[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]





                  INTERNAL REVENUE SERVICE OPERATIONS
                 AND THE 2011 TAX RETURN FILING SEASON

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

                                HEARING

                               before the

                       SUBCOMMITTEE ON OVERSIGHT

                                 of the

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

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 31, 2011

                               __________

                           Serial No. 112-OS2

                               __________

         Printed for the use of the Committee on Ways and Means








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                      COMMITTEE ON WAYS AND MEANS

                         OVERSIGHT SUBCOMMITTEE

             CHARLES W. BOUSTANY, JR., Louisiana, Chairman

DIANE BLACK, Tennessee               JOHN LEWIS, Georgia
JIM GERLACH, Pennsylvania            XAVIER BECERRA, California
VERN BUCHANAN, Florida               RON KIND, Wisconsin
AARON SCHOCK, Illinois               JIM MCDERMOTT, Washington
LYNN JENKINS, Kansas
KENNY MARCHANT, New York

                       Jon Traub, Staff Director

                  Janice Mays, Minority Staff Director








                            C O N T E N T S

                               __________
                                                                   Page

Advisory of March 31, 2011, announcing the hearing...............     2

                               WITNESSES

The Honorable Douglas Shulman, Commissioner, Internal Revenue 
  Service........................................................    50

                       SUBMISSIONS FOR THE RECORD

Chairman Boustany................................................    91
Rep. Diane Black.................................................    95
Rep. Jim Gerlach.................................................    98
Rep. John Lewis..................................................    99
Colleen M. Kelley, National President National Treasury Employees 
  Union..........................................................   101

 
                  INTERNAL REVENUE SERVICE OPERATIONS
                 AND THE 2011 TAX RETURN FILING SEASON

                              ----------                              


                        THURSDAY, MARCH 31, 2011

             U.S. House of Representatives,
                       Committee on Ways and Means,
                                 Subcommittee on Oversight,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10:02 a.m., in 
Room 1100, Longworth House Office Building, the Honorable 
Charles Boustany [chairman of the subcommittee] presiding.
    [The advisory of the hearing follows:]

HEARING ADVISORY

FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

                     Boustany Announces Hearing on

              Internal Revenue Service Operations and the

                     2011 Tax Return Filing Season

March 24, 2011

    Congressman Charles W. Boustany, Jr., MD, (R-LA), Chairman of the 
Subcommittee on Oversight of the Committee on Ways and Means, today 
announced that the Subcommittee will hold a hearing on the Internal 
Revenue Service (``IRS'') and the 2011 Tax Return Filing Season. The 
hearing will take place on Thursday, March 31, 2011, in Room 1100 of 
the Longworth House Office Building, beginning at 10:00 A.M.
      
    The Commissioner of the Internal Revenue Service, the Honorable 
Douglas Shulman, will be the only witness at the hearing. Any 
individual or organization may submit a written statement for 
consideration by the Committee and for inclusion in the printed record 
of the hearing.
      

BACKGROUND:

      
    In fiscal year 2010, the IRS collected $2.3 trillion in taxes, 
processed 141 million individual tax returns, and issued $366 billion 
in refunds. As the 2011 tax return filing season is underway, the 
Subcommittee will review IRS performance with a focus on taxpayer 
service, taxpayer rights, and refund administration.
      
    In conjunction with the review of the current tax return filing 
season, the Subcommittee will review IRS operations in general. 
Specifically, the Subcommittee will consider: (1) the protection of 
taxpayer rights; (2) fairness in examinations and tax administration; 
and (3) efforts to prevent fraud, waste, and abuse. As part of its 
consideration of IRS operations, the Subcommittee will also review the 
Administration's fiscal year 2012 budget proposal for the IRS of $13.3 
billion, an increase of $1.1 billion over the fiscal year 2010 enacted 
level.
      
    In announcing the hearing, Chairman Boustany said, ``With so many 
struggling through a tough economy, it's important we remember that the 
IRS affects every household and business across the country. The 
Subcommittee will examine how the IRS is performing this tax season, 
with an eye toward taxpayer rights and the fair collection of federal 
taxes. We will also review the Administration's new IRS budget request, 
an increase of more than 9% from 2010 levels, and the Commissioner's 
justification for this increase.''
      

FOCUS OF THE HEARING:

      
    The hearing will focus on the 2011 tax return filing season, the 
IRS' budget, and IRS operations generally.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Please Note: Any person(s) and/or organization(s) wishing to submit 
written comments for the hearing record must follow the appropriate 
link on the hearing page of the Committee website and complete the 
informational forms. From the Committee homepage, http://
waysandmeans.house.gov, select ``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, submit all requested information. ATTACH your 
submission as a Word document, in compliance with the formatting 
requirements listed below, by the close of business on Wednesday, April 
14, 2011. 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) 225-3625 or (202) 225-5522.
      

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 format and MUST NOT exceed a total of 10 pages, including 
attachments. Witnesses and submitters are advised that the Committee 
relies on electronic submissions for printing the official hearing 
record.
      
    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.
      
    3. All submissions must include a list of all clients, persons and/
or organizations on whose behalf the witness appears. A supplemental 
sheet must accompany each submission listing the name, company, 
address, telephone, and fax numbers of each witness.
      
    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four 
business days notice is requested). Questions with regard to special 
accommodation needs in general (including availability of Committee 
materials in alternative formats) may be directed to the Committee as 
noted above.
      
    Note: All Committee advisories and news releases are available on 
the World Wide Web at http://www.waysandmeans.house.gov/.

                                 

    Chairman BOUSTANY. The subcommittee will come to order. 
Good morning. I would like to welcome everyone to today's 
hearing on the Internal Revenue Service and the 2011 tax return 
filing season.
    Today's conversation about the IRS should begin with a 
topic too often ignored, and that is the taxpayer. The National 
Taxpayer Advocate's recent report to Congress provided some 
alarming facts on what the federal Tax Code has become, and how 
it affects the average taxpayer.
    Every year taxpayers face a Tax Code of growing complexity. 
For instance, there have been nearly 5,000 changes to the Tax 
Code in the past 10 years. Between the period of 1975 and 2005, 
the code tripled in size. As a result of the growing length and 
complexity of the Tax Code, individual taxpayers and businesses 
spend an estimated 6.1 billion hours and $163 billion every 
single year complying with the tax filing requirements. The 
cost of compliance for your average individual taxpayer was 
over $250 in 2007.
    So, as we meet today, we are in the middle of the 2011 tax 
return filing season. And millions of individuals and 
businesses are working to meet their annual tax return filing 
obligations. As of March 18th, IRS had processed over 73 
million individual tax returns, and issued nearly 65 million 
refunds, totaling $193 billion. With 2.5 weeks to go until the 
April 18th filing deadline, the subcommittee looks forward to 
hearing more about the ongoing tax return season and any 
problems the Agency and tax return filers might be 
encountering.
    The subcommittee would also like to learn more about the 
efforts the IRS has undertaken to improve the efficient 
processing of returns and refunds, including its eFiling 
modernization program.
    Charged with administering this growing Tax Code, the IRS 
must simultaneously respect the rights of taxpayers, provide 
assistance to the millions of taxpayers who have questions 
about their taxes, and go after those who cheat the system. And 
the Agency has to do this against the backdrop of ever-
increasing responsibilities to administer social policy 
programs. The IRS's dual mission to both revenue collector and 
social policy program administrator diverts IRS resources from 
its core mission, and can diminish taxpayer service.
    Among the biggest contributors to this problem is the new 
health care law, which gives the IRS a host of new 
responsibilities, including the indoor tanning tax, new taxes 
and fees on employers and individuals, and a complex small 
business tax credit.
    For 2011 fiscal year, the IRS has requested nearly $6 
billion, an increase of more than 8 percent from the fiscal 
year 2011 appropriation. Included in this $6 billion is a 
request for nearly a half-a-billion dollars and over 1,200 new 
employees to implement the health care law's new provisions.
    And the cost of the health care law do not end there. IRS's 
implementation of the health care law is estimated to cost 
somewhere between $5 billion and $10 billion over the next 10 
years. So, in addition to the current tax return filing season 
and the IRS budget request, I hope we can take this opportunity 
to discuss this dual mission, and whether it is hampering the 
IRS's ability and core revenue collection responsibilities.
    So, with that, I want to welcome Commissioner Shulman 
today, who is here to testify, and look forward to a fruitful 
discussion of his agency, its mission, and the ongoing tax 
return filing season.
    Commissioner, I know you were working under very time-
constrained circumstances with the passage of the law in 
December. I know you have scrambled to get things done. And it 
seems to me at this stage things are going fairly well with the 
filing season, so we look forward to your comments.
    Before I yield to Ranking Member Lewis, I ask unanimous 
consent that all Members' written statements be included in the 
record.
    [No response.]
    Chairman BOUSTANY. Without objection, so ordered. I also 
ask unanimous consent that the GAO's interim report on the 2011 
tax filing season, which is being released today, also be 
included in the record.
    [No response.]
    Chairman BOUSTANY. Without objection, so ordered.
    [The information follows: GAO's Interim Report, 2011]




