    [House Hearing, 111 Congress]
    [From the U.S. Government Publishing Office]

                    INTERNAL REVENUE SERVICE OPERATIONS AND
                      FISCAL YEAR 2010 BUDGET PROPOSALS

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

                                    HEARING

                                   before the

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

                         ONE HUNDRED ELEVENTH CONGRESS

                                 FIRST SESSION

                                   __________

                                  JUNE 4, 2009

                                   __________

                               Serial No. 111-23

                                   __________

             Printed for the use of the Committee on Ways and Means

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                          COMMITTEE ON WAYS AND MEANS

                             OVERSIGHT SUBCOMMITTEE

                         JOHN LEWIS, Georgia, Chairman

    XAVIER BECERRA, California           CHARLES W. BOUSTANY, Jr.,
    RON KIND, Wisconsin                  Louisiana, Ranking Member
    BILL PASCRELL, Jr., New Jersey       DAVID G. REICHERT, Washington
    JOHN B. LARSON, Connecticut          PETER J. ROSKAM, Illinois
    ARTUR DAVIS, Alabama                 PAUL RYAN, Wisconsin
    DANNY K. DAVIS, Illinois             JOHN LINDER, Georgia
    BOB ETHERIDGE, North Carolina
    BRIAN HIGGINS, New York

                 Janice Mays, Chief Counsel and Staff Director

                       Jon Traub, Minority Staff Director

    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

                                   __________

                                  June 4, 2009

                                                                       Page
    Advisory of May 27, 2009 announcing the hearing..................     2

                                    WITNESS

    The Hon. Douglas Shulman, Commissioner, Internal Revenue Service.     5

                           SUBMISSIONS FOR THE RECORD

    Alvin S. Brown, Statement........................................    39
    Colleen M. Kelley, Statement.....................................    45
    Mark R. Secrist, Statement.......................................    49
    Michele Dyson, Statement.........................................    56
     National Association of Professional Employer Organizations,
      Statement......................................................    61
    Patricia Read, Letter............................................    63
    Paul Cherecwich, Jr., Statement..................................    64

                       MATERIAL SUBMITTED FOR THE RECORD

    Post-Hearing Questions and Responses for the Record:
          Hon. Joseph Crowley........................................    71
          Rep. Dave Reichert, Member of Congress for Commissioner
            Douglas Shulman, International Revenue Service...........    75

                      INTERNAL REVENUE SERVICE OPERATIONS
                     AND FISCAL YEAR 2010 BUDGET PROPOSALS

                                  ----------

                             THURSDAY, JUNE 4, 2009

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

        The Subcommittee met, pursuant to notice, at 10:00 a.m., in
    Room 1100, Longworth House Office Building, Hon. John Lewis
    (Chairman of the Subcommittee) presiding.
        [The advisory of the hearing follows:]

    ADVISORY FROM THE COMMITTEE ON WAYS AND MEANS

    May 27, 2009

    By (202) 225-5522

     Lewis Announces a Hearing on Internal Revenue Service Operations and
                       Fiscal Year 2010 Budget Proposals

        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 fiscal year
    2010 budget proposals, and the 2009 tax return filing season. The
    hearing will take place on Thursday, June 4, 2009, at 10:00 a.m., in
    the main Committee hearing room, 1100 Longworth House Office Building.

        In view of the limited time available to hear witnesses, the
    Commissioner of the IRS, the Honorable Douglas Shulman, 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:

        In 2008, the IRS collected $2.7 trillion in taxes and processed
    nearly 250 million tax returns, including 150 million individual income
    tax returns. Through May 1, 2009, the IRS collected $1.5 trillion in
    taxes and processed nearly 155.4 million returns, including 126.4
    million individual returns. The Subcommittee will discuss the most
    recent tax return filing season with a focus on taxpayer service, the
    recovery rebate, and taxpayer privacy concerns.

        The Subcommittee also will review IRS operations not related to the
    filing season. Specifically, the Subcommittee will look at examination
    rates, collection activities, and the tax gap. The Subcommittee will
    discuss the Making Work Pay credit and new withholding tables, and
    administration of other tax provisions in the American Recovery and
    Reinvestment Act of 2009 (Pub. L. 111-5).

        As part of its consideration of IRS operations, the Subcommittee
    will discuss the Administration's fiscal year 2010 proposed budget for
    the IRS of $12.1 billion, an increase of 5.2 percent over the fiscal
    year 2009 level (excluding funding under Pub. L. 111-5). The
    Subcommittee will examine the Administration's revenue proposals and
    budget proposals with respect to taxpayer service, enforcement,
    operations support, and information technology.

        In announcing the hearing, Chairman Lewis said, ``The recession has
    affected all aspects of our economy, including IRS operations. We must
    make sure that the IRS strikes the right balance between enforcement
    and taxpayer service in these difficult economic times. As we move
    forward toward 2010, the Congress must ensure that the IRS has the
    tools it needs to collect taxes in a manner that is fair for all
    Americans.''

    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://democrats.waysandmeans.house.gov,
    select ``Committee Hearings.'' 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, complete all informational forms and click ``submit'' on
    the final page. ATTACH your submission as a Word or WordPerfect
    document, in compliance with the formatting requirements listed below,
    by close of business Thursday, June 18, 2009. 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 summiteers 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.

         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 TDD/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 of the
    Subcommittee on Oversight and Investigation will come to order.
    Again, this year the subcommittee is holding an oversight
    review of the Internal Revenue Service. We intend to examine
    the operation of the agency, its budget and its service to
    taxpayers.
        This is the first time the commissioner has been before the
    Subcommittee this Congress. We welcome you, Mr. Commissioner.
    This is also the first time many of the Members of this
    Subcommittee will have the opportunity to review the agency. We
    look forward to their participation.
        Today's hearing is a chance for the IRS to assure this
    Subcommittee and the public that it is acting fairly--fair in
    how it treats taxpayers and fair in how it treats its
    employees. Overall, I think the agency has done a good job.
    However, there is always room for improvement.
        I do not think it is fair that five million taxpayers
    received busy signals when they called this year for help and
    almost 18 million taxpayers hung up before getting through. If
    the agency needs additional resources to meet its customer
    service mission, we need to know that.
        I am also concerned that low-income taxpayers are having
    their Social Security payments levied by the agency. And, it is
    a shame that victims of identity theft do not have their cases
    resolved with more urgency.
        Where this Subcommittee can help the agency improve, we
    will. Taxpayers wanting to settle their tax debts should not be
    required to make a downpayment with their offer. Small
    businesses should not be run out of business by tax shelter
    penalties aimed at big corporations. These issues require tax
    law changes that the Ranking Member and I support.
        Finally, I want to be sure that the agency is being fair to
    its employees. Each year, the agency's employees collect about
    $2.7 trillion and process 250 million returns. As fewer paper
    returns are filed, the agency has started to consolidate. In
    these difficult times, I ask the agency to take every
    reasonable step to ensure that employees at these locations,
    such as Atlanta and Andover, are not without jobs.
        I want to again thank the commissioner for being so helpful
    and so responsive and thank you for being here today, Mr.
    Commissioner.
        And I am pleased to recognize the distinguished Ranking
    Member, Dr. Boustany, for his opening statement.
        Dr. BOUSTANY. Thank you, Mr. Chairman. Thank you for
    yielding time to me.
        Welcome, Commissioner. Good to see you again.
        Mr. Chairman, I want to thank you for holding this hearing
    and for your leadership on a number of legislative initiatives
    on which we are both cooperating, including our offers in
    compromise legislation as well as some other projects that we
    have discussed.
        As the new Ranking Member for this Subcommittee, I look
    forward to continuing to work with you to improve IRS tax
    administration to make the system work better for the American
    people.
        We are conducting this important annual hearing to review
    the proposed budget for the IRS and the latest filing season.
    These last two filing seasons have clearly been different from
    previous years, as the IRS has faced the enactment of economic
    stimulus legislation that provides for many tax benefits to the
    American taxpayers. These provisions have created an
    unanticipated workload on top of the expected workload for the
    2009 filing season, and I look forward to hearing about how the
    IRS has handled it and what long-term lessons the agency has
    learned from the experience.
        The President's budget for Fiscal Year 2010 requests
    additional resources for IRS enforcement efforts. And while
    additional enforcement tools may be necessary, it is important
    to remember that the most effective way to close the tax gap
    would be to simplify the Tax Code, especially for small
    businesses and the self-employed. Most of the tax gap results
    from honest mistakes by taxpayers trying to make sense of
    complex tax laws rather than intentional wrongdoing. And in
    this time of economic hardship and restricted access to credit,
    small businesses across the country are hanging on by a thread.
    Overly aggressive tax enforcement activities that single out
    small businesses that have been trapped by the complexity of
    the Tax Code could be the difference between those businesses
    surviving and disappearing.
        Also, as the IRS steps up enforcement efforts in the area
    of international tax evasion, I hope the Obama administration,
    Members of Congress, the media and the American people will
    remember that there really is a bright line distinction between
    tax evasion on one hand, which is illegal, and legitimate
    international tax policies that improve the competitiveness of
    American businesses on the other hand.
        Tax evasion is a Federal crime and individuals who break
    the law by hiding their income in offshore accounts should be
    aggressively pursued and punished to the fullest extent of the
    law but these efforts should not be confused with policies,
    such as the ability of U.S. businesses doing business overseas,
    to defer tax on foreign profits, a longstanding principle of
    sound tax policy that puts our businesses on a more even
    playingfield with foreign competitors.
        My previous conversations, Commissioner, with you give me
    great confidence that you appreciate that distinction, and I am
    heartened by that, although as I read your testimony, there
    were a couple of areas that gave me some concern that I would
    like to pursue as we get into questioning. So I certainly look
    forward to your testimony today and to discussing these issues
    further.
        Again, Mr. Chairman, thank you, and I yield back my time.
        Chairman LEWIS. Thank you very much. Now, we will hear from
    our witnesses, the IRS commissioner Doug Shulman. I ask, Mr.
    Commissioner, that you limit your testimony to 5 minutes.
    Without objection, your entire statement will be included in
    the record. Welcome.

       STATEMENT OF HON. DOUGLAS SHULMAN, COMMISSIONER, INTERNAL
                            REVENUE SERVICE

        Mr. SHULMAN. Chairman Lewis, Ranking Member Boustany,
    Members of the subcommittee, I want to thank you for the
    opportunity to testify here today, and I want to thank this
    Subcommittee for all the support that it has given the agency.
        I am very proud to be here today to talk to you about the
    dedicated work of the IRS employees around the country as they
    delivered a successful, yet difficult, filing season. I also
    want to talk to you about the President's 2010 budget request.
        Among the highlights of this year's filing season was
    record e-filing, as well as an increase in the average value of
    a refund by 14 percent, which was good news for taxpayers in
    this difficult economic time.
        Mr. Chairman, I also want to take this opportunity to
    announce today that by the end of the year I plan to deliver to
    the President and the Treasury Secretary a comprehensive set of
    recommendations on how to better leverage the tax return
    preparer community to increase taxpayer compliance and ensure
    high ethical standards of conduct for paid tax return
    preparers. Today, over 80 percent of taxpayers use either a tax
    return preparer or third party software to complete their
    returns. This is a transformational shift in tax
    administration.
        The first part of the review that I plan to undertake will
    involve fact finding and receiving input from a large and
    diverse constituent community. I know that this has been an
    issue of great interest to the subcommittee. I look forward to
    hearing your thoughts on the matter and keeping you apprized as
    we have this dialog.
        Paying taxes is one of the largest financial transactions
    that individual Americans have each year, and we need to make
    sure that the professionals who serve them are ethical and
    ensure that the right amount of tax is paid.
        Let me turn to the economy. The IRS is acutely aware of the
    many financial problems facing individual Americans,
    businesses, and nonprofit organizations, and I am very
    committed to striking the right balance between collecting the
    revenue to fund the government and using all of the tools at
    our disposal to work with taxpayers who are in difficult
    financial circumstances.
        The IRS this year continued to help boost the economy by
    executing the provisions, the tax provisions, of the American
    Recovery and Reinvestment Act. We acted in record time after
    Congress passed and the President signed legislation to boost
    working American's paychecks, and will continue to focus on
    outreach efforts to make sure that taxpayers get every credit,
    every deduction and every exclusion that they qualify for.
        Mr. Chairman, in the past year, the IRS has demonstrated
    its ability to be agile and respond to quickly changing
    situations. The 2010 budget that was submitted by the President
    will help build the strategic foundation for us to continue
    moving forward.
        My belief is that the IRS needs to excel at both service
    and enforcement to meet its mission. It is not an either/or
    proposition, and the budget helps us focus on both. It includes
    a robust portfolio of enforcement initiatives, including a
    focus on international enforcement that the President, the
    Treasury secretary and I unveiled on May 4, 2009. I have made
    international issues a top priority for my tenure, and we are
    going to have an unprecedented focus and investment in
    international issues.
        The budget also allows us to continue to evolve and improve
    with service delivery, which is fundamental to collecting the
    right amount of taxes and funding the government.
        Let me turn to the modernization of our core account payer
    database. We have consistently delivered on our commitments
    over the last several years. This year we have adopted a much
    more focused strategy that is going to allow us to complete the
    taxpayer database conversion on an accelerated timeframe, which
    is an essential element for our service and enforcement
    activities.
        Finally, Mr. Chairman, let me just encourage the
    Committee's support for the legislative proposals in the
    President's budget and let me highlight three of them: First,
    there is a suite of proposals to curb international tax
    evasion, which are very important to the IRS. Second, a
    proposal to require tax return preparers who have a certain
    volume of tax return filings to file electronically; and,
    third, is the proposal that you and the Ranking Member have put
    forth in legislation, which is to eliminate the 20 percent
    downpayment to receive an offer and compromise. And offer and
    compromise is a very important tool for us to work with
    taxpayers who cannot meet their tax obligation.
        These three provisions, the entire budget will be very
    helpful as we pursue our strategy of having a modern agency
    that continuously improves and excels at both service and
    enforcement.
        Again, thank you for the opportunity to testify, and I am
    happy to answer any questions.
        [The prepared statement of Mr. Shulman follows:]

                 Prepared Statment of the Hon. Douglas Shulman
                     Commissioner, Internal Revenue Service

        Chairman Lewis, Ranking Member Boustany and Members of the
    Subcommittee on Oversight, thank you for this opportunity to testify on
    IRS' efforts to ensure a smooth and successful tax filing season. I
    would also like to provide you with an overview of our proposed FY 2010
    budget request and what we hope to accomplish with these resources.
        I am pleased that the 2009 filing season has proceeded as planned.
    And it is important to note this year has presented us significant
    challenges. The IRS is acutely aware of the many financial problems
    currently confronting individual taxpayers, businesses and non-profit
    organizations--from struggling to hold on to jobs and homes, making
    payrolls, securing lines of credit, meeting pension plan obligations
    and paying taxes. We were also a key component in the implementation of
    the American Recovery and Reinvestment Act (ARRA)----legislation
    enacted earlier this year to help the economy and taxpayers in these
    tough times.
        Mr. Chairman, the IRS' mission consists of two important elements--
    service and enforcement. We need to provide world class service to the
    vast majority of taxpayers trying to pay their taxes and wrestle with a
    complex tax code. We need to carry out rigorous enforcement programs
    for those who do not meet their legal obligations to pay taxes. This
    proposition isn't an either/or choice. We need to do both. And we need
    to do both well.
        However, it is inevitable that during an economic downturn,
    taxpayers may fall behind in paying their taxes. As IRS Commissioner, I
    am committed to striking the right balance between collecting the
    revenues needed to fund the government, and using all the tools
    available to us to work with taxpayers who find themselves in difficult
    financial situations.
        Granted, this balance is a very fine line. On the one hand, we need
    to raise the funds to run the government. On the other hand, we also
    have to be tough on those who flout the law and won't pay what they
    owe. The American people who play by the rules every day expect us to
    vigorously enforce the tax law.
        But we also want to provide tangible relief to taxpayers in
    distress while also helping to prevent others from straying across the
    line into non-compliance. In the end, we need to be flexible yet
    principled and to empower our employees to use their judgment when
    dealing with taxpayers.

    THE 2009 FILING SEASON

        Mr. Chairman, although the current filing season will not
    officially conclude until mid-summer, I am pleased that it has
    proceeded smoothly and with few problems. Those problems that occurred,
    such as math errors and refund issues associated with the Recovery
    Rebate Credit (RRC), were quickly identified and remedied.
        The IRS and its volunteer partners have also responded with events
    such as Super Saturday both to help taxpayers identify and avail
    themselves of every credit, deduction or benefit for which they may be
    eligible--including those in ARRA--and to assist in return preparation.
    And by e-filing these taxpayers' returns, we can speed their refunds to
    them in a matter of days and help cushion the economic blow they may be
    experiencing.
        As was discussed earlier this year in the Subcommittee's hearing on
    assisting distressed taxpayers, those in hardship situations may also
    be able to adjust payment for back taxes, avoid defaulting on payment
    agreements or possibly defer collection action.
        Moreover, simplified processes, such as e-filing and self-serve
    applications on IRS.gov can improve compliance. For example, an
    electronically prepared and filed return has an error rate of less than
    one percent, compared to an error rate of approximately 20 percent for
    a paper prepared return. Taxpayers can also go to our web site and
    determine if they are eligible for the Earned Income Tax Credit or
    subject to the Alternative Minimum Tax using a calculator to determine
    the proper amount of withholding. The Sales Tax Deduction Calculator
    can even help taxpayers determine the amount of optional state and
    local sales tax they can claim on Schedule A of Form 1040.

    General Filing Season Data

        As of May 29th the IRS received almost 134 million total individual
    returns. And we have seen a continued growth in e-filing with a
    corresponding drop in paper returns. Of the total returns filed to
    date, more than 68 percent were e-filed by individuals, as compared to
    60 percent over the same time period last year. This amount is a major
    milestone and demonstrates the IRS' commitment to a robust electronic
    tax administration program.
        The use of e-filing by taxpayers from their home computers
    continues to grow this filing season. More than 31.5 million people
    prepared their own e-file return in 2009, representing more than a 19
    percent increase from the previous year. Overall, 87 percent of
    taxpayers now use computer software or a paid preparer. Tax preparers
    and the associated industry can help us increase compliance and
    strengthen the integrity of the tax system.
        Through May 29, 2009, the IRS issued 104.4 million refunds for a
    total of $279.2 billion, as compared to 100 million returns for a total
    of $235 billion over the same time period in 2008. The Average Dollar
    Refund totaled $2,674, as compared to $2,347 for the same week last
    year, an increase of almost 14 percent. Over the same time period, the
    IRS directly deposited 70.9 million refunds to taxpayers, as compared
    to 64.7 million last year.
        Working with media and its many stakeholders, the IRS publicized
    that taxpayers filing electronically with direct deposit can get their
    refunds in as few as 10 days. Based on the most current Refund
    Timeliness data, the average time to process arefund for a paper tax
    return is 6 to 8 weeks this year.
        Getting this extra money into taxpayers' hands faster is
    particularly important as the economic recovery and rebuilding process
    begins. Taxpayers can use this infusion of cash to pay bills or buy
    needed items that can help stimulate retail sales and the overall
    economy.

    Web Site Expansion and Usage

        IRS.gov continues to exhibit great popularity with taxpayers. The
    number of visits to the web site in 2009 is on a par with last year as
    taxpayers consistently rely on the Internal Revenue Service's online
    resources to get answers to tax questions, the economic recovery
    legislation and to prepare and file tax returns accurately and on time.
        This year, there have been almost 200 million taxpayer visits to
    the IRS web site. Perhaps reflecting the economic downturn, visits to
    the ``Where's My Refund'' electronic tracking tool are up more than 44
    percent over the same period last year.
        Some of the other electronic tools on IRS.gov include: The Recovery
    Rebate Credit Calculator, ``How Much was My 2008 Stimulus Payment?'',
    and the EITC Assistant where lower-income working taxpayers can
    determine if they are eligible for the refundable tax credit. IRS.gov/
    Espanol offers many of the same tax forms, publications and information
    in Spanish.
        Taxpayers can also find the latest information about the ARRA,
    including details on extending health insurance for people who lost
    their jobs, and tax breaks for first-time homebuyers. In addition, the
    IRS has developed ``What If'' scenarios and the possible tax
    implications for people who may be facing financially difficult times.
        When taxpayers visit the IRS.gov web site this filing season, they
    may also notice the new ``rotating spotlight'' feature on the homepage.
    The spotlights, which change every few seconds, give the taxpaying
    public direct access to more of the IRS web site's vast amount of
    content.
        Also on the homepage, taxpayers can click on ``1040 Central'' to
    find help preparing and filing their tax returns. Like last year, this
    popular section of IRS.gov has a wide range of offerings that address
    taxpayer needs.
        Finally, the IRS produced a number of podcasts this filing season
    that are available on IRS.gov. In addition to Tax Tips, Fact Sheets and
    News Releases, these short audio interviews cover a wide range of
    topics and are a way for the IRS to reach out to a new generation of
    taxpayers.

    Toll-Free Telephone Performance

        As of May 9th, the IRS had answered 20.3 million calls, a 3.6
    percent increase over the 19.6 million calls during the same period
    last year. It also completed 23 million automated calls, a decrease of
    almost 10 percent from last year's 25 million.
        As of May 9th, the IRS Customer Service Representative Level of
    Service (CSR LOS) dropped to 65.6 percent from 69.6 percent last year,
    a decrease of approximately 6 percent.
        The drop in CSR LOS is partially due to the number of taxpayers
    calling to obtain their Prior Year Adjusted Gross Income (PYAGI), which
    is used to satisfy the signature requirements when e-filing a current
    year return. More taxpayers were also calling regarding math errors and
    refund issues related to the RRC, and questions generated by the
    economic downturn and the ARRA.
        It should also be noted the lower LOS is due in part to voluntary
    hang-ups. IRS added an ``Estimated Wait Time'' feature this year so
    taxpayers could choose whether to wait to speak to an assistor or hang
    up and call back at a less busy or more convenient time. These
    abandoned calls are still reflected in the LOS measure and also
    contributed to the drop in service level.
        The IRS took aggressive actions to address the additional calls,
    including: identification and special processing for AGI and RRC calls;
    diversion of staff from other programs during peak demand periods; and
    redesign of the ``Stimulus Hotline'' to include information on both new
    legislation and the RRC.
        Because of these and other actions, we have been able to answer 7.5
    percent more calls than projected in our 2009 filing season plan, while
    achieving high productivity and quality. The Tax Law Customer Accuracy
    Rate for the 2009 filing season is 92.2 percent, as compared to 89.9
    percent in 2008, and the Accounts Customer Accuracy Rate for this
    filing season is 95.1 percent as compared to 93.6 percent the previous
    year.
        With the 2009 enacted budget, the IRS projects that it will answer
    a total of 35,213,718 calls. Although the current filing season CSR LOS
    is 65.6 percent we project we will achieve a 69 percent cumulative LOS
    for the year.

    Taxpayer Outreach

        Through a series of massive outreach efforts, the IRS wants to make
    sure that taxpayers are aware of every credit, deduction and exclusion
    for which they qualify, including several new benefits this year. One
    of these outreach events was aptly called ``Super Saturday.''
        On Saturday, March 21st, the IRS and its community partners, such
    as the Volunteer Income Tax Assistance (VITA) and the AARP, opened
    their doors across the nation to help low-income people needing free
    tax preparation, a question answered or payment schedule arranged. Our
    message to taxpayers was that we are going the extra mile to help those
    of you in economic distress. These steps build on our efforts in every
    tax season to increase awareness of the EITC and encourage low income
    filers to claim their money.
        By the end of the day, 252 IRS Taxpayer Assistance Centers had
    served approximately 11,000 taxpayers and 1,772 partner sites had
    prepared approximately 54,000 individual taxpayer returns and helped
    taxpayers learn if they were eligible for a number of important credits
    and benefits, such as the Earned Income Tax Credit (EITC) (see
    following section on assisting taxpayers).
        As of April 11th, total Volunteer Return Preparation stood at
    2,941,281--down 10 percent from last year's performance of 3,266,741,
    and Volunteer e-File increased by 5.4 percent compared to the same time
    last year.

    American Recovery and Reinvestment Act (ARRA)

        The Internal Revenue Service is proud of the role it has played in
    helping to implement, provide guidance and publicize many of the
    provisions of the ARRA that will assist both individuals and businesses
    in economic distress and get the Nation back on the road to economic
    recovery. The following summarizes the issues the IRS has addressed
    through recently issued guidance or increased outreach to the public.
        Make Work Pay Credit: A mere four days after President Barack Obama
    signed ARRA into law, the Treasury Department and the IRS swung into
    action in record time, developing new withholding tables to ensure
    money would get into American's pockets through the Make Work Pay
    Credit. As Treasury Secretary Geithner observed, ``Just days after the
    President signed this landmark legislation into law, we have the wheels
    turning to deliver much needed boosts to the paychecks of working
    Americans.''
        New Car Purchase: Under ARRA, taxpayers who buy a new passenger
    vehicle this year may be entitled to deduct state and local sales and
    excise taxes paid on the purchase next year on their 2009 tax returns.
    The IRS has been publicizing the deduction. For those thinking about
    buying a new car this year, this deduction may give them a little more
    drive to make their purchase this year.
        Earned Income Tax Credit: One important benefit available to many
    taxpayers of low- to moderate-income is the EITC. The ARRA temporarily
    increases the EITC for working families with three or more children.
    The IRS put in place an aggressive outreach program designed to reach
    every taxpayer who qualifies for the EITC. These efforts included EITC
    Awareness Days in which the Commissioner and various Members of
    Congress participated. We also offered EITC assistance in more than 170
    Taxpayer Assistance Centers across the country on three Saturdays in
    2009.
        Net Operating Loss: On March 16, 2009, the IRS announced that small
    businesses with deductions exceeding their income in 2008 can use a new
    net operating loss (NOL) tax provision to get a refund of taxes paid in
    prior years. The new net operating loss provisions could throw a
    lifeline to struggling businesses, providing them with a quick infusion
    of cash. Moreover, the IRS wants to make it as easy as possible for
    small businesses to take advantage of these key tax benefits.
        COBRA: ARRA provides for a 65 percent subsidy for continuation of
    health insurance premiums for up to nine months; reimbursement to
    employers would occur through reduced payroll taxes. For this to work,
    the IRS worked with employers and payroll processors to set up systems,
    develop new forms, train people, and start up a compliance program.
        Build America Bonds: ARRA also included provisions to allow state
    and local governments to issue bonds to help finance public projects
    that will benefit the local communities in many ways, including job
    creation. The IRS issued the legal guidance that potential issuers need
    to issue these bonds. According to industry figures, $10.2 billion in
    Build America Bonds have been issued as June 1, 2009 for key state and
    local infrastructure needs, creating jobs and boosting the economy
    along the way.
        Other Credits: The IRS publicized other ARRA credits, such as the
    residential energy efficient property credit that can provide a tax
    credit up-to-$1,500 for installing energy efficient windows and the
    American Opportunity Tax Credit that provides as much as $2,500 a year
    for the cost of a college education.
        First-Time Homebuyer Credit: For qualifying homes purchased after
    December 31, 2008, and before December 1, 2009, the ARRA expanded this
    unique tax incentive as a fully-refundable credit of up to $8,000,
    which does not have to be repaid provided the home remains the main
    residence for 36 months after the purchase date. As first enacted in
    the Housing and Economic Recovery Act of 2008, this credit provided a
    repayable credit of up to $7,500 for qualified taxpayers who purchased
    homes after April 8, 2008 and on or before December 31, 2008 and acted
    much like a 15-year interest-free loan.
        Other Benefits: The IRS also worked with the media to publicize
    that under ARRA, the first $2,400 of unemployment benefits is tax free
    for 2009.

