual income tax returns and are expected to 
owe additional taxes. We estimate that this initiative will result in 
securing more than 90,000 delinquent returns in FY 2008 and produce $82 
million of additional enforcement revenue per year, once the new hires 
reach full potential in FY 2010.
      $15 million to increase tax-exempt entity compliance. 
This enforcement initiative will deter abuse by entities under the 
purview of the Tax-Exempt and Governmental Entities Division (TEGE) and 
misuse of such entities by third parties for tax avoidance or other 
unintended purposes. The funding will aid in increasing the number of 
TEGE compliance contacts by 1,700 (six percent) and employee plan/
exempt organization determinations closures by over 9,000 (eight 
percent) by FY 2010.
      $10 million for increased criminal tax investigations. 
This will help us to aggressively attack abusive tax schemes, corporate 
fraud, nonfilers, and employment tax fraud. It will also address other 
tax and financial crimes identified through Bank Secrecy Act related 
examinations and case development efforts, which include an emphasis on 
the fraud referral program. Our robust pursuit of tax violators and the 
resulting publicity is aimed to foster deterrence and enhance voluntary 
compliance.
      $41 million for conducting research studies of compliance 
data for new segments of taxpayers needed to update existing estimates 
of reporting compliance. The data collected from these studies will 
enable the IRS to develop strategies to combat specific areas of non-
compliance.

    In addition to these initiatives, I would stress the importance of 
allowing us to continue with the private debt collection program. The 
use of private collection agents (PCAs) was authorized by the American 
Jobs Creation Act of 2004. As we continue to debate the efficacy of 
this program, I want to take this opportunity to make a couple of 
points for purposes of our ongoing discussions.
    One issue that has been debated is the relative efficiency of using 
PCAs versus IRS employees to collect the taxes owed. The most important 
question is not whether IRS employees or PCAs can do the job more 
efficiently, but rather whether PCAs collect money that would otherwise 
go uncollected. The IRS lacks the resources to pursue the relatively 
simple, geographically dispersed cases that are now being assigned to 
PCAs. It is not realistic to expect that the Congress is going to give 
the IRS an unlimited budget for enforcement, and if Congress provided 
the IRS additional enforcement resources, I believe those resources 
would be applied best by allocating them to more complex, higher 
priority cases that are not appropriate for PCAs.
    The IRS continues to work with PCAs to ensure that the program is 
fair to taxpayers and respects taxpayer rights. We currently estimate 
that between now and FY 2017, our partnership with PCAs will result in 
approximately 2.9 million delinquent cases receiving treatment that 
would otherwise have gone unworked. This partnership will help reduce 
the backlog in outstanding tax liabilities, which has grown by 118 
percent over the last 12 years. From September 7, 2006, when cases were 
first assigned to PCAs, through February 15, 2007 PCAs collected $14.47 
million in gross revenue. We estimate that cases worked by PCAs will 
generate estimated gross revenue of between $1.4 billion through FY 
2017.
    Another reason to continue to use this tool is to evaluate whether 
we in the public sector can learn anything from these PCAs that will 
enable us to do our jobs better. Particularly over the last 20 years, 
government agencies at all levels have adopted many practices and ways 
of doing business that have been pioneered in the private sector. One 
need look no further than the vastly expanded use by the government of 
the Internet in providing services to the public as an example of a 
practice that was pioneered in the private sector, but adopted quickly 
and effectively by the government. We should not remove PCAs as a tool 
for addressing the problem before we have an opportunity to evaluate 
the potential of this initiative to help improve compliance and perhaps 
even to show the government how to be more effective in its own 
efforts.

Reducing Opportunities for Evasion
    The IRS is already aggressively pursuing enforcement initiatives 
designed to improve compliance and reduce opportunities for evasion. As 
I pointed out earlier, these efforts have produced a steady climb in 
enforcement revenues since 2001, as well as an increase in both the 
number of examinations and the coverage rate in virtually every major 
category.
    In the budget request, the Administration proposes to expand 
information reporting, improve compliance by businesses, strengthen tax 
administration, and expand penalties in the following ways:
    Expand information reporting--Specific information reporting 
proposals would:

    (1) Require information reporting on payments to corporations;
    (2) Require basis reporting on sales of securities;
    (3) Expand broker information reporting;
    (4) Require information reporting on merchant payment card 
reimbursements;
    (5) Require a certified taxpayer identification number (TIN) from 
non-employee service providers;
    (6) Require increased information reporting for certain government 
payments for property and services; and
    (7) Increase information return penalties.

    Improve compliance by businesses--Improving compliance by 
businesses of all sizes is important. Specific proposals to improve 
compliance by businesses would:

    (1) Require electronic filing by certain large businesses;
    (2) Implement standards clarifying when employee leasing companies 
can be held liable for their clients' Federal employment taxes; and
    (3) Amend collection due process procedures applicable to 
employment tax liabilities.

    Strengthen tax administration--The IRS has taken a number of steps 
under existing law to improve compliance. These efforts would be 
enhanced by specific tax administration proposals that would:

    (1) Expand IRS access to information in the National Directory of 
New Hires database;
    (2) Permit the IRS to disclose to prison officials return 
information about tax violations; and
    (3) Make repeated failure to file a tax return a felony.

    Expand penalties--Penalties play an important role in discouraging 
intentional noncompliance. Specific proposals to expand penalties 
would:

    (1) Expand preparer penalties;
    (2) Impose a penalty on failure to comply with electronic filing 
requirements; and
    (3) Create an erroneous refund claim penalty.

    The Administration also has four proposals relating to IRS 
administrative reforms.
    The first proposal modifies employee infractions subject to 
mandatory termination and permits a broader range of available 
penalties. It strengthens taxpayer privacy while reducing employee 
anxiety resulting from unduly harsh discipline or unfounded 
allegations.
    The second proposal allows the IRS to terminate installment 
agreements when taxpayers fail to make timely tax deposits and file tax 
returns on current liabilities.
    The third proposal eliminates the requirement that the IRS Chief 
Counsel provide an opinion for any accepted offer-in-compromise of 
unpaid tax (including interest and penalties) equal to or exceeding 
$50,000. This proposal requires that the Secretary of the Treasury 
establish standards to determine when an opinion is appropriate.
    The fourth proposal modifies the way that Financial Management 
Services (FMS) recovers its transaction fees for processing IRS levies 
by permitting FMS to add the fee to the liability being recovered, 
thereby shifting the cost of collection to the delinquent taxpayer. The 
offset amount would be included as part of the 15-percent limit on 
continuous levies against income.
    Collectively, these proposals should generate $29.5 billion in 
revenue over 10 years. The proposed budget provides $23 million to 
implement these initiatives. This will fund the purchase of software 
and the modifications to IRS information technology systems necessary 
to implement these legislative proposals.

Enhancing Research
    Research enables the IRS to develop strategies to combat specific 
areas of noncompliance, improve voluntary compliance, and allocate 
resources more effectively. Historically, our estimates of reporting 
compliance were based on the Taxpayer Compliance Measurement Program 
(TCMP), which consisted of line-by-line audits of random samples of 
returns. This provided us with information on compliance trends and 
allowed us to update audit selection formulas. However, this method of 
data gathering was extremely burdensome on the taxpayers who were 
forced to participate. One former IRS Commissioner noted that the TCMP 
audits were akin to having an autopsy without the benefit of death. As 
a result of concerns raised by taxpayers, Congress, and other 
stakeholders, the last TCMP audits were done for Tax Year (TY) 1988.
    We have conducted several much narrower studies since then, but 
nothing that would give us a comprehensive perspective on the overall 
tax gap. As a result, until the recent NRP data, all of our subsequent 
estimates of the tax gap were rough projections that basically assumed 
no change in compliance rates among the major tax gap components; the 
magnitude of these projections reflected growth in tax receipts in 
these major categories.
    The National Research Program, which we have used to estimate our 
most recent tax gap updates, provides us a better focus on critical tax 
compliance issues in a manner that is far less intrusive than previous 
means of measuring tax compliance. We used a focused, statistical 
selection process that resulted in the selection of approximately 
46,000 individual returns for TY 2001. This was less than previous 
compliance studies, even though the population of individual tax 
returns had grown over time. Like the compliance studies of the past, 
the NRP was designed to allow us to estimate the overall extent of 
reporting compliance among individual income tax filers, and to update 
our audit selection formulas. It also introduced several innovations 
designed to reduce the burden imposed on taxpayers whose returns were 
selected for the study.
    The NRP provided updated estimates for determining the sources of 
noncompliance. The IRS also uses the NRP findings to better target 
examinations and other compliance activities, thus increasing the 
dollar-per-case yield and reducing ``no change'' audits of compliant 
taxpayers. Innovations in audit techniques to reduce taxpayer burden, 
pioneered during the 2001 NRP, have been adopted in regular operational 
audits.
    Almost as important as understanding what the NRP research provides 
is to understand its limitations. The focus of the first NRP reporting 
compliance study was on individual income tax returns. It did not 
provide estimates for noncompliance with other taxes, such as the 
corporate income tax or the estate tax. Our estimates of compliance 
with taxes other than the individual income tax are still based on 
projections that assume constant compliance behavior among those major 
tax gap components since the most recent compliance estimates were 
compiled (i.e., for TY 1988 or earlier).
    Recurring and timely compliance research is needed to ensure that 
the IRS can efficiently target resources, effectively provide the best 
service possible, and respond to new sources of noncompliance as they 
emerge. Compliant taxpayers benefit when the IRS uses the most up-to-
date research to improve workload selection formulas, as this reduces 
the burden of unnecessary taxpayer contacts.
    The FY 2008 Budget requests funds for two significant research 
initiatives. First, the budget requests $41 million to improve 
compliance estimates, measures, and detection of noncompliance. This 
will fund research studies of compliance data for new segments of 
taxpayers needed to update existing estimates of reporting compliance. 
Unlike in the past, the IRS will conduct an annual study of compliance 
among 1040 filers based on a smaller sample size than the 2001 NRP 
study. This will provide fresh compliance estimates each year, and by 
combining samples over several years, will provide a regular update to 
the larger sample size needed to keep our targeting systems and 
compliance estimates up to date.
    The second research program funded by the request is to research 
the effect of service on taxpayer compliance. The budget requests $5 
million for this project, which will undertake new research on the 
needs, preferences, and behaviors of taxpayers. The research will focus 
on four areas:

      Meeting taxpayer needs by providing the right channel of 
communication;
      Better understanding taxpayer burden;
      Understanding taxpayer needs through the errors they 
make; and
      Researching the impact of service on overall levels of 
voluntary compliance.

Continuing Improvements in Information Technology
    Tax administration in the 21st century requires improved IRS 
information technology (IT). We are committed to continuing to make 
improvements in technology and the FY 2008 Budget reflects that 
commitment. The FY 2008 Budget requests $81 million to improve the IRS' 
information technology infrastructure. Sixty million dollars of this 
amount is requested to upgrade critical IT infrastructure. This 
infrastructure initiative will provide funding to upgrade the backlog 
of IRS equipment that has exceeded its life cycle. Failure to replace 
the IT infrastructure will lead to increased maintenance costs and will 
increase the risk of disrupting business operations. Planned 
expenditures in FY 2008 include procuring and replacing desktop 
computers; automated call distributor hardware; mission critical 
servers; and Wide Area Network/Local Area Network routers and switches.
    The other $21 million will be used to enhance the Computer Security 
Incident Response Center (CSIRC) and the network infrastructure 
security. This infrastructure initiative will provide $13.1 million to 
fund enhancements to the CSIRC necessary to keep pace with the ever-
changing security threat environment through enhanced detection and 
analysis capability, improved forensics, and the capacity to identify 
and respond to potential intrusions before they occur. The remaining 
$7.9 million will fund enhancements to the IRS' network infrastructure 
security. It will provide the capability to perform continuous 
monitoring of the security of operational systems using security tools, 
tactics, techniques, and procedures to perform network security 
compliance monitoring of all IT assets on the network.
    Finally, the FY 2008 Budget requests a total of $282.1 million to 
continue the development and deployment of the IRS Business Systems 
Modernization (BSM) program in line with the recommendations identified 
in the IRS Modernization, Vision, and Strategy. This funding will allow 
the IRS to continue progress on modernization projects, such as the 
Customer Account Data Engine (CADE), Account Management Services (AMS), 
Modernized e-File (MeF), and Common Services Projects (CSP).
    The development of the CADE (Customer Account Data Engine) and AMS 
(Account Management Services) systems is the heart of the IT 
modernization of the IRS. The combination of these two systems working 
together will enable the IRS to process tax returns and deal with 
taxpayer issues in a near real-time manner. In fact, our objective is 
that the IRS operate similarly to what one expects from one's bank; 
account transactions occurring during the business day will be posted 
and available by the next business day. In addition, AMS will enable 
the IRS representatives who work with taxpayers to have access to all 
the information regarding that taxpayer, including electronic access to 
tax return data, and electronic copies of correspondence. Equipped with 
such comprehensive and up-to-date information, our representatives will 
be in a much better position to help taxpayers resolve their issues.
    MeF is the future of electronic filing. It provides a standard data 
format for all electronic tax returns, which will reduce the cost and 
time to add and maintain additional tax form types. MeF is a flexible 
real-time system that streamlines the processing of e-filed tax 
returns, resulting in a quicker acknowledgement of the filing to the 
taxpayer or their representative. In FY 2007, the IRS will start 
development and implementation of the 1040 on the MeF platform.
    CSP will provide funding for new portals, which are technology 
platforms that meet many IRS business needs through web-based front-
ends, and provide secure access to data, applications, and services. 
The portals are mission-critical components of the enterprise 
infrastructure required to support key business processes and 
compliance initiatives.
    The benefits accruing from the delivery and implementation of BSM 
projects not only provide value to taxpayers, the business community, 
and government, but also contribute to operational improvements and 
efficiencies within the IRS.

Summary
    The FY 2008 Budget request includes significant increases for IRS 
enforcement efforts. Fully funding that request will help us make 
progress in greatly improving voluntary compliance. Based on our 
analysis covering the most recent 11 years of collection experience, we 
estimate that every dollar we have spent on enforcement has generated a 
direct return of an average of four dollars in increased revenue to the 
Federal Treasury. This return can be expected to occur when the full 
productive benefit of the investment is realized.
    Our role is not unlike that of a highway patrolman. He will never 
be able to ticket every speeder, but he attempts to position himself in 
areas where he knows that his time is more likely to be spent 
productively. He also knows that every time he pulls a speeder over, 
other motorists see that and slow down as well.
    We also believe that dollars spent on taxpayer service have a 
positive impact on voluntary compliance. The complexity of complying 
with the nation's current tax system is a significant contributor to 
the tax gap, and even sophisticated taxpayers make honest mistakes on 
their tax returns. Accordingly, helping taxpayers understand their 
obligations under the tax law is a critical part of improving voluntary 
compliance. To this end, the IRS remains committed to a balanced 
program assisting taxpayers in both understanding the tax law and 
remitting the proper amount of tax.
    In addition, the President's FY 2008 Budget contains a number of 
legislative proposals that provide additional tools for the IRS to 
enforce the existing tax law. Perhaps the most critical of these tools 
is greater third party reporting.
    An analysis of the data from the National Research Program of TY 
2001individual income tax returns leads to one very obvious conclusion. 
Compliance is much higher in those areas where there is third party 
reporting. For example, only 1.2 percent of wages reported on Forms W-2 
are underreported. This compares to a 53.9 percent underreporting rate 
for income subject to little or no third party reporting.
    The FY 2008 Budget request asks Congress to expand information 
reporting to include additional sources of income and make other 
statutory changes to improve compliance. These legislative proposals 
are intended to improve tax compliance with minimum taxpayer burden. 
When implemented, it is estimated that these proposals will generate 
$29.5 billion over ten years.
    I anticipate that some of this year's Budget proposals will be 
criticized, perhaps because of concerns about their potential impact on 
small businesses. While the information reporting proposals will 
inevitably impose some burden on compliant taxpayers, they are designed 
to minimize that burden and to help the IRS better target its audit 
resources, thereby reducing the number of burdensome audits that result 
in little or no change to compliant taxpayers' reported liability. The 
challenges that a small business faces are difficult enough without 
having to compete directly with noncompliant competitors. We have an 
obligation to support those compliant small businesses by ensuring that 
their competitors are also paying their fair share. This is not only a 
matter of fairness, but also a way of supporting compliant small 
businesses in their efforts to remain compliant.
    Finally, full funding of the budget request will enable the IRS to 
improve our research with respect to compliance. Despite all of our 
progress, there is still much we do not know about the tax gap. 
Although the updated estimates provided by the NRP study are more 
accurate than our previous estimates, and more accurate than the 
estimates made at various times by others using more indirect methods, 
they have many limitations. These estimates are useful for 
understanding the general areas and levels of noncompliance and the 
scope of the problem, but they are far from exact measurements. With 
the exception of the individual income tax gap, the estimates do not 
adjust for noncompliance that goes undetected during examination, and 
estimates are not even available for certain (minor) components of the 
tax gap. Beginning in October 2007, the IRS will begin ongoing annual 
research activities that will ensure we have the most up to date 
compliance data possible to measure portions of the tax gap, focus our 
resources, and improve our audit selection criteria.
    I appreciate the opportunity to testify this morning, and I will be 
happy to respond to any questions that Members of the Committee may 
have.

                                 

