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



 
  FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL 
                               YEAR 2012

                              ----------                              


                        WEDNESDAY, JUNE 8, 2011

                                       U.S. Senate,
           Subcommittee of the Committee on Appropriations,
                                                    Washington, DC.
    The subcommittee met at 10:31 a.m., in room SD-138, Dirksen 
Senate Office Building, Hon. Richard J. Durbin (chairman) 
presiding.
    Present: Senators Durbin, Moran, and Kirk.

                       DEPARTMENT OF THE TREASURY

                        Internal Revenue Service

STATEMENT OF HON. DOUGLAS H. SHULMAN, COMMISSIONER

             OPENING STATEMENT OF SENATOR RICHARD J. DURBIN

    Senator Durbin. Good morning. I'm pleased to convene this 
hearing to consider the fiscal year 2012 funding request for 
the Internal Revenue Service (IRS). It's the largest single 
account within our subcommittee. Our focus today is on the 
President's budget request for the IRS. The $13.6 billion in 
annual funding constitutes more than half the total amount of 
discretionary funding under our jurisdiction.
    I'm pleased to share the dais with my friend and 
distinguished Ranking Member, Senator Moran of Kansas, and 
other Members will probably join us.
    Joining us today to present testimony about the resource 
needs of the IRS is the Honorable Douglas H. Shulman, now in 
his fourth year of a 5-year term as the 47th Commissioner of 
the IRS.
    Thanks for your service and for accepting the challenge to 
help lead the IRS from good to great. I welcome the opportunity 
to conduct a critical oversight of the IRS and its programs 
through our discussion today.
    The Congress exercises its most-effective oversight of 
agencies and programs through the appropriations process. It 
allows for an annual check-up and review of operations and 
spending.
    To complement congressional oversight, the IRS has a cadre 
of important watchdogs and keen observers, including J. Russell 
George, Treasury Inspector General for Tax Administration; Nina 
E. Olson, the National Taxpayer Advocate; Paul Cherecwich, 
Chairman, IRS Oversight Board; the U.S. Government 
Accountability Office (GAO); and Colleen M. Kelley, National 
President, National Treasury Employees Union (NTEU). Lots of 
people are watching. I appreciate the exemplary work and 
constructive contributions of each of these entities to help us 
prepare for today's hearing.
    The IRS administers the tax laws and collects revenues that 
fund more than 96 percent of Federal Government operations. 
Each year the 95,000-plus employees of the IRS make hundreds of 
millions of contacts with American taxpayers and businesses.
    The IRS represents the face of Government to more U.S. 
citizens than any other agency of Government.
    On a budget in this fiscal year of $12.15 billion, the IRS 
collected $2.345 trillion in taxes--93 percent of all Federal 
receipts. That's $194 in revenue for every $1 of appropriated 
funds given to run this agency. They processed 230 million tax 
returns, including 141 million individual returns, 7 million 
corporate, and 30 million employment tax returns. They issued 
109.5 million refunds worth $366 billion, and the list goes on.
    For fiscal year 2012, the President's budget request for 
funding of $13.2 billion represents an overall increase of $1.1 
billion, or about 9.4 percent more than the fiscal year 2011 
level. For the IRS accounts, the fiscal year 2011 enacted bill 
maintained funding at the same level as provided in fiscal year 
2010. I recognize that such a level falls more than $487 
million short of what the President had requested for this 
year, so there has been belt tightening all around, and it's 
affected your agency.

                           PREPARED STATEMENT

    We will talk today about the budgetary challenges which you 
face in the upcoming year, some of the policy challenges which 
drive spending in your agency, and I look forward to hearing 
more about the challenges the IRS faces in these difficult 
budgetary times.
    [The statements follow:]

            Prepared Statement of Senator Richard J. Durbin

    Good morning. I am pleased to convene this hearing to consider the 
fiscal year 2012 funding request of the Internal Revenue Service (IRS), 
the largest single account within the Senate Appropriations 
Subcommittee on Financial Services and General Government.
    Our focus today is on the President's fiscal year 2012 budget 
request for the IRS. The $13.6 billion in annual funding for the IRS 
alone constitutes just more than half of the total amount of 
discretionary funding under the jurisdiction of this subcommittee.
    I am pleased to share the dais with my distinguished ranking 
member, Senator Jerry Moran, and other members of the subcommittee.
    Joining us today to present testimony about the resource needs of 
the IRS is the Honorable Douglas Shulman, now in his fourth year of a 
5-year term as the 47th Commissioner of the IRS. Thank you for your 
service and for accepting the challenge to help lead the IRS from 
``good to great.''
    I welcome the opportunity today to conduct critical oversight of 
the IRS and its programs through a candid discussion of where the 
agency is today, where it needs to be, and how we can ensure that the 
IRS has the necessary resources to fulfill its important missions.
    The Congress probably exercises its most effective oversight of 
agencies and programs through the appropriations process. It allows an 
annual check-up and review of operations and spending.
    To complement Congressional oversight, the IRS has a cadre of 
important watchdogs and keen observers monitoring and evaluating its 
operations. These include the Treasury Inspector General for Tax 
Administration (TIGTA), the National Taxpayer Advocate, the IRS 
Oversight Board, the Government Accountability Office, and the National 
Treasury Employees Union.
    I appreciate the exemplary work and constructive contributions of 
each of these entities to help critique, guide, promote, and improve 
the work of the IRS. I invited top officials of each of these 
organizations to submit written materials to enrich the subcommittee's 
work and augment the record of these proceedings today.
    I ask unanimous consent that the statements and accompanying 
materials received by the subcommittee be made a part of the permanent 
record of this hearing.

                       ACCOMPLISHMENTS OF THE IRS

    The IRS administers the tax laws and collects the revenues that 
fund more than 96 percent of Federal Government operations and public 
services.
    Each year, the 95,425 employees of the IRS make hundreds of 
millions of contacts with American taxpayers and businesses. The IRS 
represents the face of Government to more U.S. citizens than any other 
agency.
    During fiscal year 2010, the IRS:
  --On a budget of $12.15 billion, collected $2.345 trillion in taxes--
        93 percent of all Federal receipts. That's $194 in revenue for 
        every $1 in appropriated funds.
  --Processed 230 million tax returns, including 141 million individual 
        returns, 7 million corporate returns, and 30 million employment 
        tax returns.
  --Issued 109.5 million refunds worth $366 billion.
  --Spent an average of 53 cents to collect each $100 of tax revenue.
  --Examined more than 1.58 million individual income tax returns (an 
        11 percent increase more than fiscal year 2009) and nearly 
        30,000 returns filed by corporations.
  --More than doubled its offshore presence--adding offices in Asia and 
        Central America, boosting law enforcement staffing throughout 
        the globe, and expanding interaction with international 
        organizations--all designed to investigate and crack down on 
        tax absconders wherever they may be.
  --Increased automated under-reporter contact closures to more than 
        4.3 million--a 19.8 percent increase more than fiscal year 
        2009--and surpassing the 4 million mark for the first time.
  --Provided taxpayer assistance through 305 million visits to the 
        IRS.gov Web site (double the volume in 2004)--responding to the 
        growing demand for electronic tools and online access to 
        information.
  --Answered 47 million calls to customer service phone lines.
  --Assisted more than 78 million taxpayers through its telephone 
        helpline or at walk-in sites.
  --Received 35.1 million automated calls, a 21 percent uptick from 
        fiscal year 2009, reflecting rising demand for self-service 
        options.

                           THE BUDGET REQUEST

    For fiscal year 2012, the President's budget requests funding of 
$13.284 billion, representing an overall increase of $1.138 billion, or 
9.4 percent, above the fiscal year 2011 enacted level of $12.146 
billion under the continuing resolution enacted on April 15 to cover 
the balance of this fiscal year.
    For the IRS accounts, the fiscal year 2011 enacted bill maintained 
funding at the same level as provided in the fiscal year 2010 
enactment. I recognize that such level falls more than $487 million 
short of what the President requested for this year.
    While my preference would have been to fund the IRS at the level 
recommended in our July 2010 Committee-reported bill, I regret to say 
that we faced a significant reduction in our available discretionary 
resources.
    In fact, our overall allocation cap was 10 percent below the fiscal 
year 2010 enacted level, compelling some difficult negotiations and 
funding decisions to finish the fiscal year 2011 bill this spring. I am 
pleased we were able to avert the troubling $603 million cut below 
fiscal year 2010 for the IRS that was included in the House-passed H.R. 
1.
    The fiscal 2012 funding forecast is, to put it mildly, bleak. This 
subcommittee faces grim prospects and challenging funding decisions for 
the ensuing fiscal year, and beyond. It will be helpful to hear 
Commissioner Shulman's honest appraisal of the resource needs that the 
IRS will require to achieve its dual mission of:
  --Providing America's taxpayers with top quality service by helping 
        them understand and meet their tax responsibilities; and
  --Applying the tax law with integrity and fairness to all.
    I look forward to hearing more about the particular challenges the 
IRS faces in these lean budgetary times, and how this subcommittee can 
be helpful in supporting the mission of the IRS.

    Now I'd like to turn the floor over to my colleague, 
Senator Moran.

                    STATEMENT OF SENATOR JERRY MORAN

    Senator Moran. Chairman Durbin, thank you. Thanks for the 
hearing today.
    Welcome, Commissioner Shulman.
    I understand that the IRS is tasked with enormous 
responsibilities. The IRS collects the revenue that funds 
Government and administers our tax laws.
    The IRS's goal of improving services, making voluntary 
compliance easier, and enforcing the laws to ensure that 
everyone pays their fair share of taxes, is all laudable. I 
also believe we would all agree that we should make sure that 
our tax code and the IRS compliance and enforcement efforts 
don't make it even harder for taxpayers and small businessmen 
and women to meet their tax obligations.
    As we know, the American economy is facing very difficult 
times, and we need to get the country's economy moving again. 
Americans are struggling, and overly burdensome regulations and 
reporting requirements hamper the ability of our Nation's small 
businesses to grow their businesses and create jobs.
    I was very pleased to see the Congress address some of the 
uncertainty by passing legislation to repeal the costly and 
unprecedented 1099 tax reporting mandate in the new healthcare 
law. This marks a significant change in our healthcare law, and 
that repeal of the 1099 requirement is good news for small 
business and agriculture producers, who bear the largest burden 
under these provisions. I am interested in talking to you, Mr. 
Commissioner, about the consequences of that repeal on your 
appropriations and budget request.
    I note that the President's request for the IRS for fiscal 
year 2012 is almost $13.3 billion. This is an approximate $1.1 
billion more than the 2010 enacted level and the fiscal year 
2011 level, resulting in a 9 percent increase. Almost half a 
billion of that increase is requested to begin implementation 
of the new healthcare law. Given the current fiscal reality, I 
am interested to learn how the IRS intends to prioritize its 
goals and carry out its core responsibilities of enforcement 
and taxpayer services and make progress on important 
information technology projects.
    I appreciate the significant and complex responsibilities 
that the IRS faces. Given our Government's fiscal constraints, 
we must carefully review all agency budget requests to ensure 
taxpayers are receiving the best value for their dollars. We 
must make sure that we address our country's economic problems 
in a fiscally responsible way.
    Mr. Chairman, I look forward to hearing the testimony, and 
I thank you for calling the hearing and look forward to working 
with you on the subjects within this subcommittee's 
jurisdiction.
    Senator Durbin. Thanks a lot, Senator Moran. And, Mr. 
Shulman, the floor is yours.

              SUMMARY STATEMENT OF HON. DOUGLAS H. SHULMAN

    Mr. Shulman. Thank you, Chairman Durbin and Ranking Member 
Moran. It's good to be here, and I appreciate the opportunity 
to testify about our 2012 budget.
    This budget was crafted during a time of fiscal austerity 
and belt tightening for the Nation, and it's incumbent upon all 
of us in Government to be as efficient as possible and to spend 
taxpayer dollars wisely. This means, in my mind, finding 
savings where we can, and continuing to invest in strategic 
priorities that allow us to improve service and voluntary 
compliance.
    The fiscal year 2012 budget includes almost $190 million in 
efficiency savings and reductions, and you've got my commitment 
to continue to look for ways to save the Federal Government 
money.
    Against this backdrop, it's also clear that the IRS is 
vital to both the functioning of the Government and keeping our 
Nation and economy strong. In fiscal year 2010, the IRS 
collected, as the chairman noted, $2.345 trillion in gross 
revenues to fund the Federal Government, which is approximately 
93 percent of all Federal receipts. For every $1 spent on the 
IRS, we collect approximately $200 of revenue.
    Mr. Chairman, one of our core duties, as you noted, is 
conducting the filing season. Despite late tax law changes, 
this filing season actually went relatively smoothly. As of the 
end of May, we had gotten about 133 million individual returns. 
We issued more than 100 million refunds, totaling $285 billion. 
We've also answered more than 50 million taxpayer calls this 
year.
    The IRS e-file program, which is lauded by many as one of 
the most successful modernization programs in all of 
Government, continues to show growth. This year, we reached two 
very major milestones. One is, for the first time ever, we had 
100 million people electronically file. And this year--we 
started the e-file program in 1986--we crossed the 1 billionth 
electronic filing of a tax return this year. Clearly it's 
changed the way Americans interact with the IRS.
    This is also a big deal for efficiency. It costs us 17 
cents to process an electronically filed return. It costs us 
$3.66 to process a paper return. And we've been reaping 
benefits and downsizing our operations ever since e-file 
started.
    Let me also note that we continue to try to help taxpayers 
who are struggling to regain their footing after the recession. 
This year, we started something we call our Fresh Start 
program, which expands our Offer in Compromise Program. It made 
lien withdrawal easier for taxpayers, it made it easier for 
small businesses to enter an installment plan, and it changed 
our lien criteria.
    Now, in recognition of the critical role that we play in 
the economy--both helping taxpayers file their taxes and also 
collecting the revenue--the President asked for judicious 
investments in the IRS in the 2012 budget. These investments 
reflect our balanced approach to both taxpayer service and 
compliance programs, and our commitment to administer the tax 
laws in a balanced and fair manner.
    It also includes funding to finish, for the 2012 filing 
season, our key core account database. If and when we've a 
fully operational account database, it will mean faster 
processing of returns, expedited refunds for all Americans, 
better customer service, and enhanced data security.
    I also want to emphasize that, because of our unique 
revenue collection function, all of the investments in the IRS 
more than pay for themselves by generating much more revenue 
than they cost.
    Mr. Chairman, I would be remiss if I did not mention for a 
moment the House budget resolution, which provided a funding 
level for the Financial Services and General Government 
Subcommittee of approximately $2 billion below the fiscal year 
2011 enacted level. Because, as you mentioned, we're the 
majority of the Financial Services and General Government bill, 
cuts of this magnitude would be substantial and affect all of 
IRS operations--from answering taxpayer questions on the phone 
to front-line compliance activities, such as audit coverage.
    Because the lost revenues from reduced tax law enforcement, 
cuts such as those in the House budget resolution would 
actually increase the deficit by decreasing revenues. In 
addition, conspicuous drops in our enforcement activities could 
have an impact on longer-term voluntary compliance in the 
country.

                          PREPARED STATEMENTS

    So let me conclude by just saying, I recognize that we are 
in a very challenging fiscal environment, and that there's 
going to be a lot of difficult choices that you and your 
colleagues are going to need to make. I look very much forward 
to a constructive dialogue over the weeks and months ahead with 
this subcommittee, and very much appreciate the support that 
this subcommittee has given the IRS.
    [The statement follows:]

                Prepared Statement of Douglas H. Shulman

                        INTRODUCTION AND SUMMARY

    Chairman Durbin, Ranking Member Moran, and members of the 
subcommittee, thank you for the opportunity to appear today to discuss 
the President's fiscal year 2012 budget request for the Internal 
Revenue Service (IRS).
    This budget was crafted during a time of fiscal austerity and belt 
tightening for the Nation and it is incumbent upon all of us in 
Government to be as efficient as possible and spend taxpayer dollars 
wisely. That means finding savings where we can, and continuing to 
invest in strategic priorities that allow us to continuously improve.
    Against this backdrop, it is clear that the IRS is vital both to 
the functioning of Government and keeping our Nation and economy 
strong. In fiscal year 2010, the IRS collected $2.345 trillion in gross 
revenue to support the Federal Government, approximately 93 percent of 
all Federal receipts. Moreover, for fiscal year 2010, we processed more 
than 140 million individual income tax returns and issued 109.5 million 
refunds to individual taxpayers totaling $366 billion.

A Record of Success
    Mr. Chairman, the IRS is also proud of its implementation track 
record over the past few years.
    We have run smooth filing seasons for the last several years, 
despite new tasks being added to our agenda and late passage of 
legislation.
    We have also made good strides in cracking down on international 
tax evasion. We struck a landmark deal with the Government of 
Switzerland, and for the first time received information on thousands 
of Americans hiding assets in Swiss bank accounts. As we turned up the 
pressure on those not paying taxes on overseas assets, we had 
approximately 15,000 voluntary disclosures from individuals who came in 
under our special Voluntary Disclosure Program (VDP). Since the special 
program closed, we received an additional 4,000 voluntary disclosures 
from individuals with bank accounts from around the world.
    Many of these voluntary disclosure cases involve significant 
amounts of previously unpaid tax.
    However, collecting such substantial additional revenue for past 
misdeeds is not the only important consideration here. Regardless of 
dollar size, it is important that we are bringing thousands of U.S. 
taxpayers back into the system so they properly report and pay their 
taxes for years to come on their offshore accounts.
    In February 2011, the IRS announced a new special voluntary 
disclosure program designed to help people with undisclosed income from 
hidden offshore accounts get current with their taxes.
    Our goal in our offshore efforts is to fundamentally change the 
risk calculus of taxpayers. We are well on our way to deterring the 
next generation of taxpayers from using hidden bank accounts to avoid 
paying taxes.
    We have also been ushering in a new relationship with corporate 
taxpayers with a major focus on creating forums and venues where we can 
resolve issues faster and provide more certainty.
    The impetus for this new approach stems from the simple shared 
belief that at the end of the day, taxpayers and tax authorities pretty 
much want the same thing. They want a balanced tax administration 
system that provides:
  --Certainty regarding a taxpayer's tax obligations sooner rather than 
        later;
  --Consistent treatment across taxpayers; and
  --An efficient use of Government and taxpayer resources by focusing 
        on the issues and taxpayers that pose the greatest risk of tax 
        noncompliance.
    There are several interlocking pieces that will help advance this 
transformation. It requires more transparency on both sides; a re-
tooling of our audit approach; and a commitment to resolving issues 
quickly and clarifying uncertainty in the law.
    We now have a number of innovative, forward-thinking programs and 
forums, such as our Industry Issue Resolution Program, Compliance 
Assurance Program, Fast Track Settlement, and our Uncertain Tax 
Positions reporting requirement that are focused as a package on the 
goals of faster issue resolution and greater certainty for those 
taxpayers who want to be transparent.
    One of the most important initiatives that the IRS has undertaken 
in recent memory is the return preparer initiative, which is now being 
implemented. In September 2010, we launched the new online Preparer Tax 
Identification Number (PTIN) application system. It is up and running 
with more than 700,000 preparers already registered in the system.
    More than just an identification number, the PTIN registration 
process gives the IRS an important and better line of sight into the 
return preparer community than we have ever had before. We can leverage 
that information to help us better communicate, analyze trends, spot 
anomalies and potentially detect fraud.
    The registration process will help us build in several years a 
publicly accessible database of preparers who are authorized to prepare 
returns. This is an extremely important tool for consumers as they will 
be able to search the database to ensure that their preparer is 
registered. It will also make it easier to find and track the bad 
actors out there. They will not be able to pull up stakes and move 
around anonymously.
    The IRS is also very proud of its work in implementing the tax-
related provisions of the American Recovery and Reinvestment Act (ARRA) 
and other economic recovery legislation. We put out billions of dollars 
to help people buy homes and stabilize the housing market through the 
First-time Homebuyer Credit, and we added $400 to $800 to families' 
paychecks through the Making Work Pay Credit, just to name two 
provisions.
    The IRS continues to provide taxpayers with quality customer 
service and different service channels and products. They run the gamut 
from traditional walk-in sites for those who need to see an IRS 
representative face-to-face, to toll-free automated and assistor 
telephone service, to Web-based applications and social media. All make 
it easier for taxpayers to file and pay their taxes.
    Telephone LOS has recovered after several challenging years. This 
year we are targeting a 71 percent assistor level of service for the 
full year. Toll-free tax law accuracy and accounts remain respectively 
at 93 percent and 95 percent, and the overall toll-free customer 
satisfaction rating stood at 92 percent. Last year, we also saw a 70 
percent e-file rate for individuals as compared to a mere 10 percent 15 
years ago. As noted in the next section, this translates into a huge 
savings.
    IRS.gov has become the favorite source of information for millions 
of taxpayers. For fiscal year 2010, there were almost 305 million Web 
page visits to IRS.gov--a 14 percent increase over the same time period 
in fiscal year 2009. Use of the ``Where's My Refund'' electronic 
tracking tool continued to post double-digit yearly gains.
    The IRS is increasingly communicating with taxpayers who may not 
get their information from traditional sources, such as newspapers and 
broadcast and cable news. By employing social and new media, such as 
YouTube, Twitter and even iTunes, we are able to reach these taxpayers 
with important service and compliance messages.
    In January 2011, the IRS also unveiled IRS2Go, its first smartphone 
application that lets taxpayers check on the status of their tax refund 
and obtain helpful tax information.
    This new smartphone app reflects our commitment to modernizing the 
agency and engaging taxpayers where and when they want.
    Finally, the IRS continues to run robust compliance programs. We 
continue to have appropriate and balanced audit coverage rates across 
taxpayers and to innovate in our collection programs.
    And in our latest effort to help struggling taxpayers, the IRS 
announced on February 24, 2011, a series of new steps to help people 
get a fresh start with their tax liabilities.
    The goal is to help individuals and small businesses meet their tax 
obligations, without adding unnecessary burden to taxpayers. 
Specifically, the IRS set forth new policies and programs to help 
taxpayers pay back taxes and avoid tax liens.
    The announcement centers on the IRS making important changes to its 
lien filing practices that will lessen the negative impact on 
taxpayers. The changes include:
  --Significantly increasing the dollar threshold when liens are 
        generally issued, resulting in fewer tax liens;
  --Making it easier for taxpayers to obtain lien withdrawals after 
        paying a tax bill;
  --Withdrawing liens in most cases where a taxpayer enters into a 
        Direct Debit Installment Agreement;
  --Creating easier access to Installment Agreements for more 
        struggling small businesses; and
  --Expanding a streamlined Offer-in-Compromise Program to cover more 
        taxpayers.
    In short, despite a quickly evolving taxpayer base and 
unprecedented demands on IRS resources, the IRS continues to deliver 
for the American people.

Working Smarter and Greater Efficiencies
    The IRS continues to reap the financial benefits of the E-File 
Program, one of the most successful modernization programs in 
Government. Today we receive nearly 100 million tax returns 
electronically. In the past these returns had to be opened, sorted, and 
transcribed manually. The efficiency savings have allowed us to reduce 
our submission processing sites in half. This year we are closing our 
5th of the original 10 sites that processed paper returns.
    The fiscal year 2012 budget request includes almost $190 million in 
efficiency savings, reductions, and nonrecurring activities. While 
these targets are substantial, I am confident that we will meet them 
and more, by finding cost-savings in our operations wherever we can.
    I have also challenged the IRS leadership and indeed, all IRS 
employees, to take a hard look at their operations and look for 
potential savings and efficiencies.
    Even in a tough budget environment, I am confident that the IRS 
will continue to deliver value for the American taxpayer and will 
emerge as a stronger agency in the years to come.
    I am particularly pleased with the progress that we are making in 
achieving efficiencies in our technology operations. The IRS has 
embarked on a multi-year effort to streamline and standardize processes 
that will allow for substantial efficiency gains. For example, the 
Information Technology Infrastructure Library is a collection of best 
practices used to aid in the implementation of a lifecycle framework 
for IT Service Management. In September 2010, an independent third 
party found that the IRS recently reached Capability Maturity Model 
(CMM) Level 2 based on established criteria.
    Achieving this level allows standardized project management 
practices across projects. This will improve our agility and quality in 
delivering software to our business customers and the taxpaying public, 
as well as reduce the cost of developing and maintaining products, and 
improve the cost of engineering services.

Investing in Core Programs
    Indeed, it is in recognition of the critical role that the IRS 
plays in the economy that the fiscal year 2012 request includes a 
judicious investment in the IRS' core service and enforcement programs 
and initiatives. Enforcement and customer service are not an either/or 
proposition. Accomplishing our mission requires that we do both well.
    The request also includes the necessary funding for completing on 
time for the 2012 filing season the core taxpayer account database. A 
fully operational customer account database will mean faster processing 
of returns, expedited refunds for 140 million individual taxpayers and 
enhanced data security.
    The funding in the President's budget request will be used to carry 
out the IRS' strategic and balanced agenda that includes:
  --Improved service to taxpayers, including enhancements to the 
        IRS.gov Web site to meet taxpayer needs and growing demand for 
        more e-services;
  --Robust and targeted enforcement programs to address offshore tax 
        evasion and improve tax compliance for corporate and high-
        income taxpayers;
  --Completion of the new taxpayer account database and enhancements to 
        our electronic filing platforms;
  --Leveraging the Return Preparer Program to reduce noncompliance;
  --Implementation of our Uncertain Tax Position reporting 
        requirements;
  --Combating errors and fraud for refundable tax credits, such as the 
        Earned Income Tax Credit (EITC);
  --Better use of data, such as credit card and securities basis 
        information reporting;
  --Implementation of new tax provisions found in major recent 
        legislation, including the Affordable Care Act (ACA);
  --Workforce development to ensure that we have a talented and capable 
        workforce for the foreseeable future; and
  --Enhancing workplace/physical security for IRS employees.
    The IRS will also administer those portions of ARRA that were 
extended into 2011. These include the expanded EITC for families with 
three or more children and the American Opportunity Tax Credit to help 
pay tuition and other expenses for individuals enrolled in institutions 
of higher education. In addition, we continue to administer the Health 
Coverage Tax Credit (HCTC) that was enacted as part of the Trade 
Adjustment Assistance Reform Act of 2002.
    The new enforcement personnel included in the request will generate 
more than $1.3 billion in additional annual enforcement revenue once 
the new hires reach full potential in fiscal year 2014. The roughly $6 
to $1 return on investment estimate related to these initiatives does 
not include the indirect revenue effect of the deterrence value of 
these investments and other IRS enforcement programs, which is 
conservatively estimated to be at least three times the direct revenue 
impact.

                                  ACA

    The IRS will need to implement and administer the tax provisions of 
the ACA (Public Law 111-148) in 2012. The IRS seeks to be helpful to 
families and businesses that will benefit from the ACA. In fact, some 
benefits have already begun. For example, upon enactment of the ACA, 
the IRS immediately began to make sure that small employers were aware 
of a significant new tax credit to help them provide health coverage to 
their workers.
    Because the tax credit was enacted mid-year, and became effective 
immediately, the IRS conducted a significant outreach campaign to small 
businesses. In addition to mailing postcards to millions of employers 
alerting them to the new credit, the IRS held or attended more than 
1,000 outreach events targeted at small businesses and the tax 
practitioners who serve them.
    Working with the Department of Health and Human Services, we also 
administered a program to provide $1 billion in tax credits and grants 
to qualifying therapeutic discovery projects.
    In addition, we have implemented or have begun to implement changes 
that expanded the tax credit for adoptive parents, a new exclusion for 
loan forgiveness programs for certain health professionals, and a new 
excise tax on indoor tanning services.
    We are also working diligently to implement the tax law components 
of the changes made to the health insurance marketplace that will begin 
in 2014. Let me put these efforts in context by describing the 
activities that we are undertaking to plan for these upcoming changes.
    The IRS also has significant information technology development 
work that must be completed in order to administer these provisions. 
The vast majority of the resources that the IRS will require between 
now and 2014 will be dedicated to technology and the associated 
business process design required to effectively administer these new 
provisions.

Exchanges and Medicaid Health Coverage
    Individuals seeking subsidized coverage will interact with the IRS 
at a few discrete points in the process:
      Obtaining Coverage Through Exchanges and/or Medicaid.--The ACA 
        outlines eligibility rules for the premium assistance tax 
        credit, as well as Medicaid. In both cases, the household 
        income as reported to the IRS by approximately 140 million 
        taxpayers on the 2012 tax returns will be relevant to 
        eligibility determination. The IRS will alter its systems to 
        take account of the new concept of household income, and is 
        planning to provide significant educational tools to help 
        individuals understand what household income represents. 
        Furthermore, planning is underway to determine the best way to 
        provide this information to taxpayers via the Web, telephone, 
        and other channels.
      Receiving Advance Premium Tax Credits.--Individuals who are 
        determined to be eligible for the premium assistance tax credit 
        can receive the benefit through advance monthly payments that 
        are made directly to the plan provider. Working with the 
        Treasury Financial Management Service, which will be making the 
        advanced payment, the IRS will develop new systems for the 
        administration of the tax credit. In addition, the IRS will 
        work with the exchanges as appropriate to ensure there is 
        significant outreach and education to make taxpayers who are 
        receiving the advance payments aware of the importance of 
        reporting mid-year changes in circumstance that could affect 
        their eligibility for, or the amount of the credit.
      Reconciling the Premium Assistance Tax Credit With Advance 
        Payments Made Through the Year.--The ACA provides that 
        individuals will reconcile the amount of advance payments of 
        the premium credit with the actual amount as computed on the 
        tax return. In other words, advance payments made throughout 
        2014 will be reconciled with individuals' tax returns that are 
        filed in the spring of 2015. To the extent that the ultimate 
        credit amount is larger than the sum of the advance payments, 
        the additional amount will be added to the taxpayer's refund. 
        If the ultimate credit amount is lower than the sum of the 
        advance credit, the taxpayer will owe additional tax on the 
        return, potentially subject to a cap.

Individual Coverage Requirement
    The IRS will also be responsible for administering the requirement 
that individuals who can afford health coverage either obtain it or 
make a payment to the IRS. While implementation of this requirement 
does not come into effect until 2014, and will appear on the 2014 tax 
forms that will be filed in the spring of 2015, we have nonetheless 
received a number of questions about how this provision will be 
implemented.
    First, we anticipate providing significant outreach and education 
on this provision. This will come directly from the IRS and in 
partnership with State and Federal agencies, employers, tax return 
preparers, and others. Our experience in administering new tax laws 
suggests that the vast majority of individuals will successfully 
incorporate this provision into their tax year 2014 returns, filed in 
2015.
    The forms will provide instructions on how individuals can 
determine if they met the coverage requirement, and if not, how to 
compute the payment and include it in that year's tax liability. We 
also plan to work closely with the tax return preparation industry to 
ensure that the professionals who advise taxpayers are fully informed 
about this provision. Today, approximately 60 percent of taxpayers use 
a return preparer and another 25 percent use software to prepare their 
own returns.

