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

       PROBLEMS AT THE INTERNAL REVENUE SERVICE: CLOSING THE TAX GAP AND
                           PREVENTING IDENTITY THEFT

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

                                    HEARING

                                   before the

                    SUBCOMMITTEE ON GOVERNMENT ORGANIZATION,
                      EFFICIENCY AND FINANCIAL MANAGEMENT

                                     of the

                             COMMITTEE ON OVERSIGHT
                             AND GOVERNMENT REFORM

                            HOUSE OF REPRESENTATIVES

                          ONE HUNDRED TWELFTH CONGRESS

                                 SECOND SESSION

                                   __________

                                 APRIL 19, 2012

                                   __________

                               Serial No. 112-142

                                   __________

    Printed for the use of the Committee on Oversight and Government Reform

             Available via the World Wide Web: http://www.fdsys.gov
                          http://www.house.gov/reform

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                  COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

                     DARRELL E. ISSA, California, Chairman
    DAN BURTON, Indiana                  ELIJAH E. CUMMINGS, Maryland,
    JOHN L. MICA, Florida                    Ranking Minority Member
    TODD RUSSELL PLATTS, Pennsylvania    EDOLPHUS TOWNS, New York
    MICHAEL R. TURNER, Ohio              CAROLYN B. MALONEY, New York
    PATRICK T. McHENRY, North Carolina   ELEANOR HOLMES NORTON, District of
    JIM JORDAN, Ohio                         Columbia
    JASON CHAFFETZ, Utah                 DENNIS J. KUCINICH, Ohio
    CONNIE MACK, Florida                 JOHN F. TIERNEY, Massachusetts
    TIM WALBERG, Michigan                WM. LACY CLAY, Missouri
    JAMES LANKFORD, Oklahoma             STEPHEN F. LYNCH, Massachusetts
    JUSTIN AMASH, Michigan               JIM COOPER, Tennessee
    ANN MARIE BUERKLE, New York          GERALD E. CONNOLLY, Virginia
    PAUL A. GOSAR, Arizona               MIKE QUIGLEY, Illinois
    RAUL R. LABRADOR, Idaho              DANNY K. DAVIS, Illinois
    PATRICK MEEHAN, Pennsylvania         BRUCE L. BRALEY, Iowa
    SCOTT DesJARLAIS, Tennessee          PETER WELCH, Vermont
    JOE WALSH, Illinois                  JOHN A. YARMUTH, Kentucky
    TREY GOWDY, South Carolina           CHRISTOPHER S. MURPHY, Connecticut
    DENNIS A. ROSS, Florida              JACKIE SPEIER, California
    FRANK C. GUINTA, New Hampshire
    BLAKE FARENTHOLD, Texas
    MIKE KELLY, Pennsylvania

                       Lawrence J. Brady, Staff Director
                    John D. Cuaderes, Deputy Staff Director
                         Robert Borden, General Counsel
                           Linda A. Good, Chief Clerk
                     David Rapallo, Minority Staff Director

       Subcommittee on Government Organization, Efficiency and Financial
                                   Management

                  TODD RUSSELL PLATTS, Pennsylvania, Chairman
    CONNIE MACK, Florida, Vice Chairman  EDOLPHUS TOWNS, New York, Ranking
    JAMES LANKFORD, Oklahoma                 Minority Member
    JUSTIN AMASH, Michigan               JIM COOPER, Tennessee
    PAUL A. GOSAR, Arizona               GERALD E. CONNOLLY, Virginia
    FRANK C. GUINTA, New Hampshire       ELEANOR HOLMES NORTON, District of
    BLAKE FARENTHOLD, Texas                  Columbia

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on April 19, 2012...................................     1

                                   WITNESSES

    Mr. Steven T. Miller, Deputy Commissioner for Services and
      Enforcement, Internal Revenue Service
            Oral Statement...........................................     4
            Written Statement........................................     7
    Ms. Nina E. Olson, National Taxpayer Advocate, Internal Revenue
      Service
            Oral Statement...........................................    18
            Written statement........................................    20
    The Honorable J. Russell George, Treasury Inspector General for
      Tax Administration
            Oral Statement...........................................    42
            Written Statement........................................    44
    Mr. James R. White, Director, Stategic Issues, U.S. Government
      Accountability Office
            Oral Statement...........................................    69
            Written Statement........................................    71

                                    APPENDIX

    The Honorable Edolphus Towns, Ranking Member, A Member of
      Congress from the State of New York: Opening Statement.........   110
    Appendix I: 2006 Tax Gap estimate data and methodology...........   112
     The Honorable Gerald E. Connolly, A Member of Congress from the
      State of Virginia: Written Statement...........................   113

       PROBLEMS AT THE INTERNAL REVENUE SERVICE: CLOSING THE TAX GAP AND
                           PREVENTING IDENTITY THEFT

                                  ----------

                           THURSDAY, APRIL 19, 2012,

                      House of Representatives,
    Subcommittee on Government Organization, Efficiency
                              and Financial Management,
                  Committee on Oversight and Government Reform,
                                                       Washington, D.C.
        The subcommittee met, pursuant to notice, at 10:007 a.m. in
    room 2154, Rayburn House Office Building, the Honorable Todd
    Russell Platts [chairman of the subcommittee], presiding.
        Present: Representatives Platts, Towns and Connolly.
        Staff Present: Michael R. Bebeau, Majority Assistant Clerk;
    Adam P. Fromm, Majority Director of Member Services and
    Committee Operations; Mark D. Marin, Majority Director of
    Oversight; Tegan Millspaw, Majority Research Analyst; Staff
    Member; Jaron Bourke, Minority Director of Administration;
    Beverly Britton Fraser, Minority Counsel; Devon Hill, Minority
    Staff Assistant; Jennifer Hoffman, Minority Press Secretary.
        Mr. Platts. Today's hearing of the Subcommittee on
    Government Organization, Efficiency and Financial Management
    will come to order.
        I certainly thank everyone for being here today, both
    witnesses and guests, and my Ranking Member, Mr. Towns from New
    York.
        Our hearing today focuses on two key issues at the Internal
    Revenue Service. First, our hearing will address the tax gap
    between what people owe in Federal taxes and what the IRS
    ultimately collects. Second, the hearing will review the
    increasing problem of identity theft related to tax fraud.
        Federal taxes make up about 96 percent of the Government's
    total revenues each year. Because of this, it is very important
    that the IRS is able to effectively collect taxes and enforce
    Federal policy. The majority of Americans pay their taxes
    voluntarily and on time. But every year, there is a gap between
    the amount of Federal taxes owed and the amount the IRS
    collects.
        Earlier this year, the IRS released its most recent
    analysis on the tax gap using data from the 2006 tax year. That
    data shows a $450 billion gap between taxes owed and taxes
    voluntarily paid. IRS recovered approximately $65 billion of
    this amount, making the net tax gap $385 billion.
        According to the National Taxpayer Advocate, the average
    household must pay approximately $3,400 or more for the
    Government to raise the same revenue it would have collected if
    everyone paid their taxes in full.
        There are many causes of the tax gap, including intentional
    under-reporting, failing to file taxes or math errors on those
    taxes that are filed. Because of this, we need a multi-faceted
    approach to achieve an effective and appropriate response, and
    to close the tax gap. Using third party information to verify
    tax returns could increase voluntary compliance. The Treasury
    Department has recommended increasing penalties for people who
    purposely do not comply with Federal tax law, especially
    egregiously, and maybe more so, repeatedly failing to comply.
        Simplifying the Federal tax code could also help by making
    it easier to file taxes and reducing the opportunity to commit
    willful tax evasion. We will hear more from our witness today
    about solutions on how to close the tax gap and better serve
    all of our taxpayers.
        This hearing will also address identity theft-related tax
    fraud. Identity theft affects thousands, as we are learning
    more and more, hundreds of thousands of taxpayers each year,
    and has a significant impact on its victims. Identity thieves
    often steal personal information from taxpayers, including
    names, social security numbers and addresses. With this
    information, the thieves can file fraudulent tax returns with
    the IRS and receive the refunds that are owed to the legitimate
    taxpayer. Victims may not even know they have had their
    identity and tax returns stolen until they go to file their own
    returns and the IRS notifies them that somebody has already
    fraudulently filed on their behalf.
        It can often take months for IRS to resolve these cases and
    issue refunds to the legitimate taxpayer, the victim of the
    crime. Identity theft-related tax fraud is a serious and
    rapidly growing problem that has been the focus of two prior
    hearings of this Subcommittee. While significant work is being
    done to address this problem, and I certainly commend the IRS
    for their efforts, we must do more to protect taxpayers from
    criminals who steal their identities and their refunds and do
    harm to not just that individual victim, but also to America
    and the hard-earned tax dollars of lawful citizens.
        Just this week, authorities reported that a man working for
    a health care non-profit stole the identities of more than 50
    brain injured patients to steal funds from the American people
    through fraudulent returns. The American people deserve a
    government that protects the taxes they pay and fairly and
    equitably enforces the law. We need solutions to ensure that
    honest taxpayers are not unduly burdened because others do not
    pay their share. We must also work to reduce identity theft and
    prevent it before payments are issued to criminals.
        Today we are joined by four experts regarding these issues,
    who have extensive knowledge about the problems that exist
    within the Federal tax systems. I look froward to the testimony
    of our witnesses and to continuing to work with each of them
    and all our partners, including here within the Subcommittee,
    to better prevent tax fraud and fairly administer the tax code.
        With that, I yield to the previous chairman of the full
    Committee and the Ranking Member of the Subcommittee, and
    previous chairman of the Subcommittee, my good friend and
    colleague from New York, Mr. Towns, for the purpose of an
    opening statement.
        Mr. Towns. Thank you very much, Mr. Chairman. Let me thank
    the witnesses as well. I think this is a very timely hearing.
        This is the third hearing in a series held by this
    Committee to examine how the IRS handles the growing problem of
    identity theft and tax fraud. As of March 3rd, 2012, the IRS
    had already identified over 440,000 tax returns with $2.7
    billion claims in fraudulent refunds. Fortunately, IRS
    screening prevented 97 percent of those fraudulent claims from
    being paid.
        Today the IRS is doing a better job of protecting the
    taxpayer and the Treasury from criminals than ever before, and
    we salute you for that. But more is required of us to stay
    ahead of the criminals and to help the victims. One of the
    first priorities we must address is the quality of assistance
    given to taxpayers victimized by employment or tax refund
    fraud. The Inspector General does not paint a pretty picture of
    how the IRS will be able to handle this problem going forward.
        It seems as if taxpayers will have fewer walk-in help
    centers, with shorter business hours, and longer hold time on
    the phone with IRS agents. Budget cuts are the primary reason,
    but I hope we can find alternate solutions to these issues.
        Today we will also focus on the $450 billion tax gap. This
    tax gap equals nearly 20 percent of our forecasted deficit for
    this fiscal year. We simply cannot afford to look the other way
    and just not do anything.
        Part of the tax gap is a result of tax cheats who simply
    refuse to comply with the law, which increases burden on the
    rest of us. But a portion is due to taxpayers' confusion and
    unintentional errors as well. I am sure that we can all agree
    that the tax code is extremely complex. This complexity makes
    it hard for taxpayers who honestly want to pay their taxes to
    figure out what they actually owe. And as a result, they can
    accidentally overpay or underpay.
        We must do more to understand the sources of the tax gap
    and compliance burdens, so we can make progress in uncovering
    new, creative solutions. We cannot close the tax gap by
    enforcement against the average American who is doing their
    best to comply with the tax laws. We all have to share the
    burden and do more. And let us work to reform our tax code in a
    way that will help us collect more of the taxes that are owed
    but not paid. And let us continue our work to make the tax code
    more fair and simple. In order to do that, we must work
    together.
        I thank our witnesses today, Inspector General Miller, Mr.
    White, Ms. Olson, for your appearance here today, Mr. George, I
    thank all of you for being here. I look forward to the
    testimony with great anticipation. We need to make certain that
    people are protected, and that is our obligation and
    responsibility to do it. I think that working together, we can
    do a lot better than what we are doing. This is not a Committee
    here to blame you and you blame us, this is a Committee to come
    up with some solutions.
        Thank you so much, Mr. Chairman.
        Mr. Platts. I thank the gentleman and would echo your final
    comment there as well, that we are about working with you and
    all to solve problems, not to pay gotcha. And all the more, we
    appreciate our witnesses being here with us today.
        We will keep the record open for seven days for any
    additional statements or extraneous materials to be submitted
    for the record.
        We are now glad to move to our witnesses and we are honored
    to have four very dedicated public servants who day in and day
    out seek to serve the American people with great distinction
    and honor, and who bring great expertise to the benefit of the
    Subcommittee today. So we thank each of you for being here.
        We are honored to have Mr. Steven Miller, Deputy
    Commissioner of Service and Enforcement at the Internal Revenue
    Service, Ms. Nina Olson, National Taxpayer Advocate, the
    Honorable J. Russell George, Treasury Inspector General for Tax
    Administration, and Mr. James White, Director of Strategic
    Issues at the United States Government Accountability Office.
        Again, we thank each of you for being here. We have had a
    chance to review your written testimony and appreciate your
    submitting that ahead of time. That allows me to go through,
    and I am famous for my blue marker and making notes in things I
    want to try to get to in the time we will have. But we do
    appreciate having that in advance and welcome your testimony
    today. If we can try to stay to about the five-minute window,
    and hopefully that will allow us again to go through all of
    your opening statements before running to the Floor for votes
    and then coming back for questions.
        Commissioner Miller, if you would like to begin. I
    apologize, if I could ask all four of you to stand. Pursuant to
    our Committee rules, I need to swear you in. If you could stand
    and raise your right hand.
        Do you solemnly swear or affirm that the testimony you are
    about to give this Committee will be the truth, the whole truth
    and nothing but the truth?
        [Witnesses respond in the affirmative.]
        Mr. Platts. Thank you, you may be seated. Let the record
    reflect that all four witnesses affirmed the oath.
        We will now begin with Commissioner Miller. You are
    recognized.

