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




   FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR 2015

_______________________________________________________________________

                                HEARINGS

                                BEFORE A

                           SUBCOMMITTEE OF THE

                       COMMITTEE ON APPROPRIATIONS

                         HOUSE OF REPRESENTATIVES

                     ONE HUNDRED THIRTEENTH CONGRESS

                             SECOND SESSION

                                ________

       SUBCOMMITTEE ON FINANCIAL SERVICES AND GENERAL GOVERNMENT 
                             APPROPRIATIONS
                    ANDER CRENSHAW, Florida, Chairman

 MARIO DIAZ-BALART, Florida          JOSE E. SERRANO, New York
 TOM GRAVES, Georgia                 MIKE QUIGLEY, Illinois
 KEVIN YODER, Kansas                 MARCY KAPTUR, Ohio
 STEVE WOMACK, Arkansas              ED PASTOR, Arizona
 JAIME HERRERA BEUTLER, Washington   
 MARK E. AMODEI, Nevada             

 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

 Oversight Hearing: Internal Revenue Service......................    1
 Internal Revenue Service, FY 2015 Budget Request.................  199
 Department of the Treasury.......................................  279



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

                     U.S. GOVERNMENT PRINTING OFFICE

 88-602                     WASHINGTON : 2014







                                  COMMITTEE ON APPROPRIATIONS

                    HAROLD ROGERS, Kentucky, Chairman

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

               William E. Smith, Clerk and Staff Director

                                  (ii)

 
   FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR 2015

                              ----------                              

                                      Wednesday, February 26, 2014.

              OVERSIGHT HEARING: INTERNAL REVENUE SERVICE

                               WITNESSES

HON. JOHN KOSKINEN, COMMISSIONER
HON. J. RUSSELL GEORGE, TREASURY INSPECTOR GENERAL FOR TAX 
    ADMINISTRATION
NINA E. OLSON, NATIONAL TAXPAYER ADVOCATE
    Mr. Crenshaw. The hearing will come to order.
    This is the first hearing of the year for our subcommittee. 
Welcome to all our returning subcommittee members. Glad to have 
you back. A warm welcome to our subcommittee's newest member, 
Mr. Amodei, who is not here yet. He is down at the end. But we 
look forward to having him work with us.
    Today, the subcommittee is going to hear from two panels. 
We are going to hear about the activities and the operations of 
the Internal Revenue Service. Our witness for the first panel 
is IRS Commissioner John Koskinen.
    Welcome to you, sir. We appreciate your return to Federal 
service, and we thank you for taking on this responsibility, 
which I think we would all agree is a difficult time.
    Our second panel of witnesses are Treasury Inspector 
General for Tax Administration Russell George and National 
Taxpayer Advocate Nina Olson. Mr. George is a regular witness 
for the subcommittee, and we appreciate his careful and 
constant oversight of the IRS. We have not heard in some time 
from Ms. Olson, so we are especially eager to hear from her.
    Now, as a matter of housekeeping, I am going to be 
following the 5-minute rule for the Members. I don't plan on 
cutting anybody off in the middle of their sentence, but if 
everybody could keep their questions and comments when we get 
to that part of the hearing to 5 minutes, that will give us a 
chance to hear from everybody and have maybe more than one 
round of questions.
    I am going to recognize the Members in order of seniority 
for those that were here when the gavel went down. For the 
latecomers, we will recognize them based on their arrival. And 
we will go back and forth between the parties.
    Now, I think most of you know that the 2014 appropriations 
cycle tested our endurance. It was only after the fiscal year 
had started and after we had a government shutdown that the 
Budget Committees came to an agreement on the discretionary 
spending. And once we had that agreement enacted, we rolled up 
our sleeves, we went to work very quickly, and got a bipartisan 
omnibus appropriations bill enacted, thanks in no small part to 
our distinguished Chairman, Mr. Rogers, who is here with us 
today.
    So we hope that this year it is going to go a little more 
smoothly because we already have an agreement on the total 
discretionary spending that is in place, and so we can have 
regular order. And by that, I mean the way we are supposed to 
work and that we will mark up our bills, we will subject them 
to amendments at the full committee and on the House floor, and 
then we will conference them with the Senate.
    Now, the Administration hasn't submitted their budget for 
2015 yet, but we will have that soon. We have invited the 
Commissioner to come back probably in April to talk about how 
much money, his wants and his needs. Today, this is an 
oversight hearing. And that really gets into how do you spend 
the money that you have been appropriated? The ``how much'' 
will come a little bit later. But I would suggest that the two 
are very interrelated because how you spend the money that you 
have impacts how much money you will receive in the future.
    I think that we all know that you have come to the IRS in 
what would be described as a difficult time. Some would say you 
have inherited a pretty big mess. We have had a situation, I 
would say it is one of the dark periods in the IRS history. You 
had at a time when the IRS was awash with money, their 
horseplay harassment started, lavish conferences were held, 
millions of dollars were wasted, silly videos were made, and 
that was not good for anybody. At the same time, we found out 
the IRS was singling out individuals, groups of individuals, 
subjecting them to harassment, to intimidation, bullying, if 
you will, in an effort, it seemed, to shut down their 
involvement in politics. And that is what you inherited, and 
also probably inherited an agency that wasn't doing a very good 
job of dealing with the customer, the folks that call the IRS 
and have questions.
    And so, when your predecessor was sitting in the chair you 
are sitting in, I asked him at a hearing like this, do you 
think the IRS has betrayed the trust of the American people? 
And he said, yes. He said, but I want to try to help rebuild 
that trust. And I am sure that one of your goals as the new 
guy, as the new Commissioner, is to rebuild the trust that has 
been lost with not only in some part with this committee, but 
also the American people. And that is what you are about.
    And I must tell you that some of the decisions that you 
have made early on are of some concern to me as you try to 
rebuild that trust--for instance, $63 million of bonuses that 
were paid. Reversing a decision that your predecessor made to 
not pay those bonuses is troublesome.
    I know that you didn't begin this 501(c)(4) rulemaking 
process. There is a rule that has been proposed that some would 
say puts in rule form what the problem was with the IRS 
harassing people and trying to cut off their political 
involvement. And the same people that were using the Tax Code 
to try to quiet people's political involvement are now 
proposing a rule that some would argue does the same thing and 
infringes upon their First Amendment right. And you didn't 
start the process, but you are continuing the process.
    One of the things that I have read from time to time--I 
know you were in my community; you were kind of on a whirlwind 
tour to talk to all the different IRS offices. One of your 
constant messages seems to be that we don't have enough money 
to do the things that we need to do. And one of the things that 
I read about from time to time is the fact that you can't 
answer all the phone calls, that I think it is 61 percent of 
the phone calls are probably going to be answered. I have heard 
you say, if we had more money, we could hire more people, we 
could answer more phone calls. And I know in Jacksonville, my 
hometown, when you were there, there was an article in the 
paper that said that you had said we don't have enough money to 
answer more than 61 percent of the calls and you found that, I 
think, unacceptable or intolerable or outrageous or something.
    But I must tell you that what I find unacceptable is that 
in this $11.3 billion appropriation that the IRS received this 
year that you can't find the money to answer more than half the 
phone calls and yet you can find the money to pay $63 million 
in bonuses. And it seems to me that that might be a slap in the 
face to the taxpayers, because their customer services, as they 
try to find answers from the IRS, they are going to find that 
that is going down, and yet the salary and bonuses of the 
employees are going up. And I would think that is hard to 
tolerate as a taxpayer or as an individual saying, I would like 
better customer services.
    It bothers me to see that you don't have enough money to 
answer those phone calls but you have the money and the time 
and the energy to pursue this rule. I read today, I think there 
are nearly 100,000 comments on this rule. And the XL pipeline, 
which is pretty controversial, there may be 7,000 comments. So 
here is a rule that is wildly controversial and has to be 
taking some time and energy and money, but you continue to 
pursue that, or whoever started it continues to pursue it, and 
yet there is not enough money to answer the phone.
    And then I know that we hear from time to time the 
argument, well, if you just give the IRS more money, then they 
will collect more revenue. In fact, the argument is that if you 
give the IRS $1, then you will get back $4 or $5----
    Mr.  Serrano. Six.
    Mr.  Crenshaw [continuing]. Maybe $6, in revenue, and if 
you don't give the IRS money, then the revenues will go down 
and the deficit will go up.
    Well, it makes intuitive sense to say, if you give the IRS 
more money, they can collect more revenue. It sounds like it 
makes sense. But there is no empirical evidence that that is 
true. In fact, at times, just the opposite is true. In 2001-
2009, the appropriations was increased for the IRS and the 
revenue collections went down.
    So, obviously, there are other factors than just how much 
money the IRS got. You have to look at inflation, you have to 
look at population, you have to look at tax policy, you have to 
look at a lot of different factors. In fact, last year, 2013, 
that is the best year ever. We collected $2.8 trillion, the 
most money the United States of America has ever collected, and 
that is at a time when the sequester was going on and so there 
was less money for the IRS to have.
    So all of that is to say, I don't necessarily believe that 
a higher level of spending equals a higher level of service. 
And that is why I think we are holding an oversight hearing to 
see how are you spending the money. Because it is not just how 
much you have, but how you spend it.
    I think how you spend it can actually improve even if you 
don't have as much as you might like to have. Because everybody 
knows the government needs money to provide services, right? 
But everybody also knows that these are difficult times in our 
country. We have $17 trillion in debt. We have an annual 
deficit. This year it is going to be less than a trillion 
dollars, and we are all excited about that. It is the first 
time in 5 years it has been less than $1 trillion, but it is 
still probably the fourth- or fifth-largest deficit we have 
ever had on an annual basis.
    So, yes, the government needs money, but I would say today 
government needs something more than that. It needs discipline 
to rein in spending. It needs courage to make tough decisions. 
It needs the commitment to make sure that we do everything more 
efficiently and more effectively than we have done it before.
    And we want to work with you to help you do that, to help 
you set the right priorities, to help you spend the money that 
we appropriate to you. And so we thank you for being here 
today. We will have questions, I know.
    And before we do that, I want to turn to my friend, the 
Ranking Member, Mr. Serrano. And first let me say to him, 
because it has been a whirlwind time when we finished the 
omnibus bill, but he has been a great partner. We don't always 
agree on everything, but as we went through the final 
negotiations with our Senate counterparts to come to this 
conclusion, it was a team effort. And I want to thank him for 
that and ask him for any comments he might have.
    Mr.  Serrano. Thank you, Mr. Chairman. And I want to thank 
you for your willingness to work with us, and especially your 
staff and our staff. They did a great job under a lot of 
pressure.
    And let's hope that the last omnibus puts us back on the 
road to regular order, something that Chairman Rogers and I 
love and you love, something that some of the younger, newer 
Members on the Committee and Congress may not have ever 
witnessed--you know, the days when we could pass a bill with 
400 votes and actually predict what the final count would be, 
350 or 400. Those days are long gone, but they may come back 
based on what we saw.
    I would also like to welcome the new Internal Revenue 
Service Commissioner, John Koskinen, for his first hearing 
before the Subcommittee. I thank you for your service to our 
Nation and for undertaking this endeavor at a very challenging 
time for the IRS.
    By now, most Americans know that last year it was reported 
that the IRS had used inappropriate criteria to decide what 
501(c)(4) entities should be subject to greater scrutiny. As I 
said at the time, all Members of Congress were appalled by 
these actions, which affected liberal and conservative groups 
alike. We all believe that the IRS must enforce our tax laws in 
a fair, evenhanded manner, and that did not occur here.
    At a hearing soon after the controversy came to light, the 
question I asked was, where do we go from here? What must be 
done to prevent something like this from happening again?
    I think that the IRS has made a good start at answering 
those questions. The IRS has implemented all of the 
recommendations suggested by the Treasury Inspector General for 
Tax Administration in this area. The IRS has also implemented 
numerous internal reforms that have brought more accountability 
and oversight to the review decisions that are being made. And 
perhaps most importantly, the IRS is making an effort to 
further clarify for 501(c)(4) organizations what is and what is 
not political activity.
    There is no doubt that in recent years a number of groups 
have abused their claims to 501(c)(4) tax-exempt status by 
primarily engaging in political activities. This tax-advantaged 
status is not a right but, rather, a responsibility, and too 
many organizations have been claiming it as a way to avoid 
transparency and taxes.
    Last year, I suggested that the IRS needed to revisit these 
rules to provide greater clarity to organizations and to their 
own auditors as to what is considered a political activity for 
purposes of making a 501(c)(4) designation. The rules proposed 
late last year by the IRS have attempted to do just that, in my 
opinion. I cannot say whether the IRS has struck the exact 
balance necessary in these proposed rules, but I do know that 
they will take any and all concerns seriously before finalizing 
them.
    However, this Committee cannot help the IRS in these 
reforms if we do not adequately fund the Agency. The fiscal 
year 2014 appropriations act gave the IRS $92 million more than 
the sequester level, but the IRS is still being funded at its 
lowest level since fiscal year 2008.
    If we care about the fair implementation of our tax laws, 
then this is simply unacceptable. We all know that at this 
level of funding every additional dollar given to the IRS 
allows them to bring in at least $6 from tax cheats. We cannot 
keep asking more and more of the IRS while providing them with 
less and less. That is not a good recipe for tax compliance or 
for this Nation.
    I hope this hearing will be of use to members of this 
Subcommittee as we discuss funding levels for the IRS in the 
fiscal year 2015 appropriations process, but I am concerned 
that we might be here to just engage in election-year politics. 
So let me simply state the facts that are on the record 
already, and these are facts that have already been proven 
after significant congressional investigation.
    Yes, the inappropriate targeting affected both liberal and 
conservative groups alike, not just one side. No, this 
targeting was not orchestrated by any political appointee or by 
any individual outside the IRS. And, yes, the IRS has been 
forthcoming in helping numerous investigations by using more 
than 150 employees to engage in 70,000 hours of work to provide 
the various investigations with more than 500,000 pages of 
documents.
    These are issues that simply do not need to be rehashed at 
this point again. Rather, this hearing must look forward. The 
fiscal year 2015 appropriations process is upon us, and the 
focus of this committee needs to be on ensuring that proper 
reforms are in place and that the IRS has the resources to 
complete its mission of serving the American taxpayer and 
ensuring that everyone follows the law. We all know the 
importance the IRS has in ensuring that we have the funding to 
pay for everything from national defense to Head Start. Using 
this controversy to cut further resources from the agency will 
not just harm the IRS but the American people as well.
    Commissioner, once again, welcome to the subcommittee, and 
I hope that when we meet again in April it will be under better 
circumstances.
    Thank you.
    Thank you, Mr. Chairman.
    Mr.  Crenshaw. Thank you, Mr. Serrano.
    And now I would like to turn to the chairman of the full 
committee, who has joined us, Mr. Rogers, for any opening 
statement he might have.
    Mr.  Rogers. Thank you, Chairman Crenshaw, for yielding me 
this time.
    Thank you, Commissioner Koskinen, for being with the 
Committee for its first hearing of this year. This is the very 
first of what will be probably 100 to 120 hearings our 
Committee will conduct during the course of this spring season. 
You are the very first one, so you have the privilege and honor 
of sitting in the dunk tank for the first time, the first one 
there.
    Before we get to the important business at hand today, let 
me first echo the Chairman's sentiments regarding the 
appropriations process in general terms. The omnibus bill for 
fiscal 2014 that we all worked on to pass last month is a true 
product of compromise. I value my partnership with Ranking 
Member Lowey, her counterpart on the Senate side, Chairwoman 
Mikulski, as well as Ranking Member Shelby. Together, along 
with the subcommittee Chairs and Ranking Members, we made 
responsible choices to realign our Nation's funding priorities 
and target precious tax dollars where they are needed the most, 
all the while continuing the 4-year trend of reducing Federal 
discretionary spending.
    While the 2014 omnibus is certainly a testament to this 
Committee's longstanding tradition and practice of bipartisan 
workmanship, now is not the time to rest on our laurels. As 
Chairman Crenshaw has mentioned, I expect the Committee to move 
forward under regular order to draft legislation for Federal 
spending in 2015 that continues to right-size our Federal 
Government, that prioritizes spending on programs that are 
demonstrating results, and that is a product of thoughtful, 
rigorous oversight. We have much difficult work ahead of us, 
but I am hopeful that the process will move swiftly and 
smoothly, given the Ryan-Murray budget agreement.
    I think it is fitting that this commitment to regular order 
and transparency in the appropriations process is reaffirmed at 
today's hearing with the IRS. Just as the Congress has a 
supreme responsibility in stewardship of the taxpayer dollar, 
so, too, does the IRS have that special duty to apply our 
country's tax laws fairly and uniformly.
    Commissioner Koskinen, you have taken the helm of this 
agency during a tumultuous time, to say the least, as I fear 
that in recent years there have been grave violations of the 
public's trust that should give all Americans cause for 
concern. And I hope that you are the right person to right the 
ship.
    In particular, as I wrote to you earlier this month, I have 
serious concerns about the proposed regulation published by 
your predecessor in November. This rule would continue to 
target the First Amendment rights of the same conservative 
grassroots organizations that were unfairly scrutinized in 
applying for tax-exempt status in the run-up to the 2010-2012 
elections.
    Given the agency's recent track record of improper 
politicization and intimidation, I strongly believe this rule 
is a step in the wrong direction for an agency struggling to 
regain the American public's faith and confidence. I look 
forward to hearing from you about your intentions in this 
respect today--in particular, your plans to cooperate with the 
Congress to ensure these dark days in the IRS history books are 
truly behind us.
    Acting Commissioner Werfel last came before the committee 
on the heels of a report detailing the IRS's wasteful spending 
on frivolous conferences and the revelation that the senior 
executives who oversaw the 501(c)(4) debacle in Cincinnati had 
received significant performance bonuses.
    Listening to Chairman Crenshaw's remarks feels like deja vu 
all over again. As the IRS is charged with the massive 
undertaking of enforcing the individual mandate of the 
Affordable Care Act, the greatest intrusion of this agency into 
personal healthcare decisions in history, combating identity 
theft and refund fraud, and addressing international compliance 
issues, among many other competing priorities, you can 
understand why the Committee views your proposal for additional 
performance awards and more training conferences with 
heightened scrutiny.
    We hope to ascertain how the IRS will go about planning its 
training conferences to ensure that they are goal-oriented and 
effective as well as compliant with the IRS's procurement 
processes. Also, if you can explain to the satisfaction of this 
Committee how and why $63 million in performance bonuses are 
appropriate or beneficial to the taxpayer. As we are all 
painfully aware, we are in the middle of some grim budget 
times, and every Federal agency, especially the IRS, is duty-
bound to rout out excess and waste. When we provide you with 
more than $11 billion annually to fulfill these duties, we 
expect you to spend it wisely and effectively.
    And, Mr. Commissioner, I hope that we have your commitment 
to work with this Committee to achieve our shared mission of 
protecting the taxpayers and their hard-earned dollars. We look 
forward to hearing your testimony, and we wish you the best of 
luck.
    Mr.  Koskinen. Thank you.
    Mr.  Crenshaw. Thank you, Mr. Rogers.
    [The information follows:]

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Mr.  Crenshaw. And now we will turn to the Commissioner for 
his testimony.
    If I could ask you, if you have any written remarks you 
would like to submit, but if you could keep your oral testimony 
in the neighborhood of 5 minutes, it will give us more time to 
ask questions.
    So the floor is yours.
    Mr.  Koskinen. Thank you, Chairman Crenshaw, Ranking Member 
Serrano, and members of the Subcommittee, and the committee 
chairman Congressman Rogers. Thank you for the opportunity to 
appear before Congressman Rogers.
    Mr.  Crenshaw. Turn on your mike.
    Mr.  Koskinen. That would also help.
    Mr. Chairman, Ranking Member Serrano, Chairman Rogers, and 
members of the subcommittee, thank you for the opportunity to 
appear before you today to give you an overview of IRS 
operations.
    I am honored to serve as the IRS Commissioner, and to have 
the opportunity to lead this Agency and the dedicated employees 
because I believe the success of the IRS is vital for this 
country. I want to outline for you what I believe are the IRS's 
key challenges and what I will focus on, moving forward.
    First and foremost, we just started a new filing season 4 
weeks ago, and over 39 million returns have already been filed. 
We sometimes lose sight of what a tremendous accomplishment it 
is for the Agency to process efficiently 150 million individual 
taxpayer returns, with 120 million of those being filed 
electronically. I am confident that, thanks to the hard work of 
our employees, the filing season will continue to go well.
    Another priority for our Agency is to put to rest all of 
the issues and concerns surrounding applications for tax-exempt 
status. The management problems associated with the 501(c)(4) 
application process have, as noted, shaken public trust in the 
IRS. Under the leadership of former Acting Commissioner Danny 
Werfel, the IRS has already made great progress in this area, 
and it is my job to help make sure we complete that work. In 
every area of the IRS, taxpayers need to be confident they will 
be treated fairly, no matter what their background or their 
affiliations. Public trust is the IRS's most valuable asset.
    The IRS also needs to build on the progress that has been 
made to improve tax compliance in a number of areas. One of the 
most critical of these is refund fraud caused by identity 
theft. The IRS has gotten much better at resolving identity-
theft cases. We closed 963,000 cases last year of individuals 
who had had their identity stolen, which is almost double the 
number for 2012. And we are resolving those cases for taxpayers 
much faster. On average, it now takes about 120 to 135 days to 
resolve new cases, compared to more than 300 days in prior 
years. But we can and will do better.
    Along with enforcement, the IRS also needs to keep looking 
for ways to improve the service we provide to taxpayers, which 
is critical to ensuring that our system of voluntary compliance 
works properly.
    I am deeply concerned, as the Chairman noted, about the 
significant reduction in the IRS budget over the last years. 
Our current funding level, at just under $11.3 billion, is 
roughly $900 million below what it was 4 years ago. We now have 
about 10,000 fewer employees than 4 years ago, including 3,500 
fewer Revenue Agents and Officers.
    As a result of fewer staff and reduced enforcement 
activities, the IRS estimates it will not be able to collect 
billions of dollars in enforcement revenues. In fiscal year 
2014, we expect audits conducted by the IRS will decline by an 
estimated 100,000 and the number of collection activities will 
decline by an estimated 190,000.
    One of our biggest concerns is being able to deliver the 
services taxpayers need during the filing season. Last year, as 
noted, for example, almost 40 percent of taxpayers who called 
were unable to reach an IRS employee, and, as the Chairman 
noted, that is unacceptable. Our employees are doing their best 
to answer every call they can, and our level-of-service goal 
during the filing season is 70 percent. For the full year, 
however, we estimate 18 million taxpayer calls will not be able 
to reach us.
    Another area of concern is the amount of time people are 
having to wait to get in-person help at our Taxpayer Assistance 
Centers. We have had reports from field staff of taxpayers 
lining up outside those centers well before they open in the 
morning to make sure they receive service the same day. The 
best of employee efforts and expansion of our online offerings 
can only go so far to ameliorate those problems.
    Amid our budget difficulties, I do recognize that there has 
been a loss of confidence within Congress and this Committee in 
regard to the way the IRS has managed its operations. One of my 
responsibilities is to ensure that we quickly solve management 
and operational problems that may arise so that Congress and 
this Subcommittee can be confident our funding will always be 
used wisely, that we understand the need to be careful stewards 
of taxpayer dollars entrusted to us.
    I look forward to working with Congress and this 
Subcommittee to solve our budget problems. I hope that one of 
my legacies at the end of my 4 years as IRS Commissioner will 
be that we have put the Agency on a more solid and sustainable 
funding level.
    This concludes my statement, and I would be happy to take 
your questions.
    Mr.  Crenshaw. Well, thank you very much.
    [The information follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



                          SPENDING PRIORITIES

    Mr. Crenshaw. Let me start the question process. You know, 
in my opening statement, I mentioned the issue about responding 
to the questions that people have. You just mentioned that 40 
percent of the calls, I think, went unanswered.
    As we have this oversight hearing and we talk about how you 
spend the money, I want to pursue how you make decisions in 
terms of priority. In other words, where do you decide to spend 
money and where do you decide you are not able to spend money 
when you have limited resources?
    By the way, this subcommittee oversees about 30 different 
agencies, and your agency receives the largest amount of money. 
In fact, it receives more than half of all the money that we 
are allocated to distribute to these agencies. So we have to 
make decisions in terms of priority--who is spending their 
money wisely, who is not. You obviously have a lot of leeway to 
make those decisions with the IRS.
    And it seems to me that one of the most important things 
you do is deal with customer services. You are like the front 
door; the phone call is the entryway to the IRS. That is a lot 
of people's first contact with the IRS, when they make a phone 
call. If they find that half of their phone calls aren't going 
to be answered and if they do get answered they are going to 
have to spend up to 20 minutes waiting, then that is not a very 
good perception of the general public to have about the IRS and 
its operations of business.
    Now, I want you to tell this Committee how you make that 
decision. Because here is what bothers me. There is an old 
trick in this town where, anytime you need more money, you pick 
out the most visible service that you offer and one that maybe 
inflicts the most pain on people, and then you say, ``We can't 
do that unless we have more money.'' It is like you turn out 
the lights in the Washington Monument because we don't have 
enough money. When the sequester came, people said, well, we 
can't have tours of the White House because we don't have 
enough money; we won't let the veterans go visit the World War 
II Memorial because we don't have enough money.
    I am not suggesting that you are using that old trick, but 
sometimes I have to wonder, when you have $11 billion and you 
have to make these decisions, it seems to me that one of the 
priorities ought to be to interact with people.
    So tell the subcommittee how you go about making that 
decision. Because I looked back 10 years; in 2004, 87 percent 
of the phone calls got answered. And that was a time when the 
IRS had $1 billion less than it has today. I know you have more 
responsibility and all those kind of things, but my point about 
how you spend the money is just as important sometimes as how 
much you have to spend.
    So tell us, if you will, do you ever think about, well, we 
have rent, we have technology, we have certain other things--
and, obviously, in this case, you had $63 million to pay the 
bonuses, and you are pursuing a rule that arguably clarifies 
things but some people would say it goes in the wrong 
direction. So what goes through that decision-making process to 
decide where the money gets spent?
    Mr. Koskinen. That is a good question. We spend a lot of 
time worrying about that question, especially trying, as I say, 
to make sure we spend the money most effectively.
    We do some things about which we have no choice. We have no 
choice about a filing season, which is why we spent a 
tremendous amount of time and effort making sure it went well 
this year. Part of the reason it is going well is we haven't 
had any major tax law changes. So I agree with you that the 
simpler the Tax Code is, the better the filing season would go. 
But that is a critical function--that is our highest priority.
    We also do have statutory mandates. If you tell us to do 
something, we will do it. So this year we are spending a 
significant amount of time implementing the Affordable Care Act 
and the Foreign Account Tax Compliance Act. We don't feel we 
have any choice about that; the mandate comes from Congress 
that we should perform that.
    Seventy-five percent of our budget is personnel. As I said, 
we have 10,000 fewer people than we had 4 years ago doing 
significantly more work, including the requirements that we 
implement those statutes.
    So we have to make decisions, and the only places we have 
discretion are, in fact, in tax enforcement and in taxpayer 
services. We have 3,500 fewer people doing enforcement, Revenue 
Agents and Revenue Officers. We have 1,500 fewer people 
answering the phones. So we have made more cuts on the 
enforcement side than on the call side.
    But they are two sides of the same coin. Ultimately, we 
depend upon voluntary compliance. And I am concerned, as you 
are, that if we can't provide adequate taxpayer service, we are 
going to undercut the core mission of the Agency. As you noted, 
98 percent of our money, as the Taxpayer Advocate has said, 
comes from voluntary compliance. Only 2 percent of the revenues 
come from our enforcement efforts, although that is $50 billion 
to $60 billion, which is a lot of money.
    So we need to protect the process as it goes forward. But 
it is not a question of just a few dollars one way or the 
other. We did have, and our goal would be to return to, those 
days when we had 85, 80 percent service on telephone calls, so 
you don't have to wait more than 5 or 7 minutes and your call 
will go through.
    Mr. Crenshaw. But is it a priority? And when you look at 
rent and you look at your contracts, do you say, gee, if we 
could save some money here, save some money there, we could 
actually answer more phone calls? Is that pretty high up in 
your priority list?
    Mr. Koskinen. By the end of this year, we will already be 
using 1,300,000 square feet less of office space. We will save 
$40 million a year with that. At the end of this year, we will 
save $60 million by not producing all the publications we used 
to, and by not mailing them out to everybody. You know, none of 
us anymore get the old 1040 forms in the mail. That saves us 
$60 million. We have cut the use of contractors by $200 million 
a year.
    So we already have $300 million a year in annual savings. 
And we are continuing to look at ways to do better than that, 
and we will be happy to share that information as we develop 
it.
    But what we are thinking about--
    Mr. Crenshaw. My time is up. I appreciate that. I just 
think that that ought to be a big priority, and I hope it is.
    So let's go now to Mr. Serrano.

                            EMPLOYEE MORALE

    Mr. Serrano. Thank you, Mr. Chairman.
    You have been on the job now at the IRS just over 2 months, 
but you have spent 21 years in various public- and private-
sector leadership positions. Because of your previous 
experiences, I would be interested in hearing what your first 
impressions of the IRS are.
    In particular, I understand that you have been going on a 
listening tour in the district offices. What have you been 
hearing from employees? And I would also like to know what the 
morale is of the employees after the hits that----
    Mr. Koskinen. Right.
    Mr. Serrano [continuing]. Many have taken for the behavior 
of a few.
    Mr. Koskinen. It is an important question. I am on, as I 
have said, the ``join the IRS, see the United States'' tour of 
the 25 major IRS offices. I am doing that primarily because my 
experience in the 20 years in the private sector as well as my 
20 years in the public sector, has been the people who know 
best about what is going on in an organization are the people 
actually doing the work on the front lines. So I am listening 
to employees. I hold a town hall at everyplace I go, with 200 
to 300 employees, who will ask me any question they want. I 
have lunch with 15 randomly selected employees to listen to 
what they have to say.
    And after the couple months I've been here--and I have had 
briefings, obviously, with everybody running any department of 
any significance at the IRS--I have been thoroughly impressed 
with the professionalism, the skill, the dedication to the 
mission of all of the employees.
    What surprised me a little when I went through these 
meetings--I started in Cincinnati, I have talked with the 
Chairman and I was in Jacksonville, and I have been in others. 
I have been in eight cities; I am off to Fresno tonight--What 
has surprised me is the level of energy and enthusiasm that 
remains. These are employees, like all Federal employees, who 
haven't had a pay raise in 4 years, who suffered through the 
government shutdown, who suffered with furlough days, and then 
had to endure the criticism over the last 8 to 10 months about 
the Agency. So you would expect that what I would hear would be 
a lot of grumbling or complaining.
    What I have heard continually across those 10 cities I have 
been to already is that the employees' primary concern is there 
aren't enough people in the offices for them to help taxpayers. 
I have sat in call centers in Baltimore, call centers in Saint 
Louis. The people, their concern is not that they are 
overworked; they are working as hard as they can. Their concern 
is that there aren't as many people as there used to be 
answering phone calls, and, therefore, they don't feel they are 
delivering taxpayers the services they deserve. The people at 
the Taxpayer Assistance Centers who run those centers, 
oftentimes with empty desks, are also concerned about the 
people standing in line.
    So, to me, it is a refreshing indication of the dedication 
the 90,000 employees working for the IRS have to meeting, and I 
think the Chairman is exactly right, the mission of the Agency 
to provide taxpayers the services they deserve if we expect 
them to be able to comply with the Tax Code.
    Mr. Serrano. So, in general, you think that the feelings of 
the staff is one of, let's get the job done, notwithstanding 
the bad publicity caused by some and the shortage in personnel?
    Mr. Koskinen. That has been my experience, and it has 
surprised me. I thought I would hear either more grumbling 
about the fact they hadn't had a pay raise in 4 years or about 
the fact that they were working overtime because of the lack of 
personnel. And, as I say, I have seen, at last count, and 
personally talked to over 3,000 employees in offices with 
20,000 employees in them, and the constant theme has been: We 
need more people to allow us to do the work.
    Mr. Serrano. Well, I think it is always a good time, and so 
I will take it now, to thank our Federal workers. I know there 
is a small number of Members of both parties who would like to 
see no Federal Government, but that is another issue for 
another hearing, not this one. I have great respect for the 
Federal workers and the work that they do.

                         REVIEW RECOMMENDATIONS

    Let me ask you a question. Former Acting Commissioner 
Werfel conducted an internal review that President Obama 
requested to restore trust in the IRS. Have the recommendations 
in that review been carried out? Are there other changes that 
you think would be helpful? If so, how can this committee 
assist you?
    Mr. Koskinen. We have implemented and responded to, 
positively, all of the nine recommendations from the Inspector 
General focused on the 501(c)(4) situation. We also have done 
broader reviews of efficiencies in the organization, again, 
trying to be able to respond more effectively to the demands 
that have been placed on the organization.
    Mr. Serrano. How is my time, Mr. Chairman?
    Mr. Koskinen. I think it is a yellow sign.
    Mr. Crenshaw. There is a yellow sign, which means 
``caution,'' and there are 30 seconds left.

                             SEQUESTRATION

    Mr. Serrano. Just one more question then. The IRS budget 
was reduced $660 million due to the sequester. What was the 
effect on your operations based on that reduction?
    Mr. Koskinen. We expect that if we had had the pre-
sequester number--not the President's request for 2014, the 
pre-sequester number--we would have been able to answer this 
year another 3\1/2\ million calls, we would do another 100,000 
audits, and we would collect approximately $3 billion more in 
our enforcement activities.
    [The information follows:]

    Customer Service Representative Level of Service 
calculation.
    The numerator equals the assistor calls answered plus the 
automated calls answered through subject matter messages. The 
denominator equals the numerator plus emergency close 
disconnects plus taxpayers that abandon in queue waiting for 
Customer Service Representative assistance plus busy signals 
and disconnects generated by announcements that advise the 
taxpayer of high demand and request the taxpayer return his or 
her call at a later time.

    Mr.  Serrano. All right.
    Thank you, Mr. Chairman.
    Mr.  Crenshaw. Thank you, Mr. Serrano.
    We will turn to Mr. Diaz-Balart.
    Mr.  Diaz-Balart. Thank you very much, Mr. Chairman.
    I am glad to have you here, sir.
    Mr.  Koskinen. Thank you.

                      TECHNICAL ADVICE MEMORANDUM

    Mr.  Diaz-Balart. Let me throw out two issues, if I may.
    One is one that I have been dealing with your predecessors, 
frankly, for quite a long time. And, unfortunately, the IRS has 
not always acted in good faith, actually at one time admitting 
to me in front of a number of people that they had been 
instructed to not tell me the truth, in other words, to mislead 
Members of Congress. The issue pertains to a specific IRS----
    Mr.  Koskinen. I am not aware of that situation.
    Mr.  Diaz-Balart. I know.
    Mr.  Koskinen. That will never be my circumstance----
    Mr.  Diaz-Balart. Right.
    Mr.  Koskinen [continuing]. I can assure you of that.
    Mr.  Diaz-Balart. Right. Right. Well, I will tell you, I 
was pleased that they at least admitted to me that they were--
the person said, I was not authorized to tell you the truth, 
which I thought was a sad day, but you better believe that is 
something that I hope will never happen again.
    It pertains to an IRS-specific ruling. It is a technical 
advice memorandum, or TAM, that all of the outside experts say 
it calls into question 70 years of settled law on the 
definition of political subdivisions, which is a--you know, 
there are many of them around the country, including in 
Florida.
    This TAM effectively makes changes--makes a change to the 
law, and it is retroactive. So, obviously, this is not 
something the IRS should be doing in a TAM. If it wants to 
change a law, it should either come to Congress or at the very 
least propose regulations to make the changes prospective.
    It is calling into question millions of dollars of tax-
exempt bonds already in the hands of investors, not only, by 
the way, of this individual group, this entity that is affected 
by it, but also many, many others around the country, to the 
point where economic development projects in Florida and other 
States have been halted as a result of this TAM. And those who 
have gone forward are having to pay higher interest rates 
because of the vagueness of this TAM.
    So, Commissioner, I have been trying to deal with this with 
your predecessors, and we have been misinformed. The chairman 
is very aware of this. I just need your commitment that you are 
going to look at this in a serious way to make sure that the 
IRS is not doing things in a way that--and retroactively in a 
way that is, in essence, changing 70 years of State law through 
a TAM.
    Mr.  Koskinen. I will be pleased to look into that and get 
back to you.
    Mr.  Diaz-Balart. And, again, I don't expect you to have 
the details right now. We will get back to--we will--but I do 
expect to get together with you, and let's try to solve that.
    Mr.  Koskinen. That is fine. I will be delighted to talk 
with you about that further.

