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



 
   FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR 2014 
=======================================================================



                                HEARINGS

                                BEFORE A

                           SUBCOMMITTEE OF THE

                       COMMITTEE ON APPROPRIATIONS

                         HOUSE OF REPRESENTATIVES

                     ONE HUNDRED THIRTEENTH CONGRESS
                              FIRST SESSION
                                ________

       SUBCOMMITTEE ON FINANCIAL SERVICES AND GENERAL GOVERNMENT 
                             APPROPRIATIONS

                    ANDER CRENSHAW, Florida, Chairman
 JO BONNER, Alabama                JOSE E. SERRANO, New York
 MARIO DIAZ-BALART, Florida        MIKE QUIGLEY, Illinois
 TOM GRAVES, Georgia               MARCY KAPTUR, Ohio
 KEVIN YODER, Kansas               ED PASTOR, Arizona
 STEVE WOMACK, Arkansas
 JAIME HERRERA BEUTLER, Washington  

 NOTE: Under Committee Rules, Mr. Rogers, as Chairman of the Full 
Committee, and Mrs. Lowey, as Ranking Minority Member of the Full 
Committee, are authorized to sit as Members of all Subcommittees.

              John Martens, Winnie Chang, Kelly Hitchcock,
                     Ariana Sarar, and Amy Cushing,
                           Subcommittee Staff
                                ________

                                 PART 7
                                                                   Page
 Treasury Inspector General for Tax Administration................    1
 Internal Revenue Service.........................................   81
 Department of the Treasury [Secretary]...........................  131
 Internal Revenue Service [Oversight].............................  219

                               ________


                               ----------
                         U.S. GOVERNMENT PRINTING OFFICE 

82-627 PDF                       WASHINGTON : 2013 




                        COMMITTEE ON APPROPRIATIONS

                    HAROLD ROGERS, Kentucky, Chairman

 C. W. BILL YOUNG, Florida \1\        NITA M. LOWEY, New York
 FRANK R. WOLF, Virginia              MARCY KAPTUR, Ohio
 JACK KINGSTON, Georgia               PETER J. VISCLOSKY, Indiana
 RODNEY P. FRELINGHUYSEN, New Jersey  JOSE E. SERRANO, New York
 TOM LATHAM, Iowa                     ROSA L. DeLAURO, Connecticut
 ROBERT B. ADERHOLT, Alabama          JAMES P. MORAN, Virginia
 KAY GRANGER, Texas                   ED PASTOR, Arizona
 MICHAEL K. SIMPSON, Idaho            DAVID E. PRICE, North Carolina
 JOHN ABNEY CULBERSON, Texas          LUCILLE ROYBAL-ALLARD, California
 ANDER CRENSHAW, Florida              SAM FARR, California
 JOHN R. CARTER, Texas                CHAKA FATTAH, Pennsylvania
 RODNEY ALEXANDER, Louisiana          SANFORD D. BISHOP, Jr., Georgia
 KEN CALVERT, California              BARBARA LEE, California
 JO BONNER, Alabama                   ADAM B. SCHIFF, California
 TOM COLE, Oklahoma                   MICHAEL M. HONDA, California
 MARIO DIAZ-BALART, Florida           BETTY McCOLLUM, Minnesota
 CHARLES W. DENT, Pennsylvania        TIM RYAN, Ohio
 TOM GRAVES, Georgia                  DEBBIE WASSERMAN SCHULTZ, Florida
 KEVIN YODER, Kansas                  HENRY CUELLAR, Texas
 STEVE WOMACK, Arkansas               CHELLIE PINGREE, Maine
 ALAN NUNNELEE, Mississippi           MIKE QUIGLEY, Illinois
 JEFF FORTENBERRY, Nebraska           WILLIAM L. OWENS, New York
 THOMAS J. ROONEY, Florida
 CHARLES J. FLEISCHMANN, Tennessee
 JAIME HERRERA BEUTLER, Washington
 DAVID P. JOYCE, Ohio
 DAVID G. VALADAO, California
 ANDY HARRIS, Maryland
   
 ----------
 1}}Chairman Emeritus    

               William E. Smith, Clerk and Staff Director

                                  (ii)


   FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR 2014

                              ----------                              

                                            Tuesday, March 5, 2013.

    OFFICE OF THE TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION

                                WITNESS

HON. J. RUSSELL GEORGE, TREASURY INSPECTOR GENERAL FOR TAX 
    ADMINISTRATION
    Mr. Crenshaw. This is the first meeting of the Financial 
Services and General Government Subcommittee of this year's 
Congress, and we have a lot of work to do. I served on this 
Subcommittee in the 111th Congress, and, at the time, Mr. 
Serrano was the chairman. We have some new members, and I am 
glad to be back, and I am honored to be asked to be the chair 
of this important Subcommittee. So I want to welcome Mr. 
Quigley, who is a new member. I think Ms. Kaptur is a new 
member as is Ms. Herrera-Beutler. And we have got returning 
members Mr. Bonner, Mr. Diaz-Balart, Mr. Graves, Mr. Yoder, Mr. 
Womack, and Mr. Pastor.
    One of the things that we will do as we begin is finish up 
some of the work we have got to do for the 2013 Appropriations 
Bill. As you all know, we got a lot of challenges as we start 
2014 as appropriators, and I think most of us recognize that a 
continuing resolution is probably not the best way to run the 
railroad. But that is where we are. In the last session of 
Congress, we had to deal with 2011-2012, and if you all will 
remember, we actually reduced spending by $95 billion, which 
has not been done in about 50 years. By 2013, because the 
Senate did not pass any of their bills through the Senate 
floor, we have not finished our work for 2013. And, as you 
know, on March the 27th, the continuing resolution runs out, 
and hopefully later this week, at least on the House side, we 
will try to provide for the funding for the rest of this year. 
And I hope that we get back to regular order.
    It is also compounded this year by the fact that the 
sequester kicked in last Friday, and $85 billion was taken out 
of the 2013 spending bill. I think as appropriators, number 
one, we would rather see the appropriation process work, where 
you have hearings like this and where we conduct oversight, 
where we mark up bills, take them to full committee, have 
amendments, go to the House floor under an open rule, and see 
legislation passed, and then conference with the Senate. That 
is the right way to run the railroad, and I think when you are 
talking about making cuts, the sequester is not a very good way 
to do that when you just have across-the-board kind of meat-ax-
type approach. I think we would all agree that it is better to 
conduct our business like we do. Sometimes we spend more money 
on important programs and we spend less money on less important 
programs, and that is the right way to do it. But that is where 
we find ourselves. And in 2014, it is compounded by the fact or 
complicated by the fact that we do not have a budget from the 
administration yet, so we hope that we will get that sooner 
than later.
    But I thought rather than just sitting around waiting, that 
we would have some hearings and have Inspector Generals come in 
and talk to us about things. We will hear from the Judiciary, 
because they are not under the oversight of OMB. And then, when 
we get the budget from the White House, we will have hearings 
with some of the agencies, as time permits. So that is where we 
find ourselves.
    Just a couple of housekeeping comments for you all. We are 
going to try to start on time. I would like to observe the 
five-minute rule, where everybody can ask questions and make 
comments, but keep those to about five minutes, so everybody 
will have a chance to ask questions. I am sure we will have 
time to go around the room and have more than one series of 
questions, but let's work on that. Also, our witnesses, we 
encourage them to keep their comments short and sweet so that 
we can all do the things we need to do. It is my intention to 
recognize people in the order in which they arrived, who was 
here when the meeting started. We will go back and forth based 
on seniority, and when people straggle in late, we will 
recognize them based on when they arrived. So that is kind of 
where we are now.
    Before we hear from our witness today, I would like to 
recognize Mr. Serrano, and by the way, a special welcome to 
him, because he has been either the chairman or the ranking 
member of this Subcommittee ever since it was first started. 
And so that means either it is a young Subcommittee or an old 
guy. Mr. Serrano.
    Mr. Serrano. Thank you, Mr. Chairman. Let me first do 
something totally, somewhat out of order, and that is to 
congratulate you on your chairmanship. I know you banged the 
gavel once but that did not count.
    Mr. Crenshaw. Okay, I will again.
    Mr. Serrano. Now it counts. And I know how exciting it is 
to be a cardinal, especially this week. You should be in Rome, 
seeing what you can do. I was a cardinal; I am now an 
archbishop, I guess, or a bishop. This Subcommittee, under your 
leadership, can accomplish great things because it is a 
Subcommittee where, when you look at the budget and the 
allocation, it may not be as large as other committees, but oh, 
my God, does it have issues to deal with. And it is through 
this Subcommittee that people that support certain programs and 
others oppose those same programs can move to work on those. 
Many people do not identify, for instance, Obamacare with a 
Subcommittee, as it is here where some folks have tried, and I 
am sure may try in the future to defund it, if you will. We 
oversee the District of Columbia, and it is there where people 
deal with a lot of social issues, rather than deal with just 
our role. And, for me, that has always been a very, somewhat a 
touchy, if not, at times, an emotional issue, because I was 
born in an American territory and I probably was the first 
chairman of a committee who said I wanted to give up power; I 
did not want to have more power over the seat, I wanted to have 
less, to where some of my colleagues said, ``No, that is not 
how politics is.'' But I lived with it well.
    But I want to congratulate you. I know that you are a 
serious member of Congress; the years that you have been on the 
committee you have served well, and I know that with very 
little effort, you and I can be good partners. And I totally 
agree with you that what is missing from the appropriations 
process is regular order. I have no problems with having a bill 
come on the floor; I do not have a problem if it takes seven 
days to do that bill as long as it gets done. In fact, I was a 
Democrat that always opposed when Democrats would agree on a 
rule, then say we are going to debate this appropriations bill 
for five hours, and then would ask unanimous consent to bring 
it down to an hour. I would say, ``No, what is wrong with just 
debating and debating and debating? That is what democracy is 
about and that is what makes us different.'' And so we may 
disagree but we do not have to be disagreeable, and you have my 
support as your ranking member.
    Mr. Crenshaw. Well, thank you very much. And by the way, I 
know there are a lot of controversial issues that we will face, 
but when I was chairman of the legislative branch subcommittee, 
I reduced the office accounts for all the members.
    Mr. Serrano. You became very unpopular.
    Mr. Crenshaw. That is right. So I can handle all this 
stuff. And I know that we are not going to agree on all the 
issues that face us, but one thing I know for sure is that we 
are going to respect the witnesses, respect each other, and 
hear from everybody. So today we are pleased to have Treasury 
Inspector General for Tax Administration, Russell George. He is 
going to share his observations about the economy and the 
efficiency of the IRS. I want to welcome him and let you all 
know that the IRS is the largest Treasury bureau, and TIGTA is 
the largest of the three Treasury Inspector Generals, so we 
look to you for some wise counsel. I would like to recognize 
you to make an opening statement; you can maybe limit those 
remarks, but certainly feel free to submit anything you would 
like for the record. So the floor is yours.
    Mr. George. Thank you, Mr. Chairman. I appreciate the 
invitation to be here. Chairman Crenshaw, Ranking Member 
Serrano, members of the Subcommittee, once again, thank you for 
the opportunity to provide my views on the Department of the 
Treasury and Internal Revenue Service as it administers the tax 
code. As you noted, the Treasury Inspector General for Tax 
Administration, which is commonly known as TIGTA, provides 
oversight of the nation's system of tax administration, and as 
I reported last year, the IRS faces a significant number of 
challenges in its efforts to administer the code.
    Once again, the Tax Gap, the difference between the amount 
that the taxpayer is estimated to owe and what they voluntarily 
and timely pay in a tax year, remains a serious challenge for 
the IRS.
    Despite an estimated voluntary compliance rate of 83 
percent, the most recent IRS assessment is that the gross Tax 
Gap equates to approximately $450 billion each year.
    Every year, more than one half of all taxpayers pay someone 
else to prepare their Federal tax returns. During the 2012 
filing season, the IRS processed approximately 70 million 
individual Federal income tax returns which were completed by 
paid tax return preparers. Given the importance of paid 
preparers to the tax system, the IRS began implementing reforms 
to improve oversight of the return preparer community. However, 
as you may be aware, most of these changes have been put on 
hold by a Federal district court ruling.
    Furthermore, I remain very concerned about the amount of 
fraudulent refunds associated with identity theft, and the 
IRS's effectiveness in providing assistance to victims of 
identity theft. The inadequate processes used by the Service in 
this area are quite troubling. Despite making some progress on 
the issue, the IRS is still challenged in detecting and 
preventing identity theft. As TIGTA previously noted, the IRS 
could issue approximately $20 billion in fraudulent income tax 
refunds over the next five years.
    IRS-administered refundable tax credits remain vulnerable 
to noncompliance, including incorrect or erroneous claims 
caused by taxpayer error or resulting from fraud. Repeated 
reviews of these credits concluded that the IRS does not have 
effective processes to ensure that claimants qualify for these 
credits. In fact, the IRS estimates that it has made over $100 
billion in improper payments over the last 10 years on many of 
these credits.
    As I also reported last year, demand for taxpayer 
assistance continues to rise while resources have decreased, 
thereby affecting the quality of customer service the IRS is 
able to provide. While the IRS does provide various options for 
taxpayers seeking assistance, most still rely on the telephone 
to contact the Service. With any increase in calls, there is a 
corresponding increase in the delay of reaching an IRS 
representative, and, ultimately, getting the help the taxpayer 
needs. Each year, more taxpayers also seek assistance from one 
of the IRS's 397 walk-in offices known as Taxpayer Assistance 
Centers. The IRS assisted almost 7 million taxpayers in Fiscal 
Year 2012; however, the IRS plans to help 15 percent fewer 
taxpayers at these centers in the current fiscal year due to 
resource concerns.
    Lastly, the Affordable Care Act contains an extensive array 
of tax law changes that will present many challenges for the 
IRS. These include incentives and tax credits to individuals 
and business to offset health care expenses. They also impose 
new taxes and penalties administered through the tax code. In 
June of 2012, my office issued a review that concluded that the 
IRS had appropriate plans to effectuate tax-related provisions 
of the health care law. We will continue to closely monitor the 
IRS's actions to implement this legislation. The IRS estimates 
that at least 50 provisions will either add to or amend the tax 
code, and at least eight will require it to build entirely new 
processes that do not currently exist within the tax 
administration system.
    Chairman Crenshaw, Ranking Member Serrano, members of the 
Subcommittee, thank you for the opportunity to share my views. 
I look forward to your questions.
    [The information follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
                             SEQUESTRATION

    Mr. Crenshaw. Well, thank you very much for those comments. 
Let me start by asking a question that is probably on 
everybody's mind, and that has to do with the sequester. I 
mentioned earlier in my opening statement that from 2010-2012, 
we actually reduced discretionary spending by $95 billion. And 
as we all know, there was a special committee set up to find 
some additional savings in discretionary spending. That did not 
happen, so we find ourselves in this sequester mode. And, 
again, I think we all agree that is not the best way to try to 
cut spending, if indeed that is what our goal is. And so my 
question to you, initially, is, tell us the impact the 
sequester is having on your operations and on the operations of 
the IRS. And maybe the second part of that is, which I think is 
very important, do you think that the fact that you are having 
to live with sequestration, is that motivating the IRS managers 
to find more efficient ways to do their jobs? So if you could 
comment on those two things, please.
    Mr. George. Thank you, Mr. Chairman, I certainly will. Let 
me start with TIGTA. Like most Federal agencies in government, 
a vast majority of our resources, our appropriations, is 
dedicated to the realm of human capital. To be precise, over 80 
percent of the appropriations that we receive, roughly $150 
million a year, again, is for payroll, for pensions and 
benefits, and the like. And that is the historic trend, for the 
most part, throughout Government. I need to note that TIGTA, 
when it first stood up as an independent office of Inspector 
General in 1999, after they passed it through the Reform Act in 
1998, we had approximately 1,100 full-time equivalent, or FTEs, 
in government-speak. We are now under 800; we are in the 700 
level, so over a 20 percent decrease. And believe me, the 
workload has followed respectively in terms of that.
    That said, what we are able to do is find savings where 
possible; meaning we have eliminated many of the contracts that 
we had, some of which, I have to say, are very hard to tolerate 
for me. I mean, we have a mission, unlike any other Inspector 
General in the entire Federal Government, in that we have to 
protect the integrity of the Nation's system of tax 
administration, and by integrity, it also includes security. So 
if someone is threatening an IRS employee or an employee of 
TIGTA, we literally have a nationwide jurisdiction to identify 
the threat and to help eliminate that threat, which requires 
travel, which requires people to be in remote parts of the 
country, which, again, with just 800 people, and with about 
approximately the high 300s who are law enforcement types, we 
are stretched for resources in that regard. But we, 
nonetheless, still have cut travel significantly; we have 
imposed a strict hiring freeze. The irony is, when I talk about 
the need for additional employees, we are coming upon that wave 
that is affecting all of Government with retirees. And these 
are retirees with significant skills, both in terms of tax 
administration and criminal law enforcement types of 
activities. And it really does not help us conduct our mission 
if these experienced people leave and there are no individuals 
to take their place.
    So that's a lot to talk about in terms of TIGTA. Now 
imagine the Internal Revenue Service facing very similar 
situations. While I have not seen the IRS's sequestration plan, 
the acting commissioner, Steven Miller, did issue a memorandum 
last week to all IRS employees in which he outlined the steps 
that the IRS plans to take to address sequestration. And among 
the items that he noted were hiring freezes, reduced funding 
for grants and other expenditures, and cuts in cost areas, such 
as training, travel, facilities, and supplies. Now, the one 
thing that he has stated directly is that IRS employees will be 
requested to take approximately five to seven furlough days 
beginning sometime after the filing season. And, by the filing 
season, he is referring to the April 15 deadline. As all of you 
know, that is not truly the end of the filing season; it is for 
individual tax returns, unless you received an extension to 
file your return. But, as you know, the tax filing season is a 
year-round process, as it relates to corporations and, again, 
individuals in certain circumstances.
    Mr. Crenshaw. It sounds like, for you, it helps motivate 
you to do things more efficiently. I mean, it is tough. Would 
you say that is true, and you would say that is true as best 
you can tell when the IRS, if you are going to have to live 
with that, then you are just forced to find more ways to be 
more and more efficient; is that a true statement?
    Mr. George. It is a true statement, sir, but it does not 
reflect the fact that, and I did not want to outline this or 
advertise it for people who might engage in some mischief, but 
we are about to eliminate our contract for security guards at 
our facilities. And so my difficult choice is: Do I get rid of 
somebody who could potentially thwart off a threat to us, or do 
I harm long-term employees, some of whom do live paycheck-by-
paycheck and who are dedicated, and, again, whose mission is so 
closely aligned to that of the overall goal of securing the 
system of tax administration? But it is a choice we had to 
make, and so we are going to get rid of our security guards. I 
would not advocate doing that in a normal set of circumstances, 
but, obviously, we are in unusual times.
    Mr. Crenshaw. I got you. Mr. Serrano.
    Mr. Serrano. Thank you, Mr. Chairman, and thank you, sir, 
for your service and for coming before us three years in a row, 
right?
    Mr. George. I think more than that.

                             IRS RESOURCES

    Mr. Serrano. I think we are doing things right, either that 
or we force you to come, I do not know how that works. Let me 
ask you a question. Given the cuts of the IRS budget for the 
last two years, compounded by sequestration, do you have 
confidence that the IRS can tackle the many challenges it 
faces? Can they implement your recommendations, or are we just 
treading water here?
    Mr. George. Well, I have to, just at the outset, point out 
that, obviously, the IRS is in the best position to respond to 
that question. From the body of work that we have done, I start 
out with the statement and the proposition that the IRS, like 
other Federal agencies in this circumstance, it is a zero sum 
game. They have a charge that they acknowledge and that all of 
you and all of us acknowledge they have to meet: administer the 
Nation's tax code. They were given additional responsibilities 
under the ACA, and their attitude, in discussions that I have 
had, is ``We are going to do what the law requires us to do.''
    Now, that said, given the limited resources and the fact 
that they are not receiving additional resources any longer to 
implement, for example, the ACA, they will have to decide what 
areas need to be sacrificed. So will it be customer service? 
Will it be enforcement? They are very difficult choices that 
they will have to make, and I know that they will make those. 
Now, what will the outcome be? Longer lines at Taxpayer 
Assistance Centers? Longer hold times on the telephone by those 
seeking assistance from people who can help taxpayers comply 
with their tax obligations by answering questions? So there are 
a motley of negative outcomes as a result of that.
    Mr. Serrano. Right. Based on that comment, let me go back. 
We realize, both the chairman and I, that these questions are 
better answered by the agency themselves, but you have 
knowledge of its functions and what goes on, and so the purpose 
of this hearing is also not only to find out about your 
particular agency, but how the IRS will be affected. And piggy-
back on that, we realize that the IRS may be the only agency 
that Americans deal with on a regular basis at least once a 
year. And so based on what you started to speak about, what 
else can citizens expect to be missing because of sequestration 
and these continued budget cuts?
    Mr. George. Well, again, I have to repeat myself because it 
is key, Mr. Serrano. My view is that most people understand 
that they have an obligation as citizens, as good citizens of 
this Nation, to pay the taxes that they owe, and are willing to 
do so if they can. And by saying ``if they can,'' if they are 
in that position where they have to file tax returns on their 
own, it is a complicated process. For example, those who have 
to determine what the cost basis is of a share of stock and 
whether it is an individual company or whether it is a mutual 
fund, that can become very complicated. And so while Congress 
did pass legislation which, you know, forward is requiring 
stock brokerages and the like to help provide that number, the 
cost basis, it is not retrospective to the extent that it would 
be able to help taxpayers. So if someone has to call the IRS to 
inquire as to how to determine this, it is going to take quite 
a while.
    I mean, years ago the IRS was even requesting that people 
leave their number and name and would call them back, and they 
committed to do so at least within a day. I would guess that 
that would take a lot longer. And if someone is determined to 
get their tax return in by a certain date because they feel 
they want to get their refund, are they going to take 
shortcuts? That is a possibility. Are they going to make sure 
they are 100 percent accurate in the amount of income that they 
report or, again, how they compute certain tax obligations? I 
certainly hope so, but human nature being what it is, who 
knows?
    Mr. Serrano. Thank you, Mr. George.
    Mr. Crenshaw. Mr. Bonner.
    Mr. Bonner. Thank you, Mr. Chairman. Mr. George, good to 
see you again.
    Mr. George. Likewise.

                       IRS SEQUESTRATION PLANNING

    Mr. Bonner. You may have this in your statement that I have 
just not discovered yet, but from where you sit, when do you 
think the IRS began preparing for sequestration?
    Mr. George. I have no idea, Mr. Bonner. I do not know the 
answer to that question. I know that in the case of TIGTA, when 
this was first discussed in 2011, there was some discussion as 
to what would happen if this occurred. And candidly, we did not 
anticipate that this would occur, and we were not given 
direction from OMB and the Department on how to proceed. We did 
not know what the percentages would be and the like. So a lot 
of this really did not occur until, relatively, the last 
minute.
    Mr. Bonner. The reason I ask, I do not think you are alone; 
I think several Federal agencies have indicated that, even 
going back to the last Presidential debate, the President said 
that Sequestration would not take effect. And, of course, it 
is. He signed it into law, and we are now into the first full 
week of it. And so I was not trying to throw you a curve ball 
in terms of you speaking for the agency; I know that you do not 
do that. But I was just wondering from your perspective as the 
Inspector General, if you think that the Service has been 
preparing for what we now find ourselves.
    Mr. George. You know, in many respects, what an IG does 
throughout government, and myself included, a lot of times that 
is retrospective. It is a look back. So I am sure that I will 
be able to answer your question the next time I am before you. 
Or the moment we have some information on that, we could supply 
it to the committee and to you.
    [The information follows:]

                         Sequestration Planning

    According to IRS officials, the IRS has been preparing to operate 
at reduced funding levels since 2011, based on the reduced budget for 
FY 2012, the FY 2013 continuing resolution, and the sequester.

                             CYBER SECURITY

    Mr. Bonner. I am going to shift gears now. Recent news 
reports have detailed the extensive penetration by advanced and 
potentially state-sponsored cyber espionage threats against 
American businesses and government agencies. Obviously, the tax 
and financial information of American businesses and 
individuals would be highly valuable to cyber criminals and 
other hackers. Can you give us any perspective in terms of what 
the IRS is doing to protect its systems, and perhaps more 
importantly, the financial data, personal data of the American 
people from cyber espionage and hacking by criminals and 
foreign threats.
    Mr. George. Thank you, Mr. Bonner, very important question, 
very timely. Fortunately, I am in a position to say that we 
have not uncovered any incidents of infiltration or hacking by 
foreign entities. Again, I cannot give you a definitive 
statement because of the sophisticated nature that many of 
these foreign countries who have, ill intent engage in, but 
again, our work thus far, and we do look at this, has not 
indicated that that has been the case.
    Now, what is very important to point out is that many times 
a threat is not necessarily an external threat. In some 
instances, it is an internal threat. And while it is not 
widespread, there are still bad actors within the IRS who may 
access information, not necessarily on a wide-scale basis, but 
people who are having domestic issues or are doing things for 
friends, or for remuneration. The IRS needs to be on the look-
out for that. That does occur. There are mechanisms in place to 
try to locate them, but, again, with limited resources, the 
extent to which that is complete, it varies.

                     BUSINESS SYSTEMS MODERNIZATION

    Mr. Bonner. Let me try to get another question, and, again, 
shifting even more, but going back to testimony that you gave 
to the Subcommittee in 2011 about the slow pace of business 
systems modernization at the IRS. I believe in your testimony 
this year you mentioned that the modernization could help close 
the tax gap by facilitating the examination process and 
expediting tax payer contact. Between 2011 and today, in your 
view, has the IRS addressed the concerns you had that you 
raised then with business systems modernization from your past 
testimony?
    Mr. George. I am pleased to report, Mr. Bonner, that the 
IRS has made significant progress in the area of business 
systems modernization. There are a number of benchmarks that we 
have been able to certify to show that the IRS has achieved 
those, and to add to that, the General Accountability Office 
even noted the progress the IRS has made in this area by 
eliminating it as a high-risk area, and the Department overall 
has noted this by removing this as a material weakness on the 
part of the Internal Revenue Service.
    Is it perfect? No. You may recall that recently the IRS 
requested that taxpayers stop going to the ``Where's My 
Refund'' link on the irs.gov website because it was being 
overwhelmed by people visiting that. And there are a couple of 
other areas which are minor in the big picture, but if you want 
to know where your refund is, I think that is an important 
factor. And, actually, I want to know where mine is, and I do 
not know where it stands.
    Mr. Bonner. It is troubling when the Inspector General does 
not know where his stands. Makes you feel all good. Thank you, 
Mr. Chairman.
    Mr. Crenshaw. Thank you. Mr. Quigley.

                      MEASURES TO INCREASE REVENUE

    Mr. Quigley. Thank you, Mr. Chairman. Good morning, Mr. 
George. Thank you for your service. Could you respond a little 
more to the GAO report about the IRS ability to boost its 
revenues through a couple different means? They highlighted 
two, particularly shifting from fewer field exams to more 
correspondence exams, and shifting over to resources of more 
productive groups than they do currently. The Chairman 
discussed the issues of the IRS being forced to be more 
efficient. What is your sense of the GAO report in this vein?
    Mr. George. While I am not well versed in what the IRS 
reported that you are quoting from, Mr. Quigley, I can say, in 
general, the IRS, again, with limited resources, has to 
determine where they get the biggest bang for the buck, and at 
the same time, they have to ensure that they are fair to all 
taxpayers. So, for example, as I pointed out in my oral 
testimony as well as in my written testimony, tax credits, 
refundable tax credits, are being abused at a rate that many 
view unacceptable, and the IRS believes that is the case. Is it 
relatively easy to identify people who are taking those credits 
inappropriately? Yes. Is this a longstanding problem? Yes. But 
when you look at a cost-benefit analysis, many times these 
credits are in the low 2000s. Now, there are examples where 
people have abused the system and it is much greater than that, 
but in general, it is a relatively low figure that people 
inappropriately request these refunds.
    However, is it the cost benefit of the IRS expending a lot 
of resources going after these small amounts as opposed to 
spending additional resources going after the big picture, 
meaning corporations and other, large tax-paying individuals 
and entities that would require much more resources for the IRS 
to determine the nature of the method being employed by that 
particular entity or person to avoid their tax obligation. If 
it will help stem further activity by people, in effect as a 
deterrent, so you make an example of a tax entity or person, 
payer, who is cheating the Government of hundreds of thousands 
of dollars, if not more, that is a determination that they have 
to make.
    But the bottom line is, throughout this entire realm, 
where, as I said at the outset, they have to determine what 
enforcement mechanisms that they are going to employ versus 
what customer service that they are going to employ versus 
implementing new processes a la the ACA, these are very 
difficult choices that they have to make, and I know that they 
are in the process of determining those.
    How it is that they go about determining who to audit and 
who not to, that is a very, and I hate to use the word, but it 
is a very secret process. There is something called the DIF, D-
I-F, and it is a method that the Internal Revenue Service 
employs to determine who most likely is cheating on their 
taxes. They will not share with me or with many people how it 
is that they make that determination. We have, overall, 
reviewed whether or not these selections are accurate; have not 
found problems with that without having all the inside 
information as to exactly how it is done.
    Mr. Quigley. Must have shared some of this with the GAO.
    Mr. George. I am sure they did but, again, I do not have 
access to their internal information.
    Mr. Quigley. Mr. Chairman, I assume I am out of time, will 
come back. Thank you.
    Mr. Crenshaw. Thank you. Mr. Graves.
    Mr. Graves. Mr. Womack might have been here before I was, 
if you want me to yield to him.
    Mr. Crenshaw. Were you here when the meeting started?
    Mr. Graves. Yes, sir.
    Mr. Crenshaw. Then you are senior to Mr. Womack.
    Mr. Graves. I understand the rules now. I tried, Mr. 
Womack. Mr. George, thank you for being here.
    Mr. George. Thank you, sir.
    Mr. Graves. I want to go back to what Mr. Quigley was 
talking about.
    Mr. Crenshaw. Mr. Graves, if Mr. Womack has to leave and 
you want to ask.
    Mr. Graves. I would be happy to yield to him.

                                  ACA

    Mr. Womack. Thank you, Mr. Chairman. I just had a couple of 
quick questions, and you spoke to it just a minute ago with Mr. 
Quigley. We have piled a lot of duty on top of the IRS. In 
looking at your expanded remarks, things like tax gap and 
identity theft, and so on and so forth, and then we add the 
Affordable Care Act to this mix; are these issues going to get 
broader? I mean, we obviously have some pretty serious issues, 
and we do not have the resources to accomplish the things that 
we are already asking the Internal Revenue Service to do. And 
even though this may be a question more appropriate to the 
acting commissioner, in your professional opinion, with the 
additional burden of the Affordable Care Act, notwithstanding 
the number of people that will be employed to help administer, 
are we going to be sitting here a couple of years later asking 
why these issues have gotten worse not better?
    Mr. George. Yes, is the short answer. There is no question 
about that. Fortunately for the IRS, the ACA is being phased in 
over the course of many years, with, of course, this year being 
one of the first years of which it really kicks in. But it is 
unprecedented in recent history the amount of responsibility 
that the IRS is being given in an area that most people do not 
anticipate as an IRS tax-related function. Most people assume 
this is HHS's area of responsibility, and it is a huge HHS area 
of responsibility, but the tax implications are substantial.
    Most Americans do not realize this yet, and once they do 
and once the requirements kick in, in terms of determining 
whether or not you are to receive a penalty because you failed 
to acquire health insurance, and then, ultimately, the 
possibility of having tax refunds offset as a result of the 
penalty that will need to be paid, this is something that the 
IRS is going to have to be able to address in a very simple way 
so that Americans understand what is going on. But, as I 
pointed out earlier, because of the interrelationship with all 
of this they are most likely going to start calling that 1-800 
IRS number, or going to that website, and if you have limited 
people answering the phone calls and/or the website is 
overwhelmed, this is going to lead to problems, sir.

                               TAX REFORM

    Mr. Womack. I wholeheartedly agree. My next question is, 
there has been a lot of talk about tax reform. In your 
professional opinion, if we were to be successful in tax 
reform, both corporate and individual, or either/or, in your 
professional opinion, what impact would that have on, 
particularly, the tax gap, which I know was the IRS's number 
one concern.
    Mr. George. Let me preface my response by saying that the 
Secretary, and this actually has been every secretary since the 
Reagan Administration, has delegated tax policy to the 
Assistant Secretary for Tax Policy, and has indicated that it 
is that individual who is the only person who can proffer an 
opinion on tax policy. But given my responsibility to report to 
Congress under the Inspector General Act I can say this, and 
that is that if you make it as simple as possible for people to 
meet their tax obligations, the vast majority will do so, Mr. 
Womack. And so how that goes about, obviously, is within the 
jurisdiction of the Congress. But there is no question that tax 
simplicity would, I think, help people comply, would encourage 
people to comply more with their obligation, and, ultimately, 
would reduce the Tax Gap.
    Mr. Womack. Would it be a small improvement, a medium 
improvement, or a large improvement? Your professional opinion 
only.
    Mr. George. Yes, no, no, because this touches on something 
that, again, I have shared with Mr. Crenshaw and I believe with 
this committee last time I was before it, but it is so relevant 
to what you are saying, and it answers your question. The issue 
that is addressed in this little handout of mine is about 
third-party reporting, and I am just going to cut right to the 
chase here. The IRS estimates that individuals whose wages are 
subject to withholding report 99 percent of their wages for tax 
purposes, and at the opposite end of the spectrum, while this 
particular statistic is somewhat dated, but it is the most 
recent that we have, self-employed individuals who operate 
businesses on a cash-only basis report just 19 percent of their 
income for tax purposes. So if what Congress considers would 
help address the issue of who is reporting income, I think it 
would significantly help in the terms of addressing the Tax 
Gap, sir.
    Mr. Womack. Thank you for your comments. Mr. Chairman, I 
yield back.
    Mr. Crenshaw. Thank you. Mr. Graves.

                             ACA: NEW TAXES

    Mr. Graves. Thank you, Mr. Chairman, Mr. George. Two lines 
of thinking, but first just going back to the implementation of 
the President's health care law, how many taxes have phased in 
since its implementation?
    Mr. George. Sir, I have that information, and I beg your 
indulgence.
    Mr. Graves. These are all new taxes?
    Mr. George. Yes, and I would like to be as precise as 
possible and then also offer to provide a much more detailed 
answer for the record. Thank you, okay, yeah. The ACA contains 
$438 billion of revenue provisions in the form of new taxes and 
fees which extend from Fiscal Year 2010 to Fiscal Year 2019. 
Seventeen revenue provisions equate to over $409 billion, and 
then there are eight other provisions which add up to $25 
billion, roughly $26 billion dollars, which include the 
adoption credit and the fee imposed on insured and self-insured 
health plans.
    [The information follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Mr. Graves. So these are all new taxes which the American 
people have not been charged. So, a total of, you were giving 
dollars there, but probably 21 new?
    Mr. George. Yes, if not more. I mean, you have the excise 
tax on tanning, indoor tanning, the excise tax on medical 
devices, the net investment income tax, an additional Medicare 
tax, among many others.
    Mr. Graves. Right, a lot of different, a wide variety. And 
what income brackets do you suppose these new taxes impact? Is 
it about 2 percent or is it everyone?
    Mr. George. I do not have the answer to that. We do not 
have the answer to that, but we will get it for the record, Mr. 
Graves.
    [The information follows:]

            Tax Brackets Impacted by the ACA Tax Provisions

    This information is not available and cannot be determined until 
each tax becomes effective and tax returns associated with the tax have 
been filed and processed.

                        ACA: TANNING EXCISE TAX

    Mr. Graves. Okay. So you brought up tanning bed tax.
    Mr. George. Yes.
    Mr. Graves. I would suggest that a wide variety of income 
brackets use tanning beds, would you not?
    Mr. George. Yes.
    Mr. Graves. Outside of the top 2 percent, I would imagine. 
We heard about tax reform momentarily a minute ago from Mr. 
Womack, and tax reform is all about eliminating winners and 
losers. Tanning bed tax is somewhat picking winners and losers. 
The sun is not taxed; that is the winner in all of this, right? 
But tanning beds now are taxed. A report was given to Chairman 
Emerson, I guess it was last year, because it was the very 
first tax, a 10 percent excise tax, and it shows that over the 
seven quarters in which the tax was collected, the tax is 
actually diminishing, the filers are diminishing over time, 
and, in fact, the actual tax collection is about a third of 
what was estimated, which, I guess, that brings up a whole 
other topic for another day. But in your explanation, are 
people just not reporting or are they just not able to report 
anymore?
    Mr. George. It is more the former, because we conducted 
that review, Mr. Graves, and we found that the IRS did not do a 
very good job in explaining to people who were subject to that, 
meaning the tanning businesses, on what the tax, what the law 
requires on how to go about doing it, complying with it. And, 
in addition, enforcement following up on this is something that 
was lacking.
    Mr. Graves. But each and every quarter the number of filers 
declined over time, and if I am not mistaken, in Georgia, it is 
estimated about 15 percent of operators of tanning beds have 
closed their business since implementation of that this tax. So 
is it not possible that the fewer filers are a result of fewer 
business owners today?
    Mr. George. I was unaware of that figure, so I am not sure.
    Mr. Graves. But it is possible.
    Mr. George. That is a possibility, most definitely.
    Mr. Graves. You are not insinuating that people are not 
filing any more. I mean, I guess the IRS has been asking for 
more money, they have been getting it, but filing has decreased 
over time. So it is possible that the filers just do not exist 
any longer.
    Mr. George. That is a possibility, sir, yes.
    Mr. Graves. Thank you, Mr. Chairman.
    Mr. Crenshaw. Thank you. Mr. Yoder.

                          PROGRAM EFFICIENCIES

    Mr. Yoder. Thank you, Mr. Chairman. Sir, I appreciate you 
being here today. I have listened closely to the questions of 
my colleagues. I wanted to follow up on a couple of items. 
There has been some discussion of the enforcement issues 
related to audits and noncompliant taxpayers, and the old 
notion that has been spun in Washington and even in State 
capitals is the idea that the more money you spend on your 
local Department of Revenue or the IRS the more revenue comes 
into the Federal Government or State government, and that, 
essentially, I have had folks argue that it is an investment by 
spending money in the IRS.
    And I guess I would like to question you on that 
conventional wisdom that has permeated this town for 
generations. I noted on Page 10 you went through some extensive 
discussion here about the ineffectiveness of some of the audits 
that are occurring, which would sort of throw cold water on the 
notion that spending money in this regard actually brings more 
money into the Federal Government. You noted that, The IRS is 
spending a significant amount of resources on unproductive 
audits and compliant taxpayers are unnecessarily burdened by 
audits.
    You also then note in the previous paragraph that the IRS 
identified and confirmed identity thieves approximately 1.5 
million in undetected tax returns with potentially fraudulent 
tax returns total in excess of $5.2 billion. So, your analysis 
here to me speaks less about needing additional resources and 
more about the processes that are used internally to find 
delinquent taxpayers, or fraudulent taxpayers.
    Mr. George. I do not disagree with a single word that you 
said, sir. It is somewhat complicated. If the question were, 
and it was not, but if it were what is the return on investment 
for every dollar given to the IRS versus the amount of revenue 
that they generate, the IRS estimates that their return on 
investment is roughly in the $4 to $1 range, and that is a 
rough estimate.
    Have we validated that number? No. Do we think it is 
completely, you know, off the wall? No. It sounds relatively 
close.
    Going back to the direct matter that you raised regarding 
the inappropriate refunds and the like: There is no question 
that when prisoners and when people are seeking and receiving 
refunds that, especially people serving for life are getting 
literally thousands of dollars in refunds, which is 
extraordinarily unlikely given the fact that if they do receive 
pay in prison it is nothing that would entitle them to that 
type of refund, or when you have children of the ages of five 
and six and seven seeking, and receiving, credits for 
supposedly purchasing their first home, and then you, and also 
parents receiving credits for children who are in grade school, 
and yet they are receiving credits for these children 
supposedly being in college, that is problematic. That is 
something that the IRS should definitely improve its processes 
to address. Again, from a deterrent point of view and in terms 
of the fact that they could do this relatively simply by asking 
more questions. In the case of the first time homebuyer's 
credit, it was a result of our work that we identified this 
massive problem and, to their credit, that the IRS implemented 
changes, but they did not even ask for paperwork to prove that 
a home was purchased. And so once we pointed that out and once 
the IRS made that change, the amount of fraud in that area 
almost evaporated rather quickly completely.

                         TIGTA RECOMMENDATIONS

    Mr. Yoder. Does your department have specific 
recommendations to the IRS to fix some of these problems? You 
pointed out the DIF system as maybe being one that is less 
effective and wasteful and burdensome on taxpayers. Is there an 
idea of how the IRS could, instead of asking for additional 
dollars in the appropriations process, figure out a way to use 
internal dollars and be more efficient with the processes they 
use and the enforcement mechanisms?
    Mr. George. The answer is yes. It has to be pointed out 
because I am sure when they are before this committee they will 
point this out, they do collect over $2 trillion in revenue 
every year, and yet we are talking, while it is a very large 
amount of money, it is not 10 percent of that.
    Mr. Yoder. I guess the most problematic point was where you 
just described they are spending a significant amount of 
resources, in your words, significant amount of resources on 
unproductive audits and compliant taxpayers are unnecessarily 
burdened by audits. I think that is the type of thing that 
drives people mad at home to know that we are wasting money on 
unproductive audits. And when we are talking about the 
sequester it falls on a lot of deaf ears when they understand 
that money is being wasted.
    Mr. George. Again, while this is best responded to by the 
IRS, they have to make determinations as to areas that they 
believe are best for, again, either the deterrent effect or 
that they can get the biggest bang for the buck, meaning, you 
know, for X number of dollars they can receive X amount in 
recovered monies.

                   ACA COMPLIANCE COSTS FOR TAXPAYERS

    Mr. Yoder. And if I might, Mr. Chairman, I had a follow up 
on the conversation you were having with Mr. Graves related to 
the burdens on taxpayers when we talk about tanning beds and 
different things that are being taxed and the impact of all 
that. Are there estimates and did you provide estimates on the 
estimated cost of these new things to taxpayers? I mean, we 
talk a lot about what is the cost to the IRS to enforce 
compliance. Do we have really good estimates on what the 
burdens will be on compliance for all of these entities as we 
implement the new health care act?
    Mr. George. I do not believe we do have that information, 
but we will double check, sir, and if so supply further 
records.
    [The information follows:]

                   ACA Compliance Costs on Taxpayers

    This information is not available.

    Mr. Yoder. I just think that is a lost conversation in this 
debate about the implementation of these acts. It is not just 
the cost on the government which is obviously sizeable and is 
impacting our ability to enforce other parts of the tax code 
and is going to cause complications for other portions, but 
what are the administrative costs on small businesses and 
individuals across this country, and can there be or do we have 
an effective analysis of what that unquantifiable cost is? Or 
unquantified cost is?
    Mr. George. Again, if we have that we will supply it for 
the record, sir.
    [The information follows:]

                   ACA Compliance Costs on Taxpayers

    This information is not available.

    Mr. Yoder. I appreciate it, sir. Thank you, Mr. Chairman.
    Mr. Crenshaw. Ms. Herrera Beutler.

                             IRS TV STUDIO

    Ms. Herrera Beutler. Thank you, Mr. Chairman. Let me 
rearrange this. You know, I am really interested, I heard a 
statistic, it was one of those fact of the week type things 
this last week about the IRS having a 24/7 television studio in 
their satellite TV studio that they operate and consequently 
that the EPA has a similar studio that they operate across the 
street. They do not share or coordinate, but it costs about $4 
million a year for the IRS, which I thought was kind of, you 
know, I am not going to say small money because it is not our 
money, but in the scheme of the grand federal budgets, but as I 
am looking through the achieving program efficiencies and cost 
savings section that you have here, I mean, you are noting $3 
million on reduction of nontechnical travel or $9 million in 
savings from increased electronic filing so $4 million is not a 
small amount and could be added to this. Is that actually true? 
They really do have said satellite studio?
    Mr. George. They have more than one studio for television 
and for audio types of messages, and I have to acknowledge that 
we at TIGTA once utilized it when we were trying to get a 
public service announcement done to warn people about phishing 
schemes, and these were activities by bad guys which targeted 
mainly the elderly and others.
    Ms. Herrera Beutler. With that, that is an important thing. 
That is something that we would want out there as consumers, as 
individuals, right? You want to know, and you are grateful when 
the IRS will take a step like that. Is that something that 
could be consolidated, perhaps? I mean, when we do PSAs as 
public officials they are free, the Broadcaster's Association 
likes it when we do them, so I would imagine there might be 
other ways to do this. Or is that such a needed function in the 
IRS that they need to have their own studio that they operate.
    Mr. George. Once again, while they are in the best position 
to respond as to whether or not they could use other facilities 
or, more importantly, because of the restrictions on tax 
information, whether others could use their facilities, there 
is no question, especially in times like these, where 
everything has to be determined, looked at and determined 
whether or not this is a good expenditure of taxpayer dollars, 
it is certainly something I am sure they could and would look 
at.

                        IRS WORKSTATION PROGRAM

    Ms. Herrera Beutler. In following up with that because you 
had some great findings here about other areas we could save 
money. One of them in your testimony you identified 
recommendations for shared workstation program for those who 
telecommute or telework. The audit report notes that the IRS 
negotiated a program with the Treasury Union to take effect in 
October of last year. Has that actually taken effect?
    Mr. George. I was told it has taken effect. So, yes.
    Ms. Herrera Beutler. Okay. Very good. Well, that is all I 
had. Thank you, Mr. Chairman.

