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




                               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

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76-370                    WASHINGTON : 2012
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                 DARRELL E. ISSA, California, Chairman
DAN BURTON, Indiana                  ELIJAH E. CUMMINGS, Maryland, 
JOHN L. MICA, Florida                    Ranking Minority Member
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
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
MIKE KELLY, Pennsylvania

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

                            C O N T E N T S

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


Mr. Mark Everson, Vice Chairman, Alliantgroup
    Oral Statement...............................................     8
    Written Statement............................................    11
Ms. Nina Olson, National Taxpayer Advocate, Internal Revenue 
    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 
    Oral Statement...............................................    45
    Written Statement............................................    47
The Honorable Douglas Shulman, Commissioner of Internal Revenue
    Oral Statement...............................................    84
    Written Statement............................................    87


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



                       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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    Lady and gentlemen, pursuant to the rules of the Committee, 
would you please rise to take the oath and raise your right 
    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 
    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 
    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 
    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 
    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 
    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.


    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    Dr. DesJarlais. What about the information reporting 
    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 
    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 
    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 
    Dr. DesJarlais. Mr. Cannon, do you agree? Is he going wrong 
    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 
    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 
    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 
    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 
    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 
    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 
    Ms. Olson. The 2012 income is what is used to determine 
your eligibility for a premium, advanced premium payment, for 
    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 
    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. 
    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 
    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 
    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 
    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 
    Professor Jost, are you familiar with RomneyCare in 
    Mr. Jost. I am familiar with the Massachusetts reforms, 
    Mr. Connolly. Well, it seems to me if we are going to call 
the ACA ObamaCare, we will call health care reform in 
    Mr. Jost. I don't, so I am trying to be even-handed.
    Mr. Connolly. I understand. I am trying to be even-handed, 
    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 
    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 
    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 
    Mr. Jost. I believe so.
    Mr. Connolly. Ms. Olson, is that your understanding, as 
    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 
    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 
    Mr. Connolly. What has happened in the last three or four 
    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 
    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 
    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. 
    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. 
    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 
    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 
    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 
    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 
    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 
    So let me ask you, Ms. Olson, how long does a business have 
to pay penalties assessed by the IRS under the employee 
    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 
    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 
    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 
    This has been a great panel. We stand in recess. Yes, Mr. 
    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.
    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.
    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.


    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' 
    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 
    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 
    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, 
    Mr. Shulman. Are you referring to the requirement that 
    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 
    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 
    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 
    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 
    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 
    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 
    Mr. Shulman. No.
    Dr. DesJarlais. Why do you say it is not true? It clearly 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    Mr. Shulman. Excuse me?
    Dr. DesJarlais. Have you ever done something like this 
    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 
    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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