                        STATEMENTS OF WITNESSES

                     STATEMENT OF STEVEN T. MILLER

        Mr. Miller. Chairman Platts, Ranking Member Towns, my name
    is Steve Miller, as you have mentioned, Deputy Commissioner of
    the Internal Revenue Service. I appreciate the opportunity to
    testify on the tax gap today and also to update the
    Subcommittee on our identity theft work this filing season.
        The tax gap is the difference between the amount of tax
    owed by taxpayers for a given year and the amount that is paid
    voluntarily and on time. The amount includes the complete
    spectrum of behavior from confusion to fraud. The tax gap
    analysis itself is best seen as a directional tool to provide
    insights into areas where non-compliance exists and the means
    by which we can impact compliance.
        As better explained in my written testimony, our work shows
    that compliance is most prevalent where there is withholding
    and/or third party reporting.
        The IRS recently received an updated tax gap study covering
    the tax year 2006, which shows that the Nation's compliance
    rate for that year is a little over 83 percent. This is
    essentially unchanged from the last review covering tax year
    2001. The report also showed that the net tax gap in dollars
    for 2006 was $385 billion.
        The tax gap is comprised of three components: under-
    reporting, non-filing and under-payment, of which under-
    reporting is by far the largest. As indicated, the largest
    parts of the under-reporting category are where there is little
    withholding or third party reporting.
        In our view, any discussion on how to reduce the tax gap
    must consider three guiding principles. First, both
    unintentional taxpayer error and intentional taxpayer evasion
    must be addressed. Thus, both enforcement and service are
    necessary.
        Second, different sources of non-compliance require
    different approaches. And third, any major attempt to address
    the tax gap by legislation, regulation or through increased
    enforcement must be considered within a context that fully
    recognizes taxpayer burden and taxpayer rights.
        In keeping with these principles, our strategy involves not
    only increasing enforcement activities but also educating
    taxpayers about their tax obligations, improving customer
    service in order to make it easier for individuals and
    businesses to get the help they need to meet their filing
    requirements, reducing opportunities for tax evasion, expanding
    compliance research and improving information technology.
        With respect to enforcement, the IRS is making significant
    headway in increasing tax compliance. Over the last decade, tax
    collections have gone up significantly and audit rates have
    risen. But some of these gains are deteriorating as our budget
    atrophies. Thus, we would ask for your support for our 2013
    budget. We believe the best way to impact the tax gap is
    through a combination of responsible discussions on legislative
    change and responsible investments in the IRS.
        Turning now to identity theft. In November I testified
    before the Subcommittee and described our ongoing work. In my
    written testimony today I provided an update on IRS actions.
    What you will see is that we have implemented the many
    initiatives we outlined in November.
        As before, our approach is two-pronged. First, we need to
    stop false refunds before they get out. Second, we need to help
    those who have been victimized. We are in fact stopping much
    more refund fraud generally and identity theft specifically. We
    have put various new identity theft screening filters in place
    to improve our ability to spot false returns before they are
    processed and before a refund is issued. The numbers are in my
    testimony and I am obviously more than willing to discuss any
    questions that you have in a particular area.
        On our work with victims, we have trained 35,000 of our
    employees to recognize and be sensitive to identity theft. We
    have also expanded a program for identity protection personal
    identification numbers, or IP PINS. For the 2012 filing season,
    we issued IP PINS to over 250,000 i.d. theft victims, which
    will allow unfettered filing for 2012 for those individuals. We
    continue to increase staffing to assist identity theft victims
    and we are revising and streamlining our process to determine
    who the real taxpayer is when duplicate filings occur.
        Again, I will say that we are not done, but we have made
    real progress in the area.
        Mr. Chairman, this concludes my oral testimony. I would be
    more than happy to answer any questions.
        [Prepared statement of Mr. Miller follows:]

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        Mr. Platts. Thank you, Commissioner Miller.
        Ms. Olson?

                        STATEMENT OF NINA OLSON

        Ms. Olson. Chairman Platts, Ranking Member Towns and
    members of the Subcommittee, thank you for inviting me to
    testify today about the subjects of the tax gap and tax-related
    identity theft. Both of these issues present challenges to tax
    administration.
        Regarding the tax gap, the IRS recently released an updated
    net tax gap estimate of $385 billion in 2006. And the size of
    this estimate has understandably attracted considerable
    attention.
        There are many causes of non-compliance, including
    difficulty understanding and complying with the law, inability
    to pay due to financial hardships, and deliberate
    understatements of tax. I believe the complexity of the tax
    code is responsible for a considerable portion of non-
    compliance, and I have repeatedly recommended in my reports to
    Congress that you all simplify the code.
        While you are working on that, and I am ever the optimist
    in that regard, that there are other steps that can be taken.
    First, the IRS should be given the resources to substantially
    improve its taxpayer services. The percentage of calls the IRS
    answers, known as the level of service, has been declining in
    recent years. For the year to date, about one out of every
    three calls seeking to reach an IRS representative hasn't
    gotten through. When taxpayers have managed to get through,
    taxpayers have waited an average of about 14 minutes on hold.
        The IRS is also behind in timely processing taxpayer
    correspondence, with the percentage of letters classified as
    over age at nearly half of all correspondence by the end of
    fiscal year 2011. There is no doubt in my mind but that some
    taxpayers give up in frustration or in anger when the find
    nobody is home and simply don't file or pay. This state of
    affairs may cause the tax gap to increase by converting
    formerly compliant taxpayers into non-compliant ones, simply
    because the IRS doesn't timely pick up the phone or look at its
    mail.
        Second, while the IRS will never be the Government's most
    popular agency, I believe its funding levels should be
    substantially increased. Overall, the IRS is an extraordinary
    investment. On a budget of $12.1 billion, it collected $2.4
    trillion in tax revenue last year, bringing in about $200 for
    every dollar invested. Yet the Congressional budget rules
    generally require that the IRS be funded like all other
    spending programs, with no direct credit given for the funds
    the IRS brings in. That makes little sense.
        In my view, simplifying the tax code, improving taxpayer
    service and giving the IRS sufficient funds to expand its
    enforcement programs in the proper way would go a long way
    toward maximizing the tax compliance.
        Regarding tax-related identity theft, the IRS has made
    significant progress in this area in recent years, including
    adopting many of my office's recommendations. Notwithstanding
    these efforts, it is clear that combating identity theft
    continues to pose significant challenges for the IRS.
        Three points deserve particular emphasis. First, the IRS
    should continue to work with the Social Security Administration
    to restrict public access to the Death Master File. Second, I
    am aware that some State and local law enforcement agencies
    would like access to taxpayer return information to help combat
    identity theft. I have significant concerns about loosening
    taxpayer privacy protections and believe this is an area where
    we need to tread carefully.
        But as I describe in my written statement, the IRS is
    developing a procedure that would enable taxpayers to consent
    to the release of their returns in appropriate circumstances.
    In my view, giving taxpayers a choice strikes the appropriate
    balance.
        Lastly, I note that even as the IRS is being urged to do
    much more to combat identity theft, taxpayers are clamoring for
    the IRS to process returns and issue refunds more quickly.
    While there is still room for the IRS to make improvements in
    both areas, the two goals are fundamentally at odds. If our
    overriding goal is to process tax returns and deliver tax
    refunds as quickly as possible for the vast majority of persons
    who file legitimate tax returns, it is inevitable that some
    identity thieves will get away with refund fraud and some
    honest taxpayers will be harmed.
        On the other hand, if we decide to place a greater value on
    protecting taxpayers against identity theft and the Treasury
    against fraudulent refund claims, the IRS will need more time
    to review returns and the roughly 110 million taxpayers who
    receive refunds will have to wait longer to get them, perhaps
    considerably longer.
        Alternatively, the IRS will require a considerably larger
    staff to enable it to review questionable returns more quickly.
    There is no way around these tradeoffs.
        I appreciate the opportunity to testify today and would be
    happy to answer your questions.
        [Prepared statement of Ms. Olson follows:]

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        Mr. Platts. Thank you, Ms. Olson.
        Inspector General George?

