[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]
IRS: ENFORCING OBAMACARE'S NEW RULES AND TAXES
=======================================================================
HEARING
before the
COMMITTEE ON OVERSIGHT
AND GOVERNMENT REFORM
HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
SECOND SESSION
__________
AUGUST 2, 2012
__________
Serial No. 112-187
__________
Printed for the use of the Committee on Oversight and Government Reform
Available via the World Wide Web: http://www.fdsys.gov
http://www.house.gov/reform
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COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM
DARRELL E. ISSA, California, Chairman
DAN BURTON, Indiana ELIJAH E. CUMMINGS, Maryland,
JOHN L. MICA, Florida Ranking Minority Member
TODD RUSSELL PLATTS, Pennsylvania EDOLPHUS TOWNS, New York
MICHAEL R. TURNER, Ohio CAROLYN B. MALONEY, New York
PATRICK T. McHENRY, North Carolina ELEANOR HOLMES NORTON, District of
JIM JORDAN, Ohio Columbia
JASON CHAFFETZ, Utah DENNIS J. KUCINICH, Ohio
CONNIE MACK, Florida JOHN F. TIERNEY, Massachusetts
TIM WALBERG, Michigan WM. LACY CLAY, Missouri
JAMES LANKFORD, Oklahoma STEPHEN F. LYNCH, Massachusetts
JUSTIN AMASH, Michigan JIM COOPER, Tennessee
ANN MARIE BUERKLE, New York GERALD E. CONNOLLY, Virginia
PAUL A. GOSAR, Arizona MIKE QUIGLEY, Illinois
RAUL R. LABRADOR, Idaho DANNY K. DAVIS, Illinois
PATRICK MEEHAN, Pennsylvania BRUCE L. BRALEY, Iowa
SCOTT DesJARLAIS, Tennessee PETER WELCH, Vermont
JOE WALSH, Illinois JOHN A. YARMUTH, Kentucky
TREY GOWDY, South Carolina CHRISTOPHER S. MURPHY, Connecticut
DENNIS A. ROSS, Florida JACKIE SPEIER, California
BLAKE FARENTHOLD, Texas
MIKE KELLY, Pennsylvania
VACANCY
Lawrence J. Brady, Staff Director
John D. Cuaderes, Deputy Staff Director
Robert Borden, General Counsel
Linda A. Good, Chief Clerk
David Rapallo, Minority Staff Director
C O N T E N T S
----------
Page
Hearing held on August 2, 2012................................... 1
WITNESSES
Mr. Mark Everson, Vice Chairman, Alliantgroup
Oral Statement............................................... 8
Written Statement............................................ 11
Ms. Nina Olson, National Taxpayer Advocate, Internal Revenue
Service
Oral Statement............................................... 20
Written Statement............................................ 22
Mr. Timothy Jost, Washington and Lee University
Oral Statement............................................... 35
Written Statement............................................ 37
Mr. Michael Cannon, Director of Health Policy Studies, Cato
Institute
Oral Statement............................................... 45
Written Statement............................................ 47
The Honorable Douglas Shulman, Commissioner of Internal Revenue
Oral Statement............................................... 84
Written Statement............................................ 87
APPENDIX
The Honorable Elijah E. Cummings, a Member of Congress from the
State of Maryland, Opening Statement........................... 106
Letter to the Honorable Douglas Shulman, Commissioner of Internal
Revenue........................................................ 108
Yes, the Federal Exchange Can Offer Premium Tax Credits by
Timothy Stoltzfus Jost......................................... 111
Legal Analysis of Availability of Premium Tax Credits in State
and Federally Created Exchanges Pursuant to the Affordable Care
Act from Jennifer Staman and Todd Garvey, Legislative Attorneys 113
Questions for the Honorable Douglas Shulman...................... 123
Mr. Mark J. Mazur, Assistant Secretary (Tax Policy), Response to
a letter to Commissioner Shulman regarding section 36B of The
Internal Revenue Code.......................................... 134
IRS: ENFORCING OBAMACARE'S NEW RULES AND TAXES
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Thursday, August 2, 2012,
House of Representatives,
Committee on Oversight and Government Reform,
Washington, D.C.
The committee met, pursuant to call, at 9:00 a.m. in room
2154, Rayburn House Office Building, Hon. Darrell E. Issa
[chairman of the committee] presiding.
Present: Representatives Issa, McHenry, Jordan, Chaffetz,
Walberg, Buerkle, Gosar, Labrador, DesJarlais, Gowdy, Kelly,
Cummings, Maloney, Norton, Tierney, Connolly, Davis, and
Murphy.
Also present: Representative Roe.
Staff Present: Brian Blase, Majority Professional Staff
Member; Molly Boyl, Majority Parliamentarian; Lawrence J.
Brady, Majority Staff Director; Sharon Casey, Majority Senior
Assistant Clerk; John Cuaderes, Majority Deputy Staff Director;
Linda Good, Majority Chief Clerk; Christopher Hixon, Majority
Deputy Chief Counsel, Oversight; Mark D. Marin, Majority
Director of Oversight; Christine Martin, Majority Counsel; Mary
Pritchau, Majority Professional Staff Member; Tegan Millspaw,
Majority Professional Staff Member; Jeff Solsby, Majority
Senior Communications Advisor; Rebecca Watkins, Majority Press
Secretary; Kevin Corbin, Minority Deputy Clerk; Yvette Cravins,
Minority Counsel; Ashley Atienne, Minority Director of
Communications; Susanne Sachsman Grooms, Minority Chief
Counsel; Jennifer Hoffman, Minority Press Secretary; Carla
Hultberg, Minority Chief Clerk; Una Lee, Minority Counsel; and
Suzanne Owen, Minority Health Policy Advisor.
Chairman Issa. The Committee will come to order.
The Oversight Committee exists to secure two fundamental
principles: first, Americans have a right to know that the
money Washington takes from them is well spent; and, second,
Americans deserve an efficient, effective Government that works
for them.
Our duty on the Oversight and Government Reform Committee
is to protect these rights. Our solemn responsibility is to
hold Government accountable to taxpayers because taxpayers have
a right to know what they get from their Government.
Our job is to work tirelessly, in partnership with citizen
watchdogs, to deliver the facts to the American people and
bring genuine reform to the Federal bureaucracy.
Today we meet because President Obama's health care law,
which was hastily written here in the House, so much so that it
was once said we have to pass it to find out what's in it, now
begins to be implemented. As we implement over 20 new tax laws,
the IRS, always willing to say we can do it, it will be
difficult, but we can do it, is going to be asked to invade
American's lives like never before. Who you are sleeping with,
who is in your bedroom, who you are married to or not married
to will, in fact, affect your status, and perhaps cause your
taxes to be taken retroactively because of a change in income,
marital status, persons living within the home during the year.
President Obama said you could keep the health care you
wanted, but, of course, that is not happening. It is not
happening in such great numbers that States who decided to rely
on subsidized, under the Obama health care plan, subsidized
health care are being told that involuntarily the Federal
Government is setting up exchanges that will, in fact, preempt
State's rights, preempt Federalism once again.
Under the letter and the discussion on the House floor of
ObamaCare, it was very clear that States could choose whether
or not to set up exchanges, and if they did not, Federal
exchanges would not be subsidized. It was considered to be an
incentive, an incentive that only four States have chosen.
Americans know today that, in fact, this was one of the
largest and most complex tax increases in American history. We
know that, whether you are a medical device manufacturer
finding that you are being taxed so as to raise the cost of
health care in order to pay for health care, or whether your
dividends and interest are being taxed for the first time ever
under Medicare, or whether or not getting married could cost
you $3,400.
The fact is, under ObamaCare if you are making $25,000, in
other words, $10 an hour with a little bit of overtime, but
living unmarried, you will receive about $1,700 in subsidy. If
you live with somebody who also makes $25,000 and is unmarried,
they will get about $1,700. But if the two of you are foolish
enough to get married, you will lose that $3,400.
The numbers are not debatable. What is debatable is, with
rules not yet written on a law that was so vague that time and
time again the Administration tells their political appointees
to interpret the meaning, to find that which is not within the
four squares of the law, and simply say it was Congressional
intent.
I am one who was here for that vote. The intent was clear.
It was an intent to deceive. ObamaCare was, in fact, a series
of promises by Nancy Pelosi to Democrats in order to get them
to vote for things that they otherwise wouldn't have. Those
Democrats, some of them here, some of them no longer here,
have, in greater and greater numbers, realized they were lied
to. Whether it was interfering with the churches, interfering
with people's personal right to stay with their own insurance
company, or, in fact, interfering with Federalism, itself, and
States' rights to choose or choose not to participate, time and
time again this Administration has broken promises through
interpretation.
It has been a long time since this Committee has looked at
an IRS Commissioner and had to say what we will say today,
which is, Madam Commissioner, you do not have the authority.
You simply have the political will to interpret that States
must, over their objections, operate effectively State
exchanges, because if you don't do it we will do it for you,
and without coming back to the Congress for a change you will
cost the American people billions of dollars, hundreds of
billions of dollars over ten years, that were not scored in the
bill.
Ultimately, ObamaCare, and I am calling it ObamaCare from
now on. I am tired of calling it an affordability bill. It is
not. It is not about quality health care and it is not about
affordability. It was the largest increase in Federal spending
and it scored in a way that was not true.
Our primary reason today is to flesh out some of these
clear problems, problems where either the law is unclear, or
when the law is clear it is chosen to be ignored, or, more
importantly, the intrusion by the IRS in our lives.
Under this legislation and its interpretation by political
appointees at the IRS, we will see every aspect of the American
life audited by the IRS in an increasing way, so much so that I
doubt they can, in fact, go after the conventional tax cheat
for the next several years.
In closing, I do not blame the IRS. They are just following
political orders. I blame the President of the United States
for pushing, when he can't get through legislation,
implementation of things that were not within the four square.
Treasury and all of its individuals need to recognize that
we will hold them accountable for the mistakes and the
intrusions into people's lives.
Lastly, for the American people that may be aware of
today's hearing, there are many things which people object to
in the Census, which comes once every ten years, with follow-
ons throughout. The Census will not be nearly as intrusive as
the IRS will be under this. States will be receiving
information and other individuals, the IRS will be receiving
information related to many things that have never been within
the four squares of the Internal Revenue Service.
More importantly, portals will be wide open to those who
need to know about whether or not you are married, you have a
change in employment, and the like, so the opportunity for
leaks out of the IRS outside of Federal IRS employees will
inherently grow. I am extremely concerned that January 2014
will come and we will have one after another failures to
maintain the confidentiality of this new and expanding
information.
Lastly, the American people need to understand insurance
carriers and exchanges will receive credits based on what the
IRS believes should be paid. You may not go to a doctor the
entire time. You may, in fact, want no health care. You may be
30 and healthy.
But if your income rises, you marry, or do anything else
that might affect that standing, or if the IRS simply overpays,
they will not go back to the insurance company who shouldn't
have gotten the subsidy; they will go to you and take the
money. You will be dunned by the IRS, an organization which can
pursue you through bankruptcy, which has no limit to its
powers, to eventually collect back money that you may not have
wanted to spend.
And, by the way, that $3,400 on the board and others, your
employer will also first be told that he participates under
ObamaCare in that subsidy if he doesn't offer health care and
you chose an exchange, but oh, by the way, it is doubtful
whether or not he will get it back as they choose to collect it
from somebody who ultimately made more pay than what was
possible for the subsidy.
That and so many other questions, so many other dozens of
questions, are with us today.
I want to thank our panel, and recognize the Ranking Member
for his opening statement.
Mr. Cummings. Good morning.
I have said it to my constituents and I have said it to my
family, the 30 years that I have been in public life there is
nothing that I have done, no vote that I have cast, that I am
more proud of than the Affordable Care Act, and the reason why
I say that is because I see the people who it will help and I
know that there are people who will die--will die--will die--
without it. That is real.
And, as I said to some constituents the other day, if they
want me to leave my neighbors on the side of the road sick,
unable to get preventive care, like the lady that I met the
other day with colon cancer who said, Congressman, just save my
life. I have no insurance. Fortunately, we were able to work
with her to get her in NIH. Then those are the people who will
benefit.
And I will say that, as we address this IRS issue, this is
the United States of America. We can do this. We can get this
done.
The Affordable Care Act is a landmark achievement that will
save huge sums of money for our Nation, while extending health
insurance coverage to millions of people. They are the ones
that get up early, that get the early bus. They work hard. They
give it everything they have got. They are our mothers, our
fathers, our friends. They are like Tyrone, the gentleman who
lived down the street from me who died, and the last word he
said to his wife on his sick bed was, Marie, I have got to get
up out of here. I ain't got no insurance.
We are talking about them, our fellow Americans, the ones
who send us here.
So last month the Congressional Budget Office issued a
report finding that the Affordable Care Act will extend health
insurance coverage to 30 million people who do not have it
today. They are not collateral damage; they are our people.
They are Americans. That is an amazing accomplishment that our
Nation should be proud of.
In addition, our constituents are already seeing how the
Affordable Care Act is putting money back in their pockets.
This week insurance companies are returning to their customers,
our constituents, more than $1 billion in the form of rebates
and lower premiums. That is a direct result of the Affordable
Care Act.
Just yesterday women in private health insurance plans
became eligible for life-saving, preventive health screenings
with no copays. This is part of the Affordable Care Act's
comprehensive effort to save money by focusing on prevention.
These are the women in our lives, our wives, our nieces, our
daughters.
It also addresses the historic disparities women face when
paying for health care. The Affordable Care Act also has begun
to ensure that seniors like my mother, who is 86 years old,
have access to preventive care. Young adults have access to
insurance on their parents' plans. And individuals are no
longer subject to lifetime limits on their care.
While all of these reforms are being realized now, many
significant changes are yet to come. The Internal Revenue
Service is the key agency charged with implementing many of the
Affordable Care Act's provisions by 2014, including minimum
coverage requirements and tax credits for individuals
purchasing health insurance on exchanges.
This is a considerable undertaking for the IRS, but we can
do this. Experts from the Government Accountability Office, the
Inspector General's office, and the National Taxpayer Advocate
have reviewed IRS's efforts to date, and they have concluded
that the IRS is on the right track to successfully implementing
the new law.
For example, GAO issued a report that says, ``The IRS
generally follows leading practices for implementing such a
large program, particularly at the level of individual offices
and projects, emphasizing that top leadership has been
involved.''
In addition, the Inspector General issued a report that
says this: ``Appropriate plans have been developed to implement
tax-related provisions of the ACA using well-established
methods for implementing tax legislation.''
And in her testimony today Nina Olson, the National
Taxpayer Advocate, says this: ``Since ACA enactment, the IRS
has been working through the major challenges, making
significant progress. The lead time provided by the ACA has
been very helpful for the IRS, and at this point it appears the
IRS has used the time well.''
Certainly there are significant challenges in implementing
this law, and as IRS moves forward it benefits greatly from the
continued rigorous oversight and recommendations from GAO, the
IG, and the National Taxpayer Advocate. At the same time, we
recognize that the IRS has been actively planning to implement
the Affordable Care Act for more than two years, and it has
already implemented many of the provisions successfully.
For the challenges that remain, the IRS is working closely
with taxpayers, the business community, and the insurance
industry to ensure that its policies are responsive to
consumers and consistent with the intent of Congress in passing
the law. I remind us that this is the law.
Today the Committee is faced with a choice: do we act
constructively or destructively? Do we build up or tear down?
Do we help or do we hurt?
On one hand, we could work with the IRS and its oversight
entities to ensure that the Affordable Care Act is successfully
implemented, particularly now that the Supreme Court has ruled
that it is Constitutional. On the other hand, we could try to
exploit any and all ways to bring down this law or starve the
IRS out of resources it needs to do its job.
I personally hope that we pursue the first approach;
however, Republicans have introduced legislation to do the
second. The Congressional Budget Office has examined the
Republican bill to repeal the Affordable Care Act and concluded
that it would increase the Federal budget deficit by $109
billion over the next ten years.
It is time to accept the Affordable Care Act, to accept the
Supreme Court decision, and to accept the billions of dollars
in savings this law will bring to our citizens.
I look forward to today's testimony and I want to thank all
of our witnesses for being here today.
Mr. Chairman, I yield back.
Chairman Issa. I thank the gentleman.
We now recognize Dr. DesJarlais for an opening statement
and a unanimous consent.
Dr. DesJarlais. Thank you, Mr. Chairman.
Chairman Issa and Ranking Member Cummings, I appreciate
your holding today's hearing to further examine how the
Internal Revenue Service has been implementing provisions of
the Affordable Care Act. One of our chief responsibilities on
this Committee is to ensure that taxpayer dollars are being
utilized both efficiently and in accordance with the law.
Unfortunately, it has become undeniably evident that the
Affordable Care Act falls short on both of these principles.
Just last week this Committee held a hearing on a new
Health and Human Services demonstration project that the Obama
Administration is paying for by cutting $8 billion from
Medicare Advantage. These are funds that would normally be used
for patient care. Two members from the nonpartisan Government
Accountability Office stated that this demonstration project
was unprecedented, flawed from its inception, and will
ultimately demonstrate nothing.
Further, there is strong evidence to suggest that the sole
purpose of this project was nothing more than an attempt by
this Administration to hide new costs that ObamaCare imposes on
seniors until after the election. I fail to see how this is an
efficient use of taxpayer dollars.
There are the sort of examples that we have come to expect
from this haphazardly passed bill authored by individuals who
told the American people that they would have to pass it in
order to find out what was in it. Well, today I want to focus
on what is not in it.
We have now discovered that when the Democrats were
drafting ObamaCare they left out important language relating to
Federally run insurance exchanges. Democrats wrongly assumed
that the States would rush to set up exchanges once the bill
was signed into law, but a majority of them are still yet to do
so.
Section 1321 of the bill gives authority to the Federal
Government to set up exchanges in States that fail to do so on
their own; however, the law only gives State-run exchanges the
ability to issue premium assistance or tax credits. Nowhere
does the bill grant this authority to Federal-run exchanges.
The Obama Administration and proponents of this rule have
stated that this was a simple drafting error. I don't see how
they can possibly make this claim when Democrats had ample
opportunity throughout the reconciliation process where they
specifically extended tax credits to exchanges created by U.S.
territories, yet left Federal exchanges alone. This leads me to
believe that this was, in fact, a deliberate and premeditated
action on the part of the Democrats as a way to incentivize
States to set up the exchanges.
Either way, there is no doubt that the language is missing.
In order to fix this glaring problem, the Internal Revenue
Service circumvented Congress' legislative authority by issuing
a rule allowing premium assistance subsidies to be offered
through Federal exchanges. Back in November of 2011, my
colleague and fellow Tennessee physician, Phil Roe, and I sent
a letter to the IRS Commissioner asking what authority his
agency had to unilaterally alter the Affordable Care Act and
what specifically within the bill gave them the authority to
bypass Congress in promulgating this rule. The response we
received from the IRS cited no specific section or language
justifying their actions.
Mr. Chairman, I ask unanimous consent that this letter and
the IRS's response be submitted into the record.
Chairman Issa. Without objection, so ordered.
