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

                 IRS: ENFORCING OBAMACARE'S NEW RULES AND TAXES

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

                                    HEARING

                                   before the

                             COMMITTEE ON OVERSIGHT
                             AND GOVERNMENT REFORM

                            HOUSE OF REPRESENTATIVES

                          ONE HUNDRED TWELFTH CONGRESS

                                 SECOND SESSION

                                   __________

                                 AUGUST 2, 2012

                                   __________

                               Serial No. 112-187

                                   __________

    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
    BLAKE FARENTHOLD, Texas
    MIKE KELLY, Pennsylvania
    VACANCY

                       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

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on August 2, 2012...................................     1

                                   WITNESSES

    Mr. Mark Everson, Vice Chairman, Alliantgroup
        Oral Statement...............................................     8
        Written Statement............................................    11
    Ms. Nina Olson, National Taxpayer Advocate, Internal Revenue
      Service
        Oral Statement...............................................    20
        Written Statement............................................    22
    Mr. Timothy Jost, Washington and Lee University
        Oral Statement...............................................    35
        Written Statement............................................    37
    Mr. Michael Cannon, Director of Health Policy Studies, Cato
      Institute
        Oral Statement...............................................    45
        Written Statement............................................    47
    The Honorable Douglas Shulman, Commissioner of Internal Revenue
        Oral Statement...............................................    84
        Written Statement............................................    87

                                    APPENDIX

    The Honorable Elijah E. Cummings, a Member of Congress from the
      State of Maryland, Opening Statement...........................   106
    Letter to the Honorable Douglas Shulman, Commissioner of Internal
      Revenue........................................................   108
    Yes, the Federal Exchange Can Offer Premium Tax Credits by
      Timothy Stoltzfus Jost.........................................   111
    Legal Analysis of Availability of Premium Tax Credits in State
      and Federally Created Exchanges Pursuant to the Affordable Care
      Act from Jennifer Staman and Todd Garvey, Legislative Attorneys   113
    Questions for the Honorable Douglas Shulman......................   123
    Mr. Mark J. Mazur, Assistant Secretary (Tax Policy), Response to
      a letter to Commissioner Shulman regarding section 36B of The
      Internal Revenue Code..........................................   134

                 IRS: ENFORCING OBAMACARE'S NEW RULES AND TAXES

                                  ----------

                           Thursday, August 2, 2012,

                      House of Representatives,
                  Committee on Oversight and Government Reform,
                                                       Washington, D.C.
        The committee met, pursuant to call, at 9:00 a.m. in room
    2154, Rayburn House Office Building, Hon. Darrell E. Issa
    [chairman of the committee] presiding.
        Present: Representatives Issa, McHenry, Jordan, Chaffetz,
    Walberg, Buerkle, Gosar, Labrador, DesJarlais, Gowdy, Kelly,
    Cummings, Maloney, Norton, Tierney, Connolly, Davis, and
    Murphy.
        Also present: Representative Roe.
        Staff Present: Brian Blase, Majority Professional Staff
    Member; Molly Boyl, Majority Parliamentarian; Lawrence J.
    Brady, Majority Staff Director; Sharon Casey, Majority Senior
    Assistant Clerk; John Cuaderes, Majority Deputy Staff Director;
    Linda Good, Majority Chief Clerk; Christopher Hixon, Majority
    Deputy Chief Counsel, Oversight; Mark D. Marin, Majority
    Director of Oversight; Christine Martin, Majority Counsel; Mary
    Pritchau, Majority Professional Staff Member; Tegan Millspaw,
    Majority Professional Staff Member; Jeff Solsby, Majority
    Senior Communications Advisor; Rebecca Watkins, Majority Press
    Secretary; Kevin Corbin, Minority Deputy Clerk; Yvette Cravins,
    Minority Counsel; Ashley Atienne, Minority Director of
    Communications; Susanne Sachsman Grooms, Minority Chief
    Counsel; Jennifer Hoffman, Minority Press Secretary; Carla
    Hultberg, Minority Chief Clerk; Una Lee, Minority Counsel; and
    Suzanne Owen, Minority Health Policy Advisor.
        Chairman Issa. The Committee will come to order.
        The Oversight Committee exists to secure two fundamental
    principles: first, Americans have a right to know that the
    money Washington takes from them is well spent; and, second,
    Americans deserve an efficient, effective Government that works
    for them.
        Our duty on the Oversight and Government Reform Committee
    is to protect these rights. Our solemn responsibility is to
    hold Government accountable to taxpayers because taxpayers have
    a right to know what they get from their Government.
        Our job is to work tirelessly, in partnership with citizen
    watchdogs, to deliver the facts to the American people and
    bring genuine reform to the Federal bureaucracy.
        Today we meet because President Obama's health care law,
    which was hastily written here in the House, so much so that it
    was once said we have to pass it to find out what's in it, now
    begins to be implemented. As we implement over 20 new tax laws,
    the IRS, always willing to say we can do it, it will be
    difficult, but we can do it, is going to be asked to invade
    American's lives like never before. Who you are sleeping with,
    who is in your bedroom, who you are married to or not married
    to will, in fact, affect your status, and perhaps cause your
    taxes to be taken retroactively because of a change in income,
    marital status, persons living within the home during the year.
        President Obama said you could keep the health care you
    wanted, but, of course, that is not happening. It is not
    happening in such great numbers that States who decided to rely
    on subsidized, under the Obama health care plan, subsidized
    health care are being told that involuntarily the Federal
    Government is setting up exchanges that will, in fact, preempt
    State's rights, preempt Federalism once again.
        Under the letter and the discussion on the House floor of
    ObamaCare, it was very clear that States could choose whether
    or not to set up exchanges, and if they did not, Federal
    exchanges would not be subsidized. It was considered to be an
    incentive, an incentive that only four States have chosen.
        Americans know today that, in fact, this was one of the
    largest and most complex tax increases in American history. We
    know that, whether you are a medical device manufacturer
    finding that you are being taxed so as to raise the cost of
    health care in order to pay for health care, or whether your
    dividends and interest are being taxed for the first time ever
    under Medicare, or whether or not getting married could cost
    you $3,400.
        The fact is, under ObamaCare if you are making $25,000, in
    other words, $10 an hour with a little bit of overtime, but
    living unmarried, you will receive about $1,700 in subsidy. If
    you live with somebody who also makes $25,000 and is unmarried,
    they will get about $1,700. But if the two of you are foolish
    enough to get married, you will lose that $3,400.
        The numbers are not debatable. What is debatable is, with
    rules not yet written on a law that was so vague that time and
    time again the Administration tells their political appointees
    to interpret the meaning, to find that which is not within the
    four squares of the law, and simply say it was Congressional
    intent.
        I am one who was here for that vote. The intent was clear.
    It was an intent to deceive. ObamaCare was, in fact, a series
    of promises by Nancy Pelosi to Democrats in order to get them
    to vote for things that they otherwise wouldn't have. Those
    Democrats, some of them here, some of them no longer here,
    have, in greater and greater numbers, realized they were lied
    to. Whether it was interfering with the churches, interfering
    with people's personal right to stay with their own insurance
    company, or, in fact, interfering with Federalism, itself, and
    States' rights to choose or choose not to participate, time and
    time again this Administration has broken promises through
    interpretation.
        It has been a long time since this Committee has looked at
    an IRS Commissioner and had to say what we will say today,
    which is, Madam Commissioner, you do not have the authority.
    You simply have the political will to interpret that States
    must, over their objections, operate effectively State
    exchanges, because if you don't do it we will do it for you,
    and without coming back to the Congress for a change you will
    cost the American people billions of dollars, hundreds of
    billions of dollars over ten years, that were not scored in the
    bill.
        Ultimately, ObamaCare, and I am calling it ObamaCare from
    now on. I am tired of calling it an affordability bill. It is
    not. It is not about quality health care and it is not about
    affordability. It was the largest increase in Federal spending
    and it scored in a way that was not true.
        Our primary reason today is to flesh out some of these
    clear problems, problems where either the law is unclear, or
    when the law is clear it is chosen to be ignored, or, more
    importantly, the intrusion by the IRS in our lives.
        Under this legislation and its interpretation by political
    appointees at the IRS, we will see every aspect of the American
    life audited by the IRS in an increasing way, so much so that I
    doubt they can, in fact, go after the conventional tax cheat
    for the next several years.
        In closing, I do not blame the IRS. They are just following
    political orders. I blame the President of the United States
    for pushing, when he can't get through legislation,
    implementation of things that were not within the four square.
        Treasury and all of its individuals need to recognize that
    we will hold them accountable for the mistakes and the
    intrusions into people's lives.
        Lastly, for the American people that may be aware of
    today's hearing, there are many things which people object to
    in the Census, which comes once every ten years, with follow-
    ons throughout. The Census will not be nearly as intrusive as
    the IRS will be under this. States will be receiving
    information and other individuals, the IRS will be receiving
    information related to many things that have never been within
    the four squares of the Internal Revenue Service.
        More importantly, portals will be wide open to those who
    need to know about whether or not you are married, you have a
    change in employment, and the like, so the opportunity for
    leaks out of the IRS outside of Federal IRS employees will
    inherently grow. I am extremely concerned that January 2014
    will come and we will have one after another failures to
    maintain the confidentiality of this new and expanding
    information.
        Lastly, the American people need to understand insurance
    carriers and exchanges will receive credits based on what the
    IRS believes should be paid. You may not go to a doctor the
    entire time. You may, in fact, want no health care. You may be
    30 and healthy.
        But if your income rises, you marry, or do anything else
    that might affect that standing, or if the IRS simply overpays,
    they will not go back to the insurance company who shouldn't
    have gotten the subsidy; they will go to you and take the
    money. You will be dunned by the IRS, an organization which can
    pursue you through bankruptcy, which has no limit to its
    powers, to eventually collect back money that you may not have
    wanted to spend.
        And, by the way, that $3,400 on the board and others, your
    employer will also first be told that he participates under
    ObamaCare in that subsidy if he doesn't offer health care and
    you chose an exchange, but oh, by the way, it is doubtful
    whether or not he will get it back as they choose to collect it
    from somebody who ultimately made more pay than what was
    possible for the subsidy.
        That and so many other questions, so many other dozens of
    questions, are with us today.
        I want to thank our panel, and recognize the Ranking Member
    for his opening statement.
        Mr. Cummings. Good morning.
        I have said it to my constituents and I have said it to my
    family, the 30 years that I have been in public life there is
    nothing that I have done, no vote that I have cast, that I am
    more proud of than the Affordable Care Act, and the reason why
    I say that is because I see the people who it will help and I
    know that there are people who will die--will die--will die--
    without it. That is real.
        And, as I said to some constituents the other day, if they
    want me to leave my neighbors on the side of the road sick,
    unable to get preventive care, like the lady that I met the
    other day with colon cancer who said, Congressman, just save my
    life. I have no insurance. Fortunately, we were able to work
    with her to get her in NIH. Then those are the people who will
    benefit.
        And I will say that, as we address this IRS issue, this is
    the United States of America. We can do this. We can get this
    done.
        The Affordable Care Act is a landmark achievement that will
    save huge sums of money for our Nation, while extending health
    insurance coverage to millions of people. They are the ones
    that get up early, that get the early bus. They work hard. They
    give it everything they have got. They are our mothers, our
    fathers, our friends. They are like Tyrone, the gentleman who
    lived down the street from me who died, and the last word he
    said to his wife on his sick bed was, Marie, I have got to get
    up out of here. I ain't got no insurance.
        We are talking about them, our fellow Americans, the ones
    who send us here.
        So last month the Congressional Budget Office issued a
    report finding that the Affordable Care Act will extend health
    insurance coverage to 30 million people who do not have it
    today. They are not collateral damage; they are our people.
    They are Americans. That is an amazing accomplishment that our
    Nation should be proud of.
        In addition, our constituents are already seeing how the
    Affordable Care Act is putting money back in their pockets.
    This week insurance companies are returning to their customers,
    our constituents, more than $1 billion in the form of rebates
    and lower premiums. That is a direct result of the Affordable
    Care Act.
        Just yesterday women in private health insurance plans
    became eligible for life-saving, preventive health screenings
    with no copays. This is part of the Affordable Care Act's
    comprehensive effort to save money by focusing on prevention.
    These are the women in our lives, our wives, our nieces, our
    daughters.
        It also addresses the historic disparities women face when
    paying for health care. The Affordable Care Act also has begun
    to ensure that seniors like my mother, who is 86 years old,
    have access to preventive care. Young adults have access to
    insurance on their parents' plans. And individuals are no
    longer subject to lifetime limits on their care.
        While all of these reforms are being realized now, many
    significant changes are yet to come. The Internal Revenue
    Service is the key agency charged with implementing many of the
    Affordable Care Act's provisions by 2014, including minimum
    coverage requirements and tax credits for individuals
    purchasing health insurance on exchanges.
        This is a considerable undertaking for the IRS, but we can
    do this. Experts from the Government Accountability Office, the
    Inspector General's office, and the National Taxpayer Advocate
    have reviewed IRS's efforts to date, and they have concluded
    that the IRS is on the right track to successfully implementing
    the new law.
        For example, GAO issued a report that says, ``The IRS
    generally follows leading practices for implementing such a
    large program, particularly at the level of individual offices
    and projects, emphasizing that top leadership has been
    involved.''
        In addition, the Inspector General issued a report that
    says this: ``Appropriate plans have been developed to implement
    tax-related provisions of the ACA using well-established
    methods for implementing tax legislation.''
        And in her testimony today Nina Olson, the National
    Taxpayer Advocate, says this: ``Since ACA enactment, the IRS
    has been working through the major challenges, making
    significant progress. The lead time provided by the ACA has
    been very helpful for the IRS, and at this point it appears the
    IRS has used the time well.''
        Certainly there are significant challenges in implementing
    this law, and as IRS moves forward it benefits greatly from the
    continued rigorous oversight and recommendations from GAO, the
    IG, and the National Taxpayer Advocate. At the same time, we
    recognize that the IRS has been actively planning to implement
    the Affordable Care Act for more than two years, and it has
    already implemented many of the provisions successfully.
        For the challenges that remain, the IRS is working closely
    with taxpayers, the business community, and the insurance
    industry to ensure that its policies are responsive to
    consumers and consistent with the intent of Congress in passing
    the law. I remind us that this is the law.
        Today the Committee is faced with a choice: do we act
    constructively or destructively? Do we build up or tear down?
    Do we help or do we hurt?
        On one hand, we could work with the IRS and its oversight
    entities to ensure that the Affordable Care Act is successfully
    implemented, particularly now that the Supreme Court has ruled
    that it is Constitutional. On the other hand, we could try to
    exploit any and all ways to bring down this law or starve the
    IRS out of resources it needs to do its job.
        I personally hope that we pursue the first approach;
    however, Republicans have introduced legislation to do the
    second. The Congressional Budget Office has examined the
    Republican bill to repeal the Affordable Care Act and concluded
    that it would increase the Federal budget deficit by $109
    billion over the next ten years.
        It is time to accept the Affordable Care Act, to accept the
    Supreme Court decision, and to accept the billions of dollars
    in savings this law will bring to our citizens.
        I look forward to today's testimony and I want to thank all
    of our witnesses for being here today.
        Mr. Chairman, I yield back.
        Chairman Issa. I thank the gentleman.
        We now recognize Dr. DesJarlais for an opening statement
    and a unanimous consent.
        Dr. DesJarlais. Thank you, Mr. Chairman.
        Chairman Issa and Ranking Member Cummings, I appreciate
    your holding today's hearing to further examine how the
    Internal Revenue Service has been implementing provisions of
    the Affordable Care Act. One of our chief responsibilities on
    this Committee is to ensure that taxpayer dollars are being
    utilized both efficiently and in accordance with the law.
    Unfortunately, it has become undeniably evident that the
    Affordable Care Act falls short on both of these principles.
        Just last week this Committee held a hearing on a new
    Health and Human Services demonstration project that the Obama
    Administration is paying for by cutting $8 billion from
    Medicare Advantage. These are funds that would normally be used
    for patient care. Two members from the nonpartisan Government
    Accountability Office stated that this demonstration project
    was unprecedented, flawed from its inception, and will
    ultimately demonstrate nothing.
        Further, there is strong evidence to suggest that the sole
    purpose of this project was nothing more than an attempt by
    this Administration to hide new costs that ObamaCare imposes on
    seniors until after the election. I fail to see how this is an
    efficient use of taxpayer dollars.
        There are the sort of examples that we have come to expect
    from this haphazardly passed bill authored by individuals who
    told the American people that they would have to pass it in
    order to find out what was in it. Well, today I want to focus
    on what is not in it.
        We have now discovered that when the Democrats were
    drafting ObamaCare they left out important language relating to
    Federally run insurance exchanges. Democrats wrongly assumed
    that the States would rush to set up exchanges once the bill
    was signed into law, but a majority of them are still yet to do
    so.
        Section 1321 of the bill gives authority to the Federal
    Government to set up exchanges in States that fail to do so on
    their own; however, the law only gives State-run exchanges the
    ability to issue premium assistance or tax credits. Nowhere
    does the bill grant this authority to Federal-run exchanges.
        The Obama Administration and proponents of this rule have
    stated that this was a simple drafting error. I don't see how
    they can possibly make this claim when Democrats had ample
    opportunity throughout the reconciliation process where they
    specifically extended tax credits to exchanges created by U.S.
    territories, yet left Federal exchanges alone. This leads me to
    believe that this was, in fact, a deliberate and premeditated
    action on the part of the Democrats as a way to incentivize
    States to set up the exchanges.
        Either way, there is no doubt that the language is missing.
    In order to fix this glaring problem, the Internal Revenue
    Service circumvented Congress' legislative authority by issuing
    a rule allowing premium assistance subsidies to be offered
    through Federal exchanges. Back in November of 2011, my
    colleague and fellow Tennessee physician, Phil Roe, and I sent
    a letter to the IRS Commissioner asking what authority his
    agency had to unilaterally alter the Affordable Care Act and
    what specifically within the bill gave them the authority to
    bypass Congress in promulgating this rule. The response we
    received from the IRS cited no specific section or language
    justifying their actions.
        Mr. Chairman, I ask unanimous consent that this letter and
    the IRS's response be submitted into the record.
        Chairman Issa. Without objection, so ordered.
        Dr. DesJarlais. On June 18th I introduced H.J. Res. 112
    which would nullify this rule under the Congressional Review
    Act. I firmly believe the actions by the IRS set a dangerous
    precedent that flies in the face of our Constitutional
    separation of powers. I am pleased to announce that Senator Ron
    Johnson has recently introduced companion legislation in the
    Senate. Ultimately, my bill and this issue are not about the
    merits of the President's health care law but on how the IRS
    has overstepped the authority it was given as a result of the
    Affordable Care Act.
        While my colleagues on the other side of the aisle may not
    share my views regarding the detrimental affects that ObamaCare
    will have on our Country, surely they will agree that the
    framers of our Constitution were clear in giving Congress sole
    legislative authority. Just because Democrats hastily drafted
    their health care law due to electoral politics, it doesn't
    mean they can now throw the separation of powers out the
    window.
        I look forward to hearing the testimony presented before us
    today, as well as having the opportunity to question our
    witnesses on these very important issues.
        I yield back the balance of my time.
        Chairman Issa. I thank the gentleman.
        Members may have seven days in which to submit opening
    statements for the record.
        We will now recognize our panel. We welcome our witnesses
    on the first panel.
        Mr. Mark Everson was Commissioner of the IRS from 2003 to
    2007 and is currently vice chairman of the AlliantGroup. I
    might note, also one of the architects of Governor Mitch
    Daniels' changes in Indiana. Ms. Nina Olson is currently the
    National Taxpayer Advocate at the IRS. Mr. Timothy Jost is
    professor at Washington and Lee University School of Law. And
    Mr. Michael Cannon is Director of Health Policies at the Cato
    Institute.
        Lady and gentlemen, pursuant to the rules of the Committee,
    would you please rise to take the oath and raise your right
    hands.
        Do you solemnly swear or affirm that the testimony you are
    about to give will be the truth, the whole truth?
        [Witnesses respond in the affirmative.]
        Chairman Issa. Please be seated. Let the record indicate
    all witnesses answered in the affirmative.
        As is the tradition of my predecessor, I will note that you
    have a time and lights, so I would only ask that you deal with
    it just the way you would green light, drive through; yellow
    light, drive through faster so you don't get caught on the red;
    red light, please do a final summary as you see your time has
    expired.
        Your entire opening statements will be placed in the
    record, so you need not go verbatim. It will all be there.
        Mr. Everson?

