[Senate Hearing 112-759]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 112-759

 
                   TAX FILING SEASON: IMPROVING THE 
                          TAXPAYER EXPERIENCE

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

                                HEARING

                               before the

                          COMMITTEE ON FINANCE
                          UNITED STATES SENATE

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                               __________

                             APRIL 26, 2012

                               __________

                                     
                                     

            Printed for the use of the Committee on Finance



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                          COMMITTEE ON FINANCE

                     MAX BAUCUS, Montana, Chairman

JOHN D. ROCKEFELLER IV, West         ORRIN G. HATCH, Utah
Virginia                             CHUCK GRASSLEY, Iowa
KENT CONRAD, North Dakota            OLYMPIA J. SNOWE, Maine
JEFF BINGAMAN, New Mexico            JON KYL, Arizona
JOHN F. KERRY, Massachusetts         MIKE CRAPO, Idaho
RON WYDEN, Oregon                    PAT ROBERTS, Kansas
CHARLES E. SCHUMER, New York         MICHAEL B. ENZI, Wyoming
DEBBIE STABENOW, Michigan            JOHN CORNYN, Texas
MARIA CANTWELL, Washington           TOM COBURN, Oklahoma
BILL NELSON, Florida                 JOHN THUNE, South Dakota
ROBERT MENENDEZ, New Jersey          RICHARD BURR, North Carolina
THOMAS R. CARPER, Delaware
BENJAMIN L. CARDIN, Maryland

                    Russell Sullivan, Staff Director

               Chris Campbell, Republican Staff Director

                                  (ii)
?



                            C O N T E N T S

                               __________

                           OPENING STATEMENTS

                                                                   Page
Baucus, Hon. Max, a U.S. Senator from Montana, chairman, 
  Committee on Finance...........................................     1
Hatch, Hon. Orrin G., a U.S. Senator from Utah...................    10

                               WITNESSES

White, James, Director, Tax Issues, Government Accountability 
  Office, Washington, DC.........................................     3
Lewis, Troy, Lewis and Associates, CPAs, LLC, Draper, UT.........     4
Tucker, Beth, Deputy Commissioner, Operations Support, Internal 
  Revenue Service, Washington, DC................................     6
Thompson, Teresa, Local Taxpayer Advocate for Montana, Taxpayer 
  Advocate Service, Helena, MT...................................     8

               ALPHABETICAL LISTING AND APPENDIX MATERIAL

Baucus, Hon. Max:
    Opening statement............................................     1
    Prepared statement...........................................    23
Hatch, Hon. Orrin G.:
    Opening statement............................................    10
    Prepared statement...........................................    25
Lewis, Troy:
    Testimony....................................................     4
    Prepared statement...........................................    27
Thompson, Teresa:
    Testimony....................................................     8
    Prepared statement...........................................    39
    Responses to questions from committee members................    50
Tucker, Beth:
    Testimony....................................................     6
    Prepared statement...........................................    51
    Responses to questions from committee members................    60
White, James:
    Testimony....................................................     3
    Prepared statement...........................................    63
    Responses to questions from committee members................    81

                             Communications

H&R Block........................................................    85
Kogod Tax Center.................................................    87
National Community Tax Coalition.................................    98
National Treasury Employees Union (NTEU).........................   100
Texas Society of Certified Public Accountants....................   106

                                 (iii)


                   TAX FILING SEASON: IMPROVING THE 
                          TAXPAYER EXPERIENCE

                              ----------                              


                        THURSDAY, APRIL 26, 2012

                                       U.S. Senate,
                                      Committee on Finance,
                                                    Washington, DC.
    The hearing was convened, pursuant to notice, at 10:09 
a.m., in room SD-215, Dirksen Senate Office Building, Hon. Max 
Baucus (chairman of the committee) presiding.
    Present: Senators Wyden, Cardin, and Hatch.
    Also present: Democratic Staff: Russ Sullivan, Staff 
Director; Neil Pinney, Detailee; Amanda Bartmann, Detailee; 
Andrea Chapman, Detailee; Ann Cammack, Tax Counsel; and David 
Burt, Detailee. Republican Staff: Chris Campbell, Staff 
Director; Mark Prater, Deputy Chief of Staff and Chief Tax 
Counsel; and Jim Lyons, Tax Counsel.

   OPENING STATEMENT OF HON. MAX BAUCUS, A U.S. SENATOR FROM 
            MONTANA, CHAIRMAN, COMMITTEE ON FINANCE

    The Chairman. The committee will come to order.
    Albert Einstein once said, ``The hardest thing in the world 
to understand is the income tax.''
    Last week, taxpayers in Montana and across the country 
filed their annual returns. I am sure many of them had the same 
thought that Einstein expressed. We need to simplify the code. 
Reforming and simplifying the code will make filing taxes 
easier for Americans and reduce uncertainty.
    Today we will look at ways we can improve the taxpayer 
experience and consider how to deal with the 132 provisions 
that frequently expire and create uncertainty. We will look at 
how to effectively use technology to improve communication 
between the taxpayers and the IRS.
    We know the great majority of taxpayers follow the law, and 
more than 80 percent of taxes are paid on time. This voluntary 
compliance shows that most people are doing their part every 
April.
    But improving the taxpayer experience and creating 
certainty can push that rate even higher. More people 
voluntarily complying with our tax laws will reduce the United 
States' annual $450 billion tax gap. Reducing this gap between 
taxes paid and those legally owed helps ensure the burden will 
not be passed on to the law-abiding Americans who do pay their 
taxes.
    However, issues with our current system make this 
difficult. Frequent and last-minute changes to the code and 
complex procedures create uncertainty and confusion. Too many 
Americans can tell you what a nightmare going through an audit 
or appealing a decision with the IRS can be. Taxpayers become 
discouraged when they cannot understand what they owe or why 
they owe it.
    One IRS process that is particularly hard on taxpayers is 
the correspondence audit. This audit is done through letters 
rather than face-to-face meetings. Often these are simple 
audits that could easily be resolved through a short 
conversation, but instead they are drawn out over months or 
even years.
    Taxpayers often cannot reach anyone at the IRS to talk to, 
and, if they ever do, the IRS representative is often 
unfamiliar with their case and none of their submitted 
documents has been considered.
    Correspondence audits are just one glaring example. There 
are others. One is staffing. IRS staffing is a major concern. 
In my hometown of Helena, MT, the Helena IRS walk-in center is 
only open part-time with temporary staff. When people travel 
across a State as large as Montana to reach an IRS official, 
they should be able to receive help during normal business 
hours.
    We cannot forget that filing taxes is one of the most 
direct relationships many Americans have with their government. 
The IRS needs to make compliance easier on taxpayers and needs 
to make the process more simple. IRS must explore innovations 
and new technologies to use resources efficiently. Private 
industry has successfully incorporated technology to make 
things easier. IRS needs to do the same.
    As we consider tax reform, we have an opportunity--indeed, 
an obligation--to improve the taxpayer experience. Through tax 
reform, we can reduce the compliance burden. We can make things 
easier for folks every April.
    So let us reform the code to give taxpayers more certainty 
and more predictability. Let us make it easier for taxpayers to 
work with IRS to resolve issues more quickly and correctly. Let 
us take the right steps to improve the taxpayer experience.
    [The prepared statement of Chairman Baucus appears in the 
appendix.]
    The Chairman. I might say to all those here, I am going to 
have to leave. Senator Cardin will take over and chair this 
hearing. And we are going to be shuffling back and forth a 
little bit. Senator Hatch is going to come a little later. 
There is just a lot going on right now. One for me is the Ag 
conference and looking at a farm bill.
    It is not meant to be disrespectful of all of you 
witnesses. We are still listening, taking testimony, asking 
questions, and doing the very best we can. So please bear with 
us.
    Our first witness is Mr. Jim White, Director of Tax Issues 
at the U.S. Government Accountability Office. Thank you, Mr. 
White.
    Second, Mr. Troy Lewis, vice president at Heritage Bank in 
Saint George, UT and owner of Lewis and Associates, an 
accounting firm in Saint George.
    Next, Beth Tucker, the Deputy Commissioner for Operations 
Support for the Internal Revenue Service. Thank you, Ms. 
Tucker.
    And finally, Ms. Teresa Thompson. Ms. Thompson is the Local 
Taxpayer Advocate for Montana. Thank you very much, Ms. 
Thompson, for coming out here.
    Our customary practice is for witness statements to be 
automatically submitted for the record and each of you to speak 
about 5 minutes.
    We will start with Mr. White. Unfortunately, I have to 
leave and, as I said, Senator Cardin will take over until 
Senator Hatch comes. And we will work it out.
    Thanks very much.
    Why don't you proceed, Mr. White?

