    [Senate Hearing 113-630]
    [From the U.S. Government Publishing Office]

      FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL
                                   YEAR 2015

                                  ----------

                           WEDNESDAY, APRIL 30, 2014

                                           U.S. Senate,
               Subcommittee of the Committee on Appropriations,
                                                        Washington, DC.

        The subcommittee met at 2 p.m., in room SD-138, Dirksen
    Senate Office Building, Hon. Tom Udall (chairman) presiding.
        Present: Senators Udall, Coons, Johanns, and Moran.

                           DEPARTMENT OF THE TREASURY

                            Office of the Secretary

    STATEMENT OF HON. JACOB LEW, SECRETARY

                     OPENING STATEMENT OF SENATOR TOM UDALL

        Senator Udall. Good afternoon. The subcommittee will come
    to order. I am pleased to convene this hearing of the Financial
    Services and General Government Subcommittee to consider the
    fiscal year 2015 funding needs of the Department of the
    Treasury and the Internal Revenue Service. I welcome my
    distinguished ranking member, Senator Mike Johanns, and other
    colleagues who I think will be joining us as we go on today.
        And let me go to my opening statement here. Okay. Senator
    Johanns, good to have you here.
        Senator Johanns. Thank you.
        Senator Udall. Always a pleasure to work with you. And with
    us today are three distinguished witnesses to present testimony
    about the resource needs of the Treasury and the IRS. I welcome
    Secretary Jacob Lew, the Internal Revenue Service Commissioner,
    John Koskinen, and Treasury Inspector General for Tax
    Administration, J. Russell George. Thank you for your service,
    and thank you for accepting your leadership posts in these
    challenging times.
        I welcome the opportunity today to conduct critical
    oversight of the Treasury Department and its programs and to
    have a candid discussion of where the Department is today,
    where it needs to be, and how we can make sure it has the
    necessary resources to fulfill its important and wide-ranging
    responsibilities.

                              PREPARED STATEMENTS

        Congress probably exercises its most effective oversight of
    agencies and programs through the appropriations process. It
    allows an annual checkup and review of operations and spending.
    The IRS also has a cadre of important watchdogs to monitor and
    evaluate its operations and to complement congressional
    oversight. These include the National Taxpayer Advocate, the
    IRS Oversight Board, the U.S. Government Accountability Office,
    and the National Treasury Employees Union. I appreciate their
    efforts to help critique, promote, and improve the work of the
    IRS. I invited the top officials of each of these organizations
    to submit written materials to support the subcommittee's work
    and to augment the record of these proceedings today, and I
    would ask unanimous consent that the statements and materials
    received by the subcommittee from these organizations be made a
    part of the hearing record. And, no objection, so ordered.
        [The statements follow:]
                    Prepared Statement of Senator Tom Udall
        Good afternoon. I am pleased to convene this hearing to consider
    the fiscal year 2015 funding request of the Department of the Treasury
    and the Internal Revenue Service (IRS). I am joined by my distinguished
    ranking member, Senator Mike Johanns, and other members of the
    subcommittee.
        With us today are three distinguished witnesses to present
    testimony about the resource needs of the Department of the Treasury
