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



 
                INTERNAL REVENUE SERVICE OPERATIONS AND 
                   THE 2012 TAX RETURN FILING SEASON 

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

                                HEARING

                               before the

                       SUBCOMMITTEE ON OVERSIGHT

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                               __________

                             MARCH 22, 2012

                               __________

                          Serial No. 112-OS10

                               __________

         Printed for the use of the Committee on Ways and Means

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                      COMMITTEE ON WAYS AND MEANS

                     DAVE CAMP, Michigan, Chairman

WALLY HERGER, California             SANDER M. LEVIN, Michigan
SAM JOHNSON, Texas                   CHARLES B. RANGEL, New York
KEVIN BRADY, Texas                   FORTNEY PETE STARK, California
PAUL RYAN, Wisconsin                 JIM MCDERMOTT, Washington
DEVIN NUNES, California              JOHN LEWIS, Georgia
PATRICK J. TIBERI, Ohio              RICHARD E. NEAL, Massachusetts
GEOFF DAVIS, Kentucky                XAVIER BECERRA, California
DAVID G. REICHERT, Washington        LLOYD DOGGETT, Texas
CHARLES W. BOUSTANY, JR., Louisiana  MIKE THOMPSON, California
PETER J. ROSKAM, Illinois            JOHN B. LARSON, Connecticut
JIM GERLACH, Pennsylvania            EARL BLUMENAUER, Oregon
TOM PRICE, Georgia                   RON KIND, Wisconsin
VERN BUCHANAN, Florida               BILL PASCRELL, JR., New Jersey
ADRIAN SMITH, Nebraska               SHELLEY BERKLEY, Nevada
AARON SCHOCK, Illinois               JOSEPH CROWLEY, New York
LYNN JENKINS, Kansas
ERIK PAULSEN, Minnesota
KENNY MARCHANT, Texas
RICK BERG, North Dakota
DIANE BLACK, Tennessee
TOM REED, New York

                   Jennifer Safavian, Staff Director

                   Janice Mays, Minority Chief Cousel

                                 ______

                       SUBCOMMITTEE ON OVERSIGHT

             CHARLES W. BOUSTANY, JR., Louisiana, Chairman

DIANE BLACK, Tennessee               JOHN LEWIS, Georgia
AARON SCHOCK, Illinois               XAVIER BECERRA, California
LYNN JENKINS, Kansas                 RON KIND, Wisconsin
KENNY MARCHANT, Texas                JIM MCDERMOTT, Washington
TOM REED, New York
ERIK PAULSEN, Minnesota



                            C O N T E N T S

                               __________

                                                                   Page

Advisory of March 22, 2012, announcing the hearing...............     2

                                WITNESS

The Honorable Douglas Shulman, Commissioner, Internal Revenue 
  Service, testimony.............................................    63

                       SUBMISSIONS FOR THE RECORD

The Honorable Lynn Jenkins #1....................................     5
The Honorable Lynn Jenkins #2....................................    50
The Honorable Scott R. Tipton....................................   100
National Community Tax Coalition.................................   101
National Treasury Employees Union................................   104


  INTERNAL REVENUE SERVICE OPERATIONS AND THE 2012 TAX RETURN FILING 
                                 SEASON

                              ----------                              


                        THURSDAY, MARCH 22, 2012

             U.S. House of Representatives,
                       Committee on Ways and Means,
                                 Subcommittee on Oversight,
                                                    Washington, DC.

    The subcommittee met, pursuant to notice, at 9:31 a.m. in 
Room 1100, Longworth House Office Building, the Honorable 
Charles W. Boustany, Jr. [Chairman of the Subcommittee] 
presiding.
    [The advisory of the hearing follows:]

HEARING ADVISORY

 Boustany Announces Hearing on Internal Revenue Service Operations and 
                   the 2012 Tax Return Filing Season

Thursday, March 22, 2012

    Congressman Charles W. Boustany, Jr., MD, (R-LA), Chairman of the 
Subcommittee on Oversight of the Committee on Ways and Means, today 
announced that the Subcommittee will hold a hearing on the Internal 
Revenue Service (``IRS'') and the 2012 tax return filing season. The 
hearing will take place on Thursday, March 22, 2012, in Room 1100 of 
the Longworth House Office Building, beginning at 9:30 A.M.
      
    The Commissioner of the Internal Revenue Service, the Honorable 
Douglas Shulman, will be the only witness at the hearing. Any 
individual or organization may submit a written statement for 
consideration by the Committee and for inclusion in the printed record 
of the hearing.
      

BACKGROUND:

      
    In fiscal year 2011, the IRS collected $2.4 trillion in taxes, 
processed 144.7 million individual tax returns, and issued $345 billion 
in refunds. With the 2012 tax return filing season underway, the 
Subcommittee will review IRS performance with a focus on taxpayer 
service, taxpayer rights, and refund administration.
      
    In conjunction with the review of the current tax return filing 
season, the Subcommittee will review IRS operations in general. 
Specifically, the Subcommittee will consider: (1) the recently reported 
delays in tax refunds; (2) fairness in examinations and tax 
administration; and (3) efforts to prevent fraud, waste, and abuse. As 
part of its consideration of IRS operations, the Subcommittee will also 
review the Administration's fiscal year 2013 budget proposal for the 
IRS of $16.1 billion, an increase of $1.3 billion over the fiscal year 
2012 enacted level.
      
    In announcing the hearing, Chairman Boustany said, ``The 
Subcommittee looks forward to hearing from Commissioner Shulman about 
steps being taken by the Agency to deliver timely service to American 
taxpayers during this filing season. In addition to a discussion of the 
current budget request, I am also particularly interested to learn more 
about how the agency is using its current budget to administer tax 
enforcement initiatives that protect taxpayer dollars from fraud.'' 
      

FOCUS OF THE HEARING:

      
    The hearing will focus on the 2012 tax return filing season, the 
IRS' budget, and IRS operations generally.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Please Note: Any person(s) and/or organization(s) wishing to submit 
written comments for the hearing record must follow the appropriate 
link on the hearing page of the Committee website and complete the 
informational forms. From the Committee homepage, http://
waysandmeans.house.gov, select ``Hearings.'' Select the hearing for 
which you would like to submit, and click on the link entitled, ``Click 
here to provide a submission for the record.'' Once you have followed 
the online instructions, submit all requested information. ATTACH your 
submission as a Word document, in compliance with the formatting 
requirements listed below, by the close of business on Thursday, April 
5, 2012. Finally, please note that due to the change in House mail 
policy, the U.S. Capitol Police will refuse sealed-package deliveries 
to all House Office Buildings. For questions, or if you encounter 
technical problems, please call (202) 225-3625 or (202) 225-5522.
      

FORMATTING REQUIREMENTS:

      
    The Committee relies on electronic submissions for printing the 
official hearing record. As always, submissions will be included in the 
record according to the discretion of the Committee. The Committee will 
not alter the content of your submission, but we reserve the right to 
format it according to our guidelines. Any submission provided to the 
Committee by a witness, any supplementary materials submitted for the 
printed record, and any written comments in response to a request for 
written comments must conform to the guidelines listed below. Any 
submission or supplementary item not in compliance with these 
guidelines will not be printed, but will be maintained in the Committee 
files for review and use by the Committee.
      
