[Senate Hearing 113-]
[From the U.S. Government Publishing Office]



 
  FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL 
                               YEAR 2014

                              ----------                              


                         WEDNESDAY, MAY 8, 2013

                                       U.S. Senate,
           Subcommittee of the Committee on Appropriations,
                                                    Washington, DC.
    The subcommittee met at 2:58 p.m., in room SD-138, Dirksen 
Senate Office Building, Hon. Barbara A. Mikulski presiding.
    Present: Senators Udall, Johanns, Moran, and Mikulski.

                       DEPARTMENT OF THE TREASURY

                        Office of the Secretary

STATEMENT OF HON. JACOB J. LEW, SECRETARY


            opening statement of senator barbara a. mikulski


    Senator Mikulski. Good afternoon, everybody. The 
Subcommittee on Financial Services and General Government will 
come to order. Today the hearing will be about the Department 
of the Treasury's request for their fiscal year 2014 
appropriations, and we will also take testimony from Acting 
Director Mr. Miller from the Internal Revenue Service (IRS), 
and we will also be listening to the Inspector General for the 
Department of the Treasury to give us ideas and recommendations 
on how we can improve the functioning of government, avoid any 
boondoggles, particularly in the area of technology, and also, 
though we're hearing particularly on IRS, we're not only going 
to talk about what are the best ways to collect the money, but 
also make sure we have a sense of frugality on how we spend the 
money. So we'll look forward to that.
    I want to note that I'm kind of a pinch hitter today for 
Chairman Lautenberg as the chairman of the full committee, and 
he wants everyone to know that he's eager to begin work on this 
new bill. He could not be with us today and, rather than make 
the perfect the enemy of the good with Senator Lautenberg 
chairing himself, I said I would move this subcommittee 
forward.
    Senator Johanns, I'd like to thank you as the ranking 
member for your courtesy here. I know that you also have to 
leave, so we're going to defer to you on some of the early bird 
questioning and really function in a bipartisan way.
    We're going to have two panels, as I said, on both the 
Secretary of the Treasury and focusing on the IRS. As the 
Treasury Department's largest bureau, IRS accounts for one-half 
of this subcommittee's funding. We're so pleased that Secretary 
Lew could join us, and he's serving in a new role, in a crucial 
role at this very important time in our economy.
    Secretary Lew knows better than anyone, after two tours of 
duty as the Office of Management and Budget Director, the 
importance of the appropriations process to create conditions 
that generate jobs today and grow our economy. That's why I 
support the President's budget level of $1.5 trillion, the same 
as we agreed to in the American Taxpayer Relief Act of 2013 
that just passed 4 months ago. We know that there will be a 
difference of opinion with the House, who is marking up at the 
Ryan budget level of $966 billion. So there are going to be 
issues there. But right now the issue is to hear what does 
Treasury need and what it is that we need.
    This week is Public Service Recognition Week, when we 
support public employees for their tireless work. The Treasury 
Department staff are on the job, providing value for the 
taxpayers. They do things like sanctions and the sanction 
experts at the Office of Foreign Asset Control target the 
sources of finances to disrupt Iran's pursuit of weapons of 
mass destruction.
    They're the intelligence analysts at the Financial Crimes 
Enforcement Network, and they follow the financial paper trail 
to make sure that crime doesn't pay for terrorist financing, 
organized crime, or the narcotraffickers.
    They're the payment specialists at the Financial Management 
Service (FMS) that ensure that Social Security benefits get to 
our seniors, taxpayers get their refunds, and benefits go to 
our disabled veterans.
    We could go through agency after agency, and these agencies 
are on the job, serving America.
    I am deeply troubled about what we face during the 
sequester. I am interested in the impact of the sequester both 
on the functioning of the Department of the Treasury--and Mr. 
Lew, we'll look to you for your commentary about it. I've heard 
it firsthand because I have world-class Treasury Department 
agencies in my State, from IRS to FMS and some other very 
important agencies.


                          prepared statements


    But we're also interested in what is the impact of the 
sequester as you see it on our economy and the failure to get 
our budget clear so that we could keep our economy on track. So 
we look forward to your commentary.
    Senator Lautenberg has a statement which he has requested 
be made part of the record. His statement will follow mine.
    [The statements follow:]
           Prepared Statement of Senator Barbara A. Mikulski
    Today, the Financial Services and General Government Subcommittee 
meets to examine the fiscal year 2014 budget request for the Department 
of the Treasury, including the Internal Revenue Service (IRS). Chairman 
Lautenberg is eager to begin work on his new bill, so I'm pleased to 
chair this hearing for him today, in order to get the process started.
    We will have two panels today. Our first panel will be Treasury 
Secretary Jack Lew, while our second panel will focus on the IRS, which 
is the Treasury Department's largest bureau. The IRS accounts for one-
half of this subcommittee's funding, so it's appropriate that we hear 
from Acting IRS Commissioner Steven Miller and Inspector General for 
Tax Administration Russell George.
    We are so pleased Secretary Lew is serving in this new role, at 
this critical time. As we all know, we are in sequester now and unless 
sequester is canceled we will face sequester for the next 8 years. 
Secretary Lew knows better than anyone, and after two tours of duty as 
the Office of Management and Budget Director, he certainly knows the 
importance of the appropriations process to creating conditions that 
generate jobs and grow our economy.
    That is why I support the President's budget request level of 
$1.058 trillion for discretionary programs, the same as the deal in the 
American Taxpayer Relief Act that passed the Senate 89-8 just 4 months 
ago. In contrast, the Ryan budget and the sequester level is $966 
billion--this is $91 billion less than the President's request. In 
addition, the Ryan budget cancels sequester for the Department of 
Defense only, which means the entire $91 billion cut is from domestic 
spending. So we look forward to hearing from Secretary Lew about 
Treasury's own budget, the importance of supporting the President's 
budget request level, and the consequences of sequester--now and in the 
future.
    This week is Public Service Recognition Week, when we salute public 
employees for their tireless work. Treasury staff are on the job 
providing value for the taxpayers, and I'll give just a couple of 
examples. Sanctions experts at the Office of Foreign Assets Control 
target sources of finance to disrupt Iran's pursuit of weapons of mass 
destruction. Intelligence analysts at the Financial Crimes Enforcement 
Network follow the financial paper trail to make sure crime doesn't pay 
for terrorist financiers, organized crime, and narcotics traffickers.
    Payment specialists at the Financial Management Service ensure that 
Social Security payments get to our seniors, benefit payments get to 
our disabled veterans, and taxpayers get their refunds. Economists 
forecast economic indicators and track market conditions to monitor 
risks building up in our financial system. Specialists at the Alcohol 
and Tobacco Tax and Trade Bureau combat tobacco smuggling and tax 
evasion. Customer service representatives at the Internal Revenue 
Service answer questions so taxpayers complete their returns 
accurately.
    To these employees and others throughout the government in these 
times of pay freezes and furloughs, I say we value your commitment and 
dedication and we thank you for your service to our country.
    As Chairwoman of the full committee, I welcome the opportunity 
today to exercise the most important role of the Appropriations 
Committee: to conduct critical oversight of Federal spending. During 
these check-ups, we pursue these questions: What resources are needed 
to carry out critical missions, and are we getting value for the 
taxpayer dollar?
    I want to have a candid discussion to determine where Treasury is 
today and where it needs to be in fiscal year 2014. To complement our 
oversight, a cadre of watchdogs and keen observers monitor and evaluate 
Treasury's operations, including: Treasury Inspector General; Treasury 
Inspector General for Tax Administration; National Taxpayer Advocate; 
IRS Oversight Board; U.S. Government Accountability Office; and, 
National Treasury Employees Union.
    I appreciate the exemplary work and contributions of each of these 
entities. Their assessments help improve the work of the Treasury and 
the IRS. Chairman Lautenberg invited each organization to submit 
written materials to enrich the subcommittee's work and augment the 
hearing record. I ask unanimous consent that the statements and 
accompanying materials be made a part of the hearing record.
    Treasury's total budget request is $14.2 billion, and the IRS 
accounts for $12.9 billion. For the remainder of Treasury operations 
the request is $1.3 billion for a wide variety of activities, from 
economic forecasting to combating terrorist financing and money 
laundering, and from community development financing to managing the 
books of the Federal Government.
    I'm pleased that despite fiscal restraints, the budget maintains 
robust funding for the Community Development Financial Institutions 
Fund, or CDFI Fund. I'm also pleased that the request extends the CDFI 
Bond Guarantee Program, and will provide $1 billion in bond financing 
to CDFIs at no cost to the taxpayer. As our financial sector continues 
an unprecedented restructuring, CDFIs are playing a more critical role 
in making credit and financial services available in economically 
challenged communities.
    I am concerned about the proposed 6-percent cut to Treasury's 
Financial Crimes Enforcement Network, which combats money laundering 
and terrorist financing by tracking the financial trail of criminals. I 
will want to learn more about why Treasury requests to reduce support 
for this critical agency.
    The IRS has a dual mission: providing America's taxpayers with top 
quality service by helping them understand and meet their tax 
responsibilities, and applying the tax law with integrity and fairness 
to all. The IRS collects revenues that fund 92 percent of Federal 
operations and public services, and spending by the IRS is just 48 
cents for every $100 collected in 2012. Each year, 89,500 IRS employees 
make hundreds of millions of contacts with taxpayers and businesses, 
representing the face of Government to more U.S. citizens than any 
other agency.
    The President's budget requests $12.449 billion for the IRS, an 
increase of $656 million above the fiscal year 2013 funding, or 5.5 
percent. Requested funding would provide:
  --$5.42 billion for tax law enforcement, an increase of $132 million, 
        or 2.5 percent;
  --$2.41 billion for taxpayer services, an increase of $177 million, 
        or 8 percent;
  --$4.32 billion for operations support, an increase of $375 million, 
        or 9 percent; and,
  --$301 million for business systems modernization, a cut of $29 
        million, or 9 percent.
    The request also includes $440 million to continue time-sensitive 
implementation of the Affordable Care Act, to establish infrastructure 
to help individuals buy healthcare on exchanges and assist public with 
questions on health insurance exchanges, tax credits. The request also 
includes $412 million for law enforcement activities to capture more 
delinquent revenue to reduce the deficit, but this is paid for in a way 
that exceeds our budget caps.
    I look forward to hearing about the challenges that Treasury and 
the IRS face and how this subcommittee can be helpful in providing the 
right resources to support their critical missions.
                                 ______
                                 
           Prepared Statement of Senator Frank R. Lautenberg
    This is our first hearing of the fiscal year 2014 appropriations 
season for the Subcommittee on Financial Services and General 
Government. I am honored to serve as chairman of this subcommittee, 
which has jurisdiction over crucial Federal programs that support our 
economy, ensure fairness in the telecommunications industry, and 
protect consumers. One of our top priorities will be completing the 
work of Wall Street Reform Act by providing Federal regulators the 
resources they need to oversee the financial industry so that Main 
Street--and not only Wall Street--succeeds. I look forward to working 
with my colleagues and Ranking Member Mike Johanns to ensure these 
priorities are met.
    Today, we examine the fiscal year 2014 budget requests for the 
Department of the Treasury and the Internal Revenue Service (IRS). 
These agencies manage many of the economic policies that are vital to 
our Nation's continued recovery from the Great Recession, ensure 
fairness by cracking down on tax cheats, oversee and intervene in the 
illicit tobacco trade, and enforce sanctions against rogue regimes, 
such as Iran. Each of these areas is of critical importance, and I 
believe Treasury and the IRS are vital to America's future prosperity.
    It has now been 5 years since the beginning of the financial crisis 
that plunged this country into the worst recession it has experienced 
since the Great Depression. President Obama has led us out of 
recession, but too many Americans are still suffering. Though we are 
now consistently creating jobs, young workers and the long-term 
unemployed face major challenges in finding work. The economy is 
growing again, but increases in worker productivity have mostly led to 
increased corporate profits, while worker wages have remained stagnant. 
The housing market has stabilized and even begun to recover in some 
parts of the country.
    Despite this progress, our recovery faces obstacles here in 
Washington. Republicans in the Congress continue to call for even 
deeper budget cuts--despite clear evidence that the austerity agenda 
they have championed has slowed the pace of job growth and needlessly 
increased the suffering of children, seniors, and middle-class 
families. These cuts could be avoided if we can come together on a 
reasonable proposal to raise revenue and stop protecting the wealthy.
    In New Jersey, we still suffer from an unemployment rate of 9 
percent--the seventh highest in the Nation. And homeowners in New 
Jersey remain under stress. With 7.3 percent of loans in foreclosure, 
New Jersey has the second highest foreclosure rate in America. The New 
Jersey HomeKeeper Program--which provides financial assistance to New 
Jerseyans facing foreclosure due to job or income loss--has been an 
important tool in keeping families in their homes. With my State's 
continued challenges and stubbornly high foreclosure rates, I call on 
the Treasury Department to redouble its efforts to ensure that New 
Jersey homeowners receive the help they need.
    Two areas that are also critically important and under the Treasury 
Department's purview are illicit tobacco trafficking and evasion of 
tobacco taxes. The Alcohol and Tobacco Tax and Trade Bureau (TTB) is 
charged with stopping tax evasion and manipulation in the tobacco 
market. Treasury has estimated that up to $4.5 billion in revenue is 
potentially lost each year due to tobacco tax evasion. We need to 
bolster TTB so it has the ability to investigate and stop the illicit 
tobacco trade and collect the revenue we need.
    In addition, the IRS needs sufficient resources to prevent tax 
evasion generally, an effort that brings in $6 in revenue for every $1 
spent.
    And when it comes to our international obligations, few are more 
important than enforcing sanctions on Iran to prevent its development 
of a nuclear weapon and to stop its support of terrorism. Although we 
have had a complete trade ban on Iran since 1995, a significant 
loophole existed that allowed the foreign subsidiaries of American 
companies to do business with Iran. After years of hard work, I was 
successful in getting this loophole closed last year. Treasury enforces 
these sanctions, which are crippling the Iranian regime's ability to 
transfer funds to its terrorist allies and further its nuclear 
ambitions. We must remain vigilant, and I look forward to working 
closely with the Treasury Department to ensure that it has the 
resources it needs to do just that.
    The spending constraints mandated by the Budget Control Act of 2011 
will make it difficult to fund all of our priorities this year. 
However, I will ensure that key programs at the Department of the 
Treasury and the IRS receive the support they need to strengthen the 
economy in New Jersey and across the country.

    Senator Mikulski. With that, I'd like to turn to Senator 
Johanns for any comments that he'd like to make.

                   STATEMENT OF SENATOR MIKE JOHANNS

    Senator Johanns. Madam Chairwoman, thank you very much. My 
comments will be relatively brief because, as indicated, I have 
to move on in about an hour.
    But I did want to offer some opening comments. To all of 
the witnesses who are here today, we appreciate your 
attendance. Today marks my first hearing as the ranking member 
of the Financial Services and General Government Subcommittee. 
I do appreciate the opportunity to serve on the Appropriations 
Committee, given its important role in providing oversight over 
discretionary spending.
    As we begin our review of the President's budget for fiscal 
year 2014, I will note that I am pleased, I'm glad the 
President acknowledged that two important entitlement programs, 
Social Security and Medicare, are in trouble and must be 
strengthened. To his credit, he has proposed adjusting the 
formula that is used to calculate Social Security and Medicare 
cost of living adjustments to more accurately reflect inflation 
rates. But that's just part of the equation.
    I am disappointed this budget does not make the necessary 
strides to addressing our Nation's debt. Unfortunately, the 
budget's small move toward entitlement reform is overtaken by 
increased spending, added debt, higher taxes, and additionally 
the President's budget calls for dismantling the bipartisan 
spending reductions he signed into law as part of the 2011 
Budget Control Act. This would leave less than $12 billion of 
annual deficit reduction, compared to this year's projected 
deficit of $845 billion.
    So the task before us is significant, if not enormous. If 
the President really wants to stimulate the economy, I would 
recommend he reverse his record of increased spending and 
taxes. It just seems straightforward to me as a former mayor, 
council member, commissioner at the local level, and Governor 
that money left at home with hard-working Americans means more 
money exchanging hands on Main Street.
    We have to reduce the deficit and forge a path to a 
balanced budget. To make any real progress toward reducing 
Government spending and ensuring the future solvency of Social 
Security and Medicare, we all must engage in a serious 
discussion about how to put entitlement programs on a 
sustainable path, not only for my generation, but for the 
generation behind us.
    My hope is that the President's recognition of the 
unsustainable path of our entitlements is only a first step, 
one that will be followed by additional meaningful proposals 
and leadership.
    There are willing partners. I myself am a member of the 
group of eight Senators who have been working for a long time 
on coming up with ideas to deal with the budget issues. As a 
member of this subcommittee and the Senate, I will continue my 
efforts to do all I can to be a part of the approach to balance 
the budget and rein in spending.
    We do need to repeal costly mandates, lower taxes, increase 
regulatory transparency and accountability. Americans are 
looking for us to do the work here in Washington. We must work 
to promote sustainable economic growth. We do so through a tax 
code that recognizes that hard work and achievement are worthy 
of reward, not penalty, and by making difficult decisions 
necessary to put our country on a path to long-term financial 
security.
    So as we review the budget request, I look forward to 
working with the chair and other members of the Committee and 
subcommittee to do our part to address the mounting financial 
issues and promote a stronger economy for our Nation.
    Thank you, Madam Chairman.
    Senator Mikulski. I want to welcome two of my colleagues: 
Senator Udall, who is new to the subcommittee, but not new to 
appropriations, excellent experience in the House; and our 
colleague Senator Moran.
    What I would like to suggest is we go right to the Treasury 
Secretary. As you know, we had to change the schedule. Senator 
Johanns has to leave. Secretary Lew had to readjust. So I'd 
like to go right to him. Comments that you'd like to make 
include in your questions as we proceed.
    Mr. Lew, I'm going to have you testify. Then, Senator 
Johanns, I will go to you, in case you have to leave, because 
we can hold down the fort. Then I'll go to my questions and 
we'll follow the regular order. Does that sound like a good 
way?
    Senator Johanns. That sounds like a great way.
    Senator Mikulski. Mr. Secretary.

                   SUMMARY STATEMENT OF JACOB J. LEW

    Secretary Lew. Thank you very much, Chairwoman Mikulski, 
Ranking Member Johanns, members of the subcommittee. I 
appreciate this opportunity to speak about the Treasury budget. 
I'd just like to say that I'm sorry that my friend Senator 
Lautenberg isn't here today and I only wish him well and that 
he returns soon.
    I want to start by thanking the talented public servants at 
the Department of the Treasury. They're thoughtful, dedicated, 
and focused. Their goal is to further the mission of the 
Department and the American people. It's really my honor to 
work with them.
    I'd like to begin with an overview on the economy and then 
get into the Treasury budget. Our economy is much stronger 
today than it was 4 years ago, but we still need to continue to 
pursue policies that will help create jobs and accelerate 
growth. Since 2009, the economy has expanded for 15 consecutive 
quarters, private employers have added 6.8 million jobs, and 
the housing market has improved. Consumer spending, business 
investment are solid, and exports have expanded.
    But very tough challenges remain. Families across the 
country are still struggling. Unemployment remains high. 
Economic growth needs to be faster. While we've made progress, 
we need to do more to put our fiscal house in order.
    At the same time, political gridlock in Washington 
continues to generate a separate set of headwinds, including 
harsh, indiscriminate spending cuts from the sequester that 
will be a drag on our economy in the months ahead if they are 
not replaced with sensible deficit reduction policies.
    The President has laid out a strategy to address these 
challenges. This path forward replaces sequestration and takes 
a balanced approach to restoring our Nation's long-term fiscal 
health. It makes important investments in manufacturing, 
infrastructure, and worker training. These investments are 
critical. They will help grow our economy and create jobs now 
and well into the future.
    I was in Cleveland yesterday visiting with business owners 
and manufacturing workers, and it's absolutely clear the 
American people want us to focus our economy policies on growth 
and jobs.
    Now, as our budget today demonstrates, Treasury helps shape 
and implement the President's economic policies, from 
streamlining the tax system and reforming the financial system 
to securing our interests abroad and increasing lending for 
small businesses at home. Whether it's making Social Security 
payments or producing our Nation's currency, Treasury touches 
the lives of almost every American. While our responsibilities 
are extensive, we're committed to meeting our obligations as 
efficiently as possible and at the lowest cost to the taxpayer.
    Over the last 4 years, Treasury has made enormous progress 
to make the Department leaner and more efficient. Today we 
build on that momentum by identifying nearly $400 million in 
additional savings. In this budget we wring out wasteful 
spending and consolidate redundant programs. We cut travel 
costs and sharply reduce expenses. We use materials more 
effectively at the Bureau of Engraving and Printing. We save on 
rent at the Bureau of Fiscal Services, and we provide more of 
our services electronically so we can continue to cut down on 
paper and paperwork.
    In total, we're reducing spending by 2.3 percent when you 
exclude the IRS and compare this year's budget to what was 
provided during the past fiscal year. The IRS is the main area 
where we're requesting an increase. These additional resources 
will, with the program integrity cap adjustment, allow the IRS 
to improve enforcement. With this new funding, the IRS will 
crack down on those who are evading the law and bring in more 
revenue. For every $1 we spend on our enforcement initiatives, 
we expect to collect $6 in revenue.
    The request for an increase also includes additional 
funding so that the IRS can meet its responsibilities under the 
healthcare law, which lowers the forecast budget deficits by 
more than $1 trillion over the next two decades. The Affordable 
Care Act (ACA) is helping to slow the growth of healthcare 
costs and continued implementation of ACA will help to improve 
the quality and efficiency of our healthcare system.
    Nevertheless, in order for the IRS to carry out its 
obligations as mandated by the Congress under the healthcare 
law, it needs the appropriate resources. Beginning in 2014, 
millions of Americans will receive unprecedented tax benefits 
that will make buying health insurance affordable. The IRS must 
have the necessary funding to assist Americans as important 
provisions of the law go into effect.
    For example, the IRS must invest in new technology and 
modify existing IRS tax administrative systems. These efforts 
will facilitate prompt and accurate application of the premium 
tax credits while protecting taxpayer information.
    I'd like to point out that sequestration has taken a toll 
on Treasury, but we are doing everything we can to absorb these 
cuts before reducing services. We have scaled back training, 
delayed contracts, and limited purchases. But even with these 
measures, the brunt of the cuts is being felt by Treasury's 
hard-working public servants. At the IRS, for example, workers 
will have to stay at home without pay for as many as 7 days 
between now and September. This will erode our ability to 
provide quality service by forcing the IRS to answer fewer 
calls and creating unexpected and unwanted delays in responding 
to taxpayer questions. It will also lead to fewer enforcement 
actions and reduced revenue collection.

                           PREPARED STATEMENT

    The fact is the sequester is not only hurting Treasury's 
employees, it's hurting taxpayers as well. As I've said before, 
sequestration must be replaced as soon as possible. The 
President's budget does that, and I hope this subcommittee and 
your colleagues will take action so we can get this done.
    With that, I thank you, and I look forward to answering any 
questions that you have.
    [The statement follows:]
                Prepared Statement of Hon. Jacob J. Lew
    Chairman Lautenberg, Ranking Member Johanns, and members of the 
subcommittee, thank you for giving me the opportunity to speak about 
the Treasury budget.
    I would like to turn to the current state of economic conditions.
    The U.S. economy has made substantial progress toward recovering 
from the worst financial crisis since the Great Depression. Despite 
significant headwinds--both as a result of the crisis and from other 
temporary shocks--the economy has grown at an average annual rate of 
just more than 2 percent over the last 3\1/2\ years. We have seen 
steady improvement in the labor market, where private sector employers 
have added 6.8 million jobs since the trough of the labor market in 
February 2010. The housing market, which had been a significant drag on 
economic growth throughout the recession and into the early stages of 
the recovery, is now gaining upward momentum.
    While our economy is stronger today, more work must be done to help 
create jobs and accelerate growth. Even though the unemployment rate, 
at 7.5 percent, is at its lowest level in 4 years, it is still too 
high. Too many Americans are still struggling to find work. Despite 
recent improvements in the housing market, many families remain 
underwater on their mortgages and credit-worthy borrowers continue to 
have trouble getting the financing they need to buy homes or refinance 
existing mortgages. Although corporate profits are at an all-time high, 
America's middle class continues to struggle.
    The President has laid out a strategy to address these challenges. 
His path forward strengthens the economic recovery by making important 
investments in manufacturing, innovation, infrastructure, education, 
and worker training while taking a balanced approach to bringing our 
deficits down to a sustainable level. This balanced approach includes 
entitlement reform, targeted spending cuts, and increased revenue 
through tax reform. And it is based on the conviction that we can both 
get our fiscal house in order and lay a foundation for long-term growth 
at the same time. We do not have to choose one over the other.
    Treasury plays a vital role in helping to shape and implement the 
President's economic policies, promoting a carefully balanced fiscal 
policy, driving reform of the financial system, encouraging lending to 
small businesses, working to reform the tax system, promoting economic 
prosperity, and monitoring risk in the financial system.
    It is important to note that Treasury continues to implement the 
comprehensive financial reforms included in the Dodd-Frank Act. These 
reforms place tougher limits on risk-taking by financial institutions 
in order to stabilize the financial system and protect American 
taxpayers. Our financial institutions have boosted their level and 
quality of capital and are stronger and more stable than before the 
crisis. These developments have made our financial system safer and 
stronger and better able to support lending and economic growth.
    We are also supporting small business growth through our Small 
Business Lending Fund (SBLF) and State Small Business Credit Initiative 
(SSBCI). As of September 30, 2012, SBLF participants have increased 
their small business lending by $7.4 billion over a $36.5 billion 
baseline and by $740 million more than the prior quarter. In 2012, 
Treasury approved $137 million for disbursement to States under the 
SSBCI. Treasury estimates disbursing cumulative totals of approximately 
$1.1 billion by the end of fiscal year 2013 and the remaining $360 
million by the end of fiscal year 2014.
    Treasury's fiscal year 2014 budget supports the President's 
strategy to meet our economic and fiscal goals by focusing on key 
priorities that will strengthen growth and lower costs to the taxpayer. 
Our budget does this by reducing waste, increasing efficiency, and 
making investments to accomplish our core missions and achieve future 
savings.
    Our request includes substantial investments in improved taxpayer 
service and enforcement and in technology at the Internal Revenue 
Service (IRS), which will drive efficiencies in the future. The 
proposal also reflects Treasury's contribution to protect our national 
security interests and prevent illicit use of the financial system.
    improving efficiency, reducing taxpayer costs, and streamlining 
                               operations
    The fiscal year 2014 Treasury budget reflects a decrease of 2.3 
percent from fiscal year 2012 enacted levels, excluding the IRS. The 
request for the IRS includes a $1 billion increase, of which $412 
million is financed by a program integrity cap adjustment for 
enforcement initiatives that provide a high return on investment. This 
cap adjustment, which also includes $5 million for enforcement 
activities at the Alcohol and Tobacco Tax and Trade Bureau (TTB), funds 
strategic investments that will help close the tax gap and will return 
$6 for every $1 invested, once fully implemented. The proposed cap 
adjustment will yield more than $32 billion in net savings to reduce 
the deficit over the next 10 years.
    Treasury's request also includes funding for initiatives that are 
critical to full and effective IRS implementation of the Affordable 
Care Act (ACA), which lowers the forecast budget deficit by more than 
$1 trillion over the next two decades. The ACA is helping to slow the 
growth of healthcare costs, and continued implementation of the ACA 
will improve the quality and efficiency of the healthcare system. 
Nevertheless, in order for the IRS to carry out its obligations as 
mandated by the Congress under the healthcare law, it needs the 
appropriate resources. Beginning in 2014, millions of Americans will 
receive unprecedented tax benefits that will make buying health 
insurance affordable. The IRS must have the necessary funding to assist 
Americans as important provisions of the law go into effect. For 
instance, the IRS must invest in new technology and modify existing IRS 
tax administration systems. These efforts will facilitate prompt and 
accurate application of the premium tax credits while protecting 
taxpayer information.
    The sequester has taken a toll on Treasury, but we are doing 
everything we can to absorb these cuts without reducing services. We 
have scaled back training, delayed contracts, and limited purchases. 
Even with these measures, the brunt of the cuts is being felt by 
Treasury's hard-working public servants. At the IRS, workers will have 
to stay at home without pay for as many as 7 days between now and 
September. The fiscal year 2013 IRS operating plan is almost $1 billion 
less than the fiscal year 2011 enacted level, and as a result, the IRS 
has 8,000 fewer full-time employees than just 2 years ago. 
Sequestration hurts not only Treasury employees, but taxpayers as well. 
The cuts imposed by sequestration erode our ability to provide quality 
service by forcing the IRS to answer fewer calls and creating 
unexpected delayed in responding to taxpayer questions. It will also 
lead to fewer enforcement actions and reduced revenue collection.
    The Treasury budget builds on our commitment over the past 4 years 
to deliver core services more efficiently and at a lower cost to the 
taxpayer. Our request identifies $354 million in efficiency savings and 
$29 million in program reductions.
    Key savings proposals include space optimization and infrastructure 
efficiencies for the IRS, manufacturing support systems and spoilage 
reduction for the Bureau of Engraving and Printing (BEP), rent and data 
center savings for the Bureau of the Fiscal Service, and numerous 
administrative and personnel efficiencies across multiple bureaus.
    We are also continuing to achieve savings from our ongoing 
paperless initiative. Treasury has implemented a multi-pronged effort 
to expand the use of electronic transactions in conducting the business 
of government, including through electronic payroll savings bonds, 
electronic benefit payments, and electronic tax collection.
    Treasury's paperless initiatives are estimated to save $500 million 
over the 5 years from fiscal year 2011 to fiscal year 2015. In addition 
to these savings, our efforts have resulted in improved customer 
service and decreased susceptibility to fraud. The IRS's e-file program 
has proven highly successful, saving the Department millions of dollars 
every year. For example, in 2012, it cost 23 cents to process an e-
filed return--a fraction of the $3.36 it takes to process a paper 
return. With e-file, taxpayers get their refund faster, with fewer data 
processing errors. The individual e-file rate is now more than 80 
percent.
    In fiscal year 2014, Treasury will implement a number of 
initiatives to improve operational efficiency and effectiveness across 
government. For example, Treasury is continuing to consolidate its two 
fiscal bureaus to create a stronger, more effective and efficient 
fiscal service organization that can take the lead in improving 
financial management throughout the government. The consolidation will 
also save up to approximately $96 million over 10 years. In addition, 
we are pleased that the Government Accountability Office (GAO) has 
recognized our progress improving the management of IRS information 
technology by removing our Business Systems Modernization from their 
high-risk list this year.
    The fiscal year 2014 budget also includes additional funding for 
the Office of Financial Innovation and Transformation (FIT), which is 
working in coordination with the Government-wide CFO Council to improve 
financial management, reduce costs, increase transparency, and improve 
delivery of agencies' missions within Treasury and across the Federal 
Government. Treasury also proposes to transfer FIT from the 
Departmental Offices to the Bureau of the Fiscal Service to allow 
closer collaboration with the bureau that most closely aligns with its 
mission.
    The budget also includes resources to administer the Resources and 
Ecosystems Sustainability, Tourist Opportunities, and Revived Economies 
of the Gulf Coast States Act of 2012 (RESTORE Act), which established 
the Gulf Coast Restoration Trust Fund to provide for the economic and 
environmental restoration of the gulf region after the Deepwater 
Horizon Spill. Treasury will serve administrative, compliance, and 
audit roles to ensure that funds are disbursed as required by the 
RESTORE Act.
    Under the leadership of my predecessor, Treasury demonstrated 
creativity and resolve to find the most efficient ways to accomplish 
the important work that we do to serve the American public. As 
Secretary, I will make sure the efforts to reduce costs and increase 
effectiveness continue across the Department.
             investing in economic growth and job creation
    Treasury supports economic growth for local communities and small 
businesses by funding projects that encourage job creation, attract 
investment, and increase financial access and capability.
    Our $225 million request for the Community Development Financial 
Institutions (CDFI) Fund focuses on providing funding to promote 
economic development investments in low-income and underserved 
communities. Up to $35 million of that request will go to the Healthy 
Food Financing Initiative (HFFI), which will support increased 
availability of affordable, healthy food alternatives in these 
communities.
    The budget requests $300 million in capped mandatory funding for 
Pay for Success, a new program that will reward nonprofits and other 
groups that finance preventive social programs that create savings for 
the Federal Government while achieving better outcomes for their target 
populations.
    The budget also proposes $5 million for the new Financial 
Capability Innovation initiative, which will help low- and moderate-
income people get the support and services they need so they can save 
more and manage their finances more effectively.
    The Treasury budget includes $3 million for research and evaluation 
efforts that will allow us to make better budget and policy decisions 
on programs designed to encourage economic growth and opportunity.
 protecting our national security interests and preventing illicit use 
                        of the financial system
    Treasury's financial intelligence and enforcement activities play a 
significant role in protecting our financial system from threats to our 
national security. Our funding request for the Office of Terrorism and 
Financial Intelligence (TFI) reflects our continued efforts to target 
rogue nations, terrorist facilitators, transnational criminals, money 
laundering, and other threats to our financial system and our Nation's 
security.
    Treasury has led the administration's efforts in isolating Iran 
from the global economy and cutting off vital sources of revenue that 
could be used to support Iran's nuclear program and support for 
terrorism. This work has resulted in what is now widely regarded as the 
toughest sanctions regime in history.
                               conclusion
    The fiscal year 2014 Treasury budget reflects a careful balance of 
savings proposals and targeted investments.
    The proposed savings will be achieved through a combination of 
efficiency improvements and increased streamlining of operational 
processes, making Treasury a stronger organization that continues to 
provide indispensable services across the country efficiently and 
effectively. Our investments are aimed at reaching goals we all share: 
an economy that is expanding, a private sector that is robust, and a 
job market that is full of opportunities.
    Treasury's work is carried out by a team of public servants that I 
am proud to represent here today. And on behalf of those hard-working 
men and women, I want to say how much we appreciate the support of this 
subcommittee over the past several years.

    Senator Mikulski. Senator Johanns.
    Senator Johanns. Thank you, Madam Chair.
    Secretary Lew, thank you for being here again. Let me, if I 
might, focus some questions on a piece of legislation that was 
passed a year or so ago, Dodd-Frank, which you are very 
familiar with. I'd like to revisit a question that was posed to 
you about 1 month ago, and it was posed in a very bipartisan 
way. Senator Tester and I wrote to you.

                      DODD-FRANK AND SYSTEMIC RISK

    You are the chair of Financial Stability Oversight Council 
(FSOC) and the question is this. What metrics is FSOC using to 
determine which nonbank companies are designated systemically 
risky? For me it seems like a very important question because 
those entities that are going to be hugely impacted by this 
designation should know where the lines are. So I'd just like 
to pose to you again what those metrics are and whether you 
think it's important for those metrics to be public?
    Secretary Lew. Well, Senator, the general approach is 
something that is public. We're looking at whether or not 
there's a risk to the financial system, and that really amounts 
to a question of a combination of factors, including what the 
nature of the institution is, the size, the scope, the 
transmission mechanisms, that would indicate whether or not, if 
there were a financial problem with those firms, there would be 
contagion in other parts of the financial system.
    The individual analyses that are going on are matters that 
are being discussed with the companies, but we haven't 
disclosed a public list of the companies and I don't think that 
would be appropriate unless and until designations are made, 
after which point in time those companies would have the 
ability to exercise any concerns they have in the review of 
those regulations--of those actions.
    So I think there is going to be every opportunity for the 
FSOC to make a determination, to put forward the analysis, and 
then for that analysis to be reviewed.
    Senator Johanns. I don't want to get stuck on this, 
although it's a hugely important issue. But as a former Cabinet 
member myself who regulated industries, it seems to me 
extremely important that you be able to say to the industry: 
This is what qualified you to be regulated, this is what 
excludes you from that regulation. I kind of look at this in 
the same way. It seems to me fair to just alert people out 
there, companies, whoever: This is why you're going to fall 
into this kind of hyper-regulation under Dodd-Frank.
    What am I missing here?
    Secretary Lew. Well, I think that the designations are 
still being reviewed. So to the extent that there are nonbank 
designations in areas where we've not yet taken action, there 
is not yet a public record to review. If actions are taken 
there will be a public record to review, and it will be very 
much substantiated by consistent analytics that get at the 
question of the scope of risk and the risk--whether or not the 
risk would spread. And there's a great deal of attention being 
given to making certain that those questions are being asked in 
a systematic way.
    We're in the early stages of implementing a lot of Dodd-
Frank. The FSOC is a new entity. This bringing together part 
regulators to make decisions like this is something that is 
being exercised for the first time. So it's difficult to have a 
long history of experience to go back on.
    But I can tell you that as chair of FSOC I am very much 
focused on making sure that there is a kind of procedural 
regularity about the way it's being reviewed, so that there is 
consistent analysis that when it's reviewed it can withstand 
scrutiny.
    So I would look forward as, assuming designations are made, 
going forward being able to demonstrate that by the actions.
    Senator Johanns. If I might just wrap that up by saying I 
also serve on the Banking Committee. We spent hours in hearings 
trying to come to grips with this concept of systemic risk and 
what to do about it. So whatever brain power you can put behind 
it and as much transparency as possible is very critical. I'm 
confident in saying that's what we were driving toward as 
members of the Banking Committee.

                      DODD-FRANK AND SWAPS PUSHOUT

    Let me, if I might, staying on the same piece of 
legislation: Chairman Bernanke testified in front of both the 
Senate Banking Committee and the House Financial Services 
Committee that Dodd-Frank section 716 does nothing to make 
banks safer and it only increases the cost of using derivatives 
for end users; it's an end user issue; and that it should be 
fixed. His testimony was very clear on that.
    Do you agree with that? I think there's a willing group of 
Republicans and Democrats saying we've got to do something on 
this. I've been working on this since the passage of Dodd-
Frank, although I'm not--I wasn't a supporter of Dodd-Frank. 
Congressman Frank supports it, Sheila Bair, Paul Volcker, 
others. Do you agree that we need to fix this?
    Secretary Lew. Senator, I think that we're still in the 
process of seeing how these issues are addressed by the 
regulatory agencies. The Fed still has some rules in this area 
that are not yet completed. I think there are questions about 
end users. The definition of ``end users'' is always a 
challenging one.
    But I think we have to see where they end up in order to 
come back then and see whether it addresses the concerns that 
have been raised.
    Senator Johanns. I'll wrap up with this because I'm out of 
time and I don't want to dominate the questioning here. But 
Senator Tester and I have been working on this. Again, I think 
we're trying to be very fair, very bipartisan about this. This 
is not a gotcha sort of thing. We just see some problems that 
we'd like resolved.
    If you could send your staff in our direction, we'd be 
happy to lay out for you our thinking and what we're proposing 
to try to deal with these issues.
    Secretary Lew. I'd be happy to have our staff follow up, 
Senator. I think there are legitimate questions for a firm that 
is trying to just run its business and have its process fuel on 
site. But the line between taking care of your regular business 
and speculating is a thin one and I would like to see where the 
regulators end up before reaching a determination as to whether 
or not there's any need for further corrective action.
    Senator Johanns. Thank you, Madam Chair.

                        IMPACTS OF SEQUESTRATION

    Senator Mikulski. Mr. Lew, you have a big agency and a 
very, very complex agency. Looking at this year's 
appropriations, we see that for Treasury if we take out IRS, 
which is the biggest agency under your umbrella of agencies, 
because the Treasury Department is really an umbrella function 
of very key functions, that the request is to fund you at $1.35 
billion. That is what you're funded in the fiscal year 2013 
continuing resolution omnibus.
    This is nearly identical to the fiscal year 2012 enacted 
level. Now, under the sequester you're cut $66 million; am I 
correct in that?
    Secretary Lew. I believe that's correct.
    Senator Mikulski. Well, it's roughly, more or less, $66 
million. My question to you, with all of the issues that you 
have to deal with in Treasury, from moving on a new framework 
related to Dodd-Frank, those other things that we ask you to 
do, to help the President formulate the fiscal policy, promote 
economic growth, promote exports, our currency, all of these 
very complex issues, along with implementing sanctions, which 
this Congress heartily supports, particularly our stunning 
success with Iran sanctions, to things at the local community 
that are near and dear to my heart and I know to Senator 
Lautenberg's, the Community Development Financial Institutions 
(CDFI) that have transformed neighborhoods.
    My question to you, sir, is what is the impact of the 
sequester on the functioning of your agency? Is it a benign 
impact or a draconian impact? What is the impact of the 
sequester?
    Secretary Lew. Senator, it is a very real impact. I already 
mentioned some of the impacts in the IRS. I think it's a very 
significant thing if taxpayers are inconvenienced by having 
difficulty reaching an office to get the assistance and advice 
that taxpayer assistance offices are meant to provide.
    I spent a lot of years in Government trying to shorten 
waiting periods and improve the service that taxpayers and 
citizens get when they reach the Government. If waiting periods 
get longer and if questions don't get answered, I don't know 
how you measure the cumulative impact, but for every person 
who's kept on hold for 15 minutes or half an hour or doesn't 
get a clear answer that's a taxpayer who hasn't been well 
served. For every dollar we don't raise in revenue that should 
have properly been paid, but because we didn't have an 
enforcement officer--it's just, it's key to our tax system that 
we enforce the law and we enforce it as best we can.
    On the program side, there are real impacts in terms of the 
direct services we provide. Our Build America bonds are being--
the benefit is being reduced. Our Closed-End Fund grants, the 
benefit is being reduced. Those are helping build our 
communities. They're providing financing for important 
infrastructure projects.
    These are the kinds of things that I don't think we would 
have chosen to cut. But because sequestration is across the 
board and it treats everything equally, they all get cut.
    I don't think that there's any way to have flexibility to 
fix the problems at an agency like Treasury or the other 
agencies of Government. I think that it's just shifting around 
reductions after years of having tightened our belts. I think 
that the challenge going forward is going to be to replace 
across-the-board cuts with a sensible policy which is balanced 
between revenue and spending cuts, and I think there should be 
some entitlement savings in a balanced package, where we solve 
the medium and long-term problem.
    Something that's not specific to Treasury, but I think all 
of us should worry about, is cumulatively sequestration is 
going to reduce our economic growth by a one-half a percent or 
more of gross domestic product (GDP). That translates into 
750,000 full-time job equivalents across our economy. Right now 
our economy is growing, but not as fast as we would like. If I 
could sit here today and testify for some other way to increase 
economic growth by a one-half a percent of GDP and to create 
750,000 jobs, people would think that was really important.
    Well, the sequester takes that away from us. We could get 
the benefit of a one-half a percent of GDP growth and 750,000 
jobs by replacing sequestration with a sensible medium and 
long-term policy, which is why the President put some very 
tough things in his budget as an alternative to sequestration.
    Senator Mikulski. So first it will have--the sequester has 
a big impact on the functioning of your agencies. In your 
appropriations, the bulk of the request for Treasury is $12.861 
billion for IRS. With the functioning of headquarters, the 
implementation of the sanctions, the financial crime, other, 
FMS, important agencies, it's $1.316 billion.
    My point is this. You're saying that because what we're 
doing with the sequester in our Government, whether it's at 
Treasury, whether it's the Department of Defense (DOD), the big 
impact on contractors and civilians, to the National Institutes 
of Health, the future thinking of cures, exports and medical 
devices and pharmaceuticals that we can sell around the world 
and can end misery--are you saying that we're not only 
sequestering employees, but it's having a draconian impact on 
our economy? Is that right?
    Secretary Lew. It's absolutely having an effect on our 
economy.
    Senator Mikulski. Could you give us a sense of--you've now 
been in Europe, where they've gone austerity big time, ``A'' 
with a capital ``A'', whether it's the French or whatever. What 
is your view of an approach to both the sequester and our 
economy--and not to be critical of other governments and their 
policies, but the consequences. It might have lowered some 
public debt, but where has it left them in terms of their 
economy?
    Secretary Lew. Well, I think before you even get to 
sequestration, the decisions that the United States made in 
2009 to take immediate action to deal with getting our economy 
growing after a deep, deep recession, to fix a financial system 
that was in collapse, our economy is back on its feet, not 
growing as fast as we would like, but we're growing.
    Europe took a different tack. They started with austerity, 
and their economies are not in general growing very well. Now, 
I don't think we disagree fundamentally that there needs to be 
deficit reduction in the medium and long term and we can't have 
deficits growing infinitely to dangerous levels. But when your 
economy is weak, you can't cut your way to growth. You have to 
get growth going and make the cuts when you can afford to 
absorb the cuts in the economy.
    On the sequestration, this is not a time when as just an 
economic matter putting $50 billion or $100 billion of drag on 
the economy is a good idea. I think we need to get growth up to 
a level where we're seeing the benefits of growth in terms of 
higher incomes, therefore higher revenues, and lower spending 
because people are working and they're not drawing as much 
benefits, and have the savings kick in when the economy can 
bear it.
    I also think that if we take a long-term view, cutting 
discretionary spending is very shortsighted at this point. 
We've made big cuts in discretionary spending. In 2011 we 
agreed collectively to cut more than $1 trillion dollars from 
discretionary spending over 10 years. So the caps that we're 
working with are already very tight. And to take the caps down 
below that means you're doing things that I don't think we 
would choose to do if we were looking at the policies not in an 
abstract way.
    I don't think you could find a lot of either elected or 
appointed officials who want to cut cancer research. But that's 
what you do when you reduce the caps the way we have.
    Senator Mikulski. Senator Moran.
    Senator Moran. Madam Chair, thank you very much.
    I was on this subcommittee for the last 2 years and I'm 
glad to be back. It has important jurisdiction.
    Mr. Secretary, congratulations on your nomination and 
confirmation.
    Secretary Lew. Thank you.
    Senator Moran. Madam Chair, pleased to be with you, hope 
Senator Lautenberg is able to return to the Senate in the near 
future.

            FINANCIAL REGULATORY REFORMS AND COMMUNITY BANKS

    Let me first start on this issue of growing the economy. 
One of the things I think that Treasury could do, along with 
other regulatory agencies, is to assist our community banks and 
other financial institutions in the regulatory environment they 
face. Senator Johanns focused on some of our largest 
institutions. As a Kansan, we pay a lot of attention to 
community banks, credit unions, and their ability to make 
loans.
    I am absolutely convinced, based upon the conversations I 
had with bankers, but also their potential borrowers, that the 
regulatory environment is handicapping the ability to make good 
solid loans to people within a community because of the 
regulatory concerns. I have a number of bankers who told me 
they no longer make home loans, real estate loans to people 
within their own community, because of the onerous nature and 
potential penalties for making an error.
    Then beyond that, the increased regulatory cost is reducing 
the number of community banks that we have. The necessity of 
growing your bank, acquiring more banks in other communities--
you have to have a significant increase in the number of 
depositors and loans in order to cover the increasing costs of 
hiring the people to comply with the rules and regulations.
    I'm interested in knowing whether or not you as the 
Secretary of the Treasury have thoughts about how we can 
unleash the opportunities that banks have to make loans in 
communities across our country, but particularly in rural 
communities, and community banks?
    Secretary Lew. Senator, I've met with community bank 
representatives and actual community bankers, even in the 8 or 
9 weeks that I've been at Treasury. I've been trying very hard 
to listen to them as they describe to me what they've described 
to you. I guess I would make a few observations.
    First, both the laws that have been enacted and the rules 
as they're being implemented are taking cognizance of the 
concerns of smaller financial institutions. I think one of the 
challenges we have in general is that there was a delay in the 
implementation of certain provisions of Dodd-Frank, frankly 
because it was still a political debate as to whether or not 
Dodd-Frank was going to be implemented or whether it was going 
to be repealed.
    I think we're beyond that. I have made implementation of 
Dodd-Frank, getting the rules out of all the agencies that 
still have rulemakings to do, a very high priority, because one 
of the things that's going on is there is a concern about what 
they don't yet know. There are rules that haven't been settled 
down and they're concerned that they're going to go in a way 
that won't reflect either the legislative or prior regulatory 
sentiments that took account of the concerns of smaller 
institutions.
    I can't sit here today and say exactly what each of the 
different regulators will do. But as I've discussed this issue 
with representatives of each of the regulatory bodies, I'm 
quite confident that they are thinking about this very hard and 
trying to address these concerns as best they can.
    I think that the size issue alone is one factor. We are not 
taking the view as we implement Dodd-Frank that a small 
institution that presents no risk should be treated as if it 
were a money center bank. I don't know any agency that's doing 
that.
    On the other hand, each of the regulators is asking the 
question: Is there a systemic risk that needs to be addressed? 
And as they resolve those issues, I'm certainly hopeful that it 
will provide the kind of clarity so that some of these issues 
will subside, and I hope that that's in the near future.
    Senator Moran. Mr. Secretary, thank you. I appreciate that 
answer, at least in part. The uncertainty is clearly a problem.
    Secretary Lew. I've heard that uncertainty as much as 
substance is what they're worried about.
    Senator Moran. And I would tell you that I've had this 
conversation with your predecessor, with the Federal Deposit 
Insurance Corporation, other regulators over--I serve on the 
Banking Committee, serve on this subcommittee. The suggestion 
that we take into account is one that is always offered in 
return to the dialogue or monologue that we just had, and the 
complaints continue.
    So I'm happy to hear you pursue the certainty. Please take 
into account the lack of systemic risk.

                   RELEASE OF TAX RETURN INFORMATION

    I only have less than 30 seconds left. I'm going to submit 
for the record a question to you and to Acting Commissioner 
Miller. It deals with this issue of the IRS's inadvertent 
release of tax returns that appear to involve contributions to 
certain political organizations and the information that is 
released ends up in the hands of other kind of politically 
oriented organizations. I'm going to outline a number of 
instances where that has happened and ask you and the 
Commissioner to explain what's going on at the IRS, what's 
happening at the Treasury Department, how did these releases 
occur, what actions have you or the Commissioner taken to make 
sure they don't happen in the future, that employees if they 
are culpable have been punished.
    Nothing I've seen has suggested that the issue of this 
release of very personal and confidential information, which 
may be used for political means, political outcomes, that 
there's been any reaction or response from the IRS or the 
Treasury Department.
    Secretary Lew. Happy to look at that, Senator.
    Senator Moran. And I'll submit that for the record, but I'm 
very interested in making certain that every American, whatever 
their political views are, they can know that their tax return 
is nothing that's going to become public.
    Secretary Lew. I'm happy to look at it. I can say as a 
principle we totally agree that there should be no politics in 
the execution of our tax laws.
    Senator Moran. Thank you very much, Mr. Treasury Secretary.

    [Note: See in the ``Additional Committee Questions'' at the 
end of the hearing the Internal Revenue Service's and the 
Department of the Treasury's responses to Senator Moran's 
question above.]

    Senator Mikulski. Senator Udall.
    Senator Udall. Thank you. Thank you very much, Madam Chair.
    Secretary Lew, thank you for joining us here today, and 
thank you for your very nice comments about Senator Lautenberg. 
We all hope that he returns very, very soon.
    I also want to thank the chairwoman and the members of the 
subcommittee and the staff for all their hard work on these 
issues. You've done an excellent job.

                ECONOMIC RECOVERY FOR LOCAL COMMUNITIES

    Secretary Lew, I completely agree with your statements 
that, even though our economy is improving, more work is 
necessary to support job creation and accelerate growth. In 
every community across New Mexico, I hear the same concerns: 
Jobs are hard to come by and businesses are struggling to stay 
open. Hard-working New Mexicans feel that the recovery hasn't 
come to Main Street and to rural towns.
    Can you speak to what efforts Treasury has under way to 
help the recovery reach Main Street? How are the Treasury 
programs supporting vibrant local economies in cities and small 
towns, and how do these efforts help support a strong--building 
a stronger middle class?
    Secretary Lew. Senator, I think we have to start with the 
big picture. We need to get overall economic growth growing 
faster, because we do need to grow more and create more jobs 
for it to reach all the parts of our country that need to get 
the benefits of a growing economy. So part of it is at the 
macro level, which gets me back to we shouldn't be creating 
headwinds for the economy.
    On a more narrow basis, the Treasury Department has a 
number of programs. Some of them we've talked about a little 
bit already this afternoon, from CDFI, the Build America bonds 
that do provide direct support to communities and institutions 
that are really getting at the need for growth in parts of our 
States and cities that otherwise might be left behind.
    We're very proud of what we've accomplished in programs 
like CDFI. We are, through our home ownership programs, Home 
Affordable Modification Program and Home Affordable Refinance 
Program, targeting the communities that have been hardest hit. 
There's more work to do.
    I think we can't look at Treasury alone. We have to look at 
Treasury together with what we're doing in the other agencies 
working together. So we have transportation programs going into 
some of those communities. We have education programs going 
into some of those communities. And we've tried in this 
administration as much as we can to concentrate the efforts of 
the different parts of the Federal Government so that we go 
into an area in a coordinated way.
    Something that I think is very important in our budget, not 
in the Treasury budget, is the manufacturing hubs that the 
President has proposed. I was in Ohio yesterday and it's really 
pretty striking when you talk to a business person who was able 
to get into an abandoned warehouse and create a high tech 
company because we brought the kind of power of coordinating 
what we do in an area together in less than a year.
    I think if we were to build 15 more of those, that would be 
15 more pockets of growth in areas of the country that might 
otherwise be left behind. I think as you look through the 
President's budget there are many things that are about getting 
at the hard-hit communities. They do all require resources and 
it's a tradeoff when we make budget decisions, both in terms of 
where we allocate resources and how we make the tradeoff 
between revenues and spending. I think that spending to grow 
the economy is something that would leave us stronger and leave 
our economy stronger.
    Senator Udall. Thank you very much for that answer.
    You talk about manufacturing hubs. We are very hopeful in 
New Mexico that having these two stellar national laboratories, 
good universities, the kinds of resources that you've talked 
about there in Ohio, to all put forward and try to get one of 
these manufacturing hubs going. I think it's the key to the 
future. It's the key to getting in front of the issues we have. 
So we really look forward to working with you on that.
    Secretary Lew. I would just add, Senator, we've done these 
things successfully before and we've done them on a bipartisan 
basis. I was proud in another administration, the Clinton 
administration, to work with the Republican Speaker, Speaker 
Hastert, on a New Markets Initiative that has done the same 
thing through tax benefits. So when we put our minds together 
and say we're going to target a program to really help build 
communities, we can get a lot done.
    Senator Udall. Thank you, Madam Chair.
    Senator Mikulski. Mr. Secretary, Senator Lautenberg had 
some questions which I'm going to submit for the record and ask 
you and your team to respond in the next few weeks.
    Secretary Lew. Happy to do that, Senator.
    Senator Mikulski. They relate to Iranian sanctions and 
their implementation and efficacy; also the implementation of 
alcohol and tobacco tax evasion; and then also his very deep 
concern about the efficacy and the good works of the Treasury 
foreclosure relief programs, particularly as it affects New 
Jersey.
    I'd like to submit them to you in writing, which is 
actually in his own words, which are pretty clear and direct, 
as is his way.
    Secretary Lew. Be happy to respond in writing, Senator.

    [Note: See in the ``Additional Committee Questions'' at the 
end of the hearing the Department of the Treasury's responses 
to Senator Lautenberg's questions submitted for the record.]

                         CYBERSECURITY MEASURES

    Senator Mikulski. Also, I just want to say that, as the 
Chair of the full committee and a member of the Intelligence 
Committee, we would like to be in conversation with you about 
cyber security. Both you as well as Acting Commissioner Miller 
are the keepers of such an enormous amount of data, 
particularly in terms of individuals and businesses, related to 
everything from our concern about identity theft and other 
things related to even cyber espionage.
    Also, the concern that our Appropriations Committee has for 
the protection not only of dot-gov, but also of dot-com, and 
the impact that we're concerned about the rising attacks on 
financial services that have occurred both overseas and the 
attempt here, the attack on NASDAQ and so on, and the 
implication that that could have for our economy.
    So we don't think that this is the forum for kind of the 
robust and meaty conversation I know our colleagues and those 
on the Subcommittees on Defense and Homeland Security as well 
as myself chairing the CJS Subcommittee funding the FBI, 
because we really want to protect critical infrastructure. 
That's number one.
    Number two, we really want to make sure that our financial 
services in the private sector are well protected and we have 
the right legislation to do that.
    The second is to make sure we protect the dot-govs that are 
the repositories of an incredible amount of information about 
American people, American citizens, and American businesses 
both small and large. I'm particularly worried about the small 
guys because they don't have the wherewithal to act with the 
security of Bank of America and these others.
    Secretary Lew. Senator, I think you've just put your finger 
on a very important problem. I've put a lot of my own time into 
cybersecurity issues since I've been at Treasury and before, 
because I think it's on that very short list of really 
dangerous things that could happen on our watch or right after. 
It's emerging as a bigger and bigger risk.
    Every time I'm out, in my office or in the country talking 
to business people, it's on their minds and I think it's on 
individuals' minds because of the individual identity theft as 
well.
    One of the things that I'm committed to doing is making 
sure that we don't just solve the problem we see today and say 
we're done. We have to stay on it, because the threats evolve 
and they change. It's not like you get to check the box and say 
we did that. This is a new way of life that we just have to 
stay on. But it's one of the reasons why we also need to have 
the resources to stay on top of it, because that takes putting 
people on these issues.
    I've met with bank representatives a couple of times 
already to discuss what can we do to help them, big and small. 
The big institutions, I think you're right, are focusing a lot 
of resource on this. The smaller ones I'm afraid are not 
necessarily doing it as much. I think they're beginning to. But 
that's where we have a special role to play coordinating and 
making sure we share information and that we can make it 
possible for them to share information.
    And legislation is really necessary. The Executive order 
the President put into effect is a very important step, but 
legislation is necessary to really give us the tools we need.
    Senator Mikulski. Well, the President has issued his 
Executive order, and I'm contemplating exercising my authority 
as full committee chair to have a full committee hearing on 
cybersecurity, because this affects financial services, DOD, 
homeland security, one, on the implementation of the 
President's Executive order, information-sharing and some 
others, that we have the wherewithal to move ahead on that, and 
at the same time that the full committee grasp what this is so 
we're all moving in the same direction in enabling agencies 
such as yours to take the necessary steps to protect dot-gov 
while we're looking to really work in partnership to protect 
the dot-coms.
    Secretary Lew. We would look forward to working with you, 
Senator.
    Senator Mikulski. Thank you. And I say that to my 
colleagues.
    Well, Mr. Secretary, thank you very much for being here 
today. We're going to move now to taking testimony from the 
IRS----
    Secretary Lew. Thank you, Senator.
    Senator Mikulski [continuing]. As well as the Inspector 
General. So thank you, until we meet again.
    Now we ask Mr. Steven Miller and Mr. J. Russell George, our 
Treasury Inspector General for Tax Administration. I must say, 
Mr. George, we welcome you to the table, but we have two 
distinguished jurists in Maryland, Mr. George Russell. So 
you've got the names transposed here a bit, but I gather you're 
as distinguished as my two colleagues.
    Colleagues, I invited Mr. George to testify, as I have on 
my own subcommittee and encouraged other subcommittee chairmen, 
so we have the benefit of the thinking of the Inspector 
Generals. You know, they identify management problems, give us 
a heads-up if we're heading to some technology boondoggles, 
which I know we're worried about. They contribute a sense of 
frugality, smart government, and perhaps some reforms that we 
could come together to support.
    But having said that, Mr. Miller, you're the Acting 
Commissioner of IRS. You have a big job and we're going to give 
you a big opportunity to tell what you need. Would you please 
proceed.

                        INTERNAL REVENUE SERVICE

STATEMENT OF STEVEN T. MILLER, ACTING COMMISSIONER
    Mr. Miller. Thank you, Chairwoman Mikulski, Ranking Member 
Johanns, and the members of the subcommittee. I appreciate the 
opportunity to testify today.
    Before I give more detail on the proposed budget, if I 
could, let me report on this year's filing season. I'm happy to 
report that the current filing season ran very smoothly. 
Through April 20, the IRS received 130 million individual 
returns, issued 94 million refunds, for a total of $250 
billion. This unfolded despite the difficult challenges 
presented by substantial tax law changes that were not enacted 
until January 2.
    In terms of the fiscal year 2014 budget, our request, I 
believe, represents a fair balance of service, enforcement, and 
innovation. The taxpayer service highlights include improving 
our phone service and providing for more online self-service 
options.
    Enforcement initiatives include increasing the resources 
and tools available for identity theft, addressing 
international issues, and improving the manner in which we use 
data. Note that for each dollar we receive, we will return 
multiples of that to the U.S. Treasury. If enacted, the 
enforcement initiatives of the fiscal year 2014 budget are 
estimated to increase revenue collected or protected by more 
than $3.5 billion.
    My testimony outlines our recent accomplishments. We have 
delivered a smooth filing season now and in the past, and 
successfully carried out core duties while making important 
progress on a number of other initiatives. An example is our 
effort to address identity theft. More than 3,000 IRS employees 
are working on identity theft, more than double the number at 
the start of last filing season.
    Last fiscal year the IRS expended nearly $330 million of 
our budget on identity theft and refund fraud, and it was money 
well spent. During fiscal year 2012 the IRS protected more than 
$20 billion of revenue, up from $14 billion the prior year. So 
far this filing season, the IRS has suspended or rejected more 
than 3.3 million suspicious returns.
    Now, I know that the current budget environment is tight, 
but it's important to understand that these and other 
accomplishments are not sustainable if our budget continues to 
atrophy. Yes, I think we'll continue to succeed with the filing 
season, and we will continue our efforts to maintain excellence 
in performance. But that performance will begin to reflect the 
impact of the large budget cuts that we've received over the 
last few years.
    This means that there will be a steady erosion in the 
service we provide to taxpayers and in the amount of money that 
we collect. In this regard, let me note the effects of the 
sequester. We've said publicly that the IRS faces up to 7 
furlough days this fiscal year. We anticipate a considerable 
reduction in the revenues we collect and the calls we can 
answer as a result of sequestration. Some of these impacts, in 
particular our ability to answer phones, will begin to be felt 
now that the filing season is over.
    We've become more efficient even as our budget has been 
reduced by around $1 billion since fiscal year 2010. That 
represents almost an 8-percent cut in our budget, even as we 
have been asked to tackle significant new challenges, including 
identity theft, ACA, and the foreign accounts work under FATCA. 
We've met some of this reduction by cutting expenses by almost 
$500 million in recent years. The fiscal year 2014 request 
contains another $255 million of savings and efficiencies. And 
we've also been strategic in our hiring decisions, using 
buyouts and reducing expenses in nonlabor areas as well. By 
closely managing hiring, we've seen a reduction of a total 
number of our full-time permanent employees by almost 7,000 to 
8,000 between fiscal year 2010 and the present. Note that this 
filing season we ran nearly 10,000 employees below where we 
were during the filing season in 2010.
    In our nonlabor spending, we've limited operating travel to 
mission-critical needs and increased the use of virtual 
delivery of meetings and training, allowing the IRS to reduce 
costs by a total of $158 million on an annual basis, a 55- 
percent reduction from fiscal year 2010. There's also been 
reduced spending on professional and technical services by $200 
million and $60 million in printing and postage savings, as 
well as aggressive reduction in rent payments.