Dr. DesJarlais. On June 18th I introduced H.J. Res. 112
which would nullify this rule under the Congressional Review
Act. I firmly believe the actions by the IRS set a dangerous
precedent that flies in the face of our Constitutional
separation of powers. I am pleased to announce that Senator Ron
Johnson has recently introduced companion legislation in the
Senate. Ultimately, my bill and this issue are not about the
merits of the President's health care law but on how the IRS
has overstepped the authority it was given as a result of the
Affordable Care Act.
While my colleagues on the other side of the aisle may not
share my views regarding the detrimental affects that ObamaCare
will have on our Country, surely they will agree that the
framers of our Constitution were clear in giving Congress sole
legislative authority. Just because Democrats hastily drafted
their health care law due to electoral politics, it doesn't
mean they can now throw the separation of powers out the
window.
I look forward to hearing the testimony presented before us
today, as well as having the opportunity to question our
witnesses on these very important issues.
I yield back the balance of my time.
Chairman Issa. I thank the gentleman.
Members may have seven days in which to submit opening
statements for the record.
We will now recognize our panel. We welcome our witnesses
on the first panel.
Mr. Mark Everson was Commissioner of the IRS from 2003 to
2007 and is currently vice chairman of the AlliantGroup. I
might note, also one of the architects of Governor Mitch
Daniels' changes in Indiana. Ms. Nina Olson is currently the
National Taxpayer Advocate at the IRS. Mr. Timothy Jost is
professor at Washington and Lee University School of Law. And
Mr. Michael Cannon is Director of Health Policies at the Cato
Institute.
Lady and gentlemen, pursuant to the rules of the Committee,
would you please rise to take the oath and raise your right
hands.
Do you solemnly swear or affirm that the testimony you are
about to give will be the truth, the whole truth?
[Witnesses respond in the affirmative.]
Chairman Issa. Please be seated. Let the record indicate
all witnesses answered in the affirmative.
As is the tradition of my predecessor, I will note that you
have a time and lights, so I would only ask that you deal with
it just the way you would green light, drive through; yellow
light, drive through faster so you don't get caught on the red;
red light, please do a final summary as you see your time has
expired.
Your entire opening statements will be placed in the
record, so you need not go verbatim. It will all be there.
Mr. Everson?
WITNESS STATEMENTS
STATEMENT OF MARK EVERSON
Mr. Everson. Good morning, Mr. Chairman, Mr. Cummings,
members of the Committee. I am pleased to be here.
As you have indicated, I am the Vice Chairman of
AlliantGroup. I want to stress that my remarks are my own, not
those of that business. But I would say that we work with CPA
firms around the Country, and some of the reflections I am
going to make are really tied to things that I have been told.
I would also say that I am not here to advocate for or
against repeal of the act or of any specific components of the
act. I am trying to help you grapple with this issue of the IRS
and its implementation.
As the GAO has noted, this is a massive undertaking. That
is the wording they have used. Very significant for the
service. Nina Olson, my colleague, former colleague and the
National Taxpayer Advocate, has said with proper planning and
funding the IRS is fully capable of implementing health care
reform. I am not so sure.
Now, clearly I know that the Service is going to do
everything it can to implement it. They always do. But this is
really quite a heavy lift, if you will.
There are really two questions. One, can they do it, and
even if they are able to do it will there be collateral damage
to tax administration as they are working on this set of
issues. They are both important questions.
The Service grapples with three things when it is
implementing laws. Are there adequate lead times? I think there
are generally in this act. Is there adequate funding? That is
essential if they are to do their job. I counsel you to make
sure you provide the funding that they need. And then, finally,
complexity. There is a lot of complexity and ambiguity in
statutes, and that is certainly the case here.
As Nina has said, complexity is the most serious problem
confronting taxpayers, and clearly this is a step backward for
tax administration because of what the IG has said is the
introduction of the most complexity in over 20 years to the tax
code. So that is a big problem.
In my testimony which you have I have raised a number of
issues. Let me just mention a few.
The first is information technology. This is going to be a
real challenge for the Service. And, as you have indicated,
reliance on a lot of outside parties will be the case. You
don't have to go any further than today's news, reading about
millions of trades on the stock exchange going forward because
of rogue programs or bad programs to know that errors get made.
Systems issues are tough. A lot of challenges for the Service
here because of the need to constantly update information. This
is going to be a challenge.
The second piece you have already mentioned, Mr. Chairman,
is the protection of taxpayer data. If there was anything I
really worried about as Commissioner, that was it. And there is
a risk here that there can be disgorged information, and it
would be very damaging to the Service and the confidence of
taxpayers in the IRS if that were to happen.
The other point that I would make is the burden on CPAs.
CPAs struggle as it is to keep up with all of the changes in
the tax code. They are the true advisors to small-and mid-sized
businesses. They don't have the staffs of the Merc or a GE to
work through all this, and this is going to be very
challenging. We get a lot of feedback on this at AlliantGroup.
Before I close, I have got three very general points that I
think are very important to place this in the overall context.
Health care reform comes at a very difficult time for the
IRS. In part, it is Congress' doing. We are heading towards the
end of the year where there is a great deal of ambiguity about
what the law is. I really do encourage you to resolve these
issues, because American businesses need certainty to make
investment planning. But beyond that, I think the IRS is
looking at the most difficult filing season next year, 2013,
that it has had in decades because of the convergence of these
factors and the potential for tax reform.
So the competition for resources at the Service and of
management attention, they only have so many senior managers,
of course, this all comes at a very difficult time.
A second point I would make that I think is sort of over-
arching is the independence of the Service. For important and
well-understood reasons, the IRS operates with a great deal of
independence from other agencies. I worry that such direct
participation of the Service in a major non-tax Administration
initiative has the potential to erode the historic independence
of the Service.
And let me be clear here. I have nothing but the highest
regard for Commissioner Shulman and his team. I am not
suggesting I have seen things, but I just think that when you
bring the Service in closer to the White House and to other
agencies you just run the risk of eroding that independence.
Let me conclude by touching on the politics of this and how
it does impact the Service. I would say that, with the Supreme
Court decision and the clear transfer of looking at all this
back into the political arms of Government, it is also clear
the Service is coming under attack. It would appear that some
opponents of the Reform Act will demonize the IRS in order to
build a case for overturning the law.
The most striking example is the disturbing comparison of
the IRS to the Gestapo by the incendiary Governor of Maine,
Paul LaPage. Reuters quotes LePage as having said, ``What I am
trying to say is the Holocaust was a horrific crime against
humanity and, frankly, I would never want to see that repeated.
Maybe the IRS is not quite as bad yet.''
Attacks upon the IRS of this kind are unconscionable and
will ultimately take their toll on the Service, its people, and
the ability of the IRS to collect the money that we need to
fund the Government.
I would close by saying that I would suggest that, even if
the Service is successful in executing the long list of tasks
assigned to the IRS under the Affordable Care Act, there is
still an unquantifiable real risk that health care reform will
falter or perhaps, and nobody can be sure of this, but perhaps
even fail because of the sheer number of moving parts and
complexity of the new system.
Let's hope health care reform is not a modern day version
of the Vasa, the famous top-heavy Swedish war ship built in
1628 and when it sailed out of Stockholm harbor it sank 400
feet from shore. If something like that happens because of all
the complexity and all the interactions and all these pieces,
if that happens, as you say, just two short years from now, the
damage to the IRS and the impact on our Country in that regard,
not the health side, will be real and lasting.
Thank you.
[Prepared statement of Mr. Everson follows:]
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Chairman Issa. Thank you.
This Committee did research a Coast Guard ship that will
crack in two in less than its first 20 years, so we are not
completely beyond that at this time.
Ms. Olson?
STATEMENT OF NINA OLSON
Ms. Olson. Chairman Issa, Ranking Member Cummings, and
members of the Committee, thank you for inviting me to testify
today about the IRS's implementation about the Patient
Protection and Affordable Care Act.
As you know, my office is non-partisan, so I take no
position pro or con regarding the wisdom of the ACA; rather, my
focus has been and continues to be on trying to ensure that a
taxpayer perspective is considered as the IRS prepares to
implement the law as it stands today.
In my 2010 annual report to Congress, I published a
detailed assessment of the administrative challenges the IRS
will face in implementing the four major tax provisions of the
law. Since that time, my office has monitored the IRS's
preparations for the ACA closely. Overall, I believe the IRS
has done a good job of moving quickly to identify its key
challenges, and has taken significant steps to address them,
although some concerns remain.
On the positive side, the IRS has already issued
considerable guidance to clarify gray areas of the law. I view
the early publication of guidance as a very positive
development, because it enables both taxpayers and employers to
know where they stand and to make informed decision about their
coverage options, and also to allow others to litigate against
those State-taken positions.
The IRS also has made progress in developing business
requirements for computers and other information technology. IT
infrastructure lies at the core of the IRS's ability to
administer the program, largely because the IRS will use
computer systems to communicate with the exchanges. Early
systems development will allow for repeated advanced testing
and enable the IRS to identify and fix glitches before the
systems go live.
My own organization, the Taxpayer Advocate Service, or TAS,
has also been making preparations, including initial training
of our employees on key provisions of the ACA, reviewing and
commenting on drafts of published guidance, designing an online
tool to help small businesses estimate the amount of small
business health care tax credit they may receive, and
conducting a survey of individuals and businesses regarding
health insurance coverage and needs that will provide useful
demographic information for outreach purposes.
Notwithstanding these important steps, some areas of
concern remain. First, the IRS and other entities need to step
up their public information campaign. The IRS should make it a
top priority to work with other agencies to develop and deploy
a targeted communications campaign designed to anticipate and
answer questions from individuals and employers. As part of
this campaign, the IRS should educate taxpayers who receive the
advance premium tax credit about the importance of updating
information if their income or other relevant circumstances
change. If the taxpayer continues to receive a subsidy but
becomes ineligible, he or she will end up with an unexpected
tax bill when eventually filing the related return.
Most taxpayers otherwise are not required to provide
periodic updates to the IRS, so this new procedure needs to be
communicated clearly.
Other remaining challenges include establishing smooth
inter-agency communications, minimizing the impact of tax-
related identify theft on eligibility determinations, and
providing additional guidance for small businesses and
employers.
I also believe it is critical that the IRS begin to include
representatives of my office on its implementation teams.
Congress placed TAS within the IRS specifically to ensure that
the IRS considers our taxpayer perspective as it develops and
implements programs, and with any program the devil is in the
details, and if TAS representatives are not included on the
teams where the details are hashed out, I am concerned the
taxpayers eventually will be harmed.
On the whole I believe the IRS will be able to successfully
implement its responsibilities under the ACA, but I believe it
is critical that the IRS receive adequate funding to meet
taxpayer needs. If the funding is restricted, the IRS simply
cannot cut spending on ACA implementation, because unless
Congress changes the law, administering the ACA is a statutory
requirement. Rather, the IRS would have to make cuts in its
taxpayer service and enforcement programs, and that would be a
mistake.
In my 2011 annual report to Congress I identified the
combination of the IRS's expanding workload and its shrinking
resources as the number one most serious problem facing
taxpayers. I am deeply concerned that taxpayer service suffers
the most when IRS funding is inadequate, and I therefore urge
you to ensure that U.S. individuals and businesses that are
trying to pay their taxes and are seeking help from the IRS are
not shortchanged.
Thank you for letting me testify today, and I would be
happy to answer your questions.
[Prepared statement of Ms. Olson follows:]
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Chairman Issa. I thank the gentlelady.
I now ask unanimous consent the 2010 annual report to
Congress be placed in the record.
Without objection, so ordered.
Chairman Issa. The gentlelady mentioned a 2011 report. Do
you have a copy of that with you?
Ms. Olson. I do not, but I can certainly get it to you for
the record.
Chairman Issa. Then I would ask unanimous consent that also
be placed in the record.
Without objection, so ordered.
Professor Jost, thank you very much. You are recognized.
STATEMENT OF TIMOTHY JOST
Mr. Jost. Thank you. Thank you, Chairman Issa, Ranking
Member Cummings, Committee members, for this opportunity to
address you today on the role of the Internal Revenue Service
in health care reform. My remarks today specifically address
Mr. Cannon's assertions which he will be making shortly that
the IRS rule that permits Federal exchanges to issue tax
credits is illegal.
If Mr. Cannon is right, many constituents of Committee
members will lose tax relief that could give them access to
affordable health insurance. Just for 2014, 1.9 million
Floridians would lose $7.7 billion in Federal tax relief,
593,000 Indianans would lose $2.2 billion, over 1 million
Ohioans would lose $4 billion, 2.6 million Texans would lose
over $10 billion in Federal tax relief to help make health
insurance affordable.
Fortunately, Mr. Cannon's position is based on a
misunderstanding of the law, its structure, and history. The
exchange is fundamentally a market for health insurance, but
exchanges will also ensure that health insurance consumers get
value for money and access to premium tax credits.
Section 1311 of the Affordable Care Act asks the States to
establish exchanges, but Section 1321 authorizes HHS to
establish a Federal exchange in States that choose not to,
which is likely to include many States of members of this
Committee.
Mr. Cannon believed that Federal exchanges cannot issue
premium tax credits. This assertion was made earlier in this
hearing. Because two subsection of Section 36(b) of the
Internal Revenue Code, which establishes eligibility for tax
credits, refer to ``persons enrolled through an exchange
established by the State under Section 1311,'' Mr. Cannon
argues that this means only State and not Federal exchanges can
offer tax credits.
The Affordable Care Act as amended by the Health Care and
Education Reconciliation Act, however, explicitly provides that
Federal exchanges can issue tax credits.
When I teach first-year law students how to read a statute,
I tell them you start with the definition section. Section
1563.C of the Affordable Care Act defines exchanges to mean
``an American health benefits exchange established under
Section 1311.'' Section 1311 literally states that a State
shall establish an exchange, and section 1311.D describes and
exchange as an exchange established by a State.
Because Congress cannot, however, Constitutionally require
a State to establish exchanges, Section 1321.C provides that
the HHS Secretary shall establish and operate such exchange
within a State, referring to the 1311 State, if a State fails
to do so.
Under the Affordable Care Act definition of exchange, a
Section 1321 exchange becomes a Section 1311 exchange
established by the State. This is reinforced by Section 1321,
itself, which, again, refers to such exchange, referring to the
earlier required 1311 required State exchange. Under ACA,
therefore, all exchanges, Federal and State, are 1311 exchanges
established by the State by definition.
Other sections of the ACA direct all exchanges, Federal and
State, to manage Federal tax credit functions, including
Section 1413, which requires all exchanges to use streamlined
applications and eligibility assessments to qualify persons for
premium tax credits.
Most importantly, a third subsection of Section 36(b),
itself, clarifies premium tax credits are available through
both State and Federal exchanges.
This subsection was added to the ACA by the Reconciliation
Act, which, as a later adopted statute, takes precedence over
the original ACA if there were any contradiction.
Mr. Cannon's interpretation is also refuted by the
legislative history of the ACA as demonstrated in my extended
remarks, which refer to repeated references to all States
having premium tax credits available.
Mr. Cannon claims to have found a statement by Senator
Baucus acknowledging that only State exchanges could issue
premium tax credits. I would be happy to introduce that
colloquy between Senator Baucus and Senator Ensign into the
record. It cannot be read to say that.
Perhaps most importantly, the CBO and JCT have consistently
assumed the availability of premium tax credits through State
and Federal exchanges since 2009, and, indeed, the CBO's report
from two weeks ago at footnote 14 explicitly recognizes that
both Federal and State exchanges will issue premium tax credit.
Finally, Section 36(b) of the IRC expressly grants the IRS
authority to write regulations if there were any ambiguity in
the statute. Under the Chevron Doctrine, the IRS's
interpretation of the statute would be accepted by the courts,
as a recent Congressional Research Service legal analysis
affirms.
In sum, premium tax credits will be available to middle
income uninsured citizens of all of your States, not just
Chairman Issa's and Mr. Cummings' States, which are going to
have State exchanges.
Thank you.
[Prepared statement of Mr. Jost follows:]
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Chairman Issa. Thank you.
I would instruct the staff to get an official copy of the
that colloquy and ask unanimous consent it be placed in the
record in the appropriate place.
Mr. Jost. Thank you very much, Mr. Chairman.
Chairman Issa. Without objection, so ordered.
With that, we recognize Mr. Cannon.
STATEMENT OF MICHAEL CANNON
Mr. Cannon. Thank you, Mr. Chairman and Mr. Cummings and
members of the Committee, for the opportunity to present my
views on the Internal Revenue Service's final rule concerning
premium assistance tax credits in the Patient Protection and
Affordable Care Act.
I have submitted written testimony on behalf of my co-
author, Professor Jonathan Adler of Case Western Reserve
University School of Law and myself. It is our contention that
this rule exceeds the IRS's statutory authority under the PPACA
and is an illegal tax increase.
Two facts are key to understanding why this IRS regulation
is illegal. First, both sides of this controversy acknowledge
that the statutory language governing eligibility for tax
credits is clear and unambiguous. The act provides that
taxpayers are eligible for tax credits if they purchase a
health plan through ``an exchange established by the State
under Section 1311.'' That language clearly authorizes tax
credits only in State-established exchanges, and the act
employs or refers to that language no less than six times when
authorizing tax credits. There is no parallel language anywhere
in the statute authorizing the IRS to offer tax credits through
Federal fall-back exchanges established under Section 1321.
The act's authors intentionally conditioned tax credits on
States establishing exchanges as one of a number of large
financial incentives designed to encourage States to implement
the statute. Even Professor Jost acknowledges that the
provisions authorizing tax credits ``clearly say,'' those are
his words, clearly say, those credits are available solely
through State-created exchanges.
Second, the remainder of the statute and the legislative
history support the clear meaning of those provisions. The only
statement anyone has found in the legislative history on this
point comes from the bill's lead author and chief sponsor,
Senate Finance Committee Chairman Max Baucus, who confirmed the
bill conditions tax credits on States establishing an exchange.
And yet, contrary to the clear language of the statute and
Congressional intent, this IRS regulation purports to issue tax
credits in States that do not establish an exchange. Under the
law's employer mandate, those illegal tax credits will trigger
an illegal $2,000 per employee tax on employers and unlawfully
appropriate hundreds of billions of dollars to private health
insurance companies in States that do not establish an
exchange.
Since those illegal expenditures will exceed the revenues
raised by this rule's illegal tax on employers, this IRS
regulation will also increase Federal deficits by hundreds of
billions of dollars, all contrary to the clear language of the
statute and Congressional intent.
This IRS regulation is a large tax increase. It imposes a
$2,000-per-worker tax on employers and obligates taxpayers to
pay for hundreds of billions of dollars of subsidies to private
insurers. For every $2 of unauthorized tax reduction that will
result from this IRS regulation, it imposes $1 of unauthorized
taxes on employers, commits taxpayers to pay for $8 of
unauthorized subsidies to private insurance companies, and
increases Federal deficits by $9. Though this IRS regulation is
nominally about tax credits, Government spending accounts for
80 percent of its budgetary impact.