    1. All submissions and supplementary materials must be provided in 
Word format and MUST NOT exceed a total of 10 pages, including 
attachments. Witnesses and submitters are advised that the Committee 
relies on electronic submissions for printing the official hearing 
record.
      
    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.
      
    3. All submissions must include a list of all clients, persons and/
or organizations on whose behalf the witness appears. A supplemental 
sheet must accompany each submission listing the name, company, 
address, telephone, and fax numbers of each witness.
      
    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four 
business days notice is requested). Questions with regard to special 
accommodation needs in general (including availability of Committee 
materials in alternative formats) may be directed to the Committee as 
noted above.
      
    Note: All Committee advisories and news releases are available on 
the World Wide Web at http://www.waysandmeans.house.gov/.

                                 

    Ms. JENKINS. [Presiding.] The Subcommittee will come to 
order on the hearing on the Internal Revenue Service budget 
request and the 2012 tax filing season.
    Hard working American taxpayers have faced incredible 
challenges over the last several years. Many have struggled 
with unemployment, sluggish economic growth, and doubt about 
our country's economic future because of out of control 
spending and public debt, and then tax season comes around.
    The Tax Code, which has tripled in size since 1975, 
continues to burden American families and small businesses with 
too many taxes, too many loopholes, and too many pages.
    It is estimated that the average taxpayer spends 21 hours 
and over $250 complying with the Tax Code each year.
    They must keep track with an increasingly complex and 
difficult to understand Tax Code or at least hire someone else 
who does.
    The Internal Revenue Service, of course, has the unenviable 
job of administering and enforcing our convoluted Tax Code.
    As we meet today, we are in the middle of the 2012 tax 
return filing season, and millions of taxpayers and employers 
are willing to meet their tax filing obligations.
    Some have reported experiencing delays in receiving tax 
refunds, and programming errors at IRS have delayed some six 
million returns, which we will discuss in today's hearing.
    We will also talk about the frustrating issue of tax fraud 
and improper payments. Taxpayers are exasperated because while 
they work so hard to comply with the Tax Code, they see press 
reports of thieves robbing the Treasury of billions of dollars 
each year.
    One recent press report detailed how an identity theft ring 
in Florida committed $130 million in fraud through stolen 
Social Security numbers.
    On top of this fraud, tens of billions of dollars in 
taxpayer money is lost every year through improper payments of 
refundable tax credits, including $17 billion a year for the 
earned income tax credit alone.
    Finally, we will talk about the Administration's fiscal 
year 2013 budget request for the IRS. For fiscal year 2013, the 
Administration has requested nearly $13 billion in 
appropriations for the Agency, an increase of eight percent 
from fiscal year 2012.
    Included in this request are over $360 million and nearly 
900 new employees to implement portions of the Affordable Care 
Act, including a new instrument subsidy and the controversial 
individual mandate penalty.
    We look forward to discussing this and the other new 
initiatives that the IRS plans for fiscal year 2013.
    With that, I would like to welcome Commission Douglas 
Shulman here today. I look forward to a fruitful discussion of 
his Agency, his mission, and the ongoing tax return filing 
season.
    Before I yield to the Ranking Member, Mr. Lewis, I ask 
unanimous consent that for all members, written statements be 
included in the record. Without objection, so ordered.
    Ms. JENKINS. I will also ask unanimous consent that GAO's 
report on the 2011 tax filing season and fiscal year 2012 
budget request be included in the record. Without objection, so 
ordered.
    [The information follows, The Honorable Lynn Jenkins #1, 
The Honorable Lynn Jenkins #2]

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Ms. JENKINS. Mr. Lewis.
    Mr. LEWIS. Thank you very much, Madam Chair, for holding 
this hearing on the Internal Revenue Service.
    I am pleased that we have the Commissioner before us today.
    I have serious concerns about the effect of the recent 
budget cuts on taxpayers, tax collection, and Agency 
operations.
    In the most recent report to Congress, the National 
Taxpayer Advocate stated that the most serious problem facing 
taxpayers is that the IRS is not adequately funded to serve 
taxpayers and to collect taxes. I fully agree with this 
statement.
    This year, the Agency's budget was cut by over $300 
million. This cut harmed taxpayers and telephone service. 
Telephone calls have increased by 34 percent, but the hours 
phones are answered have decreased by 20 percent.
    Only 65 percent of taxpayers seeking telephone assistance 
are able to speak to an IRS employee, and they must wait an 
average of 17 minutes.
    Taxpayers seeking in person assistance also have been 
harmed. This is clear from the very long wait time at Taxpayer 
Assistance Centers.
    The budget cut also harmed Agency operations. The cut 
forced the Agency to lay off thousands of employees. The 
majority of these employees worked in Enforcement. They 
protected and collected revenue. This reduction does not help 
tax collection or reduce the deficit. It makes no sense.
    I look forward to discussing these issues and the Agency's 
proposed budget for next year.
    Madam Chair, finally, I would like to take a moment to 
thank Floyd Williams for his service and dedication to the 
Agency and to this Congress.
    As many of you know, Floyd is the Legislative Affairs 
Director of IRS. He plans to retire this summer.
    Floyd began his Government service as a congressional page 
under Senator Fulbright of Arkansas many years ago. I think the 
Senator from Arkansas probably violated the child labor laws. 
You are not that old.
    I have worked with Floyd in many roles on this committee, 
and I know he will be missed. I wish him the best as he 
retires. Thank you for your great service.
    With that, Madam Chair, I yield back.
    Ms. JENKINS. Thank you, Mr. Lewis.
    I would like to welcome back the Commissioner of the 
Internal Revenue Service, Mr. Douglas H. Shulman, who has 
served as Commissioner since March 2008.
    Commissioner Shulman, thank you again for your time today. 
The Committee has received your written statement and it will 
be made part of the formal hearing record.
    You will be recognized for five minutes for your oral 
remarks, and you may begin when you are ready.