    Chairman BOUSTANY. Now I want to welcome Commissioner 
Shulman, and I will yield to the ranking member for his opening 
statement.
    Mr. LEWIS. Well, thank you very much, Mr. Chairman. Mr. 
Chairman, I want to thank you for holding this hearing on the 
Internal Revenue Service. I am pleased to have the Commissioner 
before us today. This hearing is timely. I have serious 
concerns about the Republican plans to cut funding for the 
agency, and effect that those cuts will have on our taxpayers. 
The majority's plan to cut $600 million from the agency budget 
this year will result in $4 billion in lost revenue. I do not 
understand how this helps the deficit.
    The plan also harms taxpayers. An estimated three million 
people will not have their telephone calls answered, and one 
million people will not receive face-to-face service at an 
agency center. This makes no sense.
    I look forward to discussing the agency's proposed budget 
for next year. Most of the funds requested for the Affordable 
Care Act are to assist taxpayers and improve operations, not 
for enforcement agents, as charged by some.
    Finally, I would like to ensure that the Agency has the 
resources it needs to balance taxpayer services and 
enforcement. It is important for the agencies to provide 
services that help elderly, low income, and working class 
Americans fulfill their tax obligations. It is particularly 
important that the tax laws are applied fairly to all 
taxpayers. I look forward to the Commissioner's testimony on 
how to achieve this balance.
    And I welcome you also, Mr. Commissioner. Thank you, Mr. 
Chairman.
    Chairman BOUSTANY. I thank the ranking member. And now I 
want to welcome IRS commissioner Douglas Shulman.
    Commissioner Shulman has served in this position since his 
appointment in 2008. And, sir, we want to thank you for being 
here today to testify.
    As is customary, you will have the five minutes for your 
oral statement, to present your testimony, and your full 
written testimony will be submitted for the record. And I now 
will yield time to Commissioner Shulman to present your 
testimony.
    Thank you, sir.

 STATEMENT OF DOUGLAS SHULMAN, COMMISSIONER, INTERNAL REVENUE 
                            SERVICE

    Mr. SHULMAN. Chairman Boustany, Ranking Member Lewis, 
Members of the Subcommittee, thank you for this opportunity to 
testify on the filing season, and to provide you with an 
overview of our proposed 2012 budget.
    Despite some of the challenges that the chairman mentioned 
earlier this year, particularly the late passage of tax law, 
the 2011 filing season has proceeded smoothly. As of March 19th 
of this year, we have received more than 75 million individual 
returns, have issued 65 million refunds, with an average value 
of refunds of about $3,000.
    Our eFile program continues to grow. This year, so far, our 
eFile rate is 6.3 percent higher than last year, and last year 
was 5 percent higher than the year before. We also continue to 
see people using their home computers and filing continuing to 
grow. We have received almost 25 million returns from home 
computers, a 9 percent increase over last year. The reason this 
is so significant is it is much cheaper for the Federal 
Government to process an electronically-filed return. It costs 
about $.17, as opposed to $3.66 for a paper return. And people 
get their refunds much quicker.
    We have also seen an increase in self service options. Our 
web traffic has grown eight percent. Our ``Where's My Refund'' 
tool has grown 19 percent. And automated calls answered have 
increased by about 21 percent.
    Regarding our answering phone calls, I am pleased to tell 
you our level of service, despite a flat budget, remains at 74 
percent. And our accuracy remains at 95 percent. And so the 
phone operation is going well this year.
    Let me also note during this filing season we continue to 
try to adjust core programs to meet evolving needs of 
taxpayers. And a good example of this is what I call our fresh 
start program, which is focused on our collection area. We 
announced that we were expanding our offer in compromise 
program, making the ability for lien withdrawal easier, making 
it easier for small businesses to enter an installment plan 
with us this year, and changing our criteria for filing liens. 
And you are going to see us continue to evolve our programs as 
taxpayer needs warrant it.
    Let me now turn to the 2012 budget. This budget was crafted 
during a time of fiscal austerity. For me, that means 
aggressively pursuing savings where we can find savings, but 
also investing in strategic priorities that enhance the 
nation's tax system.
    I think the President made clear in the budget that the IRS 
is vital to the functioning of the government, to keeping our 
nation strong and our economy strong. Last year, we collected 
$2.3 trillion. This translates to every dollar spent on the 
IRS, about $200 comes into the Federal Government. I think it 
is in recognition of the critical role that we play that this 
2012 budget makes judicious investments. It also tries to keep 
the balance between taxpayer service, serving honest Americans, 
and our enforcement programs, making sure we find people who 
aren't paying their fair share of taxes.
    It also continues our investment in our core account 
database, which is the cornerstone of our modernization effort. 
When this is complete in 2012, assuming we get the funding, it 
is going to mean faster processing of all returns, faster 
refunds to all Americans, and enhanced data security of our 
technology systems.
    Because of our unique revenue-raising functions, our budget 
more than pays for itself, and directly contributes to deficit 
reduction. And I will also note this year's budget, as well as 
the last several years that I have been here, has significant 
savings. We have $190 million of program cuts and savings in 
the 2012 budget.
    Now, I would be remiss in my responsibilities if I didn't 
make a few comments about H.R. 1. Under the House version of 
the continuing resolution, the total 2011 funding for the IRS 
would be $603 million below the 2010-enacted levels, with 
potentially devastating effects to the nation's tax system.
    If H.R. 1 were to be enacted, the IRS would have to make 
substantial and immediate cuts to all of its programs, 
including its enforcement programs. We estimate that this would 
reduce enforcement revenue this year by $4 billion. This would 
increase the deficit by about seven times the magnitude of the 
proposed reduction in the budget.
    In addition, such a conspicuous drop in IRS enforcement 
activities could have an impact on longer-term voluntary 
compliance. We would also be forced to dramatically reduce 
resources to taxpayer services, leading to millions of 
unanswered phone calls, delayed processing of correspondence, 
and potentially delayed refunds.
    In conclusion, we are in a very challenging environment 
with difficult choices to make. Despite this year's challenges, 
the filing season is progressing smoothly. So I look forward to 
a constructive dialogue today and over the coming weeks and 
months.
    And Mr. Chairman and Ranking Member Lewis, I also just want 
to very much thank you for the support and constructive 
dialogue that this committee has had with our agency over the 
last several years, and continuing this year. That concludes my 
testimony.
    [The prepared statement of Mr. Shulman follows:]