                      MEASURES TO INCREASE REVENUE

    Mr. Crenshaw. Thank you. Well, I think we will have time, 
maybe, if other members have some more questions, for another 
round.
    People talked about the question of do we fully fund the 
IRS and there is always that question of the Tax Gap. If we 
gave the IRS more money, then do we get more money? In fact, I 
have got a report here from the National Taxpayer Advocate and 
it says some good things but one of the things it says was it 
says that the IRS is significantly underfunded. They go on to 
say that reducing the IRS's funding means reduced revenue 
collections and a larger deficit. But when you look at the 
facts, you say how can that be? Because we reduced the IRS 
budget, I guess from 2011 to 2012, by 2.5 percent, but revenues 
increased 6.3 percent. The deficit decreased by 16 percent and 
so, obviously, there are other variables than the amount of 
money that we spend on IRS. We have kind of pointed that out.
    Could you talk a little bit about some of the other 
variables that are certainly as important as the funding for 
the IRS, maybe even more so? What are some of those?
    Mr. George. In terms of the ways that they can relate.
    Mr. Crenshaw. In other words, could you talk about 
refundable tax credits or if you simplify the tax code? There 
are other things we could probably do rather than just spend 
more money in the IRS that maybe would make it easier to 
collect more revenue.
    Mr. George. It is, I think, a tool that would dramatically 
assist the Internal Revenue Service. It is more access to 
third-party information, and it goes back to what I quoted you 
in terms of the 99 percent versus the 17 or 19 percent. If the 
IRS had access to the database that the Department of Health 
and Human Services has, it is called New Hire Directory, it 
could compare what types of income information that HHS has and 
then using the processes that it has employed in the past 
determine whether or not there is a correlation between income 
that is declared on the one hand and the amount of taxes 
declared on the other hand. There is no question that that type 
of information would be extraordinarily beneficial.
    More agreements with nations outside of the United States 
would be extraordinarily helpful. While there have been steps 
taken recently and very publicly by the IRS as it relates to 
certain banks in other countries that needs to be done on a 
much more wide-scale basis. That would certainly help the IRS 
have information and then, income that flows from that 
information from people who otherwise are able to obscure or if 
not just plain hide revenues or income that they have achieved 
outside of the United States that they should be paying and 
reporting within the United States. There are a hodgepodge, Mr. 
Crenshaw, of ideas along this line that I would, with your 
indulgence, like to submit for the record to this committee for 
its consideration.
    [The information follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
                      IDENTITY THEFT AND TAX FRAUD

    Mr. Crenshaw. That would be great. Let me ask you, you 
talked a lot in your opening statement about tax fraud, 
identity theft and it is like amazing to me when you hear these 
numbers. When I heard that there may be 900,000 tax returns 
that were just fraudulent, I am thinking, ``Was that people 
cheating on their tax returns?'' And you said, ``No, that is 
actually people that steal somebody's Social Security number 
and name, file a fraudulent return and then get a refund.'' I 
think it was last year they identified about 900,000 of those; 
totaling $6.5 billion dollars in fraud.
    I guess the question is the IRS, in your view, are they up 
to this task because they estimate, I think I heard somebody 
say that TIGTA estimated another million, or million and a 
half, and it seems to be the only thing they can do is say, 
``We will help you as a victim,'' but I am not sure they can 
actually have the tools to stop the fraudulent claims, other 
than say, ``File early.'' If you file first and then the guy 
comes behind you and files a fraudulent return, then you are 
protected, but if you are a procrastinator like most people and 
you filed late, somebody has already stolen your identity, 
filed a return and gotten a refund and then they say, Well, we 
will work with you. Is it time for us as legislators to give 
them some tools that they might need because it sounds like 
this is getting worse and worse.
    Mr. George. You identified the problem precisely, sir. It 
is growing and it is growing exponentially. It is very 
troubling. And the one aspect of this that bothers me most is 
it is not only, again, a domestic problem, it is an 
international problem given the wide scale use of electronic 
filing and people in certain countries around the world, which 
most people in this area know about, meaning the countries, 
where this problem is more prominent than in others. Unless you 
have the assistance of those governments to help stem these, it 
is something that is just going to continue to grow. They prey 
upon lonely people. They prey upon the elderly, and it is 
something that the IRS is very much aware of but, again, in 
their defense, with the declining resources how much can they 
allocate to this problem?

                      LEGISLATIVE RECOMMENDATIONS

    Mr. Crenshaw. Do you think they need maybe to talk to us 
about some assistance? There are things we do legislatively to 
make it easier to coordinate law enforcement or do whatever? 
Obviously, we will ask them that but is there anything that 
comes to mind that we can help them with?
    Mr. George. Yes, there are portions of the tax code which 
severely, under criminal penalties restrict the type of 
information that the IRS can share with law enforcement 
individuals at one end of the spectrum, to State tax 
enforcement officials at the other end and, of course, with 
foreign governments. And so, again, this being a tax policy 
issue and the like, I would have to defer to them for the 
details, but that type of assistance would help this problem 
tremendously.
    Another issue, sir, and I spoke about this in my previous 
appearance before this committee and it also touches on your 
earlier question about what could be done to help the IRS, the 
law as it stands now does not require a lot of the income 
information from the payor until a month and a half after the 
tax filing season begins. So in other words, a criminal could 
file a tax return, an improper tax return using the identity of 
someone else in January or February and have that processed and 
the IRS accepts that information and will release a refund and 
yet, the business, whatever entity is supposedly paying this 
person, is not required to provide the IRS that information 
until months later, generally in March. So it is that period in 
between the two when the bad guy files and when the IRS has 
information to confirm the information that the bad guy filed 
that all this mischief can take place. It would seem like a 
very logical, a relatively easy quote unquote area to address, 
but it just has not been done.
    Mr. Crenshaw. Well, I am filing early this year. I tell you 
that. Mr. Serrano.

                 COST SAVINGS AND PROGRAM EFFICIENCIES

    Mr. Serrano. I already filed. I have not heard back from 
them but I already filed. Just two comments on things I have 
heard discussed here. My first maybe partisan statement of the 
year and probably be one of my last, but we could have put in 
more money for the IRS for those who think they cannot do the 
job in yesterday's CR and we did not. So they asked for more 
that they are not getting.
    The other thing is, my understanding and maybe you could 
clear this up, that the studio is not only used for PSAs and so 
on but the studio is also used for training so rather than 
sending folks out in the field, training takes place at the 
studio. Is that correct?
    Mr. George. That is correct and when you are reducing 
travel for training purposes, it seems a logical, and we are 
doing the same in terms of using WebEx and other devices.

                            LEVEL OF SERVICE

    Mr. Serrano. Right, right which is a money saver. That 
should make some people happy. Mr. George, due to the budget 
cuts, the IRS operated at a level of service of 67 percent in 
2012, down from more than 80 percent in fiscal year 2007. This 
translates to approximately 16 minutes of hold time for phone 
calls. That is a long time to wait.
    Further, appointments will not be offered at taxpayer 
assistance centers which make it nearly impossible for those 
with onerous work hours to get assistance. Does a low level of 
service provision, in your opinion, relate to the level of tax 
compliance?
    Mr. George. Yes, it does. Now, the irony is notwithstanding 
what I said in my written statement which is completely 
accurate about the level of service declining, it just seems 
ironic that the number of telephone calls thus far in this tax 
filing season has decreased tremendously. So I do not know what 
is causing that. We are going to look at it in our tax filing 
season report, but the nightmare situation has not arisen yet. 
I guess that could change overnight.
    Mr. Serrano. Do you think it has decreased maybe because 
people gave up on trying to call?
    Mr. George. That certainly is a possibility.

                  LEVEL OF SERVICE AFTER SEQUESTRATION

    Mr. Serrano. I am very interested in detailing the real 
world impact of these sequester; that is, how these sequester 
impacts Americans a day-to-day basis. Would it be possible for 
your office to identify over the next few years a decline in 
the level of service due strictly to sequestration? Likewise, 
can your office detail the level of decline in compliance due 
to the sequester?
    Mr. George. We will do so, sir.

                                 ITINS

    Mr. Serrano. We would appreciate that. As we discuss each 
year, identity theft is an enormous and growing problem for the 
IRS. We are told that the improvements in the information 
technology systems are helping to flag potential fraud. There 
is a long way to go. With an inventory of more than 228,000 
identity theft cases in the pipeline, what is it going to take 
to really attack and resolve this problem?
    Let me add something that I just thought of as I was 
listening to your comments before. It looks like we are going 
to get immigration reform and just for the record, I am for it. 
I have been for it since day one. I think we have to stop all 
the mean talk and deal with an issue and get these folks out of 
the shadows and you know the rest of the statement. Part of 
immigration reform would be securing the border, will be Do you 
speak some English? Have you paid your taxes? and obviously, 
some of that has to do with some folks maybe not having their 
own identity as such, working under their own identity. Is that 
an added burden to the IRS? Has the IRS at all, in your 
knowledge, begun to deal with the possibility of this happening 
or of them being called to play a role and if such, what role 
do you think they will be called?
    I mean, I am asking the wrong person in a way because we 
will write the legislation and we will determine what role they 
play, but it seems to me they will play some role in all of 
this.
    Mr. George. I agree completely in terms of the role that 
the IRS will play, but the interesting part is, Mr. Serrano, 
that the IRS has played a role here. For some time now, the 
Internal Revenue Service issues what is called an ITIN, an 
individual taxpayer identification number, and the sole purpose 
of that is to allow people who do not have Social Security 
Numbers, it gives them the ability to comply with their tax 
obligation. So it is a number which is identical in length to 
the Social Security Number, but it is not supposed to be used 
for any other purpose other than to file taxes. And, as you 
certainly are aware, many people who may not be in this country 
and legally able to work are nonetheless compliant with tax 
obligation with the hope that that would ultimately benefit 
them if they do eventually have the opportunity to apply for 
citizenship.
    Mr. Serrano. That is true. That is one of America's little 
secrets, the fact that there are so many folks who are not here 
documented, paying taxes nonetheless and the joke around 
different neighborhoods is the IRS does not care who they get 
money from as long as they collect taxes. So they have been 
doing this already and those records we feel are in good enough 
shape for someone to say, Hey, look. I may be here undocumented 
or illegally as you call me but I did pay my taxes over these 
years.
    Mr. George. The short answer is yes. Now, I have to point 
out that the number which is supposed to be used solely for tax 
purposes is sometimes used by others for non-tax purposes which 
is contrary to the intent and the purpose of that.
    Mr. Serrano. Such as?
    Mr. George. Such as it is being used as a substitute for 
the Social Security Number.
    Mr. Serrano. I have a card. I am paying taxes. Therefore, I 
am here okay to work. Okay. Thank you, Mr. Chairman.
    Mr. Crenshaw. Thank you. Mr. Graves.

                            CONSUMPTION TAX

    Mr. Graves. That was fascinating. I want to get back to the 
abuse side as you spoke of their and the statistic that Mr. 
Yoder and I were talking about is fascinating to us was that 99 
percent of those who withhold taxes, I guess pay them or send 
them in to the IRS on a timely manner then there were 19 
percent small businesses who would, I guess, voluntarily do 
that, only do that. That was the statistic you shared a minute 
ago.
    Mr. George. Yeah, actually, but I just want to make sure I 
am clear here. It is for those who have their withholdings made 
by a third-party. So in other words, if your job, you know, 
withholds your tax.
    Mr. Graves. And then hearing all the fraud and abuse 
statistics you shown as well or given, you make a compelling 
argument for a consumption-based tax.
    Mr. George. That is a tax policy question, sir.

                           IMPROPER PAYMENTS

    Mr. Graves. Very compelling argument for that and so, you 
know, that is something you might want to consider making a 
recommendation to the IRS to support the fair tax or some other 
consumption base.
    Back to the refundable tax credit abuse; I have heard a lot 
about this in my area and I am interested to know what you 
think the solution might be and really, just about three or 
four questions within this. One, how do you quantify? What is 
that dollar figure per year, and I know you talked about $2,000 
increments potentially but globally, what is the dollar figure? 
So how to resolve that and then maybe share to the committee 
how is it done. Is it individuals doing it or is it 
organizations during this?
    Mr. George. That latter question I can answer immediately 
and that is that it is done by both. And the troubling aspect 
of this is many times, paid preparers, and they are at the 
front line, we consider them team players in the effort to have 
a fair system of tax administration and many times, these paid 
preparers will simply say to someone, If you have children, you 
are entitled to a tax credit, or an additional tax credit for 
each child. And so without necessarily requesting birth 
certificates or other proof that these children actually exist, 
they will submit that to the Internal Revenue Service which 
then willy-nilly processes them.

                                 ITINS

    Mr. Graves. And before you answer those other couple, does 
any of this tie into the number you were sharing with Mr. 
Serrano that ITIN number? Is that a component of this 
potentially as well?
    Mr. George. Yes, we have in recent work uncovered that the 
Internal Revenue Service issued billions of dollars to people 
using ITINs for credits that they were not entitled to under 
the law.

                           IMPROPER PAYMENTS

    Mr. Graves. Yeah, so serious problem. Okay, so I am sorry 
to interrupt. So quantifying globally with the dollar figure is 
and then maybe what your recommendation, your solution would 
be.
    Mr. George. Well, the solution is more information, sir. 
The IRS requires that proof of a child or that the child 
exists, proof that the child is going to the college. The IRS 
got to the point and again, with the home purchases that 
Congress in the wake of our report had to pass legislation 
saying that someone under the age of 18 was not entitled to the 
First-Time Homebuyer's Credit, which because most likely 
someone under the age of 18 is not purchasing a home so it 
would make sense.
    In Fiscal Years 2011 and 2012, we reported that the 
American Opportunity Tax Credit, the education credit, that the 
IRS erroneously allowed, most likely, $3.2 billion in the 2010 
calendar year. Under the adoption credit, we reported that the 
IRS paid an estimated $11 million in erroneous adoption 
credits, again, another example of the IRS simply not 
requesting information that a child was actually adopted.
    Now they may argue how we process these forms? Well, 
sometimes the deterrent is simply requesting the information 
because it would actually require somebody to be a little more 
sophisticated in making up an official looking document and 
probably just would not take the chance of both submitting a 
false Federal document which could get them in trouble as well 
as seeking credits that they are not entitled to. I already 
addressed the issue of identity theft cases. So again, about $5 
billion in 2010 actually, so over $20 billion.
    Mr. Graves. And the child tax credit?
    Mr. George. Excuse me, $108 million in erroneous.
    Mr. Graves. Million or billion?
    Mr. George. The adoption credit or the child credit?
    Mr. Graves. Child.
    Mr. George. Yeah, the additional child tax credit and last 
year, we estimated that the IRS refunded $108 million in 
erroneous additional child tax credits during the tax years 
2006 to 2009.
    [The information follows:]

                       Refundable Tax Credit Fund

    The IRS has not determined how many erroneous tax refunds it issues 
each year. The only program the IRS has identified for improper payment 
reporting is the Earned Income Tax Credit (EITC). The IRS reported that 
it issued between $11.6 billion and $13.6 billion in erroneous EITC 
payments in Fiscal Year 2012.
    However, we think the amount of erroneous tax refunds issued is 
significant based on recent audit work.
           American Opportunity Tax Credit--$3.2 billion in 
        erroneous payments in Tax Year 2009 (through May 28, 2010).
           Adoption Credit--$11 million in erroneous payments 
        in Processing Year 2011.
           Identify Theft--$5.2 billion in erroneous payments 
        in Tax Year 2010.
           Additional Child Tax Credit--$108 million in 
        erroneous payments during Tax Years 2006 through 2009.

    Mr. Graves. Thank you, sir, thank you. And, potentially if 
he has time to answer what a solution might be and you just 
said ask for more information.
    Mr. George. More information. And then, ultimately, 
especially if third parties are involved in this, meaning paid 
tax preparers, some type of penalty towards them to discourage 
that type of activity.
    Mr. Graves. Thank you,. Thank you, Mr. George.
    Mr. Crenshaw. Actually, Mr. Graves, I think the earned 
income tax credit, every year, about 25 percent of those 
payments are fraudulent. It is about $15 billion on their 
earned income, so that is one of the big problems that we 
pointed out.
    Mr. Serrano. Does that compare at all with corporation 
fraud?
    Mr. George. I do not know.
    Mr. Serrano. Just checking.
    Mr. George. I will check it out.
    [The information follows:]

                      Refundable Tax Credit Fraud

    The IRS estimates that corporations underreported $67 billion in 
income and underpaid $4 billion in tax in Tax Year 2006. In comparison, 
the IRS estimates it issued $10.4 billion to $12.3 billion in improper 
Earned Income Tax Credit payments for Fiscal Year 2007 (when Tax Year 
2006 tax returns were filed and processed).

    Mr. Serrano. Yes
    Mr. Crenshaw. Mr. Quigley.

                             IRS RESOURCES

    Mr. Quigley. Thank you, again. Mr. George, to summarize, at 
least from my point of view, your suggestions are we need to 
help with tax simplification, we need to help deal with issues 
of fraud, access to third party information. Among other 
things, the IRS has to avoid waste, follow the suggestions, 
including additional documentation, modernizing the equipment 
as an ongoing basis, and effectively target their resources. 
With all that being said, and let's assume all acting in 
accordance with that, do they still need more bodies? And how 
many more resources do they need in terms of revenue dollars 
for that staff? And at what point are there diminishing 
returns?
    Mr. George. Very good question. Again, the IRS in the last 
five or so years had 100,000 full-time equivalents, and as I 
indicated earlier, they are roughly at 92,000 now. As the 
chairman pointed out, there are reports of increased revenue 
collections now, so you would not necessarily see a direct 
correlation between fewer FTEs and additional revenue 
collections. We do not know if this is an aberration; 
additional information will need to be gathered and research 
done to see why this is happening.
    The common thought is, of course, if you had more people 
you could do more. There is no question that especially both 
in, again, the customer service area, as well as in the 
enforcement areas, fewer people mean you are going to have 
fewer opportunities to conduct quote, unquote, ``audits.'' 
Fewer people mean that you are going to have less telephone 
calls answered, or less people staffing these Taxpayer 
Assistance Centers. So there is a practical impact to having 
fewer employees.
    Let me back up, this is so important I need to make this 
point. The United States has, in my view, the most effective 
tax system in the world. There is no question about that. And 
most people who were surveyed, just in the last week or two, 
the IRS oversight board issued a survey result which showed 
over 90 percent of people believe they should pay all the taxes 
that they owe.
    Now, there was a separate survey done a number of years ago 
which posed, in effect, that very same question, ``Should you 
pay all the taxes you owe?'' and had a very similar result, 
meaning about 90 percent said yes. But then a second question 
was posed, and that was, ``Well, what if your neighbor down the 
street is not paying everything he or she owes, should you, 
then, pay everything that you owe?'' The number dropped 
dramatically from 90 percent. I do not have the exact figure, 
but it was a dramatic drop.
    So what that suggests, going back to your question, is what 
I view as the deterrent effect. And the deterrent effect is an 
audit. And some people seem to be under the misconception that 
an audit is sitting across a table similar to this, or a 
smaller one, in an IRS building or another Federal building.
    Mr. Quigley. A hot lamp over your head.
    Mr. George. Among other devices. But in reality, and one of 
the members of this committee pointed out, when the IRS sends 
you a letter, that is considered an audit process, or an audit. 
If they are asking you information about the income that you 
reported or deduction that you claimed, that technically is an 
audit. So audits can take different forms, they can cost 
varying amounts, but they can be done in ways that are cost-
effective.
    Mr. Quigley. Thank you, Mr. George. Thank you, Mr. 
Chairman.

                              COST SAVINGS

    Mr. Crenshaw. Mr. Yoder, do you have any more questions? 
Just following up on Mr. Quigley, I mean, sometimes it does 
take money to make money, sometimes it takes money to save 
money. Following up on what he talked about, I guess you could 
spend money on automation, maybe that you do not need as many 
people; maybe you could look at leased office space and 
consolidation. What is your observation about some of the 
areas? That original question that I asked you, when you are 
forced to look at how you spend money, it makes you spend money 
more wisely. Are those some of the things that you have 
observed when you look at IRS, could automation be of help? 
Could office space consolidation be of help, or some of those 
things or any other things that you see?
    Mr. George. Yes, Mr. Chairman, and everything you noted I 
agree with, that would help. And I have to admit, the one area 
in the Business System's Modernization effort that the IRS 
abandoned, which could have been of great assistance was, in 
effect, a device called, ``My IRS,'' and it was similar to what 
the private sector uses. If you manage bank accounts online or 
your credit cards accounts on line...
    Mr. Crenshaw. Do not tell me there is an app for that.
    Mr. George. Well, I am sure there is an app for ``Where is 
my refund from the IRS?'' They were in the process of 
developing a website where you could literally click to see 
what your tax obligations are in advance of April 15 and make 
payment arrangements. It had a multitude of possibilities, and 
it fell victim to resources, the bottom line. And I do not know 
what factor they used to precisely not to do it, but I would 
contend, again, going back to my earlier point about making it 
as simple as possible for people to comply with their tax 
obligations, would enhance the number of people who do so. And, 
again, address the many problems associated with people not 
paying what they owe.
    Mr. Crenshaw. I do not have any more questions. Other 
members, Mr. Serrano?

                                  ACTC

    Mr. Serrano. I will submit some questions for the record. I 
just have a little statement for Mr. Graves and, of course, for 
the chairman.
    Current law allows the additional child tax credit to be 
claimed by all individuals who file taxes, regardless of 
whether they use Social Security number or ITIN number. IRS 
guidance regarding this tax credit concentrates on the 
eligibility of the child, not the parent. Children must be U.S. 
citizens, U.S. nationals, or U.S. resident aliens. This means 
that on a 1040 tax form, someone filing with an ITIN number 
must provide the dependent child's Social Security number to 
prove their eligibility for the additional child tax credit.
    The current IRS strategy makes sense, since the true 
beneficiary of these tax credits is the dependent child. My 
office has seen estimates that show that currently 4.5 million 
citizen children benefit from this tax credit. My point being 
that I know that there are two issues that always come up with 
the IRS that motivate many of us, and I certainly look at it to 
see if there is fraud going on; we have to be careful, because 
this one helps citizen children. So in the process of making 
sure it works properly we should maybe look at those people who 
are claiming that they qualify when they do not, or those who 
are being induced, as you said, by someone else to claim 
something that they do not deserve. When the program works 
right, it services and helps a lot of people, young people in 
our country, and children.
    Mr. Crenshaw. Thank you.
    Mr. Serrano. Thank you.

                                FURLOUGH

    Mr. Graves. One comment and a question. First, let me just 
say, I know the IRS has a very difficult job and you have 
probably an even more difficult job in what you do. In our 
district we had an IRS workshop day just a few weeks ago, and 
folks from the agency came and offered their time, free 
counsel, advice in sorting through the tax code, and that was a 
great assistance to our constituents. Through that I found out 
that there were even many more groups that are offering free 
tax preparation services, so there are a lot of groups working 
together, including agency, to try to help folks navigate. And 
I recognize that and I appreciate what they do.
    You mentioned furloughs and this I just a question because 
sequester is new and we are hearing a lot of hypotheticals and 
it is hard to reconcile hypotheticals with reality and what we 
are all about to go through. In the state of Georgia we went 
through a lot of furloughs, including teachers, everyone 
participated.
    And one question that came up was, when you have a lot of 
sick days or vacation days, they were considered banked days, 
banked, B-A-N-K days. Is that the same case, say, with IRS? You 
said five to seven furlough days. Could they draw down from 
their days that might be banked for future use?
    Mr. George. That is not my area of expertise, Mr. Graves, 
and I am just told by staff we do not believe that is the case, 
but I am not sure.
    Mr. Graves. Okay. Something we could probably look into, I 
guess.
    Mr. George. Yes.
    [The information follows:]

                                Furlough

    Per Office of Personnel Management guidance, IRS employees may not 
substitute paid leave for any hours designated as furlough time off, 
which is a non-paid status.

    Mr. Graves. Well, thanks for your time, Mr. George.
    Mr. George. Thank you, sir.
    Mr. Crenshaw. Mr. Inspector, thank you so much for being 
here today. Thank you for your wise counsel. As we all know, 
IRS has a tough job and you got a tough job looking at the 
people that have a tough job, so thank you for the work that 
you do. We appreciate you being here today. So that hearing is 
adjourned.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                                            Tuesday, April 9, 2013.

                        INTERNAL REVENUE SERVICE

                                WITNESS

STEVEN MILLER, ACTING COMMISSIONER
    Mr. Crenshaw. Well, the hearing will come to order. Today 
the Subcommittee is going to look at the activities and the 
operations of the Internal Revenue Service, and we are going to 
hear testimony from Acting Commissioner Steve Miller.
    Welcome, Mr. Miller. Thank you for being here today to 
spend the afternoon with us. I want to thank you for all your 
years of service with the IRS and to our country and all IRS 
employees as well. I want to specifically compliment the agency 
on being removed from GAO's high risk list with regard to 
business systems modernization. I think that is a giant step 
forward.
    Now, according to the IRS Oversight Board, 72 percent of 
Americans believe that they have a civil duty to pay their fair 
share of the taxes, but because our tax code is so complicated, 
that this is easier said than done sometimes. And so because of 
that, it falls to the IRS to help individuals correctly file 
their tax returns and to pay their taxes. It also falls on you 
to investigate and find individuals who are trying to cheat. I 
know that the authorizing committees are working on tax reform, 
and hopefully this effort will include making the tax code a 
little more understandable, a little more simple, and 
therefore, easier for them to comply with it and easier for you 
to enforce.
    You are also responsible for administering numerous 
complicated tax credit programs. Improper payments in those 
programs, however, exceed over $15 billion a year and 
obviously, that is a very troubling number, and I don't think 
we ought to tolerate that. The IRS is the largest agency funded 
by this Subcommittee. You have over 90,000 employees.
    Now, we don't have the President's budget yet. I don't know 
that you have it yet. We are supposed to get it tomorrow. 
Better late than never, as they say. But we don't know what is 
going to be in that, but we do know that the House resolution, 
the budget resolution from the House, the budget resolution 
from the Senate, both, I guess, include the sequester as part 
of that budget resolution.
    So what that means is that it may be unrealistic to think 
that there is going to be much of an increase this year. We 
don't know that yet, but certainly this Subcommittee wants to 
work with you and your staff to work judiciously and 
selectively to make investments where we need to make 
investments and to make cuts where we need to make cuts. We 
want you to be able to meet your obligation to obviously 
collect the taxes and also to pursue the people that cheat.
    So, again, welcome Acting Commissioner Miller. We look 
forward to your testimony. I think the whole committee is going 
to be interested in learning how you are coping with the 
sequester, how you are identifying this identity theft, which 
seems to be growing every year. We have talked about reducing 
the burden of tax compliance, and just, I think overall, 
understanding how you are making use of the resources that you 
have.
    So, with that, I would like to yield to my ranking member, 
Mr. Serrano, for any opening statement he might like to make.
    Mr. Serrano. Thank you, Mr. Chairman, and welcome back.
    We both welcome each other back. I join you in welcoming, I 
think, Commissioner Miller, before the Subcommittee. The 
President's Fiscal Year 2014 budget request does not come out 
until tomorrow. While you may be unable to share the details 
with us here today, it is my hope that you will be able to 
discuss some of the IRS' general priorities with us.
    Obviously, as a result of the sequester and flat funding in 
the continuing resolution, the IRS has been left with a number 
of enormous budgetary holes that must be filled. We will 
hopefully get a chance to discuss the impact of the sequester 
and whether you expect revenue to be lost as a result of the 
funding cuts to the IRS.
    Unfortunately, I think that the reduced budget for the IRS 
will, simply put, help increase our deficit. I find it 
difficult to believe that we encourage greater tax compliance 
with less money for the enforcement agents and less funding for 
the very people who answer the many tax questions the taxpayers 
have. Resources at the IRS are used to assure that people 
follow the laws that Congress has passed and that Americans pay 
the taxes they owe. It is self-defeating to ask people to obey 
the law and then to reduce the number of people we have to 
ensure compliance.
    One particular area of concern is a continued 
implementation of the several tax related provisions contained 
in the Affordable Care Act. Many of the tax credits are due to 
come online this year, and unfortunately, the recent continuing 
resolution did not include the requested additional funding to 
help the IRS implement these necessary changes.
    The Affordable Care Act recently celebrated its third 
anniversary, and yet there are some in Congress who seem to 
forget that it is the law of the land. The IRS needs funding to 
update the computer systems and answer any questions that 
taxpayers have about these new provisions. Ignoring the reality 
will not stop the fact that the Affordable Care Act is law. It 
will only create confusion for taxpayers and divert IRS 
resources from other initiatives. Hopefully, we will get a 
chance to discuss what the IRS is doing to implement the 
Affordable Care Act and how your efforts have been impacted by 
both the continuing resolution and the sequester.
    Mr. Chairman, the IRS remains the one organization that 
most Americans interact with in some form. For many 
individuals, it is the only interaction they have with the 
government. We need to do our utmost to ensure that the IRS has 
the resources to do the job we in Congress have given them and 
that they have the ability to serve the American people in a 
way that is responsive, efficient, and fair.
    I hope that as we move forward with the fiscal year 2014 
appropriations, all of us here can agree to do that, and I 
thank you, Mr. Chairman.
    Mr. Crenshaw. Thank you, Mr. Serrano.
    Now we will recognize Acting Commissioner Miller for your 
opening statement. If you could keep it in the neighborhood of 
about 5 minutes, we will be happy to submit your written 
statement for the record. The floor is yours.
    Mr. Miller. Absolutely, sir. Chairman Crenshaw, Ranking 
Member Serrano, members of the Subcommittee, thank you for the 
opportunity to appear today.
    The Fiscal Year 2014 budget, as you mentioned, has not been 
released yet, but there is still much that I can report to you. 
As you are aware, the IRS is vital to the functioning of 
government, collecting $2.5 trillion in gross revenue in 2012. 
That is 92 percent of all Federal receipts.
    Let me start by stating that the current filing season is 
running very smoothly. Through March 29th, the IRS received 88 
million individual returns and issued 72 million refunds for a 
total of $202 billion back into the economy. This feat has 
unfolded despite the difficult challenges that were presented 
by substantial tax law changes that were not enacted until 
January 2nd of this year.
    It is important to understand, however, that these 
accomplishments and those that I outlined in my testimony may 
not be sustainable within the current budget environment. I 
think we will continue to succeed with the filing season, and 
we will continue our efforts to maintain excellence in 
performance, but that performance will begin to reflect the 
impact of the large budget cuts of the last few years. This 
means that there will be a steady erosion of the service we 
provide to taxpayers and in the amount of money that we 
collect. We will continue to find efficiencies, and you will 
see that we have been aggressive in this regard, and we will 
continue to dedicate staff and resources where they are most 
essential.
    Thus, for example, we will continue to commit staff to 
resolving identity theft cases even at the cost of fewer people 
on our toll free 1040 line and fewer people on our collection 
lines. And if these cuts continue, future service and 
enforcement levels will in fact reflect a more austere reality.
    In this regard, let me note the effects of sequester. We 
have said publicly that the IRS faces up to seven furlough days 
this fiscal year. We anticipate the first day that the IRS will 
be closed to be around the Memorial Day holiday. Due to 
sequester, we anticipate a considerable reduction in the 
revenues we collect and the calls that we can take. 
Notwithstanding difficult budgets, we have accomplished much, 
however. We delivered smooth filing seasons and successfully 
carried out core duties while making important progress on a 
number of our initiatives, and our efforts to address identity 
theft and refund fraud are having an impact.
    Over 3,000 IRS employees are working on identity theft as 
we speak. That is more than double the number at the start of 
last filing season. Last fiscal year, the IRS expended nearly 
$330 million of its budget on identity theft, and it was money 
well spent. During fiscal year 2012, the IRS protected more 
than $20 billion in revenue, up from $14 billion in the prior 
year. So far this filing season, the IRS has suspended or 
rejected over 2 million suspicious returns, and we have been 
more efficient, even as our budget has been reduced about $1 
billion since 2012. That represents an almost 8 percent cut in 
our budget.
    We have been asked to tackle significant new challenges, 
some of which Mr. Serrano mentioned, including identity theft, 
ACA and the new foreign reporting rules under FATCA. We 
addressed some of these cuts by cutting expenses by almost half 
a billion dollars in recent years, and we have also been 
strategic in our hiring decisions, using buyouts last year and 
reducing expenses in nonlabor categories as well.
    By closely managing hiring, we have seen a reduction in the 
total number of full-time permanent IRS employees by almost 
7,000 between the end of 2010 and 2012. Note that we are 
currently running nearly 10,000 employees below where we were 
at this time during the 2010 filing season. In our nonlabor 
spending, we limited operating travel expenses to mission 
critical needs, and we have increased the use of virtual 
delivery for meetings and training. This has allowed the IRS to 
reduce travel costs by almost $159 million, a 55 percent 
decrease from 2010.
    We have also reduced spending on professional and technical 
service contracts by $200 million and reached $60 million in 
printing and postage savings, as well as achieved aggressive 
reductions in rent payments.
    Mr. Chairman, we will continue our efforts to be fiscally 
prudent and will make wise investments in our strategic 
priorities and enforcement service and business modernization. 
However, as I noted, without a change in the current budget 
environment, the American people will see erosion in our 
ability to serve them and the Federal government will see fewer 
receipts from our enforcement activities.
    Thank you, sir, and I would be glad to take any comments or 
questions.
    [The information follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
                             SEQUESTRATION

    Mr. Crenshaw. Well, thank you very much for your testimony. 
Let me start the questions. I am going to pursue the sequester 
a little bit more. This Subcommittee oversees maybe 30 
different agencies that we are charged with providing the funds 
for, and so I think it is always important that we talk about 
sequester as it relates to efficiency and effectiveness. It 
sounds to me like that you saw it coming and you prepared for 
it.
    One of the things on this Subcommittee, most of the members 
agree that if you want to reduce spending, there is a better 
way to do it than simply have across-the-board cuts. That is 
why we have an Appropriations Committee. That is why we have 
hearings like this to look at budgets and to set priorities and 
make tough decisions and then fund the programs that need to be 
funded and reduce funding on programs that don't need to be 
funded, but we are where we are.
    As I mentioned in my opening statement, I think that our 
budget resolution as well as the Senate budget resolution 
anticipates that the sequester is going to stay here. As you 
probably know, we actually reduced spending from 2010 to 2012 
by $95 billion. That was all discretionary, but that was a 
pretty giant step. I don't think it has happened in the last 50 
years, but we are still living in difficult economic times.
    So, I appreciate what you are working on and what you are 
doing. Talk a little bit more about how you prepared for the 
sequester. What kind of information did you take into 
consideration when you decided how you were going to deal with 
this?
    I guess for nondefense agencies, about 5 percent. Defense 
is more like 8 percent. So, number one, tell us a little bit 
more about how you kind of decided what you were going to do 
and then talk a little bit more, too, about whether or not you 
think that if you have to live with the sequester, that this 
actually forces agencies like yours to do things it sounds like 
that you are trying to do that. You are actually forced to, 
because of these across-the-board cuts, forced to make some 
tough decisions to maybe be more efficient.
    When we were here before the Treasury Inspector General for 
Tax Administration, Ms. Herrera Beutler asked a question about 
the IRS TV video/studio, and I know there has been a lot of 
discussion about that and how important that is in the long 
term. So, touch on those two points as they relate to 
sequester, if you would.
    Mr. Miller. Well, I would say that your surmise is correct. 
We did see this coming. We certainly saw tighter budgets coming 
for a couple of years. In December of 2010, we put in place an 
exception-only hiring freeze at the IRS, which has allowed us 
to be at a place where we are only considering 7 days of 
furlough.
    That was a large step. That was a way for us to invest in 
those areas where we felt we needed to invest. For example, as 
you will see in the written testimony, the identity theft area 
is obviously one area that we needed to fund, and we have done 
so. We funded other priorities as well, including our return 
preparer area, our offshore work, and beginning this year, the 
ACA work that we need to do under the statute and the FATCA 
work, which is coming on as well.
    We have tried to save and invest in various ways. We have 
trimmed quite drastically in travel and training. We have cut 
back, as I mentioned, in postage. We have cut back in several 
other ways to help get us to the point where sequester is 
manageable, but not easy. It is not the way I would want to do 
it. If we, in fact, have to end up at a given lower level, I 
would like a little more time to prepare for that lower level, 
rather than have it all come in one year, frankly, because that 
is not a way to plan. That is just a way to basically take time 
off, but we have worked on it.

                               TV STUDIO

    You mentioned the studio, Mr. Chairman. Let me touch on 
that. I know there has been quite a bit of noise on that. We 
think the studio is an efficient use of our resources, 
actually. It is about 15 years old, and it allows us to train 
our people virtually, and to educate taxpayers through YouTube 
and other types of things like that, rather than face to face. 
It has allowed us to move away from face-to-face travel, to the 
point where, in 2013, we are spending about 80 percent less in 
training travel than we were in 2010, and that has allowed us 
to do quite a few things.
    On a personal basis, the studio allowed me to go online, 
over the Web, to 4,000 of my managers this fall and walk them 
through the priorities of the Internal Revenue Service. That 
was the opportunity for them to have a face-to-face with me 
online, ask their questions, and get an understanding of where 
the Service stands right now. That is kind of essential for us, 
and we do think with the cuts in travel, that the studio--which 
always can be more efficient, and I am not going to say that it 
can't be because we need to work on that and we will work on 
that--has allowed us to do these sorts of cost savings things.

                          AFFORDABLE CARE ACT

    Mr. Crenshaw. Well, thank you. And let me ask one final 
question. I think today we will have time for probably a second 
round of questions, but you touched on the Affordable Care Act, 
and I think more and more that is going to be coming to the 
forefront.
    People are starting to realize that it is coming quicker 
than they might have anticipated, and of course, you are right 
in the middle of all that. Starting in 2015, people have to 
report to you about their health insurance, and if they don't 
have insurance or if they don't have adequate insurance, then 
that is going to be a tax penalty. And I guess the question is, 
are you prepared to collect all this information, assess the 
penalties, administer the subsidies, I guess, that people are 
going to have to understand?
    And I guess the big question is, as you prepare for this, 
do you think the general public understands all that is going 
to be required of them about the penalties and the non-
penalties?
    And finally, where is all the money going to come from? I 
understand HHS has transferred some money to you all. But it 
sounds like you know it is coming and you are gearing up for 
it, but it seems to me that the general public probably doesn't 
understand all this. And I just wonder what you think about 
that and how prepared you are to deal with this because it is 
fairly complicated as it starts impacting people's daily lives.

                          AFFORDABLE CARE ACT

    Mr. Miller. There is no doubt, Mr. Chairman, that the 
healthcare provisions are a large lift for the Internal Revenue 
Service. I would say that, with respect to healthcare, HHS 
really is the face of ACA to the taxpayer because they will be 
working with the exchanges as early as this October to start 
signing people up for health coverage. We are involved in that 
but only tangentially. It is our job, and we will be ready, to 
make sure that the exchanges have the information they need to 
make intelligent decisions in terms of who qualifies for the 
advanced premium and other subsidies under the ACA. We will be 
doing matching of taxpayer identification numbers and other 
information that will flow back to the exchanges through HHS in 
order to get that information to them. That is really our 
front-end obligation with respect to ACA.
    Our people are aware of it. Yet, I think some taxpayers 
are, some are not, and the big ramp up is going to have to 
happen this summer so people that need it are ready in the fall 
to go to the exchanges. Many people are already covered by 
employer insurance fortunately, and they will not be as 
impacted. We will be ready on the back-end as well. Most of the 
reporting is not actually going to be from the taxpayer. Most 
of the reporting to us will be from the exchanges and from 
insurance companies, and we will be ready to process that and 
see who is covered and who is not. I don't anticipate problems 
in that area. That is a competency that the Internal Revenue 
Service has in many other areas as well. That is the nature of 
the 1099 matching.
    Mr. Crenshaw. So the individuals won't be required to give 
information to the IRS about whether they have insurance and 
whether it is adequate or not?
    Mr. Miller. Adequate, no. They will probably have a 
checkbox or something of that nature to say, ``yes, I am 
covered, my family is covered by insurance.'' But on the 
coverage information, I really do want to correct a 
misimpression. We are not going to be looking at what kind of 
healthcare they have. That really is up to HHS to set up those 
standards, and the insurance company will be telling folks 
whether it is the right----
    Mr. Crenshaw. Are they the ones that are going to be 
explaining to them about the subsidies that they might get, and 
ultimately doesn't that get put somewhere on the tax form?
    Mr. Miller. If you have an advanced payment, then, yes, 
that information will be somewhere on the tax form. If you are 
claiming the credit with your tax return, obviously that, too, 
will be reflected on the tax form, but the information that 
will be given should be well in advance of that, and that 
should be through the exchanges.
    Mr. Crenshaw. Seems like a lot of people are going to end 
up in 2015, and for the first time realize they got penalized 
for not having healthcare in 2014 and they thought they were 
going to get a refund and they might owe some more, but I guess 
you are working through all that.
    Mr. Miller. I don't think that is right, Mr. Chairman, but 
I understand. We have a lot of work to do, there is no question 
about that, to ensure that doesn't happen.
    Mr. Crenshaw. Thank you.
    Mr. Serrano.

                              BUDGET CUTS

    Mr. Serrano. Thank you, Mr. Chairman.
    Commissioner Miller, from fiscal year 2010 until fiscal 
year 2013, the IRS has been cut by nearly $1 billion, including 
$600 million from sequestration in the current CR. Those were 
about severe cuts in staff. As you have noted in your 
testimony, now what do you believe is the long-term impact of 
this? Because, you know, we keep talking about these cuts that 
are taking place in all Federal agencies, but you have a unique 
role. You have to implement new laws, including one I am going 
to mention in my second question if it becomes law, and you 
have to do the regular work that you do every year, which is 
incredibly important and big and yet you are getting less and 
less staff to do this. So what do you think the long-term 
impact will be?
    Mr. Miller. I think, Mr. Serrano, that we are going to 
see--you know, we have been able to maintain coverage levels at 
a good place for the American public in terms of our 
examination program. We have been able to maintain a level of 
service on our phones that, quite frankly, I would like to see 
higher, but is right now, in the 70% for the filing season, for 
people calling in. That is not bad, frankly, given the budget. 
Those are the types of things, I think, that we are going to 
see some degradation on, that we are going to see some erosion, 
as we have somewhere in the realm of 7,000 fewer permanent 
folks on board.
    Mr. Serrano. Right.
    Mr. Miller. And we have perhaps as many as 5,000, or more, 
of those in the enforcement area. There will be an impact, a 
real impact on revenues, on the level of service on the phones, 
and our ability to engage the taxpayers when they come into our 
walk-in sites. All of these are going to be impacted. There is 
no question about that.
    Mr. Serrano. And at what point do you believe we could have 
a crisis in the collection, if you will, in the enforcement, 
because this is what is happening with other hearings where we 
ask the courts, for instance, you know, do you see a crisis 
coming, and they were very open about it, and they said, yes, 
it could.
    Do we reach a point here anytime soon where you are having, 
if you will, a lot of dollars out there that are not being 
collected because we just don't have the folks to collect them?
    Mr. Miller. I think we already have a lot of dollars out 
there that we are not getting through at current levels. I 
would tell you I don't think that there is a crisis 
immediately. I don't. I do think that you are going to see some 
erosion in our performance metrics, and that isn't good for 
voluntary compliance, because as people realize that they have 
a better chance of winning the lottery than getting audited, 
they are not going to worry quite as much about what they do on 
their return.
    I don't think that is immediate, Mr. Serrano. I do think if 
the trend line continues in the fashion that it is today, then 
you may get a different answer out of me. But at this point, I 
don't see a crisis. I do see severe erosion happening.

                           IMMIGRATION REFORM

    Mr. Serrano. All right. I have one more question, Mr. 
Chairman, in this round, and it came about as I am listening to 
you. I just thought, by the end of this week, hopefully, all 
Members of Congress should be celebrating the introduction of a 
bill, but certainly, I can tell you Mr. Diaz-Balart and I will 
be celebrating, which will be comprehensive immigration reform. 
It looks like it is going to happen soon, at least the 
introduction in the debate.
    As you know, the discussion has been for you to be able to 
stay in this country and be put perhaps on a path to 
citizenship, you have to have no criminal record, you have to 
speak some English, you have to pay back taxes. In addition to 
the fact that this will be yet another Affordable Care Act sort 
of, you know, type new law that you now have to deal with, and 
I realize you are not writing the bill, neither am I--Mr. Diaz-
Balart may be writing parts of it, but I am not--we each have a 
Senator who is writing a part of it, I guess, from our States, 
but do you have any clue, any understanding at this point, any 
fear, any apprehension as to what role you will be asked to 
play? Because if you pay back taxes, at one point, somebody in 
the government is going to have to say he is up to date, she is 
up to date.
    Mr. Miller. There have been some discussions with the 
Internal Revenue Service on this matter and mostly those 
discussions are with the Department of Treasury's Office of Tax 
Policy, who really deal with the legislative work of the 
Administration.
    Do I have concerns? I don't know enough about what is going 
to be asked of the Service to really express a concern, one way 
or another. There obviously would be issues around taxpayer 
information in Section 6103. That could be handled 
legislatively. There, obviously, will be issues around 
resources, depending on what we are asked to do, but it is 
something that we need to be cognizant of, and I would hope, at 
the appropriate time, we would be brought to the table for 
those discussions, so people can make informed decisions about 
that.
    Mr. Serrano. Mr. Chairman, an additional point. If at some 
future date, you could give the Committee, with the Chairman's 
permission, I understand there are folks, I know there are 
folks who are here undocumented but who get an IRS number, if 
you will, and they pay taxes. Couldn't we have an understanding 
in the future of how many folks have been doing that already? 
And I know, in many cases, they are business people. I think in 
all cases they are business people.
    Mr. Miller. I can endeavor to do that. I don't think our 
data is perfect in that regard, as you might guess, 
Congressman, but we can certainly give it a estimate.
    [The information follows:]

    The IRS does not have information regarding the number of IRS 
employees using a professional or computer software to file their 
taxes.
    Below is the information for the entire taxpayer population:
    In Filing Season 2012, through the week ending 05-12-2012:
            70.34 million taxpayers used a professional 
        (approximately 52 percent of total taxpayer population)*
            44.78 million taxpayers self-prepared using 
        software and e-filed (approximately 33 percent of total 
        taxpayer population)**
    In Filing Season 2013, through week ending 05-11-2013:
            70.38 million taxpayers used a professional 
        (approximately 52 percent of total taxpayer population)*
            43.57 million taxpayers self-prepared using 
        software and e-filed (approximately 32 percent of total 
        taxpayer population)**
    * does not account for taxpayers who used a professional and 
submitted a paper return.
    ** does not account for taxpayers who used software and submitted a 
paper return.