STATEMENT OF DOUGLAS H. SHULMAN, COMMISSIONER, INTERNAL REVENUE 
                            SERVICE

    Mr. SHULMAN. Thank you very much, to all the Members of the 
Subcommittee, for giving me the opportunity to testify today.
    I want to talk a little about filing season, our strategic 
initiatives, and the President's 2013 budget, which would give 
us a much needed increase over the 2012 enacted levels.
    A significant portion of the President's 2013 budget would 
restore congressional reductions in IRS funding made over the 
last two years.
    I want to start by saying that I believe it is incumbent on 
all of us in the Government to be as efficient as possible and 
to spend taxpayer dollars wisely.
    For the IRS, that means finding savings where we can and 
continuing to invest in strategic priorities that allow us to 
improve service and voluntary compliance.
    From fiscal year 2009 through the 2013 proposed budget, we 
will have achieved nearly $1 billion in budget savings and 
efficiencies in core IRS operations.
    These savings and efficiencies reflect an across the board 
commitment at the IRS to find better and more efficient ways to 
administer the tax system.
    At the same time, we collect $200 in revenue for every 
dollar spent on our budget. We also collected $2.4 trillion 
last year. We issued 110 million refunds for $345 billion to 
hard working American taxpayers.
    Our compliance activities brought in a direct revenue of 
$55 billion, and we blocked another $14 billion from going out 
the door to taxpayers who were trying to commit fraud on the 
Government.
    In this regard, I want to point out that the 
Administration's proposal for IRS funding includes critically 
important enforcement initiatives that would be funded through 
a program integrity cap adjustment.
    Let me just say that this proposal makes sense and is a 
reflection of the President's and this Administration's belief 
that IRS funding actually helps reduce the deficit.
    Congress is literally leaving money on the table if it does 
not enact this proposal, which would allow for deficit reducing 
initiatives in tax compliance, while leaving specific funding 
decisions to the normal annual appropriations process.
    Let me just talk about a couple of things that we have done 
over the last few years that have moved the Agency forward to 
position it for the future and do a better job serving 
taxpayers and making sure they comply with the Tax Code.
    Let me just start with filing season. E-File continues to 
grow. This year, we have issued about 59 million refunds for a 
total of $174 billion. That is about the same number as last 
year.
    We deployed several new large technology systems. I would 
be happy to talk about those as we get further into filing 
season.
    In strategic areas, this year for the first time in 
history, we have moved from a weekly batch cycle to daily 
processing of tax returns through CADE 2. CADE 2 delivers on 
the promise of IRS modernization going back two decades, and we 
are very proud of this achievement.
    A couple of years ago, I told this committee we 
restructured our technology program, we were going to deliver 
our major technology initiatives, and this year, we have 
delivered those initiatives.
    We also had the highest score ever last year on the 
American Customer Satisfaction Index Rating, which is the 
overall score we track for taxpayer satisfaction with their 
interactions with the IRS.
    We scored 73 on this Index, and we are very proud of this 
achievement in a constrained budget environment.
    Our return preparer program is now up and running. To date, 
more than 840,000 paid preparer's have registered with the IRS. 
Both the testing and education requirements are well underway.
    This is going to be one of the most important initiatives 
in the tax system in several decades.
    We have also made significant progress in our battle 
against offshore tax evasion. We have collected more than $4.4 
billion to date through our offshore voluntary disclosure 
program. We are getting people back in the system through this 
and other offshore initiatives.
    I think we have made significant progress, as I said. We 
have cut $1 billion out of our core operating budget through 
the 2013 budget proposal that we have given.
    Let me conclude my opening statement with one concern that 
I want to emphasize for this subcommittee, and I think it is 
quite important for the Ways and Means Committee as a whole.
    In recent years, it seems taxpayers increasingly face 
uncertainty about what the tax law will be for the next filing 
season. This year, we at the IRS are very concerned with the 
status of the AMT and so-called ``extenders.''
    If the AMT and extenders are not dealt with in a timely 
fashion, we may have to delay the start of filing season for 
many millions of taxpayers as we have done in prior years.
    I have written to this committee before that it is 
imperative that whatever action Congress decides to take on AMT 
and extenders, that this action happen by the end of the year, 
which would still be late from an operational perspective, but 
not longer than that, in order to prevent even more widespread 
disruption of next year's tax filing season.
    [The prepared statement of Mr. Shulman follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Ms. JENKINS. Thank you, Commissioner Shulman. I think we 
will turn to questioning now. We will alternate between sides 
with five minutes being given to every member.
    Last year, you testified to the Committee that enforcement 
and customer service are not an either/or proposition, 
providing quality taxpayer service, especially during a filing 
season, is important to help taxpayers avoid unintentional 
errors, inadvertent non-compliance, and reduce other burdensome 
post-filing interactions with the IRS.
    So far this filing season, access to live IRS assisters is 
down to 65 percent and taxpayers are waiting an average of 18 
minutes to talk with an IRS assister.
    The rate of taxpayers getting busy signals or that are 
disconnected from the IRS has roughly doubled, yet this is not 
a new problem but rather seems to be just a bad trend.
    Since 2004, the percentage of answered calls has dropped 
from 87 percent to 70 percent in 2011. Last year, the average 
wait time was 12 minutes, and in 2007, it was five minutes or 
less.
    Personally, I have heard from Kansas CPAs that it is not 
uncommon to be on hold for 30 minutes.
    According to GAO, this decline in customer service has 
occurred despite the number of full time equivalents dedicated 
to answering the phones, having increased from 8,000 in fiscal 
year 2007 to 8,800 in 2011, and despite greater use of 
automated answers and self service website options.
    It seems to me that the IRS has placed greater emphasis on 
enforcement at the expense of service, yet as you told us last 
year, the lack of service for those who have questions will 
only lead to greater non-compliance than if those questions had 
been answered.
    Can you help me better understand a few things? First, what 
actions are being taken to ensure that taxpayers are able to 
reach a live IRS assister?
    Secondly, given your belief that the IRS must deliver both 
enforcement and customer service, do you think this budget 
request focuses too much on enforcement while sacrificing 
customer service, and then finally, does the IRS consider this 
to be an acceptable level of service?
    Mr. SHULMAN. Thanks for bringing up a set of important 
issues. First, let me repeat what I told you last year and what 
I talk about a lot with our employees, Members of Congress, and 
everyone involved in the tax system.
    It is not an either/or proposition. We need to run service 
operations and compliance operations to make the nation's tax 
system work.
    Let me put in context the resources that we have this year 
to put towards both enforcement and customer service.
    We had a $300 million budget cut, which was $1.2 billion 
less than the President had requested for service and 
enforcement last year.
    We also had to absorb for rent and other kinds of increases 
about $200 million of inflation, and $66 million was put into 
our technology accounts, which we are very appreciative of, so 
if you take 300, 200, 66, we had a $566 million reduction in 
our core services and enforcement accounts.
    What we are trying to do is do the best we can with the 
resources we were given.
    Last year, our phone level of service was about 70 percent. 
This year, it is running at about 66 percent, even though we 
had predicted about 61 percent, and the reason for that is we 
have really squeezed efficiency. We have routed calls. More 
people are using automated answering systems, and people are 
using our website.
    As you said, the wait is longer. At a certain point, we can 
squeeze as many efficiencies out of technology and other 
efficiencies as we can, but it comes to how many people do we 
have answering phones.
    Volume is up, so the numbers you gave that said we have 
more people, we also have much more volume. We have more 
taxpayers. We have a more complicated Tax Code right now.