                          PREPARED STATEMENTS

    Madam Chairwoman, we will continue our efforts to be 
fiscally prudent and to make wise investments in our strategic 
priorities and enforcement, service, and business 
modernization. However, as I've noted, without a change in the 
current budget environment the American people will see erosion 
in our ability to serve them and the Federal Government will 
see fewer receipts from our enforcement efforts.
    Thank you for the opportunity.
    [The statements follow:]
                 Prepared Statement of Steven T. Miller
                              introduction
    Chairman Lautenberg, Ranking Member Johanns, and members of the 
subcommittee, thank you for the opportunity to appear before you today 
to provide you with an overview of our proposed fiscal year 2014 budget 
and what we hope to accomplish with those resources.
    The fiscal year 2014 budget request for the Internal Revenue 
Service (IRS) was crafted during a time of fiscal austerity and belt 
tightening. The IRS remains committed to being as efficient as possible 
and spending taxpayer dollars wisely. We will continue to find savings 
wherever we can, while investing in strategic priorities that allow us 
to fulfill our dual mission of strong enforcement of the tax laws and 
excellent customer service. The IRS consistently achieves a high return 
on investment for its activities while running a fiscally disciplined 
operation.
    The IRS is vital to the functioning of government and keeping our 
Nation and economy strong. In fiscal year 2012, the IRS collected 
$2.524 trillion in gross revenue to fund the Federal Government, 
approximately 92 percent of all Federal receipts. Moreover, for fiscal 
year 2012, we processed more than 147.6 million individual tax returns 
and issued more than 121.6 million refunds to individual taxpayers 
totaling $333 billion.
    The IRS will use the funding in the President's budget request to 
carry out its mission, which includes:
  --improving service to taxpayers;
  --increasing our efforts against refund fraud;
  --making our compliance efforts more strategic;
  --using new tools, data, and capabilities to conduct a balanced 
        enforcement program, including improving our use of data 
        received through third-party information reporting; and
  --taking the next steps in building out our e-filing platforms and 
        taxpayer account database.
    The IRS will also continue to administer tax-related provisions of 
major legislation, including the Foreign Account Tax Compliance Act 
(FATCA) and the Affordable Care Act.
    It is important to understand that the accomplishments outlined 
below may not be sustainable within the current budget environment. We 
will continue to attempt to maintain our excellence, but our 
performance could begin to reflect the impact of the budget cuts of the 
last few years. This does not mean there will be a catastrophic event 
or failure at the IRS; however, there could be a steady erosion in the 
service we provide to taxpayers and in the amount of money we collect 
through enforcement activities. We will continue to find efficiencies, 
and you will see that we have been aggressive in recent years in this 
regard. We will continue to dedicate staff and resources to the most 
essential uses and in the most critical areas. For example, we will 
continue to commit staff to resolving identity theft cases, even at the 
cost of having fewer people on our toll-free taxpayer service line or 
on our automated collection phones that help us collect past due taxes.
                          a record of success
    Let me outline what we have accomplished. The IRS is proud of its 
record over the last several years. We have delivered smooth filing 
seasons and successfully carried out other core duties while also 
making important progress on a number of strategic initiatives. These 
initiatives include:
  --cracking down on international tax evasion;
  --fighting all refund fraud, but especially that related to identity 
        theft;
  --improving return preparer compliance;
  --leveraging data analytics in order to improve our operations;
  --modernizing our technology to benefit both taxpayer service and 
        compliance; and
  --positioning our workforce to ensure the IRS is prepared for 
        tomorrow's challenges.
    The 2013 filing season started with difficult challenges for the 
IRS. As the subcommittee is aware, substantial tax law changes were 
enacted on January 2 of this year, just before the IRS would normally 
begin accepting e-filed returns. IRS staff worked around the clock to 
make changes to systems and forms necessary to open the tax filing 
season. I am pleased to say that, as a result of exceptional planning 
and hard work by our employees, all but a discrete minority of 
taxpayers were able to begin filing in late January, and all were able 
to file by early March.
    Despite the challenges we faced at the outset, the filing season 
ran smoothly. Through April 20, 2013, the IRS received 129.94 million 
individual returns and issued 93.8 million refunds for a total of $249 
billion. The average dollar refund is about $2,650 and the IRS has 
directly deposited more than 76 million refunds to taxpayers thus far. 
In addition, our strengthened refund fraud detection tools have been 
working well. As for customer service, accuracy rates for both customer 
tax law and accounts questions remain in the 90-plus percentile.
    In the last few months alone we have had several other signs that 
we are achieving success in some of the initiatives I mentioned above.
    On the technology front, the Government Accountability Office (GAO) 
in February removed the IRS Business Systems Modernization program from 
its high risk list, where it had been since 1995. Citing the work the 
IRS has done to bolster information technology and financial management 
capabilities, the GAO concluded that the IRS had made substantial 
progress in addressing weaknesses over the past several years and had 
demonstrated a commitment to sustained progress. The GAO singled out 
delivery of the initial phase of the Customer Account Data Engine 
(CADE2), which has enhanced tax administration and improved taxpayer 
service.
    In March 2013, the Excellence.gov Awards Program sponsored by the 
American Council for Technology and the Industry Advisory Council 
recognized CADE2 for Excellence in Enterprise Efficiencies. This awards 
program honors government programs and projects that use information 
technology in innovative ways to enhance government operations, provide 
a more open and transparent government, and deliver important citizen 
resources.
    IRS is also maintaining quality on the customer service front. 
Every year, an independent survey is conducted by the American Customer 
Satisfaction Index (ACSI). For 2012, the survey of taxpayers who were 
satisfied with IRS services reached 75 on a scale of 100, up from 73 in 
2011, and our highest score since 1994 when we began participating in 
the survey.
    The following are some of the more prominent IRS programs and 
initiatives conducted during fiscal year 2012, including those within 
our core programs, which demonstrate how targeted investments continue 
to deliver real value to taxpayers and our Nation.
                              enforcement
    Enforcement of the tax laws is an integral part of the IRS' effort 
to enhance voluntary compliance. IRS enforcement activities, such as 
examination and collection, remain a high priority. In fiscal year 
2012, collections related to all enforcement activities exceeded $50 
billion for the third consecutive year. The IRS has shown significant 
progress in several key enforcement programs. Importantly, we also were 
able to hold individual audit rates more than 1 percent during a period 
of scarce resources, and we increased criminal investigations by 5.1 
percent, to 4,937.
International Tax Compliance
    In fiscal year 2012, the IRS enhanced international tax compliance 
efforts through the implementation of new legislation and through 
programs such as the Offshore Voluntary Disclosure Program (OVDP). In 
January 2012, the IRS reopened the OVDP with tightened eligibility 
requirements in response to strong interest from taxpayers and tax 
practitioners. Through the end of fiscal year 2012, the OVDP has 
resulted in a total of more than 38,000 disclosures of unpaid taxes and 
collected more than $5 billion in back taxes, interest, and penalties.
    Also during fiscal year 2012, the IRS worked closely with 
businesses and foreign governments in implementing FATCA. This 
legislation strengthens offshore compliance efforts by requiring all 
foreign financial institutions with U.S. accounts to report detailed 
information about foreign account holders to the IRS or face a 30 
percent withholding tax. The administration's fiscal year 2014 budget 
request allows for more work in this area, and in particular funds our 
work on FATCA's new offshore account reporting rules.
Tax Return Preparer Program
    The IRS continued implementation of its Return Preparer Program, 
begun in fiscal year 2011. The foundation of this program is mandatory 
registration for all paid tax return preparers. Through September 2012, 
more than 860,000 preparers have requested Preparer Tax Identification 
Numbers (PTINs) using the online registration system.
    In February 2013, a Federal court stopped the IRS from enforcing 
the competency testing and continuing education requirements for 
registered return preparers. The injunction does not apply to the 
requirement to obtain a PTIN, so that portion of the program continues. 
But at this time we are not permitted to move forward with testing or 
continuing education requirements. We remain confident in our legal 
authority and remain committed to protecting taxpayers through 
implementing reasonable standards in this area. The original district 
court opinion is under appeal.
    The PTIN registration requirement provides an important and 
improved view of the return preparer community from which the IRS can 
leverage information to improve communications, analyze trends, spot 
issues, and detect potential fraud. And we are developing new 
approaches in this area. For example, one pilot we conducted in 2012 
used real-time data to assess the fraud risk associated with Earned 
Income Tax Credit (EITC) return preparers and test the effectiveness of 
alternative compliance treatments. This pilot involved 1,500 preparers 
who filed large numbers of returns claiming the EITC. Taken together, 
the various compliance treatments we used in the pilot resulted in a 
total savings on improperly claimed tax credits--including the EITC and 
the Child Tax Credit--of approximately $200 million. We continue to 
develop new approaches in this area.
Refund Fraud and Identity Theft
    Our efforts to address identity theft and refund fraud are 
expanding and touch nearly every part of the IRS. We are working hard 
to prevent fraud, investigate identity theft-related crimes, and help 
taxpayers who have been victimized by identity thieves. More than 3,000 
IRS employees are currently working on identity theft--more than double 
the number at the start of last filing season. We have also trained 
37,000 employees who work with taxpayers to recognize identity theft 
and help victims. Since the beginning of 2013, the IRS has worked with 
taxpayers victimized by identity theft to resolve and close more than 
200,000 cases. To help past identity theft victims avoid delays in 
filing future returns and receiving refunds, we expanded the issuance 
of Identity Protection Personal Identification Numbers to more than 
770,000 past victims this year, more than twice as many as last year.
    Last fiscal year, the IRS significantly expanded its fraud 
detection efforts, expending nearly $330 million combating refund 
fraud, including identity theft. During fiscal year 2012, the IRS 
protected more than $20 billion of revenue related to fraudulent 
returns, including identity theft, up from $14 billion in the prior 
year. IRS efforts stopped 5 million suspicious returns in 2012--up from 
3 million stopped in 2011.
    So far this filing season, the IRS has suspended or rejected over 3 
million suspicious returns. More than 800,000 of these were rejected at 
the point of filing before they even entered IRS processing systems. 
The remaining returns generally require further review to determine 
whether the filer is legitimate. Because these returns require time to 
review, most are still in open inventory at this time. To date, we have 
stopped more than 600,000 refunds determined to be fraudulent, worth 
more than $4 billion. And this is in addition to the refunds saved on 
the 800,000 rejected returns.
    This January, the IRS also conducted a coordinated and highly 
successful identity theft enforcement sweep. The coast-to-coast effort 
against identity theft suspects led to 734 enforcement actions in 
January, including 298 indictments, informations, complaints, and 
arrests. These activities come on top of a growing identity theft 
effort that led to 2,400 other enforcement actions against identity 
thieves during fiscal year 2012.
    The IRS also has been working to assist State and local law 
enforcement agencies in the efforts they are making to fight identity 
theft-related refund fraud. One way we have done this is by developing 
the Identity Theft Victim Disclosure Waiver Process, which was launched 
in Florida in April 2012.
    This program provides for the disclosure of Federal tax returns and 
return information associated with the accounts of known and suspected 
victims of identity theft with the express written consent of those 
victims. Prior to disclosing any tax information, victims are required 
to sign a waiver authorizing the release of information to the 
designated State or local law enforcement official pursuing the 
investigation. To date the IRS has received more than 1,560 waiver 
requests from more than 100 State and local law enforcement agencies in 
the nine States that have been participating in the pilot. On March 28, 
2013, the IRS announced that this program has been expanded to all 50 
States.
                            taxpayer service
    By assisting taxpayers with their tax questions before they file 
their returns, the IRS helps prevent inadvertent noncompliance and 
reduces burdensome post-filing notices and other correspondence from 
the IRS. Accordingly, the IRS provides year-round assistance to 
millions of taxpayers through many sources, including outreach and 
education programs, issuance of tax forms and publications, rulings and 
regulations, toll-free call centers, IRS.gov, Taxpayer Assistance 
Centers (TACs), Volunteer Income Tax Assistance (VITA) sites, and Tax 
Counseling for the Elderly (TCE) sites.
2012 Filing Season
    Despite a number of challenges, the IRS delivered another 
successful filing season. During fiscal year 2012, the IRS received 
more than 147.6 million individual returns and issued more than 121.6 
million refunds totaling $333 billion. More than 82.8 million refunds 
were direct deposited, which is a 4.9 percent increase from the 78.9 
million direct deposited in fiscal year 2011. In addition, IRS 
employees responded accurately to 93.2 percent of tax law questions and 
95.6 percent of taxpayer account questions.
    The IRS' e-file program continued to grow, with more than 118.9 
million individual returns, or 80.5 percent, filed electronically, an 
increase of 4.7 percent from the previous year. Other increases in 
electronic filing results during the 2012 filing season include the 
following:
  --Business returns filed electronically were up by 15 percent to 36.7 
        percent;
  --Filing via home computers increased by 9.8 percent to 43.5 million 
        tax returns; and
  --Tax professionals' use of e-file rose 5.4 percent to 75.6 million 
        returns.
Helping Distressed Taxpayers
    The IRS' commitment to customer service also means assisting 
taxpayers who are facing difficult economic times and other hardships. 
For example, the IRS provided significant support to the Federal 
Emergency Management Agency (FEMA) in the aftermath of Hurricane Sandy. 
Before the storm dissipated, the IRS initiated its response, activating 
600 employees to answer phone calls beginning on October 29, 2012. That 
number ultimately grew to 3,000 employees answering 188,175 calls 
before the Registration Intake Line was deactivated 6 weeks later on 
December 4. Given the level of devastation, FEMA also requested IRS 
assistance in staffing its Help Line, and IRS employees answered 
149,000 of those calls. In addition to this direct assistance, the IRS 
also moved quickly to provide tax relief to victims of Hurricanes Sandy 
and Isaac through actions such as extending return filing and payment 
deadlines.
    Also in 2012, the IRS expanded the Fresh Start initiative to help 
struggling taxpayers meet their tax obligations. Changes included:
  --Increasing the dollar threshold and repayment period for individual 
        installment agreements;
  --Providing more financial analysis flexibility for installment 
        agreements and Offer in Compromise programs;
  --Issuing new guidance to address unsecured debts such as student 
        loans, credit cards, and State and local taxes;
  --Providing a 6-month grace period to certain wage earners and self-
        employed individuals on failure-to-pay penalties; and
  --Extending help to taxpayers eligible for the Innocent Spouse 
        Program by eliminating the 2-year timeframe for consideration 
        of certain innocent spouse claims.
IRS.gov and Social Media
    The IRS continued to provide alternative service options by 
increasing the amount of tax information and services available to 
taxpayers through IRS.gov. In fiscal year 2012, taxpayers viewed 
IRS.gov more than 370 million times. These taxpayers used IRS.gov to 
get forms and publications, find answers to their tax questions, and 
check the status of their refunds. Taxpayers used the ``Where's My 
Refund?'' electronic tracking tool more than 132.3 million times.
    The IRS is increasing communications with taxpayers who do not get 
their information from traditional sources, such as newspapers and 
broadcast and cable news. By employing social media such as YouTube and 
Twitter, the IRS reaches these taxpayers and provides important service 
and compliance messages to them.
    Of particular note is the IRS presence on YouTube. We have YouTube 
videos in English, Spanish, American Sign Language, and other 
languages. These videos contain useful information for taxpayers. There 
are now more than 100 IRS videos, which have been viewed more than 5.5 
million times. The ``Where's My Refund?'' video surpassed 1 million 
views this filing season. The IRS now ranks fourth in YouTube 
viewership among government YouTube channels.
    In addition to the IRS presence on Twitter, our social media work 
has recently been expanded to include Tumblr--a microblogging platform 
where users access and share text, photos, videos, and other 
information from browsers, smartphones, tablets, or desktops. We are 
using Tumblr to share information about important programs to help 
taxpayers, such as late tax law changes, the EITC, and Free File.
    Also during fiscal year 2012, the IRS released an updated version 
of its IRS2Go Smartphone application with new features that let 
taxpayers interact with the IRS using their mobile devices. To date, 
there have been more than 1.9 million downloads of the application, and 
more than 6.2 million applications launched. On April 2, 2013, the IRS 
announced that, for the first time, the IRS2Go application is available 
in Spanish.
Outreach and Education
    The IRS enhanced its outreach and education services during fiscal 
year 2012 by collaborating with State taxing authorities, volunteer 
groups, and other organizations to address taxpayer needs. By 
supporting more than 3,900 local partners and a combined 13,143 VITA 
and TCE sites, the IRS provided free tax assistance to the elderly and 
the disabled, as well as to individuals with limited proficiency in 
English.
    In fiscal year 2012, nearly 99,000 volunteers prepared almost 3.3 
million Federal returns and more than 2.5 million State returns, which 
represent increases over fiscal year 2011 of 2.4 percent and 5.9 
percent, respectively. In addition, 95 percent of the Federal returns 
under these programs were filed electronically.
                     business systems modernization
    IRS modernization efforts focused on building and deploying 
advanced information technology systems, processes, and tools to 
improve efficiency and productivity.
    The IRS reached a major milestone in its modernization efforts in 
January 2012 with the launch of its Customer Account Data Engine 
(CADE2). Up to this point, the IRS had been performing core account 
processing on a weekly basis. Launching CADE2 meant the IRS 
successfully migrated to daily processing and posting of individual 
taxpayer accounts, enabling faster refunds for more taxpayers, more 
timely account updates, and faster issuance of taxpayer notices.
    The IRS also made important progress on another front when 
Modernized e-File (MeF) Release 7 became operational in January 2012. 
The enhancements of Release 7 expanded the reach of MeF to cover 100 
percent of the 1040 population filing electronically. The IRS processed 
nearly 107 million individual Federal and State returns and more than 
14.3 million Business Master File returns through MeF. MeF is a major 
improvement over the previous system, which processed returns in 
several batches per day, rather than in real time. MeF reduces 
turnaround time, improves processing, and allows acknowledgments to be 
sent much more quickly to transmitters.
                working smarter and finding efficiencies
    Over the last several years, IRS budget requests have reflected 
strategic investments in the IRS that reduce the deficit, along with 
substantial efficiency and other targeted reductions that reflect our 
commitment to effective stewardship of the resources that we are given. 
Over the past five President's budget submissions (for fiscal year 2009 
through fiscal year 2013), the IRS declared almost half a billion 
dollars ($486 million) in budget savings. In addition to these declared 
savings, the IRS has faced reductions to its budget each year since 
fiscal year 2010, even as we took on new legislatively mandated 
responsibilities.
    Since fiscal year 2010 and including the current fiscal year, IRS 
appropriations have been cut by nearly $1 billion (including more than 
$600 million in reductions from sequestration and rescissions this 
year). This represents nearly an 8 percent cut of our annual budget 
while the total population of individual and business filers grew by 
more than 4 percent over the same time period. At the same time, we 
have tackled significant new challenges, including: implementing 
merchant card and basis reporting, implementing the Affordable Care 
Act's tax provisions and new requirements for foreign financial 
institutions under FATCA, and addressing the sharp growth in refund 
fraud and identity theft.
    While the IRS will continue to be an efficient steward of taxpayer 
resources, improving and investing in our critical programs under 
continually reduced funding levels has been difficult. Labor is our 
largest operating expense, and we have been very focused on managing 
personnel costs. We have operated under an exception-only hiring freeze 
since December 2010. In fiscal year 2012 we secured buyout authority 
that resulted in the elimination of 1,224 positions that did not 
involve direct service or enforcement interactions with taxpayers. By 
closely managing hiring, we reduced the total number of full-time, 
permanent IRS employees by almost 7,000 between the end of fiscal year 
2010 and fiscal year 2012. So far this year, we have further reduced 
full-time permanent staffing through attrition by another 1,000 full-
time employees--thus, we are down 8,000 permanent employees since 2010. 
Of these, more than 5,000 are front-line enforcement employees.
    The IRS has also implemented significant reductions in its non-
labor spending. By limiting operating travel to mission-critical needs 
and increasing the use of virtual delivery for meetings and training, 
the IRS reduced travel costs by a total of $158 million in fiscal year 
2011 and fiscal year 2012, a 55 percent reduction from fiscal year 
2010. Over the same timeframe, we also reduced spending on professional 
and technical service contracts by $200 million. Additionally, the IRS 
generated $60 million in printing and postage savings by eliminating 
the printing and mailing of selected tax packages and publications, and 
by transitioning to paperless employee pay statements.
    Finally, in an effort to promote more efficient use of the 
Government's real estate assets and to generate savings, the IRS 
announced last year a sweeping office space and rent reduction 
initiative that over 2 years is projected to close 43 smaller IRS 
offices and consolidate space in many larger facilities.
    These measures will reduce rent costs by more than $40 million and 
reduce total IRS office space by more than 1.3 million square feet by 
the end of fiscal year 2014. These savings will be realized with little 
or no impact on taxpayer service or enforcement efforts. Some examples 
of projects currently underway include consolidating the IRS Detroit 
Computing Center space for a projected annualized rent savings of $15.8 
million, and a reduction in rent in midtown Manhattan for an annualized 
savings of $4.4 million.
                             irs workforce
    The IRS remains focused on its efforts to become one of the best 
places to work in the Federal Government. We can only serve the 
Nation's taxpayers well if we have engaged employees who are respected 
and challenged, and whose managers support them, help them do their 
jobs, and hold them accountable.
    In 2008, we created the Workforce of Tomorrow task force, which has 
generated many workplace initiatives to help us achieve the 
improvements we seek. Last fall, the Partnership for Public Service 
released the results of the 2012 Best Places to Work in Federal 
Government survey. It showed the IRS is currently ranked 98th among 292 
organizations, only slightly lower than 2011 and still significantly 
higher than 2010. And we ranked third out of 15 large agencies--those 
with 20,000 or more employees--in that survey's employee engagement 
index.
    In addition, we held our ground or improved our ranking in three of 
the four IRS Human Capital Strategy Measures. We finished second only 
to the Department of State in measures related to leadership and 
knowledge management.
    These survey results are especially heartening because of the 
challenges our employees have faced over the past year, including 
budget uncertainty and freezes on pay and hiring. These survey results 
reflect the deep commitment and dedication of the IRS workforce to 
delivering for the American taxpayer.
    the administration's fiscal year 2014 budget request funds key 
                               priorities
    The fiscal year 2014 President's budget request is $12,861,033,000 
in direct appropriations and an estimated $110,627,000 from 
reimbursable programs, with an additional estimated $277,582,000 from 
user fees for a total operating level of $13,249,242,000. The direct 
appropriation is $1,044,337,000 more than the fiscal year 2012 enacted 
level of $11,816,696,000.
    The overall request is designed to provide the resources necessary 
to administer and enforce the current tax code, implement recent 
changes to the code, conduct a robust and sophisticated enforcement 
program, and serve taxpayers in a timely manner. Helping taxpayers 
understand their obligations under the tax law is critical to improving 
compliance and addressing the tax gap, the difference between taxes 
owed and taxes paid on time. Therefore, the IRS is committed to making 
the tax law easier to access and understand, and to improving voluntary 
compliance and reducing the tax gap through both taxpayer service and 
enforcement programs.
Enforcement Program
    The fiscal year 2014 budget request for IRS enforcement activities 
includes a $412 million program integrity cap adjustment that will 
increase enforcement revenue and reduce the budget deficit through 
above-base funding for high return on investment (ROI) tax enforcement 
and compliance programs. Of that total, $5 million will be transferred 
to the Alcohol and Tobacco Tax and Trade Bureau (TTB). The remaining 
$407 million will fund new activities that will enhance tax 
administration and build enforcement capabilities. Once new hires are 
fully trained and have gained experience to reach their full potential 
in fiscal year 2016, these resources are expected to raise $1.6 billion 
in additional revenue annually. The average return on investment for 
these activities is more than $6 to $1. The return on investment is 
even greater when factoring in the deterrence value of these 
investments and other IRS enforcement programs, which is estimated to 
be at least three times the direct revenue impact.
    Specific areas where the proposed fiscal year 2014 funding will 
enable the IRS to continue to strengthen enforcement efforts and reduce 
the tax gap include:
  --Strengthening enforcement activities to address offshore tax 
        evasion and expand the IRS' global presence and pursuit of 
        international tax and financial crimes. This includes 
        implementing changes required by the Foreign Account Tax 
        Compliance Act (FATCA) such as new reporting, disclosure, and 
        withholding requirements. The IRS will also continue to address 
        tax-avoidance schemes involving unreported offshore accounts;
  --Enhancing enforcement activities in connection with partnerships 
        and other flow-through entities, in light of the fact that 
        partnership businesses continue to be the fastest growing 
        segment of all tax returns filed;
  --Continuing the IRS' efforts to focus on high-wealth taxpayers by 
        increasing risk identification, case building and examination 
        capabilities; and
  --Building on previous efforts to strengthen return preparer 
        compliance, to improve taxpayer compliance and the accuracy of 
        returns filed by tax professionals.
Refund Fraud and Identity Theft
    The request provides $101 million to support IRS efforts to prevent 
identity theft-related refund fraud, protect taxpayers' identities, 
assist victims of identity theft, and enhance the revenue protection 
strategy implemented in fiscal year 2013.
    The increase in funding will support the development and 
implementation of technology enhancements to identify noncompliant 
returns before refunds are issued, manage and track workload and case 
results, send notification letters to taxpayers, and allow third-party 
data to be used earlier in the filing season. This enhancement will 
improve detection of fraudulent returns and reduce delays of legitimate 
refunds due to pre-refund compliance activities. Investment in these 
activities is projected to protect $1.3 billion in revenue, once the 
new hires reach full potential in fiscal year 2016--a revenue 
protection return on investment estimated at more than $14 to $1.
Taxpayer Service Program
    The fiscal year 2014 request includes funding to allow the IRS to 
improve customer service to meet taxpayer demand and continue 
delivering services to taxpayers using a variety of in-person, 
telephone, and Web-based methods, to help taxpayers understand their 
tax obligations, correctly file their returns, and pay taxes due in a 
timely manner.
    Taxpayer demand for self-service and electronic service options at 
the IRS has been dramatically increasing in recent years. To support 
this demand, and to transition taxpayers to less expensive, more 
efficient operations, the IRS request includes resources to support the 
Treasury Department's efforts to expand the use of electronic 
transactions, including new service options that will allow more 
taxpayers to interact with the IRS through the Internet.
    Specifically, the IRS is developing taxpayer and practitioner self-
service applications that do not exist today, such as viewable 
eTranscripts, Power of Attorney and Online Payment Agreements, and 
Installment Agreements.
    The increased funding will also facilitate the deployment of 100 
new Virtual Service Delivery (VSD) video technology units, which allow 
face-to-face contact between IRS employees and taxpayers at remote 
sites through two-way video conferencing. The IRS will be able to 
resolve taxpayer issues virtually at understaffed and unstaffed TACs, 
Taxpayer Advocate Service sites, and Low Income Tax Clinic locations. 
VSD video will also allow the IRS to explore connecting virtual tax 
examinations and other interactions with taxpayers.
Implementation of Tax Law Changes
    The fiscal year 2014 budget requests funding to support IRS efforts 
to implement programs that are designed to ensure compliance with a 
number of recent changes to the tax laws, and to help taxpayers 
understand them. These tax law changes include the reporting provisions 
related to merchant card payments and third-party reimbursements 
(included in the Housing and Economic Recovery Act of 2008), and basis 
reporting on securities sales (included in the Emergency Economic 
Stabilization Act of 2008). The funding increase will also support 
compliance activities related to provisions included in the Affordable 
Care Act (ACA) (Public Law 111-148) such as direct-pay bonds, 
requirements for tax-exempt hospitals, and the fee on manufacturers and 
importers of branded prescription drugs.
Business Systems Modernization
    The fiscal year 2014 request includes funding that will allow the 
IRS to build on the momentum of implementing new daily processing in 
2012 and the delivery of a new database for individual taxpayer account 
data by investing in state-of-the-art capabilities, such as online 
taxpayer services, that leverage the database infrastructure that is 
now in place. IRS processing systems are now accepting all 1040 forms 
electronically, and for the first time, are feeding those returns 
through a single, consolidated database, the Customer Account Data 
Engine, or CADE2. The next phase of the CADE2 effort will eliminate the 
risks associated with antiquated technologies and programming languages 
that are still used in the current IRS environment.
              explanation of budget activities by account
Enforcement
    The fiscal year 2014 President's budget request for enforcement 
activities is $5,666,787,000 in direct appropriations and an estimated 
$65,619,000 from reimbursable programs, and an estimated $18,205,000 
from user fees, for a total operating level of $5,750,611,000. To 
reduce future deficits, a portion of this appropriation, $245,904,000, 
is requested as part of the $411,990,000 total program integrity cap 
adjustment for the IRS. The adjustment includes an above-base 
investment in tax enforcement and compliance programs, including $5 
million that will be transferred to the Alcohol and Tobacco Tax and 
Trade Bureau for high return on investment enforcement activities. In 
conjunction with specified funds provided in the IRS Operations Support 
account, this increment will support tax compliance initiatives 
expected to generate high returns on investment in the form of 
increased tax revenues. This appropriation funds the following budget 
activities.
    Investigations ($661,631,000 from direct appropriations, and an 
estimated $58,402,000 from reimbursable resources).--This budget 
activity funds the criminal investigation (CI) programs that explore 
potential criminal and civil violations of tax laws; enforce criminal 
statutes relating to violations of tax laws and other financial crimes; 
and recommend prosecution as warranted. These programs identify and 
document the movement of both legal and illegal sources of income to 
identify and document cases of suspected intent to defraud. This budget 
activity provides resources for international investigations involving 
U.S. citizens residing abroad, non-resident aliens and expatriates, and 
includes investigation and prosecution of tax and money-laundering 
violations associated with narcotics organizations.
    Exam & Collection ($4,842,007,000 from direct appropriations, and 
an estimated $6,541,000 from reimbursable resources, and an estimated 
$5,000 from user fees).--This budget activity funds programs that 
enforce the tax laws and increase compliance through examination and 
collection programs that ensure proper payment and tax reporting. It 
also includes programs such as specialty tax examinations (employment 
tax, excise tax, and estate and gift tax exams), international 
collections, and international examinations. The budget activity also 
provides for campus support of the Questionable Refund Program and 
appeals and litigation activities associated with exam and collection.
    Regulatory ($163,149,000 from direct appropriations, an estimated 
$676,000 from reimbursable resources, and an estimated $18,200,000 from 
user fees).--This budget activity funds the development and printing of 
published IRS guidance materials; interpretations of tax laws; internal 
advice to the IRS on general non-tax legal issues such as procurement, 
personnel, and labor relations; enforcement of regulatory rules, laws, 
and approved business practices; and support of taxpayers in the areas 
of pre-filing agreements, determination letters, and advance pricing 
agreements. The Return Preparer Strategy, in addition to the Office of 
Professional Responsibility (which is responsible for identifying, 
communicating, and enforcing the Treasury Circular 230 standards of 
competence, integrity, and conduct of professionals representing 
taxpayers before the IRS), is funded within this activity.
Taxpayer Services
    The fiscal year 2014 President's budget request for taxpayer 
services is $2,412,576,000 in direct appropriations, an estimated 
$21,360,000 from reimbursable programs, and an estimated $151,242,000 
from user fees, for a total operating level of $2,585,178,000. This 
appropriation funds the following budget activities.
    Pre-filing Taxpayer Assistance & Education ($660,197,000 from 
direct appropriations, $98,000 from reimbursable resources, and an 
estimated $10 million from user fees).--This budget activity funds 
services to assist with tax return preparation, including tax law 
interpretation, publication, production, and advocate services. In 
addition, funding for these programs continues to emphasize taxpayer 
education, outreach, increased volunteer support time and locations, 
and enhancing pre-filing taxpayer support through electronic media.
    Filing & Account Services ($1,752,379,000 from direct 
appropriations, $21,262,000 from reimbursable resources, and an 
estimated $141,242,000 from user fees).--This budget activity funds 
programs that provide filing and account services to taxpayers, process 
paper and electronically submitted tax returns, issue refunds, and 
maintain taxpayer accounts. This budget activity also provides 
operating resources to administer the advance payment feature of the 
Trade Act of 2002 (Public Law 107-210) health insurance tax credit 
program, which assists dislocated workers with their health insurance 
premiums.
Operations Support
    The fiscal year 2014 President's budget request for operations 
support is $4,480,843,000 in direct appropriations, an estimated 
$23,648,000 from reimbursable programs, and an estimated $108,135,000 
from user fees, for a total operating level of $4,612,626,000. A 
portion of this appropriation, $166,086,000, is requested as part of 
the $411,990,000 program integrity cap adjustment for the IRS tax 
enforcement and compliance programs, which provides an above-base 
investment in these programs to reduce future deficits. In conjunction 
with specified funds provided to the IRS Enforcement account, this 
increment will support new tax compliance initiatives that are expected 
to generate high returns on investment in the form of increased tax 
revenues. This appropriation funds the following budget activities.
    Infrastructure ($939,182,000 from direct appropriations, an 
estimated $1,044,000 from reimbursable resources, and an estimated 
$17,137,000 from user fees).--This budget activity funds administrative 
services related to space and housing, rent and space alterations, 
building services, maintenance, guard services, and non-IT equipment.
    Shared Services & Support ($1,305,701,000 from direct 
appropriations, an estimated $15,806,000 from reimbursable resources, 
and an estimated $31,520,000 from user fees).--This budget activity 
funds policy management, IRS-wide support for research, strategic 
planning, communications and liaison, finance, human resources, and 
equity, diversity and inclusion programs. It also funds printing and 
postage, business systems planning, security, corporate training, legal 
services, procurements, and specific employee benefit programs.
    Information Services ($2,235,960,000 from direct appropriations, an 
estimated $6,798,000 from reimbursable resources, and an estimated 
$59,478,000 from user fees).--This budget activity funds staffing, 
equipment, and related costs to manage, maintain, and operate the 
information systems critical to the support of tax administration 
programs. This includes the design and operation of security controls 
and disaster recovery planning. This budget activity funds the 
development and maintenance of the millions of lines of programming 
code that support all aspects and phases of tax processing and the 
operation and administration of the mainframes, servers, personal 
computers, networks, and a variety of management information systems.
Business Systems Modernization
    The fiscal year 2014 President's budget request for business system 
modernization is $300,827,000 in direct appropriations. This 
appropriation funds the following budget activity.
    Business Systems Modernization ($300,827,000 from direct 
appropriations).--This budget activity funds the planning and capital 
asset acquisition of information technology (IT) to continue the 
modernization of IT systems, including labor and related costs.
        fiscal year 2014 budget adjustments: efficiency savings
    Increase e-file Savings -$5,040,000/-101 FTE.--These savings are 
the result of reduced paper returns. The IRS projects taxpayers will 
file 1,587,800 fewer paper returns (666,200 individual and 921,600 
business returns) and instead choose to e-file. As a result, the IRS 
will need 101 fewer FTE in submission processing, generating a savings 
of $5,040,000.
    Business Systems Modernization (BSM) Savings -$30,000,000/0 FTE.--
This reduction provides an fiscal year 2014 funding level of 
$300,827,000 that is required for the IRS to continue modernization of 
critical information technology systems that support the Nation's 
revenue base, including the Customer Account Data Engine 2 (CADE2) and 
Modernized e-File (MeF) programs.
    Reduce Information Technology (IT) Infrastructure -$57,500,000/0 
FTE.--In fiscal year 2014, IRS IT will continue to implement industry 
best practices to shape the future of information technology 
development and ongoing operational support, to provide a more robust 
foundation for expanding IT capabilities in the future. In fiscal year 
2014, reductions to IT resources will be managed through streamlining 
operational requirements. By adopting common technologies, managing 
demand, and taking advantage of strategic procurement opportunities the 
IRS will provide a more efficient use of resources.
    Implement Human Capital Administrative Efficiencies -$7,858,000/-73 
FTE.--The IRS will achieve human capital administrative efficiencies by 
reducing costs and streamlining operations. The IRS will take a number 
of actions to achieve these efficiencies, including: partnering with 
Treasury to eliminate the redundant costs of collecting duplicate HR 
reporting data from the National Finance Center; implementing 
improvements in the Human Capital employment program; and redesigning 
manager and employee training programs to generate savings.
    Targeted Personnel Savings -$77,766,000/-683 FTE.--Although the 
budget request calls for increased staffing resources to support a 
number of strategic priorities, the IRS is also very focused on 
managing personnel costs and reducing staff across many operational 
areas. These personnel savings are the result of the annualization of 
fiscal year 2013 attrition savings. To achieve these reductions, the 
IRS reduced overall staffing by filling behind critical vacancies only; 
streamlined the workforce by reducing administrative, analyst, and 
support positions; realigned mission-critical occupations by 
eliminating positions vacated by employees with outdated skills and 
hiring employees who have the background and skills to support the IRS 
in meeting its strategic goals, objectives, and priorities; and 
decreased non-labor costs, such as travel and services, associated with 
targeted personnel savings.
    Savings From Space Optimization -$76,700,000/0 FTE.--In an effort 
to promote more efficient use of the Government's real estate assets 
and to generate savings, the IRS plans to close, consolidate, and 
reduce its space inventory. In making these decisions, the IRS will 
consider such factors as the next closest post of duty, number of 
employees affected, timing of the lease, alteration costs, number of 
vacant workstations, and number of field-based employees. As part of 
this effort, the IRS will develop implementation strategies to minimize 
the effect on employees.
                         legislative proposals
    The fiscal year 2014 President's budget request includes a number 
of legislative proposals intended to reduce the tax gap and improve tax 
compliance with minimal taxpayer burden. The Treasury Office of Tax 
Analysis (OTA) estimates these new tax gap proposals will generate 
$77.9 billion over the next 10 years, including $46.5 billion generated 
by program integrity cap adjustments. The IRS estimates the 
implementation cost for the tax gap proposals included in the fiscal 
year 2013 President's budget that have not yet been enacted, to be 
$84.1 million over 3 years, including the initial startup, processing, 
and compliance operational costs. The administration proposes to expand 
information reporting, improve compliance by businesses, strengthen tax 
administration, and expand penalties.
    The budget also proposes to amend the Balanced Budget and Emergency 
Deficit Control Act of 1985 (BBEDCA), as amended, to provide 10 years 
(fiscal years 2014-2023) of funding to the IRS above discretionary caps 
for program integrity cap adjustments. The proposal would costs $13.8 
billion and delivers $46.5 billion in additional enforcement revenue, 
thereby generating $32.7 billion in net savings over the 10-year budget 
window.
                               conclusion
    Mr. Chairman, Ranking Member Johanns, let me thank the subcommittee 
again for the opportunity to discuss the tax filing season and the 
fiscal year 2014 budget request for the IRS. We will continue our 
efforts to be fiscally prudent and make wise investments in strategic 
priorities in enforcement, service, and business modernization. 
However, as I have noted, without a change in the current budget 
environment, the American people will see erosion in our ability to 
serve them, and the Federal Government will see fewer receipts from our 
enforcement activities.
                                 ______
                                 
   Prepared Statement of the Internal Revenue Service Oversight Board
                   introduction and executive summary
    The Internal Revenue Service (IRS) Oversight Board welcomes this 
opportunity to provide the subcommittee with its views and 
recommendations on the President's fiscal year 2014 budget request for 
the IRS and the risks and challenges the agency is confronting in 
today's austere budget environment.
    One of the Board's most important statutory responsibilities under 
26 U.S.C. Sec. 7802(d) is to review and approve the annual IRS-prepared 
budget request submitted to the Department of the Treasury. The Board 
must ensure that the approved budget and related performance 
expectations:
  --support the IRS' mission and annual and long-range strategic plans;
  --are consistent with the IRS' goals, objectives and strategies; and
  --properly align with the IRS' strategies and plans.
    In June 2012, the IRS Oversight Board recommended to the Department 
of the Treasury a fiscal year 2014 budget of $13.074 billion for the 
IRS. This is $213.6 million more than what the President put forth in 
his fiscal year 2014 budget request. After careful examination and 
deliberation of the President's budget request, the Board believes that 
the President's recommended level is appropriate for the IRS to carry 
out its statutory responsibilities.
    The IRS' budget has been reduced since fiscal year 2010, with the 
biggest cuts occurring now in fiscal year 2013 due to the budget 
sequestration. Although the IRS has sought and implemented cost savings 
and efficiencies wherever it could, that path is, in the Board's 
opinion, no longer sustainable. Performance will ultimately suffer. We 
have already seen the erosion of toll-free telephone level of service 
and projected lower revenue collection. The effects of the cuts will be 
even more pronounced in 2014. For every $1 invested in IRS services, 
enforcement, operations support, and Business Systems Modernization, 
there is at least a $4-to-$1 return, which translates into more than $4 
in additional revenue for every $1 invested in the IRS.
    The Board recommends that investments above the current fiscal year 
2013 enacted level be made in IRS Taxpayer Services, Enforcement, and 
Operations Support. The Board's budget does exactly that and does not 
take funding from one category to bolster another. The Board believes 
that the IRS' budget must reflect the intent of the IRS Restructuring 
and Reform Act of 1998 (RRA 98) where both customer service and 
enforcement are funded at appropriate levels, and not to the detriment 
of either.
    Although slightly lower that what the Board initially recommended, 
the President's budget request makes targeted investments in the same 
areas, such as strengthening telephone level of service. The 
President's budget also has a number of proposed revenue-generating 
enforcement initiatives that the Board supports which will increase 
both enforcement revenue and overall compliance. In addition, it 
provides funding so the IRS can effectively implement new 
responsibilities, such as the tax portions of the Affordable Care Act 
(ACA) and merchant credit card and stock basis reporting. Approximately 
one-half of the $1 billion increase the President seeks for the IRS 
would be financed by a program integrity cap adjustment. Treasury 
Secretary Jacob Lew has made a compelling case for this suite of 
enforcement programs and their average $6-to-$1 return on investment 
when fully realized. The Board believes these initiatives could play an 
important role in closing the tax gap, while producing revenues to 
reduce the deficit and creating funding for other programs that are 
critical to our Nation and America's taxpayers.
                          budgetary challenges
    The IRS confronts a number of formidable budgetary challenges. 
Funding uncertainty and budget cuts loom largest and present the 
highest risks to the IRS and our Nation's tax administration system. 
The inability to pass Federal budgets for the past several years has 
forced the Congress and the administration to increasingly rely on 
continuing resolutions (CR) to avoid a full or partial Federal 
Government shutdown, but often at a lower, or stagnant funding level.
    Today, the IRS is operating under a continuing resolution, plus 
sequestration rules, that fund the agency at just under $11.2 billion, 
well below both the President's and the Board's fiscal year 2013 
recommendations. This level is also more than $600 million less than 
the fiscal year 2011 level, and almost $1 billion less than fiscal year 
2010.
    Together, these budget cuts have forced the IRS to find major cost 
efficiencies and implement significant spending cuts. This has led to 
dramatic curtailments in training, travel, office space and outside 
contracts. The IRS has also been forced to significantly reduce the 
size of its workforce. In fiscal year 2012, the agency offered buyouts 
to 7,000 of its employees, with more than 1,200 accepting. The IRS also 
instituted an ``exception-only'' hiring freeze early in fiscal year 
2011, leaving most positions lost to attrition unfilled.
    All told, approximately 8,000 full-time permanent IRS positions 
have been lost since 2010, with about 5,000 coming from front-line 
enforcement personnel. In 2012, the IRS workforce (as measured in 
average full-time equivalent, or FTE) stood at just under 90,300; its 
lowest level in more than a decade. That number could go even lower 
given the large pool of IRS employees now eligible to retire.
    The immediate effects of absorbing these budget cuts have been most 
apparent in customer service, especially during the past two filing 
seasons when toll-free telephone Level of Service (LOS) hovered around 
70 percent--far below the Board's and IRS' desired level of 80 percent. 
Many IRS Taxpayer Assistance Centers are also understaffed and offer 
reduced hours and limited tax preparation services.
    However, stagnant funding provided through the continuing 
resolutions was only the beginning of the IRS' funding shortfalls. 
Today, the IRS' budget has been reduced by a total of $618 million from 
the $11.8 billion it would have received under the fiscal year 2013 
continuing resolution with $594.5 million coming from the sequestration 
and $24 million in rescission cuts.
    The resulting $11.198 billion budget is $1.6 billion less than the 
President's fiscal year 2013 budget request. This also marks the third 
consecutive year that the IRS' annual appropriation has declined. Since 
fiscal year 2010, it has seen reductions to its appropriated funding 
totaling almost $1 billion.
    To meet the mandatory spending cuts for fiscal year 2013 under 
sequestration, the IRS plans to furlough all employees for 5 to 7 
specific days beginning in late May until the end of the fiscal year. 
All IRS operations will be closed on these uniform dates, including 
toll-free operations and Taxpayer Assistance Centers.
    Although the furloughs will occur after the conclusion of the 2013 
filing season, legitimate concerns have been expressed about the 
sequestration's potential effect on the IRS' long-term performance, 
especially if more budget cuts continue in the out-years. A continuing 
budget sequestration will reduce the enforcement revenue the IRS 
collects. The effects from the budget cuts will also become more 
apparent as time goes on, with more significant reductions in revenues 
and performance beginning to show in 2014.
    The IRS has already had to adjust its fiscal year 2013 Operating 
Plan to reflect the sequestration's drain on funding. For example, to 
apply the employee furloughs evenly across the organization, the IRS 
proposed to transfer up to $75 million from its Enforcement 
Appropriation to its Taxpayer Services and Operations Support 
Appropriations.
    The Department of the Treasury asked the Board to review and 
comment on the IRS Operating Plan. We believe the plan will most likely 
result in significantly reduced performance results and the erosion of 
taxpayer service and compliance programs in fiscal year 2013 and future 
years. It should also be noted that a reduction of this size and scope 
will most likely impact voluntary compliance and IRS efforts to close 
the tax gap.
    The Board is also concerned that these drastic budget cuts and 
subsequent staffing reductions come at a time that the IRS is faced 
with increased responsibilities and workload. For example, 
administering the tax portions of the ACA presents large challenges in 
both customer service and enforcement. In fiscal year 2014, the IRS 
must also implement the merchant card and stock basis matching 
initiatives and the Foreign Account Tax Compliance Act, all of which 
will require increased funding and staff. In addition, stolen identity 
refund fraud continues to be a major problem for tax administration.
    Given all these factors, the Oversight Board believes that this is 
not the time to make shortsighted budget cuts that can erode the many 
important gains the IRS has achieved since the enactment of RRA 98, 
including better customer service, an overall increase in enforcement 
revenue, and success in modernizing major information systems. It is 
important to restore continuity and make the needed investments in 
three key areas:
  --Taxpayer services;
  --Enforcement; and
  --Operations support.
               irs oversight board budget recommendations
    The President's fiscal year 2014 budget requests $12.861 billion in 
direct appropriations for the Internal Revenue Service. This represents 
an 8.8 percent funding increase over the fiscal year 2012 enacted 
level. However, the budget request is $213.6 million less than the 
$13.074 billion initially recommended by the Oversight Board for the 
IRS to meet its statutory responsibilities in fiscal year 2014. The 
$213 million difference is related primarily to additional savings the 
IRS has identified in the President's budget. It should be noted that 
the President's fiscal year 2014 budget request does not reflect the 
$594 million (5 percent) sequestration and $24 million (0.2 percent) 
rescission cuts that the IRS had to make in fiscal year 2013. At 
present, the IRS does not know the impact of sequestration in fiscal 
year 2014.
    Nonetheless, the Board believes that the President's fiscal year 
2014 budget request is credible and reasonable. It is aligned with and 
supports IRS Strategic Plan goals and objectives and Treasury 
Department priority goals. Moreover, it makes up for much of the loss 
in resources and FTE over the past few years when the IRS was funded at 
fiscal year 2012 enacted levels.
    The Board also strongly supports a permanent extension of the 
Streamlined Critical Pay Provision contained in RRA 98. The President's 
request supports extending this provision through September 30, 2018. 
The Board has found the provision to be a valuable and effective tool 
in bringing specialized expertise to IRS initiatives. It has proven to 
be successful in not only information technology, but also in 
sophisticated and complex areas of international taxation, such as 
transfer pricing. The Board recommends the provision's permanent 
extension.
    The Board appreciates that the fiscal year 2014 budget request is 
but the beginning of a long process that can be affected by a number of 
other factors, including the larger continuing debate over deficit 
reduction. However, that should not prevent us from beginning a 
productive dialogue about how to fund the IRS so it may achieve its 
mission. Following are more detailed discussions on various budget 
items.
Investing in Customer Service
    Providing taxpayers with quality customer service is an essential 
part of the IRS' balanced mission and delivers on its strategic goal: 
``Improve Service to Make Voluntary Compliance Easier.'' Taxpayers need 
assistance to navigate and understand a highly complex tax code and 
file a correct return. Getting it right the first time benefits both 
taxpayers and the IRS as it helps prevent inadvertent non-compliance 
and costly and burdensome post-filing actions, such as audits and 
penalties. In addition to raising its telephone LOS to acceptable 
levels, fiscal year 2014 also presents a major customer service, 
outreach and taxpayer education challenge for the IRS as major tax-
related portions of the ACA take effect, including those related to 
health insurance exchanges.
            The Board Recommends
    The Board strongly supports the President's requests of $2.4 
billion for Taxpayer Services in fiscal year 2014. This request 
includes an additional $177 million to improve taxpayer service and 
meet increased demand. The Board believes that this funding level is 
necessary for the IRS to reach the LOS goal of 79 percent stated in the 
budget request. Otherwise, providing an acceptable LOS will continue to 
be a challenge for the IRS; one that the Board hopes the Congress will 
help the IRS overcome for the sake of all taxpayers.
Investing in Enforcement
    Enforcement is a top priority in the IRS Strategic Plan. In recent 
years, the IRS has made some significant achievements and advancements 
in enforcement, such as the successful Offshore Voluntary Disclosure 
Programs that not only collected $5 billion in back taxes, penalties 
and interest but sent a strong deterrence message to those considering 
illegally hiding income and assets in overseas tax havens. And last 
year, the IRS managed to maintain and deliver most of its key 
enforcement priorities, such as audits in the upper-income brackets. 
However, the IRS still faces a number of enforcement challenges in 
fiscal year 2014. The IRS must ramp up its efforts to address offshore 
noncompliance and abusive tax avoidance schemes, and expand its audit 
coverage of high-wealth individuals and enterprises. And on a broad 
scale it must increase the overall audit and collection coverage for 
all taxpayers.
    The Board and other observers from both the private and public 
sectors also question why the approximate $4 to $1 return on investment 
(ROI) for IRS enforcement activities is not recognized in the budgetary 
process. These investments pay for themselves many times over. They can 
deter noncompliance, provide greater revenues to fund essential 
Government services, and help reduce the deficit and national debt.
            The Board Recommends
    The Board strongly supports the President's request for $5.67 
billion for Enforcement activities in fiscal year 2014. The President's 
budget request also includes a number of high ROI tax enforcement and 
compliance initiatives which would receive above-base funding by a 
program integrity cap adjustment through 2018, with additional cap 
adjustments to sustain these revenue-producing initiatives from fiscal 
year 2018 through fiscal year 2023. The $407 million in IRS program 
integrity cap adjustment funding for fiscal year 2014 will generate 
more than $1.6 billion in additional annual enforcement revenue, 
achieving a fiscal year 2016 ROI of $6 to $1. Absent a cap adjustment, 
these initiatives would go unfunded. The Board believes that the suite 
of enforcement initiatives funded in the President's budget request 
represent a strategic and sound approach to effective and fair tax 
administration. They will help bolster IRS compliance efforts and 
provide balanced audit coverage rates across taxpayers with expanded 
coverage of high-wealth individuals and enterprises and partnership 
entities. However, as earlier discussed, the Board is concerned that 
some of these high-ROI enforcement initiatives are proposed to be 
funded via a program integrity cap that has not been provided through 
the authorization process in recent years. We hope that this year is 
not a repeat of the past.
Investing in Operations Support
    The successful launch of the Customer Account Data Engine (CADE) 2 
was a major milestone in the IRS' technology modernization program. It 
will allow for the retirement of the antiquated legacy system and 
enabled the IRS to move from a weekly to a daily processing cycle for 
individual accounts and conveys numerous benefits. In another 
development, Modernized e-File (MeF) now accepts both individual and 
corporate returns and processed more than 115 million returns last 
year.
    However, the Board wants to be sure that a sense of complacency 
does not set in and that funding for future releases of CADE and other 
IT programs is not reduced or delayed. Such a mindset could affect both 
customer service and enforcement initiatives, such as producing more 
web-based applications and driving forward the agency's innovative data 
analytics program that can expose not only noncompliance but criminal 
activity, including tax refund fraud.
    The risk of complacency is not limited to technology.
    The IRS' employees are its greatest asset but are placed at 
heightened risk during these uncertain budget times. An engaged 
workforce is essential if the IRS is to function at a high level and 
deliver on its mission and strategic goals. Last year, the IRS ranked 
third amongst the 15 largest Federal agencies and departments on an 
employee engagement scale. However, the Board is concerned that ranking 
could slip, especially if further staffing reductions take place and 
the exception-only hiring freeze continues.
            The Board Recommends
    The Board strongly supports the President's request for $4.48 
billion in Operations Support and $300.8 billion in Business Systems 
Modernization activities in fiscal year 2014.
    The President's budget proposal would increase staffing to support 
a number of enforcement and customer service initiatives previously 
described. The Board believes that is a wise investment in human 
capital and could provide the IRS workforce with new career 
opportunities that have been unavailable for the past 2 years. However, 
the President's budget also assumes that the IRS will continue to seek 
efficiencies in personnel and nonlabor costs, including training. And 
it is not clear whether the exception-only hiring freeze will continue 
in programs outside of those marked for increased staffing.
    Moreover, while the Board believes that the IRS must continue to 
explore and use more cost-efficient means to deliver training, such as 
over the IRS intranet, it also wants to be sure that employees receive 
quality training that may require live interaction with trainers and 
peers. As previously noted, the Board also recommends a permanent 
extension of the Streamlined Critical Pay Provision contained in RRA 
98.
                               conclusion
    The IRS Oversight Board thanks the subcommittee for this 
opportunity to present its views and recommendations on the IRS' fiscal 
year 2014 budget. With at least a $4 to $1 return on investment for the 
IRS, every $1 invested in the IRS results in more than $4 in additional 
revenue. That revenue is needed to reduce our national deficit and fund 
other important programs for our country. Should the IRS receive the 
full amount requested in the President's budget request for fiscal year 
2014, the agency would be positioned to resume its momentum in tackling 
some of our Nation's most serious challenges in tax administration. 
However, should the IRS not be properly funded in fiscal year 2014, 
voluntary compliance will suffer, as will taxpayers who rely on the IRS 
to help them understand and meet their tax responsibilities.
                                 ______
                                 

                          IRS Oversight Board

[Please Note: The following IRS Oversight Board report ``Fiscal Year 
2014 IRS Budget Recommendation Special Report'' and other IRS Oversight 
Board reports can be found at Web site http://www.treasury.gov/irsob/
reports.]
       fiscal year 2014 irs budget recommendation special report
    This report captures the Board's recommendations to Congress 
regarding the IRS Fiscal Year 2014 budget, a budget that is in line 
with the strategic goals and strategic foundations identified in the 
IRS Strategic Plan:
  --Goal 1: Improve service to make voluntary compliance easier
  --Goal 2: Enforce the law to ensure everyone meets their obligations 
        to pay taxes
  --Strategic Foundations: Invest for high performance in people and 
        technology
   irs oversight board roles and responsibilities and the irs budget
    One of the IRS Oversight Board's most important statutory 
responsibilities under 26 U.S.C. Sec. 7802(d) is to review and approve 
the annual IRS-prepared budget request submitted to the Department of 
the Treasury. The Board must ensure that the approved budget and 
related performance expectations: (1) support the IRS' mission and 
annual and long-range strategic plans; (2) are consistent with the IRS' 
goals, objectives and strategies; and (3) properly align with the IRS' 
strategies and plans.
    The President is required to submit the Board's budget 
recommendation without revision to Congress along with the 
Administration's request. Additionally, the Government Performance and 
Results Act (GPRA) spells out the agency's responsibilities for linking 
its strategic, budget and performance plans and reporting to a 
comprehensive strategic process.
    The IRS Oversight Board would also like to note that this year 
marks the 10th anniversary of the Board's budget recommendation special 
reports. Much has changed over the past decade when it comes to IRS 
programs and funding, including an equal emphasis on Taxpayer Services 
as well as enforcement and the removal of the IRS Business Systems 
Modernization (BSM) program from the Government Accountability Office's 
``High Risk'' list. Nevertheless, some of the Board's concerns raised 
in that first budget report still ring true today, such as the need to 
provide reliable and adequate funding to the IRS so it may achieve a 
high level of customer service, to address non-compliance, and to 
enhance information technology systems.
                           executive summary
    In June 2012, the IRS Oversight Board recommended to Treasury a 
Fiscal Year 2014 budget of $13.074 billion for the Internal Revenue 
Service. This is $213.6 million more than what the President put forth 
in his fiscal year 2014 budget request. After careful examination and 
deliberation, the Board believes the President's recommended funding is 
appropriate for the IRS to carry out both its statutory and additional 
new responsibilities.
    The IRS' budget has been reduced since fiscal year 2010, with the 
biggest reductions coming in fiscal year 2013 through the 
sequestration. Although the IRS has achieved significant cost savings 
and efficiencies in recent years through substantial cuts in program 
support and IRS staffing, this path is no longer sustainable. While 
many factors impact IRS performance, such as the state of the economy, 
there are already indications that the reductions in IRS budgets 
funding through fiscal year 2012 are leading to a deterioration in 
performance. The amount of enforcement revenue collected, the level of 
service on the IRS toll-free assistance line, and measures of taxpayer 
satisfaction with the IRS and of IRS employee engagement are all down 
in fiscal year 2012 compared to where these results stood in fiscal 
year 2010. The effects on the cuts will likely be even more pronounced 
in fiscal year 2014.

------------------------------------------------------------------------

-------------------------------------------------------------------------
The Board believes the President's recommended funding of $12.8 billion
 for Fiscal Year 2014 is appropriate for the IRS to carry out its
 responsibilities.
------------------------------------------------------------------------

    The Board recommends that investments above the current fiscal year 
2013 enacted level be made in Taxpayer Service, Enforcement, and 
Operations Support. The Board's budget does that and does not take 
funding from one category to bolster another.



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    The Board believes that the IRS' budget must reflect the intent of 
the IRS Restructuring and Reform Act of 1998 (RRA 98) where both 
taxpayer service and enforcement are funded at appropriate levels, and 
not to the detriment of either.
Why Should the IRS Receive the Cap Adjustment?
    The IRS estimates the requested cap adjustment funding will 
generate more than $1.6 billion in additional annual direct enforcement 
revenue beginning in fiscal year 2016, for a return on investment of 
$6-to-$1. Increased resources for IRS enforcement programs yield 
measurable results that help reduce the deficit, close the tax gap, and 
generate revenue for the United States.
    Although slightly lower than what the Board initially recommended, 
the President's budget request makes significant investments in the 
same areas, such as strengthening telephone level of service. The 
President's budget also has a number of proposed revenue-generating 
enforcement initiatives that the Board supports which will increase 
both enforcement revenue and overall compliance. In addition, it 
provides funding so the IRS can effectively implement new 
responsibilities, such as the tax portions of the Affordable Care Act 
(ACA) and merchant credit card and stock basis reporting.
                    program integrity cap adjustment
The Budget Control Act of 2011 imposed caps on discretionary spending 
by Federal agencies including the IRS. Recognizing that certain 
activities generate rates of return greater than their respective 
investment costs, Congress created a budgetary mechanism to increase 
spending allocations for programs that generate positive new revenue 
and remove them from competition against other national funding 
priorities. These allocations are referred to as program integrity cap 
adjustments.
    The IRS is requesting approximately $412,000,000 in high-return 
initiatives through program integrity cap adjustments as outlined 
below:

      REQUESTED FUNDING AMOUNT FOR PROGRAM INTEGRITY CAP ADJUSTMENT
                               INITIATIVES
                         [Dollars in thousands]
------------------------------------------------------------------------

------------------------------------------------------------------------
Address International and Offshore Compliance Issues....         $49,354
Increase Audit Coverage to Address Tax Compliance Issues         110,935
Increase Collection Coverage............................          60,474
Expand Coverage of High-Wealth Individuals and                    33,965
 Enterprises............................................
Improve Coverage of Partnerships and Flow-Through                 45,013
 Entities...............................................
Build Out Tax Return Preparer Compliance Activities.....          18,315
Leverage Data to Improve Case Selection.................          41,353
Leverage Digital Evidence for Criminal Investigation....           4,539
Develop New Online Services.............................          24,059
Develop Converged Telecommunications Networks...........          15,000
Expand Virtual Services Delivery........................           3,983
Alcohol and Tobacco Tax and Trade Bureau Transfer.......           5,000
                                                         ---------------
      Total.............................................         411,990
------------------------------------------------------------------------

    For every dollar invested in IRS services, enforcement, operations 
support, and Business Systems Modernization, there is an average $4-to-
$1 return.
    Approximately one-half of the one billion dollar increase the 
President seeks for the IRS would be financed by a program integrity 
cap adjustment. Treasury Secretary Jacob Lew has made a compelling case 
for this suite of enforcement programs and their average $6-to-$1 
return on investment when fully realized. The Board believes these 
initiatives could play an important role in closing the tax gap while 
producing revenues to reduce the deficit and creating funding for other 
programs that are critical to our Nation.
                         irs budget challenges
    The IRS confronts a number of formidable budgetary challenges. 
Funding uncertainty and budget cuts loom largest and present the 
highest risks to the IRS and our Nation's tax administration system. 
The inability to pass Federal budgets for the past several years has 
forced Congress and the Administration to increasingly rely on 
Continuing Resolutions (CR) to avoid a full or partial Federal 
Government shutdown, but often at a lower, or stagnant funding level.
    Today, the IRS is operating under a CR, plus sequestration rules, 
that fund the agency at just under $11.2 billion, well below both the 
President's and the Board's fiscal year 2013 recommendations. This 
level is also more than $600 million less than the fiscal year 2012 
level, and almost $1 billion less than fiscal year 2010.
    Together, these budget cuts have forced the IRS to find major cost 
efficiencies and implement significant spending cuts. This has led to 
dramatic curtailments in training, travel, office space and outside 
contracts. The IRS has also been forced to significantly reduce the 
size of its workforce. In fiscal year 2012, the agency offered buyouts 
to 7,000 of its employees, with more than 1,200 accepting. The IRS also 
instituted an ``exception-only'' hiring freeze leaving many positions 
lost to attrition unfilled.

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    All told, approximately 8,000 full-time IRS positions have been 
lost since 2010, with about 5,000 coming from front-line enforcement 
personnel. In 2012, the IRS workforce (as measured in average full-time 
equivalent positions realized, or FTE) stood at just under 90,300; its 
lowest level in more than a decade. That number could go even lower 
given the large pool of IRS employees now eligible to retire.