                           WITNESS STATEMENTS

                       STATEMENT OF MARK EVERSON

        Mr. Everson. Good morning, Mr. Chairman, Mr. Cummings,
    members of the Committee. I am pleased to be here.
        As you have indicated, I am the Vice Chairman of
    AlliantGroup. I want to stress that my remarks are my own, not
    those of that business. But I would say that we work with CPA
    firms around the Country, and some of the reflections I am
    going to make are really tied to things that I have been told.
        I would also say that I am not here to advocate for or
    against repeal of the act or of any specific components of the
    act. I am trying to help you grapple with this issue of the IRS
    and its implementation.
        As the GAO has noted, this is a massive undertaking. That
    is the wording they have used. Very significant for the
    service. Nina Olson, my colleague, former colleague and the
    National Taxpayer Advocate, has said with proper planning and
    funding the IRS is fully capable of implementing health care
    reform. I am not so sure.
        Now, clearly I know that the Service is going to do
    everything it can to implement it. They always do. But this is
    really quite a heavy lift, if you will.
        There are really two questions. One, can they do it, and
    even if they are able to do it will there be collateral damage
    to tax administration as they are working on this set of
    issues. They are both important questions.
        The Service grapples with three things when it is
    implementing laws. Are there adequate lead times? I think there
    are generally in this act. Is there adequate funding? That is
    essential if they are to do their job. I counsel you to make
    sure you provide the funding that they need. And then, finally,
    complexity. There is a lot of complexity and ambiguity in
    statutes, and that is certainly the case here.
        As Nina has said, complexity is the most serious problem
    confronting taxpayers, and clearly this is a step backward for
    tax administration because of what the IG has said is the
    introduction of the most complexity in over 20 years to the tax
    code. So that is a big problem.
        In my testimony which you have I have raised a number of
    issues. Let me just mention a few.
        The first is information technology. This is going to be a
    real challenge for the Service. And, as you have indicated,
    reliance on a lot of outside parties will be the case. You
    don't have to go any further than today's news, reading about
    millions of trades on the stock exchange going forward because
    of rogue programs or bad programs to know that errors get made.
    Systems issues are tough. A lot of challenges for the Service
    here because of the need to constantly update information. This
    is going to be a challenge.
        The second piece you have already mentioned, Mr. Chairman,
    is the protection of taxpayer data. If there was anything I
    really worried about as Commissioner, that was it. And there is
    a risk here that there can be disgorged information, and it
    would be very damaging to the Service and the confidence of
    taxpayers in the IRS if that were to happen.
        The other point that I would make is the burden on CPAs.
    CPAs struggle as it is to keep up with all of the changes in
    the tax code. They are the true advisors to small-and mid-sized
    businesses. They don't have the staffs of the Merc or a GE to
    work through all this, and this is going to be very
    challenging. We get a lot of feedback on this at AlliantGroup.
        Before I close, I have got three very general points that I
    think are very important to place this in the overall context.
        Health care reform comes at a very difficult time for the
    IRS. In part, it is Congress' doing. We are heading towards the
    end of the year where there is a great deal of ambiguity about
    what the law is. I really do encourage you to resolve these
    issues, because American businesses need certainty to make
    investment planning. But beyond that, I think the IRS is
    looking at the most difficult filing season next year, 2013,
    that it has had in decades because of the convergence of these
    factors and the potential for tax reform.
        So the competition for resources at the Service and of
    management attention, they only have so many senior managers,
    of course, this all comes at a very difficult time.
        A second point I would make that I think is sort of over-
    arching is the independence of the Service. For important and
    well-understood reasons, the IRS operates with a great deal of
    independence from other agencies. I worry that such direct
    participation of the Service in a major non-tax Administration
    initiative has the potential to erode the historic independence
    of the Service.
        And let me be clear here. I have nothing but the highest
    regard for Commissioner Shulman and his team. I am not
    suggesting I have seen things, but I just think that when you
    bring the Service in closer to the White House and to other
    agencies you just run the risk of eroding that independence.
        Let me conclude by touching on the politics of this and how
    it does impact the Service. I would say that, with the Supreme
    Court decision and the clear transfer of looking at all this
    back into the political arms of Government, it is also clear
    the Service is coming under attack. It would appear that some
    opponents of the Reform Act will demonize the IRS in order to
    build a case for overturning the law.
        The most striking example is the disturbing comparison of
    the IRS to the Gestapo by the incendiary Governor of Maine,
    Paul LaPage. Reuters quotes LePage as having said, ``What I am
    trying to say is the Holocaust was a horrific crime against
    humanity and, frankly, I would never want to see that repeated.
    Maybe the IRS is not quite as bad yet.''
        Attacks upon the IRS of this kind are unconscionable and
    will ultimately take their toll on the Service, its people, and
    the ability of the IRS to collect the money that we need to
    fund the Government.
        I would close by saying that I would suggest that, even if
    the Service is successful in executing the long list of tasks
    assigned to the IRS under the Affordable Care Act, there is
    still an unquantifiable real risk that health care reform will
    falter or perhaps, and nobody can be sure of this, but perhaps
    even fail because of the sheer number of moving parts and
    complexity of the new system.
        Let's hope health care reform is not a modern day version
    of the Vasa, the famous top-heavy Swedish war ship built in
    1628 and when it sailed out of Stockholm harbor it sank 400
    feet from shore. If something like that happens because of all
    the complexity and all the interactions and all these pieces,
    if that happens, as you say, just two short years from now, the
    damage to the IRS and the impact on our Country in that regard,
    not the health side, will be real and lasting.
        Thank you.
        [Prepared statement of Mr. Everson follows:]

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        Chairman Issa. Thank you.
        This Committee did research a Coast Guard ship that will
    crack in two in less than its first 20 years, so we are not
    completely beyond that at this time.
        Ms. Olson?

                        STATEMENT OF NINA OLSON

        Ms. Olson. Chairman Issa, Ranking Member Cummings, and
    members of the Committee, thank you for inviting me to testify
    today about the IRS's implementation about the Patient
    Protection and Affordable Care Act.
        As you know, my office is non-partisan, so I take no
    position pro or con regarding the wisdom of the ACA; rather, my
    focus has been and continues to be on trying to ensure that a
    taxpayer perspective is considered as the IRS prepares to
    implement the law as it stands today.
        In my 2010 annual report to Congress, I published a
    detailed assessment of the administrative challenges the IRS
    will face in implementing the four major tax provisions of the
    law. Since that time, my office has monitored the IRS's
    preparations for the ACA closely. Overall, I believe the IRS
    has done a good job of moving quickly to identify its key
    challenges, and has taken significant steps to address them,
    although some concerns remain.
        On the positive side, the IRS has already issued
    considerable guidance to clarify gray areas of the law. I view
    the early publication of guidance as a very positive
    development, because it enables both taxpayers and employers to
    know where they stand and to make informed decision about their
    coverage options, and also to allow others to litigate against
    those State-taken positions.
        The IRS also has made progress in developing business
    requirements for computers and other information technology. IT
    infrastructure lies at the core of the IRS's ability to
    administer the program, largely because the IRS will use
    computer systems to communicate with the exchanges. Early
    systems development will allow for repeated advanced testing
    and enable the IRS to identify and fix glitches before the
    systems go live.
        My own organization, the Taxpayer Advocate Service, or TAS,
    has also been making preparations, including initial training
    of our employees on key provisions of the ACA, reviewing and
    commenting on drafts of published guidance, designing an online
    tool to help small businesses estimate the amount of small
    business health care tax credit they may receive, and
    conducting a survey of individuals and businesses regarding
    health insurance coverage and needs that will provide useful
    demographic information for outreach purposes.
        Notwithstanding these important steps, some areas of
    concern remain. First, the IRS and other entities need to step
    up their public information campaign. The IRS should make it a
    top priority to work with other agencies to develop and deploy
    a targeted communications campaign designed to anticipate and
    answer questions from individuals and employers. As part of
    this campaign, the IRS should educate taxpayers who receive the
    advance premium tax credit about the importance of updating
    information if their income or other relevant circumstances
    change. If the taxpayer continues to receive a subsidy but
    becomes ineligible, he or she will end up with an unexpected
    tax bill when eventually filing the related return.
        Most taxpayers otherwise are not required to provide
    periodic updates to the IRS, so this new procedure needs to be
    communicated clearly.
        Other remaining challenges include establishing smooth
    inter-agency communications, minimizing the impact of tax-
    related identify theft on eligibility determinations, and
    providing additional guidance for small businesses and
    employers.
        I also believe it is critical that the IRS begin to include
    representatives of my office on its implementation teams.
    Congress placed TAS within the IRS specifically to ensure that
    the IRS considers our taxpayer perspective as it develops and
    implements programs, and with any program the devil is in the
    details, and if TAS representatives are not included on the
    teams where the details are hashed out, I am concerned the
    taxpayers eventually will be harmed.
        On the whole I believe the IRS will be able to successfully
    implement its responsibilities under the ACA, but I believe it
    is critical that the IRS receive adequate funding to meet
    taxpayer needs. If the funding is restricted, the IRS simply
    cannot cut spending on ACA implementation, because unless
    Congress changes the law, administering the ACA is a statutory
    requirement. Rather, the IRS would have to make cuts in its
    taxpayer service and enforcement programs, and that would be a
    mistake.
        In my 2011 annual report to Congress I identified the
    combination of the IRS's expanding workload and its shrinking
    resources as the number one most serious problem facing
    taxpayers. I am deeply concerned that taxpayer service suffers
    the most when IRS funding is inadequate, and I therefore urge
    you to ensure that U.S. individuals and businesses that are
    trying to pay their taxes and are seeking help from the IRS are
    not shortchanged.
        Thank you for letting me testify today, and I would be
    happy to answer your questions.
        [Prepared statement of Ms. Olson follows:]

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        Chairman Issa. I thank the gentlelady.
        I now ask unanimous consent the 2010 annual report to
    Congress be placed in the record.
        Without objection, so ordered.
        Chairman Issa. The gentlelady mentioned a 2011 report. Do
    you have a copy of that with you?
        Ms. Olson. I do not, but I can certainly get it to you for
    the record.
        Chairman Issa. Then I would ask unanimous consent that also
    be placed in the record.
        Without objection, so ordered.
        Professor Jost, thank you very much. You are recognized.

                       STATEMENT OF TIMOTHY JOST

        Mr. Jost. Thank you. Thank you, Chairman Issa, Ranking
    Member Cummings, Committee members, for this opportunity to
    address you today on the role of the Internal Revenue Service
    in health care reform. My remarks today specifically address
    Mr. Cannon's assertions which he will be making shortly that
    the IRS rule that permits Federal exchanges to issue tax
    credits is illegal.
        If Mr. Cannon is right, many constituents of Committee
    members will lose tax relief that could give them access to
    affordable health insurance. Just for 2014, 1.9 million
    Floridians would lose $7.7 billion in Federal tax relief,
    593,000 Indianans would lose $2.2 billion, over 1 million
    Ohioans would lose $4 billion, 2.6 million Texans would lose
    over $10 billion in Federal tax relief to help make health
    insurance affordable.
        Fortunately, Mr. Cannon's position is based on a
    misunderstanding of the law, its structure, and history. The
    exchange is fundamentally a market for health insurance, but
    exchanges will also ensure that health insurance consumers get
    value for money and access to premium tax credits.
        Section 1311 of the Affordable Care Act asks the States to
    establish exchanges, but Section 1321 authorizes HHS to
    establish a Federal exchange in States that choose not to,
    which is likely to include many States of members of this
    Committee.
        Mr. Cannon believed that Federal exchanges cannot issue
    premium tax credits. This assertion was made earlier in this
    hearing. Because two subsection of Section 36(b) of the
    Internal Revenue Code, which establishes eligibility for tax
    credits, refer to ``persons enrolled through an exchange
    established by the State under Section 1311,'' Mr. Cannon
    argues that this means only State and not Federal exchanges can
    offer tax credits.
        The Affordable Care Act as amended by the Health Care and
    Education Reconciliation Act, however, explicitly provides that
    Federal exchanges can issue tax credits.
        When I teach first-year law students how to read a statute,
    I tell them you start with the definition section. Section
    1563.C of the Affordable Care Act defines exchanges to mean
    ``an American health benefits exchange established under
    Section 1311.'' Section 1311 literally states that a State
    shall establish an exchange, and section 1311.D describes and
    exchange as an exchange established by a State.
        Because Congress cannot, however, Constitutionally require
    a State to establish exchanges, Section 1321.C provides that
    the HHS Secretary shall establish and operate such exchange
    within a State, referring to the 1311 State, if a State fails
    to do so.
        Under the Affordable Care Act definition of exchange, a
    Section 1321 exchange becomes a Section 1311 exchange
    established by the State. This is reinforced by Section 1321,
    itself, which, again, refers to such exchange, referring to the
    earlier required 1311 required State exchange. Under ACA,
    therefore, all exchanges, Federal and State, are 1311 exchanges
    established by the State by definition.
        Other sections of the ACA direct all exchanges, Federal and
    State, to manage Federal tax credit functions, including
    Section 1413, which requires all exchanges to use streamlined
    applications and eligibility assessments to qualify persons for
    premium tax credits.
        Most importantly, a third subsection of Section 36(b),
    itself, clarifies premium tax credits are available through
    both State and Federal exchanges.
        This subsection was added to the ACA by the Reconciliation
    Act, which, as a later adopted statute, takes precedence over
    the original ACA if there were any contradiction.
        Mr. Cannon's interpretation is also refuted by the
    legislative history of the ACA as demonstrated in my extended
    remarks, which refer to repeated references to all States
    having premium tax credits available.
        Mr. Cannon claims to have found a statement by Senator
    Baucus acknowledging that only State exchanges could issue
    premium tax credits. I would be happy to introduce that
    colloquy between Senator Baucus and Senator Ensign into the
    record. It cannot be read to say that.
        Perhaps most importantly, the CBO and JCT have consistently
    assumed the availability of premium tax credits through State
    and Federal exchanges since 2009, and, indeed, the CBO's report
    from two weeks ago at footnote 14 explicitly recognizes that
    both Federal and State exchanges will issue premium tax credit.
        Finally, Section 36(b) of the IRC expressly grants the IRS
    authority to write regulations if there were any ambiguity in
    the statute. Under the Chevron Doctrine, the IRS's
    interpretation of the statute would be accepted by the courts,
    as a recent Congressional Research Service legal analysis
    affirms.
        In sum, premium tax credits will be available to middle
    income uninsured citizens of all of your States, not just
    Chairman Issa's and Mr. Cummings' States, which are going to
    have State exchanges.
        Thank you.
        [Prepared statement of Mr. Jost follows:]

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        Chairman Issa. Thank you.
        I would instruct the staff to get an official copy of the
    that colloquy and ask unanimous consent it be placed in the
    record in the appropriate place.
        Mr. Jost. Thank you very much, Mr. Chairman.
        Chairman Issa. Without objection, so ordered.
        With that, we recognize Mr. Cannon.

                      STATEMENT OF MICHAEL CANNON

        Mr. Cannon. Thank you, Mr. Chairman and Mr. Cummings and
    members of the Committee, for the opportunity to present my
    views on the Internal Revenue Service's final rule concerning
    premium assistance tax credits in the Patient Protection and
    Affordable Care Act.
        I have submitted written testimony on behalf of my co-
    author, Professor Jonathan Adler of Case Western Reserve
    University School of Law and myself. It is our contention that
    this rule exceeds the IRS's statutory authority under the PPACA
    and is an illegal tax increase.
        Two facts are key to understanding why this IRS regulation
    is illegal. First, both sides of this controversy acknowledge
    that the statutory language governing eligibility for tax
    credits is clear and unambiguous. The act provides that
    taxpayers are eligible for tax credits if they purchase a
    health plan through ``an exchange established by the State
    under Section 1311.'' That language clearly authorizes tax
    credits only in State-established exchanges, and the act
    employs or refers to that language no less than six times when
    authorizing tax credits. There is no parallel language anywhere
    in the statute authorizing the IRS to offer tax credits through
    Federal fall-back exchanges established under Section 1321.
        The act's authors intentionally conditioned tax credits on
    States establishing exchanges as one of a number of large
    financial incentives designed to encourage States to implement
    the statute. Even Professor Jost acknowledges that the
    provisions authorizing tax credits ``clearly say,'' those are
    his words, clearly say, those credits are available solely
    through State-created exchanges.
        Second, the remainder of the statute and the legislative
    history support the clear meaning of those provisions. The only
    statement anyone has found in the legislative history on this
    point comes from the bill's lead author and chief sponsor,
    Senate Finance Committee Chairman Max Baucus, who confirmed the
    bill conditions tax credits on States establishing an exchange.
        And yet, contrary to the clear language of the statute and
    Congressional intent, this IRS regulation purports to issue tax
    credits in States that do not establish an exchange. Under the
    law's employer mandate, those illegal tax credits will trigger
    an illegal $2,000 per employee tax on employers and unlawfully
    appropriate hundreds of billions of dollars to private health
    insurance companies in States that do not establish an
    exchange.
        Since those illegal expenditures will exceed the revenues
    raised by this rule's illegal tax on employers, this IRS
    regulation will also increase Federal deficits by hundreds of
    billions of dollars, all contrary to the clear language of the
    statute and Congressional intent.
        This IRS regulation is a large tax increase. It imposes a
    $2,000-per-worker tax on employers and obligates taxpayers to
    pay for hundreds of billions of dollars of subsidies to private
    insurers. For every $2 of unauthorized tax reduction that will
    result from this IRS regulation, it imposes $1 of unauthorized
    taxes on employers, commits taxpayers to pay for $8 of
    unauthorized subsidies to private insurance companies, and
    increases Federal deficits by $9. Though this IRS regulation is
    nominally about tax credits, Government spending accounts for
    80 percent of its budgetary impact.
        Worse than the tax increase, though, this IRS regulation is
    an illegal tax increase. It lacks any statutory authority, it
    is contrary to both the clear language of the act and
    Congressional intent, and it cannot be justified on other legal
    grounds. It is, quite literally, taxation without
    representation.
        As you listen to the IRS and its defenders say that this
    illegal tax increase is consistent with the statute or
    supported by the statute or recognized through the statute,
    notice what they are not saying. In the year since the IRS
    proposed this regulation, they have not cited a single
    statutory provision expressly authorizing the IRS to do these
    things in Federal exchanges, because there is no such
    provision. They have not cited a single statutory provision
    that conflicts with the language limiting tax credits to State-
    created exchanges because there aren't any.
        Nor have they cited a single statement from the legislative
    history that supports either this regulation's attempt to issue
    tax credits and Federal exchanges or their claims that it was
    Congress' intent that the Patient Protection and Affordable
    Care Act would do so. There is simply no plausible way to argue
    this IRS rule is consistent with or supported by Congressional
    intent, much less the statute.
        The most important indicator of Congressional intent is the
    text of the statute, itself. That text is clear. It was there
    for all to see before Congress approved it. It is not possible
    that someone who read the bill could have mistakenly thought
    that that language authorized tax credits and Federal
    exchanges.
        The IRS should rescind this rule before it takes effect in
    2014. Alternatively, Congress and the President could stop it
    with a resolution of disapproval under the Congressional Review
    Act.
        And, finally, since this rule imposes an illegal tax on
    employers in States that opt not to create a health insurance
    exchange, those employers and possibly those States could file
    suit to block this rule in Federal court.
        Thank you.
        [Prepared statement of Mr. Cannon follows:]

