[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]
INTERNAL REVENUE SERVICE'S IMPLEMENTATION
AND ADMINISTRATION OF THE DEMOCRATS'
HEALTH CARE LAW
=======================================================================
HEARING
before the
SUBCOMMITTEE ON OVERSIGHT
of the
COMMITTEE ON WAYS AND MEANS
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
SECOND SESSION
__________
SEPTEMBER 11, 2012
__________
Serial No. 112-OS16
__________
Printed for the use of the Committee on Ways and Means
----------
U.S. GOVERNMENT PRINTING OFFICE
80-693 PDF WASHINGTON : 2013
For sale by the Superintendent of Documents, U.S. Government Printing
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800;
DC area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC,
Washington, DC 20402-0001
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
DAVID G. REICHERT, Washington XAVIER BECERRA, California
CHARLES W. BOUSTANY, JR., Louisiana LLOYD DOGGETT, Texas
PETER J. ROSKAM, Illinois MIKE THOMPSON, California
JIM GERLACH, Pennsylvania JOHN B. LARSON, Connecticut
TOM PRICE, Georgia EARL BLUMENAUER, Oregon
VERN BUCHANAN, Florida RON KIND, Wisconsin
ADRIAN SMITH, Nebraska BILL PASCRELL, JR., New Jersey
AARON SCHOCK, Illinois SHELLEY BERKLEY, Nevada
LYNN JENKINS, Kansas JOSEPH CROWLEY, New York
ERIK PAULSEN, Minnesota
KENNY MARCHANT, Texas
RICK BERG, North Dakota
DIANE BLACK, Tennessee
TOM REED, New York
Jennifer M. Safavian, Staff Director and General Counsel
Janice Mays, Minority Chief Counsel
______
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 September 11, 2012 announcing the hearing............ 2
WITNESSES
PANEL 1:
Steven T. Miller, Deputy Commissioner for Services and
Enforcement, Internal Revenue Service, Testimony............... 6
PANEL 2:
Mr. Fred Goldberg, Jr., Partner; Skadden, Arps, Slate, Meagher &
Flom LLP, Testimony............................................ 26
Ms. Kathy Pickering, Executive Director, The Tax Institute at H&R
Block; Vice President, Government Relations, Testimony......... 35
Mr. Scott A. Hodge, President; The Tax Foundation, Testimony..... 44
Mr. Seth T. Perreta, Partner, Crowell and Moring LLP, Testimony.. 52
SUBMISSIONS FOR THE RECORD
Timothy Stoltzfus Jost........................................... 77
William G. Schiffbauer........................................... 86
INTERNAL REVENUE SERVICE'S IMPLEMENTATION AND ADMINISTRATION OF THE
DEMOCRATS' HEALTH CARE LAW
----------
TUESDAY, SEPTEMBER 11, 2012
U.S. House of Representatives,
Committee on Ways and Means,
Subcommittee on Oversight,
Washington, DC.
The Subcommittee met, pursuant to notice, at 9:46 a.m. in
room 1100, Longworth House Office Building, the Honorable
Charles Boustany (Chairman of the Subcommittee) presiding.
[The advisory of the hearing follows:]
HEARING ADVISORY
Boustany Announces Hearing on the Internal Revenue Service's
Implementation and Administration of the Democrats' Health Care Law
Tuesday, September 04, 2012
*UPDATE: NEW TIME*
ALL OTHER DETAILS OF THE HEARING REMAIN THE SAME.
Congressman Charles W. Boustany, Jr., MD, (R-LA), Chairman of the
Subcommittee on Oversight of the Committee on Ways and Means, today
announced the Subcommittee will hold a hearing on the Internal Revenue
Service's (``IRS'') implementation and administration of the Patient
Protection and Affordable Care Act and Health Care and Education
Reconciliation Act of 2010 (``Democrats' health care law''). The
hearing will take place on Tuesday, September 11, 2012, in room 1100 of
the Longworth House Office Building, beginning at 9:45 A.M.
In view of the limited time available to hear witnesses, oral
testimony at this hearing will be from invited witnesses only. However,
any individual or organization not scheduled for an oral appearance may
submit a written statement for consideration by the Subcommittee and
for inclusion in the printed record of the hearing. A list of invited
witnesses will follow.
BACKGROUND:
Enacted in large part on March 23, 2010, the Democrats' health care
law contains 47 tax or tax-related provisions, some of which are
already in effect and others that will become effective over the next
18 months. These provisions include, the individual mandate and
employer mandate taxes, restrictions on the use of Flexible Spending
Arrangements and Health Savings Accounts, a new 3.8 percent tax on
investment income, newly mandated information reporting on health
insurance coverage, new taxes on medical devices, a new Medicare
payroll tax, the health insurance premium subsidy, and new requirements
for tax-exempt hospitals and group health insurance plans.
The IRS is charged with implementing and administering these new
provisions on top of its existing duties under the Internal Revenue
Code, which include collecting $2.4 trillion in taxes, processing 145
million individual tax returns, issuing $345 billion in tax refunds,
and administering numerous non-revenue provisions such as the Earned
Income Tax Credit and various green energy subsidies.
Along with its review of the IRS's new duties, the Subcommittee
will consider: (1) how the IRS's new duties under the health care law
will affect both taxpayers and the IRS's core revenue-collection
function; (2) the IRS's progress in implementing various provisions of
the health care law, both those that are already in effect and those
that are not yet in place; and (3) how the agency will coordinate with
other Federal departments, state governments, and stakeholders to
implement the new tax provisions.
In announcing the hearing, Chairman Boustany said, ``In recent
years, the Subcommittee has held hearings on the IRS's budget, its
administration of our complex and convoluted Tax Code, and an estimated
$100 billion in taxpayer dollars that have been lost to fraud, waste,
and abuse over the past decade. Under President Obama's health care
law, the IRS is now charged with administering much of the health care
law. It is imperative that we take a close look at these new duties and
consider the impact they will have on the agency and the taxpayers it
serves.''
FOCUS OF THE HEARING:
The hearing will focus on the IRS's implementation of various tax
provisions enacted in the Democrats' health care law and consider how
the agency's implementation of the law will affect taxpayers and its
core revenue-collection mission.
DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:
Please Note: Any person(s) and/or organization(s) wishing to submit
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 Tuesday, September 25, 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) 225-1721 or (202) 225-3625.
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/.
Chairman BOUSTANY. This hearing will now come to order.
Good morning and welcome to today's hearing on the Internal
Revenue's implementation and administration of the President's
health care law.
Before we begin this morning, it is appropriate to recall
that 11 years ago, almost to the hour, our Nation was savagely
attacked. After these 11 years, each of us can certainly recall
exactly what we were doing at that time.
The horror of the day should give us the resolve to
continue doing our business and demonstrate that we will not be
intimidated or deterred.
More than a decade has passed but the attacks of the day
still outrage, the tragedies still overwhelm, and the acts of
heroism still inspire us.
We still mourn those lost on that day and all those who
have given their lives since in the defense of liberty. We are
thankful for those who continue to stand and volunteer to serve
our country both at home and abroad.
We will take a recess from this Subcommittee's proceedings
at 10:45, so that those who wish to join the 9/11 remembrance
in the Capitol can do so, and then we will promptly reconvene
at 11:30 to resume the hearing.
We are going to watch the clock pretty closely and we will
stop at around 10:45.
The Internal Revenue Service has enormous responsibility.
It is tasked with administering our very convoluted tax system
and a Tax Code that has changed nearly 5,000 times in the past
10 years alone.
The agency is charged with collecting roughly $2.5
trillion, distributing hundreds of billions of dollars in tax
credits, and enforcing 4,000 pages of tax laws, and 80,000
pages of tax regulations.
The agency's core revenue collection function has
increasingly been crowded by its responsibility to administer
many social programs.
Through the years, Congress has sought to advance a
multitude of non-revenue objectives through the Tax Code,
energy policy, housing policy, and of course, health care
policy.
Making the IRS both revenue collector and administrator of
these activities has diverted the IRS' resources from its
central mission and can diminish taxpayer service.
In 2010, Congress passed President Obama's health care law,
expanding nearly 1,000 pages and passed ``so you can find out
what is in it,'' in the famous words of then-Speaker Nancy
Pelosi.
The health care law contained 47 tax provisions and charged
the IRS with vast new responsibilities.
These included the implementation and administration of the
largest entitlement created in more than a generation, new
penalty taxes on individuals and employers who fail to provide
or buy government approved health insurance, the need to
quickly create vast new information technology systems, and the
list goes on and on.
The President's health care law has put the Federal
Government in charge of approving health insurance plans,
subsidizing them, punishing those who do not buy government
approved plans, and many other aspects of our health care
system.
The Internal Revenue Service has been saddled with the
responsibility of carrying out many of these new Federal
activities.
More than creating new burdens on the IRS, the President's
health care law has led to new tax rules and regulations that
will pose significant challenges to both individuals and job
creators.
The Administration's own documents state that the
compliance burden of the new rules it has thus far written
pursuant to the President's health care law will add nearly 80
million man hours each to individuals and job creators. This is
just the 17 regulations that have been issued so far. There are
more to come.
Eighty million hours that will not be spent creating new
wealth, providing health care, or doing anything productive.
Eighty million hours simply complying with new rules from
Washington.
This is the burden from just the IRS' new rules, the 17 new
rules that have been promulgated. When you add the new
regulations from HHS, the Department of Labor, and other
agencies, the burden on our sluggish economy goes still higher.
As a former surgeon and owner of a small medical practice
in Louisiana, I certainly know how taxes, rules and regulations
from Washington can impede not only a small business but also
patient care.
I am especially interested in hearing from the IRS and our
witnesses today about how the new law will operate in the real
world, in real time.
The object of this hearing is to assess the IRS' efforts to
administer the law, including its efforts on the Service's core
mission, and how decisions made now to implement it will affect
both the agency and taxpayers as the provisions continue to
come into effect.
Ladies and gentlemen, this is also not a hearing to beat up
the IRS, an agency run by good men and good women. I want to
emphasize that. Dedicated public servants who have an
incredibly difficult job.
The agency did not write the health care law. The previous
Congress did. It passed the law. Now we are finding out what is
in it and what it means for the country and for the Internal
Revenue Service and for taxpayers.
I look forward to the testimony and questioning of our
witnesses. Now, I am pleased to yield to the distinguished
Ranking Member from Georgia, Mr. Lewis.
Mr. LEWIS. Thank you, Mr. Chairman. First of all, I want to
thank you for pausing to observe what happened to our country
11 years ago today. It is my hope and prayer that Americans all
over will pause and observe what happened.
Mr. Chairman, I want to thank you for holding this hearing
on the Affordable Care Act. We are always pleased to discuss
our landmark health reform law which will expand health
coverage to over 30 million Americans.
Because of the Affordable Care Act, children today cannot
be denied insurance benefits due to preexisting conditions, and
young adults can stay on their parents' insurance until age 26.
Seniors are already saving hundreds of dollars on their
prescription drugs and receiving free preventive services.
This morning, the Department of Health and Human Services
announced that the Affordable Care Act has saved people with
private insurance over $2 billion.
We must ensure that the Internal Revenue Service continues
to move with all deliberate speed to deliver hundreds of
billions of dollars of Federal tax credits to American families
and small businesses, which will make health insurance
affordable.
I am confident that the tax provisions of the Affordable
Care Act will be carried out on schedule.
Today, I look forward to learning where we are in the
process, the problems we have seen, and the issues that remain.
I want to thank all of the witnesses for their
recommendations to address these issues. I also look forward to
hearing from the agency about the resources it needs to fulfill
its duties under the health reform law.
I continue to have serious concerns about the effect of
recent budget cuts on taxpayers, tax collection, and agency
operations.
