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



 
THE INTERNAL REVENUE SERVICE OPERATIONS AND THE 2010 TAX RETURN FILING 
                                 SEASON

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

                                HEARING

                               before the

                       SUBCOMMITTEE ON OVERSIGHT

                                 of the

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

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                               __________

                             MARCH 25, 2010

                               __________

                           Serial No. 111-46

                               __________

         Printed for the use of the Committee on Ways and Means



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                      COMMITTEE ON WAYS AND MEANS

               SANDER M. LEVIN, Michigan, Acting Chairman

CHARLES B. RANGEL, New York          DAVE CAMP, Michigan
FORTNEY PETE STARK, California       WALLY HERGER, California
JIM MCDERMOTT, Washington            SAM JOHNSON, Texas
JOHN LEWIS, Georgia                  KEVIN BRADY, Texas
RICHARD E. NEAL, Massachusetts       PAUL RYAN, Wisconsin
JOHN S. TANNER, Tennessee            ERIC CANTOR, Virginia
XAVIER BECERRA, California           JOHN LINDER, Georgia
LLOYD DOGGETT, Texas                 DEVIN NUNES, California
EARL POMEROY, North Dakota           PATRICK J. TIBERI, Ohio
MIKE THOMPSON, California            GINNY BROWN-WAITE, Florida
JOHN B. LARSON, Connecticut          GEOFF DAVIS, Kentucky
EARL BLUMENAUER, Oregon              DAVID G. REICHERT, Washington
RON KIND, Wisconsin                  CHARLES W. BOUSTANY, JR., 
BILL PASCRELL, JR., New Jersey       Louisiana
SHELLEY BERKLEY, Nevada              DEAN HELLER, Nevada
JOSEPH CROWLEY, New York             PETER J. ROSKAM, Illinois
CHRIS VAN HOLLEN, Maryland
KENDRICK B. MEEK, Florida
ALLYSON Y. SCHWARTZ, Pennsylvania
ARTUR DAVIS, Alabama
DANNY K. DAVIS, Illinois
BOB ETHERIDGE, North Carolina
LINDA T. SANCHEZ, California
BRIAN HIGGINS, New York
JOHN A. YARMUTH, Kentucky

             Janice Mays, Chief Counsel and Staff Director

                   Jon Traub, Minority Staff Director

                                 ______

                       SUBCOMMITTEE ON OVERSIGHT

                     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

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 
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                            C O N T E N T S

                               __________
                                                                   Page

Advisory of March 18, 2010 announcing the hearing................     2

                                WITNESS

The Honorable Douglas H. Shulman, Commissioner, Internal Revenue 
  Service........................................................     5

                       SUBMISSIONS FOR THE RECORD

Cheryl Latos, Statement..........................................    38
Colleen Kelly, National Treasury Employee Union, Statement.......    41


  INTERNAL REVENUE SERVICE OPERATIONS AND THE 2010 TAX RETURN FILING 
                                 SEASON

                              ----------                              


                        THURSDAY, MARCH 25, 2010

             U.S. House of Representatives,
                       Committee on Ways and Means,
                                 Subcommittee on Oversight,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 10:04 a.m., in 
Room 1100, Longworth House Office Building, the Honorable John 
Lewis [Chairman of the Subcommittee] presiding.
    [The advisory of the hearing follows:]

HEARING ADVISORY FROM THE COMMITTEE ON WAYS AND MEANS

                      Lewis Announces a Hearing on

                Internal Revenue Service Operations and
                   the 2010 Tax Return Filing Season

March 18, 2010

    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 2010 tax 
return filing season, and Fiscal Year 2011 budget proposals. The 
hearing will take place on Thursday, March 25, 2010, at 10 a.m., in the 
main Committee hearing room, 1100 Longworth House Office Building.
      
    The Commissioner of the Internal Revenue Service, 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 2009, the IRS collected $2.35 trillion and processed 236 million 
tax returns, including 144 million individual income tax returns. The 
Subcommittee will review, and discuss any challenges arising during, 
the current tax return filing season with a focus on: the availability 
of assistance to taxpayers; the most common taxpayer questions and 
errors; tax return processing; and recent tax refund scams. Further, 
the Subcommittee will consider how the economy has affected taxpayers 
this filing season.
      
    The Subcommittee also will review overall IRS operations. 
Specifically, the Subcommittee will focus on: (1) the adequacy of 
taxpayer services, including toll-free telephone service; (2) fairness 
in the examination and collection programs, including increased 
reliance on correspondence examinations and liens; (3) efforts to 
reduce the $345 billion tax gap; and (4) needs related to security at 
IRS facilities. As part of its consideration of IRS operations, the 
Subcommittee will review the Administration's Fiscal Year 2011 budget 
proposal for the IRS of $12.6 billion, an increase of 4 percent over 
Fiscal Year 2010 levels.
      
    In announcing the hearing, Chairman Lewis said, ``A successful 
filing season is critical to confidence in our federal tax system. It 
is important for taxpayers to know that their returns will be processed 
efficiently and refunds will be issued quickly. I look forward to 
hearing from the Commissioner on the status of the filing season and 
services that are available to low-income taxpayers or those 
experiencing economic difficulties.''
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
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2010. 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 or (202) 225-3625.
      

FORMATTING REQUIREMENTS:

      
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    1. All submissions and supplementary materials must be provided in 
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with disabilities. If you are in need of special accommodations, please 
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noted above.