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        Chairman Issa. I thank the gentleman.
        I now ask unanimous consent that our colleague, the
    gentleman from Tennessee, Dr. Roe, be allowed to participate in
    today's hearing.
        Without objection, so ordered.
        I will now recognize myself for a round of questioning.
        Professor Jost, is it undeniable that there is a cost
    difference between all States participating, some States
    participating, and the Federal Government essentially
    preempting the States choosing not to participate? In other
    words, if only 14 States participate, our scoring shows over
    half a trillion dollars less in cost to the Federal Treasury.
    Would you disagree with that?
        Mr. Jost. I would agree that citizens of all the rest of
    the States would be denied a----
        Chairman Issa. Okay. So I will take that as yes, it is a
    half a trillion dollars to the taxpayers or, more specifically,
    half a trillion dollars we don't borrow from the Chinese.
        Mr. Jost. Well, a half a trillion dollars that would not be
    granted in Federal tax credits to citizens of this Country.
    Yes. Thank you.
        Chairman Issa. Mr. Cannon, when CBO scored this, my
    understanding is they made the assumption that all States would
    participate. Is that your understanding?
        Mr. Cannon. There is a widespread assumption when this law
    was passed all States would establish exchanges.
        Chairman Issa. Okay. But States not participating has a
    ramification. Isn't it true that a State not participating
    means that a company would not get a $2,000 penalty plus the
    cost of the subsidy in that case if there is no State exchange?
        Mr. Cannon. That is correct. What triggers the penalties
    against employers under this law's employer mandate, is when
    one of their employees receives a tax credit through an
    exchange, if there are no State-created exchanges there would
    be no tax credits. If there are no tax credits----
        Chairman Issa. So let's run through, because I now
    understand why Justice Roberts made the decision he made.
    Clearly this was a pot full of taxes. We may disagree with
    whether it was right, but I begin to see why this is all about
    taxing, that ObamaCare is all about taxing. So let me ask a
    question. Under a State that does not create an exchange, does
    the individual still have an individual mandate?
        Mr. Cannon. Yes.
        Chairman Issa. Does the individual then have to seek either
    private insurance or the Federal exchange that is anticipated
    in the law?
        Mr. Cannon. Or pay a penalty tax.
        Chairman Issa. okay. So the Supreme Court decision that my
    colleague, the Ranking Member, referenced doesn't change. The
    States have the right to opt out under this law. They have
    chosen to do so in huge amounts, or at least not to
    participate, and it doesn't change anything related to the
    Supreme Court question of the individual mandate; is that
    correct?
        Mr. Cannon. That is correct.
        Chairman Issa. So the challenge at the Supreme Court, which
    will occur when the tax is implemented, essentially the first
    time an employer gets his bill he can then make a challenge
    that will go all the way to the Supreme Court, what would be an
    all new challenge that won't occur until 2015, correct?
        Mr. Cannon. That is actually not clear, sir. Employers
    could file suit today, and it is a defensible, I think, perhaps
    the correct reading of the Supreme Court's ruling in NFIB v.
    Sebelius that the anti-injunction act might not bar an employer
    establishing standing immediately.
        Chairman Issa. But certainly it didn't bar on the other
    tax. But you would say, and I think since Professor Jost only
    wants to answer the questions he wants to answer, not the ones
    I ask, clearly this is a separate issue that will very possibly
    go all the way to the Supreme Court; is that correct?
        Mr. Cannon. I can't say how far it would go, sir.
        Chairman Issa. Let me rephrase that. This is a separate
    issue which would be eligible?
        Mr. Cannon. That is correct.
        Chairman Issa. Okay. Ms. Olson, you mentioned in our
    earlier conversation, I hope you don't mind my bringing it up,
    that your legal counsel, your general counsel, had made this
    decision from the rule. Correct?
        Ms. Olson. It is the Internal Revenue Service chief
    counsel, not mine, yes.
        Chairman Issa. Right, but yours being the IRS.
        Ms. Olson. Yes. Correct.
        Chairman Issa. That is a political appointee, isn't it?
        Ms. Olson. Well, yes it is.
        Chairman Issa. Okay. So a political appointee made the
    decision that this rule should be made without, according to
    Mr. Cannon and my reading of the bill, without any legal
    standing. I'm going to ask you another question. This one
    concerns me more. In year 2010 report you wrote, ``The new W-2
    reporting requirements has raised numerous concerns that
    reporting the value of health insurance on employees' W-2 may
    cause the amount to be taxed.'' You wrote that.
        You also, in your 2010 report, which is in the record, you
    said, ``To get to the underlying goal of the new law, health
    coverage for the vast majority of Americans,'' and this was a
    question, ``Will the IRS audit every taxpayer who does not
    report?'' These are areas of concern you raised.
        Ms. Olson. Yes.
        Chairman Issa. Let me go through this. You raised it again.
    If you don't audit every single person to make sure that they
    properly were taxed, then we have a vast hole in which there
    could be subsidies paid that shouldn't, there should be
    individual fines, taxes, if you will, $2,000 for those who
    don't. So essentially you almost have gotten into a situation
    in which every American needs to be audited every year. That is
    more or less what you are saying there.
        Ms. Olson. Sir, the first quote we were saying there is
    confusion about taxpayers when they get information on their W-
    2 reporting what their premiums are, should that be taxed, and
    the answer is no, that is not being taxed.
        Chairman Issa. Sure, I understand you can explain part of
    it, but the other part is essentially, if you don't audit every
    American every year, then this thing won't be right?
        Ms. Olson. The second issue was we were raising that as a
    concern, and if the IRS takes its normal approach, which is to
    select portions of the population to audit on any tax position,
    then you are not going to be able to effectively implement the
    mandate.
        Chairman Issa. Okay. And I want to recognize the Ranking
    Member, but I just want to make it clear it appears that the
    Commissioner made a political decision, which was the new W-2
    reporting requirement has been delayed until after this
    Presidential election, hasn't it?
        Ms. Olson. I can't speak to that. I think the Commissioner
    is on the next panel.
        Chairman Issa. Well, no.
        Ms. Olson. There has been a delay.
        Chairman Issa. There has been a delay, and the effect of
    that delay has been it won't appear for people to see until
    after this election.
        Ms. Olson. That is a matter of fact. Yes.
        Chairman Issa. Okay. With that, I recognize the Ranking
    Member.
        Mr. Cummings. To all of our witnesses, I really want to see
    this law implemented to its fullest degree, because I know that
    right now, right this second, there are people watching us.
    There is somebody leaning in a sick bed that can't get up.
    There is somebody who cannot get insurance. And they are
    saying, you know, whatever you do, whatever arguments you have
    got, get them straight because I want to live. And I want to
    speak for them because they are out there.
        I have often said that we all are the walking wounded. All
    of us are the walking wounded, and we are walking yet and
    wounded we will be. So, Ms. Olson, in your testimony you are
    generally positive about what the IRS has accomplished to date,
    and you say that over the past two years the IRS has used its
    time well, and I am going to come back to you in a moment.
        Mr. Everson, I want to thank you for your balanced
    testimony, but I want to ask you this. You were IRS
    Commissioner. We can do this. We can get this done. I know you
    highlighted a lot of issues that we need to be aware of, and I
    really appreciate that, and you are talking about some things
    that are perhaps preventive, hopefully, that is, so the IRS
    won't run into this, but we can get this done, can't we? This
    is America. This is the United States. We are a can-do Nation.
        Mr. Everson. Let me say this, sir. It is quite possible we
    will get it done. The Service is going to do its level best.
    The Commissioner, when you ask the Commissioner this question,
    he is going to say yes, of course. He has to. His job is to
    implement the law, however strong or however flawed, so that he
    can't be then before the Committee or before Ways and Means or
    Finance and have people say, well, you never liked this law.
    You said you couldn't do it anyway. So the Service is always
    going to say yes.
        I think the Service in this instance is a little bit like
    that frog they always talk about in the frying pan that you
    keep turning up the heat until sooner or later the frog is
    dead. It doesn't jump out. And that is my worry here, that
    there are so many pieces, there are so many things to do,
    especially on the systems side, as has been indicated, on the
    reg side. There is so much confusion out there that I do worry
    about this.
        And then secondly, as you and I have discussed, I worry
    about the impact on tax administration from a failure here.
        Mr. Cummings. Yes.
        Mr. Everson. So I don't think this is going to be easy and
    I don't think it is a certainty that it can be done, sir.
        Mr. Cummings. You said what? What was the last statement?
        Mr. Everson. I don't think it is easy and I don't think it
    is, by any means, a certainty that it can be done, even with
    very strong efforts by the IRS.
        Mr. Cummings. And with resources. I think that was one of
    the things that you talked about.
        Mr. Everson. Resources. As I have indicated, absolutely,
    give the Service the resources it needs to do then if you are
    going to hold them accountable for doing it.
        Mr. Cummings. Thank you.
        Ms. Olson, you raised one specific challenge, and that was
    the need for a communications plan and taxpayer education
    efforts. Why is that so important? I agree with you, by the
    way. I think that is much needed.
        Ms. Olson. We need to tell taxpayers, make sure taxpayers
    know where they should go for each step of this program, and
    that for the advanced premium credit they are dealing with the
    exchanges, for issues on the tax return they are dealing with
    the IRS. They need to update their information during the year
    so they don't get socked with a tax at the end of the year. And
    so we were talking about changing behavior, and we really need
    to communicate that information out there.
        To something else that Former Commissioner Everson said,
    you know, about the burden on the CPAs and other return
    preparers, I think we need to start talking to them about what
    to expect as we get closer to this date.
        Mr. Cummings. I don't know if you have read the GAO reports
    on the implementation of the Affordable Care Act, but they are
    also generally positive, Ms. Olson, about the IRS efforts to
    date. GAO finds that top IRS leaders have been directly
    involved in this process, and that IRS has accomplished a
    number of those, and that the risk of being identified and
    analyzed at the individual project level.
        GAO also makes a number of specific recommendations to
    improve the implementation of the program. For example, GAO
    recommends that IRS develop an integrated plan with detailed
    cost estimates and develop procedures identifying and
    evaluating risk mitigation strategies. Ms. Olson, are you aware
    of GAO's findings? Are they consistent with yours?
        Ms. Olson. Yes. And the IRS I know has responded to GAO's
    findings and is taking steps to address that.
        Mr. Cummings. Now let me ask you about another report. This
    one is from the Treasury Inspector General for tax
    administration and it is also fairly positive. It says that the
    IRS is effectively using tracking systems to monitor
    implementation, that it is working on forms and publications
    and other consumer outreach, and that is has completed plans
    for computer programming tasks.
        And overall the Inspector General says this: the
    appropriate plans have been developed to implement tax-related
    provisions of the ACA using well-established methods for
    implementing tax legislation. Do you agree or disagree with the
    IG's conclusion?
        Ms. Olson. From what I have seen, I would have to agree to
    date.
        Mr. Cummings. Well, my goal on this Committee is to conduct
    a constructive oversight and to work with you and the IRS to
    flag potential issues before they become problems. We will be
    having the IRS Commissioner on the next panel and I am looking
    forward to his thoughts, and I am hoping that he has listened
    very carefully to what Mr. Everson has just said and don't tell
    us what he thinks we want to hear but tell us what we need to
    hear.
        With that I yield back.
        Chairman Issa. I thank the gentleman.
        We now recognize the distinguished gentleman from
    Tennessee, Dr. DesJarlais, for his questions.
        Dr. DesJarlais. Thank you, Mr. Chairman.
        What we need to decide today is whether the IRS bypassed
    Congress, in a sense wrote a new tax law that is a power given
    solely to Congress, so let's go through first a series of yes/
    no questions. I know panels tend not to like those, but let's
    try to do the best we can.
        First, Mr. Cannon, is there anything stopping the IRS from
    implementing Section 36(b) of the Internal Revenue Code exactly
    as written?
        Mr. Cannon. Section 36(b) is large and complicated, sir. If
    what you mean is the provision restricting tax credits and
    State-run exchanges, no.
        Dr. DesJarlais. Professor Jost?
        Mr. Jost. Section 36(b), as I explained, if you read the
    definitions, does authorize Federal exchanges to issue a tax
    credit, so no, there is no problem.
        Dr. DesJarlais. There is no problem. Thank you.
        In one part of the law it authorizes tax credits for people
    who purchase a qualified health plan through an exchange
    established by a State under Section 1311, and even people who
    defend the IRS on this issue, such as yourself, Professor Jost,
    say that this part of the law is clear. Is there any part of
    the statute that prevents you from doing just that, offering
    tax credits only in State-run exchanges?
        Mr. Jost. Again, the definitions.
        Dr. DesJarlais. Mr. Cannon, is there any part of the
    statute that prevents you from doing just that, offering tax
    credits?
        Mr. Cannon. No.
        Dr. DesJarlais. No. Okay.
        Mr. Cannon. No. In fact, the statute requires that.
        Dr. DesJarlais. Okay. Is there any part of the statute that
    conflicts with that, Mr. Cannon?
        Mr. Cannon. No. In fact, all other elements of the law
    support the clear meaning of that limitation of tax credits to
    health insurance exchanges established by the State under
    Section 1311, and established by the State. Those words are
    key.
        Dr. DesJarlais. What about the information reporting
    requirement?
        Mr. Cannon. That does not conflict. It does require
    exchanges established under Section 1321 by the Federal
    Government to report information related to eligibility for tax
    credits and the advanced payment of tax credits to the Treasury
    Secretary and to individuals enrolled through those exchanges.
        Dr. DesJarlais. Okay.
        Mr. Cannon. But that does not conflict in any way with the
    limitation of tax credits to State-run exchanges.
        Dr. DesJarlais. Okay. So what is stopping the IRS from
    implementing the tax credit provision exactly as written and
    exchanges from implementing the information reporting
    requirement exactly as written, or can they both be implemented
    exactly as written without conflicting with each other?
        Mr. Cannon. The latter. They can both be implemented
    exactly as written without any conflict.
        Dr. DesJarlais. Agreed, Professor Jost?
        Mr. Jost. I would agree because, again, Federal exchanges
    can issue premium tax credits and can report.
        Dr. DesJarlais. Okay. Do you agree that when authorizing
    these premium assistance tax credits Internal Revenue Code
    explicitly refers to only health insurance exchanges as
    established by the States under 1311, Professor Jost?
        Mr. Jost. I do, and, again----
        Dr. DesJarlais. Mr. Cannon?
        Mr. Jost.--given the definition, that means Federal
    exchanges.
        Mr. Cannon. That is what the statute says, but I would
    disagree with Professor Jost that the Federal Government can
    establish a health insurance exchange established by the State,
    which is what Section 1311 requires. And that claim is
    completely inconsistent with the text of the law.
        Dr. DesJarlais. Simple question: do you agree that when
    authorizing those tax credits the IRC reportedly refers to
    exchanges established by the State under 1311?
        Mr. Cannon. That is correct.
        Dr. DesJarlais. Professor Jost, do you agree with that?
        Mr. Jost. Again, given the definition that includes Federal
    exchanges.
        Dr. DesJarlais. Okay. Do you agree that the ruling
    providing tax credits in Federal exchanges will trigger
    penalties against employers under the employer mandate in
    States with Federal exchanges, Professor Jost?
        Mr. Jost. If they do not offer health insurance or adequate
    or affordable insurance and their employees go into the
    exchange and get Federal premium tax credits, yes.
        Dr. DesJarlais. Mr. Cannon, yes or no.
        Mr. Cannon. Yes.
        Dr. DesJarlais. Thank you. Are you aware, Professor Jost,
    of how many time state reconciliation bill, the Health Care and
    Education Act, amends Section 1401 of the ObamaCare law which
    created IRC Section 36(b) authorizing the tax credits in State-
    created exchanges?
        Mr. Jost. Well, at least once, but I don't know off the top
    of my head.
        Dr. DesJarlais. Seven times. Are you aware of how many
    times that the same reconciliation bill amended Section 1402 of
    the Affordable Care Act which authorizes cost-sharing
    subsidies, credits in State-created exchanges?
        Mr. Jost. Not off the top of my head.
        Dr. DesJarlais. Okay. Five times. So a total of 12 times.
    So if Congress intended to offer tax credits and cost-sharing
    subsidies through Federal exchanges, then why didn't Congress
    include any language to that effect among the 12 amendments
    within the reconciliation bill authorizing tax credits and
    cost-sharing subsidies through exchanges established by U.S.
    territories? Is that a coincidence?
        Mr. Jost. Again, it had already authorized Federal exhibits
    to issue tax credits, and therefore there was no need to amend
    it.
        Dr. DesJarlais. Mr. Cannon, do you agree? Is he going wrong
    here?
        Mr. Cannon. There is no language authorizing tax credits in
    Federal exchanges, and the claim that Professor Jost is making
    is not supported by the text. What he is saying is that the
    Federal Government can create a health insurance exchange for
    purposes of Section 1311, but Section 1311, itself, clearly
    says that, for purposes of that section, ``an exchange shall be
    a Governmental agency or nonprofit entity that is established
    by a State.'' It is simply implausible to argue that the
    Federal Government can establish an exchange that is
    established by a State.
        Dr. DesJarlais. In fact, we know it was their intent to
    entice or almost coerce States into signing up for these
    exchanges. They thought that when ObamaCare was released the
    States would just line up and sign up for these exchanges, but
    when they didn't they realized they had a real problem. But the
    intent of the bill was clear. That is what they were trying to
    do. Do you agree?
        Mr. Cannon. And that intent was revealed by the Senate
    Finance Committee, the Chairman Max Baucus. When challenged by
    opponents of the bill in his Committee he said that it does
    condition tax credits on the State creating an exchange.
        Chairman Issa. The gentleman may finish the answer if he
    wants. You did?
        Mr. Cannon. Yes.
        Chairman Issa. The gentleman's time is expired. Thank you.
        We now go to the gentleman from Illinois, Mr. Davis, for
    his questions.
        Mr. Davis. Thank you very much, Mr. Chairman. I want to
    thank the witnesses for appearing also.
        Ms. Olson, opponents of health reform legislation have
    unfairly characterized the Affordable Care Act as resulting in
    ``an unprecedented expansion of the IRS powers.'' To be honest,
    I am not exactly sure of what they are talking about, so let's
    look at some of the possibilities.
        One claim they appear to be making is that the IRS has the
    new authority to distribute billions of dollars in tax credits
    to individuals purchasing health insurance on the exchanges. I
    think that is a good thing, but it seems that some of my
    colleagues on the other side of the aisle do not. Ms. Olson,
    does this aspect of the Affordable Care Act represent an
    unprecedented expansion of the IRS powers? Or does the IRS have
    decades of experience with distributing funds as part of
    similar social programs, like when the IRS distributed the Bush
    Administration's economic stimulus payment?
        Another claim that opponents of the law are making is that
    the IRS will have access to individuals' personal health
    information when they are verifying insurance coverage.
        Are these accurate assertions?
        Ms. Olson. I view ACA not as an unprecedented expansion of
    IRS powers, but rather an unprecedented expansion of IRS work.
    The powers that we have in the law are powers that reside in
    tax administration, period. We implement the earned income tax
    credit, which is billions of dollars; the first-time homebuyer
    credit; as you referenced, the economic stimulus payment. We
    are a disperser of payments, and that trend has been happening
    since the 1970s.
        In terms of health information that we would get, my
    understanding is that we would get the information from
    insurers whether or not the taxpayer was covered, and
    essentially nothing else. The amount of the premium paid. And
    that would be it. Nothing about their state of health or
    anything like that. That is new information that we will be
    getting; however, we have always been getting information from
    third parties. So it is not a new approach giving us
    information; it is new information.
        Mr. Davis. Well, let me proceed. A number of people appear
    to still believe that the IRS will be subjecting individuals to
    liens or levies or even jail time if they fail to purchase
    insurance. Is this from your analysis?
        Ms. Olson. No. The law, at my urging, in fact, prevents the
    IRS with respect to the individual mandate, what people call
    the individual mandate, the IRS is prevented from issuing liens
    or levies or its other enforcement action. It can collect that
    mandate through what we call refund offset, where a taxpayer
    has a refund coming to them and we would offset that refund
    amount with the amount of the penalty.
        Mr. Davis. And if low-income taxpayers cannot afford health
    insurance, will they be subject to a penalty?
        Ms. Olson. There are many provisions in the law allowing
    for exemptions, both for hardship, and the mandate only applies
    to taxpayers starting at a certain level of income.
        Mr. Davis. Some folks have claimed that the Affordable Care
    Act will require the IRS to hire 16,000 new enforcement agents.
    The Commissioner has said on a number of occasions that this is
    a made-up number with no basis in fact. Is this your
    understanding, perhaps, as well?
        Ms. Olson. I think the Commissioner can certainly speak on
    the next panel about this. The internal conversations, my
    understanding is that we are maybe looking at, going forward,
    800, 860 full-time equivalents for doing this work once it is
    implemented.
        Mr. Davis. Thank you very much. My time has expired. Mr.
    Chairman, I yield back.
        Chairman Issa. I thank the gentleman.
        I now ask unanimous consent that Professor Jost's September
    11, 2011, article, Yes, the Federal Exchange Can Offer Premium
    Tax Credits be placed in the record.
        Without objection, so ordered.
        Chairman Issa. Professor Jost, my staff has asked me to
    give you an opportunity to clarify an answer you gave to Dr.
    DesJarlais. You said that it was in the act, in the September
    11th you said it was a drafting error. Can you reconcile? Is it
    in the act in written language, or in your September 11, 2011,
    article were you correct that it was, in fact, clearly left out
    of the act?
        Mr. Jost. I have learned over the last year a bit more
    about the statute, and that is something that I think is worth
    doing.
        Chairman Issa. I just want to----
        Mr. Jost. I think the statute could have been better
    drafted, but I think if you read the statute as a whole,
    including the definitions, it does authorize Federal exchanges
    and I was wrong at that point.
        Chairman Issa. Okay. So you are saying 2011 is incorrect,
    the article, and you now stand by your testimony?
        Mr. Jost. That part of the 2011 article was incorrect, and
    I now stand by my testimony. Thank you.
        Chairman Issa. Thank you very much.
        We now recognize the gentleman from Michigan, Mr. Walberg.
        Mr. Walberg. Thank you, Mr. Chairman.
        I think the insertion of the music at that proper time was
    probably coming from the Sovereign of the Ages saying that we
    are living in a fantasy world that this thing is going to work,
    and so maybe that music will come in again at some time.
        As I understand from what I hear and what I read, what I
    have heard today, that tax credit eligibility and size are
    determined by a formula that includes a number of things,
    details. The tax credits are sent directly from Treasury to
    health insurance companies.
        Ms. Olson, you have stated that ``taxpayers who did not
    update their household information during the year may find
    that they owe a significant amount of money at the end of the
    year. Money they likely do not have.'' I would concur with you
    on that statement. At least my concerns would concur with you.
    What type of information will households have to update?
        Ms. Olson. If they are determined by the exchange in
    advance that they are eligible for these advance payments of
    their health care premium, they will need to let the exchanges
    know if they have gotten an increase in salary, because that
    may make them ineligible for the full amount of credits that
    they are getting. On the other hand, if they have a child may
    become ineligible in their household, someone may die in their
    household. On the other hand, they may be entitled to more
    credit if they get unemployed or something like that.
        But the point is it is the changing of their circumstances
    that they are going to have to update it during the year, and
    that they could end up owing money at the end of the year is a
    risk and I am very concerned about that.
        Mr. Walberg. And even with different States, changing
    States, as many people have to do just to find a job now,
    changing States with different provisions in their exchanges
    could make it very difficult, as well?
        Ms. Olson. It could very well be.
        Mr. Walberg. You know, I come from the aspect if you are a
    person who has to file a quarterly report, you understand the
    complexities of that. But if you have a bunch of new citizens
    who are going to be really required, if they are going to be
    intentional about it and not run amuck, are going to be filing
    reports that they have never done before and don't have the
    abilities of external resources to help them. The challenge
    will be there. Do you believe that most Americans are going to
    update the IRS or State exchanges when they change jobs, get
    married, move States, whatever?
        Ms. Olson. I think it is going to be a very great learning
    curve.
        Mr. Walberg. With a lot of pitfalls.
        Ms. Olson. With a lot of pitfalls. The only saving grace is
    about 80 percent, 75 to 80 percent of taxpayers get a refund,
    so it is unlikely that they will owe money to the IRS. It is
    just that their refund, average refund is $3,000, at least the
    first year their refund might be, you know, decreased. I am not
    minimizing that. That is a significant thing for taxpayers.
        Mr. Walberg. And the confusion, especially the first
    reconciliation in 2015, how would you describe it?
        Ms. Olson. I think it will be a surprise to the taxpayers
    if they don't update their information.
        Mr. Walberg. And persons who are in a situation where they
    are now having to use a Government-run or Government takeover
    of health care are not only going to have the sickness and the
    problems that they have, but also the confusion, the
    frustration, the worry, in some cases the terror of trying to
    deal with all of this while they are trying to get well.
        Ms. Olson. I think the agencies are trying to make it as
    easy as possible.
        Mr. Walberg. Okay. Thank you for your responses.
        Mr. Everson, many experts point out that the tax credit
    most similar to ObamaCare's premium tax credits is the earned
    income tax credit. Unfortunately, the ITC has an extremely high
    error rate and fraud rate, sadly. What lessons are there from
    the ITC experience and IRS that the IRS can take to reduce the
    error rate and fraud rate with premium credits?
        Mr. Everson. Well, the program, sir, is very complex, and
    it is distinguished from many other Federal programs where
    there is a real front-end application process where you sort of
    sort through information and then someone is deemed ineligible
    or eligible for a benefit, but there is no administrative cost
    to the ITC in the sense that most big food stamps or other
    Federal programs they have got a 6 or 7 percent monies that are
    appropriated go to administering on the front end. The ITC is,
    by and large, like other things on your return. You put it out
    there, and then if the Service has questions--and they hold a
    lot of the returns before they pay, because, as you indicate,
    there is a lot of fraud, there is a lot of just plain