    Financially Distressed Taxpayers

        As the economic downturn became more severe, the IRS leadership
    team created a strategy and action plan to help financially distressed
    taxpayers. The IRS worked with the media and a vast network of
    stakeholders, including tax professionals and preparers and business
    and industry groups and organizations, to raise taxpayer awareness
    about these important new options.

          Offering Installment Agreements: The IRS reminded
    employees of their ability to offer installment agreements at the end
    of an audit when taxpayers are having difficulty satisfying their
    obligations immediately, thereby enabling them to minimize interest and
    penalty charges.
          Postponement of Collection Actions: IRS employees were
    provided greater flexibility to suspend collection actions in certain
    hardship cases where taxpayers are unable to pay. This situation
    includes instances when the taxpayer has recently lost a job, is
    relying solely on Social Security or other assistance, or is facing
    devastating illness or significant medical bills. If an individual has
    recently encountered a certain type of financial problem, IRS assistors
    may be able to suspend collection without further documentation to
    minimize the tax burden on the taxpayer.
          Added Flexibility for Missed Payments: The IRS has
    flexibility in working with previously compliant individuals in
    existing Installment Agreements who have difficulty making payments
    because of financial hardship. The IRS may allow a skipped payment or a
    reduced monthly payment amount without automatically suspending the
    Installment Agreement.
          Prevention of Offer in Compromise (OIC) Defaults:
    Taxpayers who are unable to meet the payment terms of an accepted OIC
    will receive a letter from the IRS outlining options available to help
    themavoid default.
          Expedited Levy Releases: The IRS will speed the delivery
    of levy releases by easing requirements on taxpayers who request
    expedited levy releases for hardship reasons.
          What If Scenarios: The IRS recently added a special area
    on its web site focused on the financial downturn. Taxpayers with
    financial problems who discover they can't pay when they file their
    2008 tax returns have options available to them. IRS.gov has a list of
    ``What If?'' scenarios that deal with payment and other financial
    problems. These scenarios, in question-and-answer format, provide
    needed information.

    ENFORCEMENT

        In today's economic environment, it is more important than ever
    that our fellow citizens feel confident that individuals and businesses
    are playing by the rules and paying the taxes that they owe. With so
    many individuals struggling to keep their jobs and homes and provide
    for the basic necessities of life, there is little tolerance for those
    who can pay their taxes, but don't.
        Mr. Chairman, there is no ``silver bullet'' or one strategy that
    will alone solve the problems of the tax gap and tax avoidance--at home
    and abroad. As I have said on numerous occasions, we cannot audit our
    way to full compliance. Rather, an integrated approach is needed, made
    up of separate but complementary programs that will tighten the net
    around those not paying what they owe.
        For example, we know that those taxpayers who have their taxes
    withheld and reported to the IRS through third parties are the most
    compliant. On the other end of the scale, those operating without
    third-party withholding information reporting and/or withholding are
    the least compliant.
        We know that better information reporting can benefit the entire
    spectrum of taxpayers and boost compliance. In this regard, we have
    been given some new information reporting tools recently.
        For example, last year, the Congress passed new legislation
    relating to businesses that accept credit and debit cards. Starting in
    January 2012, the bank will send an information report on credit and
    debit card sales to the business and to the IRS, at the end of the
    year.
        Brokerage firms will also be required to file with the IRS annual
    information returns showing a customer's cost basis in securities
    transactions, which will go a long way to reducing misreported capital
    gains. We are taking steps to ensure that our systems are ready to
    process these additional returns in a productive and efficient manner.
        As I testified in March before the Ways and Means Subcommittee on
    Select Revenue Measures, international issues are now a major strategic
    focus of the IRS.
        While it is true that IRS agents and investigators will ultimately
    generate net enforcement revenues for the government, we view our
    international compliance strategy to date as more focused on protecting
    the approximately $2 trillion in revenue the IRS collects than the
    incremental enforcement revenue that we collect from these specific
    activities.
        A key focus of our overall enforcement strategy is to shift
    resources so we can expand programs targeted at non-compliance among
    large corporations, U.S. businesses with international operations, high
    net-worth individuals, flow-through entities and partnerships.
        Accordingly, the IRS has framed an aggressive, proactive yet
    balanced agenda to lead the agency into a new era of global tax
    administration in the 21st century. On May 4, 2009 President Obama put
    forth a set of far reaching international measures designed to rein in
    offshore tax evasion and close certain ambiguities in the tax code.
    These are discussed in detail later in my testimony under ``Legislative
    Proposals.''
        The IRS is putting pressure on offshore financial institutions that
    help U.S. citizens conceal taxable income. We are also looking for ways
    to improve the information we receive from foreign banks and through
    access to wire transfers.
        The IRS has increased the number of audits in this area over the
    last seven months and prioritized stepped-up hiring of international
    experts and investigators. With the enactment of the omnibus spending
    bill in March, the IRS began a hiring initiative to boost its ranks of
    revenue agents and officers.
        Because this problem is global, it will require a closely
    coordinated strategy among nations dedicated to ending this abuse that
    deprives our country of precious resources and erodes confidence in the
    fairness of our tax administration system.

    Enforcement Results

        Enforcement revenue has risen from $33.8 billion in FY 2001 to
    $56.3 billion in FY 2008, an increase of 67 percent.
        In FY 2008, both the levels of individual returns examined and
    coverage rates rose substantially. We conducted nearly 1.4 million
    examinations of individual tax returns in FY 2008, an 8 percent
    increase over FY 2006. This trend reflects a steady and sustained
    growth.
        While the growth in examinations of individual returns is visible
    in all income categories, it is most apparent in examinations of
    individuals with incomes over $200,000. Audits of these individuals
    increased from 105,549 in FY 2007 to 130,751 during FY 2008, an
    increase of 24 percent. Their coverage rate has risen from 2.68 percent
    in FY 2007 to 2.94 percent in FY 2008.
        Of note, coverage rates for three classes of large corporations
    with assets between $50 million and $250 million and higher all
    increased. Coverage rates for partnership returns stayed even as
    compared to FY 2007, while Subchapter S returns reflected a small .05
    percent drop due largely to the increase in number of S-corporations.
    The coverage rate for tax-exempt organizations increased slightly.
        IRS Criminal Investigation has also been vigorously addressing
    egregious tax evasion, money laundering, and other financial crimes
    that have a corrosive effect on our tax system. For example, the
    overall number of individuals charged in aninformation or indictment
    rose from 2,323 in FY 2007 to 2,547 in FY2008.
        Over the same period of time, prosecution recommendations for
    employment tax evasion more than doubled. The incarceration ratein
    these investigations was 81 percent and the average sentence was 29
    months.
        In FY 2008, IRS-developed cases related to foreign and offshore
    issues also resulted in 61 criminal convictions, and the average term
    for those going to jail was 32 months. For the first four months of FY
    2009, there were 20 convictions, and the average sentence was 84 months

    The Administration's FY 2010 Budget Request Funds Key Priorities

        The Administration's FY 2010 budget request for the IRS is a
    strategic and wise investment in the nation's tax system that will help
    the IRS stay on a path of continuous improvement in such critical areas
    as service, enforcement, technology, and human capital.
        Total resources to support IRS activities for FY2010 are
    $12,440,801,000. This amount includes $12,126,000,000 from direct
    appropriations, an estimated $147,101,000 from reimbursable programs,
    and an estimated $167,700,000 from user fees. The direct appropriation
    is a $603,402,000 increase, or a 5.2 percent increase over the FY 2009
    enacted level of $11,522,598,000. This amount excludes funding to
    implement the ARRA.
        The IRS continues to achieve efficiency savings in its operations.
    Because of the increase in e-filing, the IRS has effectively revised
    base operations and continues to implement savings resulting from the
    consolidation of an additional two paper processing sites.
        The IRS Strategic Plan 2009-2013 guides program and budget
    decisions and supports the Department of the Treasury Strategic Plan.
    The IRS Strategic Plan builds on past successes while being innovative
    and adapting to new situations, such as the increasing complexity of
    tax laws, changing business models, expanding use of electronic data
    and related security risks, accelerating growth in international tax
    activities, and growing human capital challenges. I am a firm believer
    that organizations always must be evolving, changing, and improving--
    and the Strategic Plan reflects that philosophy.
        The IRS Strategic Plan has two overarching goals: (1) improve
    service to make voluntary compliance easier; and (2) enforce the law to
    ensure everyone meets their obligation to pay taxes. The IRS must excel
    at both service and enforcement to meet its mission; it is not an
    either-or proposition.
        To improve service and make voluntary compliance easier, the FY
    2010 President's Budget Request for IRS provides the necessary funding
    to implement the following key strategic priorities.

    Enforcement Program

        The FY 2010 President's Budget request is $5,504,000,000 in direct
    appropriations and an estimated $60,797,000 from reimbursable programs,
    plus an estimated $7,800,000 from user fees, \1\ for a total operating
    level of $5,572,597,000. The direct appropriations level is an increase
    of 7.6percent from the FY2009 enacted level and includes $600,000,000
    to support tax enforcement activities funded by an allocation
    adjustment.
    ---------------------------------------------------------------------------
        \1\ Note that user fees are available to supplement appropriations
    contingent on demand for user fee services and receipt of fees. These
    amounts are subject to change.
    ---------------------------------------------------------------------------
        The FY 2010 President's Budget request includes program increases
    of $332.2 million for investments in strong compliance programs,
    including a robust portfolio of international enforcement initiatives
    discussed under ``Legislative Proposals.''
        Increased resources for the IRS compliance programs yield direct
    measurable results through high return-on-investment activities. The
    new enforcement personnel funded in the FY2010 President's Budget are
    expected to generate $2.0 billion in additional annual enforcement
    revenue once the new hires reach full potential in FY 2012. This
    estimate does not account for the deterrent effect of IRS enforcement
    programs, which are conservatively estimated to be at least three times
    larger than the direct revenue impact.
        The tax law is complex, and even sophisticated taxpayers make
    honest mistakes on their tax returns. Accordingly, helping taxpayers
    understand their obligations under the tax law is critical to improving
    compliance. To this end, the IRS remains committed to a balanced
    program of assisting taxpayers in both understanding the tax law and
    paying the proper amount of tax.

    Taxpayer Service Program

        The FY 2010 President's Budget request is $2,269,830,000 in direct
    appropriations, an estimated $39,000,000 from reimbursable programs,
    and an estimated $127,000,000 from user fees, for a total operating
    level of $2,435,830,000. The direct appropriations level is a reduction
    of 1.0 percent from the FY2009 enacted level, though it does not
    represent a program reduction due to non-recurrent activities and
    savings, such as one-time funding to carry out remaining work
    associated with the 2008 stimulus.
        The President's budget request continues improvements to both the
    quality and efficiency of taxpayer service, using a variety of person-
    to-person, telephone, and web-based and self-serve methods to help
    taxpayers understand their tax obligations and pay what they owe. The
    IRS taxpayer service program is funded in the Taxpayer Services and
    Operations Support appropriations. It should be noted that service
    investments and strategy are guided by the Taxpayer Assistance
    Blueprint--a five year plan that outlines the steps the IRS should take
    to improve taxpayer service and the IRS strategic plan.
        Providing quality taxpayer service is fundamental to keeping honest
    taxpayers in the tax system and compliant. It also helps them avoid
    making unintentional errors before returns are filed, which, in turn,
    reduces the need for follow-up correspondence from the IRS.
        The IRS provides year-round assistance to millions of taxpayers,
    including outreach and education programs, issuance of tax forms and
    publications, rulings and regulations, toll-free call centers, the
    IRS.gov web site, Taxpayer Assistance Centers (TACs), Volunteer Income
    Tax Assistance (VITA) sites, and Tax Counseling for the Elderly (TCE)
    sites.
        For example, in the Small Business arena alone, in FY 2008, the IRS
    participated in over 2,600 meetings, symposiums, and seminars attended
    by over 162,000 small business owners and tax professionals. The IRS
    also holds national and local Small Business Forums which provide an
    open avenue of communication between IRS and trade and industry groups.
    We held 135 Small Business Forums and facilitated 410 Small Business
    Tax Workshops in FY 2008.

    Business Systems Modernization (BSM)

        The FY 2010 President's Budget request is $253,674,000 in direct
    appropriations. This amount is an increase of 10.3 percent from the
    FY2009 enacted level. This appropriation funds the planning and capital
    asset acquisition of information technology (IT) to continued
    modernization of the core taxpayer account database.
        This effort is a critical underpinning of the next generation of
    IRS service and enforcement initiatives. The integration strategy
    includes a particular focus on enhanced account information technology
    security practices and robust accounting and financial management
    controls. This also funds the ongoing development of the Modernized e-
    File platform for filing tax returns electronically, as well as BSM
    labor (salaries and expense dollars) and related contract costs.

    American Recovery and Reinvestment Act

        As previously noted, the IRS is now implementing a number of ARRA
    tax provisions, including individual tax credits, such as the Making
    Work Pay credit; energy credits for certain appliances, education
    credits, and child credits; tax incentives for business; bond
    incentives; and a tax credit to provide discounted health benefits to
    certain workers who have lost their jobs. The IRS will be able to
    continue to implement and administer these critical tax programs within
    the levels contained in this Budget request.

    Legislative Proposals

        The FY 2010 President's Budget includes a number of legislative
    proposals intended to improve tax compliance with minimum taxpayer
    burden. These proposals will specifically target the tax gap and
    generate nearly $2 billion a year starting in 2012. The Administration
    proposes to expand information reporting, improve compliance by
    businesses, strengthen tax administration, expand penalties, and make
    it easier for taxpayers to enter into offer-in-compromise agreements
    (OIC).
        I also want to acknowledge that Chairman Lewis and Ranking Member
    Boustany have already introduced legislation to drop the requirement
    that a person who is requesting an offer in compromise--usually a
    person in a difficult financial situation who cannot meet their full
    tax bill--pay a 20 percent down payment to apply for the OIC. This
    legislation will increase access to OICs.

          Modify Electronic Filing Requirements--Electronic filing
    benefits taxpayers and promotes effective tax administration because it
    decreases processing errors, expedites processing and payment of
    refunds, and allows the IRS to efficiently maintain up-to-date records.
    This proposal would require electronic filing by paid tax return
    preparers as determined by a set threshold amount of taxpayers
    assisted. Volunteer preparers and direct filers would not be subject to
    this requirement.
          Expand Information Reporting--Compliance with the tax
    laws is highest when payments are subject to information reporting to
    the IRS. Specific information reporting proposals would:

            1.  Require information reporting on payments to corporations;
            2.  Require a certified taxpayer identification number (TIN)
            from contractors;
            3.  Require increased information reporting on certain
            government payments; and
            4.  Increase information return penalties.

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

            1.  Require electronic filing by certain large organizations;
            and
            2.  Implement standards clarifying when employee leasing
            companies can be held liable for their clients' federal
            employment taxes.

          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 for tax administration purposes;
            2.  Make repeated willful failure to file a tax return a
            felony;
            3.  Facilitate tax compliance with local jurisdictions;
            4.  Extend statutes of limitations where state tax adjustments
            affect federal tax liability;
            5.  Improve the investigative disclosure statute;
            6.  Repeal the requirement of a partial payment with an
            application for an offer-in-compromise; and
            7.  Allow assessment of criminal restitution as tax.

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

            1.  Impose a penalty on failure to comply with electronic
            filing requirements; and
            2.  Clarify that the bad check penalty applies to electronic
            checks and other forms of payment.

    International Legislative Proposals

        The President's international legislative proposals represent a
    balanced approach that would allow U.S. companies to continue to
    compete in the international marketplace, but would eliminate three
    major ambiguities, or gray areas, employed by U.S. multinational
    corporations to legally avoid U.S. tax.
        The international initiatives include reforming business tax
    deferral rules so that--with the exception of research and
    experimentation expenses that have significant spillover benefits to
    the United States--companies cannot receive deductions on their U.S.
    tax returns supporting their offshore investments until they pay taxes
    on their offshore profits. The Administration would also seek to
    prevent abuse of the foreign tax credit.
        In addition, clamping down on overseas tax havens is an integral
    part of the Administration's plan. It would reform the so-called
    ``check-the-box'' rules to require certain foreign subsidiaries to be
    considered as separate corporations for U.S. tax purposes. These
    subsidiaries could no longer ``disappear'' from the tax system.
        President Obama also unveiled his legislative proposals on
    financial institutions that enable and profit from international tax
    evasion. They will enhance information reporting, increase tax
    withholding, strengthen penalties, and shift the burden of proof to
    make it harder for foreign account-holders to evade U.S. taxes. They
    will also provide the enforcement tools needed to effectively deal with
    tax haven abuse.
        The core of the Administration's proposals is a new approach to
    investors who use financial institutions that do not agree to be
    Qualified Intermediaries (QI).
        I should note the OECD has also been studyingbest practices, data
    templates, outside auditor requirements, and other guidelines for
    building QI-type networks. We believe the enhanced QI system proposed
    by the President is a good starting point for a multilateral QI system.
        Under the President's proposal, the assumption will be that non-QI
    institutions are facilitating tax evasion, and the burden of proof will
    be shifted to the institutions and their account-holders to prove they
    are not sheltering income from U.S. taxation. Let me highlight some of
    the key elements.
        First, the Administration proposes to impose significant tax
    withholding on transactions involving non-Qualified Intermediaries. It
    would require U.S. financial institutions to withhold 20 percent to 30
    percent of U.S. payments to individuals who use non-QIs. To get a
    refund for the amount withheld, investors must disclose their
    identities and demonstrate that they are obeying the law.
        Second, the President's plan would create a legal presumption
    against users of non-Qualified Intermediaries. U.S. citizens who send
    money to one of these foreign banks that do not cooperate with us will
    have to provide convincing evidence to prove they are not breaking U.S.
    tax laws.
        Moreover, these presumptions will make it easier for the IRS to
    demand information and pursue cases against international tax evaders.
    This shifting of legal presumptions is a key component of the anti-tax
    haven legislation recently introduced in Congress.
        Third, the Administration's plan would give the Treasury Department
    authority to issue regulations requiring that a financial institution
    may be a QI only if all commonly-controlled financial institutions are
    also QIs. As a result, financial firms could not benefit from siphoning
    business from their legitimate QI operations to illegitimate non-QI
    affiliates.
        Fourth, the Obama Administration proposes to improve the ability of
    the IRS to successfully prosecute international tax evasion. For
    example, it would double certain penalties when a taxpayer fails to
    make a required disclosure of foreign financial accounts.
        Fifth, the plan would increase the reporting requirement on
    international investors and financial institutions, especially QIs. QIs
    would be required to report information on their U.S. customers to the
    same extent that U.S. financial intermediaries must.
        This means U.S. customers at QIs would no longer be allowed to hide
    behind foreign entities. U.S. investors would be required to report
    transfers of money or property made to or from non-QI foreign financial
    institutions on their income tax returns.
        Financial institutions would face enhanced information reporting
    requirements for transactions that establish a foreign business entity
    or transfer assets to and from foreign financial accounts on behalf of
    U.S. individuals.
        Of particular note, the Administration's plan would also extend the
    current statute of limitations on international tax enforcement from
    three to six years after the taxpayer submits required information.
        In addition, the President is giving the IRS resources to support
    the plan. The Administration's proposed FY 2010 budget for the IRS will
    allow us to make investments in the people, tools, and overall coverage
    in the international arena.
        This investment would increase the IRS' ability to combat offshore
    tax avoidance and evasion, including transfer pricing and financial
    products and transactions such as purported securities loans.

    IMPROVE TAX ADMINISTRATION AND OTHER MISCELLANEOUS PROPOSALS

        The Administration has put forward additional proposals relating to
    IRS administrative reforms. These proposals would:

          Increase information reporting penalties;
          Improve the foreign trust reporting penalty;
          Apply the Federal Payment Levy Program to contractors
    before providing Collection Due Process;
          Impose a penalty on failure to comply with electronic
    filing requirements; and
          Clarify that vendor levy on ``goods and services'' would
    not exclude ``property.''

    CONCLUSION

        Mr. Chairman, thank you again for this opportunity to testify on
    the successful 2009 filing season and the President's FY 2010 Budget
    Request for the Internal Revenue Service.
        The IRS has not only demonstrated continuous improvement in key
    areas such as e-filing but it has demonstrated its effectiveness by
    reacting quickly and in unusual situations, such as the economic
    downturn.
        We also urge passage of the President's proposed FY 2010 budget for
    the IRS. It provides the IRS with the much needed resources to provide
    taxpayers with high quality customer service, and bolster IRS
    enforcement in critical areas, such as unlawful offshore tax evasion.
    It also makes wise investments for the next generation of technology
    and the IRS workforce.
        We further urge this Subcommittee to support the enactment of the
    legislative proposals included in the Budget to improve compliance.
    Collectively, they will generate more than $10 billion over the next 10
    years if enacted.
        I look forward to working with you and the Subcommittee on this
    important budget request, and I will be happy to respond to any
    questions.