    Mr. Serrano. All right. Thank you.
    And thank you, Mr. Chairman.
    Mr. Crenshaw. Thank you.
    Mr. Womack.

                              SOCIAL MEDIA

    Mr. Womack. Thank you, Mr. Chairman, and my thanks to the 
Acting Commissioner for his testimony here today, and I have a 
couple of questions that I want to get to, but the first thing 
on my mind is, as I was preparing for work this morning, I am 
alerted via the media that the Internal Revenue Service is 
planning to use social media as in some enforcement mechanism, 
and I was hopeful that the Acting Commissioner could give us a 
window in to just what the utilization of social media actually 
means to the discriminating taxpayer out here as they continue 
to work with the IRS.
    Mr. Miller. We do not, at the current time, use social 
media. It is--it is possible. We are actually talking about it 
because on some basis, it does make some sense to look at all 
public information. We would not be using it to select people. 
It is a possibility, and I think we are talking about whether 
in our collection area, for example, a Collection Officer could 
take a look at a person's publicly available information to see 
whether that person is, frankly, showing assets that they might 
not otherwise be talking about. I don't think we are doing it 
yet. In fact, I know we are not doing it yet. We are going to 
have a long conversation before we do it, but I think it makes 
some sense for us to at least have the conversation.
    Mr. Womack. Interesting. So it would be somewhat of a micro 
targeting tool, perhaps, that you would use? I don't want to 
put words in your mouth.
    Mr. Miller. I don't think I would describe it that way. It 
would not be targeting at all. In fact, it would be a tool we 
would utilize once we had a person that we are working with 
already. It wouldn't be something that we would be using to go 
out and find people. That is not a discussion we are having 
right now.
    Mr. Womack. So, if I am hearing you correctly, you would 
not use the tool in such a way to prospect potential----
    Mr. Miller. Correct. Absolutely correct.
    Mr. Womack [continuing]. Customers, if you will. You would 
use it basically as an extraordinary means to follow up with 
already existing persons, businesses, or otherwise that are on 
social media.
    Mr. Miller. I think that is correct. First of all, we 
haven't made a decision one way or another, but secondly, to 
the extent we are talking about it, we are absolutely not 
talking about prospecting. We are talking about whether it 
would be a tool in our tool belt if we were engaged in a 
conversation with an existing taxpayer.

                          BUDGET AND RECEIPTS

    Mr. Womack. Earlier in your testimony, you talked about the 
fact that you, I think it was in 2012, collected $2.5 trillion, 
92 percent, thereabouts, of total Federal tax receipts, and we 
have had a pretty extensive discussion already in this hearing 
about the effects of sequestration, so I have a couple of 
questions related to resources.
    And so, on the first question, it would be, how would we 
calculate the total amount of resources necessary to have an 
optimum collection of what is due the Federal government? Is 
there a--I know you submit information to the White House and 
ask for certain things to be in your budget. And the second 
part of the question maybe asking it a different way. Is 
there--along the concept of diminishing returns, is there an 
amount of money out there that would not prove to be 
beneficial, i.e., would not yield back the results that you 
would be looking for? So, help me sort out the resource 
question.
    Mr. Miller. The first question of whether there is a 
perfect amount of money that we could be given to collect the 
maximum amount of revenue? That is an impossible question. I 
don't think we have an answer to that. It is clear we could use 
more resources. It is clear we are down 14 percent in our 
Revenue Officer cadre since 2010, and then that begins to show 
holes in our geographic coverage and our ability to collect.
    What we would be asking for, and the way we would ask for 
it, truly is a combination of looking at what our priorities 
are, looking at what is reasonable for us to be able to do in a 
given year in terms of hiring. We are nowhere near any of those 
things. But there is analysis that shows if you give us a 
dollar, and whether that dollar goes for enforcement service or 
otherwise, the numbers tell us, and GAO supports this, that we 
are a $4 return to the government, more than $4.
    Mr. Womack. It is not my intent to ask you an impossible 
question. It is my intent to establish, however, that at $2.5 
trillion, that is equal to or greater than Federal receipts in 
the past comparatively, right? I mean, is that is a record 
number?
    Mr. Miller. It is around that. It floats in that area, 
whether it is $2.3 trillion or $2.5 trillion.
    Mr. Womack. Okay. So, as we look over the ensuing months 
under sequestration, is it fair to assume, based on your 
testimony, that that number is going to be substantially lower 
than $2.5 trillion dollars?
    Mr. Miller. No, no, I don't think I want to say that. What 
I want to say is it will be, it could be billions of dollars 
less, but that is not much against this $1.5 trillion amount.
    Mr. Womack. Okay. So----
    Mr. Miller. But remember, the amount of money we take in is 
mostly voluntary; the 83 percent voluntary compliance rate, 
most of it comes in voluntarily. Now there are two aspects of 
providing more money for us. One is we can draw out the other 
17 percent, a certain portion of that, and secondly, over a 
long period, that 83 percent may fall to the extent we are not 
out there. Those things are intangibles that I can't really 
give you a number around, but we are not talking in the 
trillions here, Congressman, that is clear.
    Mr. Womack. But it is your testimony that under 
sequestration, we will collect less money. The question is 
whether it will be substantially less.
    Mr. Miller. And substantially is, of course, sort of a 
subjective term.
    Mr. Womack. I would understand that, yeah.
    Mr. Miller. Yes, I think we will collect, unfortunately, 
substantially less. We are working on numbers now, but I don't 
have those today, unfortunately, because we just got our $600 
million cut.
    Mr. Womack. Thank you.

                          BUDGET AND RECEIPTS

    Mr. Crenshaw. One thing, I think in 2001 and 2009, we 
actually increased the funding for IRS and actually the 
revenues went down, so I mean, that--I think your point is that 
intuitively you would think if you just spend more money on 
IRS, you get more money; you spend less, you get less, which 
sometimes, I think, doesn't always work out. Like the GAO says, 
if you spend a dollar on the GAO, you get back $69. And 
somebody said, well, why don't you give them a trillion 
dollars, and they will give us back $69 trillion, and we can 
all go home. So it doesn't quite work that way. Maybe that is 
the what you are getting at. I think the Acting Commissioner 
will probably say that it doesn't always work exactly the way--
--
    Mr. Miller. That is exactly right. It is, in general, based 
on history, it is a $4 return to 1 dollar we get. In the 
enforcement area, it is higher than that. It might be as much 
as $6 to $8 back, but what the Chairman says is exactly right. 
By the way, if you give us money this year, it is unlikely to 
have an immediate impact. In fact, it may actually erode a 
little bit because we have to hire and train, and that takes 
people off of the revenue generating activities.
    So, it always is a lagging impact, just as reduction in 
budget has a lagging impact. We are doing fewer exams as we 
speak, and those closures will not occur this year necessarily; 
they may occur next year, so sequestration will not be an 
immediate hit on our numbers. It will tail out in 2014 and 
become much more evident then.
    Mr. Crenshaw. Thank you.
    Mr. Quigley.
    Mr. Quigley. Thank you, Mr. Chairman.
    Mr. Chairman, to your point and to the gentleman's 
questions, I think they are absolutely fair.
    And Commissioner, to the extent that you can move toward 
understanding what those numbers are, certainly helps us with 
appropriations. You know, you refer to it, to an extent, as a 
performance matrix. Well, we can figure out there are other 
variables. I think the Chairman pointed out the revenues 
between 2001 and 2009, clearly, a lot of that had to do with 
the economic downturn, correct?
    Mr. Miller. Right.
    Mr. Quigley. What other variables exist out there how your 
collections go?
    Mr. Miller. There are a number of variables. Obviously, the 
number of folks we have and where we put them is a key 
variable. But also, as you mention, economic downturns and 
economic surpluses will impact receipts and will impact our 
ability. The number of balance dues that show up on our books 
during a recession is alarming. It is a large number, and that 
changes the way we do our work, and it will have an impact. 
Also, obviously, to the extent law is changed, that has an 
impact as well.

                                 AUDITS

    Mr. Quigley. GAO talked about--and I just want to get your 
reaction to it. They did a study December last year talking 
about shifting $124 million from field exams to correspondence 
exams for certain businesses with the possibility of increasing 
revenue collections by about a billion dollars per year. I am 
sure you hear of studies like this, and I am sure you are 
constantly analyzing the most efficient way to target, given 
less resources. What was your reaction to this particular 
analysis?
    Mr. Miller. I would have to go back, Mr. Quigley, and take 
a look at that one. I don't remember it off the top of my head. 
GAO does a nice job of giving us some help. I think, whether we 
would swap out work, is an interesting question. We have 
increased in the last 5 years the number of correspondence 
examinations we do. They are very efficient. They are not 
necessarily as weighty in terms of the amount of revenue they 
bring in, and you have to maintain coverage in the field 
because it is a different source of coverage than 
correspondence coverage. You need both. Could we swap out some? 
Absolutely, and we have done that, and I will take a look at 
that particular study and come back to you, sir.
    [The information follows:]

    We agreed with the GAO's recommendation that we ``review 
disparities in the ratios of direct revenue yield to costs across 
different enforcement programs and across different groups of cases 
within programs and determine whether this evidence provides a basis 
for adjusting IRS's allocation of enforcement resources each year.'' To 
do that, GAO recommended that we ``develop estimates of the marginal 
direct revenue and marginal direct cost within each enforcement program 
and each taxpayer group.'' We have begun a study to estimate marginal 
(rather than average) revenues and costs of correspondence exams, and 
expect that the methodologies we develop in that study will help us 
estimate the marginal revenues and costs of other enforcement programs. 
These will then enable us to compare the marginal revenue-to-cost ratio 
of each enforcement program as the proper basis for making resource 
allocation decisions.

                         INFORMATION TECHNOLOGY

    Mr. Quigley. Sure. Thank you. Continuing the focus on 
efficiencies, given the absolute necessity, where are you and 
how do you analyze the need for modernizing your electronic 
cargo and software and how that might help or how it has 
helped?
    Mr. Miller. Sir, I think we have done really very well, and 
we rolled out a new Master File system last year. We have had a 
great deal of success in our Modernized Electronic Filing. 
Electronic filing, by the way, right now is at 89 percent for 
individuals. That will come down as the year continues, but 
that is as high as we have seen it, and that is wonderful, and 
our systems are working quite well.
    I would say we are nowhere near done, and we are getting 
better at it, as GAO as acknowledged. If you were to ask me, if 
you had one last dollar to give me and that dollar was for 
bodies or for IT, I would take it for IT because that is the 
lifeblood of our efficiency.
    Mr. Quigley. Thank you.
    Thank you, Mr. Chairman.
    Mr. Crenshaw. Thank you. Mr. Diaz-Balart.
    Mr. Diaz-Balart. Thank you, Mr. Chairman.
    Commissioner, good to see you, sir. Let me just first thank 
you for being so accessible, and also, we all recognize that 
you have a very difficult job to do, and thank you for your 
willingness to do that.
    Very briefly, I also want to thank you for particularly 
your concern, your involvement on identity theft, and you and I 
have talked about that and I think some good steps were taken. 
I know you are frustrated that more needs to be done, but I 
really appreciate the fact that you really are focussing on 
that, and I think we share the importance of that.
    Mr. Miller. Thank you, sir.

                            TAX-EXEMPT BONDS

    Mr. Diaz-Balart. Let me talk about another issue that you 
and I talked about briefly, but I really kind of want to throw 
this out for my colleagues, and then I want to throw out five 
questions for the commissioner. But I do need to add again, 
because the commissioner has been extremely accessible, that I 
think we have a conference call with some of your staff on 
Thursday, and again I want to thank you. Thank you for that.
    Mr. Miller. Thank you.
    Mr. Diaz-Balart. I understand, Mr. Chairman, that the IRS 
is now considering declaring that the bonds of a special 
district, a particular special district in Florida, are taxable 
on the basis that at the time that the bonds were issued, the 
board of that special district was controlled by one or a few, 
a few people. My understanding is that no bonds have been 
considered to be taxable on this basis before and that the IRS 
has never articulated this requirement before. So this would 
seem to be a retroactive change from the law governing these 
special districts, and by the way, there are hundreds, if not 
thousands of them, throughout this country.
    The burden of this ruling, obviously, would fall on the 
homeowners in those districts who would ultimately have to pay 
any settlements. The resident investors in the bonds, by the 
way, of other districts would also be affected by if this 
ruling were to take place. So, Commissioner, a few questions I 
can throw your way.
    Mr. Miller. Uh-huh.
    Mr. Diaz-Balart. Has the IRS ever made such a determination 
in the past? And if so, when and where? Has the IRS--let me 
just throw those out at you.
    Mr. Miller. Throw them at me.
    Mr. Diaz-Balart. I will throw them at you, and again, has 
the IRS ever considered this issue before? If so, what was the 
outcome?
    Has the IRS audited a local government before where one or 
a few people controlled that local government and where the IRS 
did not declare the bonds to be taxable?
    Has the IRS considered the effect on similar issuers in 
Florida and, frankly, in other States and on the residents of 
those issuers, and obviously the investors in the bonds of 
those issuers?
    And finally, would this not be an issue appropriate for 
notice and for comments during the rulemaking process?
    Now, I understand those are a lot of questions, and again, 
I want to thank you for meeting with me on this before, also 
for, again, allowing and setting up that conference call, but 
really I just need to make sure that we all here understand 
that what we are trying to do, what I am trying to do, is get a 
handle on this before it becomes a major issue, because 
obviously, imagine those special districts around the country 
if all of a sudden this will take place, the impact could be 
devastating, it could be huge, so again, I thank you, 
Commissioner, for your indulgence and again meeting with me and 
speaking to me, but those are issues that I think we need to 
resolve.
    Mr. Miller. I think, Congressman, I am going to have to 
come back to you on the specifics, as you might have guessed.
    Mr. Diaz-Balart. I understand.
    Mr. Miller. There are, obviously, to the extent it is an 
individual district that we are dealing with, Section 6103 
rules that would prevent discussion here, but what I can 
certainly guarantee you is that we will have further 
conversations as we move forward in this area.
    Mr. Diaz-Balart. And Commission and Mr. Chairman, I look 
forward to the conference call. I just wanted to make sure that 
these are some of the issues that I think need to be answered, 
and obviously, we will have many more. But again, I do want to 
thank you for meeting with me and I look forward to continue 
working with you. I think, obviously, we need to make sure that 
we can avoid a catastrophe of this nature because I think the 
impact nationally and in Florida will be, frankly, potentially 
catastrophic for folks who live in those districts, and as you 
know, there are thousands of them. But again, I thank you, and 
I look forward to continue our conversation.
    Thank you, Mr. Chairman.
    Mr. Crenshaw. Thank you.
    Mr. Bonner.

                             SEQUESTRATION

    Mr. Bonner. Thank you, Mr. Chairman.
    Going back to sequestration, Mr. Acting Commissioner, you 
had indicated that May would probably be the first month where 
you would have a day where the furloughs might come into 
effect.
    Mr. Miller. Right.
    Mr. Bonner. Have you yet identified how many of the 90,000 
plus employees at the IRS will actually be furloughed?
    Mr. Miller. A couple of things. It is our intention, and we 
do need to talk to the National Treasury Employees Union, we 
need to tell our folks more formally, but right now it looks 
like the first of those days will be in May. It is our 
intention that everybody is going to be taking a furlough day. 
It may be that there are certain areas where we need to stagger 
them a little bit to protect the fisc, to protect our systems. 
There may be IT folks that have to be on in order to ensure 
that we are protected. There probably have to be cyber-security 
people on duty as well, but those would be very limited numbers 
of folks, and they would be taking days. They would just be 
taking different days, but it is our intention that everyone 
would be taking a day.

                         COMPLEXITY OF TAX CODE

    Mr. Bonner. Okay. Thank you.
    Shifting gears. In a few days, a couple of weeks, I am 
going to be holding another round of town meetings in my 
district. I am from Mobile, Alabama, along the Gulf Coast, and 
like most Members of Congress, I enjoy going home and talking 
to the people that I work for that hired me for a 2-year 
contract, and so I look forward to town meetings. But I am 
going to ask you this question because I have asked this 
question previously to your holding this acting post of 
inspector generals and previous commissioners as well. Do you, 
by chance, happen to know, since these meetings will occur 
right after the 15th of April, do you by chance know how many 
of the current number of IRS employees actually have to employ 
professional help to file their taxes or use Turbo Tax or some 
type of other means other than just the old-fashion taking the 
shoe box out of the closet and the receipts and putting them 
together themselves?
    Mr. Miller. Unfortunately, I would have no way really of 
knowing that, sir.
    [The information follows:]

    The IRS does not have information regarding the number of IRS 
employees using a professional or computer software to file their 
taxes.
    Below is the information for the entire taxpayer population:
    In Filing Season 2012, through the week ending 05-12-2012:
            70.34 million taxpayers used a professional 
        (approximately 52 percent of total taxpayer population) 
        *
            44.78 million taxpayers self-prepared using 
        software and e-filed (approximately 33 percent of total 
        taxpayer population) **
    In Filing Season 2013, through week ending 05-11-2013:
            70.38 million taxpayers used a professional 
        (approximately 52 percent of total taxpayer population) 
        *
            43.57 million taxpayers self-prepared using 
        software and e-filed (approximately 32 percent of total 
        taxpayer population) **
    * does not account for taxpayers who used a professional 
and submitted a paper return.
    ** does not account for taxpayers who used software and 
submitted a paper return.

    Mr. Bonner. It would probably be instructive. As we deal 
with the complexity of the tax code, it might be enlightening 
for even the acting commissioner to know how many of his own 
employees have to deal with the frustrations that hard working 
taxpayers around the country have to deal with, especially as 
we get closer to the 15th. I think there has been a report in 
previous years. It might be available. It might be possible to 
update.
    Mr. Miller. Okay.
    Mr. Bonner. When we met with former--with an inspector 
general a few years ago back when I think Mr. Serrano was 
chairman, I asked that question and suggested maybe you could 
even do some type of online survey so your employees could say 
whether or not they do it. It is just an idea because I promise 
you it is a question--you know, a lot of people actually don't 
think Members of Congress pay taxes or have other 
responsibilities that we do have, but I think it would be 
interesting to know how many of the employees of the service 
actually have to seek professional help like many hardworking 
taxpayers do.
    Mr. Miller. We can take a look at that, sir.
    [The information follows:]

    Under the Internal Revenue Code (Code), a resident alien's income 
is generally subject to tax in the same manner as a U.S. citizen. An 
individual is a resident alien if he or she is physically present in 
the U.S. a sufficient number of days to meet the substantial presence 
test under section 7701(b) of the Code.
    The Code requires an individual that has a tax filing obligation to 
obtain a taxpayer identification number (TIN) in order to file an 
income tax return. The SSA does not issue SSNs to resident aliens who 
are not authorized to work in the U.S. Therefore, the IRS issues 
Individual Taxpayer Identification Numbers (ITINs) to individuals who 
are required to file federal income tax returns but who are not 
eligible to obtain an SSN. The IRS issues an ITIN so that resident 
aliens can comply with their income tax return filing requirements. 
However the IRS does not obtain any information on the immigration 
status of individuals applying for an ITIN. Thus, we are unable to 
provide any information on the number of undocumented workers.

                          AFFORDABLE CARE ACT

    Mr. Bonner. That would be great. The other question that 
just comes to mind is you were talking a little bit, I think, 
in response to either the Chairman or the Ranking Member about 
the Affordable Care Act, and most of the responsibility for 
that will be on the Department of Health and Human Services. 
While we all, perhaps, probably everyone in this room, does pay 
taxes and will have that obligation to, on the 15th, do you 
know how many of the employees of the IRS will actually be 
impacted by the Affordable Care Act in terms of--will you be--
will you, like Members of Congress and staff, will you be 
available to go into the Federal exchange? I have not been able 
to get a lot of help from Health and Human Services about how 
this is going to work, and I was just wondering if the Service 
will be under the Affordable Care Act as well.
    Mr. Miller. Yes and no, I think, if I understand the 
question. We are part of the Federal Employees Health Benefits 
Program, and that is coverage that is acceptable under the 
Affordable Care Act, and so, yes, we are covered. Yes, you are 
covered by the provisions, and yes, you have employer coverage 
and therefore you are not----
    Mr. Bonner. So you will stay under--Members of Congress and 
their staff, not committee staff or leadership staff or 
Executive Office of the President.
    Mr. Miller. Yeah.
    Mr. Bonner. There was a carve out, unfortunately, and I 
just was wondering, so you will be able to continue 
participating in the Federal Employees----
    Mr. Miller. I believe so, but that is a better question for 
OPM, than it is for the IRS because we do like everyone else in 
the Federal government.
    Mr. Bonner. Very good. Mr. Chairman, I am going to save my 
second question for the second round of questions if we go to 
it. It deals with cyber security.
    Mr. Crenshaw. Thank you. Mr. Yoder.
    Mr. Yoder. Thank you, Mr. Chairman.
    Mr. Commissioner, thanks for joining us today. We 
appreciate your testimony, and I wanted to follow up on some 
questions the Chairman was asking regarding the implementation 
of the health insurance or healthcare legislation. You may have 
covered this, so just some brief follow ups here.
    Do we have an estimate on the cost to the IRS specifically 
related to implementation of the healthcare act?
    Mr. Miller. We have what we have spent so far, and we have 
what we think we will spend this year. I think tomorrow you 
will see what the President is asking us to spend next year. To 
get through 2012, we have spent something in the range of $488 
million; $405 million of that was for IT. All of that has been 
from the HIRIF fund, which is the HHS fund, to implement ACA. 
This year, we had asked in our budget for something in the 
middle $300 millions, whether it was $360 million or something 
like that. We did not get that, obviously, and so we will have 
to trim that back. And with sequestration we could get it down 
to $300, something in the realm of $309, $300 million, but with 
sequestration, it may be lower than that. Those are the ranges.
    Mr. Yoder. Is that an ongoing cost, an annual?
    Mr. Miller. It will differ going out. And I think the only 
estimate that I am aware of for a full 10-year period, is the 
CBO original estimate of $5 billion to $10 billion for the IRS 
to implement ACA. I think if you look at the $488M we have had 
so far, actually $300M this year, we may be looking at 
something in the lower end of that range, but I really don't 
have and we don't budget on a 10-year basis. We come to you 
every year.
    Mr. Yoder. And are all the forms ready? Are we at a 
position where the IRS will be on time with all the documents 
and forms that taxpayers need to fill out throughout the 
country?
    Mr. Miller. Yes, I believe so.
    Mr. Yoder. And do we have an estimate of what the cost of 
compliance is, not the healthcare cost itself, but just the 
administrative cost to small businesses, to the American people 
who are going to be affected by this?
    Mr. Miller. I don't have a specific cost. I don't know that 
there is one, to be honest with you. I don't know it. We can go 
back and check on that for you.
    [The information follows:]

    The IRS does not have any information regarding the administrative 
cost to small businesses resulting from new ACA Code provisions.

    Mr. Yoder. I think it would be helpful to know because we 
talk a lot on this committee about the cost to government to 
implement the acts that are passed in Congress, but we probably 
don't spend enough time really diving into what is the cost, 
particularly related to your agency on the compliance side; how 
much do Americans, how much are they going to be spending just 
filling out the paperwork that the IRS requires to ensure that 
there has been proper compliance? Do we have an estimates of 
what the cost of compliance with the Internal Revenue Code is 
overall in this country?
    Mr. Miller. I think that there are those studies, but we 
would have to go probably to the Department of Treasury for 
that. I don't have that with me, but I don't doubt that there 
are probably several of those. I don't know them off the top of 
my head, sir.

                          RETURN ON INVESTMENT

    Mr. Yoder. Okay. And then to follow up on the conversation 
was being had regarding the tax gap and tax compliance and 
really the bang for the buck in terms of where we spend dollars 
at the Federal Government and where those dollars have the most 
value to the American people, I think--certainly, I think your 
testimony is, sir, that for every dollar we were to place into 
the IRS, we would receive $4 back into the Treasury; is that 
how I understood your testimony?
    Mr. Miller. That is the minimum. To the extent they are 
enforcement dollars, it is larger than that, but for any 
dollar, the agreed upon amount is $4-plus.
    Mr. Yoder. And Mr. Womack and the Chairman were both sort 
of following up on that question. Certainly your testimony then 
isn't that if we put a trillion dollars into the IRS, we get $4 
trillion back, so how does that actually work itself out versus 
the law of diminishing returns? I think Mr. Womack was trying 
to get at that question.
    Mr. Miller. And I appreciate that, sir. I don't think I 
answered that one well because I don't think there really is an 
answer. We are limited in the amount we could manage, right? We 
couldn't manage a trillion dollars, even if you wanted to give 
it to us, because it is well beyond that amount with which we 
could accomplish anything. So what we ask for is what we think 
we could spend, and those amounts are manageable, and we will 
see tomorrow what those are.
    This year we were funded at $11.8 billion in the CR, and 
above that for the President's ask. Certainly those are amounts 
for which I believe the 4:1 ratio is absolute. Beyond that, it 
will depend, because we will get to the point--you are 
absolutely right--where we cannot spend it all.

                                TAX GAP

    Mr. Yoder. The tax gap in this country, I think, is 
estimated at, what, 400-some billion dollars? What is that, the 
number the IRS uses for those dollars that are out there that 
should be being paid that are not being paid?
    Mr. Miller. So we can come back to you on tax gap.
    [The information follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Mr. Miller. It is in the middle $400 million. After you net 
everything else out, including voluntary payments and 
involuntary payments, it is much less than that. But the 
voluntary compliance rate, which is on 2006 numbers, is in the 
83 percent range.
    Mr. Yoder. So leaves about a $400 billion, $450 billion tax 
gap number.
    Mr. Miller. That is the gross gap, I think.
    Mr. Yoder. The gross gap.
    Mr. Miller. The net gap is less than that. And I can come 
back on those numbers.
    Mr. Yoder. The total budget of the IRS that is going to be 
requested tomorrow, that number is not public. The current 
2013, the estimate the IRS will spend after sequester is how 
much?
    Mr. Miller. $11.19 billion.
    Mr. Yoder. $11.19 billion. So the tax gap is roughly $480 
billion. I think Mr. Womack said 485 over here--385--I 
apologize--385. So your budget right now is about $11 billion. 
On a 4:1 ratio then would it take about $100 billion then to 
get that other $400 billion at a 4:1 return?
    Mr. Miller. No, that is not my testimony, because we could 
not do that, obviously. What we can do is close the gap through 
a batch of ways, including some legislative. There is more 
money out there could be gotten with more bodies. There is no 
question about that. It will not be a pretty thing to give us 
the ability to go farther down the line of some of that money. 
But there will always be a tax gap, and it varies place to 
place.
    It will be interesting to see what some of the reporting 
that you have given us will do to the tax gap in the next 
couple of years, such as the foreign account reporting, the 
credit card reporting and the basis reporting. Those are going 
to be interesting things which should make us much more 
efficient. We would not need as many people to get at that 
money.

                              EFFICIENCIES

    Mr. Yoder. So I am glad you said efficiency, because I 
think that is something we can all agree on, that if we could 
actually get a greater efficiency in terms of dollars that IRS 
spends in its return and closing that gap, that would be 
something that certainly everyone would think would be a 
beneficial use of taxpayer funds in a more effective way.
    I know you are investing in technology and IT, and I have 
had constituents write in, one constituent sent me a note with 
an article, I think it was in 2011, that said investigators 
found an address in Michigan that was used to file 2,137 
separate returns. We have had some cases where hundreds of 
refunds are deposited into the same bank account.
    Those do not seem like manual mistakes; those seem like 
mistakes that would be caught by greater technology. And I 
guess a couple questions for you. One, how are your 
technological advancements going to make it more effective so 
that we can avoid those fraudulent transactions, those 
fraudulent claims in a way that does not required us to invest 
in more people but to invest in a more effective use of the 
dollars we have?
    And then I just note in the Inspector General's report that 
they cite hundreds of millions of dollars of reforms, including 
reducing office space by almost a million square feet, 
resulting in potential rental savings over $100 million over 5 
years, and a variety of other things. And I guess are those 
items being implemented? Do you have disagreement with some of 
the items in that report? And what are things that, beyond just 
saying if we give you a dollar you are going to return $4, but 
what are other things that the IRS can do to turn the resources 
we are using now to greater results through using efficiencies 
and greater effective policies?
    Mr. Miller. That is a set of questions. Let me hit the 
first one of those if I could, the technology question. I will 
be specific in answering the one that you raised. In an 
identity theft world, where we were seeing a lot of refunds 
going into an account or a lot of refunds going to an address, 
we have the technology fixes in place for that this year and it 
seems to be working.
    That is something that we saw happening and we took 
technological action on that through clustering sorts of 
filters. We are doing more of that and I think we are doing it 
much better. I would say we did much, much better last year 
than we did the year before on identity theft, and we are doing 
better still this year. We still have work to do. Do not get me 
wrong.
    On the Inspector General's report, I am not familiar with 
each and every one of the recommendations. I can speak to rent. 
We have been very aggressive, and you will see in my written 
testimony just how aggressive we have been. We have closed, or 
are in the process of closing, 43 posts of duty; 600,000 square 
feet of space has been returned this year. We have stopped 
paying rent on 600,000 square feet. Over the next 2 years, 1.4 
million square feet of rental space is going to be turned back. 
So we are pretty aggressive on that.
    I outlined in my written testimony, and even in here, the 
contract savings we have, the travel and training savings that 
we have. We have been aggressive over the last couple of years, 
Congressman.
    Mr. Yoder. I appreciate that.
    Thank you, Mr. Chairman.
    Mr. Crenshaw. Thank you.
    I think we have time for another round of questions. I 
would like to ask a couple of quick ones. One, as we talk about 
this, the tax gap, you know, it is kind of intuitive, you spend 
more money then you would get more money. But I think we have 
talked about the fact that bracket creep and population and 
GDP, all these things have an impact, and I think we all are 
aware of that.

                           TAX SIMPLIFICATION

    One of the interesting things is, I read not long ago that 
former Commissioner Shulman, here is what he said. He said, 
making the tax code less complex is the single most important 
thing we could do to improve taxpayer service and boost 
compliance. So it is interesting, you know, it is almost like 
you could say we could appropriate more money or we could make 
the tax code more simple, because if we make it more simple, it 
is easier to comply with, it is easier to comply with, then it 
is easier to enforce. And that may be one way that we could 
increase the revenues that would not cost any money if we get 
around to actually simplifying the tax code.
    I do not think anybody disagrees with the fact that it is 
pretty complicated, hard to understand. I think somebody said 
it is thicker than the Bible but it does not have any good news 
in it. Something like that. I had a law professor in law school 
say, he called it the thicket of verbiage.
    So I guess I would ask you as we talk about, ways to 
collect more revenue, do you agree with that, that there is a 
relationship between complexity of the tax code and compliance? 
Because at the end of the day the question might be, if we 
could simplify the tax code and make it easier to comply with, 
and make it easier to enforce, then you would not be as 
overworked as you are today.
    Mr. Miller. I think that is right. That is an absolutely 
valid set of comments, Mr. Chairman. I think that the Code is 
way too complex. I could not agree more with Doug's commentary 
in terms of making it simpler. Certainly the number of calls we 
would get would be diminished. Our difficulties in processing 
and matching should be lessened. So, yes, I agree, I would love 
to see a simpler tax code.
    Mr. Crenshaw. And I guess maybe we could report to our 
friends on the authorizing committee, if they could simplify 
the tax code then that would reduce some of the need to spend 
the money we have to spend to help people comply and also to 
catch the people that are not complying.

                             IDENTITY THEFT

    Just one last question, because we have talked all around 
this, and we talked a little bit about it when the Inspector 
General was here, about that whole question about fraud, filing 
tax returns. As I remember, it was something like maybe 900,000 
stolen IDs. People filed the tax return based on identification 
theft and then maybe $6.5 billion was paid out. And I guess can 
you talk about it from your standpoint firsthand? And are there 
things that we can do? Do you need more resources? Do you need 
more authorization? How can we get a handle on that?
    Because as I understand it, once it takes place, I mean, 
one of the things the Inspector General said, well, the best I 
can do is tell you to file early. But if you file after he 
files, as I understand it, you can be caught up in a big mess 
that might take 6 months, even though you have not done 
anything wrong, somebody stole your ID, filed a tax return, 
ended up getting a refund, and when you file your tax return 
somebody says, you are not that person. So you have got to now 
prove you are, which in fact you are, and you are stuck with a 
6-month process of trying to get out of this mess. So obviously 
if we could stop it on the front end. Are there things that we 
can help you do from a legislative standpoint?
    Mr. Miller. I think that the budget will include a few 
things that will help with identity theft. I could argue with 
the $6.5 billion. I think that that is based on old schemes 
that we have taken care of. I do not know what the number is, 
to be honest with you. I think a million people probably is not 
far from being wrong, in terms of the number of people who have 
had their identities stolen.
    I mentioned in my testimony that we have gotten better at 
this, and I think I mentioned it earlier, in Q&A. We have 
improved. We stopped $14 billion in fraud in 2011. We stopped 
$20 billion last year. Five million returns were stopped. And 
you are absolutely right, you have got to stop it up front or 
it creates all sorts of problems.
    But you are also right that if you are the second one into 
the system, you will run into an issue with us. We will have to 
work with you through having you file on paper, through having 
you file an affidavit with us. And the sheer number of those 
has caused us some delay. But I can tell you that we are 
getting much better at that, too, that we are closing many more 
than we are receiving, for the first time in quite a while, and 
that by the end of this year we should be in a much better 
place, and that 6 months, hopefully, will be the exception and 
not the rule. I hope to have 60 to 90 days to report to you. It 
is still going to take a while. It is not going to be immediate 
that we can get the right person through.
    In the future, the gold standard here, Mr. Chairman, would 
be that when you come in to file your return, you prove you are 
who you are. When you go through our filtering system, we have 
an aggressive set of filters that will help us. And that will 
get us to the point where we have many fewer people running 
into the wall here. We have 770,000 PINs now that allow a 
person who has been the victim to get through our system much 
easier, and that is going quite well. We are doing this as we 
speak. We are doing some work around so-called out-of-wallet 
questions, which means there is something that you know, but 
that somebody who steals your identity probably does not. We 
are running a test right now--the financial industry does this 
now--on asking what was your car, what was your first car, 
where did you live on a certain date? Questions that a thief is 
not going to know the answer that you probably will, and that 
will give us the sense that you are who you say you are, and we 
can move you through the system faster.
    We are testing that now. That is the gold standard going 
forward, I hope. And next filing system we will see whether we 
can get there. But it is not an easy task for us, and while we 
are doing much better, I do not want to give the impression 
that we are done because we are not.
    Mr. Crenshaw. Is there any kind of authority that we can 
help with, other than obviously in terms of resources, but just 
in terms of any kind of administrative issues or----
    Mr. Miller. There are some issues in terms of what we can 
share with State law enforcement in the 6103 area. There are 
also some issues around--and we will be glad to work with staff 
on this--there are some issues that will be addressed, I think, 
in the budget. They are generally around the strength of 
penalties in the criminal area. In the civil area there is the 
Death Master File which has caused consternation in terms of 
the forced publication of people's names and Social Security 
number after they have passed, that people then scoop up and 
use to file. There are things of that nature on which we can 
work with you, and there is a whole list of them, sir.
    Mr. Crenshaw. We will be happy to help where we can.
    Mr. Miller. And we could use resources.
    Mr. Crenshaw. I understand. You already said that.
    Mr. Serrano.

                        EARNED INCOME TAX CREDIT

    Mr. Serrano. Thank you, Mr. Chairman.
    You know, one of the questions that has come up throughout 
the years--I was tempted to quote one of my favorite subjects--
not favorite subjects, the result was never one of my favorite 
ones--was that there was a lot of discussion around the Earned 
Income Tax Credit, which in my opinion in some cases was 
targeting a certain part of the community. And at one point the 
numbers were pretty bad. Forty-five percent of the audits were 
being conducted on 17 percent of the taxpayers and 
disproportionately those obtaining the EITC deduction.
    So in keeping in line with the discussion about IT and the 
improvements you are making, are those improvements that you 
have made going to enable you to make better decisions about 
where the IRS should do the audits?
    Mr. Miller. I would hope so, Mr. Serrano, I would hope so. 
I think our percentage is lower now in the EITC area than it 
was. I think also I should mention that we have tried to be 
balanced in our approach across income levels. We have a fair 
amount of coverage in the upper income levels as well.
    I do think we still see a good deal of error and fraud in 
the EITC. We are trying to leverage resources. We have not 
talked about that this afternoon, but we should. We have been 
working on our return preparer leverage. Another way for us to 
be more efficient is in our regulation of the return preparer 
community, many of whom are working on the EITC. We have done 
work with that community to try to have them exercise more due 
diligence, to talk to them on a basis that gets them to create 
better EITC returns. Hopefully that will have a beneficial 
impact for the recipient and for the government, in terms of 
being able to leverage our efforts with respect to a preparer 
of hundred returns instead of return by return. That is less 
burdensome on the taxpayer as well.
    Mr. Serrano. In the past there were comments made to this 
Committee about this issue in the sense that in some cases it 
was not the individual who went in. And I am not saying one is 
not to blame. If there is something going on here that should 
not be going on people have to pay the price for that. But that 
they were encouraged by some of the people who prepare these 
forms to claim something that they were not supposed to be 
claiming.
    Do you know that to be a fact? Is that growing? Is that 
part of what you are discussing, to work with those communities 
so that in fact it may not be something they are doing to do 
the wrong thing but actually encouraging people to do the wrong 
thing by not being informed.
    Mr. Miller. I think the EITC is a difficult provision. It 
is complex. It is not evident to us, from the face of the form, 
exactly what is happening. I do think we have seen some return 
preparers, for good or bad, doing the wrong thing with respect 
to the EITC returns. We began last year something called the 
Real Time pilot. It is a technology improvement as well. We 
look at returns as they are coming in. We look to see who has 
prepared them and are they bad returns. And if they are bad, as 
quickly as we can, we are going out and talking to the preparer 
to try to drive them in the right direction.
    That is the kind of thing we are trying to do to be more 
efficient in our EITC work, not necessarily to burden the 
taxpayer, but to get the return preparer on the straight and 
narrow. Whether they are making errors or whether they are 
doing something worse than that, I do not know. But we are 
trying to be more aggressive in early intervention here.

                 OFFSHORE VOLUNTARY DISCLOSURE PROGRAM

    Mr. Serrano. Well, I appreciate that and I appreciate that 
approach. So for my last question, Mr. Chairman, we go from the 
lower income tax earner to the folks who have money offshore in 
the Offshore Voluntary Disclosure Program. You highlighted the 
success through which $5 billion was collected through the end 
of fiscal 2012.
    So my question is, you know, how is that program doing now? 
What is your evaluation, other than $5 billion is a great 
number? And with the cuts we are making to the IRS, or not 
increasing the funding at the proper level, is this program in 
danger of not being able to continue the success story so far?
    Mr. Miller. Well, I think I will start with a discussion. 
It has been a success story, 38,000 folks have come in, $5 
billion-plus over the last few years. It has been a success.
    That said, how will resources impact it? Not everybody 
comes in voluntarily. Where we receive information through a 
whistleblower, where we receive information from another 
source, a treaty or otherwise, where we receive information, in 
the next couple of years, from foreign financial institutions, 
there will be a lot of work to do in those cases. Those will 
not be voluntary cases. There will be examinations and those 
traditionally are very difficult and time-consuming 
examinations that use some of our best agents. That could be an 
issue. And to the extent that that does not happen, then I am 
not sure the voluntary compliance program will continue to be a 
success, because you do need, in addition to the open window, a 
bit of enforcement behind that. I would also say you do need 
both an aggressive enforcement arm, as well as the opportunity 
for people to come in voluntarily.
    Mr. Serrano. Well, I would hope that we could continue to 
grow the program. I know that is a bad word around here. But it 
is a fact that this one gets a return, and deals with fairness, 
too, so that the person who is working in an office or a 
factory is being treated the same way as the person who has got 
money somewhere else.
    Well, thank you, sir, and thank you for your service and 
thank you for your answers today.
    Mr. Miller. Appreciate it sir.
    Mr. Crenshaw. Mr. Womack.

                         EMPLOYEE PRODUCTIVITY

    Mr. Womack. I want to go back to efficiency for just a 
minute, and I am going to zero in on what I call a productivity 
model. I assume that the IRS, like other agencies, has some 
criteria by which they judge the performance of their 
personnel. And I call it a productivity model. Call it what you 
want. Do you study those models?
    Mr. Miller. We have a goodly number of measures, 
Congressman, that we do look at. We look at everything from the 
number of examinations per person, all the way through coverage 
in certain areas. So we have no lack of measures, most of which 
are productivity measures.
    Mr. Womack. Generally speaking, on what day are your people 
most productive? Are they as productive on Monday, say, as they 
are on Friday? Are they more productive Tuesday, Wednesday and 
Thursday? I mean have you gotten down----
    Mr. Miller. We have not done that. I can say that on the 
phones, Monday is our busy day, so we are more productive on 
the phones on Monday out of necessity. But outside of that, I 
am unaware of us doing something like. I am aware of some of 
the manufacturing firms that do that sort of analysis on a 
daily basis. That is not what we have done.
    Mr. Womack. So going back to your testimony originally 
about furloughs, what will be the rationale to use on just when 
the IRS subjects its people to a furlough?
    Mr. Miller. So, the analysis will be severalfold. One, we 
will have to decide when it makes sense to do it. There is no 
doubt, obviously, that a day around a holiday may be a less 
productive day at the Internal Revenue Service.
    Mr. Womack. You think?
    Mr. Miller. I do not doubt that the Service is like many 
other institutions that way. And so that is going to be 
something we are going to think about, obviously.
    We are also going to have to think about the well-being of 
our employees, which means we are not going to bunch these 
things in a fashion. It is okay for me to take this time off. I 
can afford it. It is a little different for a grade 4 or a 
grade 5 in one of our processing facilities, living hand to 
mouth, to afford it. We are going to have to space them out for 
that reason. So we would not do more than one in a pay period, 
for example. We have to try to space that out a little bit.
    We also would think about what day and how we do this. Does 
the IRS close for that day, or do we sort of do this on a 
graduated basis? We are still talking about that. But I can 
say, I think in terms of our call sites, that we will close for 
the day. Otherwise people will be frustrated with a continued 
lack of service on the remaining days, because we will be down 
throughout the week instead of just closed on a given day. Our 
judgment is that is the better way for the Agency to operate. 
It may be that we choose to close entirely because that is more 
efficient in terms of our security and other ancillary costs. 
Those are the kind of things we are talking about.
    Mr. Womack. Who will make the ultimate decision on when? 
Will it be pushed down to the managerial level, subordinate 
managerial levels, or will it----
    Mr. Miller. No, it will be my senior staff and I that will 
make the decision. To push it down, I think, invites a sort of 
madness and inconsistency, and puts managers in a bad place as 
well. So I think we will make a decision at the highest levels 
of the Service.
    Mr. Womack. Sir, I do not want to put you on the spot but 
let's say it is time to make that decision, would you say that 
the principal guidance, the cornerstone principle in the 
decision is going to be based on productivity or protection of 
the, I think you said the class 4, class 5 employee? How would 
you----
    Mr. Miller. It is going to be a mix of all those things, 
including what is best for the taxpayer, sir. It will be all of 
those things.
    Mr. Womack. In your own opinion do you think it would make 
more sense if, say, we dealt with the lower performing 
employees first, whether to retain them at all, as opposed to 
furloughing our highest performing employees?
    Mr. Miller. That is probably a question best given to OPM 
because those are rules that are across government.
    Mr. Womack. And if they were here I would ask them for 
their opinion, but I was asking for yours.
    Mr. Miller. In my understanding of the rules, I am not 
going to be able to effectuate something like that.
    Mr. Womack. Mr. Chairman, thank you for the time.
    Thank you, Mr. Commissioner.
    I yield back.
    Mr. Crenshaw. Thank you.
    Mr. Diaz-Balart.