    Chairman BOUSTANY. Thank you, Commissioner. I mentioned to 
you before the hearing I appreciated your written testimony and 
some of the breakdowns that you gave us. And the information 
was very, very helpful.
    As I mentioned in my opening statement, too often we all 
forget the enormous price in both time and dollars that the 
individual taxpayer has to pay to comply with the tax filing 
requirement. And, of course, Americans spend a vast amount of 
time and resources every year to file their tax returns. The 
Tax Code clearly is growing in complexity, and this shifts 
enormous cost to the taxpayer, but also makes honest compliance 
more difficult. The complexities have added significant burdens 
to the IRS.
    And just a simple question. Is it your opinion that the Tax 
Code is too complex?
    Mr. SHULMAN. Yes.
    Chairman BOUSTANY. We are going to be going through tax 
reform, and this is certainly going to take time. It is going 
to be a deliberative process. And so, I think as we go through 
that process, clearly with a mind on how to simplify things for 
the taxpayer, we also need to keep in mind the burdens that it 
places on your agency as well. And I would just like to hear 
you expound a little more on that aspect of the complexity.
    Mr. SHULMAN. Sure. So my short answer, yes, is what I 
believe. The Tax Code is incredibly complex, and unfortunately 
has been going in the wrong direction over the last decade.
    As I mentioned in my remarks, the vast majority of my 
employees' time and resources is spent trying to serve the 
American people and help them wade through tax complexity, and 
get their refunds quickly. We have a pretty unique view into 
what it feels like to be a taxpayer, wrestling with the Tax 
Code. We would be happy to engage in whatever dialogue people 
would like, just about simplicity.
    We also can see where there is either honest mistakes made, 
and--because of the complexity, a lot of non-compliance is 
honest mistakes by taxpayers, just getting tripped up with the 
code. We also see where we have issues in areas of controversy. 
A lot of places where we have controversy is where there is 
complexity, because there is vagaries in the law we then need 
to, with the Treasury Department, promulgate guidance.
    And so, anything you can do to simplify the code certainly 
helps our agency, because we spend a lot of time answering 
questions, providing service, correcting mistakes, and then 
having enforcement actions around the complex areas of the law. 
My belief is it would certainly help taxpayers.
    Chairman BOUSTANY. And I think you bring an important 
perspective to this, because I know in our conversations in the 
past, you have started businesses, you came from the business 
world and had to deal with the Tax Code from the perspective of 
a business owner. And now, your position heading the agency, 
the Internal Revenue Service.
    And I think you told me in the past that you get assistance 
when you file. Is that true?
    Mr. SHULMAN. I traditionally have, yes.
    Chairman BOUSTANY. Yes. And so, when the IRS commissioner 
himself is requiring, you know, professional assistance to deal 
with the Tax Code, I think that is a statement in and of 
itself, as many of us who serve in Congress probably also--I 
know I get professional help with mine. So, again, it is just 
an indicator of the complexity of the code.
    The new health care law, of course, it is no news that it 
has added enormous new duties and responsibilities. I mentioned 
an indoor tanning tax, new Medicare Part D rebates, new taxes 
on drug makers, insurance subsidies, employer penalties, and of 
course, the individual mandate.
    The 2012 budget proposal request, nearly half-a-billion 
dollars in new funding, and I think we've seen the figure of 
1,200 new employees to implement the law for next year. And 
much of this in the law isn't implemented until later in the 
decade. So I think CBO estimates that the 10-year cost for the 
IRS is going to be somewhere in the $5 billion to $10 billion 
range. And do you agree with that, as a result of the 
Affordable Care Act? Is that----
    Mr. SHULMAN. Yes.
    Chairman BOUSTANY. Do you agree with----
    Mr. SHULMAN. I think the CBO estimates are----
    Chairman BOUSTANY. Okay.
    Mr. SHULMAN [continuing]. In the general direction.
    Chairman BOUSTANY. Yes. And for 2012 do you have any 
indication--I think we have seen mention of tens of millions of 
dollars for infrastructure related to the Affordable Care Act, 
and I guess, related staff. Do you have a sense of what kind of 
staffing request or build-out you will need for the 2012 
budget?
    Mr. SHULMAN. Yes, the 2012 budget submitted is the 1,200 
people. Just a few comments about that. I want to make very 
clear that the IRS's role in the Affordable Care Act is to 
implement the Tax Code provisions in the act, the movement of 
money. It is really HHS's responsibility to be involved in the 
health policy issues.
    The vast majority of our request--82 percent--is really 
around technology and infrastructure to build systems to match 
household incomes--because right now we have AGI by individuals 
and couples--and build the interfaces with insurance companies 
and the state exchanges to administer the refundable credit 
portion of that. That is the vast majority of the request.
    Chairman BOUSTANY. That is the big part. Have you--do you 
have an estimate of how many full-time employees you're going 
to need to bring in for the implementation in 2012?
    Mr. SHULMAN. So 2012 is the 1,200.
    Chairman BOUSTANY. That is the 1,200.
    Mr. SHULMAN. Yes.
    Chairman BOUSTANY. Okay. For clarification. Okay, thank 
you.
    I now yield time to the ranking member.
    Mr. LEWIS. Thank you, Mr. Chairman. Mr. Commissioner, again 
I want to thank you for being here, and I want to thank you for 
your years of service.
    I noticed that you have a number of open houses this filing 
season. I would like to know who attended these open houses, 
and what problems are they facing?
    Mr. SHULMAN. About two years ago, as we continued to 
innovate around service--and two years ago we were still deep 
in the nation's worst recession--I really sat down with my 
senior team and said, what can we do to help taxpayers? How can 
we go the extra mile to help resolve issues?
    Last year we actually held 1,000 open houses around the 
country. And they were Saturdays, trying to create another 
service option so working people who had the weekend off could 
do this. It was mainly targeted at individual taxpayers, as 
well as small businesses, who had an outstanding issue with the 
IRS and wanted to resolve it.
    A lot of people, if they get behind on their tax, don't 
understand they can come in, and get on an installment plan. If 
they really can't pay and their circumstances have changed, we 
can put them in currently not collectible status and leave them 
alone for a year. And we can also compromise their debt, if 
there is no prospect of paying.
    So, we--and what we did is we made these available, and we 
had everyone from revenue agents, customer service reps, 
appeals officers who could settle, so everyone was there that 
they could settle their issues.
    This year we are repeating it, based on lessons of last 
year. I think the main issues--and I can get back to you with a 
specific breakdown--is we're trying to target people who have 
an outstanding debt, or are wrapped up with us in some way, 
either need to get on an installment plan, need to pay, want to 
get a lien released, or have simple tax law questions.
    We will service anyone from across the board, but we are 
really trying to focus on people who got caught up in the 
economic downturn, whose circumstances have changed. We can 
answer questions and really resolve any situations, once and 
for all.
    Mr. LEWIS. Has the agency been a little more liberal during 
these difficult economic times with taxpayers?
    Mr. SHULMAN. The way I would describe it is we always have 
the ability to be reasonable with folks, and compromise the 
debt, et cetera. I encourage anyone on the subcommittee to come 
visit IRS facilities. If you walk around, despite the popular 
image of the IRS in people's head, if you walk around and meet 
any of our employees, they say ``I am serving the American 
people.''
    Again, a year-and-a-half ago we did the open houses. I also 
announced expedited lien release for people who are refinancing 
houses. As I mentioned, this year we increased from $25,000 of 
tax debt, where a small business could automatically get on an 
installment plan without any questions asked to $50,000 this 
year. We basically said we won't file a lien with someone if 
they create direct deposits with us this year. People who felt 
that their credit scores were being hurt because a lien wasn't 
withdrawn after they paid their debt, but rather was released, 
we made it so they can automatically get it withdrawn.
    And so, absolutely I think my answer is in these tough 
economic times I have pushed the agency hard, and the agency 
has responded very well, to get creative, to try to make sure 
we help out taxpayers where we can, while also trying to make 
