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





   IMPROPER PAYMENTS IN THE ADMINISTRATION OF REFUNDABLE TAX CREDITS

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

                                HEARING

                               before the

                    SUBCOMMITTEE ON OVERSIGHT OF THE

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

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                              MAY 25, 2011

                               __________

                           Serial No. 112-OS4

                               __________

         Printed for the use of the Committee on Ways and Means









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                      COMMITTEE ON WAYS AND MEANS

                  CHARLES W. BOUSTANY, JR., Louisiana

 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

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

                               __________

Advisory of May 25, 2011 announcing the hearing..................     2

                               WITNESSES

Mr. Steven Miller, Deputy Commissioner for Services and 
  Enforcement, Internal Revenue Service..........................     5
Honorable J. Russell George, Treasury Inspector General for 
  Taxpayer Administration, U.S. Department of the Treasury 
  Accompanied by Mike McKenney, Assistant Inspector General for 
  Audit..........................................................    23
Mr. Michael Brostek, Director, Tax Policy and Administration, 
  Strategic Issues, U.S. Government Accountability Office........    36
Ms. Nina E. Olson, National Taxpayer Advocate, Internal Revenue 
  Service Testimony..............................................    55

 
  HEARING ON TRANSPARENCY AND FUNDING OF STATE AND LOCAL PENSION PLANS

                              ----------                              


                        WEDNESDAY, MAY 25, 2011

             U.S. House of Representatives,
                       Committee on Ways and Means,
                                            Washington, DC.
    The Subcommittee met, pursuant to notice, at 10:35 a.m., in 
room 1100, Longworth House Office Building, the Honorable 
Charles W. Boustany, Jr. (Chairman of the Subcommittee) 
presiding.
    [The advisory of the hearing follows:]

HEARING ADVISORY

                           Boustany Announces

 Hearing on Improper Payments in the administration of Refundable Tax 
                                Credits

                         Thursday, May 26, 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 improper tax 
payments in the administration of refundable tax credits. The hearing 
will take place on Wednesday, May 25, 2011, in room 1100 of the 
Longworth House Office Building, beginning at 10:30 A.M.
      
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from invited witnesses only. However, 
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. A list of invited 
witnesses will follow.
      

BACKGROUND:

      
    While some tax credits reduce a taxpayer's liability to zero, 
refundable credits can also result in a taxpayer receiving money from 
the government even if they have paid no taxes. In recent years, the 
number and dollar amount of improper payments arising from refundable 
tax credits has been increasing at an alarming pace. Over the last few 
years, the rampant abuse and misapplication of these credits has cost 
taxpayers an estimated $106 billion.
      
    Despite this alarming abuse of taxpayer dollars, the Treasury 
Inspector General for Tax Administration has noted that the IRS has 
made little progress in reducing improper payments since being required 
to report these figures to Congress and the Office of Management and 
Budget. In fact, the Government Accountability Office reported that in 
2010, the EITC was the fourth largest source for improper payments 
among all Federal Government programs, with an estimated $16.9 billion 
in improper payments.
      
    In announcing the hearing, Chairman Boustany said, ``At a time of 
record level Federal deficits, the last thing the government can afford 
is to be hemorrhaging tens of billions of dollars in improper payments. 
The Subcommittee needs to understand the current levels of waste, 
fraud, and abuse and what can be done to prevent billions of dollars of 
improper payments each year.''
      

FOCUS OF THE HEARING:

      
    The hearing will focus on the administration of refundable tax 
credits, with an emphasis on the level of improper payments 
attributable to refundable credits, and steps the IRS is taking to 
reduce the level of waste, fraud, and abuse related to these credits.
      

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    Chairman BOUSTANY. This Subcommittee hearing will come to 
order. Good morning to everyone. I would like to welcome 
everyone to this morning's hearing on improper payments in the 
administration of refundable tax credits.
    In the course of less than a decade, improper payments 
arising from refundable tax credits have cost taxpayers an 
estimated $106 billion, according to government reports. To put 
this amount of money in perspective, it's more than the fiscal 
year budgets of the Departments of Homeland Security, Justice, 
Treasury, and Transportation, combined.
    Refundable tax credits not only reduce an individual's tax 
liability, they can also result in payments from government 
when credits exceed one's tax liability, meaning that millions 
of Americans have been able to eliminate any income tax 
liability, and even get a check back from the government via 
refundable credits. Not surprisingly, this makes them an 
attractive target for those willing to claim more than they are 
legally due, or otherwise to cheat the system.
    The problem is so widespread that the inspector general has 
even found IRS employees abusing refundable tax credits. Some 
improper payments can also result from honest errors that are 
an inevitable result of our complex and convoluted Tax Code. 
But whether caused by innocent mistakes or outright fraud, 
improper payments cost the taxpayer dearly.
    For instance, the earned income tax credit consistently 
ranks among one of the most vulnerable Federal programs, with 
improper payments totaling nearly $17 billion in 2010, 
according to GAO. This is roughly a quarter of the program's 
total outlays. And this is not a new problem with this credit, 
as IRS has issued as much as $83 billion in improper payments 
since 2003.
    Another example is the additional child tax credit for 
which improper payments have reportedly risen from under $100 
million in the year 2000 to well over $4 billion in 2010. And 
the list goes on.
    In the case of the first-time homebuyer credit, over half-
a-billion dollars reportedly has gone to individuals who did 
not qualify for the credit. The inspector general recently 
found thousands of tax filers who claimed the first-time 
homebuyer credit by listing a P.O. box as their qualifying 
home.
    Thousands of prisoners successfully claim the first-time 
home buyer credit, as did hundreds of children. Hundreds more 
successfully claimed undecided or to-be-determined as their 
address, and still received the credit.
    Despite these numbers and examples, not enough is being 
done to stem the tide of improper payments. Reports suggest 
that IRS has failed to develop an effective way to measure 
progress at reducing these improper payments. The Agency has 
also failed to implement years of inspector general 
recommendations that, if accepted, could save the taxpayers 
billions of dollars.
    Given these staggering numbers, this morning's hearing will 
explore the size and scope of these improper payments, and 
whether IRS is doing what is necessary to ensure the integrity 
of refundable tax credit programs. I am hopeful that the 
testimony provided by today's panel will also help the 
Committee identify additional actions that might be taken to 
protect taxpayer dollars.
    Before I yield to the Ranking Member, Mr. Lewis, I ask 
unanimous consent that all Members' written statements be 
included in the record.
    [No response.]
    Chairman BOUSTANY. Without objection, so ordered.
    I now--I like to recognize the Ranking Member for the 
purposes of an opening statement.
    Mr. LEWIS. Good morning. Good morning, Mr. Chairman. I want 
to thank you for holding this hearing today. The topic is both 
timely and important. But I must say that I am troubled. I am 
concerned by the current path of this Committee.
    I continue to ask, ``Who is next? What else is on your 
list?'' We started the year with seniors and proposals to end 
Medicare. The committee then moved to teachers and their 
pensions, and then to women, health, and uninsured. And today 
the target is middle-class working families.
    In 2009 the tax credit discussed today delivered almost 
$160 billion to more than 100 million Americans. They help 
students pay for college. They help family care for their 
children. They help families adopt children. They help million 
buy homes. They help make work pay. They help middle class 
family do just a little bit better.
    Today we are here about a program for working families 
created over 35 years ago, the earned income tax credit, a 
program that encourages and rewards work and give dignity to 
people who work hard each and every day, a program that lifts 
families and their children out of poverty and into the middle 
class--over 70 million families last year alone. A program 
expanded by both Democrats and Republican, alike, including 
President Reagan.
    The administration of tax benefits for middle-class and 
working families is no different than from corporations and the 
wealthy. Tax benefits are complex. We all agree that we must 
improve the administration of our taxes. However, we should not 
use flawed estimates based on old data to single out working 
families, middle-class Americans.
    Why are we here today, putting tax benefit for middle class 
families in a bad light?
    Now, I stand for fairness in tax administration, and I 
stand for million of working American families. These families 
need our help today. I support these tax credits. And I will 
fight to improve these program and give these families a fair 
shake.
    I want to thank each and every one of the witnesses for 
being here today. Thank you, Mr. Chairman, and I yield back.
    Chairman BOUSTANY. I thank the Ranking Member for his 
statement. I now want to welcome our panel of witnesses.
    First we have Mr. Steven Miller, who is deputy commissioner 
for services and enforcement at the IRS. Mr. Miller, welcome.
    We have Mr. Russell George, the Treasury inspector general 
for tax administration. Mr. George, we welcome you. And you are 
accompanied by Mr. McKenney, Mr. Mike McKenney, assistant 
inspector general for audit. Mr. McKenney, welcome.
    We also have Mr. Michael Brostek. He is the director for 
tax policy and administration at the government Accountability 
Office. Welcome, Mr. Brostek.
    And, of course, Ms. Nina Olson, who is the national 
taxpayer advocate at the IRS. Ms. Olson, welcome.
    We thank you all for being here today.
    You will each have 5 minutes to present your testimony, 
with your full written statements being submitted for the 
record.
    Mr. Miller, we will now begin with you. You may proceed 
with your opening statement.

 STATEMENT OF STEVEN MILLER, DEPUTY COMMISSIONER FOR SERVICES 
  AND ENFORCEMENT, INTERNAL REVENUE SERVICE, WASHINGTON, D.C.