This year, the agency's budget was cut by over $300
million. This cut harmed taxpayers and tax administration. For
fiscal year 2013, the IRS requested a budget increase of $360
million for administration of the health reform law. Almost 75
percent of this money will be spent on technology needed to
deliver hundreds of billions of dollars in tax credits.
I look forward to hearing more about the IRS budget request
and how the amount requested will help the agency complete its
work on the health care law while protecting Federal tax
dollars.
Thank you very much, Mr. Chairman.
Chairman BOUSTANY. Thank you, Ranking Member Lewis. Next,
it is my pleasure to welcome two panels of witnesses before us
today.
Today's witnesses have extensive experience with the IRS
and tax compliance, and I am delighted to have all with us.
Our first panel will consist of Deputy Commissioner Steven
T. Miller. I want to welcome him again before our Subcommittee.
We appreciate you being willing to come before us today.
Steven T. Miller, Deputy Commissioner for Services and
Enforcement at the Internal Revenue Service.
Deputy Commissioner Miller, the Committee has received your
written testimony, and it will be made part of the formal
hearing record. You will have 5 minutes for your oral remarks
as is customary. You are recognized for 5 minutes, sir.
STATEMENT OF STEVEN T. MILLER, DEPUTY COMMISSIONER FOR SERVICES
AND ENFORCEMENT, INTERNAL REVENUE SERVICE
Mr. MILLER. Thanks so much, Mr. Chairman. Chairman
Boustany, Ranking Member Lewis, Members of the Subcommittee,
thanks for the opportunity to update you on the IRS' staged
implementation of the tax law portion of the Affordable Care
Act.
As I begin, let me say that there is no doubt that
implementation of the ACA has required and will continue to
require a concentrated effort on our part.
However, the IRS has a successful history of such efforts.
In this case, the IRS is taking full advantage of the fact that
the major exchange related provisions, with respect to those,
we will have time to plan our implementation and communicate
with taxpayers.
The IRS began both short term implementation and long term
planning immediately upon passage of ACA. Our efforts focused
on two things. First, to quickly implement tax law changes that
were retroactively or immediately effective.
Examples in this first category include the small business
health care tax credit, the expansion of the adoption credit,
and specific industry provisions such as those that focused on
qualified therapeutic projects and the indoor tanning industry.
In terms of those provisions that had future effective
dates, we moved quickly to put a structure and process in place
to plan and implement these provisions.
Because many ACA tax provisions are substantial and require
long term planning, the IRS established enterprise-wide
governance and planning processes, both in its business
operations and its information technology divisions. This is a
significant undertaking and a lot of work still lies ahead.
However, by involving top leadership and using established best
practices, we have made important progress.
We have prioritized our work based on the particular
effective date of a provision and/or the need for the
Government or taxpayers to build the systems necessary to
support the new law.
This approach is taken whether we are talking about our IT
work or how we prioritize our guidance to the community.
The IRS' most substantial implementation efforts relate to
our work with the exchanges and the premium tax credit. In this
area, we are working on the secure delivery of information to
HHS as well as other work that will ensure that advanced
premium tax credits are available beginning in 2014.
The Department of Health and Human Services is the lead
agency defining the structure and operations of the exchanges
with Treasury and the IRS defining some of the associated
rules.
As part of our efforts, we are working to provide clear and
flexible guidance to the community, and we have done this after
engaging in a robust dialogue with those impacted.
For example, we have worked closely with large employers to
get them key pieces of guidance and time to set up their
systems and procedures, including a number of simplifying safe
harbors to assist in measurement and compliance.
In terms of guidance on ACA more generally, we have to date
issued a variety of regulations, more than 40 notices, as well
as a variety of revenue rulings, procedures, announcements, and
frequently asked questions.
While there is much yet to be done, we have already
accomplished a great deal.
In addition to building necessary systems and issuing
guidance, we are working on how taxpayers will interact with
the IRS as they file their returns. This involves both service
and compliance.
We do have some time as most of these interactions begin
during the 2015 tax filing season. Still, we are already
engaged in discussions with tax return preparers and software
developers so the taxpayers have what they need at the time
they file their 2014 tax return.
Let me speak to one area in particular, as there have been
numerous questions about how the IRS will verify individual
coverage.
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 insurers.
We will follow up with taxpayers who appear to have over
paid, under paid, and/or were not eligible for an exemption.
This will take the form of written correspondence. Revenue
agents will not be doing this work. As required by the statute,
we will not use levies, liens, or criminal prosecutions if
taxpayers have unpaid amounts related to the individual
coverage provision.
Thank you for the opportunity to testify on our planning
and implementation efforts related to ACA's tax provisions. It
is a large undertaking but over the last several years, there
have been thousands of tax law changes, some larger than
others, and the IRS has implemented them all.
Our work to date on ACA is going well. We have the
processes and structure in place to succeed.
I would be happy to answer any questions.
[The prepared statement of Mr. Miller follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman BOUSTANY. Thank you, Mr. Miller. We have a lot of
uncertainty out there today amongst the business community and
families with regard to what is going to happen with taxes. Of
course, we know about all the expiring tax provisions that are
coming at the end of the year unless Congress duly acts.
I would like to point out that the House has acted in July
to avert rates from going up. I hope that the other body across
the Capitol will move forward and do so hastily to eliminate
this uncertainty that is ongoing.
With that having been said, clearly we know there is a lot
of uncertainty related to ACA, the implementation, the tax
implications.
I know the IRS has begun issuing regulations in accordance
with the President's health law with many more coming. In fact,
I have these two binders right here. These are the regulations,
revenue proceedings, revenue rulings, and Treasury decisions to
date, encompassing some 17 new regulations the IRS has
published so far, that will require nearly 80 million hours of
compliance work by taxpayers annually. Eighty million hours so
far.
This is according to the IRS and the Office of Management
and Budget materials published in the Federal Register.
This includes over 25 million hours for information
reporting by tax exempt organizations, over 40 million hours
for small businesses, and almost three million hours for the
self employed.
This additional 80 million hours is based only on what
regulations have been published already, not on those coming.
That is my understanding.
Mr. Miller, can you give us an estimate of the regulatory
burden expected once the President's law is fully implemented?
Mr. MILLER. First, I guess, Mr. Chairman, I do not know the
80 million figure, so I am not prepared to speak to whether
that is correct or not. I am assuming it is correct, but I do
not have that figure.
Chairman BOUSTANY. This is from IRS and OMB.
Mr. MILLER. I do not have a sense at this point for a total
number of hours. Until we do the regulations and complete that
work, that really is not possible.
Chairman BOUSTANY. I understand. Given what we have so far,
is it possible to estimate the economic cost to our economy on
this? Are you aware of any estimates of the economic burden
this will impose on American taxpayers?
Mr. MILLER. Sir, you are talking to the Administrator, Mr.
Chairman. I would not be able to speak to the economics of the
situation, only to our working through the provisions and
getting the guidance out to folks that need to comply.
Chairman BOUSTANY. This will certainly be a question we
will need to further investigate with Treasury and others.
The President's law creates new insurance subsidies and
employer mandate taxes, which are tied to the subsidies. Under
the language of Section 1401 of that law, the subsidies are
only available to individuals enrolled through an exchange
established by the state. That is the statute.
Yet, in August last year, the IRS proposed a rule that ran
counter or seemingly ran counter to the plain language of the
statute, providing for subsidies in states regardless of
whether that state chose to create an exchange or not.
This gives rise to employer mandate taxes that are not
provided for by the statute and some have alleged it was done
at the urging of political appointees at the Treasury
Department and the White House.
I know your position as Administrator is well taken, and I
understand that. Can you publicly state whether the IRS had
received any communication from political appointees at
Treasury or anyone at the White House urging this reading of
the statute?
Mr. MILLER. Let me start with how our regulatory process
works, which is a tripartite discussion between the Department
of Treasury, Office of Tax Policy, our Office of Chief Counsel,
our lawyers, and the Internal Revenue Service itself, Doug
Shulman and myself.
The jurisdictions, the Office of Tax Policy, really plays
lead on policy matters. We take a look and see, as the IRS, is
the proposed rule ``administratable,'' can we do it. We all
have a part in talking to stakeholders about the rule.
Our Chief Counsel's Office really speaks to what are the
permissible reading's of a particular statutory provision.
In this case, we probably did have discussions with the
Administration, and that is not a surprise because where there
is a multi-agency regulation, generally that will happen. Who
in particular was briefed, I do not know.
What I can say and what I want you to take away from this,
Mr. Chairman, is the decision as to whether our reading of
Federal versus just state was correct was made by our Counsel's
Office at the IRS. We believe it is the correct legal
interpretation.
Chairman BOUSTANY. This was not solely an IRS determination
but it was done with legal counsel at IRS in combination with
those at Treasury and the White House?
Mr. MILLER. You are putting the White House in there, and I
do not know they were involved. The decision on whether the
regulation contained a provision--to step around that a little
bit, our position, and it is the IRS' position, is that you
cannot read that statutory provision alone. You need to look at
not only the text but the context, the purpose, and the
structure of the statute.
Our reading that a Federal exchange can provide a subsidy
is a preferred reading, and it is the finding of the Chief
Counsel's Office at the IRS.
Chairman BOUSTANY. Okay. What we would like as a
subcommittee are the dates and participants at all meetings,
notes from those meetings. Certainly documents relating to that
determination that the insurance premium subsidies apply to the
Federal exchanges, Federally created exchanges.
This is clearly something we dispute because the reading in
the statute seems very clear. As you cite other aspects of the
law, we would like to know what other aspects in the law were
used in that determination by legal counsel and all outside
input, including if indeed there was input from White House
political advisors, but certainly I know Treasury was involved
in this because it is a policy matter.
Mr. MILLER. Right.
Chairman BOUSTANY. If you could provide that to us as
promptly as possible, we would certainly appreciate it.
Mr. MILLER. We will be glad to respond.
Chairman BOUSTANY. Thank you. With that, I will be happy to
yield to my friend, the Ranking Member, for questions.
Mr. LEWIS. Thank you very much, Mr. Chairman. Mr. Miller,
at this moment today, do you expect IRS to be ready for the
health care law by 2014?
Mr. MILLER. Absolutely, Mr. Lewis.
Mr. LEWIS. You do not have any reservation, you are ready?
Mr. MILLER. We are ready. We will be ready. Based on what I
know, based on our level of effort to date, based on the
planning and structures we have put in place, we will be ready
on the exchange related provisions and other provisions of the
ACA.
Mr. LEWIS. Will the administration of the health care law
harm the IRS' core revenue collection mission?
Mr. MILLER. I do not believe so. I will step back from that
question, Mr. Lewis. I do not recognize core versus non-core in
terms of the IRS' work. This is what we do. Congress passes a
statute, whether it is a charitable deduction or whether it is
a home mortgage deduction, some of those things have varied
purposes, but they are in the Tax Code.
We consider the ACA to be our core work. It is part of our
core work.
Mr. LEWIS. Mr. Commissioner, has the IRS been listening to
and working with outside stakeholders to provide guidance that
is responsive to their needs?
Mr. MILLER. We have. In fact, I would note for the
Chairman, in that big book, a whole bunch of that book are
requests for comments and suggested safe harbors, and all the
types of things we ought to be doing to engage the business
community and others before we put out final rules.
Mr. LEWIS. As part of carrying out the health reform law,
does the IRS plan to conduct education, maybe workshops,
activities, outreach to taxpayers, employers and tax
professionals? What has the IRS done so far?
Mr. MILLER. Again, here we are guided in our approach by
the effective date of the provision. For example, the early
provisions, we did something in excess of 1,500 meetings with
small business over the tax credit for small business. We have
done a couple of hundred meetings with folks in the tanning
industry.