Worse than the tax increase, though, this IRS regulation is
an illegal tax increase. It lacks any statutory authority, it
is contrary to both the clear language of the act and
Congressional intent, and it cannot be justified on other legal
grounds. It is, quite literally, taxation without
representation.
As you listen to the IRS and its defenders say that this
illegal tax increase is consistent with the statute or
supported by the statute or recognized through the statute,
notice what they are not saying. In the year since the IRS
proposed this regulation, they have not cited a single
statutory provision expressly authorizing the IRS to do these
things in Federal exchanges, because there is no such
provision. They have not cited a single statutory provision
that conflicts with the language limiting tax credits to State-
created exchanges because there aren't any.
Nor have they cited a single statement from the legislative
history that supports either this regulation's attempt to issue
tax credits and Federal exchanges or their claims that it was
Congress' intent that the Patient Protection and Affordable
Care Act would do so. There is simply no plausible way to argue
this IRS rule is consistent with or supported by Congressional
intent, much less the statute.
The most important indicator of Congressional intent is the
text of the statute, itself. That text is clear. It was there
for all to see before Congress approved it. It is not possible
that someone who read the bill could have mistakenly thought
that that language authorized tax credits and Federal
exchanges.
The IRS should rescind this rule before it takes effect in
2014. Alternatively, Congress and the President could stop it
with a resolution of disapproval under the Congressional Review
Act.
And, finally, since this rule imposes an illegal tax on
employers in States that opt not to create a health insurance
exchange, those employers and possibly those States could file
suit to block this rule in Federal court.
Thank you.
[Prepared statement of Mr. Cannon follows:]
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Chairman Issa. I thank the gentleman.
I now ask unanimous consent that our colleague, the
gentleman from Tennessee, Dr. Roe, be allowed to participate in
today's hearing.
Without objection, so ordered.
I will now recognize myself for a round of questioning.
Professor Jost, is it undeniable that there is a cost
difference between all States participating, some States
participating, and the Federal Government essentially
preempting the States choosing not to participate? In other
words, if only 14 States participate, our scoring shows over
half a trillion dollars less in cost to the Federal Treasury.
Would you disagree with that?
Mr. Jost. I would agree that citizens of all the rest of
the States would be denied a----
Chairman Issa. Okay. So I will take that as yes, it is a
half a trillion dollars to the taxpayers or, more specifically,
half a trillion dollars we don't borrow from the Chinese.
Mr. Jost. Well, a half a trillion dollars that would not be
granted in Federal tax credits to citizens of this Country.
Yes. Thank you.
Chairman Issa. Mr. Cannon, when CBO scored this, my
understanding is they made the assumption that all States would
participate. Is that your understanding?
Mr. Cannon. There is a widespread assumption when this law
was passed all States would establish exchanges.
Chairman Issa. Okay. But States not participating has a
ramification. Isn't it true that a State not participating
means that a company would not get a $2,000 penalty plus the
cost of the subsidy in that case if there is no State exchange?
Mr. Cannon. That is correct. What triggers the penalties
against employers under this law's employer mandate, is when
one of their employees receives a tax credit through an
exchange, if there are no State-created exchanges there would
be no tax credits. If there are no tax credits----
Chairman Issa. So let's run through, because I now
understand why Justice Roberts made the decision he made.
Clearly this was a pot full of taxes. We may disagree with
whether it was right, but I begin to see why this is all about
taxing, that ObamaCare is all about taxing. So let me ask a
question. Under a State that does not create an exchange, does
the individual still have an individual mandate?
Mr. Cannon. Yes.
Chairman Issa. Does the individual then have to seek either
private insurance or the Federal exchange that is anticipated
in the law?
Mr. Cannon. Or pay a penalty tax.
Chairman Issa. okay. So the Supreme Court decision that my
colleague, the Ranking Member, referenced doesn't change. The
States have the right to opt out under this law. They have
chosen to do so in huge amounts, or at least not to
participate, and it doesn't change anything related to the
Supreme Court question of the individual mandate; is that
correct?
Mr. Cannon. That is correct.
Chairman Issa. So the challenge at the Supreme Court, which
will occur when the tax is implemented, essentially the first
time an employer gets his bill he can then make a challenge
that will go all the way to the Supreme Court, what would be an
all new challenge that won't occur until 2015, correct?
Mr. Cannon. That is actually not clear, sir. Employers
could file suit today, and it is a defensible, I think, perhaps
the correct reading of the Supreme Court's ruling in NFIB v.
Sebelius that the anti-injunction act might not bar an employer
establishing standing immediately.
Chairman Issa. But certainly it didn't bar on the other
tax. But you would say, and I think since Professor Jost only
wants to answer the questions he wants to answer, not the ones
I ask, clearly this is a separate issue that will very possibly
go all the way to the Supreme Court; is that correct?
Mr. Cannon. I can't say how far it would go, sir.
Chairman Issa. Let me rephrase that. This is a separate
issue which would be eligible?
Mr. Cannon. That is correct.
Chairman Issa. Okay. Ms. Olson, you mentioned in our
earlier conversation, I hope you don't mind my bringing it up,
that your legal counsel, your general counsel, had made this
decision from the rule. Correct?
Ms. Olson. It is the Internal Revenue Service chief
counsel, not mine, yes.
Chairman Issa. Right, but yours being the IRS.
Ms. Olson. Yes. Correct.
Chairman Issa. That is a political appointee, isn't it?
Ms. Olson. Well, yes it is.
Chairman Issa. Okay. So a political appointee made the
decision that this rule should be made without, according to
Mr. Cannon and my reading of the bill, without any legal
standing. I'm going to ask you another question. This one
concerns me more. In year 2010 report you wrote, ``The new W-2
reporting requirements has raised numerous concerns that
reporting the value of health insurance on employees' W-2 may
cause the amount to be taxed.'' You wrote that.
You also, in your 2010 report, which is in the record, you
said, ``To get to the underlying goal of the new law, health
coverage for the vast majority of Americans,'' and this was a
question, ``Will the IRS audit every taxpayer who does not
report?'' These are areas of concern you raised.
Ms. Olson. Yes.
Chairman Issa. Let me go through this. You raised it again.
If you don't audit every single person to make sure that they
properly were taxed, then we have a vast hole in which there
could be subsidies paid that shouldn't, there should be
individual fines, taxes, if you will, $2,000 for those who
don't. So essentially you almost have gotten into a situation
in which every American needs to be audited every year. That is
more or less what you are saying there.
Ms. Olson. Sir, the first quote we were saying there is
confusion about taxpayers when they get information on their W-
2 reporting what their premiums are, should that be taxed, and
the answer is no, that is not being taxed.
Chairman Issa. Sure, I understand you can explain part of
it, but the other part is essentially, if you don't audit every
American every year, then this thing won't be right?
Ms. Olson. The second issue was we were raising that as a
concern, and if the IRS takes its normal approach, which is to
select portions of the population to audit on any tax position,
then you are not going to be able to effectively implement the
mandate.
Chairman Issa. Okay. And I want to recognize the Ranking
Member, but I just want to make it clear it appears that the
Commissioner made a political decision, which was the new W-2
reporting requirement has been delayed until after this
Presidential election, hasn't it?
Ms. Olson. I can't speak to that. I think the Commissioner
is on the next panel.
Chairman Issa. Well, no.
Ms. Olson. There has been a delay.
Chairman Issa. There has been a delay, and the effect of
that delay has been it won't appear for people to see until
after this election.
Ms. Olson. That is a matter of fact. Yes.
Chairman Issa. Okay. With that, I recognize the Ranking
Member.
Mr. Cummings. To all of our witnesses, I really want to see
this law implemented to its fullest degree, because I know that
right now, right this second, there are people watching us.
There is somebody leaning in a sick bed that can't get up.
There is somebody who cannot get insurance. And they are
saying, you know, whatever you do, whatever arguments you have
got, get them straight because I want to live. And I want to
speak for them because they are out there.
I have often said that we all are the walking wounded. All
of us are the walking wounded, and we are walking yet and
wounded we will be. So, Ms. Olson, in your testimony you are
generally positive about what the IRS has accomplished to date,
and you say that over the past two years the IRS has used its
time well, and I am going to come back to you in a moment.
Mr. Everson, I want to thank you for your balanced
testimony, but I want to ask you this. You were IRS
Commissioner. We can do this. We can get this done. I know you
highlighted a lot of issues that we need to be aware of, and I
really appreciate that, and you are talking about some things
that are perhaps preventive, hopefully, that is, so the IRS
won't run into this, but we can get this done, can't we? This
is America. This is the United States. We are a can-do Nation.
Mr. Everson. Let me say this, sir. It is quite possible we
will get it done. The Service is going to do its level best.
The Commissioner, when you ask the Commissioner this question,
he is going to say yes, of course. He has to. His job is to
implement the law, however strong or however flawed, so that he
can't be then before the Committee or before Ways and Means or
Finance and have people say, well, you never liked this law.
You said you couldn't do it anyway. So the Service is always
going to say yes.
I think the Service in this instance is a little bit like
that frog they always talk about in the frying pan that you
keep turning up the heat until sooner or later the frog is
dead. It doesn't jump out. And that is my worry here, that
there are so many pieces, there are so many things to do,
especially on the systems side, as has been indicated, on the
reg side. There is so much confusion out there that I do worry
about this.
And then secondly, as you and I have discussed, I worry
about the impact on tax administration from a failure here.
Mr. Cummings. Yes.
Mr. Everson. So I don't think this is going to be easy and
I don't think it is a certainty that it can be done, sir.
Mr. Cummings. You said what? What was the last statement?
Mr. Everson. I don't think it is easy and I don't think it
is, by any means, a certainty that it can be done, even with
very strong efforts by the IRS.
Mr. Cummings. And with resources. I think that was one of
the things that you talked about.
Mr. Everson. Resources. As I have indicated, absolutely,
give the Service the resources it needs to do then if you are
going to hold them accountable for doing it.
Mr. Cummings. Thank you.
Ms. Olson, you raised one specific challenge, and that was
the need for a communications plan and taxpayer education
efforts. Why is that so important? I agree with you, by the
way. I think that is much needed.
Ms. Olson. We need to tell taxpayers, make sure taxpayers
know where they should go for each step of this program, and
that for the advanced premium credit they are dealing with the
exchanges, for issues on the tax return they are dealing with
the IRS. They need to update their information during the year
so they don't get socked with a tax at the end of the year. And
so we were talking about changing behavior, and we really need
to communicate that information out there.
To something else that Former Commissioner Everson said,
you know, about the burden on the CPAs and other return
preparers, I think we need to start talking to them about what
to expect as we get closer to this date.
Mr. Cummings. I don't know if you have read the GAO reports
on the implementation of the Affordable Care Act, but they are
also generally positive, Ms. Olson, about the IRS efforts to
date. GAO finds that top IRS leaders have been directly
involved in this process, and that IRS has accomplished a
number of those, and that the risk of being identified and
analyzed at the individual project level.
GAO also makes a number of specific recommendations to
improve the implementation of the program. For example, GAO
recommends that IRS develop an integrated plan with detailed
cost estimates and develop procedures identifying and
evaluating risk mitigation strategies. Ms. Olson, are you aware
of GAO's findings? Are they consistent with yours?
Ms. Olson. Yes. And the IRS I know has responded to GAO's
findings and is taking steps to address that.
Mr. Cummings. Now let me ask you about another report. This
one is from the Treasury Inspector General for tax
administration and it is also fairly positive. It says that the
IRS is effectively using tracking systems to monitor
implementation, that it is working on forms and publications
and other consumer outreach, and that is has completed plans
for computer programming tasks.
And overall the Inspector General says this: the
appropriate plans have been developed to implement tax-related
provisions of the ACA using well-established methods for
implementing tax legislation. Do you agree or disagree with the
IG's conclusion?
Ms. Olson. From what I have seen, I would have to agree to
date.
Mr. Cummings. Well, my goal on this Committee is to conduct
a constructive oversight and to work with you and the IRS to
flag potential issues before they become problems. We will be
having the IRS Commissioner on the next panel and I am looking
forward to his thoughts, and I am hoping that he has listened
very carefully to what Mr. Everson has just said and don't tell
us what he thinks we want to hear but tell us what we need to
hear.
With that I yield back.
Chairman Issa. I thank the gentleman.
We now recognize the distinguished gentleman from
Tennessee, Dr. DesJarlais, for his questions.
Dr. DesJarlais. Thank you, Mr. Chairman.
What we need to decide today is whether the IRS bypassed
Congress, in a sense wrote a new tax law that is a power given
solely to Congress, so let's go through first a series of yes/
no questions. I know panels tend not to like those, but let's
try to do the best we can.
First, Mr. Cannon, is there anything stopping the IRS from
implementing Section 36(b) of the Internal Revenue Code exactly
as written?
Mr. Cannon. Section 36(b) is large and complicated, sir. If
what you mean is the provision restricting tax credits and
State-run exchanges, no.
Dr. DesJarlais. Professor Jost?
Mr. Jost. Section 36(b), as I explained, if you read the
definitions, does authorize Federal exchanges to issue a tax
credit, so no, there is no problem.
Dr. DesJarlais. There is no problem. Thank you.
In one part of the law it authorizes tax credits for people
who purchase a qualified health plan through an exchange
established by a State under Section 1311, and even people who
defend the IRS on this issue, such as yourself, Professor Jost,
say that this part of the law is clear. Is there any part of
the statute that prevents you from doing just that, offering
tax credits only in State-run exchanges?
Mr. Jost. Again, the definitions.
Dr. DesJarlais. Mr. Cannon, is there any part of the
statute that prevents you from doing just that, offering tax
credits?
Mr. Cannon. No.
Dr. DesJarlais. No. Okay.
Mr. Cannon. No. In fact, the statute requires that.
Dr. DesJarlais. Okay. Is there any part of the statute that
conflicts with that, Mr. Cannon?
Mr. Cannon. No. In fact, all other elements of the law
support the clear meaning of that limitation of tax credits to
health insurance exchanges established by the State under
Section 1311, and established by the State. Those words are
key.
Dr. DesJarlais. What about the information reporting
requirement?
Mr. Cannon. That does not conflict. It does require
exchanges established under Section 1321 by the Federal
Government to report information related to eligibility for tax
credits and the advanced payment of tax credits to the Treasury
Secretary and to individuals enrolled through those exchanges.
Dr. DesJarlais. Okay.
Mr. Cannon. But that does not conflict in any way with the
limitation of tax credits to State-run exchanges.
Dr. DesJarlais. Okay. So what is stopping the IRS from
implementing the tax credit provision exactly as written and
exchanges from implementing the information reporting
requirement exactly as written, or can they both be implemented
exactly as written without conflicting with each other?
Mr. Cannon. The latter. They can both be implemented
exactly as written without any conflict.
Dr. DesJarlais. Agreed, Professor Jost?
Mr. Jost. I would agree because, again, Federal exchanges
can issue premium tax credits and can report.
Dr. DesJarlais. Okay. Do you agree that when authorizing
these premium assistance tax credits Internal Revenue Code
explicitly refers to only health insurance exchanges as
established by the States under 1311, Professor Jost?
Mr. Jost. I do, and, again----
Dr. DesJarlais. Mr. Cannon?
Mr. Jost.--given the definition, that means Federal
exchanges.
Mr. Cannon. That is what the statute says, but I would
disagree with Professor Jost that the Federal Government can
establish a health insurance exchange established by the State,
which is what Section 1311 requires. And that claim is
completely inconsistent with the text of the law.
Dr. DesJarlais. Simple question: do you agree that when
authorizing those tax credits the IRC reportedly refers to
exchanges established by the State under 1311?
Mr. Cannon. That is correct.
Dr. DesJarlais. Professor Jost, do you agree with that?
Mr. Jost. Again, given the definition that includes Federal
exchanges.
Dr. DesJarlais. Okay. Do you agree that the ruling
providing tax credits in Federal exchanges will trigger
penalties against employers under the employer mandate in
States with Federal exchanges, Professor Jost?
Mr. Jost. If they do not offer health insurance or adequate
or affordable insurance and their employees go into the
exchange and get Federal premium tax credits, yes.
Dr. DesJarlais. Mr. Cannon, yes or no.
Mr. Cannon. Yes.
Dr. DesJarlais. Thank you. Are you aware, Professor Jost,
of how many time state reconciliation bill, the Health Care and
Education Act, amends Section 1401 of the ObamaCare law which
created IRC Section 36(b) authorizing the tax credits in State-
created exchanges?
Mr. Jost. Well, at least once, but I don't know off the top
of my head.
Dr. DesJarlais. Seven times. Are you aware of how many
times that the same reconciliation bill amended Section 1402 of
the Affordable Care Act which authorizes cost-sharing
subsidies, credits in State-created exchanges?
Mr. Jost. Not off the top of my head.
Dr. DesJarlais. Okay. Five times. So a total of 12 times.
So if Congress intended to offer tax credits and cost-sharing
subsidies through Federal exchanges, then why didn't Congress
include any language to that effect among the 12 amendments
within the reconciliation bill authorizing tax credits and
cost-sharing subsidies through exchanges established by U.S.
territories? Is that a coincidence?
Mr. Jost. Again, it had already authorized Federal exhibits
to issue tax credits, and therefore there was no need to amend
it.
Dr. DesJarlais. Mr. Cannon, do you agree? Is he going wrong
here?
Mr. Cannon. There is no language authorizing tax credits in
Federal exchanges, and the claim that Professor Jost is making
is not supported by the text. What he is saying is that the
Federal Government can create a health insurance exchange for
purposes of Section 1311, but Section 1311, itself, clearly
says that, for purposes of that section, ``an exchange shall be
a Governmental agency or nonprofit entity that is established
by a State.'' It is simply implausible to argue that the
Federal Government can establish an exchange that is
established by a State.
Dr. DesJarlais. In fact, we know it was their intent to
entice or almost coerce States into signing up for these
exchanges. They thought that when ObamaCare was released the
States would just line up and sign up for these exchanges, but
when they didn't they realized they had a real problem. But the
intent of the bill was clear. That is what they were trying to
do. Do you agree?
Mr. Cannon. And that intent was revealed by the Senate
Finance Committee, the Chairman Max Baucus. When challenged by
opponents of the bill in his Committee he said that it does
condition tax credits on the State creating an exchange.
Chairman Issa. The gentleman may finish the answer if he
wants. You did?
Mr. Cannon. Yes.
Chairman Issa. The gentleman's time is expired. Thank you.
We now go to the gentleman from Illinois, Mr. Davis, for
his questions.
Mr. Davis. Thank you very much, Mr. Chairman. I want to
thank the witnesses for appearing also.
Ms. Olson, opponents of health reform legislation have
unfairly characterized the Affordable Care Act as resulting in
``an unprecedented expansion of the IRS powers.'' To be honest,
I am not exactly sure of what they are talking about, so let's
look at some of the possibilities.
One claim they appear to be making is that the IRS has the
new authority to distribute billions of dollars in tax credits
to individuals purchasing health insurance on the exchanges. I
think that is a good thing, but it seems that some of my
colleagues on the other side of the aisle do not. Ms. Olson,
does this aspect of the Affordable Care Act represent an
unprecedented expansion of the IRS powers? Or does the IRS have
decades of experience with distributing funds as part of
similar social programs, like when the IRS distributed the Bush
Administration's economic stimulus payment?