    misunderstanding--even more of that--that gets in there, and
    that is a real problem. But I would say the biggest piece is
    the complexity and the----
        Mr. Walberg. So ObamaCare is more complex than the ITC and
    other----
        Mr. Everson. I agree with the advocate's comments earlier
    that it is about a lot more work, but it is about also very
    great complexity within each of the many provisions that are in
    the statute. So I consider this comparable in many ways, yes, I
    do, to the EITC. The EITC, at least when I was Commissioner,
    had the highest error rate of any Federal program. I believe it
    still does. I don't know.
        Mr. Walberg. And this is more complex?
        Mr. Everson. Yes. I think it is.
        Chairman Issa. Would the gentleman yield for just one
    second?
        Mr. Everson. I would yield.
        Chairman Issa. I just want to verify, Ms. Olson. You were
    saying individual taxpayers would have to update their record
    if they had a change. What year will be used by the IRS
    initially to determine, in 2014, what the subsidy will be? I
    don't want an open question. I just want to make sure it is
    clear.
        Ms. Olson. The 2012 income is what is used to determine
    your eligibility for a premium, advanced premium payment, for
    2014.
        Chairman Issa. Thank you. I just wanted to make sure we got
    that in the record. I thank the gentleman.
        With that, I recognize the gentleman from Massachusetts for
    five minutes.
        Mr. Tierney. Thank you, Mr. Chairman. I thank all of our
    witnesses today for their testimony and for their knowledge on
    this thing.
        Professor Jost, I just wanted to ask a question about the
    fact that until recently a lot of the insurance companies were
    spending, I believed, a significant amount of their premium
    money on things other than health services, whether it be
    salaries or bonuses or lobbyists or other administrative costs.
    One study, in fact, indicated that ten of the largest insurance
    companies saw their profits jump some 250 percent between 2000
    and 2009. In just 2009, alone, at the height of the economic
    recession, the five biggest insurance companies saw their
    profits increase by 56 percent. So I find that a startling
    figure, but I wonder if you have any idea how these health
    insurance companies were able to increase their profits so
    dramatically during that time.
        Mr. Jost. Yes, I do. The medical trend, the growth in
    health care costs, has been growing at historically low levels
    for the last two or three years; nevertheless, insurance
    companies were increasing premiums because they believed that,
    once the recession ended, people would start using more medical
    care and trend would go back up. So there has been a growing
    gap between premiums and actual health care costs.
        The medical loss ratio 80/20 rule that the Affordable Care
    Act imposes has resulted in 12.8 million Americans receiving
    $1.1 billion in rebates that were due as of yesterday,
    including $300 million in rebates for American small
    businesses. Yet, insurance companies are still doing very well.
    I was just reading this morning Carl McDonald says that Cigna
    beat expectations and that most insurance companies in their
    most recent quarterly reports that were just issued beat
    expectations. So we have a solution where premiums are coming
    down, Americans are getting rebates, insurers are still doing
    just fine.
        Mr. Tierney. Thank you. You know, I am glad to hear that. I
    was responsible for putting that provision in the House bill
    when it went through the education hearings on that, and this
    is the expected, anticipated result that we thought, and so it
    is good to know that your remarks coincide with what the
    Secretary has told us, as well, and what I think a number of
    reports have done that.
        Professor Jost again, the IRS issued their final regulation
    allowing the premium tax credits to be available to all people,
    regardless of the origin of their exchange participation; is
    that right?
        Mr. Jost. That is correct.
        Mr. Tierney. Okay. So Mr. Cannon made his argument that the
    rule constitutes a net tax increase. I assume that you don't
    agree with him on that?
        Mr. Jost. No. This is a tax cut.
        Mr. Tierney. And under the interpretation of the Affordable
    Care Act that Mr. Cannon puts forward, residents of States with
    Federally operated exchanges wouldn't qualify for the premium
    assistance tax credits, so I want to give you another
    opportunity, just rather than passing your opening remarks on
    that, to explain what the cost of Mr. Cannon's interpretation
    would be to taxpayers who do not get their tax credits.
        Mr. Jost. Well, it is hard to know exactly. I mean, there
    are going to be a trillion dollars in tax credits over ten
    years, and it looks like initially probably 30 or 40 States are
    going to have Federal exchanges, so all of the residents of
    those States would be denied premium tax credits.
        Mr. Tierney. So the National Health Interview Survey just
    released this past Tuesday says that more than one in five
    middle-aged United States adults and nearly half of the adults
    over the age of 65 have more than one chronic health condition,
    whether hypertension, diabetes, things of that nature. There
    are more and more people every day that need assistance in
    managing and preventing those diseases, and yet 50 million
    people are without access to health insurance.
        So, Professor, can you explain what the impact will be on
    those individuals of the exchanges coming into effect in 2014?
        Mr. Jost. Well, a report done by the Harvard Medical School
    a couple of years ago projected that about 45,000 Americans die
    every year because they are uninsured. Making premium tax
    credits available to 20 million Americans so that they can
    afford health insurance is really a question of life and death.
    It is going to be Americans whose lives are saved because they
    can get premium tax credits, and in many States that means
    initially premium tax credits through the Federal exchange.
        Mr. Tierney. Thank you.
        I yield back, Mr. Chairman.
        Chairman Issa. I thank the gentleman.
        We now go to the gentlelady from New York, Ms. Buerkle.
        Ms. Buerkle. Thank you, Mr. Chairman, and thank you for
    this very important hearing. And thank you to our panelists for
    being here today.
        I graduated from nursing school a very long time ago. I was
    one of those diploma grads who spent time doing clinical
    nursing. And then when I was 40 I decided to go to law school,
    and for 13 years before I came to Congress I represented a
    large teaching hospital in upstate New York. So pretty much my
    professional career has been spent in health care, and one of
    the reasons I ran for Congress was because I thought the
    direction of the Affordable Care Act was incorrect.
        Now I do want to make one point, and that is my colleague
    on the other side of the aisle mentioned we are opposed to
    health care reform. By no means are we opposed to health care
    reform. But I would have thought, in a health care reform and
    in a Nation that wants to make sure people have increased
    access to health care, decrease the cost of health care, that
    we would have seen tort reform, that we would have seen the
    increased use of health savings accounts, that we would have
    seen the ability to buy insurance across State lines.
    Portability. Increasing the number of physicians and
    encouraging them to go into the family practice and the
    internal medicine fields.
        But we don't see any of that, and I sit here and I think,
    Have we lost our way so much in this city that when we talk
    about health care reform we have to bring in the IRS and talk
    about raising taxes on the American people by $500 billion? Who
    in their right mind thinks that what we are talking about here
    today is going to increase access to health care for the
    American people or decrease the cost? Who has gotten so far
    away from reality down here that they think this is the way we
    help the American people?
        When my colleague talks about that patient laying in his
    bed needing health care, if you think that going to the IRS and
    dealing with the IRS is going to increase your health care,
    your access to health care, or decrease the cost or improve the
    quality of health care in this Nation, we have a problem in the
    United States of America.
        I am sitting here stunned. I have paid such close attention
    to this. All of my colleagues have. And I sit here and I think,
    What in God's name are they talking about and how is that going
    to help that senior citizen understand her benefits, make sure
    she is covered, make sure that person who is unemployed has
    access to health care. This is gibberish. We are talking about
    the most intensely personal issue for the American people,
    health care. Health care is so important to every person in
    this room. It affects how they live their lives. And we are
    talking about an agency, the IRS, and I know firsthand from the
    complaints that come in to my office how difficult it is to
    deal with the IRS, how unresponsive the IRS is, and now you
    take the IRS and it is not just going to be your income tax any
    longer, it is going to be, well, I have had a baby, I have lost
    my job, I have gotten a promotion. All that now has to be
    communicated to the IRS.
        The American people and this health care system that has
    been created in the Affordable Care Act, the largest tax on the
    American people in the history of this Nation, if one person
    can tell me in this room how that is going to improve our
    health care system, how it is going to improve access to those
    who need health care, and how it is going to decrease the cost,
    I welcome the explanation, but I fear for the American people
    that this Affordable Care Act is going to dramatically affect
    their access to health care. It is going to dramatically affect
    the cost of health care. It is going to put us into a single
    payer system which I believe was the ultimate goal of the
    Affordable Care Act.
        This does nothing, nothing, to improve the free market. Let
    the free market decide what system works best, not the Federal
    Government. We are in trouble when we sit here and we have a
    discussion that this is the best way to go for the American
    people, this is the best we can do to make sure the American
    people have health care coverage.
        I see my time has run out.
        Mr. Everson, if you could comment just briefly, we have had
    unemployment at over 8 percent for the last 42 months. How is
    this going to impact our businesses in this Nation?
        Mr. Everson. Well, in terms of the health care piece is
    your question? I do think that the difficult economic
    circumstances make the challenges that the advocate has spoken
    to of the constant updating of the information an even more
    daunting task as we go forward.
        The interactions that you have spoken about that are
    necessary with the Service, and then the complexity, the
    confusion of the fact that the person is going to be going in
    and seeing people in the exchange or talking to the exchange
    and then being told, well, the IRS says you are not eligible.
    The IRS says you already have this or that. That is all going
    to converge in a situation where a lot of people, as you
    indicate, are already under stress because of difficult
    economic circumstances, or maybe they don't have a job. So I
    think that the circumstances of the Country right now make it
    inherently more difficult.
        Ms. Buerkle. Thank you, Mr. Chairman. I yield back.
        Chairman Issa. I thank the gentlelady. The gentlelady's
    time has expired.
        We now go to the gentlelady from New York, who has been
    patiently waiting. Ms. Maloney?
        Ms. Maloney. Thank you, Mr. Chairman and Mr. Ranking
    Member, my colleagues, and all of the panelists.
        Mr. Cannon, I understand that your reading of the
    Affordable Care Act is that it does not permit the IRS to
    provide premium tax cuts or tax credits to individuals who
    participate in health insurance exchanges administered by the
    Federal Government. In fact, I believe you called this illegal.
    Is that correct?
        Mr. Cannon. That is correct.
        Ms. Maloney. Well, the Congressional Research Service has
    come out with a report on this, their own legal analysis, and
    they have examined this issue, and it did not come to the same
    conclusion. And, according to the report, which I would like
    unanimous consent to place in the record, according to the
    report it says----
        Chairman Issa. Without objection, so ordered.
        Ms. Maloney. Thank you so much.
        It says on page eight, ``The IRS rule appears to be an
    exercise of the authority delegated to the agency to implement
    Section 36(b), which includes the authority to provide
    refundable tax credits for taxpayers enrolled in a health
    insurance exchange.'' Have you read this report or have you
    seen this report?
        Mr. Cannon. I am not familiar with that at all. On what
    date was that released, may I ask?
        Ms. Maloney. This says July 23rd.
        Mr. Cannon. I will have to review that.
        Ms. Maloney. Okay. Great. Or we can get you a copy.
        Mr. Cannon. I can comment on that claim.
        Ms. Maloney. But first I would like to read other portions
    of it, too.
        The CRS also reports. It says thus: If a reviewing court
    ``determines that there is ambiguity surrounding the issue of
    whether premium credits are available in Federal exchanges, the
    regulations issued under Section 36(b), the regulations will
    very likely be considered a reasonable agency interpretation of
    the statute and accorded deference by the court.''
        Now I would like to turn to Professor Jost, if I could. Mr.
    Jost, you believe Congress provided the IRS authority to
    provide premium tax credits to individuals who participate in
    the Federal exchange?
        Mr. Jost. That is correct.
        Ms. Maloney. And why did you come to this conclusion?
        Mr. Jost. Well, again, because of the definitional sections
    of the statute and the way those work together, because of the
    structure of the statute, and because of the legislative
    history of the statute in which Congress, Senators, repeatedly
    said that tax credits would be available in all States.
        Ms. Maloney. Well, do you agree with the interpretation
    that I just ready from the Congressional Research Service?
        Mr. Jost. Yes, I do.
        Ms. Maloney. And, Mr. Jost, do you also agree with CRS that
    it is very likely that a court would defer to the IRS's
    interpretation of the statute?
        Mr. Jost. That is correct.
        Ms. Maloney. And on the substance, why was it important for
    Congress to give the IRS this authority?
        Mr. Jost. Because Section 36(b) is, as has been said a
    number of times, a complicated provision that requires
    interpretation and requires application, and the IRS has done
    an admirable job of putting out regulations with lots of
    examples in them to help people understand how this section is
    going to work.
        Ms. Maloney. Well thank you. I think you gave a clear
    indication why this is important and why it matters.
        I yield back the balance of my time.
        Chairman Issa. I thank the gentlelady.
        We now go to the gentleman from South Carolina, Mr. Gowdy.
    And I would ask the gentleman would he yield me ten seconds for
    a question.
        Mr. Gowdy. I would yield whatever time the Chairman wants.
        Chairman Issa. Thank you.
        Mr. Cannon, do you know of any Member of Congress, either
    side of the aisle, who said that Federal exchanges would have
    subsidies prior to the passage?
        Mr. Cannon. Mr. Chairman, my staff and I did a pretty
    extensive search of the Congressional Record, including markups
    and Committee action, on this statute. We found only two
    mentions in the Congressional Record of what would happen if
    States did not create a health insurance exchange on their own.
    The first was the chairman of the Senate Finance Committee said
    that tax credits are conditioned upon States establishing their
    own exchanges, so that affirmed----
        Chairman Issa. Barney Frank?
        Mr. Cannon. No, I'm sorry, the chairman of the Senate
    Finance Committee, Max Baucus, who is the lead author of this
    law. So that confirms the clear meaning of the statute.
        The only other mention was in the House during House
    consideration of the Patient Protection and Affordable Care Act
    by Congressman Michael Burgess. He said, What happens if the
    States don't create an exchange? Well, a Federal exchange will
    impose a public option. It made no mention of tax credits.
    Those are the only two we have found.
        And Professor Jost and the IRS have not cited anything from
    the Congressional Record or the legislative history other than
    the idea that all States would be establishing their own
    exchanges. There is nothing that anyone else has offered that
    suggests that if a State does not establish an exchange that
    tax credits would be available in Federal exchanges.
        Chairman Issa. Thank you. Clearly, the GSA had a mind-
    reader at its convention. Perhaps the IRS does, too.
        I thank the gentleman for yielding.
        Mr. Gowdy. Yes, sir. Speaking of mind-readers, I was going
    to ask you, Mr. Cannon, a similar series of questions. It
    appears the professor is relying on the definitional section,
    and without putting everyone in the audience to sleep with
    rules of statutory construction, the last statute takes
    precedence over a previously passed one, all provisions must be
    read in harmony if they can, all the other stuff that made us
    very anxious to get out of law school. Why is he wrong?
        Mr. Cannon. The professor makes the claim that the statute
    treats State and Federal exchanges equivalently. It does not.
    It refers to exchanges under Section 1311 as, as I quoted
    before, an exchange shall be a governmental agency or a
    nonprofit entity that is established by a State. So that is
    clear that they are not talking about an exchange established
    by the Federal Government.
        The section authorizing tax credits likewise is clear. It
    says those tax credits are available only through ``an exchange
    established by the State under Section 1311.'' Senator Baucus'
    original bill had language similar to what Professor Jost
    cites. It says if a State doesn't establish an exchange the
    Secretary shall ``establish and operate the exchanges within
    the State,'' and Senator Baucus confirmed that tax credits,
    under that language, would be available only in States that
    establish their own exchange.
        Furthermore, the statute, itself, does not address, the
    information reporting requirement that Professor Jost cites in
    his other argument refers to Section 1311 and 1321 exchanges
    separately. If every time the Federal Government referred to a
    Section 1321, if they were equivalent, there would be no need
    to refer to them separately.
        And the Finance Committee bill, which is what became the
    final law, was different from the bill that was reported by the
    Senate Health Committee and the bill that was reported by the
    House in this very important way: both the Health Committee
    bill and the House Committee bill had explicit language saying
    that State and Federal exchanges are equivalent. They drew
    explicit equivalents between exchanges created by States and
    exchanges created by the Federal Government. There is no such
    language in here. The definitional section that Professor Jost
    mentions does not establish that equivalent.
        Mr. Gowdy. Mr. Everson, what new citizen information will
    be available to the IRS that is not currently available to
    them?
        Mr. Everson. I think, sir, that the statute contemplates
    getting into any number of areas that are non-financial. It is
    true, as has been already pointed out, it is not medical
    information, and that is important, but you are going to be
    asking businesses to report on their plans and details of their
    plans so that the Service can determine or it can be determined
    whether they qualify as meeting needs under the statute.
        And then you are going to have individuals, who will, as
    was indicated earlier, they are going to have to constantly
    update information about the status of employment and whether
    they have coverage or not. I think it can't be said enough that
    this need for updating and the timeliness is a very real change
    for taxpayers that is important, in addition to the new areas
    beyond purely financial information that you as a taxpayer are
    used to already providing.
        Mr. Gowdy. Well, back in the good old days we used to have
    to get a court order just to get a tax return from somebody we
    were about to indict. What level of independence disclosure
    confidentiality will exist with this new information?
        Mr. Everson. Well, I think that is something that the
    Service is best capable of answering. The Service historically
    provides great importance to the protection of taxpayer
    information. My concern is that there are already real
    protocols that exist, through working with the State taxing
    authority. I am from Indiana, and working with the revenue
    department there, or with major cities to share that
    information. Everybody is used to doing that.
        These exchanges are going to be in the process of being
    stood up over a period of time. They are going to have enough
    they are dealing with, and yet they are going to be charged
    with protecting this information, as well.
        You get a lot of problems with disgorging of taxpayer
    information or information generally. I think there is not a
    week that goes by where a credit card company or a business
    doesn't talk about hundreds of thousands of records being just
    spat out, and you are introducing a lot of new players here. So
    while there may be protocols, getting that working is going to
    be very challenging, and I would say fraught with problems.
        The last thing I would say on this is I worry about the
    Wiki-leaks parallel where you get not an error of the system
    but an individual who has lots of records and says, I don't
    like this law or I don't like elements of this, or so-and-so
    companies didn't provide what had to happen, and individuals do
    the wrong thing.
        There is a lot of risk here, sir.
        Mr. Gowdy. Thank you, Mr. Chairman.
        Chairman Issa. I thank the gentleman.
        I would ask unanimous consent pursuant to the gentlelady
    from New York's entering into the record the Congressional
    Research study of just a few days ago.
        The Ways and Means has forwarded a specific line in answer.
    ``Applying the plain meaning rule to Section 36(b), it is
    possible that the court could read the phrase 'an exchange
    established by the State under 1311 of ACA' as being clear to
    not include an exchange established by the Federal
    Government.'' I just wanted to make sure we made it clear that
    was actually the verbatim of that report.
        With that I recognize the gentleman from Virginia, Mr.
    Connolly.
        Mr. Connolly. Thank you, Mr. Chairman, and thanks to our
    panelists for being here.
        Mr. Everson, in your testimony did I understand you to say
    that your concern is that the involvement of IRS in a major
    non-tax administration initiative has the potential to erode
    the independence of the IRS; is that correct?
        Mr. Everson. That is absolutely true, sir.
        Mr. Connolly. Ms. Olson, do you share that concern?
        Ms. Olson. I think that the IRS needs to not be viewed as a
    political or politicized agency.
        Mr. Connolly. Does the assignment, however, here from the
    ACA, in your opinion, compromise or potentially compromise the
    independence of the IRS as indicated by Mr. Everson?
        Ms. Olson. I think the IRS will conduct itself in a way
    that it will not be compromised.
        Mr. Connolly. The IRS currently or recently has had, for
    example, assignments like the economic stimulus payments, the
    earned income tax credit, the first-time homebuyers tax credit,
    and the making work pay credit; is that correct?
        Ms. Olson. Yes.
        Mr. Connolly. Did the administration of any of those
    compromise the independence of the IRS?
        Ms. Olson. The IRS implemented the law as it understood it.
        Mr. Connolly. Did it compromise the independence of the
    IRS?
        Ms. Olson. In my opinion, no.
        Mr. Connolly. Mr. Everson, in your opinion did they
    compromise the independence of the IRS?
        Mr. Everson. I believe that the items you are citing are
    pretty well within the bailiwick of traditional tax matters for
    the Service. What I think you have here is the potential that
    comes from a major Administration initiative. Again, I am
    making this context outside of politics and I am not making any
    substantive allegations. I am talking about potential systemic
    risk.
        Mr. Connolly. I understand.
        Mr. Everson. So I have not seen it, but I think that this
    is quantifiably different than anything the Service has done.
        Mr. Connolly. Mr. Everson, unfortunately I only have five
    minutes, so bear with me here.
        Mr. Everson. Okay. Go ahead.
        Mr. Connolly. Okay. Thank you. But let me ask this: in
    light of the Supreme Court ruling, Chief Justice Roberts'
    ruling and that horrible word tax, doesn't that, in fact, add
    more weight to the role of the IRS, not less?
        Mr. Everson. No doubt it does. That is right.
        Mr. Connolly. If I can, Mr. Everson.
        Mr. Everson. Yes.
        Mr. Connolly. But it seems to me to put to bed a little bit
    the concern you have, maybe not you personally, about
    independence of IRS when the Chief Justice of the Supreme Court
    and a majority ruling of the Supreme Court says otherwise, that
    it most certainly is within the purview; in fact the
    responsibility of the IRS, by virtue of his decision of what
    constituted the Constitutionality of the act.
        Mr. Everson. Well, clearly that has justified the operation
    of the individual mandate, yes.
        Mr. Connolly. Thank you. I'm sorry.
        Mr. Everson. That is okay. Go ahead.
        Mr. Connolly. I have a limited period of time here.
        Mr. Everson. We obviously disagree.
        Mr. Connolly. I understand, but we have a Supreme Court
    ruling.
        Mr. Everson. Of course.
        Mr. Connolly. And God knoweth why, but they didn't invoke
    the Commerce Clause; they invoked something else. So there we
    are.
        Professor Jost, are you familiar with RomneyCare in
    Massachusetts?
        Mr. Jost. I am familiar with the Massachusetts reforms,
    yes.
        Mr. Connolly. Well, it seems to me if we are going to call
    the ACA ObamaCare, we will call health care reform in
    Massachusetts----
        Mr. Jost. I don't, so I am trying to be even-handed.
        Mr. Connolly. I understand. I am trying to be even-handed,
    too.
        What is the role of the Massachusetts Department of
    Taxation, which is the analog in Massachusetts? I happen to
    come from Massachusetts originally. What is the role of the
    Massachusetts Department of Taxation in the administration of
    this particular set of issues in RomneyCare?
        Mr. Jost. I believe there are premium tax credits in
    Massachusetts.
        Mr. Connolly. Really? And when fines or penalties are
    imposed, as they are under the law signed into law by the
    Governor of Massachusetts at the time, Mitt Romney, how is that
    administered?
        Mr. Jost. Through the tax system.
        Mr. Connolly. Through the tax system. Is it not virtually
    identical to the system Ms. Olson described that will pertain
    to the ACA?
        Mr. Jost. The ACA was modeled on the Massachusetts health
    care reforms.
        Mr. Connolly. So, for example, as Ms. Olson was testifying
    a little bit earlier, most people have a refund and you would
    net out the refund if you owed that fee; is that correct?
        Mr. Jost. I believe so.
        Mr. Connolly. And is that not exactly how Massachusetts
    works?
        Mr. Jost. I believe so.
        Mr. Connolly. Ms. Olson, is that your understanding, as
    well?
        Ms. Olson. I am not an expert on Massachusetts. I can only
    speak about the Federal provision.
        Mr. Connolly. I see. Final point, maybe Ms. Olson, to you,
    there is a return for every dollar we invest in the IRS; is
    that not correct?
        Ms. Olson. Yes.
        Mr. Connolly. And is it my understanding for every dollar
    IRS got it produced $200 in revenue?
        Mr. Connolly. That is the ratio of what we collect to our
    appropriated----
        Mr. Connolly. So, given our obsessive concern about the
    fiscal situation and the National debt, Congress has, in fact,
    increased IRS's budget, given that ratio, so we can collect
    that which is owed; is that not correct?
        Ms. Olson. You are still working on our appropriation this
    year.
        Mr. Connolly. What has happened in the last three or four
    years?
        Ms. Olson. Actually, last year our budget was decreased.
        Mr. Connolly. Decreased?
        Ms. Olson. Yes.
        Mr. Connolly. And what is the total amount of revenue owed
    the Government, not new taxes, that is left on the table every
    year because of lack of collection?
        Ms. Olson. It is about $359 billion or something in that
    range.
        Mr. Connolly. So $359 billion a year. Now, if I multiply
    that times ten, that would be over $3.5 trillion; is that
    correct? And your understanding of the value of the sequester
    we are so concerned about, we are not going to cancel our five-
    week recess to do anything about, is $1.2 trillion; is that not
    correct?
        Ms. Olson. I'm sorry. I am not following your question.
        Mr. Connolly. The value of the sequester we are worried
    about is $1.2 trillion; is that not correct?
        Ms. Olson. That is my understanding.
        Mr. Connolly. And the amount you are talking about over
    that same period of time would be three times that.
        I thank the Chair.
        Ms. Buerkle. [Presiding]. Thank you.
        The Chair recognizes the gentleman from North Carolina, Mr.
    McHenry.
        Mr. McHenry. Thank you, Madam Chair.
        Look, Americans know that the tax code is complex. That is
    obvious to even those that don't pay taxes. I think it is one
    of the self-evident truths the American people have. I have run
    into an issue in western North Carolina dealing with small fire
    departments. I have got about six to eight of them that, based
    on a provision of the law and how the IRS chose to implement
    it, means that these volunteer fire departments that are quasi-