    and the Internal Revenue Service. I welcome the Secretary of the
    Treasury, Jacob Lew, the Internal Revenue Service Commissioner, John
    Koskinen, and the Treasury Inspector General for Tax Administration, J.
    Russell George. Thank you for your service and for accepting your key
    leadership posts in these challenging times.
        I welcome the opportunity today to conduct critical oversight of
    the Treasury Department and its programs, and to have a candid
    discussion of where the Department is today, where it needs to be, and
    how we can make sure that it has the necessary resources to fulfill its
    important and wide-ranging responsibilities.
        Congress probably exercises its most effective oversight of
    agencies and programs through the appropriations process. It allows an
    annual checkup and review of operations and spending. The IRS also has
    a cadre of important watchdogs to monitor and evaluate its operations
    and to complement congressional oversight. These include the National
    Taxpayer Advocate, the IRS Oversight Board, the U.S. Government
    Accountability Office, and the National Treasury Employees Union. I
    appreciate their efforts to help critique, promote, and improve the
    work of the IRS. I invited the top officials of each of these
    organizations to submit written materials to support the subcommittee's
    work, and to augment the record of these proceedings today, and I would
    ask unanimous consent that the statements and materials received by the
    subcommittee from these organizations be made a part of the hearing
    record.
                                treasury request
        Most of the $13.8 billion dollars gross funding request for the
    Treasury Department is for the IRS. The President's budget requests
    $1.3 billion dollars to fund the other bureaus and offices of the
    Department, a decrease of $22 million dollars, or about 2 percent less
    than fiscal year 2014. These bureaus and offices cover a wide variety
    of activities for the Department, from implementing financial sanctions
    against our enemies to forecasting economic indicators, and managing
    the Federal Government's books.
        I was pleased to see that the President's budget included robust
    funding for the Community Development Financial Institutions (CDFI)
    fund. The budget also proposes to increase the CDFI bond guarantee
    program to $1 billion dollars, to expand access to capital for
    community development organizations across the country at no cost to
    taxpayers. However, the request also includes worrisome cuts for
    several critical bureaus including the Alcohol and Tobacco, Tax and
    Trade bureau, which protects consumers, prevents smuggling, and
    collects revenue to reduce the deficit. I look forward to hearing from
    you about why Treasury is requesting cuts for this important bureau.
                                  irs request
        The Internal Revenue Service administers the tax laws and collects
    the revenues for funding over 95 percent of Federal Government
    operations and public services. The IRS has nearly 90,000 employees.
    Each year, they make hundreds of millions of contacts with American
    taxpayers and businesses. The IRS is the face of Government to more
    U.S. citizens than any other agency.
        For fiscal year 2015, the President's budget requests $11.997
    billion dollars in base appropriated funding for the IRS. This is an
    increase of $706 million dollars, or a 6 percent boost above the fiscal
    year 2014 enacted level of $11.291 billion dollars. Another $480
    million dollars is sought through a program integrity budget cap
    adjustment, raising the appropriations request to $12.477 billion
    dollars.