                          REAL TIME TAX SYSTEM

    Mr.  Diaz-Balart. Thank you.
    The other issue is, let me switch gears, it is the IRS's 
plans--there are no plans to move forward with the Real Time 
Tax System. This subcommittee has placed report language in our 
annual appropriations bills, by the way, since 2009, 
prohibiting the IRS from using any funds on a simple tax return 
pilot program associated without seeking specific authorization 
or appropriations from the Congress. That language has been 
there.
    In February 2013, I sent a letter to Acting Commissioner 
Miller then requesting that he confirm in writing that the IRS 
expenditures to convert to a Real Time Tax System had ceased. 
The Commissioner wrote back saying that, quote, ``The IRS is 
not in the process of implementing a conversion to a Real Time 
Tax System.''
    Unfortunately, later I learned that there has been money 
spent on that and that there have been plans under way. I tried 
to find out how much it was. I asked the IRS how much funding 
had been spent on a total Real Time Tax System. The response 
was that there was a contract for approximately $3.54 million 
to explore a system, sir, that Congress has specifically said 
it can't do and the IRS had told us that they weren't going to 
do.
    Later I hear from other Committees--the House Government 
Reform Oversight Committee has recovered additional documents 
from the IRS that shows that the amount spent by the IRS in the 
Real Time Tax System could be as much as $30 million. I can't 
confirm that.
    So two final questions. Are you aware of any further 
exploration and implementation by the IRS of any data-
collection system related to the Real Time Tax System, number 
one? And, again, because that language in the appropriations 
bills since 2009 seems to have been absolutely systematically 
ignored. And will you pledge to adhere to the report language 
in the current fiscal year 2014 omnibus?
    And, again, what I am asking is also 100 percent 
transparency to this subcommittee, to members of this 
subcommittee, on the other issue but also on the Real Time Tax 
System.
    Mr.  Koskinen. I am happy to commit that we will follow all 
of the instructions, whether you give them to us personally or 
in legislation, because I think that is important for us to be 
able to do.
    With regard to the Real Time Tax System, part of the 
problem is that all sorts of different systems have been called 
``Real Time Tax.'' The thing that has been the focus of a lot 
of external discussion is the idea of the IRS pre-populating a 
return form--get the information in, pre-populate the return so 
you could look at it, and then you could make decisions, or the 
IRS could even file your return for you. And that is what a lot 
of people have talked about as being the Real Time Tax System.
    Mr.  Diaz-Balart. Correct.
    Mr.  Koskinen. We are not doing anything with that. It 
would take a long time to be able to do that.
    We do have work going on to try to figure out how to get 
better third-party information into our system earlier so, as 
we actually match up tax returns for identity theft or are 
engaged in audits, we will have more data available in a more 
timely manner. Right now we don't get the W-2 forms from Social 
Security or the 1099 forms until late in the spring, which 
doesn't do us much good, as everybody is filing in January or 
February.
    So some people internally have called that a Real Time Tax 
System, but it has nothing to do with the program that you are 
talking about. And we have no program going forward that I know 
of. Certainly we don't intend to do anything like that without 
talking to you.
    [The information follows:]

    The IRS is not pursuing and has no plans to implement a 
Real Time Tax system to create pre-filled forms or software/
products for simple tax return preparation. Our exploration 
during 2011-2013 of earlier use of available data complies with 
the U.S. House of Representatives Committee on Appropriations 
statement (House Report 112-550) that prohibits the IRS from 
pursuing a simple tax return program.
    The Deputy Chief Information Officer, Strategy and 
Modernization; the Deputy Commissioner of the Wage and 
Investment Division; and the Director of Wage and Investment 
Business Modernization Office led an ad hoc team to explore the 
earlier use of available information return data during 2011-
2013, which then-Commissioner Shulman referred to as ``Real 
Time Tax.'' This concept is very different than creating a pre-
filled form or software/products for simple tax return 
preparation, which is often referred to as a Real Time Tax 
system, and which we are not pursuing nor have any plans to 
implement. The team included approximately ten employees that 
developed and refined a working vision statement and identified 
a preliminary set of business focus areas. Contractor support 
was provided by Booz Allen Hamilton and Accenture. The total 
contract costs were approximately $3.54 million. IRS Real Time 
Tax exploration concluded in 2013 and there have been no other 
costs.

    Mr.  Diaz-Balart. Thank you, Mr. Chairman.
    I look forward to working with you, Commissioner, on these 
two areas, also on identity theft and other issues.
    Mr.  Koskinen. Good.
    Mr.  Diaz-Balart. Thank you, sir.
    Mr.  Crenshaw. Thank you.
    Mr. Quigley.

                        EDUCATION AND ASSISTANCE

    Mr.  Quigley. Thank you, Mr. Chairman.
    Welcome, Commissioner.
    In addition to everything else you have going with the IRS, 
this is an historic filing period. The Defense of Marriage Act 
was struck down last June by the Supreme Court, and so, for the 
first time, same-sex couples will be filing Federal tax returns 
together. This is the first filing period that that is taking 
place.
    What education within the IRS and outside the IRS is taking 
place? How are you helping to educate the public and making 
resources available to people, particularly with some of the 
complexities involved? As you know, different States have 
different laws, and I have residents in my district and in my 
State who were married in Iowa, for example. Illinois is just 
now beginning to recognize same-sex marriages. So what is the 
IRS doing to deal with these complexities?
    Mr.  Koskinen. Well, I think it is important. One of the 
things that did surprise me back there in Congressman Serrano's 
question is the amount of outreach the IRS does, as a general 
matter, to taxpayers. We have a Web site which, if you look at 
it today, is a very different Web site than it was a year ago, 
in the sense of trying to be more user-friendly, to provide 
information taxpayers need directly.
    We have wonderful partnerships with tax preparers, who 
actually advise tax payers--we give them information. We share 
information about what information their clients will need.
    We have a YouTube channel with over 100 instructional 
videos about what you should worry about. We just put out our 
first advice to taxpayers this week about starting to look 
forward to how to deal with the Affordable Care Act, 
particularly advising taxpayers, if their circumstances change 
during the year, they need to adjust whatever Premium Tax 
Credit they are getting.
    In regards to the Defense of Marriage Act, we have been 
putting out reminders to people, like we remind people when it 
is time to pay their estimated taxes. So there is a tremendous 
amount of time spent reaching out to taxpayers, trying to 
educate them as much as we can about the Tax Code.
    As I somewhat facetiously said, it may take a while before 
I can convince people that we are from the IRS and we are here 
to help you. We do spend a significant amount of time doing 
just what you are talking about, which is, prior to the filing 
season and during the filing season, to give people as much 
information as they can get.
    So this year, for instance, we are advising people: don't 
call if you need to find about where your refund is; go to the 
Web site, push the tab. And last year 250 million people got 
information about, quote, ``Where is my refund?'' This year, 
for the first time, you can go to the Web site, authenticate 
who you are, get transcripts of your previous filings, and you 
can print them out at home. You don't have to come to an 
assistance center; you don't have to call.
    So it goes partially to the Chairman's concern, which I 
have, which is we can't just sit around and say, ``Gee, what 
will we do?'' We have spent a lot of time trying to say, what 
information do taxpayers need, what do they call about, how 
much of that could we give them in some other channel of 
communication?
    We also have tweets--I mean, we do things that I don't know 
how to do.
    Mr.  Quigley. But, sir, you recognize these are unique 
circumstances.
    Mr.  Koskinen. Those are unique----
    Mr.  Quigley. This is----
    Mr.  Koskinen [continuing]. Circumstances.
    Mr.  Quigley [continuing]. The first time in history this 
is taking place----
    Mr.  Koskinen. Yes.
    Mr.  Quigley [continuing]. And a lot of taxpayers need 
additional assistance. All the resources you are talking about 
are helping these new filings.
    Mr.  Koskinen. Right. And the people who are on the phones 
have information about that. So if taxpayers call and get 
through, they will be able to get that kind of information. But 
it is also on the Web site. We have, as I say, tried 
proactively in all of these areas to get information out to 
taxpayers before they fill out their returns, and even before 
they feel they have to call.

                             IDENTITY THEFT

    Mr.  Quigley. Well, we appreciate that.
    Your predecessor talked about the cases of identity theft, 
said that there were nearly 250,000 reported to your agency in 
2011 and 816,000 in 2012. Obviously, this is an alarming 
increase. What are you attributing this to, and what is the 
agency doing?
    Mr.  Koskinen. It has been an explosion since 2010 through, 
actually, last filing season in terms of people either 
borrowing, stealing, going to the Death Master Files, getting 
Social Security numbers, and filing false returns and trying to 
get refunds early.
    We have spent time, as I was telling the Chairman earlier, 
in Jacksonville with the wonderful task force that, jointly 
between the IRS Criminal Investigation Division and State and 
local law enforcement in Jacksonville and Florida, have become 
much more aggressive at pursuing this. We last year had 1,500 
investigations, up from 300 the 2 years before. We have a 
substantially more sophisticated filter system that identifies 
suspicious returns as they are filed electronically.
    Last year, we actually saw a plateauing in the number of 
returns that came through that we were able to attack. So we 
had 1,000 indictments recommended last year, up from 165 two 
years earlier. We think we are getting some of the people off 
the street. We are, I think, getting the message out that this 
is not a free game, it is not a free good, that you can't 
simply buy or steal a Social Security number and get a refund 
without being prosecuted for that.
    But it is a significant problem. We had in the budget 
proposed $100 million of IT work that was not included in the 
Omnibus, but we are figuring in some other ways to fund it. And 
part of the $92 million additional funding provided was for 
just this purpose, and we are spending it that way.
    But it is going to be a problem--we think we have it under 
control. As I noted, we are able to resolve for taxpayers the 
identity-theft problems much faster than we used to, but it is 
one of the three or four highest priorities we have in tax 
administration.
    Mr.  Quigley. Thank you.
    Thank you, Mr. Chairman.
    Mr.  Crenshaw. Thank you.
    Mr. Graves.

                               501(C)(4)

    Mr.  Graves. Thank you, Mr. Chairman.
    Mr. Commissioner, a lot of discussion about the 501(c)(4)s 
earlier. What are some specific examples of 501(c)(4)s?
    Mr.  Koskinen. 501(c)(4)s cover a wide gamut. You know, 
they are everything from garden clubs to, in fact, advocacy 
groups. And, in fact, the vast majority of 501(c)(4) 
applications have nothing to do with political activity as they 
go forward. A relatively small percent are in that area.
    So one of the issues, as we talk about the proposed draft 
regulations that everybody is focused on, is it really just 
political organizations that are involved. But, as I say, 
probably 90 percent of the 501(c)(4)s have nothing to do with 
political advocacy.
    Mr.  Graves. What is a specific example of a 501(c)(4), an 
organization that might come under scrutiny under this rule?
    Mr.  Koskinen. Well, under this rule, there would be any 
organization that is a social welfare organization, providing 
information to the public, that engages in political activity 
in a political campaign. So if you are an organization and you 
are providing information about any particular subject matter, 
that would be viewed as social welfare. If you then start 
running ads for a candidate in a campaign, supporting that, 
that would be political activity or campaign activity.

                           POLITICAL ACTIVITY

    Mr.  Graves. So is it not true, though, under the proposed 
definition, that it is any public communication that is made 
within a certain time period before an election would be 
considered candidate-related political activity if it 
identifies that candidate or a political office?
    Mr.  Koskinen. Right. Well, your question was what about a 
(c)(4) and what had historically been there. There is a draft 
regulation out, as the Chairman knows. We actually expect to 
have over 100,000 comments on it. And it is asking for just 
this discussion. That is what I assume the 100,000 comments are 
doing.
    Mr.  Graves. All right.
    Mr.  Koskinen. And it has three issues. One is, what should 
be the definition of political activity? What should be 
included as not appropriate for a social welfare organization, 
and what would be in that pool?
    Then the next question is----
    Mr.  Graves. Is that not part of the proposed definition?
    Mr.  Koskinen. Pardon?
    Mr.  Graves. Is there not a proposed definition?
    Mr.  Koskinen. No, there is a proposed definition----
    Mr.  Graves. Okay.
    Mr.  Koskinen [continuing]. And comment is being asked for 
that.
    Mr.  Graves. Right, right.
    Mr.  Koskinen. So my position on it is----
    Mr.  Graves. But is that the proposed definition right now, 
the one I just read that deals with political activity as it 
relates to a candidate for a political office in the time 
period before an election?
    Mr.  Koskinen. Right, as has been out there and as 
proposed. The comment that people are making is, what are the 
options to that? Should it be applied at all? Should we stay 
with the facts-and-circumstance test we have had?
    Mr.  Graves. Let's assume that that proposed definition 
stays in place as it has been proposed by your----
    Mr.  Koskinen. I would like to not assume that, because I 
think that what we need to do is review the 100,000 comments, 
which I am going to be involved with----
    Mr.  Graves. Right.
    Mr.  Koskinen [continuing]. Because it is a joint 
regulation from Treasury and IRS. And as I have said in my 
prepared testimony, my goal is that whatever comes out of this, 
if there is a regulation--it is not guaranteed there will be--
it be one that is clear, fair to everyone, and easy to 
administer. The IRS is not a political organization, and we 
ought to do whatever we can to get out of the politics of all 
this.
    Mr.  Graves. Right. So I just heard you say, then, that 
although it is a proposed definition right now, you hope that 
that is not the final definition.
    Mr.  Koskinen. Well, I hope you wouldn't put those words in 
my mouth. What I said was I hope that whatever regulation comes 
out, if there is one, is one that is clear, fair, and easy to 
administer.
    Mr.  Graves. I thought I heard you say----
    Mr.  Koskinen. That does not take a position on what is out 
there as draft.
    Mr.  Graves. I thought I heard you say you hope that is not 
the final definition.
    But under that current definition, if it were final, it 
would mean no faith-based organization can issue a voter guide 
on public positions that have been taken by candidates to 
consolidate that information to assist voters. Is that not 
accurate?
    Mr.  Koskinen. If candidates are mentioned and that is 
within, as I understand, 30 to 60 days, depending whether it is 
a primary or an election, that is what the proposed definition 
would be.
    Mr.  Graves. It would mean that Planned Parenthood wouldn't 
be able to----
    Mr.  Koskinen. Pardon?
    Mr.  Graves. It would mean organizations such as Planned 
Parenthood would not be able to issue voter guides, as well, or 
the national abortion rights could not issue----
    Mr.  Koskinen. Within the ambit of a campaign, within a 
campaign. That is what the draft would be discussing, and that 
is what the comments are about. And there will be, ultimately, 
after the comments are reviewed, there will be a public hearing 
at which Congressional Members, as well as the public, will be 
invited to attend.
    Mr.  Graves. Under the current definition, does that mean 
that the, I guess, let's say the American Legion or the VFW, 
would they be able to make phone calls to notify voters that 
want to register to vote, maybe a potential voter, or to notify 
voters about candidates and their positions on military or 
defense positions or expansion or defense in general?
    Mr.  Koskinen. Again, the proposed draft up for comment--
about which we have 100,000, and we are looking forward to 
reviewing them--would say that voter registration drives within 
the context of a campaign would not be allowable.
    And the other question that needs to be answered, I would 
hope everybody would understand, A, it is a question of what 
the definition is going to be, should it be. And, B, how much 
of that activity is permitted. Again, it is not proposed that 
people have no activity. The question is, how much of that 
activity, as it is defined, can an organization engage in 
before it jeopardizes its tax-exemption?
    Mr.  Graves. Uh-huh.
    Mr.  Koskinen. And the third important question is to what 
501(c) organizations should the regulation, if there is one, 
apply?
    Mr.  Graves. Okay.
    One last question, Mr. Chairman.
    How many in the department have been reprimanded or 
terminated as a result of that latest scandal of scrutiny of 
various organizations?
    Mr.  Koskinen. That process is still--there is a review 
board. The leadership from the top on down is all gone at this 
point, and several of the people are no longer at the IRS.
    Mr.  Graves. Is there a number you can place on that?
    Mr.  Koskinen. There is not a number. I am actually not at 
liberty to talk about personnel actions. All I can tell you is 
Danny Werfel appointed a special review board; it reviewed it. 
The leadership, starting at the ground level all the way up 
through the Exempt Organizations leadership structure, has all 
been changed.
    Mr.  Graves. And you feel like it has been, I guess, 
substantially, it has been justified, all the actions have 
been--all the reprimands have been taken care of, and you are 
satisfied with the direction the organization is going now and 
with the way it has handled the review?
    Mr.  Koskinen. I am satisfied that, as I say, the IG had 
very good recommendations for training, for guidance, for 
better review of how organizations, if there are questions, are 
handled. All of that has gone on. I went to Cincinnati and 
talked to people to make sure that people are comfortable that, 
in fact, whatever the issues were before have been solved.
    So, again, I think, as I said, it is important, going 
forward, not waiting. We have six investigations going on. And 
as I have said, I am looking forward to having at least one or 
two of them finish sometime soon, so we can see what the actual 
determination of the facts are. And we will respond 
appropriately and accordingly, and we will let you know how the 
response is to that.
    But I think people need to understand that going forward 
from, as I say, this point forward, anyone dealing with the 
IRS, any taxpayer, should be comfortable that they are going to 
get treated fairly in the same way anybody else is, no matter 
what their political affiliation; whatever their organization 
is; whoever they voted for in any election recently; whether 
they go to church or don't go to church. If they deal with the 
IRS, they are going to be treated in the same way everybody 
else is.
    If you get audited--we still, even with limited resources, 
will do 1,400,000 audits this year, a lot of them just by 
correspondence. But if you get a letter or you get 
correspondence, you need to be confident and comfortable that 
that is because there is something in your return that if it 
was in somebody else's return would get the same response. That 
it has nothing to do with who you actually talked to 2 weeks 
ago, what meeting you went to, what organization you belong to.
    [The information follows:]

    I have verified that the Shared Responsibility Payment 
(SRP) established in 5000A to which you referred is payable 
when the IRS issues a notice and demand for payment. Therefore, 
an individual is not required to pay the SRP as part of the 
quarterly estimated tax payments, and the IRS will not impose 
estimated tax penalties for failure to pay the SRP with 
estimated taxes. The statute provides special rules for the 
assessment and collection of the SRP. A taxpayer who does not 
timely pay the SRP is not subject to criminal prosecution or 
penalty for the failure; however, interest accrues on the SRP 
from the due date for payment specified in the notice.

    Mr.  Graves. Thank you.
    Thank you, Mr. Chairman.
    Mr.  Crenshaw. Thank you.
    We will turn to Mr. Amodei.
    And, in your absence, we welcomed you, so we welcome you 
again in your presence.
    Mr.  Amodei. Thank you. Thank you, Mr. Chairman. I hope my 
presence will be better than my absence, but the jury is out on 
that, so we will go from there.
    Thank you, Mr. Commissioner. I want to follow up where Mr. 
Graves was going. And, first of all, I have looked at your 
statement, and so I assume you have looked at it. And this is 
your statement; I am assuming you had help preparing it, but 
this is your statement that you stand by for purposes of the 
hearing today.
    Mr.  Koskinen. I wouldn't have submitted it if I weren't 
going to stand by it.
    Mr.  Amodei. Very good.
    You have indicated at the bottom of page 1 that the IRS 
needs to continue to fulfill responsibilities to implement tax-
related provisions, major legislation. You have referenced the 
ACA and the FATCA.

                               501(C)(4)

    I would like to focus for a minute on the genesis of the 
regulation rewrite, in that, do you know when 501(c)(4) was 
first put on the books as legislation, generally?
    Mr.  Koskinen. I----
    Mr.  Amodei. Let me tell you why I am asking you to help 
you out. Because we are talking about redoing a regulation now 
as a result of what happened, I don't believe in Cincinnati, 
but all the way up the line. And so I am wanting to know how 
501(c)(4) worked before this latest round of stuff that started 
with Cincinnati----
    Mr.  Koskinen. That has been around for a while. The 
regulation was drafted in the Eisenhower administration in 
1959.
    Mr.  Amodei. Are you aware of any problems, major problems, 
where it has been looked at by the IG from Eisenhower forward 
until what we are talking about now?
    Mr.  Koskinen. I am not.
    Mr.  Amodei. Okay. Thank you. I appreciate that. And so, 
can you--and I know you weren't there, so I am going forward. 
Congratulations on your timing, by the way. It is excellent.
    Mr.  Koskinen. Some people would say that, actually, the 
timing isn't so good.
    Mr.  Amodei. Well, it is better than others.
    Can you tell me the genesis of how it was decided within 
the IRS, we need to take a look at 501(c)(4) and do new 
regulations?
    And let me tell you why I am asking that, to help you out, 
is that I get that you want to restore confidence in the IRS 
and all its procedures and processes. And good for you. But it 
is like, there was no, as you indicated in earlier questioning, 
there was no major tax legislation recently which has aided in 
your folks' preparation for stuff, so why is 501(c)(4) now on 
the top of the regulatory heap?
    Mr.  Koskinen. Well, it is on top of the heap now because, 
A, there was the IG report noting that there were difficulties 
in the 501(c)(4) determination process. And one of the strong 
recommendations by the IG in his report and in his subsequent 
testimony was that the Treasury Department and the IRS should 
put on their priority plan review and clarification of the 
requirements. So it was--
    Mr.  Amodei. So that was generated internally as a result 
of IG operations at Department of Treasury?
    Mr.  Koskinen. No, what I am saying is all I know is that 
there was the issue in the IG report reported and that his 
recommendation, strong recommendation, was that a regulation be 
considered as part of the priority process at Treasury and IRS, 
and that is what has happened. What happened before that, I 
wasn't there and I don't know.
    Mr.  Amodei. Okay. Are you curious as to anything before?
    Mr. Koskinen. No, at this point, mostly--I have spent 40 
years, 20 in the private sector----
    Mr. Amodei. Okay.
    Mr. Koskinen [continuing].--20 in the public sector----
    Mr. Amodei. And I don't want to cut you off----
    Mr. Koskinen. No, let me just tell you my--can I just give 
you my answer?
    Mr. Amodei. You are not curious--you can't on my 5 minutes, 
I am sorry.
    Mr. Koskinen. Okay. I will answer in my 5 minutes, then.
    Mr. Amodei. But I endeavor to play by the rules, so----
    Mr. Koskinen. Okay.
    Mr. Amodei. And I know you are not trying to evade anything 
there.
    Can you tell me what percentage of the IRS's budget is 
devoted to 501(c)(4) staffing and operations? And let me tell 
you why I am asking that question. Because you talk about 
resource challenges and priorities. So what percentage of your 
operations go to 501(c)(4) administration, enforcement, 
investigation, whatever?
    Mr. Koskinen. Well, off the top of my head, I would say it 
has to be under 1 percent, significantly, in the sense that we 
have 90,000 employees; only 800 work in the entire Exempt 
Organizations itself.
    Mr. Amodei. Okay. Fair enough.
    Mr. Koskinen. So it is a very small number.
    Mr. Amodei. So it is 1 percent of your budget. I appreciate 
those numbers----
    Mr. Koskinen. No, I would say it has to be--it is 1 percent 
or less.
    Mr. Amodei. Okay.
    Mr. Koskinen. But that is an estimate that I would have to 
go take a look at. It is clearly, at this point, you know, only 
1 percent of the employees working the entire Exempt 
Organizations, and the 501(c)(4)s are probably 5 percent of 
that. So you are talking about, I don't know----
    Mr. Amodei. Okay.
    Mr. Koskinen [continuing].--0.2 percent?
    [The inforamtion follows:]

    The Exempt Organizations function within the Tax Exempt and 
Government Entities division is responsible for both service 
and compliance activities related to all tax-exempt 
organizations, including IRC 501(c)(4) social welfare 
organizations as well as employee plans and government 
entities, such as Indian tribal governments. Total FY 2013 
expenditures of that function were $95 million, or 0.85 percent 
of our overall budget of $11.2 billion. However, most tax-
exempt organizations are 501(c)(3) charitable organizations. Of 
the approximately 1.6 million tax-exempt organizations active 
in FY 2013, less than 6 percent were 501(c)(4) social welfare 
organizations.

    Mr. Amodei. So let me ask you this. I am going to read off 
about four or five things here, and the context is priorities. 
You have the ACA that you are working on. You have issues with 
conferences and spending money. Less than 1 percent, I will do 
the math on generally what that is of your budget. You have 
bonuses that are in the news. You have 501(c)(4)s. And then you 
have taxpayer assistance, which you have devoted a lot of time 
to.
    Number-one priority for regulatory reform out of those is 
501(c)(4)?
    Mr. Koskinen. It is a priority because it has been the 
issue----
    Mr. Amodei. Is it the number-one priority reform or not out 
of those five things based on----
    Mr. Koskinen. I am sorry, you were asking about regulatory 
reform. We are not reforming ACA; we are just implementing ACA 
and FATCA. So, in terms of regulatory reform, there is a set of 
regulations that----
    Mr. Amodei. No, I understand that.
    Mr. Koskinen. If you are talking about my priorities, I 
would say that, if we can solve the 501(c)(4) problem, put it 
behind us, that clearly is one of the five or six priorities I 
have.
    Mr. Amodei. Well, then, I guess you see my question, where 
it is less than 1 percent, and you are talking to this 
committee about our concerns about taxpayer service, our 
concerns about getting this filing season right, which are all 
great; the ACA, which happens to be a small project that is 
floating around. And you have some internal management problems 
that you have inherited, I appreciate all that, in terms of 
conferences and bonuses and stuff like that. And it is like, 
really? A law that has been around for 50 years, and this is 
what is going on top of the regulatory thing?
    My time has expired. Mr. Chairman, thank you.
    But I will look forward to interacting in more than a 5-
minute context----
    Mr. Koskinen. I would be delighted to sit down and have a 
longer discussion with you.
    Mr. Amodei. Great. Look forward to it.
    Mr. Crenshaw. Thank you.
    Mr. Yoder.

                                PRIVACY

    Mr. Yoder. Thank you, Mr. Chairman.
    Commissioner, welcome to the Committee. We are pleased to 
have you come before us today to talk about certainly a variety 
of issues that are important to constituents at home and many 
hardworking American taxpayers that interface with the IRS.
    You know, last year, in the midst of the outcry over the 
NSA and the IRS targeting of specifically conservative groups 
based upon ideology, there was a little-known, I think, breach 
of public trust that was occurring at the IRS and at other 
Federal agencies that was brought to light which I think is as 
stunning or more stunning than some of the other concerns that 
are constantly raised in the media. The IRS and other Federal 
agencies admitted that they were reading the emails and 
electronic correspondence of Americans without a warrant, 
without respect for Fourth Amendment privacy protections. And 
the IRS went so far as to be brazen enough to say that 
Americans do not have a reasonable expectation of privacy when 
it comes to their email correspondence. That is stunning.
    And so, under your leadership, I guess my question would be 
for you: Is the IRS continuing to read the emails or other 
electronic correspondence, the private correspondence, of 
Americans without a warrant in contravention of Fourth 
Amendment rights? And, secondly, when it was reading those 
emails, are you aware if it was reading both conservatives' and 
liberals' private emails equally, or was it also targeting 
those private readings without warrants just on conservatives, 
as it was targeted by other portions of the IRS?
    Mr. Koskinen. This is the first time I have heard that the 
IRS read anybody's email, so I can't give you any further 
information. But I will definitely look into that, and I will 
get back to you with answers to your questions.
    Mr. Yoder. Well, I appreciate it. And I am sure that if 
that is occurring, sir, would you, I guess to the Committee, 
agree to ensure that it no longer occurs at the IRS?
    Mr. Koskinen. I would be happy to say if we have no 
authority to do it, then we should not be doing it.
    Now, Criminal Investigations does investigate. You know, we 
have had 4,500 recommendations for indictments last year. So 
there is a whole enforcement arm of the IRS that, you know, has 
law enforcement authority, works with Justice Department and 
States and local governments.
    [The information follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Mr. Yoder. Well----
    Mr. Koskinen. So I don't know how much of this is in their 
domain. But let me----
    Mr. Yoder. Well, the IRS, the SEC, and other agencies have 
argued that they have legal authority under a 1986 law that 
does not treat electronic correspondence the same way it treats 
paper correspondence. This is outrageous to a lot of our 
constituents on both sides of the aisle, and, in fact, many 
interest groups and entities across the country have spoken out 
about this.
    I have introduced a bill, along with Congressman Graves, my 
colleague here, and Democratic Members, that has over 175 
bipartisan cosponsors to ensure that this practice stops in a 
variety of Federal agencies.
    And so I guess, in your leadership, I would hope that you 
could ensure that you would head that off at the pass, that the 
IRS would not be engaged in that practice, and that Americans 
could trust that their private correspondence is not being read 
by some IRS agent without a warrant, at least, or following the 
normal due-process protections that are outlined in the Fourth 
Amendment of the United States Constitution.
    Mr. Koskinen. I think it is a very serious matter, and I 
take it seriously. I will look into it, and I will personally 
get back to you.

                            FAIR ENFORCEMENT

    Mr. Yoder. Good. I appreciate that, sir. Thank you for your 
testimony on that.
    The issue has been raised regarding 501(c)(4) groups. That 
has certainly been discussed in this Committee and many 
Committees, and it is an issue that many Americans are 
concerned about. I understand that the IRS is attempting to 
write regulations that might make the enforcement potentially 
easier on the IRS.
    I think the biggest concern that many of us have is that 
most Americans didn't have a lot of trust already and now they 
have very little trust that the IRS is being fair in their 
enforcement of the law. I have had folks say that they don't 
want to get involved in campaigns or be associated with any 
groups because they are afraid they are going to be personally 
subjected to audits.
    Now, I am sure you would say today and I hope that is not 
happening. Regardless of what rules we write at the IRS, it is 
not the rules themselves, it is how they are enforced, and it 
is whether they are enforced fairly and whether we can trust 
the people, the individuals, in their private moments to do the 
right thing.
    What can you do to ensure that the folks like Lois Lerner 
and others, that even if the rules are there, that they enforce 
them fairly? That is the biggest concern for my constituents, 
not new rules, but that the rules are enforced fairly and----
    Mr. Koskinen. I agree with you. And that is a situation, as 
I say, in which the public needs to have to that comfort and 
confidence. One of the reasons I am spending as much time 
talking to frontline employees is I am trying to make sure that 
our IRS culture encourages everybody at all levels of the 
organization to raise issues and problems and concerns whenever 
they have them.
    Danny Werfel set in motion the beginnings of a program of 
risk management, and I have told people that everybody has to 
be a risk manager in the Agency. And one of the important risks 
to mitigate is to make sure that we are following the law and 
we are treating taxpayers fairly. We have a lot of rules to 
make sure that happens, a lot of review processes, but it does 
depend on people.
    And my concern is to make sure that any employee that is 
concerned or has a problem or sees anything going on that they 
feel does not reflect well on the IRS or doesn't treat 
taxpayers fairly, they need to be comfortable they can raise 
that directly, either to me or anyone else----

                             ACCOUNTABILITY

    Mr. Yoder. Well, and to that end, sir, we had Commissioner 
Shulman come before us and confirm long before this became an 
issue, we asked him in this Committee, is this happening, would 
you ever allow this to happen? And he assured us that it 
couldn't happen, it wouldn't happen.
    And so we have heard these assurances before. So just be 
aware that the trust is not there between Congress and the IRS 
either, because we have had folks sit in your chair and say, 
you can trust me, this isn't happening. And so----
    Mr. Koskinen. And what I would say to that--again, my point 
earlier was, when I get parachuted into these things, my rule 
is play the hand you are dealt----
    Mr. Yoder. Uh-huh?
    Mr. Koskinen [continuing]. And not spend a lot of time 
second-guessing decisions.
    But as I have told employees, our goal is not to have any 
mistakes. We have 90,000 employees and complicated tax laws, so 
some things are not always going to go perfectly. And I have 
told them that my view of running an organization is, if there 
is a problem, it is my problem, and we will work on it 
together. If there is a mistake, it is my mistake, and we will 
work on it together. And if there is a problem I don't know 
about, that is my fault, because that means we have not built a 
culture where issues, problems, difficulties, mistakes get 
raised through the system.
    So my view is I am responsible for and accountable for 
everything the Agency does. And whenever we make a mistake, we 
are going to find it, we are going to fix it quickly, and we 
will be transparent about it. And if I don't know about it, as 
I say, that is my fault, because I am trying to get the 
organization comfortable that every individual needs to feel 
bad news is good news. I can't help a problem, solve the 
problem, unless I know it exists.
    Mr. Yoder. I appreciate those statements of personal 
accountability and responsibility. And I look forward to good 
results from your leadership, sir.
    Thank you.
    Mr. Crenshaw. Thank you.
    Ms. Herrera Beutler is recognized.

                              SOCIAL MEDIA

    Ms. Herrera Beutler. Thank you, Mr. Chairman.
    Thank you, Commissioner, for being here. I have a couple 
questions, not quite where Mr. Yoder was coming from, but on 
the issue of social media, Twitter and Facebook.
    Last year, the IRS noted it was in the process of reviewing 
and updating its policies on the use of social media. Quote, 
``Specifically, the IRS is considering what limitations, if 
any, should be placed on the use of publicly available''--so it 
is a little bit different-- ``social media information in a 
civil examination or collection action. Any new internal 
procedures would be made public.''
    I guess I was curious--I have two thoughts about that--how 
you go about deciding who you are going to read up on, if you 
are going to go that route. You know, is it someone that you 
are trying to collect information about for a collection 
action? Or is it that people--you are looking at putting 
together part of your division that is going to specifically 
troll online spaces? What is your thought process going in this 
route?
    Mr. Koskinen. Our thought process is, when we do 
examinations, when we send you a letter about something in your 
return, we deal with you about the return. We do not go and 
look for whatever your Facebook account might look like. That 
doesn't seem to me to be efficient, effective, or appropriate.
    When we are in criminal investigations, the Criminal 
Investigation Division will use all of the information 
available when they are tracking down people, trying to track 
down assets. And so there I think it is appropriate for them to 
use whatever information they have that they need to. But that 
is when we are tracking down people who, in fact, have violated 
the law, not paid the taxes that they owe, and are----
    Ms. Herrera Beutler. Uh-huh.
    Mr. Koskinen. One Revenue Agent made a good point to me in 
Philadelphia. He said, we have to distinguish between the 
willing to pay who have difficulties, and the unwilling to pay. 
And the willing to pay who have difficulties haven't paid, but 
that is because they have some problem in their family. We 
ought to deal with them, as we try to, with Installment 
Agreements or Offers in Compromise.
    They are very different than the people who are unwilling 
to pay, hiding assets, moving them around, storing them 
offshore. My view is we should chase them to the end of the 
Earth, and if we can use social media to find the assets or 
find them, we ought to do that.
    Ms. Herrera Beutler. So you are saying you exclusively used 
Facebook and Twitter for unwilling-to-pay criminal 
investigations?
    Mr. Koskinen. That is where I think it is appropriate and 
important. I don't know----
    Ms. Herrera Beutler. So you are not using Facebook and 
Twitter for people who are not in criminal investigations?
    Mr. Koskinen. I do not know about that. I will find out the 
answer to that.
    Ms. Herrera Beutler. I would love the answer to that 
question.
    Mr. Koskinen. It is an important question.
    Ms. Herrera Beutler. Yeah.
    Mr. Koskinen. And I will be delighted to find out and share 
with you that answer.
    Ms. Herrera Beutler. Please share it with the Committee. We 
would all like to know that information.
    Mr. Koskinen. I would be delighted to share it with the 
Chairman and everyone.
    [The information follows:]

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


                   FOREIGN ACCOUNT TAX COMPLIANCE ACT

    Ms. Herrera Beutler. This is kind of switching gears. I got 
a letter from a constituent who lives abroad and obviously has 
some serious concerns about the Foreign Account Tax Compliance 
Act. And his observation was that a large number of Americans 
who are voluntarily compliant with this, with our Tax Code--and 
this law is really detrimentally impacting those folks. 
Obviously, you are wanting to go after people who are not.
    But what he was saying and what he is seeing is that, you 
know, his bank account has already been closed, he has other 
accounts that--and, specifically, his bank cited this law as 
the reason. So he is losing different services, and he is 
concerned about other accounts he has. And here he is trying to 
be compliant, he is being compliant. And basically his comment 
to me was, I am being punished for having an American 
citizenship. I am following the spirit of the law, not just the 
letter, and here I am losing services in the countries that I 
am living that have these accounts because they are citing this 
law.
    What are you doing about--so you talked a little bit before 
about going after criminal investigations. What are you doing 
to make this easier on law-abiding citizens, who are trying to 
comply, who are getting these--you know, we don't want them to 
have to disavow their American citizenship.
    Mr.  Koskinen. I think that is exactly right. And one of 
the things that we are looking at as we start to get the 
information is how to make sure that we impose as little a 
burden as we can on the people you are talking about who have 
been compliant for some time.
    The problem he is running into isn't from the IRS or from 
the United States. The problem he is running into is that some 
banks in some countries are saying, rather than actually 
determining who is native and who is a foreign-born 
participant, we are simply going to only deal with resident 
citizens. And they are saying if you are not a resident 
citizen, we are not going to provide you services.
    That is not a widespread activity because banks obviously 
are anxious in this global economy to deal with citizens 
wherever they are coming from. And we are not the only country 
engaged in this effort. But it is unfortunate wherever a bank 
in a country X decides that they are only going to deal with 
their own citizens. You would think it would be pennywise and 
pound-foolish, because they are missing out on people like your 
constituent correspondent.
    Ms.  Herrera Beutler. Can I----
    Mr.  Koskinen. But, anyway, whatever we can do for people 
who have already been compliant, to try to make sure we don't 
impose unnecessary burdens on them and that we ameliorate it, 
to the extent we can, we will. But, obviously, we don't control 
what foreign banks----

                          TAXPAYER COMPLAINTS

    Ms.  Herrera Beutler. And, really quickly, if someone has a 
challenge, whether it is this person overseas or whether it is 
the small-business man I sat next to on my flight over here, 
who did tell me he feels like he has received retribution for 
speaking out politically in the form of a beautiful audit, if 
someone has that concern or they feel like they have been 
unfairly targeted, who do they redress their grievances to? Is 
there a third, independent group? Or do they have to come back 
to you all and say, hey, wait a minute, you are doing this 
unfairly?
    Mr.  Koskinen. No, they could feel free to contact me 
personally, but they have the Taxpayer Advocate, who has been 
set up independently by a statute. You will hear from her a 
little later. They can contact her.
    The Inspector General does a very good job of pursuing 
specific issues and complaints. My view is that those are 
important sources of information. I chaired the Interagency 
Council of Inspectors General for 3 years while I was at OMB, 
and I think Inspectors General provide a valuable service and a 
lot of information. As I told the Chairman earlier, IGs don't 
create the problem, they actually just discover it for you 
before it gets bigger and more complicated. And the same with 
GAO.
    Ms.  Herrera Beutler. Okay.
    Mr.  Koskinen. So I would think that anytime they feel that 
way, they should feel comfortable contacting the Taxpayer 
Advocate.
    Because I do think--going back to this issue, if I could 
take just 30 seconds, we are going to do 1.4 million audits. 
Some of those people are going to be Republicans; some are 
going to be Democrats; some are going to be people who never go 
to church, some are going to be people who go to church 
regularly. And what is important, and all we can do is continue 
to emphasize it and actually perform, is for those people to 
understand they are not getting that letter from the IRS 
because of who they voted for, where they were last week at a 
symposium or a meeting; they are getting that letter because 
there is something in their return that we are asking 
information about.
    Ms.  Herrera Beutler. Well, let me--to that point, we are 
going to have to just say--and I will cut it off here--you are 
going to have to prove it to us. Because they have received 
that letter because of political ideology before; it has 
happened. That is part of what this whole controversy was. So 
we look forward to you proving it to us as we move forward.
    Mr.  Koskinen. We will----
    Ms.  Herrera Beutler. With that, I yield back.
    Mr.  Koskinen. It is intolerable for anybody to have it 
actually happen. And I think it is extremely corrosive for the 
tax system for people to think it might happen. And they have 
to understand that we take this seriously. Going back to the 
priorities, my highest priority is to do whatever I can to 
restore whatever trust has been lost by the American public in 
the IRS. We should be viewed as fair. We want people to pay the 
right amount, not more, not less, and if you deal with us, we 
are going to deal with you fairly in the same way we would deal 
with anyone else.