sure those who can afford to pay, pay their tax bill.
    Mr. LEWIS. Mr. Commissioner, are those that claim the 
earned income tax credit more likely to be audited than the 
general population?
    Mr. SHULMAN. Yes, they are. With any large refundable tax 
credit there is always the temptation for fraud. It is also a 
very complex credit, as I was discussing with the chairman. And 
so I think there is a whole set of honest mistakes that happen 
in claiming that.
    We basically have a two percent audit rate of earned income 
tax credit. We have a one percent audit rate for the rest of 
the individual taxpayer population. And about 36 percent of our 
audits last year were targeted at the earned income tax credit.
    What we try to do with that program, like any of our 
programs, is have balance. We do a lot of outreach and 
education--we've done it with a lot of Members of Congress--to 
make sure people who are eligible take advantage of the credit. 
And then we have very rigorous enforcement programs to make 
sure people who aren't eligible--we try to stop them from 
getting the credit.
    Mr. LEWIS. Thank you, Mr. Commissioner. Thank you, Mr. 
Chairman.
    Chairman BOUSTANY. I thank the ranking member. The chair 
now recognizes Mr. Gerlach for five minutes.
    Mr. GERLACH. Thank you, Mr. Chairman. Thank you, 
Commissioner, for being here.
    Can I follow up on just some of that last commentary you 
made on auditing? Does--the auditing work that the IRS does, 
does that fall under the enforcement part of your budget 
request, for this year, $5.9 billion that you're requesting for 
``enforcement?'' Would auditing of individuals and businesses 
fall under that category?
    Mr. SHULMAN. Yes, it would.
    Mr. GERLACH. Okay. And did I hear you correctly just a 
moment ago that, on average, you audit individuals--about one 
percent of the individuals that file with the IRS per year?
    Mr. SHULMAN. That has been a traditional rate, spread out 
across all individuals. It varies by income category, it varies 
by, as I said, earned income tax credits, a particular interest 
of ours.
    Mr. GERLACH. And what percent of business filers do you 
audit per year?
    Mr. SHULMAN. It depends on the level of income, and also, 
the volume of filers that come in. Some quick statistics, 
businesses that have assets below 10 million last year, it was 
about .94 percent. So just under one----
    Mr. GERLACH. Just under one?
    Mr. SHULMAN. Just under one percent. And then it goes up. 
Businesses that have over $250 million of assets have about a 
23 percent audit coverage rate. And then the largest 
corporations in the country generally have auditors on site and 
have lots of ongoing interactions with us.
    Mr. GERLACH. So are the audits--for the business audit, are 
they kicked off based upon random selection, or based upon red 
flags that come up from the prior filings, or the periodic 
filings? What kicks in an audit for particularly a small 
business owner?
    Mr. SHULMAN. Yes. Our audit criteria is based on a number 
of factors. We have been, as an agency--and I have been very 
focused on--risk-based audits as the most important to us. So 
it can be--we have certain geographic coverage. We have certain 
risk factors and parameters around data that comes in on 
returns.
    And we also have certain areas--certain businesses which 
are more risky, from a compliance standpoint. Cash businesses, 
obviously, have different compliance issues than other----
    Mr. GERLACH. And what is the average length of an audit? 
How much time does your auditor spend in that business?
    And how do you juxtapose that against the amount of time, 
therefore, the business has to participate and cooperate with 
those auditors, in terms of the time they are then taking their 
employees away from their business duties to them comply with 
the audit requests that the auditors are making?
    What is the ratio of time you are spending in the 
businesses auditing them, and what is the amount of time they 
are putting in to cooperate and participate and try to satisfy 
the auditor's request?
    Mr. SHULMAN. I can get back to you with that. I don't have 
the ratio off the top of my head.
    Mr. GERLACH. Okay. But I guess what I am getting at is what 
is the loss of productivity and profitability of these 
businesses that are taking time to comply with your request, 
and have you ever calculated what the impact of the auditing 
process is on profitability and productivity of the businesses 
that you are involved in?
    Mr. SHULMAN. Yes, we look at burden and calculate burden 
quite a bit. And let me just share with you my approach, and my 
philosophy----
    Mr. GERLACH. Yes, yes.
    Mr. SHULMAN [continuing]. About this. We try to do is do 
our job of making sure there is compliance with the law, do a 
lot of outreach and education--we've got extensive programs 
around small businesses, and making sure we help them comply 
with the law--and try to do our job in the least burdensome 
manner possible. Obviously, nobody likes to have an audit.
    Mr. GERLACH. Yes.
    Mr. SHULMAN. And it's going to take some time when someone 
does an audit.
    We have tried to move more and more, as I mentioned, to 
targeting our audits to places where there is potential non-
compliance, and leaving taxpayers who have traditionally been 
compliant alone. We have also tried to get better and better at 
using data, so that when data comes in, we analyze the data, 
and when we go in we spend less time.
    Mr. GERLACH. What--of those that are audited on the 
business side--and I would be interested on the individual 
side, as well--but on the business side, staying with that, how 
many are found to be in non-compliance, or to have violated the 
code, based upon that audit?
    What percentage of those in the total auditing--audited 
group there, how many do you find have violated the law and 
need to either pay penalties or interest or a combination?
    Mr. SHULMAN. We measure something called the no-change 
rate, which is what percentage of people do we audit, and there 
has been no adjustment made. I will get you the numbers. One of 
the measures is--are we doing risk-based audits appropriately? 
If we are auditing and there is not much of a no-change rate, 
then it means we might be picking the wrong folks.
    If--the no-change rates have been moving up, that means our 
analytical group has gotten better at risk-based audits. But 
we've got to be real careful.
    Mr. GERLACH. Is it 50 percent of those businesses audited?
    Mr. SHULMAN. Yes--it is more than 50 percent.
    Mr. GERLACH. Are in violation in some way, shape, or form--
--
    Mr. SHULMAN. Yes, have a change in the audit.
    Mr. GERLACH. Okay.
    Mr. SHULMAN. But just one comment I want to make is I am 
always very cognizant--and there is a whole bunch of things in 
the law about how we measure our performance. While we want to 
go in places that have higher non-compliance in the enforcement 
arena, I also don't want to set perverse incentives for my 
people to make changes where they won't happen. We are always 
trying to get that balance right and have that dialogue.
    Mr. GERLACH. Thank you. Appreciate it.
    Mr. SHULMAN. Thank you.
    Chairman BOUSTANY. I thank the gentleman. Mr. Becerra, you 
are recognized for five minutes.
    Mr. BECERRA. Thank you, Mr. Chairman, and thank you for 
holding this hearing. Commissioner, great to see you again. 
Thank you for the work you are doing.
    By the way, thank you for the work that you have done in 
trying to get agents who try to put out their services as 
preparers of tax returns for the American public, having them 
become registered agents, so that we have a way to track their 
record of service.
    Because too often I know I have had people come to my 
office saying, ``I got swindled by a guy who said he's going to 
prepare my taxes, did a terrible job, now I'm being audited, I 
had to pay a big amount of money, causing big headaches,'' so 
thank you very much for helping us go down the road of making 
the realm of tax preparers a professional service.
    And I know my own tax preparer has said to me, ``Great work 
that the IRS did in trying to help the rest of the guys out 
there do what many of us have done for years, and that is 
provide a professional service that we are willing to have 
audited at any time.''
    So thank you for that. I know you are saving the American 
public a great deal of money, and probably increasing their tax 
refunds, because they are calculating them correctly.
    You mentioned something very troubling. The budget bill 
that was passed by this House, H.R. 1, by the Republican 
majority a few weeks back, would cut $600 million out of your 
budget, which you said would cost us in revenues, because of 
lower tax collections--proper and legitimate tax collections--
some $4 billion. So, by almost a factor of seven, we would be 
increasing the size of the deficit by instituting a cut that 
would not allow you to go out and do your collection services 
appropriately. And it might also undermine the voluntary system 
that we have for tax payment by American taxpayers.
    Does that mean that you would actually have to reduce the 