  STATEMENT OF JAMES WHITE, DIRECTOR, TAX ISSUES, GOVERNMENT 
             ACCOUNTABILITY OFFICE, WASHINGTON, DC

    Mr. White. Chairman Baucus, Senator Cardin, Ranking Member 
Hatch, and members of the committee, I am pleased to be here to 
discuss improving the taxpayer experience and voluntary 
compliance.
    As you know, the U.S. tax system depends heavily on 
taxpayers calculating their tax liability, filing a return, and 
paying what they owe on time without intervention from the IRS. 
This is often referred to as voluntary compliance.
    Voluntary compliance is influenced by a number of factors, 
including, one, the quality of IRS's assistance, such as its 
telephone help line and website; two, knowledge that IRS's 
enforcement programs are effective and that noncompliance will 
not go undetected; and three, a belief that the tax system is 
fair and enforced on all--that is, that one's friends, 
neighbors and business competitors are paying their fair share.
    In addition, voluntary compliance is affected by third 
parties who assist taxpayers, including paid tax return 
preparers, tax preparation software companies, volunteer tax 
assistance sites run by private organizations, and third 
parties such as employers or banks that provide year-end 
summary information about income or expenses.
    The taxpayer experience also depends on how IRS deals with 
taxpayers who do not voluntarily comply, either intentionally 
or unintentionally.
    I now want to summarize how IRS is doing at providing 
assistance to taxpayers. In a nutshell, IRS's service is not 
what it should be. Taxpayers who want to speak to an IRS 
telephone assistor actually got through at a rate of 68 percent 
so far this year, a drop of 7 points from last year and well 
below the 82 percent rate in 2007. Wait time to speak to an 
assistor this year has averaged 16 minutes. At the same time, 
IRS is falling further behind in processing paper 
correspondence from taxpayers.
    Given the tight budget environment and increasing demands 
being made of IRS, how can the taxpayer experience be improved? 
Innovation has to be part of the answer, including more self-
service tools. The goal here should not be simply to shift 
taxpayers away from expensive live assistance. The goal should 
be to improve service by, for example, making it faster.
    One example is checking the status of amended returns. 
Taxpayers must now wait to talk to a live assistor. Automated 
assistance might be faster.
    IRS is working on an Internet strategy costing hundreds of 
millions of dollars, and we have made several recommendations 
to make it more specific, such as estimating costs and benefits 
and laying out a time frame for implementing the strategy.
    Expanded information reporting. Information reporting can 
make it easier for taxpayers to comply and reduce the need for 
burdensome audits. Two suggestions we made for additional 
information reporting cover payments for services that 
businesses make to incorporated contractors and payments for 
services made by owners of rental real estate.
    Better leveraging third parties. About 90 percent of tax 
returns are now prepared by paid preparers or tax preparation 
software, intermediaries between IRS and taxpayers. Using data 
collected on preparers as part of the new regulatory regime, 
IRS should be able to better identify problem preparers and 
take remedial actions, such as education or enforcement. The 
same point applies to tax software.
    Modernized information systems. IRS has made great strides 
developing its capacity to manage IT acquisition and 
development, but it needs to implement the next two phases of 
CADE 2, its modernized taxpayer account database.
    Pre-refund compliance checks. This is part of the 
Commissioner's vision for the future of IRS. More verification 
before issuing refunds could benefit taxpayers by catching 
errors before interest and penalties accrue. It could also 
reduce the need to resort to expensive and burdensome processes 
for trying to collect money after it has gone out the door.
    Tax code simplification. In addition to the frustration of 
figuring out tax liabilities and the need for complicated 
financial recordkeeping, tax complexity affects taxpayers in 
other ways. A surprising number overpay. Some make bad 
financial decisions. For example, in our work on higher 
education assistance, we found taxpayers selecting the wrong 
program from the perspective of their own finances.
    In addition, the stability of the tax code matters. Changes 
to the tax laws introduce opportunities for new errors by 
taxpayers. We have reported in the past how IRS's telephone 
volume is driven, in part, by taxpayer questions about tax law 
changes.
    In summary, taxpayer service will not be improved by doing 
more of the same. It will require innovation and a variety of 
approaches.
    Mr. Chairman and Ranking Member, that completes my 
statement. I would be happy to answer questions.
    [The prepared statement of Mr. White appears in the 
appendix.]
    Senator Hatch [presiding]. Thank you.
    Let us go to you, Mr. Lewis.