Another claim that opponents of the law are making is that
the IRS will have access to individuals' personal health
information when they are verifying insurance coverage.
Are these accurate assertions?
Ms. Olson. I view ACA not as an unprecedented expansion of
IRS powers, but rather an unprecedented expansion of IRS work.
The powers that we have in the law are powers that reside in
tax administration, period. We implement the earned income tax
credit, which is billions of dollars; the first-time homebuyer
credit; as you referenced, the economic stimulus payment. We
are a disperser of payments, and that trend has been happening
since the 1970s.
In terms of health information that we would get, my
understanding is that we would get the information from
insurers whether or not the taxpayer was covered, and
essentially nothing else. The amount of the premium paid. And
that would be it. Nothing about their state of health or
anything like that. That is new information that we will be
getting; however, we have always been getting information from
third parties. So it is not a new approach giving us
information; it is new information.
Mr. Davis. Well, let me proceed. A number of people appear
to still believe that the IRS will be subjecting individuals to
liens or levies or even jail time if they fail to purchase
insurance. Is this from your analysis?
Ms. Olson. No. The law, at my urging, in fact, prevents the
IRS with respect to the individual mandate, what people call
the individual mandate, the IRS is prevented from issuing liens
or levies or its other enforcement action. It can collect that
mandate through what we call refund offset, where a taxpayer
has a refund coming to them and we would offset that refund
amount with the amount of the penalty.
Mr. Davis. And if low-income taxpayers cannot afford health
insurance, will they be subject to a penalty?
Ms. Olson. There are many provisions in the law allowing
for exemptions, both for hardship, and the mandate only applies
to taxpayers starting at a certain level of income.
Mr. Davis. Some folks have claimed that the Affordable Care
Act will require the IRS to hire 16,000 new enforcement agents.
The Commissioner has said on a number of occasions that this is
a made-up number with no basis in fact. Is this your
understanding, perhaps, as well?
Ms. Olson. I think the Commissioner can certainly speak on
the next panel about this. The internal conversations, my
understanding is that we are maybe looking at, going forward,
800, 860 full-time equivalents for doing this work once it is
implemented.
Mr. Davis. Thank you very much. My time has expired. Mr.
Chairman, I yield back.
Chairman Issa. I thank the gentleman.
I now ask unanimous consent that Professor Jost's September
11, 2011, article, Yes, the Federal Exchange Can Offer Premium
Tax Credits be placed in the record.
Without objection, so ordered.
Chairman Issa. Professor Jost, my staff has asked me to
give you an opportunity to clarify an answer you gave to Dr.
DesJarlais. You said that it was in the act, in the September
11th you said it was a drafting error. Can you reconcile? Is it
in the act in written language, or in your September 11, 2011,
article were you correct that it was, in fact, clearly left out
of the act?
Mr. Jost. I have learned over the last year a bit more
about the statute, and that is something that I think is worth
doing.
Chairman Issa. I just want to----
Mr. Jost. I think the statute could have been better
drafted, but I think if you read the statute as a whole,
including the definitions, it does authorize Federal exchanges
and I was wrong at that point.
Chairman Issa. Okay. So you are saying 2011 is incorrect,
the article, and you now stand by your testimony?
Mr. Jost. That part of the 2011 article was incorrect, and
I now stand by my testimony. Thank you.
Chairman Issa. Thank you very much.
We now recognize the gentleman from Michigan, Mr. Walberg.
Mr. Walberg. Thank you, Mr. Chairman.
I think the insertion of the music at that proper time was
probably coming from the Sovereign of the Ages saying that we
are living in a fantasy world that this thing is going to work,
and so maybe that music will come in again at some time.
As I understand from what I hear and what I read, what I
have heard today, that tax credit eligibility and size are
determined by a formula that includes a number of things,
details. The tax credits are sent directly from Treasury to
health insurance companies.
Ms. Olson, you have stated that ``taxpayers who did not
update their household information during the year may find
that they owe a significant amount of money at the end of the
year. Money they likely do not have.'' I would concur with you
on that statement. At least my concerns would concur with you.
What type of information will households have to update?
Ms. Olson. If they are determined by the exchange in
advance that they are eligible for these advance payments of
their health care premium, they will need to let the exchanges
know if they have gotten an increase in salary, because that
may make them ineligible for the full amount of credits that
they are getting. On the other hand, if they have a child may
become ineligible in their household, someone may die in their
household. On the other hand, they may be entitled to more
credit if they get unemployed or something like that.
But the point is it is the changing of their circumstances
that they are going to have to update it during the year, and
that they could end up owing money at the end of the year is a
risk and I am very concerned about that.
Mr. Walberg. And even with different States, changing
States, as many people have to do just to find a job now,
changing States with different provisions in their exchanges
could make it very difficult, as well?
Ms. Olson. It could very well be.
Mr. Walberg. You know, I come from the aspect if you are a
person who has to file a quarterly report, you understand the
complexities of that. But if you have a bunch of new citizens
who are going to be really required, if they are going to be
intentional about it and not run amuck, are going to be filing
reports that they have never done before and don't have the
abilities of external resources to help them. The challenge
will be there. Do you believe that most Americans are going to
update the IRS or State exchanges when they change jobs, get
married, move States, whatever?
Ms. Olson. I think it is going to be a very great learning
curve.
Mr. Walberg. With a lot of pitfalls.
Ms. Olson. With a lot of pitfalls. The only saving grace is
about 80 percent, 75 to 80 percent of taxpayers get a refund,
so it is unlikely that they will owe money to the IRS. It is
just that their refund, average refund is $3,000, at least the
first year their refund might be, you know, decreased. I am not
minimizing that. That is a significant thing for taxpayers.
Mr. Walberg. And the confusion, especially the first
reconciliation in 2015, how would you describe it?
Ms. Olson. I think it will be a surprise to the taxpayers
if they don't update their information.
Mr. Walberg. And persons who are in a situation where they
are now having to use a Government-run or Government takeover
of health care are not only going to have the sickness and the
problems that they have, but also the confusion, the
frustration, the worry, in some cases the terror of trying to
deal with all of this while they are trying to get well.
Ms. Olson. I think the agencies are trying to make it as
easy as possible.
Mr. Walberg. Okay. Thank you for your responses.
Mr. Everson, many experts point out that the tax credit
most similar to ObamaCare's premium tax credits is the earned
income tax credit. Unfortunately, the ITC has an extremely high
error rate and fraud rate, sadly. What lessons are there from
the ITC experience and IRS that the IRS can take to reduce the
error rate and fraud rate with premium credits?
Mr. Everson. Well, the program, sir, is very complex, and
it is distinguished from many other Federal programs where
there is a real front-end application process where you sort of
sort through information and then someone is deemed ineligible
or eligible for a benefit, but there is no administrative cost
to the ITC in the sense that most big food stamps or other
Federal programs they have got a 6 or 7 percent monies that are
appropriated go to administering on the front end. The ITC is,
by and large, like other things on your return. You put it out
there, and then if the Service has questions--and they hold a
lot of the returns before they pay, because, as you indicate,
there is a lot of fraud, there is a lot of just plain
misunderstanding--even more of that--that gets in there, and
that is a real problem. But I would say the biggest piece is
the complexity and the----
Mr. Walberg. So ObamaCare is more complex than the ITC and
other----
Mr. Everson. I agree with the advocate's comments earlier
that it is about a lot more work, but it is about also very
great complexity within each of the many provisions that are in
the statute. So I consider this comparable in many ways, yes, I
do, to the EITC. The EITC, at least when I was Commissioner,
had the highest error rate of any Federal program. I believe it
still does. I don't know.
Mr. Walberg. And this is more complex?
Mr. Everson. Yes. I think it is.
Chairman Issa. Would the gentleman yield for just one
second?
Mr. Everson. I would yield.
Chairman Issa. I just want to verify, Ms. Olson. You were
saying individual taxpayers would have to update their record
if they had a change. What year will be used by the IRS
initially to determine, in 2014, what the subsidy will be? I
don't want an open question. I just want to make sure it is
clear.
Ms. Olson. The 2012 income is what is used to determine
your eligibility for a premium, advanced premium payment, for
2014.
Chairman Issa. Thank you. I just wanted to make sure we got
that in the record. I thank the gentleman.
With that, I recognize the gentleman from Massachusetts for
five minutes.
Mr. Tierney. Thank you, Mr. Chairman. I thank all of our
witnesses today for their testimony and for their knowledge on
this thing.
Professor Jost, I just wanted to ask a question about the
fact that until recently a lot of the insurance companies were
spending, I believed, a significant amount of their premium
money on things other than health services, whether it be
salaries or bonuses or lobbyists or other administrative costs.
One study, in fact, indicated that ten of the largest insurance
companies saw their profits jump some 250 percent between 2000
and 2009. In just 2009, alone, at the height of the economic
recession, the five biggest insurance companies saw their
profits increase by 56 percent. So I find that a startling
figure, but I wonder if you have any idea how these health
insurance companies were able to increase their profits so
dramatically during that time.
Mr. Jost. Yes, I do. The medical trend, the growth in
health care costs, has been growing at historically low levels
for the last two or three years; nevertheless, insurance
companies were increasing premiums because they believed that,
once the recession ended, people would start using more medical
care and trend would go back up. So there has been a growing
gap between premiums and actual health care costs.
The medical loss ratio 80/20 rule that the Affordable Care
Act imposes has resulted in 12.8 million Americans receiving
$1.1 billion in rebates that were due as of yesterday,
including $300 million in rebates for American small
businesses. Yet, insurance companies are still doing very well.
I was just reading this morning Carl McDonald says that Cigna
beat expectations and that most insurance companies in their
most recent quarterly reports that were just issued beat
expectations. So we have a solution where premiums are coming
down, Americans are getting rebates, insurers are still doing
just fine.
Mr. Tierney. Thank you. You know, I am glad to hear that. I
was responsible for putting that provision in the House bill
when it went through the education hearings on that, and this
is the expected, anticipated result that we thought, and so it
is good to know that your remarks coincide with what the
Secretary has told us, as well, and what I think a number of
reports have done that.
Professor Jost again, the IRS issued their final regulation
allowing the premium tax credits to be available to all people,
regardless of the origin of their exchange participation; is
that right?
Mr. Jost. That is correct.
Mr. Tierney. Okay. So Mr. Cannon made his argument that the
rule constitutes a net tax increase. I assume that you don't
agree with him on that?
Mr. Jost. No. This is a tax cut.
Mr. Tierney. And under the interpretation of the Affordable
Care Act that Mr. Cannon puts forward, residents of States with
Federally operated exchanges wouldn't qualify for the premium
assistance tax credits, so I want to give you another
opportunity, just rather than passing your opening remarks on
that, to explain what the cost of Mr. Cannon's interpretation
would be to taxpayers who do not get their tax credits.
Mr. Jost. Well, it is hard to know exactly. I mean, there
are going to be a trillion dollars in tax credits over ten
years, and it looks like initially probably 30 or 40 States are
going to have Federal exchanges, so all of the residents of
those States would be denied premium tax credits.
Mr. Tierney. So the National Health Interview Survey just
released this past Tuesday says that more than one in five
middle-aged United States adults and nearly half of the adults
over the age of 65 have more than one chronic health condition,
whether hypertension, diabetes, things of that nature. There
are more and more people every day that need assistance in
managing and preventing those diseases, and yet 50 million
people are without access to health insurance.
So, Professor, can you explain what the impact will be on
those individuals of the exchanges coming into effect in 2014?
Mr. Jost. Well, a report done by the Harvard Medical School
a couple of years ago projected that about 45,000 Americans die
every year because they are uninsured. Making premium tax
credits available to 20 million Americans so that they can
afford health insurance is really a question of life and death.
It is going to be Americans whose lives are saved because they
can get premium tax credits, and in many States that means
initially premium tax credits through the Federal exchange.
Mr. Tierney. Thank you.
I yield back, Mr. Chairman.
Chairman Issa. I thank the gentleman.
We now go to the gentlelady from New York, Ms. Buerkle.
Ms. Buerkle. Thank you, Mr. Chairman, and thank you for
this very important hearing. And thank you to our panelists for
being here today.
I graduated from nursing school a very long time ago. I was
one of those diploma grads who spent time doing clinical
nursing. And then when I was 40 I decided to go to law school,
and for 13 years before I came to Congress I represented a
large teaching hospital in upstate New York. So pretty much my
professional career has been spent in health care, and one of
the reasons I ran for Congress was because I thought the
direction of the Affordable Care Act was incorrect.
Now I do want to make one point, and that is my colleague
on the other side of the aisle mentioned we are opposed to
health care reform. By no means are we opposed to health care
reform. But I would have thought, in a health care reform and
in a Nation that wants to make sure people have increased
access to health care, decrease the cost of health care, that
we would have seen tort reform, that we would have seen the
increased use of health savings accounts, that we would have
seen the ability to buy insurance across State lines.
Portability. Increasing the number of physicians and
encouraging them to go into the family practice and the
internal medicine fields.
But we don't see any of that, and I sit here and I think,
Have we lost our way so much in this city that when we talk
about health care reform we have to bring in the IRS and talk
about raising taxes on the American people by $500 billion? Who
in their right mind thinks that what we are talking about here
today is going to increase access to health care for the
American people or decrease the cost? Who has gotten so far
away from reality down here that they think this is the way we
help the American people?
When my colleague talks about that patient laying in his
bed needing health care, if you think that going to the IRS and
dealing with the IRS is going to increase your health care,
your access to health care, or decrease the cost or improve the
quality of health care in this Nation, we have a problem in the
United States of America.
I am sitting here stunned. I have paid such close attention
to this. All of my colleagues have. And I sit here and I think,
What in God's name are they talking about and how is that going
to help that senior citizen understand her benefits, make sure
she is covered, make sure that person who is unemployed has
access to health care. This is gibberish. We are talking about
the most intensely personal issue for the American people,
health care. Health care is so important to every person in
this room. It affects how they live their lives. And we are
talking about an agency, the IRS, and I know firsthand from the
complaints that come in to my office how difficult it is to
deal with the IRS, how unresponsive the IRS is, and now you
take the IRS and it is not just going to be your income tax any
longer, it is going to be, well, I have had a baby, I have lost
my job, I have gotten a promotion. All that now has to be
communicated to the IRS.
The American people and this health care system that has
been created in the Affordable Care Act, the largest tax on the
American people in the history of this Nation, if one person
can tell me in this room how that is going to improve our
health care system, how it is going to improve access to those
who need health care, and how it is going to decrease the cost,
I welcome the explanation, but I fear for the American people
that this Affordable Care Act is going to dramatically affect
their access to health care. It is going to dramatically affect
the cost of health care. It is going to put us into a single
payer system which I believe was the ultimate goal of the
Affordable Care Act.
This does nothing, nothing, to improve the free market. Let
the free market decide what system works best, not the Federal
Government. We are in trouble when we sit here and we have a
discussion that this is the best way to go for the American
people, this is the best we can do to make sure the American
people have health care coverage.
I see my time has run out.
Mr. Everson, if you could comment just briefly, we have had
unemployment at over 8 percent for the last 42 months. How is
this going to impact our businesses in this Nation?
Mr. Everson. Well, in terms of the health care piece is
your question? I do think that the difficult economic
circumstances make the challenges that the advocate has spoken
to of the constant updating of the information an even more
daunting task as we go forward.
The interactions that you have spoken about that are
necessary with the Service, and then the complexity, the
confusion of the fact that the person is going to be going in
and seeing people in the exchange or talking to the exchange
and then being told, well, the IRS says you are not eligible.
The IRS says you already have this or that. That is all going
to converge in a situation where a lot of people, as you
indicate, are already under stress because of difficult
economic circumstances, or maybe they don't have a job. So I
think that the circumstances of the Country right now make it
inherently more difficult.
Ms. Buerkle. Thank you, Mr. Chairman. I yield back.
Chairman Issa. I thank the gentlelady. The gentlelady's
time has expired.
We now go to the gentlelady from New York, who has been
patiently waiting. Ms. Maloney?
Ms. Maloney. Thank you, Mr. Chairman and Mr. Ranking
Member, my colleagues, and all of the panelists.
Mr. Cannon, I understand that your reading of the
Affordable Care Act is that it does not permit the IRS to
provide premium tax cuts or tax credits to individuals who
participate in health insurance exchanges administered by the
Federal Government. In fact, I believe you called this illegal.
Is that correct?
Mr. Cannon. That is correct.
Ms. Maloney. Well, the Congressional Research Service has
come out with a report on this, their own legal analysis, and
they have examined this issue, and it did not come to the same
conclusion. And, according to the report, which I would like
unanimous consent to place in the record, according to the
report it says----
Chairman Issa. Without objection, so ordered.
Ms. Maloney. Thank you so much.
It says on page eight, ``The IRS rule appears to be an
exercise of the authority delegated to the agency to implement
Section 36(b), which includes the authority to provide
refundable tax credits for taxpayers enrolled in a health
insurance exchange.'' Have you read this report or have you
seen this report?
Mr. Cannon. I am not familiar with that at all. On what
date was that released, may I ask?
Ms. Maloney. This says July 23rd.
Mr. Cannon. I will have to review that.
Ms. Maloney. Okay. Great. Or we can get you a copy.
Mr. Cannon. I can comment on that claim.
Ms. Maloney. But first I would like to read other portions
of it, too.
The CRS also reports. It says thus: If a reviewing court
``determines that there is ambiguity surrounding the issue of
whether premium credits are available in Federal exchanges, the
regulations issued under Section 36(b), the regulations will
very likely be considered a reasonable agency interpretation of
the statute and accorded deference by the court.''
Now I would like to turn to Professor Jost, if I could. Mr.
Jost, you believe Congress provided the IRS authority to
provide premium tax credits to individuals who participate in
the Federal exchange?
Mr. Jost. That is correct.
Ms. Maloney. And why did you come to this conclusion?
Mr. Jost. Well, again, because of the definitional sections
of the statute and the way those work together, because of the
structure of the statute, and because of the legislative
history of the statute in which Congress, Senators, repeatedly
said that tax credits would be available in all States.
Ms. Maloney. Well, do you agree with the interpretation
that I just ready from the Congressional Research Service?
Mr. Jost. Yes, I do.
Ms. Maloney. And, Mr. Jost, do you also agree with CRS that
it is very likely that a court would defer to the IRS's
interpretation of the statute?
Mr. Jost. That is correct.
Ms. Maloney. And on the substance, why was it important for
Congress to give the IRS this authority?
Mr. Jost. Because Section 36(b) is, as has been said a
number of times, a complicated provision that requires
interpretation and requires application, and the IRS has done
an admirable job of putting out regulations with lots of
examples in them to help people understand how this section is
going to work.
Ms. Maloney. Well thank you. I think you gave a clear
indication why this is important and why it matters.
I yield back the balance of my time.
Chairman Issa. I thank the gentlelady.
We now go to the gentleman from South Carolina, Mr. Gowdy.
And I would ask the gentleman would he yield me ten seconds for
a question.
Mr. Gowdy. I would yield whatever time the Chairman wants.
