[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]



 
   THE INTERNAL REVENUE SERVICE AND SMALL BUSINESSES: ENSURING FAIR 
                               TREATMENT
=======================================================================


                                HEARING

                               before the

                      COMMITTEE ON SMALL BUSINESS

                             UNITED STATES

                        HOUSE OF REPRESENTATIVES

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                               __________

                              HEARING HELD

                             JULY 17, 2013

                               __________

                               [GRAPHIC] [TIFF OMITTED] 
                               

            Small Business Committee Document Number 113-030

              Available via the GPO Website: www.fdsys.gov




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                   HOUSE COMMITTEE ON SMALL BUSINESS

                     SAM GRAVES, Missouri, Chairman
                           STEVE CHABOT, Ohio
                            STEVE KING, Iowa
                         MIKE COFFMAN, Colorado
                       BLAINE LUETKEMER, Missouri
                     MICK MULVANEY, South Carolina
                         SCOTT TIPTON, Colorado
                   JAIME HERRERA BEUTLER, Washington
                        RICHARD HANNA, New York
                         TIM HUELSKAMP, Kansas
                       DAVID SCHWEIKERT, Arizona
                       KERRY BENTIVOLIO, Michigan
                        CHRIS COLLINS, New York
                        TOM RICE, South Carolina
               NYDIA VELAZQUEZ, New York, Ranking Member
                         KURT SCHRADER, Oregon
                        YVETTE CLARKE, New York
                          JUDY CHU, California
                        JANICE HAHN, California
                     DONALD PAYNE, JR., New Jersey
                          GRACE MENG, New York
                        BRAD SCHNEIDER, Illinois
                          RON BARBER, Arizona
                    ANN McLANE KUSTER, New Hampshire
                        PATRICK MURPHY, Florida

                      Lori Salley, Staff Director
                    Paul Sass, Deputy Staff Director
                      Barry Pineles, Chief Counsel
                  Michael Day, Minority Staff Director


                            C O N T E N T S

                           OPENING STATEMENTS

                                                                   Page
Hon. Sam Graves..................................................     1
Hon. Nydia Velazquez.............................................     2

                               WITNESSES

Hon. Daniel I. Werfel, Principal Deputy Commissioner, Internal 
  Revenue Service, Washington, DC................................     3

                                APPENDIX

Prepared Statements:
    Hon. Daniel I. Werfel, Principal Deputy Commissioner, 
      Internal Revenue Service, Washington, DC...................    35
Questions and Answers for the Record:
    Questions and Answers from Hon. Sam Graves to Hon. Werfel        41
    Questions and Answers from Hon. Blaine Luetkemeyer to Hon. 
      Werfel                                                         53
    Questions and Answers from Hon. Mick Mulvaney to Hon. Werfel     53
    Questions and Answers from Hon. Chris Collins to Hon. Werfel     66
    Questions and Answers from Hon. Tim Huelskamp to Hon. Werfel     72
    Questions and Answers from Hon. David Schweikert to Hon. 
      Werfel                                                         77
    Questions and Answers from Hon. Tom Rice to Hon. Werfel          78
    Questions and Answers from Hon. Donald Payne, Jr. to Hon. 
      Werfel                                                         83
    Questions and Answers from Hon. Yvette Clarke to Hon. Werfel     86
Additional Material for the Record:
    Additional Questions and Answers from Hon. Sam Graves to Hon. 
      Werfel.....................................................    88


   THE INTERNAL REVENUE SERVICE AND SMALL BUSINESSES: ENSURING FAIR 
                               TREATMENT

                              ----------                              


                        WEDNESDAY, JULY 17, 2013

                  House of Representatives,
               Committee on Small Business,
                                                    Washington, DC.
    The Committee met, pursuant to call, at 1:00 p.m., in Room 
2360, Rayburn House Office Building. Hon. Sam Graves [chairman 
of the Committee] presiding.
    Present: Representatives Graves, Chabot, King, Coffman, 
Luetkemeyer, Mulvaney, Tipton, Hanna, Huelskamp, Schweikert, 
Bentivolio, Collins, Rice, Velazquez, Clarke, Hahn, Payne, 
Meng, Schneider, Chu, and Barber.
    Chairman GRAVES. Good afternoon, everyone. I would like to 
call this hearing to order.
    Under the House rules, one of the responsibilities of this 
Committee is the study and investigation of the problems of all 
types of businesses, including those concerning tax issues. 
Today we are carrying out that duty and we are very pleased to 
have Acting Commissioner of the Internal Revenue Service, Mr. 
Werfel, here with us.
    Small businesses are vital to job creation and innovation 
in the U.S. economy, accounting for over 60 percent of new net 
private sector jobs. At the same time, these businesses have 
fewer resources than large firms to deal with an increasingly 
complex maze of tax laws and regulations.
    Over the past few years, the IRS has increased the number 
of small businesses that it audits. This has been explained as 
a way for the IRS to close the ``tax gap;'' that is, the 
difference between what the IRS believes is owed and what 
taxpayers pay voluntarily on time. We certainly support 
taxpayers paying what is due, and most small business owners do 
pay their taxes. As the IRS Taxpayer Advocate has recommended, 
Congress should vastly simplify the tax code to increase tax 
compliance.
    In May, the Inspector General for Tax Administration issued 
a report that found the IRS had used inappropriate criteria to 
target certain conservative organizations that sought nonprofit 
status. Since that time, Congressional investigations have 
raised additional questions about the IRS's improper targeting, 
and whether the IRS may have also improperly targeted the tax 
returns of small businesses for added scrutiny or audit.
    We must ensure that all taxpayers, including small 
businesses, are treated fairly. In May, I sent a letter to Mr. 
Werfel requesting information about how the IRS selects and 
classifies small business taxpayers for closer review and 
audit, the number of small businesses it audits, and the cost, 
duration, and yield from all of those audits. Who decides which 
small businesses are selected? How is the criteria developed? 
When does it change? And last evening, after a month delay, I 
did receive a letter providing responses to some of those 
questions, and we hope to learn more of those answers today.
    As elected representatives, we must make sure that our 
government is accountable, and restore the American people's 
faith in their leaders.
    And with that, I will now yield to Ranking Member Velazquez 
for her opening statement.
    Ms. VELAZQUEZ. Thank you, Chairman Graves.
    One of the focuses of this committee is to ensure small 
businesses are given the tools to comply with regulations 
without increasing their costs. No place is this more true than 
when it comes to taxes. In the past, small businesses have told 
us that complexity and uncertainty create difficulty when 
filing tax returns. Many business owners worry that one simple 
mistake can lead to a costly and timely audit, and at a time 
when many businesses are striving to expand, every hour and 
dollar counts. Small firms spend up to 66 percent more on tax 
compliance than their larger competitors and face constant 
changes to the tax code, creating further confusion and 
hindering job creation. They should not also have to face 
intense scrutiny from the IRS through business audits. 
Nevertheless, audits of small businesses, particularly pass-
through companies, continue to rise.
    While the vast majority of small business taxpayers comply 
with tax laws, it seems they may be under increased scrutiny by 
the IRS, all because a few bad actors misreport their income. 
Seeing as our nation's fiscal constraint are an ongoing 
priority, I understand that closing the 450 billion tax gap is 
critical to our long-term prosperity, but so are small 
businesses. Any effort to increase tax compliance must be done 
in a way that is responsible, fair, and not unduly burdensome 
to small firms.
    I am grateful that the IRS commissioner took time out of 
his schedule to testify before us today, but it is unfortunate 
we are turning a relevant topic into political theater. It is 
my hope we can move past the unsubstantiated belief that the 
IRS politically targeted certain small firms and instead have a 
productive discussion to ensure small businesses are not 
unfairly harmed by overzealous auditing.
    Today's hearing will give us a better grasp of the amount 
and scope of small business audits since it is necessary to 
have an accurate picture of enforcement policies. I am looking 
forward to learning about the factors considered in deciding on 
an audit and about the average result. I believe this data is 
even more important right now as the agency seeks to be more 
efficient due to financial realities.
    We will also discuss whether the private costs and burdens 
of an audit are contemplated and thereby justified in light of 
potential revenue gains of an audit. This hearing will also 
allow us to examine what is being done to minimize this burden 
for small entities.
    Small firms should be able to look to the IRS for help in 
answering questions quickly and accurately. For this reason, it 
is vitally important that we encourage better taxpayer service. 
The agency's move to increase staff levels in its Taxpayer 
Assistance Program is an important step in delivering these 
resources, and I am also pleased to see a greater emphasis on 
ACA education activities.
    With the proper tools, America's small firms can sustain 
the economic growth currently underway by investing in their 
operations without fear of an onerous audit.
    With that I would like to thank Commissioner Werfel for 
being here today, and I yield back the balance of my time.
    Chairman GRAVES. Thank you.
    And our first witness, or obviously our only witness today, 
is Daniel Werfel, who is the acting commissioner of the 
Internal Revenue Service. Commissioner Werfel was appointed to 
lead the IRS in May of 2013 and prior to his appointment he 
held several positions with the Office of Management and 
Budget, including controller and the Department of Justice. 
Thank you for being here again and I look forward to your 
testimony.