                          501(C)(4) REGULATION

    Mr.  Crenshaw. Thank you very much.
    We have some time for another round of questions, if 
Members have them. Let me start that by asking actually two 
questions.
    One has to do with the 501(c)(4). There has been a lot of 
discussion about that. And my main concern, as I said in my 
opening statement, is that it seemed to be premature, in the 
sense that all these investigations were going on and we didn't 
have all the information. I think this subcommittee will 
recall, we put a provision in our markup that said that we 
wouldn't spend any money that was appropriated under this bill 
to work on that rule.
    That was adopted by the full committee but it didn't make 
it into the omnibus bill. There was concern that, when we have 
limited resources, that maybe that is something we could wait 
until we had all the information. But that didn't happen, and 
it is going along, and I assume that you don't plan on stopping 
that any time soon.
    So let me just ask you when you anticipate finalizing the 
draft regulation. For instance, are you going to finalize the 
draft before the November elections?
    Mr.  Koskinen. I think the chances of it getting finalized 
before the November election are fairly slim. We have an 
overwhelming amount of comments to take into consideration. 
There will be a public hearing; there will be more 
opportunities for people to provide information to us.
    If there is going to be a regulation--and I would say 
``if.'' Nothing guarantees, when you start the process, you end 
up with a product at the end. If there is going to be a 
regulation and it has changes in it, it would very likely be 
republished for more comments.
    So, my hope would be that at least some of the six 
investigations would be done well before we get to anything 
that looks like finality in whatever regulation might come out. 
Because I think it is right, we need to know what the facts 
were in that particular circumstance.
    Although, again, the general issue is, how do we provide 
clarity, not just for the IRS. My concern is, if I were 
organizing an advocacy operation, I would be appreciative if I 
had clear guidelines as to how to organize it, but most 
importantly if I had clear guidelines as to how to operate it. 
Two or 3 years down the road, the more clarity we can provide 
to those people as to what you can do and what you can't do, 
and how much of it you can do without being in jeopardy, it 
seems to me is very important.
    The facts-and-circumstances test and the lack of clarity 
about how much political activity can you do means that 
everybody is sitting out there worrying and wondering, well, 
how does it get measured? Is this going to count on one side of 
the equation or on the other side of the equation? Am I above 
if I am 45 percent? Is that now no longer ``primarily''? And I 
just don't think it is helpful for us, but it certainly isn't 
helpful for people running those organizations.
    Mr.  Crenshaw. Well, it is good to hear that you don't 
think it will finalized before the elections. I guess it could 
be, you know, if there is some speed-up process.
    But maybe an equally important question is, do you think 
these draft regulations, have they already produced a chilling 
effect, as people decide, gee, maybe we better avoid political 
activities because we don't want to jeopardize our tax-exempt 
status or have it denied or have it revoked? Might that happen?
    Mr.  Koskinen. I don't know. I haven't seen any studies or 
surveys about that.
    We have tried to emphasize that we have revised and taken 
all the IG recommendations into consideration. We are 
providing, we think, appropriate training and oversight for the 
process. And we are encouraging people to continue to file, if 
they have an interest in doing that, applications.
    In fact, we have a streamlined process that was set up to 
solve the backlog, which says, if you will simply say that you 
are not going to spend more than 40 percent of your time on 
what has been historically viewed as political activity, you 
can get a streamlined approval, so that you won't even have to 
worry about the backlog.
    Mr.  Crenshaw. And the last question is--you, I think, 
answered this a little bit--whether you will wrap up all these 
loose ends and be one final regulation or maybe it might be a 
series of regulations that are, you know, adopted over the next 
couple of years. Do you have any judgment about that?
    Mr.  Koskinen. I have no idea. As I said, from my 
standpoint, I am trying to keep an open mind about the whole 
thing, see what the comments are. There is a complicated 
question of, what should the definition, whatever it be, apply 
to? Should it apply to 501(c)(3)s, 501(c)(5)s, (6)s, (7)s? And 
I think those are important questions that you can't know an 
easy answer to.
    Again, my instinct is the clearer it is and the more simple 
and administratable it is, and the fairer to everyone it is, 
the better off we will all be.

                               FREE FILE

    Mr.  Crenshaw. Well, let me ask you one quick happy 
question, and that is that I found out for the first time this 
last week that there is a program called Free File that the IRS 
has in conjunction with a lot of folks that prepare tax 
services. We had an event in my home district to try to make 
more people aware of it, because I am not sure everybody is 
aware. But if you make less than $58,000 a year, you qualify 
for the Free File, and you can actually file your tax return 
for free because of some arrangement the IRS has with this 
alliance of folks.
    They told me that they have to renew that every 5 years 
with a memorandum of understanding. And so, in an effort to 
make more and more people aware--they said 70 percent of the 
taxpayers might be aware, or might be eligible for this Free 
File. So tell us very quickly if you think that is a good idea 
and if you plan on signing a new memorandum of agreement to 
extend it for another 5 years.
    Mr.  Koskinen. It is a good idea. I should take you on the 
hustings with me, because every time I do a filing season 
discussion with the press, I try to emphasize that we have this 
agreement with 14 providers, all the major ones you would think 
of. You can go on the Free File Web site. A hundred million 
Americans are eligible. You can pick whichever of the 14 you 
like, and you can file for free. You don't have to pay 
anything. You get the same treatment you would if you were 
actually in one of their offices.
    And it is a wonderful partnership, and we do plan to renew 
it and try to give more visibility to it, because I think 
taxpayers comfortable doing their returns without a provider 
should take advantage of this. And it is one of the services we 
are happy to provide.
    Mr.  Crenshaw. Well, you are from the IRS, and you are here 
to help us. So thank you for that.
    Mr. Serrano.

                                PRIVACY

    Mr.  Serrano. Thank you, Mr. Chairman. I hope you give me a 
little leeway because I may shock the Committee and the 
Congress, using a little more time to say that I totally agree 
with Mr. Yoder. And I know that is shocking to some folks.
    I cosponsored his bill. As Ranking Member, I participated 
in a voice vote on his amendment last year. Because, whether 
Democratic or Republican, I don't believe that our privacy 
should be lost. And so, when you hear about government perhaps 
reading emails, that is unacceptable--unacceptable to us, and 
it is unacceptable to our democracy.
    And I am beginning to hear some people say, well, if you 
have nothing to hide--it has nothing to do with having anything 
to hide. It has to do with the Constitution and what this 
country is known for and the fact that so many other people 
throughout the world would like to imitate who we are, or who 
they think we are. And I know who we are, and we shouldn't have 
that.
    Now, that doesn't mean I sign up with those who don't 
believe in a Federal Government or those who would like to 
disable government agencies to the point where they can't 
function. But on this, we agree that Americans have a right to 
privacy and that it should be something that we protect.
    So I think the big headlines tomorrow in one of the Hill 
papers will be ``Serrano and Yoder agree on something,'' and 
that is a good sign.
    Mr.  Koskinen. I am happy to be the catalyst for that.
    Mr.  Serrano. Yes. Well, someone should tell me where the 
hustings are. I have no idea if they are near the Bronx or 
anywhere like that.

                               501(C)(4)

    So let me get this straight. If you have 501(c)(4) status, 
you are not supposed to engage primarily in activities that are 
political. If your activities are primarily political, then my 
understanding is that you can register as a tax-exempt 
organization under another part of the Tax Code, Section 527.
    The problem for some organizations is that if they do this, 
they will have to disclose who their donors are, as opposed to 
being registered under a 501(c)(4), where you don't have to 
disclose who funds you.
    So even though these groups could choose to be registered 
under 527 as a PAC, they don't want to do so because they would 
have to disclose their donors. Am I correct in that?
    Mr.  Koskinen. That is correct.
    Mr.  Serrano. And, not putting you in a spot where you have 
to try to figure out what happened in the past, was that part 
of the problem, that people were doing this and, therefore, 
there had to be some scrutiny, and maybe that scrutiny went 
overboard?
    Mr.  Koskinen. Well, as I say, I have not spent a lot of 
time looking backwards because we have six investigations going 
on. There was an increase in organizations and the flow of 
money into public discussion and debate and political 
activities after the Supreme Court case in 2010. So the volume 
went up, to some extent, it became more visible. Back to the 
question--you know, for a long time nobody paid much attention 
because most of these organizations weren't particularly 
visible.
    But I do think that, again, if the process is clear, then 
people who will meet the criteria ought to be able to make that 
choice. But a major factor in the choice, I understand, is that 
if you were a 527, you could spend all your time and money on 
political activity, but contributions would be visible. If you 
are a 501(c)(4) social welfare organization, you can only spend 
a certain percentage of your time. And nobody has quite known 
what the percentage is, but you have to be primarily a social 
welfare organization, not engaged in whatever is the definition 
of ``political activity.''

                           POLITICAL ACTIVITY

    Mr.  Serrano. Now, do you think that--or maybe I missed 
something. Do your rules define once and for all what is 
political activity? Do you think we will reach the day when we 
can define what is political activity?
    Mr.  Koskinen. Well, that is the whole purpose of the 
draft, and that is the whole purpose of 100,000 comments back 
to us and the public debate, which I think is an important one, 
about what should be the definition, and whatever the 
definition is, how much of that activity should you be allowed 
to do before you jeopardize your status as a social welfare 
organization.
    And it is not a simple set of questions. It is a 
complicated issue to figure out how to deal with that in a way 
that is fair to everybody. I don't think we should be in some 
way--I think the criticism needs to be considered, and the 
comments, that we ought to make sure that this applies fairly 
to people and is not viewed as singling out any particular 
group of people, which is why you also have to take a look at 
which sections of the 501(c) statute will, whatever rule, if 
there is one, comes out, apply to. And so those are important, 
difficult questions.
    As I say, as somebody new to the game, my goal would be, 
guidance that is clear, fair, and, most importantly, easy to 
administer. It will be better for the IRS and it will 
ultimately be better for the groups that meet those standards 
and are operating. Because they ought not to, 2 or 3 years down 
the road, have to be continually trying to figure out, well, 
what does this really mean?
    Mr.  Serrano. Right.
    Mr.  Koskinen. And that is my concern about the facts and 
circumstances test that always have you in a position of trying 
to judge, well, what are the facts and circumstances? How have 
they changed? What is somebody going to say? And it just seems 
to me that is not good for them, and it doesn't do us any good. 
It gets us involved in a lot of decisions that I think we would 
be better off not making.

                                TRAINING

    Mr.  Serrano. One quick last question. I supported 
including $200,000 in the Omnibus appropriations bill for 
training for enforcement employees in the Exempt Organizations 
unit. Please explain how you will use these funds to prevent 
the type of problems experienced previously from happening in 
the future.
    Mr.  Koskinen. Training is important. I know there has been 
a concern about, and I share that concern, that we train 
appropriately. The training session that went on was in 2010, 
and OMB in 2011 and 2012 has made it clear that those sessions 
aren't going to happen, and training has to be approved at a 
very high level.
    In the particular case of 501(c)(4)s, in response to the IG 
recommendations, we provide clearer guidance to employees, we 
have provided more training. One of the recommendations was to 
provide training before any election, so we will make sure that 
people understand what is appropriate and not appropriate in 
terms of reviewing these organizations as we go forward.
    And so we are comfortable that, while the standard is still 
facts and circumstances, which is a little hard to know about, 
we are comfortable that we have much better training and much 
better visibility and oversight of this issue. Before--this 
goes back to 50 years ago--nobody paid a lot of attention to 
it, which is I think part of the problem.
    Mr.  Serrano. Well, I thank you for your testimony. I thank 
you for appearing here today.
    I know you have a very difficult job ahead of you, but if 
it makes you feel any better, understand that all the years I 
have been in public office, and it is 40 now, that the IRS has 
never been a very popular agency. The IRS and the INS were 
right up there with some folks. So, yes, you have a challenge 
to bring back the confidence the President wants, but know this 
is not new. There has been a distrust for many years of the IRS 
by the public, and this is something we have to keep working 
on.
    So thank you so much for your service.
    Mr.  Koskinen. Thank you.
    Mr.  Crenshaw. Thank you.
    Mr. Amodei.

                              TRANSPARENCY

    Mr.  Amodei. Thank you, Mr. Chairman.
    And, Mr. Commissioner, thank you for your answers, and I 
appreciate that.
    I guess, I want to just--a couple of things. One is, when 
we talk about transparency and all that other sort of stuff, 
any plans to release the Lerner emails to any of the other 
committees in the near future?
    And let me tell you why I am asking that.
    Mr.  Koskinen. No, that is a good question.
    Mr.  Amodei. The context of the proposed regulation, the 
context timing-wise that it comes forward in is something that 
I don't think anybody in this room can ignore. So, actually, 
you know, the 50 years may not be very important, but on the 
heels of what has happened in 501(c)(4)s and then--because if 
that hadn't have come to light, the IG probably wouldn't have 
taken a look into that. And if that hadn't have come to light--
you know, so you sit here and you say, going forward--and I 
respect that--we want to be open, transparent, all that other 
sort of stuff. But when you say, and, by the way, as part of 
that, we are going to define political activity--and God bless 
you for your courage. Sounds about like defining obscenity to 
me. And the Supreme Court had a hell of a time trying to do 
that a long time ago. So good luck. I mean, I wish you success.
    But I sit there and look at that and say, the timing of 
when this is going--and we are going to define political 
activity. With all due respect, that is something the 
legislative branch probably ought to undertake if it needs to 
be done, because the regulation will have the effect of 
subsuming whatever the 50-year-old law is when you define 
political activity in the executive branch. And we are sitting 
here trying to go, I agree with it, disagree with it. If that 
needs to be done, then we ought to have this debate----
    Mr. Koskinen. Right.
    Mr. Amodei [continuing]. With all due respect.
    Mr. Koskinen. No, that is right.
    Mr. Amodei. So when are those Lerner emails going to those 
other meaner committees than this one?
    Mr. Koskinen. First, I would just correct a slight 
technicality. What has been in place for 50 years is the 
regulation. In other words, in 1959, it was an IRS regulation 
that set in motion the definition that we have today. The law 
has been there for a long period, longer than that.
    But you are exactly right. Even if we end up with a 
regulation, the Congress always has the authority to either 
change the statute or overrule the regulation. So it is not as 
if the IRS and Treasury have carte blanche to do whatever they 
want.
    With regard to the investigations, I am in the process of 
having further conversations with Chairman Camp of the House 
Ways and Means Committee about just your question. And we are 
anxious to provide materials, as I told Chairman Camp when I 
met with him about a month ago. And he gave me, which I think 
was very helpful, a list of things that were the last items or 
the items that they needed to have to get to closure, and we 
are very anxious to get him all the information he needs to 
make his decisions.
    And so we are working with the Committees. We are working 
with the Senate Finance Committee, as well, and the other 
Committees. We have four other Congressional investigations 
going forward, and----
    Mr. Amodei. And I appreciate that.
    Mr. Koskinen. And we want to satisfy them that they have 
the information they need to reach the determination they are 
making about the determination process.
    Mr. Amodei. But let me tell you why I think it is 
important. It is not important in terms of who did what to who 
or who shot the sheriff. It is important in terms of looking at 
this regulatory proposed action and going, was this a flaw in 
the regulation or was this something out of the ordinary for 
purposes--because, I mean, to listen to this today, it is like, 
``Yeah, we are changing the regulation.'' Not you, but I mean 
generally.
    So, anyhow, I think it is important in terms of examining 
how the existing regulatory body was working before this latest 
issue came up, not in terms of who got caught doing whatever.
    So, with that, I thank you, look forward to visiting with 
you.
    And thank you, Mr. Chairman. And I yield back.
    Mr. Koskinen. And let me just say a couple things to make 
sure we have clarity.
    The regulation was drafted pursuant to and after the IG 
report. And the IG report, by my understanding, had been under 
way when the IRS acknowledged that it, in fact, had been 
inappropriately highlighting organizations for review in the 
501(c)(4) area. But the IG investigation had been going on for 
some months, and the draft of the regulation was a 
recommendation from the IG. But you are exactly right, we need 
to actually provide as much transparency as we can.
    My goal on the investigations is to do whatever we can to 
get all of the investigators the information they need for the 
determination process. When you start a new investigation 
saying, well, actually, don't worry about the regulatory 
process, that is, you know, a different investigation than what 
we have been dealing with for the last 8 to 10 months. And my 
only thought about that is we are happy to try to get you 
information about that, but we can't do a series of 
investigations all at the same time.
    Mr. Crenshaw. I guess it would be nice to have a rule to 
just say you can't pick out people based on their political 
philosophy and bully them and intimidate them and harass them. 
That would be a pretty clear rule, but----
    Mr. Koskinen. I think that is the rule.
    Mr. Crenshaw. Well, then I guess that got violated.
    Mr. Koskinen. And I think there are investigations going on 
to find out exactly whether they were and how.
    Mr. Crenshaw. Let me recognize Mr. Yoder.
    Mr. Yoder. Thank you, Mr. Chairman.
    And, at this point, I would be happy to yield to Mr. 
Serrano to say anything else nice he would like to say about 
me.
    I mean, I don't know. If you ran out of time, I would be 
happy to provide additional time for you.
    Mr. Serrano. Don't push it.
    Mr. Yoder. All right. Okay.
    I want to thank my friend, Mr. Serrano, for his comments. 
And, as you can see, on that issue, we have strong bipartisan 
support. I know we have your assurances that we are going to 
try to fix that.
    There are a lot of issues, I think, that we agree on in 
this Committee and across Congress that don't always get the 
media headlines. And so it is nice to find more and more of 
those that we can work together on to fix in this country. And 
I appreciate Mr. Serrano and other folks on both sides of the 
aisle working on that and other issues.
    And I want to give another one, I think, that maybe we have 
some bipartisan agreement on. And this comes from a 
constituent, as I asked, what question should I ask the IRS 
Commissioner? Right? This could be fun. What would you like me 
to ask? And I think this is a very important question and one 
probably felt by a lot of Americans.
    We have talked this morning about the trust deficit that 
exists between the Internal Revenue Service and Americans, 
particularly in light of what I will term as much more 
egregious than maybe we have heard from my colleagues on the 
other side of the aisle this morning, the abuse of the Code to 
attack people based on ideology. And we are going to continue 
to investigate, not only your investigations you have 
internally, sir, but here within Congress, serious 
investigations. And people need to be held accountable more so 
than they have been.
    That being said, John, a CPA in my district, makes the 
point that he is a CPA and the Tax Code is very difficult to 
navigate. I think we would all agree with that. Four million 
words, you know, 10,000 pages.

                             TAX PREPARERS

    How can the IRS make it easier for qualified preparers and 
regular taxpayers to efficiently manage their taxes and provide 
quality service without the threat of onerous penalties for 
unintentional oversights or misinterpretations or unintentional 
errors?
    Additionally, how can there be less of an adversarial 
relationship between the professionals and the IRS when dealing 
with problem taxpayers, as well? Absent new dollars, because it 
is not just a function of money, how can you operate the IRS in 
a different way to improve that relationship, which, as you can 
imagine, for even a CPA or a regular hardworking American who 
has to pay their taxes, it is a nightmare trying to figure out 
how to sort through all this. Many of us in this country, I 
think on both sides of the aisle, believe we need tax reform.
    And I would like your comments on that, sir.
    Mr.  Koskinen. Well, as I told the Chairman earlier, I 
strongly believe in tax simplification and tax reform to make 
it easier for people to figure out how much they owe. I mean, 
most Americans, if you could tell them what they owe, they are 
happy to pay it--or not overly happy, but willing to pay it. 
But when you impose all sorts of complexity and make it 
difficult, they get a little less happy.
    We have, I think, an important partnership with preparers 
and those who are qualified to file returns. You know, we are 
always concerned about unregulated preparers around the 
periphery, who sometimes engage in fraud, sometimes are 
uneducated and really don't provide good service. But for 
people like your constituent, we have a lot of programs trying 
to reach out to preparers, trying to provide them as much 
information as we can.
    I would hope that as we make the Web site more user-
friendly--it used to be clunky in the extreme. And we are 
spending some of our resources there, because we do think it is 
important for taxpayer service. But we value the work that 
preparers do. As I say, they are our outreach to clients. If we 
can have them comfortable that they understand the intricacies 
of the Tax Code, it will make it easier for their clients.
    One of the things we have is a special tax-preparer line 
they can call. One of our concerns is even there the resources 
constraints have made people wait longer than we'd like. We 
have heard from preparers that they have to sit on the line 
longer. And I don't think that is fair to them. I mean, they 
have businesses to run. If they have to wait half an hour or 45 
minutes on the special line, if they have five or six clients, 
they could waste a significant amount of time.
    So all I can say is we value the preparer community. We 
will continue to reach out to them. The best thing we can do 
for them is to try to provide them as much information and 
guidance as we can, and we will keep doing that.
    Mr.  Yoder. And, sir, it is also a function of style. As 
you know, they take their cues from the person leading the 
organization. And so, efforts that you can make to ensure that 
the relationships are less adversarial and more supportive--I 
think we see this at all levels of the Federal Government, 
where Americans feel that these Federal agencies are not there 
to work with them but, rather, to work against them.
    Mr.  Koskinen. Right.
    Mr.  Yoder. And this is a common problem at every agency. 
And I hope that you will do your best to try to fix those 
problems at the IRS.
    Mr.  Koskinen. Right. Well, one of the advantages of this 
tour I am on is I do get to talk to people doing the work.
    And in Philadelphia I had a very nice and a very productive 
meeting with a half a dozen Revenue Agents and Revenue 
Officers. And that is where I got the willing-to-pay/unwilling-
to-pay distinction.
    And their point--these are Revenue Officers. You think they 
are sort of banging on your door to collect--they were saying, 
we need to make sure that if you are willing to pay and you 
just have difficulties, that we work with you, that we don't 
actually make you feel uncomfortable.
    And, in fact, their concern is, the biggest problem they 
have is, a lot of times, people don't respond to notices from 
the IRS because they are very nervous about it and concerned. 
And their point was we ought to have a way of making sure 
people understand that if you are just having trouble paying 
your taxes, we are going to try to work with you.
    The people we don't like are the people who, are 
consciously trying to avoid paying taxes, trying to hide their 
assets, moving around the country, engaged in fraud. Those 
people, you know, we don't have to be very nice to.
    But I think the point is well-taken. If there is an honest 
mistake made, if people didn't understand things, and they are 
trying to pay, we ought to have a productive working 
relationship with them.

     EXPENSES FROM 501(C)(4) INVESTIGATION AND AFFORDABLE CARE ACT

    Mr.  Yoder. And then, if I might, Mr. Chairman, one real 
quick budgetary question.
    Mr. Amodei asked this question earlier in a different way, 
but I would like to know--and maybe you could just follow up 
with information for the committee--how many hours and how many 
dollars have been spent related to the controversy created by 
the investigation related to 501(c)(4) groups last year and the 
reforms or the changes that you are looking at now. And I know 
you said it was less than 1 percent of your budget. If you 
could let us know the impact. I know this is prior to your time 
there, but these things do have an impact on time that could be 
spent elsewhere.
    And how much money has been spent and how much are you 
needing and requesting related to the enforcement of the 
Affordable Care Act, and the impact that is having on your 
agency. I know several years ago and throughout their hearings 
the IRS has repeatedly asked for hundreds of millions of more 
dollars to hire more agents to go out to make sure that small 
businesses and Americans are following the new big government 
mandates on them regarding this law. And I would like to know 
the cost to the IRS and where you are finding those resources.
    Mr.  Koskinen. I can answer that question, because it is a 
question I have been asking. And that is, the 2014 Presidential 
budget for the IRS proposed $440 million for the Affordable 
Care Act. $330 million of that was for information technology. 
None of that funding was provided. One of the constraints we 
have is we have to pay for the IT, particularly, out of the 
other IT projects we otherwise would have funded, as we go 
forward.
    The $100 million is primarily for preparing for and dealing 
with the information issues, designing of the systems, making 
sure that they work. As you can imagine one of the reasons it 
is my priority is I am committed that we will, at this time 
next year, have an effective filing season, which means we will 
be effectively implementing our responsibilities under the 
Affordable Care Act. We did that at the front end; the rollout 
difficulties were not IRS difficulties.
    It is a major challenge, and we are finding the funds. It 
is one of the things that we have to then find ways to fund in 
other areas of the IRS.
    [The information follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Mr.  Yoder. Just a clarification point, Mr. Chairman.
    So the amount requested was 440. How much does the IRS 
spend annually on the implementation of the Affordable Care 
Act? And how much does it project to spend in the next years?
    Mr.  Koskinen. I can get you that in terms of what we have 
spent for the last couple years, what we are spending this 
year, and what our estimate is for next year.
    Obviously, one of the issues that is going to happen to us, 
as I have talked with people about it, is that starting late in 
the fall, but certainly during filing season next year, because 
it is a new requirement, we are going to have a lot of 
inquiries from preparers, as well as taxpayers, if they are 
eligible for a Premium Tax Credit. And even if they aren't, 
making sure they are comfortable filling out that return. And 
we have started that public information campaign this week. We 
will spend all the rest of this year trying to, again, get 
preparers and taxpayers comfortable that they understand.
    Now, 70 or 80 percent of the taxpayers aren't going to have 
anything to do with it at all. They are just going to check a 
box to say, ``I have insurance,'' and they will move on their 
way. So a big chunk of people won't be affected by it.
    But we will be glad to get you and the Committee the 
information about over the last 2 or 3 years how much have we 
spent for IT or personnel on Affordable Care, what are we 
spending this year, and what do we expect the requirements are 
going to be in the next year or 2.
    [The information follows:]


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    
    Mr.  Crenshaw. I am sure that when you next appear before 
us, then there will be a lot of discussion about the dollars 
that are necessary.
    Thank you.
    Ms. Herrera Beutler.

                                BONUSES

    Ms.  Herrera Beutler. I wanted to ask about bonuses really 
quickly and making sure that bonuses are being given to 
employees who actually have shown improved performance or goals 
that they have met.
    I don't know if you have seen, have you taken--we put some 
report language together. Have you taken our guidance within 
the House report language to ensure that bonuses would be 
awarded to those who actually show improved employee 
performance and productivity?
    Mr.  Koskinen. Yes, they are performance awards. The pool 
is 1 percent of compensation. The performance judgments are 
made by managers, not by the employees themselves, obviously. 
And the history is that those awards have gone to about two-
thirds of the employees, so a third don't get any. The average 
size of those awards is about $1,200, so nobody is making a lot 
of money.
    And if I could, hold her time, if I could respond to the 1 
percent, in terms of how did I come to this decision: After the 
decision was made last year, trying to reach the sequester 
levels, that performance awards would not be paid to IRS 
employees, OMB had issued a government-wide edict that 1-
percent performance awards could be made.
    My predecessor decided that while the contract provided the 
Bargaining Unit performance awards a pool of 1.75 percent, that 
we had, we thought, negotiating ability to change that number, 
and the number went to zero. The Union then, understandably, 
filed a grievance, an Unfair Labor Practice, and a lawsuit, all 
of which were pending when I started.
    In the course of negotiating a new agreement, which we are 
in the process of--and I hope sometime in the near future we 
will have that agreement settled--we have been negotiating 
about what the performance pool ought to be going forward, 
and----
    Ms.  Herrera Beutler. When you say the ``performance 
pool,'' what does that mean?
    Mr.  Koskinen. That means that----
    Ms.  Herrera Beutler. Like, the number of people that are 
eligible?
    Mr.  Koskinen. The Bargaining Unit is whatever-thousands of 
employees it is, and you take the salary. And then the question 
is, what is the performance award pool? It doesn't go to every 
employee. And----
    Ms.  Herrera Beutler. So wait a minute. These aren't merit-
based?
    Mr.  Koskinen. These are performance awards based on merit. 
They are determined by the manager. But the size of the pool 
available for awards was set by the contract at 1.75 percent--
--
    Ms.  Herrera Beutler. So that meant--that is a floor. That 
many will get a performance award?
    Mr.  Koskinen. No. 1.75 percent was the pool. Then each 
individual Bargaining Unit was evaluated. A judgment was made. 
And, as I say, about two-thirds of them were eligible for 
awards, performance awards. The average award was about $1,200. 
One-third of them were not eligible because they had not 
performed, determined by their manager.
    And the question is what is the size of the pool or whether 
there would be a pool at all. The decision then was no pool. We 
ultimately negotiated a settlement with the Union that they 
would drop the grievance, the Unfair Labor Practice, and the 
lawsuit, and we would pay not 1.75 into a pool for performance 
awards but 1 percent.
    In terms of how we are able to do that, we had in our 
budget, post-sequester, funding for that because as a result of 
the sequester, we have actually lost another 1,300 people. And 
on an annualized basis, that provides us part of the revenues 
we need. We have made more assumptions about cuts in our other 
overhead expenses of about 4 percent.
    And the arrangement with the Union is that we won't pay 
those awards in the fiscal year the way we have always done it. 
We pay managers 2 or 3 months after the fiscal year, into the 
next one. So we are moving the Bargaining Unit awards into the 
next fiscal year. So this year we are only going to pay one 
pool award; there won't be two. And that is how it fits within 
the budget.
    So we had----
    Ms.  Herrera Beutler. So can I, really quickly, reclaiming 
my time. I----
    Mr.  Koskinen. I was going to give you back 2 minutes.
    Ms.  Herrera Beutler. What I am interested in understanding 
is--I think if someone is eligible for an award because they 
have shown based on their merit and their hard work that they 
deserve it, I am fine with that.
    Mr.  Koskinen. Good.
    Ms.  Herrera Beutler. My issue is understanding--you said 
that the managers make the decision. So I assume, you know, you 
have issued guidance whereby they can use, you know, some kind 
of criteria to make this?
    Mr.  Koskinen. Yes, there are----
    Ms.  Herrera Beutler. And----
    Mr.  Koskinen. There is an agency-wide performance plan run 
by the Human Capital Office.
    Ms.  Herrera Beutler. And then there is a follow-up for 
quality control to make sure that it is not a manager saying--
right? So that people have actually met these awards. Because 
we have seen people receive these performance awards who, for 
crying out loud, are the subject of investigations.
    So I guess I want to make sure that, moving forward, that 
these awards are appropriately--that that is where my question 
is.
    Mr.  Koskinen. I have asked that question myself to make 
sure that, for managers as well as Bargaining Unit employees, 
when we pay a performance award, we need to be comfortable that 
the system is actually rewarding performance. Employees know 
who is performing and who is not. And if you are making awards 
to people who aren't performing, that is not good for morale 
either.
    So we have a very sophisticated system. And I think your 
point is well-taken, that we need to--and I have said the same 
thing--we need to evaluate it to make sure that we are 
comfortable that this just isn't Lake Wobegon and everybody is 
above average. That basically we need to be rewarding 
performance.
    And that is my final reason for making this decision. We 
could do it within the budget. And these are, again, employees 
who haven't had a pay raise in 4 years, have been subject to a 
lot of difficulties over the last year. And, ultimately, as I 
say, 75 percent of our budget is people. Without the people, 
the work isn't going to get done.
    Part of the reason I am out wandering around the country in 
the middle of the wintertime is to remind those employees, who 
are dedicated to the mission, that we value their work. They 
are terrifically dedicated; some of them have been around 20, 
25, 30 years, working on this area. And their only concern is, 
can we get them the resources so they could provide better 
taxpayer service.
    So if, in the course of settling with the Union and saving 
us the risk of having to pay more in that pool and being able 
to time it in a different way, I can send a signal to the 
employees that we value their work, it seemed to me that was 
appropriate.
    Ms.  Herrera Beutler. All right.
    With that, I yield back.
    Mr.  Crenshaw. Anybody have any other questions? I think we 
are about ready to move into panel two.
    So let me just say to you, Commissioner, thank you. I know 
how busy you are. Thank you for being here today.
    And we know what a difficult job you have. I think 
sometimes we lose sight of the good things that the IRS does, 
that you do every day under difficult circumstances. Collecting 
the revenues, talking to folks, answering questions, chasing 
down the bad guys, all the things that you do every day, we 
very much appreciate. And we are here to help you do that even 
better.
    So thank you for the time.
    This concludes the first panel, and we will have the second 
panel come along.
    Thanks so much.
    Mr.  Koskinen. Thank you, Mr. Chairman.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


                        Panel #2--IRS Oversight

    Mr. Crenshaw. Well, let me welcome our second panel today. 
I want to thank you for your patience and for being with us 
today. We appreciate both your time and your expertise.
    I am pleased to welcome back the Treasury Inspector General 
for Tax Administration, Russell George, to share his 
observations of compliance and recommendations about the 
efficiency of the IRS. Since the IRS is the largest Treasury 
bureau, then TIGTA is accordingly the largest of the three 
Treasury inspector generals. And to whom much is given, much is 
expected.
    We are relying on your office and your counsel to help us 
assess and understand the IRS's management and use of 
taxpayers' funds. So welcome back, Inspector George.
    I am also pleased to welcome back Nina Olson, the National 
Taxpayer Advocate.
    This is your first appearance before the subcommittee since 
2007. I am hoping today we can hear from you about services you 
provide to the taxpayers, what you are doing to help those 
taxpayers who may have been victims of tax fraud and abuse, how 
the IRS can make the most of its funding. So welcome, Ms. 
Olson.
    I appreciate the service of both of you all and look 
forward to your testimony. But first let me yield to Mr. 
Serrano, the ranking member, for any opening statement he would 
like to make.
    Mr. Serrano. Well, I also want to welcome you both here.
    We just had a very interesting conversation with the 
Commissioner, and I would be interested to hear, Mr. George, 
what your recommendations are and how things are falling into 
place or not, and of course from you, Ms. Olson, on how we can 
better serve the public and maybe bring down some of that fear 
everybody has of the IRS.
    And so we thank you, and we look forward to your testimony.
    Mr. Crenshaw. Thank you.
    Let me start by asking both of you all a question. Oh, I am 
sorry. I would like to ask you to make your opening statements. 
I got carried away. Mr. Serrano was so brief, I just got so 
confused.
    But, please, take your time and tell us what is on your 
mind. Mr. George, will you begin?
    Mr. George. Thank you, Chairman Crenshaw. Ranking Member 
Serrano, Members of the subcommittee, thank you for the 
opportunity to discuss significant challenges currently facing 
the Internal Revenue Service.
    Let me start with the topic of providing quality customer 
service, which is the first step to achieving taxpayer 
compliance. We have seen a decline in the IRS's ability to 
provide a sufficient level of customer service in each of the 
channels that taxpayers use, including telephone, walk-in, and 
correspondence.
    Many taxpayers use the telephone to contact the IRS. 
Meeting demand with reduced staffing continues to be a 
struggle, resulting in long wait times, abandoned calls, and 
taxpayers redialing the IRS toll-free telephone lines for 
service.
    At its walk-in offices, known as taxpayer assistance 
centers, the IRS has decided to eliminate certain services, 
such as tax-return preparation, that can be obtained through 
other channels. The IRS assisted over 6\1/2\ million taxpayers 
at these service centers in Fiscal Year 2013 but plans to 
reduce that number by 14 percent this year.
    The IRS's ability to process taxpayer correspondence in a 
timely manner has also declined. The backlog of paper 
correspondence inventories has substantially increased. The 
over-age inventory rose from approximately 593,000 at the end 
of 2012 to almost 1.2 million at the end of 2013.
    As with all Federal agencies, the IRS is required to 
estimate the amount of improper payments made each year and 
report to Congress on the causes of and steps taken to reduce 
these payments. The IRS limits its reporting to improper 
payments associated with the Earned Income Tax Credit. However, 
in our view, the IRS's assessment should also include payments 
due to refund fraud, such as identity theft.
    Tax-fraud-related identity theft continues to be a growing 
problem which results in billions of dollars in improper 
payments. The total impact is significantly greater than the 
amount the IRS detects and prevents. Using the characteristics 
of tax returns that the IRS confirmed as involving identity 
theft, we analyzed tax year 2011 returns and identified 
approximately 1.1 million undetected returns that have 
potentially fraudulent refunds totaling approximately $3.6 
billion.
    While this is a decrease of $1.6 billion from the prior 
year, indicating that the IRS is making progress, significant 
improvements are still needed. Expanded access to the National 
Directory of New Hires could immediately provide the IRS with 
information needed to make substantial improvements in its 
fraud-detection efforts. Legislation is needed to expand the 
IRS's authority to access this data.
    The Tax Gap is also a continuing challenge. The most recent 
IRS assessment is that the gross Tax Gap is about $450 billion 
annually. Most of this amount, $376 billion, is attributable to 
taxpayers underreporting their tax liability. The law provides 
for certain new reporting requirements, including merchant card 
reporting and foreign account reporting, to help the IRS 
identify unreported income. TIGTA will be evaluating the 
implementation of these requirements this year.
    Implementation of tax law changes associated with the 
Affordable Care Act will also present many challenges for the 
IRS in the coming years. For example, the Affordable Care Act 
provides for a refundable tax credit, known as the Premium Tax 
Credit, to offset an individual's health insurance expenses. As 
with other refundable credits, there is a risk of improper 
payments.
    Further, in September 2013, we reported that a fraud-
mitigation strategy is not in place to guide Affordable Care 
Act systems development, testing, initial deployment, and long-
term operations. The IRS informed us that two new systems are 
under development that will address fraud risk. However, until 
these new systems are successfully developed and tested, TIGTA 
remains concerned that the IRS's existing fraud-detection 
system may not be capable of identifying and preventing refund 
fraud. We are also concerned about the protection of 
confidential taxpayer data that will be provided to the 
exchanges.
    Our review of the IRS's customer service strategy 
determined that it provides sufficient plans to assist 
individuals in understanding the tax implications of the 
Affordable Care Act. The IRS's role in providing customer 
service in this area will become more prominent in 2015. We 
will continue to monitor and correct any problems early in the 
process.
    Chairman Crenshaw, Ranking Member Serrano, members of the 
subcommittee, thank you for the opportunity to share my views.
    Mr. Crenshaw. Thank you.
    [The information follows:]