Chairman Issa. Thank you.
Mr. Cannon, do you know of any Member of Congress, either
side of the aisle, who said that Federal exchanges would have
subsidies prior to the passage?
Mr. Cannon. Mr. Chairman, my staff and I did a pretty
extensive search of the Congressional Record, including markups
and Committee action, on this statute. We found only two
mentions in the Congressional Record of what would happen if
States did not create a health insurance exchange on their own.
The first was the chairman of the Senate Finance Committee said
that tax credits are conditioned upon States establishing their
own exchanges, so that affirmed----
Chairman Issa. Barney Frank?
Mr. Cannon. No, I'm sorry, the chairman of the Senate
Finance Committee, Max Baucus, who is the lead author of this
law. So that confirms the clear meaning of the statute.
The only other mention was in the House during House
consideration of the Patient Protection and Affordable Care Act
by Congressman Michael Burgess. He said, What happens if the
States don't create an exchange? Well, a Federal exchange will
impose a public option. It made no mention of tax credits.
Those are the only two we have found.
And Professor Jost and the IRS have not cited anything from
the Congressional Record or the legislative history other than
the idea that all States would be establishing their own
exchanges. There is nothing that anyone else has offered that
suggests that if a State does not establish an exchange that
tax credits would be available in Federal exchanges.
Chairman Issa. Thank you. Clearly, the GSA had a mind-
reader at its convention. Perhaps the IRS does, too.
I thank the gentleman for yielding.
Mr. Gowdy. Yes, sir. Speaking of mind-readers, I was going
to ask you, Mr. Cannon, a similar series of questions. It
appears the professor is relying on the definitional section,
and without putting everyone in the audience to sleep with
rules of statutory construction, the last statute takes
precedence over a previously passed one, all provisions must be
read in harmony if they can, all the other stuff that made us
very anxious to get out of law school. Why is he wrong?
Mr. Cannon. The professor makes the claim that the statute
treats State and Federal exchanges equivalently. It does not.
It refers to exchanges under Section 1311 as, as I quoted
before, an exchange shall be a governmental agency or a
nonprofit entity that is established by a State. So that is
clear that they are not talking about an exchange established
by the Federal Government.
The section authorizing tax credits likewise is clear. It
says those tax credits are available only through ``an exchange
established by the State under Section 1311.'' Senator Baucus'
original bill had language similar to what Professor Jost
cites. It says if a State doesn't establish an exchange the
Secretary shall ``establish and operate the exchanges within
the State,'' and Senator Baucus confirmed that tax credits,
under that language, would be available only in States that
establish their own exchange.
Furthermore, the statute, itself, does not address, the
information reporting requirement that Professor Jost cites in
his other argument refers to Section 1311 and 1321 exchanges
separately. If every time the Federal Government referred to a
Section 1321, if they were equivalent, there would be no need
to refer to them separately.
And the Finance Committee bill, which is what became the
final law, was different from the bill that was reported by the
Senate Health Committee and the bill that was reported by the
House in this very important way: both the Health Committee
bill and the House Committee bill had explicit language saying
that State and Federal exchanges are equivalent. They drew
explicit equivalents between exchanges created by States and
exchanges created by the Federal Government. There is no such
language in here. The definitional section that Professor Jost
mentions does not establish that equivalent.
Mr. Gowdy. Mr. Everson, what new citizen information will
be available to the IRS that is not currently available to
them?
Mr. Everson. I think, sir, that the statute contemplates
getting into any number of areas that are non-financial. It is
true, as has been already pointed out, it is not medical
information, and that is important, but you are going to be
asking businesses to report on their plans and details of their
plans so that the Service can determine or it can be determined
whether they qualify as meeting needs under the statute.
And then you are going to have individuals, who will, as
was indicated earlier, they are going to have to constantly
update information about the status of employment and whether
they have coverage or not. I think it can't be said enough that
this need for updating and the timeliness is a very real change
for taxpayers that is important, in addition to the new areas
beyond purely financial information that you as a taxpayer are
used to already providing.
Mr. Gowdy. Well, back in the good old days we used to have
to get a court order just to get a tax return from somebody we
were about to indict. What level of independence disclosure
confidentiality will exist with this new information?
Mr. Everson. Well, I think that is something that the
Service is best capable of answering. The Service historically
provides great importance to the protection of taxpayer
information. My concern is that there are already real
protocols that exist, through working with the State taxing
authority. I am from Indiana, and working with the revenue
department there, or with major cities to share that
information. Everybody is used to doing that.
These exchanges are going to be in the process of being
stood up over a period of time. They are going to have enough
they are dealing with, and yet they are going to be charged
with protecting this information, as well.
You get a lot of problems with disgorging of taxpayer
information or information generally. I think there is not a
week that goes by where a credit card company or a business
doesn't talk about hundreds of thousands of records being just
spat out, and you are introducing a lot of new players here. So
while there may be protocols, getting that working is going to
be very challenging, and I would say fraught with problems.
The last thing I would say on this is I worry about the
Wiki-leaks parallel where you get not an error of the system
but an individual who has lots of records and says, I don't
like this law or I don't like elements of this, or so-and-so
companies didn't provide what had to happen, and individuals do
the wrong thing.
There is a lot of risk here, sir.
Mr. Gowdy. Thank you, Mr. Chairman.
Chairman Issa. I thank the gentleman.
I would ask unanimous consent pursuant to the gentlelady
from New York's entering into the record the Congressional
Research study of just a few days ago.
The Ways and Means has forwarded a specific line in answer.
``Applying the plain meaning rule to Section 36(b), it is
possible that the court could read the phrase 'an exchange
established by the State under 1311 of ACA' as being clear to
not include an exchange established by the Federal
Government.'' I just wanted to make sure we made it clear that
was actually the verbatim of that report.
With that I recognize the gentleman from Virginia, Mr.
Connolly.
Mr. Connolly. Thank you, Mr. Chairman, and thanks to our
panelists for being here.
Mr. Everson, in your testimony did I understand you to say
that your concern is that the involvement of IRS in a major
non-tax administration initiative has the potential to erode
the independence of the IRS; is that correct?
Mr. Everson. That is absolutely true, sir.
Mr. Connolly. Ms. Olson, do you share that concern?
Ms. Olson. I think that the IRS needs to not be viewed as a
political or politicized agency.
Mr. Connolly. Does the assignment, however, here from the
ACA, in your opinion, compromise or potentially compromise the
independence of the IRS as indicated by Mr. Everson?
Ms. Olson. I think the IRS will conduct itself in a way
that it will not be compromised.
Mr. Connolly. The IRS currently or recently has had, for
example, assignments like the economic stimulus payments, the
earned income tax credit, the first-time homebuyers tax credit,
and the making work pay credit; is that correct?
Ms. Olson. Yes.
Mr. Connolly. Did the administration of any of those
compromise the independence of the IRS?
Ms. Olson. The IRS implemented the law as it understood it.
Mr. Connolly. Did it compromise the independence of the
IRS?
Ms. Olson. In my opinion, no.
Mr. Connolly. Mr. Everson, in your opinion did they
compromise the independence of the IRS?
Mr. Everson. I believe that the items you are citing are
pretty well within the bailiwick of traditional tax matters for
the Service. What I think you have here is the potential that
comes from a major Administration initiative. Again, I am
making this context outside of politics and I am not making any
substantive allegations. I am talking about potential systemic
risk.
Mr. Connolly. I understand.
Mr. Everson. So I have not seen it, but I think that this
is quantifiably different than anything the Service has done.
Mr. Connolly. Mr. Everson, unfortunately I only have five
minutes, so bear with me here.
Mr. Everson. Okay. Go ahead.
Mr. Connolly. Okay. Thank you. But let me ask this: in
light of the Supreme Court ruling, Chief Justice Roberts'
ruling and that horrible word tax, doesn't that, in fact, add
more weight to the role of the IRS, not less?
Mr. Everson. No doubt it does. That is right.
Mr. Connolly. If I can, Mr. Everson.
Mr. Everson. Yes.
Mr. Connolly. But it seems to me to put to bed a little bit
the concern you have, maybe not you personally, about
independence of IRS when the Chief Justice of the Supreme Court
and a majority ruling of the Supreme Court says otherwise, that
it most certainly is within the purview; in fact the
responsibility of the IRS, by virtue of his decision of what
constituted the Constitutionality of the act.
Mr. Everson. Well, clearly that has justified the operation
of the individual mandate, yes.
Mr. Connolly. Thank you. I'm sorry.
Mr. Everson. That is okay. Go ahead.
Mr. Connolly. I have a limited period of time here.
Mr. Everson. We obviously disagree.
Mr. Connolly. I understand, but we have a Supreme Court
ruling.
Mr. Everson. Of course.
Mr. Connolly. And God knoweth why, but they didn't invoke
the Commerce Clause; they invoked something else. So there we
are.
Professor Jost, are you familiar with RomneyCare in
Massachusetts?
Mr. Jost. I am familiar with the Massachusetts reforms,
yes.
Mr. Connolly. Well, it seems to me if we are going to call
the ACA ObamaCare, we will call health care reform in
Massachusetts----
Mr. Jost. I don't, so I am trying to be even-handed.
Mr. Connolly. I understand. I am trying to be even-handed,
too.
What is the role of the Massachusetts Department of
Taxation, which is the analog in Massachusetts? I happen to
come from Massachusetts originally. What is the role of the
Massachusetts Department of Taxation in the administration of
this particular set of issues in RomneyCare?
Mr. Jost. I believe there are premium tax credits in
Massachusetts.
Mr. Connolly. Really? And when fines or penalties are
imposed, as they are under the law signed into law by the
Governor of Massachusetts at the time, Mitt Romney, how is that
administered?
Mr. Jost. Through the tax system.
Mr. Connolly. Through the tax system. Is it not virtually
identical to the system Ms. Olson described that will pertain
to the ACA?
Mr. Jost. The ACA was modeled on the Massachusetts health
care reforms.
Mr. Connolly. So, for example, as Ms. Olson was testifying
a little bit earlier, most people have a refund and you would
net out the refund if you owed that fee; is that correct?
Mr. Jost. I believe so.
Mr. Connolly. And is that not exactly how Massachusetts
works?
Mr. Jost. I believe so.
Mr. Connolly. Ms. Olson, is that your understanding, as
well?
Ms. Olson. I am not an expert on Massachusetts. I can only
speak about the Federal provision.
Mr. Connolly. I see. Final point, maybe Ms. Olson, to you,
there is a return for every dollar we invest in the IRS; is
that not correct?
Ms. Olson. Yes.
Mr. Connolly. And is it my understanding for every dollar
IRS got it produced $200 in revenue?
Mr. Connolly. That is the ratio of what we collect to our
appropriated----
Mr. Connolly. So, given our obsessive concern about the
fiscal situation and the National debt, Congress has, in fact,
increased IRS's budget, given that ratio, so we can collect
that which is owed; is that not correct?
Ms. Olson. You are still working on our appropriation this
year.
Mr. Connolly. What has happened in the last three or four
years?
Ms. Olson. Actually, last year our budget was decreased.
Mr. Connolly. Decreased?
Ms. Olson. Yes.
Mr. Connolly. And what is the total amount of revenue owed
the Government, not new taxes, that is left on the table every
year because of lack of collection?
Ms. Olson. It is about $359 billion or something in that
range.
Mr. Connolly. So $359 billion a year. Now, if I multiply
that times ten, that would be over $3.5 trillion; is that
correct? And your understanding of the value of the sequester
we are so concerned about, we are not going to cancel our five-
week recess to do anything about, is $1.2 trillion; is that not
correct?
Ms. Olson. I'm sorry. I am not following your question.
Mr. Connolly. The value of the sequester we are worried
about is $1.2 trillion; is that not correct?
Ms. Olson. That is my understanding.
Mr. Connolly. And the amount you are talking about over
that same period of time would be three times that.
I thank the Chair.
Ms. Buerkle. [Presiding]. Thank you.
The Chair recognizes the gentleman from North Carolina, Mr.
McHenry.
Mr. McHenry. Thank you, Madam Chair.
Look, Americans know that the tax code is complex. That is
obvious to even those that don't pay taxes. I think it is one
of the self-evident truths the American people have. I have run
into an issue in western North Carolina dealing with small fire
departments. I have got about six to eight of them that, based
on a provision of the law and how the IRS chose to implement
it, means that these volunteer fire departments that are quasi-
governmental non-profits, they receive taxpayer funds and they
actually have tax collection areas. We have this whole thing.
And so my office has had to be engaged in making sure these
non-profits still get to maintain their non-profit status based
on how the IRS has implemented it.
And so there is a lot of grief the American people have
with the IRS and we have got public safety at risk based on how
the IRS has chosen to implement a law.
And so I want to say, Ms. Olson, your office, the National
Taxpayer Advocate Office in Greensboro has been enormously
helpful to us in going through this whole process and trying to
be truly a taxpayer advocate for these volunteer fire
departments in my District, and I want to thank you for that.
This has been enormously frustrating and confusing, but I
certainly appreciate the work that you do and the work that
your staff does. Thank you.
Ms. Olson. Thank you, sir. I am personally very familiar
with that issue, and it is on my radar screen and we are
working on this.
Mr. McHenry. Thank you. I certainly appreciate it, and I
hope that the commissioner hears this, as well, and that you
have some compliance on behalf of taxpayers, the IRS actually
has some compliance.
To that end, and the reason why I bring this up is because
it is about the confusing and complex nature of the tax code.
And that is frustrating as it now stands, as it now stands.
That is before we even talk about ObamaCare, as my colleagues
on the other side of the aisle like to call the affordable
health care or whatever else, any way they want to call it, but
the point is if you look at how the Internal Revenue Service is
going to have to implement ObamaCare and portions of ObamaCare,
Mr. Everson, you have testified well on this.
So in your testimony you expressed doubt as to whether the
statutory scheme as enacted into law is even workable
mechanically. What do you mean by that? Explain. The IRS can,
you know, has a complex enough code. Are you saying that this
is even beyond?
Mr. Everson. I am suggesting that there are so many parts
and there are so many players that we cannot, by any means, be
sure that this is going to work. That is not getting at the
policy objections that some have raised, it is just simply as a
matter of management. That is particularly the case because of
the fact that there are different levels of government. You
have got different agencies of Government in the Federal level,
and then you have got States and you have got these quasi-State
entities, these exchanges.
All of these are players, plus private parties, companies
and individuals. All of this interacting together across these
multiple provisions I think really is an extraordinarily
daunting task from a managerial point of view. That is what I
am getting at, sir.
Mr. McHenry. Okay. So thus, you know, if they have more
folks collecting taxes and the tax code is more engaged in
people's daily lives and health care decisions?
Mr. Everson. Well, what I am saying here is that the other
piece, whether you get this done or not, the other facet of my
testimony is that I am concerned that by doing this, by
assigning these health care responsibilities to the Service,
which are contentious. They are certainly, as we know from this
hearing, contentious politically, but they are going to be
contentious for individuals because, as was indicated by the
Chair, these are the intensely personal issues. That is the
word you used. And I agree with that.
You are adding into the interaction of the citizenry with
the IRS another highly-charged element of a conversation, if
you will, and that can't help but impact how they feel about
tax collection, as well.
Mr. McHenry. Ms. Olson, to this point, with implementation
and your preparations for implementation of ObamaCare, how
daunting and how difficult is this task going to be for the
average American to be in compliance with this? You say that
with the mid-year they are going to have to update if they
change jobs, as they receive more income rather than less, or
less income rather than more? For your planning purposes, how
complex is this going to be and how much of a challenge is this
going to be?
Ms. Olson. Well, it is going to be a challenge for
individuals and the IRS and for the exchanges, and commissioner
Everson is correct about all the moving parts. The taxpayers'
ongoing responsibility to update is going to be not with the
IRS but with the exchanges, where the taxpayer is going to
interact with the IRS at the end of the year with the return
filing, and that is where we do a reconciliation of what they
got during the year and then what they actually were entitled
to based on what really happened with their income and their
family structure during the year, and there is a possibility of
a gap between that, and that will come as a rude surprise to
some taxpayers.
That is why I have emphasized that we have to really
educate taxpayers about their responsibility to talk to the
exchanges. My concern is similar to Mr. Everson's in that
taxpayers are going to look to the IRS, partly because we are
talking about the IRS all the time about this, and call the IRS
and want to give updates of information to the IRS, and they
will be confused. Where do they go? And will they get to the
right place? And will the IRS be helpful in telling them, here
is where you need to go?
I have said IRS employees have to have a Rolodex of where
to send these individuals so they can get to the right place.
Mr. McHenry. Oh, Lord. With that I yield back.
Ms. Buerkle. Thank you.
The Chair now recognizes the gentleman from Arizona, Dr.
Gosar.
Dr. Gosar. Thank you, Madam Chair.
Ms. Olson, you made an interesting finding. Oh, by the way,
I am a health care provider. I am a dentist. Okay? So I know
something about this. You talked about changing behavior. Is
that pretty easy, changing behavior?
Ms. Olson. No.
Dr. Gosar. How would you feel about that, Mr. Everson?
Mr. Everson. I'm almost 58. It is tougher every year.
Dr. Gosar. I understand that. Ms. Olson, are you familiar
with the Advanced Federal Child Tax Credit?
Ms. Olson. Yes.
Dr. Gosar. What were their instructions to the American
people. Please do not call the IRS, right?
Ms. Olson. Yes. That was in 2001.
Dr. Gosar. How many calls did you get?
Ms. Olson. In one day we got about, it was our first
million call day, and they called asking do we really not need
to call you.
Dr. Gosar. So, I mean, when you are talking about customer
service associated with this, this is much more complex?
Ms. Olson. Yes.
Dr. Gosar. Would you say exponentially?
Ms. Olson. Yes. It goes to my earlier point: it is not that
we have new powers or new duties, it is the scope.
Dr. Gosar. I understand.
Ms. Olson. It is the amount of work.
Dr. Gosar. So how many customer service people are you
planning on hiring?
Ms. Olson. Well, I am not planning on hiring people until I
know what my budget is. I think that is a question for the
Commissioner. I have heard that we will be focusing on about
800 FTE that will be partly IT and majority working on the
customer service side.
Dr. Gosar. Mr. Everson, tell me, given the quantum leap
that we are doing here for customer service, in your
estimations what kind of customer service detail would we need
to handle this?
Mr. Everson. I haven't studied it in such detail that I
would be able to give you a number. I mean, the Service is more
than capable of having that conversation. But you are really
talking, just as the Advocate has said, as Nina has said, you
have got a whole new area of responsibilities, you have got
potential for whole new conversations.
In the Act, frankly, it extends well beyond that. Small
businesses, we work at AlliantGroup where I am now, we work
with small and mid-sized businesses. They are flummoxed by the
statute and all the different obligations that they have. So
there are lots of different parties that are going to be
impacted by these changing standards, including maybe your
dentist shop. I don't know.
Dr. Gosar. Absolutely. We have kind of kept the Federal
Government away as best we can. But that is my whole point is
this is an ongoing dialogue that should be going on the whole
year, not just at reconciliation, because it is compensatory
backlog. So it is customer service intensive, would you say? So
800 FTEs ain't going to work.
Ms. Olson. Well, that is the spec'ing out, but I have not
seen the details behind that.