        Chairman LEWIS. Mr. Commissioner, thank you so much for
    your testimony. We appreciate your testimony and your willing
    to come here this morning and testify. At this time, I will
    open the hearing for questions. I ask that each Member follow
    the 5 minute rule. If the witness will respond with short
    answers, all Members should have an opportunity to ask
    questions hopefully before the first vote. We should move this
    hearing with all deliberate speed. And some of you understand
    what I mean by using the phrase ``all deliberate speed.''
        Mr. Commissioner, I am troubled by the fact that almost 23
    million taxpayers were not able to reach the agency by
    telephone this year. Some received busy signals. Others hung up
    after waiting. Could you tell us why has the level of service
    dropped? What steps are you taking to allow more taxpayers to
    speak to the agency during the next filing season?
        Mr. SHULMAN. Yes, it is a great question, it is one we are
    focused on. Any time a taxpayer calls the IRS and does not get
    right through, I am not happy. Let me give you a couple of
    statistics. In 2000, between January and May, we received 48
    million calls--I'm sorry, in 2007. In 2008, we received 64
    million calls during that time period. In 2009, we received 74
    million calls during that time period.
        That was a result of economic stimulus payments going out
    last year, cleaning those up this year, and reconciling
    accounts this year and then the American Recovery and
    Reinvestment Act coming in this year. And so the IRS has been
    called on to have an unprecedented amount of activities. The
    level of service dropped, it especially dropped during a couple
    of peak weeks, which is normal.
        Like any big enterprise, we need to balance all of our
    resources and one of the things we are quite focused on while
    our phones get a lot of attention, we triage between phones and
    paper, so we don't want people waiting a long time if they have
    written us. We don't want people waiting a long time on the
    phones.
        Our level of service was lower than we would like. We have
    done a couple of things. One is we are pushing more people to
    the web. Five million of those calls were people trying to find
    out their adjusted gross income. By next year, you will be able
    to find that out on the web. We have changed our telephone
    scripts to try to move and process people more quickly.
        We also have added an estimated wait time to your call, so
    if you call, you will know how long it takes and you can hang
    up and call back at a less busy time. So some of those hang
    ups, while they show up in our level of service going down,
    aren't necessarily a bad thing because they move people to non-
    peak hours and people do not waste their time for 10 minutes
    before they figure out that they actually cannot wait any
    longer.
        And so those are some of the things we are doing. We are
    going to keep closely monitoring those, and we are going to try
    to improve every year, albeit within resource constraints and
    try to make smart resource decisions.
        Chairman LEWIS. Thank you. Mr. Commissioner, I understand
    that the agency has assessed millions of dollars of penalties
    on taxpayers for failing to disclose tax shelters. Ninety-four
    percent of these taxpayers are small businesses. Is this true?
        Mr. SHULMAN. We have for listed transactions and reportable
    transactions, Congress passed a law that made a strict
    liability penalty if you do not report one of those
    transactions. The idea was to have some of the most egregious
    tax behavior have high penalties. We are quite well aware that
    there have been people caught up in this who the law was not
    intended for, and we are focused on this. Right now, we do not
    have discretion to waive those penalties, but I would like to
    work with Congress to try to make this reasonable so we have a
    little more discretion in these areas so if people, like small
    businesses you mentioned, get caught up unexpectedly, we have
    some leeway.
        Chairman LEWIS. We understand that the agency has imposed
    over $1 million of penalties on some taxpayers. I would like to
    submit for the record real life examples provided by the Small
    Business Council. How can this be--can you lower the penalty?
    Do you have the capacity? Do you need us to change--will our
    piece of legislation help change that?
        Mr. SHULMAN. No, this is strict liability, so generally the
    agency has quite a bit of discretion. We do not have much
    discretion here. And, as you said, there are people caught up
    in this that the law probably was not intended, so getting some
    more discretion would be something that I would be very
    interested in working with the Committee on.
        Chairman LEWIS. Thank you very much, Mr. Commissioner. I
    yield to the Ranking Member for his questions.
        Dr. BOUSTANY. Thank you, Mr. Chairman. Commissioner,
    everyone agrees that those who criminally evade U.S. tax
    obligations should be brought to justice and that greater
    enforcement resources for the IRS certainly could make this
    happen. I do have some strong concerns, however, that the
    administration and the press tend to lump together the need to
    combat offshore tax evasion on one hand with raising taxes on
    foreign profits of fully compliant U.S. businesses on the
    other.
        What we want really are U.S. corporations doing business
    overseas to be able to compete on a level playingfield with
    their foreign competitors. So for the sake of clarity, do you
    agree that the international tax enforcement funding we are
    discussing here today in the proposed budget should be kept
    distinct from proposed tax policy changes, such as restrictions
    on deferral and foreign tax credits, about which reasonable
    people can disagree?
        As I read your testimony on page 9, I think it was the very
    top paragraph, you referenced the May 4th statement by
    President Obama, and you referenced closing certain ambiguities
    in the Tax Code, which is really a policy issue that Congress
    will have to take up. And then I go down to page 14, and the
    first three paragraphs under ``International Legislative
    Proposals,'' and you reference a balanced approach that will
    allow U.S. companies to continue to compete in the
    international marketplace but yet I get to the second
    paragraph, and this is an assault on deferral, and in the third
    paragraph you talk about clamping down on overseas tax havens
    and then you get into the check the box provision. And so,
    again, do you agree that we ought to have a clear line of
    distinction between dealing with evasion and legitimate tax
    policy?
        Mr. SHULMAN. Yes, let me tell you how I think about this. I
    think there are two distinct sets of issues that the IRS spends
    times on and worries about. One is very clear: U.S. taxpayers
    hiding assets overseas illegally, not paying taxes, for those
    people we have an aggressive agenda. We are going to find them,
    and we are going to prosecute them and pursue them and there
    are a lot of very public cases out there.
        The second issue is with multi-national businesses, a very
    different and distinct issue. There is plenty of legitimate tax
    planning, and there are a lot of people trying to be
    competitive, trying to construct business transactions that
    also have a tax benefit, and people who stay within the lines
    of the law, we have no issue with.
        I also think there are large corporations that use the
    complexities of global capital markets and the complexities of
    the Tax Code to push the envelope beyond what we think is
    legal, and we have disagreements sometimes about the law. And
    so that is where I end up focusing as the IRS commissioner.
        There is also a set of--I'm sorry.
        Dr. BOUSTANY. Yes, let me just say isn't it true that most
    large U.S. businesses with worldwide operations are under
    continual audit by the IRS and have agents trained to detect
    illegal activity year round--working year round doing auditing?
        Mr. SHULMAN. Most of the largest corporations are under
    continual audit. One of the pieces in the current legislation--
    or in the President's budget is to give us money for offshore
    tax evasion but it is also to give us economists, lawyers,
    agents, who are well-trained to make sure we can continue to
    match off against corporations who are doing tax planning but
    occasionally pushing the bounds.
        Dr. BOUSTANY. Thank you. I have another question on a
    different subject. Back in I think it was 2007, then assistant
    secretary for tax policy, Eric Solomon, sent a letter to then
    Ranking Member Jim McCrery, ranking member of the Full
    Committee, explaining his concerns with the ability of the IRS
    to administer tax credit bonds. And according to Mr. Solomon at
    that time a lack of uniform rules and the proliferation of
    special purpose tax credit bonds imposed tremendous
    administrative burdens on the IRS and Treasury. Clearly, the
    Emergency Economic Stabilization Act of 2008 and the Recovery
    Act of 2009 both contain significant expansions of these tax
    credit bonds. Do you share then Assistant Secretary Solomon's
    concerns about the difficulty in administering these bonds?
        Mr. SHULMAN. I am not familiar with that specific letter,
    so I don't want to speak to his concerns. I would be happy to
    follow up with you. What I will tell you is there are some bond
    provisions in the Recovery Act that Congress passed, we are
    staffed up and ready to execute those. And so I am not aware of
    us having specific issues. I will tell you any time there is
    complexity in the Code, it puts a burden on the IRS. And when
    you get into lots of capital market flows and special
    deductions for special areas and incentives, it often causes
    administrative burden writ large, but I am not familiar with
    that specific issue.
        Dr. BOUSTANY. Perhaps we can meet on that later and have
    someone from Treasury as well just to get clarification on
    where we were in 2007 and where we are today given the
    expansion of these various tax credit vehicles.
        Mr. SHULMAN. Yes, I would be happy to.
        Dr. BOUSTANY. Thank you. I yield back.
        Chairman LEWIS. Now, I turn to Mr. Becerra for his
    questions?
        Mr. BECERRA. Thank you, Mr. Chairman, and thank you for
    holding this hearing. Mr. Shulman, great to have you hear.
    Thank you for taking the time. I am very encouraged by your
    comments today and your announcement that you will be doing
    more to examine the whole issue of paid tax preparers. This is
    something I have been concerned about for quite some time. I
    will be re-introducing legislation soon that deals with the
    issue of paid tax preparers.
        And I would like to see if I can ask a few questions.
    Understanding that you are now in the process of talking,
    collecting information and perhaps not having final answers, I
    would like to see if I can get from you some of your opinions
    on some of these issues but more importantly some of the facts
    that drove you to this decision and this announcement to move
    forward in examining the whole tax preparer community.
        First, you mentioned that 80 percent of Americans use
    either a paid tax preparer or some third party software to try
    to file their tax returns. Mine understanding is that on top of
    that statistic, some 60 percent of Americans rely on paid tax
    preparers exclusively to do this. And so well over half of
    American taxpayers go to someone else and pay that individual
    or company to get their tax filings into the IRS and get them
    in accurately.
        The concern I have, and the reason I have taken this issue
    on for quite some time, is that we find that in too many cases
    there are errors even in these filings by people who have paid
    tax preparers to prepare the returns for them. And what we are
    finding is that we have all sorts of people who are being paid
    to do tax preparation, many are certified public accountants,
    many are attorneys with experience in tax law, many are
    individuals who worked in the field of tax policy and law for
    quite some time, whether through the IRS or otherwise, but
    there is no clear standard nationally that says what you have
    to do to prepare or to become a tax preparer. You could open a
    shop tomorrow without little trouble. In fact, you and I do not
    know how many tax preparers there are right now in America, is
    that correct?
        Mr. SHULMAN. That's correct.
        Mr. BECERRA. And so I know that there has been talk of
    requiring all tax preparers who are paid to register, so at
    least you can tell us the number of tax preparers that are out
    there and begin to track their work. But that seems to only
    deal with the problem once it has already occurred. If you are
    only going to register them, then you find out that some are
    not doing good work and Americans are now paying penalties to
    the IRS because they filed income tax returns improperly based
    on a paid tax preparer having prepared these tax returns for
    these American taxpayers.
        And some of us believe, I am in this camp that believes
    that we have to do something to make sure there is a level of
    competency in these tax preparers so that when you pay good
    money to do your civic duty of paying your taxes, you do not
    have to find out that the IRS is going to come after you
    because you did it wrong. And it is very tough I suspect to go
    after that tax preparer afterwards to take care of your
    penalty, your fines, your late fees and all the rest. And so I
    am wondering if you can comment on this notion of going farther
    than just asking tax preparers, paid tax preparers, to register
    with the government through the IRS but also to ask for some
    level of competency of anyone who wishes to hold himself out as
    being a professional tax preparer?
        Mr. SHULMAN. Yes, I think a couple of things. Clearly, with
    preparers and software providers being engaged with 80 percent
    of Americans plus, there are very few people who sit down like
    the old image that people have filling out the 1040 anymore,
    they need to be part of the overall tax administration system
    for two reasons. One is they are part of making sure we have
    compliance and collect the right amount of taxes. And, two is,
    as I mentioned, paying your taxes is one of these largest
    financial transactions that American citizens and American
    taxpayers have each year, and we need to make sure that people
    are ethical, they are well-trained, they are giving good
    service, both to make sure that we collect the right amount of
    money and that people are being treated fairly.
        Mr. BECERRA. And so, Commissioner, how do you make sure
    that they are well-trained?
        Mr. SHULMAN. Well, so what I have just announced is I will
    tell you exactly my thoughts on that by the end of this year,
    and I will submit it in writing to the Treasury Secretary and
    the President. I want to enter this with an open mind. I am a
    big believer in transparent and open dialog when the government
    gets involved in a big question like this that is going to
    affect a lot of people, and so we are going to hold some open
    meetings with preparers, with consumer advocates, with
    taxpayers, with any effective constituency. We are going to be
    looking forward to having discussions with Congress. And for me
    everything is on the table with this, everything from
    education, to services we provide, to strict enforcement we
    have, to all of the regulatory issues that you discussed.
        Mr. BECERRA. Thank you, Mr. Commissioner. Thank you very
    much.
        Chairman LEWIS. Now, I turn to Mr. Pascrell for his
    questions.
        Mr. PASCRELL. Thank you, Mr. Chairman. Commissioner
    Shulman, welcome to the Committee. You did a fantastic job in
    the IRS in responding to the American Recovery and Reinvestment
    Act and all of the different programs here to stimulate the
    economy. I will ask you a question about that after. I want to
    get to this question, it is something that I have shared with
    the IRS a few times, and I want to--hopefully we can totally
    resolve it. The IRS is seeking to apply a Treasury regulation,
    which would re-define what normal retirement age means for
    purpose of examining pensions. Serious business.
        This regulation will have significant adverse effects on
    public service employees, particularly cops and firefighters
    throughout the United States of America. I understand the new
    regulations, they stipulate that plans must specifically define
    normal retirement age so that it is not based on years of
    service and yet we know in public safety, that is how we do
    define retirement, based on years of service.
        In October of last year, the IRS decided to delay the
    effective date of implementation until January 1, 2011. While
    the extension was good news, I think we want to resolve this
    once and for all. Typical public safety pension plans are
    designed around, I repeat, the years of service and not an
    arbitrary age due to the physical and mental strain of the job.
    The IRS regulation does not take into account the reasons for
    why this retirement system is established as it is. I would
    like to see governmental plans completely excluded from the
    normal retirement age regulation. Here is my question, would
    you be willing or able to provide a formal opinion stating that
    government pension plans are exempt from the normal retirement
    age?
        Mr. SHULMAN. I am going to have to have conversations on
    this obviously with our attorneys on this and the Treasury
    Department but the sentiments you have around (a) pensions
    being important for public employees, firemen, policemen,
    people who have special stress on the job, I am very
    sympathetic to. I would ask you--I am not going to be able to
    make any commitments here, but I certainly will work with your
    office on it, look at it, and give you anything I can as far as
    commitments.
        Mr. BECERRA. We are talking about a very different
    classification of workers, particularly when we talk about
    police and fire. You are talking about not only the stress of
    the job but you are talking about losing a lot of people that
    we need particularly at this time. And I would ask us to move
    as quickly as possible to get a final opinion on this. It
    affects every career firefighter and just about every police
    officer in the United States of America. I would ask for your
    indulgence on that.
        The second question is I am glad to see in your testimony
    that you highlight the new car purchase deduction. We have sent
    so much to the big three, we did not ask ourselves the
    question, some of us did on both sides of the aisle, what good
    is it if we provide dollars to keep them afloat and we do not
    sell any cars? Well, that is exactly what happened. And this is
    the result of a lot of the dealers having to shut down. It
    could have been avoidable. We had legislation to do that, as
    well as the Earned Income Tax Credit, which we have all been--
    many of us have been strong advocates of for a number of years.
        You stated that, and I am quoting you, ``Through a series
    of massive outreach efforts, the IRS wants to make sure that
    taxpayers are aware of every credit, deduction and exclusion
    for which they qualify, including several new benefits this
    year.'' You even used the word ``publicize,'' and I do not know
    how you are publicizing what is happening in the automobile
    industry to get cars, to help the process of selling cars, I
    wish you would tell us that. What more can be done do you think
    to increase the awareness of both the EITC, for instance, as
    well as the new car purchase deduction, which is going to save
    people a lot of money?
        Mr. SHULMAN. Yes, you mentioned we are very focused on the
    education and outreach component of our mission. We have got--I
    will not bore you with all the programs, but we run special
    events, we do events with Members of Congress. We do a lot of
    media, both in English and Spanish. We have a variety of
    mailings. We have a very large web presence. We have one of the
    most trafficked business non-individual web sites in the world.
    And with the Recovery Act, the President tasked every agency to
    be very aggressive about outreach. If my memory serves me
    correctly, the President actually announced the new car credit
    and he does well when it comes to media and getting attention
    and publicizing. We go all out to do that.
        It also though, takes lots of partnerships, so we try to
    work through community groups, tax preparation groups, both
    low-income taxpayer clinics, a variety of folks to do
    publications. Media and outreach and publication is a science
    and also an art, and we try to home both of them. We spend a
    lot of time and resources trying to execute that part of our
    mission because, as I think the chairman and Ranking Member
    said, if we can get people to do it right in the first place,
    that is the best way to do tax administration.
        Mr. BECERRA. Mr. Commissioner, in these thousands of
    dealers that are being forced to close, on the average there
    are 47, 48 employees at every one of these dealers. The level
    of income is between $48,000 and $55,000. You are talking about
    a lot of people. You are talking about a lot of people being
    put out to pasture, and I think whatever we can do to
    accelerate this. It is fine that the President made the
    statement, he has got the bully pulpit, but the fact is that
    the IRS must be a partner and the publicity must be something
    that gets down to the average person so that they know that
    this is real. And we should be working with the dealers to help
    them. We did such a great job, didn't we, of working with the
    big three, let's deal with the dealers and help those folks on
    Main Street.
        Thank you.
        Chairman LEWIS. Now, we turn to Mr. Linder for his
    questions.
        Mr. LINDER. Thank you, Mr. Chairman. Mr. Commissioner,
    welcome, nice to have you here.
        Mr. SHULMAN. Thank you.
        Mr. LINDER. Increasing numbers, as you pointed out in the
    early part of your remarks, are going to professionals to
    prepare their tax returns and sending them in online. Do you
    have any idea what percentage of all taxpayers use itemized
    deductions and what percent do not take itemized deductions?
        Mr. SHULMAN. I do not have that number off the top of my
    head, but I would be happy to get it.
        Mr. LINDER. Do you have a ball park?
        Mr. SHULMAN. Roughly a third.
        Mr. LINDER. A third use itemized deductions?
        Mr. SHULMAN. Yes.
        Mr. LINDER. Yes? Those third that use itemized deductions
    pay about $350 billion a year to fill out their tax--to respond
    in writing to the IRS. Businesses and individuals spend another
    $100 billion a year calculating the tax implications of a
    business decision. If we are spending $450 billion a year just
    to deal with the IRS, is that productive time and money?
        Mr. SHULMAN. If you are getting at is the Tax Code
    incredibly complex and difficult to deal with, I think it is
    incredibly complex and difficult to deal with, and my job would
    be a lot easier with a much more simple tax code.
        Mr. LINDER. Do you have any tax task force in your agency
    looking at ways to fix that?
        Mr. SHULMAN. The President has assigned the Economic
    Recovery Panel led by Paul Volcker to look at a variety of
    issues including burden and simplification, and we are engaged
    with that panel.
        Mr. LINDER. Do you have any idea how large the underground
    economy is?
        Mr. SHULMAN. I do not.
        Mr. LINDER. Would you take any guesses?
        Mr. SHULMAN. No.
        Mr. LINDER. Would you believe $2 to $3 trillion?
        Mr. SHULMAN. I will not hazard to guess.
        Mr. LINDER. In the past, we gave unpaid claims of small
    amounts to private companies to collect and they raised some
    money. That has now been taken off the books. It is not legal
    for them to do that or for you to give them the claims. Who is
    filling in that role or are we just forfeiting the money?
        Mr. SHULMAN. Yes, we have had what I think has been a
    successful honing and refining of our collection program. The
    way that we measure tax debt that is collectible, we have to
    keep debt on the books for 10 years, unlike private sector
    companies write off a lot of debt. But if you look at our
    inventory of potentially collectible debt was in 2003 about
    $7.3 billion, that has decreased in half over the last--since
    2008.
        Mr. LINDER. How can you say $7.3 billion when you tell us
    that the tax gap is $345 billion?
        Mr. SHULMAN. Two different measures, potentially
    collectible inventory is agreed upon tax that we are out
    collecting. The tax gap is a measure of what is owed that is
    not paid, which includes people who are not on the books, et
    cetera. So that is the amount of taxes owed minus the amount of
    taxes paid every year.
        Mr. LINDER. So the question was is somebody now in your
    department pursuing those smaller claims that used to be
    pursued by private companies?
        Mr. SHULMAN. Yes, yes.
        Mr. LINDER. Thank you. Thank you, Mr. Chairman.
        Chairman LEWIS. Thank you. Now, we recognize Mr. Etheridge
    for his questions.
        Mr. ETHERIDGE. Thank you, Mr. Chairman. Mr. Commissioner,
    thank you for joining us today. Let me follow a line that has
    already been followed to an extent. If you would speak to the
    IRS' ability, you touched on it a little bit earlier, to deal
    with the growing complexity, number one, in the Tax Code. And,
    second, we have expanded tax credits for education, to provide
    benefits for homeowners, to give new credits for energy
    efficiency, among others, and they are meant to help people
    make the decision, number one, to go to college or buy a home
    or, as you just talked about, buy a car or improve the home to
    save energy, et cetera.
        I guess the broader question, you testified about the
    outreach but are you reaching out through various groups out
    there? I would be interested in those comments because I think
    the time is running out on some of this.
        Mr. SHULMAN. Yes.
        Mr. ETHERIDGE. It is now June and December is going to be
    here real quick. I believe if I remember anything about the
    IRS, you have got to have that completed and paid for before
    you file your taxes. You cannot have it under contract and then
    work, and so I would be interested in your comments as we are
    reaching out because that time line really is not seven months
    now, it is probably more like four or five, depending on what
    you are going to do.
        Mr. SHULMAN. Yes, we have been--for each of the different
    tax credits, we have a set of groups, there is a wide network
    of tax professionals, both preparers, the groups, umbrella
    groups for accountants, a variety of community groups who are
    our partners that generally we reach out to for people who to
    go to tax but then also for housing credit for instance. We
    have been working with specifically different groups that we
    usually do not work with to advertise those kinds of things.
        Mr. ETHERIDGE. To get the information out.
        Mr. SHULMAN. We have partnered with HUD for instance, who
    has their networks and their outreach program to all the
    different housing groups. They are working side by side with us
    to penetrate that market. We have partnered with education to
    do outreach there, and so we have tried to go through our
    traditional channels but also specific channels just to make
    sure people get all the information they need for the Recovery
    Act.
        Mr. ETHERIDGE. To your knowledge, are all the rules and
    regulations in place or will they be in place shortly for these
    new bonds that are out there because I know there are a variety
    of zero interest bonds we put in the Recovery Act.
        Mr. SHULMAN. Yes.
        Mr. ETHERIDGE. And talked with some of the local
    governments, they are not real sure they have them in place
    where they can start issuing bonds.
        Mr. SHULMAN. We have issued most of the guidance. We also
    have now gotten questions and are working on some very specific
    technical issues, but we have been very focused. I will tell
    you as an agency head, the Vice President was tasked with
    overseeing this. Everyone has deadlines around it. It is all
    very transparent, when we are putting out guidance for what.
    Most of all of our guidance is out. Anything that is not out is
    incredibly technical, more difficult guidance, and I am
    checking on it daily and putting pressure on our agency as is
    the Treasury Secretary for the things that have to come out of
    Treasury.
        Mr. ETHERIDGE. Would it be possible for somebody from your
    department to be in touch with our office because we have got
    some specific ones I know the guidance is not there yet and
    they are in the process of trying to do some bonds that will
    help expand some stuff and this is a specific--these local
    bonds that deal with municipalities and counties and states.
        Mr. SHULMAN. Absolutely.
        Mr. ETHERIDGE. And economic development.
        Mr. SHULMAN. We would be happy to work with your office
    immediately.
        Mr. ETHERIDGE. Let me ask one other question in the time I
    have left because today our economy is increasingly global, and
    a lot of small businesses, who never thought they would be
    selling stuff offshore, are now selling stuff internationally,
    and many of them are doing quite well. When once they only
    worried about selling in state, there was not a problem for the
    tax system because they collected the tax they sold, et cetera.
    And as more businesses expand and become global, does the IRS
    have the manpower, I assume you have the expertise, to deal
    with these emerging businesses and give them the assistance
    they need in some of these complex areas because I think this
    is a great opportunity as the economy starts to recover in
    finding a level of ability to deal with that?
        Mr. SHULMAN. I came from the capital markets regulation
    field before this, and now looking at the tax system, one of
    the issues we have in this country that everyone is wrestling
    with is how do you deal with sovereign laws and sovereign
    authorities in a global world and how do you deal when you
    cross borders. I would say this agency has done a good job
    trying to get ahead of the curve. We have got a long way to go,
    and it is going to be a multi-year effort.
        You asked about if we have the resources and the
    competency. The people who are there are quite competent, they
    are going to need training because all of these techniques are
    emerging, and we are getting more resources in this year's
    budget and hopefully in next year's budget, the 2010 budget
    that was sent to the Hill. And so it is going to be an area
    that we are going to keep focused on and try to get in front
    of.
        Mr. ETHERIDGE. Mr. Commissioner, is there any way we can be
    of help? I am sure the chairman would say to you let us know
    because I think this is an area where we are going to get
    growth, and if we are really going to get out of this thing, we
    are going to need to help small business. Thank you, and I
    yield back, Mr. Chairman.
        Mr. SHULMAN. Thank you.
        Chairman LEWIS. Thank you very much. We now turn to Mr.
    Kind for his questions.
        Mr. KIND. Great, thank you, Mr. Chairman, for holding this
    hearing. Mr. Commissioner, welcome back. It is always nice to
    hear from you. Let me just follow up quickly on what Mr. Linder
    had asked you previously about the Volcker Commission. That
    obviously has been tasked to meet this summer and fall and
    report back later. The IRS role, is there any role that the IRS
    going to be playing with the Volcker Commission or what?
        Mr. SHULMAN. For the specific tax part that involves
    simplification, tax gap, enforcement, those kinds of pieces,
    yes, I have been invited to participate, we have staff engaged
    in that.
        Mr. KIND. What stage are we in with that Commission? Has it
    had a formal meeting yet?
        Mr. SHULMAN. I would rather not speak for the White House
    and the Volcker Commission. There was a formal public meeting
    in May of the whole group. I know the tax group has met but
    like I said I probably should not speak for the White House.
        Mr. KIND. Has the IRS been involved in any meetings so far?
        Mr. SHULMAN. Yes, I have attended the first meeting and am
    deeply involved as is the Treasury.
        Mr. KIND. Let me ask you a question, my staff person in
    charge of IRS issues back home indicates to me just anecdotally
    that offers and compromise have diminished quite a bit
    recently. And in light of the current economic situation, is
    there a reason or is this an anomaly or what?
        Mr. SHULMAN. They have been going down over the last
    several years. It is something I am quite concerned about. Two
    things that I think are in important. One is in the President's
    budget and in coming from the chairman and the Ranking Member
    and others Members of the Committee, there is a recommendation
    that we eliminate the 20 percent downpayment requirement, which
    I think will help boost that. We are also reviewing internally
    how we make sure we get the word out because I am very focused
    and everyone in our agency is very focused and understands we
    are a big service organization but we are also an enforcement
    organization.
        Mr. KIND. Right.
        Mr. SHULMAN. Not everyone in America understands the
    service component even though they file the return, and we want
    to make sure people know that if they reach out to us and they
    are having a hard time paying, we can work with them. And so we
    are doing an internal review and this legislative change I
    think would be important.
        Mr. KIND. But what is the reason why there has been kind of
    a drop off in offers and compromise?
        Mr. SHULMAN. We do not know, but I suspect one of the
    reasons is the law that went into place several years ago that
    required you to put a 20 percent down payment for your offer
    and compromise. And so this is usually people who do not have
    the money to pay their full tax debt. They may not have the
    full money to put 20 percent down when they do not even know if
    the debt is going to be compromised.
        Mr. KIND. Right. I think later this year new tax gap
    estimates are supposed to be released, I think the last year we
    have available is the $345 billion in 2001, does that sound
    right? In 2009, we are supposed to get an update, is that
    right?
        Mr. SHULMAN. So the tax gap, a couple of things. One is it
    is a very imprecise measure. The number is targeted to 2001 but
    a lot of that is extrapolated data from 1983, 1986, and so it
    is not based on real updated data. We have been giving some
    more money to actually update that research. We have given it
    in the past, we are giving it now. Our goal is to get to multi-
    year or to get to regular updates, recognizing that it is
    always going to be imperfect. We are shooting and right now
    working hard on S corp and C corp numbers, which are especially
    old, and we are hoping to get those out in the not too distant
    future.
        Mr. KIND. I assume that your review of this is going to be
    able to identify what might be more achievable as far as going
    after some of the tax gap revenue that we are losing right now?
        Mr. SHULMAN. Yes, I think a lot of focus on the tax gap, I
    am concerned about the tax gap. Some of these tax gap numbers
    though we know where there is no information reporting is where
    there is lower compliance, down in the 50 percent range. Where
    there is lots of information reported, like a W-2 and
    withholding, you are up in the 99 percent range. So it is
    somewhat imprecise because by definition the tax gap is money
    that is not coming in, so you do not know exactly where it is
    and what is the motivation. There are a whole bunch of
    proposals, this Committee was supportive of having credit card
    reporting and basis reporting. There are some proposals in the
    President's budget around having international focus, some
    reporting on businesses, and so I think we already have a whole
    bunch of strategies that are good to go after. And, yes, the
    research will help us target that.
        Mr. KIND. Let me ask a quick question on the withholding
    tables on Making Work Pays. It is my understanding that for
    married couples, the credit is listed as 600 bucks but is not
    the maximum amount for a married couple $800, so am I missing
    something here in the withholding tables?
        Mr. SHULMAN. Yes, the withholding tables are estimates and
    guides. If you are married, you might have one person working
    or two people working. You might be able to get $400 or $800
    depending who is working in the household. And so by definition
    these things--the withholding table is not going to take into
    account every single taxpayer's situation. My understanding is
    the Treasury Department economists who put together the tables
    tried to come up with an average which would work for the most
    people, recognizing it is not going to work for everybody.
        Mr. KIND. Is it creating confusion?
        Mr. SHULMAN. Withholding tables every year are imprecise,
    and so the important thing is for people to look at their own
    situation, decide what their withholding should be. Some people
    like to under withhold and owe something at the end. Some
    people like to over withhold and get a big refund. And so the
    one piece that was creating a lot of confusion to this
    committee was good and brought to our attention early was the
    withholding tables for people on pensions who were not working
    were taking too great of deductions and therefore were going to
    owe more at the end, and we have corrected that. And so where
    there is more confusion than normal, we will be agile and try
    to update those as we see problems.
        Mr. KIND. Thank you, Mr. Commissioner. Thank you, Mr.
    Chairman.
        Chairman LEWIS. Thank you. Now, we turn to Mr. Roskam for
    his questions.
        Mr. ROSKAM. Thank you, Mr. Chairman. Thank you,
    Commissioner. Just two quick areas, one is could you give me a
    general sense, based on your conversation earlier with some of
    the other Members, about your view on the Free File Alliance
    and how that sort of--how that interplays with other plans? The
    President during his campaign talked, I think it was pretty
    explicitly, about getting official help on the side of
    taxpayers if he had income under $100,000.
        I guess my question is do you view that Free File Alliance
    as a helpful tool right now? I guess the question is if you are
    having a hard time answering the phones and answering the mail,
    and you have got a complicated job admittedly, is that any time
    to be bringing in tax preparation in-house so to speak? Could
    you just give me your general sense of that?
        Mr. SHULMAN. Yes, my general sense is this, I would like
    the Tax Code to be simpler first so people have to rely less on
    software and people, et cetera, and it was easier. Second is
    the American people have to pay taxes, and so as cheap and easy
    as it can be, that would be great philosophically is where I
    lean. I also think the Free File Alliance has been a very good
    partnership we have had over the years that has allowed low-
    income people to file their tax returns for free online.
        It was developed at a time where the Internet had not been
    as developed and expectations of consumers broadly were
    probably not that they could get online and do something quick
    and for free. A lot of members of the Free File Alliance
    actually this year for the first time are allowing free
    electronic filing even when you purchase their software. And so
    I think this is a rapidly evolving area. I think any time you
    are talking about electronic filing, software preparation, the
    Internet, it changes every year, both the expectations of the
    American people change every year, as well as the abilities of
    both government and the private sector to deliver. And so it
    has been a good program.
        I think all of our programs around electronic filing are
    going to evolve. This year you might have seen--last year, we
    had about 58 percent of individuals filed electronically. This
    year, to date, about 68 percent have, although people who have
    extensions usually come in paper because they are more complex
    returns but it is still clearly going to be above the 58
    percent, so that keeps growing. So I think this is just going
    to be an ongoing conversation that we are going to have, and we
    as the government need to keep up with the times. That means we
    are going to be doing certain things, we are going to be doing
    certain things with the private sector and keep moving.
        Mr. ROSKAM. I would just encourage a lot of private sector
    involvement. It seems like there has been a good history there,
    so that is I am sure in the stew as you are making your
    decisions.
        Mr. SHULMAN. Absolutely.
        Mr. ROSKAM. Just switching gears quickly, and this has to
    go with the administration's request for additional enforcement
    funding, really targeted toward small business entrepreneurs,
    can you speak to that? Folks in my area, if there is a
    legitimate--well, here we have the Secretary of the Treasury
    that came in and admitted that it was so complicated that he
    had a difficult time discerning a tax liability. Is this really
    where the emphasis should be going right now at a time when we
    are in real turmoil from an economic point of view, should we
    really be focusing in from a targeting point of view at small
    business and entrepreneurs? Could you give me your sense in
    terms of emphasis?
        Mr. SHULMAN. Yes, my priority areas for coverage and
    compliance, which is not always the same as enforcement because
    sometimes you find issues and when we find issues, we try to
    work through with people hopefully, a lot of people make
    inadvertent mistakes, my priority areas are high net worth
    individuals, large corporations, international, and then some
    of the flow through entities, which are much more difficult for
    us. Those are areas where there has been--where we find bigger
    issues with tax sometimes. I do not think we have a specific
    coverage targets and increase around small business.
        I can tell you I have been in conversations with the
    administration that small businesses are engines of growth in
    this country, that entrepreneurship is very important in this
    country. What I would say is where there is not a lot of
    information reporting is one area where we are focused on.
    Sometimes we get a 1099 from a bank and sometimes it is
    attached to a Schedule C, which is part of a return, and we are
    going to be able to increase our ability to do pure document
    matching, send out letters if there is a mismatch, make sure
    people have the--get information from us and pay the right
    amount of taxes, but I do not think we have a special target on
    small businesses.
        Mr. ROSKAM. Thank you. I yield back.
        Chairman LEWIS. Thank you. We now turn to Mr. Larson for
    his questions.
        Mr. LARSON. Thank you, Mr. Chairman, and thank you as
    always for holding this very fine hearing. Thank you, Mr.
    Shulman, for being here and your service to the country. How
    many employees do we have in the IRS?
        Mr. SHULMAN. We have about 93,000 FTEs, full time
    equivalents. We have a lot of seasonal people who come on
    during filing season and process returns and go off, but the
    working number is about 93,000.
        Mr. LARSON. Has the IRS ever been specifically charged by
    the Congress to if the IRS was re-writing the Tax Code, how
    would it re-write it, have you ever received--just a curious
    question, it always comes into my mind, my guess is probably
    not?
        Mr. SHULMAN. No, I think of it as the prerogative of the
    Ways and Means Committee and Finance Committee, so no.
        Mr. LARSON. Wasn't that an intelligent answer? Let me ask
    you this as a follow-up. If you were charged by the Congress,
    who after all with the number of employees that you have and
    the vast experience of looking at a Tax Code that at best
    certainly some could describe as a Gordian Knot, would not a
    number of people who have been in that very noble public
    service have ideas about where they think changes could be
    made?
        Mr. SHULMAN. Sure.
        Mr. LARSON. And if you were charged, how long do you think
    a study like that would take?
        Mr. SHULMAN. I cannot say. What I will tell you is we have
    a very good relationship and we are a bureau of the Department
    of Treasury. I have a very good relationship with the Treasury
    Secretary. The White House and the Treasury take the lead on
    tax issues. We were talking before of the Volcker panel is
    actually engaged in that as is the Treasury Department, and we
    certainly have a strong voice in this effort.
        Mr. LARSON. We kind of consider ourselves representatives
    of the people as well, so we are interested in the sinew and
    the nuts and bolts and it would be interesting to see what our
    frontline people have to say about our tax system as well. But
    let me move rapidly on to do you have an opinion or has the IRS
    expressed an opinion on the issue that was discussed in this
    committee, et cetera, one point is we are looking at revenues
    on carried interest?
        Mr. SHULMAN. The administration has sent its opinion via
    the President's budget and I am supportive of that.
        Mr. LARSON. All right, let me try another area here for
    you.
        Mr. SHULMAN. It is hard to draw me into too much tax
    policy.
        Mr. LARSON. What is the IRS' feeling, 60 Minutes ran a
    special about what has been going on in terms of the dark
    market or the over-the-counter market with credit default swaps
    and derivatives, et cetera, should there be a separate tax
    treatment for those?
        Mr. SHULMAN. Well, as you know, internationally there is
    actually a lot of different treatments of securities lending,
    equity link notes, swaps, derivatives. What I would say is
    there is inconsistent treatment in the code today. All of it
    has been put together for different reasons and around
    competitiveness, capital flows, a variety of things. Clearly,
    with what has happened in the financial markets, there is
    interest in this, but I will not opine on whether or not it
    should be different or not.
        Mr. LARSON. Well, it is interesting because usually the
    feedback we get, ``Oh, no, God, government has got to stay away
    from this because certainly if there was an effort in this
    area, they would move offshore.'' Well, it seems to me like
    this is a global economic crisis, and when reports account for
    anywhere from $40 to $60 trillion in trades that happen in an
    over-the-counter, unregulated area, that this might at least
    pique the interest of the IRS or the administration or anyone
    concerned about revenues and loss thereof and then appropriate
    regulatory steps that should be taken in this area. Do you have
    any opinion on that?
        Mr. SHULMAN. My only opinion is I know that Treasury has
    put forward proposals around derivatives regulation. It is
    being debated in Congress and the Senate. Clearly, this is an
    area that has the attention of leaders in the country.
        Mr. LARSON. With regard to the American Recovery and
    Reinvestment Act, taxpayers are eligible for Making Work Pay,
    some have become aware of the fact that they potentially are
    going to have to repay a portion of their credit, others have
    not. I understand you are going to be undertaking an outreach
    campaign to make sure on this issue. Could you elaborate what
    efforts are being made to make sure that people will not get
    sticker shock, so to speak, when they find out they have been
    the benefactor of Making Work Pay but now they may end up
    paying portions of that back?
        Mr. SHULMAN. Yes, the biggest confusion this year was
    around pensioners who were using the tables but not working so
    they were not eligible for the Making Work Pay credit but their
    pension was being drawn down. We have changed that on the
    tables. We have worked directly with pension organizations. We
    have been working with organizations, such as the AARP, to do
    outreach to individuals to make sure they make any changes to
    their withholding as appropriate. And so we have got a pretty
    deep network through out tax exempt group into the pension
    community. So all the groups who can reach the actual
    pensions----
        Mr. LARSON. Including Social Security?
        Mr. SHULMAN. Exactly.
        Mr. LARSON. Yes. Thank you very much. Thank you, Mr.
    Chairman.
        Chairman LEWIS. Well, thank you. Mr. Commissioner, I want
    to yield to Mr. Boustany for an additional question.
        Dr. BOUSTANY. Thank you, Mr. Chairman. Commissioner, I
    looked over the June 2009 GAO report on your budget estimates
    and requests, and there was conclusion that came out. I am
    going to read briefly a paragraph here from the report. It
    says, ``By presenting ROI projections for the proposed
    enforcement initiatives in its budget request, the IRS is
    providing important information about estimated costs and
    potential revenues. Such information should be useful to
    Congress for budgeting and oversight. However, without actual
    ROI information, Congress, IRS management and the public will
    not know whether the approximately $900 million investment from
    Fiscal Year 2010 through Fiscal Year 2012 for enforcement
    initiatives actually realized the projected results.''
        GAO goes on to recommend that the commissioner take steps
    to develop a return on investments for IRS' enforcement
    programs using actual revenue and full cost data and compare
    that to the project. So could you comment on the steps that you
    are going to take in that regard?
        Mr. SHULMAN. Well, let me comment in general. One is we do
    track ROI on an aggregate basis. When I came into the job, one
    observation I have is there is a very well-defined, and agreed
    upon between OMB and CBO, of what ROI is for our collection
    versus our exam, et cetera. I think one place all the ROI
    discussions miss the mark is investments in technology and
    service also help yield voluntary compliance.
        It has often been said that a dollar put into enforcement
    has a three to one deterrent impact and education brings in the
    right amount, the preparer work that we are doing, and so I am
    actually quite focused on making sure that service, technology
    and enforcement are all seen as part of funding, helping make
    sure we fund the government and get it right. And so those are
    the kinds of things that I am quite focused on making sure that
    we have the proper dialog about it and obviously the
    measurements on the back end.
        Dr. BOUSTANY. Thank you. I yield back.
        Chairman LEWIS. Mr. Commissioner, I want to just ask one
    last question. In my statement, I mention the fact that the
    agency is closing the Atlanta and Andover units that handle
    paper returns. Could you tell us how many employees will be
    affected?
        Mr. SHULMAN. I can talk to you some about Atlanta, and
    these are all estimates because it would not happen until 2011.
    In Andover, we actually are in the process of it. And we try to
    give employees advance notice. We try to give them reassignment
    preferences. We try to allow people who want to retire early to
    swap with people who want to stay longer.
        Our experience doing this in Brookhaven and Philadelphia
    and Memphis is very few people at the end of the day actually
    have to be rifted, that we go the extra mile and try to work
    with employees because I personally believe we have an
    obligation to people who have been with us a long time, that if
    we are trying--and we have an obligation to the American people
    to try to run efficient operations and as more electronic
    filing comes in, not waste money. But at the same time, we have
    personal obligations to people who have been dedicated to the
    government, to help find them another job.
        And so in Atlanta, the number of permanent employees that
    could be affected, we have some people we brought on just for
    contracts and they knew exactly that this was a 1 year deal or
    a temporary deal, but the number of permanent could be up to
    1,000. For those people, we are going to make sure we stretch
    and bend and find other work.
        When we have opportunities to make new investment, we are
    going to try as long as it makes business sense to put it in
    the place where there are potential layoffs. So in Andover, for
    instance, we are committed to opening another AUR site, which
    is where we match information returns against actual tax
    returns.
        And so I want to just tell you I believe we have an
    obligation to people to do everything we can to work with them.
    I have instructed my staff who runs the division that is going
    to have to work on the ramp down, that if there is any place to
    be flexible and creative, that is here. And we are going to
    have an eye toward, if there is more work to be done, trying to
    have it there so we can pick up other employees.
        Chairman LEWIS. I appreciate your concern and your feeling
    along these lines. Have you had an opportunity or someone at
    the agency to talk with other Federal agencies, such as the
    Social Security Administration, about the possibility of
    looking at some of these individuals?
        Mr. SHULMAN. We have not to date but we certainly will.
        Chairman LEWIS. Thank you very much. I believe Mr. Becerra
    has a last question or two?
        Mr. BECERRA. Yes, Mr. Chairman, if I may.
        Chairman LEWIS. So I turn to you, sir.
        Mr. BECERRA. Thank you, Mr. Chairman. Commissioner, before
    I leave the whole issue of tax preparers, can I get a sense,
    the door is completely open to try to examine this issue of tax
    preparers, you are not limiting your scope of inquiry to one
    aspect of tax preparation, is it wide open?
        Mr. SHULMAN. Yes, there is going to be a very open,
    transparent and I have no pre-conceived notions, and we are
    going to just try to open the door.
        Mr. BECERRA. Great, good to hear. The tax gap, if the
    estimate for the 2001 tax gap is anywhere near accurate, and we
    have no way of knowing, but if it is in fact or it was in fact
    something in the order of $345 billion of uncollected owed
    taxes, over the last 8 years we could have collected enough
    money to not only cover this massive deficit that we see for
    2009 but probably enough to cover most of the deficit from the
    last several years, so it adds up to quite a bit of money.
        And I know that your agency is going to come up with a new
    estimate for the tax gap to update the numbers since the 2001
    number is obviously very old. We thought we were going to
    receive something soon, if not already, on this tax gap number,
    and I am wondering if you can tell me when can this Committee
    expect to hear from you and your agency on the work you have
    done to estimate the size of the tax gap between what we should
    collect and what we actually collect?
        Mr. SHULMAN. So a couple of things, one is, as I mentioned
    before to one of your colleagues, these are real estimates,
    2001 happens to be the year that we looked at but a lot of
    these are extrapolated from eighties numbers. It is very hard
    to get your hand around it. Two is I think it is important that
    Members of Congress know that this is not just free money that
    can go and get grabbed to close the deficit. This is money that
    is going to take multi-year work.
        The best way to go over the tax gap is going to be
    information reporting. We do not have a big tax gap with wage
    earners in this country, where we get their information, they
    file their return, if there is any problem, we just send them a
    letter, and we get it closed off and there is actually
    withholding at the source. And so there are a whole bunch of
    proposals that are in here.
        Our goal is to have annual tax gap updates. We are trying
    to roll through the different segments. The ones that we are
    most focused on right now are S corporations and C corporations
    and those I hope to get out in the not-to-distant future.
        Mr. BECERRA. And, Mr. Chairman, I will end with this last
    question or it is more of a comment. I want to pick up on
    something the commissioner just said. The issue of the tax gap
    really does not relate to salaried workers who get a paycheck
    week in/week out because that income is reported in a fairly
    aggressive and accurate way on a constant basis. You get your
    paycheck, taxes are deducted based on how many exemptions you
    claim and so forth. And so most wage earners do not do the type
    of tax evasion or innocent filing mistakes that would lead to
    this massive tax gap of several hundred billions of dollars.
        As you said, it is the fact that we do not have information
    from others that should be paying taxes that causes us not to
    be able to collect enough from those who have earned an income
    and have not paid it.
        The point that I am trying to make here is that most
    Americans who work for a living making a salary or a wage are
    not the folks who are trying to evade paying taxes or are
    making mistakes paying their taxes. It is folks who do not have
    the constant documentation required to pay the taxes that are
    leading to this problem. I will not say they are causing it
    because a lot of folks are innocently not filing correct
    information or inadequate information on what they should be
    paying.
        But it is clearly the case that we need to have a better
    way of tracking those who do not have a regular paycheck within
    their scope of income generation so we can figure out how it is
    that we can get every American to pay his or her fair share of
    taxes, so that we can have every American who is dutifully
    paying their taxes, not pay more than necessary to make up for
    the gap created by those who are shirking their responsibility
    to pay their fair share. So I think it is important.
        My dad worked all his life in road construction and in
    agriculture, picking crops, he always got paid through a check.
    He never got to take a deduction for his lunch or anything like
    that, but he always got taxed. And I think it is important that
    those who work day in and day out and get a paycheck know that
    they are not going to be made to pay higher taxes because there
    is somebody who is able to write off that two martini lunch,
    who is not documenting as well as he or she could and paying
    his or her fair share of taxes.
        So I thank you, Commissioner, for your presence today and
    your testimony. Thank you, Mr. Chairman.
        Chairman LEWIS. Without objection, I would like to submit a
    question for the record from Congressman Levin and Congressman
    Thompson.
        [The information follows:]