    governmental non-profits, they receive taxpayer funds and they
    actually have tax collection areas. We have this whole thing.
    And so my office has had to be engaged in making sure these
    non-profits still get to maintain their non-profit status based
    on how the IRS has implemented it.
        And so there is a lot of grief the American people have
    with the IRS and we have got public safety at risk based on how
    the IRS has chosen to implement a law.
        And so I want to say, Ms. Olson, your office, the National
    Taxpayer Advocate Office in Greensboro has been enormously
    helpful to us in going through this whole process and trying to
    be truly a taxpayer advocate for these volunteer fire
    departments in my District, and I want to thank you for that.
    This has been enormously frustrating and confusing, but I
    certainly appreciate the work that you do and the work that
    your staff does. Thank you.
        Ms. Olson. Thank you, sir. I am personally very familiar
    with that issue, and it is on my radar screen and we are
    working on this.
        Mr. McHenry. Thank you. I certainly appreciate it, and I
    hope that the commissioner hears this, as well, and that you
    have some compliance on behalf of taxpayers, the IRS actually
    has some compliance.
        To that end, and the reason why I bring this up is because
    it is about the confusing and complex nature of the tax code.
    And that is frustrating as it now stands, as it now stands.
    That is before we even talk about ObamaCare, as my colleagues
    on the other side of the aisle like to call the affordable
    health care or whatever else, any way they want to call it, but
    the point is if you look at how the Internal Revenue Service is
    going to have to implement ObamaCare and portions of ObamaCare,
    Mr. Everson, you have testified well on this.
        So in your testimony you expressed doubt as to whether the
    statutory scheme as enacted into law is even workable
    mechanically. What do you mean by that? Explain. The IRS can,
    you know, has a complex enough code. Are you saying that this
    is even beyond?
        Mr. Everson. I am suggesting that there are so many parts
    and there are so many players that we cannot, by any means, be
    sure that this is going to work. That is not getting at the
    policy objections that some have raised, it is just simply as a
    matter of management. That is particularly the case because of
    the fact that there are different levels of government. You
    have got different agencies of Government in the Federal level,
    and then you have got States and you have got these quasi-State
    entities, these exchanges.
        All of these are players, plus private parties, companies
    and individuals. All of this interacting together across these
    multiple provisions I think really is an extraordinarily
    daunting task from a managerial point of view. That is what I
    am getting at, sir.
        Mr. McHenry. Okay. So thus, you know, if they have more
    folks collecting taxes and the tax code is more engaged in
    people's daily lives and health care decisions?
        Mr. Everson. Well, what I am saying here is that the other
    piece, whether you get this done or not, the other facet of my
    testimony is that I am concerned that by doing this, by
    assigning these health care responsibilities to the Service,
    which are contentious. They are certainly, as we know from this
    hearing, contentious politically, but they are going to be
    contentious for individuals because, as was indicated by the
    Chair, these are the intensely personal issues. That is the
    word you used. And I agree with that.
        You are adding into the interaction of the citizenry with
    the IRS another highly-charged element of a conversation, if
    you will, and that can't help but impact how they feel about
    tax collection, as well.
        Mr. McHenry. Ms. Olson, to this point, with implementation
    and your preparations for implementation of ObamaCare, how
    daunting and how difficult is this task going to be for the
    average American to be in compliance with this? You say that
    with the mid-year they are going to have to update if they
    change jobs, as they receive more income rather than less, or
    less income rather than more? For your planning purposes, how
    complex is this going to be and how much of a challenge is this
    going to be?
        Ms. Olson. Well, it is going to be a challenge for
    individuals and the IRS and for the exchanges, and commissioner
    Everson is correct about all the moving parts. The taxpayers'
    ongoing responsibility to update is going to be not with the
    IRS but with the exchanges, where the taxpayer is going to
    interact with the IRS at the end of the year with the return
    filing, and that is where we do a reconciliation of what they
    got during the year and then what they actually were entitled
    to based on what really happened with their income and their
    family structure during the year, and there is a possibility of
    a gap between that, and that will come as a rude surprise to
    some taxpayers.
        That is why I have emphasized that we have to really
    educate taxpayers about their responsibility to talk to the
    exchanges. My concern is similar to Mr. Everson's in that
    taxpayers are going to look to the IRS, partly because we are
    talking about the IRS all the time about this, and call the IRS
    and want to give updates of information to the IRS, and they
    will be confused. Where do they go? And will they get to the
    right place? And will the IRS be helpful in telling them, here
    is where you need to go?
        I have said IRS employees have to have a Rolodex of where
    to send these individuals so they can get to the right place.
        Mr. McHenry. Oh, Lord. With that I yield back.
        Ms. Buerkle. Thank you.
        The Chair now recognizes the gentleman from Arizona, Dr.
    Gosar.
        Dr. Gosar. Thank you, Madam Chair.
        Ms. Olson, you made an interesting finding. Oh, by the way,
    I am a health care provider. I am a dentist. Okay? So I know
    something about this. You talked about changing behavior. Is
    that pretty easy, changing behavior?
        Ms. Olson. No.
        Dr. Gosar. How would you feel about that, Mr. Everson?
        Mr. Everson. I'm almost 58. It is tougher every year.
        Dr. Gosar. I understand that. Ms. Olson, are you familiar
    with the Advanced Federal Child Tax Credit?
        Ms. Olson. Yes.
        Dr. Gosar. What were their instructions to the American
    people. Please do not call the IRS, right?
        Ms. Olson. Yes. That was in 2001.
        Dr. Gosar. How many calls did you get?
        Ms. Olson. In one day we got about, it was our first
    million call day, and they called asking do we really not need
    to call you.
        Dr. Gosar. So, I mean, when you are talking about customer
    service associated with this, this is much more complex?
        Ms. Olson. Yes.
        Dr. Gosar. Would you say exponentially?
        Ms. Olson. Yes. It goes to my earlier point: it is not that
    we have new powers or new duties, it is the scope.
        Dr. Gosar. I understand.
        Ms. Olson. It is the amount of work.
        Dr. Gosar. So how many customer service people are you
    planning on hiring?
        Ms. Olson. Well, I am not planning on hiring people until I
    know what my budget is. I think that is a question for the
    Commissioner. I have heard that we will be focusing on about
    800 FTE that will be partly IT and majority working on the
    customer service side.
        Dr. Gosar. Mr. Everson, tell me, given the quantum leap
    that we are doing here for customer service, in your
    estimations what kind of customer service detail would we need
    to handle this?
        Mr. Everson. I haven't studied it in such detail that I
    would be able to give you a number. I mean, the Service is more
    than capable of having that conversation. But you are really
    talking, just as the Advocate has said, as Nina has said, you
    have got a whole new area of responsibilities, you have got
    potential for whole new conversations.
        In the Act, frankly, it extends well beyond that. Small
    businesses, we work at AlliantGroup where I am now, we work
    with small and mid-sized businesses. They are flummoxed by the
    statute and all the different obligations that they have. So
    there are lots of different parties that are going to be
    impacted by these changing standards, including maybe your
    dentist shop. I don't know.
        Dr. Gosar. Absolutely. We have kind of kept the Federal
    Government away as best we can. But that is my whole point is
    this is an ongoing dialogue that should be going on the whole
    year, not just at reconciliation, because it is compensatory
    backlog. So it is customer service intensive, would you say? So
    800 FTEs ain't going to work.
        Ms. Olson. Well, that is the spec'ing out, but I have not
    seen the details behind that.
        Dr. Gosar. Going back to changing behaviors, when you are
    sharing all this information, you know, and exponentially
    enlarging the pool of people accessing your personal
    information, boy, I tell you what, you had better have customer
    service. And, if I am not mistaken, you are not really known
    for customer service, right?
        Ms. Olson. We need to improve our taxpayer service.
        Dr. Gosar. So let me ask you this: what is your average
    wait for a person for customer service?
        Ms. Olson. I think this year it was about 12 minutes on the
    main phone line.
        Dr. Gosar. For an expedited form, right?
        Ms. Olson. Yes.
        Dr. Gosar. How much longer when we have questions?
        Ms. Olson. I don't know the answer to that. On some lines
    these have been----
        Dr. Gosar. Hours? Days?
        Ms. Olson.--hours. Yes.
        Dr. Gosar. Days. I'm just saying on the phone just trying
    to get somebody that is qualified to answer.
        Ms. Olson. Yes.
        Dr. Gosar. And this is much more, as we have heard the
    witnesses talk about, exponentially just growing in size.
        Mr. Everson, I am really perplexed by the safety. I know I
    couldn't find at least a sizeable leak from the IRS in personal
    information.
        Mr. Everson. Right. It has got a very good record.
        Ms. Olson. It does.
        Mr. Everson. It is a real strong point of the Service.
        Dr. Gosar. But the one problem that we have got is we are
    going out beyond that because we are going to be sharing this
    information all over the place, and we are also subjugating
    individuals to insurance companies, are we not?
        Mr. Everson. There is a tie-in into the insurance
    companies. I am not sure how that will work on the exchange of
    what they will have in terms of the taxpayer information, but
    clearly you are exactly right. When you get to the exchanges or
    you get to the other States, you are going to have a whole new
    set of players that are dealing with not just the traditional
    information but even more information.
        Dr. Gosar. So how do we guarantee that that is, and you
    alluded to it. It is sort of like my gentleman friend from
    South Carolina, you know, this is the potential to share very
    personalized, like the gentlelady up here said, for sharing
    personal information.
        Mr. Everson. There are no guarantees in this area, sir, and
    it just is a very significant area of continuing focus by the
    Service. I would tell you any business in America now that
    deals with this kind of information, it is something that
    everybody worries about, but this does increase risk. That is
    all I am saying.
        Dr. Gosar. One last question. Do you think the health care
    is individualized and should be personalized, patient friendly?
    Personally, your point of view?
        Mr. Everson. I am not going to answer a policy question on
    health care. I have not got a dog in that fight today. How is
    that?
        Dr. Gosar. You do, because your health is yours today and
    you own it, right?
        Mr. Everson. Yes.
        Dr. Gosar. How about you, Ms. Olson?
        Ms. Olson. I am not going to answer that question.
        Dr. Gosar. You don't own your health today?
        Ms. Olson. I do own my health today. I just went to my
    dentist last week.
        Dr. Gosar. God love you, and you are smiling. How about
    you, Mr. Jost?
        Mr. Jost. I believe that my health care is personal, and I
    believe that the Affordable Care Act protects it.
        Dr. Gosar. Mr. Cannon, how do you feel about that?
        Mr. Cannon. Health care is, of course, an intensely
    personal issue. There is a difference of opinion among
    obviously supporters and opponents of this law because, just
    like other opponents of this law, I think it is going to make
    access to health care less secure, not more.
        Dr. Gosar. Thank you very much.
        Mr. Cannon. And cause more people to fall through the
    cracks.
        Mr. Everson. Maybe I misunderstood your question, sir. If
    you are saying do I think information about my health care is
    personal and shouldn't be shared, yes, I agree with that.
        Dr. Gosar. Thank you very much.
        Ms. Buerkle. Thank you. The Chair now recognizes the
    gentleman from Idaho, Mr. Labrador.
        Mr. Labrador. Thank you, Madam Chair.
        Mr. Cannon, my State right now, Idaho, is going through a
    huge debate about whether we should accept the health insurance
    exchange, should we do a Federal exchange or do a State
    exchange, and interestingly I have made a recommendation to our
    governor and to our legislature that they shouldn't at this
    time accept a health insurance exchange as a State exchange,
    that they should allow it to become Federalized. So I want to
    have a little discussion with you about this. Have these true
    State exchanges that we are talking about when you are talking
    about State exchanges under ObamaCare?
        Mr. Cannon. No. The statute requires that every State-
    created exchange, in order to be compliant with ObamaCare, that
    it has to get approval from the Secretary, and the statute
    gives the Secretary the authority to heap pretty much whatever
    sorts of regulations the Secretary wants onto these State-
    created exchanges.
        So it really is a myth, the idea that States would be able
    to retain some sovereignty, retain some control over their
    health insurance markets if they create their own exchanges,
    because whatever the Secretary would be able to impose on a
    State through an exchange that the Federal Government created,
    the Secretary could also impose on a State-created exchange
    through regulation.
        Mr. Labrador. Well, you and I probably have very similar
    philosophies about the 10th Amendment and States' rights. It
    seems odd that somebody from the Cato Institute and a
    conservative Republican from Idaho are asking a State to forego
    the State exchange and actually allow for the Federal exchange.
    Could you explain?
        Mr. Cannon. Well, it is a little bit ironic, but what you
    want is a Federally-run health insurance exchange in your
    State, which is really just a Government agency controlling the
    private health insurance market. If what you want is the
    Federal Government to control your State, then the best thing
    you can do is establish an exchange because the Federal
    Government will control it.
        If a State does not establish an exchange there might not
    be an exchange at all, because, as we all know, there is no
    funding in the act for the Federal Government to create these
    exchanges, and it is not likely that Congress is going to
    approve that funding any time soon, so this is a real problem
    for the Administration. They are having to take money away from
    other things that Congress appropriated money for. I would like
    to see an investigation into that, frankly.
        But the choice is not between a State-controlled exchange
    and a Federally-controlled exchange; it is between a Federally-
    controlled and maybe none.
        Mr. Labrador. Okay. If a State would have set up its own
    exchange independent of ObamaCare, would the IRS penalties
    apply?
        Mr. Cannon. The IRS penalties against individuals who do
    not comply with the individual mandate would apply?
        Mr. Labrador. Right.
        Mr. Cannon. Penalties under the statute, the penalties
    against employers, the $2,000 per worker tax that the Patient
    Protection and Affordable Care Act imposes on employers in
    States that create their own exchanges would not apply in a
    State that does not create its own exchanges. So Utah, for
    example, could avoid that very large tax on employers by not
    creating an exchange, and what this IRS rule does is, it first
    deprives Utah of that choice, and then imposes that tax
    illegally on those employers.
        Mr. Labrador. Okay. But if a State sets up an exchange
    under ObamaCare, it is subject to the IRS penalties, right?
        Mr. Cannon. It is subjecting its employers to the employer
    mandate, which is a $2,000 per employee tax.
        Mr. Labrador. Okay. So when you are making the decision
    about whether you are going to set up a state exchange, you
    have to think about those taxation issues for your employers in
    your State?
        Mr. Cannon. As well as what employers in neighboring
    States, I'm sorry, the government's neighboring States are
    doing, because if you are in Utah and your neighbors all decide
    not to create a health insurance exchange but you create one,
    you will be imposing a tax on your employers that your
    neighbors are not, and they may want to leave your State for
    other States.
        Mr. Labrador. Okay. Isn't it true that under the actual
    text of the law that if a State does not set up its own
    ObamaCare exchange and the Federal Government steps in and sets
    up its own exchange that the IRS penalty does not apply?
        Mr. Cannon. The employer mandate, that is correct, because
    what triggers that $2,000 tax on employers is when one of that
    employer's workers receives a tax credit through an exchange.
    Again, under the statute if there are no State-created
    exchanges there can be no tax credits to trigger that penalty
    against employers.
        Mr. Labrador. And in the concept of federalism, the concept
    of having the State create something that it can manage, is it
    truly a State-managed exchange if you are doing it under the
    rules of ObamaCare?
        Mr. Cannon. Absolutely not, and for the reasons I just
    mentioned as well as the fact that there will be hundreds of
    billions of dollars flowing through these exchanges from the
    Federal Government, so the Federal Government is going to be
    controlling all of that money. The Golden Rule applies here.
        Mr. Labrador. And I just want to be clear. So when you say
    that, you mean that since they are controlling the money they
    are going to be telling the State what rules apply for that
    State exchange, and what compliance, correct?
        Mr. Cannon. That is correct. For example, Utah's exchange
    would not qualify under----
        Mr. Labrador. Under ObamaCare. Correct. Even though they
    did it before ObamaCare, correct?
        Mr. Cannon. Correct.
        Mr. Labrador. So, in essence, all the State exchange is is
    another Federal agency?
        Mr. Cannon. For which the States will have to pay, because
    if a State opts to create its own exchange it is responsible
    for the operating costs of that exchange. The estimates have
    been $10 million to $100 million per year.
        Mr. Labrador. All right. Thank you very much.
        Mr. Cannon. Thank you.
        Ms. Buerkle. I thank the gentleman.
        I now recognize the gentleman from Pennsylvania, Mr. Kelly.
        Mr. Kelly. I thank the Chairwoman, and I thank all of you
    for being here today. This is critical.
        I had a conversation yesterday, and then also today, with
    Stephanie McCafferty, an automobile dealer who still owns the
    business. My son runs it. We did build it by ourselves, by the
    way. We have had this continuing conversation trying to
    determine exactly what this new Patient Protection Affordable
    Care Act actually does to us, and I have got to tell you, even
    after sitting down with the CRS for an hour everybody still
    scratches their head and says, You know what? We don't know. We
    just don't know.
        So, Mr. Everson, let me ask you this: is it true that the
    IRS will have to collect ObamaCare's employer mandate penalty?
        Mr. Everson. Yes, sir. There will be an obligation upon the
    Service, like in many other areas, to make that assessment
    based on the information that is provided.
        Mr. Kelly. And that mandate penalty amounts to a $2,000 or
    $3,000 penalty per worker?
        Mr. Everson. I believe that is the case. I am not an expert
    in the exact figures.
        Mr. Kelly. I haven't found anybody that is an expert in any
    of this. You are not offending me by answering that way.
        Mr. Everson. Yes.
        Mr. Kelly. It is a very difficult thing. Also, since the
    ObamaCare mandate penalty is assessable in the same manner as
    other employment tax penalties, is it true that the IRS does
    not have to offer the employer an opportunity to review and
    contest the determination prior to assessing the penalty?
        Mr. Everson. Well, I would say, sir, that is a question for
    the Service to address. It is an interpretation of the law and
    they have got to write the appropriate regs. I would expect
    that the Service will be very careful in laying all this out
    and want to get, because of the problems we have been talking
    about all morning, the nature of small businesses, lack of
    sophistication and understanding of the tax code, they are
    going to want to get this right, whatever they do, so they are
    going to have to work very hard. They are going to have to work
    very hard to do it, and then that is one piece of it.
        My other concern is then whether the folks in the
    businesses will understand it, actually.
        Mr. Kelly. In our business we buy and sell cars and we
    service cars and trucks and that is what we do.
        Mr. Everson. Yes.
        Mr. Kelly. Now, in addition to that, the greatest amount of
    time we spend now in the back office is not dealing with the
    services we offer our customers, it is trying to be in
    compliance with the Government that continues.
        I have got to tell you, when I am opening the mail if it
    says it is from the Federal Government or the State government
    or the local government I say, What are they going to take from
    me now, or, How are they going to regulate me and make it
    harder for me to get through this business?
        Is there any appeals that exist, that come into play--and
    it happens after the collection begins, right, so if IRS comes
    in, they sit down, they talk with me and say, By the way, it
    starts now, it starts today.
        Mr. Everson. The Service has very clear procedures on
    appeal rights, and even before things happen you can raise
    matters up with supervisors, but I do think that there are
    going to be, this is another area where there is going to be
    more confusion. Some of these, as the taxpayer advocate has
    indicated, the provisions are different in certain standards as
    to what actions on an enforcement side the Service can take. I
    have written in my testimony I am concerned about that. Any
    time you introduce variability into a huge operation it is
    harder to run.
        So I think that these are all issues that are going to be
    tough to deal with.
        Mr. Kelly. And really I am on board with you. It is truly
    the uncertainty of what this law is asking us to do that
    creates this. I am talking now about job traders. You have got
    to stay on the sidelines because you are not sure that your
    actions are going to cause a problem for you. And I have been
    through tax audits, and I have got to tell you the thing that
    strikes fear into the hearts of most Americans is that the IRS
    is coming in to do an audit.
        Again, you say, my gosh, I know we did everything we
    thought we were supposed to do, but I guarantee you that small
    business owners who do not have, as you say, a level of
    sophistication, I mean, who does have the level of
    sophistication? It is certainly, even this panel with its vast
    knowledge and its experience, it is like I know something about
    it but I don't know everything about it. And then we go to the
    job creators, the small business people and say, You know what?
    The ball is in your court right now. How do you stand up and do
    that?
        So let me ask you, Ms. Olson, how long does a business have
    to pay penalties assessed by the IRS under the employee
    mandate?
        Ms. Olson. There is a ten-year collection statute. And I do
    want to say about the penalty, the small business penalty, that
    it applies to employers with over 50 employees, so there
    already is carved out by the law the very small.
        I think Commissioner Everson is correct that we have got to
    really work on this with the regulation and the appeals
    procedures, and if there is an ability to get reasonable cause,
    abatement of penalties, the things that we normally do with
    penalties, those are very important issues.
        Mr. Kelly. And, again, if I understood, you said the
    penalties are very small?
        Ms. Olson. No. The have exempted the very small businesses
    from the penalties.
        Mr. Kelly. Under 50?
        Ms. Olson. Under 50 employees.
        Mr. Kelly. Okay. Well, a lot of my friends have more than
    50 people, so it applies to an awful lot of them.
        Ms. Olson. Right.
        Mr. Kelly. So if a business reports an IRS error, how long
    will it take the IRS to fully investigate? Any ideas at all?
        Ms. Olson. The IRS has three years from the filing of a
    return, in general, to investigate.
        Mr. Kelly. All right. So I would just suggest, and I offer
    this only as a small businessperson who has lived in the
    private sector for his whole life, gosh, you are making it hard
    for us. You are making it so hard for us. I would ask each of
    you, who signs your paycheck?
        Mr. Everson. Sir, I would tell you, you have made it hard
    for taxpayers, not the IRS. Let's get this right. You wrote
    this law, the Congress did.
        Mr. Kelly. You know what, Mr. Everson, I just got here. I
    have only been here for 19 months. No, I didn't write it. In
    fact, nobody even read it before they passed it, so let's make
    sure we are very clear in what happened, okay?
        Mr. Everson. Okay.
        Mr. Kelly. And even the people that are sitting here on
    this panel today cannot tell us specifically what the penalties
    are going to be and how much it is going to cost small job
    creators like myself. So we can tap dance around this and we
    can pretend that it didn't happen.
        I am going to show you right now this Government is
    crushing job creators and turning away and saying, you know
    what? The problem with you folks, you just don't have the level
    of sophistication to understand this entire law. As a matter of
    fact, neither do we, but we do have the ability to come in here
    and tax you. We have the ability to come in here and shut you
    down. We have the ability to hold you accountable for a law
    that not even we understand. So how do you like that, Mr. Car
    Dealer? How do you like that, Mr. Carpenter? How do you like
    that, Mr. Manufacturer? How do you like that, Mr. Miner and
    Steelworker?
        Come on. Let's be honest with each other. This is
    absolutely astounding that we would have to have this
    conversation. You are paid by the same people that I am paid
    by, and that is the taxpayers of this great Country, and we
    have made it so hard for those folks to live the way that the
    Founders designed this place.
        I am going to yield back my time because I am way over
    time, but I will never stop fighting for the small job creators
    that are out there and the small business people who have
    nobody else to turn to. I have sat through it, and I mean that
    sincerely. There is nothing that strikes fear in the hearts of
    people that own businesses than the fact that the IRS is
    showing up. Boy, I tell you what, you try to circle the wagons
    and get all your information together.
        When it comes to the point that I have to worry more about
    not competition down the street but I have to worry about my
    own Government holding me back, there is something wrong.
        Chairman Issa. [Presiding]. I thank the gentleman for
    yielding back.
        I thank our panel for the generosity of all of your
    counsel.
        Mr. Everson, I appreciate your recognition and, to be
    honest, your seeing both sides. I agree with you on a personal
    basis that Congress deserves the blame, noting that you are no
    longer on the Federal payroll.
        Ms. Olson, I would like to thank you personally for the
    fact that your various reports and counsel of some of the areas
    of concern were areas that we took note of here.
        Professor, I thank you very much for putting out your
    position in a very accurate way. I appreciate your being here.
        Mr. Cannon, it is always a pleasure to have Cato
    represented here. I think you did a great job of expressing
    their concerns. Ultimately, much of what we said here today
    will ultimately be decided outside of Congress in all
    likelihood.
        This has been a great panel. We stand in recess. Yes, Mr.
    Everson?
        Mr. Everson. I just want to thank the Chair and the Members
    for keeping me out of this exchange fight. I didn't get any of
    the questions. Thank you, sir.
        Chairman Issa. Well, Mr. Everson, as you go back and talk
    to small businesses you consult with, I am sure they will have
    questions about that for you, so you are not going to be out of
    the fight in the other side of your life.
        Thank you again. We stand in recess until ten minutes after
    the second vote.
        [Recess.]
        Chairman Issa. The Committee will come to order.
        It is now our honor to introduce our second panel witness,
    The Honorable Douglas Shulman, who is the Commissioner of the
    IRS, a post that he has held since he was appointed under
    President Bush nearly five years ago.
        Welcome.
        Pursuant to our Committee, I would ask you to rise and take
    the oath and raise your right hand.
        Do you solemnly swear or affirm that the testimony you are
    about to give will be the truth, whole truth, and nothing but
    the truth?
        [Witness responds in the affirmative.]
        Chairman Issa. Let the record indicate the gentleman has
    answered in the affirmative. Please have a seat.
        As I noted during the first panel, you did a great job of
    staying focused on what was going here from the back. You have
    obviously done this many times before. Since you are the only
    witness, we won't hold you strictly to the five minutes, but I
    would ask you to remember that your entire written statement is
    in the record.
        With that, the gentleman is recognized.