                     STATEMENT OF J. RUSSELL GEORGE

        Mr. George. Thank you, Chairman Platts, Ranking Member
    Towns, Mr. Connolly. Thank you for the opportunity to testify
    on the tax gap and the efforts by the Internal Revenue Service
    to enforce compliance with the tax code.
        My comments will also address the growing risk of identity
    theft and tax fraud. In January 2012, the IRS released updated
    estimates of the tax gap for tax year 2006, which indicated
    that the Nation's 83 percent voluntary compliance rate was
    essentially unchanged from prior estimates. The IRS estimated
    that the gross tax gap increased from $345 billion to $450
    billion, as was indicated by Mr. Miller.
        My written statement includes a table that shows the
    comparison between the prior and current tax gap estimates.
        As also stated earlier, the IRS reports that the gross tax
    gap is comprised of three primary components, again, $376
    billion in under-reporting of tax liabilities, $28 billion due
    to non-filing of tax returns, and $46 billion in under-payment
    of tax liabilities. The IRS reported that the growth in the tax
    gap from tax year 2001 to 2006 was concentrated in the under-
    reporting and under-payment forms of non-compliance, which
    jointly account for more than nine out of ten tax gap dollars.
        The IRS also reported that the tax gap is caused by both
    unintentional taxpayer errors, whether due to tax law
    complexity, confusion or carelessness, and willful tax evasion,
    or cheating.
        The IRS needs to overcome institutional impediments to more
    effectively address the tax gap. These impediments refer to the
    established policies, practices, technologies or business
    requirements that add unintended costs or are no longer
    optimal, given today's society. We at TIGTA believe the current
    institutional impediments the IRS faces can point the way to
    improved opportunities, namely, address incomplete compliance
    research, re-assess insufficient compliance strategies,
    determine how best to fix incomplete document matching
    programs, and find a way to handle the insufficient enforcement
    resources.
        Every year, more than one half of all taxpayers pay someone
    else to prepare their Federal tax returns. Third party
    reporting and transparency is crucial to high compliance among
    individual taxpayers. Business reporting associated with the
    buying and selling of securities was an area that needed third
    party reporting based on previous studies that showed low
    levels of compliance. The new merchant card reporting
    requirements were established in 2011. They provide third party
    reporting data on business receipts for the first time, making
    it much easier for the IRS to identify businesses that are
    either under-reporting receipts or not reporting at all.
        Globalization of the U.S. economy has been a major trend
    for many years. The scope and complexity of the international
    financial system creates significant enforcement challenges for
    the IRS. The IRS continues to be challenged by a lack of
    information reporting on many cross-border transactions. The
    mis-classification of millions of employees as independent
    contractors is a nationwide problem that continues to grow and
    contribute to the $72 billion under-reporting employment tax
    gap.
        TIGTA identified more than 74,000 taxpayers who may have
    avoided paying approximately $26 million in Social Security and
    Medicare taxes in 2008.
        TIGTA has continued to assess the IRS's efforts to identify
    and prevent identity theft. Unscrupulous individuals are
    stealing identities at an alarming rate for use of submitting
    tax returns with false income and withholding documents. For
    processing year 2011, the IRS reported that it had detected
    940,000 tax returns involving identity theft and prevented the
    issuance of fraudulent tax refunds totaling $6.5 billion. The
    amount of fraudulent tax refunds the IRS detects and prevents
    is substantial. The IRS does not know how many identity thieves
    are filing fictitious tax returns and how much revenue is being
    lost, resulting from the issuance of fraudulent tax refunds.
        We have fond that the issuance of fraudulent tax refund
    based on false income documents goes beyond the amount detected
    and prevented by the IRS. An upcoming report will provide
    further data.
        Access to third party income and withholding information at
    the time tax returns are processed is the single most important
    tool the IRS could have to identify and prevent tax fraud.
    Chairman Platts, Ranking Member Towns, thank you for the
    opportunity to share my views.
        [Prepared statement of Mr. George follows:]

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        Mr. Platts. Thank you, Inspector General George.
        Mr. White?

                      STATEMENT OF JAMES R. WHITE

        Mr. White. Chairman Platts, Ranking Member Towns and
    members of the Subcommittee, I am pleased to be here to discuss
    the tax gap, i.d. theft-based fraud and how to reduce them.
        The gross tax summarized on pages 4 and 5 of my statement,
    as you have heard, was recently estimated by the IRS to be $450
    billion for tax year 2006. This is the amount the taxpayers
    should have paid but did not pay on time. Note that this is the
    amount unpaid for just one year.
        Of this, the IRS estimates, as you have heard, that it will
    ultimately collect $65 billion from its enforcement actions and
    from late payments by taxpayers, leaving a net gap of $385
    billion. One piece of context is that the tax gap has persisted
    at about the same level as a percent of total tax liability for
    decades, this despite a myriad of Congressional and IRS efforts
    to reduce it.
        Key for thinking about how to reduce the tax gap is
    understanding its nature. The tax gap is spread across various
    types of taxes, taxpayers and taxpayer behavior. Most of the
    tax gap is for the individual income tax. But the corporate
    income tax and employment tax are also significant
    contributors. Much of the tax gap is due to misreporting of
    business income, even for the individual income tax. But non-
    business income also contributes.
        Even for a certain category of taxpayer, there is a variety
    of misreporting behavior. For example, in a recent report, we
    found that sole proprietors misreport both their receipts and
    their expenses, and some of each is unintentional, while some
    is intentional.
        At one level, as you have heard, the cause of the tax gap
    is easy to understand. Income subject to withholding and/or
    information reporting to IRS by third parties, such as
    employers or banks, has low misreporting. Only about 1 percent
    of wage income withholding is misreported. On the other hand,
    56 percent of rent, royalty and sole proprietor income, with
    little or no information reporting, is misreported.
        There are opportunities to reduce the tax gap. But because
    of the variety of non-compliance, multiple approaches will be
    needed. No single approach is likely to fully and cost
    effectively address the tax gap.
        Opportunities include more third party information
    reporting. Third party reports to IRS about a taxpayer's income
    allow IRS to easily verify through computer matching and
    without an audit that the taxpayer's return is accurate. As I
    already noted, compliance is high when income is reported by
    third parties, such as employers or banks. The challenge with
    increasing third party reporting is identifying new third
    parties. They must have knowledge of taxpayers' income or
    expenses and have tolerable reporting costs.
        Also, IRS must be able to enforce the reporting
    requirements. So, for example, a small number of reporting
    entities, like banks, can be an advantage. The problem is that
    most third parties that meet these requirements are already
    required to report.
        Another opportunity is improving service to taxpayers.
    Service has declined. For example, wait time to get through to
    an IRS telephone assister has been around 16 minutes this year.
    The model of human assisters responding to taxpayers may not be
    sustainable given its high cost. Different strategies for
    answering taxpayer questions, such as on the IRS website, or
    through paid tax preparers or tax preparation software, will be
    needed.
        Another opportunity is additional resources. With tight
    budgets, if IRS's efforts to innovate don't keep up with
    workload growth, then the risk is that enforcement, and with it
    voluntary compliance, will go down. That could snowball. If
    taxpayers lose faith in the fairness of the system, they could
    become less willing to comply themselves.
        Another opportunity is increasing pre-refund compliance
    checks. Doing more computerized checks before refunds are
    issued could reduce improper payments and might also limit
    refund fraud based on i.d. theft. Leveraging external
    resources. Such resources include paid preparers, tax software
    companies and whistleblowers. We have made recommendations to
    help IRS leverage all three to reduce the tax gap.
        Modernized information systems. Such systems can route
    phone calls to help taxpayers get the answers they need and
    support IRS's enforcement staff with timely access to data.
        Simplifying the tax code, which has also been discussed.
    Simplification can make it easier for taxpayers who want to
    comply do so successfully, and make it harder for those
    intentionally trying to evade their tax obligations to hide
    from IRS.
        In closing, I want to highlight the value of research on
    the nature and causes of the tax gap. Such research is costly,
    but without it, Congress and IRS are left struggling to reduce
    the tax gap without a fact-based understanding of its causes.
        Mr. Chairman, this concludes my statement. I would be happy
    to answer any questions.
        [Prepared statement of Mr. White follows:]