              STATEMENT OF TROY LEWIS, LEWIS AND 
               ASSOCIATES, CPAs, LLC, DRAPER, UT

    Mr. Lewis. Chairman Baucus, Ranking Member Hatch, and 
members of the Senate Finance Committee, I am honored and very 
appreciative of this opportunity to address you on today's 
topic of improving the taxpayer experience.
    My written testimony contains one basic recurring theme. 
The lessons learned from the 2011 filing season suggest that 
there are things that can be done to improve the taxpayer 
experience. With the correct leadership, focus, and effort, the 
taxpayer experience can be improved.
    In my written testimony, I suggest, among other things, 
that the taxpayer experience can be improved by and through, 
one, meaningful tax reform; two, simplification of the existing 
laws; three, the IRS improving the correspondence audit 
process; and four, suspending the 1099-B matching program of 
IRS with respect to reported tax basis for the 2011 tax year.
    One, meaningful tax reform. In the long term, the taxpayer 
experience will be improved by reforming the tax code. Whether 
I am teaching a class or tax planning for a client, I often ask 
myself if the tax code of today really achieves the objectives 
that former President Ronald Reagan laid out back in 1984, the 
last time that the Congress set out to recodify and modify the 
existing tax laws, and that being that the United States tax 
code and system needed to be fair, encourage growth, and be 
simple.
    To be honest, at times, it is hard for me to see each one 
of those elements in our current tax code. Most of these terms 
are relatively defined. This individual relativism makes the 
process of reforming the code painful and spirited.
    In order to make serious progress and reform the code, it 
will take a major undertaking by all parties involved. And let 
me add my voice to the process by saying such effort is worth 
the end result.
    Two, simplification of our existing tax laws. In the short 
term, while Congress studies how to reform the tax system, I 
would suggest that there are progressive steps that can be 
considered to improve the taxpayer experience. Chief among 
those would be to simplify the tax law.
    One of the few ways I suggest this could be accomplished is 
by resolving some of the uncertainty of the tax laws 
attributable to the so-called tax extenders. I cannot with any 
surety tax plan for a client today with respect to the 2012 tax 
year regarding issues such as the purchase of new equipment or 
the ability to generate a research and experimentation credit 
because the laws for these items expired at the end of last 
year. And I cannot predict whether or not those are going to be 
retroactively made effective back to the start of 2012 so that 
there is no lapse in coverage.
    The uncertainty associated with this annual list of 
extenders weakens the taxpayers' confidence. This uncertainty 
also causes inaction on the part of the taxpayer. The law today 
is clear, but the possibility of a potential law change 
tomorrow that would impact behavior already undertaken earlier 
this year is paralyzing.
    Three, correspondent audit process. In my written 
testimony, I discuss the need for improvement in the IRS 
correspondent examination process. As less budget dollars are 
allocated to the office and field audit examination process by 
IRS, the pressure to conduct more audits through the 
correspondence process will increase.
    I suggest in my written testimony steps that should be 
considered to better this program. The program can be refined 
and significantly improved with the proper leadership and 
guidance.
    Four, 1099-B matching suspension. During 2011, the Form 
1099-B reporting was modified such that brokers were required 
for the first time to report to taxpayers the cost basis of 
sold securities of newly acquired assets. In addition, the 
reporting entity was also required for the first time to 
segregate each transaction into categories based upon certain 
criteria.
    It is very possible now that instead of an individual 
reporting all their stock transactions on one Schedule D, 
instead they would have to initially report such transactions 
on six different Form 8949s that would then be summarized into 
one Schedule D, a new process.
    As I provided in my written testimony, during the 2011 tax 
year, CPAs and other tax professionals have reported challenges 
and problems with the information being reported to the 
taxpayers on these Form 1099-Bs. I suggest that the IRS 
consider standardizing the 1099-B form, as well as suspending 
matching of the tax basis amounts for 2011 so that the known 
and yet unknown issues can be resolved without unduly burdening 
taxpayers.
    In conclusion, I am grateful to the committee for holding 
these hearings. I believe improving the taxpayer experience is 
critical to establishing confidence in the tax system and 
administration.
    Again, thank you for the opportunity to provide both 
written and verbal testimony to this committee.
    Chairman Baucus, Ranking Member Hatch, and members of the 
committee, this completes my prepared statement, and I would be 
pleased to respond to any questions that you may have at this 
time.
    [The prepared statement of Mr. Lewis appears in the 
appendix.]
    Senator Hatch. Thank you, Mr. Lewis. We are proud to have 
you here from Utah and appreciate your testimony very much.
    Ms. Tucker, we will turn to you.

        STATEMENT OF BETH TUCKER, DEPUTY COMMISSIONER, 
  OPERATIONS SUPPORT, INTERNAL REVENUE SERVICE, WASHINGTON, DC

    Ms. Tucker. Chairman Baucus, Ranking Member Hatch, and 
members of the committee, thank you for the opportunity to 
testify on the 2012 filing season and the IRS's efforts to 
improve the taxpayer experience.
    We strongly believe that it is important to provide quality 
customer service not only during the filing season, but 
throughout the year and in the post-filing season environment, 
as well. We also recognize that one size does not fit all when 
it comes to serving taxpayers and improving their experience 
with the IRS. We have a highly diverse customer base, and we 
must meet taxpayers' different needs when and where they want 
it, ranging from smart phone apps online to self-service 
applications to traditional service channels.
    Improving the taxpayer experience also means helping 
taxpayers get it right from the start. And with 9 out of 10 
taxpayers using a paid return preparer or commercial software, 
our return preparer program can do just that. By ensuring a 
basic level of competency and rooting out unscrupulous 
preparers, it can help taxpayers avoid potentially costly 
problems down the road.
    Tax software has also become popular because it guides 
taxpayers through the filing process, prompting them to report 
income, reminding them of benefits, and helping them avoid 
errors.
    Mr. Chairman, let me turn to the 2012 filing season, which 
is winding down and going smoothly. As of April 14, 2012, the 
IRS received over 109 million individual returns. We have 
issued more than 86 million refunds for a total of $237 
billion, with the average refund being approximately $2,700, 
about the same as last year.
    Of note, the individual e-file rate continues to trend 
upward this year, a very positive development, while paper 
returns continue to fall. In a challenging budget environment 
like we face at IRS, the cost savings are substantial. It costs 
IRS $0.15 to process an electronic return versus $3.50 for a 
paper return.
    Irs.gov also remains the favorite source of information for 
millions of taxpayers. As of April 14, 2012, there were over 
225 million visits, a 22-percent increase over the same period 
last year.
    We are also offering on irs.gov helpful interactive tax 
tools, such as ``where is my refund,'' the earned income tax 
credit assistant, interactive tax assistant, and the ``Get Free 
Tax Help Act.''
    Under the leadership of Commissioner Shulman, we are 
continually working to improve the services we provide 
taxpayers. One of the most important achievements in this area 
occurred earlier this year. It was largely invisible to 
taxpayers, but will be providing meaningful and tangible 
benefits to them and our tax system for years to come.
    I am speaking of the standup of our new customer account 
data engine, also known as CADE 2, that will allow the IRS to 
go from weekly batch processing to daily processing for the 
first time in 60 years.
    CADE 2 addresses the multitude of issues that historically 
created challenges and problems in the tax system. It will 
provide more up-to-date information at the fingertips of our 
customer service representatives that will enable them to 
faster resolve taxpayer account issues and account adjustments, 
both of which will greatly help taxpayers, as well as the IRS.
    CADE 2 will also correct one of the biggest problems we 
have. A taxpayer calls about a payment he or she has made, but 
our representatives cannot tell whether it has been posted or 
not. That will change because of the daily processing that CADE 
2 affords. CADE 2 will also eliminate structural technology 
problems that could lead to time lag problems, such as when 
notices are sent to taxpayers.
    The CADE 2 database will also allow the IRS to consider 
offering a wider range of web-based self-initiated service 
solutions that could fundamentally change the way that 
taxpayers interact with the Internal Revenue Service and also 
provide for greater operational efficiencies.
    A good example is the electronic transcript delivery system 
on irs.gov that we plan to launch later this year. This 
initiative will enable a taxpayer to securely send a transcript 
to an authorized third party. As a result, taxpayers will gain 
access to their tax records with greater efficiency and 
decreased burden.
    As I mentioned in my opening statement, we are providing a 
variety of service channels to meet different and evolving 
taxpayer needs in a balanced fashion. One innovative program in 
particular I wanted to mention is virtual service delivery, 
which has great potential to improve the taxpayer experience.
    Currently located in 13 sites, it uses video communication 
technology to deliver a number of services to taxpayers--such 
as assistance with letters, notices, tax law, procedural 
questions--and allows taxpayers to seek different service 
delivery options outside of the traditional brick-and-mortar 
IRS facility.
    Mr. Chairman, Ranking Member Hatch, this concludes my oral 
testimony. I would be happy to answer any questions you may 
have.
    [The prepared statement of Ms. Tucker appears in the 
appendix.]
    Senator Hatch. Thank you so much.
    Ms. Thompson, we will turn to you now.