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    Mr. Crenshaw. Ms. Olson.
    Ms. Olson. Chairman Crenshaw, Ranking Member Serrano, and 
distinguished members of the subcommittee, thank you for 
holding this hearing and inviting me to testify today.
    As you know, the IRS has faced some significant management 
and funding challenges over the last year. In my written 
testimony, I have outlined both the IRS's progress and my 
continuing concerns regarding exempt-organization applications 
and implementation of the Affordable Care Act. Today, I will 
focus on four other areas of particular concern.
    First, I believe it is critical that we adopt a taxpayer 
bill of rights. From time to time, the IRS, which is 
fundamentally an enforcement agency, will do things that are 
administratively convenient for itself but not fair to 
taxpayers. In fact, in the preface of my June report to 
Congress, I analyzed the IRS's actions in dealing with 
organizations seeking tax-exempt status under 501(c)(4) in the 
context of the 10 rights I have proposed, and I concluded the 
IRS's actions would have violated eight of those rights.
    The enactment of a taxpayer bill of rights constitutes one 
important step to prevent similar situations from arising in 
the future. I am pleased that the House of Representatives 
passed the bill of rights I have proposed on a voice vote last 
summer, and I hope the Senate acts, too, because I think that 
the taxpayer bill of rights should have the force of law. But 
the IRS itself has the authority to adopt the taxpayer bill of 
rights, and in case the Senate does not act, I have been 
working with the IRS leadership to try to get agreement to do 
so.
    Second, I am deeply concerned about the decline in the 
IRS's ability to meet the service needs of the taxpaying 
public. Even with the widespread use of tax preparers, the IRS 
received more than 109 million telephone calls on its customer 
service lines last year. Among taxpayers seeking to talk to a 
live assister, the IRS could not answer two out of every five 
calls, and those taxpayers who got through had to wait an 
average of 17.6 minutes on hold.
    For the first 4 months of the current fiscal year, the IRS 
is running behind last year's pace. And to make matters worse, 
the IRS has announced it will only answer basic tax law 
questions on its phone lines and in its walk-in sites until 
April 15th and then no--I repeat, no--tax law questions at all 
after April 15th, including questions from the millions of 
taxpayers who obtain filing extensions and prepare their 
returns later in the year.
    In the light of events of the past year, I understand that 
calls for more IRS funding may meet with skepticism, but I must 
tell you that I don't see any way the agency can begin to meet 
taxpayer needs without more funding. At the end of the day, IRS 
funding reductions don't punish the IRS; instead, they punish 
the nearly 150 million individual taxpayers and more than 10 
million business-entity taxpayers who are trying their best to 
comply with the monstrously complex Tax Code we have imposed on 
them and who are not receiving the help they need from their 
government.
    Thus, as you start to make funding decisions for fiscal 
year 2015, I implore you to keep in mind the nearly 20 million 
phone calls the IRS didn't answer last year, the tens of 
millions of taxpayers who had to wait on hold for an average of 
nearly 18 minutes, also after calling several times, and the 
IRS's new policy of not answering many tax law questions. If we 
don't do a better job of assisting taxpayers, noncompliance 
will increase, and taxpayers and the public fisc will be 
harmed.
    Third, while the IRS is doing a better job of detecting and 
stopping identity theft and other refund fraud returns, I 
remain concerned that victims of tax-related identity theft are 
not being assisted as quickly and as seamlessly as they could. 
I have recommended for many years that the IRS provide victims 
with a single employee who would serve as his or her sole 
contact and who would coordinate crossfunctional work to 
resolve cases more quickly and painlessly. The IRS should stop 
dithering and just do this.
    Fourth, in my written testimony, I provide a detailed 
analysis of the sources of Earned Income Tax Credit errors and 
make practical, concrete proposals for reducing the improper 
payment rate, even as we ensure that eligible taxpayers are not 
deterred from receiving the EITC.
    These recommendations include emphasizing personal contact 
during audits, regulating tax preparers to improve return 
accuracy and protect taxpayers, imposing penalties on preparers 
who fail to comply with due diligence requirements, using a 
third-party affidavit form to verify the residence of a child 
in the EITC audits, and accelerating the use of third-party 
information reports so the IRS can verify income data before 
paying out refunds.
    This last recommendation will help address identity theft, 
refund fraud, and improper payments combined--namely, that 
Congress direct the IRS to develop a plan to enable it to match 
information return data against tax return data before paying 
out refunds. At the same time, it could make the data available 
to taxpayers and thereby help them prepare their returns more 
accurately and easily.
    I appreciate this opportunity to share my thoughts with 
you, and I would be happy to answer any questions you may have.
    Mr. Crenshaw. Well, thank you very much.
    [The information follows:]


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


                            LEVEL OF SERVICE

    Mr.  Crenshaw. Thank both of you all.
    And let's ask a few questions. It is interesting to me to 
hear both of you all talk about the fact that one thing that 
IRS doesn't do very well, and that is answer the telephone. We 
just had the Commissioner before us, and it was one of my main 
concerns as I talked to him.
    I know it is always easy to just say, if we had more money, 
we could hire more people, we could answer the phone more. But 
as I told him, when you have $11.3 billion, then you have to 
decide how to spend the money. And it seems to me that one of 
the priorities ought to be customer service. When you look 
through the entire budget, somehow, some way you ought to be 
able to find the money to do the things that are most 
important. And if that is the--it is kind of the face of the 
IRS, answering the telephone. If you only get half the calls 
answered, and when you get answered, you wait 20 minutes--
somewhere, somehow, in all of that $11 billion, there ought to 
be money.
    I told the Commissioner, it bothered me to find $63 million 
were paid out as bonuses, reversing a decision that his 
predecessor had made because there wasn't enough money. But 
those are the kind of priority decisions that are being made, 
and that is what we talked about today.
    So maybe, particularly Ms. Olson, maybe as the Taxpayer 
Advocate, as you advocate for those people that are trying to 
get through to the IRS, maybe there are some things that you 
can do as you look through that $11 billion and say, here is an 
idea about how you could save some money here, whether it is in 
your computer contracts or your rentals.
    I know they will say they are saving money, they are 
doing--and I appreciate that, because it is tough. But, still, 
it seems like you have to do the most important things first of 
all. I hope maybe both of you all can assist us in finding 
places where there is a little more money to move to the 
customer service side, and we will see how that goes.

                   IMPLEMENTATION OF RECOMMENDATIONS

    Let me just very quickly ask you all, because we have these 
recommendations that were made, particularly Mr. George, we 
have the scandal going on and the recommendations that we 
made--and each of you actually made them, and the President 
said they are going to implement those.
    Tell us how the IRS is doing in implementing each of those 
recommendations, in general. And tell us, do you believe that 
some of the groups that are applying for tax-exempt status, are 
their people still being subjected to this kind of bullying and 
scrutiny? And then, finally, what work do you plan to do to 
kind of make sure that this doesn't go on any further?
    So maybe each of you could kind of touch on that.
    Mr.  George. Thank you, Mr. Chairman. If I may start first.
    The IRS has reported to us that they have adopted all of 
the nine recommendations that we issued in our report on the 
inappropriate treatment of certain groups seeking tax-exempt 
status. We are in the process now of engaging in a review to 
determine the adequacy of the corrective actions that the IRS 
purports to have taken. We are in the middle of that. I don't 
have a deadline yet as to when we will complete that.
    But one of the issues that we did recommend was catching up 
on the backlog of these applications that were still 
outstanding. And so, as my comments suggest, there are still 
outstanding applications for groups seeking an up or down from 
the IRS. I don't know, I wasn't here for the entire portion of 
the Commissioner's comments, but he, I know, in private has 
acknowledged that that is the case and that is a priority, but 
our report will give a thorough response as to the adequacy of 
their response to our recommendations.
    Mr.  Crenshaw. Thank you.
    Ms. Olson.
    Ms.  Olson. We have been really closely focusing on the 
process of getting an exempt-org application through, which 
creates some of the backlog, the amount of review that they 
were doing or the steps that they were taking. And we have been 
working very closely with them.
    We have also trained my employees so they do better 
advocacy when they get cases in. And we have seen a significant 
number of cases. We have issued a significant number of 
taxpayer assistance orders on these cases, including several 
that involved (c)(4)s where we felt we were not getting the 
attention. Most of it was timeliness, getting a decision.
    Something that my organization really focused on was the 
key point in Mr. George's report, where the frontline employees 
were asking for guidance on these issues for over a year, and 
no guidance was coming back. And we found that the Exempt 
Organizations function had no process for tracking the age of 
these guidance requests, for tracking the requests and saying, 
this is 3 months old, this is 6 months old. And when you leave 
employees to their own devices for a year and the backlog is 
continuing and continuing, they are going to come up with a 
solution. And we all know what that solution was: a BOLO list.
    And so we have really been focusing with them to be 
responsive on their guidance, to track the guidance so they 
have the management controls in place, and, as well, to look at 
their process and say, what do we really need to know?

                       501(C)(4) DRAFT REGULATION

    I would comment, if I could, on the prior discussion about 
the regulations. I spent a fair amount of time over the last 
week really looking at the proposed regulations, and what I saw 
in that was the IRS responding to a recommendation of mine and 
I think Mr. George's, to get greater clarity, see if there are 
some bright-line tests you can do. But when you go to the 
bright-line tests, there are winners and losers, and you have 
that tradeoff of doing facts and circumstances, which is 
subjective in a way, versus bright-line test, which is 
objective but you are going to get some results that we may not 
want to get.
    So I view these as an opportunity to begin a dialogue with 
people and hear back what the country really wants in these 
organizations.
    Mr.  Crenshaw. Well, it is interesting to hear that 
perspective, because I do think, as you probably know, they are 
expecting 100,000--they have already had over 90,000--comments 
on one of the most controversial, toxic proposals ever been 
made. The good news from hearing the Commissioner say, at least 
in his opinion, they wouldn't be put in place anytime soon, but 
he didn't really say when.
    But I think your point that there ought to be a lot of 
dialogue about that, because it certainly may have a chilling 
effect on these elections coming up now. And it certainly is 
arguable that people's freedom of speech could be limited, so 
it is very important, I think, as we go down that road. So 
thanks for that.
    Mr. Serrano.
    Mr.  Serrano. Thank you.
    And thank you both for your testimony.

                      TIGTA INVESTIGATION RESULTS

    Mr. George, your lead investigator reviewed 5,500 emails 
and concluded that there was no indication of political 
motivation, yet you failed to mention this until months after 
your audit was published. Furthermore, you never mentioned that 
progressive groups were targeted for scrutiny, as well. Your 
report repeatedly emphasized the Tea Party and other 
conservative groups while using the term ``other'' to refer to 
the two-thirds of the applications that were examined that did 
not involve Tea Party groups. External studies of similar 
information have found that terms like ``progressive'' and 
``Occupy'' were also used as part of the inappropriate criteria 
in subjecting groups to extra scrutiny.
    Are you concerned about how your initial report has been 
used? Do you think you should have been more forthcoming or 
comprehensive in your analysis? At last year's hearing, I 
thought that you said you planned to take another look at the 
groups. Have you done so?
    And I should have prefaced my comments by saying that I 
join my colleagues in denouncing anything that went wrong, in 
terms of scrutinizing people and groups. But your report 
indicates basically that it was the Tea Party when, in fact, it 
has been proven that there were other groups. And we want to 
know why you omitted that and why you did not clarify later on 
when it was known not to be the case.
    Mr.  George. There are obviously a number of issues there, 
and I beg your indulgence, Mr. Serrano; I may ask you to 
repeat, you know, one or two of them.
    But let me start with the initial comment that you made, 
and that is about the 5,000-plus emails. It was during the 
course of the initial report when I was informed by staff that 
there existed a, quote/unquote, ``smoking gun memo,'' which I 
haven't seen, which perhaps--which purported to say, hey, IRS, 
do this as it relates to the groups that were the subject of 
this, for lack of a better word, poor treatment by the 
determination unit in Cincinnati and, as we subsequently 
learned, some of the people in Washington.
    My auditors indicated to me that they did not have system 
access to employee emails. My Office of Investigations did have 
software and access which would allow them to do a quick-scan 
search to see if that memorandum existed and could be located.
    And so I did not learn about the memo that you noted in 
your comment until I was literally sitting in a hearing, I 
believe it was before the House Oversight and Government Reform 
Committee, and so was not aware that that assertion was made by 
the Deputy for Investigations. And I am not going to say that 
it is invalid in its conclusions, but I was just as surprised 
to learn about that conclusion as many others were.
    So it is not that I was hiding anything; it was that I was 
unaware that that review of the documents had been completed 
and that that was the opinion of that member of my staff.
    Now, as it relates to progressive groups----
    Mr.  Serrano. So this was a member of your staff who came 
to this conclusion but didn't tell you?
    Mr.  George. Did not tell me directly, correct. That is 
correct.
    Now, as it relates to whether progressive groups, you have 
to keep in mind, sir, this was an extraordinarily fluid period 
in which we found ourselves. And it was literally 6:30 p.m. the 
night before my first testimony before the Senate Finance 
Committee in which my former chief counsel indicated that there 
was a hidden tab in one of the documents that the IRS had 
supplied to us that indicated that there were other be-on-the-
lookout lists. At that time, we had no idea until then, at 
least I didn't, that it existed, but we certainly did not have 
any indication as to how they were being used.
    Now, from the outset of our review, we did know that groups 
with the names ``Tea Party,'' ``9/12 project,'' and ``Patriot'' 
were being identified using BOLOs and other criteria and that 
the IRS had set those aside for special processing.
    Now, when we learned about the existence of these other 
BOLOs with ``progressive'' and a few other names on it, there 
are two factors. One--and this is the key--Title 26, Section 
6103 of the United States Code has criminal penalties if I or 
anyone else with access to that information releases the names 
or, in effect, its tax-return information, with very limited 
exceptions. So the Chairman of the House Ways and Means 
Committee can receive that and the Chairman of the Senate 
Finance Committee can receive that information without 
restriction. No other committee, including this one, has access 
to that information. And if I were to reveal that information, 
not knowing, one, whether they were protected by Section 6103, 
could be subject to penalty.
    And so in the late hour of receiving that information and 
during the course of that period while we are trying to 
determine what, if anything, the IRS did with this information, 
I felt it best to--we had our facts in place before opening up 
what could have been a big issue and what could not have been a 
big issue; we did not know at that time.
    And, lastly----
    Mr.  Serrano. Yeah, but let me tell you what troubles me 
about your testimony. It seems, unless I am hearing it 
incorrectly, and that is possible, that you knew early, 
according to your report, that certain groups were being 
targeted, but you found out other things the night before you 
were ready to testify. And so I have to ask myself, how come 
you were not aware in your investigation, in the ongoing 
investigation, that other groups and other issues were at play?
    It seems to me from what I heard from you on two occasions 
is that, right before you were ready to testify, you found out 
about this or found out about that or were told that this was 
taking place or not. Yet my big question to you is, are you now 
ready or have you done anything in the past few months to say 
more than the Tea Party was targeted, if you will?
    And remember, remember, sir, that I am one of those liberal 
Democrats who denounced this practice if it did exist, while 
also saying that there are people who have misused these breaks 
they get by not having to put forth who their donors are. And 
that is at the bottom, or at the center of the problem. So you 
are not talking to one who is defending everything that 
happened.
    But it seems to me that you are not telling me either 
everything you know now or everything you have done to correct 
the misconception that went out there that only certain groups 
were targeted, when, in fact, that is not what happened, and 
that has not been the history of this country anyway.
    Mr.  George. I understand what you are saying, sir, but, 
there is something that I neglected to mention at the outset of 
my response. And that is, the very evening, so it must have 
been around 7:00 p.m., the night before that first testimony, I 
instructed my auditors to open up an audit to determine how 
these other groups were treated. And we are in the process of 
engaging in that review.
    Now, just to be clear, there is an ongoing FBI 
investigation, and so we are restricted in terms of the people 
to whom we can speak----
    Mr.  Serrano. About all groups or about the other groups, 
as you refer to them?
    Mr.  George. About the previous--the existing--the initial 
group of people that we identified.
    But we are doing an audit, and we have spoken to a few 
people who have already gone through that process, but I don't 
have a due date for that.
    And I also need to stress, too, sir, that the BOLO list, 
the be-on-the-lookout list, that we identified, some of which 
had these progressive groups listed on them, our mandate was to 
look at the political advocacy or the campaign activities of 
these groups, approximately 298 of them, and only 3 had the 
name ``progressive'' in them.
    And I have to again--I have made this point before. I was 
not in a position to determine, just because a group had the 
name ``progressive'' in it, automatically meant that it had one 
political affiliation or persuasion or another. That was not 
the purpose of this review. Others interpreted it that way. 
That certainly was not in our report nor in any of my public 
comments. I have never said that just conservative groups were 
targeted.
    Mr.  Serrano. Okay. Let me just say this to you. I think 
that your department made a grave error in letting people 
believe that only certain groups were targeted. Because now, 
even if you fix that and get to the bottom of the truth, the 
fact is that there is a political issue in this country that is 
running amok about only certain groups or one certain group 
being targeted. And we are going to hear about this until the 
November elections. That is a fact. That is a fact. That is why 
there will probably be a thousand more hearings about the IRS, 
and most of them will focus not on the budget but on what 
happened here.
    So I just hope you understand that, by going the way you 
did, you might have helped to create this kind of a situation.
    Mr.  George. If I may, though, Mr. Serrano, because the one 
thing that is getting kind of lost in all this, my audit was 
not formally complete before Lois Lerner spoke before a group 
in which she planted a question to ask about this.
    So it was someone from within the IRS who acknowledged that 
they engaged in this inappropriate behavior and treatment. The 
IRS had full access to our audit months before it was released, 
and they did not question the findings that we ultimately 
released, and of course then preempted us in terms of releasing 
that information, which is unprecedented.
    And so it is not as if we intentionally went out of our way 
to cast a pall on any particular, group. But they acquiesced in 
this, sir.
    Mr.  Serrano. Okay.
    Sorry, Mr. Chairman. I know I went over.
    Mr.  Crenshaw. No problem. We will have time to pursue 
that.
    Mr. Yoder.
    Mr.  Yoder. Thank you, Mr. Chairman.
    And thank you both for coming to testify today. We have had 
an eventful morning, both visiting with the new Commissioner 
and then certainly hearing your updates on what is going on at 
the IRS.
    Certainly, the last year or so has put the IRS and their 
rulemaking authority on the front page of nearly every paper in 
America. And I think many Americans are concerned to this day 
about the trust deficit that lies between those who are to 
enforce the law fairly and impartially. And we know that hasn't 
been occurring.
    And I know, Mr. Serrano and Mr. George, you had a dialogue 
here. Your point was one that I was going to make, in that I 
first learned about this back in May of 2013 when Ms. Lerner 
came out and essentially apologized, said it was inappropriate 
and made comments to that regard. And so I think that 
regardless of the original motives--and I think that is what we 
are still trying to determine, is how all this happened, who 
put these things on, and motivations.
    Let's talk about what has happened since then. And we are 
going to go back and relitigate who did what, and we have to 
continue to do that. But in this moment I, at least, want to 
move forward a bit and say, what are we doing to ensure that 
this doesn't happen again? We have talked about the nine 
recommendations and their implementation. You have, in your 
testimony, both written and in answer to the chairman's 
questions, stated they are following the nine recommendations.

                       501(C)(4) DRAFT REGULATION

    I would like to talk about the 501(c)(4) rules that are now 
being proposed. There is going to be legislation before the 
House on this. Interestingly, this has become a bipartisan 
moment of condemnation. You have the ACLU arguing that these 
are essentially putting a muzzle on public speech, and you have 
some liberal and conservative groups doing this.
    I would like to know, are the 501(c)(4) rules that the IRS 
is proposing, are those the result of your recommendations? And 
if not, where are they coming from?
    Mr. George. One of the proposed recommendations did come 
directly from our audit report on inappropriate treatment of 
groups, and that was we proposed that there be guidance on how 
one should measure the primary activity of the 501(c)(4). All 
of the other provisions within the proposed rule we have had no 
role in developing, sir.
    Mr. Yoder. As these rules are developed, is it your opinion 
that the Treasury Department can finalize an IRS rule without 
the approval of the IRS Commissioner?
    Mr. George. I am not privy to the procedures that the 
Treasury Department follows, except to say that for over 50 
years there have been guidance or a directive issued by the 
Secretary of the Treasury, who has deemed that it is the 
Assistant Secretary of Treasury for Tax Policy who has the 
ability to determine the final position of the Department of 
the Treasury as it relates to Internal Revenue Code or tax 
policy. And so I would have to defer to them in response to 
that question.
    Mr. Yoder. So you are not aware of an instance where the 
Treasury Secretary would make a rule or regulation in this 
regard without the consent or the participation of the IRS 
Commissioner?
    Mr. George. As I have never been a part of that, I can't 
definitively state it.
    Mr. Yoder. Okay.
    Mr. George. But one can assume that he would seek--he or 
she would seek guidance from the Commissioner.
    Ms. Olson. Sir, the current proposed rules are submitted 
under the signature of the Deputy Commissioner of Services and 
Enforcement in the IRS. So, I don't know who signs the final 
rules, but that is whom the proposed rules are signed by.
    Mr. Yoder. Regarding, sir, your recommendations on how to 
fix this problem, do you believe if the IRS follows the 
recommendations of the Inspector General that Congress could 
sleep at night, they could be rest assured, that the American 
people could be rest assured and sleep at night, knowing that 
there is no possibility that agents within the IRS could 
utilize ideology or some other perspective that goes against 
their mandate that would target individuals in any way, both as 
individuals for audits or groups for audits?
    How ironclad are these reforms and these changes to 
ensure--because, sir, it is not just on this issue. We have 
people--essentially, there is a chilling effect across the 
country now, a fear of individuals that if they even got 
involved politically and endorsed Mr. Serrano or the Chairman 
or me or made a donation, that now they are on a list, and that 
means that, maybe not today, but some other administration 
might utilize the subjective powers that exist, that human 
individuals have, that can be riddled with fraud or error or 
malfeasance, that they could use that to subject them to an 
audit in the future. And now they have to worry every time they 
get one, why are they getting an audit?
    How do we fix that?
    Mr. George. Well, allow me to answer your question, 
Congressman, by saying we are dealing with human beings.
    Mr. Yoder. Right.
    Mr. George. And so we still officially have not had a 
chance to take a formal review of the implementation that the 
IRS says it has adopted. And we are going to go one by one 
through each one to determine to what extent they have complied 
with what we recommended and any ways that they may have 
diverted, improved, or not met up to that recommendation.
    But this is somewhat of an aside, it is an ironclad rule 
that IRS employees are not supposed to access the tax-return 
information of people that they officially have no 
responsibility to work on that particular case, and yet on a 
daily basis they do that, some of them. Not a lot, but some of 
them do. So you could have the most ironclad rule in place, but 
you are dealing with human beings, who are imperfect.
    Mr. Yoder. I think this is why a lot of Americans are 
concerned about the IRS getting involved in their healthcare 
decisions and determining whether they have the proper health 
insurance to meet Federal mandates. And having that sort of 
relationship that they might think of with their doctor or 
someone else in the healthcare world now with an IRS agent I 
think scares a lot of people that this agency has become too 
powerful and it has too many opportunities to commit these 
types of anti-freedom, anti-American type of actions.
    So we are going to continue, hopefully in a bipartisan way. 
I know my colleagues on both sides of the aisle are concerned 
about this, because it can happen as easily to a conservative 
group as a liberal group or a group based upon religion or race 
or anything. And so we have to rout this out, no matter where 
we are, and make sure this doesn't ever happen again and that 
people don't feel like it could happen. Your recommendations 
are an important part of that, and we will look to move forward 
on additional recommendations as we try to fix this problem.

                             TAX COMPLIANCE

    The second topic is one which has come up today, both in 
the Commissioner's hearing and your hearing, is what is the IRS 
doing to ensure that it has better resources to deal with 
taxpayer concerns and complaints, to ensure that the phone is 
being picked up. The Chairman made that comment. Others have 
made a comment regarding your data, that it is not being--the 
responses are pretty weak in terms of handling concerns for 
consumers.
    I would like to maybe turn this question a little bit in 
that, is the problem that we have not enough people to answer 
all of the questions and concerns that taxpayers have? Or is 
the problem that the Code is so cumbersome and riddled with 
exemptions and loopholes and problems that average, everyday, 
working Americans couldn't possibly attempt to figure out on 
their own and so they have to hire accountants and lawyers? And 
we have 4 million words in this Code, and it grows, you know, 
by the second with the regulatory side as well.
    I guess, is the problem that we need more people to answer 
the problems Americans have with the Code, or is the problem in 
the Code itself?
    Mr. George. Yes. It is all of the above, Congressman. And I 
will defer to Ms. Olson in a moment, but it is a zero-sum game 
here.
    I mean, they have a finite amount of resources. They have 
to make sure that the American people understand how to comply 
with the Tax Code. It has been my belief and findings of many 
of our audit reports that it is important people understand 
what the rules are. If the IRS--and this is a key component, 
and I alluded to this in the testimony--had access to third-
party information about the income of people who have tax-
reporting obligations, that increases dramatically the 
compliance rate.
    I use this figure, and I believe I have in previous 
testimonies before this committee, but it is so important that 
I feel I have to repeat this. Again, there is a high 
correlation between tax compliance and third-party information 
reporting and withholding. The IRS itself estimates that 
individuals whose wages are subject to withholding report 99 
percent of their wages for tax purposes. Self-employed 
individuals who operate nonfarm businesses are estimated to 
report only 44 percent of their income for tax purposes. And 
the most striking figure, and while it is dated, it is the most 
up-to-date information that we have: Self-employed individuals 
opertaing businesses on a cash basis report just 19 percent of 
their income for tax purposes.
    So if the IRS had the ability to gain more information from 
third parties to attest to the income of the taxpayer, you 
would have a massive positive impact on reducing the tax gap 
and increasing the revenue that is due to the Federal 
Government.
    I want to leave enough time for Ms. Olson to respond, but 
you have to have enforcement. That is the second aspect of it. 
So the IRS has to be in a position--and whether it is by 
correspondence audit--most people don't realize that if they 
receive a letter from the IRS questioning their income tax or 
their tax return, that is an audit. An audit is not just some 
IRS person coming to your office or your home and sitting 
across from you and going line by line through receipts and 
what have you. And, also, a telephone call from the IRS making 
the same inquiries, that is an audit.
    So if you don't have those individuals in a position to do 
that--and most people who are contacted by the IRS do respond. 
So if they had more resources, more people to be able to do 
that, I think it would have a very beneficial impact on revenue 
collection.
    Mr. Yoder. Ms. Olson.
    Ms. Olson. If I may, I think there are a number of things 
operating here.
    One is the sheer volume of the work that the IRS has 
undertaken. Just even its core work has increased dramatically 
in the last 10 years. The number of phone calls we have 
received has increased by 53 percent between fiscal year 2004 
and this last fiscal year. So just the volume has increased. 
Our taxpayer service budget hasn't increased that much to be 
able to meet the demand that taxpayers have.
    In terms of what the IRS could do to get savings in one 
place and move them to these taxpayer service needs, I think 
you have to look at the appropriations format itself. We have 
the two categories of service and enforcement and then a number 
of others like IT, and it is very difficult to move dollars 
between those categories.
    And in the taxpayer service category is essentially the 
filing season. So all of those 150 million individual returns 
and 10 million business returns have to be processed, and that 
is the big chunk of the taxpayer service budget, and whatever 
is left over is for the phones.
    And, in fact, this last year, one of the reasons why the 
IRS was able to get its phone level of service even up to the 
abysmal level of service that it was was by taking people off 
of answering the phones for the automated collection system, 
where taxpayers were calling in to say, we would like to pay 
you money. We took them off of that system and put them on the 
regular 1040 line just to answer the calls during the filing 
season. If we hadn't done that, we would have been in much 
worse shape during the filing season.
    I think that there are lots of things that the IRS does--I 
mean, I write a 500-, 700-page report every year identifying 
things that the IRS could do better. And I think one of the 
things that I spend a lot of time with and I would encourage 
this Committee to really urge the IRS to look at is the work 
that they do up front that creates downstream consequences, 
that because they are not addressing issues correctly up front 
or resolving the whole issue up front, you are having many more 
touches downstream. And that wastes resources. And often those 
downstream resources are higher-graded employees than the 
person at the first line of contact. And my office has done a 
number of studies actually tracing things through the process 
to show what work is generated by not getting that right answer 
up front.
    So I think there is a lot of work that can be done in that 
area, and I think we should look at what are we categorizing as 
enforcement versus service, do we have the right allocations 
between the budget categories, and things like that. But the 
bottom line is the amount of work. Leave aside Affordable Care 
Act, leave aside anything that is new. Just the volume of 
returns that are coming in.
    And I would say one last point. After this recession, we 
are seeing more and more people becoming self-employed. They 
are not being hired back as wage earners. They are either 
putting themselves into business--and so that issue of 
unincorporated self-employed people not reporting becomes a 
larger issue for our tax gap and our business going forward.
    There is a huge taxpayer service side on that component, 
too--educating people, being out there, talking to them about 
their responsibilities, et cetera. It is not just all 
enforcement that brings in compliance.

                          TAX CODE COMPLEXITY

    Mr. Yoder. Well, I appreciate both of your comments on that 
topic, and it is one that requires a lot of study and certainly 
changes from Congress.
    I would say, Ms. Olson, that the biggest upstream factor of 
all this is--you know, you mentioned dealing with problems 
upstream and not letting them continue to have to cause 
problems down the road and have more individuals have to touch 
it more, staff have to deal with it. The biggest upstream issue 
I think is the complexity of the Tax Code.
    Ms. Olson. Uh-huh.
    Mr. Yoder. If we had a simplified Tax Code, one in which 
taxpayers knew the obligations they had, they were very clear 
and easy, it would not only be easy for taxpayers, it would be 
so much easier on the enforcement side. It would require less 
people. It would require a smaller budget for the IRS.
    And so I don't think you are going to see a lot of us say, 
you know, the answer for tax complexity is we just need more 
staff, we need more bureaucrats. That is not going to be the 
angle I think we are going to take. It is, how do we simplify 
the Code to make it easier on taxpayers and easier to enforce?
    Mr. George.
    Mr. George. Mr. Yoder, I would just--because Ms. Olson 
raised a very important point, and I don't know whether or not 
this was going to come up later. But one of the unintended 
consequences of the IRS having to shift people from one 
function to answer telephone calls, one of the areas in which 
they do this is especially troubling because they take people 
who were working identity-theft cases, who are working to help 
identity-theft victims, and literally having these individuals 
stop in midstream and move to telephone answering, how do you 
complete a return and what have you, which causes immense 
delays in helping victims of identity theft, which, as members 
of this Committee know, is a massively growing problem and, 
especially if you are the subject, if you are the victim 
involved, is very frustrating.
    And so it is just a point, again, of it being a zero-sum 
game. They need resources to do it all. This ACA role, most 
Americans have no idea of the massive role that the IRS is 
going to play in the implementation of the Affordable Care Act. 
And the IRS once again will have to make some tough choices as 
to what to focus upon.
    Mr. Yoder. Thank you, Mr. Chairman.
    Mr. Crenshaw. Thank you.
    I don't have any further questions, but I want to make a 
couple comments.

                       501(C)(4) DRAFT REGULATION

    One, Mr. Yoder, you asked about when could they finalize 
this rule. If you look at the Administrative Procedure Act, 
there is nothing to stop the IRS from finalizing the regulation 
the day after they have the comment period end. Now, that is 
not practical, but it is procedurally possible. And we heard 
the Commissioner say that he didn't think that was going to 
happen. That is, kind of, his opinion.
    But I think, in light of what Ms. Olson said, I think it is 
clear, with all the implications that that has, that would be, 
I think, outrageous if that were to happen. This needs to be 
talked about, thought out, discussed, whatever. And I hope that 
is the plan as they receive these, literally, 100,000 comments.

                          SPENDING PRIORITIES

    The other thing I would just say, based on--you know, we 
talk a lot about how much money the IRS needs. And everybody 
talked about it earlier, you need money to provide services. 
But one of the problems, we get criticized from time to time, 
people say, well, you are punishing the IRS, but you are really 
punishing the people. We are not here to punish anybody. When 
we asked the Commissioner, how are you spending the money--and 
then when you look back and you see millions of dollars wasted 
on lavish conferences, you see the harassment that has gone on.
    It was back in 2010, I think, that I think the 
appropriations to IRS was more than they asked for, and yet 
that is when all the horseplay and harassment started. In fact, 
as I recall, some of the money that was being spent on the 
conferences, since they had a little extra money, they just 
went ahead and spent it. And then there were times when they 
would ask for more money, the enforcement would be asking for 
more money, while money was being wasted somewhere else.
    So I don't think this subcommittee or the Appropriations 
Committee ever wants to punish anybody, but I think this 
Committee wants to make sure that, just like your role, Ms. 
Olson, that we are advocates for the taxpayer. And when we see 
the money being misspent or spent on the wrong priorities--and, 
as Mr. Yoder said, it might be nice to simplify the Tax Code. 
If you got it really simple, you wouldn't even need the IRS 
anymore. You would have a fair tax, as they say.
    But I don't know whether it is harder to appropriate more 
money to the IRS or to simplify the Tax Code. Neither one of 
them is very easy. But we are actually working on both of them.
    But I just wanted to make those comments.
    Mr. Serrano, do you have any final questions or comments?
    Mr. Serrano. No tax is good tax.
    Actually, I have three questions that I am going to briefly 
put into one question.
    One is about you. How do the taxpayers make their way to 
you? How can we better make taxpayers aware of your existence? 
Because you have a lot to offer, and yet the Advocate is not 
seen on a daily basis or heard from, except maybe before 
Congress. That is one.
    Secondly, I understand that you started your career when 
the Earned Income Tax Credit began under President Ford. So 
could you tell us a little bit about that program? Because that 
gets a lot of grief in Congress also, because sometimes people 
get it who don't deserve it. And, you know, how does that 
compare to all the other people who are overseas and in other 
places who don't pay any taxes at all?
    So that is the question in a couple of parts.

                       TAXPAYER ADVOCATE SERVICE

    Ms.  Olson. Well, first, in terms of getting in touch with 
us, as you all have mandated in the law, we have one office, at 
least, in each State. And I have to thank you for that, because 
we are probably the only part of the IRS that really has one 
office in each State.
    And we try to keep the cases that are worked, that arise in 
the State in our office there. I guess there is an exception 
right now for Florida because we are so inundated with identity 
theft that my employees in Florida would only work identity-
theft cases, and I think they would kill themselves if that is 
all they were doing. So we spread some of them out throughout 
the United States.
    And my local taxpayer advocates work very closely with 
taxpayers. They are in the news; they work with local media to 
make sure that the groups know about us, taxpayers know about 
us. And they have a requirement to reach out to at least 40 
grassroots groups in their locale every single year, and 40 
different ones, to let them know about us, whether it is 
domestic violence shelters, homeless shelters, small-business 
groups. You know, they go to trade associations for truckers. 
It is very creative, what they do to let people know.
    So we can always do more. We enjoy working through the 
congressional offices, and we are getting more information out 
about our organization, getting you all some posters and 
brochures.

                        EARNED INCOME TAX CREDIT

    I would say about the Earned Income Tax Credit that in my 
testimony for today we shared some information of some recent 
results of IRS audit data that shows the sources of the error. 
We have the improper payment rate, but what is really important 
in order to move that improper payment rate, lower it, is 
understanding what is causing these errors. How much of it is 
fraud, but how much of it is just the complexity of the 
statute?
    And it also helps the IRS learn how to educate taxpayers 
better, and also go after preparers. One of the things that we 
know is that unenrolled preparers, the category of preparers 
who are the ones that are not CPAs, attorneys, or enrolled 
agents--you know, just anybody can hang up a shingle--they 
prepare the vast majority of EITC returns that are prepared by 
preparers. About 60 percent of EITC returns are prepared by 
preparers, and 75 percent of those prepared returns are 
prepared by these unregulated people.
    One thing that I would like to say about the EITC, I know 
that we focus on the improper payment rate, but the EITC, to 
administer it costs about 1 percent of all of--it is a very 
low-cost program for the IRS to administer. And that contrasts 
to food stamps or welfare or anything like that, which has 
caseworkers, et cetera. Food stamps and welfare may have a 
lower error rate. Where we have our high cost is in the 
improper payment rate. But if you look at error and cost of 
administration, it really evens out.
    I am not defending the improper payment rate, and I have 
real pragmatic suggestions about how to address that. But I am 
just saying, to put it in context, there is a cost one way or 
another in these kinds of benefit programs. And it is cheap to 
administer it through the Internal Revenue Code, but the cost 
is on the improper payments side.
    Mr.  Serrano. Thank you so much.
    Mr.  Crenshaw. Well, thank you both, if that answers the 
question.
    Time has expired. Thank you all. We were having such a good 
time, time just flew by. But thanks for being here. Thanks for 
all the work that you do.
    And, with that, this hearing is adjourned.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


                                             Monday, April 7, 2014.