Employer Provisions
    Finally, the IRS will administer the employer responsibility 
payment for large employers who do not offer affordable coverage, and 
have at least one employee who receives subsidized coverage through the 
exchange. This provision closely intersects with the rest of the 
exchange provisions, and we are working closely with the Department of 
Health and Human Services and the Department of Labor to reach out to 
the employer community, understand what questions and issues they 
foresee, and incorporate the feedback that we get into the up-front 
program design and regulatory guidance.
Tax Law Changes
    The IRS is also working diligently to implement other tax law 
changes that come into effect over the next several years. Earlier in 
my testimony I mentioned several that we are already implementing, and 
would be happy to answer any questions that you have on those, or the 
provisions coming into effect in the months and years ahead.
                               conclusion
    In conclusion, let me thank the subcommittee again for this 
opportunity to discuss the IRS budget request for fiscal year 2012 
which reflects the progress and improvements the IRS continues to 
make--even in a difficult budget environment.
    I believe the fiscal year 2012 budget is fiscally prudent and makes 
wise investments in strategic priorities in enforcement, service, and 
business modernization. It will help ensure that the IRS will continue 
its vital role in keeping our Nation and economy healthy and strong.
                                 ______
                                 
  Prepared Statement of J. Russell George, Inspector General for Tax 
               Administration, Department of the Treasury

    Chairman Durbin, Ranking Member Moran, and members of the 
subcommittee, I thank you for this opportunity to provide a written 
statement regarding the fiscal year 2012 budget request for the 
Internal Revenue Service (IRS).

         OVERVIEW OF THE IRS'S FISCAL YEAR 2012 BUDGET REQUEST

    The IRS is the largest component of the Department of the Treasury 
and has primary responsibility for administering the Federal tax 
system. Since the Federal tax system is a system that relies upon 
voluntary compliance, almost everything the IRS does in some way 
relates to fostering compliance with tax laws. The IRS provides 
taxpayer service programs that help millions of taxpayers to understand 
and meet their tax obligations and administers enforcement programs 
aimed at deterring taxpayers who are inclined to evade their 
responsibilities. The IRS is charged with vigorously pursuing those who 
violate tax laws.
    The IRS must strive to enforce the tax laws fairly and efficiently 
while balancing service and education to promote voluntary compliance 
and reduce taxpayer burden. To accomplish these efforts, the proposed 
fiscal year 2012 IRS budget requested approximately $13.3 billion \1\ 
in total appropriated resources. The total appropriations amount is an 
increase of $1.138 billion, or 9.4 percent, more than the fiscal year 
2010 enacted level.
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    \1\ The fiscal year 2012 budget request also includes approximately 
$138 million from reimbursable programs and $204 million from user fees 
for a total operating level of $13.6 billion.
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Program Summary by Appropriation Account
    The IRS fiscal year 2012 budget request includes appropriations for 
five IRS budget accounts, as depicted below:




    Generally, these five appropriation accounts fund the IRS's tax 
administration functions. The three primary appropriation accounts are 
taxpayer services, enforcement, and operations support. The taxpayer 
services account funds programs that focus on assisting taxpayers with 
understanding and meeting their tax obligations, while the Enforcement 
account supports the IRS's examination and collection efforts. The 
operations support account funds functions essential to the overall 
operation of the IRS, such as infrastructure and information services. 
The Business Systems Modernization (BSM) account provides funding for 
the development of a new taxpayer account database and investments in 
electronic filing. Finally, the Health Coverage Tax Credit 
Administration account supports the administration of the Health 
Coverage Tax Credit.\2\
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    \2\ The Health Coverage Tax Credit is a refundable credit for 
health insurance available to qualified individuals, enacted as part of 
the Trade Adjustment Assistance Reform Act of 2002, Public Law No. 107-
210, 116 Stat. 933 (2002).
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    The administration seeks to increase funding more than fiscal year 
2010 enacted operating levels for all of the appropriation accounts, 
ranging from 3 to 26 percent increases (see chart below). The budget 
request includes a net increase in IRS staffing of more than 5,100 
employees, for a total of more than 100,500 IRS employees.

                IRS FISCAL YEAR 2012 BUDGET REQUEST INCREASE OVER FISCAL YEAR 2010 ENACTED BUDGET
                                             [Dollars in thousands]
----------------------------------------------------------------------------------------------------------------
                                                    Fiscal year     Fiscal year                     Percentage
              Appropriation account                2010 enacted    2012 request    Dollar change     increase
----------------------------------------------------------------------------------------------------------------
Taxpayer services...............................      $2,278,830      $2,345,133         $66,303            2.91
Enforcement.....................................      $5,504,000      $5,966,619        $462,619            8.41
Operations support..............................      $4,083,884      $4,620,526        $536,642           13.14
BSM.............................................        $263,897        $333,600         $69,703           26.41
Health Insurance Tax Credit Administration......         $15,512         $18,029          $2,517           16.23
                                                 ---------------------------------------------------------------
      Total budget appropriated resources.......     $12,146,123     $13,283,907      $1,137,784            9.37
----------------------------------------------------------------------------------------------------------------

IRS Fiscal Year 2012 Priorities
    The IRS will focus efforts on the following priorities in fiscal 
year 2012 (these priorities are reflected in multiple appropriation 
accounts):
      Enforcement.--A serious challenge confronting the IRS is the tax 
        gap.\3\ Despite an estimated voluntary compliance rate of 84 
        percent and IRS enforcement actions, a significant amount of 
        income remains unreported and unpaid. The IRS estimated the 
        gross tax gap for tax year 2001, the most current figure to 
        date, to be approximately $345 billion. The IRS's strategy for 
        reducing the tax gap is largely dependent on funding for 
        additional compliance resources as well as legislative changes.
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    \3\ The Tax Gap is the difference between the estimated amount 
taxpayers owed and the amount they voluntarily and timely paid each 
year.
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      In fiscal year 2012, the IRS will continue to invest in 
        compliance programs, including its relatively newly enhanced 
        international enforcement initiatives to address offshore tax 
        evasion. These initiatives are designed to address the under-
        reporting of income associated with international financial 
        activities and expand enforcement efforts to address 
        noncompliance by corporate and high-wealth taxpayers and the 
        complex business enterprises they control (including 
        corporations, partnerships, and trusts). The IRS plans to use 
        audit results and intelligence from ongoing offshore 
        initiatives to refine case identification and selection methods 
        to identify promoters, facilitators, and participants in 
        abusive offshore arrangements.
      In addition, the IRS will continue to pursue other significant 
        initiatives, such as the Compliance Assurance Process Program, 
        industry issue resolution projects, and fast track settlements, 
        aimed at earlier and speedier issue resolution and greater 
        efficiency. These initiatives are a major part of the overall 
        retooling of the IRS's relationships with large corporate 
        taxpayers.
      The IRS also plans to continue to implement the recommendations 
        of the Tax Return Preparer Strategy by addressing the 
        challenges associated with the implementation of registration, 
        continuing education, and testing requirements for tax return 
        preparers that are scheduled to go into effect in fiscal year 
        2011. The IRS took a major step forward in launching its new 
        Preparer Tax Identification Number online registration process. 
        The process gives the IRS an important and improved line of 
        sight into the return preparer community. The IRS plans to use 
        the information to analyze trends, spot anomalies, and 
        potentially detect fraud. In addition, the IRS will continue to 
        develop and implement legislation to increase the use of 
        electronic filing among the paid preparer community.
      Taxpayer Services.--Assisting taxpayers with their tax questions 
        before they file their tax returns helps prevent inadvertent 
        noncompliance and reduces the need for the IRS to send 
        burdensome postfiling notices and other correspondence. In 
        fiscal year 2012, the IRS plans to increase its service level 
        by adding resources to meet the ever-increasing demand and by 
        continuing to make efficiency improvements, such as automated 
        self-service applications that allow taxpayers to obtain 
        information on less complicated issues (e.g., refund 
        inquiries). The IRS believes that these improvements will allow 
        staff to address the more complex tax-law issues stemming from 
        the passage of new legislation. In addition, the IRS continues 
        to study the services it offers to taxpayers on the Internet, 
        at walk-in sites, and on its toll-free telephone lines. IRS 
        officials are also exploring the relationships between taxpayer 
        errors and unclear correspondence to guide them in the 
        development of new approaches to service.
      BSM.--Data and technology are central to the future of tax 
        administration. For the 2012 filing season, the IRS plans to 
        complete the new taxpayer account database and continue to make 
        investments in its electronic filing systems. Completion of the 
        core taxpayer account database is the cornerstone of IRS 
        modernization that is expected to expedite refunds to millions 
        of individual taxpayers. It is also a prerequisite for other 
        major initiatives, such as the expansion of online paperless 
        services. The ability of the IRS to support increasingly 
        complex taxpayer service and compliance initiatives will be 
        severely limited until the new taxpayer account database is 
        completed.
      The fiscal year 2012 BSM budget request is $333.6 million and 453 
        Full-time Equivalents (FTE).\4\ This is an increase of $69.7 
        million (26.4 percent) and 120 FTEs more than the fiscal year 
        2010 enacted level of $264 million and 333 FTEs. Almost half of 
        the budget request will fund continued development of the 
        Customer Account Data Engine 2 (CADE 2).\5\ While the current 
        BSM is in its 12th year, the IRS's modernization efforts 
        started in the 1980s. The IRS originally estimated that the BSM 
        effort would last up to 15 years and incur contractor costs of 
        approximately $8 billion. To date, the current BSM has received 
        $3.24 billion in contractor services, plus an additional $474 
        million for internal IRS costs.
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    \4\ A measure of labor hours in which 1 FTE is equal to 8 hours 
multiplied by the number of compensable days in a particular fiscal 
year.
    \5\ CADE 2 creates a modernized processing and data-centric 
infrastructure that will enable the IRS to improve the accuracy and 
speed of individual taxpayer account processing, enhance the customer 
experience through improved access to account information, and increase 
the effectiveness and efficiency of agency operations.
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      The BSM funding is intended to improve taxpayer service and 
        enforcement, and reduce the costs and risks of operating 
        parallel tax processing systems.\6\ The IRS plans to update and 
        settle individual taxpayer accounts in 24 to 48 hours with 
        current, complete, and authoritative data which should 
        facilitate expanded opportunities for compliance, increase 
        analytical capabilities, and accelerate the identification of 
        fraudulent trends.
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    \6\ The IRS operates parallel tax processing systems that require 
updates to all systems when tax legislation is changed or updated. 
These parallel systems include CADE, CADE 2, and the Individual Master 
File.
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      The increases more than the fiscal year 2010 budget seem 
        reasonable considering the investments in developing and 
        rolling out the CADE 2 during fiscal year 2012. Because the IRS 
        is taking more responsibilities for program management, there 
        are more IRS resources and fewer contractor resources devoted 
        to BSM, thus the increase in labor costs. Finally, the other 
        major BSM projects (e.g., Modernized e-File \7\) have reduced 
        budgets for fiscal year 2012 as they are winding down.
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    \7\ The Modernized e-File project develops the modernized, Web-
based platform for filing approximately 330 IRS forms electronically, 
beginning with the U.S. Corporation Income Tax Return (Form 1120), U.S. 
Income Tax Return for an S Corporation (Form 1120S), and Return of 
Organization Exempt From Income Tax (Form 990). The project serves to 
streamline filing processes and reduce the costs associated with a 
paper-based process.
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      In the area of information technology systems operations, the 
        fiscal year 2012 IRS budget request presents several budgetary 
        increases related to maintaining and improving information 
        technology operations and taxpayer service, including $33 
        million to expand online options through IRS.gov improvements, 
        $25 million for portal migration, and $27.5 million to update 
        the Integrated Financial System.
      The portal initiative funds the second year of a 3-year effort to 
        replace the aging infrastructure of the portals and complete 
        the migration of the two portals by August 2013, when the 
        existing contracts expire. This will result in significant 
        enhancements to online capabilities for tax preparers and other 
        registered users. Failure to complete the portal migration by 
        this date will result in increased portal operating costs and 
        increased risk under existing sole-source contracts. In 
        addition, taxpayer and tax practitioners will continue to use 
        more expensive, labor-intensive service delivery channels such 
        as calling the 1-800 telephone number or visiting an IRS 
        taxpayer assistance center.

Implementation of the Affordable Care Act (ACA)
    The implementation of the ACA \8\ presents a major challenge to the 
IRS. The ACA represents the largest set of tax law changes in more than 
20 years, with more than 40 provisions that amend the tax laws. 
Although the new law goes into effect gradually over many years, 
several provisions required immediate action by the IRS, including the 
Small Business Health Care Tax Credit, the Qualifying Therapeutic 
Discovery Credit, and the expanded Adoption Credit. To enact the range 
of retroactive provisions, the IRS focused on developing new systems 
and business processes for near-term provisions, conducting initial 
planning for long-term provisions, and defining appropriate outreach 
activities for each affected group.
---------------------------------------------------------------------------
    \8\ Public Law No. 111-148, 124 Stat. 119.
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       analysis of the requested fiscal year 2012 budget increase
    The fiscal year 2012 budget request of $13.3 billion for the IRS is 
a $1.138 billion (9.4 percent) increase more than the fiscal year 2010 
enacted budget. The $1.138 billion consists of the following:
Changes to the Base
    Adjustment To Reach Fiscal Year 2011 President's Budget Level 
\9\.--Increase of $402 million, including a $123 million increase 
related to the BSM appropriation.
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    \9\ The initiatives included in the fiscal year 2011 budget 
submission are separate from the $839 million in program increases 
included in the fiscal year 2012 budget submission.
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    Maintaining Current Levels.--Increase of $86 million.
    Program Reinvestment.--Increase of $1.5 million (one-time cost).
    These increases are offset by a decrease of $190 million in 
efficiencies and savings, including a $1 million decrease related to 
the modernization appropriation.

Program Changes
    Program Increases.--Increase of $839 million, including an increase 
of $52 million in the operations support appropriation for costs 
related to maintenance of deployed modernization systems. This $52 
million increase is offset by a corresponding decrease of $52 million 
in the modernization appropriation for fiscal year 2012.

Adjustment To Reach Fiscal Year 2011 President's Budget Level
    The IRS is requesting about $402 million to reach the fiscal year 
2011 President's budget request adjusted for the proposed pay freeze. 
The IRS has not issued new guidance for the fiscal year 2012 budget 
regarding the impact of the full-year fiscal year 2011 continuing 
resolution signed by the President on April 15, 2011. Therefore, we are 
presenting the information as reflected in the IRS's fiscal year 2012 
budget request dated February 14, 2011.
    The fiscal year 2012 budget request does not specify which 
initiatives are included in the $402 million increase. However, we 
reviewed the IRS's fiscal year 2011 budget request, and identified the 
following program changes in addition to changes to the base:
  --$21 million to increase the telephone level of service;
  --$25 million to improve and redesign the IRS.gov Web site;
  --$247 million to reduce the tax gap. The three largest initiatives 
        associated with this effort are $121 million for international 
        enforcement to address offshore tax evasion; $78 million for 
        under-reporting by corporate and high-wealth taxpayers, tax 
        abuse, and other under-reporting issues; and $38 million to 
        broaden collection coverage;
  --$168 million to complete development of the new taxpayer account 
        database and continue investments in electronic filing systems. 
        This includes continuing development and deployment of BSM 
        projects such as Modernized e-File, core infrastructure (such 
        as portals, hardware, software, and security), and system 
        engineering management capabilities (including project planning 
        and monitoring); and
  --$3 million program reinvestment of a portion of the electronic 
        filing savings to fund the one-time separation costs associated 
        with the September 30, 2011, closure of the Atlanta submission 
        processing site.
    Additionally, the IRS identified $9 million in program reductions 
to the taxpayer advocate service case processing activities, Low-income 
Taxpayer Clinic grants, Tax Counseling for the Elderly Program, and 
Volunteer Income Tax Assistance grants to realign the programs to the 
fiscal year 2009 enacted levels.

Maintaining Current Levels
    The IRS is requesting about $86 million to fund nonlabor inflation 
adjustments and an increase in Federal Employment Retirement System 
participation. Nonlabor inflation adjustments include rent, postage, 
supplies, and equipment. No inflation adjustment is requested for pay 
in fiscal year 2012.

Program Reinvestment
    The increased use of electronic filing has led to the consolidation 
of sites that process paper individual returns. Resources from 
electronic filing savings will be reinvested to fund one-time 
separation costs associated with the September 30, 2011, closure of the 
Atlanta submission processing site. The IRS fiscal year 2012 budget 
request includes a net increase of $1.5 million related to this effort.

Efficiencies and Savings
    The IRS fiscal year 2012 budget request includes a net reduction of 
about $190 million related to efficiency savings. This $190 million 
reduction represents a total of 523 FTEs. The four largest areas of 
cost savings are outlined below.
    $75 Million Decrease From Reduced Information Technology 
Infrastructure.--The IRS intends to reduce its infrastructure through 
the use of the Capability Maturity Model (a process improvement 
approach that yields efficiencies in software engineering); the use of 
the Information Technology Infrastructure Library, which will allow the 
IRS to improve the quality of its information technology services; and 
further consolidate its security activities to leverage security best 
practices.
    $27.3 Million Decrease From Reduced Training, Travel, and 
Programs.--The IRS intends to reduce nontechnical training and noncase-
related travel, and plans to implement various program efficiencies. 
The IRS expects to achieve program efficiencies in the BSM, Health 
Insurance Tax Credit Administration, and various taxpayer communication 
and education programs. The IRS also projects this efficiency 
initiative will lead to a reduction of 41 FTEs.
    $22.4 Million Decrease From Increased Electronic Filing Savings.--
This decrease results from savings from increased electronic filing. 
Savings are based on projected growth in electronic filing and 
continued modernization efforts. As a result of this efficiency 
initiative, the IRS projects it would need 416 fewer FTEs in submission 
processing.
    $22 Million Decrease From Non-recurring Savings.--These savings 
would result from the net reduction of nonrecurring, one-time costs 
associated with various fiscal year 2011 enforcement initiatives (e.g., 
information technology equipment and training).
Program Increases
    The IRS is requesting an increase of about $839 million for:
  --enforcement initiatives;
  --infrastructure initiatives; and
  --taxpayer service initiatives.
    The largest component of the $839 million increase is $606 million 
related to enforcement initiatives. The $606 million for the 
enforcement initiatives includes $243 million for activities the IRS 
believes will yield direct measurable results through a return on 
investment (ROI). The IRS estimates that the activities funded by the 
$243 million increase will generate $1.3 billion annually in additional 
enforcement revenues in fiscal year 2014. As stated earlier, many of 
the initiatives affect more than one appropriation account. 
Additionally, the $839 million in fiscal year 2012 program increases 
are in addition to the increases requested for all five appropriation 
accounts to reach the fiscal year 2011 budget request.
    The fiscal year 2012 budget request does not separately align the 
various program increases to the tax gap; however, many of the 
initiatives refer to the tax gap. The IRS also states that helping 
taxpayers understand their obligations under the tax law is critical to 
improving compliance and addressing the tax gap.
    IRS Enforcement Initiatives.--$606 million increase \10\ focuses on 
activities targeted at improving compliance through nine multi-year 
initiatives. These activities form the backbone of the IRS's approach 
to address the tax gap.
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    \10\ IRS enforcement initiatives are funded from a variety of 
appropriations. Therefore, the requested $606 million increase in 
enforcement initiatives will not equal the requested $462 million 
increase in enforcement appropriations identified on page 3.
---------------------------------------------------------------------------
    The five largest enforcement initiatives are summarized below.
    $260.3 Million To Ensure Accurate Delivery of Tax Credits.--This 
initiative calls for 834 new FTEs. The IRS expects this initiative will 
improve the delivery of existing credits through a combination of 
improved technology tools and increased enforcement staffing. The 
initiative also funds the information technology and other systems 
required to implement the new ACA's Premium Assistance Tax Credit, 
which becomes effective in 2014. The IRS expects that this initiative 
will produce additional annual enforcement revenue of $183.3 million 
(an ROI of 4 to 1) in fiscal year 2014.
    $96.7 Million To Increase Coverage To Address Tax Law Changes and 
Other Compliance Issues (Tax Gap).--This initiative calls for 497 new 
FTEs. The IRS anticipates this initiative will address compliance 
issues and new responsibilities arising from recent tax law changes 
included in major legislation such as the American Recovery and 
Reinvestment Act of 2009 \11\ and the ACA. This initiative will fund 
compliance programs needed for new provisions such as direct-pay bonds, 
new requirements on tax-exempt hospitals, a new fee on manufacturers 
and importers of branded prescription drugs, and the excise tax on 
indoor tanning. It will also increase audits of specialty programs 
(i.e., employment tax, excise tax, and estate and gift tax). The IRS 
believes this initiative will produce additional annual enforcement 
revenue of $80.8 million (an ROI of 3 to 1) in fiscal year 2014.
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    \11\ Public Law No. 111-5, 123 Stat. 115.
---------------------------------------------------------------------------
    $72.6 Million To Increase International Service and Enforcement.--
This initiative calls for 377 new FTEs. The IRS expects it will be able 
to implement changes required by enactment of the Hiring Incentives to 
Restore Employment (HIRE) Act of 2010,\12\ with funding for this 
initiative. The IRS will implement the reporting, disclosure, and 
withholding requirements and expand coverage of international filings; 
conduct more in-depth international compliance work; strengthen 
compliance efforts related to offshore activity; and expand the Global 
High-Wealth Compliance Group. The IRS predicts that this initiative 
will produce additional annual enforcement revenue of $467.1 million 
(an ROI of 8 to 1) in fiscal year 2014.
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    \12\ Public Law No. 111-147, 124 Stat. 71.
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    $58.5 Million To Administer New Statutory Reporting Requirements.--
This initiative calls for 187 new FTEs. Recent legislation established 
significant new information reporting and sharing requirements from 
third parties (such as employers and health insurance providers), and 
the exchanges to administer the ACA's Premium Assistance Tax Credit, 
the individual coverage requirement, and the employer responsibility 
payment. Effective implementation requires significant enhancements to 
existing information returns systems to handle the additional volumes 
and new information reporting categories. This initiative also includes 
resources to implement provisions that allow the IRS to share tax data 
with State and Federal entities to determine eligibility for the credit 
and to ensure the secure exchange of information.
    $52 Million To Increase Collection Coverage.--This initiative calls 
for 413 new FTEs. The IRS expects this initiative will expand work on 
the collection inventory and improve collection processes to bring 
taxpayers who fail to pay their debt into compliance and produce 
additional annual enforcement revenue of $398.3 million (an ROI of 9 to 
1) in fiscal year 2014.
    Infrastructure Initiatives.--$119 million increase focuses on 
enhancing employee security, developing disaster recovery system 
capability, and establishing systems to implement various provisions of 
the ACA through four initiatives. The three largest initiatives are 
summarized below.
    $62.5 Million To Implement Individual Coverage Requirement and 
Employer Responsibility Payments.--This IRS initiative supports the 
development of information technology, infrastructure, and systems to 
implement the provisions of the ACA that establish shared 
responsibility payments for both individuals and employers. The IRS 
requested an additional 65 FTEs for this program initiative. Beginning 
in 2014, the ACA requires individuals who are able to afford health 
insurance to obtain minimum essential coverage or pay a penalty. If 
affordable coverage is not available, certain individuals may be 
eligible for an exemption.
    $27.5 Million To Update the Integrated Financial System (IFS).--The 
IRS believes updating the IFS will ensure compliance with future 
Federal accounting requirements; eliminate current work-around 
processes necessary to support adjustments and reimbursable receivables 
activities not provided in the current system; eliminate the year-end 
blackout period and multiple budget versions; and eliminate the month-
end accrual process because liabilities would post upon receipt. This 
initiative calls for five new FTEs.
    $15.5 Million To Enhance Physical Security for Federal Employees.--
The February 2010 attack against the Austin, Texas, IRS office killed 
one IRS employee and injured several others. As a result of this 
attack, this initiative will provide the investments needed to update 
and/or upgrade the physical security of IRS facilities. The investments 
are designed to enhance the overall security of IRS employees in the 
workplace. This initiative calls for 10 new FTEs.
    Taxpayer Services Initiatives.--$114 million increase focuses on 
improving taxpayer service and the IRS.gov Web site through two 
initiatives as summarized below.
    $81.3 Million To Improve Taxpayer Service.--The IRS expects this 
initiative and the $25.9 million increase requested for fiscal year 
2011 will provide additional staffing of at least 519 FTEs to address 
rising demand and increase the customer service representative level of 
service from the planned target of 71 percent in fiscal year 2010 to 80 
percent in fiscal year 2012, while maintaining a 93 percent customer 
satisfaction rate for toll-free telephone services. This initiative 
also includes funding to help taxpayers understand the new tax law 
provisions and to make related call center and infrastructure changes 
to handle anticipated inquiries, including questions regarding the ACA.
    $33 Million To Expand Online Options Through IRS.gov 
Improvements.--This IRS initiative will continue the multi-year effort 
to replace the outdated web portal environment and provide additional 
online services to taxpayers. This initiative will allow the IRS to 
continue the replacement of an outdated web portal environment that has 
reached the end of its useful life with the help of 15 additional FTEs.
    Chairman Durbin, Ranking Member Moran, and members of the 
subcommittee, I thank you for the opportunity to provide this statement 
regarding the fiscal year 2012 budget request for the IRS.
                                 ______
                                 
   Prepared Statement of Nina E. Olson, National Taxpayer Advocate, 
                       Department of the Treasury

    Chairman Durbin, Ranking Member Moran, and distinguished members of 
this subcommittee: Thank you for inviting me to submit this written 
statement regarding the proposed budget of the Internal Revenue Service 
(IRS) for fiscal year 2012.\1\ As the National Taxpayer Advocate, the 
statutory voice for taxpayers and taxpayer rights inside the IRS, I 
submit the following thoughts for your consideration:
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    \1\ The views expressed herein are solely those of the National 
Taxpayer Advocate. The National Taxpayer Advocate is appointed by the 
Secretary of the Treasury and reports to the Commissioner of Internal 
Revenue. However, the National Taxpayer Advocate presents an 
independent taxpayer perspective that does not necessarily reflect the 
position of the IRS, the Treasury Department, or the Office of 
Management and Budget. Congressional testimony requested from the 
National Taxpayer Advocate is not submitted to the IRS, the Treasury 
Department, or the Office of Management and Budget for prior approval. 
However, we have provided courtesy copies of this statement to both the 
IRS and the Treasury Department in advance of this hearing.
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  --The IRS requires additional funding to collect the revenue that 
        supports the Federal Government and to better meet the service 
        needs of the taxpaying public.
  --The IRS, in particular, requires more funding to improve taxpayer 
        services. Both the quality of taxpayer services, like answering 
        taxpayer phone calls and responding to correspondence, and the 
        quantity of taxpayer outreach and education have diminished in 
        recent years. At this point, only 5 percent of the IRS budget 
        is allocated for pre-filing taxpayer assistance and education. 
        In addition, the combination of increased IRS enforcement 
        actions and the recession has created substantially greater 
        taxpayer need for assistance from the Taxpayer Advocate Service 
        (TAS) and the Low Income Taxpayer Clinic Program.
  --The existing IRS budget structure does not accurately portray the 
        activities of the IRS. In particular, a significant percentage, 
        and perhaps the majority, of funding included in the ``taxpayer 
        services'' account is not spent on programs commonly viewed as 
        taxpayer service.
  --The ``program integrity allocation adjustment'' mechanism has been 
        used in a manner that enables the IRS to receive extra funding 
        for enforcement but not for its taxpayer service activities. 
        Under the proposed fiscal year 2012 budget, the IRS would 
        receive an additional $936 million in enforcement funding 
        through this mechanism (which amounts to 16 percent of the 
        $5,966,619,000 enforcement total), while receiving $0 in 
        additional taxpayer-service funding through this mechanism.\2\ 
        This is true despite the fact that taxpayer service 
        indisputably plays a significant role in promoting tax 
        compliance.
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    \2\ IRS FY 2012 Budget Request, Congressional Budget Submission 77 
(Feb. 14, 2011), available at http://www.treasury.gov/about/budget-
performance/Documents/CJ_FY2012_IRS_508.pdf.
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  --The IRS desperately needs to conduct or commission better research 
        so it can allocate its service and enforcement resources more 
        efficiently.
  --The IRS should revise its mission statement to acknowledge 
        explicitly that its traditional role as the tax collector has 
        expanded in recent years so that it is now both--
    --collecting taxes; and
    --administering social and economic benefits programs.
    This dual role should also be recognized explicitly in the budget 
        to ensure the IRS receives sufficient funding to staff and 
        perform both roles effectively.
    Before I delve into these issues, I want to take a moment to 
acknowledge the extraordinary work of the IRS workforce and its 
leadership. In fiscal year 2010, the IRS collected more than $2.3 
trillion to support the financial commitments of the Federal 
Government.\3\ It processed about 2.7 billion information returns \4\ 
and about 230 million tax returns, including 141 million individual 
returns, 7 million corporation returns, and 30 million employment tax 
returns.\5\ Customer service representatives answered 47 million 
calls,\6\ and IRS enforcement personnel ramped up examination and 
collection activities.\7\ At the same time, the IRS launched major 
initiatives to regulate Federal tax return preparers and combat 
noncompliance by taxpayers utilizing offshore bank accounts. There are 
always tasks the IRS could perform better--and I will address some of 
them below--but I think it is important to place these comments in 
context by acknowledging how much the IRS does very well.
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    \3\ IRS Data Book, FY 2010, Table 1.
    \4\ Id. at Table 14.
    \5\ Id. at Table 2.
    \6\ IRS, Joint Operations Center, Snapshot Reports: Enterprise 
Snapshot (week ending September 30, 2010).
    \7\ See IRS FY 2010 Enforcement Results, available at http://
www.irs.gov/pub/irs-utl/2010_enforcement_results.pdf.
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 THE IRS REQUIRES ADDITIONAL FUNDING TO MAXIMIZE THE COLLECTION OF TAX 
  REVENUE AND TO BETTER MEET THE SERVICE NEEDS OF THE TAXPAYING PUBLIC

    As I have testified previously, I view the IRS as the accounts 
receivable department of the Federal Government. If the Federal 
Government were a private company, its management would fund the 
accounts receivable department at whatever level it believed would 
maximize the company's bottom line. Since the IRS is not a private 
company, maximizing the bottom line is not--in and of itself--an 
appropriate goal. But the public sector analogue should be to maximize 
tax compliance, especially voluntary compliance, with due regard for 
protecting taxpayer rights and minimizing taxpayer burden. Studies show 
that if the IRS were given more resources, it could collect 
substantially more revenue.
    In my 2006 Annual Report to Congress, I recommended that the 
Congress provide the IRS with after-inflation increases of about 2 
percent to 3 percent a year for the foreseeable future. I continue to 
believe that increasing the IRS budget at this rate is an excellent 
financial investment.
    Most Federal expenditure programs are just that--expenditure 
programs. The funds are intended to be spent on worthwhile programs, 
but the expenditures generally do not directly generate more Federal 
revenue. The IRS is different. The IRS collects well more than 90 
percent of all Federal revenue.\8\ On a budget of about $12.1 billion, 
\9\ the IRS collected about $2.35 trillion in fiscal year 2010.\10\ In 
other words, every $1 appropriated for the IRS produced about $194 in 
Federal revenue.
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    \8\ See IRS Fact Sheet, FS-2011-09, IRS FY 2012 Budget Proposal 
Summary (February 2011), available at http://www.irs.gov/newsroom/
article/0,,id=235959,00.html.
    \9\ Department of the Treasury, FY 2012 Budget in Brief (showing 
fiscal year 2010 enacted levels).
    \10\ Government Accountability Office, GAO-11-142, Financial Audit: 
IRS's Fiscal Years 2010 and 2009 Financial Statements at 59 (Nov. 
2010).
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    In evaluating the likely revenue benefits of additional funding, 
the average return on investment (ROI) of 194:1 is less important than 
the marginal ROI that can be achieved for each additional $1 spent. 
While the marginal ROI is considerably less than 194:1 and will differ 
by program, studies generally show that, within reasonable limits, each 
additional $1 appropriated to the IRS generates substantially more than 
an additional $1 in Federal revenue, assuming the funding is wisely 
spent. (As I discuss below, however, the IRS needs to develop improved 
methods to measure the ROI of its activities.)
    Because of our national fiscal challenges, there has been 
considerable discussion recently about freezing or reducing all 
domestic discretionary spending. In my view, the IRS as the tax 
collector should be exempt from any such freeze or reduction. Reducing 
funding for the IRS will almost surely increase the deficit, because 
the reduction in revenue collected by the IRS will exceed the reduction 
in funding. A decision by the Congress to address our budget problem by 
cutting IRS funding would be akin to a private business attempting to 
address a spending shortfall by cutting its Accounts receivable 
department. In other words, it would be penny-wise, but pound-foolish.