    Chairman LEWIS. Thank you very much, Mr. Commissioner, for 
your statement.
    At this time, we will open the hearing for questions. I ask 
that each Member follow the 5-minute rule. If the commissioner 
will follow with short and concise answers, all Members should 
have the opportunity to ask questions, if possible, there may 
be a second round.
    Mr. Commissioner, during the current tax filing season the 
IRS has warned taxpayers about a scam called ``phishing.'' This 
involves fake e-mails from con artists claiming to be the IRS. 
They try to get taxpayers' Social Security numbers and bank 
account numbers.
    Can you please tell the Members of the Committee about 
this?
    Mr. EVERSON. Certainly, sir. This is an important issue. We 
emphasize to everyone that we do not take contact with 
individuals via e-mail. We have had over 200 confirmed 
instances of this. They come and go very quickly. They are 
largely operated offshore, sir, where something is set up and 
it looks like they refer you back to what looks like an IRS 
website.
    As soon as we get word of it, we refer it to Treasury 
Inspector General for Tax Administration (TIGTA) that has the 
statutory authority in this area. Unfortunately, all too often, 
the damage is done. Somebody is sucked in. They say, we have 
got some money for you, purporting to be the IRS, and then some 
people do fall for this. It is very unfortunate.
    Again, they will set up and then work for a little while 
then close down the shop.
    Chairman LEWIS. Could you tell the Members of the Committee 
how many taxpayers have been abused by this scam?
    Mr. EVERSON. We have had over something like 16,000 
variants of this. I would not know how many people actually 
would be swept into it. That is 16,000 individuals, I guess, 
that we know of in these 200 plus schemes. However, there could 
be many more that have not actually come to our attention.
    Chairman LEWIS. What has the IRS done about it?
    Mr. EVERSON. Each time we hear about it, we immediately 
refer it over to TIGTA and try and get them involved on it. 
However, again, many times, most often these things are being 
established overseas. The responsibility--another question has 
been raised on setting up websites that look like the IRS, 
IRS.com or others. This is something that falls outside of our 
jurisdiction, sir. If there are abuses there, it is the Federal 
Trade Commission and the Department of Justice. I am 
comfortable with that.
    Some have said maybe the authority to monitor that ought to 
be given to the IRS. I would not think that is the right 
answer.
    Chairman LEWIS. However, at times, do you refer cases, 
incidents, to the Department of Justice?
    Mr. EVERSON. I think TIGTA on the phishing schemes would 
act if they saw a basis to prosecute and confine the people who 
were actually the culprits.
    Chairman LEWIS. The IRS provides some free tax assistance 
in IRS offices. How many returns have been prepared for free by 
the Internal Revenue Service this year alone?
    Mr. EVERSON. I don't have the exact number for this year. 
However, that number has been declining over recent years. I 
think it was about 30,000 or 33,000 last year, down from up 
above. What has happened is we have given greater emphasis to 
our community partnerships where we have some 12,000 sites 
around the country help for the elderly, they are picking up 
that work, sir, at the same income--they have the same income 
threshold that we would use.
    Chairman LEWIS. Do you have any idea how many taxpayers pay 
to have their returns prepared? What percentage?
    Mr. EVERSON. If you look at the overall statistics, about 
80 percent of all taxpayers are either using a paid preparer or 
some software. At this point, I think the paid preparer, I will 
give you the exact number for the record, but I think it 
approaches 60 percent of all taxpayers are using a paid 
preparer.
    Chairman LEWIS. Thank you very much, Mr. Commissioner. Now 
I must recognize the ranking Member, Mr. Ramstad, for 
questions.
    Mr. RAMSTAD. Thank you, Mr. Chairman.
    Commissioner, as you know, the bulk of the tax gap derives 
from underreporting. However, I am sure you will agree, there 
is no silver bullet solution. It seems an underpayment of taxes 
is an equal opportunity problem committed by individuals, 
estates, corporations large and small, as well as the self-
employed.
    As you know 2 years ago or three years ago, I believe it 
was in 2004, Congress authorized the use of private debt 
collection agencies to help close the tax gap. Also, it seems 
from what I have read and heard, that that effort is now 
bearing fruit with collections of unpaid taxes rising rather 
quickly.
    My question is this. I know the IRS does a customer 
satisfaction and a quality rating for programs like the private 
collection agency program. How do those satisfaction and 
quality ratings compare to the ratings that IRS employees 
receive when they attempt to collect unpaid taxes?
    Mr. EVERSON. We are running this program. It is a new 
program, as you indicate. We started this in September. I would 
say thus far, it is proceeding well.
    There are, generally the customer satisfaction is very 
high. There are some complaints, several dozen complaints. A 
lot of those were received, about half of them, in the first 
month or two of the program. So, I would say that the quality 
indicators in that regard are good and comparable to what we 
do.
    Collections is a tough business and it does generate 
complaints, whether it is being done by the IRS or by someone 
on the outside.
    Mr. RAMSTAD. So, vis-a-vis the in house collection efforts, 
you would say the ratings are comparable?
    Mr. EVERSON. I guess, broadly. I would say broadly speaking 
in the complaints we have been getting have been very limited 
in number, and we are following up on each one of them and 
trying to make sure, to meet my commitment I made to this 
Committee and others in the Congress, that we would hold this 
to a particularly high level. I meet with the team on this 
every month, sir, to make sure that they are satisfied with how 
this program is going.
    Mr. RAMSTAD. I think every Member on this dais would be 
happy if his or her office only received several dozen 
complaints in the same time period. So, I think that speaks----
    Mr. EVERSON. I didn't say those were the only complaints I 
got.
    Mr. RAMSTAD. No, no. I am talking about the Private 
Collection Agency (PCA) program.
    I want to also ask you as a follow-up, Commissioner, to a 
hearing that we held in the last Congress on the truly 
unbelievable tax fraud occurring in our prison system across 
the country. In addition, I was glad to see the President's tax 
gap proposals included legislation that Chairman Lewis and I 
introduced in the last Congress that would allow the IRS to 
disclose inmate tax violations to prison officials.
    I mean, that was an absurdity that we learned at the 
hearing that such criminal behavior could not be reported to 
prison officials by the IRS.
    Can you update us on the IRS efforts to crack down on tax 
return fraud by inmates?
    Mr. EVERSON. The good news here, sir, as you will recall, 
we did have difficulties. Probably the most serious problem we 
had last year was the failure of us to get this Electronic 
Fraud Detection System (EFDS) system which was screening out 
the potential fraudulent refunds. We did not get that running 
for the filing season last year.
    We have done that. This year, it is functioning. So, it is 
working on just those kinds of schemes. We are taking a deeper 
look now as to how we want to redevelop that system for the 
future to make it even better. However, that will be a process 
that will roll out over a period of years.
    Mr. RAMSTAD. Again, Commissioner, I thank you. Thank you 
for your responsiveness to your questions. I look forward to 
your further interchange.
    Thank you. I yield back.
    Chairman LEWIS. Thank you very much, Mr. Ranking Member.
    Now I turn to Mr. Neal of Massachusetts for questions.
    Mr. NEAL. Thank you very much, Mr. Chairman.
    First, Commissioner, I want to thank you and the staff. We 
had a serious problem in my hometown of Springfield, 
Massachusetts, with retirees who had been exposed to what would 
have been a series of unfair penalties and interest charges. 
Also, the local office, working with my staff here in 
Washington, really did a fine job of coming to relief of the 
individuals that were involved. Also, 2,200 individuals will 
now not face the wrath of the IRS, largely because it was a 
mistake that the city of Springfield made. So, I do want to 
acknowledge the role that your office played in that instance.
    Mr. EVERSON. Thank you. I wasn't familiar with that. 
However, I am glad to hear it, sir.
    Mr. NEAL. Just a quick follow-up to Mr. Ramstad's question. 
Haven't there been some abuses with the whole notion of 
collections, though, that have been acknowledged?
    Mr. EVERSON. You are talking about the private collection 
program?
    Mr. NEAL. Yes.
    Mr. EVERSON. We have had complaints. As I indicated, it is 
about five dozen out of 30,000 cases that have been placed. 
They run across a range of problems. Also, some have been 
things that we consider serious and we have worked with the 
contractors to address those.
    We did take an action. The first tranche of this program 
ran through early March. We had three contractors working on 
that first element of the program. We had a go, no-go decision 
solely at the discretion of the and as to whether, looking at 
each contractor, we would extend them into a second period, a 
year.
    We elected to extend two of the contractors. We did not 
elect a third. It was not that we felt they had not done their 
job, but we felt we had a very high confidence level. Also, the 
other two, we wanted to make sure that we did everything we 
possibly could to address any and all, and we felt better about 
the responsiveness of the two that we retained.
    Mr. NEAL. Thank you. Let me go specifically to questions 
that I have more than a little interest in. Let me ask you 
about the Administration's proposals on closing the tax gap. As 
you know, I am currently working on legislation to provide 
long-term and significant relief from the Alternative Minimum 
Tax (AMT). However, as we all know, it doesn't come without 
cost. Also, closing that $345 billion annual tax gap is one 
major way we could provide relief to these 23 million families 
who expect to be hit this year by AMT.
    I notice that the Administration's proposals, they will 
only raise 29 billion over 10 years. That is less than $3 
billion a year for the $345 billion annual problem. I thought 
and had hoped that we would have had more energy from the 
Administration in efforts to close that tax gap, and nobody is 
better suited than you, Commissioner, to make recommendations 
on closing the gap. Moreover, we could certainly, I think, use 
more than what we are currently witnessing.
    Mr. EVERSON. I appreciate your sentiment. The Secretary and 
I have had a lot of conversations on this along with Assistant 
Secretary Eric Solomon. I believe that what we have here is a 
balanced program. The funding component for the IRS, 
particularly to help us on the infrastructure side, because 
getting better infrastructure helps on services and 
enforcement.
    Some have characterized even more directly than you the 16 
initiatives as too modest. I think that they are an important 
start. I can tell you, I get a lot of heat from interested 
parties in here that they do not want us to do more third party 
reporting, the credit cards and everything.
    We had five proposals, sir, last year. Only one of them got 
through. I would like to see us get these 16 done and then we 
will come back obviously and look at more. However, the problem 
is, the more you do, the more you get into an incremental 
burden. In addition the more controversy you get to, as you 
know.
    Mr. NEAL. Just quickly, who would be the individual that 
might be high profile in these instances that you might hope to 
target?
    Mr. EVERSON. The proposal that I advocate most strongly is 
that first one that I mentioned, gross receipts for credit 
cards for businesses. If you go to the tax gap visibility 
chart, this shows you, sir, that out at the left is the amount 
of the tax gap that comes from wages or where you have third 
party reporting and withholding. There is only a 1 percent 
noncompliance rate in that instance. We know how much you make 
as a congressman. You are not going to fudge on that, nobody 
does. It is 1 percent.
    If you go out all the way to the right, you get to a 50 
percent or so noncompliance rate where there is no reporting or 
withholding. Also, this is largely underreported income in the 
small business community where there is a real significant 
understatement of revenues. We believe that the third party 
reporting, once a year, of gross receipts of a business, gross 
credit card receipts, will start to get at that problem.
    Mr. NEAL. Thank you, Commissioner. Thank you, Mr. Chairman.
    Chairman LEWIS. Thank you very much.
    I now turn to Mr. Pascrell of New Jersey for questioning.
    Mr. PASCRELL. Thank you, Mr. Chairman.
    Thank you, Commissioner, for being here today. When I look 
at the returns of those of the IRS and how much money it has 
spent to collect back taxes, it is $1 spent for every $32 
collected. When I look at private concerns and businesses that 
have been brought into the mix, it is $1 spent and we are 
collecting $4, so I want to talk about these private 
collectors.
    The recent IRS data shows that the service spent 42 cents 
to collect each $100 of tax revenue in fiscal year 2006, the 
third lowest figure in the last 25 years and down from 46 cents 
the year before. In addition, among collection cases handled 
solely through phone calls, the same type of work that is being 
contracted out to private collection companies, the IRS has 
estimated a return on investment of about 13 to one.
    So, why would the IRS agree to pay private collectors 
almost 25 cents for every dollar collected on the easiest 
cases, phone calls, easiest cases, in which the taxpayer 
themselves have not disputed the liability? Also, which IRS 
employees could collect much more effectively?
    Also, then I want to ask you, how are these firms hired, a 
mini-capsule of----
    Mr. EVERSON. Sure.
    Mr. PASCRELL. Would you answer the first question first?
    Mr. EVERSON. Okay. I have consistently stated, sir, that 
the IRS could do this work cheaper. Although I would point out, 
at this point, having made the significant investments that we 
have made, if you look at the incremental money coming in, it 
will have already paid for itself and be totally in the black, 
if you will, by next April.
    The blunt reality though is that, because of attrition in 
our work force, including at the phone centers, hiring to 
replace that attrition, and then even if you have an 
enforcement increment billed as we do in the 2008 budget, it 
would take a number of years hiring and training at maximum 
capacity before we would get to the work that you are talking 
about. So, there is no short term capability for us to get to 
all of the potential collection work we have.
    Also, why are we doing this? This is the law of the land, 
and Congress asked us to do that. It is true, the 
Administration supported it because of this issue. However, it 
is the law now.
    Mr. PASCRELL. However, it doesn't mean, Mr. Commissioner, 
and you have a great responsibility and you do it well, but it 
doesn't mean that you capitulate if you think that the process 
that is being suggested is not working. In fact, that you had 
to reduce, to get rid of one of the collection firms is an 
indicator to me, and I am sure that you know more about this 
than I do, it is an indicator to you.
    Mr. EVERSON. Yes.
    Mr. PASCRELL. Also, there is a fetish here in this town of 
moving into the private sector. Furthermore, we want the 
private sector to succeed. However, if the numbers don't work 
out, Mr. Commissioner, you educate me as to what I am missing, 
please.
    Mr. EVERSON. Let me go back to that second question you 
asked. There was a competitive procurement in which a number of 
entities applied, went through the normal government 
procurement process. In actual fact, the first time around, 
there was a bid protest, we had to redo this and we did it and 
we went with three.
    I draw a different inference from the fact that we did not 
continue one contractor. I believe what we have done here is we 
have executed, made good our promise to hold to the absolute 
highest standard here because of the sensitivity. I recognize 
the sensitivity of it. I don't want this to in any way damage 
the agency's reputation or undermine respect for compliance 
with the tax law. So, I think what we did was we wanted to 
assure ourselves beyond any reasonable doubt. That is why we 
took the action, sir.
    Mr. PASCRELL. However, it would seem to me in looking at 
the bottom line that there is only one inference I can draw. 
Also, that is that the public employees who have been charged 
with the responsibility of going after cheats and trying to 
reduce the gap that exists are doing a far batter job, are more 
efficient and more effective than the private collectors, God 
bless them all, that are not doing it. The numbers don't show 
that, do they, Commissioner?
    Mr. EVERSON. I have said repeatedly that the and could do 
this work and that it would be cheaper. What I do draw to your 
attention is what I just said a minute ago, that our capability 
to do that over the period of the next several years, we would 
be unable to do that.
    Mr. PASCRELL. Let the record show that, Mr. Chairman. Thank 
you.
    Chairman LEWIS. Thank you.
    Now I turn to Mr. Linder, my colleague from Georgia, for 
questions.
    Mr. LINDER. Thank you, Mr. Chairman.
    Commissioner, welcome.
    Mr. EVERSON. Nice to see you, sir.
    Mr. LINDER. Nice to see you.
    The last year for which numbers were available, was that 
2005, for the tax gap of 345 billion?
    Mr. EVERSON. What that goes back to, sir, is it was 
research about tax year 2001. The returns came in in 2002. 
Also, during 2003 and 2004, they did the audits. It took a long 
time to get all the 46,000 audits done with all the procedural 
obligations and other things. So, it is 2001, unfortunately.
    Mr. LINDER. What did you actually collect in 2001?
    Mr. EVERSON. In terms of revenues?
    Mr. LINDER. Yes.
    Mr. EVERSON. I would have to go back and give you that 
figure. However, if you go back and you look at the 2.4 
trillion that we collected last year in 2006, it was up over 
600 billion from 2003.
    Mr. LINDER. So, it wasn't 2 trillion?
    Mr. EVERSON. Yes, because it was--what happened was 2001 
was higher. The revenues, as you recall, they went down and 
they reached the low level. I think it was right about, I have 
it here, right about 2 trillion probably in total. Then it 
declined a little bit through 2003 and then it came back 
smartly, as I indicated.
    Mr. LINDER. So, you collect about 80 percent of the money 
you think is owed?
    Mr. EVERSON. That research indicated it is actually higher 
than that. It is close to 84 percent, sir.
    Mr. LINDER. That does not take into consideration the 
underground economy?
    Mr. EVERSON. That is correct, or illegal activity. It takes 
it into account to a certain degree, but it doesn't take into 
account illegal activity.
    Mr. LINDER. Do you have any idea how large the underground 
economy is?
    Mr. EVERSON. Well, cash, some cash transactions are taken 
into there. If somebody is doing a cash business, we do our 
best to estimate that within that piece. I probably misspoke.
    Mr. LINDER. What do you think the size of the underground 
economy is today?
    Mr. EVERSON. I don't have a precise figure on that.
    Mr. LINDER. Would you be shocked if I said it was over 2 
trillion?
    Mr. EVERSON. That sounds quite significant to me, but I am 
not the economist.
    Mr. LINDER. Do you take into consideration tracking money 
offshore?
    Mr. EVERSON. We do our best to do this. This is a very 
tough area. The intentional disguising of flows of funds 
offshore, particularly by individuals, is very hard to track, 
especially if it goes through tax havens or countries that have 
secrecy laws or, in some instances, don't have treaty 
obligations for exchange of information with us.
    Mr. LINDER. Three different groups, McKinsey was one, 
Boston Group was another and a third one I forget, but in 2005 
they estimated the size of the offshore economy in excess of 10 
trillion, growing by 800 billion a year. Does that sound real?
    Mr. EVERSON. I have seen large numbers like that, yes.
    Mr. LINDER. Why is that money offshore?
    Mr. EVERSON. I am not going to get drawn, sir, into a 
policy debate that gets over my head. There are a variety of 
factors in this. One is, there is no doubt, there are competing 
tax systems in the world, across the world. That is fine. You 
write a law that sets up a tax system in this country and if 
other countries do something different, there is a certain 
degree of competition for capital, if you will.
    The other thing that is in there, though, is a compliance 
issue where some might seek to get out from under the scrutiny 
of their host nations, if you will.
    Mr. LINDER. Do you get access to credit card information?
    Mr. EVERSON. The offshore credit cards, we do not routinely 
get that. We went through one initiative to look at that. I 
would not characterize it has having been particularly 
successful in terms of what we did learn through our offshore 
initiative.
    Mr. LINDER. If a high net worth individual had significant 
money offshore and had a debit card at that bank and just paid 
for everything they bought with that debit card, would you ever 
know that?
    Mr. EVERSON. We probably wouldn't unless we stumbled across 
it on an audit for some other reason that we were looking at, 
sir.
    Mr. LINDER. Thank you, Mr. Commissioner. Thank you, Mr. 
Chairman.
    Chairman LEWIS. Thank you very much.
    Now I turn to Mr. Pomeroy of South Dakota for questioning.
    Mr. POMEROY. Mr. Chairman----
    Chairman LEWIS. North Dakota.
    Mr. POMEROY. Thank you. One time, I was introduced as being 
from North Korea.
    It is a great pleasure, Mr. Chairman, to be with you on 
this panel.
    Chairman LEWIS. Thank you, Mr. Pomeroy, for being here.
    Mr. POMEROY. I appreciate it very much. I think the work of 
this Oversight Committee is so extremely important.
    Commissioner, it is great to see you again.
    I have been interested for some time in this whole business 
of e-filing and the unique joint venture with these private 
partners to try and expand e-filings. Now, our e-filing 
numbers, as good as they are, are not what we hoped they would 
be. Do you recall what the targets were for by this time?
    Mr. EVERSON. I believe when Congress led on this it was 
back in Revenue Service Restructuring and Reform At of 1988 
(RRA 98) (P.L. 105-206). The target that was established was to 
get to 80 percent by 2007. Also, it has been recognized, as I 
think you are inferring, for some time that this is not going 
to happen. The program has continued to grow, as you know, and 
it is growing again this year by several percentage points.
    Mr. POMEROY. It is absolutely fascinating. It is maybe the 
best way to watch the technological transformation of the 
United States of America. However, you have got this huge 
database of tax filers and preparation and submission of a tax 
return is fairly----
    Mr. EVERSON. It is a tremendous success, of which the 
Congress for setting that goal, I would suggest to you, and you 
were here, I wasn't, it was a guess. It was not an informed----
    Mr. POMEROY. There are a couple disappointments that I have 
relative to whether this free file alliance thing is something 
we need to continue as people do continue to progress in their 
own maturity in terms of accessing the IRS webpage and using 
information you make available, as you talk about.
    Mr. EVERSON. Yes.
    Mr. POMEROY. First of all, I know we used to, as part of 
the deal we struck with our private partners, we used to let 
them sell all kinds of stuff. I use the refund anticipation 
loan, which is the tax equivalent, in my view, of a payday 
loan, a bad value for the consumer in every instance, we used 
to allow the marketing of that right as part of the deal.
    Now that has been reduced somewhat. Can you tell me what--
--
    Mr. EVERSON. Yes. Happy to do that. The free file program 
never had a high takeup rate on the Refund Anticipation Loans 
(RALs). Let me be clear for the Committee, I think the RALs re 
predatory. I think they are extremely distasteful. However, the 
free file program had a low percentage of RALs. I think it was 
actually less than 1 percent.
    Nevertheless, we have expressed concern and they have 
dropped those this year altogether as well as any tie in to 
products. So, I believe most people would agree, it is a much 
cleaner program now, this filing season, sir, than it had been.
    Mr. POMEROY. I appreciate those changes. I think they are 
responsive to questions you have had in the Oversight Committee 
in the past. I appreciate it.
    There is a new one that I have discovered, not that I have 
discovered, I note the taxpayer advocates' comments on, and 
that is this business of providing e-file providers debt 
indicators on taxpayers for purposes of whether or not they 
might underwrite this refund anticipation loan.
    Mr. EVERSON. Yes.
    Mr. POMEROY. Now, if I understand it correctly, 
Commissioner, we are allowing confidential taxpayer information 
to be shared with e-file providers so that they can essentially 
write a zero risk loan that they price at predatory rates, as 
you and I acknowledge these things are predatory. Why in the 
world would we provide sensitive taxpayer information such as 
debt indicators to private businesses inquiring about 
taxpayers?
    Mr. EVERSON. Sure. This has been studied and we took a good 
look at it as to whether we ought to reverse ourselves on this. 
The group of people that looked at it decided that this 
actually is of more benefit to the taxpayers than not for two 
reasons. One, if you didn't have that information there, what 
it is basically doing is saying, if that loan, instead of the 
refund coming back to the taxpayer and being able to pay off 
that loan, if the taxpayer is unaware that there is going to be 
an offset, because when they file that return the and is going 
to take that $3,000 because they owe it to the, then that 
person is going to owe the $3,000 to the and still and also owe 
the money on the loan, so----
    Mr. POMEROY. Commissioner, Commissioner, Commissioner, you 
and I know how the financial markets work. It is just possible, 
if this is a noncreditworthy applicant for a loan, the ultimate 
person that is not going to get paid is the private entity, the 
e-file provider, the one that is charging the exorbitant, 
usurious interest.
    Mr. EVERSON. We were satisfied----
    Mr. POMEROY. You want to take them completely out of the 
risk. So, you basically allow the providing to e-file providers 
of sensitive, confidential taxpayer information so they can 
write a zero-risk loan for which they charge high interest.
    I don't know what group consulted you. Also, I will tell 
you what, I am mightily offended that confidential taxpayer 
information is provided to banks that are then charging high 
loans to taxpayers. This thing calls out for greater scrutiny. 
I think you have made a terrible call here.
    Mr. EVERSON. We were convinced, sir, also that the banks 
would just charge higher fees to absorb that bad loan cost, and 
that they would do that. So, that is the other reason.
    Mr. POMEROY. Well, I will tell you, I think that is really 
a shocking piece of news. I am really disturbed by it. I will 
look forward to working with you on it, Commissioner.
    I yield back.
    Chairman LEWIS. Thank you, Mr. Commissioner. Thank you, Mr. 
Pomeroy.
    Now I turn to Mr. Crowley of New York for questions.
    Mr. CROWLEY. Thank you, Mr. Chairman.
    Shift focus in the issue for just a moment. My question 
deals with the earned income tax credit.
    Mr. EVERSON. Yes, sir.
    Mr. CROWLEY. It is my understanding the IRS automatically 
scans every return and through that process, they pull out 
those that they think ought to qualify for the earned income 
tax credit and then notify the taxpayer with the appropriate 
forms that they would need to complete in order to get a return 
from the IRS and from the Federal Government. We appreciate 
that. I understand that process.
    From what I understand, and correct me if I am wrong, 
Commissioner, the taxpayer fills out the return and then 
returns them to the IRS. Many do not do that. Many do not go 
through that process who otherwise would qualify for them. 
However, those that do return them, do get a check back from 
the IRS, correct?
    Mr. EVERSON. Yes. I am not sure that the procedure you 
mention at the start is correct. New York is trying to do that. 
You may be thinking about a program they had in New York. Also, 
at a Federal level, I do not believe----
    Mr. CROWLEY. No, no, no. I am speaking about in terms of 
you write the letter to the taxpayer saying that you are 
qualified for the earned income tax credit?
    Mr. EVERSON. We have outreach programs. We have 12,000 
partnership locations around the country where they are doing 
active outreach.
    Mr. CROWLEY. I guess my question is, does the IRS ever 
notify the taxpayer that he or she is qualified for the earned 
income tax credit, possibly?
    Mr. EVERSON. I don't believe that we reach out directly in 
that regard. I will have to answer that for you for the record, 
sir.
    Yes, it is confirmed to me that is incorrect. We do not do 
that.
    Mr. CROWLEY. So, the Federal Government does not notify an 
individual----
    Mr. EVERSON. No. Also, there are many factors, sir, as to 
why you might or might not be eligible. You frankly wouldn't 
know whether you have a qualifying child or whatever else. You 
wouldn't want to mislead somebody on those series of issues. We 
don't do that on anything in the Code.
    Mr. CROWLEY. So, it is not true that you send--you do not 
send a letter to 500,000 to 700,000 people per year letting 
them know that they may be eligible for the earned income tax 
credit?
    Mr. EVERSON. Oh, well, previous filers, I gather. However, 
that is different from all the--I thought you were sort of 
referring to the larger population of individuals that may 
qualify but have never taken part in the program.
    Mr. CROWLEY. Okay. So, of those individuals, the half a 
million to three quarters of a million people that you send a 
letter to telling them that they are eligible for the earned 
income tax credit, many of them do not then follow through and 
request--fill out the form and then, through the form, receive 
their check, correct?
    Mr. EVERSON. Okay. It is a highly transient--there is a lot 
of turnover in that population for a whole host of reasons. One 
of them is the success of the program and people no longer 
qualifying.
    That is right, we are concerned because, while it is a very 
successful program with about an 80 percent participation rate, 
still 20 percent of the eligible people aren't claiming the 
credit.
    Mr. CROWLEY. Well, let me ask you this. Could the IRS in 
the first letter that you send out to those individuals ask 
about the past 3 years as well as that present year? In other 
words, if the individual knows that he or she may be eligible 3 
years and not just 1 year of a rebate or a check, why is it you 
don't do that?
    Mr. EVERSON. I don't know why. We will take a look at that, 
sir. I know again, the community partnerships, when they get 
somebody to apply and take the credit, they often go back and 
then try to determine was there eligibility for the 3 years, 
because then that $4,500 credit can become over $10,000. So, 
they try to do that.
    Mr. CROWLEY. The reason why I ask that is because, as you 
and I had a private discussion before, many of these people, 
all these people are working poor. They don't have the 
resources nor the time, necessarily. They are raising families, 
they are doing everything they can to put food on the plate. No 
one wants to walk away from money.
    There also is maybe an innate fear of the IRS and the 
Federal Government and all those other issues. Why is it that 
we can't work in a way--this is a great program, you and I have 
talked about it before. It is working for so many Americans in 
terms of an antipoverty program. However, still there are many. 
Look at my district alone, $55 million is left on the table.
    If I were to bring $55 million back to my district, I would 
be unbeatable. Yet, and what that could do to the economy of my 
district. I have a hardworking district, but $55 million that 
ought to be in the economy is not in the economy because people 
are not able to access the complexity of the form, the format, 
in terms of my constituents.
    Even the present Secretary of the Treasury said that the 
forms for filling out the application for the EITC is so 
complicated he couldn't even do it.
    Mr. EVERSON. I don't think he qualifies.
    Mr. CROWLEY. No, he doesn't. He doesn't qualify. However, 
he is the former head of Goldman Sachs, and he had difficulty 
filling it out.
    Mr. EVERSON. No, I agree.
    Mr. CROWLEY. So, there is something wrong here when there 
are eight definitions for a child. We are asking people who 
have a very incredibly difficult life to begin with to have to 
go through that process.
    Mr. EVERSON. Sir, this goes back to Ranking Member 
Ramstad's comments. Complexity beguiles success in this area, 
as in so many other areas of the Code. Simplification would be 
important here.
    Mr. CROWLEY. We would like to work with you, and the 
Chairman----
    Mr. EVERSON. We are devoted to doing better on this. It 
gets a lot of my personal time. The Secretary has got an 
interest. I will look forward to working with you directly on 
it.
    Mr. CROWLEY. Suggestions that we may make to help make this 
possible.
    Mr. EVERSON. Absolutely, sir.
    Mr. CROWLEY. Thank you.
    Chairman LEWIS. Thank you very much, Mr. Crowley, for your 
line of questions. With the Commissioner, it is something that 
we all can work on.
    Now, I recognize the gentleman from California, my 
classmate, Mr. Herger.
    Mr. HERGER. Thank you very much, Mr. Chairman. I 
appreciate, even though I don't serve on this Subcommittee, you 
allowing me to sit in. This is certainly a very important 
issue. No one wants to pay more taxes than they have to. Yet it 
does concern all of us if there are some out there who are 
cheating who aren't paying theirs that we get that in. The 
concern is there is this balance we have, that we aren't over-
inflicting pain on our taxpayers, but it is the medium we 
should have.
    Mr. Commissioner, last year, the Congress passed some 
legislation in a provision in section 511 that would require 
the, State and local and to withhold 3 percent of every payment 
made for goods or services. This would most likely apply to 
payments to government contractors as well as Medicare, farm 
disaster payments. Are you familiar with this?
    Mr. EVERSON. Yes, sir. We had a proposal, one of the five 
proposals we made touched on this area. The Congress went 
further with the withholding you are referring to than what the 
Administration had suggested.
    Mr. HERGER. Right. My concern is with how much further we 
went. Particularly with how it affects small businesses. Some 
small businesses, their profit margin isn't even maybe 3 
percent that is going to be withheld.
    My question to you, from the Governement's standpoint, the 
Federal Government, is the cost that would be involved and your 
ability to be able to implement this. This hasn't gone into 
effect yet. Hopefully we can make a change so it doesn't go 
into effect. Also, each payment that is withheld would generate 
an additional filing with the IRS. That is a great deal of 
paperwork.
    Does the IRS have the capability to match and credit all 
this additional data with the taxpayer identification numbers?
    Mr. EVERSON. We will have to improve our infrastructure to 
do that. With any change in the law, sir, it has a cost impact 
on the IRS, just to make sure that we update our systems. When 
you get to third party reporting or withholding of new 
provisions, we do have to work on that. So, there would be a 
cost, as there is with most provisions.
    Mr. HERGER. Can you tell us how large an investment? and 
Just an estimate, in the IRS infrastructure, like new computer 
systems or additional personnel would be required to fully 
implement this provision?
    Mr. EVERSON. I would have to get you an answer for the 
record. We do have some additional moneys that are provided in 
our budget for the accompanying legislative proposals this year 
in the tens of millions. It is not a huge amount of money. I 
don't have a specific figure for that statute. I will be happy 
to get it for you, sir.
    Mr. HERGER. Given the changes that would be required for 
the IRS, how difficult do you suppose it would be for State and 
local s to comply with these new requirements as well?
    Mr. EVERSON. I have not had any conversations with my 
counterparts at the State level. I have heard opposition to 
this, as you indicate, from small businesses. I have not heard 
that, any commentary from State officials.
    Mr. HERGER. Maybe some again, we have a couple years yet 
before this would be implemented. Some of them probably aren't 
aware yet.
    However, do you believe that this will result in more 
correct tax filing for companies that are unaware, uneducated 
about the laws, not attempting to cheat, but who just don't 
know better?
    Mr. EVERSON. As I indicated before, where there is third 
party reporting and withholding, you get much better 
compliance. That does happen. However, there is, as you are 
indicating, incremental burden.
    Mr. HERGER. Very good. Thank you very much.
    Thank you, Mr. Chairman.
    Chairman LEWIS. Thank you very much.
    Now I turn to Mr. Doggett for questions, Mr. Doggett of 
Texas.
    Mr. DOGGETT. Thank you, Mr. Chairman. Thank you, 
Commissioner, for your testimony this morning and for your 
courteous reply to my letter expressing concern about the way 
auditing is being handled of businesses.
    Mr. EVERSON. Yes, sir.
    Mr. DOGGETT. I would like to ask the Chairman to make my 
letter to you and your response of February 28 a part of the 
record. I think your comments there are important, I would like 
to just review some of that with you.
    I don't know if you have a copy, but I am going to quote 
directly from your letter.
    Chairman LEWIS. Without objection. It will be included in 
the record.
    [The information follows:]