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    The immediate effects of absorbing these budget cuts have been most 
apparent in Taxpayer Services, especially during the past two filing 
seasons when toll-free telephone Level of Service (LOS) hovered around 
70 percent--far below the Board's and IRS' desired level of 80 percent. 
Many IRS Taxpayer Assistance Centers are also understaffed and offer 
reduced hours and limited tax preparation services.
    Stagnant funding provided through the CRs was only the beginning of 
the IRS' funding shortfalls. Today, the IRS' budget has been reduced by 
a total of $618 million from the $11.8 billion it would have received 
under the fiscal year 2013 Continuing Resolution with $594.5 million 
coming from the sequestration and $24 million in rescission cuts.
    The resulting $11.198 billion budget is $1.6 billion less than the 
President's fiscal year 2013 budget request. This also marks the third 
consecutive year that the IRS' annual appropriation has declined. Since 
fiscal year 2010, it has seen reductions to its appropriated funding 
totaling almost $1 billion.
    To meet the mandatory spending cuts for fiscal year 2013 under 
sequestration, the IRS plans to furlough all employees for 5 to 7 
specific days beginning in late May until the end of the fiscal year. 
All IRS operations will be closed on these uniform dates, including 
toll-free operations and Taxpayer Assistance Centers.
    Although the furloughs will occur after the conclusion of the 2013 
filing season, legitimate concerns have been expressed about the 
sequestration's potential effect on the IRS' long-term performance, 
especially if more budget cuts continue in the out-years. The Board 
notes there are already signs of declining performance in key areas, as 
indicated in Figure 4. A continuing budget sequestration will reduce 
the enforcement revenue the IRS collects. The effects from the budget 
cuts will likely become more apparent as time goes on, with more 
significant reductions in revenues and performance beginning to show in 
2014.


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    The IRS has already had to adjust its fiscal year 2013 Operating 
Plan to reflect the sequestration's drain on funding. For example, to 
apply the employee furloughs evenly across the organization, the IRS 
proposed to transfer up to $75 million from its Enforcement 
Appropriation to its Taxpayer Services and Operations Support 
Appropriations.
    The Department of the Treasury asked the Board to review and 
comment on the IRS Operating Plan. We believe the plan will most likely 
result in significantly reduced performance results and the erosion of 
taxpayer service and compliance programs in fiscal year 2013 and future 
years. It should also be noted that a reduction of this size and scope 
will most likely impact voluntary compliance and IRS efforts to close 
the tax gap.
    The Board is also concerned that these drastic budget cuts and 
subsequent staffing reductions come at a time that the IRS is faced 
with increased responsibilities and workload. For example, 
administering the tax portions of the ACA presents large challenges in 
both taxpayer service and enforcement. In fiscal year 2014, the IRS 
must also leverage the merchant card and stock basis matching 
initiatives and the Foreign Account Tax Compliance Act, all of which 
will require increased funding and staff. In addition, stolen identity 
refund fraud continues to be a major problem for tax administration.
    Given all these factors, the Oversight Board believes that this is 
not the time to make shortsighted budget cuts that can erode the many 
important gains the IRS has achieved since the enactment of RRA 98, 
including better taxpayer service, an overall increase in enforcement 
revenue, and success in modernizing major information systems. It is 
important to restore continuity and make the needed investments in 
three key areas: (1) Taxpayer Services; (2) Enforcement; and (3) 
Operations Support.
president's fiscal year 2014 irs budget request and irs oversight board 
                            recommendations
    The President's fiscal year 2014 budget requests $12.861 billion in 
direct appropriations for the Internal Revenue Service. This represents 
an 8.8 percent funding increase over the fiscal year 2012 enacted 
level. However, the budget request is $213.6 million below the $13.074 
billion initially recommended by the Oversight Board for the IRS to 
meet its statutory responsibilities. The $213 million difference in the 
President's request is related primarily to additional savings the IRS 
identified.
    The President's 2014 budget further requires that the IRS achieve 
efficiencies and savings of $254.8 million from the following:
  --Targeted Personnel.--$77.8 million
  --Space Optimization Savings.--$76.7 million
  --Reduce IT Infrastructure.--$57.5 million
  --Business System Modernization (BSM).--$30 million
  --Implement Human Capital Efficiencies.--$7.9 million
  --Increase e-File Savings.--$5 million


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    It should be noted that the President's fiscal year 2014 budget 
request does not reflect the $594 million (5 percent) sequestration and 
$24 million (0.2 percent) rescission cuts that the IRS had to make in 
fiscal year 2013. At present, the IRS does not know the impact of 
sequestration in fiscal year 2014. The Board assumes no sequestration 
will be in effect in fiscal year 2014.
    Nonetheless, the Board believes that the President's fiscal year 
2014 Budget Request is credible and reasonable. It is aligned with and 
supports IRS Strategic Plan goals and objectives and Treasury 
Department priority goals. Moreover, it makes up for much of the loss 
in resources and FTE over the past few years when the IRS was funded at 
fiscal year 2012 enacted levels.
    The Board also strongly supports a permanent extension of the 
Streamlined Critical Pay Provision contained in RRA 98. The President's 
request supports extending this provision through September 30, 2018. 
The Board has found the provision to be a valuable and effective tool 
in bringing specialized expertise to IRS initiatives. It has proven to 
be successful in not only information technology, but also in 
sophisticated and complex areas of international taxation, such as 
transfer pricing. The Board recommends the provision's permanent 
extension.
    The Board appreciates that the fiscal year 2014 budget request is 
but the beginning of a long process that can be affected by a number of 
other factors, including the larger continuing debate over deficit 
reduction. However, that should not prevent us from beginning a 
productive dialogue about how to fund the IRS so it may achieve its 
mission. Following are more detailed discussions on various budget 
items.

------------------------------------------------------------------------

-------------------------------------------------------------------------
The Board believes that Streamlined Critical Pay is vital to the IRS'
 ability to attract leaders with cutting edge skills and talent for key
 positions.
------------------------------------------------------------------------

                           taxpayer services
    Providing taxpayers with quality taxpayer service is an essential 
part of the IRS' balanced mission and delivers on its strategic goal: 
``Improve Service to Make Voluntary Compliance Easier.'' Taxpayers need 
assistance to navigate and understand a highly complex tax code and 
file a correct return. Getting it right the first time benefits both 
taxpayers and the IRS as it helps prevent inadvertent non-compliance 
and costly and burdensome post-filing actions, such as audits and 
penalties. Figure 6 shows the dramatic decline in telephone assistance 
and practitioner priority service levels over the past decade. In 
addition to raising its telephone LOS to acceptable levels, fiscal year 
2014 also presents a major taxpayer service, outreach and taxpayer 
education challenge for the IRS as major tax-related portions of the 
ACA take effect, including those related to health insurance exchanges.

------------------------------------------------------------------------

-------------------------------------------------------------------------
The Board strongly supports the President's request for $2.41 billion
 for Taxpayer Services in fiscal year 2014 and believes the President's
 funding level is necessary to raise IRS telephone level of service and
 to educate taxpayers on ACA tax-related provisions.
------------------------------------------------------------------------



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What the Board Recommends
    The Board strongly supports the President's request of $2.41 
billion for Taxpayer Services in fiscal year 2014, This request 
includes an additional $177 million to improve taxpayer service and 
meet increased demand. The Board believes that this funding level is 
necessary for the IRS to reach the LOS goal of 79 percent stated in the 
budget request. Otherwise, providing an acceptable LOS will continue to 
be a challenge for the IRS; one that the Board hopes the Congress will 
help the IRS overcome for the sake of all taxpayers.

------------------------------------------------------------------------

-------------------------------------------------------------------------
The Board strongly supports the President's request for $5.67 billion
 for Enforcement activities in fiscal year 2014 and believes that the
 enforcement initiatives represent a sound, strategic approach to
 effective and fair tax administration.
------------------------------------------------------------------------

                              enforcement
    Enforcement is a top priority in the IRS Strategic Plan. In recent 
years, the IRS has made some significant achievements and advancements 
in enforcement, such as the successful Offshore Voluntary Disclosure 
Programs that not only collected $5 billion in back taxes, penalties 
and interest but sent a strong deterrence message to those considering 
illegally hiding income and assets in overseas tax havens. Last year, 
the IRS managed to maintain and deliver most of its key enforcement 
priorities, such as audits in the upper-income brackets. However, the 
IRS still faces a number of enforcement challenges in fiscal year 2014. 
The IRS must ramp up its efforts to address offshore non-compliance and 
abusive tax avoidance schemes and expand its audit coverage of high-
wealth individuals and enterprises. On a broad scale it must also 
increase the overall audit and collection coverage for all taxpayers.
    The Board and other observers from both the private and public 
sectors also question why the approximate $4-to-$1 return on investment 
(ROI) for IRS enforcement activities is not recognized in the budgetary 
process. These investments pay for themselves many times over. They can 
deter noncompliance, provide greater revenues to fund essential 
Government services, and help reduce the deficit and national debt.
What the Board Recommends
    The Board strongly supports the President's request for $5.67 
billion for Enforcement activities in fiscal year 2014. The President's 
budget request also includes a number of high ROI tax enforcement and 
compliance initiatives which would receive above-base funding by a 
program integrity cap adjustment through 2018, with additional cap 
adjustments to sustain these revenue-producing initiatives from fiscal 
year 2018 through fiscal year 2023. The $407 million in IRS program 
integrity cap adjustment funding for fiscal year 2014 will generate 
more than $1.6 billion in additional annual enforcement revenue, 
achieving a potential ROI of $6.0-to-$1.0 in fiscal year 2016. Absent a 
cap adjustment, these initiatives would go unfunded. Table 1 identifies 
the ROI on each enforcement initiative.

------------------------------------------------------------------------

-------------------------------------------------------------------------
The program integrity cap adjustment funding for fiscal year 2014 will
 generate more than $1.6 billion in additional annual enforcement
 revenue, achieving a potential ROI of $6.0-to-$1.0 in fiscal year 2016.
 Absent a cap adjustment, these initiatives would go unfunded.
------------------------------------------------------------------------


  TABLE 1.--ESTIMATED RETURN ON INVESTMENT FOR RECOMMENDED ENFORCEMENT
                               INITIATIVES
------------------------------------------------------------------------
                                                       Fiscal Year 2016
           Initiatives                Recommended          Return on
                                   Funding (Note 1)       Investment
------------------------------------------------------------------------
                 Program Increases Before Cap Adjustment
------------------------------------------------------------------------
Improve Identification and                  $101,098         $14.4 to $1
 Prevention of Refund Fraud and
 Identity Theft.................
Implement Merchant Card and                   50,279            8.5 to 1
 Basis Matching.................
Implement Foreign Account Tax                 35,190            3.7 to 1
 Compliance Act (FATCA).........
Address Impact of Affordable                  44,420            1.9 to 1
 Care Act (ACA) Statutory
 Requirements...................
Leverage Data to Improve Case                 10,348        Note 2
 Selection (Taxpayer Services
 portion).......................
------------------------------------------------------------------------
            Additional Program Increases After Cap Adjustment
------------------------------------------------------------------------
Expand Coverage of High-Wealth                33,965           13.4 to 1
 Individuals and Enterprises....
Increase Collection Coverage....              60,474            9.3 to 1
Improve Coverage of Partnerships              45,013            7.7 to 1
 and Flow-Through Entities......
Address International and                     49,354            4.5 to 1
 Offshore Compliance Issues.....
Increase Audit Coverage to                   110,935            3.2 to 1
 Address Tax Compliance Issues..
Leverage Data to Improve Case                 41,353            1.5 to 1
 Selection......................
Build Out Tax Return Preparer                 18,315        Note 2
 Compliance Activities..........
Leverage Digital Evidence for                  4,539        Note 2
 Criminal Investigation.........
------------------------------------------------------------------------
Note 1: Dollars in thousands.
Note 2: While these initiatives do not have an immediate ROI associated
  with them, they provide long-term benefits to the IRS such as
  significantly increasing the availability and use of electronic data
  in case work.

    The Board believes that the suite of enforcement initiatives funded 
in the President's budget request represent a strategic and sound 
approach to effective and fair tax administration. They will help 
bolster IRS compliance efforts and provide balanced audit coverage 
rates across taxpayers with expanded coverage of high-wealth 
individuals and enterprises and partnership entities. However, as 
earlier discussed, the Board is concerned that some of these high-ROI 
enforcement initiatives are proposed to be funded via a program 
integrity cap that has not been provided through the authorization 
process in recent years. We hope that this year is not a repeat of the 
past.

------------------------------------------------------------------------

-------------------------------------------------------------------------
The Board strongly supports the President's request for $4.48 billion in
 Operations Support and $300.8 billion in Business Systems Modernization
 activities in fiscal year 2014 and believes that funding for future IT
 programs should not be reduced or delayed.
------------------------------------------------------------------------

         operations support and business systems modernization
    The successful launch of the Customer Account Data Engine (CADE) 2 
was a major milestone in the IRS' technology modernization program. It 
will allow for the retirement of the antiquated legacy system and 
enable the IRS to move from a weekly to a daily processing cycle for 
individual accounts, which conveys numerous benefits. In another 
development, Modernized e-File systems now accept both individual and 
corporate returns and processed over 115 million returns last year.
    However, the Board wants to be sure that a sense of complacency 
does not set in and that funding for future releases of CADE and other 
IT programs is not reduced or delayed. The risk of complacency is not 
limited to technology.
    The IRS' employees are its greatest asset but are placed at 
heightened risk during these uncertain budget times. An engaged 
workforce is essential if the IRS is to function at a high level and 
deliver on its mission and strategic goals. Last year, the IRS ranked 
third amongst the 15 largest Federal agencies and departments on an 
employee engagement scale. However, the Board is concerned that ranking 
could slip, especially if further staffing reductions take place and 
the exception-only hiring freeze continues.
What the Board Recommends
    The Board strongly supports the President's request for $4.48 
billion in Operations Support and $300.8 billion in Business Systems 
Modernization activities in fiscal year 2014.
    The President's budget proposal would increase staffing to support 
a number of enforcement and taxpayer service initiatives previously 
described. The Board believes that is a wise investment in human 
capital and could provide the IRS workforce with new career 
opportunities that have been unavailable for the past 2 years. However, 
the President's budget also assumes that the IRS will continue to seek 
efficiencies in personnel and non-labor costs, including training. It 
is not clear whether the exception-only hiring freeze will continue in 
programs outside of those marked for increased staffing.

------------------------------------------------------------------------

-------------------------------------------------------------------------
The President's budget request increases IRS staffing to support several
 enforcement and taxpayer service initiatives. The Board believes it is
 a wise investment in human capital and the workforce.
------------------------------------------------------------------------

    Moreover, while the Board believes that the IRS must continue to 
explore and use more cost-efficient means to deliver training, such as 
over the IRS intranet, it also wants to be sure that employees receive 
quality training that may require live interaction with trainers and 
peers. As previously noted, the Board also recommends a permanent 
extension of the Streamlined Critical Pay Provision contained in RRA 
98.

                               Appendix A

     IRS OVERSIGHT BOARD INITIAL RECOMMENDED FISCAL YEAR 2014 BUDGET
                         [Dollars in thousands]
------------------------------------------------------------------------

------------------------------------------------------------------------
Fiscal Year 2012 Enacted Budget.....................         11,816,696
Fiscal Year 2013 Adjusted Base Request/Annualized            12,304,750
 Continuing Resolution (CR) Rate....................
------------------------------------------------------------------------
Fiscal Year 2014 Changes to Base
Maintaining Current Levels..........................            112,548
Efficiencies/Savings................................           (140,381)
Reinvestment........................................             30,000
Subtotal, Fiscal Year 2014 Changes to Base..........              2,167
Fiscal Year 2014 Current Services (Base)............         12,306,917
Program Increases
------------------------------------------------------------------------
Taxpayer Services Initiatives.......................            272,811
------------------------------------------------------------------------
Improve Taxpayer Services to Meet Increased Demand..            162,720
Develop New Online Services.........................             24,059
Assist Taxpayers in Understanding ACA Tax Issues....             79,128
Expand Virtual Services Delivery (VSD)..............              4,300
Expand Low Income Taxpayer Clinics..................              2,604
------------------------------------------------------------------------
Enforcement Initiatives.............................            369,454
------------------------------------------------------------------------
Address International and Offshore Compliance Issues             84,544
Implement Merchant Card and Basis Matching..........             50,279
Improve Identification and Prevention of Refund                  96,455
 Fraud and Identity Theft...........................
Expand Coverage of HIgh-Wealth Individuals and                   18,607
 Enterprises........................................
Improve Coverage of Partnerships and Flow-Through                45,014
 Entities...........................................
Build Out Tax Return Preparer Compliance Activities.             18,315
Leverage Data to Improve Case Selection.............             51,701
Leverage Digital Evidence for Criminal Investigation              4,539
 (CI)...............................................
------------------------------------------------------------------------
Infrastructure Initiatives..........................            125,455
------------------------------------------------------------------------
Implement IT Changes to Deliver Tax Credits and                 102,255
 Other Requirements.................................
Implement IT Changes Needed for Individual Coverage               8,200
 Requirements.......................................
Develop Converged Telecommunication Networks........             15,000
------------------------------------------------------------------------
      Total Fiscal Year 2013 Program Changes........            768,435
------------------------------------------------------------------------
Total Fiscal Year 2014 Budget Recommendation........         13,074,637
------------------------------------------------------------------------
Fiscal Year 2014 President's Budget Request.........         12,861,033
------------------------------------------------------------------------
Increase over President's Budget....................            213,604
Percent Increase over President's Budget............               1.6%
------------------------------------------------------------------------
This table presents the fiscal year 2014 IRS funding and initiatives
  initially proposed by the Oversight Board in June 2012. The table also
  identifies the overall funding difference between the Board's initial
  proposal and the President's request. Note that in developing its
  fiscal year 2014 IRS budget recommendation in June 2012, the Board
  started with an assumed fiscal year 2013 adjusted base of $12.3
  billion (along with an associated set of initiatives being funded in
  fiscal year 2013, which was in line with the Federal budget
  preparation process at that time.)

                               Appendix B

                     IRS FISCAL YEAR 2014 BUDGET HIGHLIGHTS BEFORE AND AFTER CAP ADJUSTMENT
                                             [Dollars in thousands]
----------------------------------------------------------------------------------------------------------------
                                                     Taxpayer                Operations
                   Appropriation                     Services   Enforcement    Support       BSM        Total
----------------------------------------------------------------------------------------------------------------
Fiscal Year 2012 Enacted \1\......................  2,239,703    5,299,367   3,947,416     330,210   11,816,696
Fiscal Year 2013 Annualized CR Rate...............  2,253,510    5,331,000   3,971,000     332,231   11,887,741
----------------------------------------------------------------------------------------------------------------
Fiscal Year 2014 Changes to Base:
----------------------------------------------------------------------------------------------------------------
Non-Recur CR Increase.............................    (13,807)     (31,633)    (23,584)     (2,021)     (71,045)
Maintaining Current Levels (MCLs).................     22,391       50,551      52,115         617      125,674
----------------------------------------------------------------------------------------------------------------
    Pay Inflation Adjustment......................     19,277       45,802      13,977         617       79,673
    Non-Pay Inflation Adjustment..................      3,114        4,749      38,138   ..........      46,001
----------------------------------------------------------------------------------------------------------------
Efficiencies/Savings:.............................    (18,208)     (56,605)   (150,051)    (30,000)    (254,864)
----------------------------------------------------------------------------------------------------------------
Increase e-File Savings...........................     (4,969)  ...........        (71)  ..........      (5,040)
Business Systems Modernization (BSM) Savings......  ..........  ...........  ..........    (30,000)     (30,000)
Reduce Information Technology (IT) Infrastructure.  ..........  ...........    (57,500)  ..........     (57,500)
Implement Human Capital Administrative              ..........  ...........     (7,858)  ..........      (7,858)
 Efficiencies.....................................
Targeted Personnel Savings........................    (13,239)     (56,605)     (7,922)  ..........     (77,766)
Savings from Space Optimization...................  ..........  ...........    (76,700)  ..........     (76,700)
----------------------------------------------------------------------------------------------------------------
Reinvestment:.....................................  ..........  ...........     37,500   ..........      37,500
----------------------------------------------------------------------------------------------------------------
    Implement Space Optimization to Achieve         ..........  ...........     37,500   ..........      37,500
     Savings......................................
----------------------------------------------------------------------------------------------------------------
Subtotal Fiscal Year 2014 Changes to the Base.....     (9,624)     (37,687)    (84,020)    (31,404)    (162,735)
----------------------------------------------------------------------------------------------------------------
Fiscal Year 2014 Current Services (Base)..........  2,243,886    5,293,313   3,886,980     300,827   11,725,006
----------------------------------------------------------------------------------------------------------------
Program Changes
    Program Increases Before Cap Adjustment:
        Promote Voluntary Compliance, Implement       168,690      127,570     427,777   ..........     724,037
         Legislative Changes, and Protect Revenue.
            Improve Taxpayer Services and Meet        130,306        3,250      43,501   ..........     177,057
             Increased Demand.....................
            Implement Foreign Account Tax           ..........      19,600      15,590   ..........      35,190
             Compliance Act (FATCA)...............
            Implement Merchant Card and Basis           7,643       30,275      12,361   ..........      50,279
             Matching.............................
            Address Impact of Affordable Care Act       1,124       26,084      17,212   ..........      44.420
             (ACA) Statutory Requirements.........
            Implement IT Changes to Deliver Tax     ..........  ...........    305,645   ..........     305,645
             Credits and Other Requirements.......
            Improve Identification and Prevention      19,269       48,361      33,468   ..........     101,098
             of Refund Fraud and Identity Theft...
            Leverage Data to Improve Case              10,348   ...........  ..........  ..........      10,348
             Selection (Taxpayer Services portion)
----------------------------------------------------------------------------------------------------------------
Total Request Before Cap Adjustment...............  2,412,576    5,420,883   4,314,757   ..........  12,449,043
----------------------------------------------------------------------------------------------------------------
Cap Adjustment Program Increases
    Enforcement Initiatives.......................  ..........     240,904     123,044   ..........     363,948
        Address International and Offshore          ..........      43,311       6,043   ..........      49,354
         Compliance Issues........................
        Increase Audit Coverage to Address Tax      ..........      71,453      39,482   ..........     110,935
         Compliance Issues........................
        Increase Collection Coverage..............  ..........      36,261      24,213   ..........      60,474
        Expand Coverage of High-Wealth Individuals  ..........      29,456       4,509   ..........      33,965
         and Enterprises..........................
        Improve Coverage of Partnerships and Flow-  ..........      39,136       5,877   ..........      45,013
         Through Entities.........................
        Build Out Tax Return Preparer Compliance    ..........      15,982       2,333   ..........      18,315
         Activities...............................
        Leverage Data to Improve Case Selection...  ..........       4,474      36,879   ..........      41,353
        Leverage Digital Evidence for Criminal      ..........         831       3,708   ..........       4,539
         Investigation (CI).......................
----------------------------------------------------------------------------------------------------------------
Infrastructure Initiatives........................  ..........  ...........     43,042   ..........      43,042
----------------------------------------------------------------------------------------------------------------
    Develop New Online Services...................  ..........  ...........     24,059   ..........      24,059
    Develop Converged Telecommunications Networks.  ..........  ...........     15,000   ..........      15,000
    Expand Virtual Services Delivery (VSD)........  ..........  ...........      3,983   ..........       3,983
----------------------------------------------------------------------------------------------------------------
Alcohol and Tobacco Tax and Trade Bureau (TTB)      ..........       5,000   ..........  ..........       5,000
 Program Integrity Transfer.......................
----------------------------------------------------------------------------------------------------------------
    Transfer to TTB for High-Return on Investment   ..........       5,000   ..........  ..........       5,000
     (ROI) Tax Enforcement Activities.............
----------------------------------------------------------------------------------------------------------------
Subtotal Fiscal Year 2014 Cap Adjustment..........  ..........     245,904     166,086   ..........     411,990
----------------------------------------------------------------------------------------------------------------
Total Fiscal Year 2014 Budget Request.............  2,412,576    5,666,787   4,480,843     300,827   12,861,033
----------------------------------------------------------------------------------------------------------------
Source: U.S. Treasury Budget in Brief.

                                 ______
                                 
       Prepared Statement of the Government Accountability Office
                                                       May 3, 2013.
Hon. Frank Lautenberg, Chairman,
Hon. Mike Johanns, Ranking Member,
Subcommittee on Financial Services and General Government, Committee on 
        Appropriations, U.S. Senate, Washington, DC.

Hon. Charles W. Boustany, Jr., Chairman,
Hon. John Lewis, Ranking Member,
Subcommittee on Oversight, Committee on Ways and Means, House of 
        Representatives, Washington, DC.

Internal Revenue Service: Preliminary Observations on the Fiscal Year 
2014 Budget Request

    This letter transmits briefing slides based on our work to date in 
response to your requests for a preliminary review of the fiscal year 
2014 budget request for the Internal Revenue Service (IRS). See 
appendix I and appendix II for the briefing slides that include the 
information used to brief your staff in April 2013, and were 
subsequently updated.
    Our briefing objectives were to (1) describe the fiscal year 2013 
budget for IRS and potential reductions resulting from sequestration; 
(2) describe IRS's budget data and trends from fiscal years 2010 
through 2014 and the fiscal year 2014 new program initiatives, return 
on investment (ROI) information, and major information technology (IT) 
investments; (3) list any analyses we have done related to legislative 
proposals highlighted in the congressional budget justification; and 
(4) identify our open matters for Congress and recommendations to IRS 
with a potential financial benefit.
    To conduct this work, we summarized the President's budgets and IRS 
congressional budget justifications from fiscal years 2010 through 
2014, reviewed Office of Management and Budget guidance on 
sequestration, reviewed revenue estimates from the Department of 
Treasury's Green Book, and interviewed IRS officials in the offices of 
the Chief Financial Officer and Corporate Budget. We interviewed IRS 
officials and determined that the data presented in this briefing were 
sufficiently reliable for our purposes.
    We conducted this performance audit from April to May 2013 in 
accordance with generally accepted government auditing standards. Those 
standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe that 
the evidence obtained provides a reasonable basis for our findings and 
conclusions based on our audit objectives.
    In summary:
  --The fiscal year 2013 annualized continuing resolution rate shown in 
        the fiscal year 2014 budget ($11.9 billion) is not the enacted 
        funding level, and the actual amount is $689 million lower.
  --For fiscal year 2014, the President's budget requests an increase 
        for IRS of 9 percent ($1,044 million) in discretionary funding 
        over the fiscal year 2012 appropriation and an increase of 8 
        percent (6,732 full-time equivalents) in staffing over fiscal 
        year 2012 actual levels. In addition, the funding request 
        includes:
    --Twelve new program initiatives related to enforcement activities 
            and six new program initiatives related to taxpayer 
            service, infrastructure, or other activities.
    --New information on actual return on investment for enforcement 
            activities, and expanded information on IT investments, 
            such as lifecycle costs, projected useful life of the 
            current asset, and anticipated benefits.
  --The request includes 33 legislative proposals, including 12 related 
        to our prior work.
  --As of March 2013, 39 of our products contained 10 matters for 
        congressional consideration and 88 recommendations to IRS with 
        a potential financial benefit that have not been addressed. 
        Since March 2012, IRS has implemented 24 recommendations with a 
        potential financial benefit. See appendix III for a complete 
        listing of all 39 products.
Agency Comments
    On May 1, 2013, IRS provided technical comments on our findings, 
which we have incorporated where appropriate.
    As arranged with your office, unless you publically announce the 
contents of this report earlier, we plan no further distribution until 
5 days after the date of this report. At that time, we will send copies 
of this report to other Chairmen and Ranking Members of Senate and 
House committees and subcommittees that have appropriation and 
oversight responsibilities for IRS. We also will be sending copies to 
the Acting Commissioner of Internal Revenue, the Secretary of the 
Treasury, and the Chairman of the IRS Oversight Board. Copies also are 
available at no charge on the GAO website at http://www.gao.gov.
    If you or your staffs have any questions about this report, please 
contact us at [email protected]. Contact points for our offices of 
Congressional Relations and Public Affairs are Katherine Siggerud, 
Managing Director, Congressional Relations at [email protected], and 
Chuck Young, Managing Director, Public Affairs at [email protected]. GAO 
staff members who made major contributions to this report are listed in 
appendix IV.
            Sincerely yours,
                             James R. McTigue, Jr.,
                    Director, Tax Issues, Strategic Issues.

                      Appendix I: Briefing Slides

 INTERNAL REVENUE SERVICE: PRELIMINARY OBSERVATIONS ON THE FISCAL YEAR 
                          2014 BUDGET REQUEST

    Prepared for the Subcommittee on Oversight, Committee on Ways and 
Means, U.S. House of Representatives (April 23, 2013) and the 
Subcommittee on Financial Services and General Government, Committee on 
Appropriations, U.S. Senate (April 25, 2013).
    Updated May 3, 2013.
                          briefing objectives
    You requested preliminary information on the fiscal year 2014 
budget for IRS. This briefing:
  --describes the fiscal year 2013 budget for IRS and potential 
        reductions resulting from sequestration;
  --describes IRS's budget data and trends from fiscal years 2010 
        through 2014, and the fiscal year 2014 new program initiatives, 
        return on investment (ROI) information, and major information 
        technology (IT) investments;
  --lists any analyses we have done related to legislative proposals 
        highlighted in the congressional budget justification; and
  --identifies our open matters for Congress and recommendations to IRS 
        with a potential financial benefit.
                         scope and methodology
    To conduct this work, for each objective, we:
  --summarized the President's budgets and IRS congressional 
        justifications from fiscal years 2010 through 2014, reviewed 
        Office of Management and Budget (OMB) guidance on 
        sequestration, reviewed revenue estimates from the Department 
        of Treasury's Green Book, and interviewed IRS officials in the 
        offices of the Chief Financial Officer and Corporate Budget. We 
        interviewed IRS officials and determined that the data 
        presented in this briefing were sufficiently reliable for our 
        purposes.
    We conducted this performance audit from April to May 2013 in 
accordance with generally accepted government auditing standards. Those 
standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe that 
the evidence obtained provides a reasonable basis for our findings and 
conclusions based on our audit objectives.
                            results in brief
    In summary:
  --The fiscal year 2013 annualized continuing resolution rate shown in 
        the fiscal year 2014 budget ($11.9 billion) is not the enacted 
        funding level, and the actual amount is $689 million lower.
  --For fiscal year 2014, the President's budget requests an increase 
        for IRS of 9 percent ($1,044 million) in discretionary funding 
        over the fiscal year 2012 appropriation and an increase of 8 
        percent (6,732 full-time equivalents (FTEs)) in staffing over 
        fiscal year 2012 actual levels. In addition, the funding 
        request includes:
    --Twelve new program initiatives related to enforcement activities 
            and six new program initiatives related to taxpayer 
            service, infrastructure, or other activities.
    --New information on actual return on investment for enforcement 
            activities, and expanded information on information 
            technology (IT) investments, such as lifecycle costs, 
            projected useful life of the current asset, and anticipated 
            benefits.
  --The request includes 33 legislative proposals, including 12 related 
        to our prior work.
  --As of March 2013, 39 of our products contained 10 matters for 
        congressional consideration and 88 recommendations to IRS with 
        a potential financial benefit that have not been addressed. 
        Since March 2012, IRS has implemented 24 recommendations with a 
        potential financial benefit.
                   fiscal year 2013 and sequestration
Funding Levels Down Again, While Demands on Resources Increase With 
        Implementation of Four New Laws
  --The fiscal year 2013 annualized continuing resolution rate shown in 
        the fiscal year 2014 budget ($11.9 billion) is not the enacted 
        funding level, and the actual amount is $689 million lower due 
        to sequestration ($594 million), the final continuing 
        resolution adjustment ($71 million), and a 0.2 percent 
        rescission ($24 million).
    --According to IRS budget officials, IRS adjusted its fiscal year 
            2013 operating plans to reflect these reductions, which are 
            described in the operating plan for fiscal year 2013, 
            released on April 30, 2013.
    --As a result, comparisons in the congressional justification are 
            based on fiscal year 2012 instead of fiscal year 2013.
  --The fiscal year 2013 decrease follows a fiscal year 2012 cut of 
        $305 million.
  --IRS has been implementing four new laws, relating to (1) the 
        Patient Protection and Affordable Care Act (PPACA),\1\ (2) 
        merchant card transaction,\2\ (3) basis reporting,\3\ and (4) 
        the Foreign Account Tax Compliance Act (FATCA),\4\ which have 
        resulted in additional demands for its existing resources.
---------------------------------------------------------------------------
    \1\ PPACA, Public Law No. 111-148, 124 Stat. 119 (Mar. 23, 2010), 
as amended by the Health Care and Education Reconciliation Act (HCERA), 
Public Law No. 111-152, 124 Stat. 1029 (Mar. 30, 2010). All references 
to PPACA include amendments by HCERA.
    \2\ Housing Assistance Tax Act of 2008, Public Law No. 110-289, 
div. C, Sec. 3091, 122 Stat. 2654, 2908-2911 (July 30, 2008).
    \3\ Energy Improvement and Extension Act of 2008, Public Law No. 
110-343, div. B, Sec. 403, 122 Stat. 3765, 3854-3860 (Oct. 3, 2008).
    \4\ Hiring Incentives To Restore Employment Act, Public Law 111-
147, title V, 124 Stat. 71, 97-117 (Mar. 18, 2010).
---------------------------------------------------------------------------
Sequestration Reduces Fiscal Year 2013 Budget Levels for IRS
    According to the Acting IRS Commissioner, as a result of 
sequestration, IRS may plan to:
  --continue to operate under a hiring freeze;
  --reduce funding for grants and other expenditures;
  --cut costs in areas such as travel, training, facilities, and 
        supplies;
  --review contract spending to ensure only the most critical and 
        mandatory requirements are fully funded; and
  --furlough all staff for a total of 5 to 7 days after the filing 
        season ends.\5\
---------------------------------------------------------------------------
    \5\ The Acting IRS Commissioner announced 5 furlough days, 
including May 24, 2013, June 14, 2013, July 5, 2013, July 22, 2013, and 
August 30, 2013, and that two other furlough days may be scheduled in 
August and September 2013.

   TABLE 1.--IRS FUNDING SUBJECT TO SEQUESTRATION AND SUBSEQUENT REDUCTIONS TO DISCRETIONARY IRS APPROPRIATION
                                        ACCOUNTS FOR FISCAL YEAR 2013 \a\
----------------------------------------------------------------------------------------------------------------
                                                                       Total
                                                                   sequestrable                        Total
                                                                      budget         Sequester       sequester
              Discretionary appropriation accounts                   authority      percentage      amount (in
                                                                    amount (in                       millions)
                                                                     millions)
----------------------------------------------------------------------------------------------------------------
Enforcement.....................................................          $5,348               5            $267
Operations support..............................................           3,983               5             199
Taxpayer services...............................................           2,271               5             113
Business Systems Modernization (BSM)............................             332               5              17
                                                                 -----------------------------------------------
      Total discretionary.......................................      \b\ 11,934  ..............             594
----------------------------------------------------------------------------------------------------------------
Source: GAO analysis of OMB and IRS data.
Note: Numbers may not add due to rounding.
\a\ Discretionary appropriations are budgetary resources that are provided in appropriations acts, and do not
  fund mandatory programs. Sequestration also requires reductions of 5.1 percent to other nonexempt nondefense
  mandatory programs. IRS has eight appropriation accounts, such as the IRS Miscellaneous Retained Fees account,
  that fall into this category. The total sequester amount for those appropriation accounts is $232 million.
\b\ This amount includes reimbursables ($46 million) and the final continuing resolution adjustment ($71
  million).

Cost Saving Actions Taken in Fiscal Year 2012 Resulted in a Lower Base 
        Budget for Fiscal Year 2013
  --IRS realized $426 million in savings in fiscal year 2012.
    --Savings and efficiencies resulted from, for example:
      -- Reducing FTEs by 3.4 percent ($206 million) through targeted 
            buyouts, attrition, and hiring freezes;
      -- transferring lock box fees to taxpayers as part of their 
            installment agreements; \6\
---------------------------------------------------------------------------
    \6\ A lockbox is a post office box established by a financial 
institution to receive payments made to the IRS.
---------------------------------------------------------------------------
      --reducing IT infrastructure costs (e.g., renegotiating 
            contracts);
      -- reducing printing and postage (e.g., stopped weekly mailings 
            of Publication 15, Employer's Tax Guide); and
      --reducing travel and training.
  --The savings were $236 million more than IRS projected for fiscal 
        year 2012.
  --According to IRS budget officials, some savings from fiscal year 
        2012 are being used in fiscal year 2013 to cover implementation 
        of legislative mandates and sequestration.
                fiscal year 2014 budget data and trends
Summary of Key Budget and FTE Data
  --The fiscal year 2014 budget request for IRS is $12.9 billion and 
        96,218 FTEs.
    --The budget shows a:
      -- 9 percent increase ($1,044 million) over the fiscal year 2012 
            appropriation.
      -- 8 percent increase (6,732 FTEs) in staffing over fiscal year 
            2012 actual levels.
    --In fiscal year 2014, IRS expects to gain base budget savings and 
            efficiencies of $217 million from cost reduction 
            strategies, such as hiring restrictions, space 
            consolidations, and savings resulting from more 
            electronically filed tax returns.\7\
---------------------------------------------------------------------------
    \7\ The savings and efficiencies of $217 million include a net 
reinvestment of $37.5 million.
---------------------------------------------------------------------------
    --The requested increases include:
      -- Twelve new enforcement initiatives, such as a request for $101 
            million to improve identification and prevention of refund 
            fraud and identity theft.
      -- Six taxpayer service, infrastructure, and other initiatives, 
            such as $306 million to implement IT changes to deliver tax 
            credits and other requirements for PPACA.
Dollars by Appropriation Account, Fiscal Years 2010 Through 2014

                                      TABLE 2.--IRS FISCAL YEARS 2010 THROUGH 2014 BUDGET BY APPROPRIATION ACCOUNT
                                                                  [Dollars in millions]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                         Dollar change    Percent change
                                                              Fiscal    Fiscal    Fiscal     Fiscal year                  fiscal year      fiscal year
                                                               year      year      year         2013       Fiscal year    2012 enacted     2012 enacted
                   Appropriation account                       2010      2011      2012      annualized        2014       compared to      compared to
                                                              enacted   enacted   enacted    continuing     requested     fiscal year      fiscal year
                                                                                           resolution \a\                2014 requested   2014 requested
--------------------------------------------------------------------------------------------------------------------------------------------------------
Enforcement................................................    $5,504    $5,493    $5,299         $5,331        $5,667             $367                7
Operations support.........................................     4,084     4,057     3,947          3,971         4,481              533               14
Taxpayer services..........................................     2,279     2,293     2,240          2,254         2,413              173                8
BSM........................................................       264       263       330            332           301              -29               -9
Health Insurance Tax Credit Administration (HITCA) \b\.....        16        15     \(b)\          \(b)\         \(b)\              n/a              n/a
                                                            --------------------------------------------------------------------------------------------
      Subtotal.............................................    12,146    12,122    11,817         11,888        12,861            1,044                9
Other resources, such as user fees.........................       539       655       695            905           497             -198              -29
                                                            ============================================================================================
      Total funding available for obligation...............    12,686    12,777    12,512         12,793        13,358              846                7
--------------------------------------------------------------------------------------------------------------------------------------------------------
Legend: n/a = not applicable.
Source: Fiscal year 2012, 2013, and 2014 congressional budget justifications for IRS.
Note: Dollars are nominal and not adjusted for inflation, and numbers may not add due to rounding.
\a\ A full-year 2013 appropriation for this account was not enacted at the time the budget was prepared; therefore, the budget assumes this account is
  operating under the Continuing Appropriations Resolution, 2013 (Public Law 112-175). The amounts included for 2013 reflect the annualized level
  provided by the continuing resolution and do not include reductions due to sequestration.
\b\ In fiscal year 2012, administrative resources for HITCA were moved to the taxpayer services appropriation under the Consolidated Appropriations Act,
  2012 (Public Law 112-74).

Staffing by Appropriation Account, Fiscal Years 2010 Through 2014

                                 TABLE 3.--FISCAL YEARS 2010 THROUGH 2014 FULL-TIME EQUIVALENTS BY APPROPRIATION ACCOUNT
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                           FTE change     Percent change
                                                              Fiscal    Fiscal    Fiscal     Fiscal year                  fiscal year      fiscal year
                                                               year      year      year         2013       Fiscal year    2012 actual      2012 actual
                   Appropriation  account                      2010      2011      2012      annualized        2014       compared to      compared to
                                                              actual    actual    actual     continuing     requested     fiscal year      fiscal year
                                                                                           resolution \a\                2014 requested   2014 requested
--------------------------------------------------------------------------------------------------------------------------------------------------------
Enforcement................................................    50,400    49,920    47,189         46,702        49,987            2,798                6
Operations support.........................................    12,262    12,103    11,499         12,240        13,143            1,644               14
Taxpayer services..........................................    31,607    31,574    30,236         30,402        32,575            2,339                8
BSM........................................................       337       309       562            513           513              -49               -9
HITCA \b\..................................................        12  ........  ........  ..............  ...........              n/a              n/a
                                                            --------------------------------------------------------------------------------------------
      Subtotal.............................................    94,618    93,906    89,486         89,857        96,218            6,732                8
Other resources, such as user fees.........................       752     1,003     2,185          1,698         1,093           -1,092              -50
                                                            ============================================================================================
      Total FTEs...........................................    95,370    94,909    91,671         91,555        97,311            5,640                6
--------------------------------------------------------------------------------------------------------------------------------------------------------
Legend: n/a = not applicable.
Source: Fiscal year 2012, 2013 and 2014 congressional budget justifications for IRS.
\a\ A full-year 2013 appropriation for this account was not enacted at the time the budget was prepared; therefore, the budget assumes this account is
  operating under the Continuing Appropriations Resolution, 2013 (Public Law 112-175). The amounts included for 2013 reflect the annualized level
  provided by the continuing resolution and do not include reductions due to sequestration.
\b\ In fiscal year 2012, administrative resources for HITCA were moved to the taxpayer services appropriation under the Consolidated Appropriations Act,
  2012 (Public Law 112-74).

Unobligated Balances by Appropriation Account, Fiscal Years 2010 
        Through 2014
  --Funds showed an expected decline in unobligated balances from 
        fiscal years 2012 to 2014.
  --IRS's unobligated balances are primarily resulting from no-year, 
        multi-year, and carryover funding and transfers from IRS's 
        Miscellaneous Retained Fee Fund (e.g., user fees) to its 
        discretionary appropriation accounts.
  --Fiscal years 2013 and 2014 unobligated balances represent estimates 
        of multi-year and user fee balances for future years.

             TABLE 4.--FISCAL YEARS 2010 TO 2014 UNOBLIGATED BALANCES FOR IRS APPROPRIATION ACCOUNTS
                                              [Dollars in millions]
----------------------------------------------------------------------------------------------------------------
                                    Fiscal year     Fiscal year     Fiscal year     Fiscal year     Fiscal year
      Appropriation account            2010            2011            2012       2013 estimated  2014 estimated
----------------------------------------------------------------------------------------------------------------
Enforcement.....................             $11             $16             $30             $43             $18
Operations support..............              97             142             178             291              22
Taxpayer services...............             150             148             192             205             158
BSM.............................             119             179             119              97             104
                                 -------------------------------------------------------------------------------
      Total.....................             377             485             519             636             302
----------------------------------------------------------------------------------------------------------------
Source: GAO analysis of IRS data.

$217 Million in Net Savings and Efficiencies Projected for Fiscal Year 
        2014
  --The fiscal year 2014 budget request for IRS continues efforts to 
        seek savings through:
    --Agency-wide strategies:
      -- Hiring restrictions (e.g., not replacing attrited staff) ($78 
            million);
      -- Reducing IT infrastructure ($58 million);
      -- Reducing costs and streamlining operations in the human 
            capital function ($8 million);
      -- Consolidating and closing offices ($39 million (net)):
        -- Space optimization (e.g., close, consolidate, or reduce 123 
            of 648 offices) ($77 million);
        -- One-time reinvestment to implement space optimization, which 
            requires building and consolidating space and relocating 
            employees ($38 million);
    --Program strategies:
      -- Savings related to increases in electronically filed returns 
            ($5 million); and
      -- Reduction in funding to BSM ($30 million).
The Administration Requested a Program Integrity Cap Adjustment of $412 
        Million for IRS
    Congress passes program integrity cap adjustments to allow 
additional funding above discretionary spending limits for certain 
activities that are expected to generate benefits that exceed cost.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



                new initiatives and return on investment
IRS Proposed 12 Enforcement Initiatives, Totaling $605 Million

                             TABLE 5.--FUNDING REQUESTED FOR ENFORCEMENT INITIATIVES
                                              [Dollars in millions]
----------------------------------------------------------------------------------------------------------------
                                          Fiscal year 2014 funding requested, by
                                                   appropriation account                              Projected
                                   ----------------------------------------------------                ROI for
 Description of budget adjustments    Taxpayer                 Operations                Total \a\   fiscal year
                                      services   Enforcement    support    BSM account                 2016 \b\
                                      account      account      account
----------------------------------------------------------------------------------------------------------------
New enforcement initiatives.......          $38         $365         $202  ...........         $605          n/a
    Increase audit coverage to      ...........           71           39  ...........          111          3.2
     address tax compliance issues
     \e\..........................
    Improve identification and               19           48           33  ...........          101         14.4
     prevention of refund fraud
     and identity theft...........
    Increase collection coverage    ...........           36           24  ...........           60          9.3
     \e\..........................
    Leverage data to improve case            10            4           37  ...........           52          1.5
     selection \c,\ \e\...........
    Implement merchant card and               8           30           12  ...........           50          8.5
     basis matching...............
    Address international and       ...........           43            6  ...........           49          4.5
     offshore compliance issues
     \e\..........................
    Improve coverage of             ...........           39            6  ...........           45          7.7
     partnerships and flow-through
     entities \e\.................
    Address impact of Patient                 1           26           17  ...........           44          1.9
     Protection and Affordable
     Care Act statutory
     requirements.................
    Implement Foreign Account Tax   ...........           20           16  ...........           35          3.7
     Compliance Act...............
    Expand coverage of high-wealth  ...........           29            5  ...........           34         13.4
     individuals and enterprises
     \e\..........................
    Build out tax return preparer   ...........           16            2  ...........           18        \(d)\
     compliance activities \e\....
    Leverage digital evidence for   ...........            1            4  ...........            5        \(d)\
     criminal investigation \e\...
New nonenforcement initiatives....          130            8          392  ...........          531          n/a
Inflation adjustment and pay                 22           51           52            1          126          n/a
 raises...........................
Savings and efficiencies, net               -18          -57         -113          -30         -217          n/a
 reinvestment.....................
                                   -----------------------------------------------------------------------------
      Total appropriations                  173          367          533          -29    \a\ 1,044          n/a
       adjustment.................
----------------------------------------------------------------------------------------------------------------
Source: Fiscal year 2014 congressional budget justification for IRS.
Notes: Numbers may not add due to rounding.
n/a = not applicable.
\a\ The total does not include the final continuing resolution adjustment of $71 million.
\b\ According to IRS, new fiscal year 2014 hires will reach full potential in fiscal year 2016. See appendix II
  for more information on ROI.
\c\ The taxpayer services portion of this initiative ($10 million) would not require a program integrity cap
  adjustment.
\d\ IRS does not have assurance that the Build Out Tax Return Preparer Compliance and Leverage Digital Evidence
  for Criminal Investigations initiatives will produce direct revenue.
\e\ Requested increase would require a program integrity cap adjustment.

IRS Proposed Six Taxpayer Service, Infrastructure, and Other 
        Initiatives, Totaling $531 Million

             TABLE 6.--FUNDING REQUESTED FOR TAXPAYER SERVICE, INFRASTRUCTURE, AND OTHER INITIATIVES
                                              [Dollars in millions]
----------------------------------------------------------------------------------------------------------------
                                                       Fiscal year 2014 funding requested, by
                                                                appropriation account
                                                ----------------------------------------------------
       Description of budget adjustments           Taxpayer                 Operations                Total \a\
                                                   services   Enforcement    support    BSM account
                                                   account      account      account
----------------------------------------------------------------------------------------------------------------
New enforcement initiatives....................          $38         $365         $202  ...........         $605
New nonenforcement initiatives.................          130            8          392  ...........          531
    Implement IT changes to deliver tax credits  ...........  ...........          306  ...........          306
     and other requirements....................
    Improve taxpayer service and meet increased          130            3           44  ...........          177
     demand....................................
    Develop new online services \b\............  ...........  ...........           24  ...........           24
    Develop converged telecommunication          ...........  ...........           15  ...........           15
     networks \b\..............................
    Transfer to the Alcohol and Tobacco Tax and  ...........            5  ...........  ...........            5
     Trade Bureau for high return-on-investment
     tax enforcement activities \b\............
    Expand virtual services delivery \b\.......  ...........  ...........            4  ...........            4
Inflation adjustment and pay raises............           22           51           52            1          126
Savings and efficiencies, net investment.......          -18          -57         -113          -30         -217
                                                ----------------------------------------------------------------
      Total appropriations adjustment..........          173          367          533          -29    \a\ 1,044
----------------------------------------------------------------------------------------------------------------
Source: Fiscal year 2014 congressional budget justification for IRS.
Notes: Numbers may not add due to rounding.
IRS does not calculate ROI for nonenforcement initiatives.
\a\ The total does not include the final continuing resolution adjustment of $71 million.
\b\ Requested increase would require a program integrity cap adjustment.

$440 Million and 1,954 FTEs Proposed To Implement PPACA in Fiscal Year 
        2014
  --In fiscal year 2014, PPACA funding is included in three of IRS's 
        new funding initiatives.

                                 TABLE 7.--FISCAL YEAR 2014 PPACA BUDGET REQUEST
                                              [Dollars in millions]
----------------------------------------------------------------------------------------------------------------
                                              Taxpayer         Enforcement       Operations           Total
                                              services     ------------------      support     -----------------
               Initiatives               ------------------                  ------------------
                                          Dollars    FTEs   Dollars    FTEs   Dollars    FTEs   Dollars    FTEs
----------------------------------------------------------------------------------------------------------------
Improve taxpayer service and meet             $70      908       $3       32      $16        9      $90      949
 increased demand (PPACA portion of
 initiative)............................
Address impact of PPACA statutory               1        8       26      223       17       52       44      283
 requirements...........................
Implement IT changes to deliver tax       .......  .......  .......  .......      306      722      306      722
 credits and other requirements.........
                                         -----------------------------------------------------------------------
      Total fiscal year 2014 PPACA             71      916       29      255      339      783      440    1,954
       budget request...................
----------------------------------------------------------------------------------------------------------------
Source: Fiscal year 2014 congressional budget justification for IRS.
Note: Numbers may not add due to rounding.

  --In fiscal year 2013, IRS requested $360 million to implement PPACA, 
        but did not receive it.
  --In fiscal years 2010 through 2012, IRS received a total of $488 
        million and 1,272 FTEs to implement PPACA from the Department 
        of Health and Human Services' Health Insurance Reform 
        Implementation Fund (HIRIF).

                      TABLE 8.--IRS HIRIF FUNDING FOR PPACA, FISCAL YEARS 2010 THROUGH 2012
                                              [Dollars in millions]
----------------------------------------------------------------------------------------------------------------
                                                              Fiscal year  Fiscal year  Fiscal year
                                                                  2010         2011         2012        Total
----------------------------------------------------------------------------------------------------------------
Dollars (in millions).......................................          $21         $168         $299         $488
FTEs........................................................           31          577          664        1,272
----------------------------------------------------------------------------------------------------------------
Source: Fiscal year 2014 congressional budget justification for IRS.
Note: Numbers may not add due to rounding.

IRS Reported Actual Return on Investment Data for Three Enforcement 
        Programs for the First Time

                                                 TABLE 9.--ACTUAL ROI FOR MAJOR IRS ENFORCEMENT PROGRAMS
                                                                  [Dollars in millions]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                               Fiscal year 2009            Fiscal year 2010            Fiscal year 2011            Fiscal year 2012
           Enforcement program           ---------------------------------------------------------------------------------------------------------------
                                            Cost    Revenue    ROI      Cost    Revenue    ROI      Cost    Revenue    ROI      Cost    Revenue    ROI
--------------------------------------------------------------------------------------------------------------------------------------------------------
Examination.............................   $3,965   $17,446      4.4   $4,371   $23,563      5.4   $4,333   $18,924      4.4   $4,232   $14,476      3.4
Collection..............................    1,880    26,871     14.3    1,948    29,105     14.9    1,939    31,060     16.0    1,742    30,442     17.5
Automated Underreporter.................      223     4,569     20.5      262     4,924     18.8      270     5,245     19.4      267     5,269     19.7
                                         ---------------------------------------------------------------------------------------------------------------
      IRS total.........................    6,068    48,886      8.1    6,581    57,592      8.8    6,543    55,229      8.4    6,242    50,187      8.0
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: Fiscal year 2014 congressional budget justification for IRS.
Note: Numbers may not add due to rounding.

  --IRS made significant progress by calculating average direct actual 
        ROI for the Examination, Collection, and Automated 
        Underreporter programs, as shown in table 9.
  --IRS is not yet able to calculate ROI data that measure the marginal 
        revenue produced by additional spending, such as program 
        initiatives, or that include indirect effects of enforcement on 
        voluntary compliance.
  --IRS stated that developing actual ROI at the program initiative 
        (marginal) level is challenging. As we reported in December 
        2012, developing a methodology and using data to improve the 
        allocation of IRS enforcement resources could result in a 
        significant increase in direct revenue.\8\
---------------------------------------------------------------------------
    \8\ See GAO, Tax Gap: IRS Could Significantly Increase Revenues by 
Better Targeting Enforcement Resources, GAO-13-151 (Washington, DC: 
Dec. 5, 2012).
---------------------------------------------------------------------------
                    fiscal year 2014 it investments
$2.6 Billion Requested for IT in Fiscal Year 2014 and IRS Expanded 
        Information on IT Investments
  --Of the $2.6 billion requested:
    --$1.5 billion is planned to fund 18 major IT investments.\9\ The 
            funding for major IT investments comes from multiple 
            sources:
---------------------------------------------------------------------------
    \9\ According to IRS, major investments are defined by Treasury as 
those that cost $10 million in either the current year or budget year, 
or $50 million over the 5-year period extending from the prior year 
through budget year +2. Last year, IRS reported 20 major IT systems. 
The Current Customer Account Data Engine (Current CADE) and Affordable 
Care Act (ACA, the IT investment supporting IRS's implementation of the 
PPACA requirements) are no longer on the list. Current CADE was 
terminated in December 2011. According to IRS, ACA will now be reported 
as separate nonmajor investments instead of one major investment.
---------------------------------------------------------------------------
      -- $1.2 billion from the operations support appropriation 
            account;
      -- $260 million from the BSM appropriation account;
      -- $40 million from operations support user fees; and
      -- $12 million from other funding sources.\10\
---------------------------------------------------------------------------
    \10\ Other funding sources include, for example, IRS Operations 
Support Reimbursables.
---------------------------------------------------------------------------
    --$1.1 billion is planned to fund nonmajor IT investments.
  --IRS included expanded information on its IT investments in the 
        fiscal year 2014 budget request, including lifecycle costs, 
        projected useful life of the current asset, anticipated 
        benefits and how performance will be measured.
Major IT Investments' Planned Cost

                           TABLE 10.--COST INFORMATION FOR IRS'S MAJOR IT INVESTMENTS
                                              [Dollars in millions]
----------------------------------------------------------------------------------------------------------------
                                                                                                     Projected
                                                                    Fiscal year                   useful life of
            Investment name             Fiscal year 2013 funding   2013 to 2014      Lifecycle     the  current
                                                type \a\             cost \b\          costs           asset
                                                                                                    (estimated)
----------------------------------------------------------------------------------------------------------------
Account Management Services (AMS):
    Enhances customer support by        O&M.....................             $44            $212            2019
     providing applications that
     enable IRS employees to access,
     validate, and update individual
     taxpayer accounts on demand.
Customer Account Data Engine 2 (CADE
 2):
    Provides timely access to           O&M and DME.............             496           1,479            2019
     authoritative individual taxpayer
     account information and enhances
     IRS's ability to address
     technology, security, financial
     material weaknesses, and long-
     term architectural planning and
     viability.
Electronic Fraud Detection System
 (EFDS):
    Assists in detecting fraud at the   O&M.....................              38             150            2015
     time that tax returns are filed
     in order to eliminate the
     issuance of fraudulent tax
     refunds.
e-Services (e-SVS):
    Comprises several web-based self-   O&M and DME.............              24             211            2019
     assisted services that are
     intended to allow authorized
     individuals to do business with
     the IRS electronically.
Foreign Account Tax Compliance Act
 (FATCA):
    Intended to implement provisions    DME.....................              32              91            2019
     of the Foreign Account Tax
     Compliance Act regarding
     financial institutions reporting
     to IRS information about
     financial accounts held by U.S.
     taxpayers, or foreign entities in
     which U.S. taxpayers hold a
     substantial ownership interest.
Implement Return Review Program (RRP)
 (Replaces EFDS):
    Currently under development, is     DME.....................              75             169            2019
     intended to maximize fraud
     detection at the time that tax
     returns are filed to eliminate
     issuance of questionable refunds.
Individual Master File (IMF):
    Represents the authoritative data   O&M and DME.............              18             108            2019
     source for individual tax account
     data. All other IRS information
     systems that process IMF data
     depend on output from this
     source. This investment is a
     critical component of IRS's
     ability to process tax returns.
Information Reporting and Document
 Matching (IRDM):
    Intended to establish a new         O&M and DME.............              46             186            2019
     business information matching
     program in order to increase
     voluntary compliance and accurate
     income reporting.
Integrated Customer Communication
 Environment (ICCE):
    Includes several projects that are  O&M and DME.............              33             534            2019
     intended to simplify voluntary
     compliance using voice response,
     Internet, and other computer
     technology such as the Modernized
     Internet Employee Identification
     Number, which allows third
     parties to act on the behalf of
     taxpayers.
Integrated Data Retrieval System
 (IDRS):
    Intended to provide systemic        O&M and DME.............              37             322            2019
     review, improve consistency in
     case control, alleviate staffing
     needs, issue notices to
     taxpayers, and allow taxpayers to
     see status of refunds. It is a
     mission-critical system used by
     60,000 IRS employees.
Integrated Financial System/CORE
 Financial System (IFS):
    Used by IRS for budget, payroll,    O&M and DME.............              32             483            2019
     accounts payable/receivable,
     general ledger functions, and
     financial reporting; also used to
     report on the cost of operations
     and to manage budgets by fiscal
     year.
Integrated Submission and Remittance
 Processing System (ISRP):
    Processes paper tax returns, and    O&M and DME.............              24             192            2019
     updates tax forms to comply with
     tax law changes.
IRS End User Systems and Services
 (EUSS):
    Supports products and services      O&M.....................             381           1,684            2025
     necessary for daily functions for
     over 100,000 IRS employees at
     headquarters and field sites.
IRS Main Frames and Servers Services
 and Support (MSSS):
    Intended to support the design,     O&M.....................             810           6,016            2025
     development, and deployment of
     server storage infrastructures,
     software, databases, and
     operating systems.
IRS Telecommunications Systems and
 Support (TSS):
    Supports IRS's broad and local      O&M.....................             594           2,583            2021
     network infrastructure such as
     servers, and switches for voice,
     data, and video servicing of
     about 1,000 IRS sites.
IRS.Gov-Portal Environment:
    Provides web-based services such    O&M and DME.............             131             612            2020
     as tax filing and refund
     tracking, to internal and
     external users, such as IRS
     employees and other government
     agencies, taxpayers, and business
     partners.
Modernized e-File (MeF):
    Provides a secure web-based         O&M and DME.............             140             575            2019
     platform for electronic tax
     filing of individual and business
     tax and information returns by
     registered Electronic Return
     Originators.
Service Center Recognition/Image
 Processing System (SCRIPS):
    Used as a data capture,             O&M and DME.............              19             195            2019
     management, and image storage
     system using high-speed scanning
     and digital imaging to convert
     data from the 940, 941, K-1, and
     paper returns from Information
     Returns Processing into
     electronic format.
----------------------------------------------------------------------------------------------------------------
Source: GAO analysis of fiscal year 2014 congressional budget justification for IRS.
\a\ O&M = Operations and Maintenance; DME = Development/Modernization/Enhancement.
\b\ The fiscal year 2013 to 2014 cost is defined as the base fiscal year 2013 budget plus the fiscal year 2014
  request.

                         legislative proposals
GAO Conducted Analyses Related to 12 of the 33 Legislative Proposals in 
        the Fiscal Year 2014 Budget

                           TABLE 11.--LEGISLATIVE PROPOSALS RELATED TO PRIOR GAO WORK
                                                  [In millions]
----------------------------------------------------------------------------------------------------------------
  IRS legislative proposals related to    Projected revenues over   Projected costs
             prior GAO work                       10 years            over 3 years        Related GAO reports
----------------------------------------------------------------------------------------------------------------
Modify reporting of tuition expenses and                   $1,095      Not available  GAO-10-225, GAO-13-279SP
 scholarships on Form 1098-T, Tuition
 Statement.
Increase certainty about the rules                          9,097               $1.9  GAO-09-717
 pertaining to classification of
 employees as independent contractors.
Extend IRS math error authority in                            185                1.4  GAO-10-349, GAO-10-225,
 certain circumstances.                                                                GAO-11-481
Allow IRS to absorb credit and debit                           19                9.6  GAO-10-11
 card processing fees for certain tax
 payments.
Provide Treasury with the regulatory            No revenue effect               11.2  GAO-05-491
 authority to require additional
 information to be included in
 electronically filed Form 5500, Annual
 Return/Report of Employee Benefit Plan,
 and electronic filing of certain other
 employee benefit plan reports.
Require taxpayers who prepare their             No revenue effect                6.8  GAO-12-33, GAO-08-38
 returns electronically, but file their
 returns on paper, to print their
 returns with a two-dimensional bar code.
Require all Form 990 series tax and             No revenue effect      Not available  GAO-02-526, GAO-02-444,
 information returns be filed                                                          GAO-06-799
 electronically and provide IRS with
 regulatory authority to make the
 electronically filed Form 990 series
 returns publicly available in a machine
 readable format in a timely manner.
Restrict access to Death Master File....                    1,303      Not available  GAO-02-233T
Provide whistleblowers with protection         Negligible revenue      Not available  GAO-11-683
 from retaliation.                                         effect
Provide stronger protection from                No revenue effect      Not available  GAO-11-683
 improper disclosure of taxpayer
 information in whistleblower actions.
Add tax crimes to the Aggravated               Negligible revenue      Not available  GAO-13-132T, GAO-09-882,
 Identity Theft Statute.                                   effect                      GAO-02-766
Impose a civil penalty on tax identity         Negligible revenue      Not available  GAO-13-132T, GAO-09-882,
 theft crimes.                                             effect                      GAO-02-766
----------------------------------------------------------------------------------------------------------------
Source: IRS, Fiscal year 2014 congressional budget justification, and Department of the Treasury, General
  Explanations of the Administration's Fiscal Year 2014 Revenue Proposals (Washington, DC: April 2013).

                    open matters and recommendations
Implementing Open Matters for Congress and Recommendations to IRS Could 
        Result in Financial Benefits
  --We highlighted several areas where IRS could achieve cost savings 
        and revenue enhancements in our duplication, overlap, and 
        fragmentation reports.\11\
---------------------------------------------------------------------------
    \11\ See GAO, 2013 Annual Report: Actions Needed To Reduce 
Fragmentation, Overlap, and Duplication and Achieve Other Financial 
Benefits, GAO-13-279SP (Washington, DC: Apr. 9, 2013), 2012 Annual 
Report: Opportunities To Reduce Duplication, Overlap and Fragmentation, 
Achieve Savings, and Enhance Revenue, GAO-12-342SP (Washington, DC: 
Feb. 28, 2012), and Opportunities To Reduce Potential Duplication in 
Government Programs, Save Tax Dollars, and Enhance Revenue, GAO-11-
318SP (Washington, DC: Mar. 1, 2011).
---------------------------------------------------------------------------
  --As of March 2013, 39 of our products contain 10 matters for 
        congressional consideration and 88 recommendations to IRS with 
        a potential financial benefit that have not been addressed. In 
        addition, we have multiple other recommendations that could 
        improve IRS operations if implemented. See appendix III for a 
        list of products.
  --Since March 2012, IRS has implemented 24 recommendations with a 
        potential financial benefit.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        
                Appendix II: Return on Investment Charts

 IRS ESTIMATED FUTURE ROI FOR 10 OF THE 12 NEW ENFORCEMENT INITIATIVES

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



Note: Figures 11 and 12 do not use IRS's traditional ROI calculation. 
Figure 11 shows an initiative to protect revenue and Figure 12 shows an 
initiative to entrance revenue.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    Appendix III: GAO Products With Open Matters for Congressional 
  Consideration and Recommendations to IRS With a Potential Financial 
                                Benefit

    Thirty-nine GAO products contain 10 matters for congressional 
consideration and 88 recommendations to IRS with a potential financial 
benefit that have not been addressed. Thirty have the potential to 
increase revenue (IR), 9 increase savings (IS), 19 increase both 
savings and revenue (ISR), and 40 may have indirect financial benefits 
(IFB).