Recommendation
    In light of the IRS's unique role as the Federal revenue collector, 
I recommend that the Congress develop new budget procedures to ensure 
that the IRS is funded at whatever level will maximize tax compliance, 
with due regard for protecting taxpayer rights and minimizing taxpayer 
burden. Over the long term, this approach may include exempting the IRS 
from spending ceilings or even taking the IRS off-budget. In the short 
run, this approach should include carving out the IRS from 
discretionary budget freezes intended to reduce the deficit, as cuts to 
the IRS budget are likely to increase the deficit.

 THE IRS ESPECIALLY REQUIRES MORE FUNDING TO IMPROVE TAXPAYER SERVICES

    The IRS's fiscal year 2005-fiscal year 2009 strategic plan was 
based on the slogan, ``Service + Enforcement = Compliance,'' and the 
IRS in fiscal year 2006 proposed to restructure its budget so that the 
two principal categories would be ``taxpayer services'' and 
``enforcement.'' In both cases, service is listed before enforcement. 
Although we view this formula as simplistic,\11\ it reflects the 
indisputable premise that both taxpayer service and enforcement 
contribute to tax compliance. Despite the intended implication that 
there is some rough equivalence between taxpayer service and 
enforcement in bringing about tax compliance, however, there is no 
equivalence in the IRS budget.
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    \11\ See, e.g., Internal Revenue Service FY 2008 Budget Request: 
Hearing Before the Subcomm. on Financial Services and General 
Government of the S. Comm. on Appropriations, 110th Cong. (2007) 
(statement of Nina E. Olson, National Taxpayer Advocate); Internal 
Revenue Service FY 2006 Budget Request: Hearing Before the Subcomm. on 
Transportation, Treasury, the Judiciary, Housing and Urban Development, 
and Related Agencies of the S. Comm. on Appropriations, 109th Cong. 
(2005) (statement of Nina E. Olson, National Taxpayer Advocate).
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    For fiscal year 2012, the proposed budget would spend $701 million 
on ``Pre-filing Taxpayer Assistance and Education,'' which is what most 
taxpayers think of as taxpayer service. This amounts to only 5 percent 
of the IRS budget. The last few years have been particularly 
challenging for the IRS and many taxpayers, as the recently enacted 
Economic Stimulus Payments, First-Time Homebuyer Credits, and Making 
Work Pay Credits, among other tax benefits, have proven complex to 
claim or substantiate and have led to a significant increase in 
taxpayer inquiries and problems. As I will describe below, the IRS has 
been unable to keep up with taxpayer needs.
    Significantly, the IRS has been ramping up spending for enforcement 
programs in recent years while holding taxpayer-service spending flat. 
If the proposed fiscal year 2012 budget is adopted without change, 
spending for the enforcement account will have increased by 15.4 
percent while spending for the taxpayer services account will have 
declined by 0.3 percent since fiscal year 2006 on an inflation-adjusted 
basis.\12\
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    \12\ Compare Department of the Treasury, FY 2012 Budget-in-Brief 
with Department of the Treasury, FY 2008 Budget-in-Brief. (The FY 2006 
budget was adopted using a different budget structure. The proposed FY 
2008 budget shows the enacted FY 2006 totals as translated into the 
current budget structure.) Inflation adjustments were made using the 
Bureau of Labor Statistics inflation calculator, available at http://
data.bls.gov/cgi-bin/cpicalc.pl.
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    Not surprisingly, key IRS performance measures have improved for 
enforcement, but declined for taxpayer service. For example, the IRS's 
fiscal year 2010 Management Discussion and Analysis included in the 
GAO's financial audit of the IRS states: ``Collection related to 
enforcement activities totaled $57.6 billion, a 34 percent increase 
over fiscal year 2004.'' \13\ By contrast, I note that the IRS answered 
74 percent of all calls from taxpayers seeking to speak with a 
telephone assister in fiscal year 2010 as compared with 87 percent in 
fiscal year 2004, a decline of 13 percentage points, or 15 percent.\14\ 
The IRS's ability to timely process taxpayer correspondence has also 
declined. Comparing the final week of fiscal year 2004 with the final 
week of fiscal year 2010, the backlog of taxpayer correspondence in the 
tax adjustments inventory has jumped by 76 percent (from 357,151 to 
628,016), the percentage of ``uncontrolled'' correspondence received, 
but not yet entered into IRS computer systems has increased by 134 
percent (from 8.3 percent to 19.4 percent of correspondence), and the 
percentage of taxpayer correspondence classified as ``overage'' has 
increased by 135 percent (from 11.5 percent to 27 percent).\15\
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    \13\ Government Accountability Office, GAO-11-142, Financial Audit: 
IRS's Fiscal Years 2010 and 2009 Financial Statements at 23 (Nov. 
2010).
    \14\ See IRS FY 2010 Enforcement Results, available at http://
www.irs.gov/pub/irs-utl/2010_enforcement_results.pdf.
    \15\ Compare IRS, Joint Operations Center, Weekly Enterprise 
Adjustments Inventory Report (week ending Sept. 25, 2010) with IRS, 
Joint Operations Center, Weekly Enterprise Adjustments Inventory Report 
(week ending Sept. 25, 2004).
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Taxpayer Service Contributes to Higher Rates of Tax Compliance, and 
        Outreach and Education in Particular Should be Increased
    Despite general agreement that both service and enforcement 
contribute to greater tax compliance, policymakers seeking to improve 
compliance and close the tax gap tend to focus almost exclusively on 
new enforcement measures--more audits, more collection actions, and 
more third-party information reporting to facilitate data-matching. The 
central role that service plays in promoting tax compliance is all too 
often overlooked.
    At the most basic level, there would be no compliance if the IRS 
did not publish forms and publications, provide instructions on how to 
file returns, and answer filing-related questions. However, taxpayer 
service goes beyond merely publishing forms and answering telephone 
calls.
    Taxpayer outreach and education are critically important to 
achieving voluntary tax compliance, which is the cheapest type of 
compliance for the government. In my view, the IRS is not conducting 
nearly enough outreach and education to taxpayers, especially self-
employed and small business taxpayers, to maximize voluntary 
compliance. According to the IRS's most recent estimate of unpaid 
taxes, $148 billion, or 43 percent of the aggregate tax gap, is 
attributable to unreported income earned by unincorporated businesses 
and the associated unpaid self-employment tax.\16\
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    \16\ See IRS News Release, IR-2006-28, IRS Updates Tax Gap 
Estimates (February 14, 2006) (accompanying slide 1), available at 
http://www.irs.gov/newsroom/article/0,,id=154496,00.html.
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    To be sure, a portion of the small business tax gap reflects a 
willful failure to report income. However, another portion reflects 
lack of knowledge about how to comply. For example, consider an 
individual without a college degree who becomes a successful plumber or 
electrician with a growing customer base. If he hires employees, he 
will face a host of employment, immigration verification, and local, 
State and Federal tax requirements, including the need to withhold and 
pay over payroll taxes with respect to his employees and to file 
employment tax and income tax returns on behalf of his business. 
Moreover, he likely will need to grapple with complex rules such as 
those dealing with automobile and transportation expenses, inventory, 
and depreciation of equipment and other fixed assets. For most 
taxpayers, these requirements would seem daunting or even impenetrable, 
and some taxpayers inevitably do not comply simply because they have no 
idea where to begin.
    The IRS's current compliance strategy, which consists largely of 
posting general information on its Web site and auditing a tiny 
fraction of small business returns,\17\ can be improved. The IRS can 
increase compliance in the small business community efficiently if it 
expands its outreach and education efforts through a more robust field 
function and commits more resources to meeting proactively with small 
businesses that are starting operations.
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    \17\ In fiscal year 2010, the IRS audited 0.58 percent of all 
business returns, including 0.94 percent of small C corporations (under 
$10 million in assets), 0.37 percent of Subchapter S returns, and 0.36 
percent of partnership returns. See IRS fiscal year 2010 Enforcement 
Results, available at http://www.irs.gov/pub/irs-utl/
2010_enforcement_results.pdf.
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    In fiscal year 2006, the Appropriations Committees of the House and 
the Senate directed the IRS, the IRS Oversight Board, and the National 
Taxpayer Advocate to collaboratively develop a 5-year strategic plan 
for taxpayer service.\18\ In response, the IRS developed a plan known 
as the Taxpayer Assistance Blueprint (TAB). The IRS conducted extensive 
research on the needs and preferences of individual taxpayers in the 
course of developing the TAB. Pursuant to annual appropriations 
directives, the IRS is continuing to provide the Appropriations 
Committees with annual progress reports.
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    \18\ H.R. Rep. No. 109-307, at 209 (2005) (Conf. Rep.).
---------------------------------------------------------------------------
    As I have recommended before--and as the Appropriations Committees 
urged 2 years ago \19\--the IRS should expand the scope of its TAB 
research studies to include self-employed and small business taxpayers 
and then should apply the knowledge it acquires through the studies to 
all of its interactions with those taxpayers. The IRS should also 
expand its outreach to tax-exempt organizations to improve compliance 
in that sector.
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    \19\ The House report ``urge[d] the IRS to continue to expand upon 
its TAB-related work with regard to small business and self-employed 
taxpayers and tax-exempt and government entities, and to include these 
additional categories in the annual IRS update to the TAB.'' H.R. Rep. 
No. 111-202, at 21-22 (2009). The Joint Explanatory Statement of 
Managers accompanying the conference report made clear that the House 
language was approved by the conference committee. H.R. Rep. No. 111-
366, at 892 (2009) (Conf. Rep.).
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Taxpayer Services Should Be Strengthened To Meet the Service Needs of 
        U.S. Taxpayers.
    Beyond compliance, I believe the IRS has an obligation to provide 
high-quality service to its taxpayers simply as a matter of good 
government. When we ask people to pay over a large percentage of their 
income to the Government each year, the least we can do is make the 
process as simple and painless as possible.
    In important respects, IRS taxpayer service is falling short. 
Consider the following four examples:
      Telephone Service.--Each year, tens of millions of taxpayers call 
        the IRS seeking help with a wide variety of issues, including 
        account questions and tax-filing questions. Yet the IRS is 
        unable to answer a large percentage of these telephone calls. 
        The Customer Account Services (CAS) Customer Service 
        Representative Level of Service (LOS), generally measures the 
        percentage of calls that get through to a representative among 
        all callers seeking to do so. By this measure, as noted, the 
        IRS answered 87 percent of its calls in fiscal year 2004. Since 
        that time, the LOS has been declining, plummeting to a low of 
        53 percent in fiscal year 2008. In other words, IRS telephone 
        assistors in fiscal year 2008 were unable to answer nearly one-
        half of the calls they received.
      In fiscal year 2010, the LOS rebounded somewhat to about 74 
        percent, and it is running at about that level so far in fiscal 
        year 2011.\20\
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    \20\ See IRS FY 2010 Enforcement Results, available at http://
www.irs.gov/pub/irs-utl/2010_enforcement_results.pdf; IRS, Joint 
Operations Center, Snapshot Reports: Customer Account Services--CAS 
(week ending May 21, 2011).
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      While answering 74 percent of calls is a vast improvement over 53 
        percent, it means the IRS is still failing to answer 1 out of 
        every 4 calls it receives from taxpayers who need assistance. 
        Equally concerning, among calls that do get answered, the 
        average wait time in fiscal year 2010 was nearly 11 
        minutes,\21\ up from about 4\1/2\ minutes in fiscal year 
        2007.\22\
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    \21\ IRS, Joint Operations Center, Snapshot Reports: Customer 
Account Services--CAS (week ending September 30, 2010).
    \22\ IRS, Joint Operations Center, Snapshot Reports: Customer 
Account Services--CAS (week ending September 30, 2007).
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    Although hard to quantify, the impact of the IRS's inability to 
answer taxpayer calls is significant and has considerable downstream 
consequences:
  --When taxpayers call the toll-free line with tax law questions and 
        cannot get through, some will just give up and not bother to 
        file their tax returns. Others will file inaccurate returns 
        that require IRS follow-up action and taxpayer response.
  --When taxpayers receive notices proposing additional tax, many have 
        questions and try to reach the IRS by phone. If they cannot get 
        through, they remain unsure about what to do and some will not 
        respond, requiring the IRS to take further steps and 
        potentially exposing those taxpayers to enforced collection 
        action. Others will write letters to the IRS, requiring IRS 
        employees in the AM function to respond.
    In his book, Many Unhappy Returns: One Man's Quest to Turn Around 
the Most Unpopular Organization in America, former Commissioner Charles 
Rossotti addressed the importance of maintaining a high level of 
service on the IRS's toll-free lines:

    ``Apart from the justifiable outrage it causes among honest 
taxpayers, I have never understood why anyone would think it is good 
business to fail to answer a phone call from someone who owed you 
money.'' \23\
---------------------------------------------------------------------------
    \23\ Charles O. Rossotti, Many Unhappy Returns: One Man's Quest to 
Turn Around the Most Unpopular Organization in America 285 (2005).

    Let me be clear that I am not being critical of the IRS's handling 
of the increased telephone volume--it generally is applying its current 
resources appropriately and is seeking new ways to use those resources 
more productively. However, to meet taxpayers' needs, to improve 
taxpayers' ability to comply with the law and respond to IRS notices, 
and to reduce the aggregate burden on the IRS when those who cannot get 
through by phone contact the IRS through multiple channels with the 
same question, I believe the IRS must be able to answer at least 85 
percent of taxpayer calls and keep taxpayers on hold for no longer than 
an average of 5 minutes.\24\
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    \24\ For a more detailed discussion of the IRS's toll-free 
telephone service, see National Taxpayer Advocate 2009 Annual Report to 
Congress 4-16 (Most Serious Problem: IRS Toll-Free Telephone Service Is 
Declining as Taxpayer Demand for Telephone Service Is Increasing).
---------------------------------------------------------------------------
      Taxpayer Correspondence.--The IRS's responsiveness to taxpayer 
        correspondence is also lagging. Some AM employees shuttle back 
        and forth between working with paper correspondence (including 
        the processing of amended returns) and answering telephone 
        calls. When IRS employees dedicated exclusively to answering 
        taxpayer calls cannot handle the volumes, AM employees are 
        shifted from handling paper correspondence to help out. Not 
        surprisingly, as call volumes have increased and AM employees 
        have been moved to answer telephone calls, paper correspondence 
        inventories have increased as well. The correspondence 
        inventory rose from approximately 480,000 at the end of fiscal 
        year 2007 to approximately 628,000 at the end of fiscal year 
        2010--a 31 percent increase.\25\
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    \25\ IRS, Joint Operations Center, Weekly Enterprise Adjustments 
Inventory Report (weeks ending Sept. 29, 2007 and Sept. 25, 2010, 
respectively).
---------------------------------------------------------------------------
      To some degree, the combination of poor telephone service and 
        slow correspondence processing creates a vicious cycle: 
        Taxpayers who cannot get through to the IRS by telephone send 
        letters, causing more work for employees assigned to paper 
        correspondence and leading to correspondence backlogs and 
        delays in processing amended returns, while taxpayers who write 
        to the IRS and do not receive timely responses call the IRS to 
        try to figure out what happened. The IRS requires taxpayers to 
        file their returns and respond to notices on a timely basis. 
        Taxpayers have a right to expect comparable timeliness of the 
        IRS.
      TAS.--The workload facing my own organization, the TAS, has 
        increased substantially in recent years. Although the TAS has 
        other important responsibilities, we are primarily the case-
        working operation of the IRS for taxpayers who are experiencing 
        a significant hardship. We assist taxpayers who are 
        experiencing a current or imminent financial hardship as a 
        result of an IRS action or inaction (e.g., where an IRS levy 
        against a taxpayer's paycheck will lead to eviction or a 
        shutoff of utilities) or who are experiencing a systemic 
        hardship because the IRS has not served them on a timely or 
        accurate basis (e.g., where the IRS has failed to issue a 
        refund or process a taxpayer's response to an audit or 
        collection notice). By statute, the Congress has required that 
        the TAS make at least one advocate available for each 
        State,\26\ and we currently have 74 offices that serve 
        taxpayers. Many of you are familiar with our local taxpayer 
        advocates, because TAS handles congressionally referred 
        taxpayer cases as well.
---------------------------------------------------------------------------
    \26\ IRC Sec. 7803(c)(2)(D)(i)(I).
---------------------------------------------------------------------------
      TAS's annual case receipts rose from 168,856 in fiscal year 2004 
        to 298,933 in fiscal year 2010--an increase of 77 percent. For 
        the first half of fiscal year 2011, the TAS case receipts have 
        risen by an additional 4.3 percent as compared with the first 
        half of fiscal year 2010. There are two main drivers of this 
        increase. First, the majority of the TAS's cases stems from IRS 
        compliance actions, and the IRS has substantially increased the 
        number of these actions in recent years.\27\ Second, the TAS 
        receives more cases during economic downturns, when more 
        taxpayers cannot pay their tax bills and get into trouble with 
        the IRS.
---------------------------------------------------------------------------
    \27\ From fiscal year 2004 to fiscal year 2010, levies rose from 
2,029,613 to 3,606,818; liens rose from 534,392 to 1,096,376; and 
seizures rose from 440 to 605. See IRS FY 2010 Enforcement Results, 
available at http://www.irs.gov/pub/irs-utl/
2010_enforcement_results.pdf.
---------------------------------------------------------------------------
      To date, the TAS has managed to handle the increased caseload. 
        After several years of declining staffing, the TAS has been 
        able to hire three new categories of employees over the past 
        few years to assist our case advocates in doing their jobs. We 
        now have 116 ``intake advocates,'' who answer telephone calls, 
        respond to simple taxpayer questions, and assist with case-
        building by identifying key facts and issues and requesting 
        necessary documentation. We also have 127 ``lead case 
        advocates,'' who mentor and assist case advocates with 
        unusually challenging cases, maintain partial caseloads of 
        their own, and help develop the TAS best practices. Finally, we 
        have 18 ``campus technical advisors,'' who provide technical 
        guidance and support on complex cases worked by the IRS in each 
        of its 10 campuses. These additional specialty positions have 
        freed up our case advocates to spend more direct time resolving 
        taxpayer cases and have given them helpful resources when they 
        get stuck on technical issues. The TAS management has also 
        taken steps to improve efficiencies.\28\
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    \28\ One important current project is the development and 
deployment of a new, fully integrated system for the TAS, which will 
automate many manual operations and integrate case advocacy, systemic 
advocacy, and all other TAS activities. This system, known as the 
Taxpayer Advocate Service Integrated System (TASIS), will replace more 
than 10 stand-alone systems and databases and improve efficiency by 
enabling employees to work across IRS systems, maintain and search case 
files electronically, and handle the intake, screening, and 
distribution of work electronically. The TASIS will also enable 
management to ensure a more even distribution of workload because it 
will provide information not merely on the number of cases per case 
advocate, but also on case complexity, required skills, and anticipated 
time required for case completion. Assuming the funding committed to 
the project is not cut or deferred, we anticipate that much of TASIS 
will be operational in 2013.
---------------------------------------------------------------------------
      As a result of these measures, I am pleased to report that the 
        TAS has continued to perform well. In fiscal year 2010, the TAS 
        obtained full relief for taxpayers in 69 percent of our cases 
        and partial relief for taxpayers in an additional 5 percent. 
        (In other cases, taxpayers generally are not entitled to 
        relief.) These levels are consistent with historical norms. In 
        addition, ongoing surveys conducted by an independent polling 
        firm among taxpayers assisted by the TAS show that customer 
        satisfaction stood at 84 percent in fiscal year 2004 and at 85 
        percent in fiscal year 2010.
      Despite these positive results, the significant increase in case 
        inventories is beginning to strain the TAS's capacity. In 
        fiscal year 2004, the TAS case advocates annually handled an 
        average of 135 cases, and their caseloads have been steadily 
        increasing since that time. In fiscal year 2010, the average 
        annual caseload per advocate rose to 240 cases, and in fiscal 
        year 2011, it is projected to reach 249 cases.\29\
---------------------------------------------------------------------------
    \29\ Average annual caseloads represent aggregate the TAS case 
receipts divided by the sum of case advocates, intake advocates, and 
half of TAS's lead case advocates. (lead case advocates spend 
approximately 50 percent of their time on non-case-specific work, 
including training and nonevaluative reviews).
---------------------------------------------------------------------------
      Because cases generally come to the TAS only when a taxpayer is 
        suffering from a financial hardship or the IRS's regular 
        processes have not worked as they should, the TAS as a 
        practical matter is often a taxpayer's last resort. As the 
        IRS's ``safety net'' for taxpayers, the TAS has had a policy of 
        assisting all taxpayers who meet our case-acceptance criteria 
        since the Congress created our organization in 1998. If the 
        imbalance between our resources and the demand for our services 
        widens much further, however, we will have no choice but to 
        decline to accept certain categories of cases, leaving 
        taxpayers to fend for themselves. I have served as the National 
        Taxpayer Advocate for 10 years, and this is the first time I 
        have felt compelled to sound this alarm. But I am deeply 
        concerned that if the TAS is subject to spending freezes and 
        does not have adequate resources, we will be forced to turn 
        away cases and taxpayers will suffer significant hardships as a 
        consequence.
      Low-income Taxpayer Clinics (LITCs).--In 1998, the Congress 
        established a grant program to fund LITCs.\30\ LITCs primarily 
        represent low-income taxpayers in Federal tax controversies 
        with the IRS for free or for a nominal charge.\31\ For fiscal 
        year 2010, the Congress provided $10 million for the LITCs.
---------------------------------------------------------------------------
    \30\ See IRC Sec. 7526.
    \31\ Some LITCs provide tax education and outreach for taxpayers 
who speak English as a second language.
---------------------------------------------------------------------------
      Largely because of the recession and consequent job losses, LITC 
        case inventories have risen substantially. LITCs collectively 
        worked 16,374 cases in 2008 and 21,801 cases in 2009, an 
        increase of 33 percent. During the first 6 months of 2010, 
        LITCs worked 17,293 cases--more than the number they handled 
        during all of 2008. Low-income taxpayers who face IRS audits or 
        collection action have few alternative options for assistance. 
        With roughly a doubling of cases in the last 2 years, it is 
        critical that LITCs receive sufficient resources to deal with 
        these caseloads.
      In its fiscal year 2011 budget recommendation, the IRS Oversight 
        Board recommended a $2.3 million initiative to expand coverage 
        of the LITC Program. The Oversight Board noted:

        ``The current economic environment presents significant 
        challenges as the number of taxpayers who cannot pay their 
        liabilities is increasing while available assistance from tax 
        professionals is declining.

        ``Taxpayers who want to comply with their tax obligations and 
        responsibilities must have access to information, assistance, 
        and, when appropriate, representation. Low-income taxpayers who 
        cannot afford representation can be at a disadvantage in 
        resolving tax disputes with the IRS. For example, a recent TAS 
        research study found that taxpayers who were represented in 
        Earned Income Tax Credit (EITC) audits by attorneys, 
        accountants, enrolled agents, or even unenrolled return 
        preparers, were nearly twice as likely to receive the EITC, and 
        received almost twice as much EITC, as taxpayers who were 
        unrepresented. Thus, LITCs ensure that low-income taxpayers 
        receive the correct outcome in controversies with the IRS and 
        pay the correct tax amount.'' \32\
---------------------------------------------------------------------------
    \32\ IRS Oversight Board, FY 2011 IRS Budget Recommendation 23-24 
(March 2010).

      The administration's proposed fiscal year 2012 budget would 
        reduce funding for LITCs by $500,000. I believe the LITCs need 
        additional funding to provide assistance to low-income 
        taxpayers whom the IRS has targeted for enforcement action.

Recommendations
    Both to improve tax compliance and to meet the needs of the 
taxpaying public, I recommend that the Congress provide additional 
funding for taxpayer-service activities, including increased funding 
for LITCs.
    To enable the IRS to better meet the needs of small business 
taxpayers and tax-exempt organizations, I recommend that the Congress 
direct the IRS to conduct comprehensive TAB-like research studies of 
those populations.
    the irs budget structure does not accurately portray the irs's 
    activities and probably overstates spending for taxpayer service
    As discussed above, the IRS since fiscal year 2006 has been 
proposing its budget by classifying most activities as either 
``taxpayer services'' or ``enforcement.'' For a number of reasons, 
including the availability of program integrity allocation adjustments 
for enforcement initiatives (discussed below) and how the IRS 
approaches a program, the classification of an activity as taxpayer 
service or enforcement has consequences.
    One threshold challenge in dividing the budget in this way is that 
there is no universal agreement on where to draw the line between 
service and enforcement. For the most part, I think people view 
``taxpayer service'' as including IRS activities that assist them in 
voluntarily complying with their tax obligations. I think most people 
view enforcement as including activities the IRS undertakes to collect 
tax liabilities that have not been fully and timely paid.
    The current budget follows what I view as a fairly arbitrary 
division of the IRS's activities into the taxpayer services and 
enforcement buckets. A few examples will illustrate:
      Processing Tax Returns.--The budget treats the processing of tax 
        returns entirely as a taxpayer service. In a response included 
        in the National Taxpayer Advocate's 2010 Annual Report to 
        Congress, the IRS wrote: ``The millions of taxpayers who each 
        year voluntarily file and pay their taxes likely would not view 
        the processing of their refunds as anything other than a 
        service activity.'' \33\ The thinking behind this statement is 
        not self-evident. It is true, as the IRS has pointed out, that 
        refunds are issued to many taxpayers in the course of returns 
        processing, and it is understandable that taxpayers receiving a 
        refund may see that activity as a service.
---------------------------------------------------------------------------
    \33\ National Taxpayer Advocate 2010 Annual Report to Congress 65-
66 (Most Serious Problem: The Wage & Investment Division Is Tasked With 
Supporting Multiple Agency-Wide Operations, Impeding Its Ability to 
Serve Its Core Base of Individual Taxpayers Effectively).
---------------------------------------------------------------------------
      It is also true, however, that taxpayers filing returns with 
        balances due are required to remit payment with their returns 
        and that the IRS uses the information provided on all tax 
        returns to help it determine which taxpayers to audit. As I 
        observed only somewhat facetiously in my report, if collecting 
        tax payments and facilitating audit selection are the types of 
        services the IRS provides, I believe most taxpayers would 
        choose to take a pass. In my view, returns processing is best 
        classified as neither service nor enforcement. It is simply an 
        overhead or support function that enables the IRS to collect 
        taxes.
      AM.--Funding for the AM Program, which includes the toll-free 
        phone lines and correspondence processing, is included in the 
        taxpayer services account, even though most of the AM budget is 
        allocated toward working with taxpayers by phone or letter 
        after the IRS has proposed a tax adjustment. If the IRS 
        generates a notice telling a taxpayer he or she has under-
        reported income and owes additional tax, it is far from clear 
        that the follow-up costs should be viewed as a ``service'' 
        rather than ``enforcement.''
      Field Assistance.--Funding for the Field Assistance Program, 
        which includes the IRS walk-in sites, is also included in the 
        taxpayer services account. As with AM, more than half the work 
        performed in the walk-in sites relates to account and notice 
        work, so the decision to classify these activities as services 
        is questionable.
      Small Business/Self-employed Operating Division.--The Small 
        Business/Self-Employed Operating Division (SB/SE) is tasked 
        with serving all small businesses and self-employed taxpayers. 
        For reasons I have described above, outreach and education are 
        particularly important for this population. First-time business 
        owners face a daunting array of employment tax requirements in 
        addition to recordkeeping and other business income tax 
        requirements. Growing businesses may not recognize tax issues 
        that arise as they become more successful. Businesses 
        experiencing financial difficulties may not understand that 
        ignoring tax issues can further impair their economic viability 
        in the short and long terms. Yet SB/SE is funded almost 
        exclusively from the enforcement account. Only 1 percent of its 
        funding comes from the taxpayer services account.\34\
---------------------------------------------------------------------------
    \34\ IRS, Integrated Financial System, Status of Available Funds 
Report (FY 2010).
---------------------------------------------------------------------------
      TAS and Appeals.--Under the current budget structure, the TAS is 
        funded entirely under the taxpayer services account, while the 
        Office of Appeals is funded entirely under the enforcement 
        account. I am discussing TAS and appeals together because they 
        share similar characteristics. Neither function initiates 
        contact with taxpayers. Rather, both functions become involved 
        in a case when a taxpayer is dissatisfied with actions another 
        IRS function has taken and seeks us out for assistance. This 
        similarity raises questions about the underlying rationale for 
        the difference in budget classification.
      There are other reasons to question the distinction as well. Most 
        important, sound accounting principles generally require that 
        revenues be matched with the expenses that generate them. If 
        the IRS enforcement functions propose and collect additional 
        tax amounts, downstream costs associated with the revenue the 
        IRS receives arguably should be treated as part of the costs of 
        enforcement. If the IRS treats revenue generated by the 
        collection function as ``enforcement'' revenue, but apportions 
        the costs of working with the affected taxpayers to the 
        taxpayer services account--as it currently does by treating the 
        TAS as a service expense--the net amount of IRS enforcement 
        revenue will be overstated, perhaps considerably so. This will 
        result in an inflated ROI on enforcement spending and has the 
        potential to distort funding decisions.
      In addition, the Office of Appeals is constantly seeking to 
        reassure skeptical taxpayers and practitioners that, despite 
        its placement within the IRS, it is independent from the IRS 
        Examination and Collection functions and will provide taxpayers 
        with an impartial hearing. The decision to fund Appeals 
        entirely from the enforcement account along with the 
        examination and collection functions may undermine Appeals' 
        effort to persuade outsiders that it is not simply another IRS 
        enforcement function.
      With respect to the foregoing examples, there is no objectively 
        ``correct'' answer, so the existing budget categories are not 
        necessarily wrong. But neither are they necessarily right, and 
        that is the source of my concern. Using the terms ``taxpayer 
        services'' and ``enforcement'' implies a bright-line 
        distinction that cannot accurately be drawn. In that sense, the 
        labels are arbitrary and somewhat misleading. In addition, 
        because of the significant number of programs placed within the 
        taxpayer services account that do not clearly belong there, I 
        believe the budget may substantially overstate the amount of 
        funding provided for programs that a layman would consider to 
        be taxpayer services. This is significant as a matter of truth 
        in packaging because it may paint an exaggerated portrait of 
        how much emphasis the IRS places on taxpayer service 
        activities. As discussed below, it is also significant because 
        programs assigned to the enforcement account may have more 
        funding flexibility due to the operation of program integrity 
        allocation adjustments.