We have tried to engage those folks. As we move into 2013,
we will obviously start working on what is going to happen with
the health care credits later in that year.
This past year, we engaged more than 10,000 return
preparers at our various tax forums around the country to try
to educate them on what is here today and what is coming in the
next year.
We have a very active outreach program.
Mr. LEWIS. Mr. Miller, for the year 2013, the IRS requested
about $270 million for technology and operational support to
deliver new tax credits.
I want you to explain to Members of the Committee why
additional money is needed for the IRS' computer system and how
the computer system will be used to deliver the tax credits.
Mr. MILLER. IT builds are considerable. The first that is
necessary is we are obligated under the statute to provide some
taxpayer information, to provide income and family size, so
that the exchanges can do their work as people come in to sign
up and get the right amount of advance premium.
That work continues. We are working incredibly well with
HHS and CMS to make sure that happens. That will be in place
for the open season, which begins in late 2013. That is the
first build.
We also have a build where we will have to receive the
information returns from various parties to ensure that the
correct amounts are being paid out and verify that. That work
becomes very important as we have the filing season for 2014.
We have a whole array of work with respect to the exchange
related provisions, and then there are some other provisions as
well that require IT work.
We do have significant building to do in the IT arena.
Mr. LEWIS. Thank you very much, Mr. Miller. I yield back,
Mr. Chairman.
Chairman BOUSTANY. Ms. Jenkins, you are recognized for five
minutes.
Ms. JENKINS. Thank you, Mr. Chairman. Thank you for holding
this hearing, and thank you, Commissioner Miller, for being
here.
Commissioner Shulman has said the President's health care
law, and I quote ``Fragmentation of operational workload
increases the difficulty of execution and will require an
extraordinary amount of coordination with other players in the
health care system.''
For example, HHS will have to reach out to IRS to verify
income and family size. Homeland Security might have to verify
immigration status. The Social Security Administration might
have to verify citizenship.
All of this is occurring while a trillion in subsidies will
be flying out the door.
Are you aware of any previous law that has ever required
the IRS to interact so extensively with other governmental
agencies, and what sort of stress will this extension
interaction place on the IRS' core function?
Mr. MILLER. We share taxpayer information under very
stringent restrictions with an awful lot of folks, with the
state tax authorities, the state Medicaid authorities, with
Social Security. We have a long history of doing it. It does
not stress us.
It does require us to work very hard to ensure that the
safeguards are in place, that that taxpayer information is
protected.
Ms. JENKINS. No extra heavy lift on your part to
coordinate?
Mr. MILLER. As I mentioned, the IT work itself is a decent
lift for us. We are working on that and we will succeed on it,
but it is a decent lift.
Ms. JENKINS. Okay. The insurance premium subsidy will be
based on a new definition of IRS household income, which is
affected by the make up of families' income, their personal
finances and other personal matters.
Under the President's health care law, individuals are
responsible for informing governmental officials at the
insurance exchange if they have changes to their household
income during the year. This would be the adjusted size of
their subsidy; is that correct?
Mr. MILLER. I am less familiar with that piece of that
because that is not really the IRS piece.
It is true that when you come in the door to sign up for
coverage and for an advance premium, there will be a discussion
of what is your tax situation, what is the appropriate amount
of the premium.
As things change during the year, I believe there is an
obligation to come back and talk to the exchange about whether
that impacts the amount of the premium.
Ms. JENKINS. If I lose a current job or get demoted, lose
pay or get a raise, any change in all of that, as you
understand, I would need to inform a governmental official at
the exchange?
Mr. MILLER. I do not know. I am quite sure it is not any
change, Congresswoman. I cannot speak to that because that is
an HHS sort of job to define that.
Ms. JENKINS. Is there somebody that could get us that
information?
Mr. MILLER. I would think HHS would be the place to go for
that.
Ms. JENKINS. Okay. Thank you. I yield back.
Chairman BOUSTANY. Mr. Kind.
Mr. KIND. Thank you, Mr. Chairman. Thank you, Mr. Miller,
for your testimony here today and the service that the IRS
provides our Nation overall.
I guess, Mr. Chairman, the big news this week for the
Affordable Care Act that was revealed was Mitt Romney's embrace
of some of the provisions that are part of the Affordable Care
Act.
To tell you the truth, it is not too surprising. For anyone
who has read the actual legislation and understands what is in
it and the provisions contained there, there has been wide
embrace on both sides of the aisle on a variety of provisions.
I think Mitt Romney in the light of honesty and full
disclosure admits himself there is a lot in the Affordable Care
Act that he can work with, that he would like to preserve if he
was elected President.
I thought that was a very revealing comment, but also not
surprising given that he is the one that implemented his own
health care reform, much of which was adopted with the
Affordable Care Act here in Congress.
Whether it is preexisting conditions, young adults staying
on their parents' plans, I think the Governor has acknowledged
there is a lot of good aspects of the Affordable Care Act that
should be preserved and should be protected. I thought that was
a very revealing and helpful comment.
I agree with Mr. Lewis. I think it is helpful for us to
have from time to time oversight in hearings to see about the
implementation of the Affordable Care Act, especially the IRS'
role in all of this.
I think we have heard Mr. Miller testifying in regard to
some of the resources that IRS is requesting and what that
money is going to be used for.
My sense is, and correct me if I am wrong, that the vast
amount of the resources will be used as far as outreach and
education and also some of the infrastructure needs that the
IRS has in implementing the Affordable Care Act; is that right?
Mr. MILLER. That is correct. The biggest amount of the $360
million asked for in 2013 is actually for the IT build that we
have talked about. A very small amount of it is enforcement or
service, much of the balance is infrastructure to set up the
processes to succeed.
Mr. KIND. Mr. Lewis also asked you to respond to the
outreach that is currently being conducted to the variety of
stakeholders out there, whether it is businesses, individuals,
tax preparers, things of that nature.
How would you describe that relationship and that
communication with a lot of the requests for information coming
into the IRS today?
Mr. MILLER. I think it has been robust. I think the second
panel will be a perfect panel to talk to about that issue. I
think overall, we have gotten a great response. Obviously,
there is a great deal of interest, and most things, I think,
people can live with and some things, they are continuing to
talk to us about, which is the nature of a decent discussion, I
believe.
Mr. KIND. Will the IRS be involved at all in the
enforcement of the Affordable Care Act, the requirement for
health insurance for individuals?
Mr. MILLER. We will. That is a tax provision.
Mr. KIND. To what extent will you be involved with that?
Will this be conducting audits of individuals or businesses or
what?
Mr. MILLER. I think, if I understand the question, Mr.
Kind, and I alluded to this in my oral, with respect to the
individual coverage provision, the IRS will, I believe--we have
talked about this--there will not be revenue agents involved in
this. These will not be audits. This will be a matching
process. It will be something similar to what we see when we
get in bank information with interest on it.
There will be a match to see whether there has been
insurance. There will be correspondence with the individual, if
it looks like they are not entitled to an exemption, and they
will have the ability to converse with us about whether or not
there should be a payment or not.
To the extent there is a payment, the statute is very clear
in what we can and cannot do. We cannot do liens. We cannot do
levies. We cannot do seizures. We cannot do criminal
prosecutions.
The vast majority of people in this category, they will pay
the money they owe. That is the way the American system works.
More than 70 percent of the money that we collect from the
balance of dues is collected not through drastic collection
action, but when we correspond with someone, when we give
notice or other correspondence.
I have no doubt that most people will comply with the
payment. Those that do not, we have a limited amount that we
will be able to do with respect to them, and we have talked
about that at the end of the day, it might be an offset of----
Mr. KIND. Some opponents in the past of the Affordable Care
Act claim the IRS is going to have to staff up to the tune of
16,000 enforcement agents. Is there any basis for that number?
Mr. MILLER. There is no basis for that number.
Mr. KIND. Thank you, Mr. Miller. Thank you, Mr. Chairman.
Chairman BOUSTANY. Thank you, Mr. Kind. Before we go to Mr.
Marchant, just a quick follow up. I know you mentioned a
significant amount of money requested for IT implementation. I
just want to remind you that Mr. Lewis and I sent a letter not
long ago. We are still waiting on a response.
It is about the IRS and what is going on with the money and
the allocation for IT.
Mr. MILLER. We will get you that letter this week.
Chairman BOUSTANY. I appreciate it. Thank you. Mr.
Marchant?
Mr. MARCHANT. Thank you, Mr. Chairman. Mr. Miller, I would
like to explore the new concept to the IRS of the household
income. Since it is a brand new concept, is it a legal concept
to the IRS at this point?
Mr. MILLER. It is in the statute itself. It is defined in
the statute. It is a statutory provision.
Mr. MARCHANT. Has the IRS made preliminary findings on what
constitutes a household?
Mr. MILLER. I think we have. I think the statute sets it
out. The statute basically says modified or adjusted gross
income, which basically is off your tax return. The only twist
to that is you have to add in for your family size, where you
are taking a dependent, and that dependent is filing a tax
return, that dependent's income has to be added in as well.
That is the only real difference. There are very few people in
that category, Congressman.
Mr. MARCHANT. Is it the IRS that will be the final person
who decides what constitutes that household unit or will it be
the exchanges?
Mr. MILLER. I believe, if I am understanding the question,
that the IRS will be providing the exchange with information on
any dependents that are filing a tax return in that unit.
Mr. MARCHANT. If you have two people unmarried living under
the same roof, each having a child, will that constitute a
household, and which of the tax returns will be the main tax
return that will constitute--that will apply to the exchange?
Mr. MILLER. I will come back in writing if they tell me I
am wrong, Congressman, but it is going to depend on who is
taking whom as a dependent. The household is that individual
who has some people being taken--who is taking some people as a
dependent on their return.
I do not know in a given situation whether the two
unmarried folks have a dependency relationship in that respect
or not or whether the children do or not. It really is going to
depend--the definition of ``household income'' is your modified
adjusted gross income subject to some foreign provisions in tax
exempt interest, and the income from those who you have taken
on your return as a dependent provided that dependent has filed
a tax return.
Mr. MARCHANT. If you had two adults living in the same
household that filed separate tax returns, would a married
couple filing separate tax returns be constituted as a
household?
Mr. MILLER. Well, I will answer the question in a different
way, which is if you are married under ACA, to get the premium
tax credit, you must file married, filing jointly. That is an
eligibility requirement for the credit.
Mr. MARCHANT. The physical living together has no part of
the definition of ``household.'' It is defined by virtue of the
IRS Code, purely?
Mr. MILLER. The physical proximity might have an impact on
the dependency claim on the tax return. Again, it ties off to
whether you are a dependent on that person's return.
Mr. MARCHANT. For the first time ever, it will be the IRS'
job to compile this and go through a separate step and define
``household income?''
Mr. MILLER. The only separate step, Congressman, is
including the income from a dependent who is filing a tax
return. To be quite frank, you should have a general feel for
what that income is if you are taking that person as a
dependent because that is part of the test of taking that
person as a dependent.
Much of that if not all of that discussion should be
occurring already.
Mr. MARCHANT. Heretofore, all of this information has been
passed to the states and HHS basically on an individual basis,
an individual tax return basis.
Mr. MILLER. Rather than as a household. I do not know the
answer to that one, Congressman. I apologize.
Mr. MARCHANT. Will the states get more information about
households and IRS returns and will there be more people at the
state level able to view more information about a person's IRS
income and IRS status than ever before?
Mr. MILLER. To the extent that the exchanges are using this
for eligibility purposes, then those are new purposes, and
probably new people that are taking a look at that data.
Mr. MARCHANT. Thank you.
Chairman BOUSTANY. Mr. Reed.
Mr. REED. Thank you, Mr. Chairman. Thank you, Mr. Miller,
for being here today.