                      STATEMENT OF DOUGLAS SHULMAN

        Mr. Shulman. Thank you, Mr. Chairman. And thank you for
    having me here. Thank you, Ranking Member Cummings and other
    members of the Committee.
        Immediately upon enactment of the Affordable Care Act, or
    ACA, we began our implementation efforts, which included both
    executing on the short-term provisions that were in the bill
    that were our responsibilities, as well as putting a structure
    and process in place to plan for provisions with future
    effective dates.
        The IRS moved very quickly on some of the law that became
    effective immediately. For example, we conducted outreach and
    implementation for the small business health care tax credit.
    The ACA, as you know, also expanded the adoption credit
    immediately and provided favorable tax treatment for adult
    children up to age 26 who are covered by their parents'
    insurance.
        The IRS's most substantial implementation effort relates to
    the delivery of hundreds of billions of dollars in premium
    assistance tax credits that will help millions of American
    families afford health insurance starting in 2014.
        Now, the Department of Health and Human Services is the
    lead agency in defining the structure and operations of health
    insurance exchanges, with the Treasury and the IRS defining the
    associated rules for how the tax credits can help subsidize
    coverage.
        It is important to note that the credit will be paid
    directly to the insurance company, which is a major design
    feature which should help mitigate the risk of fraudulent
    claims.
        Taxpayers will then reconcile the advance payments they
    receive on their tax return. If the credit is larger than the
    sum of the advance payments, the taxpayer will be entitled to a
    refund. IF the credit is smaller than the sum of the advance
    payments, the taxpayer will owe the difference.
        Now, starting in 2014 individuals who can afford health
    insurance coverage and are not eligible for an exemption must
    either purchase minimum essential coverage or make a payment
    with their tax return. The payment only applies to taxpayers
    who can afford insurance but do not purchase it.
        We are already working with tax return preparers and the
    tax software community to give taxpayers the tools that they
    will need to fill out their returns in 2015. The IRS process
    for verifying coverage will be very similar to the one we have
    used for years to verify wages and withholding. The IRS will
    match what is reported on the tax return with the information
    reported by the insurers.
        For the small number of taxpayers who may appear to have
    underpaid and were not eligible for an exemption, we will
    generally follow up with written correspondence.
        I think it is important that I clarify one misconception.
    Revenue agents who are trained on much more complex tax issues
    do not work on resolving these kinds of issues. The law also
    clearly specifies that the IRS will not use levies or file
    notices of Federal tax liens if the taxpayers have unpaid
    amounts related to the individual coverage provision.
        Because these and other ACA provisions are substantial and
    require long-term planning, we immediately established
    processes within our business operations and our IT operations
    to make sure we could implement the law smoothly.
        Before closing, let me just observe that the IRS is
    continuing its long tradition of being a nonpartisan agency
    that implements the laws that Congress passes. As the Chairman
    mentioned, I started my tenure in 2008, and right when I walked
    in the door we were asked to, outside of the tax systems,
    figure out a way to send 100 million Americans stimulus checks
    which the previous Administration did as the recession started
    to hit. We also played a role in the Recovery Act. During the
    serious economic downturn we set up special programs we called
    Fresh Start to work with struggling taxpayers, and now we are
    working on the Affordable Care Act.
        I believe the effort is going smoothly. I believe we have
    the proper plans in place. And all of this is a tribute to the
    dedicated professional men and women at the IRS who have
    devoted long careers to fair and even-handed administration of
    the Nation's tax laws.
        Thank you. That ends my opening statement.
        [Prepared statement of Mr. Shulman follows:]