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    Mr. EVERSON. I am familiar with this issue, as you know.
    Mr. DOGGETT. Yes, sir. We have talked about it previously 
on the Budget Committee.
    You indicate in your reply that one effect of the IRS 
restructuring and reform act 1998 is that ``corporate audit 
coverage declined by 2003 to less than half its 1997 levels.'' 
Or, in other words, at the time you got to the Service, the 
level of corporate audits had dropped by more than 50 percent 
since the passage of this act; is that correct?
    Mr. EVERSON. That is correct, sir. That was not unique to 
corporate audits. There was a broad-based decline in our 
enforcement activities.
    Mr. DOGGETT. You also stated in the letter that the 
managers and field staff at the Service ``were not addressing 
abusive tax shelters with sufficient vigor'' at the time you 
arrived there at the Service?
    Mr. EVERSON. I believe that, sir. I believe that the long 
time it has taken to issue regulations and then do audits and 
then go through the appeals process in the courts, this helped 
contribute to the confidence and the creation of these abusive 
shelters.
    Mr. DOGGETT. Of course, you certainly agree that if we, as 
you determined had occurred there, if we failed to vigorously 
address abusive corporate tax shelters, that simply adds to our 
soaring national debt and it means that much of the tax burden 
is shifted to the hardworking taxpayers, individual and 
business, that are playing by the rules and paying their fair 
share.
    Mr. EVERSON. Going after the corporations and the high-
income folks was job one for me over the last four years.
    Mr. DOGGETT. It also remains a high priority at the Service 
to address abusive tax shelters, does it not?
    Mr. EVERSON. I agree with you, sir.
    Mr. DOGGETT. Determining where to focus the limited 
resources that you have, I know, is important. Corporations, 
and you refer to the class of corporations with assets over 
$250 million in your letter to me, because they control about 
90 percent of all corporate assets and contribute about 87 
percent of all corporate income, it is important to ensure that 
those large corporations are paying their fair share of taxes 
and I believe, are they not, that they are more or less 
responsible for roughly three-fourths of the taxes that the 
auditors find in their audits are owed to the government?
    Mr. EVERSON. You mean the corporate----
    Mr. DOGGETT. The corporations----
    Mr. EVERSON. There is a very disproportionate piece. That 
is where the action is, yes, sir.
    Mr. DOGGETT. These corporations, of course, have the 
ability to hire the brightest and most creative people in their 
tax departments. I will tell you they also have demonstrated 
the ability to hire the best and brightest lobbyists and they 
have the most flush political action Committee in terms of 
influencing what we do here.
    You also note in your letter that the size of your work 
force for audits of these entities has remained flat. So, you 
are having to audit using audits of a shorter duration to try 
to stretch your work force to address these large corporations, 
are you not?
    Mr. EVERSON. I would say it is partially to get more 
coverage. Also, as I indicated, I do believe this is a case, 
and as Gladstone said, justice delayed is justice denied. I 
think it is in everybody's interest to get these things 
resolved.
    Mr. DOGGETT. Absolutely. If you have an audit that goes on 
forever, that is unfair to the taxpayer.
    Mr. EVERSON. Yes.
    Mr. DOGGETT. On the other hand, if you have a cut and run 
audit, where you leave prematurely and you don't do the audit 
thoroughly, it is unfair----
    Mr. EVERSON. I agree 100 percent with that.
    Mr. DOGGETT. It is also noteworthy that once you close one 
of these audits, if they are closed prematurely, they won't be 
reopened. They are done and closed while you are commissioner 
and for any future commissioner?
    Mr. EVERSON. That is correct.
    Mr. DOGGETT. In order to encourage performance from your 
managers and auditors that would return the maximum amount of 
money owed, is there any reason why the performance incentives 
cannot be based on the identification of new tax shelter scams 
or previously unidentified issues?
    Mr. EVERSON. It is probably illegal.
    Mr. DOGGETT. To focus on the issues, even though you are 
not evaluating based on revenue raised?
    Mr. EVERSON. There is a section of the law, section 1204, 
that says you cannot evaluate individuals based on enforcement 
results. It would take careful analysis as to where that would 
get you. However, you would be in a competition for Joe got 
shelter X which was worth a billion and Susie only got shelter 
Y, which was worth 80 million.
    Mr. DOGGETT. Are you familiar with the use of sweeps where 
agents with cases that have been in process for certain periods 
of time are told that those cases must be closed by a certain 
date, regardless of whether they have found all that's owed in 
a particular case?
    Mr. EVERSON. Not really. I have, again, given the directive 
that we work to reduce the cycle time and I believe we have 
made some--this hasn't been a dramatic change, a period of 
several months. Where we are really going to get faster, sir, 
is with the electronic filing now is really going to change 
things. However, management looks and if someone says, I have 
more to do, they have that discussion and then they make a 
decision.
    Mr. DOGGETT. So, sweeps do not happen and would be contrary 
to policy at IRS?
    Mr. EVERSON. I am not sure what a sweep is, and I would ask 
you to define that and I will get back to you for the record.
    Mr. DOGGETT. Is that a term that you have heard of before?
    Mr. EVERSON. No, it is not a term that I have heard of.
    Mr. DOGGETT. Has IRS used quotas or goals for revenue 
agents with regard to the number of cases that they are 
expected to close in a certain period of time.
    Mr. EVERSON. Not to my knowledge.
    Mr. DOGGETT. That also would be contrary to IRS policy?
    Mr. EVERSON. I would not want quotas to be used there. I do 
want serious conversations about how long we are working on 
this. One of the issues we have here is we have some employees 
who are upset now because we are enforcing standards where they 
need to rotate off an audit after an extended period of time, 
like 7 years. Some people don't want to do that.
    Mr. DOGGETT. I understand that there have been enough 
complaints about rotating them off before some of the auditors 
think it is appropriate to be rotated off, that a Deborah 
Nolan, who heads the division of businesses of 10 million and 
above, has set up a website for those auditors to forward their 
complaints?
    Mr. EVERSON. Yes, she and I are both very concerned about 
this. Also, I think that the employee engagement, the 
satisfaction with the programs generally in that area is high. 
There is clearly a small group of people that is dissatisfied 
with the very issues you are getting after.
    Mr. DOGGETT. Are those types of complaints that are coming 
in to that website with appropriate redaction something that 
you can forward to this Subcommittee if an appropriate request 
is made?
    Mr. EVERSON. I would be happy to keep you personally 
informed on this, sir.
    Mr. DOGGETT. The use of the limited issue focus 
examination, is that something that is being done currently in 
this area?
    Mr. EVERSON. It is. We have a variety of programs, sir. We 
have something called the Capital Access Programs (CAP) 
program, which is to work with large corporations to try and 
get--if we can identify issues and get the returns accepted as 
filed.
    Mr. DOGGETT. Specifically on what is called the Life 
program, it requires a risk assessment before it is 
implemented, doesn't it?
    Mr. EVERSON. It does. My understanding is the employees and 
the managers, the team that is working on this, they get 
together, they make the decision. It is not driven down from 
the top, look only at A, B and C. It is the team members, the 
auditors themselves, that make the choices.
    Mr. DOGGETT. Thank you, Mr. Chairman. I will have a few 
more questions in the next round.
    Chairman LEWIS. Thank you very much, Mr. Doggett.
    Thank you very much, Mr. Commissioner.
    I now recognize Mr. Tiberi from Ohio for questioning. You 
may have some extra time also.
    Mr. TIBERI. Thank you, Mr. Chairman.
    Mr. Commissioner, the last time you came to Congress, you 
were testifying before the budget Committee. You were nice 
enough to bring your daughter. I hope her experience wasn't too 
bad that you didn't bring her back this time.
    Mr. EVERSON. We had an argument last night, and I don't 
think she would have come if I had asked her today.
    Mr. TIBERI. Thank you for being here today. We really 
appreciate it.
    I was talking a couple weeks ago to a person I know back in 
central Ohio who has been doing taxes for 30 years for 
individuals and small businessowners. She has a Certified 
Public Accountant (CPA), she has a tax background in law, so 
she is a tax lawyer as well. She was lamenting to me about how, 
over the last 30 years, we in Congress have made it so much 
more complicated for regular individuals to do their own taxes. 
It is gotten to the point where she, as a tax lawyer and CPA, 
has to constantly reeducate herself for her client base. So, 
while we have maybe helped her and her profession, in terms of 
being more in need of them, she doesn't believe we have helped 
make it any simpler for Americans to file their taxes.
    In relation to that, she was telling me how--I don't know 
if you have heard this before--how we have also made it more 
difficult for people like her in doing taxes, in terms of the 
responsibility that goes along with a CPA and a tax lawyer, in 
certifying a client's taxes. At the same time, agencies that 
have cropped up on the outside who are doing people's taxes may 
not be a CPA, may not be a tax lawyer, and don't have the same 
sort of responsibility to have the tax return of their clients 
done in an ethical manner.
    Is there something that we can do here in Congress to make 
sure that playingfield is level while we talk about this tax 
gap?
    Mr. EVERSON. Sure. This has been the subject of a fair 
amount of discussion, just last year in fact, should there be 
regulation more broadly of preparers. I have been reluctant to 
embrace that at this stage because of our capability to 
administer it, should it happen. I do believe that where people 
are unscrupulous, instead of if someone is making an error 
because they don't understand it, they are providing a lower 
level of service, that is one thing. Perhaps through education 
and testing you would do better. However, I would worry where 
people are unscrupulous, they would say, I have this prepared, 
now you just sign it and they won't show up as a preparer at 
all. So, the idea that this would get after fraud, I don't 
think it would.
    Mr. TIBERI. Thank you. Do you think that there, obviously 
not today but over the next several years, that we as 
policymakers, from what you have seen, can get back to where we 
were 30 years ago, in terms of my dad with a sixth grade 
education, who was a laborer and is retired today, could do his 
taxes like he did 30 years ago, because it was a lot simpler? 
Our Tax Code was a lot simpler. Instead of him having to go 
hire an accountant to do his taxes? That that would help solve 
this tax gap as well? Plus the cost to Americans to find a 
preparer to do their taxes? If we simplified our Tax Code, 
would that help?
    Mr. EVERSON. I am a strong advocate of simplification of 
the Code. What I say, sir, is that complexity obscures 
understanding. The taxpayer who seeks to comply can be confused 
and finally raise their hands and say, why bother. Or the 
taxpayer who seeks to avoid or evade taxes can use complexity 
as well. So, I think simplification would be a good thing.
    The other point I would make to you, sir, is this is a hard 
issue. We have a representative democracy and your 
constituents, they asked you to do your best to get them a 
slightly separate deal from Mr. Lewis's constituents in 
Georgia, and that is the nub of this. That is the competition 
between good policy, simplification, and a representative 
democracy.
    Mr. TIBERI. So, when we talk about the tax gap, this friend 
of mine who has been doing taxes for a long time, she believes 
that much of that--comment on this--much of that comes from 
small businesses, entrepreneurs, individuals who don't realize 
maybe that they are not paying as much as they should be 
paying. Can you comment on your thoughts of where that gap 
might be?
    Mr. EVERSON. The biggest piece of the tax gap--there are 
three components. There is the area out at the left, less than 
10 percent, that is nonfiling. The area out at the right is 
underpayment. Over 80 percent of the tax gap is in 
underreporting of income, mostly by individuals.
    When you get down within that, there is a lot that is 
associated with small businesses. There is no doubt confusion. 
I would suggest to you, sir, that the biggest component of that 
is understatement of revenues. I have got to tell you, this 
comes down to the fact that there is no third party reporting 
on the revenues. What is so hard to understand if you have 
100,000 in revenues that you have to report 100,000 in 
revenues? That is not necessarily a confusion issue.
    There are a lot of things in the code that are a confusion 
issue, though.
    Mr. TIBERI. Talking again about the tax gap, the tax 
collection program by private tax collectors, are there other 
agencies in the Federal Government that use private tax 
collectors to your knowledge?
    Mr. EVERSON. There are a number of other agencies. The 
Financial Management Service (FMS), part of Treasury, also 
education loans, they use private debt collectors. Over 40 
States use private collectors for elements of their tax 
collection program.
    Mr. TIBERI. Do you believe that without these private 
collectors that you would have taken in less money last year?
    Mr. EVERSON. Yes, sir. We are now successfully implementing 
that program. We brought in I think about $12 million so far. 
It will increase over time.
    As I have indicated in questioning before, this is work we 
could not get to, even if you wanted to throw money at us in 
the next few years, we just couldn't have the capacity to hire 
and train all the people to do the work.
    Mr. TIBERI. Last question, Mr. Chairman. Thanks for your 
indulgence.
    Do you believe since you have been at the IRS that private 
collectors have helped close that tax gap?
    Mr. EVERSON. This is a new program. It has not yet 
generated significant returns. It is--Senator Grassley has 
called it a pilot. I think it is very much in the wait and see 
mode.
    Mr. TIBERI. Thank you. Thank you, Mr. Chairman.
    Chairman LEWIS. Thank you very much.
    Now I turn to Ms. Tubbs Jones for questions, Ms. Tubbs 
Jones of Ohio. You may have some extra time for being so 
patient.
    Ms. TUBBS JONES. Thank you, Mr. Chairman, Mr. Ranking 
Member.
    Before I get started, I would like to have the students 
from Cuyahoga Community College Metro Eastern and Western 
Campus to stand up. Stand up, ladies and gentlemen. Meet the 
Chairman of the Subcommittee on Oversight, Ways and Means, 
Congressman John Lewis from Georgia, the Ranking Member, Mr. 
Ramstad, and meet the IRS commissioner, Mr. Everson.
    Thank you, ladies and gentlemen.
    Chairman LEWIS. Welcome. We are delighted, very happy and 
very pleased to have you here, seeing how the and works.
    Ms. TUBBS JONES. I'm sorry, Mr. Doggett, as well as my 
friend, Mr. Pomeroy, all my colleagues. Mr. Tiberi from Ohio.
    Mr. EVERSON. Just give me your name and Social Security 
number when you're leaving.
    Ms. TUBBS JONES. Actually, my students wanted to ask you to 
make sure that you did additional tax collection so that you 
can assure them that there will be greater dollars available 
from the and dollars for Pell grants. Is that what you asked me 
to do, students?
    Thanks very much. You can be seated.
    I am very happy to have them here and participating in the 
process. My first question for you, first of all is to say good 
morning. Secondly, to ask you are any of the tax collection 
agencies or private firms that you hire African American, 
Hispanic or any minority?
    Mr. EVERSON. Well, are you saying are they minority owned 
businesses under----
    Ms. TUBBS JONES. Yes, yes.
    Mr. EVERSON. I don't believe they are. I don't have a 
definitive answer to that question. They were selected in a 
competitive procurement process that recognizes all the various 
factors and we ended up with who we ended up with.
    Ms. TUBBS JONES. I am not sure what those factors are. I 
would hope that in the process of granting these contracts, 
that there would be access and opportunity for minority 
business firms.
    Mr. EVERSON. I am sure there was.
    Ms. TUBBS JONES. Check for me, please, and get back with 
me----
    Mr. EVERSON. What I am saying, in this area we follow the 
law scrupulously and apply it and those are written into 
procurement standards.
    Ms. TUBBS JONES. I hear you, Mr. Commissioner. I used to be 
an Equal Employment Opportunity Commission (EEOC) trial lawyer. 
As a trial lawyer, sometimes the law on its face appears to be 
neutral but in its implementation, it is discriminatory. So, 
all I am asking you to do is take a look at it and make sure 
that minorities have access to that opportunity.
    Mr. EVERSON. Certainly.
    Ms. TUBBS JONES. In addition to which, it may be that 
minority contractors could help you do a better job at 
collection of these resources, depending on who they are 
dealing with. That has come to fruition in a lot of other 
areas.
    Mr. EVERSON. Absolutely, ma'am. In fact, I would note if 
you are unaware of this, Senator Nelson has spoken about trying 
to get the disabled veterans to help do some of this work too.
    Ms. TUBBS JONES. Okay. Next subject. The new piece on the 
horizon this year is in fact the telephone excise tax refund 
that many people are eligible for but a number of them have not 
applied for. I do have a press release from the IRS where you 
have suggested that people make sure they apply or include this 
in their tax return. Can you tell me what the result of that 
has been? What else you've done other than a press release to 
make the American people aware that they are entitled to a 
telephone excise tax refund?
    Mr. EVERSON. Yes, ma'am. This has been a surprise to us. 
The claim rate, if you will, has been fairly consistent over 
the course of the filing season, about 30 percent or right 
around 30 percent are not claiming that. Some people would not 
be eligible but he's a dependent of mine, so I got my 60 
dollars, including Leonard's, the impact of Leonard. So, some 
of that was to be expected. We think it is running higher.
    From the start, we worked with the software providers and 
everybody else to make sure that they tried to recognize this 
opportunity. We're surprised that even going through on some of 
the different routines that they've got that people will skip 
over the question because last year it wasn't there, it is only 
going to be there this year, as you know, as a one-time item, 
and they just seem to be ignoring it. Let alone the folks who 
do a paper return and they've done it the way year after year. 