number of personnel that are actually working to help process 
forms? What actually goes into this $600 million cut that makes 
it difficult for the U.S. Treasury to collect the money that is 
owed to it, and therefore, makes other taxpayers have to pay 
more, because they will have to make up for the $4 billion lost 
by those who owe the money?
    Mr. SHULMAN. First of all, I am hopeful--at least from my 
proprietary perspective, as the IRS Commissioner--that we don't 
have those cuts. And I know that all Members of Congress and 
the administration are now working to try to get a budget deal 
done.
    The cuts would be just big, big cuts that would have to be 
jammed into a six-month window. We would have to have across-
the-board cuts. We would either have to have long furloughs or 
RIFs, and we would be taking people basically away from every 
function. So we would be taking people away from collection, we 
would take them away from exam, we would take them away from 
automatic screening. We would be taking them from customer 
service, we would be taking them from outreach. We would be 
taking them out of our technology operation.
    My responsibility--as, obviously, Congress's responsibility 
to give us whatever budget, my responsibility is to tell you 
what would happen. This would be our estimate, $4 billion less 
revenue, phone calls not answered, returns backed up and not 
processed.
    Mr. BECERRA. Yes. And so there was no direction in the 
budget bill that cuts the $600 million as to how you could do 
it in a way that would not undermine services. And I don't hear 
you saying that you could find a way to institute those cuts 
that wouldn't undermine services.
    Mr. SHULMAN. Well, if you look at the allocations, across 
our enforcement, our service, our operations budget, all the 
things I laid out would happen. The biggest cut is to 
enforcement.
    Mr. BECERRA. I also want to make sure I emphasize again 
something else you said, because there is a need to dispel this 
rumor, this myth floating out there, that the money that IRS 
needs to try to implement this new patient's bill of rights is 
somehow all focused on getting IRS agents to bang on people's 
doors, when my understanding is the bulk of the money, the vast 
majority of the money, is really used to provide assistance, 
taxpayer assistance services, or to beef up mostly our IT, our 
intellectual--our Internet technology, so that we can help 
process a lot of these claims.
    I was looking at the budget that you outlined for the use 
of the money. Am I correct that 60 percent of the $470 million 
that you requested to implement the new patients bill of rights 
would go towards computer system upgrades, and those things 
that you need to just implement the bill, getting 30 million 
Americans now with good health insurance, and that of the 40 
percent that remains, that would be used for personnel, two-
thirds of that would be used for taxpayer services in other 
ways to provide a service, not necessarily to go out there and 
do enforcement?
    So, I guess that totals to about 85 percent of the money 
being used for services, and for better systems operations.
    Mr. SHULMAN. Let me make sure I give you accurate numbers. 
So let me give you the way I----
    Mr. BECERRA. Thank you.
    Mr. SHULMAN [continuing]. Look at it, which is about 82 
percent, or $390 million of the request, is to support the 
refundable credit operation. Clearly, the biggest lift for us 
is the infrastructure around having technology that gets income 
data smoothly into and out of, in real time, the 50 exchanges 
that will be built around the country in the 50 different 
states.
    When people get a refundable credit, we actually send money 
on a monthly basis to the insurance company that people send 
that money--so we need to have reconciliation systems with 
them, feeding it back into the states in a real-time basis.
    Only about 11 percent, or $50 million of the budget, is for 
enforcement. And so, everybody likes to talk about IRS agents. 
We have lots of people who are phone operators, technology 
folks. We're much more boring than the popular image of the 
agent, in lots of our operations. I think of us as a large 
financial service operation. We are more--but we are very akin 
to that. We do a lot of money flows, $2.3 trillion. And so that 
is where most of it goes.
    The enforcement money in the 2012 budget is largely for 
traditional tax enforcement, compliance programs around the 
taxes that are going into effect--that are in effect now, and 
are going into effect over the next year or two.
    Mr. BECERRA. Thank you. Thank you, Mr. Chairman. I 
appreciate it.
    Chairman BOUSTANY. I thank the gentleman. The chair now 
recognizes Ms. Jenkins for five minutes.
    Ms. JENKINS. Thank you, Mr. Chairman. Thank you, 
Commissioner, for being here.
    As the House and Senate continue budget talks in an effort 
to prevent a government shutdown, it is important that we 
understand whether the IRS is prepared to handle a government 
shutdown. So I am just curious. In the event of a shutdown, 
what is the IRS's plan to process tax returns and issue tax 
refunds?
    Mr. SHULMAN. First of all, I will tell you everybody is 
hopeful that there will not be a shutdown. We run a $13 billion 
financial services operation, and the idea of stopping it for a 
few days or a few weeks is strange to someone like me who has 
run big operations. I think the President has been very clear 
that it is not in anybody's interest to have a government 
shutdown. My understanding is there is very productive talks 
going on at this point.
    What I will tell you is we had an old plan that looked at 
government shutdowns based on October 1, when the fiscal year 
begins. We have never had a government shutdown in the middle 
of the filing season before. The closer we get to April 15th, 
the more consideration and factors are at play.
    As these dates, I think we are on our sixth CR, have pushed 
out, we have had to adjust plans going forward. I will tell you 
right now we are in discussions with OMB and the Administration 
of exactly what would happen. And so I cannot tell you. Our old 
plan was we deposited checks, we didn't process returns. That 
was a plan that was built in 1995, when there was not so much 
electronic filing. And now we are closely looking at it, and 
are having discussions.
    Ms. JENKINS. Okay, thank you. In your testimony here you 
mentioned that the average refund is nearly $3,000. And you say 
this money can help taxpayers pay their bills, make needed 
purchases, and to save.
    But we all know that this refund money isn't just plucked 
off the money tree in the back of the Capitol. This is money--
this is the taxpayer's money, and it could have been used the 
whole year for them to invest, or to make purchases. And I 
think, instead, they are giving the government, basically, an 
interest-free loan.
    So, I am just, again, curious. Do you see this high level 
of refund as a deliberate action of taxpayers, or as a result 
of maybe a Tax Code that is overly complex?
    Mr. SHULMAN. I think each taxpayer is different--I think a 
lot of taxpayers actually use the withholding system to have 
automated savings so that they can then get a refund. People 
like to do it.
    In my ideal world as a taxpayer, I actually withhold the 
exact right amount, and I neither pay nor get a refund. That is 
my own personal goal. It is very hard to hit, because of the 
complexity of the code and estimating exactly, you know, all 
the factors that will come in.
    And so, it is a fact that we usually put out, you know, 
$250 billion to $300 billion of refunds. Retail sales--the 
Commerce Department, over time, has looked at this--retail 
sales usually increase in February through May, as a direct 
result of refunds. I always encourage people to withhold 
correctly.
    And so, we see it as just a fact of the tax system, neither 
good nor bad, just a fact, that we give you and you can make 
your own judgements about.
    Ms. JENKINS. But if it was a more simplified calculation, 
do you think people would deliberately be lending the 
government interest-free money during the year?
    Mr. SHULMAN. I won't speculate on it. I mean I think a lot 
of it is not--there is the complexity of the code, but there is 
also the issue of people don't know always exactly what they 
will make, what their spouse will make, what interest income 
they might get, how their jobs will change, if they are going 
to get a second job. So I think there is a bunch of factors.
    Ms. JENKINS. Okay. Thank you. I yield back.
    Chairman BOUSTANY. The chair now recognizes Mr. Buchanan 
for five minutes.
    Mr. BUCHANAN. Thank you, Mr. Chairman, and I appreciate the 
Commissioner being here. You met with us a couple of weeks ago, 
and so I don't know how you get much work done--you are here. 
But we are excited to see you back.
    Let me just touch on a couple of things. And it is along 
the line of tax simplification. I look at--in our area I was 
chairman of a Chamber. We had about 2,500 businesses. Most of 
them are--a lot of these businesses are 3 to 10 employees. 
There are some that are larger, larger companies, banks, and 