Dr. Gosar. Going back to changing behaviors, when you are
sharing all this information, you know, and exponentially
enlarging the pool of people accessing your personal
information, boy, I tell you what, you had better have customer
service. And, if I am not mistaken, you are not really known
for customer service, right?
Ms. Olson. We need to improve our taxpayer service.
Dr. Gosar. So let me ask you this: what is your average
wait for a person for customer service?
Ms. Olson. I think this year it was about 12 minutes on the
main phone line.
Dr. Gosar. For an expedited form, right?
Ms. Olson. Yes.
Dr. Gosar. How much longer when we have questions?
Ms. Olson. I don't know the answer to that. On some lines
these have been----
Dr. Gosar. Hours? Days?
Ms. Olson.--hours. Yes.
Dr. Gosar. Days. I'm just saying on the phone just trying
to get somebody that is qualified to answer.
Ms. Olson. Yes.
Dr. Gosar. And this is much more, as we have heard the
witnesses talk about, exponentially just growing in size.
Mr. Everson, I am really perplexed by the safety. I know I
couldn't find at least a sizeable leak from the IRS in personal
information.
Mr. Everson. Right. It has got a very good record.
Ms. Olson. It does.
Mr. Everson. It is a real strong point of the Service.
Dr. Gosar. But the one problem that we have got is we are
going out beyond that because we are going to be sharing this
information all over the place, and we are also subjugating
individuals to insurance companies, are we not?
Mr. Everson. There is a tie-in into the insurance
companies. I am not sure how that will work on the exchange of
what they will have in terms of the taxpayer information, but
clearly you are exactly right. When you get to the exchanges or
you get to the other States, you are going to have a whole new
set of players that are dealing with not just the traditional
information but even more information.
Dr. Gosar. So how do we guarantee that that is, and you
alluded to it. It is sort of like my gentleman friend from
South Carolina, you know, this is the potential to share very
personalized, like the gentlelady up here said, for sharing
personal information.
Mr. Everson. There are no guarantees in this area, sir, and
it just is a very significant area of continuing focus by the
Service. I would tell you any business in America now that
deals with this kind of information, it is something that
everybody worries about, but this does increase risk. That is
all I am saying.
Dr. Gosar. One last question. Do you think the health care
is individualized and should be personalized, patient friendly?
Personally, your point of view?
Mr. Everson. I am not going to answer a policy question on
health care. I have not got a dog in that fight today. How is
that?
Dr. Gosar. You do, because your health is yours today and
you own it, right?
Mr. Everson. Yes.
Dr. Gosar. How about you, Ms. Olson?
Ms. Olson. I am not going to answer that question.
Dr. Gosar. You don't own your health today?
Ms. Olson. I do own my health today. I just went to my
dentist last week.
Dr. Gosar. God love you, and you are smiling. How about
you, Mr. Jost?
Mr. Jost. I believe that my health care is personal, and I
believe that the Affordable Care Act protects it.
Dr. Gosar. Mr. Cannon, how do you feel about that?
Mr. Cannon. Health care is, of course, an intensely
personal issue. There is a difference of opinion among
obviously supporters and opponents of this law because, just
like other opponents of this law, I think it is going to make
access to health care less secure, not more.
Dr. Gosar. Thank you very much.
Mr. Cannon. And cause more people to fall through the
cracks.
Mr. Everson. Maybe I misunderstood your question, sir. If
you are saying do I think information about my health care is
personal and shouldn't be shared, yes, I agree with that.
Dr. Gosar. Thank you very much.
Ms. Buerkle. Thank you. The Chair now recognizes the
gentleman from Idaho, Mr. Labrador.
Mr. Labrador. Thank you, Madam Chair.
Mr. Cannon, my State right now, Idaho, is going through a
huge debate about whether we should accept the health insurance
exchange, should we do a Federal exchange or do a State
exchange, and interestingly I have made a recommendation to our
governor and to our legislature that they shouldn't at this
time accept a health insurance exchange as a State exchange,
that they should allow it to become Federalized. So I want to
have a little discussion with you about this. Have these true
State exchanges that we are talking about when you are talking
about State exchanges under ObamaCare?
Mr. Cannon. No. The statute requires that every State-
created exchange, in order to be compliant with ObamaCare, that
it has to get approval from the Secretary, and the statute
gives the Secretary the authority to heap pretty much whatever
sorts of regulations the Secretary wants onto these State-
created exchanges.
So it really is a myth, the idea that States would be able
to retain some sovereignty, retain some control over their
health insurance markets if they create their own exchanges,
because whatever the Secretary would be able to impose on a
State through an exchange that the Federal Government created,
the Secretary could also impose on a State-created exchange
through regulation.
Mr. Labrador. Well, you and I probably have very similar
philosophies about the 10th Amendment and States' rights. It
seems odd that somebody from the Cato Institute and a
conservative Republican from Idaho are asking a State to forego
the State exchange and actually allow for the Federal exchange.
Could you explain?
Mr. Cannon. Well, it is a little bit ironic, but what you
want is a Federally-run health insurance exchange in your
State, which is really just a Government agency controlling the
private health insurance market. If what you want is the
Federal Government to control your State, then the best thing
you can do is establish an exchange because the Federal
Government will control it.
If a State does not establish an exchange there might not
be an exchange at all, because, as we all know, there is no
funding in the act for the Federal Government to create these
exchanges, and it is not likely that Congress is going to
approve that funding any time soon, so this is a real problem
for the Administration. They are having to take money away from
other things that Congress appropriated money for. I would like
to see an investigation into that, frankly.
But the choice is not between a State-controlled exchange
and a Federally-controlled exchange; it is between a Federally-
controlled and maybe none.
Mr. Labrador. Okay. If a State would have set up its own
exchange independent of ObamaCare, would the IRS penalties
apply?
Mr. Cannon. The IRS penalties against individuals who do
not comply with the individual mandate would apply?
Mr. Labrador. Right.
Mr. Cannon. Penalties under the statute, the penalties
against employers, the $2,000 per worker tax that the Patient
Protection and Affordable Care Act imposes on employers in
States that create their own exchanges would not apply in a
State that does not create its own exchanges. So Utah, for
example, could avoid that very large tax on employers by not
creating an exchange, and what this IRS rule does is, it first
deprives Utah of that choice, and then imposes that tax
illegally on those employers.
Mr. Labrador. Okay. But if a State sets up an exchange
under ObamaCare, it is subject to the IRS penalties, right?
Mr. Cannon. It is subjecting its employers to the employer
mandate, which is a $2,000 per employee tax.
Mr. Labrador. Okay. So when you are making the decision
about whether you are going to set up a state exchange, you
have to think about those taxation issues for your employers in
your State?
Mr. Cannon. As well as what employers in neighboring
States, I'm sorry, the government's neighboring States are
doing, because if you are in Utah and your neighbors all decide
not to create a health insurance exchange but you create one,
you will be imposing a tax on your employers that your
neighbors are not, and they may want to leave your State for
other States.
Mr. Labrador. Okay. Isn't it true that under the actual
text of the law that if a State does not set up its own
ObamaCare exchange and the Federal Government steps in and sets
up its own exchange that the IRS penalty does not apply?
Mr. Cannon. The employer mandate, that is correct, because
what triggers that $2,000 tax on employers is when one of that
employer's workers receives a tax credit through an exchange.
Again, under the statute if there are no State-created
exchanges there can be no tax credits to trigger that penalty
against employers.
Mr. Labrador. And in the concept of federalism, the concept
of having the State create something that it can manage, is it
truly a State-managed exchange if you are doing it under the
rules of ObamaCare?
Mr. Cannon. Absolutely not, and for the reasons I just
mentioned as well as the fact that there will be hundreds of
billions of dollars flowing through these exchanges from the
Federal Government, so the Federal Government is going to be
controlling all of that money. The Golden Rule applies here.
Mr. Labrador. And I just want to be clear. So when you say
that, you mean that since they are controlling the money they
are going to be telling the State what rules apply for that
State exchange, and what compliance, correct?
Mr. Cannon. That is correct. For example, Utah's exchange
would not qualify under----
Mr. Labrador. Under ObamaCare. Correct. Even though they
did it before ObamaCare, correct?
Mr. Cannon. Correct.
Mr. Labrador. So, in essence, all the State exchange is is
another Federal agency?
Mr. Cannon. For which the States will have to pay, because
if a State opts to create its own exchange it is responsible
for the operating costs of that exchange. The estimates have
been $10 million to $100 million per year.
Mr. Labrador. All right. Thank you very much.
Mr. Cannon. Thank you.
Ms. Buerkle. I thank the gentleman.
I now recognize the gentleman from Pennsylvania, Mr. Kelly.
Mr. Kelly. I thank the Chairwoman, and I thank all of you
for being here today. This is critical.
I had a conversation yesterday, and then also today, with
Stephanie McCafferty, an automobile dealer who still owns the
business. My son runs it. We did build it by ourselves, by the
way. We have had this continuing conversation trying to
determine exactly what this new Patient Protection Affordable
Care Act actually does to us, and I have got to tell you, even
after sitting down with the CRS for an hour everybody still
scratches their head and says, You know what? We don't know. We
just don't know.
So, Mr. Everson, let me ask you this: is it true that the
IRS will have to collect ObamaCare's employer mandate penalty?
Mr. Everson. Yes, sir. There will be an obligation upon the
Service, like in many other areas, to make that assessment
based on the information that is provided.
Mr. Kelly. And that mandate penalty amounts to a $2,000 or
$3,000 penalty per worker?
Mr. Everson. I believe that is the case. I am not an expert
in the exact figures.
Mr. Kelly. I haven't found anybody that is an expert in any
of this. You are not offending me by answering that way.
Mr. Everson. Yes.
Mr. Kelly. It is a very difficult thing. Also, since the
ObamaCare mandate penalty is assessable in the same manner as
other employment tax penalties, is it true that the IRS does
not have to offer the employer an opportunity to review and
contest the determination prior to assessing the penalty?
Mr. Everson. Well, I would say, sir, that is a question for
the Service to address. It is an interpretation of the law and
they have got to write the appropriate regs. I would expect
that the Service will be very careful in laying all this out
and want to get, because of the problems we have been talking
about all morning, the nature of small businesses, lack of
sophistication and understanding of the tax code, they are
going to want to get this right, whatever they do, so they are
going to have to work very hard. They are going to have to work
very hard to do it, and then that is one piece of it.
My other concern is then whether the folks in the
businesses will understand it, actually.
Mr. Kelly. In our business we buy and sell cars and we
service cars and trucks and that is what we do.
Mr. Everson. Yes.
Mr. Kelly. Now, in addition to that, the greatest amount of
time we spend now in the back office is not dealing with the
services we offer our customers, it is trying to be in
compliance with the Government that continues.
I have got to tell you, when I am opening the mail if it
says it is from the Federal Government or the State government
or the local government I say, What are they going to take from
me now, or, How are they going to regulate me and make it
harder for me to get through this business?
Is there any appeals that exist, that come into play--and
it happens after the collection begins, right, so if IRS comes
in, they sit down, they talk with me and say, By the way, it
starts now, it starts today.
Mr. Everson. The Service has very clear procedures on
appeal rights, and even before things happen you can raise
matters up with supervisors, but I do think that there are
going to be, this is another area where there is going to be
more confusion. Some of these, as the taxpayer advocate has
indicated, the provisions are different in certain standards as
to what actions on an enforcement side the Service can take. I
have written in my testimony I am concerned about that. Any
time you introduce variability into a huge operation it is
harder to run.
So I think that these are all issues that are going to be
tough to deal with.
Mr. Kelly. And really I am on board with you. It is truly
the uncertainty of what this law is asking us to do that
creates this. I am talking now about job traders. You have got
to stay on the sidelines because you are not sure that your
actions are going to cause a problem for you. And I have been
through tax audits, and I have got to tell you the thing that
strikes fear into the hearts of most Americans is that the IRS
is coming in to do an audit.
Again, you say, my gosh, I know we did everything we
thought we were supposed to do, but I guarantee you that small
business owners who do not have, as you say, a level of
sophistication, I mean, who does have the level of
sophistication? It is certainly, even this panel with its vast
knowledge and its experience, it is like I know something about
it but I don't know everything about it. And then we go to the
job creators, the small business people and say, You know what?
The ball is in your court right now. How do you stand up and do
that?
So let me ask you, Ms. Olson, how long does a business have
to pay penalties assessed by the IRS under the employee
mandate?
Ms. Olson. There is a ten-year collection statute. And I do
want to say about the penalty, the small business penalty, that
it applies to employers with over 50 employees, so there
already is carved out by the law the very small.
I think Commissioner Everson is correct that we have got to
really work on this with the regulation and the appeals
procedures, and if there is an ability to get reasonable cause,
abatement of penalties, the things that we normally do with
penalties, those are very important issues.
Mr. Kelly. And, again, if I understood, you said the
penalties are very small?
Ms. Olson. No. The have exempted the very small businesses
from the penalties.
Mr. Kelly. Under 50?
Ms. Olson. Under 50 employees.
Mr. Kelly. Okay. Well, a lot of my friends have more than
50 people, so it applies to an awful lot of them.
Ms. Olson. Right.
Mr. Kelly. So if a business reports an IRS error, how long
will it take the IRS to fully investigate? Any ideas at all?
Ms. Olson. The IRS has three years from the filing of a
return, in general, to investigate.
Mr. Kelly. All right. So I would just suggest, and I offer
this only as a small businessperson who has lived in the
private sector for his whole life, gosh, you are making it hard
for us. You are making it so hard for us. I would ask each of
you, who signs your paycheck?
Mr. Everson. Sir, I would tell you, you have made it hard
for taxpayers, not the IRS. Let's get this right. You wrote
this law, the Congress did.
Mr. Kelly. You know what, Mr. Everson, I just got here. I
have only been here for 19 months. No, I didn't write it. In
fact, nobody even read it before they passed it, so let's make
sure we are very clear in what happened, okay?
Mr. Everson. Okay.
Mr. Kelly. And even the people that are sitting here on
this panel today cannot tell us specifically what the penalties
are going to be and how much it is going to cost small job
creators like myself. So we can tap dance around this and we
can pretend that it didn't happen.
I am going to show you right now this Government is
crushing job creators and turning away and saying, you know
what? The problem with you folks, you just don't have the level
of sophistication to understand this entire law. As a matter of
fact, neither do we, but we do have the ability to come in here
and tax you. We have the ability to come in here and shut you
down. We have the ability to hold you accountable for a law
that not even we understand. So how do you like that, Mr. Car
Dealer? How do you like that, Mr. Carpenter? How do you like
that, Mr. Manufacturer? How do you like that, Mr. Miner and
Steelworker?
Come on. Let's be honest with each other. This is
absolutely astounding that we would have to have this
conversation. You are paid by the same people that I am paid
by, and that is the taxpayers of this great Country, and we
have made it so hard for those folks to live the way that the
Founders designed this place.
I am going to yield back my time because I am way over
time, but I will never stop fighting for the small job creators
that are out there and the small business people who have
nobody else to turn to. I have sat through it, and I mean that
sincerely. There is nothing that strikes fear in the hearts of
people that own businesses than the fact that the IRS is
showing up. Boy, I tell you what, you try to circle the wagons
and get all your information together.
When it comes to the point that I have to worry more about
not competition down the street but I have to worry about my
own Government holding me back, there is something wrong.
Chairman Issa. [Presiding]. I thank the gentleman for
yielding back.
I thank our panel for the generosity of all of your
counsel.
Mr. Everson, I appreciate your recognition and, to be
honest, your seeing both sides. I agree with you on a personal
basis that Congress deserves the blame, noting that you are no
longer on the Federal payroll.
Ms. Olson, I would like to thank you personally for the
fact that your various reports and counsel of some of the areas
of concern were areas that we took note of here.
Professor, I thank you very much for putting out your
position in a very accurate way. I appreciate your being here.
Mr. Cannon, it is always a pleasure to have Cato
represented here. I think you did a great job of expressing
their concerns. Ultimately, much of what we said here today
will ultimately be decided outside of Congress in all
likelihood.
This has been a great panel. We stand in recess. Yes, Mr.
Everson?
Mr. Everson. I just want to thank the Chair and the Members
for keeping me out of this exchange fight. I didn't get any of
the questions. Thank you, sir.
Chairman Issa. Well, Mr. Everson, as you go back and talk
to small businesses you consult with, I am sure they will have
questions about that for you, so you are not going to be out of
the fight in the other side of your life.
Thank you again. We stand in recess until ten minutes after
the second vote.
[Recess.]
Chairman Issa. The Committee will come to order.
It is now our honor to introduce our second panel witness,
The Honorable Douglas Shulman, who is the Commissioner of the
IRS, a post that he has held since he was appointed under
President Bush nearly five years ago.
Welcome.
Pursuant to our Committee, I would ask you to rise and take
the oath and raise your right hand.
Do you solemnly swear or affirm that the testimony you are
about to give will be the truth, whole truth, and nothing but
the truth?
[Witness responds in the affirmative.]
Chairman Issa. Let the record indicate the gentleman has
answered in the affirmative. Please have a seat.
As I noted during the first panel, you did a great job of
staying focused on what was going here from the back. You have
obviously done this many times before. Since you are the only
witness, we won't hold you strictly to the five minutes, but I
would ask you to remember that your entire written statement is
in the record.
With that, the gentleman is recognized.
STATEMENT OF DOUGLAS SHULMAN
Mr. Shulman. Thank you, Mr. Chairman. And thank you for
having me here. Thank you, Ranking Member Cummings and other
members of the Committee.
Immediately upon enactment of the Affordable Care Act, or
ACA, we began our implementation efforts, which included both
executing on the short-term provisions that were in the bill
that were our responsibilities, as well as putting a structure
and process in place to plan for provisions with future
effective dates.
The IRS moved very quickly on some of the law that became
effective immediately. For example, we conducted outreach and
implementation for the small business health care tax credit.
The ACA, as you know, also expanded the adoption credit
immediately and provided favorable tax treatment for adult
children up to age 26 who are covered by their parents'
insurance.
The IRS's most substantial implementation effort relates to
the delivery of hundreds of billions of dollars in premium
assistance tax credits that will help millions of American
families afford health insurance starting in 2014.
Now, the Department of Health and Human Services is the
lead agency in defining the structure and operations of health
insurance exchanges, with the Treasury and the IRS defining the
associated rules for how the tax credits can help subsidize
coverage.
It is important to note that the credit will be paid
directly to the insurance company, which is a major design
feature which should help mitigate the risk of fraudulent
claims.
Taxpayers will then reconcile the advance payments they
receive on their tax return. If the credit is larger than the
sum of the advance payments, the taxpayer will be entitled to a
refund. IF the credit is smaller than the sum of the advance
payments, the taxpayer will owe the difference.
Now, starting in 2014 individuals who can afford health
insurance coverage and are not eligible for an exemption must
either purchase minimum essential coverage or make a payment
with their tax return. The payment only applies to taxpayers
who can afford insurance but do not purchase it.