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        Mr. Platts. Thank you, Mr. White, and again, I thank all
    four of you.
        Perfect timing, clock is at zero on the Floor, so I am
    going to run over. Mr. Towns, Mr. Connolly and I will return
    very quickly, as soon as the vote is concluded. And then we
    will get into questions with you. I appreciate your testimony.
        This hearing stands in recess until the call of the Chair.
        [Recess.]
        Mr. Platts. The hearing will come to order.
        I appreciate everyone's patience while we concluded Floor
    votes. We will move right into questions, and I will yield
    myself five minutes to begin.
        Certainly the numbers are pretty staggering when you think
    of a tax cap of almost $400 billion, even after netting some
    recovery of taxes that were not properly paid. When we talk
    about taxpayer identity theft, fraud, the fact that we have
    hundreds of thousands of Americans being victimized and again,
    billions of dollars at risk. So the issues that we are trying
    to address today are real issues that are about real money for
    the American people, and about trying to protect American
    people as well, that they are not paying $3,400 of somebody
    else's tax bill, or they are not being victimized by criminals.
        Starting with the area of the tax gap, Commissioner Miller,
    I guess kind of a structural question or framework, the data we
    are looking at, it is 2006 data, we are in 2012. Prior to that
    it was 2001, five years back before we had similar data. One,
    is there a plan that, this year you are going to update it
    again, five years, now six years, to update the data about the
    tax gap? And what is the difficulty in having it be more
    current? Having six-year old data certainly is helpful, but it
    wouldn't be as helpful as if it was one-year old or two-year
    old data.
        Mr. Miller. I think that is right, Mr. Chairman. The
    process has been to do examinations. So for example, if we were
    to do 2011 year, those returns are now coming in. It would be a
    while before we do our statistical sample. And using 1040s as
    an example, we are doing 14,000 research audits per year to try
    to update this. So it is a continuing path we are on.
        It will be a while, it will be a few years, before we
    complete those audits, before we are able to roll up the
    information with respect to those audits. Two thousand and six
    is a long time ago, but I am not sure how much better we would
    be able to get. I think we will have an easier time going
    forward than we had in 2001. We did a better job in 2006, we
    had better data, better estimating models. And we will get more
    current. But I don't think we will ever be, the 2011 gap is, as
    we said, in 2012.
        Mr. Platts. And I certainly don't expect that in 2012 we
    could look and say, in 2011, this was what the tax cap was. But
    it is, the fact that it is six-year old data that we are still
    using, especially with technology and I guess what concerns me
    a little bit is that we are still doing audits and haven't
    really completed and compiled the information from audits from
    2006, well, 2007, 2008, so four year back, five years back that
    we still have that.
        Because I think that is one of the issues that I think the
    Inspector General raises in the ability to use the data we
    have. And whether it deals with identity theft, whether it
    deals with the tax gap is that, I understand that it costs
    money. But if we do it well and then act on what we learn it
    will save money in the long run by helping us to close that tax
    gap in this case.
        So that is a concern that jumps out, is that we are relying
    on six-year old data and the need to make that more current so
    we can be more effective in how we can respond to whatever that
    data tells us.
        Ms. Olson. Mr. Chairman, if I may add, jump in here. I do
    think that the IRS is doing a rolling research study. So they
    are going to be doing three years rolled up at a time. So you
    would be able, even though you may be a bit behind, when 2006
    is done, you would do 2007, 2008 and 2009 rolled together. And
    then you just move one year on as you go along.
        And to the point about how long it really does take, if you
    have even 2006, some people are filing in October 15th and you
    may want those people in your random sample, because they may
    be some complex returns. So you are waiting for those to go
    through the processing. And then taxpayers have rights. So even
    those 14,000 audits that we have, they may want to go to
    appeals before they go to tax court. If they go to tax court,
    it may take a year and a half before they are out of tax court.
    And we have to wait until we are final on the whole issue. We
    don't know what is going to be in that 14,000 case sample,
    whether there are going to be some tax court ones or not.
        So it is not an easy thing. But I do think that the IRS's
    proposal about the rolling sample really will work, that will
    give us, even though we will have some years of lag, it will
    give us good data going forward.
        Mr. Platts. I certainly appreciate that some of these cases
    are going to be very complex, especially those that go into tax
    court. But again, we don't need the data from all 14,000 to be
    able to assess what is working or not. If we lost 4,000, we had
    10,000 to look at. But it is three-year old data instead of
    six-year old data, that certainly would be more beneficial.
        Inspector George?
        Mr. George. I was just going to add, sir, that there are
    certain segments of the tax gap that the IRS just really hasn't
    adequately addressed, too. For example, the international tax
    gap. Our office estimates that is in the hundreds of billions
    of dollars, again, per year, that is due to the American
    taxpayer, the Treasury, and isn't being paid on time, if at
    all.
        So again, it is an enormous task, as was pointed out, that
    does need additional resources. But it is something that needs
    to be addressed.
        Mr. Platts. Commissioner Miller, do you want to comment on
    that? I know that is an area where we have, in my
    understanding, the most limited information regarding what
    efforts are. Again, I realize this is an issue of resources. I
    am not an appropriator, although I want to look at how we can
    try to make the case, and the Taxpayer Advocate well documents
    the return on investment if we invest in taxpayer services and
    what a dramatic return on investment that is compared to
    enforcement and how we can help to promote what your needs are.
        But when we hear hundreds of billions of dollars that maybe
    we are not getting in that one category, how can we do better?
        Mr. Miller. On the international tax gap, I am not familiar
    with the Inspector General's numbers, to be honest with you. So
    I am not going to speak directly on that.
        On international, I can say two things. Really, you are not
    looking at a single number, you are looking at different
    components. You are looking at what is cross-border activity of
    large corporations, and that is one set of documentation that
    we would look at. And we are doing operational audits there,
    and we do look at that. That is our window into that world.
        The other world is offshore accounts, which as you may be
    aware, we have done a remarkably good job in. We have 33,000
    people that have come into us in the last two years, three
    years, with over $4.4 billion of declared money coming into the
    Treasury as we go out and attack bank secrecy jurisdictions.
        Do we know the total number? Do we know the full pie in
    either case? Probably not. But we are on our way doing good
    things in both areas.
        Mr. Platts. I don't want to suggest that we are not moving
    in the right direction, but I think to the American people that
    are paying their taxes and doing their best to pay, whether it
    is $5,000 or $3,000 or $10,000, and then when they see numbers
    that are, if it was even tens of billions, but it is hundreds
    of billions that is not being paid, that we need to do a better
    job, out of fairness to those who are complying with the law
    and paying their fair share.
        One other question before yielding to the Ranking Member.
    One of the issues, Ms. Olson, you talked about, is in the
    current system, we use an electronic system of collection,
    especially for the withholding of income taxes and employment
    taxes. And we have a mandatory 94 percent requirement for IRS
    in using electronic collection. Can you expand on that. The way
    I understood it is, your suggestion and recommendation is, if
    we apply that same approach to estimated tax payments, it would
    not just help the taxpayer be more compliant but ultimately
    generate more collection if we took that approach?
        Ms. Olson. With estimated, we were very successful once the
    IRS was given sort of a little nudge to say, achieve this goal
    in employment taxes, in getting electronic payments, which
    saves the whole government money, obviously, because you are
    not processing checks. But it also makes it easier for the
    taxpayer, after they get used to it.
        But we should apply that to estimated taxes. I think that
    in some areas, it is very hard for taxpayers to save up money
    to pay estimated taxes quarterly. So if they can pay it monthly
    like they pay other bills, and most, they pay lots of bills
    through their bank accounts, just setting up payments. And we
    don't have a good interface. So I think that if we could get
    some kind of a nudge from Congress that sets a goal, the IRS
    has always responded well with that and developed a strategy.
    Then we would get the different parts of Treasury together to
    make it a really good user interface for the taxpayer.
        Mr. Platts. Is it kind of the same argument on making it
    clear that voluntary withholding agreements would achieve, in
    essence, that same goal?
        Ms. Olson. Yes. And that proposal actually came from some
    trade associations that met with me that said, for example, the
    hair salons, they do have an employee like the receptionist. So
    they are already in the payroll tax system. And the people who
    cut hair really are independent contractors, they are renting
    booths from them. But they get in trouble, and then they move
    on, because they don't pay their estimated taxes.
        So the hair salon was saying, if we could enter into an
    agreement where these are not our employees, because they are
    renting and everything, but we are already in the system, we
    will withhold a percentage and keep them in compliance, we will
    have these people stay with us and we won't have so much
    upheaval. And when we worked with counsel, they have said that
    we don't have the legal authority to enter into those
    agreements the way that particular code section is written.
        Mr. Platts. The IRS general counsel?
        Ms. Olson. Yes, the IRS general counsel.
        Mr. Platts. They need additional statutory authority?
        Ms. Olson. They need additional statutory authority. And so
    this really was a user-friendly, taxpayer-friendly proposal.
        Mr. Platts. Something that we are glad to look at as a
    committee and try to see if we can work to allow that. I think
    it sounds like a win-win for the person who has those
    independent contractors working in their facility. They don't
    get the turnover, the independent contractor is more----
        Ms. Olson. And it is not mandatory. It is totally
    voluntary.
        Mr. Platts. Right, and ultimately the taxes that are owed
    are better collected.
        Ms. Olson. Right.
        Mr. Platts. I yield to the Ranking Member, Mr. Towns, for
    the purpose of questions.
        Mr. Towns. Thank you very much, Mr. Chairman.
        Let me begin with you, General George. Your testimony
    indicates that the IRS has institutional impediments that
    prevents them from effectively addressing the tax gap. And of
    course, you mention specifically that even when the IRS
    examines a tax return that needs improvement, often there is no
    change made to the return. And this increases the burden on
    compliant taxpayers.
        Could you just elaborate on this just a little bit more?
        Mr. George. Certainly, Mr. Towns.
        The IRS, the bottom line is the IRS has incomplete
    compliance research. Specifically, the IRS does not know all
    the sources of non-compliance, so the IRS's resources cannot be
    targeted appropriately. The research which is needed is on the
    relationship between the taxpayers' burden and compliance and
    on the impact on customer service on voluntary compliance.
        These are various studies that they may have engaged in in
    the past, but we don't believe they have done so adequately.
    Additional research is also needed to measure how establishing
    benchmarks and other measures to assess the effectiveness of
    some of the efforts that IRS has engaged in in the past,
    whether something is working or isn't working.
        So for example, we know for a fact that when they reach out
    to a taxpayer by letter, the initial contact normally results
    in a relatively high response from the taxpayer. That is, the
    taxpayer will either acknowledges that he or she owes the tax
    and pay it. Yet if the IRS delays reaching out to the taxpayer
    by, I don't have the exact numbers yet, whether the number of
    weeks or number of days, we know that the response rate
    declines.
        So in a recent report, we encouraged the IRS to increase
    the frequency in which they communicate with taxpayers. The