         STATEMENT OF TERESA THOMPSON, LOCAL TAXPAYER 
  ADVOCATE FOR MONTANA, TAXPAYER ADVOCATE SERVICE, HELENA, MT

    Ms. Thompson. Chairman Baucus, Ranking Member Hatch, and 
members of the Senate Finance Committee, thank you for inviting 
me to testify today regarding filing season 2012 and the 
assistance the Taxpayer Advocate Service provides in Montana.
    This filing season has seen challenges in both Montana and 
the country as a whole. I will highlight five points from my 
written testimony that deserve emphasis.
    First, although Montana may not be as populated as other 
States, its individuals should be afforded all services 
provided by their Federal Government. The IRS must be available 
to them. Taxpayers should be able to reach an IRS employee by 
telephone or by visiting a walk-in office when they have 
questions or other concerns about Federal income taxes.
    Unfortunately, many taxpayers cannot get through on the IRS 
toll-free lines or cannot visit walk-in sites because they are 
not open. For example, the Helena walk-in office, it is open 
only on limited days and for limited hours.
    So taxpayers call our office as the only available 
alternative. But, because of budget constraints, my office is 
not even staffed with a secretary to answer phone calls. Unless 
staffing levels improve, my staff and I will continue to be 
drawn away from the taxpayers who need our help the most--those 
assigned to the Taxpayer Advocate Service.
    I would also like to point out that the IRS does not have 
an appeals officer or a settlement officer in Montana and 
numerous other States. Taxpayers should be afforded access to 
these officers locally. Their knowledge of local economic 
issues relevant to taxpayer cases is important to ensure fair 
and impartial hearings.
    Second, Montana would be the perfect place for piloting 2-
way video conferencing with taxpayers because of its geographic 
size and weather conditions at various times during the year. 
IRS problems do not always happen when there is good weather in 
Montana. People cannot travel to Helena to visit my office or 
travel to any of the walk-in offices throughout the State when 
road conditions are dangerous. And getting through on the toll-
free number is always a gamble.
    Why not harness technology that is already available and 
provide top-notch service to our taxpayers by utilizing 2-way 
video conferencing? Two-way video conferencing would be an 
effective way of delivering government services to a diverse 
population and could alleviate taxpayer frustration and 
confusion.
    Third, identity theft is a national epidemic, and, when the 
theft has tax consequences that cause economic harm to 
taxpayers, they often seek help from the Taxpayer Advocate 
Service. The IRS should prioritize assistance to victims of 
tax-related identity theft. A crime has been committed, and, as 
such, the victims should be made whole as soon as possible.
    This requires dedication of resources and strategic 
casework planning both on the front end to catch the identity 
theft before the refund is issued, and on the back end when the 
damage has already been done and the taxpayer needs to be made 
whole. Unfortunately, budget shortfalls resulting in staffing 
cutbacks have hindered these efforts.
    Fourth, correspondence audits can be confusing and 
impersonal. Documentation sent in by taxpayers or their 
representatives to verify items on tax returns are sometimes 
never associated with the case.
    What happens to this mail? The responsibility for a 
correspondence audit should be given to a single IRS auditor 
who will work the case from beginning to end, as we do in the 
Taxpayer Advocate Service. The auditor should contact the 
taxpayer by telephone or through 2-way video conferencing when 
that is available.
    Correspondence audits should be limited to returns with 
specific, clear-cut issues, and are not well-suited to 
complicated issues like business expenses.
    Fifth, there are seven federally recognized Native American 
tribes in Montana. These tribes have a unique legal status 
which should not be overlooked when Congress writes legislation 
for income, expenses, and credits.
    At times, TAS casework reflects this legislative omission. 
When a Native American child adopted from a reservation does 
not meet qualifications for the adoption credit, as currently 
spelled out in the Internal Revenue Code, my opinion is that a 
part of this country has been overlooked.
    I am honored to be here today and would be happy to answer 
your questions.
    [The prepared statement of Ms. Thompson appears in the 
appendix.]
    Senator Hatch. Thank you so much. We really appreciate the 
testimony of each of you and look forward to asking you some 
questions.
    Maybe I can just make my opening remarks at this point, and 
then we will go into questions. I will probably turn to you 
first. How is that? I think that is appropriate.