 STATEMENT OF DANIEL I. WERFEL, PRINCIPAL DEPUTY COMMISSIONER, 
             UNITED STATES INTERNAL REVENUE SERVICE

    Mr. WERFEL. Thank you, Chairman Graves, Ranking Member 
Velazquez, and members of the Committee. Thank you for the 
opportunity to appear before you today to discuss tax matters 
affecting small businesses.
    The IRS takes seriously the need to provide excellent 
service to small business taxpayers. This service includes 
helping them understand and meet their tax obligations. Our 
assistance takes many forms. For example, to increase 
understanding of changes in tax law and in filing requirements, 
we sponsor meetings, symposiums, and seminars for small 
business owners and the tax practitioner community each year. 
We also provide virtual assistance through our website, 
IRS.gov, which contains a section devoted to small businesses. 
It has a wealth of videos, audio presentations, and seminars on 
a wide range of tax topics. Even as we work to ensure that our 
service to small businesses meet high standards, the IRS must 
also carry out a rigorous enforcement program.
    In fiscal year 2012, the IRS audited approximately 1.65 
million returns, of which 21 percent were small business 
returns. The 2012 small business audit rate equates to only 0.2 
percent of all returns filed and 1.3 percent of all small 
business returns filed. In going about our work in the 
enforcement area, the IRS strives to ensure the taxpayers 
receive fair treatment. For instance, we recognize that 
individual taxpayers and businesses being audited may be 
dealing with financial hardships, and we have encouraged our 
employees to be flexible in these situations.
    One major example of our efforts in this regard is the 
Fresh Start Initiative. Under Fresh Start, we have added 
flexibility to our collection program in 2011 and 2012 to help 
taxpayers who are struggling financially. We are also focusing 
on reducing taxpayer burden through such efforts as simplifying 
forms and publications and streamlining policies and 
procedures. For example, in January of this year, we announced 
a simplified method for claiming the Home Office Deduction. 
This new option will significantly reduce the paperwork and 
recordkeeping burden associated with calculating the deduction.
    Ensuring fair treatment also involves making sure 
taxpayers, including small business owners, have recourse in 
tax disputes with the IRS. We are taking action to raise 
taxpayers' awareness of the tools at their disposal for 
resolving issues such as the Taxpayer Advocate Service. We need 
to be sure taxpayers know how to engage the Taxpayer Advocate 
Service when they feel they are being treated inappropriately 
or encounter excessive bureaucratic obstacles. It is important 
to note that all of our initiatives for assisting taxpayers 
depend on the IRS receiving adequate funding. It is imperative 
that we have the ability to continue reaching out to small 
business owners to provide the help they may need in meeting 
their tax obligations.
    Since fiscal year 2010, the IRS has absorbed cuts and 
appropriated funding that totaled nearly $1 billion or nearly 8 
percent. This includes a reduction of $618 million as a result 
of sequestration this year. At the same time, we have made 
major strides in reducing costs and finding efficiencies in our 
operations. We estimate that we will have achieved $1 billion 
in budget savings and efficiencies between 2010 and 2013. But 
additional significant cuts to the IRS budget have the 
potential to weaken our ability to deliver our service and 
enforcement programs, including those dedicated to assisting 
small business owners.
    Before I conclude, I want to want to briefly mention the 
work we have been doing over the past several weeks to chart a 
new path forward for the IRS as these efforts are important to 
all taxpayers, including the small business community. We have 
initiated a robust action plan to address needed improvements 
that we believe will help restore and sustain the public's 
trust in the IRS. The report we released last month describes a 
number of important findings, aggressive actions, and next 
steps for the IRS. The problems with the 501(c)4 application 
process that were uncovered by the Treasury Inspector General 
for Tax Administration have created significant concerns for 
individuals and taxpayers, and it is incumbent upon us to take 
swift action to fix the problems that occurred. We are also 
reviewing the full range of IRS operations, processes, and 
practices to focus on how we deliver our mission today and how 
we can make improvements in the future. And that way, we will 
better understand organizational risks wherever they exist in 
the IRS. The IRS is committed to correcting the problems that 
have occurred and to continuing the important work of the 
agency on behalf of the taxpayers.
    Mr. Chairman, Ranking Member Velazquez, that concludes my 
statement. I will be happy to answer your questions.
    Chairman GRAVES. Thank you very much, Commissioner. You 
obviously do not have an easy job; that is for sure.
    The first question, real easy, has anyone in the IRS ever 
improperly targeted small businesses for additional scrutiny?
    Mr. WERFEL. I am not aware of improper targeting of small 
businesses. Let me explain the context of how I am answering 
that question because I think it is important.
    The TIGTA report that was released in May dealt in the area 
of 501(c)4 review. That is a particular part of the law where 
the political activities of the entity under the law are 
relevant to their application for benefit. In this case, a tax 
exempt status. So the IRS, it is incumbent because it is in the 
law. We have to do an evaluation. Now, that evaluation involves 
assessing the degree to which the entity is involved in 
political campaign intervention. And in this case, as the IG 
reported, the way in which that was carried out was done 
inappropriately.
    But shifting over to small businesses, as a general matter, 
throughout our small business--throughout the tax code and 
throughout our implementation efforts under the small business, 
it is rare or virtually nonexistent that the political activity 
of an entity would be relevant in terms of any increased 
scrutiny that we would provide. So separating the two in terms 
of is there a risk that what was found in the IG report 
transfers over to small businesses, I have two responses to 
that. One is the risk of inappropriate political labels being 
used is extremely low because political activities are not 
relevant to the evaluation that we do. And second, as the 
report that we issued last month indicates, because of the 
importance of the findings in the IG report and because of the 
public concern about those findings which I think are very well 
justified, we are engaging in a process right now with each of 
our operating divisions, including our small business and self-
employed division, to review the criteria by which small 
businesses or any taxpayers--but in this case small 
businesses--are selected for additional scrutiny. To do 
basically a fairness review, are we doing it exactly right or 
is there any evidence of any problems, we will surface them. So 
we are going through that review right now.
    Chairman GRAVES. And again, I am glad you are talking 
obviously to the folks below you. That is what I am worried 
about, is if you can be sure that they are not, without your 
knowing it or whatever the case may be, that they are not 
improperly targeting those small businesses.
    Mr. WERFEL. I think one of the things we do is we have 
procedures in place for how a small business or other taxpayer 
may be selected for an exam, and we review those procedures on 
an ongoing basis, and we are going to do a special review as a 
result of what happened in the IG report of those procedures 
and those protocols, to make sure they are fair in design. They 
also have to be fair in implementation and effective in 
implementation. But that is part of it. It is about training. 
It is about making sure the architecture of the protocols that 
we use to essentially select taxpayers for additional scrutiny, 
is that architecture fair, reasonable, effective? And is it 
being carried out fair, reasonably, and effective? And we are 
dedicated to making sure, and I think the IG report is a 
helpful reminder in some ways to make sure how important it is 
that we are diligent about that in all areas of the IRS.
    Chairman GRAVES. Well, and that is obviously what I am very 
interested in, too, is the process of how you select, or what 
goes into that criteria on how you select, small businesses for 
additional scrutiny. I know you cannot tell us what those 
triggers are or what those specific items are on a tax return, 
but my question is when a small business is identified for 
further scrutiny or a tax return is kicked out based on 
whatever trigger that is, well, what happens then? What is the 
next step in that process?
    Mr. WERFEL. Let me start with--make sure that everyone on 
the Committee understands that so much of the footprint of that 
work in terms of reviewing returns and selecting is automated 
and based on a computer application. And that is helpful in a 
certain regard because to the extent you can take some of the 
human element out of it, you create a better sense of 
objectivity about how things may be selected.
    And so we have this process. We call it discriminate 
function or in the halls of the IRS it is called DIF for short. 
And it basically establishes a set of scores that based on the 
information that is on a return, just what is on its face, it 
basically gets us a risk score for potential noncompliance. And 
the key is how do we structure and program the DIF for what 
returns may be selected? And that is informed based on ongoing 
literature and analytics around where we have tended to see 
noncompliance over time. And critical to that is something 
called the National Research Program, which is a broader, 
statistically based study of taxpayer compliance across the 
broad spectrum of the tax code. And based on those findings, 
which we get periodically, we learn, okay, this is an area that 
is growing the tax gap because we are having areas of 
noncompliance here and then we can translate that into our 
computer program and say if you see something similar--trend, 
pattern, behavior--then it should be flagged for a potential 
audit or exam. That does not mean the taxpayer necessarily did 
something that was noncompliant but we need some type of 
mechanism to make sure our resources are most effectively 
following where the risks may be and that is the process. So 
once that is flagged then it would go into our exam phase and 
we would initiate a process and it could be either a field exam 
or a correspondence exam. We have a great many number of more 
correspondence exams than field exams because the 
correspondence exams are less burdensome on the taxpayer, less 
burdensome on the individual. We found over time that by 
sending a letter to a taxpayer informing them of certain 
questions or flags we see in their tax return, that can be a 
very effective mechanism in terms of reconciling a difference 
that we want understood rather than going through and sending a 
team of IRS people out to a particular location.
    Chairman GRAVES. Well, sooner or later there is a 
subjective component to that. I mean, somebody has to make a 
decision on whether or not that business is going to be audited 
or given further scrutiny. Who does that? What division?
    Mr. WERFEL. So there is a process in place. You are right. 
It is a combination. We have structures in place that will 
enable us to target our resources to higher risk areas, and 
what we try to do is make sure that those structures are as 
objective as possible based on substantive analytics, based on 
an automated review of returns which is becoming much and much 
easier and more effective as e-file numbers increase. And so we 
are heading into, you know, we are in there but we are really 
in a modern era now where we can get tax return information 
electronically. They come in and we can do automated reviews of 
them immediately.
    And where does the human element come in? It comes in in a 
couple of places. First of all, it is humans. It is IRS 
employees that are designing these protocols and programming 
the computer in terms of how it structures its risk. And then 
at some point when you determine a problem and you start to see 
that you have interacted with the taxpayer and you are starting 
to see how the information is arising between the problem we 
think may exist and the taxpayer's reaction, then the human 
intervention comes in to make sure that we are managing this to 
a successful resolution. And to make sure the process has as 
much integrity as possible there has to be a series of reviews 
and checks and balances to make sure that the technology that 
we are using is fairly structured and architected and that the 
individuals carrying out on that technology are carrying out in 
a fair and effective way. And we have existing mechanisms in 
place to do those reviews. We have an inspector general as an 
example who, in this one case in 501(c)4, found a major problem 
and now obviously we have a lot of cleanup to do and fixes to 
do in that area, but that also, as part of a checks and 
balances, has led to us now reviewing all the various 
procedures that I just outlined. We are now doing special 
additional reviews to make sure that there is fairness in the 
entire lifecycle.
    Chairman GRAVES. Is there any other reason that you know of 
why a small business would be targeted other than some of the 
things you just told us?
    Mr. WERFEL. I really do not. I think if the program is 
working as designed and as intended--and I think there is 
always a risk of variation, there is always a combination of a 
mistake that could happen, and unfortunately, there have been 
cases within the IRS where someone acts inappropriately and 
there is underlying malfeasance or misconduct. Those are rare 
but they happen, and I am not aware of any of that happening 
with respect to the selection of a small business. But what I 
am suggesting is that we do not have any particular evidence at 
this time that the objective and analytical criteria that we 
put in place to review small businesses for potential increased 
scrutiny has any fundamental flaw that would lead one to the 
conclusion that there was unfair targeting. I do not have any 
evidence of that but the review that I have asked the new chief 
risk officer at IRS to carry out--and by the way, that new 
chief officer I hired away from the Government Accountability 
Office and he was a leader within GAO and has a lot of 
knowledge and experience in terms of understanding risk and how 
to review these types of activities--he is the one that is 
leading this review. And my commitment has been--it is to this 
Committee and to other Committees, we want to share the results 
of that review with Congress because when I go back to that 
audit report that we have referenced, one of the concerns that 
I have in looking backwards at this and seeing what happened 
and dissecting it is that there was not enough sharing of 
information with appropriate committees as these risks were 
emerging. And so I want to change that dynamic within the IRS 
so that not only are we more systemically evaluating our risks 
on an ongoing basis, but as we are learning information we are 
bringing it to the attention of the appropriate committees. 
Clearly, the review that we do within our small business and 
self-employment area is highly relevant to this Committee and I 
look forward to sharing the results of our reviews with you so 
you can kind of roll up your sleeves and help us make sure that 
we are doing things appropriately.
    Chairman GRAVES. Who is it that is doing that review?
    Mr. WERFEL. Well, we have, again, I have a chief risk 
officer named David Fisher. He was my first hire when I arrived 
at IRS on May 22nd. Previously, the IRS had not had a chief 
risk officer position, and based on what I was perceiving 
coming into the job as this situation, I felt it needed a chief 
risk officer. That individual is working with our various 
operating division heads. So in this case, for Small Business, 
he will work with Faris Fink and Ruth Perez, the commissioner 
and deputy commissioner for our Small Business operation.
    Chairman GRAVES. Well, we would like to continue to work 
with you on that process as it moves forward.
    Mr. WERFEL. Absolutely.
    Chairman GRAVES. Ms. Velazquez.
    Ms. VELAZQUEZ. Thank you, Mr. Chairman.
    Commissioner Werfel, the Taxpayer Advocate recently 
conducted her own study of small business audits and that 
report identified geographies and industries where business 