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        Chairman Issa. Thank you.
        I recognize myself now.
        I want to start off by thanking you and the men and women
    of the IRS. I note that your job is a strenuous one, one that
    has a five-year term. I understand you are the third to have
    that term. And it was intended to take away the partisan
    perception, and I think you have done a good job of that. But I
    do have some questions, perhaps not so-called partisan, but
    maybe Pollyannaish.
        You have done, the IRS has done a selective outreach based
    on ObamaCare or the ACA's benefits. You said it in your
    testimony. You sent out millions of post cards doing an
    outreach to educate people as to the law's benefit or tax
    credit to small business, correct?
        Mr. Shulman. We did send out tax credits.
        Chairman Issa. Do you plan on sending post cards out to
    tell people about the tax increases?
        Mr. Shulman. No.
        Chairman Issa. So you are only telling people, the IRS is
    only telling people about the good news and not telling them
    about tax increases. Aren't tax increases more something you
    need to know about in advance for planning than windfalls of
    money? I grew up in a neighborhood where that windfall is
    [foreign word], it is found money. This isn't what you need
    warning for. You don't need warning about good news; you need
    warning about tax increases, don't you?
        Mr. Shulman. We do extensive outreach on all tax
    provisions, and we have started----
        Chairman Issa. But you are not sending any indication to
    small businesses about the tax increases they are going to see
    under ObamaCare?
        Mr. Shulman. We have done extensive outreach and we do it
    based on looking at what's the best way to get the word out for
    different pieces. I think right now we are working with the
    preparer community and business community to work through, a,
    getting our systems in place in a way that works well, getting
    the interaction----
        Chairman Issa. Well, speaking of the systems, under
    ObamaCare Section 9002 you were required to deal with the W-2
    forms, and yet you unilaterally delayed reporting requirements.
    In other words, this piece of bad news is not going out that
    otherwise would have made it clear that, again, tax increases,
    right?
        Mr. Shulman. Are you referring to the requirement that
    employers----
        Chairman Issa. Put a value of health insurance benefits on
    the W-2.
        Mr. Shulman. How much they paid for their health insurance.
        Chairman Issa. Right.
        Mr. Shulman. No, we actually delayed the reporting
    requirement at the request of our information reporting
    committee that works with us regularly because they couldn't
    get their systems ready.
        Chairman Issa. They couldn't get their systems ready?
        Mr. Shulman. We had a lot of feedback from the business
    community that----
        Chairman Issa. Well, let's go through that. There is
    Paychecks and ADP. They both got it ready. They are both able
    to do it.
        Mr. Shulman. So I am----
        Chairman Issa. I am trying to understand. This was
    something that I think many people who want folks to
    understand, this is sort of the bad news again. This is letting
    people know how much is already being paid in. The question is:
    where did you get the authority to unilaterally delay? You are
    saying it is based on not being ready, and yet the vast
    majority of these things, either you could have allowed a
    waiver and yet still implemented for those who are ready, and
    if someone was using Paychecks or ADP they would have been
    ready and it would have happened, right?
        Mr. Shulman. That is not my understanding. So my
    understanding is that this reporting, which I guess I am
    confused about it being bad news, this is just saying how much
    your current employer pays for your health insurance.
        Chairman Issa. Well, most Americans have no idea that
    health care costs as much as it does. This provision was one
    that I think Republicans wanted genuinely in there so people
    would understand just how expensive it is, how much is already
    being paid for. Having over the years had employees who left
    who were shocked when they had to pay their COBRA and they
    wanted to know what was wrong, and the answer was, Well, we
    were paying 90 percent of it, now you can see what you are not
    seeing from a tax standpoint.
        Let me go through just one or two more questions. You said
    that the IRS would not be essentially dunning people who owed
    under the mandate, but is there anything that would prohibit
    you from assuming that the first $1,000 owed under the mandate
    penalty which now is assessed to be a tax by our U.S. Supreme
    Court, and let's just say they refuse to pay it, is there
    anything that keeps you from considering that dollar one of
    taxable requirements and thus having the last dollar be owed?
        In other words, if I pay in $10,000 and I owe $9,000 or
    $8,000, and you simply make the assumption the first $1,000
    added is this tax that they didn't pay, is there any reason you
    wouldn't take it all and dun them for revenues owed? Is there
    anything that stops you from doing that?
        Mr. Shulman. Let me try to answer the question. I'm not
    sure I understand it.
        Chairman Issa. If I don't pay my taxes, isn't it possible
    you could treat the $1,000 mandated penalty like any other tax
    and dun me for it with penalty and interest?
        Mr. Shulman. So if you don't pay that, what we would do is
    send out a letter. As you know, most people pay the taxes they
    owe on time. We would send out----
        Chairman Issa. But this is a tax that is not collected
    through withholding. If you assessed it as the first part of
    withholding, took it out of withholding, and then just simply
    dun me for being in arrears on my overall taxes, you could
    treat it, as long as there was $1,000 of withholding, you would
    take it for this and then treat it as though I didn't have
    sufficient withholding. Couldn't you deal with that?
        Mr. Shulman. So we would treat it as, you know, a penalty
    on your return. The statute is clear, and it is the only place
    the statute is clear, we can't do a lien or a levy, which is
    very rare, which we do way down the line. Beyond that, it would
    be part of your Federal tax obligation.
        Chairman Issa. I want to get this very clear, and I
    apologize for running over, but I haven't gotten the answer to
    the actual question, so let me be clear on the question. If I
    owe $10,000 in normal taxes on income and I have this $1,000
    penalty, if you put the $1,000 penalty at the end then you
    don't have the ability to levy or lien.
        However, if you simply collect it as the first $1,000 on my
    withholding, take it out, I now have a shortfall in my
    withholding, so now you are not levying against the penalty,
    you are levying against ordinary taxes you have already
    collected on the front end. There is nothing that stops you
    from taking that as the first dollar and then levying on the
    last dollar against income tax.
        Mr. Shulman. I apologize. I want to be responsive. It will
    be part of your overall liability. If there is $1,000 owed,
    there will be a $1,000 carve-out that there could never be a
    lien on. I am confused about the withholding.
        Chairman Issa. And I am going to yield to the Ranking
    Member, but there clearly was a statement, no question at all,
    Federal exchanges were not covered in this law, in the letter
    of the law, and yet you have had a rule-making that covers it,
    covers it without legislative action but rather based on some
    loose intent.
        The fact that we said that there is no levy, all you would
    have to do is collect this money off of the first $1,000 of
    withholding and then the shortfall would actually be on other
    funds you could levy. Any creative accountant could come up
    with it. I am going to assume that the IRS will do so based on
    what your folks have chosen to do on something that was outside
    ObamaCare's right, which was subsidizing the Federal exchanges.
        Mr. Ranking Member, I would ask unanimous consent you have
    an additional three minutes, so if you will tally eight minutes
    I will yield to the gentleman.
        Mr. Cummings. Thank you very much.
        Commissioner Shulman, I hope that IRS employees are
    watching this, and I want to say to them publicly thank you,
    and I thank you. Let me tell you what I am thanking you for. As
    I listened to the last panel, I listened to Mr. Everson, and
    you heard most of his testimony, did you not?
        Mr. Shulman. I did hear some of it.
        Mr. Cummings. Yes. And he talked a lot about his concerns
    and basically all but said it can't be done. And I have got to
    tell you that, as one who rose up from poverty to the Congress
    of the United States of America, I know that this Country, we
    can do anything we try hard enough to do. I know that. My own
    life has told me that.
        When you started off your testimony today to talk about
    what you all have done already and what you did, I think you
    started back in 2008, you said you had to come in and do
    certain things. I just like the can-do attitude, because
    certainly if we stick with the naysayers I guess we won't get
    anything done. The fact is that what the people at IRS are
    doing in trying to make sure the law works properly will go a
    long ways towards helping a lot of people.
        And I say this over and over again because I mean it. I am
    talking about people at IRS will end up helping people save
    their lives and save a lot of pain. And so I want to thank you
    all publicly for that can-do attitude. I know IRS gets a lot of
    bad comments. As a matter of fact, Government employees get a
    lot of bad comments. But when I hear things like what you just
    said, it just, in my mother's words, who is a former
    sharecropper, it just makes my heart glad.
        Commissioner Shulman, in the earlier panel the Committee
    heard from Nina Olson, the National Taxpayer Advocate. In her
    testimony she explained that the IRS has made significant
    progress on rule-making and other areas. Let me read from her
    testimony. She says, ``Since the enactment of ACA, the IRS has
    been working through the major challenges, making significant
    progress. The lead time provided by the ACA has been very
    helpful for the IRS, and at this point it appears the IRS has
    used the time well.'' Ms. Olson is very complimentary about
    your efforts over the past two years to ensure that the
    planning process is on track.
        I would like to know your perspective. How did you approach
    the planning process over the past two years, and how would you
    evaluate your own efforts today?
        Mr. Shulman. Well, the one thing, while the ACA is a
    substantial undertaking, the tax provisions for the IRS, you
    know, I come from a business background, and the one thing I
    would say generally is that what you need is proper planning,
    enough lead time, and proper resources to implement things.
        In the world of tax, we have gotten used to, unfortunately,
    late legislation, retroactive legislation, and the one thing
    this law affords us is plenty of time to do implementation
    right.
        We had to scramble to get some of the things done, some of
    the things that the Chairman referenced and we talked about,
    but the major pieces of the legislation where we have the most
    work to do, like setting up our infrastructure to make sure we
    distribute tax credits, the premium tax credits in conjunction
    with the exchanges, we had multiple years to do.
        And so there is always room for improvement, but I think
    our team, both our team who had to work to do the planning, do
    the immediate implementation, and then build the IT systems,
    you know, I think they are well on track in doing, you know a
    good job, so I would give them a pretty good grade.
        That said, we have got to keep our eye on the ball and with
    any piece of tax legislation we need to make sure we take it
    through and implement at the end.
        Mr. Cummings. Well, I hope that they know that they have a
    lot of grateful people who appreciate what they are doing.
        On the first panel we heard a lot of concerns about data
    privacy, and that is a concern of mine. I know the IRS actually
    has a great record on protecting taxpayers' information. You
    may have heard some of that testimony.
        Commissioner Shulman, what steps has the agency taken to
    ensure the security of taxpayer information going forward, and
    do you think that steps that you have taken will be sufficient?
    And what additional steps do you see being necessary?
        Mr. Shulman. Let me say a couple things. First of all, this
    agency takes data security very, very seriously. And we have an
    excellent track record of protecting the American taxpayers'
    basic income data.
        Second, I would just say there has been a lot of, both in
    the previous panel and also, you know, out there in the general
    dialogue, I think way overstatements of the risk of data
    security. I mean, this is not something wildly new to us. Right
    now we share data with States for child support information,
    with States for Medicaid, with States for tax information, and
    we have very strict safeguards around that data.
        In this case, any data we exchange with States they have to
    have written procedures in place that we will look at. They
    have to agree to separate the data. They have to agree to have
    limited use of the data just for the purposes of the law. They
    need to train their people.
        We have an Office of Data Privacy and Security that will go
    out and do audits to make sure it is right, and the Federal law
    takes tax data very seriously, and individual employees can be
    prosecuted for breaching tax data. That individual liability
    extends out to anyone we send data to.
        And so this is nothing new for us. Obviously, it is an
    effort and we are going to have to do it, but I think the
    concerns about data security around this are overstated.
        Mr. Cummings. You sound like you take a lot of pride in
    IRS's efforts to keep the privacy of Americans' tax information
    private. You seem very proud of that. Are you?
        Mr. Shulman. Well, A, I am very proud of it; B, it is a
    cornerstone of the tax system; C, we have done it a lot
    exchanging with States, and we haven't had major issues.
        I will tell you a little story. My first day I showed up at
    the job I went to the Treasury Department and was sworn in by
    the Treasury Secretary. I came back, and the person waiting for
    me was the lawyer to explain the data privacy rules and the
    people who did the training for me. That is how seriously the
    agency takes this. They didn't brief me on our technology or
    our filing season, et cetera. The first thing I was briefed on
    was data security.
        Mr. Cummings. My last question, Ms. Olson spent a lot of
    time talking about the challenge for IRS with regard to
    communication, or communication strategy, taxpayer education
    about these new rules. Do you agree that taxpayer education is
    essential to the success of the implementation? And can you
    please explain how the IRS plans to educate the public about
    these new rules?
        Mr. Shulman. Well, there are a few things. One is any time
    a tax law is passed we do a variety of things. We use social
    media to get information out. Sometimes we do direct
    communication, and 80 percent of taxpayers, and it is growing.
    Last tax season it was up actually over 85 percent, use either
    a paid professional preparer or tax software. And so a lot of
    the details of these rules, just like the details of the rest
    of people's tax forms, gets sorted out either when they are
    figuring out how to file or get sorted out, you know, with
    their preparer. So we do a lot of work with them, and we expect
    to expand our outreach.
        I will also note that, because this issue has gotten, the
    Affordable Care Act has gotten so much attention by the media,
    you know, this is not something people are unaware of, and we
    are trying hard just to get the actual facts out, and we will
    keep that campaign up.
        Dr. DesJarlais. [Presiding]. I thank the Ranking Member.
        The Chair will now recognize himself for five minutes.
        Mr. Shulman, thank you so much for being here today,
    because certainly we have several things we would like to clear
    up in regards to the initial drafting of the Affordable Care
    Act and the subsequent ruling by the IRS. I think you were
    listening to the first panel, and clearly there are some
    disagreements between Professor Jost and Mr. Cannon on whether
    or not the IRS ruling was illegal.
        Why do you think, first of all, I think that the intent
    when the law was written it was clear that the Administration
    and the authors of the bill assumed that the States would set
    up exchanges. Certainly it was clearly mentioned numerous times
    throughout the language of the bill and there was not mention
    of the Federal exchanges. I think, one, that the health care
    law people were very leery of. I think 63 percent opposed this
    law when it was first presented or even passed. And I think
    Senator Baucus from Montana clearly wanted a national exchange,
    but I think the American people resoundingly rejected the
    thought of a national takeover of health care.
        So the language was carefully crafted in the bill to
    mention State exchanges because State exchanges sounded much
    more palatable to people than a Federal takeover of health
    care.
        So were you a little shocked, I guess, when I think there's
    only 14 States now that have decided to set up State exchanges?
    Was that kind of a surprise to you and something you hadn't
    anticipated?
        Mr. Shulman. I guess I didn't follow, you know, the before
    and after as closely as that, so I had no reaction. I am
    watching how this goes. I mean, our main job is to try to
    implement the law that was written.
        Dr. DesJarlais. Sure. Fair enough. Do you agree that when
    authorizing these premium assistance tax credits the Internal
    Revenue Code, Section 36(b), explicitly refers to health
    insurance exchanges established by the States under Section
    1311?
        Mr. Shulman. I think 36(b) has some contradictory language
    in it.
        Dr. DesJarlais. Well, we can put up a slide. Is there
    anything unclear about that? Is there anything unclear? Does it
    mention Federal exchanges anywhere in that section?
        Mr. Shulman. I am looking at the slide, but I am also aware
    of the whole statute, so I guess I----
        Dr. DesJarlais. Okay. Do you recall it mentioning Federal
    exchanges?
        Mr. Shulman. Excuse me?
        Dr. DesJarlais. Are you aware, does it mention Federal
    exchanges or just State exchanges?
        Mr. Shulman. Anywhere in 36(b), yes.
        Dr. DesJarlais. In 1311. That is the slide. That is not the
    slide. We have another slide.
        Mr. Shulman. I guess I watched the first panel and would
    agree that there is a lot of disagreement, and we obviously
    looked at the total statute and think we came to the correct
    legal reading.
        Dr. DesJarlais. Okay. The plain meaning of the Rule 36(b),
    it is possible that the court could read the phrase an exchange
    established by the State under 1311 of ACA, this was the CRS
    ruling that the gentlelady from New York referred to in the
    first panel. It said that the exchange could be clear to not
    include an exchange establishment by the Federal Government.
    Indeed, the language seems to be straightforward on its face.
        Are you aware of that CRS ruling?
        Mr. Shulman. I am not aware of that.
        Dr. DesJarlais. Okay. Well, do you agree that when
    authorizing those tax credits the IRC repeatedly refers to
    exchanges established by the State under Section 1311?
        Mr. Shulman. I guess I am not aware of the----
        Dr. DesJarlais. Okay. Well, it does repeatedly. Why did the
    IRS add the phrase, or in 1321 in the rule, do you believe this
    is a dramatic interpretation that in essence rewrites the law?
        Mr. Shulman. No.
        Dr. DesJarlais. Why do you say that?
        Mr. Shulman. Maybe it would be helpful for you to hear how
    our rule-writing process works. I mean, our legal experts,
    career civil servants who are some of the best tax lawyers in
    the world, if not the best, take a look at statutes, look at
    the entirety of the statute, and try to come up with their best
    legal analysis.
        Dr. DesJarlais. Okay. Well, basically we are set to
    scramble because this bill was set to be passed and go to
    conference, and it did not go to conference but rather
    reconciliation because the votes simply weren't there to pass
    the law. Scott Brown was elected and he was on his way in, so
    they had to rush this law. They knew it was imperfect. They
    knew that they couldn't force the States to set up exchanges.
        The Federal Government doesn't have the power to force the
    States to do it, so they had to try, in essence, to coerce the
    States in a sense to set up these exchanges, and they didn't
    mention Federal exchanges on purpose because they wanted the
    States to do this. They wanted to kind of strong-arm the States
    to set up these exchanges, and they knew that they had to put
    out a bill with this language that was imperfect because if
    they didn't do it before the end of the year, and they did it
    on Christmas Eve, then they were going to have to deal with
    probably not passing the law at all.
        So now you are tasked with basically cleaning up their
    mess, cleaning up their language, because it clearly wasn't in
    the bill. They referred to State-run exchanges repeatedly and
    left out the Federal exchanges, even in the reconciliation
    process. It simply wasn't in there.
        So I think Mr. Cannon, his point is that the IRS way
    overstepped its bounds of separation of power, in essence wrote
    a huge tax increase, trillion dollar tax increase, that
    Congress did not intend, but this mess was created when the
    States didn't fall in line and set up the exchanges; isn't that
    true?
        Mr. Shulman. No.
        Dr. DesJarlais. Why do you say it is not true? It clearly
    is.
        Mr. Shulman. I just disagree with Mr. Cannon. I think that
    this was the correct reading of the law. I have no idea what
    the reference is to a tax increase, but we are not concerned
    with that.
        Dr. DesJarlais. You understand the statute. Does the
    statute ever say that the credits are available in Federal
    exchanges? Does it ever say that?
        Mr. Shulman. There are sections of the statute that
    directly talk about a Federally-run exchange----
        Dr. DesJarlais. Can you tell me where?
        Mr. Shulman.--and the information to the IRS. In Section
    1401, which is the same as 36(b), there's reference about
    information reporting of premium tax credits to the IRS from
    the Federal exchange. Look, I fully understand that you have a
    view on this and that we disagree. I think the law professors
    before on the panel before fleshed out the arguments on both
    sides. Our legal experts came down on the side that we came out
    with.
        Dr. DesJarlais. I clearly disagree with you, because we
    know what the intent was. We know why this all came about, and
    I don't think the argument was clearly refuted. In fact,
    Professor Jost in several cases rescinded. First, he wanted to
    call it a drafting error, a scrivener's error. He retracted all
    those statements because they are scrambling to find a reason
    to justify what the IRS did.