           OPENING STATEMENT OF HON. ORRIN G. HATCH, 
                    A U.S. SENATOR FROM UTAH

    Senator Hatch. Though you would not know it from the fiscal 
policies being advanced by President Obama, this Nation faces a 
real crisis in just a few months. What some have called 
``taxmageddon'' is rapidly approaching.
    Unless Congress acts appropriately come January 1, 2013, 
Americans will be hit with the largest tax increase in history. 
Now, this record-breaking tax increase will hit every American 
who pays income taxes. Small business owners will face a top 
marginal rate hike of 17 percent.
    The number of farmers and small businesses that will face a 
death tax will grow exponentially. Do not forget, the 
alternative minimum tax patch has already expired, leaving 26 
million middle-income families and individuals paying $92 
billion in stealth taxes in just 8 months. In fact, those 26 
million families and individuals are required by law to have 
already made their first estimated tax payments this year.
    The rate of tax on dividends will nearly triple from 15 
percent to 43.4 percent. Now, the President has actually 
proposed this massive dividend tax increase in the latest 
version of his annual tax-and-spend budget that is still 
supported by exactly nobody. And the rate of tax on capital 
gains will increase by 59 percent from 15 percent to 23.8 
percent.
    Now, these tax increases are ones for the record book, and 
Congress should have already prevented them from occurring. 
They are ticking time bombs, in my opinion, for families, 
individuals, and the American economy. Instead, the Senate 
continues to dawdle on the non-starter provisions like the 
Buffett tax. That so-called deficit reduction proposal is so 
backwards that it actually loses $793 billion over the next 10 
years if it is implemented in the way proposed by President 
Obama in his most recent budget. That is, if the Buffett tax 
replaces the AMT, as President Obama says it should, we 
actually increase the deficit by $793 billion over the next 10 
years alone.
    Unfortunately, some view the expiration of such a large 
part of our tax code at the end of the year as a bonanza for 
bigger government. Deploying the tired rhetoric of class 
warfare, they welcome these tax increases, which will finance 
even higher government spending.
    But make no mistake about it. This impulse to increase 
taxes at all costs risks a recession. Congress should come 
together and act to prevent this historic tax increase that is 
hanging over the nation's head like the Sword of Damocles. 
Doing so would greatly improve the taxpayer experience by 
giving taxpayers more predictability and allowing the IRS to 
put out more complete and timely guidance for taxpayers, points 
that some of you have made.
    With respect to the IRS's performance when it comes to the 
tax filing experience, I will say that one thing that stands 
out is its stated goal of answering 61 percent of phone calls 
from taxpayers. Now, I have heard of setting the bar low so 
that it is easy to exceed expectations, but 61 percent of phone 
calls answered is simply not good enough. It would earn a 
student a D-minus, at best, and that is probably grade 
inflation.
    On this issue, I would give the IRS a failing grade, and I 
suspect that the nearly 40 percent of taxpayers whose calls go 
unanswered would probably agree. It is a real problem to us.
    [The prepared statement of Senator Hatch appears in the 
appendix.]
    Senator Hatch. I would like to extend, like I say, a 
special welcome to Mr. Troy Lewis, who comes from Utah and has 
a wide array of experience with taxes. He is an adjunct 
professor at Brigham Young University. He owns his own CPA firm 
and is vice president of Heritage Bank in Saint George, UT. He 
spent the majority of his career at a large accounting firm in 
Salt Lake City.
    So I want to thank you all for coming this morning. It 
means a great deal that we could have your expertise in this 
area. And this is one of the hearings that we have been having 
with regard to tax matters, and I want to personally pay 
tribute to our chairman for being willing to go through so many 
hearings on the tax situation that we are all so concerned 
about.
    Let me turn to the distinguished Senator from Delaware----
    Senator Cardin. Maryland
    Senator Hatch. Maryland.
    Senator Cardin. But a University of Pittsburgh graduate.
    Senator Hatch. A University of Pittsburgh graduate. I did 
not realize that you had that great experience until you came 
to the Senate.
    Senator Cardin. Senator Hatch, thank you very much.
    Senator Hatch. I am sorry to mess up your State. I 
apologize.
    Senator Cardin. Do not mess up our State. It is a great 
State.
    Senator Hatch. It is.
    Senator Cardin. Let me thank Senator Hatch and thank all of 
our witnesses here for their testimony and for your work.
    I want to go back, I guess, a little over a decade ago when 
we had the commission that looked into the IRS. Then-
Congressman Portman was one of the leaders. He needed a partner 
in the House of Representatives to advance those proposals. So 
I joined him, and we were able to get some significant reforms 
done in the IRS.
    As Ms. Tucker knows, I have recently been out to visit with 
our IRS employees to thank them. I think they are doing an 
incredible job. They are being asked to do more with less under 
very stressful conditions, and I think they are doing their 
best, and we are very proud of their public service.
    So I want to start off with the fact that I think we have 
some very dedicated people who are working to collect taxes, 
which is never a popular thing to do, but an extremely 
important role for our society.
    But the recommendation about a decade ago was to modernize 
the IRS with technology and to instill more consumer function 
to the IRS so that it would be more consumer-friendly, based 
upon the recognition that voluntary compliance dictated that 
type of a model.
    So, back when we started looking at this, I would say the 
telephone connection rate was well below what it is today, and 
we brought it up to levels that we thought were where it should 
be, and now we are falling back in the wrong direction.
    So that is a major concern to me, and I think it should be 
a major concern to this committee and our country. And I expect 
that a good part of this has been the budget and failure to 
provide the type of support for this agency.
    It is not only the number of personnel. It is also the 
equipment and the technology and all of the above. And I think 
we need to get back to that if we are going to be able to, 
again, meet the needs of our consumers.
    I think, Ms. Thompson, your point about offices not being 
open during normal business hours, that is unacceptable. That 
is unacceptable. And the connection rate of in the 60s is 
unacceptable. We need to have that in the 90s.
    So I think we need to refocus again on making the IRS a 
more consumer-friendly group, but do not expect it to perform 
miracles as Congress cuts the budgets. Now, some of you have 
mentioned, properly, and so has Senator Hatch, that Congress 
could do a lot of things to help you. We could simplify the tax 
code. We could do tax reform. We could pass some of the 
information issues that, Mr. White, you pointed out.
    All of that, I think, would be helpful, but I think a 
critical part is to give the type of support to the IRS that it 
needs. And the interesting point is, all of the scorekeepers 
here tell us that if we made the resources available, IRS would 
collect more money.
    So, from the point of view of helping our budget deficit, 
we are shortchanging our budget deficit by what we are doing on 
the support for the IRS.
    I want to ask a specific question on ID theft. Ms. 
Thompson, you raised that issue. And I have had a couple cases 
in my office of taxpayers who have had their identification 
stolen and fraudulent efforts to get refunds using an ID of 
someone else. In one or two of these cases that I have looked 
at personally, the individual taxpayer was not notified until 
many months later.
    Ms. Tucker, I just really want to know. I understand you 
have to do certain investigations. I know you have to confirm 
what happens. In these cases, what normally happens is someone 
has filed a fraudulent return in an effort to get a refund 
using someone else's identity. Then the real taxpayer files 
their tax return. So you look at the two and you say something 
is not right here.
    But should it take months before the victim of the identity 
theft is notified?
    Ms. Tucker. First of all, Senator Cardin, thank you so much 
for the kind words you expressed to the IRS workforce. You are 
absolutely right. The 97,000 men and women of IRS are doing 
their best every day for our taxpayers and to ensure that we 
have a quality tax administration system.
    As we have talked about before, identity theft is one of 
the most vexing and complex tax situations that we are seeing 
right now at IRS. Unfortunately, these fraudsters, the 
perpetrators, they come in, they file a tax return, as you 
indicated. That is the first return in. We then subsequently 
receive a return from the legitimate taxpayer or even 
potentially another return from another fraudulent taxpayer.
    And so then we have to go about the process of doing the 
validation of, are you really who you say you are? And that 