owners are more likely to game the system. For instance, low 
compliance was correlated to taxpayers who have less trust in 
the government and belong to associations whose members had 
similar feelings. With that in mind, was there politically 
motivated targeting of small businesses through audits?
    Mr. WERFEL. Again, I do not believe--I certainly do not 
have any evidence of it, and I think part of the risk that 
created the problem with the IG report on 501(c)4 was that 
there was relevancy to the political activities that were going 
on and that created additional risk. We have to operate within 
that risk because that is the law. In this case, we did not 
manage that risk effectively and that is part of the findings.
    But to your point, to the extent--and that is why this is 
so important. To the extent that an individual or a small 
business or a large business has a lack of trust in the IRS, 
that does a lot of damage to our voluntary compliance tax 
system. So maintaining that trust is our bottom line, and right 
now we have some work to do but I would point out that one of 
the jobs I have in building that trust is making sure that the 
public, this Committee, and other committees understand the 
nature of the problem that we had in the tax-exempt 
organizations world and whether it was systemic throughout IRS. 
And as I have mentioned in my report, we do not have evidence 
that those types of issues with respect to the use of 
inappropriate political labels for screening is systemic 
throughout the IRS. There is no evidence of that but we are 
doing extra due diligence to look at potential other areas just 
to make sure that we are answering taxpayer questions.
    Ms. VELAZQUEZ. So let me ask you, does the IRS intend to 
use those findings as a blueprint for auditing specific types 
of businesses in certain locations around the country?
    Mr. WERFEL. I do not think there is any--I would have to go 
back. I do not believe or have specific knowledge that some of 
the risk factors that would be placed into our audit selection 
programming would involve the type of criteria that you 
mentioned. I will go back, but I do not believe they do. I 
think it is more about we do research. We randomly select as 
part of a statistical study tax forms and we look at them and 
we conduct audits of them and we learn where there is 
underreporting. We learn where there is underreporting of 
income. We learn where there may be a lack of filing or 
something like that. And it could be things like confusion over 
how to fill out a schedule. There is a whole host of reasons 
why you might see a material difference between what should 
have been reported on a tax return and what is not. And we use 
that study. I do not believe we use kind of the feelings about 
the IRS in any way, shape, or form as a basis by which to 
audit.
    Ms. VELAZQUEZ. Thank you.
    Commissioner, the most recent Enforcement and Service 
Results report revealed that returns examined by the IRS of 
large firms has remained pretty steady over the last few years, 
even as more large corporate returns were filed. Yet, audits of 
small businesses have increased even though fewer returns were 
filed. Can you please explain why more attention is given to 
smaller firms rather than larger companies despite the fact 
that there was a reduction in the small corporate returns 
filed?
    Mr. WERFEL. So I think it is something that we will have to 
work with you on to understand those numbers because as I 
understand those numbers, and Mr. Chairman, we responded to 
your letter and I apologize for the delay in getting that 
response, but the statistics that we provided to this Committee 
in that response show a relatively stable audit coverage rate 
for small businesses over the last few years. We are holding 
essentially steady that the audit footprint is roughly 1.4 
percent of all small business returns and roughly 0.2 percent. 
And that is true from fiscal year 2010, 2011, and 2012. There 
are slight increases or decreases in the numbers, but from a 
macro standpoint our audit footprint over small businesses has 
remained relatively constant. And so I want to learn more about 
the data and statistics that you are referring to that point to 
an increase. We do not have that same information.
    Ms. VELAZQUEZ. I just would like to see some reconciliation 
between your numbers and this report.
    Mr. WERFEL. Yes. I think we need to work through that, the 
numbers. And maybe the response that I provided to the chairman 
can be a first step in making sure that there is a consistent 
understanding of what the trend might be with respect to the 
audit coverage on small businesses. What I am reporting to you 
now, based on the best information I have available, is that 
that audit coverage footprint has remained relatively constant 
between 10, 11, and 12. When you get----
    Ms. VELAZQUEZ. I guess you need to do a better job at 
putting that out there.
    Mr. WERFEL. That could be true. We may need to publicize 
that. To the extent we can, we can certainly work with----
    Ms. VELAZQUEZ. Because otherwise you are going to be 
hammered constantly, and the constant comment is that the IRS 
goes after small businesses because you need to close that gap. 
And that is what is out there. That is the perception. And time 
and again that is what people hear.
    Mr. WERFEL. I understand.
    Ms. VELAZQUEZ. As you may have already guessed, one of the 
most frequently asked questions from our nation's employers is 
how the employer mandate will affect their business. 
Unfortunately, we cannot adequately address their concerns 
because the final rules have yet to be released. Can you 
provide any information as to when we can expect the final rule 
on the employer mandate so that employers can get some 
certainty?
    Mr. WERFEL. So the employer mandate, let me comment on 
that.
    First of all, part of the challenge and approach on the 
Affordable Care Act implementation from the IRS's perspective, 
and I think from HHS's perspective, is to have a back and forth 
with the business community in terms of the impact of this 
legal impact the ACA is going to have on them. So there are a 
lot of moving pieces with respect to our readiness for ACA 
implementation. We have systems that we need to deploy. We need 
to get our tax filing that are relevant to the ACA ready to go, 
and we are making good progress and are hitting all our 
milestones.
    But also, employers have to get ready as well. And so we 
have an ongoing dialogue with them. And based on that ongoing 
dialogue regarding what the law requires and based on that what 
we think employers are going to need to do to meet the 
statutory mandate, they reached back to us and said we have 
concerns about the start of this occurring in year one. And we 
made a judgment, or the Treasury Department made a judgment 
call that there was a need to have a transition period before 
those employer requirements would trigger.
    In terms of the regulations, there are a lot of different 
regulations so I want to make sure that I am answering which 
question--which regulation you are asking for, but I can get 
you--I can do it now or I can do it later--but I can get you 
information in terms of what the exact schedule is on any given 
ACA regulation.
    Ms. VELAZQUEZ. Thank you.
    Chairman GRAVES. Mr. Rice.
    Mr. RICE. Thank you, sir.
    Thank you, Mr. Werfel, for being here today.
    What is your history with the IRS?
    Mr. WERFEL. I am a career civil servant. I joined the 
government in 1997 and I am coming up on my 16 year anniversary 
in the government. My main interaction with the IRS, prior to 
joining the IRS in my current capacity, was I spent a large 
part of my career on financial management, and in particular, 
efforts to reduce fraud, error, and waste in the federal 
government. My prior position, which is a Senate-confirmed 
position of controller of OMB, that is one of the main things 
you do at OMB as the controller--you work on government-wide 
efforts to reduce fraud and error. So my main interaction with 
the IRS was around things like EITC improper payments and 
things like that.
    Mr. RICE. In your last job, you were managing a department 
or a bunch of people?
    Mr. WERFEL. Yes. When I achieved my highest level within 
the Office of Management and Budget, let us say as of May of 
this year, I was managing somewhere between 100 and 150 people.
    Mr. RICE. And you achieved that in May of this year?
    Mr. WERFEL. Well, no, I started January of 2012, I think is 
when I started managing a larger footprint of people within 
OMB.
    Mr. RICE. How many people work for the IRS?
    Mr. WERFEL. Roughly 85,000.
    But I would point out, just based on your question, that 
one of the things about the position that I held within OMB is 
I had leadership responsibilities over the entire financial 
management community. I ran the day-to-day operations of the 
Chief Financial Officer's Council and coordinated the 
activities of all CFO offices across government. And when you 
are doing things like implementing the Recovery Act or 
preparing for a potential government shutdown, the reality is 
the project management of that and the scope of what I was 
leading was large. Much larger than just----
    Mr. RICE. You know, it seems to me--I do not know you. I 
have only met you today and I have seen you in testimony and 
other things, but you seem to be a very forthright and 
competent guy. But man, you have stepped into a big mess here. 
And I sure hope that you are a good manager because they need a 
good manager. This entity is completely out of control as far 
as I can tell. You have had your past commissioner just resign. 
You had two directors plead the fifth in the last month. You 
have had disclosures. You spent $50 million on conventions at 
some of the worst economic downturn in United States history in 
the last 80 years, and disclosures that the IRS cannot even 
tell us what they spent because their accounting records are 
not that good. And at a time when we are lambasting corporate 
executives for money they spend on conventions and denying 
their deductions and lambasting them for the mode of travel 
they take, and yet we are spending an average of $250,000 per 
convention at the IRS. So this entity is completely out of 
control as far as I can tell.
    Mr. WERFEL. Can I respond to that?
    Mr. RICE. Okay, go ahead and respond.
    Mr. WERFEL. I think one of the reflections that I have, 
having arrived at the IRS and coming up on my two month mark, 
is that it is complex. There is a mixture----
    Mr. RICE. Well, yes, it is complex. How many employees?
    Mr. WERFEL. There is a mixture--there are very, very 
effective managers and leaders within the IRS. There are a lot 
of results that I can point to at the IRS that are extremely 
commendable and impressive that we need to build on. And I 
think it is worth noting----
    Mr. RICE. My friend, when you have got three of your top 
people either resigning or pleading the Fifth to avoid criminal 
prosecution in the last month, this thing is completely out of 
control. And somebody, some strong manager is going to have to 
go in there and grab control or I do not know where we are 
headed with this thing.
    Let me ask you this. Do you think they are ready to add to 
their responsibilities significantly? Do you think they are 
ready to take on the administration of the Affordable Care Act?
    Mr. WERFEL. I think what the IRS does is it carries out the 
laws that are passed and it more often than not--in fact, a 
great majority of the time does so effectively. When we make a 
mistake, it is very public and very significant and we take it 
seriously. We are going to be ready to implement the ACA. That 
I am convinced of based on everything I have seen in terms of 
the project plan, the schedule, the milestones we have hit.
    Mr. RICE. Let me reclaim my limited time.
    As a taxpayer and a CPA for 25 years, I can point to 
numerous examples where the IRS is absolutely unresponsive and 
incapable of handling the job that it already has. And then you 
add to this all these disclosures and confusions and scandals 
that have come out in the last three months, and I am really, 
really concerned about the IRS doing its existing job, much 
less taking on further responsibilities. Thank you very much.
    Mr. WERFEL. Okay.
    Chairman GRAVES. Ms. Hahn.
    Ms. HAHN. Thank you, Mr. Chairman.
    I just was going to follow up on the Affordable Care Act 
question. Clearly, the IRS has a huge role to play, but I even 
think before this law is rolled out and implemented, I think 
you have a role to play in reaching out to Americans, 
particularly small businesses. I hold small business workshops 
in my congressional district out of Los Angeles all the time, 
and I have done several specifically on the Affordable Care 
Act, what it means to small businesses, and when the tax issue 
comes up, you know, there is a lot of uncertainty, there is a 
lot of anxiety. I think there is a lot of misinformation out 
there, so I am happy to do my part to educate folks on the 
Affordable Care Act.
    But it is not just negative, right? There are some tax 
credits that are going to be very valuable to small businesses 
as this is rolled out. What are you all doing to partner with 
HHS, Small Business Administration, to help educate and 
possibly diffuse some of these misconceptions and anxiety that 
is out there, particularly as it relates to small businesses? I 
do not see you out there yet.
    Mr. WERFEL. Well, that is a good question. Certainly, let 
me distinguish between myself personally and the IRS team. The 
reason why I say that is because I was in Atlanta last week and 
I met--not only did I go and visit with the Wage and Investment 
employees in the Atlantic campus in the Atlantic region, but I 
also had the opportunity to meet with members of the public, 
members of the tax professional community, tax preparer 
community, university community. It was a diverse group. And 
one of the points that was raised to me, and it was raised in 
several different ways, was concerns about small business. And 
the reality is that in order for small businesses to maintain 
their competitive edge to be sustainable in today's economy, 
they need an effective IRS that they can work with. And we did 
not get perfect scores from the small businesses that I met 
with, but they are extremely appreciative of the important role 
that we play and they are very concerned about, for example, 
our resources and the diminution of our resources and how that 
impacts their ability to do a bunch of things, not only contact 
someone at the IRS but also the way in which we modernize our 
forms and our files, et cetera.
    So I have started that dialogue and I am finding it useful. 
And I think it is something useful that I can bring back to 
Congress, and in particular the Budget Committees, and explain 
that significant cuts to the IRS budget, certainly they impact 
the IRS but they also impact small businesses within all of 
your jurisdictions.
    In terms of the Small Business Division, they do a lot of 
outreach. I was very impressed with the number of symposiums 
and meetings, and whether they are done electronically or in-
person, and obviously, the Affordable Care Act is on everyone's 
mind right now because it is new and because it creates a 
different footprint of requirements. Their tax forms are going 
to start looking different in the coming years and obviously 
there are implications for them. So we are definitively 
committed to having an open dialogue with small businesses and 
large businesses for that matter about their responsibilities 
under the ACA. And if there are other suggestions you have--but 
I think if I walked you through the series of symposiums and 
forms and meetings you would find them overly impressive, but 
you would also see that we are somewhat constrained by our 
resources in terms of how much we can do.
    Ms. HAHN. I got it. But I do think it is important and I 
just have not seen any of these out in the Los Angeles area.
    Let me just quickly follow up on one more question. More 
and more businesses are shifting their operations onto computer 
and Internet platforms, from sales to accounting, invoices, 
inventory tracking, and other operations. So it is more 
important for the IRS's e-platforms to work well. I know, 
again, sequestration, really, you guys have taken a big hit on 
that. But, and I know you face a lot of obstacles, but within 
the constraints that you have, what procedures are you 
considering to operate a more efficient tax administration 
system as it relates to our new emerging technologies?
    Mr. WERFEL. Well, I will tell you, I have a lot of budget 
meetings as the head of the IRS, and it is often about how are 