some other things. But I would say out of the 2,600 probably 
2,200 are 20 employees or less. What are you doing to help 
simplify their ability to file and, you know, quarterly things 
that they have got to file?
    Because I do hear it just takes so much time and effort 
from these small businesses. You know, a lot of them do not 
have a controller or a CPA, or they are a CPA but they have got 
an accountant that is outside. What is the IRS doing to make it 
simpler for them?
    Mr. SHULMAN. As you know, we implement the tax laws that 
are written. And as you know, I had the conversation with the 
chairman earlier about simpler laws would clearly be helpful. 
But it is not our role.
    What we try to do is, given the laws that are on the books, 
do as much outreach education service as we can. I would be 
surprised if one of our people wasn't at the Chamber of 
Commerce on a regular basis in your district, holding education 
events, explaining tax law changes, being available to 
businesses.
    We spend a lot of time with the practitioner community. For 
individuals, 66 percent of people use a tax professional. For 
businesses, including small businesses, it is 80 percent. So if 
we can get good information and tools to the practitioner 
community, they can make sure that people file it well.
    And we answer millions of calls from small businesses every 
year. Our phone operators spend a lot of time doing that. We 
have a dedicated website. We have a dedicated outreach and 
education unit for small businesses. We have an e-newsletter on 
tax issues for small businesses that has a distribution of 
about 200,000. And so we do everything we can, given our 
resources, given the code----
    Mr. BUCHANAN. And secondly, because we have just got five 
minutes, what about independent contractors? We have a lot of 
Realtors, everybody else, you know, maybe it is themself, their 
husband, but basically there is a lot of people out there--they 
might be with Amway or whatever they are with, as independent 
contractors. Is there anything we are doing to--and their 
situation is probably even more difficult, because they are 
just themselves, and--is there anything that we are doing to 
help them and simplify things for them, as well?
    Mr. SHULMAN. Again, we have all of the avenues of service. 
They usually afford themselves of the individual services. We 
answered 35 million calls last year. We keep having more self-
service options on our website, and we will continue to do 
that. And we are trying just to get the right balance of--you 
know, with the service resources we have.
    My personal view is the vast majority of our service 
resources should be going to individuals and small businesses 
who cannot afford themselves of the professional tax community 
help and are struggling to make ends meet.
    Mr. BUCHANAN. And, Commissioner, my colleague mentioned 
about dispute, when you have a dispute with the IRS. Let us say 
medium-sized companies or a little larger companies, what is 
the process--are the negotiators on the IRS side, are they 
empowered--because you hear these things a lot of time just 
drag on and on and on. Very expensive, and not only in terms of 
outside professionals, but very expensive in terms of the 
internal time it takes an organization--I am not talking about 
the person that has got 5 employees, someone that has got, in 
our area, for example, 400, 400 or 500. They have a dispute, it 
just seems like it drags on forever.
    And I guess the question is, you know, what is the process 
on your side to resolve these things, or have someone in that 
is bright enough, sharp enough--not that they are all not--but 
is--are they empowered to get something done and get these 
things wrapped up and get a compromise or--what is your 
attitude, or how does it work on your side?
    Mr. SHULMAN. I have been very public. I mean if you look at 
things I have been talking about for the last three years, my 
real goal with the business taxpayer is to resolve issues and 
get certainty sooner for the IRS and for taxpayers. We have a 
whole slew of programs, and I have been pushing them very hard.
    Part of it is getting clearer guidance, creating safe 
harbor, where we can simplify the rules. We have an appeals 
function. So if you disagree with us, we close out an audit, 
you can go to our appeals function----
    Mr. BUCHANAN. Well, before the appeals, is the auditor 
itself, the person, can they--do they have a boss that they can 
go through and try to negotiate it out before it goes to the 
appeal?
    Mr. SHULMAN. Oh, absolutely. But what I was going to tell 
you is we have expanded what we call fast-track appeals, where 
we can just go in and audit, invite an appeals officer in to 
negotiate a settlement.
    Our folks have the ability to work through issues. We do 
have time lines where you have got to get in, you have got to 
get out with folks.
    Mr. BUCHANAN. Yes.
    Mr. SHULMAN. Now, some taxpayers complain about the time 
lines.
    Mr. BUCHANAN. Yes.
    Mr. SHULMAN. Because they say someone is in, and they are 
just trying to get issues and get out----
    Mr. BUCHANAN. The big thing I hear is just getting it done 
fast-track. I am glad to hear you have got something like that, 
because they just don't want things to drag on for a year, they 
would rather just get the people in the room and try to work 
something out and move forward, because it costs a lot of 
money, time, and aggravation over, you know, a period of time.
    Mr. SHULMAN. Yes, absolutely.
    Mr. BUCHANAN. Okay. Thank you. I yield back.
    Chairman BOUSTANY. I thank the gentleman. The chair now 
recognizes Dr. McDermott for questioning.
    Mr. MCDERMOTT. Thank you, Commissioner. I have been 
listening to this testimony today, and I am not real sure why 
we are having this hearing. But I heard the chairman mention 
the Affordable Care Act and the additional responsibilities you 
will have in auditing people's behavior with respect to 
purchase of health insurance.
    And I understand that this afternoon, later today, we are 
going to mark up a bill that would prevent any money from being 
spent in an insurance policy on abortions. And I suspect that 
the audit responsibility will fall to you to determine whether 
or not any money has been spent on abortions, or is planned by 
the insurance companies--it sounds like an insurance function 
that is going to wind up in your hands.
    And I would be surprised if you have already started to 
think about this, because you don't start to think until we do 
something, but it is coming down the road. And I have some 
questions I would like you to think about, and give me a 
response if you can, in terms of how many additional people you 
are going to have to hire to look at all the insurance plans, 
to be sure that no money is being spent on abortions.
    One of the issues that I think ought to be considered in 
that is also the HSA. If I put my money in an HSA, can I take 
it out and spend it any way I want on health care costs? And 
how do you audit that to be sure that I am not taking advantage 
of the Tax Code to put money in there and then wind up paying 
for an abortion for whomever?
    It seems to me we are adding things. We continually look at 
the IRS as kind of our unofficial enforcer, and that you wind 
up with the responsibility for doing that. And I would 
appreciate if you could give me an answer in writing as to what 
you think the effect will be, if the bill passes today 
preventing the use of any health care money for abortion, I 
would like to see from you an estimate of what it means to the 
bureaucracy to have to go around and look and be sure that 
nobody is taking advantage of the Tax Code.
    You have any information about that at all at the moment? I 
mean how many people you are going to have to have in this 
system to do this?
    Mr. SHULMAN. I don't.
    Mr. MCDERMOTT. And do you have an estimate of what you are 
spending already, or you will spend to audit the system, under 
the Affordable Care Act?
    Mr. SHULMAN. On the bill you referred to regarding our 
involvement, lots of bills are around until bills are passed.
    Mr. MCDERMOTT. Right.
    Mr. SHULMAN [continuing]. We will look at that, and any 
question you send me I will be happy to respond to.
    Regarding the Affordable Care Act, we laid out in 
excruciating detail in our 2012 budget what we will need in 
2012. And as I mentioned before, the vast majority of that 
money is technology infrastructure service money to interface 
with the exchanges, interface with insurance companies to move 
the money with the refundable credits.
    Mr. MCDERMOTT. And do you have--how are you going to 
enforce the fact that people have or have not complied with the 
law, the individual mandate?
    Mr. SHULMAN. Oh, the individual responsibility payment? We 
requested some money for that in 2012. All of that money is 
technology and infrastructure money just around systems. It 
will basically be document-matching, just like a W-2.
    So, the insurance company will either send us fact or 
coverage, saying ``This person is covered,'' or not. If they 
say they are not, generally people will voluntarily comply, our 