We've worked with all those people and we've tried to publicize 
it as much as we can, ma'am.
    Ms. TUBBS JONES. I would encourage you to make sure you--by 
you, not just you personally but the IRS take a look at 
opportunities for savings for low-income Americans like the 
earned income tax credit and like this one-time telephone 
credit. For people who are in low-income areas, $60 is like $60 
million at the upper echelon. The earned income tax credit is a 
significant opportunity for those people to have the chance to 
gain some of those dollars back.
    So, I would encourage you specifically to come up with ways 
in which we can jointly, the Congress and the IRS, get out to 
the people access to that.
    Mr. EVERSON. I agree with you. We work very closely with 
partnerships. We have 12,000 volunteer sites around the country 
to try and do that. We want to keep growing that program for 
all the reasons you suggest.
    Ms. TUBBS JONES. Lastly, on the telephone excise tax, are 
you also finding people who are trying to abuse the refund by 
claim their whole phone bill in the process?
    Mr. EVERSON. Yes, ma'am. In fact, we were very aggressive 
about this in the initial weeks. We saw a pattern of returns. 
We had criminal investigators going to seven different 
practitioners around the country with search warrants and get 
after it right away, because we wanted to make sure that people 
understood. We had some individuals claiming in excess of 
$10,000. You have to have a pretty big phone bill to get that 
amount of credit.
    Ms. TUBBS JONES. I would like to thank you for your 
testimony, Mr. Commissioner. My colleagues, if any of you have 
time, we are going to be in the Ways and Means library. Stop 
back and say hi to some of the finest students in this and from 
Cuyahoga Community College. Thank you very much.
    Mr. EVERSON. Thank you. Nice to see you again.
    Chairman LEWIS. Thank you very much, Mr. Commissioner.
    Mr. Commissioner, how would the proposed budget for the new 
year for the IRS, it is $11 billion, how would the IRS use an 
additional one million dollars?
    Mr. EVERSON. An extra one million dollars?
    Chairman LEWIS. If you had another one million dollars, how 
would you use it? It's not much money when you look at $11 
billion.
    Mr. EVERSON. Not much money. I think that would be 
swallowed up, sir, by the many contingencies that occur over 
the course of a year. We--a couple years ago, we got a very 
modest increase. We had a lot of different proposals we had 
made. In that instance, I elected to use it all in our tax 
exempt and governmental entities unit. You try to make balanced 
decisions. That was in an area that was, I felt, suffering from 
under funding. However, I would--I would make the decision at 
the time, depending on how we had done overall in the budget.
    Chairman LEWIS. Thank you, Commissioner.
    I now turn to the ranking Member, Mr. Ramstad, for 
questions.
    Mr. RAMSTAD. Thank you, Mr. Chairman. Commissioner, thanks 
for being so generous with your time. I will be brief.
    I just wanted to follow up on Mr. Pascrell's question and 
concern that ``only 75 cents on the dollar in the private debt 
collection program is returned to the Treasury.''
    Since the IRS would not be able to work these cases, as you 
testified, for a number of years, and at dramatically increased 
staffing levels, isn't it better to collect 75 cents on the 
dollar rather than zero cents on the dollar?
    Mr. EVERSON. Well, I spent most of my career, sir, in the 
private sector. A program that pays out and gets back to break 
even after just 2 years and then generates that kind of return 
is an easy investment decision, yes.
    Mr. RAMSTAD. Isn't it true that much of this tax debt 
literally becomes uncollectible because of the statute of 
limitations?
    Mr. EVERSON. Well, the statute goes out a long time. 
However, the truth is, with debt, the longer you wait, the 
harder it is to get it.
    Mr. RAMSTAD. Just another question. Mr. Pomeroy raised the 
issue of the free file program, albeit in another context. I 
want to ask you whether the new $50,000 income cap is 
contributing to the decline in the free file program?
    Mr. EVERSON. That program has been at that level for the 
last couple of years. We are seeing--the program started out 
much lower this year. It was down 15 percent in the initial 
weeks. It is now running ahead of last year. Filing season to 
date, it is about 5 percent down year over year. I am a little 
bit surprised by this. I expect at this point, it will end up 
at about the same level as next year. May even surpass it, but 
just modestly.
    Mr. RAMSTAD. So, no causal relationship with the $50,000 
cap?
    Mr. EVERSON. I don't think so. I think that that has been 
in effect for 2 years now, it is my understanding. I think that 
there was a lot of support for this and hype of it in the first 
year or two. There is a little less attention to it now.
    Mr. RAMSTAD. Thank you again, Commissioner. Mr. Chairman, I 
yield back.
    Chairman LEWIS. Thank you, Mr. Ranking Member.
    I now turn to Mr. Pomeroy of North Dakota for questioning.
    Mr. POMEROY. Thank you. Mr. Commissioner, I want to come 
back to this whole free file business, e-file business and the 
providers we work with. First of all, I am still a little 
hacked off about slapping the $52,000 cap on there, referencing 
the preceding question. It seemed to me we have a program going 
along and then suddenly you have these private partners saying, 
wait a minute, wait a minute, these are--we can charge for part 
of this group and with the Service's full complicity, you slap 
a $50,000 cap on there and a lot of people that might have 
otherwise used it are now not able to use it for free. On the 
other hand, the free file alliance gets to concentrate on the 
group that might be most susceptible to the refund anticipation 
loan business.
    This whole thing, Commissioner, I think you have the 
highest standards of integrity, professionalism, wonderful 
background, a great organization leader. However, there are 
things about these relationships with these free file folks and 
the refund anticipation loans that look badly for the Service.
    Mr. EVERSON. Sir, let me be perfectly clear here. Free file 
does not include RALs this year. That is knocked out.
    Mr. POMEROY. I think that that is virtuous. I am glad about 
that.
    Also, there are other things still swirling about here that 
just don't look good. First of all, I think substantively this 
business of providing confidential taxpayer information to 
private sector entities, that is just bad. It is just 
inappropriate for the Service. It is a unique departure from 
anything else the Service does relative to confidentiality and 
I am surprised you went down that road.
    Also, beyond that, that was the last series of questions. 
What would you think about a group that basically used as a 
domain name like IRS.com to try and interact with the public? 
Do you think that IRS.com is an appropriate domain name to be 
privately available?
    Mr. EVERSON. I am not going to comment on what an 
enterprise--it is not my area of oversight. I think it is 
unfortunate, I would say. Obviously, anything that causes 
confusion.
    Let me start over again, the tax code, complying with your 
civic obligation to pay your taxes is complicated enough and 
there are enough folks out there who are misleading and trying 
to take advantage of folks. We don't need additional confusion 
or susceptibility to wrong things from things like that.
    Mr. POMEROY. Right. Now, even though we have a taxpayer 
advocate within the Service, I trust and I hope that you in the 
commissioner's spot think that taxpayer advocacy in terms of 
simplicity of complying and this kind of thing, is a big part 
of what your job is.
    So, IRS.com, and you were reluctant to express an opinion 
on it. I'm not reluctant. I think that that is a deliberate 
attempt to confuse the public, to basically use, again, market 
opportunity on a domain name that reflects a very important 
government agency. Also, as commissioner, you didn't have an 
opinion on it, I'm surprised. I have a strong opinion on it.
    Mr. EVERSON. I don't know exactly what they do. 
Furthermore, I don't like anything that causes confusion. 
Basically I am taking a pass, because it is not my area of 
oversight.
    Mr. POMEROY. Well, what they do is they make tax loans 
available. They are a RAL provider, they are lender, at these 
exorbitant, usurious rates. In fact, they got a breakout of 
their rates, as probably required by law. Estimated Annual 
Percentage Rate (APR), the interest rate, 93 percent. Unless 
you have a loan above $3,000 and then it drops down to 82 
percent interest rate. They are using the name IRS.com.
    Now, as unfortunate as that is, this IRS.com links to a 
group called Tax Act and they advertise themselves as a free 
and online tax preparation service. So, IRS.com is basically 
just a domain name they use to get people in that think they 
are writing to you while they are writing to this private 
entity that files them then to Tax Act. Bad business. That 
would really bother me.
    In addition, beyond that, commissioner, on your own 
webpage, IRS.gov, you have these free file alliance companies 
and you have Tax Act listed right on your own webpage. So, you 
have IRS.com and IRS.gov referring to the same Tax Act.
    Mr. EVERSON. Is Tax Act, are they part of the Free File 
Alliance? Is that it?
    Mr. POMEROY. Yes, sir.
    Mr. EVERSON. I see.
    Mr. POMEROY. If I had a private partner conducting 
themselves like that, that private partner and I would be 
parting ways. I am going to be very interested in watching what 
the Service does relative to this kind of activity by one of 
your Free File Alliance partners.
    Mr. EVERSON. I will make sure we take a look at it, sir.
    Mr. POMEROY. Thank you.
    Chairman LEWIS. Thank you very much, Mr. Pomeroy, for your 
line of questioning.
    I now recognize the gentleman from Texas, Mr. Doggett.
    Mr. DOGGETT. Thank you. Commissioner, when IRS reviews are 
short cycled, at the conclusion of the audit, do you have an 
exit procedure where the auditor can note how much money he or 
she thinks has been left on the table or at least what 
questionable issues or practices were left unattended to?
    Mr. EVERSON. I am unfamiliar with our procedures at that 
level of operations, sir. I will get an answer for you for the 
record.
    Mr. DOGGETT. Do you think that would be a good idea to know 
what your auditors believe they are leaving behind?
    Mr. EVERSON. I would want to reflect carefully before 
answering that question.
    Mr. DOGGETT. That is fair enough.
    Mr. EVERSON. Since you can get people to overstate or 
understate. There could be an inference that an individual has 
done something when we haven't felt that it is serious enough 
to proceed. It could be problematic.
    Mr. DOGGETT. Is there information currently posted on the 
internal IRS website calling for cycle times to be cut in half 
during the next year?
    Mr. EVERSON. I do not know the answer to that question. I 
would be surprised. Cycle times cut in half over a 1-year 
period would be quite significant.
    Mr. DOGGETT. You would be surprised if that is an 
objective?
    Mr. EVERSON. I would be surprised. I could be wrong. I 
would say to you, again, I have emphasized we need to reduce 
cycle times. I have also said, sir, they will change, things 
will change dramatically with the introduction which we have 
made of electronic filing which will change the whole audit 
process. That, too, is going to generate controversy for some 
employees who are resistant to change, as you can imagine.
    Mr. DOGGETT. Well, are managers and their performance 
evaluated? Is one of the factors how many cases have been 
closed?
    Mr. EVERSON. I do not know whether numbers like that are 
actually considered. Obviously one case, when you are talking 
about big corporations, can be very different from another 
case. So, I would be surprised if that was the instance, was 
the fact. I am not sure, again, that you could look at that in 
the context of section 1204 and make that stick legally.
    Mr. DOGGETT. I am encouraged by your answers to my previous 
set of questions about what IRS policy is. I contrast that with 
the reports that at least one e-mail message from Audit Quality 
Assurance to some of the auditors said, ``We must have 10 cases 
a piece closed by 3/7/2007. You must keep me informed and make 
me aware immediately if you will have any problems meeting this 
goal. The goal translates into two cases per week.''
    That is contrary to the policy that you said was the IRS 
policy?
    Mr. EVERSON. I am not sure it is, sir. Because my 
understanding is that that was an e-mail exchange between 
people who were doing a quality review, not the audit itself. 
That is a very different thing to say, we need to keep making 
sure we get our job done assessing the quality and getting at 
the very issues that you are getting at. So, I don't think 
those were, as it was reported to me this morning, that was not 
about an auditor per se.
    Mr. DOGGETT. So, that e-mail and your analysis of what it 
was or wasn't is something you can again respond to us and 
follow up.
    Mr. EVERSON. Yes. Certainly.
    Mr. DOGGETT. The same with regard to the report that one of 
your directors for audits of telecommunications technology 
companies chastised subordinates for not closing the audits 
quickly enough?
    Mr. EVERSON. I will certainly get back to you, sir on that, 
and take a look at it.
    Mr. DOGGETT. Thank you. I think overall we will be 
interested in looking at the training materials and the 
evaluation criteria to ensure that IRS does not have a catch 
and release program, that not only releases people, releases 
corporations on these other issues, but doesn't even measure 
the size of the fish. That is my concern. As I look at the 
overall data and the impact that that policy can have, you 
referred to the fact that you have more coverage this year than 
you did, more coverage in 2006 than you did when you arrived 
there in 2003.
    Mr. EVERSON. Yes, sir.
    Mr. DOGGETT. You actually have a decline in coverage for 
large corporations from fiscal year 2005 to 2006. If you 
compare it going back to 1997, you have a rather significant 
decline in coverage on large corporation audits over a 10-year 
period, don't you?
    Mr. EVERSON. You are probably right in that statistic 
because, as I indicated before, you had a very broad-based 
decline in enforcement activities. Over 25 percent of our 
revenue agents were drawn down over a period of years. Now we 
are bringing that back.
    Mr. DOGGETT. So, we have not gotten back to the 1997 level?
    Mr. EVERSON. Not in the corporate area. If you look at 
certain areas like the levies, we have gotten back. In the 
corporate area, we have brought it back over the last few 
years, as I have indicated, though.
    Mr. DOGGETT. My concern, sir, is that again overall, 
looking at this tax gap question, and this is my final query, 
Mr. Chairman, there have been estimates that the tax gap is as 
much as $300 billion a year. You testified to the Senate Budget 
Committee last year that we could get between $50 billion and 
$100 billion ``without changing the dynamic between the IRS and 
the people.''--yet the 16 proposals to which you refer are 
estimated by, I guess, OMB to raise only 29 billion over 10 
years.
    So, it is a very small portion of the tax gap, a very small 
portion of what you estimated could be raised to close the tax 
gap that is being addressed in these legislative proposals.
    Mr. EVERSON. Let me make two points, sir. First, I 
appreciate your keen interest in this area of corporate 
compliance. It is a top priority of mine. I look forward to a 
continuing dialog on it. We are doing our level best to improve 
the compliance here. I think there are some indications, as we 
said in the Budget Committee, that there are improvements.
    On overall progress in the tax gap, I would, as I indicated 
before Chairman Spratt's Committee, we have made some progress 
with ramping up the enforcement and the indirect effect there. 
I believe that the Administration's proposals, both on the 
funding side for the IRS and in these 16 proposals are 
significant. A relatively modest amount of money, you are 
correct. I think that they have generated a fair amount of heat 
already. I would like to see us as a group, the Congress and 
the Administration, get these done and then we will take a look 
beyond them. However, each time you do more, you get into this 
burden question that was addressed a few minutes ago.
    Mr. DOGGETT. Thank you, Mr. Chairman. Thank you, 
Commissioner. My concern is that, while we are waiting, 
billions of dollars are being lost to the Treasury which have 
to be made up some other way. To assure that what is happening 
in practice, with these frontline auditors, is consistent with 
what you have told us is IRS policy. Thank you very much.
    Mr. EVERSON. Thank you for your interest, sir.
    Chairman LEWIS. Thank you very much.
    I now turn to Mr. Tiberi of Ohio for questioning.
    Mr. TIBERI. Thank you, Mr. Chairman.
    One last question, Commissioner, and you may not be able to 
answer it and you may have to get back to me, which is fine. In 
the Administration's fiscal year 2008 budget request before 
Congress, they propose granting authority to the Department of 
the Treasury to promulgate rules requiring organizations that 
process credit cards for merchants who accept credit card 
payments to report to the IRS gross reimbursement payments made 
to those merchants.
    My question is, how did we go in the Administration's 
fiscal year 2007 budget from a figure of 225 million collected 
from that program to nearly 11 billion, with a B, which is a 
pretty big jump even by Washington standards, in the 2008 
budget?
    Mr. EVERSON. I will have to get back to you for the record 
on that. As was indicated before, my team doesn't make 
estimates of what are the revenue impacts on any of the 
legislative proposals. That is done, and I think appropriately 
so, independently by the Treasury Department. Generally and it 
goes back to Congressman Doggett's question. I think that those 
estimates, from my point of view, are somewhat conservative.
    However, I don't want to comment on any discrepancy between 
figures 1 year and the next.
    Mr. TIBERI. I appreciate that. It is just that the numbers 
really stood out in terms of 225 million to nearly 11 billion.
    Mr. EVERSON. One may be over a period of time. I am not 
sure.
    Mr. TIBERI. Both are over 10 years.
    Mr. EVERSON. They are?
    Mr. TIBERI. Both are over 10 years. So, there is a 
significant difference.
    Mr. EVERSON. Well, I think we will do well if we get that 
proposal done. So, I think there is real money there. I would 
like to see us get it done.
    Mr. TIBERI. Thank you.
    Chairman LEWIS. Well, let me take this moment to thank the 
ranking Member and all Members of the Committee for being 
present and for participating in this hearing.
    Mr. Commissioner, I want to thank you for your time, you 
gave us a lot of time, and for your testimony. We look forward 
to continuing to work with you. We wish you well during this 
tax filing season.
    There being no other business coming before the Committee, 
the Committee is now adjourned.