we going to apply a diminishing resource base to a growing set 
of responsibilities and requirements.
    Just to give you an example, there is a lot of concern out 
there from certain parts of our constituents in terms of the 
pace by which we are putting forms in an online way because it 
makes their life much easier if they can do things in a digital 
environment versus a paper environment. But we have resource 
constraints in terms of our ability to modernize those forms, 
and we have to make choices, like am I going to invest in 
modernizing this particular form or am I going to have more 
people at the call center so that we can improve our overall 
service numbers? Or am I going to keep the Taxpayer Assistance 
Centers open for a longer period of time so members of a local 
community can come in and get direct feedback on their tax 
questions? These are the types of issues that behind the scenes 
at the IRS we are grappling with.
    One part of the answer that I wanted to provide you is we 
try to make really smart decisions about these tradeoffs. So, 
for example, if we see a form that has usage rate of 12 percent 
versus a form that has a usage rate of 78 percent we are going 
to say, okay, well let us not digitize the 12 percent one even 
though there is a very loud community of concern if we do not, 
we are going to go with the 78 percent one. Those are the types 
of tradeoffs we are making behind the scenes, but ultimately, 
taxpayers are concerned because they are not getting the full 
complement of modernization and service that they are hoping 
for.
    Ms. HAHN. Thank you. Thank you. I yield back.
    Chairman GRAVES. Mr. Collins.
    Mr. COLLINS. Thank you, Commissioner.
    I would like to maybe rock-n-roll through a little bit of 
this. I am chairing the Subcommittee on Health so I get more 
calls from small business on the Obamacare than anything else.
    But I would like to begin by just asking--if you could be 
quick and direct that would be good--do you do your own tax 
return?
    Mr. WERFEL. I do.
    Mr. COLLINS. Good. A lot of people do not.
    When we get to the 50 workers, there is a lot of confusion. 
Is it 30 hours a week or 130 hours a month?
    Mr. WERFEL. So orient me back. You are talking about the 50 
FTE cutoff?
    Mr. COLLINS. We have 12 buckets. Each month we create a new 
bucket of whether or not, you know, how many FTEs we had in 
January, February, March, April, May. Then we add them up, 
divide by 12, and see if that averages 50 or more. And a lot of 
companies, to set the stage, are very worried about weeks. 
Monday through Wednesday are in one month; Thursday through 
Sunday are in another month; their payroll records are by week. 
So right now there are 12 buckets. Each month you have to do 
the calculation. And people are doing it right now because I 
should say the employer mandate has not been eliminated. The 
employer mandate is the law of this country and it goes into 
effect January 1. And if people are going to comply, they have 
to be complying in about five months. You may not enforce the 
penalty, but that does not mean the law has been delayed. Most 
of the companies I talked to want to--they do not want to be 
lawbreakers, so you need to be able to define for them how they 
are not lawbreakers whether or not you enforce the penalty.
    So for each bucket each month, is it 130 hours in the month 
as opposed--so if you worked 40 hours, 42, then 26, and 12, as 
long as it added up to less than 130?
    Mr. WERFEL. I apologize. I am not going to be able to speak 
specifically to the tech--I can certainly get you an answer to 
that question but the underlying technicalities of how you 
would evaluate your status of having 50 FTE versus 49 FTE in 
terms of whether your responsibilities trigger for the employer 
responsibilities, that is something I am going to have to get 
back to you on with more technicality. I just do not have that 
at my fingertips.
    Mr. COLLINS. So the acting commissioner of the IRS does not 
know the rules today which we are demanding small businesses 
adhere to and they are lined up at my office, whether it is a 
donut shop or a franchise, they are desperately wanting to 
comply with a law that takes place January 1; the fact that you 
are not enforcing it until a year from January 1, it is still 
the law, and I am certainly disappointed that you cannot answer 
something. That is one of the most fundamental basic questions 
I had to ask.
    But let me keep going here.
    Mr. WERFEL. Please.
    Mr. COLLINS. If a company had a husband, a wife, and three 
kids under 26--so that is five full-time workers--is that one 
health plan they have to offer? Let us say they do not offer a 
health plan. Husband, wife, and three kids under the age of 26. 
Do they get penalized five times $2,000 or one family times 
$2,000?
    Mr. WERFEL. I mean, again, we are going to start to devolve 
into a situation where there is going to be a lot more facts 
that are going to need to be asked, and I am going to have 
particular subject matter expertise as the head of the IRS, the 
but the head of the IRS is not going to be the one doing those 
calculations and providing that legal and technical advice. So 
it is a question of how we use our resources effectively. You 
can go through the tax code in great detail and catch me in a 
lot of things that I am not going to know, especially being two 
months on the job, but my commitment here, what I am saying 
here as the acting commissioner and what I am very committed to 
you is making sure that your constituents or you, yourself, 
have the answers to those questions because I have 
professionals at the IRS who are ready, willing, and able to 
make sure that those answers are as crystal clear as possible. 
That is the commitment I can make as the head of IRS.
    Mr. COLLINS. What I would like to do after this is give you 
a very detailed list.
    Mr. WERFEL. Please.
    Mr. COLLINS. These are the exact questions the owners of 
the donut shops and small businesses, they are the exact 
questions they are asking because they want to comply with the 
law. They do not want to be lawbreakers. And it starts right 
now. I mean, here we are in July. This is the qualifying year, 
and today the IRS cannot tell them whether these employees 
qualify or not. How do you calculate a bonus? If I give someone 
a bonus, do I back that into so many hours because somebody has 
done well? W-2 wages, 9.5 percent of W-2. What about 401(k) 
deductions? Where do they enter in? These folk want to comply 
with the law. We cannot get any answers out of your 
organization. So the fact that you are not going to enforce the 
penalty does not mean the law does not go into effect.
    And I know most people, if they are driving down the street 
and the speed limit is 45, they adhere to the speed limit. They 
do not go 100 miles an hour because somebody said the state 
police was not going to be there. So I am very concerned 
because the clock is moving. Come January 1, that starts the 
next year so I would like to follow up with these questions and 
hopefully in a very prompt manner you can get them back so I 
can answer the questions of my desperate small business owners. 
Thank you.
    Chairman GRAVES. Ms. Meng.
    Ms. MENG. Thank you, Mr. Chair and Mr. Werfel for being 
here.
    The fiscal year 2014 IRS budget request provides for an 
increase of over 7 percent for taxpayer services. I understand 
better taxpayer service and education leads to higher 
compliance rates. Could you explain if and how this increase in 
taxpayer service will be used to assist our small business 
taxpayers?
    Mr. WERFEL. Yes, certainly.
    The reality is, not to oversimplify but to provide you kind 
of the basic frame, the way we think about it, two of our core 
basic missions are services and enforcement. And on the 
enforcement side, you know, we have a very robust analytic 
frame that shows that for every dollar that we spend on 
enforcement activities there is a very significant return on 
investment for that dollar. And so when we defund our 
enforcement activities, ultimately it means less receipts to 
the federal government and that has real deficit impact.
    In terms of our service levels, we invest in a whole 
variety of different ways to make sure that we are serving our 
taxpayers--small businesses in particular. Those involved, for 
example, our phone banks. One of the main ways in which people 
get answers to the questions and get peace of mind and a sense 
of what they need to do and cut down on the amount of time that 
they have to spend trying to figure out what the tax code means 
is calling up an IRS individual and getting them on the phone 
and working through the issues. And what our budgets are 
intended to reflect is we aim to meet certain levels of service 
metrics. We have metrics for everything, and our levels of 
service metrics are down. They are down significantly because 
of the inability of us to fund individuals and hire individuals 
to train them to be in our call centers to answer these 
questions. It also limits our ability to invest in web tools 
and other technologies so that a small business can say, well, 
I can either call or now the IRS has this new format on the web 
that makes my life a lot easier. This is great. Let me go on 
and access it. And when we defund the IRS we miss out on 
opportunities to help taxpayers navigate what I think we can 
all agree is a complex set of laws and regulations.
    And so when I am sitting here on other committees defending 
the president's budget, I am not doing so I think without 
strong analytics that tie these increases to both return on 
investments for the taxpayers so that more receipts come into 
the federal government as appropriate and we have a better 
situation bottom line on our deficit and that we are financing 
and funding the right activities within the IRS to improve our 
service to small businesses, to families, to corporations, et 
cetera. And I think we could spend time, and I am happy to do 
so, in terms of how the specifics of the president's 2014 
budget, what that buys you in terms of improved service levels. 
But it is really about services and enforcement and there is a 
modernization element to all of it because as we improve 
services and enforcement, a lot of that is about investing in 
new technologies and make sure the IRS is along in the 21st 
century with other government entities and corporations.
    Ms. MENG. Thank you. I yield back.
    Chairman GRAVES. Mr. Bentivolio.
    Mr. BENTIVOLIO. Thank you very much, Mr. Chairman.
    Mr. Werfel--did I pronounce that correctly?
    Mr. WERFEL. You did.
    Mr. BENTIVOLIO. Thank you very much for being here today.
    You said you had 85,000 employees in the IRS, plus or minus 
roughly.
    Mr. WERFEL. There are part-time employees. There are 
contractors, but we usually rely on about 85,000 as a rough 
estimate.
    Mr. BENTIVOLIO. One of the prerequisites for becoming an 
IRS agent, if I am not mistaken, is you have to have a 
background in accounting. Is that correct?
    Mr. WERFEL. I think it depends on what type of work you are 
going to do.
    Mr. BENTIVOLIO. But pretty much accounting.
    Mr. WERFEL. Accounting is an important part, yes.
    Mr. BENTIVOLIO. Could you tell me again what you said 
earlier today during the introduction on the sequester?
    Mr. WERFEL. Yes.
    Mr. BENTIVOLIO. How it affected the IRS?
    Mr. WERFEL. Yes. Under the Budget Control Act, between the 
sequester and something called the 0.2 percent rescission, it 
is about a little over 600 million. But just the sequester 
itself, $594 million reduction in our budget authority for this 
year as a result of the sequester.
    Mr. BENTIVOLIO. And so how much is that in relation to your 
overall budget?
    Mr. WERFEL. It took our budget from 11.9 billion down to 
11.2 billion, both the sequester and the rescission.
    Mr. BENTIVOLIO. What percentage would that be?
    Mr. WERFEL. It is in and around 8 or 9 percent.
    Mr. BENTIVOLIO. Eight or 9 percent. People in my district 
have been taking cuts of 15-20 percent. In some cases, now they 
have to work part-time. That is the only job they can get 
because, well, the employer mandate, you can only have so many 
hours and then they have got to kick in a lot of money. 
Amazing. And you cannot find a 9 percent cut in the IRS budget 
when you are doing all these fancy conventions and videos?
    Mr. WERFEL. We found the cuts. We are operating on that 
lower base. It is a question of making sure we are transparent 
about what we are giving up by operating at that lower base. 
And ultimately, if the powers that be decide we should operate 
at that lower base that will happen, but I want to make sure 
that we are transparent with you and the American people about 
what tradeoffs are involved in operating at that lower budget 
level.
    Mr. BENTIVOLIO. And in regards to picking and choosing 
winners and losers conservative groups, so on and so forth, you 
said, if I am not mistaken, you do not believe that small 
businesses, or any business for that matter, is being singled 
out because of their political beliefs in any way, shape, or 
form.
    Mr. WERFEL. What I am suggesting is that other than the 
TIGTA report which shelved the 501(c)4 applications, I have no 
other evidence at my disposal. And I do not want to speculate, 
but I have no other evidence of similar type of targeting of 
other entities. But I have asked my chief risk officer to help 
coordinate a review across the IRS to look at that question so 
I can provide a more definitive answer.
    Mr. BENTIVOLIO. In that review, would you employ, let us 
say, cross-referencing somebody who donated to a political 
campaign from a FEC report to whether or not their small 
business was audited?
    Mr. WERFEL. Again, I would say if there are any types of 
flagging of a taxpayer for additional scrutiny that was based 
on political activity, I think that is something that we should 
be extremely concerned with.
    Mr. BENTIVOLIO. What would raise the red flag--10 to 1? For 
every, you know, maybe 10 businesses because the employer or 
the owner of the business contributed to a campaign or was 
involved in some tea party group or something like that?
    Mr. WERFEL. A single instance of inappropriate behavior by 
the IRS should be flagged and addressed. I mean, we have 
situations in which we have employees that unfortunately at 
times--you know, it is 85,000 people, so we have TIGTA reports 
that demonstrate a situation of employee misconduct. TIGTA can 
write an entire report and spend a lot of resources about one 
instance of employee misconduct. That is important to us not 
only to enforce accountability for that individual and to be 
transparent about it, but also to make sure there is no other 
systemic behavior going on similar to that particular issue of 
misconduct. So we care about every incident.
    Mr. BENTIVOLIO. Okay. So you are going to check and cross-
reference?
    Mr. WERFEL. Well, what we are going to do--well, then you 
are getting into the feasibility about what we can do, and what 
we are going to do is a variety of different steps, including 
evaluating the architecture of our screeners, our filters, how 
things are flagged for additional scrutiny. We can evaluate 
that architecture. We can make sure that we are documenting it, 
updating it frequently, benchmarking it against other parts of 
the IRS and other ways of looking, doing checks and balances to 
make sure it is appropriate. There is a whole process that we 
can go through that I think reflects very strong management 
approaches in terms of how you mitigate risk and error in your 
operations. It is very difficult to eliminate risk and error, 
but I think high-functioning organizations work on very robust 
and sophisticated frameworks to understand their risks and 
errors and put in place compensating controls to mitigate them 
to appropriate levels. And that is what we are engaging with in 
the IRS right now.
    Mr. BENTIVOLIO. I see I am out of time. Thank you very 
much.
    Mr. WERFEL. Thank you.
    Chairman GRAVES. Mr. Barber.
    Mr. BARBER. Well, thank you, Mr. Chairman. And thanks to 
you and the ranking member for convening this important 
hearing. And thank you, acting commissioner, for being here. 
And I have to say thank you for taking on this really sweet 
opportunity you have been given. It is always good in my mind 
when someone is willing to step up in the middle of a crisis 
and say I am going to tackle it and try to get things done. I 
really have to say from what I have seen and heard today and 
what I have seen and heard you say in other hearings, I think 
you are very forthright, and I believe you are doing everything 
you can to restore public trust in the IRS. The citizens of 