I just want to follow up quickly before I get to another
point on Mr. Kind's comment. When he asked you about the 16,000
new employees for the IRS, you quickly and confidently said
there was no basis for that number.
It is clear to me that you have taken a look at that
situation in depth to be able to make such a quick response and
confident response.
What I am going to ask you, Mr. Miller, is in 2012, I
believe there were 1,278 additional employees to implement the
Affordable Care Act that were requested and put forth in the
IRS. In 2013, 859 new employees.
Do you agree with those numbers of employees that were
increased in the staffing for IRS to implement the Affordable
Care Act?
Mr. MILLER. No. It is a mis-reading. The total number of
people working on ACA in 2012, and I will be wrong on the
specific number, but something like 670.
Mr. REED. 670 for 2012. For 2013, how many new employees
will be doing that work, or is it just 670 is all you are going
to need?
Mr. MILLER. It is the 670 plus the increment to get to the
859 you were talking about. 859 is the total number of folks.
Mr. REED. 670 in 2012 and the difference between 859 and
670 would be the increase for 2013.
Mr. MILLER. Right.
Mr. REED. From 2012 to 2013, the testimony is 859 new
employees?
Mr. MILLER. No, sir.
Mr. REED. I am confused. Please correct me.
Mr. MILLER. Again, the total number of employees will be
859 employees in 2013. They are not additive. We already have
670, whatever the math is. I cannot do the math off the top of
my head.
Mr. REED. The total for the 2 years, 2012 and 2013, is 859?
Is that what you are saying?
Mr. MILLER. No, I do not think I am saying that. I am
saying in 2012, we had 670 people work on it. In 2013, our
intention is to have 859 work on it. They are separate numbers.
Mr. REED. Let's go forward, 2014, the bulk of the law goes
into further implementation, how many additional employees do
you feel are going to be either hired or allocated to implement
the Affordable Care Act thereafter?
Mr. MILLER. That number we are working on as we speak. We
have a draft 2014 budget that is floating up into a discussion
with Department of Treasury, OMB, and that will be part of the
administration's budget.
Mr. REED. Okay. You are working on an estimate, you are
working on a proposal. What does that estimate show you right
now at this point in time?
Mr. MILLER. I do not have that number for you because
again, it is an estimate and it has not been approved.
Mr. REED. You are working on it, I would hope.
Mr. MILLER. Yes, we are working on the 2014 budget, which
is due in January.
Mr. REED. The employment needs for the IRS in 2015 and
beyond, I hope you are doing some projections as to what you
are going to need in order to implement the law.
Mr. MILLER. That becomes more difficult because again we
operate on an annual basis. We are working on 2014 and we will
see what we have in 2014, and that will inform along with where
we are on various other business processes, what we desire in
2015. We do not have details.
Mr. REED. That concerns me, Mr. Miller. You are the agency
that has been responsible or charged with responsibility for
implementing this law. What you are telling me is you really do
not have a clear indication as to what employment burdens are
going to be put on the IRS as a result of this law. That is
very concerning to me.
Would you agree that is concerning to a Member of an
oversight Committee on your agency, that the agency should have
some type of projection as to what those employment burdens are
going to be and the costs associated?
Mr. MILLER. Mr. Reed, I understand your point, and if you
were to give me a budget for multiple years, I might have a
better sense of what I could do or not.
The budgetary process is an annual process. It is difficult
for me given the scenario of budgets to have a precise number
for you at this point for 2015. We are working on 2014, sir.
Mr. REED. How about anything past 2015? Nothing?
Mr. MILLER. We will be in steady state in 2016, sir.
Mr. REED. I have a few more minutes, I hope. I want to talk
about the premium tax credits real quick. My understanding is
the advance payment for that goes to the insurer.
Mr. MILLER. The insurance company.
Mr. REED. The insurance company, not the insured, but the
insurer, which is the insurance company.
Mr. MILLER. Correct.
Mr. REED. If there is an over credit, and I know I am short
on time, do you go back to the insurance carrier to get that
over payment or do you go to the individual taxpayer?
Mr. MILLER. I would be glad to answer it. I am not sure I
understand the question, sir. I apologize.
Mr. REED. Okay. I am out of time. I do want to follow up on
that. I am concerned that the money goes to the carrier and yet
the taxpayer ultimately, if it is an over payment situation,
the money never gets from the carrier back to the individual.
It comes from the IRS which then comes from the taxpayers.
Mr. MILLER. There will be a reconciliation process on both
ends.
Mr. REED. I will submit written questions on that. I
appreciate your input, Mr. Miller. I really do. Thank you. I
yield back.
Chairman BOUSTANY. Thank you, Mr. Reed. If you could
respond to that final piece in writing.
Mr. MILLER. We will do that.
Chairman BOUSTANY. Thanks, Mr. Miller.
Mr. Paulsen.
Mr. PAULSEN. Thank you, Mr. Chairman, for conducting the
hearing. Mr. Miller, last week we heard from the IRS about
plans to publish revisions to Form 637 very soon. 637, that is
the application for registration dealing with excise taxes in
particular.
In reviewing this form, I am looking at the form, I know
there are a lot of items that are listed that are subject to
the excise tax. Items like gas guzzler automobiles, sports
fishing equipment, fishing tackle boxes, bows, quivers,
broadheads, points, arrow shafts, also alcohol, tobacco and
gasoline are subject to an excise tax.
The public policy rationale in the past for excise tax has
historically been to deter certain activities. As you know, the
medical device tax, which is a part of the new health care law,
is an excise tax. In my mind, the last thing we want to do is
deter creation or innovation of these life saving, life
improving drugs.
Do you believe as a matter of public policy it is
appropriate to apply an excise tax to medical devices in a
similar category as these other items?
Mr. MILLER. Congressman, I only administer it. I cannot
really speak to whether it is appropriate policy in terms of
use or not.
Mr. PAULSEN. Do you think the line item we might see on a
Form 637 is going to also include gas guzzling automobiles and
life saving medical devices? Will there be a line item that
will identify it for medical device companies in that manner?
Mr. MILLER. I do not know specifically. We are working
hard. We have proposed regulations out on the medical device
tax. We are working with the industry to make sure we try not
to burden them and get them to know the rules and comply going
forward.
I am not sure on the form itself. I am not familiar with
it.
Mr. PAULSEN. According to the new law, the companies will
have to begin paying this tax on January 1, which is just a few
months from now. Am I correct in my understanding that no final
rule has been released by the IRS yet on this?
Mr. MILLER. Right. That is close, sir.
Mr. PAULSEN. Without clarity of the rules, you said you
were working with the industry, but I know they are expressing
concern about having to comply with the new law, certainly. You
say you are working with them?
Mr. MILLER. We are.
Mr. PAULSEN. There are about 7,000 of these companies
across the country. They do a lot of medical devices. It could
be diagnostic equipment. Many of these companies are not
profitable. They are still going to be required to pay the tax.
This fact does not take into account the administrative burdens
of the tax that will come through the new IRS form, for
instance.
Has the IRS done a Paperwork Reduction Act analysis to
measure the administrative burdens of the device tax on
companies?
Mr. MILLER. I do not know the answer to that. I can get
back to you on that, sir.
Mr. PAULSEN. That would be good to know. I am just curious.
Mr. MILLER. If I could say one thing. The burden that has
been placed on--it is a statutory provision. We did not create
this out of whole cloth, sir.
Mr. PAULSEN. I know there is going to be additional
paperwork, costs for companies to comply with the tax. It is
also my understanding that the excise tax payments are
traditionally collected semi-monthly or every 2 weeks.
Do you think that model would fit for many of these
companies which have the experience essentially of making
estimated income tax deposits on a quarterly basis, but they do
not have any experience in the Federal excise tax component,
and I do not think they have systems in place for calculations.
Is there consideration being taken into account for that?
Mr. MILLER. I do not know the answer to that question
either, sir. Again, we are working with them. The proposed
regulations are out. The number of issues, Congressman, are not
a myriad. There are a few issues that remain unclear and we are
working with them on. A lot of this has been put out and
discussed.
Mr. PAULSEN. Okay. Mr. Chairman, I just raise some of these
issues because I think we are clearly going in a precarious
situation or dangerous situation for a lot of these companies
that provide a lot of jobs, it is domestic manufacturing, and
we have analyzed a little bit of what the effects of the tax
would be.
We have tried to stop it. We have repealed it in the House
in a very strong bipartisan vote.
Now that we are moving forward on January 1 and these
companies are laying off employees already, I want to make sure
we are also taking into account the paperwork connections and
the IRS following up on the Paperwork Reduction Act analysis
and process as well.
I yield back.
Chairman BOUSTANY. I thank the gentleman. I think the
gentleman is correct in that we have a lot of uncertainty in
the policy of the law but also concerns about the
implementation, too, and the timing.
This is creating uncertainty for business, and it is
certainly not helping our economy.
Ms. Black, you are recognized for 5 minutes.
Mrs. BLACK. Thank you, Mr. Chairman. Mr. Miller, I want to
go to the privacy issue. As we know, there are few things more
sacrosanct to people than having their tax information known
broadly and widely to other folks.
An entire section of the Tax Code, Section 6103, as you
well know, is devoted to limited instances in which this
information can be shared, but in the wrong hands, taxpayer
information can be used to steal tens of thousands of dollars
from the Treasury. We have already seen instances of that. We
have had hearings here related to that matter.
It contains information of a personal nature, about
personal finances, and family information.
Underneath of the President's health care law, the IRS will
be sharing this information, this taxpayer information, more
broadly with many more parties than you ever have before.
While the IRS already shares some of this data with places
like child support, we have heard about that in testimony,
Medicaid and some other revenue collection situations, this new
sharing is going to be much broader, especially since the
exchange employees will be taking place.
How do you plan to make sure this information is fully
protected?
Mr. MILLER. Congresswoman, this is what we do. We do this
quite a bit already. We have hundreds of agreements with
various governmental agencies.
The process is quite restrictive actually, and I think if
you would talk to other agencies, they would tell you how
restrictive we are in terms of making sure that the information
that is sent needs to go--once it arrives, it is stored
properly, it is subject to appropriate controls in terms of who
has access to it, and is subject to either destruction or
return to the IRS when it is no longer needed.
These are rules, and I can outline these in writing, these
are safeguard rules, that we have an entire part of the IRS
working with folks on.
We will come to an agreement with a particular government
entity or the exchange as to what is the expectation of what
will happen with that data. We will then go on-site and inspect
to ensure that document is correct.
We have quite detailed rules in the area because we take it
incredibly seriously.
Mrs. BLACK. You already have memorandum's of understanding
with agencies and exchanges?
Mr. MILLER. Not exchanges at this point, I do not believe.
Mrs. BLACK. Not exchanges. You say you already have rules
in place?
Mr. MILLER. We have rules in place generally,
Congresswoman, for this sort of situation.
Mrs. BLACK. Okay. Can you provide us with what you are
doing with those agencies as that comes along? I think that
will be important for this Committee, considering the fact, as
I say, we have already had hearings about how taxpayer
information is used by people to fraudulently get their return,
get money back that does not belong to them.
I think it would be important for this Committee, this
oversight Committee, to know that we are protecting even more
information with even more people that are going to have access
to this.
My next question is what will be the repercussions against
exchange employees or contractors that mis-use taxpayer
information? Do you already have something in place?
Mr. MILLER. I will come back to you on that, but I believe
they are subject to the same restrictions as I am in terms of
being subject to criminal prosecution and other penalties for
disclosing that information.
Mrs. BLACK. I would appreciate you keeping this Committee
in touch with what you are doing so we can be sure that
absolutely is happening considering all the things that are
happening with people's information right now.
Thank you. I yield back the balance of my time.