Recommendations
    I recommend the following steps:
  --Move the funding associated with returns processing into the 
        operations support account.
  --Divide the funding associated with AM and field assistance 
        activities between the taxpayer services account and the 
        enforcement account based on the underlying activities to which 
        they relate.
  --Divide funding for the TAS between the taxpayer services account 
        and the enforcement account based on the percentage of the TAS 
        cases that are service-related and the percentage of the TAS 
        cases that are enforcement-related.
  --Consider for the longer term devising a set of budget categories 
        that do away with the artificial distinction between taxpayer 
        service and enforcement.
the ``program integrity allocation adjustment'' mechanism has been used 
   in a manner that enables the irs to receive extra funding for its 
  enforcement activities but not for its taxpayer service activities, 
 despite the fact that taxpayer service activities also contribute to 
                               compliance
    During the last few years, the IRS budget has utilized a mechanism 
that makes it relatively easy to provide increases for enforcement 
spending, but the procedure is not used for the taxpayer services 
account. Under this mechanism, known as a ``program integrity 
allocation adjustment,'' new funding appropriated for IRS enforcement 
programs generally does not count against otherwise applicable spending 
ceilings provided:
  --the IRS's existing enforcement base is fully funded; and
  --a determination is made that the proposed additional expenditures 
        will generate a ROI of greater than 1:1 (i.e., the additional 
        expenditures will reduce the deficit on a net basis).
    These conditions reflect the fact that the IRS is able to project 
the direct ROI of its enforcement activities--it can measure to the 
dollar the amounts collected by its examination, collection, and 
document-matching functions--but faces a much harder task in measuring 
the ROI of taxpayer services. As discussed above, it seems intuitively 
clear that the ROI of taxpayer service activities is greater than 1:1. 
Basic services like publishing tax forms, providing guidance, and 
answering taxpayer questions are essential for enabling taxpayers to 
file returns and enabling the IRS to collect revenue. Yet because the 
IRS cannot quantify either the overall ROI of taxpayer service spending 
or the ROI of specific taxpayer service initiatives, taxpayer services 
spending is not currently considered eligible for program integrity 
allocation adjustments.
    As a consequence, the IRS has been able to request larger increases 
each year for enforcement than for taxpayer services, and it is 
increasingly becoming more of an enforcement agency with a relatively 
smaller focus on taxpayer service. If the proposed fiscal year 2012 
budget is adopted without change, as noted above, spending for the 
enforcement account will have increased by 15.4 percent while spending 
for the taxpayer services account will have declined by 0.3 percent 
since fiscal year 2006 on an inflation-adjusted basis.\35\ In essence, 
the 15.4 percent increase in enforcement is entirely attributable to 
program integrity allocation adjustments. Under the proposed fiscal 
year 2012 budget, the IRS would receive an additional $936 million in 
enforcement funding through this mechanism, which amounts to 16 percent 
of the $5,966,619,000 enforcement total.
---------------------------------------------------------------------------
    \35\ Compare Department of the Treasury, FY 2012 Budget-in-Brief 
with Department of the Treasury, FY 2008 Budget-in-Brief. (The FY 2006 
budget was adopted using a different budget structure. The proposed FY 
2008 budget shows the enacted FY 2006 totals as translated into the 
current budget structure.) Inflation adjustments were made using the 
Bureau of Labor Statistics inflation calculator, available at http://
data.bls.gov/cgi-bin/cpicalc.pl.
---------------------------------------------------------------------------
    Moreover, the recent trend is likely to continue. The 
administration's fiscal year 2012 budget proposal contains spending 
projections for future years. Over the next 5 years (from fiscal year 
2012 to fiscal year 2016), it projects that enforcement spending will 
rise by another 28 percent while taxpayer services spending will 
slightly decline.\36\
---------------------------------------------------------------------------
    \36\ Budget of the United States Government: Analytical 
Perspectives, Supplemental Materials Fiscal Year 2012: Federal Programs 
by Agency and Account, at 317-318, available at http://
www.whitehouse.gov/sites/default/files/omb/budget/fy2012/assets/
33_1.pdf. Taxpayer service spending is shown on page 317 (see line 
labeled ``Taxpayer Services: Appropriations, discretionary . . . 
803''). Enforcement spending is the sum of the line on page 317 labeled 
``(Federal law enforcement activities): Appropriations, discretionary . 
. . 751'' and the line on page 318 labeled ``(Central fiscal 
operations): Appropriations, discretionary . . .  803.''
---------------------------------------------------------------------------
    I am deeply concerned about the widening resource gap between the 
agency's taxpayer service and enforcement programs. First, for reasons 
discussed in the prior section, I think the distinction between service 
and enforcement can be highly artificial and arbitrary. To provide 
substantial additional funding to any program that gets classified as 
``enforcement'' while reducing or holding flat spending for any program 
that gets classified as ``taxpayer service'' will not result in a 
balanced agency and may even encourage game-playing to classify 
priority programs as enforcement. Moreover, the classification of a 
program as ``enforcement'' rather than ``service'' has significant 
implications for the way the IRS treats taxpayers.
    Second, as I have also discussed, it is widely acknowledged that 
taxpayer service contributes significantly to compliance. In some 
cases, service may contribute even more than enforcement to improved 
compliance. Because the IRS currently is unable to compute an ROI for 
service activities, however, service activities by themselves do not 
qualify for allocation adjustments.
    Third, the Congress has given the IRS an increasing number of 
social and economic benefit programs to administer, and as I will 
discuss below, both of these types of benefits programs typically 
require more service.
    The use of program integrity allocation adjustments has enabled the 
IRS to receive more funding than would otherwise be the case, and I 
think that is positive. But I strongly encourage the IRS and this 
subcommittee to consider ways to modify the way allocation adjustments 
are used so that taxpayer needs are met and the IRS remains a balanced 
agency. One possibility is to define new compliance initiatives more 
broadly, so that they include both an enforcement component and a 
service component. Because the projected ROI of some types of 
enforcement initiatives is high, a more broadly constructed initiative 
could still produce an ROI of greater than 1:1 (i.e., the service 
components would piggyback on the high-ROI enforcement activity). That 
could satisfy the requirements for an allocation adjustment while 
giving the agency more flexibility to meet taxpayer needs and improve 
compliance in obvious yet currently immeasurable ways.
Example of a Broader Compliance Initiative
    Assume the IRS is planning a new enforcement initiative to improve 
compliance among small business taxpayers. The initiative will cost $50 
million and is projected to produce an ROI of 6:1 (or $300 million in 
additional revenue). The IRS intends to request $50 million for this 
initiative as a program integrity allocation adjustment.
    Assume further that the IRS has identified taxpayer service 
activities that would also improve small business compliance, such as 
new or additional types of outreach and education. The cost of the 
service initiative would be $25 million, but the IRS cannot quantify 
the ROI.
    If the IRS defines new compliance initiatives more broadly to 
include service activities, it could package the enforcement measures 
with the outreach and education measures and request $75 million for 
the combined initiative as an allocation adjustment. The ROI would 
still be positive (the $75 million cost and projected revenue of $300 
million would produce an ROI of 4:1). Most important, the IRS would be 
operating a more integrated, effective, and balanced compliance 
program.

Recommendation
    I recommend that the IRS and the Congress consider ways to broaden 
the use of program integrity allocation adjustments so that compliance 
initiatives include taxpayer service components.

 THE IRS DESPERATELY NEEDS TO CONDUCT OR COMMISSION BETTER RESEARCH SO 
 IT CAN ALLOCATE ITS SERVICE AND ENFORCEMENT RESOURCES MORE EFFICIENTLY

    The IRS would be able to allocate its resources more effectively if 
it had a better understanding of the causes of noncompliance and could 
test alternative compliance approaches. At present, the IRS has a 
tendency to treat all noncompliance as willful and to treat taxpayers 
who do not fully comply as ``bad'' taxpayers.
    If all noncompliance reflected a willful decision by taxpayers to 
cheat the Government, a compliance approach that emphasizes hard-core 
enforcement measures might make sense. But much, if not most, 
noncompliance occurs for different reasons. In some cases, taxpayers do 
not know the rules. In some cases, taxpayers find complying with the 
rules excessively burdensome or confusing. In other instances, 
significant life events arise (e.g., illness, unemployment, or divorce) 
and taxpayers do not file returns. (This cuts both ways from a revenue 
standpoint. Some taxpayers who owe tax do not file returns, but many 
taxpayers who are due refunds each year also do not file returns and 
thus overpay their taxes.) In still other cases, taxpayers are too 
intimidated to file returns. For example, an individual who loses his 
job and cannot afford to pay may decide against filing a return because 
he fears what may happen if he reports a tax liability and cannot pay 
it.
    In large part, the IRS's one-size-fits-all approach reflects the 
absence of data on which to base better resource-allocation decisions. 
It bears emphasizing that ``direct enforcement revenue'' constitutes 
only about 2 percent of the revenue the IRS collects.\37\ Ninety-eight 
percent of the revenue the IRS collects is paid voluntarily due to a 
combination of its taxpayer service programs and the indirect, 
deterrent effect of its enforcement activities. However, the IRS does 
not have adequate data to determine the relative contribution to 
compliance of taxpayer service and enforcement, let alone which 
components of taxpayer service and enforcement are most effective. 
Without these critical pieces of information, resource-allocation 
decisions are necessarily made more on the basis of best guesses and 
hunches than empirical evidence.
---------------------------------------------------------------------------
    \37\ In fiscal year 2010, the IRS collected $2.345 trillion. See 
IRS Data Book, FY 2010, Table 1. The amount of enforcement revenue it 
collected was $57.6 billion. See IRS FY 2010 Enforcement Results, 
available at http://www.irs.gov/pub/irs-utl/
2010_enforcement_results.pdf.
---------------------------------------------------------------------------
    I suggest that the Congress consider directing the IRS to undertake 
additional research studies, perhaps utilizing the expertise of outside 
experts, to improve the accuracy of its ROI estimates for various 
categories of work, especially taxpayer service and the indirect effect 
of enforcement actions. The IRS should also improve its methods of 
verifying, retrospectively, the marginal ROI it has achieved for each 
category of work. ROI estimates should include costs relating to the 
downstream consequences of the various categories of IRS work, 
including increased phone calls and correspondence, Appeals 
conferences, TAS cases, and Tax Court litigation.
    I acknowledge that developing reasonably accurate modeling is a 
significant challenge and will require a commitment of resources. 
Nonetheless, I have recommended in the past and continue to believe 
that this information will aid the IRS enormously in making resource-
allocation decisions and will provide Members of Congress with 
additional information on which to base future funding decisions.\38\
---------------------------------------------------------------------------
    \38\ The congressional budget rules currently prohibit the 
Congressional Budget Office or the Office of Management and Budget from 
treating changes in discretionary appropriations to the IRS as giving 
rise to scorable increases in tax receipts. See H.R. Conf. Rep. No. 
101-964 (1990). See also Office of Management and Budget, OMB Circular 
No. A-11, Part 8, Appendix A, Principle 14 (2006). Because changes to 
IRS funding levels undoubtedly have an impact on tax collections, this 
prohibition seemingly reflects the practical difficulty of devising 
accurate estimates. Yet accurate estimates would be helpful to the 
Congress, and we believe the IRS should make developing better 
estimates a priority objective.
---------------------------------------------------------------------------
Recommendation
    I recommend that the Congress direct the IRS to undertake 
additional research studies, perhaps utilizing the expertise of outside 
experts, to improve the accuracy of its ROI estimates for various 
categories of work, especially taxpayer service and the indirect effect 
of enforcement actions.

 THE IRS SHOULD REVISE ITS MISSION STATEMENT TO EXPLICITLY ACKNOWLEDGE 
 THAT ITS TRADITIONAL ROLE AS THE TAX COLLECTOR HAS EXPANDED IN RECENT 
      YEARS SO THAT IT IS NOW BOTH (I) COLLECTING TAXES AND (II) 
           ADMINISTERING SOCIAL AND ECONOMIC BENEFIT PROGRAMS

    Historically, the IRS's mission has been to collect taxes imposed 
by the Congress to fund Federal spending. In recent years, however, 
Congress has increasingly been using the tax code to provide economic 
incentives or social benefits for taxpayers.
    In 1975, the Congress enacted the Earned Income Tax Credit, which 
allows low-income, working taxpayers to receive, through the tax code, 
Government payments that exceed their income tax liabilities. In 2008, 
the Congress directed the IRS to make Economic Stimulus Payments. Also 
beginning in 2008, the Congress made available the first of three 
iterations of the First-Time Homebuyer Credit. Beginning in 2009, the 
Congress provided the Making Work Pay Credit. Then last year, the 
Congress enacted the Hiring Incentives to Restore Employment Act, which 
provides incentives for small businesses to hire additional workers, 
and the Patient Protection and Affordable Care Act, which contains 
numerous provisions that will require interaction between the IRS and 
businesses or individuals.
    In many cases, there are compelling reasons for administering these 
programs through the tax code. Absent adequate planning, however, I am 
concerned that directing a law enforcement agency to administer such 
programs could be problematic. While enforcement measures are required 
to prevent inappropriate claims in benefits programs, the overriding 
objective of agencies that administer benefits programs has 
traditionally been to help as many eligible persons qualify for the 
benefits as possible. That requires extensive outreach and even working 
one-on-one with potentially eligible individuals.
    There are significant differences between benefits agencies and 
enforcement agencies in terms of culture, mind set, and the skill sets 
and training of their employees. Benefits agencies like the Social 
Security Administration and the Department of Veterans Affairs, despite 
some shortcomings, are primarily trying to get to yes--to help as many 
eligible persons qualify for benefits as possible. Enforcement agencies 
are more in the business of saying no. As the IRS prepares to 
administer large portions of the healthcare legislation, including 
approving claims by low-income persons for healthcare tax credits and 
imposing a penalty tax on those who are required to purchase health 
insurance but fail to do so, I believe the IRS should hire and train a 
new category of caseworkers--employees with social welfare-type 
backgrounds or similar training who will work one-on-one with taxpayers 
to resolve legitimate disagreements, instead of merely sending out 
notices saying, in effect, ``you owe us.''
    In addition, the IRS will require more funding to perform 
effectively both its traditional tax collection role and its expanding 
role as a benefits administrator. I am convinced that with adequate 
planning and funding, the IRS can do the job. But if the IRS does not 
recognize the importance of improving its benefits administration 
capacity or does not receive adequate funding, there are likely to be 
significant violations of taxpayer rights and significant taxpayer 
burden. In this regard, the trend toward increased funding for the 
IRS's enforcement account relative to the taxpayer services account, as 
discussed above, is concerning and should be carefully evaluated.
    To help ensure that the IRS focuses on these challenges and that 
its needs are recognized in the budget process, I believe the IRS 
should revise its mission statement to make explicit that its mission 
is both to collect taxes and to deliver economic and social benefits 
authorized by the Congress. In this connection, the IRS should (i) 
revise Revenue Procedure 64-22 to include the IRS's responsibility as a 
benefits administrator; (ii) create a new program office and deputy 
commissioner position to provide strategic direction for all benefits 
programs; and (iii) conduct a comprehensive evaluation of the 
administration of previous and existing benefits programs to aid in the 
planning and implementation of future programs.
Recommendation
    I recommend that the IRS revise its mission statement to make 
explicit that its mission is both to collect taxes and to deliver 
economic and social benefits authorized by the Congress.

                               CONCLUSION

    In this statement, I have attempted to describe six issues that 
this subcommittee may wish to consider. Some require immediate 
attention, while others would benefit from consideration over the 
longer term. In the near term, my overriding concern relates to the 
overall funding of the IRS. As the Nation's tax collector, the IRS is 
part of the solution to the problem of budget deficits, not part of the 
problem. There has been considerable discussion about freezing all 
domestic discretionary spending, which would presumably include funding 
for the IRS. I believe freezing or restricting IRS funding--either for 
taxpayer service activities or for enforcement activities--would be a 
mistake and would undermine the goal of closing the tax gap and 
reducing the deficit. I strongly encourage this subcommittee and the 
Congress to find a way to exempt the IRS from any such cuts.
                                 ______
                                 
  Prepared Statement of Paul Cherecwich, Jr., Chairman, IRS Oversight 
                   Board, Department of the Treasury

    The Internal Revenue Service (IRS) Oversight Board thanks Chairman 
Durbin, Ranking Member Moran, and members of the subcommittee for the 
opportunity to present the Oversight Board's views on the 
administration's fiscal year 2012 IRS budget request.
    This statement presents the Board's recommendations for the IRS' 
fiscal year 2012 budget and why the Board believes this level of 
funding is needed to meet the IRS needs. Created as part of the IRS 
Restructuring and Reform Act of 1998, the Oversight Board's 
responsibilities include overseeing the IRS in its administration, 
management, conduct, direction, and supervision of the execution and 
application of internal revenue laws. The Board is also responsible for 
ensuring that the IRS' organization and operations allow the agency to 
carry out its mission.
    The Board has a responsibility to ensure that the IRS' budget and 
the related measured contained in the performance budget support the 
IRS Strategic Plan 2009-2013. In addition to this statement, the Board 
developed a special report in which it explains the detailed rationale 
for its budget recommendations. The report is available online at 
www.irsoversightboard.treas.gov.

          FISCAL YEAR 2012 IRS BUDGET RECOMMENDATIONS SUMMARY

    The IRS Oversight Board recommends a fiscal year 2012 IRS budget of 
$13.342 billion, an increase of $1.2 billion more than the fiscal year 
2010 enacted IRS budget, and an increase of $709 million more than the 
President's fiscal year 2011 IRS budget request.
    The Board's fiscal year 2012 recommendation is substantially higher 
than those made in the IRS fiscal year 2010 and fiscal year 2011 budget 
recommendations due in part to the cost to implement provisions of the 
Patient Protection and Affordable Care Act (ACA), which totals $473 
million in the Board's fiscal year 2012 IRS budget recommendation. 
Tables 1 and 2 show more information on the Board's budget 
recommendations. Table 1 shows the program initiatives or increases the 
Board is recommending, and Table 2 shows the Board's recommendations 
budget by account. The Board has also included an appendix to this 
statement that summaries new tax law provisions that have placed 
additional demands on IRS resources during the 2007-2010 filing 
seasons.
    The Board's foremost priority within its fiscal year 2012 budget 
recommendation is the $333.6 million in total funding recommended for 
the Business Systems Modernization (BSM) account, along with an 
associated $52 million within the operations support account for 
information technology infrastructure to support ongoing BSM 
maintenance.
    The Board's second-highest priority is funding of taxpayer service 
that allows for the restoration of an 80 percent level of service (LOS) 
on IRS toll-free telephone assistance during fiscal year 2012. The 
Board believes that additional funding is needed to improve toll-free 
service, as major changes to the tax laws in recent years have 
contributed to a substantial increase in the number of calls to the IRS 
and a corresponding drop in the LOS. The Board notes that it foresees a 
greater demand for toll-free assistance in the coming years, driven by 
a proliferation of new tax provisions.

  TABLE 1.--IRS OVERSIGHT BOARD RECOMMENDED FISCAL YEAR 2012 IRS BUDGET
------------------------------------------------------------------------
                                                              Amount
------------------------------------------------------------------------
Fiscal year 2010 enacted budget........................     $12,146,123
                                                        ================
Fiscal year 2011 annualized continuing resolution Level     $12,146,123
Maintaining current levels.............................         $85,754
Efficiencies/savings...................................       ($189,957)
Base reinvestment: consolidate submission processing             $1,486
 Atlanta...............................................
Adjustment fiscal year 2011 President's policy level...        $401,665
                                                        ----------------
      Fiscal year 2012 adjusted base...................     $12,445,071
                                                        ================
Improve taxpayer service...............................         $81,307
IRS.gov improvements...................................         $33,000
                                                        ----------------
Taxpayer service initiatives...........................        $114,307
                                                        ================
Increase international service and enforcement.........         $72,596
Increase collection coverage...........................         $52,000
Implement merchant card and basis reporting............         $35,730
Increase coverage to address tax law changes and other          $96,718
 compliance issues.....................................
Ensure accurate delivery of tax credits................        $260,293
Administer new statutory reporting requirements........         $58,505
Leverage return preparer...............................         $16,600
Address appeals workload growth........................          $9,100
Implement uncertain tax position (UTP) reporting                 $4,129
 requirements..........................................
                                                        ----------------
Enforcement initiatives................................        $605,671
                                                        ================
Enhance security and disaster recovery.................         $35,000
Update integrated financial system.....................         $27,500
Leveraging data to improve compliance..................          $1,400
Enhance physical security for employees................         $31,057
Implement individual coverage requirement and employer          $62,477
 responsibility payments...............................
Attract, retain, and develop a quality workforce.......         $20,000
                                                        ----------------
Infrastructure initiatives.............................        $177,434
                                                        ================
BSM initiative: continue migration from aging tax        ...............
 administration system.................................
Continue migration from aging tax administration system  ...............
                                                        ================
Health Insurance Tax Credit Administration.............  ...............
                                                        ----------------
      Total Oversight Board budget.....................     $13,342,483
                                                        ================
President's fiscal year 2012 budget....................     $13,283,907
                                                        ================
Increase over President's budget.......................         $58,576
                                                        ================
Percentage increase over President's budget............             0.4
------------------------------------------------------------------------


                                      TABLE 2.--IRS OVERSIGHT BOARD RECOMMENDED FISCAL YEAR 2012 BUDGET BY ACCOUNT
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                             Health
                                                        Taxpayer                         Operations                      Insurance Tax
                                                        service        Enforcement        support            BSM             Credit           Total
                                                                                                                         Administration
--------------------------------------------------------------------------------------------------------------------------------------------------------
Fiscal year 2010 enacted budget...................      $2,278,830       $5,504,000       $4,083,884         $263,897          $15,512      $12,146,123
                                                   =====================================================================================================
Fiscal year 2011 annualized continuing resolution       $2,278,830       $5,504,000       $4,083,884         $263,897          $15,512      $12,146,123
 level............................................
                                                   =====================================================================================================
Maintaining current levels........................         $12,908          $30,691          $41,755             $168             $232          $85,754
Efficiencies/savings..............................        ($41,333)        ($21,996)       ($124,440)         ($1,026)         ($1,162)       ($189,957)
Base reinvestment: consolidate submission                   $1,486   ...............  ...............  ...............  ...............          $1,486
 processing Atlanta...............................
Adjustment fiscal year 2011 President's policy             $23,254         $242,275          $10,128         $122,561           $3,447         $401,665
 level............................................
                                                   =====================================================================================================
Taxpayer service initiatives......................         $44,078   ...............         $70,229   ...............  ...............        $114,307
                                                   -----------------------------------------------------------------------------------------------------
Improve taxpayer service..........................         $44,078   ...............         $37,229   ...............  ...............         $81,307
IRS.gov improvements..............................  ...............  ...............         $33,000   ...............  ...............         $33,000
                                                   =====================================================================================================
Enforcement initiatives...........................         $25,910         $209,668         $370,093   ...............  ...............        $605,671
                                                   -----------------------------------------------------------------------------------------------------
Increase international service and enforcement....  ...............         $48,363          $24,233   ...............  ...............         $72,596
Increase collection coverage......................          $2,201          $30,275          $19,524   ...............  ...............         $52,000
Implement merchant card and basis reporting.......         $10,475          $17,495           $7,760   ...............  ...............         $35,730
Increase coverage to address tax law changes and            $7,229          $33,936          $55,553   ...............  ...............         $96,718
 other compliance issues..........................
Ensure accurate delivery of tax credits...........          $4,946          $49,083         $206,264   ...............  ...............        $260,293
Administer new statutory reporting requirements...          $1,059           $5,061          $52,385   ...............  ...............         $58,505
Leverage return preparer..........................  ...............         $14,240           $2,360   ...............  ...............         $16,600
Address appeals workload growth...................          $7,450           $1,650           $9,100
Implement UTP reporting requirements..............  ...............          $3,765             $364   ...............  ...............          $4,129
                                                   =====================================================================================================
Infrastructure initiatives........................            $500           $7,911         $169,023   ...............  ...............        $177,434
                                                   -----------------------------------------------------------------------------------------------------
Enhance security and disaster recovery............  ...............  ...............         $35,000   ...............  ...............         $35,000
Update integrated financial system................  ...............  ...............         $27,500   ...............  ...............         $27,500
Leveraging data to improve compliance.............  ...............  ...............          $1,400   ...............  ...............          $1,400
Enhance physical security for employees...........  ...............          $3,911          $27,146   ...............  ...............         $31,057
Implement individual coverage requirement and       ...............  ...............         $62,477   ...............  ...............         $62,477
 employer responsibility payments.................
Attract, retain, and develop a quality workforce..            $500           $4,000          $15,500   ...............  ...............         $20,000
                                                   =====================================================================================================
BSM initiative: continue migration from aging tax   ...............  ...............         $52,000         ($52,000)  ...............  ...............
 administration system............................
                                                   =====================================================================================================
HITCA.............................................  ...............  ...............  ...............  ...............  ...............  ...............
                                                   -----------------------------------------------------------------------------------------------------
      Total.......................................      $2,345,633       $5,972,549       $4,672,672         $333,600          $18,029      $13,342,483
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Appendix 1, taken from the Board's Annual Report to Congress 2010, 
provides a summary of major legislative and administrative tax 
provisions enacted in recent years and the challenges that each 
presented to tax administration during the 2007 through 2010 filing 
seasons. In addition to describing the impacts associated with 
implementing these provisions, the appendix provides a short assessment 
of the IRS' performance in implementing many of them made by either the 
Government Accountability Office (GAO) or the Treasury Inspector 
General for Tax Administration (TIGTA).
    The appendix highlights the many challenges the IRS faced in 
implementing new tax provisions that affected the last four filing 
seasons. Expanding taxpayer service and enforcement programs to ensure 
these provisions were understood and being claimed properly by 
taxpayers put a significant demand on IRS resources.
    The Board's IRS budget recommendation also acknowledges the wide 
range of new responsibilities under the ACA, such as the administration 
of new tax credits and additional information reporting.
Resources Needed To Implement the ACA
    The detail in Table 3 makes the fiscal year 2012 budget needs for 
implementing the ACA fully transparent. The IRS has been tasked with a 
wide range of new responsibilities under the ACA, including the 
requirements that it:
  --Administer new tax credits for individuals and businesses;
  --Collect a new excise tax on tanning services and a new fee on 
        certain businesses engaged in the manufacturing and importing 
        of prescription drugs;
  --Implement expanded exemption requirements on charitable hospitals; 
        and
  --Gather, process, and share additional information reports.\1\
---------------------------------------------------------------------------
    \1\ Enactment of Public Law 112-9 on April 14, 2011 repeals certain 
information reporting required by the ACA and reduces the funding 
needed for ACA implementation by $23.3 million and lowers the entire 
request by that amount.
---------------------------------------------------------------------------
    The Board concurs with the President's budget request as to what 
the IRS funding needs are in fiscal year 2012 to responsibly implement 
the ACA as currently enacted. As shown in Table 3, the fiscal year 2012 
funding needed to implement the ACA is $473 million with a staffing 
level of 1,269 full-time equivalents (FTEs). The Board's budget 
recommendation identifies the funds the IRS needs to provide the 
necessary assistance, enforcement presence, and supporting systems 
infrastructure to carry out the ACA requirements in an effective 
manner.
    Of the total dollar funding needed in fiscal year 2012 for the ACA, 
nearly 83 percent is in the operations support account, much of which 
is for IRS staff, contractors, hardware, and software needed to build 
new IT systems and to modify existing tax processing systems to 
accommodate the new ACA provisions.

                  OVERSIGHT BOARD'S BUDGET PRIORITIES

    The Board's budget recommendation for fiscal year 2012 is 
approximately $59 million higher than the President's request of 
$13.284 billion, a difference of 0.4 percent. The Board firmly believes 
that its fiscal year 2012 IRS budget recommendation is the minimum 
imperative for strong and responsible tax administration. The Board's 
recommendation calls for an overall IRS appropriation in fiscal year 
2012 of $2.35 billion for the taxpayer service account; $5.97 billion 
for the Enforcement account; $4.67 billion for the operations support 
account; $333.6 million for the BSM account; and $18 million for the 
Health Insurance Tax Credit Administration (HITCA) account.
    In the view of the Board, its budget recommendation reflects a 
proper balance between taxpayer service and tax law enforcement, funds 
strategic investments to reduce the tax gap and replace antiquated IRS 
tax processing systems, and furthers other strategic objectives of tax 
administration such as greater leveraging of Internet capabilities.