                             IDENTITY THEFT

    Mr. Diaz-Balart. Thank you, Mr. Chairman.
    Commissioner, going go back to identity theft, and South 
Florida, as you know, is, frankly, ground zero, right, for 
identity theft, and whether it is IRS or any other kind of 
identity theft. And I know there have been some pilot programs 
in cooperation with the State's attorney's office and local law 
enforcement.
    Could you give us any idea as to, is it working as well as 
you had hoped? Is it yielding any results? Is there anything 
else that we could be doing and anything that we could do to 
help you do that?
    Mr. Miller. I think it is. We would have to talk to the 
States and local governments about this. This speaks to the 
fact that, in Florida in particular, there is no income tax, 
and as a result, we do not have a natural way of communicating 
with law enforcement. In many other States, it is easier to 
collaborate because we can talk about taxes to other tax 
people. But in Florida and some other States, it is more 
difficult and local law enforcement does not have the right, 
under section 6103, to get that information. So what we did was 
create a waiver process for victims who wanted to help out. 
They give a waiver to local law enforcement to come to us and 
allow us to share the information.
    I would say it got started slowly. Florida and about eight 
other States were first. We have had 1,500-plus waiver requests 
and it is working all right. And we just recently, in fact in 
the last few weeks, we expanded it across the country, judging 
that it worked well. We have, I think, more than 300 local and 
State authorities that are participating with us at this point.
    Mr. Diaz-Balart. That is good news. Before you were talking 
about the issue about the PIN. And obviously the IRS is not the 
only one who is subjected to this kind of theft, not only folks 
that deal with the IRS. It is the private sector, it is credit 
cards, et cetera. Coincidentally I went to get gas last night 
at a gas station in Miami and it was declined because they 
just--I guess it was a gas station that they did not know I 
went to much or whatever. And it literally was declined, I had 
to call, and then they are like, is this yours? Great. And then 
they reestablished the credit card.
    Now, they are not immune, I am sure we have all heard about 
the, I guess, billions of dollars where the private sector was 
hit on as well. But here is my question. When you are going 
through your process, are you doing it internally or can you 
contract some of this stuff out to others who are doing it? Are 
you looking at what the private sector is doing? Are you 
looking at contracting with the private sector? Or do you know 
if you have a better record, frankly, than some of those credit 
card companies--and I will just mention that--and therefore are 
doing a better job internally if you are not contracting? How 
does that work?
    Mr. Miller. You ask a mix of questions again and I will 
give a mix of answers, if I could, Mr. Diaz-Balart.
    Mr. Diaz-Balart. Kind of throwing it out there for you.
    Mr. Miller. I did mention earlier in the hearing that we 
are doing some out-of-wallet work. And out-of-wallet work would 
be to go to an outside contractor who has the sort of 
information that says, ``where did you, Steve Miller, live in 
1995?'' And do the comparison there. We are testing to see 
whether that works, whether that is a way forward.
    In a perfect world, again, you would prove that you are 
Steve Miller before you file your return. When we receive your 
return, you have everything that we know about you accessible. 
We know that Steve Miller has lived in the same house for the 
last 20 years, that he has the same wife and dependent, and 
things of that nature, so that we could compare it to what 
comes in. Right? Because it seems obvious that Steve Miller 
probably does not have nine dependents and has moved to South 
Florida, for example. That would be an odd sort of change and 
that should raise flags for us. We are getting there. We are 
not there yet. But that is where we need to get to.
    I think financial institutions, and we are talking to them 
all the time, financial institutions have a much richer 
database of interactions. They know where you have been 
shopping. They know what you have been doing with that credit 
card. And it is much easier for them to flag discrepancies. We 
need to get there. Our issue is it is only once a year, really, 
that we have an interaction with you. It is not a series of 
credit card transactions. We will get there.
    Mr. Diaz-Balart. Thank you.
    Thank you, Mr. Chairman.
    Mr. Crenshaw. Mr. Bonner.

                             CYBERSECURITY

    Mr. Bonner. Mr. Chairman, I am going to ask two more 
questions. I want to veer off the identity theft per se and 
talk a little bit broader about cybersecurity and specifically 
with regard to foreign threats. When the Inspector General for 
the Treasury for Tax Administration came before this 
Subcommittee last month, I had the privilege of asking him a 
question that I am going to ask you and I would very much 
appreciate your response on this.
    Recent news reports have detailed the extensive penetration 
by advanced, potentially state-sponsored cyber espionage 
threats against American businesses and government agencies. 
Obviously the tax and financial information of American 
businesses and individuals would be highly valuable to cyber 
criminals and other hackers.
    Can you give us an assessment about what the IRS is doing 
to protect its systems, especially from foreign threats, if you 
know of any?
    Mr. Miller. I think we are probably better served coming 
back to you in more detail and possibly, if you want, having 
our cybersecurity guys come up and talk to you directly.
    I can say I think we have a first-rate team, that we take 
it incredibly seriously, that it is not necessarily about 
penetration into the system. It is what you do once you are in 
the system and how you get out again. And we are very good at 
that, I think.
    That said, it is not a perfect world. But I think we would 
be better served, if you would like, if we can come up and have 
a more direct conversation with you.
    Mr. Bonner. Mr. Chairman, that is just an idea. I know we 
both sit on the Defense Subcommittee and we have had numerous 
hearings about cyber threats and especially from foreign 
entities. So it is just an idea that the Committee might want 
to consider.
    I am going to shift gear in my last question. And I am not 
trying to throw you a curve ball. I asked earlier if you knew 
how many people who worked with IRS employ professional tax 
preparer services. You said you did not, but you would try to 
get that answer if possible and get back to us and that would 
be great.
    [The information follows:]

    Please refer to the earlier response on page 107.

                              REGULATIONS

    Mr. Bonner. From time to time, I do not know if the Acting 
Commissioner of the IRS has ever run into this, but Members of 
Congress sometimes are exposed to questions from their 
constituents. Why would you knuckleheads pass this law that 
would force me to do this thing, this act? Many times it is not 
actually a law. It is not even legislation that ever moved up 
here. It is some rule that has been promulgated by an agency or 
a department that the law created. I will give you a quick 
example that has nothing to do with you. We live on the Gulf 
Coast, Mr. Diaz-Balart and Mr. Crenshaw and I do, and I know 
Mr. Serrano would like to live on the Gulf Coast, but he lives 
in the beautiful Bronx.
    Mr. Serrano. Eventually he will.
    Mr. Bonner. Eventually he will. But the Department of 
Commerce, which again has nothing to do with you, but they have 
the National Marine Fishery Services under the Department of 
Commerce, and they have recently come out with a rule--not a 
law, not a bill that we introduced, legislation we passed or 
that President Obama signed into law--but a rule that says that 
you can only catch red snapper for 27 days, two fish per day. 
That has nothing to do with the IRS, but I am using that as the 
example.
    Do you have any idea how much of the tax code that is 
enforced by the IRS and administered actually is a direct 
result of legislation but became enacted into law versus how 
much of it is enforced by some rule or regulation that is 
interpreted by the IRS? Does that question make sense?
    Mr. Miller. It makes sense. I do not think I have an answer 
for you, though, Mr. Bonner. I do not. I mean, admittedly, I am 
quite sure that there are places in the regulations where we 
are more complex and more difficult than we need to be. The 
regulations are more voluminous than the code is, and the code 
is bigger than the Bible. So I am quite sure there are places 
where that is the case. We try our best not to do that, and 
succeed sometimes and do not succeed other times. But I do not 
know what the balance of that is.
    Mr. Bonner. It was a thought that came to mind as you were 
answering some other questions and do not even know that it 
would be possible to get a number on it. But it is, at least to 
the people who live in my district, and I cannot believe I am 
alone, it is very frustrating at times when people look at 
Washington, look at government in a broad brush and think that 
sometimes these crazy ideas that come down from this city, 
actually that we even had a debate on it, much less a vote on 
it. And I can just only imagine, because as I said, I am 
getting ready to do town meetings, and every other town meeting 
I have had always I get a question about the complexity of the 
tax code, and I was just curious. Thank you very much.
    Thank you, Mr. Chairman.
    Mr. Crenshaw. Thank you. I understand, I am not sure, but I 
am told that the word ``child'' has 19 different definitions 
under the tax code and the regs that accompany that. So it is 
not hard to imagine people having a tough time understanding 
what is in there, whether it is a regulation or whether it is 
actually in the code.
    Mr. Yoder.

                               TAX REFORM

    Mr. Yoder. Thank you, Mr. Chairman.
    And following up on Mr. Bonner's line of questioning, I 
guess when we look at tax reform, that is a fundamental, I 
guess, discussion we have to have, which is how did all these 
things get into the tax code, 70,000 pages, 4 million words. It 
is very frustrating to small businesses and individuals who try 
to comply.
    I know the Chairman brought up tax reform earlier. What 
extent is the IRS directly engaged in conversations regarding 
tax reform? Does the IRS have a history of offering up specific 
proposals?
    Mr. Miller. We have offered up proposals in the past. And 
we are asked one-offs, at this point. I do not think we are 
part of any sort of organized discussion right now. I would 
hope we would be in that, because to say tax reform is 
wonderful is right. But it needs to be done with the knowledge 
of what our systems can do and cannot do, and the time it would 
take to get to a point where we catch up with the law. So there 
are things that we do bring to the table. Again, tax reform 
generally would be the Department of Treasury's Tax Policy arm, 
they would be doing that.
    Mr. Yoder. Both parties and folks from I think both ends of 
the political spectrum are talking about tax reform. We know 
the Ways and Means Committee is focused on it. It is going to 
be a significant part of the policy debate in Washington, D.C., 
this year. Looking at State examples or other nations, are 
there empirical data that shows that the simplicity of the code 
relates to--I know the chairman asked about this already--tax 
collection in particular? And are there examples of codes that 
not only have greater compliance rates but are very simple and 
yet effective in achieving the results? Do we have other 
countries that have a good model?
    Mr. Miller. I am unaware of that and I would not 
necessarily be exposed to that. I would think, again, we would 
be able to talk to the Tax Policy folks and the economists over 
there who may have been doing much more work in that area than 
I would have at this point.

                                 AUDITS

    Mr. Yoder. Okay. And then we can spend some time discussing 
the audit procedures, the compliance related to that, and we 
have talked at length about identification, folks stealing 
identification. Looking at some of the audits, I was looking at 
the Inspector General's report, just to quote from it a little 
bit, it says, ``IRS statistics show that 50 percent of the 
partnership returns audited after being selected by the 
Discriminant Index Function system or related DIF-selected 
returns were closed as a no-charge in fiscal year 2011. The IRS 
has relied on the system to decide how to best allocate its 
audit resources. According to the IRS, a high no-change rate 
means the IRS is spending a significant amount of resources on 
unproductive audits and compliant taxpayers are unnecessarily 
burdened by these audits.''
    Do you concur with those findings? And what are we doing to 
fix that problem going forward? And how do we, maybe at least 
in the case of these DIF system-related audits, how do we 
create a system that burdens taxpayers who are obviously 
following the rules properly less and targets those who are not 
more?
    Mr. Miller. Let me talk about partnerships after a more 
general discussion on the selection of returns. I think it is 
absolutely the case that it is actually a problem if we have a 
high no-change rate, which means we have come to you and we 
have found that you are generally compliant, we have no 
adjustments to your return. We will always have some of that, 
but something at the 50 percent level indicates we are probably 
either doing it wrong or should not be there. And it could be 
either, actually.
    The partnership area has been difficult for us. I think 
more recently that is not the case. I think we are doing better 
in terms of audit selection. I would say the partnership area 
has grown, that we are seeing huge growth in the number of 
flow-through entities. And we need a presence there. We also 
need to have a better selection mechanism. And we are getting 
there. But the fundamental point is right. If you have a high 
no-change rate, then you are probably either doing something 
wrong or should not be there. And we need to move away from 
those areas and better target our resources.
    Mr. Yoder. We will look forward to those results. 
Appreciate it, Mr. Commissioner.
    Thank you, Mr. Chairman.
    Mr. Crenshaw. Thank you.
    And, Mr. Miller, we genuinely thank you for taking the time 
to be here today. The largest agency that we provide funding 
for. We appreciate your service, all the service of the 90,000 
people. And in particular, as you know, in these difficult 
economic times, the work that you do is so important to 
providing the funds. The more we collect that is duly owed, the 
better off we are. And so if there are ways in these difficult 
times, if we can work together, we want to work with you. And 
genuinely thank you for all the work that you do and for being 
here today.
    Mr. Miller. Thank you very much, Mr. Chairman.
    Mr. Crenshaw. This meeting is adjourned.
    [The information follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
                                          Thursday, April 25, 2013.

                       DEPARTMENT OF THE TREASURY

                                WITNESS

HON. JACOB LEW, SECRETARY, DEPARTMENT OF TREASURY
    Mr. Crenshaw. Well, good morning, everyone. This meeting 
will come to order. I want to thank our witness, Treasury 
Secretary Jack Lew, for joining us this morning to give 
testimony about the President's 2014 budget and to respond to 
questions. As members of the Subcommittee have heard me say 
before, my hope that, for fiscal year 2014, we will have 
regular order. We will mark up bills that reflect our nation's 
priorities. We will amend the bills in the Committee and we 
will amend them again on the floor. And then we will go to 
conference with the United States Senate. But regular order 
begins with the timely transmittal of the President's budget on 
the first Monday of February. That did not quite happen, but, 
as I have said before, better late than never, and we are ready 
to move forward.
    Presidents rarely get the budget that they request, and 
this year looks no different than normal. The House budget 
resolution assumes sequestration within the discretionary 
allocation, making the budget increases, such as a billion 
dollar increase requested for the Internal Revenue Service, 
improbable and maybe even impossible. But nonetheless, we want 
to work with you and your staff to make informed investments 
and cuts so that the Department may fulfill its many missions 
with available resources.
    Now, under Chairman Rogers' able leadership, this Committee 
did a lot of heavy lifting back in 2011 and 2012, and we 
actually reduced spending by some $95 billion. And then if you 
throw in sequestration, you have another 5 percent from non-
security programs and almost 8 percent from the security 
programs. My preference, and I am sure the preference of this 
Subcommittee, would be to find the successful programs and fund 
them, and then find the wasteful programs and either reduce 
them or eliminate them. But we have to wait until the 
Administration and the authorizing committees find agreement on 
tax and entitlement reform policies.
    In my view, the President's budget masks proposed increases 
in mandatory and discretionary spending with even higher taxes. 
I do not support this kind of approach to do deficit reduction 
because I think that growing the government and taking more out 
of the wallets of the American people does not lower 
unemployment; it does not really get the economy moving again. 
For instance, yesterday, the Special Inspector General for the 
TARP program issued a report that highlighted some of the 
shortcomings of the Treasury's programs to help homeowners and 
small businesses. The report states that homeowners who 
received mortgage modification from Treasury's HAMP, H-A-M-P, 
program were actually defaulting at an alarming rate. In fact, 
the report says that the longer a homeowner remains in HAMP, 
the more likely they are to redefault out of the program. And, 
in addition, this same report highlights how billions of 
dollars provided to banks through the Small Business Lending 
Fund were actually used to repay TARP loans, and some of the 
banks actually paid dividends to shareholders and did not 
increase their small business lending.
    So these seem to be good examples of how using taxpayers' 
funds to intervene into the private sector does not always work 
the way it is intended. The Special Inspector General for the 
TARP program outlines a number of recommendations, and I would 
strongly encourage the Treasury to take a look at those and 
seriously think about moving forward to implement them. And I 
am sure at today's hearing, somebody is going to want to ask 
about the controversy about the IRS, maybe, making warrantless 
searches by reading folks' emails. I am sure there will be 
questions about that.
    A lot of questions, Mr. Secretary, and you have a 
challenging job. And before the end of the year, Congress is 
going to have to work with the Administration. We are going to 
have to negotiate the debt ceiling. We are going to have to 
talk about mandatory and discretionary spending and revenue. 
And so you and your department are going to play a pivotal role 
in all of these issues. We look forward to working with you 
with these challenges, and we hope that you will always feel 
free to have an open and frank relationship with us. And so, 
once again, Mr. Secretary, welcome. I look forward to your 
testimony. And with that, I would yield to Mr. Serrano for any 
opening statement that he might like to make.
    Mr. Serrano. Thank you, Mr. Chairman, and before I begin, 
let me preface my comments by telling you that I also look 
forward to the days when we have regular order. I remember when 
Chairman Rogers was chairman of the Commerce Justice State 
Subcommittee, and I was Ranking Member, and regular order meant 
we were there for a couple of days on the House floor with 
amendments, and even reached a point where there was a pool. No 
money was involved by the staff as to how many votes the bill 
would get, and it always went over 300 votes. Those were the 
days when we worked things out ahead of time and presented a 
good package to the floor. I hope those days come back.
    Secretary Lew, you joined the Department, and I send you 
greetings from the Bronx. Secretary Lew, you joined the 
Department of the Treasury at a very important time for our 
nation. Our economic recovery is underway, but it is being 
hampered by sequestration. Our nation will soon reach its debt 
limit, but there are members of Congress amending that we 
should put our economy at risk by doing nothing at all. The 
Treasury Department plays a vital role in keeping our economy 
moving forward, our government functioning, and our financial 
system secure. Unfortunately, many of these missions are being 
undermined by congressionally-created crises.
    The sequester is, of course, our primary focus on the 
Appropriations Committee. Just two weeks ago, we heard 
testimony from the largest component of the Department of the 
Treasury, the Internal Revenue Service. Acting IRS Commissioner 
Steven Miller told us that the sequester will result in 
furloughs and in billions of dollars in revenue that is owed to 
the United States that the IRS cannot collect. The Treasury 
Department, through the IRS, collects that vast majority of the 
revenue that our government uses to fund itself. This seems to 
me to be a prime example of exactly the problem that the 
sequester has created. We are underfunding the very agency that 
provides us with the revenue necessary to operate our 
government. Unfortunately, we have yet to see any real effort 
from the other side to help alleviate the pain that many 
agencies and many Americans are feeling as a result of the 
sequester.
    Your budget request in fiscal year 2014 has had to fill a 
number of fiscal holes at the IRS and throughout your 
Department. I look forward to discussing the impact of the 
sequester and how the Department is attempting to continue its 
primary missions in the face of these difficult circumstances. 
In particular, I remain interested in the Department's efforts 
to expand economic opportunities to underserved communities 
like the one I represent in the Bronx. I have been a long-time 
supporter of the Community Development Financial Institutions 
Fund, and I continue to believe that it is an effective and 
efficient way to promote economic development. I am heartened 
that the fund will be bolstered by the start of the CDFI Bond 
Guarantee Program, which I believe will provide local CDFIs 
with an important new funding resource. Additionally, I am 
interested in learning more about your newly-proposed Financial 
Capability Innovation Fund.
    The Treasury Department plays a vital role in ensuring 
stability in our financial system, enforcing our tax laws, and 
promoting economic opportunity. I hope that we will be able to 
provide you with the resources necessary to accomplish these 
important missions in fiscal year 2014. You have, as the 
Chairman has said, a very difficult job, and we stand ready to 
assist you. Thank you, Mr. Chairman.
    Mr. Crenshaw. Thank you, and we are joined today by the 
Chairman of the Full Committee, Mr. Rogers, and so, I would 
like to recognize him for any opening statement he might like 
to make.
    Mr. Rogers. Thank you, Mr. Chairman. Congratulations on 
being Chairman. Mr. Secretary, welcome in your new role, your 
new hat that you are wearing. You have had several hats over 
the last several years. It is good to see you and welcome to 
the Committee. Forgive me a little bit for feeling as though I 
am living through Groundhog Day, but each year in this hearing, 
the Subcommittee points out just how unsustainable our nation's 
fiscal situation has become, and each year, the Administration 
has allowed it to get worse through inaction. As you know, Mr. 
Secretary, the debt is approaching $17 trillion, having grown 
about $1 trillion each year of the Obama Administration.
    While we have a new Subcommittee chair, a new, albeit late, 
budget request, and even a new secretary, we are back to where 
we started. Accounting gimmicks, funny math, no real solutions 
to getting our fiscal house in order, and our nation's debt 
making us less competitive and less secure, ticking upward. As 
these fiscal issues continue to mount, the American people 
expect leadership from the President. Unfortunately, they will 
be left wanting. Last year, the President argued then that his 
Fiscal Year 2013 budget requests would have reduced deficits by 
$4 trillion in a decade. In fact, CBO indicated it would add 
$3.5 trillion in cumulative deficits over baseline projections, 
and result in $8.7 trillion in additional debt over the next 10 
years. That is moving backward, not forward. Unfortunately, 
Fiscal Year 2014 looks to be more of the same, only this time, 
with a budget two and a half months late. CBO has not had time 
to score it ahead of this hearing. While the President is 
making every effort to blame sequestration on Congress, he is 
happy to claim that $1.2 trillion in projected savings over 10 
years within his budget deficit reduction figures. But when you 
delve into his spending recommendations, it leaves the true 
intent of his budget proposal clear: over $600 billion in 
additional new taxes in a year when your Department will take 
in more tax dollars than any other year in American history.
    Speaking of your department, the Fiscal Year 2014 Treasury 
request is $16 billion, which is a $1 billion increase over 
fiscal year 2013 CR, without taking into account sequestration. 
The vast majority of the increase, as it has been in recent 
years, is for the IRS for tax enforcement, primarily associated 
with the implementation of ObamaCare, but also for enforcing 
the President's proposed tax hikes; increases this Subcommittee 
has zeroed out in the past.
    So, Mr. Secretary, we are happy that you are here. Thank 
you for your time. We look forward to hearing from you.
    Mr. Crenshaw. Thank you. I would like to now recognize 
Secretary Lew for an opening statement. If you could keep that 
within the five minutes, we would be happy to submit your 
written testimony for the record. The floor is yours.
    Secretary Lew. Thank you, Mr. Chairman, Ranking Member 
Serrano, Chairman Rogers. I have had the pleasure of working 
with Chairman Rogers and Ranking Member Serrano for many 
decades now, and I look forward to working, Congressman 
Crenshaw, with you as well. I know the Treasury has got a good 
relationship with this Committee, and I look forward to 
continuing that.
    It is a pleasure to be here today to have a chance to speak 
about Treasury's budget, and I want to start by thanking the 
talented public servants at the Treasury Department who have 
been so helpful to me in these past few weeks settling into my 
role as Secretary. They are thoughtful, dedicated, and focused 
on furthering the mission of the Department. It is my honor to 
work with them.
    Now, I would briefly like to provide an overview about both 
the economy and our budget. Our economy is much stronger today 
than it was four years ago, but we must continue to pursue 
policies that help create jobs and accelerate growth. Since 
2009, the economy has expanded for 14 consecutive quarters. 
Private employers have added nearly 6.5 million jobs over the 
past 37 months. The housing market has improved. Consumer 
spending and business investment have been solid, and exports 
have expanded. But very tough challenges remain. Families 
across the country are still struggling. Unemployment remains 
high. Economic growth needs to be faster. And while we have 
made progress, we need to do much more to put our fiscal house 
in order.
    At the same time, political gridlock in Washington 
continues to generate headwinds, including harsh, 
indiscriminate spending cuts from the sequester that will be a 
drag on our economy in the months ahead if they are not 
replaced with sensible deficit reduction policies. The 
President has laid out a strategy to address these challenges. 
His path forward strengthens the recovery by making important 
investments in manufacturing, innovation, infrastructure, 
education, and worker training, while taking a balanced 
approach to restoring our nation's long-term fiscal health. As 
our budget today demonstrates, Treasury helps shape and 
implement the President's economic policies from streamlining 
the tax system, to reforming the financial system, to securing 
our interests abroad, and increasing lending for small 
businesses here at home. And whether it is making Social 
Security payments or producing our nation's currency, Treasury 
touches the lives of virtually every American.
    Now, while our responsibilities are broad, we are committed 
to meeting our obligations as efficiently as possible and at 
the lowest cost to the taxpayer. Over the last four years, 
Treasury has made enormous progress to make the Department 
leaner and more efficient. Today, we build on that momentum by 
identifying nearly $400 million in additional savings. In this 
budget, we wring out wasteful spending and consolidate 
redundant programs. We cut travel costs and expenses. We use 
materials more effectively at the Bureau of Engraving and 
Printing. We save on rent at the Bureau of Fiscal Service, and 
we provide more of our services electronically so we can 
continue to cut down on paper and paperwork. In total, we 
reduce spending by 2.3 percent when you exclude the IRS and 
compare this year's budget to what was provided during the past 
fiscal year.
    As was noted, the IRS is the main area where we are 
requesting an increase. The additional resources that we 
request with the program integrity cap adjustment will allow 
the IRS to improve enforcement. With this new funding, the IRS 
will crack down on those who are evading the law, and bring in 
more revenue. For every dollar we spend on our enforcement 
initiatives, we expect to collect $6. The request for an 
increase also includes additional funding so that the IRS can 
meet its responsibilities under the health care law, which 
lowers the forecast budget deficits by more than $1 trillion 
over the next two decades. The Affordable Care Act is helping 
to slow the growth of health care costs, and continued 
implementation of the Affordable Care Act will help improve the 
quality and efficiency of the health care system.
    Nevertheless, in order for the IRS to carry out its 
obligations as mandated by Congress under the health care law, 
it needs the appropriate resources. Beginning in 2014, millions 
of Americans will receive unprecedented tax benefits that will 
make buying health insurance affordable. The IRS must have the 
necessary funding to assist Americans as important provisions 
of the law go into effect. For instance, the IRS must invest in 
new technology and modify existing tax administrative systems. 
These efforts will facilitate prompt and accurate application 
of the premium tax credit while protecting taxpayer 
information.
    I would like to point out that the sequester has taken a 
toll on Treasury, but we are doing everything we can to absorb 
these cuts while maintaining service standards, even if delays 
may be experienced. We have scaled back training, delayed 
contracts, and limited purchases. Even with these measures, the 
brunt of the cuts are being felt by Treasury's hard-working 
public servants. At the IRS, for example, workers will be 
furloughed without pay for as many as seven days between now 
and the end of September. This will erode our ability to 
provide quality service by forcing the IRS to answer fewer 
calls, and creating delays in responding to taxpayer questions. 
It will also lead to fewer enforcement actions and reduce 
revenue collection. The fact is, the sequester is not only 
hurting Treasury's employees, it is hurting taxpayers, too.
    As I have said before, sequestration must be replaced as 
soon as possible. The President's budget does that, and I hope 
this Committee and your colleagues will take action so we can 
get this done. Thank you, and I look forward to answering your 
questions.
    [The information follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Mr. Crenshaw. Thank you very much, Mr. Secretary, and we 
will start the questions. We have got a pretty full panel here 
today, so I am going to try and enforce the five-minute rule so 
that everyone will have a chance to ask questions. We will 
recognize the members in terms of their seniority that were 
here when the hearing started and then when they arrived.

             OFFICE OF TERRORISM AND FINANCIAL INTELLIGENCE

    So I will go ahead and start. Mr. Secretary, I want to 
follow up. Yesterday, when you were before the State and 
Foreign Operations Subcommittee, I asked you a question about 
the Office of Terrorism and Financial Intelligence. And since 
this is the Committee that actually provides those funds, I 
thought I would just bring that point up again, and not to ask 
you to repeat your answer to the question as much as maybe give 
some idea to the members of the panel. As you may know, there 
is a request for a $1 billion increase, but I told the 
Secretary yesterday I was surprised to learn that for Office of 
Terrorism and Financial Intelligence, the budget request was $2 
million less than last year. And this is the office, as you all 
know, that helps make sure that our financial systems are not 
used in criminal activities, and maybe even more importantly, 
tries to make sure that we can fight some of the international 
terrorism like we are doing with the sanctions in Iran. And 
that is what prompted the question yesterday.
    And I told the Secretary I was a little surprised, this is 
pretty important stuff. The number one responsibility of the 
federal government is to protect American lives, and I was 
surprised to see that this office, which deals with terrorism, 
and, of course, with all the things that are on our minds 
today, why we would actually reduce spending there and increase 
spending in other areas. And I think he said that it is an 
important moment in history that the work that they do, I think 
he knows about the work they do. He said it is central to our 
national security. But maybe I wanted you to just maybe explain 
to this panel what goes through your thought process as how you 
decide on where you want to spend more money or less money. If 
you could just respond to that.
    Secretary Lew. Mr. Chairman, I could not agree with you 
more that the work done by our Terrorist Financing Offices is 
critically important, and I am very proud of the work they do, 
and I work very closely with them. Clearly, budgets are about 
making tough choices, and we have to ask the question, given 
the growth in funding in TFI, and given the fact that it has 
built up substantially over the last few years, not just with 
people but with IT, whether they are staffed at a level that is 
appropriate. Our budget maintains the level of effort, but we 
do have lower costs associated with some of the IT 
infrastructure because it has been built up in recent years. 
There is enormously important work being done there. It has got 
the support, not just of myself, but it has got the support of 
the entire Administration. We are central to the work the 
Administration does in many investigations and actions that are 
taken, and the budget reflects what we believe is needed to 
maintain that level of effort. It does not reflect any 
lessening or diminution of importance.
    Mr. Crenshaw. Could you maybe, for the Subcommittee, talk 
about some of the things that that office does? I know they can 
freeze the assets of drug cartels, things like that. We 
obviously had the conversation regarding the sanctions. Touch 
on just a couple of things that that office does to go after 
some of these international conspiracies.
    Secretary Lew. Well, it has got a varied range of 
functions, as you know. When there are sanctions in place, that 
is the office that coordinates the policy and the 
implementation. We have OFAC, which is very much involved in 
day-to-day management of the licensing issues that are 
associated with areas where threats exist. We have 
investigations that go on when there are specific threats or 
actions that have to be investigated because there has been 
either criminal activity, whether it has been in narcotics or 
in terrorism. And, as you know, our investigative group is very 
much part of the government-wide effort. When there are 
questions that arise related to the flow of funds, it is our 
team that does the work, tracing and analyzing how funds are 
flowing.
    Mr. Crenshaw. Well, thank you. And I think we want to work 
with you at a time, I think, when international threats seem to 
be on the increase rather than the decrease. That we can work 
together, I am sure. And I appreciate the work that you are 
doing to try to make those tough choices.
    Secretary Lew. And, Mr. Chairman, I would say that the 
threats we face as a country are not just threats of terrorism. 
When you and I spoke, we talked at length about the economic 
threats from the eurozone to the United States. Our 
International Affairs Team is working every day, following the 
economic developments in all areas of the world. We are very 
conscious of the fact that if we did everything right in the 
boundaries of the United States, threats economically from 
overseas could be the kinds of headwinds that send our economy 
in the wrong direction. So we have to maintain our effort in 
areas like monitoring the eurozone, like working on issues 
related to China currency, so we have a broad range of 
activities that really get at the heart of America's economic 
and national security. And we, in this budget, have tried to 
balance those considerations and make the marginal investments 
where we thought we had the most ability to do good.

                 FINANCIAL STABILITY OVERSIGHT COUNCIL

    Mr. Crenshaw. And on that point, one quick final question, 
the Financial Stability Oversight Council, the FSOC, so-called 
FSOC. One of the things that council does is try to oversee a 
lot of the different rules and regulations and help in 
coordination. And, as you know, we had Dodd-Frank; that has 
generated thousands and thousands of new regulations, and 
forms, and things like that. And one of the things that I hear, 
I think we all hear back home, is that the rules and the 
regulations that come out of Washington tend to create a lot of 
uncertainty in markets. And I think we all know there is a 
place for reasonable regulation, but in that regard, with the 
so-called FSOC, one of the things that I see, you got different 
agencies now writing these new rules and regulations under the 
Dodd-Frank. And your council that you chair, I think part of 
its responsibility is to try to coordinate, because if you got 
one agency writing a rule with one set of definitions, and 
another agency writing a rule with another set of definitions, 
and sometimes they do not really jive, then you throw in the 
international aspect that you talk about, and you got other 
countries, they are writing rules and regulations that deal 
with financial instruments. So I saw a GAO report that said 
that, actually, that Oversight Council is not doing as much as 
it might do to help coordinate these interagency rules to kind 
of bring some certainty and stability. Can you comment on it? 
Would that be an appropriate role for that Oversight Council?
    Secretary Lew. Mr. Chairman, I will be chairing my third 
FSOC meeting today since becoming Secretary.
    Mr. Crenshaw. Yeah, I heard it is at 2:30, get you ready 
for it.
    Secretary Lew. Just to give you a sense, on my eighth week, 
I am chairing my third meeting of the group, and there have 
been meetings of subgroups in between. Let me first address the 
uncertainty question. I think on the question of uncertainty, 
it is critically important that we complete the process of 
implementing Dodd-Frank. In fairness, part of the uncertainty 
was created by several years of extended debate over whether or 
not to implement Dodd-Frank. Happily, that is over. I think now 
we are in a place where the industry and the political process 
are aligned, that we need to get the law implemented, and we 
need to do it as quickly as possible. I made clear from 
literally my first hour as Secretary that it was a matter of 
urgency to me that we get this done, and we get it done 
quickly, and I am driving the process. I do not have the 
authority to write the rules. There are five independent 
regulatory bodies that write the rules. It is more of a 
shepherding authority than it is a direct authority to write 
the rules. But I think it is an important role. And progress is 
being made on very complicated matters. The convening of power 
you have as chair is real, and I plan to use it, and to use it 
as effectively as I can.
    As far as the international piece goes, just last week we 
had the spring meetings of the IMF and the World Bank. I met 
with both my counterparts, and, as a group, with many of the 
leaders from around the world implementing these rules. We 
discussed at length many of the issues that are both questions 
in the United States and internationally. I think it is a very 
important role that Treasury plays, and it is not so much FSOC 
as FSOC, but it is part of the broader role that we have. Our 
team is engaged to make sure that, for example, rules in other 
countries do not usurp on our ability to make rules here in the 
United States, and to defend our right to have rules where 
foreign banks have to meet the standards that American banks 
meet. So we have to work on all fronts.
    I have not seen the report you are referring to. I am happy 
to look at it. My observation, as now having been through 
almost two months of chairing the FSOC, is it is an important 
instrument for moving the process forward. It does not have the 
traditional tools that you have when you have the authority to 
do things, and it calls upon one's skills not just analytically 
but as a convener and a chair, trying to get others to do their 
work as opposed to doing your own work. I am deeply invested in 
it, and my goal is to be able to sit here next year and report 
progress in all the key areas.
    Mr. Crenshaw. Well, that is great because I think there is 
a great opportunity for that interagency cooperation, and you 
can help kind of work on it.
    Secretary Lew. And I will say, Mr. Chairman, there is a 
very good spirit of cooperation amongst the agencies. There is 
not the kind of resistance that one often sees around 
jurisdictional boundaries. The agencies want to get this right. 
They approach it with different areas of expertise and 
different processes. Some have the ability to do things by 
virtue of one decision maker. Others require a majority vote. 
And it is probably not the regulatory system one would have 
designed if you were starting from scratch. But we have a 
hundred years of history that came together and were updated in 
Dodd-Frank. And it is an important challenge because the reason 
Dodd-Frank was enacted was that the financial collapse in 2008-
2009 cannot be allowed to happen again because of the failure 
of oversight. We need to make sure that our laws stay current 
with the problems we face and our regulatory capacity is equal 
to the task. And that is something that we are committed to.
    Mr. Crenshaw. Thank you very much. Mr. Serrano.

                              BUDGET CUTS

    Mr. Serrano. Thank you, Mr. Chairman. Welcome, once again. 
As you know, there is a behavior, if you will, in Congress 
these days to cut, cut, cut, cut, in my opinion, without really 
thinking what those cuts will do to our economy and to the 
future of this country. So on a subject that I spoke about in 
my opening statement, and you touched on also, which is the one 
that glares as me in terms of just a contradiction, at what 
point does it become a crisis for the IRS to continue to 
sustain cuts that do not allow them to then go and collect the 
dollars that are out there? I think you said that for every 
dollar we invest in the IRS, we can pick up six. It would seem 
to me, and, again, you know, I can argue, I could give you 25, 
education, housing, you know, social services; there are so 
many things that I could be against. But this is the one that 
brings money into the till on a daily basis, and yet we keep 
cutting it. So at what point do you think it becomes a crisis?
    Secretary Lew. Congressman, that is an interesting 
question. It is a big problem. Where the line between problem 
and crisis is really is hard to define. I think most 
businesses, if they could see a 6 to 1 return, would say that 
is a pretty good return on investment, and would not leave that 
kind of low-hanging fruit out there.
    This has been an ongoing debate. I remember when I was at 
OMB in the 1990s, there were ridiculous multipliers that some 
people used, 20 to 1, 15 to 1. The fact that we have got it 
down to the point where we have a clear sense of what the 
relationship of revenue to spending is, should make it much 
easier for us to have the kind of agreement to find a mechanism 
to fully fund the IRS. This allows us to both raise the revenue 
that we need, but also make sure our tax system is fair so that 
people who think twice about it know they are going to get 
caught if they do not comply with the tax code. We have put 
together our budget proposal in a way so that in the body of 
our budget we do the things that kind of keep body and soul 
together, taxpayer assistance and the basic mechanics of doing 
our job. What is clear is we will not be able to be as 
aggressive on the enforcement front as we should be if we do 
not have the resources. And I think it is going to take 
something like the cap adjustment to get that done, given the 
very tight caps that constrain this Committee and all the 
Appropriations Committees.
    Mr. Serrano. Right, and we never have really been able to 
get a straight answer. And I do not mean that people are 
evading the question, but do we know what the numbers are of 
money we could recover if it was fully funded? I mean, has 
anyone done a study there that members on both sides could say, 
``Okay, that sounds pretty correct''?
    Secretary Lew. I think there are two questions. One is, the 
6 to 1 ratio is pretty well-established based on what we see 
are the results when we put out additional enforcement 
resources. There is another question, which is the size of the 
underground economy and how big the total is. That is a harder 
question to answer. By definition, it is not fully visible. So 
there is a lot of different estimates as to the size of it. It 
is clearly large. My own view is that no matter how large it 
is, we should be doing whatever we can do that is effective to 
get tax dollars in when they legally are owed. So we do not 
need to wait until there is the authoritative number. As long 
as we know we can get 6 to 1 return if we put dollars into 
enforcement, there is more that we can do there, and that is 
why we put the proposal together that we did.

                              IMMIGRATION

    Mr. Serrano. All right. Very briefly, there is a question I 
do not have written down, but I just thought about it as I am 
speaking to you. Immigration reform may happen this year. Is 
the Treasury Department part of the secret eight, or nine, or 
10 who are working in both Houses on this, because it would 
seem to me that the minute people are out of the shadows of 
society, two things happen. In order to be legalized, if you 
will, you will have to go back and pay some taxes that you may 
owe. Maybe you can talk about how that will happen, you know, 
how to determine what you owe, being here 10 years, 15 years. 
And then immediately those folks coming out of the shadows will 
become regular taxpayers. I almost was tempted to say ``happy 
taxpayers,'' but that is improper use of the language. What 
role, if any, is Treasury being asked to play at this point?
    Secretary Lew. Congressman, we are part of the conversation 
in the executive branch on immigration. Obviously, until the 
law is enacted, the issues that you are describing are things 
that are just in the planning stages. So we are not in a 
position to take the further steps. I can tell you from both an 
Administration point of view and my own personal point of view, 
it is an enormously important challenge that when immigration 
reform passes, that we do it right, that we make sure that 
people who come out of the shadows understand what their 
obligations are, that they pay the taxes that they owe, and 
that they become part of the system. That is the way we are 
going to both solve the immigration problem and do it in a way 
that is fair and balanced. I have worked on the immigration 
issue for many decades.
    Mr. Serrano. I know you have.
    Secretary Lew. You and I have worked together on it for a 
long time. I think this is something that should get done this 
year, and we look forward, at Treasury, to doing our part to 
implementing it effectively.
    Mr. Serrano. One last comment. Would it be fair to say that 
immigration reform will bring money into the Treasury?
    Secretary Lew. Yes, I think that when we bring people out 
of the shadows, and they are on the books, and they are being 
paid, and withholding taxes in order, it should only lead to 
more, not less revenue.
    Mr. Serrano. Thank you.
    Mr. Crenshaw. Thank you. Mr. Rogers.

                            COMMUNITY BANKS

    Mr. Rogers. Mr. Secretary, you have touched on Dodd-Frank a 
bit already, but let me take another tack with it. These small 
community banks are being swamped with regulations intended for 
the big banks that caused the problem that Dodd-Frank tries to 
correct. These small banks are just not equipped to deal with 
the flood of onerous regulations. And not only that, but rather 
than reinforce bank competition and reverse ``too big to 
fail,'' Dodd-Frank has so raised the costs of compliance for 
these banks that the reforms themselves are acting as a driver 
of consolidation, creating ever larger banks, in order to be 
able to afford to live with these regulations. Have you given 
any thought that there could be some regulations issued that 
would be adaptive to small community banks who are swamped with 
these new regulations? These banks had nothing to do with the 
too big to fail problem that the country faced. Can you help 
them in any way?
    Secretary Lew. Mr. Chairman, I think there are very serious 
issues regarding the small community banks where they are 
different than the large money center banks that were taken 
into account in the drafting of the legislation; they are being 
taken into account as the rules are being written. I know that 
they have commented heavily on intermediate stages of 
rulemakings. I have talked to the regulators. I know they are 
looking seriously at those comments.
    The goal is to make sure that we are dealing with the core 
charge of Dodd-Frank, which is to make sure that the soundness 
of the system can be assured, and to the extent that there are 
special circumstances where there is not a risk, and small 
institutions can be treated in a way that reflects both the 
risk and the size, I know the agencies are looking at that. 
There is a balance that has to be struck because we have to 
make sure that we are implementing the law in a way that avoids 
areas of risk, but there is a great deal of sensitivity to the 
fact that there are different kinds of risks coming from 
different institutions. I know that there are several specific 
issues that the community banks have raised. And when I have 
followed up with the regulators after hearing those concerns 
from the community banks, I certainly have the sense that they 
are hearing the message and trying to figure out how to address 
the issues that can be addressed. It is still a work in 
progress.
    Mr. Rogers. All of us on this Committee, I think, have 
heard of this problem for the small and community banks, which 
are the backbone of our communities out there. They are being 
swamped and they are hiring people that they cannot afford to 
live with these regulations that were designed for the big 
banks--the money centers--who caused the problem in the first 
place. So these are innocent bystanders who are getting 
slaughtered along the way, and I would hope that you would 
exert some real action on giving some relief.
    Secretary Lew. Mr. Chairman, I have met with the community 
banks. I have listened to the arguments and the case that they 
have made, and I have taken those issues back to the 
regulators. Obviously, the regulatory agencies have authority 
in each of their own respective areas, but I do have the strong 
sense that they are thinking hard about how to deal with this.

                            CHINESE CURRENCY

    Mr. Rogers. Quickly, on another subject entirely, the 
currency manipulation by China: there is not a soul in the 
world that does not believe that the renminbi is being 
manipulated by the Chinese for trade practice purposes, and it 
is working. Very smoothly, as a matter of fact. The Department 
of Commerce cannot move until you have taken action. What is 
your thinking about Chinese currency manipulation and its 
impact.
    Secretary Lew. Mr. Chairman, I was in China just about 
three weeks ago, raising these issues with all of China's 
senior leaders. I think that they were making some progress in 
terms of the value of the currency.
    Mr. Rogers. Three percent.
    Secretary Lew. No, it was more than that. Overall I think 
it was considerably more correction than that. But it did 
flatten out. And I made a very strong case that we were 
watching this very carefully, and that they needed to expand 
the band that they were using in making their decisions in 
terms of the exchange rate with the dollar. And there are signs 
that there is some movement there. We put out a currency report 
just about 10 days ago where we went through these issues in 
great length. The challenge that we have is to make the case 
and to get countries like China to adhere to the principle that 
has been agreed to in the kind of G7 and G20 context, that 
interest rates should be market-determined, that they should 
not be exchange rate targeted. And we will continue to make 
that case very forcefully in both the bilateral and the 
multilateral settings.
    Mr. Rogers. Well, Commerce cannot levy countervailing 
duties unless Treasury registers China as a currency 
manipulator. And this been going on for decades now, and we are 
getting beat, our economy is absolutely suffering tremendously 
because of the undervalue of the Renminbi. In fact, I am told 
that it is set now at 6.14 renminbi to the dollar, which is 
from my information, a reduction of about 3 percent from this 
time last year. Is that not correct?
    Secretary Lew. I would have to check the current figures, 
but over the last couple of years there has been substantial 
progress in terms of the appreciation against the dollar. These 
numbers move on a daily, month-to-month basis. So I would be 
happy to follow up with you, Mr. Chairman. The thing I would 
just add is that when it comes to trade actions between the 
United States and China, this Administration has been quite 
aggressive, whether it is in areas like auto parts, or tires, 
or rare earths, we have used the tools available to bring 
actions and to prevail on them. We take fair trade and 
defending the rights of the U.S. worker and the U.S. economy 
very seriously. We are trying to do it in the way that is most 
effective, where we actually can change the practices. As you 
can see from the report we put out, we are not pulling any 
punches in terms of what we analyze, how we make the case, and 
how we drive towards action. So I would look forward to working 
with you on it.
    Mr. Rogers. Well, we will keep an eye on it, and I hope and 
expect action. Quickly, Mr. Chairman, do I have time for one 
more?
    Mr. Crenshaw. Certainly.

                         EITC IMPROPER PAYMENTS

    Mr. Rogers. IRS issued more than $11 billion in faulty 
refunds through the Earned Income Tax Credit last year 
according to an IG report released this week. Treasury Deputy 
Inspector General Michael McKenney found that the IRS has 
failed, for the past two years, to comply with a federal law 
requiring agencies to reduce payment errors to a rate of less 
than 10 percent. The President signed that statute in 2010. IRS 
says that at least 21 percent of its EITC payments in 2012 were 
faulty--21 percent, $11 billion, money thrown down the drain. 
Can we fix that?
    Secretary Lew. Mr. Chairman, this is obviously an area that 
we have been working on with Congress for years. There has been 
substantial progress in reducing the error rate. I think that 
we need to take a step back and remember that in the context of 
the Earned Income Tax Credit, which is one of the most 
effective programs that we have had in getting people off of 
welfare onto work since the Nixon Administration, it is a very 
complicated program. The laws that are set up make it necessary 
for low income people to go to tax preparers, for the most 
part, in order to file their tax returns. One of the things 
that we are doing now is reaching out to the tax return 
preparers and giving them a checklist of all the things that 
they need to do to reduce their error rate. I think that by 
working diligently at that end, we will make more progress. We 
are committed to reducing error rates throughout our 
enforcement of the tax code, not just with regard to these tax 
credits, but with regard to corporate taxes, and regards to the 
tax deductions and credits taken by high income taxpayers. I 
think if you look at the dollars that tax enforcement could 
produce, there are much larger numbers in the areas of 
corporate and high income taxpayers. All of it has to be of 
equal concern to us, and it is.
    Mr. Rogers. Well, 21 percent is unacceptable. I can 
understand, you know, something less than that. But 21 percent, 
that is one out of every $5 that is faulty. I expect heads to 
roll on this one. This is ``too big to fail,'' if you will. 
Thank you.
    Mr. Crenshaw. Thank you. We have been joined by the Ranking 
Member of the Full Committee, Ms. Lowey. She is going to wait 
one second to catch her breath, and I am going to call on Mr. 
Bonner. Some of the members were not here earlier. We are going 
to try to abide by the five-minute rule. And also I am going to 
recognize members by seniority that were here when the meeting 
started, and then after that, the order in which they arrived 
at the Committee meeting. So I would recognize Mr. Bonner right 
now.

