[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 
[email protected].
    \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.
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    \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.''

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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.
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    \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.
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    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.

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``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
    [email protected]

                                 
                      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
    [email protected]

                                 
                        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
    [email protected]

                                 
    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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