        The fiscal year 2015 funding forecast is not encouraging. Budgetary
    constraints remain in place. This subcommittee faces challenging
    funding decisions balancing many competing demands for the ensuing
    fiscal year. It will be helpful to hear Secretary Lew and Commissioner
    Koskinen's frank appraisals of the minimum resource needs to ensure
    that the Treasury Department can fulfill its stewardship
    responsibilities for U.S. economic and financial systems. Moreover, we
    will be carefully assessing what resources are required to deliver top
    quality service to taxpayers, and enforce the law with integrity and
    fairness to all.
        I look forward to hearing more about the particular challenges the
    Department and the IRS face, the consequences of funding shortfalls,
    and how this subcommittee can be helpful in supporting the Department's
    vital mission.
                                     ______

       Prepared Statement of the Internal Revenue Service Oversight Board
                       introduction and executive summary
        Chairman Udall and Ranking Member Johanns, the IRS Oversight Board
    thanks the subcommittee for this opportunity to present its views and
    recommendations on the President's fiscal year 2015 budget request for
    the Internal Revenue Service (IRS).
        First, the Board would like to make some broad observations
    regarding the context in which the current budget debate is taking
    place and the possible ramifications for the IRS, taxpayers and our
    Nation.
        Last summer's controversy regarding the IRS' use of inappropriate
    criteria to review certain organizations applying for tax exempt status
    and the agency paying for large conferences and questionable training
    videos with taxpayer dollars still cast a long shadow over the IRS'
    budget.
        The IRS was one of only a few Government agencies that did not have
    its funding restored to pre-sequestration levels under the Consolidated
    Appropriations Act of 2014. In fact, the IRS' fiscal year 2013 post-
    sequestration funding level was the lowest since fiscal year 2009. For
    fiscal year 2014, the IRS received approximately $11.3 billion--
    approximately $1.6 billion less than the President's budget request and
    $1.8 billion less than the Board's recommendation. The Board believes
    that this budgetary path is unsustainable.
        The Oversight Board hoped the management controls and risk
    management tools put in place last year by then Acting Commissioner
    Werfel, coupled with the proven leadership skills of newly appointed
    Commissioner John Koskinen would dispel any lingering concerns about
    the IRS' ability to effectively manage taxpayer-provided resources and
    fairly administer Federal tax laws. Often lost in the discussion is the
    fact that the IRS accepted and implemented every recommendation
    contained in the Treasury Inspector General for Tax Administration's
    reports on the aforementioned incidents and then took additional steps
    to institute even more safeguards than proposed by TIGTA.
        However, in spite of these corrective actions, there are still
    those who want to punish the IRS and believe the best way to do so is
    to slash its budget. Last year, the House Appropriations Subcommittee
    on Financial Services and General Government voted for a drastic 24
    percent cut in the IRS' budget. Although largely symbolic, it was
    indicative of a sentiment that has carried over into 2014 and the
    fiscal year 2015 budget cycle.
        The Board believes we need to have a rational and nonpartisan
    dialogue about the IRS' budget and the effects--good or bad--
    appropriated funding levels could have on customer service,
    enforcement, Business Systems Modernization and human capital. In spite
    of the often heated rhetoric, we should not shy away from the simple
    fact that there is a choice about the future of tax administration at
    the IRS.
        The Oversight Board has long contended that attempting to punish
    the IRS by cutting its budget only punishes honest taxpayers who play
    by the rules and expect their neighbors and business competitors to do
    the same.
        These taxpayers--and their return preparers--expect the IRS to
    answer their questions about an ever-changing and complex tax code and
    resolve their individual tax issues; process their returns efficiently;
    and promptly issue a refund if they are legally due one.
        They also expect the IRS to vigorously and fairly enforce the tax
    laws--whether it's a tax cheat claiming illegal deductions or refunds,
    an identity thief engaged in refund fraud, or taxpayers not disclosing
    money and assets hidden in tax havens.
        Taxpayers also expect a variety of customer service channels and
    Web-based tools tailored to their needs. And increasingly, they want to
    be able to communicate and conduct transactions with the IRS
    electronically--much as they already do with other large financial
    institutions and commercial enterprises.
        This begs the question, ``How can the IRS meet these basic taxpayer
    expectations without adequate funding?'' The inescapable conclusion is,
    ``The IRS can't.''