                                 

    Chairman LEWIS. Good morning. The hearing is now called to 
order.
    Today the Oversight Subcommittee will review the operation 
of the Internal Revenue Service and the tax filing season.
    Before we begin, I would like to express our continued 
sympathy to the IRS employees in Austin and throughout our 
country. I want them to know that their safety is our top 
concern. I also want them to know that we value the good work 
that they do to help taxpayers, process tax returns, and 
collect our federal revenue.
    Mr. Commissioner, we want to thank you for your leadership, 
for your vision, and for your deduction. We are pleased to have 
you before us. First we would like to thank you for coming to 
this hearing today, and for holding hundreds of open houses 
this filing season to help taxpayers who are having serious 
financial problems. We also would like to learn if there is 
more that can be done to help taxpayers this season, either in 
person or on the telephone.
    We thank you, Mr. Commissioner, again for your leadership 
on the regulation of tax return preparers. I believe that the 
regulation of tax return preparers will protect taxpayers and 
enhance compliance.
    Finally, we will explore the agency's proposed budget. We 
will consider what must be done to provide the agency with the 
resources that it needs to meet its core tax mission and its 
increasing responsibilities, including those under the health 
reform legislation.
    We on this subcommittee have full confidence that the IRS 
can balance taxpayer service and enforcement with the support 
of the Congress. I am hopeful that others on the subcommittee 
and in the Congress will join me in pledging their support 
today.
    Now I am pleased to recognize the distinguished Ranking 
Member, Dr. Boustany, for his opening statement.
    Dr. BOUSTANY. Thank you, Mr. Chairman, and thank you for 
holding the hearing. And I thank you for yielding time to me.
    Commissioner Shulman, welcome. Thank you once again for 
appearing before this Subcommittee. And more generally, I want 
to thank you and every IRS employee who works for you for their 
hard work and their dedication to public service.
    And I want to make it clear that even when we in Congress 
criticize certain IRS operations and question certain 
responsibilities and how they are handled, we are doing this in 
the context of our job in oversight. And we are not--I want to 
emphasize not--personally attacking the fine public servants 
who work at the agency, and we are not attacking your 
leadership on a personal level.
    I also want to mention the horrific attack on the IRS 
offices in Austin, Texas on February 18th. Let us continue to 
honor the memory of Mr. Vernon Hunter, the IRS employee and 
Vietnam veteran who lost his life in this very senseless 
attack. And as I said on the House floor on March 3rd, we also 
should recognize the courage and heroism of those men and 
women, including IRS employees, first responders, and others, 
who responded to the attack to ensure that our country did not 
suffer even greater losses.
    And I want to offer my pledge to work with you, and that 
pledge also to the agents and employees of the IRS, that we 
will work to ensure that all safety needs are met with your 
agency. So I just wanted to offer that. I enjoyed our 
conversation yesterday, and I look forward to future 
conversations as well on this issue.
    Mr. Chairman, I want to say though our debate is often 
sharp and contentious, as we saw during the health care debate 
over the weekend, clearly there is no license for violence in 
our society, nor is there license for the kinds of racial slurs 
and other slurs that we heard about.
    And so, you know, we should continue a vigorous debate on 
the issues and try to stay aboveboard and keep it from 
degenerating to, you know, a total lack of civility. So I 
wanted to offer that publicly.
    Before Commissioner Shulman begins his testimony, I want to 
highlight two issue sort of importance to me. The first is the 
IRS's role in health legislation that the President just signed 
into law. This legislation envisions the IRS having a central 
role in administering a new national health insurance system 
and enforcing the rules.
    During the 2008 presidential campaign, then-Senator Obama 
and Candidate Obama attacked Senator McCain's health care 
reform plan on two main points. In an October 4, 2008 memo, 
then-Candidate Obama argued against the McCain approach 
because, ``It pays for its new tax credit by taxing employee 
health benefits for the first time in history,'' and, ``The new 
tax credit would go directly to insurance companies, not 
individuals.''
    I find this ironic that the Democrats' government health 
care plan, in the bill that was now signed into law, does 
precisely these two things. The health care bill imposes a 40 
percent tax on what the Democrats call ``excess benefits,'' and 
turns the IRS into a collection agency for health insurance 
companies. These so-called tax credits won't actually end up in 
the taxpayers' pockets. Instead, they will end up in the 
insurance companies' profits.
    The second topic I would like to mention involves the 
Democrats' failed stimulus bill. This past Monday, Commissioner 
Shulman, you joined Vice President Biden and Treasury Secretary 
Geithner in celebrating this year's increase in average tax 
refunds.
    And you said, I quote, ``The average tax refund has reached 
$3,036 this year, a $266 increase from a year ago. The Recovery 
Act is a major factor behind these larger record refunds.'' And 
then you went on to suggest that the tax benefits provided in 
the stimulus bill were putting more money in people's pockets.
    But we have done some analysis on the economic data, and we 
see a different story. In fact, higher refunds provide further 
proof that the stimulus bill was a failure. The economic data 
show that people earned less income in 2009 than in 2008 due to 
job losses and wage cuts.
    For instance, between the end of 2008 and the end of 2009, 
the unemployment rate, we all know, went from 7.4 percent to 10 
percent. Non-farm private sector employment dropped by 5 
million jobs over the course of 2009. Yet many people who first 
became unemployed in 2009 probably over-withheld during the 
period they were working because they set their withholding 
based on an analyzed salary that either later disappeared or 
was diminished.
    And as a result, their year-end income was lower than 
expected, and now they are entitled to a tax refund. Thus, 
larger refunds are evidence of a worsening economy in 2009, 
which in turn is evidence of a failed stimulus bill.
    So, Commissioner Shulman, I look forward to your testimony 
today, hearing your thoughts on these and other issues. And Mr. 
Chairman, I yield back.
    Chairman LEWIS. Thank you very much, Dr. Boustany, for your 
statement and for your extended remarks on the climate and 
atmosphere here in Washington.
    Dr. BOUSTANY. Thank you, Mr. Chairman.
    Chairman LEWIS. Now we will hear from our witness, IRS 
Commissioner Doug Shulman. I ask that you limit your testimony 
to five minutes. Without objection, your entire statement will 
be included in the record. Welcome.