                        Question from Congressman Levin

    [GRAPHIC] [TIFF OMITTED] T2997.001

    [GRAPHIC] [TIFF OMITTED] T2997.002

                    Question from Congressman Mike Thompson

    [GRAPHIC] [TIFF OMITTED] T2997.003

    [GRAPHIC] [TIFF OMITTED] T2997.004

    [GRAPHIC] [TIFF OMITTED] T2997.005

        Chairman LEWIS. Commissioner, I would like to thank you for
    being here today, for your testimony. We appreciate your views.
    You have been more than helpful.
        Is there any other business to come before the
    Subcommittee? There being no further business, this hearing is
    adjourned. Thank you very much.
        [Whereupon, at 11:20 a.m., the Subcommittee was adjourned.]

        [Submissions for the Record follow:]

                          Statement of Alvin S. Brown

        Chairman Lewis, Ranking Member Boustany, and Members of the
    Subcommittee on Oversight, I appreciate the opportunity to address
    Internal Revenue Service (IRS) operations now subject to its annual
    review. Mr. Chairman, I agree with your concern about IRS levies on
    Social Security income. The IRS often levies Social Security income
    without taking into account whether the taxpayer is left with money for
    food, housing, transportation and other necessary expenses. Under
    section 6343(a)(2)(D) of the IRS Code, the IRS is prohibited from any
    levy that creates an ``economic hardship.'' \1\ My testimony deals with
    the larger topic of counterproductive IRS tax lien and tax levy
    practices. In many cases, these liens and levies not only cause
    economic hardship to individual and business taxpayers, they even have
    the perverse effect of decreasing tax revenue and, correspondingly,
    increasing the Tax Gap.
    ---------------------------------------------------------------------------
        \1\ Section 301.6342-1(b)(4)(i) of the Income Tax Regulations
    states the general rule that a levy creates an ``economic hardship'' if
    the levy, ``in whole or in part will cause an individual taxpayer to be
    unable to pay his or her reasonable basic living expenses.''
    ---------------------------------------------------------------------------
        I am a tax attorney with the law firm of Alvin Brown & Associates
    \2\ and the founder of The IRS Forum, www.IRSForum.org,\3\ a 501(c)(3)
    educational organization. I had a 27 year career in the Office of the
    IRS Chief Counsel. I have been representing taxpayers throughout the
    U.S. and abroad specializing in IRS controversies for more than a
    decade. With this experience within and outside of the IRS, I have
    valuable insight on current IRS practices that negatively impact both
    the collection of revenue and economic growth. My testimony reflects my
    personal experiences with the IRS representing taxpayers before the
    IRS. I will support the following statements:
    ---------------------------------------------------------------------------
        \2\ 9667B Main Street, Fairfax, VA 22031 (703) 425-1400
    ab@irstaxattorney.com.
        \3\ The IRS Forum offers an internet platform for taxpayers to
    voluntarily upload their IRS experiences by issue. The objective of the
    IRS Forum is to provide IRS ``transparency'' with a national data base
    of actual taxpayer interactions with the IRS. A perpetual data base of
    taxpayer experiences with the IRS will provide educational insight on
    IRS operational and administrative practices.

          In many instances, IRS tax levies of salaries of
    taxpayers and gross income of businesses reduce the collection of tax
    revenue, destroy small businesses, cause the loss of jobs, and reduce
    tax compliance;
          In many instances, IRS tax liens also reduce tax revenue,
    destroy small businesses, cause the loss of jobs and reduce tax
    compliance.
          The Subcommittee's annual review of the IRS fiscal year
    budget proposal, with testimony from the IRS Commissioner, while
    important, does not assure effective IRS oversight because the
    Subcommittee does not have access to sufficient data to independently
    evaluate the operations and activities of the IRS. Greater transparency
    of IRS operations and activities is necessary for effective oversight
    of the IRS. There is ample available data that could provide
    transparency of IRS practices in its administration of the tax law, but
    it has not yet been compiled in an accessible database.
          The Subcommittee would be assisted in providing more
    effective IRS oversight if it could reference a data base of taxpayer
    complaints about IRS abuses of power, abuses of discretion,
    misapplication of law, and even misconduct. If the individual taxpayer
    complaints to Members of Congress were saved and combined, organized by
    issue, and uploaded into a permanent data base, the Subcommittee would
    have important data to provide needed IRS transparency and result in
    more effective IRS oversight. Such organized data are necessary to
    identify IRS positions and practices that have a negative impact on the
    economy and on the collection of tax revenue.
          The National Taxpayer Advocate does not effectively use
    its authority to issue Taxpayer Assistance Offers under section 7811(a)
    to impede IRS abuses of power and abuses of discretion.

    Counterproductive Tax Liens

        Section 6321 of the Internal Revenue Code creates an unperfected
    (statutory) tax lien on taxpayers in cases where there is an unpaid tax
    debt. The IRS thereafter has the plenary discretion to file the Notice
    of Filing of Tax Lien (NFTL) in the public records. The NFTL is
    immediately picked up by the credit agencies in their credit reports.
    The tax lien will not be released until the tax debt is paid or
    otherwise discharged. The credit agencies keep a record of the tax lien
    on the taxpayer's credit report during the period that the tax debt
    remains unpaid and for seven years after the tax debt is released or
    discharged. The NFTL has severe negative economic consequences on
    individual and business taxpayers often initially and long after any
    tax obligation is resolved.
        The IRS criteria for filing tax liens is found in the Internal
    Revenue Manual (IRM) 5.12.2.4.1 (05-20-2005). The IRM requires a filing
    of a NFTL if the unpaid balance of assessment (UBA) is $5,000 or more.
    Even where a taxpayer has offered to pay in full the UBA in an
    Installment Agreement (including interest and penalties), the IRS
    mandates the filing of an NFTL.
        A mandatory NFTL, in effect, is in conflict with the intent of
    Congress to make the NFTL discretionary. IRM 5.12.2.4.1 requires the
    NFTL without taking into account whether or not the tax lien will cause
    an economic hardship or reduce taxable revenue. My personal experience
    with IRS Revenue Officers is that they will file a an NFTL even when
    they know it will cause irreparable economic harm to an individual or
    business taxpayer because they believe they are mandated to file the
    NFTL by the IRM despite the Congressional statute to the contrary.
        The underlying tax policy for IRS tax liens is to protect the
    standing of the IRS as a creditor over other future creditors. That tax
    policy is not served where an individual taxpayer has limited assets,
    owns no real estate and has limited income that is only sufficient for
    reasonable and necessary living expenses. That tax policy is not served
    if the result of an NFTL is a large loss of current and future income
    for individual and business taxpayers.
        An NFTL filed in the public records is devastating to individual
    taxpayers. We live at a time where there is immediate access to credit
    reports. Landlords will often not rent an apartment to a taxpayer with
    an NFTL. Increasingly, employers will not hire a taxpayer with an NFTL,
    and some employers will dismiss an existing employee with an NFTL. The
    reduction of taxable income caused by an unnecessary NFTL undercuts the
    ability of a taxpayer to pay his or her outstanding tax liability. For
    that reason, this IRS practice actually reduces revenue and expands the
    Tax Gap.
        When an NFTL is filed on a business, current lenders often withdraw
    financing (e.g., account receivable factors), and the business will not
    be able to get credit for inventory and supplies. Business customers
    often terminate their business relationship immediately when they have
    notice that their supplier or service provider has an NFTL. The bad
    credit caused by an NFTL means that the business will lose the ability
    to borrow money to purchase inventory or borrow to invest in further
    business growth. An NFTL is one of the largest factors contributing to
    the demise of small businesses. When the business closes, there is a
    loss of business income, a loss of tax revenue and a loss of jobs.
        In small-asset situations and in the case of pure service providers
    (e.g., consultants and other professionals), an NFTL has no effect or
    purpose other than to ruin the credit of the service business
    taxpayers. Insurance companies will not accept contracts from an
    insurance broker with an NFTL. Stock brokers will lose licenses as the
    result of an NFTL. The Department of Defense will not do business with
    an individual or a business with an NFTL and will also refuse to renew
    an existing contract. Without real estate or other large assets, the
    purpose for an NFTL, to give the IRS a security interest in assets, is
    not met. In these cases the NFTL causes a loss of employment, a loss of
    business income, creates economic hardship, and discourages tax
    compliance with a resulting negative impact on the Tax Gap. Taxpayers
    incurring economic hardship as the result of an NFTL may join the
    underground economy and not be tax compliant.
        It is counterproductive to file tax liens on taxpayers who are
    willing to pay their tax debt in full, including interest and penalties
    in an Installment Agreement. In Installment Agreement cases,
    individuals and businesses are penalized with a mandatory NFTL even
    though they want to pay their outstanding tax debt in full because of
    the NFTL. A loss of business due to the NFTL diminishes the ability of
    a taxpayer to make the Installment Agreement payments.
        If an NFTL is filed when an Offer in Compromise (OIC) for a
    business is under active consideration, the resulting loss of business
    income will correspondingly reduce the amount needed to pay the IRS to
    settle the outstanding business tax debt because business income is
    considered in the settlement calculations.
        The economic damage caused by an unnecessary and economically
    counterproductive tax lien is inconsistent with the Mission Statement
    of the IRS to apply the tax law with ``fairness'' and with
    ``integrity.'' It is senseless for the IRM to mandate an NFTL without
    measuring whether the economic damage or hardship caused by the NFTL
    outweighs the benefit of the NFTL. There is no current legislative
    threshold or ``safe harbor'' to prevent an economically
    counterproductive NFTL. My comment in this matter only applies to
    situations where the NFTL is not justified. Obviously, there are
    situations where the NFTL is needed to protect the creditor status of
    the U.S.
        An NFTL can be appealed under section 6320 and section 6630 for a
    collection due process or equivalency hearing. The problem is that
    these statutes do not offer NFTL relief; they merely provide collection
    alternatives such as the filing of an OIC or an Installment Agreement.
    There is an anomaly that section 6320 and section 6330 provide an
    opportunity to appeal an NFTL but no opportunity to ask for a tax lien
    withdrawal even if the tax lien is causing an economic hardship and a
    loss of income. Collection due process appeals under section 6330
    provide no relief even when an NFTL is causing an economic hardship.
    The discretion of the IRS to withdraw a tax lien under section 6323(j)
    is rare and unusual. Although the National Taxpayer Advocate (NTA) has
    been granted the authority to stop a ``significant hardship'' under
    section 7811, that authority is underused, rare, unusual and difficult
    to achieve on any tax lien issue.
        Section 7811(a) \4\ of the Code permits the NTA to stop a
    ``hardship'' with a Taxpayer Assistance Order (TAO) as the result of
    the manner in which the internal revenue laws are being administered by
    the IRS. Notwithstanding, a TAO is not used on tax lien issues under
    the authority of the ``hardship'' language of section 7811. Instead the
    NTA involvement with tax lien issues is considered, if at all, for tax
    lien withdrawal requests under section 6323(j)(1)(D) with the consent
    of personnel at the centralized IRS lien office. The NTA defers to the
    IRS centralized lien offices to resolve tax lien withdrawal matters.
    The IRS consent to a tax lien withdrawal is rare and unusual (e.g.,
    situations where there has been an error or mistake in filing the
    NFTL). The NTA does not use its authority under section 7811 to
    consider tax lien ``hardships'' and make determinations independent of
    the IRS centralized lien office in requests for lien withdrawals. The
    function of the NTA as an ombudsman on tax lien matters is inert and
    inconsistent with Congressional intent under section 7811 to use a TAO
    when there is a ``significant hardship'' and irreparable injury to
    taxpayers. I cannot think of greater irreparable harm than the loss of
    businesses, jobs and taxable revenue resulting from an NFTL when the
    interest of the U.S. as a creditor is economically insubstantial in
    contrast to the economic damage caused to individual and business
    taxpayers as is the case, for example, in pure service businesses.
    ---------------------------------------------------------------------------
        \4\ Under section 7811(a)(1)(A) the NTA has the authority to issue
    a Taxpayer Assistance Order if ``the National Taxpayer Advocate
    determines the taxpayer is suffering or about to suffer a significant
    hardship as a result of the manner in which the internal revenue laws
    are being administered by the Secretary * * *.'' Section 7811(a)(3)(D)
    a ``significant hardship'' includes ``irreparable injury to, or a long-
    term adverse impact on, the taxpayer if relief is not granted.''