                                                                       TABLE 3.--ACA-RELATED FUNDING AND FTE BY INITIATIVE
                                                                                     [Dollars in thousands]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                         Taxpayer service                   Enforcement                 Operations support                     Total
                                                                 -------------------------------------------------------------------------------------------------------------------------------
                                                                      Amount            FTE           Amount            FTE           Amount            FTE           Amount            FTE
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Taxpayer service initiatives:
    Improve taxpayer service....................................         $20,725             150         $30,582          51,307            $150  ..............  ..............  ..............
                                                                 -------------------------------------------------------------------------------------------------------------------------------
      Subtotal, taxpayer service initiatives....................         $20,725             150         $30,582          51,307            $150  ..............  ..............  ..............
                                                                 -------------------------------------------------------------------------------------------------------------------------------
Enforcement initiatives:
    Increase coverage to address tax law changes and other                $4,904              46         $22,784             174         $45,927             143         $73,615             363
     compliance issues..........................................
    Ensure accurate delivery of tax credits.....................          $4,946              49         $23,015             233        $199,535             222        $227,496             504
    Administer new statutory reporting requirements.............          $1,059               7          $5,061              48         $52,385             132         $58,505             187
                                                                 -------------------------------------------------------------------------------------------------------------------------------
      Subtotal, Enforcement initiatives.........................         $10,909             102         $50,860             455        $297,847             497        $359,616           1,054
                                                                 -------------------------------------------------------------------------------------------------------------------------------
Infrastructure Initiatives:
    Implement individual coverage requirement and employer        ..............  ..............  ..............  ..............         $62,477              65         $62,477              65
     responsibility payments....................................
                                                                 -------------------------------------------------------------------------------------------------------------------------------
        Subtotal, Infrastructure initiatives....................  ..............  ..............  ..............  ..............         $62,477              65         $62,477              65
                                                                 ===============================================================================================================================
        Total, fiscal year 2012 ACA initiatives.................         $31,634             252         $50,860             455        $390,906             562        $473,400           1,269
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

    Moreover, the Board's foremost priority within its fiscal year 2012 
budget recommendation is the $333.6 million in total funding 
recommended for the BSM account, along with an associated $52 million 
within the operations support account for information technology 
infrastructure to support the ongoing maintenance of BSM components 
that have been successfully implemented. This level of funding for BSM 
is imperative and requires a $122.6 million increase in fiscal year 
2011 in the base BSM account to achieve the President's policy level--a 
proposed adjustment contained in both the Board's recommendation and 
the President's budget request.
    The Board assigns top budget priority to BSM funding primarily 
because of the critical role these resources will play in modernizing 
the core taxpayer account system for individual taxpayers under the 
Customer Account Data Engine 2 (CADE 2) Program. With the recommended 
funding, the CADE 2 Program is poised to deliver daily account 
processing by the 2012 filing season, a major milestone in the IRS BSM 
effort that will yield tangible benefits, such as quicker refunds, to 
tens of millions of taxpayers. The Board's recommended investments in 
BSM also lay the necessary technological foundation for other major 
advancements in IRS efficiency, taxpayer service, and enforcement for 
years to come--thereby helping to achieve the strategic goals of the 
agency. Both the TIGTA and the GAO agree that modernizing the IRS' 
antiquated computer systems, for which CADE 2 is instrumental, is 
critical to providing improved and expanded service to taxpayers.
    The Board's second-highest priority is funding of taxpayer service 
that allows for the restoration of an 80 percent LOS on IRS toll-free 
telephone lines during fiscal year 2012. Achieving this LOS requires 
both the $23.3 million increase in fiscal year 2011 to reach the 
President's policy level and the $81.3 million initiative in fiscal 
year 2012 to improve taxpayer service. Recent experience shows that 
tens of millions of taxpayers still depend on the IRS toll-free 
telephone operations for assistance in understanding their tax 
obligations, their eligibility for various tax credits and other tax 
provisions, or to resolve their account balances. However, major 
changes to the tax laws in recent years have contributed to a 
substantial increase in the number of calls to the IRS and a 
corresponding drop in the LOS into the low 70 percent range. In 
addition, as more of the provisions of the ACA become effective in 
2012, the Board believes that demand for IRS toll-free assistance will 
grow. Thus, the Board sees it as imperative that the IRS provides 
taxpayers with an adequate level of telephone assistance in the coming 
fiscal year; a level the Board believes should be no less than 80 
percent. Increased telephone demand, driven by a proliferation of new 
tax provisions, has prevented the IRS from reaching this level, last 
achieved in 2007, and the Board believes taxpayers deserve no less in 
such a complex tax environment.
    The IRS has also been tasked with a wide range of new 
responsibilities under the ACA, such as the administration of new tax 
credits for individuals and businesses, and additional information 
reporting. These new responsibilities must be afforded budget priority 
as well to enable the IRS to properly implement the law. Both the 
Board's recommendation and the President's budget make transparent the 
resources in fiscal year 2012 needed to implement the ACA. These ACA 
funding requirements total $473 million with a staffing level of 1,269 
FTEs. Of the total dollar funding recommended, nearly 83 percent is in 
the operations support account--much of it for IRS staff, contractors, 
hardware, and software needed to build new IT systems and to modify 
existing tax processing systems to accommodate the new ACA provisions.

 COMPARISON OF OVERSIGHT BOARD'S AND PRESIDENT'S BUDGET RECOMMENDATIONS

    The Board's budget recommendations are largely consistent with the 
President's budget request in many categories. In particular, inflation 
adjustments, savings, and reinvestments are identical in both budgets. 
To facilitate a direct comparison of the Board's recommendations to the 
President's budget, the Board's budget mirrors the upward adjustments 
to the fiscal year 2011 base funding to reach the President's policy 
level. However, it is important to note that these adjustments to 
achieve the President's policy levels essentially reflect proposed 
increases to the base IRS budget in fiscal year 2011; increases which 
had not been enacted at the time the Board and the President prepared 
their fiscal year 2012 IRS budget recommendations, and which may or may 
not be realized.
    As shown in Figure 1, for its first and second funding priorities, 
BSM and taxpayer service, the Board recommended budget and the 
President's budget request are the same. The proposed enforcement 
budgets, as well as the ACA-related funding, are also the same in both 
budgets, as is the Heath Insurance Tax Credit Administration.




    The $58.6 million difference between the Board's fiscal year 2012 
IRS funding recommendation and the President's budget request occurs in 
three areas. The Board believes that more resources are needed in the 
area of IRS security and applauds the President's budget request for 
including two valuable initiatives in these areas: (1) to improve IRS 
system security and disaster recovery capabilities and (2) another to 
improve physical security at IRS facilities. The Board notes that TIGTA 
has identified security as the top management challenge facing the IRS. 
The Board recommends higher funding levels in both areas. The Board is 
also recommending an additional initiative not contained in the 
President's request, which accounts for the third area of difference.
    Specifically, the Oversight Board recommends that:
  --an additional $23 million be added to the infrastructure initiative 
        in the President's budget to enhance security and disaster 
        recovery systems capability;
  --an additional $15.6 million be added to the infrastructure 
        initiative in the President's budget to enhance physical 
        security for Federal employees; and
  --an additional infrastructure initiative be approved for $20 million 
        to attract, retain, and develop a highly engaged workforce.
    All the budget recommendations by the Oversight Board are driven by 
the need to support the IRS Strategic Plan 2009-2013. As the Oversight 
Board has emphasized in its 2009 annual report to the Congress, the IRS 
has a strategic plan that addresses two serious weaknesses of the tax 
administration system: the tax gap and the IRS' archaic information 
technology systems. The need to overcome these weaknesses, as well as 
effectively implementing the new tax-related provisions of the ACA 
drives the Board's IRS budget recommendations.

      GOAL 1: IMPROVE SERVICE TO MAKE VOLUNTARY COMPLIANCE EASIER

    The President's policy level adjustment and the two taxpayer 
service initiatives contained in the President's budget request and 
listed in Table 4. The Board considers its support of the $23.3 million 
fiscal year 2011 policy level adjustment for taxpayer service and the 
$81.3 million fiscal year 2012 initiative to improve taxpayer service 
particularly important to America's taxpayers, and has identified them 
as its second-highest funding priority.

TABLE 4.--TAXPAYER SERVICE ADJUSTMENT AND INITIATIVES RECOMMENDED BY THE
                    OVERSIGHT BOARD AND THE PRESIDENT
                        [In thousands of dollars]
------------------------------------------------------------------------
                                                          Portion due to
                                              Amount          the ACA
                                                          implementation
------------------------------------------------------------------------
President's policy level adjustment.....          23,254  ..............
                                         ===============================
Taxpayer service initiatives:
    Improve taxpayer service............          81,307          51,307
    IRS.gov Improvements................          33,000  ..............
                                         -------------------------------
      Initiative total..................         114,307          51,307
------------------------------------------------------------------------

    Data from the IRS Oversight Board 2010 taxpayer attitude survey 
attests to the value taxpayers place on the IRS taxpayer assistance 
programs and the IRS toll-free telephone assistance operation in 
particular. As shown in Figure 2, more than 80 percent of the public 
say it is either very or somewhat important that the IRS provide 
assistance on certain key service channels including assistance via 
toll-free telephone lines, an IRS Web site, and IRS office locations 
for walk-in assistance. In most instances, a sizable majority say it is 
``very important.''




    Source.--IRS Oversight Board 2010 Taxpayer Attitude Survey.

    The Board's survey further shows an increase in recent years in the 
percentage of the public who say that an IRS representative is a ``very 
valuable'' source for tax advice. As depicted in Figure 3, that upward 
trend, beginning in 2008, coincides with the start of major tax law 
changes designed to spur the economy. Clearly, taxpayers see a growing 
importance for the assistance the IRS provides through its service 
programs.




    Source.--IRS Oversight Board Taxpayer Attitude Survey.

    The Board believes that quality IRS assistance is critical to 
maintaining and ultimately improving voluntary compliance. Both the 
fiscal year 2011 adjustment to achieve the President's policy level and 
the fiscal year 2012 initiative to improve taxpayer service are needed 
to provide an 80 percent level of service in fiscal year 2012 on the 
IRS toll-free telephone operations, while maintaining an answer 
accuracy rate above 92 percent. In the view of the Board, the IRS 
should be equipped with the resources to deliver no less than an 80 
percent telephone level of service. However, the IRS has fallen short 
of that standard in recent years. Should the Congress and the President 
agree on an IRS funding level for the rest of fiscal year 2011 that 
does not include the policy level adjustment, an additional $23.3 
million will need to be added to the fiscal year 2012 initiative to 
improve taxpayer service.
    As indicated in Figure 4, during the 3-year period prior to 2008, 
the IRS was receiving just under 60 million calls per year on its toll-
free assistance lines and delivering a LOS of just more than 80 
percent. However, due primarily to major tax law changes, such as those 
relating to economic stimulus payments, recovery rebate credits, and 
several other special tax provisions, the number of calls the IRS 
received rose sharply starting in 2008 and is now nearly 80 million 
calls per year. This increase in call volume has resulted in a 
corresponding drop in LOS, which now stands in the low 70 percent 
range. In looking forward to 2012, the Board seeks to ensure that 
taxpayers once again receive a minimum 80 percent level of service, 
addressing not only the slippage that has occurred since 2008, but also 
the increased call volume that will surely ensue as provisions of the 
ACA become effective.
    The Board also views as an important investment the Expand Online 
Options Through IRS.gov Improvements initiative to upgrade and expand 
IRS Internet services. The resources recommended for the IRS.gov Web 
site reflect a strategic investment that is key to providing 
substantially better service to greater and greater numbers of 
taxpayers in the years to come. This initiative furthers one of the 
guiding principles articulated in the IRS Taxpayer Assistance 
Blueprint, which calls for the IRS to enhance its Web site so that it 
becomes the first choice of more taxpayers for obtaining the 
information and services needed to comply with tax obligations. It also 
advances one of the core objectives in the IRS Strategic Plan 2009-2013 
to deploy advanced information technology tools to improve IRS 
efficiency and productivity, and to expand online services that improve 
service and enforcement. In 2010, the IRS recorded more than 304 
million page visits on IRS.gov, up from around 268 million visits in 
2009, and roughly double the volume experienced in 2004.




    Source.--IRS and GAO.

    There is little doubt that IRS Internet applications for both 
internal and external customers are foundational to the success of tax 
administration. However, the IRS needs to replace its aging and 
outdated Internet portal environment to improve security and the 
quality of its Web services. The critical upgrades and expansion of the 
IRS Web site funded by this initiative are key to achieving the long-
term vision for electronic tax administration inspired by the IRS 
Restructuring and Reform Act of 1998; a vision in which the vast 
majority of taxpayer interaction with the tax administration system are 
handled electronically. Moreover, taxpayer services delivered over the 
Internet are considerably less expensive than telephone service. Also, 
investing in an improved Internet capability that eventually lessens 
telephone volume will result in future savings. In addition, because 
the Internet is available to taxpayers 24 hours a day, it overcomes a 
limitation of IRS telephone service.

 GOAL 2: ENFORCE THE LAW TO ENSURE EVERYONE MEETS THEIR OBLIGATION TO 
                               PAY TAXES

    The IRS Oversight Board supports the fiscal year 2011 adjustment 
and nine enforcement initiatives that are contained in the President's 
budget and listed in Table 5.
    The Oversight Board supports the President's proposed increases in 
the enforcement area in part because they continue a funding pattern in 
more recent years that has enabled the realistic and steady growth in 
enforcement resources; a pattern the Board has consistently 
recommended. For example, the IRS reports that staffing for its key 
enforcement occupations of Revenue Officers, Revenue Agents, and 
Special Agents, has grown from 20,113 in fiscal year 2002, to 21,185 in 
fiscal year 2006, to 22,710 in fiscal year 2010.

   TABLE 5.--ENFORCEMENT ADJUSTMENT AND INITIATIVES RECOMMENDED BY THE
                    OVERSIGHT BOARD AND THE PRESIDENT
                        [In thousands of dollars]
------------------------------------------------------------------------
                                                          Portion due to
                                              Amount          the ACA
                                                          implementation
------------------------------------------------------------------------
President's policy level adjustment.....         242,275  ..............
                                         ===============================
Initiatives:
    Increase international service and            72,596  ..............
     enforcement........................
    Increase collection coverage........          52,000  ..............
    Implement merchant card and basis             35,730  ..............
     reporting..........................
    Increase coverage to address tax law          96,718          73,615
     changes and other compliance issues
    Ensure accurate delivery of tax              260,293         227,496
     credits............................
    Administer new statutory reporting            58,505          58,505
     requirements.......................
    Leverage return preparer............          16,600  ..............
    Address appeals workload growth.....           9,100  ..............
    Implement UTP reporting requirements           4,129  ..............
                                         -------------------------------
      Initiative total..................         605,671         359,616
------------------------------------------------------------------------

    The gradual growth in enforcement resources has allowed the IRS to 
increase its enforcement presence among both business and individual 
taxpayers, and is generally reflected in the IRS enforcement revenue 
results, which totaled $57.6 billion in fiscal year 2010. The value of 
IRS enforcement programs is more than just direct revenue, and year-to-
year fluctuations in IRS enforcement revenue occur for various reasons, 
such as the final resolution of large dollar cases worked over several 
years. Nevertheless, the clear upward trend in direct enforcement 
revenue attributed to IRS compliance programs since 2002, as shown in 
Figure 5, illustrates one tangible result from funding a greater IRS 
enforcement presence in more recent years.




    In the view of the Board, the recommended fiscal year 2011 policy 
adjustment and fiscal year 2012 initiatives also bolster IRS 
enforcement operations in a manner consistent with the IRS strategy to 
reduce the tax gap. In particular, the Board's and the President's 
recommended funding for enforcement initiatives combines a focus on:
  --expanded IRS global enforcement presence relative to business and 
        individual taxpayers with international economic activity;
  --efforts to improve the accuracy of return submissions provided 
        through paid tax preparers;
  --implementation and leveraging of various new information reporting 
        requirements;
  --improved technology tools and increased enforcement staffing to 
        detect fraud and other noncompliance with a myriad of new and 
        existing tax credits, several involving rather substantial 
        amounts; and
  --with attention to workload growth in appeals to ensure taxpayer 
        rights are protected.
    The Board also notes that more than 40 percent of the total 
requested amounts for the fiscal year 2011 policy level adjustment and 
these fiscal year 2012 initiatives are directed toward the 
implementation of the ACA--most of which are for the investment in new 
technology and related infrastructure to administer the new tax 
credits. Among these new credits are those for small businesses to help 
them provide healthcare coverage for their employees and the new 
premium credit designed to help millions of other Americans purchase 
individual health coverage. The Board strongly believes that a balanced 
approach to the implementation of the ACA requires a proper degree of 
compliance activity, in addition to taxpayer assistance efforts, to 
deter noncompliance and fraud.
    The Board further notes that while IRS enforcement efforts produce 
direct revenue, their indirect contributions to voluntary compliance 
are likely even greater. IRS enforcement presence helps improve 
voluntary compliance by discouraging noncompliance by those who might 
otherwise be tempted to under-report their taxes and by giving 
compliant taxpayers confidence in the tax system and the fairness with 
which the IRS is administering the tax laws.
    To provide further context to the value of improved voluntary 
compliance, the Board notes that a 1 percentage point improvement in 
the voluntary compliance rate translates into an additional $21 billion 
per year in timely paid Federal taxes, based on estimates for tax year 
2001 developed from the IRS National Research Program. Some signs of 
potentially improved voluntary compliance from IRS enforcement efforts 
can be found in the Board's 2010 taxpayer attitude survey. Respondents 
who had received an IRS-initiated contact in the prior year, such as a 
math error notice, were less likely to agree that it is acceptable to 
cheat on one's taxes (either ``a little here and there'' or ``as much 
as possible'') than were respondents who had not been contacted by the 
IRS, i.e., 8 percent of the former versus 12 percent for the latter.

   STRATEGIC FOUNDATIONS: INVEST FOR HIGH PERFORMANCE IN PEOPLE AND 
                               TECHNOLOGY

    Strategic foundations comprise two accounts in the IRS budget: BSM 
and operations support.
BSM
    The IRS Oversight Board supports the total fiscal year 2012 budget 
of $333.6 million for the BSM account as contained in the President's 
budget request and summarized in Table 6. The Board considers its 
funding recommendation for BSM as its highest priority because it 
reflects a strategic investment, which is crucial to rectifying one of 
the fundamental weaknesses in the current tax administration 
environment, i.e., archaic IRS tax processing systems.
    Embedded in the President's request and the Board's recommendation 
for BSM is an fiscal year 2011 adjustment (increase) of $122.6 million 
to achieve the President's policy level. Because the Board considers 
BSM funding its highest priority, it further emphasizes that if the IRS 
does not receive the $122.6 million increase in fiscal year 2011 to 
achieve the President's policy level, then this amount should be viewed 
as a Board-recommended fiscal year 2012 initiative for BSM.

   TABLE 6.--TOTAL PROPOSED FISCAL YEAR 2012 BUDGET FOR BSM BY PROJECT
      ACTIVITY RECOMMENDED BY THE OVERSIGHT BOARD AND THE PRESIDENT
                        [In thousands of dollars]
------------------------------------------------------------------------
                                                            Fiscal year
                BSM projects/initiatives                    2012 budget
------------------------------------------------------------------------
Application migration to CADE 2 (taxpayer account                156,800
 database)..............................................
Current CADE............................................          19,000
Modernized e-File.......................................          20,500
Core infrastructure.....................................          37,700
Architecture, integration, and management...............          27,645
Management reserve......................................           2,622
                                                         ---------------
      Subtotal, capital investment......................         264,267
                                                         ---------------
BSM labor...............................................          69,333
                                                         ---------------
      Total, BSM........................................         333,600
------------------------------------------------------------------------

    The President's request and the Board's recommendations for BSM 
also include a proposed shift in fiscal year 2012 of $52 million 
(following the President's requested policy level increase for BSM in 
fiscal year 2011) from the BSM account to the operations support 
account. This shift recognizes that as major components of IRS' aging 
computer technology are modernized through successful BSM efforts, the 
ongoing operation and maintenance needs of these components can best be 
met in the future as part of the funding for existing IT infrastructure 
within the operations support account.
    The information in Table 6 reflects the BSM budget for fiscal year 
2012 by project activity, assuming the Board's recommendations and 
President's request for BSM are enacted. Most of the total BSM budget, 
including nearly 60 percent of the portion devoted to capital 
investments, reflect the funds needed for the CADE 2 Program. By the 
2012 filing season, CADE 2 will provide a modern relational database 
and daily updating capability for the core tax processing system for 
individual accounts. The IRS refers to this important milestone as 
``Transition State 1.''
    Achievement of Transition State 1 under the CADE 2 Program will 
have immediate benefits to taxpayers, including more timely account 
balance information to better serve taxpayers and the issuance of 
quicker refunds to the roughly 109 million individual refund filers 
each year--a major leap forward from the much smaller pool of about 41 
million taxpayers receiving daily account processing today under the 
more limited ``current'' CADE system. The CADE 2 funding also enables 
the IRS to build on its new relational database foundation and begin 
the work on Transition State 2, which will help address long-standing 
financial material weaknesses identified by the GAO, and begin the 
replacement of current service and enforcement applications, based on 
antiquated computer code, with state-of-the-art, Internet-centric 
modular applications using modern programming languages.
    The annual assessment of the BSM Program by TIGTA lends further 
support to the merits of the requested BSM funds for CADE 2. As TIGTA 
stated in their assessment issued in September 2010,

    ``The IRS has refocused the BSM Program to deliver the modernized 
systems sooner. TIGTA is encouraged by the actions planned and taken to 
refocus the BSM Program, especially related to the retooling of the 
CADE Program, known as CADE 2. When successful, the CADE 2 Program will 
provide a significant boost to the IRS' ability to move away from its 
antiquated tax return processing systems and provide improved service 
to taxpayers.'' \2\
---------------------------------------------------------------------------
    \2\ Treasury Inspector General for Tax Administration, Annual 
Assessment of the Business Systems Modernization Program, Reference 
Number 2010-2094, September 23, 2010.

    The Board's recommended funding for BSM will help the IRS advance 
technologically on other fronts as well, such as enabling the IRS to 
continue further expansion of its successful Modernized e-File (MeF) 
applications to include the employment series tax returns such as the 
Form 941, Employer's Quarterly Federal Tax Return. Extending MeF 
capabilities to employment tax returns is particularly strategic, for 
as was emphasized in the Board's recent 2010 report to the Congress on 
electronic filing, achieving the IRS long-term goal of an 80 percent e-
file rate for all major tax returns will require effective strategies 
to substantially increase the volume of electronically filed employment 
tax returns, particularly the Form 941.
    The modern relational database to be achieved through the CADE 2 
Program and the Internet-filing capabilities achieved through the 
expanding universe of MeF systems, provide the necessary foundations 
for a new generation of tools and Internet applications that can 
dramatically improve IRS service and enforcement programs. That is why 
it so important, in the view of the Board, that policymakers provide 
the needed BSM funding requested by the President. Indeed, in 
designating the IRS BSM Program as one of the Government programs on 
its ``High-Risk Series'' list, the GAO has emphasized that the 
development and delivery of the modernized tax administration and 
internal management systems are

    ``. . . critical to providing improved and expanded service to 
taxpayers and internal business efficiencies for IRS and providing 
reliable and timely financial management information needed to better 
enable IRS to justify its resource allocation decisions and 
congressional budgetary requests.'' \3\
---------------------------------------------------------------------------
    \3\ The United States Government Accountability Office, High-Risk 
Series: An Update, GAO-11-278, February 2011.
---------------------------------------------------------------------------
Operations Support
    The IRS Oversight Board supports the fiscal year 2011 adjustment in 
the operations support account and the six infrastructure initiatives 
contained in the President's budget request, but also believes more 
funding is needed. In particular, the infrastructure funding requested 
by the President and supported by the Board is vital to sensible tax 
administration including resources needed to improve security for IRS 
systems and staff; provide for a long-overdue upgrade to the IRS' 
obsolete financial management system that currently prevents the agency 
from meeting Federal accounting standards; and enable the development 
of the technology and other infrastructure components to implement 
major provisions of the ACA including new information reporting 
requirements.
    However, while the Board applauds the President's budget request 
for including initiatives to enhance IRS computer systems security and 
disaster recovery capabilities, and to enhance physical security at IRS 
facilities, the Board believes more resources are warranted. In 
addition, the Board is also proposing a new initiative not in the 
President's budget, which supports a long-term strategic goal for the 
IRS to be one of the best places to work in the Federal Government. The 
Board's recommendations for Infrastructure Initiatives are presented in 
Table 7.

 TABLE 7.--OPERATIONS SUPPORT ADJUSTMENT AND INFRASTRUCTURE INITIATIVES
                   RECOMMENDED BY THE OVERSIGHT BOARD
                        [In thousands of dollars]
------------------------------------------------------------------------
                                                          Portion due to
                                              Amount          the ACA
                                                          implementation
------------------------------------------------------------------------
President's policy level adjustment.....          10,128  ..............
                                         ===============================
Infrastructure initiatives:
    Enhance security and disaster                 35,000  ..............
     recovery...........................
    Update integrated financial system..          27,500  ..............
    Leveraging data to improve                     1,400  ..............
     compliance.........................
    Enhance physical security for                 31,057  ..............
     employees..........................
    Implement individual coverage                 62,477          62,477
     requirement and employer
     responsibility payments............
    Attract, retain, and develop a                20,000  ..............
     quality workforce..................
                                         -------------------------------
      Initiative total..................         177,434          62,477
------------------------------------------------------------------------

    In relation to the areas where the Board believes more funding is 
needed for infrastructure initiatives than the President has requested, 
the Board is recommending an additional $23 million for the initiative 
to enhance IRS system security and disaster recovery capabilities 
(bringing the total initiative request to $35 million) and an 
additional $15.6 million for the initiative to enhance the physical 
security for IRS employees and taxpayers at IRS office locations 
(bringing that total to $31.1 million). The Board is also recommending 
an initiative of $20 million to further develop a highly engaged IRS 
workforce.

Enhance Security and Disaster Recovery Systems Capability
    The Board views its two recommendations around enhanced systems 
security/disaster recovery and enhanced physical security at IRS office 
locations as highly important to a more robust IRS enterprise risk 
management strategy. As recent events demonstrate, both natural and 
manmade catastrophes do occur, so the IRS needs to be prepared-given 
the critical role tax administration plays in the economic health of 
this country. Indeed, Homeland Security Presidential Memorandum has 
designated several core IRS tax processing systems as part of the 
Critical Infrastructure Protection (CIP) Program. In a similar vein, 
TIGTA in its most recent report to the Treasury Secretary on the top 10 
management and performance challenges facing the IRS elevated 
``security'' to the top challenge, in recognition of the difficult task 
the IRS faces in safeguarding a vast amount of sensitive financial and 
personal data and also protecting approximately 100,000 employees and 
more than 700 facilities.
    The infrastructure initiative to enhance security and disaster 
recovery systems capability would address the IRS' need to provide 
resiliency of four critical tax systems:
  --Processing remittances;
  --Processing tax returns;
  --Processing refunds; and
  --Responding to taxpayer inquiries.
    The intent of this initiative is to move the IRS closer to its goal 
of having a disaster recovery time that does not exceed 12 to 36 hours, 
dependent upon the system disabled. The IRS' current disaster recovery 
capability could leave some systems out of operation for days or even 
weeks at a time.

Enhance Physical Security for Federal Employees
    This initiative will fund guard services for the IRS TACs during 
the filing season, a period when the IRS employees and taxpayers 
receiving assistance may be exposed to greater risk of dangerous 
situations. The initiative will also enable the purchase and 
installation of security equipment--cameras, screening equipment, and 
surveillance devices--as another strategy to address areas of 
vulnerability identified through a thorough security reassessment of 
all IRS facilities. This initiative will also support the IRS' full 
participation on the Joint Terrorism Task Forces (JTTFs) and the 
Attorney General's Advisory Counsels (AGACs). It will also train and 
develop agents to carry out assignments and rapidly follow-up on leads 
developed by the Garden City Counterterrorism Lead Development Center.
Attract, Retain, and Develop a Highly Engaged Workforce
    The Board has approved a long-term strategic goal for the IRS to be 
one of the best places to work in Government, and will evaluate the 
IRS' success in achieving this goal by comparing its employee 
engagement score, as measured by the Office of Personnel Management's 
annual employee survey, to other Federal agencies. Successful 
achievement of the goal requires the IRS to be in the top quartile 
among the 14 largest Federal agencies by 2012, based on that employee 
engagement index score.
    The Board believes that it is imperative that the IRS workforce be 
among the most highly engaged of all large Federal agencies for several 
reasons:
  --The agency is vital to the Nation's economic security.
  --More Americans interact with the IRS than virtually any other 
        Federal agency, and the performance of the IRS' employees will 
        have a direct bearing on whether taxpayers' transactions with 
        the IRS are satisfactory.
  --Studies have demonstrated that highly engaged employees are the 
        most productive, and increased productivity will be asked of 
        all Federal agencies.
  --More productive employees will also lower taxpayer burden through 
        improved timeliness, which studies have shown is a key factor 
        in taxpayer satisfaction with IRS transactions.
    Additionally, in the last 2 years, the IRS has hired a number of 
new employees to replace the growing number of retirees and to increase 
its enforcement staff. It has successfully recruited highly qualified 
employees, aided in part by higher unemployment. Retirement rates are 
expected to remain high in the future, so the IRS will need to continue 
to recruit highly qualified new employees to replace retired employees, 
and it must retain those employees it has hired and trained in the last 
several years. Improving economic conditions will make both these 
objectives more difficult.
    Specific findings by a major IRS operating division indicate that 
there is a significant benefit associated with high employee 
satisfaction, all indicating a high degree of efficiency and 
productivity. Also, attrition by resignation for highly satisfied new 
employees is significantly lower than for the overall division 
population.
    The proposed initiative will be used to fund activities that have a 
direct link to increasing and maintaining high levels of employee 
engagement for front line employees, especially those in mission-
critical occupations who deal with taxpayers on a regular basis. 
Effective first-line management is a critical factor in developing a 
highly engaged workforce.
    The Board is concerned with two issues that relate to developing 
effective front line managers. First, many highly qualified technical 
employees are reluctant to move into management. Second, although 
qualified employees may be highly skilled in their chosen area, they 
often lack the skills needed to be effective managers and to 
effectively develop and engage the employees they supervise.
    Approval of this initiative would enable the IRS to:
  --Eliminate the backlog of untrained front line managers;
  --Ensure enough capacity to train new managers upon selection in all 
        business units;
  --Improve and expand readiness programs to provide a cadre of 
        candidates to step into management positions;
  --Revise the management curriculum to incorporate more e-learning and 
        promote continuous learning; and
  --Evaluate the effectiveness and impact of the IRS' leadership 
        programs.