 TABLE 12.--LIST OF OPEN MATTERS FOR CONGRESS AND RECOMMENDATIONS TO IRS
  THAT COULD RESULT IN POTENTIAL SAVINGS OR INCREASED REVENUES OR BOTH
------------------------------------------------------------------------
                                     Web site for
                                   current status of       Potential
     Report title and number        matters and/or         financial
                                    recommendations        benefits
------------------------------------------------------------------------
Addressing identity theft:
    Identify Theft: Total Extent  http://www.gao.gov/ IFB
     of Refund Fraud Using         products/GAO-13-
     Stolen Identities Is          132T
     Unknown (GAO-13-132T).
Detecting abusive tax avoidance
 transactions:
    Abusive Tax Avoidance         http://www.gao.gov/ IR, IFB
     Transactions: IRS Needs       products/GAO-11-
     Better Data To Inform         493
     Decisions about
     Transactions (GAO-11-493).
Enhancing budget requests:
    IRS 2013 Budget: Continuing   http://www.gao.gov/ IS, IFB
     To Improve Information on     products/GAO-12-
     Program Costs and Results     603
     Could Aid in Resource
     Decision Making (GAO-12-
     603).
    IRS Budget 2012: Extending    http://www.gao.gov/ IS
     Systematic Reviews of         products/GAO-11-
     Spending Could Identify       547
     More Savings Over Time (GAO-
     11-547).
Enhancing collection of user
 fees:
    User Fees: Additional         http://www.gao.gov/ IFB
     Guidance and Documentation    products/GAO-12-
     Could Further Strengthen      193
     IRS's Biennial Review of
     Fees (GAO-12-193).
Enhancing electronic filing:
    E-Filing Tax Returns:         http://www.gao.gov/ IS, ISR, IFB
     Penalty Authority and         products/GAO-12-
     Digitizing More Paper         33
     Return Data Could Increase
     Benefits (GAO-12-33).
    Electronic Tax Return         http://www.gao.gov/ IS
     Filing: Improvements Can Be   products/GAO-11-
     Made Before Mandate Becomes   344
     Fully Implemented (GAO-11-
     344).
    Tax Administration:           http://www.gao.gov/ ISR
     Opportunities Exist for IRS   products/GAO-09-
     To Enhance Taxpayer Service   1026
     and Enforcement for the
     2010 Filing Season (GAO-09-
     1026).
Enhancing electronic filing and
 improving accuracy of paid
 preparers:
    Tax Administration: Many      http://www.gao.gov/ IFB
     Taxpayers Rely on Tax         products/GAO-09-
     Software and IRS Needs To     297
     Assess Associated Risks
     (GAO-09-297).
Enhancing internal controls:
    Management Report:            http://www.gao.gov/ IS, IFB
     Improvements Are Needed To    products/GAO-11-
     Enhance the Internal          494R
     Revenue Service's Internal
     Controls and Operating
     Effectiveness (GAO-11-494R).
Enhancing taxpayer services:
    2012 Tax Filing: IRS Faces    http://www.gao.gov/ ISR
     Challenges Providing          products/GAO-13-
     Service to Taxpayers and      156
     Could Collect Balances Due
     More Effectively (GAO-13-
     156).
    2011 Tax Filing: Processing   http://www.gao.gov/ ISR
     Gains, but Taxpayer           products/GAO-12-
     Assistance Could Be           176
     Enhanced by More Self-
     Service Tools (GAO-12-176).
Enhancing treatment of
 appraisals issues:
    Appraised Values on Tax       http://www.gao.gov/ ISR
     Returns: Burdens on           products/GAO-12-
     Taxpayers Could Be Reduced    608
     and Selected Practices
     Improved (GAO-12-608).
Expanding use of math error
 authority or third party data:
    2011 Tax Filing: IRS Dealt    http://www.gao.gov/ IR
     With Challenges to Date but   products/GAO-11-
     Needs Additional Authority    481
     To Verify Compliance (GAO-
     11-481).
    Recovery Act: IRS Quickly     http://www.gao.gov/ ISR
     Implemented Tax Provisions,   products/GAO-10-
     but Reporting and             349
     Enforcement Improvements
     Are Needed (GAO-10-349).
    2009 Tax Filing Season: IRS   http://www.gao.gov/ IR, ISR
     Met Many 2009 Goals, but      products/GAO-10-
     Telephone Access Remained     225
     Low, and Taxpayer Service
     and Enforcement Could Be
     Improved (GAO-10-225).
    Tax Administration: IRS's     http://www.gao.gov/ ISR
     2008 Filing Season            products/GAO-09-
     Generally Successful          146
     Despite Challenges,
     Although IRS Could Expand
     Enforcement During Returns
     Processing (GAO-09-146).
Implementing Information
 Reporting and Document Matching
 (IRDM) system:
    IRS Management: Cost          http://www.gao.gov/ IFB
     Estimate for New              products/GAO-12-
     Information Reporting         59
     System Needs To Be Made
     More Reliable (GAO-12-59).
    Information Reporting: IRS    http://www.gao.gov/ IFB
     Could Improve Cost Basis      products/GAO-11-
     and Transaction Settlement    557
     Reporting Implementation
     (GAO-11-557).
Implementing Patient Protection
 and Affordable Care Act
 (PPACA):
    Patient Protection and        http://www.gao.gov/ IFB
     Affordable Care Act: IRS      products/GAO-12-
     Managing Implementation       690
     Risks, but Its Approach
     Could Be Refined (GAO-12-
     690).
    Patient Protection and        http://www.gao.gov/ IFB
     Affordable Care Act: IRS      products/GAO-11-
     Should Expand Its Strategic   719
     Approach to Implementation
     (GAO-11-719).
Improving allocation of
 enforcement resources:
    Tax Gap: IRS Could            http://www.gao.gov/ IR
     Significantly Increase        products/GAO-13-
     Revenues by Better            151
     Targeting Enforcement
     Resources (GAO-13-151).
Improving collection of unpaid
 taxes from Medicaid providers:
    Medicaid: Providers in Three  http://www.gao.gov/ IS
     States With Unpaid Federal    products/GAO-12-
     Taxes Received Over $6        857
     Billion in Medicaid
     Reimbursements (GAO-12-857).
Improving corporate tax
 compliance:
    Tax Gap: Actions Needed to    http://www.gao.gov/ IR, IFB
     Address Noncompliance with    products/GAO-10-
     S Corporation Tax Rules       195
     (GAO-10-195).
Improving individual or
 corporate tax compliance:
    Financial Derivatives:        http://www.gao.gov/ IFB
     Disparate Tax Treatment and   products/GAO-11-
     Information Gaps Create       750
     Uncertainty and Potential
     Abuse (GAO-11-750).
    Federal Tax Collection:       http://www.gao.gov/ IR
     Potential for Using           products/GAO-11-
     Passport Issuance To          272
     Increase Collection of
     Unpaid Taxes (GAO-11-272).
Improving management of
 information technology (IT)
 investments:
    Investment Management: IRS    http://www.gao.gov/ IS, IFB
     Has a Strong Oversight        products/GAO-11-
     Process but Needs To          587
     Improve How It Continues
     Funding Ongoing Investments
     (GAO-11-587).
Improving offshore compliance:
    Offshore Tax Evasion: IRS     http://www.gao.gov/ IR
     Has Collected Billions of     products/GAO-13-
     Dollars, but May Be Missing   318
     Continued Evasion (GAO-13-
     318) \a\.
Improving real estate tax
 compliance:
    Tax Administration: Expanded  http://www.gao.gov/ IR
     Information Reporting Could   products/GAO-10-
     Help IRS Address Compliance   997
     Challenges With Forgiven
     Mortgage Debt (GAO-10-997).
    Home Mortgage Interest        http://www.gao.gov/ IR
     Deduction: Despite            products/GAO-09-
     Challenges Presented by       769
     Complex Tax Rules, IRS
     Could Enhance Enforcement
     and Guidance (GAO-09-769).
    Real Estate Tax Deduction:    http://www.gao.gov/ IR
     Taxpayers Face Challenges     products/GAO-09-
     in Determining What           521
     Qualifies; Better
     Information Could Improve
     Compliance (GAO-09-521).
Improving rental real estate
 compliance:
    Tax Gap: Actions That Could   http://www.gao.gov/ IR
     Improve Rental Real Estate    products/GAO-08-
     Reporting Compliance (GAO-    956
     08-956).
Improving sole proprietors'
 compliance:
    Tax Gap: Limiting Sole        http://www.gao.gov/ IFB
     Proprietor Loss Deductions    products/GAO-09-
     Could Improve Compliance      815
     but Would Also Limit Some
     Legitimate Losses (GAO-09-
     815).
Improving tax credit
 administration:
    Small Employer Health Tax     http://www.gao.gov/ ISR
     Credit: Factors               products/GAO-12-
     Contributing to Low Use and   549
     Complexity (GAO-12-549).
Improving third party
 compliance:
    Tax Gap: IRS Could Do More    http://www.gao.gov/ IR, IFB
     To Promote Compliance by      products/GAO-09-
     Third Parties With            238
     Miscellaneous Income
     Reporting Requirements (GAO-
     09-238).
Improving use of whistleblower
 claims:
    Tax Whistleblowers:           http://www.gao.gov/ IR, IFB
     Incomplete Data Hinders       products/GAO-11-
     IRS's Ability To Manage       683
     Claim Processing Time and
     Enhance External
     Communication (GAO-11-683).
Increasing tax debt collection:
    Tax Debt Collection: IRS      http://www.gao.gov/ ISR
     Needs To Better Manage the    products/GAO-09-
     Collection Notices Sent to    976
     Individuals (GAO-09-976).
Promoting effective use of third-
 party data:
    Tax Gap: IRS Has Modernized   http://www.gao.gov/ IR, IFB
     Its Business Nonfiler         products/GAO-10-
     Program but Could Benefit     950
     From More Evaluation and
     Use of Third-Party Data
     (GAO-10-950).
Reducing tax evasion:
    Tax Gap: IRS Can Improve      http://www.gao.gov/ IFB
     Efforts To Address Tax        products/GAO-10-
     Evasion by Networks of        968
     Businesses and Related
     Entities (GAO-10-968).
------------------------------------------------------------------------
Legend: IR--Increase revenue, IS--Increase savings, ISR--Increase
  savings and revenue, IFB--Indirect financial benefit.
Source: GAO.
Notes: Products with open matters and recommendations identified as of
  March 11, 2013, with the exception of GAO-13-318 (see table note a).
  Some products may have matters and/or recommendations that do not have
  potential financial benefits or could be placed in different
  categories than provided above.
\a\ This product includes open recommendations identified as of March
  27, 2013.

          Appendix IV: GAO Contact and Staff Acknowledgements

                              gao contact
    James R. McTigue, Jr., [email protected].
                         staff acknowledgements
    In addition to the contact named above, Libby Mixon, Assistant 
Director; Amy Bowser, Chuck Fox, Paul Middleton, Ulyana Panchishin, 
Sabine Paul, Laurel Plume, Neil Pinney, Mark Ryan, Erinn L. Sauer, 
Cynthia Saunders, and Robert Yetvin made key contributions to this 
report.
                                 ______
                                 
    Prepared Statement of Nina E. Olson, National Taxpayer Advocate
    Chairman Lautenberg, Ranking Member Johanns, and distinguished 
members of this subcommittee:
    Thank you for inviting me to submit this statement regarding the 
proposed budget of the Internal Revenue Service for fiscal year 
2014.\1\
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    \1\ The views expressed herein are solely those of the National 
Taxpayer Advocate. The National Taxpayer Advocate is appointed by the 
Secretary of the Treasury and reports to the Commissioner of Internal 
Revenue. However, the National Taxpayer Advocate presents an 
independent taxpayer perspective that does not necessarily reflect the 
position of the IRS, the Treasury Department, or the Office of 
Management and Budget. Congressional testimony requested from the 
National Taxpayer Advocate is not submitted to the IRS, the Treasury 
Department, or the Office of Management and Budget for prior approval. 
However, we have provided courtesy copies of this statement to both the 
IRS and the Treasury Department in advance of this hearing.
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    I have been privileged to serve as the National Taxpayer Advocate 
since 2001, and I have never been more concerned than I am today about 
the IRS's ability to fulfill its mission of helping taxpayers 
voluntarily comply with their tax obligations and collecting the 
revenue on which the rest of the government depends.\2\
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    \2\ In the National Taxpayer Advocate's 2011 and 2012 Annual 
Reports to Congress, I identified the significant and chronic 
underfunding of the IRS as one of the most serious problems facing 
taxpayers. See National Taxpayer Advocate 2012 Annual Report to 
Congress 34-41 (Most Serious Problem: The IRS Is Significantly 
Underfunded to Serve Taxpayers and Collect Tax); National Taxpayer 
Advocate 2011 Annual Report to Congress 3-27 (Most Serious Problem: The 
IRS Is Not Adequately Funded to Serve Taxpayers and Collect Taxes).
---------------------------------------------------------------------------
    Since fiscal year 2010, the IRS's budget has been reduced by nearly 
$1 billion, or about 8 percent, due to across-the-board budget cuts and 
sequestration.\3\ Consequently, the IRS is unable to answer about one 
out of every three calls it receives from taxpayers seeking to speak 
with an employee.\4\ It is unable to process a high percentage of 
taxpayer letters responding to IRS compliance notices within 
established timeframes.\5\ It is unable to assist hundreds of thousands 
of identity theft victims in a timely manner, instead requiring them to 
wait 6 months or longer to receive their refunds.\6\ It continues to 
automate enforcement tasks, making it harder for taxpayers who need to 
speak with an employee to do so.\7\ And by the end of fiscal year 2013, 
it projects it will have cut its training budget by more than 80 
percent, which in my view is leaving employees less able to assist 
taxpayers properly.\8\
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    \3\ See Hearing Before Subcomm. on Financial Services and General 
Government of H. Comm. on Appropriations, 113th Cong. (2013) (statement 
of Steven T. Miller, Acting Commissioner of Internal Revenue), at 
http://appropriations.house.gov/uploadedfiles/hhrg-113-ap23-wstate-
millers-20130409.pdf.
    \4\ IRS, Joint Operations Center, Snapshot Reports: Enterprise 
Snapshot (week ending Sept. 30, 2012). The Accounts Management phones 
lines (previously known as the Customer Account Services phone lines) 
receive the significant majority of taxpayer calls. However, calls to 
compliance phone lines and certain other categories of calls are 
excluded from this total.
    \5\ During the final week of fiscal year 2012, the backlog of 
correspondence in the tax adjustments inventory stood at over 1 million 
letters, and the percentage classified as ``overage'' stood at 48 
percent. IRS, Joint Operations Center, Weekly Enterprise Adjustments 
Inventory Report (week ending Sept. 29, 2012).
    \6\ See, e.g., National Taxpayer Advocate 2012 Annual Report to 
Congress 42-67 (Most Serious Problem: The IRS Has Failed to Provide 
Effective and Timely Assistance to Victims of Identity Theft).
    \7\ See, e.g., National Taxpayer Advocate 2011 Annual Report to 
Congress 93-108 (Most Serious Problem: Automated ``Enforcement 
Assessments'' Gone Wild: IRS Efforts to Address the Non-Filer 
Population Have Produced Questionable Business Results for the IRS, 
While Creating Serious Burden for Many Taxpayers); see also National 
Taxpayer Advocate 2011 Annual Report to Congress, vol. 2, at 63-90 (An 
Analysis of the IRS Examination Strategy: Suggestions to Maximize 
Compliance, Improve Credibility, and Respect Taxpayer Rights), which 
notes that automation is leading to fewer personal contacts with 
taxpayers and lack of awareness among taxpayers that they are facing an 
enforcement action.
    \8\ IRS Fact Sheet, FS-2013-05, IRS Achieves $1 Billion in Cost 
Savings and Efficiencies (April 2013), at http://www.irs.gov/uac/IRS-
Achieves-$1-Billion-in-Cost-Savings-and-Efficiencies (last visited May 
1, 2013).
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    On April 15, the statutory deadline for filing individual income 
tax returns, the IRS managed to answer only 57 percent of the calls it 
received.\9\ By any measure, 57 percent is an ``F.'' At the risk of 
understatement, the taxpaying public deserves better.
---------------------------------------------------------------------------
    \9\ IRS, Joint Operations Center, Accounts Management Rollup (Apr. 
15, 2013).
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 the irs budget should be fenced off from across-the-board budget cuts 
  and sequestration because a crippled irs means inadequate taxpayer 
   service, less revenue collection, and ultimately a larger budget 
                                deficit
    The rationale for cutting Federal spending generally is to help 
reduce the imbalance between spending and revenue. Yet the IRS is 
different from all other Federal agencies: It is the revenue collector. 
Each dollar appropriated for the IRS generates substantially more than 
$1 dollar in Federal revenue. In fiscal year 2012, the IRS collected 
about $2.52 trillion \10\ on a budget of about $11.8 billion.\11\ That 
translates to an average return-on-investment (ROI) of about 214:1. The 
marginal ROI of additional spending will not be nearly so large, but 
virtually everyone who has studied the IRS budget has concluded that 
the ROI of additional funding is positive. In 2011, former Commissioner 
Shulman estimated in a letter to Congress that proposed cuts to the IRS 
budget would result in reduced revenue collection of seven times as 
much as the cuts.\12\
---------------------------------------------------------------------------
    \10\ Government Accountability Office (GAO), GAO-13-120, Financial 
Audit: IRS's Fiscal Years 2012 and 2011 Financial Statements 65 (Nov. 
2012), at http://www.gao.gov/assets/650/649881.pdf.
    \11\ Department of the Treasury, Fiscal Year 2013 Budget in Brief, 
at http://www.treasury.gov/about/budget-performance/budget-in-brief/
Documents/11.%20IRS_508%20-%20passed.pdf.
    \12\ Letter from Douglas H. Shulman, Commissioner of Internal 
Revenue, to the chairmen and ranking members of the House Committee on 
Ways and Means (and its Subcommittee on Oversight) and the Senate 
Committee on Finance (Oct. 17, 2011), at http://
democrats.waysandmeans.house.gov/sites/
democrats.waysandmeans.house.gov/files/media/pdf/112/
Rep_Lewis_IRS_Letter.pdf. In addition to generating direct revenue, IRS 
compliance actions produce indirect revenue gains. Studies show that 
taxpayers who might otherwise be tempted to bend the rules report their 
income more accurately as the likelihood of an audit increases.
---------------------------------------------------------------------------
    If the chief executive officer of a Fortune 500 company were told 
that each dollar allocated to his company's accounts receivable 
department would generate $7 dollars in return, it is difficult to see 
how the CEO would keep his job if he chose not to provide the 
department with the funding it needed. Yet that is exactly what has 
been happening with respect to IRS funding for years, and there has 
been little effort to fix this obvious problem.
    This is not a new issue. It arises because the Federal budgeting 
rules generally treat the IRS in the same manner as all other Federal 
agencies, giving it no ``credit'' for the revenue it collects. Once 
this subcommittee receives its section 302(b) allocation for the 
upcoming fiscal year, funding the programs under your jurisdiction is 
essentially a zero sum game--each dollar allocated to one agency 
reduces the pool of funds available for others.\13\
---------------------------------------------------------------------------
    \13\ See Congressional Budget and Impoundment Control Act, Public 
Law No. 93-344, Sec. 302(b)(1), 88 Stat. 297, 308 (1974) (providing 
that the Appropriations Committee of each House shall subdivide its 
allocation of funding under the annual budget resolution among its 
subcommittees). The ``program integrity cap adjustment'' mechanism, 
which I discuss in the text below, is a limited but flawed exception to 
this rule.
---------------------------------------------------------------------------
    In the National Taxpayer Advocate's 2006 Annual Report to Congress, 
I discussed the IRS funding challenge in detail and recommended, among 
other things, that Congress consider revising its budget rules in a 
manner that allows the relevant congressional committees to consider 
and decide: ``What level of funding will maximize tax compliance, 
particularly voluntary compliance, with our nation's tax laws, with due 
regard for protecting taxpayer rights and minimizing taxpayer burden?'' 
I recommended that Congress revise the budget rules so it could then 
set the IRS funding level accordingly, without regard to spending 
caps.\14\
---------------------------------------------------------------------------
    \14\ See National Taxpayer Advocate 2006 Annual Report to Congress 
442-457 (Legislative Recommendation: Revising Congressional Budget 
Procedures to Improve IRS Funding Decisions), at http://www.irs.gov/
pub/irs-utl/2006_arc_section2_v2.pdf.
---------------------------------------------------------------------------
    In the course of developing and presenting that recommendation, my 
staff and I met with 14 separate congressional staffs--specifically, 
the House and Senate majority and minority staffs of the appropriations 
committees, budget committees, and tax writing committees as well as 
tax counsel for the House and Senate majority leaders. In our 
discussions, there appeared to be no significant disagreement with the 
premise that the IRS generates a positive return on investment and is 
underfunded. However, we were repeatedly told that creating a new set 
of rules to establish IRS funding levels would be a ``heavy lift'' and 
would raise jurisdictional issues that have to be worked through. The 
last three IRS Commissioners have also raised these concerns.\15\ So 
have the former chairman and ranking member of the Senate Budget 
Committee.\16\
---------------------------------------------------------------------------
    \15\ See, e.g., Charles O. Rossotti, Many Unhappy Returns: One 
Man's Quest to Turn Around the Most Unpopular Organization in America 
278 (2005) (``When I talked to business friends about my job at the 
IRS, they were always surprised when I said that the most intractable 
part of the job, by far, was dealing with the IRS budget. The reaction 
was usually `Why should that be a problem? If you need a little money 
to bring in a lot of money, why wouldn't you be able to get it?' '').
    \16\ In 2006, Senator Judd Gregg acknowledged that the existing 
budget procedures have the effect of shortchanging the IRS. He said: 
``We've got to talk to the [Congressional Budget Office] about scoring 
on [additional funding provided to IRS]. Clearly there's a return on 
that money.'' Dustin Stamper, Everson Pledges to Narrow Growing Tax 
Gap, 110 Tax Notes 807 (Feb. 20, 2006). Similarly, Senator Kent Conrad 
stated: ``Rather than a tax increase, I think the first place we ought 
to look . . . is the tax gap. If we could collect this money, we'd 
virtually eliminate the deficit.'' Emily Dagostino, Senate Budget 
Resolution Would Increase IRS Enforcement Funding, 110 Tax Notes 1129 
(Mar. 13, 2006).
---------------------------------------------------------------------------
    I believe the time to attempt the ``heavy lift'' is now. Not only 
are cuts to the IRS budget harmful from a taxpayer service perspective, 
but to the extent they are designed to reduce the budget deficit, they 
are self-defeating. For the reasons I have described, reductions in the 
IRS budget almost surely lead to a larger deficit. In fiscal terms, the 
IRS's mission trumps those of all other agencies, because without an 
effective revenue collector, those agencies could not exist. If the IRS 
is not properly funded to collect the revenue, there will be fewer 
dollars available for the military, for social programs, for 
intelligence and embassy protection, for infrastructure maintenance, 
for medical research--or simply for deficit reduction.
    Just as a Fortune 500 company would find a way to fund its accounts 
receivable department, I encourage the members of this subcommittee to 
work with their colleagues on the full Appropriations Committee, the 
Budget Committee, and the Finance Committee to exempt the IRS from 
across-the-board spending cuts and begin to recognize the IRS's unique 
role as the agency that collects the revenue that makes all other 
government programs possible.
if a ``program integrity cap adjustment'' mechanism is used, it should 
      encompass taxpayer service activities as well as enforcement
    In a partial attempt to address this problem, several 
appropriations acts in recent years have given the IRS additional 
funding by using a mechanism known as a ``program integrity cap 
adjustment.'' Under this mechanism, new funding appropriated for IRS 
enforcement programs generally does not count against otherwise 
applicable spending ceilings provided:
  --The IRS's existing enforcement base is fully funded; and
  --A determination is made that the proposed additional expenditures 
        will generate an ROI of greater than 1:1 (i.e., the additional 
        expenditures will increase Federal revenue on a net basis).
    The administration's budget proposal released last month recommends 
a change to the Balanced Budget and Emergency Deficit Control Act of 
1985 to provide program integrity cap adjustments for the next 10 
years.\17\ While this cap adjustment mechanism may provide an easier 
path to providing the IRS with more resources than a fundamental change 
in IRS funding rules, I am concerned that taxpayer service activities 
have been excluded from this enhanced funding mechanism in the past and 
would continue to be excluded under the administration's proposal. The 
rationale has been that the IRS is able to measure the direct ROI of 
its enforcement activities--i.e., it can compute to the dollar the 
amounts collected by its examination, collection, and document matching 
functions --but is unable to quantify the ROI of taxpayer services. 
Thus, it is not currently possible to document whether or to what 
extent its taxpayer services generate an ROI greater than 1:1.
---------------------------------------------------------------------------
    \17\ See Department of the Treasury, General Explanations of the 
Administration's fiscal year 2014 Revenue Proposals 187 (Apr. 2013).
---------------------------------------------------------------------------
    Creating a mechanism that allows more funding for enforcement 
actions while excluding taxpayer service activities like outreach and 
education would be a mistake, for two reasons. First, common sense 
tells us that taxpayer services are a significant driver of tax 
compliance and generate a very high ROI. Publishing tax forms and 
instructions, conducting outreach and education, assisting taxpayers, 
tax preparers, and tax-software manufacturers, and otherwise 
administering the tax filing season are absolute prerequisites for tax 
compliance. In general, the ROI of these service activities is probably 
greater than the ROI of enforcement actions. As I discussed in detail 
in the National Taxpayer Advocate's 2012 Annual Report to Congress, the 
IRS could greatly improve its taxpayer services if it received 
additional funding for that purpose.
    Second, an enforcement-only cap adjustment will inherently push the 
IRS to become more of a hard core enforcement agency. It should be 
emphasized that in fiscal year 2012, direct enforcement revenue 
amounted to only $50.2 billion, \18\ or 2 percent of total IRS tax 
collection of $2.52 trillion.\19\ The remaining 98 percent resulted 
from voluntary front-end tax compliance. If cap adjustments are applied 
solely to bolster enforcement funding, the relative allocation of the 
IRS budget between enforcement and taxpayer service will shift over 
time in a direction that causes taxpayers to fear the IRS more and 
voluntarily cooperate less. Primarily because of the proposed cap 
adjustments, the administration's 10-year funding projections show that 
funding for the IRS enforcement appropriation would increase by more 
than twice as much as funding for the IRS's taxpayer services 
appropriation.\20\ In our effort to enforce the laws against 
noncompliant taxpayers, we must take care to avoid steps that may 
alienate compliant taxpayers and thereby jeopardize the existing tax 
base.
---------------------------------------------------------------------------
    \18\ IRS, fiscal year 2012 Enforcement and Service Results, at 
http://www.irs.gov/pub/irs-news/
FY%202012%20enforcement%20and%20service%20results-%20Media.pdf.
    \19\ GAO, GAO-13-120, Financial Audit: IRS's Fiscal Years 2012 and 
2011 Financial Statements 65 (Nov. 2012), at http://www.gao.gov/assets/
650/649881.pdf.
    \20\ Budget of the United States Government: Analytical 
Perspectives, Supplemental Materials Fiscal Year 2014: Table 32-1, 
Federal Programs by Agency and Account, at 304-305, at http://
www.whitehouse.gov/sites/default/files/omb/budget/fy2014/assets/
32_1.pdf. Taxpayer service spending is shown on the top line, which is 
labeled ``Taxpayer Services: Appropriations, discretionary . . . 803.'' 
Enforcement spending is the sum of the line labeled ``Federal law 
enforcement activities: Appropriations, discretionary . . . 751'' and 
the line labeled ``Central fiscal operations: Appropriations, 
discretionary . . . 803.'' Over the fiscal year 2014 through fiscal 
year 2023 period, these projections show that Taxpayer Services 
spending would rise by 23 percent, while Enforcement spending would 
increase by 54 percent.
---------------------------------------------------------------------------
    If program integrity cap adjustments are used, I recommend that 
compliance initiatives be defined more broadly, so they include both an 
enforcement component and a service component (e.g., better outreach, 
education, and assistance for small businesses). Because the projected 
ROI of many enforcement programs is high, a more broadly constructed 
initiative could still produce a demonstrable ROI of greater than 1:1, 
even if it contained service components with ROIs that are 
unquantifiable.\21\
---------------------------------------------------------------------------
    \21\ In our past annual reports, we have written about local 
compliance initiatives the IRS has undertaken that include integrated 
enforcement and outreach and education components. See, e.g., National 
Taxpayer Advocate 2008 Annual Report to Congress 176-192 (Most Serious 
Problem: Local Compliance Initiatives Have Great Potential but Face 
Significant Challenges). One example: In the early 1990s, the IRS 
launched an initiative designed to address noncompliance by fishermen 
in Alaska that resulted from confusion as well as community norms and 
attitudes. The IRS combined stepped up enforcement activities with an 
extensive outreach and education campaign in remote fishing villages 
and on fishing vessels that included assisting with tax return 
preparation and training local volunteers to assist taxpayers. By the 
end of the initiative, the number of nonfilers among the target 
population declined by 30 percent. Id. at 177-178.
---------------------------------------------------------------------------
  a reduction in the irs training budget of more than 80 percent and 
 overly rigid training approval requirements will leave irs employees 
         ill equipped to do their jobs and meet taxpayer needs
    I am deeply concerned about the dramatic reduction in the training 
budget for IRS employees. Because of budget constraints, the IRS's 
full-time, permanent workforce was cut from about 86,000 to 79,000 
employees from fiscal year 2010 to fiscal year 2012, a decrease of 8 
percent.\22\ This workforce reduction makes it imperative that the 
remaining IRS employees receive top quality training so they can 
perform their jobs as effectively and efficiently as possible. Yet the 
IRS estimates that by the end of fiscal year 2013, it will have cut its 
training budget by 83 percent as compared with fiscal year 2010.\23\
---------------------------------------------------------------------------
    \22\ IRS Integrated Financial System, Commitments, Obligations, 
Expenditures & Disbursements report. These figures track employees in 
``pay status'' and exclude employees who were on Leave Without Pay or 
related statuses.
    \23\ IRS Fact Sheet, FS-2013-05, IRS Achieves $1 Billion in Cost 
Savings and Efficiencies (April 2013), at http://www.irs.gov/uac/IRS-
Achieves-$1-Billion-in-Cost-Savings-and-Efficiencies (last visited 
April 12, 2013). From fiscal year 2010 to fiscal year 2012, the IRS 
already cut its training budget from about $168 million to about $63 
million, a reduction of 62 percent. IRS Integrated Financial System, 
Commitments, Obligations, Expenditures & Disbursements report.
---------------------------------------------------------------------------
    I view this as a very serious problem. In most years, workforce 
attrition exceeds 5 percent. When employees leave, the IRS must 
identify existing or new employees to pick up the slack--sometimes with 
internal promotions, sometimes with limited new hires. In addition, the 
IRS employs thousands of seasonal employees during the filing season 
and for other limited tasks throughout the year. And even employees who 
do not change jobs face constant changes in the nature of their 
workloads. For example, as the problem of tax-related identity theft 
has increased, the IRS has had to train and assign thousands of 
employees to work in that area.
    The IRS has tried to train employees at lower cost by replacing in-
person training with remote instruction. That is a constructive 
approach to a point. Some types of training can effectively be provided 
remotely. But other types, such as teaching taxpayer facing employees 
how to interview taxpayers and working through case studies, do not 
lend themselves well to a virtual setting. In addition, employees of 
many IRS functions are spread around the country, and it is difficult 
for IRS managers to do their jobs properly if they cannot meet 
periodically--face to face--with the employees they supervise. In my 
view, it is impossible to cut the IRS's training budget by 83 percent 
without impairing the ability of IRS employees to perform their jobs 
effectively.
    The IRS, pursuant to a Treasury Department directive, has 
implemented new rules that require executives who manage the major IRS 
functions, myself included, to obtain prior approval from the Deputy 
Commissioner for any training (or other event) that will cost $3,000 or 
more.\24\ As a practical matter, this low threshold has made most in-
person meetings impossible. Considering the costs of airfare, local 
transportation, hotel accommodations, and per diem reimbursements, 
attendance by more than two persons in many cases will generate costs 
above $3,000. By analogy, these rules are akin to requiring Senators 
and their staffs to obtain advance written permission from the Majority 
Leader before visiting the States they represent, including their State 
offices, or attending any conferences outside Washington, DC--on the 
theory that ``virtual'' town halls are just as effective as being 
there. The quality of the communication is simply not equivalent. My 
own organization, the Taxpayer Advocate Service, used to provide a 
rigorous 1-week training session each year for all of our employees. It 
is not reasonable to expect employees to sit in front of a computer 
screen for a full week and absorb the same level of information they 
would receive from classroom presentations, interactive case studies, 
and discussions.
---------------------------------------------------------------------------
    \24\ See Interim Guidance Memorandum, Control No. CFO-01-1212-01 
(Dec. 27, 2012) (issued pursuant to Treasury Directive 12-70 (Nov. 28, 
2012), at http://www.treasury.gov/about/role-of-treasury/orders-
directives/Pages/td12-70.aspx). The Deputy Commissioner herself can 
only approve training and travel up to $24,999. Any training or travel 
over that threshold must be sent to the Treasury Department for 
approval.
---------------------------------------------------------------------------
    Nor has it become easier to provide remote instruction. One major 
alternative to in-person meetings is the use of the IRS's production 
studio at the New Carrollton Federal Building, where trainings can be 
taped and then made available to employees wherever they work. The 
Acting IRS Commissioner has stated: ``Utilizing the production studio 
allows the IRS to provide education and training to large audiences, 
both within the IRS and to the public, often while reducing travel and 
other costs associated with such programs.'' \25\ I share his view that 
the production studio is an appropriate and low-cost alternative to in-
person meetings for some types of training, yet the IRS has imposed 
stringent approval requirements on all virtual training sessions that 
utilize the production studio. Specifically, the IRS leadership has 
directed that ``no videos should be produced until further notice 
unless the project has been reviewed by the Video Editorial Board and 
approved by the business unit head of office and the Deputy 
Commissioner for Operations Support.'' \26\
---------------------------------------------------------------------------
    \25\ Letter from Steven T. Miller, Acting Commissioner of Internal 
Revenue, to Hon. Charles Boustany Jr., M.D., Chairman, Subcommittee on 
Oversight, House Committee on Ways and Means (March 4, 2013).
    \26\ Memorandum from Beth Tucker, Deputy Commissioner, Operations 
Support, to Senior Executive Team, Additional Information on Video 
Production (March 7, 2013). The approval requirements are an 
understandable response to criticism the agency received for an over-
the-top video that included a parody of Star Trek. When taken together 
with other training restrictions, however, the net effect is that 
employees will not have the knowledge to do their jobs properly.
---------------------------------------------------------------------------
    With the frequency of changes in the tax law, the concomitant need 
to reiterate taxpayer rights protections, the need to train new 
employees and those promoted to new positions, the use of thousands of 
seasonal employees, the dramatic expansion in tax-related identity 
theft, and the ongoing preparations to administer the tax provisions of 
the Patient Protection and Affordable Care Act, IRS employees 
desperately need top notch training and updates to enable them to do 
their jobs. Rather than facilitating training, the IRS has imposed a 
series of roadblocks that, from a taxpayer perspective, mean that 
employees often will not have the information they need to make the 
right decisions, accurately answer taxpayer inquiries, or adequately 
protect taxpayer rights.
                               conclusion
    For the reasons I have described, I believe it is time for this 
subcommittee and others to give serious thought to the way the IRS is 
funded and consider changing the budget rules to reflect the IRS's 
unique role as the agency that collects Federal revenue. For almost all 
other programs, a reduction in funding helps to reduce the Federal 
budget deficit. For the IRS, a reduction in funding increases taxpayer 
noncompliance and ultimately increases the deficit. The budget rules 
today do not reflect that dichotomy, but they should. Therefore, I 
believe that as a first step the IRS budget should be fenced off from 
future across-the-board cuts and from the effects of the current 
sequester. Over the longer term, I encourage this subcommittee to find 
a way to set IRS funding levels in a manner that focuses on maximizing 
revenue collection, with due regard for protecting taxpayer rights and 
minimizing taxpayer burden, outside the zero-sum game limitations 
imposed by the section 302(b) allocations.
    When we require U.S. citizens and others to pay over a large 
percentage of their incomes to the government, we have an obligation to 
make the process as painless as possible. The IRS must be funded at a 
level that enables it to provide necessary taxpayer assistance and to 
enforce the laws, both to raise the revenue the government requires and 
to provide compliant taxpayers with assurance that others are paying 
their fair share. I am deeply concerned that recent cuts to the IRS 
budget are jeopardizing its ability to carry out this vital mission.
                                 ______
                                 
      Prepared Statement of the National Treasury Employees Union
    Chairman Lautenberg, Ranking Member Johanns and distinguished 
members of the subcommittee, I would like to thank you for allowing me 
to provide comments on the administration's fiscal year 2014 budget 
request for the Internal Revenue Service (IRS) and the impact that 
recent budget cuts and sequestration have had on the agency. As 
president of the National Treasury Employees Union (NTEU), I have the 
honor of representing more than 150,000 Federal workers in 31 agencies, 
including the men and women at the IRS.
        internal revenue service fiscal year 2014 budget request
    Mr. Chairman, NTEU strongly supports the administration's fiscal 
year 2014 budget request of $12.8 billion for the IRS that would 
restore funding for important taxpayer service and enforcement 
activities that has been slashed in recent years. These funding 
reductions have adversely impacted IRS' ability to meet its mission, 
and without action by the Congress, IRS' ability to serve taxpayers and 
enforce our Nation's tax laws will continue to erode.
        impact of recent cuts to internal revenue service budget
    Mr. Chairman, despite the critical role that the IRS plays in 
helping taxpayers meet their tax obligations and generating revenue to 
fund the Federal Government, the IRS' ability to continue doing so has 
been severely challenged due to reduced funding in recent years and the 
cuts mandated by sequestration.
    Since fiscal year 2011, the IRS budget has been reduced by almost 
$1 billion due to a cut of $305 million for fiscal year 2012 and more 
than $600 million under sequestration. The funding reductions have 
forced the IRS to operate under an exception-only hiring freeze since 
December 2010, and have forced the IRS to reduce the total number of 
full-time, permanent employees by 8,000 since the end of fiscal year 
2010, more than 5,000 of which are front-line enforcement employees. 
The lack of sufficient staffing has strained IRS' capacity to carry out 
its important taxpayer service and enforcement missions.
    In addition, the cuts mandated by sequestration will force the IRS 
to furlough all of its employees between 5 and 7 days, further 
hampering IRS' ability to meet its mission. According to the IRS, the 
sequester cuts to operating expenses and furloughs of IRS employees 
will result in the inability of millions of taxpayers to get answers 
from IRS call centers and taxpayer assistance centers and will 
significantly delay IRS responses to taxpayer letters.
    The funding cuts will also reduce IRS' capacity to generate 
critical revenue for the Federal Government. According to the IRS, 
every $1 invested in the IRS enforcement programs generates roughly $7 
in return. Thus, a $600 million reduction to IRS' budget for fiscal 
year 2013 will result in the loss of more than $4 billion in revenue 
this fiscal year alone. That lost revenue could otherwise be invested 
in critical government programs or used to reduce the Federal deficit.
    The drastic cuts to IRS' budget come at a time when the IRS 
workforce is already facing a dramatically increasing workload with 
staffing levels down by 10,000 from 2 years ago, and more than 20 
percent less than what they were just 15 years ago. In 1995, the IRS 
had a staff of 114,064 to administer tax laws and process 205 million 
tax returns. By 2012, staffing had fallen to 90,711 to administer a 
more complicated tax code and process 236 million much more complex tax 
returns. For this year's tax-filing season, the IRS is operating with 
8,000 fewer employees than just 2 years ago.
                         impact on enforcement
    Mr. Chairman, NTEU believes that the recent funding cuts to IRS' 
budget have greatly impaired its' ability to maximize taxpayer 
compliance, reduce the tax gap and generate critical revenue for the 
Federal Government.
    IRS' ability to generate critical revenue necessary to reduce the 
Federal deficit is clear. In fiscal year 2012, on a budget of $11.8 
billion, the IRS collected $2.52 trillion, roughly 93 percent of 
Federal Government receipts. This means that, for every $1 that the 
Congress appropriated for the IRS, the IRS collected about $214 in 
return.
    However, reductions in enforcement funding in fiscal year 2011 and 
fiscal year 2012 have undermined IRS' ability to maximize taxpayer 
compliance and bring in much needed Federal revenue. In fiscal year 
2012, the IRS generated $50 billion in enforcement revenue, down from 
$57.6 billion in fiscal year 2010. The reduction in revenue can be 
partly attributed to a reduction in the total number of revenue 
officers (ROs) and revenue agents (RAs). Despite the critical role they 
play in maximizing taxpayer compliance and generating revenue, the 
total number of ROs and RAs was reduced by more than 1,500 between 2011 
and the end of 2012 and are down more than 20 percent since 1995.
    The need for sufficient enforcement staffing is more important than 
ever. Last January, the IRS released a new set of tax gap estimates for 
tax year 2006. The tax gap is defined as the amount of tax owed by 
taxpayers that is not paid on time and is the most comprehensive and 
up-to-date data that IRS has on noncompliance. According to the IRS, 
the amount of taxes not timely paid is $450 billion, translating to a 
noncompliance rate of almost 17 percent. While the tax gap can never be 
completely eliminated, even an incremental reduction in the amount of 
unpaid taxes would provide critical resources for the Federal 
Government.
                        combating identity theft
    The funding cuts have also impacted IRS' ability to combat the 
rising incidence of tax-related identity theft, and without sufficient 
funding, its ability to detect and prevent fraud and assist taxpayers 
in a timely manner will erode.
    According to recent testimony by Nina Olson, the National Taxpayer 
Advocate, the IRS had more than 1.25 million identity theft cases in 
its inventory as of the end of February 2013, a drastic increase from 
2012, when it had less than 235,000 cases. In addition, with the 
average current cycle time for resolution of identity theft cases 
exceeding 6 months, Olson warned the cycle time for resolving these 
cases may dramatically increase as the inventory of cases continues to 
grow.
    Despite insufficient resources, the IRS is doing what it can to 
prevent and investigate identify theft crimes and help victims. 
Currently, more than 3,000 IRS employees are working on identity theft, 
more than double the number during the previous filing season. In 
addition, IRS has trained 35,000 employees that work with taxpayers to 
help them better recognize identity theft and assist victims. In 
addition, despite budget reductions of more than $1 billion over the 
past 2 years which has reduced staffing levels by more than 8,000, the 
IRS is continuing to dedicate staff to preventing identity theft and 
assisting victims, and in fiscal year 2012 spent roughly $328 million 
on refund fraud and identity theft efforts. These investments helped 
the IRS protect $20 billion of fraudulent refunds, including those 
related to identity theft during fiscal year 2012, compared with $14 
billion in fiscal year 2011. But due to the rapidly growing nature of 
identity theft, it will be impossible for the IRS to keep pace without 
additional resources.
    That is why NTEU was happy to see the administration's budget 
request would provide a $360 million increase in funding for IRS tax 
enforcement more than the fiscal year 2012 enacted level, including 
funding for programs designed to protect revenue by identifying fraud 
and preventing issuance of questionable refunds including tax-related 
identity theft. In particular, the budget request would provide $101 
million to improve identification and prevention of refund fraud 
identity theft, protect taxpayers' identities and assist victims of 
identity theft. This funding will support 850 new full-time 
equivalents, and is projected to protect $1.3 billion in revenue, once 
the new hires reach full potential in fiscal year 2016, a protected 
revenue return on investment (ROI) of $14.4 to $1.
    NTEU also strongly supports the administration's request for an 
additional $412 million in enforcement funding for fiscal year 2014 
through a program integrity cap adjustment for high revenue generating 
enforcement activities. This $412 million in funding, coupled with 
additional investments through 2023, will support a variety of 
compliance activities, including new initiatives that deepen and 
broaden IRS' focus on international tax compliance of high net worth 
individuals and entities. These investments are expected to generate 
$32.7 billion in net savings over 10 years.
                      impact on taxpayer services
    In addition to hampering IRS' ability to enforce tax laws and 
maximize taxpayer compliance, funding cuts in the past few years have 
hurt IRS efforts to provide taxpayers with the assistance they need in 
a timely manner. As you may know, demand for telephone service remained 
extremely high in fiscal year 2012 as more taxpayers called the IRS to 
resolve tax account issues and to request installment packages. 
Assisting these taxpayers earlier in the tax administration process 
through taxpayer service venues, rather than through more costly 
compliance activities, allows the IRS to resolve customer inquiries 
more quickly and cost-effectively. The significant increase in call 
demand stressed existing resources which negatively impacted the level 
of service. According to IRS, in fiscal year 2012, the IRS handled 68 
percent of calls, with an average wait time of 17 minutes on hold. In 
2004, it answered 87 percent of calls, with an average wait time of 
2\1/2\ minutes.
    A lack of adequate resources is also impacting IRS efforts to 
assist taxpayers during the current filing season, which was delayed 
until January 30 for most taxpayers due to late congressional action on 
year-end tax legislation. According to the IRS, because it has been 
forced to dedicate staff and resources to the most essential areas, it 
has had to commit staff to resolving identity theft cases, at the cost 
of having fewer people on its toll-free taxpayer service line. This has 
prevented IRS from answering 3 out of every 10 calls it receives from 
taxpayers seeking to speak to a telephone assister, and resulted in 
wait times in excess of 13 minutes for those that are able to get 
through.
    NTEU believes that without the additional funding proposed in the 
administration's budget request, taxpayers will continue experiencing a 
degradation of services including difficulty seeking telephone 
assistance, delays in responses to letters, including those seeking to 
resolve issues with taxes due, delayed responses to small business 
owners or individual taxpayers looking to set up payment plans.
    That is why we strongly support the President's request of $2.4 
billion for taxpayer services which will enable the IRS to improve the 
responsiveness and accuracy of taxpayer service, and support IRS 
efforts to enhance taxpayer compliance.
                               conclusion
    Mr. Chairman, thank you for the opportunity to provide NTEU's views 
on the administration's fiscal year 2014 budget request for the IRS. 
NTEU believes that only by restoring critical funding for effective 
enforcement and taxpayer service programs can the IRS provide America's 
taxpayers with quality service while maximizing revenue collection that 
is critical to reducing the Federal deficit.

    Senator Mikulski. Thank you, Commissioner.
    Mr. George, we'd like to also hear from you now, sir.
STATEMENT OF HON. J. RUSSELL GEORGE, TREASURY INSPECTOR 
            GENERAL FOR TAX ADMINISTRATION
    Mr. George. Thank you, Madam Chairwoman. Madam Chairwoman 
Mikulski, Ranking Member Johanns, and Senator Udall: Thank you 
for the opportunity to testify on the IRS's fiscal year 2014 
budget request, our recent work related to the most significant 
issues currently confronting the IRS, and the fiscal year 2014 
budget request for the Treasury Inspector General for Tax 
Administration, also referred to as ``TIGTA.''
    The proposed IRS budget requests appropriated resources of 
approximately $12.9 billion. This is an increase of slightly 
more than $1 billion from fiscal year 2012 enacted levels. ACA 
contains an extensive array of tax law changes that will 
present many challenges for the IRS in the coming years. The 
IRS's fiscal year 2014 budget request includes additional 
funding of $440 million for the ACA and, while the Department 
of Health and Services (HHS) will take the lead in developing 
the policy provisions of the act, the IRS will administer the 
law's numerous tax provisions.
    The development and implementation of new systems for the 
ACA provisions presents major information, technology, 
management challenges. These include rapid implementation of 
interdependent projects that require extensive coordination 
within the IRS and with other Federal agencies.
    One key healthcare provision takes effect December 31 of 
this year. This provision is the requirement for individuals to 
maintain minimum essential healthcare coverage or face a 
continuous penalty. Starting in calendar year 2014, the IRS 
will be responsible for implementing the premium assistance tax 
credit as well as implementing the penalty on applicable 
individuals for each month that they fail to have minimum 
essential coverage.
    These two issues have a far-reaching impact on the IRS and 
will require significant resources to design and build the new 
computer systems and prepare for increased customer service as 
taxpayers turn to the IRS with questions and issues about the 
ACA and their tax and health insurance requirements.
    Customer service has been declining in recent years, with 
fewer taxpayers being served at their local offices and the IRS 
answering fewer telephone calls. The ACA will further stretch 
these already limited resources at the IRS.
    A serious challenge confronting the IRS is the tax gap, 
which is defined as the difference between the estimated amount 
taxpayers owe and the amount that they voluntarily and timely 
pay for a tax year. The most recent gross tax gap estimate 
developed by the IRS was $450 billion for tax year 2006 and 
that's $450 billion each year.
    The following are examples of strategies that could help 
improve tax compliance: Enhancing information reporting by 
third parties to the IRS could reduce evasion and help 
taxpayers comply voluntarily. However, identifying additional 
reporting opportunities can be challenging because third 
parties may not have accurate information that is readily 
available. Also, adding reporting requirements creates a burden 
for both third parties as well as the IRS.
    To determine the appropriate level of enforcement 
resources, the IRS would need to consider how to balance 
taxpayer service and enforcement and how productively it uses 
its resources. We reviewed enforcement trends and noted that in 
fiscal year 2007 the IRS collected more than $59 billion in 
taxes, penalties, and interest. In fiscal year 2012, dollars 
collected decreased to approximately $50 billion.
    There are two new systems that will help the IRS reduce the 
tax gap. One is a system that will automatically match business 
return filings to third-party information returns in two areas, 
merchant payment cards and cost basis reporting on the sale of 
securities.
    The other system, which was referred to by Mr. Miller, will 
match the Foreign Account Tax Compliance Act, FATCA, 
information reported by financial institutions in foreign 
countries and U.S. citizens regarding offshore bank accounts.
    Simplifying the tax code could help taxpayers understand 
and voluntarily comply with their tax obligations and limit 
opportunities for tax evasion.
    Incidents of identity theft have continued to rise since 
2011 when the IRS again identified more than 1 million 
incidents. In 2012, the IRS identified almost 1.8 million 
incidents. The IRS has placed emphasis on this area over the 
past year, but there is still work to be done. Emphasis on this 
area over the past year--TIGTA identified 1.5 million 
undetected tax year 2010 returns with characteristics of 
identity theft and $5.2 billion in refunds that were 
inappropriately issued.
    The IRS administers numerous refundable tax credits. The 
most significant refundable credit is the earned income tax 
credit, which the IRS reported improper payments of $12 billion 
to $14 billion in fiscal year 2012. Two other refundable 
credits include the additional child tax credit and the 
American opportunity tax credit, also referred to as ``the 
education credit.''
    TIGTA found that if the IRS freezes a questionable earned 
income tax credit claim it will later disallow the additional 
child tax credit claim 67 percent of the time. The IRS could 
have prevented $419 million in erroneous additional child 
credits had it reviewed the child credit at the same time as 
the earned income tax credit.
    TIGTA also reported that as of May 2010 more than 2 million 
taxpayers received $3.2 billion in potentially erroneous 
refunds for the education credit.
    As demand for taxpayer services continues to rise, 
resources have decreased, thereby affecting the quality of 
customer service that the IRS is able to provide. In September 
2012, TIGTA reported that an increase in call demand and 
limited resources continue to adversely affect the IRS's level 
of service for its toll-free telephone lines.
    Continued enforcement on human capital remain important. 
More than one-third of all executives and almost 20 percent of 
nonexecutive managers are currently eligible for retirement. 
Within 5 fiscal years nearly 70 percent of all IRS executives 
and nearly one-half of the managers are projected to be 
eligible for retirement. Overall 40 percent of the IRS's 
employees will be retirement-eligible within 5 fiscal years.
    Finally, Madam Chairwoman, TIGTA's budget, as you requested 
information on, includes mitigating risks associated with 
modernization, security over taxpayer data and employees, 
procurement fraud, the tax gap, implementing major tax law 
changes, and human capital challenges confronting both the IRS 
as well as TIGTA.
    In addition to responding to the growing number of threats 
against IRS employees, we will continue to put that as a 
priority. Recent audit work uncovered inefficient use of 
resources by the IRS concerning air cards, wireless cards 
allowing for wireless computer services, and BlackBerry use, 
smartphones, and shortcomings in the IRS's compliance with the 
Improper Payments Elimination and Recovery Act, and 
imperfections in the way the IRS refers and recognizes 
indications of fraud.

                           PREPARED STATEMENT

    Furthermore, TIGTA has determined that the IRS could 
develop or improve processes that will increase its ability to 
detect and prevent the issuance of fraudulent refunds resulting 
from identity theft.
    Madam Chairwoman, Ranking Member Johanns, and Senator 
Udall, thank you for the opportunity to share my views and I'm 
happy to address any questions that you may have.
    [The statement follows:]
              Prepared Statement of Hon. J. Russell George
    Chairman Lautenberg, Ranking Member Johanns, and members of the 
subcommittee, thank you for the opportunity to testify on the Internal 
Revenue Service's (IRS) fiscal year \1\ 2014 budget request, our recent 
work related to the most significant challenges currently facing the 
IRS, and the Treasury Inspector General for Tax Administration's 
(TIGTA) fiscal year 2014 budget request.
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    \1\ The Federal Government's fiscal year begins on October 1 and 
ends on September 30.
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    TIGTA is a nationwide organization. We are statutorily mandated to 
provide independent audit, investigative, and inspection and evaluation 
services necessary to improve the quality and credibility of IRS 
operations, including the oversight of the IRS Chief Counsel and the 
IRS Oversight Board. TIGTA's oversight activities are explicitly 
designed to identify high-risk systemic inefficiencies in IRS 
operations and to investigate weaknesses in tax administration. TIGTA's 
role is critical to providing America's taxpayers with assurance that 
the approximately 99,300 \2\ IRS employees who collect more than $2.1 
trillion in tax revenue each year, process more than 147 million 
individual tax returns, and issue $333 billion in tax refunds, do so in 
an effective and efficient manner while minimizing the risks of waste, 
fraud, and abuse.
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    \2\ Total IRS staffing as of March 23, 2013.
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    TIGTA's Office of Audit (OA) reviews all aspects of the IRS tax 
administration system and provides recommendations to: Improve IRS 
systems and operations, ensure the fair and equitable treatment of 
taxpayers, and prevent and detect waste, fraud, and abuse. OA places 
audit emphasis on high-risk areas, statutory mandates, as well as areas 
of concern to the Congress, the Secretary of the Treasury, the 
Commissioner of Internal Revenue, and other key stakeholders. These 
reviews have covered such significant issues as identity theft, refund 
fraud, improper payments, security vulnerabilities, complex modernized 
computer systems, tax collections and revenue, and waste and abuse in 
IRS operations.
    TIGTA's Office of Investigations (OI) protects the integrity of the 
IRS by investigating allegations of IRS employee misconduct, external 
threats to employees and facilities, and attempts to impede or 
otherwise interfere with the IRS's ability to collect taxes. Misconduct 
by IRS employees manifests itself in many ways, including extortion, 
theft, taxpayer abuses, false statements, financial fraud, and identity 
theft.
    TIGTA OI has the unique statutory responsibility to protect the IRS 
by identifying, investigating, and responding to threats against IRS 
employees located in more than 670 IRS facilities located nationwide. 
Threats and assaults directed at IRS employees, facilities, and 
critical infrastructure impede the effective administration of the 
Federal tax system. Contact with the IRS at times can be stressful for 
taxpayers, and over the last several years, taxpayers have become more 
confrontational and on occasion violent, when they interact with the 
IRS.
    The threat environment confronting the IRS is significant. Over the 
past three fiscal years, TIGTA has processed more than 8,600 threat-
related complaints that resulted in more than 4,000 investigations. 
These investigations resulted in 67 criminal prosecutions and 
identification of 2,800 people as potentially harmful to IRS employees. 
Two examples include a taxpayer who flew an airplane into a building 
that contained an IRS office in 2010 and the three individuals arrested 
in Atlanta in 2011 for conspiring to blow up Federal facilities, 
including IRS offices.
    TIGTA will continue to place a priority on ensuring the safety and 
security of IRS employees and facilities. We will review and respond to 
intelligence information relating to potential violent acts against IRS 
employees and facilities and develop proactive leads to investigate and 
mitigate potential threats. In addition, investigators will respond to 
violent acts committed against IRS employees and facilities and will 
work towards the arrest, conviction, and sentencing of the 
perpetrators.
         overview of the irs's fiscal year 2014 budget request
    The IRS is the largest component of the Department of the Treasury 
and has primary responsibility for administering the Federal tax 
system. The IRS's budget request supports the Department of the 
Treasury's goals to pursue comprehensive tax and fiscal reform and to 
manage the Government's finances in a fiscally responsible manner. The 
IRS supports these goals through its strategies of increasing voluntary 
tax compliance and increasing the number of electronic transactions 
with the public. The IRS strives to enforce the tax laws fairly and 
efficiently while balancing service and education to promote voluntary 
compliance and reduce taxpayer burden. The IRS's role is unique within 
the Federal Government in that it collects the revenue that funds the 
Government and administers the Nation's tax laws. It also works to 
protect Federal revenue by detecting and preventing the growing risk of 
fraudulent tax refunds and other improper payments.
    To achieve these goals, the proposed fiscal year 2014 IRS budget 
requests appropriated resources of approximately $12.9 billion.\3\ The 
total appropriations amount is an increase of slightly more than $1 
billion, or approximately 9 percent more than the fiscal year 2012 
enacted level of approximately $11.8 billion. This increase is 
illustrated in Table 1. The budget request includes a net staffing 
increase of 4,572 full-time equivalents (FTEs) \4\ for a total of 
approximately 96,200 appropriated FTEs. The IRS is operating under a 
Continuing Resolution \5\ for fiscal year 2013; however, this funding 
was reduced by $618 million as a result of the sequestration \6\ and 
rescission.\7\
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    \3\ The FY 2014 budget request also includes approximately $111 
million from reimbursable programs, $278 million from user fees, $114 
million in available multi-year/no-year funds, and a transfer out to 
the Alcohol and Tobacco Tax and Trade Bureau of $5 million for a total 
amount of $13.4 billion in available resources. Multi-year funds are 
made available for a specific time period of more than one fiscal year. 
No-year funds do not have a specific time period that the funds must be 
spent by and are available until the objectives of the program have 
been achieved.
    \4\ A full-time employee working 40 hours per week for 52 weeks.
    \5\ A continuing resolution provides temporary funding for the 
period of time specified in the continuing resolution.
    \6\ Sequestration involves automatic spending cuts of approximately 
$1 trillion across the Federal Government that took effect on March 1, 
2013.
    \7\ A rescission cancels part of an agency's discretionary budget 
authority and is usually established as a percentage reduction to the 
budget authority.

           TABLE 1.--IRS FISCAL YEAR 2014 BUDGET REQUEST INCREASE OVER FISCAL YEAR 2012 ENACTED BUDGET
                                            [In thousands of dollars]
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                                                   Fiscal Year     Fiscal Year                      Percentage
             Appropriations Account               2012 Enacted    2014 Request    Amount Change       Change
----------------------------------------------------------------------------------------------------------------
Taxpayer Services..............................      $2,239,703      $2,412,756        $172,873             7.72
Enforcement....................................       5,299,367       5,666,787         367,420             6.93
Operations Support.............................       3,947,416       4,480,843         533,427            13.51
Business Systems Modernization.................         330,210         300,827         (29,383)           -8.90
                                                ----------------------------------------------------------------
      Total Appropriated Resources.............      11,816,696      12,861,033       1,044,337             8.84
----------------------------------------------------------------------------------------------------------------
Source: TIGTA analysis of IRS's Fiscal Year 2014 Budget Request, Operating Level Tables.