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

    Mr. SHULMAN. Thank you, Mr. Chairman, Ranking Member 
Boustany, Members of the Subcommittee. I appreciate this 
opportunity to testify about the filing season and our 2011 
budget.
    2010 filing season has proceeded smoothly thus far. 
Telephone-assisted levels of service have improved since last 
year, when they declined due to unprecedented demand and 
enactment of tax-related legislation.
    Accuracy rates and customer tax law account questions 
remain very high. Overall, filing is down a little bit at this 
point, which we think is due to the severe snowstorms and 
weather. E-File remains up, and the trend continues in the 
right direction, where we are getting more electronic filing. I 
would also mention that in this challenging economy, average 
refunds are up by about $266 this year, to about $3,036 this 
year.
    We have taken several steps this year, building on steps we 
took last year, to help taxpayers through some of these 
unprecedented difficult times. The most notable that I would 
mention is I announced earlier this month that we are changing 
the eligibility rules for our offer and compromise program, 
where someone can settle a tax debt.
    In the past, you looked at three-year average earnings, so 
you looked back. And someone who lost a job would average in, 
when they had a job, their earnings. Now we are just looking at 
current income, making settlement offers with people. And then, 
if they get a job, we will do an adjustment in the future.
    We also mentioned, Mr. Chairman, as you mentioned as well, 
we are holding special Saturday open houses. We are assembling 
all the people needed to make a decision and solve taxpayer 
decisions on the spot. We will hold about a thousand of those 
this year, the first one this Saturday.
    We are also working hard to implement the recent Hiring 
Incentives to Restore Employment Act, also known as the Jobs 
Act, where people receive a 6.2 percent payroll tax incentive 
that goes directly to small businesses. We are working on 
guidance; by second quarter, people will be able to claim that, 
and that should help with jobs in this economy. We are looking 
forward to supporting that legislation.
    In recognition of the critical role that the IRS plays in 
this economy, the President has given us a judicious investment 
in both service and enforcement programs in his 2011 budget. 
That budget is going to allow us to carry out things like our 
continued focus on offshore tax evasion; our focus on making 
sure high income individuals and corporations pay the proper 
amount of taxes; our effort to oversee the tax return preparer 
community, which is integral to our strategy for compliance and 
service; and will also give us the funds to finish our tax 
account database projects, which is going on for a number of 
years. We will be able to complete it for the 2012 filing 
season, assuming Congress approves the budget.
    Let me end by giving you a quick update on the incident in 
Austin where an individual flew a plane into an IRS building, 
killing one of our employees. This was an incredibly sad event 
for the IRS. But it is also an event that reminded me of the 
important work that the men and the women of the IRS do every 
day, and that it is work that is sometimes not appreciated by 
those who would blame this agency for the nation's tax laws.
    First, I will tell you we have no reason to believe that 
this attack could have been prevented. And we have no 
recollection to believe that this was part of any organized 
opposition to the agency. However, I am very concerned that 
this incident not fan the flames of ignorance about the IRS's 
core mission and our approach.
    While we do engage in compliance activities for the small 
portion of Americans who aren't paying their fair share of 
taxes, the vast majority of our work is serving the hardworking 
taxpayers of this country--processing returns, sending out 
refunds, answering questions on the phone, trying to help 
people navigate a complex tax system.
    I am incredibly appreciative of the support that this 
committee has shown the agency during the difficult days after 
Austin. And I request that all Members of the Committee join me 
in explaining to the public that the vast majority of Americans 
experience an IRS that is merely trying to help them process a 
tax return and get a refund; and that at its core, we are an 
agency of public servants working to serve the American people.
    Mr. Chairman, this concludes my oral testimony. I am happy 
to answer questions.
    [The prepared statement of Mr. Shulman follows:]