  APPENDIX 1.--SELECTED MAJOR LEGISLATIVE AND ADMINISTRATIVE PROVISIONS THAT CREATED SIGNIFICANT CHALLENGES FOR
                               THE IRS DURING THE 2007 THROUGH 2010 FILING SEASONS
                                               2007 FILING SEASON
----------------------------------------------------------------------------------------------------------------
Legislation/provision and impact(s) on filing
                    season                                   Some related GAO/TIGTA audit findings
----------------------------------------------------------------------------------------------------------------
Tax Relief and Health Care Act of 2006
Legislation extended certain existing tax      IRS improved most filing season services during 2007: electronic
 deductions such as those relating to           filing grew and several IRS Web site measures improved such as
 deductions for State and local sales taxes.    customer satisfaction; meanwhile, access to IRS telephone
This late-passed legislation forced             assistance and the associated IRS response accuracy were
 approximately 1 million taxpayers to delay     comparable to the prior year (GAO-08-38).
 their return filing and any associated        Overall, the IRS correctly implemented the key tax law and
 refund claim for about 3 weeks while IRS       administrative changes with no significant delays in returns
 finalized its system programs and testing.     processing during the 2007 filing season (TIGTA report: 2007-40-
Required taxpayers to make, and IRS to          187).
 process, unique annotations on paper tax      The IRS provided taxpayers with effective access to telephone
 returns to claim certain deductions.           service; however, the quality and level of service for Spanish
                                                applications were lower than those in English (TIGTA report:
                                                2007-40-160).
                                               There were some areas in which taxpayers did not take full
                                                advantage of the benefits the tax law and administrative changes
                                                provided (TIGTA report: 2007-40-187).
Telephone Excise Tax Refund (TETR)
Allowed for a one-time refund on income tax    The IRS received fewer TETR requests from individuals than
 returns applicable to all who paid telephone   expected; early data showed minimal impact on returns processing
 excise tax, regardless of obligation to file   and taxpayer service (GAO-07-695).
 a tax return.                                 With some exceptions, the IRS successfully planned and
                                                implemented the TETR Program for individuals and businesses;
                                                this includes revising forms, developing strategies to educate
                                                taxpayers, and developing methods for taxpayers to estimate
                                                their TETR claim without burden of obtaining years of telephone
                                                bills (TIGTA reports: 2007-30-178 and 2008-30-091).
                                               Despite IRS efforts, much of the over-collected tax went
                                                unclaimed and unrefunded (TIGTA reports 2007-30-178 and 2008-30-
                                                091).
                                               The IRS did not scrutinize many questionable TETR claims by
                                                individuals because of competing priorities to examine other
                                                issues on returns (TIGTA report: 2007-30-178).
                                               The IRS effort to identify overstated TETR claims by businesses
                                                were ambitious; however, minimum selection criteria for some
                                                businesses were inconsistently applied (TIGTA report: 2008-30-
                                                091).
                                               A TIGTA survey indicated that 27 percent of preparers who did not
                                                compute the TETR claim for their business clients due to cost
                                                involved were not aware that the IRS had offered a simplified
                                                method to estimate the refund (TIGTA report: 2008-30-175).
----------------------------------------------------------------------------------------------------------------


                                               2008 FILING SEASON
----------------------------------------------------------------------------------------------------------------
Legislation/provision and impact(s) on filing
                    season                                   Some related GAO/TIGTA audit findings
----------------------------------------------------------------------------------------------------------------
Tax Increase Prevention Act of 2007
Legislation extended Alternative Minimum Tax   Overall, the IRS correctly implemented the tax law changes
 (AMT) ``patch'' and certain AMT credit         enacted late in the year with no significant delays in the
 offsets.                                       processing of tax returns (TIGTA report: 2008-40-183).
This late-passed legislation forced            The IRS did not achieve its toll-free assistance and level of
 approximately 3 to 4 million taxpayers to      service performance goals because of the high volume of calls
 delay their return filing and any associated   regarding the economic stimulus payments (TIGTA report: 2008-40-
 refund claim for about 4 weeks, while the      168).
 IRS finalized its system programs and
 testing.
Mortgage Forgiveness Debt Relief Act of 2007
Allowed taxpayers to generally exclude from    The amount of forgiven mortgage debt excluded from income could
 income forgiven mortgage debt used to buy or   be significant (GAO-10-997).
 improve principal residence.                  The IRS faced several compliance challenges in administering this
                                                complicated tax provision, including limited information on
                                                current IRS forms, and return on investment considerations on
                                                whether to devote limited IRS enforcement resources to enforce
                                                this provision (GAO-10-997).
Economic Stimulus Act of 2008
Mandated that the IRS send stimulus payments   As of June 13, 2008, the IRS had generated 129 million economic
 to more than 100 million households based on   stimulus payments, totaling more than $89 billion with an
 who filed a tax year 2007 during the 2008      accuracy rate of 99.6 percent (TIGTA report: 2008-40-174).
 filing season.                                The first stimulus payments were issued via direct deposit on
Congressional passage occurred approximate 3    April 28, 2008 (TIGTA report: 2009-40-069).
 weeks after the start of the 2008 filing      The IRS made significant efforts to ensure eligible taxpayers
 season.                                        received their stimulus payment such as sending advance
                                                information notices to more than 130 million taxpayers who filed
                                                a tax year 2006 return, initiating outreach efforts to retired
                                                individuals and veterans who normally have no need to file a tax
                                                return, and initiating outreach efforts to individuals whose
                                                stimulus payments were returned as undeliverable (TIGTA reports:
                                                2009-40-069 and 2008-40-100).
                                               Demand for telephone assistance related to the economic stimulus
                                                legislation was unprecedented and led to a significant reduction
                                                in IRS telephone service (GAO-08-916T).
                                               The IRS decision to reallocate hundreds of IRS collections staff
                                                to help address large telephone call demand resulting from
                                                economic stimulus legislation resulted in up to $565 million in
                                                foregone enforcement revenue (GAO-08-916T).
                                               TIGTA identified $1.2 million in false stimulus payments that
                                                were issued by the IRS in 2008 and another $138 million that
                                                could be potentially released erroneously in 2009 unless the IRS
                                                made improvements in its fraud referral process (TIGTA report:
                                                2009-10-049).
----------------------------------------------------------------------------------------------------------------


                                               2009 FILING SEASON
----------------------------------------------------------------------------------------------------------------
Legislation/provision and impact(s) on filing
                    season                                   Some related GAO/TIGTA audit findings
----------------------------------------------------------------------------------------------------------------
Economic Stimulus Act of 2008
Allowed taxpayers who did not receive the      Overall, the IRS successfully planned the implementation of the
 full stimulus payment during the 2008 filing   Recovery Rebate Credit and issued approximately $8.5 billion in
 season to receive the unpaid portion on        credits to approximately 21 million taxpayers (TIGTA report:
 their tax year 2008 return as a Recovery       2009-40-129).
 Rebate Credit during the 2009 filing season.  Taxpayers had difficulty determining whether they qualified for
                                                this credit and early in the filing season the IRS had already
                                                identified more than 5 million tax returns with Recovery Rebate
                                                Credit errors (TIGTA report 2009-40-058).
                                               TIGTA found the IRS calculation errors in less than 1 percent of
                                                the cases but also identified a programming error, which the IRS
                                                took immediate action to correct, that could have potentially
                                                allowed almost 6 million taxpayers to erroneously claim nearly
                                                $1.6 billion in credits (TIGTA report: 2009-40-129).
                                               Legislation did not provide the IRS with math error authority to
                                                prevent individuals without valid SSNs from receiving the credit
                                                at the time the returns were processed, and as a result the IRS
                                                provided more than $27 million in credits to taxpayers without a
                                                valid SSN (TIGTA report: 2009-40-129).
Housing and Economic Recovery Act of 2008
 (HERA)                                        The IRS met many of its processing goals during the 2009 filing
Provided taxpayers a First Time Homebuyer       season, but telephone access remained low, due in part to calls
 (FTHB) credit of up to $7,500 on purchase of   about tax law changes; despite the heavy call volume, IRS
 home, but required them to repay the credit    accuracy remained above 90 percent (GAO-10-225).
 over 15 years starting in 2011 filing         The IRS had a successful 2009 filing season despite the unique
 season.                                        challenges it faced (TIGTA report 2009-40-142).
While the FTHB credit was initially contained  The varied FTHB credit provisions within the HERA versus the
 in the HERA, it was subsequently expanded,     American Recovery and Reinvestment Act may have confused
 and the repayment provision eliminated in      taxpayers and also presented the IRS with significant challenges
 most instances, under the American Recovery    to ensure the credit was used correctly as authorized. (TIGTA
 and Reinvestment Act of 2009.                  report 2010-41-069).
American Recovery and Reinvestment Act of
 2009 (Recovery Act)                           The 2009 filing season provided challenges for the IRS due to the
Congressional passage occurred approximately    two significant tax laws that provided a new FTHB credit, and a
 4 weeks after start of the 2009 filing         massive bailout and tax relief package, which entailed 116
 season.                                        different tax provisions (TIGTA report: 2009-40-058).
Provided taxpayers a revised credit of up to   The Recovery Act posed significant implementation challenges for
 $8,000 on the purchase of home with need to    the IRS because it had more than 50 provisions, many of which
 repay only if home is resold or ceases to be   were immediate or retroactive and had to be implemented during
 primary residence within 3 years.              the 2009 filing season (GAO-10-349).
Allowed small businesses to apply certain      The IRS responded quickly to the implementation challenges of the
 2008 net operating losses against tax          Recovery Act; however, that quick response entailed tradeoffs,
 liabilities from the previous 5 years.         such as not making some computer changes to collect data (GAO-10-
Provided Federal subsidies for State and        349).
 local bonds, including Build America Bonds    Nearly 50,000 taxpayers may not have claimed the full amount of
 (BAB), through certain credit provisions.      the FTHB credit to which they were entitled; the IRS agreed to
                                                contact the applicable taxpayers to inform them (TIGTA report:
                                                2009-41-144).
                                               Despite the fact that the Recovery Act was enacted during the
                                                filing season, the IRS issued timely and clear guidance that
                                                helped foster compliance with the new NOL provisions; by the end
                                                of 2009, the IRS processed approximately 44,000 NOL claims
                                                totaling more than $3 billion (TIGTA report: 2010-41-070).
                                               The initial guidance on bonds published by the IRS was quick,
                                                complete, accurate, and consistent with the requirements of the
                                                Recovery Act (TIGTA report: 2010-11-035).
                                               Generally, all complete requests for payment of Build America
                                                Bonds (BAB) Federal subsidies were processed accurately and
                                                timely by the IRS, and without indications of fraudulent or
                                                erroneous disbursements; as of September 2009, State and local
                                                governments received almost $26.4 billion in funding through 315
                                                BAB issuances (TIGTA report: 2010-11-083).
----------------------------------------------------------------------------------------------------------------


                                               2010 FILING SEASON
----------------------------------------------------------------------------------------------------------------
Legislation/provision and impact(s) on filing
                    season                                   Some related GAO/TIGTA audit findings
----------------------------------------------------------------------------------------------------------------
American Recovery and Reinvestment Act of
 2009 (Recovery Act)                           The IRS dealt with a number of challenges during the 2010 filing
Provided a Making Work Pay (MWP) credit to      season, including significant tax law changes such as the MWP
 working individuals.                           credit (GAO-11-111).
Increased allowable credit amount for          The IRS balanced its resources across filing season activities
 homeowners who make certain energy             with improvements in some areas but fluctuations in others:
 efficiency improvements.                       electronic filing and IRS Web site visits increased, level of
                                                service to callers seeking live IRS assistance improved compared
                                                to 2009, and the accuracy of answers remained high; however,
                                                average wait time for telephone service increased compared to
                                                2009, and millions of taxpayer refunds were delayed primarily
                                                because of the time needed to correct taxpayer errors associated
                                                with the MWP credit (GAO-11-111).
                                               The IRS implemented the MWP credit in accordance with the consent
                                                of the Congress by advancing it to taxpayers through a decrease
                                                in Federal income tax withholding rates (TIGTA report: 2011-41-
                                                002).
                                               The IRS initiated a significant outreach program to inform
                                                taxpayers about the change in withholding associated with the
                                                MWP credit and its potential to leave certain taxpayers
                                                underwithheld and owing taxes at the time they are due (TIGTA
                                                report: 2011-41-002).
                                               Despite IRS outreach actions, more than 13 million taxpayers were
                                                or will be negatively affected by the MWP credit withholding
                                                rate changes, including more than 1 million who may face an
                                                increase in their Estimated Tax Penalty amount (TIGTA report:
                                                2011-41-002).
                                               A survey of taxpayers who appeared to be negatively impacted by
                                                the MWP credit withholding changes indicated that most were not
                                                aware of the credit or its effect on their taxes (TIGTA report:
                                                2011-41-002).
Worker, Homeownership, and Business
 Assistance Act of 2009                        As of early 2010, the IRS still did not have the ability to
Extended FTHB credit another 5 months (to       identify individuals who received the FTHB credit but who would
 April 30, 2010) and allowed a credit up to     have some repayment requirements because the home ceased to be
 $6,500 for certain long-time homeowners        their main residence; the IRS was, however, developing a
 purchasing new homes.                          comprehensive strategy to address this issue (TIGTA report: 2010-
Provided the IRS with ``math error              41-086).
 authority'' to deny erroneous FTHB credit     In May 2009, the IRS implemented a number of controls to prevent
 claims upfront during the IRS return           inappropriate FTHB credits claims from being issued before the
 processing phase.                              claims were processed; however, follow-up action by the IRS was
Expanded and extended the NOL carry back        still needed on fraudulent and questionable claims processed
 provisions for businesses.                     before the controls were implemented (TIGTA report: 2010-41-
                                                069).
                                               The IRS timely implementing procedures to identify and reject
                                                extended NOL claims inappropriately submitted by Troubled Asset
                                                Relief Program recipients, but was somewhat late in implementing
                                                controls to apply a limit on the amount of the loss carried back
                                                to the fifth year (TIGTA report: 2010-41-070).
                                               The IRS received millions of calls related to the MWP and the
                                                FTHB; approximately 9 percent of all calls received (GAO-11-
                                                111).
----------------------------------------------------------------------------------------------------------------

                                 ______
                                 
 Prepared Statement of Colleen M. Kelley, President, National Treasury 
                            Employees Union

    Chairman Durbin, Ranking Member Moran, and distinguished members of 
the subcommittee, I would like to thank you for allowing me to provide 
comments on the administration's fiscal year 2012 budget request for 
the Internal Revenue Service (IRS). As president of the National 
Treasury Employees Union (NTEU), I have the honor of representing more 
than 150,000 Federal workers in 31 agencies, including the men and 
women at the IRS.

                  IRS FISCAL YEAR 2012 BUDGET REQUEST

    Mr. Chairman, the NTEU strongly supports the administration's 
fiscal year 2012 budget request of $13.2 billion for the IRS, a 9 
percent increase of $1.1 billion more than the current fiscal year 2010 
enacted level. We believe that the President's request will allow the 
IRS to continue helping taxpayers meet their tax obligations, improve 
enforcement of the tax law and generate much needed revenue for the 
Federal Government.
    We are particularly pleased the administration's budget request 
would provide critical increases for IRS enforcement and taxpayer 
service activities, and would allow the IRS to continue rebuilding its 
workforce which remains well below mid-1990 levels.
    As in previous years, the NTEU also supports the budget 
recommendations proposed by the IRS Oversight Board which have 
generally called for additional funding above that requested by the 
administration. For fiscal year 2012, the Oversight Board has 
recommended $13.5 billion in funding for the IRS. We would be inclined 
to support providing additional funding for the IRS above the 
administration's request and look forward to reviewing the details of 
the Board's recommendation.

                           TAXPAYER SERVICES

    Providing quality customer service to the taxpayer is an important 
part of IRS efforts to help the taxpaying public understand their tax 
obligations while making it easier to participate in the tax system. 
Through a variety of channels, the IRS is able to provide year-round 
assistance to millions of taxpayers, including outreach and education 
programs, issuance of tax forms and publications, rulings and 
regulations, toll-free call centers, the IRS.gov Web site, Taxpayer 
Assistance Centers (TACs), Volunteer Income Tax Assistance (VITA) 
sites, and Tax Counseling for the Elderly (TCE) sites. These efforts 
have enabled the IRS continue raising the standard of service to 
America's taxpayers and assisted in efforts to improve voluntary 
compliance.
    In fiscal year 2010, these efforts helped the IRS meet or exceed 83 
percent of the taxpayer service performance targets. In addition, IRS 
taxpayer service activities were critical to its ability to deliver a 
successful 2010 filing season during which IRS employees processed more 
than 141 million individual returns and issued 109 million refunds, 
totaling $366 billion and answered almost 36 million calls from 
taxpayers requesting information on new credits available to them. In 
addition, the IRS also provided in-person service at its 401 Taxpayer 
Assistance Centers (TACs) located around the country, for taxpayers to 
resolve tax issues and receive help to prepare their tax returns. In 
2010, 6.4 million taxpayers visited a TAC, 3 percent more than in 2009. 
Walk-in service at TACs remains popular among elderly taxpayers, those 
with limited English and computer proficiency, and taxpayers without 
Internet access.
    In addition, during the 2010 filing season, the IRS expanded hours 
of service at 16 geographically dispersed TACs, and seven were open 
every Saturday. In 27 locations, low-income taxpayers took advantage of 
IRS help in the preparation of both their State and Federal tax 
returns. The IRS held Open House events at 200 TACs and partner sites 
nationwide to help taxpayers prepare their returns and resolve their 
tax issues. As a result, more than 31,400 taxpayers were served and 
more than 7,700 returns were prepared at these events.
    The delivery of a successful 2010 filing season by the IRS is all 
the more impressive as employees delivered these numbers while also 
being confronted by a variety of challenges presented by implementation 
of provisions in the American Reinvestment and Recovery Act of 2009, 
the Worker, Homeownership, and Business Assistance Act of 2009, and 
increased telephone demand for Economic Recovery Payment inquiries.
    We were glad to see the administration's request of $2.3 billion 
for taxpayer services acknowledges the good service that IRS employees 
provided to taxpayers in fiscal year 2010 while also recognizing that 
additional progress can be made. In particular, we strongly support the 
proposed additional funding to improve telephone level of service, 
improve the IRS Web site and provide a variety of new online services.
    In fiscal year 2012, the IRS plans to increase the telephone level 
of service by adding resources to meet the ever-increasing demand and 
continuing to make efficiency improvements such as automated self-
service applications that allow taxpayers to obtain information on less 
complex issues such as refund inquiries. These improvements will free 
up staff to deal with the more complex tax law issues stemming from the 
passage of new legislation. In addition, the IRS continues to study the 
effects of services it offers to taxpayers on the Internet, at walk-in 
sites, and on its toll-free telephone lines as well as exploring the 
relationships between taxpayer errors and unclear correspondence to aid 
in the development of new approaches to service.
    The NTEU strongly believes providing quality services to taxpayers 
is an important part of any overall strategy to improve compliance and 
that the President's request for taxpayer services will enable the IRS 
to deliver another successful filing season, improve the responsiveness 
and accuracy of taxpayer service, and support IRS efforts to enhance 
taxpayer compliance.

                              ENFORCEMENT

    Mr. Chairman, the NTEU believes a strong enforcement program that 
respects taxpayer rights, and minimizes taxpayer burden, plays a 
critical role in the IRS' efforts to enhance voluntary compliance, 
narrow the tax gap and reduce the deficit. In fiscal year 2010, the IRS 
enforcement efforts brought in almost $58 billion in enforcement 
revenue, an 18 percent increase more than fiscal year 2009. In 
addition, other key IRS enforcement programs continued to show progress 
over fiscal year 2009. These include a 6 percent increase in collection 
case closures, a 20 percent increase in Automated Under Reporter (AUR) 
contact closures, an 8 percent increase in large corporate audits and 
an 11 percent increase in the number of individual return examinations.
    That is why the NTEU was happy to see the administration's budget 
request would provide a $462 million increase in funding for the IRS 
tax enforcement above the current fiscal year 2010 enacted level, 
including additional resources made available through a program 
integrity cap adjustment.
    This increased funding will enable the IRS to continue 
strengthening current IRS compliance programs designed to close the tax 
gap in several areas, including: increasing compliance by addressing 
offshore tax evasion through more examinations and full implementation 
of the Foreign Account Tax Compliance Act (FACTA); implementing 
information reporting requirements approved by the Congress in 2008 to 
validate income reported by businesses by reconciling their income with 
their payment card receipts and third-party transactions; and improving 
tax debt collection coverage and collection processes. The proposal 
will also allow the IRS to continue to focus on compliance issues and 
new responsibilities arising from recent tax law changes included in 
major legislation, including the American Recovery and Reinvestment Act 
and the Affordable Care Act.
    These investments in IRS enforcement programs are expected to 
generate $1.3 billion in additional annual enforcement revenue, 
resulting in a return on investment (ROI) of 6.4 to 1, once new hires 
reach full potential in fiscal year 2014. In addition, investment in 
new enforcement initiatives will also encourage voluntary compliance, 
further increasing revenue. According to the IRS, the deterrence value 
of these investments and other IRS enforcement programs on voluntary 
compliance is conservatively estimated to be at least three times the 
direct revenue impact.
    The NTEU strongly supports targeting additional resources to 
programs that would help close the tax gap, including new initiatives 
that deepen and broaden the IRS' focus on international tax compliance 
of high-net-worth individuals and entities. The IRS has demonstrated 
that targeted compliance resources more than pay for themselves through 
increased revenues, which has motivated past Congresses to target 
additional funds to these enforcement activities. In addition to 
generating additional revenue for the Federal Government, reducing the 
tax gap will help strengthen public trust in the fairness of the tax 
system which will positively impact voluntary compliance with tax laws.

                           PHYSICAL SECURITY

    Mr. Chairman, as you know, last February, in what authorities 
believe was an intentional attack, a pilot crashed his small plane into 
a building housing almost 200 IRS employees in Austin, Texas, killing 1 
employee and seriously injuring several others. This brazen and 
cowardly attack, serves as a grim reminder of the great risk that the 
men and women of the IRS face each and every day in service of this 
country.
    As one of the most public faces of the U.S. Government, the IRS and 
its employees often bear the brunt of anti-Government rhetoric and 
threats. According to the Treasury Inspector General for Tax 
Administration (TIGTA) which is charged with investigating threats and 
assaults against IRS personnel, more than 1,200 threat and assault 
cases were referred to TIGTA for investigation between 2001 and 2008. 
The cases resulted in more than 167 indictments and at least 195 
convictions.
    That is why the NTEU was happy to see that the administration 
proposed $15 million to enhance physical security for IRS employees. 
This includes $10 million to expand guard serve at Taxpayer Assistance 
Centers (TACs) during filing season, $1.5 million to improve security 
at IRS facilities around the country, and $3.9 million to provide 
additional resources to identify and investigate individuals or 
entities whose anti-Government or anti-tax rhetoric exhibit behavioral 
traits associated with domestic terrorism.
    The NTEU believes these critical investments will enhance the 
overall security of IRS employees in the work place, while maintaining 
open access for the taxpayers that they serve.

                            CONTRACTING OUT

    Mr. Chairman, the NTEU recognizes that in the current fiscal 
crisis, it is critical that the Federal Government look for ways to 
maximize its resources and to root out waste, fraud, and abuse wherever 
they find it. One way in which the NTEU believes that the Federal 
Government can best accomplish this is to reform the broken competitive 
sourcing process, and bring contracted work back in-house. By ensuring 
Federal employees are able to compete for work with contractors on an 
even playing field, and identifying areas in which the Government could 
perform this work more effectively and efficiently, the Federal 
Government will be better able to provide high-quality services and 
will save taxpayer dollars. The administration has already begun to 
reform Federal contracting by requiring Federal agencies to cut 
wasteful contract spending, reduce over-reliance on contractors, and 
improve oversight and accountability. These efforts are expected to 
result in $40 billion in annual savings by the end of 2011 which could 
be used to ensure agencies have the necessary resources and staffing.
    In recent years, the Congress has acknowledged the inherent flaws 
in the competitive sourcing process and has included language in year-
end spending bills that prohibit the use of funds to begin new public-
private Circular A-76 competitions for another year. The NTEU strongly 
believes the current A-76 competition moratorium should be continued 
for another year until further steps are taken to reform the broken 
competitive sourcing process that has eroded the ability of agencies to 
perform many critical functions, and has led to contractors performing 
work that should be performed solely by Federal employees.
    In addition, we would strongly encourage the Congress to continue 
the current prohibition on the use of funds for private collection 
agencies through fiscal year 2012. The use of private collection 
agencies to collect tax debts has repeatedly been shown to be a waste 
of taxpayer dollars and lead to taxpayer abuse. The 2006 initiative 
resulted in widespread taxpayer abuse and a loss of almost $5 million 
to the Federal Government, after subtracting program administration 
costs and commissions payable to the PCAs. While the IRS ended the 
private tax collection program in 2009, it still retains the statutory 
authority to revive the program in the future.

                               CONCLUSION

    Mr. Chairman, thank you again for allowing the NTEU to provide our 
thoughts on the administration's fiscal year 2012 budget request for 
the IRS. We strongly believe that by investing in demonstrably 
effective enforcement and taxpayer service programs, the 
administration's request will allow the IRS to provide taxpayers with 
top-quality service, enhance voluntary compliance, narrow the tax gap, 
and reduce the deficit.

    Senator Durbin. Thank you very much.
    As I mentioned in my opening statement, the IRS deals with 
a huge volume, processing more than 230 million tax returns and 
issuing more than 109 million refunds. It's an indication of 
the challenge that you face, and your people that you work with 
face, on a regular basis. And, of course, there are going to be 
cases where people set out to defraud or cheat the Government 
in terms of filing these tax returns.
    I'd like to call your attention to one that's received some 
attention over the last year or so. This is the providing of 
refunds to people who are serving in prisons across the United 
States. The Treasury Inspector General for Tax Administration 
reported that erroneous prisoner refund claims are on the 
rise--up of 44,944 claiming refunds of $295.1 million in the 
year 2009.
    Even though the IRS has been able to prevent large amounts 
of these refunds from being issued--256 million were rejected 
in 2009, this year of the study--the amount of false refunds 
issued still hit a high of $39.1 million. Since 2004, when 
18,103 false tax returns were filed, nearly $123 million in 
fraudulent refunds have been issued to those serving in prison.
    Now, I can think of a situation where someone serving in 
prison may be eligible for a refund. It could happen. But 
clearly, in this case we're dealing with those ineligible to 
receive refunds who are trying to defraud the Government. They 
aren't satisfied with being punished by sitting in prison. They 
are dreaming up new crimes--at the taxpayers' expense here--to 
try to defraud the Government.
    And so let me ask you at the outset--I understand you've 
spoken to the U.S. Bureau of Prisons to try to make sure that 
we can have identification of those prisoners filing these 
returns. But I also understand that, when it comes to the State 
prison systems, that your authority to have this kind of 
information transferred will expire at the end of this year.
    Can you tell me what's being done to stop these false 
claims by prisoners, and what more we can do to protect the 
taxpayers and the Treasury?

                            PRISONER CLAIMS

    Mr. Shulman. Mr. Chairman, it's an issue we take very 
seriously and we've been focused on. The bottom line is, when 
we have the name of a prisoner, we can stop the refund from 
going out, and we do.
    The problem is getting the data. And we signed last year a 
memorandum of understanding with the Federal Bureau of Prisons, 
so we'll get the data in a format we need so we can put screens 
in place to block the refund.
    I sent letters out to the Governors of the 10 States that 
have the highest prison populations and the biggest problems 
here. We've since that time signed memorandums of understanding 
with seven of those States to get the information. We're in 
discussions with 17 other States. So, we've seen some progress 
with States getting us the information so we can block it.
    We have a bigger problem with big counties and 
municipalities, because we need to get information from them. 
They've got budget constraints; and we need to get the 
information in a format we can use in December, so we can load 
it into our system, so that we can put blocks in place for the 
filing seasons.
    What I would tell you--and I think the Inspector General 
recognized this in the last report--is, we're stopping more, 
we're detecting more, and we're screening more now.
    Senator Durbin. Are we prosecuting those who file false 
returns?
    Mr. Shulman. The biggest hammer that we have is sending 
someone to jail. And these people are already in jail. And so, 
what we've been doing in these memorandums with States and the 
Federal Government--and this is authority you talked about--is 
sharing tax data, which generally we can't do under 6103 of the 
tax laws, so that officials can do things like have additional 
punishment in prisons. Wardens can put a prisoner in solitary 
confinement and things of that like. Because the people we 
generally block are people who are there for life. As you 
mentioned, there's a lot of prisoners who are married, filing 
jointly, who are due a refund. So, what we need to do is screen 
the return and make sure we're not hurting the spouse of a 
prisoner.
    I think we've made a lot of progress. This year we've 
actually processed and done screens and follow-ups of 100,000 
more returns. I added resources to the unit that does the 
screening. And so, all of this is moving in the right 
direction. And as long as we get the information, we can 
properly block these refunds.