                        INTERNAL REVENUE SERVICE

                                WITNESS

HON. JOHN KOSKINEN, COMMISSIONER
    Mr. Crenshaw. Good afternoon, everyone. This hearing will 
come to order.
    I want to thank everyone for being here today. This is our 
second IRS hearing of the year. Our hearing in February focused 
on the IRS operations, whereas today our hearing will focus on 
the IRS 2015 budget request.
    So welcome back, Commissioner. We appreciate your 
willingness to come see us again.
    Similar to the IRS 2012, 2013 and 2014 budget requests, the 
Administration is seeking discretionary spending for the IRS 
well above the discretionary caps that are in current law.
    So absent a change in either the Budget Control Act or the 
Ryan-Murray agreement, $480 million of the IRS request is both 
meaningless and pointless because, if the $480 million was of 
importance to the Administration, then the President would have 
found a way to pay for it from the $1.014 trillion allowable 
under the Ryan-Murray rather than use a gimmick that the Budget 
Committees have rejected now for four consecutive years.
    Perhaps even more troubling, the Service is asking this 
Committee for language to pay IRS employees bigger salaries and 
bigger bonuses than are allowed under the civil service system 
and, also, to eliminate some language that we put in the 
Omnibus Bill last year.
    Specifically, the language that we put in to prohibit the 
IRS from targeting groups from additional scrutiny based on 
their ideological beliefs is not in the Administration's budget 
request.
    We put in language to prohibit the IRS from targeting 
citizens of the United States for exercising their rights 
guaranteed under the First Amendment, and that language has 
been eliminated, too.
    We also had language that would prohibit the IRS from 
producing videos without being reviewed for cost, topic, tone 
and purpose, and that has been eliminated as well.
    So on its face, Mr. Commissioner, your request appears to 
ask for a $1 billion increase in order for the IRS to silence 
the Administration's critics and to make silly videos. I am 
sure that is not your intent.
    But I would like to hear why you propose to eliminate these 
good government provisions, which were intended to help restore 
credibility and confidence to the IRS.
    And as you can tell from the roughly, I guess, 150,000 
comments on the draft 501(c)(4) regulation, Americans are still 
angry about the additional scrutiny that the IRS gave to 
certain organizations.
    Explaining how the inappropriate criteria came in to use, 
how they were allowed to go on for years, and who was 
responsible for them is what is needed to assure the public 
that the IRS can administer the Tax Code in an impartial and 
nonpartisan manner.
    Requesting a $1 billion increase, eliminating prohibitions 
against targeting that were negotiated by this Committee, and 
proposing a new rule for the 501(c)(4) before investigations by 
Congress and the Department of Justice have been completed will 
not build trust in the IRS, the Department of the Treasury or 
the Federal Government in general.
    So now let me turn to Ranking Member Serrano.
    And, again, Commissioner, we thank you for being here 
today.
    Mr. Serrano.
    Mr. Serrano. Thank you, Mr. Chairman.
    I would also like to welcome our Internal Revenue Service 
Commissioner back to the subcommittee. It has been a whole 5 
weeks since we last saw you. So welcome back.
    We are here today to discuss your fiscal year 2015 budget 
request in which you request significant new resources in order 
to better do the job that we in Congress have given you.
    But before we do that, I think it is important to have some 
historical context. In fiscal year 2010, the IRS was funded 
$12.146 billion. In fiscal year 2011, the first year the other 
side was in charge of the House, that number dropped $25 
million to $12.121 billion. Fiscal year 2012, that number was 
reduced even further to $11.8 billion. And in 2013, because of 
the sequester, the IRS was forced to operate at a level of 
$11.199 billion.
    Last year we were able to restore some funding to the IRS, 
but the Agency is still funded at levels well below previous 
years. Since Republicans took over the House, there has been a 
cut of close to $1 billion in funding.
    I am sure some of my colleagues think that cutting funding 
for the IRS is a good thing, and I am sure some of them are 
proud of this effort. But I am not sure we want the tax laws 
with no one able to answer questions when our constituents have 
them and with no one around to ensure justice for those who 
attempt to evade the law.
    And today I am sure we will hear complaints about the 
reduction in the level of service or the reduction in the 
ability of our taxpayer service centers to accept tax 
applications.
    Well, we need to be clear as to the reason why. We can talk 
about conference waste all we want to. But when you cut almost 
$1 billion in funding, then people should not be surprised when 
the IRS cannot do all that we ask of them.
    No one here debates that ensuring efficiency in any 
government agency is important. But, at a certain point, the 
level of cuts overwhelms the ability of an agency to streamline 
their operations, which is why your budget request is so 
important.
    Your request seeks to restore significant funding to the 
Agency both to help rebuild needed services and to help enforce 
some of the most abused areas of our Tax Code.
    You are asking for money to prevent identity theft and to 
address the backlog of cases where we know money is owed to the 
government. You ask for resources to implement the tax 
provisions of the Affordable Care Act and to expand audit 
coverage.
    In my mind, these all seem like important and worthy 
investments in the Agency that brings in the vast majority of 
our Nation's revenue.
    I know the IRS is an easy Agency to beat up on, especially 
after last year's controversies, but it seems to me that it is 
much more responsible to ensure that we are adequately funding 
the Agency rather than hindering its ability to function 
properly.
    Mr. Chairman, since you brought it up--I had not intended 
to bring it up--I think that the recent report that came out 
about the alleged abuses, the timing was excellent. It came 
right before this hearing, and maybe there was a reason for 
that.
    Secondly, I am on record here three, four, five, maybe even 
more, times saying that, if, indeed, abuses were committed 
against organizations or any groups, that I am as outraged and 
upset and lack tolerance of it as much as any Republican or any 
American.
    But at the same time, we seem to know, we are pretty sure, 
that different groups were targeted. And why we continue to 
argue that only conservative or Tea Party groups were targeted 
only makes this hearing and these kinds of conversations much 
more difficult.
    So I would hope that, as time goes on, people will stop 
politicizing this issue and get to the facts, number one, and 
number two, get to the point where we understand that the IRS 
is charged with a special responsibility, they must meet that 
obligation, and we must be supportive of it.
    Thank you, Mr. Chairman.
    Mr. Crenshaw. Thank you.
    And I see that we have been joined by the Ranking Member of 
the full Committee, Mrs. Lowey. So I would like to recognize 
her for any opening statements she might like to make.
    Mrs. Lowey. Well, I certainly would like to thank Chairman 
Crenshaw, Ranking Member Serrano for holding this hearing.
    And I would like to thank Commissioner Koskinen, a 
distinguished graduate of Duke University, for coming before 
the Committee this afternoon.
    As we know, the IRS fiscal year 2015 budget request calls 
for $12.477 billion in funding, an increase of 10.5 percent 
above the fiscal year 2014 enacted level. This includes $2.317 
billion for taxpayer services, $639.25 million for prefiling 
taxpayer assistance and education. In addition, the request 
includes $5.134 billion in enforcement initiatives.
    As we know, funding for enforcement not only holds tax 
frauds accountable, it also brings in more than a 5-to-1 return 
on investment.
    I am concerned that the Republican majority's efforts to 
continually underfund the IRS makes it easier for tax cheats to 
go undetected and more difficult for law-abiding members of the 
public to get questions answered and the resources they need 
from the IRS.
    And I want to also thank you because I know you have been 
traveling around the country visiting various offices, talking 
to employees and trying to get as much information as you can 
so you could certainly do the job appropriately and continue 
your distinguished career.
    As we saw last year with the reports of inappropriate 
screening criteria, funds for proper training and taxpayer 
services are severely needed so that employees know proper 
procedures and, most important, American taxpayers can have 
confidence in the IRS.
    Commissioner Koskinen, to put it simply, you have a lot on 
your plate. In addition to the budget and Affordable Care Act 
implementation, this year for the first time gay and lesbian 
married taxpayers will be able to file jointly as well as amend 
past tax returns, as some States such as New York recognize 
same-sex marriage and some, unfortunately, do not, leading to 
more confusion for taxpayers who look to the IRS for guidance.
    I look forward to discussing some of these matters in more 
detail with you shortly. And thank you again for your service.
    Mr. Crenshaw. Thank you very much.
    Now we will have some time for some questions. Oh, I almost 
forgot to call on the Commissioner for his opening statement.
    So, if you could, limit your remarks to about 5 minutes. 
You can certainly submit your written statement for the record. 
And I apologize for almost not recognizing you.
    Please be recognized. And we would love to hear what you 
have to say. Thank you.
    Mr. Koskinen. Chairman Crenshaw, Ranking Member Serrano, 
Congressman Lowey, Congressman Womack, thank all of you for the 
opportunity to provide you with an overview of our proposed 
Fiscal Year 2015 budget and what we hope to accomplish with 
those resources.
    In discussing the IRS budget, we remain concerned about the 
constraints under which the IRS has been operating since 2010. 
Our funding for Fiscal Year 2014 was set, as noted, at $11.29 
billion, more than $850 million below the rate for Fiscal Year 
2010.
    It is important to note the IRS is the only major Federal 
Agency operating at close to our post-sequester level rather 
than returning to the higher, pre-sequester level, as many 
other agencies were allowed to do.
    The ongoing funding shortfall has major implications for 
taxpayers and the tax system. This year, millions of taxpayers 
are finding unacceptably long wait times on the phone and at 
our Taxpayer Assistance centers to get basic questions answered 
and to resolve tax issues.
    Further, as a result of fewer staff and reduced enforcement 
activities, the IRS estimates it will not be able to collect 
billions of dollars in enforcement revenues.
    We estimate this year we would have returned to the Federal 
Government over $2 billion more in collections had we received 
the remaining $500 million cut from our budget by the 
sequester.
    The solution of the funding problem faced by the IRS begins 
with the administration's Fiscal Year 2015 budget request, 
which totals $12.64 billion. That is approximately $1.35 
billion above the fiscal year 2014 enacted level.
    American taxpayers deserve to know what value they would 
receive for the $1.35 billion increase in funding requested for 
the IRS. Let me give you a few details.
    About $400 million would go to taxpayer service programs. 
We estimate this would allow us to answer an additional 12 
million taxpayer calls and cause our level of phone service to 
exceed 80 percent, which would be 20 points higher than last 
year's level of 60.5 percent.
    The additional calls answered would include calls from 
those seeking help with the tax-exempt provisions of the 
Affordable Care Act.
    We would also improve phone service by, for example, making 
our system capable of retaining taxpayers' identifying 
information so they wouldn't have to repeat it after being 
transferred from one operator to another.
    Part of the funding would also go to technology investments 
for such things as further improvements to our Web site at 
irs.gov.
    Another $334 million of the total additional request would 
go to enforcement programs. With this funding, we estimate 
closing more than 500,000 additional cases, including 
individual audits, employment tax exams and collection 
activities.
    We would also be able to do other things, like increase our 
document matching program which we use to spot underreporting 
of income.
    Through these activities, we estimate we would collect an 
additional $2.1 billion a year in enforcement revenues. That 
would more than pay for the entire amount of additional funding 
being requested for the IRS for fiscal year 2015.
    An important subset of enforcement is the fight against 
refund fraud caused by identity theft. About $65 million of the 
additional request would go to this area.
    We estimate that, through improved identity theft fraud 
detection, we would protect an additional $360 million a year 
in revenue from going out the door. We would also close an 
additional 13,000 cases where taxpayers have been victimized by 
identity thieves.
    Another major priority for us is implementing enacted 
legislation. We would use $394 million of the additional 
request to continue implementing the Affordable Care Act and 
FATCA.
    A large portion of this is for IT upgrades. For example, we 
need to build new technology systems to process and analyze the 
reports coming to us from financial institutions under FATCA.
    Investments in IT are also needed to continue implementing 
two major ACA provisions, the Premium Tax Credit and the 
Individual Shared Responsibility provision. I want to stress 
that we are mandated to implement ACA and FATCA; so, if we 
don't receive this funding, we must take it from either 
taxpayer service or enforcement or both.
    With respect to information technology, we would use 
another $100 million of additional requests to invest in a 
number of longer-term IT projects on the drawing board that are 
designed for such things as providing a more stable and secure 
computing environment and taking us to the next level of 
digital services for taxpayers.
    I want to emphasize that we take very seriously the need to 
be careful stewards of the funding we receive. Congress and the 
American public need to be confident that this money will be 
used wisely.
    It is my responsibility to ensure that happens, and I would 
be delighted to report back to the Committee as Fiscal Year 
2015 unfolds to discuss with you what the American taxpayer, in 
fact, receive for any additional investments in our Agency.
    That concludes my statement. And I would be happy to take 
your questions.
    Mr.Crenshaw. Thank you very much.
    [The information follows:]


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


                          SPENDING PRIORITIES

    Mr. Crenshaw. Let me start out by asking a question about 
spending priorities. When you were here before, we talked about 
the fact that how you spend the money is just as important or 
almost important or pretty close to as important as how much 
money you have.
    And I guess Mr. Serrano mentioned that 2010 you not only 
received a record high amount of funding, it was actually more 
than the IRS had asked for. You weren't at the IRS at the time.
    But, actually, instead of hiring more revenue agents, like 
it said it was going to do, the IRS spent a record amount of 
money on travel and training.
    And so now we find out that you have been struggling to 
come up with $30 million to finish migrating to Windows--I 
think they call it Windows 7----
    Mr. Koskinen. Yes.
    Mr. Crenshaw [continuing]. Even though Microsoft announced 
in 2008 that it would stop supporting Windows XP past 2014.
    So I know you probably wish you had already done that 
instead of making those videos and wasting that money, that is 
all hindsight.
    But just tell the subcommittee how we can be confident that 
you have got the correct spending priorities when, in the past, 
some of the excess funding got spent on silly videos and things 
like that.
    So, for instance, the $30 million that is going to Windows; 
I think you are going to take that from enforcement, but tell 
us what that means. Is that more important to the IRS than the 
revenue agents?
    If you ask for a $350 million increase for enforcement next 
year, then part of that money is going to come out for the IT.
    Just talk a little bit about how you decide what are the 
priorities and how you spend the money.
    Mr. Koskinen. It is an important question that I am 
delighted to answer and, as I say, keep you advised.
    Wherever you think we were in 2010, we are now 10,000 fewer 
people and, depending how you count, $850 to $1 billion less. 
So whatever might have been excessive in that budget has 
clearly been squeezed out.
    At the same period of time, over the 4 years, the number of 
taxpayers has increased by somewhere in the range of 6 to 8 
million. Plus, we have additional responsibilities provided by 
Congress, including implementation of the Foreign Account Tax 
Compliance Act and the ACA.
    So our problem right now is not around the edges. Our 
problem goes to the fundamental issues of what we can do. And 
that is one of the reasons I tried to highlight in my oral 
statement the priorities we have.
    If you think about it and step back, we have two major 
areas of activity. We do taxpayer services--trying to make it 
as easy as possible for taxpayers to figure out what they owe 
and to make the payments. And we have tax enforcement and 
collection--trying to make sure that those not willing to pay, 
those who are actually trying to cut corners, pay their fair 
share, so that when you pay your taxes, you are confident that 
everybody is paying their fair share.
    So those are two sides of the same coin, as far as I am 
concerned, and we are understaffed in both areas. As you know, 
our telephone service level is about 60 percent for 2013. 
During the filing season now, it is a little above 70, 72 
percent, because we spent a lot of time and effort answering as 
many calls and questions as we could.
    But for the year, because we don't have much more money now 
than we had then, we think it is going to be at 60 percent, 
which means 40 percent of the calls, over the course of the 
year, don't go through.
    There are long lines at our assistance centers, and we 
think, again, it is unfair to taxpayers not to provide them the 
level of service, I think we would all agree, they deserve.
    On the enforcement side, we have close to 5,000 fewer 
revenue agents and officers than we had 4 years ago. So under 
this budget, we wouldn't replace all of them, but we would 
replace a significant number of them.
    In terms of our Criminal Investigation department, they 
have 350 fewer people than they had 4 years ago. They are 
concerned that they will be down 500 people at the rate we are 
going. All of that personnel would generate significantly 
increased revenues.
    As noted, our estimate is, if we had the additional 
funding--the $1.2 billion, $1.3 billion--in the budget, we 
would return $2.1 billion to the government, significantly more 
than the amount of money we are seeking.
    In information technology, this year we have close to $300 
million of projects on the board to improve the operations of 
the IRS, but they are not being done because of the funding 
shortfall.
    I view it as, and refer to it as, driving a Model T with a 
lot of things on top of it. We are the classic fix-the-
airplane-while-you-are-flying-it attempt.
    Windows 7 is part of that. You are exactly right. It has 
been some time since people knew Windows XP was going to 
disappear.
    The problem with Windows 7 is, if we don't make that fix, 
which we are trying to finish up now, Windows XP will no longer 
be serviced. So all of the security issues that are continually 
updated no longer will be updated.
    So we are very concerned that, if we don't complete that 
work, we are going to have an unstable environment in terms of 
security.
    So we are significantly understaffed virtually everywhere. 
We are not talking about doing anything very exotic. We are not 
talking about making new videos.
    Last year we cut training by over 85 percent. Now, whatever 
you thought about the training budget, cutting it over 80 
percent couldn't have been the right answer. So we are going to 
spend more money on training. We will spend more money on 
travel.
    But it is all going to be focused on trying to make sure 
that new and existing IRS employees are appropriately trained 
to be able to deal effectively with the taxpayers, whether they 
are dealing with them as taxpayer services representatives or 
they are dealing with them as revenue agents and officers.
    So they are, for me, fairly simple, straightforward 
priorities, things we have to do that we want to do better than 
we are doing now. And at the back of all of that, behind it, is 
we have to implement FATCA and the ACA. We have no choice about 
that.

                                BONUSES

    Mr. Crenshaw. Well, thank you.
    When you were here before, we talked about some of these 
issues about how you spend the money. And one of the things 
that we talked about at that time was that only 60 percent of 
the telephone calls were being answered, but we also talked 
about the fact that you had decided to pay $63 million in 
bonuses that your predecessor had decided he wasn't going to 
do.
    And if you look at fiscal year 2015, I think the travel 
budget increases by $58 million which is in addition to a $44 
million increase this year.
    And so you have to ask the question: Is the travel more 
important than answering the phone calls? Is it more important 
than upgrades and IT? Talk about those priorities.
    Mr. Koskinen. Again, a good question.
    We have 90,000 employees spread across 500 offices. As 
Congresswoman Lowey mentioned, I have now been to 20 of them 
and talked to over 8,000 employees.
    The travel we are talking about is related to both managers 
being able to visit and see their employees. It's about 
employees, when we are not able to appropriately and 
effectively do training with regard to computerized or video 
conferencing, actually having to travel someplace with trainers 
to gain the training as we go forward.
    And this is training not just for new employees. This is 
training to upgrade the skills of existing employees in the 
Agency. So there is nobody going to fancy places.
    The last training we did was in New Carrollton. As I told 
somebody, it was pretty easy for me to approve it. And we have 
much more rigorous approval levels than we have ever had 
before.
    And so all of that is focused on trying to make sure, 
again, that the employees working for the Agency have the right 
tools to be able to deal effectively with the public.

                            LEVEL OF SERVICE

    Mr. Crenshaw. For instance, is there an increase in the 
money that will be used to answer the phone this time?
    Mr. Koskinen. Yes.
    Mr. Crenshaw. If there is more money for travel, but is 
there also--there probably is. Tell us a little about that.
    Mr. Koskinen. Yes. The level of service last year in 2013 
was about 60.5 percent. We worked very hard to raise it. We 
have got a better Web site. We think it is going to be a little 
higher, but it is going to still be in the low 60s.
    With these funds, we would have a level of service--
including an additional 11 million call demand for ACA up to 80 
percent.
    In the golden days in the mid-2000s, we were at an 88 
percent level of service. Probably we would never go above 90 
because then you have people waiting for the call.
    But we think we could get to 80 percent. That would be our 
goal. And we would be willing to be held accountable to see if 
we couldn't do that. It would mean, overall, we would answer 
about 12 million more calls.
    And I think that, beyond that--we used to measure how long 
you had to wait on the phone in seconds. In fact, we still do 
it, but the seconds now are running into anywhere from 15 to 25 
minutes for the calls to get through. So it is one of the 
highest priorities.
    I have given you in this statement our priorities. One is 
to raise the service level from 60 to 80 percent. The other is 
to increase enforcement. We think we will collect $2 billion 
more from people who are cutting corners or not paying at all, 
including foreign tax cheats and avoiders. And the third would 
be to improve our information technology system to allow us to 
effectively absorb the responsibilities for ACA.
    I would note the ACA implementation requires us to change 
our tax filing process. For the vast majority of Americans, 
they are going to check a box that says they have insurance and 
they won't be affected either way by the Affordable Care Act.
    But for those who have gotten Premium Tax Credits paid to 
the insurance company, not to them, we have to reconcile those. 
They are based on an estimate the individuals have made of what 
they would actually make in 2014, just the way we all estimate 
how much money should be withheld.
    All of that has to be reconciled, all of that in the middle 
of the filing season. So one of the reasons I have tried to 
make it clear that we have no choice, if we can't implement the 
Affordable Care Act, it means we won't be able to run the 
filing season effectively.
    And, as you know, we collect, net of the $300 billion in 
refunds we sent out, about $2.5 trillion, so any negative 
impact on the filing season dwarfs--the potential loss--dwarfs 
anything else we are talking about.
    Mr. Crenshaw. Well, thank you.
    And I am happy to hear that the phone calls are a priority 
because, as you know, that is kind of the front door to the IRS 
and that is the first contact people have and it drives people 
crazy.
    Just in today's world, people always want to talk to, like, 
a real live person, and I appreciate the fact that you are 
making that a priority because I think that would go a long way 
toward making people feel like they are getting the response 
they need. And I appreciate that.
    Mr. Koskinen. Well, I just got an email yesterday. I have 
talked to over 8,000 employees now, and I have encouraged them 
to have information flow from the bottom up. And I have a 
mailbox so they can send things to me.
    A common concern across all of those employees is just this 
issue. They feel badly that they can't answer the questions and 
provide the service to taxpayers that they want to provide. The 
email yesterday was to say, one of the things, to try to allow 
us to answer more calls.
    We have told our call center operators that they cannot 
answer complicated tax law questions. We have to send people to 
our Web site. We can answer straightforward questions. You 
know, the common, ``How do I file?'', ``Who is the head of 
household?'' standard questions, but anything at all 
complicated, which we up until this year answered, we can't.
    So this email was kind of a plea from a call center person 
saying, ``You know, I just feel badly when I can't tell people 
this. Isn't there some way we could actually answer those 
calls? Because we know how to do it.''
    And I had to write her back and say it was a difficult 
choice people had to make to try to figure out how to process 
as many calls as we can.
    And the problem with complicated questions is they take 
longer so that, to try to keep the call level service up, we 
have had to tell people to go to our Web site, which is far 
improved over where it was a year ago, but still isn't the 
state-of-the-art Web site that we would like to have.
    So, again, when we go to 80 percent, that would include the 
ability for us now, next year, and 2015 to answer those 
complicated tax law questions at the same time.
    Because I couldn't agree with you more. The face for most 
taxpayers of the government and, really, the IRS, is when they 
call. And if they can't get through, they are unhappy. If they 
can get through and then can't get an answer, they are unhappy.
    But we have people working in call centers for 15 or 20 
years, which I always thought, ``Gee, that can't be the most 
fun in the world.''
    They do it because they feel that they are providing a 
service and, when they can answer a question, provide help to a 
taxpayer, they find that very rewarding and satisfying.
    So I couldn't agree with you more. It is an immensely 
important priority for us.
    Mr. Crenshaw. Thank you.
    Mr. Serrano.
    Mr. Serrano. Thank you, Mr. Chairman.
    Speaking of phone calls, you may have a few when you get 
back to the office because you are now quoted as saying that 
New Carrollton is not a fancy place and----
    Mr. Koskinen. I am sorry about that.
    Mr. Serrano. You might be getting some from New Carrollton.

                            LEVEL OF SERVICE

    Let me ask you a couple of questions about restoration of 
services. In 2014, Congress kept the IRS at the sequester level 
with the addition of $92 million for certain specific purposes.
    How far does that go to us restoring services to the 
taxpayer that were reduced by the sequester?
    And as a follow-up, the start of the filing season was 
moved back 10 days due to the 16-day government shutdown. 
Please tell us why the shutdown had that effect.
    And are there other lingering effects that the shutdown had 
and, also, how the fact that we were still trying to restore 
services that we lost before affected you?
    Mr. Koskinen. I would note, even with my concerns about the 
underfunding, we did appreciate the $92 million of additional 
funding.
    I don't want anybody to think that wasn't real money and 
that hasn't been used well. It was designated for customer 
service, Foreign Account Tax Compliance Act implementation, and 
then information technology. So $34 million of it is going to 
customer service.
    I will tell you, the complication is they estimate it takes 
$6- to $8 million to improve customer service levels by 1 
percent. So part of the reason we think the tax filing season 
is going so well, in terms of an increased level of customer 
service, is we are able to spend that money and will continue 
to spend it through this year.
    $39 million will go to FATCA. And the reason we haven't 
provided the Committee with an operating plan yet for the $92 
million is the other $19 million we are looking at is tied to 
the $300 million of deferred IT projects we are trying to find 
which $19 million are going to be the highest priority. And 
part of it may be in additional support for Windows 7.
    We will give you the spending plan and then show you. We 
are using the money very well, but there are a lot of other 
things that are not being done that the $92 million won't let 
us reach.
    Mr. Serrano. Right.
    Mr. Koskinen. The shutdown, obviously, delayed the start of 
filing season. And so we didn't start until January 31. So it 
compressed it a little.
    But, thus far, I am delighted to report the filing season 
has gone very smoothly. We have over 100 million returns 
already processed. Over 90 percent of them have been filed 
electronically. 70 percent or so of those returns are getting 
refunds electronically that they have already gotten.
    So it is going very smoothly. Partially, it is going 
smoothly because there were no significant tax law changes for 
the average taxpayer. So for preparers and people filing 
returns, that went well.
    It is also going better because a lot of people go to our 
Web site now and get information there that they used to get on 
calls, and that has helped us maintain a very low level, but 
still maintain it.
    So our hope would be that we don't do it again because what 
happens in the shutdown is the entire IT department goes away 
for 2 weeks, 18 days, whatever the shutdown period is, and then 
simply can't make that up. That is why we had to delay the 
start this year.

                             TAX PREPARERS

    Mr. Serrano. Okay. You know, one thing that we have 
discussed on this committee for years--and this still bothers 
me--is these--I don't know how else to call them--fly-by-night 
storefront operations that seem to continue to creep up in many 
communities throughout this country and hurt the taxpayer.
    I don't know if you read--there was a story that recently 
came out--maybe it was today--where a person went to get their 
taxes done and they were being charged $400 for a very simple 
form and they said, ``No. Don't file that. Forget it'' and the 
person went ahead--the tax preparer went ahead and filed it 
anyway and took a fee.
    I don't know how that happens that you take a fee from a 
return. And the person then was caught between two different 
places. This seems to be an ongoing problem, and I know the IRS 
has dealt with it.
    Where are we with that or is that one that is out of hand?
    Mr. Koskinen. It is a concern to us. Most tax preparers are 
well trained and they do a good job. 56 percent of people use 
tax preparers. Another 34 percent use tax preparer software. So 
the vast majority of them do fine.
    There are people who are uninformed and undertrained and 
then are still preparing returns. Anybody in this room could go 
outside tomorrow morning and set up as a tax preparer. There 
are no requirements, no standards.
    As somebody has noted, we regulate and register 
hairdressers in every one of 50 States, and in three States we 
register and regulate preparers.
    And as H&R Block had said, you would think that you would 
care as much about your tax preparer as you do about your 
haircut.
    So what happens is we have cases where we have fraudulent 
returns prepared by tax preparers. We have cases like the one 
you said, where they file a return, get the refund sent to 
them, then they either take their fee out and give the 
remaining part of the refund to the taxpayer, or they keep the 
refund totally themselves.
    We have many numbers of cases of tax preparer fraud where 
the taxpayer then has to come to us and said, ``I had a refund 
coming and I have never seen it. Where did it go?''
    We had set up in 2010 a program to provide minimum 
standards and certification for preparers, and the courts 
earlier this year ruled we had exceeded our authority to do 
that.
    So there is a hearing tomorrow in the Senate on tax 
preparers, and we will be supportive--I will testify and be 
supportive--of legislation from the Congress that would give us 
the ability and the authority to provide and guarantee minimum 
standards for anybody who is going to prepare a tax return.
    And in low- and middle-income communities, particularly 
immigrant communities, people are comfortable working in the 
community. So if somebody sets up shop in the community center 
or refers to somebody's brother-in-law, a lot of returns are 
filed.
    And our concern is not only the fraud or the excessive 
charges to the taxpayer, but if the tax preparer doesn't know 
what he is doing, we can get an inaccurate return.
    So we than have to process back, talk to the taxpayer, 
trying to get just the right amount paid, which the taxpayer 
probably wanted to have paid to begin with.
    Mr. Serrano. Right.
    Very briefly, do you think this is something that has to be 
done State by State or, from your viewpoint, could it be done 
from the Federal Government?
    I mean, I know that we want less and less government, but 
this is one where I think both parties could agree that it is 
abuse.
    Mr. Koskinen. There are at least three States who regulate 
locally. The tax preparer community has been supportive of a 
national standard, so you don't end up with 50 different 
standards. And if you are a company operating in two or three 
States or more, you have to then meet a whole lot of different 
standards.
    We cleared the program--it was up and running for a while--
with all the constituents and all the parties, and designed 
testing and the minimum standards it would require.
    It wouldn't be a CPA exam. It would not be that difficult. 
You just have to show some minimal amount of competence, like 
a----
    Mr. Serrano. And what boundaries was it that the Court said 
you had overstepped?
    Mr. Koskinen. Pardon?
    Mr. Serrano. What was it that the Court said you had done 
wrong?
    Mr. Koskinen. The Court said we didn't have the authority. 
We could require people to register and get a preparer PTIN, 
which 600,000 preparers now have, but we couldn't require them 
to also take an exam--a competency exam--at the same time 
because there was not statutory authority for that.
    So we still hand out PTINs. And a number of people took the 
test. As I noted, you know, about 75 percent of them passed it.
    The other side of the coin is that means a significant 
number of people couldn't pass a relatively minimum test, which 
is an indication that maybe a little more education would be 
helpful.
    Mr. Serrano. Thank you.
    Mr. Chairman, this is a very serious issue and I think one 
that maybe the Committee should take a closer look at. I don't 
know what we possibly could do at the Federal level.
    And I know that the trend--and this is not a knock--is for 
less involvement by the Federal Government, but people are 
getting ripped off all over this country. And it makes their 
work harder. It makes the tax system look like a monster to a 
lot of people who want to pay their taxes.
    When you have happen what the Commissioner just said, 
somebody capable of taking the refund--the full refund for 
themselves--I mean, I had no idea. I thought refunds went to 
somebody's house--they can go to a preparer and then he or she 
keeps it, that is fraud at the highest level and abuse at the 
highest level, and maybe we should look at it as something the 
Committee could speak on or do something about.
    Mr. Crenshaw. I think you are right. I think any kind of 
reasonable regulation to protect taxpayers is what we are all 
about. So that is a great point.
    Mr. Womack.
    Mr. Womack. Thank you, Mr. Chairman.
    Commissioner Koskinen, welcome, and good to see you again. 
Funny you would mention hairdressers a minute ago. Every time I 
factor my--figure my taxes, I feel like I am getting a haircut. 
So, you know, it is kind of an interesting parallel there.

                       MEASURING LEVEL OF SERVICE

    In your testimony, you said that, of the $1.4 billion 
increase that you would request in 2015, that a couple hundred 
million of that, $222 million, I think, would go to improve 
taxpayer service, and you said that it would allow you to 
answer 12 million more calls, get you to a service level of 
like 80 percent.
    So can you share with the subcommittee on what metrics you 
used to kind of reach that. Was that just a simple math 
problem? How would we actually get to the 12 million additional 
calls? And how many personnel are we talking about? That sort 
of thing.
    Mr. Koskinen. I asked the question myself, ``How do we 
measure the level of service?'', and you won't be surprised to 
find that it is a little complicated because you have to figure 
out, when you hang up, does that count or not count?
    We actually electronically count every call that comes in. 
We count which ones then don't get an answer, where people wait 
and wait and then they just hang up. We count then the 
processing and who goes into our automated system, as opposed 
to who gets a representative. And it is a very detailed system.
    We would be happy to get you the more complicated--you 
know, the way it actually works.
    [The information follows:]

    Customer Service Representative Level of Service 
calculation.
    The numerator equals the assistor calls answered plus the 
automated calls answered through subject matter messages. The 
denominator equals the numerator plus emergency close 
disconnects plus taxpayers that abandon in queue waiting for 
Customer Service Representative assistance plus busy signals 
and disconnects generated by announcements that advise the 
taxpayer of high demand and request the taxpayer return his or 
her call at a later time.

    But, actually, every call that comes in gets measured. We 
also measure how long it takes for that call to get through. 
And then, in our call centers, we measure how long the 
responses take, and we try to make sure that the call-takers 
are efficient so they don't spend a lot of time just chatting 
with the taxpayer. So there is a balance of wanting to give the 
right information, but as efficiently as we can.
    It is a fully monitored system in which we are confident 
that we can measure exactly how many calls we are going to 
answer, and in what order, and how long it takes you to get 
through.
    We used to be able to say you wouldn't have to wait more 
than 10 seconds to 20 seconds to get an answer. Now that is up 
into the minutes. So all of that is measured.
    Mr. Womack. I think you said that people sitting in the 
queue sometimes 15, 20 minutes or more----
    Mr. Koskinen. Yes.
    Mr. Womack. That was part of your testimony.
    Mr. Koskinen. Yes.

                  AFFORDABLE CARE ACT TELEPHONE CALLS

    Mr. Womack. And I am assuming that part of the new line of 
questioning that you are beginning to receive is referenced to 
the ACA. Is that correct?
    Mr. Koskinen. Haven't gotten much now because it doesn't 
affect anybody in terms of their tax return. But we estimate 
that, starting late in the fall and then into the filing season 
next year, as people look at the forms, we will get calls. Most 
Americans are going to check a box and they are going to move 
on.
    But for those who have questions, preparers as well as 
people filling out the returns, our estimate is that we will 
get another 11 million calls just by the number of people in 
the program.
    Because a lot of people who will be calling signed up. A 
lot of people will be calling who don't have insurance and will 
want to figure out exactly how they should be responding.
    We already have started this year. We will work through the 
summer and into the fall to put out as much information to 
taxpayers as we can.
    We are developing our Web site so it will be easy for 
people to get information. There will be a special section on 
the Affordable Care Act, to try to make the answers as easily 
accessible as we can for people, so they don't have to call.
    But, inevitably, our experience is, whenever there is a new 
provision, you get a significant number of calls asking about 
it.
    Mr. Womack. So to kind of preempt the anticipated surge in 
phone calls you are going to get regarding the ACA, I am glad 
you mentioned that you are going to do some things preemptively 
to try to push information out.

                       CHANNELS OF COMMUNICATION

    What are the best management practices today in trying to 
reach the clientele that are trying to communicate with you?
    Are there any things that we have learned over the last 3 
or 4 years about people and their questions and the origin of 
their questions or their socioeconomic status or whatever that 
might help us better pinpoint how we direct and leverage the 
limited money we have to answer a lot of those questions?
    Mr. Koskinen. It goes across a set of communication 
channels. We have now an online services group--small, but 
lovable--who are looking at just those questions. That is, how 
can we move people into the least expensive channel to get them 
the most information.
    And the least expensive channel is, obviously, a Web site 
because, if you come there, the information is there. Other 
than just the cost of maintaining it, it is a relatively 
inexpensive way to get information out. So we spend a lot of 
time trying to improve it.
    If you looked at the Web site a year ago and looked at it 
today, it is like it is a different entity, but it is still 
clunkier than we would like it to be. We would like it to be 
easily searchable, so that anybody used to going to Web sites 
could go there and find the information they need.
    A lot of people and a lot of information goes out over 
things that I don't know much about: Twitter, Tumblr, YouTube. 
We have 100 videos on our You----
    Mr. Womack. Those are kind of new to me, too.
    Mr. Koskinen. Yeah. So we all have the same experience.
    But there are YouTube videos telling you all sorts of 
information that you otherwise would be calling us to ask 
about.
    On our Web site we have a ``Where's My Refund?'' app. Last 
year it had over 200 million hits. Not 200 million taxpayers. 
As I tell people, some people just can't resist pushing it and 
seeing each day how their refund is doing. But those are the 
people that used to have to call.
    This year, for the first time, you can authenticate 
yourself and ask for previously filed returns. So instead of 
having to call us or come to our assistance centers, you can 
actually print out your last year's tax return and, if you need 
it for a mortgage or for employment or anything else, you don't 
have to call us about it.
    So what we have discovered is kind of axiomatic, that 
younger people tend to be in social media, so as much of our 
outreach goes there as we can. Significant portions of the 
population are now used to using Web sites. They go to shop on 
Web sites. They do their banking on Web sites. So, again, we 
have been way behind and we need to be better at that.
    There will be, inevitably, a percentage of the population 
uncomfortable with all of that, who will be uncomfortable 
filing electronically. They are in a paper generation and they 
are going to stay there.
    And part of our commitment is we need to be able to deal 
with those people as well. I never want anybody to feel they 
have got to do something they don't know how to do or are 
uncomfortable with.

                               NEW HIRES

    Mr. Womack. How many new people are we talking about?
    Mr. Koskinen. Pardon?
    Mr. Womack. Taxpayer service, how many new people?
    Mr. Koskinen. How many new people? We are talking about as 
many as a couple thousand.
    Mr. Womack. And then, to take one of those couple of 
thousand people, to get them from zero to trained, what kind of 
a timeframe are we looking at?
    Mr. Koskinen. We have what we call seasonal employees. We 
are, to some extent, a seasonal business. We obviously are in 
the middle of that season right now.
    And so we have people who work, sometimes, anywhere from 6 
to 8 to 10 months in that filing season. And we hire those 
people and train them, and it takes 4 to 6 weeks to get them 
just the basic training they are going to need.
    And, usually, the way we have streamlined it, is people get 
trained in answering certain questions. So when you go to the 
phone, it will ask you to select what your question is, and 
then that will send you to somebody who knows that area.
    Now, with our more experienced call center people, they can 
actually answer some other questions as well. So part of the 
challenge for us is, if I am very good at answering head of 
household questions and the fundamentals, and you have another 
question, if I haven't been trained in that, I have to say, 
``Excuse me. I have to send you to--'' and then there is a 
place where you send them to somebody who is an expert in that.
    Done well--and that is where we would like to get back to--
you would have people at the call centers who have a broader 
base of information.
    So when somebody calls, even though they pushed, ``My call 
is `Where is my refund?' '', if that caller has another 
question, I would like to increase the likelihood the person on 
the phone could answer that other question for you. But for the 
basic training, 4 to 6 weeks.
    Mr. Womack. Thank you.
    Mr. Crenshaw. Thank you.
    Mrs. Lowey.
    Mrs. Lowey. Thank you.
    Mr. Commissioner, I would like to follow up with my 
colleague's question before because I would like you to get a 
little outraged about these scams out there and I wonder what 
you are doing either in social media or signs.
    The storefronts open up and innocent people come in. They 
don't know whether that person is legitimate or not. And then 
suddenly, after April 15, the storefront closes and there are 
an awful lot of people who are just taking the refunds and 
going off.