takes time. We have dramatically increased our staff who are 
working identity theft. In fact, by the end of this calendar 
year, we will increase our staffing 5 times over. We will have 
roughly 2,500 folks going at this work.
    But, unfortunately, it is complex. It takes time.
    Senator Cardin. That is an incredible number. And we know 
it is the fastest-growing--I think it is the fastest-growing 
crime in America. At least the last time I checked, it was the 
fastest-
growing crime in America. And it is pervasive in so many 
different areas.
    IRS returns is certainly just one of many areas in which 
people's identities have been compromised and they themselves 
have been compromised. I would just urge you to do everything 
you possibly can to inform the victim at the earliest possible 
stage. Now, we have taken steps, when computer information has 
been compromised, to make sure those who are potential victims 
of identity theft are notified at the earliest possible moment.
    I think you need to be able to at least identify that 
someone's identity has been compromised and let him or her know 
about it at an early stage so that they are aware of it.
    And I understand you would like to have all the information 
in place before you go forward, but I can tell you, the anxiety 
of knowing that you have been victimized, and knowing that it 
was done 6 months ago and you are just finding out about it, 
adds to the trauma.
    Thank you, Senator Hatch.
    Senator Hatch. Thank you, Senator Cardin. Sorry about your 
State. I still have not gotten awake, I think. [Laughter.]
    I have enjoyed your testimony, every one of you, and, 
frankly, you have brought some pretty important points out.
    Let me just say this. Let me ask you this question. And I 
am concerned about the 61 percent, Ms. Thompson. I am concerned 
about that. And there is an average wait time, I think, of 
around 19 minutes.
    It is a tough job you have. So I am the last to try to find 
major fault with it. But it would be better if we could somehow 
figure out how to do that. And then again, we are not doing our 
job up here well enough for you, either, as far as I am 
concerned.
    Let me just ask this question. Levels of taxpayer service 
have already decreased at the IRS. If the health spending law 
is implemented--we are talking about Obamacare, or the 
Affordable Care Act, whichever you care to choose--but, if the 
health spending law is implemented, the IRS would be forced to 
deal with administering tax credits that are given to 23 
million people who are newly enrolled in the health exchanges 
by, I think, 2019. In addition, 3.9 million people will be 
subject to the individual mandate penalty, according to CBO's 
April 22, 2010 analysis, and the IRS is the agency responsible 
for administering that penalty.
    Therefore, will not levels of taxpayer service decline even 
further as the IRS resources for taxpayer services are diverted 
to deal with the health spending law?
    How do you handle that problem? It is not one of your own 
choosing, I know.
    Ms. Tucker. Let me first talk about our overall level of 
customer service. So, the 61-percent figure that folks have 
talked about today, that was our projected level of service 
based on our budget allocation.
    So I think that we have talked about this with the 
committee before. IRS resources were down by roughly 5,000 
employees at this point in the filing season this year. Of that 
5,000, roughly 2,000 employees were down in the taxpayer 
service area.
    So, as we have started this filing season, based on our 
available resources, based on our available budget, we 
projected a level of service of 61 percent. Now, the good 
news--trying to be the eternal optimist--our level of service 
coming out of this point in the filing season is actually 67.5 
percent, and that increase, we believe, is due to a couple of 
things.
    Number one, all of the other automated tools that we have 
introduced. As I mentioned earlier, the taxpayers coming to 
irs.gov have significantly increased this year. We have more 
folks using the automated phones assistor application. We have 
more people using our interactive tax assistors. We have more 
folks using the mobile app to check information.
    So we actually have achieved a better level of service on 
our phones than we had anticipated based upon our funding 
situation, just like any other program. The IRS worked to 
implement the tax provision associated with the Affordable Care 
Act. We will take those provisions just like we do any other 
new tax law change, and we will work that into our available 
budget, staffing, and resources.
    The other thing that we are doing is--to your point earlier 
about how we have to continue to focus on the customer 
experience--so much of the work that we are doing right now on 
the technology front is really going to change the way that IRS 
is able to interact with taxpayers, not only with increased 
online services and online applications, but things like my 
colleague from Montana talked about: the increased use of 
things like virtual assistors.
    So at IRS, it is always a balancing act, and we come to 
work every day trying to do our very best for the taxpayers 
based on our available funding and staffing.
    Senator Hatch. I appreciate that.
    Let me just ask a question for the whole panel, and we will 
start with you. And that question is this. If you were given 
the power to change one thing about our tax system to improve 
American taxpayers' experience with paying taxes, what one 
thing would each of you change? Start with you.
    Mr. White. If it is literally one thing, I think it would 
have to be the complexity of the tax code. That would have the 
biggest impact. Now, that is a tax policy change.
    On the administrative side, if I was limited to tax 
administration, then I think the change that needs to be made 
is in terms of innovation, the problems that have been 
discussed so far, taxpayers being able to get through on the 
phones or dealing with ID theft.
    There are long-term options there that hold out a lot of 
potential for solving some of those problems. Trying to deal 
with them through traditional methods--just getting better at 
answering the telephone or dealing with ID theft cases given 
current technology and current information available to IRS--is 
not going to be very effective. It is going to take a long time 
for taxpayers to be notified.
    So, if we can think in more innovative ways--and IRS, I 
give them credit, is looking at some different approaches. 
Being able to match tax returns to W-2s before issuing refunds 
would go a long way to preventing ID theft from being 
successful in terms of committing tax fraud. Thinking about how 
to leverage the tax preparation community and tax preparation 
software to answer taxpayers' questions and head off the need 
for them to call IRS in the first place would solve some of the 
telephone call problem at IRS.
    Some people need to call IRS, and only an IRS assistor can 
help them. But a fair number of the calls to IRS do not have to 
be answered today by a live assistor.
    Senator Hatch. Thank you, Director White. We appreciate the 
work you do, and your whole organization.
    Mr. Lewis?
    Mr. Lewis. Thank you. Limited to one item, I would have to 
say tax reform/tax simplification. The whole process of the tax 
filing is a unique business relationship because, in the 
private industry, for instance, in my accounting firm, if I was 
unresponsive, if I did not pick up the phone, if I did not 
answer questions timely, if I chose not to provide accurate 
information, eventually the client would just move on and go 
somewhere else.
    Unfortunately for the taxpayers, one thing is certain--next 
year they are going to be dealing with the same folks. There is 
really not a brand X that you can choose. So that is one point.
    The other point I think I would make would be that the code 
today is so complicated that I think the average American 
really does not even have a sense of what they owe. They 
completely rely on what the software tells them or what their 
paid preparer tells them.
    If you were to ask someone, ``Just how much money do you 
think you are going to owe this next year,'' their only sense 
would be, ``What I owed last year.'' It would just be a 
relative comparison. But they really do not have a good feel of 
how taxes impact them.
    And when they get so far removed, I think you lose 
confidence in the system. If there was more of a direct--if it 
was simple enough that they felt a direct correlation between 
what they did and what they owed, I think that would increase 
and improve the taxpayer experience.
    Senator Hatch. Thank you.
    Yes?
    Ms. Tucker. I will sound like a broken record, but it is 
the simplification issue, as my colleagues on the panel have 
stated. We know that our ability to clearly communicate with 
the taxpaying public about their obligations to file and pay is 
made much easier the less burden that there is in interpreting 
the tax law, the regulations, the guidelines. So anything that 
drives simplification, we believe is better for our taxpayer.
    I guess the other thing, if today is our wish list day of 
what we think would help us, in particular, at IRS, I think we 
are very, very concerned about the uncertainty for the 
remainder of this tax year.
    Believe it or not, we just wrapped up filing season last 
