[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