                             IDENTITY THEFT

    And a similar scam that I have been hearing about which is 
of great concern to me, criminals are using the IRS to steal 
the identity of innocent taxpayers. They claim large refunds. 
They profit by the fraud. And the number of taxpayers affected 
by identity theft has more than doubled since 2011 alone.
    A recent Inspector General report released last year stated 
that billions of dollars had been fraudulently paid as a result 
of identity theft. And, shockingly, it is my understanding that 
amounts to as much as $21 billion in fraudulent refunds could 
be paid out in the next 5 years. You know, this is just a slap 
in the face to hardworking taxpayers, and I wonder what you are 
thinking about that.
    What steps has the IRS taken to halt these criminal 
actions? Does the budget request include adequate funds for 
enforcement to adequately combat this problem?
    Mr. Koskinen. It is a critical problem. I would start by 
noting that people are not stealing identities from the IRS.
    What is happening in refund fraud is criminals--and it is 
increasingly organized crime and organized syndicates--are 
stealing, borrowing, buying, however they get it, Social 
Security numbers outside the IRS. We have never had any 
incident, of any size, where somebody got that information from 
us. But they do get it.
    Sometimes it is from the Death Master File. Sometimes it is 
for kids. They get the Social Security number, fill out 
fraudulent numbers that show they are entitled to a refund, 
file it electronically, and then get paid.
    And they are not filing one or two of these. Some of these 
people are filing hundreds or thousands at a time. It exploded 
in 2010 to 2012. Overwhelmed law enforcement. Overwhelmed our 
resources as well.
    We have devoted 3,500 people who do nothing but work on 
this problem. We are working with State and local law 
enforcement, with all the financial institutions, with the 
Bureau of Prisons, because that is where some of it started, 
with people in prison. We have developed sophisticated filters 
that identify where the scams are coming from.
    Last year, we estimate, we stopped just a little less than 
$18 billion in fraudulent refunds from going out the door.
    But, of course--and in the IG report, we are all trying to 
figure out, ``What does that mean in terms of you don't know 
what you don't know? How much is going out?'' And we have done 
audits and we are doing algorithms that project that.
    Part of the additional funding here would allow us to 
upgrade our IT because right now our filters can only be 
adjusted in between filing season. This Model T does not allow 
us, on the run, to adjust the filters. Some portion of the IT 
money here would go to what we call the Return Review Program, 
which would allow us, as we see scams, to adjust immediately.
    We also are taking a hard look at, and one of our 
legislative proposals is, moving the filing of W-2s with the 
IRS up to the end of January, the way it is for employees. We 
don't get the W-2s that go through Social Security until the 
middle of March.
    As I have told people, we have gotten to be too efficient. 
In the old days, when I was younger, you sent a check, it took 
a while to get it deposited, and it took months before you got 
your refund. Now we tell you that, if you file electronically 
or on paper, we will get you a refund in 21 days, but the 
problem is we have leapfrogged the third-party information.
    And then the final piece is we have ramped up, from 2012 to 
2013, by multiples of four and five the number of 
investigations, indictments, prosecutions and convictions. Last 
year we recommended over 1,000 prosecutions. We had 400 people 
sent to jail for a long time. These are not 6-month sentences.
    I just met Friday with U.S. Attorneys for Indiana and 
Northern Illinois about our cooperative efforts prosecuting 
refund fraud and other cases, and we have got partnerships 
across the country.
    It is a significant problem. If you ask me what are the 
four or five things we focus most on, refund fraud and identity 
theft is one of them.
    Mrs. Lowey. Do you have adequate resources in order to do 
what you have to do?
    Mr. Koskinen. Well, as I said, right now we have this 
mechanical clunky system that doesn't allow us to respond on 
the spot. A significant part, $65 million or more, of the IT 
request would allow us to, in fact, become quicker on our feet.
    If we don't become quicker on our feet, we will still get 
better because the filters are very sophisticated. We just 
can't adjust them. And part of what is happening is people are 
reverse-engineering.
    You know, you file 1,000 fraudulent returns and see which 
ones go through. You can pretty quickly try to figure out, 
okay, what we are looking at, and then you adjust on the run. 
They can adjust faster than we can adjust.
    Mrs. Lowey. Well, thank you, Mr. Chairman.
    I do hope that we will give you the resources so you can 
continue to pursue these crooks out there, and I thank you very 
much for your attention to it.
    Mr. Crenshaw. Thank you, Mrs. Lowey.
    And I think somewhere I read that some address like in 
Atlanta, Georgia, got like 2,000 refunds. Somebody stole their 
identities, listed the address in Atlanta.
    Is that close to the truth?
    Mr. Crenshaw. A, it is true. B, there are some places where 
multiple refunds legitimately go. Some preparers get the 
refunds. Some retirement communities. There are groups of 
people who file and it all goes to a single address.
    But one of the issues is being a little slow in responding. 
As we go forward, we think we have got a way to stop that. It 
is all mechanical.
    I went to Detroit just Thursday and watched. We send out 
200 million notices a year to people. And I watched the 
computer program at work. I mean, it is like an assembly line, 
this big set of machines that have to crank out those notices 
and file them.
    You process 150 million tax returns, as we will this year. 
I mean, it is a stunning number when you try to figure out what 
does that look like.
    So part of the reason and the way we are able to process 
refunds so quickly is they are processed automatically. So we 
have to build in the filters that say, it makes no sense to 
send a whole lot of refunds to that address. Banks are stopping 
refund fraud when they see it and sending us the money back.
    But, you know, it is like the old Whack-a-Mole. You knock 
him down here and it comes up over there. But one of the big 
issues was looking at it and saying, ``Well, you know, if there 
are more than 10 refunds going there, there has got to be some 
issue worth looking into.''
    Mr. Crenshaw. Yeah. And the point being, we all know it 
takes money to do these things, but more money is not the only 
answer to all the problems in the world.
    Mr. Koskinen. Right.
    Mr. Crenshaw. And I appreciate the fact that you are trying 
to kind of figure out process efficiencies, all those kind of 
things, trying to stay ahead of the bad guys.
    Mr. Koskinen. Right.
    Mr. Crenshaw. Mr. Graves has joined us.
    Mr. Graves. Thank you, Mr. Chairman.
    Commissioner, good to see you again.

                    AFFORDABLE CARE ACT PREPARATIONS

    I know your statement references your preparation for how 
the Department will begin handling the healthcare law 
implications within your arena. And I guess we are about 53 
weeks away from the individual side beginning----
    Mr. Koskinen. Actually, less than that. The individual side 
has to be up and running at the start of filing season, so 
January.
    Mr. Graves. Could you maybe tell us a little bit about that 
and some of your preparations, and I know you indicate in your 
comments here that a lot is under way, and maybe, bring some 
clarity to how the verification process works, whether 
individuals in fact do have the appropriate health care 
coverage that is demanded under the law.
    Mr. Koskinen. Right.
    Mr. Graves. How the penalties will be assessed, or I guess 
you refer to them now as the individual shared responsibility 
provision. Is that only through a refund, or is that outside of 
a refund? Is there some other mechanism that occurs? And then 
when you are finished with that, maybe clarity on the 
differences between individuals and then small business owners 
who are currently filing this year for 2014's taxes as well.
    So a couple of different things there, but to bring 
clarity, and I will be happy to follow up.
    Mr. Koskinen. I will do my best to do that. As you can 
understand, it is a multifaceted issue.
    On the front end, in terms of just how the program runs and 
refund fraud that we are talking about there, what are the 
fraudulent filings, let's say for the vast majority of 
Americans, they have got insurance, they have got Medicare, 
whatever it is, so this is all going to be beyond them. They 
won't be affected by it.
    If you apply for an Advance Premium Tax Credit, the money 
doesn't go to you, it goes to the insurance company from whom 
you are buying the policy. At the front end, there is less 
incentive for people to fraudulently try to claim the money 
because it doesn't go to them, unless you have got an uncle at 
Blue Cross you would like to get a bigger premium. Everybody is 
making a guess, an estimate, as to what they are going to earn 
this year to figure out what Premium Credit they are entitled 
to, and that is going to the insurance companies.
    In filing season next year, when those people file, they 
are going to actually know how much they made and they are 
going to have to reconcile the amount of the credit, and they 
will either owe us money or we will owe them money. Some people 
could not get the advance credit during the year and would 
apply and say, ``okay, I bought this insurance policy, here is 
my income, I now get a refund.'' That refund would go directly 
to them, but it only goes to them if the insurance company 
which is sending us all this data verifies that the filer 
actually had a policy. So you can't get a credit independent of 
the policy.
    Now, the processing of all that is, as I say, just in the 
middle of filing----
    Mr. Graves. You will receive information from the insurance 
company.
    Mr. Koskinen. We are going to get information starting 
through the year.
    Mr. Graves. To begin pairing that together----
    Mr. Koskinen. And we are going to be able to verify 
coverage. It is like getting W-2 information. It is third party 
information that will verify that you had a policy.
    Mr. Graves. Okay.
    Mr. Koskinen. So that the chances of your figuring out how 
to get money beyond what you are entitled to are slim in that 
case.
    The problem for us, the challenge, IT challenge, is that 
all of this has to be built into our normal computerized filing 
system. So there are something like over 50 systems that have 
to be adjusted to take into account these calculations.
    Then getting to the question about what do we do about 
enforcement? If you got too much credit, you will owe us the 
money and we will take it out of your refund, or you will pay 
it as a tax due. If you got too little, we will add it to your 
return and refund, or subtract it from the amount you owe as 
you go forward.
    The question will be, ``okay, I didn't buy. I was supposed 
to buy insurance, I didn't buy it. I have a responsibility 
payment, penalty, however you would call it, of $95 or 1 
percent.'' The statute limits our ability to collect on that. 
We can deduct it from a refund, so if you owe us $95 and 
otherwise would have gotten a $500 refund, we will subtract it.
    But if you owe taxes and pay taxes, but now you don't pay 
the $95 and we assess it, we can't levy against you. We can't 
do the usual enforcement. We can write you a letter and say, 
``hey, you owe us the money,'' and next year take it out of a 
refund, but we have limited enforcement ability against you. It 
is easy to understand, but that is another complication for our 
filing return systems because then we have to be able to 
identify that what you owe us is tied to the responsibility 
payment, not normal taxes. Because if it is normal taxes, you 
go into our normal collection and enforcement process.
    Mr. Graves. Which is a penalty system----
    Mr. Koskinen. We have to have a computer system. The 
penalty system goes into a modified collection process. So the 
computer system has to recognize all that and be able to say, 
``all right you owe us $95 but that is what you owed us because 
you earned and didn't pay enough in withholding,'' or ``you owe 
us $95 and that is because you didn't buy an insurance 
policy,'' and now we are actually going to collect from you in 
a different or modified way than before. So that the----
    Mr. Graves. Could I ask another question on that?
    Mr. Koskinen. Sure.
    Mr. Graves. So, if you have unpaid taxes there is penalties 
and interest.
    Mr. Koskinen. Right.
    Mr. Graves. That date back to the time the taxes were due. 
Is that the same that the Supreme Court ruled----
    Mr. Koskinen. My understanding is if you owe the money, you 
owe the money. There are limits of what we can do to chase you 
for it.
    Mr. Graves. Okay. So are there penalties and interest if 
somebody doesn't pay their $95?
    Mr. Koskinen. Yes. My understanding, although that is the 
first time anybody has asked that specific question, so I will 
double-check to make sure I am right, but my understanding----
    Mr. Graves. And the reason I asked is because the Supreme 
Court I thought ruled this a tax--
    Mr. Koskinen. Yes.
    Mr. Graves. And you continue to use, and everybody does I 
guess, the individual shared responsibility provision. And so I 
am curious if it is being treated the same as a tax.
    Mr. Koskinen. It is. It is partially because we can collect 
from you in the way we normally do, short of filing a levy or 
chasing you. That is my understanding. It is like money you owe 
us. We will take it out of next year's refund and there are 
penalties and interest applied.

    [The information follows:]

    I have verified that the SRP established in section 5000A 
to which you referred is payable when the IRS issues a notice 
and demand for payment. Therefore, an individual is not 
required to pay the SRP as part of quarterly estimated tax 
payments, and the IRS will not impose estimated tax penalties 
for a failure to pay the SRP with estimated taxes. The statue 
provides special rules for the assessment and collection of the 
SRP. A taxpayer who does not timely pay the SRP is not subject 
to criminal prosecution or penalty for the failure; however, 
interest accrues on the SRP from the due date for payment 
specified in our notice.

    Mr. Graves. Okay, and if I could ask one more, Mr. 
Chairman.
    And then as far as small business owners who are filing 
quarterly currently, are they required to begin that process 
now, seeing how they are paying their quarterly taxes today? 
Because I think there has been some dispute as to whether or 
not they wait to----
    Mr. Koskinen. Until the end of the year.
    Mr. Graves. To the end of the year, to the 2015 filing 
backwards, but because they pay quarterly now as small business 
owners, as individuals or sole proprietors, I assume?
    Mr. Koskinen. That I don't know the answer to, but I will 
get back to you very quickly because that is a straightforward 
simple question and I will get back to you in the next few 
days.
    Mr. Graves. Okay, thank you, Mr. Chairman.
    Mr. Crenshaw. Mr. Yoder just walked in. He is collecting 
his thoughts.
    Mr. Koskinen. He and I are suffering from the NCAA 
tournament together.
    Mr. Crenshaw. I hope you didn't have anything to do with 
Duke losing to Mercer, because I think that knocked out about 
99 percent of all of the people.
    Mr. Graves. What is wrong with Mercer?
    Mr. Crenshaw. Nothing, but I don't think anybody other than 
you, Mr. Graves, picked Mercer to beat Duke. So a lot of 
unhappy people.

                         TARGETING PROHIBITIONS

    Okay, well let me ask a quick question. I mentioned in my 
opening statement that we had the omnibus bill last year that 
was bipartisan and we put language in there that said you can't 
use the funds to target certain groups. We said you can't use 
money from the funding to target certain citizens for rights 
guaranteed under the First Amendment. We said that we were 
going to require videos that were produced by you all to be 
subject to appropriate review.
    And so my question is, why didn't your budget request 
include those three prohibitions?
    Mr. Koskinen. Because for years, OMB, whoever the 
Administration was, has always opposed riders on appropriation 
bills, whatever they say. This was a decision made by the 
Administration and OMB to, again, continue to oppose any 
riders.
    I would note, that as far as I am concerned, I think 
taxpayers have a right to expect to be treated fairly, not only 
under the Constitutional rights, but they need to understand 
that no matter who they are, whatever organization they belong 
to, whoever they voted for in the last election, when they deal 
with the IRS in any way, they need to feel they are going to be 
treated the same way everybody else is. If we contact you it is 
because we have a question about something in your return, and 
that is the only reason you are going to hear from us. And if 
somebody else had that same issue in their return, they would 
hear from us in the same way.
    So my sense is we don't need a rider. If you want to put 
another one in, that is fine, but I don't think we ought to 
need a rider, and we certainly don't as long as I am there. I 
will just say I think people ought to be treated fairly. They 
ought not be singled out because of anything other than 
whatever they are filing with the IRS. And so my strong view--
--
    Mr. Crenshaw. So you don't, you know, plan on doing those 
activities this year.
    Mr. Koskinen. No.
    Mr. Crenshaw. You wouldn't have any problem if we were to 
prohibit those activities in this year's bill?
    Mr. Koskinen. No. As I say, I know, having been at OMB 20 
years ago, although I was on the management side, and even when 
I was in the city, any time riders are put into appropriations 
bills, the recipients say you ought to do that separate from 
it. And so they will continue. It will always be that dialogue 
and response back.
    But as I say, we are not going to do it anyway. Whether you 
add the rider or leave it out or change the language in it, it 
is not going to affect the way we behave.
    Mr. Crenshaw. That is good to hear. I do think sometimes 
riders make their way into requests, but that is not your call 
to make and I appreciate that. But I think there are probably 
some things, in the request the Administration made this year, 
so whoever makes that decision is not always absolutely 
consistent. But, again, that is above your pay grade.
    Mr. Koskinen. Right.

                       501(C)(4) DRAFT REGULATION

    Mr. Crenshaw. Let me ask you about the 501(c)(4) 
regulation. We talked a little bit about this when you were 
here before. And as you know, the Chairman of the full 
Committee, Mr. Rogers, and some others, the House leaders, 
wrote a letter to ask you to withdraw the draft of the 
501(c)(4) regulation, which I would probably agree with but I 
don't think you agree with that, and as far as I know, you 
continue to move ahead. We talked about the fact that the 
number of comments grows almost daily. Last report I had was 
there were 150,000 comments. Are we getting higher than that 
now?
    Mr. Koskinen. Well, the last estimate I had from Treasury 
which keeps of track of these, although I don't know who counts 
them, but anyway is it is just above 150,000.
    Mr. Crenshaw. Got you. As kind of a perspective, I 
understand the XL Pipeline, which is pretty controversial, had 
about 7,000 comments, and so, evidently there are a lot of 
people that are interested in this regulation.
    And so, you talked before that maybe something that 
controversial you might republish the rule and ask for even 
additional comments. Can you give us an update on what your 
plans are?
    Mr. Koskinen. Yes, as you know, this draft proposal was put 
out, it is actually convenient, two weeks before my 
confirmation hearing just to make it more interesting to have 
that confirmation hearing. I don't know how it about came about 
and what they did with it.
    My view and I have said publicly on numerous occasions, is 
that I do think clarity would help. While I don't control the 
process, I do think that any regulation that comes out finally 
ought to be fair to everybody, ought to be clear and ought to 
be easily administrable.
    In light of the comments, which are voluminous, there will 
be a public hearing at which people in the public, as well as 
the Congress, can testify. They will have to figure out a way 
to screen everybody, otherwise we could be there for weeks. 
There will be a public hearing.
    In light of the comments, a lot of them I haven't seen, but 
I know that some of them are long and thoughtful, and I assume 
a number of them will be. I think there is a reasonable 
possibility we will have to reissue, redraft a proposal which 
would go out again for public comment.
    I originally said, when we had about 25,000 comments, that 
I thought the chances of getting a final regulation through the 
process before the end of the year were slim. At 150,000 
comments, all of which we have an obligation to consider, I 
think that it will be the end of the year, probably, before we 
get to it.
    But I do think that we should be moving from a ``facts and 
circumstances'' test which doesn't give people running the 
organization any more clarity than it does IRS people trying to 
figure out whether they apply or not. If you had a regulation 
that was fair to everybody--it didn't discriminate one group 
against another, it didn't encourage you to form yourself one 
way or another, it was just a fair, straightforward, clear and 
easy to administer set of rules--you would then make it a lot 
easier for people running these organizations to feel 
comfortable that they know what to do, and they can do every 
day, and they are not risking their exemption. Again, wherever 
they are in the political spectrum, they are all in the same 
boat.
    Mr. Crenshaw. Well, you know, there was a lot of concern 
when it was first published whether it was going to happen 
before this year's election cycle, was on the tip of everyone's 
tongue, and from your testimony it sounds like it won't happen 
before the end of this year which won't happen before the 
elections in November. Is that still your best judgment?
    Mr. Koskinen. That is my best judgment.

                 COST OF PREPARING 501(C)(4) REGULATION

    Mr. Crenshaw. Tell us, and this has to do with priorities, 
but how much staff time have you at the IRS spent on preparing 
the regulation and reviewing the comments? Because that gets 
into where your priorities are, but have you got have an idea 
of how much time and energy and money has been spent on 
promulgating this and then reviewing this?
    Mr. Koskinen. I don't. The promulgation was all done and 
the discussions were before late November when it was issued. 
We are in the review process now. A lot of the comments are 
electronic. You can measure it. You go to the website and it 
will tell you how many they have counted on the electronic 
side, and then we have got paper ones to boot. So we are at the 
front end of that process of segregating them into who is in 
favor of what.
    There are three big questions. One is what is the 
definition of political activity; the second is to which 
organizations should it apply across the 501(c)(3), (4), (5), 
(6), (7)s; and what is the amount of activity that you can 
engage in without jeopardizing whatever your qualification is. 
The regulation only proposed a definition of political 
activity. It left open, and asked for comments, on the other 
two questions.
    So we have to bucket as it were, there is probably a better 
verb than that, but anyway take these comments, put them into 
processes so we can actually know. Some of them will be 
repetitive, so you will know, okay, there were 5,000 that say 
this. I have seen a couple that are very thoughtful, like five 
page intellectual analyses of what should count, what the 
impact would be.
    One of the questions is, ``what is the impact on somebody 
who is a 501(c)(3) or a 501(c)(5)?'' There are 1.6 million tax 
exempt organizations out there, and part of the reason for 
asking for comments was nobody knows exactly what all of them 
are doing. Garden clubs, obviously, one would think would not 
be involved.
    So at this point, I could get you an estimate, but the time 
that it is going to take is really going forward, which is to 
try to work through all of those comments, then take them into 
consideration, have a public hearing, and then figure out what 
is an appropriate response to both the public hearing, all of 
the debate that has gone on, but in particular, an appropriate 
response to the comments.
    Because, as I say, the purpose of them is you should read 
them, listen to them and benefit from them.
    Mr. Crenshaw. Well, my only point is that, that obviously 
costs something and in terms of you figure out your limited 
resources, you have got to make those judgments, that to try to 
do a rule like this fast would probably cost more money 
devoting more people you know, early on as opposed to doing it 
you know, in maybe a more thoughtful way that might take a 
little more time but also it might let you spread out the 
expense through all the staff.
    Mr. Koskinen. Right. Well, that is the way we are going. I 
mean, there is no rush to judgment on this, to say ``we got to 
get it out,'' and in fact, I think, personally, not the guy who 
controls it all, but the goal here is not to end up rushing to 
see if we can get it out in October, which would seem to me----
    Mr. Crenshaw. You still have to answer the phone along the 
way, right?
    Mr. Koskinen. That is right. So we got to answer the phone. 
I think you are right, that we ought to address it in an 
appropriate, thoughtful way. Because I want people to feel 
comfortable when we come out with whatever we are coming out 
with, that it wasn't something that we just went through the 
motions with. That we actually listened and read and heard what 
the comments were, and the concerns were across all three 
questions; about the definition of political activity, to whom 
it ought to apply, and how much of it you could do without 
jeopardizing your exemption.
    Mr. Crenshaw. Thank you.
    Mr. Serrano.

                    PURPOSE OF 501(C)(4) REGULATION

    Mr. Serrano. Thank you, Mr. Chairman.
    Following up on that, you have released proposed 
regulations intended to provide clarity to the standards for 
determining the tax exempt status of 501(c)(4) organizations.
    I understand that you have received over 150,000 comments 
and that public hearings will start soon on the proposed 
regulations; why did the IRS issue these proposed regulations?
    Mr. Koskinen. Why?
    Mr. Serrano. Why?
    Mr. Koskinen. I wasn't around so I can't tell you why. I 
can tell you, from my standpoint as a new guy on the block, 
having a standard that says ``facts and circumstances,'' is 
difficult to administer, difficult for people running an 
organization to understand, on a rolling basis, how it runs, 
how to measure how much of it, it is.
    So, just from outside the ongoing debate, it does seem to 
me if we came up with a rule that is fair to everybody, clear, 
easily administered, everybody would benefit. So I think it is 
worth the effort. But what was going on when people decided to 
promulgate it, it was a recommendation of the Inspector 
General.
    Mr. Serrano. Okay. That is what I was going to say. My 
understanding was----
    Mr. Koskinen. One of his nine recommendations was the IRS 
and Treasury ought to put on their priority plan clarity, and 
so I am sure that was the major driver last fall.
    Mr. Serrano. Well, that is what I understood, that it was 
the recommendation of the IG, and while some may differ in a 
respectful way on how much time you spend on regulations, I 
think this particular one has caused enough heartache in this 
country, this whole issue, that we need to clarify clearly what 
is allowed and what is not allowed as much as we can so that 
people have guidance and so that we can stop talking about as 
much as we talk about it too.
    Mr. Koskinen. Well, again, I would hope the public would 
feel comfortable of that, in light of the volume of the 
comments, but also that they come from everywhere. So we 
managed to generate interest across the entire political 
spectrum, across a lot of different organizations. It is a 
broader, which I think is appropriate, review and discussion 
than it might have been viewed, perhaps, in the past.
    So I hope people would understand that everybody is going 
to be heard, and that, ultimately, while we may not satisfy 
exactly everybody, I think if it is a fair result, and 
balanced, and deals with everybody fairly, most people will, I 
think, be comfortable and think it is an improvement.

                            TAX GAP ESTIMATE

    Mr. Serrano. All right. Let me ask you something about an 
issue that we deal with all the time and sometimes I think 
doesn't get the attention it should. The tax gap, which was 
last updated in 2006, will the IRS be updating this statistic 
and if so when will you do so? And please talk about your 
efforts to address it, which can cost taxpayers or is costing 
taxpayers $450 billion a year right now.
    Mr. Koskinen. Actually, the tax gap was updated either in 
2011 or 12, but it is on the basis of 2006 data. And the 
problem is it is a long, complicated process, so you are always 
out of sync and out of check with it. I have asked that 
question, to see, when is it meaningful? The tax gap number 
didn't change significantly between the earlier update. When is 
it meaningful for us again, with the resources we have, to 
undertake the research project it takes? It is a long analysis; 
you have to worry about taking into consideration all the 
information you get from audits. You do some additional audits 
to try to test where the compliance taxpayers are, how many 
other people are out there who should look like them.
    One of the big improvements in attacking the tax gap is 
thanks to legislation passed by the Congress, which requires 
credit card companies to file what is called a 1099-K with 
anybody who has clients who use a credit card as well as with 
the IRS. So for the first time we will have third party 
information about what is going on in a big chunk of the 
economy. And the estimate has been about one-third of the tax 
gap is in that area. Everybody from gas station owners to mid-
sized companies, who basically have been operating without 
knowing that we don't have any independent way, other than 
auditing them and going through their books and records, to 
know exactly how much they had in revenues and what their 
expenses were. Our experience is that compliance goes up 
significantly when people know you have got the data.
    We are a tax compliant Nation. I think we deserve great 
credit for that. But part of it is because everybody knows we 
got your W-2. Sooner or later we are going to get your 1099. 
Now with FATCA we are going to find out who has assets in the 
Cayman Islands and in Switzerland. So my guess is that 
compliance is going to go up a lot, voluntarily abroad as well.
    I think we are going to make inroads in the tax gap. It may 
actually make more sense a year or two from now, as we have 
begun to complete our pilots about how to use this information, 
how to deal with small and medium size businesses, to see what 
difference it makes. Because we know kind of where we were. 
There is no indication that the gap has changed significantly 
from about $425 billion, less about $50 billion that we 
collect. A lot of the collections are part of the tax gap 
obviously because those are people who weren't paying or didn't 
want to pay. So about $375 billion was the net, and as I say 
about $135 billion of that was the estimate in this area, and 
we are now able to deal with that thanks to the support we have 
gotten from Congress.
    Mr. Serrano. Do I have time for one more question?
    Mr. Crenshaw. A quick one.

                                BITCOIN

    Mr. Serrano. Sure.
    You know, when you are in this room for sure you are on TV. 
I don't know if you are aware of this. The big room gets seen 
by the public, and hearing the word Bitcoin, could you tell us 
from a IRS perspective what is a Bitcoin, why did you decide to 
tax it as property and how challenging will that be in going 
through the returns and finding out the information you need?
    Mr. Koskinen. I feel like Congressman Womack here. He and I 
are looking at Bitcoin just about the same way we are looking 
at some of the social media issues.
    Bitcoin is a fascinating kind of intellectual challenge. 
The question is, ``what is currency?'' In the old days, really 
old, thousands of years ago, currency was whatever you 
bartered. Salt was a very valuable commodity. People bartered, 
used salt as a currency. The Romans had old coins.
    So the question is, ``how does currency function?'' and 
particularly here, ``how does currency function when it is not 
issued by a government?'' It doesn't have anything behind it 
other than the transaction nature.
    So, I think we are at the beginning of the discussion about 
what Bitcoin is and how it is going to work or what online non-
governmental currencies are. The position that the IRS Treasury 
regulation took was, at this point, it is not a currency in the 
way we think of currency because it is not supported by any 
visible means and, therefore, it is a commodity. When you trade 
it, you can't pay your taxes with it, but we recognize people 
are in commerce, trading it back and forth.
    And what it says is you have to treat it as property, and 
that is, if you are making a profit or a loss as you trade the 
Bitcoin and buy something with it, you have to keep track of 
that, which will be complicated needless to say.
    But it is not that different. Normally if you go to Europe 
and you buy Euros and they go up or down in value, you don't 
pay any attention to that, you just use the Euro. You are, in 
effect, making or losing money, but you are not keeping much 
track of it.
    Currency traders--people who trade currencies and treat 
them as property--they are making money on the change in the 
value. So, in effect, everybody who is in the Bitcoin business, 
it is as if they are a currency trader in Bitcoin and it is 
property, so you have to keep track of it.
    Now, in the paper I read, there are people saying, ``well, 
they are going to figure out ways to make it easy for you to 
figure out how much did you pay for your Bitcoins? And when you 
held them for a while and used them, did you make money on them 
or lose on them?''
    As it is now, it is like a stock you have to keep track of 
yourself. In the old days that is what everybody had to do. You 
bought the stock and then if it went up or down, you had to 
keep track yourself as to what its value change was.
    On the one hand, the IRS Treasury regulation accepts or 
validates that Bitcoins are out there and people are using 
them. There is enough real about them that, in fact, the IRS 
would say they are property. But it is an understandable 
position for the experts on this, of which I am not one, to 
take the position but it is not a currency at this stage.
    Now, at some point in the evolution of time will it become 
a currency? Will it be traded or treated or supported as such? 
You know, who knows? But I think we are at the front end of 
Bitcoins. The issue recently was about whether you could 
suddenly lose track of where they are. They are electronic, so 
when whatever it was--Cox or whoever the company was that went 
under--if you suddenly had hundreds of millions of dollars of 
Bitcoins disappear, it gave you some idea that, well, this 
isn't your normal currency.
    And so I think at this stage the advice given by the 
Treasury and IRS was an attempt to start moving down the path 
of dealing with these currencies and transactions as they 
unfold.
    Mr. Serrano. Well, I thank you. If it doesn't make noise in 
your pocket it is going to be hard for us to understand.
    Mr. Crenshaw. Well, I will let you know, Mr. Serrano, 
without divulging, I don't know what the IRS implications might 
be, but as you look into the future, if you want to go take a 
ride in outer space, there are people that will allow you to 
pay for that with Bitcoins. So, just keep that in mind as we 
look to the future.
    Now I will recognize Mr. Womack.
    Mr. Serrano. Is that where you are trying to send me?
    Mr. Womack. Why would Serrano want to pay large Bitcoins to 
go to outer space when he has already been there a few times? 
That is a joke.
    Mr. Serrano. I went. No, No, I did, on Saturday night, and 
it was full of Republicans.
    Mr. Womack. Yeah, I hear you.
    Mr. Chairman, I think Mr. Yoder was next.
    Mr. Crenshaw. Well, if he has gathered his thoughts.
    Mr. Womack. He has had plenty of time.
    Mr. Crenshaw. He didn't give me a signal.
    Mr. Yoder. I have had more than enough time. Thank you, Mr. 
Chairman.
    Mr. Crenshaw. Okay, great. Mr. Yoder.
    Mr. Yoder. Thank you, Mr. Chairman.
    Commissioner, welcome back to the Committee. I want to 
thank you for something. You know, after the University of 
Kansas lost their second round basketball game in the NCAA 
tournament, it took a while for me to be able to even speak of 
that awful moment. But knowing that Duke had lost already 
really made it a lot easier for me to be able to get through my 
day. So, I want to thank Duke for losing and North Carolina for 
losing as well.
    Mr. Koskinen. Once your team loses, you root for everybody 
else to lose. You become a great supporter of Dayton.
    Mr. Womack. Remember the overall Chairman's team is playing 
tonight, so----
    Mr. Yoder. Well, and that is a problem for me as well 
because my wife is a Kentucky grad. So we will just move on to 
other topics.

                   FOREIGN ACCOUNT TAX COMPLIANCE ACT

    I want to ask you a question on a few different topics. I 
want to start with the Foreign Account Tax Compliance Act. I 
understand that Treasury and the IRS have recently issued forms 
and rules to help alleviate problems financial institutions are 
phasing in complying with this new act. However, the Act is 
scheduled to be in effect starting July 1 of this year but 
existing law in some countries makes it impossible for some 
financial institutions to comply without an intergovernmental 
agreement, an IGA, in place to resolve those legal issues.
    It is my understanding that fewer than 30 intergovernmental 
agreements have been signed by the U.S. and fewer than 30 IGAs 
have been tentatively agreed to. That unfortunately leaves many 
dozens of countries that have not reached agreement with the 
U.S. on how their financial institutions can comply with the 
FATCA.
    So I have a few questions for you. One, what guidance can 
you provide to global financial institutions that are trying to 
comply but cannot because the U.S. has not reached the 
necessary agreements with many countries on compliance with 
FATCA. Secondly, would the IRS take the view that the inability 
to comply in one of many countries in which they do business 
might affect the treatment of the entire organization?
    In other words, should the fact that the U.S. has not 
reached agreement with India, for example, mean that the entire 
foreign financial institution cannot be in compliance with 
FATCA even though it is in fact in compliance for all of its 
operations in countries where the U.S. has negotiated the 
necessary agreements?
    And then lastly on this topic, would you be prepared to 
offer accommodations to financial institutions that are as 
compliant as they can be under the current law given the 
complexities of achieving the necessary cooperation of 
international taxing authorities?
    Mr. Koskinen. Well, let me work in reverse.
    Mr. Yoder. Sure.
    Mr. Koskinen. I would note that, much like the 501(c)(4) 
regulation, I don't control the guidance process. It is a joint 
effort, and ultimately Treasury is responsible for those 
things, and Treasury is responsible for tax policy as it 
relates to that. We are tax administrators, tax collectors. So 
the answers to most of your questions, which are very important 
questions for, obviously, the financial institutions involved, 
really are going to come out of the Treasury tax policy group.
    But at this point, the good news is that Treasury has 
announced that--I think they have announced anyway--my 
understanding is if you have initialed the agreement and it is 
just waiting for final adoption, that will count. So we are 
getting close to 50 countries that either have a signed 
agreement or basically a negotiated agreement, that has been 
initialed by both parties and are now just moving toward a 
conclusion.
    Fifty is a good number in the sense that it covers a lot of 
the countries that everybody has been focused on as we go. But 
it does raise--and there are a lot of other countries, you 
know, another 100, 125 easily--the questions you raise, and 
particularly the one I had not heard people discuss yet, but it 
does seem to me appropriate, is in this global economy, any 
number of financial institutions are operating in a number of 
different countries.
    The good question is, ``if I am in 30 countries, 20 of 
which have agreements and 10 don't, do I at least get credit 
for the 20 I am in that have agreements?'' And, again, that is 
a question that Treasury would have to answer, but it does seem 
to me, logically, that you ought to be. If you are operating 
and your accounts are in a country that is compliant, that 
ought to count for something. But the problem is the penalty is 
withholding payments made on accounts you have here.
    So it is going to be a more complicated answer than the 
logic of well, you ought to get some credit because you ought 
to for that. I will be happy to find out from Treasury where 
they are and whether anybody has asked that question. I know 
they are working, and most of the countries, are working very 
hard to get to the international agreement.
    Some of the 50, a lot of the other countries, in effect 
have rules that allow the banks to provide the information 
directly. Some of the countries that had bank secrecy laws, 
which were part of their attraction for people as a place to 
have accounts, then discovered they were suddenly stuck in that 
message. But a lot of countries basically will allow their 
banks to provide that information.
    So the real question is between 50 and 180, or whatever the 
number of countries are, how many of them have bank secrecy 
laws and no agreement, and that I don't know the answer to.
    Mr. Yoder. Well, your efforts to clarify some of these 
things will be helpful, and as I am sure you can imagine, there 
is a lot of confusion going out and July 1 is coming quickly. 
And there is this uncertainty. Our office gets questions, and 
so I pass those questions along to you and to extent you can 
help us clarify, great, and we appreciate your efforts in that 
regard.