this country have to trust their government. And what happened 
at the IRS, I think we would all agree, was egregious. The 
behavior undermined confidence and trust. It was wrong. It has 
been acknowledged that it was wrong and I believe you are doing 
what you can to restore trust and good management. And I 
appreciate the fact that you have hired someone to take a look 
at risk who will keep an eye on those things for you.
    I have a couple of questions because I think it has been 
asked and answered, the questions related to targeting, and I 
am not going to go over that same territory, but I have a 
couple of questions related to other matters that I think 
impact adversely or make things difficult for small businesses.
    For example, recent IT reports have indicated that there is 
a very high rate of IRS audits that lead to no significant 
increase in revenue. In fact, in 2011, 62 percent of S corps 
cases were closed with no recorded change in revenue, and yet 
these audits, as you can imagine, cost affected businesses a 
great deal of money and time. So what steps can you take in 
your position as acting commissioner to ensure that small 
businesses are not unnecessarily audited? I mean, there has to 
be a cost-benefit analysis here of the amount of investment we 
have in audits and the end result with 62 percent cases closed 
without a recorded increase or change in revenue seems to me 
that there might be some overreaching here. So could you 
respond to how you might take another look at this?
    Mr. WERFEL. Yeah, absolutely. I think if you are going to 
evaluate your mechanisms to enforce compliance, you want to 
evaluate them across a series of different variables. One of 
the ones that we are obviously prioritizing right now is 
fairness and selection and I think that is appropriate given 
the IG report raised significant questions and it provides us 
and inspires us to want to look across the IRS and give 
taxpayers comfort that we are doing that review and sharing our 
findings and rooting out any potential areas of concern.
    But I think you also want to look at the effectiveness of 
your selection. And I mentioned earlier that we have ways of 
improving on a continuous basis our models for how we would 
select a taxpayer for audit. In a limited resource 
environment--this is very intuitive--in a limited resource 
environment, when you are trying to do your best and spend the 
taxpayer dollars as wisely as possible, you are going to try to 
target those dollars in a way that has the highest impact in 
terms of driving greater compliance. And if we see issues, 
whether it is identified by the inspector general, GAO, or 
internally we discover it, audits that we are doing are not 
resulting in any change or any additional revenue collected. 
And that is relevant data in terms of updating how you are 
going to do your selection going forward. So it is a continuous 
model of trying to make sure that we are as focused as we can 
on the areas of noncompliance because one of the goals here is 
to narrow the tax gap that we have because I think small 
businesses, they certainly do not want to be audited. They 
certainly do not want to be audited excessively. I completely 
understand that and we support that, but I think they also want 
to make sure that everyone is playing on the same fair ground 
and that if they are complying with the tax laws, which a vast, 
vast majority of them are voluntarily without ever having 
gotten audited, they want to make sure that the IRS is doing 
our part to make sure the other small businesses are being 
compliant as well on a voluntary basis.
    And so I think there is mutual interest in making sure that 
our models for how we select taxpayers for audit are effective, 
sophisticated, fair. And so I think we are on the same page in 
terms of improving not just the fairness but also the 
effectiveness of them. And those TIGTA reports are relevant as 
we go back and relook at those models.
    Mr. BARBER. Just a quick follow-up on that. You talked 
about closing the tax gap, and I agree we need to do that. So 
the than auditing small businesses, which may produce limited 
results, what other measures can the IRS take to close the tax 
gap?
    Mr. WERFEL. Well, I mean, it is in large measure around a 
combination of enforcement activities. What we try to 
demonstrate each year as we are planning and showing Congress 
our budget and the American people our budget, you know, these 
are the types of enforcement activities that we would engage 
in. We can do things like increase our efforts on identity 
theft. We can increase our computer sophistication when a 
return comes in in terms of identifying a return that might 
have fraud in it or might have an understatement of their 
income leading to a higher refund than they were otherwise 
eligible for.
    But remember earlier when I was answering a particular 
question before I said there are two arms to this. There is 
enforcement and services. And services are important as well 
because effectively serving our taxpayers does two key things. 
It helps them navigate the complex tax code more effectively 
and allows them to be compliant, but it also builds trust to 
the sense that they are having a positive experience, they are 
getting the answers they need from the IRS, we are helping them 
navigate. It inspires that type of voluntary compliance 
framework to work more effectively.
    So again, when we talk about our budget and the investments 
that we make, my goal is to just make sure that there is a 
substantive discussion around the tradeoffs that are involved 
at our different budget levels. I understand we are in a tight 
budget environment, and I understand that small businesses 
around the country are tightening their belts. We have to 
tighten ours. There are ways in which we are. It is a public 
dialogue about those tradeoffs involved in our budget.
    Mr. BARBER. Thank you. And thank you, Mr. Chairman, for the 
additional time.
    Chairman GRAVES. Mr. Tipton.
    Mr. TIPTON. Thank you, Mr. Chairman. Thank you, Mr. Werfel, 
for taking the time to be here.
    You had commented in your oral testimony about being 
committed to good service, having knowledge of struggling 
taxpayers, and trying to be able to develop policies to be able 
to help them. You certainly understand that the IRS is not 
viewed as warm and cuddly and caring. You know, it gets back to 
actually paying these taxes.
    Mr. WERFEL. I understand that. I definitely understand 
that.
    Mr. TIPTON. You know, but you followed that up with needing 
adequate resources to be able to help those taxpayers. We 
actually calculated it out. Even with sequestration, it was 5.8 
percent reduction. Can you assure this Committee, can you 
assure this Congress, and most importantly, can you assure the 
American people that you are not going to have any more Star 
War parodies; that you are not going to have any more line 
dances? And you had noted that you had gone through in part of 
your previous life in terms of looking out for waste, fraud, 
and abuse in government, what is being done to make sure that 
we really are spending those taxpayer dollars correctly?
    Mr. WERFEL. I am glad you asked that question. I have a 
couple of responses.
    First, when I arrived at the IRS, what I found is that 
while there are incidences out there--things like videos and 
the expensive conference in Anaheim--and videos are okay but we 
want to make sure that the videos are for the appropriate 
purpose and at the appropriate level of funding for those 
videos because we use videos to train our employees. It helps 
us cut down on travel. There can be a lot of value to videos. 
But we have to eliminate our extraneous expenditures. And what 
I found was a lot of procedures were put in place before I 
arrived. The IG report that came out on the Anaheim conference, 
the videos that are garnering some attention were made in some 
cases 2010, in some cases 2011. I am not excusing them, I am 
just saying what has the IRS done since then and where are we 
today? In July of 2013, what does our footprint look like? And 
we do not do conferences like we did in Anaheim anymore. That 
is a vestige of a past. We have new controls in place around 
video costs and content. Again, not excusing the prior 
activities, and there may be more that come out that occurred 
in 2010, 2011 before these procedures were put in place. But 
what I can assure you is that strong, robust procedures have 
been put in place to constrain both conference spending and any 
spending of extraneous costs on videos, I cannot say we are at 
zero risk but we are at a significantly lower risk than we were 
previously. And that is part of the trust building with the 
American people, is demonstrating how we are cutting our costs 
in those areas. There are very impressive results in this area.
    Mr. TIPTON. But the bottom line, I guess, and I know you 
can understand this, what the American people's frustration, my 
frustration is, when we look at the IRS, just saying, ``Hey, we 
are going to correct the problem. We are sorry. It will not 
happen again,'' and they move on down the road, do you apply 
those same standards to American taxpayers?
    Mr. WERFEL. Again, as I said, I am not excusing the 
behavior. I am just providing an explanation of what steps are 
taken when a problem occurs. There are varying different types 
of mistakes and we can talk about mistakes from the IG report 
that led to a change in leadership at five positions within the 
IRS from the commissioner down to the lowest senior executive 
within that managerial chain. They are all----
    Mr. TIPTON. Maybe we ought to move maybe to the root of the 
problem really because when we look at it you noted with Mr. 
Collins you do your own taxes. Do you do TurboTax or do you do 
the long form?
    Mr. WERFEL. I do not want to give any favorite to anybody. 
I use a provider. I use a software.
    Mr. TIPTON. You use a provider for that.
    Do you know how many small businesses fill out their own 
tax returns and send them in? Is there any kind of data on 
that?
    Mr. WERFEL. I think small businesses are roughly about 80 
percent professional preparers.
    Mr. TIPTON. Eighty percent. How many pages are there in the 
tax code?
    Mr. WERFEL. Oh, gosh.
    Mr. TIPTON. Seventy thousand plus? Seventy thousand plus?
    Mr. WERFEL. Something like that. It is a very high number.
    Mr. TIPTON. If I call up the IRS today wanting to be able 
to pay my taxes, to be able to do it lawfully, will whoever 
answers that phone guarantee me that their answer is correct?
    Mr. WERFEL. That is not the way the process works.
    Mr. TIPTON. That is not the way the process works when we 
sign the tax return. So the IRS cannot figure it out. The IRS 
cannot guarantee us that they understand the policies that are 
in place, and yet we are trying to tell the American people you 
must obey the law. Does this not really call for legitimate tax 
reform to get a flatter, fairer, and simpler tax code and to 
reduce the number of employees that you would need to manage 
just by making it sensible for the American people to work 
with?
    Mr. WERFEL. I will answer that question. I have been asked 
that question numerous times. It is a very important and good 
question. Two things. One, as a general principle, the IRS 
administers whatever law Congress passes, and we rely on the 
Treasury Department to articulate----
    Mr. TIPTON. That is not completely true though, is it, 
simply from the standpoint? Do you not issue rules and 
regulations that are not approved by Congress? It is your 
assumption that it meets the legislative directive?
    Mr. WERFEL. Right.
    Mr. TIPTON. But you do not come back and ask us if it meets 
the legislative directive.
    Mr. WERFEL. We get feedback if there is a concern about it 
but the reality is--I want to answer your original question.
    Mr. TIPTON. I will tell you, as a member of Congress, a lot 
of the frustration really is we give the feedback and it falls 
on deaf ears. It is kind of the assumption we are going to be 
here longer than you are and we are going to do it our own way. 
And that is the real frustration I think with a lot of the 
bureaucracies here in D.C.
    Mr. WERFEL. If that is the message you are getting that is 
unfortunate. We want to partner with Congress. These are not 
easy issues. As you mentioned, the tax code is complex. Our 
responsibility at the IRS is to do what we can to carry out 
those complexities in the most efficient and effective 
mechanism. Very often we are successful. There are situations 
in which we are not. Those situations are normally publicized 
and raised as significant concerns and it is all valid.
    I think we have the same objective. Our collective 
objective is to provide a fair and efficient and effective tax 
system for the American people. From IRS's standpoint, we do 
deal with a lot of complexities. We want to partner with both 
the public and Congress and others in terms of how we can 
continuously improve. We have problems. I understand that. 
Whether it is the conferences or the IG report, what I am here 
to say is not to excuse them. I am here to provide transparency 
on the nature of the problem, what we are doing to try to fix 
it, how we are holding people accountable--we can certainly 
talk about that--how we are fixing it, and what are our future 
barriers right now. What barriers do we face right now to that 
goal of more effective tax administration? I just want to have 
a dialogue about that. And we are working on solutions at the 
IRS right now and we want to work with you on those solutions.
    Mr. TIPTON. Thank you, Mr. Chairman. Far past time.
    Chairman GRAVES. Ms. Chu.
    Ms. CHU. Thank you, Mr. Chair.
    We know that small firms, especially those that are already 
complying with the tax laws, fear an audit as they are 
expensive and time-consuming, and I know that the average 
amount of time an employee spends on a correspondence audit in 
2008 was 1.6 hours while for a field exam was 46.4 hours. So 
that is quite a difference.
    Does the IRS estimate the audit costs for taxpayers? And 
how will you ensure that increased audits do not unnecessarily 
burden compliance small businesses?
    Mr. WERFEL. Well, we certainly look at--we certainly track 
the duration of an audit. I do not know whether we have an 
information mechanism that can give us detailed costs on an 
audit. I mean, we would want to be sensitive to the community 
in terms of not asking them for information that would increase 
their burden in terms of having them tracking their costs for 
complying with a particular audit. But I think the goal here is 
to achieve the right footprint. What is the optimal? The audit 
footprint that we maintain should have the right mixture of 
both correspondence and field. It should have the right mixture 
because the audits serve multiple purposes; right? They 
establish a base by which a voluntary compliance system is 
going to work more effectively because they deter bad behavior 
and incentivize good behavior. But they also, if they are 
driven effectively by the right risk algorithms and the right 
analytics, can really uncover a lot of money. And I think our 
revenue that we brought in from the IRS based on our 
enforcement activities exceeded $50 billion last year. So there 
are multiple benefits there and I think the goal is to evaluate 
the various policy tensions that are involved in structuring 
those and making sure that we are making the appropriate 
adjustments, whether it is to Congressman Barber's question of 
making sure that if we are having fruitless audits, I mean, the 
shame of it would be if we did not learn from those fruitless 
audits and incorporate into our process going forward. And so 
that is the goal. These are some of the guiding principles that 
the IRS has. And again, there are a lot of imperfections but 
the objectives I think are the right objectives. And in many 
cases we are successful.
    Ms. CHU. Well, one of those big decisions for a small 
business is the classification of workers and it continues to 
be a daunting decision for many small employers as to whether 
to work as an employee or an independent contractor. As part of 
the Fresh Start Initiative, which helps taxpayers and 
businesses address their tax responsibilities, the Voluntary 
Classification Settlement Program was introduced. Can you 
describe this program and also tell us how successful this 
settlement program has been and what about the Fresh Start 
Initiative as a whole?
    Mr. WERFEL. That is a good question. One of the messages we 
have is about the IRS looking to work with taxpayers in a way 
to help them navigate our system. But it is not just complying 
with every letter of the law. It is, are there changes that we 
can make and adjustments we can make to provide increased 