                            BUDGET INCREASES

    Mr. Bonner. Thank you, Mr. Chairman. And I am going to try 
to get three questions in during my five minutes. So let me see 
if I can speak fast, which is a challenge for a kid from 
Alabama. Mr. Secretary, the other day I got a standing ovation, 
which members of Congress do not get very often, when I told 
some people in my district in Alabama that under the leadership 
of the Speaker of the House, we have cut our budget almost 20 
percent over the last two and a half years. And yet the budget 
that you probably had a hand in when you were still at OMB, and 
certainly you were discussing in your testimony today, some of 
the departments in this budget that the President has submitted 
calls for double digit increases in spending. Is it that hard 
for the executive branch to find ways to save the American 
taxpayers hard-earned money when the legislative branch has 
shown a way to do it?
    Secretary Lew. Congressman, I think if you look at the 
areas of growth in the executive branch, it is very much 
correlated to where there have been new legislative enactments 
and new programs, and where the rate of activity has gone up. 
So, yes, there has been an increase in spending to implement 
things like the Affordable Care Act and Dodd-Frank. There has 
also been increases in areas like Veterans Affairs, where we 
have returning Wounded Warriors that are creating burdens that 
we should share and happily pay for to thank them for their 
service. If you go through the budget, the areas of growth 
really track the areas where there is a need for more federal 
activity. In general, this is the tightest discretionary budget 
in a generation. We are going into a period where discretionary 
spending, as a percentage of the economy, will be at the lowest 
level it has been since Eisenhower was President. And we have a 
population that is growing, and challenges that the American 
people expect us to meet. So I think we have done actually a 
very effective job tailoring our budgets to the needs of the 
time and the shrinking availability of resources.

                              RESTORE ACT

    Mr. Bonner. Let me shift gears for a minute, and ask you to 
think for a minute about the RESTORE Act. The budget was not 
the only thing that is late. The RESTORE Act, as you know, is 
legislation that we passed in response to the worst 
environmental oil spill in the history of mankind that affected 
the five Gulf Coast states, Alabama being one of them. It is my 
understanding that Treasury was supposed to, on January 2, 
provide draft regulations for the RESTORE Act. I think you 
mentioned this in your written testimony. Could you give us any 
idea, we are into April now, when Treasury is planning to 
release its draft regulations as required by law, and when they 
would be available for public comment?
    Secretary Lew. Congressman, I would have to check on the 
exact date, but I would say this about the RESTORE Act: It is a 
complicated piece of legislation which we are determined to 
implement, and we are determined to implement correctly. And if 
it takes a little bit longer to write the rule so that that is 
the case, I think it is important to do it right. There has 
only been one recovery into the RESTORE Act fund. Those funds 
will remain available, and will be used as intended in the 
RESTORE Act for the states that were designated. So none of the 
money will go to other purposes. And we are working as quickly 
as we can, and I would be happy to follow up with you on the 
schedule.

                       IRS INVESTIGATIVE TACTICS

    Mr. Bonner. We would appreciate that. And I know it is 
complicated, but it is important for the public to have access 
to the draft. The last question, the Chairman mentioned this in 
his opening comments, we had the opportunity to visit with the 
Acting Commissioner of the Internal Revenue Service a few days 
ago. And he did say that while the Service was examining the 
use of social media information as part of investigations, he 
implied that the IRS was looking at the new technology, new 
social media as ways that it could be used. After he left, 
however, it was reported in the press that the IRS, based on 
the 2009 employee handbook and in the 2010 policy statement, 
does not believe that emails are protected by the Fourth 
Amendment. And recognizing that a spokesman for the IRS is not 
necessarily the same thing as the Commissioner, or, in this 
case, the Secretary, could you share with us your thoughts 
about whether the IRS would be required to obtain a warrant 
before gaining access to a taxpayer's emails, and does the IRS, 
in your view, have the authority to investigate the emails of 
taxpayers who are not already under investigation?
    Secretary Lew. Congressman, protecting the privacy of 
taxpayers is of paramount importance. In criminal matters, I do 
not think there has been any question on the need for warrants 
for searches of email. I understand that in the past there may 
have been some uncertainty in limited cases on civil matters. 
That has been clarified, and it is clear that it is not policy 
to go into private email in civil or criminal matters. And 
going forward, I will work with our team to make sure that that 
remains the case.
    Mr. Bonner. You could just imagine a scenario where you 
were emailing your accountant and asking, you know, ``Is there 
any relief in this loophole or that loophole where I can 
legally pay what I have to pay but no more than what I am 
obligated to pay?'' and it just, I think, sent a streak of fear 
down, and perhaps it was just misunderstood in the 
communication in the press, but it sent a streak of fear down a 
lot of taxpayers' spines so close to April 15 when they had to 
write those big checks.
    Secretary Lew. My understanding, Congressman, is that there 
were limited cases of misunderstandings on the civil side. That 
has been clarified, and you can be assured that we will 
continue as I have described.
    Mr. Bonner. Thank you, Mr. Chairman.
    Mr. Crenshaw. Thank you. Mrs. Lowey.

                        ALTERNATIVE MINIMUM TAX

    Mrs. Lowey. Thank you very much, Mr. Chairman, and welcome 
again, Secretary Lew. One of the highlights of the bipartisan 
tax compromise this past December was the inclusion of a 
permanent patch for the AMTs so that middle class families 
would not be hit by this unfair and unnecessary tax scheme. The 
tax compromise increased a patch of 50,600 for individuals and 
78,750 for married couples, and, of crucial importance, indexed 
these levels to inflation. This saved 28 million families from 
paying thousands of dollars in unfair taxes. This tax 
compromise was a big step forward, and I am pleased that it 
will protect middle class families from the fear of the AMT in 
the future. Could you share with us how the Administration 
would address the AMT for individuals and families as part of a 
comprehensive tax reform once and for all?
    Secretary Lew. Congresswoman, the need to simplify our tax 
code is clear from the question that you asked. It was never 
intended that middle class taxpayers would get caught up in a 
web of the AMT. The tax reform should result in a world where 
people can do their own taxes, where they do not need 
accountants and lawyers, where you know your income, you know 
your deductions, and you know your taxes. I think the AMT is 
the kind of evidence of how the system grew not to be what we 
meant for it to be.
    So as we look at individual tax reform, simplification is a 
big goal, fairness is a big goal, because if you have access to 
accountants and lawyers, you should not get better treatment 
than if you are doing your own taxes. So in a world where we 
need to have simplicity but we need to have revenue, one of the 
features in the President's budget that I think is very 
important is the provision called the Buffett Rule. We propose 
a simple rule, that if you earn more than a million dollars, 
you should pay at least 30 percent tax rate. Simple rules are 
easier to implement, and we would look forward in tax reform to 
simplifying the rules, making them more fair, and, ultimately, 
raising the revenue we need in a fair way.
    Mrs. Lowey. Well, that is a good answer, but I understand 
you might not want to lay out the whole thing now, but as you 
well know, there are people making mega-millions who are still 
not paying any taxes because of the way the tax process works. 
So I hear from people making $100,000, $80,000 who are really 
stuck with this, and paying a lot more than they should. So I 
hope you keep that in mind.
    Secretary Lew. The Buffett Rule would end that. I mean, if 
you had a simple rule that income over a million dollars is 
taxed at a 30 percent rate, you would make sure that people who 
are making multiple millions of dollars were paying at least 
the same tax rate as the people working for them.
    Mrs. Lowey. I get that, but I am hoping you address the 
phenomenon, you know, that exists with people who are not 
making close to a million dollars and they are stuck with the 
AMT, which originally was designed to catch people who are 
paying no taxes.
    Secretary Lew. Yes, and we are going to need to replace the 
AMT with a system that raises the revenue we need without 
having the unintended consequence.
    Mrs. Lowey. Okay, as a native New Yorker, there are many 
benefits to having New York as a home, as a New Yorker myself, 
but one of the few disadvantages is that New Yorkers pay 
substantially more in federal taxes than the state receives in 
return. On top of that, New Yorkers pay high state and local 
taxes, which are often exponentially higher than other areas of 
the country. And I am very concerned about efforts to eliminate 
or substantially limit the state and local tax deduction, and 
doing so would have a disproportionate impact on New Yorkers as 
well as others who live in high cost of living areas, many of 
which are also financial, transportation, and commercial 
centers of the country, that contribute so heavily to our 
national economy. Taxpayers should not have to pay taxes on the 
money they have already sent to a government. Is the 
Administration considering limiting or eliminating the state 
and local tax deduction as a way to generate revenue for tax 
reform? And, if so, are there concerns that eliminating this 
deduction could have a negative impact on the regional 
economics of the nation's highest-taxed areas?
    Secretary Lew. Well, as a proud New York taxpayer, I 
understand the tax burdens in New York, and we are very aware 
of how important state and local taxes are to finance the 
critical services that our people need, and to finance the 
infrastructure investment that is key to our future. Our budget 
did not propose eliminating the state and local tax deduction. 
Our budget has a broad cap on deductions at 28 percent, 
essentially saying that if you are in the top tax bracket, you 
should only get the same value for your tax deductions as 
somebody who makes $250,000 a year. I do not think that would 
have the kind of dramatic effect that people have been worried 
about in the context of a repeal of the state and local 
deduction. We have also made it clear that any action we would 
take in this area is part of a budget where we are also 
investing in areas that are very important for state and local 
governments in terms of infrastructure in particular.
    So I think that we have to look at this in its totality, 
both in terms of the tax code and our overall federal effort. 
But I think you can rest assured that this Administration is 
very concerned that state and local governments continue to 
have the ability to make the investments they need in our 
communities and to provide the services that are needed.
    Mrs. Lowey. Thank you. And thank you, Mr. Chairman.
    Mr. Crenshaw. Thank you. Mr. Yoder.
    Mr. Yoder. Thank you, Mr. Chairman, Mr. Secretary. Welcome 
to the Committee. Good to see you again. I have several 
different topics I want to cover, so I will try to move quickly 
here. First of all, in the last several years, the 
Administration has supported, and Congress has supported, tax 
increases in a variety of areas. The Obama health care bill 
raises over a trillion dollars in new taxes. On January 1, we 
had $600 billion in new taxes, plus another trillion in Social 
Security tax increase. And I know in your budget that there is 
another trillion dollars proposed in new taxes on the American 
people. And the budget also removes any of the spending cuts 
that have been currently put in place. And it is a hard thing, 
I think, for my constituents to understand that the sequester 
cuts, when looked at in the total expenditures of the federal 
government, amount to about a penny. It is about $40-some 
billion of actual expenditures that will not be spent this 
year. And so it is pretty hard, I think, to explain to 
taxpayers why the federal government cannot find a penny of 
savings.

                             TAX INCREASES

    And so I note in your budget you remove the sequester, but 
replace it with additional tax increases, so spending goes up 
overall and federal government taxes go up. And so my question 
for you on this topic is, does the Administration believe that 
raising taxes on the American people helps the economy? And do 
they think it is fair, given the economic challenges the 
country is facing, to take more dollars from the American 
people? And does the Administration believe the American people 
pay enough in taxes?
    Secretary Lew. Congressman, I do not think that was an 
accurate description of our budget. So let me just take 30 
seconds to describe what our budget does. Our budget says we 
need to do more spending reduction and we need more revenue for 
a balanced approach because the sequester was never intended to 
take effect because it was designed to be bad policy, and it is 
bad policy. We are seeing every day stories of unintended 
consequences. I do not think that you can look at it as a 
percentage of the total budget because we cannot reduce Social 
Security checks or Medicare payments to make up for a dollar in 
either air traffic control or the Defense Department. They are 
different parts of the budget. These are deep cuts to our 
agencies, and the question will be ``Are the American people 
prepared to live with the reduction in service that comes from 
having the kinds of across-the-board cuts that sequester puts 
in place, or would they prefer to have the kinds of sensible 
reforms in entitlement programs that would help these programs 
in the future, and the kinds of revenue that would get us back 
to a 2:1 ratio of spending cuts to revenue, which is what the 
President has been trying to do, to do $4 trillion of deficit 
reductions?''
    Mr. Yoder. Does the Administration believe that raising 
taxes helps the economy?
    Secretary Lew. I think that our fiscal policy reaching the 
kinds of deficit reduction that we proposed would help the 
economy. I think having the right balance between spending and 
revenue is key. And I think the package the President has 
proposed would help the economy.
    Mr. Yoder. Does the Administration believe that Americans 
pay enough money in taxes to the federal government?
    Secretary Lew. I think that if you look at 2001, 2003, 
Congress enacted tax cuts we could not afford. And we, in 
January, took an important step to reducing the benefit for 
wealthy taxpayers that we, frankly, could not afford to lose 
the revenue. What we have proposed is, finishing the job of 
getting the revenue we need in the balanced package, so it is 2 
to 1 spending cuts to revenue.
    Mr. Yoder. I would just say that with the taxes that went 
up about 12 weeks ago, and the new proposed taxes in the 
President's budget, the taxes that went up with the Affordable 
Care Act, I think it is a hard sell to the American people, for 
them to understand that we believe they can pinch pennies and 
send us more of their dollars, but we cannot pinch ours in any 
way to reduce spending. I know you feel that is a 
mischaracterization, but the American people believe we can 
actually cut spending. And so I think they would like to see 
us, if we are going to undo the sequester, replace it with 
other spending reductions, not asking them for more of their 
hard-earned tax dollars that they get up every morning to earn. 
And we tell them, ``You can pinch more of yours. We cannot 
pinch ours.'' And I think that is a message that many of our 
constituents do not agree with.
    Secretary Lew. I would just say that we had pretty robust 
debate, where the American people heard this debate for months. 
And there was an election, and I think the result of the 
election was consistent with what surveys tell us, which is the 
American people want a balanced approach. They want us to reach 
a conclusion and solve the problem, which is what the President 
wants to do.

                            DERIVATIVE RULES

    Mr. Yoder. Switching subjects to subject related to CFTC, 
Chairman Gensler was before the Ag Appros Committee two weeks 
ago; I, along with other members of the Subcommittee, raised 
concerns about his development of cross-border guidance and the 
lack of coordination with the SEC. Since that hearing, 10 
finance ministers from G20 countries wrote you a letter 
expressing concern about fragmentation in the derivatives 
market, because of a lack of regulatory coordination. What can 
you do to ensure that these regulators better coordinate their 
international derivative rules, particularly between the CFTC 
and the SEC?
    Secretary Lew. Congressman, I told many of those ministers 
what I am about to tell you, which is that their letter does 
not reflect where our process is. There is actually very good 
coordination going on, conversations between the CFTC and the 
SEC, so I do not think the letter is correct in its 
characterization of where things stand. These are two 
independent regulatory agencies that are going to have to write 
rules that they can pass by majority in each of their 
commissions. They are important issues, and I think they are 
working through them. I would look over what the CFTC and the 
SEC are doing, not that letter.
    Mr. Yoder. And we are following that. I think it is a great 
concern to American businesses and to investors when 10 finance 
ministers from G20 countries express this concern. And so I 
would just ask that you take another look at that and do 
anything you can to ensure that we have consistent policies 
between the CFTC and the SEC as they implement these derivative 
rules. As you can imagine, if they go in different directions, 
you know, the SEC uses rule-making authority, CFTC creates 
guidances, and they are inconsistent in their application, that 
is going to be a real problem.
    Secretary Lew. I think as a broad principle, I totally 
agree that that is one of the things that FSOC was created to 
do, was to be a place where these kinds of issues can be 
discussed so that agencies know what each other are doing, and 
they can coordinate. I totally agree that there needs to be the 
kind of effort to have sensible rule-makings. I guess what I am 
saying is that that is what is going on. And the letter was 
not, I think, well-advised.
    Mr. Yoder. Well, obviously, there is a disagreement on 
that. Anything you can do to provide leadership in that regard 
would be much appreciated. Thank you, Mr. Secretary. Thank you, 
Mr. Chairman.
    Mr. Crenshaw. Thank you. Ms. Herrera Beutler.

                            BALANCED BUDGET

    Ms. Herrera Beutler. Thank you, Mr. Chairman. And I 
actually would like to follow up. You know, I heard you respond 
to my colleague's question about you know, the President would 
like to find the right balance between spending and taxes. And 
that this budget is balanced. He wants a balanced approach. 
And, honestly, I believe in balance. I think a lot of people 
do. I think that is what people voted for last November. Part 
of our challenge is there was no balance in the President's 
budget. Does it actually come into balance at any point? Does 
the budget actually balance?
    Secretary Lew. I do not think that it would be the right 
policy right now to necessarily reach balance in the next 10 
years. But the President's budget reduces the deficit.
    Ms. Herrera Beutler. I think that is fair. If the answer is 
``no,'' that is fair.
    Secretary Lew. That is different from a balanced policy.
    Ms. Herrera Beutler. That is fair. See, I do not think so. 
You know, I have heard the talking points from every secretary 
now, and the committees on which we serve. They come in and 
say, ``Balance, balance, balance.'' And when the American 
people hear ``balance,'' they think that you mean spending 
reductions and tax increases, right? But the truth is, this 
budget represents zero, a net zero reduction in government 
spending. How is that balanced? So neither does it actually 
ever come into balance, which the American people know, a 
balanced budget helps us grow jobs. But it does not even have 
the balance that you all are walking around with the talking 
points on.
    Secretary Lew. Congresswoman, that is not a fair 
characterization of the budget. The budget has, $400 billion of 
savings in Medicare. Those are very real. If you are either a 
provider or a beneficiary, there are going to be changes that 
are very real. It has additional savings in other mandatory 
programs of $200 billion.

                                FAIRNESS

    Ms. Herrera Beutler. Well, I guess when you are talking 
about ``fair,'' so is it true, then, am I wrong? It is not a 
net zero in spending reduction? Is that not true?
    Secretary Lew. I am not sure what baseline you are looking 
at. The fact that the baby boom is retiring, and Social 
Security and Medicare are growing, is something that we all 
have known for a generation was going to happen. That does not 
mean that we are not reducing spending from where spending 
would be if we did not take action.
    Ms. Herrera Beutler. You use the word ``fair.'' And I 
believe in fair. You know, I voted for the compromise bill at 
the beginning of the year. So I am not afraid to put my money 
where my mouth is, so to speak. But when you talk about fair, I 
think about my own folks. My dad is an American of Mexican 
descent. He has worked his entire life. He started in poverty, 
and my folks, together, working very hard, raised six of us. 
And today, they should be planning their retirement. They are 
both working. They are working more for less. And you know 
what? They are sending more dollars to the IRS.
    That, to me, is not fair. What is fair is more Americans 
should get to keep more of their money. My biggest challenge 
with this budget is it does not balance, and it is not 
balanced. If you had brought us something that truly reduced 
spending, you are not going to hear the argument about raising 
taxes in other places or closing loopholes. But the problem is, 
the problem is, you do not reduce spending anywhere. The IRS, 
this is one I love to bring up. The IRS has a 24/7 satellite TV 
studio in its building that it uses for training employees and 
so forth. Okay. The EPA across the street from the IRS has the 
same 24/7 satellite TV studio. Must cost $4 million or so a 
year. Rather than limit those, or limit the President's 
vacations, we are limiting air traffic controllers. That, to 
me, is not the balance and the fairness that the American 
people voted for. And I guess I am frustrated with what I feel 
like was total politics.

                             SEQUESTRATION

    Secretary Lew. Well, Congresswoman, if I could respond. The 
cuts that you are referring to with the air traffic controllers 
are a result of sequestration, which we think should be 
replaced.
    Ms. Herrera Beutler. Well, let me hit you on that one, 
because what I have here, and, as you know, you were in the 
middle of the controversy, it has been reported that that was 
between you and Rob Nabors. That was your idea. So I hear this 
often as well, ``Balanced budget, and sequestration's awful.'' 
Well, for crying out loud, if you do not like it, why did you 
propose it?
    Secretary Lew. I think the record is clear. We were in a 
negotiation where we thought the right answer was to have 
revenue increases and spending cuts that would take effect if 
there was not an agreement. The only thing agreeable to the 
Republican leadership of Congress was all spending cuts.
    Ms. Herrera Beutler. I understand.
    Secretary Lew. The sequester was designed to be a bad 
outcome to get Congress, through the super committee, to act.
    Ms. Herrera Beutler. I am not arguing that you were up 
against people who wanted more cuts than you did. I am not 
saying that that is not accurate.
    Secretary Lew. It was not meant to become policy. It was 
meant to force action.
    Ms. Herrera Beutler. The point is, is it fair and 
appropriate to come up here and to totally decry sequester when 
you proposed it?
    Secretary Lew. Absolutely. It was never meant to take 
effect. It is bad policy.
    Ms. Herrera Beutler. I guess that is one of those things 
that people hate about politics in Washington, D.C. It does not 
pass the straight face test.
    Secretary Lew. I think people hate that there has not been 
the kind of balanced agreement reached through the super 
committee.
    Ms. Herrera Beutler. I agree.
    Secretary Lew. And they would like us to do it. So we 
should be talking about the balance of spending cuts and 
revenue increases to make sensible policy.
    Ms. Herrera Beutler. I agree. I have shared with you, I 
voted for the compromise legislation.
    Secretary Lew. Which I appreciate. Which I appreciate.
    Ms. Herrera Beutler. So I am not afraid to do that. My 
frustration is you send us a budget that is 10 weeks late, that 
never balances, and has no net spending reductions. And I guess 
my message back, as you go back and as you are continued to 
task with a very difficult, I am not going to say that leading 
the Treasury Department is easy. I understand. But I would urge 
you, there are those of us here who want to make this work, but 
when we get brought something that we do not feel is balanced, 
or fair, or appropriate, or that makes the American people take 
it on the chin, we are going to reject it. And with that I 
yield back my time.
    Secretary Lew. If I could make one final point, Mr. 
Chairman. You know, in years of discussions between Republican 
leaders and the White House, over and over again I heard that 
there were three things that needed to be in any plan for there 
to be more revenue on the table. One of them was chained CPI; a 
second was means testing Medicare. The President's budget does 
chained CPI, and it puts in an income-related premium which 
means you would have to pay for your own Medicare benefit if 
you can afford to. I think that it is not fair to say that 
there is no tough medicine in this budget. There is very tough 
medicine, and we would look for the conversation to get the 
right balance between spending and revenue to get the job done. 
We do not want to have a disagreement here. We want to get the 
job done.
    Mr. Crenshaw. We are going to have time for another round 
of questions, so we will keep going. Mr. Graves.

                     BASEL III CAPITAL REQUIREMENTS

    Mr. Graves. Thank you, Mr. Chairman, and I appreciate Ms. 
Herrera Beutler's passion. She expresses what many of us feel, 
and dealt with it correctly. Mr. Secretary, I just want to talk 
a little policy a second because I think, as we all know, the 
economy is number one on our mind, and making sure that it 
recovers correctly and sustainably. And I want to talk a little 
bit about Basel III, something that the American people maybe 
do not hear about a lot, but I think could have a very negative 
impact on the financial sector in the future. You are probably 
aware that Senators Vitter and Brown recently, very recently, 
introduced some legislation to exempt all financial 
institutions based in the United States from Basel III, from 
the requirements there, and instead put in place some different 
capital requirements. I wanted to get just sort of your 
thoughts on their proposal as well as the timeline, or do you 
support, I guess, exempting United States financial 
institutions from Basel III as their legislation proposes, and 
if not, what impact do you think it is going to have on our 
economy in the future?
    Secretary Lew. Congressman, I am going to have to take a 
look at the details in the legislation, so let me, if I could, 
just take a step back and talk a little bit more broadly about 
what we have done, what we are doing, and what Basel III would 
do. We had a serious problem in 2008 that our banks were 
undercapitalized and our regulatory structure was not able to 
see what it needed to see to make the sensible regulatory 
decisions to supervise. We are in the process of fixing that 
through our domestic laws, through Dodd-Frank, and by complying 
with Basel III. I think we have done a much better job than 
much of the world building capital over the last four years, 
and we are now in a better, stronger position to be able to say 
that we are not going to face the same kinds of problems that 
existed in 2008. So I think that we need to continue on the 
course we are on, building the capital requirements so that we 
are complying with both the U.S. and Basel standards, and look 
at proposals that would provide for more security if there are 
ideas out there, we should be looking at.
    Mr. Graves. So their proposal exempts financial 
institutions in the United States from Basel III, in effect 
exempting our financial institutions from an international 
agreement in which, I guess, it is about 27 countries come 
together in a location in which none of the details are 
disclosed about the deliberations that take place, nor the 
agreements, nor the politics. It is very closed-door, smoke-
room-filled agreement that comes into being, and which then is 
implemented by our agencies here in the United States without a 
lot of input and without a lot of oversight from Congress. Is 
that something you support?
    Secretary Lew. Congressman, what I tried to say, and I will 
say again, I think the combination of implementing Dodd-Frank 
and complying with Basel III leaves the U.S. financial system 
in a safer, sounder place, and, I think we need to continue to 
do that.
    Mr. Graves. So you would not support exempting United 
States financial institutions from this.
    Secretary Lew. I am refraining from commenting on a bill 
that I have not had a chance to read, but I am trying to state 
what my policy is.

                            TOO BIG TO FAIL

    Mr. Graves. So it sounds a little European to me, and I 
have seen what has happened there, and do not think that is 
very healthy. Okay, changing topics a second, and talking about 
Dodd-Frank, which you referenced, and not only do we have it, 
but now pulling in something international to overlay on top of 
that, being the Basel III side, but Dodd-Frank was supposed to 
address the ``too big to fail,'' and, in fact, I guess the five 
largest money centers have increased in size over the last 
couple of years, while, at the same time, as the Chairman 
mentioned, community banks have taken a larger hit, and, in 
fact, I imagine there have probably been zero new community 
banks net across the nation being created. Do you believe too 
big to fail is, in fact, in place?
    Secretary Lew. I think that Dodd-Frank established very 
clearly the principle that too big to fail is unacceptable, and 
it put in place policies, which we are in the process of 
implementing, to achieve the goal of being able to say too big 
to fail is no longer the case. We are not yet fully 
implemented. I think a lot of the commentary that I have read 
mixes up today as a moment in time to where will we be when 
Dodd-Frank is fully implemented. I can tell you that when it is 
fully implemented, we need to continue to ask the question, 
because if our policy is that too big to fail is unacceptable, 
we have to make sure that we make that the case.
    Mr. Graves. So you believe Dodd-Frank ended too big to 
fail.
    Secretary Lew. I would just say this about the question you 
asked about consolidation and large money center banks. In the 
course of the financial crisis, there were a lot of 
institutions in the resolution process that disappeared, and 
there was a growth of some of the large institutions as they 
were failures that were resolved during the financial crisis. I 
think that is separate from the question that you asked about 
community banks, and as I tried to indicate in my response to 
Chairman Rogers, we are very much aware of the concerns raised 
by the community banks, and I know the regulators are as well.
    Mr. Graves. Right. So you believe that Dodd-Frank has ended 
too big to fail?
    Secretary Lew. Well, I will just restate very clearly that 
Dodd-Frank established the policy that it is unacceptable for 
banks to be too big to fail.
    Mr. Graves. Well, I understand that it implemented the 
policy.
    Secretary Lew. We are implementing those policies, and we 
have not yet completed the process of implementing those 
policies. We are determined to do so, and we will continue to 
ask the question as it is implemented, and if, in fact, I 
cannot sit here a year or year and a half from now and say 
that, we will have more work to do, but I cannot tell you that 
today, and I am determined to do the very best we can 
implementing the laws so the answer that will be positive.
    Mr. Graves. Thank you.
    Mr. Crenshaw. Ms. Kaptur.
    Ms. Kaptur. Thank you, Mr. Chairman. Glad you looked down 
this side. I want to welcome the new Secretary and wish him the 
very best in his important new duties, and we know your 
background, and we have great confidence in your 
levelheadedness and your deep commitment to service.

                            COMMUNITY BANKS

    I wanted to associate myself first with Chairman Rogers' 
remarks relating to banks across our country that did not abuse 
their privilege, and I wanted to implore that Treasury, in its 
rule-making, find a way to distinguish between banks that were 
the worst abusers versus those that maintained stellar records 
and prudent lending practices. I can tell you in my own 
district the Bank of Lorraine, the First Federal Bank of 
Lakewood had none of this as a part of their portfolio, and 
perhaps there is a way for Treasury to provide recognition to 
these types of institutions for their prudent practices, and 
think about that as you proceed forward. I do not really have a 
question on that, Mr. Secretary, I am just encouraging you to 
recognize the best in our country as we try to restrain those 
who abuse their privileges, and I think that many of these 
banks that are local do not get any recognition. We figured out 
how to give FDIC seals on the door to give confidence to the 
public, and maybe there is something special Treasury could do. 
So I just wanted to put that on the record.

                           HARDEST HIT FUNDS

    My questions really center on important topics you have 
raised right in the first and second paragraph of your 
testimony relating to the housing market. And housing has 
always led the way in most modern recoveries except this one, 
and ever since the mortgage securitization instrument was 
invented, unfortunately, the housing crisis lands at Treasury's 
door now. And regions such as I represent have been deeply, 
deeply harmed because of the crisis, as many others have as 
well, and there has been a tremendous market adjustment that 
has been occurring. And so I appreciate your mentioning housing 
in your very early remarks in your testimony, and I have some 
questions relating to one of the programs that Treasury 
operates called The Hardest Hit Fund. Treasury's budget request 
indicates that the Department has only dispersed about $1.76 
billion out of a possible $7.6 billion under the Hardest Hit 
Fund as of December of last year.
    My question is, and I have a couple of them, so let me just 
run through them, please explain why less than 25 percent of 
the funds have been allocated despite the fact that we are 
still seeing high foreclosure rates, certainly in our area in 
northern Ohio. For years I have been urging Treasury to allow 
states to use their Hardest Hit Funds for demolition, as well 
as rehab, or try to work out the mortgage. That is the best 
alternative, if it can be done, but Treasury has yet to give a 
yes or no answer on that. And could you possibly enlighten us 
on what Treasury is doing to determine if Hardest Hit Funds can 
be used for demolition? I can tell you across northern Ohio 
from Cleveland to Toledo, a region that the Administration 
knows well, we literally have 50,000 units we have to rip down. 
Local governments, because of the sputtering of the economy, 
have difficulty in finding the funds to do that. And I am 
wondering if you might address that, or one of your staff who 
is with you today.
    Secretary Lew. Congresswoman, I would be happy to address 
it. As you know, this has been a very difficult area for both 
federal and local policy and we have been working very hard to 
get the resources out into the places where it could do good. 
In the almost two months that I have been at Treasury, the 
issue of demolition has come up, and we have not reached a 
final determination, but the argument is, I think, a strong 
one, that in a community where houses are underwater, and the 
only way for them to get above water is to remove the blighted 
properties that need to be demolished, that there may well be 
savings, and therefore ability, for the homeowners to get above 
water to pay their mortgages, if the demolished properties were 
addressed. We are looking at whether or not the Hardest Hit 
Fund can be used for that. We have a great deal of sympathy for 
the policy, and I think there is a strong argument. It is not 
resolved yet, so I cannot speak to a final decision, but it is 
something that I am personally paying a great deal of attention 
to.
    Ms. Kaptur. I thank you very much. Could you give us any 
window? I mean, are we talking about by June?
    Secretary Lew. Yes, I would have to get back to you on the 
timeframe, but I can tell you that in my first two months it 
has been the subject of more than a couple of conversations.
    Ms. Kaptur. I thank you very much for that, and we also 
have a bipartisan bill that has been introduced here dealing 
with the challenges that regions like ours face in trying to 
readjust our housing markets. Deputy Assistant Secretary Graves 
has actually come out to our region trying to figure out what 
do we do with this situation, and I would urge you to take a 
look at our bill, perhaps there might be something in there the 
Department would find useful, and as we try to readjust our 
marketplace. So, I thank you very much for that.

                   HEALTHY FOOD FINANCING INITIATIVE

    And I just want to ask one additional question on the 
Healthy Food Financing Initiative that is a part of the budget 
submission, could you provide now, or for the record, the 
eligible institutions that the CDFIs could link to? Are they 
just for-profit institutions? Or if you have, for example, a 
Cleveland foundation working with local non-profits trying to 
raise food in communities that sell at farmer's markets, would 
they be eligible for assistance? So I am looking for how that 
fund is going to be used.
    Secretary Lew. Congresswoman, I am probably going to have 
to get back to you as to who the entities to be funded are, but 
certainly the idea is to try and get into the communities 
through the entities that have the ability to achieve the 
goals. I would be happy to follow up with you. I cannot speak 
to the question of a farmer's market, but it is a kind of 
activity that certainly does address the problem. So I would be 
happy to get back to you.
    Ms. Kaptur. All right. Very good. Thank you. Thank you, Mr. 
Chairman.
    Mr. Crenshaw. Thank you. Mr. Diaz-Balart.
    Mr. Diaz-Balart. Thank you, Mr. Chairman. Good to see you 
again, sir.
    Secretary Lew. Good to see you.
    Mr. Diaz-Balart. You are kind of stuck with us, right?
    Secretary Lew. Yes, it feels like it was only yesterday.

                             TAX INCREASES

    Mr. Diaz-Balart. Yeah, right. Deja vu all over again. Just 
want to go back to the conversation that you had with my 
colleague here, and you mentioned some of the things that 
Republicans wanted to put on the table as a condition to 
potential revenues. And you talked about that. You know, my 
memory may not be that good, but, you know, the American people 
have already gotten hit with a number of tax increases. 
Revenues were already increased. Taxes already went up. I do 
not recall the President saying that taxes were going to 
increase all the time, continuously. He talked about, during 
the campaign, increasing taxes on what he called, you know, the 
high earners. That already took place. But not only that; there 
has been a huge tax increase on the middle class because of the 
Affordable Care Act, known commonly as ObamaCare, huge tax 
increase on the middle class. And nobody has gotten hit more 
than the middle class, based on the payroll tax increase. And 
do not take my word for it, but I will just pose a question.
    Mr. Secretary, I know you know that people feel the payroll 
tax increase. It is a huge tax increase, not on the wealthy, on 
everyone. So revenues already were increased. Taxes went up, 
whether we care to admit it or not, they went up. The American 
people know they went up. There are others that are coming, by 
the way. So is there ever a limit to tax increases? Because 
that argument, that debate took place already. The President 
got his tax increases, and now it seems that the American 
people are supposed to forget that they are receiving less 
money because of the payroll tax increase, because of other tax 
increases, and that now that did not happen, so now tax 
increases have to be on the table again. You know, is this 
going to be the constant discussion no matter what we do? 
There's always going to be an effort to increase taxes?
    Secretary Lew. Well, Congressman, first of all, I 
appreciate your strong support for the payroll tax, which we 
fought for in 2010 and 2011. We heard a lot of arguments that 
the payroll tax cut was a bad idea and took an awful lot of 
work to get that passed, and it was only passed because it was 
short-term, and it was to deal with the economic conditions of 
the time. It was never considered as part of the overall 
dealing with our deficit.
    Mr. Diaz-Balart. But the American people are feeling it.
    Secretary Lew. We spent money on the payroll tax cut to 
have it in place for the two years.
    Mr. Diaz-Balart. And the American people are feeling it 
now.
    Secretary Lew. The American people are better off for the 
growth that we got for the brief period of lowering the payroll 
tax. Look, the challenge in getting a balanced spending cut 
revenue package is that we are doing a lot of spending cuts. We 
have done, $1.8 trillion in spending cuts. We have done $600 
billion of revenue as part of the package. If we need to do $4 
trillion, and the ratio should be 2:1, we are not coming back 
for more revenues, we are coming back to finish the work on 
both the spending side and the revenue side. I think it was a 
very good thing that Congress passed in January, the 
legislation that rolled back the tax cut on the very wealthiest 
Americans. It did not finish the job, and we said so at the 
time, and there should be no surprise that when you only do 
half of the job, half of the job is left. So we collectively 
have more work to do on both the spending and the revenue side 
if we are going to deal with the deficit in the long-term 
fiscal policy in a fair and balanced way.

                     AFFORDABLE CARE ACT PENALTIES

    Mr. Diaz-Balart. Mr. Secretary, the $600 billion, I know 
where that number comes from, does that include the tax 
increase that the middle class is subject to because of 
ObamaCare? The Supreme Court said it was a tax increase.
    Secretary Lew. We can have a debate.
    Mr. Diaz-Balart. No, I'm just asking.
    Secretary Lew. That $600 billion is raising rates on the 
highest income taxpayers above $250,000. I think that the whole 
question of the Affordable Care Act is a legitimate question to 
have a conversation about, but it was not a set of revenues 
that was part of a deficit reduction package. It was a set of 
policies to make sure Americans have access to health care, and 
that when they do not choose to get health care, rather than 
shifting the cost to other people, they pay a penalty.
    Mr. Diaz-Balart. I understand that.
    Secretary Lew. So it would be shifting the cost. Very 
different.
    Mr. Diaz-Balart. Right. So just very simple. That $600 
billion in tax increases, do we know what the expected tax 
increases, how much money the tax increase on the middle class 
is supposed to bring in?
    Secretary Lew. I am not sure what you are asking, 
Congressman.
    Mr. Diaz-Balart. Well, I mean, I do not always agree with 
the Supreme Court, and I know you do not either, the Supreme 
Court made it very clear that the tax increase, that the fine 
that the middle class, thousands or millions of people in the 
middle class are probably going to have to pay, is a tax 
increase. Do we know how much that is supposed to bring in?
    Secretary Lew. I would be happy to follow up with you on 
Affordable Care Act penalties.
    Mr. Diaz-Balart. Okay, well, so the penalties, the Supreme 
Court, whether you or I like it, has said it is a tax on the 
middle class. So, again, I know that government, you know, 
going back to what my colleague was saying, sometimes it is 
frustrating. Government likes to kind of pretend if a different 
agency takes money from your pocket, that that is not real 
money, or that you do not count that. But the reality is, the 
American people are feeling tax increases. They are feeling 
those tax increases, and they are going to feel that tax 
increases of ObamaCare in a pretty immediate sense, and I think 
it is important to remember that the President got huge tax 
increases. There are other huge tax increases that are coming, 
and the question is, is there ever going to be enough new tax 
increases?
    Secretary Lew. Congressman, I think the American people 
appreciate the fact that they have access to health care 
coverage that they did not have; that their children graduate 
from college, they can stay on their health care plan; and if 
they have someone in their family with a pre-existing 
condition, that they can afford to get health care coverage. I 
think that the entire package of the Affordable Care Act, when 
it is implemented, will be something that the American people 
see as having been one of the most important set of policies 
and a very good value. That is a separate question from what we 
do to get our fiscal house in order, and I think everyone on 
this Committee knows that the tax cuts in 2001 and 2003 were 
not part of the Affordable Care Act. Those were tax cuts we 
could not afford. The President has said all along that as part 
of a balanced deficit reduction plan, we need to have some 
correction where, for people at $250,000 and above, we take 
back some of the benefit that we just cannot afford to give to 
the wealthiest people in America. That is what the President 
has proposed.
    Mr. Crenshaw. Thank you. Hopefully we get a little more 
time. Mr. Quigley.
    Mr. Quigley. Thank you, Mr. Chairman. And in a moment of 
kumbaya qualities, I, too, want to associate my remarks with 
the Chairman of the Full Committee as it relates to community 
banks. I think Illinois is second in the whole country, and 
many of them in the heart of my district are suffering because 
of what happened, but also because of unintended consequences. 
So I certainly appreciate, Mr. Secretary, your efforts as you 
have outlined previously.

                         CONFORMING LOAN LIMITS

    And in a related point, one of your colleagues, Mr. 
Donovan, and I exchanged questions about conforming loan 
limits, and he has pledged to help. Now I understand there are 
different jurisdictions here, but as he clearly understands and 
outlined in our discussion, the way the lines are drawn for 
conforming loan limits creates a skewing, and are 
disproportionate, so that certain areas that are drawn in with 
dramatically lower numbers have their numbers drawn so that the 
loan that is otherwise a jumbo is way, way low, and, frankly, 
it just kills sales of certain types of housing. So I would 
certainly appreciate your comments and thoughts about trying to 
help Mr. Donovan and ourselves affect that change.
    Secretary Lew. Congressman, I would be happy to look at the 
conforming loan question. It is largely in Housing and Urban 
Development's area, but I will say this, that in the last 
number of years since the financial crisis, we have seen the 
loan limits go way up, and we have seen federal lending become 
a predominant form of lending. One of the things that we are 
concerned about is getting private lenders back into the 
marketplace. So as we look at these questions, I think our goal 
has to be maintaining access to housing finance, but also 
reducing the prevalence of the federal government as the 
predominant lender or guarantor. And it is something we look 
forward to working with you on.
    Mr. Quigley. Absolutely, and I think the reality of the 
situation is when this discussion goes forward, now, it is not 
just is HUD going to be asked about this, they are going to 
look in your direction for your thoughts.
    Secretary Lew. I look forward to working with my colleagues 
on that.

                             IRAN SANCTIONS

    Mr. Quigley. On an unrelated point, correct me if I am 
wrong, but I think, to date, the Treasury Department has 
sanctioned just two non-Iranian foreign banks for conducting 
significant financial transactions with sanctioned banks 
relating to doing business with Iran. Can you explain a little 
bit about what the agency is doing now, because there seems to 
be a lot of information about other banks doing this, about 
what you are trying to do to address this issue?
    Secretary Lew. Congressman, we are working vigorously to 
implement and enforce what is the toughest set of sanctions 
ever put in place by the international community, and 
unilaterally, by the United States. Importantly we have the 
cooperation of, the U.N., including China and Russia. We are 
working with our European allies. This is not just the United 
States. In order to really tighten the pressure on Iran's 
economy, we need that kind of full cooperation. I think if you 
look at the economic conditions in Iran, it is showing that it 
is having effect. We see it in Iran's GDP. We see it in their 
unemployment rate. We see it in their exchange rate. We see it 
in the availability of food on the shelves.
    Now, sanctions alone do not change policies. Governments 
have to change policies. What sanctions can do is they can send 
a very clear message that we are serious. When the President of 
the United States says we are going to keep the pressure on, 
and all options remain on the table, we are very serious. We 
are taking our enforcement responsibility equally seriously. 
These are case-by-case matters that our team follows up on. As 
Secretary, I will remain vigilant watching the work they do, 
being part of it, and making sure that we meet that standard.
    Mr. Quigley. Well, I would certainly appreciate hearing 
about, especially given the information we are hearing about 
other banks who should be the subject of these investigations 
or sanctions, but I certainly appreciate your efforts. Mr. 
Chairman, if I might, and I am sure at this point you will 
probably tell me since I am new I have no business to say this, 
but on a personal point of view, I have served four years now, 
maybe not on this Committee, but often in the minority, and 
often with Republican and Democratic witnesses.

                                DECORUM

    And I would just like to encourage my colleagues, in no way 
associating with my friend, Mr. Diaz-Balart's exchange, because 
I think that is very healthy, but I do think there is a line 
where we show a courtesy and decorum, and allow witnesses to 
answer questions. They may disagree.
    Ms. Herrera Beutler. Did the gentleman yield?
    Mr. Quigley. No, I would like to finish if I could. They 
may disagree, and I appreciate passion, and I also respect the 
fact that in four years I have seen witnesses filibuster for 
their five minutes, and so there is a priding that goes along 
there. All I am saying is, in as gentle a way as I can, is I 
think it adds to the decorum and the value of the discussion if 
we allow witnesses to answer a question, and if we disagree, we 
can say so then. I yield.
    Mr. Crenshaw. Mr. Womack.

                              BUFFETT RULE

    Mr. Womack. Thank you, Mr. Chairman. I am going to try to 
be a kinder, gentler questioner. Try. Thank you, Mr. Secretary, 
for being here. Earlier, the Buffett rule came up. Refresh my 
memory. How much revenue, assuming the Buffett rule or law, how 
much over 10 years would that raise? Round numbers. Round 
numbers.
    Secretary Lew. I would have to check the exact number. It 
is not an enormous number.
    Mr. Womack. That is where I am going.
    Secretary Lew. And I know that is where you are heading. It 
is a principle as much as it is a number, because, frankly, it 
is just a matter of basic fairness that the tax rates should 
reflect fair distribution of burden.
    Mr. Womack. I knew you knew where I was going with that. It 
is not a significant number, and I think it is quite generous 
to say that it is just a principle. It is really more of a 
talking point to divert attention away from the real problems 
facing our country and try to convince people that that is the 
real problem. And that is not the real problem. But anyway, I 
will not have enough time to drill down terribly on that. Over 
the proposed budget, over the next 10 years, now let me back 
up. This year, what will the net interest on the debt be? Round 
numbers.
    Secretary Lew. Congressman, I did not bring all my numbers 
on the budget with me because I was here testifying about the 
Treasury budget.
    Mr. Womack. Well, easily over a couple of hundred billion, 
right?
    Secretary Lew. Yes, I just do not like to do numbers 
without having them in front of me.
    Mr. Womack. But would you agree that it is safely over $200 
billion?
    Secretary Lew. Yes. It is a large number.
    Mr. Womack. Okay.
    Secretary Lew. Importantly, it grows over time, because, 
interest rates go up in the forecast period.