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    Chairman LEWIS. Mr. Commissioner, thank you for your 
statement. And as Chair of this Subcommittee, and the Ranking 
Member and I think all Members of the Subcommittee and our Full 
Committee, will do our part in explaining the role of the 
Internal Revenue Service, all of the employees, in doing the 
job that they are authorized and committed to do. So thank you 
again for your service.
    At this time we will open the hearing for questions. I 
would like to remind members that we will follow the Givens 
rule for questions. And I ask that each member be brief and 
abide by the five-minute rule.
    Mr. Commissioner, are you concerned that there has been an 
increase in the number of extensions and the use of credit 
cards to pay taxes this filing season? What advice does the IRS 
have for taxpayers in financial distress this filing season?
    Mr. SHULMAN. You know, we haven't seen any major trends 
that are troubling to us thus far. I think the advice I give 
people this filing season is similar to other advice, with one 
caveat, given that there are more people unemployed than in the 
past who may be unable to pay their tax obligation.
    I mean, in general we tell people, pay on time. If you 
can't pay on time, still file a return and we will work with 
you. We are encouraging people to electronically file and 
direct deposit because if you do, you can get your refund in 
ten days, get cash into people's pockets.
    I think the important thing for this year is, you know, I 
have instructed all of our people in all of our operations, 
especially our collections operations where people have--are 
actually owing the IRS money and due to the government, that we 
need to--while we need to collect the money needed to fund the 
government, we also have to meet each taxpayer based on their 
individual circumstances.
    And so the best advice I can give people is if they can't 
pay, they should still file. They shouldn't disappear. They 
should call us. Our people can work with folks. They can put 
them on an installment plan. If they qualify, they can get an 
offer in compromise. We can work through people's issues with 
them, and it is important for people to remember that.
    Chairman LEWIS. Mr. Commissioner, I notice that the budget 
proposal shifts $9 million to toll-free telephone assistance 
from low-income services such as the VITA program and low-
income taxpayer clinics.
    Would this affect the IRS' service to low-income taxpayers?
    Mr. SHULMAN. As you know, Mr. Chairman, we are in tight 
budget times, with deficits higher than the President would 
like. He asked every agency to try to be as efficient as we 
could and make a series of tradeoffs.
    That budget tried to do that. Our telephone service serves 
a number of low-income, elderly citizens, and so it wasn't 
where we wanted it to be. Some money was shifted from the VITA, 
the low-income taxpayer clinics, et cetera. I think it is a 
very reasonable discussion to debate whether that should be 
shifted or not.
    Chairman LEWIS. Thank you. Now I turn to the Ranking 
Member, Dr. Boustany, for his questions.
    Dr. BOUSTANY. Thank you, Mr. Chairman.
    Commissioner Shulman, with regard to the increase in 
average refund that I referenced in my opening statement, can 
you share with us evidence that you might have that the higher 
utilization of stimulus tax credits is driving the refund data?
    Mr. SHULMAN. So I was listening closely when you gave your 
opening statement, and hadn't--not familiar with the analysis 
you did around employed/unemployed. You know, there are a 
number of things going into refunds, including 1.4--or almost 2 
million people have gotten the first-time home-buyers' credit 
already, which is $7500, which clearly increases refunds. The 
Make Work Pay credit, most Americans are getting $400, or $800 
if they are a married couple. I would be happy to work with 
your staff afterwards and give you our analysis.
    Dr. BOUSTANY. I appreciate that because it would seem to me 
that some who--or perhaps many who started the year with a 
certain level of income and saw a decline over the course of 
the year and had withholdings on the front end, that could be a 
major factor in driving up the percentage of their--of refunds, 
or the increase that we have seen. So we would like some data 
just to sort of, you know, really dig into that, to understand 
what is going on, in the interest of oversight.
    And before I get--I have a couple of health care questions. 
But in a previous subcommittee hearing, we talked a lot about 
the first-time home-buyer tax credit, and some of the fraud 
issues. I know we have worked with you to address this problem 
to help with tools that you might need.
    And could you give us an update on the correction of some 
of the problems we were seeing with that tax credit?
    Mr. SHULMAN. Yes. I mean, the first thing I would say, any 
time there is a very short term for implementation, narrow 
window, and a $7500 or $8000 credit, you are going to see 
fraud.
    What we try to do is balance getting the money out to 
people, where the intent was to get money to people to help 
stabilize the home market and help them buy a home, and 
minimize fraud. An important tool for us is to have math error 
authority. And so we had no authority if we saw an indicia of 
fraud to actually stop and change your refund. We either had to 
do a full-blown audit, which can take time; stop a refund, and 
sometimes stop a refund from someone if we find out that the 
indicia doesn't come through; or we needed to put the refund 
out and not do anything.
    We came back and asked Congress to give us audit authority, 
which they did, or math error authority, which was very 
important. We have also now asked for more documentation from 
home buyers, to see actual closing documents. And so some of 
the past problems, we think, are solved.
    I will tell you we have taken a major number of audit 
resources and shifted them to first-time home-buyer credit. We 
have shifted--we probably, by the end of this year, will have 
opened 200,000 audits to make sure that there is not fraud in 
that program.
    Subsequently, Congress passed a second first-time home-
buyer credit bill that also had a--people who had owned their 
home for five years, lived in it for three consecutive years, 
et cetera. That is going to cause similar issues for us.
    And I think it is important for people to know, when there 
are short-term things and use the IRS to stimulate the economy, 
we are going to do our job. We are going to be a distribution 
mechanism. But there is also opportunity for fraud, and we are 
going to have to make those tradeoffs and resource tradeoffs.
    Dr. BOUSTANY. Thank you. And going to health care now, I 
referenced the premium tax credit and how it will go directly 
to insurance companies. Is it true that those taxpayers who do 
receive this premium tax credit will not actually see the money 
in their refund checks, but rather the IRS will send tax 
dollars directly to the health insurance companies under the 
new law?
    Mr. SHULMAN. Let me just say something about kind of our 
role around health care. You know, our role is to administer 
the tax portions of the health care law. And I really think of 
us as, you know, the payor bank that needs to process and do 
lots of financial transactions around that to make sure the 
benefits are going to the right place.
    My understanding is--if you are talking about the tax 
credits to help people buy insurance, yes, my understanding is 
that we are going to try to work that out in a way that is the 
most efficient for the system.
    I think the law contemplates that people will work through 
the exchange. The exchange will give us whatever information is 
needed. And instead of them sending money to the health care 
provider, that money will be sent directly.