    [Whereupon, at 11:42 a.m., the hearing was adjourned.]

    [Questions submitted by the Members to the witness follow:]

            Question Submitted by Mr. Tanner to Mr. Everson

    Question: Our nation's fiscal house is a mess, and the entitlement 
nightmare is fast approaching. But before we even consider asking the 
American taxpayer to reach further into their pocket to help restore 
our fiscal discipline, we have got to find out how this government is 
spending the money it already receives and figure out how to best 
retrieve the money it is owed. The annual tax gap is estimated to be 
about $350 billion. The President has put forward some ideas on how to 
reduce the gap, and we are certain to see both the Senate and the House 
present their own plans on how to close this gap. But I would like to 
know what the IRS is doing today to reduce this obscene number. Under 
the current approach, what will the tax gap look like in 5 years?

    Answer: The IRS' long-term goal is to increase the Voluntary 
Compliance Rate (VCR) to 86% by tax year 2009 and Senate Finance 
Committee Chairman Max Baucus has asked for a 90 percent voluntary 
compliance goal by 2017. However, even with a constant VCR, the tax gap 
grows over time to the extent tax liabilities grow over time.
    On August 2, 2007, the IRS released the report ``Reducing the 
Federal Tax Gap: A Report on Improving Voluntary Compliance,'' 
outlining steps that the IRS will take to increase voluntary compliance 
and reduce the tax gap. One of the primary challenges that the IRS 
faces in improving compliance is to get a better understanding of the 
current sources of noncompliance by improving research in this area. 
The IRS has taken significant steps in this direction, most importantly 
through the National Research Program (NRP), which is the source of 
updated estimates of compliance among individual taxpayers for Tax Year 
2001.
    The IRS does not have annual estimates of overall compliance. 
However, based on the limited information available, compliance rates 
appear to have remained relatively stable at around 85 percent for 
decades. To make a meaningful improvement in this number without a 
fundamental change in the relationship between taxpayers and the 
government will require a long-term, focused effort. Implementation of 
the steps outlined in this document and in the Administration's Fiscal 
Year (FY) 2008 Budget request for the IRS will be subject to the 
uncertainties associated with the annual budget process. Moreover, it 
must be recognized that the causes of noncompliance are numerous and 
that only a portion of the tax gap results from intentional avoidance 
or evasion of the law. An equally or perhaps more important part of the 
problem lies in the growing complexity of the tax laws, which will 
continue to frustrate efforts to improve compliance. The Administration 
is committed to working with Congress and other stakeholders to reduce 
the tax gap. The Administration's FY 2008 Budget request includes $11.1 
billion for the IRS, a 4.7-percent increase over the budget enacted for 
FY 2007. A total of $410 million is for new enforcement initiatives as 
part of a strategy to improve compliance by:

      Increasing frontline enforcement resources;
      Increasing voluntary compliance through improved taxpayer 
service options and enhanced research;
      Investing in technology to reverse infrastructure 
deterioration, accelerate modernization, and improve the productivity 
of existing resources; and
      Implementing legislative and regulatory changes.

                                 

    [Submissions for the Record follow:]

   Statement of Colleen M. Kelley, National Treasury Employees Union

    Chairman Lewis, Ranking Member Ramstad, and distinguished members 
of the Subcommittee, I would like to thank you for allowing me to 
provide comments on IRS operations and the tax gap. As President of the 
National Treasury Employees Union (NTEU), I have the honor of 
representing over 150,000 federal workers in 30 agencies men and women 
at the IRS.
    Mr. Chairman, the National Treasury Employees Union has serious 
concerns about a number of IRS policies that we believe are undermining 
the agency's ability to fulfill its tax enforcement mission as well as 
hampering efforts to close the tax gap. These include ongoing staff 
cuts of some of the IRS's most productive employees, reliance on 
outside contractors to handle inherently governmental activities such 
as the collection of taxes, and a shift in philosophy which focuses 
enforcement efforts too much on wage earners and not enough on high-
income individuals and large businesses and corporations.
Tax Gap
    In April 2006, the IRS released updated estimates showing that the 
tax gap was approximately $345 billion in Tax Year 2001. As Nina Olson, 
the National Taxpayer Advocate noted, this amounts to a per-taxpayer 
``surtax'' of some $2,000 per year to subsidize noncompliance. And 
while the agency has made small inroads and the overall compliance rate 
through the voluntary compliance system remains high, much more can and 
should be done. NTEU believes that in order to close the tax gap, the 
IRS needs additional employees on the frontlines of tax compliance and 
customer service. In addition, we believe Congress should establish a 
dedicated funding stream to provide adequate resources for those 
employees.
    History has shown that the IRS has the expertise to improve 
taxpayer compliance but lacks the necessary personnel and resources. 
The President's own fiscal 2008 budget proposal trumpets the increased 
tax collections produced by IRS's own employees and cites the increased 
collections of delinquent tax debt from $34 billion in 2002 to $49 
billion in 2006, an increase of 44 percent. Unfortunately, instead of 
providing additional resources to hire more enforcement staff, IRS 
personnel resources have been slashed in recent years resulting in a 
36% decline in combined collection and examination function enforcement 
staff between 1996 and 2003. In addition, these staffing cuts have come 
at a time when the IRS workload has dramatically increased.
    According to IRS's own annual reports and data, taxpayers filed 
114.6 million returns in 1995. After a steady annual climb, eleven 
years later, the Service saw more than 132 million returns filed. In 
addition, between 1997 and 2005, the number of individual tax returns 
with $100,000 in reported income, which are generally more complex 
returns, increased by more than 52 percent. Yet, between 1995 and 2003, 
total numbers of employees shrunk from 114,000 to 94,000. Even more 
alarming is that during that period, revenue officers and revenue 
agents--two groups critical to reducing the tax gap--shrunk by 40 and 
30 percent respectively. Revenue officers who collect large delinquent 
accounts went from 8,139 to 5,004 and revenue agents who do audits fell 
from 16,078 to 11,513. Unfortunately, instead of reversing this trend, 
the IRS has continued efforts to reduce its workforce and has moved 
forward with downsizing in several different areas which have targeted 
some of the service's most productive employees.
    These include last year's re-organization of the Estate and Gift 
Tax Program which sought the elimination of 157 of the agency's 345 
estate and gift tax attorneys--almost half of the agency's estate tax 
lawyers--who audit some of the wealthiest Americans.  The Service 
pursued this drastic course of action despite internal data showing 
that estate and gift attorneys are among the most productive 
enforcement personnel at the IRS, collecting $2,200 in taxes for each 
hour of work.
    The IRS decision to drastically reduce the number of attorneys in 
the estate and gift tax area flies in the face of several reports made 
to Congress by Treasury and IRS officials over the past few years, 
indicating that tax evasion and cheating among the highest-income 
Americans is a serious and growing problem. In fact, an IRS study found 
that in 1999, more than 80 percent of the 1,651 tax returns reporting 
gifts of $1 million or more that were audited that year understated the 
value of the gift. The study found that the average understatement was 
about $303,000, on which about $167,000 in additional gift taxes was 
due. This alone cost the government about $275 million. Consequently, 
it is difficult to understand why the IRS sought the elimination of key 
workforce positions in an area that could produce significant revenue 
to the general treasury.
    In addition, the Service continues to move forward with its plan to 
close five of its ten paper tax return submission facilities by 2011. 
The IRS originally sought the closings of the five paper return 
submission centers due to the rise in the use of electronic filing (e-
filing) and in order to comply with the IRS Restructuring and Reform 
Act of 1998 (RRA 98) which established a goal for the IRS to have 80 
percent of Federal tax and information returns filed electronically by 
2007. But in their recent report to Congress on e-filing, the IRS 
Oversight Board noted that the IRS will fall well short of the 80 
percent goal and urged Congress to extend the deadline to 2012. The 
report noted that in 2006 just 54 percent of individuals e-filed their 
returns, well short of the 80 percent goal. Furthermore, the report 
cited a decline in 2006 in the number of e-file returns received from 
individual taxpayers who self-prepared their taxes. And finally a 
recent GAO report on the 2006 filing season noted the year over year 
percentage growth in individual e-filing slowed to a level lower than 
any of the previous three years
    While overall use of e-filing may be on the rise, the number of 
taxpayers opting to use this type of return is not increasing as 
rapidly as the IRS had originally projected. Combined with the fact 
that almost a third of American taxpayers do not even have internet 
access and changes to the IRS Free File Program that are expected to 
increase the number of paper filing returns, it is clear that paper 
submission processing facilities are still necessary and that serious 
thought and consideration must be given before any additional closings 
are undertaken.
    Mr. Chairman, it is clear that drastic reductions in some of the 
agency's most productive tax law enforcement employees has undermined 
agency efforts to close the tax gap and directly contradicts the 
Service's stated enforcement priority to discourage and deter non-
compliance, particularly among high-income individuals.
NTEU Staffing Proposal
    In order to address the staffing shortage at the IRS and combat the 
tax gap, NTEU supports a two percent annual net increase in staffing 
(roughly 1,885 positions per year) over a five-year period to gradually 
rebuild the depleted IRS workforce to pre-1998 levels. A similar idea 
was proposed by former IRS Commissioner Charles Rossotti in a 2002 
report to the IRS Oversight Board. In the report, Rossotti quantified 
the workload gap in non-compliance, that is, the number of cases that 
should have been, but could not be acted upon because of resource 
limitations. Rossotti pointed out that in the area of known tax debts, 
assigning additional employees to collection work could bring in 
roughly $30 for every $1 spent. The Rossotti report recognized the 
importance of increased IRS staffing noting that due to the continued 
growth in IRS' workload (averaging about 1.5 to 2.0 percent per year) 
and the large accumulated increase in work that should be done but 
could not be, even aggressive productivity growth could not possibly 
close the compliance gap. Rossotti also recognized that for this 
approach to work, the budget must provide for a net increase in 
staffing on a sustained yearly basis and not take a ``one time 
approach.''
    Although this would require a substantial financial commitment, the 
potential for increasing revenues, enhancing compliance and shrinking 
the tax gap makes it very sound budget policy. One option for funding a 
new staffing initiative would be to allow the IRS to hire personnel 
off-budget, or outside of the ordinary budget process. This is not 
unprecedented. In fact, Congress took exactly the same approach to 
funding in 1994 when Congress provided funding for the Administration's 
IRS Tax Compliance Initiative which sought the addition of 5,000 
compliance positions for the IRS. The initiative was expected to 
generate in excess of $9 billion in new revenue over five years while 
spending only about $2 billion during the same period. Because of the 
initiative's potential to dramatically increase federal revenue, 
spending for the positions was not considered in calculating 
appropriations that must come within annual caps.
    A second option for providing funding to hire additional IRS 
personnel outside the ordinary budget process could be to allow IRS to 
retain a small portion of the revenue it collects. The statute that 
gives the IRS the authority to use private collection companies to 
collect taxes allows 25 percent of collected revenue to be returned to 
the companies as payment, thereby circumventing the appropriations 
process altogether. Clearly, there is nothing magical about revenues 
collected by private collection companies. If those revenues can be 
dedicated directly to contract payments, there is no reason some small 
portion of other revenues collected by the IRS could not be dedicated 
to funding additional staff positions to strengthen enforcement.
    While NTEU agrees with IRS' stated goal of enhancing tax compliance 
and enforcement, we don't agree with the approach of sacrificing 
taxpayer service in order to pay for additional compliance efforts. 
NTEU believes providing quality services to taxpayers is an important 
part of any overall strategy to improve compliance and that reducing 
the number of employees dedicated to assisting taxpayers meet their 
obligations would only serve to exacerbate, not shrink, the tax gap. 
The Administration's own budget proposal for 2008 notes that in FY 
2006, IRS' customer assistance centers answered almost 33 million 
assistor telephone calls and met the 82 percent level of service goal, 
with an accuracy rate of 91 percent for tax law questions. In addition, 
a recent study commissioned by the Oversight Board found that more than 
80 percent of taxpayers contacted said that IRS service was better than 
or equal to service from other government agencies. And while these 
numbers show that IRS taxpayer services are being effective, more can 
and should be done.
    Mr. Chairman, in order to continue to make improvements in taxpayer 
services while simultaneously processing a growing number of tax 
returns and stabilizing collections and examinations of cases, it is 
imperative to reverse the severe cuts in IRS staffing levels and begin 
providing adequate resources to meet these challenges. With the future 
workload expected to continue to rise, the IRS will be under a great 
deal of pressure to improve customer service standards while 
simultaneously enforcing the nation's tax laws. NTEU strongly believes 
that providing additional staffing resources would permit IRS to meet 
the rising workload level, stabilize and strengthen tax compliance and 
customer service programs and allow the Service to address the tax gap 
in a serious and meaningful way.
Private Tax Collection
    Mr. Chairman, as stated previously, if provided the necessary 
resources, IRS employees have the expertise and knowledge to ensure 
taxpayers are complying with their tax obligations. That is why NTEU 
continues to strongly oppose the Administration's private tax 
collection program, which began in September of last year. Under the 
program, the IRS is permitted to hire private sector tax collectors to 
collect delinquent tax debt from taxpayers and pay them a bounty of up 
to 25 percent of the money they collect. NTEU believes this misguided 
proposal is a waste of taxpayer's dollars, invites overly aggressive 
collection techniques, jeopardizes the financial privacy of American 
taxpayers and may ultimately serve to undermine efforts to close the 
tax gap.
    NTEU strongly believes the collection of taxes is an inherently 
governmental function that should be restricted to properly trained and 
proficient IRS personnel. When supported with the tools and resources 
they need to do their jobs, there is no one who is more reliable and 
who can do the work of the IRS better than IRS employees.
    As you may know, under current contracts, private collection firms 
are eligible to retain 21% to 24% of what they collect, depending on 
the size of the case. In testimony before Congress, the IRS 
Commissioner, Mark Everson, has twice acknowledged that using private 
collection companies to collect federal taxes will be more expensive 
than having the IRS do the work itself. The Commissioner's admission 
directly contradicts one the Administration's central justifications 
for using private collection agencies--that the use of private 
collectors is cost efficient and effective.
    In addition to being fiscally unsound, the idea of allowing private 
collection agencies to collect tax debt on a commission basis also 
flies in the face of the tenets of the IRS Restructuring and Reform Act 
of 1998. Section 1204 of the law specifically prevents employees or 
supervisors at the IRS from being evaluated on the amount of 
collections they bring in. But now, the IRS has agreed to pay private 
collection agencies out of their tax collection proceeds, which will 
clearly encourage overly aggressive tax collection techniques, the 
exact dynamic the 1998 law sought to avoid. Furthermore, the IRS is 
turning over tax collection responsibilities to an industry that has a 
long record of abuse. For example, in 2005 (the latest year statistics 
are available), the Federal Trade Commission received 66,627 consumer 
complaints about debt collection agencies--giving debt collectors the 
impressive title of the FTC's most complained-about industry.
    NTEU believes that a better option would be to provide the IRS with 
the resources and staffing it needs. There is no doubt that IRS 
employees are--by far--the most reliable, cost-effective means for 
collecting federal income taxes. As noted previously, the IRS 
Commissioner himself has admitted that using IRS employees to collect 
unpaid tax debts is more efficient than using private collectors. In 
addition, the 2002 budget report submitted to the IRS Oversight Board, 
former Commissioner Charles Rossotti made clear that with more 
resources to increase IRS staffing, the IRS would be able to close the 
compliance gap.
    This is not the first time the IRS has tried this flawed program. 
Two pilot projects were authorized by Congress to test private 
collection of tax debt for 1996 and 1997. The 1996 pilot was so 
unsuccessful it was cancelled after 12 months, despite the fact it was 
authorized and scheduled to operate for two years. A subsequent review 
by the IRS Office of Inspector General found that contractors 
participating in the pilot programs regularly violated the Fair Debt 
Collection Practices Act, did not adequately protect the security of 
personal taxpayer information, and even failed to bring in a net 
increase in revenue. In fact, a 1997 GAO report found that private 
companies did not bring in anywhere near the dollars projected, and the 
pilot caused a $17 million net loss.
    Despite IRS assurances that it has learned from its past mistakes, 
two recent reports indicate otherwise. A March 2004 report by the 
Treasury Inspector General for Tax Administration raised a number of 
questions about IRS' contract administration and oversight of 
contractors. The report found that ``a contractor's employees committed 
numerous security violations that placed IRS equipment and taxpayer 
data at risk'' and in some cases, ``contractors blatantly circumvented 
IRS policies and procedures even when security personnel identified 
inappropriate practices.'' (TIGTA Audit #200320010). The proliferation 
of security breaches at a number of government agencies that put 
personal information at risk further argue against this proposal. These 
security breaches illustrate not only the risks associated with 
collecting and disseminating large amounts of electronic personal 
information, but the risk of harm or injury to consumers from identity 
theft crimes.
    In addition, a September 2006 examination of the IRS private 
collection program by the Government Accountability Office (GAO) 
reveals that like the 1996 pilot, the program may actually lose money 
by the scheduled conclusion of the program's initial phase in December 
2007. The report cited preliminary IRS data showing that the agency 
expects to collect as little as $56 million through the end of 2007, 
while initial program costs are expected to surpass $61 million. What's 
more, the projected costs do not even include the 21-24 percent 
commission fees paid to the collection agencies directly from the taxes 
they collect.
    In addition to the direct costs of the program, I am greatly 
concerned about the potential negative effect that the private tax 
collection program will have on our tax administration system. In her 
recent report to Congress, the National Taxpayer Advocate voiced 
similar concern about the unintended consequences of privatizing tax 
collection. Olson cited a number of ``hidden costs'' that private tax 
collection has on the tax system including reduced transparency of IRS 
tax collection operations, inconsistent treatment for similarly 
situated taxpayers, and reduced tax compliance. Clearly the negative 
effects of contracting out tax collection to private collectors hampers 
the agency's ability to improve taxpayer compliance and will only serve 
to undermine future efforts to close the tax gap.
    NTEU is not alone in its opposition to the IRS' plan. Similar 
proposals allowing private collection agencies to collect taxes on a 
commission basis have been around for a long time and have consistently 
been opposed by both parties. In fact, the Reagan Administration 
strongly opposed the concept of privatizing tax collections warning of 
a considerable adverse public reaction to such a plan, and emphasizing 
the importance of not compromising the integrity of the tax system. 
(Treasury Dept. Statement to House Judiciary Comm. 8/8/86). More 
recently, opposition to the private tax collection program has been 
voiced by a growing number of members of Congress, major public 
interest groups, tax experts, as well as the Taxpayer Advocacy Panel, a 
volunteer federal advisory group--whose members are appointed by the 
IRS and the Treasury Department. In addition, the National Taxpayer 
Advocate, an independent official within the IRS recently identified 
the IRS private tax collection initiative as one of the most serious 
problems facing taxpayers and called on Congress to immediately repeal 
the IRS' authority to outsource tax collection work to private debt 
collectors ( National Taxpayer Advocate 2006 Report to Congress).
    Instead of rushing to privatize tax collection functions which 
jeopardizes taxpayer information, reduces potential revenue for the 
federal government and undermine efforts to close the tax gap, the IRS 
should increase compliance staffing levels at the IRS to ensure that 
the collection of taxes is restricted to properly trained and 
proficient IRS personnel.
    Mr. Chairman, NTEU believes that frontline IRS employees are the 
best defense against an increasing U.S. tax gap. Unfortunately, the 
Administration has not requested the funding necessary to close the tax 
gap. Congress must, therefore, act to provide IRS with the necessary 
staffing and a dedicated funding stream to support those additional 
workers.

IRS Audits of High-Income Individuals and Large Businesses and 
        Corporations
    Mr. Chairman, I would also like to briefly discuss IRS enforcement 
efforts with regard to   high-income individuals and large businesses 
and corporations. I previously noted the drastic staff reductions in 
the estate and gift tax division that occurred last year and will 
obviously hamper the Service's ability to achieve greater compliance 
from the wealthiest Americans. In addition, recent IRS data shows that 
IRS audits of high-income individuals have dropped dramatically over 
the past decade. The audit rate for face-to-face audits fell from 2.9 
percent of high-income tax filers in FY 1992 to 0.38 percent in FY 2001 
and then drifted down to 0.35 percent in FY 2004. While the audit rate 
has rebounded somewhat in the last two years, it is still far below the 
level of the mid-1990's. These facts seem to directly contradict claims 
by the IRS that the Service's first enforcement priority is to 
discourage and deter non-compliance, with an emphasis on high-income 
individuals.
    We are seeing similar troubling trends with respect to large 
corporations. While this issue has just started receiving public 
attention in recent weeks, it has long been of concern to IRS employees 
that believe recent IRS currency and cycle time initiatives are 
resulting in the premature closing of audits of large companies, 
possibly leaving hundreds of millions of dollars of taxes owed on the 
table. IRS data shows the thoroughness of IRS enforcement efforts for 
the nation's largest corporations--measured by the number of hours 
devoted to each audit--has substantially declined since FY 2002. IRS 
data also show that the annual audit rates for these corporations, all 
with assets of $250 million or more, while increasing in FY 2004 and 
2005, receded in 2006 to about the level it was in 2002 and is much 
lower than levels that prevailed a decade or more ago.
    Although the number of the largest corporations is small, they are 
a very significant presence in the American economy. In FY 2002, the 
largest corporations were responsible for almost 75 percent of all 
additional taxes the IRS auditors said were owed the government. By 
comparison, low and middle income taxpayers in the same year were 
responsible for less than 10 percent of the total.
    Agency data shows that audit attention given those corporations 
with $250 million or more in assets has substantially declined in the 
last five years. In 2002, an average of 1,210 hours were devoted to 
each of the audits of the corporations in this category. The time 
devoted to each audit dropped sharply in 2004 and by 2006 the number of 
hours per audit remained 20% below what it was in 2002.
    But what may be most disturbing is that according to IRS' own data, 
while the coverage rate of large corporation returns( identified as 
those with assets of $10 million and higher) increased in FY 2004 and 
2005, the number of audits for these corporations actually decreased in 
2006. Clearly, the rationale the IRS is using to justify a reduction in 
time and scope of large corporation audits, that is, to allow for 
expanding the total number of companies audited is not working.
    IRS officials have continued to point to a rise in additional tax 
recommended for each hour of audit as a sign that the policy is 
working, but most auditors know that this rise can be primarily 
attributed to the proliferation of illegal tax shelters which makes it 
easier to find additional taxes due.
    Warnings about the potential negative consequences of such policy 
decisions were made by a number of IRS employees in a recent New York 
Times article and are not new. In fact, when the IRS first began 
limiting the time and scope of business audits through implementation 
of the Limited Issue Focused Examination (LIFE) process in 2002, the 
former chief counsel of the IRS said that the IRS' proposed reductions 
in cycle time of corporate audits would ``virtually guarantee that IRS 
auditors would miss tax dodges, fail to explore suspicious 
transactions, or even walk away from audits that are on the verge of 
finding wrongdoing.''
    In addition, IRS employees have raised concerns about this shift in 
approach to the auditing of business tax returns since its 
implementation several years ago. Their concerns are multi-fold. 
Primarily, employees' feel that their experience and professional 
judgment is being ignored when the scope of audits is limited and cycle 
times are reduced. Revenue agents need flexibility to determine the 
scope of an audit and need the ability to expand the examination time 
when necessary. The men and women of the IRS that perform these audits 
are highly experienced employees who know which issues to examine and 
when more time is necessary on a case. But under current IRS policies, 
this is just not the case.
    Mr. Chairman, we have heard directly from a number of our members 
about the detrimental effect this policy has had not just on efforts to 
ensure corporations are in full compliance, but also how this misguided 
policy is damaging employee morale. In one instance, an IRS agent with 
29 years of experience, including 19 as an international specialist 
examining tax returns of large, multinational corporations was given an 
unreasonably short period of time to examine three tax years of a very 
large company. The agent reported being constantly harassed for 
refusing to further limit the scope of the examination beyond that 
which was set at the beginning of the audit, even though he had 
successfully completed two prior examinations of the same taxpayer in a 
timely manner. The employee knew the issues and how to examine them but 
also knew they would need more than the allotted time to complete his 
part of the examination. But, despite past successes, management 
refused to provide the employee with additional time to complete his 
portion of the audit and labeled the employee as uncooperative and not 
a ``team player.'' Although the employee refused to compromise, he 
believed that other members of the examination team had been pressured 
into dropping issues which likely would have resulted in additional 
tax.
    Mr. Chairman, in the face of a rising tax gap and exploding federal 
deficits, it is imperative that the agency is provided with the 
necessary resources to allow IRS professionals to pursue each and every 
dollar of the taxes owed by large businesses and corporations. Allowing 
these corporations to pay just a fraction of what they owe in taxes 
greatly hinders efforts to close the tax gap and is fundamentally 
unfair to the millions of ordinary taxpayers that dutifully pay their 
taxes. Only by increasing the overall number of IRS employees that do 
this work can the Service ensure that businesses and large corporations 
are complying with their tax obligations and that the tax gap is being 
closed.