flexibility. So if something like they owe a debt to us and 
they are having trouble making up that debt, we have programs 
in place, like you mention, like the Fresh Start Initiative 
that can help kind of relevel--understand the financial 
hardships that a particular taxpayer might be having right now; 
adjusting, whether it is the payment schedule or the approach 
we take with that taxpayer. It is one of those things--and 
there is also, as you mention, voluntary reports that taxpayers 
can come in and provide us if they think they have a concern 
with their taxes. We open up our doors for them to talk about 
it. We create, to the best of our ability, a nonthreatening 
environment for them to come in and go over those issues. And 
we work with them collaboratively on a path forward that makes 
sense, that gives them peace of mind but also brings them 
closer into compliance. It is that type of work that I think is 
very critical. It demonstrates that the IRS is not in a place 
where if it is not--every I is not dotted and T is crossed 
exactly the way it is supposed to be that some kind of hammer 
comes down. It is demonstrating that there are avenues that you 
can take with the IRS to work through issues. And in 
particular, if there is an entity or an individual with 
financial hardship, we have programs in place that have proven 
successful over the years in providing whether it is a safe 
harbor or a new approach for taxpayers. They are very 
successful. They are very popular. I am concerned about their 
sustainability based on budget. It is another one of those 
areas where I would like to present a potential tradeoff 
depending on our budget levels. But I think you are raising an 
important point about our programs and our ability to work with 
taxpayers in this way.
    Ms. CHU. Thank you. I yield back.
    Chairman GRAVES. Mr. Schweikert.
    Mr. SCHWEIKERT. Thank you, Mr. Chairman.
    Mr. Commissioner, in some of the discussion you have had 
here today you have talked about noncompliance and triggers, 
what sets off inquiries. I would like to do something a little 
bit different in some of the questions. Let us paint a scenario 
and then see if you can help me work through it.
    I am a small business and all of a sudden I have a spike in 
business or a crash in my business or whatever it may be, so I 
have more money flowing into my bank accounts. Does the IRS in 
their data collection see that?
    Mr. WERFEL. Likely, no. I mean, we do not access private 
bank accounts. There could be situations--we have third-party 
reports, like a 1099. So we might see a change in their 
interest income.
    Mr. SCHWEIKERT. So you might see depending on the model of 
the business because most of what we would call small 
businesses are going to be pass-through type entities. So there 
might be K1s or other types of partnerships or interlocking----
    Mr. WERFEL. The nature of the changing circumstance of a 
particular entity depends on existing mechanisms. So, for 
example, we get 1099 forms that report to us, you know, things 
like interest income and other things. So we might have 
insight, and that is all about trying to use third-party data 
sources.
    Mr. SCHWEIKERT. And you are heading already where I wish to 
go. I am trying to understand what data accumulation the IRS 
collects to decide that I have a noncompliance or I have 
something here I need to investigate or I have someone here I 
need to send a letter of inquiry or someone here I need to 
audit. How many layers of information collection are there out 
there? Are you collecting from private sources? Are you 
collecting through regulatory sources? How does the triggering 
mechanisms end up working to now saying this business, 
something different is happening. Let us go investigate them.
    Mr. WERFEL. I want to keep it general because, again, there 
are certain parts of our business operations that are 
confidential.
    Mr. SCHWEIKERT. And that is a different discussion whether 
they should be confidential in the government.
    Mr. WERFEL. But the answer to your question, again, it is 
one that might not be able to be effectively answered in two 
minutes. It varies. We might, you know, someone might come in 
with information, a tip, or something like that that we would 
use. That could be. But a large footprint of what happens is 
that the taxpayer will file their tax returns and then we get 
information after the filing is done through third-party 
sources.
    Mr. SCHWEIKERT. Walk me through that information because 
you spoke earlier that much of what happens is automated in the 
background. That sort of indemnifies bad acts from individuals. 
I am now trying to understand what--not necessarily bad acts 
but how much data accumulation is happening.
    Mr. WERFEL. I will do my best.
    Mr. SCHWEIKERT. And it is a fair question because we all 
live in the databasing of America, but for you, does that 
databasing trigger when my constituents get audited?
    Mr. WERFEL. Let me answer to the best of my ability and 
then I might want to bring in reinforcements to help me answer.
    Mr. SCHWEIKERT. Okay.
    Mr. WERFEL. And I am going to make the assumption that the 
tax return is filed electronically. But even if it is not it 
just takes a little bit more time as we process a paper return. 
But there is an upfront review of the tax return that is done--
--
    Mr. SCHWEIKERT. It is automated?
    Mr. WERFEL. Most of it is automated. It picks up on math 
error. It picks up on different indicators of potential fraud 
or error. So that happens.
    Mr. SCHWEIKERT. And then it is bounced against----
    Mr. WERFEL. Well, then what happens is it is flagged for 
potential--we might not process the return immediately. If we 
think there is identity theft we might hold it before we just 
all of a sudden process the refund. Different events would 
occur. That is based on a data entry. I am just trying to give 
you the difference because there are two points. There is data 
entry and then there is later.
    Mr. SCHWEIKERT. In my last 60 seconds, and I know this is 
really complicated, let us go from the other side. You have 
third-party vendors providing you data that all of a sudden 
this business has a much greater velocity of deposits, 
withdrawals, deposits, withdrawals.
    Mr. WERFEL. Yes, we can get that. That information does 
come in.
    Mr. SCHWEIKERT. So it is not about what they filed; it is 
we are picking up something else over here.
    Mr. WERFEL. Well, we will run a comparison.
    Mr. SCHWEIKERT. But does this set off a trigger to go look 
at their filing?
    Mr. WERFEL. It could. In other words, what happens is once 
the filing is done and we get all the 1099 or the third-party 
data in, we will basically run kind of an aggregate comparison. 
And where we see material anomalies between what was reported 
on the tax return versus this other information that maybe 
dictates that it was a materially higher revenue amount for the 
taxpayer than was put on their tax return, that could trigger, 
for example, a correspondence. They might get a letter and they 
might say we want you to look at this.
    Mr. SCHWEIKERT. Just because I am thinking about it, as we 
go through certain business cycles, you know, sometimes a 
business gets a contract they may not be making a lot of profit 
on it but that contract may have a lot of in and out, in and 
out through their bank accounts, through their vendors, through 
other mechanics.
    Mr. WERFEL. Yes.
    Mr. SCHWEIKERT. Does that trigger?
    Mr. WERFEL. I do not know. It would depend on the 
circumstances. In a very general matter, we would look for a 
material difference between what a 1099 is telling us about 
income going into a particular entity and what they reported on 
their tax form. If we see a material difference we will flag it 
and we will ask the taxpayer about it, whether it is through a 
field exam or a correspondence exam, it will depend on the 
situation.
    Mr. SCHWEIKERT. Thank you, Mr. Commissioner. Thank you for 
your patience, Mr. Chairman.
    Chairman GRAVES. We have a series of three votes. Would you 
be able to stay?
    Mr. WERFEL. Yes. Whatever you need.
    Chairman GRAVES. Okay. We will recess briefly and come 
right back and start with Mr. Payne when we get back. And 
please get back as quickly as possible. We are recessed.
    [Recess]
    Chairman GRAVES. We will go ahead and bring the hearing 
back to order, and we will start off with Mr. Luetkemeyer.
    Mr. LUETKEMEYER. Thank you, Mr. Chairman.
    Mr. Werfel, on May 22nd we had Secretary Lew in front of us 
in the Financial Services Committee, and at that time I brought 
up to him an issue that was of concern to me with regards to 
the activities of the department within your agency that 
oversaw the--well, that Ms. Lerner was in charge of and oversaw 
the applications for tax exempt organizations. And in 
discussing those with him he said he was going to meet with you 
that following afternoon with your new job and give you 
directions on what he wanted to do and the situation you were 
in. One of the things I brought up to him at that meeting was 
that not only was it disclosed at that point that the IRS was 
unfairly targeting conservative groups--tax exempt conservative 
groups--but I wanted to make the point out to him that they 
were not enforcing the law against some liberal organizations. 
There was an instance that was brought up to me by a group 
within my state of some activities with regards to a particular 
group, and I spent three years working with Ms. Lerner to try 
and get an investigation of that group. Myself and the other 
group they are working with submitted over 3,000 documents to 
her and never received a single remark from her with regards to 
how the investigation was going, whether anything was done. And 
so Secretary Lew pledged to me that day that he would talk to 
you about that and have that be investigated and that be in the 
report, the 30-day report that you submitted. I did not see it 
in the report. Did he ask you to review that situation?
    Mr. WERFEL. I think one of the first things I would respond 
with is I have some restrictions in terms of what I can and 
cannot talk about with respect to an individual taxpayer 
because it seems that your question orients around an 
individual taxpayer. And delving into the specifics of the 
situation with that taxpayer would require a 6103 waiver or 
something like that. So I apologize. I do not know the answer 
to your question unless I can get more specifics.
    Mr. LUETKEMEYER. My question is did he ask you to 
investigate that situation?
    Mr. WERFEL. He asked me--maybe this is a good way of 
answering it--he asked me to broadly review a variety of 
different activities within the IRS to ensure fair enforcement. 
With respect to a particular activity, I do not have a 
recollection of him raising a particular taxpayer or a 
particular issue, but I have to go back and consult.
    Mr. LUETKEMEYER. Well, one of the concerns I have is that 
your report, the reports that you did over a 30-day period, 
does not indicate any sort of investigation or oversight or 
even a mention of looking at the fact that there may have been 
a lack of enforcement by the IRS with regards to other 
organizations. It would lead me to believe that there was not a 
follow-up or he did not ask the question.
    Mr. WERFEL. Let me respond in a couple of different ways. 
First of all, the 30-day report is a point in time. More work 
is needed and there is more evaluation that is underway. So to 
the extent that there is some topic or area that is not as 
robustly covered in the report that should be based on input 
from this Committee and others, that is something long overdue. 
That report was intended to set up a dialogue.
    Secondly, I would have to reengage with Mr. Lew to kind of 
remind ourselves of conversations we had two months ago. But as 
a general matter, because the issue involves a specific 
taxpayer, I may not be able to cover it in a public report. It 
may be something that I need to deal with, and unless you have 
a waiver from that taxpayer, it may be something that I cannot 
even articulate in specifics with you just based on what the 
law is, not because I do not want to help.
    Mr. LUETKEMEYER. Okay. Will you pledge to me today to 
investigate those folks if I send you a request?
    Mr. WERFEL. I will pledge to certainly look into it. Look 
into the matter.
    Mr. LUETKEMEYER. And respond in a timely fashion?
    Mr. WERFEL. I will respond to the extent I can permitted by 
law. Yes.
    Mr. LUETKEMEYER. But again, what my suggestion may be is 
that it may be appropriate for the taxpayer to provide a waiver 
so that I can talk directly about the situation with a 
particular taxpayer to you, which is done.
    Mr. WERFEL. Well, they are not going to do that because 
they are of a different political ilk and so they are not going 
to be willing to do that. That is the problem is that they are 
being very punitive in the way they go about their activities. 
They are in direct violation of something you said a while ago 
to a degree in which they are engaged in political activities 
that are absolutely in violation of their 501(c)3, I believe.
    Mr. WERFEL. Let me make one point since you raised the 
question, if I could, and that is one of the things that was in 
my 30-day report but as circumstances evolve it merits more 
discussion and attention. And I think this has been publicly 
reported but the facts in this case as we review more documents 
and talk to more people is that there is a diversity across the 
political spectrum of entities that were, for example, included 
on these lookout lists that were screened for additional 
scrutiny. And the reason why I am raising it is just kind of in 
response to the question of to the extent there was activity by 
the IRS that leaned in one way, aggressive scrutiny towards one 
end of the political spectrum and another way less aggressive 
scrutiny, as the facts and circumstances emerge in this case, I 
just want to make sure it is clear that there is a diversity 
across the political spectrum of entities that had issues that 
are covered by that TIGTA repot.
    Mr. LUETKEMEYER. Well, the point I am trying to make, Mr. 
Werfel, is this. Ms. Lerner had a political bent. She obviously 
was trying to be punitive in the way she looked at the 
conservative groups. I am saying that there is another side to 
this that nobody has thought about, nobody has investigated, 
nobody has said anything about. And that is a fact that she did 
not enforce the law on the other side of the political spectrum 
and let them get away with stuff that did not provide fair 
treatment to all parties who were involved in this 501(c)3 
exemption. That is the point I am trying to make is there needs 
to be a realization and acknowledgment to the fact that she, as 
a member of this organization, refused to investigate it and 
that has to be investigated.
    Mr. WERFEL. I am not aware of evidence that would support 
your conclusion.
    Mr. LUETKEMEYER. It is in the file. The IRS has got it. 
Over 3,000 pages of documents. If you want me to send it again, 
I will be glad to do it.
    Mr. WERFEL. I am telling you I am not aware of the evidence 
that would support it.
    Mr. LUETKEMEYER. Okay. Are you willing to look into it 
then?
    Mr. WERFEL. Yes. I mean, one of my main objectives is to 
look into this entire situation.
    Mr. LUETKEMEYER. Okay. I am way over time. I will yield 
back but I think there is an important question that also needs 
to be asked today by somebody. Do you share your databases with 
anybody?
    Mr. WERFEL. We, under the law, we have certain legal 
responsibilities to share our data, for example, for the 
administration of tax purposes, yes, we share our data but we 
do so in a way that has an enormous number of safeguards.
    Mr. LUETKEMEYER. Could you share a list with the Committee 
of all the agencies, all the departments across government that 
you share your list with? And if anybody on the private sector, 
any third-parties get access to that information?
    Mr. WERFEL. I can. I can give you a head start on your 
answer, too, which is if you go to section 6103 there is a 
particular set of exceptions that dictate when the IRS can 
share information outside the IRS.
    Mr. LUETKEMEYER. Will you be willing, Mr. Werfel, to give 
us a list?
    Mr. WERFEL. Yes.
    Mr. LUETKEMEYER. Of every agency in state government and 
all the third-party contractors that collect data that you have 
access to and that you have sharing agreements with?
    Mr. WERFEL. We will do our best to provide you a 
comprehensive list.
    Mr. LUETKEMEYER. Okay. Thank you very much.
    Chairman GRAVES. Mr. Huelskamp.
    Mr. HUELSKAMP. Thank you, Mr. Chairman. I appreciate, Mr. 