Chairman BOUSTANY. Thank you. Mr. Miller, I think that
concludes our questioning. We appreciate you being here today
and providing this information.
Of course, there is more work to be done as we look at the
implementation of this. We look forward to hearing from you in
the future. We appreciate your testimony and your forthright
answers.
Mr. MILLER. Thank you.
Chairman BOUSTANY. We are going to ask the next panel to
come forward, and we will start taking testimony. We will
recess, as I mentioned earlier, to attend the commemoration,
and then we will resume at 11:30.
We will ask the next panel to come up and we will try to
get through some of the testimony.
I want to thank our next panel of witnesses for being with
us today. We have four experts on this subject.
First, we will hear from the Honorable Fred Goldberg, a
partner of SkaddenArps, a law firm here in Washington, DC. Mr.
Goldberg is a former IRS Commissioner, former Assistant
Secretary of Treasury for Tax Policy.
Next, we will welcome Kathy Pickering. Ms. Pickering is
Executive Director of The Tax Institute and Vice President of
governmental Relations at H&R Block.
Third on the panel is Scott Hodge. Mr. Hodge is President
of The Tax Foundation here in Washington.
Finally, we will hear from Mr. Seth Perretta, a partner of
the law firm Crowell and Moring.
We want to thank you all for being with us today. The
Committee has received your written testimony and it will be
made part of the formal hearing record. Each of you will be
recognized for 5 minutes for your oral remarks.
Mr. Goldberg, we will start with you for 5 minutes. We will
try to get through two statements. We will recess and come back
promptly at 11:30.
Mr. Goldberg, you may proceed.
STATEMENT OF FRED GOLDBERG, JR., PARTNER; SKADDEN, ARPS, SLATE,
MEAGHER & FLOM
Mr. GOLDBERG. Mr. Chairman, Ranking Member Lewis, Members
of the Committee, it is an honor to appear before you today to
discuss the impact of certain revenue provisions of the
Affordable Care Act on taxpayers and the IRS.
I am appearing today solely in my individual capacity.
Many years ago, I had the pleasure of appearing before this
Committee during my time as IRS Chief Counsel, as IRS
Commissioner, and as Assistant Secretary for Tax Policy.
Your Committee has a long bipartisan history of concern for
effective tax administration and your efforts have served the
American people well.
Before starting, I would like to make a preliminary
observation. The administrative, behavioral and tax compliance
issues you are considering are inherent in any policy that
provides phased out tax credits to subsidize the purchase of
health insurance, including, for example, the Ryan-Wyden
proposal. They are not unique to the Affordable Care Act.
Much of my written statement explains in some detail why my
experience as IRS Commissioner convinces me that the revenue
provisions of the Act in their current form will become a
burdensome, costly, and frustrating quagmire for millions of
Americans, and will cause significant non-compliance with our
tax laws.
My oral statement does not address portions of my written
statement dealing with adverse impact of the Act's financial
incentives on employers and individuals, but I will be happy to
answer any questions.
What I want to emphasize today is my experience as IRS
Commissioner also convinces me that these failings are
unnecessary and are easily minimized.
Chief Justice Roberts and four of his colleagues have
decided that the revenue provisions of the Act are all about
the government's taxing power.
I believe they got it right and the best way to avoid
administrative, behavioral and tax compliance melt down is to
embrace this reality.
First, now that we know the revenue provisions are all
about the government's taxing authority, there is no longer any
reason whatsoever why each of 51 different exchanges should
have responsibility for determining the proper amount of health
insurance tax credits on behalf of millions of individuals and
families.
The exchanges will be starting from scratch with
information that is 2 years out of date because personal and
financial circumstances change. Change is the one constant in
our real lives. The exchange's credit calculations will be too
high or too low most of the time. Now, in hopes of getting it
less wrong, each exchange will need to obtain sensitive
personal and financial information from millions of individuals
and families and it will need to do so throughout the year
because life's changes do not follow the bookkeeper's calendar.
These efforts will require direct interaction with millions of
individuals and families in ways that meet their reasonable
expectations and allow them to make timely decisions.
Decades of IRS experience make clear that as citizens, we
want our questions answered and our issues resolved promptly,
properly, and in ways we understand. We are sharing intimate
details of our personal and financial lives and expect that our
information will remain confidential, and because the stakes
are so significant, our health and hard-earned money, we have
high expectations and little tolerance for mess ups.
These responsibilities are not going to be core competency
of the exchanges. There is no reason they should be and there
is no chance the exchanges will get it anywhere near right.
They are facing more than enough challenges without functioning
as some weird hybrid of tax advisor and tax enforcer. Let folks
figure out their expected credits with support from a long-
established network of public and private intermediaries and
let them make appropriate representations to their exchanges.
They have been doing this kind of thing for decades in their
dealings with the IRS. Taking the exchanges out of the picture
will make things far less intrusive, burdensome, and costly and
will save the exchanges a fortune.
Second, from the standpoint of tax compliance, the current
sanctions for overstating the amount of health insurance tax
credit, coupled with limits on IRS enforcement activities,
effectively guarantee that there will be widespread
noncompliance. To avoid these compliance issues, treat these
taxes like all other taxes.
Thank you very much.
[The prepared statement of Mr. Goldberg follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman BOUSTANY. Thank you, Mr. Goldberg.
Ms. Pickering, you're recognized for 5 minutes.
STATEMENT OF KATHY PICKERING, EXECUTIVE DIRECTOR, THE TAX
INSTITUTE AT H&R BLOCK; VICE PRESIDENT, GOVERNMENT RELATIONS
Ms. PICKERING. Good morning, Chairman Boustany, Ranking
Member Lewis, and distinguished Members of the Oversight
Subcommittee. Thank you for the opportunity to share H&R
Block's views on the IRS' implementation of the Patient
Protection and Affordable Care Act.
H&R Block is the country's leading provider of tax
preparation services. In each of your districts, we have on
average 37 offices, 12 franchisees, and 323 preparers. We are
one of the largest employers of military spouses in the nation
and we work alongside the IRS to help taxpayers annually file
about 25 million returns.
Clearly, the implantation of ACA is a significant
undertaking and we commend the IRS for the progress it has
made; however, it will face numerous challenges and conflicting
demands for resources.
First, the IRS and HHS have two very different missions and
focuses with respect to the ACA. HHS will focus on ensuring
that everyone has healthcare coverage. The focus of the IRS
will be on enforcing tax law, reconciling advanced payments of
the premium tax credit, and collecting revenues from the
various tax provisions of the ACA.
For example, HHS has stated that an individual can enroll
in an exchange, but using documentation from other sources to
substantiate income levels; however, the IRS will require
individuals to file a tax return to reconcile advanced payments
of the premium tax credit. As a result, individuals may receive
an unpleasant surprise when they find out that they have a tax
liability because they improperly estimated their income. We
recommend the IRS and HHS develop consistent processes for
income verification and eligibility. Requiring individuals to
provide tax return information is the most reliable, consistent
way to provide this verification.
The second area I wish to highlight is the need for
finalizing regulations and educating the greater tax community.
There are many key provisions that still need to be finalized
in order to implement by January 1, 2014. As a franchisor, H&R
Block is concerned about the impact and timing of new
regulations on small businessowners. For example, small
businessowners will need at least 4 months to plan and to
determine if they will participate in a small business health
options program where enrollment begins in October 2013. We
recommend that, given the time required to publish regulations,
the IRS should ensure all ACA regulations are proposed by April
30, 2013.
To be successful, the IRS and HHS must also provide
individuals with timely education and guidance. This may be one
of the most challenging tasks the IRS will face in 2013. We
recommend the IRS leverage the tax preparation community
through the Return Preparer Initiative to amplify taxpayer
outreach and education efforts. To do so, the IRS and its
testing vendor need to ensure they have sufficient testing
capacity across the country to meet the December 2013 deadline;
however, the IRS has ongoing operational challenges which will
be magnified by the difficulties of implementing of ACA.
Therefore, a third and final area of importance is ensuring
readiness for the 2013 tax season.
In the 2012 tax season, millions in refunds were delayed in
the early season due to fraud system programming errors and
transmission problems with the Modernized e-File System,
coupled with a decrease in IRS toll-free phone services in
2012. Taxpayers dealt with increased hold times and a decreased
level of service. The IRS must complete the full transition to
the Modernized e-File System, continue to improve fraud
controls, respond to late tax legislation, and successfully
implement the Return Preparer Initiative, all while handling
the effects of a late start to the e-filing system currently
set for January 22nd. This means that many early season, low-
income filers will not receive their much needed refunds until
well into February.
We recommend that the IRS begin accepting and processing e-
filed returns no later than January 15, 2013. Additionally, the
IRS should maintain legacy as a contingency and provide the
framework they intend to use to determine if it will be
deployed. More importantly, the IRS should promptly notify the
tax preparation community and taxpayers of problems with
processing returns.
In conclusion, the IRS and HHS together have a daunting
task ahead and the IRS should use the upcoming tax season to
improve several key areas of tax administration in order to be
better positioned to fully implement ACA. H&R Block looks
forward to continue to working with the IRS in these and many
other areas.
Chairman Boustany, thank you once again for organizing
today's hearing and for the opportunity to testify.
[The prepared statement of Ms. Pickering follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman BOUSTANY. Thank you, Ms. Pickering.
We are now--the Committee is now going to recess for the
commemoration of 9/11. I appreciate the panel's patience with
us. We will promptly reconvene at around--right about 11:30 at
the conclusion of that commemoration and we will proceed from
there.
So we thank you. Committee stands in recess.
[Recess.]
Chairman BOUSTANY. We would like to reconvene the hearing.
I would ask the panelists to please take their seats.
The Subcommittee thanks you all for your patience with this
delay we have had and--but, anyway, we will continue onward.
And Mr. Hodge, you are recognized for 5 minutes for your
oral statement.
STATEMENT OF SCOTT A. HODGE, PRESIDENT; THE TAX FOUNDATION
Mr. HODGE. Thank you, Mr. Chairman and Mr. Lewis and
Members of the Committee. I really do appreciate the
opportunity to talk about this important topic.
I am sure you all agree that the ideal tax system should do
only one thing and that is raise a sufficient amount of
revenues to fund the government activities with the least
amount of harm to the economy, but by all accounts, the U.S.
Tax Code is far from that ideal. Our current tax system is a
byzantine monstrosity that spans 70,000 pages, costs taxpayers
more than $160 billion a year to comply with, and now dictates
virtually every aspect of our lives, and even before the ACA
grafted more than 40 new provisions to the Tax Code, the
relentless growth of credits and deductions over the past 20
years has made the IRS a super agency, engaged in policies as
unrelated as delivering welfare benefits to subsidizing energy-
efficient refrigerators.
Although the IRS's annual budget may be relatively small,
it is essentially controlling vastly more budgetary resources
than any cabinet level agency. The more than 170 different tax
expenditure programs in the Tax Code have a total budgetary
cost of over $1 trillion and these myriad tax provisions were
enacted to achieve all manner of social and economic
objectives, but the most troubling development in recent years
is that the expanded use of these tax credits to deliver social
policy has knocked millions of people off the tax rolls and
turned the IRS into an extension of the welfare state, a role
that it has not managed very well, and today there are a record
number of Americans, 56 million in all, 41 percent of all
filers now pay no individual income taxes because of the
generous credits and deductions, and worse yet, the IRS now
gives out more than $100 billion in refundable credits to
people who have no income tax liability.
In 2010, the budgetary costs of both refundable and
nonrefundable tax credits exceeded $224 billion, and to put
this in perspective, if tax credits were combined into a single
program, they would be the fourth largest domestic program
behind Social Security, Medicare, and Medicaid, and the ACA's
generous tax credits and cost sharing programs will no doubt
increase the number of non-payers and increase the IRS's role
as a deliverer of social benefits and the IRS has a dismal
record of managing these tax credit programs. So we should
expect the ACA to lead to billions of dollars in fraud, abuse,
and erroneous payments.