        We are already witnessing an alarming erosion in both customer
    service and enforcement that shows no signs of abating. Although the
    2014 filing season proceeded smoothly, projections show that telephone
    level of service on the IRS toll-free lines will fall to 60.5 percent
    by the end of 2014--exactly the same level as last year. In other
    words, 4 out of 10 taxpayers will be unable to reach an IRS assistor.
    Average telephone wait times are expected to more than double,
    according to current IRS estimates.
        IRS customer service problems are not limited to phone service.
    Long lines greeted taxpayers at IRS walk-in centers this filing season.
    Commissioner Koskinen testified before the House Appropriations
    Subcommittee on Financial Services and General Government that people
    were lining up outside the Taxpayer Assistance Centers (TACs) before
    they opened in the morning to make sure they got service the same day,
    and once inside, may have had to wait 90 minutes or more for help from
    an IRS representative.
        Tax compliance is also suffering due to the budget cuts and
    sequestration. The individual audit coverage has now dropped to below
    0.9 percent--the lowest in a decade. Business return audits have
    plummeted by 13 percent. Audit revenues are at their lowest point in a
    decade. Core enforcement activities, such as liens, levies and seizures
    are also on the decline. Additionally, although progress has been made,
    tax-related identity theft and tax refund fraud are still major
    challenges for the IRS.
        The effects of budget cuts go beyond the IRS workforce--the
    agency's biggest expense. After a successful launch of the initial
    phase of the Customer Account Data Engine (CADE) 2, the IRS'
    Information Technology (IT) Program is threatened yet again with
    insufficient funding to address pressing infrastructure needs.
        Meanwhile, the IRS is legally bound to implement the tax-related
    portions of two major pieces of legislation--the Foreign Account Tax
    Compliance Act (FATCA) and the Affordable Care Act (ACA). Due to budget
    cuts, these duties have become unfunded mandates. Commissioner Koskinen
    warned that to meet these statutory responsibilities with a flat or
    reduced budget, he will have no choice but to pull people from both IRS
    customer service and enforcement functions with serious repercussions
    in both areas. Congress must realize that robbing Peter to pay Paul is
    not a viable solution to the IRS' budget problems.
        Again, the Board believes we have a choice: stay mired in the past
    or make the fiscal year 2015 budget debate about the future of the IRS,
    taxpayers and the integrity of our tax administration system. In this
    regard, we believe that it is time to invest in the IRS and our
    country's future. With taxpayer service suffering and appropriate risk
    management tools in place, it makes little sense to underfund the IRS.
    This is the time to restore funding so the IRS can improve service,
    increase enforcement, and continue to modernize its systems and
    processes.
        To this end, in July 2013, the IRS Oversight Board recommended to
    the Secretary of the Treasury a fiscal year 2015 budget request of
    $13.590 billion for the IRS. The IRS Restructuring and Reform Act of
    1998 (RRA 98) requires the Board to make such an annual budget
    submission. Although $1.14 billion higher than the President's budget
    request of $12.477 billion due to different baselines as starting
    points, the Board supports the administration's IRS fiscal year 2015
    budget request.
        The Board believes that the President's recommended funding is
    sufficient for the IRS to carry out both its dual mission and new
    statutory responsibilities. It makes targeted and wise investments in
    many of the same areas suggested by the Oversight Board, such as
    improving telephone level of service and improving audit coverage.
        Finally, the Oversight Board notes that enforcement initiatives are
    paid through a $475 million program integrity cap adjustment with more
    than a $4-to-$1 return on investment when enforcement initiatives, such
    as new hires of revenue officers, are fully realized.
        The Board is concerned over the recent track record of such
    adjustments. Although some discretionary cap adjustments were approved
    during then IRS Commissioner Everson's tenure, none have been passed
    over the past 4 years. Cap or no cap adjustment, the IRS simply needs
    additional funding to conduct more enforcement activities which help to
    deter non-compliance and close the tax gap, while generating much
    needed revenue for our country.
                         the president's budget request
        Upon taking office, Commissioner Koskinen said adequate funding for
    the IRS was probably the most ``intractable'' and ``difficult'' issue
    he would face during his tenure. That is no overstatement, in the
    Board's view. The IRS is now operating with a budget at close to pre-
    sequestration levels; the lowest since fiscal year 2009, and when
    indexed against the rate of inflation, the lowest in history. As the