    Mr. MILLER. Thank you, Mr. Chairman, Ranking Member Lewis, 
Members of the Subcommittee. My name is Steve Miller, Deputy 
Commissioner at the Internal Revenue Service. I appreciate the 
opportunity to testify on refundable tax credits.
    The IRS currently administers numerous refundable credits, 
including the earned income tax credit, first-time home buyer 
credit, additional child tax credit, adoption credit, making 
work pay, and the American Opportunity tax credit. As we 
administer these credits, we must balance two considerations: 
first, refundable credits are provided to achieve important 
Congressional purposes, such as relief from poverty or boosting 
the economy; second, a refundable credit allows the taxpayer to 
receive cash without regard to tax liability. As a result of 
these factors, the IRS must deliver the promised refunds in the 
intended timeframe, while ensuring that appropriate controls 
are in place to minimize errors and fraud.
    To be more specific, let me outline some of the challenges 
in this area. The first is complexity. Complexity in the rules 
governing eligibility, and in the operation of certain 
refundable credits creates challenges for both taxpayers and 
the IRS. Mistakes in the application of the law are a 
significant portion of claims made in error.
    Second is the lack of third-party data. In many cases, the 
IRS lacks real-time third-party data to verify eligibility. For 
example, under one version of the home buyer credit, an 
individual must have owned and lived in a house for five 
consecutive years during an eight-year period prior to the 
subsequent purchase of a home. There is no third-party data to 
verify that requirement.
    Third, the timing of data. Even if third-party data does 
exist, the IRS often must decide on the validity of a refund 
before receiving that data. Now, I want to note that we are 
continuing to focus on getting more information in earlier than 
the filing season to do matching. But it is a challenge.
    Fourth, hard-to-detect fraud. The IRS confronts on an 
ongoing basis schemes involving erroneous refund claims, 
including claims made by prisoners, non-citizens, as well as 
schemes involving deceased persons. The problem is particularly 
acute in the case of prisoner refunds, and we have developed 
systems that provide special scrutiny in this area and, in 
fact, have doubled the number of refunds being stopped this 
year.
    Finally, tax law changes. The IRS often faces extremely 
compressed timeframes for implementing a new law. Let me take a 
moment to outline some of our work on the earned income tax 
credit. Fraud and error in the EITC is a significant problem, 
and a top priority for us. Because the eligibility requirements 
are numerous and complex, our work begins with informing people 
of these requirements before they file.
    Our enforcement tools recover or protect billions annually. 
These tools include examinations, math error, and document 
matching. The IRS started more than 500,000 EITC exams in 2010, 
most of which were pre-refund. Last year, using math error 
authority, IRS also blocked approximately 350,000 improper 
refund claims. We do matching of data that is effective, as 
well, finding 900,000 mismatched returns last year. And we have 
asked for additional enforcement resources for next year in the 
2012 budget.
    While traditional compliance efforts are effective, we 
continue to explore other ways to combat non-compliance. The 
cornerstone of these efforts is our return preparer approach. 
More than 60 percent of EITC returns are from preparers. Our 
work begins with outreach, but includes thousands of contacts, 
including 10,000 notices and more than 1,000 due diligence 
visits. Most importantly, we now require registration of return 
preparers, and will shortly require testing and continuing 
professional education. More than 700,000 have registered with 
us.
    Finally, in 2011, return preparers who file an EITC return 
will have to attach the current form 8867, detailing the due 
diligence they performed in preparing the EITC claim. More 
changes in the due diligence requirements will be proposed 
later this summer.
    Let me conclude. Refundable tax credits play an important 
role in fulfilling congressional policies. But, as I have 
mentioned, they pose challenges. I believe we are improving our 
administration of these credits. But much work remains. And 
toward that end, as part of our 2012 budget, in addition to the 
enforcement resources that we have outlined above, we have also 
requested funds to create a refundable credits office that will 
centralize planning and oversight in this area.
    Mr. Chairman, this concludes my prepared remarks. I will be 
glad to answer any questions.
    [The statement of Mr. Miller follows:]




    Chairman BOUSTANY. Thank you, Mr. Miller.
    Mr. George, you may proceed.

STATEMENT OF J. RUSSELL GEORGE, TREASURY INSPECTOR GENERAL FOR 
     TAX ADMINISTRATION, U.S. DEPARTMENT OF THE TREASURY, 
WASHINGTON, D.C., ACCOMPANIED BY MICHAEL E. MCKENNEY, ASSISTANT 
                  INSPECTOR GENERAL FOR AUDIT

    Mr. GEORGE. Thank you, Mr. Chairman, Chairman Boustany, 
Ranking Member Lewis, Members of the Subcommittee. Thank you 
for the opportunity to testify on the Internal Revenue 
Service's administration of refundable tax credits.
    As noted, refundable credits were designed to help low-
income individuals reduce their tax burden, or to provide 
incentives for other activities. The earned income tax credit, 
created in 1975, is used to offset the impact of Social 
Security taxes on low-income families, and to encourage them to 
seek employment rather than public assistance.
    More recent refundable credits provide incentives for other 
activities such as, as you noted Mr. Chairman, buying a home, 
obtaining a college education--Ranking Member, you pointed that 
out--and adopting a child. The two largest refundable credits, 
the EITC and Additional Child Tax Credit, receive a much larger 
appropriation than the IRS' own budget. The appropriations for 
these credits in Fiscal Year 2010 were approximately $55 
billion for the EITC, and $23 billion for the Additional Child 
Tax Credit. In contrast, the IRS' total Fiscal Year 2012 budget 
request is just over $13 billion.
    Although each of these refundable credits provides benefits 
to individuals, the unintended consequence of these credits is 
that they are often the target of individuals who file 
erroneous claims for the credits. In a 2010 report to TIGTA, 
the IRS noted that refundable credits present an additional 
avenue for individuals to commit filing fraud.
    Nonrefundable tax credits are limited to the amount of an 
individual's income tax liability. As such, the maximum benefit 
an individual would receive if a nonrefundable credit is 
claimed inappropriately is to fully offset his or her tax 
liability resulting in owing nothing. Refundable credits do not 
have such limitations. In essence, individuals can obtain money 
they did not earn, and to which they are not entitled, simply 
by claiming a refundable tax credit. Refundable credits can 
result in tax refunds, even if no income tax is withheld or 
paid.
    The total amount of improper payments relating to 
refundable credits far exceeds the amount of fraudulent tax 
returns the IRS identifies and stops as part of its Taxpayer 
Assurance Program. The IRS continues to report that 23 to 28 
percent of EITC payments are issued improperly each year. In 
fiscal year--as pointed out earlier, in fiscal year 2009, this 
equated to $11 billion to $13 billion in improper EITC 
payments. Although the IRS has annually reported billions in 
EITC improper payments, little improvements have been made in 
reducing these payments.
    TIGTA has conducted a number of audits that have identified 
opportunities to reduce EITC improper payments. We have 
provided the IRS with specific actions that could have been 
taken to reduce improper payments, and allow the IRS to 
establish measurable reduction targets. While the IRS has 
implemented some of our recommendations, it has not taken 
action to address key recommendations aimed at preventing or 
reducing improper EITC payments.
    The IRS does not require individuals to provide any 
supporting documentation to verify eligibility for claiming the 
EITC, although it piloted such a plan a few years ago.
    In 2009 we reported a significant increase in the 
Additional Child Tax Credit claims by filers who were unable to 
obtain a Social Security Number or were not eligible to receive 
a Social Security Number. These individuals were not authorized 
to work in the United States and filed tax returns using an 
Individual Taxpayer Identification Number, referred to as an 
ITIN.
    The refundable credit claims made by these filers have 
grown substantially. For Tax Year 2000, a total of 62,000 ITIN 
filers received $62 million in Additional Child Tax Credits. 
This has since grown to 2.3 million ITIN filers, claiming the 
credit totaling $4.2 billion in 2010. As part of our Recovery 
Act oversight, we are in the process of completing a review 
assessing the effectiveness of the IRS's processes to identify 
erroneous American Opportunity Tax Credit claims.
    The Recovery Act amended the HOPE Scholarship Credit to 
allow a refundable tax credit. This program allows individuals 
to receive a credit for higher education expenses up to $2,500 
per year for Tax Years 2009 and 2010, with up to $1,000 being 
refundable. The IRS requires no documentation to be provided to 
verify eligibility, including whether an individual claimed as 
a student even attends a required accredited educational 
institution. Our review is identifying significant improper 
payments being made to taxpayers claiming the credit and using 
ineligible students.
    The Adoption Credit was changed to recognize the amount--to 
increase the amount, and made the credit refundable. 
Recognizing that this could increase the risk for erroneous 
claims, the IRS developed a strategy to attempt to reduce this 
risk. However, our analysis found that while the IRS requires 
individuals to provide documentation that verifies their 
eligibility, the IRS does not have the authority to deny the 
Adoption Credit if the documentation is not provided. Without 
this math error authority, the IRS cannot deny the credit 
during processing of tax returns, but must instead deny the 
credit post-processing, through the examination process, which 
is a much more costly, resource-intensive, and burdensome 
process.
    Mr. Chairman, Members of the Committee, we take our mandate 
seriously at TIGTA, and we want to help you conduct your 
oversight of this most important responsibility. Thank you.
    [The statement of Mr. George follows:]




    Chairman BOUSTANY. Thank you, Mr. George.
    Mr. Brostek, you may proceed.

    STATEMENT OF MICHAEL BROSTEK, DIRECTOR, TAX POLICY AND 
       ADMINISTRATION, STRATEGIC ISSUES, U.S. GOVERNMENT 
            ACCOUNTABILITY OFFICE, WASHINGTON, D.C.