IRS Budget
    Mr. Chairman, the final issue that I would like to discuss is the 
Administration's FY '08 budget request for the IRS. As you know, the 
IRS budget forms the foundation for what the IRS can provide to 
taxpayers in terms of customer service and how the agency can address 
the ever-increasing tax gap through enforcement. Without an adequate 
budget, the IRS cannot expect continued improvement in customer service 
performance ratings and will be hampered in its effort to shrink the 
tax gap. I would like to applaud the Administration for acknowledging 
in its FY-08 Budget in Brief (page 65) that ``assisting the public to 
understand their tax reporting and payment obligations is the 
cornerstone of taxpayer compliance and is vital for maintaining public 
confidence in the tax system.'' However, I was disappointed in the 
Administration for failing to request a budget for FY '08 that meets 
the needs of the Agency to fulfill its customer service and enforcement 
challenges as well as to address closing the tax gap in a meaningful 
way.
    Although it's widely recognized that additional funding for 
enforcement provides a great return on the investment, the 
Administration seems reluctant to request an adequate budget for the 
IRS. In addition, despite citing a lack of resources as the primary 
rationale for contracting out a number of inherently governmental 
activities, such as the collection of taxes, the Commissioner of the 
IRS has told Congress that the IRS does not need any additional funding 
above the President' budget request.
    NTEU believes that Congress must provide the IRS with a budget that 
will allow the Service to replenish the depleted workforce, 
particularly with respect to enforcement personnel. And while it is 
imperative that Congress provide the IRS with sufficient staffing 
resources, we also believe that the IRS can look at the management to 
bargaining unit employee ratio to find additional resources for 
increased frontline tax compliance efforts. As noted previously, while 
the number of employees at the IRS has decreased by almost 20,000 since 
1995, the number of managers who supervise these employees has 
increased over this same period. If the IRS decreased the number of 
managers and management officials at the same rate as it has decreased 
its rank and file employees, the Agency could put the savings toward 
bolstering enforcement staff which would clearly aid efforts to close 
the tax gap. While the IRS has previously cited concerns about the 
number of employees that would have to be taken offline to train 
additional frontline employees, we believe this training could be done 
with minimal disruption to current operations. One possibility would be 
to use the increasing number of managers and management officials to do 
the training. This would ensure that these employees are afforded the 
best possible training while allowing current operations to continue to 
run efficiently.

                                 

                                Electronic Transactions Association
                                                      April 3, 2007
Honorable John Lewis
Committee on Ways and Means, Subcommittee on Oversight
U.S. House of Representatives
1102 Longworth House Office Building
Washington, D.C. 20515

Dear Representative Lewis:

    The Electronic Transaction Association\1\ (``ETA'') is pleased to 
submit our comments to the Subcommittee on Oversight regarding the 
Hearing on Internal Revenue Service Operations and the Tax Gap. 
Specifically, ETA would like to address a proposal in President Bush's 
FY2008 Federal Budget for the U.S. Department of Treasury that would 
require merchant acquiring banks to report aggregate credit/debit card 
reimbursements made to merchants.
---------------------------------------------------------------------------
    \1\ ETA, founded in 1990, is the nation's oldest and largest 
organization of businesses representing the merchant acquiring industry 
that enables merchants to offer electronic payment services to 
consumers. With over 500 member companies, ETA's diverse membership, 
including state/federal chartered financial institutions, merchant 
service providers (also know as independent sales organizations), and 
credit card companies, is part of the backbone of the American economy 
that facilitates electronic payments.
---------------------------------------------------------------------------
ETA Position
    ETA strongly recommends that the Subcommittee consider the effects 
this new reporting requirement would have on merchant acquiring banks, 
small businesses, and individual consumers. While ETA supports efforts 
to ensure greater tax compliance, the merchant acquirer reporting 
proposal as stated is vague and could lead to misleading information 
being provided to the IRS. Moreover, the estimates provided by Treasury 
(approx. $10 billion over 10 years) are unsubstantiated and likely 
significantly overstated. In order for this proposal to provide 
actionable information to the IRS for compliance purposes, ETA believes 
it would require an exhaustive amount of information that would be a 
significant burden on the merchant acquiring payment industry. The 
increased costs of complying with these burdensome reporting 
requirements would be born by consumers.
The Proposal/Background
    In the FY2008 Federal Budget, the President has proposed requiring 
merchant acquiring banks to report to the IRS annually on aggregate 
credit and debit card reimbursement payments made to businesses. A 
similar proposal existed in the FY2007 Federal Budget; however no 
action was taken in the last Congress. The purpose of requiring this 
reporting is based on the belief that small businesses are 
underreporting their income for a variety of reasons, including tax 
avoidance and lack of understanding related to the tax law. It has been 
proposed that by requiring merchant acquiring banks to provide reports 
on payments to merchants, the IRS could compare actual reported credit 
and debit card sales with reported tax filings, thereby allowing the 
IRS to extrapolate what a business' cash transaction income should be. 
If the reported income on tax returns is not as it should be, the IRS 
would conceivably be able to target audit resources at those businesses 
that appear to have underreported.

Reporting Requirements Unfair to Small Businesses and Merchant 
        Acquiring Banks
    The rapid growth of credit, debit, and stored value card use as a 
percentage of sales will constantly and materially change as the shift 
in consumer payment preferences evolve. This evolution--along with 
consumer payment preferences that vary significantly by business type, 
region and other factors--reduce the reliability of card transactions 
alone as a measure of business total sales. ETA believes that the 
burden that this reporting requirement would place on merchant 
acquiring banks, as well as small businesses, will vastly outweigh any 
benefits gained from such reports. Furthermore, as this would be a 
system of guessing, it is ripe for abuse. With thousands of businesses 
currently operating in the U.S., it is not practical to expect that the 
IRS could become an expert on the spending habits of individuals and 
businesses.
    While ETA supports increased compliance by small businesses when 
filing their tax returns, it is not a simple process for merchant 
acquiring banks to send the credit and debit reimbursement information 
to the IRS that would be meaningful. For example, there are cash back 
options on purchases; returns/chargebacks; tips/merchandise on a single 
transaction; redemption of gift cards purchased in one tax season and 
redeemed in another; retained merchant fees (e.g., terminal rental, 
custom services, etc); and many more such examples that illustrate why 
a single aggregate number may provide misleading information. 
Implementing a reporting system that would provide useful information 
to the IRS would cost merchant acquiring banks millions of dollars and 
countless hours to gather information for an effort that is 
fundamentally flawed.
    In addition, most merchant banks would likely be required to rely 
on third parties, such as payment processors and other third party 
service providers to provide information that the IRS wants. This 
proposal will have far reaching efforts and unintended consequences.

Source of Budget Estimates Unclear
    The uncertainty over the benefits of this reporting requirement is 
most evident in the Federal budget proposals from FY2007 and FY2008. In 
the FY2007 report, the Treasury estimated that the reporting 
requirement would help generate $9 million in 2007, $92 million during 
the years 2007-2011, and $225 million during the years 2007-2016. In 
contrast, the FY2008 report stated that the reporting requirement would 
help generate $113 million in 2008, $3.3 billion during the years 2008-
2012, and $10.8 billion during the years 2008-2017. Both the FY2007 and 
FY2008 report are based on data gathered from the 2001 tax year, and 
there is no explanation for how the proposed revenue estimate jumped 
astronomically from 2007 to 2008.

Disincentive for Small Merchants to Accept Credit and Debit Cards
    ETA believes that the proposed merchant acquirer reporting 
requirement may have the unintended consequence of driving away 
traditional cash-based merchants from accepting payment cards. The 
proposal would punish the vast majority of small businesses that are in 
compliance with reporting because of the indiscretions of those few 
that underreport. Those few dishonest small businesses that knowingly 
underreport may choose not to accept payment cards in the future when 
it is known that credit and debit card expenditures are reported to the 
IRS and any misrepresentation could be revealed upon review. Therefore, 
this approach would only increase the costs associated with credit and 
debit card usage without identifying any additional taxable income that 
would not have already been reported.
    Finally, the increased costs of compliance for merchant acquiring 
banks will be passed on to the merchants and eventually borne by 
consumers in the form of higher prices for goods and services.

Conclusion
    ETA requests that the Subcommittee undertake a critical evaluation 
of the proposed merchant acquiring bank reporting requirement. ETA 
believes that as proposed, the reporting requirement would: (1) provide 
potentially misleading information to the IRS; (2) create a costly new 
reporting requirement that would increase consumer prices; and (3) 
drive small businesses away from accepting payment cards.
    The ETA stands ready to assist the Subcommittee as it considers 
this proposal. Should you have any questions or need additional 
information, please contact Rob Drozdowski of my staff at (202) 828-
2635 or [email protected].
            Sincerely,
                                                      Carla Balakgi
                                                 Executive Director

                                 
           Statement of Gerald E. Scorse, New York, New York

    Taxes on long-term capital gains are at their lowest level in over 
70 years. Should we be celebrating? Not to my mind, and I hope to win 
you over to my point of view. First a brief preface: President Bush has 
dubbed himself The Decider, and he most definitely is. Far away, about 
as far from deciding as a person could possibly get, I've dubbed myself 
a fact-finder.
    Nobody can find all the facts so I had to pick a category and I 
chose taxes. Within the category I opted to focus on tax fairness for 
ordinary Americans.
    This is the fifth year in which I've filed written testimony on a 
tax fairness issue, and I greatly appreciate these opportunities. It's 
a wonderful country where a plain fact-finder gets to present his 
arguments directly to the lawmakers.
    With that I invite you to read ``The Spurious, Curious Case for Low 
Taxes on Capital Gains'' plus an addendum. The addendum includes 
important, related points which would have slowed down the article 
itself.
     Once you have read all the material, I further invite you to draw 
your own conclusions based on (what else) the facts.
The Spurious, Curious Case for Low Capital Gains Taxes
    These are heady times for backers of low taxes on capital gains. 
Presidents Clinton and Bush both cut the capital gains rate, bringing 
the current levy on long-term gains down to 15%. That's the lowest in 
more than 70 years, ``gloriously low'' in the words of economist Ben 
Stein, and it means that profits on stock market transactions are now 
taxed at a lower rate than the wages of average Americans.
    There's no good reason for this preferential treatment, and 
powerful reasons to end it. Leading the list is the simple fact that 
stock market ``investors'' are almost never real investors in the first 
place.
    The argument for a low rate on capital gains is invariable (and in 
recent years, invariably effective): it holds that investments in the 
stock market grow jobs, grow businesses, and provide vital fuel for the 
United States economy. Partly as inducement and partly in gratitude, 
the argument goes, it behooves government to reward investors with low 
capital gains taxes.
    A potent blend of myth, propaganda and misimpressions. Let's look 
instead at some truths.
    It's routine on Wall Street these days for trading volume to run in 
the billions of shares. On any given day, only a tiny fraction of those 
billions has any valid claim to growing jobs or businesses or the 
economy. On many days not a single share qualifies as a bona fide 
investment.
    Almost all the time, all that's happening is money changing hands 
as shares move from sellers to buyers. Not a cent goes to the companies 
whose shares are traded. No jobs are created (except in the financial 
community, which is not the point here). No businesses are expanded. 
Investments are really being made not in the economy but in personal 
portfolios.
    The only genuine stock market investments are those in initial 
public offerings (IPOs) and secondary offerings. In those cases alone 
does the money move on to do the work it's purported to do. All the 
rest is aftermarket noise as the players place their bets at the tables 
down on Wall Street.
    Securities markets clearly play an energizing role in the American 
economy. All the same it's nonsense to claim that buyers of stocks 
deserve a tax break when they sell their shares at a profit. A tax 
break? For making money in the market?Now for more reasons why this is 
poor policy.
    There's a fairness issue that flows from taxing one kind of income 
differently from another. Income is income and should be taxed at the 
same rates no matter where it comes from; what's good for the goose is 
good for the gander.
    There's the issue of income inequality, which has soared in America 
lately. According to the David Cay Johnston book Perfectly Legal, the 
top one percent of taxpayers controls about half the nation's financial 
assets. Two-thirds of the income of the 400 highest-income Americans 
comes from long-term capital gains. Undeniably, the benefits of tax 
breaks for capital gains flow overwhelmingly to the already-wealthy; 
undeniably, preferential rates on capital gains exacerbate income 
inequality.
    Finally there's a tax equity issue which our forebears even 
considered a moral issue. In 1924 Congress first differentiated between 
earned income (wages and salaries) and unearned income (e.g., capital 
gains and dividends), and taxed the unearned income at higher rates. It 
was deemed the right thing to do; old-timers would have shuddered at 
the notion of taxing wages at higher rates than capital gains.
    Those were the days. Now it's 2007.
    Under the trumped-up cover of spurring economic growth, average 
American workers have to pay higher taxes on their wages than if they 
made the same amount of money in the stock market. They're getting 
stiffed by carrying a heavier relative tax burden, getting fewer 
services or some of both.
    The latest capital gains tax cut is set to expire in 2010, and the 
new Democratic Congress has indicated that it has no plans to visit the 
issue until after the 2008 elections. This gives them plenty of time to 
look beyond the propaganda, and to consider taxing capital gains at 
least as much as earned income. A political pipedream? It was the rule 
not long ago: from 1988 to 1992, long-term realized gains were 
essentially taxed at the same rate as other income.
    Then the K Street apostles went forth and preached, and the 
spurious case became gospel.
SOURCES
    Johnston, David Cay. Perfectly Legal (New York: The Penguin Group, 
2003), pp. 16-17, p. 310
    Stein, Ben. ``It's a Great Country, Especially if You're Rich,'' 
Sunday Business, The New York Times, February 11, 2007
    Weisman, Steven. The Great Tax Wars (New York: Simon and Schuster, 
2002), p. 351

ADDENDUM
(1) A Way to Pay for Repeal of the Alternative Minimum Tax
    The Congress could look at restoring equal taxes on ordinary income 
and capital gains as a way to fund repeal of the AMT.
    It will immediately be objected (by Republicans and likely some 
Democrats), no doubt at high decibel levels, that this is a tax 
increase, and that the increase will have a chilling effect on 
investments. Let's go straight to these arguments, starting with the 
``tax increase'':
    Millions of Americans for whom the AMT was never intended are 
already paying a tax increase because of the AMT. In 2006 about 20 
million taxpayers qualified for the AMT and about 3.5 million actually 
paid it (the difference between those numbers being those who were 
spared by the latest of Congress's AMT patches).
    But the patches have become increasingly expensive as millions more 
cross into AMT territory. Estimates are that 30 million taxpayers will 
qualify by 2010 and 60 million within a decade. According to a news 
article in The New York Times on March 14, a two-year freeze currently 
being considered by Congress would cost $200 billion.
    There's an idiom for Congress's handling of the AMT: ``kicking the 
can down the road.'' The kicking has to stop sometime.
    This is a choice you have: continue a tax increase that was never 
intended, or let expire a tax decrease that should never have been 
enacted.
    (Regarding the Iraq War, Senator Hagel admonished his fellow 
senators that they were in politics to make the hard choices. Do the 
Senator's words also apply to the choice between continuing the AMT or 
annulling the capital gains tax cuts? Only you can decide.)
    Now to the supposed ill effects on investments of the increase in 
capital gains taxes:
    If it wishes, Congress could in fact continue the favorable 
taxation of capital gains on shares purchased in initial public 
offerings (IPOs) or secondary offerings. Current technology would make 
it a simple matter to identify and track these shares for tax purposes.
    It might also be argued that investors need no extra tax incentive: 
the profit motive is alive and well, and can be counted on to operate 
even when the tax on capital gains is the same as the tax on earned 
income.
(2) Average Americans' Capital Gains Are Taxed as Ordinary Income
    One defense of low taxes on capital gains is the notion that 
stockholding has become commonplace in America: everybody owns stocks, 
so everybody benefits.
The argument contains an ounce of truth and a pound of deceit.
    Stock ownership by average Americans has surely risen in recent 
years, most particularly since the government's creation of tax-
deferred retirement accounts in 1974. The number and type of such 
accounts has increased continually as Congress has approved (and the 
financial community has created) new ways for workers to save for 
retirement.
    But workers and their families have run into strong headwinds. U.S. 
employment has undergone a structural shift away from higher-paying, 
higher-benefit jobs in manufacturing and toward lower-paying, lower-
benefit jobs in the service sector. Defined-benefit pension plans, once 
the norm, have steadily given way to defined-contribution plans. The 
new plans carry no guarantees and essentially amount to cuts in 
retirement benefits.
    Moreover, despite incentives such as tax deductions, tax deferral, 
and matching contributions by employers, the percentage of workers 
enrolling in retirement plans has not lived up to expectations. 
Congress took note of this as recently as last summer when it included, 
in the Pension Protection Act of 2006, a provision for automatic 
enrollment of workers in companies offering 401(k), 403(b) and 457 
plans.
    Dollar amounts put away for retirement have also fallen short. The 
2006 Fidelity Retirement Index showed that the typical working American 
household had saved only $20,000 toward retirement, and 15% of families 
had not even started to save.
    So one part of the deceit is the idea that ``everybody'' owns 
stocks, and ``everybody'' benefits, from low capital gains tax rates. 
The Cato Institute unwittingly underlined the second, most telling part 
in its Policy Analysis No. 586 (January 8, 2007).
    On page 6 of the analysis Cato's Alan Reynolds correctly notes that 
``--in recent years, an increasingly large share of middle-income 
investment returns have been sheltered inside tax-favored accounts.'' 
On page 7 Reynolds notes, also correctly, that when these investments 
are withdrawn they will show up as ordinary income.
    This means, of course, that the realized capital gains of average 
Americans are taxed as ordinary income. They are not covered by the 
capital gains tax cuts passed under Presidents Clinton and Bush (nor 
should they be, but that is irrelevant here).
    To sum up: stockholding is not genuinely widespread in America, and 
most middle-income Americans who do own stock do not benefit from low 
capital gains tax rates because their capital gains are taxed at 
ordinary income rates.
An ounce of truth, a pound of deceit.
(3) Repeal The $3,000 Annual Capital Loss Tax Write-off
    All the arguments against preferential taxation of stock market 
capital gains apply with equal force to the tax write-off of the first 
$3,000 of net capital losses (and more: amounts greater than $3,000 can 
be carried forward indefinitely until they too are amortized).
    Investors in original and secondary offerings fully deserve these 
write-offs, and for them the amounts should be increased; $3,000 is 
little more than chump-change these days.
    But the write-offs for all other ``investors'' should end. The 
government has no business subsidizing stock market losses. It serves 
no public policy purpose; as for fiscal policy, the only possible 
result is to cost the Treasury billions upon billions, year after year.
    Congress can end these losses, and strike a small blow for tax 
fairness, by repealing this provision of the Internal Revenue Code.
(4) Bond Interest Taxed As Ordinary Income
    The arguments for low taxes on capital gains are totally undercut 
by the taxation of bond interest at ordinary income rates.
    Initial and secondary-issue corporate bonds are vital debt 
instruments. They do create jobs, do grow businesses and do stimulate 
the economy.
    Please note that there is no lack of demand for these offerings. 
This is true even though the major reason for their purchase, the 
interest they pay, is taxed at ordinary income rates.