    agency notes, its budget has been cut by 7 percent since 2010 while the
    total number of individual and business tax filers has grown by 4
    percent over the same time span.
        The IRS has done its best to deal with the underfunding by wringing
    out as many efficiencies and cost savings as possible. These include
    employee buy-outs, an exception-only hiring freeze, consolidation of
    office space, all but case-related travel bans, and steep cuts in
    training. But this budget strategy is not sustainable. The IRS is now
    left with no other choice but to make cuts to core programs.
        The President's budget seeks to reverse this trend by restoring
    some of the funding lost over the past 3 years and putting the IRS back
    on a path of sustained and reliable funding. This is a reasonable and
    honest budget with a suite of smart, forward-thinking initiatives that
    address head on areas of concern that the Board has pointed out in
    customer service, enforcement, IT and human capital. The budget request
    also supports and is aligned with the IRS Strategic Plan and Treasury
    Department Priority Goals.
                                customer service
        Customer service is both a great opportunity and challenge for the
    IRS. Helping taxpayers navigate an increasingly complex and changing
    tax code and answering tax law and account questions is a major
    component of the IRS' balanced mission; and taxpayers use and value
    this service.
        The Oversight Board's 2013 Annual Taxpayer Attitude Survey showed
    that 84 percent of respondents said they are likely to call the IRS
    toll-free telephone line for assistance; 83 percent said they are
    likely to visit IRS.gov for help; and 74 percent said they are likely
    to visit an IRS walk-in site (TAC) for help. Moreover, 89 percent of
    respondents said the tax advice and information provided by an IRS
    representative was ``very or somewhat valuable.'' This is equal to paid
    tax professionals. Such an accolade is a great tribute to the
    dedication, determination and professionalism of the IRS workforce.
        In addition to providing traditional customer service channels, the
    IRS is trying to migrate taxpayers to Web-based, self-serve tools, such
    as ``Where's My Refund?'' And in recognition of a diverse and evolving
    taxpayer base that may not be getting its tax information from
    traditional media sources, the IRS has been employing social media,
    such as YouTube and Twitter to push out important service and
    compliance messages. The IRS also offers a smartphone app, IRS2Go,
    where users can receive tax news updates and check the status of their
    refunds.
        Although it is difficult to assign a dollar value for customer
    service return-on-investment, we do know that if taxpayers get their
    returns right from the start, both the IRS and taxpayers can avoid
    costly back-end audits. For example, eligibility for tax credits can be
    extremely confusing and frustrating for taxpayers. Speaking to an IRS
    representative before claiming a credit could prevent an audit for the
    taxpayer and potentially costly back taxes, interest and penalties down
    the road. However, while the overall IRS customer service program is
    comprised of several components, the funding level for IRS taxpayer
    assistance, education and outreach decreased by nearly 34 percent from
    fiscal year 2012 to fiscal year 2013.
        Commissioner Koskinen has also testified that the IRS had 11,000
    fewer employees working during the 2014 filing season than it had in
    2010, while at the same time processing a record number of returns.
        The end results of these, and other factors were unacceptable
    telephone levels of service (LOS), and long lines and wait times at IRS
    walk-in centers. The projected 60.5 telephone LOS falls far short of
    the 80 percent the Board believes is the minimum toll-free LOS that
    taxpayers deserve to help them meet their tax responsibilities.
        The IRS is also facing increased backlogs in its written taxpayer
    correspondence inventory. This is particularly worrisome since the IRS
    conducts about 75 percent of all examinations by mail, and sends out
    millions of additional notices each year to taxpayers.
        The IRS faces other customer service challenges that may come as a
    surprise to many. For example, while the number of visits to IRS.gov
    continued to increase in fiscal year 2013 to more than 456 million Web
    page visits, customer satisfaction with the Web site has actually
    declined.
        According to the American Customer Satisfaction Index (ACSI), the
    score for IRS.gov has steadily ebbed, from 73 in 2011 to 69 in 2013.
    IRS.gov also received lower scores than those of other Federal Web
    sites overall and those of Internet-based retail and brokerage
    companies; another downward trend suggesting the IRS is not keeping
    pace with online advances achieved by the Federal Government and the
    private sector.
        The Board also heard from the annual Taxpayer Attitude Survey and
    its listening sessions at the IRS Nationwide Tax Forums that taxpayers,
    employees and practitioners are frustrated they can't communicate and