systems will match that, and they will say, ``I wasn't covered, 
and here is the payment.'' If they don't say that, and we see 
it, we will send them a bill. And the Affordable Care Act was 
very clear about having some of our enforcement tools, such as 
a lien or a levy not being available for that.
    So, think of it like a credit card bill that you either 
choose to pay or not pay. If you don't pay, you will get a 
bill.
    Mr. MCDERMOTT. And--but you have no enforcement capacity.
    Mr. SHULMAN. Some will call that enforcement capacity, 
getting a letter from the IRS. It's like a credit card bill, 
but it will have our letterhead on it.
    I believe what you were talking about before in here is 
that first of all, we are just going to have fact of coverage 
information. We are not going to know about your coverage, we 
are not going to know about your personal health issues.
    And second of all, this is not the kind of thing that 
agents spend time on, these dollar amounts. And so you don't 
have agents rooting around asking these things. You have 
document-matching, and bills that get sent out.
    Mr. MCDERMOTT. So people could get around the bill?
    Mr. SHULMAN. What is that?
    Mr. MCDERMOTT. People could get around the bill, since no 
agent is going to ever look into their health care records. You 
are not going to put agents at work looking into people's 
health care.
    Mr. SHULMAN. Most of our enforcement activity is not based 
on face-to-face agents. And most people comply voluntarily with 
the tax laws. Lots of people, when they get in correspondence 
with us, pay up and feel that is enforcement.
    So, I would not characterize it that we anticipate large 
numbers of people getting around it. But there is always non-
compliance, and there is some non-compliance we don't find.
    Mr. MCDERMOTT. Thank you.
    Chairman BOUSTANY. I thank the gentleman. The chair now 
recognizes Ms. Black for questioning.
    Mrs. BLACK. Thank you, Mr. Chairman. And as I talked to you 
the other day, Commissioner, you asked me if I had some 
concerns, and I talked a little bit about people making phone 
calls, and maybe getting different answers as they called in, 
one time to the other.
    But I want to turn to a piece that I have read in the 
information that was provided us about telephone assistance for 
taxpayers, and that it continues to be a problem.
    The percentage of callers that successfully obtain the live 
assistance over the phone is down from 74.2 percent down to 
72.6 percent this year. And the average wait times have also 
increased from 9.9 to 10.3 minutes. And so far, this year, 10.3 
percent of the calls were abandoned, and .8 percent reached a 
busy signal or ended in a disconnection, probably out of 
frustration. But both numbers are increases from prior years.
    And the IRS's goal, as we understand it, is to answer only 
71 percent of the calls in this current year, and then 80 
percent in 2012, which is down from the goal that was set back 
in 2007, of answering 82 percent. So the goal has been 
decreased. And I know that you have requested an additional $30 
million. So my question is, what do you intend on doing with 
those $30 million and, with the goal being decreased, just how 
does that fit? Why a decreased goal?
    Mr. SHULMAN. Thanks for the question. Answering the 
nation's taxpayers' telephone calls is a big deal to us, and 
something we take seriously.
    Let me be very clear about what the level of service is. 
The level of service, which I checked this morning and is 
running at about 74 percent this year, is a formula that takes 
into account people who hang up, as well as the people that get 
through to a live assister. It does not translate into 26 
percent of people unhappy.
    We added last year, a call waiting feature. It used to be 
you just waited. And now it says, ``Your wait will be 10 
minutes,'' if it is going to be 10 minutes. If people who hang 
up after they hear that, because they do not want to wait, and 
decide to call back later, if you add that, it adds about 10 
percentage points. So you are actually up closer to 84 percent.
    The reality is, from where I sit and my folks who are 
stretching and trying to hit 74 percent, it is a pretty 
straightforward formula. How many people do you have sitting on 
the phones, answering the phones, being accurate with your 
questions?
    Most of this will be extra seasonal people during filing 
season. And I am actually pretty proud the agency is 
maintaining the level of last year, given that we are under a 
CR and do not know what kind of cuts are coming forward. And so 
we are trying to balance the money we have against the level of 
service.
    Mrs. BLACK. And my time is running out here, so--I do have 
a second part of the question.
    Mr. SHULMAN. Sure.
    Mrs. BLACK. But to that I would say that I hope maybe we 
use some technology as well, maybe as you say, to give them 
more information about it will be a 10-minute wait time or 
whatever, not just personnel, but also looking at other 
technology that can be used.
    But I want to turn the attention to a program called the 
Historic Preservation Facade Easement Program. And I know that 
Chairman Jo Ann Emerson was concerned about this, and brought 
this situation up in Appropriations. And it has come to my 
attention by someone else back at home, in particular.
    And then, also the IRS advisory council in the 2009 general 
report took issue with what is going on with the audits. And I 
wondered if you might, in my one-minute time that I have left, 
speak a little bit about the program and the fact that even the 
advisory committee recommends that there may be a safe harbor 
on the audit policy, because of it appearing to be so onerous. 
And if you could speak to that, I would appreciate it.
    Mr. SHULMAN. Sure. I would love you to come to our call 
centers and see. We have spent a lot of time on technology and 
productivity. Part of the reason we can still hit 74 percent is 
because we have squeezed a lot of productivity out of not 
adding workers this year.
    On easements, historic easements is an issue. You get a big 
tax credit. We need to have some coverage, make sure people 
don't abuse it, but also make sure that there is historic 
preservation, and people use those easements.
    We take very seriously the IRSAC recommendations. Those 
people spent a lot of time. And we are looking right now at 
those recommendations. I cannot speak specifically to the 
program here, but would be happy to follow up with you on it.
    Mrs. BLACK. Well, I appreciate that, because there was a 
recommendation, and I would like to know what you think about 
the recommendation, if you all will follow through on that. 
Thank you.
    Mr. SHULMAN. Thank you.
    Chairman BOUSTANY. The chair now recognizes Mr. Kind for 
questioning.
    Mr. KIND. Thank you, Mr. Chairman, for holding this 
hearing. Mr. Commissioner, thank you for being here, and for 
the service that you provide.
    I missed your opening testimony, so I apologize for asking, 
but do you have an update in regards to the paid preparer regs 
that you are coming forward with?
    Mr. SHULMAN. Yes. We have started registering. We have over 
700,000 paid preparers registered this year, which just means 
they get their name in and they have a number. We are now in 
the process of working through the testing and continuing 
education component, which will be next.
    I have been very clear that I think this is important for 
the tax system, to have a minimum level of competence with paid 
preparers. But we also want to do it in a staged way, so there 
is no disruption of service to taxpayers.
    And so, we registered this year, we are working on the 
programs for testing, and then we are going to give people 
several years to pass the test to get in. So it is going to 
take several years to get up and running.
    Mr. KIND. Okay. And what is the response rate, as far as 
eFiling right now? What percentage are filing?
    Mr. SHULMAN. Last year, we were about 70 percent. We are 
running about five percent higher than that this year. And so 
it looks to be going in a positive direction.
    Mr. KIND. Okay. You know, and any update on the debit card 
refund program and how well that is working?
    Mr. SHULMAN. No updates at this point of the program that 
the Treasury Department is running.
    Mr. KIND. Okay. Let me ask you, we have the, under the 
Affordable Care Act, tax credits going to small businesses, 35 
percent last year, this year we will continue to 2014, when it 
goes up to 50 percent. Are you encountering any difficulty with 
small businesses applying for those tax credits under the 
Affordable Care Act?
    Mr. SHULMAN. Most business returns come in in the fall. So 
we will see what is coming. It is a very targeted group that is 
eligible. As you know, 10 employees going to 25 employees with 
a phase-out. And so I think, you would not yet encounter people 
who are eligible having issues. We have heard from people who 
wish they were eligible but who fall outside those ranges.
    Mr. KIND. Yes, but you are not encountering any degree of 
difficulty, as far as people determining their eligibility, or 