    Another number that is interesting to look at is how many 
people hang up in the first couple of minutes. We have added a 
feature that tells them how long a wait.
    We say if you want to, use our web, use our automated 
phone, or call back when there is less time, then our phone 
level of service this year is 77 percent, if you take away the 
people who hung up in the first couple of minutes.
    I guess my view of this is we have taken a whole bunch of 
actions. At a certain point, we need money to invest. You need 
people to answer phones for live service.
    I am pretty proud that while service is down, it has not 
degraded to a point where it could have gone given the cuts, 
and the answer to your last question, which is do we think it 
is acceptable, you know, I want everyone who contacts the IRS 
to get what they need from the IRS.
    This year, everyone is not getting what they need from the 
IRS, but I think we are doing a pretty good job given the 
resources we were given.
    Ms. JENKINS. Okay. Thank you, Commissioner. I am just 
looking at data, and the budget cuts compared to the level of 
service, they do not always follow, given this information from 
the GAO.
    We would just encourage you to continue to work on that, 
and we would be delighted to work with you in any way we can.
    With that, I would recognize Mr. Lewis for five minutes.
    Mr. LEWIS. Thank you very much, Madam Chair.
    Mr. Commissioner, the GAO notes there has been a 34 percent 
increase in the number of calls for this filing season, and 
about a 50 percent increase in calls answered by the automated 
service.
    Can you tell us what the taxpayers are calling about? What 
are the nature of the calls?
    Mr. SHULMAN. You know, calls can be anything from people 
want to set up a payment plan to people are curious, I am 
filling out my return and I am going to take this deduction, 
how does that work, just general tax law questions, to 
questions about where is my refund, I filed last Friday, and my 
preparer told me I would get a refund on Wednesday and I have 
not gotten it.
    Calls vary. We can get you a specific breakdown of what the 
calls are.
    Mr. LEWIS. Thank you very much. We understand IRS is 
requesting a cap adjustment of about $700 million for next 
year's budget to fund the enforcement program.
    What are your plans if any if the Agency does not receive 
these resources?
    Mr. SHULMAN. Well, we are still early in the congressional 
budget and appropriations cycle, so we are quite hopeful. In 
the past, we have had broad bipartisan support for cap 
adjustments.
    The most recent cap adjustment was 2006 in 2007 with a 
Republican President and a Democratic controlled Congress.
    We actually think this is a bipartisan proposal. It 
reflects the Administration's belief that prudent investments 
in the IRS are good for deficit reduction, so that there should 
be cap adjustments for our budget. Investments for us is good 
for the long term for the tax system.
    Right now, I think our position is that for this budget 
program, integrity cap adjustments are good for the system, 
that people should agree with it, and we have had good 
productive conversations in both the House and Senate about it.
    Mr. LEWIS. Mr. Commissioner, could you tell Members of the 
Subcommittee, how has the $300 million budget cut impacted 
taxpayer service this year, and what taxpayer service has been 
reduced?
    Mr. SHULMAN. For Ms. Jenkins, I walked through the notion 
of there is $300 million at the top, but the impact is greater, 
given where the resources were put in our budget.
    I think we have a slight dip in number of taxpayers served 
in walk-in centers, but we have had a corresponding increase in 
number of taxpayers served in volunteer VITA sites, where we 
encourage them to go, because we work in partnership with 
community organizations.
    Our phone level of service is down by about four percent 
compared to last year, although automated calls are up, and the 
wait times are longer.
    I guess the way I characterize it is there has been a 
predictable effect because of less resources. With that said, I 
am quite proud that we have been able to mitigate some of that 
effect by making sure we work smart and we really drive 
efficiencies as hard as we can.
    Mr. LEWIS. Thank you very much, Mr. Commissioner. I yield 
back, Madam Chair.
    Ms. JENKINS. Thank you, Mr. Lewis. Now we will give five 
minutes to the Representative from Minnesota, Mr. Paulsen.
    Mr. PAULSEN. Thank you, Madam Chair.
    Thank you, Commissioner, for being here today. I just 
wanted to follow up on a letter I sent to you not too long ago.
    In the last year, you have been talking a lot or a great 
deal about this concept of a real time tax system, and have had 
a number of actually public meetings on the issue as well.
    I know there are benefits to receiving real time 
verification and having that information on hand, but I am 
concerned that the cost could outweigh the benefits, 
particularly in the sense that having this filing system could 
lead to a burden that is very similar to the 1099 provision 
that was being rolled out as a part of the President's new 
health care law, which would have been a nightmare for 
America's employers, small and large.
    If the IRS is going to make this real time system work, I 
am sure you are going to want to have all the data earlier than 
is required today, you probably are going to want more 1099 
data as well.
    Just looking at what has been discussed today, it seems 
that compressing this reporting time line is going to make it 
more challenging for reporting requirements for pretty much a 
very onerous and burdensome process right now.
    Let me ask you this, what are you doing right now to work 
with existing stakeholders, with the business community, you 
know, to kind of get their feedback, their buy in, as part of 
this?
    There is no doubt increased regulatory and compliance costs 
are a big deal now for employers. It is one of the reasons I 
think on that level of uncertainty you mentioned on some tax 
rate issues and AMT and extender issues, but I know this is a 
factor as well.
    Can you talk a little bit about that? Have you conducted 
any studies of the increased cost to businesses of changing 
deadlines, for instance, for reporting informational returns or 
increasing reporting requirements, or would you agree to an 
independent study as part of that process? Would that make 
sense?
    Mr. SHULMAN. Thanks, Mr. Paulsen, it is great questions and 
an important set of issues. Let me give you perspective on it.
    I view one of my jobs as Commissioner to make sure I am 
helping prod the tax system forward so it works better for the 
American people ten years and 20 years from now than it does 
today.
    The combination of consumer expectations of us working 
better and quicker and more timely with taxpayers with the 
advances in technology, clearly there is room for us to think 
about a future that works better for people.
    What really struck me is the average taxpayer, if they have 
an interaction with us beyond just filing, that interaction is 
they have their economic activity one year, they file their 
return the next year, and it can take us a year to two years to 
reach out to them.
    By the time we go back to them, they have either spent 
their refund or their records and all the memory is gone, 
whether it is a small business or individual.
    I think the current system actually adds a lot of burden to 
people, and we have heard that.
    I laid out this vision that said what if we could clear 
everything up rather than coming back to them on the back end 
at the time they filed, which is the simplest way to think 
about this.
    I also recognize all the things you said, which is this is 
something that would affect all the stakeholders in the tax 
system, from taxpayers to tax preparers to information return 
filers.
    The way we went about this is the way I think a public 
agency should go about this, which is we held a series of 
public meetings, which I hosted, with stakeholders, the broad 
range of stakeholders, to get their input.
    What we heard universally is basically makes sense, we 
would all love to have everything work faster in the tax 
system, but we need to make sure we work through the details 
together in a constructive fashion so that we do not add burden 
in the process.
    What we are doing now is taking the next step and really 
developing detailed vision about what this would mean.
    I think there has been some misunderstanding. We have never 
suggested speeding up or adding more information reporting. We 
have asked questions about what do people have now, when is it 
ready, and when could they get it to us, not is there more or 
would they have to start doing what they already do faster.
    We have asked ourselves internally, how do our systems 
work, and when could we do this kind of matching.
    Mr. PAULSEN. Let me just ask you this, time is kind of 
running out here. How much will an upgraded system cost, to 
sort of encapsulate all of this, that would be needed to run 
this type of system?
    How many years would it take to build and test? You are 
here justifying the budget in terms of the request that 