        Clearly, this issue is far from over. The companies in the
    States without State-run exchanges are going to challenge the
    IRS rule and this will probably end up in Federal court. I
    don't think there is any question about if; it is just a matter
    of when.
        I see my time has expired. I will yield to the gentleman
    from Illinois, Mr. Davis.
        Mr. Davis. Thank you very much, Mr. Chairman. And thank
    you, Commissioner.
        There are a lot of assertions that people make and have
    made, and they have said that this is in the legislation, this
    is in the bill, it is going to cause people to do this and
    cause people to do that. And then when you look you can't find
    what they are basing their assumptions on.
        I know that some opponents of the legislation have claimed
    that to implement this that the Internal Revenue Service has
    got to hire 16,000 new agents, enforcement agents. And you have
    said on numerous occasions that this is a made-up number with
    no basis in fact. As a matter of fact, some people have even
    compared the Internal Revenue Service to the Gestapo, as Mr.
    Everson pointed out in his testimony on the first panel, which
    is not only inaccurate but, quite frankly, unconscionable way
    beyond the pale, I think.
        Do you agree that this type of non-information, of mis-
    information is damaging to the image of the agency? And is it
    true that you are going to have to hire all of these people to
    enforce provisions of the act?
        Mr. Shulman. Sir, we have been incredibly transparent in
    what we need to implement this law. We put forward budgets and
    then sent to Congress the last three years of information, and
    then we put forward a budget this year. The budget we put
    forward this year, 92 percent of it is for infrastructure and
    technology to make sure that the act is executed. And so
    referring to this number 16,000 agents, I have no idea where
    anyone got that. That is not going to happen. And, as I said,
    the major parts of this law are going to be handled, the
    compliance aspects, through correspondence.
        You know, regarding unfortunate remarks about the IRS, all
    I would say is we have a very good track record of interacting
    with the American people in incredibly respectful ways. Right
    now the American customer satisfaction index, which is run by
    the University of Michigan, which looks at major companies
    across the globe as well as Government agencies, we have our
    highest rating ever at 73. Most people who interact with us
    send in a refund return, and within five to ten days get $3,000
    back from us, so I know that the words IRS sometimes conjure up
    things that people can make scary. The reality is, for most
    people we are a great service organization. So yes, it is
    unhelpful for people to use rhetoric, but I think our record
    stands for itself.
        When you ask American citizens one by one in things like
    the American Customer Satisfaction Index, we get very high
    ratings.
        Mr. Davis. There are also individuals who use this invasion
    of privacy. It is very interesting who some of them are. They
    are not people that I have known to be protecting the privacy
    of individual citizens in a lot of other instances and a lot of
    other ways, but they claim that the Internal Revenue Service is
    going to have access to individuals' private health
    information. Is that a need in order to enforce the provisions
    of the act?
        Mr. Shulman. No. Absolutely not. What we will know and
    asked for, based on the law, is: do you have health insurance
    coverage? If so, for how many months? And what was the name of
    the insurance company?
        Right now we get information about what's your income, who
    is your employer, how long were you employed? Do you own a
    house? Did you sell a house? Was there interest on this house?
    Do you have stocks or bonds? Did you buy them or sell them? And
    so we get lots of information, but we get the bare bones that
    we need to file a tax return.
        I think it has been way over-stated our role in health
    care. I mean, we are basically going to facilitate the
    financial transactions that make this whole law work, but we
    are not going to have access to private individual health care
    information except for the fact of coverage.
        Mr. Davis. Do you see individuals being locked up,
    incarcerated, liens placed on their homes or their properties
    or whatever it is that they might own in order to make sure
    that there is compliance?
        Mr. Shulman. I mean, the minimum coverage provisions which
    say that you either need to have insurance or you pay a
    penalty, those specifically prohibit liens, levies, criminal
    prosecution, and so they are treated very different from other
    liabilities owed to the Federal Government.
        Mr. Davis. So then many of these assertions are quite
    honestly inaccurate?
        Mr. Shulman. Well, some of the ones you brought up, yes.
        Mr. Davis. Well, thank you very much. My time is expired.
        Mr. Chairman, I yield back.
        Dr. DesJarlais. I thank the gentleman.
        I think, being as we have a small dias today, I think we
    can go through a second round of questioning if you will
    indulge us.
        Can you describe the universe of people who will be subject
    to the new HHS reporting requirements? We understand that it is
    expected that 20 million people will fall under these
    requirements; is that correct?
        Mr. Shulman. I'm sorry? Which requirements?
        Dr. DesJarlais. The HHS reporting requirements.
        Mr. Shulman. I am not sure what the HHS reporting
    requirements are or what you are referring to.
        Dr. DesJarlais. Okay. Well, under the HHS rules, isn't it
    true that for these Americans they will now be required to tell
    the State and the IRS when they change jobs within 30 days of
    the change?
        Mr. Shulman. I think you are referring to the people who
    receive a premium tax credit?
        Dr. DesJarlais. Okay. Isn't it true? Yes, you are referring
    to that.
        Mr. Shulman. So the way the premium tax credit works is
    people go to an exchange. If they have not been offered
    affordable health care coverage by their employer, they may be
    eligible for a tax credit to help subsidize the purchase of
    insurance. And that is based on a number of factors, including
    their income.
        If their income changes, they have an obligation to come
    back and say that the income changes so that the amount of the
    credit can be adjusted.
        Dr. DesJarlais. Okay. And that is within 30 days?
        Mr. Shulman. I am really not aware of the details of when
    that reporting back to the exchanges are, because that is not a
    piece of the act that we will be administering. That falls
    with, as you said, HHS and the exchanges.
        Dr. DesJarlais. Okay. If they don't report the changes,
    assuming it is 30 days in the window, what are the consequences
    and how do you plan to enforce the rule?
        Mr. Shulman. So the way the premium tax credit works, which
    I referred to in my opening comments, is people go to the
    exchange, they determine the eligibility for a credit and the
    amount of the credit. They receive the credit, an advance
    payment, and that payment is made directly to the insurance
    company, and then there is a true-up procedure when they file a
    tax return, much like a true-up of estimated taxes or a true-up
    of your withholding, and the way that it works is if they got
    too much of a credit up front they will owe some money back; if
    they got not enough, the Federal Government will owe them the
    true-up, so there is a true-up procedure that will be
    administered on the back end.
        Dr. DesJarlais. According to your July 2010 report, IRS has
    fallen short of providing adequate taxpayer service in
    important areas. Given the massive scope of ObamaCare, is it
    likely the IRS customer service is going to get worse rather
    than better?
        Mr. Shulman. I am not sure what the July 10 report is.
        Dr. DesJarlais. The Taxpayer Advocate report.
        Mr. Shulman. That is from the Taxpayer Advocate, who
    independently reports to Congress.
        Dr. DesJarlais. Okay. Well, the question still stands about
    customer service. How do you anticipate that is going to be
    handled?
        Mr. Shulman. We have had what I think is a very good track
    record of customer service with the resources we have been
    given, and I expect us to continue to deliver good customer
    service.
        Dr. DesJarlais. So an hour-plus wait in your opinion is
    good customer service when people actually need to talk to
    somebody who knows something about an issue?
        Mr. Shulman. We don't have an hour-plus wait on average.
        Dr. DesJarlais. What would you say the wait is?
        Mr. Shulman. It depends when you call. The wait can be as
    short as someone picks up the phone immediately and there is no
    wait, and it can be a lot longer. If people call at peak times,
    we tell them how long their wait is and they call back.
        Dr. DesJarlais. Okay. From the National Taxpayer
    Association, for calls that require issues of expertise, the
    IRS track record is even worse. In March 2012 taxpayers calling
    IRS tax protection unit only reached IRS 11 percent of the time
    after an average wait time of an hour and six minutes.
        Mr. Shulman. This was a very specialized line that had just
    been set up. It was under-staffed at the very beginning. Once
    we became aware of the problems we put new people on, and the
    year we have averaged 90 percent, and so that is a very short
    point in time, and when we see issues we correct them.
        Dr. DesJarlais. I mean, I understand having pride in the
    agency that you oversee, but you can look in the camera and
    tell all the Americans watching that you feel the customer
    service within the IRS agency is good?
        Mr. Shulman. I can do it the other way around, which is, as
    I mentioned, the American Customer Satisfaction Index, which
    goes out and asks Americans how are their interactions with the
    IRS, is at its highest level ever at 73 percent.
        Dr. DesJarlais. That is not what the data says, and I think
    for the people watching they can probably make up their own
    minds. They don't have to take my opinion or yours.
        My time has expired and I would be happy to yield or
    recognize now the Ranking Member for five minutes.
        Mr. Cummings. Thank you very much.
        During one of our Subcommittee's hearings some business
    entities told us, Commissioner, that they were not sure which
    rules will apply to them and how they will comply with new
    requirements. I understand that some of these rules are still
    in progress, such as the rule on how to calculate full-time
    equivalent employees. Has the IRS engaged with businesses to
    ensure that programs and regulations are responsive to their
    concerns? And, number two, are there still misperceptions about
    IRS's role in implementing the health care reform bill?
        Mr. Shulman. To the second one, any time there is, you
    know, a major tax bill we need to educate people. Frankly,
    until you start actually implementing, that is when people
    really focus their mind and understand.
        With that said, we have been having extensive dialogue with
    the business community about the employer responsibility
    provisions of the law that we need to administer. As you
    mentioned, there's a couple things. One is there is a
    misperception that every business is subject to this. Ninety-
    six percent Of Americans' businesses have less than 50
    employees, and those people are totally exempt from the
    coverage requirements under the Affordable Care Act.
        Second is we have really focused our time trying to put
    guidance out to the business community, so there is this notion
    of you need to have 50 full-time equivalent employees in order
    for the provisions to kick in, and so there's obvious questions
    about, okay, what is a full-time equivalent? What if I have 49
    and then it goes to 50? What if somebody went from full time to
    part time? We have tried just to be very responsive, and so we
    have a look-back that says you can look back a year and say
    what did it look like the last year, and then you get a safe
    harbor for the next year so that people aren't going to
    continually be having to wrestle with this.
        And so in the Affordable Care Act, but also really any time
    there is a major tax provision that is going to affect
    businesses, we have extensive dialogue with the business
    community, and what we try to do is make sure we put clear
    rules in place that will allow us to implement the law in the
    least burdensome manner possible to the business community.
        Mr. Cummings. Commissioner, as you mentioned earlier, the
    IRS will be involved in distributing billions of dollars in
    premium tax credits for people buying insurance in the exchange
    and administering the minimum essential coverage provisions of
    the Affordable Care Act. Therefore, the IRS will be in the
    position of verifying information provided by third parties
    such as insurers. Can you tell us a little bit about your real
    time tax initiative and what is it and when does it begin?
        Mr. Shulman. So I guess two separate things. Yes, we are
    going to get information from insurance companies, information
    reporting very similar to what we get from brokerage companies
    today, banks, about interest information and home ownership and
    interest information from there.
        The real time initiative is really something apart and
    separate from this. That is basically a concept that I have
    laid out that says a lot of the tax system runs after the fact,
    meaning people file, we then later match returns and we send
    them letters; that we actually think we could have a much less
    burdensome system for the American people and one that actually
    led to better compliance, as well, if we could get information
    returns at the same time as the tax returns and any time there
    was any confusion clear it up.
        But the real time initiative that we have is something that
    is on a very different track. It is something that is just in
    the discussion phases, and we are getting lots of input, and it
    is really very separate from Affordable Care Act
    implementation.
        Mr. Cummings. Well, I am going to, just as my last
    question, the Chairman just asked you to look into the camera
    and talk about something. I am going to ask you to look into
    the camera, too, and that is: can you tell the American people
    why you feel comfortable that you are going to be able to do
    what is required of you, your agency, that is, under the
    Affordable Care Act? Do you feel comfortable, assuming that you
    get the resources, I'm sure.
        Mr. Shulman. Yes. No, we feel very comfortable that the
    part of the Affordable Care Act which is in the Internal
    Revenue Code which we are responsible for, that it will be
    implemented well, it will be implemented on time, and people
    have my personal commitment and the agency's broad commitment
    that we will do it in a way that minimizes burden on business
    and individuals and respects taxpayer rights and tries to
    facilitate, you know, a very good flow of information.
        Mr. Cummings. Thank you very much.
        Dr. DesJarlais. [Presiding]. Thank you.
        For the third round, we would like to go back to the
    exchange rule a little bit. I can understand your confidence
    when essentially the IRS was given unprecedented power in this
    case to basically rewrite a rule and bypass Congress as it has
    in this case, so I guess maybe it would be easier to be
    confident if I knew that I didn't have to go through Congress
    any more, I can just kind of make it up as I go.
        But can you specify the exact language that says the
    subsidies go to exchanges created by the Federal Government?
        Mr. Shulman. So a couple things. First, on your comment, we
    exercised the rule-writing authority that is delegated to the
    Secretary of the Treasury in every tax bill, and that is what
    we did. And there is actually a process in this Country that
    allows Congress to write the laws, we interpret them through
    rule, and implement them, and if there is a disagreement there
    is always the courts. So I don't think we have any special
    power under the Affordable Care Act that we don't have any time
    that we do rule-writing.
        Section 1321 talks about the Federal Government will stand
    in for the State at times. Section 1401 talks about----
        Dr. DesJarlais. Okay. Stop there. It says it may stand in,
    but it doesn't say it can issue tax credit, premium tax credits
    and it can't imply the tax against the employers. It doesn't
    say that, does it?
        Mr. Shulman. Section 1401, the second cite you are asking
    for, is saying that each exchange, and explicitly references
    the Federal exchange, shall report information to the IRS
    regarding the premium credits that it pays. And so I very much
    agree with you that there is some contradictory language. Our
    lawyers' job is to say, taken in totality----
        Dr. DesJarlais. You are not agreeing with me. I don't think
    it is ambiguous, sir. I don't think it is ambiguous. I think it
    is very clear. I think you are trying to twist it because you
    have to cover a gross misinterpretation that the States would
    set up exchanges, so that right now, to save this law, they
    couldn't save it the proper way by going to conference. They
    couldn't do that because Scott Brown was coming in and it was
    all going to fall apart, so they had to pass an imperfect bill,
    as Nancy Pelosi shared with all of us those famous words, we
    have to pass the bill to see what is in it.
        They had to pass an imperfect bill, so now when the States
    didn't set up the exchanges we are having to go back around and
    try to find reasons for you to make this rule to include the
    Federal exchanges, which they did not intend to include. They
    wanted to force the States to do this. When the States didn't
    do it, now we have this problem that we are here talking about
    today.
        Who initiated the rule for the exchange rule? Did the rule
    initiate at IRS or at the Treasury?
        Mr. Shulman. The way our rule-writing works is that lawyers
    at the IRS look at statutes, come up with their best
    interpretation. I have to sign off on rules, as does the
    Assistant Secretary of Tax Policy.
        Dr. DesJarlais. How many times did you meet with the
    Treasury to discuss this rule?
        Mr. Shulman. Excuse me?
        Dr. DesJarlais. How many times did you meet with the
    Treasury to discuss this rule?
        Mr. Shulman. I meet with the Treasury Department of Tax
    Policy and their leadership on a regular basis. I have no idea
    how many times we actually talked about this rule. We talk
    about a lot of things. The tax code is very big and very
    complex.
        Dr. DesJarlais. It is, and it needs to be reformed.
        Was there any pressure from the Treasury Department to
    issue a rule that went beyond the statutory authorization?
        Mr. Shulman. I never felt any pressure on this rule. You
    know, my judgment on the rule was based on speaking with our
    lawyers and coming up with what we thought was the correct
    legal reading.
        Dr. DesJarlais. Have you ever done anything like this
    before?
        Mr. Shulman. Excuse me?
        Dr. DesJarlais. Have you ever done something like this
    before?
        Mr. Shulman. The Commissioner of Internal Revenue Service
    is continually consulting with the lawyers of the Internal
    Revenue Service and putting out regulations to interpret
    statutes. It is a major part of the job.
        Dr. DesJarlais. Okay, Mr. Shulman, and I know you are just
    trying to do your job. I will just close with one last
    question. The IRS will be responsible for collecting thousands
    of dollars from employers under the employer mandate. If the
    IRS makes mistakes, how can employers protect themselves from
    having to pay hundreds of thousands of dollars in error?
        Mr. Shulman. We have very laid-out, traditional
    administrative processes, and so, if we think somebody owes
    more taxes the first thing we do is try to work with them. If
    they disagree, they have, you know, very established appeals
    rights to supervisors. Then there is actually an administrative
    appeals process, our Office of Appeals, and then there is
    always the courts. And so there is a lot of avenues for people
    to disagree with us, and that is, you know, part of this
    Country.
        Dr. DesJarlais. Okay. So you are saying that your plans for
    an appeal process for employers is already in place?
        Mr. Shulman. It will be, you know, plans that we have, you
    know. It is not plans; it is procedures that we have in place,
    long-established procedures to make sure the tax code is
    administered in a fair and even-handed manner.
        Dr. DesJarlais. So we don't really know how employers will
    be able to appeal their penalties at this point?
        Mr. Shulman. If a penalty is assessed, most people
    voluntarily pay. If they disagree, whoever made the
    determination for the assessment they can always talk with
    their supervisor, and those processes are well enunciated in
    the Internal Revenue Manual. They can then go to our appeals
    function, which is an independent function much like an
    administrative court inside the IRS. And if they still disagree
    after those two steps, they can go to the courts.
        Dr. DesJarlais. Okay. Identity theft is a big problem, and
    information sharing in ObamaCare makes it worse. That is a
    report that just came out from the IRS today.
        Mr. Shulman. That is incorrect. Identity theft is a problem
    in this Country, but there has never been an allegation that
    there is a problem with information for identity theft coming
    from the IRS.
        Dr. DesJarlais. This is the text from the ruling issued
    today. In a new report to be issued Thursday, the Inspector
    General for the IRS says the tax thieves are stealing the
    identity of taxpayers and filing bogus returns on their behalf
    and collecting fraudulent refunds as a result. That is about
    $21 billion in fraudulent tax refunds over the next five years.
    Are you not aware of that?
        Mr. Shulman. I am aware of that report, but I want to be
    very clear: people get their purse stolen in a mall, someone
    has personal information, and then they file a return with us.
    Or someone has access to an employer database and they steal
    information and file a return with us. There are no allegations
    in that report or other places that information is being taken
    out of the IRS for identity theft purposes.
        Further, I have read that report. That report is very clear
    that the problems with identity theft mostly are systemic, and
    there is a variety of things that we have asked Congress to do
    to give us powers that haven't passed.
        Dr. DesJarlais. So you don't think it is possible that with
    all the new information you have got to collect regarding
    ObamaCare, that this problem could get worse?
        Mr. Shulman. I think connecting identity theft as a problem
    in this Country and the Affordable Care Act would be totally
    irresponsible to connect those two.
        Dr. DesJarlais. Interesting. All right. Well, I tell you
    what, I thank you very much for your testimony and your
    patience in going through three rounds of questioning.
        I would like to thank all of our witnesses today for taking
    time from their busy schedules to appear before us today.
        The Committee stands adjourned.
        [Whereupon, at 12:43 p.m., the committee was adjourned.]

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