    Mr. BROSTEK. Chairman Boustany, Ranking Member Lewis, and 
Members of the subcommittee, thank you for the opportunity to 
discuss IRS' pre-refund compliance checks.
    To provide an idea of the universe that these checks could 
affect, in 2010 IRS processed 137,000,000 individual income tax 
returns and issued about 107,000,000 refunds, totaling over 
$312 billion. Its compliance checks thus could affect millions 
of taxpayers and billions of dollars of refunds by identifying 
taxpayers who overclaim refunds and taxpayers who underclaim 
benefits to which they are entitled.
    My statement focuses on pre-refund checks and their 
benefits, how those checks can be enhanced immediately, and how 
they may be enhanced in the future.
    Pre-refund checks take several forms. When tax returns are 
received, the initial process helps correct taxpayer 
identification errors, and ensure that taxpayers have filled in 
all required fields. Then, return information is captured in 
IRS' systems.
    At this point, IRS applies additional computerized filters. 
Some filters identify errors that can be corrected using IRS' 
math error authority. Others identify errors that can be 
addressed through audits. Finally, still others identify 
possible fraud.
    When IRS identifies errors that can be corrected with 
virtual certainty, they are correctable under IRS' math error 
authority. Despite the name, math errors encompass much more 
than simple arithmetic errors. They also include, for instance, 
identifying incorrect Social Security or other taxpayer 
identification numbers, problems with taxpayers' filing status 
or claiming of dependents, and missing schedules and forms. 
Some of these errors are detected from information included on 
the tax return, and some are detected by comparing the return 
to IRS databases or to databases obtained from other parties, 
such as the Social Security Administration.
    IRS staff manually review the math errors and enter codes 
that automatically generate a notice to the taxpayer explaining 
the error, identifying the revision in the taxpayer's refund 
amount, or possibly a new balance due to IRS, and instructing a 
taxpayer on how to respond if she or he disagrees.
    When math error authority cannot be used, the return is 
placed in queue for possible pre or post-refund audit. 
Depending on available resources, IRS will audit a portion of 
these returns, generally through correspondence, before 
complete refunds are sent to taxpayers. To the extent returns 
are not handled in pre-refund audits, IRS will include them for 
possible post-refund audits.
    IRS' computer filters also identify some refund claims that 
may be fraudulent. These are forwarded to IRS' criminal 
investigation division. In some cases, the investigation may be 
of a taxpayer, and in others it may focus on paid preparers or 
others who may be engaging in fraud affecting many returns.
    IRS' pre-refund checks can be enhanced if Congress provides 
greater math authority, math error authority, to IRS. We have 
suggested that Congress consider extending a broad math error 
authority to IRS with appropriate protections for taxpayers. 
Broad authority would be especially valuable for addressing 
possible non-compliance with newly created refundable tax 
credits.
    In terms of protections, Congress can specify the level of 
certainty that IRS needs to have that it will be correct in 
identifying and correcting an error. It might also require IRS 
to report to Congress or to a committee of Congress before or 
after they use math error authority. Or, Congress could require 
consultation with the National Taxpayer Advocate before IRS 
actually uses a new authority.
    Congress could also enact specific new math error 
authorities that GAO has suggested, such as allowing IRS to use 
prior-year tax return information to ensure taxpayers do not 
claim benefits in excess of lifetime limits, and enabling IRS 
to correct various age-related errors.
    Looking forward, IRS has significant opportunities to move 
more compliance improvement efforts into the pre-refund 
environment. IRS receives a substantial amount of documentation 
that is used after the filing season. Over time, this 
documentation may be usable pre-refund. This would, however, 
require significant investments in computer systems and likely 
changes in requirements for those who provide information to 
IRS. It's a long-term endeavor.
    Further, IRS' paid preparer regulatory regime may improve 
the accuracy of returns prepared by this industry when they are 
filed, and give IRS the ability to take corrective measures 
during the filing season as it identifies emerging error 
trends.
    This concludes my oral statement. I would be happy to 
answer questions.
    [The statement of Mr. Brostek follows:]




    Chairman BOUSTANY. Thank you, Mr. Brostek.
    Ms. Olson, you may proceed.

    STATEMENT OF NINA E. OLSON, NATIONAL TAXPAYER ADVOCATE, 
           INTERNAL REVENUE SERVICE, WASHINGTON, D.C.

    Ms. OLSON. Chairman Boustany, Ranking Member Lewis, and 
distinguished Members of the Subcommittee, thank you for 
inviting me to testify today about improper payments of Federal 
funds.
    The Tax Code authorizes numerous refundable credits that 
may give rise to improper payments. These include the earned 
income tax credit, additional child tax credit, first-time home 
buyer tax credit, adoption credit, American Opportunity tax 
credit, and the fuel tax credit for businesses.
    It goes without saying that the job of the IRS in 
administering these provisions is to ensure that payments are 
made to eligible persons and only to eligible persons. But for 
context, it is important to keep in mind that the IRS has a lot 
on its plate.
    For tax year 2001, the tax gap was estimated at 345 billion 
a year. By comparison, improper payments related to the EITC 
constitute less than five percent of that amount.
    As money is fungible, overstatement of a refundable credit 
is economically equivalent to underpayment of tax for any other 
reason. They both have the same impact on the public treasury. 
The IRS must address both problems. And with limited resources, 
every additional EITC audit the IRS conducts cuts into the 
resources it has available to audit other areas of the tax gap. 
At present, the audit rate for returns with EITC claims is more 
than twice that for individual returns in general. Moreover, 
EITC audits constitute about a third of all individual audits, 
yet they yield, on average, only about a third as much tax per 
exam.
    For tax year 1999, an IRS study estimated that 27 to almost 
32 percent of EITC claims should not have been paid. For fiscal 
year 2009 the IRS estimate of EITC improper payments was 23 to 
28 percent. Assuming that these IRS estimates are comparable, 
the compliance rate would have appeared to have improved by 4 
percentage points. Taking a 27 percent non-compliance rate down 
by 4 points to 23 percent would have reduced the gap by almost 
15 percent. And this is huge for any tax administration 
program. It suggests that over the last 10 years both the IRS 
and interested stakeholders may be making progress in 
addressing EITC non-compliance.
    That said, I believe all of these estimates substantially 
over-estimate the percentage of ineligible taxpayers claiming 
the benefit. Among other things, the EITC requires taxpayers to 
prove that they have a qualifying relationship with a claimed 
child, and that they lived with the claimed child for more than 
half the year. In many cases, these requirements are 
notoriously difficult to prove, and an IRS denial of claim in 
these cases proves simply that the taxpayer could not prove 
these elements, not that he or she didn't actually meet them.
    Two taxpayer advocate service studies have found this to be 
the case. In one study, taxpayers had been confused by IRS 
audit procedures, notices, and documentation requirements. When 
TAS staff explained the requirements, reported eligibility 
increased. Notably, the percentage of taxpayers who received 
EITC increased in direct proportion to the number of telephone 
contacts that TAS had initiated.
    In other studies, taxpayers who were represented fared 
substantially better than taxpayers who were not. TAS has made 
numerous regulatory and legislative recommendations to improve 
the administration of refundable credits, particularly the 
EITC, and to reduce improper payments without unduly burdening 
taxpayer rights. Regulation of return preparers, including 
testing and continuing education on EITC and ethics, 
curtailment of refund anticipation loans, which has been 
statistically linked with non-compliance, enhanced preparer 
penalties, and strengthened due diligence requirements should 
all have a positive impact.
    If the IRS could receive and process third-party 
information returns before it issues refunds, and if Congress 
separated the worker portion of the EITC from the portion of 
EITC attributable to family size, and consolidated all family-
related benefits into one provision, we could further reduce 
improper payments, incentives for fraud, and taxpayers' 
compliance burden all in one stroke.
    Additional legislative action could also reduce improper 
payments, notably limiting public access to the database of 
decedents' Social Security numbers and other personal 
information, and authorizing the use of math error authority 
for revisions that cap either the lifetime amount of a credit 
or the number of years for which a credit may be claimed.
    I appreciate the opportunity to share my thoughts with you, 
and would be happy to answer your questions.
    [The statement of Ms. Olson follows:]