Commissioner, for you being here today. I would like to cover a 
couple things that we have briefly discuss previously and want 
to know under what specific statutory authority was the 
employer mandate penalty delayed?
    Mr. WERFEL. I do not have the details on the legal 
analysis. The role of the IRS in that decision was to be 
consulted on the operational implications of this transitional 
relief period that the Treasury Department announced early in 
July.
    Mr. HUELSKAMP. And did the White House visit with you 
directly about that period?
    Mr. WERFEL. No.
    Mr. HUELSKAMP. And so how did you find out about it?
    Mr. WERFEL. It was a combination of two factors. One, the 
first step was that Treasury engaged IRS staff and consulted 
them on the, again, the administrative implications of a 
transitional relief period. And then I, in a subsequent meeting 
with the Treasury Department, learned that they were 
considering it. And again, the IRS footprint in this is what 
are the administrative implications?
    Mr. HUELSKAMP. In the follow up to that, in the proposal 
you talk about voluntarily complying. Obviously, the penalty 
has been suspended. The 4 in 2014 has been changed to 2015 but 
will there be any implications particularly for small 
businesses if they do not voluntarily comply?
    Mr. WERFEL. No. Again, the definition of small business is 
one that we have to make sure that we are clear on because if 
you have more than 50 FTE, then you have these employer 
reporting requirements and particular responsibilities. If you 
have less than 50 FTE, the situation for you as an employer is 
very different. But there will be no penalty. We encourage 
voluntary reporting but no penalty for not reporting and no 
responsibility payment in the first year.
    Mr. HUELSKAMP. Will there be any implications in terms of 
your algorithms in terms of selection for audit if folks do not 
voluntarily comply? You can guarantee that will not be part of 
that.
    Mr. WERFEL. No, I will talk to the team about it and make 
sure but there is no intent to do that at all.
    Mr. HUELSKAMP. Well, speaking of determining who receives 
an audit, a few weeks ago it was noted that approximately 
24,000 refunds were sent to one address in Atlanta.
    Mr. WERFEL. Yes, I am aware of that situation.
    Mr. HUELSKAMP. How exactly does your algorithm ignore 
addresses? That does not show up? You do not compare addresses? 
That is not in the algorithm to determine whether or not we 
have some fraud going on?
    Mr. WERFEL. That is a very important question. And what 
happened there, I think there was illegally obtained taxpayer 
identification numbers and the way in which this individual or 
entity sought to defraud the government, they were able to 
orient those in a way that we did not pick up on it as quickly 
as we should have. We are learning from that experience but I 
agree.
    Mr. HUELSKAMP. Do you know how they missed it? I mean, this 
is not just--that is the one big instance. There are 154 
different addresses that received more than 1,000 refunds to 
those addresses. So you do not take the address into account at 
all in the algorithm in determining who to audit?
    Mr. WERFEL. I think we do but I have to get back to you to 
answer the question why this particular fraud scheme alluded 
us.
    Mr. HUELSKAMP. And these folks that put this algorithm 
together or are investigating that, are they the same folk that 
will put together the Obamacare reporting system that will be 
implemented obviously for individuals beginning January 1st?
    Mr. WERFEL. Not exactly. But there will be some overlap 
between the work that is done in terms of our enforcement of 
ACA and those that would look at individuals. It depends on the 
nature of the ACA enforcement, but there will be some overlap. 
Yes. Because the way it works in the IRS is we set up by wage 
and investment deals with individuals, small businesses deal 
with small businesses, so I would have to go back and 
understand exactly how that Atlanta-based scheme played out and 
who was involved. But there could be some overlap. Yes.
    Mr. HUELSKAMP. Well, again, it was not just Atlanta. There 
were 153 other addresses.
    Mr. WERFEL. Yes. No, I understand.
    Mr. HUELSKAMP. And I want to make sure that we are clear on 
the IG report.
    I have very specific, a couple regulations that are very 
detrimental to small businesses. One is regulation by the IRS 
that will require businesses with non-audited financial 
statements to evaluate each and every expense over $100 to 
determine whether that item must be depreciated; that will kick 
in on January 1st. And the second one would require that any 
small business spending more than $100 to repair any buildings, 
unit, or property subject, every single expenditure over $100 
up to nine different tests to determine if the amount spent is 
an improvement. Now, that is a mouthful. I mean, that is your 
mouthful, not mine.
    But as an absolutely ridiculous example, if a small 
business owner, for example, would replace a toilet in a 
building at a cost of $400 under this guidance, they will be 
forced to depreciate that toilet over 39 years for a net 
deduction of $10 every year. Now, there are a couple of very 
specific regulations coming on January 1st impacting small 
businesses. Can you explain the rationale behind these?
    Mr. WERFEL. No. What you described sounds nonsensical. I 
would like to look into it.
    Mr. HUELSKAMP. Okay. Can you provide a written response to 
the Committee?
    Mr. WERFEL. Yes.
    Mr. HUELSKAMP. Again, I believe one of these, perhaps both 
of them, were delayed for a year. And again, there is no 
specific, I do not believe, statutory authority, which is much 
different than the Obamacare penalty delay. But this is coming 
January 1st. I am hearing this from small businesses, and it is 
an absolute paperwork nightmare. I would appreciate very quick 
response.
    Mr. WERFEL. I appreciate you raising the question.
    Mr. HUELSKAMP. Because they are preparing for that. We are 
already, obviously, into the month of July and they have to 
start gathering this information to prepare for next January 
1st.
    Mr. WERFEL. I appreciate you raising the concern.
    Mr. HUELSKAMP. I yield back, Mr. Chairman. Thank you.
    Chairman GRAVES. Mr. Mulvaney.
    Mr. MULVANEY. Thank you.
    Mr. Werfel, I am going to ask you a couple of questions 
about the revelations that came out of Senator Grassley's 
office in the last couple of days.
    Mr. WERFEL. Yes.
    Mr. MULVANEY. Do you know the donors or candidates whose 
information was supposedly improperly scrutinized?
    Mr. WERFEL. I talked to my staff and I think my staff spoke 
to the inspector general shop, so we were able to learn that 
information.
    Mr. MULVANEY. Do you intend to tell those folk that their 
information was inappropriate?
    Mr. WERFEL. I think that is consistent with the appropriate 
process.
    Mr. MULVANEY. Have you all figured out yet, I think there 
is a report today saying that there were several instances 
where the disclosure may have been inadvertent, one where it 
was intentional and that that was conducted by a person who was 
not a member of your agency?
    Mr. WERFEL. We have been able to confirm that the one 
willful, unauthorized disclosure did not occur within the IRS.
    Mr. MULVANEY. How is it possible that somebody who is not 
within the IRS had access to that information to begin with?
    Mr. WERFEL. It is a good question. As I mentioned earlier, 
there are legal frameworks, programs, and policies in place in 
which the IRS will share taxpayer information with other 
federal agencies and with state agencies. In particular, for 
example, for the implementation of Medicaid. These are the way 
the programs work. We set up safeguards to ensure that those 
informations are not breached.
    Mr. MULVANEY. But you do not think it was a hacker? You 
think it was somebody who was--without telling me who it was 
because I do not want to know who it was because that is an 
ongoing investigation I take it.
    Mr. WERFEL. That is right.
    Mr. MULVANEY. It is somebody that was properly given the 
information; they improperly shared it beyond that?
    Mr. WERFEL. It could be one of a number of things but it 
may be that you have, let us say, hypothetically an individual 
in a state revenue office who did not have a need to know the 
information but accessed it anyway. Something like that.
    Mr. MULVANEY. Gotcha.
    Mr. WERFEL. Is what we are talking about.
    Mr. MULVANEY. In the cases where it was inadvertently 
scrutinized, do you know which members of your agency 
participated in that?
    Mr. WERFEL. I do not have the full details yet, but in any 
case in which the IG reports that situation to us, we look into 
it and we make sure that we are taking the appropriate 
procedures to make sure that such an inadvertent disclosure 
does not happen again.
    Mr. MULVANEY. Switch with me for a second to your Internet 
e-mail policy. According to the 2009 IRS employee handbook, 
your agency says the Fourth Amendment does not protect e-mails 
because Internet users do not have ``a reasonable expectation 
of privacy in such communications.'' Especially in light of the 
fact that your agency is going to be overseeing or implementing 
large portions of Obamacare, is it still the position of the 
IRS that it has the right to search, collect, and review 
Internet or e-mail data without a search warrant?
    Mr. WERFEL. I think there is a Supreme Court decision on 
this.
    Mr. MULVANEY. It is a Sixth Circuit case. It is not a 
Supreme Court case.
    I am not exactly sure.
    Mr. MULVANEY. Would you mind letting us know in writing as 
to what the policy is?
    Mr. WERFEL. I will. I will.
    Mr. MULVANEY. Thank you very much.
    If a small business owner who also happens to be either a 
participant in a conservative group or a donor to a 
conservative group or a donor to a conservative candidate has 
been audited in the last say 48 months and they are naturally 
suspicious as to whether or not they have been targeted 
improperly, what is the appropriate steps for them to take to 
answer that question to their satisfaction?
    Mr. WERFEL. I would offer two, and several are taking these 
steps.
    One, if they believe it was inappropriate, they can refer 
the matter to the Treasury Inspector General for Tax 
Administration. And I believe TIGTA is receiving those and 
doing the appropriate investigations. Or they can go to the 
National Taxpayer Advocate and raise the issue. Now, the 
National Taxpayer Advocate is more aligned to--``not that I 
necessarily feel I was treated inappropriately'' but ``I am 
having trouble with the bureaucracy.'' So it really depends on 
the circumstance. But if the taxpayer believes that there was 
really wrongful conduct going on, they should refer the matter 
to the IG. If I find such an issue, I certainly would refer it 
to the IG and have them do the appropriate investigation.
    Mr. MULVANEY. So if a large donor to Mr. Huelskamp, for 
example, was audited for the first time in his history and is 
concerned that he has been targeted, you think the appropriate 
step is to call the inspector general?
    Mr. WERFEL. If the person has a basis to believe that there 
was something inappropriate going on, but just based on the 
fact pattern that you provided, it would be very difficult for 
the IRS to know.
    Mr. MULVANEY. How would they know if there is a basis?
    Mr. WERFEL. Well, it is a good question. But I would 
articulate, I mean, I think out of an abundance of caution, if 
they felt that they were being mistreated by the IRS, they 
should raise the issue. But I would also articulate that I am 
not sure the IRS would have that information, nor know how to 
influence the audit footprint.
    Mr. MULVANEY. Are you all worried and have talked about any 
potential legal liability that you may have to folks that have 
been targeted?
    Mr. WERFEL. We have several lawsuits pending as a result of 
the IG report that was issued in mid-May.
    Mr. MULVANEY. Have you budgeted for any losses related to 
that lawsuits?
    Mr. WERFEL. Well, the budgeting process around litigation 
loss in the government is somewhat complicated. There are 
judgment funds that are reserve funds that pay out for those 
things. So the answer to your question is I have to go back and 
look at how we are dealing with our litigation exposure. This 
would not be the first time we are under litigation and we have 
certain budgetary procedures in place.
    Mr. MULVANEY. That makes sense. And finally--and I 
appreciate the extra time, Mr. Chairman--I was a little bit 
surprised because, again, I never worked for the government--
when Ms. Lerner was asked to resign several weeks ago, she 
declined and then she was placed on administrative leave, I 
believe, with pay. Okay, this is something that is completely 
foreign to those of us who came up in the private sector. Why 
was she not fired?
    Mr. WERFEL. So if I could, can I lift up the discussion?
    Mr. MULVANEY. Sure.
    Mr. WERFEL. Because the Privacy Act----
    Mr. MULVANEY. Better than dragging it down. Yes, go ahead.
    Mr. WERFEL. I have to lift it up to more generalities 
because the Privacy Act would preclude me from commenting on a 
particular employee's status with respect to a disciplinary 
action.
    Mr. MULVANEY. Understood.
    Mr. WERFEL. But let me say this. It is a good question, and 
I am glad you raised it.
    There are very specific laws and regulations in place that 
govern civil servant employment--how you hire them, how you pay 
them, how you potentially separate from the government from 
them, whether it is retirement, buyout, or a disciplinary 
action leave. And what we do in the IRS and what I am making 
sure that we do is to the extent appropriate we will take the 
most aggressive possible action we can where we believe an 
individual can no longer hold a position of trust within this 
agency. And that is generally the steps we take. Now, there is 
a process, a due process that goes on and it was built to 
protect federal employees for a whole variety of different 
reasons, and there is probably a valid public policy debate we 
could have on those rules where if you have concerns that an 
individual can no longer hold the position of public trust 
within the government, the first step in that process is to 
place them on leave--it is paid leave--while you build the 
record and give them a chance to respond to that record about 
what the ultimate disposition of their employment should be.
    The rules and regulations are just set up that you default 
while that discovery is being done and while that due process 
is being done, the individual is paid. It would be a violation 
of the law for me in a situation where I felt that an 
individual could no longer hold the position of public trust to 
move to immediate termination. There are circumstances where 
you can do it but it has to do with criminal violations.
    Mr. MULVANEY. Just to wrap up and try to bring it back to 
Ms. Lerner, is that due process still ongoing or have you all 
made a determination as to whether or not she is able to stay 
with the organization within a position of trust?
    Mr. WERFEL. I cannot comment on that particular situation. 
I will say that as a general----
    Mr. MULVANEY. You can tell me if it is still ongoing or 
finished, can you not, without telling me any of the details?
    Mr. WERFEL. No. I can tell you in a setting that is not 
public. I can share that information.
    Mr. MULVANEY. Is she still employed by the IRS? You can 
tell me that.
    Mr. WERFEL. Yes, she is still employed by the IRS.
    Mr. MULVANEY. Thank you, Mr. Chairman. I appreciate the 
additional time.
    Chairman GRAVES. Thank you very much. And with that I want 
to thank acting commissioner Werfel for being here today. We 
are going to continue to monitor the IRS and its treatment of 
small businesses. And I appreciate the fact that you designated 
Faris Fink as our point person and included us as a part of 
this review process that you are talking about. He is obviously 
the commissioner of Small Business and Self-employed Division 
and we want to interact with him.
    In addition, we are also going to have some questions. 
There will be Committee members on both sides of the aisle that 
will have questions and I want you to commit to respond to 
those in a timely manner and as quickly as possible and as 
fully as possible.
    With that, I would ask unanimous consent that members have 
five legislative days to submit statements and supporting 
materials for the record.
    Without objection, that is so ordered. And with that the 
hearing is adjourned. Thank you.
    [Whereupon, at 3:33 p.m., the Committee was adjourned.]
                            A P P E N D I X