                                 

                                                     James R. White
                                                      April 3, 2007
The Honorable Jim Ramstad
Ranking Minority Member
Subcommittee on Oversight
Committee on Ways and Means
House of Representatives

Dear Mr. Ramstad:

    Effective tax administration requires a balance of taxpayer service 
and tax law enforcement. To provide enforcement and taxpayer service in 
fiscal year (FY) 2008, the Internal Revenue Service (IRS) has requested 
an $11.6 billion \1\ operating level budget with about 63 percent going 
for enforcement activities and 31 percent for taxpayer service 
(including operational support). The remaining request includes funding 
to develop and implement modernized information systems.
---------------------------------------------------------------------------
    \1\ The $11.6 billion includes $11.1 billion in new appropriated 
funds and $0.5 billion in other funds.
---------------------------------------------------------------------------
    IRS provides much of its services to taxpayers during the annual 
tax return filing season, making filing season performance a key 
indicator of how well IRS is serving taxpayers. In past reports and 
testimonies, we said that IRS has made significant progress improving 
taxpayer service since passage of the IRS Restructuring and Reform Act 
of 1998 (RRA 98).\2\ Improvements include increased electronic filing, 
better access to IRS's telephone assistors, and more accurate answers 
to taxpayers' questions. However, we have also described taxpayer 
service challenges such as the quality of assistance at walk-in and 
volunteer sites where taxpayers get face-to-face assistance. Moreover, 
the Commissioner of Internal Revenue stated that this year's filing 
season is high risk for several reasons, including challenges in 
implementing the new telephone excise tax refund (TETR), split refund 
option (refunds can now be directly deposited to up to three separate 
accounts), and several tax law extensions that passed late in 2006.
---------------------------------------------------------------------------
    \2\ See, for example, GAO, Tax Administration: IRS Improved Some 
Filing Season Services, but Long-term Goals Would Help Manage Strategic 
Trade-offs, GAO-06-51 (Washington, D.C.: Nov. 14, 2005), Internal 
Revenue Service: Assessment of the Interim Results of the 2006 Filing 
Season and Fiscal Year 2007 Budget Request, GAO-06-615T (Washington, 
D.C.: Apr. 6, 2006), and Tax Administration: Most Filing Season 
Services Continue to Improve, but Opportunities Exist for Additional 
Savings, GAO-07-27 (Washington, D.C.: Nov. 15, 2006).
---------------------------------------------------------------------------
    Although IRS has increased revenue collected through its 
enforcement programs in recent years, enforcement continues to be 
included on our list of high-risk federal programs.\3\ This is due, in 
part, to the persistence of a large tax gap.\4\ IRS estimated the gross 
tax gap to be $345 billion for tax year 2001. After late payments by 
taxpayers and revenue brought in by IRS's enforcement efforts, the 
resulting net tax gap is estimated to be $290 billion.
---------------------------------------------------------------------------
    \3\ GAO, High-Risk Series: An Update, GAO-07-310 (Washington, D.C.: 
January 2007).
    \4\ The tax gap is an estimate of the difference between what 
taxpayers pay in taxes voluntarily and on time and what they should pay 
under the law.
---------------------------------------------------------------------------
    Another high-risk challenge is IRS's ongoing Business Systems 
Modernization (BSM) program, a multibillion-dollar, highly complex 
effort that involves the development and delivery of a number of 
modernized information systems that are intended to replace the 
agency's aging business and tax processing systems. The program is 
critical to supporting IRS's taxpayer service and enforcement goals and 
reducing the tax gap. We recently reported that despite progress made 
in implementing BSM projects and improving modernization management 
controls and capabilities, significant challenges and serious risks 
remain, and further program improvements are needed, which IRS is 
working to address.\5\
---------------------------------------------------------------------------
    \5\ GAO, Business Systems Modernization: Internal Revenue Service's 
Fiscal Year 2007 Expenditure Plan, GAO-07-247 (Washington, D.C.: Feb. 
15, 2007).
---------------------------------------------------------------------------
    In light of the challenges IRS faces, you asked us to assess IRS's 
2007 tax filing season performance, FY 2008 budget request, and the 
status of the BSM program. Our objectives were to (1) describe IRS's 
2007 tax filing season performance for returns processing and taxpayer 
assistance including the impact of tax system changes, such as the 
TETR, split refund option, and several tax law extensions that passed 
late in 2006, (2) assess IRS's proposed FY 2008 budget and compare it 
with prior years' spending and staffing and determine what information 
it provides on the impact of proposals on the tax gap, how new spending 
initiatives are justified, and whether there are opportunities to 
reduce or reallocate resources, and (3) evaluate the status of IRS's 
efforts to develop and implement BSM.
    On March 15, 2007, we briefed your staff and staff of the 
Subcommittee Chair on the preliminary observations of our review. This 
report transmits the updated materials we used at the briefing, which 
are reprinted as appendix I in the complete version of this report.
    In summary, we made the following major points:

      Despite initial concerns and IRS's characterization of 
this year's filing season as high risk, early data show that tax 
systems changes have not had a significant effect on filing season 
operations or performance. In particular, TETR-related requests and 
telephone calls have been far less than IRS planned. As of March 16, 
2007, IRS has processed 63.5 million individual income tax returns, 
with 69 percent including TETR requests. The number of returns filed 
electronically is 5 percent greater than this time last year. Also, IRS 
is achieving its goals for telephone service. However, there are areas 
of concern. In early March, the latest release of the Customer Account 
Data Engine (CADE), one of IRS's key tax return processing systems, 
became operational--2 months behind schedule. As a result of the delay, 
IRS has had slower processing times and delayed refunds for up to 
several days for millions of taxpayers. This delay may have a more 
serious impact on IRS's ability to deliver future releases of CADE, 
because it caused contention for key resources, but it is too early to 
know. Taxpayers' use of the Free File program (an alliance of companies 
that offer free return preparation and electronic filing on their Web 
sites to eligible taxpayers) is 5.5 percent below last year at this 
time.
      IRS's 2008 budget request would increase spending, 
particularly for enforcement. The $11.6 billion requested total 
operating budget is an increase of $608.8 million (5.6 percent) over 
the FY 2007 continuing resolution level. IRS proposes spending $7.2 
billion for enforcement (including operational support), an increase of 
6.5 percent, continuing a trend since 2004 of shifting a greater 
proportion of overall spending toward enforcement as compared to 
taxpayer service. IRS's budget request includes initiatives and 
legislative proposals to address the tax gap. There is limited data in 
IRS's request on the expected impact of the proposals on the gap. The 
expected direct enforcement revenue to be gained is small compared to 
the size of the tax gap. For example, IRS expects to yield about $699 
million in FY 2010, or about 1/4 of 1 percent of the tax year 2001 net 
tax gap from additional enforcement staffing. However, the indirect 
effect on voluntary compliance is unknown. Several research studies by 
economists, while subject to data limitations, suggest that indirect 
revenue might exceed direct revenues gained. We asked for supplementary 
documents on six initiatives to better understand their expected 
benefits and costs. The documented justifications for those initiatives 
varied in the depth of useful information they provided. We continue to 
assess the justifications for the initiatives and whether IRS could 
cost effectively provide additional information that could be useful 
for the Congress and others as they assess IRS's budget request. IRS 
identified savings in the 2008 budget request, but other savings 
opportunities may exist. For example, IRS may be able to change the mix 
of services provided--such as giving taxpayers more options for help by 
e-mail or its Web site in place of more costly telephone or walk-in 
operations--but its study to identify cost-effective service delivery 
methods is several months behind schedule.
      IRS continues to make progress in implementing BSM 
projects and meeting cost and schedule commitments, but two key 
projects--CADE (discussed above) and Modernized e-File (a new 
electronic filing system)--experienced significant cost overruns during 
2006. Future BSM project releases face serious risks, which IRS is 
working to mitigate. For example, delays in deploying the latest 
release of CADE have resulted in contention for key resources and will 
likely impact the design and development of the next two important 
releases, which are scheduled to be deployed later this year. IRS has 
made significant progress in implementing our prior recommendations and 
improving its modernization management controls and capabilities. 
However, critical controls and capabilities related to requirements 
development and management and post implementation reviews of deployed 
BSM projects have not yet been fully implemented. In addition, more 
work remains to be done by the agency to fully develop a long-term 
vision and strategy for completing the BSM program, including 
establishing time frames for consolidating and retiring legacy systems.

Scope and Methodology
    To assess IRS's filing season performance for processing, 
telephones, face-to-face assistance and its Internet Web site, we 
obtained and analyzed IRS's performance and production data and 
compared it to annual goals and prior years' performance. Our work also 
included direct observations of key filing season operations, and 
interviews with IRS officials and other external stakeholders.
    To assess IRS's 2008 budget request, we reviewed IRS's 
congressional budget justifications and supplementary documents to (1) 
identify trends in spending and staffing from FYs 2004 through 2008, 
(2) assess information on the tax gap and selected spending initiatives 
to assess the information provided to justify the request, and (3) 
identify areas of potential opportunities for savings and efficiencies. 
Our assessment is based on a comparative analysis funding, 
expenditures, and other documentation and interviews with IRS 
officials.
    Our filing season and budget audit work was done primarily at IRS's 
National Office and its operating divisions including the Large and 
Mid-Size Business operating division in Washington, D.C; Small 
Business/Self-Employed operating division in New Carrollton, Md; and 
Wage and Investment Division operating division headquarters and Joint 
Operations Center and call site in Atlanta, Ga. We also interviewed 
officials at the IRS Oversight Board in Washington, D.C. Additionally, 
we reviewed relevant external documentation and our reports and reports 
of the Treasury Inspector General for Tax Administration.
    Our analysis of the BSM program was based primarily upon the 
results of our detailed review of the FY 2007 BSM expenditure plan that 
we issued in a recent report.\6\
---------------------------------------------------------------------------
    \6\ GAO-07-247.
---------------------------------------------------------------------------
    In past work, we assessed IRS's budget and filing season 
performance data. We considered filing season performance measures and 
data that cover the quality, accessibility, and timeliness of IRS's 
services to be objective and reliable based on our prior work. Since 
the data sources and procedures for producing this year's budget and 
filing season data have not significantly changed from prior years, we 
determined that the data were sufficiently reliable for the purposes of 
this report. To the extent possible, we corroborated information from 
interviews with documentation and data and where not possible, we 
report the information as attributed to IRS officials. We have 
determined that the estimates for cost savings and Web site performance 
come from competent sources and are reasonable. Data limitations are 
discussed where appropriate. We performed our work from December 2006 
through March 2007 in accordance with generally accepted government 
auditing standards.

Agency Comments
    In commenting on a draft of this report, IRS officials emphasized 
that the budget's initiatives and legislative proposals will result in 
additional direct and indirect revenue and, ultimately, increase 
compliance. It also reported that it will soon release its strategic 
plan for taxpayer service delivery, which will serve as the foundation 
for future decisions for service improvements and efficiencies.
    We are sending copies of this report to the Chairmen and Ranking 
Minority Members of other Senate and House committees and subcommittees 
that have appropriation, authorization, and oversight responsibilities 
for the IRS. We are also sending copies to the Commissioner of Internal 
Revenue, the Secretary of the Treasury, the Chairman of the IRS 
Oversight Board, and the Director of the Office of Management and 
Budget. Copies are also available at no charge on the GAO Web site at 
http://www.gao.gov.
    If you or you staff have any questions or wish to discuss the 
material in this briefing further, please call me. Contact points for 
our offices of Congressional Relations and Public Affairs may be found 
on the last page of this report. GAO staff who made major contributions 
to this report are listed in Appendix II in the complete version of 
this report.

            Sincerely yours,
                                                     James R. White
                                                           Director

                                 

                                                 Colfax, California
                                                     March 22, 2007
The Honorable Richard E. Neil
2208 Rayburn House Office Building
Washington, D.C. 20515

Dear Congressman Neal,

    My name is Janine Valdivieso, 49, I grew up in Southern California, 
and now work as a Child-Support Specialist in North-Eastern California. 
My husband Joe and I have three daughters, and live Colfax, ca. Joe and 
I began saving for college tuition for our two youngest daughters, and 
setting aside money for our retirement fund
    I have spent the majority of my work life in public service. I 
served in the United States Army and worked for 2 state governments and 
2 county governments. It wasn't until August 1999, when I was offered a 
job at Symyx, that I made the decision to enter the private sector. As 
a part of my overall compensation, I was granted incentive stock 
options (ISOs). Like many others, I hoped that it would some day offer 
our family a little better financial future. I accepted a lower salary 
then I needed, because the company offered ISOs, which I hoped would 
someday make up for the lower salary.
    Joe also received incentive stock options from Sandisk). We were 
told by our employers that we would not be impacted by alternative 
minimum tax (AMT), as long as we held on to the stock, and did not sell 
during the same year (it made common sense since Congress also 
encourages people to hold stock for the long term). Unfortunately, this 
was information that would prove to be both incorrect and financially 
devastating.
    Joe and I followed that advice, and purchased the shares as they 
vested throughout the year. One transaction in particular was 
especially damaging. The option, or strike price, was around $3, but 
the company stock closed that day at $94.
    The alternative minimum tax is assessed based on the difference 
between the price paid for the options and the fair market value, or 
closing price, on that same day. By the end of the year, even though it 
was a paper profit only, we did not actually sell any of those shares, 
we owed tax in the amount of $100,000 in addition to the almost $25,000 
in regular tax that we paid throughout the year, an amount greater then 
our combined annual income. Please remember, there were no capital 
gains because we had not sold the stock.
    To pay the AMT, we had to sell most of our stock at a much lower 
price than what we were taxed on. We also had to sell all of the stock 
in our retirement funds and cash-in our girls' college tuition savings. 
Meanwhile the AMT overpayment sits as an interest-free loan with U.S. 
Treasury while we are out $100,000 in retirement savings and college 
funds! This makes NO logical sense and we feel that we are be penalized 
for being good tax paying citizens.
    ``It hurts every day to feel that we have been unfairly taxed by 
our government when I have spent a good part of my life working for 
that same government. I have been trying for six years to figure out 
how the IRS is using our money while we struggle each and every day.''
    Actually we were some of the lucky people who were able to sell the 
stock and pay the tax. I have met hundreds of people who have been 
financially devastated and are now in fear of losing their houses and 
cannot hope to pay the tax in a lifetime.
    Please help to fix this insidious tax.

                                                  Janine Valdivieso

                                 
         Statement of Nancy L. Shoemake, Burnsville, Minnesota

    I would like to share with you a first-hand encounter into the 
culture and abuse of the IRS.
    I have been preparing tax returns for the past 20 years. I 
predominately serve airline employees and handle specific issues 
pertaining to the travel industry. In July, 2005 many of my clients 
began receiving audits out of the Fresno, California IRS Service 
Center. After 300+ clients received these letters requiring 
substantiation of all Schedule A deductions, it became apparent that 
this was no ordinary procedure. A ``Freedom of Information Request'' 
was filed and the report identified an ``informant'' had precipitated 
this action. Upon further investigation it was evident that my ``former 
husband and his new wife'' had launched a smear attack to discredit and 
destroy my business to coerce me to cease pending child support 
litigation.
    Most of these audit clients sought the assistance of my office. The 
IRS requested an initial response within 30 days of receipt of the 
audit letter. Consequently, my small staff was inundated with over 300 
``correspondence audits'' initiated by a Service Center halfway across 
the country. Over 30,000 documents were copied and faxed to Fresno from 
my Minnesota-based office. Fresno basically ignored this documentation 
and issued ``deficiency'' letters to approximately 80% of these 
taxpayers. The letters required that if the Tax Court Petition was not 
filed within 90 days, then the tax recomputed by the Service Center 
(computed basically with the disallowance of all employee expenses and 
itemized deductions) would be assessed and collected. In essence, these 
taxpayers were given two choices: take their case to Tax Court or 
accept the disallowance of their deductions and pay the balance due.
    Under these circumstances, the majority of the taxpayers elected to 
go to Tax Court. Unfortunately, this infuriated a number of people at 
the IRS St. Paul offices since what should originally have been 
conducted as 300 ``office audits'' at the initial audit level had now 
been transferred to being 300 ``office audits'' conducted at the 
``Appeals'' or ``IRS Counsel'' level. Each department has been more 
than ready to voice their hostility to this procedure since it is 
clearly not a customary practice to handle an audit in this manner. The 
taxpayers had sought to compromise and limit the cost and inconvenience 
of the representation and required appearances before the IRS by the 
taxpayers and their representatives versus paying the actual proposed 
deficiency. Some of my clients (as anticipated by the IRS Service 
Center) had concluded that the cost of paying the deficiency is less 
than the cost and inconvenience of the actual trial. However, with the 
guidance of the Taxpayer Advocate Office in St Paul, it was decided 
that to encourage this course of action was a disservice to the 
taxpayer.
    What caused this problem? According to the IRS Commissioner's most 
recent numbers, there are now approximately 12,500 IRS audit personnel 
(as opposed to 15,000 FBI agents). Since the IRS audit and enforcement 
personnel and budget has been slashed by such drastic and substantial 
amounts, in order to maintain the appearance of anything like 
``adequate'' audit coverage (in the ?70's and ?80's approximately 3% of 
the tax returns were audited whereas today less than 1 in 2000 is 
audited), the definition of an ``audit'' has been changed from the 
previous procedure of an actual office auditor or IRS agent making face 
to face contact and actually examining items of substantiation related 
to a return in their possession to a ``new definition'' of an 
``audit''. Today the IRS defines an ``audit'' as any piece of paper 
generated by the Service Center and directed to the taxpayer in 
relation to their tax return. In essence, if you receive a letter from 
the Service Center that your return was ``accepted as filed'', you have 
been ``audited'' and this entitles the Commissioner to appear before 
congress and allege that this administration has conducted 
substantially more audits with much less in the way of resources. Of 
course, this is bogus, but the majority of the public and congress is 
totally in the dark that what has changed is not the efficiency of the 
IRS but rather the definition of an ``audit''.
    In summary, it appears that the administration, in their quest to 
generate a large number of ``audits'' without the expenditure of any 
manpower or resources, chose to spray 300 Statutory Notices of 
Deficiencies without ever having conducted an actual ``audit''. When 
this process blew up in their face, they just walked away from it and 
left the taxpayers and my office to deal with the problem of conducting 
real audits at the Tax Court level.
    When these several hundred cases docketed for trial reached St. 
Paul, an effort was made to resolve them all without the necessity of 
trial. However, District Counsel stated that it was their intent to 
``try them all''. Once it had become apparent that the IRS had no 
interest in settling these cases on a basis that was fair and equitable 
to both the taxpayers and the government and the government's position 
was basically ``bring' em on'', the taxpayers proceeded to trail. In 
April 2006, (8) taxpayer cases were tried in Tax Court with a 
cumulative deficiency (after amending a few of the tax returns due to 
subsequent corrected interest amortization and other adjustments) of 
$735.50 per client. The Tax Court decisions were more favorable to the 
taxpayers than what the taxpayers had offered to settle for in order to 
avoid the time, trouble, cost and inconvenience of an actual Tax Court 
trial.
    Not at all chastened by this outcome, the IRS proceeded to trial 
again with more of these cases in October of 2006, but this time with a 
more favorably disposed Judge. A handful of clients are still awaiting 
the determination of the October, 2006 Tax Court.
    It should be noted that the Judge brought in to handle these 
October, 2006 ``S'' cases was a local lady who started the proceedings 
by stating to the taxpayers (and made the same comment for the record 
numerous times) they had been ``duped'' by their tax preparer and the 
deductions they had claimed were bogus and not allowable. The Judge was 
making these pronouncements prior to having received or heard any 
evidence whatsoever. Furthermore, this Judge had previously stated 
during telephone conferences held with the taxpayers who had pending 
cases prior to trial that she knew the District Counsel attorney and 
that the taxpayers should ignore what their CPA was telling them and 
rely instead upon what the IRS attorney advised them was an allowable 
deduction because she knew the attorney to be ``trustworthy and 
reliable''. Keep in mind that this Judge is giving this advice to 
pending litigants when the results of the identical cases tried the 
previous April resulted in the allowance of the expenses claimed far in 
excess of what the IRS alleged was ``allowable''.
    Since this Judge had absolutely no prior dealings with me in the 
past and had no first hand knowledge of me, it would appear that there 
were exparte discussions being held between the Judge and the Office of 
District Counsel which this Judge had accepted as ``gospel''. She made 
the decision to shed the robes of a judge and had assumed instead the 
mantel of the advocate prior to ever setting foot in the courtroom. 
Hence, several of the taxpayers have written the Chief Judge of the Tax 
Court expressing their dismay at the conduct of the Court. The 
taxpayers were looking for a Judge who was impartial and not so 
blatantly biased.
    The Judge in the October ``S'' Court Trial Calendar having made the 
above remarks prior to the start of the trials moved the other 
taxpayers who had pending ``S'' cases to request that their cases be 
removed from the S calendar and tried as a regular Tax Court case since 
the Court had basically rendered her decision prior to the cases having 
even started and in essence told the taxpayers they were ``going to 
lose''.
    This past year and a half has opened my eyes as well as many 
taxpayers to a system and process that drastically needs accountability 
and change. The mission statement of the IRS is ``To provide America's 
taxpayers with top quality service by helping them understand and meet 
their tax responsibilities and by applying the tax law with integrity 
and fairness to all.'' The responsible parties are now telling us 
``mission accomplished'? However, everyone who has witnessed and 
experienced this process would take issue with that mission statement.
    To hold taxpayers accountable for providing proof of their 
deductions is a necessary and reasonable expectation. In order to 
maintain voluntary compliance a certain level of audit verification is 
essential. However, this administration, in order to distort the level 
of audit compliance actually in effect has changed the definition of an 
``audit'' to allow the Service Centers to contact and spray Statutory 
Notices of Deficiencies to allow the Commissioner to claim that he has 
maximized the efficiency of the IRS to conduct a massive increase in 
audits with much lower manpower and resources. In order to attempt to 
maintain this bogus claim it is necessary to use intimidation tactics 
and then to create such a cumbersome, exhausting and expensive process 
for the purpose of exchanging information at the Service Center level 
that taxpayers become exhausted both financial and emotionally. This is 
not reasonable.
    While it appears that IRS reform began in the late 1990's to create 
an environment that was conducive for communication, it appears as 
though this ``reformation'' did not reach the Appeals and General 
Counsel Level. Many of my clients desire an opportunity to share their 
experiences concerning ``abuse of power'' and ``techniques of 
manipulation'' by both employees in the St. Paul Appeals and Counsel 
divisions. Unfortunately, the accountability that is needed to promote 
change has not reached the upper levels of the IRS. This is apparent in 
the communication and actions of these departments.
    As stated above, I have been in the business of tax preparation for 
over 20 years and have filed close to 30,000 tax returns. This entire 
debacle has been one of harassment since the IRS could not find wrong 
doing with the 300+ returns that were audited. The IRS acted on behalf 
of a dubious informant with malicious intent and has invested numerous 
dollars into my demise.
    As Mr. Paul Ferber, IRS Officer, EIN 41-03970, stated during an 
October 17, 2006 meeting at my office the ``typical investigative 
protocol'' is 15-20 audits to see if there were truly any patterns of 
tax preparer misconduct. This was not followed.
    Unfortunately, this whole investigation was skewed with the 
intention of finding some form of misconduct attributed to me instead 
of choosing to look at the reasons the IRS resorted to the ``mass mail 
audit method'' initiating over 300 audits based on a spiteful ex-
spouse. This has been an exhausting ordeal to the taxpayers and I can 
only estimate the cost to the American public is in excess of seven 
digits.
    Thank you for the opportunity to communicate this pernicious and 
prejudicial experience. In addition to my statement there are many of 
these 300+ taxpayers that would welcome the opportunity to share the 
injustice perpetrated by the IRS.