Congress would give to the President, for instance, or the 
Administration, to run your operations.
    Mr. SHULMAN. Way too early. This is a vision that we are 
having conversations with stakeholders on. The first step is 
laying out exactly what it would mean.
    There are a bunch of things we can do right away, which is 
just process things through our system quicker, so we could 
have quicker engagement.
    I cannot tell you. There is no blueprint right now. We have 
laid out a vision. We have had a broad set of stakeholder 
engagements, and we are now moving in to have the next round of 
stakeholder engagements.
    Mr. PAULSEN. Would it be safe to say that you plan to have 
an actual proposal for Congress to have feedback on at some 
point as a part of your vision?
    Mr. SHULMAN. I think for sure we will have public 
proposals. We will have plenty of time for interaction.
    Mr. PAULSEN. Thank you.
    Ms. JENKINS. Thank you. We will recognize Representative 
Becerra for five minutes.
    Mr. BECERRA. Thank you, Madam Chair.
    Commissioner, always good to see you. By the way, thank you 
for the work that you are doing, given the real budgetary 
constraints that you are facing, and if you will pass along to 
each and every one of your employees who are doing yeoman's 
work, I cannot imagine the stress they are under given that you 
have thousands of Americans waiting to connect with them on the 
phone, who are waiting 10/20 minutes, and many of them very 
unhappy that they have to wait that long.
    I think after two or three minutes, most Americans tend to 
hang up on any phone call where they are having to be put on 
hold.
    I hope we will get this done in a smart way. I do not think 
the first thing we want to do is short change the Agency, which 
already has a tough task, and that is asking Americans to 
voluntarily pay their taxes, and where we have Americans who do 
so to watch as others do not, it is very frustrating.
    We do not want to undermine the voluntary compliance rates 
that we have in this country by Americans who pay their taxes.
    Please share with all the folks you work with that we thank 
them very much, and also tell that gentleman right over there, 
Mr. Williams, that we thank Floyd Williams for all his years of 
service.
    We are going to miss him because he has been a tremendous 
asset to not just Congress but to the American people because 
of the service he has provided to the IRS and to us as the go 
between, between your Agency and the Congress. We are going to 
miss him, and we want to say, Floyd, to you, thank you for all 
the service you have provided over the years.
    Your initiative on tax preparer's, that universe of people 
out there who are representing themselves as competent and 
qualified to prepare American's tax returns, and get paid to do 
it.
    We know there are some great ones, but we know there have 
been some that have just ripped off the American public.
    It is hard to believe you need a license to cut someone's 
hair, but in America, you do not need a license to prepare 
someone's perhaps most important financial documents.
    I thank you for the initiative to try to bird dog that 
industry and make sure competent folks are the ones that are 
preparing our taxes.
    I am distressed. As I sit and listen to what you are 
saying, you have lost 5,000 employees. Your budget was cut $300 
million.
    We know when you do tax compliance enforcement, that dollar 
you spend to have that investigator and those folks who follow 
through to make sure people are complying with payment of the 
taxes they owe, that you return $6 for every $1 we invest in 
you to do that.
    For us to be cutting $300 million from your budget, it is 
distressing. The last thing we want is stories of how some over 
zealous tax agent goes and busts someone's door down to try to 
collect taxes.
    The truth is for the most part, you have employees who do 
just yeoman's work to try to help their fellow American's 
prepare their taxes.
    I hope that you will sound the alarms, if they are alarms, 
on the ability for us to pay our taxes the right way 
voluntarily.
    My understanding is, and correct me if I am wrong, that we 
now estimate that some $385 billion annually is not paid in 
taxes that are either avoided or intentionally not paid in this 
country.
    Is that the estimate now, $385 billion?
    Mr. SHULMAN. That is the tax gap estimate for tax year 
2006.
    Mr. BECERRA. That is more money than we would fund you for 
how many years?
    Mr. SHULMAN. A lot.
    Mr. BECERRA. It is just incredible. We have American's who 
are voluntarily paying their taxes. You have a whole bunch of 
other American's who unfortunately are not doing what they 
should or at the level they should, so the responsible 
taxpayers in this country are having to cover for those who are 
not.
    You can go out and figure out who they are, if you just had 
the compliance money, the enforcement money, to go out there 
and find them.
    Many of them make errors, simple errors. I think most of 
those American's are ready to pay their fair share. Others are 
not. Others are trying to send their money overseas and do 
things that they should not, and we should make them pay their 
fair share.
    I just hope that we go out there and do this the right way.
    Is there any hope that with the funding that you are 
getting that you can fulfill everything that we are asking you 
to do?
    Mr. SHULMAN. Well, it is very much the prerogative of 
Congress to fund us, and whatever Congress ends up giving us, 
we will do the best that we can.
    I am quite proud of this Agency delivering on multiple 
fronts over the last several years and especially this year in 
a decreased budget environment, and really trying to balance 
compliance and service.
    I think we are doing a good job.
    Ms. JENKINS. Thank you. The time has expired. Ms. Black is 
recognized for five minutes.
    Mrs. BLACK. Thank you, Madam Chair, and thank you, Mr. 
Shulman, for being here.
    We are all talking about limited dollars. We need to spend 
our dollars in the best way we possibly can.
    I was reading a report just recently from the Treasury 
Inspector General for Tax Administration, who found billions of 
dollars in Federal education credits that were issued in error.
    What I am really trying to get to here is number one, to 
save, to make sure we are giving the money to the people that 
really deserve the money, so that we can use it in the 
budgetary process to fund those places, such as yourself, that 
can continue to do a good job.
    It is very disturbing when I see here how much money this 
represents that was potentially given to those who do not 
deserve it.
    I just want to read a couple of things out of that report. 
1.7 million taxpayers received $2.6 billion in education 
credits for students for whom there was no supporting 
documentation in the IRS files that they even attended an 
educational institution.
    Almost 380,000 of these individuals claims students were 
not eligible because they did not attend the required amount of 
time or were post-graduate students, resulting in an estimated 
$550 million in erroneous education credits, 64,000 of those 
taxpayers erroneously received $88 million in education credits 
for students claimed as a dependent or a spouse on the other 
one's return. It was a double payment. 250 prisoners 
erroneously received over $255,000.
    It says here that it was identified that a valid Social 
Security number is required for Federal student aid, but not 
for these educational credits.
    That just blows me away. I know when we were talking about 
the child tax credit at one of the other hearings, that was 
told to us, that it was not a requirement that they have a 
Social Security number.
    I am not sure how you track that when you do not have a 
Social Security number being used.
    I want to go to trying to find ways to help you, what we 
can do, what kind of tools we can do and give you so you can 
have the authority to say we are not going to process this 
return, it does not have the proper information on there.
    A Social Security number just seems like an easy thing to 
me, not sending it to a prison would seem like an easy thing, 
as well as making sure they attended the classes, or at least 
attended a college, and perhaps maybe a valid school EIN number 
would also help, to make sure that when those credits are being 
processed, that you have all the information to verify that 
truly they qualify for those.
    Can you help me out with that?
    Mr. SHULMAN. Sure. Thanks for bringing it up and I 
appreciate the offer of help. We can always use help.
    A couple of things. One is we have significantly stepped up 
our effort to crack down on fraud. Last year we stopped $14 
billion in potentially either fraudulent or mistaken credits 
from going out the door.
    The specific report that you referenced, I just want to 
point out a couple of things.
    There was an Inspector General report a couple of years 
earlier that showed that there was huge error rate on the 
1098's, which are the education reports we get.
    While that report said there could have been that level of 