                          WRITTEN TESTIMONY OF


                             DANIEL WERFEL


                     PRINCIPAL DEPUTY COMMISSIONER


                        INTERNAL REVENUE SERVICE


                               BEFORE THE


                     HOUSE SMALL BUSINESS COMMITTEE


        ON THE IRS AND SMALL BUSINESSES: ENSURING FAIR TREATMENT


                             JULY 17, 2013


    Introduction

    Chairman Graves, Ranking Member Velazquez and Members of 
the Committee, thank you for the opportunity to appear before 
you today to discuss tax matters affecting small businesses.

    The mission of the IRS in regard to small businesses, and 
indeed to all taxpayers, is to provide quality service by 
helping them understand and meet their tax responsibilities, 
and to enforce the law with integrity and fairness to all.

    The IRS takes seriously the need to provide excellent 
service to small business taxpayers. Small businesses and self-
employed taxpayers in the U.S. are vital to our country as 
engines of economic growth, and the IRS needs to do its part to 
ensure that they can move full speed ahead and flourish. This 
assistance takes a number of forms to help taxpayers avoid 
unintentional errors in attempting to comply with the tax laws. 
Small businesses, from sole proprietors who file Form 1040 with 
a Schedule C to small corporations and partnerships, 
continually must face the task of familiarizing themselves with 
complex aspects of the tax code. Some of these provisions 
change from year to year, making it important for taxpayers to 
update their understanding each year. Assisting taxpayers with 
questions before they file their returns prevents inadvertent 
errors and reduces burdensome post-filing notices and other 
correspondence from the IRS.

    The IRS believes it is important to conduct outreach to 
small businesses on changes to the tax law and the latest in 
filing requirements. The operation of this outreach reflects 
the widespread use of tax professionals by small business 
owners. Because the vast majority of small businesses and self-
employed individuals use professional return preparers, the IRS 
partners with thousands of industry and small business 
organizations, including minority-owned business associations, 
tax professional and payroll associations and other government 
agencies to extend and amplify our outreach and education 
efforts.

    A major component of our outreach efforts involves the 
meetings, symposiums and seminars we sponsor for small business 
owners and the tax practitioner community each year. In FY 
2012, the IRS held more than 2,000 of these events, which were 
attended by more than 163,000 business owners and tax 
professionals.

    Increasingly, the IRS is employing technology to reach 
small business owners and help them fulfill their tax 
obligations. Our website, IRS.gov, includes a section that is 
devoted to small businesses and contains a wealth of videos, 
audio presentations and webinars on a wide range of tax topics, 
such as employment taxes, electronic filing and retirement 
plans geared toward small business.

    We also assist business taxpayers by operating a special 
toll-free telephone line dedicated to small businesses, 
corporations, partnerships and trusts. Callers can get help 
with, for example, business returns or business accounts, 
employer identification numbers and federal tax deposit issues. 
A separate toll-free line for practitioners is staffed by IRS 
representatives specially trained to handle their questions and 
resolve their clients' account-related issues.

    IRS-published products are also important resources for 
small business taxpayers. These include the Tax Calendars which 
provide highlights on tax topics, resources, instructions and 
important dates. Our electronic publication, e-News for Small 
Businesses, includes the latest IRS news releases and 
announcements. The quarterly SSA/IRS Reporter is a 
collaborative effort with the Social Security Administration 
that provides information on payroll taxes and other employee 
issues.

    IRS Enforcement Programs

    Even as we seek to ensure that our service to small 
businesses meets high standards, the IRS also must carry out a 
rigorous enforcement program. This includes administering a 
balanced examination program that helps ensure that taxpayers 
accurately report their income, deductions and credits. This 
also includes administering our collection program, which seeks 
to collect assessed tax liabilities.

    The IRS collected more than $50 billion in total 
enforcement revenue in Fiscal Year (FY) 2012, the third year in 
a row the enforcement revenue exceeded that level. The amount 
collected in 2012 was actually lower than in 2011 and 2010, for 
a number of reasons. For example, the economic slowdown 
contributed to lower enforcement figures, as most enforcement 
dollars collected resulted from audits of returns for years 
during the slowdown. Another factor behind the FY 2012 numbers 
reflected changes in agency staffing and budget resources. 
After a nearly flat budget in FY 2011, the IRS' FY 2012 budget 
was reduced by $305 million. This reduction affected the level 
of staffing available to deliver service and enforcement 
programs. Overall full-time staffing has declined by more than 
8 percent over the last two years, and staffing for key 
enforcement occupations fell nearly 6 percent in the past year. 
In 2013, the IRS absorbed an additional $618-million reduction 
in its budget due to sequestration, which will have further 
negative impacts on IRS performance, including performance in 
enforcement programs.

    In FY 2012, the IRS audited approximately 1.65 million 
returns, of which 21 percent were small business returns. For 
FY 2011 the percentage was 22 percent, and for FY 2010, 21 
percent. This group includes filers of Schedule C and Schedule 
F, along with small corporations, S corporations and 
partnerships. The 2012 small business audit rate equates to 
only 0.2 percent of all returns filed, and 1.3 percent of small 
business returns filed.

    In conducting its examination program, the IRS uses a 
variety of techniques to focus exam resources on the areas of 
greatest compliance risk. As returns are processed, a majority 
of them are scored by a computer program for compliance risk, 
with a higher score indicating a higher probability that a 
change will be recommended during an examination. While the 
computer score is the most frequent reason for selecting a 
return for examination, there are other reasons a return may be 
selected. These include the need to reconcile what is reported 
on a taxpayer's return with third-party information provided on 
forms such as W-2s or 1099s.

    In addition, a small business may be randomly selected for 
audit under our National Research Program. The results from 
examinations conducted under this program are used for research 
purposes. The information gained from these audits helps us 
improve our audit selection criteria and update our estimates 
of the tax gap, which is the amount of taxes owed but not paid 
on time.

    The type of audit a taxpayer may undergo depends on the 
number and complexity of issues involved. A single issue 
questioned on a return will generally give rise to a 
correspondence audit, while multiple issues will likely result 
in a face-to-face exam.

    For all exams, the average additional tax recommended in FY 
2012 was $23,345. Within that total, the average additional tax 
recommended for self-employed individuals was $11,880 and for 
small corporations, $28,988. For all taxpayers, the average 
cost to the IRS of a correspondence exam in FY 2012 was $400, 
compared with $324 in FY 2010. The average cost of a field exam 
to the IRS in FY 2012 was $6,232, down from $7,248 in FY 2010.

    Ensuring Fair Treatment for Small Business Taxpayers

    In going about our work in the enforcement area, the IRS 
realizes that many small businesses face substantial economic 
challenges, even as the economy recovers. We have worked 
diligently to communicate to our employees the importance of 
recognizing that individual taxpayers and businesses being 
audited may be dealing with financial hardships, and we have 
encouraged our employees to be flexible in these situations.

    Increasing our employees' flexibility allows them to 
respond appropriately to taxpayers with financial troubles. 
Even as our economy recovers, too many small business owners 
continue to struggle to make their payrolls, secure lines of 
credit, contribute to their employees' retirement plans and 
stay current with their taxes. For that reason, we will 
continue to make sure that our employees have the guidance and 
the discretion they need to assist small businesses with the 
service they need and deserve.

    One major example of our efforts to help individuals and 
small business owners in this regard is the Fresh Start 
initiative, which began in 2011. Under this initiative, we have 
increased flexibility in our collection program to help 
taxpayers who are struggling financially. For example, we made 
it easier for taxpayers to obtain lien withdrawals after paying 
back taxes owed, and allowed liens to be withdrawn when a 
taxpayer signs a Direct Debit Installment Agreement (DDIA). 
Another provision helps more small businesses get access to 
Installment Agreements if they sign up for a DDIA and have less 
than $25,000 in unpaid taxes. We also changed our rules for 
Offers in Compromise (OIC) so that more taxpayers could qualify 
for a streamlined OIC.

    We have continued to refine the Fresh Start initiative, and 
further increased flexibility in our collection program in 
2012. This includes easing failure-to-pay penalties for 
unemployed taxpayers, and expanding our Allowable Living 
Expenses (ALE) standard. The standard is used to provide 
taxpayers a fair and consistent amount to live on while they 
repay tax debts.

    As part of our work to ensure fair treatment for small 
business taxpayers, we continue our focus on taxpayer burden 
reduction, through such efforts as simplifying forms and 
publications and streamlining policies and procedures. For 
example, as part of our effort to implement Executive Order 
13610, ``Identifying and Reducing Regulatory Burdens,'' in 
January 2013 we announced a simplified method for claiming the 
home office deduction. This new option is expected to help 
owners of home-based businesses by significantly reducing the 
paperwork and recordkeeping burden associated with calculating 
the deduction for business use of a home.

    Another aspect of ensuring that small business owners 
receive fair treatment involves ensuring that they have 
recourse in tax disputes with the IRS. It is important to note 
that my plan of action for improving IRS operations, which I 
will describe in more detail later in my testimony, includes 
enhancing mechanisms for taxpayer recourse. The IRS does have 
the Taxpayer Advocate Service (TAS) to assist taxpayers having 
difficulty resolving issues with the IRS, but we concluded in 
our recent report that these mechanisms are not well understood 
by taxpayers and therefore are not being sufficiently 
leveraged.

    Therefore, we are taking action to raise taxpayers' 
awareness of their rights and of the tools at their disposal 
for resolving issues, such as TAS. We need to be sure that all 
IRS employees are aware of their responsibilities with respect 
to ensuring taxpayers know their rights, and in particular, 
ensuring that taxpayers know how to engage TAS when they feel 
they are being treated inappropriately or are encountering 
excessive bureaucratic obstacles. The IRS leadership is 
committed to working with the National Taxpayer Advocate to 
evaluate the training provided to all IRS employees in this 
regard and modify it, as appropriate, to make necessary 
improvements to fill whatever gaps may exist in the current 
process or actual behavior.

    It is important to note that all of the outreach, education 
and burden-reduction initiatives I have described in my 
testimony depend on the IRS receiving adequate resources to 
fund them. It is imperative that we be able to continue to 
reach out to small business owners to help them file income and 
payroll taxes, understand tax law changes and seek help from us 
in cases of financial hardship. The IRS has absorbed 
significant cuts in our budget in the last few years, and we 
have made major strides in reducing costs and finding 
efficiencies in our operations. Additional significant cuts to 
the IRS budget have the potential to weaken our ability to 
deliver our service and enforcement programs, including those 
dedicated to assisting small business owners.

    Charting a Future Path for the IRS

    Before concluding my testimony, I want to give the 
Committee a brief overview of the work we have been doing over 
the past several weeks to chart a new path forward for the IRS, 
as these efforts are important to all taxpayers, including the 
small business community. We have initiated a robust action 
plan to address needed improvements that we believe will help 
restore and sustain the public's trust in the IRS.

    The report we released last month describes a number of 
important findings, aggressive actions and next steps for the 
IRS. The problems with the 501(c)(4) application process that 
were uncovered by the Treasury Inspector General for Tax 
Administration (TIGTA) have created significant concerns for 
individual and business taxpayers, and it is incumbent upon us 
to take swift action to ensure accountability, fix the problems 
that occurred and thoroughly examine other aspects of IRS 
operations.

    Over the past month, an ongoing review of the events 
described in the TIGTA report has shed further light on the 
management failures that occurred within the IRS and the causes 
of those failures. There was insufficient action by IRS leaders 
to identify, prevent, address and disclose the problems that 
emerged with reviews of applications for tax-exempt status. Our 
report outlines management deficiencies and the steps that must 
be taken to correct them.

    Of note, there is no current evidence of the use of 
inappropriate screeners or other types of criteria in other IRA 
operations beyond those discussed in the TIGTA report. We 
recognize, however, that there is public concern over the 
criteria the IRS adopted to review applications for tax-exempt 
status, a concern shared by the Committee as expressed in its 
recent letter to the IRS. Because we realize that more needs to 
be done to evaluate our screening criteria and procedures, we 
are establishing a review process by which screening criteria 
and procedures across the IRS will be periodically assessed to 
safeguard against any risks of inappropriate criteria.

    We are also continuing to review the full range of IRS 
operations, processes and practices to focus on how we deliver 
our mission today and how we can make improvements in the 
future. In that way, we will develop a better understanding of 
organizational risks wherever they exist in the IRS. We have a 
great deal of work ahead of us, and the IRS is committed not 
only to correcting the problems that have occurred, but also to 
continuing other important work of the agency.

    Conclusion

    Mr. Chairman, Ranking Member Velazquez, thank you again for 
the opportunity to testify today on the IRS service and 
enforcement efforts in relation to small businesses. As we 
continue to chart a path forward for our agency and determine 
what improvements are needed in IRS operations, we will do 
everything possible to ensure that small businesses are treated 
fairly and given the assistance they need to comply with our 
nation's tax laws. This concludes my statement, and I would be 
happy to answer your questions.


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