[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. [The information follows:] [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] 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. [The information follows:] [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] 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. [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] W I T N E S S E S ---------- Page George, J. R.....................................................1, 219 Kelley, C. M..................................................... 322 Lew, Hon. Jacob.................................................. 131 Miller, Steven................................................... 81 Werfel, Danny.................................................... 219