The Treasury's own IG for tax administration has testified
here that refundable credits are a magnet for unscrupulous
individuals who file erroneous claims for these credits and the
IRS' failure to rein in the sizable amount of fraud and
improper payments in programs such as the EITC and the Hope
Credit should give us great concern about the ability of the
IRS to skillfully manage the ACA, and the IRS stumbled out of
the gate in implementing some of the earliest and perhaps the
simplest provisions of the ACA, such as the Small Business
Healthcare Credit and the indoor tanning tax.
Many businessowners said that the benefits of the Small
Business Health Insurance Credit was not worth the effort and
you can't blame them considering that calculating the credit
takes multiple steps and seven different worksheets, and the
IRS also had difficulty simply identifying the number of
businesses who are supposed to pay the tanning excise tax.
In many areas, the ACA makes the IRS an extension of the
Department of Health and Human Services. The Premium Assistance
Credit is a case in point where HHS has the authority to make
the rules while the IRS and Treasury are responsible for doing
the paperwork, policing the system, cutting the checks, and
fixing any problems that may arise.
Now, imagine if the Supplemental Nutrition Assistance
Program were run in the same fashion where eligibility for SNAP
benefits was determined by USDA, but the IRS was responsible
for verifying the incomes of recipients and either giving a
food tax credit directly to taxpayers or sending checks to
grocery stores on their behalf. Does anyone think that that
would make for an efficient and user-friendly system?
The added compliance costs of the ACA will fall
disproportionately on small businesses and the poor. Already
about 73 percent of those people claiming their income tax
credit pay a professional preparer to complete their tax return
and no doubt that number will arise because of the ACA. The
irony is that many taxpayers, low-income taxpayers, will have
to ask themselves how much they can afford to pay a
professional tax preparer in order to claim a tax credit that
is intended to pay for health insurance that they currently
cannot afford.
In conclusion, Mr. Chairman, it is hard to believe that
anything can make the Tax Code look simple and understandable,
but the Affordable Care Act does just that. The solution is not
to give the IRS more money, resources or staff. The solution is
to reform the Tax Code and eliminate the most burdensome and
distortionary tax preferences and return the IRS to its core
mission of simply collecting the necessary revenues to fund
government programs.
Thank you very much for this opportunity. I welcome any
questions that you may have.
[The prepared statement of Mr. Hodge follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman BOUSTANY. Thank you, Mr. Hodge.
Mr. Perretta, you may proceed with 5 minutes.
STATEMENT OF SETH PERRETTA, PARTNER; CROWELL & MORING, LLP
Mr. PERRETTA. Thank you, Mr. Chairman and Members of the
Subcommittee. I am Seth Perretta, a partner at Crowell and
Moring, where I lead the firm's employee benefits practice. I
am here today on behalf of the American Benefits Council for
whom I serve as outside health tax counsel.
The Council's Members are principally major national
employers, as well as health insurers and employee benefit
advisors. Collectively, the Council's Members either sponsor
directly or provide services to health and retirement plans
covering more than 100 million Americans.
I would like to briefly address three points today. The
first concerns the job that the Treasury Department and the IRS
have done in helping employers and others comply with the
Affordable Care Act, the second is to refer to a few examples
of how the agencies have resolved the challenges faced by
employer sponsors of health plans, and the third is to mention
some of the important decisions yet to be made.
First, whether one believes the Affordable Care Act
represents good policy or bad policy, everyone ought to agree
on two points. Namely, the Act is a large and complex statute
involving many new responsibilities for employers and other
stakeholders, and given that reality, the Treasury Department
and IRS have overall done a very commendable job helping
employers and others understand and comply with the law's
requirements.
As referenced in my written testimony, the Council and the
employer community as a whole have not always agreed with the
interpretations that the agencies have made regarding certain
provisions of the Act. For example, the agencies'
interpretation of what constitutes a grandfathered plan is an
example, but it has been our experience that the agencies have
generally sought to give employers flexibility in implementing
the law and I can say without reservation that the agencies
have been very accessible during this process to us, not only
welcoming input from us, but also actively seeking out our
views on how to make the law more administratable.
Since March of 2010, the American Benefits Council has
hosted 14 webinars for our members on different aspects of the
Affordable Care Act. Collectively, thousands of employee
benefits professionals nationwide have participated. IRS or
Treasury officials have directly presented at a great many of
these programs and have been a very valuable technical resource
for all of them.
In the same vein, I just completed my term as chairman of
the Employee Benefits Committee of the DC Bar where we hosted
seven programs ourselves related to the ACA for the benefit of
legal practitioners across the city. Again, the agencies'
officials actively participated in these programs upon request.
These sessions and other formal and informal communications
have allowed the regulators to answer numerous questions from
employers as well as benefit practitioners. Of equal
importance, the agencies have used these opportunities to
better understand the design and operation of employer
sponsored health plans so they could address the true diversity
of plan offerings that exist and develop rules regarding
implementation.
Second, time does not permit a lengthy discussion of
specific regulatory projects, but my written testimony
addresses some in greater detail, and of course I will be
pleased to answer any questions you may have about them.
The first concerns the requirement for employers to include
the value of employer healthcare on an employee's form W-2
starting for the 2011 tax year. Employers had many questions
and concerns about this new requirement, including whether
particular coverage was to be included on the form, and if so,
how do actually value that coverage. In answering these
questions, the IRS incorporated many employer suggestions and
in fact gave employers a much needed one-year reprieve in
complying with the new requirement.
Another example concern to the law is the so called pay-or-
play provision and the challenge of defining what constitutes
full-time employment and whether coverage is deemed affordable.
This is relevant both from employer penalties as well as for
purposes of the premium tax credit. The IRS has crafted safe
harbors that will make these determinations simpler for plan
sponsors.
A third example relates to the way in which IRS allows
employers to treat multiple plan offerings for purposes of
determining their financial obligation to pay one of the new
fees prescribed by the law. I believe one of you mentioned the
medical device tax. Well, this is--there is another fee called
the PCORI fee and the IRS issues favorable guidance from the
employer perspective that makes it easier to comply.
Again, with respect to all three examples, it goes without
saying that many companies may not like the underlying
requirements, but IRS action has made compliance with these
provisions more straightforward and flexible to accommodate a
variety of plan structures.
The third and final point I want to emphasize concerns the
future. In the coming months, employers will need clear and
easy to follow guidance in order to fulfill a number of
reporting and disclosure obligations, including just 6 months
from now a March 2013 notice related to state insurance
exchanges. The IRS also needs to more fully explain how
employers are to determine whether the plans they offer provide
minimum value for purposes of the Act's pay-or-play provision.
And likewise, employers who sponsor wellness programs to
improve the health of their employees and control healthcare
costs need to know how wellness incentives will be taken into
account for determining whether an employer-sponsored plan is
deemed affordable.
With respect to these and other regulatory projects yet to
be developed, we urge the IRS to continue to be receptive to
input from employers in the same fashion that it has sought to
do so from day one of the Act.
Thank you for allowing me to testify this morning. I would
be pleased to answer any questions.
[The prepared statement of Mr. Perretta follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman BOUSTANY. Thank you, Mr. Perretta. We will begin
questioning.
Our tax laws provide financial and behavioral incentives to
actors across our entire economy, some intended, others not.
Mr. Goldberg, in your experience both as a government
official in multiple capacities and a tax practitioner, I think
you probably have a deeper understanding than most of us about
how that all plays out. Can you describe in greater detail some
of the unintended consequences the new law might provide?
For example, might it provide incentives for employers to
dump low-income employees into an insurance exchange or shift
workers to part-time employment?
On the individual's side, does it incentive healthy
individuals to forgo buying health insurance until they are
sick or injured?
Could you comment on some of the unintended consequences
that might ensure?
Mr. GOLDBERG. Sure, Mr. Chairman.
My experience tells me that the American people are
extraordinarily responsive to incentives created by the Tax
Code. They are aided in this process by a massive
infrastructure of advisors. For the most part, I think this is
healthy. This is part of who we are.
The way the Affordable Care Act is currently structured, I
believe that employers will have significant incentives to
discontinue group coverage and split their savings with
employees. I believe that is going to happen. I believe that
the current tax penalty structure for failure to purchase
insurance on an exchange clearly provides a young, healthy
individual to not purchase the policy until he or she is in
need of insurance. So this is going to happen and it is going
to happen for sure.
You can change it. You have decades of collective
experience in structuring incentives. If you structure the
incentives properly, you will change the behavior.
Chairman BOUSTANY. Others want to comment on this, on
unintended consequences?
Mr. HODGE. Yes, Mr. Chairman.
If you are looking to reduce the cost of healthcare, this
is not the way to do it, and for instance, two taxes in
particular, one is the medical device tax, which the ultimate
payer of that tax will be insurance companies of the first
order, ultimately consumers, but that will cascade down to
consumers eventually. In addition to that, there is the fee
that is being placed on insurance companies. That will also
cascade down to the payers, the companies, businesses, and
individuals.
Chairman BOUSTANY. In higher premiums then?
Mr. HODGE. In higher premiums. So these will actually jack
up the cost of premiums in insurance. So if the intended goal
is to reduce that, this is going to have a contrary effect.
Chairman BOUSTANY. Thank you.
Others want to comment on this?
Mr. Hodge, you made a comment in your statement and it is
also in your written statement about the tax credits that we
have thrown throughout our entire Tax Code and the sheer
complexity of this and you made a statement and I want to make
sure I have this correct. It constitutes the--it would
constitute the fourth largest social welfare program.
Mr. HODGE. That's correct, Mr. Chairman.
If you add up to the total cost in both the refundable and
nonrefundable costs of all of the tax credits that are
currently administered, it would be the fourth largest domestic
program in the budget. They currently total $224 billion and
that would make them fourth only to Social Security, Medicare,
and Medicaid.
Chairman BOUSTANY. And so now we are going in a direction--
with ACA we are going in a direction of more complexity in the
Tax Code rather than the stated goals of trying to get to a
simplified Tax Code with lower rates?
Mr. HODGE. Well, we have certainly turned the IRS now into
a full-blown governmental agency managing vast numbers of
programs in a way that it was simply not intended to do.
Chairman BOUSTANY. Thank you.
And I would like to hear from the panel on how the new
responsibilities from the healthcare law might affect the tax
gap. I think when I read through testimony, this was raised,
and Mr. Goldberg, I know you mentioned a threat of an increased
tax gap in your written testimony. Could you expand on that?
Mr. GOLDBERG. Yes, Mr. Chairman.
Again, I have a simple story. This is a tax. Treat it like
a tax. The current penalties for noncompliance, and I am
talking principally about on the credit side, there is no
interest, there are no penalties. The IRS is not going to
engage in its customary enforcement efforts. This is an ugly
story. It is not happy, but it is true, and if you give--if you
simply let the IRS do its job the way it does elsewhere, you
will mitigate significantly these compliance problems.
It is not a perfect marriage, but it has been around a long
time and despite what others say, I believe the IRS and
taxpayers pretty much have worked it out pretty well and if you
are going to go down this road, let taxpayers do their job, let
the IRS do its job, and I believe it will significantly
minimize noncompliance, but as currently structured, it is
going to be a mess.
Chairman BOUSTANY. So we will see a widening of the tax
gap?
Mr. GOLDBERG. Yes, sir.
Chairman BOUSTANY. And the revenue generated from these
taxes in ACA are basically a significant part of the funding of
the new program, the coverage expansion; is that correct?