fraud, there is also a recognition that the documents they were 
using to match might not have been accurate documents, meaning 
the education institutions often do not send in the right 
information, so it is not always clear the student was not 
there, even though it came up.
    With that said, the answer to what we can get to help, if 
we want to block a credit because we think there is not right 
documentation, if we do not have math error authority, we have 
to go through a full fledged audit, which is resource 
intensive, and it comes to people.
    Even if we see an issue, if we do not have people who will 
follow up, answer the phone, engage with the taxpayer, we 
cannot block it, because we cannot change their return.
    If we have math error authority tied to certain provisions, 
then we can block it and change the return without going 
through a full fledged audit.
    We requested in this budget math error authority for a 
couple of things.
    The second that you mentioned, prisoners, authorization for 
us to share information with prisons, so there can be a real 
punishment for a prisoner, like losing privileges or put in 
solitary confinement if they try to defraud the system, our 
authorization in Congress to actually share information back 
with prisons so we can have that kind of dialogue expired at 
the end of last year.
    Re-upping that authorization is another thing you all could 
do to help.
    Mrs. BLACK. This math error authority, you need to be given 
that. Is that by law?
    Mr. SHULMAN. Yes.
    Mrs. BLACK. We do have to change the law. Do you already 
have the authority to require there be a Social Security number 
on that form?
    Mr. SHULMAN. That is a whole different issue. Certain tax 
credits, you have to have a Social Security number. Certain tax 
credits, you do not.
    The ones you are mentioning, you do not. It is not a 
requirement. If Congress decides that only people with Social 
Security numbers can get that credit, then that would have to 
be up to Congress. We cannot stop it because it is not a 
requirement at this point.
    Mrs. BLACK. Okay. I know some ways we can help you. Thank 
you.
    Mr. SHULMAN. Thank you.
    Chairman BOUSTANY. [Presiding] Commissioner Shulman, good 
to see you. I apologize for arriving very late to this hearing.
    Before I recognize Mr. Reed for his questions, I want to 
take a moment to recognize Floyd Williams for his 15 years of 
service at the IRS. I think it is a total of what, 35 years of 
Government service? Sir, we want to thank you as you move on to 
what I hope is a good retirement. Thank you for your service.
    With that, Mr. Reed, you are recognized for five minutes.
    Mr. REED. Thank you very much, Mr. Chairman. Thank you, 
Commissioner, for being here with us today.
    Commissioner, I would like to explore--I really try to rely 
on data when we make decisions here in Congress.
    One thing that I have a concern with is on the enforcement 
initiatives, you have certain projections on return of 
investment for those enforcement initiatives.
    I am sure you are familiar with the issue we are going to 
talk about here.
    I believe for 2013 you proposed an enforcement initiatives' 
return on investment will be 1.9 to 1. 2015, you project, it is 
my understanding, the return on the investment for those 
enforcement initiatives will be 4.3 to 1.
    Historically, I read some reports that projected that by 
2012, there was supposed to be a 7.8 return on investment to a 
dollar.
    Do you confirm those numbers, those estimates, those 
projections with actual data? If you do, how do you do that? If 
you do not, why do you not do that?
    Mr. SHULMAN. It is a great question. Let me give you how I 
think about return on investment and exactly what backs it up.
    First of all, we are very conservative in the numbers we 
give you. The people that we know do those jobs, a rolling ten 
year average on the exact enforcement initiatives.
    If we are going to hire 20 Grade 13 examiners for an excise 
tax, we look at ten year rolling average, how much revenue 
comes in directly from those people making adjustments that 
actually comes into the Treasury.
    It is a look back ten year rolling average of those 
numbers.
    I actually think those way understate the impact because 
the real game of running the tax system and the real objective 
is the $2.4 trillion that comes in every year, which most of 
those people we do not engage with in that kind of activity.
    Our job is to run good service, so when people call, they 
get answers to questions. Compliance coverage where there is 
the most risk, so that if you get an audit, your neighbors know 
that you get an audit around specific issues and it drives 
voluntary compliance.
    Another way to look at our numbers is a $12 billion budget, 
give or take, $2.4 trillion in revenue, every dollar invested 
brings you $200, or a smaller way to look at it is we have what 
we call our turk numbers, which are real dollars in the door 
every year.
    Last year, it was about $55 billion. The year before, it 
was 57. The year before, it was 49. That is literally people go 
out, make an adjustment, people go through the adjudicatory 
process, and bring money into us. That is a 5 to 1 return.
    The numbers you gave us are based on very specific 
activities in a granular way based on the kind of people that 
do those activities, looking back ten years, how does that tie 
to those turk numbers.
    Mr. REED. Is it fair to say your testimony is they are 
based on actual data where you go back and confirm the numbers?
    You are looking at actual data, when you project the 1.9 to 
1 for 2013, return on investment, you will be able to show us 
at the end of 2013 the actual data that confirms whether or not 
you had an 1.9 to 1 return on investment?
    Mr. SHULMAN. I think we will be able to--what I said was I 
think it is very good numbers. It is ten year rolling averages. 
I think things spike and they move, so this is an estimate.
    2013 might not be exactly that. It might be higher in 2013 
or lower, but over a ten year period, I think you are going to 
see it average out to be that amount.
    Mr. REED. I guess that is my question. In 2012, it was 
projected to be a 7.8 to 1 return on investment. Was it 7.8? 
What was the number for 2012 on your enforcement initiatives' 
return on investment?
    Mr. SHULMAN. Again, I do not think you want to look at 
these things as year point in time, and you do not want to 
encourage us to do that.
    What you want to encourage us to do is get the right 
resources that over time are going to drive the right taxpayer 
behavior.
    These numbers are ones we certainly consult with GAO and 
OMB on. I think we are very comfortable with these numbers, and 
we have ongoing dialogue.
    Mr. REED. You bring up a great point when you bring GAO 
into the conversation. My understanding in reading some of 
their materials is they are very concerned that you are not 
using actual data to confirm those projected return on 
investment numbers that you are giving to us.
    Mr. SHULMAN. I would not characterize it as very concerned. 
I think they have said we can together work on methodology, and 
we are actually having those staff conversations on a regular 
basis.
    Mr. REED. Okay. You are working with GAO to come to some 
sort of----
    Mr. SHULMAN. Absolutely, but again, I feel very comfortable 
in our numbers, and if anything, I think they understate the 
return.
    Mr. REED. I appreciate that. I appreciate the work you do, 
Commissioner, I really do. I appreciate all the work you do 
over there. It is a tough job.
    Mr. SHULMAN. Yes, I know. Thank you. These are great 
questions because we need to be accountable for delivering 
results.
    Mr. REED. Thank you. With that, Mr. Chairman, I yield back.
    Chairman BOUSTANY. Thank you. Commissioner Shulman, again, 
welcome.
    Does the IRS have available resources with the current 
budget to tackle new enforcement responsibilities? Do you have 
the resources available to take on new enforcement 
responsibilities?
    Mr. SHULMAN. Earlier I was saying we try to do the best we 
can with the budget that Congress gives us. Obviously, we have 
a big job to do, and we try to balance across the board all the 
things we do.
    We have requested in the 2013 budget some new resources for 
some of the new legislation that has come through, and we are 
quite hopeful we will get that.
    Chairman BOUSTANY. In reviewing the President's 2013 budget 
proposal, this proposes saddling the IRS with additional 
enforcement responsibilities by shifting alcohol and tobacco 
tax and trade bureau duties of enforcing tax provisions related 
to alcohol and tobacco to the IRS with no funding allocated in 
this budget to pursue those kinds of violations.
    Is that something you have had internal discussions with 
others in the Administration about?
    Mr. SHULMAN. I am sorry, Mr. Chairman. What are you 
referring to in the budget? I do not think there is a major 
shift in the budget.
    Chairman BOUSTANY. I think the 2013 budget proposes giving 
you additional enforcement responsibilities by shifting alcohol 
and tobacco tax and trade bureau duties to the IRS.