    Dr. BOUSTANY. All right. Thank you. And one final question, 
Mr. Chairman, if you don't mind.
    The CBO came out with some estimates, and the figure of $10 
billion over the next decade in additional funding was cited, 
on top of the base budget, to carry out the new authorities 
that you are going to need to deal with the new health care 
law.
    Do you agree with this estimate, or have you done some 
internal work? Were you consulted on this?
    Mr. SHULMAN. We were not consulted by CBO. That is their 
estimate. Their tradition is to come up with their own 
estimates of administrative costs. But that is--I think it is 5 
to 10 billion is the number that is accounted for in the 
overall cost of the legislation.
    What we do is watch legislation. Clearly, we have been 
involved in planning. Now that the legislation is passed, I 
have a staff working on the actual numbers that it will cost 
for us to implement the tax portion of the health care bill. 
And we will be coming up with those numbers, you know, as quick 
as we can.
    Dr. BOUSTANY. And given that a lot of these provisions 
don't go into effect until 2014 that affect the agency, so this 
is really a six-year figure, in effect.
    Mr. SHULMAN. Again, it is a CBO figure, so I don't know how 
they came up with them.
    Dr. BOUSTANY. Okay. Well, one final thing. You mentioned 
the additional resources going into dealing with the first-time 
home-buyer tax credit. And I just want to express my deep 
concern about the resource demand on IRS as this new law is 
implemented. And we will work hopefully very closely with you 
to examine those requirements.
    Mr. SHULMAN. Yes. No, what is interesting about the tax 
system is, over time, it has become a very efficient 
distribution mechanism, not just in this country; all tax 
authorities are asked to do things. We have proven quite adept 
at it, with the stimulus checks under President Bush, Recovery 
Act under President Obama, the earned income tax credit we have 
administered for years.
    As the head of the agency, the important thing for me is to 
be given plenty of leave time, being given administrative 
flexibility, and then being given the right resources to 
implement it. And so I feel very confident we can implement 
well what Congress passes, given that we have those three 
things, which I have confidence we will have in the case of the 
health care legislation.
    Dr. BOUSTANY. We shall see. Thank you.
    Chairman LEWIS. Thank you. Now we turn to Mr. Davis for his 
questioning.
    Mr. DAVIS OF ILLINOIS. Thank you very much, Mr. Chairman, 
and thank you, Commissioner, for being here.
    Following up a little bit on the question just raised by my 
friend from Louisiana, would this also count as jobs being 
created, the number of additional employees that you might need 
for Internal Revenue Service?
    Mr. SHULMAN. You know, I don't know. Sure. If there are 
jobs, you know, if I hire someone, that is a job in the Federal 
Government. I think generally the President's approach has been 
to have jobs bills focused at the private sector, growing small 
businesses, growing the economy that way.
    Mr. DAVIS OF ILLINOIS. Well, I think a job is a job, 
especially if it is one that is needed, and it becomes part of 
the job creation.
    But let me ask you: There is some concern about how helpful 
the Service is being to low-income taxpayers, given that we are 
in the season, earned income tax credits and those kinds of 
things.
    Could you explain how impactful you think the Service is 
being right now for low-income taxpayers?
    Mr. SHULMAN. Sure. We are very focused on trying to do 
outreach, help people get their returns prepared, work with 
volunteer organizations across the country. My belief is, you 
know, while we are a large financial service organization for 
many people, we are not like a financial service company who 
gets to choose its customers and decides which customers it 
wants to serve and which it doesn't want to serve. We need to 
serve every last taxpayer, and we need to serve them well.
    And so some people want internet service. Some people are 
going to go hire an accountant. But often elderly, lower-income 
taxpayers need specialized help by the IRS. We have low-income 
taxpayer clinics which can help people resolve issues, which we 
fund.
    We have an extensive VITA program, which is the Volunteers 
in Tax Administration, where we train people, give them 
computers, et cetera. Our biggest VITA partner is AARP, but we 
work with any number of nonprofits across the country, 10,000 
sites.
    We have tax clinics for the elderly. We do earned income 
taxpayer outreach events. One was done with the Chairman; we 
would love to do it with other folks. We have taxpayer 
assistance centers all over the country.
    If a low-income taxpayer clearly can't meet their 
obligation, I mentioned in my opening statement, we have some 
special programs like an offer in compromise program. We are 
adjusting that during these really difficult economic times. We 
are holding a thousand open houses, where people can come in 
and get their tax problem resolved.
    You know, we do have limited resources, and we need to 
balance the resources across all of our demands. But I think 
that this agency has a special obligation to meet people who 
can't afford an accountant or don't have a computer to use tax 
software. So we have got a number of programs, and we spend a 
lot of time, a lot of effort, on outreach, education, and 
service.
    Mr. DAVIS OF ILLINOIS. There has been some concern in the 
past about the ability of people who are incarcerated to 
perpetuate scams in terms of filing, getting checks, having 
relatives and friends cash them.
    Can you give us an update on how that has been handled?
    Mr. SHULMAN. Yes. You know, before I came into the job, I 
know this was a major focus. The IRS has stepped up its efforts 
working with state and federal law enforcement agencies, prison 
systems, et cetera, to make sure we can try to match and make 
sure that someone incarcerated isn't perpetrating fraud.
    Sometimes, I will tell you, though, someone was employed 
for half a year, is then incarcerated, and actually can file a 
return from prison. So that happens.
    The big problem, sir, really, at the end of the day, is now 
if someone perpetrates fraud, the biggest penalty we can have 
is we have--they are under criminal investigation and they go 
to jail. Once somebody goes to jail, that penalty has already 
been taken care of. And so the question is: When someone 
perpetrates fraud in jail, what is the penalty for them?
    We also have limitations around we can't share with the 
warden someone's tax information because of tax privacy laws. 
And so we think we have made great progress. It is never going 
to be fully eradicated. But, you know, we have been quite 
focused on this.
    Mr. DAVIS OF ILLINOIS. Thank you. Mr. Chairman, can I have 
a second here? I have got--there is some concern that has been 
expressed by secondary filers that your computer system may not 
pick up the information as readily. I will submit that in 
writing, and see if we can get a response to it.
    Mr. SHULMAN. Absolutely.
    Mr. DAVIS OF ILLINOIS. Thank you. Thank you, Mr. Chairman.
    Chairman LEWIS. Thank you.
    Now we turn to Mr. Etheridge for his questioning.
    Mr. ETHERIDGE. Thank you, Mr. Chairman.
    Mr. Shulman, thank you for your testimony. Thank you for 
being here this morning.
    Let me just mention an issue with IRS that is very 
pleasant. Last month I was able to participate in an IRS free 
file event that we held in North Carolina at Fayetteville Tech. 
And I was pleasantly surprised.
    We had over 20 community-based organizations, and roughly 
60 students and a number of families from Fort Bragg, which is, 
as you probably know, right adjacent there and a large 
installation. They came and used the free file system that you 