                            IMPROPER CLAIMS

    Senator Durbin. In the infinite wisdom of a Member of 
Congress, we dream up new tax deductions and tax credits for 
perfectly valid reasons--at least in our opinion. And then it's 
up to you to try to make it work. And one of them related to 
tax credits for energy efficient windows, doors and insulation 
and geothermal heat pumps and solar water heaters. I probably 
voted for it. I would have if it were a separate vote. It 
sounded like a good idea.
    For tax year 2009, taxpayers claimed more than $5.8 billion 
of the energy credits which were included in the 2009 Economic 
Stimulus Recovery Act. Based on a review of a statistically 
valid sample of 150 tax returns, the Treasury Inspector General 
for Tax Administration was unable to confirm home ownership for 
30 percent of that sample--45 of the taxpayers--which, of 
course, is required to claim the credit. So, there is, at 
least, a question mark going forward as to whether these 30 
percent of the people who claimed this money were eligible for 
it.
    In addition, the Inspector General identified 362 
ineligible individuals who were allowed to erroneously claim 
$404,578 in residential energy credits on their tax returns. 
These individuals included 262 prisoners--here they are again, 
now claiming that they deserve a tax credit for energy 
efficient windows in their prison cells, I guess--and 100 
individuals under the age of 18 who were ineligible to file.
    So, how do we get to the bottom of this--once again, with 
the prisoners, and, again, with those who are ineligible--to 
try to police the ranks and make sure that people aren't filing 
and claiming credits that they're not entitled to?
    Mr. Shulman. I think there's a couple of things. This is a 
worldwide phenomenon. When people wanted to give incentives to 
spend when there was a major economic meltdown across the 
globe, people quickly used the tax system to push a lot of 
money out to help stabilize economies. The tax system is 
efficient, and there's already an annual interaction that 
happens every year with most Americans.
    When we have time, we can properly set up filters, think 
this process through, engage with the industry, find out where 
there's potential leakage, find out what data we can get in, 
find out what data we can get through on our electronically 
filed returns, and then set up screens and filters. And we do 
that. For instance, in the report you referenced, we 
generally--this law happened very quickly, when we were trying 
to do some things--set up a set of filters. Our Inspector 
General--who provides incredibly valuable service, and we learn 
along the way, I think, both of us, as we go--recommended we 
put more filters in place while we were having dialogue on that 
report.
    Some leakage occurred. We'd like to have zero leakage. 
There's going to be some leakage with any credits, because 
we're only going to be able to screen and follow up with a 
certain amount. But we do follow-up. And so, when things happen 
very quickly, sometimes more refunds go out the door that are 
questionable. Then we have an audit program where we can go 
audit, find out what's there, do follow-up, and close. If we 
have a lot more lead time, with more developed credits, we can 
set up the screens ahead of time.
    But make no mistake--I think we're getting better at this, 
and we've a lot of sophisticated filters, and we stop the vast 
majority of fraudulent returns from going out. But if you're 
going to use the tax system, which is built on voluntary 
compliance, to achieve these goals we've got to get this 
balance right between getting refunds to people who are due 
them and rely on them, and blocking the bad ones, there's going 
to be some leakage. Our goal is to get that balance right--to 
narrow the leakage as much as we can.
    Senator Durbin. If--Senator Moran, just bear with me. I 
want to ask two questions to close this line here.
    In the most egregious cases, when someone is claiming 
they're a homeowner and entitled to these credits and, in fact, 
they're not----
    Mr. Shulman. Yes.
    Senator Durbin [continuing]. So, they are just clearly 
misrepresenting their eligibility for the program. It's not a 
math error. It's a clear misrepresentation. In those cases, 
when you detect them, is there follow-up in terms of penalties, 
fines, prosecution?

                          PENALTIES AND FINES

    Mr. Shulman. Penalties, yes. Fines, yes. We have limited 
prosecutorial resources. We try to spend those resources on the 
places that are going to create the most long-term deterrence. 
Our Criminal Investigation Division is balancing things around 
money laundering, terrorist financing, preparer fraud, identity 
theft fraud, and very specific tax fraud. We try to allocate 
the resources appropriately.
    So the answer is ``Yes''. And a lot of times, you'll see a 
scheme where one person puts a bunch of false claims in, files 
a return, comes back. An individual who claims $1,000 credit 
for himself fraudulently usually will be fined in more of a 
civil context than a criminal context. But the bigger the 
crime, the more prosecution is likely to happen. And as you 
know, it's a partnership with the Justice Department and local 
U.S. Attorneys.

                            IMPROPER CLAIMS

    Senator Durbin. So, we talked about these jail-cell 
taxpayers, and I've talked about this specific credit. If you 
could--the last question here--if you could take a look at the 
overall landscape, where do we find the most fraud--the most 
cheating going on in terms of people claiming what they are not 
entitled to under our tax code?
    Mr. Shulman. You know, the tax code is incredibly complex. 
There's a fair amount of noncompliance. Some of it is 
confusion; some of it's fraud. The places we focus, which is 
where we think the most leverage is for the tax system to make 
sure we protect the fisc, is overseas and offshore tax 
evasion--people just parking assets overseas. I would say, 
where there's complexity is where people hide money and push 
the envelope.
    We've been focused around preparer fraud, because we think 
it's a big point of leverage. If one preparer gets 1,000 
taxpayers and encourages them to do something fraudulent, a lot 
of times the taxpayer is unsuspecting. If we can lock that 
down, it's a big link in the system.
    And then refundable credits. In places where you can get a 
large tax credit, you find fraud. So, we did a lot of focus on 
the First-time Home Buyer Credit, where there was a big 
refundable credit that was temporary, that was quick. Earned 
Income Tax Credit--we put a lot of effort there, doing both 
civil and criminal follow-up. And then, this set of credits 
that you talked about, is where we put a lot of effort.
    Senator Durbin. Thank you.
    Thank you, Senator Moran, for your patience.
    Senator Moran. Mr. Chairman, thank you.

                            FRAUD DETECTION

    Commissioner, following that line of questioning, how often 
is it that the IRS finds the fraud, as compared to an Inspector 
General's report, or a GAO report requested by the Congress? 
How actively engaged and how successful are you in ferreting 
out the problem with some, without some other agency pointing 
out the fraud or the challenge?
    Mr. Shulman. Every tax return goes through a screen. We 
call it the Electronic Fraud Detection System (EFDS). It's our 
fraud filters. And it looks for, for example, returns that have 
the same address--100 returns that have the same address; big 
changes in income; not having the proper documentation attached 
or not including information in the return. We set filters and 
tolerances, frankly, based on resources. A lot of these are an 
indication that we need to follow up.
    And so, we have civil units that call employers and say, 
``Was this person employed? Is this income accurate?'' And then 
it kicks out to criminal, who develop schemes, and that feeds 
our criminal prosecutions.
    What I would say is the GAO, our Inspector General, 
Congressional oversight all really help us by focusing on 
places where they think we've had too much leakage. I don't 
think there's been an instance--at least since I have been 
there--where people have found more fraud in their 
investigation than we've actually blocked.
    And so just to give you a sense of magnitude, our EFDS 
filters, screen filters, kick out between 1 and 2 million tax 
returns a year that we do follow-up on. We block every year and 
reject 2 million returns who have duplicate SSNs of either 
dependents or individuals. And sometimes it's a transcription 
error, but sometimes it's somebody trying to defraud the 
system. In EITC alone we protect $4 billion annually through 
our enforcement efforts and blocking refunds.
    We've got an incredibly active program there. But then it's 
very helpful to have people overseeing the program, finding 
where they think there's too much leakage, and we tighten--you 
know, it's a continual evolution and tightening up. Frankly, 
the real fraudsters, they're always testing our tolerances, 
sending things in to our systems. And so, we always have to be 
one step ahead.

                            PRISONER CLAIMS

    Senator Moran. Well, the two examples that Chairman Durbin 
indicated--the prisoner example--that's something you would 
have known before we read about it in the paper?
    Mr. Shulman. Well, sure, we've had extensive conversations. 
Look, it's counterintuitive to your average American that a 
prisoner could get a tax refund, right? So it's going to be in 
the paper.
    Senator Moran. It makes a story.
    Mr. Shulman. I think the reality is, some prisoners can get 
tax refunds. We can't just reject everyone. So we need to do 
screening.
    If you look at the reports that say there's been more, they 
also show that we've been screening more and blocking more and 
identifying more. It's just the volume's grown, so the gross 
volume of refunds were higher this year. The numbers, the 
percentages that we caught, the amount we caught and filtered, 
also grew exponentially. So, we were protecting a lot more 
money for the Federal Government. But, as a fraction, more was 
going out.
    Senator Moran. Okay.

                                E-FILING

    You talked about e-filing and the savings that come from 
that successful program. Your sentiment--first of all, how much 
more potential is there for savings? Is there more, opportunity 
for more e-filing expected? And then second, you talk about the 
$190 million in efficiency savings, reductions and nonrecurring 
activities. What does that mean in the budget and 
appropriations process?
    Mr. Shulman. Sure. So, on e-file, just to tell you what 
we've done, we've shut down 5 of our 10 processing centers over 
the last 6 years. It hasn't been popular with folks where those 
processing centers were. But, we've been very clearly reaping 
the savings of e-filing. Right now, we plan to get to 80 
percent of returns e-filed. We're at 75 percent. But, 
certainly, we're going to look to reap more savings. So, we're 
at 75 percent individuals e-filing.
    Twenty years from now, my guess is the IRS won't take any 
paper. We still take some paper. I am hoping that percentage is 
just going to keep going up, and that's been a great success. 
Really working with the private sector, with individuals, to 
help them to understand, we take data security very seriously, 
so nobody will be worried with those 1 billion returns that 
there's going to be any leakage.
    Since I came here, and for every budget for the last 3 
years that I've submitted, we've always included substantial 
savings. Because I believe, as the head of a big hundred-
thousand-person agency, that you can always find efficiencies. 
You've always got to be looking at core operations, stopping 
operations that don't make sense so you can keep investing in 
the future and positioning yourself for the future.
    This year, the $190 million is some savings from e-file. 
We're just reaping the benefits and cutting down our processing 
operations; reducing IT infrastructure. We've been going 
through a process called Capability Maturity Models, which is 
pretty standard practice in the private sector, where I came 
from--I used to be involved in helping to run stock markets and 
run big computer systems--where you standardize your processes 
across your whole IT infrastructure. So you have standard ways 
of documenting IT, standard ways of developing requirements. 
You bring in an outsider to observe--there's a thing called the 
Software Engineering Institute that will come in and do random 
audits to see where it is. And we've been promising and reaping 
benefits, for the last 3 years, $75 million a year by being 
more efficient and more standardized. And my Chief Technology 
Officer has signed up to those savings. And as long as I am 
here, you're just going to expect it, and we say we're just 
going to keep doing savings and adjusting core operations. It 
actually increases efficiency, while saving money.
    And then we made some tough choices. This year we didn't 
automatically send out any paper 1040 forms. E-filing crossed a 
threshold. We just said, even in the past, if you filed a paper 
1040, we didn't send you a paper 1040. I thought that was a 
self-fulfilling prophecy. So what we did instead this year, we 
sent you a postcard and said, if you really want your 1040, 
give us a call and we'll send it to you, but we're not going to 
spend $10 million printing and sending out those.
    We've cut contracts. I mean, this is just a series of 
issues. And to be honest, as the chairman said, we've been 
under a continuing resolution. Because there's inflation in 
things like rent and other things, it's an effective cut, and 
we've been doing aggressive cost cutting this year as well, 
beyond the things we listed in our 2011 budget as cost savings.
    Senator Moran. So, you would be requesting $190 million 
more in your appropriations request in your budget request, but 
for those savings?
    Mr. Shulman. Correct.

                             FILING METHODS

    Senator Moran. Okay. What percentage of American 
individuals file their return with the assistance of a 
professional preparer?
    Mr. Shulman. About 60 percent last year. That number is 
actually going up. And then, another 20 percent use prepackaged 
software. So, 80 percent of people are using someone in the 
professional realm to help them with their tax return.
    Senator Moran. And if you use someone in the professional 
realm, is that an automatic e-file, or are there professional 
preparers who are still filing paper?
    Mr. Shulman. One of the things that, if you come out to one 
of our processing centers you will see--which drives me crazy--
is someone who clearly printed, had developed their tax return 
on a computer, printed it and sent it to us. And I have got 
people there typing it back into the system after it had 
already been typed in once. And there's 10 percent error. We've 
been reducing it, but that is how you have transcription 
errors, and it's just incredibly inefficient.
    And so last year, the Congress passed an e-file mandate for 
preparers. We started, we've been phasing it in. It gave us 
authority to have any preparer who files 10 returns, to e-file. 
This year we started with preparers with 100 returns.
    The good thing about e-file, and I think we did this right 
over the years, is we only got to a mandate once we really had 
momentum and almost everyone that we could convince voluntarily 
to send in electronically had gone in voluntarily. And so, over 
the years we've really increased e-file. And, now there's a 
mandate that says if you're a professional preparer and you're 
using software, you're going to need to e-file--unless you get 
a waiver from your client who really wants to send it in----
    Senator Moran. Thank you.
    Mr. Shulman [continuing]. On paper.
    Senator Moran. Chairman, I have other questions, but I 
assume you do, too.
    Senator Durbin. Thanks a lot, Senator Moran.

                                TAX GAP

    So we're in this debate here about our deficit and how we 
can come up with a savings of $4 trillion over 10 years, or 
roughly $400 billion a year, either in cutting spending or 
raising revenue. So, that is, kind of, the standard we're 
using--save $400 billion.
    It's estimated that $345 billion of Federal taxes go 
uncollected each year--a noncompliance rate of 16.3 percent. 
This gross tax gap problem illustrates an enormous untapped 
resource of Federal revenue which can go a long way to dealing 
with our shortfalls and our deficit.
    Most of the tax gap--$285 billion out of $345 billion, or 
82 percent--is attributable to under-reporting tax liability, 
$197 billion of that from individual income tax payers. Under-
reporting can be the result of understated, or, can be 
understated income, improper deductions, overstated expenses, 
and erroneously claimed credits.
    So, we went through a little exercise here on the 
Affordable Health Care Act and decided that one way we could 
capture some of these uncollected tax revenues when it came to 
small businesses was to have more reporting from them, more 
1099s reflecting their business activity. Well, naturally, 
there was huge push-back from the business community saying, 
``More paperwork? Thank you, Washington. That is just what we 
need.'' And so we back-tracked and walked away from that and 
said okay, we won't tighten up the system at the expense of 
more paperwork.
    So I want to ask you a pretty obvious question--with a 
pretty obvious answer, I am sure. Is there a way to address 
this tax gap without more reporting, more regulation, and more 
disclosure?
    Mr. Shulman. Our statistics basically show, when you have 
information reporting and withholding--like the average 
American's paycheck, where it's withheld and the employer sends 
in the taxes and they get a refund--you have more than 99 
percent compliance. Where you have some information reporting--
mortgage interest deduction, 1099 reporting for interest on 
bank accounts that kind of thing--you've got 95, 96 percent 
compliance.
    Where you have no information reporting--cash economies, 
think about cash businesses--the compliance drops. It's hard to 
do these compliance studies. I mean, they're by their nature 
inaccurate, because what you don't get, you don't know. But we 
go out and we do research. We do some statistically selected 
samples, et cetera--you get 50 percent, 60 percent compliance, 
70 percent compliance, etc.
    And so the real answer, and the place where there's 
leverage, is information reporting. But as you said, we set up 
our tax system as a voluntary tax system, where you're supposed 
to be fully forthcoming with the Government, report what you 
know, and then we keep an eye on things. The way that we can 
have broad coverage and keep an eye on things is having a third 
party do information reporting. It's the only efficient way to 
really go at the tax gap. But because it affects a lot of 
people with the tax code, it becomes pretty politically 
unpopular, like you said, for example with the 1099 reporting.
    So that would have helped with the tax gap, but I fully 
understand both the politics and the reality around small 
businesses and what people are trying to do. And so, it's very 
tough.
    There was an economist who's spent a lot of time in tax, 
who said the thing to remember about the tax gap is, it's like 
a deep shale oil reserve. This is not just money sitting there 
that's easily tapped. I mean, we've in many ways tapped the 
easy money. We actually have a very high tax compliance rate in 
this country. There's only five countries who study the tax 
gap, and we're as high as any of them. And the real way to go 
at the tax gap is better information reporting, but it brings 
with it some burden.
    I do think there's some hope, though, as we get better at 
information technology, as information becomes more ubiquitous, 
it's lower cost and easier for people to do reporting. A great 
example is, this year we're implementing the credit card 
reporting, where we will get from credit card processors and 
people like PayPal, gross receipts that were paid into 
businesses. That's not a direct match, because some industries 
have high credit card receipts, some industries have lower 
credit card receipts. We'll look at those statistics, and it 
will be another factor we use in our audit selection and our 
compliance selection. And what we try to do with our compliance 
selection is spend time on noncompliant taxpayers and leave 
compliant taxpayers alone.

                         INFORMATION REPORTING

    Senator Durbin. So, I think you answered--I was going to 
ask a question, if other countries do it more effectively than 
we do, and I think what you said, we're in the top five in 
terms of compliance. So I, if there is an example of another 
country that has figured out how to do this with greater 
efficiency in terms of collecting taxes owed, I would 
appreciate you sharing it.
    The second part of it, though, I think you've alluded to. 
As, we started off with the premise, I receive a W-2 and my 
1040 form from the IRS, sit down and dutifully fill it out, 
sign it, mail it back, and some human being receives this paper 
and goes through it to see if I'm telling the truth, or it 
looks presentable--that whole system is starting to change and 
become paperless. And information is flowing back and forth out 
without the traditional paper form.
    So, are we looking, would you say, looking to a 
transformation in information gathering, as you just described 
with credit cards, that may make compliance easier? Where we 
may not be burdening local businesses so much with filing 
forms, but rather, having some basic flow-through of 
information that tells us what we need to know to assume, or, 
to assert tax liability?
    Mr. Shulman. I think there's a couple of possibilities. I 
laid out kind of a long-term vision. We're still quite a ways 
away from there, because we've got to get some of our core 
technology done. We're trying to get W2s, 1099s loaded into our 
system before filing. Right now, the way that all the reporting 
happens is, those don't get loaded in the system until after 
people file. We can't use those as screens and blocks. And in 
some ways, it's back to this refundable credit question.
    So I laid out a concept which basically asked if we could 
figure out a way to front-load the issue--could we potentially 
work with the private sector and make that information 
available to people? So rather than people scrambling around 
and trying to look through their files for those envelopes that 
say, ``Important tax return information,'' and opening it up 
and sending it to their accountant or keeping a file of it, we 
could have a database that would have that.
    When people filed, if there was a mismatch, we'd ask them 
to correct it. It would come in to us. We think we'd have a lot 
better compliance on the front end, and we'd create a lot less 
hassle for taxpayers. Right now, if you file and you get it 
wrong 6 months later you get a letter from us. You then have 
got to scramble to get your records, go back to your 
accountant, pay them again, and go through a second loop with 
us, which is probably unnecessary. So, I think that's one thing 
we can potentially do.
    Second is, I actually started an office, reporting directly 
to me, on compliance data analytics, which is looking at our 
databases and trying to make sure we're really smart about the 
information we have, and that we're applying appropriate 
treatment streams. So, for instance, we're looking at things 
like, rather than sending out the standard four letters to 
taxpayers, which they get over time, making a call to a 
taxpayer immediately when they have a tax liability, to try to 
sort things out immediately, much like a credit card company. 
We are continually looking at data analytics to get better.
    I think on the flow-through issue, it's more of a 
conceptual conversation, and one that we'd have to have a full 
vetting with the Congress. Because as the 1099 issue showed, 
people are very sensitive about burden, but people are also 
sensitive about the voluntary nature of our tax system and the 
government not knowing too much about people. And so in our 
compliance job we want to get as much information as we can, 
again, so we spend time with noncompliant taxpayers and don't 
spend time with compliant taxpayers.
    I just think in the world there's a lot more information 
available that can move around a lot quicker. And so, there 
could be less burdensome ways to get that information.

                            IT CAPABILITIES

    Senator Durbin. My last question is, do you have the 
information technology capability and the staff capability to 
develop what we've just discussed--a new generation of thinking 
about collecting and processing information that doesn't rely 
on the transfer of paper?
    Mr. Shulman. Well we've had this conversation. I think we 
have the staff capability. I would put my IT leadership team 
that we've recruited up against anybody else in the Government 
or the private sector. We brought in a CTO who had been head of 
technology for Boeing, then EDS, then Visa International. He's 
built an incredibly strong team. And that's why we're able, 
even under tough budget circumstances, to finally finish this 
20-year modernization of our account database.
    With that said, where I came from, building big technology 
and the benchmarks in financial service are, you spend 
somewhere between 10 and 20 percent of your budget on capital 
investment in the future and technology, because you're all 
about processing money, getting information, serving people--
which is a very similar model to ours.
    Our capital investment, this President had asked to almost 
double it from 1.5 percent of our budget to about just under 3 
percent of our budget. And so my objective view is that this 
agency, for 20 years, has been underfunded in investing in 
technology for the future, and we're just getting there. And we 
recognize the constraints that we're under. And I'm not going 
to come and make a request for a 10 percent increase in our 
technology budget, or 10 percent of our budget be technology 
investment. But I do think the future of running the Nation's 
tax system is all about investment in technology, investment in 
information, dealing with information well. And we're going to 
need to keep investing.
    Senator Durbin. Thank you.
    Senator Moran.
    Senator Moran. Mr. Chairman, thank you again.

                              1099 REPEAL

    The IRS 1099 issue that Chairman Durbin just talked about, 
as I understand, your budget request included $23.3 million and 
82 full-time employees attributed to that healthcare law's 
provisions. In light of its repeal, the IRS's request is 
reduced by that $23.3 million, and a change in the 180, or, I 
am sorry, in the 82 full-time employees?
    Mr. Shulman. Yes. Well, we've--that's dropped.
    Senator Moran. Good. That's the correct answer.
    Mr. Shulman. We just saved some money.

                       SECURITY OF TAXPAYER DATA

    Senator Moran. And then, what Chairman Durbin was talking 
about caused me to want to inquire about the security. You 
mentioned about the voluntary nature, the concern by Americans 
about information, the Federal Government having information 
about them. How secure of a system do we have in place that 
protects taxpayer information from those who would want to 
either damage, harm the system, or steal the information for 
their own use?
    Mr. Shulman. It is very secure and locked down. I always 
tell everybody when I was sworn in, I came back to the office, 
and the first briefing I had as IRS Commissioner was about 
protection of taxpayer data and data security. It's really 
built into the DNA of the IRS. There's laws that prohibit any 
of our individual employees from sharing information about any 
individual taxpayer with anyone, and we prosecute aggressively 
when anything happens.
    From the just pure data security infrastructure, we've got 
extensive perimeter infrastructure around the Web, and we're 
continually monitoring that. We coordinate with all of the 
Federal and national securities agencies around this issue to 
make sure our infrastructure is protected.
    And then for internal security, we have logs monitoring 
lockdown. And one of the things that I committed to when I came 
in, is that any new technology we put online is going to have 
100 percent lockdown data security. You have to make choices 
about what you're going to do, but we're never going to make a 
choice around data security. So, we take this very seriously 
and we will stay focused on it.

                           ACA IMPLEMENTATION

    Senator Moran. One of the reasons--I'll shift topics--but, 
one of the reasons you would request more money and more 
personnel is the passage of the Affordable Care Act (ACA). Its 
constitutionality is being tested and, I assume, ultimately 
will be decided by the United States Supreme Court.
    In light of whatever the uncertainty is, whatever the 
magnitude of that uncertainty is, is the IRS operating as if it 
is constitutional and going to be fully implemented? Is there a 
middle-of-the-road approach? I assume that you've not, or, 
you're not sitting there waiting for the constitutionality to 
be determined. But are you behaving any differently in the 
expenditure of money, the use of personnel, the focus of 
resources because of the constitutional challenge?
    Mr. Shulman. Our job is to administer the laws that are on 
the books. And there's lots of tax laws that are in different 
places in the courts. This is obviously a high-profile one.
    Just to be clear, our responsibility regarding the ACA is 
to administer traditional tax laws, issue refundable credits, 
and collect some of the revenues for that. And we are 
implementing the law on the books. We're in the process of 
implementing the ACA. If, obviously, if something happens and 
changes, we'll move. Similar to the 1099 issue that was in 
there, we would have been prepared to implement that. We had 
started to do a small amount of planning. It got repealed, we 
stopped. But, we move forward with the laws that are on the 
books.
    Senator Moran. Timeframe wise, for implementation of ACA, 
what happens incrementally between now and 2014, or, its full 
implementation? Is there a series of additional use of 
resources, personnel and tax collections and enforcement?
    Mr. Shulman. Yes. So, you can really break up the work that 
we're going to need to do on the ACA into the technology 
infrastructure, largely around the refundable credits, and 
connecting with the State exchanges. And that's our biggest 
lift between now and 2014. Technology and operations are 82 
percent of the request in the 2012 budget. It's building the 
infrastructure to hook up with all the State exchanges, so when 
people are registering, they can find out their eligibility for 
tax credits, can sign up for tax credits, and then we have the 
information flows and the money flows with the insurance 
companies to be paying those on a regular basis.
    And then there's some very bespoke tax law in the ACA that 
we need to implement immediately. There's a lot of immediately 
effective provisions, such as an excise tax on tanning salons, 
which was implemented. And right now we're doing outreach to 
them. There's 2,500 who have never had an excise tax. And so, 
we're doing outreach, education, and then we'll have a 
compliance program.
    There's a credit for small businesses to help them buy 
insurance, or, I mean, to help them buy insurance for their 
employees. There's a tax on branded pharmaceuticals, which 
right now we've sent out the initial bills to the branded 
pharmaceutical companies for that. They're verifying the data. 
It's actually based on Government purchases. And so there's 
that kind of work, but that is a very small amount of the work.

                           ACA IMPLEMENTATION

    So between now and 2014, there'll be the immediately 
implemented tax provisions and the work that has to happen 
there. But the big lift is building the technology 
infrastructure to be ready to interface with the State 
exchanges and the insurance companies around the refundable, 
the $400 billion of refundable credits.
    Senator Moran. And that's required by, in 2014?
    Mr. Shulman. Yes. The open enrollment will happen sometime 
in 2013. And if you scope a systems build, you basically need 
to lock down requirements, then do your build, and then do your 
testing. So, there's a huge lift in 2012 around requirements 
and build, because by 2013 you should be testing the systems.
    Senator Moran. Mr. Chairman, I think perhaps my last 
question is related to Nina E. Olson, the National Taxpayer 
Advocate's, testimony. And she raised a couple of issues for me 
talking about, really, customer service, taxpayer service.

                       TAXPAYER SERVICE MEASURES

    The IRS's fiscal year 2010 management discussion analysis 
included the GAO's financial audit of the IRS. Collection 
related to enforcement activities totaled $57.6 billion--a 34 
percent increase more than 2004. By contrast, the Taxpayer 
Advocate noted that the IRS answered 74 percent of all calls 
from taxpayers seeking to speak with a telephone assister in 
2010, as compared to 87 percent in 2004. So, a decline of 13 
percent--13 percentage points--or 15 percent. So, less access 
to the person, the live person on the phone, I think, is the 
point that's being made here.
    And then, also, this sentence that, ``the backlog of 
taxpayer correspondence and the tax adjustments inventory has 
jumped by 76 percent. The percentage of `uncontrolled' 
correspondence received''--I don't know exactly what the word 
uncontrolled means, but it's in quotes--`` `uncontrolled' 
correspondence received but not yet entered into the IRS 
computer system has increased by 134 percent. And the 
percentage of taxpayer correspondence classified as `overreach' 
''--again in quotes--``has increased by 135 percent.''
    What are we being told, and what does that mean?
    Mr. Shulman. As I mentioned at the beginning, I take very 
seriously that the vast majority of Americans are wrestling 
with a very complex tax code. Their interaction with us every 
year is: file a return and get a refund. And that's the last 
they hear of us. And I think about it, and I talk about it 
internally at the IRS, as we're a big financial service 
operation. We need to answer the phones, have a Web site that 
works, process paper, do all the things that you need to do to 
serve the American people.
    The reality is, we're right now operating with about 1,200 
less people than we were at the end of the last fiscal year 
because we were under a continuing resolution, and our budget 
was slightly reduced. We have allocations to taxpayer service 
and we have allocations to enforcement, and those enforcement 
allocations have a ring around them because they have a direct 
revenue-producing effect.
    The reality, in my mind, is our taxpayer service operations 
also bring in revenue. When we answer a tax law question, help 
them get it right, help them e-file, or build computer systems 
so that we can do matching--all of those actually help get the 
$2.3 trillion in revenue.
    And we're trying to get a mix of investments.
    The phone calls--I think we're actually doing okay. We 
actually need more people to answer more phone calls. We didn't 
get the request last year for 2011, and we've put the request 
in again for 2012, which will bring up that level of service.
    I would point out, because we use this thing we call the 
level of service. That is not: ``Is a taxpayer satisfied with 
the service?'' We actually have a 96 percent customer 
satisfaction rating on our phone calls.
    We've introduced a few things, which has dropped our level 
of service, but we think it increased satisfaction, like wait 
time. So, if a taxpayer calls and hangs up, that counts as a 
negative. So, that's not in the 74 percent. But we tell them, 
it's a 12-minute wait and you might want to call back at a less 
busy time.
    Our paper inventory has been growing because we've had less 
people processing paper. We either put people on the phones or 
put people on paper. The way we try to balance it is, during 
March and April we try to make sure we answer all the phone 
calls we can, and so paper gets backed up, and then we catch up 
with paper as we go.
    This request asks for more customer service folks because I 
mean, this, you've got to just process mail. You need people to 
process it, open it up, look at it, make decisions about where 
it goes. Things fall out and into error. And so, that's gone 
down.
    I've always leaned and said, around priorities, we want to 
make sure--technology is the key, and we need to make sure we 
invest in technology. Phones and paper and the Web--because we 
can move people off of paper and the phones if we can do more 
transactions on the Web--have to be invested in. And, frankly, 
the conversation that ends up happening with people who spend 
time with the budget is, there's always a tendency to put money 
into enforcement. And so, we really need--I think you're 
pointing out and the Taxpayer Advocate's pointed out--we need 
to keep an eye on a balanced program.
    I think the President's budget is very balanced and will 
get us--will boost those numbers, and so we'll be serving 
people better. But make no mistake about it. In tough budget 
times, there's going to be longer wait times; we're going to 
answer less phone calls; paper is going to take longer.

                              IRS WORKLOAD

    Senator Moran. Are there more inquiries over time? More 
taxpayers are calling asking for help? Or less?
    Mr. Shulman. It spikes based on different kinds of 
provisions. We had a huge spike in 2008, when we sent out the 
stimulus checks to every American. People were, ``Where's my 
stimulus check? Am I going to get one?'' et cetera. And phone 
call volume spiked and our level of service plummeted.
    We've had kind of steady--and a lot of it depends on tax 
law, what's going to happen. If you look at our ACA request--
just back to what you were talking about--technology and 
service, and making sure people understand how the rules work, 
what they're eligible for, is really the bulk of the request.
    Senator Moran. Thank you, Commissioner.
    Thank you, Mr. Chairman.
    Senator Durbin. Thank you.
    Senator Kirk.
    Senator Kirk. Mr. Chairman, you, I, none of us have been 
accused of ever being in a tanning booth, so I think you can go 
forward with your outreach without us being affected.