                      INTEREST RATE NORMALIZATION

    Mr. Womack. You know, not long ago in a town hall meeting I 
had somebody ask me, ``Mr. Congressman, what keeps you up at 
night?'' And I remember my response vividly, that, 
internationally, it is a nuclear-armed Iran, and domestically, 
it is normalized interest rates. So I want to ask you this 
question. If it is safely over $200 billion this year, and as I 
look at the budget over the next 10-year window, it explodes 
even under assumptions that interest rates remain somewhat 
artificially low, maybe not even somewhat, to three-quarters of 
a trillion dollars. Now, to put that in perspective, as I noted 
in an article recently, that number in 2023 is more than we 
spent on any single program last year. And Social Security 
being the big one at 700 and some change, does this alarm you?
    Secretary Lew. Congressman, this is not my first time in 
the administration. When I was in the Clinton Administration as 
budget director, I balanced the budget, I ran a surplus three 
years, and I came before the Congress on my last day, and I had 
a plan for paying down the debt. There were a series of policy 
decisions that were made in the next number of years where we 
had several tax cuts we could not afford, we had wars we did 
not pay for, we extended Medicare prescription drugs without 
paying for it, and then we had an economic crisis, and revenues 
went down and spending went up.
    The President has laid out a plan that would stabilize our 
deficit as a percentage of GDP and our debt as a percentage of 
GDP. At the end of the 10 year window, our deficit would be 
less than 2 percent of GDP; our debt would be in the 70s. Not 
going through a barrier that all of us agree we have to try to 
control.
    I think this question of debt is a very important one. I 
think we cannot kid ourselves into thinking that you can take 
decisions that were made over a long period of time and reverse 
them overnight. Our budget, I would beg to differ, in terms of 
the assumption on interest rates; I think it is a realistic 
assumption on interest rates. It is consistent with other 
conservative assumptions. It shows a ramping up of interest 
rates. We do not make the decision; the Federal Reserve Board 
makes the decision in terms of timing a lot of these things. 
But our policy, our projections are consistent with both the 
mainstream Blue Chip projections and the Fed projections.
    I think the reality is that we have accumulated a very 
large debt because of the policies largely before this 
Administration took place. And we have to first get our budget 
to a place where we are not adding any new spending policy that 
increases the debt burden before you can even think about 
drawing down the debt as we did in the '90s when I was in 
charge of the budget the first time. I hope that we are in a 
position in my tenure to have that conversation. But the first 
step is to stabilize the deficit and the debt as a percentage 
of GDP, which is what the President's budget would do.
    Mr. Womack. And I think we can kind of debate, and we will 
not have time here for this session to debate whether or not we 
actually stabilize this disparity between our income and our 
expense ledger. And I am sure my time is about gone, but before 
I close, maybe a yes or no question back to my original 
question. Does it concern you that in 2023, based on what we 
are seeing here in the President's proposed budget, that our 
net interest on the debt, assuming those interest rates, would 
be the better part of three quarters of a trillion dollars?
    Secretary Lew. What concerns me, Congressman, is that we 
need to reach agreement on a balanced plan so that we can hit 
the debt and deficit as a percentage of GDP targets that are in 
the President's budget, because I think that that would leave 
us in the position that is sustainable where we could continue 
to have the discussions that we need to have about policy for 
the next generation.
    Mr. Womack. I will take it as a yes. Thank you.
    Mr. Crenshaw. Thank you. Well, Mr. Secretary, we have got 
just a few minutes left, and some people have another question. 
I just want to make sure, since some of you all were not here 
when the meeting started, I announced that I would call on 
people based on seniority if they were here when the meeting 
started, and after that, we would go from side to side. But 
after that, I would call on people in the order in which they 
walked in the door. But now that everybody is here, we will go 
back from side to side. I will waive my time and submit some 
questions in writing so that we can have other members have 
more time, so if it works out maybe we can ask another.
    Mr. Serrano.

                              BUDGET CUTS

    Mr. Serrano. Mr. Chairman, I will just ask one question, 
and then I will join you in submitting my questions for the 
record. The Ryan budget of $966 billion for discretionary 
spending, what, in your opinion, or have you been able to look 
at this? I know that you may, when we asked you have you looked 
at this, we are talking about the two month period, but it is 
also two decades of looking at this and other situations. So 
what impact do you think it will have on our economy if we cut 
back so severely on discretionary spending? Because, see, here 
is my concern, and I may be on the Appropriations Committee, 
but unlike you and a couple others on the Committee, I am not 
an expert on these numbers, but I do notice something that is 
happening here which is very dangerous. There is such a desire 
to cut the budget and to balance it that we are hindering the 
opportunity to invest in some areas.
    Now, I know some of my colleagues call that spending, but 
investing and spending may be the same thing, or it may not be 
the same thing. But the best example I use is there is 
somewhere right now, a man and a woman in a white coat, working 
on perhaps finding a cure for cancer, or a cure for AIDS, or 
something, and we are cutting across the board with no concern 
for what happens. So what is the impact, or have you had a 
chance to look at it over a period of time?
    Secretary Lew. Congressman, I have looked at the budget, 
and it is obviously not the first time the proposal has been 
put forward. I would make two or three points.
    First, the revenue policies in the budget create a much 
bigger problem than they are a solution. There are over $5 
trillion dollars of tax cuts that go largely to upper income 
people that are not paid for. So there is a huge hole in that 
part of the budget. So there would either have to be more pain 
or tax increases on middle class people in order to pay for the 
tax cuts. So I think, when we look at the magnitude of impact, 
I always look at the things that are not paid for because that 
tells you whether it is going to be better or worse. It would 
be worse.
    If you look at what is in the body of the budget, I think 
on the discretionary side, it is eating our seed corn to not 
invest in research, to not invest in infrastructure, to not 
invest in education. And if you cut discretionary spending to 
the levels that that budget would, it leaves you no choice. And 
I cannot tell you the specific decisions; this Appropriations 
Committee will make the specific decisions. But I think 
everyone on this Committee knows that when you lower the caps, 
something has got to go. And that we all like to talk about 
cutting the things that are wasteful, and we all agree that 
that is where we should go first, but we are getting beyond 
that. We are down to really hard choices, really hard choices. 
And I think that the next generation has a right to depend on 
us to educate the next generations for the challenges they will 
face, to make sure that they have an infrastructure so that 
when they produce things they can get them to port and to 
market, and that we maintain our cutting edge as being the 
country that has led the world in scientific breakthroughs 
which has been driven by federal research support.
    So these are basic questions about what kind of country we 
are going to be, when my grandchildren grow up in the Bronx.
    Mr. Serrano. Right. And let me in closing, Mr. Chairman, 
just say that that is what concerns me the most. And I know 
that, as I look across the panel here, I know that everyone has 
very serious concerns about the future of our country. My main 
concern is that in this constant desire to cut, cut, cut, we do 
not invest, and, in the process, we take away that which made 
us great. We were able, always, to do both, to keep a budget 
that made sense and also to invest. So I hope that we come to 
our senses and realize that, yes, you have to cut the budget, 
but also, you have to invest. And the best example I give you 
is, is it a crisis if we can no longer find cures for disease? 
Is it a crisis if we can no longer provide proper health care? 
Yes. Well, we have had crisis. And one of them is always 
wartime. And in wartime we never really stop to think about 
what the cost will be, we just defend the country. There are 
different ways to defend the country, and one of them is to 
secure a future that does not cut, cut, cut, but invests in 
some areas, and I thank you.
    Mr. Crenshaw. Thank you. Mr. Yoder.

                          DEBT PRIORITIZATION

    Mr. Yoder. Thank you, Mr. Chairman, Mr. Secretary.
    A little different topic. Probably sometime in the next few 
months we are going to be dealing with the issue of the debt 
ceiling increase again. Your predecessor spent a lot of time on 
media, on news, et cetera, making comments that I am assuming 
you will be making soon enough that suggest that if Congress 
does not acquiesce to the demands of the Administration to 
raise the debt ceiling by whatever amount the Administration 
says, that it will have the potential of causing economic ruin 
across the world because of the potential for the U.S. to 
default on their bond obligations. Nobody wants that scenario 
to occur. And the main thrust of that argument, Mr. Secretary, 
is that we need to protect the full faith and credit of the 
United States, and that that is critical for our economy.
    I got a great opportunity for you to have the 
Administration join members in both parties and support 
bipartisan legislation that would ensure that the full faith 
and credit of the United States regarding those Treasury bonds 
are always paid. There is legislation before Congress that 
would prioritize the debt to ensure that that scenario would 
never happen, which would, therefore, not have the economic 
consequences, at least in that regard. There may be other 
economic consequences for not raising the debt ceiling that I 
am sure you can articulate, but can we join together as we have 
this debate, recognizing that the President opposed raising the 
debt ceiling when he was in the Senate, and was very clear 
about his rationale for opposing that. Democrats have opposed 
it; Republicans have opposed it. We know where this going to 
go. We know how this debate is going to go. Can we work 
together to not have the Administration sort of create a self-
fulfilling prophecy by going out and saying, If they do not 
raise the debt ceiling, then we are going to have these 
economic consequences. Therefore, the markets get edgy; then we 
get the consequences anyway? I would so appreciate if we could 
avoid all that, and actually have an honest debate.
    The American people are very, very concerned about raising 
the debt ceiling without a plan that we can agree on to pay it 
back, and we have an obligation to do that. So it is a 
legitimate debate to have. But can we take the full faith and 
credit debate off the table, and support legislation that would 
ensure those payments go out no matter what, and reassure 
global markets?
    Secretary Lew. Congressman, I have testified four times on 
this already, so I think you are right to assume that I will be 
saying things that I believe are very much true. You cannot 
prioritize what obligations of the federal government to pay 
without resulting in a default if the debt limit is not 
extended. You are only going to be changing what it is we 
default on. When this Committee appropriates money and agencies 
commit to spend that money, they have an obligation to make 
their commitments whole, whether it is to pay for rent or 
utilities, or to pay a grant. There are obligations that go 
with being the United States of America, making a commitment, 
that has been authorized by Congress. Prioritization kind of 
pretends that you can pick and choose amongst the commitments 
and avoid defaulting on an obligation. You will be in default 
if you do not extend the debt limit, and the United States does 
not meet its obligations.

                               DEBT LIMIT

    You know, it is not a new thing that we pay our bills. 
When, the United States was formed, one of the challenges was 
to pay the Revolutionary War debt. And since then, we have 
always paid our bills, and I hope we always will. Congress has 
to extend the debt limit. It does not incur a single penny of 
new spending. All it does is pay the bills that Congress has 
authorized, already-committed funds. And I think that, it has 
historically never been the case that we have failed to do 
that. And I think Congress will do what it has to do, which is 
pay the bills.
    Mr. Yoder. Well, with all due respect, Mr. Secretary, that 
is not entirely accurate because the debt limit increase would 
not only go to pay current obligations, it would also authorize 
future spending for the future Congress to appropriate from. 
And so it does not just pay the bills until the end of the 
fiscal year, September 30th. The debt ceiling that increased in 
August of 2011 increased the debt limit way beyond that fiscal 
year and forward. And so it does not just go to pay prior 
obligations. It also goes to allow Congress to spend additional 
dollars.
    We have had a fairly, you know, important debate this 
morning regarding the finances of the country. We have clear 
differences about the Administration's approach towards taxes 
and increasing spending on the American people, versus the 
balanced approach that the House is moving forward, which 
actually balances the budget. That debate has been had.
    But as we get into the debt ceiling debate, my hope is, and 
I am sure this will not occur, but I will say it because I just 
hope that you will consider this, that the rhetoric that the 
Administration has previously used on this issue has created a 
self-fulfilling result. And so if we could tone down the 
hyperbole on default, knowing that there are dollars that will 
come into this federal government that will pay our debt and 
interest regardless of whether that ceiling is raised, if we 
can tone that part of it down, that would be something we could 
all work towards.
    I get that, yes, there would be potential obligations that 
would not be met elsewhere. But that is not nuanced in the 
debate. The debate that is had is, we are going to default on 
our Treasury bonds, and that is going to cause global economic 
meltdowns. So if we can, and I will watch you on Sunday talk 
shows, my hope is that you will take some efforts to tone that 
down and maybe, potentially, support an approach that would 
ensure that occurred.
    Secretary Lew. The thing I would just urge you to consider 
is that you enter a world that we have never been in once the 
United States is not meeting its obligations. We cannot assume 
that we know that markets will function in an orderly way if 
that happens. And you cannot prepare for a scenario where you 
can predict that we will have the ability to continue to go to 
market and roll over debt if we stop paying our bills.
    And the one point I would really urge you to think about is 
the debt limit does not appropriate a dollar; it does not 
extend an entitlement payment; it does not extend a tax cut. 
All it does is say that all the other decisions Congress has 
made, we can meet those obligations. And, you know, I 
understand your point that the debt limit, covers the current 
year as well. But, that is not what is driving the need for a 
debt limit increase. What is driving the need for a debt limit 
increase is the fact that, past decisions were made.
    Mr. Yoder. Which, Mr. Secretary, is one of the reasons that 
we are not going to be supportive of the President's budget, 
because it drives those obligation up even further, therefore 
increasing further demands on a debt ceiling increase. So it is 
a bit circular to say, Well, you voted for a budget, therefore 
you have to vote for our debt ceiling increase.
    Secretary Lew. I wish I could say you voted for our budget.
    Mr. Yoder. Well, sorry, we have not. But let's agree to 
stop putting additional obligations on the American taxpayers, 
therefore we do not have to increase the debt ceiling.
    Mr. Serrano. Will the gentlemen yield for a second, Mr. 
Chairman?
    Mr. Yoder. I will yield back to the Chairman, I am sure my 
time has expired.
    Mr. Crenshaw. Yeah, I did not turn your mic off, it just 
went off automatically. But there are four people left here 
that maybe have a question. And I know it is 12:00, and you 
have been very generous with your time, but I think if we all 
kind of focused on maybe another question, then we would have 
time and not take up too much room. So could we do that, Ms. 
Kaptur?
    Ms. Kaptur. Thank you, Mr. Chairman. Thank you, Mr. 
Chairman, for allowing us another round. I have full 
confidence, Secretary Lew, that you, having been a part of 
balancing federal budgets when we were responsible as a 
country, will help get us back on that path. And I served much 
longer than some of the other members who are new on this dais 
now. And we are a part of a Congress that saw very 
irresponsible budgets set up by an Administration that 
conducted wars and did not pay for them, passed bills dealing 
with pharmaceuticals and Medicare and did not pay for them, and 
then we got into the mess that we are in now, so trying to dig 
ourselves out. But you have my confidence, Mr. Secretary.
    I just wanted to point out that it is no secret that a few 
big Wall Street banks and money center banks have actually been 
expanding in our economy, taking a greater share of assets and 
control of wealth, managing the wealth of this country since 
the financial crisis. It is surprising how few there are, 
actually, of very large ones, and how much they actually 
control. Smaller local banks have been facing, interestingly 
and troubling to me, many more regulatory burdens related to 
what the big banks did, and their share is not growing.

                            COMMUNITY BANKS

    And so I want to go back, Mr. Secretary, and see if there 
are ways that Treasury can actually allow those financial 
institutions that did not cause this crisis, and have the 
ability to make housing loans at the local level, and have a 
very, very good record, they do not have a stained record of 
performance, that if there is some way that Treasury, as you 
work through all this, could lighten their burden, actually 
invite them in. Find those around this country, and I will give 
you the Ohio list, to actually find a way for them to be more 
robust partners with you as you move forward. Is this in your 
thinking? Are you looking at those institutions around the 
country that actually performed very prudently and trying, as 
we recover, to engage them in additional lending, rather than 
burdening them in a way that they simply are being displaced in 
their marketplace by the very institutions that caused the 
problem?
    Secretary Lew. Congresswoman, we have tried over the last 
number of years to create incentives for lending to small- and 
medium-sized enterprises to make it easier for businesses to 
get access to credit. I am not sure whether there is any 
mechanism to do what you are describing. I am happy to go back 
and talk to our team about it. Many of the rules that community 
banks are worried about are not in the jurisdiction of the 
Treasury Department squarely; they are either in the FDIC, or 
the Federal Reserve, or another agency. As the chair of FSOC, I 
have had discussions with the other members of FSOC, which 
include all the regulators, and I know that they are sensitive 
to the concerns of community banks. So I would look forward to 
working with you on it. I would have to look at what tools, if 
any, are available.
    Ms. Kaptur. You know, I look at the Department of Energy, 
and we have LEED-certified buildings, and I go out to all kinds 
of ceremonies with local businesses that are very proud that 
they have, you know, met this standard. And we think of ways 
that we recognize top scholars in our country. Well, we have 
banks that have done a good job, and we have some that have 
done a very poor job. And it just seems to me, I can told you 
at the local level, the lending is stuck. There is the 
uncertainty about what is happening with the regulatory 
process, and perhaps because of the multi-agency engagement in 
this, unclear messages are coming down locally that is 
restricting lending, but it is hurting the housing market right 
now.
    Mr. Crenshaw. Your five minutes is up.
    Ms. Kaptur. Thank you, Mr. Chairman.
    Mr. Crenshaw. Ms. Herrera Beutler.
    Ms. Herrera Beutler. Thank you, Mr. Chairman, and, you 
know, I would agree with a lot of what has been said here 
today, and I think we can definitely point the blame at both 
parties and administrations over the last umpteen years. I 
certainly do not believe that this President created the debt 
at all. And I share this, I share this at my Lincoln Day 
dinners, and every head bobs, because we know it, it is the 
truth. Most Americans know what is happening. I think the 
difference is, and the reason I am here, is because we have to 
course correct. We cannot do things as we have always done or 
we are going to get the same result.

                      SMALL BUSINESS LENDING FUND

    In that vein, more specifically to us, a program, and I was 
not in office when this program got put in place, I do not know 
if I would have supported it, but it is there, and I want to 
see it used effectively. It was brought to my attention in a 
recent SIGTARP, I do not know if I am saying that right, audit. 
It shows a substantial number of banks use the Small Business 
Lending Fund to exit TARP. However, other institutions, like 
Craft3 in my district, effectively use that Small Business 
Lending Fund that was created, and were able to leverage 
significant other dollars, and then lend it to small businesses 
in a hurting community. I guess I am interested in how the 
Treasury is going to work to ensure more institutions are 
effectively increasing lending to small businesses. And I have 
a lot of numbers here that are kind of disconcerting about 
folks who are using it to pay off things, not increasing their 
lending.
    Secretary Lew. Congresswoman, I read the report, and I am 
familiar with the program. There have been a number of efforts 
over the last number of years to really improve the 
availability of lending for small businesses. That was the 
purpose of the program. I guess a couple points. First, the 
statute, the law that Congress passed, made repayment of loans, 
including TARP loans, eligible. The purpose of the program was 
not for the federal government to micromanage the book of a 
local lending institution, but it is set up so the incentives 
are all to lend more. So the dividends that go to the 
institution are variable, depending on how much their profits 
are kept versus returned to the federal government. The more 
they lend, the more they keep. So it is very much set up to 
encourage lending.
    If you look at these institutions overall, tracking where 
the dollars went is only half of the question. The other half 
is, what have the institutions overall done? The performance in 
terms of lending to small businesses is much higher than 
tracking where the dollars in the program went, and we need to 
go back, and I would be happy to follow up on this to be able 
to answer in more detail, but, you know, the institutions have 
been doing more small business lending, even if the dollars 
were used partially to pay back their obligations under TARP.
    Ms. Herrera Beutler. And again, I was not here when they 
wrote that.
    Secretary Lew. Nor was I in this role.
    Ms. Herrera Beutler. So I am not sure all the ins and outs 
of their intent, but it is called the Small Business Lending 
Fund, and it was the only game in town there for a few years, 
so I have had a lot of small businesses say, ``We cannot get 
anything out of it.'' And I know that there are a good number 
of banks who actually decreased their small business lending 
over this last period of time based on the Inspector General's 
report.
    Secretary Lew. I do not think that has been the general. I 
think the opposite has been more general.
    Ms. Herrera Beutler. You think that is the outlier?
    Secretary Lew. I believe so. But we should go through it in 
detail and get back to you.
    Ms. Herrera Beutler. That would be great. Thank you.
    Mr. Crenshaw. Thank you. Mr. Graves.

                             INTEREST RATES

    Mr. Graves. Thank you, Mr. Chairman. Mr. Secretary, thank 
you for your time this morning. A couple of quick things. I 
have heard a lot of concerns in the financial sector about what 
you will be doing from the money supply side, easing off the 
increase of the money supply as well as what the Fed will be 
doing with interest rates that we can all agree are 
artificially low and held low right now. What do you foresee as 
the exit ramp that brings everything back together in a more 
natural, free-market way of things being again?
    Secretary Lew. Congressman, I think I am going to say the 
same thing that all my predecessors before me have said, which 
is that the Federal Reserve Board makes decisions in this area. 
It is not an area where Treasury or the Executive Branch is the 
decision maker.
    Mr. Graves. What would be your recommendation to them?
    Secretary Lew. Well, we do not recommend policies to each 
other. I think there has been a balance between fiscal and 
monetary policy that has worked very well, given the way our 
system works, each making their own decisions.
    Mr. Graves. Many experts would agree that right now the 
environment is very artificial, and, at some point, it has got 
to return to the norm, and I think there is a lot of concern at 
how that happens. So I would, at some point, in the future be 
interested in your, you have mentioned a couple of times, your 
couple of decades of service and a lot of experience. We all 
agree with that, and so it is some of that experience, I think, 
we would rely on.

                           BALANCED APPROACH

    And then quickly just to go back to the conversation 
earlier about balanced approach, and I know it has been a 
spirited debate about that today and through the election, as 
you mentioned, and that you guys won the election based on 
balanced approach, and yet you have commented that 
sequestration was bad policy, never intended to take effect. 
However, the President did sign it into law, so it was the law 
of the land, which sort of implies it will take effect. And I 
think that was part of the election as well. I mean, it was in 
place, but yet, after the election, all of a sudden, no, no, 
no, it is not supposed to happen, not supposed to take effect.
    But, again, back to balanced approach, very strong claim 
through the election, balanced approach, 2 for 1, whatever it 
might be, all the formulas. But then after the election, we get 
to the fiscal cliff, and as my counterpart here has mentioned 
many times, my colleague, about the $600 billion in new taxes 
that you guys received at the beginning of the year, as well as 
the payroll tax that went up on all middle Americans, all 
Americans that receive a paycheck. Can you remind us what 
reductions in the size of government occurred as a result of 
that, and that 2-for-1 balanced approach?
    Secretary Lew. Congressman, I would just remind you that in 
December, the President said he thought it was a mistake to do 
revenues only. He thought there should be spending cuts. He 
made an offer to the Speaker that had almost a trillion dollars 
of spending cuts in it. This budget repeats the offer the 
President made to the Speaker, so I think you have to explain 
to me why the House and the Senate chose to do revenues only. 
It is not our proposal.
    Mr. Graves. The point of my question is that it was to be a 
balanced approach. You got tax increases. You got it. But yet 
today, you still want more tax increases, but yet are offering 
zero reductions in the size of the government, saying that, no, 
we need more revenues because it is a balance.
    Secretary Lew. No. That is not correct.
    Mr. Graves. But it was very imbalanced previously, if I 
remember right. All tax increases, and, in fact, more 
government spending, no reduction in the size of government or 
reduction in spending whatsoever, Mr. Chairman.
    Secretary Lew. That is just not a correct description of 
the President's proposal. The President believed in December, 
he believes today, that we should overall do $4 trillion of 
deficit reduction, the ratio should be 2:1.
    Mr. Graves. He signed it into law.
    Secretary Lew. Of course he signed it into law. He signed 
it into law as a step along the way. In 2011, he signed into 
law spending cuts only. We may not be getting there all at 
once, but if you look cumulatively, we have done about $2.5 
trillion of the $4 trillion of deficit reduction. We need to 
complete the job, and we look forward to working in a 
bipartisan way to do it in a balanced way. But $600 billion in 
revenue was, at the time, only half of what we were discussing 
in a balanced approach. So the fact that Congress chose to pull 
a piece of the revenue out and do it alone was not something 
that we recommended. Obviously, as a step along the way, it is 
very important to have had the rates go back to where they 
should be.
    Mr. Graves. So where are the $1.2 trillion in cuts, that 2 
for 1? Where is that? I have not seen that proposal.
    Secretary Lew. It is in the President's budget. I would be 
happy to send you another copy of it.
    Mr. Graves. Where was it then?
    Secretary Lew. Oh, where was it?
    Mr. Graves. Yeah. I mean, now it is part of the budget with 
new tax increases.
    Secretary Lew. No, no.
    Mr. Graves. So it is like you are double dipping again 
here, I think.
    Secretary Lew. I think the President's position in December 
was very clear. He was negotiating with the Speaker. He had an 
offer that included, the spending reductions that I have 
described, including the CPI, including means testing Medicare. 
He has put those proposals in his budget. It is before the 
Congress now, and we would really look forward to a bipartisan 
discussion.
    Mr. Graves. Mr. Chairman, I know my time has expired, could 
the President show us $1.2 trillion in cuts, aside from new 
revenues, aside from his budget, and say this was the other 
half of the deal that I was proposing in December?
    Secretary Lew. Well, that is not what the deal in December 
was. The President has put in his budget what was the remaining 
portion of the proposal he made in December. And we do not 
think that the entire answer to the sequester is spending cuts. 
It has to be a balanced approach, and we would really look 
forward to having that conversation.
    Mr. Graves. Thank you, Mr. Chairman. Apparently, it has not 
been too balanced.
    Mr. Crenshaw. Well, before I recognize Mr. Diaz-Balart, I 
want to help Mr. Graves with the interest rate question, and I 
think you can count on this, that rates will go up. They will 
flatten out. They will go down. Not necessarily in that order.
    Mr. Diaz-Balart.

                                  CUBA

    Mr. Diaz-Balart. Thank you, Mr. Chairman. Mr. Secretary, 
let me go back to a discussion that we had yesterday, and I 
will leave some of this with you, if that is all right, with 
your staff. Yesterday we were talking about enforcing of 
sanctions, and particularly Cuba. And, as you all know, tourism 
is outright unlawful. So these are a couple of things that I do 
not think are too subject to interpretation. If you go on 
spring break and you go scuba-diving; if you go and you do 
water sports; if you go snorkeling; if you go to take a swim in 
the warm Caribbean waters; if you go dancing; and if you go on 
eco-tourism, I mean, the word itself says tourism, that is 
tourism.
    So I will leave with you a couple documents of an entity 
that is licensed, that that is what they talk about in their 
brochure. They also have an itinerary that ends at noon, and 
then after that, you are on your own. So, anyways, I will leave 
that with you, and we will have continued talks. You know, 
obviously, you have not seen this. But again, as you well 
stated, you know, your role is to enforce the law, and tourism 
is unlawful. Here are just some examples that I think we need 
to kind of sit down and look at because there may be some that 
are questionable, things like this, where they actually talk 
about spring break, eco-tourism, snorkeling, bird-watching. But 
I will leave that with you, if that is all right.
    Secretary Lew. I am happy to look at it, Congressman. We 
had a long discussion on this yesterday.
    Mr. Diaz-Balart. Yeah, I know, and that is why I am not 
asking you for something because you have not seen this. But, I 
am saying, this is the kind of thing, however, that clearly 
does not even come close to being, you know, under the law.
    Secretary Lew. I would only say that our team at OFAC looks 
at each application and makes sure that it complies with the 
law. They review the manual, and they make sure they comply 
with the law. I am happy to look at the materials.
    Mr. Diaz-Balart. Sure.
    Secretary Lew. But I know that they are very careful about 
making sure that we comply with the law.
    Mr. Diaz-Balart. Right, Mr. Secretary. I know this does not 
surprise you, but nobody is infallible. And so, again, if 
tourism is not legal, eco-tourism is not legal, and if you have 
somebody that says eco-tourism on the front of their brochure, 
the fact that it has not at least, you know, tossed up a red 
flag leads me to believe that maybe, maybe, you know, but 
nobody is infallible.
    Secretary Lew. I will have our team take a look at that.

                                DECORUM

    Mr. Diaz-Balart. Right, so we will sit down about that. And 
Mr. Chairman, just the last thing, and it is too bad Mr. 
Quigley is not here. I thank, by the way, I thank him for 
always bringing up decorum. We always have to be reminded of 
decorum. And you know, I say ``my friend'' Quigley. We usually 
say that and do not really mean it. In this case, I do. He is 
one of the people that I really, really like. He is a friend, 
he is a personal friend, somebody that I greatly admire, so I 
appreciate that. I do want to, however, just with great 
decorum, tell the Chairman and everybody here, decorum is 
important, but it is also important that people stay focused on 
trying to answer questions. And I will never, ever be shy or be 
apologetic about defending the interests of the folks that I 
represent who are hurting because their taxes have been 
increased, who are struggling to make ends meet. So do it with 
decorum, yes, but I will also do it aggressively. I yield back. 
Thank you, Mr. Chairman.
    Mr. Crenshaw. Thank you, and Mr. Secretary, thank you so 
much. You have been more than generous with your time. We know 
you have a challenging job in front of you, and we look forward 
to working with you. Thank you so much.
    Secretary Lew. Thank you, Mr. Chairman. I look forward to 
working with you.
    Mr. Crenshaw. Meeting is adjourned.

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
                                              Monday, June 3, 2013.

                        INTERNAL REVENUE SERVICE

                               WITNESSES

DANNY WERFEL, ACTING COMMISSIONER, INTERNAL REVENUE SERVICE
J. RUSSELL GEORGE, TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION
    Mr. Crenshaw. This hearing will come to order. Well, good 
afternoon, everyone. First let me say that it gives me no 
pleasure to convene this IRS oversight hearing today because 
the facts and the circumstances that bring us here are enough 
to shatter anyone's faith and trust in government.
    Targeting groups based on their names and political beliefs 
is both chilling and outrageous. A voluntary tax system depends 
on a fair and impartial collection process. Because as Chief 
Justice Marshall once said, the power to tax is the power to 
destroy.
    But here is what we know. In an arrogant and absolute abuse 
of power, the IRS office in Cincinnati singled out groups and 
individuals based on their political philosophy for extra 
scrutiny. They were harassed, they were intimidated, they were 
bullied, and this went on for almost 3 years and no one spoke 
up. We know that, but there is a lot that we don't know, and it 
is time for the IRS to come clean.
    It is time to talk about what happened, how it happened, 
who came up with this plan and why, how widespread were these 
abuses, who is responsible, who is going to be held 
accountable, and how do we make sure this never happens again. 
Because more than $10 billion, that is ``B'' as in billion, in 
hard-earned taxpayers'' money get appropriated every year to 
the IRS to conduct its operations, and before Congress spends 
one more dime on the IRS, we need to know how it spends the 
money it receives already. We need to know what safeguards the 
IRS has in place or plans to put in place to make sure the 
funds are used in a legal and appropriate way and are not 
wasted, poured down the drain like we have just learned. That 
is why we are holding this hearing today.
    I have heard some say that the IRS has been underfunded and 
that using names and political briefs to target these 501(c)(4) 
applications for additional scrutiny was just a shortcut to 
deal with the growing number of tax exempt applications. These 
shortcuts, however, started in 2010 when the number of 
501(c)(4) applications were basically static, and the total 
number of applications for tax exemption were going down, and 
the funds appropriated to the IRS in 2010 were not only a 
record high amount, but also the second consecutive year that 
funds appropriated to the IRS actually exceeded the budget 
request of the IRS.
    Doesn't it seem counterintuitive or seem strange that the 
IRS had less work to do and more money than ever to do that 
work that they would decide to take these shortcuts? And in 
addition, sending abusive letters and asking for unnecessary 
information from these applicants, doesn't sound like a 
shortcut to me.
    And now we learn of the flagrant waste of taxpayers' 
dollars on conferences and videos, and the money came in part 
from the unused funds from the IRS enforcement budget at the 
same time the IRS was asking for more money for enforcement so 
they could catch the so-called tax cheats.
    For 2014, the IRS budget request is for $12.9 billion. That 
is a $1 billion increase over the current year and of which 
$440 million is to help implement this so-called Affordable 
Care Act, the so-called ObamaCare. Now, even before the 
Inspector General's report was released, any kind of increase 
of this magnitude was going to be a challenge for some very 
basic reasons. There are a lot of objections to the Affordable 
Health Care Act, a lot of objections to ObamaCare. The 
Subcommittee has limited money. We all know that. We are 
looking at this breach of trust that we are talking about today 
in this terms of this scandal, and now we have this newly 
discovered incredible waste, so we are going to have to think 
very carefully about the amount of money that we provide to the 
IRS.
    Nevertheless, I think we all know this, we need to fund 
this agency so it can accurately answer questions from 
businesses and individuals about tax matters. It needs to 
produce tax forms and instructions that promote compliance. It 
has got to process tax returns in a timely manner and it has 
also got to investigate the criminals that are committing tax 
fraud.
    However, we cannot, in good conscience, continue to provide 
hard-earned taxpayers' dollars to the IRS and have them use 
those funds to abuse the rights of American citizens, and we 
can't continue to provide the IRS with money and watch them so 
flagrantly waste those dollars.
    Now, today we are going to take testimony from Acting 
Commissioner Daniel Werfel and Treasury Inspector General J. 
Russell George. I hope that we will hear a little bit how we 
are going to get to the bottom of all this and how we going to 
prevent this from happening again.
    But here are some things I can tell you already. We are 
going to insist that the IRS implement all nine of the 
recommendations in the Inspector General's report to the 
satisfaction of the Inspector General. We are going to require 
more frequent and in-depth reports from the IRS about how they 
allocate their funds among their different offices, and we are 
also going to demand that the IRS demonstrate to the committee 
that the funds provided by this committee are used without a 
hint of partisanship or ideology when it comes to the 
application of the tax laws.
    Now, this hearing is the Inspector General's second 
appearance before the Subcommittee this year and we appreciate 
your willingness to meet with us again. This is Mr. Werfel's 
first congressional hearing in his new role as Acting IRS 
Commissioner. I want to congratulate you, if that is the right 
word, on your appointment and thank you for taking this 
assignment at a very difficult time. We appreciate your 
service.
    And finally, let me say that this committee expects 
witnesses to be candid and forthcoming. If additional 
information about the practice of targeting or other topics 
discussed here today comes to light after the hearing, we 
expect General George and Mr. Werfel to keep this committee 
apprised of the latest information.
    Now, I want everybody to have a chance to ask questions 
today and everybody to have a chance to have those questions 
answered, so I am going to keep strict time in order to keep 
the hearing moving. And we want to get as many rounds of 
questions as we can, but right now I would like to recognize 
the Ranking Member Serrano for any opening statement he might 
like to make.
    Mr. Serrano. Thank you, Mr. Chairman, and I, too, welcome 
our guests to this hearing today.
    I think all Members of Congress, Democrats and Republicans, 
were appalled by the inappropriate actions taken by the IRS in 
determining how to examine the tax exempt status applications 
of various groups. The delays in processing applications, the 
criteria used for further review of the information it asked 
for indicates an organizational failure that is simply 
unacceptable. The IRS is supposed to administer our tax laws in 
a fair and impartial manner. Anything else, and the agency 
loses the confidence of the American people.
    The IRS has not helped the situation with a seeming lack of 
clarity and forthrightness with Congress on these issues. In 
March of 2012, this Subcommittee was told, in no uncertain 
terms, that the IRS was not targeting particular groups for 
further scrutiny and that there were several safeguards in 
place to prevent biased or unfair examination policies of 
501(c)(4) organizations. Both of these answers were terribly 
wrong then and they are terribly wrong now.
    While the information we have now does not indicate that 
Commissioner Shulman believed these responses to be anything 
less than truthful at the time, no subsequent effort was made 
to ensure that this committee knew that there was more to the 
story, especially in subsequent months when the leadership of 
the IRS became aware of these problems. In other words, when 
you folks at the agency knew that things had changed and were 
not the way we were told, no one came back to tell us.
    This past weekend we all read press reports about excessive 
conference spending at the IRS. The lack of oversight and 
accountability in both of these areas seems to point to larger 
cultural issues at the IRS. Many of these issues have been well 
documented by the Inspector General George and at several 
committee hearings over the past few weeks. Today we ask the 
next question. What do we do now?
    I am not sure we have an easy response. We clearly need to 
reform the process by which 501(c)(4) organizations are chosen 
for further review. We need to provide more guidance as to what 
is and is not allowable for 501(c)(4) organizations, and we 
need greater accountability in the IRS management structure to 
ensure safeguards are in place to prevent this type of 
behavior.
    We also need to do more research. The current TIGTA report 
provides us with important analysis into the problems, but I 
was struck by how much more we need to find out. We all know 
that some one-third of the organizations that received further 
scrutiny here were chosen for that review based on their 
organization title. However, we still don't know how much, 
about two-thirds of the organizations caught up in the process. 
Beyond the recent incidents, I remember that these same 
complaints were leveled at the IRS during the Bush 
administration by groups that were opposed to the war in Iraq. 
Clearly, this is an issue that has spanned a number of years 
and this latest scandal is only the most recent one that we 
know about.
    I think we will all benefit from a longer and more in-depth 
look at the actions within the tax exempt and government 
entities division over a number of years and a number of 
administrations.
    We need to have a serious discussion about funding levels 
at the IRS. This Subcommittee has been given an allocation of 
$16.9 billion for fiscal year 2014, which is almost $3 billion 
below the current sequester-impacted level. Undoubtedly, this 
is going to result in massive cuts to the IRS and many other 
Federal agencies.
    While there are certainly efficiencies that can occur, the 
conference spending issue comes to mind, the IRS simply cannot 
sustain itself with this overall funding level. Although I am 
certain there are some who would view this as a good step, I 
disagree. There is no clearer way to promote more scandals than 
by cutting funding that could be used for oversight, training 
and reform. At the level this Subcommittee is funded right now, 
we are just asking for more trouble at the IRS and elsewhere.
    Lastly, we need to have a conversation about why we allow 
groups who are primarily involved in politics to have a special 
tax advantage status. I think it is clear that we have a number 
of groups on both sides of the political spectrum that have 
abused their tax status as either 501(c)(3) or 501(c)(4). 
Freedom of speech certainly does not require these groups to be 
tax advantaged. We need to ensure the integrity of both our tax 
system and our political system, and the current practice allow 
abuses of both. One step we should consider is to return to a 
previous standard for 501(c)(4) applications which until 1959, 
were required to be operated exclusively for the promotion of 
social welfare. This would ensure that organizations could no 
longer take advantage of the Tax Code in order to engage in 
political activity without the transparency required by our 
campaign finance laws.
    As I said earlier, none of these questions have an easy 
answer, and I hope that today, after we look at the report, 
after we hear the answers to the questions, we can begin to 
move in the proper direction.
    And let me just end on a very personal note, Mr. Chairman. 
I am second to no one in this Congress in asking for more 
funding for the IRS, and so it hurts me both as a 
representative of the American people, a member of this 
committee, and personally that while I and others stood to 
support the IRS, it was not doing what it was supposed to do. I 
don't care who the groups were. No one should have been 
targeted. No one should have been singled out for any bad 
treatment. That is not the way the IRS should behave, and that 
is certainly not the way our country should behave. Thank you, 
Mr. Chairman.
    Mr. Crenshaw. Thank you, Mr. Serrano. And we are joined 
today by the chairman of the full committee, Mr. Rogers. I 
would like to recognize him for any opening statement he might 
make.
    Mr. Rogers. Thank you, Mr. Chairman, and thank you for 
hosting this session. We want to thank Commissioner Werfel for 
making your first appearance on the Hill and Mr. George, thank 
you for being here again with us.
    I want to echo my colleague's deep concern about the 
targeting scandal and other inappropriate spending at the IRS. 
The IRS has committed grave violations of the public's trust 
that should give all Americans cause for deep concern.
    Today we are discussing at least a threefold misuse of 
public funds. It is our duty as appropriators to get to the 
bottom of any misuse of Federal dollars, particularly as this 
Subcommittee drafts the bill that will fund the IRS for the 
next fiscal year.
    The alleged targeting of conservative organizations 
applying for tax exempt status is a shameful violation of the 
intent of the Constitution. I am deeply offended, as I am sure 
all Americans are, at the notion that a Federal agency can 
somehow pass judgment on an entire group of people simply based 
on their political affiliation. This activity is even more 
egregious because the agency, the IRS, has such power to ruin 
the lives of every American. We will not tolerate another 
political enemy's list. We have been there before.
    Having an enemy's list harkens back to a dark page in our 
past, and the arrogance of power that we have seen from those 
involved in this instance is deeply, deeply disconcerting.
    Furthermore, I am absolutely appalled at the apparent waste 
of taxpayer dollars on frivolous conferences outlined in Mr. 
George's forthcoming report. In no way, shape, or form is this 
kind of excess ever appropriate. This bureaucratic largesse is 
even more unsettling as we face budget shortfalls across the 
board in critical areas of government, including our own 
national defense. It seems we have a new misstep every day at 
the IRS. I am very troubled at what may come to light next, so 
we have got to take every step possible to figure out how we 
can stop this kind of abuse in its tracks.
    And Mr. Commissioner, you are the man. We are in the middle 
of some very grim budget times. We simply cannot allow the IRS 
or anyone else to waste precious tax dollars on improper, maybe 
even illegal, practices that treat Americans unequally for any 
reason or on frivolous activities or improper tax refunds, of 
which I am told there is some $13 billion.
    When we provide you with more than $10 billion annually to 
fulfill your duties, we expect you to spend it wisely and 
effectively. Commissioner Werfel, I know you have already 
publicly stated that these conferences were inappropriate uses 
of taxpayer dollars and that you intend to root out any other 
inappropriate behavior at the IRS, and I hope that this 
committee works with you to review how we can prevent spending 
like this from ever happening again.
    Mr. Chairman, we may want to consider putting conditions on 
your funding that allow us to monitor your agency's compliance 
with proper practices. This committee's done that before and we 
very well may be in that mode again. My committee already has 
and will continue to enact tough measures and oversight at 
other agencies as we did with the GSA to root out this kind of 
excess and abuse. If it takes legislation to stop these latest 
misguided endeavors, so be it, that is what we will do.
    This agency, allegedly an independent agency, should 
operate in a nonpolitical, fair way to every American. That 
rule has been violated. We look forward to your testimony and 
your answers, more importantly, to Members' questions to help 
this Subcommittee provide the vigorous oversight necessary to 
prevent bad actors from running amok.
    Thank you, Mr. Chairman.
    Mr. Crenshaw. Thank you. I would now like to recognize Mrs. 
Lowey, who is the ranking member of the full committee for any 
remarks she might like to make.
    Mrs. Lowey. Thank you, Mr. Chairman, and I want to join you 
in welcoming Acting Commissioner Werfel and J. Russell George 
here today. We thank you and we look forward to your testimony, 
and I would like to thank, again, Chairman Crenshaw and Ranking 
Member Serrano for holding this very important hearing.
    We know that the IRS is the first line of defense in 
ensuring that hard earned tax dollars of American citizens are 
appropriately handled, and as my colleagues have said, I join 
them in such shock that news that millions of dollars were 
unnecessarily spent on conferences, videos, senseless 
purchases, such as baseball tickets, presidential suites, along 
with allegations that the IRS targeted ideological groups for 
increased scrutiny raised serious questions regarding whether 
the IRS is properly working for the people.
    I, like so many citizens, am quite simply wondering, what 
was the IRS thinking? What on earth were they thinking? It is 
truly amazing to me, and I am furious that the IRS engaged in 
ideological scrutiny which is absolutely unacceptable. We have 
a responsibility to the American people to make sure this is 
rectified and does not happen again. Our Nation was founded on 
the principles of freedom of speech and expression. No position 
or party has a monopoly in our public debate or government. The 
IRS should never be used for any activities that come close to 
partisan or political action, period.
    The IRS' responsibility to evaluate applications for tax 
exempt status, frankly, has been lost in this debate. A 
dramatic increase in the number of 501(c)(4) organizations will 
lead to more reviews, but those reviews should never target one 
part of the ideological spectrum of others, and in this 
hearing, I know we all want to hear what went wrong, what steps 
are being taken to prevent similar practices in the future. And 
again, I would like to thank Acting Commissioner Werfel and 
Inspector General George for being here today.
    Commissioner Werfel, I know you have been in this position 
for a matter of weeks, did not manage the IRS or the division 
in question during the time of these improper activities, so I 
appreciate your assistance and hope that this hearing helps to 
get to the bottom of this issue. And I thank you, Mr. Chairman.
    Mr. Crenshaw. Thank you. I would like now to recognize Mr. 
Werfel. If you could limit your statement to 5 minutes or less, 
it will give us more time for questions, and we will be happy 
to submit your written statement for the record.
    Mr. Werfel. Thank you, Chairman Crenshaw, Ranking Member 
Serrano, Chairman Rogers, Ranking Member Lowey, and members of 
the Subcommittee. Thank you for the opportunity to appear 
before you today to discuss the work we are doing to chart a 
path forward for the IRS. This is obviously a difficult time 
for the Agency, and the public is rightly concerned and upset, 
as am I, about the inappropriate and unacceptable actions 
highlighted in the recent Inspector General's report regarding 
the 501(c)(4) application process. Working together, though, I 
am confident that we can address the problems that exist and 
move forward with a better and more effective IRS.
    With that in mind, in my first few days, I have initiated a 
comprehensive review of the Agency and have taken immediate 
actions to begin to address significant and alarming problems 
identified in the report. In taking these steps, I am guided by 
several principles.
    First, we will ensure that we operate with the utmost 
fairness and impartiality in administering and enforcing the 
Nation's tax laws. Second, we will be open and transparent with 
the American people. And third, we will operate in close 
consultation and cooperation with the Inspector General and 
Congress. Adhering to these principles will ensure that we 
always act with the best interest of the taxpayers in mind.
    Although additional investigations are underway that will 
shed further light on what happened with the 501(c)(4) 
application process, I have reached an inescapable conclusion 
about the behavior described in the IG's report. The use of 
certain political labels to determine how applications would be 
handled resulted in applications being inappropriately singled 
out for additional scrutiny.
    Moreover, there was a fundamental failure by IRS management 
to prevent this inconsistent treatment and ensure that it was 
halted once management became aware. These failures have 
undermined the public's trust in the IRS' ability to administer 
the tax laws in a fair and impartial manner, and they must be 
corrected. The Agency stands ready to confront the problems 
that occurred, hold accountable those who acted 
inappropriately, be open about what happened, and permanently 
fix these problems so that such missteps do not occur again.
    Clearly, ensuring full accountability for the actions taken 
and the management failures that allowed them to occur must be 
one of our first orders of business. That is why there is new 
leadership at several critical levels of the managerial chain 
of command. We now have new leadership in the Commissioner's 
Office, and we have new leaders carrying out the duties of the 
Deputy Commissioner for Services and Enforcement, the 
Commissioner of Tax Exempt and Government Entities, and the 
Director of Exempt Organizations. While this new leadership is 
in place, a critical area where we are turning our attention is 
the unacceptably large backlog of applications for 501(c)(4) 
status, focusing initially on the ``potential political cases'' 
referenced in the IG report that are more than 120 days old. 
Some of these applications are 400, 500 days old. That is 
simply unacceptable.
    I have directed my team to submit a plan to me by the end 
of this week that contains specific milestones for 
expeditiously resolving this group of cases. I have also made 
clear that these applications must be examined in a manner 
consistent with the IG recommendations so that the reviews, 
while thorough, are also fair and impartial.
    I further instructed my team to work swiftly to ensure that 
all nine of the recommendations in the IG report are fully 
implemented. I asked to receive, at a minimum, weekly updates 
on their progress, and I intend to regularly update the public, 
both on this effort and the progress being made to eliminate 
the backlog of applications.
    I am also reviewing the broad spectrum 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 within the IRS. For example, in line 
with the IG report to be published this week on conference 
expenditures, we must ensure that we continue to have the right 
controls and oversight in place to prevent wasteful or 
inappropriate spending in this and other areas.
    Wherever we find management failures or breakdowns in 
internal controls, we will move to correct these problems 
quickly and in a robust manner. We will report to the 
President, the Treasury Secretary, and the public by the end of 
the month about our progress on all of these efforts.
    We have a great deal of work ahead of us to review and 
correct the serious problems that have occurred at the IRS, and 
continue the important work of the Agency on behalf of 
taxpayers. In the few days that I have been at the IRS, it has 
already become clear to me that this Agency is populated by 
thousands of dedicated public servants who are strongly 
committed to carrying out the Agency's mission. It is an honor 
for me to serve alongside them, and I am confident that 
together, with Congress and other external stakeholders, we 
will address the current challenges and move forward with the 
indispensable work of this agency.
    Mr. Chairman, Ranking Member Serrano, this concludes my 
testimony. I would be happy to answer your questions.
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    Mr. Crenshaw. And now we will turn to J. Russell George, 
Inspector General, for any openings remarks he would like to 
make.
    Mr. George. Thank you, sir. Chairman Crenshaw, Ranking 
Member Serrano, Chairman Rogers, Ranking Member Lowey, members 
of the Subcommittee, thank you for the opportunity to discuss 
our audit recommendations concerning the Internal Revenue 
Service's treatment of groups that apply for tax exempt status.
    As you know, our audit was initiated based on concerns 
expressed regarding taxpayer allegations that they were 
subjected to unfair treatment by the IRS. Our review confirmed 
that the IRS targeted specific groups applying for tax exempt 
status, it delayed the processing of these groups' 
applications, and it also requested unnecessary information 
from these groups. To its credit, during our audit, the IRS 
took some actions to address these problem areas.
    The IRS corrected the inappropriate criteria for selecting 
applications for additional scrutiny as potential political 
cases in May 2012. The revised criteria focused on indicators 
of significant political campaign intervention, not on names or 
policy positions. These revisions were still in place in 
December 2012 at the end of our audit field work.
    The IRS also put two new controls in place by having Exempt 
Organizations headquarters in Washington, D.C. involved in 
reviewing all criteria included on the ``Be On the Look Out'' 
listing and in reviewing all letters requesting additional 
information for potential political cases.
    However, we identified other areas needing improvement. We 
reviewed two statistical samples of the Internal Revenue Code 
section 501(c)(4) applications and estimate that the 
determinations unit specialist did not identify more than 175 
applications with indications of significant campaign 
intervention that should have been referred to the team of 
specialists for review.
    Furthermore, of the 296 potential political cases we 
reviewed, almost one-third, 91 cases, did not contain 
indications of significant campaign intervention in the case 
file.
    As noted, we made nine recommendations in our report. The 
IRS should formalize its new requirement for an Exempt 
Organization's executive to approve all criteria on the ``Be On 
The Look Out'' listing. The IRS plans to incorporate this 
requirement in its manual by September 30th of this year. The 
IRS should require that specialists document the specific 
reasons why applications are chosen for review for potential 
political cases. The IRS informed us that it would review its 
screening procedures and determine what documentation can be 
implemented by September 30th of this year.
    The IRS should develop a process for formally requesting 
assistance from the Exempt Organization's Technical Unit to 
ensure that requests are responded to timely. The IRS indicated 
that it would develop a formal process by June 30th of this 
year. The IRS should provide oversight to ensure open cases are 
approved or denied expeditiously. The IRS agreed to closely 
oversee the remaining open cases as of April 30th of this year; 
however, it did not provide a date for completing the cases.
    The IRS should recommend to the Department of the Treasury 
the guidance on how to measure the ``primary activity'' of 
social welfare organizations be considered. The IRS agreed to 
share this recommendation with the its Chief Counsel and the 
Treasury's Office of Tax Policy by May 3rd of this year.
    The IRS should provide training and guidance in four areas. 
First, properly identifying applications requiring additional 
review of campaign intervention activities; second, processing 
applications for tax exempt status involving potential campaign 
intervention; third, understanding what constitutes campaign 
intervention; and fourth, requesting additional information and 
how to word the questions. The IRS plans to develop a schedule 
by January 31st, 2014, to provide the staff the recommended 
training.
    In closing, the IRS still has work to do to resolve these 
troubling allegations and to ensure that they do not happen 
again. We plan to conduct additional audits to assess the IRS' 
progress in addressing our recommendations. We also plan to 
review how the IRS monitors social welfare, agricultural, 
labor, and business league organizations to ensure that 
political campaign intervention does not constitute their 
primary activity.
    TIGTA is also continuing to look into whether any 
violations of the Internal Revenue Service Restructuring and 
Reform Act of 1998 have occurred and if any inappropriate 
influence caused the change in criteria and the unnecessary 
questions posed to applicants.
    Chairman Crenshaw, Ranking Member Serrano, Chairman Rogers, 
Ranking Member Lowey, thank you for the invitation to provide 
my perspective on this issue.
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    Mr. Crenshaw. Well, thank you very much. I thank both of 
you all for your testimony. We are going to turn to questions 
from the members of the Subcommittee, and I am going to 
recognize the members in order of seniority who were here when 
the hearing started, and then I will recognize those in order 
which they arrived, and we will go from side to side.