    The three largest appropriation accounts are Taxpayer Services, 
Enforcement, and Operations Support. The Taxpayer Services account 
provides funding for programs that focus on helping taxpayers 
understand and meet their tax obligations, while the Enforcement 
account supports the IRS's examination and collection efforts. The 
Operations Support account provides funding for functions that are 
essential to the overall operation of the IRS, such as infrastructure 
and information services. Finally, the Business Systems Modernization 
account provides funding for the development of new tax administration 
systems and investments in electronic filing.
           funding related to implementing the aca provisions
    The Patient Protection and Affordable Care Act of 2010 \8\ and the 
Health Care and Education Reconciliation Act of 2010 that made 
amendments to it (collectively referred to as the ``ACA'') contains an 
extensive array of tax law changes that will present many challenges 
for the IRS in the coming years. The ACA provisions provide incentives 
and tax breaks to individuals and small businesses to offset health 
care expenses. They also impose penalties, administered through the tax 
code, for individuals and businesses that do not obtain health care 
coverage for themselves or their employees.
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    \8\ Public Law No. 111-148, 124 Stat. 119. 2010 (codified as 
amended in scattered sections of the U.S. Code), as amended by the 
Health Care and Education Reconciliation Act of 2010, Public Law No. 
111-152, 124 Stat. 1029.
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    While the Department of Health and Human Services (HHS) will take 
the lead in developing the policy provisions of the Act, the IRS will 
administer the law's numerous tax provisions. The IRS estimates that 
the ACA includes approximately 50 tax provisions, at least eight of 
which will require the IRS to build new computer applications and 
business processes that do not exist within the current tax 
administration system.
    In June 2012, we reported that appropriate plans had been developed 
to implement tax-related provisions of the ACA using well-established 
methods for implementing tax legislation. The IRS's plans addressed tax 
forms, instructions, and most of the affected publications, as well as 
employee training, outreach and guidance to taxpayers and preparers, 
computer programming, and the compilation of additional data to enforce 
compliance with various ACA provisions.
    In fiscal year 2012, the IRS received $299 million from the Health 
Insurance Reform Implementation Fund (HIRIF) to support an additional 
664 FTEs. The HIRIF is administered by the Department of Health and 
Human Services as provided for in the Health Care and Education 
Reconciliation Act of 2010 to carry out the ACA. This was in addition 
to the funding received by the IRS based on its enacted budget.
    The IRS informed TIGTA that it does not anticipate receiving any 
funding from the HIRIF after fiscal year 2012. The IRS also informed 
TIGTA that its fiscal year 2013 spending plan includes $360 million to 
implement the ACA in fiscal year 2013. Since the IRS will not be 
reimbursed from the HIRIF for 2013, all fiscal year 2013 ACA spending 
is funded from the IRS's operating budget.
    The IRS's fiscal year 2014 budget request includes additional 
funding of $440 million to provide 1,954 FTEs for continued efforts 
related to the implementation of the ACA. The largest component of this 
increase is $306 million for the implementation of the information 
technology changes needed to deliver tax credits and other 
requirements.
    The development and implementation of new systems for the ACA 
provisions present major information technology management challenges. 
These include rapid implementation of interdependent projects that 
require extensive coordination within the IRS and with other Federal 
agencies. For example, one new system is the Income and Family Size 
Verification project, which uses tax return data to verify household 
income and family size for each person applying for health care 
coverage. TIGTA found that the IRS was generally managing system risks 
and made recommendations to improve the system development process.\9\
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    \9\ TIGTA, Ref. No. 2013-23-034, Affordable Care Act: The Income 
and Family Size Verification Project Is Applying a New Iterative 
Systems Development Process (Mar. 2013).
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    One key healthcare provision takes effect December 31, 2013. This 
provision is the requirement for individuals to maintain minimum 
essential health care coverage \10\ or face a continuous penalty. 
Starting in Calendar Year 2014, the IRS will be responsible for 
implementing the Premium Assistance Tax Credit \11\ as well as 
implementing the penalty on applicable individuals for each month they 
fail to have minimum essential coverage. These two issues have a far-
reaching impact on the IRS and will require significant resources, 
particularly customer service resources, as taxpayers turn to the IRS 
with questions and issues about the ACA and their tax and health 
insurance requirements. Customer service has been declining in recent 
years, with fewer taxpayers being served at the local offices and the 
IRS answering fewer telephone calls. The ACA will further stretch these 
already limited resources at the IRS.
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    \10\ The type of coverage an individual needs to have to meet the 
individual responsibility requirement under the Affordable Care Act.
    \11\ The Premium Assistance Tax Credit provides a refundable tax 
credit that eligible taxpayers can use to help cover the cost of health 
insurance premiums for individuals and families who purchase health 
insurance through a State health benefit exchange.
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               selected significant issues facing the irs
    As requested by the subcommittee, in this section of my testimony, 
I will examine several of the most significant challenges now facing 
the IRS as it administers the Nation's tax laws.
                              irs tax gap
    A serious challenge confronting the IRS is the Tax Gap, which is 
defined as the difference between the estimated amount taxpayers owe 
and the amount they voluntarily and timely pay for a Tax Year. The most 
recent gross Tax Gap estimate developed by the IRS was $450 billion for 
TY 2006. In comparison, the gross Tax Gap was estimated at $345 billion 
for TY 2001. The $450 billion Tax Gap estimate for 2006 is the best 
approximation of noncompliance the IRS can provide. However, it is 
important to note that because of the methods that are used, a 
significant portion of the Tax Gap is inferred. The voluntary 
compliance rate \12\ decreased slightly from 83.7 percent in 2001 to 
83.1 percent in 2006. Figure 2 shows the IRS's latest Tax Gap Map 
illustrating the various components of the Tax Gap.
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    \12\ The voluntary compliance rate is the amount of true tax 
liability imposed by law for a given tax year that is paid voluntarily 
and timely by the taxpayer.
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                       Figure 2.--Tax Gap ``Map''
                             Tax Year 2006
                         [Dollars in billions]

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



Source.--Internal Revenue Service, December 2011

    Reducing the Tax Gap is an IRS priority. For example, in September 
2006, the Treasury Department's Office of Tax Policy published ``A 
Comprehensive Strategy for Reducing the Tax Gap.'' The 2006 report 
provided a seven-component strategy for reducing the Tax Gap. The 
components of that strategy are to:
  --reduce opportunities for evasion;
  --make a multi-year commitment to research;
  --continue improvements in information technology;
  --improve compliance activities;
  --enhance taxpayer service;
  --reform and simplify the tax law; and
  --coordinate with partners and stakeholders.
    In July 2009, the Treasury Department completed a report on the Tax 
Gap that identified detailed strategic priorities, compliance program 
accomplishments, planned actions and legislative proposals.\13\ 
Notwithstanding this well-laid plan, reducing the Tax Gap and improving 
voluntary compliance are an ongoing challenge that requires a multi-
faceted approach.
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    \13\ The Department of the Treasury, ``Update on Reducing the 
Federal Tax Gap and Improving Voluntary Compliance.'' July 2009. 
Available at http://www.irs.gov/pub/newsroom/tax_gap_report_-
final_version.pdf.
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    More recently, the Government Accountability Office issued its Tax 
Gap report,\14\ stating that because noncompliance has multiple causes 
and spans different types of taxes and taxpayers, multiple approaches 
are needed to reduce the Tax Gap.
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    \14\ Government Accountability Office, Ref. No. GAO 12-651T, Tax 
Gap: Sources of Noncompliance and Strategies to Reduce It (Apr. 2012).
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    TIGTA has also identified several concerns with both estimating the 
Tax Gap and efforts to reduce it. For example, while the IRS has not 
developed an estimate for the international portion \15\ of the Federal 
Tax Gap, non-IRS estimates of the international Tax Gap range from $40 
billion to $123 billion.\16\ Another concern about the IRS's methods to 
estimate the size of the Tax Gap is that the various sample sizes used 
in the employment tax study may be insufficient to determine compliance 
levels.\17\
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    \15\ The international Tax Gap is defined as taxes owed--but not 
collected on time--from a U.S. person or foreign person whose cross-
border transactions are subject to U.S. taxation.
    \16\ TIGTA, Ref. No. 2009-IE-R001, A Combination of Legislative 
Actions and Increased IRS Capability and Capacity Are Required to 
Reduce the Multi-Billion Dollar U.S. International Tax Gap (Jan. 2009).
    \17\ TIGTA, Ref. No. 2011-10-034, Limitations in the Sample Size 
for the Internal Revenue Service's Employment Tax Study May Impact 
Ability to Determine Compliance Levels (May 2010).
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    The following strategies could help improve tax compliance:
  --Information Reporting.--Enhancing information reporting by third 
        parties to the IRS could reduce tax evasion and help taxpayers 
        comply voluntarily. However, identifying additional reporting 
        opportunities can be challenging because third parties may not 
        have accurate information that is readily available. Also, 
        adding reporting requirements creates a burden for both third 
        parties and the IRS.
          The IRS has developed a strategy and vision to explore more 
        ``real time'' or upfront matching of tax returns when they are 
        first filed with the IRS instead of the traditional ``look 
        back'' model of compliance. If the tax return contains 
        information that does not match the IRS's records, the IRS 
        could provide the taxpayer the opportunity to fix his or her 
        tax return before it is accepted. It would also enable the IRS 
        to identify and prevent a significant number of fraudulent 
        refund claims based on false W-2 data.
  --Taxpayer Service.--Ensuring high-quality services to taxpayers, 
        such as by telephone and correspondence or online, can help 
        encourage those taxpayers who wish to comply with tax laws but 
        do not understand their tax obligations. However, tax law 
        changes and funding priorities have recently affected the IRS's 
        ability to provide quality taxpayer services.
          TIGTA reported that taxpayers are increasing their use of 
        customer assistance tools; however, budget cuts and staffing 
        shortages prevented the IRS from properly meeting its Level of 
        Service \18\ goals for fiscal year 2012. As a result, taxpayers 
        waited longer on the IRS's toll-free telephone assistance 
        lines. In addition, tax return preparation was provided only on 
        a limited number of days per week and only on a first-come, 
        first-served basis at Taxpayer Assistance Centers.\19\
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    \18\ The IRS's Level of Service measure reflects the percentage of 
taxpayers who call for live assistance on the Customer Service's toll-
free telephone lines and speak with an assistor.
    \19\ TIGTA, Ref. No. 2012-40-119, The Majority of Individual Tax 
Returns Were Processed Timely, but Not All Tax Credits Were Processed 
Correctly During the 2012 Filing Season (Sep. 2012).
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  --Enforcement.--Devoting additional resources to enforcement could 
        enable the IRS to contact the millions of potentially 
        noncompliant taxpayers it identifies but cannot contact due to 
        resource limitations. To determine the appropriate level of 
        enforcement resources, policymakers would need to consider how 
        to balance taxpayer service and enforcement activities and how 
        effectively and efficiently the IRS currently uses its 
        resources. We reviewed enforcement revenue trends and noted 
        that in fiscal year 2007, the IRS collected over $59 billion in 
        taxes, penalties and interest, but the dollars collected 
        dropped over the next 2 years before increasing again in fiscal 
        year 2010. Subsequently, dollars collected decreased to 
        slightly more than $50 billion in fiscal year 2012. While the 
        IRS did not track the reason for the increase in fiscal year 
        2010, the IRS did receive additional funds to hire more than 
        1,500 revenue officers from June 2009 to February 2010.
          IRS statistics show that 50 percent of the partnership 
        returns \20\ audited after being selected by the Discriminant 
        Index Function (DIF) system,\21\ or related to a DIF-selected 
        return, were closed as a no-change in fiscal year 2011. The IRS 
        has relied on this system to decide how to best allocate its 
        audit resources. According to the IRS, a high no-change rate 
        means the IRS is spending a significant amount of resources on 
        unproductive audits and compliant taxpayers are unnecessarily 
        burdened by audits. TIGTA reported that the IRS should pursue 
        alternative audit selection techniques by using existing 
        databases containing partnership data to help identify 
        additional productive returns for audit.\22\
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    \20\ Form 1065, U.S. Return of Partnership Income, is an 
information return used to report the income, gains, losses, 
deductions, credits, etc., from the operation of a partnership. A 
partnership does not pay tax on its income but ``passes through'' any 
profits or losses to its partners.
    \21\ The DIF system uses computer formulas to classify tax returns 
for examination potential by assigning weights to certain basic tax 
return characteristics and scoring the tax return. The higher the 
score, the higher the probability of significant tax change as a result 
of the examination.
    \22\ TIGTA, Ref. No. 2012-30-06, Despite Some Favorable Partnership 
Audit Trends, the Number of No-Change Audits Is a Concern (June 2012).
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          The IRS approach to International Tax Administration includes 
        an initiative to identify and develop baselines and measures to 
        better assess the international Tax Gap and progress in 
        reducing it. The Foreign Account Tax Compliance Act (FATCA) is 
        an important development in U.S. efforts to improve tax 
        compliance involving foreign financial assets and offshore 
        accounts. The changes required by the FATCA will combat tax 
        evasion by U.S. persons holding investments in offshore 
        accounts, expand the IRS global presence, and pursue 
        international tax and financial crimes. Prior to the enactment 
        of the FATCA, the IRS did not have a system to detect offshore 
        tax evasion. The IRS's development of a new FATCA system is a 
        major Information Technology investment for the IRS and is 
        critical for the IRS to ensure international tax compliance. 
        TIGTA plans to review the development of this critical system 
        and the operation of FATCA once implemented.
  --Compliance Checks.--Expanding compliance checks before the IRS 
        issues refunds would involve matching information returns to 
        tax returns during, rather than after, the tax filing season. 
        This approach would require a major reworking of some 
        fundamental IRS computer systems but could help address 
        identity theft-related fraud and allow the IRS to use 
        enforcement resources on other compliance problems.
          TIGTA reported that the IRS took a number of additional steps 
        for the 2012 Filing Season \23\ to detect identity theft tax 
        refund fraud before it occurred.\24\ These efforts included 
        designing new identity theft screening filters \25\ that the 
        IRS indicates will improve its ability to identify false tax 
        returns before the tax return is processed and before a 
        fraudulent tax refund is issued. In addition, beginning in 
        Processing Year \26\ 2012 the filters use benefit and 
        withholding information from the Social Security Administration 
        (SSA). This information is used to verify that Social Security 
        benefits and related withholding reported on tax returns match 
        the information reported by the SSA. The IRS reports that it 
        identified and confirmed identity theft on over 31,000 tax 
        returns claiming fraudulent Social Security benefits and 
        withholding, and stopped approximately $169 million in 
        fraudulent tax refunds in Processing Year 2012 using the 
        information provided by SSA. The IRS advised us that for the 
        2013 Filing Season, the filters have been refined and 
        incorporate criteria based on the latest characteristics of 
        confirmed identity theft tax returns.
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    \23\ The period from January through mid-April when most individual 
income tax returns are filed.
    \24\ TIGTA, Ref. No. 2012-42-080, There Are Billions of Dollars in 
Undetected Tax Refund Fraud Resulting From Identity Theft (July 2012).
    \25\ Computer programs designed to detect fraud and improve the 
IRS's ability to spot false returns before they are processed and 
refunds are issued.
    \26\ The calendar year in which the tax return or document is 
processed by the IRS.
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  --External Parties.--Leveraging external resources, such as paid tax 
        return preparers and whistleblowers, can help improve tax 
        compliance because paid preparers' actions have an enormous 
        impact on the IRS's ability to effectively administer tax laws. 
        In addition, whistleblowers provide the IRS with information on 
        suspected noncompliance.
          TIGTA has reported on the IRS's efforts to improve oversight 
        of the return preparer community.\27\ While the IRS began 
        implementing the new preparer requirements in fiscal year 2011, 
        TIGTA reported that it will take years for the IRS to implement 
        the Return Preparer Program, including establishing all of the 
        program requirements and developing the systems and processes 
        necessary to administer and oversee the program. However, this 
        program is on hold based on a recent court ruling. On January 
        18, 2013, the United States District Court for the District of 
        Columbia ruled that the IRS did not have the authority to 
        regulate tax preparers who had not been regulated before--
        namely preparers who were not certified public accountants, 
        attorneys, enrolled agents, or enrolled actuaries.\28\ On 
        January 23, 2013, the IRS filed a motion to suspend the 
        injunction pending appeal. The U.S. District Court for the 
        District of Columbia denied the IRS's motion but clarified that 
        the IRS is not required to suspend the Preparer Tax 
        Identification Number (PTIN) program, which is one aspect of 
        the Return Preparer Program.\29\ The IRS filed a notice of 
        appeal to the District of Columbia Circuit Court on February 
        20, 2013.
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    \27\ TIGTA, Ref. No. 2010-40-127, It Will Take Years to Implement 
the Return Preparer Program and to Realize Its Impact (Sep. 2010).
    \28\ Loving v. IRS, 2013 U.S. Dist. LEXIS 7980 (D.D.C. Jan. 18, 
2013).
    \29\ Loving v. IRS, 2013 U.S. Dist. LEXIS 13878 (D.D.C. Feb. 1, 
2013).
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          The IRS Whistleblower Program also plays an important role in 
        reducing the Tax Gap and maintaining the integrity of a 
        voluntary tax compliance system. However, TIGTA reported that 
        the program continued to have internal control weaknesses on 
        the processing of whistleblower claims. For example, 
        information captured from multiple systems and entered into a 
        single inventory control system was potentially inaccurate, and 
        the quality review process for the new inventory system was not 
        sufficient to ensure that claims were accurately controlled. 
        Additionally, TIGTA determined that timeliness standards for 
        processing claims were not sufficient. Without adequate 
        oversight of the Whistleblower Program, the IRS is not as 
        effective as it could be in responding timely to tax 
        noncompliance issues.\30\
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    \30\ TIGTA, Ref. No. 2012-30-045, Improved Oversight Is Needed to 
Effectively Process Whistleblower Claims (Apr. 2012).
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  --Modernization.--Modernizing information systems could potentially 
        allow the IRS to post more comprehensive tax return information 
        to its computer systems, which could facilitate the examination 
        process and expedite taxpayer contacts for faster resolution.
          The IRS considers the Customer Account Data Engine 2 (CADE 2) 
        program critical to the IRS's mission, and it is the IRS's most 
        important information technology investment. TIGTA reported 
        that the implementation of CADE 2 daily processing allowed the 
        IRS to process tax returns for individual taxpayers more 
        quickly by replacing existing weekly processing.\31\ The CADE 2 
        system also provides for a centralized database of individual 
        taxpayer accounts, which will allow IRS employees to view tax 
        data online and provide timely responses to the taxpayers once 
        it is implemented. The IRS's modernization efforts also include 
        the development of computer programs to conduct predictive 
        analytics to reduce refund fraud.\32\ The successful 
        implementation of the IRS's modernization program should 
        significantly improve service to taxpayers and enhance Federal 
        tax administration.
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    \31\ TIGTA, Ref. No. 2012-20-122, Customer Account Data Engine 2 
System Requirements and Testing Processes Need Improvements (Sep. 
2012).
    \32\ Computer models that analyze extremely large quantities of 
data to seek out data patterns and relationships that could indicate 
potential tax fraud schemes.
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  --Simplifying tax return requirements.--Simplifying the tax code 
        could help taxpayers understand and voluntarily comply with 
        their tax obligations and limit opportunities for tax evasion.
  --Penalties.--Congress provided numerous penalty provisions in the 
        Internal Revenue Code that the IRS can use to help remedy the 
        noncompliance that contributes to the Tax Gap. The IRS can 
        assess accuracy-related penalties for negligence, substantial 
        understatement of income tax, or substantial valuation 
        misstatement. The IRS estimated that the underreporting of tax 
        contributed $376 billion (84 percent) of the $450 billion total 
        gross Tax Gap, including $235 billion from individual income 
        taxes. To deter this type of behavior, the IRS reported that it 
        assessed more than 500,000 accuracy-related penalties, 
        involving more than $1 billion against individuals during 
        fiscal year 2011.
          Penalties are an important tool because they discourage 
        taxpayer behavior that contributes to the Tax Gap. However, the 
        numerous reports TIGTA has issued suggest that the IRS could 
        take better advantage of these tools to deter noncompliance.
          For example, TIGTA reported that additional steps must be 
        taken to ensure that examiners properly consider and assess 
        accuracy-related penalties when taxpayers are negligent or 
        understate their tax liabilities by $5,000 or more.\33\ A 
        review of 229 audits conducted through the mail found 211 
        instances (92 percent) where applicable penalties were not 
        considered and assessed. Each of the audits resulted in the 
        taxpayer agreeing they owed additional taxes of at least 
        $5,000. The $5,000 threshold is important because examiners are 
        required to consider assessing an accuracy-related penalty. 
        Since the penalties were not considered and assessed, TIGTA 
        believes opportunities may have been missed to promote 
        compliance among an estimated 9,255 taxpayers over a 5-year 
        period, and to enhance penalty and interest revenue by an 
        estimated $17.5 million.
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    \33\ TIGTA, Ref. No. 2010-30-059, Accuracy-Related Penalties Are 
Seldom Considered Properly During Correspondence Audits (June 2010).
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          In another example, TIGTA made several recommendations to 
        help ensure that taxpayers receive fair and consistent 
        treatment by improving how the IRS administered a penalty under 
        Internal Revenue Code Section 6707A.\34\ This penalty could be 
        assessed against taxpayers for failing to disclose 
        participation in certain reportable transactions and was 
        enacted to detect, deter, and shut down abusive tax shelter 
        activity. Its importance to the IRS's efforts in combating 
        abusive tax shelters was reflected in the severity of the 
        penalty. The penalty could be as high as $100,000 for 
        individuals and $200,000 for businesses if they fail to 
        disclose participation in specific transactions that the IRS 
        has identified and listed in publications as abusive.
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    \34\ TIGTA, Ref. No. 2011-30-004, Penalty Cases for Failure to 
Disclose Reportable Transactions Were Not Always Fully Developed (Dec. 
2010).
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          Finally, TIGTA reported that actions could be taken to 
        reinforce the importance of recognizing and investigating fraud 
        indicators during field audits.\35\ TIGTA reviewed 116 audits 
        of sole proprietors \36\ in which the taxpayer agreed they owed 
        additional taxes of at least $10,000 and found 26 audits with 
        fraud indicators that were not recognized or investigated. As a 
        result, TIGTA believes sole proprietors in some 1,872 audits 
        avoided approximately $19.7 million ($98 million over 5 years) 
        in civil fraud penalties that may have been owed. The fact that 
        fraud indicators were not recognized and investigated in nearly 
        one out of every four of these large-dollar cases is a concern 
        because the omitted income and overstated deductions were 
        substantial.
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    \35\ TIGTA, Ref. No. 2012-30-030, Actions Can Be Taken to Reinforce 
the Importance of Recognizing and Investigating Fraud Indicators During 
Field Audits (Mar. 2012).
    \36\ A sole proprietor is someone who owns an unincorporated 
business by himself or herself.
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                  identity theft and tax refund fraud
Identity Theft
    Incidents of identity theft affecting tax administration have 
continued to rise since calendar year 2011, when the IRS identified 
more than 1 million incidents of identity theft that impacted our 
Nation's tax system. As of December 31, 2012, the IRS identified almost 
1.8 million incidents during calendar year 2012. This figure includes 
approximately 280,000 incidents in which taxpayers contacted the IRS 
alleging that they were victims of identity theft,\37\ and more than 
1.5 million incidents in which the IRS detected potential identity 
theft.\38\
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    \37\ Taxpayers can be affected by more than one incident of 
identity theft. The 280,000 incidents affected 233,365 taxpayers.
    \38\ These 1.5 million incidents affected 985,843 taxpayers.
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    In July 2012, TIGTA reported that the impact of identity theft on 
tax administration is significantly greater than the amount the IRS 
detects and prevents.\39\ Using the characteristics of confirmed 
identity theft and data that becomes available later in the year, we 
analyzed tax year 2010 tax returns processed during the 2011 filing 
season and identified 1.5 million undetected tax returns with 
potentially fraudulent tax refunds totaling in excess of $5 billion. If 
not addressed, we estimate that the IRS could issue approximately $21 
billion in fraudulent tax refunds resulting from identity theft over 
the next 5 years.
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    \39\ TIGTA, Ref. No. 2012-42-080, There Are Billions of Dollars in 
Undetected Tax Refund Fraud Resulting From Identity Theft (July 2012).
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    As a result of the delayed start of this year's filing season, we 
were unable to determine the extent of identity theft cases this year 
or compare trends with last year's filing season during our interim 
filing season audit. However, it is highly likely that incidents of 
identity theft will show a continued increase when the current filing 
season results are reported.
    Although the IRS is working toward finding ways to determine which 
tax returns are legitimate, access to third-party income and 
withholding information at the time tax returns are processed is the 
single most important tool the IRS could use to detect and prevent 
identity theft tax fraud resulting from the reporting of false income 
and withholding. Third-party reporting information would enable the IRS 
to identify the income as false and prevent the issuance of a 
fraudulent tax refund. However, most of this information is not 
available until well after tax return filing begins.\40\
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    \40\ Form W-2, Wage and Tax Statement, is an information return 
containing wage and withholding information for taxpayers. Employers 
were required to file Forms W-2 to the IRS for the 2012 tax year by 
April 1, 2013.
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    Another important tool that could immediately help the IRS prevent 
tax fraud-related identity theft is the National Directory of New 
Hires.\41\ However, legislation is needed to expand the IRS's authority 
to access the National Directory of New Hires wage information for use 
in identifying tax fraud. Currently, the IRS's use of this information 
is limited by law to just those tax returns that include a claim for 
the Earned Income Tax Credit.\42\ The IRS included a request for 
expanded access to this information in its annual budget submissions 
for fiscal year 2010 through 2013 and has once again included this 
request in its fiscal year 2014 budget submission.
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    \41\ A Department of Health and Human Services national database of 
wage and employment information submitted by Federal agencies and State 
workforce agencies.
    \42\ A tax credit for certain people who work and have earned 
income under $50,270.
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    One promising development occurred at the end of March 2013, when 
the IRS announced it was expanding a program designed to help law 
enforcement obtain tax return data for their investigations and 
prosecutions of specific cases of identity theft. The IRS initiated 
this program to assist local law enforcement with arrests and 
prosecutions related to identity theft. Under a pilot program, which 
was started in April 2012 in the State of Florida, State and local law 
enforcement officials who have evidence of identity theft involving 
fraudulently filed tax returns were able, through a written disclosure 
consent waiver from the victim, to obtain tax returns filed using the 
victim's SSN. The pilot was expanded in October 2012 to eight 
additional States. There was widespread use of this program. Under the 
pilot, more than 1,560 waiver requests were received by the IRS from 
more than 100 State and local law enforcement agencies in the nine 
States participating in the pilot. On March 29, 2013, the pilot was 
expanded to a permanent program that was effective for all 50 States 
and the District of Columbia.
    Even with improved identification of tax returns that report false 
wage and withholding information, verifying whether the returns are 
fraudulent will require resources. Using IRS estimates, it would cost 
approximately $32 million to screen and verify the approximately 1.5 
million tax returns that we identified as not having third-party 
information, which indicates that the return information could be 
false.
    The IRS is developing a new Return Review Program system to 
implement its emerging business model for a coordinated approach for 
prevention, detection, and resolution of pre-refund tax fraud. This 
system will replace the IRS's current fraud detection system, the 
Electronic Fraud Detection System, which was implemented in 1994. The 
Return Review Program system is critical for the IRS's success in 
dealing with tax schemes, and will evaluate tax returns against the 
prior 3 years' filing history and other external data sources. The 
first two phases of implementation for the Return Review Program will 
occur in the 2014 and 2015 filing seasons.
    Regarding assistance to identity theft victims, TIGTA reported that 
the IRS is not effectively providing assistance to taxpayers who report 
that they have been victims of identity theft, resulting in increased 
burden for those victims.\43\ Moreover, identity theft cases can take 
more than 1 year to resolve and communication between the IRS and 
victims is limited and confusing. Victims are also asked multiple times 
to substantiate their identities.
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    \43\ TIGTA, Ref. No. 2012-40-050, Most Taxpayers Whose Identities 
Have Been Stolen to Commit Refund Fraud Do Not Receive Quality Customer 
Service (May 2012).
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    In addition, the management information system that telephone 
assistors use to control and work cases can add to the taxpayer's 
burden. For instance, the IRS may open multiple cases for the same 
victim, and multiple assistors may work that same victim's identity 
theft issue. A review of 17 taxpayers' identity theft cases showed that 
58 different cases involving those taxpayers had been opened, and 
multiple assistors had worked their cases. Our audit also found that 
victims become further frustrated when they are asked numerous times to 
prove their identities, even though they have previously followed IRS 
instructions and sent in Identity Theft Affidavits \44\ and copies of 
their identification with their tax returns. We also found in May 2012 
\45\ that the IRS sends the victims duplicate letters at different 
times, wasting agency resources and possibly confusing the victims.
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    \44\ IRS Form 14039, Identity Theft Affidavit.
    \45\ TIGTA, Ref. No. 2012-40-050, Most Taxpayers Whose Identities 
Have Been Stolen to Commit Refund Fraud Do Not Receive Quality Customer 
Service (May 2012).
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    The growth of identity theft presents considerable challenges to 
tax administration. In calendar year 2011, the IRS reported that over 
641,000 taxpayers were victims of identity theft. This figure includes 
taxpayers who contacted the IRS alleging that they were victims. In 
calendar year 2012, the IRS identified an additional 1.2 million of 
these taxpayers.
    In fiscal year 2012, the IRS dedicated 400 additional employees to 
the Accounts Management function \46\ to work identity theft cases. As 
a result, the function now has approximately 2,000 employees working 
these cases. However, its inventory of identity theft cases has grown 
almost 50 percent from fiscal year 2011 to 2012. As of March 9, 2013, 
the Accounts Management function reported that it had more than 249,000 
identity theft cases in its inventory.
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    \46\ The function that works the majority of identity theft cases 
involving individual duplicate tax returns.
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Criminal Investigations of Identity Theft
    Identity theft not only has a negative impact on the economy, but 
the damage it causes to its victims can be personally, professionally, 
and financially devastating. When individuals steal identities and file 
false tax returns to obtain fraudulent refunds before the legitimate 
taxpayers file, the crime is simple tax fraud, which falls within the 
programmatic responsibility of IRS Criminal Investigation. TIGTA's 
Office of Investigations focuses its resources on investigating 
identity theft that has any type of IRS employee involvement, the 
misuse of client information by tax preparers, or the impersonation of 
the IRS through phishing \47\ schemes and other means.
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    \47\ Phishing is an attempt by an individual or group to solicit 
personal and financial information from unsuspecting users in an 
electronic communication by masquerading as trustworthy entities such 
as government agencies, popular social Web sites, auction sites, online 
payment processors, or information technology administrators.
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    For example, a former IRS employee was arrested after being charged 
by a Federal grand jury on June 26, 2012, for aggravated identity 
theft, mail fraud, unauthorized inspection of tax returns and return 
information, and unauthorized disclosure of tax returns and return 
information. She subsequently pled guilty to those charges on August 
14, 2012, and was sentenced on March 28, 2013, to 28 months of 
imprisonment with 3 years of supervised release.\48\
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    \48\ E.D. Pa. Arrest Warrant executed July 5, 2012; E.D. Pa. Crim. 
Indict. filed June 26, 2012; E.D. Pa. Crim. Docket dated Jan. 22, 2013.
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    TIGTA also investigated a tax preparer who stole the personal 
identifiers of several individuals and unlawfully disclosed the 
information to others to fraudulently obtain tax refunds. According to 
the indictment, the subject of the investigation worked as a tax 
preparer from January 2002 to June 2008. In 2010, he used the personal 
identifiers of other individuals to file false income tax returns and 
obtain refunds from the IRS. The preparer obtained most of the personal 
identifiers in the course of his prior employment as a tax preparer and 
from other employment positions he held. He disclosed this information 
to co-conspirators so they could also file false income tax returns and 
obtain refunds from the IRS. The subject and his co-conspirators 
ultimately defrauded or attempted to defraud the IRS out of at least 
$560,000 in tax refunds.\49\
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    \49\ S.D. Cal. Superseding Indict. filed June 19, 2012.
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    As a third example, TIGTA investigated a phishing scheme in which 
several individuals were deceived into divulging their personal 
identifiers and banking information to identity thieves who then 
defrauded them of more than $1 million. The subject and his co-
conspirators operated a scheme to defraud numerous individuals through 
Internet solicitations and stealing the identities of those 
individuals. The subject of the investigation was sentenced to a total 
of 30 months of imprisonment and 5 years of supervised release for 
aggravated identity theft and conspiracy to commit wire fraud. He was 
also ordered to pay $1,741,822 in restitution to his victims.\50\
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    \50\ E.D.N.Y. Response to Defendant's Sentencing Letter filed Dec. 
19, 2011; E.D.N.Y. Judgment filed Aug. 9, 2012.
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    While phishing schemes may vary in their technical complexity, most 
share a common trait: They involve computers located outside the United 
States. Despite the significant investigative challenge this poses, 
TIGTA has been successful in working with law enforcement personnel in 
foreign countries to identify the perpetrators and obtain prosecutions.
    Identity thieves may also commit identity theft by impersonating 
IRS employees or misusing the IRS seal to induce unsuspecting taxpayers 
to disclose their personal identifiers and financial information. One 
such criminal posed as an IRS ``Audit Group Representative'' and, 
according to the indictment, sent letters to various employers 
demanding that they send him the names, contact information, dates of 
birth, and SSNs of their employees. He then prepared and filed false 
Federal tax returns in the names of the employees without their 
knowledge or consent. The tax returns contained W-2 \51\ information, 
such as income and withholding, that was falsely and fraudulently 
inflated. The subject of the investigation used the refunds to purchase 
personal items. The subject pled guilty to false impersonation of an 
officer and employee of the United States; identity theft; subscribing 
to false and fraudulent U.S. individual income tax returns; and false, 
fictitious, or fraudulent claims. He was sentenced to 41 months of 
imprisonment and 3 years of supervised release. He was also ordered to 
pay $8,716 in restitution.\52\
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    \51\ Form W-2, Wage and Tax Statement.
    \52\ S.D.N.Y. Crim. Indict. filed Jan. 25, 2012; S.D.N.Y. Minute 
Entry filed July 11, 2012; S.D.N.Y. Judgment filed March 25, 2013.
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Refundable Credits
    The IRS administers numerous refundable tax credits.\53\ The most 
significant refundable credit is the Earned Income Tax Credit (EITC). 
Two other refundable credits include the Additional Child Tax Credit 
(ACTC) and the American Opportunity Tax Credit (AOTC).\54\ For several 
years, TIGTA has reported significant concerns with the growth in 
noncompliance and fraud in refundable tax credits.\55\
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    \53\ A refundable tax credit is a tax credit that is treated as a 
payment and can be refunded to the taxpayer. Refundable credits can 
create a Federal tax refund that is larger than the amount a person 
actually paid in taxes during the year.
    \54\ Other refundable credits claimed by a small number of 
taxpayers include the Health Coverage Tax Credit, the Fuel Tax Credit, 
and the Credit for Prior Year Minimum Tax.
    \55\ TIGTA, Ref. No. 2012-40-105, Expansion of Controls Over 
Refundable Credits Could Help Reduce the Billions of Dollars of 
Improperly Paid Claims (Sep. 2012).
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    The EITC remains the largest refundable credit based on the total 
claims paid, and it continues to be vulnerable to a high rate of 
noncompliance, including incorrect or erroneous claims caused by 
taxpayer error or resulting from fraud. TIGTA continues to report that 
the IRS does not have effective processes to ensure that claimants 
qualify for these credits at the time tax returns are processed and 
prior to issuance of fraudulent tax refunds. The IRS estimates that it 
has paid between $110 billion and $133 billion in improper EITC 
payments from fiscal years 2003 through 2012.\56\ It does not track 
estimates for the other refundable credits.\57\
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    \56\ Department of the Treasury Performance and Accountability 
Reports for fiscal years 2003 through 2010 and the Agency Financial 
Report for fiscal years 2011 and 2012, as outlined in Office of 
Management and Budget Circular No. A-136.
    \57\ TIGTA, Ref. No. 2013-40-024, The Internal Revenue Service Was 
Not in Compliance With All Requirements of the Improper Payments 
Elimination and Recovery Act for fiscal year 2012 (Feb. 2013).
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    The IRS has made little improvement in reducing EITC improper 
payments in the years since it was required to report estimates of 
these payments to the Congress in calendar year 2002. The rate of 
improper EITC payments has remained high and there continues to be a 
risk that no significant improvement will be made in reducing EITC 
improper payments. The IRS estimates that the EITC improper payment 
rate was 21-25 percent in fiscal year 2012, which equates to $12 
billion to $14 billion.
    TIGTA further reported that although Executive Order 13520 \58\ 
requires the IRS to intensify its efforts to reduce EITC improper 
payments, reduction targets and strategies have not been established to 
reduce the billions of dollars associated with these payments.\59\ For 
example, the Executive order requires the IRS to provide TIGTA with its 
plans and supporting analysis for meeting those targets. The IRS's 
report to TIGTA did not include any quantifiable targets to reduce EITC 
improper payments. IRS management noted that it did not set reduction 
targets because it must balance enforcement efforts among different 
taxpayer income levels.
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    \58\ Reducing Improper Payments and Eliminating Waste in Federal 
Programs, November 23, 2009.
    \59\ TIGTA, Ref. No. 2011-40-023, Reduction Targets and Strategies 
Have Not Been Established to Reduce the Billions of Dollars in Improper 
Earned Income Tax Credit Payments Each Year (Feb. 2011).
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    The Additional Child Tax Credit is also susceptible to improper 
claims. However, the IRS did not identify the ACTC as a high-risk 
program under the Improper Payments Elimination and Recovery Act of 
2010 (IPERA).\60\ Agencies are not required to take any further action 
to assess or quantify improper payments if a high risk for improper 
payments does not exist. As a result, the IRS and the Department of the 
Treasury are not required to quantify and report on ACTC improper 
payments. Nevertheless, TIGTA found that taxpayers repeatedly claimed 
erroneous ACTCs after their claims were disallowed the previous 
year.\61\ The IRS could have saved more than $108 million by reviewing 
claims made by taxpayers who were previously disallowed the credit. 
TIGTA has reported that the IRS's risk process does not provide a 
reliable assessment of the risk of improper payments in the IRS's 
revenue program funds.\62\ In addition, TIGTA found that the IRS is not 
in compliance with all IPERA requirements reported to the Department of 
the Treasury.\63\
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    \60\ Public Law 111-204, 124 Stat. 2224. 2010.
    \61\ TIGTA, Ref. No. 2012-40-105, Expansion of Controls Over 
Refundable Credits Could Help Reduce the Billions of Dollars of 
Improperly Paid Claims (Sep. 2012).
    \62\ TIGTA, Ref. No. 2013-40-015, Improper Payments Elimination and 
Recovery Act Risk Assessments of Revenue Programs are Unreliable (Jan. 
2013).
    \63\ TIGTA, Ref. No. 2013-40-024, The Internal Revenue Service Was 
Not in Compliance With All Requirements of the Improper Payments 
Elimination and Recovery Act for Fiscal Year 2012 (Feb. 2013).
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    TIGTA also found that when the IRS freezes and reviews a 
questionable EITC claim but releases a related ACTC, the ACTC will 
later be disallowed 67 percent of the time, and the IRS will have to 
employ post-refund collection methods to recover the credits. Erroneous 
credits discovered after refunds are released may require more costly 
enforcement actions, and the likelihood of collection diminishes over 
time. The IRS could have prevented approximately $419 million in 
erroneous ACTC refunds from being released had it reviewed the ACTC at 
the same time the EITC was being reviewed.
    In September 2011, we reported that as of May 28, 2010, 2.1 million 
taxpayers received $3.2 billion in education credits such as the AOTC 
that appeared to be erroneous.\64\ Another TIGTA audit found that 
individuals were claiming education tax credits for students who, based 
on age, are unlikely to be pursuing an undergraduate degree or 
vocational certification.\65\
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    \64\ TIGTA, Ref. No. 2011-41-083, Billions of Dollars in Education 
Credits Appear to Be Erroneous (Sep. 2011).
    \65\ TIGTA, Ref. No. 2012-40-119, The Majority of Individual Tax 
Returns Were Processed Timely, but Not All Tax Credits Were Processed 
Correctly During the 2012 Filing Season (Sep. 2012).
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    We notified the IRS on January 5, 2012 that we had identified 
approximately 35,000 individuals who were younger than the typical age 
of individuals enrolled in a 4-year college degree program or 
vocational school certificate program who were claimed for the AOTC. It 
appeared that the individuals were used to erroneously claim the AOTC 
on TY 2009 returns. Of the 35,000 individuals, 13,870 were age 10 and 
younger. TIGTA's additional review identified more than 109,000 
taxpayers who as of May 2, 2012, received refundable AOTC for TY 2011 
totaling more than $159 million for students whose age made them 
unlikely to be enrolled in a 4-year college degree program or 
vocational certification.
                            taxpayer service
    As demand for taxpayer services continues to increase, resources 
have decreased, thereby affecting the quality of customer service that 
the IRS is able to provide. Despite other available options, most 
taxpayers continue to use the telephone as the primary method to make 
contact with the IRS. In addition, more taxpayers are calling the IRS's 
toll-free telephone lines each year. In September 2012, TIGTA reported 
that an increase in call demand and limited resources continue to 
adversely affect the IRS's Level of Service for its toll-free telephone 
lines.\66\ During the 2012 Filing Season, taxpayers made over 90 
million attempts to call the various Customer Account Services function 
toll-free telephone assistance lines \67\ seeking help in understanding 
the tax law and meeting their tax obligations.\68\ IRS assistors 
answered more than 13 million calls and achieved approximately a 68 
percent Level of Service and a 946-second (almost 16 minutes) Average 
Speed of Answer.\69\
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    \66\ TIGTA, Ref. No. 2012-40-119, The Majority of Individual Tax 
Returns Were Processed Timely, but Not All Tax Credits Were Processed 
Correctly During the 2012 Filing Season (Sep. 2012).
    \67\ The IRS refers to the suite of 29 telephone lines to which 
taxpayers can make calls as ``Customer Account Services Toll-Free.''
    \68\ Toll-free telephone assistance data were taken from available 
IRS reports through the week ending April 21, 2012.
    \69\ The average amount of time for an assistor to answer the call 
after the call is routed to a call center staff.
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    A reduction in funding for toll-free telephone and correspondence 
services resulted in a Level of Service for fiscal year 2012 of 67 
percent. The IRS plans to provide a 70 percent Level of Service for the 
2013 Filing Season as well as for fiscal year 2013. As of March 9, 
2013, approximately 56.5 million taxpayers contacted the IRS by calling 
the various customer service toll-free telephone assistance lines 
seeking help in understanding the tax law and meeting their tax 
obligations. IRS assistors have answered 8.3 million calls and have 
achieved a 67.8 percent Level of Service with a 14.2 minute Average 
Speed of Answer. This decrease in the Level of Service translates to 
longer customer wait times, an increased number of customers abandoning 
calls, and an increased number of customers redialing the IRS toll-free 
telephone lines for service. The last year the IRS provided a Level of 
Service of more than 80 percent was fiscal year 2007.
    From the 2007 to the 2012 Filing Season, the IRS's ability to 
process taxpayer correspondence in a timely manner also declined. 
Assistors who answer the toll-free telephone lines also handle taxpayer 
correspondence (including processing amended tax returns and identity 
theft cases). During the filing season when call demand is usually at 
its highest, more resources are shifted to the telephones to answer 
calls, and correspondence inventory processing is placed on hold until 
call demand subsides. As call volumes have increased and assistors have 
been moved to answer telephone calls, paper correspondence inventories 
have substantially increased. The correspondence inventory rose from 
approximately 480,000 at the end of fiscal year 2007 to more than 1 
million at the end of fiscal year 2012, representing an increase of 
nearly 114 percent.
    Each year, many taxpayers also seek assistance from one of the 
IRS's 397 walk in offices, called Taxpayer Assistance Centers. The IRS 
assisted almost 7 million taxpayers in fiscal year 2012 and plans to 
assist 6 million taxpayers during fiscal year 2013, 15 percent fewer 
than in fiscal year 2012. The fiscal year 2013 plan was based on the 
assumption of limited seasonal staff support and continuing reduction 
of permanent staff as a result of the hiring freeze.
    As a result, during the 2013 Filing Season, the IRS again provided 
tax return preparation on a limited number of days per week and only on 
a first-come, first-served basis. The IRS will not offer taxpayers the 
option to leave a message when they call local Taxpayer Assistance 
Center telephone lines. Appointments will not be available. Instead, 
the IRS offers alternative services for tax return preparation, such as 
Volunteer Income Tax Assistance, Free File, and Fillable Forms. The IRS 
has indicated that service provided to taxpayers and the amount of 
money collected through enforcement activities could decline as a 
result of the budget cuts of the last few years.
                             human capital
    Continued focus by IRS executive management on human capital will 
remain important because the IRS is facing several key challenges. In 
addition to a workforce that shrunk by approximately 10,000 employees 
between the end of fiscal year 2010 and the end of fiscal year 2012, 
IRS data show that more than one-third of all executives and almost 20 
percent of nonexecutive managers are currently eligible for retirement. 
In addition, the IRS reported FTEs were further reduced in fiscal year 
2013. Within 5 fiscal years, nearly 70 percent of all IRS executives 
and nearly one-half of the IRS's nonexecutive managers are projected to 
be eligible for retirement. Overall, about 40 percent of the IRS's 
employees will be retirement eligible within 5 fiscal years.
    In the current budget environment, the IRS will also be challenged 
to continue some of the human capital work it has started. For example, 
the IRS is undergoing a change in top leadership. Commissioner Douglas 
Shulman left the IRS when his term expired in November 2012. During 
Commissioner Shulman's term, he formed the Workforce of Tomorrow Task 
Force to address the IRS's most serious workforce issues, and much 
progress was made on human capital issues during his tenure. Interim 
leadership and the next Commissioner will need to ensure that actions 
are taken to build on the momentum gained during Commissioner Shulman's 
term and to effectively address human capital challenges.
               tigta budget request for fiscal year 2014
    As requested by the subcommittee, I will now provide information on 
our budget request for fiscal year 2014.
    TIGTA's fiscal year 2014 President's budget request is 
$149,538,000, a decrease of 1.42 percent below the fiscal year 2012 
enacted budget. These reductions were a result of savings TIGTA 
achieved by increasing efficiency, streamlining operations, and 
reducing costs such as travel, training, communications/utilities, and 
operations/maintenance of equipment, as well as a hiring freeze for the 
remainder of the fiscal year and do not include the sequestration 
reductions. While these budget cuts impact existing programs and 
reflect the tough choices that the Nation continues to face, TIGTA will 
continue to focus on its mission of ensuring an effective and efficient 
tax administration system in this lean budget environment. The fiscal 
year 2014 budget resources include funding to support TIGTA's critical 
audit, investigative, and inspection and evaluation priorities, while 
still maintaining a culture that continually seeks to identify 
opportunities to achieve efficiencies and cost savings. During the 
period April 1, 2012 through March 31, 2013, TIGTA's combined audit and 
investigative efforts have recovered, protected, and identified \70\ 
monetary benefits totaling $23.6 billion, including cost savings, 
increased revenue, revenue protection,\71\ and court-ordered 
settlements in criminal investigations.
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    \70\ Dollars potentially compromised by bribery; dollar amount of 
tax liability for taxpayers who threaten and/or assault IRS employees; 
dollar value of IRS and resources protected against malicious loss; 
dollar amount of embezzlement or taxpayer remittance theft; dollar 
value of Government property recovered; dollar value of court ordered 
criminal and civil penalties, fines, and restitution; and dollar value 
of seizures, forfeitures, and recoveries from contract fraud.
    \71\ Recommendations made by TIGTA to prevent erroneous refunds or 
efforts to defraud the tax system.
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    TIGTA's fiscal year 2014 budget request proposes eliminating 
certain reviews required by the IRS Restructuring and Reform Act of 
1998,\72\ which add little value to mission achievement. Eliminating 
these statutory reporting requirements will allow TIGTA to reinvest 
resources to conduct higher priority audits.
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    \72\ Public Law No. 105-206, 112 Stat. 685. 1998 (codified as 
amended in scattered sections of 2 U.S.C., 5 U.S.C. app., 16 U.S.C., 19 
U.S.C., 22 U.S.C., 23 U.S.C., 26 U.S.C., 31 U.S.C., 38 U.S.C., and 49 
U.S.C.).
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IRS Implementation of the ACA
    Several key ACA provisions will become effective in fiscal year 
2014, therefore making fiscal year 2014 a significant year for ACA 
oversight. Many provisions that previously became effective will 
require continued oversight to ensure that appropriate corrective 
actions are taken by the IRS. TIGTA's oversight requires close 
coordination among the Audit, Investigations, and Inspections and 
Evaluations functions. Each program office brings unique skills and 
experience, but TIGTA's overall success depends greatly upon these 
offices' close collaboration. As such, TIGTA has implemented a multi-
year oversight strategy that includes audits, evaluations, and 
investigative resources to assess and to proactively deter efforts to 
impede the IRS's implementation of the ACA. This strategy includes 
coordination with other agencies, including the Department of Health 
and Human Services Office of Inspector General.
    For example, in fiscal year 2013, TIGTA is planning to conduct or 
initiate 14 ACA-related audits with at least 10 new audits planned for 
fiscal year 2014. This extensive ACA coverage is stretching TIGTA's 
Audit resources, especially in light of other audit priorities 
including requests from the Congress, Treasury, and the IRS and TIGTA's 
hiring freeze. For TIGTA's investigators, our experience has shown that 
the IRS's expanded role under the ACA may spark a new wave of animosity 
directed toward IRS employees. For example, TIGTA has investigated 
threats made by taxpayers to IRS employees as a result of the IRS 
offsetting their Federal tax refunds for the repayment of student loans 
or court-ordered child support payments. TIGTA foresees an increase in 
the number of threats against IRS employees and facilities as ACA 
provisions start to take effect, requiring additional resources to be 
dedicated to investigating these threats.
    Shortly after the Supreme Court upheld the constitutionality of the 
ACA, the media reported that criminals impersonated a Federal agency in 
an attempt to fraudulently obtain personally identifiable information 
from unsuspecting taxpayers to further their identity theft schemes and 
other crimes under the guise that the sensitive information was 
required for ACA compliance. Based upon our experience investigating 
this type of criminal activity, TIGTA anticipates a significant 
increase in the number of ACA-related impersonation attempts as the IRS 
begins its role in ACA compliance activity.
TIGTA's Audit Priorities
    TIGTA's audit priorities include mitigating risks associated with 
modernization, security over taxpayer data and employees, procurement 
fraud, addressing the Tax Gap, implementing major tax law changes, and 
human capital challenges facing the IRS. Recent audit work has 
uncovered inefficient use of resources at the IRS concerning aircard 
and BlackBerry smartphone assignments, shortcomings in the IRS's 
compliance with the Improper Payments Elimination and Recovery Act, and 
imperfections in the way the IRS refers and recognizes indications of 
fraud. In addition, TIGTA has determined that the IRS could develop or 
improve processes that will increase its ability to detect and prevent 
the issuance of fraudulent tax refunds resulting from identity theft.
TIGTA's Investigative Priorities
    Over the past several years, in order to be responsive to mission 
requirements, the Office of Investigations has identified efficiencies 
and embarked on numerous reorganizations to properly place its assets 
in a position to address the growing number of threats. Consequently, 
any future budget reductions for OI will be absorbed primarily through 
law enforcement staffing. This reduction will also severely hamper OI's 
ability to effectively investigate its other primary program area, 
investigating allegations of IRS employee misconduct and wrongdoing. OI 
will be forced to reduce the number of these investigations that are 
critical to ensuring the IRS and its employees operate with the utmost 
integrity, free from internal corruption.
Procurement Fraud
    TIGTA's Procurement Fraud group investigates allegations of waste, 
fraud, and abuse involving IRS procurements and procurement-related 
misconduct by IRS employees. The Procurement Fraud group is also 
responsible for promoting fraud awareness within the IRS contracting 
community. On average, the IRS executes approximately 900 procurements 
each year worth approximately $31 billion in total contract value.\73\ 
Due to budgetary pressures, the Procurement Fraud group is currently 
operating at a reduced staffing level. Consequently, TIGTA does not 
have the investigative resources to proactively identify and address 
procurement fraud risks in IRS programs. If the Procurement Fraud group 
was fully staffed, TIGTA could help ensure that the IRS and taxpayers 
receive full value for the billions of contracting dollars spent. For 
example, based on its limited staffing, from May 1, 2009 through 
September 30, 2012, the Procurement Fraud group initiated 44 
investigations, resulting in the recovery of more than $112 million. If 
properly staffed, the number of investigations and the resulting 
recoveries would increase substantially. A 2012 Association of 
Certified Fraud Examiners report \74\ estimated that 5 percent of an 
organization's revenue is at risk of fraud annually. In the case of the 
IRS, this estimate is $1.6 billion.
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    \73\ The total dollar value of a contract over the life of the 
contract.
    \74\ Association of Certified Fraud Examiners, ``Report to the 
Nations on Occupational Fraud and Abuse,'' 2012.
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Combating Phishing Schemes
    Criminals involved in identity theft schemes use creative ways to 
obtain victims' personally identifiable information \75\ to commit 
fraud. Over the past several years, TIGTA has observed an increase in 
phishing attacks that use the IRS as a lure--from 3,000 phishing sites 
in 2008 to more than 13,000 sites so far this year. Much of the 
activity is hosted from foreign countries. Phishing,\76\ which usually 
involves mass solicitation of potential victims through e-mail or other 
forms of electronic communication, is a widespread method used by 
criminals to steal another's identity. TIGTA investigators work with 
IRS personnel to identify and block these phishing sites and have been 
successful in working with law enforcement personnel in foreign 
countries to identify the perpetrators and obtain prosecutions.
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    \75\ Personally identifiable information (PII) refers to 
information that can be used to distinguish or trace an individual's 
identity, alone or when combined with other personal or identifying 
information. Examples of PII include: Name, Social Security Number, 
biometric records, date of birth, financial or bank account 
information, and driver's license number.
    \76\ Phishing is an attempt by an individual or group to solicit 
personal and financial information from unsuspecting users in an 
electronic communication by masquerading as trustworthy entities such 
as government agencies, popular social Web sites, auction sites, online 
payment processors, or information technology administrators.
---------------------------------------------------------------------------
    Criminals often send e-mails claiming to be from the IRS. These 
phishing e-mails contain a ``hook'' that induces the victim to take 
some sort of overt action. The criminals may lead the victims to 
believe they are due a tax refund from the IRS or they have won the 
lottery but must first pay a ``tax'' before they can receive the money. 
The victims are instructed to provide their personally identifiable 
information and financial information such as bank account numbers or 
credit card numbers to the criminals before the refund or lottery 
winnings can be released.
    Some phishing schemes are designed to install malicious code, or 
``malware'', on a victim's computer. The malware is installed when the 
victim opens an attachment to the phishing e-mail or clicks on a 
hyperlink in the e-mail. Once installed, the malware can steal 
information from the victim-computers or use the victim-computers as 
part of a network of compromised computers which are then used to 
perpetrate criminal activity.
    In addition, TIGTA OI is also implementing two new enforcement 
initiatives to address critical tax administration issues:
    TIGTA is responsible for protecting the integrity of Federal tax 
administration and the IRS's most valuable asset: Its employees. Over 
the past several years, our country has experienced numerous violent 
incidents in schools, private offices, and public areas. These tragic 
events are usually unpredictable and result in numerous innocent people 
losing their lives or being severely injured. Between fiscal year 2009 
and 2012, TIGTA has processed more than 8,600 threat-related complaints 
and conducted more than 4,000 investigations of threats made against 
IRS employees. To address the potential danger that one of these active 
threat incidents would be focused on IRS employees (such as the 
taxpayer who attempted to commit suicide inside an IRS office in 2007), 
TIGTA special agents are being trained to respond to and neutralize an 
active threat which could endanger the lives of the approximately 
99,300 IRS employees who are employed in more than 670 facilities 
nationwide.
    A large portion of IRS employees are in direct contact with 
taxpayers and often encounter situations where a taxpayer may challenge 
the employee's integrity. Bribery, or attempted bribery, of a public 
official is a serious offense and it is an attack on the integrity of 
the entire IRS organization. Our voluntary tax compliance system is 
only successful if taxpayers have confidence that everyone pays their 
fair share and individuals who attempt to bribe their way out of paying 
their taxes will be caught and prosecuted. To appropriately respond to 
this serious crime, TIGTA created a training program for both IRS 
employees and TIGTA special agents. The purpose of this critical 
training is two-fold: (1) to raise awareness of bribery overtures to 
IRS employees and (2) to provide TIGTA special agents with refresher 
training for conducting bribery investigations. By raising awareness, 
TIGTA hopes that IRS employees will recognize bribery attempts and 
promptly report such attempts to TIGTA for investigation.
    In this challenging budget environment, we at TIGTA remain 
committed to delivering our mission of ensuring an effective and 
efficient tax administration system and preventing, detecting, and 
deterring waste, fraud, and abuse. We will also identify additional 
opportunities for cost savings, increased revenue, and revenue 
protection throughout the IRS. However, with lower budgets, our 
investigations and audits will be reduced which will result in 
increased risks of IRS employee integrity lapses, undetected 
procurement fraud, and the reduced ability to respond to phishing 
schemes. It will also result in lower identified cost savings and funds 
put to better use because of fewer audit recommendations to improve 
control weaknesses and reduced financial recoveries due to fewer 
successful investigations and prosecutions. TIGTA will be challenged to 
provide comprehensive coverage to address emerging risks facing the 
IRS.
    I hope my discussion of the IRS budget request and some of the 
major challenges facing the IRS assists Congress in ensuring 
accountability over the IRS.
    Chairman Lautenberg, Ranking Member Johanns, and members of the 
subcommittee, thank you for the opportunity to share my views.

    Senator Mikulski. Thank you very much. We're glad we 
invited you. That was a very content-rich presentation.
    Mr. George. Thank you.
    Senator Mikulski. Again, Senator Johanns, sensitive to your 
time, I'll turn to you, then myself, and then Senator Udall.
    Senator Johanns. Thank you.
    Gentlemen, thank you for being here. Mr. George, having 
worked with an inspector general when I was Secretary of 
Agriculture, I have great respect for what you folks do. I 
can't always say that I enjoyed the meetings with the inspector 
general, but, you know, the oversight was very positive, and it 
challenges departments to be better.

                          AFFORDABLE CARE ACT

    If I could focus a few questions on the ACA. I would 
suspect either one of you would be capable of answering this. 
At the first of the year there is of course a mandate that goes 
in place. Under ACA, basically we say thou shalt have this or 
if you don't you get penalized.
    The Supreme Court has weighed in, upheld the validity, said 
this is a tax. I guess that means the IRS is now involved. So 
let's say you have thousands, maybe millions, of people out 
there that aren't complying with ACA, taxpayers. I'm assuming, 
Inspector General or Mr. Commissioner, that the normal rules of 
collecting a tax apply. Is that a safe assumption?
    Mr. Miller. I'll start, Senator. Actually, under ACA, if 
we're talking about the individual shared responsibility 
payment, which is the--in the first year it's a $95 tax--the 
normal rules don't apply. The collection rules are different 
and a lighter touch is required of the Internal Revenue Service 
with respect to 5000A, the individual mandate, as you called 
it.
    Senator Johanns. Could you withhold a--Commissioner, you 
had something you wanted to offer?
    Mr. George. I was just going to say, Senator, I agree with 
what Mr. Miller stated, but I think you were alluding to this. 
It would be in the ability of the IRS to withhold a refund from 
the noncompliant taxpayer, and that's the way they would 
enforce the ``penalty.''
    Senator Johanns. Right. I'm not suggesting, Commissioner, 
you'll go put liens against houses and start selling houses 
across America. But if you owe the IRS money, one of the ways 
you have of collecting that is, if you're on the positive side 
in terms of your refund for the next year, that can be seized, 
in effect, and applied to the penalty.
    Commissioner, my assumption is you would have every 
intention of doing that to taxpayers. They owe the money, you 
hold the refund.
    Mr. Miller. I think that the offset rules do apply. 
Precisely what we do in the first year will be a topic of some 
discussion, because I'm quite sure there will be some 
confusion, and we'll have to take a good hard look at exactly 
how we do that.
    We're really talking about filing season 2015 in terms of 
that decisionmaking.
    Senator Johanns. There's always a day of reckoning with the 
IRS, though, isn't there? There will be a day where you'll 
collect whatever penalty is owed. If they have a refund, you'll 
take it.
    Mr. Miller. I would assume, like any other provision of 
law, we will enforce the law, yes, Senator.
    Senator Johanns. In terms of the law itself, a very 
complicated piece of legislation. The regulations, you've seen 
the pictures of the 7-foot-high stack of regulations that have 
been promulgated by different folks implementing this law. In 
terms of the IRS role, it seems to me that, willing or 
unwilling, you're a major player in how this law works. You've 
got to determine a whole bunch of things about taxpayers to see 
if they qualify for the premium assistance. You've got to 
determine do they have the appropriate policy, should they be 
penalized. You've got businesses out there that maybe choose 
not to provide insurance that should be providing insurance. 
They've got to be penalized.
    It just kind of goes on and on, and I'm not even mentioning 
half of it. Do your systems today have the information in place 
where on whatever effective date you're dealing with you hit 
the switch, boom, you're ready to go? You can say, Mike 
Johanns, you qualify for premium assistance?
    Mr. Miller. I think the answer is more complicated than 
that, so let me walk through it a little bit if I could, 
Senator. Divide the world into two pieces. The first piece of 
the world begins in October of this year when the health 
exchanges open up. The health exchanges are State and Federal 
partnerships. HHS is the face of healthcare with respect to the 
exchanges for the Federal Government.
    Our job, with respect to the October timeframe, is to make 
sure that the information is available to the exchange to make 
a reasoned decision as to whether that advance premium credit 
is available or not. We're not really involved in it other than 
providing information. That piping has been worked on and I 
believe we will be ready. That's the first piece.
    The second piece goes more to your first question, which is 
are we set up to do the matching in 2015 for the year 2014 when 
these things first come in play? The answer to that question is 
we are not yet ready for that. We are working on it. Part of 
the budget request goes to that, frankly. But we're working 
that as we speak and I have no doubt we'll be ready. But that 
question of how we build systems that will receive 1099s that 
are specific, how we receive information from the exchanges, 
insurance companies, and employers, that is not completely done 
yet, and there is no need for it to be. We're years away from 
that at this point.
    Senator Johanns. Yes?
    Mr. George. Senator, as you are well aware, there are 
already aspects of the ACA in effect. This includes a tanning 
tax and a number of other provisions. The ultimate 
implementation of this is over the course of a number of years. 
We have at TIGTA conducted a few reviews of the IRS's progress 
thus far in implementing the law.
    The law will require approximately 50 changes to the tax 
code, very complicated in many respects. The IRS has a huge 
responsibility to inform the American taxpayers about--both 
taxpayers as well as businesses, individuals, or what have 
you--of the new requirements under the law. Again, thus far our 
assessment has been that they've done a sufficient job, but 
it's just the beginning. There's a lot more that needs to be 
done, and really the bottom line is, with limited resources, 
whether through sequestration, rescission, what have you, the 
IRS is going to have to take from Peter to pay Paul. So whether 
it's enforcement, whether it's customer service, I don't know 
how they're going to be able to accomplish this huge 
responsibility. But I'll defer to the Acting Commissioner to 
respond further.
    Senator Johanns. I'll wrap up there because I've used up 
all my time. You know, that's why I like the inspector 
generals. They're straight shooters. You know, they don't try 
to color this.
    This is a difficult problem that you have and I just can't 
imagine how you get from point A to point B. I appreciate the 
candor of your response, I really do. Thank you.
    Mr. George. Thank you, Senator.
    Senator Johanns. Thank you, Madam Chair.
    Senator Mikulski. I concur with Senator Johanns. We hear 
this and it's not colored, it's unvarnished and independent. 
That's why we so value the inspector general. And it shows the 
complexity of implementing ACA.
    But in order to implement ACA, you can't use the 
Appropriations Committee or the sequester to derail a policy 
that has now been passed into law. That's what I'm concerned 
about. We have now passed ACA. The House has voted 39 times to 
repeal it, and I would hope as we go through our regular order 
we don't use the various Appropriations subcommittees to go 
after ACA by proxy.

                           IRS RESOURCE NEEDS

    So Mr. Miller has a big job and also he's dealt a very 
complex hand, one of which is the certainty of his 
appropriations request through the President and also the 
impact of the sequester on implementing not only that, but 
other laws.
    Now, I want to be clear on the request. As I understand it, 
the President has requested for the Treasury Department $14.177 
billion for the whole Department of the Treasury. Within that, 
there's a request for IRS and, Mr. Miller, that request is for 
$12.861 billion, is that correct?
    Mr. Miller. Yes, it is, Madam Chairwoman.
    Senator Mikulski. Then, however, when we enacted fiscal 
year 2013 finally on March 27, with incredible bipartisan 
support, we were able to pass the continuing funding 
resolution. That was at $11.793 billion, I believe; is that 
correct?
    Mr. Miller. Yes, ma'am.
    Senator Mikulski. But you had a sequestration hit of $594 
million, and then because you're a big agency another 2 
percent. So don't we have across-the-board cuts of $618 
million?
    Mr. Miller. That sounds exactly right.
    Senator Mikulski. Is that what you're living with?
    Mr. Miller. Yes, $620 million sounds right.
    Senator Mikulski. About $620 million coming out of IRS, 
with its technological challenges: one, cyber security; the 
other, technological modernization in order for you to receive 
data and to do the job we ask you to do.
    Then you have personnel. And from what I gather, your 
personnel is a highly talented one because it requires people 
with business, accounting, and other pretty technical skills. 
Am I correct in that?
    Mr. Miller. The vast majority of our folks are very 
professional in terms of knowing the tax law and dealing with 
different aspects of it, yes.
    Senator Mikulski. So it's not only--first of all, the 
person answering the phone has to know everything about 
everything, because who knows what they get. And TurboTax is 
sometimes not as turbo as we'd like it. Then to the people who 
actually have to do all the back office work.
    How is the morale with the sequester? These are people, 
very talented business sector, and I would think they're highly 
desirable in the private sector.
    Mr. Miller. I would--I'm quite sure morale is not what any 
of us would like it to be, as a Federal employee generally, and 
as an IRS employee that's taking some time off, who will not be 
getting the promotional opportunities that they might have 
expected.
    But we have an incredibly highly dedicated workforce, and 
I'd like to think they're dedicated to public service. That's 
why they're there, as you might mention. So while morale is not 
what I would like it to be, we're a dedicated batch of folks 
and we will get the job done.