We are already working with tax return preparers and the
tax software community to give taxpayers the tools that they
will need to fill out their returns in 2015. The IRS process
for verifying coverage will be very similar to the one we have
used for years to verify wages and withholding. The IRS will
match what is reported on the tax return with the information
reported by the insurers.
For the small number of taxpayers who may appear to have
underpaid and were not eligible for an exemption, we will
generally follow up with written correspondence.
I think it is important that I clarify one misconception.
Revenue agents who are trained on much more complex tax issues
do not work on resolving these kinds of issues. The law also
clearly specifies that the IRS will not use levies or file
notices of Federal tax liens if the taxpayers have unpaid
amounts related to the individual coverage provision.
Because these and other ACA provisions are substantial and
require long-term planning, we immediately established
processes within our business operations and our IT operations
to make sure we could implement the law smoothly.
Before closing, let me just observe that the IRS is
continuing its long tradition of being a nonpartisan agency
that implements the laws that Congress passes. As the Chairman
mentioned, I started my tenure in 2008, and right when I walked
in the door we were asked to, outside of the tax systems,
figure out a way to send 100 million Americans stimulus checks
which the previous Administration did as the recession started
to hit. We also played a role in the Recovery Act. During the
serious economic downturn we set up special programs we called
Fresh Start to work with struggling taxpayers, and now we are
working on the Affordable Care Act.
I believe the effort is going smoothly. I believe we have
the proper plans in place. And all of this is a tribute to the
dedicated professional men and women at the IRS who have
devoted long careers to fair and even-handed administration of
the Nation's tax laws.
Thank you. That ends my opening statement.
[Prepared statement of Mr. Shulman follows:]
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Chairman Issa. Thank you.
I recognize myself now.
I want to start off by thanking you and the men and women
of the IRS. I note that your job is a strenuous one, one that
has a five-year term. I understand you are the third to have
that term. And it was intended to take away the partisan
perception, and I think you have done a good job of that. But I
do have some questions, perhaps not so-called partisan, but
maybe Pollyannaish.
You have done, the IRS has done a selective outreach based
on ObamaCare or the ACA's benefits. You said it in your
testimony. You sent out millions of post cards doing an
outreach to educate people as to the law's benefit or tax
credit to small business, correct?
Mr. Shulman. We did send out tax credits.
Chairman Issa. Do you plan on sending post cards out to
tell people about the tax increases?
Mr. Shulman. No.
Chairman Issa. So you are only telling people, the IRS is
only telling people about the good news and not telling them
about tax increases. Aren't tax increases more something you
need to know about in advance for planning than windfalls of
money? I grew up in a neighborhood where that windfall is
[foreign word], it is found money. This isn't what you need
warning for. You don't need warning about good news; you need
warning about tax increases, don't you?
Mr. Shulman. We do extensive outreach on all tax
provisions, and we have started----
Chairman Issa. But you are not sending any indication to
small businesses about the tax increases they are going to see
under ObamaCare?
Mr. Shulman. We have done extensive outreach and we do it
based on looking at what's the best way to get the word out for
different pieces. I think right now we are working with the
preparer community and business community to work through, a,
getting our systems in place in a way that works well, getting
the interaction----
Chairman Issa. Well, speaking of the systems, under
ObamaCare Section 9002 you were required to deal with the W-2
forms, and yet you unilaterally delayed reporting requirements.
In other words, this piece of bad news is not going out that
otherwise would have made it clear that, again, tax increases,
right?
Mr. Shulman. Are you referring to the requirement that
employers----
Chairman Issa. Put a value of health insurance benefits on
the W-2.
Mr. Shulman. How much they paid for their health insurance.
Chairman Issa. Right.
Mr. Shulman. No, we actually delayed the reporting
requirement at the request of our information reporting
committee that works with us regularly because they couldn't
get their systems ready.
Chairman Issa. They couldn't get their systems ready?
Mr. Shulman. We had a lot of feedback from the business
community that----
Chairman Issa. Well, let's go through that. There is
Paychecks and ADP. They both got it ready. They are both able
to do it.
Mr. Shulman. So I am----
Chairman Issa. I am trying to understand. This was
something that I think many people who want folks to
understand, this is sort of the bad news again. This is letting
people know how much is already being paid in. The question is:
where did you get the authority to unilaterally delay? You are
saying it is based on not being ready, and yet the vast
majority of these things, either you could have allowed a
waiver and yet still implemented for those who are ready, and
if someone was using Paychecks or ADP they would have been
ready and it would have happened, right?
Mr. Shulman. That is not my understanding. So my
understanding is that this reporting, which I guess I am
confused about it being bad news, this is just saying how much
your current employer pays for your health insurance.
Chairman Issa. Well, most Americans have no idea that
health care costs as much as it does. This provision was one
that I think Republicans wanted genuinely in there so people
would understand just how expensive it is, how much is already
being paid for. Having over the years had employees who left
who were shocked when they had to pay their COBRA and they
wanted to know what was wrong, and the answer was, Well, we
were paying 90 percent of it, now you can see what you are not
seeing from a tax standpoint.
Let me go through just one or two more questions. You said
that the IRS would not be essentially dunning people who owed
under the mandate, but is there anything that would prohibit
you from assuming that the first $1,000 owed under the mandate
penalty which now is assessed to be a tax by our U.S. Supreme
Court, and let's just say they refuse to pay it, is there
anything that keeps you from considering that dollar one of
taxable requirements and thus having the last dollar be owed?
In other words, if I pay in $10,000 and I owe $9,000 or
$8,000, and you simply make the assumption the first $1,000
added is this tax that they didn't pay, is there any reason you
wouldn't take it all and dun them for revenues owed? Is there
anything that stops you from doing that?
Mr. Shulman. Let me try to answer the question. I'm not
sure I understand it.
Chairman Issa. If I don't pay my taxes, isn't it possible
you could treat the $1,000 mandated penalty like any other tax
and dun me for it with penalty and interest?
Mr. Shulman. So if you don't pay that, what we would do is
send out a letter. As you know, most people pay the taxes they
owe on time. We would send out----
Chairman Issa. But this is a tax that is not collected
through withholding. If you assessed it as the first part of
withholding, took it out of withholding, and then just simply
dun me for being in arrears on my overall taxes, you could
treat it, as long as there was $1,000 of withholding, you would
take it for this and then treat it as though I didn't have
sufficient withholding. Couldn't you deal with that?
Mr. Shulman. So we would treat it as, you know, a penalty
on your return. The statute is clear, and it is the only place
the statute is clear, we can't do a lien or a levy, which is
very rare, which we do way down the line. Beyond that, it would
be part of your Federal tax obligation.
Chairman Issa. I want to get this very clear, and I
apologize for running over, but I haven't gotten the answer to
the actual question, so let me be clear on the question. If I
owe $10,000 in normal taxes on income and I have this $1,000
penalty, if you put the $1,000 penalty at the end then you
don't have the ability to levy or lien.
However, if you simply collect it as the first $1,000 on my
withholding, take it out, I now have a shortfall in my
withholding, so now you are not levying against the penalty,
you are levying against ordinary taxes you have already
collected on the front end. There is nothing that stops you
from taking that as the first dollar and then levying on the
last dollar against income tax.
Mr. Shulman. I apologize. I want to be responsive. It will
be part of your overall liability. If there is $1,000 owed,
there will be a $1,000 carve-out that there could never be a
lien on. I am confused about the withholding.
Chairman Issa. And I am going to yield to the Ranking
Member, but there clearly was a statement, no question at all,
Federal exchanges were not covered in this law, in the letter
of the law, and yet you have had a rule-making that covers it,
covers it without legislative action but rather based on some
loose intent.
The fact that we said that there is no levy, all you would
have to do is collect this money off of the first $1,000 of
withholding and then the shortfall would actually be on other
funds you could levy. Any creative accountant could come up
with it. I am going to assume that the IRS will do so based on
what your folks have chosen to do on something that was outside
ObamaCare's right, which was subsidizing the Federal exchanges.
Mr. Ranking Member, I would ask unanimous consent you have
an additional three minutes, so if you will tally eight minutes
I will yield to the gentleman.
Mr. Cummings. Thank you very much.
Commissioner Shulman, I hope that IRS employees are
watching this, and I want to say to them publicly thank you,
and I thank you. Let me tell you what I am thanking you for. As
I listened to the last panel, I listened to Mr. Everson, and
you heard most of his testimony, did you not?
Mr. Shulman. I did hear some of it.
Mr. Cummings. Yes. And he talked a lot about his concerns
and basically all but said it can't be done. And I have got to
tell you that, as one who rose up from poverty to the Congress
of the United States of America, I know that this Country, we
can do anything we try hard enough to do. I know that. My own
life has told me that.
When you started off your testimony today to talk about
what you all have done already and what you did, I think you
started back in 2008, you said you had to come in and do
certain things. I just like the can-do attitude, because
certainly if we stick with the naysayers I guess we won't get
anything done. The fact is that what the people at IRS are
doing in trying to make sure the law works properly will go a
long ways towards helping a lot of people.
And I say this over and over again because I mean it. I am
talking about people at IRS will end up helping people save
their lives and save a lot of pain. And so I want to thank you
all publicly for that can-do attitude. I know IRS gets a lot of
bad comments. As a matter of fact, Government employees get a
lot of bad comments. But when I hear things like what you just
said, it just, in my mother's words, who is a former
sharecropper, it just makes my heart glad.
Commissioner Shulman, in the earlier panel the Committee
heard from Nina Olson, the National Taxpayer Advocate. In her
testimony she explained that the IRS has made significant
progress on rule-making and other areas. Let me read from her
testimony. She says, ``Since the enactment of ACA, the IRS has
been working through the major challenges, making significant
progress. The lead time provided by the ACA has been very
helpful for the IRS, and at this point it appears the IRS has
used the time well.'' Ms. Olson is very complimentary about
your efforts over the past two years to ensure that the
planning process is on track.
I would like to know your perspective. How did you approach
the planning process over the past two years, and how would you
evaluate your own efforts today?
Mr. Shulman. Well, the one thing, while the ACA is a
substantial undertaking, the tax provisions for the IRS, you
know, I come from a business background, and the one thing I
would say generally is that what you need is proper planning,
enough lead time, and proper resources to implement things.
In the world of tax, we have gotten used to, unfortunately,
late legislation, retroactive legislation, and the one thing
this law affords us is plenty of time to do implementation
right.
We had to scramble to get some of the things done, some of
the things that the Chairman referenced and we talked about,
but the major pieces of the legislation where we have the most
work to do, like setting up our infrastructure to make sure we
distribute tax credits, the premium tax credits in conjunction
with the exchanges, we had multiple years to do.
And so there is always room for improvement, but I think
our team, both our team who had to work to do the planning, do
the immediate implementation, and then build the IT systems,
you know, I think they are well on track in doing, you know a
good job, so I would give them a pretty good grade.
That said, we have got to keep our eye on the ball and with
any piece of tax legislation we need to make sure we take it
through and implement at the end.
Mr. Cummings. Well, I hope that they know that they have a
lot of grateful people who appreciate what they are doing.
On the first panel we heard a lot of concerns about data
privacy, and that is a concern of mine. I know the IRS actually
has a great record on protecting taxpayers' information. You
may have heard some of that testimony.
Commissioner Shulman, what steps has the agency taken to
ensure the security of taxpayer information going forward, and
do you think that steps that you have taken will be sufficient?
And what additional steps do you see being necessary?
Mr. Shulman. Let me say a couple things. First of all, this
agency takes data security very, very seriously. And we have an
excellent track record of protecting the American taxpayers'
basic income data.
Second, I would just say there has been a lot of, both in
the previous panel and also, you know, out there in the general
dialogue, I think way overstatements of the risk of data
security. I mean, this is not something wildly new to us. Right
now we share data with States for child support information,
with States for Medicaid, with States for tax information, and
we have very strict safeguards around that data.
In this case, any data we exchange with States they have to
have written procedures in place that we will look at. They
have to agree to separate the data. They have to agree to have
limited use of the data just for the purposes of the law. They
need to train their people.
We have an Office of Data Privacy and Security that will go
out and do audits to make sure it is right, and the Federal law
takes tax data very seriously, and individual employees can be
prosecuted for breaching tax data. That individual liability
extends out to anyone we send data to.
And so this is nothing new for us. Obviously, it is an
effort and we are going to have to do it, but I think the
concerns about data security around this are overstated.
Mr. Cummings. You sound like you take a lot of pride in
IRS's efforts to keep the privacy of Americans' tax information
private. You seem very proud of that. Are you?
Mr. Shulman. Well, A, I am very proud of it; B, it is a
cornerstone of the tax system; C, we have done it a lot
exchanging with States, and we haven't had major issues.
I will tell you a little story. My first day I showed up at
the job I went to the Treasury Department and was sworn in by
the Treasury Secretary. I came back, and the person waiting for
me was the lawyer to explain the data privacy rules and the
people who did the training for me. That is how seriously the
agency takes this. They didn't brief me on our technology or
our filing season, et cetera. The first thing I was briefed on
was data security.
Mr. Cummings. My last question, Ms. Olson spent a lot of
time talking about the challenge for IRS with regard to
communication, or communication strategy, taxpayer education
about these new rules. Do you agree that taxpayer education is
essential to the success of the implementation? And can you
please explain how the IRS plans to educate the public about
these new rules?
Mr. Shulman. Well, there are a few things. One is any time
a tax law is passed we do a variety of things. We use social
media to get information out. Sometimes we do direct
communication, and 80 percent of taxpayers, and it is growing.
Last tax season it was up actually over 85 percent, use either
a paid professional preparer or tax software. And so a lot of
the details of these rules, just like the details of the rest
of people's tax forms, gets sorted out either when they are
figuring out how to file or get sorted out, you know, with
their preparer. So we do a lot of work with them, and we expect
to expand our outreach.
I will also note that, because this issue has gotten, the
Affordable Care Act has gotten so much attention by the media,
you know, this is not something people are unaware of, and we
are trying hard just to get the actual facts out, and we will
keep that campaign up.
Dr. DesJarlais. [Presiding]. I thank the Ranking Member.
The Chair will now recognize himself for five minutes.
Mr. Shulman, thank you so much for being here today,
because certainly we have several things we would like to clear
up in regards to the initial drafting of the Affordable Care
Act and the subsequent ruling by the IRS. I think you were
listening to the first panel, and clearly there are some
disagreements between Professor Jost and Mr. Cannon on whether
or not the IRS ruling was illegal.
Why do you think, first of all, I think that the intent
when the law was written it was clear that the Administration
and the authors of the bill assumed that the States would set
up exchanges. Certainly it was clearly mentioned numerous times
throughout the language of the bill and there was not mention
of the Federal exchanges. I think, one, that the health care
law people were very leery of. I think 63 percent opposed this
law when it was first presented or even passed. And I think
Senator Baucus from Montana clearly wanted a national exchange,
but I think the American people resoundingly rejected the
thought of a national takeover of health care.
So the language was carefully crafted in the bill to
mention State exchanges because State exchanges sounded much
more palatable to people than a Federal takeover of health
care.
So were you a little shocked, I guess, when I think there's
only 14 States now that have decided to set up State exchanges?
Was that kind of a surprise to you and something you hadn't
anticipated?
Mr. Shulman. I guess I didn't follow, you know, the before
and after as closely as that, so I had no reaction. I am
watching how this goes. I mean, our main job is to try to
implement the law that was written.
Dr. DesJarlais. Sure. Fair enough. Do you agree that when
authorizing these premium assistance tax credits the Internal
Revenue Code, Section 36(b), explicitly refers to health
insurance exchanges established by the States under Section
1311?
Mr. Shulman. I think 36(b) has some contradictory language
in it.
Dr. DesJarlais. Well, we can put up a slide. Is there
anything unclear about that? Is there anything unclear? Does it
mention Federal exchanges anywhere in that section?
Mr. Shulman. I am looking at the slide, but I am also aware
of the whole statute, so I guess I----
Dr. DesJarlais. Okay. Do you recall it mentioning Federal
exchanges?
Mr. Shulman. Excuse me?
Dr. DesJarlais. Are you aware, does it mention Federal
exchanges or just State exchanges?
Mr. Shulman. Anywhere in 36(b), yes.
Dr. DesJarlais. In 1311. That is the slide. That is not the
slide. We have another slide.
Mr. Shulman. I guess I watched the first panel and would
agree that there is a lot of disagreement, and we obviously
looked at the total statute and think we came to the correct
legal reading.
Dr. DesJarlais. Okay. The plain meaning of the Rule 36(b),
it is possible that the court could read the phrase an exchange
established by the State under 1311 of ACA, this was the CRS
ruling that the gentlelady from New York referred to in the
first panel. It said that the exchange could be clear to not
include an exchange establishment by the Federal Government.
Indeed, the language seems to be straightforward on its face.
Are you aware of that CRS ruling?
Mr. Shulman. I am not aware of that.
Dr. DesJarlais. Okay. Well, do you agree that when
authorizing those tax credits the IRC repeatedly refers to
exchanges established by the State under Section 1311?
Mr. Shulman. I guess I am not aware of the----
Dr. DesJarlais. Okay. Well, it does repeatedly. Why did the
IRS add the phrase, or in 1321 in the rule, do you believe this
is a dramatic interpretation that in essence rewrites the law?
Mr. Shulman. No.
Dr. DesJarlais. Why do you say that?
Mr. Shulman. Maybe it would be helpful for you to hear how
our rule-writing process works. I mean, our legal experts,
career civil servants who are some of the best tax lawyers in
the world, if not the best, take a look at statutes, look at
the entirety of the statute, and try to come up with their best
legal analysis.
Dr. DesJarlais. Okay. Well, basically we are set to
scramble because this bill was set to be passed and go to
conference, and it did not go to conference but rather
reconciliation because the votes simply weren't there to pass
the law. Scott Brown was elected and he was on his way in, so
they had to rush this law. They knew it was imperfect. They
knew that they couldn't force the States to set up exchanges.
The Federal Government doesn't have the power to force the
States to do it, so they had to try, in essence, to coerce the
States in a sense to set up these exchanges, and they didn't
mention Federal exchanges on purpose because they wanted the
States to do this. They wanted to kind of strong-arm the States
to set up these exchanges, and they knew that they had to put
out a bill with this language that was imperfect because if
they didn't do it before the end of the year, and they did it
on Christmas Eve, then they were going to have to deal with
probably not passing the law at all.
So now you are tasked with basically cleaning up their
mess, cleaning up their language, because it clearly wasn't in
the bill. They referred to State-run exchanges repeatedly and
left out the Federal exchanges, even in the reconciliation
process. It simply wasn't in there.
So I think Mr. Cannon, his point is that the IRS way
overstepped its bounds of separation of power, in essence wrote
a huge tax increase, trillion dollar tax increase, that
Congress did not intend, but this mess was created when the
States didn't fall in line and set up the exchanges; isn't that
true?
Mr. Shulman. No.
Dr. DesJarlais. Why do you say it is not true? It clearly
is.
Mr. Shulman. I just disagree with Mr. Cannon. I think that
this was the correct reading of the law. I have no idea what
the reference is to a tax increase, but we are not concerned
with that.