are working with. And North Carolina is a free file state, as 
you probably know.
    So let me thank you and all your people who were able to 
help because this is a great process between the federal and 
the state, doing taxes online for free. And I personally 
enjoyed it. I think the folks there really appreciated the 
outreach and the help.
    And let me just congratulate you because I am glad that you 
have now signed, I think, a new five-year deal with the Free 
File Alliance to provide this service to the American 
taxpayers. And I think that is a great help to people who 
really don't have a real sophisticated--but it helps them get 
it done quickly. They can do it online and get the returns 
quickly. So I congratulate you on that.
    Let me move to another point now because I am pleased that 
you mentioned the HIRE Act in your testimony a little while 
ago. And I know that these credits are going to and can make a 
big difference for businesses. And I think it will help our 
economy grow.
    But one of the biggest criticisms of the 1977 to 1978 Tax 
Credit Act was that folks didn't know about it, or at least 
said they didn't. I was in business, happened to know something 
about it, and used it.
    But my question to you this morning is: What has IRS done 
and what are you doing to make sure through groups that 
businesses are aware that this is available to them and can use 
it to their advantage?
    Mr. SHULMAN. Thanks for the question. So we immediately, 
you know, put out press around this, worked with press offices 
around the country. Frankly, the whole administration is 
mobilizing around this, is supporting it.
    And so, you know, sometimes a tax provision gets passed and 
the IRS publicizes it. Now, you know, we have got the advantage 
of important jobs acts. We have got the White House. We have 
got the Treasury. Everybody is mobilized to get the word out.
    We are also working with practitioners. Most small 
businesses use an accountant or a tax preparer, someone else to 
work on their taxes. And so we are getting the word out through 
our extensive practitioner network, which is important, and the 
payroll providers. A lot of people, you know, do the payroll 
tax through the payroll providers, and so we are holding 
regular conference calls. We are pushing that information out.
    I would also note, in the health care legislation, the 
first thing we are going to need to implement is a tax credit 
for small businesses who put--to help them offset their costs 
of providing health care to their employees. And so we are 
immediately mobilizing around that effort.
    Mr. ETHERIDGE. And how much is that? How much is that?
    Mr. SHULMAN. It is 35 percent----
    Mr. ETHERIDGE. Thank you.
    Mr. SHULMAN [continuing]. Now and it will go to 50 percent, 
I think, when it is--you know, by 2014.
    Mr. ETHERIDGE. And what is the starting date on it?
    Mr. SHULMAN. Starting date was last January 1, so it is for 
this tax year.
    Mr. ETHERIDGE. Thank you. One other question. I just think 
it helps to get--every time we get an opportunity to get it 
out, we need to remind folks when it is.
    As you know, many Americans are struggling, and that is why 
we are doing many of the things we are doing. And I think all 
of us talk about our experiences, and certainly, as you know, 
North Carolina is really above the national average in terms of 
unemployment, which is a little unusual for us in our state. I 
have counties in my district where it is approaching 15 
percent.
    So my question is, I guess, what additional steps can we 
take and are you able to take to help make folks know what tax 
cuts that have been passed are available to many of these 
people? You have talked about it some already. And how can 
taxpayers reduce their taxes currently as a move forward?
    Because I think--I notice that you talked about compromise, 
and that the IRS offers in its compromise, it dropped to about 
72 percent during the last administration. Is this a measure 
that you plan to implement more often as we move into these 
very difficult times we now have?
    Mr. SHULMAN. So a couple things. We actually just started a 
program this month where we are partnering with state 
unemployment offices to promote the tax credits people can get, 
to promote our open houses, et cetera.
    And so recognizing that unemployment is a problem everybody 
is trying to tackle, we are actually going to the unemployment 
offices so when people show up there, they will be able to get 
IRS literature. They will be able to understand that they 
should claim the Make Work Pay Credit. If they get out of work, 
they can get a COBRA subsidy, things like that.
    We are also letting them know about the changes in offers 
in compromise, the open houses. We are publicizing in state 
unemployment offices at a local level. And so we are going to 
go the extra mile.
    I mean, we have this fine line to walk. I mean, I am 
responsible to raise all the money to fund the government. And 
people who can pay need to pay, and we need to run our programs 
for that. But again, we also need to walk in taxpayers' shoes.
    And if you are struggling and trying to put food on the 
table and have medicine and put your kid through college, if we 
can be helpful and use our flexibilities to help people through 
this tough time to keep them, you know, in good financial 
condition for the long term, for their own benefit and also to 
be taxpayers, that is good for the IRS and it is good for them.
    On offers in compromise, that program has declined 
dramatically. I think it is a good program. We are looking very 
hard at what we can do to reverse this. I think the single most 
important one is one that I compliment the Chairman and the 
rest of the committee for supporting, which is repealing the 20 
percent down payment, which came into effect at about the same 
time this started plummeting. I don't think there is any reason 
people should have to put a 20 percent down payment when, by 
definition, they are having a hardship situation.
    We are also looking to see when in the collection process 
is the appropriate time to introduce it. How can we streamline 
the program, potentially have some online tools so people can 
go in and figure out if they are eligible. And so I actually 
have a whole team looking at this because I think it is a 
program that is under-utilized. I would like to figure out how 
to get the utilization back up.
    Mr. ETHERIDGE. Mr. Chairman, thank you for your time and 
your patience because we do want everyone to pay what they are 
due to pay but, you know, fairness to help those who need help, 
too. Thank you, sir, and I yield back.
    Chairman LEWIS. Thank you.
    Now we turn to Mr. Kind for his questioning.
    Mr. KIND. Great. Thank you, Mr. Chairman.
    Mr. Shulman, thank you again for being here to testify. We 
appreciate the job you and everyone at the IRS does on behalf 
of the country.
    You know, Dr. Boustany raised the issue of the health care 
reform bill, and I think there is a lot of misinformation and a 
lot of misperception about the role that the IRS is going to 
play in the implementation of the recently passed health care 
bill. So let me ask you a series of questions, and as much as 
you can, just answer yes or no to clarify some questions that I 
have about the exact role that the IRS will play.
    The health care bill that was just signed by the President 
is not going to fundamentally alter the relationship of the IRS 
with the American taxpayer, will it?
    Mr. SHULMAN. No.
    Mr. KIND. And you said that right now you are moving 
forward as far as doing calculations as far as the costs and 
the staffing needs that the IRS has. But you haven't made any 
of those final determinations yet, have you?
    Mr. SHULMAN. That is correct.
    Mr. KIND. And the IRS agents are not going to be going out 
and auditing taxpayers to verify if they have obtained 