So we are going to see a widening tax gap, but also
significant underfunding of the proposed program; is that a
fair statement?
Mr. GOLDBERG. I believe it is, Mr. Chairman. I think your
Committee historically has done an admirable job bipartisan
supporting adequate funding for the IRS. They are charged with
immense responsibility and they should be funded properly to
discharge it.
Chairman BOUSTANY. Thank you.
Others want to comment on the tax gap issue? No.
Thank you. That's all I have.
Mr. Lewis?
Mr. LEWIS. Thank you, Mr. Chairman.
I want to thank each one of you for being here today,
taking the time and being so patient.
Mr. Perretta has reached out to the IRS on issues related
to health reform, to the health reform law, and what have been
your experience in term of the IRS responding?
Mr. PERRETTA. I speak with folks at the IRS and Treasury on
issues both on behalf of the American Benefits Council and on
behalf of my issuer and employer clients on a very frequent
basis. I would say I speak with them probably on a biweekly or
certainly once a month on issues of emerging importance in
terms of figuring out how to comply with these rules and I can
say that the response has always been fantastic.
The IRS and Treasury, I really think, in many respects as a
Federal agency are a model for making themselves available to
help comply with their rules. They always make themselves
available to provide both explanations on an informal basis to
individual practitioners, but also to larger groups.
As I mentioned, as chairman of the DC Bar Employee Benefits
Committee, we hosted several programs and several--seven or
eight programs since 2010 on the ACA and you call around town
and you try to get people from the agencies to come speak to
practitioners who are trying to understand these rules and help
employers understand these rules, and I can say without a
doubt, the IRS and Treasury have always been the most
responsive of the agencies I have dealt with in making
available people to help have those conversations.
Mr. LEWIS. What type of help/assistance do employers need
from the IRS that hasn't been issued yet?
Mr. PERRETTA. There are sort of, I think, three really,
really big issues. One is minimum value in order to determine
whether or not an employer is providing coverage that will
qualify as minimum essential coverage under the pay-or-play, so
essentially how an employer decides whether or not they are
complying with the obligation to provide qualifying coverage.
The coverage must provide minimum value, and right now, we have
a proposed sort of concept as to how minimum value will be
determined, which we are very thankful for and very happy with,
but I think further contours on that rule would be helpful so
employers can understand their obligation.
Wellness incentives, employers are using wellness programs
to a greater extent to help both reduce the healthcare trends
and also to make sure their employees are healthy and wellness
incentives were codified--sorry, were addressed in regulation
by HIPAA almost 20 years ago and it was codified by Congress in
the ACA, and employers just want to make sure that as we move
forward with wellness programs, that they are supported as a
way for employers to continue to encourage their employees to
become healthier.
I think those would be two of the more significant.
Mr. LEWIS. Thank you very much.
Mr. Hodge, I am somewhat curious and maybe I just want to
know. You seem to be saying by the IRS helping to carry out the
mandate of the Affordable Care Act, that it is helping to
expand the welfare state and I want to be sure that we are
reading from the same page.
Could you just tell me what is the welfare state?
Mr. HODGE. I would include all of the means-tested type
safety net programs in addition to all--many entitlement
programs that are generally administered through HHS and so
forth, and the IRS has now become an integral part of many of
those welfare type programs, broadly stated, and so, yes, it is
an integral part of the welfare state in providing basic
assistance to people through things like the Earned Income Tax
Credit and other sorts of refundable credits.
Mr. LEWIS. And do you think that is a good thing or----
Mr. HODGE. I think it is a very bad thing actually. I do
not think it is a role for the IRS to play in that. I think for
the IRS to be handing out now over $100 billion worth of
refundable credits is a very bad trend.
Mr. LEWIS. Well, who should play that role? What agency of
the government should play that role? It is a necessary role
for someone to play. Who should play that role?
Mr. HODGE. Well, it is already being played in other areas
of the government. For instance, HHS is providing that role
through its assistance programs and now we have it duplicated
through the Tax Code and I think that we ought to have agencies
that specialize in it keep to their core missions.
Mr. LEWIS. Would other Members of the panel like to
respond?
Mr. Goldberg.
Mr. GOLDBERG. Mr. Lewis, I--my first presidential
appointment was from Ronald Reagan. My second presidential
appointment and third were from the first President George
Bush. Each of those presidents supported increases in the
Earned Income Tax Credit. The intellectual birth of the Earned
Income Tax Credit is Milton Friedman.
The IRS is the most efficient delivery of these kinds of
incentives in the world. It doesn't regulate. It doesn't
dictate behavior. It simply administers a pricing system. One
would think that conservatives are particularly enamored, as am
I, of pricing systems. The code is about our values. It is
about homeownership. It is about education. It is about thrift.
It is about education. It is about health. And abstract notions
to get rid of all of that, I believe, are stillborn.
So I think the IRS is doing a terrific job. It is a job
that was charged with by each of my bosses, President Reagan
and President Bush, and I think they do it very well.
Thank you very much.
Mr. LEWIS. Thank you, Mr. Goldberg.
Madam Chair, I yield back.
Mrs. BLACK. Thank you, Mr. Lewis.
And now, Ms. Jenkins, you are recognized for 5 minutes.
Ms. JENKINS. Thank you, Madam Chair. Thank you all for
being here.
Ms. Pickering, in your testimony you noted that the vastly
different missions of the Department of Health and Human
Services and the Internal Revenue Service has the potential to
create taxpayer confusion and unexpected debt, tax debts, as a
result of overpayments of subsidies. For example, according to
HHS regs, a taxpayer does not have to file a tax return to
substantiate their income level; however, the IRS will require
a tax return to reconcile the advanced premium tax credit.
Can you just elaborate on the consequences of having two
different standards and what recommendations would you have to
ensure that taxpayers do not receive an unpleasant surprise
because they improperly estimated their income?
Ms. PICKERING. Thanks for that question.
We certainly, on the frontline as we are serving our
clients, see from a very real and practical experience the
challenges that individuals have in navigating the complex tax
laws. What we are particularly concerned about with regards to,
you know, the HHS having much looser documentation requirements
for establishing income and eligibility, the HHS in their
mission is motivated and incented to help everyone gain health
coverage and the IRS is incented to collect taxes and reconcile
that premium, and so for that, we are afraid that with
different standards and different confusing information, and
certainly as this is a new regulation being rolled out, we will
see that there are many taxpayers that have not recently or
ever been required to file their taxes will now have to enter
into the tax system to file their taxes to reconcile that
premium and that is going to cause some frustration, some
surprises, and put people into a situation where they have a
tax liability through no fault of their own, certainly not
through, you know, bad intentions. They just didn't understand
the regulations, estimated things incorrectly, and now find
themselves owing money.
Ms. JENKINS. Okay. Thank you. That helps.
From my understanding, current law requires that if a
taxpayer's circumstances change during the year, whether it is
due to good news, like a new job or a raise, or because they
lost their job, the taxpayer's responsible for updating their
information with the exchange, potentially resulting in a large
overpayment or underpayment if not timely reported. The
taxpayer advocate has warned taxpayers who do 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.
Maybe, Mr. Goldberg, each of you could comment and describe
how this requirement to provide notice and the IRS
reconciliation process works from this perspective of just
everyday taxpayers.
Mr. GOLDBERG. Sure, Ms. Jenkins.
Let me comment very briefly on your prior question.
Ms. JENKINS. Sure.
Mr. GOLDBERG. I believe that the issue of forcing people to
file tax returns may be less than is generally estimated.
Because of the way the Affordable Care Act is structured, I
believe virtually all of--a very, very large percentage of
those folks will receive health coverage through Medicaid
rather than on the exchanges. There will be some exceptions and
it is going to be a problem.
Stepping back, I think that we have decided to run this
through the exchanges. I believe, frankly, that was a political
decision because people didn't want to call it a tax. That
creates a wholly unnecessary intermediary dealing with all of
the information you are talking about. They don't know how to
do it. Mrs. Black, as you alluded to, it raises serious
confidentiality and privacy--and it is just not necessary. The
H&R Blocks of the world, the advisors of the world, the
churches, the nonexempt or tax-exempt organizations, the IRS, I
believe will do a credible job of educating employees and
purchasers on the exchanges generally how the rules work.
If you simply let the family go in and say, ``Gee, I got a
raise, I want to change my premium,'' which families are
perfectly capable of doing, it will work fine. If you say,
``You have to fill out three forms and talk with four different
government employees, getting passed from phone to phone before
you can make the change,'' they are just not going to do it.
So my recommendation is you trust the individuals and
families to make that decision working with advisors, working
with providers, and you will significantly reduce that problem
and I believe the IRS, properly instructed by this Committee,
will be reasonable in dealing with the transition, but as it is
structured, it is just a bureaucratic mess.
Ms. JENKINS. Okay. Fair enough.
Madam Chair, I yield back.
Mrs. BLACK. Thank you, Ms. Jenkins.
And Mr. Becerra, you are recognized for 5 minutes.
Mr. BECERRA. Thank you, Madam Chair, and thank you all for
your testimony. By the way, thanks for being patient with us as
we went out to commemorate 9/11.
You know, I would agree with anyone who is willing to say
that any time you do something big, especially in a big place
like America, it is going to take a little time to adjust.
And, Mr. Goldberg, can I just say to you thank you for your
constructive comments. We could be critical or critique, but at
the same time, what we are hoping to do is have a functional
government, and I appreciate where you point out where IRS can
do better and where it is doing the best it can and I agree
with you. There aren't too many governments in the world that
can say they have as efficient a system as we do. We still have
to figure out how we collect on that tax gap that we got, but I
got to believe that men and women who work in the IRS, who
oftentimes get a lot of heartburn for what they do, are trying
to do the best job they can, especially the folks that are out
there trying to do the enforcement, you know, trying to find
the folks who are trying to evade paying their fair share of
taxes.
So I am going to be the last one that is going to sound
like Scrooge and say that as we try to expand healthcare to 33
million Americans who had a heck of a time trying to afford it,
that we should try to go backward because the reality is it is
not just about trying to help 33 million Americans and their
families to get health insurance, quality, affordable health
insurance for the first time. Actually, a lot more is at stake.
There are over 100 million Americans who, beginning 2014, will
never have to worry about a preexisting condition again. They
all have the security of knowing that they are going to keep
their insurance, and as we try to administer this program,
whether through the IRS or HHS, who cares, we are trying to do
something to help folks.
At the end of the day, as Mr. Goldberg, I think you said,
it is trying to make sure that government works for people,
whether it is the IRS or any other agency, and my sense is that
if we all work together, we can make this happen.
Mr. Hodge, I am concerned when I hear people say that the
IRS is taking on way too many things. It should go back to
its--I think you said something to the effect of it should go
back to its core responsibilities. I don't disagree with that
except that the IRS helps people save money. Should the IRS
stop providing assistance through these provisions that help
people save money by encouraging them to do so and getting a
tax break by doing so? Should the IRS not do that?
Mr. HODGE. There are certain elements of the Tax Code that
should be in place. We should not be taxing savings. So I don't
consider that a ``tax break.'' It should----
Mr. BECERRA. But we do tax it. We do tax benefits/gains
that are made, people's income, and what we do is we give
people a chance to not have all their income taxed if they save
some of it.
So should we not provide folks with that type of a tax
credit or a tax deduction through the code?
Mr. HODGE. We have gone way beyond that into----
Mr. BECERRA. No, I know we have. I agree with that, but----
Mr. HODGE.--now giving credits for replacing the windows of
their home and buying an electric car and putting their kids in
daycare and so forth, and so----
Mr. BECERRA. Right. So should we return to, as you say, the
core mission of simply collecting the necessary amount of tax
revenues the government?
Mr. HODGE. That is right.