    IRS, to my understanding, has declined to do so, again, citing
    resources. But that is just one example.
        Incomplete compliance strategies, the IRS's systems that
    identify returns for examination need improvement to identify
    potentially non-compliant returns. The collection activity that
    extends for years has a lower rate of collection for delinquent
    liabilities. The IRS has something called the queue, which is a
    data base in which tax returns for people who owe taxes which
    aren't handled by IRS revenue officers or any other method
    within the IRS literally are put in line. And that line
    contains millions of tax returns.
        Keep in mind, there is a statute of limitations on when
    someone has to comply with their tax obligations. So millions
    of dollars are potentially, and in reality, being lost because
    the IRS has not simply addressed these returns, had someone
    assigned to them to look at them.
        But one of the most disconcerting aspects of all of this is
    that the IRS has an incomplete document matching program. So
    the IRS does not have reliable third party data for taxpayers,
    for all taxpayer sectors, at least, and for all types of tax
    returns. Most notably, income earned by the self-employed.
        I carry this card with me and I cite this at every
    opportunity that I can, because this is information that comes
    from the IRS that is just very compelling. You heard earlier
    today, there is a very high correlation between tax compliance
    and third party reporting. The IRS estimates individuals whose
    wages are subject to withholding report 99 percent of their
    wages for tax purposes. Self-employed individuals who operate
    non-farm businesses are estimated to report only 68 percent of
    their income for tax purposes.
        But the most striking number is self-employed individuals
    who operate businesses on a cash basis are estimated to report
    only 19 percent of their income. So there is no question that
    if the IRS, and again, it would have to have authority from
    Congress in some of these instances, were able to mandate third
    party reporting, the levels of compliance would go up,
    astronomically, I would argue.
        Mr. Towns. Right. Mr. Chairman, I just need a minute to
    give Mr. Miller an opportunity to respond to some of that. Also
    Mr. White, very quickly.
        Mr. Miller. Thank you, Mr. Towns. There is a whole batch
    that was wrapped into General George's comment. A few things I
    would like to clarify. One, our national research program that
    comes up with the tax gap is also used on an annual basis to
    improve our filters. So it has a benefit to us to do these
    things to improve our selection process. Because we have a
    living process that filters back in the results, so that we can
    target better our non-compliance. There is no doubt that we can
    improve, and we are improving on an annual basis.
        Other things I will mention, the queue in the collection
    area exists, no question about that. Cases go to the queue when
    they are lower priority than other cases. Other cases can be a
    high priority, one, because we think they are better dollar
    cases, or two, because we don't have the resources to reach
    them at this point.
        We are doing a better job of selecting cases for
    collection. It is not first in first out, I do want to make
    that very clear. It is based on the attributes of the given
    case.
        Mr. Towns. Let me ask you this very quickly. I appreciate
    your generosity. Has anybody ever estimated or looked at the
    fact that you indicate you have 35,000 employees who detect
    identity theft. What would happen if you had 55,000 or 45,000?
    Would the resources increase? I am not sure that not having
    more staff is an economical way to go.
        Mr. Miller. Mr. Towns, I would agree with you. I think that
    Nina has said, and others at this table have said, that we
    believe the IRS is a pretty good investment, in that we are in
    essence the people who bring in $2.4 trillion and in the 90
    percent, upper 90 percentile of every dollar that comes into
    the government on an annual basis.
        So I think that as we pull people, and we have pulled many
    people to work on identity theft, as we had to and as we
    should, that does impact other programs.
        Ms. Olson. Sir, if I might comment on some of the earlier
    points from the Inspector General. The IRS does have a project
    right now that is looking into the impact of service on
    compliance. My office is working very closely with the Office
    of Research and with the Wage and Investment Division. We are
    doing a lot of surveys of taxpayers. It will be very
    interesting what we find out. And this is a constantly
    developing area.
        I have been very critical of the IRS's collection strategy
    and their use of automation and their failure to just pick up
    the phone and talk to taxpayers. Because I think you can really
    get resolution. But the notice stream, where we send out
    notices to taxpayers early in the system, or in the process is
    very effective. But what that leaves us with are those
    taxpayers who aren't going to willingly come forward. And they
    need maybe a little nudging. And it is how you do the nudging.
        The main point I want to talk about is the comment about
    our incomplete document matching. We have been given some
    significant tools with the merchant card reporting. But you all
    just repealed a provision that would have given the IRS more
    information about the purchases that businesses made. But the
    upshot, and we really criticized the provision, because it
    imposed so much burden on the businesses who are going to have
    to do the reporting. I think that is the tradeoff.
        And in the self-employed area, the way to get information
    reporting on the self-employed is to get the householder to
    report on the person who is cutting their grass every week. And
    you are not going to get that done. That is just not something
    we can impose on those taxpayers.
        So that is why you have to do vigorous audits and look at
    areas of risk and then think of some alternative strategies. I
    am not convinced that information reporting is the end all, be
    all for this tough area that we have.
        Mr. Towns. Right.
        Mr. White, just before you answer or respond, also include
    in your response getting back to the third party reporting. Do
    you think the IRS is taking full advantage of third party
    reporting? And then whatever else you have to add, I would
    appreciate it.
        Mr. White. Let me start with a quick example that
    highlights the importance of research. I want to follow up on
    Mr. Miller's point there.
        The recently-enacted basis reporting requirements for
    financial transactions, financial securities, that policy
    proposal was based in significant part on research that was
    done using the compliance data that IRS develops to estimate
    the tax gap. So that is an example of how you can use that data
    to make changes to reduce the tax gap. It is estimated that the
    first seven years of that basis reporting proposal bring in $7
    billion. That is a reduction in the tax gap.
        In terms of information reporting, third party information
    reporting, one of the advantages there, as I think has been
    discussed somewhat, is that IRS can match that information to
    tax returns rather than having to do an audit. Audits are
    labor-intensive, very costly for IRS. More importantly, they
    are very burdensome on taxpayers. So this is an alternative to
    audits for enforcement processes.
        The difficulty is in identifying new information reporting
    sources. There are some that we have raised in recent reports,
    some additional sources. One is payment for services.
        Mr. Platts. Mr. White, if I can ask you, Mr. Towns, if you
    don't mind, Mr. Connolly needs to run for a Floor statement. IF
    we can kind of come back, let Mr. Connolly get in and then we
    are going to come back to those examples of additional sources.
    Is that okay?
        Mr. Towns. That is fine.
        Mr. Platts. Yield to the gentleman from Virginia.
        Mr. Connolly. I thank my colleagues.
        Mr. Chairman, I would ask unanimous consent that my opening
    statement be entered into the record in full.
        Mr. Platts. Without objection, so ordered.
        Mr. Connolly. I would further request that Colleen
    Kelley's, the President of the National Treasury Employees
    Union, statement prepared for this hearing also be entered into
    the record in full.
        Mr. Platts. Without objection, so ordered.
        Mr. Connolly. I thank the Chair.
        Mr. George, you talked about, I think you said a $450
    billion tax gap?
        Mr. George. Gross, yes.
        Mr. Connolly. That is this year?
        Mr. George. That is as of 2006.
        Mr. Connolly. 2006 and it is growing?
        Mr. George. Yes, it is. I believe it is a lowball figure,
    and again, part of the earlier discussion indicated that is an
    ongoing review. And it doesn't include aspects such as the
    international tax gap.
        Mr. Connolly. Understood. Do you think there could be some
    relationship between that growing gap and the fact that we have
    had a 20 percent reduction since 1995 in revenue offices and
    revenue agents?
        Mr. George. There is no question that if the IRS had
    additional resources, they would be able to collect additional
    tax receipts.
        Mr. Connolly. I would point out to my colleagues, just for
    the sake of argument, $450 billion in money owed the Government
    we are not collecting. That is what the tax gap is, correct?
        Mr. George. Roughly.
        Mr. Connolly. Times ten is $4.5 trillion.
        Now, here we are sweating can we go big at $4 trillion,
    sweating a sequestration that would be $1.2 trillion. This
    would be a big dent in the debt if we simply put the resources
    into IRS to collect the money that is owed.
        Now, over and above that, this Subcommittee, led by my
    colleagues, Mr. Platts and Mr. Towns, has done a lot of work on
    the issue of improper payments. And Mr. Miller, I think you
    were covering that in your testimony. What is the estimate of
    annual improper payments, mistakes get made, refunds get sent
    to people who really didn't qualify for them or the amounts are
    wrong or whatever it may be? What is the estimated annual
    improper payment for IRS?
        Mr. George. Just to give two examples, under the----
        Mr. Connolly. Well, no, is there a global figure? You have
    $450 billion as the tax gap. What is the comparable figure for
    annual improper payments?
        Mr. George. Let me respond by saying that I can tell you
    definitively that under the additional child tax credit it is
    estimated at $4.2 billion a year, although the IRS under an
    interpretation from Treasury disputes whether or not that is an
    actual improper payment. We don't believe we, the IG's office,
    don't believe that Congress, the law, authorizes the payment of
    the additional child tax credit to people who are not U.S.
    citizens and who don't have----
        Mr. Connolly. Yes, but we are trying to deal with global
    numbers here. It would be useful to have a number. The total
    amount estimated for the entire Federal Government is $125
    billion a year.
        Mr. George. And then of course the earned income tax credit
    is estimated at about $13 billion a year. But no, I do not have
    a golden number.
        Ms. Olson. Our tax gap numbers say that tax credits as part
    of the under-reporting gap are about $28 billion of that $450
    or 6 percent of the gross tax gap. So that includes a number of
    refundable tax credits.
        Mr. Connolly. Mr. Miller?
        Mr. Miller. Sir, the only thing I would caution is, there
    is a difference between the improper payment, which is what
    went out that shouldn't have gone out, and the tax gap which
    includes all sorts of different pieces.
        Mr. Connolly. Yes, I agree with you. I am making that
    distinction, and I am trying to get what is the number for the
    former.
        Mr. Miller. And I don't have that number. We can come back
    to the Committee with that.
        Mr. Connolly. That would be helpful. Because again, if you
    set a goal of making it zero, understanding that that is
    probably an impossible task, but backing into that, what would
    be required? What would be required to close that $450 billion
    gap and to better get our handle on the improper payments?
    Because we are making incredible and, in my opinion, sometimes
    egregious policy decisions that are going to do real damage to
    the United States of America. We are cutting back on
    investments that are very important if we are going to stay
    competitive.
        And here right in front of us is a source of revenue we are
    owed. Except this body is not willing to make the investments
    in IRS that we need to make. And what is very clear from your
    testimony is that for every dollar we invest in IRS, especially
    in terms of compliance, we have a big return without pain and
    suffering. It puzzles one why Congress wouldn't seize on that
    opportunity as one measure to put a real dent in the debt
    without having to create weeping and gnashing of teeth.
        Let me ask a question of Mr. Miller. Oops, if I may, Mr.
    Chairman?
        You talked about offshore tax havens, is that correct?
        Mr. Miller. Yes, sir.
        Mr. Connolly. That is kind of something every ordinary,
    average American taxpayer has, right?
        [Laughter.]
        Mr. Miller. I hope not, actually.
        Mr. Connolly. Well, what percentage of tax filers have
    offshore accounts?
        Mr. Miller. We know the ones, and I don't have the