                         MANAGEMENT FLEXIBILITY

    Senator Mikulski. Well, suppose you were given so-called 
flexibility. Given where you were already cut less than the 
fiscal year 2008 level, if you had flexibility would that solve 
your problem?
    Mr. Miller. I'm not quite sure what flexibilities we're 
talking about, whether it's the integrity cap or--I'm not sure 
what we're speaking of, Madam Chairwoman.
    Senator Mikulski. Well, what I'm saying is there's the 
belief out here that giving management flexibility is a 
substitute for money. Is management flexibility a substitute 
for money?
    Mr. Miller. I think management flexibility will help, but 
it will only go so far. We have trimmed so much in so many 
areas that I would think, while being clever managers and 
efficient people will get us part of the way, it won't get us 
all the way.
    Senator Mikulski. Well, Mr. Miller, I'm going to get to a 
couple of other issues. But I do know your employees. I am so 
honored that IRS is headquartered in Maryland. As I go around 
Prince George's County, in and out of Wegman's, I don't exactly 
join the dance party on Friday night, but I'm out there in the 
community. I meet the IRS employees, and they are apprehensive.
    They signed up for a Government career and they really want 
to learn the tax code, implement that tax code, and go after 
the fraud. They want to make sure that if you filed a return 
and you deserve a refund, you get it in a timely way. If you 
call, they want to make sure it is answered. They want to go 
after those crooks in prison that are trying to concoct even 
more complicated tax fraud schemes. And they want to comply 
with the VA mandate.
    So I think this is not about you, sir. This is about us. 
And I think we need to really come to grips with this issue of 
ending the sequester. I know we want the banks to have 
certainty. I'm for that and regulatory certainty. But you know 
what else I'm for? I'm for our Federal employees having 
certainty, that if they work hard and they have a job with 
their Government and they're doing the job and meeting 
performance standards they should get pay. And where they are 
going after fraud or they're doing the job they should, we 
should be shaking their hand and not handing them a pink slip.
    Mr. Miller. Thank you.
    Senator Mikulski. So I'm pretty firm about this.

                     PAYROLL SERVICE PROVIDER FRAUD

    Now, let me go to standing up for the little guy, small 
business, and a problem that I've come across in Maryland. I 
come from a family of small business, sir. My father was a 
small neighborhood grocer. My grandmother ran a great bakery 
shop. Now when you go to businesses like that, it could be the 
home improvement agency, the florist, they often turn to a 
payroll service provider in order to meet compliance. They're 
not like a big business. So they give them the money to pay 
their taxes and they think they're signing up for all rules and 
regulations to be met and that their taxes would be paid.
    Well, we have a company, whose name I will not mention 
because of ongoing investigations, that just disappeared. And 
you know what disappeared? They disappeared and the money that 
these businesses, like DuClaw Brewery and others, paid in, 
thinking that they had paid their taxes, also disappeared.
    What is now happening, sir, is IRS is coming to them for 
the taxes. So they feel that they're going to double pay, and 
then they're getting penalties and fees and so on. So let me 
tell you where I'm heading with this, not to talk about this 
individual case. So I was pretty jazzed when I heard about this 
situation, that these really hard-working, profit-thin 
businesses, a lot of sweat equity for what they get.
    So here is my question. IRS has seen these types of 
problems before. There was one in Silver Spring and so on. 
Could you tell me what reforms that you would be making at IRS 
to deal with this type of fraud? I'm working on legislation, 
but I want to look at prevention and also make sure that these 
small businesses don't have to double pay. Could you tell me 
how you see this problem and what you see to correct this 
problem?
    Mr. Miller. Again, we won't be talking about specific cases 
because, of course, we can't. But in general, it's a horrible 
situation. You have people that don't necessarily know that 
they're being taken advantage of, and you have the tax 
liability unpaid.
    In these cases--and we need to get better at this, there's 
no question about it. We need to ensure that there's some way 
that people receive the notices we send out, because, when we 
do not receive taxes, we will try to contact people.
    There are occasions when things happen that the notice 
doesn't go to the right place, and we need to get better about 
that. We have----
    Senator Mikulski. Not better. It's got to be solved. I'm 
going to be pretty firm about this. They didn't get these 
notices. They wrote a check to the company who was supposed to 
send the money to you. Now, that company didn't tell you or 
gave them the wrong address, so they never got a notice that 
they were delinquent. There was no flashing yellow light to 
them.
    So it's not better. It has to be pretty near perfect.
    Mr. Miller. Again, we won't be talking about the individual 
case, but I will agree with you that it is a problem that we 
need to solve, and we'll work on that with you as well.
    Senator Mikulski. But what do want to start working on now 
and what resources would you need? Why hasn't this been dealt 
with? Is it a lack of resources?
    Mr. Miller. Part of this, Chairwoman Mikulski, hits a 
little too close to the individual case. I'm more than willing 
to come up and talk to you about it. There are some of our 
procedures that need to be----
    Senator Mikulski. Ten years ago, a Silver Spring company 
called First Pay stole millions of dollars, and your own 
Taxpayer Advocate has said this has come up at other times.
    Mr. Miller. It has.
    Senator Mikulski. So if it's come up at other times, aren't 
there yellow flashing lights to have dealt with this sooner?
    Mr. Miller. I think all the cases are a little different. 
So I'm not ``sure.'' I'm not as familiar with that individual 
case and I don't think I could speak to it in any event. But 
all the cases are a little bit different.
    It does happen. There are times when taxpayers are 
absolutely unknowingly involved, and there are times when they 
are more a part of this activity than not. All these things are 
different. What I will tell you is we will, in these cases, 
work with the taxpayer to try to relieve as much stress and as 
much liability as we can. With respect to penalties, that is 
not difficult. With respect to interest, it's a little more 
difficult. Frankly, with respect to taxes it's very difficult. 
So you have to sort of bucket these things in our discussion.
    Senator Mikulski. Well, right now does the IRS notify 
taxpayers when a payroll service provider tries to change its 
client's business address?
    Mr. Miller. I don't believe so, but let me come back to you 
on that.
    [The information follows:]

    At this time, the IRS does not have a process to provide 
dual notification to the taxpayer and to the requestor for any 
change of address; however, the IRS is in the process of 
changing that process and is working to implement dual 
notification beginning January 1, 2015.

    Senator Mikulski. Would you take a look at that and see if 
that would constitute a reform?
    Mr. Miller. It's one of the areas that I agree with you 
we've got to do.
    Senator Mikulski. Does the IRS notify taxpayers when the 
payroll service is delinquent?
    Mr. Miller. That one I do not know.
    Senator Mikulski. And multiple delinquents?
    See, these go to systemic reform, not every case is 
different. I know every case is different, but then we would 
never have reform. There are patterns and practices.
    Number two, in the prosecution of these cases do you ever 
seek not only payment, but does it seek restitution?
    Mr. Miller. I would--I have to defer to--the criminal side 
of this would be handled by the Department of Justice (DOJ). I 
do believe there's some restitution aspects of it, but I'm not 
familiar enough. I'd have to come back to you on that.
    [The information follows:]

    As indicated, the Department of Justice handles the 
criminal prosecution side of these cases; however, we can 
confirm there are instances in which the court orders the 
Payroll Service Provider to make restitution to the victims.

    Senator Mikulski. Does investigation of these cases lie in 
IRS or does it lie with DOJ?
    Mr. Miller. It's the IRS. The IRS will investigate, make a 
recommendation to DOJ, and DOJ will prosecute.
    Senator Mikulski. I see.
    Inspector General.
    Mr. George. I don't disagree with most of what Mr. Miller 
stated. I would just elaborate on the following. We at TIGTA do 
have some responsibility investigating those types of 
incidents, especially when it involves third-party preparers. 
They play such an integral role in the overall system of tax 
administration, you're exactly right, Madam Chairwoman, that we 
have to, the IRS, has to get a closer control over impropriety 
committed by them.
    We have done work that has shown, one, that many IRS 
employees wear multiple hats. So sometimes they're answering 
phone calls for the average taxpayer about their tax return, 
and then these same individuals are sometimes assigned to 
individuals who have been victims of tax fraud. And that system 
needs a little more clarification, a little more clarity, both 
for the victim as well as for the IRS itself.
    There are just so many aspects of this overall issue that 
are troubling to us that--one, thank you for raising it. It's 
again not limited solely to tax preparers, such as the one you 
averred to earlier in your statement, Senator, but also again 
to individual taxpayers in terms of there is some complicity, 
as Mr. Miller alluded to. If people know that they're under 
investigation for alleged tax impropriety, they will 
immediately claim----
    Senator Mikulski. I've got to stick to this point right 
now. I'd like to come back, Mr. Miller. What troubles me about 
your answer, sir, is that you're treating this as a cluster of 
individual cases rather than a nationwide problem. Now, I think 
we're going to see, we're seeing this differently. I see this 
as a nationwide problem. I want to acknowledge that most of 
these payroll agencies are honest people and small to medium-
sized business must rely upon them in order to meet all rules 
and requirements that they could never learn working all by 
themselves.
    But do you see this as a nationwide problem or do you see 
this as, well, each case is different?
    Mr. Miller. It is a recurring problem. Whether it's a 
nationwide problem is a different question. I don't know that 
it recurs frequently enough for me to consider it a nationwide 
problem. What we would agree with you on, absolutely, is that 
there are systemic ways to solve it.
    Senator Mikulski. Well, one, as we move forward, because I 
know my time is up, that I would really like you to take a look 
at this and truly identify over the last 5 years how many 
complaints have you gotten like this, so you actually know what 
you got. And I invite the IG for any thoughts, analysis, and 
recommendations that he would have; and then as we work on 
legislation that would go through the authorizing process, what 
recommendations for reform that you would have, one of which is 
when does the taxpayer have to pay again?
    So remember, if they can show that they have written you--
written that they took every demonstrable step, with every 
intent to meet their tax obligation, and you come back and want 
the same amount of money from them, when do they pay? I believe 
they should pay when the case has been concluded, not during 
the case. It's another area of doing it.
    This whole address thing and notification and so on, I 
think notification is important. From what I understand from 
Mr. Miller, there are multiple ways and multiple different 
sources that could change addresses.
    So let's work on reform. But this is something that's been 
going on for 10 years, acknowledging the good people, but I'm 
telling you I've got a real problem. And it's not that I have a 
problem, but here we are with people who really work hard.
    Mr. Miller. Agreed.
    Senator Mikulski. And how we can help them.
    Senator Udall.
    Senator Udall. Thank you, Madam Chair. That was a very good 
line of questioning there.

               PREVENTING IDENTITY THEFT AND REFUND FRAUD

    I very much appreciate having you both here. Mr. Miller, as 
you note in your comments, the work of the IRS is critically 
important, though often thankless, to the functioning of our 
Government. My first question to you is, in your testimony you 
spoke about identity theft and refund fraud prevention efforts. 
I know these issues are problems in my State. Examples I've 
heard range from constituents whose refund is claimed by 
someone who has stolen their identity, to cases where refunds 
are sent directly to another account and the filer never sees a 
penny of it. These problems are prevalent in rural areas, 
target limited English proficiency speakers and Native American 
communities.
    Can you share more about what the IRS is doing to stop 
identity theft and refund fraud in these communities?
    Mr. Miller. I think we're doing a much better job, Senator, 
on identity theft generally, and that would include rural 
communities as well. We have quite a few new filters to stop a 
bad return from coming through. We're not where we need to be 
yet, but at $20 billion and 5 million returns stopped last 
year, we are so much better than we were.
    But we're not done, there's no question about that. In a 
perfect world, what would happen is the individual, when they 
file their return, would have to authenticate that they are who 
they say they are, whether it's through an out-of-wallet set of 
questions or something like that. That Steve Miller shows that, 
yes, he knows where he lived in 1995, or something like that. 
Then the return would come in to us. That, in and of itself, 
would cut down on a tremendous amount of this work. Then it 
would go through our filters.
    The second piece of this we need to get so much better at 
is what happens to the second individual who comes in, the real 
taxpayer often, because that person hits a wall right now and 
has to file on paper with an affidavit, and then we have to 
sort through what is often five Steve Millers, not just two but 
five.
    That has sort of buried us, quite frankly, and we're 
digging our way out. We had a high of, something close to, 
400,000 of these cases. We're now well under 200,000 of these 
cases. So we're getting past it, and we're stopping more up 
front, which really is where we need to be. And we do need to 
get the technology to accept the second return, and have them 
prove who they are at that time, and let it go through. We're 
starting to do that now in pilot phases.
    Senator Mikulski. Senator Udall.
    Senator Udall. Please.
    Senator Mikulski. Sir, I need to excuse myself and I'm 
going to ask you to take over the hearing, and go as long as 
you want and as long as Miller and George can take it, and then 
close it out.
    I want to thank both of you for your participation. We're 
going to need your advice on an ongoing basis for what we 
really see are some very difficult challenges around protecting 
people as they try to comply with this.
    Senator Udall. Thank you, Madam Chair.
    Mr. George. Thank you, Madam Chair.

             GENERAL WELFARE EXEMPTION AND TRIBAL PAYMENTS

    Senator Udall [presiding]. Commissioner Miller, my next 
question to you is about an issue that affects Native American 
communities, the general welfare exception. As you know--the 
general welfare exemption. As you know, this exemption allows 
Indian tribal governments, among other local government 
entities, to provide social benefit programs to promote general 
welfare without counting as personal income.
    There have been some instances where field examiners have 
not had the proper training and guidance to understand how this 
provision should be applied in Native American communities. I 
understand that the IRS is currently accepting comments on 
proposed guidance, and I'm pleased that you are taking steps to 
ensure proper application of the exemption.
    Can you give us an update on that process?
    Mr. Miller. Sure, Senator. In December 2012 we put out a 
draft revenue procedure setting out a whole series of safe 
harbors on the general welfare doctrine, with respect to tribal 
payments covering housing, covering eldercare, covering a batch 
of different areas.
    We did that after extensive consultation with tribes. And 
we are now adhering to that, even during its pendency. The time 
for comments, I think, ends some time in June and we will then 
consult again with the tribes and see where we are. But I think 
so far we've heard that it's going rather well. We have a 
limited number of examinations in the area continuing that are 
outside of the safe harbors. We've sort of centralized 
management of those cases. We've ensured our people are 
trained. I think we're in a much better place than we were, 
Senator.
    Senator Udall. Thank you.

                             IRS WORKFORCE

    Now, Commissioner Miller, some people may have a different 
opinion, but I agree with the testimony we've heard here and I 
think our Federal employees are a real important resource. The 
IRS has a large, diverse, and technical workforce. Could you 
share information about IRS employees, their education level, 
years of service, the value they provide the Federal 
Government?
    Mr. Miller. I can do that. It probably makes sense for us 
to follow up with more detailed information.
    [The information follows:]

    At the end of the last pay period of fiscal year 2012 (September 
22, 2012) the Internal Revenue Service (IRS) had 97,942 employees on 
the rolls in all functions. These 97,942 employees had the following 
demographic characteristics:
  --Average years of government service: 15.92
  --Average years of IRS service: 14.95
  --Average age: 48.08 years old
  --Average years of education: 15.92 (where 16 would be a bachelor's 
        degree).
    The IRS does not track or report enforcement revenue collected by 
employee, but reports on Return on Investment (ROI) based on the annual 
enforcement revenue collected and annual appropriated budget. For 
fiscal year 2012, the IRS enforcement revenue collected was $50.2 
billion for a ROI of 4.25.

    Senator Udall. Good.
    Mr. Miller. But in general we reflect our community, both 
in terms of diversity and in terms of age and of years of 
service. If you look at our years of service, it's fairly flat. 
It's not really a bell curve, and you would expect some holes. 
But generally if you look at 0 to 5, 5 to 10, and so on, it's 
roughly the same percentage of our workforce.
    Now, that becomes a little more problematic, and we'll 
start seeing donut holes where we didn't do hiring over the 
last couple of years. That's an issue because at some point 
these people would have moved into management.
    But what you'll see is that we are generally reflective of 
the communities of which we're a part.
    Senator Udall. Thank you very much.
    I would ask, Mr. George, if any of the subjects that I 
covered with the Commissioner, do you have any comments on 
those?
    Mr. George. Briefly, yes, Senator.
    Senator Udall. Please.
    Mr. George. As it relates to the ID fraud issue, it is very 
complicated. It is somewhat perverse in ways because it's who 
files first who really takes and gets advantage in the overall 
situation. So if a thief, for lack of a better word, files a 
false tax return, he or she has the advantage both in terms of 
the IRS processing that return, paying whatever refund the 
thief alleges is owed to him or her. But the added complication 
is the address that the thief gives is put into the IRS's 
system and that is the way that the IRS communicates with the 
alleged taxperson as opposed to the actual taxpayer who 
subsequently files a legitimate tax return and then encounters 
this--I won't say this maze, but a very unusual system.
    The IRS is, again, making progress, as Acting Commissioner 
Miller pointed out, but it is still extraordinarily 
frustrating, for the reasons I stated before, in that not a 
single IRS employee is assigned to a case permanently. It's 
tossed around to various IRS employees. The IRS employees 
contact the victim repeatedly asking for identification that 
the victim has already provided, and it's just extraordinarily 
frustrating.
    For the system itself, ultimately the IRS will hopefully 
resolve it for the legitimate taxpayer, but then to collect the 
money from the fraudster is so problematic that--I'll defer to 
Mr. Miller as it relates to that, whether they actually go 
after them. You know, I'm not going to reveal any information 
here that might encourage that type of behavior.
    But it's an extraordinarily frustrating system. Something 
definitely needs to be done. It's an extremely fast-growing 
problem. It's not only domestic. It's international in nature. 
And with the advent, obviously, of all the electronic 
communications that occurs, technology that is used, this is a 
major problem that the IRS is going to have to address, sir.
    Mr. Miller. Let me if I could, Senator.
    Senator Mikulski. Mr. Miller, could you please, if you want 
to say a few words on that.
    Mr. Miller. Just on that one. I think the IG's caricature 
is an interesting characterization of the system. I think that 
may be a reflection of the past and not the present. I'd be 
happy to supply more information for the record that will 
clarify our processes.
    Senator Udall. We would very much appreciate it.
    [The information follows:]

    In October 2012, the Internal Revenue Service (IRS) established 
several identity theft specialized groups to assist with processing 
identity theft cases. The mission of these groups is to handle identity 
theft cases efficiently and with consistency. These groups provide a 
single point of contact based on origin of the problem thus eliminating 
the need for victims to interact with multiple units. For victims who 
have multiple issues crossing functions, they will continue to be 
monitored by the Identity Protection Specialized Unit (IPSU) and be 
given the IPSU telephone number as their single point of contact for 
the IRS. This process allows improved tracking and decreases the need 
for referrals among business units. In identity theft
situations, employees work with each victim to resolve their particular 
situation. Identity theft cases are becoming increasingly complex, 
involving a manual authentication and review process to ensure we 
resolve cases satisfactorily for the victim. More than 3,000 employees 
now work identity theft issues, which is more than double the staffing 
resources dedicated to working identity theft cases in the previous 
filing season.

                     ADDITIONAL COMMITTEE QUESTIONS

    Senator Udall. I thank you both today. If there are no 
further questions this afternoon, Senators may submit 
additional questions for the subcommittee's official hearing 
record by the close of business on Friday, May 10. We request 
Treasury, IRS, and TIGTA's responses within 30 days. I 
understand that this subcommittee has been frustrated in the 
past with unacceptable delay in the receipt of responses from 
the Treasury Department. I urge that the responses be submitted 
in a timely manner this year.
    [The following questions were not asked at the hearing, but 
were submitted to the Department for response subsequent to the 
hearing:]
                Questions Submitted to Hon. Jacob J. Lew
           Questions Submitted by Senator Frank R. Lautenberg
    cuts impacting anti-money laundering/terrorist financing efforts
    Question. Recent action by the Financial Crimes Enforcement Network 
(FinCEN) effectively cut off from the international financial system 
two entities funneling money to Hezbollah. This was a complex web of 
illicit activity--two Lebanese exchange houses were illegally merging 
cocaine profits with profits from seemingly legitimate sales of used 
cars and diverting some of the funds to Hezbollah. This is precisely 
the type of ``connect the dots'' tactical work FinCEN uses to follow 
the trail of criminal networks attempting to exploit our financial 
system.
    Because criminals don't give up, law enforcement must stay the 
course. The requested 6 percent cut to FinCEN is a concern. While 
FinCEN just completed a major IT overhaul, the budget doesn't provide 
funding to hone the new system's capabilities. The budget also 
envisions cutting eight staff and other generic administrative costs. 
Further, the Treasury Inspector General cites Treasury's Anti-Money 
Laundering and Terrorist Financing Enforcement as a continuing Top 
Management Challenge for the Department.
    With a requested budget cut of 6 percent for fiscal year 2014, how 
will FinCEN continue its robust efforts to combat these kinds of 
transnational threats to our Nation?
    How will Treasury be able to address the challenges cited by the 
Inspector General if resources for Anti-Money Laundering and Terrorist 
Financing activities are reduced?
    Answer. Combating transnational criminal threats and all other 
forms of financial crimes is a top priority for Treasury. The Office of 
Terrorism and Financial Intelligence, which includes FinCEN, will 
continue to marshal the Department's intelligence and enforcement 
functions and authorities to safeguard the U.S. financial system from 
illicit actors that threaten our Nation. While the budget request for 
FinCEN is lean, the bureau is just one part of the Department's broad, 
comprehensive effort to address the challenges cited in the Inspector 
General's management memorandum. We will continue to ensure our anti-
money laundering and counter terrorist financing programs and 
strategies are as effective and vigorous as possible.
   community development financial institution (cdfi) bond guarantee 
                                program
    Question. The fiscal year 2014 request would extend the CDFI Bond 
Guarantee Program, which complements the CDFI grant program by 
providing $1 billion annually in federally-guaranteed bond financing to 
CDFIs. The program is estimated to have zero net cost to the taxpayer 
because loan loss reserves and fees will offset any losses paid by the 
Federal Government.
    What impact will the Bond Guarantee Program have on CDFIs' 
abilities to invest in and serve distressed communities?
    Answer. The availability of long-term financing is one of the major 
structural issues facing the revitalization of low-income communities. 
The CDFI Bond Guarantee Program will enable CDFIs to address this need 
by providing them with a new and affordable source of long-term 
capital.
    Proceeds from guaranteed bonds must be used for eligible community 
or economic development purposes. Authorized uses of the loans financed 
may include a variety of financial activities, such as supporting 
commercial facilities that promote revitalization, community stability, 
and job creation or retention; community facilities; the provision of 
basic financial services; housing that is principally affordable to 
low-income people; businesses that provide jobs for low-income people 
or are owned by low-income people; and community or economic 
development in low-income or underserved rural areas.
    Question. Will the CDFI Bond Guarantee Program require any 
appropriations in 2014? If not, how will the Federal Government recoup 
any losses under the program?
    Answer. Consistent with the program's statutory and policy 
requirements and congressional intent, Treasury does not anticipate 
needing appropriated funds to cover the cost of the loans under the 
Bond Guarantee Program. The CDFI Bond Guarantee Program will use 
various mechanisms, such as the mandatory 3 percent risk-share pool 
from each eligible CDFI (the borrower) and a liquidity premium on each 
loan, to mitigate the likelihood of defaults on loans made under each 
issued Bond, and the borrower collateral requirements will help cover 
losses should a default arise. Also, the CDFI Fund will review the bond 
loan for each eligible CDFI made by the qualified issuer, taking into 
account the eligible CDFI's credit quality and other risk 
characteristics.
                             cybersecurity
    Question. The Treasury Inspector General (IG) has identified 
Treasury's cybersecurity efforts as a matter of concern and a potential 
vulnerability for the Department. Treasury's systems are critical to 
the core functions of Government and the Nation's financial 
infrastructure. The IG recommends that Treasury build on existing 
partnerships among financial institutions, regulators, and private 
entities in the financial sector so that the Government will be able to 
identify and respond to emergency cyber threats against financial 
institutions and the broader financial sector.
    How does Treasury's fiscal year 2014 budget request provide 
adequate budgetary and human resources to properly guard against cyber 
intrusions?
    Answer. Treasury's fiscal year 2014 Budget request includes a 24 x 
7 x 365 Government Security Operations Center (GSOC) for Department-
wide security event monitoring at our five Internet gateways through 
which over 95 percent of Treasury's Internet traffic flows. One Bureau 
is temporarily using a Department of Homeland Security (DHS)-approved 
gateway at a shared private-sector facility, so over 99 percent of our 
traffic is monitored in accordance with DHS requirements.
    We also provide funding to support the annual review and 
identification of Treasury's critical infrastructure systems, which 
provides for the cost-effective prioritization of security resource 
allocation to the approximately top 5 percent of our more than 400 
systems. Our fiscal year 2014 Budget also proposes a new capability to 
enhance protection of our classified systems through the installation 
of wireless-intrusion detection and monitoring capability at our two 
major facilities that contain our classified networks.
    Despite tightening budgets, the Department has been able to 
maintain and enhance our cyber security staffing levels most notably 
through contractor conversions. We also will be seeking to leverage the 
DHS's Continuous Diagnostics and Mitigation Program, where appropriate, 
to maximize the protection of our very sensitive information and 
availability of services provided by our systems.
    Additionally, the Department is working to stand up the Financial 
Sector Cyber Intelligence Group (FS-CIG) in fiscal year 2013 with the 
mission of identifying, analyzing, and disseminating timely and 
actionable cyber threat information to the financial sector.
    Question. How is Treasury coordinating and collaborating with the 
private sector to guard against cyber threats against our financial 
system?
    Answer. Treasury addresses cybersecurity through a network of 
private and public sector partnerships. Important engagement is being 
conducted at the level of individual institutions, trade associations, 
and public-private partnerships. Groups such as the Financial Services 
Roundtable's BITS division, the Financial Services Sector Coordinating 
Council for Critical Infrastructure Protection and Homeland Security, 
L.L.C. (the ``Financial Services Sector Coordinating Council (FSSCC)'' 
or ``Sector Council'' comprised of 60 financial and financial-related 
institutions and associations), and the operational hub for cyber 
reporting within the sector the Financial Services Information Sharing 
and Analysis Center (FS-ISAC) are critical to this engagement. 
Treasury, participating in the whole of government approach on 
cybersecurity, is similarly engaged with the public sector through the 
Financial and Banking Information Infrastructure Committee (FBIIC). The 
FBIIC, which is chaired by Treasury, includes as members the Financial 
Stability Oversight Council, the Department of Homeland Security, the 
Department of Defense, law enforcement agencies, and the intelligence 
community. Treasury has been one of the most active Government agencies 
in the Administration's efforts to secure our Nation's digital 
infrastructure.
    Question. Who does Treasury turn to for assistance in creating 
adequate and appropriate cybersecurity protocols?
    Answer. Treasury refers to DHS, National Institutes of Standards 
and Technology, Defense Information Systems Agency, OMB, Committee on 
National Security Systems, and Intelligence Community guidance 
concerning cybersecurity procedures, requirements, and protocols and is 
an active participant in the Federal Cybersecurity Coordination, 
Assessment, and Response (C-CAR) protocol for inter-agency 
notifications. We work with the various coordination centers, most 
notably DHS's, during the course of unclassified incidents and through 
their Joint Agency Cyber Knowledge Exchange group. We also actively 
communicate with other Federal agencies that have similar activity for 
lessons learned and best practices. Under our standing procedures, we 
refer possible criminal activity to the appropriate Inspector General.
    Question. How will the administration's February 2013 executive 
order on cybersecurity help to improve information sharing between 
Treasury and the private sector on cyber threats?
    Answer. The President's Executive Order mentions a number of 
specific actions which will help to improve information sharing between 
Treasury and the financial sector. The President has ordered agencies 
that produce cyber-threat information to do so with greater speed, 
including at the unclassified level. In addition, DHS is expanding its 
private-sector clearance program which expedites the processing of 
security clearances to appropriate personnel employed by critical 
infrastructure owners and operators. Concurrently, DHS has been tasked 
to expand the Enhanced Cybersecurity Services program, to share 
classified cyber-threat and technical information from the U.S. 
Government to eligible critical infrastructure companies. Taken as a 
whole, these actions are providing an unprecedented level of Government 
information sharing that was previously unavailable to the private 
sector. Treasury is actively promoting and coordinating these programs 
within the financial sector.
                      foreclosure relief programs
    Question. New Jersey ranks second in the Nation after Florida in 
the percentage of mortgage loans in foreclosure. The New Jersey 
HomeKeeper Program received $300 million from Treasury's ``Hardest Hit 
Fund'' to help New Jerseyans facing foreclosure due to job or income 
loss. Homeowners are eligible for up to $48,000 through a zero interest 
loan, and no payments are due for up to 24 months. HomeKeeper is 
administered by the State of New Jersey, but overseen by Treasury. 
Unfortunately, the program had only spent 9 percent of its funds by the 
end of 2012.
    What has Treasury done to ensure that the implementation challenges 
associated with the New Jersey HomeKeeper Program have been resolved? 
Can you confirm that homeowners in New Jersey are now getting the help 
they need?
    Answer. Treasury shares your commitment to ensuring that all 
government--Federal and State--foreclosure prevention programs reach 
eligible homeowners in need of assistance and has made clear to all 
State housing finance agencies (HFAs) participating in the Hardest Hit 
Fund (HHF) that it is critical to provide relief to struggling families 
while the need is still great.
    Implementation and management of the State programs under HHF are 
the responsibility of each HFA. Treasury's job is to facilitate the 
HFAs' use of the funds. Treasury has worked with the New Jersey 
HomeKeeper (NJ Housing and Mortgage Finance Agency (HMFA)) staff on 
improving the performance of the New Jersey HomeKeeper Program by 
helping to identify operational barriers, share promising and 
innovative strategies, and work with mortgage servicers and investors 
to gain wider participation in these programs. NJ HMFA has taken a 
number of operational and program design actions that have enabled more 
homeowners to participate in the program. The NJ HMFA staff is also 
evaluating some new program ideas to pursue in the near future.
    NJ HMFA staff estimate that if they assist approximately 250 new 
homeowners per month, they will fully commit all their funds by 
December 2014; on average they have consistently met or exceeded this 
target over the last 6 months. Recent performance updates indicate the 
program has seen strong growth in homeowner assistance: between 
September 2012 and March 2013, the number of homeowners assisted in New 
Jersey has grown by approximately 150 percent. As of May 31, 2013, the 
program has assisted an estimated 3,330 homeowners with approximately 
$141 million in committed funds. Actual fund disbursements exceed $64 
million.
                             iran sanctions
    Question. U.S. companies have been prohibited from doing any 
business with Iran since a complete trade ban was signed into law in 
1995. In August 2012, a new Iran sanctions package was signed into law 
that included a provision, written by me, closing the loophole that 
allowed foreign subsidiaries of U.S. companies to continue doing 
business with Iran without placing the penalties of the U.S. trade ban 
on the parent companies. A foreign subsidiary of a U.S. company that 
violates or attempts to violate this provision is now subject to the 
same penalties as its U.S. parent company would if it were conducting 
business with Iran, including at least a $250,000 fine per violation. 
These provisions went into effect in February 2013 after a divestment 
period. Treasury is responsible for enforcing this law and issuing 
fines.
    If companies are now found to be in violation of this provision, 
how is Treasury ensuring they will be punished to the maximum extent 
possible under the law?
    Answer. The Office of Foreign Assets Control (OFAC) actively 
investigates any information about possible sanctions violations across 
all of its sanctions programs, and takes enforcement action as 
appropriate. If companies are found to be in violation of Section 218 
of the Iran Threat Reduction and Syria Human Rights Act of 2012, OFAC 
will take appropriate investigative and enforcement action, as it does 
with all its programs.
                    alcohol and tobacco tax evasion
    Question. Treasury's Alcohol and Tobacco Tax and Trade Bureau (TTB) 
collects Federal excise taxes on alcohol, tobacco, firearms, and 
ammunition. TTB collects $23 billion annually in excise taxes with a 
requested budget for fiscal year 2014 of $101.2 million.
    TTB also conducts investigations into suspected tobacco tax 
evasion.
    There are drastically different Federal excise tax rates for the 
many different tobacco products on the market. These differential rates 
provide tobacco manufacturers with an incentive to manipulate their 
products in ways that qualify them for lower excise tax rates. For 
example, the alteration of a product's weight could qualify it for a 
lower excise tax rate. Is TTB aware of any practices tobacco 
manufacturers use to attempt to secure lower Federal excise tax rates 
for their products? If so, please describe these practices.
    Answer. Since enactment of the Children's Health Insurance Program 
Reauthorization Act of 2009 (CHIPRA), TTB has identified and monitored 
market shifts toward lower-taxed tobacco products by manufacturers, 
importers, and price-sensitive consumers.
    A notable trend is the apparent shift in the volume of small cigars 
to large cigars. Under the Internal Revenue Code, small cigars are 
cigars that weigh 3 pounds or less per 1,000, while large cigars are 
cigars that weigh over 3 pounds per 1,000. Pursuant to CHIPRA, small 
cigar tax rates increased from $1.828 per thousand to $50.33 per 
thousand. At the same time, the large cigar tax increased from 20.719 
percent of the sale price (not to exceed $48.75 per thousand) to 52.75 
percent of the sales price (not to exceed $402.60 per thousand). The ad 
valorem tax on large cigars can result in lower tax rates on these 
products, depending on the sale price of the cigar. As a result, since 
the tax increase in CHIPRA, TTB has found that some manufacturers 
increased the weight of products so that they meet the statutory 
definition of a large cigar for tax purposes. The chart below 
summarizes the market shift from small cigars to large cigars since 
CHIPRA.

                                                      DOMESTIC MANUFACTURED CIGARS--REMOVAL SUMMARY
                                                           [Percent of Domestic Cigar Market]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                        Pre CHIPRA                                Post CHIPRA
                                                                    ------------------------------------------------------------------------------------
                                                                      Period 1--2009   Period 2--2010   Period 3--2011   Period 4--2012   Period 5--2013
--------------------------------------------------------------------------------------------------------------------------------------------------------
Large Cigars Percent Mkt...........................................              47               89               92               93               93
Small Cigars Percent Mkt...........................................              53               11                8                7                7
--------------------------------------------------------------------------------------------------------------------------------------------------------

    A second trend is the shift in pipe tobacco and roll-your-own (RYO) 
tobacco products. The definitions of these products in the Internal 
Revenue Code include how they are packaged and labeled for consumers 
and do not specify distinguishing physical characteristics of the 
tobacco itself. Prior to CHIPRA, the tax rates on pipe tobacco and RYO 
tobacco were the same at just under $1.10 per pound. As a result of 
CHIPRA, the tax on pipe tobacco was increased to just over $2.83 per 
pound, while the tax on RYO tobacco was increased to $24.78 per pound. 
This difference in tax rates has resulted in an increase in the volume 
of pipe tobacco reported as produced by domestic manufacturers, with a 
corresponding decrease in the amount of RYO tobacco reported as 
removed. The chart below summarizes the market shift from RYO tobacco 
to pipe tobacco since CHIPRA.

                                                     DOMESTIC PIPE AND RYO TOBACCO--REMOVAL SUMMARY
                                                              [Percent of Pipe/RYO Market]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                        Pre CHIPRA                                Post CHIPRA
                                                                    ------------------------------------------------------------------------------------
                                                                      Period 1--2009   Period 2--2010   Period 3--2011   Period 4--2012   Period 5--2013
--------------------------------------------------------------------------------------------------------------------------------------------------------
Pipe Tobacco Percent Mkt...........................................              13               67               82               88               90
RYO Tobacco Percent Mkt............................................              87               33               18               12               10
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Question. If a TTB investigation reveals tobacco tax evasion has 
occurred, what enforcement tools does TTB have to levy penalties on the 
violating person or entity? Are these enforcement tools effective in 
halting and preventing further tobacco tax violations? If so, what 
features contribute to their effectiveness? If not, why not, and what 
other enforcement tools would be necessary to ensure that TTB's tax 
enforcement efforts effectively deter further violations?
    Answer. Under the Internal Revenue Code, TTB may initiate 
administrative action to suspend or revoke a permit under 26 U.S.C. 
Sec. 5713; impose civil penalties under 26 U.S.C. Sec. Sec. 5761, 6663, 
and 6701; investigate and refer criminal violations under 26 U.S.C. 
Sec. Sec. 5731, 5762, 7201, 7203, 7206, 7207, and 7208; and seize and 
forfeit property under 26 U.S.C. Sec. 5763.
    Permit actions (suspending or revoking a permit) effectively deter 
tax evasion by the affected permitted industry members, who typically 
wish to continue operations. The industry-wide deterrent effect of 
these cases is muted, however, due to limitations on disclosure of tax 
return information under 26 U.S.C. Sec. 6103, which make publicity 
surrounding these proceedings limited or non-existent.
    Civil penalties are generally effective against permitted industry 
members, particularly those penalties that are assessable as a tax 
pursuant to 26 U.S.C. Sec. 6665. Many tobacco excise and related civil 
penalties are assessable; a notable exception is the $1,000 civil 
penalty under 26 U.S.C. Sec. 5761(a) for willfully omitting things 
required or doing things forbidden, which must be recovered in a civil 
action. Criminal penalties are TTB's most effective tool against non-
permitted industry members.
                    alcohol and tobacco tax evasion
    Question. The fiscal year 2014 budget request includes $2 million 
to continue a pilot program allowing TTB to pursue criminal tax 
evasion. The program not only provides public health benefits by 
keeping illicit alcohol and tobacco off of the market, but it also 
helps secure potentially billions in Treasury revenues. It is estimated 
that evasion of Federal tobacco taxes alone totals about $4.5 billion a 
year.
    How has the pilot program enabled TTB to expand its enforcement 
efforts for tobacco and alcohol tax evasion?
    Answer. Before receiving this funding, TTB did not have direct 
access to agents to develop and investigate criminal cases for tobacco 
and alcohol tax evasion. Since fiscal year 2011, the six special agents 
provided to TTB by IRS on a reimbursable basis have opened 58 criminal 
investigations that involve a total estimated Federal excise tax 
liability of nearly $340 million and seizures valued at over $115 
million. To date, TTB has presented 53 of these investigations to 
Assistant United States Attorneys, all of which have been accepted for 
investigation. Several additional cases pending acceptance for 
investigation are expected to be presented in the near future.
    By operating its own criminal enforcement program, TTB has been 
able to exercise control over its investigations and use the 
complementary skill sets of its auditors, investigators, and scientists 
in developing criminal cases. Through investigating its own cases, TTB 
is also better able to address all issues in a case, so that remedies 
such as restitution and surrender of permits can be included in 
criminal case resolutions where appropriate. In addition, TTB special 
agents have allowed the bureau to pursue cases and violations that may 
not have been pursued by other Federal law enforcement agencies that 
lack primary jurisdiction for those violations, particularly in cases 
that solely involve Federal excise tax violations.
    It should also be noted that the extent of Federal revenue losses 
due to tobacco diversion is currently unknown due to the inherently 
clandestine nature of diversion activity and the lack of reliable 
tobacco consumption data upon which such an evaluation would be based.
    Question. What types of cases has TTB pursued? Have there been 
major convictions?
    Answer. TTB agents have been involved in the following types of 
investigations:
  --Diversion of export only cigarettes;
  --Illegal manufacturing of cigarettes;
  --Illegal manufacturing of hookah tobacco;
  --Illegal importation of tobacco products;
  --Floor stocks excise tax evasion on cigarettes;
  --Filing of false excise tax returns for the production of alcohol;
  --Diversion of export only alcohol;
  --Misclassification for tax purposes of imported liquor;
  --Illegal transportation of alcohol from lower tax States to higher 
        tax States;
  --Importation of intentionally mislabeled wine; and
  --Illegal manufacturing of spirits.
    TTB's accomplishments since fiscal year 2011 include the following:
  --Conviction on TTB's first-ever criminal floor stocks tax 
        investigation. Federal excise tax loss was in excess of 
        $275,000.
  --Convictions of three subjects and the indictment of two additional 
        individuals in a cigarette excise tax evasion case. Federal 
        excise tax loss was in excess of $37 million.
  --Conviction of an individual involved in the sale of untaxed bidis 
        cigarettes. Federal excise tax loss was in excess of $640,000.
  --Conviction of an individual for the evasion of alcohol excise tax 
        on manufactured product. Federal excise tax loss was in excess 
        of $870,000.
  --Convictions of two individuals involved in the importing of fruit 
        wines intentionally misclassified for Federal excise tax 
        purposes. TTB seized over 11,500 cases of wine. Federal excise 
        tax loss was in excess of $120,000.
  --Conviction of an individual for the misclassification of Soju 
        liquor as wine to evade Federal excise taxes. Federal excise 
        tax loss was in excess of $92,000.
    The total amount that TTB will actually collect from these cases 
(as compared to the identified Federal excise tax losses) cannot yet be 
determined because civil penalties are typically resolved following the 
resolution of criminal charges. The above convictions are relatively 
recent, and the civil penalties have not yet been resolved.
    Question. How is TTB measuring the outcomes of the pilot program? 
What outcomes have been shown?
    Answer. There are inherent challenges in measuring the outcomes of 
TTB enforcement activity because assessing the magnitude of illicit 
activity is difficult given that the goal of perpetrators is to conceal 
transactions and evade detection. In addition, TTB does not have 
baseline and trend data for its criminal enforcement program because it 
is still in its early stages. To date, TTB's evaluation of the outcomes 
of its program has included the number of cases opened, the value of 
liabilities identified and property seized, and the acceptance rate of 
cases referred to Assistant U.S. Attorneys. Since the inception of 
TTB's criminal enforcement program in fiscal year 2011, TTB has 
initiated 58 cases with identified Federal tax liabilities of nearly 
$340 million and seizures valued at more than $115 million, and 
achieved an acceptance rate of 100 percent for the cases referred to 
Assistant U.S. Attorneys for investigation. Notably, all of the cases 
that have been forwarded by TTB for prosecution and which have come to 
a conclusion in the criminal justice system to date have resulted in 
convictions, indicating the quality of the cases developed by TTB's 
criminal enforcement program.
    Question. How does TTB's pilot program enhance Federal Government 
efforts to pursue criminal tax evasion? How do TTB's enforcement 
efforts differ from those of the Bureau of Alcohol, Tobacco, Firearms, 
and Explosives (ATF) and the Federal Bureau of Investigation (FBI)? How 
does TTB collaborate with and build upon the tax evasion enforcement 
efforts of ATF and FBI?
    Answer. TTB's enforcement program is focused on detecting and 
investigating violations in areas where TTB has primary jurisdiction, 
which include the Federal Alcohol Administration Act and the Internal 
Revenue Code as it relates to alcohol, tobacco, firearms, and 
ammunition. By contrast, ATF and FBI's primary jurisdiction and focus 
do not involve the collection of Federal excise taxes. When TTB 
conducts joint investigations with other Federal agencies, TTB special 
agents, investigators, and auditors ensure that criminal tax evasion is 
pursued and that related remedies, including restitution and surrender 
of permits, can be included in criminal case resolutions where 
appropriate.
    Question. Are there additional efforts that could be pursued if 
more than $2 million was available for the pilot program in fiscal year 
2014?
    Answer. The fiscal year 2014 President's budget proposes a program 
integrity cap adjustment of $5 million to pursue tax enforcement and 
compliance efforts that would not be feasible with only $2 million 
available for the TTB program. The proposal would fund new revenue-
producing tax enforcement and compliance initiatives in fiscal year 
2014, and continue to provide $5 million annually to TTB for additional 
enforcement and compliance initiatives from 2015 through 2018. These 
funds, of which $2 million will be used for special agent support, 
would support the increased enforcement activities and capabilities 
that are needed to address tax-evasion schemes relating to alcohol and 
tobacco diversion. Through these initiatives, TTB would target points 
in the supply chain that are susceptible to diversion activity and 
implement forensic audits and investigations of targeted entities in 
the alcohol and tobacco industries. The fiscal year 2014 President's 
Budget cap adjustment request of $5 million allows for the hiring of 
auditors, investigators, and special agents. The total above-base cap 
adjustment including inflation would be $202 million over the 10-year 
period. Over this same period, these investments would generate an 
estimated $406 million in additional tax revenue and a net savings of 
$204 million.
                          libya claims program
    Question. As you may know, I have long sought justice for victims 
of state-sponsored terrorism and championed the legislation creating a 
fund for Libya to compensate U.S. victims of Libyan terrorism. It is my 
understanding that the Foreign Claims Settlement Commission at the 
Department of Justice has notified Treasury that it has completed its 
adjudication of all claims under the Libya I and II claims programs. I 
also understand that Treasury has only made partial, prorated payments 
of 20 percent of the unpaid balance that remains on the awards in the 
Libya claims programs.
    What is Treasury's timeline for making the payments on the 
remaining 80 percent of Libya claims favorably adjudicated by the 
Foreign Claims Settlement Commission?
    Answer. Treasury began mailing notification packages to awardees 
the week of
6/10/13. The packages contain documents that must be signed by the 
awardees, notarized (as required), and returned to Treasury. Once 
signed documents are received from an awardee, Treasury will begin 
processing payment of the award balance remaining due to that awardee. 
Treasury's required processing time is typically 2 to 4 weeks from the 
date that documents are received. Therefore, the actual timeline for 
Treasury to complete making these final payments is dependent upon the 
responsiveness and timeliness of awardees in returning their completed 
documents to Treasury.
    Question. What is Treasury's estimate of remaining funds in the 
Libya settlement fund once these payments are made in full?
    Answer. Although the exact amounts will depend on several factors 
(including the actual timing of all disbursements), Treasury is able to 
provide the following general information: The Department of State 
transferred approximately $416.6 million from its Libyan Settlement 
Fund account to Treasury in connection with its two referrals of claims 
to the Foreign Claims Settlement Commission. Of this amount, 
approximately $20.8 million was deposited into Treasury as 
miscellaneous receipts pursuant to 22 U.S.C. Sec. 1626(b)(2). The 
balance was deposited into two Treasury accounts established for the 
payment of Commission awards arising out of the Libya I and II claims 
programs. The Commission's awards from those two programs total 
approximately $370.8 million. Therefore, once Treasury has completed 
paying all Libya I and II Commission awards, just under $25 million 
will remain of the amounts originally transferred to Treasury by State. 
Any questions concerning the disbursement of the remaining funds should 
be directed to the State Department.
                    international sanctions on iran
    Question. The European Union has been a valuable partner in 
creating an international sanctions regime on Iran. Europe's ban on the 
importation of Iranian oil has led to billions of dollars in lost 
revenue to Tehran. However, some have raised concerns about the ability 
of Iran to use the European Central Bank's (ECB) payment system, 
Target2, to process euro transactions.
    Has Treasury found evidence of Iran's ability to evade financial 
sanctions by conducting transactions involving euros utilizing the 
ECB's payment system?
    Answer. Treasury strongly supports the policy objective of 
restricting Iran's access to the euro, which we believe is also shared 
by European policy-makers and regulators. Treasury remains vigilant in 
watching for evidence that sanctioned Iranian entities are evading U.S. 
and international sanctions by accessing the international financial 
system, including through the EU financial system. Additionally, any 
foreign financial institutions that knowingly facilitate significant 
transactions or provide significant financial services for entities or 
individuals sanctioned under our Iran program are exposed to the 
potential loss of access to the U.S. financial system under the 
Comprehensive Iran Sanctions, Accountability, and Divestment Act of 
2010 (CISADA).
    Question. What steps can the U.S. take to ensure Iran does not have 
the ability to conduct transactions in euros or other foreign 
currencies?
    Answer. Treasury has engaged with our European partners about 
further restricting Iran's access to the European financial system and 
to the euro. As of July 1, pursuant to a new Executive Order, E.O. 
13645, any foreign financial institution that knowingly conducts 
significant transactions related to the sale or purchase of Iranian 
rials, or holds significant funds or accounts outside Iran denominated 
in rials, is exposed to U.S. sanctions. This new measure will present a 
substantial impediment to Iran's efforts to convert rials into desired 
international currencies.
                         anti-money laundering
    Question. In the last few years, several major financial 
institutions, including HSBC and Standard Chartered, have been fined 
hundreds of millions of dollars for conducting transactions with state 
sponsors of terrorism and for laundering money for drug cartels.
    Do you believe that banks, regardless of their size, should be held 
criminally liable if they knowingly violate U.S. sanctions and money 
laundering laws? Should the individual bankers responsible for the 
violations be held accountable?
    Answer. The Treasury Department supports vigorous enforcement of 
the law and believes that no individual or institution is above the 
law, regardless of size or any other characteristic. Although Treasury 
does not have statutory authority to impose criminal penalties--that 
authority rests exclusively with the Department of Justice--Treasury 
does have the authority to investigate potential violations of U.S. 
economic sanctions, as well as certain anti-money laundering laws and 
regulations, and to impose civil penalties. Treasury has a clear record 
of aggressively pursuing investigations and enforcement actions against 
both U.S. and foreign financial institutions that violate those laws 
and regulations.
    Question. Can you describe the cooperation between Treasury, the 
Department of Justice, and other Federal regulators in investigating 
violations of money laundering and sanctions laws and making decisions 
as to whether to bring about criminal charges? Are there ways that 
cooperation and information sharing towards these efforts could be 
improved?
    Answer. The Treasury Department has a number of formal and informal 
mechanisms to facilitate cooperation with the Federal regulators. 
Treasury's cooperation primarily involves the Financial Crimes 
Enforcement Network (FinCEN) for matters involving money laundering 
violations, and the Office of Foreign Assets Control (OFAC) for matters 
involving sanctions violations. With regards to cooperation on 
potential criminal actions, these Treasury points of contact would 
cooperate with the relevant offices of the Federal regulators and the 
Department of Justice and share information in order to develop a 
common understanding of the facts underlying any potential violations 
being investigated. In addition, the Treasury Department convened an 
Anti-Money Laundering (AML) Task Force last fall that includes, in 
addition to Treasury, the Federal banking regulators (Federal Reserve, 
FDIC, OCC, and the National Credit Union Administration), the IRS, the 
Commodity Futures Trading Commission, the Securities and Exchange 
Commission, and the Department of Justice. The Task Force is currently 
analyzing a number of issues relevant to the United States' AML 
framework, including improving information sharing among all the 
agencies.
                     state and local tax deduction
    Question. States like New Jersey that provide their residents 
comprehensive State and local government services (thereby reducing the 
burden on the Federal Government's safety net) tend to have higher 
State and local taxes. Right now, taxpayers who itemize can take a 
deduction on their Federal tax return for State and local taxes paid. 
But Treasury has proposed that Congress limit the value of itemized 
deductions, including the deduction for State and local taxes paid, for 
certain taxpayers. This is estimated to affect 6.7 percent of New 
Jersey taxpayers.
    Could limiting the ability of taxpayers to deduct State and local 
taxes paid reduce the willingness of State and local governments to 
provide services that contribute to the health and welfare of their 
citizens?
    Answer. The administration's proposal only limits the value of the 
deduction and State and local taxes for higher-income taxpayers; it is 
not eliminated. The deduction still provides a substantial benefit of 
up to 28 cents on the dollar. We do not expect this modest reduction in 
the value of the Federal tax expenditure for the deduction of State and 
local taxes to have much effect on the level of services provided by 
State and local governments in New Jersey and other States.
    Question. Could a limit on the ability to deduct State and local 
income taxes on Federal income tax returns encourage States to instead 
raise revenue through regressive sales taxes instead of more 
progressive property and income taxes?
    Answer. There is no reason to believe that the Administration's 
proposal will induce a significant move to State and local sales taxes. 
The Administration's proposal would allow the deduction of income and 
property taxes (though with a maximum value of 28 percent), while the 
deduction for sales taxes is scheduled to expire at the end of 2013, 
thereby maintaining an incentive for New Jersey to use income and 
property taxes to raise needed revenue.
                                 ______
                                 
              Questions Submitted by Senator Mike Johanns
    Question. Following up on a discussion we had at the hearing, do I 
understand correctly that the Treasury Department will not support any 
legislation to protect non-financial end users until the point in time 
when the flawed rules are fully implemented and manufactures, 
agricultural and energy producers, and technology companies suffer?
    Answer. The Dodd-Frank Act included critically important reforms to 
provide regulation of derivatives activity. The issue of end-user 
margin is very important, but I understand that the regulators are 
still working on their task in this regard. Once there has been full 
implementation, I am happy to work with Congress on issues that warrant 
attention.
    Question. I believe it to be beyond debate that the Congressional 
intent of financial regulatory reform was to protect those end users 
that utilize the derivatives markets to mitigate legitimate business 
risk. Do you agree?
    Answer. The Federal agencies responsible for implementing Title VII 
of the Dodd-Frank Act have proceeded in accordance with their 
interpretations of the statute.
    The Commodity Futures Trading Commission (CFTC) and SEC have 
proposed rules that would not impose margin requirements on non-cleared 
swaps entered into with a non-financial end-user. Under the proposals, 
non-bank swap dealers and major swap participants would be required to 
establish credit support agreements with the non-financial counterparty 
that cover credit risk terms and conditions.
    The prudential banking regulators jointly proposed and reopened 
rules that would require bank swap dealers and major swap participants 
to establish credit thresholds above which margin would have to be 
posted by non-financial end-users. Under guidance currently being 
developed, non-financial end-users would only have to post margin if 
their non-cleared swap exposures were more than $50 million. The CFTC, 
the SEC, and the prudential regulators should be permitted to continue 
their work through the public comment and rulemaking process.
    Question. Chairman Bernanke has repeatedly indicated that the 
Federal Reserve would like to have the flexibility to not mandate that 
the entities it regulates impose costly margin requirements on non-
financial counterparties. Is it your view that we must wait and see how 
costly and economically destructive these margin requirements may be 
before we fix such an obvious problem?
    Answer. We should allow the regulators to complete their ongoing 
rulemakings, and provide ample time to evaluate the effects of 
regulatory reform. This period of time will help us determine what 
changes, if any, might be necessary in certain areas to improve the 
effectiveness of these reforms.
    Question. On a related note, even key players in the passage of 
Dodd-Frank such as former Chairman Frank, Chairman Bernanke, Sheila 
Bair and Paul Volcker have been outspoken about the ``push-out'' 
provisions in Section 716 doing nothing to eliminate risk--in fact, 
perhaps increasing risk by moving swaps portfolios into less-
capitalized entities--and instead doing much to increase the cost of 
using swaps by end users. Others cite Section 716 as a major impediment 
to the workability of Orderly Liquidation Authority, a primary tenet of 
the Dodd-Frank regulatory regime. Your view is that we should allow 
this harmful rule to go into effect, instead of fixing the train wreck 
we can all see coming?
    Answer. In the last Congress, legislation was introduced to respond 
to criticisms made by market participants, including foreign banks, 
about Section 716. Regulators are still considering the best way to 
address the implementation of the swaps push-out provision. In a recent 
action, the Federal Reserve provided additional guidance in this area, 
demonstrating that regulators have the flexibility to respond 
appropriately to legitimate concerns.
    We should allow the regulators to complete their ongoing processes, 
and provide ample time to evaluate the effects of regulatory reform. 
Taking up piecemeal legislation at this time is premature and would be 
disruptive and harmful to the implementation of key reforms.
    Question. Are there any areas in which you feel Dodd-Frank could 
stand to be tweaked? Be they merely technical corrections, such as 
moving commas and the like, minor tweaks to correct oversights and 
drafting errors--such as the CFPB privilege bill that passed last 
year--or more substantive changes, are there any that you would 
envision supporting at this time?
    Answer. The Dodd-Frank Act, like all pieces of legislation, is not 
perfect, but we have not identified any provisions that need to be 
clarified or improved that would affect the core areas of reform that 
are essential to strengthening the global financial system. The 
regulators have thus far been able to work to appropriately implement 
the Act without legislative adjustments. We should allow them to 
complete their ongoing rulemakings and only then determine what 
changes, if any, might be necessary to improve the effectiveness of 
these reforms.
    Question. As the Congress works through the thorny problem of 
reforming the housing finance system, will you commit to us that the 
Treasury Department will give guidance as to what you would like to see 
in a reform proposal, and offer constructive commentary on any 
bipartisan proposals that the Congress pursues?
    Answer. It is critically important that we move ahead with 
reforming the housing finance market and winding down Fannie Mae and 
Freddie Mac. Creating a more stable and sustainable housing finance 
market is an important priority of this Administration and I look 
forward to continue working on this issue with Congress.
    The administration is committed to a sustainable housing finance 
system that does not allow the government-sponsored enterprises (GSEs) 
to return to their previous form, where private gains were allowed at 
the expense of taxpayer losses. Any future system must also protect 
taxpayers and financial stability, promote private capital taking on 
more mortgage credit risk in a responsible way, and meet the needs of 
our Nation's rental population. At the same time, we must preserve 
access to credit for American families, including long-term fixed rate 
mortgages and better-targeted Government support for low- and moderate-
income Americans, including the development of affordable rental 
options. Our housing finance system must also include stronger and 
clearer consumer protections and must establish a level playing field 
for all participating institutions.
    Question. As Chairman of the Financial Stability Oversight Council 
(FSOC), you have been tasked with taking a leadership role and solving 
the in-fighting between regulators, coordinating difficult rulemakings 
such as the Volcker Rule. Can you provide us any clarity on the 
progress being made on the Volcker Rule? Do you have any sense of when 
a final rule may be published, whether the rule will be re-proposed, or 
generally when we will make any progress at all?
    Answer. Since the issuance of the Council's study on the Volcker 
Rule in January 2011, Treasury has been working to fulfill the 
statutory mandate to coordinate the regulations issued under the Rule. 
To meet this obligation, Treasury staff actively participates with the 
Federal banking agencies and the SEC and CFTC in the interagency 
process working to develop these rules. This process includes regular 
meetings that serve as constructive forums for the agencies to 
deliberate on key aspects of the rules. This process has resulted in 
the issuance of proposed regulations that were substantively identical, 
demonstrating a commitment among the agencies to a coordinated 
approach, and it continues as regulators work to finalize the rules.
    Regulators are completing their review of the nearly 18,000 public 
comments to the proposed rules. Reviewing these comments takes time, 
and it is important for the rulemaking agencies to get the final 
product right. We take Treasury's role as coordinator seriously and 
remain committed to working with the rulemaking agencies towards a 
substantively identical final rule.
    Question. At the hearing, you reiterated the criteria by which non-
bank financial institutions are reviewed for systemic risk. My 
question, however, referred to the metrics or analytics used to 
evaluate such criteria, and whether they would be both industry-
specific and open for public comment. For example, I don't believe it 
enough to say that you are looking at ``interconnectedness,'' but 
instead, we should ensure that the methods by which you measure 
interconnectedness are sensible and tailored for the business line of 
the company you are examining. Please refer to the letter dated April 
25, 2013 sent to you by Senator Tester and me for a more in-depth 
description of this issue. When can we look forward to your detailed 
reply?
    Answer. As Treasury stated in our May 30, 2013, response to you and 
Senator Tester, the Council's final rule and interpretive guidance, 
which were issued on April 3, 2012, describe a three-stage process 
leading to a proposed determination, beginning with an initial stage 
using quantitative thresholds based on, among other things, 
measurements of size, indebtedness, and leverage. The Council's 
guidance describes how those thresholds help identify firms that could 
pose a threat to U.S. financial stability. By developing this set of 
uniform quantitative thresholds, the Council provided transparency to 
companies on whether they are likely to be subject to additional 
review. The second and third stages of the Council's determination 
process provide for a thorough evaluation of different types of nonbank 
financial companies based on quantitative and qualitative 
considerations and taking into account company- and industry-specific 
information as appropriate. The Council's interpretive guidance, which 
was subject to public notice and comment before it was issued, includes 
a number of sample metrics that the Council may use to assess 
interconnectedness and other considerations. In addition, the Dodd-
Frank Act requires the Council to provide a nonbank financial company 
with an explanation of the basis of any proposed determination, and to 
report to Congress regarding the basis for all final determinations.
    Question. Why, given the previous rejections of such adjustments, 
would the administration request funding for important IRS activities 
through a cap adjustment, which is clearly outside those exceptions to 
the discretionary spending caps outlined in statute by the Budget 
Control Act or 2011?
    Answer. The program integrity cap adjustment will provide 
additional funding for IRS tax enforcement and compliance programs to 
improve fairness in the tax system, narrow the tax gap (estimated at 
$450 billion annually in taxes owed but not paid), and will reduce the 
deficit through increased revenue collections.
    The IRS has demonstrated that targeted compliance resources such as 
these more than pay for themselves through increased revenues. In 
fiscal year 2012 alone, IRS enforcement activities returned over $50.2 
billion in late or unpaid taxes to the United States Treasury. It is 
important to note that the non-partisan Congressional Budget Office 
scored the administration's similar fiscal year 2013 Budget multi-year 
cap adjustment proposal as generating net savings of over $20 billion 
over the budget window.
    The $407 million program integrity cap adjustment funding proposed 
in the 2014 Treasury budget includes $323 million for traditional 
enforcement initiatives, $41 million for a revenue-enhancing 
enforcement initiative, and $43 million for other compliance program 
initiatives. An additional $5 million is proposed to generate new 
revenue at the Alcohol and Tobacco Tax and Trade Bureau.
    This spending will have a high return on investment (ROI). 
Increased spending at the IRS on the traditional enforcement activities 
will generate more than $1.6 billion in additional annual enforcement, 
achieving an ROI of $6 to $1.
    Unlike the 2013 Budget, the cap adjustment does not include funding 
for implementing the Affordable Care Act or other IRS legislative 
requirements, such as IRS's document matching program and the Foreign 
Account Tax Compliance Act. These legislative requirements are 
requested as a part of the regular discretionary request in the 2014 
Budget. The program integrity cap adjustment is primarily reserved for 
revenue-generating enforcement activities.
    Question. The Treasury Inspector General for Tax Administration 
(TIGTA) report indicates that IRS disagrees with two key IG 
recommendations, including the recommendation that IRS develop 
procedures to document reasons applications are chosen for review and 
the recommendation that IRS develop guidance on how to process requests 
for tax-exempt status involving potentially significant political 
campaign intervention. In a May 15, 2013 statement, President Obama 
stated that he ``directed Secretary Lew to ensure the IRS begins 
implementing the IG's recommendations right away.'' Will you ensure 
that IRS implements the aforementioned two recommendations with which 
IRS disagreed?
    Answer. Treasury believes that the tax code must be administered to 
the highest of standards and without bias. Treasury oversees the IRS 
with respect to matters of broad management and tax policy. The 
longstanding practice, spanning administrations of both political 
parties, is not to be involved in the details of tax administration and 
enforcement. Last month, the President appointed Daniel Werfel, a 
career public servant, to lead the IRS. On Mr. Werfel's first day on 
the job, Secretary Lew directed him to implement, fully and promptly, 
all nine of the recommendations in the Treasury Inspector General for 
Tax Administration's (TIGTA) report. As detailed in his written report 
delivered to Secretary Lew on June 24 \1\, Mr. Werfel has taken quick 
action to implement all of the recommendations included in the TIGTA 
report.
---------------------------------------------------------------------------
    \1\ http://www.irs.gov/pub/newsroom/
Initial%20Assessment%20and%20Plan%20of%20Action.pdf.