                        EARNED INCOME TAX CREDIT

    Shifting gears for a minute, I want to talk a little about 
the Earned Income Tax Credit. And I had some tax preparers in 
my office recently and we were talking about just the amount of 
fraud that goes on in this program. I know you are probably 
well aware of it.
    It is a pretty stunning number. When you look at a program 
that has had upwards of 25 to 30 percent of the payments 
fraudulent, I think reports now are 21 to 25 percent of the 
earned income tax payments are fraudulent payments that go to 
folks that are not entitled or eligible for those benefits. And 
correct me if you have better more accurate numbers in a moment 
here.
    What tools do you need to fix this problem? You know, we 
are talking $10 to maybe $13, $14 billion in lost revenue or 
money that is going out basically from the Federal Treasury to 
folks that don't deserve those dollars. That is a lot of money, 
particularly when we are talking about trying to find money for 
Head Start and cancer research and things that could really 
help people, or reduce the tax burden for Americans that are 
already struggling in this economy. How do we root out that 
fraud, number one.
    And then, two, the taxpayer suggested to me that there is a 
little bit of a loophole in that when they help someone prepare 
an earned income tax application they have to certify a list of 
questions that they are on the line for determining were 
accurately responded to, or at least that they asked the 
questions and sought answers, and they have had people when 
they have asked the question say, never mind, I am just going 
to file it myself. That way I don't have to actually answer 
those questions, and they described an online loophole that 
allows people to basically not have to attest to all of the 
same things they might have to attest to with the preparer.
    What do you know about that, is that accurate, and what can 
we do to fix that problem as well?
    Mr. Koskinen. Right. As I talk with employees, I tell them 
that even with our constrained resources there are a set of 
things we need to address, and they are what I call the visible 
issues. So we need to make sure filing season, which is the 
most visible, goes well, as it has this year. And the challenge 
for implementing the Affordable Care Act and FATCA next year, 
is to make sure that it goes well because it ties directly into 
the filing season. So we are going to do that and I am 
committed to that.
    In terms of other issues, we need to get the (c)(4) issue 
behind us. We are providing voluminous documents to the six 
investigative groups. It is not a resource issue, it is just, 
``can we ever get the document production completed and 
somebody issue a report.'' Because I said, once we have the 
report, we will take the facts, whatever they are, do whatever 
we need to do in addition to the things we have already done, 
and then we will move on. We need to do that.
    We need to deal with a (c)(3) backlog that requires us--we 
are redoing the way small PTAs, as I call them, get processed. 
There is no reason they should get the same 31 page application 
as somebody that is going to spend $2 million. And those are 
all visible and those are things we need to deal with. I think 
we have a program and we are in good shape for that.
    We have a good story, as I just talked about, around a huge 
problem of refund fraud, where we have programs going. We are 
making a dent in it. I think we are going to--with a little bit 
more funding--actually make a bigger dent.
    The area that is the last area that is visible where I 
don't think we have had a good story, is in fact the Earned 
Income Tax Credit. As you note, the improper payment rate has 
been 20 to 22 percent, and the amount of money improperly going 
out is $12 billion to $14 billion, and it has been that way for 
several years.
    And it is not that the IRS has not tried a lot of things. 
They have tried a lot of different things and it seems to have 
made no difference. So I have told people that is an untenable 
position to be in. We need to let people know that we know it 
is a problem, that we recognize that. We think it is important 
to solve the problem, and we think that, in fact, there ought 
to be a way to deal with it.
    I have had two long meetings with anybody who ever thought 
of this problem in the IRS to say, okay, don't tell me what we 
have done, that is fine, it didn't work. You know, we can't 
keep doing it expecting it to be different. What are the 
changes we need?
    So your question is my question, and there are several 
things. One, have we disaggregated where does the improper 
payment comes from? Some of it is fraud by refund preparers who 
take the money and run off.
    Some of it is improper payment, definitionally. The statute 
is very complicated about where the children are. There is 
relatively little fraud in the single taxpayer with no 
children. The maximum payment there is about $600, so it is not 
a huge incentive to cheat, and the fraud there is just the 
understatement of income to try to make yourself qualify, and 
we have the usual ways of tracking that.
    The real problem is the complexity around dependents and 
how many children you have and where are they. Are they with 
you, are they with your wife if you are divorced, are they with 
somebody's grandmother? How many different people are claiming 
them? And that is where the attestation comes in and people 
have to certify, ``okay, I have got this many children and this 
is where they are.''
    We have spent a lot of time auditing these people, but it 
is clear we are not going to audit our way out of the problem. 
We have dealt with tax preparers because over 50 percent, 57, 
at one point over 60 percent of the returns were filed by 
preparers, and so they were a group we could educate about the 
problem. We could ask for their assistance to make sure they 
are comfortable that they are filing.
    And your report is right, some people have said well, in 
that case I won't go to the preparer. I will just do it myself. 
And so, part of it goes to our goal of providing minimum 
standards in regulating preparers, but part of it is there are 
legislative things that would help us.
    Two of them are--one is what is called correctable error 
authority, which would allow us if we see beyond just math 
errors, if we see an error in a return--we see them in 
particular in this area where we have information that says we 
don't think you have got the right number of children here--now 
we can't adjust that refund without actually auditing you. We 
don't have the authority to adjust it.
    Now, if we adjusted it and had that authority we would tell 
you that we adjusted it. You would still have the normal rights 
to appeal or complain or explain. But we haven't got enough 
resources, and it wouldn't make sense for us in all of those 
returns where we see there is a problem, to then go out and try 
to audit. We do half a million audits in this area already. It 
is about one-third of the audits we do. So if we had 
correctable error authority it would be a big step forward.
    The other thing we are asking for is authority to move 
the W-2 filings to the IRS by the end of January. We would 
collect some of the understatement of income from people. It 
would allow us to make sure that the fraudulent filers are out 
of there. The problem is a lot of EITC filers don't have W-2s. 
They make money and they file schedule C's, they are gardeners, 
they are working in assistance places where they don't get W-
2s.
    The third piece we are looking at is where we can get third 
party information, particularly about children. We have some of 
that in our dependent database. We need to make that improved 
and better.
    And then the fourth, and we haven't gotten that far yet, is 
whether there is a way to simplify the statute. I have got to 
tell you, I have read it, I read the requirements, and even I 
have trouble figuring out what some of the rules are. You know 
you can't be filing a return above a certain age if you are 
already on somebody else's return or you are older than the 
taxpayer who is filing. And I mean, you look at it and I am 
thinking what kind of situation is that?
    So I understand how these things grow, but one of the 
things I have asked for, and we don't have it in our 
legislative proposal yet is, is there a way to make the statute 
simpler so that people trying to make the right decision and 
make the right filing would be able to do it without a lot of 
complications?
    But I do think it is an important problem, and as I have 
told our employees, we have to have a better story, and it is 
not a better story to talk about. We have to have a better 
story on beginning to make a dent in the improper payment rate 
and in the amount of money that is being paid out.
    Mr. Yoder. If I might just on this topic follow up, Mr. 
Chairman, and I will yield back.
    Is it accurate they don't have to, these applicants don't 
have to attest the same information that they might have to 
attest through a preparer? Wouldn't that be something we could 
clear up, clean up very easily?
    Mr. Koskinen. That is one of the issues and that is one of 
the questions. Some of these things we can do on our own. Some 
we need legislation for, and one of the questions we are 
looking at is everybody sensitive, appropriately, to the burden 
we place on individual taxpayers----
    Mr. Yoder. Absolutely.
    Mr. Koskinen [continuing]. And so we don't want to 
gratuitously, suddenly, make a group of people do more. But on 
the other hand, this is an important program. I remember when 
it was passed, it supports the working poor, it gives people 
incentives to work. It is a great program and it turns over. 
Part of the problem is a third of the eligible people turn over 
every year. They get a better job, something changes in their 
circumstances. So we have this irony. We have to be out trying 
to make sure eligible people sign up, an odd thing for tax 
collectors to be doing.
    Mr. Yoder. On that specific point----
    Mr. Koskinen. On that point, my view is I am sensitive to 
the burden, we have to be careful about it. But on the other 
hand, we can't live with these numbers. So if it means that 
there is going to be a little more burden to file, and if it 
means the refund maybe comes a couple weeks later, so we can 
actually process third party information, we need to take a 
hard look at doing that.
    Mr. Yoder. I just think when a program has 20, 22, and it 
has been up to--I have read maybe 25 or 30 percent over the 
years in fraud----
    Mr. Koskinen. It has always been--somehow magically 20-22 
is the number. That is not up to the 30 percent.
    Mr. Yoder. Either way, that is a stunning amount of fraud, 
and I would think something as simple as you have to attest to 
certain facts before you are eligible, the same facts you would 
have to attest through a preparer when you fill out your form, 
to me seems a minimum burden to root out what is essentially a 
fraud that cheats and hurts every other taxpaying American who 
isn't cheating the system.
    Mr. Koskinen. Not all of it is fraud. It is improper 
payments, to a lot of extent. It is not necessarily people 
consciously trying to do it. It is in fact complicated to 
figure out.
    Mr. Crenshaw. If we simplify the Tax Code, then we don't 
need to spend as much money on the IRS.
    Mr. Womack.

                       OFFSHORE TAX NONCOMPLIANCE

    Mr. Womack. Real quickly, what is the amount of money that 
the Treasury is losing to offshore tax noncompliance?
    Mr. Koskinen. I am not sure anybody knows the answer to 
that.
    Mr. Womack. What do you think it is?
    Mr. Koskinen. We don't know--now we do know that the 
Voluntary Disclosure Program has flushed out 43,000 people that 
have paid about $6 billion already, and obviously some of the 
more hard-core people are still hanging out there, figuring 
maybe we won't get to their country or their assets. But I have 
never seen an estimate as to what is out there.
    My concern about it has been, or my view of why it is 
important, is it is important to have collected the $5 or $6 
billion, which is a lot of money.
    Mr. Womack. But it is more than that.
    Mr. Koskinen. Yes, It has got to be more than that.
    Mr. Womack. A multiple of that.
    Mr. Koskinen. I think that is right. There are estimates 
that it is multiples of that. I think we need to. It rankles me 
when people don't pay, so I am happy, as I have said publicly, 
to take the unwilling to pay. Willing to pay people who have 
trouble, we ought to work with. We have installment agreements. 
There are ways we can help you try to get to be compliant if 
you want to be compliant. We ought to work with you.
    If you are unwilling to pay, I am happy to chase you to the 
end of the Earth and throw you in jail, if we can, because it 
rankles me when you don't pay. And one of the advantages, the 
important signals we send with FATCA, is to the average 
taxpayer who is paying his taxes, he no longer has to think, 
``if I had a really fancy attorney and had a lot of money and a 
really fancy accountant I could hide my money and I wouldn't 
have to pay those taxes.''
    Mr. Womack. Just like those other guys do.
    Mr. Koskinen. Just like those other guys. And so what I 
want the average taxpayer to feel, is if they are trying to do 
that, the IRS is out after them, and then we are going to be 
out after them too.

                                PRIVACY

    Mr. Womack. Back in our oversight hearing in February you 
mentioned a couple of things that piqued my curiosity.
    First, you said you that weren't at liberty to discuss 
personnel issues, and then second because of some union 
agreements you are basically forced to pay these bonuses that 
have already been brought up once in this hearing.
    So what exactly is it that precludes you from being able to 
discuss with the Oversight Committee personnel issues?
    Mr. Koskinen. Personnel issues is not just the IRS. No 
agency can talk, in fact no private sector company that doesn't 
want to get sued, can talk about personnel questions. You see 
it in universities all the time. That, basically, if there is 
an individual personnel action, privacy protections don't allow 
people to discuss it. Obviously you don't have privacy if you 
are indicted and have a public trial. But across the 
government, if somebody has a personnel action taken, that is a 
private matter.
    Mr. Womack. Is there anything that could be done from our 
standpoint? You know, you were talking a minute ago about 
seeking approval for things like correctable errors, certain 
types of authority that you don't presently have. Is there 
something along the lines--I guess what I am getting to is 
doesn't it make sense that the commissioner of the IRS should 
be able to be able to have a conversation with a Committee like 
this in the eyes of the public when there are personnel 
shortcomings, obvious personnel shortcomings that for a variety 
of reasons are just not being properly addressed?
    I will leave it there.
    Mr. Koskinen. Well, the decision has been made far beyond 
the IRS or this area that, in fact, personnel matters are 
personal, and in the private sector as well. If actions are 
taken against individual people, as a general matter those are 
held to be private, to protect the privacy of the individual.

                         WHISTLEBLOWER PROGRAM

    Mr. Womack. Do you guys have a whistleblower program?
    Mr. Koskinen. Pardon?
    Mr. Womack. Do you have a whistleblower program?
    Mr. Koskinen. We have a whistleblower program of which I am 
a big supporter.
    Mr. Womack. How long has it been in place?
    Mr. Koskinen. The whistleblower program has been there for 
some years.
    Mr. Womack. Does it reward people for helping discover, 
expose, if you will, people that are conducting themselves 
improperly?
    Mr. Koskinen. Yes, it does. But one of the complications of 
it is that we can't just release data. The whistleblower report 
just came out and it has taken awhile to aggregate enough 
statistics so we were not reporting, in the whistleblower 
report, the taxpayers that were in fact identified.
    Again, taxpayer information is protected under section 
6103, so when we deal with the whistleblowers, it is more 
complicated than it would be if we could just say. Because if 
somebody says General Motors has been cheating, General Motors 
may or may not have been cheating, and to have that out in the 
public domain at the front end is a problem.
    But we do pay a lot of money. I am a big believer in it, 
primarily because when there are large complicated 
corporations, and if somebody is deciding to cut corners, I 
would like them to worry a little that there are a lot of 
people that know about that--lawyers, accountants, people in 
the finance department--and somebody might turn them in and get 
a big payment. That might be an incentive, and so that is why I 
think it is a great program.

                            IDEAL TAX RETURN

    Mr. Womack. Finally, my last question, in a perfect world, 
if you were running things, king for the day, whatever you call 
it, although I think there are some people that think that the 
IRS is a monarchy, what would the ideal, and I am only talking 
on the individual side now--what would the ideal return look 
like to you?
    Mr. Koskinen. I would preface this by saying, as I always 
do, tax policy is the Treasury Department, the Administration 
and the Congress.
    Mr. Womack. I get that.
    Mr. Koskinen. But having said that, the ideal return would 
say this is my gross income----
    Mr. Womack. Send it to us.
    Mr. Koskinen. Not send all of it, no, just send part of it. 
This is my gross income, I might say, and this is my family 
situation, a few deductions. I multiply it by a number and I 
send in a check.
    Mr. Womack. Okay. That is kind of like flat tax. That 
sounds like flat tax.
    Mr. Koskinen. Well, the problem with the flat tax is it got 
a bad name because people called it a flat tax. Because most 
flat taxes are progressive. They would say there is a 10 
percent rate, a 12 percent, 14 or 18. You know, there are 
usually three rates. And I have always thought people who 
support simplification would do better not calling it a flat 
tax, just calling it a simple tax, because nobody would propose 
that the millionaire ought to pay the same amount of tax as 
somebody who makes $20,000 a year.
    So all of the simple tax proponents have usually said 10 
percent, 16, 18, whatever you want. Somehow three always seemed 
to be the number. So at the bottom of my simple return you 
would say, ``okay, I am above this, so I multiply it by 12, 16, 
18 or 10,'' whatever it might be.
    I only say that because I do think tax simplification is an 
important strategy, and I don't want people to think if it 
really got simple, it would be just a single flat tax, and then 
you have a whole lot of arguments, progressive or non-
progressive. I think the best argument to have is by complexity 
and non-complexity.
    Mr. Womack. Thank you, Mr. Chairman.
    And thank you, Mr. Commissioner.
    Mr. Crenshaw. Thank you.
    I think we have had most of the answers today. I have some 
questions I will submit for the record and Mr. Serrano may as 
well.
    [The information follows:]


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    
    Mr. Crenshaw. One thing I would remind you, we asked in the 
February hearing there were some requests made for the record 
for some information that is still forthcoming. So I just want 
to remind you of that.
    Mr. Koskinen. I am unhappy about that. My view is we ought 
to be responsive and try to get back to you as quickly as we 
can. Again, those answers are prepared. Some other people are 
involved, you know, as the normal process, every agency goes 
through. Treasury gets to look at it and then OMB gets to look 
at them and they always end up not getting changed very much.
    But it is a process. But all I can tell you is that I don't 
think the response time is appropriate. We ought to get back to 
you quickly. And if you will send me these questions, I commit 
to you I will do the best we can to get you answers quickly.
    Mr. Crenshaw. We appreciate that, and we know you have a 
tough job, I think, ultimately, to restore the confidence and 
credibility of the IRS, and so we want to work with you anyway 
we can to make that happen.
    Thank you for being here today. This meeting is adjourned.
                                           Tuesday, April 29, 2014.

                       DEPARTMENT OF THE TREASURY

                                WITNESS

HON. JACK LEW, SECRETARY
    Mr. Crenshaw. Good morning. The hearing will come to order. 
Welcome members of the Subcommittee and to our witness Jack Lew 
from the Department of the Treasury. Mr. Secretary, glad you 
are here to consider the President's 2015 budget request. We 
also welcome yesterday's announcement about the many new 
Treasury sanctions against individuals and businesses 
undermining Ukraine's stability and sovereignty. We expect the 
Department to use its powers both fully and forcefully against 
those who threaten Ukraine's security.
    Mr. Secretary, I know you are pleased that the deficit 
dropped to 4.1 percent of the GDP last year, but the deficit is 
still the highest it has ever been both in real and constant 
dollars other than the four past consecutive deficits that 
exceeded $1 trillion under this Administration. That string of 
$1 trillion deficits is why the gross Federal debt last year 
exceeded 100 percent of the GDP and will remain there, it looks 
like, for the rest of this Administration. I doubt that you or 
the President should be pleased about this legacy.
    When we look at the mandatory spending in the President's 
budget, it is estimated to grow from $2.5 trillion in the 
fiscal year 2014 to $3.6 trillion by the fiscal year 2019. By 
then, the gross interest payments on the debt alone will exceed 
$750 billion which will dwarf our defense spending. And because 
of that, it troubles me, and I wonder why the Administration 
didn't propose any serious entitlement reforms to prevent 
further intergenerational inequality.
    And so I hope that you will work with the Budget Committees 
and the authorizing Committees to give the next generation the 
opportunity to forge their own way forward rather than saddle 
them with the debts of their grandparents and their parents. As 
a member of the Appropriations Committee, we have driven down 
discretionary spending every year since fiscal year 2011, and I 
am a little concerned that more progress has not been made on 
the mandatory side of the ledger.
    The Department's own budget request also raises some 
questions. The request seeks to add more than $1 billion to the 
IRS; it seeks to authorize language to pay certain IRS 
employees bigger salaries and bonuses than are allowed under 
the civil service system. It seeks to eliminate language 
enacted in the omnibus to prohibit the IRS from targeting 
groups for additional scrutiny based on their ideological 
beliefs and to prohibit the IRS from targeting citizens of the 
United States for exercising any right guaranteed under the 
First Amendment. It also seeks to eliminate language requiring 
the videos produced by the IRS to be appropriately reviewed. 
Requesting $1 billion more, eliminating prohibitions against 
targeting that were negotiated by this Committee, and proposing 
a new rule for the 501(c)(4)s before investigations by Congress 
and the Department of Justice had been completed will not build 
trust in the IRS, the Department of the Treasury, the Federal 
government, or overall government.
    So I think that if you were to explain how the 
inappropriate criteria came into use, how they were allowed to 
be used for years, that's what we need to bring back some trust 
in the IRS and make sure the IRS can administer the tax code in 
an impartial and nonpartisan manner.
    Similar to the Department's 2012, 2013, and 2014 budget 
requests, the Department is seeking discretionary spending for 
the IRS above the spending caps by relying on discretionary cap 
adjustments that are not part of current law. Absent a change 
to either the Budget Control Act or the Ryan-Murray agreement, 
$480 million of the IRS request is both pointless and 
meaningless. If the $480 million is of importance to the 
Administration, then the President would have found a way to 
pay for it from the $1.14 trillion allowable under the Ryan-
Murray rather than use a gimmick that the Budget Committees 
have rejected for the past three years.
    In addition, I am interested to hear from you today an 
update on the final regulations to implement the Foreign 
Account Tax Compliance Act which will take place on July 1 of 
this year. The so-called FATCA has profound and far-reaching 
impact on U.S.-based companies as well as foreign companies 
with assets in the United States or clients. And I am concerned 
with the amount of time that's going to be available to comply 
with these regulations when the final rules were not released 
until the end of February. That's going to give a lot of the 
global companies less than five months to comply. But again I 
want to thank Secretary Lew for being here today and I would 
like now to turn to the Ranking Member, Mr. Serrano, for his 
comments.
    Mr. Serrano. Thank you Mr. Chairman. I would like to join 
you in welcoming Secretary Lew before the Subcommittee for the 
second time. You lead a department with a variety of missions 
important to our economy, our government, and our nation as a 
whole. The Treasury Department plays a central role in 
promoting economic growth and opportunity through programs like 
the CDFI Fund, ensuring financial stability through the 
implementation of Dodd-Frank, enforcing our tax laws fairly, 
and managing our nation's finances. Your budget request for 
fiscal year 2015 promotes all of these things. Most of the 
agency is held to pretty austere budget levels, but there are 
significant requested investments at the IRS which is the 
largest part of your budget. And those requested increases are 
much needed.
    As I said at our hearing on the IRS a few weeks ago, almost 
$1 billion has been cut from their budget over the past four 
fiscal years, and we should not be surprised that the result is 
we do less service and an increased tax gap. Since that hearing 
we have even more evidence of the negative impact that these 
budget cuts are having on the IRS. A recent GAO report found 
that the budget cuts to the IRS instituted over the last few 
years had resulted in reduced enforcement and reduced taxpayer 
services. This comes on top of reports the IRS audit rates are 
at their lowest levels since the 1980s. As it currently stands, 
these cuts have had the perverse effect of promoting 
noncompliance for those who want to cheat the system while at 
the same deterring people who want to file their taxes 
correctly from getting their questions answered. Your budget 
request for the IRS attempts to reinvest in the agency restore 
those losses, and reverse these wrong-headed incentives.
    On a different topic I am a strong supporter of the 
Community Development Financial Institutions Fund, which has 
help promote economic investment in traditionally underserved 
areas. I understand that you re-proposing a small decrease in 
the FY 2015 Budget Request for the CDFI Fund. Although I hope 
we will get to discuss this in more detail, I am particularly 
concerned by a separate proposal within this request to 
eliminate the Bank Enterprise Award Program within the CDFI 
Fund. I have heard numerous concerns about this idea from 
various stakeholders and just recently visited a CDFI that has 
been able to do great work in my district with funding from the 
BEA. This part of the program is long-standing and I don't know 
that it makes sense to try and eliminate it at this time.
    Secretary Lew, there remain great challenges for your 
agency in the year ahead with the continued implementation of 
the tax provisions of the Affordable Care Act, the ongoing 
stewardship of our economic recovery, and the need for further 
investment in key areas. We will work with you to ensure that 
you have the resources to accomplish all of these goals. As you 
know, you and I have worked together through this 
Appropriations Committee and other committees many times 
before. I have great respect for you and for your abilities and 
we hope that we can continue to have that as we move forward. 
Thank you, Mr. Chairman.
    Mr. Crenshaw. Thank you. I would like to now recognize the 
Chairman of the Full Appropriations Committee, Mr. Rogers, for 
any opening statement he might like to make.
    Chairman Rogers. Mr. Chairman, thank you for yielding. 
Having marked up our first two bills in full committee before 
we broke, that's the earliest by the way since 1974 the 
adoption of the present Budget Act. So we are well underway 
with the fiscal year 2015 process and, Mr. Secretary, we are 
pleased to have you with us this morning to discuss the 
President's budget for Treasury. Like the Chairman, I have some 
very significant concerns about the request. We have worked on 
this Committee in a very nonpartisan way for the most part to 
construct bills that comply with the Budget Control Act and the 
Ryan-Murray agreement. The Administration's request for 
Treasury seemingly cast these statutory budget caps--just cast 
them aside as merely suggestions. We, obviously, understand 
that it is more difficult to operate in these constrained 
budget environments, but these challenging times calls for 
leadership and tough choices, not a $480 million gimmick that 
the Congress has patently and repeatedly refused and rejected 
on a bipartisan basis. It is sort of like deavu all over again.
    In contrast, the fiscal year 2014 Omnibus Package is a 
prime example of what we can accomplish by working together. 
Under regular order, this Committee was able to provide every 
facet to the Federal government with adequate responsible 
funding while continuing to reduce Federal spending, totaling 
$165 billion in cuts since fiscal year 2010. As we have 
collaborated to reduce spending on the discretionary side of 
the ledger, I would be absolutely remiss if I did not echo the 
sentiments of Chairman Crenshaw and others in calling for some 
leadership from this Administration, and your department 
specifically, on the problem of mandatory spending that's 
squeezing aside everything else.
    Today, mandatory spending, as you know, accounts for two-
thirds of Federal spending. When I came to Congress in 1981, we 
appropriated two-thirds and mandatory was one-third roughly. 
Now, it is just the reverse and zooming. We have managed to 
control discretionary. We have reduced discretionary over these 
last two or three years, but, in the meantime, the mandatories 
are zooming skyward and crowding out everything that you and we 
want to do on the discretionary side. And I see no leadership 
out of the Administration, particularly Treasury, about trying 
to wrestle the mandatory growth to the ground. Mr. Secretary, 
unless we do something, it is going to completely eat us alive 
along with the interest on the debt. From transportation 
projects, medical research, housing assistance, criminal 
justice, everything else, including military, are going to be 
shoved aside.
    Second, Mr. Secretary, I have some very strong issues with 
the posture the Administration has taken towards coal-fired 
generation in developing countries and I simply cannot support 
many of the policies emerging from Treasury in that regard. 
Simply put, these policies are bad for domestic industries in 
America and they are bad for areas in the developing world in 
dire need of a reliable, low-cost energy source. To be blunt, 
the U.S. Environmental Protection Agency has thrown up 
roadblocks at every turn to diminish our domestic producers' 
ability to mine coal and burn coal. In my region of southern 
eastern Kentucky, these regulatory attacks have resulted in 
some 8,000 miners laid off in just the last several months. Men 
who were making a very skilled wage, $80,000 to $90,000 a year 
now trying to find a job at McDonald's, unsuccessfully, and 
trying to support children and families because of the 
regulatory attacks from this Administration. Like salt on an 
open wound, Treasury has now sent a clear message that the U.S. 
should no longer be in the business of exporting coal. Your 
department issued new rules last year and now the United States 
will vote against financing any new coal power plant by the 
World Bank, unless it is in one of the poorest countries or the 
project uses carbon capture technologies that are not readily 
available even in the U.S. These policies deny our companies 
the ability to provide developing countries with more efficient 
technologies and they encourage these countries to look for 
financing from investors with lower environmental standards, 
particularly China.
    I would even go far as to say these policies show that this 
Administration is in denial about the reality of expanding 
energy access to the poorest nations. For example, I do not 
understand how the Administration can possibly meet its goal of 
providing more power for African countries if coal is left out 
of the equation. I hope that you could help us understand that.
    Finally, in response to Russia's continued threats against 
Ukraine, we want to hear about the Administration's efforts to 
support our friends and allies, particularly yesterday's 
announcement of additional sanctions. Unquestionably, the U.S. 
must send a strong signal and demonstrate leadership in the 
international community that such acts of aggression in 
violation of Ukraine's territorial sovereignty are unacceptable 
and should not be allowed to continue with impunity. Mr. 
Secretary, we look forward to hearing your testimony. Welcome 
to the Committee.
    Mr. Crenshaw. Thank you. I would like now to recognize Mrs. 
Lowey, who's the ranking member of the Full Committee for any 
opening statements she might have.
    Mrs. Lowey. Thank you Mr. Chairman, and I would like to 
thank you and Ranking Member Serrano for holding this hearing. 
And to my friend, Secretary Lew, thank you for joining us 
today. We are indeed fortunate to have a person with your 
wisdom and your talent in public service today. We appreciate 
it.
    Mr. Secretary, your fiscal 2015 budget requests $13.8 
billion to support the Department of the Treasury. As you note 
in your testimony, businesses have added more than 8.9 million 
jobs over the last 49 months and the economy and housing 
markets continue to improve, and yet much more must be done to 
provide access to capital and get people back to work. 
Taxpayers need clarity in the tax code and responsiveness from 
the IRS. The budget would address the funding shortfalls that 
the IRS, which amazingly have resulted in 39 percent of phone 
calls going unanswered in FY 2013. This is unacceptable. The 
American people deserve better. I am pleased that your budget 
would address this deficiency.
    I am also pleased to see that the budget proposes to extend 
the Terrorism Risk Insurance Program or T-R-I-A, TRIA. This 
vital program, which is scheduled to expire at the end of this 
year, provides a federal backstop for insurance claims 
resulting from acts of terrorism. If TRIA were to expire 
infrastructure investments and capital projects throughout the 
country would come to a halt. My friends on the other side of 
the aisle often say that the government should not be in the 
business of doing the private sector's job, as there is no 
affordable and accessible Terrorism Risk Insurance Program in 
the private sector. TRIA is very much a federal responsibility 
and TRIA should be reauthorized without delay.
    Unfortunately, your hearing before the Subcommittee on 
State and Foreign Operations could not be rescheduled. I want 
to take the opportunity now to reiterate my strong support for 
IMF reforms. The IMF is an excellent tool to help stabilize 
struggling economies and protect our own financial institutions 
from getting directly involved in bailouts caused by foreign 
financial emergencies. We need to maintain our leadership 
within the IMF, expand its lending capacity, and support the 
quota reforms in order to protect our own economic and security 
interest.
    I also want to commend your department's work, specifically 
Under Secretary Cohen's office in disrupting terrorist 
financing networks and enforcement of sanctions against 
countries such as Iran and North Korea. In particular, 
sustained implementation of these efforts must remain the 
backbone of our Iran policy especially while nuclear 
negotiations continue. I hope to hear what additional economic 
actions and sanctions the Administration will seek if 
negotiations with Iran fail to yield an agreement permanently 
denying Iran nuclear weapons capability.
    And before I close, I want to apologize not because of lack 
of interest, but I have another hearing directly across the 
hall. So thank you again for appearing before us.
    Mr. Crenshaw. Thank you. And now I would like to recognize 
the Secretary for his opening statement. Your written statement 
will be made part of the record and if you could limit your 
oral testimony to about five minutes it will give us more time 
for questions. So the floor is yours.
    Secretary Lew. Well thank you Mr. Chairman, Ranking Member 
Serrano, members of the Subcommittee and thank you for the 
opportunity to speak about the Treasury budget. I appreciate 
your cooperation on rescheduling the hearing and I will keep my 
opening remarks brief.
    Let me start by saying what an honor it is to work with the 
dedicated men and women at the Treasury Department. They are 
talented public servants who are focused on strengthening our 
country and they have performed with excellence under quite 
difficult conditions over recent years and I want to thank them 
for their service and commitment.
    The president's budget addresses the fundamental challenges 
our nation faces, and the request for Treasury is part of that 
comprehensive strategy. This request will allow the Department 
to help maintain a strong economy, sensibly manage the 
government's finances, foster a greater investment in American 
communities and small businesses, protect our national 
security, monitor risks to the financial system, and promote 
conditions that support economic growth and stability at home 
and abroad. Over the past five years Treasury has met its 
responsibilities efficiently and at lower cost. Today's Budget 
Request builds on that progress. It includes even more ways to 
cut costs and achieve savings while offering carefully designed 
proposals to increase the Department's effectiveness.
    For instance, we are seeking a second round of funding for 
the State small business credit initiative which has been 
enormously successful in strengthening small businesses across 
the country. We are working to reduce the risks from cyber 
security attacks by helping to improve the financial sector's 
resilience to such attacks and investing in Treasury's own 
defenses and infrastructure. And we are requesting sufficient 
funding for the Internal Revenue Service so it can provide the 
kind of quality service that American taxpayers deserve.
    As we consider what's in the best interest of taxpayers it 
is important to note that it is been five and a half years 
since Fannie Mae and Freddie Mac went into conservatorship. Now 
is the time to reform our housing system, and I am encouraged 
that the Senate Banking Committee is making bipartisan progress 
on this very complex issue. Since the financial crisis, 
Treasury has played a central role in designing and 
implementing the most comprehensive reforms to the financial 
system since the Great Depression. One major piece of 
unfinished business is housing finance reform, and we need 
legislation that protects taxpayers, ensures continued 
widespread availability of consumer friendly mortgage products 
like the 30-year fixed rate loan, it provides liquidity during 
times of economic stress and facilitates the availabity of 
affordable housing in an explicit and transparent manner.
    Before I take questions, I would like to talk briefly about 
Ukraine. The United States and the international community have 
made it clear that we will continue to stand with the Ukrainian 
people during this critical time. That's why we are united in 
our effort to impose costs on Russia for its unlawful and 
provocative acts. On Monday, the United States responded to 
Russia's latest actions with additional sanctions which will 
increase the impact we have already begun to see on Russia's 
economy from U.S. and international sanctions. We urge Russia 
to pursue a diplomatic solution to the situation especially as 
Ukraine moves forward with presidential elections next month.
    Finally, we continue to vigorously enforce our highly 
effective Iran sanctions regime. As a result, earlier today we 
sanctioned individuals and entities for providing support to 
the government of Iran and evading oil sanctions and 
facilitating Iran's ballistic missile procurement.
    With that, let me thank you for the opportunity to appear 
before you today, and I look forward to answering your 
questions.
    [The information follows:]


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


                     PROPOSED 501(C)(4) REGULATION

    Mr. Crenshaw. Thank you very much. And Members, we are 
going to try to conclude our hearing in an hour and a half so 
we'll observe the five-minute rule and we'll have as many 
questions as we can possibly have. Let me start, Mr. Secretary, 
just a follow up question when Commissioner Koskinen was here 
with the IRS, we asked a lot of questions about this proposed 
501(c)(4) regulation and he told the Subcommittee that he 
didn't think that the draft would be finalized before November 
and, I wonder, is that your view as well?
    Secretary Lew. Mr. Chairman, I have said on a number of 
occasions that there are many steps from where we are now to a 
final rule. There have been extensive comments as you know, 
roughly 150,000 comments. There is a process for reviewing 
those, and there is going to be a need for the administrative 
process to go step-by-step as revisions are reviewed. So I 
think, yes, his estimate of the timeframe is consistent with 
our expectation. You know the challenge is to have a 
conversation about what to do to limit the discretion in this 
area so that we don't ever see the kind of problems that were 
reported last year.
    Mr. Crenshaw. I know that you mention 150,000 comments and 
that's fairly a large number, maybe historic, do you know yet 
will there be any further hearings when you have that kind of 
comment?
    Secretary Lew. Well I expect that there will be further 
opportunities for public comment both on the written material 
that's issued subsequently and potentially with hearings.
    Mr. Crenshaw. So it is hard for you to say when you think 
it might be finalized?
    Secretary Lew. Yes, I think it is going to take a while. 
You know I have been very clear about that. The goal here is to 
get this done right. This is a very controversial and 
complicated area. The proposed rule made clear that there was 
an active request for comment. So we were not surprised by the 
comment. The rule is not even complete in every regards because 
it says there are some areas that without comment it was very 
difficult to pave a path forward. So it was meant to open a 
process. I would just point out that last year when this whole 
issue came to light through the IG report there were a number 
of recommendations in the report one of which was to clarify 
this rule and the proposed rule was a first step in that 
process.

                                 FATCA

    Mr. Crenshaw. I appreciate that. Let me ask you--I mention 
in my opening statement about the Foreign Account Tax 
Compliance Act, that's going after tax evasion, and it is an 
extensive regulation. It is going to have a profound and far 
reaching impact on our economy, but sometimes I think when 
those kind of rules are proposed they have unintended 
consequences. For instance, you don't want people hiding cash 
off shore, but if you have a non-cash value insurance, in other 
words like property and casualty insurance, that's basically a 
promise by the insurer to provide payment to cover a specific 
event. Now, in Florida, we have hurricanes and we have 
catastrophic events, so people buy insurance, non-cash value 
insurance, property casual insurance, and re-insurance.
    And so it seems like they cannot be used for the purposes 
of tax evasion and, you know, I don't know that the IRS can see 
any additional money there. And so the question becomes how did 
they happen to include premiums that have no cash value in this 
regulation? Do you know that? And for instance, I am told that 
these companies are going to have to spend an awful lot of 
money to demonstrate that there is no cash there and I wonder 
if somebody did an economic analysis of the proposed rule 
before.
    Secretary Lew. I am happy to go back and look at this 
specific issue about insurance. The general goal 
[unintelligible] is one that I know we all support which is to 
make sure taxpayers cannot evade U.S. taxes or taxes anywhere 
by hiding their income in overseas accounts. It is a 
complicated area. One of the reasons that we extended the 
period was to make sure that we had time to enter into 
agreements with other countries. There was a great deal of 
interest in having bilateral agreements. I think it actually 
has been a tremendous success.
    As I go to international meetings, I don't like to use 
acronyms at meetings, so I would not use an acronym like FATCA 
but in various accents I heard people saying we need FATCA for 
all. You know we need it to become a global standard. And so we 
will work on getting the details right, I am not familiar with 
the specific issue on insurance premiums but I am happy to look 
at and get back to you.
    [Clerk's note.--The Department of the Treasury was either 
incapable or unwilling to answer this inquiry prior to the 
publication of this hearing volume.]
    Mr. Crenshaw. I appreciate that because I do think we all 
think that it is a great concept that we want to stop the tax 
evasion. But if you think about it, if somebody's buying re-
insurance or property insurance, there is no way, as I 
understand it, they can hide any cash in there. It would 
probably be appropriate just to revisit that and do some sort 
of economic analysis and if it is not something then they could 
not be part of that. But certainly it is a great concept 
overall.
    Secretary Lew. I am happy to look at it and get back to 
you.
    Mr. Crenshaw. Thank you. Now let's turn to Mr. Serrano.

                     BANK ENTERPRISE AWARD PROGRAM

    Mr. Serrano. Thank you, Mr. Chairman. I am going to try to 
get in at least two questions because I know we have a short 
time and, Mr. Secretary, you draw a big crowd, as you can see. 
Great attendance. Your request eliminates the Bank Enterprise 
Award Program, something I am very concerned about. I have 
heard very good reports about the impact program is having in 
my district and elsewhere. In FY 2014, we provided $18 million 
for it. Why are you proposing to zero it out this year? And I 
must tell you that it is been a while since I have gotten so 
many comments from constituents on an issue as I am getting on 
this one.
    Secretary Lew. Congressman, we had to make a lot of tough 
choices in this budget as you have to make in the 
appropriations process. And based on the current fiscal 
environment we thought that concentrating the CDFI funds in 
other areas was the right trade off. You know the appropriated 
funding level for the BEA Program has decreased over time and 
it really was a question of concentrating our effort in other 
very important areas, but we understand that there are some 
concerns because of this decision.
    Mr. Serrano. Well the big issue here is that you've got 
programs up and running. You have situations, for instance, in 
my district, an area that for years the biggest complaint was 
that there were no banks around and through this kind of 
funding that this Committee put forth you know local banks were 
able to spring up and that's a bad pun because one of them is 
called Spring. But anyway so now they run the risk of falling 
apart and I don't know what process you have going forward. We 
certainly have our role to play but I must tell you that this 
is one that has support in the community and support on this 
Committee. And so you should keep that in mind as we move 
forward.
    Secretary Lew. I appreciate that Congressman and I know 
there is support for the other activities that CDFI funds as 
well.
    Mr. Serrano. Right.
    Secretary Lew. So it is a question of competing goods and 
obviously with unlimited resources we might make other 
decisions but we did try in this budget in a number of areas to 
concentrate our effort in a world of very tight budget 
resources. And this was a trade off that we made but I would be 
happy to follow up and discuss the matter with you.