    ---------------------------------------------------------------------------
    Counterproductive tax levies

        The tax policy of section 6343(a)(2)(D) to prevent or stop a levy
    in the case of an ``economic hardship'' is explicit and unqualified.
    Congress prohibits \5\ a tax levy if the levy denies a family, food,
    housing transportation, medicine, health insurance, child care, court
    ordered payments, and other reasonable and necessary living expenses.
    Families in an ``economic hardship'' situation cannot be tax compliant.
    If there is a choice between food and taxes, the election will always
    be to feed the family. On the other hand, if taxpayers have sufficient
    assets and income for their necessary expenses, they are able to seek
    gainful employment and contribute to the tax revenue base. Taxpayers
    frequently quit their job when a levy on wages causes an economic
    hardship. My testimony today is that in almost every IRS levy of
    income, the IRS Revenue Officer levy invariably creates a taxpayer
    ``economic hardship'' within the meaning of section 6343(a)(2)(D) for
    two reasons: (1) levies on income from employment and levies on
    accounts receivable are continuous; and (2) the IRS sends the employer
    Publication 1494 \6\ which lists the amount exempt from income under
    section 6634.\7\ The amounts exempt from levy under section 6664 are
    minimal amounts unrelated to the amounts that cannot be levied under
    section 6343(a)(2)(D). When employers receive Publication 1494 from the
    IRS, the employers erroneously believe that the levy is for all amounts
    that exceed the section 6634 limitations because the IRS does not also
    give employers instructions that will create a prohibited ``economic
    hardship'' precluded by section 6343(a)(2)(D). For this reason IRS
    continuous levies of wages will generally create a taxpayer ``economic
    hardship'' in conflict with the intent of Congress under section
    6343(a)(2)(D). In these circumstances taxpayers often elect to work in
    the underground economy and avoid future tax compliance. These dire
    consequences result when the IRS refuses to follow the unqualified
    legislative mandate of section 6343(a)(2)(D). The willful failure to
    comply with the ``economic prohibition'' of 6343(a)(2)(D) is an
    ``unlawful'' act.\8\ That unlawful act is not prohibited by either IRS
    management or the NTA.
    ---------------------------------------------------------------------------
        \5\ Through section 301.6343-1(b)(4) of legislative regulations
    under 6343(a)(2)(D).
        \6\ Last published in 2007.
        \7\ Section 6634 of the Code identifies property exempt from levy.
    The exclusion includes clothing, tools and other items including the
    minimum exclusion from income under section 6634(d). The small section
    6634 exclusions from levy are unrelated to the ``economic hardship''
    prohibition under 6343(a)(2)(D).
        \8\ Section 7214(a)(3) makes it an ``unlawful act'' when an IRS
    willfully fails to comply with a tax statute. Any unlawful act requires
    mandatory dismissal from the IRS and subject that employee to a fine of
    up to $10,000.
    ---------------------------------------------------------------------------
        Almost all businesses will fail if the IRS files a continuous levy
    on accounts receivable. Gross income is needed for taxes, payroll, and
    other administrative and operating expenses. A levy on gross income
    will usually force a business to discharge all employees and cease
    operations leaving an unpaid tax debt. A levy can be appealed but the
    business will normally be irreparably damaged before the three to six
    months it takes to schedule a levy appeal.
        Levies on bank accounts can also be economically counterproductive.
    Although the bank account levies are one-time only levies and capture
    only the amount in the account at the time of the levy, levies can be
    made on the same account repeatedly at the discretion of the IRS
    Revenue Officer. In the case of a business bank account, the levy often
    takes money deposited for payroll, taxes and other necessary business
    administrative and operational expenses. A bank account levy on a
    business bank account can put it out of business resulting in a loss of
    jobs and taxable income.
        The NTA and the IRS have taken the position that a business cannot
    have an ``economic hardship'' within the meaning of section
    6343(a)(2)(D). This position apparently came from TD 9007 that
    published the final OIC regulations on July 23, 2002. TD 9997 states
    that the economic hardship standard of section 301.6343-1 on the
    regulations ``specifically applies only to individuals.'' The IRS
    position in TD 9007 is wrong because section 6343(a)(2)(D) does not
    distinguish between individual and business ``economic hardship'' and
    further because of Sec. 301.6343-1(a) is expressly limited by the term
    in general. The ``in general'' preface does not exclude a business
    hardship. It is patently absurd for the IRS and the NTA to take a
    position that a business cannot have an economic hardship.
        Levies can be appealed under section 6330 and that appeal, if made
    timely, will stop collection action. In the appeal, the Taxpayer can
    submit an OIC or an Installment Agreement as an alternative to the
    collection action. However, under section 6330(c)(2)(B), the underlying
    tax liability may not be raised as a basis for appeal unless the
    taxpayer did not receive a statutory notice of deficiency or did not
    otherwise have an opportunity to dispute the tax liability. The
    limitation to challenge the underlying liability in section
    6330(c)(2)(B) is inconsistent with the fact that a taxpayer is always
    able to challenge the underlying tax liability in an OIC under the
    plain language of section 7122(a). Further, the IRS will permit ``audit
    reconsideration.'' The advantage of raising a liability issue under
    section 6330 is that the discretion of the IRS is subject to judicial
    review for ``abuse of discretion'' whereas there is no judicial review
    for an OIC.
        Taxpayers are often not represented or underrepresented when tax
    assessments are made. I have frequently found tax issues that should
    have been raised had there been competent representation. In the best
    interest of helping individual and business taxpayers who may have an
    erroneous tax assessment that results in an inappropriate tax levy,
    taxpayers should be allowed to raise substantive issues in a section
    6330 appeal even if there has been prior consideration of the
    substantive issues. Although section 6330(c)(2)(A)(iii) allows an OIC
    to be submitted, the IRS will not permit an OIC based on ``doubt as to
    liability.'' That limitation on IRS appeals of a tax levy is incorrect
    because the statute does not distinguish between the different types of
    OICs. Further, the language of section 6330(c)(2)(A)(iii) is not
    modified by the limitations of section 6330(c)(2)(B).
        The NTA does not use its authority to issue a TAO in levy and tax
    lien hardship cases.\9\ My office has literally filed hundreds of Forms
    911, a request for a TAO, and no TAO has ever been issued in any of
    those cases even when the economic hardship caused by a levy is
    irreparable and clear ``misconduct'' within the meaning of 7214(a)(3).
    Instead the NTA attempts to orally persuade IRS Revenue Officers to
    stop levies that create an economic hardship. That advocacy style
    intervention does not always work when Revenue Officers and their
    managers refuse to release a levy even when they know the levy will
    close a business or cause an economic hardship to an individual. The
    refusal of the NTA to issue a TAO in ``significant hardship'' cases is
    in conflict with the legislative intent of Congress to use a TAO as a
    tool to intercede in those circumstances. The underutilized TAO has the
    obvious effect of reducing taxable revenue caused by closed businesses
    and lost jobs. In these instances the NTA does not stop clear IRS
    ``misconduct.''
    ---------------------------------------------------------------------------
        \9\ IRM 13.1.2.D (12-15-2007), requires a TAO in stalemate
    situations involving a ``significant hardship.''
    ---------------------------------------------------------------------------
        The problems described above in tax lien and tax levy hardship
    cases, and the resulting loss of tax revenue, can be ameliorated in
    large part if the NTA consents to use a TAO as intended by Congress
    under section 7811. Every Form 911 should result in an expeditious TAO
    if a TAO is justified at the discretion of the NTA to conform with the
    intent of Congress to have the NTA use its power as ombudsman for
    taxpayers. The NTA condones IRS misconduct if it does nothing to stop
    IRS misconduct on ``economic hardship'' issues precluded by
    6343(a)(2)(D).

    The Need for IRS ``Transparency'' to Facilitate IRS Oversight

        My testimony today highlights the need for improved IRS
    transparency and oversight on a daily basis rather than at the time of
    the annual oversight review by the Subcommittee of the IRS fiscal year
    budget. The economically counterproductive activities of the IRS that I
    have identified in this testimony would likely not occur if visible to
    Congress, the media and the public.
        The Internal Revenue Code quite properly limits disclosure of its
    interaction with a taxpayer.\10\ The privacy of a taxpayer is protected
    by law. For this reason nobody knows what actions the IRS takes except
    the IRS, the taxpayer, the taxpayer's representative, and in some cases
    the NTA. However, taxpayers can voluntarily reveal their IRS
    experiences with or without disclosing their identity.
    ---------------------------------------------------------------------------
        \10\ Section 6103.

    ---------------------------------------------------------------------------
    ``Transparency''--National Data Base--Voluntary Taxpayer Submissions

        It is fair to say that every Member of Congress gets complaints
    about the IRS regularly. Constituents complain about IRS abuses of
    power, IRS misconduct, erroneous applications of law, and hardship.
    However, these data are not saved; becoming wasted data. The complaint
    traffic to the NTA is also wasted data. There is no national data base
    for IRS complaints. Obviously, the IRS will be hesitant to be overly
    aggressive on a tax matter or to engage in the counterproductive
    practices I have described if IRS actions were more transparent to the
    public, to the media, and to Congress.
        The Subcommittee on Oversight will be able to execute its oversight
    function over the IRS more effectively if it has access to a national
    data base reflecting IRS interactions with taxpayers. Taxpayers
    throughout the U.S. voluntarily voice their IRS experiences constantly
    to all Members of Congress as well as to the members of this
    Subcommittee. That empirical data is available but it is neither
    organized nor saved. There is also no platform to upload that data to a
    combined data base. Such a national data base of taxpayer and
    constituent experiences, if collected, organized by issue and analyzed
    would give this Subcommittee and Congress the IRS transparency that is
    presently lacking.

    The IRS Forum as a Vehicle to Provide IRS Transparency and Oversight

        The IRS Forum has been approved by the IRS as a 501(c)(3)
    educational organization. The IRS Forum has a presence on the internet
    at www.irsforum.org to encourage the uploading of the experiences of
    taxpayers with the IRS. The sole purpose of this is to provide IRS
    transparency to facilitate oversight of the IRS.
        The IRS Forum provides an internet portal for taxpayers to record
    and discuss their IRS experiences with other taxpayers who have
    suffered with the same or similar abusive experiences. Individual
    taxpayers will be able to facilitate positive changes in the IRS by
    joining with hundreds and thousands of other taxpayers with similar
    experiences and similar issues into a unified national voice of
    sufficient magnitude to get the attention of the media, top management
    of the IRS, and the Congress for constructive changes in the law and
    the administration of the tax law. Taxpayers are thereby empowered.
        At the IRS Forum, with a platform to upload experiences, taxpayers
    can fully discuss their IRS experiences along with the factual and
    legal issues considered by the IRS. This transparency will put the
    spotlight on IRS practices and encourage the IRS to treat taxpayers
    with integrity and fairness.

        In particular, the IRS Forum data base has important potential
    benefits for Members of Congress:

          The IRS Forum will accumulate constituent data that would
    otherwise not be saved.
          To the extent that constituents vent their IRS complaints
    directly to the IRS Forum, that action will free up more Member and
    staff time for their legislative responsibilities.
          Actual case histories of IRS administrative and
    operational problems create ``talking points'' for tax simplification
    or tax reform.
          Constituent problems and complaints about the IRS have
    far greater impact when they join with a larger group with similar
    issues at the IRS Forum.
          Transparency of IRS operations enhances the ability of
    the Subcommittee on Oversight to identify IRS abuses of power, abuses
    of discretion, and misapplication of the law. For example, the tax lien
    and tax levy abuses discussed above would be identified from voluntary
    submissions of cases of these abuses by taxpayers to the national data
    base.
          When the data hits critical mass, it will get the
    attention of the media, the public and Congress for possible corrective
    legislation.
          When tax legislation is being considered, that data base
    in the IRS Forum could be searched for information and guidance.

        In addition, the transparency of the accumulative data will be
    educational for all taxpayers and constituents.
        The non-partisan IRS Forum is not a commercial venture. There are
    no membership fees, and the IRS Forum does not accept advertising. The
    IRS Forum functions only as a non-profit educational organization on
    IRS positions and administrative practices.
        The Immediate Goal of the IRS Forum: to provide assistance to the
    Congress in conducting oversight of the IRS by accumulating and making
    publicly available data regarding IRS practices. To facilitate the
    accumulation of that data, the members of the Subcommittee on
    Oversight, other Members of the House Committee on Ways and Means, and
    other members of the House and Senate are encouraged to refer
    constituent IRS complaint traffic to the IRS Forum. That cooperation
    would help in building a permanent institutional data base of taxpayer
    experiences with the IRS to facilitate IRS transparency and oversight.

    Summary

        I thank the Chairman and this Committee for receiving this
    testimony. From my personal experiences in dealing with the IRS on
    behalf of clients, I have identified IRS administrative practices
    dealing with tax liens and tax levies that reduce the collection of tax
    revenue, increase the Tax Gap, create economic hardship for taxpayers,
    contribute to a loss of jobs, result in business failures, and conflict
    with sound tax policy. Correction of these counterproductive practices
    by the IRS will operate as a ``revenue raiser'' that will assist in
    reducing the Tax Gap and have a positive impact on the economy.
        I believe it is important for the NTA to change its procedures to
    use a TAO for every significant economic hardship. I have also made
    some suggestions to improve the rights of taxpayers in collection due
    process appeals and also broaden the issues that can be petitioned to
    the Tax Court.
        IRS oversight by the Subcommittee will be significantly enhanced
    with improved IRS transparency from a permanent national data base with
    information voluntarily uploaded by taxpayers to the IRS Forum. With
    guidance from the Subcommittee, I am willing to modify the IRS Forum in
    any way that would help serve the non-partisan oversight objectives of
    the Subcommittee and the constituents of all Members of Congress. It is
    also helpful to the U.S. public to have a platform to learn about tax
    issues. The simple idea of a permanent data base on the internet
    managed by the IRS Forum is an elegant way to improve IRS transparency
    and oversight and serve its educational purposes. The IRS Forum can
    meet all of its educational objectives if Members of Congress elect to
    inform constituents, complaining about the IRS, that they can upload
    those experiences to the IRS Forum and gain the benefit of interacting
    with other taxpayers with similar issues and at the same time, help
    make the IRS transparent and also help make their experiences part of
    an important data base.
        Given my long history of dealing with the IRS as a manager in the
    Office of the IRS Chief Counsel and also in representing taxpayers
    before the IRS, I would be pleased to make myself available to the
    Subcommittee and its staff on any of the issues discussed in this
    testimony, the IRS Forum, and on any other IRS matter including some
    suggestions for revenue raisers that can improve tax compliance.
                Respectfully submitted,
        Alvin S. Brown, Esq.
        (703) 425-1400 ex 106
        ab@irstaxattorney.com

                          Colleen M. Kelley, Statement

        Chairman Lewis, Ranking Member Boustany, and distinguished members
    of the Subcommittee, I would like to thank you for allowing me to
    provide comments on the Administration's FY 2010 budget request for the
    Internal Revenue Service(IRS). As President of the National Treasury
    Employees Union (NTEU), I have the honor of representing over 150,000
    federal workers in 31 agencies, including the men and women at the IRS.

    IRS FY 2010 Budget Request

        Mr. Chairman, NTEU strongly supports the Administration's FY 2010
    budget request of $12.1 billion for the IRS, a roughly $600 million
    increase over FY 2009 levels. We believe that the President's request
    will allow the IRS to continue providing taxpayers with top quality
    service and will assist efforts to enhance taxpayer compliance and
    close the tax gap.
        We are particularly pleased the Administration's budget request
    would provide $5.5 billion for IRS tax enforcement, including
    additional resources made available through a program integrity
    allocation adjustment. According to the Administration, IRS enforcement
    efforts recoup $5 for every $1 dollar invested and the program
    integrity savings from increased investment for IRS enforcement efforts
    will be more than $13 billion between 2010-2014.
        We are also pleased to see the recently passed budget resolution
    fully funds the President's budget request for the IRS and includes the
    President's request for additional resources for IRS tax-law
    enforcement.
        I would also note that in previous years, NTEU has supported the
    budget recommendations proposed by the IRS Oversight Board which have
    generally called for additional resources above that requested by the
    Administration. For FY 2010, the Oversight Board has recommended
    $12.961 billion in funding for the IRS. While we have not seen the
    specific details of the Board's updated proposal, we would be inclined
    to support providing additional funding for the IRS above the
    Administration's request and look forward to reviewing the Board's
    final recommendation.

    Major Challenges

        Mr. Chairman, NTEU believes the President's request will allow the
    IRS to meet its customer service and enforcement challenges while also
    addressing some of the most immediate challenges it will face in the
    coming years, including the growing human capital crisis, increasing
    complexity of tax administration, and a burgeoning tax gap.

    Human Capital Crisis

        NTEU believes that IRS employees are the most valuable asset in
    effective tax administration. We are glad to see that the IRS Strategic
    Plan for 2009-2013 recognizes this fact and stresses the importance of
    investing in the workforce in order to achieve its service and
    enforcement goals. But as the IRS notes, they face several major
    challenges such as large numbers of retirements and competition with
    both the public and private sectors for critical talent. According to
    the IRS, more than half of IRS employees and managers are age 50 or
    older. The expected large scale retirements of thousands of Service
    personnel over the next several years will only further deplete the
    decimated IRS workforce that is down by more than 23,000 since 1995.
    According to a report by the IRS Oversight Board, an independent body
    charged with providing IRS with long-term guidance and direction,
    roughly 4,000 IRS employees a year for the next four years are expected
    to retire, taking with them years of experience and valuable skills.
    The dramatic decline in staffing levels coupled with the pending
    retirement wave has caused the Oversight Board to identify human
    capital issues as one the most important strategic challenges facing
    the IRS.
        In the face of an aging workforce and looming wave of retirements,
    Commissioner Shulman created the Workforce of Tomorrow task force to
    ensure that in five years the IRS has the leadership and workforce
    ready for the next 15 years and to help make the IRS the best place to
    work in government.
        NTEU was happy to see that the President's budget request
    acknowledges the human capital crisis at the Service and provides for
    major increases in Service staffing, particularly in the area of
    enforcement. According to the Administration, the new enforcement
    personnel funded in the President's budget will generate $2.0 billion
    in additional annual enforcement revenue once the new hires reach full
    potential in FY 2012.

    Increasing Complexity of Tax Administration

        Under the President's budget request, the IRS will also be better
    equipped to handle the challenges associated with the increasingly
    complexity of tax administration. For example, one of the biggest
    challenges the IRS confronts each year is identifying new tax law and
    administrative changes as well as expiring tax provisions. According to
    the IRS, in 2007 alone, 41 tax provisions expired affecting a wide
    range of taxpayers.
        During the 2009 Filing Season, the IRS was presented with
    additional challenges due to the enactment of two significant new tax
    laws, the ``Housing and Economic Recovery Act of 2008,'' which includes
    a refundable homebuyer credit as well as an additional standard
    deduction for real property taxes, as well as the ``Emergency Economic
    Stabilization Act of 2008,'' which included 116 different tax
    provisions.
        In the future, the IRS will also be confronted with the challenges
    presented by the increasing globalization of individual taxpayers and
    businesses. As more and more U.S. taxpayers and businesses expand into
    global markets, it will be important that the IRS has the technical
    expertise to identify and understand the proliferation of complex
    international activities and the emerging global nature of tax
    administration.

    Tax Gap

        Recent and projected large federal budget deficits have generated
    congressional and executive branch interest in raising revenue by
    reducing the tax gap, that is, the difference between what taxpayers
    should have paid and what they actually paid on a timely basis. For tax
    year 2001, the IRS estimated a gross tax gap of $345 billion, equal to
    a noncompliance rate of 16.3 percent.
        NTEU believes that efforts to close the tax gap must focus on
    improving compliance activities and enhancing taxpayer service. By
    improving document matching, examination, and collection activities,
    the IRS will be better able to prevent, detect, and remedy
    noncompliance. And providing taxpayers with assistance and clear and
    accurate information before they file their tax returns will help
    reduce unnecessary contacts afterwards, allowing IRS to focus
    enforcement resources on taxpayers who are intentionally evading their
    tax obligations.
        In addition to generating additional revenue for the federal
    government, reducing the tax gap will help strengthen public trust in
    the fairness of the tax system which will positively impact voluntary
    compliance with tax laws.
        That is why NTEU supports the President's request for an additional
    $332 million to help close the tax gap by strengthening compliance and
    allowing the IRS to better address the main components of the tax gap
    including, underreporting, non-filing and underpayment.

    Enforcement

        Mr. Chairman, as you know enforcement of the tax laws is an
    integral component of IRS' effort to enhance voluntary compliance and
    close the tax gap. IRS enforcement activities, such as examination and
    collection, target elements of the tax gap and are a high priority for
    the Service. In FY 2008, the IRS initiated additional information
    reporting requirements for large partnerships and foreign corporations,
    soft notices and self-correction to improve compliance.
        These efforts helped the IRS bring in $56.4 billion in enforcement
    revenue in 2008, a 65 percent increase over FY 2002. The $56.4 billion
    in collections in 2008 represents a 5 to 1 return on investment for all
    IRS activities. In addition, the IRS showed consistent improvement in
    its enforcement results meeting or exceeding 78 percent (14 of 18) of
    its program targets.
        Most impressively, the IRS continues to bring in record amounts of
    enforcement revenue despite severe cuts to enforcement staffing over
    the past 13 years. In particular, the number of revenue officers and
    revenue agents--two groups critical to closing the tax gap and thereby
    reducing the federal budget deficit--have shrunk by 33 and 20 percent
    respectively. Revenue officers went from 8,139 to 5,481 and revenue
    agents fell from 16,078 to 12,951. As noted previously, these drastic
    cuts have come at a time when the IRS workload has increased
    dramatically due to the increasing complexity of tax administration.
        NTEU believes it is essential that the IRS continue to direct
    resources toward enforcement activities that have the greatest overall
    impact on compliance and can best aid the Service's efforts to close
    the tax gap. One such activity is the IRS Automated Underreporter (AUR)
    program which has evolved as an important Service compliance initiative
    using third-party information returns to identify income and deductions
    that were not reported on tax returns. NTEU believes the program is an
    effective way to detect taxpayer underreporting which accounts for
    roughly 82 percent of the gross tax gap.
        In FY '08, increased AUR contact closures increased by almost 4
    percent from the previous year and dollars collected through AUR and
    information return processing increased by 22 percent.
        The Administration's budget request acknowledges the import role
    the AUR program can have in closing the tax gap by reducing the number
    of taxpayers who underreport their income and proposes an increase of
    $26.2 million and 300 FTE to increase coverage of the AUR document
    matching program. According to the Administration, this request will
    generate $386.5 million in additional revenue once new hires reach full
    potential in FY 2012 resulting in a return on investment (ROI) of 17 to
    1.

    Taxpayer Service

        Mr. Chairman, NTEU strongly believes that providing quality
    customer service to the taxpayer is an important part of IRS efforts to
    help the taxpaying public understand their tax obligations while making
    it easier to participate in the tax system. Through many sources, the
    IRS provides year-round assistance to millions of taxpayers, including
    outreach and education programs, issuance of tax forms and
    publications, rulings and regulations, toll-free call centers, the
    IRS.gov web site, Taxpayer Assistance Centers (TACs), Volunteer Income
    Tax Assistance (VITA) sites, and Tax Counseling for the Elderly (TCE)
    sites. These efforts have helped the IRS raise their standard of
    service to America's taxpayers and assisted in efforts to improve
    voluntary compliance. The IRS has continued to make great strides in
    recent years in the quality of the service it provides despite
    relatively flat budgets, that when adjusted for inflation, have
    provided the IRS with fewer resources over the past several years
    compared to FY2002.
        But despite receiving fewer resources and continued reductions in
    the number of customer service representatives at the Service, the IRS
    was able to deliver a successful 2008 filing season. As you know, the
    2008 filing season was particularly challenging due to late enactment
    of the AMT legislation and implementation of the Economic Stimulus
    Payment program. Despite these challenges, the IRS carried out another
    successful filing season during which IRS employees processed more than
    155 million individual returns including returns filed solely to claim
    an economic stimulus payment, an increase of 11 percent over last year
    and issued 107.6 million refunds, totaling $369 billion; answered over
    40.4 million calls, an increase of 21 percent due to a large increase
    in taxpayer inquiries about the economic stimulus checks; completed 52
    million automated calls, an increase of over 123 percent; maintained
    account and tax law accuracy rates of over 90 percent and expanded
    return preparation at IRS Taxpayer Assistance Centers (TACs) preparing
    over 575,000 returns, a 42 percent increase over last year.
        Mr. Chairman, while IRS employees were able to continue providing
    quality service to taxpayers in FY 2008, we do have concerns about the
    potential negative effect on IRS' ability to continue doing so should
    the ``efficiency savings'' assumed in the Administration's budget
    request not materialize. For FY 2010, the budget request identifies
    ``efficiency savings'' of more than $118 million at the cost of 1,504
    FTE's. If, as sometimes been the case in previous years, IRS fails to
    realize all expected savings then the funds available for critical
    Service personnel, such as those working at the 401TACs located
    nationwide, would be further reduced.
        As stated previously, NTEU strongly believes providing quality
    service to taxpayers is critical to ensuring taxpayers understand their
    tax obligations while making it easier for them to participate in the
    tax system. And in the current economic climate, we believe it is more
    important than ever that taxpayers be able to deal with the IRS
    directly to work through any financial difficulties they may encounter.
    IRS employees have a wide range of tools and information at their
    disposal, which allow them to work with taxpayers to address their
    financial hardships and to become compliant.
        Above all else, the IRS employee's interest is in assisting
    struggling taxpayers to meet their tax obligations in a way that will
    not exacerbate their financial distress. When an IRS employee works
    with a taxpayer, the employee has access to all of the taxpayer's
    information and can answer questions and offer advice. For example,
    they can see whether a taxpayer has not filed a return and explain that
    the sooner the taxpayer makes arrangements to address filing and
    balance due issues the less penalty and interest they will owe. They
    can look at the taxpayer's records and answer questions about why they
    owe a balance and what they can do about it. They can also tell the
    taxpayer that they are not having enough taxes withheld by their
    employer and need to address that or that if an ex-spouse is claiming a
    child as a dependent they will not also be able to receive an
    exemption. If a simple mistake, like a math error, has occurred, they
    can fix it. They can provide an extension of the time period for
    payment. They can make a determination that the taxpayer meets the
    currently not collectible requirements or whether the taxpayer may be
    eligible for an Offer in Compromise, in which part of the balance due
    is forgone.
        NTEU believes providing quality services to taxpayers is an
    important part of any overall strategy to improve compliance and that
    the President's request for taxpayer services will enable the IRS to
    deliver another successful filing season, improve the responsiveness
    and accuracy of taxpayer service, and support Service efforts to
    enhance taxpayer compliance.