Mr. BECERRA. Okay. So then we shouldn't provide--encourage
people, through a tax credit or a tax deduction, encourage them
to save more money? We shouldn't encourage them through the
homeowner's mortgage interest deduction, an incentive to
purchase a home. We shouldn't provide them with a tax credit to
save money to prepare to send their kids to college.
Those are not core missions of the IRS, and from what I
gather from your testimony, we are simply pure and have the IRS
collect the revenues that the government needs. There are a
whole bunch of Americans who would have a tougher time buying a
home, saving for their kids' college education or even saving
for their own retirement, and I understand what you are saying.
The further away you get from your core responsibility, the
more chance that there is mischief or a mistake, but I got to
believe that only Scrooge would say don't try to package that
present for that little child on Christmas Day.
There are things that we try to do to make life better.
Don't always get them right, but, as I think Mr. Goldberg was
just saying, if we try to focus on doing it right, then there
is a good chance that we are going to be helping a lot of
Americans and in a bill that has become law, historic
legislation, that now will extend protections against
discrimination on preexisting condition in healthcare to 150
million Americans or so, to extend coverage to 33 million
American families now. I hope that what we do is just work
together, figure out how we can help the IRS make sure it
doesn't make mistakes and does it right so that when Christmas
comes, everyone gets what they deserve.
With that, Madam Chair, I will yield back the balance of my
time.
Mrs. BLACK. Thank you, Mr. Becerra.
And Mr. Marchant, you are recognized for 5 minutes.
Mr. MARCHANT. Thank you, Madam Chair.
When I held my town hall meetings this last break, Bedford,
Texas comes to mind, the crowds pretty consistently stood and
delivered one message. Please simplify the Tax Code. Please
make it to where the IRS does not have as much involvement in
our lives. Pretty simple message from my constituents.
When I got the briefing paper for this hearing today, which
was a very good briefing paper, I was taken aback by the exact
opposite. When the Affordable Healthcare Act comes into effect,
the IRS is going to be even more involved in our lives. The IRS
is going to be a bigger part of everybody's tax return, and in
fact, in my opinion, people that have been doing their own
taxes may now have to consult with someone and pay someone to
help, and in my mind, we are going exactly the opposite
direction.
Yes, 33 million people theoretically will become--have
access to healthcare, but 300 million people are possibly
impacted by the process that we have put in place to bring
about that change.
Mr. Hodge, Deputy Commissioner Miller suggested that the
process of taxpayers updating government officials about the
details, the intimate details, of their personal and family
lives had really nothing to do with the IRS. It was just going
to be a simple calculation, a simple you fill out your return
and based on what you put on the return, that was going to be
the extent of the IRS's involvement. Do you have anything to
say about that?
Mr. HODGE. Well, it looks very clear, as I understand the
legislation, and especially from what Mr. Goldberg and Ms.
Pickering has said, the IRS will be immediately and very--and
intimately involved in that, and if I read the briefing from
the Joint Committee on Taxation summary of the ACA, it says
very clearly that any adjustment to tax resulting from the
difference between the advanced premium assistance and the
allowable refundable tax credit would be assessed as an
additional tax or a reduction in tax on the tax return. In many
aspects, this will be like the Alternative Minimum Tax where it
is sort of an accidental thing that people fall into when they
actually fill out their tax return. It is very difficult for
them to adjust their withholding in such a manner as to
anticipate this situation. So they are going to be caught in
this bureaucratic quagmire between HHS and the exchanges, which
could make a mistake, and their own changes and their own
situation, and then the IRS that has to rectify these.
It is--I feel sorry for folks that are going to get caught
up in this and they will end up on April 15th realizing a tax
burden that they may not have seen coming and that is pretty
frightening.
Mr. MARCHANT. Mr. Goldberg, do you see--you made the
comment earlier that business and individuals are very
responsive to the Tax Code and they will sit down, they will
figure it out. Do you see the opportunities for additional tax
avoidance in the way these forms are filled out or do you see
people's behavior being altered? Do you see them sitting down
with their accountant saying, ``Okay, we may have filed this
way before, but because of the new rules, we are going to
decide to file this way?'' And, in fact, the Alternative
Minimum Tax is an excellent example from my district because
that's the number one thing in the Tax Code that catches my
constituents.
Will it alter the behavior of taxpayers?
Mr. GOLDBERG. Yes, sir, I believe that it is a certainty.
For example, if you have a young kid off on his or her own who
is healthy, someone, I guarantee you, will tell her, ``You can
either pay $400 to the IRS or you can pay $3,000 to the
exchange or you can wait and when you get sick, you can buy an
insurance policy because there is no preexisting conditions. So
you can save 2,600 bucks a year till you get sick.'' That is
going to happen for sure.
So, yes, of course, and I think that is just human nature.
That is--I mean you see nothing but human nature if you are
running the IRS, better and worse.
The important point I think that Congress needs to keep in
mind is if you say you want to maintain private markets for
health insurance and if you say I want to subsidize the cost of
insurance for those who have difficulty paying, you have just
said I want some form of phased-out credit. That is what you
have just said, otherwise you can give everybody $25,000 and
tell everybody to go buy insurance and tax it at the back end.
That would actually work, but otherwise, you are stuck with
this question.
I personally think the structure of the Ryan proposal,
setting aside the numbers, in many ways is a terrific
structure. It was first supported by President Clinton, but it
has the same question. How are you going to get progressive,
subsidized subsidies from the government to buy health
insurance? See, you got the same question any way you go. You
got the same issues, and I believe the choice is very simple.
For all of its problems, you either let the IRS administer
those kinds of progressive credits or you get somebody else to
do it, and I think it is a more prudent choice to let the IRS
do it, but you can't avoid the choice. You go to single-payer,
you avoid the choice, but otherwise, I think you are stuck with
it.
You are absolutely right about the behavior. The Tax Code
today is grotesque. It is repulsive. It is so unneedlessly
complex (sic). In terms of issues, your colleague across the
capitol, Senator Coburn, is a profile in courage for calling
out some of the needless subsidies provided by the Tax Code.
You guys could do a terrific job to strip it down. Healthcare,
progressive subsidies, phased-out credit, you are stuck where
you are, whether it is Congressman Ryan or whether it is the
Affordable Care Act. That's what I----
Mrs. BLACK. And thank you, Mr. Goldberg. The time is
expired. Thank you, Mr. Marchant.
And I think, barring anyone else walking in the door, it
looks like we are at the end, and I just want to go back to a
question that I asked to the previous panel, Mr. Miller,
related to the amount of information that is going to be in so
many different places having to do with the taxpayer's personal
information so much more than we have ever known before and
that is a real concern for me.
I mean obviously right now the IRS does share some of this
data with Child Support, some with Medicaid, and maybe some
other cases of revenue collection, but now we are going to see
it much broader. We are going to see it where the exchange
employees with vast amounts of information that they haven't
previously been privy to, and I want to know from your
perspective, each of you, if you have the same concern that I
have, especially given the fact, as I said in the previous
panel, that what we have seen in this Committee, as we have had
the IRS hearings, that we know that there is fraud out there.
There are people who have gotten refunds that didn't belong to
them, and are--do you have a concern about where we are going
with this?
Mr. Goldberg, I want to start out with you and if we can
just go down the panel, that would be great.
Mr. GOLDBERG. Yes, I share the concern. It is one of the
greatest concerns about the Affordable Care Act. The easiest
solution is to take the exchanges out of that business.
Mrs. BLACK. Thank you.
Ms. PICKERING. Yes, I share that concern as well. We know
that the IRS works very hard to protect taxpayer information.
In working with HHS and the exchanges now, there is going to be
a broader exchange of information, and while I believe everyone
works to the--you know, to the best of their ability with the
best intentions, there is just so much more opportunity and the
fraudsters and the criminals are getting so much more clever in
their ability to propagate these fraud schemes. So I think
there is exposure and vulnerability.
Mrs. BLACK. Thank you.
Mr. Hodge.
Mr. HODGE. Yeah, I too share that and I am sure every
taxpayer fears their information getting out. They do so when
they fill out a credit card application, a health plan.
Everything is now accessible to these hackers and I would think
everyone would worry that the more you disseminate this kind of
information, personal information, the more vulnerable it is to
that kind of mischief.
Mr. PERRETTA. Thank you. I certainly support the comments
of my fellow panelists here.
I can't help but say a couple things from the perspective
of the Council, which is employers are obviously very focused
on employee privacy and, you know, one of the issues that
employers were concerned about was the issue of having to
figure out whether their health coverage was affordable because
that is relevant to figuring out whether the employer has to
pay a penalty, and most employers don't know what their
employees' household income is and most employees don't want to
tell their employers what the household income is, and
thankfully the IRS listened to the Council and the employer
community and they came up with the Safe Harbor Rule, which
lets employers base affordability on the employee's W-2 wage,
which is something that the employer will know, and so it does
go a little bit to your point, Chairwoman, about the issue of
privacy.
Another issue I do want to touch on while I have your
attention is the issue of notice and disclosure and this goes a
little bit to the issue of flowing of information from parties,
and I think employers, both small and large, are obviously
concerned about the burdens that are going to fall upon them in
terms of having to transmit, collect, store information as part
of their obligations under the ACA and I think as the IRS moves
forward, they have been very thoughtful in reaching out to us
to understand sort of what our concerns are, but that is
obviously an area where working closely with the employer
community would be helpful since the employers will bear a
significant piece of that burden in making sure that
information flows in the right way.
Mrs. BLACK. Thank you.
Ms. Pickering, I have one additional question, one final
question for you, and this goes back to the comment that you
made both here and also in your written testimony about the
concerns as preparers and getting your--the folks that work for
you educated on what they are going to have to be doing as far
as the rules go and I would like for you just to expound a
little bit about how if we don't get those final rules in a
timely manner, how this is really going to affect those who
will be preparing those taxes for folks/the clients that you
will be seeing?
Ms. PICKERING. We have got a number of factors going on
there. The Registered Tax Return Preparer Initiative is a very
important initiative for getting all professional tax preparers
registered with the IRS and up to--you know, up to standard
competency levels. This is something that we have always
supported. We think it is important for the professionalism of
the industry, and in there, there is a continuing education
requirement as well which says that preparers need to stay
current on tax law.
Now, as the ACA is rolling out as well, our clients will be
coming to us looking forward to some additional understanding
at least a minimum what are the tax implications to them with
regards to the healthcare implementation and it is very
important to have timely regulations so that all of that can be
incorporated into the training plans and getting people
prepared.
So the timing of these things is critical and it is, you
know, certainly a daunting task, but one that we look forward
to partnering with the IRS on.
Mrs. BLACK. Well, thank you.
Mr. PERRETTA. Could I just add a follow-up comment?
Mrs. BLACK. Yes.
Mr. PERRETTA. Just to the idea that--going on that point,
employers are often pricing their health insurance coverage 12
to 14 months in advance.
Mrs. BLACK. That is right.
Mr. PERRETTA. And so when you think about having coverage
in effect for 2014, many employers are beginning to fashion
that coverage and make decisions about what that is going to
look like, what their subsidies are going to be, and obviously
playing on that point about the timely information, really the
sooner the regulations can come out, obviously with opportunity
for notice and comment, the better.
Mrs. BLACK. Absolutely, and I know I am also hearing this
from the insurance industry as well. Everybody's waiting for
those final rules and regulations, almost that they need them
yesterday in order to be able to give advice to their clients
or those that are buying the product.
Once again, I want to say thank you to the panel for your
patience today and thank you for all of the good information
that you provided to us.
This hearing is completed.
[Whereupon, at 12:20 p.m., the Subcommittee was adjourned.]
[Submissions for the Record follow:]
Timothy Stoltzfus Jost
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
William G. Schiffbauer
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]