    percentage with me, but we don't know, we know the ones who are
    declaring them either under the FBAR rules or under our new
    rules that call for a check box on the 1040. We will find that
    out when the 2011 returns fully come in.
        Mr. Connolly. And that is a legal loophole in the law that
    somebody can take advantage of?
        Mr. Miller. It is a permissible act. Obviously, we have
    made inroads on offshore, and we also have the FACA rules now
    that are going to require banks to report to the United States
    those who have foreign bank accounts.
        Mr. Connolly. Can't think of anybody who has those kinds of
    accounts--oh, yes, I can think of one.
        According to one study, the percentage of income paid in
    taxes for the top one-tenth of 1 percent of taxpayers in that
    top bracket has declined from 70 percent to 40 percent. And if
    you look at the middle income quintile, it has increased from
    15.9 percent to 20 percent. That suggests a rather dramatic
    regression in taxes paid and the de facto tax code we are
    living with. Would you comment?
        Mr. Miller. I really wouldn't be able to comment on that.
        Mr. Connolly. Well, are those numbers accurate?
        Mr. Miller. I don't know. I would have to check on that.
        Mr. Connolly. Well, would you not agree that if the top
    one-tenth of 1 percent, which used to pay 70 percent of the
    percentage of income paid in taxes is now 40 percent, that is
    certainly not progress that is called regression?
        Mr. Miller. That is outside of what the Deputy at the
    Internal Revenue Service would be speaking about, sir.
        Mr. Connolly. Ms. Olson?
        Ms. Olson. Sir, I don't have those numbers. I would be glad
    to look into them and get back to you.
        Mr. Connolly. Would you agree if those numbers are
    accurate, that would suggest that the de facto income tax in
    this Country is becoming more regressive, not more progressive?
    If the top one-tenth of 1 percent is paying almost half of what
    it used to pay and the middle quintile is paying more?
        Ms. Olson. Sir, the reason why it is difficult to answer
    that question is that I have just been looking at historical
    data. And it is not clear to me that the highest income tax
    payers are paying less than what they might have done
    historically. So that is why I am saying I would need to look
    at what you are asking me and look at the charts that I have
    and be able to answer for the record.
        Mr. Connolly. I have to say to you, Ms. Olson, the numbers
    available to me are quite clear. They are not ambiguous. They
    have declined significantly in terms of the total percentage of
    income tax collected by the IRS.
        Mr. Chairman, I thank you, and I thank you, Mr. Towns, for
    your indulgence.
        Mr. Platts. I thank the gentleman. And before coming back,
    Mr. Towns, I would associate myself with the gentleman's
    comments about the need for us to do a better job of making
    that investment with the revenue officers to get the return on
    that investment for the American taxpayers. And similar to how
    the three us worked together on the funding levels for the
    Government Accountability Office and advocating to the
    Appropriations Committee members and staff on the return, I
    think there was like $86 for every dollar spent at GAO, glad to
    work with you and Mr. Towns on something similar to that that
    makes a case. The Advocate's numbers really presented pretty
    well on what that return on investment is.
        With that, I will come back to Mr. Towns, and if it is
    okay, Mr. White, if you wanted to conclude. You were
    referencing some examples of additional data collection that
    would be helpful.
        Mr. White. This would be additional information reporting.
    Two things we have recommended in recent reports, one is
    payments for services to corporations. This is not payments for
    goods, but this would be purchases of services from perhaps,
    from contractors, outside contractors who may be incorporated.
    If you are incorporated, that does not have to be reported to
    IRS. If you are not incorporated, it does have to be reported
    to IRS.
        So one suggestion for additional information reporting
    there is to extend that to contractors who are incorporated.
    Payments for services by owners or rental real estate is
    another area where we have recommended increased reporting.
        And then there are also cases where reporting is done now
    but where additional information could be provided. One example
    is on reporting on mortgages. Currently the 1098 forms that
    report mortgage information do not include the address of the
    mortgaged property. That creates problems for IRS in sorting
    out suspicious returns from correct returns. Because it is not
    easy to tell even how many properties somebody owns. So there
    are both sorts of opportunities there.
        One other point I would mention is, there has been quite a
    bit of discussion about return on investment. This is
    something, our recent work, we have highlighted with IRS the
    importance of doing more estimates of return on investment,
    both for proposed initiatives, which the Service is now doing,
    and then after the fact, trying to calculate, trying to measure
    the actual return from investment on compliance initiatives. So
    that the Service learns what has been effective, what has been
    more effective than they thought it would be, what has been
    less effective than they thought it would be. That raises then
    the possibility of redirecting resources to areas to get the
    biggest bang for the buck.
        Mr. Towns. Thank you. Mr. George?
        Mr. George. Mr. Towns, I beg your indulgence just to touch
    on what Mr. White discussed. Throughout this session, we have
    talked about the need for the IRS to receive additional
    information, third party information and how that would enhance
    revenue collection. But what is just as important is, once the
    IRS receives this information, what it does with it. And that
    is a problem that we have reported on before, whether it is a
    1099 or what have you. The IRS will receive this information
    from an employer and then will receive a tax return or return
    seeking a refund, and it won't match the two in time to ensure
    that the information is accurate.
        So if someone wants to commit tax fraud, they are able to
    claim more in a refund than they are entitled to, because the
    IRS didn't on a timely basis compare the information. That is a
    major problem, yes, it is a resource, you don't derive in terms
    of their having fewer computer systems or revenue officers. I
    will defer to Mr. Miller to address how they handle that
    internally. But it is a significant problem.
        Mr. Towns. Right. Mr. Miller?
        Mr. Miller. Mr. Towns, I agree with General George that it
    is a significant problem and it stems from a number of reasons,
    the key of which is timing. We don't have the 1099 or the W-2
    often when the return comes in for refund. We do what we can.
    But under the current systems, we don't have the information to
    match.
        We have recently started talking to the community about
    being more real time, which would, has in mind exactly what
    General George is talking about. The most information we can
    have at the time of that refund, the better off we will all be.
        We should have the W-2, we should have the 1099s with
    respect to that person, so that we can validate, one, that it
    is the person that should be getting the refund and two, that
    the amount is correct.
        Mr. Towns. Why can't we get that?
        Mr. Miller. We receive, many 1099s are due March 30th, and
    we already are 70 million into the refund stream by that time.
        Mr. Towns. What changes would have to be made? This is why
    we are having this hearing, to see in terms of what we can
    correct. That is the purpose. So what needs to be done?
        Ms. Olson. This is something that my office has proposed
    several years ago. We did a study, looked at many different
    countries around the world. Many countries, and I alluded to
    this in my testimony a little bit, don't start the filings,
    they don't issue refunds until the filing season is closed and
    they have received all the returns and they have had a chance,
    including information returns, and they have had a chance to
    run everything against, and do matching. And then they issue
    the refunds.
        Now, in the United States, people are showing up the first
    week of January to file their returns to get a refund. And it
    would mean a major shock to the system.
        I do understand, I understand that some of the payroll
    processing companies have said that if all we needed was gross
    wages and withholding on the W-2s, they could basically provide
    us that information within the first couple of weeks of
    January. It is all the information classifying non-taxable
    health insurance and retirement plans. That is what takes a
    little bit longer for them to process.
        So I think that the IRS is looking, as Commissioner Miller
    said, we are engaging in conversations now with the information
    reporting sector to see what we can get early.
        I could also tell you that Australia took a very
    interesting approach, sort of what the United States is doing.
    They sat down with many of their partners, like the major banks
    and some of the major employers, and they said, what
    information can you get us very quickly. And people voluntarily
    came in and said, we can get you this very quickly. And then
    they told the taxpayers, if you wait until this date, filing
    season starts here, but if you wait until this date, you can go
    online and you can see the information that we have, so you can
    be sure about what you get.
        So they voluntarily asked taxpayers to sort of wait in the
    filing season. And because they had a pre-filled return, so
    that taxpayers could just sort of download that information and
    fill in the rest of the stuff, it was viewed as a very positive
    thing.
        Now, they are really getting about 40 percent of their
    taxpayers are actually waiting and using the information that
    the agency is getting voluntarily. And they are getting to the
    point where they might be able to say, okay, now we are
    changing deadlines, because we are seeing people move to later
    in the filing season.
        And that is the approach that we have recommended. Use if
    voluntarily, make it as a desirable thing, taxpayers will wait
    because they want the certainty. Negotiate with your partners
    like the IRS is beginning to do. And rather than bringing a
    huge shock to the system where taxpayers are really desperately
    waiting for their refunds up early.
        Mr. Towns. Right. Mr. White?
        Mr. White. I would just add a little bit to this. A few
    other considerations in addition to the burden on the third
    parties, changing the filing date for the information returns,
    there does need to be enough time allowed for them to ensure
    that those information returns are accurate. If they are not
    accurate, if they have errors in them, then they are much less
    useful for IRS, because it means they are finding false
    positives. At that point, contacting taxpayers about a mismatch
    when there may not be a true mismatch.
        One other point about the value of this kind of information
    return matching early on, before refunds are issued, is that it
    would to some extent be a long-term solution, or at least a
    partial solution to the i.d. theft problem. IRS would be able
    to do more verification before issuing refunds to detect
    illegitimate claims.
        Mr. Towns. You mentioned, and this is it for me, Mr.
    Chairman, you mentioned in terms of statute of limitations.
    There is no statute of limitation on fraud.
        Ms. Olson. Correct.
        Mr. George. That is correct.
        Mr. Towns. Okay, Mr. Chairman.
        Mr. George. But proving the fraud, it is which comes first.
    So it is in the queue. If it is there for five years, and that
    is the statute of limitations for it, for someone having to pay
    their tax obligation, if the IRS hasn't gotten to it, it is out
    of the queue. That is my understanding, and you can correct me
    if I am wrong, Commissioner.
        So if they haven't proven it by then, how do they know it
    was fraudulent?
        Mr. White. And much of the tax gap is not in that queue.
    There are significant parts of the tax gap that IRS does not
    detect in the sense of identifying the particular taxpayers
    that owe that amount.
        One of the issues here is that a significant portion of the
    tax gap is in very small amounts of money spread over millions
    of taxpayers. There are a lot of small businesses that have
    reporting problems, both intentional and unintentional. They
    are small, by definition the tax liabilities there are small.
    And it raises the question of whether it is worth going after
    them. Because to find the unpaid taxes, in many cases, you
    would have to audit them.
        And then another question is how intrusive you want the tax
    system to be to find those relatively small amounts spread
    over, again, millions of taxpayers.
        Mr. Miller. Sir, if I could, just one correction to General
    George. There is a 10-year statute for us to collect the money.
    And actually, I think I would agree that the older and colder
    the debt, the less likely it is we are going to collect it. It
    is just like any other debt.
        But we do have offsets that occur constantly and we have
    other liens and other tools that do make use of that data. And