    Section 1203

        Mr. Chairman, while meaningful funding for the IRS is important to
    operations, NTEU also believes that in order to maximize efficiencies
    at the IRS, Congress must act to modify Section 1203 of the IRS
    Restructuring and Reform Act of 1988 (RRA 98). Commonly known as the
    ``Ten Deadly Sins,'' Section 1203 outlines ten infractions for which
    IRS employees must be fired, including the untimely filing of federal
    income taxes even when a refund is due. No other federal or
    congressional employee is subject to similar mandatory termination.
        Without question, Section 1203 has had a negative impact on the
    morale of the IRS workforce and is impeding the ability of the IRS to
    perform its mission. According to numerous GAO reports, IRS employees
    greatly fear the threat of being fired under Section 1203. This in turn
    has had a chilling effect on the ability of IRS employees to do their
    jobs. In particular, employees specifically attribute the decrease in
    recommending a seizure of taxpayer's assets to Section 1203. Clearly,
    Section 1203 impedes IRS' enforcement mission and is unfair to the IRS
    employees who must work under the constant threat of losing their jobs.
        NTEU believes mandatory termination for Section 1203 violations is
    unduly harsh and should not be the only disciplinary action available.
    We advocate amending RRA 98 to allow for appropriate penalties other
    than mandatory termination for Section 1203 violations and to allow for
    independent review of determinations.
         To be clear, NTEU does not condone any violation of law or rules
    of conduct by its members at the IRS or in any other government agency.
    Violations of some rules clearly warrant termination of employment.
    However, one group of federal employees should not be singled out and
    required to be fired for offenses that do not subject other executive,
    judicial, or legislative branch employees to the same penalty.
        Mr. Chairman, the large majority of IRS employees work hard, follow
    the rules and pay their taxes on time. It is patently unfair to hold
    those who are charged with enforcing the tax laws to a higher standard
    than those who write them. NTEU asks for your support for changes to
    Section 1203 of the IRS Reform and Restructuring Act, so that tax
    fairness applies to all Americans, even those who work at the IRS.

    Conclusion

        Mr. Chairman, thank you for the opportunity to provide NTEU's
    thoughts on the Administration's FY 2010 budget request for the IRS. We
    believe that by investing in the IRS workforce and demonstrably
    effective enforcement and taxpayer service programs, the
    Administration's request will ensure the IRS continues to meet its
    mission of providing 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.

                           Mark R. Secrist, Statement

        Chairman Lewis, Ranking Member Boustany and Members of the
    Subcommittee on Oversight, thank you for this opportunity to
    participate in these discussions concerning the efforts made by the IRS
    to assist economically distressed taxpayers. I am most fortunate to
    have been born in the United States, and I have grown to appreciate the
    tremendous blessing it is to be a citizen. I enlisted in the Army in
    1973 during the Vietnam conflict. I received an appointment to the
    United States Military Academy at West Point. I received a commission
    as a 2nd Lieutenant in the Marine Corps and served as a C-130 tanker
    pilot. I am currently living in Winchester, Virginia with my wife and
    six children. I am also serving as a pilot for a major commercial
    airline. I consider it an honor and a duty to pay taxes for the
    operation of this country as I have always done, and I am pleased to
    read Commissioner Shulman's comments when he remarked:

             ``We need to ensure that we balance our responsibility to
            enforce the law with the economic realities facing many
            American citizens today. We want to go the extra mile to help
            taxpayers, especially those who've done the right thing in the
            past and are facing unusual hardships.''

        Contrary to the statement of Commissioner Shulman, my testimony
    today is that the IRS has misapplied tax law and has even broken law as
    I will document to the Subcommittee. My testimony today will illustrate
    astonishing misapplication of the facts and the law that does not take
    into account the IRS Mission Statement to apply the tax law with
    ``integrity'' and ``fairness.''
        This is a time that is very stressful for my family and me. I am
    facing a most unusual hardship caused by extraordinary misapplication
    of the law by the IRS arising out of the fact that I am a victim of an
    offshore Ponzi scheme. I am 54 years old, I have had a flawless record
    in paying my taxes and fulfilling my tax obligations to this wonderful
    country, but the ``unthinkabl'' has happened. I was financially
    destroyed by white-collar criminals, on the island of St. Kitts, who
    were running a complex and elaborate Ponzi scheme that hurt me and many
    other US citizens as well. In exchange for $300,000, sourced from
    refinancing my home, I was promised 20 percent interest. The $300,000
    was embezzled. The problem has been exacerbated by an IRS examination
    which resulted in approximately $1.1 million in section 6677 penalties
    on the money that was embezzled. The IRS also assessed a 75 percent
    penalty for civil fraud for making contributions to two 501(c)(3)
    approved churches. I believe that the Subcommittee and Commissioner
    Schulman need to know the facts about IRS misconduct in this matter.

    General Statement of the Issues for the Subcommittee.

        I got caught up in an offshore Ponzi scheme operated by
    Administrative Services Limited (ASL) and its successor in interest
    (BMT). Each of these companies, and others, were Kittitan entities set
    up, beneficially owned, and controlled by two Americans, Bill Gagnon
    and his wife, Mary Estes. I sent them approximately $300,000 in
    exchange for a 20 percent return. ASL would not let me invest the
    $300,000 unless I agreed to pay them for two foreign non-grantor trusts
    formed by ASL under St. Kitts law. The money was embezzled. I was
    assessed the 35 percent penalty under section 6677 for not filing a
    Form 3520 to report an interest in a foreign ``grantor trust.''
        In order to assess the 6677 penalty, the IRS ``deemed'' a non-
    grantor trust to be a grantor trust. The 6677 penalty was assessed even
    though the Department of Justice stated that the trusts formed by ASL
    were ``sham'' trusts. The penalty was assessed even though the High
    Court of St. Kitts has held that I was a victim of fraud and that ASL
    and others conducted a Ponzi scheme. The penalty was applied even
    though the ``deemed'' grantor trusts are void from their inception
    under the law of St. Kitts. The penalty was assessed even though there
    is court testimony from ASL insiders that my money never got into a
    foreign trust. The penalty was assessed even though I have demonstrated
    ``reasonable cause'' under section 6677(d) that included full due
    diligence, reliance on a CPA, reliance on a private ruling letter from
    IRS Puerto Rico, reliance on Kittitian Attorneys Inniss and Inniss,
    reliance on State Department Website commenting on the development of
    the Gagnon Resort, and reliance on two expert tax attorneys. The
    penalty was assessed because the IRS took the view that a ``sham
    trust'' can be deemed to be a valid trust so that the IRS could assess
    the 6677 penalty for not reporting an interest in a foreign grantor
    trust. If that were not enough, I have been assessed tax on the 20
    percent interest income that I did not receive even though the IRS
    knows that the money was embezzled. I was also hit with a 75 percent
    civil fraud penalty for making documented contributions to two
    501(c)(3) churches located in the U.S. I also want the Subcommittee to
    know that this matter was brought to the attention of the National
    Taxpayer Advocate on the issue of whether the IRS can take the
    inconsistent position of deeming a sham trust to be a valid trust
    solely for the purpose of assessing the 6677 penalty. The National
    Taxpayer Advocate considered the issue but elected to defer to the IRS
    examiners even though the position of the IRS on taking inconsistent
    positions is unpublished.
        My testimony will illustrate abusive IRS examination tactics, and a
    refusal to follow the law. For that reason there is very serious IRS
    misconduct that I can document under the facts and under the law.

    I can document the following facts:

         1.  The High Court of St. Kitts determined that ASL and BMT
    conducted a Ponzi scheme and that I am a victim of fraud.
         2.  The Department of Justice determined that ASL was a fraudulent
    tax shelter and that the trusts were sham trusts.
         3.  Investor data held in respect of over 100 US citizens was
    demanded and received by IRS examiners in this matter (William Everett
    and Louis Pacho, Manager) in violation of the MLAT Treaty between the
    US and St. Kitts. This data was demanded of BMT Ltd, a St. Kitts
    company with no place of business in the US. The IRS has no
    jurisdiction over BMT Ltd, yet despite this, Mr. Everett of the IRS
    purported to issue a summons against BMT Ltd, at BMT's request. Failure
    to follow the law is a serious issue under section 7214(a)(3) of the
    Code.
         4.  The IRS Examiners returned the data on 3 government CDs, with
    all of the private data of investors including social security numbers
    and bank account numbers. This data was returned to be used by ASL and
    BMT's owners and officers in their defense of a class action law suit
    in St. Kitts in which I was a claimant. The data was made available to
    third parties. The investors, whose data this was, had not consented to
    it being sent by the IRS to the third party concerned, one Janet
    Conway, an unlicensed private investigator based in Blue Bell,
    Pennsylvania; who was retained by BMT at one time. I believe that
    disclosure is prohibited by section 6103 and 7213 of the Code.
         5.  I reported the IRS misconduct for Everett's disclosures, to
    TIGTA. Incredibly, TIGTA did not find IRS misconduct when the IRS
    examiners sent off tax return data with the potential for identify
    theft to third parties, contrary to section 6103 and section 7213 of
    the Code.
         6.  The 3 CDs with confidential data were sent to BMT's
    investigator, Janet Conway, to help in its defense against me and other
    claimants. Since ASL and BMT were ultimately found to be liable to the
    claimants, the IRS examiners at minimum provided assistance to their
    efforts to avoid that liability.
         7.  I have a letter from Martin Kenney & Co, an English law firm
    which acts for me in St. Kitts, that states that the foreign trusts
    were void from their inception under the law of St. Kitts. The IRS has
    treated the Ponzi trusts as valid trusts solely for the purpose of
    assessing the 35 percent 6677 penalty on the money that was embezzled.
         8.  There is court testimony by insiders filed in my St. Kitts
    action, that most of the investor income was embezzled by Mr. Gagnon
    and his successors, and that Gagnon controlled entities kept false
    records to record the fictional 20 percent investment return.
         9.  The IRS and the case law conclude that in the case of abusive
    tax shelters, ``substance'' prevails over ``form.'' For that reason I
    got in touch with the National Taxpayer Advocate for assistance on the
    6677 penalty. There is no precedent for treating a ``sham trust'' as a
    trust solely for the purpose of filing the 6677 35 percent penalty. I
    argued that if the IRS wanted to take an inconsistent position and
    disregard a sham trust and then take a conflicting view that it is a
    trust, they should publish that position first. Otherwise, the IRS
    cannot meet its Mission Statement to apply the tax law with
    ``integrity'' and ``fairness.'' The NTA took no action because the IRS
    said that they wanted to take this inconsistent position even though
    the IRS has not published that inconsistent position. The NTA deferred
    to the IRS examiners.
        10.  The section 6677 penalty can be abated for ``reasonable
    cause'' under section 6677(d). I raised substantial reasons for
    ``reasonable cause'' but the IRS refused to discuss any of the reasons
    for ``reasonable cause'' including reliance on a tax attorney with 40
    years IRS experience who advised me that Form 3520 does not have to be
    filed if the foreign trust is a sham trust.
        11.  The IRS in Puerto Rico apparently provided a ``Private Ruling
    Lette'' to ASL, dated 8-23-98, from District Director Guaynabo, that
    states (1) The ASL trust structures are code compliant valid
    structures, (2) They are not a tax avoidance or evasion trust, (3) They
    are Non-Grantor Trust which are not reportable on Forms 3520/3520A.--
    (PRL) 19981007, letter 729 (Rev.7-97)

    Chronological Statement of the Facts.

         1.  In 1999, I picked up a flyer and a card at church from a
    neighbor who had just heard Mr. Bill Gagnon speak. Gagnon and his wife
    were the owners of ASL, a St. Kitts company. My neighbor said that Bill
    Gagnon was a Christian Minister businessman who was involved with the
    building and the construction of a resort project on the island of St.
    Kitts that was nearing completion. I was told that the resort was 85
    percent rented out most of the time to people from the UK and other
    parts of the world, and that it was generating income for those who
    could invest in the project. I flew down to St. Kitts in 1999 to meet
    Mr. Gagnon personally. He acted in a very professional manner as he
    persuaded me to be a better steward of my money by investing it wisely.
    He introduced me to his staff, gave me a tour of the resort he was
    promoting for investment, and provided me an opportunity to stay in a
    room at the resort. I chose not to accept his offer to stay at the
    resort. I wanted to have more time to speak with him to learn all I
    could during my short visit and accepted his offer to stay at his home.
    During my visit he told me he was an ordained minister and that he had
    previously served as a missionary in Africa for over twenty years. I
    heard him passionately speak of spiritual matters and watched him
    lovingly care for his quadriplegic wife, Mary Estes, all of which made
    me to believe he was sincerely a man of God and could be trusted. I
    also saw the completed buildings with people in them. I toured the
    individual rooms that were filled with fine teak wood furniture and
    beautiful dcor immaculately maintained. I saw the buildings that were
    under construction with workers present, and I saw the blueprints for
    the entire project including the pool and restaurant.

             Special notices were given to me by Brad Woodard (the CFO of
    ASL) informing me that a staff of attorneys and legal professionals
    were on the job and currently involved in maintaining trust documents
    for other clients, thus keeping us in full compliance with the US tax
    law. Mr. Brad Woodard, was held out as an expert accountant and would
    regularly communicate his analysis of U.S. tax laws to me. Mr. Woodard
    assured me that Mr. Gagnon's organization was U.S. tax compliant. A
    letter, dated 14 January 1999, by the respected and prominent St. Kitts
    law firm of `Innis and Innis' stated that: ``the trust document
    structures were legal and compliant with US tax law and IRS rules and
    regulations. They are Non-Grantor status according to three US CPA's,
    therefore no legal and no annual IRS 3520 or 3520A forms need to be
    filed.'' Even the Federation of St. Kitts government said the trusts
    were legal and compliant with US tax law and IRS regulations in a
    letter dated 12 April 1999, by GA Dwyer Astaphan, Minister. I've shown
    good faith, reasonable cause and reliance on professional counsel as
    I'm ignorant of the complexities associated with this type of trust.

             ASL was a St. Kitts Corporation that Mr. Gagnon claimed had a
    `start to finish' plan for a complete package with the staff to walk me
    through it. I decided to invest also because Mr. Gagnon promised a 20
    percent return on my investment. So convinced was I of ASL's knowledge,
    professionalism and legitimacy that under its guidance and direction I
    took out two equity loans on my house and sent two large checks into
    the Paradise Beach Investment totaling approximately $300,000.

         2.  In order for me to invest, Mr. Gagnon said that everyone
    desiring the 20 percent return must have ASL create a foreign trust
    structure that involved one domestic trust and two foreign trust
    documents. Mr. Gagnon and the staff explained to me that I was not the
    owner of the trust, only the administrator of the trust.
         3.  A few years later, in 2001, Mr. Gagnon died from a heart
    attack. Mr. Gagnon's wife, Mary Estes, then assumed control of the
    Gagnon organization. Mary was a quadriplegic M.S. sufferer. She died in
    2003. Shortly before Mary Estes' death, Roland Thomas took control of
    the Gagnon organization, including the resort complex. Mr. Thomas kept
    control until sometime in 2007. As a result of four years of hard
    fought litigation in St. Kitts, I and my co-claimant established that a
    constructive trust was impressed upon the Resort which Gagnon had used
    our money to buy and develop. Mr. Thomas denied knowledge of me and
    others, under oath, as a person(s) who had invested in the resort.
    Thomas hoped to get rid of the investors in ASL, so he would be able to
    keep the resort property without any obligations to me and the other
    ASL investors whose money was embezzled.
         4.  I began a class action lawsuit in St. Kitts in 2003 against
    ASL, BMT and others. At the time I commenced my action, Roland Thomas
    was CEO of BMT. Mr. Thomas is a British citizen who I believe currently
    resides in the Las Vegas area. (BMT is a St. Kitts company with no
    presence in the U.S.) I am one of the lead claimants against BMT and
    others for recovery of the assets of BMT.
         5.  In 2004, Judge Baptiste (a St. Kitts Judge) ordered BMT and
    Mr. Thomas, (the CEO of BMT in 2004) to produce the personal and
    financial records it held of myself (and the records of 125 other US
    citizens who had invested also) that were located on the property.
    These records would have proven my case against ASL, BMT and others.
    Mr. Thomas did not obey Judge Baptiste's court order. However, Mr.
    Thomas went back into the courtroom, seven days later, and testified
    before Judge Baptiste that, ``There were no records to be found.'' --A
    direct lie.
         6.  To get around the Baptiste Order, Thomas called the IRS and
    made contact with Agent Louis Pacho (group manager) and Agent William
    Everett who worked for Mr. Pacho. These two federal employees
    coordinated with Mr. Thomas by supplying him with an IRS summons. The
    IRS summons was signed by Mr. Everett and was directed to Mr. Thomas as
    CEO of BMT. Under the MLAT Treaty between the US and St. Kitts, data
    held in St. Kitts can only be requested by the IRS in a criminal
    matter. The Summons was a civil summons. Before the data left the
    island, according to sworn affidavit testimony of certain ``whistle
    blower'' employees, Mr. Thomas instructed the office manager to destroy
    all documents pertaining to the ASL investors and to ``bleach''
    computer records. The Court of St. Kitts was denied critical evidence
    needed to support my claims. The data received by the IRS from BMT was
    data which it was not entitled to request or obtain. The IRS summons
    was in breach of (a) the Baptiste Disclosure Order; (b) the US--St.
    Kitts MLAT Treaty; and (c) the St. Kitts Confidential Relationships Act
    1985.
         7.  Two years went by, and a number of ``whistle-blowers'' who
    worked for BMT, at that time, surfaced. Their combined testimony
    concerning the presence of the records on the property and what these
    records contained was enough to convince Judge Belle that Judge
    Baptiste was lied to by Mr. Thomas, and others acting for BMT in 2004.
         8.  In 2006, Judge Belle ordered BMT to produce these same records
    in three days, or its defenses would be completely struck out and BMT
    would be prevented from filing any other defense as well. Mr. Thomas
    was caught in a lie. Janet Conway (an unlicensed Pennsylvania private
    investigator hired by Mr. Thomas) and professional advisors working for
    BMT made an urgent plea to IRS Agent Everett for the data to be
    returned to them ASAP to comply with Judge Belle's order. The data was
    needed to satisfy the Order made by Belle J. in October, 2006. A letter
    written by Mr. Thomas to IRS Agent William Everett, dated, March 17,
    2006, contains Mr. Thomas' urgent request for an inventory to be done
    on all of the data that was sent by him pursuant to the IRS summons.
    Mr. Thomas tells Mr. Everett that he is being falsely accused of
    improprieties by myself and that the private/taxpayer data is
    absolutely needed for BMT to defend itself from these false
    accusations. Mr. Thomas accused the Claimants of fraud and communicated
    that charge to Mr. Everett. Mr. Everett proceeded to help the
    Defendants even though Mr. Everett and his manager were conducting IRS
    examinations on the investor-Claimants at that time.
         9.  At this point, Agent Everett came to the rescue of BMT by
    quickly, and voluntarily providing all of the data requested by BMT on
    3 government CD's printed from Atlanta, GA. However, the IRS agents did
    not send the data directly back to BMT. Agent Louis Pacho or his
    assistant sent the data to Janet Conway. She did not have authority
    from any of the individuals whose data was on the discs, to view the
    private taxpayer data. At that time, Janet Conway was operating her
    business unlawfully, as she did not have a private investigator's
    license, which is required by the state of Pennsylvania. The IRS agents
    chose to deal with her anyway and provided her the private/taxpayer
    data on 3 government printed disks that were not encrypted. Over 630
    pounds of US citizen's private data were on these disks. The Federal
    Trade Commission's protocol for data breach is currently being
    followed.
        10.  The data on the IRS CD's satisfied the demand of Judge Belle,
    and as a result, the lawsuit continued to rage on, burning-up more of
    my assets, totaling over 1 million dollars of additional attorney fees.
    Finally, the St. Kitts government seized the property. Based on current
    information, the St. Kitts government then quickly sold the property to
    the Marriott Hotel for an undisclosed amount. The Kenney Firm (my
    attorneys) is now engaged in an effort to obtain appropriate
    compensation from the Government of St Kitts. This effort is currently
    going on, and may last for years to come. If the IRS agent(s) did not
    take the private/sensitive data from BMT in 2004, and then give it back
    in 2006, I would have (1) won the lawsuit sooner and (2) I could have
    sold the Resort for top-dollar as I had a purchaser willing to buy it
    from me. I would have been able to pay my attorney fees and to
    completely recover financially from this.
        11.  On September 27, 2007, the High Court of St. Kitts along with
    the attorneys representing both the defendants and the claimants
    concluded that I, along with the others, was a victim of fraud. My
    money was in fact embezzled by Mr. Gagnon and others. The court
    determined this to be a Ponzi scheme as noted by Judge Belle, who
    presided over my case, and made the court order that concluded my
    lawsuit against the defendants.

    Judge Belle wrote on September 27, 2007:

        ``The financial schemes marketed to the Claimants and operated by
    Bill Gagnon, and following his death by Mary Estes, were nothing more
    than a mechanism to cause the Claimants to unknowingly and unwillingly
    invest their money into an elaborate and fraudulent ponzi scheme that
    collapsed under its own weight.''

        12.  I have been charged by the IRS Civil Penalties for tax year(s)
    1999, 2000, 2001, 2002, and 2003 totaling $1,174,934.50 for violations
    under IRC 6038, 6038A, 6677, and 6679.

        I was audited by IRS Agent Eugene Nelson (50-19235) on April 26,
    2006, concerning my involvement with ASL. My case languished on his
    desk for almost 2 years after the audit until I received a letter from
    him dated, January 8, 2008. I was given 30 days to respond to the
    penalties he had determined that I owed. However, after looking closely
    at Mr. Nelson's work, my CPA and I noticed that he did not take into
    account that I amended my taxes in January of 2005. Mr. Nelson also has
    charged me with civil fraud as well, based on donations that I gave to
    (two) legitimate churches that are still currently recognized on
    government web sites as being 501(c)3 organizations. I was given
    misinformation by Mr. Gagnon to induce me to give money to the
    churches. Mr. Gagnon told me that I could receive a future economic
    benefit from doing so; however, no future benefit promised by Mr.
    Gagnon was received by me. My attorney wrote a protest letter to Mr.
    Nelson. Mr. Nelson provided no response to my attorney's protest
    letter. My case was mysteriously transferred to Mr. Everett. No reason
    was provided by Mr. Nelson for the transfer. My case has been with Mr.
    Everett now since February 2009 to the present. Mr. Nelson has accused
    me of civil fraud assessed under section 6663 of the Code and the
    negligence penalty under section 6662(a). I do not understand why it
    should take over three years to examine the tax return of a victim of a
    Ponzi scheme. I am just a W-2 employee.
        I initially took a 100 percent charitable deduction for all of my
    cash contributions. When I consulted an expert tax attorney, he advised
    me to amend my tax returns because I was told by Mr. Gagnon that 90
    percent of the charitable contribution would provide some kind of an
    economic benefit in the future. I now know, as will be discussed below,
    that I was given misinformation by Mr. Gagnon, or his agents, to induce
    me to give cash payments to the 501(c)(3) churches. I disallowed myself
    the 90 percent benefit in Jan. 2005.
        To illustrate the extreme nature of the IRS examination, Nelson has
    charged me with having received interest income from the 20 percent
    Ponzi interest income even though I did not receive the income and
    there is now strong evidence that ASL kept ``dummy'' records to reflect
    interest income. This evidence comprises(a) the sworn testimony of
    Derrick Fraites, who worked for several years as the Office Manager
    within ASL and BMT under Bill Gagnon, Mary Estes, Robert Estes and
    Roland Thomas; and (b) copies of those dummy records, which Mr. Fraites
    described and exhibited to his affidavit, sworn in the St. Kitts
    Action. It cannot get more bizarre to have ASL steal my money, and then
    be charged with taxable income from the money embezzled.
        The cash contributions were made to 501(c)(3) churches. I have
    canceled checks for all of the charitable contributions. Mr. Nelson saw
    and reviewed all of the checks that were given to the churches. It is
    basic law that all taxpayers are entitled to charitable contributions
    when they donate money to 501(c)(3) churches.
        I provided Mr. Nelson with communications that were received by the
    IRS. In these communications, I expressed my personal emotions about my
    reliance on the ``ministry'' of Bill Gagnon, a minister who took
    advantage of my Christian faith. These documents were in the possession
    of Mr. Nelson and show my good faith, reliance on a Christian Minister,
    and my ``good faith'' in placing investments with ASL.
        This reliance is sufficient to justify ``reasonable cause'' under
    section 6664(c) of the Code for the penalties proposed by Mr. Nelson
    under section 6662. Obviously, if there is ``reasonable cause'' for a
    negligence penalty, it would be impossible to prove ``willfulness''
    under section 6663.
        A report from CPA Audry Pomerening, dated February 1, 2008,
    indicates that Mr Nelson disallowed the charitable deductions twice and
    gave no credit for the taxes paid to the charities.
        Under new facts, I may have been wrongly told that the churches did
    not keep all of the money donated to them. More importantly, I had no
    obligation under law to monitor what a church does with donations and
    how they expend donations for religious purposes. The IRS is required
    to follow the law under the clear language of section 170. See section
    7214(a)(3) of the Code.
        There is no technical authority for Mr. Nelson to invent interest
    income on embezzled money, nor is there authority for a finding that if
    a taxpayer is embezzled, then the taxpayer should be charged with civil
    fraud for having his money embezzled.
        In summary, Nelson has made audit adjustments and alleged civil
    fraud without any justification in fact or in law. During the
    examination conference, Mr. Nelson did not mention civil fraud in any
    way. No allegation of civil fraud should be made by Mr. Nelson merely
    because a taxpayer is a faithful Christian. Further, Mr. Nelson cannot
    make the case that bogus interest income that was based on a false set
    of books to cover up embezzlement is taxable income.