                            TRUSTWORTHINESS

    So, let me start out and let me ask you, Mr. Werfel. It is 
good to hear your perspective, because you are the new guy. I 
think, if you add them up, you have been here 12 days, that 
probably counting weekends, and you have probably been working 
on the weekends, and in another 18 days, you are expected to 
give a kind of a first look at a 30-day review of what has gone 
on here. I think we have all looked at the facts and we 
recognize that what has happened here has really shaken the 
trust of the American people in the IRS and in its ability to 
be fair and impartial. As I said earlier, I think you have to 
have a fair and impartial agency that is going to collect taxes 
when you base the collections on volunteerism. People 
voluntarily pay their taxes, but they need to be able to trust 
the agency that is collecting those taxes.
    One of the problems I have found is that this went on for 
some time and yet no one spoke up. Now, there is some question, 
is this some rogue agents in Cincinnati? It is hard to believe 
that somebody just stood up one day and said, hey, here is a 
way that we can really embarrass people of a particular 
political philosophy. But we are trying to figure out what 
happened, and I know you want to figure out what happened, and 
you are going to conduct a top-to-bottom review of that. But 
one of the problems we have had is that we never get straight 
answers. The story seems to change from time to time. The facts 
seem to change from time to time, and I think that is why we 
all want to work with you to find out what happened.
    Most importantly, we want to make sure it doesn't happen 
again. We want to help you help us all figure out some way that 
we can restore the trust of the American people in the IRS, 
because as you know, and most people are just now realizing, 
the IRS is going to be the face of this new Affordable Care 
Act, the so-called ObamaCare. It is the IRS that is going to be 
charged with making sure that people not only to have 
insurance, but the right type of insurance. And when they don't 
have the right type of insurance, the IRS is going to be the 
agency to say we are going to collect a penalty.
    It seems to me that more important than ever before, we are 
in a critical time, we got to do everything we can do to make 
sure that we let people know that you can trust the IRS, that 
they are going to be fair and impartial, and that is what you 
want to do.
    So, let me start by just asking you, do you feel like the 
IRS has betrayed the trust of the American people?
    Mr. Werfel. I do, Mr. Chairman. I think that is why, in 
thinking about this in terms of my primary mission, it is to 
restore that trust. I am hopeful that by the end of this 
hearing today, for the various questions that you ask, that I 
can lay out our approach, but I think it has to start with a 
recognition that the trust has been violated and it has to 
start with the recognition that we have to get all the facts 
out. And part of this process of restoring the trust, which is 
a multi-step process, is to start with making sure that you are 
getting those facts out, that you are understanding who needs 
to be held accountable for the breakdowns that occurred, or the 
missteps that occurred, that led to that violation of trust. We 
have to fix the problem.
    Part of the fact-finding is not only to get to the 
accountability element, it is to understand the root of what 
caused this breakdown to occur, because that is going to help 
us fix it, in putting the right controls and processes in place 
to make sure it never happens again.
    And then I don't think it is smart to stop there. I think 
that this type of problem, and when you look at the conference 
report that just came out, it shows that there are other issues 
throughout the IRS, other control issues, managerial oversight 
issues that we need to thoroughly look at and start bringing 
into the public light. I am planning to work very closely with 
the Inspector General on this to make sure that we have an 
understanding across the entire agency where the weaknesses are 
and how do we fix them. And it is really not just me and the 
Inspector General. It is a partnership with Congress----

                              COOPERATION

    Mr. Crenshaw. I am glad to hear you say that because I do 
think that bad news doesn't get better when time goes by, and I 
think you are committed, we are committed to trying to find out 
what went on and let those facts lead us where they lead us. 
But let me ask you one more question, and I am glad to hear you 
say that you do believe that the trust of the American people 
been betrayed because it seems fairly obvious, but I want to 
ask you if you are willing to cooperate fully with these 
congressional investigations that are going on so that we can 
find out what went on, and again, restore the trust the 
American people need to have.
    Mr. Werfel. Absolutely. You have my commitment for full 
cooperation.
    Mr. Crenshaw. Well, thank you very much. Now I will turn to 
Mr. Serrano.

                   PREVENTING INAPPROPRIATE ACTIVITY

    Mr. Serrano. Thank you, Mr. Chairman.
    I am going to ask you a question that may sound easy, but 
if analyzed, I think it is a more tougher question than it 
would sound. I can assure you that there are many members of 
Congress who would like to map out the future of the IRS. You 
are not one of the most popular agencies now. You never were, 
but you are certainly not one of the more popular ones now.
    And so, rather than doing that, we on this committee are 
charged with a special responsibility. We have to allocate 
dollars and then we also have to make sure that those dollars 
are spent properly. Others may just comment on how those 
dollars are spent, but we have to come up with those dollars 
and then oversee those dollars in many ways.
    So my questions to you is, what concrete steps that we on 
this committee, Appropriations Committee, can take to prevent 
this sort of inappropriate activity from happening again? I am 
giving you an opportunity, both of you, to tell this committee 
what can be done by us to make sure this doesn't happen again.
    Mr. Werfel. Well, I will start. I think first, holding 
hearings like this, asking us the right questions to make sure 
that there is transparency, from both the Inspector General and 
the IRS in terms of the facts and circumstances that were in 
existence when this happened, helping us evaluate what the 
right fixes are. I mean, I have only been here for a few days, 
and when I start to dig into this issue around how do you 
appropriately set up a (c)(4) review process, there aren't a 
lot of easy answers in terms of making sure it is set up right.
    That doesn't mean we are not going to find those answers, 
we will, but it strikes me that trying to find those answers 
just within the IRS, in an insular way, is definitely not the 
right answer. We have to surface these issues. There are 
experts sitting across from me right now in terms of the IRS 
and how it operates. There are experts in the Inspector 
General's office. There are external experts that have been 
looking at and evaluating the IRS for years. We need to bring 
these people together and sort through what the issues are.

                                FUNDING

    And since we are sitting here in front of Appropriators, I 
think it makes sense to talk about funding, and one of the 
important points I want to make is that the solution here is, 
in my opinion, not more money. The solution here in this 
situation is to understand what controls need to be put in 
place, what oversight, getting the right leadership in place, 
the right processes in a collective way, and then determining 
what the resource footprint is that is needed to sustain those 
in an effective way.
    If you start with more money, it is the wrong starting 
point. The right starting point has to be what is the optimal 
footprint or framework for doing this right. Then we sit down 
and we figure out what the resource allocation is, and that is 
why what I offer to you is, I think, the right way to analyze 
the situation, and I am very open and eager to work with you on 
that.
    Mr. Serrano. Thank you.

                               OVERSIGHT

    Mr. George. Mr. Serrano, as our audit concluded, what 
happened in this instance was a result of gross mismanagement 
of a key program, a key function of the Internal Revenue 
Service. That said, I associate myself with the comments that 
the Commissioner indicated. I would add to that, something that 
Chairman Rogers indicated, conditions on funding, regular 
reports to the committees of jurisdiction, in this instance, 
the House Appropriations Committee, for the IRS to regularly 
report how they expended their funds, and of course, the 
oversight responsibilities that the Inspector General's office 
has in addition to that type of activity.
    Mr. Serrano. So, you both would welcome or not oppose a 
deeper oversight role by the Appropriations Committee in this 
particular case?
    Mr. George. I think it is very important that that occur, 
sir.

                             MISMANAGEMENT

    Mr. Serrano. And when you say ``gross mismanagement,'' and 
I close with this, Mr. Chairman, was that mismanagement as 
reported in the press, or as some have said, one that targeted 
groups based on what those groups believed in, or do you 
believe that it was so mismanaged that it didn't care who it 
held up or who it asked silly questions of?
    Mr. George. Sir, for me, I could not give you a definitive 
answer at this time because there is an ongoing review of this 
matter by my organization and others, obviously, on this, but 
there is no question that there is a little of both in this 
matter.
    Mr. Serrano. All right. Thank you, Mr. Chairman.
    Mr. Crenshaw. Thank you. Mr. Rogers.
    Mr. Rogers. Mr. Werfel, I am beginning to like you when you 
say you don't want more money. That is music to my ears, and I 
am sure the chairman feels the same.

                                BONUSES

    Now, in addition to the $50 million for conferences over 
the last 3 years, the press is reporting that the IRS paid out 
more than $92 million in bonuses during that 3-year period, and 
within that sum, key figures in the current scandal got 
bonuses. Sara Hall Ingram, the former Commissioner of the Tax 
Exempt and Government Division that was responsible for 
overseeing the 501(c)(4) applications, received bonuses of 
$103,000 plus, which increased during the period of the 
increased scrutiny of these conservative groups. In addition to 
that, she was promoted now to head up the IRS involvement with 
ObamaCare. Joseph Grant, former Deputy Commissioner of Tax 
Exempt, 3 bonuses, 83-, almost $84,000, over the same period of 
time. Lois Lerner, Director of the Exempt Organizations 
Division, given $42,000 in bonuses during that period, and all 
of these had to be approved by the President; isn't that right?
    Mr. Werfel. My understanding is there is a small subclass 
of bonuses called Presidential Rank Awards that are approved by 
the President, but they are relatively a small number. There is 
maybe a couple hundred throughout the entire government. The 
net--the larger amount of bonuses in terms of quantity--are 
typically approved by the Agency head.
    [The information follows:]

    All but one of the awards to the individuals you name were SES 
performance awards. SES performance awards can exceed $25,000 without 
Presidential approval. Sarah Hall Ingram received a Meritorious 
Presidential Rank Award (PRA), for which she was nominated by the 
agency head, recommended by the Director of OPM and selected by the 
President. A PRA is not a performance award; it is an award recognizing 
sustained accomplishments over at least a 3-year period as an SES. Ms. 
Ingram's award was 20 percent of her annual basic pay, as set forth in 
statute (Title 5 United States Code Sec. 4507).
    I should also clarify that the amounts received by each individual 
you mention are not single awards, but instead are aggregate amounts 
received over multiple years.
    All SES performance bonuses were not less than 5 percent and no 
more than 20 percent of the basic rate of pay of each SES awardee, as 
set forth in statute (Title 5 United States Code Sec. 5384(a)-(b)(2)). 
Performance awards granted to SES employees under this statutory 
authority can exceed $25,000 without Presidential approval; therefore, 
the OPM guidelines were not violated.

    Mr. Rogers. Well, OPM's guidelines say that bonuses over 
$25,000 have to be approved by the President, so did the 
President approve these bonuses of these very critical people 
in this scandal that we are investigating?
    Mr. Werfel. I am not sure of the answer to that question. I 
am also not sure, from the way you phrased the question, if the 
bonus totals that you articulated were individual bonuses that 
added up to those numbers, or if there was an individual bonus 
that exceeded $25,000, but that is something we can certainly 
look into and get back to you.
    Mr. Rogers. Would you let me know?
    Mr. Werfel. Yes.
    [The information follows:]

    Sarah Hall Ingram received a meritorious Presidential Rank 
Award (PRA), for which she was nominated by the agency head, 
recommended by the Director if OPM and approved by the 
President. A PRA is not a performance award; it is an award 
recognizing sustained accomplishments over at least a 3-year 
period as an SES (5 CFR 451.301(b)(3)). The other individuals 
whom you named were granted SES performance awards under the 
authority of Title 5 United States Code Sec. 5384, which do not 
require Presidential approval.

    Mr. Rogers. Now, looking forward, how do we--how do we set 
up criteria for the awarding of promotions and bonuses to 
employees at a time when every other Federal employees' pay is 
frozen?
    Mr. Werfel. This is a very important question, and as I 
look at this situation, and we see the type of gross 
mismanagement that the Inspector General spoke about, and then 
you layer on top of that the existence of bonuses in this area, 
it speaks to a larger issue that we have within the IRS to 
improve our overall management oversight. That includes not 
just making sure that we understand where the weaknesses are, 
but making sure that our people are adequately trained. It 
relates to compensation and fairness as well, and this has to 
be part of the review.
    Mr. Rogers. If these people received these bonuses, and by 
OPM's guidelines, were required to be approved by the 
President, and he did not approve them, should they not pay 
those bonuses back?
    Mr. Werfel. That is a--again, that is a question that I 
have to go back and talk to HR experts and others about, but 
certainly we can get an answer.
    Mr. Rogers. Will you get back to me on that?
    Mr. Werfel. I will.
    [The information follows:]

    SES Performance Awards, which were granted to the named 
individuals, can exceed $25,000 without Presidential approval; 
therefore the OPM guidelines were not violated.

    Mr. Rogers. Mr. George.
    Mr. George. Mr. Chairman I would just note that my 
organization is conducting an ongoing audit on the issue of 
bonuses paid at the Internal Revenue Service that is due some 
time this fall, and we will certainly share those results with 
this Committee and with you.

                           IMPROPER PAYMENTS

    Mr. Rogers. Now, switching gears briefly, one scandal to 
another. Mr. George, it was your report that the IRS had 
overpaid low income tax credits by up to $13.6 billion in one 
year, 2012. When Secretary Lew was before this Subcommittee in 
late April, I made clear to him in no uncertain terms that this 
was unacceptable. That sum is more than the entire budget of 
the IRS. What steps are being taken, Mr. George, to tackle that 
problem?
    Mr. George. Sir, this is one of the most intractable 
problems confronting the Internal Revenue Service. Refundable 
tax credits, which again are credits that can be paid to people 
who do not have tax obligations, once the money is out the 
door, it is extremely difficult for the Internal Revenue 
Service to collect it. And then I will defer to the 
Commissioner to define their procedures and the policies, but 
they conduct a cost benefit analysis, and in many instances, it 
is more expensive for them to go after those who have gamed the 
system or cheated the system than to, in effect, write it off. 
And we are just talking one instance in terms of the earned 
income tax credit, the additional child tax credit, the child 
tax credit, among many other credits. This is a very, very 
difficult issue for the IRS to confront, and it is a 
longstanding one, sir. This is something that Congress has been 
looking at for decades.
    Mr. Rogers. Well, this is not a small problem. This is a 
huge amount of money. It is more than the budget of the entire 
agency, as I said. Has anyone been fired over this?
    Mr. George. Not to my knowledge.
    Mr. Rogers. Mr. Werfel?
    Mr. Werfel. Not to my knowledge.
    Mr. Rogers. Will there be?
    Mr. Werfel. Again, on this particular question of improper 
refund payment, let me, if you could indulge me, I think one of 
the causes of these improper payments orients around the 
complexity of the Code and the complexity of the eligibility 
criteria.
    If you look at, for example, the Earned Income Tax Credit, 
one of the things that we look at in terms of determining 
eligibility is whether the individual has lived with their 
dependent child for more than 6 months or not. That is one of 
the criteria. That is extremely difficult to validate. We don't 
have a global childhood residency database. It is very 
difficult to validate. When we go in and we check on things, we 
find mistakes. I think, to answer your question, in terms of 
whether anyone should be fired, it really goes to the question 
of whether any of those payments were paid out advertently in 
error, versus inadvertently in error. If there is some 
underlying malfeasance associated with these improper payments, 
then certainly. But in most cases, and this is an area that I 
just coincidentally happen to have some expertise on from 
earlier parts of my career in the Federal Government, in most 
cases, the errors that are made are not due to malfeasance of 
the underlying employee. It is due to complexity in the program 
and complexity in identifying the right eligibility criteria. I 
am not making excuses for it. I am just suggesting that there 
are other fixes other than employee dismissal.
    Mr. Rogers. Well, fix it, because $1 of every $5 of Earned 
Income Tax Credit issue, 1 out of every 5 was improper. That is 
not a very good record.
    Thank you, Mr. Chairman.
    Mr. Crenshaw. Thank you. Mrs. Lowey.
    Mrs. Lowey. Thank you, Mr. Chairman.

                          POLITICAL APPOINTEES

    Commissioner Werfel and Inspector General George, I would 
like to get a few facts on the record. Is there any evidence, 
to date, that political appointees at the IRS, directed, 
requested, recommended, or in any way supported a review of 
501(c)(4) applications based on a particular ideology?
    Mr. George. The answer to your question directly is no from 
our audit, but Mrs. Lowey, that was not the focus of our audit. 
So as----
    Mrs. Lowey. To date, it is no.
    Mr. George. It is no.
    Mrs. Lowey. Is that correct?
    Mr. George. That is correct.
    Mr. Werfel. That is my understanding, as well, of Mr. 
George's audit, and the underlying support of that audit is 
that there is no evidence of that at this time.
    Mrs. Lowey. Now, is there any evidence that the White House 
directed, requested, recommended, or in any way supported such 
a review?
    Mr. George. No.
    Mr. Werfel. I am not aware of any evidence of that.
    Mrs. Lowey. So, to be clear, as of this date, there is no 
factual evidence that this was a politically motivated review 
from senior officials at the IRS at the White House; is that 
correct?
    Mr. George. I can definitively say within the White House, 
no, as of today. I cannot say that as of the IRS as a result of 
the fact that we did not look at that aspect of it.
    Mr. Werfel. And I am going to have to rely on Mr. George. I 
am, for the most part, relying on his audit finding and his 
audit work to help draw conclusions.
    Mrs. Lowey. So, if that is the case, it seems to me that 
the sorting and reviewing of these 501(c)(4) applications was 
done by career IRS employees who made a series of incredibly, 
incredibly bad decisions which reflect poorly on management who 
should have known that these activities were taking place and 
put an end to it immediately; is that correct?
    Mr. George. As of the end of our audit field work and the 
instant audit, that is correct. But again, Congresswoman, this 
is an ongoing matter and we do not know. We are going to go to 
wherever the facts lead us, ma'am.

                   PREVENTING INAPPROPRIATE ACTIVITY

    Mrs. Lowey. So as of today, can you tell us why they didn't 
realize there was a problem with their methodology, and correct 
it? Is there no routine mechanism in place to prevent 
discriminatory or ideological practices?
    Mr. George. Well, keep in mind, once again, when this first 
occurred, and when it eventually was brought to the attention 
of senior officials in Washington, corrective action was 
ordered, but subsequent to that the people in the 
Determinations Unit reverted back to this very inappropriate 
type of activity. So there was a breakdown, again, in 
management here going back to the concept of gross 
mismanagement, and it is something that they ultimately, as of 
again at the end of our audit field work, seemed to have 
addressed, but subsequent review will be necessary to confirm 
that.
    Mrs. Lowey. Now, since the Citizens United decision, which 
I strongly oppose, removed limits on independent political 
donations by corporations and other groups in Federal 
elections, scores of new political organizations were created 
and a record amount of money has flowed in in support of these 
political activities. This is one of the primary reasons, in my 
judgment, the number of organizations applying for 501(c)(4) 
status more than doubled from 2010 to 2012 alone, an increase 
of 226 percent. Meanwhile, the IRS budget has shrunk. Two 
hundred twenty-six percent increase. The IRS has a 
responsibility of making sure that those groups who applied for 
501(c)(4) status are not primarily engaged in political 
advocacy. Clearly, the reviews used were the wrong way to go 
about this. Could you share with us, as you are reviewing the 
process, what should be the process to review 501(c)(4) 
organizations?
    Mr. George. That is one of the recommendations that we have 
issued in this report that the IRS seek further clarity both 
from the Office of Tax Policy, and on its own, as to how to 
undergo, undertake that type of evaluation. But it is important 
to note, again, though, Congresswoman, that not all 
organizations who operate like these are required to seek 
501(c)(4) designation. They do so in the event that the IRS 
later looks at their activities to determine whether or not 
there is the tax liability matter. But they can still operate 
the way they would like to without coming to the IRS for their 
stamp of approval.
    Mrs. Lowey. I see the red light is on. Thank you, Mr. 
Chairman. We will continue this discussion.
    Mr. Crenshaw. Thank you, Ms. Lowey.
    Mr. Graves.

                        WHITE HOUSE EXPECTATIONS

    Mr. Graves. Last week we were in our districts and I have 
to tell you, my constituents are furious. They are angry about 
what has occurred at the IRS. As I come into this meeting 
today, there is a lot that is on my mind and their minds, but 
the first thing I want to know, did you meet with anyone from 
the White House to prepare for this meeting?
    Mr. Werfel. I did not.
    Mr. Graves. Were you briefed on this?
    Mr. Werfel. I was not.
    Mr. Graves. Have you spoken to the President on this 
matter?
    Mr. Werfel. I spoke to the President on May 16th or 17th, 
around the day I was appointed. We had, about, a 20-minute 
conversation, where he articulated his expectations for my 
mission at the IRS.
    Mr. Graves. Did he order you to clean house, to terminate 
anyone, to hold anyone accountable?
    Mr. Werfel. He ordered me to do an accountability review. 
His primary order to me was to restore the trust. He offered 
several guiding principles to me, such as operate in good 
faith.
    Mr. Graves. But he did not order you to terminate, clean 
house, or hold anyone accountable, just to restore the trust?
    Mr. Werfel. Essentially, he and Secretary Lew gave me a 
first assignment. They asked for a plan, again, which I am 
prepared to provide by the end of this month. And in that plan 
there were three aspects. And that first aspect was get to the 
bottom of this and hold the appropriate people accountable. So 
that is the way the instruction was framed.

                             ACCOUNTABILITY

    Mr. Graves. Regardless of whether the President asked you 
to or not, do you plan on clearing house, terminating anyone, 
or holding anyone accountable?
    Mr. Werfel. I certainly plan on holding people accountable. 
I don't know that----
    Mr. Graves. What is your definition of accountable?
    Mr. Werfel. That is a good question. Here is where we are 
right now in the process. We have an audit report that the 
Inspector General provided. And that audit report has 
conclusions about mismanagement. And so the first part of the 
review is to figure out whether any of that mismanagement would 
lead one to the conclusion that that individual can no longer 
hold a position of public trust in the IRS. And that is my 
first order of business.
    Mr. Graves. You have already stated publicly that the 
public trust has been lost. You stated that in the beginning of 
this meeting.
    Mr. Werfel. Right.
    Mr. Graves. You also stated that to the chairman's question 
if somebody has done something wrong, would you terminate them? 
And it was in accordance to the refundable tax credits. And you 
said, advertently, if somebody knowingly, advertently, and 
intentionally does that yes, you would fire them. So we know 
that something has occurred here and yet we hear there is this 
long review process and yet no one has been held accountable. 
So for the committee, has anyone to date been held accountable?
    Mr. Werfel. Well, let me answer you question this way. If 
you look at the IRS organization----
    Mr. Graves. That is a yes or no. Has anyone been held 
accountable.
    Mr. Werfel. I would say yes, and then I would like to 
expand on that. If you look at the IRS organization today 
versus the day the IG report was issued, we have new leadership 
in the Commissioner's Office, Deputy Commissioner for Services 
and Enforcement office, the Commissioner for Tax Exempt and 
Government Entities, and in the Exempt Organizations office.
    Mr. Graves. That is new leadership, but who has been held 
accountable?
    Mr. Werfel. Well, I think the leaders that were replaced, 
certainly. I think the fact that they are no longer holding 
positions of public trust, that is part of the accountability. 
The critical point here----
    Mr. Graves. Were they terminated?
    Mr. Werfel. In most cases, they resigned.
    Mr. Graves. Voluntarily or were they asked to resign?
    Mr. Werfel. It is a combination, but for example, Steve 
Miller was asked to resign.
    Mr. Graves. So resignation is accountability? Is that what 
you are telling the American people?
    Mr. Werfel. Well, here is what I am saying.
    Mr. Graves. Lois Lerner being on administrative leave is 
accountability? Is Lois Lerner still being paid today?
    Mr. Werfel. She is.
    Mr. Graves. Is that your definition of accountability?
    Mr. Werfel. Well, if you would let me, if you would indulge 
me just to answer the question.
    Mr. Graves. That is easy. Yes or no.
    Mr. Werfel. There are two stages to accountability here. 
The first stage is based on the facts we have now to determine 
who can no longer hold a position of trust within the IRS, and 
the second stage, which I know is where you are going, is to 
determine whether there was any underlying malfeasance or 
issues that would warrant dismissal. We are going to follow the 
facts where they take us. We just do not yet have that 
completed review. Inspector General----
    Mr. Graves. If you don't know that there is underlying 
malfeasance then why was somebody asked to resign?
    Mr. Werfel. Because the decision was made that that person 
could no longer hold a position of public trust because of the 
failures of management oversight. Whether those failures were 
motivated by something----
    Mr. Graves. So they were asked to resign just to restore 
public trust, for public perception purposes, or maybe 
political purposes?
    Mr. Werfel. No, I wouldn't say that. I would say that when 
there is a breakdown in management, when there is gross 
mismanagement, you have to make tough decisions about whether 
that person can continue to hold their position of trust.
    Mr. Graves. One last question, Mr. Chairman, I know my time 
is expiring. Have either of you asked the individuals in 
Cincinnati who ordered this? Who ordered them to use this extra 
scrutiny to punish, or penalize, or postpone or deny? Has that 
question been asked of any employee?
    Mr. George. Yes, during our audit, Congressman, we did pose 
that question, and no one would acknowledge who, if anyone, 
provided that direction.
    Mr. Graves. So no one would acknowledge who gave the 
directive to do this?
    Mr. George. That is correct.
    Mr. Graves. That question was asked?
    Mr. George. Questioned during the audit phase of this.
    Mr. Graves. Mr. Werfel, are you satisfied with that 
response from the individuals in Cincinnati?
    Mr. Werfel. No, no.
    Mr. Graves. Will you get to that bottom of that?
    Mr. Werfel. We have to get to the bottom of that. I 
completely agree.
    Mr. Graves. No matter how high it goes up the chain, you 
will find out who made this order?
    Mr. Werfel. We will uncover every fact.
    Mr. Graves. Thank you.
    Mr. Crenshaw. Thank you.
    Mr. Quigley.

                             ACCOUNTABILITY

    Mr. Quigley. Thank you, Mr. Chairman. Acting Commissioner, 
let me ask the same line of questioning in a different way. In 
a sense what you are suggesting is that accountability is going 
to happen, but there is a process to it that requires some time 
and investigation.
    Mr. Werfel. That is exactly right. We have to do this 
fairly and thoroughly. But I, like everyone else, I am 
frustrated too. I want these facts to emerge quickly.
    Mr. Quigley. It is a complicated process and a complicated, 
byzantine process that took place to get us here, correct?
    Mr. Werfel. It is a complicated process, yes.
    Mr. Quigley. And inasmuch as the anger exists and the anger 
is justified, without knowing exactly what took place, it is 
hard to find people accountable in the correct way. If you 
don't know exactly what happened and who ordered what and who 
did what, it is hard to immediately find people accountable. 
And if the word ``fire'' and so forth, and ``prosecute'', and 
``investigate'' is there, it is just going to take a little bit 
of time, correct?
    Mr. Werfel. That is exactly right. We have to get the facts 
in a fair and thorough way.
    Mr. Quigley. Listen, the Chairman began this hearing 
talking about scandals and people being embarrassed and how far 
this is. You know, it is hard to shock and awe someone who is 
from Chicago, Illinois about scandals. My last two previous 
governors either went to jail or are in jail; two of my last 
four predecessors sitting in my seat are in jail or went to 
jail. So I get it. But this is getting there, and clearly, this 
makes--I am often asked what the real cost of corruption is. 
Clearly, there is a loss of trust here. That loss of trust is 
probably the greatest thing, because it makes it very difficult 
to lead when you don't have the public's trust. So gentlemen, 
that is your task.

                   PREVENTING INAPPROPRIATE ACTIVITY

    Mr. George, let me just, and ours to follow-up. Let me just 
ask you this, and I know your agency is the one that brought 
out this stuff about collected and wasted, is there some sense 
that it took too long to get this out, and to catch the other 
scandal that is involved here? Since if we didn't catch it 
before, how do we know we can prevent it again in the future?
    Mr. George. That is a very good question, sir. We are the 
ones who have to respond to allegations. You can only be so 
proactive, especially in the context of the Tax Code that the 
law will allow. And unless someone brings to your attention an 
instance of malfeasance, or what have you, there is very little 
that you can do, again, proactively to address it.
    So for example, in this instance, Members of Congress as 
well as media reports brought to our attention allegations that 
certain groups were being targeted by the IRS. In the instance 
of the report that we will be releasing tomorrow on 
conferences, it was a whistleblower within the Internal Revenue 
Service who brought that matter to our attention. So you can 
only do so much in this type of circumstance, sir.
    Mr. Quigley. Any comment, Mr. Werfel?
    Mr. Werfel. You know, I think that it is incumbent upon 
organizations, in particular public-sector organizations, to 
ensure that they have the right controls, management, 
leadership, processes----
    Mr. Quigley. You agree, it shouldn't take a whistleblower, 
right?
    Mr. Werfel. It should not. It should not.
    Mr. Quigley. Someone should be reviewing these conferences 
on an ongoing basis to see if they are really appropriate.
    Mr. Werfel. Yes, I think one of the lessons learned that is 
going to emerge out of this process is we need a much more 
sophisticated risk management and control structure within the 
IRS. That is clear based on what happened here, and, obviously, 
some of the emerging issues coming out of Mr. George's office.
    Mr. Quigley. Thank you. Thank you, Mr. Chairman, I yield 
back.
    Mr. Crenshaw. Mr. Yoder.
    Mr. Yoder. Thank you, Mr. Chairman. Mr. Werfel, 
congratulations on your new position. Certainly, we have our 
work cut out for us here.
    Mr. Werfel. Yes.
    Mr. Yoder. I wanted to start with some questions related to 
the tense we are using in terms of past tense or current 
regarding the targeting of specific political groups.
    Mr. Werfel. Yes.

                     DELAYED 501(C)(4) APPLICATIONS

    Mr. Yoder. Most of this hearing has been about the actions 
that have occurred, the audits that were put in place, the 
delays, the obstruction that was put in place for groups of 
Americans that essentially wanted to exercise their First 
Amendment rights.
    How many Americans, how many groups of Americans continue 
to have their applications delayed? How many groups continue to 
be held under unjust, unconstitutional scrutiny by the IRS as 
of today?
    Mr. Werfel. That is a question that I want the answer to as 
well. And what we are doing is initiating, as quickly and as 
efficiently as possible, a review of the IRS across the entire 
Agency, to see if there are any common elements of impartiality 
in other parts that occurred in this particular area.
    Mr. Yoder. But not just in other parts. How many groups 
have applied for 501(c)(4) status, some of which in the 
Inspector General's report have been over 2 years, now over 3 
years had applied that are still at the IRS today waiting to 
have their applications approved, or denied, or at least some 
answer?
    Now, I know you have been on there 12 days, but over the 
past weeks as this has come about and become acknowledged, and 
frankly, since IRS officials were alerted to this over a year 
ago, many of these groups continue to have their applications 
denied. And so we talk about this today in this hearing here in 
Washington, D.C., as if this is something that has occurred and 
we are going to investigate and we will hold those who did this 
accountable. But sir, your agency, the IRS, continues today to 
deny and block the Constitutional rights of Americans as we sit 
here this very moment. How many Americans are having their 
Constitutional rights blocked as of this afternoon?
    Mr. Werfel. I don't know that a conclusion has been reached 
on Constitutional rights. I think there is a legal review being 
undertaken by the Justice Department, but to give you an answer 
to your question, there are 132 cases that are in this grouping 
of potential political advocacy that are referenced in the IG 
report. 132 cases in that grouping that have not been acted 
upon in over 120 days, which by IRS definition, is overdue. And 
as I said earlier, I have directed new leadership, new 
leadership that is heading Exempt Organizations, TEGE, and our 
new Chief Risk Officer, David Fisher from GAO, to submit to me 
by the end of this week--and I will share that with you--a plan 
with specific milestones for how we are going to knock out that 
backlog quickly and effectively.
    [The information follows:]

    My report ``Charting a Path Forward at the IRS: Initial Assessment 
and Plan of Action,'' detailed our approach for eliminating the backlog 
of 132 cases that TIGTA called ``potential political cases.'' That 
approach includes two paths: first, adding resources and process 
reforms to the ``traditional'' determinations process, and second, 
adding a new, streamlined approval process allowing applicants to self-
certify their level of political campaign intervention. Both processes 
are underway. As of August 8, 53 of the 132 cases were closed, 
including 17 organizations that took advantage of the self-
certification process.

    Mr. Yoder. You mentioned 120 groups. How many of these 
groups have been in application process for more than 2 years?
    Mr. Werfel. It is a number I don't have at my fingertips, 
but there are groups and it is unacceptable.
    Mr. Yoder. It seems like if there are 132 it would be 
something that we could simply identify. Is that something you 
can provide for the Committee today?
    Mr. Werfel. Absolutely.
    Mr. Yoder. Okay, you can do that by close of business 
today, to inform us how many groups are waiting over 2 years to 
have their applications approved.
    Mr. Werfel. Yes, I think we have that data and we can 
provide it to you.
    [The information follows:]

    As of May 28, 2013, there were a total of 136 501(c)(4) cases 
segregated by the Exempt Organizations unit as requiring evaluation for 
possible political campaign intervention activities. At that time, 132 
had been open for 120 days or more, and 4 cases had been open less than 
120 days. Of the 132 cases, 120 cases had been open more than 200 days. 
The 120 cases included 28 cases open more than 200 days but less than 1 
year, 73 cases open more than 1 year but less than 2 years, and 19 
cases open more than 2 years. As of July 3rd, there have been 35 
closures, which represents 27% of the inventory that has been open for 
120 days or more (the 132 cases). These closures include 18 cases 
approved, 4 taxpayer withdrawals, and 13 cases closed for ``failure to 
establish'' (i.e., failure to provide necessary information). There 
have been no denials as of July 3, 2013.

    Mr. Yoder. Mr. Inspector, do you have any information 
relevant to this?
    Mr. George. I do, sir, but it is somewhat dated because it 
is as of the end of our audit. And so as of December 17th of 
last year, of the 296 cases that we identified in that 
political category, 160, which is roughly 54 percent, were open 
from 206 to 1,138 calendar days, and then 129 of the 160 open 
cases have been open for more than 1 year as of December of 
2012.
    Mr. Yoder. Mr. Werfel, one of the reasons this is such an 
important topic to this committee in particular, is because 
these questions were asked of then Commissioner Shulman in 
March of 2012 and he assured the committee at that time that 
there were built-in safeguards; there was a culture and tone at 
the top, and people knew it would not be tolerated. Today we 
are having the opportunity to go through this same experience, 
but going forward, we want to know that the positions you take 
today, that the statements we make are accurate, and they are 
based upon fact. Clearly, Mr. Shulman did not know, either 
misled the committee, or knew it and didn't tell the committee 
the truth, but either way, the facts were not presented to the 
committee that day.

                            AUDIT SELECTION

    We have heard there have been at least comments made that 
the Audit Division could potentially be engaging in similar 
practices. Do you have any awareness or any reason to believe 
and can you investigate whether the Audit Division has targeted 
individuals, specifically, for audits based upon donations, or 
engagement in conservative political activities, or any 
political activities?
    Mr. Werfel. Let me answer that directly. I am not aware of 
any such behavior. I have initiated a review to answer that 
very question. And if I find anything that is similar in scope 
to what is in this Inspector General report, I will make you 
aware.
    Mr. Yoder. Inspector, did you find anything related to this 
in your review?
    Mr. George. We have not conducted a review in this area, 
Congressman.
    Mr. Yoder. Thank you. Thank you, Mr. Chairman.
    Mr. Crenshaw. Thank you.
    Ms. Kaptur.

                   REVIEWING TAX EXEMPT APPLICATIONS

    Ms. Kaptur. Thank you, Mr. Chairman. Thank you gentleman 
for your testimony. Let me begin with this, Inspector General. 
Some media outlets have been reporting that the IRS was 
targeting conservative groups for political purposes. Your 
report contradicts that claim. Could you please comment on if 
you found any political motivation in reviewing tax-exempt 
applications?
    Mr. George. Congresswoman, let me respond to your question 
in the following way: When we looked at the 298, well, there 
were 298 cases that were put into a category for political 
activities. We were able to look at 296 of them because 2 
didn't contain enough information for us to base a review on, 
we were able to identify 96 cases that were definitely put to 
the side because they had Tea Party, 9/12, and Patriot in the 
name of the group. The vast majority of the other 
organizations, their names were so innocuous that we did not 
deem it possible to determine whether or not they were 
conservative groups, or whether or not they were groups that 
might be on the other side of the political spectrum. And so 
this is something that we are continuing to look at, but in the 
instance of the political activity matter, we did not uncover 
instances of groups that could readily be identified as being 
liberal, for lack of a better term, that were treated in the 
manner that these Tea Party cases were.
    Ms. Kaptur. In your report, there is quite a pie chart that 
shows that the vast majority of groups that were investigated 
did not fall into so-called conservative category. Am I reading 
the chart correctly?
    Mr. George. You are, because they were not by the title of 
the organization readily identifiable, Congresswoman.

                           527 ORGANIZATIONS

    Ms. Kaptur. All right. Now, let me say this: In 2010 there 
was a Supreme Court ruling, Citizens United, that allowed 
unlimited amounts of money, as you well know, to be assembled 
for political campaigns, many times by secret donors that don't 
have to disclose under Section 501(c)(4). And I am wondering, 
an organization that incorporates has many options if they want 
to engage in civic life, and then if they move into donations 
to campaigns, they could have incorporated as a 527. We have 
had many groups that do that. But you were looking at 
501(c)(4)s, am I correct? This is the--the Cincinnati office, 
apparently, was looking at--why might an organization choose to 
incorporate under 501(c)(4) rather than 527 if they are 
political, if their intent is political?
    Mr. George. I have no idea.