    those accounts are collected on.
        Ms. Olson. Something that Mr. White said, there are things
    other than direct enforcement that are very valuable tools.
    Commissioner Miller mentioned the refund offsets. A large
    percentage of collection occurs because a taxpayer has a debt
    with us but they are also getting a refund in a future year.
    That is just the computer seeing the refund and grabbing it.
    And it goes into the public treasury.
        But another thing that the IRS is doing this year is some
    behavior modification, if you will. We had recommended several
    years ago on the sole proprietorship return that you break out
    the lines for reporting income where you say, here is income
    from 1099s, that is reported on 1099s filed to me, and here is
    other income. I just know as a former return preparer that my
    client would come in and they would just show me their 1099
    income. And I would say, well, clearly, I am not going to audit
    your books, but clearly you have more money than this that you
    earned, that you brought in. And they would go, oh, yes, $100
    or something.
        Well, if you force taxpayers to have to articulate, they
    are going to look at, they have put all their money under the
    1099, they are going to think, oh, the IRS is going to audit me
    if I don't report some money on this other line, the non-1099
    income. So suddenly you disappear, even if people were now
    reporting $100 and they go up to $1,000, that is $900 per
    taxpayer. And that is a lot of money.
        So we have used that in the past, little behavior
    modifications that drive people to a little bit more compliant
    behavior because they think we are looking at them. That is a
    very important tool. That is really the policy behind
    information reporting, but you don't just need it for third
    party. You could do it through what they have to report on
    their returns.
        Mr. Towns. Thank you, Mr. Chairman, for your generosity.
        Mr. Platts. The gentleman is more than welcome. I want to
    turn the discussion a little more toward specifically identity
    theft and the issue that the Ranking Member and I have focused
    a lot of time on with our staff, and both sides, with the
    Subcommittee staff. I certainly want to commend the IRS for
    increased focus on this issue. It certainly is a necessity as
    we see the numbers going up each year of those who are seeking
    to defraud the American people through identity theft related
    to tax refunds.
        I know one of the issue is the taxpayer protection units
    that have been established. As someone who has been a victim of
    identity theft, or believes they have, to have a designated
    unit, I think that is an important step. But I will tel you,
    one of the things that jumped out to me, and it was the
    Taxpayer Advocate's testimony, that is just unacceptable, is
    how I would say it, is the level of service numbers. I
    understand that in general, the goal this year was about 60
    plus percent level of service. And yet when the taxpayer
    protection unit level of service in mid-March was under 12
    percent, and even in this past week and kind of the heaviest
    time was only at 35 percent.
        I look at that as saying, we are going to create a special
    unit for those who have been victimized, and I emphasize
    victimized by criminals because of identity theft. And we set
    up a special unit for them to call, and we are only helping not
    even two-thirds, when we have the highest level of assistance
    dedicated to their assistance. And even those who do get
    through to get assistance, according to the Advocate's
    testimony, the average wait on hold was one hour and six
    minutes. That is not how we should be treating victims.
        And it goes to our previous discussions here that we need
    to recognize this for what it is. It is a crime and there is a
    victim of the crime. And that we set up a special unit is a
    good thing. But if the unit can't deliver to help the victims,
    that is not a good thing.
        So dropping to 60 percent level of service overall is of
    concern. But dropping to 12 percent for those that are supposed
    to help those who have been victimized, and even those who got
    help had to wait over an hour on hold, anybody in this room
    enjoy being on hold for over an hour? I don't think so. I am
    amazed that anybody stayed on hold for over an hour, quite
    frankly. That is just not acceptable. That is not how you treat
    a victim of a crime.
        So I want to recognize that you are trying to do the right
    thing here, but we are far from where we need to be.
        Ms. Olson. Chairman Platts, just to make a clarification,
    the unit that that number went to is different from the unit
    where taxpayers who think they have been identity theft victims
    calls the IRS out of the blue. The unit that those statistics
    go to is a unit where the IRS has sent taxpayers letters and
    said, we think there is a question about your return and we are
    not going to hold it. So I just wanted to make that
    distinction.
        Mr. Platts. Yes, absolutely. But where there is a belief
    that there is identity theft here, and so we set up a special
    unit for them then to respond, and then we put them on hold for
    an hour, if they get through, and as the numbers show, the
    overwhelming majority do not.
        Mr. Miller. I agree, Mr. Chairman. I was unaware of the 35
    percent, I wasn't aware of the earlier problems. I thought we
    had resolved that. I know we have added more staffing, and
    maybe we have not added enough.
        Mr. Platts. Yes.
        Mr. George. Not only do they not have adequate staffing and
    extended wait times, if someone calls back to find out what the
    status is of their case, they are assigned to someone who may
    not have seen the case before. They are not handed to the same
    person who has the institutional knowledge of their case.
        In addition, in times such as recently, with the tax filing
    deadline, people who are normally assigned to those types of
    cases are reassigned to answering regular tax concerns from
    other taxpayers who dial the 800 number or who walk into
    taxpayer assistance centers. So there is a way that the IRS
    could certainly run this system a lot better than it is.
        Mr. Platts. And General George, you raise an important
    point in whether the IRS has looked at this in the past or not.
    Especially when you set up that special unit to respond to
    specifically, and certainly at a fraction of the numbers here.
    But I will equate it to my office or Ranking Member Towns'
    office, we open about, over 4,000 new constituent cases a year
    as an office. And that is individuals.
        Now, if somebody calls in and the person they were working
    with is not in, another member of my staff can pull up their
    case to see if there has been anything updated in it since they
    last talked to the staffers. But there is a dedicated staff
    person that they are working with. And that does make a huge
    difference than having to start over.
        So I don't know if that is anything that the IRS has looked
    at doing, so that when you call in, once you make that contact,
    that you then have, all right, here is your case manager that
    you should be dealing with, so you are not starting over and
    having to re-educate every time you call in. Is that something
    considered?
        Mr. Miller. It is considered. And I don't know whether it
    would work here or not, to be honest with you. Generally, and I
    think the Taxpayer Advocate and I may disagree on this, we
    don't necessarily have the resources to say, this is your
    person. What we ought to be doing is to ensure whoever does get
    on the phone with you has all the information in front of them,
    and that is what we try to do.
        Mr. Platts. Is that done through the case files
    electronically, that whoever helps you, that they are then well
    documenting?
        Mr. Miller. That is our attempt. Our attempt is to have,
    and remember, we are talking about, this is a microcosm of the
    way we are doing business on the phone generally, where we
    can't necessarily, our systems do not permit a single person,
    we don't believe it is the most efficient way to do it, and we
    can't do a single number to a single person at this point.
        So we are looking at it. In a perfect world, yes, I would
    have an individual who was assigned to my account. And we have
    not been able to get there in terms of resources or systems to
    date.
        Ms. Olson. All I know is that, not just in identity theft,
    but in correspondence exam and in automated collection, some of
    the most significant and frequent complaints we get are
    taxpayers saying, I have talked to four different people, I
    have had to explain my situation over and over again for each
    one. I have looked personally at some of the notes that people
    take. And you cannot read, you can't build a story from the
    notes. You don't know what the person before you did.
        And to Mr. White's point, this is where you go into the
    return on investment, to do the analysis to say, by saving
    pennies by having anybody answer the phone, whoever is the next
    available person, are you really saving money downstream, where
    you get the wrong result and the taxpayer keeps calling back.
    And then you go to a taxpayer advocate service, where you have
    two employees working the case, mine and the IRS employer. You
    go to appeals, which is a higher-graded employer, you go to tax
    court, where you have the lawyers and the paralegals and the
    tax court personnel involved. And can we really do a good
    return on investment on that? I would say no, you are not
    saving money.
        Mr. Platts. And when you add to that the data that has been
    shared here today, that we know that our best chance of
    eliminating the tax gap is voluntary compliance. So the person
    who is calling in is trying to figure out, I will use the
    example of the victim calling in because they have been
    defrauded or victimized. But for anybody calling in, the fact
    that they are calling in is a good thing. They are trying to
    resolve their case.
        So we want to get them the assistance they need and the
    data shows that. And that goes to that issue of taxpayer
    services, the return on investment versus enforcement. And so
    yes, I think it is a penny saved and a pound lost. It doesn't
    seem to be a well thought-out approach.
        An issue where I want to acknowledge what I think is a very
    positive step in the area of identity theft, if I understand
    this correctly, and this s something we raised in the first
    hearing on identity theft last June, I guess it was. That is,
    somebody files a return fraudulently. The legitimate taxpayer
    then submits their return, finds out, hey, somebody already
    filed and got a $4,000 refund, and it is going to take a while
    for us to work through.
        But even when that happens, and we are working on
    shortening that time frame for the victim to be made whole,
    that in the past, the victim couldn't get any information about
    the fraudulent conduct, even though it was submitted in their
    name, their Social Security number, as I understand, your
    General Counsel has issued an opinion now that says, the
    legitimate taxpayer has a right to that information, of the
    fraudulent material that was submitted, and then can authorize,
    I want that information and I want to be able to share it with
    law enforcement.
        I will use the example of a couple of the citizens who
    testified last year. I guarantee you, if they had been given it
    a year ago, the information, they probably would have gone to
    New York with the information, gone to the NYPD and said,
    listen, here is where the check went, let's go get the photos
    from the bank that will show who came in and collected that
    money, if they had that information. At that point, they were
    being told no.
        But is that correct that it has been changed, that they
    have a right to that information?
        Mr. Miller. It is correct, Mr. Chairman, that we have the
    opinion of counsel that we can share that information. It will
    require, and what we are doing, as we speak, we are rolling out
    a pilot with some local law enforcement.
        The real issue is, we cannot share this information with
    local law enforcement.
        Mr. Platts. But the taxpayer can authorize it to be shared,
    right?
        Mr. Miller. The taxpayer can authorize through waiver for
    it to be shared. We are rolling that out as we speak.
        Mr. Platts. That is great. I have heard of it being used in
    cases in Tampa and local law enforcement in Florida. If the
    legitimate taxpayer can say, hey, I want to work with the local
    police, give them everything you have, I think that is going to
    be an important step. Because I understand when we are talking
    about an average of I think $3,500 or $4,000 as the fraudulent
    return refund, that from a prioritization resources the cost
    of, at the national level, trying to go after those.
        But the local guys, that is what they do every day. That is
    what my local police are doing, helping citizens every day with
    those smaller types of crimes or fraudulent conduct. So I think
    that is a very positive step. While I am very displeased with
    the level of service on the TPU, the taxpayer protection unit,
    I do want to recognize that is a very important step in the
    right direction.
        Maybe two other issues here before we wrap up and I
    appreciate all our witnesses' patience, the issue of the Social
    Security Death Master list and the fact that is pretty much