        Department of Justice Determines Administrative Services, Ltd. used
    sham domestic and offshore trusts, in the case of Victor Carlysle
    Sullivan, Jr. 1/12/2007.

        The Complaint filed by the Department of Justice states ASL
    operated a tax-fraud scheme. The ASL tax scheme involves the sale and
    use of sham business organizations and offshore trusts. Paragraph 16 of
    the complaint states: The reason that the customers fail to report
    their assets and the income filtered through these trusts [reference is
    to the failure to file Form 3520] is that the trusts are simply sham
    entities formed without any economic purpose. Paragraph 32 states: The
    intent and effect of the ASL offshore tax scheme is to promote, aid,
    and abet federal income tax evasion.
        The IRS is required to follow the determination by the Department
    of Justice that the trusts created for Taxpayer in the present case by
    ASL are sham trusts. In addition, I consulted Carlyle Sullivan, a CPA
    to prepare my tax returns. I relied on Mr. Sullivan for my ASL
    investments. Reliance on a CPA is ``reasonable cause'' under the
    section 6664 regulations. Obviously, if negligence can be abated by
    reliance on a ``professional'' there is even a stronger reason why
    there is no civil fraud in my case.

    Court Order from the St. Kitts and Nevis Circuit Court.

        This Court Order is significant because it is a judicial
    determination of fraud and it was agreed to by the principal Defendants
    in the class action law suit I brought with others, in St. Kitts. BMT
    was the successor in interest to ASL and held all of the assets
    embezzled from the investors in St. Kitts, including myself.
        Paragraph N. states: It is now apparent that the various financial
    schemes marketed to the Claimants and operated by Bill Gagnon, and
    following his death, my Mary Estes, were nothing more than a mechanism
    to cause the Claimants to unknowingly and unwillingly invest their
    money into an elaborate and fraudulent Ponzi scheme which ultimately
    collapsed under its own weight. Under this scheme, investors were
    promised rates of return upwards of 20 percent per annum. However,
    there was never any genuine economic activity underlying the scheme
    which produced a rate of return. Instead, the Investors' capital was
    simply misapplied and paid out as a form of ``income'' or ``return;''
    used to fund the overhead of the Sherwood/Estes enterprise and the
    lifestyles of Mr. Gagnon and Ms. Estes; and used to acquire the title
    to the lands and build the Resort.
        Paragraph O states that the Investors' capital ended up being
    remitted to bank accounts maintained by BMT while exclusively
    controlled by Bill Gagon and Mary Estes. Mr. Gagnon was the sole
    signatory for all of the accounts that he maintained for the claimants.
        By this Order, BMT agreed that there was fraud on the ASL investors
    (including Mr. Secrist). Judgment in default was entered against ASL.

    Memorandum from Martin Kenney & Co., (``MKS'') December 6, 2006 and
            December 13, 2006.

        MKS specializes in fraud recovery. MKS was successful in having me
    and my co-claimant declared to be owners of the Angelus Resort, in
    place of BMT. Mr. Kenney is an expert in English law, from which the
    law of St. Kitts is derived. His opinion letter indicates that the
    foreign trusts located in St. Kitts, purchased by myself are void ab
    initio.. Mr. Kenney identifies a Ponzi scheme and other fraudulent
    activities and that all funds transferred to Administrative Services
    were not under the control of Mr. Secrist. ``The trust documents,
    fabricated by Mr. Gagnon were designed to create the illusion that the
    administrators had some control over their investment dollars, but this
    was not the case.'' Mr. Kenney concludes that the trusts purchased by
    Mr. Secrist were ``sham trusts.''
        Because the trusts were procured by Estes/Gagnon as a centerpiece
    to their grand scheme of fraud, we say they were not properly
    constituted from their inception._Martin Kenney
        Kenney has concluded that the foreign trusts never existed!

    Affidavit of Derrick Fraites 5/24/2004 before the High Court of St.
            Kitts 5/24/2004.

        Mr. Fraites was the office manager for ASL and he testified under
    oath that all of the money paid to ASL was embezzled and that ASL kept
    a false set of books. Mr. Fraites would make fictitious entries into
    the accounts so that I would see what I had invested. He testified that
    the entries ``were fictitious as the actual accounts were almost always
    empty. Mr. Gagnon would endorse all of the checks coming in for his own
    use.''
        This further establishes the sham nature of all of the ASL
    operations. This document is important because it is court testimony
    made under penalties of perjury, that my money was embezzled and that
    ASL and other entities within the Gagnon organization maintained a
    dummy set of books.

    IRS Summons Dated March 8, 2004.

        The summons was sent to BMT Ltd, a St. Kitts Corporation by William
    Everett and his manager Louis R. Pacho. There is no jurisdiction for
    the U.S. Summons on a St. Kitts corporation, therefore, all of the data
    received by the IRS and used in my examination is unlawful. The IRS has
    been using data from an unlawful Summons, including the Secrist
    investment data. Mr. Nelson's willful use of unlawful data is a
    7214(a)(3) violation.

    Affidavit of Janet Conway, April 13, 2006 before the High Court of St.
            Kitts.

        Ms. Conway referenced the fact that an IRS examiner (apparently
    Everett) advised her that the investigations had been completed and
    that appropriate documentation and recommendations had been sent to the
    Department of Justice in Washington DC. It appears that Ms Conway was
    referring to Mr. Everett. Apparently, the IRS was conducting a criminal
    examination in the guise of a civil examination because Mr. Everett
    made contact with the Department of Justice.
        For the reasons set out above, it is reasonable for me and my
    attorney to ask that he be removed as my examiner.

    Amended tax returns of Secrist for 1999, 2000, 2001, 2002, and 2003
            with evidence of payment.

        I was told by Mr. Gagnon that I could make contributions to the two
    churches and also get a personal benefit in some way. In my original
    tax returns I took charitable deductions for the full amount of cash
    paid to the churches. My amended returns, submitted in Jan. 2005, were
    made just in case the churches did not keep all of the money I
    contributed to them. However, I have discovered zero data that the
    churches did not keep all of the money given by myself. In November
    2004, I ordered my CPA to remove 90 percent of the cash contribution
    benefit that I received from the donations as I was informed by an
    expert tax attorney that I cannot take the full donation amount as the
    churches, as I was told, only kept 10 percent of my donation. I paid
    all of the back-taxes and the interest to the IRS for this 15 months
    before any contact with me at all was made by the IRS. I found the
    problem, I fixed the problem. It's not a crime to be temporarily
    deceived and fooled by people who misrepresented the law to me. My
    conduct negates any willful attempt to not pay my taxes as I have
    always paid.

    TIGTA has failed to provide oversight.

        I filed a misconduct complaint against Everett for unlawful
    disclosure of my tax return data in the 3 CDs sent to Janet Conway to
    be used by defendants in the class action lawsuit. TIGTA cleared Mr.
    Everett without seeing the CDs and without discussing the facts with me
    or my attorney. Obviously, there was a disclosure and the potential for
    identity theft. It is not clear to me why TIGTA cleared Everett when
    there appears to have been a clear disclosure violation under section
    6103.

    Summary and Conclusions.

        My testimony is intended to make sure that the Subcommittee on
    Oversight is aware of the fact that in my case, the IRS did not comply
    with its Mission Statement to apply the tax law with integrity and
    fairness. I have also identified IRS documented misconduct for making
    social security numbers and other financial data available to people
    not entitled to have that data. I can document the fact that the IRS
    examiners did not comply with the U.S. MLAT Treaty. The IRS also
    refused to follow the law on trusts under the applicable law of St.
    Kitts. I have also identified the fact that in my case the Taxpayer
    Advocate did not exercise her independent judgment to act as ombudsman
    for me when the IRS deemed a sham trust to be a valid trust. In effect
    the IRS recognized a sham trust solely for the purpose of accusing me
    of not filing a Form 3520 for the fictitious foreign ``deemed'' grantor
    trust. This was despite the previous applicable finding in the Carlysle
    case. I have identified IRS examination that is so outrageous that it
    was necessary for them to use a fictional grantor trust just so they
    could find a way to assess a 35 percent penalty on the money embezzled
    by crooks in a fraudulent Ponzi scheme. I am a victim. The IRS chose to
    punish a victim with a new position for which there is no legal
    precedent. I am available to Members of the Subcommittee to show you
    all of my documentation and the outrageous positions taken by the IRS.
    This testimony is submitted in good faith and on the assumption that
    the Subcommittee is interested in an actual case like mine in addition
    to the platitudes of the IRS Commissioner and the National Taxpayer
    Advocate. What is important are actual case histories for true
    oversight of the IRS. I would encourage the Subcommittee to hold
    hearings on the subject of IRS misconduct and whether TIGTA is policing
    IRS misconduct. I would be pleased to be a witness at any Hearing on
    this topic. The extreme position taken in my case by the IRS is in
    contrast to the liberal policy taken by the IRS for Ponzi scheme
    victims in Rev. Rul. 2009-9 and Proc. 2009-20. Although the IRS has
    provided favorable guidance to the Madoff Ponzi victims by giving them
    tax relief and ``safe harbor'' benefits, the IRS has treated me with
    absurd determinations including assessment of interest income based on
    demonstrably dummy records.
        Mark Richard Secrist
        1623 Laurel Grove Road
        Winchester, VA 22602
        msecrist@hughes.net

                            Michele Dyson, Statement

        Chairman Lewis, Ranking Member Charles W. Boustany, Jr., and
    Members of the Subcommittee, I am honored to have the opportunity to
    present testimony that I hope will be considered by this distinguished
    Committee during the Internal Revenue Service (IRS) annual review to
    safeguard taxpayers against unfair IRS collections procedures. My
    testimony addresses the adverse financial hardship caused by premature
    IRS tax liens, tax levies, and Trust Fund Penalties against citizens
    and small business. In my case, the IRS misapplied tax payments,
    miscalculated penalty and interest and filed a tax lien. This pre-
    mature and capricious tax lien against my company caused a domino
    effect which resulted in loss of our credit line, revenue, tax revenue
    to the Treasury, including the revenue lost from the employees who were
    let go. My company would be in an entirely different position today, if
    the IRS had corrected its records and applied the payments to the
    proper periods. Instead of an overpayment of over $114,000, the IRS
    misapplication of payments and miscalculations resulted in a liability
    of accruing penalties and interest of over $400,000.
        I applaud the Ways and Means Oversight Subcommittee Chairman John
    Lewis and Ranking Member Charles W. Boustany, Jr. introduction of the
    OIC Legislation that Eliminates Down Payment H.R. 2343, the Tax
    Compromise Improvement Act of 2009 to help taxpayers enter into offer
    in compromise agreements with the IRS. Due to the broad discretion of
    the IRS, taxpayer offering to settle a tax liability to make either a
    partial payment with submission of an OIC application (e.g., a
    nonrefundable, 20-percent down payment) or to make proposed installment
    payments during the period of the OIC's pendency are often denied. If
    the OIC application is rejected, the taxpayer's down payment (or
    installment payments) is not refunded and with it any hopes of
    resolution denied as well. This vicious circle incarcerates taxpayers
    to pay money they do not have in addition to interest and penalties
    they cannot afford. The financial devastation caused by liens, levies,
    and IRS discretionary actions against taxpayer's causes economic
    hardship, loss of employment, and destruction of one's credit rating.
    Moreover, taxpayers cannot get a Government job or can lose their
    security clearances resulting in the same fate. The proposed changes in
    the OIC legislation must make it out of Committee to offer some relief.
    But more needs to be done to protect taxpayers and provide relief.
        My story like many others was the realization of the American
    dream. In my case, I started a family owned business.
        My great grandmother was a slave, my grandmother an elevator
    operator, and my mother a government worker. I built my business from
    the basement of my home in an industry where over 25 years ago, there
    were no women represented. Over the past 25 years, it grew into a
    multi-million dollar technology company that employed over 400 people,
    provided college scholarships, summer employment, and contributed time
    and money to a number of community charities to feed the homeless and
    others less fortunate. We paid taxes in excess of over $30 million and
    supported various community and educational programs.
        In 2002, my company received a notice from the IRS for tax
    liabilities owed dating back to 1996 which had accrued over $400,000 in
    penalties and interest. We were assigned a Revenue Officer whom we met
    and presented documentation which showed that deposits/payments had
    been misapplied and the IRS calculations were incorrect. The IRS
    officer stated in fact, that it made no mistakes and she would not move
    payments.
        Within 30 days, the Revenue Officer filed liens and levies against
    the company, eventually a Trust Fund Penalty against me; and our bank
    records summoned. We were told by the Revenue Officer--``it is easier
    for you to pay the tax and go to court and try and get it back.'' It
    was at that point, I knew that the IRS mission was not about assisting
    taxpayers--it was about collecting money.
        Premature tax liens, levies and Trust Fund Penalties, and summons
    destroyed my business, bank credit, and my personal finances. My
    personal and company bank accounts were levied, revenues from invoices
    seized, and our credit line cancelled resulting in layoffs and an
    inability to pay creditors.
        We hired an expert Forensics IRS Accountant who through the Freedom
    of Information received our IRS internal records. Using the IRS
    internal records of payments received and documented in their system,
    the accountant applied tax payments to the correct periods. The
    recalculation showed that once the payments had been applied correctly;
    the company had overpaid its taxes by over $114,000.00. The IRS
    rejected the report.
        We contacted the Tax Advocates office asking for records dating
    back to 1996. It was through the Tax Advocates office, we received
    internal IRS reports which clearly showed that the IRS had applied tax
    deposits incorrectly dating back to 1996 resulting in miscalculation
    and misapplication of payments and penalty and interest calculations.
    The IRS rejected the IRS report.
        Under the Freedom of Information, we were able to get the Revenue
    Officer's ICS Transcripts which documents IRS communication with the
    taxpayer and internal IRS employees. The ICS records documented that
    the IRS applied payments to the wrong period; the Revenue Officer
    interfered with the appeals process; and filed false statements. The
    IRS rejected our complaint.
        We requested a new Revenue Officer. The IRS rejected our request.
        We filed misconduct complaints. The IRS rejected the complaint.
        We requested the removal of the liens, levies, and Trust Fund
    Penalties submitting numerous Offers in Compromise. The Revenue Officer
    stated the OIC was not processable and not in the best interest of the
    Government.The IRS rejected the OIC.
        We filed an appeal. The IRS rejected our appeal.
        Later under FOIA, we discovered that the IRS Revenue Officer had
    contacted the Appeals Officer who in conversation called me a criminal
    who they couldn't wait to take to court. My attorney was called a
    racist; during a meeting I was searched and interrogated by
    investigative officers with guns for over an hour due to a false
    statement by the Revenue Officer.
        Finally, we submitted our complaint to tax court. The IRS
    attorney's reviewed the case, the documentation, and returned it to
    appeals for re-consideration.
        Seven years later, the IRS still refuses to correct the error.
    Refuses to remove liens, levies, Trust Fund Penalties, accrued
    penalties and interest; and continues to reject any OIC stating that it
    is too complicated and not in the best interest of the Government. Due
    to the devastation of the IRS process to my business, we were no longer
    in a position to pay the outstanding liability which had accrued
    interest and penalty since 1996--although we were notified in 2002. The
    review of our finances by the IRS Appeals office states that the tax is
    uncollectable. Yet, the IRS continued to reject the OIC.
        The abusive process and actions taken by the IRS were at the
    Revenue Officer's discretion. The Revenue Officer has an enormous
    amount of power to ruin a taxpayer's life and livelihood under the
    guise ``it is not in the best interest of the Government'' without
    cause or substantiation. A taxpayer with no knowledge of the IRS system
    is rendered helpless going up against a Goliath Government bureaucracy
    which lacks transparency and accountability to the taxpayer.
        My testimony demonstrates how a correctable IRS payment
    misapplication escalated into an abuse of discretion resulting in IRS
    misconduct, premature liens, levies, and seizures that destroyed the
    lives, livelihood, and inappropriate tax collection of a taxpayer under
    the unsupportable cover that IRS actions were in ``best interest of the
    Government''.
        I am here to ask Congress to ensure that this does not happen to
    another taxpayer. IRS delays, misconduct, and abuse should not destroy
    a taxpayer's livelihood; and create laws to make IRS actions
    transparent to Congress, to the American people, and to those IRS
    Government employees who are accountable.

    IRS Delays

          IRC 6501 allows the IRS three years from the filling to
    assess tax. In my case, the IRS notified me six years later of a tax
    liability, filed tax liens, levies, and Trust Fund Penalties resulting
    in damage to my credit, loss of revenue, and company layoffs. Taxpayers
    should not be penalized for an unknown potential tax liability. Nor
    should they have to pay accrued tax on unknown amounts without the
    ability to verify or dispute the liability which allows escalate into
    an unpayable amount. There should be no limit to correcting a tax
    problem identified years later.
          The IRS response was that if the liability is incorrect,
    then they can go back and correct the records. Correcting a problem
    months or years later does not help a taxpayer, the damage is done--
    jobs are lost, credit is ruined, and a company goes under. In my case,
    the records were never corrected and revenue to stay afloat seized.
          Some tax periods that were lien/levied were beyond the 3
    years statute of limitation. The date of assessment was 9/00. However,
    my company was not notified until 10/02. (I.R.C 650 (a)) Our first
    meeting with the IRS revenue officer was 10/31/02.

    Disputed Liability

          Penalties and interest should not be applied to any tax
    liability until 90 days after the taxpayer has been notified and
    allowed time to dispute or verify the tax liability.
          According to IRS Act 3001(a) IRC 7491, the IRS must
    provide proof of its facts. IRS regulations allow tax payments to be
    moved to the period requested by the tax payer. In my case, the IRS
    never presented any facts disputing the misapplication of payments and
    refused to move payments to the correct period as requested as was
    documented in the Revenue Officer's internal ICS records.
          The IRS should not be able to seize refunds, bank
    accounts, properties on disputed liability.

    Liens, Levies, Trust Fund, Seizures

          Liens, Levies, Trust Fund, and Seizures should not be
    placed on disputed liabilities until the IRS can provide documented
    proof that the amount is owed. This can be done by providing detailed
    reports that show the date of the liability, the date and amount of
    payment applied and any calculation of penalty and interest. The
    taxpayer has no knowledge of the IRS systems or available reports, so
    they do not know what information to request.
          The IRS should be required to provide a report that
    breaks down how each tax payment was applied, how the IRS calculated
    interest and penalty, and ensure that the application of payment is
    accurate. In cases where payments are misapplied, the IRS should run
    the best scenario for the taxpayer to reduce the tax liability and be
    able to show the tax payer ways they can get help.
          Through the Tax Advocates Office, I was able to receive a
    breakdown of a tax report that showed how the taxes were applied by
    date and amount. If it were not for that report, I never would have
    known that the IRS applied the taxes incorrectly. The reports received
    from the Revenue Officer only showed a listing of payments made and the
    tax liability due. It did not show how the tax was applied to a
    specific quarter. Our tax liability was twice a month. The IRS split
    the liability into four times a month which incorrectly increased the
    liability and penalty and interest without our knowledge.
          When the IRS files liens, levies, Trust Funds, or
    seizures, a taxpayer is assumed guilty. In today's credit ill world,
    credit is never repaired and the hardship caused collapses a company's
    revenue base.

    Offers in Compromise

          H.R. 2343, the Tax Compromise Improvement Act of 2009 to
    help taxpayers enter into offer in compromise agreements with the IRS
    is a good change to the OIC regulations. However, the IRS has enormous
    discretion in how it applies the regulation and must be required to put
    in writing with supporting documentation stating the regulation that
    allows the rejection.
          In my case, the IRS refused to accept the OIC stating
    that ``it was not processable'' and that ``it was not in the best
    interest of the Government.'' This is neither acceptable nor
    supportable. It is a flawed and false interpretation of the intent of
    the OIC regulation and should not be allowed as valid justification.
    The Tax Advocate should be allowed to reverse such action and work with
    the taxpayer to process the OIC.
          Unsupportable OIC rejections should be documented in a
    Revenue Officer's personnel file and reviewed as a part of their annual
    review as a part of IRS accountability to the taxpayer. Multiple
    infractions should be documented for disciplinary action.
          If tax records cannot be corrected in two years, then an
    OIC should be automatic where if not executed by the Revenue Officer,
    the Tax Advocate can grant.

    IRS Officers/Employees Accountability

          IRS representatives are accountable to the American
    people. They must be able to support and document adverse actions
    against a taxpayer and show compliance with IRS regulation as well as
    intent of law to the taxpayer. General unsupportable statements must
    not be a basis to take adverse actions against a taxpayer. Laws must
    protect the tax payer against unfair tax collection and interpretation.

          In my case, the Revenue Officer stated:

              The OIC is not process able
              It is not in the Best Interest of the Government
              That she stopped any chance of an appeal

          Complaints against an IRS employee should become a part
    of the employee's record and addressed as a part of their annual
    review. When numerous complaints of similar nature are repeatedly
    reported, the employee should go through a reprimand procedure to
    include dismissal. The names of agents with numerous complaints should
    be made available so that a taxpayer can request a different agent if
    necessary.

          In my case all requests were ignored, we:

              Filed a misconduct complaint
              Requested the Revenue Officer be removed
              Requested supporting documentation of the regulation
            that allowed the discretionary OIC rejection

        All requests were rejected.

    Tax Advocate

        The Tax Advocate must have the power to intervene and enforce
    regulations on the Tax payer's behalf:

          Stop IRS officers from taking adverse action where
    clearly there are disputes, misconduct, or abuse of discretion.
          Stop liens, levies, seizures when the tax payer can show
    cause.
          Request written regulatory support from the IRS Revenue
    Officer that upholds a discretionary decision.
          Investigate and replace a Revenue Officer if requested by
    the tax payer.
          File a quarterly report of complaints against IRS
    employees to the Secretary of the Treasury and to the Office of IRS
    Human Resource Director that is filed in each employee's folder.
          The tax Advocate should have the power to grant an OIC
    where abuse, improper discretion, or unreasonable delays in correcting
    tax records is demonstrated.

        Transparency

         After taxpayers spent billions of dollars on an IRS Enterprise
    System, accuracy of tax records are not transparent. Taxpayers have no
    idea of what information is available to them if not provided by the
    IRS Revenue Officer. Complaints are buried by bureaucracy forcing the
    taxpayer to get an attorney.

          The Congressional Oversight Committee needs to have
    visibility into the complaint process to identify problems and abuse of
    authority to safeguard taxpayers against unfair IRS collection actions
    and repeated offenders.
          Taxpayers must have a way to file confidential or open
    complaints that are not buried and rejected by IRS bureaucracy.
          Complaints should be tracked or categorized on IRS abuses
    of power, IRS misconduct, erroneous applications of law, abuse of
    discretion, and unnecessary hardship caused by IRS actions.
          Taxpayers should receive a complete report breakdown of
    the tax period in question showing the tax liability, payments, and
    penalty and interest calculations. This report should show the date and
    amount of payments applied so that the tax payer can verify or dispute
    the liability.
          The taxpayer should be provided a list of all reports
    available including information available under the Freedom of
    Information when they are notified of a liability.

    Summary

         In 2002, I owned a viable business that employed people who had
    been with the company over 10 years. Our company was a family owned
    business that supported its employees, their families, and its
    community. I have spent the last seven years in a process of
    malfeasance due to the abuse of IRS collection procedures and lack of
    transparency.
        I know that I am not the only one. We as taxpayers must stand up
    for our rights when wronged.
        If my records had been corrected in 2002, we would have had an
    overpayment of over $114,000 not a tax liability of over $400,000.
    Instead, every asset of the company and my personal assets are levied,
    lien, seized, or lost. OIC' were rejected based on the unsupportable
    discretion of the IRS Revenue Officer who hid behind one phrase ``Not
    in the best interest of the Government.'' After numerous submissions of
    financials, supporting documentation, expert forensic reports, and IRS
    determination that the tax was uncollectable, there is still no relief
    and nothing more to take. There must be a time limit on the IRS to
    correct a tax payer's record and relief for the taxpayer against IRS
    abuse.
         Today, there is no transparency against these abuses. IRS
    employees set a scenario of ``us against them.'' Complaints get buried,
    questions go unanswered, and accountability is non-existent.
         Today, I come to the House Subcommittee on Oversight on Internal
    Revenue Service Operations to ask for new laws that protect, safeguard,
    and require Internal Revenue Service (IRS) accountability against
    unfair IRS collection procedures to:

          Establish transparency for complaints
          Give the Tax Advocate power to intervene to approve an
    OIC, document, and demand IRS accountability
          Stop penalty and interest calculations and accrual until
    the taxpayer is notified and provided 90 days to verify the liability
          Stop liens, levies, seizures, and Trust Fund Penalties
    until the IRS can document that the liability exist and that they
    provide the taxpayer all available information to support their
    position
          Require an automatic OIC approval if taxpayer's records
    are not corrected in a timely manner and at a maximum two year period.

         Somewhere along the line, there are IRS employees who forgot their
    mission to serve the public through fair, unbiased, and reasonable
    interpretation of the law--not distorted discretion rendering the
    intent of those laws lost in translation. The frustration of the
    taxpayer can only be documented when we speak out. It is why America
    exists today.
        While it would be hard to point to any one event that singularly
    led to the American Revolution, there is no doubt that taxation without
    representation was a major factor. Americans should not fear their
    government--the tax system--nor be at the mercy of unfair IRS tax
    collection procedures. Unless we as Americans let Congress know the
    hardship created by this lack of accountability, safeguards, and
    transparency--we have no one to blame but ourselves.
        Congress must enact laws that safeguard the taxpayers to protect
    our rights so that IRS employees do no harm through abusive enforcement
    and interpretation of the law. It is the voice of the people who expose
    any betrayal of that public trust.
        The times we face are trying the very soul and spirit of every
    American. But opportunity will rise from chaos. But when opportunity is
    destroyed by distortion of the law--by those who hide behind the guise
    of their authority to harm the people they are entrusted to help, tax
    payers face their government in adversarial combat--a battle no one
    wins. Lives are destroyed--in some cases; those so overwhelmed and
    weakened by the fight take their own lives.
        In my case, the IRS misapplied tax payments, miscalculated penalty
    and interest, and filed a capricious tax lien. This pre-mature and
    capricious tax lien against my company caused a domino effect which
    resulted in loss of our credit line, revenue, tax revenue to the
    Treasury, including the revenue lost from the employees who were let
    go. My company would be in an entirely different position today, if the
    IRS had corrected its records and applied the payments to the proper
    periods. Instead of an overpayment of $114,000, the IRS misapplication
    and miscalculation resulted in an accruing liability of penalties and
    interest of over $400,000.
         Who sees? Who knows? I am here to share my story--so that this
    committee knows. Congress is the ultimate protector of the people with
    the power to enact laws to stop adverse financial hardship caused by
    premature IRS tax liens, tax levies, Trust Fund Penalties, and unfair
    IRS collection procedures.
        If this administration wants transparency and fairness of
    Government, this Congress must demand it.
                Respectfully Submitted,
        Michele Dyson
        President Computer Information Specialist
        240-206-6045
        mdyson@cisglobal.com

        Statement of the National Association of Professional Employer
                                 Organizations

        Chairman Lewis, Ranking Member Boustany, and other members of the
    Subcommittee, thank you for providing the opportunity to comment on the
    Obama Administration's FY 2010 budget proposals.
        The National Association of Professional Employer Organizations
    (NAPEO) supports the Administration's budget proposal that would
    clarify when employee leasing companies and professional employer
    organizations (PEOs) would be held liable for their clients' federal
    employment taxes.
        NAPEO is the largest trade association for PEOs nationwide, with
    nearly 400 PEO members operating in all 50 states, representing
    approximately 90 percent of the revenues of the $64 billion industry.
    PEOs provide human resources services to their small business clients--
    paying wages and taxes and assuming responsibility for compliance with
    myriad state and federal laws, including employment taxes.