[Note: The next 24 questions are addressed by RESPONSE #1 which is at 
the end of the last question and it appears under the heading (RESPONSE 
---------------------------------------------------------------------------
#1).]

    Question. According to reports, Treasury Department officials were 
notified of the audit related to the use of inappropriate criteria to 
identify tax-exempt applications for review on more than one occasion. 
Please list the names and positions of all of the individuals within 
the Department of Treasury that were notified directly by the TIGTA and 
the dates on which they were notified or this audit was referenced or 
discussed.
    Answer. See (RESPONSE #1).
    Question. Did any employee of the Treasury Department, including 
the IRS, have any verbal, written or electronic communication with 
Secretary Geithner regarding any IRS action in relation to the scrutiny 
of tax-exempt applications?
    Answer. See (RESPONSE #1).
    Question. Was former Treasury Secretary Geithner or any of his 
direct reports ever made aware of the IRS using inappropriate criteria 
to target tax-exempt applicants or the TIGTA audit of such activity?
    Answer. See (RESPONSE #1).
    Question. Please provide the Committee with all written or 
electronic communication of the Department of the Treasury, including 
the IRS, pertaining to the targeting of applications for tax exempt 
status or the audit by the Inspector General, from calendar year 2010 
to the present.
    Answer. See (RESPONSE #1).
    Question. Please provide the committee with detailed information on 
all interactions involving the Department of the Treasury regarding 
this audit, including email communications, phone calls and in-person 
discussions.
    Answer. See (RESPONSE #1).
    Question. When did you first become aware of Internal Revenue 
Service's (IRS) use of inappropriate criteria to identify tax-exempt 
applications for review?
    Answer. See (RESPONSE #1).
    Question. When did you first become aware of the TIGTA audit of 
IRS' review of organizations applying for tax-exempt status?
    Answer. See (RESPONSE #1).
    Question. When did the Department of Treasury first notify the 
White House of the IRS' use of inappropriate criteria to review non-
profit groups applying for tax-exempt status?
    Answer. See (RESPONSE #1).
    Question. When did the Department of Treasury first contact the 
White House regarding the TIGTA audit of the IRS using inappropriate 
criteria to review organizations applying for tax-exempt status?
    Answer. See (RESPONSE #1).
    Question. What Department of Treasury officials and White House 
officials were party to the earliest conveyance of information between 
the Department of Treasury and the White House regarding the activities 
described in the TIGTA report?
    Answer. See (RESPONSE #1).
    Question. What specific information was conveyed, and in what 
manner was the information conveyed, during the earliest communication 
between the Department of Treasury and the White House regarding the 
activities described in the TIGTA report?
    Answer. See (RESPONSE #1).
    Question. During press briefings on May 20, 2013 and May 21, 2013, 
White House Press Secretary Jay Carney stated that the Department of 
Treasury notified the White House Counsel's office on April 16, 2013 of 
the existence of the TIGTA audit, the report of which was ultimately 
issued on May 14, 2013.
  --What specific information was conveyed by Treasury to the Counsel's 
        office in the communication referenced above on April 16, 2013?
  --How was the information conveyed?
  --Please list all persons from the Department of Treasury and the 
        White House that were party to the aforementioned communication 
        of April 16, 2013.
  --Please provide the Committee with copies of all emails, phone call 
        logs, and other existing documentation related to the 
        aforementioned communication of April 16, 2013.
    Answer. See (RESPONSE #1).
    Question. During press briefings on May 20, 2013 and May 21, 2013, 
White House Press Secretary Jay Carney stated that the week of April 
22, 2013, the Department of Treasury notified the White House Counsel's 
office of detailed information regarding the TIGTA report. Further, he 
noted that on April 24, 2013, White House Counsel Kathryn Ruemmler was 
notified by the Department of Treasury, either directly or indirectly 
through staff, in ``full form,'' that, ``the Inspector General for Tax 
Administration was completing a report about line IRS employees 
improperly scrutinizing what are known as 501(c)(4) organizations by 
using words such as `tea party' and `patriot.' ''
  --What specific information did Treasury convey to the White House 
        Counsel or the White House Counsel's office during the 
        communication referenced above from the week of April 22, 2013?
  --When was this information communicated?
  --What is the method by which this information was conveyed?
  --Was this information communicated directly to White House Counsel 
        Kathryn Ruemmler?
  --Please list all persons from the Department of Treasury and the 
        Counsel's office that were party to the aforementioned 
        communication of the week of April 22, 2013.
  --Please provide the Committee with copies of all emails, phone call 
        logs, and other existing documentation related to the 
        aforementioned communication of the week of April 22, 2013.
    Answer. See (RESPONSE #1).
    Question. At any time during the communications between the 
Department of Treasury and White House Counsel's office from the week 
of April 22, 2013 that were described by Press Secretary Jay Carney on 
May 20, 2013 and May 21, 2013, did any White House personnel, 
specifically the White House Counsel or persons within the Counsel's 
office, communicate or indicate the intent to communicate information 
related to the TIGTA report or the activities described therein to 
White House personnel outside the Counsel's office? If so:
  --When did such communication or indication occur?
  --To which White House personnel outside the Counsel's office was the 
        information conveyed or intended to be conveyed?
    Answer. See (RESPONSE #1).
    Question. At any time before, during, or following the 
communications between the Department of Treasury and White House 
Counsel's office the week of April 22, 2013 that were described by 
Press Secretary Jay Carney on May 20, 2013 and May 21, 2013, did any 
White House personnel, specifically the White House Counsel or persons 
within the Counsel's office, indicate to Treasury the intent to 
communicate information related to the activities described in the 
TIGTA report to White House personnel outside the Counsel's office? If 
so:
  --When did all such indications occur?
  --Which White House personnel made each such indication?
  --To which Treasury personnel was such indication directed?
  --To which White House personnel outside the Counsel's office was the 
        information intended to be conveyed?
    Answer. See (RESPONSE #1).
    Question. During a press briefing on May 20, 2013, White House 
Press Secretary Jay Carney stated that following the communications 
between the Department of Treasury and White House Counsel's office the 
week of April 22, 2013, there were subsequent ``communications between 
White House Counsel's Office and White House Chief of Staff's Office, 
with Treasury Office of General Counsel and Treasury's Chief of Staff 
Office to understand the anticipated timing of the release of the 
report and the potential findings by the IG.''
  --Through what media were these communications sent?
  --On what dates and for what duration did the subsequent 
        communications referenced above occur?
  --Who initiated the subsequent communications described above?
  --In what manner were these communications initiated?
  --Please list all Treasury and White House personnel that were party 
        to the subsequent communications described above.
  --Were any individuals outside the Treasury Department and White 
        House party to these communications?
    --If so, please list those individuals and any relevant 
            affiliations.
  --What specific information was conveyed in these communications?
  --Did any of the subsequent communications not include the White 
        House Counsel's office? If so:
    --Why did the communications occur directly between Treasury 
            officials and White House officials without inclusion of 
            the Counsel's office?
    --Is it standard practice for Treasury officials to discuss 
            Inspector General audits with White House officials to this 
            extent, prior to the official issuance of the audit report, 
            while excluding the Counsel's office from the discussion?
  --In these communications, did any White House or Treasury official 
        raise the question of whether to inform President Obama of the 
        TIGTA report or activities described in the report? If so:
    --What person or persons specifically raised the issue of informing 
            the President?
    --What specific information was conveyed with respect to the 
            question of informing the President?
  --Was Director of the Exempt Organization function of the IRS, Lois 
        Lerner, made aware of the subsequent communications described 
        above?
  --Did the subsequent communications described above include 
        information regarding Director Lerner? If so:
    --Please describe such information in detail.
  --Please provide the Committee with copies of all emails, phone call 
        logs, and other existing documentation related to the 
        subsequent communication described above.
    Answer. See (RESPONSE #1).
    Question. Prior to May 10, 2013, did anyone within the Department 
of Treasury ever discuss with White House officials the method by which 
the public would become aware of the TIGTA report or the activities 
described in the report? If so:
  --Who were party to such discussions?
  --What potential methods of public disclosure were suggested in such 
        discussions?
  --Which individuals suggested each of these potential methods of 
        disclosure?
  --Please provide the Committee with copies of all emails, phone call 
        logs, and other existing documentation related to such 
        discussions.
    Answer. See (RESPONSE #1).
    Question. Did anyone within the Department of Treasury ever discuss 
with Director Lerner the method by which the TIGTA report or activities 
described therein could be disclosed? If so:
  --Please list the persons that were party to these discussions, as 
        well as the disclosure methods that were discussed.
  --Please provide the Committee with copies of all emails, phone call 
        logs, and other existing documentation related to such 
        discussions.
    Answer. See (RESPONSE #1).
    Question. Did anyone within the Department of Treasury ever suggest 
to Director Lerner that information regarding the TIGTA report or 
activities described therein be disclosed in an unofficial manner? If 
so:
  --Please list the individual or individuals who made such suggestion.
  --Please provide the Committee with copies of all emails, phone call 
        logs, and other existing documentation related to such 
        suggestion.
    Answer. See (RESPONSE #1).
    Question. Since May 10, 2013, has anyone within the Department of 
Treasury requested information from Director Lerner about the public 
disclosure of the existence of the TIGTA report or activities described 
therein? If so:
  --What persons requested such information?
  --What information has been requested?
  --What information has been furnished pursuant to such request or 
        requests?
  --Please provide the Committee with copies of all emails, phone call 
        logs, and other existing documentation related to such 
        requests.
    Answer. See (RESPONSE #1).
    Question. Since May 10, 2013, has anyone within the Department of 
Treasury requested information from Director Lerner about her knowledge 
of or role in the IRS using inappropriate criteria to review 
organizations applying for tax-exempt status? If so:
  --What persons requested such information?
  --What information has been requested?
  --What information has been furnished pursuant to such request or 
        requests?
  --Please provide the Committee with copies of all emails, phone call 
        logs, and other existing documentation related to such 
        requests.
    Answer. See (RESPONSE #1).
    Question. Did Director Lerner indicate to any person within the 
Department of Treasury that there was a possibility she would publicly 
disclose information regarding the TIGTA report or activities described 
therein? If so:
  --When was such indication made?
  --To whom was such indication directed?
  --Please provide the Committee with copies of all emails, phone call 
        logs, and other existing documentation related to such 
        indication.
    Answer. See (RESPONSE #1).
    Question. Since May 10, 2013, has anyone within the Department of 
Treasury requested the resignation of Director Lerner or suggested to 
Director Lerner that she resign?
    Answer. See (RESPONSE #1).
    Question. On May 23, 2013, it was reported that Director Lerner had 
been placed on administrative leave. Prior to May 23, 2013, did anyone 
within the Treasury Department communicate with anyone in the White 
House regarding the prospect of Director Lerner taking administrative 
leave? If so:
  --Please list all persons within the White House and Treasury 
        Department who were party to such communication.
  --Please provide the Committee with copies of all emails, phone call 
        logs, and other existing documentation related to such 
        communications.
  --For what duration will Director Lerner be placed on leave?
  --While on administrative leave, will Director Lerner continue to 
        receive pay?
    Answer. See (RESPONSE #1).

                             (RESPONSE #1)

    Answer. As stated in Congressional testimony, J. Russell George 
notified Treasury officials in June 2012 that he was beginning an audit 
regarding Section 501(c)(4) tax-exempt organizations. This notification 
occurred at approximately the same time that Mr. George initiated the 
audit. Mr. George also testified that he did not inform Treasury 
officials at the time of any results or audit findings. Treasury 
strongly supports the independent oversight provided by its three 
Inspectors General, and it does not interfere in ongoing IG audits.
    Treasury first became aware of TIGTA's draft audit findings 
regarding Section 501(c)(4) tax-exempt organizations in March 2013. In 
mid-March 2013, TIGTA provided to the IRS, consistent with its standard 
practice, an initial draft report for the Section 501(c)(4) audit. 
Shortly thereafter, IRS staff described the general contents of the 
draft report to Treasury. In mid-April 2013, TIGTA provided an updated 
draft report to IRS staff. In late April 2013, after notifying TIGTA, 
IRS staff shared a copy of the updated draft report with Treasury. 
Because the report was not yet final, and consistent with standard 
practice, Treasury staff did not share it with the Secretary or Deputy 
Secretary. As the White House has previously said, the Treasury General 
Counsel's office first informed the White House counsel's office in 
April 2013 of the TIGTA audit.
    On March 15, 2013, Mr. George had a short introductory meeting with 
Secretary Lew. At the meeting, Mr. George informed Secretary Lew of a 
number of matters TIGTA was reviewing, including the forthcoming audit 
report regarding Section 501(c)(4) tax-exempt organizations. Mr. 
George, however, did not describe his audit findings. As he has 
testified to Congress, Secretary Lew first learned about TIGTA's 
findings when they were reported publicly in mid-May 2013.
    On June 24, 2013, Mr. Werfel delivered a detailed written report to 
Secretary Lew on progress made at the IRS. Mr. Werfel has taken quick 
action to implement the recommendations included in TIGTA's report. In 
addition, Mr. Werfel reported on his progress in each of the three 
areas outlined by Secretary Lew: (1) ensuring staff that acted 
inappropriately are held accountable; (2) examining and correcting any 
failures in the processing of applications for tax-exempt status; and 
(3) taking a forward-looking systemic view at the IRS's organization. 
Mr. Werfel has taken important steps that further the goal of ensuring 
that the IRS administers the tax code to the highest of standards and 
without bias.
    Mr. Werfel's 30-day review found no evidence of intentional 
wrongdoing at the IRS. In addition, Mr. Werfel's review found no 
evidence of involvement from anyone outside of the IRS in the behavior 
described in the TIGTA report. Finally, Mr. Werfel's review found no 
evidence of the use of inappropriate criteria in other IRS business 
unit operations. While more work remains, the assessments and actions 
outlined in Mr. Werfel's report have charted a path that will improve 
performance and accountability at the IRS. In addition, a series of 
independent reviews related to how the IRS evaluated applications for 
tax-exempt status under section 501(c)(4) are ongoing.

                          (END OF RESPONSE #1)

[Note: The next 6 questions are addressed by RESPONSE #2 which is at 
the end of the last question and it appears under the heading (RESPONSE 
#2).]

    Question. Please provide information on all performance bonuses 
received by Treasury and IRS SES employees, career and non-career, 
including Presidential rank awards, and any other awards at IRS and 
Treasury from the beginning of calendar year 2010 to the present.
    Answer. See (RESPONSE #2).
    Question. Include documentation of the all deliberations and review 
by the Treasury Departmental Performance Review Board and the PRB's 
recommendations and ultimate decisions on awards for all SES positions 
for which the Secretary or Deputy Secretary is the appointing authority 
including identifying all recommending and approval officials. If the 
recommendation by the PRB was revised, please provide specific 
information regarding any change in the rating or amount or type of 
award.
    Answer. See (RESPONSE #2).
    Question. Please provide documentation for any and all performance 
awards provided to all Treasury and IRS SES employees, including career 
and non-career from the beginning of calendar year 2010 to the present. 
Also include all documentation of any board functioning as a 
performance review board.
    Answer. See (RESPONSE #2).
    Question. Please provide the names and positions of all members of 
the Departmental Performance Review Board and any other board that 
functions as a PRB for any SES, career or non-career, within the 
Department of the Treasury and IRS from calendar year 2010 to the 
present.
    Answer. See (RESPONSE #2).
    Question. Please provide information on each member of the 
Departmental PRB from calendar year 2010 to the present in their 
capacity as rating officials for other employees. List each position 
for which a member of the Departmental PRB serves as a rating or 
approving official. List all awards approved by each official from the 
beginning of calendar year 2010 to the present.
    Answer. See (RESPONSE #2).
    Question. Please provide information on all performance awards 
provided to any employee in positions under the responsibility of the 
Deputy Commissioner for Services and Enforcement including the Tax 
Exempt and Government Entities Division, Exempt Organizations, Rulings 
and Agreements, the Determinations, Guidance and Technical Units. List 
all awards for all positions from the beginning of calendar year 2010 
to the present.
    Answer. See (RESPONSE #2).

                             (RESPONSE #2)

    Answer. Treasury is committed to being a careful steward of 
taxpayer dollars. Treasury adheres to guidance and budget limits 
established by the Office of Personnel Management (OPM) and the Office 
of Management and Budget (OMB) on employee awards.

                          (END OF RESPONSE #2)

[Note: The next 2 questions are addressed by RESPONSE #3 which is at 
the end of the last question and it appears under the heading (RESPONSE 
#3).]

    Question. I am troubled by the administration's continued 
characterization of the depreciation schedules used by the General 
Aviation (GA) industry under Federal tax law. Key employers in the 
General Aviation industry have indicated to me on multiple occasions 
that market demand for services provided by the GA manufacturing sector 
decreases virtually every time the Administration uses language 
characterizing the GA industry as being comprised of or used by ``fat 
cats'' or ``corporate big wigs.'' In other words, it is clear that the 
use of language demonizing the GA industry hurts people, and 
unacceptably targets a single industry because it makes for good 
political theater.
    Is the Administration aware that the market for the consumption of 
aviation services varies substantially with the public use of language 
attacking the use of business aircraft, and that consequently, the 
labor force supplying the aircraft, and servicing the aircraft is 
directly affected by the use of language disparaging the GA industry?
    Answer. See (RESPONSE #3).
    Question. When Congress repealed the excise taxes on certain boats, 
aircraft, jewelry, and furs in 1993, Congress noted at the time, that
        ``during the recent recession, the boat, aircraft, jewelry, and 
        fur industries have suffered job losses and increased 
        unemployment. The committee believes that it is appropriate to 
        eliminate the burden these taxes impose in the interests of 
        fostering economic recovery in those and related industries.''
    Does the Administration believe that extracting additional revenue 
from the GA sector through the use of the tax code, as proposed in the 
President's budget, will not result in contraction in economic activity 
in that sector?
    Answer. See (RESPONSE #3).

                             (RESPONSE #3)

    Answer. The Administration's fiscal year 2014 Budget proposes to 
conform the depreciation rules for airplanes not used in commercial or 
contract carrying of passengers or freight (general aviation passenger 
aircraft) to similar aircraft used in commercial transportation. Under 
current depreciation rules, the recovery period for general aviation 
passenger aircraft is 5 years and the recovery period for commercial 
passenger and freight aircraft is 7 years. The purpose of the Budget 
proposal is to level the playing field for different types of aircraft, 
because the shorter recovery period for depreciating general aviation 
passenger aircraft provides a tax preference in comparison to similar 
aircraft used for commercial transportation. Aircraft primarily engaged 
in non-passenger activities (for example, crop dusting, firefighting, 
and aerial surveying aircraft) would continue to be depreciated over a 
recovery period of 5 years.

                          (END OF RESPONSE #3)

                                 ______
                                 
                Questions Submitted to Steven T. Miller
           Questions Submitted by Senator Frank R. Lautenberg
                             identity theft
    Question. Identity theft is a serious and growing problem in the 
United States and a daunting challenge for the IRS. Taxpayers are 
harmed when identity thieves file fraudulent tax documents using stolen 
names and Social Security numbers, and wrongfully receive refunds. 
Identity theft can be devastating for victims, whose legitimate refunds 
are blocked, forcing them to spend months untangling their account 
problems with the IRS.
    What is IRS's current strategy for dealing with identity theft and 
refund fraud?
    Answer. The IRS has a comprehensive strategy to combat identity 
theft focusing on preventing refund fraud, investigating these crimes, 
and assisting taxpayers victimized by identity theft. We have 
implemented, and continue to refine, our business processes to improve 
identification and prevention of tax fraud. Along with prevention, 
providing assistance to taxpayers whose personal information has been 
stolen and used by a perpetrator in the tax filing process is a key 
element in the strategy. Through the formation of specialized groups to 
process identity theft cases and the issuance of Identity Protection 
Personal Identification Numbers, or IP PINs (described in further 
detail below), we work to address all of the taxpayer's issues and 
prevent future instances of tax-related identity theft.
    The investigative work done by the Criminal Investigation (CI) 
division is a major component of our efforts to combat tax-related 
identity theft. CI investigates and detects tax and other financial 
fraud, including identity theft, and coordinates with other IRS 
divisions to ensure that false refunds involving identity theft are 
quickly addressed. CI recommends prosecution of identity theft cases to 
the Department of Justice. In addition, we have been increasing our 
investigations of fraud related to identity theft, and expanding our 
efforts to work with local law enforcement and other Federal agencies 
in this area.
    We have instituted a number of new procedures in the last few years 
to enhance our ability to prevent tax refund fraud using stolen 
identities.
  --The Electronic Fraud Detection System (EFDS) identifies potential 
        fraudulent returns. This system relies on data mining scores, 
        fraud models and algorithms to determine the likelihood of 
        fraud. As part of this process, we also look for similar 
        attributes or characteristics such as a primary address that 
        has been used multiple times on different returns or an IP 
        address that is consistently used in the filing of fictitious 
        claims.
  --The IRS uses a process of income verification in its risk 
        assessment to determine whether a return is fraudulent. We have 
        accelerated the use of information returns (e.g., Form W-2) in 
        order to identify mismatches earlier. Moving this matching 
        process forward in time has enhanced our ability to identify 
        fraudulent tax returns before we process them.
  --In addition to EFDS, the IRS developed identity theft screening 
        filters to improve our ability to spot false returns before we 
        process them and issue refunds. For example, we designed and 
        launched new filters that flag clusters of returns when certain 
        characteristics are detected such as multiple refunds into a 
        single bank account or to a single mailing address. While the 
        development of effective filters is complex given the dynamic 
        lives of legitimate taxpayers, these filters enable us to 
        identify fraudulent returns even if a taxpayer's information 
        has not been previously used for filing by an identity thief.
  --One of our primary strategies to assist past victims of identity 
        theft and prevent further fraudulent filings is the creation of 
        an Identity Protection Personal Identification Number (IP PIN). 
        The IP PIN program began in 2011 and has since been expanded 
        and enhanced to protect victims of identity theft by creating 
        an additional layer of security by requiring the IP PIN when 
        filing a tax return. The IP PIN allows the IRS to more 
        effectively identify fraudulent returns, while at the same 
        time, validate that the return filed is the legitimate 
        taxpayer's return. For the 2013 filing season, we issued more 
        than 770,000 IP PINs and have improved processing of returns 
        filed with an IP PIN. Additionally, the replacement IP PIN 
        process (for taxpayers who lose or misplace their original IP 
        PIN) has been significantly streamlined to provide better 
        service. Taxpayers are asked to validate their identities by 
        answering a series of questions for disclosure level 
        authentication and if validated, they receive the replacement 
        IP PIN at the point of contact.
  --Beginning in 2008, we implemented the use of identity theft markers 
        which are placed on a taxpayer's account to identify an 
        identity theft incident. These markers are used to distinguish 
        legitimate returns from fraudulent returns and prevent victims 
        from facing the same problems every year. The markers provide 
        additional protection from identity thieves by systemically 
        evaluating taxpayers' future returns to check for 
        inconsistencies and discrepancies that indicate potential 
        fraudulent filing.
  --We are also attempting to prevent the growing misuse of decedent 
        social security numbers by detecting and stopping potentially 
        fraudulent returns before they are processed. We are coding the 
        accounts of deceased taxpayers who were previously victimized 
        and where there is no longer a future filing requirement. This 
        coding ``locks'' a taxpayer's account, preventing the 
        acceptance of potentially fraudulent returns.
  --The IRS is reducing the use of SSNs on our systems, forms, notices 
        and letters to protect taxpayers from identity theft. In 
        addition, the Administration's fiscal year 2014 budget includes 
        a legislative proposal to grant the IRS authority to require or 
        permit truncated social security numbers on W-2 forms that 
        employers send to employees, to reduce the risk that the 
        information could be stolen from a paper payee statement by 
        identity thieves.
  --To address tax refund fraud associated specifically with direct 
        deposit to prepaid and other forms of debit and bank accounts, 
        the IRS and Treasury's Financial Management Service (FMS) have 
        collaborated with NACHA, the Electronic Payment Association, to 
        develop an opt-in program for interested financial institutions 
        to enable them to return ACH direct tax refund deposits if they 
        suspect the transfers were based on fraudulent returns. The IRS 
        Refund Return Opt-In Program will help the IRS examine the 
        validity of refunds already issued and stop payment on or 
        recover invalid refunds; build better pre-refund filters; and 
        prevent future fraudulent refunds.
    Question. What measures would make it easier for the IRS to stop 
thieves in their tracks?
    Answer. The Administration's fiscal year 2014 budget request 
includes several important proposals needed to help us improve our 
efforts to stop refund fraud caused by identity theft. The 
Administration proposes to:
  --Expand IRS access to information in the National Directory of New 
        Hires for general tax administration purposes, including data 
        matching and verification of taxpayer claims during processing;
  --Restrict access to the Death Master File (DMF) to those users who 
        legitimately need the information for fraud prevention purposes 
        and to delay the release of the DMF for 3 years to all other 
        users. This change would make it more difficult for identity 
        thieves to obtain identifying information of deceased persons 
        in order to file fraudulent returns;
  --Grant the IRS the authority to require or permit truncated social 
        security numbers on W-2 forms that employers send to employees, 
        to reduce the risk that the information could be stolen from a 
        paper payee statement by identity thieves;
  --Add a $5,000 civil penalty to the Internal Revenue Code for tax-
        related identity theft; and
  --Add the tax-related offenses in title 18 and the criminal tax 
        offenses in title 26 to the list of predicate offenses 
        contained in the Aggravated Identity Theft Statute under 
        Federal law. A conviction for aggravated identity theft adds 2 
        years to the sentence imposed for the underlying felony.
    Question. Do you agree with the concern expressed by the National 
Taxpayer Advocate that victims still face the same ``labyrinth of 
procedures and drawn-out timeframes for resolution'' that they faced 5 
years ago?
    Answer. The IRS has made significant changes in its procedures 
around identity theft, and we believe we have made significant progress 
in addressing the National Taxpayer Advocate's concerns. In October 
2012, we established several identity theft specialized groups to 
assist with processing identity theft cases. The mission of these 
groups is to handle identity theft cases efficiently and with 
consistency. These groups provide a single point of contact based on 
origin of the problem thus eliminating the need for victims to interact 
with multiple units. This process also allows us to improve tracking 
and decrease the need for referrals among business units. Additionally, 
we now have more than 3,000 employees working identity theft issues, 
which is more than double the staffing resources dedicated to working 
identity theft cases in the previous filing season. In all identity 
theft situations, our employees work with each victim to resolve their 
particular situation. Identity theft cases are becoming increasingly 
complex, involving a manual authentication and review process to ensure 
we resolve the case satisfactorily for the victim. We are working to 
speed up case resolution, provide more training for our employees who 
assist victims of identity theft, and increase outreach to and 
education of taxpayers so they can prevent and resolve tax-related 
identity theft issues quickly.
    Victims who have multiple issues crossing functions will continue 
to be monitored by the Identity Protection Specialized Unit (IPSU) and 
be given the IPSU number as their single point of contact for the IRS. 
They will not need to deal with the different functions individually. 
If they have questions about the status of their account, they will be 
able to call the IPSU.
    Question. Is a 6-month wait for resolution of tax refund fraud 
cases acceptable to the IRS?
    Answer. A 6-month wait is not acceptable. However, identity theft 
cases are complex, often encompassing multiple issues and tax years. 
Identity theft case work is growing rapidly. During fiscal year 2012, 
the number of cases received had grown to over 600,000. However, a 
number of initiatives put in place to frustrate identity thieves, and 
the application of additional resources, have reversed a multi-year 
trend and calendar year 2013 receipts are similar to calendar year 2012 
receipts.
    The IRS strives to set realistic taxpayer expectations to deal with 
identity theft issues. We continually review our policies and 
procedures to ensure we are doing everything possible to minimize the 
incidence of identity theft, help victims, and investigate 
perpetrators. Once a legitimate taxpayer's account is identified, 
marked, adjusted, and closed, it is the IRS's intent to ensure that 
future filings of returns by these taxpayers are protected from further 
harm or burden. Business rules are implemented to identify unique 
characteristics of fraudulent returns submitted by identity thieves, 
and used as a basis for rejecting them if these characteristics 
surface.
    The IRS is dedicating a significant number of additional resources 
to identity theft. We have also implemented new procedures to resolve 
cases more efficiently and accurately, as well as found additional ways 
to reduce customer burden. New procedures are in place to identify the 
legitimate taxpayer's return, correct taxpayer account data and 
initiate refunds to identity theft victims more quickly. One such 
procedure added the use of Electronic Fraud Detection System data as a 
tool to determine the true SSN owner, thus eliminating numerous 
research steps and improving efficiencies. Additionally, new 
programming to identify returns with identity theft documentation 
attached was implemented. Cases are now generated directly to the 
specialized groups, reducing the amount of cases that pass through 
several areas.
    Combating identity theft and providing victim assistance are top 
priorities of the IRS. We are committed to helping the victims of 
identity theft and, while more work remains, we have made significant 
progress. Our endeavors have resulted in increased closures and 
downward-trending inventories. Although we cannot stop all identity 
theft, our recent efforts provide a solid foundation upon which we will 
continue to build and improve.
    Question. What additional resources--both technology and human 
capital--does the IRS need to expedite case resolution for innocent 
victims who often wait months for their rightful refunds?
    Answer. The IRS continues its work in this area to identify false 
tax returns and prevent fraudulent refunds from being issued. The IRS 
has and continues to request additional funding through the budgetary 
process for additional staffing and advanced technologies to support 
continued efforts to handle the increased workload associated with 
identity theft and refund fraud. In the fiscal year 2014 budget 
request, there is a request for $101 million to support IRS efforts to 
prevent identity theft-related refund fraud, protect taxpayers' 
identities, assist victims of identity theft, and enhance the revenue 
protection strategy implemented in fiscal year 2013. The increase in 
funding will support the development and implementation of technology 
enhancements to identify noncompliant returns before refunds are 
issued, manage and track workload and case results, send notification 
letters to taxpayers, and allow third-party data to be used earlier in 
the filing season. Examples of technology solutions under development 
that would to help combat ID theft include:
  --Development of e-File authentication technology to authenticate 
        taxpayer identities through the issuance and maintenance of 
        persistent credentials, as well as authenticate each tax return 
        at the time of submission against these credentials, and
  --Development of the Return Review Program (RRP) to screen 
        questionable returns and improve detection, resolution, and 
        prevention of identity theft and refund fraud.
    Question. What is your reaction to concerns of the National 
Taxpayer Advocate about IRS's decision to decentralize and replace the 
``Identity Protection Specialized Unit'' that IRS set up in 2008 to 
provide a one-stop shop for victims of identity theft?
    Answer. The IRS's streamlined approach allows the IRS point of 
contact to be a person knowledgeable of the specific identity theft 
issue at hand and authorized to execute the actions necessary to 
resolve the problem. Accordingly, we believe it is a 
mischaracterization to state that the IRS is heading toward a 
decentralized approach in light of how the specialized groups function. 
The specialization process allows the IRS to utilize the unique skill 
sets and experience of dedicated employees, who work in strict 
accordance with service-wide policy, procedures, and processing 
timeframes that instill consistency and efficiency. Specialization not 
only provides a single point of contact for the taxpayer, but it also 
affords the taxpayer with the expertise needed to handle all aspects of 
their case. While we continue to explore ways to improve service to 
victims of identity theft, the Identity Protection Specialized Unit 
(IPSU) will continue to provide taxpayers with a single point of 
contact at the IRS via a special toll free telephone line, just as it 
has since its inception in October 2008.
                          affordable care act
    Question. The IRS has significant responsibilities in implementing 
and administering the Affordable Care Act (ACA), including taxpayer 
education and outreach, deliverance of tax credits, and development of 
new Information Technology (IT) infrastructure to support all of these 
areas.
    Has funding been a challenge that the IRS faces as it implements 
and administers the ACA? If so, what parts of implementation and 
administration have been most affected?
    Answer. Recent budget cuts and sequestration have been a challenge 
in funding all IRS functions. Prior to fiscal year 2013, the HHS Health 
Insurance Reform Implementation Fund (HIRIF) account funded IRS 
staffing and information technology development costs necessary to 
implement ACA. Without additional appropriations or HIRIF resources to 
continue the implementation of ACA in fiscal year 2013, the IRS has 
absorbed the costs of the staff, previously funded by HIRIF, into base 
resources and reprioritized current technology requirements to ensure 
IT resources are available to cover the costs for ACA IT needs. 
Although the IRS has absorbed the staff in the base for fiscal year 
2013, this comes at the expense of not being able to fill behind 
attrition in critical IRS service, enforcement, and operations support 
programs. Additional user fees and other funds appropriated in fiscal 
year 2012 and available for 2 years (through fiscal year 2013) are also 
being used to continue this work. As a result of these actions all 
critical activities needed for the successful implementation and 
administration of the ACA have been funded to date, but at the expense 
of other programs resulting in the deterioration of taxpayer service 
availability and enforcement revenue, among other effects.
    Question. How does your fiscal year 2014 budget request support 
successful fulfillment of the IRS's responsibilities in implementing 
and administering the ACA?
    Answer. While the IRS has continued ACA implementation for fiscal 
year 2013 through a combination of absorbing personnel costs within 
base resources combined with the use of user fees and other funds that 
expire in fiscal year 2013, this is not a long-term funding solution. 
The fiscal year 2014 budget request will ensure that the IRS has the 
resources to continue implementing ACA--not only for the critical IT 
development but to address the anticipated increase for customer 
service through the call centers. Should IRS not receive the requested 
funding, it will be difficult to sustain the on-going requirements for 
fiscal year 2014 and beyond without degrading our IT infrastructure and 
eroding performance in service and enforcement programs.
    Question. If the IRS fails to receive the funding it has requested, 
how will this affect its ability to implement the ACA as well as to 
meet its other responsibilities?
    Answer. The IRS is constantly balancing the need to implement the 
laws on the books, provide services to taxpayers, follow up on 
potential non-compliance, and make long-term investments in information 
technology and workforce development. In general, for any given fiscal 
year, the IRS faces challenges when it does not receive the requested 
funding. For example, the IRS requested $360 million and 858 full-time 
equivalents in fiscal year 2013 for ACA implementation, but in the 
absence of this funding we have implemented short term solutions to 
deliver our fiscal year 2013 requirements, including determining what 
we could absorb within our reduced base funding.
    Question. How is the IRS presently handling the immediate and time-
sensitive IT development projects to ensure that functioning systems 
are in place for the premium assistance tax credit and other ACA 
features that take effect in 2014?
    Answer. Upon enactment, the IRS took steps to implement governance 
structures and processes that provide transparency and oversight across 
all elements necessary to timely implement the tax provisions of ACA. 
As part of that structure, the IRS's IT organization established a 
Program Management Office (PMO) solely focused on implementation of the 
IT components of the ACA. Working in partnership with counsel and the 
IRS operational business units' leadership, these governance 
structures, supplemented with regular status and risks review meetings, 
independent reviews and other management disciplines, provide the IRS 
with visibility into the implementation status of the ACA program. 
These processes enable resolution of issues and give the IRS high 
confidence in its ability to timely deliver required applications.
    In October 2013, the IRS will have systems in place to support the 
Marketplace Exchange Open Enrollment. We have made significant progress 
in this regard and the bulk of our systems development work is 
complete. To ensure the systems function as planned, in addition to 
internal testing, we are currently testing with the Health and Human 
Services Department's Centers for Medicare and Medicaid Services (HHS/
CMS). We are also developing management processes that will be in place 
to ensure consistent support once the systems are operational.
    We are preparing systems to receive periodic data (via the Data 
Services Hub being implemented by HHS/CMS) from the Exchanges. 
Implementation of this phase of development will begin in calendar year 
2014. We are also preparing systems to incorporate the reconciliation 
of the premium tax credit into the individual tax filing process, which 
will begin with the 2015 tax filing season. In addition, we are 
developing the business requirements to support compliance processes 
associated with claimed credits. Implementation of this phase will 
begin with the 2015 filing season.
                       taxpayer customer service
    Question. Providing access to quality customer service helps 
taxpayers understand their obligations so they can pay the right amount 
on time. Staffing shortages due to budget cuts in recent years coupled 
with increased call volumes have adversely impacted the IRS's response 
to taxpayers' phone calls. The level of service has been severely 
declining. In 2004, the IRS answered 87 percent of calls seeking to 
reach a phone assister, with an average wait time of 2\1/2\ minutes. In 
2012, the IRS answered just 68 percent of its calls, and those who got 
through spent an average of nearly 17 minutes waiting on hold.
    How does the IRS define an ``acceptable'' level of service for 
taxpayers calling for assistance on the toll-free phones?
    Will the level of funding in the fiscal year 2014 request help 
attain an acceptable level of service?
    What factors could impede the IRS from attaining the level of 
service goal for 2014?
    What setbacks might the IRS experience if resources in 2014 fall 
short of the request?
    What steps is the IRS taking to be prepared for a potential surge 
in the call volume relating to taxpayer questions about the Affordable 
Care Act?
    Answer. The fiscal year 2014 budget request reflects the increased 
call volume expected when several significant tax law provisions 
related to the ACA become effective in 2014. The IRS expects to answer 
approximately 7.7 million ACA-related telephone calls in 2014. 
Approximately 4.7 million calls are expected to be answered using 
automated services with about 3.0 million calls answered by telephone 
customer service representatives. With the requested funding in the 
fiscal year 2014 budget, the IRS projects a 79 percent level of service
    Question. What lessons were learned from IRS experience when the 
call volume spiked in 2008 in response to the economic stimulus 
payments and the level of service dipped to 53 percent?
    Answer. The IRS sets the Level of Service (LOS) target each year 
based on the projected telephone demand and the budgetary resources 
available. Our objective is to provide taxpayers with accurate 
telephone services while managing demand. This is achieved by:
  --Improving IRS contact center efficiency;
  --Enhancing the workforce customer assistance tools; and
  --Reducing toll-free telephone demand by providing issue resolution 
        alternative channels.
    We monitor our toll-free performance to provide the most effective 
taxpayer service possible with allocated resources. The LOS goal for 
fiscal year 2013 is 70 percent, which is 3 percent higher than fiscal 
year 2012. The fiscal year 2014 budget request includes funding 
necessary to improve our toll-free customer service, and to attain a 79 
percent LOS (based on projections prior to sequestration budget 
impacts). We also track the number of callers who hang up while waiting 
(i.e., abandon) relatively early in the call. When adjusted for early 
abandons, our toll-free LOS is almost ten percentage points higher than 
our standard LOS measure.
    We actively work to improve our live taxpayer service as well as 
supplement with 24 x 7 automated services. The Where's My Refund (WMR) 
web application was enhanced with a status tracker in 2013. WMR now 
shows taxpayers how their refund is progressing through three stages: 
return received, refund approved, and refund sent. We also deployed a 
similar status tracker for amended returns (Form 1040X) in March 2013.
    The availability of enhanced online tools and automated services 
has impacted the type and the complexity of the toll-free calls. 
Overall, the percent of complex, account-related calls has increased 
and the percent of brief tax law calls has decreased. This changing 
call mix means that our Customer Service Representatives (CSR) are 
answering more complex calls which increases the average handle time 
(AHT) per call. In 2004 the AHT was 584 seconds (9.73 minutes). The AHT 
has steadily increased since, and by 2012, AHT had risen to 748 seconds 
(12.76 minutes). So far, fiscal year 2013 AHT is 676 seconds (11.26 
minutes).
    Unforeseen events can increase telephone demand such as the 2008 
stimulus legislation. From fiscal year 2004 through fiscal year 2007, 
our telephone demand was steady. During this period the IRS achieved a 
CSR LOS at or above 82 percent. The stimulus legislation prompted an 
unprecedented number of taxpayers to call the IRS which had a 
significant negative impact on fiscal year 2008 CSR LOS. Demand for 
toll-free service did not return to pre-stimulus levels. Since fiscal 
year 2009, demand for telephone service has averaged about 18 percent 
above fiscal year 2007 levels.
    To meet the taxpayer toll-free demand associated with the 
Affordable Care Act (ACA), the IRS developed detailed call volume and 
inventory projections, along with the anticipated staffing needs. 
Through the formal budget initiative process, we are requesting 
additional resources to meet the projected ACA telephone demand. In 
April 2013, we deployed a toll-free option where customers can get pre-
recorded ACA information. If demand warrants, we are prepared to 
activate special announcements to redirect callers to ACA information 
on IRS.gov and HHS.gov websites. We continually update ACA information 
on the IRS.gov to ensure taxpayers have the most current information.
                    overseas tax evasion initiatives
    Question. U.S. taxpayers can hold offshore accounts for legitimate 
reasons, but they must comply with their tax obligations. Catching 
overseas tax dodgers is a top priority of the IRS to make sure honest 
taxpayers are not footing the bill for those hiding assets offshore. 
The IRS has operated some successful offshore compliance programs, such 
as the Offshore Voluntary Disclosure Program, that have recouped $5.5 
billion in back taxes, penalties, and interest and provided an 
opportunity for 39,000 tax cheats to come clean. The 2014 funding 
request to support overseas tax evasion initiatives is conditioned on 
securing funds that would exceed the available budget cap. Without 2014 
funding, the IRS will lack critical resources to meet overseas tax 
collection priorities.
    What have been the benefits for the IRS in conducting the various 
Overseas Voluntary Disclosure Programs?
    Answer. Global tax enforcement is a top priority at IRS, and we 
have made significant progress on multiple fronts, including 
groundbreaking international tax agreements and increased cooperation 
with other governments. In addition, the IRS and the Justice Department 
have increased efforts involving criminal investigation of 
international tax evasion. This combination of efforts helped support 
the 2009 Offshore Voluntary Disclosure Program, the 2011 Offshore 
Voluntary Disclosure Initiative (OVDI), and the ongoing 2012 Offshore 
Voluntary Disclosure Program . The goal of these programs is to get 
individuals back into the U.S. tax system and to turn the tide against 
offshore tax evasion.
    The Offshore Voluntary Disclosure Programs have:
  --Given U.S. taxpayers with undisclosed assets or income offshore an 
        opportunity to become compliant with the U.S. tax system, pay 
        their fair share and avoid potential criminal charges;
  --Been effective in encouraging taxpayers to disclose unreported 
        offshore income and so far have resulted in the collection of 
        more than $5.5 billion in back taxes, interest, and penalties 
        from approximately 38,000 participants;
  --Provided the IRS with a wealth of information on various banks and 
        advisors assisting people with offshore tax evasion, which the 
        IRS is using to continue its international enforcement efforts.
    Question. How is the IRS addressing the concerns raised by GAO that 
there are persons outside of these programs now declaring overseas 
assets but escaping any penalties?
    Answer. The IRS is taking several steps, as described below, to 
address the concerns that persons outside the OVDI programs are 
reporting existing foreign accounts on the Form 1040, Schedule B, or on 
FBARs for the first time and circumventing some of the taxes, 
interests, and penalties that would otherwise be owed.
  --The Large Business and International (LB&I) Director, International 
        Individual Compliance received the quiet disclosure data 
        gathered through the GAO report. This data will be reviewed and 
        analyzed, and appropriate action will be taken to address 
        identified noncompliance.
  --The IRS is also analyzing filed Forms 8938, Statement of Specified 
        Foreign Financial Assets, to identify specific characteristics 
        of the filing population and to assess filing behaviors 
        indicating potential compliance issues. This analysis includes 
        a statistical analysis of filers (e.g., income, age, filing 
        status) and several measures of year-to-year filing behavior 
        (e.g., taxable income changes, FBAR filing history, and 
        Schedule B reporting patterns). This data will also be 
        evaluated against other indicators of compliance risk.
  --In addition, the Director, International Individual Compliance will 
        work with the IRS's Large Business and International Division 
        (LB&I) research personnel to explore means of analyzing Form 
        1040, Schedule B, and FBAR filings to identify first-time FBAR 
        filers who may be improperly reporting offshore accounts as new 
        accounts. The IRS will take the necessary action to address any 
        identified noncompliance.
    Question. How will the IRS devote resources to the overseas 
initiatives in 2014 if the requested funds are not appropriated?
    Answer. Offshore compliance will remain a key operational priority 
for IRS in fiscal year 2014. Our recent efforts have resulted in 
additional leads which we need to pursue. The proposed funding for 
overseas tax non-compliance is critical for pursuing these leads and in 
the development of additional enforcement activities such as John Doe 
Summons on facilitators and compliance actions on those taxpayers and 
advisors that have not or will not come forward voluntarily. If the 
requested funds are not appropriated, however, some of our offshore 
compliance efforts would be scaled back and IRS efforts to implement 
the Foreign Account Tax Compliance Act would be hindered.
    Question. Can you confirm that--as presented in your 2014 budget 
justification--the requested funds for overseas compliance initiatives 
depend on securing resources above the statutory budget cap?
    Answer. The fiscal year 2014 President's Budget includes the 
initiative Implement Foreign Account Tax Compliance Act (FATCA) that is 
funded within the statutory budget cap and the initiative Address 
International and Offshore Compliance Issues that is dependent on 
securing resources above the statutory budget cap through a program 
integrity cap adjustment. The cap adjustment and associated funding 
request are premised on the expectation that resources provided above 
the cap will return significantly more to the Treasury in the form of 
increased tax revenue than the activities will cost, thereby generating 
over $30 billion in net savings over 10 years.
    The IRS continues to experience an increase in the number of 
international assistance requests from special agents in the field and 
our international law enforcement partners worldwide. Without the 
requested resources, the efficiency, effectiveness, and timeliness of 
the support we provide could be affected as we strive to fulfill a key 
component of our mission, combating offshore tax evasion and 
international money laundering. In addition, we will have to repurpose 
resources from other critical program areas to address this shortfall. 
Recognizing that international assistance is a priority, the 
repurposing of resources to this program could result in an increase in 
cycle time and/or a decrease in completions and initiations in other 
program areas. The IRS is committed to its goal of pursuing 
international tax evasion. However, without the requested funding, 
other mission areas will be stretched thin, which could negatively 
impact our overall efforts in support of the IRS' Strategic Plan.
    The OVDI continues to improve taxpayer compliance as taxpayers are 
still applying to the program and working with the IRS to pay back 
taxes, penalties, and interest. However, we are now committing 
significant full-time resources to manage this program at the expense 
of other program areas. Additional funding would allow the Service to 
fill behind these OVDI resources to more effectively handle ongoing 
cases and identify new criminal investigations and emerging compliance 
issues.
                              the tax gap
    Question. The ``tax gap'' is the difference between the estimated 
amount taxpayers owe and the amount voluntarily and timely paid. An 
estimated $450 billion of Federal taxes are unpaid each year, for a 
noncompliance rate of nearly 17 percent. Collecting unpaid taxes is an 
enormous untapped source of Federal revenue that could fund many worthy 
unmet national needs. The bulk of the tax gap is attributable to 
underreporting of tax liability. One important way to tackle the 
problem of underreporting is for the IRS to intensify its work to 
obtain and match third-party information.
    What are the components of the IRS's strategy to narrow the tax 
gap?
    Answer. The tax gap stems from both intentional tax avoidance and 
unintentional mistakes that arise from a complex tax code. For that 
reason, IRS maintains a comprehensive strategy to increase tax 
compliance through a combination of enforcement activities coupled with 
third-party reporting requirements and programs to educate taxpayers 
about their tax obligations and make it easier to fulfill their filing 
and payment requirements. IRS efforts to address the tax gap and 
improve tax compliance follow four guiding principles:
  --Both unintentional taxpayer errors and intentional taxpayer evasion 
        should be addressed;
  --Sources of noncompliance should be targeted with specificity;
  --Enforcement activities should be combined with a commitment to 
        taxpayer service; and
  --Policy positions and compliance proposals should be sensitive to 
        taxpayer rights and maintain an appropriate balance between 
        enforcement activity and imposition of taxpayer burden.
    Achieving greater voluntary compliance and shrinking the tax gap 
involves a comprehensive, integrated multi-year strategy. Along with 
increased enforcement activities, components of this strategy also 
include: reducing opportunities for tax evasion, expanding compliance 
research, improving information technology, enhancing taxpayer service, 
reforming and simplifying the tax law and coordinating with partners 
and stakeholders, such as States and foreign governments, to share 
compliance strategies. Recent efforts include:
  --Launching a multi-faceted return preparer strategy;
  --Improving risk-based audit selection for business tax audits;
  --Establishing a voluntary worker classification settlement program;
  --Implementing new basis reporting requirements for financial 
        securities;
  --Instituting merchant card reporting requirements that provide 
        third-party data on business receipts for the first time;
  --Addressing offshore tax avoidance;
  --Requiring disclosure of uncertain tax positions for certain large 
        corporations;
  --Significantly augmenting our efforts to detect and prevent refund 
        fraud, including identity theft schemes;
  --Addressing improper EITC claims through outreach and enforcement;
  --Improving our ability to identify nonfilers and underreporters; and
  --Investing in research to identify compliance risks and improve 
        compliance.
    The IRS has published more details about this strategy on the web. 
You may find it on: http://www.irs.gov/pub/newsroom/tax_gap_report_-
final_version.pdf
    Question. How are appropriated funds in 2013 being channeled to 
address the tax gap?
    Answer. Increasing the rate of voluntary compliance is the most 
cost-effective way to reduce the tax gap. The IRS remains committed to 
improving voluntary compliance and reducing the tax gap through the 
balance of taxpayer service and enforcement programs along with 
operations support activities. Approximately 64 percent of IRS 
appropriated funds are allocated to the Taxpayer Services and 
Enforcement accounts and the remaining 36 percent are allocated to the 
Operations Support and Business Systems Modernization accounts, which 
provides critical infrastructure and systems investments and support 
for the IRS's core activities. Over the last several years IRS has 
focused on areas that promote voluntary compliance including increasing 
the amount of information and services available to taxpayers through 
online and social media.
    Question. How will funds requested for 2014 be devoted to increased 
information reporting?
    Answer. The fiscal year 2014 President's Budget requests funding to 
implement new information reporting requirements resulting from 
enactment of recent legislation. This includes resources in the:
  --Implement Foreign Account Tax Compliance Act (FATCA) initiative to 
        improve offshore compliance by implementing new information 
        reporting enacted in FATCA that was included in the Hiring 
        Incentives to Restore Employment Act of 2010 (Public Law 111-
        147);
  --Implement Merchant Card and Basis Matching initiative to allow the 
        IRS to take advantage of the reporting provisions of the 
        merchant card and third party reimbursements enacted in the 
        Housing and Economic Recovery Act of 2008 (Public Law 110-289) 
        and the basis reporting on security sales enacted in the 
        Emergency Economic Stabilization Act of 2008 (Public Law 110-
        343); and
  --Implement IT changes to Deliver Tax Credits and Other Requirements 
        initiative to implement the new information reporting 
        requirements for Federal and State exchanges, certain large 
        employers, and insurance issuers contained in the ACA (Public 
        Law 111-148).
    Question. To what extent is the IRS's ability to require better or 
more robust information reporting hampered by the lack of legislative 
authority?
    Answer. All information reporting requirements need to be 
authorized by law. The IRS implements whatever requirements are imposed 
by the law through specific regulations, forms, and procedures. From 
time to time IRS works with Treasury's Office of Tax Policy to propose 
new information reporting requirements for consideration by Congress. 
This collaboration resulted recently in new information reporting 
requirements related to merchant card transactions and the cost basis 
on the sale of securities.
    Question. Absent enactment of legislative reform, are there any 
purely administrative actions that the IRS can pursue that will yield 
additional revenue?
    Answer. Administrative actions would involve trade-offs. For 
example:
  --Absent legislative reform, it would be possible to yield additional 
        revenue by expanding current IRS activities, but that would 
        require increasing the IRS budget. It is clear, however, that 
        increases in the budget would result in revenue gains that far 
        exceed the budget increase.
  --In the absence of additional investments, it would be possible to 
        reallocate some existing resources subject to various statutory 
        constraints (which is somewhat constrained by separate 
        legislated appropriations). However, given that the primary 
        impact of IRS activities is to promote voluntary compliance, 
        and that changes in voluntary compliance behavior cannot be 
        observed in isolation, estimating the magnitudes of these 
        effects is still a matter of active research.
  --Finally, IRS is continually pursuing new efficiencies, enabling us 
        to do the same things with fewer resources. But these generally 
        rely on emerging technologies that require up-front 
        investments, and are often dependent on changing taxpayer 
        preferences, which typically happens gradually.
                effects of budget reductions/constraints
    Question. In fiscal year 2013, the IRS is operating with a budget 
that is almost $1 billion below the fiscal year 2011 enacted level, 
and, as a result, the IRS has 8,000 fewer full-time employees than just 
2 years ago.
    To what extent are reductions to IRS's budget limiting its 
modernization initiative, and how has IRS's ability to deliver key 
services to taxpayers been affected?
    Answer. The IRS has gained efficiencies in the IT organization by 
adopting the Information Technology Infrastructure Library (ITIL) 
approach to IT service management, which includes best practices drawn 
from public and private IT organizations internationally. The IRS has 
also matured management control processes in its IT applications 
development organization by applying the respected Capability Maturity 
Model Integration (CMMI) methodology. With several years of budget 
reductions, the efficiencies gained by applying these standards across 
our IT organization afforded IT support of the annual delivery of 
filing season and other application changes, while also taking in new 
work such as the implementation of new legislation, including the 
Affordable Care Act.
    However, these ongoing budget reductions and reduced staffing 
levels are unsustainable. The IRS is taking action to slow its 
modernization efforts, which will delay business and taxpayer benefits 
and influence the overall level of service that the IRS could provide. 
Delays can be expected in the following project areas:
  --Development of the Customer Service Data Engine (CADE2). The IRS is 
        experiencing limitations in moving forward with Transition 
        State 2 (TS 2) in building infrastructure, developing systems, 
        and delivering planned functionality. Specifically, TS 2 
        prototype work is being slowed, which is affecting efforts such 
        as: identifying new mechanisms by which data will be delivered 
        downstream, deciding how system performance is affected by 
        encrypting data between two applications and developing 
        capabilities to ensure CADE 2 generates the same business 
        results that the existing core business systems generate. This 
        will further delay delivery of planned functionality that will 
        offer business benefits such as enhanced protection from fraud 
        and identity theft, improved accuracy and consistency of 
        service, system changes to address the unpaid assessments 
        relating to the financial material weakness, and enhance 
        maintainability, traceability, and flexibility of our core tax 
        processing systems.
  --Ongoing development of the Modernized e-File project, which serves 
        as the primary external point of interaction for all electronic 
        tax filings. The benefit is electronic access to tax return 
        data, which significantly reduces the handling/mailing of paper 
        returns and increases service to the taxpayer. Delays in this 
        project result in the following:
    --Delays the IRS's Customer Service Representatives' (CSRs) ability 
            to provide faster responses to taxpayers.
    --Delays the provision of online capabilities that will enhance 
            compliance and enforcement activities by allowing access to 
            taxpayer data in a timely and accurate manner.
    --Delays retirement of the legacy Electronic Management System 
            (EMS), which would reduce future operations and maintenance 
            budgets. (The EMS cannot be retired until MeF can support 
            all forms.)
  --Delay in infrastructure replacement. Taxpayers rely on the IRS's 
        information technology infrastructure to ensure reliable 
        satisfaction of their tax liabilities and quick resolution of 
        any issues that might arise as they meet their tax obligations. 
        IRS employees rely on the information technology infrastructure 
        as they work to ensure a high level of service to both 
        taxpayers and the Federal Government. The core technology 
        systems that the IRS uses to manage taxpayer data and 
        facilitate their service and enforcement work were 
        groundbreaking when first created. However, they have not kept 
        pace with rapid innovations in technology and the explosion in 
        online interaction. This limits the new capabilities the IRS 
        can deliver to its employees and taxpayers.
  --Delay in development of the Return Review Program (RRP) program. 
        RRP is a system in development that will use leading-edge 
        technologies to advance IRS effectiveness in detecting, 
        addressing and preventing tax refund fraud, and protecting the 
        U.S. Treasury revenue. It will replace the legacy Electronic 
        Fraud Detection System (EFDS) built in the mid-1990s. The 
        entirely new RRP fraud framework is critical for IRS success in 
        tackling ever-evolving tax schemes in a sophisticated, scalable 
        and adaptable manner. Using massively parallel processing, the 
        system's capacity will promote speed, even during the peak of 
        tax filing season. This speed will serve taxpayers not only by 
        supporting fast refunds, but also by quickly recognizing 
        patterns and redirecting fraudulently filed returns. The 
        database query speed will be more than 10 times that of the 
        current EFDS system. Delay of RRP has a negative impact on 
        taxpayers, tax enforcement, and review protection.
    Question. Are there any further actions the IRS can take to help 
mitigate the negative effects of these budget cuts?
    Answer. As mentioned above, the IRS has managed through budget 
reductions for the past several years and the IT organization has taken 
steps to become leaner and more efficient. To cope with the budget and 
people constraints, the IRS is prioritizing IT deliverables in a manner 
that minimizes the effect on taxpayers; however, going forward it is 
expected that these constraints will show a decline in level of 
service. In addition, IT is exploring steps to reduce the year-to-year 
maintenance footprint such as fewer hours of internal help desk support 
and reduced maintenance service level contracts.
    Question. What program areas do you anticipate being most 
negatively affected by the reductions to the IRS base budget?
    Answer. We anticipate continued and significant degradation of 
several core functions, including: the level of service taxpayers 
receive when they interact with the IRS; enforcement programs and 
resulting revenue; and support levels for our IRS internal business and 
functional operating divisions. In addition, IRS will need to reduce 
the hardware and software replacement/refreshment activities on some of 
our key IT projects, which increases the operational risk. It will also 
need to consider discontinuation of enhancements/improvements of some 
applications for the IRS business operating divisions.
    Question. Which performance metrics may show a negative trend 
because of budget reductions/constraints?
    Answer. The IRS has maintained an exception only hiring freeze 
since December of 2010 that has resulted in a reduction of 8,000 full-
time employees. IRS can only sustain so much of a reduction before 
performance is impacted, and IRS expects that taxpayer service programs 
such as IRS telephone Level of Service and correspondence inventory 
metrics will suffer. In addition, enforcement program metrics such as 
individual and business audits and audit/examination coverage rates, 
Automated Underreporting contact closures, collection actions and 
appeals case closures will be impacted, all resulting in the likelihood 
of lost direct enforcement revenues.
                taxpayer service and compliance programs
    Question. I understand the IRS is currently making plans to address 
budget reductions resulting from sequestration. This will mean a 
reduction of approximately $689 million in discretionary funding.
    How will taxpayer service and compliance programs be affected?
    Which taxpayer services and compliance programs will be reduced?
    Can the IRS use transfer authority in any way to help absorb the 
reduction?
    Answer. Based on the nature of sequestration and the rescission, 
IRS applied the reduction equally across all IRS accounts meaning that 
every taxpayer service and compliance program was affected by the 
reductions. However, the actions IRS has taken since fiscal year 2011 
have helped the IRS manage within budget levels impacted by 
sequestration and other budget cuts. Furthermore, although the cut was 
across all programs, to help mitigate the impact on employees funded by 
different appropriations, the IRS fiscal year 2013 operating plan 
requested and received approval for the use of transfer authority. This 
transfer authority helped balance the impacts of the reductions and 
supported the plan for up to seven furlough days by every IRS employee.
                           budget control act
    Question. The President's budget requests that $411.9 million in 
IRS tax enforcement expenditures be exempted from the Budget Control 
Act (BCA) spending caps under a program integrity cap adjustment. But, 
as you know, the BCA does not allow for an IRS program integrity cap 
adjustment, which would allow IRS spending in excess of the BCA 
spending caps.
    If Congress fails to amend the Budget Control Act, and the IRS does 
not receive this $411.9 million in requested funding, how much of a 
deficit increase can we expect?
    Answer. The IRS estimates that the initiatives funded through a 
program integrity cap adjustment will reduce the deficit by generating 
$1.6 billion in additional annual enforcement revenue once the new 
hires reach the full performance level in fiscal year 2016. Over the 
10-year-budget window, the costs and savings associated with 
maintaining these initiatives and conducting new activities via the 
funds provided by the cap adjustment is estimated to generate $32.7 
billion in net deficit savings. If IRS does not receive funding for the 
program integrity cap adjustment initiatives, the result would be a 
missed opportunity to reduce the deficit.
              superstorm sandy disaster tax relief package
    Question. As a member of the Senate Appropriations Committee, I co-
authored the Superstorm Sandy emergency supplemental funding package 
that provided a total of $60.2 billion in disaster aid funding to 
Sandy-affected States. Unfortunately, the Senate and House have not yet 
passed legislation that would provide tax relief to Sandy victims. In 
the past, disaster-affected taxpayers have been granted a range of tax 
relief, including the ability to fully deduct disaster cleanup expenses 
and make penalty-free withdrawals from retirement accounts to pay for 
disaster recovery.
    By what date would a Sandy disaster tax relief package have to be 
passed and signed into law in order for the IRS to have sufficient time 
to prepare tax forms and appropriate guidance for taxpayers to file for 
relief on their 2013 income tax returns?
    Answer. Superstorm Sandy occurred in late October 2012 with 
disaster recovery activities continuing into 2013. Internal Revenue 
Code Sec. 7508A, ``Authority to postpone certain deadlines by reason of 
Presidentially declared disaster or terroristic or military actions,'' 
allowed the IRS to provide administrative tax relief to Superstorm 
Sandy victims as soon as Superstorm Sandy was designated as a 
Presidentially declared disaster. Taxpayers who sustained a casualty 
loss from Superstorm Sandy were eligible, under Internal Revenue Code 
Sec. 165(i), to claim their eligible loss on their prior year return 
allowing for a quicker tax refund. Information and frequently asked 
questions for disaster victims can be found on IRS.gov: http://
www.irs.gov/uac/Tax-Relief-in-Disaster-Situations.
    For tax year 2012, taxpayers who did not elect to claim their 
eligible loss on an amended 2011 tax return can claim their loss on 
their 2012 tax return. If legislation is passed providing additional 
relief for victims of Superstorm Sandy, taxpayers would either file an 
amended return to take advantage of the relief provisions or include 
them in their original 2012 year return if still on a valid extension.
    For tax year 2013, the IRS would incorporate any legislative 
changes into the applicable forms, instructions, and publications (if 
the legislation is enacted in time to make changes before the end of 
the calendar year). Regardless of when legislation is enacted, the IRS 
would issue guidance on IRS.gov to quickly reach the largest number of 
taxpayers.
                          capital gains taxes
    Question. The IRS has requested increased funding to help taxpayers 
understand and comply with a new requirement to report the cost basis 
used when calculating capital gains and losses on stock sales. This 
requirement is intended to help ensure that taxes owed are paid. In 
order to assist with compliance, investment firms are required to 
provide their clients and the IRS with cost basis information whenever 
shares of a stock purchased after January 1, 2011 are sold. However, 
most stocks sold are likely to have been purchased before 2011.
    What steps is the IRS taking to ensure that the correct amount of 
capital gains taxes owed on sales of stock purchased before 2011 are 
paid?
    Answer. For transactions that pertain to stock purchased before 
2011, the IRS continues to address underreporting of stock transactions 
through our traditional Compliance Programs. The IRS works with the 
taxpayer to verify the basis reported on the taxpayer's Schedule D, 
Capital Gains & Losses.
    Stockholders must retain purchase documentation along with any 
adjustments to cost basis during the time period they owned the stock. 
The IRS has provided information to assist taxpayers with the record-
keeping requirements for stock purchases, on how to address basis 
adjustments over the time the stock was held by the taxpayer, and how 
to report capital gains or losses of stock. For example, IRS 
Publication 17, Your Federal Income Tax Return (For Individuals); 
Publication 550, Investment Income and Expenses; and Publication 551, 
Basis of Assets, offer detailed guidance and instructions on these 
topics. Although brokerage firms are not required to report basis to 
IRS on stock purchased prior to 2011, they often do report the basis to 
their customers. This should also assist taxpayers in voluntarily 
reporting the gain/loss from stock transactions.
    The IRS is working to establish new examination selection criteria 
regarding Schedule D, Capital Gains & Losses, using the new cost basis 
information. The IRS continues to reach out to and partner with 
external stakeholders to gather and share information about how basis 
computation issues may affect brokerage firms, practitioners, and 
taxpayers. The result of these types of exchanges are shared with IRS/
Treasury Counsel and as appropriate, are posted to irs.gov to provide 
additional guidance to all interested parties. IRS utilizes a variety 
of e-Services tools to communicate this information and, where 
feasible, by having a presence at various professional meetings/
organizations or taxpayer outreach initiatives.
    Question. Because the cost basis of a stock is affected by 
corporate actions such as mergers, stock splits, and spin-offs, it can 
be difficult both for taxpayers and the IRS to determine cost basis 
even when the share purchase dates are known. Does the IRS have 
software that incorporates information about corporate actions and 
allows the IRS to easily determine whether a taxpayer has calculated 
cost basis correctly?
    Answer. No, the IRS does not have this type of software readily 
available. Form 8937, Report of Organizational Actions Affecting Basis 
of Securities, is a new form generally required if you are an issuer of 
a specified security that takes an organizational action that affects 
the basis of that security. For example, you must file Form 8937 if you 
make a nontaxable cash distribution to shareholders or if you make a 
nontaxable stock distribution to shareholders, including a stock split. 
This filing requirement applies to organizational actions after 2010 
and includes providing such information to each holder of record. The 
regulations do allow for optional reporting via the corporation's 
public web site as an alternative to filing/furnishing Form 8937. In 
that instance such information must remain on the entity's web site for 
10 years.
    Question. Would the IRS be willing to make available on its website 
a cost basis calculator to help taxpayers comply with the new 
requirements?
    Answer. The IRS would certainly consider this to help taxpayers 
comply with new requirements or otherwise reduce the burdens they face. 
However, due to such actions as mergers, stock splits and spin-offs, 
the development and maintenance of this type of program would be costly 
and challenging in the current environment where the IRS is facing a 
shrinking budget and staffing shortages.
                                 ______
                                 