acceptable health insurance, will they?
    Mr. SHULMAN. No.
    Mr. KIND. In fact, it is going to be the insurance 
companies that will be merely certifying whether or not an 
individual has obtained health care coverage. And they will be 
certifying that to the IRS?
    Mr. SHULMAN. Yes. Let me--it is probably worth me just----
    Mr. KIND. Sure.
    Mr. SHULMAN [continuing]. Being very clear because I think 
there have, you know, been some misconceptions out there.
    The way we envision this working is HHS, Department of 
Health and Human Services, and the exchanges will be working 
with the insurance companies to determine what is acceptable 
coverage. All that will happen with the IRS is similar to a 
current 1099, where a bank sends the IRS a statement that says, 
here is the interest someone has, and they send it to the 
taxpayer.
    We expect to get a simple form that we won't look behind 
that says, this person has acceptable health coverage. There 
are not going to be any discussions about health coverage with 
an IRS employee.
    Mr. KIND. In fact, I would envision that the major role the 
IRS will play is trying to get information into the 
individuals' hands and businesses about the various tax 
incentives that the health care reform bill has, and how they 
can best access those incentives and utilize them. Is that 
right?
    Mr. SHULMAN. Yes. I mean, the role of the IRS is going to 
be, again, the tax portions of this, not the health portions of 
this. And what we are going to do is try to make sure people 
are educated. There is information. We process payments 
quickly. We also will make sure that there is no fraud and 
abuse in the system, as we always do.
    Mr. KIND. So the IRS is still going to pick up the phone 
and answer questions in regards to tax incentives under health 
care bill?
    Mr. SHULMAN. Yes.
    Mr. KIND. And I assume the IRS will try to build some type 
of online education service, too, for people to access as far 
as what they are eligible for?
    Mr. SHULMAN. Absolutely.
    Mr. KIND. And you will probably be performing some 
additional outreach services with businesses and taxpayers 
about the health care bill?
    Mr. SHULMAN. Absolutely.
    Mr. KIND. And as you indicated to Mr. Etheridge, you are 
already moving forward on the 35 percent tax credit that small 
businesses are going to be getting this year already with the 
enactment of the health care bill?
    Mr. SHULMAN. That is our first move.
    Mr. KIND. And no taxpayer is going to be subject to any IRS 
liens or levies or jail time for failing to disclose insurance 
requirements to the IRS?
    Mr. SHULMAN. That is what the legislation calls for, yes.
    Mr. KIND. And as soon as your internal review is done, I 
assume you are going to report back to Congress what type of 
resources you will need for staffing or for additional funds in 
order to implement the health care bill?
    Mr. SHULMAN. Yes. I do want to be clear, as I was with Mr. 
Boustany. We will need resources to implement the tax 
provisions in this legislation. And we will look forward to 
working with the committee to make sure we have the proper 
resources to serve the American people.
    Mr. KIND. Thank you. And let me just ask you a final 
question, that reports are coming out that there is roughly a 
10 percent increase in the average return for taxpayers filing. 
And I think you have indicated and made public statements that 
that in large part is attributed to the various tax relief that 
taxpayers are receiving under the American Recovery Act. Is 
that your opinion?
    Mr. SHULMAN. Yes. I mean, clearly the Recovery Act is a 
major portion of that.
    Mr. KIND. So more money in taxpayers' pockets during this 
tough economic time due to the Recovery Act. And the only 
proviso to that is that the returns coming in are a little bit 
slower. And so we don't have the complete returns, or even the 
typical number of returns, at this point of the year. Is that 
right?
    Mr. SHULMAN. Yes. It is 3 percent down. We have about half 
the tax returns have come in at this point, which is more or 
less average. It is a small decline, but it is not 
statistically significant.
    Mr. KIND. The number that I am looking at here, that in 
2009 the average tax return was about $2,770. But now in 2010, 
that jumped up to $3,036, so roughly a $266 additional refund 
to the average taxpayer.
    Does that sound about right to you?
    Mr. SHULMAN. That is the current run rate, yes.
    Mr. KIND. Great. Thank you, Mr.----
    Dr. BOUSTANY. Would the gentleman yield?
    Mr. KIND. Yes. I would be happy to yield.
    Dr. BOUSTANY. Just for clarification on the health care 
issue, Commissioner, could you talk to us about the compliance 
side with regard to the individual mandate? Obviously, in terms 
of being able to enforce compliance, what is going to be your 
role with regard to any penalties paid in this?
    Mr. SHULMAN. Yes. So my understanding of the bill--and 
again, you know, this is a bill that some of it has passed; a 
big portion has passed, but there are still some, you know, 
pieces of the reconciliation which adjust things--you know, the 
insurance company will send to us whether or not somebody has 
coverage or not. People will do their self-filing, as they 
always do.
    If they file, they will--if they file, and they have to 
have insurance if they have money to have insurance, so not 
everybody has a requirement, as I understand it; there is also 
an exception for lower-income people who can't afford 
insurance--it will come in and they will adjust their tax rate, 
and based on whether they have insurance or not.
    And the Tax Code is used, and the tax return is used, as 
the financial incentive around this. So our role will be people 
will either pay their taxes or not. If they don't pay their 
taxes, then they will get a letter from us saying what you owe.
    Mr. KIND. Mr. Chairman, just one last question, reclaiming 
my time.
    Just so we are clear, there is no mandate for individuals 
to have to go out and purchase insurance under the health care 
bill. They can choose to purchase insurance. But if they don't, 
we are going to be asking them to contribute a little bit so 
that if they do get sick or injured and they do go into the 
emergency room, that those costs aren't going to be passed on 
to people who are paying for insurance or swallowed by the 
health care providers themselves.
    But it is going to be an individual choice whether they 
want to have insurance or not. But if they don't, for the first 
time we are asking them to contribute a little bit so that the 
cost of the uninsured isn't passed on to Americans who have 
insurance in our current system.
    Thank you, Mr. Chairman.
    Dr. BOUSTANY. If the gentleman would yield?
    Mr. KIND. My time is expired.
    Chairman LEWIS. Thank you.
    Now we turn to Mr. Becerra for his questioning.
    Mr. BECERRA. Thank you, Mr. Chairman.
    Commissioner, good to see you. Thank you for being here. 
And I want to congratulate you and offer you our support--I 
won't say condolences, but support. Because condolences, 
support, are required because you are now going to be tasked 
with additional work to try to make sure that the $40 billion 
in tax credits, tax cuts that small businesses will receive 
under this health care bill, and the close to around $400 
billion in tax cuts that individuals will receive to help them 
cover the cost of health insurance because of their tax 
credits, will be administered through your shop.
    And so support because we need to make sure that you do 
this well, and condolences because we always expect you to do 
more than is humanly possible, given the time and the resources 
that you have. So make sure that it is more support than 
condolence that we ultimately give you in that regard.
    Mr. SHULMAN. I will ask of that, sir.
    Mr. BECERRA. Absolutely, and please. The last thing I think 