                    OFFICE OF FOREIGN ASSET CONTROL

    Mr. Serrano. Thank you. My next question is one that Mrs. 
Lowey wanted to ask you at her hearing--at this hearing and I 
wanted to ask you so that merits being asked. The FY 2014 
Omnibus required Treasury to submit recommendations for 
reducing the response time for applications to the Office of 
Foreign Assets Control, for a general license for humanitarian, 
non-governmental organizations seeking to provide aide to 
famine victims in South Central Somalia. While we appreciate 
the response you've given us it doesn't really respond to the 
report language. We like to see a more thorough response 
delivered to the committee. What timeframe do you think you can 
have to get that to us?
    Secretary Lew. Congressman, I would have to go back and 
check exactly what the timeframe is. I do know that the 
issuance of licenses in Somalia has been a very challenging 
undertaking. I have had the responsibility to work on it from 
multiple different perspectives when I was at the State 
Department and now obviously at Treasury. And the challenge is 
to make sure that humanitarian goods are going where they need 
to go and should go but that we are not seeing support for 
organizations that are listed terrorist organizations. We have 
tried very hard to work, to strike that balance to make sure 
humanitarian supplies can continue to go forward. I am not sure 
of the exact schedule. I would be happy to get back to you.
    Mr. Serrano. Right, are you at liberty in terms of security 
issues to tell us what the challenges have been?
    Secretary Lew. Well the whole process is one that is some 
things are public, some are not. Rather than cross the line 
perhaps we should have the conversation separately but over 
time there have been concerns about payments that were used to 
support organizations essentially charging tolls on the roads 
to raise funds for terrorist organizations. So there are real 
concerns on both sides. Obviously our goal in the humanitarian 
programs is to get the money in, to get it in safely, and to 
get it in without having there be the kinds of collateral 
support for people who are not intended to get benefit from 
these programs. And I am happy to follow up on the timing; 
obviously humanitarian licenses are very important.
    Mr. Serrano. I realize I have put on your plate two 
questions that some people would see them as being that far 
apart because one is very local, one is part of our foreign 
policy but both speak about growth and support for people so 
we'll be talking in the future. Thank you, Mr. Chairman.
    Mr. Crenshaw. Thank you. Mr. Rogers.

                               MARIJUANA

    Chairman Rogers. Mr. Secretary let me ask you about 
marijuana. Washington State and Colorado have legalized 
recreational use of marijuana, but it remains illegal in most 
States and certainly under Federal law. Nevertheless, the 
Department of Justice told the governors that it will not 
challenge their legalization laws and has told Federal 
prosecutors to de-emphasize marijuana prosecutions.
    In addition, and what I want to ask you about, the Treasury 
Department's Financial Crimes Enforcement Network issued new 
rules that give banks a green light to do business with 
marijuana shops, illegal shops. The combination of this 
guidance should allow both medical and recreational marijuana-
related businesses to make full use of banking services and 
institutions even though they are dealing with an illegal 
operation. The DEA Administrator recently told a congressional 
hearing that cash is the driving force for these drug 
trafficking organizations and the DEA has already seen signs 
they say that gangs are attempting to exploit the new banking 
rules.
    The issuance for a green light for banking institutions to 
do business with these illegal marijuana shops and subsequent 
action by the Treasury Department to in effect rubber stamp 
that gives me some pause because this is still an illegal 
product in practically every State. Is it wise to offer 
regulatory guidance from the Federal government on illegal 
activity?
    Secretary Lew. Congressman, this is a very complicated 
area. Obviously when two States pass a law making an activity 
legal in the State there is going to be an increase in activity 
in that area. Obviously the Justice Department guidance 
provided guidelines for how prosecution matters would be 
considered. We believed it was important for there to be 
clarity in terms of the consistency between the prosecutorial 
guidelines and the banking guidelines.
    The risk of cash transactions is actually something that we 
were quite concerned about. Without any guidance there would be 
a proliferation of cash only businesses and that would make it 
impossible to see when there are actions going on that violate 
both Federal and State law and would be of real concern. We 
thought that the clarity, bringing it into daylight was a 
better solution. Obviously the real clarity here would require 
legislation that conformed with a policy. But since we don't 
have that, it was an attempt to have as much clarity as one can 
have given the complex situation with the State laws.
    Chairman Rogers. What about cocaine dealers, should not 
they be given the same break?
    Secretary Lew. I am not aware of any State that has 
legalized activity in that area.
    Chairman Rogers. But are you not aware that practically in 
every State marijuana still is considered illegal?
    Secretary Lew. So the actions we took will really just 
apply in the States where the state law makes these shops 
legal. Where the business would be done with cash, if it were 
not done through banks. And we think that the actions we have 
taken provide greater transparency and less likelihood of the 
kinds of behavior that I think we are all most concerned about.
    I will note that there have been quite a number of BSA's, 
the suspicious activity reports filed with us from Washington 
and Colorado. These reports give us the ability to see where 
there are transactions in those two states that would violate 
both their State laws and Federal laws, and I think would 
indicate the kinds of troublesome behavior and activity that we 
would all want to be able to see.
    Mr. Rogers. Well, the Department of Justice apparently 
qualified its approval of legal marijuana only if that State 
created strong and effective regulatory and enforcement 
systems. Washington's medical marijuana dispensaries still are 
not licensed or regulated by the State and yet you waive all of 
that and allow these regulations and help with banks in doing 
business with those shops, which are illegal under the State 
law much less the Federal law.
    Secretary Lew. I cannot conclude what is or is not illegal 
under the State. Obviously the States have to enforce their 
State law, but they did legalize the opening of these shops and 
these transactions. The question was whether the transactions 
would be in cash or through a transparent banking system. And 
that really is the area where the guidance is meant to provide 
some clarity.
    Mr. Rogers. But as I saw in Washington State these 
dispensaries are still not licensed by the State or regulated 
by the State. If they are not licensed or regulated, from a 
legal perspective how are they any different from a drug dealer 
on a street corner?
    Secretary Lew. Congressman, I am happy to follow up with 
you on some of the details of how things are being done in 
Washington.
    Mr. Rogers. This is not complicated.
    Secretary Lew. Most States passed laws that created a space 
for transactions that under State law are legal. And the 
guidance we put out was merely meant to facilitate having 
transparency so that that would not become a kind of cash 
economy, where there is no way to see when there are 
transactions that suggest large scale transactions that would 
actually violate the State law.
    Mr. Rogers. Well, Mr. Chairman, my time is up I am sure. 
But it is not complicated, Washington State is not regulating 
those marijuana dealers and yet the U.S. government through 
your Department are putting a stamp of approval on banks doing 
business with illegal shops even in the State of Washington.
    Secretary Lew. I would just note that when there are 
suspicious activities that would violate State law, they are 
being reported, and being followed up on. I think the 
transparency is something that actually makes enforcement of 
law more likely to happen in an effective way.
    Mr. Crenshaw. Thank you. Mr. Quigley.

                             IRAN SANCTIONS

    Mr. Quigley. Thank you Mr. Chairman, welcome Mr. Secretary. 
Secretary, before I go on I would like to echo the Ranking 
Member's concern about the Bank Enterprise Award Program. I 
understand we all have different priorities, all we are doing 
today is telling you this is a program that is a high priority 
for our communities and we understand your response.
    In the meantime, half a world away the President said 
something that he thought the odds of the Iran talks succeeding 
were about 50/50 and that if they broke that down, additional 
sanctions could be underway and they could be passed by 
Congress in a very short period of time. Do you have a sense of 
what kind of additional sanctions might be in place? What kinds 
of sanctions seem to be working right now?
    Secretary Lew. Well Congressman, I think we have seen that 
the sanctions that are in place on Iran's oil sector and their 
financial sector have been very effective. There has been 
consistent degradation to Iran's economy; you see it in their 
GDP. You see it in their exchange rate, you see it in their 
inflation rate, their unemployment rate, you see it in their 
willingness to come to the table and negotiate.
    Now we do not know the outcome of the negotiation. 
Obviously the President put the assessment out there that made 
it clear we are going into this with our eyes open. You know 
sanctions cannot force an outcome, what they can do is create 
an environment where a leader is feeling the pressure, so that 
if they want to do what it takes to improve conditions for 
their people, they have to change their policy.
    If, in fact, the negotiations do not succeed, we will look 
for other means to tighten the pressure. Working with the world 
community is one of the reasons that the Iran sanctions have 
been so successful and that we have not been alone. We are 
working with most of the rest of the world to have it be a 
sanctions system that has very little leakage. We obviously are 
hoping and working hard to make those negotiations successful, 
but we are very much aware of the fact that it could go either 
way. I am not going to prejudge what steps we would take, but I 
think the President's determination and mine is that if the 
negotiations do not go well, we will have a full some set of 
options to pursue.

                           UKRAINE SANCTIONS

    Mr. Quigley. I appreciate that. In a different country, 
looking at what has worked here the second round of sanctions 
involving Ukraine, seem to be met with underwhelming response 
by their stock market. Having just returned from there you get 
the impression that the type of sanctions that would work 
versus Russia might be the same, those dealing with, more 
specifically, with the energy sector and the banking sector, 
have those been considered or is this an issue with the 
European Union?
    Secretary Lew. Well Congressman, obviously they have been 
considered because the President has signed an Executive Order 
that creates the authority for us to designate sectors should 
we make the determination that that is the appropriate step.
    Mr. Quigley. It just would have been a stronger second 
step, perhaps.
    Secretary Lew. Well I think if you look at the impact on 
Russia's economy, it is a little misleading to look at what 
happens day by day, you have to look over the period of time 
since Russia went into Crimea, since we have imposed sanctions. 
There has been a quite substantial deterioration in Russia's 
already weak economy. And we see it in their stock exchange, we 
see it in their exchange rate, we see it in a number of 
important economic indicators. They were downgraded to one 
notch above junk and the rationale in the bond rating was in 
part, the sanctions being imposed.
    I think the question here is how do we proceed in a careful 
way, step-by-step, building pressure. President Putin has 
acknowledged that the sanctions are creating pressure on them. 
Now obviously they did not change their policy. I think that we 
need to continue to keep our options open. We are prepared to 
take action and we have made clear we are prepared to take more 
action if the policy of Russia does not change.
    The reality is again working in partnership with our allies 
is the most effective way to do it. We are seeing movement 
there; we are seeing even yesterday that the Europeans made 
additional designations. If you look at the individuals 
designated in Russia, they are some of the leading business 
people closest to the government. You know Igor Sechin is the 
CEO of a huge oil business. You know Sergey Chemezov is the CEO 
of a big industrial complex that includes arms deals. Gennady 
Nikolayevich Timchenko is a CEO of Gunvor, which is the biggest 
energy-trading platform. The Rotenberg are very close 
personally and are part of the banking system that supports all 
of the people who are in the inner circle. I think they have 
gotten the message that we are serious. They have gotten the 
message that we have more actions that we can and will take. We 
need to remain determined and push ahead and work with our 
allies to do it in a way that is an effective way to change the 
situation on the ground.
    Mr. Quigley. We appreciate that and look forward to working 
with you in the future.
    Mr. Crenshaw. Thank you. Mr. Womack.

                                 FATCA

    Mr. Womack. Thank you Mr. Chairman. And thank you, 
Secretary, for your testimony here today. I want to go back to 
FATCA for just a moment and then I have got a couple of other 
more brief questions. But as has already been mentioned, and I 
associate my remarks with that of the Chairman and others who 
have indicated that our collective effort to collect and deter 
offshore tax evasion is a goal that we all share. I know that 
some Treasury officials have insisted that the July 1 FATCA 
withholding deadline should remain in place, but can you 
explain for the panel and for our constituents what the risks 
are to U.S. financial institutions and the U.S. economy if 
large numbers of banks are required to without the 30 percent 
tax on routine cross border transactions?
    Secretary Lew. The risk of not having the reporting is that 
transactions go undetected and tax avoidance and evasion goes 
ahead.
    Mr. Womack. More to the concept of the regulatory 
requirements, let's just go in that direction.
    Secretary Lew. This is a new regulatory approach. The FATCA 
law, which was a strong bipartisan law, put in place the 
authorities that are being implemented. We have been very 
cognizant of the fact that it is going to require new reporting 
procedures to be put into place. We are also very cognizant of 
the fact that it requires cooperation with banks and 
governments oversees. We extended the deadline in order to 
facilitate a smooth, effective transition. I think at whatever 
point it goes into effect, there is going to be a new set of 
requirements, but I think they are appropriate requirements 
because if we do not have that reporting, we cannot see where 
the tax avoidance is taking place. So the bipartisan effort to 
make sure that we can see what is going on so that we can stop 
illegal tax avoidance is the purpose of it. You know I wish it 
could be done without any burden at all; obviously any 
reporting program creates some extra work. We have tried to 
keep it simple; we have tried to extend the timeline to do it 
in a way that makes it as unburdensome as possible to meet the 
higher goal.

                                DEFICIT

    Mr. Womack. This year, what will be the estimated budget 
deficit in this country?
    Secretary Lew. I was not looking at budget numbers before I 
came up here.
    Mr. Womack. Round numbers.
    Secretary Lew. It is around 600.
    Mr. Womack. 600.
    Secretary Lew. It has been coming down. The reason I am 
hesitating is each time it is estimated we thought it was going 
to come down 30 or 40; now it is coming down 70. It has been 
coming down rapidly.
    Mr. Womack. So $600 billion, we are going to throw that on 
top of an already nearly $17.5 trillion public debt. When I go 
home, and I have got the debt clock on my website as a lot of 
my colleagues do, people are concerned about this public debt. 
When I make my presentations, particularly in large groups, I 
try to explain to them that as an appropriator, and much to the 
credit of the people that are on this dias today, and 
particularly our overall Chairman Mr. Rogers, we have done a 
very credible job in trimming discretionary spending. But as 
our overall Chairman said in his remarks, we still have 
mandatory spending that has not been addressed. Honestly, I am 
not seeing the leadership there.
    I guess my question, Mr. Secretary, is, do you agree that 
this debt under the interest rate structure that we have today 
is a major national concern and that the sands in the hourglass 
are running on us?
    Secretary Lew. Congressman, I have spent much of the last 
30 years of working on trying to have a responsible fiscal 
policy, so I certainly agree that it is a critically important 
issue. But we have made more progress reducing the deficit at a 
faster speed than any time since the end of World War II and 
the demobilization after World War II. We had an enormous 
coming together of drivers that drove the deficit up, first we 
have policies that created policy gaps in the early 2000s, than 
we have the worst recession since the Great Depression. We are 
not seeing recovery from that. We have seen policy. And I agree 
that mostly, or very substantially, it has been discretionary 
spending reduction, there were some tax increases at the 
beginning of last year.
    We have seen entitlement savings, but there are more. We 
have in our budget proposals for Medicare savings; we look 
forward to working on a bipartisan basis for many years to 
reach agreements there. I think that we are on a path where the 
deficit will be below 3 percent of GDP. We are in a place where 
we have a little bit of time to deal with it. But I have always 
believed that you should not wait until your time runs out. So 
I am not going to say, let's wait 10 years to have the 
conversation. But we are in a much better place than we were 
just a few years ago.
    Mr. Womack. I know my time is up. I yield back.
    Mr. Crenshaw. Thank you. Ms. Kaptur.
    Ms. Kaptur. Thank you. Mr. Chairman, I would like to 
request at some point, with the Secretary's willingness, a 
special briefing of our Subcommittee on our sanctions relative 
to Ukraine and their implications. I do not know if the 
Chairman would be open to that or not, but I think it is 
terribly important and I just wanted to make the formal 
request.
    Secretary Lew, thank you so much particularly someone whose 
career has spanned helping to restore the solvency of Social 
Security in 1983 all the way up to the balanced budgets of the 
Clinton Administration, President Obama has put the right 
American in charge. So we welcome you before our Committee 
today.

                                HOUSING

    I wanted to focus in two areas in this round. First of all 
in the housing sector where our secondary market is in a bit of 
a jam at this point, we know that Wall Street's terrible 
mortgage securitization record created the largest transfer of 
capital from Main Street to Wall Street in our history. African 
Americans lost all their accumulated equity since World War II, 
Hispanic Americans similarly, working class people across this 
country. I represent communities terribly impacted by the 
securitization meltdown.
    My question is what is Treasury doing, perhaps working with 
the Justice Department, to recoup some of those assets for 
these hardworking Americans in communities that have been so 
devastated? By the way, those banks are doing very well, the 
major ones that were a part of this. Everybody seems to be fine 
up there. But have you considered, in addition to recompense 
from those institutions back to the street, through the people 
that are at Treasury, had you considered working to develop new 
mechanisms, such as pilot efforts with county land banks in 
places like Cleveland, Lorain, Sandusky, Toledo, to better 
handle adjustment in the housing sector in these communities? 
Does Treasury have a mechanism A) to bring the big banks to the 
table and B) to get more recompense and to initiate working 
with county organizations, local governments that are trying so 
hard to prevent further abandonment and adjustment at the local 
level?
    Secretary Lew. Congresswoman, obviously the large dollar 
settlements are out of the Justice Department's Office of 
Litigation and we do not directly have a role in that, though 
there have been some settlements that have put money back into 
some of the programs, mostly in the Department of Housing and 
Urban Development. We have a series of programs where we have 
been actively engaged with local communities and homeowners to 
help homeowners refinance their mortgages, to help them modify 
their mortgages.
    We have tried to be creative in using programs like the 
Hardest Hit fund to help the community as well as individual 
homeowners. I was just in Detroit last week and saw the first 
demolitions done using Hardest Hit funds because if you have a 
blighted house on a block that is struggling to stay above 
water, you need to have the house that is dilapidated and 
drawing down everyone's values dealt with.
    So we are trying in every way we can with homeowner 
assistance and with community assistance to be engaged in this. 
We have seen millions of refinancings and modifications. There 
is obviously a lot more work to do. We have a number of other 
programs like the SSBCI where we are not dealing with the 
housing piece of it, but we are dealing with the economic 
development piece of it to create jobs in those communities. I 
think we have had great success in that effort.

                                UKRAINE

    Ms. Kaptur. I will have some follow-up for the record. I 
wanted to shift to Ukraine for a second and just so the 
Secretary of Treasury knows this, the agricultural sector of 
Ukraine can pay all the bills as time goes on. I do not find in 
what we are doing yet as a country we actually are thinking 
about that power. I can guarantee you, under the corrupt 
Yanukovych administration, ordinary farmers were being charged 
19 percent interest rate, but the friends of the deposed 
president, Yanukovych were being charged 4 percent. I hope in 
the financing schemes that the IMF and others are thinking 
about that the identification of grass roots farmers in that 
country, not associated with the past regime, that somebody 
pays attention to those and that competitive interest rates are 
offered to those farmers because that sector can ultimately pay 
the bills.
    And finally for the record, because you get in meetings 
that I do not get into, women of that country are feeding that 
country, in little villages nobody sees them. We need a 
humanitarian effort in my opinion that brings in good seed, 
shovels, basic equipment. And I am talking about very humble 
things like buckets like CARE does around the world, to help 
these women; 75 percent of the food is raised in those small 
towns, in those small villages. Nobody sees those women but all 
you have to do is just look at the satellite over the weekend, 
you see all the people drive out of Kiev and go out to these 
little villages, go get food, and come back into the city 
because prices have gone up.
    So I wanted to put that on the record, because perhaps you 
can be a voice in the meetings that are occurring to support 
agriculture among those who really do want reform and help 
those who are holding that country together at this point as we 
weather this crisis. So I thank you very much for listening, 
thank you Mr. Chairman.
    Mr. Crenshaw. Thank you. Mr. Graves.

                          BENEFICIAL OWNERSHIP

    Mr. Graves. Thank you, Mr. Chairman. Mr. Secretary, good to 
see you and wish you well on your continued recovery. I wanted 
to ask your thoughts on a recent proposal that was on the White 
House blog and I am going to read a little bit about it, but it 
was authored by Caroline Atkinson, the Deputy National Security 
Advisor for International Economics. It described in her 
proposal as requiring that all companies formed in any State to 
obtain a Federal tax employee identification number in 
requiring the Internal Revenue Service to collect information 
on the beneficial owner of any legal entity organized in any 
state; and for the IRS to allow law enforcement to access this 
information without following the safeguards in current law 
that generally require a showing of reasonable cause to believe 
a criminal act was committed before the IRS shares taxpayer 
information under Section 6103 of the code.
    In light of, and the still unresolved questions and 
scandals involving the IRS, targeting the opponents of the 
administration, it concerns justifying the safeguards in 
Section 6103 are as relevant today as they were right after 
Watergate when they were implemented. It is incumbent upon 
Congress to scrutinize the government's use of confidential IRS 
data about citizens and in protections designed to safeguard 
even when the administration asserts the national security 
requires eliminating these safeguards.
    I guess knowing that proposal has been issued as part of 
the President's 2015 budget and it has been described now, just 
a few weeks ago on the White House blog, would this proposal by 
the president do away with the requirement that Federal, State, 
and local agencies establish reasonable cause to believe a 
crime was committed before sharing confidential taxpayer return 
information.
    Secretary Lew. Congressman, the protections of 6103 are 
extremely important and we spend a lot of effort to make sure 
that we honor 6103 in everything that we do. It has to do with 
the basic trust the American people have in their system, and 
that is something that is our obligation to maintain.
    The issue of beneficial ownership is a very complicated 
one; it is a complicated one internationally because there is a 
huge demand internationally to see more transparency into 
beneficial ownership because it is considered to be one of the 
things driving base erosion and tax avoidance internationally.
    We have taken the view that we have to protect individual 
information and act in a way that is consistent with the 
individual protections that are provided at 6103. So I have, on 
a number of occasions, in international meetings said that we 
would not make beneficial ownership broadly public but we would 
only do it through proper channels, law enforcement agency, and 
tax enforcement agency to one another. I am happy to look at 
the blog post and answer any detailed questions that you have 
about it, but that is our general policy.
    Mr. Graves. So if 6103 is in place and there is currently a 
process that requires reasonable cause, I guess my question 
would be does it improve on protections for U.S. citizens or is 
it removing protections for U.S. citizens?
    Secretary Lew. I am happy to take a look at that blog post 
and respond in more detail to you.
    [Clerk's note.--The Department of Treasury was either 
incapable or unwilling to answer this inquiry prior to the 
publication of this hearing volume.]
    Mr. Graves. Okay and so I guess just for clarity, do you 
think it is the Administration's expectation that Congress will 
curtail the protections in the current law as it relates to 
6103 as we look ahead and we are going through the process of 
some of the other questions dealing with the 501(c)s and such.
    Secretary Lew. Well I think that the protection of 
individual privacy and information and making sure that our 
system is a fair one and transparent where it should be 
transparent, but not transparent on personal matters where it 
should not be is one of our very highest obligations. So I am 
not aware of any effort for us to change that. As I offered I 
am happy to look at this particular matter.
    Mr. Graves. Okay, well, I would hope that the 
administration would not be proposing any kind of concept that 
would allow the Internal Revenue Service to serve freely 
information to other agencies without reasonable cause; and 
that is what I will be looking forward to your response on.
    Mr. Crenshaw. Thank you. Mr. Diaz-Balart.

                               MARIJUANA

    Mr. Diaz-Balart. Thank you very much Mr. Chairman. Mr. 
Secretary, good to see you, sir. A few issues, one of them, and 
I was not going to bring it up except that Chairman Rogers 
brought it up, it got me thinking obviously. It is your 
responsibility to enforce Federal law; my understanding is that 
it has not changed that marijuana is illegal under Federal law. 
And yet I understand that now your department is doing these 
guidelines or giving guidance to banks as to how to deal with 
something that is illegal under Federal law. Are those 
guidelines going to at least have a very clear statement that 
marijuana is illegal under Federal law?
    Secretary Lew. Our guidelines in no way change Federal law.
    Mr. Diaz-Balart. My question is this, sir, and I apologize, 
is there in those guidelines, since it is not going to change 
Federal law, is there a statement stating that this is illegal 
under Federal law, which the Federal law is correct.
    Secretary Lew. We are in no way telling people that things 
that are illegal under Federal law are legal. The exact 
language I would have to go back and look.
    [Clerk's note.--The Department of Treasury was either 
incapable or unwilling to answer this inquiry prior to the 
publication of this hearing volume.]
    Mr. Diaz-Balart. It would be interesting to note if, in 
fact, since it is your responsibility is to enforce Federal law 
and you are giving guidelines on something that is illegal 
according to Federal law, that at least there should be an 
indication that it is illegal under Federal law, which is what 
your obligation is.
    Secretary Lew. To be clear, the Department of Justice 
guidelines make clear their prosecutorial priorities, it does 
not say that things that are illegal are legal. So I do not 
think any of the activities confuse the question of Federal and 
State law. Our concern is that in a very complicated situation 
where States have made certain activities legal, there will be 
transactions. Cash transactions, rather than banked 
transactions, create more risk of illegal behavior. So we tried 
to put out guidelines so that there would be some clarity for 
banks to be able to provide some transparency into these 
transactions.
    Mr. Diaz-Balart. I understand what you said, Mr. Secretary, 
but I think if a banker receives guidelines on how to deal with 
certain entities from the Federal government, I think that in 
itself would make it very unclear whether it is something that 
is illegal under Federal law. So I just think making that very 
clear would be something that that would be helpful.
    Secretary Lew. I actually think that they very much 
understand that they are in an area where they are at risk, and 
they are filing suspicious activity reports and a lot of banks 
are not taking these accounts. I do not think there is any 
ambiguity out there in the banking world. They have to walk a 
very narrow line.
    Mr. Diaz-Balart. Because you do believe that they are at 
risk if they do so?
    Secretary Lew. They are filing suspicious activity reports 
for behavior that warrants suspicious activity reports.

                           DEBT RESTRUCTURING

    Mr. Diaz-Balart. Secretary, let me bring you to a couple 
other points that were brought up; one was not brought up, let 
me start with this one. Last week, Mexico, I heard, was 
considering filing an amicus brief with the U.S. Supreme Court 
taking the side of Argentina in a case against U.S. 
ambassadors. Now we have the Secretary of State and I asked him 
whether the Department of State would intervene even if asked 
and he said absolutely not. But now we know by press reports 
that last July junior officials in your department urged the 
IMF to file a similar brief before they were overruled, by the 
way, all credit to senior department officials. The U.S. then 
obviously withdrew such support. Again, that would have been an 
unprecedented move by the IMF. Could you tell us with respect 
to this Mexican brief, has any official in your department 
encouraged Mexico or expressed approval to Mexico, contacted 
Mexico at any point in the last year regarding them filing that 
brief?
    Secretary Lew. Well, Congressman, just to be clear we did 
file in the lower court proceedings, a brief. I am not going to 
defend Argentina's behavior in any general way but on this 
narrow issue of law, we do think that the rights of creditors 
warrants attention and we filed a brief. There is a general 
policy in the executive branch to only file amicus briefs at 
the Supreme Court when invited. So we did not file an amicus 
brief at the Supreme Court.
    Mr. Diaz-Balart. Right, I am aware of that. My question is 
have you had contact with Mexico asking them?
    Secretary Lew. I have had conversations with my 
counterparts. I have told them exactly what I have told you, 
which makes it clear what we think the right legal outcome 
would be. I think the conversations with the IMF you know, last 
year kind of reflected them just conforming to the fact that we 
were not filing a brief, they did not file a brief.
    Mr. Diaz-Balart. But Mr. Secretary, my question is 
separate. My question is have folks in your department, as far 
as you know, contacted Mexico, asking or encourage them to do 
that?
    Secretary Lew. I have just said I have had conversations 
with my counterparts.
    Mr. Diaz-Balart. Counterparts in Mexico?
    Secretary Lew. Yes.
    Mr. Diaz-Balart. So you have had those?
    Secretary Lew. Yes.
    Mr. Diaz-Balart. You have asked them to?
    Secretary Lew. I just told you; they have asked us our 
views. I have told them what I have told you.
    Mr. Diaz-Balart. I think I am out of time, Mr. Chairman. 
Thank you, sir.
    Mr. Crenshaw. Thank you. Mr. Yoder.

                           SIFI DESIGNATIONS

    Mr. Yoder. Thank you Mr. Chairman and Mr. Secretary welcome 
back to the committee. I have a couple different areas I would 
like to ask you about this morning. First of all is the SIFI 
designation that the FSOC is going forward with. And I am 
concerned that the FSOC is not undertaking a deliberate and 
thorough process in reviewing the asset management industry for 
potential SIFI designations. The only public report issued by 
the OFR on the asset management industry was heavily criticized 
for failing to demonstrate a complete understanding of the 
asset management business and the unique characteristics that 
differentiate it from banks and other financial institutions. 
The FSOC has not defined what risks it is concerned about with 
respect to asset managers or confirmed the specific metric and 
thresholds it is using the evaluate asset managers.
    In an apparent effort to deepen its understanding of the 
industry, the FSOC announced it would hold a round table May 19 
so they could hear directly from industry and other 
stakeholders on this issue, yet last week the Wall Street 
Journal reported that two asset managers have already been 
moved to stage two of the SIFI designation process.
    Can you please explain why the FSOC is advancing asset 
managers through the process when it publicly admits it is 
still gathering information? And what can be done to ensure 
that proper decisions are made here and that all voices are 
heard to make sure that we do not make problems worse through 
improper designations?
    Secretary Lew. Congressman, I think that if you look at 
this issue it is one of many issues that FSOC will be 
considering. The FSOC was created to look, not in the rear view 
mirror, but forward at what are the potential risks to 
financial stability. OFR was asked to do some analysis here, it 
was not a regulatory action it was a piece of analysis. I will 
not discuss any specific conversations regarding any entity, I 
am just speaking to the review of the sector. There is no one 
on FSOC who knows the outcome of this process because we are 
still in the fact finding stages. There is going to be a public 
session, where there would be views presented and some will 
disagree with the OFR study and I am sure some will support it.
    Our challenge is to make sure we ask hard questions and 
that we are not afraid to ask questions when we do not know 
whether the answer is yes or no. That is the only way we are 
going to be able to detect the threats of the future. I think 
that this is an area where it warrants attention. It is way 
premature for anyone to be speculating on what the outcome is. 
I can tell you as the chairman of FSOC, I do not know the 
outcome, and I should not know the outcome until we are fully 
informed.

                            DEBT AND DEFICIT

    Mr. Yoder. I appreciate that. Returning to the national 
deficit for a minute, my colleague Mr. Womack asked, I think, 
some very pertinent questions and I wanted to follow up on your 
responses. I think anyone in Washington that pats themselves on 
the back for a $600 billion deficit clearly knows that that is 
not an achievement that is going to create the fiscal 
responsibility this country needs to get back to. We now have 
revenue coming in over our 40-year average, into this 
government. I believe we have more revenue coming in, dollar-
wise than any time in American history. We are running the 
sixth largest deficit in history only because the last five 
were the five were larger all within this current 
Administration. CBO projects another $6.5 trillion in debt over 
the next 10 years.
    I cannot find anyone in my district, maybe one of my 
colleagues can find people in their district that want to see 
us borrow another $6-7 trillion. We have the President's budget 
increasing spending beyond that, attempting to increase the 
deficit to even greater and deficits going up over the rest of 
the decade, which are attributable to mostly healthcare costs, 
the Affordable Care Act, Medicare costs, debt, and interest 
payments. I think many of our colleagues are tired of sending 
more money to Washington, D.C.; they are tired of the constant 
request for additional taxes, that Washington cannot live 
within its means. I think estimates are there $3 trillion in 
new taxes coming in over the next 10 years because of tax 
increases that have occurred in the last couple of years.
    I know we talked about the short-term, and congratulations 
that the Administration feels that $600 billion is an 
achievement in a deficit; that is short term. Long term will 
the Administration get serious about our long-term debt 
challenges or does it intend to leave this for the next 
Administration? And if so, what are the specific ideas that the 
Administration is going to put forward?
    Secretary Lew. Congressman, I think that you have to look 
at where we started and we have made enormous progress. I have 
not said that I am happy that there is a $600 billion deficit, 
but I am happy that we have reduced the deficit and we are on a 
path towards keeping it coming down so that it will shrink as a 
percentage of GDP.
    I think when you talk about entitlements you have got to be 
clear, the Affordable Care Act on net is reducing the deficit, 
not increasing it. The thing that is driving entitlements up is 
that the baby boom is retiring and people are claiming the 
Social Security and Medicare that they are entitled to. These 
are very challenging areas and unless somebody wants to stand 
up and say they are going to do something other than pay Social 
Security and Medicare, the solutions are very hard. We have 
tried over a number of years to work on a bipartisan budget 
agreement. The President put his every best effort into it; we 
were not able to get an agreement on a bipartisan basis. 
Notwithstanding that we have made enormous progress, 
incrementally doing it on discretionary spending, doing it with 
the tax bill at the beginning of last year.
    I think that right now the most urgent thing facing 
Americans is what can we do to promote more growth and job 
creation in this economy. What do we do to get construction and 
housing moving again? I think we have a little bit of time, I 
am not saying decades; it is not today's crisis to deal with 
the deficit. I think today for most middle class families what 
they want to know is what are we doing to grow the economy. And 
I think the kinds of things that we have been talking about in 
terms of helping to make job creation more robust is frankly 
what we should currently be paying attention to.
    Mr. Yoder. Thank you, Mr. Secretary. Thank you, Mr. 
Chairman.
    Mr. Crenshaw. Thank you. Ms. Herrera Beutler.

                            DEBT COLLECTION

    Ms. Herrera Beutler. Thank you, Mr. Chairman. I have a 
couple of questions. The first one has to do with debt 
collection. As you are aware the Washington Post reported on a 
couple weeks ago, that the government was seizing State and 
Federal tax refunds. I think they were on their way to about 
400,000 Americans who had relatives who owed money to Social 
Security. And in many cases the people whose refunds were 
intercepted had never heard of the debts and the debts were as 
far back as the mid-century. I realize that it was the Farm 
Bill in 2008 that gave or set up the authority to go back and 
get back taxes, but I wanted to ask, in my understanding of it, 
I do not see anywhere where we have given you the authority to 
offset payments from an individual to pay debts that are not in 
his or her name, where did you get that authority?
    Secretary Lew. Treasury's role is really as an agent of 
other Federal agencies. The 2008 Farm Bill did create an 
authority here. The Social Security Administration certified 
valid claims and Treasury executes on those claims; it does not 
create them. The Social Security Administration has said they 
are changing their policy so this is not going to be happening 
going forward. I think the concerns raised are worthy of 
further investigation and, frankly, they are a concern that I 
share in terms of how some of these notifications issues 
develop.
    Ms. Herrera Beutler. So those folks who had assets seized 
on behalf of a debt that his or her father had before they even 
perish when they were a kid, is that money going to be returned 
then or how are you going to move forward with that?
    Secretary Lew. I am not aware of how Social Security is 
handling retroactively going back. If they are looking at it, I 
am happy to follow up on that and get back to you.
    [The information follows:]


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    
    Ms. Herrera Beutler. I just find it concerning that with 
your direction or under your permission a federal agency would 
see it fit to read beyond what is in the law, which says you 
can go back and appropriately when people owe money, go back 
and get it, but to then take it a step beyond and say we are 
going to get it from your kids and your grandkids, without that 
actually ever having been given permission in the law.
    Secretary Lew. Just to be clear, the specific collection 
item is not something the Treasury exercises judgment over or 
would exercise judgment over, so I am not the right person to 
answer some of the questions about how the claim was 
determined.
    Ms. Herrera Beutler. But you do the collection, right?
    Secretary Lew. It just triggers a responsibility, yes, but 
it is not an independent action.
    Ms. Herrera Beutler. No, I understand it is not 
independent, but I guess if you are the one actually taking the 
money then there is some shared responsibility for ensuring 
that you are taking it appropriately. No?
    Secretary Lew. I think that we all collectively have a 
responsibility to make sure that we do business in a way that 
we are comfortable with different direct lines of 
responsibility and that is why I am not the right person to 
answer some of these questions.

                                BONUSES

    Ms. Herrera Beutler. Okay, switching gears. So let's see, 
Treasury Inspector General for the Tax Administration recently 
announced an investigation from October 2010 to December 2012, 
more than 2,800 employees with recent substantiated conduct 
issues that resulted in disciplinary action received more than 
$2.8 million in bonus awards and more than $27,000 in time off. 
Among these more than 1,100 IRS employees with substantiated 
Federal tax compliance problems received more than $1 million 
in cash awards with more than 10,000 hours in time off. Do you 
believe that that poor performance and especially the failure 
to pay taxes should be rewarded through bonuses to IRS 
employees?
    Secretary Lew. Congresswoman, our position is that 
individuals who have been found to have engaged in significant 
misconduct including nonpayment of taxes should not be eligible 
for performance awards during the relevant time period. The IRS 
has already had discussions with the union; this is a 
collective bargaining agreement, this bonus program, about the 
eligibility standards for performance awards. I understand that 
the union has agreed to work with the IRS to address this issue 
so clearly this has to change.
    Ms. Herrera Beutler. So any chance you are going to go back 
and collect that money that was paid if you believe it should 
not have been given?
    Secretary Lew. Well, let's first make the policy going 
forward and then we can look at questions as to whether or not 
there is any retroactivity to it. These bonuses were for 
several years ago; the question is what happens with future 
bonuses and this will govern that. We have already changed the 
policy for things that are discretionary bonuses at executive 
levels so that this kind of performance and misconduct are 
taken into consideration. Now it will be taken into 
consideration for all bonuses.
    Ms. Herrera Beutler. Thank you. I yield back.
    Mr. Crenshaw. Thank you. One thought, Mr. Secretary. 
Someone mentioned the FSOC and I would just leave you with one 
of the concerns that I hear from time to time that there are 
complex issues that are dealt with by FSOC that some would 
argue that other regulators that have the expertise in those 
areas. So I just want to share that concern that you not 
reinvent the wheel and duplicate regulatory aspects, just 
something that we have heard from time to time.
    I want to thank you very much for being here today, for 
working with us to reschedule this hearing and being here under 
less than ideal circumstances. I want to thank the Members for 
their interest and their attendance today. And so with that the 
meeting is adjourned.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



                           W I T N E S S E S

                              ----------                              
                                                                   Page
George, J. R.....................................................     1
Koskinen, John...................................................1, 199
Lew, Hon. Jack...................................................   279
Olson, N. E......................................................     1

                                  [all]