Dr. DesJarlais. You understand the statute. Does the
statute ever say that the credits are available in Federal
exchanges? Does it ever say that?
Mr. Shulman. There are sections of the statute that
directly talk about a Federally-run exchange----
Dr. DesJarlais. Can you tell me where?
Mr. Shulman.--and the information to the IRS. In Section
1401, which is the same as 36(b), there's reference about
information reporting of premium tax credits to the IRS from
the Federal exchange. Look, I fully understand that you have a
view on this and that we disagree. I think the law professors
before on the panel before fleshed out the arguments on both
sides. Our legal experts came down on the side that we came out
with.
Dr. DesJarlais. I clearly disagree with you, because we
know what the intent was. We know why this all came about, and
I don't think the argument was clearly refuted. In fact,
Professor Jost in several cases rescinded. First, he wanted to
call it a drafting error, a scrivener's error. He retracted all
those statements because they are scrambling to find a reason
to justify what the IRS did.
Clearly, this issue is far from over. The companies in the
States without State-run exchanges are going to challenge the
IRS rule and this will probably end up in Federal court. I
don't think there is any question about if; it is just a matter
of when.
I see my time has expired. I will yield to the gentleman
from Illinois, Mr. Davis.
Mr. Davis. Thank you very much, Mr. Chairman. And thank
you, Commissioner.
There are a lot of assertions that people make and have
made, and they have said that this is in the legislation, this
is in the bill, it is going to cause people to do this and
cause people to do that. And then when you look you can't find
what they are basing their assumptions on.
I know that some opponents of the legislation have claimed
that to implement this that the Internal Revenue Service has
got to hire 16,000 new agents, enforcement agents. And you have
said on numerous occasions that this is a made-up number with
no basis in fact. As a matter of fact, some people have even
compared the Internal Revenue Service to the Gestapo, as Mr.
Everson pointed out in his testimony on the first panel, which
is not only inaccurate but, quite frankly, unconscionable way
beyond the pale, I think.
Do you agree that this type of non-information, of mis-
information is damaging to the image of the agency? And is it
true that you are going to have to hire all of these people to
enforce provisions of the act?
Mr. Shulman. Sir, we have been incredibly transparent in
what we need to implement this law. We put forward budgets and
then sent to Congress the last three years of information, and
then we put forward a budget this year. The budget we put
forward this year, 92 percent of it is for infrastructure and
technology to make sure that the act is executed. And so
referring to this number 16,000 agents, I have no idea where
anyone got that. That is not going to happen. And, as I said,
the major parts of this law are going to be handled, the
compliance aspects, through correspondence.
You know, regarding unfortunate remarks about the IRS, all
I would say is we have a very good track record of interacting
with the American people in incredibly respectful ways. Right
now the American customer satisfaction index, which is run by
the University of Michigan, which looks at major companies
across the globe as well as Government agencies, we have our
highest rating ever at 73. Most people who interact with us
send in a refund return, and within five to ten days get $3,000
back from us, so I know that the words IRS sometimes conjure up
things that people can make scary. The reality is, for most
people we are a great service organization. So yes, it is
unhelpful for people to use rhetoric, but I think our record
stands for itself.
When you ask American citizens one by one in things like
the American Customer Satisfaction Index, we get very high
ratings.
Mr. Davis. There are also individuals who use this invasion
of privacy. It is very interesting who some of them are. They
are not people that I have known to be protecting the privacy
of individual citizens in a lot of other instances and a lot of
other ways, but they claim that the Internal Revenue Service is
going to have access to individuals' private health
information. Is that a need in order to enforce the provisions
of the act?
Mr. Shulman. No. Absolutely not. What we will know and
asked for, based on the law, is: do you have health insurance
coverage? If so, for how many months? And what was the name of
the insurance company?
Right now we get information about what's your income, who
is your employer, how long were you employed? Do you own a
house? Did you sell a house? Was there interest on this house?
Do you have stocks or bonds? Did you buy them or sell them? And
so we get lots of information, but we get the bare bones that
we need to file a tax return.
I think it has been way over-stated our role in health
care. I mean, we are basically going to facilitate the
financial transactions that make this whole law work, but we
are not going to have access to private individual health care
information except for the fact of coverage.
Mr. Davis. Do you see individuals being locked up,
incarcerated, liens placed on their homes or their properties
or whatever it is that they might own in order to make sure
that there is compliance?
Mr. Shulman. I mean, the minimum coverage provisions which
say that you either need to have insurance or you pay a
penalty, those specifically prohibit liens, levies, criminal
prosecution, and so they are treated very different from other
liabilities owed to the Federal Government.
Mr. Davis. So then many of these assertions are quite
honestly inaccurate?
Mr. Shulman. Well, some of the ones you brought up, yes.
Mr. Davis. Well, thank you very much. My time is expired.
Mr. Chairman, I yield back.
Dr. DesJarlais. I thank the gentleman.
I think, being as we have a small dias today, I think we
can go through a second round of questioning if you will
indulge us.
Can you describe the universe of people who will be subject
to the new HHS reporting requirements? We understand that it is
expected that 20 million people will fall under these
requirements; is that correct?
Mr. Shulman. I'm sorry? Which requirements?
Dr. DesJarlais. The HHS reporting requirements.
Mr. Shulman. I am not sure what the HHS reporting
requirements are or what you are referring to.
Dr. DesJarlais. Okay. Well, under the HHS rules, isn't it
true that for these Americans they will now be required to tell
the State and the IRS when they change jobs within 30 days of
the change?
Mr. Shulman. I think you are referring to the people who
receive a premium tax credit?
Dr. DesJarlais. Okay. Isn't it true? Yes, you are referring
to that.
Mr. Shulman. So the way the premium tax credit works is
people go to an exchange. If they have not been offered
affordable health care coverage by their employer, they may be
eligible for a tax credit to help subsidize the purchase of
insurance. And that is based on a number of factors, including
their income.
If their income changes, they have an obligation to come
back and say that the income changes so that the amount of the
credit can be adjusted.
Dr. DesJarlais. Okay. And that is within 30 days?
Mr. Shulman. I am really not aware of the details of when
that reporting back to the exchanges are, because that is not a
piece of the act that we will be administering. That falls
with, as you said, HHS and the exchanges.
Dr. DesJarlais. Okay. If they don't report the changes,
assuming it is 30 days in the window, what are the consequences
and how do you plan to enforce the rule?
Mr. Shulman. So the way the premium tax credit works, which
I referred to in my opening comments, is people go to the
exchange, they determine the eligibility for a credit and the
amount of the credit. They receive the credit, an advance
payment, and that payment is made directly to the insurance
company, and then there is a true-up procedure when they file a
tax return, much like a true-up of estimated taxes or a true-up
of your withholding, and the way that it works is if they got
too much of a credit up front they will owe some money back; if
they got not enough, the Federal Government will owe them the
true-up, so there is a true-up procedure that will be
administered on the back end.
Dr. DesJarlais. According to your July 2010 report, IRS has
fallen short of providing adequate taxpayer service in
important areas. Given the massive scope of ObamaCare, is it
likely the IRS customer service is going to get worse rather
than better?
Mr. Shulman. I am not sure what the July 10 report is.
Dr. DesJarlais. The Taxpayer Advocate report.
Mr. Shulman. That is from the Taxpayer Advocate, who
independently reports to Congress.
Dr. DesJarlais. Okay. Well, the question still stands about
customer service. How do you anticipate that is going to be
handled?
Mr. Shulman. We have had what I think is a very good track
record of customer service with the resources we have been
given, and I expect us to continue to deliver good customer
service.
Dr. DesJarlais. So an hour-plus wait in your opinion is
good customer service when people actually need to talk to
somebody who knows something about an issue?
Mr. Shulman. We don't have an hour-plus wait on average.
Dr. DesJarlais. What would you say the wait is?
Mr. Shulman. It depends when you call. The wait can be as
short as someone picks up the phone immediately and there is no
wait, and it can be a lot longer. If people call at peak times,
we tell them how long their wait is and they call back.
Dr. DesJarlais. Okay. From the National Taxpayer
Association, for calls that require issues of expertise, the
IRS track record is even worse. In March 2012 taxpayers calling
IRS tax protection unit only reached IRS 11 percent of the time
after an average wait time of an hour and six minutes.
Mr. Shulman. This was a very specialized line that had just
been set up. It was under-staffed at the very beginning. Once
we became aware of the problems we put new people on, and the
year we have averaged 90 percent, and so that is a very short
point in time, and when we see issues we correct them.
Dr. DesJarlais. I mean, I understand having pride in the
agency that you oversee, but you can look in the camera and
tell all the Americans watching that you feel the customer
service within the IRS agency is good?
Mr. Shulman. I can do it the other way around, which is, as
I mentioned, the American Customer Satisfaction Index, which
goes out and asks Americans how are their interactions with the
IRS, is at its highest level ever at 73 percent.
Dr. DesJarlais. That is not what the data says, and I think
for the people watching they can probably make up their own
minds. They don't have to take my opinion or yours.
My time has expired and I would be happy to yield or
recognize now the Ranking Member for five minutes.
Mr. Cummings. Thank you very much.
During one of our Subcommittee's hearings some business
entities told us, Commissioner, that they were not sure which
rules will apply to them and how they will comply with new
requirements. I understand that some of these rules are still
in progress, such as the rule on how to calculate full-time
equivalent employees. Has the IRS engaged with businesses to
ensure that programs and regulations are responsive to their
concerns? And, number two, are there still misperceptions about
IRS's role in implementing the health care reform bill?
Mr. Shulman. To the second one, any time there is, you
know, a major tax bill we need to educate people. Frankly,
until you start actually implementing, that is when people
really focus their mind and understand.
With that said, we have been having extensive dialogue with
the business community about the employer responsibility
provisions of the law that we need to administer. As you
mentioned, there's a couple things. One is there is a
misperception that every business is subject to this. Ninety-
six percent Of Americans' businesses have less than 50
employees, and those people are totally exempt from the
coverage requirements under the Affordable Care Act.
Second is we have really focused our time trying to put
guidance out to the business community, so there is this notion
of you need to have 50 full-time equivalent employees in order
for the provisions to kick in, and so there's obvious questions
about, okay, what is a full-time equivalent? What if I have 49
and then it goes to 50? What if somebody went from full time to
part time? We have tried just to be very responsive, and so we
have a look-back that says you can look back a year and say
what did it look like the last year, and then you get a safe
harbor for the next year so that people aren't going to
continually be having to wrestle with this.
And so in the Affordable Care Act, but also really any time
there is a major tax provision that is going to affect
businesses, we have extensive dialogue with the business
community, and what we try to do is make sure we put clear
rules in place that will allow us to implement the law in the
least burdensome manner possible to the business community.
Mr. Cummings. Commissioner, as you mentioned earlier, the
IRS will be involved in distributing billions of dollars in
premium tax credits for people buying insurance in the exchange
and administering the minimum essential coverage provisions of
the Affordable Care Act. Therefore, the IRS will be in the
position of verifying information provided by third parties
such as insurers. Can you tell us a little bit about your real
time tax initiative and what is it and when does it begin?
Mr. Shulman. So I guess two separate things. Yes, we are
going to get information from insurance companies, information
reporting very similar to what we get from brokerage companies
today, banks, about interest information and home ownership and
interest information from there.
The real time initiative is really something apart and
separate from this. That is basically a concept that I have
laid out that says a lot of the tax system runs after the fact,
meaning people file, we then later match returns and we send
them letters; that we actually think we could have a much less
burdensome system for the American people and one that actually
led to better compliance, as well, if we could get information
returns at the same time as the tax returns and any time there
was any confusion clear it up.
But the real time initiative that we have is something that
is on a very different track. It is something that is just in
the discussion phases, and we are getting lots of input, and it
is really very separate from Affordable Care Act
implementation.
Mr. Cummings. Well, I am going to, just as my last
question, the Chairman just asked you to look into the camera
and talk about something. I am going to ask you to look into
the camera, too, and that is: can you tell the American people
why you feel comfortable that you are going to be able to do
what is required of you, your agency, that is, under the
Affordable Care Act? Do you feel comfortable, assuming that you
get the resources, I'm sure.
Mr. Shulman. Yes. No, we feel very comfortable that the
part of the Affordable Care Act which is in the Internal
Revenue Code which we are responsible for, that it will be
implemented well, it will be implemented on time, and people
have my personal commitment and the agency's broad commitment
that we will do it in a way that minimizes burden on business
and individuals and respects taxpayer rights and tries to
facilitate, you know, a very good flow of information.
Mr. Cummings. Thank you very much.
Dr. DesJarlais. [Presiding]. Thank you.
For the third round, we would like to go back to the
exchange rule a little bit. I can understand your confidence
when essentially the IRS was given unprecedented power in this
case to basically rewrite a rule and bypass Congress as it has
in this case, so I guess maybe it would be easier to be
confident if I knew that I didn't have to go through Congress
any more, I can just kind of make it up as I go.
But can you specify the exact language that says the
subsidies go to exchanges created by the Federal Government?
Mr. Shulman. So a couple things. First, on your comment, we
exercised the rule-writing authority that is delegated to the
Secretary of the Treasury in every tax bill, and that is what
we did. And there is actually a process in this Country that
allows Congress to write the laws, we interpret them through
rule, and implement them, and if there is a disagreement there
is always the courts. So I don't think we have any special
power under the Affordable Care Act that we don't have any time
that we do rule-writing.
Section 1321 talks about the Federal Government will stand
in for the State at times. Section 1401 talks about----
Dr. DesJarlais. Okay. Stop there. It says it may stand in,
but it doesn't say it can issue tax credit, premium tax credits
and it can't imply the tax against the employers. It doesn't
say that, does it?
Mr. Shulman. Section 1401, the second cite you are asking
for, is saying that each exchange, and explicitly references
the Federal exchange, shall report information to the IRS
regarding the premium credits that it pays. And so I very much
agree with you that there is some contradictory language. Our
lawyers' job is to say, taken in totality----
Dr. DesJarlais. You are not agreeing with me. I don't think
it is ambiguous, sir. I don't think it is ambiguous. I think it
is very clear. I think you are trying to twist it because you
have to cover a gross misinterpretation that the States would
set up exchanges, so that right now, to save this law, they
couldn't save it the proper way by going to conference. They
couldn't do that because Scott Brown was coming in and it was
all going to fall apart, so they had to pass an imperfect bill,
as Nancy Pelosi shared with all of us those famous words, we
have to pass the bill to see what is in it.
They had to pass an imperfect bill, so now when the States
didn't set up the exchanges we are having to go back around and
try to find reasons for you to make this rule to include the
Federal exchanges, which they did not intend to include. They
wanted to force the States to do this. When the States didn't
do it, now we have this problem that we are here talking about
today.
Who initiated the rule for the exchange rule? Did the rule
initiate at IRS or at the Treasury?
Mr. Shulman. The way our rule-writing works is that lawyers
at the IRS look at statutes, come up with their best
interpretation. I have to sign off on rules, as does the
Assistant Secretary of Tax Policy.
Dr. DesJarlais. How many times did you meet with the
Treasury to discuss this rule?
Mr. Shulman. Excuse me?
Dr. DesJarlais. How many times did you meet with the
Treasury to discuss this rule?
Mr. Shulman. I meet with the Treasury Department of Tax
Policy and their leadership on a regular basis. I have no idea
how many times we actually talked about this rule. We talk
about a lot of things. The tax code is very big and very
complex.
Dr. DesJarlais. It is, and it needs to be reformed.
Was there any pressure from the Treasury Department to
issue a rule that went beyond the statutory authorization?
Mr. Shulman. I never felt any pressure on this rule. You
know, my judgment on the rule was based on speaking with our
lawyers and coming up with what we thought was the correct
legal reading.
Dr. DesJarlais. Have you ever done anything like this
before?
Mr. Shulman. Excuse me?
Dr. DesJarlais. Have you ever done something like this
before?
Mr. Shulman. The Commissioner of Internal Revenue Service
is continually consulting with the lawyers of the Internal
Revenue Service and putting out regulations to interpret
statutes. It is a major part of the job.
Dr. DesJarlais. Okay, Mr. Shulman, and I know you are just
trying to do your job. I will just close with one last
question. The IRS will be responsible for collecting thousands
of dollars from employers under the employer mandate. If the
IRS makes mistakes, how can employers protect themselves from
having to pay hundreds of thousands of dollars in error?
Mr. Shulman. We have very laid-out, traditional
administrative processes, and so, if we think somebody owes
more taxes the first thing we do is try to work with them. If
they disagree, they have, you know, very established appeals
rights to supervisors. Then there is actually an administrative
appeals process, our Office of Appeals, and then there is
always the courts. And so there is a lot of avenues for people
to disagree with us, and that is, you know, part of this
Country.
Dr. DesJarlais. Okay. So you are saying that your plans for
an appeal process for employers is already in place?
Mr. Shulman. It will be, you know, plans that we have, you
know. It is not plans; it is procedures that we have in place,
long-established procedures to make sure the tax code is
administered in a fair and even-handed manner.
Dr. DesJarlais. So we don't really know how employers will
be able to appeal their penalties at this point?
Mr. Shulman. If a penalty is assessed, most people
voluntarily pay. If they disagree, whoever made the
determination for the assessment they can always talk with
their supervisor, and those processes are well enunciated in
the Internal Revenue Manual. They can then go to our appeals
function, which is an independent function much like an
administrative court inside the IRS. And if they still disagree
after those two steps, they can go to the courts.
Dr. DesJarlais. Okay. Identity theft is a big problem, and
information sharing in ObamaCare makes it worse. That is a
report that just came out from the IRS today.
Mr. Shulman. That is incorrect. Identity theft is a problem
in this Country, but there has never been an allegation that
there is a problem with information for identity theft coming
from the IRS.
Dr. DesJarlais. This is the text from the ruling issued
today. In a new report to be issued Thursday, the Inspector
General for the IRS says the tax thieves are stealing the
identity of taxpayers and filing bogus returns on their behalf
and collecting fraudulent refunds as a result. That is about
$21 billion in fraudulent tax refunds over the next five years.
Are you not aware of that?
Mr. Shulman. I am aware of that report, but I want to be
very clear: people get their purse stolen in a mall, someone
has personal information, and then they file a return with us.
Or someone has access to an employer database and they steal
information and file a return with us. There are no allegations
in that report or other places that information is being taken
out of the IRS for identity theft purposes.
Further, I have read that report. That report is very clear
that the problems with identity theft mostly are systemic, and
there is a variety of things that we have asked Congress to do
to give us powers that haven't passed.
Dr. DesJarlais. So you don't think it is possible that with
all the new information you have got to collect regarding
ObamaCare, that this problem could get worse?
Mr. Shulman. I think connecting identity theft as a problem
in this Country and the Affordable Care Act would be totally
irresponsible to connect those two.
Dr. DesJarlais. Interesting. All right. Well, I tell you
what, I thank you very much for your testimony and your
patience in going through three rounds of questioning.
I would like to thank all of our witnesses today for taking
time from their busy schedules to appear before us today.
The Committee stands adjourned.
[Whereupon, at 12:43 p.m., the committee was adjourned.]
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