                                 
                  Statement of William David Kebshull

    The purpose of this statement is to bring to the attention of the 
Subcommittee on Oversight Internal Revenue Service misconduct 
concerning instructions that produce illegal ``Double or Nothing 
Taxation'' of the income and recovery related to an itemized deduction. 
Because IRS instruction are not consistent with section 111(a) of the 
Internal Revenue Code, some taxpayers are defrauded by numerous IRS 
instructions, at least one of which, the instruction for the 
calculation of taxable Social security benefits, goes back to 1984. On 
the other hand, the bollixed IRS instruction for Line 7 on Form 6251, 
Alternative Minimum Tax--Individuals, has caused the loss of billions 
of dollars to the United States Treasury since 1988.

IRS's Bollixed Interpretation of Section 56(b)(1)(D): A Multi-billion 
        Fraud on the United States Treasury
    In 1999, two letters from me to IRS and two letters from IRS to me 
were released by IRS as Tax Correspondence and published in Tax 
Analyst.\i\ The letter from a respondent in the IRS Office of Chief 
Counsel presented a detailed response to my concerns about the tax 
treatment of itemized deduction recoveries. Unfortunately, the 
respondent seemed to subscribed to the philosophy of John Sears, an 
advisor to Ronald Regan, ``reality is an illusion that can be 
overcome.'' Here is how the respondent tried to justify the IRS 
instruction (currently line 7 on Form 6251) that has produced a multi-
billion dollar fraud on the United States Treasury.
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    \i\ Tax Analyst,Tax Notes Today,March 18, 1999 Thursday, 
Department: Official Announcements, Notices, and News Releases; IRS Tax 
Correspondence, Cite: 1999 TNT 52-53. HEADLINE: 1999 TNT 52-53 Taxpayer 
Irate About IRS's Position on AMT and Tax Benefit Rule (Section 111--
Tax Benefit Recovery Items;) (Release Date: DECEMBER 08, 1998) (Doc 
1999-10275 (28 original pages))
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    As stated in prior correspondence we disagree with your assertion 
that recoveries of taxes described in paragraphs (1), (2), or (3) of 
section 164(a) should only be excluded from gross income in computing 
AMTI to the extent deduction of the taxes did not reduce the taxpayer's 
income tax liability. Under your interpretation section 56(b)(1)(D) 
would be unnecessary; it would only apply to exclude items from gross 
income when such items are already excluded from gross income under 
section 111.

Comment:
    When the respondent's letter was published in 1999 his assertion 
that a tax deduction taken in a year that the Alternative Minimum 
Tax(AMT) was paid could not have reduced a taxpayer's income tax 
liability and therefore the refund should not be included in gross 
income on Form 1040 was no longer true. In fact, beginning in 1997, a 
tax deduction claimed on Schedule A (Form 1040) could have reduced a 
taxpayer's tax liability when the AMT was paid as a result of what I 
have described below as the limited long-term capital gains rate-based 
tax benefit which results from the two tier capital gains rate 
structure. See page 2 of Form 6251. The benefit of a tax overpayment is 
revealed by application of IRS instructions in Publication 525.
The IRS respondent then stated:
    Section 56(b)(1)(D) provides that no recovery of any tax to which 
section 56(b)(1)(A)(ii) applied shall be included in gross income for 
purposes of computing AMTI. By its terms section 56(b)(1)(A)(ii) denies 
any deduction in computing AMTI for taxes described in section 
164(a)(1)-(3). It does not limit its application to taxable years in 
which the taxpayer is liable for AMT. Because these taxes are never 
deductible in computing AMTI, recoveries of such taxes are always 
excluded from gross income, under section 56(b)(1)(D), for purposes of 
computing AMTI.

Comment:
    What the IRS respondent is saying is that section 56(b)(1)(D) 
provides that refunds of taxes that were allowed as itemized deductions 
under section 164(a) and as such produced a tax benefit when the 
regular tax was paid are excluded from AMTI in addition to the taxes 
that were not allowed as a deduction under section 56(b)(1)(A)(ii) and 
therefore produced no tax benefit because the AMT was paid.
    When the respondent stated, It does not limit its application to 
taxable years in which the taxpayer is liable for AMT, he was simply 
wrong. Section 56(b)(1)(D) means exactly what it says: no recovery of 
any tax to which subparagraph (A)(ii) applied shall be included in 
gross income for purposes of determining alternative minimum taxable 
income. For subparagraph (A)(ii) to have applied to the tax being 
refunded, payment of the AMT would have been required. Section 
56(b)(1)(D) is necessary to appropriately preclude the inclusion in 
AMTI of a refund of a tax overpayment that produced a limited long-term 
capital gains rate-based tax benefit in a year the AMT was paid. When 
the tax benefit is the result of paying tax on less taxable income 
rather than the result of paying tax at a lower rate on a portion of 
capital gains, the tax refund must be included in AMTI based on a 
rational interpretation of the tax benefit rule.
    If it were the intent of Congress not to include the refunds of all 
taxes claimed as itemized deductions on Schedule A (1040), section 
56(b)(1)(D) would state the following:
Treatment of certain recoveries
    No recovery of any tax claimed as a itemized deduction under 
subparagraphs (1), (2), or (3) of section 164(a) shall not be included 
in gross income for purposes of determining alternative minimum taxable 
income.
    But that is not what 56(b)(1)(D) states.
    This is a question for the Internal Revenue Service and the 
Treasury Department to answer:
    If a tax overpayment is allowed as a deduction and produces a tax 
benefit in a year that the regular tax is paid and the refund of that 
overpayment is to be excluded from alternative minimum taxable income 
in a year the AMT is paid as indicated by the IRS respondent, just when 
is the income/refund taxed directly?
    IRS's Defective Interpretations of the Tax Benefit Rule, Section 
111(a) of the Internal Revenue Code, Produces Double Taxation of 
Itemized Deductions Recoveries.
    Section 111(a) of the Internal Revenue Code provides: Deductions.
    Gross income does not include income attributable to the recovery 
during the taxable year of any amount deducted in any prior taxable 
year to the extent such amount did not reduce the amount of tax imposed 
by this chapter.
    Here are two fundamental facts related to the impact of itemized 
deductions on the taxes paid on an individual's federal income tax 
return.

      An itemized deduction included on Schedule A (Form 1040) 
does not reduce the amount of gross income reported on Form 1040.
      The reduction in taxable income attributable to an 
itemized deduction cannot reduce taxable income by more than the amount 
of the itemized deduction.

    Here are some of the results of instructions related to the 
Internal Revenue Service's erroneous interpretation of section 111(a) 
of the Internal Revenue Code:

      Inclusion of an itemized deduction recovery in the 
calculation of taxable Social Security benefits can result in the gross 
income attributable to a recovery being up to 1.85 times the amount of 
the recovery. (Remember, the income used for the payment of the 
deductible expense could have produced a similar result the a prior 
year.)
      Inclusion of itemized deduction recoveries in the 
calculation of taxable Social Security benefits and in adjusted gross 
income (AGI) or one of the numerous versions of modified adjusted gross 
income, when calculating deductions, credits, exemptions, exclusions, 
or eligibilities, can result in the taxable income attributable to a 
recovery being more than twice the amount of the recovery.
      In the case of some credits, the reduction in the 
allowable tax credit attributable to a itemized deduction recovery may 
be many times the amount of the recovery. Take the retirement savings 
contribution credit for example where a tax refund of only a few 
dollars can eliminate a $400 credit.

    The National Taxpayer Advocate 2006 Annual Report to Congress lists 
23 provisions, in addition to those cited above with income-based 
phase-outs.\ii\ In addition, there is now the refundable AMT credit 
provision that was included in late 2006 legislation that is subject to 
a MAGI phase-out. The effect of including an itemized deduction 
recovery in the calculation of these items are adverse to the interest 
of the individual taxpayer in every case.
---------------------------------------------------------------------------
    \ii\ National Taxpayer Advocate 2006 Report to Congress, Table 
2.4.1, pp. 473-476.
---------------------------------------------------------------------------
    Here is how the Internal Revenue Service defined the ``tax benefit 
rule'', section 111 of the Internal Revenue Code in IRS Publication 
525:
    Tax benefit rule. You must include a recovery in your income in the 
year you receive it up to the amount by which the deduction or credit 
you took for the recovered amount reduced your tax in the earlier year. 
For this purpose, any increase to an amount carried over to the current 
year that resulted from the deduction or credit is considered to have 
reduced your tax in the earlier year.
    The Internal Revenue Service omitted a very important word in 
defining the tax benefit rule. The rule should read to be consistent 
with the language in section 111(a). You must include a recovery in 
your taxable income in the year you receive it up to the amount by 
which the deduction or credit you took for the recovered amount reduced 
your tax in the earlier year. --
    Parsing the language in section 111(a) of the Internal Revenue Code 
yields the inescapable conclusion that it must be applied to every 
provision in the Internal Revenue Code that affects the determination 
of taxes. When this is done, taxable income will be increased by a 
recovery by the amount that IRS instructions indicate that is to be 
entered on either line 10 or line 21 of Form 1040. The Subcommittee 
should find the 1994 law review article by Professor Matthew J. Barrett 
of interest with respect to the application of the tax benefit rule. 
\iii\
---------------------------------------------------------------------------
    \iii\ Matthew J. Barrett, ``Determining an Individual's Federal 
Income Tax Liability When the Tax Benefit Rule Applies: A Fifty-Year 
Checkup Brings a New Prescription for Calculating Gross, Adjusted 
Gross, and Taxable Incomes'' Tax Analyst, Tax Notes Today Cite: 94 TNT 
87-34, May 5, 1994
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    If the Oversight Subcommittee of the House Ways and Means has any 
concern about IRS conduct here is a question that the subcommittee must 
demand that IRS and Treasury officials answer.
    Precisely, what is about the language in section 111(a) of the 
Internal Revenue Code that permits the Internal Revenue Service to 
issue instructions can result in the gross income attributable to an 
itemized deduction recovery exceeding the amount of the recovery? 
(Remember the inclusion of itemized deduction recoveries in the 
calculation of taxable Social Security benefits!)
IRS's Interpretation of Section 56(b)(1)(D) Yields a Multi-billion 
        Fraud on the Treasury
    While the Internal Revenue Service abuses taxpayers with 
instructions that result in taxes in excess of those permitted under 
the Internal Revenue Code as described above, other taxpayers are the 
beneficiaries of a bollixed IRS interpretation of a code section that 
defrauds the Treasury of the United States.
    Here are the applicable sections of the Internal Revenue Code that 
are relevant to the tax treatment of deductible taxes and tax refunds 
when payment of the AMT is involved..
    Section 56(b)(1)(a)(ii) and 56(b)(1)(D)
    (b) Adjustments applicable to individuals In determining the amount 
of the alternative minimum taxable income of any taxpayer (other than a 
corporation), the following treatment shall apply (in lieu of the 
treatment applicable for purposes of computing the regular tax):
    (1) Limitation on deductions
    (A) In general No deduction shall be allowed
    (ii) for any taxes described in paragraph (1), (2), or (3) of 
section 164(a). Clause (ii) shall not apply to any amount allowable in 
computing adjusted gross income.
    (D) Treatment of certain recoveries No recovery of any tax to which 
subparagraph (A)(ii) applied shall be included in gross income for 
purposes of determining alternative minimum taxable income.
    Section 164(a)
    (a) General rule Except as otherwise provided in this section, the 
following taxes shall be allowed as a deduction for the taxable year 
within which paid or accrued:
    (1) State and local, and foreign, real property taxes.
    (2) State and local personal property taxes.
    (3) State and local, and foreign, income, war profits, and excess 
profits taxes
    Here two fundamental facts related to tax deductions reported on 
Schedule A when the alternative minimum tax is paid:

      Deductions claimed for taxes reported on Schedule A (Form 
1040) are not allowed as deductions in determining alternative minimum 
taxable income (AMTI).
      Deductions claimed for taxes reported on Schedule A (Form 
1040) may provide a limited long-term capital gain rate-based tax 
benefit in a year the AMT is paid if the tax deduction increases the 
portion of capital gains being tax at 5 percent and reduces the portion 
being taxed at 15 percent. This tax benefit is reveal by application of 
instructions in IRS Publication 525.

    Here are the result of IRS instructions when the AMT is paid in the 
year of a tax overpayment and the year that the refund of the 
overpayment is received.

      Provided there is no long-term capital gains rate-based 
tax benefit, a tax overpayment would have not have produced a tax 
benefit and the refund in a subsequent year is not included in gross 
income based on section 111(a) of the Internal Revenue Code.
      However, if there was a limited long-term capital gains 
rate-based tax benefit, when the AMT is paid, the portion of the refund 
that produced the benefit would be included in gross income and then 
appropriately excluded from AMTI by the instruction on line 7 of Form 
6251. The refund amount included in gross income would flow to regular 
taxable income and thus increase the portion of long-term capital gains 
taxed at 15 percent and reduce the portion taxed at 5 percent thus 
offsetting the tax benefit from the tax overpayment in the prior year.
      When there is a long-term capital gains rate-based tax 
benefit from a tax overpayment in a year that the AMT is paid, IRS 
instructions erroneously include the refund of the overpayment in AGI 
when calculating a medical expense deduction thus reducing the 
deduction.

    Now consider the result of IRS instructions when there is a tax 
overpayment and refund and the regular tax is paid in one of the years 
and the AMT is paid in the other.

      When an itemized deduction is claimed for a tax 
overpayment in a year that only the regular tax is paid and the refund 
of the overpayment is received in a year that the alternative minimum 
tax (AMT) is paid, neither the income used for the overpayment nor the 
refund of the overpayment is taxed directly because of IRS's bollixed 
interpretation of section 56(b)(1)(D) of the Internal Revenue Code. The 
instruction that results from this bollixed interpretation is currently 
on line 7 of Form 6251. The consequence of this instruction has been 
the loss to the United States Treasury of billions of dollars since 
1988. My estimate of the loss for tax year 2006 is about $500,000,000.
      Even though neither the income nor the refund related to 
a tax overpayment are tax directly under the circumstances described 
above, both the income used for the overpayment and the refund can 
reduce medical expense deductions. Inclusion of the refund in AGI when 
calculating medical expense deductions violates section 111(a) of the 
Internal Revenue Code.
      When an itemized deduction is claimed on Schedule A (Form 
1040) for a tax overpayment in a year that the AMT is paid and there is 
a limited long-term capital gains rate-based tax benefit (under the 
circumstances described above) and the regular tax is paid in the year 
that the tax refund is received, the refund will be included in gross 
income per IRS instructions. Thus the income used for the tax 
overpayment will be taxed at the AMT rate and the refund will be taxed 
at the regular tax rate. Based on section 111(a) the refund of a tax 
overpayment that produced a limited long-term capital gains rate-based 
benefit should only be include in gross income for the purpose of 
determining the capital gains portion of a person's income tax in the 
refund year.

    To summarize, based on IRS instructions when the regular tax is 
paid in one year and the AMT is paid in the other, and there is a tax 
benefit as a result of a tax overpayment included on Schedule A, the 
sequence in which the regular tax and the AMT is paid determines 
whether the income/refund related to the tax overpayment is taxed 
``Double or Nothing''. I believe that it was Nina Olsen, the National 
Taxpayer Advocate, who described the tax treatment of income under the 
AMT as being ``counterintuitive''. I believe that because of IRS 
instructions a better term would be fraudulent.
    The IRS Mission: ``Provide America's taxpayers top quality service 
by helping them understand and meet their tax responsibilities and by 
applying the tax law with integrity and fairness to all''.
    Based on its mission, IRS would have us to believe that under the 
law all taxpayers are created equal. The reality is based on IRS's 
conduct, to paraphrase George Orwell, all taxpayers are created equal, 
but some taxpayers are more equal than others in the eyes of the 
Internal Revenue Service. If this assessment of IRS attitude were not 
true, there would be no ``Double or Nothing Taxation '' of the income/
recovery related to an itemized deduction.

Anecdotal Experience--Eliminating Double Taxation With an Amended 
        Return
    On March 8, 2004, I amended the 2000 and 2001 Federal Income Tax 
returns for my father, who had died in early 2002, to reduce the 
taxable income attributable to state income tax refunds on those 
returns from being more than twice the amount of the refunds to being 
equal to the refunds. Tax professional were responsible for determining 
estimated taxes and preparing his tax returns.
    Before receiving the second of the two refunds, I received Letter 
3175 SC (Rev. 1999).
    I believe this letter was in response to information that I 
provided the IRS Office of Chief Counsel and which was reviewed by the 
Office of Treasury Inspector General for Tax Administration. The letter 
closed with ``Federal courts have consistently ruled against the 
arguments you have made. Therefore, we will not respond to future 
correspondence concerning these issues.'' If the courts have 
consistently ruled against my arguments, why did I subsequently receive 
a refund based on my arguments? Examination of the Title 26, United 
States Code, Annotated section 111 suggests that the courts have ruled 
in favor of my arguments.
    Two days after I filed the two amended returns, March 10, 2004, 
Newsday reported that Commissioner Mark Everson had announced that he 
had paid the AMT for the first time. Taxpayers, especially Social 
Security recipients who have been double taxed on their tax refunds, 
can only wonder if Commissioner Everson was the beneficiary of the 
fraudulent instruction on line 7 of Form 6251.
    Any continuing failure of the Subcommittee on Oversight to reign-in 
IRS's misconduct related to ``Double or Nothing Taxation'' under 
sections 111(a) and 56(b)(1)(D) will bring into question the commitment 
of the Subcommittee to effective oversight of the Internal Revenue 
Service.
                                 ______
                                 
    Here is Letter 3175 (SC) (Rev. 2-1999) with notations of errors in 
the heading.
Department of the Treasury

Internal Revenue Service
1973 North Rulon White Blvd.
Ogden, UT 84404

Date: Ddecember 14, 2004 (yes, Ddecember)

William D Kiebschull (Correct spelling is Kebschull)
Churchville, Maryland 21028

Dear Taxpayer(s):

    This is in reply to you recent correspondence. Federal tax laws are 
passed by Congress and signed by the President. The Internal Revenue 
Service is responsible for administering Federal tax laws fairly and 
ensuring that taxpayers comply with the laws. We do not have authority 
to change the laws.
    The Internal Revenue Service strives to collect the proper amount 
of revenue at the least cost to the public, and in a manner that 
warrants the highest degree of public confidence in our integrity, 
efficiency, and fairness. In accomplishing this, we continually strive 
to help taxpayers resolve legitimate account problems as effectively as 
possible. While tax collection is not a popular function of government, 
it clearly is a necessary one. Without it all other function would 
cease.
    There are people who encourage others to deliberately violate our 
nation's tax laws. It would be unfortunate if you were to rely on their 
opinions. These persons take legal statements out of context and claim 
that they are not subject to tax laws. Many offer advice that is false 
and misleading, hoping to encourage others to join them. Generally, 
their advice isn't free. Taxpayers who purchase this kind of 
information often wind up paying more in taxes, interest, and penalties 
than they would have paid simply by filing correct tax returns. Some 
may subject themselves to criminal penalties, including fines and 
possible imprisonment.
    Federal courts have consistently ruled against the arguments you 
have made. Therefore, we will not respond to future correspondence 
concerning these issues.

            Sincerely yours,

Facsimile signature for Dennis Parizek
Operations Manager
Exam SC Support

Enclosure
Publication 2105

Letter 3175 (SC) (Rev. 2-1999)
Cat. No. 26859J

April 3, 2007

    My submittal to the Oversight Subcommittee of the House Ways and 
Means Committee concerning the Hearing on Internal Revenue Service 
Operations and the Tax Gap represents my opinions and only my opinions.

William David Kebschull

                                 
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