    Chairman BOUSTANY. Thank you, Ms. Olson. Now we will 
proceed with questions.
    Mr. Miller, we are trying to get a handle on the magnitude 
of the problem. And in your testimony you sort of glossed over 
the magnitude. But I think there is broad recognition across 
the board that there is a problem with overpayments. The 
Subcommittee welcomes the move to register the tax preparers. 
This, I think, is good. And we also recognize the difficulties 
you have had with some of the newer tax credits, the compressed 
timeframe from implementation and administration, coupled with 
the complexity.
    But could you talk to us a little bit about efforts being 
made after the fact, after the fact that there have been 
overpayments? Recognizing that preventing overpayments is 
easier to do than after the fact, what efforts are being made 
at IRS to collect on overpayments?
    Mr. MILLER. If you are talking about post-refund, after the 
money has gone out?
    Chairman BOUSTANY. Post-refund.
    Mr. MILLER. Obviously, it is much more difficult for us to 
chase down that money once it's outside, out the door. But we 
maintain a pretty robust system. So, since the mid-2000s we 
have increased our work in the under-reporter area to the point 
where, we do something in the realm of 900,000 matches and 
mismatches, and assess, with respect to those cases, about $1.4 
billion, collecting about 90 percent of that. This is 
relatively new and enhanced.
    We also have quite a bit of post-refund examination. We do 
hundreds of thousands of exams post-refund, as well. Both of 
those are specific to the earned income tax credit. For 
example, in the child credit, we don't do specific exams in 
that area. But within the EITC exams, 65 percent of those exams 
impact the child tax credit. So we look at that there, as well. 
The same is true for the American Opportunities tax credit, 
where some 300,000 exams involve that credit as a secondary 
issue. So we have major coverage in the area.
    But again, as has been made clear by this panel, it is much 
easier for us to stop the refund at the door, instead of trying 
to chase after it afterwards.
    Chairman BOUSTANY. There have been recommendations made by 
TIGTA, some of which you have followed, others which have not 
been implemented. Would you comment on the reasons behind not 
implementing some of the things that have been recommended?
    Mr. MILLER. So let me start, Mr. Chairman, by saying we 
have a very good relationship with the Inspector General and 
his office. And let me sort of put a baseline down, which is, 
by our count, something like 13 closed TIGTA reports, something 
just in excess of 40 recommendations. By our count, four of 
those we have disagreed on. So I don't want to give you the 
sense that we disagree very often, because we don't.
    Some of the ones that we have not completed yet include one 
where I think that TIGTA has requested or suggested that we 
require documentation on all EITC credits. And we are looking 
at that. But, quite frankly, that would require something in 
the realm of 26 million paper filings. This is going to cause a 
substantial delay, in terms of our compliance efforts, and it's 
going to cause a substantial delay in refunds in that area. So 
we have to go very carefully in terms of what sort of 
documentation we require.
    The other part of this is the suggestion that we look at 
alternative means of enforcement here, and that we have done. 
The return preparer is a harbinger for our efforts in that 
area. TIGTA has also suggested math error authority. That is 
statutory, and I will rely on the good wisdom of those on the 
other side there to speak to whether we should have math error 
authority. But it's certainly something we look forward to 
working with you on.
    Chairman BOUSTANY. We recognize that on the math error 
authority.
    Mr. George, your agency found instances where numerous IRS 
employees were themselves engaging in tax fraud through the 
refundable tax credits. In this case it was the First-Time 
Homebuyer Credit. Can you tell the Subcommittee a little bit 
about this investigation?
    Mr. GEORGE. Mr. Chairman, those are active criminal 
investigations, and so I have been advised by counsel not to 
address it in a public forum, but would be happy to do so in 
private with you and your staff.
    Chairman BOUSTANY. We appreciate that. And, Mr. Miller, can 
you describe any steps you or IRS has taken to safeguard 
against this type of activity in the future -----
    Mr. MILLER. So, Mr. Chairman, it is not a positive, by any 
means, to have IRS employees engaged in this sort of conduct. 
It is not welcomed by us. And, in fact, we fire a great number 
of people for this.
    That said, I will say that the Internal Revenue Service, 
with 100,000 people, is the size of a small city. And we, 
unfortunately, have people across the spectrum. The IRS's tax 
compliance work for their employees is considerable. We are the 
most compliant Federal agency in government, and far outstrip, 
obviously, the public. But we take these things very seriously. 
There are going to be instances, unfortunately, where our folks 
do the wrong thing. We do follow up, we do take quick action. 
There is statutory authority for us to take aggressive action 
in those cases and dismiss those people.
    Chairman BOUSTANY. I appreciate that. Thank you, Mr. 
Miller.
    And now, the chair now recognizes the Ranking Member for 
questions.
    Mr. LEWIS. Thank you. Thank you very much, Mr. Chairman. I 
want to thank each of you for being here today. For each 
panelist, please answer yes or no.
    Are all EITC overpayment due to fraud or abuse?
    Mr. GEORGE. I am happy to start. While I cannot give you a 
definitive answer----
    Mr. LEWIS. I just want yes or no. I have a limited amount 
of time.
    Mr. GEORGE. Yes and no, sir. Yes and no. I hate--I am not 
being coy here.
    Mr. LEWIS. That is okay. Mr. Miller?
    Mr. MILLER. I mean they are subject, yes.
    Mr. McKENNEY. Yes, some of them.
    Mr. BROSTEK. I think your question was are all claims due 
to fraud.
    Mr. LEWIS. Or abuse.
    Mr. BROSTEK. All due to fraud. And no, they are not all due 
to fraud.
    Mr. MILLER. Then my answer is no, because I misheard. I 
apologize.
    Mr. GEORGE. Yes. Same here, sir. Not all.
    Mr. MILLER. Certainly not all.
    Mr. LEWIS. Ms. Olson?
    Ms. OLSON. No.
    Mr. LEWIS. Mr. Miller, I understand that in 2009 over 
100,000,000 tax return claim refundable credits for tax 
benefits of more than 150 billion. Is this correct? Yes or no.
    Mr. MILLER. That is correct.
    Mr. LEWIS. Nine million claim education tax credit. Is that 
yes or no?
    Mr. MILLER. In 2009, that is our number, yes.
    Mr. LEWIS. Twenty million claimed child's tax credit. Yes 
or no?
    Mr. MILLER. Again, our numbers would say yes.
    Mr. LEWIS. And 101 million claimed a making work pay 
credit.
    Mr. MILLER. Yes.
    Mr. LEWIS. Mr. Miller, further, the EITC overpayment 
estimate are based on tax return from 5 to 10 years ago. Please 
answer yes or no. Has the IRS made improvement in its computer 
systems in the way it processes return over the last 5 to 10 
years?
    Mr. MILLER. We would say yes.
    Mr. LEWIS. Ms. Olson?
    Ms. OLSON. Yes, sir.
    Mr. LEWIS. It is good to see you again.
    Ms. OLSON. Thank you, sir.
    Mr. LEWIS. Does a refundable nature of a credit increase 
non-compliance more than any other tax benefit?
    Ms. OLSON. I am sorry. Ask that question again.
    Mr. LEWIS. Does the refundable nature of a credit increase 
non-compliance more than any other tax benefit?
    Ms. OLSON. In my opinion, refundability does not increase 
non-compliance, per se.
    Mr. LEWIS. Okay, Ms. Olson. Why refundable tax credit 
important for working American?
    Ms. OLSON. Well, first, it lifts--the earned income tax 
credit lifts millions of taxpayers out of poverty. It ensures 
that a taxpayer who is working at minimum wage full-time is not 
below poverty level, and also does not pay income taxes on 
poverty-level wages. It serves as an incentive for taxpayers to 
work, rather than not work. It reduces pressure on increasing 
the minimum wage. And it basically helps families, working 
families, be able to enter the work force. It has a very high 
impact in that threshold of people who are not working to 
entering the work force.
    Mr. LEWIS. Ms. Olson, the other witnesses have stated that 
the EITC overpayment rate is estimated to be 23 to 28 percent. 
Do you have concern with how this estimate was reached? If so, 
please describe.
    Ms. OLSON. Well, the estimate has a low and a high bound. 
And the high bound assumed that every taxpayer who did not 
respond to an IRS audit letter was non-compliant with the 
earned income credit, was not compliant. And the low bound 
assumed that the non-responders had the same compliance rate as 
the rest of the EITC population.
    We then did--my office of research did--significant studies 
in which we discovered, through representative samples of EITC 
taxpayers under audit, and in audit reconsideration, that, in 
fact, the lower bound estimate, where the non-responders had 
the same non-compliance rate as the responders, was, in fact, 
the accurate rate.
    And one study that we found, which was very telling, was 
that about 25 percent of the taxpayers who were under audit 
over a given period did not know that they were under audit 
when they received the IRS letter. They couldn't understand 
that the IRS letter was telling them that they were under 
audit, which has an impact on whether you are going to respond 
or not.
    Mr. LEWIS. For each panelist, could you please answer yes 
or no? In any year is the EITC estimate or improper payment 
based on that year's current tax return?
    Mr. GEORGE. The answer is no, right?
    Mr. McKENNEY. No.
    Mr. MILLER. The answer is no.
    Mr. GEORGE. No.
    Mr. BROSTEK. No.
    Ms. OLSON. No.
    Mr. LEWIS. Thank you very much. Thank you, Mr. Chairman. 
And I yield back.
    Chairman BOUSTANY. I thank the gentleman. The chair now 
recognizes Ms. Black for 5 minutes.
    Ms. BLACK. Thank you, Mr. Chairman, and thank you, 
panelists, for being here today.
    I want to go to the issue of requiring documentation. It 
seems to me that this is a huge issue in being able to get to 
just how much fraud is there or is not there. Because, 
obviously, if you don't have the information to make that 
determination, you can't really adequately make that 
determination.
    So, I know that, Mr. George, you did testify about the 
documentation and the lack thereof in so many of these cases. 
And some would say, well, this is more burdensome for the 
individual, and it is too burdensome. I would like for you, 
first, to speak to that. And then, I would also like any of the 
other panelists that would like to come behind.
    Mr. GEORGE. Thank you, Ms. Black. That is a very important 
issue. Suffice it to say--and again, I am going to give you the 
abridged answer--as the IRS increases its efforts and has the 
systems in place which will allow for taxpayers to file, to 
scan in documents, to submit other paper material, it will make 
it a lot easier for the taxpayer to comply with his or her tax 
obligation.
    There is no question that if the IRS received more 
information--I believe that was acknowledged a moment ago by 
Mr. Miller--third-party information, that they would have an 
easier time in assessing whether or not someone is actually 
eligible for the credit that they seek.
    There is no question now that, if taxpayers are given a 
chance to submit paperwork or not submit paperwork, they are 
going to do what is easier for them.
    And I would just lastly like to point out that there are 
many other government programs, such as the ones for people 
seeking food stamps, which require other forms of documentation 
which are readily provided by the taxpayer.
    Ms. OLSON. I think that documentation is possible in 
certain circumstances. But let me tell you the experience with 
the first-time home buyer credit which seemed fairly simple for 
the IRS to say, ``In order to claim it you have to attach a HUD 
closing statement.''
    After the IRS pronounced that and said, ``If you don't, we 
will reject returns,'' we found that 22 states do not require 
the use of the HUD closing statement. Therefore, we have to 
come up with 22 variations of the acceptable documentation, or 
we will be discriminating against taxpayers who just happen to 
live in those states that don't use the HUD closing statement.
    You can imagine what that would be like as you try to say, 
``How are you going to prove that a child lived with you for 
more than half the year,'' or that this child has a proper 