                        TAX EXEMPT APPLICATIONS

    Ms. Kaptur. Well, you know it is interesting, because they 
don't have to disclose donors, and so it is very interesting to 
me that if one looks, and I am going to ask you for the record, 
of the organizations that you were looking at there, after the 
Citizens United ruling how much did your applications increase 
in the 501(c)(4) category, did you say? I think Congresswoman 
Lowey, or Ranking Member Lowey.
    Mr. George. I would have to----
    Mr. Werfel. I have that information. In 2010, the number of 
(c)(4) applications was 1,735. In 2012, it was 3,357.
    Ms. Kaptur. Yes. It is very interesting trends here, and 
there isn't a person up here that doesn't understand what is 
going on politically in this country and the hidden nature of 
what is affecting campaigns today that is very unlike what many 
of us faced when we first were engaged in political life. Yes, 
sir.
    Mr. George. Congresswoman, I just want to elaborate. Of the 
groups, the 298 that were put into that political category that 
were singled out for specialized treatment, not all were 
501(c)(4)s. Some were 501(c)(3)s also. So they were singled out 
for treatment, which may or may not have been justified if 
handled properly.
    Ms. Kaptur. What percentage would you guess were 501(c)(4), 
78?
    Mr. George. Well, 89 of 298 were 501(c)(3)s.
    Ms. Kaptur. So the majority were 501(c)(4)s?
    Mr. George. Yes.
    Ms. Kaptur. Were there any 527s?
    Mr. George. Not to my knowledge.
    Ms. Kaptur. Very interesting. How many--well, of that group 
that you specifically investigated, what number, approximately, 
fell into the Tea Party, 9/11--however that is described, that 
so-called super conservative group?
    Mr. George. Yes, one moment, please. There were 72 Tea 
Party groups; there were 13 groups that were identified under 
the Patriot category; and there were 11 that were identified 
under the 9/12 category.

                               CINCINNATI

    Ms. Kaptur. Thank you for providing that to the record. Why 
the Cincinnati office? That happens to be in my home state. I 
mean, was this a specific assignment of that office?
    Mr. Werfel. The Cincinnati office is where the 
Determinations Unit is housed, and they have the responsibility 
to do the 501(c) review process for incoming applications.
    Ms. Kaptur. For the whole country?
    Mr. Werfel. Yes.
    Ms. Kaptur. All right.
    Mr. George. Although in this instance there were a few IRS 
employees located outside of Cincinnati who also were engaged.
    Mr. Werfel. That is right. As a general matter, most of the 
work happens in Cincinnati in this unit.
    Ms. Kaptur. All right, I am going to ask Mr. Chairman, as 
these gentlemen provide information for the record, I am very 
interested in knowing if the definition of political in 
501(c)(3), (c)(4), or 527 is inadequate, and if there is some 
rubber language in there that allowed for perhaps some 
miscalculation. I don't know, but I am looking at the changes 
in the law, and what has happened to us as a country, and the 
fact that you have had so many more applications in that 
category at a time when our economy is not doing that well. So 
I am interested in which of those groups that are applying 
would have a political nature of that, you said 3,357, the 
additional ones.
    Mr. Crenshaw. They will get you that information.
    Ms. Kaptur. Thank you very much, Mr. Chairman.
    [The information follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Mr. Crenshaw. Mr. Diaz-Balart.
    Mr. Diaz-Balart. Thank you very much, Mr. Chairman. First, 
Mr. Werfel, I must tell you that I am grateful for your 
willingness to do this. Because I guess some people would say 
the smart thing to do would be just to run away. And so, 
seriously, exceedingly grateful for your willingness to now 
jump in under very difficult circumstances.
    Mr. Werfel. Thank you.

                         INAPPROPRIATE ACTIVITY

    Mr. Diaz-Balart. Mr. Quigley mentioned, you know, that he 
is not usually in shock and awe of corruption, I believe is 
what he said, and that this one may do that. You know, 
mismanagement, or incompetence, or missteps or corruption are 
frankly always destructive, you know, and unacceptable. I will 
tell you, and maybe this is just because I represent a 
constituency, a very diverse constituency that come from 
countries where the government targets people for their 
beliefs. I think this is worse. As dangerous, as unacceptable 
as those that I just mentioned are, and they are, when 
government targets individuals for their beliefs, this is now 
an affront on democracy, on our freedoms. And I just wanted to 
see if you thought that I was exaggerating in my understanding 
of how just how dangerous, how unacceptable this issue can be.
    Mr. Werfel. I agree with you. It is completely inexcusable, 
and it is inherently damaging. In particular, now that I have 
been at the IRS for a few days, I have recognized that this 
important Agency is founded on a principle of operating 
impartially, and we failed in that most basic core principle 
here. And it is devastating to us as an Agency, and to the 
people in that Agency. They are very, very upset, and appalled 
by this as well. I mean, a story I don't think has been told, 
is that the people in the IRS, most of whom I would articulate 
are hard working, are appalled.
    The one point I would raise to you, and this is frustrating 
for everyone involved, is that more analysis and investigation 
is going to be needed to understand what motivated, if 
anything, this behavior. What were the circumstances 
surrounding it? And we have to get to the bottom of that, and 
then I think we can better understand the problem. But on its 
face, I agree, it is completely inexcusable, and it is a 
violation of that fundamental tenet of the IRS which people 
take so seriously, and it is very upsetting.
    Mr. Diaz-Balart. Well, and I would just, you know, not 
putting words in your mouth, but I would say not only the IRS, 
but frankly, it is the basis of our country that you should not 
fear the government because of your beliefs.
    Mr. Werfel. I totally agree with you.
    Mr. Diaz-Balart. And again, so I thank you for your 
willingness to do this. Now, you know, some people are going to 
talk about funding, and I think that is a bit of a joke. You 
already mentioned that you don't think that more money is now 
the way to do it. I think whether it is the, you know, what is 
it, 220 conferences for employees between 2010 and 2012, would 
state that funding doesn't seem to be a problem, or the bonuses 
that the chairman mentioned doesn't seem that funding is an 
issue.

                              TRANSPARENCY

    I think people are going to also talk about legislation, 
and all sorts of different excuses. Now, you know, you now have 
a choice to make. And I am optimistic that you are going to 
because you have agreed to take this on, that you are going to 
make the right choice. But the choices are very simple. You can 
either try to change the story and cover this up, and try to 
give it a good spin, or you can make sure that you get to the 
bottom of it, that people are held accountable, that proposals 
are made to make sure that in the future this is more difficult 
to do, and I know that is already starting, and that the 
American people have a clear understanding when this is said 
and done, as to who did, and ordered what, and for what reason, 
and I just wanted to--obviously, I trust that you are going to 
do the right thing. But the right thing means absolute 
transparency. Would you agree with that?
    Mr. Werfel. Yes. I have two reactions, if I could. One is, 
as I have gotten to know the IRS and started to learn, I came 
in with this notion that we have to be completely open in 
everything we do. I quickly got a briefing on Section 6103, and 
realized that there are certain parameters. We are getting 
these congressional requests in. I want to push information out 
as quickly and as expediently as possible to you, so we can get 
to the bottom of this. And then I am learning that before we 
send that information out, we have to review it from the 6103 
standpoint, to protect taxpayer information. So my commitment 
on transparency is absolute within the legal abilities I have. 
And then, if I could, I need to make a clarification on the 
budget. The point that I was making, and we haven't gotten to 
that yet, and if we don't get to it that is fine. The 
President's budget is out there. I am prepared to defend the 
increases that we are asking for because I think they have 
important return on investment benefits to the taxpayer.

                                FUNDING

    With respect to this Exempt Organizations Unit, the point I 
was making was, it would be a mistake for me to come in and ask 
for more money as a solution. The right answer is for us to 
figure out what the right processes are, and then figure out 
what budget is necessary to sustain that. It could be the same, 
it could be less, it could be more, but the Chairman started 
this hearing by saying, ``how can we give you another dime?'' 
And my answer is, let's explore together what is going on in 
this process and figure out what the right funding is. But I 
can't come in here and say we need more money for that aspect 
of IRS operations without working with you on the review. And 
that is what I meant.
    Mr. Diaz-Balart. My time is up, Mr. Chairman.
    Mr. Crenshaw. Thank you very much.
    Mr. Womack.
    Mr. Womack. I thank the chairman and I thank the gentlemen 
for their testimony today. Mr. George, you have been inspecting 
the IRS for now the better part of 10 years.
    Mr. George. About 8 years, sir.
    Mr. Womack. You have been through a lot of inspections.
    Mr. George. Yes.

                      TIGTA RELATIONSHIP WITH IRS

    Mr. Womack. Characterize for me and for this panel your 
relationship up to this point with the Service you inspect.
    Mr. George. It is a symbiotic relationship, sir, in many 
respects. While there is no question that we have a unique role 
in terms of the IG relationship between an agency in that we 
were once part of the IRS until the Restructuring and Reform 
Act of 1998, and when that stood us up in our current capacity, 
we retained some of the responsibilities and that is to protect 
the integrity of the overall system of tax administration, but 
it also vested us with the responsibilities of an independent 
Inspector General.
    Mr. Womack. Has there ever been an occasion when you made a 
recommendation back to the hierarchy, not this gentleman, but 
his predecessor and others, that have not been acknowledged, 
honored, put into effect?
    Mr. George. Very few. We take----
    Mr. Womack. But it has happened?
    Mr. George. It has happened, yes, sir.
    Mr. Womack. Anything along this line?
    Mr. George. No, sir. No, nothing of this sort.

                              PUBLIC TRUST

    Mr. Womack. Did this particular circumstance surprise you?
    Mr. George. Yes, very much so. This is unprecedented, 
Congressman. And again, during the Nixon administration, there 
were attempts to use the Internal Revenue Service in manners 
that might be comparable in terms of misusing it. I am not 
saying that what the actions that were taken are comparable, 
but I am just saying that the misuse of the--causing a distrust 
of the system occurred sometime ago, but this is unprecedented.
    Mr. Womack. Thank you. Mr. Werfel, I don't know whether to 
admire you or pity you because you have the weight of the 
United States Constitution on your shoulders, literally and 
figuratively. Because you said in your conversation with the 
White House that job one was, I think in your words, restore 
the public trust.
    Mr. Werfel. Correct.
    Mr. Womack. How do you do that?
    Mr. Werfel. It is going to be a difficult process, but the 
best thing I know how to do right now is articulate a roadmap, 
and that roadmap includes several key principles and 
ingredients. The principles revolve around openness, fairness, 
expediency, cooperation.
    Mr. Womack. All of the things that the people of this 
country, citizens of the United States have always expected, 
not just demanded, but generally an expectation of their 
government. Those are the things that you have to restore.

                             ACCOUNTABILITY

    Now, Mr. Graves a few minutes ago asked you about 
consequences, about people that were part and parcel to this 
whole process, some of whom are still drawing a Federal 
paycheck, and I realize there are HR due process, and those 
kinds of things. We get all of that. Has there been a 
consequence taken off the table for any of the perpetrators of 
this--of these processes?
    Mr. Werfel. I am not taking any consequences off the table.
    Mr. Womack. Has the White House suggested that there are 
certain consequences that should be taken off the table for any 
individual, or individuals----
    Mr. Werfel. I am not aware of any.
    Mr. Womack [continuing]. Deemed to be involved?
    Mr. Werfel. I am not aware of any such thing.
    Mr. Womack. Has the Treasury Department asked you to take 
any potential consequences off the table for any of the 
perpetrators involved in this process?
    Mr. Werfel. No.
    Mr. Womack. Now, or known, or to be discovered through the 
investigation process.
    Mr. Werfel. I think the key is, to do the job to get the 
facts, and then figure it out together, collectively. Again, I 
want to go back to my earlier point, and it is a point in 
response to Congressman Yoder's question, are we going to find 
similar problems? Are we going to realize what happened here? 
And the answer is, it is a mistake if that process unfolds in 
the IRS alone. We have to figure out a mechanism to make sure 
that, as we discover issues and concerns within the IRS, it is 
not discovered just within IRS. We are doing it collectively. 
So I think the question is, and I have asked the Chairman about 
this, can I call, to convene meetings, to give periodic updates 
about what we are finding, so that we can collectively 
determine what the right answer is and analyze these facts. 
Because I think, as we get more facts, we are going to figure 
out what happened. And it is not going to be an easy analysis, 
but it is one I think we can do collectively.
    Mr. Womack. Are you prepared for the worst possible 
outcomes, that there may be a universe of people, a large 
number of IRS employees caught in this, in this process that 
have culpability?
    Mr. Werfel. I am prepared to follow the facts wherever they 
take us. I think it is the only way to restore the trust.
    Mr. Womack. I thank the gentlemen. Thank you, Mr. Chairman. 
I know my time is expired.

                             ACCOUNTABILITY

    Mr. Crenshaw. Thank you very much, and I think we will have 
time for another round of questions. So let me start, Mr. 
Werfel, because on one hand, I am encouraged by what you say, 
that you want to follow the facts where they lead, and you want 
to hold people accountable. Because I think that is what we all 
want to know. What happened? But it seems to me that it is not 
just mismanagement. You can argue that the $50 million that 
somebody spent on conferences, and videos, that is gross 
mismanagement. But when an entire office of the IRS somehow 
begins to single out conservative groups and bully them, and 
harass them, and it occurs to me that commonsense tells you 
that just doesn't happen. That is not bad management. That is 
somebody gone wrong. And quite frankly, sir, if that office 
just got together and somehow people started doing this, and as 
I said earlier, and nobody spoke up, I mean, you have got a lot 
of people watching this abuse take place, and nobody speaks up 
and says this isn't right. And if that is all there is, in 
other words, if somebody didn't say, here is a plan, go do 
that, and then they just did that, that scares me more than 
anything. It is like there is this culture of intimidation, 
that people got together and they are just doing that, and 
nobody, nobody steps up and says, this is wrong.
    Now, that is what I think we all want to figure out. Did 
this just happen, or did somewhere along the way, somebody give 
some direction? Because I think that is what accountability is, 
to find out somebody that is responsible. I don't know if 
anybody came up with this plan or not, but it just doesn't seem 
reasonable that it just happened that people just said, oh, and 
all of a sudden you look back and say for the last 3 years, we 
have been picking on people that happen to have a conservative 
philosophy.
    So I am concerned about when I hear you say, well, we just 
want to kind of uncover the mismanagement, whatever. So here is 
my question. If you are going to be there 120 days, what do you 
want to happen? When you leave 120 days from now, what do you 
want to be able to report to us?
    Mr. Werfel. Those are all good questions. Let me start with 
following the facts because that statement needs to be backed 
up by the realities of what is going on. We have the Inspector 
General conducting additional investigations, following up the 
audit. We have the Justice Department investigating, we have 
Congressional overseers investigating, and then there is my 
review with my leadership team. So there are four separate 
reviews. Critical to that is making sure that we are supporting 
one another and reinforcing one another to get this 
information.
    I am not sure right now. I can't give you an answer in 
terms of what the world looks like 120 days from now, what we 
have uncovered. I know that we have already started sending 
responses and information back to Congressional Committees, 
based on questions that we have received. I know that the 
Justice Department is actively engaged in the investigation, as 
of a few days ago. So the process is unfolding, and it is real. 
What is happening to uncover the facts is real. But it is going 
to be a process, and as I said before, it is frustrating that 
it is going to take time. But that process is underway, and for 
all intents and purposes, I anticipate that Mr. George and 
everyone else will ensure that that process is robust. I am 
certainly going to do my job to make sure. What I want to get 
accomplished while I am here, is to initiate this plan, this 
roadmap. I want to talk with you and other Committees, and the 
American people about what that roadmap needs to look like, or 
do we have the key ingredients around accountability, around 
fixing the problem, around a broader IRS review. My bottom 
line----

                             ACCOUNTABILITY

    Mr. Crenshaw. Let me, I mean, at the end of the day, the 
best way to stop this is just to have it stopped. And so I am 
asking you, what--who are you going to talk to? What kind of 
questions are you going to ask? You got all of these people 
down there that were participating in what most people would 
say is really an absolute abuse of power, and it is going on, 
and nobody, nobody, stood up and said, I don't think this is 
right. But somehow, some way, we found out that is what going 
on. And so are you going to talk to those folks and say, how 
did all of this happen down here? I understand all of these 
roadmaps and all these kinds of things, but it seems like it is 
pretty simple. I would go ask those people and say look, how 
did you all decide to do this? Did somebody stand up on their 
desk one day or did somebody send a memo from somewhere? I 
mean, it seems like that is, at the end of the day, we want to 
find out who is responsible. I know you do, too.
    Mr. Werfel. Yes.
    Mr. Crenshaw. And I am just wondering how we do that 
putting all of these systems in place. It seems like there are 
some basic questions. That is why I want to know what you plan 
to do, who you are going to talk to, and what kind of questions 
are you going to ask.
    Mr. Werfel. Let me answer that question, and maybe ask Mr. 
George to talk about what he is doing. But the key is that 
there is a lot of people asking questions right now, the 
Justice Department, Mr. George's team, Members of Congress, you 
know, I have to--I am asking questions as well. And----
    Mr. Crenshaw. What kind of questions are you asking?
    Mr. Werfel. I am asking my leadership team, for example, to 
evaluate the management breakdowns that took place. I want to 
understand. I am asking them to initiate processes to ensure 
that these types of control breakdowns weren't occurring in 
other parts of the IRS.
    Mr. Crenshaw. Are you asking your management team like why 
nobody on the management team watched what was going on and 
didn't say is this right or wrong?
    Mr. Werfel. It is new leaders that have been put in place, 
including a top-ranking official from GAO that I brought over 
to help do this. I can walk through with you in great detail 
this plan and the roadmap. Part of it involves evaluating the 
audit report. A lot of good work has been done by Mr. George, 
which reveals certain elements of where the public trust was 
violated in terms of gross mismanagement. There are further 
questions to be asked, and the challenge that I have, and I 
want to talk through that challenge with this Committee and 
with others, is that I have to make sure that I am reinforcing 
his work, and not stepping on the work of the Inspector 
General, the work of the Justice Department, and the 
Congressional oversight committees that are doing those 
interviews.
    Mr. Crenshaw. My time is up. But it either just kind of 
happened, or somebody made it happen, and I hope we can figure 
that out.
    Mr. Serrano.
    Mr. Serrano. Thank you, Mr. Chairman, and I say this, Mr. 
Chairman, with all due respect, because I am not referring to 
you, but I think the gentleman needs to know if he doesn't know 
already that some folks in this Congress are not going to be 
satisfied until the President gets blamed directly for this 
taking place, when in fact both of you have stated that this 
was gross mismanagement that created a problem.
    Now, there are some people that have written articles in 
different places that show different numbers. For instance, I 
have some figures that indicate that of the aggrieved, if you 
will, or the people that were further scrutinized, 26 were Tea 
Party or Patriots, 76 were clearly conservative, 6 could not be 
determined, and 48 were nonconservative groups. So let me be 
clear that my outrage is about anyone being targeted, if anyone 
was targeted, but I suspect that if anyone was targeted, it 
might have been right across the border, not necessarily one 
group.
    Secondly, and most importantly, in answers to Ms. Lowey, or 
ranking member, you, Mr. George, made it clear that there is no 
direction showing, or any information showing that anyone gave 
an order to this. This is why you have called it gross 
mismanagement because people can get caught up in thinking they 
are doing the right work, and not do the right work at all.
    Now, again, for the record, if people were targeted we need 
to know that eventually. And we will know that. But I think we 
are spending too much time trying to figure out if someone said 
do it, rather than why it was done, and who did it. And I think 
that that is where we are wasting time; not necessarily today, 
but in general in this Congress.
    Now, can you repeat for us, again, what you said before? Is 
there anything in your audits that indicate that this was 
something that was set up at a larger level, with more in mind 
than actually what we know happened?
    Mr. George. Not in this audit, Congressman. But once again, 
we are continuing a review of this matter, and we will go 
wherever the facts take us.

                                FUNDING

    Mr. Serrano. Thank you. Now, Mr. Commissioner, you made 
some of us on this committee extremely happy, and others just 
perplexed, and made our work a little harder. You see, the 
easiest thing to tell this committee is, I don't want any more 
money. We had an agency that did that before. It is called the 
SEC. When I was Chairman they actually came before us and said, 
we don't need any more money. Then we found out why they didn't 
need any more money because they were not interested in 
oversight, and that is part of the reason Wall Street and 
everything fell apart. And they kept telling us, we don't want 
any more money. And it was, I must tell you, and if you want to 
classify me as people are being classified here today, I guess 
as a liberal I was saying are you sure you don't want any more 
money to go and do the work you are supposed to do? We don't 
want any more money. And then later we found out they didn't 
want oversight. Now, I am sure that is not what you are saying.
    Mr. Werfel. No.
    Mr. Serrano. But please understand, that there are 
consequences to the fact that we are cutting this budget, your 
budget all the time. Your job is not only to find out what went 
wrong in this particular issue working jointly with Mr. George, 
who by the way, I have to commend you for coming back, and 
back, and back every time we invite you. One could say, well, 
you have to, but you could be sitting there not smiling at all 
ever. And you do it with great grace.
    But there are other parts here. For instance, during the 
year we will remind you to go find out who the tax cheats are. 
During the year, we will go and tell you to find out where 
missing dollars are that could come into the Treasury. During 
the year we will tell you to make sure that people are not 
banking money overseas. All of that costs money. And it has 
been proven that for every dollar you get, seven are returned 
when there is no mismanagement.
    So what I am saying to you is, friendly advice, find 
another way of saying that you will get to the bottom of this 
without saying don't give me any more money. Because trust me, 
there are folks here who don't want to give you more money. In 
fact, there are some who would like to cut you to the bare 
bones.
    Mr. Werfel. I appreciate the question and an opportunity to 
reclarify again. My testimony is not that I am not asking for 
any money. My testimony is that I am prepared to defend the 
President's budget request because I think the increase in 
resources that we are requesting are going to have a very 
positive impact on the Federal budget in terms of reducing 
refund fraud, reducing identity theft, and improving overall 
taxpayer service.
    What I testified earlier was that, with respect to whether 
there is a need for more money in the Determinations Unit 
process to solve the (c)(4) issue, before we answer that 
question, let's determine what the right approach is for (c)(4) 
reviews, and then align our budget to that right process.
    Mr. Serrano. Right.

                                FUNDING

    Mr. Werfel. It could be an increase. It could be level or 
it could be less. That is all I am suggesting because I wanted 
to erase any notion that I think this problem can be fixed just 
with more resources.
    Mr. Serrano. And in closing, Mr. Chairman, and Mr. 
Commissioner, yes, in answer to a question you said that there 
is money that goes out that maybe shouldn't be going out to 
people who don't deserve it. Those people usually under that 
program fall into a category of folks with very few resources. 
I am not suggesting at all that if they don't deserve the money 
they should be getting it. But I think that we should not go 
back to the days when 44 percent of the audits were being 
conducted on 17 percent of the people; meaning that 44 percent 
of the audits at one time in this committee in your agency were 
being conducted on the EITC program, and the billionaires were 
not getting audited at all.
    So I would hope that as we go out to deal with what is fair 
and unjust and what is unfair, we also remember the mission of 
the IRS, which is to be fair to all taxpayers and to all 
Americans.
    Thank you, Mr. Chairman.
    Mr. Crenshaw. I thank you for that clarification. I think 
most people understand what you are saying and I think you 
should be commended. Your first response is not everything gets 
solved with more money. And that is all he is trying to say, 
and I think you can look at the facts of this whole discussion 
about mismanagement. If it started in 2010 when IRS got the 
most money they had ever gotten, and they had less work to do, 
that doesn't make any sense. Maybe IRS had too much money. 
Maybe that is why the mismanagement started.
    Mr. Serrano. Mr. Chairman, I appreciate his clarification. 
I appreciate your clarification. I just wanted my clarification 
to be clear that I have dealt with agencies that didn't want 
more money, and that is because they had no interest in 
oversight, which created the problems in Wall Street, I 
believe.
    Mr. Crenshaw. Thank you for your clarification of your 
clarification.
    Now, I would like to turn to Mr. Rogers.
    Mr. Rogers. Well, the question of whether or not you want 
or need more money is academic anyway, because we ain't got no 
money.
    Mr. Serrano. I hate life.
    Mr. Rogers. My friend Joe.

                       CINCINNATI AND WASHINGTON

    Whether or not the denial of the applications of 
conservative groups was the product of a few rogue employees in 
Cincinnati, or whether or not it was directed from on high, is 
a matter of great importance. I am sure you appreciate that.
    And that is the question that we want to track down. And 
Commissioner Werfel, you say you will follow the facts wherever 
they go. Well, we want you to push the facts to find out where 
the orders came from. Surely, they came from somewhere. I can't 
imagine two low-level employees taking on such a hefty 
political policy decision on their own. That just doesn't hold 
water, it doesn't make sense.
    In fact, one of the junior agents told the investigators of 
the Oversight Committee of the House that he believes the order 
to target Tea Party groups came from the agency's Washington, 
D.C. office, and that it was impossible, he said, for the 
targeting of Tea Party groups to have originated with a few 
rogue agents in the Cincinnati office. He went on to describe 
how the agency's Washington office requested the files of 
specific Tea Party groups that contained their applications for 
tax exemption.
    It is widely believed that the D.C. office was closely 
involved in the targeting of these groups from the outset. 
Intrusive questions and inappropriate requests were made of 
these applicants. Some pro-life groups, most notably the 
Coalition of Life for Iowa, were reportedly asked by an IRS 
agent to pledge not to protest outside of a Planned Parenthood 
office in exchange for granting tax exemption.
    That is completely unacceptable. Do you agree with that?
    Mr. Werfel. Let me start by saying I think your question 
concerns a particular taxpayer, and therefore, I am restricted 
by 6103 from commenting on that particular case. But yes, as a 
broader matter, those types of questions are, from my vantage 
point, and I know I am early in the job, inexcusable.
    Mr. Rogers. There are numerous reports that we are hearing 
now from investigators who have talked to staff that have, I 
think, inclusively made the point that these orders came from 
on high, from Washington, D.C., from the headquarters office.
    Now, what we want to know is, who gave the orders? Where 
did this come from? We will not rest, Mr. Werfel, until you, 
somebody gets us those answers because that is terribly 
important to the United States of America.

                                FUNDING

    Now, on the funding. In the past, when we had an agency 
that was not doing something that they were supposed to do, 
this committee would put conditions on the financing of that 
agency in installments so that your money would not come until 
you do what you are supposed to do. That is a straight jacket. 
I don't like to do that. But we have done with it the Coast 
Guard, and GSA, and others.
    And it very well may be that the Subcommittee may recommend 
to the full Committee, and we may take it to the floor, the 
proposition that your funding will be conditional on your 
response to the questions that we are asking you. We will not 
rest until this is done, and I don't need to remind you or 
anyone else that the power of the purse rests in the Congress, 
and we are prepared to use that purse to get to the truth.
    Mr. Crenshaw. Thank you.
    Ms. Kaptur.

                        501(C)(4) ORGANIZATIONS

    Ms. Kaptur. I have been listening to this testimony today 
and thinking a lot about the 501(c)(4) organizations. And I 
agree with the members on both sides of the aisle here who 
don't want to target any group based on political ideology, or 
any kind of ideology. But I will tell you, this 501(c)(4) 
category is one that demands serious attention by the IRS. And 
I think because of the Supreme Court rulings, and perhaps 
because of insufficiencies in the law itself, what is deemed 
political and worthy of oversight is not well expressed 
perhaps. Perhaps there is a shortcoming in the law.
    I would like to place on the record two articles, one from 
Forbes Magazine, and one from Mother Jones that relate to one 
organization that I would guess is a 501(c)(4), Freedom Works, 
in which their top leader resigned last year stating that it 
appeared to him that the leaders of the organization were 
trying to produce a book entitled Hostile Takeover, which would 
jeopardize the organization's (c)(4) status.
    Now, obviously, you can't give a lot of information here 
today about the hundreds of organizations you have looked at. 
But just on the hunch that there might have been some smart 
people working in the Cincinnati office who were concerned that 
there were a lot of new 501(c)(4) filings in this country, and 
that there have been tax cheats in the history of this country, 
that maybe somebody over there at IRS was actually doing their 
job. And though your testimony can't reflect any of that, I 
would like to say that there might be some of those people over 
there and that in fact that they were trying to find people who 
wanted to be hidden donors and not be on record, then I think 
the American people ought to take a second look at this. And 
you can't state a lot in your testimony today, but Inspector 
General, you listed a couple of things here in your testimony, 
inappropriate criteria were developed and stayed in place for a 
total of more than 18 months. Of course, you don't say what 
those inappropriate criteria were. You talk about substantial 
delays in processing. Most Americans got their refund in time 
this year despite the almost $1 billion that was taken away 
from IRS. I think a lot of people at IRS are working very hard, 
and then there were unnecessary information requests. Well, if 
you are trying to figure out who secret donors are and if an 
organization is really a 501(c)(4) and not overstepping its 
boundaries under the spirit of the law, maybe there might be 
some delays.
    So I am asking myself some questions after listening to 
you, and reading your testimony, and finding that I need more 
that isn't in there. So let me ask you, of the hundreds of 
organizations that you reviewed, will any of those names be 
available for the record, or are those hidden to the public?
    Mr. George. Title 26, Section 6103 places very severe 
limitations on who we can reveal taxpayer information to. It is 
limited to the Chairman of the Ways and Means Committee in the 
House, the Chairman of the Senate Finance Committee, and the 
Chairman of the Joint Tax Committee. They, in turn, can share 
that information with various members of their committees. But 
they too have restrictions, limitations on who they can share 
taxpayer information with. So that is part of the reason why, 
Congresswoman, a lot of the names are not provided in our 
report.
    Ms. Kaptur. I am glad to have that clarification, and I am 
glad to know that the Constitution is working a little bit 
here.

                     DELAYED 501(C)(4) APPLICATIONS

    Let me ask you, Mr. Inspector General, some media outlets 
have been reporting that the IRS targeted only conservative 
organizations and your report does not state that the 
organizations asked to provide additional information were only 
conservative groups. Consequently, is it correct to assume that 
organizations other than conservative organizations were 
inappropriately asked to provide additional information about 
their tax exempt applications and if so, approximately what 
percent of the total that were reviewed?
    Mr. George. Percent, I will see if one of my colleagues can 
provide that information. But once again, Congresswoman, some 
of the groups that were identified in the 296 that we were able 
to look at who were placed in this category of political 
activity, they, part of that group by name, were agnostic. We 
couldn't tell one way or the other whether they were 
progressive, conservative, what have you. But of that 296 that 
we were able to examine who were placed in that category, 72 
were identified as Tea Party, 13 were identified as Patriot 
groups in their names, and 11 had the 9/12 date/name in their 
name.
    Ms. Kaptur. So theoretically, some liberal groups could 
have been in the majority then, of the groups that were looked 
at.
    Mr. George. That is correct.
    Mr. Crenshaw. Your time is expired. Please let's recognize 
Mr. Graves.
    Mr. Graves. Thank you. Following up on my last questions. 
Mr. Werfel, have you asked any of the employees in Cincinnati 
if they were ordered to carry out these targeted probes?
    Mr. Werfel. Not at this time. I have not asked those 
questions, yet.

                         COMMISSIONER POSITION

    Mr. Graves. Who interviewed you?
    Mr. Werfel. Who interviewed me?
    Mr. Graves. For this position.
    Mr. Werfel. I was first approached and asked about whether 
I would be interested in going over and helping the IRS by the 
White House Chief of Staff, Denis McDonough. He is the first 
person who approached me.
    Mr. Graves. Did you ask the White House Chief of Staff who, 
in fact, had ordered the special targets here?
    Mr. Werfel. I did not. I wanted to make sure that I 
understood what the mission was, and what they were asking me 
to do.
    Mr. Graves. So you were willing to take the post without 
knowing where it may go, what it involved, who was responsible 
for the scandal? And then you have yet to even go to Cincinnati 
and ask those employees who ordered it.
    Mr. Werfel. By way of background, I have been a civil 
servant in government for 16 years. I have deep respect for the 
civil servants across the Federal Government, including those 
at the IRS. The IRS is an agency in need right now. I have a 
reputation for stepping in and helping solve government 
problems. I took the job because I felt like I could be 
helpful. That is why I took the job.

                               CINCINNATI

    Mr. Graves. Okay. Well, I think one way to be helpful is to 
go to Cincinnati and find out who ordered them to carry out 
these targets. And then the earlier question to Mr. George, I 
think your response, when I asked that to you, was they did not 
respond or you did not get a response; is that correct?
    Mr. George. They did, correct. They did not identify anyone 
who gave the order.
    Mr. Graves. So you can infer, then, that either they took 
it upon themselves or they were hiding the identity of somebody 
else. Which would you conclude?
    Mr. George. Well, at this stage, Congressman, I would say 
when we questioned them, it was in the guise of an audit, and 
the circumstances, when you are conducting an audit, you are 
really looking at, institutional.
    Mr. Graves. So this should be Mr. Werfel's first question 
then in Cincinnati is who gave you this order then? 
Understanding yours was more of an audit; his end is seeking 
out who actually made the call.
    Mr. George. It could be, but this is an important fact that 
I do need to bring up, Congressman. We, working with the 
Department of Justice, are looking further into this matter, 
and if Mr. Werfel were to exert himself too much into the 
process, it might impact our ability and the Justice 
Department's ability to continue our review. So, there are 
also----

                            SENATE DEMOCRATS

    Mr. Graves. Can I, Mr. George, just change lines here a 
second. It has been reported recently that Senate Democrats at 
various times over the last 3 years have been asked--had asked 
the IRS to intervene or look into tax exempt status of various 
groups. The New York Times reported it in March of last year. 
It represented Democrats, sent a letter asking the IRS to crack 
down on 501(c)(4)s, I guess, to sort of following up on Ms. 
Kaptur's concerns there. In the course of your investigation 
into the targeting of conservative groups and throughout all 
the interviews and all the employees, senior officials, others, 
did anyone indicate that they felt pressure from Senate 
Democrats?
    Mr. George. Nothing in our audit has revealed that type of 
information, sir.
    Mr. Graves. Have you seen any evidence at all?
    Mr. George. I have not.
    Mr. Graves. That the IRS reviews tax exempt status groups, 
or tax exempt groups requested by the Senate Democrats 
coincided in any way with the targeted groups that have been 
identified?
    Mr. George. In the course of conducting the instant audit, 
no.
    Mr. Graves. Do you anticipate that you will see?
    Mr. George. We will go over wherever the facts take us, 
sir.
    Mr. Graves. I think truth is very important as we--as we 
all sit here today, it is about the truth, and I appreciate 
your focus on that as well. Fact-finding is very important, and 
so I will just sort of conclude with two final questions, Mr. 
Werfel.

                          POLITICAL OPPONENTS

    Do you agree that those that have been targeted are not 
political allies of the President?
    Mr. Werfel. Let me make sure I answer that question as 
directly as I can. I believe that certain applications were 
singled out based on inappropriate criteria. Based on the 
evidence that the audit provided, those applications were 
associated with conservative groups. I think one of the 
questions that has been raised, and I don't know the answer 
right now----
    Mr. Graves. So a 9/12, a Tea Party.
    Mr. Werfel. Exactly.
    Mr. Graves. A conservative group, is that an ally of the 
President or would consider that a political opponent?
    Mr. Werfel. I will just offer as a layperson and a citizen, 
I would say that those are typically not allies of the 
President.
    Mr. Graves. So they are political opponents. And would you 
agree then that Ms. Lerner, Mr. Shulman, Miller, senior staff 
that admitted knowing this information previously are 
subordinates of the President?
    Mr. Werfel. Yes, they are subordinates of the President.
    Mr. Graves. And so, therefore, we can conclude then that 
they are either the President or the subordinates of the 
President were well aware of or involved in the targeting of 
political opponents, basic response?
    Mr. Werfel. I don't know that I could jump to that 
conclusion. I think there is more analysis and review that 
needs to be done. I understand the question and I understand 
the need to want to know the answer to that question. We are 
asking for indulgence to make sure that we can review the facts 
and get the information that you and this Committee needs to 
help answer those questions.
    Mr. Graves. Thank you, Mr. Chairman.
    Mr. Crenshaw. Thank you. Mr. Yoder.
    Mr. Yoder. Thank you, Mr. Chairman.
    Well, this is quite a mystery. We spent a couple of hours 
now. There has been a hearing today, there has been hearings 
last week trying to determine how this came about, and I know 
there has been some conversation today that it is not 
necessarily relevant why these individuals took these actions. 
I think it is very, very relevant, and determining the 
motivation and determining the rationale is very critical to 
preventing this from ever happening again.

                               EMPLOYEES

    And so, as we go through this what seems to be a mystery, 
we are left with the understanding that frontline employees, 
based upon their own volition, determined that they were going 
to scrutinize certain political groups based upon the ideology 
of those groups, and so I would ask Mr. George, in your 
opinion, who gave the order for the IRS to target conservative 
groups?
    Mr. George. I do not have an answer to that question yet. 
Again, we are engaged in ongoing work and perhaps we will be 
able to respond to that question.
    Mr. Yoder. In your conversations, in your interviews with 
the frontline employees that you have identified, did they 
express particular political animus towards conservative groups 
or any political groups?
    Mr. George. I have not been engaged personally in those 
interviews and nothing has been brought to my attention by 
those who have that that is the case, sir.
    Mr. Yoder. Are you aware that they are overly politically 
active or attending rallies or somehow imbedded in the IRS 
because they personally, on their own volition, determined that 
they wanted to target specific groups?
    Mr. George. I have no information on that, sir.
    Mr. Yoder. Well, because we are left with the conclusion 
that these folks are very politically active, yet people on 
Capitol Hill, the administration, they are, wouldn't be 
political at all, so somehow career line, frontline employees 
are the political scapegoats here, yet the folks in Washington, 
D.C., the folks who make policy, the folks who are very attuned 
to politics somehow disavow any knowledge or any engagement in 
this at all.
    Mr. George, have they expressed in any of the interviews 
that you are aware of, any awareness of the letters coming from 
Capitol Hill or comments made by the President regarding 
specific conservative groups?
    Mr. George. Beg your indulgence.
    That subject did not come up during our conversations thus 
far, sir.
    Mr. Yoder. In your investigation, in your reviews, did you 
determine that the approximately 157 visits by then 
Commissioner Shulman to the White House had any impact on this 
policy to target conservative groups?
    Mr. George. That was not a focus of the audit, sir, and 
that did not come to my attention until media or a 
congressional hearing at which that fact was revealed.
    Mr. Yoder. Has there been any investigation by your office, 
sir, as the independent investigator, related to any 
conversations that the White House or any upper level officials 
in the administration had with IRS officials regarding the 
targeting of conservative groups?
    Mr. George. Sir, that is a matter that would fall under the 
aegis of this additional review that we are doing, so I am not 
at liberty to discuss that information at this time, sir.
    Mr. Yoder. Well, Mr. Werfel, given your quest for justice 
in this matter and your expressed desire to get to the bottom 
of this, you know, we certainly look forward to and hope that 
your internal investigation will uncover what has occurred here 
because it is certainly, I think, tragic and laughable to many 
Americans that this would somehow be laid at the feet of some 
frontline employees and that there would be no effort to push 
them in any way from the political arm of this administration.

                           SPECIAL PROSECUTOR

    Given that your role is going to be internal, given that we 
have an investigation by the Inspector General that has not 
uncovered many of these conversations, we still don't know who 
gave the order, we don't really have any information regarding 
this, would you welcome a special prosecutor or independent 
counsel to look into these matters?
    Mr. Werfel. I think it is a good question. I think right 
now, as I mentioned, we have four layers of review ongoing: 
Justice and the FBI, the Inspector General, Congressional 
oversight committees, and myself and my new leadership team. My 
position right now is that is, I believe, currently a 
sufficient footprint of oversight and investigation to uncover 
the facts.
    What I would suggest is we let that process move forward as 
expediently and as fairly and as federally as possible, and 
revisit the question on a periodic basis of whether that is the 
footprint for an investigation is getting the job done.
    Mr. Yoder. But would you object to a special prosecutor or 
independent counsel being moved forward?
    Mr. Werfel. I am not the decision maker on that. Whatever 
is decided in terms of necessary investigation footprint, I 
will be cooperative and welcome any investigation. But as I 
said, right now there are four layers of investigation, and 
what I would suggest is let's monitor that. Some of it has just 
gotten underway. Let's monitor that and see if we are getting 
the progress that this Committee is demanding and then revisit.
    Mr. Yoder. And that is fair, Commissioner, and certainly 
you are brand new to this position, 12 days in. I will tell you 
that for those of us who have been on this committee and been 
working on what appear to be a lack of accountability on many 
different fronts with this administration, whether it be Fast 
and Furious, Benghazi, AP phone records, or now the IRS 
situation, I think the idea that we would somehow trust that 
the administration can internally investigate these matters and 
successfully root out the cause, you are going to have to 
understand there is going to be a healthy dose of skepticism 
and many of us would like to see an independent investigation 
of these beyond the administration, so we will hopefully have 
your cooperation on that and we hope to do everything we can to 
get your support to get to the bottom of this.
    Thank you, Mr. Chairman.
    Mr. Crenshaw. Thank you. Mr. Diaz-Balart.

                      LENGTH OF TAX EXEMPT REVIEWS

    Mr. Diaz-Balart. Mr. Chairman, thank you very much. You 
know, these (c)(3) and (c)(4) reviews, how long do they 
usually--I mean, in a normal process, without this, how long 
does that usually take?
    Mr. Werfel. It is a good question, and my understanding is 
that once it is longer than 120 days, we would characterize it 
as longer than what the IRS expects the process to run, but I 
don't know the average at my fingertips. We can certainly get 
you that information.
    Mr. Diaz-Balart. Do you have any idea of what would be like 
a quick one, you know, what would be a fast one?
    Mr. Werfel. I don't, but I can get you that information.
    [The information follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Mr. Diaz-Balart. Just because I am--Mr. George, in your 
report, you talk a lot about, and I understand why, you have 
explained it, about this being a--basically a ineffective or 
gross mismanagement. Now, if it was consistent, I would 
understand that, but if it is targeted, and I think it is 
pretty clear that it is targeted, it seems to be a little bit 
more than just gross mismanagement. It is targeted 
mismanagement, and in some cases, it would seem, that it is 
very effective management.
    Not a beacon of conservative ideals, The Washington Post 
talks about IRS stalled conservative groups but gave speedy 
approval to Obama Foundation. That, I believe is, I don't know 
if it is (c)(3) or (c)(4), was processed in 1 month and then--
given to them in 1 month, according to this Post article, and 
then they were given retroactively as well, which, according to 
the Post, is very rare.
    So, on one side, it would seem that you have very effective 
management, in this case, to the Obama Foundation, while at the 
same time you have ineffective management when it goes to, you 
know, conservative groups. I don't know if I would--this is 
just me personally. I don't know if I would call that 
ineffective management. I mean, that seems to be targeted, is 
it not?
    Mr. George. Well, again, in this instance, the reason we 
deem it ineffective management is because when identified by 
the manager that there was a problem, she attempted or did 
actually effect change, and later, just unbeknownst to her, we 
assume, at this stage, people reverted back to the 
inappropriate behavior. And then there seems to have been, for 
quite awhile, a lack of accountability in terms of going back 
to see whether they are doing what we told to them to do. The 
answer was ``no'' for quite awhile, and then of course, there 
were groups that were targeted in this instance. So, that is 
how I come about to use of the term mismanagement.
    Mr. Diaz-Balart. And I understand that. You have been very 
clear of that. But again, when you have it on the other side, 
and you know, this--I don't know how many of these cases there 
are, but when the Obama Foundation gets taken care of in 1 
month and then retroactively, this seems more than just by 
omission. This took somebody to take action to do, and the 
pulling out these conservative groups, it took somebody 
actually doing it, so it actually was a, you know, an action 
that was required, and again, that is why it is so troubling.
    But this is another point that I have. The (c)(3) and 
(c)(4) reviews, is it fair to say it is a relatively--it is a 
pretty standard part of what the IRS does, correct?
    Mr. George. That is correct.

                          AFFORDABLE CARE ACT

    Mr. Diaz-Balart. And they do this quite a bit, and you 
know, so on some of it is pretty basic, pretty standard. At 
best, it is gross mismanagement. At best, it is, you know, and 
at worst, it is frankly a lot deeper than that. Could you tell 
me how I should feel good about giving the IRS now a totally 
new complicated, above and beyond--you know, you are now 
dealing with our health care, the ACA, or what is commonly 
known as ObamaCare, can you just--how do I tell my 
constituents, hey, on something that is pretty basic, look what 
is going on, but don't worry about it, because now we are going 
to give the IRS that we know we have all these issues, we are 
going to give them now, in essence, control of a big part of 
our health care, and then we will be able to determine who gets 
fined and who doesn't, can you please tell me how I should be 
able to feel good about that?
    Mr. George. I can say that you can feel good about it in 
this way, sir. We at TIGTA have conducted two and its thus far 
looking at the steps that the Internal Revenue Service is 
taking to prepare for the implementation of the Affordable Care 
Act, and thus far, our reviews have been positive that the IRS 
is doing what it needs to do in order to gear up for this.
    That said, the IRS has to create many, many new computer 
programs, and historically, they have had trouble instituting 
new computer programs for implementing tax law changes, so that 
is a risk. And, in all candor, unless the IRS receives 
additional resources in order to implement the ACA, they truly, 
it is a zero-sum game. They are going to have to make very 
difficult choices in terms of customer service, in terms of 
enforcement in order to take on this huge responsibility that 
they have been presented with.
    Mr. Diaz-Balart. Mr. Chairman, time is up.
    Mr. Crenshaw. And one of the things they could do is when 
we learn that the money that was wasted on the conferences and 
the videos came from the unused portions that was appropriated 
for enforcement while the enforcement division was demanding 
more money, that tells us that IRS, just like every other 
agency, can be more efficient and more effective, but you all 
have been very generous with your time. Mr. Werfel, Mr. George, 
thank you for being here today. You have got a tough job. We 
want to work with you to make this thing work right, and I 
thank the members and thank you for the time.
    Mr. George. Thank you, Mr. Chairman.
    Mr. Crenshaw. This meeting is adjourned.

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                           W I T N E S S E S

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                                                                   Page
George, J. R.....................................................1, 219
Kelley, C. M.....................................................   322
Lew, Hon. Jacob..................................................   131
Miller, Steven...................................................    81
Werfel, Danny....................................................   219

                                  
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