    open game for fraudulent conduct, or those who want to commit
    fraudulent conduct. I know the IRS, I believe the position is
    to restrict access to that. Is that correct, that you would
    like legislative action to restrict who can access that
    information?
        Mr. Miller. I think we are working with the Social Security
    Administration and the Administration more generally on
    legislation that would do that.
        Mr. Platts. So that is an ongoing effort, but not ready yet
    to say, here is what we think is the right approach within the
    Administration?
        Mr. Miller. I think that is right. I think your question
    would be very well answered to go to SSA and have that
    discussion. I think they are actively engaged in talking to
    people about it as we speak.
        Mr. Platts. It is something that we want to look at, of how
    to do that. To me, the fact that that information is too freely
    shared, sometimes for legitimate purposes shared, but it is
    just too big a target for those who are committing the identity
    theft.
        Mr. Miller. Yes.
        Mr. Platts. The other final issue is more of a broad issue.
    That is the balance, and if any of the four of you would like
    to comment, when it comes to the fraudulent, and this goes to
    the issue of the timing of matching documentation with returns,
    I know it is a balance between a quick refund, which those who
    are entitled to refunds want it to be quick, because they can.
        Although I would also say that most taxpayers don't have to
    wait for a refund if they wanted to adjust the filings and get
    the money in their paycheck, so they could get an instantaneous
    refund every paycheck rather than one lump sum.
        Ms. Olson, you were talking about human nature and
    behavioral management, I will admit I am one that, it is kind
    of a forced savings and I would rather get $1,000 back than
    have to write a check for $1,000. I think it is a mental psyche
    of how you look at it.
        But it is a choice that every taxpayer has, to try to
    ensure that they don't have to get a refund. In fact, if they
    want, they can owe money and come out ahead because they had
    the money and then write a lump sum check.
        But given that, how do we balance that quick refund against
    the risk, and that we are not able to match? Today with
    electronic filings, as the use of electronic filings more and
    more the norm, more and more the norm also is that typical
    individual doesn't just have a computer, but they also have a
    printer that is also the scanner. That is the norm with
    printers today. If you buy a printer, it can scan, fax and
    print.
        Have you looked at saying, if you want to file
    electronically, and maybe it is not all refunds, maybe it is a
    pilot to look at, but you have to scan in your W-2s, so rather
    than waiting for anything to be mailed in or matched up from
    the third party, if you want an electronic return, you scan in
    your W-2. So when you electronically submit and especially when
    it is paid taxpayers, what is the percentage, Commissioner
    Miller, is it 65 percent or higher than use paid?
        Mr. Miller. It is above 60, yes, in that range.
        Mr. Platts. For those, it would especially be, I guarantee
    you, if you are a paid provider, your ability to scan a
    document is a given. Is that something that we should consider?
        Mr. Miller. If I could start out, a couple of things. I
    think two separate points altogether, which is enforce savings.
    I think it is absolutely true for you and I, I think it is less
    true as you go down the income scale, where you have the earned
    income tax credit and maybe one-third of people float in and
    out of on an annual basis. It is a changing circumstance.
        Mr. Platts. I think that is a very relevant point.
        Mr. Miller. On the second piece, I think we should look at
    everything we possibly can. We need to get better at our
    screening, we need to get as much information as fast as we can
    to apply it to refunds as they come in.
        On the scanning item, we certainly should look at it. I
    think at this point, to be honest with you, we still get a lot
    of paper fraud in. They have dummied up W-2s. So I am not sure
    that that, in and of itself, it may be a piece of a larger
    strategy and is absolutely worth looking at. But I am not sure
    in and of itself that that will be a game changer for us.
        Mr. Platts. Mr. White?
        Mr. White. I agree. I have the same concern about the
    scanning, that the i.d. thieves are making up W-2s. So getting
    one from the taxpayer doesn't guarantee that it is legitimate.
    What you need to do is get the information return, the W-2 from
    the third party employers faster. That is where technology may
    help, that a lot of the deadline that Mr. Miller mentioned
    earlier, for due dates for those information returns were set
    many years ago. With more modern technology it may be possible
    for third parties, for at least certain kinds of information
    returns, to submit them much earlier in the filing season, so
    that they could be matched to returns.
        Now, there are some other things that need to be in place
    to make this work as well. IRS is modernizing its information
    systems. But obviously you need systems in place that can
    handle massive amounts of data. IRS gets billions of
    information returns each year. So you are talking about a lot
    of information that you would have to match very quickly so
    that you are not making taxpayers wait for refunds.
        Mr. George. Mr. Chairman, I would note though, certain
    software tax packages, Turbo Tax being one, do allow for people
    to download their W-2s electronically. So it does exist, but
    again, you are right, it is $65 to purchase that package, and
    some people just don't want to make that expense.
        Ms. Olson. We have thought a lot about behavioral
    modification. I think that the demise of refund anticipation
    loans has, what refund anticipation loans did was tell
    taxpayers, you can get your dollars tomorrow. So suddenly the
    IRS getting you money through direct deposit and electronic
    filing within 10 days looked like an enormously long time.
        I think we have to really think hard about messaging and
    communicating with taxpayers to talk to them about what is the
    reality of the filing season, and that they actually really do
    want us to do these refund screens. The first year it may be
    hard because you are depending on this money like you have
    always. But if you can adjust your behavior, then you can
    depend on it in the future at the same time every year.
        The lower income really used this for paying their heating
    bills. The studies showed that they used it for things like
    buying refrigerators, buying school clothes, stuff like that.
    So I think we have to work with a larger community to get
    people used to it. But I think the IRS has to step up to that
    plate and really change expectations and behavior.
        Mr. Platts. Mr. Towns, I just have two more questions, then
    we will wrap up and conclude.
        Two final questions here. One is, with the information that
    is provided with the push on certified tax preparers that you
    are moving forward with, when there is a professional tax
    preparer, paid tax preparer, do they have to certify, I know
    that they sign they prepared the document, the return. But do
    they have to certify in some way that they have seen the W-2s
    or the supporting documentation? Is there an affirmation they
    have to make?
        Mr. Miller. I don't think the signature means that, Mr.
    Chairman. I can come back to you on a more detailed discussion
    of under Circular 230 what exactly are they signing when they
    sign the return. But the due diligence that they are required
    to do I think is at a broader level than that.
        But I can come back to you with a more specific answer on
    that.
        Mr. Platts. That would be great.
        And the final thing is, in looking again at conduct and the
    type of fraud, are we able today, when we talked last year, it
    was about the issue of debit cards and what percentage of
    identity theft fraud is paid out on debit cards versus a
    deposit into a bank account, because of the ability for a
    criminal that they have to go in and access money in a bank
    account, there is much more of a trail to be followed if we are
    going to pursue the criminal conduct, different than with a
    debit card.
        Mr. Miller. I will have to come back to you with that as
    well. I think we have seen an increase in the use of debit
    cards, and you are quite right, there are pluses and minuses to
    that.
        Mr. Platts. I think that goes to the broader issue of
    assessment of the information that we have. If we are
    identifying, say there is 400,000 possible cases or actual
    cases of identity theft that were identified and stopped, what
    percentage of those were asking for refunds on debit cards. And
    as to, shall we be issuing debit cards.
        Ms. Olson. I am not sure we would know that.
        Mr. Miller. That is why I said----
        Mr. Platts. That is what I am getting after is, I think we
    need to know that.
        Ms. Olson. I think that the debit card has an account that
    is the same as a bank account.
        Mr. Miller. And the Financial Management Services, actually
    the part of Treasury that is making the payment, it sees an
    account number. It does not know, I don't believe, whether it
    is a debit card or a bank account. That would be something that
    was known by the software providers. And those are discussions
    that are ongoing. I agree, we need to get our arms around that.
        Mr. Platts. Because when you hear the testimony or the
    information from, like in Tampa, when they go in, and a former
    drug dealer, I think, went in and they have 50 debit cards with
    $4,000 in each of them that were fraudulent returns, that seems
    like some evidence that the criminals, who are organized
    criminals doing this, are using that method more likely than
    any other method.
        Again, it is a data analysis that's what I am after.
        Mr. Miller. Right. I think one other point, because there
    is one no doubt that we are seeing the same stories you are,
    where there are rows of debit cards. I want to make it clear,
    if we have stopped the refund, the criminal will have a debit
    card, he or she will have a debit card, there will be nothing
    loaded on it. And when he or she goes to load, there will be
    nothing there, because it will have been stopped, either by us
    or frankly, by the debit card company because it is finding
    fraud as well.
        Those stacks, I am sure some of them have money, don't get
    me wrong, but it shouldn't be assumed that they all have money
    on them.
        Mr. Platts. I am going to make a final comment, then we
    need to wrap up. On the issue of identity theft, I want to just
    re-emphasize that this is about the victims, legitimate
    taxpayers who are victimized by criminals. There is maybe no
    more egregious example of what I heard reported this week of a
    fallen hero of this Nation, who gave his life in defense of the
    Nation, and then his parents come to learn that not only did
    they lose their son, but their deceased son, who gave his life
    in defense of this Nation, was victimized by identity theft
    related to taxpayer refund. That just epitomizes the type of
    victimization that is occurring. We need to do right by that
    family and by every individual or family out there, that those
    legitimate, hard-working, law-abiding citizens are not
    victimized. And if and when they are, that we prioritize them.
        So I know we can do a lot better in that regard.
        I want to thank each of you for your testimony, your
    patience here, especially with the break, with the Floor votes.
    I thank the Ranking Member. As hopefully came through, we are
    not about gotcha, we are about trying to work through this
    issue with you and how can we help. Whether it is the issue of
    adequate funding for the resources that make that return on
    investment, that we invest and the taxpayers come out ahead,
    whether it be on legislative authority that you don't have that
    we need to provide. But on all aspects, we want to work with
    each and every one of you and your offices.
        General George, did you have a final comment?
        Mr. George. I just wanted to clarify one thing. In response
    to Mr. Towns' question about the statute of limitations, Mr.
    Miller was correct in terms of it is 10 years to collect. There
    is no statute of limitations on fraud if it is willful fraud.
    But there is a three-year statute of limitations on the IRS's
    ability to conduct examinations on tax returns.
        So it is something that needs to be clarified here in the
    overall record.
        Mr. Platts. I appreciate the clarification.
        Mr. Towns, did you want to make a closing remark?
        Mr. Towns. Actually, I want to associate myself with your
    remarks and thank the witnesses for being here. And to say that
    if there is something that we need to do on this side, feel
    free to let us know. I just think there are some areas here
    that need to be dealt with. I think that working together, we
    can deal with it.
        I thank you very much, Mr. Chairman, for this hearing.
        Mr. Platts. Again, we will have the record open for seven
    days for some of that extraneous material or responses to some
    of the questions. I appreciate our witnesses' testimony and
    this hearing stands adjourned.
        [Whereupon, at 12:15 p.m., the committee was adjourned.]

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