    conduct more transactions electronically with the IRS.
        Given these factors, the Board believes it is critical to fund the
    IRS so it can deliver a higher level of service to taxpayers who need
    its assistance in complying with an increasingly complex tax code.
    Underfunding this critical function endangers not only the IRS'
    mission, but could ultimately imperil voluntary compliance.
        The Oversight Board believes that the President's budget will help
    provide the resources to bring IRS customer service back to a level
    where it can meet taxpayer needs and expectations both today and in an
    ever changing and challenging tax environment.
        The President's budget request would provide a total of $211
    million for customer service, including resources from the new
    Opportunity, Growth and Security Initiative. This will allow the IRS
    not only to make up for the lost ground in customer service but will
    allow the IRS to answer an additional 12 million phone calls from
    taxpayers seeking answers to their tax law and account questions. This
    includes a projected high number of calls from taxpayers related to
    implementation of the Affordable Care Act. Overall telephone level of
    service could rise from today's unacceptable 60.5 percent to exceeding
    the aforementioned 80 percent goal set by the Board.
        The request also includes investments in advanced technology and
    communications infrastructure at IRS toll-free telephone centers. One
    welcomed initiative would give taxpayers the option to be called back
    rather than waiting on hold. Another, dealing with high-speed Internet
    connection would allow customer service representatives to call up
    immediately displays of taxpayer information, much as a bank or
    brokerage house could do.
                                  enforcement
        To achieve its balanced mission and help ensure overall compliance
    across taxpayer groups and income brackets, the IRS must run a fair yet
    vigorous enforcement program. According to the Board's 2013 Taxpayer
    Attitude Survey, approximately 96 percent of respondents cite personal
    integrity as the main reason for honestly reporting and paying what
    they legally owe. However, 60 percent also cited the fear of an audit
    as a reason behind their compliance.
        Our tax system is based on self-assessment, also known as voluntary
    compliance. It depends largely on honest taxpayers believing their
    neighbors and business competitors are playing by the rules and not
    trying to game the system. The integrity of our tax administration
    system would be seriously threatened if compliant taxpayers thought tax
    cheats were getting away with their crimes.
        That is why it is so important to maintain reasonable audit
    coverage for all taxpayer income classes and to create initiatives,
    such as the Offshore Voluntary Disclosure Program (OVDP), which act as
    strong incentives for bringing taxpayers into full compliance with
    Internal Revenue laws.
        Moreover, although the overwhelming majority of gross revenue
    collected by the IRS comes in voluntarily--through withholding and
    estimated tax payments, for example--it is important that we do not
    discount the importance of enforcement revenue. It can help reduce
    budget deficits and narrow the tax gap.
        Enforcement revenue totaled $53.3 billion in fiscal year 2013, and
    since its inception in 2009, OVDP has brought in $6.5 billion in back
    taxes, penalties and interest. It also bears noting that there is a
    high return of investment for enforcement activities. Every dollar
    invested in IRS enforcement returns four dollars and as much as six
    dollars and higher for some initiatives. Every dollar not provided for
    enforcement initiatives means tax evasion grows, refund fraud persists,
    and the tax gap widens.
        However, IRS enforcement has taken some heavy budget blows over the
    past 3 years. By the end of 2013, the number of revenue officers was
    the lowest in at least 10 years; the number of revenue agents was the
    lowest in 9 years. Overall, there has been a 14 percent decline in key
    enforcement personnel since 2010.
        While audits of individuals topped one million for the 7th year in
    a row, that figure can be misleading. The overall coverage rate fell
    below 1 percent for the first time since fiscal year 2006. And the
    audit coverage rate for taxpayers in the highest income bracket--$1
    million and higher--showed a steady 13 percent decline since 2011. Tax
    refund fraud, particularly as it relates to identity theft remains a
    major challenge for the IRS and the honest taxpayers who have been
    victimized. In 2013, the IRS identified over 3.5 million identity theft
    ``incidents'' as compared 247,000 in 2011.
        The President's fiscal year 2015 budget request contains a suite of
    proposed enforcement initiatives that aggressively address many of
    these challenges. The initiatives are expected to generate almost $2.1
    billion in additional enforcement revenue annually once the new hires
    reach their full potential in fiscal year 2017. Some of the more
    prominent programs include:

      --Address International and Offshore Compliance.--This initiative
            would help the IRS to ramp up its efforts to identity U.S.
            taxpayers not disclosing money and assets in bank secrecy
            jurisdictions. In addition to increasing criminal
            investigations of international and financial crimes, the
            additional funding will allow the IRS to expand data and
            information gathering that will help the agency root out the
            promoters of these abusive tax avoidance schemes.
      --Expand Audit Coverage of Individuals.--Audit coverage for
            individuals now hovers below 1 percent for the first time since
            fiscal year 2006. The funding would help reverse the drain of
            key enforcement personnel, including revenue agents, and allow
            the IRS to perform an estimated 243,000 additional individual
            examination cases, including correspondence audits. It would
            also allow for greater document matching to uncover unreported
            or misreported income.
      --Expand Audit Coverage of High-Wealth Taxpayers and Enterprises.--
            Many of these global high net-worth taxpayers are not your
            typical filers. Some use a web of highly sophisticated and
            complex financial and cross border tax arrangements. Many of
            these arrangements are perfectly legal; others hide abusive tax
            avoidance schemes. The IRS projects that the additional funding
            will allow it to close an additional 325 of these cases.
      --Prevent Tax-Related Identity Theft and Refund Fraud.--The
            additional funding will help the IRS address the increased
            workload associated with ID theft and tax refund fraud and
            bring down the ID theft case backlog. The IRS will be able to
            better assist victims while protecting the revenue through
            investing in new technology that will help verify potentially
            fraudulent returns and reduce erroneous payments.
      --Improve Audit Coverage of Partnerships and Flow-Through Entities.--
            According to the IRS, partnerships are the fastest growing
            segment of all tax returns filed. One of the reasons is that
            many taxpayers believe they can escape audits by choosing to
            operate as large, widely-held partnerships. The additional
            funding will allow the IRS to hire examiners with specialized
            knowledge in partnerships and close an additional 2,800 cases.
      --Enhance Collection Coverage.--The President's budget would provide
            additional funding so the IRS can hire new staff, primarily
            revenue officers, to collect back taxes owed. With these
            resources, the IRS also wants to reach out taxpayers earlier in
            the collection process. The IRS projects that it will be able
            to close an additional 244,000 collection cases. The collection
            initiative will also provide additional funding to hire the
            staff to deal with the increasing number of cases involving
            unpaid employment taxes.
      --Enhance Return Preparer Compliance.--The President's budget
            contains a legislative proposal that would explicitly authorize
            the IRS to regulate all paid tax return preparers, thereby
            dealing with the legal objections that formed the basis of the
            Loving v. IRS decision. However, while awaiting congressional
            action on the proposal, the fiscal year 2015 budget request
            contains additional funding to bolster audits of return
            preparers and increase monitoring and pursuit of unscrupulous
            preparers engaged in fraudulent activities, including filing
            false EITC claims for their clients.
           human capital and business systems modernization (bsm)/it
    Human Capital
        The IRS confronts a number of serious human capital issues.
    Commissioner Koskinen has remarked on numerous occasions that he must
    not only rebuild public trust in the agency, but also employee morale
    which has suffered greatly over the past 3 years. The Best Places to
    Work in Government survey of Federal employees reported an almost eight
    point drop for the IRS between 2012 and 2013--from 66 to 54.3.
        The decline in morale is due to a number of factors, some of which
    are directly related to lean budgets and the sequestration, such as the
    furloughs, exception-only hiring freeze, increased workload, and
    drastic reductions in training. The Board thought the cuts to training
    budgets were extreme and unwarranted.
        Last year's heated 501(c)(4) tax exempt controversy also took a
    heavy toll on employee morale. Although it actually involved very few
    employees, the entire workforce felt it was being blamed and under
    fire. Employees told the Board at its listening sessions at the
    Nationwide Tax Forums that they were subject to disparaging remarks by
    taxpayers, and in some instances, felt physically threatened.
        The cuts in training were a major issue for IRS employees,
    practitioners, and ultimately taxpayers. According to the National
    Taxpayer Advocate's 2013 Annual Report to Congress, the IRS training
    budget was cut by more than 85 percent from fiscal year 2009 to fiscal
    year 2013. In 2013, less than $250 was spent per-employee on training
    versus $1,450 in 2009. In some divisions, the training budget cuts were
    staggering. The Small Business/Self Employed operating division saw its
    training budget cut by 93 percent over the same timeframe; Appeals was
    cut by 96 percent.
        With travel-related training virtually non-existent, many employees