week, but our staff is already busy working, planning for the 
next filing season. And that includes not only programming our 
computer systems, revising our forms, preparing our 
publications, and, as Commissioner Shulman stated during some 
recent testimony, we are very, very concerned about the adverse 
implications we could have going into the next filing season if 
we do not have certainty on the expiring provisions or new 
provisions that could be enacted.
    Senator Hatch. I have a very high opinion of Mr. Shulman 
and you. We would really appreciate if you would weigh in 
really heavily on what changes ought to be made and what kind 
of language should be used. You are great experts.
    We will go to you, Ms. Thompson.
    Ms. Thompson. Well, I am sorry, I am going to have to make 
it 4-for-4. Tax simplification is my long-term desire or wish 
for this country. It has gotten to where people call, they do 
not understand. They just do not understand the complexity of 
what is going on with their tax returns.
    I do not even want to repeat everything they said, because 
I agree with everything my co-panelists have said. In the 
short-term, we have to deal with this identity theft. If you 
will notice, in my written testimony, the Taxpayer Advocate 
Service cases not only in Montana, but in the country, are 
skyrocketing from the ID theft, and there are sad cases of 
these people coming in who need these refunds--the correct 
people coming in. We have not had any uncorrect people yet come 
to us, but that could happen, I suppose.
    But the correct people have come to us and are desperate 
for their refunds. They are expecting the refunds that they get 
or that are due them, and when they find out someone else has 
filed under their numbers, they are devastated.
    It is a very personal crime that is being committed against 
them, and we do our best in the Taxpayer Advocate Service to 
get them their refund as soon as possible.
    But those are my two wishes.
    Senator Hatch. I appreciate that.
    Senator Cardin, I have to leave, so I am going to turn this 
over.
    Senator Cardin. Let me turn it over to Senator Wyden.
    Senator Hatch. I am sorry. I did not see Senator Wyden.
    Senator Wyden [presiding]. Thank you, Senator Cardin and 
Senator Hatch.
    It has been a great panel. I have been out in the tax 
reform precincts for almost a decade now. It really started 
with Rahm Emanuel, who was then on the House Ways and Means 
Committee and had been trying to build a bipartisan coalition 
for tax reform, and then Senator Gregg joined the cause, and 
then, of course, he retired, and now I have been partnering 
with Senator Coats, the Republican Senator from Indiana.
    And, as I listened to the points that the four of you made, 
I think you give us, particularly at this critical time when, 
with the expiring provisions of the Bush tax cuts, people are 
talking about what is next, you really give us the foundation 
that we have been trying to build for the last decade for tax 
reform, and I want to go over just kind of one key part of it.
    It seems to me all of you are, in effect, articulating the 
position that a simpler tax code that makes it easier to comply 
and harder to cheat is going to be better for the vast majority 
of Americans and businesses. And by reducing the tax gap, that 
is also going to help us close the Nation's deficit.
    That is a winning proposition. And I want to see if I can--
particularly with you, Ms. Thompson, and you, Mr. Lewis, not to 
insult our Washington witnesses, but to kind of hear from 
particularly out in our part of the country, the west, their 
thoughts on one other key kind of subject, and that is, the 
longer you look at this, the more convinced you become that the 
heart of the complexity problem, this myriad array of 
incomprehensible provisions in the tax code, involves a 
relatively small number of people, the people who tend to be 
well-off financially and, over the years, have had lobbyists 
and various kinds of experts try to--and they have been 
extremely successful--try to advance provisions in the tax law 
that will promote their interests. And that is their right. 
That is what we do in a free country.
    I am wondering about your thoughts about the idea that, if 
we get rid of these provisions, these ones that are 
extraordinarily complicated and tend to benefit a relatively 
small number of people, will not the whole country be better 
off because we will be able to address those broader goals that 
you identified, reduce cheating, close the trade gap, and also 
be fair to them, because that was done, for example, in 1986, 
where everybody felt that they were given an opportunity to get 
at it?
    So my question--and maybe we can start with you, Mr. 
Lewis--do you share this view that the lion's share of these 
special interest tax breaks, tax expenditures, go to a 
relatively small number of people and that the whole country 
can benefit by going after those kinds of breaks to broaden the 
base and hold down rates for everybody and achieve the goals 
that you have been talking about?
    Mr. Lewis. Thank you for your question. The question of how 
big should the base be is one that we have debated here for 
several years. The question of complexity is a separate 
component.
    So let us deal first with the base. I think Ann Landers had 
the basic quote attributed to her that said, ``One doesn't know 
how much to be grateful for something until you have to pay 
taxes on it,'' the concept being that, if you have some skin in 
the game, you have some substance and you have a connection.
    I think there is a lot of truth in that. Even if it is 
something--I mean, more than 50 percent of the U.S. households 
pay no Federal income tax. That is a disconnect. It is sort of 
a--it is a disincentive. You do not pay, you do not have any 
vested interest, and there is that debate we can have.
    But as far as the base itself, I see a wider base being a 
positive. As far as the complexity issue, you are correct: a 
lot of the provisions are specialized. There are several 
provisions, though, that we have in today's tax code which I 
would suggest offer complexity for the average American; for 
instance, education. This last semester that I taught a 
taxation class, I had to teach them that there were five, six 
different potential ways that you could deal with expenses you 
paid to go to college.
    That is complex for people. They want, ``Do I get a 
credit?'' Well, yes, but it depends on which credit, and it 
depends on if they have ever been convicted of a felony for 
drug possession. Was it a misdemeanor? All right, then. There 
are all these little exceptions to the rules, and that gets to 
be burdensome, I think.
    Retirement plans. You will see in my written testimony, 
there are a lot of different retirement plans. I think we can 
simplify a lot of those type provisions, which would give that 
mass reduction. It would give some stability to the system, and 
it would take out a lot of the complexity.
    As far as specific provisions, yes, a lot of the provisions 
that you referenced do tend to take on a very unique single 
class, and I think we can do a lot in that regard to limit the 
complexity by targeting those.
    Senator Wyden. And how about you, Ms. Thompson? It is a 
question of the lion's share of the benefits from most of these 
special interest tax breaks going to a relatively small number 
of people and, by rooting those out, we get a simpler system 
and one that, in my view, is going to do more to encourage 
growth for the country.
    Ms. Thompson. Well, I am going to make a political 
statement, but in general, the----
    Senator Wyden. We have never had any political statements 
here. [Laughter.]
    Ms. Thompson. The Taxpayer Advocate Service tries to stick 
to the tax administration, and we avoid commenting on tax 
policy like rich versus poor.
    Senator Wyden. This is not a rich versus poor issue. This 
is a question of, when I take out the $1 trillion worth of tax 
expenditures, they seem to go to a small number of these 
special interests. And then I hear you all tell me about 
complexity, and I say, would it not make for a simpler system 
to, in effect, root those out and ensure fairness for 
everybody, not hurting any one class, but ensuring fairness for 
everybody?
    Ms. Thompson. Well, I am sure it would. But to Mr. Lewis's 
point, even the basic credits--of education credit, pension, 
IRAs--there is so much complexity. Even in the earned income 
tax credit now, it is complex--if you are related this way, if 
you are not related that way.
    I mean, there is just complexity even at the lower levels 
that, personally, I think, should and could be simplified for 
people filing their tax returns.
    Senator Wyden. Well, you are surely right about that. We 
saw, for example, in the economic recovery legislation, the 
extra relief that was provided to those people, and our friends 
at the IRS can recall all the problems that middle-income and 
low middle-income people had signing up for that. They could 
not figure out how to do it.
    Again, it comes back to the argument for tax reform. I 
would say to members here on this committee, I would say, here 
we are having debates about the Recovery Act. Most Americans 
had no idea that there were any tax provisions in that, and 
they said, ``Oh, this is just another big kind of spending 
bill,'' because the system, as you have outlined, is so big and 