    Mr. SHULMAN. I should get back to you on this. I do not 
think there is a full shift proposed.
    In the past, we have been reimbursed to have some of our 
investigators help them with some investigations, and that is 
what I am aware of that has happened in the past.
    Chairman BOUSTANY. If you could just get me some 
clarification on that, I would appreciate it.
    Mr. SHULMAN. Sure.
    Chairman BOUSTANY. One other question. It has come to my 
attention and I have gotten a number of letters just recently.
    We have seen some recent press allegations that the IRS is 
targeting certain Tea Party groups across the country 
requesting what have been described as onerous document 
requests, delaying approval for tax exempt status, and that 
kind of thing.
    Can you elaborate on what is going on with that? Can you 
give us assurances that the IRS is not targeting particular 
groups based on political leanings?
    Mr. SHULMAN. Thanks for bringing this up. I think there has 
been a lot of press about this and a lot of moving information. 
I appreciate the opportunity to clarify.
    First, let me start by saying yes, I can give you 
assurances. As you know, we pride ourselves on being a non-
political, non-partisan organization.
    I am the only--me and our chief counsel are the only 
presidential appointees, and I have a five year term that runs 
through presidential elections, just so we will have none of 
that kind of political intervention in things we do.
    For 501(c)(4) organizations, which is what has been in the 
press, organizations do not need to apply for tax exemption. 
Organizations can actually hold themselves out as 501(c)(4) 
organizations and then file a 990 with us.
    The organizations that have been in the press are all ones 
that are in the application process. First of all, I think it 
is very important to emphasize that all of these organizations 
came in voluntarily.
    They did not need to engage the IRS in a back and forth. 
They could have held themselves out, filed a 990, and if we 
would have seen an issue, we would have engaged, but otherwise, 
we would not.
    The basic rules around 501(c)(4) organizations are they 
need to be primarily engaged in promoting the common good and 
general welfare of their community. They can be involved in 
political and campaign activity, but it cannot be their primary 
purpose.
    When people apply for 501(c)(4) status, what we do is 
engage them in a number of questions about making sure we 
understand their primary purpose around this and other sorts of 
engagement.
    What has been happening has been the normal back and forth 
that happens with the IRS. None of the alleged taxpayers, and 
obviously, I cannot talk about individual taxpayers, and I am 
not involved in these, are in an examination process. They are 
in an application process, which they moved into voluntarily.
    There is absolutely no targeting. This is the kind of back 
and forth that happens when people apply for 501(c)(4) status.
    Chairman BOUSTANY. Finally, is it fair to say that there 
has been no change in IRS practice with regard to what triggers 
audits and so forth with regard to tax exempt organizations as 
a whole?
    Mr. SHULMAN. So, as a whole, we have audits based on risk 
criteria, coverage requirements, et cetera. In the area of 
political activities, just to make extra sure that folks are 
very insulated, we actually have a committee of three career 
professionals who are not based in Washington, D.C., that any 
time an audit will be triggered because of potential political 
activity or if there is a referral from a Member of Congress 
and other kinds of things that could be viewed as political, 
that group of three actually first looks at it, so no single 
individual can launch an audit. It has to be agreement amongst 
three.
    Then the decision would be made for an audit based on 
resources, risk, allegations, facts, et cetera, and it would be 
shipped out to an auditor to do that audit.
    That has been the practice for many years for anything to 
do with political activity, and that is the practice now.
    Chairman BOUSTANY. I thank you for your answer. Mr. 
McDermott, do you want to inquire? You may inquire.
    Mr. MCDERMOTT. Thank you, Mr. Chairman.
    I want to shift the questions just a little bit or the 
issues you have been dealing with here.
    I have a lot of LGBT clients or constituents. They have 
been approaching me about the problems of dealing with the IRS 
on how to file their income taxes, and are having the 
experience of having more than one source give them a different 
answer.
    They are not quite sure--they are spending some of them 
twice as much as a married couple would spend to get their 
income tax done. They have gotten married under the law, but 
suddenly, when they ask questions about certain things, it is 
just not clear what the answer is.
    I am wondering, is there any single place or perhaps should 
there be a single place where they can call and find out the 
answer to a question or some place in the IRS where somebody 
takes this issue and begins to give definitive answers?
    Mr. SHULMAN. Great question. I am aware of the issue. We 
have actually tried to do a bunch.
    First of all, it is a very complex issue for these 
taxpayers because under state law, these taxpayers have a 
different legal status than under Federal law, because of some 
of our Federal laws.
    Under state law, they often split the income but under 
Federal law, they have to actually file separately.
    We recognized there was a lot of confusion, so we actually 
consolidated and put a group together who worked and put out a 
whole set of frequently asked questions that answered a lot of 
these questions.
    We realized that as laws have changed around the country, 
this has been an issue. We have been engaging with the 
community around this, and I think we have clarified a lot of 
questions.
    Let me just say until you have state laws and Federal laws 
recognizing couples the same way, this is going to remain 
difficult for people.
    Some of the things people have asked us to do, we cannot do 
under the law.
    Mr. MCDERMOTT. When they are filing their income tax 
federally, I suppose if you have a different thing at the state 
level, but federally, if they are doing it together, they 
cannot do it together. Is that what you are saying?
    Mr. SHULMAN. It all depends. Different states have 
different domestic partnership laws. State returns often piggy 
back on Federal returns, but recognizing couples as couples is 
different depending on which state and also Federal laws are 
different.
    Mr. MCDERMOTT. The piggy backing off the Federal tax return 
sort of works in reverse at the state level. They are going to 
have to change some state laws to actually make this rational.
    Mr. SHULMAN. It adds complexity to these taxpayers filing. 
We have tried very hard to make sure we do our job, like we do 
with all taxpayers, which is we have a set of taxpayers with 
specific issues, we get a team together. We worked on these 
things. We did outreach and engagement, and we tried to really 
clarify what we could clarify.
    Mr. MCDERMOTT. If I had a question, what number would I 
call to get the answer?
    Mr. SHULMAN. You would dial our 800 number.
    Mr. MCDERMOTT. That number should get you to somebody who 
will give you the same answer day after day, you will not get 
two different answers?
    Mr. SHULMAN. That is our hope. We track accuracy and 
consistency, and they are always in the high 90s.
    Mr. MCDERMOTT. All right. I appreciate that. It is an issue 
I hear from the District a lot, and I want to know what it is 
that you have tried to do, and we will see if we need to do 
something about it and we need to look at it.
    Thank you.
    Chairman BOUSTANY. With your indulgence, Commissioner 
Shulman, Mr. Becerra has one follow up question.
    Mr. BECERRA. Mr. Chairman, thank you for generously 
allowing me to ask one last question.
    Commissioner, two weeks ago, I sat down with my tax 
preparer and went over my taxes in preparation to file. He has 
been doing this forever. He is an enrolled agent. He is 
licensed and all the rest.
    He said to me, you know, I was always supportive of what 
you all were doing with regard to the tax preparer's, trying to 
get us to be a more defined group.
    He gets folks who come in to correct taxes that have been 
filed improperly by folks who prepared these things and charged 
people money and did it the wrong way.
    He asked me a question. He said it seems to me like a lot 
of us who have done this for a long time are the ones that are 
being asked to go through the process to certify that we are 
competent and all the rest.
    I said to him my sense is that everyone is going to be at 
some point touched by the IRS as it is moving toward the effort 
of trying to certify that folks are competent to be out there 
representing themselves as qualified preparer's of tax returns 
for money.
    The Chairman was gracious enough to indulge me. I am 
wondering if you can tell us what the status is of the 
initiative at the IRS to try to help do the bird dogging, the 
oversight, of tax preparer's, and maybe respond to the question 