anyone in this committee would like to see is that we delay the 
ability of Americans to purchase affordable and quality health 
care simply because we are unable to get them their credits, 
tax credits, quickly enough. So let us know how we help you 
administer this as you go on and do your business.
    I also wanted, as I said, to congratulate you because you 
just issued regulations on something I think is very, very 
important for those of us who represent a large population of 
middle class and modest income families.
    What you issued recently as regulations is critical, saves 
hundreds of dollars, in some cases thousands of dollars, and 
perhaps lots of headache for a lot of these families that end 
up filing returns using tax preparers and thinking that they 
have now done the right thing by using a tax preparer, who 
should be more skilled and knowledgeable on the preparation of 
tax filings.
    And yet they find out that they were either incorrect in 
their filing or they were duped in their filing, and certainly 
in many--and too often in the cases that they were overcharged 
for the filing.
    And so I wanted to just make sure I understand what your 
regulations call for that are now out there for consideration 
and comment. It is the case--it is the case today that just 
about anyone can put out a shingle and say, I will prepare your 
taxes and charge any amount. In fact, in most states there is 
more regulation over who cut your hair or my hair than there is 
over who prepared your taxes or my taxes.
    And you issued some regulations to try to help us provide 
some sanity within this industry because more often than not, 
we find Americans who could have filled out the simple 1040 
form being charged hundreds of dollars to do what could have 
been done by a basic computer program, or perhaps the person by 
himself or herself, just reading the basic instructions of the 
IRS instruction manual.
    And so I am hoping you give me a quick synopsis of what 
your regulations are proposing.
    Mr. SHULMAN. Sure. So we put out a report which gave a road 
map over about three years of moving from a place where we 
largely have minimal oversight over tax return preparers to 
really trying to bring a minimal level of competency to all tax 
return preparers. We think there are about a million of them. 
We think that is a good, efficient use of leveraging our 
resources for service and effort.
    The basic road map is this. People will have to get an 
identification number if they prepare returns, which we call a 
PTIN in those regulations we just put out yesterday. And we are 
hoping to get the PTINs up and running for next filing season.
    Next, people will have to take a minimum competency exam, 
basically that they can do a 1040. And then we are looking at 
doing a small business exam, too, to make sure small businesses 
are receiving the same level of service.
    They will have to have continuing education, which is 
general tax education except for some of that will have to be 
ethics and some of that will have to be tax law changes; 
because of the pace of tax law changes, it is an important 
thing where people can make mistakes.
    We will then put a database out. This will come down the 
road, once people take the test and have continuing education 
responsibilities, so the American people can look up and say, 
are they working with a registered return preparer, give them 
some level of confidence, their working with them.
    And then we are going to shift some oversight and 
enforcement resources into this area because there will be 
people who go underground, and we want to find them and make 
sure they are not preparing returns.
    And so that shift will happen over time. But immediately, 
we actually did thousands of visits to preparers this season to 
remind them of their obligations. We sent out 10,000 letters to 
remind people of their obligations. So we are already starting 
to make that kind of education and enforcement shift.
    Mr. BECERRA. And let's be clear. The legislation I have, 
which would move in the direction that you are proposing in 
your regulations, and I believe the regulations you have 
issued, would not apply to a tax accountant or an attorney who 
we already can tell, from their education and their work 
experience, are prepared or are versed in the preparation of 
tax filings.
    This is for folks who we are not certain what type of 
educational background they have, what type of experience they 
have. And so what we are trying to make sure is that there is 
level of competency that gives them the right and the 
opportunity to go out there and sell themselves and tax 
preparers.
    Mr. SHULMAN. That is correct. We exempted people who 
already have a professional competency test, a minimal level of 
competence. They need to prove ongoing education--attorneys, 
enrolled agents who are enrolled with the IRS, and CPAs.
    With that said, I did say that over the next couple of 
years, once we start tracking people, we are going to see and 
be able to see what differences there are between the accuracy 
of returns. And it is something we are willing to revisit if, 
you know, we go down the line.
    But we didn't think we should put an extra level of 
requirements on a group that already has requirements.
    Mr. BECERRA. And, Mr. Chairman, one final question, if I 
may.
    Commissioner, when we say we are going to require this 
competency of people who prepare these forms, someone could try 
to get away by saying, well, I am the one that signed the form, 
but I have a shop of people who help prepare these.
    How do you make sure that the people who actually do the 
preparation will be required to have the competency so that we 
make sure that someone can't try to skirt this new regulation 
by saying, I signed it, I prepared it, yet in fact they have a 
whole bunch of folks who don't have experience who are actually 
doing the work?
    Mr. SHULMAN. There are a couple of things. One is we want 
to make sure the people you are talking about, who are sitting 
in a shop actually coaching taxpayers through their return, 
helping them with their return, get registered. We also don't 
want to make someone who is a front office receptionist, who 
takes tax returns and types in the information and doesn't use 
any judgment calls and doesn't have any conversations with the 
taxpayer--we don't want to put the requirement on everyone who 
ever touches a return.
    And so we have tried to craft these regulations carefully. 
One is, you know, if someone is sitting there and you think 
they walked you through your return and they are your preparer, 
then they are going to need to sign.
    We can usually see--there is usually a threshold number of 
what is humanly possible as far as sending in returns in a time 
basis. So if we see somebody sending in, you know, a couple 
thousand returns under their name, we are going to send 
somebody out to see, you know, who is really doing all those 
returns.
    We will also be doing, you know, random blank audits of 
folks. And we will also be looking for lots of mistakes. And so 
we will be putting in place compliance programs on the back end 
around this requirement.
    Mr. BECERRA. Commissioner, thank you. Chairman, thank you.
    Chairman LEWIS. Mr. Commissioner, thank you for your time 
and for your testimony. We wish you well. The Subcommittee 
appreciates your views, and we look forward to another meeting 
with you in the days and months and years to come.
    Also like to thank the staff on both sides of the aisle for 
your help on this hearing, and thank the Ranking Member and all 
of the Members for attending.
    There being no further business, the hearing is now 
adjourned.
    [Whereupon, at 10:57 a.m., the Subcommittee hearing was 
adjourned.]
    [Submissions for the Record follow:]

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