relationship. We give an example in our testimony of trying to 
prove a grand-uncle who claimed a grand-neice, and he has to 
get four birth certificates.
    So, I think in some instances requiring documentation 
works. In others, it will really harm taxpayers getting the 
benefit to which they are entitled.
    And if I may make one more point, last year we identified a 
website called falsereceipts.com, where taxpayers could go to 
generate a HUD closing statement that looked pretty good, and 
would go--so even though taxpayers were attaching that, we 
would not necessarily catch that that was a false piece of 
documentation.
    Ms. BLACK. Ms. Olson, I appreciate your testimony, and I 
appreciate your comments there. But I happen to really believe 
that if someone is going to get a benefit, that they do have a 
responsibility of--with documentation, to show that that 
benefit--and there are--there is paperwork that can be done in 
those situations where a child lives with you more than half of 
the year by court order of the--who the primary care giver is.
    I want to just go to another thing very quickly, and my 
time is very limited. But I wanted to deal with the issue of 
when someone is fraudulently found to have committed fraud. How 
vigorous is the penalties, applying those penalties to those 
individuals, so that we are showing by not only receiving the 
money back, but also holding them accountable with a penalty, 
that--are they put into the system that they have fraudulently 
filed a document, so we know that in the future, and we don't 
have repeats?
    I don't know whether Mr. George or Mr. McKenney can help 
out with that one.
    Mr. McKENNEY. They--the IRS does have a recertification 
program, and there is different levels, depending on the level 
of non-compliance. It can--it means they have to recertify 
before they come back into the program. It can also bar them 
for two years from claiming the EITC, and then have to 
recertify it when they come to the program, or it can bar them 
for 10 years, depending on the level of negligence or intent.
    And what we found, in many cases, when the taxpayer does 
come in and try to recertify, in about 80 percent of those 
cases they are still not eligible.
    So, yes, they do have a mechanism for that.
    Ms. BLACK. Thank you, Mr. Chairman.
    Chairman BOUSTANY. I thank the lady. The chair now 
recognizes Mr. Becerra for questioning.
    Mr. BECERRA. Thank you, Mr. Chairman, and thank you all for 
your testimony today, and for helping illuminate some of the 
issues that we all must confront as we try to make the Tax Code 
a document filled with laws that most people will voluntarily 
agree to comply with. And that is obviously what we are trying 
to get, is voluntary compliance. We don't have police roaming 
the streets, forcing you to show how much you earned. And we 
are hoping that people will do the right thing and pay their 
taxes.
    You all pointed out some very important areas that we can 
explore. But my sense is that we are exploring more than other 
areas this issue of refundability and credits. I think, Ms. 
Olson, you mentioned that we do--what was it--a third more 
audits, but we get a third--why don't you restate what you 
said?
    Ms. OLSON. EITC's taxpayers are audited twice as much as 
all individual taxpayers.
    Mr. BECERRA. And how much--do we reap--do we yield the 
benefit of having that many audits on those middle class----
    Ms. OLSON. No. The dollars of the EITC exams are, on 
average, over the last few years, about a third of what comes 
from other examination issues in an individual area.
    Mr. BECERRA. And I think one of the things that was pointed 
out by, I believe, most of you was that one of the issues with 
regards to the earned income tax credit compliance is that, 
often times, we find that many of the errors or mistakes that 
are made, or fraudulently claimed EITC reimbursements, are the 
result of paid preparers who have prepared these returns for, 
often times, middle and modest income families.
    Is it the case that, with these new changes that the IRS 
has made to require more integrity in the process for these 
paid preparers, could help us reduce the error rate, or the 
wrongly submitted EITC claims?
    Mr. MILLER. So that is certainly our hope, in rolling out 
the return preparer initiative. And we hope, in fact, that, as 
we require the form 8867, which right now, a preparer is 
supposed to fill out as they question the individual on their 
eligibility, they are supposed to put that in their drawer. We 
are now going to require that to be filed with the return. And 
we hope that has a salutatory effect, as well.
    Mr. BECERRA. I hope you move aggressively on the issue of 
getting people who get paid a good chunk of money to help file 
returns for folks who are getting a very modest return--
because, in my city of Los Angeles, and in particular, my 
congressional district, I have the vast majority of 
constituents who are working class, make a modest income, who 
don't own their homes, and who constantly tell me the stories 
of how they got ripped off by their preparer, and now they are 
being audited by the IRS because of some erroneous entry into 
the form. And ultimately, they correct it, but meanwhile they 
have got IRS breathing down their necks, and it is costing them 
probably more money than they paid these preparers, just to 
correct their tax filings. So, I think it's a big problem.
    Mr. Brostek?
    Mr. BROSTEK. If I could contribute on this, I definitely 
agree that the paid preparer regime has promise for addressing 
issues like this.
    About six years ago we did some undercover visits to major 
paid preparer organizations, and had tax returns prepared for 
us. In 5 of 10 cases, the paid preparers claimed a child for 
EITC when the child was not eligible. We were honest taxpayers, 
we made sure they understood that the information we were 
providing indicated the child wasn't eligible. Sometimes they 
ignored our responses, sometimes they changed the answer from 
what our responses were.
    So, I don't want to impugn that the whole industry has a 
problem here, but I do think that addressing the industry and 
improving its understanding and addressing some bad actors is a 
very important thing.
    Mr. BECERRA. Thank you for that point. Because I think what 
we are looking at here are some extremely important programs. 
Some of these programs have helped lift families out of 
poverty, working families. Because now they get to keep a 
little bit more money that they would have otherwise paid in 
taxes.
    And so, I think it's important that we not try to undermine 
programs that have helped a middle class family afford college 
for their child, working families who are better off working 
than going on welfare. And so it's very important that we try 
to get them right, no doubt.
    Now, Ms. Olson, you pointed out something else that I think 
is important. I think you said that the earned income tax 
credit overpayments constitute about 5 percent of the tax gap 
from all sources of individuals and corporations that either 
don't pay their taxes, or pay them incorrectly. It sounds to me 
like we need to do a lot more research into the 95 percent of 
other areas where folks aren't paying their taxes properly or 
making mistakes before we go after middle class families and 
target them. So thank you very much for your testimony.
    Chairman BOUSTANY. I thank the gentleman. I think you raise 
some important points, especially about after-the-fact and 
audits. And as we, in Congress, design these programs, we ought 
to be cognizant on how we design them with regard to the 
simplicity in administration. But we will eagerly await the 
results from the regulation of the tax preparers. I think this 
is an important step. But at the same time, we all have to 
ensure that the integrity of these programs is what it should 
be. So I thank the gentleman for raising those important 
points.
    The chair now recognizes Mr. Buchanan for questioning.
    Mr. BUCHANAN. Thank you, Mr. Chairman, for holding the 
important hearing today. I also like to thank all our 
panelists, witnesses, for being here today.
    Mr. Brostek, let me ask you. The GAO has long viewed the 
EITC as the largest single type of improper refund payment. And 
I guess it amounts to about $16 billion in 2010. How does that 
stack up about other programs where you've got challenges? Is 
that the largest area of abuse, or potential abuse? Your 
number, I think, is--or GAO's number is $16 billion in 2010 of 
improper payments.
    Mr. BROSTEK. Unfortunately, I can get back to you for the 
record on that. I don't know for sure if that is the largest 
improper payment.
    Mr. BUCHANAN. But what's your thought? I mean why is it 
such a huge amount? How did you come up with $16 billion? That 
is a huge amount of taxpayer money that is----
    Mr. BROSTEK. Right.
    Mr. BUCHANAN.--that is flowing out----
    Mr. BROSTEK. That $16 billion amount is our averaging of 
the upper and lower bound estimate that Ms. Olson referred to 
from estimates made by the Treasury Department, by IRS itself.
    In terms of what are the causes, there are many causes that 
are in play here, including the complexity of the credit, where 
people sometimes don't understand. There are certainly, as we 
have heard, cases of fraud that occur. And there are certainly 
cases where the documentation that is required in order to 
prove eligibility is difficult for taxpayers to round up.
    So, there are lots of different causes. And I think, as is 
common across the tax gap in general, it is going to take 
multiple solutions in order to try to address the level of non-
compliance.
    Mr. BUCHANAN. And is--what is your sense of how many people 
are, you know, deliberating trying to take advantage of a 
situation, in terms of fraud? How much of it is just mistakes, 
in general? I know this would be a guess, but I was just 
curious----
    Mr. BROSTEK. I would like to be able to answer that, but 
there is no solid evidence, one way or the other, on what those 
proportions might be, that I am aware of.
    Mr. GEORGE. Mr. Buchanan, if I may, though----
    Mr. BUCHANAN. Yes.
    Mr. GEORGE.--this is Russell George. If I may, I have an 
answer to your question----
    Mr. BUCHANAN. Yes, go ahead. I appreciate it.
    Mr. GEORGE. GAO has estimated that earned income tax credit 
is the fourth largest, in terms of improper payments, that 
medical fee--service is $34.3 billion each year, Medicaid $22.5 
billion each year, unemployment insurance $17.5 billion, Earned 
Income Tax Credit, again, around $16 billion to $17 billion, 
and the Medicare Advantage program $13.6 billion per year in 
improper payments.
    Mr. BROSTEK. Thank you for the assistance.
    Mr. BUCHANAN. And let me ask you, while you brought that 
up. What are we doing to try to minimize that effort? I know 
the IRS has, you know, a lot of things it is involved in every 
day. Someone said 73,000 pages, in terms of the Code. But what 
are we doing to try to move in that direction to minimize some 
of the abuse?
    Mr. GEORGE. Well, first of all, I think it is 
extraordinarily important, what the IRS is doing as it relates 
to preparers, paid preparers. They are at the frontline of the 
effort for the IRS to ensure that people can--are able to 
voluntarily comply with their tax obligations.
    There is a statistic, sir, that I point out at every 
opportunity that I can about third-party information reporting. 
And by the IRS' own information, the IRS estimates that 
individuals whose wages are subject to withholding report 99 
percent of their wages for tax purposes, that self-employed 
individuals who operate non-farm businesses are estimated to 
report only 68 percent of their income for tax purposes. But 
the striking number is that self-employed individuals operating 
on a cash basis report just 19 percent of their income.
    So, there is no question that the more third-party 
reporting of information, the more likely people are to comply 
with their tax obligation, and help address both the tax gap 
issue, let alone this issue of improper payment, seeking 
credits that they are--and the refunds they are not entitled 
to.
    Mr. BUCHANAN. Thank you. Mr. Miller, just quickly, you 
stated that you are doing all you can to try to reduce or 
minimize improper payments. But it's not clear in my mind--you 
get a bunch of recommendations, I guess, that were brought up. 
Are you really implementing a lot of these recommendations, as 
it relates to protect the $8.2 billion of taxpayer's money?
    Mr. MILLER. Well, we believe we are. We believe a hunk of 