of who is being contacted in the tax preparer world by the IRS 
to follow up?
    He said he had to go through some courses or programs to 
test his qualifications and so forth.
    If you could just give us a quick sense of where things 
stand.
    Mr. SHULMAN. Sure. First, similar to what I talked about 
with the real time system, this is a big initiative. We had 
multiple public hearings around the country, vetted it with a 
report, put out regulations with lots of public comment, so we 
have had a lot of engagement with the preparer community around 
this.
    This is really about partnering with the preparer community 
to make sure taxpayers are served well.
    Status is we have had about 840,000 people apply and 
receive PTINs, which is preparer tax identification number. 
About 60 percent of those were not already an enrolled agent, a 
CPA, or a lawyer.
    Mr. BECERRA. Wow.
    Mr. SHULMAN. Enrolled agents, your preparer and CPAs and 
lawyers who already had higher level qualifications, had 
already gone through their own set of competency testing, 
already had ongoing continuing education requirements, were not 
required to take the test, because they have already taken a 
test, or have continuing education.
    Your preparer should not have had to take a test if he was 
already an enrolled agent.
    We have about 840,000 people who have signed up. Last Fall, 
we started administering the competency examination, and we 
have a number of people through that.
    One of our promises to the American people was that we were 
not going to cut out preparer services. We wanted to make sure 
people still could get service.
    There are a lot of very competent preparer's who have been 
preparing returns for 20 to 30 years who have not taken a test 
in a while, so we gave them three years to pass the test.
    People are now starting to pass the test. You do not 
actually become a registered tax return preparer until you pass 
the test. All you do is have the PTIN right now.
    Now people are starting to move through the test, and we 
have had several thousand who have taken the test, and we 
expect that number to grow.
    We started approving continuing education providers. This 
year, continuing education requirements kick in.
    We are well on our way to move there. The last thing I 
would say is this filing season, we had the PTIN. We had CADE 
processing everything faster. We have a lot better data 
analytics.
    We were able to look at preparer's who had really egregious 
problems with their returns, go out to them immediately, in 
late January, with visits, letters, phone calls, and really 
start to engage the preparer community to make sure they are 
treating taxpayers well.
    We are very pleased with the status of the initiative, and 
that is a broad overview.
    Mr. BECERRA. Thanks very much. Mr. Chairman, thank you very 
much.
    Chairman BOUSTANY. Mr. Kind, you may inquire.
    Mr. KIND. Thank you, Mr. Chairman. I apologize. I was a 
little bit late. I was tied up in another meeting.
    Commissioner Shulman, thank you for your testimony and for 
the work you are doing. We really appreciate it.
    Obviously, there are a lot of issues that are pending. I 
had a chance to review the National Taxpayer Advocate Report, 
and I am sure you all at the IRS pay attention to that as well.
    Obviously, some of the disturbing trends that they see in 
that report is mainly the inadequacy of funding for the IRS in 
order to do your job adequately and serve the citizens of our 
country.
    In particular, they were concerned because of funding cuts 
and the inadequacy of resources, what that means to the IRS' 
ability to address the non-compliance issue.
    The concern is it is only going to go wider, if there is a 
lack of confidence or belief in the IRS when it comes to 
compliance measures, it is only to exacerbate the situation.
    Do you agree with what the report was stating in regards to 
enforcement of non-compliance?
    Mr. SHULMAN. Well, we had budget cuts. We try to do the 
best we can with those budget cuts. We talked for a while 
before about service. We have not really talked a lot about 
compliance.
    Clearly, we are doing less exam's this year, and we have to 
triage and find places. We are doing less collection 
activities. It is going to result in less money coming in than 
otherwise would have come in.
    The big trend I am worried about is if we do not stem the 
tide in the 2013 and 2014 budget, you get to a point where 
there is enough news about compliance rates being so low, but 
still, a lot of people are going to pay their taxes because 
they are honest, hard working Americans, and they want to pay 
into the society they feel benefits them.
    But if people want to push the envelope, which some do, and 
want to cut corners, if they think we are not on the job, then 
they will do so.
    I think the general comments about you cannot have a long 
term trend of degrading compliance resources, because that 
really starts to hit voluntary compliance, and I think the 
specific of just less funding means less dollars in the door. 
That is simple math.
    Mr. KIND. Let me ask you a couple of questions. We are 
approaching the second anniversary of passage of the Affordable 
Care Act.
    One of the provisions is they did allow tax credits to 
small businesses who do provide health care coverage for their 
workers, 35 percent this year. It is supposed to go to 50 
percent in 2014 with the creation of the exchanges.
    There are moments back home when some small business owners 
come to me and complain about the complexity of that tax credit 
and having to fill that out.
    What is your opinion on that? Is that an item where the IRS 
or us working with you can try to simplify that process to make 
it easier for small businesses to qualify for that tax credit?
    Mr. SHULMAN. Yes. One, it is obviously an important tax 
credit for small businesses, to help them afford paying for 
health coverage for their workers, which is a key component of 
the Affordable Care Act.
    I think it is a very complex credit. We have heard from a 
lot of practitioners and small businesses that the phase out's 
around that and other issues have made it very hard for people 
to (a) understand if they can hit the sweet spot where you get 
the credit, and (b) sometimes discourages people from actually 
taking advantage of the credit.
    The President's budget actually has a simplification 
proposal in it, which works on the phase out's and other issues 
to make it hopefully much more attractive to small businesses, 
and Congress taking up and passing that, I think, would be 
beneficial.
    Mr. KIND. You think that makes a lot of sense, what the 
Administration has looked at and what they are proposing?
    Mr. SHULMAN. Yes.
    Mr. KIND. What about in 2014, with the exchanges, there is 
going to be a lot of credits for the individuals within the 
exchange market?
    Is the IRS making preparations in order to deal with that, 
and are you on track?
    Mr. SHULMAN. Yes. We are making preparations. We are on 
track. The majority of the work we are doing and the people we 
have to hire is to build technology systems to interact with 
the state exchanges and the Federal exchange, so that an 
estimated 30 million people can get over a ten year period $400 
billion of tax credits.
    I testified yesterday before our Appropriations Committee. 
What I said to them is I understand there is heartfelt policy 
debate about the Affordable Care Act, and there are some 
Members of Congress who do not like it. There are members who 
like it.
    The bottom line is come 2014, there is going to be a lot of 
constituents in every District who are going to expect a tax 
credit when they show up at the exchange, and we need to get 
funded appropriately in the 2013 budget to prepare for that.
    We are on track. We are spending money now based on 
authorization that came through the bill, but we are going to 
need to get financial support because we have a big job to do.
    Again, we are not involved in health policy. We are 
involved in moving the money to help make the law work.
    Mr. KIND. Thank you, Commissioner. Thank you, Mr. Chairman.
    Chairman BOUSTANY. You know, this broader question of the 
complexity of the Tax Code should give impetus to all of us to 
look at fundamental tax reform.
    I know the Chairman has set that as a goal. I think it is 
something we should do in a bipartisan way.
    Commissioner Shulman, thank you for appearing before us 
today. As is customary, please be advised that members may have 
additional questions that they may submit to you in writing, 
and those questions and your responses will be made part of the 
official record.
    With that, we will conclude the Subcommittee hearing.
    [Whereupon, at 10:39 a.m., the Subcommittee was adjourned.]
    [Submissions for the Record follow:]

                     The Honorable Scott R. Tipton

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                    National Community Tax Coalition

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                   National Treasury Employees Union

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