    are left with no other option than online training. Managers and
    employees told the Board at the Nationwide Tax Forums that this new
    approach to training is not working well for most people.
        Many employees felt rushed to complete their online training in
    light of the increased and more complex workload. Some said that they
    had not received the training needed to do their jobs; others expressed
    concern about the quality of the training. They said that new hires
    especially need face-to-face training; classroom work is critical to
    their success, as is mentoring.
        Employees also said they have limited opportunities to learn from
    one another and there is no peer networking. Without travel funding,
    teams of IRS employees working together across operating divisions may
    never meet each other and managers may not see their subordinates.
        The Board is deeply concerned by the state of training at the IRS.
    The IRS simply cannot build a highly talented, knowledgeable and
    proficient workforce without quality training; nor can it achieve its
    strategic goals. Inadequate training means that employees cannot
    provide quality service for both taxpayers and practitioners, or
    compete with well-financed tax professionals in adversarial
    proceedings. The President's budget allows the IRS to invest once again
    in training. The agency must take full advantage of it.
    BSM/IT
        The IRS Business Systems Modernization program is a major area of
    concern, and one which the Government Accountability Office (GAO)
    placed on its ``high-risk'' list for almost two decades. However, the
    GAO recently removed BSM from the list, noting the progress the IRS
    made in addressing significant IT weaknesses.
        The successful delivery of the initial phase of CADE2 and plans for
    the second phase to address financial material weaknesses involving
    unpaid tax assessments were cited as reasons behind GAO's actions.
        Another major IT milestone occurred in 2014 when the Form 1040
    Modernized e-file (MeF) system received and processed 100 percent of
    individual e-filed returns, enabling the IRS to retire the legacy e-
    file system.
        However, in spite of these and other IT successes, Commissioner
    Koskinen warned in testimony before the House Appropriations
    Subcommittee on Financial Services and General Government that fiscal
    year 2014 funding is inadequate ``to address critical technology
    infrastructure needs.'' These include improvements to IRS.gov, new
    tools to combat identity theft, and upgrades to IRS basic computer
    software.
        The Board supports the President's budget request for BSM because
    it provides a solid commitment to build and deploy IT systems to
    improve efficiency, enhance productivity, and better serve taxpayers.
    For example, it would continue the expansion of CADE2 and begin the
    development of Form 1040X (Amended U.S. Individual Income Tax Return)
    so it can be accepted and processed electronically.
        In 2014, the IRS moved the Return Review Program (RRP) and Office
    of Online Services (OLS) under BSM. Aimed at detecting and preventing
    tax refund fraud, and using cutting edge technology and data analytics,
    RRP is one of most promising programs in the IRS' compliance toolbox.
    The President's budget request would allow BSM to fully develop and
    deploy RRP and enable the retirement of the outmoded Electronic Fraud
    Detection System (EFDS).
        The President's budget would also allow the development of OLS
    projects that will build on existing service capabilities to improve
    the taxpayer's online experience, provide secure digital
    communications, and add more interactive capabilities to existing self-
    serve options.
                                   conclusion
        The IRS Oversight Board believes that attempting to punish the IRS
    for past mistakes only hurts taxpayers and the integrity of our tax
    administration. With significant risk management tools and safeguards
    now in place, it is time to move beyond controversy to collaboration
    and consensus. All interested parties must work together and take steps
    together to give the IRS the resources it needs to carry out at an
    acceptable level its balanced mission of customer service and
    enforcement. In this regard, the Oversight Board strongly supports the
    President's fiscal year 2015 budget request for the IRS. It is forward
    thinking and reverses years of shortsighted budget cuts to the IRS and
    puts it on a path of stable funding and continuous improvement. We
    thank the subcommittee for this opportunity to present our views and
    recommendations.
                                     ______

           Prepared Statement of the Government Accountability Office
                                                        April 21, 2014.
    Hon. Ron Wyden, Chairman,
    Hon. Orrin Hatch, Ranking Member,
    Committee on Finance, U.S. Senate, Washington, DC.

    Hon. Tom Udall, 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: absorbing budget cuts has resulted in
              significant staffing declines and uneven performance
        This letter transmits briefing slides based on our work to date in
    response to your requests for information on our ongoing reviews of the
    2014 tax filing season and fiscal year 2015 budget request for the
    Internal Revenue Service (IRS). See the enclosed briefing slides that
    include the information used to brief your staff on April 10, 2014. We
    subsequently updated the briefing slides to reflect more current
    information.
        Our briefing objectives were to (1) analyze IRS funding, staffing,
    and performance trends for fiscal years 2009 through 2014, including an
    assessment of