    PEOs Help Small Businesses Comply with Federal Tax Laws

        Small businesses face significant challenges in meeting many
    complex federal and state compliance responsibilities, and in the
    current economic climate, hiring and maintaining a full complement of
    staff proficient in the regulatory and recordkeeping functions needed
    to fulfill these responsibilities can be cost prohibitive.
        Although PEOs are sometimes labeled employee leasing companies, as
    a practical matter, PEOs do not lease employees. Rather, PEOs provide a
    solution to the burdens their small business clients face by assuming
    responsibility and liability for remitting federal employment taxes,
    maintaining employee records, handling employee complaints, providing
    information to workers, and providing many other essential human
    resource functions as well. In addition, PEOs provide workers a variety
    of benefits, including retirement (usually a 401(k) plan), health,
    dental, life insurance, and dependent care. PEOs also bring workers
    under the protection of federal laws applicable only to large
    employers, providing workers such benefits as COBRA health care
    continuation coverage--protections that would not otherwise have been
    available to those workers. The average client of a NAPEO member has 19
    employees who are paid an average of $31,000. That small business
    cannot efficiently handle the many obligations placed on it by state
    and federal laws. The PEO lifts those cumbersome responsibilities from
    the shoulders of business owners allowing the small business to devote
    more time and energy to core business functions.
        As small- and medium-sized businesses have increasingly sought out
    the services of PEOs over the past decade, the industry has expanded to
    meet this demand. At the state level, NAPEO has in many cases sought
    recognition for PEOs and supported regulation, such as licensing, to
    help make certain that the industry could grow in a manner that ensured
    quality services. Today the majority of states specifically regulate
    PEOs. At the federal level, however, PEOs have been confronted with a
    tax code that was written long before the development of our industry.
    Therefore, the current law governing who can collect employment taxes
    does not neatly fit PEOs, their customers, or their on-site workers.

    The President's Budget and H.R. 2447 Will Improve Compliance and
            Fairness

        The President's FY 2010 budget proposal would clarify the rights
    and responsibilities of companies like PEOs with respect to employment
    taxes due. Today, the determination of which party or parties are
    ultimately responsible for employment taxes is a complex factual
    determination based on a multi-factor common law test. In some cases,
    this leads to uncertainty as to which party is ultimately liable for
    unpaid federal employment taxes; uncertainty that is detrimental to tax
    compliance and unfair to small businesses.
        The Obama Administration has stated that its budget proposal will
    facilitate the assessment, payment, and collection of employment taxes.
    NAPEO shares that view. We believe the Administration's proposal will
    substantially improve compliance with employment tax requirements,
    facilitate tax administration, reduce the number of returns the IRS has
    to process, and reduce errors in calculating and paying employment
    taxes.
        As a general matter, the President's proposal would clarify that an
    entity that holds itself out as an employer (by filing employment tax
    returns using its own name and employer identification number) could
    not later attempt to escape liability by arguing that it was not
    actually a common law employer. In that instance, the entity that held
    itself out as the employer would, under the Administration's proposal,
    be held to be jointly and severally liable for federal employment taxes
    due on wages paid. The Administration would also provide that entities
    like PEOs that meet specified requirements would be solely liable for
    such taxes. That latter part of the Administration's proposal tracks
    the structure proposed by four members of this Committee in legislation
    introduced last month. Representatives Earl Pomeroy, Kevin Brady, Ron
    Kind, and Wally Herger introduced H.R. 2447 (the Small Business
    Efficiency Act), a bill that embodies the Administration's sole
    liability budget proposal and that is substantively comparable to
    legislation that twice passed the Senate in the last Congress. NAPEO
    applauds the introduction of H.R. 2447 and urges its prompt adoption.
        The Administration's budget proposal and H.R. 2447 clear up
    ambiguities for PEOs and their small business clients. They would also
    provide important safeguards and guarantees to the federal government
    and workers in PEO arrangements. H.R. 2447 directs the Department of
    Treasury to create a certification program for PEOs to collect and
    remit federal employment taxes for their business clients. To become a
    certified PEO (CPEO), the CPEO must meet financial conditions
    (including bonding and financial audit requirements), must satisfy
    reporting obligations, and must meet other ongoing standards set by the
    IRS. After meeting certification requirements, the CPEO assumes full
    and sole responsibility for employment taxes on wages that it pays. For
    this purpose, the bill is narrowly targeted, making clear that except
    for the payment of employment taxes as provided in the legislation,
    there is no inference regarding the determination of who is a common
    law employer under federal tax laws or who is an employer under other
    provisions of the law.
        Mr. Chairman, thank you for the opportunity to speak to the
    importance of the Administration's budget proposal and H.R. 2447 for
    PEOs, their clients, and the federal government. This legislation will
    provide significant benefits to the all parties, in terms of
    efficiency, effective oversight, and revenue in trying financial times
    when every little bit helps.
        National Association of Professional Organizations
        707 North Saint Asaph Street
        Alexandria VA 22314
        (703) 836-0466
        Milan Yager, Executive Vice President
        Cheryl Gannon, Director, Federal Government Affairs

                             Patricia Read, Letter
    June 17, 2009

    The Honorable John Lewis
    House Ways and Means Subcommittee on Oversight
    343 Cannon House Office Building
    United States House of Representatives
    Washington, DC 20515

    RE: Internal Revenue Service Operations and Fiscal Year 2010 Budget
    Proposals

    Dear Chairman Lewis:

        Thank you for the opportunity to submit this statement for the
    record of the
    June 4 hearing regarding the Internal Revenue Service Operations and
    Fiscal Year 2010 Budget Proposals.
        Independent Sector, the national coalition of public charities,
    private foundations, and corporate giving programs, urges support for
    expanding IRS authority to require electronic filing of the Form 990.
    We also support a recommendation on streamlining the international
    grantmaking process that was recently issued by the Advisory Committee
    on Tax Exempt and Government Entities (ACT).
        In his FY 2010 budget proposal, President Obama recommended
    allowing reduction of the current threshold (250 or more returns per
    calendar year) for mandatory electronic filing. Independent Sector
    strongly supports this proposal, as well as a similar proposal you
    incorporated in Section 9 of your bill, the Charity Enhancement Act of
    2008 (H.R.7083), which passed the House of Representatives on September
    27, 2008.
        The Form 990 informational tax return filed by nonprofit
    organizations serves as the primary document for providing information
    about an organization's finances, governance, operations, and programs
    to federal regulators, state charity officials, and the public.
    Expanding electronic filing of this annual information return will
    enhance tax compliance and transparency, improve oversight and
    enforcement by the IRS, and provide more timely, accurate information
    to the public.
        We also bring to the Subcommittee's attention a compliance
    recommendation offered in the June 10, 2009 report of the Advisory
    Committee on Tax Exempt and Government Entities (ACT). That
    recommendation calls on the IRS to permit grantmaking organizations to
    share and rely on determinations that foreign organizations are the
    equivalent of a U.S. public charity, and thus eligible to receive
    qualifying grants. This sharing of information through an Equivalency
    Determination Information Repository would both improve efficiency and
    enhance compliance with tax rules. We ask that the Subcommittee promote
    the adoption of this ACT recommendation.
        Thank you for the opportunity to share these comments. We look
    forward to working with you on this and other legislation related to
    oversight of the nonprofit sector.
                Sincerely,

                                                          Patricia Read
            Senior Vice President, Public Policy and Government Affairs

                       Statement of Paul Cherecwich, Jr.
        The Internal Revenue Service (IRS) Oversight Board thanks Chairman
    Lewis, Ranking Member Boustany, and members of the Subcommittee for the
    opportunity to present the Oversight Board's views on the
    Administration's FY2010 IRS budget request.
        This statement presents the Board's recommendations for the IRS'
    FY2010 budget and why the Board believes this level of funding is
    needed to meet the needs of the country and of taxpayers. Created as
    part of the IRS Restructuring and Reform Act of 1998 (RRA 98), the
    Oversight Board's responsibilities include overseeing the IRS in its
    administration, management, conduct, direction and supervision of the
    execution and application of the internal revenue laws. The Board is
    also responsible for ensuring that the IRS' organization and operations
    allow the agency to carry out its mission. To this end, the Board was
    given specific responsibilities for reviewing and approving annual
    budgets and strategic plans.
        The Board has a responsibility to ensure that the IRS' budget and
    the related performance expectations contained in the performance
    budget support the recently published IRS Strategic Plan 2009-2013. In
    addition to this statement, the Board develops a formal report in which
    it explains in detail why it has recommended this budget for the IRS.
    Because of the late budget cycle caused by the change in
    Administrations, this report is still under development. The Board
    requests that this report be entered into the meeting record when it is
    sent to the Subcommittee later this month.

    FY 2010 IRS Budget Recommendations

        The IRS Oversight Board recommends an FY2010 IRS budget of $12.489
    billion, an increase of $966 million over the enacted FY2009 amount of
    $11.523 billion. This recommendation is $363 million above the
    President's request of $12.126 billion.
        Tables 1 and 2 at the end of this statement show more information
    on the Board's budget recommendations. Table 1 shows the program
    initiatives or increases the Board is recommending, and Table 2 shows
    the Board's recommended budget by account.
        As the Board stated in its 2008 Annual Report to Congress, our tax
    administration system has two serious weaknesses, the $290 billion tax
    gap and the archaic nature of IRS information systems. As a result, the
    Board recommends that strengthening the system be a national priority.
    Addressing those weaknesses is critical and urgent. The Board is fully
    supportive of the Administration's boost in enforcement funding.
    However, the Board recommends greater funding in the areas of Business
    Systems Modernization (BSM) and Operations Support than the President's
    budget requests. While the Oversight Board and the Administration's
    budgets agree in many ways, the Board feels that these key additional
    investments are needed sooner--not later--to strengthen our tax
    administration system.
        The effort required to correct the two weaknesses identified above
    is not to be taken lightly. Although the tax gap can never
    realistically be eliminated, it is equally as foolish to suggest that
    nothing can be done to reduce it. As the Board has opined on numerous
    occasions, there is not a single solution to reducing the tax gap.
    Rather, a comprehensive, multi-faceted, multi-year, approach is needed
    that provides for excellent taxpayer service combined with vigorous
    enforcement, along with a long-term investment in IRS information
    technology and infrastructure. It is generally recognized that the IRS
    ``cannot audit its way out of the tax gap.'' Balance between immediate
    expansion of personnel combined with long term investments in
    information technology and infrastructure is needed.
        The second weakness, modernizing the IRS' archaic information
    technology systems, is equally daunting--yet it must be done. As noted
    in the Board's 2008 Annual Report to Congress, the IRS' systems
    modernization program has been on the Government Accountability
    Office's (GAO's) high risk list since 1995. The GAO placed this program
    on its high risk list because it believed that the IRS relied on
    obsolete automated systems for key operational and financial management
    functions. The Board believes that it is unacceptable for this program
    to remain on the high risk list for so long.
        The Board believes strongly that the IRS' BSM program must be in a
    position to move forward in FY2010 and FY2011 so that program
    milestones scheduled for 2011 can be achieved. Because the President's
    budget provides little additional funding for the Customer Account Data
    Engine in FY2010, it puts the FY2011 milestones at great risk. In
    addition, the Board believes additional funding is needed to refresh
    and update the IRS' aging infrastructure. In total, of the $363 million
    difference in the two budgets, about $332 million is for investments in
    critical information technology and infrastructure.
        The Board would also increase funding for several key initiatives
    to improve taxpayer service. These initiatives are all designed to help
    the IRS plan and implement better taxpayer service in the future.

        Board Fully Supports Increased Enforcement Funding

        The Board's recommendation for the enforcement account, which at
    $5.5 billion is close to half of the IRS total budget, is identical to
    the President's budgets. Both the President's and Oversight Board's
    budgets add $332 million for additional enforcement. This increase
    constitutes a 7.6 percent boost in enforcement funding, and includes
    additional funding to strengthen criminal investigations programs,
    increase examinations and collections, and support a variety of
    regulatory matters.
        This increase in enforcement resources pays for itself; in some
    cases many times over--a consideration that should not be ignored in
    the budget process. In addition, it helps to reduce the tax gap, which
    deprives the nation, and hence its citizens, of $290 billion it is
    legally owed. The tax gap is an affront to honest taxpayers and efforts
    must be made to reduce it.
        The President's request for enforcement funding includes a multi-
    year investment of $128 million, starting in FY2010, to deal more
    effectively with increasing international tax activities of individual
    and business taxpayers. The Board is pleased with this, as the effects
    of globalization on tax administration are significant and must be
    addressed.
        The Board also strongly supports additional funding to improve
    compliance among ``high-risk'' taxpayer segments. Estimates shows that
    much of the tax gap is due to underreporting of income by businesses,
    mostly run by individuals. It is imperative that the IRS not only
    ensure that all individuals understand their tax obligations, but that
    they report their income and pay their taxes.

        Taxpayer Service Increase Recommended

        For the taxpayer service account, the Oversight Board's and
    President's budgets are within 0.2 percent of one another. The
    President's budget request for taxpayer service benefits from
    congressional action taken during consideration of the FY2009 budget.
    By adding additional funding to the IRS taxpayer service budget in
    FY2009, Congress raised the base amount for taxpayer service in FY2010,
    giving the IRS additional resources to serve taxpayers in an
    increasingly more complex economic environment.
        The need for taxpayer service is especially acute during periods of
    economic hardship, as taxpayers may find themselves facing challenging
    financial situations. In addition, taxpayers need additional help to
    understand new tax provisions and programs designed to help them during
    difficult times. Every change in the tax code causes the tax
    administration system to become more complex, with more taxpayers in
    need of help to understand and meet their obligations. It is especially
    important during this recession that the IRS be able to follow through
    on its strategic goal to ``make voluntary compliance easier.''
        Despite a higher funding base for taxpayer service, there are
    several areas where the Board recommends additional funding. In 2005,
    Congress asked the IRS, National Taxpayer Advocate, and the IRS
    Oversight Board to develop a five-year plan to improve taxpayer
    service. The result was the Taxpayer Assistance Blueprint (TAB), which
    was completed in April 2007. In the Board's opinion, the IRS needs
    additional resources to more fully carry out the TAB by expanding its
    on-line capabilities. Additional funding is also needed to optimize the
    use of Taxpayer Assistance Centers, also known as walk-in sites, which
    traditionally serve lower income taxpayers who depend more on walk-in
    services. Overall, the Board recommends an additional $31.6 million be
    appropriated for taxpayer service, all of which will be focused on
    improving taxpayer service in the future.

        Strategic Funding Needed for Business Systems Modernization

        The IRS' archaic computer systems are a serious challenge facing
    the IRS. The Board is dismayed by the long-term under-funding of the
    BSM program, forcing the IRS to stretch out its efforts at a painfully
    slow pace, to the detriment of taxpayers.
        The Board is pleased that the IRS has revised its BSM approach to
    put more focus on completing the program, and considers it a critical
    foundation of service and enforcement in the future.
        However, the Board questions whether the President's budget will
    allow for substantive progress in the coming years. The Board has
    opined in past years that the BSM account is fundamentally under-
    funded, and despite the additional $7.3 million added by Congress in
    FY2009 and the President's FY2010 requested increase of $22.6 million,
    the FY2010 request for BSM continues to be far too low. Progress will
    come slowly should that trend continue. The Customer Account Data
    Engine project, in particular, has funding needs that go far beyond
    what was requested in FY2010, and those needs will only grow in FY2011.
        The Board's recommended BSM budget of $400 million is 58 percent
    higher than the President's BSM budget of $253.7 million. At $253.7
    million, the President's BSM budget consumes 2.1 percent of the IRS
    total budget of $12.126 billion. This compares to the Board's
    recommendation of a $400 million BSM budget, which consumes 3.2 percent
    of its total $12.489 billion budget. Although the difference is quite
    small when viewed as a portion of the total budget, the vision
    presented by these two BSM budgets is quite different. The Board
    believes that funding decisions for the IRS must look beyond
    consideration of short term benefits and immediate return on
    investment. Serious consideration must also be given to the long term
    benefits to taxpayers and the tax administration system that will
    result from a modernized information technology system. These
    investments will result in fundamental changes to tax administration
    that will benefit both taxpayers and tax administrators alike.
        The Board recommends that a total of $400 million be appropriated
    for the BSM program so that the pace of progress is increased, allowing
    the IRS to achieve key milestones in FY2011, such as the deployment of
    a daily Individual Master File capability and a Customer Account Data
    Engine relational database.

        More Funding for Operations Support

        Another important aspect of the IRS' performance is the state of
    its legacy infrastructure: the technology and tools used by IRS
    employees to do their work. IRS laptops, software, the
    telecommunications systems, and the buildings themselves are aging and
    must be updated and maintained. In addition, the IRS must protect its
    hardware and data infrastructure from threat, whether it comes from bad
    weather or cyber-attack.
        The Administration's FY2010 budget calls for $108.1 million in
    program increases to address information technology security and
    material weaknesses and to strengthen the Electronic Fraud Detection
    System. The Board supports this funding, as both can help ensure the
    integrity of the tax system and maintain taxpayer confidence that its
    returns remain private and safe from security risks.
        However, more needs to be done. The Board recommends a total of
    $292 million in infrastructure program initiatives, compared to the
    $108 million requested by the President's IRS budget. The Board
    recommends an additional $164 million in technology initiatives and a
    $20 million initiative related to workforce development. This funding
    is needed to refresh and maintain the IRS' infrastructure, strengthen
    its ability to protect the personal information of taxpayers, increase
    the productivity of its workforce by leveraging information technology,
    and upgrade its financial services accounting system that uses a
    software application product that is so old the vendor will no longer
    support the program in 2013.
        In addition, workforce development cannot be ignored, especially
    during a period when the IRS is losing experienced employees to
    retirement and is hiring a significant number of new employees.
    Frontline supervision plays a key role in employee satisfaction,
    quality, and productivity, and the IRS lacks funding to properly train
    frontline managers in a timely fashion. Approximately $15 million of
    the workforce initiative is for frontline management training, with the
    remaining $5 million for succession planning and executive development.

        Long-Term Investment Key to IRS Strength

        Although the magnitude of the Board's budget recommendations for
    the IRS are not vastly different from the President's budget request in
    amount, they do focus more on the IRS' strategic goals and call for
    investments that are needed today for a stronger tax administration
    system in the future. The Oversight Board believes that its approach
    represents a meaningful long-term investment to benefit our nation in
    the decades to come.
    Table 1.

    IRS Oversight Board Recommended FY 2010 IRS Budget by Program Initiative
                             (dollars in thousands)
    ------------------------------------------------------------------------

    ------------------------------------------------------------------------
    FY 2009 Enacted                                             $11,522,598
    ------------------------------------------------------------------------
    Changes to Base:
    ------------------------------------------------------------------------
    Maintaining Current Levels                                     $256,329
    ------------------------------------------------------------------------
    Efficiencies/Savings                                         ($118,125)
    ------------------------------------------------------------------------
    Reinvestment                                                     $2,331
    ------------------------------------------------------------------------
    Subtotal Changes to Base                                       $140,535
    ------------------------------------------------------------------------
    Total FY 2010 Base--Current Services                         $11,663133
    ------------------------------------------------------------------------
    Program Increases
    ------------------------------------------------------------------------
    Taxpayer Service Initiatives
    ------------------------------------------------------------------------
    TAB Technology Enhancements                                      $6,000
    ------------------------------------------------------------------------
    Optimize TAC Footprint                                          $17,880
    ------------------------------------------------------------------------
    Research and Analysis to Improve Taxpayer Service                $7,750
    ------------------------------------------------------------------------
    Subtotal, Taxpaper Service Initiatives                         $31,630
    ------------------------------------------------------------------------
    Program Increases:
    ------------------------------------------------------------------------
    Enforcement Initiatives
    ------------------------------------------------------------------------
    Reduce the Tax Gap Attributable to International                128,064
     Activities
    ------------------------------------------------------------------------
    Improve Reporting Compliance of SB/SE Taxpayers                  94,215
    ------------------------------------------------------------------------
    Expand Document Matching for Business Taxpayers                  26,237
    ------------------------------------------------------------------------
    Address Nonfiling/Underpayment and Collection                    83,644
     Coverage
    ------------------------------------------------------------------------
    Subtotal, Enforcement Initiatives                             $332,160
    ------------------------------------------------------------------------
    Infrastructure Initiatives
    ------------------------------------------------------------------------
    Address IT Security and Material Weakness                       $90,000
    ------------------------------------------------------------------------
    Implement Return Review Program                                 $18,100
    ------------------------------------------------------------------------
    Refresh/Sustain Infrastructure                                  $75,000
    ------------------------------------------------------------------------
    Training and Certifying Project Managers                         $5,000
    ------------------------------------------------------------------------
    Enhance Privacy, Information Protection and Data                 $9,154
     Security
    ------------------------------------------------------------------------
    Technology Investments to Enhance Operations                    $35,000
    ------------------------------------------------------------------------
    Upgrade Integrated Financial System (IFS)                       $40,700
    ------------------------------------------------------------------------
    Leadership Training and Development                             $20,000
    ------------------------------------------------------------------------
    Subtotal, Infrastructure Initiatives                          $292,954
    ------------------------------------------------------------------------
    BSM Initiative
    ------------------------------------------------------------------------
    Fund BSM to Accelerate Taxpayer Benefits                       $168,933
    ------------------------------------------------------------------------
    Subtotal, BSM                                                 $168,933
    ------------------------------------------------------------------------
    Subtotal FY 2010 Program Initiatives                          $825,677
    ------------------------------------------------------------------------
    Total FY 2010 Request                                      $12,488,810
    ------------------------------------------------------------------------
    FY 2010 President's Request for IRS                         $12,126,000
    ------------------------------------------------------------------------
    Increase Over President's Request                              $362,810
    ------------------------------------------------------------------------

    Table 2

                                              Summary of Oversight Board Recommended IRS FY 2010 Budget by Account
                                                                     (dollars in thousands)
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                   Taxpayer
                                                                    Service      Enforcement      Ops Support         BSM          HITCA          Total
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    FY 2009 Enacted Budget                                        $2,293,000       $5,117,267       $3,867,011      $229,914       $15,406      $11,522,598
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Changes to Base:                                                                       $0                                                            $0
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Maintaining Current Levels Adjustment                            $60,195         $133,815          $61,060        $1,153          $106         $256,329
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Efficiencies/Savings                                           ($90,918)               $0        ($27,207)            $0            $0       ($118,125)
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Reinvestment                                                      $2,025               $0             $306            $0            $0           $2,331
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Subtotal Changes to Base                                       ($28,698)         $133,815          $34,159        $1,153          $106         $140,535
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Total FY 2010 Base--Current Services                          $2,264,302       $5,251,082       $3,901,170      $231,067       $15,512      $11,663,133
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Program Increases
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Taxpayer Service Initiatives
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    TAB Technology Enhancements                                         $592                            $5,408                                       $6,000
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Optimize TAC Footprint                                            $4,238                           $13,642                                      $17,880
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Research and Analysis to Improve Service                                                            $7,750                                       $7,750
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Subtotal, Taxpayer Service Initiatives                            $4,830                           $26,800                                      $31,630
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Enforcement Initiatives                                                                                                                               0
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Reduce the Tax Gap Attributable to InternationalActivities        $3,124         $104,113          $20,827                                     $128,064
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Improve Reporting Compliance of SB/SE Taxpayers                     $267          $75,114          $18,834                                      $94,215
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Expand Document Matching for Business Taxpayers                   $1,425          $17,955           $6,857                                      $26,237
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Address Nonfiling/Underpayment and Collection Coverage              $712          $55,736          $27,196                                      $83,644
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Subtotal, Enforcement Initiatives                                 $5,528         $252,918          $73,714            $0            $0         $332,160
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Infrastructure Initiatives
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Address IT Security and Material Weakness                                                          $90,000                                      $90,000
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Implement Return Review Program (RRP)                                                              $18,100                                      $18,100
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Refresh/Sustain Infrastructure                                                                     $75,000                                      $75,000
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Training and Certifying Project Managers                                                            $5,000                                       $5,000
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Enhance Privacy, Information Protection and Data Security                                           $9,154                                       $9,154
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Technology Investments to Enhance Operations                                                       $35,000                                      $35,000
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Upgrade Integrated Financial System (IFS)                                                          $40,700                                      $40,700
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Leadership Training and Development                                                                $20,000                                      $20,000
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Subtotal, Infrastructure Initiatives                                  $0               $0         $292,954            $0            $0         $292,954
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Business Systems Modernization Initiative
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Fund BSM to Accelerate Taxpayer Benefits                                                                        $168,933                       $168,933
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Subtotal, Business Systems Modernization                              $0               $0               $0      $168,933            $0         $168,933
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Subtotal FY 2010 Program Changes                                 $10,358         $252,918         $393,468      $168,933            $0         $825,677
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Total FY 2010 Board Recommendation                            $2,274,660       $5,504,000       $4,294,638      $400,000       $15,512      $12,488,810
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    FY2009 Enacted                                                $2,293,000       $5,117,267       $3,867,011      $229,914       $15,406      $11,522,598
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    FY2010 President's Request for IRS                            $2,269,830       $5,504,000       $4,082,984      $253,674       $15,512      $12,126,000
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Increase Over President's Request                                 $4,830               $0         $211,654      $146,326            $0         $362,810
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Percent Increase Over President's Request                           0.2%             0.0%             5.2%         57.7%          0.0%             3.0%
    --------------------------------------------------------------------------------------------------------------------------------------------------------

                       MATERIAL SUBMITTED FOR THE RECORD
                   Questions from Congressman Joseph Crowley

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                  Questions from Representative Dave Reichert

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