that--if you are referring to Mr. George's reports talking 
about $8 billion on the table----
    Mr. BUCHANAN. Yes.
    Mr. MILLER.--We have agreed to some of those, some of those 
are in process. A large hunk of that is math error authority, 
which is up to you all, and not us. And also, looking at 
alternatives to traditional enforcement, which we have talked 
about here. Obviously, the stalking horse for that is the 
return preparer initiative.
    Mr. BUCHANAN. Thank you. I yield back, Mr. Chairman.
    Chairman BOUSTANY. I thank the gentleman. The chair now 
recognizes Mr. Kind for questioning.
    *Mr. Kind. Thank you, Mr. Chairman. I want to thank the 
witnesses for your testimony here today. And let me start--
maybe Mr. George, Mr. Brostek, you guys might be the ones to 
have the answer to this. We have been focusing on the amount of 
improper payments, the amount of money, the number of people 
applying. But do we have good data on people who are eligible 
to claim these credits who are not seeking them, not filing and 
receiving it?
    Mr. GEORGE. I am not aware of that information.
    Mr. KIND. Mr. Brostek?
    Mr. BROSTEK. We have a number of estimates, including 
estimates that GAO did a little over a decade ago, that the 
take-up rate, the number--percentage of people who are 
eligible, is very high for EITC. I believe it was around 90 
percent for people with children, and maybe 85 percent or so 
overall who are eligible.
    And that does contrast some with more traditional 
discretionary spending programs, where take-up rates tend to be 
lower, and administrative costs much higher.
    Mr. KIND. And of that who are eligible, how many of them 
are actually applying? Do you have any percentage bases?
    Mr. BROSTEK. Well, those were the figures I meant to 
convey, about----
    Mr. KIND. Oh, that was----
    Mr. BROSTEK. About 90 percent of those eligible with 
children apply, and about 85 percent overall of those eligible 
apply.
    Mr. KIND. Okay.
    Mr. BROSTEK. That is my recollection of those figures.
    Mr. KIND. And, Ms. Olson, in your opinion, is there a 
greater need or effort, as far as education or outreach for the 
families that are eligible who, for whatever reason, aren't 
applying right now?
    Ms. OLSON. Well, I think that there is--that outreach and 
education always help, and that that is a very important 
component of getting people to file appropriate claims.
    A really important fact of the earned income tax credit is 
that about a third of the population each year becomes 
ineligible, and a new third is eligible, because people's 
family circumstances change. Another child is born, another--
you know, somebody loses a job and has lower income, or gets a 
raise. And so that causes confusion with the earned income 
credit, and leads to some of the claims, too. You were eligible 
last year, not eligible this year. Why is that?
    Mr. KIND. And I think in your written testimony you 
indicated that a lot of the improper payments going out isn't 
necessarily a result of out and out fraud or ineligibility, but 
also some other factors that are at play here.
    Ms. OLSON. Right. I think it's very confusing for people. 
The dollar amount also of the increase in overclaims is 
attributable to changes in the law that Congress has made, you 
know, extending it to three children, as opposed to two, 
extending the phase-out rate, giving some married filing joint, 
married relief. And just the effect of inflation over the 10 
years, as you look at the dollar and how it's increased over 
the last 10 years.
    Mr. KIND. Right. Mr. George, you had indicated in your 
testimony that IG has made some specific recommendations to IRS 
to implement in order to deal with improper payments. I sense a 
source of frustration in your voice that they haven't been able 
to make greater progress on all of the recommendations. How 
many of the recommendations have they, however, moved forward 
on? Do you know?
    Mr. GEORGE. I believe I have that information for you, sir, 
if you will bear with me for one moment.
    In terms of an actual number, I can't give that to you. But 
in terms of just broad categories, seeking additional 
documentation, as we indicated before, making sure that 
information that is provided--that there is more sharing of 
information between various governmental agencies, such as 
Health and Human Services and the Department of Agriculture----
    Mr. KIND. I think it is safe to say, according to your 
testimony, the IRS has made some progress in some of their 
recommendations. They haven't just completed everything that--
--
    Mr. GEORGE. That is correct.
    Mr. KIND.--IG's office is recommending.
    Mr. GEORGE. That is correct.
    Mr. KIND. And have you gotten feedback from them why, or 
what is holding them up, as far as implementing the----
    Mr. GEORGE. They have cited a lack of resources as a major 
hindrance to addressing many of our concerns. But I would 
actually defer to the IRS to respond to that in detail, sir.
    Mr. KIND. Mr. Miller?
    Mr. MILLER. So, with respect to requiring documentation for 
all claims, resources is an obvious issue for us, and whether 
the cost benefit analysis--makes sense to do that or not. With 
respect to----
    Mr. KIND. Well, Mr. Miller, I think that is helpful, and 
helpful to the committee, because some of us were also raising 
concerns about the budget proposal that was before us earlier 
in the year. It was talking about another $600 million in cuts 
to the IRS, about a billion dollars in additional cuts in the 
next fiscal year.
    So, almost 8 percent of the IRS budget that was being 
proposed for cut-backs under the budget proposal that was voted 
on by the other side. And now we are having a hearing, in some 
part criticizing the IRS for not doing a better job of 
enforcement or compliance issues. I just don't think they can 
have it both ways, you know, demanding greater compliance and 
better enforcement, while at the same time drastically cutting 
your budget, which you need in order to accomplish what you are 
being asked to do.
    Now, I am not going to ask you to respond, because it is an 
opinion that I am expressing here. But it just seems logical, 
hearing the testimony that we had today, that we have to be a 
little bit more sensitive to the needs of the IRS resources as 
we move forward on these issues, Mr. Chairman. Thank you.
    Chairman BOUSTANY. I thank the gentleman. The chair now 
recognizes Mr. McDermott for questioning.
    Mr. McDERMOTT. Thank you, Mr. Chairman. I have taken the 
liberty of passing out the tax gap map of the year 2001, so 
everybody could look here. I always think that Willie Sutton 
kind of had it right, that the reason you rob banks was because 
that is where the money was. So, when I see us spending a 
hearing on these folks on EITC, I have to--I figure, well, are 
they the only ones in the process that aren't paying their 
taxes? And, lo and behold, we have got $290 billion worth of 
taxes not collected, and we are talking about $17 billion.
    Now, it isn't as though we want people to file 
fraudulently. There is nobody up here wants that. But I don't 
understand why we are focusing on $17 billion of earned income 
tax credits and child tax credits. Because I was sitting here, 
thinking about the fact that, as a Member of Congress, I live 
in two different places. I live here some and I live in 
Washington State some. And, on tax bases, I have to figure out 
every year how many days did I live in Washington, D.C. and how 
many days did I live in the State of Washington. I say to my 
secretary, ``Will you take my schedule and count the days?''
    Now, I have a secretary to do that. So I am thinking about 
these people who cannot prove how long their kids lived with 
them, and I, being a child psychiatrist, I also know that when 
there is a divorce, sometimes the children live with the mother 
and sometimes they live with the father. And if the father is 
getting the tax credit because he is working, and he is taking 
care of the kid, that is one thing.
    But if the kid is living with the mother and he has to pay 
child support payments, does--Ms. Olson, how is that figured 
out? Does he get credit for when the child is living with the 
mother, but he is paying tax?
    Ms. OLSON. No, but this is--no, he doesn't. And this is 
some of the complexity of the Code. The mother can release the 
dependency exemption, and the child tax credit will follow the 
dependency exemption. So the mother, the custodial parent, can 
release it to the non-custodial parent who is making the money.
    However, the earned income tax credit stays with the 
custodial parent, the person who has the child for more than 
half the year. And so, some of these errors are from confusion, 
because it makes--why would one provision go to the non-
custodial, but the other doesn't?
    I have seen court orders where family court judges are 
ordering the custodial parent, against the law, to give up the 
earned income credit to the non-custodial parent. And, you 
know, the Federal law says that the non-custodial parent can't 
get it. And yet the family court judge is confused about it. 
That is just one layer of complexity with the earned income 
credit, and goes to how difficult it is for people to provide 
documents in these circumstances.
    Mr. McDERMOTT. Well, as I look at this tax gap map here, I 
see that individual income tax under-reporting is $197 billion. 
Now, why are we doing twice as much scanning of these earned 
income tax credit folks than we are on others, where they are 
making almost 10 times--where we have got 10 times as much in 
play? Why would we be doing that? What is the purpose of that?
    Ms. OLSON. If you are asking me, I see no reason to do 
that. Earned income credit audits bring in less dollars than a 
audit on unreported business income or unreported individual 
income. That is what our numbers show.
    I think that it is just this sense that refundable credits 
are somehow worse to the public treasury than not--you know, 
overclaiming charitable contributions, or under-reporting your 
business income, or overstating your cost of goods sold. They 
all--the last few that I have just stated have a much greater 
impact on the public treasury in non-compliance than the earned 
income credit claims do.
    Mr. McDERMOTT. Mr. Miller?
    Mr. MILLER. No----
    Mr. McDERMOTT. Help me out here. Why do you spend twice as 
much money looking at these poor folks? They are all making 
less than a median income in the United States, less than 
$43,000. Why are you going after them, when you are not going 
after--you are going after them twice as often, as opposed to 
the business people.
    Mr. MILLER. So let me re-straighten the baseline here.
    Mr. McDERMOTT. Okay.
    Mr. MILLER. About 30 percent of our audits are EITC audits.
    Mr. McDERMOTT. Thirty percent of your audits.
    Mr. MILLER. Correct.
    Mr. McDERMOTT. Are on EITC?
    Mr. MILLER. That is correct.
    Mr. McDERMOTT. For 17 billion? Okay.
    Mr. MILLER. Correct. They are--the vast majority of them 
are campus examinations, which are a very efficient way to do 
an examination. We have purposely said, let's maintain a 
balanced program, so that we have resources--and I believe we 
have resources within our constraints--to reach other areas. 
And so, we maintain coverage across all sorts of taxpayers.
    The two-percent rate versus the 1 percent rate----
    Chairman BOUSTANY. Mr. Miller, if you would wrap up, the 
gentleman's time has expired.
    Mr. MILLER. Absolutely. The coverage rates we are talking 
about are all individuals versus EITC individuals. There are 
different coverage rates for different categories within the 
individual category.
    Chairman BOUSTANY. The gentleman's time has expired.
    I want to make the statement that, yes, we have a tax gap. 
And we--and this Committee has the obligation to examine all of 
the causes of the tax gap.
    I also want to make the point that we are talking about an 
estimated $106 billion over several years, based on GAO and 
TIGTA estimates. And this Committee has an obligation to 
investigate all of these problems with all these tax credits. 
And I think everybody has admitted that the refundable tax 
credits are problematic, from the standpoint of complexity.
    And so, yes, we are investigating this. We will investigate 
other areas of importance, as we look at the tax gap. But I 
think that point needs to be made. And this hearing is focused 
on not just the earned income tax credit, a very valuable 
program, but all of these refundable tax credits, and the 
problems that are inherent in the administration thereof.