being able to figure out whether to apply for the tax credit or 
not?
    Mr. SHULMAN. We have tried to, do outreach, make sure we 
are available. We know the practitioner community is very, very 
focused on that, as well.
    Mr. KIND. Yes. I checked the website, IRS website, as far 
as how you are explaining this to the small business community 
out there, and you also offer some small examples of small 
businesses, but not a calculator, itself. Is that purposeful, 
that you are avoiding kind of a plug-in calculator from the IRS 
website to see if small businesses would be eligible or not?
    Mr. SHULMAN. I don't think we were avoiding it. Calculators 
are good for some things and not for others. Our folks who work 
on it probably decided it wasn't going to be that helpful for 
this.
    Mr. KIND. Okay. Notification of small businesses. The IRS 
sent out postcards to small----
    Mr. SHULMAN. Yes.
    Mr. KIND [continuing]. About possible notification. What 
about e-notices to small businesses?
    Mr. SHULMAN. Yes. We have an e-business newsletter for 
small businesses, and there has been information about it 
there. I mean we----
    Mr. KIND. Are most small businesses filing electronically 
these days?
    Mr. SHULMAN. Most are.
    Mr. KIND. Okay. So--I'm just thinking of the efficiency, 
and maybe cost savings. Does it make more sense just to notify 
them through e-notices, as opposed to formal postcards being 
mailed out?
    Mr. SHULMAN. We have tried different methods of 
communication. We always do that. Most of our methods are 
electronic, but sometimes we send out postcards to folks, 
sometimes we don't. It is all based on the population, how we 
can reach them, what information we have in the database. With 
our e-business newsletter--not every small business signs up 
with the IRS, but we actually had a database of potential 
eligible taxpayers that had addresses. So that is why we sent 
them.
    Mr. KIND. Now I share Representative Becerra's concern that 
many people have already raised in regards to what the $600 
million in cuts to the IRS would mean, as far as the collection 
of revenue and the lost revenue that we would miss out on.
    But could you today give the committee kind of an update on 
what type of cost savings measures that you are going through 
in the IRS--in light of the budget deficits that we are facing, 
some of the efficiencies that you are trying to encourage?
    Mr. SHULMAN. Yes. Absolutely. I am a big believer--and 
folks know this even before everybody was talking about the 
deficit. The day I showed up I told our team that I view a job 
of any big business or big operation is stop programs that no 
longer make sense, make cuts where you can make cuts, and then 
invest in the future. And that is--the set of budgets that I 
put forward to try to do that.
    Our 2011 budget--not the 2012--had about $180 million of 
cuts. As electronic filing has grown, we have actually reduced 
service centers and people processing returns. We have taken 
our technology up to a standardization level that we are 
extracting $75 million each year out of our core technology 
budget. We have standardized on certain technology platforms, 
made it easier. We have consolidated data centers. And then we 
have actually just made some cuts in programs. We have cut some 
outreach programs. We have actually cut some mailing of 
materials, and we are going to keep doing that, going forward.
    I will tell you, given the current fiscal environment, I 
have also put a hiring freeze in place. Exceptions to come to 
me to approve, and we are still investing in strategic 
priorities. We have dramatically cut our travel budget, except 
for case-related travel this year. And we have been in the 
process of putting in contingency plans, so that if there are 
dramatic cuts, that we could implement them.
    I think our employees actually understand. The way I have 
explained it to them--when I go out in town halls around the 
country--is we need to find cuts now. We are going to have to 
make hard decisions. If our budget is cut severely, I would 
rather have us find the cuts, rather than RIF people. Because 
in the Federal Government when you RIF everyone thinks you are 
just finding efficiencies. It is a pretty blunt tool, and it is 
based on seniority, and who got added last, and people kick 
down. What I would rather do is find programs that, at least in 
the hierarchy of priorities, we feel we should make cuts.
    Mr. KIND. Great. Thank you. Thank you, Mr. Chairman.
    Chairman BOUSTANY. I thank the gentleman. Thank you, 
Commissioner Shulman, for appearing before the subcommittee. 
And we appreciate your testimony and your frank answers to all 
these questions.
    Please be advised that Members may have some additional 
questions that they will submit in writing. And those questions 
and answers would be part of this hearing record.
    Also, Commissioner, no doubt you have heard the news 
reports about the report that Chairman Herger, Congressman 
Reichert, and I released yesterday regarding the AARP's 
structure and function. And early next week we will be sending 
that report to you to request further examination of the tax-
exempt status of the AARP. But I wanted to officially let you 
know that we will be sending that report to you.
    Mr. BECERRA. Mr. Chairman, in regards to that, could I ask 
is the committee going to inquire of other of these not-for-
profit 501(c)(3) or 501(c)(4)'s?
    Because as we have served on this subcommittee in the past, 
that has been one issue I have raised quite often, with regard 
to the non-profit, charitable world, is are they, in fact, 
providing a service, a public good, that pays for the loss of 
revenue that we give to those non-profits through tax-
deductible contributions, through the non-tax status that they 
carry.
    And so, I would be interested to know, does the chairman 
expect that this subcommittee will do further examination of 
other organizations, not just senior organizations, I know 
there are a number of new senior organizations that have been 
out there doing quite a bit of political work, and I would be 
interested in making sure that we examine the non-profit world 
all together. But certainly if we are going to look at, in this 
case, the AARP, other senior groups, as well.
    Chairman BOUSTANY. I share the gentleman's concerns. I 
think they are very legitimate. And as we look at tax reform in 
that context, we will be having those discussions. And the 
specific report referenced as a result of questions that were 
asked by Congressman Reichert and Ginny Brown-Waite, and the 
report released was a culmination of 18 months of work done to 
seek answers to those questions.
    So, at this time we are focused on that particular issue. 
But I think, in the context of tax reform, those--your question 
is certainly an important one, and will be discussed.
    Mr. BECERRA. I thank the chairman for that response. If I 
could just indulge and ask one last question, the issue, as I 
see it, is not about a particular organization, or about the 
activities of an organization. To me it is we have a code that 
says that you can apply to be treated differently from a for-
profit entity, which has to pay taxes. And if you are going to 
get to forgo having to pay those taxes that an otherwise 
established enterprise has to pay, we should make sure that the 
public is getting some benefit for it.
    Because there are a lot of businesses that want to do the 
same type of thing and get the same type of break. You know, 
essentially these not-for-profits get to operate for a far-less 
cost, because they don't have to pay taxes. And there are a lot 
of folks who are out there engaging in an enterprise and paying 
taxes because they have registered as a corporation or some 
type of business.
    And I think it is important for us to make sure that if you 
are going to try to tell the public that they should not have 
to pay the same level of taxes that a for-profit enterprise 
pays, that it should be for a good reason.
    And I think the Commissioner would be a great witness to 
have, along with the folks from his operations, to try to help 
guide us in making sure that these operations that otherwise 
would be taxable as for-profit entities are operating as they 
should, as organizations that legitimately deserve that non-
profit status.
    Chairman BOUSTANY. Very important questions, and certainly 
know we have a current body of law that needs to be followed 
with regard to whether an organization qualifies as tax-exempt 
or not.
    And clearly, the IRS is the agency, the entity that is best 
positioned to make that determination, to enforce the law.
    And so, that is why we are returning this--we are going to 
send this specific report over. And then we will have further 
discussions in the context of tax reform. I thank the 
gentleman. His concerns are legitimate.
    With that, the committee stands adjourned. Thank you, 
Commissioner.
    [Whereupon, at 11:13 a.m., the subcommittee was adjourned.]
    [Questions for the Record follow:]




                                 
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