                             TAX COMPLEXITY

    I want to ask about, the Taxpayer Advocate has estimated 
that it takes Americans about 6 billion man-hours a year to 
comply with Federal taxes, which, when you divide it out by a 
full-time equivalent employee, is 3 million jobs, just 
complying with Federal law. When we look at how people then 
comply with this law, in a practical way, about 60 percent of 
the individuals are hiring someone else, about 29 percent of 
people are interacting with software. It's a hidden tax on 
Americans of, on average, about $250 a year. And it's really an 
extra tax on top of the tax that you pay to comply with Federal 
law.
    Have you thought about a way--it seems to be unreasonable 
to take 3 million Americans in a country of 300 million to 
comply with Federal law. Have you thought about a way to 
develop metrics and then, through software, get it down to 1 
million Americans? Maybe just 2 billion hours to comply with 
taxes, instead of 6 billion? This is an incredible drag on the 
economy.
    Mr. Shulman. As you know, the Congress has the prerogative 
of passing the tax laws. Our job is to administer whatever laws 
the Congress passes and the President signs.
    Senator Kirk. But let me interrupt you on that. There are 
two ways in the 21st century we can handle complexity. The 
ideal way, for me, is a flatter, fairer tax, like what the Gang 
of Six may come up with to lower the rate to 28 percent. But, 
you know, we'll see.
    The other way is entirely in your hands--that an American 
doesn't pay TurboTax, doesn't pay H&R Block, simply logs onto 
the IRS Web site and fills out their taxes in an accurate, 
complete way in which the software is handling all of the 
complexity. And the amount of time spent complying with Federal 
law drops like a rock, which is entirely within your purview.
    Mr. Shulman. We were talking earlier about my view, in 
looking at the metrics, that we've under-invested in IRS 
technology for more than 20 years--not in recent history. I 
will tell you frankly, we don't have the capability. We need to 
build some things like our core account database, and get that 
off of a 30-year platform, which we're finishing this year. And 
so, we need to build some core infrastructure.
    We do have available forms that calculate, that people can 
go in and file online directly with us.
    I think there's a big discussion about the IRS having 
software. And, frankly, it's an administrative discussion. But, 
it's also a political discussion about----
    Senator Kirk. Your total budget is how much?
    Mr. Shulman. Our total budget is about $12 billion.

                            DIRECT E-FILING

    Senator Kirk. About $12 billion.
    And, Mr. Chairman, I think something we might work on--
because I think Americans would love not to pay TurboTax, and 
not to pay someone else, just, my guess, correct me if I am 
wrong--to develop a software package might be a $20- to $30-
million job? And then put it up on the Web for free to 
Americans?
    Mr. Shulman. I mean we've taken some looks at this. I don't 
think it's quite that simple. And I think there are choices----
    Senator Kirk. Actually----
    Mr. Shulman [continuing]. And I can show you some----
    Senator Kirk. I would just disagree. It might actually be 
even more simple. Because the software companies have to make 
software calls based on checking with you. Whereas, you 
actually own all the rules and could be setting up the decision 
matrix, because you're the authority.
    Mr. Shulman. I would love, Senator, to talk to you about 
this further, and I'm happy to talk about it here. I've got 
lots of letters on both sides of these issues about, should we 
be in the business of the sets of choices that are embedded in 
software, or shouldn't we?
    What I would tell you is, we've got a very full plate right 
now of technology investments that we need to get done. That 
would build the basic infrastructure to start talking about 
those things, and I would welcome a full-ranging discussion 
about it.
    Senator Kirk. Chairman, I think it might be something that 
we can work together on.
    Because it should--it shouldn't be a theological discussion 
for you. Your mission should be to make it as easy as possible 
to comply with Federal law. So, this argument inside your shop 
should end, like, in an hour.
    And then you say, how do we then deploy software in a 21st 
century context so that an American gets on, puts in their 
basic data, files, doesn't pay anybody, and, you know, sort of 
like the E-Verify program--we're making it as easy as possible 
through an Internet 21st century solution to comply with 
Federal law.
    Thank you, Mr. Chairman.
    Senator Durbin. Thank you, Senator Kirk.
    Oh, a call from H&R Block.
    Thank you very much for, thanks for--and I don't think 
that's, I think it's a valid question.
    Mr. Shulman. Oh, I do too. I totally agree.

                             TAX COMPLEXITY

    Senator Durbin. If we can eliminate the middleman, the 
middleman will hate it, but it may save taxpayers money. And 
if, I'm looking for ease of filing, to be, put another idea on 
the table--which will never pass as a law--I may have mentioned 
to you that about 15 years ago my accountant died in 
Springfield. And I said, come on. I'm a lawyer. I'm a Senator. 
My tax return is not that complicated. I'll do it myself.
    Every Member of Congress should be required to do their own 
personal income tax return. I guarantee, we'd have tax 
simplification overnight. Because I struggled with it for hours 
thinking, why is this so hard? You know? Because I don't do it. 
And I didn't have a computer program to work with. I was just 
using my wits. And it didn't turn out to be that impressive.
    But the point I am getting to is that the complexity of the 
system, I think you would agree, needs to be continually 
reviewed, so that we can make it within the grasp of ordinary 
Americans to understand how their taxes are being calculated. 
If there's a mystery associated with it, there is a sense of 
injustice that I'm paying, and he isn't. You know, that sort of 
notion. And it is expensive as heck to get some of these tax 
preparers to do some pretty basic returns. So, I don't think 
Senator Kirk's off base that, and I want to follow through with 
it. Let's see what we can do about that.
    Senator Moran, do you have anything more?
    Senator Moran. I do not.

                     ADDITIONAL COMMITTEE QUESTIONS

    Senator Durbin. Thanks for coming. I appreciate it, 
Commissioner Shulman. We'll have some written questions for 
you, and maybe some other colleagues will send some along. I'd 
appreciate it if you'd take a look at them. Thanks.
    Mr. Shulman. Thank you very much.
    Senator Durbin. Thank you.
    [The following questions were not asked at the hearing, but 
were submitted to the Department for response subsequent to the 
hearing:]

            Questions Submitted by Senator Richard J. Durbin

                    REGULATING FEDERAL TAX PREPARERS

    Question. Every year, more than one-half of all taxpayers pay 
someone else to prepare their Federal income tax returns. In calendar 
year 2009, the Internal Revenue Service (IRS) processed approximately 
83.1 million individual Federal income tax returns prepared by paid 
preparers.
    Last year, the IRS launched an oversight program to regulate paid 
tax return preparers. The purpose of this initiative is to improve the 
accuracy and quality of filed tax returns and to heighten awareness of 
preparer responsibilities.
    All preparers must now obtain a preparer tax identification number 
(PTIN) and pass a tax compliance check. Additionally, over the next 
several years, the IRS plans to establish competency testing and 
continuing education requirements for preparers.
    The fiscal year 2012 budget request for the IRS includes nearly $17 
million to increase oversight of tax return preparers. Among the 
efforts planned are ensuring that all tax practitioners, tax preparers, 
and other third parties in the tax system adhere to professional 
standards and follow the law. In addition, the IRS will develop a 
public database so that the public can ensure that their tax return 
preparer is registered with the IRS.
    How is the paid tax preparer registration initiative progressing?
    Answer. Since September 28, 2010, more than 708,000 individuals 
have obtained or renewed their PTINs in the IRS Tax Professional PTIN 
System. The IRS processed approximately 95 percent of the applications 
online and 5 percent on paper. Per newly implemented user fee 
regulations, applicants must pay $64.25 annually for PTINs, consisting 
of $50 to recover IRS costs and $14.25 for third-party vendor costs.
    On June 3, 2011 (scheduled to be effective on August 2, 2011) the 
IRS published the final regulations that amended Treasury Department 
Circular No. 230 (Circular 230).\1\  Some of these significant changes 
include creation of a new registered tax return preparer designation, 
extension of Circular 230 ethical rules to all paid preparers, creation 
of new rules applicable to continuing education providers, expansion of 
the definition of practice to include return preparation, and numerous 
other revisions.
---------------------------------------------------------------------------
    \1\ Regulations Governing Practice Before the Internal Revenue 
Service.
---------------------------------------------------------------------------
    In April 2011, the IRS selected two vendors to develop/administer 
the competency testing and fingerprinting programs. Planning is 
underway for a projected fourth quarter 2011 launch of both programs.
    In preparation for the launch of a new 15-hour annual continuing 
education requirement for certain preparers, the IRS is gathering 
information to help revamp the education provider approval process. The 
IRS is targeting the new continuing education requirement to begin 
January 2012.
    Question. To what extent is the IRS identifying and weeding-out 
unscrupulous or unqualified tax preparers?
    Answer. The IRS is developing a competency test for return 
preparers. Additionally, we will begin fingerprinting return preparers 
in order to conduct a suitability check. Fingerprinting will help to 
insure that those who are entrusted with taxpayer information do not 
have a criminal history of violations.
    The IRS continues to develop and enhance various internal filtering 
tools to detect egregious behavior and inaccurate return preparation. 
These tools will enable the IRS to look at aggregate individual return 
information and extract unique characteristics, identifying likely 
questionable issues with a return preparer.
    We are developing a comprehensive database to house all preparer 
information, with the goal of detecting unscrupulous return preparers 
and intervene early. This central database will enable the IRS to track 
preparers who try to avoid detection through changes in location and 
varying customers. The IRS is also designing a referral system to 
investigate and timely address taxpayer and stakeholder complaints 
surrounding return preparers. The IRS is also developing an aggressive 
and dynamic identification system for preparers who are being 
compensated to prepare returns, but who are not properly identifying 
themselves.
    Additionally, the IRS is taking steps to address preparer 
compliance. Beginning in July, we will begin contacting more than 
100,000 preparers who prepared returns in 2011, but failed to follow 
the new requirements. These preparers either used outdated PTINs or 
Social Security Numbers as identifying numbers on the returns they 
prepared. Also, we have identified more than 1 million returns that 
appear to have been prepared by someone other than the taxpayer, and 
later this year we will begin to contact those taxpayers to determine 
who actually prepared these returns.
    These initial efforts are part of a comprehensive effort to improve 
both the way in which the IRS identifies problematic preparers and the 
methods used to bring them into compliance. Unscrupulous preparers may 
attempt to elude the new requirements by not signing the returns they 
prepare. With better data and stronger analytical and historical 
knowledge, our goal is to ensure all preparers comply with the rules 
and that unscrupulous or unethical preparers do not continue to prey on 
taxpayers and the tax system.
    Question. To what extent does the IRS plan to assess the impact of 
tax preparer registration on compliance?
    Answer. The IRS has developed a Service-wide preparer compliance 
strategy to ensure return preparers adhere to the newly implemented 
registration requirements. The scope of the strategy is to review 
return preparer compliance with return filings, and includes e-file 
visitations, return preparer visitations, ghost preparer visitations, 
and preparer action cases.
    This integrated strategy allows for a consistent implementation of 
the program and assessment of sanctions and/or penalties, and 
identifies the potential noncompliant/questionable paid return 
preparers. Through this strategy the IRS will identify the population 
of return preparers who may have chosen to ignore the new tax preparer 
registration requirements.
    The IRS is also developing a proposed set of long-term strategic 
measures that will enable the agency to assess the effect of the 
program on tax compliance. To do this assessment, the newly established 
IRS Return Preparer Office (RPO) is working with Research, Analysis and 
Statistics and the Office of Compliance Analytics. The IRS plans to 
establish a baseline for the measures in 2012 and to track progress 
from that point.
    Additionally, the IRS is developing a proposed set of short and 
long-term strategic measures that will enable the agency to assess the 
effect of the program. Short-term measures that could be used to assess 
program performance using current compliance metrics include the 
Discriminate Function (DIF) score,\2\ the Dependent Database (DDB) Rule 
Breaks,\3\ Risk Scores,\4\ and accuracy measures.\5\ With the exception 
of the risk scores, the IRS designed all of the other preceding metrics 
for purposes other than measuring preparer compliance. The newly 
established IRS RPO is working with the Office of Research, Analysis, 
and Statistics and the Office of Compliance Analytics to develop 
longer-term strategic measures. The IRS plans to establish a baseline 
for the measures in 2012 and to track progress from that point. The RPO 
will develop this more customized means for measuring the impact of the 
preparer program over the next 2 to 3 years.
---------------------------------------------------------------------------
    \2\ The DIF is a mathematical technique used to classify income tax 
returns as to examination potential. Under this concept, formulas are 
developed based on available data and are programmed into the computer 
to classify returns by assigning weights to certain basic return 
characteristics. These weights are added together to obtain a composite 
score for each return processed. This score is used to rank the returns 
in numerical sequence (highest to lowest). The higher the score, the 
higher the probability of significant tax change.
    \3\ DDB Rule Breaks are used to verify eligibility for the Earned 
Income Tax Credit by determining if a taxpayer is eligible to claim 
dependents.
    \4\ The IRS developed a risk-based scoring tool to identify high-
risk preparers based on filters that look at volumes and ratios of 
certain deductions from various schedules.
    \5\ By using data collected ruing tax administration processes 
(math errors, Automated Underreporter (AUR), and the Examination 
Operational Automation Database), it may be possible to develop a 
limited accuracy/error rate for individual preparers as well as groups 
of preparers.
---------------------------------------------------------------------------
    Question. What performance indicators will be used to measure the 
impact of regulating paid preparers?
    Answer. As noted above, the IRS is evaluating current compliance 
metrics to assess the near-term effect (6-18 months) of the program. 
Over time, the IRS will develop a more comprehensive measure of 
compliance that can be more directly tied to the specific education, 
service, and compliance initiatives of the program.
    In the meantime, the IRS is developing indicators to measure the 
impact of regulating paid preparers. The IRS is still developing the 
suite of indicators. Indicators may include, for example:
  --Number of tax preparers who apply for a PTIN;
  --Number of applicants who pass/fail a background check;
  --Number of applicants who pass/fail a personal tax compliance check; 
        and
  --Incidence of paid preparers misrepresenting professional credential 
        to the IRS and the public.
    The above indicators are a small representation of those the IRS is 
developing. However, such indicators focus on outputs rather than on 
outcomes. The development of outcome measures requires additional time 
and experience.
    The IRS has also developed a Service-wide preparer compliance 
strategy to ensure return preparers adhere to the newly implemented 
registration requirements. The scope of the strategy is to review 
return preparer compliance with return filings, and includes e-file 
visitations, return preparer visitations, identification of 
unregistered preparers, and visitations and preparer action cases. 
Measures are included for each of the strategy's components, which 
include letters and visits to high-risk preparers, program compliance 
checks, and identification of nonsigning return preparers.
    This integrated strategy allows for a consistent implementation of 
the program and assessment of sanctions and/or penalties, and 
identifies the potential noncompliant/questionable paid return 
preparers. Through this strategy the IRS will identify the population 
of return preparers who may have chosen to ignore the new tax preparer 
registration requirements.
    Question. Does the IRS expect to be able to cover the costs for the 
entire registration program with user fees or will you need to depend 
on existing compliance funds to support the program?
    Answer. The user fees are necessary to recover the costs to the IRS 
that are associated with administering the PTIN application and renewal 
program, undertaking the fingerprinting and testing requirements, and 
providing the special benefits that are associated with obtaining a 
PTIN. The costs to the Government include:
  --the development and maintenance of the IRS information technology 
        system that interfaces with the prime contractor's systems;
  --the development and maintenance of internal applications;
  --IRS customer service support activities, which include development 
        and maintenance of an IRS Web site and call center staffing; 
        and
  --personnel, administrative, and management support needed to 
        evaluate and address tax compliance issues, investigate and 
        address conduct and suitability issues, and otherwise support 
        and enforce the programs that require individuals to apply for 
        or renew a PTIN.
    User fees do not support traditional compliance activities. In 
fiscal year 2012 the IRS requested funding for initiatives that focus 
on preparer activities and utilize traditional enforcement actions 
currently conducted by IRS personnel.

          BUDGET CONSTRAINTS AND FORECAST IN THE FACE OF CUTS

    Question. In the final continuing resolution enacted for fiscal 
year 2011, funding for the IRS was maintained at the fiscal year 2010 
enacted level, which was $487 million below the requested level.
    What initiatives planned for fiscal year 2011 were put on the back-
burner as a result of the reduced level?
    What are the consequences of deferring or not being able to address 
the resource needs contemplated in your fiscal year 2011 funding 
request?
    Answer. Due to the reduced funding in fiscal year 2011, the IRS 
will not realize the projected new hires who would have reached full 
performance potential by fiscal year 2013; therefore, the IRS will 
collect $1.9 billion less in Federal revenues per year due to a 
diminished ability to fairly enforce tax law. As a rule of thumb, for 
every $1 spent on additional enforcement initiatives, the IRS would 
have collected about $7 in revenue or more at full performance, so 
these cuts actually add to our Federal deficit. American taxpayers will 
also see a diminished level of telephone service as a result of these 
cuts. Specifically, the following initiatives were put on the back-
burner as a result of the reduced level:
      International.--Without the funding to hire additional staff, the 
        IRS estimates that it will not collect an additional $812.2 
        million in enforcement revenue that would have been collected 
        once the new fiscal year 2011 hires reached full potential in 
        fiscal year 2013. Furthermore, the IRS was unable to increase 
        data capture from certain paper returns that would have 
        improved identification of abusive transactions using complex 
        enterprise structures, and was unable to increase the capacity 
        to support law enforcement efforts to investigate and address 
        multi-jurisdictional tax evasions.
      Examination.--Without the additional planned staff in field 
        examination, specialty tax (matters that involve the excise, 
        estate and gift and employment tax programs), correspondence 
        examination and Automated Underreporter, the IRS estimates that 
        it will not collect an additional $659.6 million in enforcement 
        revenue that would have been collected once the new fiscal year 
        2011 hires reach full potential in fiscal year 2013.
      Collection.--Without the additional staff the IRS planned to hire 
        in field collection and the Automated Collection System (ACS), 
        the IRS estimates that it will not collect an additional $474.4 
        million in enforcement revenue that would have been collected 
        once the new fiscal year 2011 hires reached full potential in 
        fiscal year 2013.
      Increase Telephone Level of Service (LOS).--Without the 
        additional funding, the IRS will deliver a 71 percent LOS in 
        fiscal year 2011, instead of the 74 percent LOS achieved in 
        fiscal year 2010.
    Question. The IRS has outlined a handful of ambitious high-priority 
performance goals for fiscal year 2012. These include achieving 4.5 
million document matching closures (where the IRS information does not 
match taxpayer reported information), ensuring 80 percent of individual 
taxpayers receive refunds on a 5-day cycle in the new customer account 
engine database; attaining an individual income tax filers' American 
Customer Satisfaction Index score of 70 percent; improving telephone 
level of service to 80 percent; and raising the individual e-File rate 
to 76 percent.
    How might these goals and your proposed IRS priorities for fiscal 
year 2012 be impacted and IRS operations affected if the additional 
resources you seek aren't addressed given the austere fiscal 
projections?
    Answer. Without the funding requested in fiscal year 2011 and 
fiscal year 2012, the IRS will have to delay/reduce program priorities, 
identify alternative funding sources, and/or decrease base resources in 
other programs to implement mandatory legislation, such as the Foreign 
Account Tax Compliance Act, Merchant Card and Basis Reporting, Tax 
Return Preparer, and the Affordable Care Act. Furthermore, the IRS may 
be unable to:
  --Deliver an 80 percent telephone LOS;
  --Replace the outdated Web portal environment and provide additional 
        online services to taxpayers;
  --Expand global high-wealth coverage, and further its global presence 
        and pursuit of offshore tax and financial crimes;
  --Increase coverage in ACS and Offers in Compromise collection 
        programs;
  --Develop a comprehensive and integrated compliance strategy for 
        administering refundable credits and addressing refund schemes;
  --Address increasing workloads in Appeals and Counsel;
  --Enhance security and disaster recovery systems capability;
  --Upgrade the Integrated Financial System;
  --Improve compliance by leveraging data;
  --Enhance physical security for employees; and
  --Continue migration from an aging tax administration system.

                      CAPTURING ADDITIONAL SAVINGS

    Question. The IRS found $75 million in savings for 2012 through 
reductions in information technology (IT) infrastructure. These savings 
were identified through a systematic process to which several staff 
were dedicated.
    Can the IRS apply this systematic approach agency-wide to identify 
more savings?
    Answer. The IRS uses a variety of approaches to identify savings, 
including soliciting ideas from front-line employees, establishing task 
forces of agency subject-matter experts, conducting analysis of 
existing programs, streamlining existing processes, and directing 
detailed analysis to determine the need and the effectiveness of each 
program. In addition to the approaches listed above, in the annual 
internal instructions and guidance for the budget submission, the IRS 
will continue to look to the business units to identify specific and 
achievable savings and efficiencies.
    Question. What is your reaction to the suggestions by the 
Government Accountability Office (GAO) that the IRS may be missing 
savings opportunities and that the costs of conducting periodic reviews 
on other select aspects of the budget, targeting areas with high 
potential for savings and efficiencies, could be offset by the savings 
that are identified?
    Answer. The IRS remains committed to exploring additional areas for 
savings and efficiencies as is evidenced by the identification of $190 
million in savings and efficiencies in both the fiscal year 2011 and 
fiscal year 2012 budgets, and will continue to employ new approaches to 
identify opportunities for further savings, balancing the cost with the 
expected benefits.

        IMPROVED UTILITY OF BUDGET REQUEST: GAO RECOMMENDATIONS

    Question. Because of the size of the IRS's budget and the 
importance of its service and compliance programs for all taxpayers, 
the subcommittee requested that the GAO to review the fiscal year 2012 
budget justification for the IRS.
    In its April 11 report (GAO-11-547), the GAO stresses that several 
of the open matters for the Congress or recommendations to the IRS have 
the potential to increase revenue or savings if implemented.
    To improve the usefulness of the budget request for the IRS, the 
GAO recommends that the IRS take the following four actions:
  --further expand efforts to systematically identify savings and 
        efficiencies as part of its budget development process on a 
        periodic, but not necessarily annual, basis;
  --report in its budget justification how savings beyond projections 
        were used. The amount of explanation provided should correspond 
        to the amount of the savings;
  --provide cost estimates for individual legislative proposals in 
        future budget justifications; and
  --include measures of cost and schedule performance for major IT 
        systems in Operations Support, such as it does for Business 
        Systems Modernization (BSM).
    What is the IRS's reaction to the findings and recommendations of 
the GAO?
    Answer. The IRS appreciates and agrees with many of the GAO 
recommendations. The IRS agrees to the following:
  --Continue to expand efforts to systematically identify savings and 
        efficiencies throughout the budget process;
  --Include in future budget submissions actual savings and to identify 
        how additional savings beyond projections are utilized;
  --Provide costs for individual legislative proposals in future budget 
        submissions for those proposals received in sufficient time to 
        prepare the cost estimates; and
  --Provide cost and schedule performance for major IT systems in 
        Operations Support in future budget submissions.
    Question. Are the GAO's proposals for enhancing your budget 
presentation reasonable ones and worthwhile for inclusion in your 
fiscal year 2013 budget submission?
    Answer. The GAO's proposals for enhancing the IRS budget 
presentation appear reasonable and the IRS will strive to include them 
as a part of the fiscal year 2013 and future budget submissions.

                  MEASURING RETURN ON INVESTMENT (ROI)

    Question. In this year's congressional budget justification, the 
IRS estimates the ROI for six proposed new enforcement initiatives.
    The fiscal year 2012 budget includes $339 million in new IRS 
enforcement initiatives, which raise $1.3 billion in revenue annually 
at full performance. This is a ROI of 4.5 to 1 when new hires reach 
full potential in fiscal year 2014.
    The GAO has consistently recommended that the IRS compile actual 
ROI outcome data that could be compared to the original projections.
    How much progress has been made developing actual ROI's to measure 
the effectiveness and success of initiatives previously funded to 
determine if the anticipated revenue was reaped, exceeded, or fell 
short of projections?
    Answer. The IRS has made progress in measuring the effectiveness 
and success of the fiscal year 2009 and fiscal year 2010 initiatives. 
The IRS is able to compare the actual revenue collected (adjusted for 
the late hiring of the fiscal year 2009 and fiscal year 2010 initiative 
staff) to the projected revenue expected from the initiatives' hires in 
the three major enforcement functions--Examination, Collection and AUR. 
As the table below shows, in fiscal year 2010, the enforcement revenue 
collected exceeded fiscal year 2009 collections by $8.7 billion, or 
$7.5 billion once initiative revenue is removed. The large increase in 
fiscal year 2010 can be attributed to several factors--new initiative 
hires, closing of several large cases, and continued implementation of 
better case selection and case analysis tools.

                                                                [In millions of dollars]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                        Additional
                                                                         revenue                                                             Revenue
    Actual enforcement revenue       Fiscal year      Fiscal year       collected       Fiscal year      Fiscal year        Revenue         collected
            collected                    2009             2010         (fiscal year         2009             2010        projected from    above/below
                                                                       2010-fiscal                                      initiatives \1\     prior year
                                                                        year 2009)                                                            level
--------------------------------------------------------------------------------------------------------------------------------------------------------
Examination......................           17,446           23,563            6,117            179.5            414.7            594.2          5,522.8
Collection.......................           26,871           29,105            2,234             58.7            258.9            317.6          1,916.4
AUR..............................            4,569            4,924              355             47.4            239.8            287.5             67.5
                                  ----------------------------------------------------------------------------------------------------------------------
      Total......................           48,886           57,592            8,706            285.9            913.4          1,119.3          7,506.7
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Adjusted for staggered on-board of hires.

    Question. The IRS is currently developing a methodology to compare 
actual costs to projected costs so that a ROI can be calculated for the 
three major enforcement functions.
    Would it not be prudent and helpful to determine the extent to 
which your revenue forecasts were accurate and the yield was realized?
    Answer. The IRS agrees it would be ideal if the IRS could determine 
the exact accuracy for its revenue forecasts.
    It is important to recognize the actual revenue collected is 
affected by many external and internal factors such as the economy, 
implementation of new legislative proposals, enforcement resources, 
changing priorities, and implementation of new case selection and case 
analysis tools.
    Question. Assuming that the Congress is able to provide these 
resources as requested and that the IRS proceeds with the initiatives 
as planned, how will we know whether this was a wise investment?
    Answer. The specific answer depends on the initiative. Some 
initiatives relate to short-term revenue-producing activities, which 
can be measured by program performance and compliance results. Others 
are longer-term and strategic, with a larger payback in the long-run, 
but are more difficult to measure in the early years. In either case, 
the IRS articulates, for each initiative, suggested measures or 
indicators for what the initiatives will deliver, which can serve as 
the basis for evaluating these initiatives after the fact.

               IT FUNDING: COST AND SCHEDULE INFORMATION

    Question. The IRS seeks $2.67 billion for IT funding in fiscal year 
2012, of which $333.6 million (12.5 percent) is for BSM and the $2.3 
billion (87.5 percent) is for Operations Support.
    The IRS funds 155 IT systems. Of these, about 31 are considered 
``major,'' each having an overall life-cycle cost of greater than $50 
million or an annual budget of greater than $5 million. The other 124 
systems are ``non-major.''
    The GAO's review of the systems funding justification notes the 
lack of cost and schedule performance information for the bulk of the 
IT funding.
    Can the IRS undertake the formulation and submission of better 
estimates for at least some of the major systems?
    Answer. The IRS plans to provide cost and schedule performance for 
major IT systems in Operations Support in future budget submissions. A 
Treasury and OMB reporting system for all major IT investments already 
contains the cost and schedule data. In the future, the IRS will 
utilize an extract to provide the information for the congressional 
justification.
    Question. What factors or circumstances hamper the IRS's ability to 
develop such estimates?
    Answer. As part of budget formulation process, the IRS currently 
develops high-level estimates of cost and schedule for each major and 
nonmajor IT investment. Once the Congress enacts the fiscal year 
appropriations bill, the IRS completes the process by developing the 
more detailed cost and schedule plans. The timing and resources 
required hinder the IRS's ability to develop more detailed estimates 
before the enactment of appropriations.
    During the initial design stage, the IRS uses a tool to produces a 
Rough Order of Magnitude (ROM) estimate. After that ROM exercise, the 
IRS follows-up with a rigorous estimation analysis, updated during the 
passback cycle. On average, a full costing exercise takes 55 business 
days, three full-time equivalents and participation of multiple IRS 
business unit representatives. This analysis can be completed prior to 
the enactment of the appropriation, but generally would not be captured 
in time for inclusion with the budget submission.
    Each year the IRS identifies in the internal budget formulation 
process new IT investments required to implement legislation and other 
IRS strategic priorities that become part of the President's budget 
request. The IRS submits proposals and develops cost estimates based on 
past experience with similar projects. The IRS includes cost estimates 
by major category (i.e., labor, contractor costs, equipment, software, 
etc.) in the cost tables that are part of each initiative justification
    Once the Congress appropriates funding for the new IT projects, the 
IRS develops detailed requirements, cost and schedule information. This 
information is available at ITDashboard.gov.

         VOLUNTEER INCOME TAX ASSISTANCE (VITA) SCOPE EXPANSION

    Question. Almost all businesses (more than 90 percent) start as a 
sole proprietorship or self-employed businesses. Unless incorporated or 
part of a partnership, self-employed business income is subject to 
taxation through calculations performed on ``Schedule C'' (or C-EZ). 
Each year, approximately 20 million self-employed businesses file a 
Schedule C or C-EZ.
    In August 2010, the IRS, in partnership with the National Community 
Tax Coalition and Self-Employed Tax Initiative, launched the Schedule C 
VITA Pilot for the 2011 tax season.
    The pilot is designed to determine the feasibility of restructuring 
IRS policies governing self-employment tax preparation at VITA sites. 
The 12 VITA sites involved in the pilot are exploring the expansion of 
service delivery to low-income, self-employed individuals.
    What are the preliminary results of the Schedule C VITA pilots?
    Answer. There are 24 sites participating in the Schedule C VITA 
pilot. Preliminary results indicate a total of 3,216 Schedule C returns 
filed at those 24 pilot sites from January 1 to June 6, 2011.
    Question. When will a complete assessment be available?
    Answer. The IRS will share the complete assessment with 
participating stakeholder partnerships, education, and communication 
partners by July 31, 2011. Additionally, the IRS will have a summary of 
the results by mid-August.
    Question. Does the IRS plan to extend and expand the pilot more 
broadly to other VITA sites to expand the program reach to small 
businesses?
    Answer. The IRS is still waiting for the final report results.

                         CONCLUSION OF HEARINGS

    Senator Durbin. This will conclude the hearings for this 
fiscal year and the subcommittee will stand in recess.
    [Whereupon, at 11:34 a.m., Wednesday, June 8, the hearings 
were concluded, and the subcommittee was recessed to reconvene 
subject to the call of the Chair.]
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