so complicated.
    Even when there is a tax break for somebody, people cannot 
figure it out, and they cannot figure out how to get it, which 
is what we saw in the Recovery Act.
    Let me just ask one last question, if I might, for you, Mr. 
Lewis. You make another good point with respect to the problems 
that the small businesses have in terms of being overwhelmed by 
tax law changes at the end of a year.
    My sense is that this year, this is going to be 
particularly acute. In other words, the warning lights that you 
and Ms. Thompson have talked about in the past with respect to 
the end of the year, this is going to be an even greater 
problem at the end of this year, because the Congress will be 
faced with a lame duck end of these provisions and the like.
    What is your assessment of how bad this problem is going to 
be for small businesses at the end of this year with so much on 
the schedule to expire?
    Mr. Lewis. Thank you for the question. There are two 
aspects of the extenders. There is the taxpayer reaction, the 
taxpayers who will actually go out and do something about the 
tax laws. There is the administration aspect as well. So let us 
deal with it first. It is paralyzing. Today, Mr. Wyden, if you 
were my client, if you came to me and you said, ``My estimated 
tax payment was due a couple weeks ago for the first quarter,'' 
I really could not tell you what that is going to be.
    I can tell you, historically, that the Congress has 
typically gone back and retroactively made all these things 
applicable, but I cannot tell you whether that is going to 
occur or not. As you mentioned, with the political environment, 
with the potential push for some summer legislation, but, quite 
frankly, in an election year and everything else, I fear that 
it will come down to the end of the year.
    Does it have an impact? Absolutely, because today, for 
instance, even in a normal year, without the extenders, the 
depreciation that you are going to receive on a purchase of a 
fixed asset, you will not really know what that number is until 
you know several other components: what is my income for the 
year, what are my other asset purchases going to be today, and, 
more importantly, what are they going to be in the last quarter 
of the year?
    I mean, there are all these other tax rules. But on top of 
that, if you are going to insert, ``Well, they might raise the 
section 179 limitation, they may put back more than 50-percent 
bonus,'' I think that businesses are keenly aware of the 
uncertainty, and it paralyzes.
    I do not know that they do anything counter, but they do 
not do anything pro.
    Administratively, if I may----
    Senator Wyden. Go ahead.
    Mr. Lewis. Administratively, I think you then have to say, 
what is that going to do in terms of the IRS, and Ms. Tucker 
could answer that. But my sense is, yes, this is a big one. All 
these other ones have just sort of--we have had a little bit 
here, maybe 10 provisions, but now with the expiration and the 
sunsetting of the 10-years-ago so-called Bush tax cuts and the 
patch that we did for the estate tax and all of these things, 
they have all sort of just been pushed to this year. It is a 
culmination, and it does worry me.
    Senator Wyden. I think that is a very thoughtful answer, 
and that was really the question that I was trying to get at.
    I think there is no doubt that, generally, when the 
Congress is looking at a lame duck session, small businesses, 
in particular, are saying to themselves, ``Oh, my goodness, 
what are they going to think up now?''
    What you have done, though, is addressed the question I was 
most interested in. I think all of those concerns--the lack of 
certainty, the lack of predictability, what is coming at the 
end of the year--are going to be multiplied several times over 
during this kind of November-December period with the prospect 
of a lame duck session.
    You all have been a great panel, and we are going to have 
to have you in the tax reform debate.
    Mr. Chairman, you have given me a lot of time, and I thank 
you.
    Senator Cardin [presiding]. I thank Senator Wyden for his 
comments. I think we all share the concern of the uncertainty 
and what is going to happen come tax planning, whether it is by 
the IRS or by individuals or businesses, how they go about 
doing it for the next tax season.
    I just want to ask one additional question, Ms. Tucker, as 
it relates to identity theft. I think Ms. Thompson raised this 
also, with the number of people who are being victimized, as to 
what the IRS is doing proactively to help minimize identity 
theft. And let me just give you one example.
    I have seen instructions in this tax season that all 
documents that you send to the IRS should include your 
identification number, your Social Security number, including 
the remittance checks.
    I would hope that the IRS is taking proactive steps to tell 
those who give advice to tax filers to only use the last four 
numbers and not to use the entire identification number. Are 
you doing things like that to try to minimize the risk of 
identity theft?
    Ms. Tucker. Let me address where we are seeing the source 
of the identity theft. We are very cognizant that the folks who 
are coming into IRS victimized by identity theft, that their 
Social Security number or their identity has not been 
compromised through the filing process.
    So in other words, these perpetrators are getting the 
Social Security number, they are getting the identifying 
information outside of the tax system.
    They are just using the tax system as a way to come in and 
get----
    Senator Cardin. Let me just clarify. When you write a tax 
remittance check and you put your Social Security number on it, 
it is very possible that the integrity is maintained through 
the entire system while IRS has it in custody.
    Ms. Tucker. Yes.
    Senator Cardin. But that check goes other places, and there 
may not be the same degree of integrity as it goes through the 
banking system or as it goes through wherever else those checks 
end up.
    My question is pretty direct. There should be no need for 
you to have the full identification number on a remittance 
check or other documents where you are just trying to make sure 
you are attaching it to the right document.
    Would not the last four numbers satisfy that? And do you 
have direct instructions to tell people who are responsible for 
giving advice to taxpayers not to include the full number on 
such a document?
    Ms. Tucker. So a couple of things that we are doing. You 
are probably aware that a lot of the taxpayer notices that we 
mail out, in the past, typically did have the full Social 
Security number on it. And we have initiated a whole host of 
notice improvement initiatives where we are using bar coding, 
scanning only the last four digits. Simply because of that 
reason, the less identifying information that is circulating 
around, obviously, the better for all taxpayers.
    With regard to the question about the identifying 
information on the actual payment check, we will need to go 
back and look into that for you.
    I know a lot of it has been to make sure, especially with 
paper returns, as they come in to a large processing center, a 
lot of times, the checks are split from the return for us to 
get that deposit in in a timely manner. And so for us to 
properly credit that payment to your account, we would need to 
know the Social Security number to get that process through.
    But let me go back and look at that and come back to you.
    Senator Cardin. I would appreciate that. I remember looking 
at some of the internal procedures here in the U.S. Congress 
where they used our identification numbers--certainly in health 
claims--where they used our Social Security numbers, and it was 
amazing how many times it was not necessary.
    You are only as strong as your weakest link, and the more 
people who have access to Social Security numbers, the more 
vulnerable we are.
    So I would hope that the IRS, which is now having to employ 
2,500 people to deal with identity theft, would take a very 
proactive role to show best practices for the best possible 
security we have and not put full Social Security numbers on 
documents that are handled by individuals outside the IRS. A 
remittance check gets handled outside the IRS.
    So I would hope you would be able to give explicit 
instructions to those who help prepare returns that they should 
not be putting the full Social Security number on a remittance 
check, because I do think that makes us all more vulnerable to 
identity theft.
    Ms. Tucker. Let us go back and look at this issue.
    Senator Cardin. I would appreciate that.
    Once again, let me thank all of our witnesses. I found this 
hearing to be very instructive. We have the message about 
simplicity, we have the message about tax reform, and we also, 
I think, understand the importance of our constituents having 
convenient service, accurate service, to be able to comply with 
the tax code.
    I think most individuals really do want to voluntarily 
comply, but, with the complexity and the uncertainty and the 
lack of getting information, it makes it difficult for that, in 
fact, to be at the level that we expect it to be.
    With that, the hearing will stand adjourned.
    [Whereupon, at 11:19 a.m., the hearing was concluded.]


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