[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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