    And, with that, the chair now recognizes Ms. Jenkins.
    Ms. JENKINS. Thank you, Mr. Chairman, and thank you for 
holding this hearing. Thank you all for your participation and 
being here today.
    Mr. George, last week TIGTA released a report showing that 
the IRS cannot determine whether taxpayers claiming residential 
energy credits were entitled to receive them. TIGTA was unable 
to verify homeownership for 30 percent of the sample returns. 
Home ownership, of course, being required to claim the credit.
    More troubling, TIGTA identified 362 ineligible recipients 
of the tax credit, totaling more than $400,000, including 262 
prisoners because, according to the report, the IRS did not 
have a process in place to identify prisoners or individuals 
too young to buy a home, despite the IRS having data that could 
be used to identify the erroneous credits.
    In the report I believe you stated that, ``I am troubled by 
the IRS' continued failure to develop appropriate verification 
methods for distributing Recovery Act credits.''
    Can you just reiterate for the Committee what actions the 
IRS can take to prevent this sort of fraud in the future?
    Mr. GEORGE. Yes, Ms. Jenkins. It is a question of seeking 
information, getting third-party information, as it relates to 
who is eligible and who is ineligible for this. As a preface to 
this report, you rightfully pointed out--and I think the 
chairman did, also--the First-Time Homebuyer's Credit, which 
was a complete example of where the IRS, if they had followed 
recommendations that we had identified early in the process, 
while they were first implementing that program, and that is 
requiring some sort of proof, whether it is the HUD-1 form, 
which ultimately Congress did require, or some other way of 
documenting that a person was eligible for the credit, that he 
or she would be able to receive it.
    And so, there seems to be a pattern here where the IRS--
again, I give them credit in terms of the inability to have 
resources to address every single one of these on an expedited 
basis--but again, with this modernized eFile system that should 
be up and running within the next 2 years, and they should no 
longer be able to rely on that as an excuse for not ensuring 
that people who are not eligible for these credits do not 
receive them.
    But there is--and again, to Mr. Miller's credit and to the 
IRS' credit, they do require math error authority. They need 
legislation from Congress which will allow them to prevent 
mistakes before they go out. Because the bottom line is if--
once it goes out the door, it is almost next to impossible--
with a few exceptions, like prisoners, because that is such a 
defined population, and in some instances, children--to 
identify those people and eventually attempt to recover the 
money.
    And again, I would have to defer to Mr. Miller, in terms of 
actually how much money they are able to recover, once it goes 
out the door.
    Ms. JENKINS. Okay. Thank you.
    Ms. OLSON. May I make a comment? I think your question 
really goes to a major issue about these credits, which is the 
design of them, that some of the programs, the IRS could get 
documentation. But we would still, even with math error, we 
would still have to have the staff to look at them. And then 
they start turning into a traditional welfare program, which 
has very high costs, because everybody is looking at every 
single application that comes in.
    So, some of these programs really shouldn't be run through 
the Internal Revenue Code at all, because we can't do a good 
job of them, if we do it efficiently. And if we do it with 
great scrutiny, such as the inspector general is suggesting, 
then we start running up our costs of personnel, and things 
like that.
    So, I just wanted to make that point about maybe some of 
these programs shouldn't come in.
    Ms. JENKINS. Okay. I appreciate that. Thank you. In 
addition, a 2009 Treasury Inspector General for Tax 
Administration report found $39 million in Federal tax refunds 
were issued to prison inmates. That was nearly tripling the 
$13.4 million found in 2004. At the time, the IRS said it could 
not immediately determine how much, if any, of the fraudulent 
returns in 2009 has been recovered, because the recapture 
process can take several years.
    Following that report, Mr. George, you stated that if the 
IRS does not take action, the problem will only worsen, and 
more taxpayer dollars will be lost. So, Mr. George, since 2009, 
just please remind us what substantial action has the IRS taken 
to address this epidemic of inmates defrauding taxpayers? What 
further action might be required? And I think you have already 
hit on it, but what does the IRS need, in additional authority, 
from Congress?
    Mr. GEORGE. The interesting part, Ms. Jenkins, is that in 
this very hearing room almost 7 years ago I testified on this 
very issue, of the fact that prisoners and a propensity--an 
actual number of them were coming from Florida. And Congress 
did give the IRS a limited Federal authority to execute 
agreements with State prison officials in order to help educate 
both the IRS, as well as State prison authorities, about this 
growing problem.
    And our most recent report unveiled that the IRS has failed 
to complete many of these agreements. I think they now changed 
their attitude toward this, given--in the wake of the Homebuyer 
Credit and a few of the other credits that you have cited. But 
the IRS failed once again in that instance to comply with the 
recommendation that we believe, had they done so, that problem 
may not have been eliminated, but it would have been stemmed 
greatly.
    Mr. MILLER. So, Mr. Chairman----
    Ms. JENKINS. Thanks.
    Mr. MILLER. I apologize for breaking in--and I will be glad 
to do this in a response for the record--but we have taken 
substantial steps, with respect to prisoners, substantial steps 
in the last 6 months, coming to agreements with seven States, 
with the Federal Bureau of Prisons, doubling the number of 
returns that we are stopping in our pre-refund. And I would be 
glad to----
    Chairman BOUSTANY. If you would, Mr. Miller, provide a more 
detailed reporting.
    Mr. MILLER. I will do that, sir.
    Chairman BOUSTANY. Of the steps taken, we would appreciate 
it. Thank you.
    The chair now recognizes Mr. Rangel for questioning.
    Mr. RANGEL. Thank you, Mr. Chairman. I am happy that this 
hearing--this is a very sensitive program, and we think when it 
is effective it really has pulled so many people out of poverty 
and given them the incentive to continue to work, rather than 
go on welfare.
    Mr. George, did you say that soon, and very soon, you 
expect that the new computer system is going to correct most of 
these errors?
    Mr. GEORGE. Not correct, but will enable the IRS to more 
efficiently process forms that would help provide documentation 
as to whether or not someone is eligible for a tax credit, or 
whatever they may be seeking.
    Mr. RANGEL. Is there any difference in the penalty if the 
taxes are made by a paid preparer, rather than the--the 
penalties are different?
    Mr. GEORGE. No, I am just saying that that is an issue 
because, ultimately, it is the taxpayer's responsibility to 
ensure that the tax forms submitted are accurate.
    Now, some companies have a program which they would say 
they will seek--they will represent you before the IRS if they 
prepare your tax return and there happens to be a mistake, or 
the IRS questions something. But ultimately, it is the taxpayer 
who is obligated----
    Ms. OLSON. Actually, if I may clarify that, there is--the 
taxpayer, if they are negligent in preparing their own return, 
or providing information to the IRS, has a negligence penalty. 
But that penalty can be waived if the taxpayer has reasonably 
relied on the return preparer.
    Mr. RANGEL. But the standard is higher with a professional 
preparer?
    Ms. OLSON. Actually, the taxpayer is--if the taxpayer goes 
to a preparer and it is a good preparer, then the IRS is very--
is actually lenient to the taxpayer. What we have pointed out--
--
    Mr. RANGEL. I don't mean to the taxpayer. Is there a 
penalty for the professional preparer----
    Ms. OLSON. Well, that is the question----
    Mr. RANGEL [continuing]. when you see fraud?
    Ms. OLSON. The--I think that we really need enhancement on 
the preparer side for some of the penalties----
    Mr. RANGEL. So all of you believe this Committee should 
look into the sanctions as relates to deliberate fraud by paid 
preparers?
    Mr. MILLER. We certainly would support that. And, in fact, 
in the 2012 budget proposal that has been set forth, there is a 
due diligence penalty. If a paid preparer does not exercise due 
diligence, a level of due diligence in the EITC area, there is 
a specific penalty.
    Mr. RANGEL. Okay.
    Mr. MILLER. We have actually asked for that to be 
multiplied----
    Mr. RANGEL. Okay, we will look into that.
    Mr. MILLER [continuing]. by five.
    Mr. RANGEL. As it relates to the policy decision as to 
where you have the audits, I think Mr. Crowley and others were 
asking if you get less money for investing more time, why would 
you have that policy?
    [No response.]
    Mr. RANGEL. I think, Ms. Olson, didn't you indicate that 
you thought that it was more attention being paid to these 
lower-income people than the corporate structure?
    Well, who would make a policy decision like that? I mean is 
that your--everybody's understanding, is that you do spend more 
time auditing in these type of things than you would where 
there are larger amounts of moneys that could be collected?
    Mr. MILLER. So if I could--and I am sure the Taxpayer 
Advocate can chip in, but if I could--again, the 2 percent 
coverage rate for the EITC versus the 1 percent for all 
individuals is----
    Mr. RANGEL. Why is that?
    Mr. MILLER [continuing]. very high-level. For those who are 
over $200,000, that individual rate goes up to something like 6 
percent. For those who are over a million, it goes up to 8 
percent. So we try to maintain a balance. For very large 
corporations, it is in excess of 25 percent.
    Mr. RANGEL. I know Ms. Olson said--and no one challenged 
it, unless you are doing that now--that, based on the amount of 
money that is collected, and the amount of time that is being 
put in for the audit, that, by far, there is less money to be 
collected from this group.
    First, I want to make it abundantly clear. This program is 
so good that I would just want it to be as pure as the driven 
snow. And so, I do want everything done possibly so that people 
who are against the program for policy reasons won't have an 
excuse that there is fraud, deliberate fraud that is going on. 
And the government should assist people not to make mistakes by 
educational programs.
    Did someone say that there is 75 or 80 percent 
participation with eligible people for this?
    Mr. MILLER. Yes, I did say that.
    Mr. RANGEL. Wow. I don't know whether other people on the 
committee find that high percentage, but we do a lot of 
educating on this subject.
    But you know what I am trying to say, Mr. Miller. Is this 
targeted for political reasons, this group of people?
    Mr. MILLER. No, sir, it is not.
    Mr. RANGEL. And you think this is the most efficient way to 
use the auditors' time, to concentrate on this group more than 
you concentrate on others?
    Mr. MILLER. So you ask how is this set up. Frankly, it is 
set up in discussions with my boss, Mr. Shulman. But it is also 
our top-level group, including especially me, quite frankly, 
that sets an annual work plan and determines where, generally, 
we are going to be spending our time.
    Mr. RANGEL. Well----
    Mr. MILLER. I believe that this is a balanced approach.
    Mr. RANGEL. Send something to me.
    Mr. MILLER. Surely.
    Mr. RANGEL. Because there has been other questions asked 
similar to the ones that I have asked. And, for whatever 
reason--I am not saying that they might not be a good reason to 
send a message out that if you find that there is more fraud in 
this particular tax benefit, that you may want to increase the 
penalty or increase the audits. But you are not saying that.
    And so, if you could send to me, like--the Google question 
is, ``Are there more--is there more oversight for EITC 
recipients than other taxpayers?''
    Mr. MILLER. Surely.
    Mr. RANGEL. And if I was to ask you that, what would you 
say right now?
    Mr. MILLER. It is really going to depend. I can't answer 
that, based at 10,000 feet. Is there more on the EITC than 
there are on wealthy Americans? No, I can say that. Than there 
are on large corporations? No. Small corporations? No.