                Question Submitted by Senator Tom Udall
    Question. In your answer to my question about the qualifications 
and profile of IRS employees you shared that they are reflective of the 
communities they are in. While I understand that IRS employees vary by 
region, please provide the following statics for the national average 
IRS employee:
  --Total years of government service;
  --Years of service in the IRS;
  --Age;
  --Years of education; and
  --Revenue collected.
    Answer. At the end of the last pay period of fiscal year 2012 (09/
22/2012) the IRS had 97,942 employees on the rolls in all functions. 
These 97,942 employees had the following demographic characteristics:
  --Average years of government service: 15.92
  --Average years of IRS service: 14.95
  --Average age: 48.08 years old
  --Average years of education: 14.34 (where 14 would be an associate's 
        degree and 16 would be a bachelor's degree).
    The IRS does not track or report enforcement revenue collected by 
employee, but reports on Return on Investment (ROI) based on the annual 
enforcement revenue collected and annual appropriated budget. For 
fiscal year 2012, the IRS enforcement revenue collected was $50.2 
billion. Based on the IRS budget of $11.87 billion, this level equates 
to an ROI of $4.25 for every $1 appropriated to the IRS.
                                 ______
                                 
              Questions Submitted by Senator Mike Johanns
    Question. In the hearing, you explained that you will have to use a 
use a ``lighter touch'' when it comes to enforcing the healthcare law's 
individual mandate, because that law specifies that normal tax 
collection rules will not apply. When will you have details about how 
the IRS intends to enforce the mandate? Do you believe that the way the 
law was written will make it difficult to enforce the mandate?
    Answer. Most Americans already have health insurance coverage 
either through their employer, a government program like Medicaid or 
TRICARE, or a family member. In addition, many people will qualify for 
one of the statutory exemptions provided in the individual coverage 
provision itself. Taxpayers will be able, on their annual Form 1040 
return, to indicate fact of coverage, indicate which exemption applies 
to them, or enter a shared responsibility payment amount on the return. 
As with many new provisions, we are focusing on educating taxpayers and 
building practical products related to the tax filing process. Our 
efforts also include both partnering with HHS to increase citizen 
awareness of opportunities to acquire affordable health insurance 
coverage and making the appropriate changes to IRS IT and business 
infrastructure.
    Most taxpayers are highly compliant and when they have tax 
liability they make a payment with their return. For those who do not 
remit payment related to the individual coverage provision, the IRS 
will communicate with the taxpayer and attempt to resolve the 
outstanding liability. Like any ``balance due'' remaining on an 
account, if a future return would result in a refund, normal rules will 
offset the existing balance due against the new refund. The provision 
is unique in that it contains a prohibition on the use of particular 
collection processes such as liens or levies.
    Question. How does implementation of the Affordable Care Act change 
the workforce needs at IRS? What percentage of the IRS workforce is now 
doing work related to implementation of the healthcare law? What does 
this percentage need to be in order for you to adequately enforce the 
law? And have you outlined the agency's workforce needs over the next 5 
and 10 years in relation to the healthcare law? If not, will you commit 
to doing so and sharing this information with us?
    Answer. For fiscal year 2012, the IRS had just under 700 full-time 
equivalent staff working on the tax law changes in the ACA. Our fiscal 
year 2013 budget requested 858 full-time equivalents, about 70 percent 
of which is for IT implementation and program management. This 
represents less than 1 percent of the IRS's total workforce. In fiscal 
year 2014, the IRS will continue supporting the ACA by building new 
systems and modifying established IRS systems and processes. In 
addition, the IRS expects a significant increase in demand for customer 
service through telephones and paper correspondence. The IRS 
anticipates additional needs over the next few years as ACA provisions 
are phased in through 2016.
    Question. There is broad concern that it is hard to capture the 
true cost of the Affordable Care Act. For example, the President's 
budget proposes $440 million for the Affordable Care Act in the fiscal 
year 2014 budget. The overall operating plan for IRS for fiscal year 
2013 describes $75 million in transfers from the Enforcement account to 
the Taxpayer Service account ($13 million) and the Operations Support 
account ($62 million). Are these transfers related to implementation of 
the Affordable Care Act? Is the IRS yet able to provide us with a plan 
on how it intends spend money to implement the Affordable Care Act in 
fiscal year 2013? Do you intend to use additional user fees, transfers 
from other accounts or other unobligated funds available to continue 
this work?
    Answer. The ``up to'' $75 million of transfer authority requested 
in the fiscal year 2013 Operating Plan is to enable the IRS to minimize 
the impact of sequestration on IRS employees by providing the IRS the 
flexibility to manage resources and balance the number of furlough days 
evenly across all appropriations. This imbalance, which is due 
primarily to the difference in the number and cost of FTE in each 
account as well as the large amount of fixed costs (rent and IT 
infrastructure) in operations support, is not directly related to 
implementation of the Affordable Care Act. Without additional resources 
in fiscal year 2013, the IRS has absorbed the staff previously funded 
by resources from the Health and Human Services Department's (HHS) 
Health Insurance Reform Implementation Fund (HIRIF) account. Additional 
user fees and two-year funds authorized in fiscal year 2013 are also 
being used to continue this work.
    Question. On a related note, how does the IRS plan to implement the 
Affordable Care Act if additional funding is not received in fiscal 
year 2014 and beyond? How will you prioritize your long list of 
responsibilities? Will you have to choose between enforcing the law's 
penalties and delivering customer service as the Inspector General 
mentioned in the hearing?
    Answer. The fiscal year 2014 budget requests $440 million for the 
IRS to continue implementing the Affordable Care Act. The majority of 
this funding covers the staffing and IT costs previously funded by 
HHS's Health Insurance Reform Implementation Fund (HIRIF). Although IRS 
has absorbed the staff in the base for fiscal year 2013, this comes at 
a cost of not being able to fill behind attrition in other critical IRS 
service, enforcement and operations support programs. Additionally, 
fiscal year 2012 two-year funds that expire in fiscal year 2013 will 
not be available in fiscal year 2014 and user fee balances cannot 
sustain the on-going requirements for fiscal year 2014 and beyond--
especially with the increased staffing requirements in taxpayer service 
to address the projected growth in demand resulting from individuals, 
businesses and third parties affected by the implementation of the 
Affordable Care Act--without significantly degrading performance in 
service and enforcement programs.
    Question. How much of an impact has the cost of implementing 
Affordable Care Act had on the IRS budget and the need for furloughs in 
fiscal year 2013?
    Answer. Due to the one time availability of expiring fiscal year 
2012 IT funds and user fees, the IRS was able to mitigate a portion of 
the impact of not receiving the funding requested to implement the 
Affordable Care Act in fiscal year 2013. Although the IRS also absorbed 
the cost of staff working on ACA through savings resulting from 
unfilled attrition in other IRS program areas, while this did impact 
the IRS's ability to fill behind critical vacancies, it did not have a 
significant impact on the need to furlough under sequestration.
    Question. I've heard a number of concerns about the information 
technology systems IRS must quickly design and implement to carry out 
key provisions of the law. What progress have you made on this large 
and complicated network of systems and when do you expect the various 
components to be complete?
    Answer. There are over 45 tax-related provisions in the 
legislation. Many of these involve new technology systems and/or 
modifications to existing operational systems and infrastructure. While 
the IRS is currently preparing for implementation and administration of 
the provisions that will become effective in 2014, it is important to 
note that several tax-related provisions have already gone into effect 
and have been successfully supported by information technology. Some of 
those implemented in 2010 include: Small Business Health Care Tax 
Credit, Qualifying Therapeutic Discovery Project Credit, Excise Tax on 
Indoor Tanning Services, and Adoption Credit Expansion. Charitable 
Hospital Reporting and the Branded Prescription Drug Industry Fee were 
implemented in 2011. Each of these required updates in 2012 and 2013.
    In October 2013, the IRS will have systems in place to support the 
Marketplace Exchange Open Enrollment. When an individual seeks to 
purchase insurance through a Marketplace and seeks financial 
assistance, the Marketplace must determine what assistance, if any the 
applicant may qualify for. To make that determination, the Marketplace 
will request Federal taxpayer data from us, and we will provide, for 
each applicant, some limited tax data from the applicant's most 
recently filed Federal income tax return. The IRS is also responsible 
for providing a computation service if the Marketplace determines that 
the applicant is eligible for and interested in, advance payments of 
the premium tax credit, which are sent to the individual's insurance 
company. Without identifying the applicant, the Marketplace will submit 
a few data elements, including income and family size, for the IRS 
computational services through the HHS data hub, and receive back a 
single figure. The figure represents the maximum advance premium tax 
credit resulting from those inputs. We have made significant progress 
in this regard and the bulk of our systems development work is 
complete. To ensure the systems function as planned, in addition to 
internal testing, we are currently testing with HHS/CMS. We are also 
developing management processes that will be in place to ensure 
consistent support once the systems are operational.
    We are preparing systems to receive periodic data (via the Data 
Services Hub being implemented by HHS/CMS) from the Exchanges. 
Implementation of this phase of development will begin in early 
calendar year 2014. We are also preparing systems to incorporate the 
reconciliation of the premium tax credit into the individual tax filing 
process, which will begin with the 2015 tax filing season. In addition, 
we are developing the business requirements to support compliance 
processes associated with claimed credits. Implementation of this phase 
will begin with the 2015 filing season.
    Question. The IRS developed a definition of ``preventive care'' 
that has applied to Health Savings Accounts (HSA) since their creation 
in 2003. The Affordable Care Act created a new definition of 
``preventive care'' that is inconsistent with the IRS definition for 
HSA-qualified plans. Does the IRS plan to modify the definition of 
``preventive care'' for HSAs so that they are not disqualified from 
participating in the healthcare law due to this technical difference?
    Answer. The IRS released Notice 2013-57 on September 9 to address 
the issue raised in the question. The notice is linked on the IRS.gov 
webpage: http://www.irs.gov/pub/irs-drop/n-13-57.pdf.
                                 ______
                                 
     Questions Submitted to Hon. Jacob J. Lew and Steven T. Miller
               Questions Submitted by Senator Jerry Moran
    Question. Over the past year, the IRS has had a number of allegedly 
``inadvertent'' releases of protected, confidential taxpayer 
information. Most of these relate to the improper release of Schedule B 
of Form 990 listing donors to nonprofit organizations. The IRS made 
these improper releases of information about nonprofit groups in 
response to information requests from other groups that subsequently 
used this information to attack the organizations and their donors.
    EXAMPLE #1: In April of last year, the IRS improperly disclosed the 
Schedule B donor list on the Form 990 of the National Organization for 
Marriage, a 501(c)(4) issue group that advocates for traditional 
marriage between a man and a woman. While the Form 990 is publicly 
available, tax law and IRS regulations make clear that Schedule B donor 
list of the 990 is not to be released for (c)(3)s and (c)(4)s.
    EXAMPLE #2: Last December, the IRS turned over several applications 
for non-profit status that included pending applications for tax-exempt 
status from a number of 501(c)(4)s to the group Pro Publica. While 
applications for non-profit status are available to the public after an 
official exemption is granted, they are protected tax return 
information while the application is pending.
    As I understand it, publishing unauthorized tax returns or return 
information is a felony punishable by up to 5 years in prison or a fine 
of up to $5,000, or both. Despite this, Pro Publica published 
information from these pending applications that it should never have 
received. I have not been able to confirm that appropriate 
administrative or legal responses have been undertaken by the IRS and 
the Treasury.
    EXAMPLE #3: Earlier this year in another allegedly ``inadvertent'' 
disclosure the IRS released to a another group, one page of the 
Schedule B showing donors to a 501(c)(4) affiliated with the Republican 
Governors Association.
    These incidents are alarming because they show a breakdown in the 
safeguards surrounding confidential taxpayer information that has yet 
to be addressed.
    I am concerned about the lack of progress on the parts of the IRS, 
the Treasury Department and the Justice Department in pursuing the 
apparent breakdown in taxpayer protection. We can all agree that tax 
return information should not be used for political gain, regardless of 
the political leanings of both the taxpayer and the tax administrator.
    Secretary Lew and Acting Commissioner Miller, can you confirm that 
there is an active effort on the parts of both the IRS and the 
Department of the Treasury to find the sources of these releases?
    Has the Department of the Treasury and the IRS identified other 
instances of Schedule B donor lists being improperly released to other 
parties? Please list any and all instances in your response.
    Will you both commit to conducting a full investigation to identify 
the IRS sources responsible for these improper disclosures of protected 
taxpayer information and ascertain for what purpose that information 
was released in the first place?
    Will you yourselves fully cooperate and direct your subordinates to 
fully cooperate with any such investigation?
    As part of this investigation, will you give this subcommittee 
access to all materials related to the means and motives surrounding 
these disclosures and specifically investigate fully whether these 
disclosures were the result of intentional acts by the employees 
involved?
    Will you submit the findings of this investigation to the Justice 
Department to take action and prosecute groups that knowingly published 
protected taxpayer information that they improperly received.
    What concrete steps will you take to ensure that these apparent 
lapses in the protection of taxpayer information cease?
    Will the Secretary and the Acting Commissioner confirm that they 
will not permit the IRS to politicize protected taxpayer information, 
regardless of the political nature of the information?
    Answer. In response to questions at recent hearings, the IRS has 
stated that it is aware that the Treasury Inspector General for Tax 
Administration (TIGTA) was looking into the matters described in the 
examples above. It is our understanding that TIGTA did not find 
evidence that the disclosures in example one or two were willful or 
intentional. We have no information as to the status of example three. 
It is our understanding that TIGTA did not find evidence that either 
disclosure was willful or intentional. We defer to TIGTA for any 
additional information regarding their investigations. The IRS has 
taken steps to modify its processes, where necessary, to protect 
against these types of inadvertent disclosures. The IRS is currently 
engaged in another process review to determine whether additional 
modifications from an efficiency or taxpayer data protection 
perspective can be made.
    Further, as a general matter, the IRS cannot comment on a specific 
release of taxpayer information nor on any specific investigation 
surrounding a potential release of taxpayer return information or other 
categories of protected information. The procedures regarding the 
release of such categories of taxpayer information are governed by the 
Freedom of Information Act (FOIA) process and the confidentiality and 
disclosure provisions of 26 U.S.C. 6103. The IRS is committed to 
following these procedures rigorously. It is absolutely inappropriate 
for the IRS to politicize protected taxpayer information, and we would 
see it as a violation of the IRS mission statement, which requires us 
to enforce the law with integrity and fairness to all.
    Employees are required and trained to report within one hour of 
becoming aware of a potential inadvertent disclosure, loss or theft of 
sensitive information. They report first to their manager and then to 
one of the following offices depending on what was disclosed:
  --to the Office of Taxpayer Correspondence (OTC), formerly Notice 
        Gatekeeper, if the disclosure involves information released 
        through correspondence to a taxpayer including in any of the 
        following formats: notices, letters, transcripts, faxes, and 
        other electronic transmissions such as e-mail;
  --to the IRS Situation Awareness Management Center (SAMC), if the 
        incident does not involve taxpayer correspondence, e.g., a 
        verbal disclosure, or if the incident involves the loss, theft, 
        or release of sensitive information, e.g., hardcopy records or 
        documents, packages lost during shipment, etc., or a non-IRS IT 
        asset, i.e., an IT asset in the Bring Your Own Device (BYOD) 
        program or an IRS Contractor asset that has IRS data; or
  --to the Computer Security Incident Response Center (CSIRC), if the 
        incident involves the loss or theft of an IRS IT asset, e.g., 
        an IRS issued computer, laptop, router, printer, removable 
        media, CD/DVD, flash drive, floppy, cell phones, BlackBerry, 
        etc.
    In addition, if management determines that an unauthorized 
disclosure may be willful, it is referred to the Treasury Inspector 
General for Tax Administration (TIGTA) for investigation. Unlike 
inadvertent disclosures, a willful disclosure of IRS sensitive tax 
payer information is a violation of section 6103 and as such considered 
illegal. If TIGTA concludes there is evidence of wrongdoing, then TIGTA 
would refer the case to the Department of Justice for prosecution/
penalties under 26 U.S.C. section 7213. In the situations outlined 
above, TIGTA concluded that the disclosures were inadvertent.
    Treasury's longstanding practice, spanning administrations of both 
political parties, is not to be involved in the details of tax 
administration and enforcement. This is especially true with regard to 
individual taxpayers. Several independent reviews, including multiple 
investigations by Congressional Committees, are ongoing. Treasury is 
cooperating with these reviews.
                                 ______
                                 
             Questions Submitted to Hon. J. Russell George
           Questions Submitted by Senator Frank R. Lautenberg
    Question. Identity theft is a serious and growing problem in the 
United States and a daunting challenge for the IRS. Taxpayers are 
harmed when identity thieves file fraudulent tax documents using stolen 
names and Social Security numbers, and wrongfully receive refunds. 
Identity theft can be devastating for victims, whose legitimate refunds 
are blocked, forcing them to spend months untangling their account 
problems with the IRS.
    Do you consider IRS's current strategy for dealing with identity 
theft and refund fraud to be adequate?
    Answer. No. Although the IRS continues to improve its identity 
theft and refund fraud detection efforts, additional actions are 
needed.
    In July 2012, we reported that the Tax Year (TY) 2010 tax returns 
processed during the 2011 filing season identified that tax fraud by 
individuals filing fictitious tax returns with false income and 
withholding is significantly larger than what the IRS detects and 
prevents. In addition, in May 2012, we reported that the IRS is not 
effectively providing assistance to taxpayers who report that they have 
been victims of identity theft, resulting in increased burden for these 
victims. Moreover, identity theft cases can take more than 1 year to 
resolve and communication between the IRS and victims is limited and 
confusing.
    TIGTA has also continued to report significant concerns with the 
growth in noncompliance and fraud in refundable tax credits. The IRS 
does not have effective processes to ensure that claimants qualify for 
the Earned Income Tax Credit (EITC) at the time tax returns are 
processed and prior to issuance of fraudulent tax refunds. In addition, 
the IRS has made little improvement in reducing EITC improper payments 
in the years since it was required to report estimates of these 
payments to Congress in Calendar Year 2002. The IRS estimates that the 
EITC improper payment rate was 21-25 percent in fiscal year 2012, which 
equates to $12 billion to $14 billion.
    The IRS continues to expand its efforts to prevent the payment of 
fraudulent tax refunds by processing all individual tax returns through 
identity-theft screening filters. These filters look for known 
characteristics of identity-theft cases to detect false tax returns 
before they are processed and before any fraudulent tax refunds are 
issued. However, without third-party income and withholding 
information, the filters will not identify the majority of potentially 
fraudulent tax returns for taxpayers who do not have a filing 
requirement.
    For the 2013 filing season, the IRS indicates that for e-filed tax 
returns using the Social Security Number of a deceased individual, the 
tax returns are rejected from processing. For paper tax returns, the 
IRS has prevented the issuance of approximately $2.4 million in 
fraudulent tax refunds as a result of a program to lock taxpayers' 
accounts when there is a date of death. The IRS does not yet have 
similar information for e-filed tax returns; however, we are reviewing 
this in our current audit.
    TIGTA made numerous recommendations for the IRS to develop or 
improve processes that will increase the IRS's ability to detect and 
prevent the issuance of fraudulent tax refunds resulting from identity 
theft. These include coordinating with responsible Federal agencies and 
banking institutions to develop a process to ensure that tax refunds 
issued via direct deposit to either a bank account or a debit card 
account are made only to an account in the taxpayer's name. In 
addition, the IRS should limit the number of tax refunds issued via 
direct deposit to the same bank account or debit card account, and work 
with the Department of the Treasury to ensure financial institutions 
and debit card administration companies authenticate the identity of 
individuals purchasing a debit card.
    TIGTA's recommendations to improve the IRS's ability to detect and 
prevent the issuance of fraudulent tax refunds from erroneous claims 
for refundable credits include implementing an account indicator to 
identify taxpayers who claim erroneous refundable credits. Taxpayers 
with such an indicator should be required to provide documentation 
before their claims for refundable credits are processed. The IRS 
should also freeze and verify claims for the Additional Child Tax 
Credit on all returns for which the EITC is frozen. Furthermore, the 
IRS should work with the Department of the Treasury's Office of Tax 
Policy to seek legislation to expand the EITC due diligence 
requirements and penalties to include the Additional Child Tax Credit.
    Question. What measures should the IRS pursue with greater vigor to 
improve its response to the growing problem of refund fraud and 
identity theft?
    Answer. An important tool that could immediately help the IRS 
prevent identity theft-related tax fraud is the National Directory of 
New Hires. However, legislation is needed to expand the IRS's authority 
to access the National Directory of New Hires wage information for use 
in identifying tax fraud. Currently, the IRS's use of this information 
is limited by law to just those tax returns with a claim for the Earned 
Income Tax Credit. The IRS included a request for expanded access in 
its annual budget submissions for fiscal years 2010-2013, and has once 
again included a request in its fiscal year 2014 budget submission.
    In addition, the IRS is developing a new Return Review Program 
system that will use leading-edge technologies to advance the IRS's 
effectiveness in detecting, addressing and preventing tax refund fraud, 
and protecting the U.S. Treasury revenue. It will replace the legacy 
Electronic Fraud Detection System built in the mid-1990s. The entirely 
new Return Review Program fraud framework is critical for IRS success 
in tackling ever-evolving tax schemes in a sophisticated, scalable and 
adaptable manner. We plan to issue a report by July 2013 that contains 
recommendations to improve the development of this system.
    The IRS has a long-term initiative to move to a real-time tax 
system. The IRS's vision is to move away from an after-the-fact 
approach to compliance. A real-time tax system would allow the IRS to 
verify many tax return elements at the time a tax return is filed and 
allow taxpayers to correct potential discrepancies before the IRS 
completes the processing of their tax return. Of equal importance is 
that this type of tax system will allow the IRS to quickly identify 
fraudulent tax return filings based on false income reporting. The IRS 
is assessing its ability to use partial year wage and withholding 
information from employers and/or States, and whether the information 
would allow the IRS to better identify individuals filing fraudulent 
tax returns.
    Question. Do you share the concern expressed by the National 
Taxpayer Advocate that victims still face the same ``labyrinth of 
procedures and drawn-out timeframes for resolution'' that they faced 5 
years ago?
    Answer. While we did not review the length of time to resolve 
identity theft cases 5 years ago, we reported in May 2012 that the IRS 
is not effectively providing assistance to identity theft victims.\1\ 
Moreover, processes are not adequate to communicate identity theft 
procedures to taxpayers, resulting in increased burden for victims. Of 
continuing concern is the length of time taxpayers must work with the 
IRS to resolve identity theft cases. Identity theft cases can take more 
than 1 year to resolve. Communications between identity theft victims 
and the IRS are limited and confusing, and victims are asked multiple 
times to substantiate their identity. A typical identify theft refund 
case that is not overly complex will be resolved in approximately 11 
months and will be handled by multiple IRS units. We plan to issue a 
report by September 2013 that evaluates whether the IRS has improved 
assistance to taxpayers.
---------------------------------------------------------------------------
    \1\ TIGTA, Ref. No. 2012-40-050, Most Taxpayers Whose Identities 
Have Been Stolen to Commit Refund Fraud Do Not Recieve Quality Customer 
Service (May 2013).
---------------------------------------------------------------------------
    Question. The IRS has significant responsibilities in implementing 
and administering the Affordable Care Act (ACA), including taxpayer 
education and outreach, deliverance of tax credits, and development of 
new Information Technology (IT) infrastructure to support all of these 
areas. TIGTA has identified ``Implementing ACA'' as a top management 
challenge for the IRS.
    Based on TIGTA's audits and reviews, what are your chief concerns 
about the capacity of the IRS to meet its responsibilities for 
implementing and administering the various new responsibilities under 
the ACA given the IRS's budget constraints?
    Answer. Several key ACA provisions will become effective in fiscal 
year 2014, therefore making fiscal year 2014 a significant year for ACA 
oversight. One key healthcare provision takes effect December 31, 2013. 
This provision is the requirement for individuals to maintain minimum 
essential health care coverage or face a continuous penalty. Starting 
in Calendar Year 2014, the IRS will be responsible for implementing the 
Premium Assistance Tax Credit as well as implementing the penalty on 
applicable individuals for each month they fail to have minimum 
essential coverage. This has far-reaching impact on the IRS, and will 
require significant resources, particularly customer service resources, 
as taxpayers turn to the IRS with questions and issues about the ACA 
and their tax and health insurance requirements. Later this year, we 
will be opening an audit of the IRS's administration of the Premium Tax 
Credit Project, which includes calculations necessary for designating 
ACA benefits.
    We are also concerned that ACA-related work will continue to 
stretch the IRS's appropriated resources in the future. Beginning in 
fiscal year 2013, the IRS will no longer obtain any funding from the 
Health Insurance Reform Implementation Fund (Fund) for ACA-related 
work. The Fund is administered by the Department of Health and Human 
Services as provided for in the Health Care and Education 
Reconciliation Act of 2010 to carry out the ACA. In fiscal year 2012, 
the IRS received $299 million from the Fund to support an additional 
664 Full-Time Equivalents. This was in addition to the funding received 
by the IRS based on its enacted budget. The IRS informed TIGTA that it 
does not anticipate receiving any funding from the Fund after fiscal 
year 2012. According to the IRS, its fiscal year 2013 spending plan 
includes $360 million to implement the ACA in fiscal year 2013. Since 
the IRS will not be reimbursed from the Fund for 2013, all fiscal year 
2013 ACA spending is funded from the IRS's operating budget.
    The IRS's fiscal year 2014 budget request includes a request for 
additional funding of $440 million to provide 1,954 Full-Time 
Equivalents for continued efforts related to the implementation of the 
ACA. The largest component of this increase is $306 million for the 
implementation of the information technology changes needed to deliver 
tax credits and other requirements.
    Customer service has been declining in recent years, with fewer 
taxpayers being served at local offices and the IRS answering fewer 
telephone calls. The ACA will further stretch these already limited 
resources at the IRS. We recently began a review of the IRS's efforts 
to evaluate the IRS's customer service planning efforts to provide 
individuals assistance relating to ACA provisions on obtaining minimum 
essential health insurance coverage and tax credits to offset health 
care expenses. We plan to issue our report later in Calendar Year 2013.
    TIGTA's fiscal year 2013 audit plan includes other ACA-related 
reviews that address Information Technology (IT) risks, including new 
systems development as required to meet IRS responsibilities under the 
ACA legislation.
    TIGTA is also coordinating with the Health and Human Services 
Office of the Inspector General to consider the status and risk 
management for IRS systems and the requirements and results for 
interagency testing processes.
    TIGTA plans to evaluate other IT risk areas for new ACA systems, 
including:
  --a review of the IRS's Internet portal, which will support 
        transactions generated by ACA systems; and
  --an assessment of the impact of ACA business requirements on the 
        IRS's IT systems and control environment.
    Question. What constructive recommendations can TIGTA offer to the 
IRS to address the challenges it faces in implementing the ACA?
    Answer. TIGTA has completed 10 ACA-related audits. Attached is a 
summary of these audits, including the recommendations made and the 
IRS's response to those recommendations.
                              (attachment)

           Treasury Inspector General for Tax Administration
                  Completed Affordable Care Act Audits

Reference Number: 2013-23-034, Affordable Care Act: The Income and 
Family Size Verification Project: Improvements Could Strengthen the 
Internal Revenue Service's New Systems Development Process (March 
2013).

    This audit was initiated to determine whether the Internal Revenue 
Service (IRS) adequately managed systems development risk for the 
Income and Family Verification System (IFVS) Project. This review 
addresses the major management challenge of Implementing Health Care 
and Other Tax Law Changes. The overall objective was to evaluate the 
IRS's progress in establishing controls to determine whether tax exempt 
hospitals comply with select provisions of the Affordable Care Act 
(ACA).
    what the treasury inspector general for tax administration found
    By the end of August 2012, the IFSV Project had completed all six 
systems development components. While cost data specific to the IFSV 
Project were not readily available during this audit, the IRS is 
generally managing systems development risk areas with the 
implementation of the new Iterative Path within the Enterprise Life 
Cycle.
    However, process improvements are needed to better ensure that:
  --the IFSV Project team adheres to configuration management 
        guidelines when baselined requirements are changed; and
  --the ACA Program Configuration Control Board emergency meeting 
        processes are effectively communicated.
    Further, an integrated suite of automated tools could improve 
requirements management and testing for the IFSV Project.
 what the treasury inspector general for tax administration recommended
    The Treasury Inspector General for Tax Administration (TIGTA) 
recommended that the Chief Technical Officer complete a broader review 
to evaluate the effectiveness of existing controls to ensure that 
change requests and impact assessments are adequately developed and 
processed as required by the ACA Program Configuration Management 
guidelines. The Chief Technology Officer should also ensure that the 
ACA Program Configuration Management Plan is updated to include 
procedures to request and convene emergency ACA program Configuration 
Control Board meetings when timely program-level responses are needed. 
In addition, the Chief Technology Officer should ensure a standard 
suite of integrated, automated tools is implemented for the ACA Program 
and ACA projects to manage sprint processes, develop and manage 
requirements, develop and manage test cases, and bidirectionally trace 
requirements and test cases.
    In response to our report, IRS management agreed with two of our 
three recommendations. However, the IRS disagreed with our 
recommendation to implement a standard suite of integrated, automated 
tools for the ACA Program and ACA projects.

Reference Number: 2013-43-033, Affordable Care Act: Implementation of 
Key Information Reporting Provisions (March 2013).

    This audit was initiated as part of TIGTA's efforts to evaluate the 
IRS's plans for implementing the various ACA tax provisions. This 
review addresses the major management challenge of Implementing Health 
Care and Other Tax Law Changes. The overall objective was to determine 
whether the IRS is effectively implementing select ACA reporting 
requirements.
    what the treasury inspector general for tax administration found
    The IRS continues to make progress in implementing the information 
reporting requirements relating to Provisions 1502, 1514, 9002, and 
9010 of the ACA. However, the implementation of Provision 9002 that 
requires the inclusion of employer health coverage on Form W-2, Wage 
and Tax Statement, does not address how the IRS will use the 
information and how the IRS will ensure employer compliance with this 
information reporting requirement.
    Many of the tax provisions included in the ACA are interrelated. As 
such, planning efforts should identify the relationships among the 
various tax and information reporting provisions. The IRS must ensure 
that all information needed to accurately and effectively administer 
these provisions is provided by employers, insurers, and taxpayers. In 
addition, creating separate implementation plans and assigning 
responsibility to different IRS offices may result in the IRS not 
evaluating these provisions collectively to ensure that it is 
requesting all the information needed to effectively verify employer, 
insurance provider, and individual compliance with the ACA.
 what the treasury inspector general for tax administration recommended
    TIGTA recommended that the IRS update the implementation plan for 
Provision 9002 to identify the actions needed to verify that employers 
are accurately reporting the total dollar value of health insurance 
coverage provided to an employee. The IRS should also ensure that all 
information necessary to maximize the IRS's ability to verify 
compliance with other tax-related provisions within the ACA is 
requested from third parties and processes are developed to use the 
information effectively.
    In response to our report, the IRS agreed with our recommendations. 
IRS officials stated that the IRS has updated the Compliance Plan for 
Provision 9002 to include steps for verifying reporting compliance. The 
IRS also indicated that executive oversight by the Director, Affordable 
Care Office, and the Director, Implementation Oversight and Non-
Exchange Provisions, ensures that the overall planning for all ACA 
provisions, including the ones affecting information reporting, is 
coordinated.

Reference Number: 2012-43-064, Affordable Care Act: Planning Efforts 
for the Tax Provisions of the Patient Protection and Affordable Care 
Act Appear Adequate; However, the Resource Estimation Process Needs 
Improvement (June 2012).

    Our audit objective was to assess the Internal Revenue Service's 
(IRS) overall planning to implement the tax provisions of the new law.
    what the treasury inspector general for tax administration found
    The ACA contains many provisions that are to be implemented over 
the course of several years, including some that required 
implementation during the year the legislation was signed into law. 
TIGTA found that appropriate plans had been developed to implement tax-
related provisions of the ACA using well-established methods for 
implementing tax legislation. The IRS's plans addressed tax forms, 
instructions, and most of the affected publications, as well as 
employee training, outreach and guidance to taxpayers and preparers, 
computer programming, and data needs.
    The IRS projected its fiscal years 2012 and 2013 ACA staffing needs 
to be 1,278 Full-Time Equivalents and 859 Full-Time Equivalents, 
respectively. The IRS has not projected staffing needs beyond fiscal 
year 2013. A lack of documentation to support the staffing requirements 
needed to implement the ACA precluded TIGTA from providing an opinion 
on the adequacy of staffing requests to support implementation. The IRS 
did not analyze each provision to determine the amount of staffing 
necessary to implement the provision.
 what the treasury inspector general for tax administration recommended
    TIGTA recommended that the IRS perform an analysis to evaluate the 
resources necessary to efficiently implement the provisions and ensure 
that this process is documented.
    In their response to the report, IRS management agreed with the 
recommendation. The IRS plans to complete an evaluation by the end of 
fiscal year 2012 of the major ACA provisions for which implementation 
has not been completed and evaluate the resources needed for 
implementation, especially any with specialized skills.

Reference Number: 2012-40-065, Processes to Address Erroneous Adoption 
Credits Result in Increased Taxpayer Burden and Credits Allowed to 
Nonqualifying Individuals (June 2012).

    This audit was initiated because, for tax years 2010 and 2011, the 
Adoption Credit became a refundable credit and the maximum credit 
amount was increased to $13,170 per adopted child for Tax Year 2010. 
The overall objective of this review was to assess the IRS's efforts to 
ensure the accuracy of Adoption Credit claims for tax returns filed 
from January 1 through August 6, 2011.
    what the treasury inspector general for tax administration found
    The law did not provide and the IRS did not seek math error 
authority for Adoption Credit claims that did not include sufficient 
documentation. As a result, 43,295 (42.6 percent) of the 101,627 total 
Adoption Credit claims were referred to the IRS's Examination function 
because of incomplete or missing documentation. Math error authority 
would have allowed the IRS to spend approximately $1.9 million for 
other high-priority programs in the Examination function.
    Our review also found that, as of August 6, 2011, the IRS processed 
94,092 tax returns with an Adoption Credit claim and found that 4,258 
(4.5 percent) taxpayers received almost $49.3 million in Adoption 
Credits without sufficient supporting documentation. Of these 4,258 
taxpayers, TIGTA estimated that 953 tax returns claiming Adoption 
Credits totaling more than $11 million were erroneous.
    In addition, TIGTA found that 333 taxpayers who had valid Adoption 
Credit claims totaling $2 million had their Credits incorrectly 
suspended and their tax returns were referred to the Examination 
function. These taxpayers had previously provided documentation when 
they applied for a Taxpayer Identification Number for a pending U.S. 
adoption.
 what the treasury inspector general for tax administration recommended
    TIGTA recommended that the IRS develop a process to prevent 
taxpayers from receiving the Adoption Credit when a foreign adoption is 
in process and to ensure that taxpayers identified as erroneously 
claiming the Adoption Credit are reviewed in the Examination function. 
The IRS should also ensure that computer programming accurately 
excludes tax returns that list Adoption Taxpayer Identification Numbers 
on Form 8839, Qualified Adoption Expenses, and indicate the adoption is 
in process so these taxpayers do not have their refunds erroneously 
suspended and delayed.
    IRS management agreed and implemented corrective actions for all 
the recommendations. The corrective actions included changing 
processing procedures, updating instructions, and training employees to 
ensure erroneous adoption benefits are identified when a foreign 
adoption is in process. In addition, programming changes were 
implemented for the 2012 filing season to prevent refund delays when an 
Adoption Taxpayer Identification Number is used. Returns TIGTA 
identified for taxpayers who potentially received erroneous adoption 
credits were selected for examination, when warranted.

Reference Number: 2012-13-070, Affordable Care Act: While Much Has Been 
Accomplished, the Extent of Additional Controls Needed to Implement 
Tax-Exempt Hospital Provisions Is Uncertain (June 2012).

    This audit was initiated as part of TIGTA's efforts to evaluate the 
IRS's plans for implementing the various ACA tax provisions. This 
review addresses the major management challenge of Implementing Health 
Care and Other Tax Law Changes. The overall objective was to evaluate 
the IRS's progress in establishing controls to determine whether tax 
exempt hospitals comply with select provisions of the ACA.
    what the treasury inspector general for tax administration found
    The IRS has made progress establishing controls to determine 
whether tax-exempt hospitals comply with provisions of the ACA and has 
already opened reviews of the community benefit activities of 
approximately 1,700 healthcare organizations. However, it is difficult 
to determine at this point how much additional work will be required of 
the Exempt Organizations function to fully implement controls because 
legal guidance has not been published. This guidance, which is 
currently under review, would provide the Exempt Organizations function 
with a basis for identifying additional controls needed to determine 
whether tax exempt hospitals comply with the ACA.
    In addition, the Department of the Treasury will be required in the 
near future to send its first annual report to Congress regarding tax-
exempt hospitals. The IRS is responsible for working with the 
Department of Health and Human Services to gather the data for this 
report. While communication has been established, the format and timing 
of receipt of data have not been formalized.
 what the treasury inspector general for tax administration recommended
    TIGTA recommended that the Director, Exempt Organizations, work 
with the Department of the Treasury to establish a Memorandum of 
Understanding with the Department of Health and Human Services. The 
Memorandum of Understanding should take into consideration when 
information for the annual report to Congress should be received by the 
IRS and the proper format of the data to ensure it will be timely and 
usable for the report to Congress.
    In response to our report, IRS management agreed with our 
recommendation. The IRS plans to work with the Department of the 
Treasury to establish a Memorandum of Understanding with the Department 
of Health and Human Services that takes into consideration when 
information for the annual report to Congress should be received and 
the proper format of the data to ensure it will be timely and usable 
for the report to Congress.

Reference Number: 2012-13-009, Affordable Care Act: The Office of 
Appeals Planning Efforts for the Health Care Reform Legislation 
(December 2011).

    The overall objective of our audit was to determine how Appeals 
planned for the implementation of the health care legislation. This 
review is included in our fiscal year 2012 Annual Audit Plan and 
addresses the major management challenge of Implementing Major Tax Law 
Changes.
    what the treasury inspector general for tax administration found
    After the ACA was enacted in March 2010, the IRS ACA Office 
determined that the impact on Appeals would be minimal until after 
Calendar Year 2013. Given this time period, Appeals management has 
taken some initial actions to begin preparing for the ACA legislation. 
Appeals personnel have been detailed to the IRS ACA Office and other 
IRS ACA teams on an ongoing basis to remain informed on how the IRS is 
preparing for the ACA and the potential impact of these efforts on 
Appeals. To lead its planning efforts, Appeals appointed a Senior 
Analyst in July 2011 to serve as the Appeals ACA Program Manager.
    In addition, Appeals created an internal Web site with links to IRS 
ACA-related training, guidance, and other resources. Appeals management 
also informed TIGTA they are currently assessing how to code ACA cases 
on their inventory database to track the number of taxpayers and 
businesses that appeal the various health care provisions.
    As Appeals moves forward with its planning efforts, TIGTA believes 
management should develop a more formal approach to its ACA planning 
activities to ensure they are ready to resolve taxpayer requests of 
ACA-related issues in a timely and effective manner. This should 
include outlining the key objectives/tasks that need to be addressed to 
prepare for the ACA-related impact on Appeals, who will be responsible 
for conducting these activities, and when these actions need to be 
completed over the next several years.
    In addition, Appeals management should consider the type and 
frequency of communication between the Appeals internal working group, 
the IRS ACA Office, and other IRS operating divisions to ensure their 
planning efforts are coordinated as appropriate. This communication 
will assist Appeals management in staying informed of IRS actions to 
address the ACA provisions. Effective planning is critical to ensuring 
Appeals' readiness to prepare for this legislation and resolve taxpayer 
requests in a timely and effective manner.
 what the treasury inspector general for tax administration recommended
    TIGTA made no recommendations in this report. Appeals management 
reviewed the report before it was issued and offered clarifying 
comments and suggestions, which have been taken into account.

Reference Number: 2011-40-100, Legislative Requirements Were Met When 
Awarding Credits and Grants for the Qualifying Therapeutic Discovery 
Project Program (September 2011).

    This audit was initiated to determine whether the QTDP Program met 
legislative requirements when considering and awarding credits and 
grants to qualifying therapeutic discovery project applicants, and 
whether the IRS implemented adequate controls to monitor the credits 
and grants.
    what the treasury inspector general for tax administration found
    The IRS met legislative requirements when awarding credits and 
grants to QTDP Program recipients. Despite the unprecedented short time 
period allotted by the law for creating the QTDP Program, the IRS 
achieved its goal.
    The IRS team administering the QTDP Program, in consultation with 
the Department of Health and Human Services, processed 5,663 
Applications for Certification of Qualified Investments Eligible for 
Credits and Grants Under the Qualifying Therapeutic Discovery Project 
Program (Form 8942). Of the 5,663 Forms 8942 received, 4,606 (81.3 
percent) were approved for a credit or grant.
    All QTDP Program certified applicants were listed by State on 
IRS.gov, as required by law. The IRS has internally revised and 
corrected the number of entities receiving credits or grants, but it 
has not updated IRS.gov since November 1, 2010.
    The IRS prepared numerous documents that record the process for 
implementing the QTDP Program. These documents will be helpful for 
implementing future unique and similar projects.
    A compliance plan was developed and is being implemented. The plan 
includes reviewing the tax returns of taxpayers who accepted QTDP 
Program credits and grants. The IRS mailed 326 letters to grant 
recipients that had not yet filed an amended Tax Year 2009 tax return.
 what the treasury inspector general for tax administration recommended
    TIGTA recommended that the Commissioner, Small Business/Self-
Employed Division, ensure:
  --the information regarding the applicant names and amounts allocated 
        are updated on IRS.gov to accurately show which taxpayers and 
        projects were originally awarded QTDP Program credits and 
        grants; and
  --the QTDP Program line item is removed from Investment Credit (Form 
        3468) after a determination is made that all QTDP Program 
        taxpayers have filed their Tax Year 2010 returns.
    The IRS agreed with the recommendations. The IRS plans to:
  --update the information on IRS.gov regarding the applicant names and 
        amounts allocated through July 31, 2011; and
  --by July 15, 2012, make a final update to IRS.gov to reflect any 
        activity from August 1, 2011, to the end of the QTDP Program. 
        Concerning the second recommendation, the IRS has notified the 
        Forms and Publications function of the need to remove the QTDP 
        Program line from Form 3468 once it has determined that all 
        QTDP Program taxpayers have filed their Tax Year 2010 returns.

Reference Number: 2011-40-115, Affordable Care Act: The Number of 
Taxpayers Filing Tanning Excise Tax Returns Is Lower Than Expected 
(September 2011).

    The objective of our audit was to determine whether the Internal 
Revenue Service (IRS) effectively implemented this tax.
    what the treasury inspector general for tax administration found
    The IRS developed an outreach plan, updated the excise tax form and 
instructions, and made preparations for receiving and processing tax 
returns with the tax. The IRS also developed a plan for dealing with 
noncompliance, including initiating audits and issuing notices to 
taxpayers who may potentially owe the tax.
    The number of taxpayers filing tanning services excise tax returns 
is much lower than expected. According to IRS documents, in April 2010, 
the Indoor Tanning Association estimated that 25,000 businesses were 
providing indoor tanning services. However, the actual number of 
businesses liable for the tax has been difficult to determine with any 
degree of accuracy. Identifying these taxpayers has been one of the 
more challenging tasks the IRS has faced when implementing this 
provision. For the first three applicable quarters, the number of 
Federal excise tax forms reporting tanning taxes has averaged 
approximately 10,300.
    The IRS could have taken more timely actions to contact taxpayers 
who may owe the tax. By the time notices were issued, tanning excise 
tax returns had been due for three quarters. Late filing of these 
returns would result in the taxpayer owing the unpaid tax, plus 
interest and penalties. In addition, the information used to identify 
these taxpayers appears incomplete. Furthermore, TIGTA advised the IRS 
that the notice did not contain some pertinent information. The IRS 
added this information before mailing.
    Finally, the publication containing information about excise tax 
requirements was not updated until more than 1 year had passed since 
the provision became effective.
 what the treasury inspector general for tax administration recommended
    TIGTA recommended that the IRS perform further analyses of the data 
sources used, including records with incomplete address information, to 
determine whether a large number of tanning businesses were not 
identified, monitor the results from the notice mailing to determine 
whether additional data sources are warranted, and update the excise 
tax publication to include tanning tax information.
    In their response to the report, IRS officials agreed with our 
recommendations. The IRS plans to perform the analysis suggested, 
monitor the results of the notice mailing, and consider additional 
actions based on the results. The excise tax publication was revised in 
July 2011 to include tanning tax information.

Reference Number: 2011-20-105, The Modernization and Information 
Technology Services Organization Is Effectively Planning for the 
Implementation of the Affordable Care Act (September 2011).

    This audit was initiated to evaluate the Modernization and 
Information Technology Services organization's planning efforts to 
implement the Affordable Care Act.
    what the treasury inspector general for tax administration found
    The Modernization and Information Technology Services organization 
planned an effective approach to address the information technology 
work needed to implement the Affordable Care Act provisions. For 
example, it determined the Affordable Care Act's impact on its 
organization, created a new organization called the Associate Chief 
Information Officer Affordable Care Act--Program Management Office, and 
obtained staffing and funding. A Program Governance Board Charter was 
approved and a governance plan was prepared. However, the governance 
plan did not include escalation procedures for unresolved issues or 
critical decisions.
 what the treasury inspector general for tax administration recommended
    TIGTA recommended that the Chief Technology Officer ensure that the 
Modernization and Information Technology Services organization's 
Affordable Care Act--Program Management Office governance plan is 
updated to include escalation procedures to timely address unresolved 
issues and critical decisions.
    In their response to the report, IRS management agreed with the 
recommendation. The IRS plans to include the escalation procedures in 
the Affordable Care Act--Program Management Office governance plan.

Reference Number: 2011-40-103, Affordable Care Act: Efforts to 
Implement the Small Business Health Care Tax Credit Were Mostly 
Successful, but Some Improvements Are Needed (September 2011).

    This audit was initiated to determine whether the IRS adequately 
implemented and accurately processed the Credit. The Congressional 
Budget Office estimated the Credit would cost $37 billion over 10 years 
and that taxpayers would claim up to $2 billion of Credit for Tax Year 
2010.
    what the treasury inspector general for tax administration found
    The IRS timely completed actions to plan for and implement the 
Credit. The volume of claims for the Credit has been low despite IRS 
efforts to inform 4.4 million taxpayers who could potentially qualify 
for the Credit. According to the IRS, as of mid-May 2011, just more 
than 228,000 taxpayers had claimed the Credit for a total amount of 
more than $278 million. Among reasons given by industry groups and 
professional organizations for the low volume was the time and effort 
required to claim the Credit. The IRS plans to conduct focus groups to 
determine why the claim rate was so low.
    The Credit is specifically targeted to small employers but certain 
taxpayers may claim the Credit even when they have not filed employment 
tax returns. This occurs because companies can enter into a contractual 
relationship with a Professional Employer Organization that manages 
human resources. As a result, the IRS cannot determine if employment 
taxes were actually filed.
    The Credit for Small Employer Health Insurance Premiums (Form 8941) 
does not contain all of the data and calculations needed to verify each 
step of Credit eligibility and calculation. Based on the information 
that was available, TIGTA found that both taxpayers and tax 
practitioners were making mistakes when completing Form 8941. The IRS 
has not validated the calculations where possible, nor has it captured 
sufficient information from the Form 8941 to allow it to use computer 
checks to validate the calculations.
 what the treasury inspector general for tax administration recommended
    TIGTA recommended that the IRS track Professional Employer 
Organization relationships; seek legislation to provide targeted math 
error authority that would allow the IRS to disallow the Credit when 
employment tax returns have not been filed; until math error processes 
are established, consider implementing processing criteria that would 
route returns that are obviously wrong to the Examination function 
prior to completing processing; and ensure that all lines from the Form 
8941 are transcribed onto IRS systems to allow more basic checks of 
arithmetic accuracy during processing.
    In their response to the report, IRS officials agreed with the 
recommendations and plan to take appropriate corrective actions.
                          (end of attachment)
    Question. Is the funding requested by the IRS sufficient to 
complete the systems development needed to have fully functioning 
systems in place when the new health insurance premium tax credits and 
other ACA provisions take effect in 2014?
    Answer. Additional funding for ACA-related systems development has 
been requested each year; however, the IRS only received additional 
funding from the Health Insurance Reform Implementation Fund (Fund) in 
fiscal years 2010-2012 to implement the ACA. The IRS did not receive 
additional funding for ACA in fiscal year 2013. As a result, the IRS 
has had to use regular appropriated funds to fund ACA systems 
development.
    In fiscal year 2010, the IRS received $21 million from the Fund; in 
fiscal year 2011, the IRS received $168 million; and in fiscal year 
2012, the IRS received $299 million to support an additional 664 Full-
Time Equivalents. The Fund is administered by the Department of Health 
and Human Services as provided for in the Health Care and Education 
Reconciliation Act of 2010 to carry out the ACA. This was in addition 
to the funding received by the IRS based on its enacted budget. The IRS 
informed TIGTA that its fiscal year 2013 spending plan includes $360 
million to implement the ACA in fiscal year 2013. Since the IRS will 
not be reimbursed from the Fund for 2013, all fiscal year 2013 ACA 
spending is funded from the IRS's operating budget.
    TIGTA reviewed the IRS's planning for the information technology 
impact of the ACA. The ACA will require the IRS to build eight new 
computer applications to implement ACA provisions. The IRS was 
authorized direct hire authority to hire up to 355 information 
technology personnel to support the ACA implementation. As of April 
2011, 368 employees were assigned to ACA-related work within the IRS 
Information Technology organization: 255 in the Program Management 
Office and 113 in the Information Technology organization delivery 
partner organizations. The Program Management Office stated that the 
staffing as of April 2011 is adequate for the current workload. The 
Program Management Office plans to hire additional people as more 
projects are initiated and will reevaluate its staffing needs as it 
works with the IRS operating divisions to refine the business 
requirements.
    The development and implementation of new systems for the ACA 
provisions present major information technology management challenges. 
These include rapid implementation of interdependent projects that 
require extensive coordination within the IRS and with other Federal 
agencies.
    TIGTA's fiscal year 2013 audit plan includes other ACA-related 
reviews that address Information Technology (IT) risks, including new 
systems development as required to meet IRS responsibilities under the 
ACA legislation. We are currently auditing the Premium Tax Credit 
Project, which includes calculations necessary for designating ACA 
benefits.
    TIGTA is also coordinating with the Health and Human Services 
Office of the Inspector General to consider the status and risk 
management for IRS systems and the requirements and results for 
interagency testing processes.
    TIGTA plans to evaluate other IT risk areas for new ACA systems, 
including:
  --a review of the IRS's Internet portal, which will support 
        transactions generated by ACA systems; and
  --an assessment of the impact of ACA business requirements on the 
        IRS's IT systems and control environment.
    Question. The ``tax gap'' is the difference between the estimated 
amount taxpayers owe and the amount voluntarily and timely paid. An 
estimated $450 billion of Federal taxes are unpaid each year, for a 
noncompliance rate of nearly 17 percent. TIGTA cites Tax Compliance as 
the second greatest management challenge facing the IRS. A significant 
amount of income remains unreported. Collecting unpaid taxes is an 
enormous untapped source of Federal revenue that could fund many worthy 
unmet national needs.
    What are your views on the adequacy of the IRS's strategy to narrow 
the tax gap?
    Answer. The IRS and Treasury strategy to narrow the Tax Gap is a 
multi-faceted approach that encompasses virtually every aspect of tax 
administration. It is uncertain whether or not the strategy will lead 
to long-term success in reducing the Tax Gap. The strategy was 
developed in 2007 and is predicated on increased funding for compliance 
resources, legislative changes, increased information reporting and a 
successful Business Systems Modernization. This includes improving 
customer service to allow the IRS to migrate more customer service 
interactions from phones and walk-in sites to automated self-service 
options; implementing third-party information reporting programs 
through matching Form 1099-K information with businesses' reported 
income; enhancing domestic and international tax enforcement activities 
through programs such as the Offshore Voluntary Disclosure Program; 
and, working to propose and enact legislative proposals to increase tax 
compliance. Fewer resources will reduce the abilities of the IRS to 
implement these initiatives.
    Question. What impediments must the IRS address to be more 
effective in narrowing the tax gap?
    Answer. The IRS will be challenged to close the Tax Gap with fewer 
resources. The IRS will need to look to other methods to address the 
different types and causes of noncompliance. Specifically, enhanced 
information reporting by third parties, modernized information systems, 
penalty assessments, and increased leveraging of external resources, 
such as paid tax return preparers and whistleblowers, can help improve 
tax compliance.
    Tax Gap reduction is an incremental effort to increase voluntary 
compliance and is an ongoing process. The way to attack the Tax Gap in 
an austere environment is to continue to build organizational 
capability and capacity. At the same time, simplifying the tax law and 
increasing the visibility of transactions through information reporting 
would help the IRS to identify noncompliance at less cost.
    In addition, the Foreign Account Tax Compliance Act (FATCA) is an 
important development in U.S. efforts to improve tax compliance 
involving foreign financial assets and offshore accounts which, if 
successful, could help to reduce the Tax Gap.
    Question. What is the effect of declining resources on the IRS's 
ability to meaningfully address the tax gap through new compliance and 
enforcement initiatives?
    Answer. Due to resource limitations, the IRS is not able to devote 
additional resources to enforcement that would enable it to contact the 
millions of potentially noncompliant taxpayers it identifies. The 
Acting IRS Commissioner (Steven T. Miller) testified on May 8, 2013 
that the budget cuts in the past few years could result in a steady 
erosion in the service the IRS provides to taxpayers and in the amount 
of money it collects through enforcement activities.
    To determine the appropriate level of enforcement resources, 
policymakers would need to consider how to balance taxpayer service and 
enforcement activities with other priority programs such as identity 
theft and the ACA. Another consideration would be how effectively and 
efficiently the IRS currently uses its resources. TIGTA has reported 
that the IRS should pursue alternative audit selection techniques by 
using existing databases containing partnership data to help identify 
additional productive returns for audit. In addition, TIGTA plans to 
review the development of a new Foreign Accounts Tax Compliance Act 
system once implemented that is critical for the IRS to ensure 
international tax compliance.
    Notwithstanding resource limitations, the IRS can use several 
different methods to address the different types and causes of non-
compliance attributed to the Tax Gap, such as enhancing information 
reporting by third parties; ensuring high-quality services to 
taxpayers; expanding compliance checks before the IRS issues refunds; 
leveraging external resources, such as paid tax return preparers and 
whistleblowers; modernizing information systems; simplifying tax return 
requirements; increasing the use of penalty provisions to deter 
noncompliance; and using the IRS's National Research Project data to 
better target examinations on areas of noncompliance.
    Question. How important are sustained resources for increased 
information reporting to narrowing the tax gap?
    Answer. For individual tax returns, increased third-party 
information reporting of wages and withholding is the single most 
important tool in detecting and stopping fraudulent tax refunds before 
they are issued. For international tax compliance, information 
reporting by foreign financial institutions under the Foreign Account 
Tax Compliance Act is an important development in U.S. efforts to 
improve tax compliance involving foreign financial assets and offshore 
accounts which, if successful, could help to reduce the Tax Gap. For 
business taxpayers, implementing third-party information reporting 
programs through matching Form 1099-K information with businesses' 
reported income will assist the IRS in improving business tax 
compliance. However, fewer resources, and other competing priorities 
such as ACA-related work and identity theft, will reduce the abilities 
of the IRS to implement these initiatives.
    Question. What additional oversight does TIGTA recommend to ensure 
that information obtained from voluntary disclosures is accurate and 
complete to better identify additional taxpayers and promoters who 
continue to defraud the U.S. through offshore activities?
    Answer. In September 2011, we reported that the IRS's voluntary 
disclosure practices were effective, and cases were being appropriately 
assigned and verified even with the unusually high volume of disclosure 
requests received and accepted. However, our review of closed voluntary 
disclosure cases showed that not all cases had evidence of the 
taxpayers reconciling the unreported income in their offshore accounts 
to their amended or newly filed delinquent tax returns. In some cases, 
information from the taxpayers' financial accounts and promoters either 
was not captured or was incorrectly transcribed on the data collection 
system used for current and subsequent data mining efforts.
    We made several recommendations and the IRS agreed to implement a 
requirement for taxpayers to provide a detailed reconciliation of 
unreported income and to develop a quality review process to ensure all 
data relating to voluntary disclosures are properly transcribed for 
future data mining.
                                 ______
                                 
              Questions Submitted by Senator Mike Johanns
    Question. According to reports, Treasury Department officials were 
notified of the audit related to the use of inappropriate criteria to 
identify tax-exempt applications for review on more than one occasion. 
Please list the names and positions of all of the individuals notified 
directly by the Treasury Inspector General for Tax Administration 
(TIGTA) and the dates on which they were notified or this audit was 
referenced or discussed.
    Answer.--
  --June 4, 2012--J. Russell George briefed Chris Meade about the new 
        audit, who was the Treasury's Deputy General Counsel at that 
        time.
  --Mid-summer 2012 (Approximately July)--J. Russell George briefed the 
        Treasury Deputy Secretary Neal Wolin about the audit.
  --March 15, 2013--J. Russell George met with Secretary Jacob Lew and 
        briefed him on the audit.
    Question. Did TIGTA ever notify Treasury Secretary Timothy Geithner 
regarding this audit?
    Answer. To the best of his recollection and per his calendar 
schedule, J. Russell George did not.
    Question. Did TIGTA notify any Treasury Department officials who 
reported to Secretary Geithner about this audit? If so, please list the 
names and positions of these individuals.
    Answer. Please see our answer to the first question. It is not 
known whether the individuals TIGTA briefed reported any information 
about the audit to Secretary Geithner. J. Russell George briefed Deputy 
General Counsel Christopher Meade on June 4, 2012. According to 
Treasury Order 101-5, the General Counsel reports directly to the 
Deputy Secretary; therefore, we do not know if Mr. Meade briefed 
Secretary Geithner directly.
    Question. When was Secretary Lew first notified by TIGTA about this 
audit?
    Answer. J. Russell George met with Secretary Jacob Lew on March 15, 
2013.
    Question. Did TIGTA ever directly notify persons within the White 
House of the audit or have discussions with the White House about the 
audit?
    Answer. No. J. Russell George did not directly notify or have 
discussions with any persons within the White House about the audit.
    Question. Had the TIGTA issued the final report on this audit when 
the Interal Revenue Service (IRS) made the issue public at the ABA 
meeting on May 10, 2013?
    Answer. No. We issued the final report on May 14, 2013. A redacted 
final report was posted on our public Website later in the evening on 
May 14, 2013.
    Question. Has the IRS ever before publicly disclosed information 
about a TIGTA audit or investigation prior to TIGTA's issuance of its 
final report?
    Answer. To the best of our recollection, we do not remember an 
instance when the IRS publicly disclosed information regarding the 
findings of an audit report prior to it being issued as a final report.
    Question. Is TIGTA currently engaged in any other audits related to 
the management of the IRS?
    Answer. Yes, we publicly released a report on IRS conference 
spending on June 4, 2013.
    We also have audits and an inspection review on the following 
management oversight areas at the IRS:
  --Purchase card transactions;
  --Executive travel;
  --Vendor payment controls;
  --Validating return on investment for enforcement initiatives;
  --Contractor employee eligibility;
  --Affordable Care Act--Use of the health insurance reform 
        implementation fund;
  --Socioeconomic contracting;
  --Efforts to detect and prevent identity theft;
  --Issuance of employer identification numbers;
  --Return review program; and
  --Awards.
    These audits are in various stages of the audit and final reports 
have not been issued. As a result, for most of the audits, we do not 
know whether there are management oversight concerns that would be of 
interest to the subcommittee. We would be willing to brief the 
subcommittee after we issue the final reports to the IRS and before the 
reports are publicly released.

                          SUBCOMMITTEE RECESS

    Senator Udall. This subcommittee stands recessed.
    [Whereupon, at 4:39 p.m., Wednesday, May 8, the 
subcommittee was recessed, to reconvene subject to the call of 
the Chair.]
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