    Mr. RANGEL. Anybody else.
    Chairman BOUSTANY. Mr. Miller----
    Mr. RANGEL. This----
    Chairman BOUSTANY. Yes, thank you.
    Mr. RANGEL. Okay.
    Chairman BOUSTANY. The gentleman's time has expired, but I 
appreciate the line of questioning. And I think Mr. Miller will 
respond to you----
    Mr. RANGEL. Please, Mr. Miller, just----
    Mr. MILLER. I will do that. Absolutely.
    Mr. RANGEL. Because I want to defend what you are doing. 
And the answers don't just fit into a category that you can 
easily respond.
    Mr. MILLER. Right.
    Mr. RANGEL. Thank you, Mr. Chairman.
    Chairman BOUSTANY. I thank the gentleman from New York. The 
other gentleman from New York now is allowed to ask questions.
    Mr. CROWLEY. Thank you, Mr. Chairman. Thank you, Doctor. I 
appreciate you for that.
    And first I will say, Mr. Chairman and Mr. Lewis, I have 
some great concerns about the subject of the hearing today. The 
U.S. has a $14 trillion deficit, $14 trillion deficit. And I 
would argue that more than half of that was run up by the 
borrowing and spend policies of the previous Administration, 
from 2001 to 2009. And yet, we are starting today, this 
hearing, at the bottom, the very bottom of the scale.
    An Administration that oversaw the enactment of tax cuts 
for the wealthiest in this country, the start of two wars--some 
would argue three, now that we're entered into what started 
with the first two--and the biggest bail-out in the history of 
the United States, TARP, for the wealthiest in this country. 
Yet we are still starting at the bottom today.
    But has my--but have my Republican colleagues in the 
Congress taken responsibility for the part that was started? 
Have they put forward a plan to remedy the situation to scale 
back spending? Well, kind of. They are not willing to admit 
that the policies of their party got us to this point in the 
first place, but they are willing to try to pay down the bills. 
Good news, right?
    Well, maybe not exactly. First, their budget proposal to 
eliminate Medicare as we know it, and in turn, drastically 
increasing seniors' cost for their health care, I think I was 
home sick during my high school days when we were taught about 
how seniors have been fleecing America. I could have sworn they 
were the ones who actually paid their dues and living out their 
retirement years now.
    Now, my colleagues on the other side are making tweaks in 
the Tax Code to find savings. That is good news, isn't it?
    Well, maybe not so much. Are Republicans returning tax 
rates on millionaires to what they were during the economically 
prosperous years of the nineties? No. Are they eliminating tax 
subsidies provided to the oil industry, an industry profiting 
from $4 a gas cost at the pumps, and the industry's record 
profits? No.
    Here is a list of what tax benefits they are cutting--
proposing to cut back on: the child tax credit, the adoption 
tax credit, the housing benefits for middle class credit. 
Republicans appear to believe the rich pay too much in taxes, 
and the middle class not enough. And that is the subject of 
this hearing today.
    That brings me to my first question. Mr. Miller, you are 
from the IRS. From preliminary returns from the 2010 tax year, 
41,000 tax returns claimed the refundable adoption tax credit. 
Is that correct?
    Mr. MILLER. I think our numbers are maybe updated to 70,000 
or so.
    Mr. CROWLEY. Seventy thousand? Who is eligible to claim 
this? Is it not for families who are adopting children? Or am I 
confused on what the adoption tax credit is for?
    Mr. MILLER. It is for adopting families.
    Mr. CROWLEY. Thank you. Mr. Miller, 7.9 million Americans 
claimed--have claims--claimed the refundable higher education 
tax credit. Is that correct, or has that number changed?
    Mr. MILLER. I think that number is correct, although I 
would have to check it again.
    Mr. CROWLEY. Isn't that for families, again, who are 
sending their children to--or child to college, to make it more 
affordable, and to give them an opportunity, a better way of 
life, and to help our country expand and to grow? Well, at 
least isn't it--don't answer that. The end of the--I have the 
end part. But isn't it to help make affordable more--college 
more affordable?
    Mr. MILLER. I believe it is.
    Mr. CROWLEY. These are tax benefits that my colleagues on 
this side want to repeal in the name of budgetary soundness. 
But, like the Republican Medicare voucher plan, the Republican 
plan to eliminate tax benefits, may save the government money, 
but it bankrupts these families, families like those that want 
to take such activities as adopting a child, sending a child to 
college, or trying to purchase a home.
    But what is even more ironic is, while the Republicans are 
ripping Medicare away from seniors and stealing tax benefits 
from the middle class, they uniformly oppose tax measures 
pushed by the Democrats to punish the wealthy Americans who 
hide their money in Swiss bank accounts.
    Yes. Hundreds of billions of dollars of money are hidden 
overseas. And my colleagues on the other side, including every 
member of this Committee but one--I believe Ms. Black--
opposed--she wasn't here--opposed legislation to track down and 
reclaim those hidden funds. They are protecting people who have 
money in Swiss bank accounts. How many of us have constituents 
with money in Swiss bank accounts? Anyone here? How many of us 
have constituents who use the child tax credit? Anyone here use 
that?
    They also oppose efforts to crack down on Federal 
contractors who owe back taxes.
    And in a press release from the Republican Committee 
majority, they have lambasted this administration for raising 
taxes on people in prisons. And I appreciate Ms. Jenkins 
bringing up the point----
    Chairman BOUSTANY. The gentleman's time has expired.
    Mr. CROWLEY. Thank you, Mr. Chairman.
    Chairman BOUSTANY. I appreciate the gentleman's statements 
of a broad political nature, but I want to point out that the 
purpose of this hearing was focused on the integrity of these 
programs. We all recognize the value of the programs. But we 
also have a responsibility to provide oversight as to the 
integrity of these programs. And we are----
    Mr. CROWLEY. Will the gentleman yield? One question, one--
--
    Chairman BOUSTANY. We are going to look at tax reform, as 
the gentleman well knows, and it is going to be a fundamental 
look at the entirety of the Tax Code. And this is but a small 
part of the oversight of these specific refundable tax credits, 
which all the witnesses have proposed that there are endemic 
problems with the administration of those programs.
    And so, that is the purpose of this hearing. I want to get 
us back on track----
    Mr. CROWLEY. Mr. Chairman, can I--for the purpose of a 
question?
    Chairman BOUSTANY. Yes.
    Mr. CROWLEY. Will this Committee consider a Committee 
hearing on the concept of a shared sacrifice in this country? 
Is that something that we could look forward to?
    Chairman BOUSTANY. This Committee is going to fulfill the 
functions that are outlined in the rules of the Committee, 
which is to look at the jurisdiction of the Full Committee, in 
concurrence with the other subcommittees. And since tax reform 
is a big part of what we are going to be doing over the course 
of this year, that will be the focus of the oversight function 
in this----
    Mr. CROWLEY. I will take it as a yes. Thank you, Mr. 
Chairman.
    Chairman BOUSTANY. It is basically what the rules of the 
subcommittee and the Committee are. And I will leave it at 
that.
    And now the chair will recognize Mr. Marchant, who has 
waited patiently.
    Mr. MARCHANT. Thank you, Mr. Chairman, and thank you to the 
panelists.
    Every time I stand before a group of taxpayers in my 
district, my constituents, the question comes up, 
``Congressman, what are you doing, and what is Congress doing, 
and what is the Federal Government doing, to cut waste, fraud, 
and abuse?'' I don't think there is a single congressman that 
does not get that question when they go home.
    So, I deeply appreciate the fact that you are at the 
hearing today, that the hearing has been called for this 
purpose, and I appreciate your comments, because I think this 
is the purpose of this--of Congress. This is oversight. And I 
have learned a great deal today. And to our constituents this 
Congress is going to do something with your help on this fraud 
and abuse, because I don't think anybody here would deny that 
there is fraud and abuse going on.
    For Mr. Miller, when a person accepts a refundable tax 
payment, and they receive the cash, and they have done so 
fraudulently, have they committed a crime?
    Mr. MILLER. I suppose some have. There is civil fraud, as 
well as criminal fraud. So not necessarily in all cases, 
depending on various things that I am less familiar with than I 
should be.
    Mr. MARCHANT. But it is undoubtable that when they do 
receive that refundable tax credit, if they don't deserve to 
receive it and they are audited, they have, in fact, created 
for themselves a tax liability, because they owe the money 
back.
    Mr. MILLER. Correct.
    Mr. MARCHANT. When the tax liability is created, does that 
tax liability take any kind of precedence over any other tax 
liability that the person--that any other taxpayer owes? Is the 
collection activity different from a collection activity from 
someone who owes $2,700 on last year's taxes and have not paid?
    Mr. MILLER. So if I could rephrase the question, if--I 
think I understand it--in our collection operations, is $2,700 
$2,700, regardless of whether it is----
    Mr. MARCHANT. Yes. Is this a priority----
    Mr. MILLER. It is not a priority. Whether it actually ends 
up being--moved up in line will depend on what else is there, 
and what our determination of the collectability of that amount 
is.
    Mr. MARCHANT. So, the collection activity will fall under 
the same criteria as all collection activity, and you are going 
to look at each individual taxpayer and say, ``Is this a''--you 
know, ``How likely are we going to be able to collect this 
money back?''
    Mr. MILLER. Correct.
    Mr. MARCHANT. And do you take the next step and say, this 
person, or this taxpayer, whether it be corporate, energy, 
earned income credit, any of the tax refundable programs we 
have talked about today, does that person then earn a--the same 
kind of treatment that any taxpayer would have if they owed a 
tax liability?
    Mr. MILLER. Yes. I will note the EITC, as was mentioned 
earlier, there is a re-certification rule that can occur. We 
have the ability to ban a person from EITC under--all these 
things are statutory--for either 2 or 10 years. There are 
things that we can do that are different, with respect to this 
tax liability, than others.
    Mr. MARCHANT. Well, to the taxpayers in my district that 
consider it a duty to pay their taxes and to pay what they owe, 
it is demoralizing to them to pick up the newspaper or see a 
report that is given that reports these kinds of obvious fraud. 
It is demoralizing for them to pick up the Wall Street Journal 
or any newspaper and read that people--that prisoners, or 
people from--that don't deserve the home buyer credit are 
getting it. I don't give any more weight to the earned income 
credit as I do the energy credits or the homebuyer credit. 
Fraud is fraud.
    I agree that the preparer--we should begin to look more 
closely at the preparer. Because in my area most--I believe 
most of the fraud is aided and abetted by the preparer. In 
fact, I pick up the newspaper and you can see in the classified 
ads or on late night cable--I am a night owl, so I--you can see 
the preparers are enticing people into the scheme, and showing 
them how to get the money, and they are charging them 
exorbitant amounts of money, and the benefit to the taxpayer 
ends up that they actually are accruing the tax liability that 
probably will brand them for years.
    So, thank you for what you are doing. Thank you, Mr. 
Chairman.
    Chairman BOUSTANY. I thank the gentleman. I want to thank 
all the witnesses for being here today, and providing 
testimony. This has been very helpful to us. Please be advised 
that Members may have written questions that they will submit 
to each of you, and those questions and answers will be made 
part of the record, the official hearing record.
    So, thank you again. I thank the Members for their 
participation. This hearing is now adjourned.
    [Whereupon, at 12:06 p.m., the Subcommittee was adjourned.]
    [Questions for the Record follow:]



    
                                 
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